Invacare Corporation
Q2 2016 Earnings Call Transcript

Published: 28 Jul 2016

[Operator:]

Please stand by. Good morning, ladies and gentlemen. And thank you for standing by. Welcome to the Invacare 2016 Second Quarter Conference Call. I would like to remind you that all phone lines have been placed on mute for the first part of the call. After the management overview we will open the call to questions. This conference is being recorded Thursday, July 28, 2016. I will now turn the call over to Lara Mahoney, Invacare’s Senior Director of Corporate Communications and Investor Relations. Please go ahead.

[Lara Mahoney:]

Thank you, Holly. Joining me on today’s call from Invacare are Matthew Monaghan, Chairman, President and Chief Executive Officer; and Rob Gudbranson, Senior Vice President and Chief Financial Officer. We will begin the call with the customary Safe Harbor statement that this conference call may include statements regarding anticipated or future developments that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those that describe future outcomes or expectations that are usually identified by words such as should, could, plan, intend, expect, continue, forecast, believe, and anticipate; and include, for example, any statement made regarding our future results. Actual results may differ materially as a result of inherent uncertainties and risks, including the risk factors described in our Form 10-K and other filings with the Securities and Exchange Commission and in our earnings release, and we refer you to those risks factors. We may not be able to predict and may have little or no control over the factors or events that may influence our financial results. On July 2, 2015 the company divested its United States medical device rentals businesses for long-term care facilities, which were a part of the Institutional Products Group or the IPG segment. The rentals businesses were not deemed discontinued operations for reporting purposes and therefore are included in the 2015 results below unless otherwise noted. On today’s call, we will focus on the highlights of the quarter as opposed to covering all the details, which you can read in the earnings release that was issued earlier today. In particular, I would refer investors to the release for the definitions of free cash flow, constant currency net sales, and the adjusted earnings and loss items which will be discussed during the call. I also like to note that the company has modified its definition of free cash flow and adjusted earnings to no longer exclude the impact from restructuring. You can find the release and access to our SEC filings at www.invacare.com, under the Investor Relations tab. I will now turn the call over to Matt Monaghan.

[Matthew Monaghan:]

Thank you, Lara, and good morning. I’d like to begin today’s call by reviewing the consolidated results for the company’s second quarter ended June 30, 2016. During the quarter we continued to execute our transformation from being a generalist durable medical equipment company to one more focused on solutions for clinically complex and post-acute care. Primarily as a result of this focus and excluding the impact of the divested rentals businesses, consolidated gross margin as a percentage of net sales improved by 1.2 percentage points and constant currency net sales decreased by 1.6% compared to the second quarter last year. This result is in line with our expectations as we move away from lower-margin less-differentiated products. Our short-term metric for assessing the success of our transformation is gross margin improvement as a percentage of net sales. For the third consecutive quarter the North America/HME segment, where the most significant turnaround work is occurring improved gross margin as a percentage of net sales by 2.5 percentage points compared to the second quarter last year. This improvement was driven by net sales increases in mobility and seating products, which comprise the majority of our clinically complex portfolio. Excluding the impact of the divested rentals businesses, consolidated gross profit dollars also increased compared to second quarter last year, largely driven by the Europe segment with contributions from the Asia/Pacific and North America/HME segments. In the second quarter, SG&A expense decreased by 4.0% to $79.3 million. Excluding the impacts of the divested rentals businesses and foreign currency translation, SG&A expense increased $2.5 million or 3.2%, compared to the second quarter last year primarily related to increased employment and product liability costs. The company incurred net interest expense of $3.8 million in the second quarter of 2016 compared to $0.5 million in the second quarter of last year. The net increase of $3.3 million was primarily due to the convertible debt issuance in the first quarter of 2016. The increase in interest expense is primarily reflected in the North America/HME segment. Lower net sales, increased warranty expense and higher interest expense for our issuance of convertible debt in the first quarter of 2016 led to an adjusted net loss per share of $0.33 in the second quarter of 2016, compared to adjusted net loss per share of $0.25 in the second quarter last year. Operating loss was $6.3 million compared to a loss of $5.9 million in the second quarter last year. In the second quarter of 2016, free cash flow was negative $17.4 million driven by the net loss in the period, the final payment of $10.6 million related to a previously disclosed tax liability, and increases in both accounts receivable and inventory. To give investors a more accurate comparison of free cash flow between the periods, in the release we compare free cash flow in the first six months of 2016 to 2015, which eliminates certain timing differences between the quarters. Excluding a few discrete items that we note in the release free cash flow for the first six months was negative $45.1 million in 2016 and negative $28.6 million in 2015. I’ll now turn the call over to Rob Gudbranson, our CFO to discuss the performance of the segments and additional financial results from the quarter.

[Robert Gudbranson:]

Thanks, Matt. For the second quarter of 2016, European constant currency net sales increased 5.5% compared to the second quarter last year. The improvement in constant currency net sales was driven by increases in lifestyle, and the mobility and seating products, partially offset by decreases in respiratory products. For the second quarter, earnings before income taxes increased by $0.7 million compared to the second quarter last year. This increase in earnings was primarily due to increased net sales and favorable sales mix partially offset by increased warranty expense and SG&A expense related to employment costs. Gross margin as a percentage of net sales and gross profit dollars increased in the quarter compared to the second quarter last year. For the second quarter of 2016, North America/HME constant currency net sales decreased 7.6% compared to the second quarter last year. The decrease in constant currency net sales was driven by declines in lifestyle and respiratory products partially offset by increases in mobility and seating products. Loss before income taxes increased by $3.6 million compared to the second quarter last year. This increase in loss was a result of reduced net sales, increased interest expense and higher warranty expense partially offset by stronger gross margin as a result of favorable sales mix. During the quarter, gross margin as a percentage of net sales increased and gross profit dollars were marginally positive to the second quarter last year. Excluding the net sales impact of the divested rentals businesses constant currency net sales in the IPG segment decreased by 20.2%. During the second quarter of 2016, the IPG leadership team enhanced its focus on building a post-acute care sales force, including investments in clinical sales training, assessment of customer call points, and recruitment. Transforming the post-acute care business, principally in the IPG segment, is the second phase of the company’s transformation. Earnings before income taxes compared to the second quarter of last year decreased by $0.8 million. This decrease in earnings was largely due to reduced net sales and a lower gross margin related to increased warranty costs, partially offset by reduced SG&A expense related to employment costs. In addition to pressure on gross margin as a percentage of net sales during the quarter, gross profit dollars were down compared to the second quarter of last year. For the second quarter of 2016, Asia Pacific constant currency net sales increased 13.2%. The improvement was due to net sales increases in the Australian distribution business and the company’s subsidiary that produces microprocessor controllers. For the second quarter, loss before income taxes decreased by $0.6 million compared to the second quarter last year. The decrease in loss was largely due to favorable gross margin related to reduced manufacturing and freight cost. Gross margin as percentage of net sales and gross profit dollars increased in the quarter compared to the second quarter last year. Total debts outstanding as of June 30, 2016 was $197.5 million. The company’s total debt outstanding consisted of $163.4 million in convertible debt and $34.1 million of other debt, principally lease liabilities. The company has zero drawn on its revolving credit facilities as of June 30, 2016. The company’s cash balances were $125.3 million as of June 30, 2016, compared to $144.7 million on March 31, 2016 and $60.1 million as of December 31, 2015. Cash balances declined in the second quarter of 2016 compared to the first quarter of 2016, primarily due to negative free cash flow. The increase in cash balances compared to December 31, 2015 was the result of the net proceeds received from the issuance of convertible debt during the first quarter of 2016. As of the end of the second quarter, days sales outstanding were 46 days, up from 42 days as of December 31, 2015 and down from 49 days as of June 30, 2015. At the end of the second quarter, inventory turns were 4.7, as compared to 5.0 as of December 31, 2015 and 4.7 as of June 30, 2015. I will now turn the call back over to Matt for few closing comments. We can then address questions.

[Matthew Monaghan:]

Thank you, Rob. We’re pleased with the company’s performance in Europe and the Asia Pacific segment and the progress based in the North America/HME segment. We have more to do in the IPG. In our recent investor conferences and presentations, we shared our strategic expectation that our North America/HME net sales would continue to decline. We expected growth margin as a percentage of net sales to improve. We believe we’re on the right track as the segment second quarter financial results continue to be in line with our expectations. This 2015, we’ve been transforming our North America/HME business to focus on more clinically complex care with the ability of rehabilitation to sales force, trained to provide clinical solutions with our mobility and seating product portfolio, including increase in access to related products from our subsidiaries. This will be an ongoing effort of investment and training. With the North America/HME transformation underway, we have initiated the second phase of the change, which is the enhancement of our post-acute care business affecting principally the IPG segment. Post-acute care can be provided in a variety of clinical selling outside of hospital. Over the past quarter, we’ve began developing our specialized post-acute care sales force with investments in clinical sales training of certain customer call points, and recruitment. As we continue to pursue our turnaround with additional investments, we expect increase consolidated gross profit dollars over time in addition to the gross margin percentage. While we are executing this transformation, we will be managing through external uncertainty, including foreign currency fluctuations, as well as continued reimbursement pressures particularly on the ongoing rollout of National Competitive Bidding in the United States. As we can see more transformation, we remain committed to our number one priority by establishing a quality culture. As noted in our Form 8-K filing on June 9, 2016, we received feedback from FDA on steps required to proceed with the consent decree. Our team continues to work on design history file remediation and broader deployment of quality systems improvement, quality will remain at the center of what we do as a company and unfazed to the teams’ progress. I’d also like to share some organizational changes. Today we announced on Form 8-K that Gordon Sutherland, our Senior Vice President and General Manager of Europe has resigned to take any role. Gordon joined the Invacare Europe in 2012 and has led the business segments to deliver consistent results. I appreciate Gordon’s leadership, I wish him good luck in his role. We’re fortunate to have a strong leadership team across the Europe segment and we expect the transition to be smooth. Also this morning, we announced upcoming changes from our Board of Directors. General James Jones, who joined the board in 2010, has decided to step down effective August 26, 2015. As a result of the increasing global responsibilities and travel for this other two roles. In addition, after 30-years of service Michael Delaney has expressed his intend, not sustained for reelection with his terms from the 2017 Annual Meeting. It has been very helpful for me to come to this company with such deep experience in place on the board. General Jones with his insights into government and international affairs, as well as his guidance on culture based on his years of leadership with the United States government, has been a great resource. Mike Delaney has given the company invaluable insight into the consumers of our products from his personal experiences, as well as those from his career with the Paralyzed Veterans of America. On behalf of Invacare, I want to thank both of them for their contributions and commitments. This is an exciting time for Invacare, the remaining opportunities ahead of us and we are proud our machine to provide clinical solutions to the growing number of people and need of our products. As the markets for our solutions expand we’re transforming our companies to be able to advance to that opportunity. Thank you for your time and attention on today’s call. We will now open the phone lines for questions. Holly, let’s open the phone lines for questions.

[Operator:]

Thank you. [Operator Instructions] And we will now take our first question from Matt Mishan with KeyBanc Capital Markets.

[Aubrey Tianello:]

Hi, guys. This is actually Aubrey on for Matt. Can you hear me all right?

[Matthew Monaghan:]

Hi, Aubrey. Good morning.

[Aubrey Tianello:]

Okay. Thanks for taking my questions. First I wanted to see, if you guys could help quantify the impact of some of the rationalization away from some of the last differentiated products on your sales. As far as when this began and how long before you said it’s going to start to normalize?

[Matthew Monaghan:]

Sure, Aubrey. We’ve been talking about this for number of quarters to really selectively focused on things that provide distinguished and differentiated care on our solutions. And we call a number of elements of the business that we are doing lots of Aids for Daily Living. It’s difficult for us to put a precise number on that, because part of the differentiation is not only the product, but deciding on which those are sold. As we’ve discussed in our investor relations presentations, as customers in certain segments continue to look for highly durable robust products. We continue to meet them at a price point, that we’ve recommended, the intersection where Invacare plays very well in some channels. The set is more for single use products where our products aren’t just well positioned, because we are about robust long-term design conclusions. We’ve – and that has changed to critically complex selling and customer engagements really, since July of last year, and I think for three quarters now this being the third, we have in the results of the decline in that business in the first quarter that part of the business was down quite substantially more so than the second quarter. Second quarter, we see continued decline, but to a lesser extent. And we assume at some point, we will inverse into more normal levels of sales of ongoing customers and products.

[Aubrey Tianello:]

Okay, got it. And then, I just had one follow-up on free cash flow. Historically it’s been stronger in the back half of the year, but just giving some of the investments that you’ve been making and the expectations for higher CapEx. How should we be thinking about free cash flow into third and fourth quarter?

[Matthew Monaghan:]

Well, we don’t looking guidance for the back half of the year, but you are right, seasonally the business has typically been cash consummated in the first-half. And cash accretive in the second-half. I think, last year it uses a comparison of which we had some one-time costs of retirement payments in sales we expect. Our free cash flow in the first-half was an consumption of $22 million and for the full year, last year, we generated over $13 million, so we were offsetting that in the second half. So we expect that the same external factors generally are applying this year. And we look forward to improvements in the second-half, which you’re right. We’re also making investments and when we make those investments in the commercial teams, which are in the form of payroll kind of expenses for new sales reps who are not yet accretive, but all the equipment demonstration units expand and things for them, to get out in the effective. It can be six to 12 months before they have a full book of business really trying to kind of results we expect. We’re pleased with the uptick in effectiveness of our sales transformation, our new sales associates. But it’s still pretty early in that transformation. So we’ll expect their affectivity to improve on the next couple or few quarters.

[Matthew Monaghan:]

Rob, really one thing I’d add to that is just for one more color around the prior year. Now, that we don’t include restructuring the first-half of about $28.6 million in terms of the drain. And for the full year we generated $11.9 million, and I think that’s exactly a point, which is second-half is positive. And what I’ve done there I mean, covered separately as I pulled out all the impacts from the retirement payments in the sale leaseback from last year, that’s really a better indicator with the business line. So again, we didn’t repeat for the first-half of 2015 of $28.6 million in the back-half. Let us have a positive $11.9 million, but again at this point really I’m talking about 2016.

[Aubrey Tianello:]

Okay, sure. And then, just the last one for me. Thinking about gross margin, as you mentioned is sort of a short-term metric to measure your successes. You’re rationalizing lower margin products and optimizing the portfolio. I think, last quarter excluding rentals is up a 100 basis points and a little bit more than that this quarter. Just wondering if this is around the level of year-over-year improvement we should start to expect or is there some other things maybe small variation quarter-to-quarter, as we go on with the process.

[Matthew Monaghan:]

Every quarter, we obviously accumulate all the transactions that make up the quarter, so we can’t exactly say we’re in the yard [ph]. But that’s I think, the last two quarters of performance in margin shift reflect a fundamental shift in the type of transactions that we’re doing to serve customers very well with our complex rehabilitation product. They come with higher gross margin, because they’re highly customized, they deliver more value for our customers. And I think, that is a fundamental shift that can continue in future quarters.

[Lara Mahoney:]

And just to add to that. A lot of the transformation investments we’ve made in 2016, we have not yet seen the benefits from that. So I mean, much of what we’re seeing right now is related to a turnaround we did with the existing sales force and the training in early investments, so more to come.

[Matthew Monaghan:]

We really – the analysis, we’re really paying interest on the construction loan before we like to buy the house [ph], we’ve incurred SG&A increases which we’re mindful of. We got to make good returns on those. Our substantive sales force increases in personal, really occurred at the beginning of second quarter, and it’s really in their 10 year to be accretive yet, so that’s the gap that we’re seeing right now.

[Aubrey Tianello:]

Got it. Thanks guys.

[Matthew Monaghan:]

Thanks, Aubrey.

[Operator:]

[Operator Instructions] We’ll now take our next question from Bob Labick, CJS Securities.

[Robert Labick:]

Good morning.

[Matthew Monaghan:]

Good morning, Bob.

[Robert Labick:]

Hi. I just want to get a follow-up on the gross margins. Obviously, you’re demonstrating some good apple-to-apple improvements particularly in North America/HME. Can you talk about kind of where we stand in the process? As you said, it’s been about three quarters. Is this a one year deal and then we’ll be lapping it? Do you view this as a multiple year process and can you – maybe quantify the opportunity for gross margins three years from now?

[Robert Gudbranson:]

Okay. Timing and gross margins in the future, so I would let you a few rows of thinking on top of a calendar to talk about the timing. So if you remember – listeners may remember from second and third quarter last year. We talked about the investment beginning to be made in the incumbent sales force in terms of assessments, skills trained and clinical training, coded development with a new portfolio of product. So I think, we’re relatively well seeded in terms of building affectivity of the incumbent sales force. And those have been the large drivers of the mixed shift in gross margin improvement in quarters for, one and two. We talked about the increase in the sales force and further development than the increase in sales force of new personal really began in the second quarter 2016 and those folks go through many weeks of training getting out into their new territory. You are starting to build a book of business. I view those sales folks to be effective over six to 12 months. So the second role of layering of timing, it’s kind of six to 12 months that begins – let’s say beginning of first – beginning of second quarter of this year. And then, I think, if you look at the commercial changes, we really saw the big step down in sales of our Aids for Daily Living business to begin in the first quarter of this year principally in the HME segment. And at some point anniversary into the years’ worth of those kind of changes. So you might take a 12 months row and say, these are kind of the sales renewing that happened in that segment beginning in first quarter of this year. So those are kind of the three layers, I think about affecting North America/HME segment. And then, we are staggering the same kind of transformation of the IPG segment and that’s really begun in the second quarter of this year. And you’ll see probably a similar multi-period pattern. The second part of your question was about gross margin in the future, and I think, in our investor presentation and some of the discussions we’ve had, we’ve been able to describe the historic market in which we play, which had a relatively normal shaped bell curve of product profitability, turn it around the companies reported average. And historically, that’s been a little tighter distribution, where we were able to make good gross margin in the full range of products. Over the last two years of National Competitive Bidding with other external pressures but lacking in less profitable side of that curve has gone down into the lower gross margin large segments. But we still have a half of a bell curve of profit by product, this is above the average. We are really trying to focus on our signals which are bringing great customized products and products that deliver demonstrably different clinical care. Those are typically above average in gross margin, which were value that we bring in the marketplace. So that is the kind of gross margin shift that we should be able to see over the medium and long term.

[Robert Labick:]

Okay. And then, you touched on obviously IPG, a little bit of that is in the call and in the release. The magnitude of the sales changed in the quarter was a bit of surprise. Is this a new kind of run rate for the sales from that division on a go forward basis or how should we think about IPG over the next three plus quarters?

[Matthew Monaghan:]

Sure. IPG that spoke to me now is more of a B2B capital sale. We do make smaller transactions for replacement and small changes that operators make. But folks to operate this post-acute long term care facilities are typically buying on a fleet basis maybe for a larger renovation product there, long cycle projects in our selling cycles and capital cycle to a large extent. What we had in the second quarter of this year was a tack up of couple of things that both went negative, one that we knew would happen would be the decline in the sales teams effectiveness and we took a lot of the marketplace that’s selling kind of assessment and kind of things we’ve done in complex, we have a year prior. The thing that we were unable to predict exactly with the lumpiness of the timing of the things that workout and size, and timing of projects, or things that get delayed or the bids that we lose, and we just had both of those going to same negative way this quarter. I don’t think that’s a consistent expectation going on, but we continue to evaluate that business as we’re transforming.

[Robert Labick:]

Okay, great. And then, last one for me. You obviously highlighted the 8-K that you got in June in the release. And can you just give us any progress and milestones for outsiders to look for the ongoing discussions with the FDA?

[Matthew Monaghan:]

Yes. We continued to have a constructive engagement with the FDA. And as I mentioned, we’re all about quality and not just to tick and tie the tactics to solve the problem on consent decree, but really to drive meaningful results in the culture and operation and processes, because we want this to be, not only in improvement, because we should be on the consent decree, but it’s going to be a sustainable competitive difference that Invacare has for its customers that over the long term have to lead to better customer engagement, share growth and other positive economic factors to benefit shareholders. And we are all about that. The consent decree is sort of updated from the feedback the FDA gave us at the beginning of 8-K in terms of the related next steps that we have to undertake principally around design history file remediation, as I mean to demonstrate our processes for executing the design control parts of the federal requirement of section 820, 30. Those are relatively straight forward and we have the opportunity now to go back and very clearly document the improvements in our design history files and our processes, so we can demonstrate to FDA. Once that’s done we can move into the third section. But I think as we’ve really demonstrated now for three quarters in a row, the company isn’t about a consent decree. And I’m really pleased that the response we’ve gotten from the investors in market, that see that we’re able to do a tremendous amount to deliver better economic returns to our customers in spite of consent decree. We are really not about the consent decree. We have a tremendous amount of value offered.

[Robert Labick:]

That’s great.

[Matthew Monaghan:]

Quality is our priority and the consent decree is on every one of activity in Cleveland. But I’ll tell you. It’s sort of a two-part discussion, where we take the FDA’s requirement very seriously. I take quality culture extremely seriously and we’re deploying that. But at the same time that can’t be an excuse for anybody in the company to underperform. So while we’re tackling the consent decree and doing all the right things, we’re driving the business to improve, where now in the third quarter surely we can do that.

[Robert Labick:]

Perfect, all right, thank you.

[Matthew Monaghan:]

Thanks, Bob.

[Operator:]

[Operator Instructions] Our next question comes from Jim Sidoti with Sidoti & Company.

[James Sidoti:]

Good morning. Can you hear me?

[Matthew Monaghan:]

We can, Jim. Good morning.

[Lara Mahoney:]

Hi, Jim.

[James Sidoti:]

Sorry, if I – this is already been missed, and couple of calls going on at once right now. But, I guess, first one for Rob. When you broke out the pro forma earnings you left in the restructuring charges. Is that typical for you?

[Robert Gudbranson:]

Yes, we actually announced at the beginning of the call and we mentioned it, but I’m happy to re-cover it. We’re going to stop on free cash flow where we used to take restructuring activities, cancelling on restructuring activities. We used to use that as an add-back for free cash flow. We’re not going to do that any longer. So we’ve made that adjustment. I think it’s cleaner, Jim, to be honest. Additionally, we made a change on the adjusted earnings, the restructuring charges we used to be an add-back, but we’re going to leave that in as an expense. This is something we have to manage. So again, I think it will be cleaner both on the adjusted earnings and free cash flow. But you’re right we did make adjustments on both of those.

[James Sidoti:]

And will that number be coming down over time? Is that why you made this decision?

[Robert Gudbranson:]

You know what, I think it’s two-fold, Bob, clearly we’re going to do the right thing. So we’re not going to – not pursue for restructuring, it’s the right thing to do. But at the same time I think you have – when we have restructuring that occurs in some measure every quarter, adding that back, I think at some point it doesn’t make a lot of sense. So I think it’s more a way of looking at it than necessarily an indication, we’re going to do more or less restructuring.

[Matthew Monaghan:]

And, Jim, this is Matt. I guess, I’d add to Rob’s comments. And I want a private culture internally where we are talking about the same thing that shareholders and that’s real cash at the end of the day, real earnings at the end of the day and we got to make restructuring into our programs. We’re really in a business that’s going to have long-term renovation and we have to get used to accommodating those in the way we talk about our progress.

[James Sidoti:]

I wish more of the names I covered were like that. So I think it is good idea. The other question is and I understand it’s not all about the consent decree. And then you’re starting to become profitable even prior to the consent decree being lifted. But on the consent decree, just can you give us a timeframe or estimated time you think that third ordering will take? Is that something that takes weeks, months, years?

[Matthew Monaghan:]

There is not a precise way to estimate it, but I’ll give you some ways we look at it. It’s not a trivial exercise like you might see in an international operation that can be done within a week. That can happen. I think in this case, if you look at the last year, the FDA had inspectors here for five months. So it’s of, let’s say, a similar scope. It’s the cert 1 and cert 2 consent decree. This will be cert 3. So our best guess is it could be five months, it could be nine months, it could be longer, it could be shorter, but I don’t think it could be extremely short. And there is no real way to tell. If we look at other company’s experience are there too many other factors to make those compared estimate. So we kind of look at last year as the best median indicator.

[James Sidoti:]

All right. Thank you.

[Matthew Monaghan:]

Okay. Thank you, Jim.

[Operator:]

Our next question comes from David Cohen from Midwood.

[David Cohen:]

Yes, sorry, I joined the call a little bit late. But anyway you’re not in the skyded [ph] game, generally speaking. But, I guess, how would you sort of level-set? So the expectations at some point, near to medium term, as it looks lower quarterly SG&A in the business, is required to support the scale of the business you’re trying to achieve?

[Matthew Monaghan:]

Yes, it’s an interesting question to answer, given all the moving parts we have in our limited guidance. So our operating mechanism on a strategic basis and then what we do weekly and monthly to manage is really to look at where the business needs to go in terms of fundamental improvements in meeting customer needs that are clinically complex because that’s where the company can get the best return for its investment in resources and expertise in building highly unique customized solutions and things that really make a difference. We are a medical device patient-centered company. This is an economic transformation. It’s really a patient-centric transformation that has positive solid sustainable long-term economic gains for shareholders. So as we go through that process, if you look at what we can do in terms of gross margin to make our engineering work more sustainable in terms of delivering results. And I think what you see in the last three quarters is indicative of where we can go in the future and the market certainly can sustain that, because the more of the patients who need that kind of care globally is very robust. The amount of SG&A that we spend is determined by how gross margin dollars shift between the months. So we strive for gross margin percent improvements in the short-term. We look at how customer contracts have allowed to anniversary in a particular month. We look for the dollars that will be contributed from the gross margin line and we modulate our spending in SG&A accordingly. I think the level of SG&A spending now is enabling us to build the sales force that we need and make the right kinds of investments, depending on where the appreciation lays. But clearly in terms of a cash flow, we also meet our CapEx spending in that same way. Historically the company – recent history of the company has had relatively suppressed CapEx. In 2015, for example, it was less than 0.7% of sales. CapEx needs to probably come up a little bit 1% of sales or 2%. We don’t have catch-up CapEx spending to get to, but we’ll methodically come up to a more reasonable level. And we modulate that also monthly based on our contribution margins. In other way, people can look at the long-term efforts to see if the income generation of the company. If you look at our European segment, which is really a version of unfettered access of our products in a very competitive marketplace, where we continue to see sales gains and good earnings contribution in a competitive marketplace, that’s kind of the way I would triangulate.

[David Cohen:]

All right. Thank you.

[Matthew Monaghan:]

Okay. Thank you, David.

[Operator:]

This concludes today’s question-and-answer session. I would now like to turn the call over to Matt Monaghan for additional or closing remarks.

[Matthew Monaghan:]

Well, as I stated in my closing comments. It is an exciting time for Invacare, because we’re well positioned in this marketplace to advantage of the – being at the destination of the transformation of healthcare spending out of acute care space into the places where we succeed. We do have a wonderful portfolio of differentiated product-set, can contribute positively. On behalf the shareholders we look forward to taking advantage of that. Thanks for your time and attention today. We’ll be available for calls.

[Operator:]

This concludes today’s call. Thank you for your participation. You may now disconnect.