Invacare Corporation
Q3 2008 Earnings Call Transcript

Published: 23 Oct 2008

[Operator:]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Invacare 2008 Third Quarter Earnings Conference Call. We are now ready to begin the call. Before I turn the call over to the Invacare’s Chairman and Chief Executive Officer, Mr. Mal Mixon, I would like to remind you that all phone lines have been placed on mute for the first part of this call. After the management review, we will open the call up to questions. This conference is being recorded Thursday, October 23rd, 2008. I would like to turn the call over to Mr. Mal Mixon, Chairman and Chief Executive Officer. Mr. Mixon, you may now begin.

[Mal Mixon:]

Thank you very much. For today’s call I have with me Rob Gudbranson, Invacare’s Chief Financial Officer. I’d like to begin with our customary Safe Harbor statement, that is that this conference call may include statements regarding anticipated and future developments, that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Results may differ materially as a result of the risk factors included in the company’s filings with the Securities and Exchange Commission, and other factors over which the company has no control. I will now review Invacare’s performance in the third quarter ended September 30th, 2008. We will focus on the highlights of the release, as opposed to covering all of the detail, which you can read in the release after the call. I would refer investors to the company’s earning release to review the definition of free cash flow and some of the adjusted earnings items which will be mentioned below. You can find the release on Invacare’s website. Invacare reported strong earnings growth in the third quarter. Adjusted earnings per share were $0.42 for the third quarter of 2008, as compared to adjusted earnings per share for the same period last year of $0.34. Adjusted net earnings for the quarter were $13.4 million versus $10.8 million last year. Adjusted earnings before taxes for the third quarter were $17.5 million, as compared to $12.4 million for the third quarter last year. The significant improvement in adjusted earnings before income taxes was primarily the result of organic sales growth for both volume and selective price increases, cost reduction activities and reduced net interest expense, which were partially offset by increases commodities in costs. Net sales for the third quarter increased 13.4% to $461.8 million versus $407.3 million last year. Organic net sales for the quarter grew 9.3% over the same period last year, driven by improved performance in all segments, particularly for North America/Home Medical Equipment and the Institutional Products Group. Reflecting the improved stability and sequential improvement of this business segment, the North American/Home Medical Equipment organic net sales increase of 12.7% for the quarter represents the fourth consecutive quarter-over-quarter increase. Institutional Products Group’s organic net sales increase of 30.4% for the quarter was driven primarily by new product introductions. While European organic net sales growth grew at 3.1% for the quarter, this growth rate was below the first half growth rate of 7.4%, primarily a result of the reimbursement and pricing pressures. The company’s operating performance was solid all the way from strong organic sales growth for the quarter to the 40% improvement in adjusted earnings before income taxes. The company realized benefits from cost reduction initiatives, as well as selective price increases implemented during the quarter, which helped to offset increased commodity costs. Equally important, third quarter free cash flow strengthened as a result of increased earnings to a positive $16 million for the quarter, a significant improvement over the first half of the year despite higher sales, leading to increased receivables and inventory needs to support the continued stronger than expected organic sales growth. With continued increase in profitability and improved working capital management in the fourth quarter, free cash flow is still projected to be strong for the year. With that, I’d like to turn it over to Rob to review additional financial highlights of the second quarter.

[Rob Gudbranson:]

Thanks, Mal. Good morning. Gross margin as a percentage of net sales for the third quarter was higher was 0.1 percentage points compared to last year’s third quarter, due to increased volumes, price increases, and cost reduction activities, which were largely offset by increased commodity costs, as well as an unfavorable product mix in Europe. As compared to the second quarter of 2008, gross margins as a percentage of net sales improved by 0.6 percentage points, driven by increased volumes, price increases, and cost reduction initiatives. Selling, general and administrative expense increased 14.7% to $106.2 million in the third quarter, compared to $92.5 million in the third quarter last year. Foreign currency translation increased SG&A expense by 4 percentage points, while acquisitions increased SG&A expense by 1 percentage point. Excluding foreign currency translation and acquisitions, SG&A expense increased 9.5% when compared to third quarter last year, primarily due to variable costs associated with increased sales volumes, including wages, commissions, bonus, and bad debt. For the quarter ended September 30th, 2008 North American HME net sales increased 13.9% to $191.2 million, compared to the $167.9 million in the same period last year, driven primarily by sales increases in all principal product lines. For the third quarter excluding restructuring, North American HME earnings before income taxes were $6.2 million, as compared to earnings before income taxes of $4.1 million last year. The increase in earnings before income taxes was primarily the result of increased volumes, selective price increases, and cost reduction initiatives, partially offset by commodity cost increases. Invacare Supply Group net sales for the third quarter increased 5.5% to $67.6 million, compared to $64.1 million for the same period last year, driven by growth in home delivery program sales, increased volumes with large providers, and growth in urological incontinence and infusion product lines. Again excluding restructuring, earnings before income taxes for the third quarter increased to $1.3 million, as compared to $0.8 million last year, primarily as a result of increased volumes and freight recovery programs, partially offset by increased discounts associated with higher sales to large providers. Institutional Product Group net sales for the third quarter increased by 30.7% to $26.3 million, compared to $20.1 million last year. The net sales increase was driven by new products introduced late last year including beds, therapeutic support services, and clinical recliners, along with strong sales in durable medical equipment and bathing products. Excluding restructuring, earnings before incomes taxes for the third quarter increased to $1.7 million, as compared to a loss of $0.6 million last year, primarily as a result of volume increases and freight recovery programs. These were partially offset by commodity cost increases. In the third quarter, European net sales increased 14.2% to $151.5 million versus $132.7 million last year. Foreign currency translation increased net sales by 11 percentage points. Net sales performance continues to be strong in most countries, especially in the United Kingdom as a result of new product introductions, including HomeFill. However, business performance in Germany continues to be negatively impacted by reimbursement and pricing pressures in the market place. For the third quarter, excluding restructuring, European earnings before income taxes were $14.2 million, as compared to $14 million last year. This increase in earnings is attributable to volume increases, cost reduction initiatives, and a weakening US dollar. These benefits were partially offset by higher freight costs, an unfavorable product mix towards lower margin product, and unfavorable currency impact from the weakness of the British pound, as compared to the euro. For the third quarter, Asia Pacific net sales increased 11.7% to $25.2 million versus $22.6 million last year. The net sales improvement was the result of volume increases in the company’s distribution business in Australia, and at the company’s subsidiary which manufactures microprocessor controllers. For the quarter, excluding restructuring, earnings before incomes taxes were $0.2 million, as compared to a loss of $0.5 million last year. The earnings increase is attributable to volume increases and continued cost reduction initiatives, partially offset by an increase in SG&A for labor costs. The company’s cost reduction initiative to move controller manufacturing from New Zealand to China was completed during the quarter ended September 30th, 2008. The Company made progress on its working capital measures. Days sales outstanding were down three days to 59 days versus the third quarter of 2007. Inventory turns at 4.9 improved compared to 4.8 as of the end of third quarter 2007. Total debt outstanding was $508.2 million at the end of the third quarter. The company’s debt outstanding decreased by $18 million, compared to the end of the second quarter. I’ll now return the call back over to Mal to review Invacare’s guidance for the fourth quarter of 2008, and to make some concluding come minutes. Then we can address questions.

[Mal Mixon:]

Thanks Rob. I would now like to review Invacare’s guidance for 2008. First, organic sales growth in net sales of 6% to 7%, excluding the impact from acquisitions and foreign currency translation adjustments. Secondly, effective tax rate of 25% on adjusted annual earnings. Thirdly, adjusted earnings per share of $1.35 to the $1.40, and fourthly, free cash flow between $35 million and $40 million. Although, the global financial crisis will impact all businesses including Invacare’s, demand for home medical products and services should remain strong. Additionally, the company’s cash flow continues to improve sequentially, and existing credit availability of $123 million puts Invacare in the strong position to continue to grow in the current environment. The likely adverse trend in the short term is the sudden strengthening of the US dollar, which will cause a translation of overseas profits in the lower US dollar results, all other factors being equal. We expect current exchange rates to lower European fourth quarter operating income by $0.05 since the last earnings release forecast of earnings. Looking at risks over the medium term, the company will remain judicious in its extension of credit to customers, since it is uncertain what potential impact the credit crisis will have on Invacare’s customers funding sources. During the third quarter, the company continued to experience reimbursement and pricing pressures, particularly in Germany. Late in the third quarter, France healthcare authorities reduced reimbursement for beds and other select product. As previously communicated, the Centers for Medicare and Medicaid Services or CMS, announced US reimbursement cuts of 9.5% for those product categories, which were to have been included in Phase 1 of the now delayed National Competitive Bidding program. While these US cuts are not effective until January 2009, the Home Medical Equipment industry may be cautious in its buying patterns with such changes. In addition, while the company has implemented numerous cost reduction programs to increase profitability during the year, the benefit from these programs has been hampered by rising commodity costs in the first nine months. Although, some commodity costs are now falling, the company has largely locked in costs for commodities in the fourth quarter. While we remain cautious regarding the impact of reimbursement changes and the stronger US dollar, we expect to remain within the original reigns of earnings guidance given at the beginning of the year, and well above 2007 adjusted net earnings. Projected increase in earnings, particularly before income taxes, will be substantial, and indicates a continued improvement in Invacare’s businesses. This time, we will open up the phone lines and take your questions.

[Operator:]

(Operator Instructions). Your first question comes from the line of Eric Gommel with Stifel Nicolaus.

[Eric Gommel:]

Good morning. A couple of questions. Can you quantify sort of the impact of some of those price increases that you put in on July 1st on the North American business? I mean how much of that contributed to the growth, I mean, from a number standpoint?

[Rob Gudbranson:]

Sure. Glad to do that, Eric. It’s Rob. In terms of looking at our gross margin, if you pull out the restructuring for the quarter that we had, our gross margin on a GAAP businesses was up 0.1%. So, we continue to expand compared to prior year. But, I would say even, more importantly again, pulling out the restructuring, it was up 0.3%, and sequentially even stronger. So, we are making the right movement there. If you look at the pieces and quantify these more overall for the whole company as opposed to necessarily looking at individual divisions, but in terms of our cost savings that we put in the press release, we had about 5 million, that’s a little more than a percentage point. Pricing benefits, we think, might have been almost another percent, that was largely offset or more than offset by commodity cost increases of about 1.1%. So, we are still a little bit ahead there. There was some mix though, we mentioned particularly in the press release that the mix in Europe, we sold a lot more beds as opposed to power wheelchairs, in terms of the growth, and that hurts us a bit on the margins. So, that brings us back down to that 0.3 level. So, those sort of give you the pieces. But I’d really emphasize, I think this is pretty important. If you go first quarter, second quarter to third quarter, we are expanding that gross margin, and then even more importantly looking at the operating margin, I think Eric, when you go through it, you will see we went pulling out the restructuring from 3.7% to 4.4%, to a third quarter 5.7%. So, we are pretty pleased with the performance.

[Eric Gommel:]

Yes. And I mean just from – it appears then your competitors followed you on sort of -- or may have had to follow you on the price increases. Can you talk about what you are seeing in the competitive environment? Has it changed here substantially over the last maybe year or nine months at all, relative to maybe power wheelchair, and then also North American HME?

[Mal Mixon:]

Now, this is Mal, Eric. Really there are sort of two forms of the price increase. One was an actual raising of the prices, and the other one was that we put in sort of a surcharge on freight instead of free freight. And we hadn’t forecast this sharp rise in commodity prices when we did our annual plan, and we didn’t have a price increase really built into the annual. So, our goal was to try to recover the commodity costs with a small price increase, and we achieved that as Rob indicated. As those prices began to skyrocket, we locked in, or tried to lock in the best pricing we could get in this quarter coming up, the fourth quarter, the quarter we are in now. And we are obviously seeing fuel prices decline, commodity prices coming down. And we won’t benefit, begin to benefit from that until the first quarter. So, it’s certainly a relief to me to see this trend happening. And yes, we did have our competitors by and large within 60 days of our movement take similar action. So, we are not seeing the kind of really aggressive pricing competition that we saw two years ago. And I think, just to remind you, Invacare had to totally reposition our manufacturing business, and in some cases, lowered our prices 20% to 25%. So, no one really has an advantage over us any longer. And I think prices with competitors are much closer together than they were at that time. And I know my competitors are struggling with the same issues, and I think some of them being private, are having more difficulty with the banks than Invacare is.

[Eric Gommel:]

And I am going to ask one more question, and I’ll hop off back into queue. I mean speaking about the credit market and stuff. Rob, could you talk a little bit about what your sort of liquidity requirements from a debt standpoint are over maybe over the next 12 to 18 months? Thanks.

[Rob Gudbranson:]

No problem, Eric. We have and it’s detailed in all of our releases. We have additional payments we need to make on the term loan B, but actually we are very well-positioned. We have $123 million of availability in our revolver with a good bank group, compared to probably a lot of the companies that out there. And then additionally, we have the free cash flow strength, as Mal mentioned in the comments, we have $16 million free cash flow, sequentially up from the second quarter of $11 million. So, you take a business that’s cash flow positive, and you throw in that good availability on the revolver. I can imagine there are a lot of companies who wish they were in our position right now.

[Eric Gommel:]

Great. Thanks.

[Mal Mixon:]

Eric, one thing I will just add, that with our rapidly improving ratios, one of the principal ones being debt to EBITDA. Our covenants loosen up considerably on acquisitions next year. But given the current environment, I think now it’s not the time to be doing that. So, we are going to continue paying down debt and improve our earnings, and not only that make the company even stronger, but stronger financially. So, when we did the refinancing last year of $720 million, I was complaining about the cost of the money, and that whole thing. But now I really feel we were very fortunate to be able to get that done then and have the solid capability and availability we have now, and with a really good syndicate of banks. So, we feel very good as we go into the new year.

[Operator:]

Your next question comes from the line of Joshua Zable with Natixis.

[Joshua Zable:]

Hi, guys. Thanks for taking my question. Congratulations on another great quarter here.

[Mal Mixon:]

Thank you, Joshua.

[Joshua Zable:]

Just a question regarding the outlook. I know you took down the EPS outlook from the top end of the range, and I know you guys are actually very, very good about detailing what’s going on and all of the moving parts. Maybe this is just my notes incorrect. I had the previous range up to $1.50, and now we are down to $1.40 at the top end. And I know you guys talked about $0.05 coming from currency. So, to me the math means that there is another $0.05 that you guys took down. Can you kind of talk about that? I know you alluded to, obviously, the difficult economic environment in general, but the demand for your products seem to be going pretty well to say the lease. So I’m just trying to understand. Is my math correct there? And if so, can you help me understand where that other $0.05 is going?

[Rob Gudbranson:]

Sure, Josh, glad to do that. You’re right, the original range at the beginning of the year was $1.35 to $1.50. We are at $1.35 to $1.40. A big piece of that, Josh, as we mentioned, was FX in Europe. Additionally, there is some pressure in terms of business in Europe beyond that. It’s not just all currency. We mentioned, French authorities, particularly on the institutional market for nursing, has cut some reimbursement. That was stronger than we expected. That was something that hit towards the end of this quarter, third quarter. So, we have got some pressure in the core business there additionally. And then when you add in the commodity costs, and I think we made the right decision, but we did lock in some of the costs for the fourth quarter. We put all of those pieces together, that gives you sort of the qualitative answer to the $0.05.

[Mal Mixon:]

Just to add on to it. We had a pretty wide range because there were uncertainties during the year, and the mid-range was a $1.42. And so the mid-range now is $1.375 and $1.425. So, there is the nickel really that we are talking about. And if the euro had held up there, we still would have reported in the upper part of the range, not the lower part of the range.

[Joshua Zable:]

Again, just as a follow-up. That’s very helpful guys. I mean the third quarter typically is a pretty weak quarter in Europe in general. And I know the fourth quarter, usually you see a step up. But you guys, obviously, and I know you are being conservative, but you actually think it’s as a reimbursement trends more so than maybe just kind of seasonal issues?

[Mal Mixon:]

The third quarter actually to fourth quarter strength is particularly in the US. The third quarter to fourth quarter in Europe is slightly down, normally just a seasonal business. So, that’s one pressure. And then when you throw on the currency, when you throw on pressures in two of the big markets, we think this is the right range. We try not pick a range that’s conservative or aggressive. We think the range is right. So, we have committed to that, and that’s what we are going to deliver.

[Joshua Zable:]

Okay, great. And then just on the -- obviously the organic sales outlook you guys took up, so business seems to be very, very strong, which is great to hear. And I appreciate you guys talking about the sort of general economic issues out there not effecting home care. I guess you answered it with your numbers, but maybe if you can give us more color on what you are seeing out there in the home care industry, as far as you’re obviously going to be cautious with credit, which is obviously smart. But as far as consumer purchasing, I know there seems to be some beliefs out there that if consumers weaken, the home care industry could potentially weaken. Obviously that’s not in your numbers here. Can you maybe talk about what you are seeing, and what you are hearing out there from the field, if anything, as far as weakness goes?

[Mal Mixon:]

This is Mal. I don’t think any of us are old enough to have ever gone through anything like what we are going through. And some of the old timers here at the company tell me that Invacare actually did better in bad economic times than the good ones, because people aren’t working. They have health problems. They go see their doctor. We are really not seeing. If I weren’t reading the paper, I wouldn’t see any impact on our business. Really the only impact we’ve had has been the euro. Europe is not quite on their profit goals. The US is ahead of their profit goals. So it has been about a wash. Our sales are very strong. I think it’s very hard for Rob and me to forecast if that’s going to continue. If it continues three or four quarters in a row, then we might change it. But, I think Rob started the year at 4% to 5%, and now we’ve moved it up to 5% to 5% growth. If we can sustain continued growth then we will talk about it later. But overall, in bad economic times, you would expect commodity prices to start falling, and that’s what we are beginning to see here now. So, I really think we are about as good a business as you can have to be insulated from the general economy. And we are being cautious on our credit, and so far we haven’t seen any strange things happening. And you have got to realize that the revenue streams of our customers are pretty certain. The federal government, state government and HMOs, and insurance companies by and large. So, their revenue stream is still very strong. The issues they have to deal with are the absolute rates based on reimbursement. They don’t have a -- they really don’t have a risk that suddenly their income stream gets impaired, and that’s all good for Invacare. So, with the cuts coming in the first quarter, we will continue to look at marginal accounts, and probably not be quite as generous with credit. But overall, I think we have really strengthened the company for the year and I think we are moving into the next year with a lot of momentum.

[Rob Gudbranson:]

Mal, I agree. The only thing I have just on the Josh to talk about the organic sales growth. The reason why we moved it to 6% to 7% is for the first nine months, we had 7.7%. So, it’s a little hard to be sitting there and looking at the results and say to ourselves, we are going to still stay in the lower range. So, I think some of that’s been gaining market share, as our HME business in particular have come back strong, given that it’s got its costs right. So, don’t think we perceive that continuing long term, as Mal said.

[Joshua Zable:]

Great. And then one final question, sorry to take up so much. Just on the gross margin side, you guys have done a really good job growing that. I guess the one thing you really can’t control is mix, which you are going to sell everything you can and that’s fine. But is there any specific trend related to reimbursement or anything that will effect to the mix? Or is it just kind of some quarters we sell more of this and there is no sort of – it just happens you sold more beds. It is what it is, and next quarter you may sell more or less?

[Mal Mixon:]

Well, there is a little bit you can do, for example, the commission plans that you run for your sales force, the special programs you run. And we try to motivate the sales organization to sell the higher margin products, and also to concentrate on the higher margin accounts. Beyond that, obviously, we are going to take the business that comes in. And we are trying to continue the engineer cost out of the products to improve the margins, and this is an ongoing thing. This is not a one-time program. So, Rob, you may have further comments on this, on the margin.

[Rob Gudbranson:]

I think, Josh, I would agree with what Mal says. There are some issues with specific markets that might pop up, for instance we may be in a marketplace where reimbursement gets cut on one particular product, but I would say in general the key is to motivate the sales force to sell the whole product line, but ideally the higher margin, and we will see where it falls out. I think there is going to be some movement quarter-to-quarter, and we try to build that in to having a range.

[Joshua Zable:]

Thanks for taking all my questions. Congratulations again.

[Mal Mixon:]

Thanks Josh.

[Operator:]

Your next question comes from the line of Greg Williams from Sidoti and Company.

[Greg Williams:]

Good morning, guys, thanks for taking my call. Just to talk again about the locked commodity costs, are you saying, you used hedging vehicles to lock in those commodity costs, and they would expire at the end of the year?

[Mal Mixon:]

No, really what happens, you have a contract with a supplier, say steel. And they call you up and say, we are announcing a price increase. We say, look, we have a contract, and so our purchasing department tries to stretch out the old price as long as they can, and avoid the spike as long as you can. So with good intention, they locked in some prices which looked pretty good, relative to where we were at that point in time, so meanwhile they spike even higher than that, and now they come down perhaps lower than that. So we are talking about a 90-day period here, and so we pretty well know our commodity costs for the balance of the year. Our purchasing people are feverishly working right now to renegotiate fuel, renegotiate steel, aluminum, lead, and it should be a lot more fun purchasing, than it was during the other periods. I hope that explains the situation. We don't speculate and buy futures, or anything like that.

[Greg Williams:]

Okay. Thanks for clearing that up. Can you talk about the standard product line, it had some very nice growth 22%, and I am just wondering, is that really due to coming down and price priority with competitors, your competition is struggling. Anything you can hold your hat on, or we can attribute to a large amount of the standard product growth?

[Mal Mixon:]

Well I have to say that we probably lost some market share during that period where we had a price umbrella with the Chinese importers. Also in starting up our Chinese factories, it took a while for us to get a real balance of product on the water, and what I would call consistent product delivery and availability. As I sit here talking to you today, we have never had better availability of product, we are in the 95 percentile, we deliver it faster, more relying, a lot of business coming back that we might have lost. Secondly, we haven't talked about it, but Invacare has had big role in fighting for the industry in Washington, and I have had an outpouring of calls and thank yous, and e-mails and letters from customers who said, Thank You Invacare for saving us from competitive bidding, and so forth. I think that we are being rewarded for our efforts in that regard. And lastly, Invacare, we talk about the services that we offer our customers. We used to be only a product, supplier of products. But now we made a tiny little acquisition in this quarter, which is not significant, in terms of its financial size. But, it is a little company that specializes in collecting the co-pay, the 20% co-pay of our customers, and many of our customers don't have a credit department big enough to really do that. So here is a service I can go to you, and say look, I will help you collect your co-pay. I will help you install your computer systems with the right kind of software. I will help you service your product and sales in States you have sold on the Internet. I will help you structure and understand your costs better with our consulting group, so we are continuing to hold the hand, and develop relationships that go beyond just the products, and I think we are being rewarded for that. Rob, is there anything you want to add to the end of that?

[Rob Gudbranson:]

No, you hit the key point. They are both good points, but I would particularly say that we see, Greg, that losing that market share over many, many quarters, if you went back, I know you have been on the coverage, for not multiple, multiple, multiple years. But if you go back a lot of years, there were painful times, where we consistently shrunk standard, because we didn't have the right pricing we didn't have the right costs. So I think a lot of it is coming back, I would concur.

[Greg Williams:]

Great. Very helpful. Mal, you mentioned about the 20% co-pay and in fact you made, and that gets me thinking, so there is a substantial piece of that out of pocket with folks. You made a good case that volumes will be strong in down market, but facing that market would you maybe see a product mix shift towards possibly lower end products, or products with less whistles and bells?

[Mal Mixon:]

I wouldn't refer to them as whistles and bells so much, but we do have different price points on virtually every product. And we are seeing a slow migration, as Medicaid or Medicare make a cut in a certain product. It is not so much a discounting of the product you are selling, they may migrate down to a less configured product, a more basic product. For example, we make a full electric bed, where you can lift the patient up, and change the head and foot of the bed. We make a semi-electric bed, and we make a manually operated bed. Well if you can crank with your hand, it will still get the bed up. So it may be that you will see some migration into a less featured category, but at the same time, we are offering different price points, and lowering the cost of all of these products. I guess that would be the way I would define what is happening.

[Greg Williams:]

Okay. Great guys. Thank you.

[Mal Mixon:]

Thank you, Greg.

[Operator:]

Your next question comes from the line of Greg Halter with Great Lakes Review.

[Greg Halter:]

Good morning guys. I know you briefly mentioned your customers, and receivables, and so forth. I think I also read a comment that there was an increase in bad debts, bad debt expense in the quarter. I wonder if you could quantify that?

[Rob Gudbranson:]

It was not substantial, Greg, but it is part of the explanation for the increased SG&A. It is right on-line with our AOP, we typically during the course of the year increase our bad debt expense just to be in-line with the sales exposure, so nothing funny there.

[Mal Mixon:]

I would say, Greg, that our bad debt expense is probably and the accruals are probably in the best shape they have been in a long time. Certainly nothing going on that is different or unusual. And I think that we will continue to accrue bad debt expense when we can, and strengthen, continue to strengthen the portfolio.

[Greg Halter:]

Okay. I know Europe is about a third of your overall business. Can you provide some perspective on what countries make up that 33% or so of your at least in this quarter's sales?

[Mal Mixon:]

Well, I don't know that we have ever broken it down by country, Rob. But we are strong throughout Europe, you may or may not remember we made some significant acquisitions in France, Scandinavia, and Germany. So they are all, if you look at the English speaking countries, the UK, the southern region, which is headed by France, the Nordic area, and then of course, Germany, Austria, Switzerland, and that, we haven't broken them down into four main areas. And in our businesses who are more profitable over there than here, and I think our European group hasn't felt the same kind of cost pressures, necessity is the mother of invention. While they have had cost reduction problems, I don't think they have attacked it with the same velocity, and ferocity I should say that our guys here in the States have. So I think some of the commodity stuff kind of snuck up on them a little bit, and they weren't out in front of the pricing like maybe they should have been. But I think you are going to see a much more aggressive stance going forward. And as I say, it is pretty well spread throughout Europe. There is no one country we are dependent on.

[Greg Halter:]

Okay. You said it is more profitable than the US?

[Mal Mixon:]

Well, our margins are significantly better than in the US. Rob, do you want to--?

[Rob Gudbranson:]

Yes, you look at both the gross and the performance, and you look over the last couple of years, Greg, I think you will remember how important Europe's performance has been to us, as we have been turning around the US.

[Greg Halter:]

Alright. Okay. And one housekeeping issue, your goodwill was about 535,000, and I know last quarter total goodwill and intangibles was about 675, is there a component in the other, included in other assets that I am missing?

[Rob Gudbranson:]

I would be very happy if it was 500,000.

[Greg Halter:]

535 million, I mean.

[Rob Gudbranson:]

Yes. We would be pleased. The big mover there, and one of the reasons why you will see in the press release, Greg, we talk about the fact that our debt-to-total capital went up a little bit, we paid down debt by 18 million, so you expect that debt-to-total cap to get better. We translate the balance sheet in Europe in particular, where we have a lot of goodwill, over back into US dollars by the end of quarter, as you are aware, the dollar strengthened quite a bit, that Euro-based primarily Euro-based goodwill comes back at a much lower level, and that actually impacts shareholder's equity, so those are the two entries that get made. You are right, it went down and that’s the big reason for the move, and the shareholder's equity going down too.

[Greg Halter:]

Okay. Is it fair to say that you have about $100 million in other intangible assets?

[Rob Gudbranson:]

If you are looking at goodwill to goodwill, that is just the movement from the currency, we have additional intangibles elsewhere.

[Greg Halter:]

Right, that is what I mean. That’s what I am trying to get is what the amounts of those other intangibles?

[Rob Gudbranson:]

We would be glad to discuss that with you after the call, I will give you the break out on that.

[Greg Halter:]

No problem, thanks.

[Operator:]

Your next call comes from Gregory Macosko with Lord Abbett.

[Greg Macosko:]

Hi. How are you there?

[Rob Gudbranson:]

Good.

[Greg Macosko:]

Good. Perhaps we could talk about the new products. I see there is a big part of the growth in one of the areas in the Institutional Product Group, developing from new products. Give us a sense of how much of the revenue is from products three years old? Do you have any feel for that?

[Mal Mixon:]

I don't have those statistics totally in front of me. But I can say that Invacare virtually replaces every product in about a three to four year cycle. What I call a new product is really something that is different than what we are selling. For example, HomeFill continues to be very popular, growing in the US, and now we are finally beginning to penetrate Europe with a product. That is very exciting. In the institutional group, they have come up with a new nursing home or long-term care bed, and the nursing home industry really loves this bed, and associated products, and they are selling a lot more of them than I thought we would. And demand continues very strong as we sit here today. So that is an example of a couple of new products. We have some new advanced power wheelchairs that are being introduced here very shortly. It is a never ending function that we have. We have not reduced our engineering R&D, even through the tough times. So Invacare is known as an innovator, and a new products company. We still have a lot of exciting products ahead for us in the next year's budget as well.

[Greg Macosko:]

Give me some sense of price? You mentioned that you got a little price, but then of course commodities rose and now they fell again. If we look out going forward, you also mentioned that your competitors are kind of being coming in line and following you perhaps a little better than they did in the past, I know you cut price earlier from changing your sourcing, etcetera. But give me a sense of what we should think about relative to price going forward next year?

[Mal Mixon:]

Well, the pricing in our industry for manufacturers is really driven by competition, not from the buyers. Our largest customer is less than 4% of our sales. So any time we have ever adjusted our price, because of some competitor's actions. I think that through the process, the margins got down to a level that weren't sustainable finally for some of our competitors. And we are in a situation now, where I don't forecast some crazy price war, or anything like that. Going forward, the steps that have been taken to reposition our manufacturing in China, and our Mexican facility now is very, very attractive as the peso has weakened, and the freight costs, and some other things in China have increased. We are building a new factory in Portugal, which is sort of a low cost base for Europe. So I think we are in pretty good shape. To forecast price increases are very, very difficult. We haven't had any in so long. I wouldn't make your model going forward based on price increases, but I do think we can improve our margins, by not having much further pricing deterioration. Another way to say it, is that we can reduce our cost faster than prices might gradually decline. So we have another very, very aggressive cost reduction program that we are presenting to our Board next month for the next three years, and a lot of that has that do with standardizing platforms of things like motorized wheelchairs. We have seven or eight different platforms, when we could really design common platforms that substantially reduce our costs, so that is a rather long-winded answer. Rob, you want to add anything further to that?

[Rob Gudbranson:]

That was a good answer.

[Greg Macosko:]

Okay. But with regard to the sourcing, clearly you have changed things, has the sort of the biggest part of the change in sourcing to China, Mexico, you talked Portugal. Is that done now, and do you look, obviously you talk about another cost reduction program, but does that mean maybe more factory closings charges, things like that with regard to this new program perhaps coming?

[Rob Gudbranson:]

What Mal focused on which I think is the key issue is really the globalization, so if you think the low hanging fruit, in terms of just moving sourcing overseas. There is still more of that, as Mal mentioned in terms of Europe probably not being as far along as the US, in terms of looking to Asia, and looking to other locations for low cost sourcing. But I think the bigger issue is again, let's take the extreme example. We have got depending on how you want to count it, 30 or 60 models of walkers worldwide, and why do you have them. When you sit down and look at it, the changes on some of them are so deminimis, we can get down to a common platform. We had 96 motor gear boxes set ups, these are just things of us thinking more as a global company, and that gives us both purchasing capability, and then in the plants we have, it gives us the ability to do longer runs. A lot of upside here without taking huge actions. Could we be shutting a plant at some point is not something we are focusing on. We are focusing on improving our capability of getting more products through our plants, and through the suppliers.

[Greg Macosko:]

Okay. And then to the balance sheet, if I could. The free cash flow, basically are you taking, are you going to use the free cash flow to continue to pay down debt? You have paid down 18 million. I understand the shift with the debt-to-total capital, that was a good explanation, but talk about as the free cash flow, I would assume you talked about is going to be nice, positive, where is that going to go?

[Mal Mixon:]

This is Mal. I can tell you on the current environment, we are going to pay down debt, and get more and more secure. And my goal, if the banks ever get back to normal, my goal is to get back on unsecured credit again as we were before we had our refinancing last year, and if you look at our ratios, they are substantially improving. Every quarter they are improving, and I think by the middle of next year if things were normal, we would be in a position to talk about lower rates, a bigger line. But again, I am not taking any chances, and I want to make sure that we have plenty of availability, and hopefully some of my competitors will have a lot bigger problem, and they may not have the availability to finance the growth, and carry the industry's receivables, and so forth. So I am essentially saying, don't expect us to do any acquisitions, we are going to pay down debt.

[Greg Macosko:]

And DSOs are down 3, the turns improved by 0.1. Any kind of goals with regard to the working capital?

[Mal Mixon:]

I am very happy with what is happening with receivables. I am not happy with what is happening with inventory. We despite goals that we have set internally, we have a lot of opportunity to improve our inventory turns, so we should be I think at least 6, and not 4.9. I think on the days receivable, I don't know that we can make a lot more progress there, Rob, maybe a day here or there. But the working capital, with all these complex models that we have, we talk about having nine different platforms for power chair. If we can, what my people are calling localization, where you take a motorized chair, where the chassis are all the same, the electronics are all the same, but you get to the German market at the very end, they want headlights and turn signals. We don't have those in America. So you localize the product at the tail end, but globalize it up to the maximum point you have. If we could do that, we would have much less complexity in our inventory. And not only reduce costs, but substantially reduce inventory. So this is all ahead for Invacare in the next five years, to really reduce costs through globalizing our products, localizing them at the end, and taking tremendous complexity out the inventory, which is going to shrink.

[Greg Macosko:]

The payables those are where they should be? Or are going to be?

[Rob Gudbranson:]

No, we think there is improvement on that front, we have got a number of actions to see if we can get our terms improved. There is still room on that Greg.

[Greg Macosko:]

Okay. Thanks very much.

[Operator:]

Your next question is a follow-up from the line of Joshua Zable with Natixis.

[Joshua Zable:]

Hey, guys thanks for taking the follow-up. I know this is going long so I will be quick here. Feel free to refrain from answering this. Obviously with politics on a lot of people's mind and the election coming up here. Any thoughts as to how any of the results could effect you guys, and again just because I know you guys play such an active role in Washington, and have really helped out the industry, just maybe general thoughts to the extent that you are comfortable?

[Mal Mixon:]

Yes. Well, it is a very important issue, and as you listen to McCain and Obama talk about healthcare, they are dealing with a global issues of healthcare, and home care only represents about 2% of the whole Medicare budget. I met with Tom Daschelle the other day in Washington, who is heavily involved with Obama's campaign, and a lot of speculation he is going to be the next Secretary of Health, and Tom tells me that Obama is a big believer in home care, wants people to be able to have their medical care at home, and not institutionalize them, if that is where they want to be. I really encouraged him to have Obama mention that in his healthcare platform. I think this whole financial disaster is going to take front stage for a long time. And I really don't see how they are going to do some giant Medicare bill, when they are faced with the kind of issues they are dealing with. I don't have a clear understanding yet of McCain and Obama's position on our little industry, but I am trying to find out. And a lot of my customers are asking me now who is really going to support home healthcare? So we will keep working on that, and we are advocates for home health care, and we certainly have supporters on both sides of the aisle, as an example of that was a tremendous Congressional support we had overriding the veto of the President on the 'doc fix' Bill, when we able to get the long delay in competitive bidding. And we are very hopeful the industry can work with CMS to change that program to an alternative, so that is kind of how I see things right now.

[Joshua Zable:]

Great. That is very helpful. Thanks guys.

[Operator:]

Your next question is a follow-up from the line of Greg Halter with Great Lakes Review.

[Greg Halter:]

Yes, thank you again for taking the follow-up. You mentioned a factory being built in Portugal. How does that compute into the capital spending plans for '08 and '09 as well?

[Mal Mixon:]

Yes. It is a facility, I believe, Rob, we are leasing the facility. It is not a huge factory. I will let Rob comment on capital. By and large, what we are doing today is not requiring capital. For example, the facilities in China we lease. And we don't have a lot of capital equipment involved in that. The biggest capital expenditure we had was our systems, which is behind us now. Rob, do you want to just comment generally?

[Rob Gudbranson:]

The amount of money we were actually spending in Portugal was deminimis, in terms of the total for the year. I think we are getting operating by the end of the month this month. November 1, I think we are up and starting. It is not anything that is going to be a big move, in terms of our capital, Greg, so that won't be a big issue. And to answer your question from earlier on, in the Other assets column, Other assets are about 163 million. Long-term intangibles are about 100 million of that approximately, just approximately.

[Greg Halter:]

Okay. That is good. I know you said your capital spending plans would be about 25 million, if am correct?

[Rob Gudbranson:]

Yes, that was our original guesstimate, I don't think we are going to make it all of the way there, if you look at what we spent through the nine months.

[Greg Halter:]

You are at 15 now. Probably less than 25, but more than 15?

[Rob Gudbranson:]

We are going to spend some more, but I would be very shocked if we got much above 20, given what we have got on the plate.

[Greg Halter:]

Any thoughts for '09 at this point?

[Rob Gudbranson:]

We will stay consistent to our past performance, in terms of covering that when we get to the end of the year.

[Mal Mixon:]

I will just say that we expect it to be better than this year.

[Greg Halter:]

Okay. Meaning lower?

[Mal Mixon:]

Better earnings.

[Greg Halter:]

I got you.

[Mal Mixon:]

Same answer I gave you last year at this time, which was that '08 would be better than '07.

[Greg Halter:]

Okay. Well, that is good to hear too. You made a comment about the new product beds, specifically in the nursing home area. Who are you competing against there, who are you taking share from I guess I should say?

[Mal Mixon:]

Well our principal competitor is a division of Sunrise Medical, called Joerns. It is a separate organization for Invacare, we have a separate sales organization, and we make the beds, and what are called the case goods, or the furniture that is used in the nursing home room, along with our home medical equipment that is also used in the nursing home environment, so and it's current run rate, it is now over $100 million. And we have some single product competitors on various components, and I would say that probably Joerns is our principal competitor.

[Greg Halter:]

Okay. That is excellent. Thanks a lot.

[Operator:]

There are no further questions at this time.

[Rob Gudbranson:]

I will just make one comment, during the call we talked about debt-to-total, debt-to-EBITDA, and just for the purposes of the people on the call, I will let them know that we got down to 3.5 times. Last quarter we were at 3.7, and first quarter we were at 4 times. As Mal mentioned earlier, we have made good progress, and at 3.5 times debt-to-EBITDA, we are will on the way to the improvement that we want to see. Mal, I will let you conclude.

[Mal Mixon:]

I understand there are no further questions.

[Operator:]

That is correct.

[Mal Mixon:]

I will just wrap up by saying, thank everyone for just sitting in on the call this morning. We are very pleased with our results in a difficult economic period, and we feel that we will deliver in the range that we began with when we made our forecast for the year. We look forward to telling you more about '09, when we release our fourth quarter earnings. If anyone has any further follow-up questions or issues, please feel free to call Rob Gudbranson or me here at the headquarters. Good bye.

[Operator:]

This concludes today's conference call. You may now disconnect.