Savaria Corporation (SIS) Earnings Call Transcript & Summary

Good afternoon, good evening. My name is Razia. I will be your conference operator today. At this time, I would like to welcome everyone to Savaria Corporation's Q1 2023 Conference Call. [Operator Instructions] This call may contain forward-looking statements, which are subject to the disclosure statement contained in Savaria's most recent press release issued on May 10, 2023, with respect to its Q1 2023 results. Thank you. Mr. Sebastien Bourassa, you may begin your conference.

Thank you, Raz. So basically, this morning, I have the honor to lead the call because Mr. Marcel is absent for personal reason. But he wants to know that he's always available by a call or e-mail if you have any questions and he is doing very good. And he was proud of this Q1, so that's why he started to let his team lead the call. So it was a very good first quarter, historically, which is our strongest quarter for Savaria. So I would like to thank all the employee for their hard work, and we think it was a solid execution because we have a very good organic growth in the accessibility and the patient care. Positively, our backlog remain at a historic level, which is a very good news because it's still, again, that we are in a fantastic industry, and that will be good for the remaining of the year. So very happy about that. As Marcel said in his press release, we continue to build on our plan for the $1 billion and $1 billion is the target that we want to achieve by 2025. And so we continue to elaborate on this plan to make sure we'll be able to execute. Some key highlights in the Accessibility. Mexico ramp-up continue to happen. Right now we have 45 employees. We have 4 different assembly lines, and we are doing some shipments of some units straight to the U.S.A. So this is very important. Supply chain, I hope we don't have too many questions on that today because for us, we consider it is relatively stable. It's a perfect, once in a while there's going to be issue, but overall, it is good and give us the opportunity to achieve our plan. I think [indiscernible] keep this segment for me this morning, but you want to highlight the patient care.

Yes. Thanks, Seb. For sure, our Patient Care segment delivered record results in Q1, including an EBITDA margin at top 20% for the quarter. And again, that was a first for the segment. As you might imagine, the team is very proud of their performance as they should be. Well, we don't want to get ahead of ourselves, and it's just one quarter. It goes to show what's possible. And what we're seeing -- and this is really a continuation of what we saw last year, is evidence of the tremendous synergies being unlocked through the integration of Span and Handicare. And in particular, as it relates to Q1, sales were especially strong, up 13% organically versus last year. This was driven by a number of factors, including continued strength and new build activities, cross-selling initiatives and good spending by certain strategic partners. In turn, the higher sales volume allowed for a better fixed cost absorption, which contributed to the record margins experienced in Q1. In addition, we benefited from a good product mix and the realization of some higher-margin projects. And finally, the pricing initiatives that were put in place last year are having a meaningful impact on profitability. So to conclude, it's always nice to start the year with a solid Q1, and we feel good about the backlog exiting the quarter, so there's a certain level of optimism for the remainder of the year as well. With that, I'll pass it over to Steve for the financial review.

Thanks, Nick, and good morning, everyone. I'm going to begin with some remarks regarding our Q1 2023 consolidated financial metrics. For the quarter, the corporation generated revenue of $211.6 million, up $28.1 million or 15.3% compared to Q1 2022. The increase was driven by strong organic growth of 13.5%, originating from all segments. In addition, the corporation experienced foreign exchange tailwinds of 1.8% in the quarter, combining for 15.3% growth overall. Gross profit and gross margin stood at $72 million and 34%, respectively, compared to $58.5 million and 31.9% in Q1 2022. The increase in gross profit of $13.5 million was mainly driven by higher revenues and increased gross margins and to a lesser extent, favorable foreign exchange rates used in the conversion of the results of subsidiaries. The increase in gross margin versus last year was mainly attributable to greater profitability coming from the Patient Care segment due to better cost absorption and favorable product mix, partially offset by continued inflationary pressures resulting in material and labor cost increases, especially in Europe. Adjusted EBITDA and adjusted EBITDA margin finished at $31.2 million and 14.7%, respectively, compared to $24.4 million and 13.3% in Q1 2022. The improvement in profitability is mainly explained by the gross margin increase as well as the decrease in selling and admin expenses as a percentage of revenue. And now I'm going to move on to our segment results. Revenue from our Accessibility segment was $151.4 million in Q1 2023, an increase of $21 million or 16.1% compared to the same period in 2022. The increase in revenue was mainly attributable to organic growth of 14.4%. Foreign currency had a further positive impact of 1.7% for the quarter as the U.S. dollar and euro both strengthened versus the Canadian dollar. Our revenue growth was fueled by both the residential and commercial sectors as well in price and volume increases, and we continue to build our backlog. At March 31, 2023, our Accessibility backlog was approximately 8% higher than Q4 2022 last quarter. Adjusted EBITDA and adjusted EBITDA margin stood at $23.4 million and 15.5% respectively, compared to $20.5 million and 15.7% for Q1 2022. The increase in adjusted EBITDA was mainly driven by higher sales volumes, while the slight decrease in adjusted EBITDA margin was mainly due to continued inflationary pressures causing higher material and labor costs, especially in Europe, partially offset by better cost absorption from the increased revenues. Revenue from our Patient Care segment was $48.8 million for the quarter, an increase of $7.2 million or 17.2% when compared to Q1 2022. Revenue growth includes organic growth of 13.2%, which was driven in large part by new contracts signed with health care facilities, cross-selling synergies with Handicare and pricing optimization, as Nick alluded to earlier. For the quarter, foreign currency provided a 4% tailwind. Adjusted EBITDA and adjusted EBITDA margin stood at $9.8 million and 20.1% respectively, compared to $5.3 million and 12.8% for the same period in 2022. The increase in both metrics was primarily due to the increase in revenues and improvements in gross margins, mainly explained by better cost absorption and product mix, pricing initiatives and synergies with Handicare. Revenue generated from the Adapted Vehicle segment was $11.4 million, a decrease of $0.1 million or 0.8% when compared to Q1 2022. The slight decrease in revenue was mainly related to a negative foreign exchange impact of 4.5%, which was partially offset by positive organic growth of 3.7%. Adjusted EBITDA and adjusted EBITDA margin, both before head office costs, finished at $0.6 million and 5.4%, respectively, compared to $0.6 million and 4.9% for Q1 2022. For the quarter, net finance costs were $7 million compared to $1.4 million in Q1 2022. Interest on long-term debt increased by $3 million when compared to Q1 2022 due to higher market interest rates. Net finance costs were also impacted by a net foreign currency loss of -- excuse me, $1.3 million compared to a net gain of $0.7 million in 2022, most of which was unrealized in nature. Also, the corporation incurred a gain on the ineffective portion of changes in fair value of net investment hedges of $0.8 million in 2022, which was not repeated in Q1 2023. Net earnings were $6 million or $0.09 per diluted share for the quarter compared to $5.3 million or $0.08 per diluted share -- diluted share, excuse me, in Q1 2022. Adjusted net earnings was $8.4 million or $0.13 per diluted share compared to $6.8 million or $0.10 per diluted share in Q1 2022. This reflects an increase of 24% or $0.03 on a diluted share basis. Turning now to capital resources and liquidity. Savaria generated cash flows from operating activities of $16 million for the quarter compared to $13 million in Q1 2022. The increase is mainly due to the higher profit generated by the corporation in the quarter, partially offset by higher income taxes paid versus Q1 last year. In the quarter, the company made a net investment of $2.1 million in working capital versus $2.7 million in Q1 2022. Cash generated from investing activities was $7.7 million for Q1 2023 compared to cash used of $4.8 million in Q1 2022. In 2023, net cash from the Norway divestment totaled $12.4 million, while the corporation disbursed $1.4 million for the acquisition of Ultron in 2022. Conversely, disbursements of $4.5 million for fixed and intangible assets were made in Q1 2023 compared to $3.6 million in Q1 2022. Cash used in financing activities was $6.3 million for the quarter compared to $27.2 million in 2022. Q1 2023, the revolver balance increased by $8.5 million, which we can largely see reflected in the quarter ending cash balance. As of March 31, 2023, Savaria had a net debt position of $358.9 million and was in compliance with all of its covenants. On a trailing 12-month adjusted EBITDA basis, Savaria's net debt to adjusted EBITDA ratio was approximately 2.8x. This represents approximately a 0.24 decrease versus Q4 2022. And this reduction helps us to achieve our 2023 reduction leverage target of 0.5x. Savaria has funds available of approximately $135 million to support working capital investments and growth opportunities. Looking forward, for 2023, Savaria expects to generate revenue, which will be approximately 8% to 10% higher than 2022 when normalizing for the impact of the Norwegian auto division divestments with adjusted EBITDA margins of approximately 16%. In addition, as previously noted, for 2023, we are targeting a reduction in our leverage ratio of 0.5x. And this outlook is based primarily on continued strong organic growth coming from the Accessibility in Patient Care segments, supported by high backlog levels, cross-selling synergies and strong demand as well as continued successful integration of Handicare and progress towards achieving the next strategic phase of synergies in line with management's plan. And with that, this completes my prepared remarks, and I'll turn the call over to you, Razia, to open it up for questions, please.

[Operator Instructions] We're now going to proceed with our first question, and the questions come from the line of Derek Lessard from TD Securities.

Congratulations on a really good quarter. Maybe I just wanted to, Nick, to start with you and really dig down into that 20% Patient Care margin performance and some of the drivers behind that? And how you guys are thinking about the sustainability of that margin? And I guess, how does that all tie into your 16% consolidated margin guidance for the year?

Derek, again, as I mentioned in the opening remarks, we're very happy with the results, right? I think 20% was a new level for that segment. At the same time, we do realize that it was just one quarter, right? So we want to kind of be cautious about moving forward, but it does show it's possible, right? Bringing the teams together and they've been doing a fantastic job. In terms of the margins, in particular, what we're seeing is anytime you get above $40 million in the quarter in terms of sales and then especially when you get about $45 million in sales, then that fixed cost absorption really kicks in. So there's a lot of leverage in that business as a sales increase. So that's probably one of the biggest contributing factors there to the margin that you saw there in the first quarter. The second, I would say, big impact is the pricing initiatives, right? Something that we talked about a lot last year. There is a little bit of a delay sometimes in terms of when those kick in. And so what you're seeing here in Q1 is really kind of the full impact -- meaningful impact of those price initiatives that we have been talking about for the past several quarters. So I would say that's kind of the big drivers of the margin improvement. One, just the strong sales performance and the pricing initiatives.

And just maybe on the Handicare synergies, can you just help us understand where they're coming from, both on the revenue margin side and where you think maybe that there's even more opportunity to extract more?

There's some big synergies that we're seeing, and this is where I think there's more to come, is going to be on the cross-selling, right? So really from the commercial perspective, the team is really coming together. The sales force integration is something that it is a key project for us. I guess as we ended last year and going into this year. So it's something that we're looking at with Canada and also in the U.S. to realigning the sales forces. So they're working efficiently, working together, and we're also bidding on the whole room. So that's something that's a little bit different than what we saw before and now is going to some of this, and we're bidding on the entirety of it, right? So whether it's the bed frame, the mattress, the sealing lift, the sling power portion of it, the case goods, so that's actually what we're quite excited about is as we're looking forward to the various tenders that are coming up and it's going to kind of recall sales over the next several quarters, if not years, is that we're really one of the few one-stop shop player similar to what we say in Accessibility being the one-stop shop for our dealers, it's a similar concept playing out there within Patient Care and that we're one of the few players that can provide the entire room. So that's, I would say, one of the biggest synergies that you're seeing within, I guess, between Span and Handicare. And it's something that we're just starting to step into them. So it's something to look forward to over the next several quarters, over the years. So that's what I would say is one of the biggest synergies that we're seeing is on the commercial side.

And maybe a few for some housekeeping for me for Steve. On the working capital, just wondering how you're thinking about it for the rest of 2023, I guess, given the inflationary pressure in Europe, and are you expecting those inventories to grow as you cycle through the higher cost and mix some other, I guess, inventory plans as you expand the Mexican plant.

Yes. Derek, good to talk to you. It's -- we're actually not expecting to see inventory climb for the rest of the year. In the quarter, we had a net investment in working capital in working capital, about $2.7 million. To be frank, I'm a little bit disappointed in that. I was hoping to see a reduction versus Q4. We are planning on seeing a reduction. So for the rest of the year, regardless of Mexico and everything happening in Europe, we are expecting to see working capital levels remain tight. We're not expecting any investment to answer your question.

And then maybe one final one for me before I review the fund depreciation. The -- there was an increase of about $1 million on the amortization of intangibles. How should we be thinking about that?

Sure. And it can be a little bit lumpy. I mean, obviously, we did see a large jump up in the intangible amortization for the Handicare deal. But also a big part of intangible amortization as a lot of the R&D spending that we have, which can be lumpy. So we saw the increase in Q1 of about, as you said, $1 million from Q4. But if we look at Q3 last year or Q2 last year, it's -- the increase is much less. So I think if you want to think about that going forward, I would say there's going to be some up and downs just with regards to timing of R&D project amortization, but nothing to imply a higher run rate, Derek.

We are now going to proceed with our next question, and the questions come from the line of Michael Glen from Raymond James.

Okay. So -- just circling into the Accessibility segment and you're talking about within patient care, you're talking about the benefits that you're starting to see from those pricing initiatives? And I know that there's some pricing initiatives you've taken in accessibility too. Like when do you think we'll start to see those start to roll through in the margin? And what type of -- should we think -- how should we think about the margin benefit as those pricing initiatives start to work through the backlog?

Thank you. So basically, for certain high backlog goes a bit about the price we set the price increase that we do. So we will expect from the second quarter to see a bit of better margins in terms of excess it. But yes, we are very lucky that our backlog has given us the approach to have a good first quarter. And I think we have been able also to fill some of the acquisition that we added about labor, in factory or installation that has helped us to generate some more output. So that's about the answer for this question.

Now for -- so for accessibility, would you -- do you think that 1Q would represent then the low point for the year and will work better from this point forward?

Good question. Thanks for that, Michael. I mean, we do have price increases coming into effect -- the 2023 price increases that came into effect this year haven't quite worked their way through the backlog yet as far as Q1 is concerned. So we will see the impact coming through the remainder of the year. What we're seeing right now in some of that organic growth is the price increase versus last year. So a similar timing last year's price increase came into effect at the beginning of the year, takes a quarter to work its way through. So we started to see that in Q2, but we're still seeing that now versus Q1 2022. With regards to the remainder of the year, when we look at our price increases and how much we put into effect, we obviously are trying to improve margins, but we also need to keep in mind cost increases that we're seeing across our business. So it's one to improve margins, but also to make sure that we level off or negate any negative impacts from vendor cost increases or other cost increases across the business. So yes, our plan is that the margins will keep increasing from here, but we have to keep in mind that there are cost increases happening, ongoing throughout the business throughout the remaining quarters of the year as well.

And then just in terms of -- I know you guys have spoken in the past about targeting becoming a top 3 player in North America in that stairlift business. Are you able to provide an indication or translate that into what that would mean from a revenue perspective for your top line?

I think right now, we have delivered some guidance of 8% to 10% of organic growth. And if we look at the size of business that we are right now, I will consider that we are in the top 3 difficulty worldwide in terms of manufacturer of other different products. We are the only company in the world that can offer a stair lift, a porch lift, an inclined lift, a normal home lift and then also some Patient Care products. So I think we are quiet the best companies of our product offering to grow size also.

Maybe Michael there, you think about stair lift in North America, in particular, I think there is more room to grow. So we think about that 18%, you might think that maybe there will be outsized growth within stair lift in North America because there's a lot more of a runway there for us. So that's maybe how to frame that.

And one additional one. Any guidance on the interest expense for the year where that would come in?

A lot of our debt is variable rate right now. So I mean it would be nice to know exactly where the interest rate is going to be in the next couple of quarters. But for forecasting purposes, I would expect that for Q2, Q3 and Q4, that we're going to see similar interest expense in line with Q1.

We are going to proceed with our next question. The questions come from the line of Nick Agostino from Laurentian Bank Securities.

So I guess my first question is just a comment that I saw in your press release where you guys talked about seeing growth beyond 2025. Can you just maybe give some color as to why that comment was added?

I think Nick, first. I think we are just trying to reiterate that the $1 billion plan is our mission on this way. I think in any way in the company know that we're making steps or investments towards that. So I think Marcel just want to reiterate that again, we are always focusing on that trying to improve, if something isn't working per the plan, we [ function it ]. And yes, 2025 is coming soon, but we did some investments in [indiscernible]. We're thinking that it will be good for the next 5 to 10 years. I think it's just a general comment to reiterate that in a nice industry and we are thinking about the future and then just on the short term.

Okay. So we shouldn't read too much into that comment?

Yes. It's more general comments.

And then my other question for Nick, first, just given the fact that you put 20% up on the patient care margin in the quarter. I recognize it's not necessarily going to be a sticky number. But can you just remind us what you're looking for patient care margins for the full year? And does this particular number in Q1 maybe push your thoughts a little bit higher for the full year?

I think we're a little bit early to push our thoughts for the full year. So I don't want to stray too much from what we've talked about in terms of guidance. We talked about 16% margins across the business. I don't think we give guidance by segment. So we'll kind of stick to that. I mean I think patient care delivered a very good Q1. So very happy, right? I mean it's better to be above than symbol, right? So we're not doing ourselves out as a whole as we go into the year. But I wouldn't want to read too much into it and think that it sets the bar for the rest of the quarter, I think we want to be cautious about that. And maybe after another quarter or 2 of good performance, maybe that will be more indicative of the trend. Right now, we're just very happy with the performance. And -- but again, we're sticking to our guidance, if you will, for the remainder of the year. We're not looking to change that just yet.