Savaria Corporation

I am very happy what we released for Q3 to our shareholders. You can see that we worked very hard to reach the goal that were one of the goals to reach around 16% and we are there.

We have good growth. So, it's a very good quarter.

So, here around me I have Mauro, our CFO; Nicolas Rimbert, he is responsible for Span and acquisitions; and on my left I have Sebastien who is in charge of operations. So, first of all, Mauro please.

Thank you, Marcel, and good morning, everyone. Overall we are very pleased with our results for Q3 2019.

The Corporation generated revenue of CAD96.4 million for the quarter, up CAD24.3 million or 33.8% compared to Q3 2018, mainly due to acquisitions. The Corporation's accessibility segment revenue grew organically by 8.3%, while revenue from Patient Handling and Adapted Vehicles segment contracted all in line with management's expectations.

Gross margin stood at CAD32.1 million and 33.3% as a percentage of revenue compared to CAD23.9 million and 33.2% in Q3 2018. The increase in gross margin was in line with the increase in revenue.

Gross margin as a percentage of revenue remained stable. Adjusted EBITDA and adjusted EBITDA margin for the quarter stood at CAD15.7 million and 16.2% respectively compared to CAD10 million and 13.8% for the same (technical difficulty) 2018.

The increase in adjusted EBITDA was in line with the increase in revenue mainly due to acquisitions made in 2018 and 2019. The increase in adjusted EBITDA margin was due to a continued integration-related improvement in Garaventa's Lift standalone adjusted EBITDA margin as well as improvement in Patient Handling's adjusted EBITDA margin due in part to the exit from Span's custom product market segment.

The adjusted EBITDA and adjusted EBITDA margin derived from Silvalea acquired on July 1, 2019 also had a positive impact on the Patient Handling reportable segment's adjusted EBITDA metrics as a whole. On September 30, 2019 the Corporation completed a sale and leaseback transaction pertaining to its Surrey, British Columbia operating plant netting proceeds of CAD28.4 million and providing additional financial flexibility.

Now for a more detailed operational review by reportable segment. Revenue from the accessibility segment stood at CAD69.4 million for the quarter, up CAD26.6 million or 62.2% compared to Q3 2018 due in large part to the acquisition of Garaventa Lift made in Q3 of 2018.

Organically revenue grew by 8.3% mainly due to an increase in core residential elevator unit sales. Timing of shipments, which had a negative impact on Q2 organic growth, had the anticipated positive impact on Q3.

On a year-to-date basis organic growth stood at 4.5%, in line with management's expectations. Adjusted EBITDA before head office cost was CAD12.5 million for the quarter, an increase of CAD4.9 million or 65.4% compared to the same period in 2018.

The increase in adjusted EBITDA before head office cost was mainly due to the acquisitions made in 2018 and 2019. Adjusted EBITDA margin before head office cost stood at 18% compared to 17.6% in Q3 of 2018.

The increase in adjusted EBITDA margin before head office cost was due to a better product mix and to Garaventa Lift's improved standalone adjusted EBITDA margin before head office costs. On a standalone basis, and excluding the favorable impact of the adoption of IFRS 16 leases, the legacy Savaria accessibility reportable segment generated an adjusted EBITDA margin before head office cost of 22.6%.

Garaventa Lift's standalone adjusted EBITDA margin before head office cost was 11.8% for the quarter, an increase from 9.4% in Q2 and 7.3% in Q1. On a year-to-date basis it stood at 10%.

The improvement in adjusted EBITDA margin before head office cost for the segment as a whole from 16.9% in Q2 to 18% in Q3 was in line with management's expectations and due mainly to the continued Garaventa Lift's operations integration-related synergies. Revenue for the Patient Handling segment stood at $21.6 million for the quarter, a decrease of 0.8 or 3.7% when compared to the same period in 2018 mainly due to lower revenue from Span's custom products market segment partially offset by Silvalea acquisition-related revenue.

The lower revenue from Span's custom product market segment was in line with management's previously disclosed decision to exit that segment effective Q3 2019. Adjusted EBITDA before head office cost was CAD3.3 million for the quarter, an increase of CAD1.2 million or 60% compared to the same period in 2018.

The increase in adjusted EBITDA before head office cost was due to a better product mix from Span, the contribution from our Silvalea acquisition and continued cost containment efforts. Adjusted EBITDA margin before head office costs stood at 15.2% compared to 9.1% in Q3 of 2018.

Excluding the favorable impact of the adoption of IFRS 16 leases, adjusted EBITDA margin before head office costs would have been 14.5%. The increase of adjusted EBITDA margin before head office cost was mainly due to the same factors attributable to the increases in adjusted EBITDA before head office costs.

Costs and provisions to date pertaining to the Corporation's previously disclosed decision to exit from Span's custom products market segment starting in Q3 of 2019 stood at USD1.6 million with potential minor additional cost flowing into the final quarter of the year. The Corporation's initial estimated cost to exit from this market segment was $2 million.

Revenue for the Adapted Vehicles segment was CAD5.5 million in Q3 of 2019, a decrease of CAD1.4 million or 20.9% when compared to the third quarter of 2018. The decrease in revenue since the beginning of the fiscal year was due in part to the termination of a nonprofit organization's vehicle accessibility program at the end of 2018 as well as the yet to be renewed calendar 2019 Province of Québec subsidy program for Adapted Vehicles.

Adjusted EBITDA before head office costs for the segment decreased from CAD0.6 million to CAD0.3 million, in line with the drop in revenue. Adjusted EBITDA margin before head office cost was 5.2% compared to 8.3% in Q3 of 2018.

Excluding the favorable impact of the adoption of IFRS 16 leases, adjusted EBITDA margin before head office costs would have been 3.5%. The decrease in adjusted EBITDA margin before head office costs was mainly due to reduced fixed cost absorption.

At the three-quarter year mark the Corporation now forecasts 2019 full-year revenue to range between CAD370 million and CAD380 million. The decrease in revenue from its previously disclosed outlook is mainly due to the Corporation's decision to exit from Span's custom product market segment which had a more pronounced impact than anticipated.

As well, flat organic growth within Span's US medical business, lower adapted vehicle segment revenue and the focus put upon the integration of the Garaventa Lift throughout the year also had an impact. However, the aforementioned decision to exit Span's lower margin custom products business combined with the real-life synergies from the integration of Garaventa Lift and continued cost containment efforts have enabled the Corporation to significantly improve its consolidated adjusted EBITDA margin profile.

As a result, despite the lower anticipated revenue the Corporation remains confident in its ability to achieve its full-year CAD55 million to CAD60 million adjusted EBITDA guidance albeit at the lower end of the range. This concludes my prepared remarks for the quarter.

Marcel, back to you.

Mauro, thank you very much and you see our balance sheet. Our balance sheet is the best balance sheet ever at Savaria.

So, that gave us the opportunity to restart looking about maybe some acquisitions, but always continue to focus on the integration of Span and Garaventa. So, we are ready for questions.

Congrats on the quarter. Just first of all quickly on the Garaventa synergies and particularly on the -- I'm just curious to know was the decreased quarter-over-quarter on selling and engineering expenses mostly related to that?

Or I guess if you could comment on -- or provide color on what magnitude of that drop may have been related to that.

Okay, so where are we specifically on Garaventa, Sebastien?

Good morning, Ammar. So I think Garaventa, we see that the continuous improvement since the beginning of the year and it's kind of a mixed factor.

We have -- our purchasing has improved a lot in the last year with them and some synergies between some of our vendors in China, some of our vendors in North America. So, that if you look at each store, a year ago we had some issues in some of the locations.

I think a year after, each store is now profitable, so that has added to improve the margins. And after that Q3 is typically a good quarter for Garaventa.

It's a good, busy season with them with all the schools and everything. But definitely there's a very big improvement at Garaventa.

And especially if you look a year ago, we have [indiscernible] overhead on some engineering, some R&D. And we have put some new products together with the network, some [indiscernible] in Italy.

We are now ready for some [indiscernible] also in North America with Garaventa and of course all the team of Garaventa is very much vetted and first our President, Mr. Vince, is doing a fantastic job.

That is a bit what's happening at Garaventa.

That's great, very good color. Curious to know the 11.8%, which obviously was good to see, do you think there could be upside on that number or would you characterize that as a good print I guess in future quarters?

For sure Q4 is always a shorter quarter. We hope to continue to build on that.

I think if we look at year to year we have a 10% increase, so we went from Q1, Q2, Q3. For sure for next year I think it's really about we can improve this 10% to potentially a higher number, near 12% approximately.

Awesome. And then, sorry, just going back to the OpEx.

So, obviously it was lower quarter over quarter. I'm just curious to know is that a reasonable run rate going forward and then kind of heading into 2020 as well?

Sorry, Ammar, which number specifically are you talking about on the financials?

I guess I'm more -- I am just -- the numbers in particular I'm referring to are the selling and engineering expenses, which obviously were I'd say significantly lower than last quarter. So, I just wanted to know from a modeling perspective, for Q4 and then into 2020, is it reasonable to assume levels around that or could there be a reversion back to a level seen in previous quarters?

I mean, listen, the best thing I can tell you is maybe just go to take the year-to-date number and that's your run rate. There is always some timing from quarter to quarter, but I think if you use your year-to-date number that's probably your best guess at this point.

Okay, great. Thank you for the color and I'll turn it back.

Good morning and congratulations. I just had to -- I wanted to follow up a little bit on the Garaventa margins.

I think I got the numbers right, it was 11.8% in the last quarter, and that compares with your legacy business at 22.6%. There is still a large gap there.

Just wondering, now that you've had Garaventa for a year, what do you think the ultimate potential is in terms of where you can get those margins over time? And how long do you think it takes you to get there?

Bonjour, Steve. That is Marcel.

And I will pass the answer to Sebastien because I am very optimistic, sometimes too optimistic. So, Sebastien, what do you see in that?

Good morning, Steve. As we just said a few minutes ago, I think we think next year, a 12% target should be a good number.

And for sure Garaventa, we need to understand we operate in Europe; Europe is much more competitive than North America. We are putting another effort to streamline the lineup of products.

It will take some time and we have to go step-by-step. We cannot change everything overnight.

I think for the long-term target for Garaventa, I think it will be hard to comment this morning on it exactly. We will start by next year, but for sure on the long-term it is very similar to Garaventa as to Savaria business.

So, there is no good reason other than Europe why we cannot come full circle around the Savaria margins. But again, it takes time.

Perfect. While you mentioned Europe, can you talk a little bit about how that's going?

I think you were looking for some key personnel when we talked on the last call and just wondering how that transition is going so far.

So, if we look at Europe, we have some big changes this year in Italy. Italy used to be a loss center for us, this year we are profitable over there.

We make a change over there of management in Germany in May, but that's going in the right direction. And that's important because Italy and Germany is some areas where we have some good growth, so it's important for customers in those markets.

And after that, yes, we are looking for a head of Europe so we can continue to do our improvements. So, if you have any good candidates, feel free to send some to us.

Okay, that's great. And you did mention acquisitions and certainly the balance sheet is in good shape to support that.

Can you give us a little sense of what are your priorities as you consider making additional acquisition? What parts of the business are you looking to build or add to?

Thank you, Steve, and [indiscernible] Savaria, we have a guy that is a specialist in that [indiscernible] full-time. So, Nicolas?

In terms of acquisitions, you are right, we kind of took a little pause this past year to focus on integration and now with our balance sheet we are well positioned going forward. Accessibility always remains kind of at the core of Savaria.

I would say -- not to necessarily prioritize between the segments, but I think if there was something to do in accessibility that would be something of interest for us. In terms of location, North America has always been our original focus.

Now that Europe is doing better I think we're in a position to possibly look at opportunities on the other side of the pond. But I would say accessibility is probably our main focus.

But we'll see, right? It depends on what opportunities are out there and we're making studies in certain of our key categories to see what's out there and what's best for us going forward.

Great. Thank you very much.

Appreciate it.

First question is on accessibility. I was wondering if you could comment on your order book as you exited Q3 for accessibility.

And perhaps we can link that to your future expectations of organic growth. Is the 4.5% year-to-date organic growth in accessibility a good range for us to use going forward?

When we are looking at the organic growth for predictions, really I think yes. If you look at your year-to-date organic growth profile, that's a good target for us.

We are still in the process of finalizing our budgets for next year and it looks something similar to that. So, we think it's a good point to start with going forward.

Obviously we'd like to get it up higher, but that's what it's trending right now and it's a reasonable assumption going forward.

Okay, and switching to (multiple speakers).

Excuse me, that was Mauro, not Marcel.

Of course not. We know the difference, Marcel, don't worry.

All right, I guess we will use a range then. On Patient Handling, is the exit from certain products category done?

Meaning is there more incremental impact on the revenue front and I guess margin front to expect in coming quarters? And then do you see other opportunities to improve margins further there?

I know you mentioned some cost-containment efforts, so maybe your overall outlook for that?

The exit from the market segment, it's pretty much -- it's almost fully complete by now. We may have some straggling costs between now and the end of the year, but nothing significant obviously.

With regards to cost-containment efforts, listen, they're always ongoing; we're always looking at ways to cutting costs and improving our margin. This year we've had the double benefit of the cost-cutting efforts plus the exiting from the segment, which really had a boost to our margin overall.

We are still working on budgets for right now, so how much upside is there for next year? I said if we take a look at our year-to-date margin profile for Patient Handling, that's a good starting point and, obviously, we're going to see how we can improve on that.

Maybe Fred I can give you some color on -- the biggest impact in our minds of where margins are going to improve on the Patient Handling side is really the ramp-up in our sitting lift and sling business. The reason why we did exit custom products -- we did take that hit to revenue was with the anticipation that we were going to be able to replace those revenues with more higher-margin products.

So, I think what you'll see, we first have our -- I guess our first-quarter of Silvalea as part of the Group, so that's performing to plan. I think we also will see a further ramp-up in our sitting lift and our overall patient lift category.

We have a new floor lift that was just introduced this past fall, so that's something else from the sales guys to expand to be able to go sell there into their long-term care client base. At the same time we've made investments to get into the acute care market or more into the acute care market, especially in terms of our patient lift and slings.

That is something that over the next several quarters we made investment in personnel to really tackle that acute care market, because that was something that was a bit lacking, I would say, in terms of the overall Patient Handling space. So, I think that's what's really going to push the margins going forward.

Yes, there's going to be ongoing cost-containments; yes, the custom products has been negative. But as we replace those sales with those higher-margin ceiling lift and sling sales, I think that's where you're going to see the lift whether it be in Q4 or next year.

Okay, that's great color. Thank you and congrats on a very good quarter.

If I can just start with the ceiling lifts comment. Just maybe give some color as to what that specific segment or product line did in the quarter both from a sales and from a unit growth perspective.

And just -- my question really comes from what your two competitors out there said. Handicare Said that the market in North America was a struggle for them or continues to be a struggle because of slower uptake on the institutional side.

Arjo, on the other hand, saw a very good quarter as a result of ceiling lifts. So, I just want to get your sense as to what you guys are seeing.

Nicolas?

Well for starters, we are a new player in the ceiling lift market. I think it's important to note that we are starting from a pretty small base of revenue.

So, there is quite a bit of growth that we are seeing. I guess if you look at what we did last year, it was around CAD3 million of ceiling lift sales or I guess patient lift sales.

This year we'll see how it shakes out, but what we've said in the past still holds of getting to that CAD5 million range. That is kind of what we are aiming for 2019.

In terms of specifics as it relates to customers, or competitors I should say, we are seeing some market share gains whether it be on both the patient lift side of things or whether it be on some of the core pressure care side for Patient Handling. So, from our end I would say we are seeing some market share gains and, again, we are expecting some strong revenue growth from that ceiling lift category.

And then again, slings is something that's just going to add to that because that's something that we didn't necessarily have before Silvalea as kind of a big revenue generator within that space. So, that's something that's more incremental.

And so, we do expect that to increase I guess in Q4 and then in 2020.

Okay, great. I appreciate that color.

And also on the stair lifts themselves, both straight and curved, what does the unit growth look like for those -- organically speaking for those product segments?

So, basically stair lift is not our biggest growing segment. We are a bit flat on that.

But definitely we are working to address that in the future by putting it in production with Garaventa facilities in Italy and Vancouver. Unfortunately this year we have been more focused on home elevators.

If you see this year we had growth on our home elevators [indiscernible] up 13%. And I think part of that is driving [indiscernible].

We said it in the past that [indiscernible] was a flagship product for us. It is bringing a lot of traffic.

We are seeing a really good big growth in our home elevator segment. Unfortunately stair lift is a segment that we want to review and we want to be better in the future.

And you know what I will add about that? What I like about the straight and curved stairway, so that's a CAD1 billion market, more than a CAD1 billion market around the world.

But what I like is that it is a bit recession proof. And if I compare that to elevators, elevators is not recession proof.

We can sell it if we have a recession, okay? But some people say since two years a recession is coming and coming and coming, but it is never there.

We grow, grow. But I like this segment.

Okay, appreciate that color. And then just last question.

I think in your press release you talked about the Vuelift for the European market. And I believe you stated that it's going to be an early 2020 launch.

Just correct me if I'm wrong here, but was the original target Q3 of this year, in other words the past quarter? And if that was the case, what's maybe causing the I guess two quarter delay?

Sebastien?

So basically -- thanks for asking the question. Now we are working -- we have two different sides of the current Vuelift which is from the old acquisition of Visilift two years ago.

We did the length of arm view around that and we came out in September with a new version which is the mini Vuelift which would be more for the small space [indiscernible] for the retrofit market. And it's always taken a little bit longer than expected, but right now we are doing some beta tests in some of our locations with some good customers of ours and that something that early next year we'll be able to take some orders from customers.

So I guess from the next second quarter next year we hopefully can see some new sales from the mini Vuelift. But first we have to test it thoroughly, make sure it works, it suits all the different codes around the world and that's something that we did.

But it will be a very good driver for us next year, the mini Vuelift. We still have [indiscernible] in R&D across all the different organizations, so each year we have to come up with some new products that we can add for our organic growth.

So, that's a priority for us.

And I will be the first co-buyer for the small Vuelift and the unit will go in my home. But right in the center of the stair and it is fantastic.

That will be a winner for Savaria.

Okay, great. Thank you.

Good morning, everyone. Congrats on the quarter.

I just wanted to ask you about the benefit from the shipments delayed from Q2 into Q3. What would your organic growth have been without that benefit?

Mauro?

It is hard to [indiscernible], but I'd say probably half-half. If you take that number and split it halfway it would've been about half-half.

So, it would have been in line with our year-to-date organic growth. So, that would be the best guestimate of this thing.

It's hard to estimate 100%, but that would be the number.

That's helpful, thanks. And you said that 2019 is a year of integration, but at the end of 2019 is just around the corner and the balance sheet is looking very strong.

In the context of targets for future acquisitions, are you guys focusing primarily on product additions, dealer tuck-ins, or maybe something else?

It is always the same and it's somebody who [indiscernible] can bring new products to us that we can put in our network. Or somebody has a different network from us in North America or if we have outside North America, a company can bring another territory that we will put our products.

So, we have the biggest family of products in the industry and that gives us some opportunity. So, we are looking always at [indiscernible] thing that I tell you.

Thank you very much. And are there any geographies that are particularly interesting to you?

We are always focused first North America. North America is a great market and first focus is North America.

But we are already in Europe. So, maybe something to strengthen our position in Europe can be looked.

And also, just to comment on that, if you look at Silvalea, which was a European -- a UK-based business, part of the reason why it was attractive to us was because we were able to leverage their products to sell throughout our North American business. So, their sling is within our North American sales channel.

So those are things we're also looking at as well. So, we believe that a European business -- how much of their business we will be able to leverage in terms of cross-selling opportunities into our North American channels.

So, those are things that kind of come into play as well when we look at geographies.

That's helpful. I appreciate the color.

I'll turn it over.

Okay, so thank you very much. You are so important in the growth of Savaria and the future of Savaria.

Again, I am -- I think my team are very excited what we see in Q3. So, thanks from me there and back to you I assume.

Thanks to my team too.