Savaria Corporation

Hi, I’m Marcel Bourassa, I’m the CEO. It’s pleasure to make this call after our results that where you see yesterday that’s why I’m very, very happy.

I have with me Mr. Mauro, our newest CFO.

After that, I have and Sebastien Bourassa. So we are ready for questions.

Good morning to all. Before diving into our Q2 2019 results, we have undoubtedly noticed changes made to the format and layout of our quarterly MD&A.

There were too many reasons for these changes. First the streamlining improve the information of documents and second to provide a clear picture on what management focuses upon whether by report of segment or on a consolidated basis.

Given that Q2 2019 is the first quarter which incorporates these changes, if anything is unclear, you can reach out to me directly offline for any of your queries. Now on to our 2019, Q2 2019 review.

Overall, we are pleased with our Q2 financial results. We generated revenue of $94 million up $29.8 million or 46.2% compared to Q2 2018 mainly due to acquisitions.

Excluding acquisitions revenue contracted 7.5% stemming mainly from the corporations patient handling and Adapted Vehicles segments. While the Accessibility segment also experienced a slight contraction in revenue in Q2, we anticipate return to organic growth in the second half of the year.

Gross margin for the quarter was $32 million and 34.1% as a percentage of revenue respectively compared to $21.7 million and 33.8% in Q2 of 2018. The increase in gross margin was in line with the increase in revenue, the improvement in gross margin as a percentage of revenue was mainly due to a better consolidated product mix as well as a ramp-up in Garaventa lift and related cost synergies and continued cost payment methods.

Adjusted EBITDA and adjusted EBITDA margins for the quarter stood at $14.4 million and 15.3% respectively compared to $10 million and 15.6% for the same period in 2018. The increase in adjusted EBITDA was in line with the increase in revenue.

As anticipated the decrease in adjusted EBITDA margin was mainly due to the blending of Garaventa Lift operations acquired in Q3 of 2018 which has a higher construction cost base with Savaria’s legacy operations. However excluding Garaventa Lift and the favorable impact related to the adoption of IFRS 16, adjusted EBITDA margin was 17.4%.

Now for a in-depth review of our financial results by reportable segments. Revenue from the Accessibility segment stood at $67.1 million for the quarter up $34.2 million or 104.2% compared to Q2 of 2018 due in large part to the acquisition of Garaventa Lift in Q3 of 2018.

Excluding acquisitions, revenue contracted slightly mainly due to timing and return to organic growth is anticipated for the second half of the fiscal year. On a year-to-date basis, revenue grew organically by 1.4%.

Adjusted EBITDA before head office costs was $11.3 million for the quarter an increase of $3.8 million or 50.6% compared to the same period in 2018. The increase in adjusted EBITDA before head office cost was mainly due to acquisitions made post Q2 2018.

Adjusted EBITDA margins before head office costs stood at 16.9% compared to 22.9% in Q2 of 2018. The decrease in adjusted EBITDA margin before head office costs was mainly due once again to the blending of Garaventa Lift operations which had a higher structural cost base than Savaria’s legacy operations.

On a standalone basis and excluding the impact of the adoption of IFRS 16, the legacy Savaria accessibility for segment generated an adjusted EBITDA margin before head office cost of 22.7%. Garaventa Lift’s standalone adjusted EBITDA margin before head office cost was 9.4% for the quarter and increased from 7.3% in Q1 of 2019.

On a year-to-date basis stood at 8.4% and it is anticipated to continue on a positive trend for the remainder of the year. The improvement in adjusted EBITDA margin before head office costs for the segment as a whole from 13% in Q1 2019 to 16.9% in Q2 was anticipated by management and should progress throughout the remainder of the year as Garaventa Lift integration and related synergies continue to materialize for the second half of 2019.

Revenue for the Patient Handling segment stood at $21.2 million for the quarter, a decrease of $2.9 million or 10% when compared to the same period in 2018 mainly due to lower revenue from custom products and to a lesser extent of medical products. Adjusted EBITDA before head office cost was $3.2 million for the quarter, an increase of $1 million or 44.5% compared to same period in 2018.

The increase in adjusted EBITDA before head office costs was mainly due to continued cost containment efforts and in an increase in ceiling lift unit sales. Adjusted EBITDA margin before head office costs stood at 15% compared to 9.1% in Q2 of 2018.

Excluding this favorable impact of the adoption of IFRS 16, adjusting EBITDA margins before head office costs would have been 14.6%. The increase in adjusted EBITDA margin before head office costs was mainly due to a more favorable product mix notably an increase in higher margin ceiling lift unit sales and aforementioned cost containment efforts.

In line with its focus on the integration of recent years transformational acquisitions, the corporation has decided to exit Span custom products market segment effective Q3 of 2019. Although the decision to exit this market segment will negatively impact the revenue for the remainder of the year, it should positively impact future adjusted EBITDA margins before head office costs as custom products traditionally generate adjusted EBITDA margin in the low single digits.

As a reference point, Span’s custom products market segments represented slightly over 5% of the corporation's 2018 revenue. Cost pertaining to the corporations exit from Span’s custom products market segment are estimated at approximately $2 million and would be incurred mostly in the third quarter.

Subsequent to quarter-end, the cooperation completed the acquisition of the Silvalea Group, the U.K. based manufacturer of patient transfer slings and accessories.

The second acquisition requiring minimal integration will expand our patient handling portfolio while also providing cross-selling opportunities in both Europe and North America. We take this opportunity to welcome our new colleagues to the Savaria family.

Revenue for the Adapted Vehicles segment was $5.7 million in Q2 of 2019, a decrease of $1.6 million or 21.4% when compared to the second quarter of 2018. The decrease in revenue was due in part to the termination of a non-profit organizations of vehicle accessibility program at the end of 2018 as well as the yet to be renewed calendar 2019 Province of Quebec subsidy program for Adapted Vehicles.

Adjusted EBITDA before head office costs for the segment decreased from $0.6 million to $0.3 million in line with the drop in revenue. Adjusted EBITDA margins before head office costs was 5.2% compared to 8.5% for Q2 of 2018.

Excluding the favorable impact to the adoption of IFRS 16, the adjusted EBITDA margin before head office custom orders has been 3.5%. The decrease in the EBITDA margin before head office costs was mainly due to a reduced fixed cost absorption rate.

Quickly turning to cash flow, during the quarter the corporation declared and paid dividends of $5.3 million and $5.1 million respectively. Our balance sheet remains strong with a net debt-to-adjusted EBITDA ratio of one-time.

As we have indicated, aside from potential other tuck-in acquisitions, 2019 is and will remain a year of integration for us blotting the landscape for the future. With results to-date in line with our expectations management remains confident in its ability to deliver on plan for 2019 and therefore reiterates its previously disclosed full-year outlook of $385 million to $400 million in revenue and $55 million to $60 million in adjusted EBITDA.

This concludes my financial review for Q2. Marcel, back to you.

Yes, thank you Mauro. (Inaudible), Jessica?

Thank you, good morning.

Good morning, Frederic.

So first question, we're seeing some very nice margin improvement on Garaventa. Can you talk about what's driving the margin progression there, is it mainly cost synergies or you also seeing some positive impacts from volume as well?

So I would refer you to guy, I think that know more about Garaventa, it’s Sebastien.

Good morning, Fred. So I think since the beginning of the year with a lot of things that's changed at Garaventa and especially Q2 results movement, we have merged star at Garaventa with total, we have merged two star internal in Garaventa and Savaria.

So this is going to add on that purchasing, we continue to see some good progress. Some new parts and a mix of Savaria and Garaventa vendor, I've had to move up.

We have introduced some new, some new products at district and of Savaria now manufactured in Italy. Also we have introduced a Vuelift in month of May in Europe.

So we should expect some sales in our Vuelift by the end of the year in Europe. Also the small Vuelift and in Germany, if you remember last conference call we did a change of management in Germany, so that Germany is a good prospect for us and that should be good.

After that fortunately, I just saw that the volume is good. So if you look at the Q2, Q3 some very good period for Garaventa without school that a lot of project from the client platform.

So I think it's really a good change and a good work from a team of Garaventa engines.

Okay, thanks for that. Can you share a bit of bit more details on the impact of the unfavorable timing of deliveries in the Accessibility segment which products were impacted and what caused some of the sales to be pushed into Q3?

Okay. So Fred, I would refer you to Sebastien, that’s an easy one.

So I think Fred, you noted the economy in the U.S. is tight on the labor market.

A lot of our dealers are struggling a bit to find some installers. You need a good level of technicians completing installation of elevators and that that does reflect a bit on our delivery.

So a lot of delivery has been pushed out from Q2 to Q3. We had a very good production number but at the end we have to be able to ship them out of the building.

And Q3 is almost especially half way done now. Have you seen a good pickup so far in the quarter?

I think that's why we really continued to have the same guidance for the year. We see a good Q3 and good Q4 in front of us.

Okay. Last question for me.

I was wondering if you could talk a bit about the competitive environment in Accessibility and Patient Handling and maybe discuss what you think are Savaria’s key advantages versus your main competitors?

Okay, we are lucky because we at the end of this quarter, is that right?

Well, I mean I don't think anything has changed dramatically in terms of the environment for Accessibility. The key advantages that we had in Q2, I mean are the things that have continued I guess for the past several years, I mean one of it's just that that vertical integration that we talk about that's something that allows us to have better control on our costs and our products more and more and what you'll see is that we're selling more direct and this is something that's having a continued impact.

I mean you see with the acquisition of Florida Lifts that we made earlier in the year and then some other acquisition like H.E.S and Premier Lifts in past years, I want to say our excessive baggage of our capability revenues is close to 40% now that come from direct sales. And so that also is having a pretty good impact for us as it relates to just seeing better control in terms of our customers in the market there.

So that’s I think one thing that is changing and it has changed with Garaventa as well with their direct source. That's kind of just broadened our direct sales can build here in North America.

So that's having a positive impact for us.

Great. Thank you very much.

Hey guys. Good morning.

Ammar Shah, good morning.

So I just wanted to talk to about patient lifts. So great quarter there even with the weaker custom products firstly is if you exclude custom products approximately, what would be margin have been from an EBITDA perspective.

And then do you see that being kind of sustainable for the rest of the year?

Sebastien?

So I think we don't necessarily again break out the within a specific segment that EBITDA contribution in the quarter. So I mean we talk about custom products being in the low single digits.

So think given the volume of custom products, no if you run the math, you'll see that it's a bit higher than where we ended up. At the same time for the Span segment as a whole or I guess patient handling as a whole now, when we talked about what our margin expectations were for the year, now we looked at 12% that was the I guess the achievement was essentially where we ended last year in Q4 and that's what our goals were for 2019.

And in Q1 we’re at 10%, 10.5% of EBITDA margin, it's only know the math is such that we're going to have to have quarters above 12% and so that's what we end up delivering in Q2. And so I think given the restructuring that's ongoing there and we'll be in a better position now, I would say in Q3 to give you a sense of what that kind of standalone EBITDA margin is within Span.

So within the patient handling group. But yes I mean you can imagine that it should be higher once you remove the custom products segment.

Okay, great color. And then I guess last quarter you guys had touched on the Vuelift elevator sales picking up particularly on the -- I guess backlog of orders.

I'm just wondering how that's kind of progressed now that we're into Q3?

We will go back with Sebastien.

So to get review for in terms of units for shareholder, we will have hope to have shipped more in 2000 and I mentioned that what we did so far. I think we have a good progress but one thing to remember is on the Vuelift the sales cycle is very long.

We are talking to a customer that is very often building out of few million dollars, it takes time clearly you need to look the shop on Thursdays and you will work with the architect. It might take two or three years before we can start the elevator because the glass elevator is the last piece that goes in those.

Unfortunately Vuelift is really helping all the elevators, the lift, Gara, Infinity, so I think it’s hard to judge that the only performance of the Vuelift is because it's really driving a complete suite of elevator and we are doing very good in the elevator this year and last year. So I think it has a good contribution.

We have finished our CE certification for Europe. That's why we are launching it and now we are working also on small Vuelift to go in a smaller footprint in Europe and Asia.

So I think we’re not finished pack-up at Vuelift, we have a great future with it.

And just reminds us that when we go at the show, you should see that number of architects. Okay, we'll go that show and see this product, okay.

So that's a leader and we would see that a good number I think, okay next year. But our residential elevators, I think benefit from that like a flagship product it is very important.

Right. And then just final one from me.

Obviously it's nice to see gross margins above that 34% level. You think that's a good run rate number.

Or is this just indicative of a very good quarter to try to get some color on I guess the modeling front?

Okay, Mr. Mauro?

Well obviously we did have a very good quarter but let's not forget there's also some seasonality on Q1 what is traditionally be probably our lowest ones, so you'll have some flex there. Again it is a good runway to what we'll see in the next few quarters but it's definitely going in the right direction and it should that that's a main group.

Awesome, great color guys. Thank you.

Thank you.

Good morning.

Good morning, MacDougall.

I understand, I guess the high level reason to exit that custom products division but I was wondering if you could just give us a little more insight into how that decision evolved and what that means for the rest of the division in terms of perhaps you now will have more management capacity to focus on the other products within that division or manufacturing efficiencies et cetera?

Hi Maggie, so as custom products was when we acquired Span a couple of years, custom products was part of the package and it's something that we've looked at for a while, it wasn't a knee jerk reaction to something that's been kind of thought about on an annual, every year and even before we were in the picture, there is something that the old management team had always thought about. Now custom products being part of the rationale for having it did absorb overhead and it did provide volume to the factory.

And so as were looking at expanding on not only the ceiling lifts and that patient lift business now we've been looking at the Silvalea transaction for a number of months, I mean it's something that's been in the works since last year. We thought that the timing was right to exit that business and again put more focus on the Medical segment which is really what we wanted to do with Span.

So it's kind of a combination. It's something that's been a long way in the works I guess something that we've been thinking about for quite some time.

And then with the Silvalea transaction and the timing was great right I mean that's going to be able to provide us with more revenues to kind of replace those custom products revenues that we were, we'll be I guess missing now but be able to replace that with something that is more core to our business and that has higher margins.

Okay, great. It makes sense.

And Maggie you don't leave for many years okay. I work and I got that okay and Mr.

Mauro mentioned that that would make 22% of EBITDA on that segment, okay. So when I work with single digit, I cannot do that very longer time.

Yes, I understand that. That makes a lot of sense.

The other question I had was on Adapted Vehicles and it sounds like there was a couple of things that have impacted the sales in that division recently. So first on the subsidy item in Quebec is the expectation that that will be renewed this year or is it a bit more unclear around what the intentions are to bring that subsidy back for 2019?

Yes I like Quebec okay but we never know given the program in current place. So I don't know and maybe there will not be in place, we don't know.

You’re not sure. Okay.

Maggie, you get a chance to travel to the airport in Toronto or Montreal. I'll be around Montreal, you just see Savaria from times, now it’s a small attention if we are lucky.

What you see for the sales, it’s a cycle, people we need to renew the advance and people need to move school somewhere and we'll be there's no need transportation for people in wheelchair. So I think we'll just have to be patient and plan will go back in the right direction eventually.

Okay, okay. Thanks, that's all for me.

Have a great day.

Thank you, Maggie.

Hi, Stephen, morning.

Good morning, gentlemen. I just had a couple here on the Garaventa acquisition.

I just wonder if you could go through and give us some more color as to where you are in the integration process. I think when you started, you were closing down facilities in Shanghai trying to get sort of a commonality of purchasing that kind of stuff.

It sounds like you've moved now to be integrating some of the sales offices and achieving some savings there. What's sort of in the cards for the second half of this year and then next year as priorities on the Garaventa acquisition and thinking particularly in North America?

I will pass to Sebastien.

I think first Stephen we are going to finish with this project, just starting, we have a good first 10 or 11 months first year anniversary would be September 1, the next level is going to be it's a bit deeper talking about R&D, that is a new R&D project coming on next year with a new lift platform that is going to add the word maybe to look to see what we can do, some of maybe, some of our product more on to Garaventa products like what is the best, the best model, the best controller will be the next phase. I think Garaventa is always looking to improve their efficiencies and that's something we're working very closely with our Vancouver factory.

We have more shipment from our China factory to Italy or to Vancouver and we're looking to manufacture some product of Savaria into the city of New Delhi or Vancouver such as Sterling. So I think that's the next level which it's a bit deeper and now we're focusing also to make sure that each star is profitable at any moment.

But I think that that's would be the next level for Garaventa.

Okay. On the China integration.

What percentage of the products that come through the Surrey plant have now originated in China. Is it still a fairly low number?

Well that's a fair low number, I received 10% of my purchasing power, Vancouver and China would be happy that we're not there yet.

Sorry you're at 10% or not at 10%.

We are in the 10% range.

Yes, okay. And where do you think that could get to over time?

Well, first of all we have to check what's going to happen in the new channel in the U.S. But right now Vancouver is moment I think from A to Z and maybe more from M to Z and focusing on the custom parts.

So I think fortunately wanting to do some subassembly and focus on the custom parts, I think that would be the goal. I think if you can focus to bring that 25% in the next two, three years that should be a good level.

Okay, perfect. And just it seems like on the Custom Products side of Span, it seems like the winding down of that business has already began in Q2.

How much revenues are left of that low foam business as you exit Q2?

Hi Steve, this is Mauro here. Well listen yes you’re right.

It has started off to slow down in the second quarter. We still have a little bit left to do in Q2 before we finally exit.

But as we've indicated, we don't go into subsegments and providing revenues within each segment. So it's not something that we will be providing that we give you an idea, how much it represented out of the 2018 revenue.

So you can probably do some quick math there and figure it out but we don't give out that specific information.

Sure, that's fine. All right.

Thanks very much.

Great, thank you. Have a good day.

Good morning. Following up on the question about China's sourcing.

Does the new match of tariff in the U.S., China trade war impact your supply chain?

Basically right now to target the impact for us is approximately $500,000 per year which is straight more or less that we should look from China to the U.S. and the rest we do so many parts custom in Canada, we don’t forget so many but there is different sizes, different color but yes we’re doing some sub-assembly from China but most of the parts are still are made in Canada and that Span the same thing the bed is made in Canada, the bed frame and in the States we’re very happy that we do our mattresses in the States.

So right now the impact is approximately $500,000 full-year.

Thank you. That's helpful.

Looking at the margin improvement at patient handling. Can you break that down for us in terms of cost containment initiatives and better product mix, how much from each?

Hi Zack, again we don’t want to go into specifics, we provide you with the broad strokes again for competitive reasons here we're not going to -- we're not going to start putting that up but obviously it is a good mix of the two. And going forward obviously as the custom products, we get smaller and smaller, the margin will increase, the cost containment efforts have been there since the beginning of the year, it took a little bit of time for them to kick-in but that's also something that is going to be continuing during the second half of the year.

If you look basically our year-to-date margin is just under 13% for patient handling, it would make sense obviously that would probably stick around there for maybe like another quarter given the noise tags at the segment and then you should see a little bit of an uptick going there. Just again mathematically speaking because you're getting rid of the custom products.

Okay, that's very helpful. And then I guess without jumping into the numbers.

Can you give us an idea of which cost containment initiatives were most helpful and how much is left on the table there?

Sorry. I'll just go back to patient handling segment.

Yes in patient handling.

Well, I mean some of it obviously is headcount related and the rest of it is basically the manufacturer, sorry the plant itself in terms of getting some efficiencies with regards to productions and so forth. So I would think that's mostly where it is not sure if there is anything else to add to that.

All right. Thanks so much.

I'll turn it over.

Good morning.

Hey just a follow-up, I just want to know from the Adapted Vehicle segment. I know you guys have talked last quarter on the potential to possibly partner with right sharing and things like that.

I just want to see if there's any other comments you could provide on that. Is there any potential or are there any chats, any color be good?

I should say that we have given, we continue okay as we do with our products that they speak to people but nothing in the short term can happen with that. Maybe what they can be good, maybe it will begin whey they need to have some accessible.

Okay, that’s it. That's what I have to do then there at market.

Right, fair enough.

Hi guys, just one more follow-up. If you're exiting the custom products business, what does that do for your plant in South Carolina in terms of capacity utilization and is there anything that you would do with that that extra capacity put you there?

Maybe Sebastien.

Hi Steve. So it’s a good point you bring up, this is a pretty big facility that they have there in Greenville.

When you think about in terms of the manufacturing and the warehousing space that's consumed by the industrials and consumer products which make-up the custom product segment, it's about 40% of the space. So part of once you gone through this restructuring, I’d say this is happening as we speak here in Q3.

Following that, we're looking to reorganize that space and then going forward we'll see. Right, I mean it could be something as Silvalea business grows.

Right, I mean Silvalea is what we're looking to transfer some of that that knowhow and expertise that they have on the manufacturing side to Greenville. And so we do have a selling station there in Greenville and as we anticipate the sling sales should ramp-up.

And if they do, that will maybe but to expand into part of that 40% and also note the Accessibility side. That's something that we could know at some point in the future look at having some Accessibility manufacturing capacity in the U.S.

it's always. No, it isn't in the cards.

But right now it's a bit too early to tell you exactly what the plans are for that. But you're absolutely correct, there is going to be some space there that we'll be able to utilize.

Perfect. Thank you.

Okay, so thank you very much for Q2 as I said earlier. Okay and we got great partner and thank you, Jessica.