Savaria Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2023

There are 11 speakers on the call.

Operator

Good morning. My name is Sarah, and I will be your conference operator today. At this time, I would like to welcome everyone to Savaria Corporation's Q3 2023 Conference Call. Q and A session. To withdraw your question.

Operator

This call may contain forward looking statements, which are subject to the disclosure statement contained in Savaria's most recent press release issued on the 1st November with respect to its Q3 2023 results. Thank you. Mr. Bourassa, you may begin your conference.

Speaker 1

Thank you very much, Sarah. So as you mentioned, my name is Marcel Bourassa, And it's a pleasure to begin the call, okay? After that, okay, I will transfer that to my colleague. If I was taking in every year, okay, I think we are going in the right direction. Now we have Q2 a little bit weak, okay.

Speaker 1

But Q3, I think you can see that Europe, okay, will be better in the coming quarter. And so that will be an impact, okay, on our sales and EBITDA. So I am very positive, okay. And one thing very important, I think, it's We are based our company is based on the aging of the population. And you can see, okay, that We have the war, okay.

Speaker 1

It's sad, okay, but it's happened, okay. And we have some country, okay, that man, okay, It's always a question, okay. Like, not very respectful for the people, But it is what it is, us, okay. We are our projects is basically of the aging of the population. And it will be there, okay, for I think for me, okay, at least forever, okay.

Speaker 1

And thank you, okay. I read Some comments yesterday, okay, about you make on Savaria Q3. And thank you very much, okay. And you can see that we have a good quarter, okay, and we have all have a great The backlog is there and 2024 look tremendous for us.

Speaker 2

Thanks, Marcel, and good morning, everyone. Thanks for joining us on the call. I'm going to begin with some remarks regarding our Q3 2023 consolidated financial metrics. For the quarter, the corporation generated revenue of $210,100,000 an increase of $8,700,000 as well as a decrease in revenue of 4.5 percent due to the divestiture of the vehicle division in Norway combining for 4.3% growth overall for the quarter. Gross profit and gross margin stood at $72,600,000 34.5 percent respectively, compared to $64,000,000 31.8 percent in Q3 2022.

Speaker 2

The increase in gross profit Of $8,500,000 was mainly attributable to higher revenues 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 North American divisions Adjusted EBITDA and adjusted EBITDA margin finished at $33,600,000 16%, respectively, excuse me, driven partially by $900,000 of costs related to Savaria 1. On September 15, 2023, the corporation issued 4,363,100 common shares via a public offering And 1,983,750 common shares via a concurrent private placement with Caisse de depot de Quebec, Both at a price of $14.50 For aggregate gross proceeds of 92,000,000 which included the full exercise of the over allotment option granted to the underwriters of the offering and the additional subscription option granted to CDPQ. Net proceeds after transaction costs of $4,600,000 was $87,400,000 which was used to reimburse credit facilities. And now I'm going to move on to our segmented results.

Speaker 2

Revenue from our Accessibility segment was 100 and $56,300,000 in Q3 2023, an increase of $7,700,000 or 4.8 Driven by continued strong demand in both the residential and commercial sectors in North America, which saw 9% organic growth as well as price increases. The growth was also driven by a positive foreign exchange impact of 5.4%, mainly coming from the U. S, Euro excuse me, in British pound currencies. This was partially offset by Norway previously noted, which caused a year over year decrease of 5.7% when compared to Q3 2022. Adjusted EBITDA and adjusted EBITDA margin for the accessibility segments stood at $29,900,000 18 percent respectively compared to $26,900,000 17% for the same period in 2022.

Speaker 2

The increase in adjusted EBITDA and adjusted EBITDA margin was mainly due to better cost absorption from increased revenues in North America as well as improved pricing. Revenue from our Patient Care segment was $43,800,000 for the quarter, an increase of $1,000,000 or 2.4 As a reminder to our investors, our Patient Care business is driven in large part by project based sales, which can be lumpy from time to time. For the quarter, foreign currency provided a 2.1% tailwind. Adjusted EBITDA and adjusted EBITDA margin Stood at $6,100,000 for the Patient Care segment and 14% respectively compared to $5,900,000 13.8 percent For the quarter, net finance costs were $5,500,000 compared to $2,500,000 in Q3 2022. Interest on long term debt increased by $2,000,000 when compared to last year due to higher market interest rates.

Speaker 2

Net finance costs We're also impacted by a lower net foreign currency gain of $300,000 compared to a gain of $2,200,000 last year, most of which are unrealized in nature. Net earnings were $12,100,000 or 0 point share for the quarter compared to $10,600,000 or $0.16 per diluted share in Q3 2022. Adjusted net earnings was again $12,100,000 or $0.18 per diluted share compared to $11,200,000 or $0.18 diluted share last year. The year over year increase in net earnings is driven from increased operating income, which was mainly driven by increased gross profit across business. So turning now to capital resources and liquidity.

Speaker 2

For the quarter, cash flows related to operating activities before net changes in non cash operating items reached 26,900,000 versus 28,900,000 for the same period in 2022. The slight decrease Mainly reflects the impact of higher income tax paid. Net changes in non cash operating items reduced liquidity by $1,600,000 compared to $9,700,000 in the same quarter last year. The improvement is mainly due to stabilization levels across the business. As a result, cash generated from operating activities in Q3 2022 stood at $25,300,000 compared to $19,200,000 for the same period in 2022.

Speaker 2

Cash used in investing activities was $4,500,000 for Q3 2023 compared to $4,200,000 in the same quarter last year And the corporation disbursed $4,600,000 for fixed and intangible assets this year compared to $4,400,000 last year. Cash used in financing activities was $20,700,000 for Q3 2023 compared to $10,900,000 in 2022. The variation is mainly explained by a reimbursement of $91,000,000 on our credit facilities following net proceeds from the issuance of common shares previously noted of $88,300,000 as well as higher interest paid of $2,200,000 in Q3 2023. As at September 30, 2023, Savaria had a net debt position of $290,200,000 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 2.28 times.

Speaker 2

The large reduction versus prior quarter was the result of the share issuance net proceeds being used to pay down debt. At the end of the quarter, Savaria had net funds available of approximately $203,400,000 to support working capital investments and growth opportunities. And now looking forward for 2023, Savaria continues to expect to generate revenue, which will be approximately 8% to 10% higher than 2022 when normalizing for the divestiture of the Norwegian Auto Division as well as adjusted EBITDA margins of approximately 16%. And as a reminder, Norway represented approximately 60% of the overall vehicle segment revenues in 2022. This outlook continues to be based primarily on continued strong organic growth coming from both Accessibility and Patient Care segments, supported by high backlog levels, cross selling initiatives and strong demand And continued successful integration of Handicare and progress towards achieving the next strategic phase of synergies in line with management's plan.

Speaker 2

And with that, this completes my prepared remarks, and I'm going to turn the call to Sebastien for an operational update. Thank

Speaker 3

you, Steve. First, I need to say quite a few of the results on the accessibility for the Q3. In North America, we had a growth of 9%, which came mostly from the output of Vancouver and Toronto factory. So good job, guys. And we are continuing to have a very healthy backlog.

Speaker 3

So that's positive for the future quarter. In Europe, it was mostly flat, but it's a very nice rebound from the second quarter And the situation is back to normal with good lead time. And we have improved a lot of our visibility in the U. K. Factory with the ERP that But now we have some very good information, live data.

Speaker 3

We're quite happy with the change we have made. In Mexico, we continue to ramp up We have approximately 50 employees. We do some weekly tracks to Toronto, the U. S. With some porch lift and also we started some shipment to Vancouver.

Speaker 3

We are now a vertical integrated for metal works, so that's nice. Also in Toronto, we started to manufacture a second model of Endicare Stirlip, the 4000, which model made in U. K. So this will help us to increase our sales in the future in North America because we'll have better lead time. Finally, on the Savaria 1, quite happy with the start.

Speaker 3

So we did a our consultant did a due diligence on Savaria to identify opportunities. We now did a bottom up plan with the Savaria employees in different areas such as commercial, procurement, production and we are now starting the implementation step by step over the next 2 years. The program also includes some training for our people in order to bring Savaria to operate the business as a $1,000,000,000 company It's a very general update, but the intention is to have an Investor Day in the Q1 next year so that we can talk more about the Savaria 1 project. Mr. Nikanna, Patient Care.

Speaker 4

Yes. Thank you, Sebastien, and good morning. Following a very strong first half of the year, The performance within our Patient Care segment was more moderate in Q3. We had a slow start to the quarter with a relatively weak month of July. In particular, we experienced lower volumes within our bed frame business and some lumpiness with project work over the summer months.

Speaker 4

Consequently, organic growth was flat in the quarter and lower than the record levels seen in Q1 and Q2. That said, Our backlog is still in good shape and was higher exiting the quarter than where we began. We also saw a positive uptick in bed frame orders during October. We feel confident about year end budgetary spending, which bodes well for Q4 revenue and should enable us to have a strong finish to the year. From a profitability perspective, the lower sales in Q3 didn't allow us to absorb as much overhead as compared to prior quarters, which undoubtedly had a negative effect on our EBITDA margin.

Speaker 4

While overall EBITDA margin stood at 14% in Q3, we're looking over the longer period year to date, the Patient Care margin of 18% still significant improvement over 2022. Despite this pullback in Q3, we firmly believe that the performance this year is a testament to the strong leadership within patient care And proof of the lasting synergies unlocked through the integration of Handicare and Span. To that end, our operations teams are interacting more than ever to share best practices and quality and we've reorganized our sales force to allow them to focus on their respective strengths within acute and long term care. So to conclude, we expect to bounce back in Q4 and have confidence in our sales leadership to deliver a good result to close out the year. And with that, I'll turn the call back over to Marcel.

Speaker 1

Yes. Thank you very much, Nicolas, and thank you To Steve and Sebastien. I just want to reiterate one thing that Steve mentioned, okay. Our debt EBITDA is around 2.2 right now after the offering. When I decide to make an offering, okay, is because, okay, I want, okay, to have reduced the debt By the time that we are right now, okay, my our balance sheet, okay, with the ratio around 2, 2.2, okay, We'll go maybe, okay, shortly, less than 2, okay.

Speaker 1

And then we are in position, okay, a strong position, okay, to continue our growth, okay? And maybe

Speaker 5

Before that, no.

Speaker 1

What?

Speaker 3

I think there was some noise on the line, Marcel, you can continue.

Speaker 1

Okay, okay, okay. But I just want to mention, okay, that we have a balance sheet right now that is very strong, okay, And we are there, okay, to make maybe some little acquisition, okay. But right now, okay, we are just to continue our good job of integration of Emtekare. And I know that The penalty is over and me, okay, they're stuck, okay. I was at a 5 minutes penalty, okay, because we make an offering.

Speaker 1

But my penalty is about to finish, okay? And then you will see, I think, okay, that the people will recognize key value of this offering that we make, okay, in this difficult time. So I will begin the question. So we are on the line and the person will answer the question, okay, if it is okay on finance, okay, On the production or on patient leave, if okay with Nicolas. So we're ready for the questions,

Operator

thank Thank you. We'll now take our first question. First question is from the line of Gabriel Moreau from Scotiabank. Please go ahead.

Speaker 5

Hi, good morning. On the Savaria 1 project costs, is there something you expect to incur in the next couple of quarters? And can you provide us with the preview at a high level on what to expect from Savaria 1 in terms of how I think it might help on the margin versus the cross selling side. Also, finally, any way to think about the cadence of that improvement through the next 2 years?

Speaker 2

Hi, Gabrielle. I'll take this question. Steve here. Just on the first part of the question there On Savaria 1 related costs, so we did have just to highlight actually that the $900,000 that we saw in the quarter and the $1,600,000 that we saw to date. I mean, so some of that is obviously consulting fees, some of that is internal trading and there's It's a bit of a mixed bag in there.

Speaker 2

But going forward, I mean, we can continue to expect costs related to Savaria 1. There is The largest part is consulting costs and the consulting arrangement that we do have in place, it's mix between fixed fees and performance fees. So there's a fixed portion that we're going to continue to see until the end of the project, which It's expected to run at this point until approximately May 2025, and there's also a performance base fee in there as well. So that fee is obviously more variable. So it's hard to give you an exact amount that we can expect to see in future quarters, but I would expect the number that we saw in Q3 I'm sorry, can you repeat your the second part of your question, Gabriel?

Speaker 5

Yes. Just if you can give us a high level of what to expect in terms of cross selling side on margin.

Speaker 3

I think, Gabriel, we need to go back to the vision of the EUR 1,000,000,000, okay, that we want to be. And this is why we'll have call in the Q1 next year to be able to describe a bit more about the Savaria 1, how do we see the next 2 years. Right now, we're still at the beginning of the implementation. Right now, we have reiterated guidance for 2023. So as you can see, there's no change for this year, but there will be some small cost for the Savaria 1 project, but we see some benefit in the next 2 years.

Speaker 3

And this is something that we'll be able to address in the Q1 next year. So I think it's a very good news.

Speaker 5

Good. And maybe just my second one. I know you said the ERP was fully behind you, But can you confirm it had no impact on the result for this quarter? And then more broadly, are the challenge in Europe Related to the macro or is there something operationally that you think could be improved?

Speaker 3

So I can take this one. So I think, yes, the ERP, Yes. Again, we discussed a bit earlier that again, we had a good rebound, which was flat versus last year. But again, it's a big change from the Q2. So I consider that ERP thing is over in England, and we are back to good lead time to be a good company.

Speaker 3

One thing we need to understand is in Europe and North America, yes, it has been a bit more challenging than last year, but we are not the same company yet. We don't have the same product offering. And we want to have more cross selling in Europe with some vertical platform on Elevator. So I think over time, we'll be more diversified and that would put less pressure And some of the margins. So I think, again, consider that the second quarter is over and ERP is finished.

Speaker 6

Perfect. That's it for me.

Speaker 5

Thank you very much.

Operator

Thank you. We'll now take our next question. And this is from the line of Cheryl Zhang from TD Securities. Please go ahead.

Speaker 7

Good morning. This is Cheryl standing in for Derek, and thanks so much for taking our questions. So my first question is on Patient Care. So Like you mentioned in your remarks, it looks like a more lumpy business given the timing of order. But just wondering if you could speak to speak more to the rebound in that you're seeing there sounds like so like in the early stage of Q4.

Speaker 7

Thank you.

Speaker 4

Hi, I can take this. The rebound, I guess, in terms of Q4 that we had mentioned is essentially as you described, right? There was some lumpiness that we saw over the summer months. We started the year with very high sales volumes. I'm very happy with how the first half of the year went.

Speaker 4

I think as we had mentioned on the previous call, It was fantastic quarters in Q1 and Q2. And I would love to be able to say that we're going to have 4 fantastic quarters every year. Sometimes you have an okay quarter and that's what we saw here in Q3. We did see an uptick as we exited the quarter in order intake and then also into October. And that's what gives us confidence that we are seeing sales come back and orders coming back following kind of that summer slowdown.

Speaker 4

And that's what gives us the confidence for Q4. And in that same time, Q4, there's some budgetary spending that happens. And so we do anticipate to be able to take advantage of that. So that's, I guess, where we have the confidence there, as I mentioned earlier.

Speaker 7

Okay. That's very helpful. And I guess my second question is, So, can you speak to the backlog level in accessibility and patient care and if

Speaker 2

Hi, Sheryl. I'll take this one. Good to hear from you on the call. The backlog remains strong. So overall, the backlog across the company is about the same level that we saw Exiting last quarter, exiting Q2.

Speaker 2

So I think that we have seen certain pockets based on Some of our divisions being able to increase output significantly, especially Garaventa, in Garaventa Suri and British Columbia and here in Brampton, Been able to produce more on a daily basis, so we have been able to improve our lead times and eat a little bit into our backlog. But The backlog remains very healthy. There's no concerns across either residential or commercial sectors at this point. Both remain very strong and for us bode well

Operator

thank you. We'll now move to our next question. This is from the line of Michael Glen from Raymond James. Please go ahead.

Speaker 8

Hey, good morning. Just coming back, Marcel, thank you for the commentary surrounding the equity issuance. So I just want to see if you're able to give a bit more indication. If we're thinking about Savaria In terms of the M and A outlook, like what are some of the areas of the business that you would like to add To or what would represent opportunistic areas for Savaria to gain Get some additional business lines in.

Speaker 1

I would begin after maybe Sebastien you make some follow-up, okay. I just see, okay, that first of all, okay, I am very happy to have made this offering, okay, And thank you for the people, okay, who buy this offering. That's even if the market right now is a little bit lower than the offering, but I think in some quick times, okay, it's all the reason that we will pass this point, okay, When they will see, okay, what we have, what we are doing. Just an example, okay, about Europe, okay. We manufacture for North America, telecom, okay.

Speaker 1

Right now on our design, okay, meeting the code, okay, in Europe, okay, we'll put this in 24, okay, Tele cab, okay, 2 floor Tele cab. And I think, okay, that's a diversification, okay, from just some stairlift curve and straight, okay. But okay, that's a major market for Europe. So we can see that we work more together. We see the need, okay, that Europe's need, okay, and we are there, okay, with our team of design, okay, To just give them, okay, some new products, okay, than just the stairlift.

Speaker 1

So I see very good thing, okay, on the year 2024 and 2025 to reach, okay, our €1,000,000,000 of sales. And I mentioned, okay, that on past call, okay, that we want an objective. An objective, we have to have objective, okay, Up 20 percent of EBITDA. And you know something, I was doing the mathematics this morning And the mathematics is there, okay. For sure, nothing is easy, but I think, okay, just Of course, okay, with the consultant, okay, we are very confident, okay, to achieve both, okay, about EBITDA and About the sales, okay, maybe the sales is more hazy than EBITDA, but at least, okay, we'll work on that.

Speaker 1

Maybe Sebastien, okay, you will complete my answer.

Speaker 3

Yes. Thank you, Marcel. So yes, R and D is always a key element of our business. So that's bringing new products to the market, that's It's important for us. We want to be a leader in that order to complete us.

Speaker 3

In terms of M and A, we always say that again, a complementary product is always nice because we have 1,000 dealer And from time to time, we have 30 direct office right now. From time to time, we buy back some of our dealer when they have no maybe succession plan and it is a good business. So That's maybe 2 elements that we could bring going forward.

Speaker 8

And would you say overall There you are seeing like with the timing of the equity issuance, Is it fair to say that you have seen a step change or uptick in the M and A opportunity set in front of you then?

Speaker 3

I think now we are focused on the Savaria 1 project and the integration. I think again it was just some cautiousness on the balance sheet because Marcel liked to be ready a bit in advance. So again, but right now, there is no acquisition in the coming months. We are focused on Savaria 1. But going forward, in the coming years, we could see some opportunities.

Speaker 8

Okay. And then just on cash flow, Stephen, are you able to give some indication for CapEx next fiscal year and working capital over the next 12 months.

Speaker 2

I guess to start on the CapEx front, Michael. CapEx is an area we've always spent Historically, 2% to 2.5% of revenues, that's always been our guide. This year, we tried to rush it down a bit closer to 2%. A big part of our CapEx though is R and D spend, right? And we just talked about how a bit about how important it is to be bringing new products to the market and be innovative.

Speaker 2

So it's that's not an area that we're looking to make cuts at all. We'll probably continue at least in line with where we're spending this year on R and D, internal R and D projects. For next year, We haven't yet nailed down our budget, but I would say it's going to be in the 2% to 2.5%, maybe closer to 2.5% next year, as we look at Savaria 1 and other projects, but it's not going to be a large upswing because of Savaria 1, if that's sort of what you're hinting at. With regards to working cap, similar comment around we're still working through our budgets for next year, but We are I can say that we don't think working capital is an area that needs to be invested more heavily in where we're looking at Different inventory reduction plans at a few of our key locations. So

Speaker 3

we hope to see some results come out

Speaker 2

of that and also working across working with our vendors to improve terms and our AR position is strong I mean, we plan on continuing that to be in a healthy position next year. So overall, not expecting a big investment in working capital. But Again, Michael, we are forecasting decent revenue growth, right? The $1,000,000,000 target implies good revenue growth over the next couple of years. And there always is Going to need to be working capital investment to support that top line growth.

Speaker 8

Okay. And then just one more. With the debt re payment. Do you have an indication of like what your run rate interest expense will look like?

Speaker 2

The run rate interest expense, so We are more tilted to variable than fixed. We have a small portion of our debt that's fixed. So a lot of it is market based rates. Our interest expense This quarter, I mean, without giving you a number, I mean, obviously, it's going to come down by a good chunk. But Yes, I mean, I think what you're going to see in Q4 Would be a good run rate for next year, but I don't have a number to give you for what it's going to come down in Q4.

Speaker 8

Okay. Thanks for taking the question.

Operator

Thank you. We'll now take our next question. This is from the line of Frederic Tremblay from Desjardins Capital Markets. Please go ahead.

Speaker 6

Thank you. Good morning. Maybe starting with Europe. In past quarters, you highlighted some inflation pressures in Europe. Can you maybe provide an update on that, what you're seeing generally on that front as well as maybe an update on Your plan for price adjustments, I know in the past, sort of early 2024 was considered maybe for some price adjustments in Europe.

Speaker 6

So maybe just an update on

Speaker 3

I'll take this one. Thank you, Fred. So I would say the inflation has probably stabilized. It's a bit better than it was 1.5 years ago. And in terms of price increase, you know that again we have different brands from Savaria to Garaventa to our direct store to Endicare.

Speaker 3

So I think there's different history of annual increase. And now we see that we have a healthy backlog. So sometimes it's Again, the price increase, but many brands will do a price increase in early January. So we Typically, you see an uptick in margins in the Q2 of the following year of the next year.

Speaker 6

Perfect. And so we saw organic growth of 9% in North America Accessibility, which I think as you said implies that Europe was Roughly Flat, which is a good outcome versus Q2. I'm just thinking of maybe 2024 and beyond and sort of what Europe Could potentially do on an organic growth front with potentially pricing and some of the product introductions that you're planning there without, I guess, providing formal guidance on European organic growth. How do you think about the potential of Europe in terms of top line growth in the coming years?

Speaker 3

I can take this one. So I think Fred, again, if we do the math, the SEK1 billion, okay, which is again our target and then saw the family together, I think it's the entire 8% 10% of organic growth. So again, this year was a bit lower in Europe, but with some new products we are bringing back. So I'd expect that over time, Europe and North America should have a So I think that's what we should think, Fred.

Speaker 6

Okay, great. Maybe last one for me on Patient Care. Just wondering if you can comment on the current bidding environment as well as the competitive environment in that segment?

Speaker 4

Yes. Thanks, Fred. It is competitive. I'll start by saying that. But I think we're well positioned with the full offering that we have now with the both And the Care and Span teams together, bidding has been good.

Speaker 4

I would say

Speaker 3

there's a

Speaker 4

lot of newbuild activity that's out there, a lot of planned government So we're looking to win as much as possible against some of our competitors in certain markets. We do feel that we're stealing market share. We're gaining market share. So it is a healthy environment overall, very competitive, and we're holding our own. So I feel very strong about our position.

Speaker 6

Maybe just a quick follow-up on that. On the government business, is the margin profile there Different than nongovernment patient care businesses or like how does that compare?

Speaker 4

Not so much. I think here in Canada, there are certain provinces where you do see that. I would say Quebec, for example, is a province where maybe it's a lower margin. Ontario tends to be a bit higher margin. So there are some differences provinces province to province.

Speaker 4

But overall, no, I mean, We're bidding on business, whether it's government or private. We do have our own margin expectations to maintain. So we're not out there just Low balling it just to win business. So we are, I guess, smart from our approach there. And it's not always about pricing, even with the government, right?

Speaker 4

There's certain governments that do recognize the quality of better products in terms of patient care and clinical outcomes. So no, it's not always on price when you're going government, but it is something to be conscious of for sure.

Speaker 6

Great. Thank you.

Operator

Call. Thank you. We'll now take our next question. This is from the line of Julian Hung from Stifel. Please go ahead.

Speaker 9

Hi, Justin Keywood on here. Thanks for taking my call. Just on the gross margin strength, I think it was the highest it's been in 2 years. Is there anything that drove that? And then also The EBITDA margin expansion didn't see the benefits of the gross margin, just wondering the delta there.

Speaker 9

Thank you.

Speaker 2

Hi, I'll take this one. I mean, first on the gross margin improvement, most of that came from we didn't see some in Patient Care, but Most of it really came from North American accessibility. It's coming from the Brampton and the Surrey, British Columbia sites, the Garamenta slate in British Columbia. It mostly has to do with operating leverage. We had a very large sales growth out of those two locations specifically in the quarter that a lot of that contribution margin just Right to the bottom line.

Speaker 2

So that's our gross profit, which flowed through the bottom line. So that's really what helped it and drove over the overall company. SG and A did tick up this quarter. Some of it was related to Savaria 1 as mentioned, but we had some other costs in other pockets of the business It made it a little higher. There are a couple of one off costs in there as well.

Speaker 2

But we are expecting SG and A To go a little bit down next quarter, but keeping in mind that Savaria 1 costs are going to continue and that's buried in our actual results. So that's going to continue for the next up until sort of May 2025 as mentioned.

Speaker 9

Okay, understood. And then if we just took a step back and Considering the margin expansion goal from 16% now to 20% in 2025, what would be the main drivers As far as expanding that margin?

Speaker 1

I would take this one, okay? So it's quite is big, okay, coming from 16, okay, to 20, okay. But don't forget, okay, we have This consultant will work with us, okay, and we review our pricing, we review our costs, okay, and Don't forget one thing, okay. In the next 2 years, 2024 and 2025, okay, the net, okay, from the consultant and what Savaria again, okay. It will be very positive for Savaria, okay.

Speaker 1

It's why I'm very optimistic, okay, See that we will have this 20%, okay. It's not easy. I repeat that, repeat that, okay. But We'll work on the pricing with them, okay? And that's very different the way right now that we think, okay, about the pricing With some knowledge that they can give us, okay, the participation, okay, they are like a teacher for us, a teacher from university, okay, And it's great, Tukit, but we go after that, okay, take the balance sheet.

Speaker 1

So we will have more sales, okay. We have more sales with a bigger, okay, EBITDA, okay. And I think when you combine that altogether, okay, what you can save on cost, better sales, Better sales pricing. It's really important. You have better sales, but maybe the pricing is not there.

Speaker 1

And the pricing, okay, in Europe, okay, was always Too conservative, okay, compared that what we have in North America. So we fixed that, okay, with our friend, okay, from Europe, okay. But if you put always that together and I see, okay, me, okay, I was putting on the number of my I can't, I can't just say, man, okay, we will achieve that, okay, and maybe we will exceed that, because, okay, We work from the tap from the sales, okay, and the cost of materials, okay, and they have a consultant help us, okay, To find maybe new supplier, okay, with a better cost. So we'll work on that. So we'll work on many fields at the same time, it's why, okay, that I believe, okay, strong belief that we will find the 20% in 2 years.

Speaker 9

Well, thank you, Marcel. Yes, and I know there's been a track record of at Savaria of exceeding long term goals. So we look forward to that. Maybe just one more question of clarification. On the management or the consultant fees, if I heard correctly, there's a variable component to it.

Speaker 9

If you're able just to describe is that variable component attached to the margin expansion goal?

Speaker 2

Yes. So I'll take this one. I mean, we'll definitely be providing more guidance on this at the Investor Day. But yes, there is a variable component And some of that the variable piece is tied to our performance. So The better results we see in our business, we can expect some fees associated with that.

Speaker 2

So it's a win win on both sides of the arrangement.

Speaker 9

Great. Thank you for taking my call. And

Speaker 2

Sarah, if I could just go back to a previous question that Michael Michael Glenn had on the interest savings. I just had to pull up a file. It's about $1,500,000 of interest savings, Michael, per quarter With the reduction of debt, but also the fact that we've achieved now a lower tier on our pricing based on the lower leverage ratio that we have. So it's about $1,500,000 savings a quarter and about Some of that is going to be obviously eaten up by higher dividends. But going back to your question, Michael, it's about 1,500,000 Sorry, thanks, Sarah.

Speaker 2

You can open it back up for questions.

Operator

Thank you. We'll now take our next question. This is from the line of Zachary Evershed from National Bank Financial. Please go ahead.

Speaker 10

Good morning, everyone. Thanks for taking my questions. I think most of them will have to wait for the Investor Day on Savaria 1, but maybe just one on Patient Care. If the backlog is higher exiting the quarter, was it really just order timing preventing you from delivering another high-40s revenue quarter?

Speaker 4

Order timing, yes. I think that is part of it. We see the uptick, I guess, as you exit summer. September October in particular, we did see some good uptick there in terms of order intake. So it is a combination of just increased order activity Exiting the summer, but also just question of lumpiness within the quarter itself as it relates to projects.

Speaker 10

So nothing stopping you from executing on the backlog within the quarter?

Speaker 4

No, no. I mean, it's very much the orders coming in now, For the most part, it's trying to beat this, I guess, the year end spend, right? So you have certain I guess, there are certain kind of budgets that have a December year end, you have to eat at those budget dollars, otherwise, in many cases, they go away. So we are trying to take advantage of that. So some orders that you're seeing coming in now, this inflow now, It is very much to help us in Q4.

Speaker 4

There is some of the backlog. I will say that the backlog, it isn't just a Q4 backlog, right? I mean, within Patient Care given the project nature of some of the work, It has gone beyond a quarter, but that's normal. But some of the spending that you're seeing now or some of the uptick that we've seen exiting the quarter, It is very much to help us with Q4.

Speaker 10

That's good color. Thanks. And then maybe just one on management We've talked about the balance sheet opening up your options over the coming years, as Sebastien said. Are you still entertaining discussions like how laser focused is management on Savaria 1 versus keeping those conversations going in the M and A pipeline?

Speaker 3

I can take this one, Zack. So I'll take again, we're 99% focused on the Savaria one. So I think we need to say that there's nothing coming in the next few months. Right now, we have enough on our plates and we'll finish this year. We'll do a Savaria one and I'm sure opportunity will come at the right time now.

Speaker 10

Great answer. Thanks. I'll turn it over.

Operator

Thank you. We'll now take our next question. This is from Cheryl Zhang from TD Securities. Please go ahead.

Speaker 7

Hi, thank you. Just a quick follow-up and apologies if I missed this earlier as I got disconnected. So With the public equity offering now closed and your leverage down to 2.28x, just curious how you think about the priorities in your capital allocation?

Speaker 2

Yes. Hi, Cheryl. Thanks for the follow-up. Capital allocation for us. I mean, again, going back to Sebastian's last point, it's not that we're looking at any near term M and A.

Speaker 2

We are very focused on Savaria 1, but that project, as I noted earlier, there's not going to be a large tick up in CapEx or Expecting CapEx for 2024. I mean, it's too early to comment in 2025, but there's no large CapEx spend associated with Savaria 1. So we're going to come in at a historical range on CapEx for 2024. And working capital, we believe that we have to have the working capital support the business growth, absolutely. But we believe we can ratchet down working capital levels a little bit more versus what we have right now.

Speaker 2

So I'm expecting some improvement there as well.

Speaker 7

Okay. That's very helpful. Thank you so much.

Operator

Call. Thank you. And there are no further questions at this time. So I will hand back to the speakers.

Speaker 1

Okay. First, okay, thank you very much, okay, for to be on the call this morning. And this is very important, the institution, okay, the way you see things for the future, okay. You are the people, okay, who You can take the good news of Savaria, okay, and put that, okay, through the investors. So you are very, very important for us.

Speaker 1

And I am very happy to have the cash, okay, around 10% of equity, okay. So thanks, okay, to the partner, okay, of FICA. And I'm very happy that Many people participate, okay, with about our and we don't see a lot of offering right now in the market, okay. So I am was very happy to succeed at least to make that and that push us at another level of comfort. And while you are comfort, okay, you are better, okay.

Speaker 1

So and we have some cash, okay, to entertain, okay, a lot of possibility. So again, I thank my people, okay, and thanks the institution, okay, to participate, okay, and our vision, okay, of Savaria at least until the end of 'twenty five. So thank you very much, everybody, okay, to I'll be on the call. And thanks for your question, and thanks for my people to answer the call. Thank you, Sarah.

Operator

Thank you. This does conclude the conference for today. Thank you for participating and you may now disconnect.

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Earnings Conference Call
Savaria Q3 2023
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