FOCUSED ON PROFITABLE GROWTH, THE SALES SHOULD COME
THE TD COWEN INSIGHT
We think that the early share weakness was tied to the sales performance in Europe. However, SIS' focus has been on profitable growth which is clearly working highlighted by a 300bps improvement in European margins. With the new cost structure now in place, phase 2 of Savaria One (S1) is focused on driving incremental sales and we would expect this to drive significant operating leverage.
Impact: NEUTRAL
Savaria reported Q3/24 revenue of C$214mm, 4% below TD/consensus estimate of C $221mm/C$223mm. That said, adjusted EBITDA of C$41.7mm was in line with consensus on better margins.
Accessibility: North America growth momentum continues; Europe temporarily pressured by profitability guardrails. North American organic growth of 8.0% was healthy, with strong demand across residential and commercial sectors. European sales remain challenged (organic decline of 6.6%) as it increased pricing to protect margins in a competitive market, which we expect will last for another quarter before Europe returns to growth in 2025 (from ongoing S1 initiatives including cross-selling, new product introductions, updated pricing, and increased higher-margin reconditioned units, among others). The focus on profitable growth, together with cost savings and production efficiencies (i.e., improved procurement, transferring production between sites, machinery upgrades), should also translate into higher adj. EBITDA margin, which we expect to expand by 155bps/year through 2026.
Patient Care: Sales steadied in a slow market, on better margins. Organic sales declined modestly by 1.1% due to a slowdown in new build (long-term care facilities) activities given timing and project delays, mainly affecting ceiling lift sales. That said, management expects growth in Q4 given the strong pipeline and product innovations. Adj. EBITDA margin increased by a substantial 140bps y/y to 17.4% despite the lighter top line thanks to pricing initiatives (from S1) and lower material costs, and remains on the right path towards the 20% target by 2025.
Strong balance sheet with ample capacity. Leverage is at 1.69x (versus 1.88x in Q2/24) with ~C$247mm in available cash and credit facilities. Both should position SIS well to execute on strategic initiatives and opportunistic tuck-in acquisitions (i.e., dealers/ distributors and providers of complementary products).
We lowered our 2024 revenue estimate by ~2% on lighter European Accessibility sales tied to focus on profitable growth, but kept 2024 EBITDA estimate unchanged as we expect better margins in both segments. Our $30 target is unchanged.