Savaria Corporation, the Canadian accessibility solutions provider, reported their Q1 2024 earnings on May 9th. On the surface, it seemed like a mixed bag. Revenue growth fell short of expectations, primarily due to divestitures and a sluggish European market. Yet, amidst this top-line uncertainty, a glimmer of something extraordinary emerged: Savaria's EBITDA margin expanded by a significant 200 basis points year-over-year, landing at a record 16.6%.

While analysts acknowledged this margin improvement, attributing it to the ongoing "Savaria One" efficiency program, I believe they've overlooked a crucial detail, a detail that could signal a fundamental shift in Savaria's profitability trajectory. This detail lies not in the grand pronouncements of operational excellence, but in the subtle interplay of revenue decline and margin expansion within the European Accessibility segment.

Savaria's European Accessibility segment, which typically accounts for roughly 30% of the company's EBITDA, saw revenues decline by 3.4% in Q1 2024. Simultaneously, the segment's EBITDA margin expanded from 10.8% to 12.7%, a remarkable feat considering the top-line contraction.

This inverse relationship between revenue and margin deserves a closer look. Could it be that Savaria is strategically shedding low-margin business in Europe, a move that, while impacting short-term revenue, paves the way for a higher-margin future?

The company's statements seem to support this hypothesis. During the Q1 earnings call, both CEO Sebastien Bourassa and CFO Stephen Reitknecht alluded to a strategic shift in Europe, focusing on "product mix" and "pricing initiatives."

Let's consider the potential impact of this shift. If we assume that Savaria is selectively forgoing a portion of its European sales, the true organic growth of the remaining, higher-margin business could be significantly higher than the reported 2.6%. For instance, if we hypothetically assume that Savaria shed 6% of its lowest margin European business (representing roughly 2% of total company revenue), the organic growth of the remaining business would be closer to 4.6% (2.6% reported + 2% shed).

This hypothetical 4.6% organic growth figure, coupled with the segment's remarkable 200 basis points margin expansion despite revenue decline, suggests that the underlying profitability of Savaria's European Accessibility segment is improving at a rapid pace.

The implications of this margin expansion are far-reaching. Savaria's management has set ambitious targets for 2025, aiming to reach $1 billion in revenue with a 20% EBITDA margin. While many analysts remain skeptical of these targets, the Q1 2024 results, particularly within the European Accessibility segment, hint that these goals might be more attainable than Wall Street currently predicts.

Savaria's strategic shedding of low-margin business could be a significant catalyst in this margin expansion journey. By focusing on higher-value products and optimizing pricing, Savaria is not just improving efficiency; it's fundamentally reshaping its profitability profile.

This shift in Europe is particularly significant as the segment historically lags behind North America in terms of margin. If Savaria can successfully elevate the European margin profile to approach North American levels, the company could unlock a new era of profitability.

EBITDA Margin Comparison: Europe vs. North America

This chart, derived from Savaria's Q1 2024 earnings call transcript, illustrates the EBITDA margin gap between Savaria's European and North American Accessibility segments.

It's important to acknowledge that this hypothesis is based on a single quarter's results and requires further analysis and observation. However, the initial signs are compelling. Savaria's strategic shift in Europe, though subtle, could be the hidden driver that propels the company towards its ambitious 2025 targets and beyond.

"Fun Fact: Did you know that Savaria's history is intertwined with the iconic Montreal Expos baseball team? In the 1980s, Marcel Bourassa, Savaria's founder, installed a stairlift at Olympic Stadium to help fans with mobility issues access their seats, showcasing the company's commitment to accessibility even in the world of sports."