Andlauer Healthcare Group Inc

TSX:AND

Earnings Call Transcript 2022-Q2

[Operator]

Good morning. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Andlauer Healthcare Group 2022 Second Quarter Results Conference Call.

Please be aware that certain information discussed today may be forward-looking in nature. Such forward-looking information reflects the company's current views with respect to future events. Any such information is subject to risks, uncertainties and assumptions that could cause actual results to differ materially from those projected in the forward-looking information.

For more information on the risks, uncertainties and assumptions relating to forward-looking information please refer to the company's latest MD&A and annual information form which are available on SEDAR. Management may also refer to certain non-IFRS financial measures.

Although the company believes these measures provide useful supplemental information about financial performance they are not recognized measures and do not have standardized meanings under IFRS. Please see the company's latest MD&A for additional information regarding non-IFRS financial measures including for reconciliations to the nearest IFRS measures. Please note that unless otherwise stated all references to any financial figures are in Canadian dollars. Following management's remarks there will be a question-and-answer session. This call is being recorded today, August 10, 2022.

And I'd now like to turn the conference over to Michael Andlauer. Please go ahead, sir.

[Michael Andlauer, executive]

Thank you, Michelle, and good morning everyone. Thank you for joining us today. With me on the call I have Peter Bromley, our Chief Financial Officer.

Following my opening remarks Peter will follow with a more detailed discussion of our second quarter and I'll then provide some closing remarks and look forward to opening the lines to any questions. No doubt, this quarter is a direct result of everything going right at Andlauer Healthcare Group. Between predictable and continued organic growth across all our product lines, the successful integration of our U.S. acquisitions, Boyle, Skelton USA in Q4 2021 as well as acquisition of the Quebec-based LSU in Q1 2022. The future enabled to have record numbers all across the board. Our revenue for the second quarter increased by 58.1% to $169.4 million compared to $107.1 million in Q2 a year ago. During the quarter, Skelton USA and Boyle Transportation generated $32.5 million in incremental revenue for our ground transportation product line and LSU generated $7.8 million in incremental revenue for our logistics and distribution operations.

Approximately 2.6% or $4.4 million of our consolidated revenue for the quarter was generated by working with manufacturers, 3PL distributor and government clients involved in the supply of Covid vaccines and related products. This compares to approximately 5.3% or $5.7 million of our consolidated revenue in Q2 a year ago when our vaccine-related business [ securities ] were at their peak. On the flip side, our packaging revenue in Q2 this year exceeded what we generated for the same period during 2019 for the first time since the onset of the pandemic. As I noted earlier, we generated solid organic growth across our product lines. In particular, our air freight forwarding revenue was up 79.3% year-over-year. This outsized growth is probably largely due to the result of pandemic-related supply chain issues. Certain customers are willing to pay more for this expedited service to get their product to market. This accounted for approximately 50% of the increase.

Looking ahead as supply chain issues resolved over time, we expect the current demand rate to soften in the airfreight side. It's important to note that significant higher fuel costs passed on to customers as a component of our pricing artificially impacted revenue and particularly in our specialized transportation segment. In step with our strong top line performance, we continue to generate strong EBITDA and margins. Despite these inflationary times, we were able to maintain margins because of great collaboration and integration of our acquisitions and a red velvet rope approach to our present business which emphasized even more focus on our workers, employees, drivers and our present valued clients.

EBITDA increased 54.6% to $46.3 million in the quarter from $30 million in Q2 last year and our EBITDA margin was 27.3% compared to 28% in Q2 a year ago. EBITDA margins from our U.S. operations, Skelton USA and Boyle transportation are in line with our consolidated margin range and LSU achieved a margin consistent with our logistics and distribution product lines. Total comprehensive income was $27.6 million or $0.49 per share diluted compared to $13.1 million or $0.33 per share in Q2 last year. We've entered the second half of 2022 with a very strong momentum.

I'd like to turn the call over to Peter to review our financial performance in more detail.

[Peter Bromley, executive]

Thank you, Michael, and good morning everyone. Revenue for our Healthcare Logistics segment totaled $48 million, an increase of 38.3% compared to Q2 last year. The increase was primarily attributable to our acquisition of LSU on March 1 of this year. Year-over-year growth in our logistics and distribution product line reflecting greater outbound order handling activities for Accuristix and increases in transportation buildings impacted by fuel surcharge programs from carriers which are passed on to customers. Further, our packaging solutions contributed 10.7% revenue growth in the quarter. Revenue in the specialized transportation segment totaled $121.4 million, an increase of 67.7% compared with Q2 last year. The increase was attributable to 70.8% growth in our ground transportation product line driven by incremental revenue from our Skelton USA and Boyle Transportation acquisitions, organic growth and higher fuel costs passed on to customers as a component of our pricing.

Our airfreight forwarding and dedicated and last-mile delivery product lines also contributed to growth in our specialized transportation segment with year-on-year revenue increases of 79.3% and 27.6%, respectively. Michael already discussed the drivers for the strong growth in our airfreight forwarding line growth in dedicated and last mile delivery was attributable to incremental revenue from route expansion in Western Canada and increases in fuel costs passed on to customers. Cost of transportation and services was $82.8 million or 48.9% of revenues compared with $47.3 million or 44.1% of revenue for Q2 last year. The higher cost of transportation and services was primarily attributable to our acquisitions of Skelton USA and Boyle Transportation and higher fuel costs in line with the increases in revenue related to fuel prices. The increase in the operating ratio this quarter reflects our Skelton USA and Boyle Transportation acquisitions which have increased the relative proportion of specialized transportation segment as a percentage of our total consolidated revenue and cost profiles.

Direct operating expenses for the quarter were $28.3 million or 16.7% of revenue compared with $21.6 million or 20.1% of revenue for Q2 last year. The increase was primarily attributable to outbound volume growth for Accuristix and the acquisition of LSU. Our specialized transportation acquisitions Boyle Transportation and Skelton USA have lower facility-related costs compared to the healthcare logistics segment which resulted in the lower direct operating ratio in the quarter.

SG&A expenses were $12.1 million or 7.2% of revenue compared with $9.2 million or 8.6% of revenue in Q2 last year. The increase is primarily attributable to our LSU, Skelton USA and Boyle acquisitions. The decrease as a percentage of revenue reflects operating leverage generated within SG&A functions compared to revenue growth.

Operating income for the quarter totaled $30.2 million, an increase of $11.4 million or 60.5% compared with Q2 a year ago. Approximately $3.9 million of the increase is attributable to our LSU, Skelton USA and Boyle Transportation acquisitions with the remainder attributable to organic growth. Net income for the quarter totaled $21.0 million up from $13.1 million in Q2 a year ago.

Higher segment net income before eliminations for both our healthcare logistics and specialized transportation segments contributed to our increased profitability on a consolidated basis. Total comprehensive income for the quarter was $27.6 million, reflecting foreign currency translation adjustment gain of $6.6 million related to our acquisition of foreign operations of Skelton USA and Boyle Transportation.

If I look at our balance sheet now as at June 30, 2022, we had cash and cash equivalents of $29.3 million and working capital of $49.2 million. This compares to cash and cash equivalents of $25 million and working capital of $31.6 million at 2021 year-end. The significant increase in working capital is primarily attributable to the increased scale of our business since the acquisitions of LSU, Skelton USA and Boyle Transportation and the repayment of amounts drawn on our revolving credit facility.

At quarter end, the aggregate amount outstanding under our credit facilities was $50 million under our term facility and nil under our revolving credit facility. So we remain well positioned financially to pursue growth opportunities. I'd now like to turn the call back to Michael for closing comments.

[Michael Andlauer, executive]

Well, since the time of our IPO in December 2019, we've significantly strengthened and expanded our platform delivering on each of the components of our growth strategy while maintaining our disciplined approach with respect to both financial and operating metrics.

We continue to build on our unique culture where employees, drivers, owner operators and customers continue to be our most important stakeholders. I'm extremely proud of our management team and our personnel in successfully managing our day-to-day operations and commitments to our customers through all of the additional challenges related to the pandemic inflation, etc., while also supporting the advancement of our growth strategy.

This includes the many contributions of our new partners at Skelton, Boyle and LSU, who have shown that the management employees and drivers care about each other and its customers with the same passion of other HG companies. This has been evidenced by the incredible collaboration of witnessed between Accuristix and LSU, between ATS Healthcare and Skelton Canada and between Skelton USA and Boyle.

I mentioned earlier that we've entered the second half of 2022 with strong momentum. We're well positioned to continue building value for our stakeholders for the rest of the year. And I might also like to also announce that we'll be increasing our dividend to $0.07. Our Board accrued that yesterday for all the shareholders on the line. So that concludes our formal remarks and I'd like to open the lines to questions.

[Operator]

[Operator Instructions] Your first question comes from Kevin Chiang of CIBC.

[Kevin Chiang, analyst]

Congrats on obviously a very strong second quarter here. Thanks for all the details in your prepared remarks. Maybe I got to dig into your margin performance in Q2 in the sense that we've seen a lot of transportation and industrial names that have what I'll call pricing power such as yourselves. They've seen sequential margin erosion even if they're capturing inflation to dollars just given the flow-through impact of surcharges. You stand out here in the sense that you saw sequential margin [indiscernible] despite rising inflation. And I believe the acquisitions that you made over the past 12 months would have initially been dilutive to your margins. So if you could just maybe dig in a little bit further as to maybe some of the puts and takes that you're able to pull on to offset maybe some of the headwinds on margins in the second quarter?

[Michael Andlauer, executive]

And yes indeed, there's no doubt that especially with inflation the way it is. And I think I spoke to that in the previous quarter earnings call or various investment calls that we were wary of the input costs. Everywhere we looked we saw double-digit input costs, never mind trying to get access to equipment and the labor market is so tight particularly in the first quarter that it became evident. But I think we anticipated that when we did our business plan last year, we were anticipating that already. We were seeing the signs. And part of the red velvet rope approach that I referred to is truly this year was really about focusing on each other and our customers, enhancing the communication lines and supporting each other. And part of it was with all our companies at Accuristix with the cost of stores going up and leases going up and letting customers know that this was in the pipeline and getting them ready for it. And this was done pretty much Q4 of last year.

So part of it is the discipline that we instilled and enhanced communication. And we went out there and gave our employees an increase right off the bat in January to start the year off. And we looked at all those and we communicated to that. And you're right, we do have certainly the ability to speak to our customers and let them know that these resources are important and these costs keep those in line. You mentioned about the acquisition being dilutive. I'd like to disagree on that, Kevin. I believe that it actually has surprised me how it's done the opposite. And that's probably attributable to the incredible collaboration that I've seen. I'm amazed to see how collaborative the owners of these acquisitions have been and the employees and the willingness to work together and collaborate and share. And the one thing that's come out of this is the best practices and not everybody does it perfect. And they've quickly been able to adopt to say, "Hey, this is how we do it here and all of a sudden for example Accuristix, were talked about vaccine distribution.

LSU has incredible experience with the vaccines with the Quebec government and be able to share the best practice and now Accuristix can go to Ministry of Ontario and offer these type of services. I'm just giving you an example off the top of my head. But certainly Skelton from an ESG standpoint where their trailers, they are able to plug in the reapers when they're stationary in facilities. So having our ATS facilities with the plug-in capability. So when the trailers come in that they're able to be plugged in and not have to run on diesel fuel. Those are some of the examples. And they're fast and furious and they're being done collaboratively and those best practice typically end up on your bottom line with better efficiencies. So I've seen that as being a real windfall for us. So that red velvet rope approach is a focus on them and each other. And then our customers with good communication. And as contracts come up we had anticipated that. So hats off. Like I said the management and the team have done an incredible job in keeping the larger communication open.

[Kevin Chiang, analyst]

So it's obviously a great performance. Maybe just if I could ask on the dedicated last mile you saw a strong sequential growth and year-over-year growth. It looks like you're expanding your routes into Western Canada. Are you seeing maybe an inflection in the opportunity that you see within this segment? Maybe are you seeing changes in maybe consumer buying habits probably all the pandemic. Just any commentary there.

[Michael Andlauer, executive]

No. Our business is like the friends of mowers line says that [indiscernible] and make money. Our business is somewhat predictable than boring really when it comes to healthcare consumption. It's not fashionable. I guess maybe sunscreen but what traveling but it's really not. We don't see that, we still see the pharmacy channel being very strong. I guess you can probably ask your friends at Loblaw or Shoppers or McKesson or Neighborly and see how they're performing. I think certainly, the trust in pharmacy by Canadians is still very strong and we see it with the volumes going into the pharmacy.

[Kevin Chiang, analyst]

That's great color. And just one last one for me maybe for you, Peter. I apologize if I missed this. The $22 million in organic revenue growth in the quarter, how much of that was fuel surcharge? Fuel surcharge increase maybe is a bit the way to ask it, if you happen to have that number?

[Peter Bromley, executive]

We don't really disclose the portion. It's difficult to measure across all the different business units because it's all the same way. So we don't really disclose that number. But it is significant. I mean you can probably do the math on it just for reference. If you look at the average diesel price in Q2 of 2021 probably in around $1 and 20 liter mark. For Q2, it was over $2, $2.10 and sometimes over $2.28 to $2.40. I think it reached at one point. So you can imagine the amount of fuel surcharge revenue that was generated. I would suggest that half of that would be a fuel surcharge. That's why I needed to indicate that in my call here.

[Operator]

Your next question comes from Konark Gupta of Scotia Capital.

[Konark Gupta, analyst]

Congrats on a good quarter. So I wanted to dig into the packaging revenue actually. So it seems like as you pointed out not even just up from last year but also up from Q2 of 2019. In 2019, I noticed that there's been a little bit of volatility between quarters on that revenue line. So from like pre-pandemic perspective in terms of demand in that segment and in terms of like people and resources in your shops, where do things stand? I'm not just looking at them if it's looking at the volume and kind of your capacity in packaging business. Where does it stand pre-pandemic?

[Michael Andlauer, executive]

It's pretty much business as usual from that standpoint from the co-packaging. Part of the co-packaging also includes the packaging which includes Credo. Interestingly enough baked in these numbers is actually a decrease in Credo sales and usage. I think I alluded to last year that every province had ordered except for PEI Credo packaging from us for the vaccines and it was fast and furious on that standpoint. And quarter-over-quarter year-over-year has dropped. But our co-packaging business certainly one of the largest sunscreen products in the country we co-package for and other large consumer bold. But certainly, there was an uptick on that when you consider that not many people are traveling over the last couple of years. But it's not an area Konark that I'm putting too much emphasis on. It's very complementary to our Accuristix business for our clients but it's probably the most commoditized part of our business of all the segments.

[Konark Gupta, analyst]

It's on the kind of industry environment. So the U.S. government came out with a Medicare package just recently and there were some thoughts about drug price reforms there, etc. I'm just kind of curious obviously, you guys are starting to build out your U.S. franchise with the 2 acquisitions. The drug reform which is kind of proposed in the U.S. we also have something similar but in a different way in Canada as well. Any thoughts as to what kind of implications do these 3 farms in the U.S. or Canada have on your business as you look forward or your customers on the manufacturing side?

[Michael Andlauer, executive]

For me, I mean the [ U.S. ] market is definitely a different market than Canada. I focus on the distribution aspect of it. The distribution in the U.S. is really dominated by the 3 wholesalers that being McKesson, Cardinal and AmerisourceBergen. So that's probably a question for them more so than for me. At the end of the day Americans or Canadians don't consume more because the prices are cheaper. It's a matter of working manufacturers dealing generics. So maybe generic companies maybe an advantage maybe with these type of reform. So that may be an area where you might see increased business from generic and less from an ethical manufacturer. So I think from that standpoint it really does not impact our business. I'm more concerned about the FDA regulations when it comes to the movement of goods and the transportation and temperature controls. And that's an area where I'm bullish about because there's already discussions about it and we're seeing that with our manufacturer clients who are starting to ask more of that in the U.S.

[Operator]

Your next question comes from Tim James of TD.

[Tim James, analyst]

Congratulations on a great quarter here. 2 kind of bigger-picture questions I guess, Michael. You now have approximately 2 years I guess or almost 2 years since you started making acquisitions. They all seem to have gone so well for you. But are there any challenges that have come from your M&A that have created lessons learned for the future? Or have they been as seamless as they appear from the outside and by looking at your results?

[Michael Andlauer, executive]

And I don't take anything for granted certainly. And I recognize that our business is about people. And certainly, character is definitely one of the areas that I know we looked at. From a sports franchise standpoint when we look at drafting players or the likes, we look at character as being. And sometimes you really can't measure. So the culture of a company has proven to me that that's an area that I'm now focused more on because of the success that we've had with these 3 acquisitions in particular. And because if you do have the right same culture then the collaboration becomes even greater. And the things I have learned it's actually exceeded my expectations, Tim. And that's why I'd like to speak to it.

It hasn't come easy I might add. I mean certainly you got to do the right due diligence and Peter and his team and our executive team are very vocal and honest about their assessments which makes it easier to navigate but it takes time. And this year to me I made it clear to the Board that I really wanted to focus on our employees and our customers this year. So the challenges is time from a due diligence standpoint and being able to do it right. And then and I think that's what it is. I think the input efforts is the challenge. And we've said no to many initiatives, signed the NDAs, looked under the hood and said, "You know what? It's going to be a lot more work to try to even though it is accretive.” So I think that's been our approach. So the challenge is making sure that we found the right fit. And they're out there. I mean at the end of the day I think people want to work for a company that appreciates the efforts that's employee-focused. And so that's what we offer.

[Tim James, analyst]

My second question, I'm wondering if you can cite any areas and I'm thinking across your business broadly. Any areas where you can point to where you've taken market share view in the second quarter. Maybe I should open it up to call it the first half of the year if it's easier. Or do you feel that once you exclude acquisitions and fuel surcharges your revenue growth has been kind of in line with the relative industry growth rates?

[Michael Andlauer, executive]

I think that's the message that it's been a wonderful like everything all the stars aligned in this quarter. And I think if you look closer, you realize that the organic growth really was in line with the industry which is mid to high single digits. The fuel artificially rose that. Certainly, we're extremely pleased with our margin performance. And that's indicative of a lot of factors. But all in all we've shown to be consistent. We'll continue to show consistency in our margins. We haven't frayed from that. And interestingly enough I mean one of the areas that we've looked at particularly on the logistics side of things is because the pricing of new facilities let's say maybe we're grossly is not a great word but it feels that way inflated. We felt it was more strategic to ensure that we take care of the present customers and look at all our margins and look at our business and like I said create that growth approach of the business.

And I think when industrial leases has become a bit more reasonable. And I really believe that we've hit our peak in that space. That's just my opinion that we'll be in a better position in a year or 2 year to put the top on. On the transportation segment while the U.S. continues to grow we've been limited by the access to equipment. It's not even as much as on the driver side as much as equipment. That's starting to flow in right now on the U.S. side but there's been a big demand for our services from a security and a temperature standpoint. On the Canadian side of things we've really focused on our employees. If you recall in Q1, everybody had issues with staff and whether it be the Covid outbreaks or whether the fact that people who are reluctant to coming back to work who are working from home, etc. So we really focused on our customers.

And in some cases, we've actually looked at the less complementary clients, i.e., medical equipment clients that really don't need our services because we offer temperature control. And if it's a radiology equipment that has to go to a hospital which is complementary from a line haul and last mile delivery standpoint. But really it doesn't need temperature control, we would ask them to please find another carrier. So we've really focused our energy on ensuring that there's a smoothness to it. So really, if anything we have not taken any more market share. We've just improved our relationship with our customers.

[Operator]

Your next question comes from Margaret MacDougall of Stifel.

[Maggie MacDougall, analyst]

My question was around the degree of pricing versus fuel surcharge versus true organic growth that we can look at when we look at your reported non-acquisitive revenue contribution in the quarter. I think you sort of just answered that when you discussed your organic growth relative to the industry as being mid to high single digits. But we'll leave the question open here if there's anything further that you'd like to add.

[Michael Andlauer, executive]

No. I mean I think at the end of the day like I said we really focused on our present clients and making sure that communications was open and clear about input costs. So certainly, pricing played a part in the revenue growth. We did have like I said organic growth. We probably had more organic growth had we decided to be more focused on more sales. But to me what's important, our employees and drivers and management they worked extremely hard over the previous year and a bit with the pandemic and we just want to make sure that there's an opportunity to people just to focus on a bit of more normalcy and it's been incredible. And the best part is that we've been able to become more efficient and that served our clients well. Our on-time performance is at an all-time high. And it's allowed people just to take a good breather. So yes, hopefully that answers and gives you a bit more color.

[Maggie MacDougall, analyst]

The other question I had was around your expectation for price increases implemented to be sticky and I'll exclude fuel from that, that's just a pass-through. If we do see inflation cool which who knows if that's going to happen or not but let's say it's possible. Would you expect to maintain your pricing at the current level given the portion of that is wage increases and not sure that you'd be keen to roll those back?

[Michael Andlauer, executive]

Definitely not. I think Metro just announced their quarter results last night as well and they seem to have passed on that to the consumers all the inflation of their goods looking at these numbers. So the cost of groceries aren't going down. The cost of housing, if you can't afford a house you're going to have to rent now and renting is not going to go down. I don't know about clothing. But certainly, when I look at the basic necessities I don't think our frontline workers in particular aren't going to see. So it's been difficult. I don't want our frontline workers to have to be worried about having to get a second job in order to manage their family. So for us, it was very important. Many of our facilities we don't have a bus line whether it be in Chatham or Val-d'Or and some of these. Most of our employees drive to work still.

And we've kind of alluded to the fuel prices and all of them. Unless there's deflation which I don't think is in the horizon our costs are going to be. But it's a matter of understanding what our costing model is and in many cases sharing it with our clients and say "Here we go." And they have the same issue especially if it's a transportation client where they have their own distribution centers. So they know what their input costs are. So to me, it's keeping open line of communication and sharing that information. And so it's one of the hardest things for a salesperson to do is going for an increase with present client when they have a good relationship but it's not. So we don't like to do it and we hope not to have to do it by becoming more efficient as well.

[Operator]

Your next question comes from Walter Spracklin of RBC Capital Markets.

[Walter Spracklin, analyst]

I just want to come back to your comments Michael, on U.S. regulations and the opportunity you see there of increased monitoring of temperature control, transportation component. If we were to see that happen what I'm trying to figure out is how much lead time will you have as a company versus competitors that will be looking to build up their own ability to offer what you've been offering for so many years. Do you think the government will provide that lead time to get the call it the incumbents, the national carriers. Give them time to build up that type of investment in their equipment and if they will and if they won't what do you generally see as your lead time to profit from that? And how much can you, in fact, capture given your existing footprint, that growth if it were to come?

[Michael Andlauer, executive]

With respect to the U.S., I'm looking at how Canada evolved with respect to guideline 0069. And typically, it's done -- inspectors go out there and they go and the manufacturer, and now, in this case, wholesalers, and then they kind of say, "Hey, you're not being compliant here. So we're going to -- here's an observation, how are you going to deal with it. Here's the timeline." And then they kind of -- and typically, what it's -- what they're asking for is we want to see progress. So the next time we come and see you, we want to see progress.

Here's a problem. There's not that many inspectors out there. And by the time they come back and see it might be a year or 2 years. Here's the other problem. It costs more to move goods in a temperature-controlled piece of equipment where a trailer will cost you over $100,000 when you put the extra installation so it's validated properly. It's not a typical trailer. And the reefer equipment and the technology to validate to make sure that every part of that trailer is maintaining the temperature not just the front part of the trailer or the back part. So they're more reluctant to spend more money, especially if you're a wholesaler distributor where you're looking at all your costs. So it's a work in progress.

But ultimately, the FDA inspector or the Health Canada inspector can shut you down, too. So they do take it seriously and I think you've heard me say over and over again in our world particularly on the drug side of things it's a quality trump procurement. So the manufacturers actually are the ones that are probably going to push it more because the manufactures typically a global in nature, the global enterprises. And their QA obviously have to deal with other countries and they understand that. So we're seeing more of a request from the manufacturing standpoint requesting the UPSs or the [indiscernible] or whoever 3PL to use a temperature validated equipment. So it's a work in progress.

I'm figuring there probably about I don't know guesstimate, I think we talked to the Board about that maybe 5 to 7 years away what Canada is. So it's a work in progress. This is not something that's going to happen overnight. And we understand the business. We understand the customer we have a relationship with the manufacturers, a reputation that allows us to continue to grow it and understand it because all we handle is healthcare. We don't do anything else. And so that's our approach to it in the U.S.

[Walter Spracklin, analyst]

And I guess, having the history with the manufacturing and if it's coming from the manufacturer and they're used to dealing with you, that will give you a little bit of lead time, a little bit of advantage in the U.S. if and when that does come about your relations...

[Technical Difficulty].

[Operator]

Your next question comes from Endri Leno of National Bank.

[Endri Leno, analyst]

Congrats on the good quarter, Michael. I'll start with a question on the U.S. potentially from another angle, actually, maybe perhaps another growth opportunity that you might see there. And just your thoughts on it. But I think there was recently a month or so ago a report published at the behalf of the White House on assessing the U.S. pharma supply chain and the need to ensure or to nearshore everything from precursors to raw materials to finished products, increased inventories and all that kind of stuff or to more friendly countries, let's put it versus the U.S. I was just wondering if you can talk a little bit about that. I mean into the line is there a capacity to do is that currently? What would it take? And what could be the benefit there for Andlauer?

[Michael Andlauer, executive]

I think the benefits are big. And I look at a company like UPS and how of admiring their approach on taking UPS Healthcare as truly a separate part of their business, focus part. So they're feeling bullish about it too. I mean they just finished an acquisition in Europe a significant one, creating a network. Now they're global in scale and I tend to be more domestic focused. But the approach is the same and we're looking at it from probably the same lens except there is probably 30x stronger. But I feel pretty bullish about that approach. I mean you look at precursors and obviously the drug trafficking and say. The one thing I did finding interesting as I'm learning about the U.S. is security becomes way more of an issue than in Canada.

So certainly, the government is there to try to make sure that they protect that. And I guess maybe that's what it's all about and as well. So how do I answer that? I think something will come out of it. I would anticipate that in 2023 we will be seeing a little bit more interaction in different lines of healthcare in the U.S. I was in Massachusetts out a Boyle meeting last couple of weeks ago I guess. Peter and I and it was really engaging to listen to some of the pharma folks that spoke some of the security folks that spoke as well because we have to have a Board that is the Board because we're [indiscernible] and we handle [indiscernible] product at Boyle. And saw the relationship between security and healthcare. So anyway long and short of I anticipate growth there but this is not even a year old acquisition. So we're still learning and feel comfortable with our footing. But certainly, the initiatives by the federal government can only help our business.

[Endri Leno, analyst]

Another question on potential kind of growth, this one a bit closer to home. But I think 2 or 3 weeks ago GSK and the federal government they announced a new flu vaccine contract to be handled out of Quebec and you just acquired LSU there. So just kind of wondering your thoughts on whether you'll be able or willing to participate in the distribution and the handling of those flu vaccines?

[Michael Andlauer, executive]

So the answer is willing yes, able, yes, and ongoing negotiations, yes, and that’s to be continued. But we're very, very excited about that. And especially LSU they have been doing the vaccines. Quebec is the only province that outsources their vaccine distribution and has been doing a LSU for many years now. So we're bullish about that.

[Endri Leno, analyst]

And the next line of question, it's a bit more back to kind of that organic growth. And I mean our numbers at least our estimates show you had like somewhere 8% 9% kind of organic growth in the quarter [ steel ] surcharges. Would you expect something like that to continue in coming quarters? I mean also mentioning that you exited with strong momentum from Q2.

[Michael Andlauer, executive]

Yes. I feel pretty strong about that. I don't see a trend either way. Like I said we’re pretty predictable industry and from what I gather.

[Endri Leno, analyst]

And then the last one I had. You also mentioned or perhaps it was Peter on the growth opportunities. And I'm thinking about acquisitions at the back of my head. So with just that kind of thought in view is there some area that, for example, through an acquisition you might like to expand or add a capability that you don't have? I mean is there something that would kind of fit in the company that you currently don't have and would improve the offering at you?

[Michael Andlauer, executive]

When I look at the logistics chain one of the things that I don't want to go visit the Accuristix and LSU facilities is the amount of returns that happens. Typically, the returns never go back in stock. If you have a drug identification number, you can so that destruction needs to happen and a lot of the stuff is outsourced. And that it rolls well but it just doesn't. I think there's a better way. So certainly looking from a returns aspect and destruction aspect I think it's probably, especially with the network that we have across this country, I think we have an opportunity to maybe find a better way in working with manufacturers in a more effective way.

We talked about co-pack. We’re into our packaging business it's co-packaging but we don't do a contract packaging that's an area that may be, but that's listening to the customer and being there for them. And if the need arises they'll be talking. So their businesses change. Certainly, biologics is an area that's not going to go south. It's going north and understanding that. And that's why when we did the capital expenses of getting the fridges and the freezers in Calgary and in Toronto it's proven well there. It's a lot easier to fill those these days.

Thank you very much, everybody. I appreciate all of you participating this morning. Thank you and have a great day.