Andlauer Healthcare Group Inc
TSX:AND
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Earnings Call Analysis
Q2-2024 Analysis
Andlauer Healthcare Group Inc
The recent earnings call of Andlauer Healthcare Group presented a contrasting picture across its operations in Canada and the U.S. CEO Michael Andlauer noted that the Canadian specialized transportation network thrived, with revenue from ground transportation up 7.1% and dedicated and last-mile deliveries witnessing a robust growth of 12.2%. However, the U.S. truckload business faced ongoing challenges, with a decline in revenue and margins attributed to persistent post-pandemic rate pressures, ultimately resulting in lower EBITDA.
For Q2 2024, overall revenue in the Healthcare Logistics segment grew modestly by 1.3% to $44.2 million, driven mainly by a 13% increase in packaging revenue. On the other hand, the Specialized Transportation segment achieved growth of 3.1%, totaling $117.2 million, despite suffering setbacks in the U.S. truckload operations. Direct operating expenses remained stable relative to revenue, but overall operating income saw a decline of 1.9%. Noteworthy was the net income remaining flat at $15.7 million per diluted share despite higher costs.
The company reported an EBITDA of $40.1 million, marking a slight increase of 1.4% from the previous year. The EBITDA margin stood at 24.8%, down from 25.1% a year ago. This decline was primarily due to reduced margins in U.S.-based truckload operations, which reached the lowest level since Andlauer entered the market. The management maintained that they are still within their strategic EBITDA margin target of 24% to 26%, indicating resilience despite the current pressure.
The company emphasized its commitment to enhancing shareholder value through strategic capital allocation. Management successfully bought back over 2.6 million shares under its normal course issuer bid (NCIB) and a subsequent substantial issuer bid (SIB) totaling $90 million. With cash reserves of $40.7 million, the company is well-positioned to support further growth opportunities while also handling existing operational challenges.
Andlauer's management is optimistic yet cautious regarding the U.S. truckload sector, indicating a strategy focused on revenue quality. Future directives include right-sizing operations, aligning with the ongoing trends in high-demand areas such as healthcare logistics. Despite current challenges, the management is confident that the market will eventually stabilize, with a commitment to adapting operational strategies accordingly. They assert that the long-term fundamentals of both transportation and healthcare logistics remain positive, which is expected to support the company's growth trajectory.
The executives acknowledged unprecedented rate pressures in the U.S. truckload segment but maintained that the company is still generating sufficient cash flow. While committed to sustaining operations in this segment, they are also keen on exploring potential mergers and acquisitions, focusing on smaller targets to enhance the company's footprint in the healthcare logistics market. The management highlighted their intent to continue leveraging their existing network to tap into emerging opportunities in sectors closely aligned with healthcare.
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Good morning. My name is Joelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Andlauer Healthcare Group 2024 Second Quarter Results Conference Call. [Operator Instructions]
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 the 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 the IFRS. Please see the company's latest MD&A for additional information regarding non-IFRS financial measures, including 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 on August 1, 2024.
I would now like to turn the conference over to Michael Andlauer. Please go ahead, sir.
Thank you, Joelle, and good morning, everyone. Thank you for joining us today. With me on the call, I've got Peter Bromley, our Chief Financial Officer.
So following my opening remarks, Peter will follow up with a more detailed discussion on our Q2 financial results. I'll then provide some closing comments and open the line to questions.
So I can summarize the second quarter as a tale of two cities, one from Canada that did very well and one from the U.S. that didn't do quite that well. We continue to generate solid organic growth in our Canadian specialized transportation network in Q2, with each product line posting year-over-year revenue increases.
Our Canadian ground transportation revenue, excluding fuel, increased by 7.1% in the quarter. Dedicated and last mile was up 12.2%, and our air freight revenue increased 3.1% on higher volumes. And in our Healthcare Logistics segment, we returned to growth in both our logistics and distribution and our packaging product lines in the quarter.
However, our U.S. truckload business revenue and margins have continued to decline in 2024 due to sustained post-pandemic rate pressures. I spoke of reaching a trough in the U.S. in our Q3 call last year, but now I realized that it was way premature as rate pressures have persisted into the first half of 2024.
When combined with our decision to focus on revenue quality, which has resulted in idle equipment in our U.S. operations, our second quarter margins in the U.S. are at the lowest point since we entered this market. As a result, EBITDA attributable to Boyle Transportation and Skelton USA was approximately $2.8 million lower in the quarter compared to Q2 last year.
Our leaders at Boyle Transportation in the U.S., who have been in the business for a long time, are saying that this extended period of rate pressure in this cycle is unprecedented. And while we are confident that the market will correct itself, it's difficult to predict the exact timing. In response, we're maintaining our heightened focus on revenue quality and now looking at opportunities to fixed cost reduction as we wait on the cycle to turn.
In summary, we're very pleased with the performance of our Canadian specialized transportation network and our Healthcare Logistics segment in the quarter. And while we're still a premium margin generated in the U.S. trucking operations, we're not satisfied with the level of performance.
I'll now call over to Peter Bromley review our financial performance in more detail. Peter?
Thank you, Michael, and good morning, everyone.
Revenue for the Healthcare Logistics segment totaled $44.2 million, an increase of 1.3% compared with Q2 last year, reflecting a slight increase in our logistics and distribution product line revenue and 13% growth in our packaging revenue.
The slight increase in logistics and distribution revenue was primarily attributable to higher revenue from our pharmaceutical and biologics clients largely offset by lower outbound order handling and transportation activities for certain of our Accuristix consumer health clients. Our increase in packaging revenue was attributable to higher volume.
Revenue in our Specialized Transportation segment totaled $117.2 million, an increase of 3.1% compared with Q2 a year ago, reflecting organic growth in each of our Canadian Specialized Transportation product lines, partially offset by a decline in our U.S.-based truckload revenue.
Ground transportation revenue for the quarter was $105 million, up 1.5% compared with Q2 last year. The increase was attributable to organic growth in our Canadian ground transportation network and higher fuel costs passed on to customers as a component of pricing compared with Q2 last year.
Air freight forwarding revenue was $7.9 million for the quarter, an increase of 3.1% compared to Q2 a year ago, as we had approximately 4.2% higher weight shipped partially offset by lower fuel surcharge revenue.
The 12.2% revenue growth in our dedicated and last mile delivery product was attributable to continued organic growth and higher fuel surcharge revenue.
Cost of transportation and services was $80.9 million or 50.1% of revenue compared with $78.9 million or 50.1% of revenue for Q2 last year. The $2 million increase was in line with higher revenue, including higher fuel costs. As outlined by Michael, we continue to carry certain idle equipment costs in our U.S.-based truckload businesses arising from a lower volume of truckloads as we continue to focus on revenue quality.
Direct operating expenses were $26.6 million or 16.5% of revenue compared with $26.4 million or 16.8% of revenue for Q2 a year ago and are generally in line with the increase in revenue for Q2 this year.
Operating income for the quarter was $22.2 million, a 1.9% decline compared to Q2 last year, which was primarily attributable to lower contributions from our U.S.-based truckload businesses as well as increased SG&A expenses related to corporate development activities in the quarter.
Net income was $15.7 million or $0.38 per share diluted compared with $15.7 million or $0.37 per share diluted in Q2 2023. Higher segment net income before eliminations for our Specialized Transportation segment reflects organic growth in our Canadian specialized transportation network largely offset by lower contributions from Boyle Transportation and Skelton USA, and slightly higher segment net income from our Healthcare Logistics operating segment primarily reflects increased revenue from our packaging business largely offset by SG&A expenses related to our implementation of a new warehouse management system for Accuristix.
EBITDA totaled $40.1 million in the quarter, an increase of 1.4% from Q2 last year. The increase was due to the factors already discussed.
EBITDA margin was 24.8% in the quarter compared to 25.1% in Q2 last year. The slight decline was attributable to the reduction of our U.S.-based truckload margins. We remain well within our targeted 24% to 26% EBITDA margin target range despite the current weakness in our U.S. truckload business.
And our balance sheet continues to be strong. At quarter end, we had $25.0 million outstanding under our term facility and $40.0 million drawn on our revolving facility and a conservative net leverage ratio below 1 at 0.8x. We used the $40 million drawn on our revolver to partially finance our recently completed $90 million substantial issuer bid. The $50 million balance was financed with cash on hand.
Despite our SIB expenditure, we had cash and cash equivalents of $40.7 million and working capital of $40.1 million at quarter end. We remain well positioned financially to pursue growth opportunities.
I'll now turn the call back to Michael for closing comments.
Thanks, Peter. As I alluded to, our low debt level, combined with the continued strong cash generation of our business, has provided us with the financial flexibility to be active not only buying back shares both through our normal course issuer bids and our recently completed SIB. Today, we bought back more than 2.6 million shares through our first NCIB and our more recently completed SIB. We intend to continue to be active buyers.
Just prior to quarter end, the TSX approved our notice of intention to make another normal course issuer bid for up to a maximum of approximately 1.8 million of our subordinate voting shares or approximately 10% of our public float as of June 26 over the 12-month period commencing July 2. I believe that these share buybacks represent an attractive accretive path for capital allocation and support the best interest of our shareholders over the long term. Further, our share buybacks do not hinder at all our ability to pursue complementary acquisitions, which we continue to evaluate.
As I alluded to at the front end of this call, our business north of the border is doing great. Our Canadian specialized transportation network is performing very well and in line with our expectations. We're also pleased with the performance improvement in our Healthcare Logistics segment in this quarter, and we're well positioned for the immediate future.
We're focused on improving the performance of our specialized U.S. truckload operations. We have the same management teams that we inherited both at Boyle and Skelton USA. And over the past quarter, they have gotten together and collaborated to rightsize and refocus on strategy.
Looking ahead, we're confident that we can continue to leverage our unique platform and core competencies to drive increased value for our shareholders supported by the positive long-term industry growth fundamentals that characterize the health care, transportation and logistics markets in Canada and in the U.S.
As we look further to expand our platform, we'll maintain our disciplined approach with respect to both financial and operating metrics and our constant focus on better serving our customers and supporting our employees and drivers who are continuing to make a difference in delivering health care.
I'll now open the lines for the questions. Joelle, please commence the Q&A.
[Operator Instructions] Your first question comes from Walter Spracklin with RBC Capital Markets.
This is James McGarragle. I'm on for Walter this morning. I hope everyone's keeping well.
Excellent, James, good to hear from you.
So I just wanted to ask, there was an interesting comment in your MD&A, that said the increase in SG&A was primarily attributable to legal and other professional fees in connection with some corporate activities. Is there anything to read into there with regards to potentially some imminent M&A? Or is that related to past activities? And just as a quick follow-up, should we expect those expenses to fall off into Q3?
Yes. That's pretty astute, James. To answer your question, yes, it's relative to previous M&A activity and also attributable to, and I think Peter alluded to in his comment there, extra costs associated with our implementation of our WMS system at Accuristix to the tune of probably $600,000, and $300,000, respectively. So I don't anticipate that to be reoccurring. It better not. And we don't like to report adjusted EBITDA. But certainly, if you take those numbers, it makes it even more positive.
Okay. And I know you alluded to the U.S. truckload environment in your prepared remarks, but we heard some indications from U.S. peers during Q2 reporting that they're seeing some indication the market is bottoming. Are you seeing anything similar in the markets that you compete in? And I can turn the line over after that.
Yes, James. Like I said, I mentioned in Q3 of last year I was kind of bullish and figure that this cycle was -- and the fact that the FD&A don't have the same stringent measures, we still felt confident that we would rebound and it has continued to be the case. We do have a lot of -- I mean we've really focused on discipline, on the load factor, which has unfortunately created an environment where we have too much equipment. But we're keeping that discipline about us.
I'm optimistic that we're turning that corner, and like I said, the management teams have gotten together and refocused the strategy. To me, it's about sustainability and creating a difference in the markets that we serve. And I guess we're not used to going the other way in terms of we're always focused on growing the business and how we continue to grow the business. So regardless of how the cycle goes, I'm confident that we'll bring those margins back up. It may not be from a growth level, but hopefully, that answers your question.
Your next question comes from Konark Gupta with Scotiabank.
Just wanted to follow up on the U.S. truckload side for a bit, Michael. There's three ways to do that, I don't know if there's another way or not, but like either you fix it, you cut it or you exit. I'm just curious, like, right now, you said you guys are looking to address the fixed cost here. Like, what if the situation drags on? This seems unprecedented, for sure. What's your plan A, plan B there?
Yes, Konark, that's a good question, and we talked about it at the Board over the last couple of days. And you're right, you have choices. I'd just remind the listeners that this is not a money loser. It's just a me-too business now like the other truckload companies in the U.S., as I see it. Amongst our peers, we're still performing better. But we did pay a premium for these businesses and expect it to be able to leverage and continue to grow.
We recognize that we probably need to adjust, more than anything else. Like I said, the management teams that we inherited are still the same. The level of care and service is still the same. The customers are pushing back on rate pressure, which means that -- in this business, unlike Canada, we're dealing with a lot of brokers and orders and middlemen because of the volume or the coverage. There's no one carrier that can handle all that business. So it becomes more commoditized. So we got to pick and choose what is the best.
So we've started that process. I think I mentioned in the last quarter, we would be focusing more on, for example, plasma, blood plasma, things that we do extremely well in Canada; biologics, which continues to grow. So really not just basically growth because you're a health care customer and consumer goods and the like, but more focused, which means that we anticipated bigger growth. So obviously, our truck orders were -- and trucks take time to get orders, sometimes it's a year in advance, and trailers as well. So now we're pivoting just to making sure that we rightsize the fleet.
Our load factors are the same in terms of revenue. So those haven't changed. We just had 14% fewer loads than we did Q2 last year because we're staying disciplined and focused on making sure that we have the right margins. The problem is when you have 9 trucks sitting at the fence and, whatever, 14 trailers in the yard that are not moving, and you got costs associated with that. So it's just basically rightsizing.
The neat thing is that the trailers, we can move them to Canada. There's a need for them. And so it's a timing thing, Konark, 1 quarter, 2 quarters just to address and kind of rightsizing it. I feel really confident with the management teams there. It's a good product. And if the cycle changes, then we're also well positioned, too. So I'm not going to go chase bad revenue just because I have trucks. I'd rather have best-in-class and a good reading of the garden and then let that flourish again.
That's a very good answer, Michael. And then if I can follow up on capital allocation priorities at this moment. So there was obviously the SIB in the second quarter, which worked out well, I guess. You continue to buy back under NCIB. Dividend, you guys raised as well or planning to raise effective next quarter. So clearly, you're warning the shareholders here. Any other capital priorities you have at this moment besides these things, meaning like M&A you talked about? Obviously, we know like there was a situation in Canada, which took a sort of different direction. But any big opportunities, any key opportunities or strategic opportunities you're focusing on besides shareholders?
Yes. Absolutely. Certainly, M&A is top of mind. Disappointed that we didn't do M&A last year. But I guess summer is baseball season. And using that analogy, we try to hit the home run and I guess, struck out. But we learned a ton. We learned so much about this health care industry in Canada. I'm not upset, but I think it's time to focus on singles and doubles. And we were successful with the tuck-ins, and we are now really focusing on those.
We have a nice pipeline that either complementary or tuck-in that we are looking at. We're well positioned with our national network. We're well positioned with the management team that cares and feels very confident. Our service levels are the best as they've ever been, and then we continue to listen to the customers and adapting to the changes in the health care industry. Our manufacturers are focusing more on biologics and specialty pharma, and that continues to grow. So we're trying to adapt and being close and those are the areas that we're hopefully using those capital allocation going into the future.
Your next question comes from Ty Collin with Eight Capital.
Michael, I know we're kind of just alluding to it in some of the last answers you gave regarding that big deal you were chasing. I'm just wondering if you could, at this point, expand on what the sort of strategic rationale was there in that pursuit, why you like that opportunity, not to dwell on the past but more so just to understand your strategic thinking around that.
Yes. Strategically, I mean I'm passionate -- people talk about transportation, right? Sometimes we get put in that category or logistics. And yes, we are that. My passion is what we move, what's in the box, and why we move it. And I think I alluded to it a little bit last quarter as well. But anything that complements our customers' needs from a services standpoint or allows Canadian health care services to be better, that intrigues me.
Like I said to Konark earlier on, we have a national network that covers from coast to coast to coast. And we can make a difference in the health care industry in Canada, particularly. Obviously, that's our house. We certainly do that with the execution of the COVID vaccines. We can complement the Canadian health care business in more ways than one, as I see it, as we move forward. I saw a lot of opportunity to not just be a company that's looking at buying and that can do so much more. But in any event, that's about as much color as I'm going to give. And hopefully, that answers your question, Ty.
Yes. No, I appreciate that additional color there. And then just moving to the U.S. business, on the margins there. So I know you mentioned those kind of hit a trough in Q2 since you've owned those assets. Can you try to quantify that at all, what the margins in that business are vis-a-vis the rest of the company? And I mean, you're still clipping almost a 25% EBITDA margin, even with margins in the U.S. business bottoming up. What kind of upside do you see when some of that slack there gets addressed? And do you see maybe your run rate margins towards the higher end of your historical range once the U.S. business kind of normalizes?
Yes. You're right. The margins used to be similar to what we were accustomed to in the U.S. That's what made these companies so attractive. Now we're more like a normal truckload margin type of business. Like I said earlier on, when Konark said sell it or get rid of it, it's not. It's still producing cash flow for AHG. The cycle will change. I think the growth will not be as dramatic as we saw in the initial stages. And obviously, that was artificial growth with the vaccine distribution.
I mean Canada is still the bulk of the revenue at AHG. And so it will make a difference. Obviously, I think I alluded to the $2.8 million difference. If you start adding that up and do the margin on there, you can probably see what it could have been, how have we just done the same type of EBITDA as last year.
Okay. That's helpful. And Michael, if I could maybe just sneak in one more little one here. Are you able to help us understand, I guess, what the run rate revenues of the U.S. business are at this point, either in dollar terms or compared to what they were when you bought them?
No. But I think one of the things we talked about at the Board level yesterday was to maybe decide that because we touched specialized transportation, I think you're asking the same question, that maybe can we start quantifying the Canadian transportation to the U.S. transportation. So I think that's a to-do. I don't know if Peter wants to elaborate on that or not, but I think that's one of the areas that I think you're asking.
The next question comes from Tim James with TD Cowen.
First question, I just wanted to turn to the dedicated and last mile business. Just wondering, Michael, if you can kind of give us a bit of an update as you look at that piece and kind of opportunities there or challenges that, that part of the business is facing and if you're seeing any changes at all in the competitive landscape.
No. Certainly, the dedicated business is solid. There are not that many players in the market, and we've captured their imagination by offering that network, particularly into the rural areas of Canada where it's very hard to get the right economies of scale. And so I think we certainly have a first-mover advantage there.
The growth is not going to be -- unless we get more pharmacies and more hospitals and more clinics, I think the growth is not going to -- it's going to be consistent, but it won't be -- unless we bring on new clients to complement our dedicated business. But I think right now, that's a pretty mature area in Canada. We pretty much delivered in every hospital and every pharmacy every single day in this country. There's probably an opportunity for doctors' offices, other clinics as well. Certainly, there might be an opportunity there. The last mile is not something that we've focused on, but it's an area that intrigues me. But I think if we do it, we'll do it organically. Well, the industry is not there yet.
Okay. That's helpful. My second question, just coming back to the U.S. business, and I appreciate and like what you're saying in terms of acknowledging the cost and what you paid for that relative to the current sort of earnings, and so I'm just thinking about it on a go-forward basis, can you elaborate on how you view the sort of long-term value of that business to Andlauer relative to if you were to move the capital or the proceeds that you could get, if we can think about it that way, from that business into the Canadian market?
You look at it, it's still profitable and still has value. But am I correct because you've talked about other opportunities in Canada in terms of the M&A landscape and where you could deploy capital? I mean at some point, is it possible that you might say, hey, for every dollar you've got or could get out of the U.S. business, you could generate a higher return if you move that into some of these Canadian M&A opportunities? Or is it too early still to even be considering that, you need to give the U.S. business more time to mature and see where it goes?
Yes. No, I think we got into the business as a springboard to get into the U.S. business. And I think I mentioned that earlier on, we got in, we're learning with the health care industry in the U.S. It's quite different than it is in Canada. The dynamics are much different, both from a quality standpoint and from a demographic geography, how distribution is done in the U.S. So it's been a great learning experience. It's still very positive. We're just going through a lull right now.
But it's also a springboard for other things. So people knew that we are, in other aspects, hoping that perhaps we could leverage that on the 3PL side of things, on the logistics side of things. And it still can happen. So it's a learning process for me. That's the way I look at it. And I got 2 management teams there that, like I said, care. They're more collaborative now because they're both going through the same pain points.
How do you make it better? How do you become more efficient? And so for me, let's just continue to learn, let's just refocus. My expertise is operations. So I look at it from that perspective. And it can be fixed, but it's not something that's going to grow. So to the extent we had anticipated, right now, that capital, we've got a strong balance sheet, and that capital is being put in good use. It will be fine. The U.S. will be fine.
Okay. No, that's great. I'm glad to hear that. And am I correct in saying that your sort of access to capital is more than sufficient to sort of carry out any M&A that you see in the rest of the business in Canada, I mean you're well capitalized with plenty of room to go?
Yes. I mean another one of the learnings from the home run I tried to hit. I realized, at that point, the access to capital is there and the confidence is there. So we've got nice flexibility going forward.
[Operator Instructions] Your next question comes from Justin Keywood with Stifel.
We saw the Lineage IPO last week as the largest network of cold storage warehouses focused in food and beverage. But my question is, one, if there is any overlap in the U.S. with Lineage, perhaps in some smaller health care markets. And then also, if food and beverage is a possible vertical that Andlauer has looked at in the past or could be going forward as far as potential M&A.
Yes. One of my learnings in health care industry is health care doesn't like grocery and grocery doesn't like pharmacy, yet you find them at your local Loblaw. But certainly, yes, there are QA requirements there, they're governed by different bodies, and it's not something that -- but I like your way of thinking there, Justin. It had crossed my mind because they do have similar characteristics, certainly from a transportation last mile when you're going and delivering to a restaurant, there's usually 3 different temperatures in that truck and certainly the warehouses.
But no, they are different altogether. When you mentioned food and beverage, I must admit our Kelowna facility, the #1 revenue generator is wine from the Okanagan Valley. There's not much to ship out of there. But the interesting part is that wine actually has to be temperature-controlled after October and before April. And because we have temperature-controlled vehicles, we're picking up at all those wineries, but the only aspect that we look at in terms of food and beverage.
Interesting. And maybe just one quick follow-on, just as far as the M&A and pursuing singles and doubles, any indication on the size of transaction that we could be looking at in a broad range?
No. I can't. Only because either NDAs are signed or we don't know what's going to cross home plate. And I really don't have -- they range. But I think like I said, we're more focused right now. And probably the tuck-ins will be the easiest to execute on. So they'd be bunt singles.
Understood. Appreciate the perspective.
There are no further questions at this time. I will now turn the call over to Michael for closing remarks.
Well, yes, thank you for joining us. I know it's a first day of August and just probably trying to enjoy the rest of our summer. So have yourself a great day. Thank you for calling in, all the best.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.