Andlauer Healthcare Group Inc

TSX:AND

Earnings Call Transcript 2021-Q3

[Operator]

Good morning. My name is Catherine, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Andlauer Healthcare Group 2021 Third Quarter Results Conference call. [Operator Instructions] Please be aware that certain information discussed today may be forward-looking in nature. Such forward-looking information reflect 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 the 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 that these measures provide useful supplementation information about the 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 for reconciliation 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 any questions-and-answer session. This call is being recorded on November 11, 2021.I would now like to turn the conference over to Michael Andlauer. Please go ahead, sir.

[Michael N. Andlauer, President, CEO & Director]

Thank you, Catherine, and good morning, everyone. Thank you for joining us today. With me on the call is Peter Bromley, our Chief Financial Officer. Following my opening remarks, Peter and I will -- Peter will follow-up with more detailed discussions of our financial performance, and I'll conclude with some comments on our outlook and growth strategy, and then we can open up the lines to any questions. Before I begin, I'd be remiss if we didn't pause to remember the sacrifices of the many Canadians who have given their lives for the safety and security and freedom that we enjoy today. So on this Remembrance Day, 11th day of the 11th month, we thank the proud men and women of the Canadian Armed Forces, and we remember are fallen, lest we forget. Our strong performance in the first half of the year continued throughout this third quarter, both from a top line and our bottom line, thanks to both organic growth and through acquisitions. We generated strong revenue growth across each of our product lines, growing 37.5% from $75.8 to $104.2 million, with particularly robust performance in ground transportation and dedicated last mile delivery segment. Our acquisitions of McAllister Courier and Skelton Canada contributed to our strong growth in our ground transportation product line and our acquisition of TDS Logistics contributed to the growth in our dedicated and last mile delivery product line. Organic growth, despite these acquisitions over the last 12 months, still represented over 10% of our revenue. From a bottom line perspective, we also showed no signs of slowing down with similar growth as revenue.EBITDA rose by 38.8% to $28 million from $20.2 million in Q3 2020. We continue to support the distribution of COVID-19 vaccines, ancillary products to Canadians in the quarter through volume -- though volumes were down sequentially in Q3 as vaccination rates climbed, our vaccine related revenue comprised approximately 2.5% of our total revenue in the quarter compared to the 5.0% last quarter. We maintained service levels across our operations while taken on this added mandate. The ongoing collaboration of our team in monitoring and adhering to our COVID safety measures continues to ensure the timely delivery of essential products to hospital pharmacies and clinics across Canada.On October 1, we successfully implemented a new vaccine -- vaccination policy where employees and drivers of all our companies needed to be fully vaccinated or be tested within a 72-hour window of work. This rollout was extremely well communicated and executed with only a handful of people who would not participate among the approximate 2,000 associates from coast to coast. I am so very proud of our employees and drivers who have shown incredible respect, care, collaboration and commitment in keeping safe during this COVID period, and also ensuring the flawless execution of the distribution of the code of vaccine in Canada in 2021.I'd now like to turn the call over to Peter to review our financial performance in more detail. Peter?

[Peter Bromley, CFO & Corporate Secretary]

Thank you, Michael, and good morning, everyone. Revenue for Q3 2021 increased by 37.5% or $28 million to $104.2 million compared to Q3 last year. Our TDS Logistics, McAllister Courier and Skelton Canada acquisitions contributed approximately $18.2 million of incremental revenue in the quarter, with the remaining increase attributable to organic growth. Revenue for our Healthcare Logistics segment totaled $33.5 million, an increase of 11.7% compared with Q3 a year ago. The increase was primarily attributable to the 12.7% year-on-year growth in our logistics and distribution product line, generated from greater inbound product volume and storage and handling activities. Our packaging solutions also contributed to growth in the segment, with revenue totaling $4.5 million in the quarter, an increase of 5.7% from Q3 2020. Revenue in our Specialized Transportation segment totaled $70.7 million, an increase of 54% -- 54.2% compared with Q3 last year. Our ground transportation product line grew 41.5% and reflects incremental revenue from our McAllister and Skelton Canada acquisitions of approximately $12.3 million, higher volume from our existing client base and higher fuel costs passed on to customers as a component of our pricing. Year-over-year growth in our airfreight forwarding and dedicated and last mile delivery product lines of 7.3% and 110%, respectively, also contributed to growth in our Specialized Transportation segment.Growth in air freight forwarding was attributable to increased fuel revenue related to higher fuel costs as volumes were relatively consistent with Q3 last year. Growth in dedicated and last mile delivery was primarily attributable to incremental revenue of approximately $5.9 million from our TDS acquisition, with the remainder attributable to route expansion in Western Canada and increases in fuel costs, passed on to customers.Looking at our expenses. Cost of transportation and services was $47.5 million or 45.6% of revenue compared with $30.8 million or 40.6% of revenue for Q3 last year. The higher cost of -- this quarter reflects an approximate 7.4% year-over-year increase in volume in our ATS Healthcare business, our acquisitions of TDS, McAllister and Skelton Canada and higher fuel costs in line with the increases related to fuel prices. Increase in operating ratio this quarter reflects the addition of our TDS, McAllister and Skelton Canada acquisitions, which have increased the relative proportion of the specialized transportation segment as a percentage of our total consolidated revenue and cost profiles.Direct operating expenses were $21.4 million or 20.5% of revenue compared with $18 million or 23.7% of revenue for Q3 last year. The increase was primarily attributable to our acquisitions of TDS, McAllister and Skelton in Canada. However, these acquisitions, which are included in our Specialized Transportation segment have lower facility-related costs compared to our Healthcare Logistics segment, which results in the lower operating expense ratio in Q3 this year. SG&A expenses were $8.3 million or 7.9% of revenue compared with $6.8 million or 9% of revenue for Q3 2020. Increased SG&A expenses for the quarter are attributable to our acquisitions of TDS, McAllister and Skelton Canada and professional fees related to our acquisition of Boyle Transportation, partially offset by reduction in costs attributable to share-based compensation expenses. The decrease in SG&A expense as a percentage of revenue reflects operating leverage generated within our SG&A functions compared to revenue growth.Operating income for Q3 2021 was $16.8 million, an increase of 27.6% compared to Q3 last year, primarily reflecting our growth in total revenue. Net income and comprehensive income increased by 41.8% to $12.2 million or $0.31 per share on a diluted basis from $8.6 million or $0.22 per share diluted in Q3 a year ago. The increase reflects higher segment net income before eliminations from both our Healthcare Logistics and Specialized Transportation operating segments and $1 million contribution from our 49% interest in Skelton USA. EBITDA increased by 38.8% to $28 million from $20.2 million in Q3 2020, reflecting the factors discussed previously and incremental contributions from our acquisitions. EBITDA margin improved to 26.9%, up 30 basis points from Q3 last year as the performance of our 2 operating segments continued to result in strong and stable EBITDA margins at the higher end of our historical range. Further, Skelton Canada's higher-margin profile has positively impacted our overall margin.Turning to our balance sheet. As at September 30, 2021, we had cash and cash equivalents of $14.3 million and working capital of $18.5 million. This compares to cash and cash equivalents of $30.1 million and working capital of $44.4 million at 2020 year-end. The decrease in our cash and working capital at quarter end is primarily attributable to the acquisitions of Skelton Canada and our 49% in Skelton USA. We partially financed these acquisitions through a combination of cash on hand and by drawing $50 million on our revolving credit facility and $25 million on our term facility. During the quarter, we paid $11 million down on our revolving credit facility, and we expect to continue to reduce amounts drawn off the revolving credit facility during fiscal 2021, with excess free cash flow generated from operations.I'd now like to turn it back over to Michael for closing comments. Michael?

[Michael N. Andlauer, President, CEO & Director]

Thank you, Peter. I'd like to add that subsequent to our quarter end, we continue to advance our acquisition strategy. On November 1, we completed the acquisitions of Boyle Transportation and the remaining 51% of Skelton USA, increasing our aggregate ownership of Skelton USA to 100%. Through these transactions, we have significantly advanced our strategic expansion into the U.S. healthcare market. Each at Boyle and Skelton USA have a strong commitment to customer-focused care and a people-first approach, which are the core values of AHG. Based in Massachusetts, Boyle Transportation operates throughout the 48 contiguous United States and to and from Canada. They provide specialized transportation services to clients and life sciences and government defense sectors, with life sciences customers comprising approximately 75% of the consolidated revenue. Boyle adheres to stringent quality and security standards, employs highly trained and dedicated professionals that continually invest in advanced technology and equipment. They were recently named the overall best fleet to drive for in the U.S. and Canada for the second year in a row. As you know, concurrent with our acquisition of Skelton in Canada in Q1 this year, we purchased a 49% interest in Skelton USA with an option to purchase the remaining 51%. Our decision to exercise this option reflects the strong fit of Skelton companies with AHG and the tremendous potential we see in the U.S. market. With our acquisition of Boyle Transportation, the remaining 51% of Skelton USA, we have now established a U.S. platform with scale.Together, Boyle Transportation, Skelton USA generated over $21 million of EBITDA for the 12 months ending August 31, at a margin of approximately 23.7%. We satisfied the approximate USD 80 million, at purchase price for Boyle Transportation through issuance of subordinate voting shares and cash of approximately USD 60 million. The purchase price for the 51% interest in Skelton USA was approximately CAD 50 million and was satisfied through the issuance of subordinate voting shares and cash of approximately CAD 25 million. We completed a bought deal offering 3.5 million subordinate voting shares for aggregate gross proceed of $168.7 million in late October. The offering was comprised of 2 million subordinate voting shares issued from treasury and 1.5 million of subordinate voting shares offered by Andlauer Management Group. We used the net proceeds from the treasury offering to partially fund the cash.Excuse me for a second, I've got to blow my nose here. Can I get a Kleenex? Sorry about that. I'm back. That's a first. Where was I here sorry? Okay, we completed a bought deal.Yes, as I said, we talked about the bought deal. We appreciate the support from our investors and your confidence in our strategic direction. This is done in short order and executed extremely well. Our strong performance in the quarter and year-to-date is demonstrated by the stable and reliable organic growth that our core national platform generates. And the additional contribution provided by our success in supporting the COVID vaccine in certain regions of Canada and our acquisitions of TDS Logistics, McAllister Courier, Skelton Canada and our initial minority positions, Skelton USA over the trailing 12 months. With our focus on our biggest stakeholders, that being our employees, drivers and clients, with our leadership position in Healthcare Logistics in Canada, we can expect continued strong organic growth ahead. And now combined with the future contributions from our expanded U.S. platform, Andlauer Healthcare Group is very well positioned to continue to generate enhanced returns over the long term.That concludes our formal remarks. And I'd like to open up the lines to questions. Thank you. Catherine?

[Operator]

[Operator Instructions] We'll now take the first question from Konark Gupta at Scotiabank.

[Konark Gupta, Analyst]

Mike, Peter, so maybe my first question is on the vaccine distribution. Mike, I think if I heard you correctly, you mentioned the contribution was down from, obviously, Q2, which is not really, I think, surprising here, as you mentioned before. With the third boost or let's say, the booster shot coming up and -- as well, I think these guys are looking at approving the vaccine for kids, 5 to 11 or 5 to 12. What do you think about the kind of rebound potential in this vaccine distribution revenue for you guys? Is there any shot here for the next couple of quarters or this is probably going to be flattish or down from here?

[Michael N. Andlauer, President, CEO & Director]

Yes, that's a good question, Konark. Just an FYI, I'm on a call every Tuesday -- I'll try to be on a call every Tuesday, 1:30 with the Ministry of Health in Ontario and to get a good feel for -- and try to anticipate and certainly collaborate and give advice in the execution of the distribution. We are discussing, certainly the booster vaccines and it's a lot of times, we have to be waiting for Health Canada approvals. Because we have the relationships with particularly Pfizer by doing their distribution in Canada, there's good collaboration and coordination and communication. We anticipate that this quarter, we will be starting to push the booster shots. Those have just been approved. And the 5 to 11 vaccines are, while they are ready to be shipped out of Michigan instead of Belgium with the previous -- they still don't have approval from Health Canada as of yet. I would imagine that, that would be imminent, but once it is things aren't -- it will happen imminently the distribution. So I would anticipate that we would have more distribution requirements in the fourth quarter as we did in the third quarter. And also, Covid-related, we do see more test kits being distributed. Those have to be shipped ambient. Some of our clients are -- do the distribution of many of the test kits in Canada. So we've seen an uprise -- uptick in that volume. Case in point, at AHG companies for the 5-or-so-percent of folks who aren't vaccinated, they have to take those tests.

[Konark Gupta, Analyst]

That's great color, Mike. And then I'm just trying to understand the fuel dynamics here a little bit. Obviously, as fuel price kind of goes up, you pass it on to your customers as well, directly or indirectly. Can you help us understand like, is there any sort of major lag in value capture that you will pass-through versus what you pay in the pumps or is it pretty much prompt?

[Michael N. Andlauer, President, CEO & Director]

Yes, there's probably maybe a week's lag or 2-week's lag within our sectors. And it all differentiates between -- differs between the air freight and ground. But we don't see it as much of an impact as maybe a strict transport company would. Obviously, there's a big element of our business that's not fuel-related, particularly in logistics and co-packaging. But from a transportation side, we would see a slight lag, I'd say maybe a couple of weeks difference.

[Konark Gupta, Analyst]

That's great. And last one for me before I turn it over. On the lease rate side of things, so we have seen a lot of these industrial REITs have been kind of doing pretty well recently. Clearly, the expectations are going up for lease rates on renewal. Can you remind us, a, what portion of your book tends to renew, I don't know, every year or so? And then on the recent renewals, if any, what kind of rate increases have you seen?

[Michael N. Andlauer, President, CEO & Director]

Significant. Yes and this is definitely when you look at some of these industrial real estate reports, particularly in Canada, and you see BC and Ontario with 1% vacancies and the lack of construction to meet with the demand, we're seeing significant increases. Konark, a typical Class A building would have fetched you 3 years ago in Ontario, $7 a square foot. Right now, newbuilds or spec building right now in around the area that we are, is fetching anywhere between $15 and $17. And any type of renewal, so you see these -- the summit REITs of the world going out there and even with old buildings out there being, I guess, opportunistic and raising the rates from what would have been $6 or $7 to $11 on slightly older buildings. So yes, we see that as being an area of concern. I look at it also as an area of opportunity. We are about a year ago, we renewed in one of our Brampton facilities, got ahead of it with some -- a couple of our bond facilities here. And then the next leases aren't up for another 2, 3 years. So we're watching it closely. And one of the things that we have to understand is what the market rates are and the opportunities as well with our clients in terms of -- from a strategy standpoint, do we want to stay in the same building and maybe the lower clients maybe -- the clients that aren't really as demanding in our standards. We do have some clients in the consumer goods side of things that tend to be a bit more price-sensitive and maybe that gets replaced with newer business, higher yielding business at the present rates that we're paying. So those were some of the strategies that we're looking at as we're building our business plan for 2022 and especially with the labor situation. But I feel we're on top of it, and I don't think it's going to be material, certainly for the next 2 years for us.

[Konark Gupta, Analyst]

Yes, I can see your margins are expanding net of leases. So that kind of speaks to that.

[Operator]

We'll now take the next question from Maggie MacDougall at Stifel.

[Margaret Anne MacDougall, Head of Research]

You kind of touched on one of my questions, which was just around labor and it's a thing we're hearing a lot about. I was wondering if you could enlighten us how you're dealing with what appears to be a tight labor market in both Canada and the U.S. and whether early learnings from the acquisitions in the U.S., lead you to believe that there may be some differences in that market as it pertains to that item versus the Canadian market?

[Michael N. Andlauer, President, CEO & Director]

Maggie, yes, that's absolutely that's one of the things that's keeping lot of people up at night is labor force and you see it everywhere around. Just yesterday, we had our Board meeting and somebody from our Board mentioned something about McDonald's offering $20 an hour. It's real. I think we saw yesterday, the USA inflation rate was, as I mentioned, 6.2% increase. It's not just fuel that's driving that, labor force is definitely tight. We looked at this about -- well, beginning of the year, we -- and kind of anticipated this, and we went out there and started increasing rates to our employees. Now wages isn't the only thing. I mean, I think everybody can compete at the end of the day, it's a level playing field, where we different -- where differentiation happens and that's one of the things, for example, and I'll get to the U.S. in a second. But we recognize that at Andlauer Healthcare, our differentiator truly is our people. I can't say it enough that we care -- we institute the care factors, not only amongst our stakeholders, but also translated to our clients, which -- that aspect of our business allows us to keep our people. And it's more paramount now than ever. So we try to be the place where people want to work for given the best conditions possible and create that environment that allows us to maintain our workforce, but also be able to recruit.Recruiting is not -- has been difficult, but it has not affected us yet. That doesn't mean that we're not going to look at different ways of recruiting and looking at our business model to ensure that we protect ourselves. We're not massive and that's an -- that's a good thing. But at the end of the day, we recognize that service is the most important thing that we can offer our clients. That's what -- and it can only happen with people. South of the border is the same thing. We instituted wage increases to our drivers, both at Skelton and at Boyle. It actually happened at Boyle during the due diligence, but interestingly enough, the culture at Boyle is the same thing as at Skelton. And in Boyle's case, they have the accreditation of being the best fleet to work for and that is right aligned with our AHG mantra and we want -- and feel very comfortable. And when you look at the equipment that these drivers drive, it's new, it's shiny. It's -- the new facilities that we built in Skelton Ohio, makes it for our drivers between having the laundromats there and the facilities are best-in-class. So it's about how we treat people and I think that's going to be the ability for us to adapt through these tough labor times.

[Operator]

[Operator Instructions] We'll now take the next question from Walter Spracklin at RBC.

[Walter Noel Spracklin, MD & Analyst]

I guess my first question is on your inherent growth rate. I know this is something we used to always kind of peg in the high single-digit growth level. But with inflation and weird comps from prior periods and so on, it makes just a set growth rate to put on your company going forward, a little bit more problematic. So maybe if we go down to the EBITDA level and just assume you are successful in passing on pricing or passing on inflationary costs and any of those challenges. Is it fair to assume that ex acquisitions your core EBITDA is in that kind of high single-digit and remains in that high single-digit range into 2022 and then layer your acquisitions onto that? Is there any reason why that would not be the case, Michael, as we look at your business going into 2022?

[Michael N. Andlauer, President, CEO & Director]

The answer is no. I mean, I think at the end of the day, we're a robust -- we work in a robust industry, and then we've proven -- these numbers that we've shown in Q3 are similar to some of the companies that other public companies that have posted in Q3, but many of these companies did not have the same Q3 2020 that we did in terms of growth. Obviously, I think we've been able to show that this business is very robust and somewhat predictable in light of the products that we move. And with the Baby Boom generation, that's between the ages of, whatever, 57 and 75, I think it's fair to say that we are in a position where we'll continue to see that robust growth in the near future. With respect to passing this on, interestingly enough, we had a presentation to our Board yesterday, Skelton made a presentation because it was a first one that President, Ron Skelton presented. And one of the clients that we talked about differentiated Canadian Blood Services, which has been a long-term client of Skelton's. And one of the remarks that was made is that some of the trucks that were sent are not are not big trucks. They're like not 53 footers, but 28 foot pops going down across the country, what would you use such a small truck? Is it because when we're moving blood, you cannot move more than $5 million at a time. My point to this is that when it comes to transportation and logistics, when you're talking about product lines of that nature, services more is paramount.And in order to provide service, you have to have qualified people, qualified processes and best-in-class in order to execute. You have to execute flawlessly, just like we've done with the vaccines. There's no room for error. And that means that you can't if somebody at McDonald's is making $20 an hour, you can't be paying somebody $20 an hour and go through a whole rigorous training program about -- and hold them accountable to move $5 million worth of blood products across the country. So that can be very well-articulated to the QA groups of these companies. And so they're not -- I guess a good point being is they're not going to be penny-pinching on that. So I think we're in a robust situation that allows us to pass that along, but most importantly, it's important that we have the right personnel and pay them properly and in light of what the industry is offering.

[Walter Noel Spracklin, MD & Analyst]

That makes complete sense. My follow-up question here is on M&A. Michael, I know back in your earlier days of a public company, you didn't execute a lot on M&A. You've started to do here. It looks to be very successful. You clearly got the support of shareholders. Your multiple is very high. It almost -- it indicates that M&A is an opportunity here. Would you agree with that? And more importantly, are you focusing now in the U.S. or is there still M&A you could do in Canada, either direct -- in direct areas of your business or in adjacent areas to your business in Canada or is that -- or are you just seeing too many opportunities now as you look to the U.S. based on some of your preliminary acquisitions there?

[Michael N. Andlauer, President, CEO & Director]

That's an interesting question, because I went into it not looking for M&As, but it's interesting when you do some successful ones, how all of a sudden, you get attention. Certainly, the Boyle acquisition, I think, articulated to some of the investors who I spoke to during the bought deal. It was not intended to happen. We were actually approached. I would have loved to have said that we were looking for them as it turned out. And with the COVID vaccine distribution and with the large acquisition of Skelton, I just want to stay focused and keep our executive team and management team focused as well, and there was enough on our plate for this year. But when I saw the makeup of Boyle Transportation and the approach that Mark and Andrew Boyle had about the business, it was such an alignment in how they treat their drivers and employees and how they care for their customers. And then the customers are the same customers in Canada.The thing about Andrew and Mark is they're excited not to continue on in transport, but they have an appetite and connections with the life sciences and the pharma companies in the U.S. and see the platform as being an opportunity. So that's to be continued, and we'll see what transpires from there. On the Canadian side, so it's just -- we're not going to go look for it actively, but if it happens, it happens. And we've already had some customers that have already had some discussions with some of the U.S. customers and to talk about Andlauer Healthcare Group and who we who we are to some of these U.S. clients already.In Canada, there's still a lot in the pipeline. And it could be ancillary offerings, but also competitive offerings as well. I think there's -- Peter Bromley has that list, and we're looking through it as time permits and opportunity comes. But we feel comfortable that there's opportunity in Canada. And that's -- that, to us, is to make sure that, that moat is as large as possible and continue to be better. And if there's an opportunity to make our service better for our clients or more effective, then we will embark on that journey.

[Operator]

[Operator Instructions] It appears we have no further questions at this time. I'd like to turn the conference back to Michael. Please go ahead, sir.

[Michael N. Andlauer, President, CEO & Director]

Thank you, Catherine. Thank you for all of you participating this morning. Have a great day and for our listeners in the U.S., I want to wish you a Happy Veterans Day.