Andlauer Healthcare Group Inc

TSX:AND

Earnings Call Transcript 2024-Q3

[Operator]

Good morning. My name is Chloe, and I will be your conference operator today. At this time, I would like to welcome everyone to the Andlauer Healthcare Group 2024 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 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 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 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 question-and-session, and this call is being recorded on November 6, 2024.

 

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

[Michael Andlauer, executive]

Thank you very much, Chloe, and good morning, everyone. Thank you for joining us today. With me on the call today, I've got Peter Bromley, our Chief Financial Officer. Following my opening remarks, Peter will follow up with a more detailed discussion of our Q3 financial results, and I'll then provide closing comments and open the lines for questions.

 

Our Q3 financial results reflect a similar story as our last quarter. Our results for the quarter reflect a strong performance of our Logistics and Distribution and our Canadian specialized transportation product lines, offset somewhat by our U.S. transportation business. 



Our Canadian Grand transportation revenue, excluding fuel, increased by approximately 8.5% compared to Q3 of last year. Our dedicated and last mile was up 10.2% and our air freight forwarding grew by 5.1%. Our Logistics and distribution revenue increased by 6.8% year-over-year reflecting continued growth in revenue from our pharmaceutical and particular biologics clients, partially offset by slightly lower outbound volumes from our consumer health products.

 

Our year-to-date logistics and distribution revenue is now slightly ahead of the comparable period of a year ago despite continued lower volumes from certain consumer health clients. The overall growth in our Canadian operations aside from packaging is more attributable to stronger volumes and price increases.

 

Our consolidated EBITDA margin was 25.9% for the quarter, up from 24.9% in Q3 last year, represents our strongest quarterly margin to date in 2024. This positive momentum was partially offset, as I said earlier, by the continued impact of the challenging operating conditions in our U.S.-based truckload business. In the U.S., we continue to maintain our heightened focus on revenue quality and cost controls. We recently relocated some of our U.S. equipment to Canada to optimize capacity utilization.

 

EBITDA attributable to Boyle Transportation and Skelton USA was approximately $1.5 million lower in the quarter compared to Q3 last year. In Q1 and Q2 this year, EBITDA attributable to Boyle and Skelton was approximately $2.5 million and $2.8 million, respectively, than the comparable quarters in 2023. So it looks like some of the challenging market conditions we're facing in the U.S. are finally flattening out.

 

In summary, our Canadian specialized transportation network is performing well and in line with our expectations. We're also pleased with the performance improvement in logistics and distribution product line in the quarter. Despite the challenging market conditions, we remain focused on improving the performance of our specialized U.S. truckload operations, where we're executing for an opportunity to high-grade the business.

 

Let me turn over the call to Peter to review our financial performance in more detail. Peter?

[Peter Bromley, executive]

Thank you, Michael, and good morning, everybody. Revenue for the Healthcare Logistics segment totaled $44.1 million, an increase of 4.7% compared with Q3 last year. The increase reflects 6.7% increase in our logistics and distribution revenue, which was driven by continued growth from our pharmaceutical and biologics clients, as Michael has already noted, partially offset by 16.7% decline in our packaging revenue attributable to lower volumes.

 

Revenue in our Specialized Transportation segment totaled $115.5 million, an increase of 0.8% compared with Q3 a year ago, reflecting solid 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 $104.3 million, up 0.5% compared with Q3 last year, reflecting strong growth in our Canadian operations, partially offset by lower fuel surcharge revenue and continued challenging conditions in our U.S. operations.

 

During the quarter, average diesel prices were approximately 6% lower than Q3 a year ago. Air freight forwarding revenue was $7.7 million in the quarter, an increase of 5.1% compared with Q3 a year ago, primarily due to increased shipments. Our dedicated and last-mile delivery revenue was up 10.2% to $18.8 million, reflecting continued organic growth. Cost of transportation and services was $79.7 million or 50% of revenue compared with $79.6 million or 50.1% of revenue in Q3 last year. The slight increase was in line with higher revenue and lower fuel costs.

 

Direct operating expenses were $25.3 million or 15.9% of revenue compared with $25.3 million or 16.2% of revenue for Q3 a year ago and generally in line with revenue for Q3.

 

Operating income for the quarter was $23.8 million, an increase of 9.6% from Q3 a year ago. The increase was attributable to organic growth in our Canadian specialized transportation and logistics and distribution product lines, partially offset by lower contributions from our U.S.-based truckload businesses. 



Net income was $16.3 million or $0.41 per share on a diluted basis compared with $15.3 million or $0.36 per share on a diluted basis in Q3 last year. Higher segment net income before eliminations for our Specialized Transportation segment reflects organic growth in our Canadian Specialized Transportation business, largely offset by lower contributions from Boyle Transportation and Skelton USA and slightly higher segment net income from our Healthcare Logistics segment primarily reflects the increased revenue of our pharmaceutical and biologics clients. These are offset by slightly increased SG&A costs related to the implementation of our new warehouse management system for Accuristics. 



EBITDA totaled $41.3 million in the quarter, an increase of 5.9% from Q3 last year. The increase was due to the factors already discussed and with an EBITDA margin of 25.9% for the quarter, we remain within our targeted 24% to 26% EBITDA margin target range despite the current weakness in our U.S. Truckload business. 



Our balance sheet continues to be strong. Last quarter, we drew $40 million on our revolver to partially finance our recently completed $90 million substantial issuer bid. The $50 million balance was financed by cash on hand. During Q3, we paid down $10 million on our revolving facility. And on July 2, we commenced our second NCIB. At September 30, we bought back and canceled just over 220,000 shares for a total of $8.6 million. At quarter end, we had $25 million outstanding under our term facility and $30 million drawn on our revolving facility with a very conservative net leverage ratio of 0.74x. 





We had cash and cash equivalents of $36 million and working capital of $47 million at quarter end. Accordingly, we remain well positioned financially to pursue growth opportunities. 





I'll now turn the call back to Michael for closing comments. Michael?

[Michael Andlauer, executive]

Thanks, Peter. Our low debt level, combined with the continued strong cash generation of our businesses provides us with financial flexibility to be active in buying back shares, both through our normal course issuer bid and recently completed SIB. As Peter noted, we're continuing to buy back stock. We also raised our quarterly dividend this past quarter to $0.11 a share. 

 

We're committed to these value-enhancing initiatives for our shareholders, but I also want to emphasize that the expansion of our platform is a capital allocation priority. We're an asset-light strong cash flow business that provides us with the ability to regularly increase our dividend and buy back shares without impacting our ability to pursue complementary acquisitions. With interest rates easing, we're now seeing a more active acquisition market. We're currently evaluating a number of opportunities and excited for the future. 

 

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 better supporting our employees, our drivers and our owner operators. I'll now open the line to the questions. 



Chloe, please commence the Q&A.

[Walter Spracklin, analyst]

So with the third quarter results now and fourth quarter trends kind of intact. I want to look out a little bit to 2025 to the extent you can give us some color there. And looking at your Canadian business, pretty much steady as expected, right? I mean you're in a good space there. It seems to be even when you look at your third-quarter results in that kind of high single mid- to high single-digit range. When you look out to 2025, the moving parts and just looking at your Canadian business, any reason why you kind of up high single-digit historical trend would be any different next year with the outlook you have right now?

[Michael Andlauer, executive]

Walter, it's Michael. I would suggest that our business is continuing to stay robust. And if anything, like I said that in my last sense of my speech is that we continue to stay focused. And for me, I'm not going to take anything for granted. We're going to look at what our needs are for our customers. I think because that's all we do is health care, we're more in touch and in tune to what are the changing requirements of our customers' needs in Canada, not only in Canada but within the provinces where a lot of the decision-making is done in health care in Canada. 

 

So our focus is continuing to expand our network, be more robust, increase the moat, and add value to our clients. I always find there are always things to do and continue to improve. So I think we're in a good position. We're finding more areas of efficiency as we continue to grow the Canadian business. And I kind of alluded to the acquisition part. And I think our focus is going to be more on the Canadian healthcare side of M&A. That's where we feel comfortable. That's what we understand best. And I also feel that there are opportunities to expand the platform that we have in Canada. I feel good about 2025.

[Walter Spracklin, analyst]

Okay. And I actually had a follow-on on M&A, you went into that. And so when you mentioned M&A in health care in Canada, is that in transportation logistics you're referring to? Or could that be something kind of adjacent, I know, Michael, you and I have talked about things that you're doing more and more service into your pharmaceutical customer that you mentioned destruction at one point, but is it something along those lines? Or do you still see opportunities in transportation logistics within Canada from an M&A perspective?

[Michael Andlauer, executive]

Yes. From a transportation and logistics in Canada, I think we continue to grow organically, whether it be opening new facilities. Now that could be through the acquisition of a smaller player, but it's not significant enough. I think it was last quarter, I talked about our M&A approach last year was more to try to hit that home run and transformational home run, and we're going to focus more on singles and doubles this time around. 



So I think we're more looking at bunt singles when it comes to transportation. But when it comes to ancillary products, I think there's a need. We're seeing a lot of the banks are showing us some good entrepreneurial initiatives from businesses that are looking to grow in the healthcare space that are somewhat complementary to our transportation and logistics sector.

[Walter Spracklin, analyst]

Last question for you, Michael, is the U.S. business. You indicated it's flattening out, I think you said, and great that we're kind of stabilizing there. As you look into '25, is there any green shoots at all? Are you seeing capacity kind of tighten up at all, anything on the freight pricing standpoint that suggesting at all any rebound off the bottom here? Or are we kind of bumping along the bottom for a little while?

[Michael Andlauer, executive]

Yes. I used the word trough a bit 3 quarters ago, and I guess I was mistaken. But I really feel now that we are at the trough. And as I see that as indicated here that some of the comparables are getting smaller and smaller. We've put a marked focus. And when you're looking at change, transition change in terms of approach, marketing, or even operational, you incur some of the one-time costs, and sometimes change doesn't -- customers aren't willing to switch overnight. it's taking a little -- it takes time. But I'm happy with the progress that we're making. And I think we'll be better positioned going into 2025 with the structure that we have going forward and the focus on more higher value and more specialty part of the business and using that equipment for that versus trying to grow at the pace that we were growing during COVID. 

So I feel that we're -- we'll find our niche, we'll find our space, and we will have not only stabilized, but we'll be looking at growth again in 2025.

[Operator]

Our next question comes from the line of Kevin Chiang from CIBC.

[Kevin Chiang, analyst]

Maybe just looking into Q4, I don't generally think of your business as being seasonal. But if I just look back, you've typically had a sequential improvement in revenue even before the pandemic and some of the M&A from Q3 into Q4. Just wondering if you'd expect something similar this time around? Or are some of the moving parts around the U.S. business and maybe the broader health of the Canadian consumer, maybe that impacts that typical seasonality we've seen?

[Michael Andlauer, executive]

Kevin, have you or any of your family members had a cold in the last couple of weeks?

[Kevin Chiang, analyst]

I have a coworker that just got COVID. So it seems like it's making its head around again.

[Michael Andlauer, executive]

I figured I'd give it a try, and I figured that would be the answer. I think our consumer health business, I think, is going to be a little bit more robust going into Q4 and Q1 of 2025. And sometimes I think we saw the consumer health take a bit of a hit certainly on the cold and flu side of things. We have a couple of big largest clients that we distribute for and during COVID, obviously, everybody was very masked and it wasn't -- that seemed to be the priority. And so I think we are in a position where we're going to see a little bit more of that volume going up. 



Q4 typically, because we are in health care and most of the product is obviously pharmaceuticals and OTC to narcotics and all. But we also have a line that is more HA, health, and beauty aids, some cosmetic clients because we get the coincidence of delivery into the pharmacies and some of the retailers with our pharmacies. And so there is a bit of a seasonal spike because of Q4 because of you want to buy your wife a perfume or something like that or cosmetics. But ultimately, we do a little bit, but it's not like other retail or other transportation or logistics where Q4 is a big quarter, but we do see a little bit of a spike.

[Kevin Chiang, analyst]

Maybe if I could just my second question, if I could just unpack the margin performance. So I know you messaged kind of a 24% to 26% margin range, and you're typically kind of right down the fairway looking past the most recent quarters and obviously, at the upper end in Q3 here. But you're still seeing some pressure on the U.S. business. I know it's getting better. I guess are you able to highlight just maybe how much of a headwind the U.S. business was to your consolidated margins? Or conversely, as you think of U.S., that U.S. business normalizing, is there any reason why that range shouldn't increase over time just because that consolidated margin is performing well now despite the fact that the U.S. business seems to be underperforming? It feels like if that normalizes, that would be an upside to your overall consolidated margin performance.

[Michael Andlauer, executive]

Yes. I'll be -- I shouldn't say this, but you know me, I'm pretty transparent. But I was a little surprised when I saw our margins being as high as they were for the last quarter. And then when you do some analysis and you realize that there's a combination of elements. And just as much of a surprise because I look at each segment, obviously, I measure -- I have monthly management meetings with each of the business units, and I see the growth. And then all of a sudden, I looked at Peter's report, and at the end of the Q and I said, what do you mean we didn't grow that much in revenue? And I realize that there's a combination of factors. 





And one of the things is as our industry gets more robust in Canada, there are more intercompany transactions and also where our logistics and distribution businesses, while it may grow, it grows by offering freight services, which in turn, a lot of it goes to ATS or Skelton and these end up becoming intercompany eliminations. So in essence, our revenue is actually artificially lower compared to -- I think hopefully, I'm clear. So that combined with the lower fuel in the last quarter will increase -- will artificially decrease revenue but it doesn't affect EBITDA, which -- so by default, your margins increase. So I saw -- and I'm sure the MD&A will reflect that, there are much more intercompany transactions between the companies. So I think that has a part.

 

Yes, there's no doubt that the U.S. part of the business, the margins were somewhat depressed comparatively to other years and as we streamline, that's only going to help. So I'd say we're in the middle of the runway, fairway, I don't know if you've seen me golf, you probably wouldn't want to use that term again with me. But I would certainly suggest that we will keep it within the runway. It's a focus item because to me, for our employees, security, to me, it's about sustainability and making sure this company is healthy.

[Operator]

Our next question comes from the line of Konark Gupta from Scotiabank.

[Konark Gupta, analyst]

So I wanted to ask a follow-up actually on Kevin's questions a little bit differently on Q4. So like last year, especially, we had a big bump in Q4 in terms of revenue and margins were extremely high as well, it seems like outside of your typical range. So I'm just curious like this Q4, would you consider last year's Q4 as a tough comp? Or that's more sort of a baseline on which you can grow this Q4?

[Michael Andlauer, executive]

Yes. I think there will be some organic growth to it. I don't see anything -- I know that we had a big bump on Q4 '23, but we had -- we ended up getting a large dedicated client in Q4 of last year that we onboarded. So obviously, they're still with us, not obviously but thank goodness they're still with us and so I think we'll see some organic growth based on that. So I don't see that -- I think that's what -- that was the big reason from Q4 '23 to Q4 '22. So it won't be as drastic of an increase as we saw from Q3 '23 to Q4 '23.

[Konark Gupta, analyst]

And then in terms of the U.S. business, just like maybe a 2-part question there, perhaps. One, like have you kind of like figured out any kind of implications for your business, be it regulations or something else post-Trump victory in the U.S.? Any thoughts on how the election changes the nature of the business in the U.S.?

[Michael Andlauer, executive]

I'd like to have something to say about the election, but really, I don't see any connection for us. On the U.S. side, I don't know. I think I heard something this morning on the way in that I think Robert Kennedy, Jr. is going to be the [Indiscernible]. So I don't know, he didn't like vaccines so I don't know. I'm only -- I'm not even speculating, I'm just joking. So I don't really have any comment. To me, it's business as usual. Health care is one of those commodities that you need, that you want, that's not a luxury.

[Konark Gupta, analyst]

Yes, that makes sense. Okay. So just like in terms of understanding the business profile next year as you speak to recently, you have a base that's getting better, the comps are getting better. So maybe next year, you're lapping a very easy comp because your EBITDA is probably down about call it, $7 million, $8 million, $9 million by the end of this year, full year in the U.S. So like just having that trough, you can naturally get some growth next year and then maybe hit the market or the economy can grow itself. So how should we frame the U.S. growth profile next year? Is it looking like a typical historical growth range or is it looking incrementally better because of the easy comps?

[Michael Andlauer, executive]

Yes. I think you're bang on, Konark, from my perspective. 



The one thing we are doing is, I'm going to say, rightsizing just because we're going to focus more on not as much as growth, but stabilization and organic growth from within the client base that we want to go after. So I think I mentioned in my speech or Walter about the trough. And I think we finally hit that trough. As I'm looking into Q4, I think our comparables on the U.S. side are going to be pretty much the same as Q4 '23, which will mean that, that's only going to be upside for the overall AHG business. And then obviously, we're going to focus on growing it the way that our client, the U.S. clients are expecting. Having said that, the one thing I kind of kick myself from an M&A standpoint is certainly on the logistics side of things and not as much on the transportation, which is obviously more commoditized in the U.S. So I think we're focusing more on that area from expansion in the U.S., clinical trial business, and the like. Those are the areas that started to really excite me.

[Operator]

Our next question comes from the line of Tim James from TD Cowen.

[Tim James, analyst]

I was wondering, Michael, if you could talk about any sort of notable organic investment opportunities in the Canadian business specifically. You mentioned that's more of an organic and maybe some small tuck-in acquisitions in terms of growth there. But is there anything as you look to 2025 in terms of plans for CapEx there, facility expansions, new facilities, anything notable that's worth calling out?

[Michael Andlauer, executive]

Yes. Certainly, I'll give you an example right off the top that we're obviously looking at. We're looking at streamlining our -- not streamlining, but consolidating our narcotics vaults. Our Vice President Quality Assurance was successful in working with Health Canada to change some of the regulations. She spearheaded that so that third-party logistics company could have the same advantages as distributors do in consolidating narcotics with the same security measures of where today, 3PL companies, each manufacturer we represent has to have their own narcotics Vault. We are looking at consolidating that savings space. 

 

With that comes you know the Vault is $0.5 million or whatever some capital cost requirements on that, but it's the paybacks are really good, big capital cost, but it's going to create an environment where we're going to be more efficient and more effective for our clients as well, giving them the opportunity to grow that business without having to incur large capital costs, more variable cost approach, and we become more efficient. In Montreal with LSU, we're actually moving to a brand-new facility. I think by Q2 or Q3 of next year. And we have the opportunity there to transform our business into the facility that we're in an older facility that used to be a Bristol-Myers Squibb warehouse we're moving to a brand-new facility. 

 

We have 6 different fridge spaces in that area. Now we're going to basically expand our fridge and freezer capacity as we see biologics and vaccine business growing. So those are the areas that we're going to focus on. There are some areas where we're going to expand in the Maritime, we're looking at opening a couple of new facilities to expand our network in rural Atlantic Canada. Some of the areas. So really, it's the opportunity to grow organically and make it better for our clients with the network. So that's where we're looking at from a capital organic growth side of things for next year.

[Operator]

Our next question comes from the line of Julian Hung from Stifel.

[Julian Hung, analyst]

This is Julian sitting in for Justin today. With the mention of a more active M&A market, is there a consideration of letting go of the U.S. business to refocus in Canada?

[Michael Andlauer, executive]

I mean, no, there's definitely not a focus. I'm not going to -- but there is definitely -- no, I think we have a good business. I mean it's still a good business despite the fact that we're not performing at the levels that we were over the last couple of years. It's still a good business. It offers a great service. It's got great people managing it and running it. So for me, it's not you know it's a good business. Is it a focus of mine? No, the learnings I've had with -- on the last mile and understanding the health care market in the U.S., how drugs are being distributed and delivered is markedly different than it is in Canada. 

 

So we have to make sure that we understand that and not just -- so I feel comfortable with the Canadian health care. I'm passionate about it, whether may be me personally getting involved with donations to hospitals and the likes or -- so for me, it's become a passion of mine. And I just want to find other opportunities to make healthcare in Canada better and by serving it better and working with our clients, which are the pharmaceutical manufacturers and the distributors and the pharmacies to making sure that we're complementing them.

[Julian Hung, analyst]

Okay. And another question. So one of your peers, UPS has been expanding their health care capabilities through M&A across Europe. Has there been any word of them doing the same in Canada?

[Michael Andlauer, executive]

I think you should be asking UPS that question, not me.

[Operator]

No question at this time. Presenters, please go ahead.

[Michael Andlauer, executive]

Well, that's great. Well, thank you for joining the call. I'm looking forward to seeing you Q4 and talking more about this exciting company that we have.

[Operator]

This concludes today's conference call. You may now disconnect. Thank you, everyone.