Andlauer Healthcare Group Inc
TSX:AND
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Good morning. My name is Anas, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Andlauer Healthcare Group 2021 Fourth Quarter and Year End Results Conference Call. All lines have been placed on mute to prevent any background noise.
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 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 managements' remarks, there will be a questions-and-answers session. This call is being recorded on March 3, 2022.
I would now like to turn the conference over to Michael Andlauer. Please go ahead, sir.
Hi. Thank you. Good morning. Good morning, everybody. Thank you, Anas, and 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 financial performance, and then I'll provide closing remarks, open the line to any questions.
Well, what an incredible fourth quarter for AHG. It's truly a direct result of the commitment and dedication of our employees, our drivers, our owner/operators and management, all of them, our collective companies, and the fruits of our labor resulted in better than expected financial performance, not only for this quarter, but overall for 2021. We continue to generate solid organic growth from our core businesses while also generating strong incremental growth from the strategic acquisitions made early in the year as well as in the fourth quarter. In particular, with the acquisition of Skelton Canada, Skelton USA, and Boyle Transportation.
Skelton Canada has significantly strengthened our specialized transportation business segment as the leader of the refrigerated and frozen healthcare shipments with a national reach and a fleet offering validated temperature control, state-of-the-art security systems, and real-time shipping monitoring. Throughout the year, access to the ATS national network in collaboration between those two entities have allowed Skelton more efficiencies in its product offering.
Skelton USA was originally launched in 2017 as a result of Skelton's pharmaceutical customers pulling them into the US domestic market. They've been growing rapidly since then, successfully leveraging the Skelton Company reputation and brand for cold chain expertise. We initially purchased 49% of Skelton USA along with 100% of Skelton Canada in March of last year, almost exactly 12 months ago today. Skelton USA was our initial entry into the US market and gave us an opportunity to learn about the large US market as a minority owner. Needless to say, we like what we saw, and at the beginning of our fourth quarter, we entered into an agreement to purchase the remaining 51% of Skelton USA and closed in November, bringing our ownership of the Skelton USA to 100%.
Through this process of entering the US market, we were also presented with the opportunity to acquire Boyle Transportation. And given what we had learned about the US market through Skelton USA, combined with our extensive due diligence of Boyle, we seized that opportunity. Based in Massachusetts, Boyle Transportation operates throughout the 48 contiguous United States and to and from Canada. They provide specialized transportation services to clients in life sciences and government and defense sectors, with the life science customers representing approximately 75% of their consolidated revenue. Like Skelton USA, Boyle adheres to stringent quality and security standards, employs highly trained and dedicated professionals, and continue to invest in advanced technology and equipment.
Our acquisition of Boyle Transportation closed at the same time as the step acquisition of the Skelton USA early in November. I couldn't be more pleased with the addition of these business to our platform and how well the respective management teams have fit with our leadership group. We share the same focus on exceptional client service and so many similarities in our cultures with the understanding that our drivers and employees are our most important stakeholders.
We partially funded the acquisition of the remaining 51% of Skelton USA and 100% of Boyle through the successful completion of a bought deal offering of 3.5 million subordinate voting shares for aggregate gross proceeds of CAD 168.7 million. The offering was comprised of 2 million subordinate voting shares issued from Treasury and 1.5 million subordinate voting shares offered by Andlauer Management Group, thereby enhancing our capital market liquidity, something that many of you investors were looking for. We appreciate the strong support shown by our investors in such a short notice in order to make this acquisition a reality.
The remaining portions of the respective purchase prices for the 51% of Skelton USA and 100% of Boyle were satisfied through the issuance of an additional 522,000 and 519,000 subordinate voting shares of AHG to the selling shareholders of Boyle and Skelton USA, respectively. Their acceptance of AHG shares as partial payment demonstrates their belief and alignment and commitment to the future growth of AHG. I'm extremely proud of our team for their contributions in the successful execution of these important transactions in a year where we had several challenges presented by the pandemic.
From an operational level, the ongoing successful collaboration of our team in monitoring our operations and for our people in adhering to our COVID safety measures, ensure that there were no disruptions and allowed for the timely delivery of essential products to hospitals, pharmacies, and clinics across Canada throughout this year. In particular, we also have the additional responsibility of continuing to support the distribution of COVID-19 vaccines and ancillary products to Canadians, which continued during our fourth quarter. Our vaccine-related revenue, including test kits, comprised approximately of 5% of our total revenue in the quarter. To add more adversity, in the fourth quarter operation, in particular to the Canadian companies, we had to overcome the closure of British Columbia roads due to floods.
We generated double-digit revenue growth across each of our product lines in the fourth quarter, with particularly strong performance from the ground transportation, our largest product line in terms of revenue generation. Revenue in ground transportation was up 76.2% year-over-year, reflecting the strong contributions from our Skelton and Boyle acquisitions. Our three acquisitions, Skelton, Skelton USA and Boyle, accounted for approximately CAD 30.9 million of the CAD 46.4 million year-over-year increase in our ground transportation revenue. Contributions from just Boyle and Skelton USA, effectively our US operations, contributed approximately CAD 19 million of the consolidated revenue during the Q4 2021. Through Skelton USA and Boyle, we've established a strong platform for growth in the USA.
In step with our strong top line performance, we continue to generate strong EBITDA margins. EBITDA increased to CAD 73.7 million in the quarter, now that does include CAD 37.9 million gain on the step acquisition of Skelton USA. So, comparing apples-to-apples, the adjusted EBITDA was
[ph]
CAD 35.8 million (00:08:17) compared to CAD 22 million in Q4 a year ago. EBITDA margin was 55.4%, or 26.9% excluding the gain on the step acquisition, up from 25.4% in Q4 last year. This momentum will position us to continue generating strong performance into 2022.
I'd now like to turn the call over to Peter to review our financial performance in more detail. Peter?
Thank you, Michael, and good morning, everyone. Revenue for our fourth quarter increased by 53.6% to CAD 133 million compared with Q4 last year, reflecting the impact of our acquisitions and continued organic growth. Revenue for the healthcare logistics segment totaled CAD 33.9 million, an increase of 12.9% compared with Q4 a year ago. The increase reflects 13.3% year-on-year growth in our logistics and distribution product line and 10.9% growth in our packaging solutions product.
Revenue in our specialized transportation segment totaled CAD 99.2 million, an increase of 75.1% compared with Q4 last year. Michael just discussed the strong performance in our ground transportation product line which was driven by acquisitions, organic growth, and higher fuel costs passed on to customers as a component of our pricing. The other contributors to growth in our specialized transportation segment during the quarter included 64.6% growth in our airfreight forwarding product line and 30.1% in our dedicated and last-mile delivery product line.
The significant increase in airfreight forwarding was primarily attributed to the increased volume which was the result of our clients attempting to minimize service disruptions in B.C. arising from the atmospheric river – weather events that occurred in November, which severed regional railroad and rail links to Vancouver due to flooding and landslides. Our growth in dedicated and last-mile was particularly attributable to our route expansion in Western Canada and increases in fuel costs passed on to customers. Our TDS acquisition, which was completed on October 1, 2020, has been reflected in our results for a full 12 months, but has also contributed to our year-on-year growth and margin improvement.
Cost of transportation and services was CAD 65.7 million, or 49.4% of revenue, compared with CAD 38.5 million, or 44.5% of revenue, for Q4 last year. The higher cost of transportation and services is primarily attributable to approximately 4.1% increase in volume of our ATS Healthcare business, the acquisitions of Skelton Canada, Skelton USA, and Boyle Transportation, as well as higher fuel costs in line with the increases in revenue related to fuel prices. The increase in our operating ratio reflects our Skelton and Boyle acquisitions, which have increased the relative proportion of our specialized transportation segment as a percentage of our total consolidated revenue and cost profiles.
Direct operating expenses for the fourth quarter were CAD 21.3 million, or 16% of revenue, compared with CAD 18.8 million, or 21.7% of revenue, for Q4 a year ago. The increase is primarily attributable to growth in our Accuristix logistics and distribution business and investments made to expand our ATS Healthcare network in Canada. Our Skelton and Boyle 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 direct operating expense operating ratio compared to Q4 a year ago.
SG&A expenses were CAD 10.9 million, or 8.2% of revenue, compared with CAD 7.3 million, or 9% of revenue, in Q4 last year. Increased SG&A expenses for the quarter are attributable to our acquisitions, including CAD 0.8 million in professional fees for our acquisition of Boyle, partially offset by a reduction in the cost attributable to share-based compensation expenses. The decrease in SG&A expenses as a percentage of revenue reflects operating leverage generated within our SG&A functions compared with revenue growth.
Operating income for the quarter was CAD 21.5 million, which is an increase of 50.2% compared to Q4 2020. Approximately CAD 3.5 million of the increase is attributable to our Skelton and Boyle acquisitions with the remainder attributable to organic growth. Net income for the quarter totaled CAD 53.1 million. This was significantly impacted by the gain on the step acquisition of our equity accounted investee, Skelton USA, which was CAD 37.9 million as Michael had previously talked about.
Our net income for Q4 2020 of CAD 13.9 million was impacted by a deferred income tax recovery of approximately CAD 4.3 million. However, the higher segment net income before eliminations for both the healthcare logistics segment and specialized transportation segments also contributed to the increased profitability in Q4 this year on a consolidated basis. Total comprehensive income for Q4 2021 was CAD 56 million, or CAD 1.26 per share on a diluted basis, compared to CAD 13.9 million, or CAD 0.36 per share on a diluted basis, in Q4 a year ago. Our fourth quarter this year is the first quarter in which total comprehensive income differs from net income due to the acquisition of foreign operations, Skelton USA and Boyle, which resulted in a positive foreign currency translation adjustment of CAD 2.9 million for the quarter.
If we look at the fiscal year of 2021, total revenue increased 40% to CAD 440.1 million, operating income increased 44.7% to CAD 73.3 million (sic) [CAD 73.7 million] (00:14:28), net income increased to CAD 90 million, including the gain on the step acquisition, compared to CAD 37.7 million in fiscal 2020. Total comprehensive income increased to CAD 92.8 million, or CAD 2.25 per share on a diluted basis, compared with CAD 37.7 million, or CAD 0.98 per share on a diluted basis, from last year. 2021 EBITDA increased to CAD 157.2 million, or CAD 119.3 million if we exclude the gain on the step acquisition, compared with CAD 78.9 million in fiscal 2020. Finally, EBITDA margin was 35.7%, or 27.1% including – excluding the gain on the step acquisition compared to 25.1% last year.
Turning to our balance sheet, as at December 31, 2021, we had cash and cash equivalents of CAD 25 million and working capital of CAD 31.6 million. This compares to cash and cash equivalents of CAD 30.1 million and working capital of CAD 44.4 million at 2020's yearend. The decline in working capital is primarily attributable to the acquisitions of Skelton Canada and our 49% interest in Skelton USA. During fiscal 2021, we repaid CAD 39 million of the CAD 50 million that we initially drew on our revolving credit facility in connection with the Skelton and Skelton USA acquisitions in March of 2021.
Subsequent to yearend and just a couple of days ago, we used a combination of the cash that we had on hand at yearend and an additional draw on our revolver to fund the cash portion of the purchase price of our recent acquisition of Logistics Support Unit, or LSU, which Michael will discuss in a few moments. We expect to continue to reduce amounts drawn on our revolving credit facility during fiscal 2022 with excess free cash flow generated from operations. We remain well positioned financially to pursue growth opportunities.
I'll now turn it back to Michael for closing comments.
Hey. Thanks, Peter. Yeah. Well, our strong performance in the quarter and year demonstrates a stable and reliable growth that our core national platform generates and the additional torque provided by our significant platform enhancements over the past year, which included the continued growth in the reach of our dedicated last-mile delivery product line, our success in supporting and flawless execution of the COVID vaccine distribution, our acquisition of Skelton Canada, and of course, our strategic entry into the US market through Skelton USA and Boyle acquisitions.
We continue to advance our acquisition strategy in 2022. As Peter alluded to, we closed our acquisition of Québec based Logistics Support Unit Inc. a couple of days ago for a total aggregate consideration of approximately CAD 30 million, subject to customary purchase price adjustments. Established in 2008, LSU is a leading third-party logistics provider in Québec, offering specialty pharmacy, warehousing, distribution, and order management services throughout Canada to national and international companies as well as government clients in the pharmaceutical, medical and biotechnology sectors. LSU is also the exclusive distributor of immunizing agents for the Québec public health system.
Our relationship with
[indiscernible]
(00:17:58) meant that we were also tasked with the responsibility of warehousing and delivery of the COVID vaccines to all Quebeckers. They add further validated temperature controls, security, quality control and real-time inventory tracking capabilities to our logistics platform while expanding our market presence in Québec. We expect the acquisition to be immediately accretive to cash flow and earnings per share [Foreign Language] (00:18:24-00:18:36). We look forward to welcome LSU into our logistics platform and working with them to continue the LSU brand and legacy under the AHG umbrella.
In closing, we expect the momentum of 2021 to parlay itself into continued growth in 2022, regardless of the revenue enhancements that we may have had in 2021 caused by COVID, we're delighted that this pandemic is behind us and that all our associates, and especially our drivers and warehouse employees, will have a renewed sense of normalcy and predictability in their day to day lives. Between the resilience of our industry and our companies and the fruits of our hard work this past year, I feel very confident we're very well positioned to continue to generate enhanced returns to our investors over the long-term.
That concludes our formal remarks. And now, I'd like to open the line to any questions you have. Operator, please start the Q&A.
Thank you, sir. Ladies and gentlemen, we'll now begin the question-and-answer session.
[Operator Instructions]
Your first question comes from Walter Spracklin with RBC Capital Markets. Please go ahead.
Yeah. Thanks very much. Good morning, everyone.
Good morning.
Good morning, Walter.
Hey. So, yeah, great quarter. Just trying to parse out now that we don't get too far ahead of our skis here for next year or this year, I guess, when we look back at some of the things that we hope are going to go away that helped you last year, in particular on the vaccine and the flooding. So, when we look at your results, layering on the acquisitions that you've already announced, but just comparing it or growing it relative to the base business from last year, do you think that the growth ex acquisitions that you have lined up for this year can overtake the potential relaxing or loss of vaccine-related moves if they do continue to – or if they do start to trail off and the flooding from B.C., can you still do better than you did last year, if those things don't happen here this year?
Yes, Walter. Absolutely, without a doubt. I mean, with all these distractions come a lot of extra costs. I wouldn't necessarily represent the COVID vaccine revenues and the B.C. floods in the same light. I think the B.C. flood was one that was – like I said, I wouldn't – it wasn't really an increase in revenue. Yes, some of the freight might have gone on by air, but the costs were overwhelming to try to get – we had drivers, the Skelton drivers and other drivers stuck. We had to move freight, and thank goodness, we have 30,000 square feet of empty temperature-controlled space in Calgary that we were able to bring the freight back and keep it from – keep it temperature controlled for our clients. So, that disruption to me is not something that's accretive to our business.
The COVID vaccine, yes, I would say that that's – that mandate and especially as the year went along in 2021, we got more accustom in terms of the expectations and the processes were streamlined a bit more. And certainly, with the advent of these test kits, I think you couldn't freeze those test kits, so they had to go temperature controlled. That was a quite a bit of revenue. But there's also other parts of the healthcare business that was – that didn't really pick up as much as it could have. But what we did in our business plan and budgets with all the companies, we recognize that indeed we would eclipse any type of shortfall of revenue.
Okay. That's fantastic. That's commendable. When you look at your deal pipeline now, switching gears a little bit, can you talk a bit about the strategy and your capacity, not financial capacity or operating capacity, but just your head office capacity to review deals? When I look at other companies I cover that are extremely acquisitive and I'm referencing like GFL and TFI International, I mean they have a whole dedicated people that are just reviewing deals and are doing them quite often. Are you looking down the avenue of – do you look at every deal and does that stretch your ability then to keep your eye on operations or is this something that you see evolving as you do more and more deals, will you start to create that analytical capacity within your organization to be able to execute and review more deals? I assume you're probably reviewing a lot more deals than you're executing on, but it's kind of the type of work you still need to do, and therefore, it uses up some of your capacity. Just curious as to what your strategy is from a deal analytics and how that capacity there is evolving over there as you do more and more deals.
Yeah. That's a great question, Walter, and I'd say you should be on our board, our board of directors asking that question, and indeed that's – we do not have an acquisition team per se. We have our executive team that gets involved, obviously, Peter and myself, and we've proven that we can do acquisitions as we did in 2021 and even to start 2022 with LSU. To me, acquisition is something that has to – there has to be a fit. It's not something that we go looking for. Interestingly enough, because of our success and because of our presence in the healthcare, we do get a lot of interest. I think I alluded to last quarter, this quarter that, the Boyle was actually not we didn't go looking for, they came to us and – but the culture of a company is, to me, the most critical ingredient to make it a fit. So, not all acquisitions will fit for the Andlauer Healthcare Group and just because it's accretive is not a reason to be going forward. To me, the most important thing is the cultural fit.
We're about people and we're about taking care of our clients and every one of our clients, particularly in the healthcare, have different unique needs. So, we look at it from a different lens, I guess, than some of these other companies like
[indiscernible]
(00:26:22) and we'll do it at our pace and we've proven that it works. Having said that, there's no doubt that as things get bigger and we progress, we adjust with the times, certainly with – in terms of management and how we approach where we will approach it. But at this juncture, we feel quite comfortable with how we've done in 2021 and how we started 2022. We've got to keep in mind that timing is everything. There's a talent war out there with respect to having great people and we're not going to do – we're going to pick and choose the right moments. But hopefully that gives you a bit of a flavor of how we approach acquisitions.
Yeah. Absolutely, it does. I'll keep it at two. Thanks very much for your time, Michael.
Thank you, Walter.
Thank you. Your next question comes from Konark Gupta with Scotiabank. Please go ahead.
Good morning and thanks for taking my questions, and congrats on a great quarter as well as kudos to the team for surviving the tough 2021. So, my first question is on Q4, I think ground revenue, especially in transportation segment, fared extremely well and I understand, obviously, you have Skelton and Boyle there. I was just wondering if there's anything you can share on unit volume or pricing environment that might have contributed to that success in Q4 on ground revenue as well as contract shifts. Thank you.
I'm just trying to think out loud. Certainly, from a revenue standpoint, the price of fuel was at its highest levels that I've seen and that would artificially increase revenue and it was significant and I think that the MDA explains and talks to that. Our pricing, interestingly enough, didn't change that much, but certainly it was talked about. Certainly, we talked about inflation last quarter and anticipated, and I don't think inflation is not behind us, it's actually in front of us. We have to deal with it, and I think last year's inflation is not going to be as – I think this year's inflation – pardon me – will be greater than it was last year. So, we have to anticipate that. So, I think from a pricing standpoint, Q4 was not reflective of it, but I believe that 2022 will be more reflective of pricing than the Q4. But other than that, Konark, and thanks for the accolades, because our – particularly with respect to our employees and management, it was an exhausting year for Andlauer.
Makes sense. Thanks. And just second one for me, on the lease payment side of things, so it seems like you have kind of approached, call it, CAD 30 million-plus in terms of lease payments run rate right now and that's kind of, I think, up more than 20%. I understand I think there's some kind of contribution from maybe recent acquisitions. But if you can talk about how do you see the lease payments go from here, given the kind of significant increases
[indiscernible]
(00:30:14)?
Yeah. so, I just – and maybe I got Peter here with me who can correct me if I'm wrong, but I think a lot of the lease payments that you see going up are actually related to rolling equipment and not more so of the $10 million increase than actual industrial space. Is that right?
It'll be a split, but yeah, there's definitely – the acquisitions will drive new right-of-use facilities which could go into our lease, but also we've continued to invest in our fleet as we would always do. And so, it's a split.
Okay. So, with that, certainly the acquisitions of Boyle and Skelton USA, have you laid in with rolling equipments, tractors and trailers that is. On the industrial side of things, we seem to have a nice hedge in light of the fact that we don't – our leases are not – our next big leases aren't being renewed for another three years, so we have that benefit going forward. And keeping on that line, I would suggest that we'll look at all options going forward and I'm not talking about acquisition of real estate per se as much as a location of – particularly on our logistics side. One of the great opportunities that I see with having a footprint in Québec now with the leading logistics provider in Québec being LSU is while the market is tight in Montreal, it's still not what the GTA is. So, looking outside the GTA is definitely one of the things that we're actively looking doing right now as an area for growth in our logistics sector.
Yeah. Thanks for the color, Michael. Thank you.
Thank you.
Thank you. Your next question comes from Tim James with TD Securities. Please go ahead.
Thank you. Good morning, everyone, and congratulations on a good end to the year. My first question, Michael, looking at the – I think it was approximately CAD 7 million in revenue from the vaccine or vaccine-related revenues here in the fourth quarter. I'm just wondering, could a portion of this now become regular revenue or incremental vaccine-related revenue going forward? And does your experience with other annually administered vaccines give you any insight into what sort of annual revenue this could present on a go-forward basis or is it just too early or too difficult to try and think about that at this point?
No. That's a very good question. I don't believe that that momentum will continue forward with respect to the COVID vaccine. I mean a lot of it is the vaccine-related – the CAD 6.6 million or CAD 7 million, as you alluded to, in Q4 was actually test kits, and test kits are bulky in size and there were millions of them being transported all across Canada and across and north into the Yukon, et cetera. So, I don't anticipate that, even though, it did spill over into January Q1, and now as you see, a lot of people are not getting vaccinated. We've gone through the booster vaccine and – but you make a very good point. One of the things that we've been able to do is working with government to execute this vaccine and we've done a wonderful job in doing so.
That was definitely one of the goals of this year is a flawless execution of these vaccines and we've gotten a lot of good momentum with governments in terms of them understanding our capabilities and being able to provide that. Interestingly enough, when I went through this, it was new for me at AHG in last February or last January when the vaccines were rolling out. And I actually picked up the phone and spoke with Johanne Bissonnette at LSU, because she had all the experience working with
[indiscernible]
(00:35:15) and getting best practices and learnings from her. So, she was, interestingly enough, instrumental and – but she has been doing the vaccines for the Québec Government for many years.
Now, the opportunity is for AHG to embark and doing the flu vaccines for other provinces and we've already had a good insight or good contracts with that. So, that will spill over. And so, to answer your question, by default, we will see new revenue for distribution of flu vaccines, influenza vaccines and the likes. And probably, in speaking to the manufacturers, the influenza vaccine and the COVID vaccine might be one and the same in the near future with the technology that's in place and we will be the beneficiary of it, and I feel quite confident of that.
Okay. Thank you. My second question, you've got a great history of maintaining relatively stable margins which presumably in part reflects the company's ability to price according to changes in your cost structure. You mentioned inflation sort of being ahead still. What is your early read on your ability to continue passing through higher costs to customers? Are they generally as understanding and accepting, I'm not saying they're happy, but accepting as they have been in the past or is there any reason it could be more challenging to do that in the coming year or years?
Yeah. Another good question. I believe that looking in this first quarter in terms of some of the actions that we've done, there's been very little pushback. It's not fun, but part of it is education and communication and information, and I think every industry has faced with the same challenges. It's not just wages, it's not just leases, it's everything that's affected material handling equipment. There's such little inventory out there for the demand that is creating price pressures. It will be interesting to see how people adapt to it in terms of in-sourcing or how do you deal with inventories going forward. But there's no doubt that everywhere we look at every input costs to manage our businesses have gone up, and in most cases, it's double-digit.
So, it's basically showing them and in some cases there are comparables that they can look at, starting wages, they know that internally, I don't think I've talked to any company who doesn't have any issues with talent – the talent shortage. So, it's just a matter of good communication and it's not about – and good discipline at the end of the day. So, there's a bit of a lag effect for this year with respect to that, but we'll keep that – we'll keep feel comfortable that our margins will remain the same, they might be a little lower. Certainly, the – to take an account, the Boyle USA business throughout the year, until November, was a bottom line contribution and not on the top line. Now that we own 100% of Boyle USA, we...
Skelton.
Did I say Boyle? I meant to say Skelton. Skelton USA, now that we own a 100% of Skelton USA, we have to report top line revenue. So, that might move the needle a little bit, but all in all, I feel quite confident that our margin levels will remain the same.
Okay. Great. Thank you very much.
Thank you. Your next question comes from Kevin Chiang with CIBC. Please go ahead.
Good morning and thanks for taking my questions here and congrats on a strong end to the year. I'm wondering as we hopefully come out of this pandemic here, when you talk to your end customers or potential customers, it feels like there should be some sort of structural change to kind of healthcare logistics industry as a benefit to – supply chain issues are, obviously, content centered. Does that change what people are looking at insourcing versus outsourcing? It seems to make sense to me that that given all the supply chain issues, it makes sense for those insourcing to leave to the experts like you to deal with what's happening.
And then, there was a Wall Street Journal article I think earlier this week about, I think, diagnostics companies may be looking at test kits for other things that COVID-19 might have opened up household testing for a broad range of diseases or viruses. Just wondering when you talk to your clients, do they see that as another revenue opportunity that that means more things for you to ship potentially.
There's no doubt, in my opinion, that government is looking at things in a different light. I think they've been overwhelmed and they still are overwhelmed. So, the ability to outsource or certainly get advice from the experts is I think they're more open minded to that than ever before. The question – so, I see that as an opportunity and I think we've proven ourselves as being capable providers, and especially with the fluid nature of what COVID brought us and nobody knew what's going on, we had to react
[indiscernible]
(00:41:44) many times within 24 hours to get product out, working throughout the night, receiving product throughout the night and getting it delivered to public health units that – or mass distribution, mass vaccination facilities. So, those experiences are such that and we see that as opportunistic.
The other aspect, obviously, is – and I think it was talked about before last year was onshoring and I think the investment by government to protect our house per se in the Canadian House and making sure that we are protected with inventory control and where inventories in case the next pandemic comes out. So, I see that planning. And so, that offers more opportunity for logistics and transportation providers in the healthcare industry.
With respect to diagnostics and the likes, and technology and the likes, there's – is there a paradigm that that will have more home healthcare versus going to hospitals, where it's costing more money to stay in a hospital bed than it does to stay at Four Seasons Hotel. Those things are always question and looking at efficiencies and we don't see that changing any time soon. But certainly, as technology changes, the ability to adapt to the home delivery or smaller – it is, will be there. Certainly, the pharmacy channel in this country is strong and probably stronger than it's ever been. I think government looks to the pharmacy channel as a great method of distribution, and case in point, with the influenza vaccine, that's the model that they're going with going forward.
Okay. That's helpful. And if I could just ask on the M&A activity, you've seen a nice pick up here over the past year. Just wondering – and it seems like a lot of it is organic as you mentioned to Walter's question, you don't have a team of people hunting deals down. Just wondering what's driving that? Is this a situation that you've, obviously, performed well during the pandemic and maybe you have the benefit of scale and maybe some of the smaller players are having a more challenging time, despite some of the positive macro tailwinds for healthcare logistics or is there something else driving it that's kind of creating this accelerated M&A activity.
Yeah. No. I think I guess we're rolling with the punches and it's working out really, really well. I'm excited with these acquisitions. I think the – I guess I mentioned the cultural fit, I've had opportunities to meet with all the employees of these companies, and I love that that feel of caring and the like. So, it's – maybe I'm lucky with this, but we're going to keep on doing the same approach, and there's a lot in the pipeline, but there's no need to rush either. I think at the end of the day, we want to do it right. Acquisitions take it time, and the integration I think is – and I'm not talking about integration by stopping two companies together or taking costs out.
I'm talking about cultural fit and how do we make it better for the customers, and I gave the example earlier on with Skelton Canada and ATS collaborating. While they're not – they're still somewhat competitors and they still do their own things, but the ability to have – a perfect example is during the B.C. floods, the Skelton trucks were stuck in the mountain, had to come back to Calgary, and we had to keep these trucks moving. Skelton, before the acquisition, didn't have any facilities across the country. Now, they have access to facilities across and they were able to unload the freight and keep the trucks moving, going back to Toronto to pick up Canadian Blood Services product to go back out west and the like. So, those are the efficiencies that we're looking at and those don't happen overnight. We talk through it and work through it with management, making sure that these companies feel comfortable that what made them successful will continue to make them successful going forward.
One thing, Kevin, that I see as and I don't know, the same way I said this time last year, about Skelton USA that I needed to learn more about the USA is I see opportunities in the USA, but I don't – I haven't identified them yet. But my feel – my gut says that it's – they're there, case in point, FDA has finally started to look at enhancing the regulations in terms of the movement of product and handling of drug product and put more earnest on the distributors, the wholesalers or distributors in the USA. So, all of a sudden, I'm starting to see the same thing that I saw 10 years ago here in Canada and they're looking more at Health Canada and European standards. That's not going to mean that if the company is using a warehouse that's not temperature-controlled and qualified, now they're going to have to. I think that's going to open the doors for other opportunities for, particularly Accuristix and LSU, logistics area. And so, I don't know how that's going to happen, but when the opportunity comes, we'll look at it and we'll approach it the same way that we did with Boyle and Skelton, and now LSU.
That's great color and, obviously, your strategies proved itself out during a very challenging couple of years here. So, congratulations to that and that's it for me. Thank you very much.
Thank you, Kevin.
Thank you. Your next question comes from Endri Leno with National Bank. Please go ahead.
Hey. Good morning. Thanks for taking my questions and congrats on the accomplishments in 2021. I'll start the question – or I'll actually just pick up on your last answer, Michael, on the FDA proposed regulations. Like, what kind of comments do you generally have in there? And you mentioned that they improve your view of the US market, but how does it compare to what the regulations are, for example, where Boyle operates now and would it be more incremental to what's out there, especially Massachusetts and the other state that they're in?
Yeah. The regulations have always been a little bit less in the US, I think I've alluded to that before, and a lot of it has to do with lack of capacity or lack of supply, and it was the same way when Guidelines 0069 first came to Canada, basically the Health Canada suggested that, because Europe was doing it that way and there wasn't the supply, so it's pretty hard to mandate something if you can't provide it. This, interestingly enough, Boyle and Skelton USA have – already have those standards. They've got qualified. Every one of the traders are individually qualified and temperature monitored and security and the likes. And a lot of the companies were using them, because they either, A, saw it coming, or B, the manufacturers, who are the customers, are – many of them are based in Europe.
So, we've gone through a period and the growth in that sector is not necessarily because we've got way more trucks and drivers, because we can't get them unfortunately, but because there's so much demand for services that we're able to price it in such a way and making sure we pay our drivers accordingly. So, the issue is more related to the warehousing versus the transport side of things. It's the AmerisourceBergens and the McKessons of the worlds and the other distributors or 3PL companies that are being used by these pharma customers, and they have to enhance their standards. So, that's where the opportunity in. Accuristix or LSU who are best-in-class already have those standards. The opportunity is there for them, more so than the transport side.
Great. Thank you for the color. It's actually a very good ramp to my other question, as you mentioned capacity in there. DHL recently announced that, I believe, that they're increasing their space by 27% on the healthcare supply chain. Any comment on that, and I'm going to tie in to that question, how do you expect the growth for your existing US operations to develop next year?
Yeah. So, DHL has done it. I think UPS is putting more and more focus on the healthcare logistics side of things as well. And in comparison, we're a small player, but we were a small player – Accuristix was a very small player, a much smaller player 10 years ago. And I think of our attention to detail has – and the people have allowed this company to grow to be where it's at here in Canada. We see the opportunities happening in the US, to what degree, I don't know, but certainly DHL cannot have all that business – secure all that business for UPS. So, I think there's opportunities.
There will be opportunity. I can't really quantify it at this juncture, because it's still very new to me, but certainly having that last mile capability is another advantage that we've had from a visibility standpoint for our customers and controls. In the US, interestingly enough, security is more important than it is in Canada, because the quantities that are moved are sometimes and many times in truckload quantities, so that now you're talking about shipments with millions of millions of dollars of value being transported, and in the US, you have the right to bear an arm.
Thank you. I'll switch gears and last question for me. Are you able to provide any financial metrics from the acquisition of LSU?
We haven't disclosed an awful lot in our public statements at this stage.
Okay. But any in terms of quantum like, 1% to 2% of...
Yeah. I'm sorry, what I would say is that kind of the reverse math engineering that a couple of the analysts have sort of put out there publicly, they're spot on. They're in the range in terms of the accretive EBITDA numbers that we expect to see from LSU
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(00:54:55).
Thank you. Yeah. No, it does. Thank you.
Thank you. Your next question comes from Maggie MacDougall with Stifel. Please go ahead.
Good morning.
Good morning, Maggie.
Taking a bit of a different tack here, I'm just thinking through some of the longer tail risks that are impacting equity markets and a bunch of companies, and would be interested in hearing if you have any insights into any potential impacts in your business from the recent developments in Eastern Europe. I know that about 55% of medications are imported into Russia. I realize you're a domestic player and you tap into the North American market. However, world is a connected place, so thought worth asking the question this morning.
Yeah. I mean, I'll be honest with you, I haven't really thought of it, being a domestic player and – but that would be a question I should be asking our customers' clients. Most of the product that I think are consumed by Canadians are manufactured in the US or some generic in Canada, a lot of it in India, and probably a lot of – most of it in Europe, the Switzerlands of the world and Germany, France and Sweden. But I don't see that – the logistics supply affecting that, but that's a good question.
Okay. And then, you mentioned in your earlier statements that inflation is not behind us, it's ahead of us and we have to deal with it, and I'm sure that applies to your business in many ways. But are there certain areas where you see it's more easy to deal with than others? Is it a simple exercise in price increases or are there other initiatives ongoing to help offset some of the cost inflation you may be experiencing?
Yeah. It's a bit easier on the transportation side, because the contracts are typically on an annual basis, done on an annual basis, and the logistics contracts tend to be more ironclad and thicker in terms of pages
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(00:57:44) and typically sometimes when you're dealing with the multinational manufacturers, you've got – there tends to be it's a bit little tighter, but there's usually – there's always a bit of a CPI index or some type of language that allows us to manage through it. So, there's definitely a lag effect in some of these contracts, but we're dealing with each one of them. And I think, like I said, it's good open communication, it's transparency, it's being able to identify and work with our clients and try to get ahead of it, too. It's not about waiting for the contracts over, it's educating our clients and taking the time and making sure that that's in place.
I'm not – I really don't know where we are, you talk to economists or bank economists and sometimes you get different opinions. But we will – we are adapting to it and I think we started speaking about this last – early last fall, I wouldn't try to get ahead of it and we try to get ahead even with our talent. Part of our business plan this year was arbitrarily giving everybody an increase, including our owner/operators, 5% increase or almost all the employees for all the companies, in some cases, it was higher. Just to get ahead of it, just to making sure that the employees understood that we're not going to wait. Truck can't roll without a driver behind the wheel, that's as simple as that, and the same with our warehouse employees and so on and so forth. So, I would suggest that we're staying on top of it. It's fluid, but we've got the right information and the right data to be able to do it.
Thanks, Michael.
Thanks, Maggie.
Thank you. There are no further questions at this time. Mr. Andlauer, you may proceed.
Thank you very much, everybody, and we appreciate all of you for participating this morning and entrusting us. Have a wonderful day. Stay safe.
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