Andlauer Healthcare Group Inc

TSX:AND

Good morning. My name is Sylvie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Andlauer Healthcare Group 2024 Fourth Quarter and Year-End 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 in the risks, uncertainties and assumptions related 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 the 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. [Operator Instructions] This call is being recorded on February 27, 2025.

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

Thank you very much, Sylvie, and good day, everyone. Thank you for joining us today. With me on the call, I have our CFO, Peter Bromley. Following my opening remarks, Peter will follow with a more detailed discussion in our Q4 financial results. I'll then provide closing comments and open the line for questions.

Our results for the quarter and the year reflect continued growth in our Canadian specialized transportation network and improved performance of our Logistics and Distribution product line in the second half of the year and a solid fourth quarter for our Packaging Solutions business.

Ground Transportation revenue, excluding fuel, in our Canadian network increased by approximately 6.3% in this fourth quarter. We generated solid growth throughout the year in our Canadian Ground Transportation operations.

After a slow start to the year in our Logistics and Distribution product line largely due to lower volumes in some of our consumer health clients, we started to generate higher revenue from -- pushed by pharmaceutical and biologics clients in Q2, which began to offset the cyclical decline in consumer health product volumes. This trend continued in Q3 when higher volumes from our pharmaceutical and biologics clients more than offsetting lower consumer health product volumes.

In Q4, although we continued to have kind of stabilized consumer health clients, we had increased revenue from both Accuristix and LSU, reflecting a combination of higher overall volumes and planned rate increases, which took effect in that quarter.

Our Packaging Solutions revenue was lumpy throughout the year, but we finished strong with Q4 revenue up 25% year-over-year, resulting in marginal growth for the year. Unfortunately, this growth in our Canadian operations was offset by the continued headwinds in our U.S.-based truckload businesses caused by ongoing rate pressures.

Ground Transportation revenue, excluding fuel, in our U.S. operation was down 17% in Q4 this year compared to Q4 last year. And EBITDA attributable to Boyle Transportation and Skelton USA was approximately $2.5 million lower in Q4 this year compared to Q4 last year.

Well, after thinking last year, this time last year that we were perhaps reaching a trough in the cycle, well, 2024 proved to be a weaker year for this business. Some people kind of refer to it as the Great Freight Recession in industry circles in the U.S., and it's lasted a little longer than the bull-run we experienced during the pandemic when we bought the businesses.

We continue to focus on the revenue quality in our U.S. operation, and as a result, some of our equipments in Q4 remained idle. But we relocated a bunch of our U.S. trailers to Canada -- I think 25 -- to optimize capacity utilization and reducing our CapEx in Canada.

In Q4, we also started to transition in the amalgamation of both Skelton USA and Boyle Transport. Despite our challenges south of the border, our consolidated revenue increased to a record $650.5 million for the year and we maintained our EBITDA margin at 25.3%, in line with our target range of 24% to 26%. That was supported by the positive growth in our Canadian operations.

Our earnings per share for the year increased to $1.58, diluted up from $1.55 on the same basis a year ago. Our share buybacks have had an accretive impact on our earnings per share.

I'll turn it over to Peter now to review our financial results in more detail. Peter?

Thank you, Michael, and good morning, everyone. Revenue for our Healthcare Logistics segment totaled $48.7 million in the fourth quarter, an increase of 10.4% from Q4 last year, reflecting a 9.2% increase in our Logistics and Distribution revenue, which was driven by increased revenue from our Accuristix and LSU clients, as Michael noted, and 25.2% growth in our Packaging revenue.

Revenue in our Specialized Transportation segment totaled $119.6 million, a decrease of 4.3% compared with Q4 a year ago, reflecting the decline in our U.S.-based truckload revenue and lower fuel surcharge revenue, partially offset by organic growth in each of our Canadian specialized transportation product lines.

Ground Transportation revenue for the quarter was $108.8 million, down 4.3% compared with Q4 last year, reflecting the continued challenging conditions in our U.S. operations and lower fuel surcharge revenue, partially offset by organic growth in our Canadian operations. Our Ground Transportation revenue for the quarter, excluding fuel, in our Canadian network increased by approximately 6.3% compared with Q4 a year ago.

During the quarter, average diesel prices were approximately 10% lower than Q4 a year ago. Air Freight Forwarding revenue was $8.3 million in the quarter, an increase of 3.3% compared to Q4 a year ago, reflecting increased shipments. Our Dedicated and Last Mile Delivery revenue was up 3.7% in the quarter to $19 million, reflecting continued organic growth.

Cost of transportation and services was $83.5 million or 49.6% of revenue compared with $85.8 million or 50.7% of revenue in Q4 last year. This decrease is in line with revenue and lower fuel costs.

Direct operating expenses were $27.6 million or 16.4% of revenue compared with $25.1 million or 14.8% of revenue in Q4 a year ago. The increase was primarily attributable to growth in our Logistics and Distribution product line.

Operating income for the quarter was $26.7 million, a decrease of 4.7% from Q4 a year ago. The decline was attributable to lower contributions from our U.S.-based truckload businesses, partially offset by organic growth in our Canadian Specialized Transportation, Logistics and Distribution and Packaging product lines.

Net income was $17.5 million or $0.44 per share diluted compared with $18.6 million or $0.44 per share diluted in Q4 last year. The decline in the dollar amount was primarily attributable to lower contributions from Boyle Transportation and Skelton USA. The flat per share amount reflected the positive impact of the share repurchase under our NCIB.

EBITDA totaled $43.6 million in the quarter, a decrease of 2.7% from $44.8 million in Q4 last year. The decline was due to the factors already discussed. EBITDA margin was 25.9% in the quarter compared with 26.5% in Q4 a year ago.

Our balance sheet remains very strong. At quarter-end, we had $25 million outstanding under our term facility and $30 million drawn on our revolving facility with a conservative net leverage ratio of 0.86.

On July 2, we commenced our second NCIB. At the year-end, we bought back and canceled just over 266,000 shares for a total of $10.4 million under that NCIB. And at year-end, we had cash and cash equivalents of $40.5 million and working capital of $62.7 million. So we remain well positioned financially to pursue growth opportunities.

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

Thank you, Peter. Our low debt level combined with our continued strong cash generation of our business has provided us with the financial flexibility to be active in buying back shares, both through our normal course issuer bids and a substantial issuer bid. As Peter noted, we're continuing to buy back stock.

We're also raising our quarterly dividend this quarter to $0.12 per share. We're committed to these value-enhancing initiatives for our shareholders, but I also want to emphasize that the expansion of our platform remains a capital allocation priority for me. We are 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.

While it's difficult to control the timing, we've been actively assessing a number of opportunities to expand our platform. As we do so, we're maintaining our disciplined approach with respect to both financial and operating metrics and our constant focus on better serving our customers and supporting our unique culture with our people and drivers.

I'll now open the line to questions. Sylvie, you may commence the Q&A.

[Operator Instructions] First, we will hear from Konark Gupta at Scotiabank.

This is Eddie filling in for Konark. What drove the rebound in Packaging volume in Q4? And how sustainable is this turnaround?

It was more of an adjustment to the lower clients actually finishing their year-end and more of a transition from Q3 to Q4 in a couple of those clients. But we're seeing a bit of a turnaround. We're actually seeing a bit of momentum from other clients as well and a bit of a pipeline. There's a bit of an appetite for some of this secondary packaging. And the Credo business continues to strive.

That's helpful. And maybe just one more on CapEx. What do you expect for maintenance and growth CapEx this year? And where would this CapEx be focused?

So we continue to focus on our core business, and that's been our strength, that's been our history. It's the most -- it's robust. And we continue to expand our network in Canada as we continue to grow the business. So from a maintenance CapEx, that's critical, keep it fresh. And I don't expect -- I mean, Peter, feel -- please chime in with some numbers, if you wish. But it's pretty much consistent to what last year was.

Yes, that's right. And usually, our split between maintenance and growth CapEx is -- it's kind of 50-50 with the -- if you look in the rear-view mirror, it generally is 50-50. We'll be approximately -- we were $17.6 million in CapEx for 2024. And that number, as Michael said, should be relatively the same. It might -- it will be sub-$20 million in any case for CapEx and generally split between maintenance and growth.

Next question will be from Walter Spracklin at RBC Capital Markets.

Yes, I just got a question -- a couple of questions there on your base businesses and then one on M&A. I know both you, Michael, and Peter both alluded to some of the capacity you have there. So let's start with Canada. Solid -- you've seen the LTL sector in Canada and the U.S. under significant pressure, but your business in Canada is very solid.

Just want to always make sure that's still the -- when you look at 2025, is there any indication that, that should change? Is there any customer migration we should be aware of, mix effects? Anything that would lead your Canadian -- the solid aspect of your Canadian business to not continue the way it really successfully has been over the last couple of years, in other words, high single-digit growth effectively?

Yes. I think from -- my perspective, I think high single-digit growth is attainable. We budget for mid-single-digit growth. And our business -- the neat thing about our business is that we really only have one industry we serve, and that's health care. And that doesn't seem -- from a discretionary spending standpoint, it doesn't -- I was at another one of the conferences in January and I was asked. And I said that our business is somewhat boring. It's predictable. It doesn't have huge spikes unless, obviously, there's a disruption to supply chain. Events like COVID or any type of disruption, sometimes we tend to prosper on that.

But on the health care side, it's very consistent. When we ask these manufacturers their prospects, it seems to be quite consistent. It's usually based on the demographics of our country and it continues to grow. So it may change. I mean, some of the consumer health products might be a little bit more discretionary to a certain extent, but most of it -- and now in light of the increase in biologics and the like, our Logistics and Distribution business is changing somewhat.

But it doesn't -- it's a very robust industry that we serve. So I don't anticipate anything. And I certainly don't -- we haven't forecasted as such and feel very comfortable with our positioning. We've got -- we have happy employees and drivers and we have very satisfied customers based on the feedback that we get from surveys and the like.

So we're in a good place. We're in a good spot. So our base business is solid. And we keep on expanding in certain markets where -- in rural markets, where we finally get the economies of scale to put our own equipment and people in. So we're only getting stronger.

Yes. That's great. I mean that's fantastic. Now moving to the U.S. business, it remains challenged. Tariffs could make it worse. Is this a business that you just leave it alone and just let organic growth or lack of -- just play itself out? Or do you have -- is lack of density an issue? In other words, do you leave it alone? Or could you sell it as a -- it's a nice tuck-in maybe for someone else who would like to grow it or would make the investment to grow it? How do you look at what to do with your U.S. business strategically going forward?

Yes, it sounds like you're listening to some of our management meetings, Walter, with these questions. And we're very open to it. From a tariff perspective, we're not -- we're somewhat insulated because both companies -- on the ground, especially in Canada, we're -- because it's domestic, our businesses are domestic from logistics or transportation or packaging, and the fact that we're handling the same amount of volume. Unless, of course -- I mean, there's no doubt that tariffs are going to affect the health care industry.

But based on your question -- I'll answer your question. The U.S. business is domestic. It's truckload domestic business from manufacturer to wholesaler, wholesaler to other DCs. It's truckload domestic. We do very little trans-border business. And that's a necessity regardless -- if it's manufactured in U.S.A., even with tariffs, you would still have to move it in order to supply the Canadian drug supply. So I don't think tariffs are going to affect.

With respect to the business, it was -- I think it was in Q4 of last year on the earnings call when I suggested that perhaps we're hitting a trough. And it's been ground-hog day for the last 4 quarters. And as you know, because you cover the other transport companies and logistics companies, that the U.S. has really taken a hit. We were a little late to try to adjust. And we focused on quality and we were disciplined with our pricing.

What we were not quick on was adjusting the equipment, the fleet. As they alluded to moving 25 trailers to Canada to -- so we have less maintenance CapEx in Canada for next year. We had a lot of our tractors that were on leases that we had to -- that were parked on the side.

By keeping that discipline, we had less customers. I wasn't going to grow the business for the sake of growing business. So we're taking a bit of a hit because we've had trucks sitting at the fence and had lease payments on these trucks and insurance on these trucks. And so, we had to incur those costs. It affected our margins.

But we made a decision in Q4 to amalgamate, to integrate Boyle and Skelton USA. So we're going through this process in Q4 and Q1 and obviously incurring maybe a little bit more cost. But these are -- it's like a good weeding of a garden. And we will be at probably 15% to 20% less equipment power, but it will be with clients who are -- who look for quality, clients who actually -- interestingly enough, for the first time in 2 years in our last monthly management meeting with HD USA, I actually heard we're actually -- clients are actually accepting increases, these clients, modest increases, but increases. Whereas, the last 2 years, it has been basically, "We're going to pay a lot less."

So we're seeing that. So I think it's adjusting it to the same type of disciplines that we've always had managing a business. And then we'll -- now is it a stand-alone business? Absolutely. Is there -- if somebody comes along and looks at it and makes it attractive and makes it better for the employees, makes it better for the business moving forward, makes it better for the customers than it's worth looking at, then I will look at it. So that's my -- that's our thought process at AHG, which is obviously a lot of the questions that you've asked, we've asked ourselves the same question.

Okay. And last question for me. In M&A, if we're not allocating a lot of capital to the U.S., and as Peter said, you're devoting 50% of your CapEx to growth and that's some of the expansion you talked about in Canada into rural areas. You signaled dividend increase. You signaled buyback. Is that to suggest that we're not looking for -- or there's less opportunity for M&A in Canada given you are fairly a large player in the segments you serve and not really an appetite for going adjacent into adjacent sectors? Or do you see yourself having the cash flow and debt capacity to still, despite those allocations, support potential M&A into adjacent categories?

Yes. I think because of our positioning in the areas that we are in our platform, we're -- the focus is ensuring that the employees and drivers that manage that business are happy and we continue the strong communication and pride in our business and that we take care of our customers. And that's -- but the appetite for me, as I see as I get -- after -- I guess, AHG started in 2009. And the more integrated we are getting into health care, the more -- the appetite for me is to truly expand that network where we can. And I think that will play well for the future of AHG.

So that's our focus. I think there's definitely some tuck-ins in the horizon that we've been working on and -- in the present platform that we have. But I'm also open-minded with expanding the platform. That are areas that are not core to the pharmaceutical, like that's not their core business or anything that's secondary that we can touch and support the manufacturers that we serve.

Next question will be from Justin Keywood at Stifel.

Maybe just to conclude on the growth outlook. It sounds pretty favorable for Canada, not so much for the U.S. Is it fair to say that in 2025, the return to Andlauer's historic organic growth rate, that 4% to 7%, is that achievable?

I think -- when I talked about boring business, I think it's because it's predictable. And I feel strong that we are at that stage. I think the U.S., there's so much of a trough that we're in now. I think that now that the -- I think Q1 we're disrupting it because we're integrating everything. But the business has truly kind of refocused on who we are. The deltas between -- year-over-year are going to be stabilizing. And I anticipate by the end of the year, it will be actually growing, not -- modestly, I might add.

So if you take that away and, Justin, if I look at the comparison year-over-year, '23 to '24, we had $18 million less revenue year-over-year. And that equated to $9 million of EBITDA for AHG year-over-year negative. So that's not going to happen next year. So you combine those 2 operations and then you're -- it's fair to say that you're back to its normalcy.

Okay. Great. Good to hear. And then we noticed the Canadian federal government purchased 500,000 avian flu vaccines. I know Andlauer has the capability to store and distribute such products. Is this a potential opportunity for Andlauer or not that material? Or if you have any comments on that?

Yes, it's definitely an opportunity. I mean, typically, the federal government purchases, but they don't manage it. That's filtered down to the provinces and then it goes from there. So that's -- but it eventually goes through the Andlauer Health Care chain in one form or another. But that's not significant enough.

But to that point, the avian flu vaccines are -- they're kept in cooler space. And that's one area that we've really focused on growth. And our Logistics and Distribution business is growing in that area. We expanded last year in Laval. And that cooler space is already full.

We're building a new facility in Boucherville, where LSU is located, right next door actually, a brand-new facility. And we will have a capacity of a lot more cooler space. It's an area where we're focusing on. We do well. And we'll continue to grow on that. So that's a -- I hope that answers your question, Justin.

Next question will be from Andrew Pikul at National Bank.

Just wanted to ask, you mentioned the Logistics segment specifically saw some benefits from planned rate increases in Q4. Is there anything -- any more like incremental rate increases that you guys expect throughout the first couple of quarters of the year?

Typically, it's year-end getting ready for -- they stagger throughout the year. And on the freight side, it's typically on an annual basis. But it can stagger from customer to customer. It just so happened in Q4 some of our larger customers came due.

And on the Logistics side of things, on the warehousing and distribution part of it, it tends to be multiyear contracts. So it was probably more of a timing thing, Andrew, than anything else. But like I said, it typically is staggered throughout the year.

Okay. Great. And then maybe just quickly going back to the CapEx for the year. You have good color on sort of what you expect. And last quarter, you mentioned some of the specific sort of organic investment opportunities that you saw like with the narcotic vaults and things like that. So maybe just give an update on what you're seeing this year and, I guess, progress on any of those or new growth opportunities that you're seeing?

Yes, it's typically more maintenance CapEx. I referred to the Boucherville. Obviously, there's -- whenever you bring in a new building, you'll have more CapEx required because it has to be validated in such a way that we can move health care products, whether it be narcotics or vaccines or the like.

But that's normal course. The one thing that we have when we looked at our business -- because I try to look 5 years ahead in terms of capacity and the like. And we do have a lot of -- as big as we are in Canada, we still have a lot of capacity in our transportation network. And we've built our Distribution -- our Logistics business in such a way that we'll be good for some years to come.

So it's -- unless we get consumer health clients, which has a lot of volume. But certainly from a capacity of -- whether it be narcotics vaults or cooler space, we're in a good position right now. So there's not going to be significant capital allocation -- new CapEx, I guess, moving forward. Or it will be consistent to what we've always done.

[Operator Instructions] Next, we will hear from [indiscernible] at TD Cowen.

I'm filling in for Tim James this morning. We just have one question. Were there any notable market share wins that you could call out that supported the 9.2% Logistics and Distribution revenue growth in Q4? Or would you say that was more reflective of market growth?

I think it's reflective of market growth. And the consumer -- how that -- it started the year, it was slow. But it wasn't as impactful towards the end of the year. And consumer health is somewhat large volume when you consider pharmaceutical behind-the-counter versus over-the-counter. That's my analogy when I see -- like consumer health is over-the-counter drugs.

So I don't -- Peter, if you can think of something, let me know. But I think it's been a good focus. Some of these contracts that we alluded to came due. And these are multiyear contracts. And sometimes there's a catch-up with some of those contracts that come due. But off the top of my head, I can't think -- Peter, do you have anything in mind?

No, I don't think so. I mean the consumer health business did start off slow, as you said, and started to rebound. It's lumpy for them. It depends on the client, whether it's in shampoo or baby formula. Those are different consumption patterns. But our pharmaceutical and biologic businesses were strong and certain of our consumer health clients rebounded, but others still stayed depressed.

So it's a mixed bag. But overall, it's a blend of volume increases across the board for LSU clients as well as Accuristix. And as we've talked about, some of the rate increases kicking in, in the fourth quarter.

And at this time, Mr. Andlauer, we have no other questions. Please proceed.

Thank you. Thank you for your call. Thanks for your support of Andlauer Healthcare Group. And I'm looking forward to our next update in Q1 of 2025. Bye for now.

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we ask that you please disconnect your lines.