Andlauer Healthcare Group Q3 2024 Earnings Report

Andlauer Healthcare Group EPS Results

• Actual EPS: C$0.41
• Consensus EPS: C$0.44
• Beat/Miss: Missed by -C$0.03
• One Year Ago EPS: C$0.36

Andlauer Healthcare Group Revenue Results

• Actual Revenue: N/A
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Andlauer Healthcare Group Announcement Details

• Quarter: Q3 2024
• Date: 11/5/2024
• Time: After Market Closes
• Conference Call Date: Wednesday, November 6, 2024
• Conference Call Time: 8:30AM ET

Andlauer Healthcare Group (TSE:AND) Inc is an investment holding company. It operates in two segments namely Specialized Transportation and Healthcare Logistics. The company generates maximum revenue from the Specialized Transportation segment. Its Specialized Transportation segment provides specialized temperature controlled services to healthcare customers. The company's transportation products include ground transportation, air freight forwarding, and dedicated and last mile delivery. The Healthcare Logistics segment provides contract logistics services for customers, including logistics and distribution, and packaging.

Andlauer Healthcare Group Q3 2024 Earnings Call Transcript

Key Takeaways

• Q3 revenue in Canadian specialized transportation rose 8.5% year-over-year (ex-fuel), with Dedicated & Last Mile up 10.2% and air freight forwarding up 5.1%, while Logistics & Distribution grew 6.8% driven by pharmaceutical and biologics clients.
• Consolidated EBITDA margin reached a 2024 high of 25.9%, within the target 24–26% range, despite a US truckload business drag that reduced Boyle Transportation’s EBITDA by about $1.5 million versus last year.
• US trucking operations are stabilizing after a challenging period, with management focusing on revenue quality, cost control and “high-grading” the business for sustainable profitability in 2025.
• The balance sheet remains strong with a net leverage ratio of 0.74x, $36 million in cash, and ongoing share repurchases (over $8.6 million in Q3) alongside a raised quarterly dividend of $0.11 per share.
• Capital allocation priorities include disciplined tuck-in acquisitions in Canadian healthcare logistics, organic network expansions (new facilities and consolidated narcotics vaults), and potential US clinical-trial logistics deals.

Presentation

[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. 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 risk uncertainties and assumptions that could cause actual results to differ materially from those projected in the forward-looking information. For more information on risk 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.

[Operator]

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 a question-and-answer session, and this call is being recorded on November 6th of 2024. I would now like to turn the conference over to Michael Andlauer. Please go ahead, sir.

[Michael Andlauer, CEO at Andlauer Healthcare Group]

Thank you very much, Chloe, and good morning, everyone. Thank you for joining us today. With me on the call today, I got Peter Bromley, 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 ground 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%.

[Michael Andlauer, CEO at Andlauer Healthcare Group]

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 our 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.

[Michael Andlauer, CEO at Andlauer Healthcare Group]

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 CAD 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 CAD 2.5 million and CAD 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.

[Michael Andlauer, CEO at Andlauer Healthcare Group]

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

[Peter Bromley, CFO at Andlauer Healthcare Group]

Thank you, Michael, and good morning, everybody. Revenue for the healthcare logistics segment totaled CAD 44.1 million, an increase of 4.7% compared with Q3 last year. The increase reflects a 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 a 16.7% decline in our packaging revenue attributable to lower volumes. Revenue in our specialized transportation segment totaled CAD 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 CAD 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.

[Peter Bromley, CFO at Andlauer Healthcare Group]

During the quarter, average diesel prices were approximately 6% lower than Q3 a year ago. Air freight forwarding revenue was CAD 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 CAD 18.8 million, reflecting continued organic growth. Cost of transportation and services was CAD 79.7 million, or 50% of revenue, compared with CAD 79.6 million, or 50.1% of revenue in Q3 last year. A slight increase was in line with higher revenue and lower fuel costs. Direct operating expenses were CAD 25.3 million, or 15.9% of revenue, compared with CAD 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 CAD 23.8 million, an increase of 9.6% from Q3 a year ago.

[Peter Bromley, CFO at Andlauer Healthcare Group]

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 CAD 16.3 million, or CAD 0.41 per share on a diluted basis, compared with CAD 15.3 million, or CAD 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 Accuristix. EBITDA totaled CAD 41.3 million in the quarter, an increase of 5.9% from Q3 last year.

[Peter Bromley, CFO at Andlauer Healthcare Group]

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%-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 CAD 40 million on a revolver to partially finance our recently completed CAD 90 million Substantial Issuer Bid. The CAD 50 million balance was financed by cash on hand. During Q3, we paid down CAD 10 million on our revolving facility. And on July 2nd, we commenced our second NCIB. At September 30th, we bought back and canceled just over 220,000 shares for a total of CAD 8.6 million. At quarter end, we had CAD 25 million outstanding under our term facility and CAD 30 million drawn on our revolving facility with a very conservative net leverage ratio of 0.74 times.

[Peter Bromley, CFO at Andlauer Healthcare Group]

We had cash and cash equivalents of CAD 36 million and working capital of CAD 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, CEO at Andlauer Healthcare Group]

Hey, thanks, Peter. Our low debt level, combined with the continued strong cash generation of our business, has provided 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 CAD 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 buyback 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.

[Michael Andlauer, CEO at Andlauer Healthcare Group]

As we look further to expand our platform, we'll maintain our disciplined approach in 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.

[Operator]

Thank you. I would like to remind everyone, in order to ask the question, please press star followed by the number one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, please press star one to ask the question, and we'll pause for just a moment to allow everyone to signal for questions. Our first question comes from the line of Walter Spracklin from RBC Capital Markets. Their line is open.

[Walter Spracklin, Analyst at RBC Capital Markets]

Thanks very much everybody. Good morning, everyone.

[Michael Andlauer, CEO at Andlauer Healthcare Group]

Good morning, Walter.

[Walter Spracklin, Analyst at RBC Capital Markets]

Yeah, yeah. So I want to look into, 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're kind of up high single-digit historical trend would be any different next year with the outlook you have right now?

[Michael Andlauer, CEO at Andlauer Healthcare Group]

Yeah, good morning, Walter. It's Michael. I would suggest that our business is continuing to stay robust. And if anything, like I said in the last sentence 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 healthcare, we're more in touch and in tune with 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 healthcare 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's always things to do and continuing to improve. So I think we're in a good position.

[Michael Andlauer, CEO at Andlauer Healthcare Group]

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 where we understand best. And I also feel that there are opportunities to expand the platform that we have in Canada.

[Walter Spracklin, Analyst at RBC Capital Markets]

So that was actually a follow-up.

[Michael Andlauer, CEO at Andlauer Healthcare Group]

I feel good about 2025.

[Walter Spracklin, Analyst at RBC Capital Markets]

Okay, and I actually had a follow-on on M&A, and you kind of went into that. So when you mention M&A in healthcare 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've done, and you're doing more and more service into your pharmaceutical customer that you mentioned distribution 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, CEO at Andlauer Healthcare Group]

Yeah. From a transportation 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 were going to focus more on singles and doubles this time around. So I think we're more looking at bunch of 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 logistics sector.

[Walter Spracklin, Analyst at RBC Capital Markets]

Okay. That's great. 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 2025, is there any green shoots at all, or are you seeing capacity kind of tighten up at all, anything on the freight pricing standpoint that's suggesting at all any rebound off the bottom here, or are we kind of bumping along the bottom for a little while?

[Michael Andlauer, CEO at Andlauer Healthcare Group]

Yeah. I used the word trough a bit three 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.

[Michael Andlauer, CEO at Andlauer Healthcare Group]

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-valued and more specialty part of the business and using that equipment for that versus trying to grow at the pace that we were with Boyle and Skelton USA were growing during COVID, so I feel that 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.

[Walter Spracklin, Analyst at RBC Capital Markets]

Okay. That's fantastic. Appreciate the time as always, Michael.

[Michael Andlauer, CEO at Andlauer Healthcare Group]

Thank you, Walter.

[Operator]

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

[Kevin Chiang, Analyst at CIBC]

Hi. Thanks for taking my question here. 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 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 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, CEO at Andlauer Healthcare Group]

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

[Kevin Chiang, Analyst at CIBC]

I have a coworker that just got COVID, so it seems like it's making the rounds again.

[Michael Andlauer, CEO at Andlauer Healthcare Group]

Yeah. And 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, large, largest clients that we distribute for. And during COVID, obviously, everybody was wearing masks, and vaccines 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.

[Michael Andlauer, CEO at Andlauer Healthcare Group]

Q4, typically, because we are in healthcare and most of the product is obviously pharmaceuticals and OTC, to narcotics and all, but we also have a line that is more HABA, health and beauty aids, some cosmetic clients, because we get the convenience 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 you want to buy your wife a perfume or something like that or cosmetics. But ultimately, we do a little bump, 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 at CIBC]

Right. That makes sense. That makes sense. 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%-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 are seeing pressure on, well, 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 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.

[Kevin Chiang, Analyst at CIBC]

It feels like if that normalizes, that would be upset your overall consolidated margin performance.

[Michael Andlauer, CEO at Andlauer Healthcare Group]

Yeah. 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 looked 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 look at Peter's report at the end of the Q, and I said, "What do you mean we didn't grow that much in revenue?" And then I realized that there's a combination of factors. And one of the things is, as our industry gets more robust in Canada, there's more intercompany transactions.

[Michael Andlauer, CEO at Andlauer Healthcare Group]

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 - and I think hopefully I'm clear.

[Kevin Chiang, Analyst at CIBC]

Yeah. No, I get what you're saying. Yeah.

[Michael Andlauer, CEO at Andlauer Healthcare Group]

Yeah. So that combined with the lower fuel in the last quarter will increase, will artificially decrease revenue, but it doesn't affect EBITDA, which 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. Yeah. 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 say we're in the middle of the runway, fairway. I don't know if you've seen my 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.

[Kevin Chiang, Analyst at CIBC]

That makes sense for me. Those are my two. Thank you very much for taking my questions.

[Michael Andlauer, CEO at Andlauer Healthcare Group]

Thank you, Kevin.

[Operator]

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

[Michael Andlauer, CEO at Andlauer Healthcare Group]

You're on mute, Konark.

[Konark Gupta, Analyst at Scotiabank]

Oh, sorry.

[Konark Gupta, Analyst at Scotiabank]

Oh. Can you hear me now?

[Michael Andlauer, CEO at Andlauer Healthcare Group]

Yeah. I hear you.

[Michael Andlauer, CEO at Andlauer Healthcare Group]

Yeah. I got you now. Thanks, Konark.

[Konark Gupta, Analyst at Scotiabank]

Okay. Thanks. Sorry. Yeah. So I wanted to ask follow-up, actually, on Kevin's question, so a little bit differently on Q4. So 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, 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, CEO at Andlauer Healthcare Group]

Yeah. 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 2023, but 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. I think that was the big reason from Q4 2023 to Q4 2022. So it won't be as drastic of an increase as we saw from Q3 2023 to Q4 2023. We'll do that. Yeah.

[Konark Gupta, Analyst at Scotiabank]

Yeah. That makes sense.

[Michael Andlauer, CEO at Andlauer Healthcare Group]

That makes sense. Yeah. Yeah.

[Konark Gupta, Analyst at Scotiabank]

Okay. And in terms of the U.S. business, just maybe a two-part question there, perhaps. One, have you kind of 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, CEO at Andlauer Healthcare Group]

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 health, 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 comments. To me, it's business as usual. Healthcare is one of those commodities that you need, not that you want to, that's not a luxury.

[Konark Gupta, Analyst at Scotiabank]

Yeah. That makes sense. Okay. So just 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, CAD 7 million-CAD 9 million by the end of this year, full year, in the U.S. So just having that trough, you can actually get some growth next year, and then maybe the market or the economy can grow itself. So how should we frame the U.S. growth profile next year? Is it looking like your typical historical growth range, or is it looking incrementally better because of the easy comps?

[Michael Andlauer, CEO at Andlauer Healthcare Group]

Yeah. I think you're bang on, Konark. From my perspective, the one thing we are doing is I'm going to say right-sizing 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 2023, 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.

[Michael Andlauer, CEO at Andlauer Healthcare Group]

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 are starting to really excite me.

[Konark Gupta, Analyst at Scotiabank]

Yeah. That's all from me. Thank you so much for the time. I appreciate it.

[Michael Andlauer, CEO at Andlauer Healthcare Group]

Thank you, Konark.

[Operator]

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

[Tim James, Analyst at TD Cowen]

Thanks very much. Good morning. I was wondering, Michael, if you could talk about any 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, CEO at Andlauer Healthcare Group]

Yeah. 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, a vault is CAD 500,000 or whatever, so some capital cost requirements on that.

[Michael Andlauer, CEO at Andlauer Healthcare Group]

But the paybacks are really good. The 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 them incur large capital costs, more variable cost approach, and we become more efficient. On Innomar with LSU, we're actually moving into a brand new facility. I think it's 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 six different fridge spaces in that area. Now we're going to basically expand our fridge and freezer capacity as we see the biologics and vaccine business growing.

[Michael Andlauer, CEO at Andlauer Healthcare Group]

So those are the areas that we're going to focus on. There are some areas where we're going to expand. In the Maritimes, 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.

[Tim James, Analyst at TD Cowen]

Great. Thank you very much.

[Operator]

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

[Julian Hung, Analyst at Stifel]

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

[Michael Andlauer, CEO at Andlauer Healthcare Group]

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. It's a good business. Is it a focus of mine? No. The learnings I've had on the last mile and understanding the healthcare 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 healthcare.

[Michael Andlauer, CEO at Andlauer Healthcare Group]

I'm passionate about it, whether it be me personally getting involved with donations to hospitals and the likes, so for me, it's become a passion of mine, and I just want to find other opportunities to make the 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 at Stifel]

Okay. Another question. One of your peers, UPS, has been expanding their healthcare capabilities through M&A across Europe. Has there been any word of them doing the same in Canada?

[Michael Andlauer, CEO at Andlauer Healthcare Group]

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

[Julian Hung, Analyst at Stifel]

All right.

[Michael Andlauer, CEO at Andlauer Healthcare Group]

Thanks, Julian.

[Julian Hung, Analyst at Stifel]

Thanks so much for taking the lead.

Participants

Executives

• Peter Bromley, CFO
• Michael Andlauer, CEO

Analysts

• Walter Spracklin, Analyst at RBC Capital Markets
• Julian Hung, Analyst at Stifel
• Tim James, Analyst at TD Cowen
• Konark Gupta, Analyst at Scotiabank
• Kevin Chiang, Analyst at CIBC