Boyd Group Services Inc.

Good morning, everyone. Welcome to the Boyd Group Services Inc. Third Quarter 2021 Results Conference Call. Listeners are reminded that certain matters discussed in today's conference call or answers that may be given to questions asked could constitute forward-looking statements that are subject to risks and uncertainties related to Boyd's future financial or business performance. Actual results could differ materially from those anticipated in these forward-looking statements The risk factors that may affect results are detailed in the BOID's annual information form and other periodic fillings and registration statements. And you can access these documents at the CEDA database found at ceda.com. I'd like to remind you, everyone that this conference call is being recorded today, Wednesday, November 10th, 2021. I would like to introduce Mr. Tim O'Day, President and Chief Executive Officer of BOID Group Services Inc. Please go ahead, Mr. O'Day.

Thank you, Operator. Good morning, everyone, and thank you for joining us for today's call. On the call with me today are Pat Pathpatti, our Executive Vice President and Chief Financial Officer, and Brock Bulbuck, our Executive Chair. We released our 2021 third quarter results before markets opened today. You can access our news release as well as our complete financial statements and management discussion and analysis on our website at BoydGroup.com. Our news release, financial statements, and MD&A have also been filed on CDAR this morning. On today's call, we will discuss the financial results for the three and nine-month periods ended September 30, 2021, and provide a general business update. We will then open the call for questions. As was previously communicated, beginning on January 1, 2021, Boyd is reporting results in U.S. dollars. This change has been made in order to better reflect the company's business activities given the significance of the U.S. denominated revenues. Throughout the third quarter, demand for services exceeded our capacity in all U.S. markets, which resulted in high levels of work in process. Adding and retaining location-level administrative staff and technician capacity to address this constraint Thank you for joining us. In addition to a tight labor market and the slow recovery of demand in Canada, during the third quarter we faced rapidly increasing supply chain disruptions for original equipment and aftermarket parts in both the Canadian and U.S. markets, which quickly resulted in a negative impact on margins as a higher percentage of parts had to be sourced from non-primary suppliers in order to complete repairs. During the third quarter, we recorded sales of $490.2 million, adjusted EBITDA of $51.5 million, and net earnings of $0.4 million. Sales were $490.2 million, a 28.4% increase when compared to the same period of 2020. This reflects a $67.8 million contribution from 121 new locations. Our same-store sales, excluding foreign currency exchange, increased by 10.7% in the third quarter, recognizing the same number of selling and production days in the US and Canada in the third quarter of 2021 when compared to the same period of 2020. Same-store sales growth in Canada was much lower than same-store sales growth in the US. Production challenges, including administrative and technician capacity constraints and supply chain disruption, impacted sales during the third quarter of 2021. Gross margin was 44% in the third quarter of 2021 compared to the 47.2% achieved in the same period of 2020. The gross margin percentage was negatively impacted by reduced parts and labor margins, as well as variability in direct repair pricing and a higher mix of parts in relation to labor. During the third quarter of 2021, Boyd faced rapidly increasing supply chain disruptions for OE and aftermarket parts in both the Canadian and U.S. markets, which quickly resulted in a negative impact on margins as a higher percentage of parts had to be sourced from non-primary suppliers in order to complete repairs. Labor margins were negatively impacted by the extraordinarily tight labor market, which resulted in increased wage costs to both retain and recruit staff The shortage of labor also resulted in a higher mix of parts and part sales in relation to labor. Operating expenses for the third quarter of 2021 were $164.2 million, or 33.5% of sales, compared to $116.8 million, or 30.6% of sales in the same period of 2020. The increase as a percentage of sales was due to capacity constraints and supply chain disruptions, which impacted the sales levels that could be achieved during the third quarter of 2021, as well as the addition of new locations with fixed operating costs, such as property taxes. In addition, the prior period was impacted by wage reductions, which included higher levels of SEWS, reduced management compensation, and lower wages as a result of temporary layoffs. In the third quarter of 2020, Boyd took a cautious approach to bringing back resources as revenues began to grow, which resulted in lower expenses but were not sustainable. Adjusted EBITDA, or EBITDA adjusted for fair value adjustments to financial instruments and costs related to acquisitions and transactions, was $51.5 million, a decrease of 18.9% over the same period of 2020. The decrease was primarily the result of lower gross margin percentage and higher operating expenses. In total, adjusted EBITDA in the third quarter benefited from the SEWS in the amount of $0.5 million as compared to $7.5 million in the same period of the prior year. The amount of the SEWS has decreased as the program phases out, ending on October 23, 2021. Net earnings for the third quarter of 2021 was $0.4 million compared to $15.9 million in the same period of 2020. Excluding fair value adjustments and acquisition and transaction costs, adjusted net earnings for the third quarter of 2021 was $2.4 million or $0.11 per share compared to $16.4 million or $0.76 per share in the same period of the prior year. Adjusted net earnings and adjusted net earnings per share for the period were impacted by lower gross margin percentage and higher levels of operating expenses, as well as location growth. These new locations are subject to the same labor and supply challenges as Boyd is currently facing across its business. These market conditions are impacting the results that can be achieved in the short term, while new location growth has resulted in increased levels of depreciation and Amortization. For the nine-month period ending September 30th, we reported sales of $1.356.5 million, an increase of 17.2% over the same period of the prior year, driven by same-store sales growth of 6.7% or 7.2% on a day's adjusted basis, as well as contributions from new locations that had not been in operation for the full comparative period. Gross margin decreased to 45.3% of sales compared to 46.1% in the comparative period. The gross margin percentage was negatively impacted by reduced parts and labor margins, as well as variability in DRP pricing and a higher mix of parts sales in relation to labor, partially offset by a higher mix of glass sales in relation to collision sales on a year-to-date basis. Operating expenses increased to $78.2 million by $78.2 million from $374 million to $452.5 million when compared to the same period of the prior year, primarily due to growth in the number of locations, as well as the COVID-19 related cost reductions that impacted the second and third quarters of 2020. Operating expenses were negatively impacted by the extraordinarily tight labor market, which resulted in increased wage costs to both retain and recruit staff. Adjusted EBITDA for the nine months ended September 30th, 2021 was $162.2 million compared to $159.6 million in the same period of the prior year. The $2.6 million increase was positively impacted by improved sales levels. In total, adjusted EBITDA in the nine months ended September 30th, 2021 benefited from SUSE in the amount of $7.5 million as compared to $10.8 million in the same period of the prior year. We reported net earnings of $18.6 million compared to $27.9 million in the same period of the prior year. Adjusted net earnings per share decreased from $1.28 to $1.03. adjusted net earnings and adjusted net earnings per share were impacted by lower gross margin percentage and higher levels of operating expenses, as well as location growth. These new locations are subject to the same labor and supply challenges Boyd is currently facing across its business. These market conditions are impacting the results that can be achieved in the short term, while new location growth has resulted in increased levels of depreciation and amortization. At the end of the period, we had total debt net of cash of $896.9 million compared to $671.1 million at June 30, 2021. Debt net of cash increased when compared to the prior periods primarily as a result of acquisition activity, including draws on the revolving credit facility as well as increased lease liabilities. During 2021, the company expects to make cash capital expenditures within the previously guided range of 1.6% to 1.8% of sales. This excludes those capital expenditures related to acquisition and development of new location, the investment in environmental initiatives, such as LED lighting, and the investment in the expansion of the WAO operating way practices through the Corporate Applications and Process Improvement Efficiency Project. During the first nine months of the year, the company has invested approximately $2.4 million in environmental initiatives. These investments will not only provide environmental and social benefits, but they also achieve accretive returns on capital. Additionally, the company is expanding its while operating way practices to its corporate business processes. The related technology and process efficiency project will result in an additional $2 to $2.5 million of investment before the project is complete in the second quarter of 2022. The project will also be expected to streamline various processes as well as generate economic returns once fully implemented. Our third quarter 2021 adjusted EBITDA margin of 10.5% was significantly lower than our historical levels achieved over the last several years and therefore very disappointing. In the U.S., although demand approached pre-pandemic levels, the highly competitive labor market translated into significant wage pressure and labor margin compression as the quarter progressed. Additionally, the early signs of supply chain constraints that we reported in the second quarter got progressively worse as the quarter unfolded and compounded our overall gross margin compression as we needed to source parts and materials from non-primary suppliers along with a higher mix of OEE versus alternative parts, all at lower margins in order to complete repairs and serve our clients and customers. We also experienced a shift in mix to higher part content repairs as our labor capacity constraints necessitated that we schedule out repairs with higher labor and lower part content. In addition to this gross margin depression, our adjusted EBITDA margin decline has been exacerbated by a lack of fixed cost absorption due to lower sales per location than pre-pandemic levels. As we've commented since early this year, in preparation for claim volumes returning to pre-pandemic levels, we brought back the administrative resources needed to effectively operate and manage our business as it recovered from the pandemic, but we have not yet been able to add sufficient technician labor capacity to service the work that is available in the U.S., and we continue to experience a slower recovery in demand in our Canadian business. We have also added more than 160 locations to our network in the past two years which, given market conditions, are experiencing the same gross margin challenges as well as sales per location levels that are below historical levels. We are confident that as we continue to build our revenue, our fixed costs will be in line and result in improving our adjusted EBITDA margins. As a side note, and for competitive reasons, we are going to move to reporting our growth only with our quarterly results. Despite market claim volume in the third quarter approaching but still being below pre-pandemic levels, demand for our services exceeded our labor capacity in all U.S. markets which resulted in high levels of work in process and reduced sales capture rates. Adding and retaining location-level administrative staff and technician capacity to address this capacity constraint has been challenging in an extraordinarily tight labor market, and we have taken specific actions to address this. These actions include investing in and growing our technician development program, increasing our recruitment support staff to improve lead generation and follow-up, proactively evaluating compensation levels and making appropriate adjustments to ensure that we remain competitive in a rapidly changing environment, and driving high levels of execution for our onboarding and orientation programs to increase retention. These are making a difference, but have resulted in increased wage costs to both retain and recruit resulting in near-term pressure on labor margins and operating expenses. Additionally, we completed the implementation of the WOW operating way human resource systems during the quarter and are beginning to leverage these new processes. Historically, Boyd and the industry have recovered labor cost increases through selling rate increases from clients. However, to retain and recruit in the current labor environment, Thank you for joining us. to achieve all of the needed price adjustments and margins may therefore continue to be impacted in the near term. However, we are moving with a great sense of urgency on this matter. In the meantime, we are not relying solely on these key client price increases. Given our excessive levels of work, we are endeavoring to prioritize our production toward higher margin business as well as raising prices where possible and suspending business relationships with a few lower margin clients that are not willing to increase pricing in order to better serve our core clients and accelerate our margin recovery efforts. We believe that these actions will result in our labor margins returning to historical levels. However, this may take several quarters. Long-term solution to the staffing shortage is through internal training and development programs. We have strengthened our people development processes with a number of formal training programs, including our technician development program, which we assess as being industry leading. While we suspended this program during the pandemic, we have been successful at growing this program during the past nine months and have recently committed to growing it further by doubling the number of trainees in the program to help meet our future needs. We are very pleased with this program, but the costs associated with it negatively impacts margins for several quarters, primarily due to the unproductive wage costs during the first several months of a trainee's employment. As we achieve a balance of TDPs across experience levels, from entry level to near graduation, the margin impact will be softened, and we are confident that the long-term benefit significantly outweighs the short-term costs. We believe that the part availability and related margin challenges related to supply chain disruption is transitory and will normalize as the underlying manufacturing and distribution issues are resolved. In the meantime, we are working with key suppliers to source parts at normal margins, but will continue to use non-primary suppliers when necessary to complete repairs for our clients and customers. We also expect our sales mix to return to historical levels as we build our labor capacity. Though these actions outlined, along with the normalization of the supply chain issues, we expect our revenue and throughput, as well as gross margin and EBITDA margins, to recover in the coming quarters. However, the actions noted are unlikely to have a material impact on the fourth quarter. We are committed to driving the need to change aggressively. Despite these near-term market challenges, our leadership position, our strong balance sheet, position as well to successfully execute on our plan to double the size of our business by 2025 and deliver attractive returns to our shareholders. During the first quarter of 2022, Boyd intends to publish an inaugural Sustainability Roadmap Report. The Sustainability Roadmap will outline Boyd's ambitions in the areas of environmental, social, and governance matters. This is an important area that will be critical to the position of Boyd and our success well into the future. With that, I would now like to open the call for questions. Operator?

Thank you, sir. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We will now take our first question from Michael Dalmish from Skoda Capital. Please go ahead.