Boyd Group Services Inc.

Please stand by, we're about to begin. Good morning, everyone. Welcome to the Boyd Group Services Incorporated fourth quarter and year-end 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 risk 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 Boyd's Annual Information Form and other periodic filings and registration statements, and you can access these documents at CDER's database found at CDER.com. I'd like to remind everyone that this conference call is being recorded today, Wednesday, March 23, 2022. I would now like to introduce Mr. Tim O'Day, President and Chief Executive Officer of Boyd Group Services. Please go ahead, Mr. O'Day.

Thank you, operator, and good morning, everyone. And thank you for joining us for today's call. On the call with me today is Pat Pappapatti, our Executive Vice President and Chief Financial Officer. We released our 2021 fourth quarter and year-end 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-month period ended December 31st, 2021, provide a general business update and discuss our long-term growth strategy. We will then open the call for questions. On January 2nd, 2020, I was appointed President and CEO of Boyd Group Services Inc., and concurrent with this change, Brock Bulbuck moved into the role of Executive Chair. On December 31st, 2021, our transition plan was completed and Brock retired from his management role. I would like to thank Brock for his many years of dedicated service to Boyd and for the great support he provided during the two-year transition period. I look forward to Brock's continued contributions to Boyd as a member of our Board of Directors. As was previously communicated, beginning 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 U.S. denominated revenues. Financial results in the first half of 2021 showed steady improvement as demand for services began to recover from the COVID-19 pandemic that emerged in March of 2020. However, as demand continued to increase during the second half of 2021 and approached pre-pandemic levels in most of our U.S. markets, Boyd's ability to service this demand was meaningfully impacted by a tight labor market and supply chain disruptions. The collision repair industry is experiencing significant and unprecedented competition for talent, and in particular, a limited pool of qualified technicians and estimators. As a result, Boyd experienced increased wage costs in order to both retain and recruit employees, causing pressure on labor margins and operating expenses. During 2021, we were able to add a record 127 new locations, including 101 locations through acquisition, 10 startup locations, and 16 locations operating as intake centers. Unfortunately, these new locations are also experiencing margin challenges as a result of the tight labor market, wage inflation, and supply chain disruptions, as well as sales per location levels that are below pre-pandemic levels due to capacity constraints. For the year ended December 31, 2021, we reported sales of $1.9 billion, an increase of 19.9% over the prior year, driven by same-store sales increases of 7% and contributions from 154 new locations that had not been in operation for the full comparative period. Gross margin decreased to 44.8% compared to 46% in the comparative period. The gross margin percentage was negatively impacted by reduced parts and labor margins, a higher mix of parts in relation to labor, and these impacts were partially offset by higher mix of glass sales in relation to collision sales. During the second half of 2021, Boyd faced increasing supply chain disruptions. which resulted in a negative impact on gross margins as a higher percentage of parts had to be sourced from non-primary suppliers in order to complete repairs and fewer aftermarket parts were available. 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 part sales in relation to labor. The Canada Emergency Wage Subsidy, or SUES, was put into place on April 11, 2020 and remained in place until October 23, 2021. As was the objective of the program, Boyd continued to employ and incur costs for employees that would have otherwise been furloughed absent the wage subsidy. The recognition of SUES related to direct labor was approximately $4 million in the year ended December 31, 2021. compared to $5.3 million in the prior year. Operating expenses increased $120.9 million when compared to the same period of the prior year, primarily due to the growth in the number of locations, as well as the COVID-19 related cost reductions that impacted the prior year. Operating expenses benefited from the SEWS of approximately $5.8 million as compared to $7.4 million in the same period of the prior year. which helped mitigate incremental COVID-19 indirect wage costs. Operating expenses were negatively impacted by the extraordinarily tight labor market, which as noted, resulted in increased wage costs to both retain and recruit staff. Adjusted EBITDA for the year ended December 31st, 2021 was 219.5 million compared to 220 million in the same period of the prior year. The $0.5 million decrease was primarily the result of lower gross margin percentage and higher levels of operating expenses, which more than offset the incremental impact of location growth. We reported net earnings of $23.5 million compared to $44.1 million in the same period of the prior year. Adjusted net earnings per share decreased from $1.97 to $1.30. The decrease in adjusted net earnings per share is primarily attributed to a lower gross margin percentage and higher levels of operating expenses, which more than offset the impact of incremental location growth. Now, moving on to our Q4 results. During the fourth quarter, we recorded sales of $516.2 million, a 27.9% increase when compared to the same period of 2020. Our same-store sales, excluding foreign exchange, increased by 8.5% in the fourth quarter. The improvement in same-store sales was a result of the continued return of business following the slowdown caused by the COVID-19 pandemic that began in March of 2020. The increase in same-store sales percentage was constrained by production challenges, including technician and administrative staffing capacity constraints, as well as supply chain disruption, which impacted sales levels during the fourth quarter of 2021. Sales growth of $79 million was attributable to incremental sales generated from 131 new locations. Gross margin was 43.5% for the fourth quarter of 2021. compared to 45.8% achieved in the same period of 2020. The gross margin percentage was negatively impacted by reduced parts and labor margins and a higher mix of part sales in relation to labor. During the fourth quarter of 2021, Boyd continued to face supply chain disruptions, which 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 part sales in relation to labor. Operating expenses for the fourth quarter of 2021 were $167.2 million, or 32.4% of sales, compared to 30.9% in the same period of 2020. Operating expenses were negatively impacted by the extraordinarily tight labor market, and fourth quarter operating expenses for both periods benefited from year-end expense accrual reductions as certain expense estimates were firmed up in amounts that were lower than previously estimated and accrued. Adjusted EBITDA, or EBITDA adjusted for fair value adjustments to financial instruments and costs related to acquisitions and transactions, was $57.3 million, a decrease of 5.1% over the same period of 2020. The decrease was primarily the result of lower gross margin percentage and higher levels of operating expenses, partially offset by proceeds from SUES. In addition, adjusted EBITDA for the three months ended December 31st, 2021 benefited from SUES in the amount of approximately $2.3 million. Net earnings for the fourth quarter of 2021 was $4.9 million compared to $16.3 million in the same period of 2020. Excluding fair value adjustments and acquisition and transaction costs, adjusted net earnings for the fourth quarter of 2021 was $5.9 million or $0.28 per share compared to adjusted net earnings of $14.6 million or $0.68 per share in the same period of the prior year. Adjusted net earnings for the period was impacted by lower gross margin percentage and higher levels of operating expenses, as well as location growth. Our new locations are subject to the same labor and supply challenges that 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 year, we had total debt net of cash of $957.7 million, compared to $896.9 million at September 30, 2021, and $538.5 million at the end of 2020. Debt net of cash increased when compared to December 31, 2020, primarily as a result of acquisition activity, including draws on the revolving credit facility, as well as increased seller notes and lease liabilities. Based on the confidence we have in our business, we announced an increase to our dividends by 2.1% to 57.6 cents per share on an annualized basis in Canadian dollars, beginning in the fourth quarter of 2021. This is the 14th consecutive year we've increased dividends to shareholders. During 2022, the company expects to make cash capital expenditures of approximately 1.6% of sales. This excludes those capital expenditures related to the acquisition and development of new locations and the investment in the expansion of the WOW operating way practices through our corporate applications and process improvement efficiency project. During 2021, the company invested approximately $5.6 million in LED lighting in order to reduce energy consumption and enhance the shop work environment. Continued investment in LED lighting will not only provide environmental and social benefits, but also achieve accretive returns on invested capital. Additionally, the company is expanding its while operating way practices to corporate business processes. The related technology and process efficiency project will result in an additional 1 to 1.5 million investment before the project is completed in the second quarter of 2022, and will be expected to streamline various processes as well as generate economic returns after the project is fully implemented. During the year ended December 31st, 2021, the company spent approximately 4.5 million on the WOW operating way expansion to corporate business processes. In November of 2020, we announced our new five-year growth strategy in which Boyd intends to again double the size of our business over the five-year period from 2021 to 2025 based on 2019 constant currency revenues, implying a compound annual growth rate of 15%. During 2021, we were able to add a record 127 new locations, including 101 locations through acquisition, 10 startup locations, and 16 locations operating as intake centers. In the short term, we are primarily focused on addressing the labor shortage for our core business. In the long term, we remain confident in our business model and its ability to increase market share by expanding Boyd's presence in North America through a new location and organic growth from Boyd's existing operations. We are committed to addressing the labor market challenges through initiatives such as our technician development program, and we are working to more than double the number of trainees in the program to help meet our future needs. We continue to increase recruitment support staff to improve lead generation and follow-up, proactively evaluate compensation levels and make appropriate adjustments to ensure the company remains competitive in a rapidly changing environment and drive high levels of execution for onboarding and orientation programs to increase retention. We continue to work with key suppliers to source parts at normal margins, but will continue to use OE parts in place of aftermarket parts when necessary in order to complete repairs for our clients. We have made progress in addressing margin challenges by securing an unprecedented number of rate increases from clients for both labor and paint materials. To date, The vast majority of our clients have increased rates and the level of increase is much higher than we have ever seen historically. However, further increases are required to reflect the current environment so that the industry can attract and retain the talent needed to properly serve our customers and complete repairs on a timely basis. We continue to actively pursue and push for the necessary pricing increases. Given how significantly and rapidly wage costs have increased and the continued tight labor market, it will take some time to achieve all of the needed price adjustments and margins will continue to be impacted in the near term. In addition, as price increases are received, they are applied only to new work so that the work that is already in process or that has been assigned are subject to previous pricing, which delays the pricing benefit. By contrast, Wage increases are immediately realized in our costs, and as a result, it will take time for new rates to be realized and improved gross margin. Thus far, in the first quarter of 2022, the majority of the benefits of the price increases have not been realized. Unlike one year ago, demand for Boyd services is continuing to substantially exceed capacities. The ability to service demand continues to be constrained by labor availability and parts supply chain issues, with the accompanying margin pressure continuing into the first quarter of 2022. During the first quarter of 2022, the Omicron variant negatively impacted capacity constraints with increased levels of absenteeism relative to earlier periods in the pandemic. In addition, the first quarter is burdened by higher payroll taxes that occur early in the year, while the fourth quarter of 2021 benefited from expense accrual reductions as certain expense estimates were firmed up at amounts that were lower than previously estimated and accrued. The Canada employment wage subsidy also ended in the fourth quarter of 2021. As a result, these factors cause operating expenses to be higher in terms of dollars and a percentage of sales compared to the fourth quarter and have a dampening effect on adjusted EBITDA and adjusted net earnings. Throughout 2021, we've increased our focus on ESG and are proud to announce the publishing of our first ESG report this month, which outlines our priority areas in each of environmental, social, and governance pillars. The report reflects our existing efforts to embed sustainability into our organization and sets a baseline for future performance as we strive to deliver against our mission to wow all of our customers with quality work and best-in-class service. We recognize that we have the potential to deliver significant positive impacts to society and the environment. Our ESG report builds on existing strengths to ensure robust environmental, social and governance principles and practices across our company. Our approach is informed by the priorities of our key stakeholders, including our employees, our investors, our customers, and our communities, as well as local and global developments that define the context in which we operate. In summary and in closing, I continue to be incredibly proud of our team, who have adjusted to this new environment and are working hard to position us well for the future. With that, I would now like to open the call for questions. Operator?

Thank you. If you'd like to ask a question, please signal by pressing star 1 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. Once again, press star 1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. And we'll go first to Michael Dumet with Scotia Capital.