Boyd Group Services Inc.

Good morning, everyone. Welcome to the Boyd Group Services Inc. First Quarter 2022 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 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, May 11, 2022. I would now like to introduce Mr. Tim O'Day, President and Chief Executive Officer of Floyd Group Services Inc. Please go ahead, Mr. O'Day.

Thank you, Operator. Good morning, everyone, and thank you for joining us on today's call. On the call with me today is Pat Pappapatti, our Executive Vice President and Chief Financial Officer. We released our 2022 first 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'll discuss the financial results for the three-month period ended March 31st, 2022 and provide a general business update. We will then open the call for questions. During the first quarter of 2022, we saw strong same-store sales growth in both Canada and the U.S. Demand for Boyd services continued to substantially exceed capacity in all U.S. markets. During the latter part of the first quarter, we experienced some modest recovery of demand for services in Canada as the remaining pandemic restrictions were lifted in most provinces. The ability to service demand continues to be constrained by market conditions including labor availability in the U.S. and parts supply chain issues throughout North America. Early in the first quarter of 2022, Omicron further negatively impacted capacity with increased levels of absenteeism. Throughout the first quarter, we continued to experience cost pressures including wages as well as inflationary increases and certain operating costs. Together, these factors continued to impact the margins that could be achieved in the first quarter of 2022. During the first quarter, we recorded sales of $556.8 million, adjusted EBITDA of $53.8 million, and net earnings of $1.6 million. Sales were $556.8 million, a 32% increase when compared to the same period of 2021. This reflects a $74.6 million contribution from 119 new locations. Our same-store sales, excluding foreign exchange, increased by 14.7% in the first quarter, recognizing one additional selling and production day in the U.S. and Canada when compared to the same period of 2021, which increased selling and production capacity by approximately 1.8%. Same-store sales growth was a result of pricing increases and high levels of demand for services, although ongoing staffing constraints and supply chain disruption continued to impact sales levels that could be achieved during the first quarter of 2022. Gross margin was 44.1% in the first quarter of 2022 compared to 46% achieved in the same period of 2021 with the prior period including the recognition of the Canada Emergency Wage Subsidy of approximately $1.5 million. The gross margin percentage was negatively impacted by reduced parts and labor margins, as well as a higher mix of parts in relation to labor. During the first quarter of 2022, Boyd continued to face supply chain disruptions, which resulted in a negative impact on margin as a higher percentage of parts were sourced from non-primary suppliers in order to complete repairs, and our mix of OE parts relative to alternative parts increased. While pricing increases began to flow through the results in the first quarter of 22, which resulted in a modest incremental improvement of gross margin from the fourth quarter of 2021, labor margins were negatively impacted by the extraordinarily tight labor market, which continued to result in increased wage costs to both retain and recruit staff. The shortage of labor also resulted in a higher mix of cart sales in relation to labor. Operating expenses for the first quarter of 2022 were $191.6 million, or 34.4% of sales, compared to $141.2 million, or 33.5% in the same period of 2021, with the prior period, including the recognition of the SUES, of approximately $1.9 million. 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 first quarter of 2022, as well as inflationary pressures and increased support costs related to the expansion of our while operating way practices to corporate business processes. Adjusted EBITDA or EBITDA adjusted for fair value adjustments to financial instruments and costs related to acquisitions and transactions was $53.8 million an increase of 1.9% over the same period of 2021, with the prior period including the recognition of SUSE of approximately 3.4 million. The increase was primarily the result of increased sales levels from same-store sales growth as well as new location growth. Adjusted EBITDA for the period was impacted by technician capacity due to the tight labor market and the impact of absenteeism due to Omicron during the first quarter. Market conditions, including wage pressure, a tight labor market, and supply chain disruption, are impacting the results that can be achieved in the near term. Net earnings for the first quarter of 2022 was $1.6 million compared to $7.7 million in the same period of 2021. Excluding fair value adjustments and acquisition and transaction costs, adjusted net earnings for the first quarter of 2022 was $2.1 million and John Wysseier. At the end of the period, we had total debt, net of cash, of $970.1 million compared to $957.7 million at December 31, 2021. Debt, net of cash, increased when compared to prior periods primarily as a result of acquisition activity, which resulted in increased lease liabilities. During 2021, the company expects to make cash capital expenditures within the previously guided range of 1.6% of sales. This excludes those capital expenditures related to acquisition and development of new locations. Demand for Boyd services is continuing to substantially exceed capacity, which has resulted in high levels of work in process. The ability to service demand continues to be constrained by labor availability in the U.S. and parts and supply chain issues throughout North America, with the accompanying margin pressure continuing into the second quarter of 2022. Thus far in the second quarter of 2022, the company has experienced and others. Building on the success we achieved in early 2022, Boyd continues to negotiate an unprecedented number of meaningful pricing increases from clients, which contributed to a modest incremental improvement in gross margin percentage from the fourth quarter of 2021 to the first quarter of 2022, with continuing cost pressure impacting the level of margin we've experienced thus far. We are experiencing pricing differences between clients, which is a key area of focus in continuing pricing discussions. Until these differences are addressed, continuing wage pressure has an impact on Boyd's near-term ability to meaningfully improve labor margins. In addition, supply chain disruption is continuing to impact the completion of many repairs, and it has resulted in a continued growth of work in process. As noted in our fiscal 2021 year end reporting, it takes time for pricing changes to flow through results. We believe that supply chain disruption is transitory and will normalize as the underlying manufacturing and distribution issues are resolved. However, the company has not experienced an improvement in these conditions thus far during 2022. Given the record level of acquisition and development activity that took place during 2021 and the impact the current market conditions are having on the business, recent growth activity has been more selective with greater emphasis on brownfield and greenfield development. This does not change our outlook on our long-term growth, but solving for the current business challenges provides a strong platform from which to continue to grow our business. We remain committed to addressing the labor market challenges through initiatives such as our Technician Development Program, including our commitment to more than double the number of trainees in the program to help meet future needs. We are off to a good start and are confident that we will achieve this goal, which will help build our capacity over the long term as TDPs complete the program after 18 months. We continue to increase recruitment support 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 our onboarding and orientation programs to increase retention. In the short term, we are primarily focused on addressing the labor shortage for our core business. There is an urgent need to raise wage rates in order to attract talent to the industry and Client Pricing needs to reflect this market change. Notwithstanding near-term challenges, Boyd remains confident in the business model and the company's plan to double the size of our business on a constant currency basis from 2021 to 2025 against 2019 sales with same-store sales being a primary driver of growth in the very near term. With that, I would now like to open the call to questions. Operator?

Yes, sir. Thank you. And if you would 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 your equipment. Once again, that is star 1 if you would like to ask a question. And we'll take our first question from Michael Dumet with Scotiabank.