Boyd Group Services Inc.

Good morning, everyone, and welcome to the Boyd Group Services Inc. fourth 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 is being recorded today, Wednesday, March 22nd, 2023. I would now like to introduce Mr. Tim O'Day, President and Chief Executive Officer of Boyd 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 is Jeff Murray, our Vice President of Finance and Interim Chief Financial Officer. At the end of 2022, Pat Pappapatti retired from the role of Executive Vice President and CFO. As the search to succeed him continues, we've appointed Jeff Murray as Interim CFO effective January 1, 2023. We believe Jeff's long tenure, skills, and experience will serve us well during this surge period and enable us to carry out our goals and achieve our long-term goals. We released our 2022 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 boitgroup.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, 2022, provide a general business update, and discuss our long-term growth strategy. We will then open the call for questions. In 2022, Boyd was able to achieve record sales and demonstrate resilience in the face of many challenges, including supply chain disruption and an extremely tight labor market with the accompanying waste pressure. We are pleased with the progress we made in 2022, and in particular, the level of same store sales growth and the improved adjusted EBITDA delivered consistently during the last three quarters of the year. We remain focused on our key challenges of building capacity to increase staffing and negotiating sufficient price increases to recover lost margin from waste pressure. With the year ended December 31, 2022, we reported sales of $2.4 billion, an increase of 29.9% over the prior year, driven by same-store sales increases of 19.8% and contributions from 136 new locations that adopted an operation for the full comparative period. The gross margin decreased to 44.7% of sales compared to 44.8% in the comparative period. The prior period included the recognition of Canada Emergency Wage Subsidy, or SUSE, of approximately $4.0 million. The gross margin percentage was negatively impacted by reduced labor and part margins, as well as a higher mix of part sales in relation to labor. During 2022, Boyd faced supply chain disruptions, which resulted in a negative impact on margins. While pricing increased and improvements were made throughout the year, labor margins were negatively impacted by the extraordinarily tight labor market, which continued to result in increased waste costs to both retain and recruit staff. The shortage of labor and increasing vehicle complexity also resulted in a higher mix of parts sales in relation to labor. These negative impacts were partially upset by performance-based credit relief to address the constraints caused by current market conditions and increased scanning and calibration services. Operating expenses increased to $194.1 million when compared to the same period of the prior year, primarily as a result of increased sales based on same-store sales as well as location growth. The prior period includes the recognition of SUEs of approximately $5.8 million. Operating expenses were negatively impacted by the extraordinarily tight labor market, which resulted in increased wage and benefit costs to both retain and recruit staff. also impacting the year ended December 31st, 2022, were increased support costs related to recruitment and training, including costs associated with the technician development program, as well as support costs related to the expansion of the while operating way practices to corporate business processes. Adjusted EBITDA for the year ended December 31, 2022 was $273.5 billion compared to $219.5 billion in the same period of the prior year. The $54 million increase was primarily the result of improved sales levels. Adjusted EBITDA for the year was constrained by technician capacity and was also negatively impacted by wage inflation and supply chain disruptions. In total, adjusted EBITDA for the year ended December 31st, 2021 benefited from the SUSE payment of approximately $9.8 million. We reported net earnings of $41 million compared to $23.5 million in the same period of the prior year. Adjusted net earnings per share increased from $1.30 to $1.97. The increase in adjusted net earnings per share is primarily attributable to increased sales partially offset by the lower gross margin percentage and the higher levels of operating expenses. Now, moving on to Q4 results. During the fourth quarter, we recorded sales of $637.1 million, a 23.4% increase when compared to the same period of 2021. Our same-store sales, excluding foreign exchange, increased by 20.7% in the fourth quarter. Same-store sales benefited from pricing increases and high levels of demand for services, as well as an increase in production capacity related to technician hiring and the growth in the technician development program. Although ongoing staffing constraints and supply chain disruption continued to impact the sales levels that could be achieved during the fourth quarter of 2022. Sales also increased based on higher repair costs due to increasing vehicle complexity, increased scanning and calibration services, as well as general market inflation. Same-store sales in Canada continued to recover, but this recovery continued to be impacted by supply chain disruption, as well as labor capacity constraints in the fourth quarter of 2022. Gross margin was 44.3% in the fourth quarter of 2022, compared to 43.5% achieved in the same period of 2021. Gross margin percentage benefited from pricing increases, including performance-based credit relief to address the constraints caused by the conditions, market conditions, and increased scanning and calibration services. These benefits were partially offset by a higher mix of part sales in relation to labor. Increasing vehicle complexity resulted in a higher mix of part sales in relation to labor. The lower gross margin percentage in the fourth quarter of 2022 relative to the third quarter of 2022 is primarily the result of variability in parts sourcing and pricing, which is resulting in slightly greater part margin variability quarter to quarter. The margin for the year ended December 31st, 2022 is within the normal range. adjusted EBITDA or EBITDA just for fair value adjustments to financial instruments and costs related to acquisitions and transactions was $74.7 million, an increase of 30.4% over the same period of 2021. The increase was primarily the result of improved sales levels. In total, adjusted EBITDA for the three months ended December 31st, 2021 benefited from the SEWS in the amount of $2.3 million. Net earnings for the fourth quarter of 2022 was $14.2 million compared to $4.9 million in the same period of 2021. Excluding fair value adjustments and acquisition and transaction costs, adjusted net earnings for the fourth quarter of 2022 were $14.6 million, or $0.68 per share, compared to adjusted net earnings of $5.9 million, or $0.28 per share, in the same period of the prior year. Adjusted net earnings for the period was positively impacted by higher levels of sales and higher gross margin percentage, partially offset by higher levels of operating expenses. At the end of the year, we had total debt net of cash of $963 million compared to $940.8 million at September 30, 2022, $957 million at the end of 2021. Net of cash increased when compared to December 31st, 2021, primarily as a result of an increase in lease liabilities driven by lease renewal activity. During the year ended December 31st, 2022, the company completed the sale lease back transactions for proceeds of 55.1 million. The increase in startup locations resulted in a buildup of real estate assets. The company's strategy has been to not hold real estate, and the sale and leaseback transactions allow the company to replenish capital for continuing to use these properties. Based on the confidence we have in our business, we announced an increase to our dividends by 2.1% to 58.8 cents per share on an annualized basis in Canadian dollars beginning in the fourth quarter of 2022. This is the 15th consecutive year that we've increased dividends to shareholders. During 2023, we plan to make cash capital expenditures, excluding those related to acquisition and development of new locations, within the range of 1.6% to 1.8% of sales. In addition to these capital expenditures, we plan to invest in network technology upgrades to further strengthen our technology and security infrastructure and prepare for advanced technology needs in the future. This investment is expected in 2023 to be in the range of $5 to $8 million, with similar investments expected in 2024 and 2025. These investments align with our ESG sustainability roadmap to responsibly address data privacy and cybersecurity. In November of 2020, we announced our new five-year growth strategy in which Boyd intends to again double the size of the business over a five-year period from 2021 to 2025 based on 2019 constant currency revenues, implying a compound annual growth rate of 15%. Given the high level of location growth in 2021 and the strong same-store sales growth in 2022, We remain confident that we were on track to achieve our long-term growth goals. Our intake location strategy is intended to drive same-store sales growth at times when capacity is not constrained. In late 22 and early 23, we decided to close many intake locations in the US based on the reality of our current capacity constraints. We plan to increase production location growth during 2023 in relation to 2022. We are pleased to have opened or acquired 17 locations thus far in the quarter, all of which have been single locations, and the pipeline to add new locations and to expand into new markets is robust. We remain focused on our key challenges of building our capacity through increased staffing and negotiating sufficient price increases to recover lost margin from waste pressure. We continue to experience high volumes of work and we are benefiting from increased scanning and calibration revenue. However, there's also been a continued shift of higher mix in parts in relation to labor driven by increasing repair complexity. Thus far, in the first quarter of 2023, same store sales results have been consistent with the growth experienced over the past few quarters. The balance of 2023 will have higher comparative periods for which same store sales will be measured against. Workforce initiatives, such as the Technician Development Program, are having a positive impact on capacity and ongoing investments in technology, equipment, and training position as well for continued operational execution. We remain committed to addressing the labor market challenges so that we can service additional demand through initiatives such as the Technician Development Program. Price increases for labor continue to work their way through the system market by market and client by client. This has resulted in gradual improvement in labor margins. The timeline for when this issue resolves is difficult to predict, but the impact is expected to be less and less as wage increases stabilize and pricing matures. As communicated previously, performance-based pricing programs may cause margin to vary on a quarter-by-quarter basis. Throughout 2022, we made progress on the priority areas in each of the environmental, social, and the governance pillars outlined in our first ESG report published in March of 22. We recognize that we have the potential to deliver significant positive impacts to society and the environment. We look forward to publishing our second ESG report in the coming months. In summary and in closing, I continue to be incredibly proud of our team who have adjusted to the new environment and are working hard to position us well for the future. With that, I would like to open the call for questions. Operator?

Thank you. And to our phone audience joining today, if you would like to ask a question, simply press star and 1 on your telephone keypad. Pressing star and one will place your line into a queue, and we ask that if you're joining today on a speakerphone, please return to your handset prior to pressing star and one to be certain that your signal does reach our equipment. Once again, ladies and gentlemen, that is star and one if you'd like to ask a question. We'll hear first from Chris Murray at ATB Capital Markets. Chris Murray.