Boyd Group Services Inc.

Good morning, everyone. Welcome to the Boyd Group Services Incorporated first quarter 2023 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 CDAR's database found at cdar.com. I'd like to remind everyone this conference call is being recorded today, Wednesday, May 10th, 2023. I would now like to introduce Mr. Tim O'Day, President and Chief Executive Officer of Boyd Group Services Incorporated. Please go ahead, Mr. 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. We released our 2023 first quarter results before markets opened today. You can access our news release as well as our complete financial statements and management discussion analysis on our website at boydgroup.com. Our news released 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 end of March 31st, 2023 and provide a general business update. We will then open the call for questions. During the first quarter of 2023, we delivered record sales and adjusted EBITDA, although adjusted EBITDA margins remained below pre-pandemic levels. Demand continues to be strong, with results once again constrained by the tight labor market and accompanying wage pressure. Supply chain disruption continues to normalize, however, sustained levels of high demand continue to result in elevated levels of work and process inventory. While the ability to service demand continues to be constrained by market conditions, new technician training and other initiatives are providing some improved capacity. However, the path to servicing the level of demand requires continuing increases in technician compensation to attract more labor into the industry and company, and this will require continued price increases from our customers. As we address this issue, we will be able to reduce cycle times and increase customer satisfaction levels. During the first quarter, we recorded record sales of 714.9 million, adjusted EBITDA of 84.7 million, and net earnings of 20.8 million. Sales were 714.9 million, a 28.4% increase, when compared to the same period of 2022. This reflects a $23.7 million contribution from 52 new locations. Our same-store sales, excluding foreign exchange, increased by 25.2% in the first quarter, recognizing the same number of selling and production days in the US and Canada when compared to the same period of 2022. Same-store sales benefited from high levels of demand for services, as well as some increase in production capacity related to technician hiring, growth in the technician development program, as well as productivity improvement, although ongoing staffing constraints continue to impact sales and service levels that could be achieved. Sales also increased based on higher repair costs due to increasing vehicle complexity, higher park content and cost, increased scanning and calibration services, as well as general market inflation. Gross margin was 45.7% in the first quarter of 2023, compared to 44.1% achieved in the same period of 2022. Gross margin benefited from improvements in part margins, and parts are once again being sourced from primary suppliers, and the mix of alternative parts continues to move toward historical levels. Increased scan and calibration services also positively impacted gross margins. Labor margins have improved, but continue to be negatively impacted by the tight labor market, which has resulted in continued wage pressure to both retain and recruit staff. Operative expenses for the first quarter of 2023 were $242.4 million, or 33.9% of sales, compared to $191.6 million, or 34.4% of sales, in the same period of 2022. Operating expenses as a percentage of sales was positively impacted by improved sales levels, which provided an improved leveraging of certain operating costs, partially offset by wage and other inflationary increases, as well as increased support costs related to recruitment and training, including the costs associated with the technician development program. Adjusted EBITDA, or EBITDA adjusted for fair value adjustments to financial instruments, and costs related to acquisitions and transactions was $84.7 million, an increase of 57.5% over the same period of 2022. The increase was primarily the result of improved sales levels and gross margin percentage, which also improved leveraging of certain operating costs. Net earnings for the first quarter of 2023 was $20.8 million, compared to 1.6 million in the same period of 2022. Excluding fair value adjustments and the acquisition and transaction costs, adjusted net earnings for the first quarter of 2023 was 21.2 million, or 99 cents per share, compared to 2.1 million, or 10 cents per share, in the same period of the prior year. Adjusted net earnings for the period was positively impacted by increased sales and improvements in gross margin percentage as well as improved leverage of operating expenses. At the end of the period, we had total debt, net of cash, of $1.008 billion, compared to $963 million at December 31, 2022. Debt, net of cash, increased when compared to prior periods, primarily as a result of increased lease liabilities, resulting from location growth, as well as lease renewal activity. During the first quarter of 2023, the company was able to reduce the level of long-term debt held under the revolving credit facility by approximately $8.2 million. During 2023, the company plans to make cash capital expenditures, excluding those related to the acquisition and development of new locations, within the range of 1.6% and 1.8% of sales. In addition to these capital expenditures, the company plans to invest in network technology upgrades to further strengthen our technology and security infrastructure and to prepare for advanced technology needs in the future. The investment expected in 2023 is in the range of $5 to $8 million, with similar investments expected in 2024 and 2025. This investment is expected to begin in the second half of 2023. Looking ahead, we remain focused on the key challenges of building capacity through increased staffing and negotiating sufficient price increases to recover lost margin from continuing wage pressure. We continue to experience high volumes of work and elevated levels of work in process. We continue to benefit from increased scanning and calibration revenue. Thus far in the second quarter, our sales run rate is modestly above that experienced in the first quarter of 2023. And same store sales results have been slightly lower than the growth experienced recently. The balance of 2023, beginning in May and June, has higher comparative periods for which same store sales will be measured against. We remain committed to addressing the labor market challenges so that we can service additional demand. Price increases for labor continue to work their way through the system, market by market and client by client. Modest improvements in labor margins have been experienced. However, price increases have not been sufficient to attract requisite talent into the industry and to offset the wage increases experienced to date. As communicated previously, performance credit-based programs may cause margin to vary on a quarter-by-quarter basis. Our intake location strategy is intended to drive same-store sales growth at times when capacity is not constrained. In late 2022 and in early 2023, we decided to close many intake locations based on the reality of our current capacity constraints. On the other hand, we're pleased to have opened or acquired 30 collision repair locations thus far in 2023 and the pipeline to add new locations and to expand into new markets is robust. Operationally, we're focused on optimizing performance of new locations, as well as scanning and calibration services, and consistent execution of the WOW operating way. Given the high level of location growth in 2021, the strong same store sales growth during 2022, and the combination of same store sales growth and location growth thus far in 2023, we remain confident the company is on track to achieve its long-term growth goals, including doubling the size of the business on a constant currency basis from 2021 to 2025 against 2019 sales. With that, I would now like to open the call to questions. Operator?

Thank you. Ladies and gentlemen, we'll now conduct the question and answer session. If you'd like to ask a question, please press star, followed by one on your telephone keypad. If you'd like to withdraw your question, please press star, followed by two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment for your first question. Okay, and your first question comes from Michael Dumais from Scotiabank. Michael, please go ahead. Morning, Michael.