Boyd Group Services Inc.

Everyone, welcome to the Boyd Group Services, Inc. second quarter 2023 results conference call. Listeners are reminded that certain matters discussed on 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 CDAR's database found at www.cdar.com. I would like to remind everyone that this conference call is being recorded today, Thursday, August the 10th, 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, who has joined me for a number of calls as Interim CFO. I'm excited to now have him joining me in the permanent role of Executive Vice President and Chief Financial Officer. We released our 2023 second 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 boygroup.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 six-month period ended June 30, 2023, and provide a general business update. We will then open the call for questions. During the second quarter of 2023, Boyd recorded record sales of $753.2 million, adjusted EBITDA of $95.4 million, and net earnings of $26.3 million. The initiatives put in place to improve throughput and increase capacity along with solid execution have resulted in record sales levels and improved profitability during the second quarter. Our team continues to adapt to challenging market conditions and to deliver results, including doubling the level of adjusted net earnings per share when compared to the same period of the prior year. 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 better serve our customers. For the second quarter of 2023, sales were $753.2 million, a 22.9% increase when compared to the same period of 2022. This reflects a $29.1 million increase from 64 new locations. Our same store sales, excluding foreign exchange, increased by 18.9% in the second quarter, recognizing the same number of selling and production days in both the U.S. 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 continued to impact sales and service levels that could otherwise be achieved. Sales also increased based on high repair costs due to increasing vehicle complexity, increased scanning and calibration services, as well as general market inflation. Gross margin was 45.5% in the second quarter, compared to 45.3% achieved in the same period of 2022. Gross margin benefited from improved glass margins, higher part margins, and increased scanning and calibration. Labor margins were relatively flat, with pricing increases to date not having been sufficient to attract requisite talent into the industry and offset wage increases experienced. Performance-based programs negatively impacted gross margin during the second quarter of 2023 as compared to the same period of the prior year. Operating expenses for the second quarter were $247.3 million, or 32.8% of sales, compared to 205.5 million or 33.5% of sales in the same period of 2022. Operating expenses as a percentage of sales was positively impacted by improved sales levels, which provided improved leveraging of certain operating costs. Adjusted EBITDA or EBITDA adjusted for fair value adjustments to financial instruments and costs related to acquisitions and transactions was 95.4 million, an increase of 32.5% over the same period of 2022. The increase was primarily the result of improved sales levels and improved leveraging of certain operating expenses. Net earnings for the second quarter of 2023 was 26.3 million, compared to 13.3 million in the same period of 2022. Excluding fair value adjustments and acquisition and transaction costs, Adjusted net earnings for the second quarter of 2023 was $27 million or $1.26 per share compared to $13.6 million or $0.63 per share in the same period of the prior year. Adjusted net earnings for the period was positively impacted by increased sales and improved leveraging of operating expenses. For the six months ended June 30, 2023, sales totaled $1.5 billion and an increase of $298.6 million, or 25.5%, when compared to the same period of the prior year, driven by same-store sales growth of 21.9%, as well as contributions from new locations that had not been in operation for the full comparative period. Gross margin increased to 45.6% of sales compared to 44.7% in the comparative period. Gross margin percentage was positively impacted by improved part margins, along with increased scanning and calibration services. Labor margins have improved. However, pricing increases to date have not been sufficient to attract the requisite talent into the industry and offset the wage increases experienced. Performance-based programs negatively impacted gross margin during the first six months of 2023 as compared to the same period of the prior year. Operating expenses increased by $92.5 million when compared to the same period of prior year, primarily as a result of increased sales based on same-store sales growth as well as location growth in addition to inflationary increases. Adjusted EBITDA for the six months ended June 30th was $180.1 million compared to $125.8 million in the same period of the prior year. The $54.3 million increase was primarily the result of improved sales levels and gross margin percentage, which also provided improved leverage of certain operating costs. We reported net earnings of 47.1 million compared to 14.9 million in the same period of the prior year. Adjusted net earnings per share increased from 73 cents to $2.25. The increase in adjusted net earnings per share primarily attributed to increased sales and improvements in the gross margin percentage, as well as improved leverage of certain operating expenses. At the end of the period, we had total debt net of cash of just over $1 billion. Debt net of cash decreased when compared to the prior quarter, primarily as a result of increased cash flow from operations. During the second quarter of 2023, the company was able to reduce net the level of long-term debt held under its revolving credit facility net of financing costs from 184.1 million to 174.5 million. During 2023, the company plans 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, The company plans to invest in network technology upgrades to further strengthen our technology and security infrastructure and prepare for advanced technology needs in the future. The investment in the second half of 2023 is expected to range from $5 to $6 million, with investments expected in 2024 and 2025 ranging from $5 to $9 million per year. We remain focused on the key challenge of building capacity through increased staffing, including negotiating sufficient client price increases to attract talent into the industry and our company and recover lost labor margin from wage pressure. Workforce initiatives are having a positive impact on capacity and ongoing investments in technology, equipment, and training position the company well for continued operational execution. Boyd remains committed to addressing the labor market challenges so that the company can service additional demand. Relative to the second quarter, the third quarter of 2023 will have one less selling and production day and will also be negatively impacted by seasonal vacations that have a dampening effect on capacity and sales. Thus far in the third quarter, same-store sales increases are approximately half of what we have experienced during the first six months of 2023. Boyd is pleased to have opened or acquired 57 collision repair locations thus far in 2023, and the pipeline to add new locations and expand to new markets is robust. Operationally, Boyd is 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 strong same-store sales growth and location growth thus far in 2023, Boyd remains confident that the company is on track to achieve its long-term 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, sir. Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, please press star followed by the number one on your telephone keypad. If your question has been answered and you would like to withdraw from the queue, please press star followed by the number two. And if you are using a speakerphone, please lift your handset before pressing any keys. One moment, please, for your first question. Your first question will come from Tammy Chen at BMO Capital Markets. Please go ahead.