Boyd Group Services Inc.

Good morning, everyone. Welcome to the Boyd Group Services Inc. Third 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 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 VOID's annual information form and other periodic filings and registration statements. And you can access these documents at CDER's database found at cderplus.ca. I'd like to remind everyone that this conference call is being recorded today, Friday, November 10, 2023. I would now like to introduce Mr. Tim O'Day, President and Chief Executive Officer of Void Group Services Incorporated. 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 Executive Vice President and Chief Financial Officer. We released our 2023 third 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 and nine month periods ended September 30th, 2023, and provide a general business update. We will then open the call for questions. During the third quarter of 2023, Boyd recorded sales of 737.8 million, adjusted EBITDA of 94 million, and net earnings of 20.5 million. For the third quarter, sales were 737.8 million, a 17.9% increase when compared to the same period of 2022. This reflects a $40.5 million contribution from 89 new locations. Our same store sales, excluding foreign exchange, increased by 11.8% in the third quarter, recognizing one less selling and production day when compared to the same period of 2022, which decreased selling and production capacity by approximately 1.6%. Same store sales benefited from high levels of demand for our services, as well as some increase in production capacity related to technician hiring, growth in our technician development program, as well as productivity improvement, although ongoing staffing constraints continue to impact sales and service levels that could otherwise be achieved. Sales also increased based on higher repair costs due to increasing vehicle complexity, increased scanning and calibration services, as well as general market inflation. Gross margin was 45.2% in the third quarter of 2023, compared to 45.1% achieved in the same period of 2022. Gross margin benefited from improved glass margins, higher part margins, and increased scanning and calibration. Client pricing increases resulted in improvement in labor margins. However, margins remain below historical levels. Certain performance-based programs negatively impacted gross margin during the third quarter of 2023 as compared to the same period of the prior year. Operating expenses in the third quarter were 239.9 million, or 32.5% of sales, compared to 209.3 million, or 33.4% of sales, in the same period of the prior year. Operating expenses as a percentage of sales was positively impacted by improved sales levels, which provided improved leveraging of certain operating costs, including salary and wage costs. Adjusted EBITDA or EBITDA adjusted for fair value adjustments to financial instruments and costs related to acquisitions and transactions was $94 million, an increase of 28.7% over the same period of 2022. The increase was primarily the result of new location growth, improved sales levels, and improved leveraging of certain operating costs. Net earnings for the third quarter of 2023 was $20.5 million, compared to $11.9 million in the same period of 2022. Excluding fair value adjustments and acquisition and transaction costs, adjusted net earnings for the third quarter of 2023 was $21.5 million, or $1 per share, compared to $12.1 million, or $0.56 per share, in the same period of the prior year. Adjusted net earnings for the period was positively impacted by increased sales based on same store sales as well as location growth, and improved leveraging of operating expenses, partially offset by increased finance costs and increased depreciation related to property, plant, and equipment. For the nine months ended September 30, 2023, sales totaled $2.2 billion, an increase of $410.8 million, or 22.9% when compared to the same period of the prior year, driven by same-store sales growth of 18.3%, as well as contributions from new locations that had not been in operation for the full comparative period. Gross margin increased to 45.5% of sales, compared to 44.9% in the comparative period. The gross margin percentage benefited from improved glass margins, higher part margins, and increased scanning and calibration. Client pricing increases resulted in improvement in labor margins. However, margins remain below historical levels. Certain performance-based programs negatively impacted gross margin during the first nine months as compared to the same period of the prior year. Operating expenses increased $123.1 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 in addition to inflationary increases. Adjusted EBITDA for the nine months ended September 30th was $274 million compared to $198.8 million in the same period of the prior year. The $75.2 million increase was primarily the result of improved sales levels and gross margin percentage, which also provided leveraging of operating costs. We reported net earnings of $67.6 million compared to $26.8 million in the same period of the prior year. Adjusted net income per share increased from $1.29 to $3.25. The increase in adjusted net earnings per share is primarily attributed to increased sales and improvements in gross margin percentage, as well as improved leveraging of operating expenses. At the end of the period, we had total debt net of cash of just over $1 billion. Debt net of cash increased when compared to the prior quarter, primarily as a result of increased acquisition activity and other growth-related capital expenditures. 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 began in the second half of 2023, but the majority of the capital will be invested in 2024 and 2025. During the nine months ended September 30th, 2023, incremental capital expenditures were incurred relative to the expected range for capital expenditures as a percentage of sales for the full year. These capital expenditures included the purchase of certain real estate assets as well as non-routine replacements and repairs. Excluding the impact of these incremental items, capital expenditures remained slightly above the range of 1.6% to 1.8% of sales. We continue to execute on our growth strategy. During 2023, the company has added 78 single locations while at the same time achieving same-store sales increases of 18.3% for the year thus far. While quarterly same-store sales increases have tapered from those experienced during the period following the pandemic and pandemic-related disruptions, the company has posted average quarterly same-store sales increases of 6.7% and 5.9% over the past five and 10-year periods, respectively. Thus far in the fourth quarter, same-store sales increases are lower than was experienced in the third quarter of 2023, but remain ahead of the five-year same-store sales growth levels. Workforce initiatives continue to have a positive impact on capacity, and ongoing investments in technology, equipment, and training position the company well for continued operational execution. Client pricing increases resulted in improvement in labor margins. However, margins do remain below historical levels. This remains a key area of focus for the company, impacting both the gross margin percentage and adjusted EBITDA margin that can be achieved in the short term. The United Auto Workers strike did not impact Boyd's ability to source parts and complete collision repairs during the third quarter of 2023. Despite the tentative settlements underway, the duration of the strike has resulted in modest delays in supply chain of certain parts, and therefore the completion of a small number of repairs during the fourth quarter thus far. Boyd has made investments in resources to support the growth through single locations, multi-location businesses, or a combination of single and multi-location businesses, giving the company the best flexibility on how to grow. Operationally, Boyd is focused on optimizing performance of new locations as well as scanning and calibration services and consistent execution of the WAO operating way. Given the high level of location growth in 2021 and the strong same-store sales growth thus far in 2022, the combination of same-store sales growth and location growth, Boyd remains confident that 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 21 to 25 against 2019 sales. With that, I'd now like to open the call to questions. Operator?

Thank you. Ladies and gentlemen, we will now conduct the question and answer session. If you have a question, please press star followed by the number one on your touchstone phone. If you wish to cancel your request, please press star two. Your first question comes from Tammy Chen from BMO Capital Markets. Your line is now open.

Hi, good morning. Good morning, Tammy. Thanks for the question. Morning. First, I have a clarification question. The 11.8% same-store sales, is that same-day same-store sales, or is same-day 11.8% plus the 1.6%?

Yeah, it does. It's 11.8% plus the 1.6%.

It's same-day. Okay, understood. And then sticking with the comp, could you talk a bit about some of the key moving pieces in there? So what are you seeing currently with respect to total loss rates? Are they starting to normalize, i.e. go up? How about severity in the repair orders? And I'm also curious about your level of backlogs. Now, I know it's been elevated, but presumably you must have been making progress on that. So if you can talk about those moving pieces, how they've been in this quarter versus the prior one or two quarters.

Yeah, from a repair severity standpoint, we do continue to see increasing repair severity. And I would expect that that will continue over time. If we look at vehicles that are being repaired that are newer vehicles, say the one to three-year-old range, the average repair cost of those vehicles is meaningfully higher than you would see in four to seven and then eight plus. And that's really a reflection. Newer cars are more expensive to repair anyway, but the newer vehicles also have more technology. So I think that's a trend that, like it or not, is more than likely to continue. In terms of total loss rates, I think over the last several quarters, we have seen total loss rates moving up, not to levels that they were previously, but they have increased. In terms of that, maybe as it relates to demand, we've really seen no softening of demand and continue to have robust levels of work available to us in virtually every market. So, you know, we wouldn't anticipate that, you know, modest normalizations of total loss rates would in the near term affect the level of work available to us.

Okay, got it. And then my other question is, I noticed in the press release the language on inorganic growth. touched a bit on multi-shop locations, which is something you haven't really, you know, focused as much on or looked on as much given the bidding environment the last couple of years, and you've been more on the single store location. So I'm wondering, as you look out in the landscape now, is your view changing a bit where perhaps the current rate environment has started to make some of those multi-shop assets more attractive? Thanks.

Yeah, I think that we've always been very interested in acquiring MSOs in addition to our single shop growth strategy. And as is clear from our balance sheet, we have the capital and the cash flow to do that. We just need to make sure those acquisitions are accretive. We felt like pricing in the marketplace had gotten quite high. We will see over the coming quarters whether or not that is normalized to a level that make sense for Boyd. But I think it's important to note that we've done a pretty effective job of deploying capital on the single shop growth strategy. We've opened a significant number of locations to date. We've beefed up our capability and we're delivering on that with our greenfield and brownfield openings. So in terms of our confidence of achieving our 2025 revenue goal, we're quite confident and believe that that can be done even without acquiring multi-shop businesses.

Right. That's it for me. Thank you.

Thanks, Tammy. Your next question comes from Derek Lazard from TD Cowens. Your line is now open.

Yeah, good morning, Tim and Jeff. Solid quarter. Good morning, Derek. Good morning. I want to start maybe in an area that doesn't get a whole lot of attention. In the MD&A, you talk about investments from CapEx into the glass repair business. Maybe you can just talk about the investment there and maybe on the opportunity and outlook you have for that business.

Yeah, I think we've quietly grown our auto glass business in tandem with our collision repair business for many, many years. And the auto glass business is a really important part of our company. I think we see great opportunity over the past, you know, probably a year and a half. Not only have we been growing it organically, and there's some good tailwinds in the auto glass business, including an increasing requirement for calibration of front and forward facing cameras, windshields that we replace. And we've been active with modest acquisitions to enter new markets or build scale in existing markets in Auto Glass. And I would expect that to continue. I'm pretty excited about our Auto Glass business and the opportunity that we have. So we'll continue to work to grow that kind of in tandem with our collision business.

Can you maybe just touch a bit more on sort of the M&A opportunity you see in this space?

Sure. I mean, the auto glass business is dominated by one large player. There are a few mid-sized players such as Boyd, or relatively small, but certainly scaled with the ability to serve our insurance partners more broadly. The rest of the market, though, is highly fragmented with small glass businesses, typically owner-operated small glass businesses, much like the collision repair industry. So we're able to acquire businesses at attractive multiples, build them into and integrate them into our business. And that's part of the formula for growing our glass business. So I think there are a lot of similarities to it, to what we see in our collision business. Interestingly, the auto glass business is also primarily serving our customer's customer. So I'd say it's one of the strengths of Boyd is to be focused on delivering value not by just satisfying the vehicle owner, but also making sure we do it in a way that keeps our insurance companies' costs under control and gives them a reason to give us more of their work. Okay, thanks for that.

And maybe just one last one for me before I re-cue. One of the bigger insurance companies in the U.S., they started rolling out a comprehensive after-markets program across the U.S., I guess it's still pretty early, and I guess we'll take time for a new claim to do your backlog, but just curious what your thoughts on the program rollout are.

We support any program that allows us to repair vehicles more cost-effectively, and the use of alternative parts allows us to do that. Over time, you would expect that to reduce things like total loss rates, but also keep premium costs down for policyholders. So we're supportive of it. The impact on our business is not really very significant. Aftermarket parts will lower our revenue because they do retail for less. They tend to have a higher average margin than an OE part would. So we'll see lower revenue, but higher gross profit margin. But the dollars are probably fairly comparable. So I don't see it having a big impact on our business other than to better serve a client that allows those parts by reducing their cost of repair. Okay. Thanks for that, Tim.

Thank you. Your next question comes from Gary Ho from Desjardins. The line is now open. Hi, Gary. Thanks.

Good morning. Hey, good morning. First one I have, I just want to dig through the gross profit margin expansion a little bit, especially when we look out to 2024. You've received price increases that improve labour margins, but sounded like more is needed. I imagine some are more controllable when you think about margin improvements, such as your scanning and calibration, while others are less controllable as you're asking for your insurance partners for rate increases. I'm hopeful that you can provide a bit more qualitative outlook on how quickly you can recover margins. And second, maybe help us bucket your margin expansion between what's controllable and maybe stuff that's less controllable.

Yeah. Well, first, on the labor side, I think we've made some reasonable progress on the labor side. Part of the offset to that is that we continue to invest in people development with our technician apprenticeship program, which does burden our labor margins significantly. and mitigates the impact of the success we've had with client rate increases. Having said that, we know it's the right thing to do because ultimately building our workforce, the industry doesn't have an adequate supply of technicians, and the only way we're going to solve that problem is by making investments in people. So we've been pretty aggressive with those investments, and we're confident that it's the right thing to do. In terms of which levers and margin we have direct control over, I suppose we could reduce our focus on our technician development program and benefit from that from a margin standpoint in the short run, but it would be a bad long-term decision. On the part side, I would say we continue to better organize ourselves and leverage our scale to both negotiate the best available service and pricing terms that we can with our suppliers, and then concentrate our purchases on those suppliers that have made that commitment to us. We've made good progress on that during 2023 and expect to continue that. So the parts is an area I think that is somewhat or maybe largely within our control that we're working on. Scanning and calibration is another one. We still, and we've talked about this, but we still serve a substantial portion of our calibration needs. with third party sublet services. We do own a calibration business and we've talked over the last few quarters about putting the infrastructure in place this year that will allow us to grow that business in a controlled manner with the proper systems. We have implemented those systems now and we'll be focused on growing our labor calibration capabilities. That has two pretty meaningful benefits. It will lower the cost of repair for our customer because something that's sublet tends to have the highest cost for a customer. For example, if we have to sublet a calibration out to a dealership, we've got to transport the car to the dealership. We're going to pay a premium price to have that calibration done. And then our profit is really a relatively modest markup, but it does drive cost up for our customer. So as we internalize that work, we can reduce cost for our customers. and convert that from a third-party sublet operation to an internal labor operation. So we've got opportunity to convert the business that we're already doing. In addition to that, the calibration market, and you can look at different industry data on this, but the calibration market is expected to grow as more cars with ADAS equipment come into the marketplace. So I would say that labor, we have a lever available to us if we wanted to slow down our investment, but we don't. We should be able to continue to make progress in parts. And I think calibration is a tailwind that we're pretty excited about.

Maybe I'll just add the other element is the mix. You know, the fact that we've got pricing coming through and complexity of parts is driving more parts usage. That can have a little bit of a dampening effect because of the mix element of that. And just getting back to calibration, you know, to the extent that the calibration activity grows, but we have to use sublet, that's you know, it's really the rate that we can internalize it versus the rate that it grows is, you know, the two levers really that can relate to calibration.

That's a good point.

Thanks, Jeff. Great. Thanks for that. My next question, so thanks for your comments on the UAW strike implications. Just curious, you know, if you see any increase side that they received. It might not be a direct comparison, but indirectly the 25% increase workers get over four years, do you see that as a risk at all to your talent pool? Any kind of historical correlation between those workers and your technicians?

We've never observed a historical correlation to that. I think we're competing for others in the automotive aftermarket for that. So we don't have any data that would suggest that that should flow through to our cost structure.

And part of it, those markets are specific markets. They're not broad. It's where the plants are, I think, is a factor, plus the ability that we pay flat rate. It's not directly comparable.

Yeah, and if you look at the wages that our technicians earn, they're actually quite attractive, even today. So what we'd like to make them better, our technicians do very well.

Okay, great. And then maybe I sneak one more in, just a numbers question. Just in your 4Q same-store sales growth today, I guess you're pointing to roughly 6% to 12%. That's a pretty big range. I was wondering if you can narrow that a bit for us on a quarter-to-day basis. Is it on the upper end of that, midpoint perhaps?

You know, the challenge we have is that we're one month into the quarter and fairly early in November. So we're confident that we'll be in that range, but we haven't narrowed it down beyond that. Okay. Those are my questions. Thank you. Thank you.

Next question comes from Brett Jordan from Jefferies. Your line is now open.

Hey, good morning, guys.

Morning, Brett.

On the conversation of sort of diagnostics and the still substantial amounts that's sourced to third parties, could you quantify at all sort of what you pick up on a work, on a job that you're doing your own diagnostics versus outsourcing? Give us some sort of Transposed around what kind of margin benefit bringing in a house could be?

I'm not sure we publicly quantified that, but I would say what we have been saying, Brett, is that right now for that work, we're seeing sublet margins on it, which are our least attractive margin. And when we convert it to internal labor, we would see labor operation, labor margins. So we're shifting it from our lowest margin category to our highest margin category. And we may see some degradation of revenue because we're able to price it better. But it's highly attractive to us.

And then I guess similarly in the auto glass business, When you think about the fragmented market, is the consolidation accelerating because the five-year-old and younger car has got so much technology in the glass, these smaller players can't do it? Or is the hurdle not that great, that they're not really getting forced out of the market?

Well, I think it's early on in that. But I do think servicing a vehicle with a glass replacement that requires technology a static calibration, one that has to be done at a facility. The glass business in the U.S. has been serviced largely by mobile vans for decades. I think we're one of only two countries that the majority of the market is serviced that way. But as we evolve toward more static calibration, those are going to have to be done in a building. So unless a glass company as physical plant capacity. I don't know how they'll be able to do that. They can sublet it to a dealer, although that's quite expensive and inconvenient for the customer. So our strategy has really been a combination of opening some locations for our glass business to service that need, but also partnering our collision and glass businesses together to take advantage of the large footprint that we have on the collision side to also service glass customers. So I think it will be more difficult for smaller players without physical plant to service the needs as it continues to evolve.

Great, thank you.

Your next question comes from Krista Saracen from CIBC. Your line is now open.

Hi, good morning. Thanks for taking my question. Just a little bit more on the margins and the calibration. So as we think out, I guess, kind of through the rest of this decade and you kind of continue to progress on this calibration business and you get the pricing you need from your insurance partners, how should we think about margins? Like, what is the opportunity there? I have to assume that we'd be able to exceed pre-pandemic margins when you bring this business in-house.

We haven't provided any specific guidance on that, but there's no question that as calibration grows, it will be a tailwind for us. We're in the right position because we're servicing the customer, so we have the vehicle, and all we really have to do to capture that revenue and service it with our own labor is build our labor force on the calibration side. Our labor force, there's obviously an equipment need their diagnostic tools and targeting systems. And to the extent that it's done somewhat via mobile or we move technicians between sites, there are mobile vans to move that around. But it's a, I would call it a long-term tailwind opportunity for our business as that continues to progress. And I think we're not in the first inning of that journey right now, but we're not deep into it either.

Okay, great. And as you look to grow that business, are you looking to do that similar to kind of how you've done so already by acquiring these mobile scanning calibration businesses?

You know, we'll consider that. Our founding company or founding business was an acquisition, and we've been growing the footprint of that acquisition expanding from its base and growing into new markets thus far. We were handicapped because we didn't yet have the technology in place to grow it rapidly in a controlled manner. We've solved that problem now. We'll consider, where it makes sense, acquiring assets to grow it more rapidly. But we can grow it organically. But I would say We're open to both organic and acquisitive growth on that segment.

Okay, great. And then maybe just on EVs, and you were talking about total loss rates earlier in the call, but what are you seeing in terms of total loss rates on EVs specifically? We've kind of read a lot in the news lately about how expensive they are to So what are you seeing there and any comments on trends going forward?

I'm not sure I have good data on that, Krista, to tell you. You know, we repair a lot of EVs, although it's still a pretty small portion of the total repairs that we do. So I'm not sure that we have enough data ourselves. We'd probably rely on data from the information providers because they would have, you know, a broader view of the marketplace for that.

Okay, great. Thanks for the comments, and I'll jump back in the queue.

Thank you.

Our next question comes from Steve Hansen from Raymond James. The line is now open.

Good morning, Steve. Good morning, guys. Thanks for the time. Tim, there's been some concerns out there that incremental price increases are going to be harder to get from the insurance carriers. Can you just maybe reinforce your view one way or another as to how you feel about the ability to keep getting price if labor rises?

Well, we've continued to see reasonable levels of price increases from our clients. And in conversations, I would say clients understand that You know, there's going to need to be further increases for us to be able to build a workforce to service them. So while we may not see the rate that we did early on, I would say that I would expect we'll continue to see rate from key insurance clients because the capacity that the industry has is not even close to sufficient to properly service the demand. And length of rental remains limited. Well, it's improved a little bit. It remains very elevated. I think service levels that we're able to provide aren't where we would expect it to be. And the solution to that is to continue to build our labor force, both at Boyd and across the industry. So I think we'll continue to see success. Now, having said that, the pricing pressure and the gap that existed six or seven quarters ago, we don't have the same gap today. When we were receiving price increases a year or five, six quarters ago, the increases that we were getting weren't sufficient to even cover the cost increases that we'd already seen, and we continued to go back. I think at some point, as inflation is under better control, the labor market cools down a little bit, that the need for increases will not be as great, and we'll be able to continue to catch up. You know, our progress on labor margins has been somewhat masked by our continued investment in TDP. And what I think we've tried to communicate in the disclosures is that we've made some progress on labor margin. The progress could have been more had we not had to make investments in our workforce. But we see no alternative but to make the investments that we're making. That's good color.

Thanks for that. And just to follow up, I want to circle back to the MSO piece. One of the trade-offs always with single shops versus larger deals is multiple spread and multiple expectations in the market. Have you seen a noticeable shift in expectations in the market that make the MSO deals more palatable at this point? They're always going to be a premium, of course, but are they coming down into the strike zone, I guess, is the question ultimately.

Yeah. We're happy to pay a premium for a multi-shop business, although I'm pretty pleased with what our team has been able to accomplish with the single shop growth, which has included new market entries where we didn't have a presence and we built our presence up through single shop growth. Northern California would be the most mature example of that where a couple years ago we had no stores and now we have over 20 and we haven't acquired any multi-shop businesses to accomplish that. Our old strategy, Steve, was really based on buying a platform foundational business and then growing from that. So I think we've proved that we can grow in different ways. We do have capital, though. And if we can find attractive multi-shop investments, we will pursue them. And we are willing to pay, you know, certainly a multiple above what we would pay for single shop growth. But we want to make sure it's accretive and makes sense. And we know we can accomplish our current stated growth goal, even without those MSO acquisitions. So I think we're in a great position. Appreciate your time, guys. Thanks.

Your next question comes from Chris Murray from ATB Capital Markets. Your line is now open.

Yeah, thanks, guys. Good morning. Maybe a bit of a theoretical question, but something that has also impacted you in the past and Thinking about the Florida insurance market, there's been a lot of discussion around several insurers starting to move out of the market or changing the way that they're going to cover damage. I'm just wondering if you guys are starting to think of any changes to how you approach the business in areas which are going to be hurricane impacted or where insurers are going to be a little more cautious on a go-forward basis, whether that's having to increase marketing spend to go direct-to-consumer or anything like that. Just any thoughts you may have about how this is shifting.

Yeah, I think the impact of this has less to do on the automotive side than it does on the homeowner side. So I know there have been some pretty public exits from a market like Florida, and I believe in Florida, and somebody would have to confirm this, but I believe that If you write auto and home, you can't exit for home without exiting for auto. So I don't see it. I mean, we've got a property risk in Florida, certainly, because we've got a large presence in a hurricane market like that. But I don't see it really impacting our strategy around auto.

Okay. Just a light check. And then just one other follow-up question. There was a question, and I kind of have the same one, about the capital investment into the glass business. Just a little more, if you can be a little more specific about exactly what that investment actually entails or looks like. Is that for systems and processes that you're alluding to, or is that more for calibration equipment? Just any more color you can give us on exactly where those dollars are going would be great. Yeah.

I would say the investment that we're making in our glass business, in our core glass business, would be both some technology. There is certainly equipment. When you're calibrating vehicles, it requires tools and targeting systems, as well as facilities. We're going to do our best to do that work in collision repair buildings where we have capacity. But our auto glass business does operate in markets that we don't yet serve. in collision, which means we need physical space for our auto glass business. So it's really tools, equipment, technology, and vans because it is still, by and large, a mobile service operation.

But it's safe to say it's not as significant as a collision repair center.

No. I mean, the van is typically the most expensive part of adding auto glass capacity today.

Sure. But I guess the other thing I think about is when you think about greenfield expansion, then when I hear you talk about glass and maybe the fact that you can co-locate and do a little bit of this, does that change your thinking around the economics of greenfield openings as we go into the next few years?

Well, certainly our greenfield design incorporates all of our businesses, including collision glass and calibration. And you've seen us expanding our focus on greenfield and brownfield locations. And we think that's an important part of just preparing the business for the long term to make sure that we have more and more locations that can house all the components of our business. And I think that has the opportunity over time as we evolve that model to enhance returns on the physical plant that we build out.

Okay, that's helpful. Thanks, folks. Thanks. Thanks, Chris.

Your next question comes from Zachary Evershed from National Bank Financial. Your line is now open.

Thank you. Good morning, everyone. Good morning. So maybe just a follow-up on that last question on the physical investments in Greenfields and Brownfields that can hold all three businesses together. Does that impact your decision on real estate ownership at all, or are you still pretty happy with the sale-leaseback model?

We're still happy with the sale-leaseback model. Our focus is to drive ROIC, to do our best to drive up ROIC. And as you know, property investments typically have low ROIC. So we'll continue to do sale-leasebacks on those properties.

Perfect. And then in the quarter where we saw a little bit higher depreciation level, is that just a timing issue on some of those sales?

Yeah, it's primarily timing. There's been a little bit of a buildup over the last few quarters of some of the maintenance capbacks, and so you're seeing a little bit of that coming through, but there is some variability quarter to quarter.

Good, Kelly. Thanks. On the backlog, given how much addressable work there is, is the impact from the strike on parts availability actually affecting the pace of sales at this point in time in Q4, or are you able to efficiently set those aside?

It hasn't had enough of an impact that we're calling it out. I mean, we do have a number of jobs in the company that are not being actively worked on because there's an OE part that's not available, but it's not material and it's nothing like what we experienced during kind of the peak of supply chain disruption. So I'm not overly concerned about it. Could it have a small impact on Q4? It's possible, but I don't think it's anything that we're really concerned about.

Thank you very much. And then just one last one, a bit more speculative. Do you have any comments on right to repair in the U.S. given some progress in some jurisdictions there?

Yeah, there's been some progress on it. I mean, obviously we, we believe in the right to repair it. And interestingly, you know, part of that is access. Part of the concern is the aftermarket having access to the systems and vehicles, uh, and repair procedures. Uh, we have great access to both. I mean, the, we, uh, we have access to always scan tools, uh, if needed for any vehicle that we repair. And we can do that across every one of our locations at Boyd. So we've built technology and access to those systems so that we can properly repair vehicles. We also have access to repair procedures, either through third-party tools or directly with the OEs. So I don't feel like we're handicapped by this right now, but I'm supportive of the aftermarket having access to all the information it needs to properly repair vehicles.

Great, Collier. Thanks. I'll turn it over.

Thanks, Zachary. Next question comes from Michael Dumais from Scotiabank. Your line is now open. Morning, Michael.

Hey, good morning, Tim. Hey, Josh. On operating expenses, so the dollar amount this quarter was actually lower than the amount in Q2, which helped the margin. And I guess if you look back at the last two, three years, this is the first time we see, call it a decent step down quarter on quarter. So I'm wondering what drove that, if there's anything that we can take away from that.

Well, I think the first thing that comes to mind is that one less selling day does have a significant impact on some of our variable costs. And so that's probably one of the reasons. And so because really went backwards on a sales side as well. So other than that, I wouldn't say that I would read into it any more than that.

Okay. Thanks for that, Jeff. And then maybe just turning to your your comment about the five-year average same-store sales growth rate, which I find interesting. And I know you didn't say this specifically, Tim, but I wonder if you're signaling, you know, same-store sales growth trend going forward, you know, given the fact that we'll probably see some inflation, higher parts mix, you know, technician ads, scanning and calibration. So just any discussion around what you highlighted as a historical five-year trend to how we should think about beyond Q4, anything there?

We weren't trying to signal anything specific on that, Michael. I think the average repair cost has gone up. It is related to, at least in part, it's related to vehicle complexity, higher used car prices and vehicle complexity. I mentioned earlier on the call that when we look at newer vehicles, They have a meaningfully higher average repair cost than vehicles that are, say, three to five years old or four to seven years old. So I think there's a trend that is likely not easy to stop. And it's not just the more complex vehicles. It's the shift in the vehicle population away from sedans to SUVs, crossovers, and trucks, which have always had a higher average cost of repair. And so I think that there's just a long-term trend that we're seeing come through in our revenue via the average cost of repair.

I'll leave it at that. Thank you, guys. Thanks, Michael.

Your next question comes from Derek Lessard from TD Cowan. Your line is now open.

Yeah, guys, just a few follow-ups for me. I'm just curious on if there's any margin differences between the glass and auto repair businesses, or are you agnostic between the two?

Glass is a bit seasonal, Derek, but it does have higher gross margins, and it is benefiting from growth and calibration, which has been a positive for margins in our glass business. I mean, they're not wildly different, but You'll notice in our commentary on MD&A over the years that we've frequently commented during the second and third quarters that the glass business has had a favorable impact on overall margins. And glass seasonally has higher revenues in Q2 and Q3, often related to just higher miles driven in those quarters.

Okay. And this may be changing it up a bit. Could you maybe quantify the impact of the performance programs on the gross margin. You called it out, I think, for the last two quarters. How should we think about that going forward?

You're going to see variability quarter to quarter depending on how we perform for our clients. So I don't think that we weren't trying to point out any stark difference. And we've been saying for about as long as I can remember that we will have quarterly quarter to quarter variation in our margin based on performance-based pricing. But it's not something that I would say is different. We had less of it during the peak of the pandemic when we had no revenue, but what we're seeing now is really pretty normal. Okay. And these are tied to the technicians? It's typically tied. It varies depending on the relationship, but it's tied to what metrics our clients tell us is important to them, and it motivates us to focus on what they say is important. Okay, thanks. Thanks, Derek.

Your next question comes from Jonathan Lemaire from Laurentian Bank. Your line is now open.

Good morning. Hi, Jonathan.

Good morning.

Could you update us on the demand situation, Tim? Are you continuing to see demand in excess of capacity across your markets, or are you starting to see any pockets of softer demand?

There's been no change. Demand remains very strong.

As you look to 2024, do you have any visibility as to when we might see production capacity step up again?

I would expect it to be gradual improvement. obviously talk a lot about this, but our strategy around increasing our capacity has four elements to it. Our first is to focus on retention, and we've done a number of different things and continue to do things to drive retention. We've stepped up and have a strong team that works with our operating partners, the HR and operating teams, on recruitment. and we're aggressively recruiting in the market. Third is really development, and that's developing new technicians through our technician development program, which we've talked a lot about over the last few years. And then lastly, and this is one that we had not talked about as much previously but have started to introduce more clearly over the past few quarters, we're looking to drive improved productivity for our existing workforce. And we're doing that through training, process, and technology. And I think all four of those are opportunities for us to gradually improve our productive capacity and service the business that's available to us. But unfortunately, there's not a silver bullet that we can shoot today to solve the problem everywhere, but we're working hard on all four of those key strategies to drive the improvement.

Great. Thanks for your comments.

Thank you. Thanks, Jonathan.

Your last question comes from Sabahat Khan from RBC Capital Markets. Your line is now open.

Great. Thanks and good morning. You provided a little bit of commentary around the expectations from potential targets are high around multiples and price and so forth. But I guess if we think about the current rate environment, you know, is there a potential offset and maybe less competition for some of these assets, particularly from some of the larger platforms? And also competitive environment, whether it's for MSOs or for the one and two shop owners?

Yeah, we find that most of the smaller acquisitions are not competitively bid. So we just have to be, you know, fair with our offer. And we've, you know, obviously we've been very, very successful with that. We do win single shop competitive bidding situations, though, so it isn't like we can't step up and get the job done in a competitive situation. We do and have had a number of those situations. The MSO side, there hasn't been a lot of trading on MSOs over the last several quarters. I'm not sure whether that means that valuations have come down and sellers haven't yet reconciled with that. or if there are other pressures in the marketplace. But we're going to continue to be involved in looking at any asset that we think is a fit into our business and do our best to be competitive to acquire it. But I would still reiterate that we can achieve our growth goals even if that market isn't easily available to us, and we intend on doing that.

And just kind of continuing on that conversation, a couple years ago as we were in the pandemic, maybe coming out of it, some of the larger financial sponsor-backed folks were in a bit of financial constraints. Some were consolidating, and the view was maybe they might be out of the active consolidation space for a bit, I guess. Has that all normalized, or how would you describe maybe the activity levels among some of your competitors out there for assets?

I would say for the industry, the activity levels in 2023 have probably been as low as they've been in quite some time. You know, on the other hand, we've grown on a single shop basis, we've grown more single shops than we have at any time in our history. So I'd say we're different than the marketplace and the marketplace has definitely seen some slowdown and that's likely, you know, people get in their house in order to get ready to grow again. Great. Thanks so much for the call. Okay. Thanks, Abba.

There are no further questions at this time. Mr. Tim O'Day, please proceed with your closing remarks.

Okay. Thank you, Operator, and thanks to everyone once again for joining our call today. We look forward to reporting our fourth quarter and year-end results in March. Have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.