Boyd Group Services Inc.

Good morning, everyone. Welcome to the Boyd Group Services Inc. Third Quarter 2024 Results Conference Call. 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. from those anticipated. in these forward-looking statements. The risk factors that may affect the results are detailed in board's annual information form and other periodic filings and registration statements. And you can access these documents at CDAR's database found at cdarplus.ca. I'd like to remind everyone that this conference call is being recorded today, Tuesday, November 5th, 2024. And I would like to introduce Mr. Tim O'Day, President and Chief Executive Officer of Board Group Services. Please go ahead, sir.

Thank you, Operator. I apologize for the delay, everyone, and good morning, 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, and Brian Kaner, our President and Chief Operating Officer. We released our 2024 third quarter results before markets opened today. You can access our news release as well as our complete financial statements and MD&A on our website, employedgroup.com. Our news release, financial statements, and MD&A have also been filed on CDAR Plus this morning. On today's call, we'll discuss the financial results, but the three and nine-month periods ended September 30, 2024, and provide a general business update. We will then open the call for questions. Third quarter results continue to be impacted by low claims volumes. Although we're disappointed with the third quarter results, the company continues to perform better than the industry and continues to be well positioned for the future. During the third quarter of 2024, Boyd recorded sales of $752.3 million, adjusted EBITDA of $80.1 million, and net earnings of $2.9 million. During the third quarter, the industry experienced higher total loss rates, as well as a deferral in repairs and an increase in non-filed claims, driven, we believe, by significant insurance premium inflation and overall economic uncertainty. Industry sources report a year-over-year decrease in repairable claims of 12.6% for all losses and 9.5% excluding comprehensive claims. Boyd outperformed the industry, posting a year-over-year same-store sales decline of 3.5%, For the third quarter of 2024, sales were 752.3 million, a 2% increase when compared to the same period of 2023. This reflects a $41.3 million incremental contribution from 94 new locations. As mentioned earlier, our same-store sales, excluding foreign exchange, decreased by 3.5%. The third quarter recognized one additional selling and production day, when compared to the same period of 2023, which increased selling and production capacity by approximately 1.6%. Gross margin was 45.7% in the third quarter, compared to 45.2% achieved in the same period of 2023. Gross margin percentage benefited from increased internalization of scanning and calibration, improved performance-based pricing, and improved glass margins, partially offset by reduced labor margin and part margins. Labor rate increases have added to sales and gross profit dollars. However, margins remain below historical levels. Gross margins are within the normal historical range for mix and margin changes period to period. Operating expenses for the third quarter of 2024 were $263.4 million, or 35% of sales, compared to 239.9 million, or 32.5% of sales in the same period of 23. Operating expenses as the percentage of sales was significantly impacted by the decline in same-store sales and new locations, which contributed sales but with an operating expense ratio that was higher than the operating expense ratio of same stores. Although operating expenses as a percentage of sales was positively impacted by reductions in staffing made to better align with current levels of demand, as well as reduced incentive compensation and recruiting costs, these impacts were more than offset by the fixed costs on existing and new locations. On a sequential basis, operating expenses as a percentage of sales increased from 34.1% to 35%, from the second to the third quarter of 2024. During this period, operating expenses as a percentage of sales was significantly impacted by the decline in sales on a quarter-over-quarter basis. Adjusted EBITDA or EBITDA adjusted for fair value adjustments to financial instruments and costs related to acquisitions and transactions was 80.1 million, a decrease of 14.7% over the same period of 23. The decrease was primarily the result of a decline in repairable claims, which resulted in same-store sales declines and a high ratio of operating expenses as a percentage of sales. Net earnings for the third period of 24 was $2.9 million compared to $20.5 million in the same period of 23, excluding fair value adjustments and acquisition and transaction costs. Adjusted net earnings for the third quarter of 24 was $3.2 million, or $0.15 per share, compared to $21.5 million, or $1 per share, in the same period of the prior year. Net earnings and adjusted net earnings for the period was negatively impacted by the decrease in adjusted EBITDA, as well as increased depreciation expense and increased finance costs. Appreciation and finance costs were negatively affected by investments in growth and investment in network technology upgrades during a period of lower sales and adjusted EBITDA. For the nine months ended September 30th, 24, sales totaled 2.3 billion, an increase of 112 million or 5.1% when compared to the same period of the prior year, driven by 152.4 million in incremental contributions from 142 new locations that had not been in operation for the full comparative period. Our same store sales, excluding foreign exchange, decreased by 1.8% for the nine months ended September 30th, 24, recognizing one additional selling and production day when compared to the same period of 23, which increased selling and production capacity by approximately half a percent. Gross margin decreased to 45.4% of sales compared to 45.5% in the comparative period, while gross profit increased to $1,051,000,000 from $1,003,000,000 compared to the same period of the prior year. Gross profit increased as a result of increased sales due to location growth when compared to the prior period. Gross margin percentage decreased due to several factors, including lower contributions from a greater number of new locations and laboring margins which remained below historical levels. These negative impacts were partially offset by the benefit of increased internalization of scanning and calibration, improved glass margins, and improvements in performance-based pricing. Operating expenses increased 70.7 million when compared to the same period of the prior year, primarily as a result of location growth and inflationary increases. Operating expenses as a percentage of sales were 34.5% for the nine months ended September 30th, which compared to 33.1% for the same period of 23. Operating expenses as a percentage of sales was negatively impacted by the decline in same-store sales and new locations, which contributed sales with a higher operating expense ratio. Adjusted EBITDA for the nine months ended September 30, 24, was $251.4 million, compared to $274.0 million in the same period of the prior year. The $22.6 million decrease was primarily the result of declines in comparable claims for services, which resulted in same-store sales declines and a high ratio of operating expenses as a percentage of sales. Although operating expenses that's pursuing sales was positively impacted by reductions in staffing made to better align with current levels of demand, as well as reduced incentive compensation and recruiting costs, these impacts were more than offset by the fixed costs on existing and new locations. The reported net income of $22.1 million compared to $67.6 million for the same period of the prior year. Adjusted net earnings per share decreased from $3.25 to $1.15. The decrease in adjusted net earnings per share is primarily attributed to the decrease in adjusted EBITDA as well as increased finance costs and increased depreciation related to location growth, including additional held real estate assets, and our investment in network technology upgrades. At the end of the period, we had total debt net of cash of $1.2 billion. Debt net of cash before lease liabilities increased from $399.2 million at December 31, 2023 to $486.2 million at September 30, 2024. Debt net of cash before lease liabilities increased as a result of location growth including increased real estate assets that pertain to startup locations. The company's strategy has been not to hold real estate except where it is necessary for growth opportunities. Certain startup locations necessitate short-term holding of real estate until the build is complete and operations have begun. During the third quarter of 24, the company completed sale-leaseback transactions for proceeds of $31.9 million. The sale-leaseback transactions allow the company to replenish capital that can be redeployed to further grow the business. At September 30, 2024, the company has held real estate assets totaling $66.3 million. During 2024, the company plans to make cash capital expenditures, excluding those related to network technology upgrades and acquisition and development of new locations, within the range of 1.8 to 2.8 to 2.0% of sales. Excluding these expenditures, the company spent approximately 52.1 million or 2.2% of sales on capital expenditures during the nine months ended September 30th, 2024. The company spent 45.1 million or 2% of sales on capital expenditures for the same period of 23. The current rate of capital expenditures as percentage of sales has been trending above these percentages due to the decreased level of sales that the business is currently generating. The current industry and market conditions are continuing to impact demand for services thus far in the fourth quarter, which has resulted in same-store sales experience in line with third quarter results. Similar to the third quarter, The fourth quarter has also been modestly impacted by hurricane activity. In this challenging environment, the company continues to focus on maximizing value to customers and shareholders through initiatives to improve controllable metrics, including sales, with a focus on improving capture rates, leveraging insurance company relationships, and adding and expanding fleet relationships. Boyd is committed to improving gross margin through initiatives such as the internalization of scan and calibration services, executing on Boyd's repair-first strategy, and focusing on the use of cost-effective alternative parts, which also delivers strong value by lowering repair costs for the company's customers. While management took a number of cost-related actions during the third quarter, the continuing softer level of demand has caused us to further examine the company's cost structure as well as cost-saving initiatives to drive improvement in operating expenses as a percentage of sales, and we are confident opportunities exist. The sales and gross margin initiatives, along with a heightened focus on and a full review of Boyd's operating expenses, will help mitigate the impact of the current environment and put Boyd in the best possible position if conditions improve. On a year-to-date basis, Boyd has added 41 new locations. In the current negative claims environment, Boyd has placed additional focus and attention on the core business. As a result, acquisition activity is running at a slower pace than was the case one year ago. However, Boyd is continuing to identify and pursue opportunities, and the commitment to growth remains. Growth through startup locations is also continuing. In spite of the longer development cycle, ramp-up period, and additional initial capital investment required when compared to single shop locations. Startup locations offer a number of advantages, and as a result, the company plans to continue increasing the proportion of growth using this approach. While the company has been successfully executing on Boyd's long-term growth goals, the current year has brought with it some unanticipated economic and industry conditions. The company is focused on increasing value to our customers and shareholders and has consistently performed above industry with a focus on emergence from these conditions in a strong position. In spite of the initiatives in place, current market conditions may cause a slight delay in Boyd achieving its long-term goal of doubling the size of the business on a constant currency basis, from 2021 to 2025 against 2019 sales. Management remains firmly committed and cautiously optimistic that the company will achieve its long-term goal. In the long term, management remains confident in its business model and its ability to increase market share by expanding its presence in North America through strategic acquisitions alongside organic growth from Boyd's existing operations. Accretive growth will remain the company's long-term focus, whether it's through organic growth, new store development, or acquisitions. The North American collision repair industry remains highly fragmented and offers attractive opportunities for industry leaders to build value through focused consolidation and economies of scale. As a growth company, Boyd's objective continues to be to maintain a conservative dip-down policy that will provide the financial flexibility necessary to support growth initiatives while gradually increasing dividends over time. The company remains confident in its management team, systems, and experience. This, along with a strong financial position and financial options, positions void well for success in the future. With that, I would now like to open the call to questions. Operator?

Thank you, sir. Ladies and gentlemen, if you do have a question, please press star followed by one on your touchtone phone. You will then hear a prompt acknowledging that your hand has been raised. And if you wish to decline from the polling process, please press star followed by two. And if you're using your speakerphone, you'll need to lift the handset first before pressing any keys. Please press star one now if you have any questions. And your first question will be from Sabat Khan at RBC Capital Markets. Please go ahead.