Q3 2021 Boyd Group Services Inc Earnings Call
Good morning, everyone welcome to the Boyd Group Services, Inc chart closer 2021 results conference call.
Listeners are reminded that certain matters discussed in today's conference calls are just stop me. If he gets it to questions asked could constitute forward looking statements are subject to risks and uncertainties relationship boyd's future financial or business performance.
Actual results could differ materially from those anticipation that these forward looking statements.
The risk factors that may affect results are detailed at the Boyd's annual information form.
And other periodic fillings and registration statements and you can access. These documents does he just got a base I don't see that.
Dot com.
I'd like to remind you.
Everyone that this conference call is being recorded today Wednesday November 10th 2021.
I would like to introduce Mr. Tim <unk>, President and Chief Executive Officer of Boyd Group Services, Inc. Please go ahead, Mr. A J.
Thank you operator, good morning, everyone and thank you for joining us for today's call.
On the call with me today are Pat that's Patty, our executive Vice President and Chief Financial Officer, and Brook ballpark, our executive chair.
We released our 2021 third quarter results before markets opened today, you can access our news release as well as our complete financial statements and management's discussion and analysis on our website at Boyd group Dotcom, Our news release financial statements and MD&A have also been filed on SEDAR. This morning.
On today's call, we will discuss the financial results for the three and nine month periods ended September 30th 2021 and provide a general business update we will then open the call for questions.
As was previously communicated beginning on January one 2021 Boyd is reporting results in U S. Dollars. This change has been made in order to better reflect the company's business activities given the significance of the U S dominated denominated revenues.
Throughout the third quarter demand for services exceeded our capacity in all U S markets, which resulted in high levels of work in process.
Adding and retaining location level administrative staff and technician capacity to address this constraint has been challenging and an extraordinarily tight labor market exacerbated by Covid related absenteeism.
This has resulted in increased wage cost to both retain and recruit resulting in near term pressure on labor margins and operating expenses.
And in Canada increased slowly and gradually during the third quarter of 2021 as restrictions were eased and removed, but remained well below pre pandemic levels.
In addition to a tight labor market and the slow recovery of demand in Canada. During the third quarter, we faced rapidly increasing supply chain disruptions for original equipment and aftermarket parts in both the Canadian and U S markets, which quickly resulted in a negative impact on margins as a higher.
Percentage of parts had to be sourced from non primary suppliers in order to complete repairs.
During the third quarter, we recorded sales of $490 2 million.
Adjusted EBITDA of $51 5 million and net earnings of <unk> 4 million.
Sales were $490 2 million or 28, 4% increase when compared to the same period of 2020.
This reflects a $67 8 million dollar contribution from 121, new locations. Our same store sales, excluding foreign currency exchange increased by 10, 7% in the third quarter, recognizing the same number of selling and production days in the U S and Canada in the.
Third quarter of 2021 when compared to the same period of 2020.
Same store sales growth in Canada was much lower than same store sales growth in the U S.
Production challenges, including administrative and technician capacity constraints and supply chain disruption impacted sales during the third quarter of 2020 one.
Gross margin was 44% in the third quarter of 2021 compared to the 47, 2% achieved in the same period of 2020.
The gross margin percentage was negatively impacted by reduced parts and labor margins as well as variability indirect repair pricing and a higher mix of parts in relation to labor.
During the third quarter of 2020, one Boyd faced rapidly increasing supply chain disruptions for OE and aftermarket parts in both the Canadian and U S markets, which quickly resulted in a negative impact on margins as a higher percentage of parts had to be sourced from non primary suppliers in order to complete.
Preparers.
Labor margins were negatively impacted by the extraordinarily tight labor market, which resulted in increased wage cost to both retain and recruit staff. The shortage of labor also resulted in a higher mix of parts and parts sales in relation to labor.
Operating expenses for the third quarter of 2021, $164 2 million or 33, 5% of sales compared to $116 8 million or 36% of sales in the same period of 2020.
The increase as a percentage of sales was due to capacity constraints and supply chain disruptions, which impacted the sales levels that can be achieved during the third quarter of 2021 as well as the addition of new locations with fixed operating costs such as property taxes.
In addition, the prior period was impacted by wage reductions, which included higher levels of Suez reduced management compensation and lower wages as a result of temporary layoffs in.
In the third quarter of 2020, Boyd took a cautious approach to bring them back resources have Robyn as revenues began to grow which resulted in lower expenses, but were not sustainable.
Adjusted EBITDA or EBITDA adjusted for fair value adjustments to financial instruments and costs related to acquisitions and transactions was $51 5 million a decrease of 18, 9% over the same period of 2020.
The decrease was primarily the result of lower gross margin percentage and higher operating expenses in total adjusted EBITDA in the third quarter benefited from the Suez and the amount of <unk> 5 million as compared to $7 5 billion in the same period of the prior year.
The amount of the Suez has decreased as the program phases out ending on October 23rd 2021.
Net earnings for the third quarter of 2021 was point 4 million compared to $15 9 million in the same period of 2020.
Excluding fair value adjustments and acquisition and transaction costs adjusted net earnings for the third quarter of 2021 was $2 4 million or 11 cents per share compared to $16 4 million or 76 cents per share in the same period of the prior year.
Adjusted net earnings and adjusted net earnings per share for the period were impacted by lower gross margin percentage and higher levels of operating expenses as well as location growth.
These new locations are subject to the same labor and supply challenges as Boyd is currently facing across its business.
These market conditions are impacting the results that can be achieved in the short term while new location growth has resulted in increased levels of depreciation and amortization.
For the nine month period ended September 30th we reported sales of 1.35, $6 5 million an increase of 17, 2% over the same period of the prior year driven by same store sales growth of 6.7% or seven 2% on a days.
Adjusted basis as well as contributions from new locations that had not been in operation for the full comparative period.
Gross margin decreased to 45, 3% of sales compared to 46, 1% in the comparative period.
The gross margin percentage was negatively impacted by reduced parts and labor margins as well as variability in the European pricing at a higher mix of parts sales in relation to labor, partially offset by higher mix of glass sales in relation to collision sales on a year to date basis.
Operating expenses increased to $78 2 million.
$78 two.
$2 million from 373, 374 million to $452 5 million when compared to the same period of the prior year, primarily due to growth in the number of locations as well as the COVID-19 related cost reductions that impacted the second and third quarters of 2020.
Operating expenses were negatively impacted by the extraordinarily tight labor market, which resulted in increased wage costs to both retain and recruit staff.
Adjusted EBITDA for the nine months ended September 30th 2021 was $162 2 million compared to $159 6 million in the same period of the prior year.
The $2.6 million increase was positively impacted by improved sales levels in total adjusted EBITDA in the nine months ended September 30th 2021 benefited from sues and the amount of $7 5 million as compared to $10 8 million in the same period of the prior year.
We reported net earnings of $18 6 million compared to 27.9 million in the same period of the prior year.
Adjusted net earnings per share decreased from $1 28 to $1 three.
Adjusted net earnings and adjusted net earnings per share were impacted by lower gross margin percentage and higher levels of operating expenses as well as location growth.
These new locations are subject to the same labor and supply challenges Boyd is currently facing across its business.
Market conditions are impacting the results that can be achieved in the short term while new location growth has resulted in increased levels of depreciation and amortization.
At the end of the period, we had total debt net of cash of $896 9 million compared to $671 1 million at June 32021.
Debt net of cash increased when compared to the prior periods, primarily as a result of acquisition activity, including draws on the revolving credit facility as well as increased lease liabilities.
During 2021, the company expects to make cash capital expenditures within the previously guided range of 1.6 to one 8% of sales.
This excludes those capital expenditures related to acquisition and development of new location, the investment and environmental initiatives, such as L. A D lighting and the investment in the expansion of the wall operating way practices through the corporate applications and process improvement efficiency project.
During the first nine months of the year. The company has invested approximately $2.4 million and environmental initiatives.
These investments will not only provide environmental and social benefits, but they also achieve accretive returns on capital.
Additionally, the company is expanding its wall operating way practices to its corporate business processes there.
The related technology and process efficiency project will result in an additional $2 million to $2.5 million of investment before the project is complete in the second quarter of 2022.
The project will also be expected to streamline various processes as well as generate economic returns once fully implemented.
Our third quarter 2021, adjusted EBITDA margin of 10, 5% was significantly lower than our historical levels achieved over the last several years and therefore very disappointing.
In the U S. All the demand approached pre pandemic levels, the highly competitive labor market translated into significant wage pressure and labor margin compression as the quarter progressed. Additionally.
Additionally, the early signs of supply chain constraints that we reported in the second quarter got progressively worse as the quarter unfolded and compounded whole world gross margin compression as we needed to source parts and materials from non primary suppliers, along with a higher mix of OE versus alternative parts.
All at lower margins and order, a complete repairs and serve our clients and customers.
We also experienced a shift in mix to higher park content repairs as our labor capacity constraints necessitated that we schedule out repairs with higher labor and lower part content.
In addition to this gross margin compression our adjusted EBITA margin decline has been exacerbated by a lack of his call it fixed cost absorption due to lower sales per location than pre pandemic levels.
As we've commented since early this year in preparation for claim volumes returning to pre pandemic levels. We brought back the administrative resources needed to effectively operate and manage our business as it recovered from the pandemic, but we have not yet been able to add sufficient technician labor capacity to service. The work that is available in the U S.
And we continue to experience a slower recovery in demand in our Canadian business.
We have also added more than 160 locations to our network in the past two years, which given market conditions are experiencing the same gross margin challenges as well as sales per location levels that are below historical levels. We are confident that as we continue to build our revenue our fixed costs.
<unk> will be in line and result in improving our adjusted EBITDA margins.
As a side note and for competitive reasons, we're going to move to reporting our growth only with our quarterly results.
Despite market claim volume in the third quarter approaching but still not but still being below pre pandemic levels demand for services exceeded our labor capacity and all U S markets, which resulted in high levels of work in process and reduced sales capture rates.
Adding and retaining location level administrative staff and technician capacity to address this capacity constraint has been challenging and an extraordinarily tight labor market and we have taken specific actions to address this.
These actions include investing in and growing our technician development program, increasing our recruitment support staff to improve lead generation and follow up.
Proactively evaluating compensation levels, and making appropriate adjustments to ensure that we remain competitive in a rapidly changing environment and driving high levels of execution for our onboarding and orientation programs to increase retention.
These are making a difference but have resulted in increased wage cost to both retain and recruit resulting in near term pressure on labor margins and operating expenses. Additionally.
Additionally, we completed the implementation of the Wow operating way human resource systems during the quarter and are beginning to leverage these new processes.
Historically, Boyd and the industry have recovered labor cost increases through selling rate increases from clients.
However to retain and recruit in the current labor environment. It has been necessary to rapidly adjust wages at levels not previously experienced <unk>.
Management is committed to aggressively addressing this challenge and is having constructive discussions with large key clients about the urgent need for price increases to reflect the current environment.
However, given how significantly and rapidly wage costs have increased and the key business relationship. These clients represent it may take some time to achieve all of the needed price adjustments and margins made airport continued to be impacted in the near term. However, we are moving with a great sense of urgency.
See on this matter in.
In the meantime, we are not relying solely on these key client price increases.
Given our excessive levels of work, we are endeavoring to prioritize our production towards higher margin business as well as raising prices, where possible and suspending business relationships with a few lower margin clients that are not willing to increase pricing in order to better serve our core clients and accelerate our <unk>.
Recovery efforts.
We believe that these actions will result in our labor margins returning to historical levels. However, this may take several quarters.
Long term solution to the staffing shortage is through internal training and development programs. We have strengthened our people development processes with a number of formal training programs, including our technician development program, which we assess as being industry leading.
Well, we suspended this program during the pandemic, we have been successful at growing this program during the past nine months and have recently committed to growing it further by doubling the number of trainees in the program to help meet our future needs. We are very pleased with this program, but the costs associated with it negatively impacts <unk>.
<unk> for several quarters, primarily due to the unproductive wage costs during the first several months of the trainees employment.
As we achieve a balance of T. B T D piece across experience levels from entry level to near graduation, the margin impact will be softened and we are confident that the long term benefit significantly outweighs the short term costs.
We believe that the part availability and related margin challenges related to the supply chain disruption is transitory and will normalize as the underlying manufacturing and distribution issues are resolved in the meantime, we are working with key suppliers to source parts in normal margins, but will continue to use non primary.
Players when necessary to complete repairs for our clients and customers.
We also expect our sales mix to return to historical levels as we build our labor capacity.
These ex though these actions outlined along with the normalization of the supply chain issues, we expect our revenue and throughput as well as gross margin and EBITDA margins to recover in the coming quarters. However, the actions noted are unlikely to have a material impact on the fourth quarter we.
We're committed to driving the need to change aggressively.
Despite these near term market challenges, our leadership position, our strong balance sheet position us well to successfully execute on our plan to double the size of our business by 2025 and deliver attractive returns to our shareholders.
During the first quarter of 2022, Boyd intends to publish an inaugural go inaugural sustainability roadmap report the sustainability roadmap wildlife Boyd's ambitions in the areas of environmental social and governance matters. This is an important area that will be critical to the position and avoid it.
Our success well into the future.
With that I would now look to open the call for questions operator.
Thank you Sir if you would like to ask a question. Please signal by pressing star one on your telephone keypad.
I figure full speaker phone. Please make sure your mute function is turned off.
Your signal to reach our Clinton.
I can press star one to ask a question.
We will now take our first question from Michael Tamas from Kodak Petra.
Please go ahead.
Good morning, Michael Hey, Good morning, guys. Good morning.
You you highlighted that you do not expect the actions you've taken.
Have a material impact to margins in the fourth quarter.
More specifically does that mean that you think or do you expect Q4 margins to be flat or slightly up sequentially. I guess, that's the first part of the question then and then maybe two rigs.
Break that down a little bit further you know thinking about labor margin spread between rate the wages.
Wages continue to increase in Q4.
And just to get a sense of you've been able to successfully increase rates as well just trying to understand the moving parts place.
Yes.
Really the.
What we've said is that we don't expect the changes that we're working on now to have a material impact on the fourth quarter. It's we're still early in the quarter. So it's difficult to say exactly where it'll end up but I think even as we achieve pricing changes, we're already halfway through the quarter and pricing changes.
Slide two new work not told work, which is why even of course to the extent that we're successful it really wouldn't have much of an impact on Q4.
And the spread between the what we get from our clients and what we pay to our staff.
The I would say the wage pressure has continued.
And we expect to continue to work with our clients to get rates that will allow us to recover back to normal margins, although that could take time.
Got it okay. That's helpful.
And then.
I guess, maybe a higher level.
Moving labor to higher margin work in them, presumably everybody else says.
And that would create bidding activity for label Labor.
And if volumes continue to normalize.
There's less labor in the industry I mean shouldn't that allow for pricing normalization to happen quickly I guess, it's in line with your thinking about the question is how frictionless is it to know kind of production from lower paying customers to higher paying customers.
Well I mean, we've got a solid core group of clients.
But in the end will likely be similarly priced so it's it would be smaller clients or non traditional work that might be lower margin that the.
In the environment. We're in today would be very difficult for us to service because it would be displacing core client work.
We will be there for the long term.
So it is.
It's not difficult to de prioritize some noncore client type work.
That's some of the actions we have underway.
But we are we're not looking to de prioritize kind of that core client.
Great and maybe if I can follow up alright, Kevin Kim.
Tim It's Brock you might just clarify as well that that prioritization.
Our lower margin work as well.
That in and of itself is not going to resolve the issue we need.
We need pricing increases from those larger key clients and the although Tim commented on the de prioritization of lower margin work as being one of the initiatives that would not be considered a sort of.
Our material initiate up relative to the other options that are being taken.
Michael I think you May know, we are price takers. The top 10 insurance catalyst has time to call us in the market and our industry is highly fragmented so till the Texan got price take us. So we can pursue eight but they can't.
Implement unilaterally our price increase.
But having said that Michael that this pressure is.
It is not unique to Boyd this is pressure.
Everything I can see and what I hear this as pressure that's being felt across the collision repair industry.
Got it no that's clear I mean, presumably some are having tougher times managing this so maybe that leads to normalization going forward. Thanks for the answers guys I appreciate it.
Thanks, Michael Thanks, Michael.
We will now take our next question is from Steve Hansen from Raymond James. Please go ahead.
Good morning, Steve.
Good morning, guys, Thanks, I'm going to I'm going to go.
On the strike is a little bit harder.
Can you, maybe just give us a sense for how the discussions with your core carriers have gone, thus far and our willingness to understand these pressures I mean, I think the data is pretty clear.
Probably by yourselves, but I think industry wide level. So I'm just trying to understand why there would be resistance to price increases and whether or not there's going to be some sort of ability to protect yourself in the future.
Whether it's in some sort of inflation escalators or whatever it may be I'm, just trying understand how discussions with BARDA.
Yes.
Obviously, I'm not going to get any details on specific client discussions, but I can tell you that.
They absolutely understand the problem and the challenge that the industry has and I think they intend to be responsive to us.
It is not easy for them to move quickly.
And we have to make a good compelling case.
The reality is that the industry can't attract labor without paying wages that are competitive with other industries and technicians in our industry.
Our highly skilled and they're not just skilled in collision repair work.
Can move into other industries as necessary. So we have to pay good competitive.
Compensation to allow us to both attract and retain in the industry and that's really what we're doing and our insurance clients need quality repair capacity to service their customers and that's why I feel confident that over time.
We will write this but insurance companies tend not to move as quickly as I would like and these are unusual times the cost increases were.
We're pretty abrupt and.
And that's tougher for an insurance.
They have to make adjustments to their premiums to help recover. This so that's why I think it could still take some time, but our discussions are positive they understand it and I'm sure we'll work through the appropriate changes.
Okay. That's helpful. I appreciate that and just just as a quick follow up before getting back in the queue. The same challenges that you described are clearly industry wide. So I'm also just trying to understand where these pressures allow you to ramp up any of your.
M&A activity at all do you think there is an ability to take advantage of the current situation I guess is the question.
Hum.
You know I don't know that I see it as being able to take advantage of that situation right. Now, we're very focused on making sure that we.
Manage our business effectively and get fair rates, so that we can get the right returns.
On the value we provide so it's I think it's less of an acquisition opportunity right now.
Then it is we just need to work hard to get these things back on track.
Two we will be prudent capital allocation for acquisitions, and if we see compelling opportunities certainly we'll pursue them.
Oh that's.
Consistent with what we have quoted in the past.
Okay. Appreciate the time guys I'll get back in queue.
Thanks, Steve.
Thanks.
We will now take our next question from Chris Murray from <unk> Capital markets. Please go ahead.
Yes, thanks folks, maybe just turning to some of the cost pressures.
But not on the labor side, but on the parts side.
I'm just trying to understand.
How much of this is related to OE production of their own components. How much of this is sort of supply chain coming from from out of the country type of thing and just trying to get a better feeling for.
Maybe some benchmarks are some milestones on what we should be looking for in terms of getting you back to a more normalized part supply.
I think there are probably three components to it.
There are supply challenges on the OE side, where we can't get an OE part from our primary supplier and maybe we can't get it all which means we have repair is suspended and production waiting for parts to the extent anybody has looked at the industry length of rental it is.
Gone up very materially in the past four or five months it's.
Over 15 days now and it was just over 12 and I think a lot of that is tied to the parts issue. Some labor constraints, but also parts. So we have an issue with.
With not being able to source the OE parts that we need and when that happens if our primary supplier doesn't habit. We're gonna look wherever we have to really do anything within our power to get the parts of the we can complete the repair for our customer and that often comes at a reduced margin. The other issue is the aftermarket heart avail.
The ability.
Is not as strong as it was I suspect that thats in part tied to.
And a bit an inability to get the parts out of Asia and to the warehouses in the U S. When that happens we ended up having to move to an OE part, which has both a higher cost for our customer and a lower margin for our business relative to the aftermarket alternatives and then third is across the board.
B, we're buying parts, whether it's aftermarket horrible E.
We'd be buying parts from non primary suppliers at at lesser discounts it hurts our margin and profitability. So it's really part is not available and aftermarket we have to go away. That's lower margin, we have OE parts that aren't available and we have to source from non primary suppliers or delay repairs and and then.
The lack of ability with availability of aftermarket as well.
Okay. That's that's helpful.
And then just thinking about overall repair volumes I mean, it sounds like at least from what you're saying.
That volumes are starting to come back to maybe not all the way pre pandemic levels, but we're starting to we're starting to get there, but you did make the comment that some of your stores are still under capacity.
Do you go back and revisit whether or not you should have some of those stores open and functioning and maybe convert a couple to intake centers just for the near term and maybe concentrate your your operations in it.
A fewer number of stores in a local region is that is that something that's even at an opportunity I know this goes back to the reopening in advance of type of discussion, but but just any thoughts around around what you can do in the near term around your store capacity.
I think when we talk about store capacity, it's our constraint is.
Almost always labor capacity in our physical plant capacity.
And in the U S market, where really.
At or above primarily over our capacity levels.
In terms of work available.
All markets across the U S that is not necessarily true in Canada, Canada is still slowly slowly recovering, but I don't think that.
Our hub and spoke or closing up production facilities would be the solution right now, we really need to build our workforce to service the work that's available to us.
Tim if I might add I think we're at Christmas maybe thinking on this lack of capacity was when you talked about fixed cost absorption, but as Tim just Chris as Tim just mentioned the reason we don't have adequate.
Cost absorption with sales throughput is because we are constrained by labor capacity not by lack of demand.
Yeah, we have the demand to solve the capacity utilization problem if.
If we could put the labor in place to service it.
Okay. That's helpful. Thank you.
Thanks, Chris.
We will now take our next question from David Newman from discharge.
Please go ahead.
Good morning, gentlemen.
Just on the pricing conversations that youre, having with insurers. The DRP is obviously a key performance indicators.
Some of the performance based ERP have they waived or widen the goalposts on on that criteria at all given the industry difficulties.
Hi.
We wouldn't provide any detail on that but I would say that that is and that is an area where.
Our insurance clients, probably have an easier time, demonstrating some flexibility.
And we have seen some flexibility on those.
Those metrics.
Interesting and then on the parts side does it get the.
Pass through and what you're using different sources non traditional suppliers et cetera does the blanket cover all types apart and does it cover like just a.
Percentage of the pirates or they expect it is at a bare minimum cost that they expected to partly how do they how do they benchmark the actual part.
Yes, it's <unk>.
It's pretty simple actually we generally sell apart at list price and our margin is the leverage that we get on the list versus net.
And aftermarket parts.
Have higher margin characteristics than OE parts.
And so if we shift from aftermarket to OE.
Increased selling cost and reduces margin.
Which are good obviously and then if we have to source those parts from suppliers that we don't have formal relationships with them, we would be getting lower margins on those parts sourced from non primary vendors.
Okay great.
That makes sense.
And just last one for me guys just in terms of the yard at 52 locations.
Across the industry. This kid, so I mean, obviously it.
Keep it up but I mean is that something that you might want to consider taking a pause given the core business you know trying to getting things back on track in terms of the wage and parts inflation.
Or is it such a unique opportunity as your competitors are suffering more and are under pressure that you just have to you just have to move forward on the M&A program like in other words.
Maybe it's a bit of a distraction at this juncture and the focus should be on the core operations, but maybe just a comment.
Yeah.
I think we're committed to continuing to grow accretively.
I think we will we will review the opportunities we've got a healthy pipeline, we will review the opportunities and make sure that they are they're.
They're good investments.
We will probably focus a little more that they're good investments in the near term as well as the long term.
But we're still committed to growing the company through unit growth.
I'm just more thinking Kim like in terms of throwing more logs on the fire kind of thing I mean as you.
You'd incorporate these locations there are all the heap beset with their own challenges and how you incorporate that in as part of the integration does that come into the pricing conversation.
Obviously some of these locations youre buying might be under a bit of pressure. So how does that factor.
But I think that's up to us to be disciplined in our approach to evaluating and what we buy and we do consider that okay very good. Thanks Scott.
Thanks, David Thanks, David.
We will now take our next question from Goldman Sachs Heath I'm, an Orange Bank Securities. Please go ahead.
Hey, good morning, everyone.
So just going back on the demand question, where you mentioned that the demand is such that you know it's really the labor thing that's impacting your capacity I'm. Just wondering if you could give some idea of how much work that you do so.
Left because of that issue like your same store sales growth was 11% would that have been 15% or like how big of a difference is that right now.
We haven't actually size that up but we've got a.
Significant opportunity that while the market isn't yet at pre pandemic levels. There is plenty of work out there for us and for the industry and as we build our technician workforce through TDP through active recruitment.
All sides are that there's there's work available there to help us continue to grow same store sales at a at a very attractive rate, but we haven't actually size that up.
Okay.
Alright, you might comment that we are seeing higher work in progress levels at unprecedented high levels levels that we've never seen before.
Yeah, I did comment on in the script as well, Brian, but you're right I mean, our work in process levels are quite high and our capture rates.
Our down so.
So our work in process levels could be higher if we were able to capture all the work that's available to us.
The right now we're really intensely focused on building staffing at the shop level to service. The work that's available to reduce length of rental and make sure were performing at our best for our clients.
If you look at the foot.
<unk> provides.
Color on orbit. So as you can see it's at historically high levels and could it be new hire.
So do you think that that might give you some color.
Yeah, Yeah, that's fair and just when you talk about the training and different.
In different plants that you have I'm just wondering is there something baked into your cleaning program that allows some of these technicians that you don't have to do with it and training them they have to sort of work.
With your firm for like another two years or something or it is just that.
You have to provide them, some sort of claiming incentive for them to sort of stick with you and not go to a competitor.
I think the the approach that we're taking we're really helping them launch their.
Their careers and our technician development program, which is the primary one that I've talked about we take people that really don't have any experience or committed skill in our industry and over a period of time, we build their skills and their certifications up to a high level.
We intend to treat them well.
<unk> pay them competitively and make sure they know the career opportunity that they have.
With our company in order to retain them, but yeah Theres no no handcuff I mean, we have to be.
A great employer and that's why we're also focused on.
Leadership development training to make sure that our people know.
Know how to interact properly with their staff, we've implemented the HR systems through our new applications, which will also help our teams provide better support, but we really just need to be a the right choice for them in terms of a place to work and that's really what we're striving for.
And Tim Tim.
I think that it perhaps would be additive to let to let the listeners know that with that nurturing.
Element of the technician development program.
Building technicians over over.
A longer term period, the retention rate on that on those technicians as materially better than the retention rate that we have across our wider technician pool.
Yeah. Thanks, So there is room for it.
Let's do it.
And part of that is just the we're making a really committed investment in developing that talent and I think that when I talk to our GDP is when I'm visiting our shops. They they love the program and they appreciate what we're doing for them.
They're going to make a great living working for Boyd.
Okay. No. That's good color. Thank you for that and maybe just last one from my end I don't know if you break it out but between these margin contraction Lake, which is a bigger component in Q3, that's impacting us at the labor one or is it the supply chain one maybe for Q4 as well.
Pat do you want to handle that one yeah, yeah, we don't provide that breakdown.
But in terms of the margins and absolute margins labor margins are substantially higher than the past margins.
Okay. Thank you I appreciate it thank you.
We will now take our next question from Kate Mcshane from Goldman Sachs. Please go ahead.
Good morning, This is mark Jordan on for Kate.
Going back to the parts and supply chain headwinds are you seeing less availability in OE and aftermarket parts or or is it sort of the same and put them in the prepared remarks, you mentioned alternative iron and I'm not sure if I heard it correctly that increasing or decreasing your alternative parts utilization.
We've seen a.
Decrease in mix of alternative and an increase in mix of O E.
And I don't really have a good read on the disruption in the two different channels in terms of part availability they are both.
They are both an issue.
With aftermarket sometimes its timeliness of availability it may be available in a different part of the country and difficult to get to us, but that can also be true with the OE.
I don't have refined data to know.
Percentages as to which but but the shift in our mix has been toward OE and a portion of that is being bought from Nab preferreds are not primary suppliers.
Okay great.
And then thinking about technician capacity, how did that trend during the quarter as it has it been kind of a steady pace of improvement.
We are we've made progress during the quarter yes.
It's slow steady progress.
Expect us to continue to make.
Slow steady progress and hopefully pick up the pace on it.
It is a very tight labor market, though very competitive labor market.
Okay, great. Thank you very much for taking my questions.
Thanks Mark.
We will now take our next question from Gerald Young with TD Securities. Please go ahead.
Good morning Gail.
Good morning.
My question is around the insurance pricing and historically I think you've mentioned that.
The significant volumes processed through the small mom and Pops has been an element that's helped support pricing discussions because they are so much lower margin.
And so I guess, just wondering now that we've seen the insurance companies really pare back their ERP partners and focus on the big Msos.
Are they.
Are there any insurance players that are processing, a disproportionately high number of MSL customers that are higher margin and therefore could potentially negotiate more on on or said differently hold prices lower for longer because they know the msos there are higher margin.
Well I'm not sure I can answer that I think that the the market pressure.
I don't think the market pressure will be that much different for an MSL.
That it would be for a single shop.
<unk>.
So but item pad or rock any do you have any comment on that.
Like you I.
No.
Notwithstanding the continued movement to MSL.
Moving volume to Msos Theres still a it's still a very highly fragmented industry and the insurance companies still need supplement EMS. So MSL.
Production capacity with with the broader industry. So.
Darryl I guess Ken.
Really don't have enough information, but I don't think that the fact that insurance companies are dealing with.
Not many of them are dealing with just large msos, who who they might believe can handle this longer I think as Tim said market pressure will be broad is extended throughout to all levels in all sizes of businesses and Im sure insurance companies aren't hearing from everyone.
Yes.
I think maybe just.
Further clarification on that.
The labor rates that insurers pay in the market.
<unk> tend to be across the different channels.
Similar across the different channels.
MSR relationships may have some performance based agreements for the types of things like length of rental and customer satisfaction.
But the labor rates tend to be fairly uniform in the market.
Okay got it thanks, and then just one other quick one in the past I think you've targeted on the balance sheet two to two five times net debt to EBITDA.
Just with the depressed EBITDA levels currently.
Would you let leverage float above those levels.
But let me comment about.
The leverage I think you hit the nail on your targets are based on our normal levels of EBITDA and right now they're experiencing.
Unusual levels so.
When we talk about the targets the targets are based on the normal levels. So yeah, we will.
Wanted to closely depending upon the business conditions will make necessary adjustments.
Got it okay. That's it thanks very much guys.
Thank you. Thank you.
We will now take our next question from Bret Jordan from Jefferies. Please go ahead.
Hey, guys talk about the mix of OE versus alternative parks, maybe what youre seeing today versus pre COVID-19 levels.
We we.
We don't really disclose specifics on that Brett, but we've definitely seen a change in the ratio.
I think related to the supply chain challenges that's moved to the OE mix up in the alternative part mix down.
Right, Okay, and then I guess on the M&A side are you seeing any overlap with other msos as youre in the market acquiring collision shops, I mean, obviously msos have grown as a percentage of.
Overall share are you starting to see more overlap.
Overlap in terms of acquisition activity or overlap.
From servicing our clients in terms of acquisition activity are you in situations, where there might be another MSR bidding on these assets.
I wouldn't say it anymore.
Yes for most msos, it's generally a competitive bid process.
Yes, yes.
Okay, and I guess does that increase I guess.
The assumption would be that is increasing as you are starting to geographically bump into some of the other major msas.
I think it's always been the case the players at the table might be a little different today than they were three or four years ago through some of the consolidation that's that's occurred but.
I don't think its.
All that different than it was a few years ago in terms of the number of people that may be bidding on an asset.
I guess are you seeing any change in the valuations given the competitive environment or is it relatively static.
We haven't changed our approach.
So there are deals that we lose.
But when we lose them I think we've assessed that.
The value we offer was.
What made sense to us.
We we are focused.
We have shifted some of our focus to more greenfield and brownfield development and are seeing good success with that.
And more single sharp focus.
I haven't said that we did acquire obviously two pretty large msos that we were successful at acquiring this year, but we're not really reliant on buying larger msos in order to achieve our double 'twenty strategy doubled 25 strategy.
Okay, great. Thank you.
Thanks, Brett.
We will now take our next question from Jonathan Jonathan Lamers from BMO capital markets. Please go ahead.
Good morning.
Good morning, Jonathan can you can you have been responsible for boy.
Boyd groups relationships with the insurance customers for many years.
Would you be willing to hazard, a guess as to approximately.
When you might receive a response on the rate increases.
And approximately which month or quarter this might be implemented.
No problem.
Can't do that.
<unk>.
We are making it really clear to our core clients that this is important.
Our ability to get property returns and invest in our business and grow our staff from pay for things like our technician development program all to make sure that we can effectively serve them.
I'd love to see all of the major players in the industry. He has committed to technician development. As we are I think that will make a difference over time.
But I can't I can't predict exactly when our clients will do.
Do the right thing and help us recover our labor margins, but I do expect that that will happen over time.
Yes, Jonathan just thought there was.
A question earlier about the margin deterioration that I think you're asking a specific question relating to the clients and the pricing in the order of magnitude the gross margin deterioration loss.
More because of the labor margin deterioration or the other.
Others like a parcel also had an impact but certainly labor had the biggest impact in terms of their tuition because the base pair just really spiked.
And the insurance companies are slow to respond to the price increase requests.
And the parts piece that as we've discussed is really we view that as transitory.
We don't see that as a permanent issue.
Once the supply chain normalizes, we should be able to acquire parts as we historically have.
Tim just one follow up I mean, this business has shown remarkably stable gross margins for decades.
Is there any precedent for that type of inflation that we're seeing now and requesting these types of rate increases outside of <unk>.
Normal course discussions.
I've been in this industry almost 25 years and there is no precedent in that time that I've seen. So this has been a really unusual labor market and that's why I think it is.
As we've seen gradual labor pressure over the past 20 years.
We've maintained very stable labor margins because the market has moved slowly to fix that we just have to make sure our clients understand that the market moved at a completely different pace I believe they they see that and understand it and it's going to take a different approach to adjustment than what has worked successfully for.
Youll probably multiple decades.
Thanks, I just have one more question.
On the U S vaccine mandate for January.
How are you expecting that to impact operations will that exacerbate your labor capacity issues.
Well I think that it's uncertain as to whether that mandate.
<unk> ended up being implemented broadly I think there are there is some some litigation in place both at a federal level and in multiple states.
But we are.
Preparing to comply with the mandate.
And.
But it's difficult to say what impact that may have on us.
Got it.
It's well I believe it's the right thing to do to to get everybody vaccinated I'm not sure. The right thing to do is to impose that requirement unemployed.
But we haven't really assess what impact that will have.
Right you just you had mentioned that.
Covid related back absenteeism.
It's been an issue so I would think if everybody's vaccinated.
That's positive longer term, but I know some other companies are saying that they.
They have large portions of their workforce that are not vaccinated and they're concerned about the ability to convince those employees to become vaccinated. So yeah, although the alternative being vaccinated.
As weekly testing under the Osha guidelines that have been established so there is the option of not a mandate, but allow weekly testing.
Thanks for your comments.
Thank you Jonathan.
We will now take our next question from Zachary <unk>.
National Bank financial please go ahead.
Thank you good morning, everyone. Thanks for taking my question.
Good morning.
Good morning mentioned, it's difficult for insurers to address premiums and move quickly on labor rates and I do understand that we're in unprecedented times chair, but looking at it historically, what's the typical delay on pricing adjustments from key customers how much of a lag has there been in the past between cost increases and pricing.
Kris.
I'm not sure we've ever experienced much of a lag and if you look back at our margins over and we talked about this a little bit earlier, but if you look at our margins over an extended period of time, they've been pretty stable because whatever cost increases we've experienced.
Washed through to rate increases.
But so I think our job is to make sure our clients understand the impact. This has had on our business and ultimately our.
The impact on our ability to service them and we've absorbed the price increase right now.
And at some point, it's going to have to move upstream in the price increase may short term be absorbed by insurance companies as they move to raise rates to get the premiums that afford them the opportunity to get their returns. So I think it's been so abrupt it'll take longer than it has normally but.
I believe it will happen.
<unk>.
The sooner the better from my perspective.
And Tim I believe that we have seen some insurers announced this week that they are increasing premiums.
They are moving out of increased.
That movement.
Yes, Youre right Brock.
So we've seen that.
I read that with one major U S insurer, that's seeing the pressure in raising rates and and that's obviously the as one moves it moves rates up I'm sure that others will as well.
That's really helpful. Thanks, and one last one thinking about sourcing from your primary suppliers and your preferred mix of aftermarket versus OE parts is the pressure from the supply situation in Q4 stable improving or worsening versus Q3.
Well, it's it's.
I'd say it accelerated Q through Q3 it was.
We saw it.
Get worse as Q3 progressed.
We're still early in Q4 I'm not sure that it's.
It's gotten worse, but as we said we don't necessarily expect the actions were taken to have.
A material impact on our Q4 results.
I understood. Thanks, very much I'll turn it over.
Thank you.
We will now take our next question from Christopher <unk>.
CIP Harlan.
Please go ahead.
Hi, Christopher Thanks for squeezing me in here.
I just wanted to follow up on the margins and the actions that you're taking.
My understanding is that you're prioritizing some of that higher margin business is that something that you were doing it through all of Q3 or is that.
Shifts that you've made.
<unk> Q4, and could we expect to see a slight improvement in Q4 because it.
Your prioritization of this work.
I think that all of the real solution to this.
Is getting fair rates from our clients. So that's my primary focus is making sure that we put a compelling case forward for our clients. So that we can be paid fairly for the change in the market conditions. The other actions that we're taking will help incrementally, but theyre not the solution and.
So I wouldn't expect that those adjustments moving to suspend low margin clients, which are not anywhere near the lion's share of our our business. So those types of actions will help on the fringe, but our real focus is making sure that we're paid fairly.
The work that we're doing so that we can recover the change that's happened in our business.
Thanks that makes a lot of sense and I'll jump back in the queue.
Thanks, Chris that the Q.
We will now take our next question from Maggie Macdougall from stifle.
Please go ahead.
Hi, good morning.
Hi.
A little off the wall question here.
In the long haul here on the call with a lot of focus on the cost side.
Years ago, you guys had the foresight to implement Wow that was quite successful for you in terms of generating operating efficiencies and cost savings.
And I'm wondering if maybe there is some.
Opportunity given just a ton on in supply chain labor inflation to revisit.
Where there could be ways to technology or to look at things a little bit differently.
<unk> manufacturing.
Want to call it that standpoint.
Because it does seem as though.
For example, the labor issue is one that's been around for a long time for you guys and.
And I'm thinking about automation or any of those kinds of opportunities that could be as interim chair.
Yes, I think that.
There are.
We believe that there are some technology opportunities to streamline how we process work maybe two brings.
Bring some insights to how we process work.
And improve efficiency.
We've talked in the past about the fact that we have a.
A fairly sizable team of dedicated technical trainers intercompany that deliver the vast majority of the technical training in our company.
Those individuals are also responsible for coaching and helping our technicians.
Find ways to be more productive with the time that they do spend in our business looking for efficiency opportunities for them and so I think that's an opportunity.
We also are exploring different labor segmentation opportunities that may do you skills certain types of work, where we could bring in.
Labor that could be brought up to speed.
<unk> quickly then a body technician, which.
A very high skilled position, but could peel off some of the work from what those highly skilled technicians do in.
And do it with a lower skilled position that's easier to recruit so I do think there are opportunities there.
And we are I'd.
I'd say, we're always looking for those opportunities.
Thanks, Tim that's contractual and then just one final question I know others have touched on it but.
I think it's taking a bit more I'd be really curious your take on Harold President dynamics, which are challenging have impacted the competitive landscape for <unk>.
And you compete with.
Organic growth in market share.
Yes.
As many people to follow the industry know there are some.
Some newer private equity backed players over the past couple of years that have been pretty active.
So, we obviously would be seen them.
For some of the transactions that we're looking at.
Our our approach to that has been we're going to be competitive where it makes sense and if we.
If it doesn't make sense to us we're not going to we're not going to get hungry for a transaction that doesn't make sense. We are focused more on greenfield and brownfield development and are seeing good success with that.
And because of the fragmentation there are lots of single shop opportunities out there that we've been pursuing that.
We think make a lot of sense to fill in our network. So.
I think the well the environment is competitive for acquisitions I think we have a good strategy to address that and continue to be able to to grow accretively.
For for our business.
That may have answered the one mega what was your other question.
Thanks, Matt.
Oh go ahead, Pat excuse me.
No no no I think yes.
Committed to our growth strategy and we'll deploy capital wherever it provides the best of your time, so if you're probably best to Tony in terms of the same store sales growth, we'll do that at the single shot brownfield Greenfield. So we'll see where the opportunities are more compelling and that's where we're going to commit more capital to accomplish our goals.
Thanks.
Just one more thing.
We talk a lot about it.
One thing that hasn't been touched on rent.
At least in the city of Toronto, Ontario generally.
Industrial rents are central for fairly large increases.
Are you guys at least the majority of our locations can you give us.
The guidance in terms of how rent rollovers will impact your lease rates over the next few years.
Just keeping in mind that you know you could.
I have some maturities.
In constant currency.
Right.
Yes.
I haven't I don't have an assessment of that I can really speak to Maggie I can tell you we typically enter.
Long term leases for our properties often with the options with the price.
That in advance.
So while I'm sure that there are some some of our properties that given market conditions could increase more than average I think generally we're we're pretty well protected with the way we've leased properties over the past several years.
Thanks, very much I hope you take as well.
Thanks, Craig Thanks, Pete.
Yes personally no further questions at this time.
Well very good well. Thank you operator, and thank all of you 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. Thank you.
Thanks, everyone.
This concludes today's call. Thank you for your participation and you may now disconnect.
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