Q4 2021 Boyd Group Services Inc Earnings Call
Please standby were about to begin.
Good morning, everyone welcome to the Boyd Group services incorporated fourth quarter and year end 2021 results conference call.
Listeners are reminded that certain matters discussed in today's conference call or answers that maybe given to questions that could constitute forward looking statements other subject to risk and uncertainties related to boyd's future financial or business performance.
Actual results could differ materially from those anticipated in these forward looking statements.
The risk factors that may affect results are detailed in boyd's annual information form and other periodic filings and registration statements and you can access these documents at Caesars database at theater Dotcom.
I'd like to remind everyone that this conference call is being recorded today Wednesday March 23rd 2022.
I'd now like to introduce Mr. Tim O date, President and Chief Executive Officer Boyd Group services. Please go ahead Mr. O'day.
Thank you operator, and good morning, everyone.
Thank you for joining us for today's call.
On the call with me today is Pat <unk>, our executive Vice President and Chief Financial Officer.
We released our 2021 fourth quarter and year end 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 Boyd group Dot com.
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 months period ended December 31, 2021 provide a general business update and discuss our long term growth strategy. We will then open the call for questions.
On January 20, <unk> of January 2020, I was appointed President and CEO of Boyd Group Services, Inc, and concurrent with this change Bronco, but moved into the role of executive Chair.
December 31, 2021, our transition plan was completed a broad retired from his management role.
I would like to thank Brian for his many years of dedicated service to Boyd and for the great support he provided during the two year transition period.
I look forward to <unk> continued contributions to Boyd as a member of our board of directors.
As was previously communicated beginning January one 2021 Boyd is reporting results in U S. Dollars. This change has been made in order to better reflect the companys business activities given the significance of U S denominated revenues.
Yeah.
Financial results in the first half of 2021 showed steady improvement as demand for services began to recover from the COVID-19 pandemic that emerged in March of 2020. However, as demand continued to increase during the second half of 2021 and approached pre pandemic levels in most of our U S markets.
Boyd's ability to service this demand was.
It was meaningfully impacted by a tight labor market and supply chain disruptions.
The collision repair industry is experiencing significant and unprecedented competition for talent and in particular, a limited pool of qualified technicians and estimators.
As a result, Boyd experienced increased wage costs in order to both retain and recruit employees, causing pressure on labor margins and operating expenses.
Okay.
During 2021, we were able to add a record 127, new locations, including 101 locations through acquisition 10 startup locations in 16 locations operated this intake centers.
Unfortunately, these new locations are also experiencing margin challenges as a result of the tight labor market wage inflation and supply chain disruptions as well as sales per location levels that are below pretax pre pandemic levels due to capacity constraints.
For the year ended December 31, 2021, we reported sales of $1 9 billion, an increase of 19, 9% over the prior year driven by same store sales increases of 7% and contributions from 154, new locations that had not been in operation for the full compare.
Period.
Gross margin decreased to 44, 8% compared to 46% in the comparative period.
Gross margin percentage was negatively impacted by reduced parts and labor margins, a higher mix of parts and.
In relation to labor and these impacts were partially offset by higher mix of glass sales in relation to collision sales.
During the second half of 2021 boy faced increasing supply chain disruptions, which resulted in a negative impact on gross margins as a higher percentage of parts had to be sourced from non primary suppliers in order to complete repairs and fewer aftermarket parts were available.
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 sales in relation to labor.
The Canada, Canada emergency wage subsidy or Suez was put into place on April 11th 2020 and remain in place until October 23 2021.
As was the objective of the program Boyd continue to employ and incur costs for employees that would have otherwise been furloughed absent the wage subsidy.
The recognition of Suez related to direct labor was approximately $4 million in the year ended December 31, 2021, compared to $5 3 million in the prior year.
Operating expenses increased $120 9 billion when compared to the same period of the prior year, primarily due to the growth in the number of locations as well as the COVID-19 related cost reductions that impacted the prior year.
Operating expenses benefited from the <unk> of approximately $5 8 million as compared to seven 4 million in the same period of the prior year, which helped mitigate incremental COVID-19 indirect wage costs.
Operating expenses were negatively impacted by the extraordinarily tight labor market, which as noted resulted in increased wage cost to both retain and recruit staff.
Adjusted EBITDA for the year ended December 31, 2021 was $219 5 billion compared to $220 million in the same period of the prior year.
<unk> 5 million decrease was primarily the result of lower gross margin percentage at higher levels of operating expenses, which more than offset the incremental impact of location growth.
We reported net earnings of $23 5 million compared to $44 1 billion in the same period of the prior year.
Adjusted net earnings per share decreased from $1.97.
To $1 30.
The decrease in adjusted net earnings per share is primarily attributed to a lower gross margin percentage and higher levels of operating expenses, which more than offset the impact of incremental location growth.
Now moving onto our Q4 results.
During the fourth quarter, we recorded sales of $516 2 million or 27, 9% increase when compared to the same period of 2020.
Our same store sales excluding foreign exchange.
Okay I thought we lost the connection we did that so our same store sales excluding foreign exchange increased by eight 5% in the fourth quarter.
The improvement in same store sales was a result of the continued return of business. Following the slowdown caused by the COVID-19 pandemic that began in March of 2020.
The increase in same store sales percentage was constrained by production challenges, including technician at administrative staffing capacity constraints as well as supply chain disruption, which impacted sales levels during the fourth quarter of 2021.
Sales growth of $79 million was attributable to incremental sales generated from 131 new locations.
Gross margin was 43, 5% for the fourth quarter of 'twenty, one compared to 45, 8% achieved in the same period of 2020.
The gross margin percentage was negatively impacted by reduced parts and labor margins at a higher mix of parts sales in relation to labor.
During the fourth quarter of 2021, Boyd continue to face supply chain disruptions, which 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.
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 sales in relation to labor.
Operating expenses for the fourth quarter of 2021 were $167 2 million or 32, 4% of sales compared to 39% in the same period of 2020.
Operating expenses were negatively impacted by the extraordinarily tight labor market and.
Fourth quarter operating expenses for both periods benefited premier it expense accrual reductions as certain expense estimates were firmed up at amounts that were lower than previously estimated and accrued.
Adjusted EBITDA or EBITDA adjusted for fair value adjustments to financial instruments and costs related to acquisitions and transactions was $57 3 million.
Decrease of five 1% over the same period of 2020.
The decrease was primarily the result of lower gross margin percentage and higher levels of operating expenses, partially offset by proceeds from sues.
In addition, adjusted EBITDA for the three months ended December 31, 2021 benefited from <unk> and the amount of approximately $2 3 million.
Net earnings for the fourth quarter of 2021 was $4 9 million compared to $16 3 million in the same period of 2020.
Excluding fair value adjustments and acquisition and transaction costs adjusted net earnings for the fourth quarter of 2021 was $5 9 million or <unk> 28 per share.
Compared to adjusted net earnings of $14 6 million or <unk> 68 per share in the same period of the prior year.
Adjusted net earnings for the period was impacted by lower gross margin percentage and higher levels of operating expenses as well as location growth.
Our new locations are subject to the same labor and supply challenges import 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 is record has resulted in increased levels of depreciation and amortization.
At the end of the year, we had total debt net of cash of $957 7 million compared to $896 9 million at September 32021, and $538 5 million at the end of 2020.
Debt net of cash increased when compared to December 31, 2020, primarily as a result of acquisition activity, including draws on our revolving credit facility as well as increased seller notes and lease liabilities.
Based on the confidence we have in our business, we announced an increase to our dividends by two 1% to $57 six per share on an annualized basis in Canadian dollars beginning in the fourth quarter of 2021. This.
This is the 14th consecutive year, we've increased dividends to shareholders.
During 2022, the company expects to make cash capital expenditures of approximately one 6% of sales.
This excludes those capital expenditures related to the acquisition and development of new locations and the investment in the expansion of the Wow operating way practices through our corporate applications and process improvement efficiency project.
During 2021, the company invested approximately $5 6 million in led lighting in order to reduce energy consumption and enhanced the shop work environment.
<unk> investment in led lighting will not only provide environmental and social benefits, but also achieve accretive returns on invested capital.
Additionally, the company is expanding its while operating way practices to corporate business processes.
The related technology and process efficiency project will result in an additional one to $1 5 billion of investment before the project is completed in the second quarter of 2022 and will be expected to streamline various processes as well as generate economic returns. After the project is fully implemented.
During the year ended December 31, 2021, the company spent approximately $4 5 billion on the wall operating way expansion to corporate business processes.
In November of 2020, we announced our new five year growth strategy, and which buoyed intends to again double the size of our business over the five year period from 2021% to 2025 based on 2019 constant currency revenues, implying a compound annual growth rate of 15%.
During 2021, we were able to add a record 127, new locations, including 100, located 101 locations through acquisition 10 startup locations in 16 locations operating as intake centers.
In the short term, we are primarily focused on addressing the labor shortage for our core business and the long term, we remain confident in our business model and its ability to increase market share by expanding <unk> presence in North America through new location and organic growth from Boyd's existing opera.
<unk>.
We are committed to addressing the labor market challenges through initiatives such as our technician development program and we are working to more than double the number of trainees in the program to help meet our future needs. We continue to increase recruitment support staff to approved lead generation and follow up proactively evaluate compensation levels.
And make appropriate adjustments to ensure the company remains competitive in a rapidly changing environment.
And drive high levels of execution for Onboarding and orientation programs to increase retention.
We continue to work with key suppliers to source parts at normal margins, but we'll continue to use OE parts in place of aftermarket parts when necessary in order to complete repairs for our clients.
We have made progress in addressing margin challenges by securing an unprecedented number of rate increases from clients for both labor and paint materials.
To date, the vast majority of our clients have increased rates and the level of increase is much higher than we've ever seen historically.
However, further increases are required to reflect the current environment. So that the industry can attract and retain the talent needed to properly serve our customers and complete repairs on a timely basis.
We continue to actively pursue and push for the necessary pricing increases.
Given how significantly and rapidly wage costs have increased and the continued tight labor market. It will take some time to achieve all of the needed price adjustments and margins will continue to be impacted in the near term.
In addition, as price increases are received they are applied only to new work. So that the work that is already in process or that has been aside are subject to previous pricing, which delays the pricing benefit by contrast wage increases are immediately realized and our costs and as a result, it will take.
Time for new rates to be realized and improved gross margin.
Thus far in the first quarter of 2022, the more majority of the benefits of the price increases have not been realized.
Unlike one year ago demand for <unk> services is continuing to substantially exceed capacity.
The ability to service demand continues to be constrained by labor availability and parts supply chain issues with the accompanying margin pressure continuing into the first quarter of 2022.
During the first quarter of 2022, the <unk> negatively impacted capacity constraints with increased levels of absenteeism relatively relative to earlier periods and the pandemic.
In addition, the first quarter was burdened by higher payroll taxes that occur early in the year, where the fourth quarter of 2021 benefited from expense accrual reductions of certain expense estimates were firmed up at amounts that were lower than previously estimated and accrued.
The Canada employment wage subsidy also ended in the fourth quarter of 2021.
As a result, these factors caused operating expenses to be higher in terms of dollars and percentage of sales compared to the fourth quarter and have a dampening effect on adjusted EBITDA and adjusted net earnings.
Throughout 2021, we've increased our focus on ESG and are proud to announce the publishing of our first ESG report this month, which outlines our priority areas and each of environmental social and governance pillars.
The report reflects our existing efforts to embed sustainability into our organization and sets a baseline for future performance as we strive to deliver against our mission to while all of our customers with quality work and best in class service.
We recognize that we have the potential to deliver significant positive impact to society and the environment.
Our ESG report builds on existing strengths to ensure robust environmental social and governance principles and practices across our company.
Our approach is informed by the priorities of our key stakeholders, including our employees, our investors our customers and our communities as well as local and global developments that defined to find the context in which we operate.
In summary, and in closing I continue to be incredibly proud of our team who have adjusted to this new environment and are working hard to position us well for the future.
With that I would now like to open the call for questions operator.
If you'd like to ask a question. Please signal by pressing star one on your telephone keypad. If you are a speaker phone. Please make sure. Your mute function is turned off to lighter signal to reach our equipment. Once again press star one to ask a question, we'll pause for just a moment to allow everyone an opportunity to signal for questions.
Yes.
And we'll go first to Michael <unk> with Scotia capital.
Good morning, Michael Hey, Good morning, Tim.
Okay.
On the negotiated rate increase to date.
What are the mechanism exactly for that to flow through the P&L does that get more fully reflected in the Q2 and also.
Any chance you can quantify the rate increase you know how much more of the wage inflation to date this will cover or how much more you'll need for the wage inflation to get covered.
Yes, we're not prepared to.
To answer the second question Michael but.
The mechanism for getting the rate increases into our revenue when we get an opportunity or an assignment from assurance company, an insurance company and we write an initial estimate and schedule that out the pricing thats attached to that estimate is whatever was in place at the time that we uploaded the estimate so as a result.
<unk> for all the work that we've estimated and as we've noted we've got significant backlogs.
It has the previous pricing in place not the current pricing. So we really need to work through that backlog for the pricing to show up so well.
Satisfied with the first round of increases, but absolutely need.
Much more in the way of increases from our insurance clients over satisfied it really won't be reflected significantly in Q1.
I also noted that we are wage cost increases hit our cost immediately versus having a similar level to what we have on the revenue side. So that's the reason that we've indicated that we wouldn't see much in the way of margin relief in the first quarter. So Michael to supplement here to ask a question, yes, it will flow.
During Q2, the price increases we have negotiated with whatever you had happiness in Q1.
As we disclose most of them have not been they will flow through in Q2 will be a lifeline.
The one thing that you need to keep in mind as that.
The labor market is still very tight we're working hard to build our SaaS and we're going to pay competitively to attract the staff that we need which could put some near term pressure on margins as a result.
Got it okay. Thank you and then I guess according to the Bureau of Labor Statistics.
The way the breakout labor inflation in the industry. It does look like it's decelerating on a quarter over quarter basis.
Again can you confirm whether you're seeing a similar trend.
And I guess with that in mind and it relates to the first question are you confident that the first round of price increases can outpace.
The wage inflation or is enough to drive gross margin improvement.
By Q2.
Hi.
No I think we've got more work to do.
On price increases.
I think it was very difficult for insurance clients to.
To quickly recognize the pressure the industry was under and respond to it.
Have responded to it but I would say they have responded to what we were seeing in the third quarter of last year and not the continuing pressure.
That the industry has been under to attract more labor into it. So there is no question that we're going to and we are going back to our clients and seeking further rate relief.
And we don't yet know.
Don't have good data whether the.
Wages have stabilized.
But given the shortage of technicians and my expectation is that the market is going to be tight for some time I don't know that we that we can conclude that wages are stabilized yet.
We want to get to pre pandemic levels with the price increases we have realized we need more that's point number one point number two to keep the talent of oxide the talented in the industry, we need a bit more competitive wages. So it's important to get more price increases from from our clients and I think we will.
Pet to more competitive we believe we are competitive but the industry lacks sufficient capacity in terms of technical talent and we're going to have to continue to make our industry more attractive through higher wages to attract the talent, we need to service the business.
It's really at our door now.
Perfect. Thanks for the answers guys I'll get back in queue.
Thanks, Michael Thanks, Michael.
We'll go next to Chris Murray with ATB capital markets.
Good morning, Chris Thanks, Bill and good morning.
So I guess my first question, maybe maybe just following on them this a little bit.
It's maybe around the revenue side.
Thinking about just even lapping some of the year over year comps certainly we saw some pretty negative same store sales numbers early.
Last year and even if you look at Q4 its number it probably wasn't.
Quite as strong as we were thinking.
Can you maybe give us an idea of how quickly you are able to start clearing some of these backlogs and is this something like this this call at this restriction.
Yes.
Should we be expecting this is going to persist for maybe a couple more quarters before you kind of get caught backup into normal levels.
There are two components to the building work in process, one as not having enough labor to process to work.
The other is the supply chain issues.
With regard to the supply chain issues, we find that we have many repairs that are.
Substantially complete but missing apart.
And cannot be safely delivered as a result, so part of our whip buildup is related to the supply chain challenge issues and we've really not seen much mitigation of supply chain challenges to date and it's difficult to say when that might happen. Some of the feedback we've received from Oes would indicate that.
That isn't going to happen quickly, but time will tell on that on the labor side.
As I've said, it's a very tight labor market. We're battling every day to attract the talent we need in the organization to process of work and we're making some progress we've not yet made the progress that we need to make.
But we're going to continue to focus on recruiting that talent into our organization.
Putting programs in place and executing those programs to retain it and importantly for the long run building our technician development program up Chris you asked about the same store sales growth how long it takes to get to pre Covid. If you look at the Q1 of 2020.
It looks like all the same.
<unk> sales declined by 12, 6% and the decent quarter reported increase of eight five so if you adjust for those things if you compound them down by 5% compared to the pre COVID-19 level.
And in Q1, thus far in the quarter, obviously, the Qantas October thus far in the quarter. So we are seeing same store sales growth to be consistent with what we have experienced so so if you put that featured exceed by the end of Q1 to the pre pandemic level.
Okay. That's helpful. Thanks, Pat.
My other question is around sort of acquisitions and acquisition strategy and look it's fair to say that youre not the only folks in the industry are having some pressures.
I think there was one of your major competitors, which dealing with either refinancing some pretty major data or bankruptcy filings.
Whats doing I guess to I guess two part question. What is this doing to sellers in terms of you guys being able to acquire and I guess the second part of this is you've got some revisions that you put in place to your credit facility does that in any way impact the acquisition strategy. This year.
And then in terms of the acquisition of SaaS, you know, Chris the acquisitions are lumpy, we had a phenomenal year. We added 127 locations and so we don't have to do as many this year.
We're confident about our five year target.
Reiterating our confidence in meeting our growth targets. So thats point number one number two relating to the trade agreement. So this is a proactive move what you've started covenant breach issue. This is to enhance our financial flexibility by having more liquidity diversity than we chose to.
The covenant flex in that demand.
Okay. Thanks, Thanks folks I'll get back in queue.
Thank you Chris.
We will go next to <unk>.
<unk>.
Thank.
Good morning, Hi.
Hi, good morning.
So the first question I think you've mentioned that most lines have increased the pricing I'm, just wondering where the spot. The ones that are left is it just matter of time that they'll do it and the second part about the pricing is you guys just had particularly strong how confident you are that.
For the second round insurance companies would be more open to the discussions that we had they had for the first round.
On your first question it is a matter of timing for those that.
I have not yet provided price relief.
Very confident that we will receive the price relief there is tremendous market pressure for price relief in the collision repair industry, our margins are not where they need to be to properly serve our clients.
The significant increase in length of repair, which is reported by enterprise rent a car in the U S.
It is very bad for insurance clients from a customer service and our rental cost standpoint. So there is some economic reasons for them to help us increase our capacity.
So the so.
I believe that I am confident that the clients that have not moved will move and should move fairly shortly in terms of the second round. There's really no choice I think what will end up happening in the industry and I believe its even beginning to happen now as insurance clients that haven't moved.
Some repairs will begin to disfavor of their work.
And exchange of work that has higher margins and and that is an untenable position for an insurance client in the long run. So I think that will help to normalize it.
Even today, we see insurance clients that have moved their rates up to levels that are more reflective of what's currently needed and others that have not and so that'll be our early target will be to normalize that and then to continue to press for what we need so that the industry can build the talent it needs to properly service our customers.
Okay, No that's great color.
If you could just speak about the technician chocolate is how is that trending during the quarter. I mean has it improved in early March with let's say in December or it's pretty much still the same.
We don't comment specifically on numbers on that we were making slow progress towards it.
And we're focused on on the actions that will improve our ability to make progress on that such as expanding the size of our.
Field recruitment efforts, so that we're closer to the ground and more responsive when we'd get applicants.
Our retention initiatives to make sure that we do a good job of Onboarding and stay in touch with our team and of course, our technician development program and we've got some other entry level training programs. So that we can bring new talent into the organization and grow it into the key positions and we're short on.
Okay, Thanks, and maybe just one last one Steve.
So you've mentioned that some of the new locations that you've acquired are also facing these challenges.
Comfort like shortages.
Paper shortages I'm just wondering.
Is the market really competitive on the M&A side that you guys have to go and do.
These location acquisition using the SBA or is it just that you've seen that the turnaround floor for debt obligations would be pretty quick.
The idea is to ask why.
With us on that front, yes.
That's a place that.
Thats still challenging.
Yes. Unfortunately, we had a fortunately had unfortunately, we had a very good year of growth last year. So we really were ahead of.
Maybe our internal thinking on that last year.
And some of those businesses are impacted by the same same forces that are impacting our business overall.
We believe that there is still good growth opportunities that make sense to execute on today, even in a <unk>.
Constrained labor environment. So we will continue to grow.
But but we do have a little more focus right now on <unk>.
Integrating and getting the operating results from the growth from last year on track.
And we think we have a big same store sales or big revenue improvement opportunity.
<unk> put in some of our focus into that so we're continuing to focus on growth, but I would say we have an intense focus on the performance of our existing network.
Okay. No. That's very helpful. Thanks for taking my questions I'll get back in the queue. Thank you.
Excellent.
We will go next to Maggie Macdougall with Stifel.
Maggie.
Good morning, and I apologize for the background noise sitting.
On an airplane.
So I hope you can hear me. My question is really just around the carbon and flex that link granted.
You touched on the rationale.
And essentially enable you to access your liquidity can you give us an idea.
Capacity that you are able to access in terms of drawdown on your credit facility.
And this is simply a measure.
Given the I guess I'm certain the outlook provides inflation in pricing, especially with regards to training.
Or if we should think about this differently.
No I think you said, yes.
Yes, as you pointed Maggie the intent here is to increase the capacity and also I cannot give you a number because it's a moving target except for it goes to $4 five in Florida in the quarter, but I can provide the framework how it works so plus fall at the Covenant Tsai senior funded debt leverage ratio.
On a pre <unk> 16 basis, so you'd have to make a three adjustments the first one and Tom self op.
I'll put aside just mentioned so you have to back off and calculating and the second one is you have to back out the bank note approximately $54 million of our vendor north. So you have to back that off and we do get the benefit on the EBITDA side for the pro forma EBITDA.
I'll talk about a year or so after the tightened we execute so so you do get.
That are denominated in terms of the EBITDA. So if you make those adjustments you will see how much will we have and again it'll unintended not to provide exact inflammation because it changes and if you don't want to give a static number and keep on updating you could easily calculate based on those three factors and again, we have ample capacity at this point in time.
I think the the changes put us in a good position to take advantage of opportunities.
To the extent that opportunities emerge from this difficult environment.
We're very well positioned on that our balance sheet remains very strong.
And so that was part of the reason in as well.
Okay. Thank you and if I may just one follow up on that.
Have you seen any signs that the large quantities of Goldman possibly operating at lower margin than you are.
Okay.
Alright.
I'm not sure we've seen an acceleration of it theres always been an ample supply of <unk>.
Single shop operators that are interested in selling.
So and I would say, there's still ample supply today.
Okay.
Thanks very much.
Okay.
We'll go next to David Newman with days or a day.
Hi, good morning, Tim and Pat.
Great.
In terms of part supply.
Shipping rates freight costs and things like that it remain elevated and you guys are using obviously alternative suppliers OE parts and things like that to solve some of the issues.
And supply chain challenges still remain and I know what it's like.
Cost pass through.
The P&C insurers, but can you dynamically pass through all of that and I'm also thinking like some of the commodity inflation, we're thinking on what will end up going to the supply chain.
For parts for OE parts and things like that.
Or do you have do you get squeezed on the Mark up at all to share the pain in this kind of environment just on the parts side nearly killed the labor issue.
I think to date the challenges we've had on the parts supply chain side are really a lack of availability, which is suspending repairs and process were delaying bring a repair in or when the parts not available from our primary supplier and we buy at discount levels that are attractive to us.
In addition, if aftermarket isn't available which has been aftermarket supply has been more challenged.
OE, although <unk> been.
Been challenging.
Our margins on aftermarket or better than our margins at OE, So thats had a negative impact.
But to answer your question.
If the part pricing goes up.
Which it has a we're still able to pass that through so we're buying from our primary supplier and the price goes up.
Thats a pass through and that negatively impacted margin. So the negative impact is really suppliers that don't have that we do business with that don't have the part and source it elsewhere and the shift from aftermarket to OE, we have incurred modest freight charges that can be difficult to pass through but I would say in the scheme of things.
That's pretty insignificant.
Okay, and then second question just relates to.
We talk about the financials in the progression from the margins went up but just from the shop floor productivity point of view are you seeing any incremental improvements in terms of the work in process, maybe the length of rental cycle.
Cycle times, all of that sort of thing are you seeing any incremental improvement as you kind of balance equation between labor and parts.
I would say that we have not seen incremental improvement and I would attribute much I would attribute much of that to the supply chain challenges.
Unlike the rentals continued to go up I believe in December it was over 19 days in the U S. The aperture is extraordinary.
But I think thats reflective of primarily the supply chain challenges, but certainly the labor as well.
When repairs right now get vehicles towed in and there are already overcapacity they have to balance out repairing that vehicle that they have no choice to accept with drivable vehicles that may be in process. So until we build our labor to the point, where we can services work.
And the supply chain disruption as.
Is reduced I think we'll continue to see elevated cycle times.
If you look at it.
Not just the audio issues the industry as a whole that experiencing these two challenges and as Tim pointed out if we look at the beginning of the quarter. It was $17 eight days and this is for the industry and other quarters $19 fall. So does increase because of the capacity constraints and also because of the top agent disruption.
Makes sense and two quick ones for me just obviously with these interest rate increases that we're seeing.
And I know the private market valuations were a lot different than public market valuations et cetera.
And this has been kind of a p/e theme has kind of crept into everything in the industry recently with all the p/e acquiring from the Msos and single shops et cetera.
Youre one of your major competitors P equal to <unk> back, but and you've also got a lot of pay stepping in buying msos with these rate increases and given that the leverage of these guys deploy I would assume that going forward at some point.
The bandwidth of M&A that you guys have could be very very significant.
I think we're well positioned.
Versus our competitors on this yes, absolutely right, David I think <unk> I think you hit the nail on ex Harry like if you look at the <unk> model is to have high leverage.
Rising interest rate environment, and with a comprehensive EBITDA margins did find it difficult to continue that path actively unless to the sponsor decided infused iPhone equity so from that perspective.
<unk> much better and if you look at the large eight of the top eight other than US all others are controlled by <unk>.
All of them have higher leverage than us so <unk> position.
Okay and last one from me I'm selfishly going to ask one more because it's my last call with you guys from a research seat and I look forward to supporting them from the from the sales going forward, but just the accrual reversals in four Q on <unk> Dot com, maybe just kind of.
Ballpark, what was that kind of the impact there on the reversals.
And again, we don't give a specific.
Factor out the specific numbers there David but I'll help you here are the three things that are going to impact from Q4 to Q1. The first one is on accruals, we take a lot of eating accrual.
So Dr.
That is accretive to the EBITDA. The second one is the payroll taxes typically know you Max out on Q3 Q4 will have very little so in Q1, you restarted the clock for the unemployment of social security and stuff like that so thats. The second factor on the total and as soon as we commented Q4 benefited by 2.3.
So you won't see that in Q1. So those are the three things that are going to have a negative impact didn't give some color. If you look at Q4 of 2022 Q1, FY 2021, I'm not saying that's going to happen yet, but just to provide a context in Q4 of 2020, we had a 30 point.
9% Opex ratio in the Q1 that was a 33.5.
So it will help by almost 250 basis points IMAX I, just think it would be $2 50, but I am saying it shows the order of magnitude the impact of the Opex and the <unk>.
But therefore you saw.
Cruel offset got it very helpful. Thanks, guys.
Thank you very much and good luck for the next bill. Thank you David Good luck and thanks, Pat appreciate it.
We'll go next to Jonathan Lamers with BMO capital markets.
Good morning, Good morning, Hi, Jonathan.
Hi, most of my questions were answered.
One follow up during.
During the Q&A earlier did you say that Q1 quarter end name.
Same store sales.
Should exceed 2019 level.
Despite the technician shortages.
So I was illustrating.
Because the question was on the same store sales growth when we would get back to the pre pandemic level.
Illustrating in Q4 of 2020, the same stores declined by 12, 6% in Q1 of 2021 same store sales exceeded by eight 5% compound that too.
Net net our same store sales were down by approximately 5% at the end of Q4, and thus far in the quarter. We are seeing the same store sales growth.
Sustained with the fourth quarter for fourth quarter for $8, if I'm not saying, it's exactly the same but if you add that to eight 5% of this 95% that would exceed the 100 plus at the pre pandemic level that was the point I was trying to illustrate.
Okay. Thank you that's clear.
Thanks, Jonathan Labor shortages have been an issue for the wait for several years now.
So I think the tricky thing for investors to sort out is.
How far below 2019 levels our volumes now.
Can you.
Get operating margins back to historical levels.
Absent the throughput, but it really depends on the technicians.
Yes, I think this is not just to avoid issue. This is an industry issue added affects our customers and so the solution is for the industry to build its capacity and to do that we have to attract new labor into the industry.
And to attracted from say the mechanical repair industry or other industries, where his skills and we're <unk>.
Could become proficient at our trade in a reasonable period of time compensation levels in our industry are going to have to go up and in order for that to happen.
Insurers are going to have to pay more for the repairs otherwise, we wont be able to attract the labor. So we're going to continue and as I said earlier. It is absolutely an an insurer's best interest for their customers to be very satisfied with the timely quality repair when they have a claim otherwise.
They're very likely to change insurance companies. So I think there is motivation all around to do the right things. So that we can attract and retain the talent in our industry, but these are things that happen overnight because it.
It requires adjustments to your business the insurers have to raise rates, which if you've been reading the news on the automotive claims fraud.
Insurers have been taken rate right and left and in significant percentages and will collision repairs at the only segment that recovery for that risk. It is a sizable piece of it so I think that.
Unfortunately premiums for consumers will continue to go up and I think that will continue to get pass through until we have stabilization of labor in our industry, which is what's what's necessary for us to really to service our customer properly.
One follow up on that if I can.
So now.
You have secured this first round of rate increases.
Which are unprecedented we will go next.
Set of negotiations or the next round of rate increases be easier or.
Will those be contingent on.
Thank you my premiums going up first for example, and there'll be a bit tougher.
Yes.
I don't know the answer that I can tell you that we are going to continue to pursue increases aggressively.
That's what's needed for our business to properly service, our customers and we will.
We help our customers understand that.
Did mentioned earlier that when we look at the market right now and we've been I think we've been.
The patient is probably the wrong word, but I think we've accepted insurers moving at different paces to get their rates to where they need to be.
At some point given the significant.
Lack of capacity versus the demand that exists.
The industry will have no choice, but to favor work from insurers, who are paying rates that allow us to make an acceptable level of margin.
So I don't know that Thats happened broadly yet, but it has to happen because the returns were getting right now aren't adequate and we have all of the work we could one.
At our door, so I think that.
There will be continuing pressure, particularly for those insurers that have not yet gotten the competitive rates versus our peers.
And we will continue to push from there.
Great. Thanks for your comments.
Thanks, Jonathan Thanks, Jonathan.
We will go next to Bret Jordan with Jefferies.
Good morning, good morning, guys.
Alright, the parts supply chain challenges could you talk maybe about the cadence are you seeing any improvement in availability and maybe carve out between OE and aftermarket is one looking better than the other going into Q1 Q2.
Don't know anything about Q2, yet I would say thus far in Q1.
We have not seen.
Any meaningful improvement.
So the.
The number of parts that are back quarter across our network at the highest level that they have been and we have a substantial portion of our work in process.
That hasnt arrived recently.
Waiting for parts to be completed.
And you said OE is in better shape than aftermarket.
Maybe talk about where OE percentage of mix was.
Quarter versus a year ago, or maybe pre COVID-19 how much of it.
Shifted back to OE.
We definitely have seen a shift toward OLED from aftermarket, but the OE parts quite frankly, those are the big problem because if we if we can't get an aftermarket apart we can use in OE part to complete the repair so the real issue. We've got with our whip is a lack of OE part availability and.
It's across the board from all manufacturers.
Okay. So I guess, how do we think about like the mix of obviously the margins better on aftermarket.
As a percentage of your product or your parts usage could you talk about where aftermarket is versus the prior year.
I don't I don't think we disclose I don't have it in front of me anyway breath it.
But aftermarket usage is down relative to <unk> usage and Thats what are the drivers of the negative impact on our part margin a bit.
As you said aftermarket parts typically have a higher gross margin and there are lower cost to our customers. So it's it's unfortunate that there is a lack of availability, but I think fill rates on the aftermarket side, especially timely fill rates are not what they were before the pandemic.
But I think you know this already we have majority of approximately box.
The aftermarket is a minority a chunk of our usage.
Right.
Okay, great. Thank you.
Thanks, Brett.
We will go next to Steve Hansen with Raymond James.
Good morning, Stephen It's Steve.
Yes, good morning, guys.
I just want to go back to your comment around the price increases not being realized thus far in Q1, I think we can all understand the concept of a delay given the backlog, but even if I look at industry backlogs running.
Call. It five six weeks, which is unprecedented I would still think that you would have some of that price benefits starting to roll through in Q1.
Those price increases secured as of the first of the year anyways. So maybe just help us walk through what you mean by Theyre not rolling through as yet.
And whether or not it's just that the labor running harder faster or the price increases actually running through the quarter. So far I was trying to get a sense for why the lag it would be so material.
I think we've seen some benefit on the revenue side from the price increases in Q1.
But we've also continued to see wage pressure.
But we've certainly not seen anywhere near close to the full benefit.
Of the rates that we've negotiated and then six week lag is pretty significant.
Also have to consider that the average repair time right now is.
He used to be.
12, 12 days now it's significantly higher than that so we don't book the revenue until the car is gone the repair completed.
There is a pretty good lag from from.
From the time, we get a rate increase to when youll see it in our margins.
Okay. That's helpful. And then just on the idea of going back to your your customers again.
For further rate increases you suggested it's going to be.
Effectively necessary a certainty.
But how frequent is that Tim is that when you were going to be doing quarterly on a quarterly basis for all of these customers. If youre in a rationing effect evaluable capacity you have to think you're going to be pushing hard but is it is that it gives you a regimented schedule that you would be going back on or is it just as you feel like we're trying to get a sense for how you protect yourself here through.
Through the balance of this year in particular.
Yes, I am confident that all of our key clients know today that whatever we've gotten isn't going to cover the need and there will be asking for more and we are asking for more so I think it'll be fairly constant we will use some analytics to identify where we think.
The best opportunities are and put our focus on that but.
I would expect that we're going to be going back for rate for several months.
Thanks, Steve it's difficult to comment I know that they're going to go back every quarter depends on how much increase we're going to get because we want to be very competitive with the other industries.
And that way we can.
<unk> retained people and it's not a matter of taking one insurance client and negotiating with them nationally.
Many time or most of the time, we're looking at the rates.
Market basis.
And then comparing it to what we need what other clients who are paying and then making our case based on that.
Okay.
Understood. Okay. That's helpful. And then just turning back to the M&A side again, it's been suggested at.
At least somewhat publicly that you guys have halted eliminate recently.
We don't think Thats the case, but just trying to give us a sense of your comp and the M&A track record going forward here.
I think we need all understand.
The plan has not changed.
Five year plans that we articulated here, but I want to understand clearly that the M&A is still one that you are continuing on.
As I said in my conference call script.
We remain confident in our ability to double our revenue from 2019 by the end of 2025.
Your growth by acquisition or Greenfield brownfield opening is a very key part of that.
Im not sure where there was ever any indication that we've suspended growth.
First of all we're not doing that secondly, we've never publicly stated that so to the extent that that was out there was wrong.
We remain committed to growth we are very focused as I said earlier, we're very focused on driving the results of our core operations, but we've got separate business development resources.
That are focused on growth and we'll remain focused on growth. So.
Growth can be lumpy, so I'm not saying that we had 127 locations last year that doesn't mean, we'll open 127 locations. This year, but we will continue to grow.
Okay, Great helpful. And then just maybe just last one I'll just ask it directly because I think we're all trying to get there but.
Margin improvement again sequentially I'm thinking off of fourth quarter doesn't sound like it's necessarily in the cards in Q1, and maybe it's hard to tell but I mean, maybe I will ask that question first is can we get any sequential margin improvement given the accrual differentials in the payroll tax issues that you mentioned and if not in Q1 can we do.
Get it in Q2 against sequential not year over year.
Yes.
Steve will be commented and we cannot give exact guidance on the margin improvement, but I commented about the impact of Opex, how it behaved in the past, but in Q4 and Q1. When you didn't have the benefits of the accruals, but we didn't have the payroll taxes reset on the top of that this time, we have no.
Benefit in <unk>.
<unk> so given those three factors in the past the increase was approximately 250 basis points again, I'm not suggesting it.
No you expect you should expect but just use up a framework you start like a very small amount it has a pretty meaningful amount in terms of the hit.
The impact of those factors, but beyond that no we cannot give exact guidance, but historically our expenses in Q1 have been higher tier or by meaningful because of those three factors here.
I don't want easily in terms of the plus store sales. So you have to see where they are now compared to where they were before and then the under absorption of the fixed cost those are all the factors that contribute to the Delta just alluded to.
Sure I understand that <unk> been furnace sensor the price increases that you are secured and the future price increases that are coming there is no visibility at this juncture I guess on when and if youll be getting sequential improvement in margins I guess, that's the question.
We did say that in Q1 that you shouldn't expect to see incremental improvement in the gross margin.
Sure.
Okay. That's helpful. I appreciate that guys. Thanks.
We will go next to Daryl young with TD Securities.
Good morning, guys Darryl.
Just a question some of the insurance companies have been highlighting a need for greater integration and greater use of technology potentially then.
Parts procurement relationships on their side I was just wondering if you can give us a bit of color on what some of those initiatives are and whether it's a benefit or or a potential risk to two yourself and the large msos model.
Got it.
I'm not familiar with the details but my.
My understanding is that it.
Likely where an insurance carrier may develop or have a relationship with a parts supplier.
It may.
Provide some favor to the insured directly from the parts supplier.
For committed to volume from that supplier, so I think those.
They're not likely to directly impact us, although it could impact the suppliers' ability to how they price, but theres lots of competition out there.
<unk>.
On a good day parts is complex.
For us and we put a lot of time and effort into it I think it would be very difficult for an insurer to inject themselves and the parts procurement decisions in a way that.
Would be very beneficial to them so.
I guess it remains to see what they can accomplish with that but.
Right now I think that they are better off with US tried us sourcing the parts and working hard to keep their cost down which we do.
Got you okay.
And then.
Just on the acquisition side the acquisition cost per location I know you've done some high quality MSR acquisitions. This past year, but it certainly been marching higher on a on a per location cost.
Should we look at sort of a trailing 12 month number is representative of go forward or is there anything to go from that.
No because I think that last year, the acquisition cost plus shop lessor inflated because of the two msos with data, namely <unk> and John Harris, and we clearly indicated on a going forward. We have an increased emphasis on the single shops, a single shops and promptly greenfields.
Vestment by shop is lower than the mix. If we take the last year mix. If you look at the statement of cash flows to see $317 million or <unk>.
<unk> hundred 27 locations. So you cannot use that as an indicator it should be lower than that.
Okay got you and then just one last one.
Triple C had some information out stratify the average age of <unk>.
Their technicians.
Which would appear to be significantly skewed toward and older.
Repair average Perry repair or age.
We see that as being a significant sort of hurdle in the future or I know, you're working hard to bring in more technicians and up the training today, but is that a big.
Hey, Pat.
Looming concern mass retirements.
It's a concern but it's also one of the reasons that in 2018, we launched our technician development program. So we're we're successfully bringing in young talent to our industry and to our company.
To help to offset that but.
I think during the pandemic, we probably saw an acceleration of retirements.
From that.
That segment of the workforce that was not far from retirement.
So it is a concern, but one that we're working to address.
Okay great.
Back in the queue. Thanks, guys.
Thanks, Joe.
We'll go next to Zachary <unk> with National Bank financial.
Zack Zack.
Good morning folks thanks for taking my questions most of them have already been answered, but maybe you could touch on the admin staff and capacity constraints.
That having a material drag on same store sales growth on a store by store level and how does that really compare with the situation you're experiencing and the technician labor pool.
There are definitely connected.
If we don't have sufficient skilled staffing in the front office, then we're not able to rate quality estimates and build repair plants that makes that work for our technicians, both more available and more efficient. So it's a balancing act and what we generally talk about technicians.
We have similar programs in place on the estimated side.
Similar to what we have and the technician said, we actually have an estimate or development program.
We've launched we've actually had that underway for quite some time now.
We are expanding that this year as well, but like any business the front office and the admin side needs to be in sync with the production side to optimize results. So there are both challenges and we've got good effort going into both the front and back office.
That's good color. Thanks, and then a follow up on your training program approximately how long does it take for someone to graduate and then if you could comment on the retention rate on those graduates.
Yes.
Well first of all our retention rate is quite good.
<unk>.
And we actually are developing some additional plans right now to further improve retention because it is it is.
Clearly a vulnerability we make a big investment.
To bring them up to.
A pretty good skill level.
The program our program has an 18 month program.
But it's important to note that the.
Do become productive and accretive to our capacity.
Well before 18 months generally in their first three to six months.
They would be.
Drag on not on capacity, but a drag on margin.
And then by the time they get to the.
And are there first third of the time and the program Theyre actually additive to production capacity and should not be a negative drag on margin and by the time in their last there last third they should be accretive to margin and accretive to production capacity and a fairly meaningful way.
Or once they're graduated our experiences that theyre producing had not far from the average level of productivity of the technician and then they really need probably another 12 to 18 months to continue to build their skills and their efficiency. So it's not a short term solution, but it is it is a long term solution.
Got you. Thank you very much.
That's it for me I'll turn it over.
Thanks, Jack Thanks Zack.
We'll go next to you Christa Friesen with CIBC World markets.
Lancaster. Thanks. Good morning, Thanks for thanks for taking my questions have been answered.
But I was just wondering on the right side of the equation.
Are you hearing any concerns from insurance companies that for future rate increases.
How much more they can really push through to.
Their customer.
And approved from a regulatory standpoint.
No I haven't heard that in fact, I think when what are the major insurers reported.
Or six weeks ago.
They expressed confidence in getting the rates that they needed to maintain the profitability of their portfolio and noted that they would be going back multiple times. So I think the reality is we've got an inflationary environment.
And pricing is going to have to adjust.
Isn't necessarily overnight, but I think there is lots of evidence to suggest that.
There is pricing power in the marketplace for insurers to increase premiums to cover their loss costs.
Okay, Perfect and then maybe just one on the labor side of the equation are you are you seeing a net increase in your head count as it works through Q1 here when you factor in any sort of retention market are you still increasing head count.
We're not disclosing specifics on that but we.
<unk>.
We're making progress against our goals.
I'd like to make faster progress, but were making progress against our goals and I think we have the right.
<unk> strategies in place to continue to make progress and build our labor capacity.
Okay, Great. That's it from me thank you.
Thanks Kristina.
And at this time I will turn the call back to the speakers.
Alright, well, thank you operator, and thanks to everyone for joining our call today, and we look forward to reporting our first call results in May I have a great day. Thank you. Thanks, everyone for your interest in the body.
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