Q2 2022 Boyd Group Services Inc Earnings Call
Good morning, everyone and welcome to the Boyd Group services incorporated second quarter 2022 results conference call listeners are reminded that certain matters discussed in today's conference call or answers that maybe given to questions asked could constitute forward looking statements that are subject to risks and uncertainties related to boyd's future financial or business performance.
Actual results could differ materially from those anticipated in these forward looking statements. The risk factors that may affect results are detailed in boyd's annual information form and other periodic filings and registration statements you can access these documents on SEDAR.
Database found that S E T. A R dot com I'd like to remind everyone that this conference is being recorded today Wednesday August 10th 2022.
I'd now like to introduce Mr. Tim Eau de President and Chief Executive Officer of Boyd Group services incorporated.
Please go ahead Mr O'day.
Thank you operator, good morning, everyone and thank you for joining us for today's call on the call with me today is Pat pets, Petty, our executive Vice President and Chief Financial Officer.
We released our 2022 second quarter results before markets opened today.
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 and six month period ended June 30th 2022, and provide a general business update we will then open the call for questions.
During the second quarter of 2022, we delivered record sales and adjusted EBITDA supported by strong same store sales growth in both Canada and the U S as well as solid contributions from new location growth glass and calibration services.
Mad for Boyd services continued to substantially exceed capacity in all U S markets well Canadian markets continued to experience recovery of demand for our services as conditions began to normalize.
The ability to service demand continues to be constrained by market conditions.
Path to achieving historical levels of performance requires additional labor capacity pricing increases and continued easing of supply chain pressure. These market conditions continued to result in an under absorption of fixed costs and high levels of work in process at the end of the second quarter.
During the second quarter, we recorded record sales of $612 8 billion adjusted EBITDA of $72 million net earnings of $13 3 million.
Sales were $612 8 billion or 37, 8% increase when compared to the same period of 2021.
This reflects a $73 4 million dollar contribution from 111 11, new locations. Our same store sales excluding foreign exchange increased by 22, 3% in the second quarter recognizing the same number of selling of production days in the U S and Canada when compared to the same period of 2000.
'twenty one.
Same store sales growth was a result of pricing increases and high levels of demand for services, although ongoing staffing constraints and supply chain disruption continued to impact sales levels that could be achieved during the second quarter of 2022.
The gross margin was 45, 3% in the second quarter of 2022 compared to 46, 1% achieved in the same period of 2021 with the prior period, including the recognition of the Canada emergency wage subsidy or sous of approximately $1 5 billion.
The gross margin percentage was negatively impacted by reduced labor margins as well as a higher mix of <unk>.
Sales in relation to labor.
Well pricing increases continue to flow through the results in the second quarter of 2022 labor margins were negatively impacted by the extraordinarily tight labor market, which continued to result 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 second quarter of 2022 benefited from performance based credit relief to address constraints caused by current market conditions.
Operating expenses for the second quarter of 2022 were $205 5 million or 33, 5% of sales compared to $147 1 million or 33, 1% of sales in the same period of 2021 with the prior period, including the recognition of Suez.
Proximately $2 1 billion.
The increase as a percentage of sales was due to wage and other inflationary increases as well as increased support costs related to recruitment and training, including the costs associated with the technician development program and support costs related to the expansion of the wall operating way practices to our corporate business processes.
These impacts were partially offset by improved sales levels, which provided improved leveraging of certain operating costs.
Operating expenses as a percentage of sales for the period were constrained by the technician capacity due to a tight labor market market conditions, including wage pressure, a tight labor market and supply chain disruption are impacting the results that can be achieved in the near term.
Adjusted EBITDA or EBITDA adjusted for fair value adjustments to financial instruments and costs related to acquisitions and transactions was $72 million an increase of 24, 2% over the same period of 2021 with the prior period, including the recognition of sous of approximately.
$3 6 million.
The increase was primarily related to improved sales levels, which also provided improved leveraging of certain operating costs.
Adjusted EBITDA for the period was constrained by technician capacity due to a tight labor market.
Market conditions, including wage pressure, a tight labor market and supply chain disruptions are impacting the results that can be achieved in the near term.
Net earnings for the second quarter of 2022 was $13 3 billion compared to $10 5 billion in the same period of 2021.
Excluding fair value adjustments and acquisition and transaction costs adjusted net earnings for the second quarter of 2022 was $13 6 million or <unk> 63 cents per share comp.
Compared to 11 4 million or 53 per share in the same period of the prior year.
The increase in adjusted net earnings per share was positively impacted by increased sales, partially offset by lower gross margin at a higher level of operating expenses.
Staffing constraints wage inflation and supply chain disruption impacted net earnings and adjusted net earnings for the second quarter of 2022.
For the six months period, ending June 32022 sales totaled $1 2 billion, an increase of $303 3 million or 35% when compared to the same period of the prior year.
Driven by same store sales growth of 18, 3% as well as contributions from new locations that had not been in operation for the full comparative period.
Gross margin decreased to 44, 7% of sales compared to $46, 1% in the comparative period.
The prior period included the recognition of <unk> of approximately $3 million.
The gross margin percentage was impacted by reduced parts and labor margins as well as a higher mix of parts sales in relation to labor.
Will pricing increases began to flow through the results in the first and second quarters of 2022 labor margins were negatively.
Impacted by the extraordinarily tight labor market, which continued to result 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 first six months been in front of performance based credits to address the constraints caused by the current market conditions.
Operating expenses increased $108 8 million when compared to the same period of the prior year, primarily the result of increased same store sales as well as location growth.
Prior period included the recognition of <unk> of approximately 4 million.
Operating expenses were negatively impacted by the extraordinarily tight labor market, which resulted in increased wage and benefit costs to both retain and recruit staff.
Also impacting the first six months of 2022 were increased support costs related to recruitment and training, including costs associated with the technician development program as well as costs related to the expansion of the Wow operating way practices to our corporate business processes.
Adjusted EBITDA for the six month period, ending June 32022 was $125 8 million compared to $110 7 million in the same period of the prior year.
The prior period included recognition of Suez of approximately $7 million the $15 million increase was positive positively impacted by improved sales levels, which also provided improved leveraging of certain operating costs.
We reported net earnings of $14 9 billion compared to $8 $10 2 million in the same period of the prior year.
Adjusted net earnings per share decreased from 92.
73.
The decrease in adjusted net earnings per share is primarily attributed to the lower gross margin percentage and higher levels of operating expenses.
At the end of the period, we had total debt net of cash of $973 7 million compared to $970 1 million at the end of March.
Debt net of cash increased when compared to prior periods, primarily as a result of acquisition activity, which resulted in increased lease liabilities.
Prudent financial management allowed Boyd to reduce the level of debt net of cash prior to lease liabilities during both the first and second quarters of 2022.
During 2022, the company expects to make cash capital expenditures within the previously guided range of one 6% of sales. This excludes those capital expenditures related to the acquisition and development of new locations.
Demand for Boyd services continues to substantially exceed capacity in all U S markets, where Canadian markets continued to experience recovery of demand for services as conditions began to normalize.
The ability to service demand continues to be constrained by market conditions, the path to achieving historical levels of performance requires additional labor capacity pricing increases and continued easing of supply chain pressure.
These market conditions continue to result in an under absorption of fixed costs at high levels of work in process at the end of the second quarter.
Building on the success, we achieved in early 'twenty two.
<unk> continues to negotiate pricing increases from clients, which are necessary in order to support the attraction of talent to the industry and the retention of the current talent.
We've made good progress with many clients, but have not achieved the level of pricing that will return our labor margins to historical levels in.
In addition, we're experiencing pricing variability between clients, which in addition to receiving sufficient pricing. All overall is a key area of focus and our ongoing pricing negotiations the.
The fact is a higher level of pricing is critical for our industry to attract and retain skilled labor that's needed to meet even reduced levels of demand.
Supply chain disruption has continued to impact the completion of many repairs and has resulted in a high levels of work in process. However, this disruption is showing early signs of normalization as your underlying manufacturing and distribution issues reduce.
We remain committed to addressing the labor challenges through initiatives, such as our technician development program, including our commitment to double the number of the training trainees in the program to help meet future needs. We are increasing the number of technicians and the development program from approximately 200 at the beginning of 2022 to four.
Hundred by the second quarter of 2023.
In the short term, we remain focused on addressing the labor shortage for our core business. Our revenue will continue to be impacted in the near term, but continued levels of absenteeism from COVID-19, which will be further compounded by the challenges of vacation, especially given the already tight workforce.
We're focused on optimizing performance of our new locations as well as scanning and calibration and consistent execution of our Wow operating way.
Notwithstanding near term challenges void remains confident in the business model and the company's ability to double the size of the business on a constant currency basis from 2021% to 2025 against 2019 sales.
In the very near term same store sales will continue to be an important driver of growth. Thus far in the third quarter of 2022. The company has experienced same store sales growth within the range of the first half of 2022.
Accretive growth will remain the companys long term focus whether it's through organic growth new store development or acquisitions.
Earlier today, we also announced the planned retirement of Pep Pep Pep Petit from the role of Executive Vice President and Chief <unk> Officer <unk>.
<unk> 31 2022.
And exact and executive search process for his successor as commenced.
That has played an important role in the Boyd group's growth since joining as executive Vice President and CFO in 2015. Since then the company's revenue has tripled for six consecutive years of his tenure boys with Boyd was named as either the T X us as number one or number two top performing stock based on <unk>.
Performance of the past decade under Pat's leadership, the company successfully executed acquisitions of hundreds of stores doubled the number of research analysts covering the business completed the conversion from an income fund structure to a corporate share structure moved from Canadian dollar to U S dollar reporting and increased the credit facility.
More than six fold in order to support our rapid growth.
While we have every confidence that the company will continue to execute against the solid business strategy supported by an excellent long tenured leadership team pets contributions have been appreciated throughout his time at Boyd and will certainly be missed as he retires.
With that I would like to open the call to questions operator.
Thank you, ladies and gentlemen, if you'd like to ask a question you may do so by pressing star one on your Touchtone telephone star one for questions. Please make sure the mute function on your phone is turned off so the signal can be read by our equipment.
Darwin for questions, we'll pause a moment to assemble the phone queue.
We'll take our first question from Maggie Macdougall with Stifel. Please go ahead.
Good morning, good morning Maggie.
Thank you.
Congratulations on an excellent second quarter.
Thank you.
My question is around the components of our organic growth.
Very strong number.
Q2 and.
In my mind, there's probably a few categories. So I know that auto parts costs are up and theres pricing pass through or not I know that you've also got some price increases from your insurance company customers or partners, which is great.
And then.
It would be a volume component.
Severity of claim component I'm not sure I was hoping maybe you could try to explain a little bit which of those factors may have been the more meaningful.
And how you see that shaping up over the coming months.
We don't really have a lot of detail on breaking that out by component Maggie but.
Youre right I mean, there there are multiple coordinates that drove the 22, 3% same store sales growth some of it is pricing pass through.
On parts.
<unk> reported at the end of the first quarter that part pricing year over year.
It was up about 8%.
So that's one component.
Per complexity that you alluded to is also increasing.
So we are seeing a higher parts content more parts per repair on average which would be another contributor.
We have.
We have been successful getting some increased pricing on labor and paint as we've commented on previously.
And repair severity and you'll see this in a lot of our client reports repair severity is also up.
That's driven by some of the factors Ive already mentioned.
But high used car prices are also driving repair severity up because it reduces total losses.
Has us repairing vehicles that in a more normal environment may not have been repaired right.
Alright, just a.
Couple of other things yourself, we're also driving additional productivity from our workforce as well as we are experiencing.
Higher.
Revenues from calibration scanning of that's important from a quantity perspective as well.
Thank you Pat.
Another question I have.
Is regarding.
Propagation of your Wow operating way to your corporate locations can you just explain to us what does that mean I know, it's a continuous improvement program, but perhaps a little bit of color around Watson.
Maybe.
Absolutely first of all in terms of the scope that we have expanded.
Expanded all operating way into corporate and strategic support so I would say, it's like finance I T. H R and procurement. It has two broad company in this sector.
All of the component.
That is.
Critical for scaling up that business as it grow and the second one is a transformational component, which is transforming the existing processes. So we used a workday as a technology platform to drive that operating rate. So those are the two components.
I've got pretty optimistic and as we've disclosed we went live on July <unk>.
Okay perfect in it and so it is at its live everywhere or is there a bit of a rollout timeline around it.
It's live everywhere, but as you can imagine from amazing implementation you'll have.
Our class Vishal to attaining a Chinese state. So we just have gone live and it's going to take a quarter.
Quite a lot to to to get to that steady state.
Okay perfect. Thank you.
And Pat congratulations on a successful.
It's nice to hear that you're.
Hear everything that you've accomplished and I'm sure you're looking forward to retirement as well.
Thanks, Maggie I appreciate those thoughts.
Matthew your line over.
We will take our next question from Steve Hansen with Raymond James. Please go ahead.
Good morning, Steve Good morning, Steve Yeah. Good morning, guys. Thanks for the time.
Just a couple if I may you've done a pretty good job, but it sounds like it's securing the price increases.
But based upon your commentary it does sound like they tend to be highly variable depending on the carrier just.
Just curious as to how often infrequent youre going back to the different carriers to make sure that everyone knows what's happening in and try to get a more uniform price increase or are you in regular dialogue with them as it quarterly now asked a similar question I think on the last call, but I was trying to get a sense for how frequent dialogue is so we can understand how quickly there.
The carriers might respond.
It's ongoing dialogue, it's not quarterly it's it's very frequent.
There are some complexities with it Steve pricing at our industry isn't uniform across markets.
So we're constantly evaluating pricing across clients on a market by market basis, and then presenting that information to our clients to get more consistent pricing.
But also.
Looking at what we need in pricing in order to be able to attract and retain labor in our industry.
So it's a constant discussion with our clients.
And probably will be for for a number of months.
Okay, No that's fair and just given the incremental success that you have seen thus far.
Strictly that you're making progress here you know do you have a sense for the timeframe to get back to a normalized margin profile is at first quarter next year late next year.
You can have.
We havent, we havent community timeframe, and it's really difficult to properly assess that.
It's still a very very tight and competitive labor market.
So even as we're receiving price relief from our clients were still under cost pressure.
So it is dependent both upon our success and the timing from getting increases from clients kind of leveling out quiet pricing, a little bit more and when the wage pressure softens up.
I know we've talked about this before but it's it's our belief that the industry needs to raise the bar on compensation for skilled labor to retain what we've got and to attract that labor from other industries.
Because there's just not enough capacity right now in the in the industry in the U S to service even reduced levels of demand. So we're going to continue to work hard to build.
Build a value proposition so that we can properly service our clients.
And that's going to take increased compensation to our workforce.
Fair enough.
Lastly, if I may on the broader growth outlook.
Can you, perhaps just comment on your.
Your aspirations for growth here in the in the.
Over the next 12 to 18 months on both in M&A and Greenfield basis, just given the context of the recent M&A in the landscape.
Larger msos getting larger.
We continue to be committed to growth and while it's been a little slow as we focused on our core operations.
We're committed to continuing to grow and we reiterated that we are confident in our ability to achieve our 2025 revenue plan and I think if you just back into that Youll see we will have to.
Step up the pace of growth going forward in order to accomplish that so we're very committed to growth in <unk>.
We believe that there are ample opportunities out there.
Available to us to continue to grow at a good pace.
Okay. Thanks, guys appreciate it.
We will take our next question from Chris Murray.
<unk> capital markets. Please go ahead good morning, Chris.
Good morning folks.
So probably maybe going back to your comment about.
Pricing and maybe I just wanted to ask you to clarify.
You talked about variability.
When you're referring to or variability you're talking about maybe differences between what youre getting for price increases between parts and labor or is that across our different types of insurance. So any additional color to help us understand what you mean by that would be helpful.
The two primary negotiated.
Ponant some pricing in our industry are labor labor rates and paint material rates. So what I was really referring to is the fact that as we've.
<unk> been successful at getting increases on a market by market basis. We review for large clients. We review the level of pricing that we've received from large clients in our market and we compare that to our current pricing from other large clients and what we're seeking is to level that out and minimize the differences.
Yes.
In fairness spoke to the clients that have moved sooner and in order for us to be able to recover and get back to more normal labor margins. So it's really the variability across larger clients.
Okay. That's helpful.
And then just a quick question.
One of the things about seeing such a strong same store number.
Part of it I would have thought of especially as you kind of called out. The fact that you've had some some improved parts supply.
As I would've expected with inventory to come down so I guess a couple of parts of this question.
With actually was up in the quarter.
And you I think if I'm reading. This correctly you guys are calling for something in the 18% range. If I look at your H one same store print.
Which would actually be kind of maybe a bit of a deceleration period to period. So just can you help me understand.
How youre thinking about same store going into Q3.
And the unwind of that whip as things start.
Improving and then is there any chance that that perhaps to catch up on with.
Maybe turns at that same store number higher.
Until we get it normalized.
I guess first of all on the.
On the same store sales growth that you just referred to what we commented on was what we've seen.
Thus far in the quarter, which.
As you know is fairly limited.
But but that's typically how we provided information to the market on what we've seen thus far as far as the web.
We have seen the whip dollars may have gone up they didn't go up at the same pace that our revenue increased so we've seen I'd say a slight improvement in early improvement in whip.
And the ratio with two our completed sales.
So that's really the component of it as we I think there is an opportunity as parts supply improves.
A good portion of the whip that suspended because it's missing apart has had a fair amount of the labor completed on it so as that frees up I do think we have some upside same store sales opportunity. It's pretty early on I mean, we noted that we'd seen.
Early signs of improvement, but as you as you saw our investment in work in process actually went up a little bit.
But the ratio has gone so well.
Chris one way of looking at it is you're absolutely right. It has gone up modestly from auto and $76 million end of last quarter to 70 770.
$78 million in at the end of Q2, but if you look at the sales we had $556 million was $612 million. So we predict that DSM.
It has actually gone down so dataset patent metric than the absolute dollar amount and also the indicated if you look at the entire rental for the industry. It is modestly gone down front end up Q1 to end up Q2. So those are the indicators for a slight improvement in the top they trade disruptions.
Alright thats helpful. Thanks folks.
Thanks, Greg.
We'll take our next question from Michael <unk> with Deutsche Bank. Please go ahead.
Good morning, Mike Hey, good morning, guys.
Hi, Good morning. So you commented on the price increases in Q4.
And how that you know they take effectively some time to flow through the P&L as we see wages.
Move to the upside as well can you speak to the margin cadence through Q2 and I Wonder also if you can expand on the performance credit base.
Like performance based credit you received in the quarter.
When it comes to the the margins Mike.
We reported 45, 3% and.
That's a significant improvement compared to what they reported sequentially Q1, we had $44 one and also had come past reasonably well to 2019, if you look at the year as a whole it was $45 four granted in Q2 of a slightly elevated so modest we are making great progress in terms of performance.
Pricing of the credits, we don't get into lot of details for competitive reasons.
Okay. That's helpful. Thanks.
And then maybe flipping here, so opex that increased about 7% quarter over quarter without a real significant increase to the store count I'm wondering if you can give us a sense for what pure inflation is versus maybe some of the growth initiatives that you invested in.
Maybe just comment.
If you can to the extent that the.
Corporate Wow operating way will drive.
Efficiencies in the second half.
So again, if you look at the Q2 of last year. It was 33, one and we reported 33 five and as you know last year, we had the suit the Canadian subsidy. So so you have to backhaul that particular thing. So if you eliminate that it was actually 33, 6%.
But last year compared to 33, 5%.
And so yes, you are talking quarter over quarter Youre talking sequentially.
Yes sequentially quarter over quarter increase was.
7% store count didn't really move up to that extent, so I'm just trying to.
You get a sense for inflation versus maybe some of the growth initiatives.
Q1, we reported it as a percentage of sales 34, 4% compared to Q2 $33 five and when you say it had gone up Opex ratio sequentially can you can you, therefore, which number you're referring to.
Alright.
Specifically, referring to is the number so the dollar amount.
Okay sure Yeah, absolutely I think I've done a bunch of things that are.
Going through and the fed.
One is I think the number of locations the Opex goes up.
One is as you pointed out the inflation and the third one is relating to approximate and consulting services relating to the implementation of the wall operating way asked the last into like a useful investments we've made in recruiting and training people.
So those are the drivers.
Including the expenses with the technician development program, absolutely growing quarter over quarter over quarter Yeah.
So listen we have a pretty aggressive client expands our technician program. So that's certainly.
Going through Opex.
Okay perfect.
And then just maybe one more I mean, you and I guess, many others I guess.
Your competitors have discussed how the collision repair industry needs more competitive wages versus other industries to recruit more sustainably. We can you give us a sense for how much catching up is required for this industry versus versus the others.
Yes.
We don't have an answer for that I think that we'll find that out as we are successful at increasing compensation and more successful with the recruitment of people into our industry.
I think it's going to be a test it out and continue to try and.
Have a balanced approach so that we put the people in place that we need to service level of demand Thats out there.
There is there is certainly we know there's a gap I don't know if its a 5% GAAP were up 1% or a 10% gap, but there is there is a gap because we'd be I know many industries are challenged with labor right now, but we've got very attractive job opportunities for people.
<unk> do provide good compensation, we just need to make sure we're competitive against the alternatives for this type of skilled labor, yes, Mike as you know a Friday.
Brazil, increasing interest rates to slowdown the inflation. So it you will see a softening economy is softening and Doug will review the opportunity cost for people, who want to more of an industry. As you know our industry is the decision resilient and other industries Monaco, so to that extent and I think you could get competitive but again.
There's just one perspective, we do need the price increases from our client, but the longer term.
Perfect that makes sense and just lastly.
Congratulations Pat obviously, a fantastic career right.
Thank you.
Likewise, thank you.
Thanks, Mike.
We will take our next question from Gary Ho with.
<unk> capital markets. Please go ahead.
Good morning, Gary Hi, Gary.
Morning.
First question just want to go back to the EBITDA margin side of things I'm trying to get a sense of how sustainable. This quarter's strength was just given the price increases you've asked for in the wage pressure side that you mentioned, yes, the 11.7% EBITDA margin, but more of a base and kind of grow from here on out or.
You think about it.
Well I would say are our longer term objective Gary is to get back to the EBITDA margins that we were experiencing prior to the pandemic.
It won't happen overnight for all the reasons, we've really discussed.
In the disclosures that we've made.
I can't say that it's going to be.
Sequential quarter by quarter by quarter, there could be variability in it but we are we feel very good about over a period of time getting back to normal EBITDA margins.
As you know, we don't provide guidance but.
But it doesn't necessarily mean, we will have a straight line up.
Okay got it this is an opportunity Gary yes, certainly hitting the liquor download or there is an opportunity for improvement, but we don't provide guidance for the timing of that improvement.
Yes, Okay, and then Ken.
Just wanted your thoughts on the cross Champions service King deal from that competitive landscape point of view.
And how does and more consolidated environment benefit or hurt your business or is it in passenger growth strategy looking out.
I don't think it impacts our growth strategy our growth strategy is.
Hasnt really changed other than maybe slowing down a little bit to focus on our core business over the past couple of quarters.
I would imagine that that it will take some time for those two fairly large businesses too.
Merge in.
Put in place whatever common practices they need so they may be.
Somewhat distracted doing that for a few quarters, but it doesn't really change our view, we still have a very small share of the U S collision repair market.
I think there is ample opportunity ample opportunity for us to continue our growth strategy two.
To accomplish our 2025 goal without regard to any.
Any impact of the cross Champions service King merger, Gary If you think about it I think it would actually validates our business model. So we have been a consolidator for a long time and others are joining the party that telco business model really delivers tremendous shareholder value number one number two if you look at service can crack champion service King again based on market.
800, <unk> of debt and no EBITDA and crashed champion again have some EBITDA, but they do have substantial amount of debt. So if you combine the two you have a lot of debt and EBITDA you can make your own assumption. So they have very high leverage so they have to deal with that and as Tim pointed out so they have to go.
Through the integration of the two businesses, that's going to take one of them will have potentially to take them out of the market for some time.
Okay that makes sense and then just last one for me.
I'll go back to the price increase.
When you chat with you insure counterparts any sense. They are maybe starting to get some resistance from the state regulators on their side.
When you think about how much price increases.
As we look out the next couple of years.
I haven't had conversations along those lines, certainly theres going to be pressure, but there is no question that the cost of repairing vehicles is increasing.
Insurers have to be profitable.
Are there are policies.
I am confident that there'll be successful over time, but these transitions do take time, so while we've been under pressure I know our clients have also been under pressure.
You've seen it if you've looked at earnings releases of some of the major carriers.
Just fairly recently they've seen a significant uptick in their average cost per claim in their loss ratios.
So we need to work with them to do what we can to keep their repair costs down through good estimating practices repairing what can be repaired using alternative parts, we're very motivated to drive the repair costs down as low as we can get up we'll still performing a quality repair and having adequate returns for our shareholders.
Okay, Yes.
That makes sense.
Thats It from me thank you very much.
Thanks, guys.
Yes.
We will take our next question from Daryl Young with TD Securities. Please go ahead.
Good morning, Dan Good morning Darryl.
Morning, gentlemen, and congrats on a terrific career.
Thank you first question.
First question just around around labor.
And I'm, just curious where you guys would stand in terms of your hourly rates, you're paying labor versus say some of the smaller players in the industry and I guess, what I'm trying to vet out is just.
Or are you seeing a net influx of labor from competitors or are you seeing progress on net new.
Technicians coming into the industry.
Yes, it's tough to read on technicians coming in to the industry, we know that our what we pay our technicians is very competitive we benchmark that constantly and as you can see from our labor margins. We've made we've made consistent adjustments over the past several months so I'm caught.
After that we're competitive and we continue to review that to make sure that we remain competitive I think the whole industry is challenged with attracting new labor into the industry.
We.
So.
It's still a pretty challenging environment in the long run the technician development program and we've now disclosed kind of the quantity that we're expecting to increase that by that is that.
That is one of the keys to building industry capacity has to bring.
New talent into the industry and really upscale it over a period of time and I expect that to be a major contributor for us and I know that some of our competitors have similar programs in place.
And hopefully all of our key competitors will we'll double down and invest in entry level labor.
To solve the longer term problem.
And I guess.
When we talk about the labor because we make a lot of acquisition single shops asphalt as msos like John Harris encoded hearing what's so we know what competition payer. So that said, we feel very comfortable saying.
Labor rates are very competitive within the industry.
Got it okay. Thanks.
And then with respect to aftermarket parts.
On a long term trend of increasing usage of aftermarket parts and I think one of the major insurers just announced.
Plans to investigate.
Further penetration of aftermarket just curious if you have any commentary in terms of.
You would expect that to be a long term tailwind for margin growth for yourselves or any implications of insurance further penetrating aftermarket parts.
Yes, I think it has been a positive trend for us for a long time as more and more and more clients have embraced it.
Over the past year. The challenge has really been the availability of those parts and we've talked about this on prior calls, but we've seen a shift away from aftermarket toward OE.
Because of reduced aftermarket availability and most of those parts are manufactured in Taiwan, and then obviously exported.
Given both manufacturing issues or distribution issues theres been a more limited supply.
Q did report when they released that they've seen some improved availability and they are expected to improve further.
Late this summer and early into fall they have a lot of parts.
On the water on the way to the U S. So we may see some improved aftermarket availability, which would be good for us and it would be good for our clients because it will reduce the average cost of repair.
You did note that there is an insurer exploring increasing or authorizing use of aftermarket parts that could be favorable for us as well.
But but availability has been challenged with aftermarket over the past three or four quarters.
Got it Okay, and just one last one.
Is there a way to benchmark it from a volume perspective, how productive the shops are today versus pre pandemic are we at 75% of capacity come out from a daily throughput or any.
Any metrics you can give there just the inflation has obviously made the revenue per store.
Come back quite quickly.
It's difficult to assess that because the inflation isn't just inflation.
Parts or labor.
Per complexity has increased which has actually increased the number of labor hours per repair. So we've seen an increase in the number of labor hours per repair we've seen increase in parts cost, we've seen increasing labor paint material prices we've.
Have a higher percentage of vehicles that have scanning and calibration operations, it's pretty difficult to decipher the components of it.
But.
We've mentioned this on prior conference calls there is some industry data that suggests that the capacity of the collision repair industry is meaningful meaningfully below where it was prior to the pandemic probably in that.
14% to 15% range.
Got it okay. That's great. Thanks, Thanks, very much guys.
Thanks Dale.
We will take our next question from Bret Jordan with Jefferies. Please go ahead.
Hey, good morning, Brett.
On the I guess variability that you see in price increases.
Ben your recourse I guess, if you've got.
The limited capacity you have got more work than you can do and.
Customers paying less in others can you reject work or does that create a longer term relationship issue.
I would say that.
Thus far we have.
We've tried to be transparent with clients share the data that we've got with them.
<unk> work with them to get the pricing to levels that are acceptable.
These are and I think we've talked about this on prior calls as well but.
We have a pretty deep long term relationships with our insurance clients and they've been with us through good times and through tough times.
And we're not inclined to.
Disrupt those relationships rapidly.
But over time.
We'll have to service.
If a client is really out of line, we'll have to prioritize work. So that we can get the returns that we need to invest further in our business, but that's not something that we would do rapidly and we would be pretty transparent and have open conversation with our clients before we would make that kind of a move.
Okay, and then a little bit of a follow up on the last question I think in your prepared remarks, you talked about supply chain, improving is that skewed one way or the other OE versus alternative parts.
Are you seeing one picking up more than the other.
We didn't we didn't look at it that way, we really just no because the ratio of our work in process at the end of the month compared to our revenue has improved modestly.
And so that's really been the metric we focused on we didn't break it down by OE versus aftermarket.
I think LKQ has reported some improvement in aftermarket part availability.
So it's probably a combination of the two.
Okay, great. Thank you.
Thanks, Brad Thanks, Brett.
We will take our next question from Zachary <unk> with National Bank Financial. Please go ahead.
Good morning, Jack.
Congrats on the quarter.
Thank you Hugh.
So some carriers have increased rates more than others and obviously the bottom end has to catch up.
What about the top end you've increased the most.
Are they at levels that would allow boy to operate at historical margin levels or is there still more to come.
Well.
One thing we've talked about is the fact that the target continues to move we continue to see.
Wage pressure and need to attract more talent to our industry.
For the.
We have we have carriers that are smaller carriers.
Likely have or generally up higher rates than what we would get from major carriers.
So we do see.
Our GAAP for smaller carriers for larger carriers, our focus is really on our major clients those that have <unk>.
Reasonable to substantial market share in each area to balance off price and to the best where our ability amongst those clients and really the top 10 carriers.
Over 75% of the <unk>.
But.
Insurance market in the United States, So that's really our focus.
That makes sense. Thanks.
Either percentage terms or in terms of catching up to inflation up to a period of time.
How much have you secured on average in your rate increases.
At this point in time.
Okay.
We we aren't able to provide details on that.
One thing we have said in the past is that when we when we receive a rate increase from our clients and implemented it does take time for that to flow through to our revenue.
Because the jobs are priced at the time of the initial estimate.
And if we're backlog on repair work we have.
Old pricing in certain in some files that has to flow through our revenue.
But.
But we don't have an exact metric.
The timing of catching up from an inflation standpoint.
Okay, because thats, a moving target, but I think the inflation is a moving target there is bigger.
Moving target. So we can give is tied to cancer.
We.
We were successful at getting price increases, but we need more.
To serve our clients better.
Gotcha.
And given that it's a moving target and that's where your focus is right now in the core business do you have a period in time, where you plan to refocus on M&A or is it on the back burner until this has been resolved.
It is.
We've been pretty focused on our core business.
We've got work to do on our core business, but I'm very pleased with the progress we've made and.
We have reiterated our expectation of achieving our 2025 goal and that really requires that we step up and.
Focus on M&A as well as our core business.
So it's it's not on the back burner, where we see lots of opportunity to.
To continue with our growth strategy.
Hi, Thanks, and then just one last one.
You think labor tightness, increasing from vacation season is likely to see margins decline quarter over quarter or do you think rate hikes will more than offset that impact.
I think the real issue that we're faced with in the third quarter as we are still seeing.
Plenty of people out for a week or so as a result of COVID-19 illnesses and I think everybody can see that.
Infection rates are still quite high and will the illnesses arent as severe it has impacted our production.
That combined with the fact that August and July and August and to a lesser extent September .
Are the heaviest vacation seasons.
We will continue to pressure from a capacity standpoint.
That's it for me I'll turn it over and congrats Pat happy trails.
Thanks Zack.
We will take our next question Fahad Khan with RBC capital markets. Please go ahead.
Good morning, Sara.
Good morning.
Morning.
Just a question on some of the discussion earlier around the different pricing that youre seeing from insurers to the extent that you can comment I guess should we assume the pricing that you're getting from insurers is somewhat directionally tied to their combined ratios I guess.
Think about a single market how did two different insurers justify giving you different pricing.
Is it purely just a function of the profitability that we're seeing are there other puts and takes you can maybe share.
Yeah.
I don't think it has to do with their combined ratio although.
Et.
As said earlier that I know our clients are feeling significant pressure because of their combined ratios but.
Our clients need collision repair capacity and well, we're pretty patient and we want to work with everybody to to get rates in line with whats fair in the market.
Their loss ratios arent really what's driving it.
They need to have competitive rates in order to.
To take the capacity that's available in the market to service their clients.
So I would say no it's not tied to their loss ratios.
Okay. Thanks, and then just.
The commentary that you shared around the number of people that you are looking to put the technician development program.
Maybe give some perspective on how many people have been.
<unk> graduated hung people have graduate from that program and also in terms of the intake.
How are you going to work towards getting an extra 200 people through that.
Market and going out to kind of the right school for some perspective on how you're going to go about this kind of get into the two 400 number.
Yes, we do have dedicated teams both to the recruitment and then the support of the development of those technicians and we've been pretty effective at it.
That we recruit both out of trade schools. We also have many team members that work for us in a different role they may come in and in entry level parts roll or even a quarter roll and they have a desire to move into the program and they've got.
They've got some experience with us we know that their work ethic and their commitment and we would put them into the technician development program. So we're finding good success with candidates to bring into the technician development program and we've made progress throughout thus far this year, we've made progress.
<unk> from where we started the year in terms of the number of graduates.
We really re initiated this program at the beginning of last year and it is a.
18 month program. So we have had graduates we had some people in the program prior to the beginning of last year, but over the next year, we will see more and more graduates coming out of the program.
To meet our needs and I'm pretty excited about our future with that.
Yeah, we have nice sourcing for this program <unk>, we are confident about hitting that 400 number.
Okay. Thanks, and just one quick follow up before I pass it on there just in terms of I guess the investment required to get these extra 200, you know obviously you guys have talked about the cadence of profitability at the peak.
And the training program become more.
Accretive I guess should we expect a bit of SG&A investment over the call. It. The next 12 months to get these people on the program.
We did mention in our disclosures that part of our operating expense.
Part of our increase in operating expenses is tied to the technician development program. It is a pretty substantial investment in the company as part.
Two to train. These people we do have them, it's a metro ship program and we reward the mentor.
The team members are not very productive out of the gate and we do absorb those expenses and there is significant training expense I mean, these when they come out of our 18 month program. They may not have their proficiency up to journeyman levels, but they've been highly trained after 18 months. So there is an expense burden associated with it.
Some of that is already reflected in our quarterly results.
And there could be some additional expenses, we continue to grow the program, but it is an expense that.
I am confident is worth the investment.
Okay. Thanks, so much for the color.
Thanks, so much of it.
We will take our next question from.
Christa Friesen with CIBC. Please go ahead.
Morning, Kristina Kristina, taking my questions and congrats on a great quarter.
I was just wondering.
And the technician program.
Is there is there any sort of.
That could.
The technicians need to know that they'll stay for a certain number of certain time period after they.
Graduate from the program, our first financial and questions that are put in place.
Sure.
Number of years afterwards.
Just wondering if theres anything preventing them from leaving to another shop that might offer them.
Hi, Jack.
We do have some ties related to the program, but our focus is not to capture them, it's to incent them and make sure. They have a great career opportunity with our company. So we're really focused on building their career in fact at the conclusion of the 18 month period.
Training program, we actually have an additional layer of training that they can go through that will allow them to continue to build their skills and EBIT become mentors to other entry level technician. So while there are some ties I think the primary thing we're focused on is making sure that we're a great home for them to build there.
Career, Chris essentially that we provide mentorship and will provide excellent Canadian opportunity provides the right Ron maybe with all the tools they need.
So I think that's what people look for so thats something that we are very optimistic about this program.
Great that makes sense.
Just wondering kind of at a higher level.
As you negotiate with your partners have there been any sort of discussion around <unk>.
Changes.
Two how contracts are structured long term to prevent this.
The sort of.
Catch up to that.
Needed to play over the last several months in the future if you build in any sort of.
Mechanism.
To automatically increase rates are or anything like that.
No.
There's been I think we're all we're all working hard just to make sure that the industry can be healthy our clients need us.
They're they're very open to the dialogue.
What we're going through right now is at least in my almost 25 years in the industry, it's completely unprecedented and so we're all we're all working hard to be fair with each other to deal with it but there's been no discussion about changing how contracts are done so that maybe they have automatic increases to us that arent.
Market driven.
Really a market driven negotiation.
I think contract produces a win win relationship.
Hi.
Given that is not proper pricing, we can sell that customer better. So they can have better retention with the customers that customer retention.
Our acquisition costs are pretty high for the insurance companies. So we are actually serving them.
Wanted to dial down.
I think that's what's going to drive more that binding contracts relating to pricing.
So we are integrating that.
Perfect that's great.
Your line.
Congrats Pat Hope you enjoy retirement.
Thanks Christa.
Ladies and gentlemen. This concludes today's question and answer session. At this time for closing remarks, I would like to turn the call over back to Tim O D.
Good thank you operator.
Thanks, All of you once again for joining our call today, and we look forward to reporting our third quarter results in November have a great day.
Thanks, everyone.
Ladies and gentlemen, this concludes today's conference we appreciate your participation.
You may now disconnect.
Yeah.
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