Good morning, everyone. Welcome to the Boyd Group Services Inc. Q3 2021 results conference call. Listeners are reminded that certain matters discussed in today's conference call or answers that may be given to questions asked could constitute forward-looking statements that are subject to risks and uncertainties related to Boyd's future financial or business performance. Actual results could differ materially from those anticipated in these forward-looking statements. The risk factors that may affect results are detailed in Boyd's Annual Information Form and other periodic filings and registration statements, and you can access these documents at the SEDAR database found at sedar.com. I'd like to remind you, everyone, that this conference call is being recorded today, Wednesday, November 10, 2021. I would like to introduce Mr. Tim O'Day, President and Chief Executive Officer of Boyd Group Services Inc. 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 are Pat Pathipati, our Executive Vice President and Chief Financial Officer, and Brock Bulbuck, our Executive Chair. We released our 2021 Q3 results before markets opened today. You can access our news release as well as our complete financial statements and management discussion and analysis on our website at boydgroup.com. Our news release, financial statements, and MD&A have also been filed on SEDAR this morning. On today's call, we will discuss the financial results for the three- and nine-month periods ended September 30, 2021, and provide a general business update. We will then open the call for questions. As was previously communicated, beginning on January 1, 2021, Boyd is reporting results in US dollars.
This change has been made in order to better reflect the company's business activities, given the significance of the U.S. denominated revenues. Throughout the Q3, demand for services exceeded our capacity in all U.S. markets, which resulted in high levels of work in process. Adding and retaining location-level administrative staff and technician capacity to address this constraint has been challenging in an extraordinarily tight labor market, exacerbated by COVID-related absenteeism. This has resulted in increased wage costs to both retain and recruit, resulting in near-term pressure on labor margins and operating expenses. Demand in Canada increased slowly and gradually during the Q3 of 2021 as restrictions were eased and removed, but remained well below pre-pandemic levels.
In addition to a tight labor market and the slow recovery of demand in Canada, during the Q3, we faced rapidly increasing supply chain disruptions for original equipment and aftermarket parts in both the Canadian and U.S. markets, which quickly resulted in a negative impact on margins as a higher percentage of parts had to be sourced from non-primary suppliers in order to complete repairs. During the Q3, we recorded sales of $490.2 million, Adjusted EBITDA of $51.5 million, and net earnings of $0.4 million. Sales were $490.2 million, a 28.4% increase when compared to the same period of 2020. This reflects a $67.8 million dollar contribution from 121 new locations.
Our same-store sales, excluding foreign currency exchange, increased by 10.7% in the Q3, recognizing the same number of selling and production days in the U.S. and Canada in the Q3 of 2021 when compared to the same period of 2020. Same-store sales growth in Canada was much lower than same-store sales growth in the U.S. Production challenges, including administrative and technician capacity constraints and supply chain disruption, impacted sales during the Q3 of 2021. Gross margin was 44% in the Q3 of 2021 compared to the 47.2% achieved in the same period of 2020. The gross margin percentage was negatively impacted by reduced parts and labor margins, as well as variability in direct repair pricing and a higher mix of parts in relation to labor.
During the Q3 of 2021, Boyd faced rapidly increasing supply chain disruptions for OE and aftermarket parts in both the Canadian and U.S. markets, which quickly resulted in a negative impact on margins as a higher percentage of parts had to be sourced from non-primary suppliers in order to complete repairs. Labor margins were negatively impacted by the extraordinarily tight labor market, which resulted in increased wage costs to both retain and recruit staff. The shortage of labor also resulted in a higher mix of parts and parts sales in relation to labor. Operating expenses for the Q3 of 2021 were CAD 164.2 million, or 33.5% of sales, compared to CAD 116.8 million or 30.6% of sales in the same period of 2020.
The increase as a percentage of sales was due to capacity constraints and supply chain disruptions, which impacted the sales levels that could be achieved during the Q3 of 2021, as well as the addition of new locations with fixed operating costs such as property taxes. In addition, the prior period was impacted by wage reductions, which included higher levels of CEWS, reduced management compensation and lower wages as a result of temporary layoffs. In the Q3 of 2020, Boyd took a cautious approach to bringing back resources as revenues began to grow, which resulted in lower expenses but were not sustainable. Adjusted EBITDA, or EBITDA adjusted for fair value adjustments to financial instruments and costs related to acquisitions and transactions, was CAD 51.5 million, a decrease of 18.9% over the same period of 2020.
The decrease was primarily the result of lower gross margin percentage and higher operating expenses. In total, adjusted EBITDA in the Q3 benefited from the CEWS in the amount of CAD 0.5 million as compared to CAD 7.5 million in the same period of the prior year. The amount of the CEWS has decreased as the program phases out, ending on October 23, 2021. Net earnings for the Q3 of 2021 was CAD 0.4 million compared to CAD 15.9 million in the same period of 2020. Excluding fair value adjustments and acquisition and transaction costs, adjusted net earnings for the Q3 of 2021 was CAD 2.4 million or CAD 0.11 per share, compared to CAD 16.4 million or CAD 0.76 per share in the same period of the prior year.
Adjusted net earnings and adjusted net earnings per share for the period were impacted by lower gross margin percentage and higher levels of operating expenses as well as location growth. These new locations are subject to the same labor and supply challenges as Boyd is currently facing across its business. These market conditions are impacting the results that can be achieved in the short term, while new location growth has resulted in increased levels of depreciation and amortization. For the nine-month period ending September 30, we reported sales of $1,356.5 million, an increase of 17.2% over the same period of the prior year, driven by same-store sales growth of 6.7% or 7.2% on a days-adjusted basis, as well as contributions from new locations that had not been in operation for the full comparative period.
Gross margin decreased to 45.3% of sales compared to 46.1% in the comparative period. The gross margin percentage was negatively impacted by reduced parts and labor margins, as well as variability in DRP pricing and a higher mix of parts sales in relation to labor, partially offset by a higher mix of glass sales in relation to collision sales on a year-to-date basis. Operating expenses increased to CAD 78.2 million, by CAD 78.2 million from CAD 374 million to CAD 452.5 million when compared to the same period of the prior year, primarily due to growth in the number of locations as well as the COVID-19 related cost reductions that impacted the second and Q3s of 2020.
Operating expenses were negatively impacted by the extraordinarily tight labor market, which resulted in increased wage costs to both retain and recruit staff. Adjusted EBITDA for the nine months ended September 30, 2021 was CAD 162.2 million, compared to CAD 159.6 million in the same period of the prior year. The CAD 2.6 million increase was positively impacted by improved sales levels. In total, Adjusted EBITDA in the nine months ended September 30, 2021, benefited from CEWS in the amount of CAD 7.5 million, as compared to CAD 10.8 million in the same period of the prior year. We reported net earnings of CAD 18.6 million, compared to CAD 27.9 million in the same period of the prior year.
Adjusted net earnings per share decreased from $1.28 to $1.03. Adjusted net earnings and adjusted net earnings per share were impacted by lower gross margin percentage and higher levels of operating expenses as well as location growth. These new locations are subject to the same labor and supply challenges Boyd is currently facing across its business. These market conditions are impacting the results that can be achieved in the short term, while new location growth has resulted in increased levels of depreciation and amortization. At the end of the period, we had total debt net of cash of $896.9 million compared to $671.1 million at June 30, 2021.
Debt net of cash increased when compared to the prior periods primarily as a result of acquisition activity, including draws on the revolving credit facility as well as increased lease liabilities. During 2021, the company expects to make cash capital expenditures within the previously guided range of 1.6%-1.8% of sales. This excludes those capital expenditures related to acquisition and development of new location, the investment in environmental initiatives such as LED lighting, and the investment in the expansion of the WOW Operating Way practices through the corporate applications and process improvement efficiency project. During the first nine months of the year, the company's invested approximately $2.4 million in environmental initiatives.
These investments will not only provide environmental and social benefits, but they also achieve accretive returns on capital. Additionally, the company is expanding its WOW Operating Way practices to its corporate business processes. The related technology and process efficiency project will result in an additional $2-$2.5 million of investment before the project is complete in Q2 2022. The project will also be expected to streamline various processes as well as generate economic returns once fully implemented. Our Q3 2021 Adjusted EBITDA margin of 10.5% was significantly lower than our historical levels achieved over the last several years and therefore very disappointing. In the U.S., although demand approached pre-pandemic levels, the highly competitive labor market translated into significant wage pressure and labor margin compression as the quarter progressed.
Additionally, the early signs of supply chain constraints that we reported in the Q2 got progressively worse as the quarter unfolded and compounded our overall gross margin compression as we needed to source parts and materials from non-primary suppliers, along with a higher mix of OE versus alternative parts, all at lower margins in order to complete repairs and serve our clients and customers. We also experienced a shift in mix to higher part content repairs as our labor capacity constraints necessitated that we schedule out repairs with higher labor and lower part content. In addition to this gross margin compression, our Adjusted EBITDA margin decline has been exacerbated by a lack of fixed-cost absorption due to lower sales per location than pre-pandemic levels.
As we've commented since early this year, in preparation for claim volumes returning to pre-pandemic levels, we brought back the administrative resources needed to effectively operate and manage our business as it recovered from the pandemic. We have not yet been able to add sufficient technician labor capacity to service the work that is available in the U.S., and we continue to experience a slower recovery in demand in our Canadian business. We have also added more than 160 locations to our network in the past two years, which given market conditions, are experiencing the same gross margin challenges as well as sales per location levels that are below historical levels. We are confident that as we continue to build our revenue, our fixed costs will be in line and result in improving our Adjusted EBITDA margins.
As a side note, and for competitive reasons, we are going to move to reporting our growth only with our quarterly results. Despite market claim volume in the Q3 approaching, but still not, but still being below pre-pandemic levels, demand for our services exceeded our labor capacity in all U.S. markets, which resulted in high levels of work in process and reduced sales capture rates. Adding and retaining location-level administrative staff and technician capacity to address this capacity constraint has been challenging in an extraordinarily tight labor market, and we have taken specific actions to address this.
These actions include investing in and growing our Technician Development Program, increasing our recruitment support staff to improve lead generation and follow-up, proactively evaluating compensation levels and making appropriate adjustments to ensure that we remain competitive in a rapidly changing environment, and driving high levels of execution for our onboarding and orientation programs to increase retention. These are making a difference, but have resulted in increased wage costs to both retain and recruit, resulting in near-term pressure on labor margins and operating expenses. Additionally, we completed the implementation of the WOW Operating Way human resource systems during the quarter and are beginning to leverage these new processes. Historically, Boyd and the industry have recovered labor cost increases through selling rate increases from clients. However, to retain and recruit in the current labor environment, it has been necessary to rapidly adjust wages at levels not previously experienced.
Management is committed to aggressively addressing this challenge and is having constructive discussions with large key clients about the urgent need for price increases to reflect the current environment. However, given how significantly and rapidly wage costs have increased and the key business relationship these clients represent, it may take some time to achieve all of the needed price adjustments, and margins may therefore continue to be impacted in the near term. However, we are moving with a great sense of urgency on this matter. In the meantime, we are not relying solely on these key client price increases.
Given our excessive levels of work, we are endeavoring to prioritize our production toward higher margin business, as well as raising prices where possible and suspending business relationships with a few lower margin clients that are not willing to increase pricing in order to better serve our core clients and accelerate our margin recovery efforts. We believe that these actions will result in our labor margins returning to historical levels. However, this may take several quarters. The long-term solution to the staffing shortage is through internal training and development programs.
We have strengthened our people development processes with a number of formal training programs, including our Technician Development Program, which we assess as being industry-leading. While we suspended this program during the pandemic, we have been successful at growing this program during the past nine months and have recently committed to growing it further by doubling the number of trainees in the program to help meet our future needs. We are very pleased with this program, but the costs associated with it negatively impacts margins for several quarters, primarily due to the unproductive wage costs during the first several months of a trainee's employment. As we achieve a balance of TDPs across experience levels from entry-level to near graduation, the margin impact will be softened, and we are confident that the long-term benefit significantly outweighs the short-term costs.
We believe that the part availability and related margin challenges related to supply chain disruption is transitory and will normalize as the underlying manufacturing and distribution issues are resolved. In the meantime, we are working with key suppliers to source parts at normal margins, but we'll continue to use non-primary suppliers when necessary to complete repairs for our clients and customers. We also expect our sales mix to return to historical levels as we build our labor capacity. Though these actions outlined, along with the normalization of the supply chain issues, we expect our revenue and throughput as well as gross margin and EBITDA margins to recover in the coming quarters. However, the actions noted are unlikely to have a material impact on the Q4. We are committed to driving the needed change aggressively.
Despite these near-term market challenges, our leadership position, our strong balance sheet position us well to successfully execute on our plan to double the size of our business by 2025 and deliver attractive returns to our shareholders. During the first quarter of 2022, Boyd intends to publish an inaugural ESG Report. This sustainability roadmap will outline Boyd's ambitions in the areas of environmental, social, and governance matters. This is an important area that will be critical to the positioning of Boyd and our success well into the future. With that, I would now like to open the call for questions. Operator?
Thank you, sir. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We will now take our first question from Michael Doumet from Scotia Capital. Please go ahead.
Morning, Michael.
Hey, good morning, guys.
Good morning.
You highlighted that you do not expect the actions you've taken, you know, to have a material impact to margins in the Q4. More specifically, does that mean that you think or you expect Q4 margins to be flat or slightly up sequentially? I guess that's the first part of the question. Then maybe to break that down a little bit further. You know, thinking about labor margins as a spread between rates and wages, have wages continued to increase through Q4? And just to get a sense, have you been able to successfully increase rates as well? Just trying to understand the moving parts, please.
Yeah. What we've said is that we don't expect the changes that we're working on now to have a material impact on the Q4. We're still early in the quarter, so it's difficult to say exactly where it'll end up. I think even as we achieve pricing changes, we're already halfway through the quarter, and pricing changes apply to new work, not to old work, which is why, to the extent that we're successful, it really wouldn't have much of an impact on Q4.
The spread between what we get from our clients and what we pay to our staff, you know. I would say the wage pressure has continued, and we expect to continue to work with our clients to get rates that will allow us to recover back to normal margins, although that could take time.
Got it. Okay, that's helpful. Thanks. Then, I guess maybe higher level, you know, if you're moving labor to higher margin work, and presumably everybody else is, and, you know, that would create bidding activity for labor. If volumes continue to normalize and there's less labor in the industry, I mean, shouldn't that allow for pricing normalization to happen quickly? I guess it's in line with your thinking, but the question is, you know, how frictionless is it to move kinda production from, you know, lower-paying customers to higher-paying customers?
Well, I mean, we've got a solid core group of clients that in the end will likely be similarly priced. It would be smaller clients or non-traditional work that might be lower margin that in the environment we're in today would be very difficult for us to service because it would be displacing core client work that you know will be there for the long term. It's not difficult to deprioritize some non-core client type work. You know, that's some of the actions we have underway. We're not looking to deprioritize kind of that core client work.
Great. Maybe if I can
Sorry, Tim.
Follow up.
Sorry, Tim. Tim, it's Brock. You might just clarify as well that deprioritization of-
That in and of itself is not going to resolve the issue. We need pricing increases from those larger key clients. Although Tim commented on the deprioritization of lower margin work as being one of the initiatives, that would not be considered a sort of, a material initiative relative to the other actions that are being taken.
Michael, I think that you may know we are price takers. The top ten insurance carriers have 74% of the market, and our industry is highly fragmented. To the extent we are price takers, we can persuade, but we can't implement unilaterally a price increase.
But, but-
Yeah.
Having said that, Michael, this pressure is not unique to Boyd. This is pressure, you know, from everything I can see and what I hear, this is pressure that's being felt across the collision repair industry.
Got it. No, that's clear. I mean, presumably some are having tougher times managing this, so, and maybe that leads to normalization going forward. Thanks for the answers, guys. Appreciate it.
Thanks, Michael.
Thanks, Michael.
We will now take our next question from Steve Hansen from Raymond James. Please go ahead.
Go ahead, Steve.
Hi, Steve.
Good morning, guys. Thanks. I'm gonna push on this thread just a little bit harder. You know, can you maybe just give us a sense for how the discussions with your core carriers have gone thus far and their willingness to understand these pressures? I mean, I think the data is pretty clear, not just probably by yourselves, but at an industry-wide level. I'm just trying to understand why there would be resistance to price increases and whether or not there's gonna be some sort of ability to protect yourselves in the future, whether it's some sort of inflation escalators or whatever it may be. I'm just trying to understand how the discussions have gone.
You know, I obviously am not going to get into any details on specific client discussions, but I can tell you that they absolutely understand the problem and the challenge that the industry has, and I think they intend to be responsive to us. It is not easy for them to move quickly, and we have to make a good, compelling case. You know, the reality is that the industry can't attract labor without paying wages that are competitive with other industries. You know, technicians in our industry are highly skilled, and they're not just skilled in collision repair work. They can move into other industries as necessary. We have to pay good competitive, you know, compensation to allow us to both attract and retain in the industry. That's really what we're doing.
Our insurance clients need quality repair capacity to service their customers. That's why I feel confident that over time, we will right this. Insurance companies tend not to move as quickly as I would like. These are unusual times. The cost increases were pretty abrupt. That's tougher for an insurance client. You know, they have to make adjustments to their premiums to help recover this. That's why I think it could still take some time. Our discussions are positive. They understand it, and I'm sure we'll work through the appropriate changes.
Okay. That's helpful. I appreciate that. Just as a quick follow-up before I jump back in the queue, you know, the same challenges you described are clearly industry-wide. I'm also just trying to understand, you know, will these pressures allow you to ramp up any of your M&A activity at all? Do you think there's an ability to take advantage of the current situation, I guess is the question.
I don't know that I see it as being able to take advantage of that situation right now. We're very focused on making sure that we, you know, manage our business effectively and get fair rates so that we can get the right returns on the value we provide. It's less of an acquisition opportunity right now than it is, you know, we just need to work hard to get these things back on track.
Steve,
Okay.
We'll be prudent with capital allocation for acquisitions, and if we see compelling opportunities, certainly we'll pursue them. That's consistent with what we have told in the past.
Okay. Appreciate the time, guys. I'll jump back in the queue.
Thanks, Steve.
Thanks.
We will now take our next question from Chris Murray from ATB Capital Markets. Please go ahead.
Yeah. Thanks, folks. Maybe just turning to some of the cost pressures, but not on the labor side, but on the parts side. Just trying to understand, you know, at one point how much of this is related to OE production of their own components? How much of this is sort of supply chain coming from out of the country type of thing? And just trying to get a better feeling for, you know, maybe some benchmarks or some milestones and what we should be looking for in terms of getting you back to a more normalized parts supply.
I think there are probably three components to it. There are supply challenges on the OE side, where we can't get an OE part from our primary supplier, and maybe we can't get it at all, which means we have repairs, you know, suspended in production, waiting for parts. I don't know to the extent that anybody's looked at the industry length of rental. It's actually gone up very materially in the past four or five months. It's over 15 days now, and it was just over 12. I think a lot of that is tied to the parts issue, some labor constraints, but also parts. We have an issue with not being able to source the OE parts that we need.
When that happens, if our primary supplier doesn't have it, we're gonna look wherever we have to and really do anything within our power to get the parts so that we can complete the repair for our customer. That often comes at a reduced margin. The other issue is the aftermarket part availability is not as strong as it was. I suspect that that's in part tied to an inability to get the parts out of Asia and, you know, to the warehouses in the U.S. When that happens, we end up having to move to an OE part, which has both a higher cost for our customer and a lower margin for our business relative to the aftermarket alternatives.
Third is, across the board, we're buying parts, whether it's aftermarket or OE, we'd be buying parts from non-primary suppliers at lesser discounts that hurts our margin and profitability. It's really parts are not available. In aftermarket, we have to go OE, that's a lower margin. We have OE parts that aren't available, and we have to source from non-primary suppliers or delay repairs. Then the lack of availability of aftermarket as well.
Okay. That's helpful. Just thinking about, you know, overall repair volumes. I mean, it sounds like, at least from what you're saying, that volumes are starting to come back to maybe not all the way pre-pandemic levels, but we're starting to get there. But you did make the comment that some of your stores are still under capacity. Do you go back and revisit whether or not you should have some of those stores open and functioning and maybe, you know, convert a couple to intake centers just for the near term and maybe concentrate your operations in a fewer number of stores in the local region? Is that something that's even an opportunity?
I know this goes back to the, you know, reopening in advance of type of discussion.
Yeah.
Just any thoughts around what you can do in the near term around your store capacity.
I think when we talk about store capacity, our constraint is almost always labor capacity, not physical plant capacity. In the U.S. market, we're really at or above, primarily over our capacity levels in terms of work available in all markets across the U.S. That is not necessarily true in Canada. Canada is still slowly recovering. I don't think that a hub and spoke or closing down production facilities would be the solution right now. We really need to build our workforce to service the work that's available to us.
Tim, if I might add, I think where Chris was maybe thinking on this lack of capacity was when you talked about fixed cost absorption. As Tim just mentioned, the reason we don't have adequate fixed cost absorption with sales throughput is because we are constrained by labor capacity, not by lack of demand.
Yeah. We have the demand to solve the capacity utilization problem, if we could put the labor in place to service it.
Okay. That's helpful. Thank you.
Thanks, Chris.
We will now take our next question from David Newman from Desjardins. Please go ahead.
Good morning, gentlemen.
Good morning, David.
Just on the pricing conversations that you're having with insurers, the DRPs obviously have key performance indicators and some of the performance-based DRPs. Have they waived or widened the goalposts on that criteria at all, given the industry difficulties?
We wouldn't provide any detail on that, but I would say that is an area where our insurance clients probably have an easier time demonstrating some flexibility, and we have seen some flexibility on those metrics.
Interesting. On the parts side, is it pass-through? You know, but you're using different sources, non-traditional suppliers, et cetera. Does the blanket cover all types of parts, and does it cover like just a, or, you know, a percentage of parts? Is it a bare minimum cost that they expect in the parts? Like, how do they benchmark the actual part?
It's pretty simple, actually. We generally sell a part at list price, and our margin is the leverage that we get on list versus net. Aftermarket parts have higher margin characteristics than OE parts. If we shift from aftermarket to OE, it increases selling cost and reduces margin, neither of which are good, obviously. If we have to source those parts from suppliers that we don't have formal relationships with, then we would be getting lower margins on those parts sourced from non-primary vendors.
Excellent. Great answer. That makes sense. Just last one from me, guys. Just in terms of the you added 52 locations across the industry this Q. So I mean, obviously it's heated up. But I mean, is that something that you might want to consider taking a pause on given the core business, you know, trying to getting things back on track in terms of the wage and parts inflation? Or is it such a unique opportunity as your competitors are suffering more and are under pressure that you just have to move forward on the M&A program? Like, in other words, maybe it's a bit of a distraction at this juncture and the focus should be on the core operations, but maybe just a comment.
Yeah, you know, I think we're committed to continuing to grow accretively. I think we will, you know, we'll review the opportunities. We've got a healthy pipeline. We'll review the opportunities and make sure that they're, you know, good investments. We'll probably focus a little more that they're good investments in the near term as well as the long term. We're still committed to growing the company through unit growth.
I'm just more thinking, Tim, like in terms of throwing more logs on the fire kinda thing. I mean, as you incorporate these locations, they are obviously beset with their own challenges and how you incorporate that in as part of the integrations. Does that come into the pricing conversation or, because obviously some of these locations you're buying might be under a bit of pressure. So how does that factor?
I think that's up to us to be disciplined in our approach to evaluating and what we buy, and we do consider that.
Okay. Very good. Thanks, guys.
Thanks, David.
Thanks, David.
We will now take our next question from Sabahat Khan from Laurentian Bank Securities. Please go ahead.
Hey, good morning, everyone. Just going back on the demand question, where you've mentioned that the demand is such that, you know, it's really the labor thing that's impacting your capacity. I'm just wondering if you could give some idea of how much work that, you know, sort of left because of that issue. Like your same-store sales growth was closer to 11%. Would that have been 15%? Or like how big of a difference is that right now?
We haven't actually sized that up, but we've got a significant opportunity. While the market isn't yet at pre-pandemic levels, there's plenty of work out there for us and for the industry. As we, you know, build our technician workforce, you know, through TDP, through active recruitment, all signs are that there's work available there to help us continue to grow same-store sales at a very attractive rate. But we haven't actually sized that up.
Okay.
Tim, you might comment that we're seeing our work in progress levels at unprecedented high levels that we've never seen before.
Yeah. Which I-
And any-
Yeah, I did comment on it in the script as well, Brock, but you're right. I mean, our work in process levels are quite high, and our capture rates are down. So our work in process levels could be higher if we were able to capture all the work that's available to us. Right now we're really intensely focused on building staffing at the shop level to service the work that's available to reduce length of rental and make sure we're, you know, performing at our best for our clients.
If you look at the footnote, it provides color on our WIP. As you can see, it's at historically high levels and could have been even higher. That I think might give you some color.
Yeah. Yeah, that's fair. Just when you talk about the training and different plans that you have, I'm just wondering, is there something baked into your training program that allows some of these technicians that, you know, if they do a certain training, then they have to sort of work with your firm for like another two years or something? It's just that continuously you have to provide them some sort of training incentive for them to sort of stick with you and not go to a competitor?
I think the approach that we're taking, we're really helping them launch their careers in our Technician Development Program, which is the primary one that I've talked about. We take people that really don't have any experience or committed skill in our industry, and over a period of time, we build their skills and their certifications up to a high level. We intend to treat them well, pay them competitively, and make sure they know the career opportunity that they have with our company in order to retain them. You know, there's no handcuff. I mean, we have to be a great employer, and that's why we're also focused on leadership development training to make sure that our people know how to interact properly with their staff.
We've implemented the HR systems through our new applications, which will also help our teams provide better support. We really just need to be the right choice for them as in terms of a place to work, and that's really what we're striving for.
Tim, you know, I think it perhaps would be additive to let the listeners know that with that nurturing element of the Technician Development Program and building technicians over you know a longer term period, the retention rate on those technicians is you know materially better than the retention rate that we have across our wider technician pool.
Yeah. Thanks.
There is some stickiness to it.
Part of that is just we're making a really committed investment in developing that talent. I think that, you know, when I talk to our TDPs when I'm visiting our shops, they love the program and they appreciate what we're doing for them. You know, they're gonna make a great living working for Boyd.
Okay. No, that's good color. Thank you for that. Maybe just last one from my end. I don't know if you break it out, but between these margin contraction, like which is a bigger component in Q3 that's impacting you? Is it the labor one or is it the supply chain one maybe for Q4 as well?
Pat, do you wanna handle that one?
Yeah. We don't provide the breakdown. In terms of the margins, in absolute margins, labor margins are substantially higher than the past margins.
Okay. Thank you. I appreciate it. Thank you.
We will now take our next question from Kate McShane from Goldman Sachs. Please go ahead.
Good morning. This is Mark Jordan on for Kate. Going back to the parts and supply chain headwinds, are you seeing less availability in OE than in aftermarket parts or is it sort of the same? In the prepared remarks you mentioned alternative parts, and I'm not sure if I heard it correctly, but are you increasing or decreasing your alternative parts utilization?
We've seen a decrease in mix of alternative and an increase in mix of OE. I don't really have a good read on the disruption in the two different channels in terms of part availability. They're both an issue. With aftermarket, sometimes it's timeliness of availability. It may be available in a different part of the country and difficult to get to us, but that can also be true with the OE. I don't have refined data to know the exact percentages as to which. The shift in our mix has been toward OE, and a portion of that is being bought from non-preferred or non-primary suppliers.
Okay, great. Thinking about technician capacity, how did that trend during the quarter? Has it been kind of a steady pace of improvement?
We've made progress during the quarter, yes. It's slow, steady progress, and I expect us to continue to make slow, steady progress and hopefully pick up the pace on it. It is a very tight labor market, though, very competitive labor market.
Okay, great. Thank you very much for taking our questions.
Thanks, Mark.
Thank you.
We will now take our next question from Daryl Young from TD Securities. Please go ahead.
Morning, guys.
Morning.
My question's around the insurance pricing. Historically, I think you've mentioned that the significant volumes processed through the small mom and pops has been an element that's helped support pricing discussions because they are so much lower margin. I guess just wondering now that we've seen the insurance companies really pare back their DRP partners and focus on the big MSOs, are there any insurance players that are processing a disproportionately high number of MSO customers that are higher margin and therefore could potentially negotiate more on, or said they're gonna hold prices lower for longer because they know the MSOs are higher margin?
Boy, I'm not sure I can answer that. I think that the market pressure, I don't think the market pressure will be that much different for an MSO than it would be for a single shop. Pat or Brock, do you have any comment on that?
Like you know, notwithstanding the continued movement to MSO, you know, moving volume to MSOs, there's still—it's still a very highly fragmented industry, and the insurance companies still need to supplement MSO production capacity with the broader industry. So, Daryl, I guess can't answer that. You know, really don't have enough information. But I don't think that the fact that insurance companies are dealing with not many of them are dealing with just large MSOs who they might believe can handle this longer. I think as Tim said, the market pressure will be broad, is extended throughout to all levels and all sizes of businesses, and I'm sure insurance companies are hearing from everyone.
I think maybe just further clarification on that. The labor rates that insurers pay on the market tend to be across the different channels, similar across the different channels. The MSO relationships may have some performance-based agreements that tie to things like length of rental and customer satisfaction. The labor rates tend to be fairly uniform in the market.
Okay. Got it. Thanks. Just one other quick one. In the past, I think you targeted on the balance sheet 2x-2.5x net debt to EBITDA. Just with the depressed EBITDA levels currently, would you let leverage float above those levels?
Daryl, let me comment about the leverage. I think that you hit the nail on the head. It's based on the normal levels of EBITDA. Right now we're experiencing unusual levels. When we talk about the targets, the targets are based on the normal levels. Yeah, we will monitor it closely depending upon the business conditions. We'll make necessary adjustments.
Got it. Okay. That's it. Thanks very much, guys.
Thank you.
Thank you.
We will now take our next question from Bret Jordan from Jefferies. Please go ahead.
Hey, guys.
Morning, Bret.
Could you talk about the mix of OE versus alternative parts, maybe, what you're seeing today versus pre-COVID levels?
We don't really disclose specifics on that, Brett, but we've definitely seen a change in the ratio, I think related to the supply chain challenges that's moved the OE mix up and the alternative part mix down.
Right. Okay. I guess, on the M&A side, are you seeing any overlap with other MSOs as you're in the market acquiring collision shops? I mean, obviously MSOs have grown as a percentage of overall share, are you starting to see more overlap?
Overlap in terms of acquisition activity or overlap from servicing our clients?
Yeah, in terms of acquisition activity. Are you in situations where there might be another MSO bidding on these assets?
I would say that for-
Yes, typically.
For most MSOs, it's generally a competitive bid process.
The answer is yes. Yeah.
Okay. I guess, does that increase. I guess, I think the assumption would be that's increasing as you are starting to geographically bump into some of the other major MSOs.
I think it's always been the case. The players at the table might be a little different today than they were three or four years ago through some of the consolidation that's occurred. I don't think it's all that different than it was a few years ago in terms of the number of people that may be bidding on an asset.
I guess, are you seeing any change in the valuations given the competitive bid environment? Or is it relatively static?
We haven't changed our approach. You know, there are deals that we lose. When we lose them, I think we've assessed that the value we offered was what, you know, what made sense to us. You know, we are focused. We have shifted some of our focus to more greenfield and brownfield development and are seeing good success with that and, you know, more single shop focus. Having said that, we did acquire, you know, obviously two pretty large MSOs that we were successful at acquiring this year. We're not really reliant on buying larger MSOs in order to achieve our double-by-2025 strategy.
Okay, great. Thank you.
Thanks, Bret.
We will now take our next question from Jonathan Lamers from BMO Capital Markets. Please go ahead.
Good morning.
Morning, Jonathan.
Tim, you've been responsible for Boyd Group's relationships with the insurance customers for many years. Would you be willing to hazard a guess as to approximately when you might receive a response on the rate increases and approximately which month or quarter this might be implemented?
No. I probably can't do that. We are making it really clear to our core clients that this is important to our ability to get proper returns and invest in our business and grow our staff and pay for things like our Technician Development Program, all to make sure that we can effectively serve them. I'd love to see all the major players in the industry be as committed to Technician Development as we are. I think that will make a difference over time.
I can't predict exactly when our clients will do the right thing and help us recover our labor margins. I do expect that will happen over time.
Yeah, Jonathan, just that there was a question earlier about the margin deterioration, and I think you're asking a specific question relating to the clients and the pricing. In the order of magnitude, the gross margin deterioration was more because of the labor margin deterioration. Other cycle parts also had an impact, but certainly labor had the biggest impact in terms of the deterioration. Because the wage pressures really spiked, and the insurance companies are slow to respond to the price increase requests.
The parts piece that as we've discussed and is really we view that as transitory, and we don't see that as a permanent issue. I think once the supply chain normalizes, we should be able to acquire parts as we historically have.
Tim, just one follow-up. I mean, this business has shown remarkably stable gross margins for decades.
Yep.
Is there any precedent for the type of inflation that we're seeing now and requesting these types of rate increases outside of normal course discussions?
I've been in this industry almost 25 years, and there's no precedent in that time that I've seen. This has been a really unusual labor market, and that's why I think it is, you know, as we've seen gradual labor pressure over the past 20 years, we've maintained very stable labor margins because the market has moved slowly to fix that. We just have to make sure our clients understand that the market moved at a completely different pace. I believe they see that and understand it, and it's gonna take a different approach to adjustment than what has worked successfully for, you know, for probably multiple decades.
Thanks. I just have one more question. On the U.S. vaccine mandate for January, how are you expecting that to impact operations? Will that exacerbate your labor capacity issues?
Well, I think that it's uncertain as to whether that mandate will end up being implemented broadly. I think there's some litigation in place, both at a federal level and in multiple states. You know, we are preparing to comply with the mandate. It's difficult to say what impact that may have on us. You know, I believe it's the right thing to do to get everybody vaccinated. I'm not sure the right thing to do is to impose that requirement on employers. We haven't really assessed what impact that will have.
Right. You did mention that COVID-related vaccine absenteeism has been an issue. I would think if everybody's vaccinated that that's positive longer term. I know some other companies are saying that they have large portions of their workforce that are not vaccinated, and they're concerned about the ability to convince those employees to become vaccinated.
Yeah. Although the alternative to being vaccinated is weekly testing under the OSHA guidelines that have been established. So there is the option of not a mandate, but allow weekly testing.
Thanks for your comments.
Thanks, Jonathan Lamers.
We will now take our next question from Zachary Evershed from National Bank Financial. Please go ahead.
Thank you. Morning, everyone. Thanks for taking my question.
Good morning.
Morning. You mentioned it's difficult for insurers to adjust premiums and move quickly on labor rates, and I do understand that we're in unprecedented times here. Looking at it historically, what's the typical delay on pricing adjustments from key customers? How much of a lag has there been in the past between cost increases and price increases?
You know, I'm not sure we've ever experienced much of a lag. If you look back at our margins over an extended period of time, they've been pretty stable because whatever cost increases we've experienced have washed through to rate increases. I think our job is to make sure our clients understand the impact this has had on our business and ultimately the impact on our ability to service them. You know, we've absorbed the price increase right now. At some point, it's gonna have to move upstream, and the price increase may short-term be absorbed by insurance companies as they move to raise rates to get to premiums that afford them the opportunity to get their return.
I think it's been so abrupt it'll take longer than it has normally, but I believe it will happen, and the sooner the better from my perspective.
Tim, I believe that we have seen some insurers announce this week that they're increasing premiums, that they are moving to increase premiums. That movement has started.
Yeah. You're right, Brock. So we've seen that with I read that with one major U.S. insurer that's seeing the pressure and raising rates. You know, that's obviously as one moves rates up, I'm sure that others will as well.
That's really helpful. Thanks. One last one. Thinking about sourcing from your primary suppliers and your preferred mix of aftermarket versus OE parts, is the pressure from the supply situation in Q4 stable, improving, or worsening versus Q3?
Well, it's I'd say it accelerated through Q3. It was we saw it get worse as Q3 progressed. We're still early in Q4. I'm not sure that it's gotten worse. As we said, we don't necessarily expect the actions we're taking to have a material impact on our Q4 results.
Understood. Thanks very much. I'll turn it over.
Thank you.
Thanks, Zach.
We will now take our next question from Krista Friesen from CIBC Capital Markets. Please go ahead.
Hi, Krista.
Hi. Thanks for squeezing me in here. I just wanted to follow up on the margins and the actions that you're taking. My understanding is that you're prioritizing some of the higher margin business. Is that something that you were doing through all of Q3, or is that a shift that you've made as you've entered Q4? Could we expect to see a slight improvement in Q4 because of your prioritization of this work?
I think that all of the real solution to this is getting fair rates from our clients. That's my primary focus, is making sure that we, you know, put a compelling case forward for our clients so that we can be paid fairly for the change in the market conditions. The other actions that we're taking will help incrementally, but they're not the solution. I wouldn't expect that those adjustments, you know, moving to suspend low margin clients, which are not anywhere near the lion's share of our business. Those types of actions will help on the fringe, but our real focus is making sure that we're paid fairly for the work that we're doing so that we can recover the change that's happened in our business.
Thanks. That makes a lot of sense. I'll jump back in the queue.
Thanks, Krista.
Thank you.
We will now take our next question from Maggie MacDougall from Stifel. Please go ahead.
Hi, Maggie.
Good morning.
Good morning.
Hi. A little off the wall question here because I know this has been a long haul here on the call with a lot of focus on the cost side. You know, years ago, you guys had the foresight to implement WOW, and that was quite successful for you in terms of generating operating efficiencies and cost savings. I'm wondering if maybe there's some opportunity given just what's gone on in supply chain, labor, and inflation to revisit where there could be ways to use technology or to look at things a little bit differently from a manufacturing, if you wanna call it that, standpoint. Because it does seem as though, you know, for example, the labor issue is one that's been around for a long time for you guys.
I'm thinking about, you know, automation or any of those kinds of opportunities that could be of interest in the future.
We believe that there are some technology opportunities to streamline how we process work, maybe to, you know, bring some insights to how we process work that could improve efficiency. We've talked in the past about the fact that we have a fairly sizable team of dedicated technical trainers in our company that deliver the vast majority of the technical training in our company. But those individuals are also responsible for coaching and helping our technicians find ways to be more productive with the time that they do spend in our business looking for efficiency opportunities for them. I think that's an opportunity.
We also are exploring different labor segmentation opportunities that may, you know, de-skill certain types of work where we could bring in labor that could be brought up to speed more quickly than a body technician, which is a very high-skilled position. We could peel off some of the work from what those highly skilled technicians do and do it with a lower skilled position that's easier to recruit. I do think there are opportunities there. I'd say we're always looking for those opportunities.
Thanks, Tim. That's insightful. Just one final question. I know others have touched on it, but I think just digging in a bit more, I'd be really curious your take on how the present dynamics, which are challenging, have impacted the competitive landscape, both for M&A and then as you compete just for organic growth and market share?
Well, as many people that follow the industry know, there are some newer private equity-backed players over the past couple of years that have been pretty active. You know, we obviously would be seeing them for some of the transactions that we're looking at. Our approach to that has been, you know, we're gonna be competitive where it makes sense. If it doesn't make sense to us, we're not gonna get hungry for a transaction that doesn't make sense. We are focused more on greenfield and brownfield development and are seeing good success with that. Because of the fragmentation, there are lots of single shop opportunities out there that we've been pursuing that we think make a lot of sense to fill in our network.
Well, the environment is competitive for acquisitions. I think we have a good strategy to address that and continue to be able to grow accretively, you know, to for our business. That may have answered the one, Maggie. What was your other question?
That did answer it.
Yeah. Mag, I think
Oh, go ahead, Pat. Excuse me.
No, no. I think, yeah, we are committed to our growth strategy, and we'll deploy capital wherever it provides the best return. If it provides best return in terms of the same-store sales growth, we'll do that or in the single shops, brownfield, greenfield. We'll see where the opportunities are more compelling, and that's where we are going to commit more capital to accomplish our goals.
Thanks. Just one more thing. You know, we talk a lot about input costs. One thing that hasn't been touched on is rent. At least in the city of Toronto and Ontario, generally speaking, I know industrial rents are set for fairly large increases. You guys lease the majority of the locations. Can you give us some guidance in terms of how rent rollovers will impact your lease rates over the next few years? Just keeping in mind that, you know, you could have some maturities and some cost increases on that side.
You know, I don't have an assessment of that I can really speak to, Maggie. I can tell you we typically enter long-term leases for our properties, often with options the price set in advance. While I'm sure that there are some of our properties that, given market conditions, could increase more than average, I think generally we're pretty well protected with the way we've leased properties over the past several years.
Thanks very much. Hope your day goes well.
Thanks, Maggie.
Thanks. Peace.
There appears to be no further questions at this time.
Well, very good. Well, thank you, operator, and thank all of you once again for joining our call today. We look forward to reporting our Q4 and year-end results in March. Have a great day. Thank you.
Thanks, everyone.
This concludes today's call. Thank you for your participation. You may now disconnect.