Good morning, everyone. Welcome to the Boyd Group Services Inc.'s third quarter 2020 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 relating 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 SEDAR's database found at sedar.com. I'd like to remind everyone that this conference call is being recorded today, Wednesday, November 11, 2020. I would now like to introduce Mr. Tim O'Day, President and Chief Executive Officer of the 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 Kolb, our Executive Vice President and Chief Financial Officer, and Brock Bulbuck, our Executive Chair. We released our 2020 third quarter 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, 2020, provide a general business update, and discuss our long-term growth strategy. We will then open the call for questions. As was expected, the third quarter of 2020 continued to be significantly impacted by the COVID-19 pandemic.
Although the impact was less severe than we experienced in the second quarter. We continue to focus on health and safety practices, such as contact-free customer drop-off and pickup, enhanced vehicle and facility cleaning practices, social distancing, and wearing of personal protective equipment to keep our employees and customers safe. We continue to follow key practices that include deep cleaning facilities where an employee with a potential or confirmed case of COVID-19 is identified, as well as defined processes for quarantine and testing in situations of potential exposure to help prevent the spread of the virus. During the third quarter, we recorded sales of CAD 508.3 million, adjusted EBITDA of CAD 84.5 million, and net earnings of CAD 21.1 million. Sales at CAD 508.3 million showed a 10.3% decrease when compared to the same period of 2019. This reflects a CAD 22.7 million contribution from 68 new locations.
Our same-store sales, excluding foreign exchange, decreased by 15% in the third quarter. Same-store sales declines in Canada continued to be significantly higher than same-store sales declines in the U.S., which reflects the continued slower economic reopening in Canada when compared to the U.S. Foreign exchange increased sales by $3.6 million due to the translation of same-store sales at a higher US dollar exchange rate. Gross margin was 47.2% in the third quarter of 2020, compared to 45.3% achieved in the same period of 2019. The gross margin percentage improved as a result of higher labor margins, primarily due to the recognition of the Canada Emergency Wage Subsidy of approximately CAD 3.9 million, which more than offset the incremental COVID-19 related labor costs. Labor margins were also positively impacted by prudent cost controls, such as a cautious approach to bringing back resources as revenue grew in the U.S.
The gross margin was positively impacted by a favorable mix of higher margin retail glass sales and normal variability in DRP pricing. Operating expenses for the third quarter of 2020 were CAD 155.5 million or 30.6% of sales, compared to 31.7% in the same period of 2019. The decrease as a percentage of sales was impacted by the Canada Emergency Wage Subsidy, as well as lower wages as a result of temporary layoffs and reduced management compensation. Boyd took a cautious approach to bringing back resources as revenue grew, which resulted in lower Q3 expenses but is not sustainable. While many operating expenses were managed in relation to the decline in sales, certain expenses could not be reduced, such as property taxes and utility costs, which increased as a percentage of sales.
Adjusted EBITDA or EBITDA adjusted for fair value adjustments to financial instruments and costs related to acquisitions and transactions was CAD 84.5 million, an increase of 9.2% over the same period in 2019. The increase was primarily due to improvements in gross margin percentage. In addition, adjusted EBITDA in the third quarter benefited from the Canada Emergency Wage Subsidy in the amount of CAD 9.9 million. However, it should be noted, as is the objective of this program, we continued to employ and incur costs for employees that would otherwise have been laid off or furloughed absent the subsidy. Net earnings for the third quarter of 2020 was CAD 21.1 million, compared to CAD 14.8 million in the same period of 2019.
Excluding fair value adjustments and acquisition and transaction costs, adjusted net earnings for the third quarter of 2020 was CAD 21.8 million, or CAD 1.02 per share, compared to adjusted net earnings of CAD 20.7 million, or CAD 1.04 per share in the same period of the prior year. The decrease in adjusted net earnings per share is primarily attributable to a higher number of weighted average shares in 2020 due to the equity offering completed in the second quarter of this year. For the nine-month period ended September 30th, 2020, we reported sales of CAD 1.6 billion, a decrease of 7.9% over the same period of the prior year, driven by same-store sales declines of 16.5%, or 17% on a days-adjusted basis, partially offset by contributions from new locations that had not been in operation for the full comparative period. Gross margin increased to 46.1% of sales compared to 45.5% in the comparative period.
The gross margin percentage was positively impacted by higher labor margins as a result of the Canada Emergency Wage Subsidy and a cautious approach to bringing back resources as revenue grew in the U.S., along with a favorable mix of retail glass sales and normal variability in DRP pricing. Operating expenses decreased CAD 31.1 million when compared to the same period of the prior year, primarily due to COVID-19 related cost reductions, such as staffing reductions, salary and other compensation adjustments, and reductions to other variable expenses. Operating expenses benefited from the Canada Emergency Wage Subsidy recorded as an offset to applicable indirect wages. Adjusted EBITDA for the nine-month period ended September 30th, 2020, was CAD 215.1 million, compared to CAD 235.8 million in the same period of the prior year.
The CAD 20.7 million decrease was primarily the result of the business slowdown caused by the COVID-19 pandemic, including operating expenses that could not be mitigated. We reported net earnings of CAD 36.7 million, compared to CAD 49.9 million in the same period of the prior year. Adjusted net earnings per unit decreased from CAD 3.64 to CAD 1.69 in adjusted net earnings per share. These amounts were significantly impacted by the COVID-19 pandemic. At the end of the period, we had total debt net of cash of CAD 672 million, compared to CAD 708.7 million at June 30th, 2020, CAD 949.9 million at March 31st, 2020, and CAD 893.2 million at the end of 2019. At the onset of the pandemic, we faced significant uncertainty regarding the extent and duration of the impact of COVID-19 on our business.
In addition to acting quickly to reduce our expenses, we further addressed the uncertainty by drawing down on our credit facility and raising equity to ensure our balance sheet could withstand the impact of the pandemic and still be prepared for growth as conditions stabilized. As conditions have stabilized and the impact of COVID-19 has become better understood, Boyd has made repayments of CAD 824.3 million during the nine months ended September 30th to reduce the level of outstanding debt. As a result of the adoption of IFRS 16, Boyd reported total debt net of cash, including lease liabilities of CAD 672 million, compared to CAD 895 million as of September 30th, 2019, and CAD 893.2 million as of December 31st, 2019.
Based on the strength of and confidence in our business, we announced today that we are again increasing our dividend by 2.2% to CAD 0.564 per share on an annualized basis from their present level of CAD 0.552, beginning in the fourth quarter of 2020. This is the 13th consecutive year that we have increased dividends to shareholders. During 2020, the company expects to make cash capital expenditures within the previously guided range of 1.6%-1.8% of COVID-affected sales. This excludes those capital expenditures related to acquisition and development of new locations, the investment in 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 has invested approximately CAD 3.5 million in LED lighting of a planned CAD 5 million investment in order to reduce energy consumption and enhance the shop work environment. This investment will not only provide environmental and social benefits, but also achieve accretive returns on invested capital. Additionally, the company has begun to expand its WOW Operating Way practices to corporate business processes. The related technology and efficiency project will result in a total of CAD 9 million-CAD 10 million investment over the next 12 months and will also be expected to streamline various processes as well as generate economic returns after the project is fully implemented. This initiative began in the third quarter of 2020 and thus far has incurred nominal costs.
Thus far, we've been able to successfully adjust and manage through the challenging situation that has arisen as a result of the COVID-19 pandemic. Our efforts have continued to deliver positive operating cash flow during the third quarter, notwithstanding the substantial decline in revenues caused by COVID-19. Following the pause on acquisition activity that occurred during the second quarter, we have added 11 locations during and subsequent to quarter end. On a year-to-date basis, we have thus far added 30 locations. As has been our practice, I would now like to comment on some potential for insider selling.
With the recent changes to the economic and political environment that has translated into the potential for tax increases in the not-too-distant future, including taxes on capital gains, some insiders may choose to sell some of their Boyd holdings in advance of any such tax increases. In any event, we'll continue to hold ownership of Boyd shares at levels well above those required by the company's share ownership policies. The COVID-19 pandemic continues to impact our business. Thus far in the fourth quarter of 2020, same-store sales activity has continued below normal levels, although slightly better than reported in the third quarter, with both fewer miles traveled and reduced traffic congestion impacting accident frequency. In addition, the higher margin retail glass business, which had a favorable impact on our gross margin percentage in the seasonally high third quarter, is entering a seasonally slower period in the fourth quarter.
The company will continue to make applications under the Canada Emergency Wage Subsidy program as long as it continues to meet eligibility requirements. However, changes have been made to the program such that the subsidy is now determined by a particular employer's revenue reduction percentage in each qualifying period, rather than providing a subsidy amount based on a minimum decline in revenues. This change, combined with some additional uncertainty as to how the program will work beyond November 21st of 2020, will significantly reduce the subsidy that Boyd will be entitled to with respect to the fourth quarter of 2020 in comparison to both the second and third quarters of 2020. Overall, we are well-positioned to navigate through this challenging environment, and we are pleased to announce our new five-year growth strategy.
Our new growth strategy is to double the size of our business on a constant currency revenue basis from 2021 to 2025, based on 2019 revenues, implying an average annual growth rate of 15%. In order to achieve this, we will pursue accretive growth through a combination of organic or same-store sales growth, as well as adding new locations to our network in the United States and Canada. New location growth will continue to include single-location acquisitions as well as brownfield and greenfield startups and multi-location acquisitions. Additionally, to reduce volatility from exchange rates, effective January 2021, Boyd will begin reporting results in US dollars. Given almost 90% of our revenues come from the US, this makes sense as an appropriate currency for reporting purposes. As always, operational excellence remains central to our business model and continuous improvement investment in our WOW Operating Way.
We continue to work to drive excellence in repair quality, customer satisfaction, and repair cycle times to ensure the continued support of our insurance partners and vehicle owner customers. Additionally, the company has begun to expand its WOW Operating Way practices to corporate business processes, an initiative that began in the third quarter and is expected to streamline various processes as well as generate economic returns. In summary and in closing, I continue to be incredibly proud of the steps that we've taken to adjust to this new environment and position ourselves well for the future. We've been able to adjust our business to manage through this challenging situation. We continue to believe that there will be many opportunities that come from this crisis, both internal and external, and we put ourselves in a good position to come out of this crisis as a stronger company.
Our priorities remain taking care of the health and safety of our team members and customers, as well as preserving financial flexibility and preparing for the opportunities that lie ahead. With that, I would now like to open the call to questions. Operator?
At this time, I would like to advise everyone, in order to ask a question, please press star then the number one on your telephone keypad. Again, that is star then the number one on your telephone keypad. Our first question comes from the line of Steve Hansen with Raymond James. Please go ahead. Your line is open.
Morning, Steve.
Morning, guys.
Morning, Steve.
One for me to start is on, I think your commentary seems to suggest to be cautious on the gross margin going forward. You said effectively not wanting us to extrapolate the recent performance given you're bringing back resources more slowly. I'm just trying to get a sense for now you've got two quarters in a row where you've probably outperformed most people's expectations. Over what time frame should we expect those gross margins to get back to normal? Is it a quarter or two, Tim, or is it three quarters? I'm just trying to get a sense of that cadence.
Steve, we really haven't said the timing of it. I think the impact that you saw in the third quarter, and actually in the second quarter in part as well, was a combination of a few things. We did eliminate lots of expense that was difficult to sustain, and we were slow to bring back some of that. A good example would be our apprenticeship program, which we weren't growing at the rate that we'd expected to grow, but we now are full steam ahead on that, and that does put some downward pressure on margin. The other key factor is the wage subsidy. The Canadian Wage Subsidy was fairly meaningful in both Q2 and Q3. Q2 and Q3 are seasonally high for our glass business. With lower collision sales and the glass business is a greater percentage of total sales, that has a lift on margin.
We won't get the benefit of the glass seasonality in Q4. We also aren't anticipating the benefit of the Canadian wage subsidy, at least not at the level that we've seen. We have brought back most of the resources and are really trying to move full steam ahead to manage the revenue that we have available. Hopefully that answers your question.
Yeah, no, that's helpful. Just one follow-up on the strategic growth plan to double again. Quite bold. Just curious if you guys mapped out that pace of acquisitions you need to make to get there over the five years. Really, over what cadence should we expect that to unfold? You've been relatively slow thus far, I'd say, coming out of the trough relative to a few others. Just trying to get a sense for whether you envision some bigger deals to happen in amongst there. Because if it's just smaller one-offs, you're going to have to really accelerate the pace. Just maybe walk us through how confident you are in meeting that plan and whether it entails medium and/or larger sized deals within it. Thanks.
Yeah. I feel very good about the opportunity that we have to achieve that goal. I wouldn't say that it's a quarter-by-quarter march toward that goal. There will be periods of time when we grow much faster, maybe through multiple MSO deals that happen over a successive period, as we've seen in the past. We're geared up and ready to grow both with single shops and MSO. The single shops will include, as we've done in the past, single shop acquisitions. We'll also put some focus on greenfield and brownfield opportunities. I think that I'm comfortable with our strategy and the resources that we have in place to accomplish that.
Steve, if you look at it, you made a comment, it has been slow, and that was a choice we made. We paused because of the uncertainties relating to the COVID-19 pandemic. We now publicly are stating now that we are pursuing, we are recommencing the growth. The industry is still highly fragmented, and we are well-positioned to consolidate. We are very optimistic.
Okay. That's great, guys. Appreciate the time.
Thanks, Steve.
Thanks, Steve.
Our next question comes from the line of Michael Doumet with Scotiabank. Please go ahead. Your line is open.
Hi, Michael.
Hey. Good morning, guys. Hi.
Good morning, Michael.
Good morning. I'd like to get a little bit more clarity on the comment regarding the sustainability of the cost actions taken in Q3. Just in terms of how we're supposed to interpret the comment around sustainability, should we assume that margins in Q3, as a %, may have peaked, but the dollar profits should improve with volumes? I mean, asked another way, should we expect revenues to come back faster than cost?
I think one of the comments I made was that we were slow to bring back resources as revenue ramped up in Q3. If I had to do it over, I might not be as slow with bringing back those resources. I think the Q3 benefited from a combination of things that I did describe, but one of them was a slower response to bringing back resources just out of caution, because we really didn't know exactly how the revenue would build.
Got you. That's clear. Maybe as an offset, just as a follow-on, if it were not for CEWS, what would be the alternate cost actions that resulted in terms of cost reductions?
Michael, we really haven't tried to assess that. We had plans that we laid out when the pandemic began, and CEWS did allow us to avoid some furloughs or layoffs. Because the whole situation evolved in terms of the decline in revenue and how it ramped back up, we really don't have the ability to go back and look at what might have happened had that not occurred.
That's fair. Okay. Just on the second question, obviously we're not at the acquisition pace that gets us that 15% CAGR. I'd like to get your take on maybe what you think are the main obstacles or what you think it would take to get back to that desired activity level.
I think that we have a team that is prepared to accomplish the level of growth that's required to achieve that. What you're seeing or what you've seen in 2020 was an intentional halt on growth. While we kept things that were in the pipeline warm, we've still been relatively cautious with acquisitions and integration. We are getting more comfortable with doing more of the integration activity virtually and having limited resources on the ground. We're prepared to step up the pace and believe that we have the resources available to us today to get on the run rate to accomplish the five-year plan.
Okay, great. All right. Nice adjustment and good performance, guys. Thank you.
Thanks, Michael.
Our next question comes from the line of David Newman with Desjardins. Your line is open.
Go ahead, David.
Go on, David.
Their line has disconnected. Please press star one if you would like to ask your question. Our next question comes from the line of Sabahat Khan with Goldman Sachs. Please go ahead, your line is open.
Hey, guys. Thank you for taking my question. Just going back to your five-year plan, in terms of doubling the revenue. As you think about the composition of that with the acquisitions and then same-store sales, how should we think about the split? Should we go back to the prior five-year, and is sort of the 3.5%-4% comp still the right way to think about it as we look forward?
We don't really provide specific guidance on that. Our growth plan includes both organic growth as well as growth through new unit development, whether it's by acquisition or brownfield, greenfield. What our plan really calls for is 15% annual growth over that period of time, but without defining the organic versus unit growth.
I guess that's fair. I guess what I'm trying to understand is, coming out of the pandemic, obviously, that's the big reality now. Do you see anything changing the underlying drivers of the industry that we should consider? Let's just say that a vaccine comes out and things get back to normal. Do you see anything changing just the underlying dynamics of how we should be thinking about the core groups?
I'm not sure I see anything significant. Obviously, this is such a disrupted year. We would expect as we come out of the pandemic that our organic growth year-over-year would be substantially higher next year than you would normally see.
Right.
That's really a recovery as a result of COVID. It still remains to be seen what's going to happen with miles driven, with traffic congestion. Despite all of that, I think we have an excellent opportunity to consolidate the industry and to serve insurance clients and participate in OE certification programs to help gain share as part of our overall strategy toward growth.
Got it. A follow-up question. You guys talked about streamlining some corporate practices briefly there. Can you perhaps throw some more light? What can we expect? What sort of cost efficiencies can you achieve there?
We have not disclosed the cost efficiencies relating to that yet. The only thing we disclosed is that we'll be completing that over the next 12 months, and also the cost associated with that. You can certainly expect the benefits potentially starting in 2022. We have not disclosed that information yet, the magnitude of those benefits.
Got it. Thank you very much.
I think the one thing we have said is we expect it to provide economic returns, though.
Absolutely. Yeah. It's a great investment from that point of view. Absolutely.
Great. Thank you.
Thank you.
Our next question comes from the line of David Newman with Desjardins. Please go ahead, your line is open.
Hi, David.
Hi, David.
I think I got cut off there. Can you hear me?
Yep.
Yes.
Very good. Great set of results first off the top. Just a couple of questions. One is on the margin front again. I just want to look at it a kind of a different way, though. Do you think you'll revert to historic levels? Coming out of the pandemic, do you think Boyd might look a little different in terms of hub and spoke intake centers, any permanent cost reductions or other identified efficiencies beyond the WOW Operating Way in the corporate offices? Loaded question.
I think there are multiple questions, David. I think if you peel the onion, one is relating to the cost structure. The cost structure, as we commented, you need to normalize for the CEWS. The second one is relating to some of the staffing Tim commented. We might add back, so to that extent, it might put some pressure on the margins. The third one is the mix between the repair versus the replace. When you have less pressure on labor, you tend to use more labor, and that has higher margins. As you come back full steam, that might change a little bit back. Those are the factors I think that might have an impact on the margins. I'm going to revert back to the 45.5 in the range so that we cannot answer. We don't provide guidance on those things.
We'll be striving hard to enhance the EBITDA margins. Again, we don't want to get specific about the growth margins or the OpExes, but our focus is to enhance the EBITDA margins over a period of time.
Just more of a high level, though. This pause from the pandemic, it's afforded many companies a chance to kind of really look at what they're doing and how they do it. Was there any revelations for you guys in terms of how you were operating or any changes? I know you're very efficient. Did you identify anything that could be used go forward?
Absolutely. I think in terms of the practices, we told in the past, I think we'll be increasing our focus on the dealer intake centers. I think that is certainly one thing. Also, we looked at our cost structure, and we found some opportunities to consolidate some of the functions and derive synergies related to those things. Again, we have not disclosed those things, but yeah. In fact, we have done, and we are doing those things.
Okay. Any benefit from the right to repair law that was recently passed? I know you already have a pre and post diagnostics, but anything at the margin, any benefits that you guys can see?
I don't think there's an immediate benefit on that, although that was an important decision for the automotive aftermarket. I think that Massachusetts had tended to lead the way on legislation like that. I view that as favorable for the aftermarket.
Okay, last one from me, guys. U.S. dollar reporting, is this, do you think eventually will lead into potentially dual listed?
That I think we'll make that call at the appropriate time. I think now we are doing this to reduce the volatility because of the exchange rates.
Makes sense. Thanks, gentlemen.
Thanks, David.
Thanks, David.
Our next question comes from the line of Maggie MacDougall with Stifel. Please go ahead. Your line is open.
Good morning.
Hi, Maggie.
Quick question on your intentions to extend the WOW Operating Way into your corporate culture and operations. The investment or the cost for that, is that actually an investment in systems, or is that more of a restructuring cost? Secondly, could you provide us a bit of detail in terms of what you plan on implementing corporately? I can imagine that your on-the-floor shop operations implementation of WOW is going to be quite a bit different from what you're going to be doing in your back office. We'll be curious exactly what you have planned there. Thank you.
Sure. Yeah, there are two things. One is, you're right, the WOW Operating Way we have implemented in operations is different, and that's an ongoing process. We embarked on that four or five years ago, whereas this was started in Q3, and the focus is on finance, human resources, procurement, and areas like that, the strategic support services and the corporate functions. The investments of CAD 9 million-CAD 10 million we have identified do include systems. We are implementing a system, and that investment is a part of that.
It sounds to me as though this may be something that will help you scale over the next 5 years as you work towards your new revenue target goal. Is this the type of thing that could enhance operating efficiencies as you continue to add businesses to your platform? Is it simply going to be removing a bit of excess cost or creating some new efficiencies within your existing-
No. I think one of the reasons we are implementing the system is to scale up because we do have ambitious plans to grow the business, and this provides the right platform to enable that growth. In addition to that, certainly we are going to realize the cost synergies as Tim pointed out. Now we are looking for an attractive return on invested capital.
Mm-hmm. Just with regards to the competitive landscape, wondering if you could provide any insight into how it may have shifted or changed given the unusual circumstances of this year. It's obviously been a challenging year for the collision industry in terms of demand. You guys and others, I imagine, have navigated it very efficiently. Have you seen this sort of increased pressure on the single-store operators? Has there been a multiplier in terms of benefit to the larger groups given that the balance sheet stability you have is superior, and you have been able to navigate this challenge so well?
Maggie, I think we've commented on this in the prior quarter as well. Immediately after the pandemic, there was a fairly significant amount of support in the U.S. provided to small businesses that really allowed those that may have been undercapitalized to get through it pretty well. Having said that, I think that over time, there could be more single shops that are motivated to sell as a result of what we've gone through or what we're going through.
We're still in the early stages, I'd say of that, but I'm optimistic that we'll see good opportunities to come from this.
Okay. Thanks very much, guys. Have a nice day.
Thanks, Maggie.
Thanks, Maggie.
Our next question comes from the line of Bret Jordan with Jefferies. Please go ahead. Your line is open.
Hey, good morning, guys.
Morning, Bret.
Good morning, Bret.
When you look at the pandemic and I guess the last maybe four or five months, did you see a spike in total loss rates that compounded the impact on the negative comp? I guess if you could sort of carve out any kind of short-term change in the insurance company's thoughts here. I guess the second question, I'll ask it all at once. As you look at the DRP impact versus OE certification, given your scale and relationships with both OE and insurance companies, which of those do you see as a bigger driver going forward in the consolidation of volumes to major players?
On the first question, Bret, with regard to total losses, I think we rely on the data that CCC publishes for that. Most total losses don't get to a collision repair shop. The insurance companies are motivated to identify those as total losses before they get to a shop. We wouldn't necessarily see an increase in total loss rates in our operations, but CCC has reported an increase in total losses. Used car values are a driver of that, as you know, and used car prices initially went down because of oversupply, but they've since returned to actually pretty solid levels. That's a favorable trend for us. Total loss rates have been creeping up over the past several years and it may well be that they continue to do that.
On the balance between DRP and OE certifications, I actually think that there is balance between that. We've invested in many OE certification programs to date. We expect to continue to grow our portfolio of OE certifications and view that as important. Most insurers today do not refer business based on an OE certification program, most OEs today don't play a significant role in where cars get repaired. I think there's the potential for both insurers to recognize certifications and for OEs to play a greater influence on where cars go. That's the reason that I think we'll maintain strong direct repair relationships, but also continue to invest in the equipment and training and processes necessary for OE certifications.
Okay, great. Thank you.
Thanks, Bret.
Our next question comes from the line of Zachary Evershed with National Bank Financial. Please go ahead. Your line is open.
Morning, everyone. Congrats on the quarter.
Good morning.
Thanks, Zachary.
Looking at the potential growth drivers, we have same-store sales growth, obviously, we have the acquisitions, greenfields and brownfields. How do the returns compare on an acquisition at typical prices versus a greenfield and versus a brownfield?
I guess we would generally expect greenfield and brownfield acquisitions or a growth to have a higher return on capital than single shop. I think we've provided information in the past. Well, Pat, do you want to comment on that?
Yeah, I think in terms of relatively, if you look at the four buckets, I think the same-store sales growth has the highest contribution margin. You have the brownfield/greenfields, and the third one is the single shops, and the last one is the MSOs. Instead of purely the ROIC, one has to look at the strategic value these things bring. The MSOs may have lower, but it does add strategic benefits for our platform. You have to factor that in. In order of magnitude, that's how they stack up.
That's helpful. Thanks. Given the current environment, how easily do you think you can staff greenfields and brownfields with technicians?
I don't view that to be an exceptional challenge. It is probably easier to attract staff into a newer facility with very current equipment. It will require effort on our part, but we're prepared to make that effort.
That's great. Thanks. Helpful. I'll turn it over.
Thank you.
Our next question comes from the line of Jonathan Lamers with BMO. Please go ahead. Your line is open.
Good morning, Jonathan.
Morning, Jonathan.
Good morning. Thanks for taking my question. Just following up on that last discussion on the greenfield store plans. Can you comment as to whether you've secured a real estate development partner to assist you with that?
We have various options with that, so it is certainly not a barrier for us in terms of that method of growth.
When should we be thinking about those greenfield stores beginning to be implemented and thinking about working those into our forecasts?
We already started focusing on the brownfield/greenfield. In fact, before the COVID-19 hit, we slightly started, but we will increase the focus. As you know, it is going to take time, unlike the acquisitions which will hit ground running. There is a startup phase. As I said, we are not providing any specific goal, but that is part of the mix. We are going to evaluate the opportunities. If we find brownfield/greenfield to be more meaningful in a strategic location than acquiring a shop, then we would do it. That is how we are going to evaluate. It is going to be part of the mix. It is one of the arrows in the quiver to facilitate the growth.
Okay, last topic. On the Q3 same-store sales, it seems the U.S. business is well outperforming the industry claims volumes. Can you offer any comments as to what you would attribute that to, whether it is higher industry severity rates, market share gains for Boyd's shops, or both?
It's probably a combination of that. Those are pretty difficult numbers for us to clearly assess. We do believe we've gained some share. We have strong direct repair relationships with our insurance clients. There is also a component of severity of the average cost of repair, which has been creeping up over the years, and that's continued even through 2020 based on the data we see. It's a combination of those.
Great. Thanks for your comments.
Thanks, Jonathan.
You're welcome.
Your next question comes from the line of Steve Hansen with Raymond James. Please go ahead, your line is open.
Hey, guys. Just two quick follow-ups, if I may. First is on the fourth quarter same-store sales trend. You commented, Tim, that things are trending slightly better than the third quarter print. I am just curious if you have seen any fade at all in the activity pattern through November as we start here. Some of the industry data suggests that things are a little bit softer here.
I think the only comment we are really providing is a historical look back. Up through the very recent time, we have seen a slight improvement from where we were in Q3, it is pretty difficult to predict exactly what will happen over the next seven weeks with there is a pretty significant increase in the pandemic and the impact of the pandemic, we do not really have any other guidance for what the delta Q4 may look like.
Great. That is fine. Just one point of clarification on the five-year target, just to make sure I have got the language correct. It sounds like you are using 2019 as the baseline for your five-year doubling.
That's correct
2020 is almost a throw-out year in a way.
Right. That's correct.
Yeah. That's sort of how we're viewing it, Steve.
Okay
we're basing the targets on 2019 revenue.
And-
Okay. Just wanted to make sure that was clear.
Yeah. Tim, it's Brock. Just maybe a comment to add on that. Based on some of the earlier questions that sort of intimated that we were behind the curve against that growth trajectory. Well, we're really not behind because the measurement period really hasn't started yet. The measurement period is 2021 through 2025. Just as we are basing the baseline on 2019, and 2020 is therefore a throwaway year from a baseline perspective, it's also a throwaway year from a growth perspective. I thought it was important to point out that the measurement period, that the five-year period that we are giving ourselves to achieve this growth really doesn't kick in till 2021.
No, that's good commentary. That's helpful, guys. Okay, appreciate the time. Great results.
Thanks, Steve.
Thanks, Steve.
Our next question comes from the line of Matt Bank with CIBC. Please go ahead, your line is open.
Good morning, Matt.
Hi, Matt.
Morning. I want to clarify, make sure that I understood a comment you made earlier on the call. It sounded like you said that even after officially restarting M&A and doing some of it, you were cautious on deals, but now you are ready to pick up the pace. Is that a fair way of hearing it? Then can you just also comment on the pipeline, and the M&A opportunities available to you and how that looks versus what you would've seen pre-COVID?
Well, on your first question, Matt, I think we are prepared to pick up the pace. I would say we still need to be aware of the fact that the number of COVID cases is increasing, and we have a responsibility to keep our team safe. If the environment were to make it more difficult, we could slow down some things for that reason. We're prepared to pick up the pace. In terms of the pipeline, I would say we're comfortable that our pipeline has, as we've communicated in the past, we think we have a strong pipeline of potential opportunities to pursue, and that should not be a barrier to achieving our plan.
Matt, our focus is for the longer term, you may see a slightly different pace in the very short term. That's why we're providing the guidance for five years starting 2021, we're very confident about achieving those goals.
That's it for me. Thanks, guys.
Thanks, Matt.
Thanks, Matt.
Our next question comes from the line of Chris Murray with AltaCorp. Your line is open.
Hi, Chris.
Yeah. Good morning, folks.
Hi.
Hi, Chris.
I guess maybe my question is thinking a little bit about the strategic plan. You've talked about the five-year revenue target. What I was also curious about is thinking about the composition of how you're going to build that revenue. You've talked about certainly same-store sales and store acquisitions, but just wondering about things like how you're going to be thinking about things like intake centers, cost management. What I'm really trying to understand is should we expect, not necessarily the revenue growth number, we can kind of get there, but the quality of earnings over that period. How do you think that that's going to evolve?
I'm not sure I completely understand the question.
Well, is there anything you can do as you grow that revenue to improve the margin profile of the company other than just straight up absorption?
Yeah. I think that we'll have to see what the market gives us the opportunity to do on that, Chris. I think in the collision repair business right now, parts as a percentage of total mix has been increasing because of greater part content as well as higher part prices. As you know, our parts margins tend to be lower than our labor margins, or they are lower than our labor margins. On the other hand, I think there are opportunities for additional labor operations, particularly as it relates to ADAS, that could help to offset that. Obviously we're looking for organic sales growth that would drive maybe not gross margin improvement, but EBITDA margin improvement to help us improve our profitability during that planning horizon. I don't know if that answers your question.
Yeah. Just maybe any thoughts around do you try to look to accelerate using intake centers, which generally bias your margins one way or another, or anything like that? Again, I guess the other piece is your involvement with DRP programs. Do you do something different there as well?
I don't see any significant change in our involvement with direct repair programs. I think those are a key source of our revenue and delivering value to our clients from that standpoint. I do think intake centers is something that we will continue to pay attention to. We have been, and we will continue to do that. That's a good driver for organic growth. I don't think it changes the overall profit profile beyond driving organic growth and using DRPs and operational excellence to drive further organic growth.
Okay. That's fair. Thanks, folks.
Thanks, Chris.
Thanks, Chris.
There are no further questions at this time. I will now turn the call back to Timothy O'Day.
Very good. Thank you, operator. Thank you all once again for joining our call today. We look forward to reporting our fourth quarter and year-end results in March of next year. Thanks. Have a great day. Bye-bye.
Thanks, everyone.
This concludes today's conference call. Thank you for your participation. You may now disconnect.