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Boyd Group Services Inc
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Good morning, everyone. Welcome to the Boyd Group Services, Inc. Second 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 Board's future financial and 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, August 12, 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 Pathipati, our Executive Vice President and Chief Financial Officer; and Brock Bulbuck, our Executive Chair. We released our 2020 second quarter results before markets open today. You can access our news release as well as our complete financial statements and management discussion and analysis on our website at www.boydgroup.com. Our news release, financial statements and MD&A have also been filed on SEDAR this morning. On today's call we'll comment on the impact of COVID-19 on our business. We will discuss the financial results for the 3 and 6-month periods ended June 30, 2020, and provide a general business update. We will then open the call for questions. As was expected, the second quarter of 2020 was significantly impacted by the COVID-19 pandemic, with the primary impact being a significant reduction in sales due to reduced demand for our services. Throughout the quarter, we took proactive steps to continuously adapt to the new environment, including both financial management actions as well as increased health and safety practices such as contact-free customer drop off and pickup, enhanced vehicle cleaning practices, social distancing and wearing a personal protective equipment. Thus far, Boyd has been able to successfully adjust and manage through the challenging situation that has arisen as a result of the pandemic. During the second quarter, we recorded sales of $426.5 million and adjusted EBITDA of $49.2 million. However, while we were able to effectively manage down many operating expenses to mitigate the impact of the decline in sales, certain expenses, which have a significant fixed component to them, increased as a percentage of sales. This, along with the fixed nature of depreciation and amortization as well as increased financing costs incurred with respect to the temporary drawdown of credit facilities, contributed to an overall net loss in the second quarter of $7.1 million. Looking further into our results for the second quarter of 2020. Sales were $426.5 million, which was a 25.5% decrease when compared to the same period of 2019. This reflects a $30.4 million contribution from 79 new locations. Our same-store sales, excluding foreign exchange, decreased by 33% in the second quarter, with that decrease being negatively impacted by the slower economic reopening in Canada. Foreign exchange increased sales by $12.2 million due to the translation of same-store sales at a higher U.S. dollar exchange rate. Gross margin was 46.8% in the second quarter of 2020 compared to 45.9% achieved in the same period of 2019. The gross margin percentage improved as a result of higher labor margins and a higher mix of retail glass sales. In addition, the recognition of the Canadian Emergency Wage Subsidy, in the amount of approximately $2.2 million, helped to mitigate incremental COVID labor costs and also contributed to gross margin improvement. Operating expenses for the second quarter of 2020 were $150.4 million or 35.3% of sales compared to 31.9% in the same period of 2019. The increase, as a percentage of sales, was primarily due to the negative impact of the COVID-19 pandemic. While many operating expenses could be managed in relation to the decline in sales and in order to reduce the impact of the pandemic on our business, certain expenses, such as benefits, which were extended to staff that was temporarily laid off as well as certain costs that could not be reduced, such as property taxes and utility costs, increased as a percentage of sales. In addition, operating expenses benefited from the Canada Emergency Wage Subsidy in the amount of approximately $2.5 million, which helped to mitigate incremental COVID-19 indirect wage costs. Adjusted EBITDA or EBITDA adjusted for fair value adjustments to financial instruments and costs related to acquisitions and transactions was $49.2 million, a decrease of 38.6% over the same period of 2019. The decrease was primarily the result of lower sales due to the impact of the COVID-19 pandemic and operating expenses that could not be mitigated. Net loss for the second quarter of 2020 was $7.1 million compared to net earnings of $13.7 million in the same period of 2019. The current quarter loss was impacted by the fixed nature of depreciation and amortization as well as increased financing costs incurred with respect to the temporary drawdown on credit facilities. The net loss and net earnings in both the current and prior year were also impacted by the recording of fair value adjustments and acquisition and transaction costs. Excluding fair value adjustments and acquisition and transaction costs, adjusted net loss for the second quarter of 2020 was $6.9 million or $0.33 per share in comparison to net earnings of $23.5 million or $1.18 per unit in the same period of the prior year. For the 6-month period ended June 30, reported sales were $1.1 billion, a decrease of 6.7% over the same period of the prior year, driven by same-store sales declines of 17% partially offset by contributions from new locations that had not been in operation for the full comparative period. Gross margin was consistent when compared to the period of 2019 at 45.6% of sales. Operating expenses decreased by $7 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. Adjusted EBITDA for the 6-month period ended June 30, 2020, was $130.6 million compared to $158.4 million in the same period of the prior year. The $27.8 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 $15.6 million compared to $35.1 million in the same period of the prior year. Adjusted net earnings per unit decreased from $2.60 to 65% 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 $708.7 million compared to $949.9 million at March 31, 2020, and $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. Total debt, net of cash, decreased as a result of the offering, which was completed in May of 2020. With greater confidence now in the extent of the COVID-19 impact, subsequent to quarter end, we repaid USD 167.5 million of the revolving credit facility with available cash. As a result of the adoption of IFRS 16, total debt, net of cash, included lease liabilities, of $538.6 million compared to $550.5 million as of March 31, 2020, and $513.4 million as of December 31, 2019. The company has resumed its capital investment plans and expects to make cash capital expenditures, excluding those related to acquisition and development of new locations within the previously guided range of 1.6% to 1.8% of COVID affected sales. In addition to these capital expenditures, the company has invested during the first half of the year, approximately $2.9 million in LED lighting of a planned $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 attractive returns on invested capital. Additionally, the company plans to expand its WOW Operating Way practices to corporate business processes. The related technology and process efficiency project will result in a total $9 million to $10 million investment over the next 15 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. 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 delivered positive operating cash flow during the second quarter, notwithstanding the substantial decline in our revenue caused by the COVID-19 pandemic. Recently, we've been able to increase our production capacity, as demand for collision repair services rises, and we are once again beginning to evaluate growth opportunities as they emerge. Our capital raise, together with our revised credit agreement, provides us with availability of dry powder of over $1 billion, which will allow us to take advantage of market opportunities as they present themselves. The COVID-19 pandemic continues to impact our business. Thus far in the third quarter of 2020, same-store sales activity has continued below normal levels at approximately 14% to 16% below the same period of the prior year, with both fewer miles traveled and reduced traffic congestion impacting accident frequency. As demand has gradually recovered from the lows experienced in early April, we have converted many locations back from temporary intake facilities to full production facilities and recalled many employees who have been temporarily laid off. Notwithstanding the actions we've taken and adjustments we will continue to make, certain operating expenses and personnel costs, along with the ongoing reduced demand for services, will continue to impact the levels of adjusted EBITDA that can be achieved during 2020. As we look to our future, we do plan to communicate our 5-year plan late this year, likely in conjunction with our Q3 earnings release. 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 to position ourselves well for the future. We've been able to adjust our business to manage through this challenging situation and are beginning to evaluate growth opportunities as they emerge. 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, while scaling our business appropriately during this pandemic 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?
The first question is from Steve Hansen with Raymond James.
Yes. Just a question, first of all, on the employee base. Have you had any difficulty in pulling employees back, if it all? I've been hearing some accounts that it's been difficult to get some technicians back into the shops with some of the support growth programs in place. Just wondering if that's impacting your recovery at all.
Most of our technicians would make more than what was offered through unemployment. And as you may know, at the end of July, the additional federal unemployment support in the U.S., which was significantly, ended. So our technicians would earn far more working than they would on unemployment now. So I don't think that that's a driving factor.
Okay. Helpful. And just on as you evaluate these temporary intake centers reverting back to full-scale facilities, do you think that all of them ultimately come back? I only ask because I've been hearing some accounts that people sort of trying to reassess that broader footprint and whether they need actual full-scale facilities everywhere or in some cases, these intake centers might be sufficient from an operational efficiency standpoint.
I would not anticipate permanent closures of the intake facilities.
Okay. Great. And then just the last one, if I may. You described the recovery process where you stand today, 14% to 16% that I think you suggested. Has that started to taper off at all? Have you seen any sort of drawdowns in that -- in parts of your network due to the second wave in the U.S. South, in particular? Or just how are you thinking about it for a regional standpoint in terms of the recovery?
We haven't provided any guidance or input on any regional differences. Really all we can offer up at this point is what we've seen, which is thus far in the quarter down in that 14% to 16% range.
The next question is from Chris Murray with ATB Capital Markets.
First of all, congratulations on managing through a pretty challenging quarter. I think the 1 thing that took me a bit by surprise was the fact that you were able to mitigate some of your operating costs as well as you were. Can you just walk us through how we should be thinking about your operating cost footprint that's fixed versus variable? I mean, I'm assuming that you're going to -- we're going to have to have a similar impact in Q3 because I think it's also fair to think that you want to maintain the footprint that you have today with the assumption that you've moved back to full operations, call it, in the next quarter.
Yes. I think in terms of how you should think about it, I believe we've demonstrated that we have reasonable flexibility to move our cost structure down, obviously, not complete flexibility. And I commented a couple of times that there are a number of expenses that, despite our best efforts, we don't really have any near-term control over. There are some occupancy-related costs, utilities, taxes that -- well utilities may be modestly lower, not completely mitigated. So I think that it will continue to bear the burden of fixed expenses that can't be fully absorbed until we're able to return to more normal sales levels. But I think what we accomplished in the second quarter is a pretty good indication of the flex that we had in the system.
Chris, the illustrated the flexibility or the part of our business model, the networking where we could convert the full production centers intake centers and take some of the semi-fixed costs down. So as we ramp back up, I think it's a really difficult question to answer because you have a fixed cost that are fixed, variable cost and then have semi-fixed. So that is where I think you have the shades of gray. And so that's why we'll try to be prudent in managing those costs down as we recover.
Okay. Fair enough. And then, while I guess, thinking about -- you can call it whatever you want, but really going back to acquisitions and your ability to do acquisitions, I'm assuming that you've mentioned in the last couple of quarters, the pipeline is healthy, certainly you're well capitalized now with the opportunity to look at it. What do you think your ability is over the next couple months about being able to actually close any sort of transactions to be able to integrate them, I think, maybe more importantly?
Yes. I would say that we've developed plans that have not yet been implemented to be able to support the integration of a new business into our company with more remote work. I think most people that have dealt with this pandemic have learned that more can be done remotely than maybe we ever imagined. So while untested, we believe that we can effectively integrate with limited on-site presence.
Chris, there are 2 aspects why we pause. The first one is being financially prudent. With uncertainties posed by the COVID-19 pandemic, we wanted to be prudent, and now I think those uncertainties have come down to, it's uncertain, but they've come down. We have stabilized operations. And the second one is what Tim alluded to in terms of health and safety of employees, and we're going to be very prudent because we keep health and safety on the front and center. And as we ramp back up, I think that comes into play. It's difficult to comment on the next quarter, but the long-term fundamentals are very good for consolidating this industry. So the growth story is intact.
Okay. That's fair. And then last, just maybe a bit of a housekeeping question for you, Pat. I know we've had a number of companies talk about the fact that cash flows, there have been some unusual timing impacts in the quarter, some deferrals of things like taxes and other adjustments. Any sort of thoughts around working capital in the second half that might see, call it, an unusual unwind or anything like that, that would be atypical for other years?
No, I think if you -- there are 2 aspects. One is the capital investment and I think that we offered new guidance. With the COVID-19 impacted sales, our range is still 1.6% to 1.8%, and then we have 2 special projects, as Tim alluded to. And working capital, obviously, have been prudent with both the receivables and payables, both in terms of the collection, in terms of the payments, I think -- so you would see the prudence continuing. You're right, in terms of the taxes, typically, like if you look at last year, we paid approximately $19 million of cash taxes. If you go to the statement of cash flows to the bottom, you'll see that number. And if you see the current quarter's statement of cash flow, so it's pretty close to 0. So we received certain tax benefits. So to the extent that are deferrals, and the timing of that, I think, is going to depend on the type of the benefit offered under various programs. So [indiscernible] so then our tax cash outflows would go back to normal levels. You'll see the impact of those things.
The next question is from Bret Jordan with Jefferies.
This is Mark Jordan on for Bret. I guess going back to the M&A. I'm just wondering if you can talk about maybe the scale of opportunities out there. Are you seeing an increase in perhaps distressed sellers? And maybe have there been a change in any valuation expectations?
It's a little early to comment on that, Mark. Because the PPP certainly benefited a lot of small businesses, including the companies in our industry. So we don't know the full impact of COVID-19. We are navigating through. So it's a little early to comment on the impact, whether we are going to see digital sales or not. But from our point of view, we are positioned extremely well. With a dry powder in excess of $1 billion, if we have opportunities, we can take full advantage of those opportunities.
Okay. Great. And then I guess, thinking about market share gains, do you think there's opportunity out there to take share? I guess, particularly, against some small peers as maybe the DRP programs might push volumes to, I guess, to operators that are better positioned in the current environment?
I think we've, over the years, been able to consistently, we believe, gain market share. Whether that opportunity will accelerate as a result of what's going on? I'm not clear on that. I think that everybody has lower volume right now and is fighting for what's available. But certainly, I think we're well positioned with our clients to continue to earn more business from them through good performance.
Okay. Great. And just one last one for me. Thinking about total loss trends. I mean, we've been hearing that maybe less road congestion combined with higher speeds prior to a collision had led to an increase in severity and associated total loss rates. Is that something you're seeing in your mix right now?
Well, we don't see it as much in our mix. Keep in mind that many total losses never get to collision shops. The insurers do reasonably effective job at assessing those at time of loss. So we haven't -- although we see the same data that you do on total loss trends and there has been an increase over the past few years in the percentage of claims that are declared total losses.
The next question is from Furaz Ahmad with Laurentian Bank.
Congrats on the strong quarter. Firstly, I just wanted to focus on M&A. I was wondering, coming out of this, as things go to normalize and you're more active on the M&A front, are you seeing any changes in terms of prices in the market?
I think Pat really answered that one before. It's a little too early for us to know whether there's any change in price in the market at this point.
Okay. Sorry, I must have missed that. And then -- sorry, go ahead.
Well, as Pat mentioned, specifically the PPP loans and the fact that many of the players in the industry were well propped up through that. So I think the support provided in the U.S. to smaller business was pretty effective at keeping them operating effectively.
Okay. Got it. And then just secondly, I wanted to the -- you mentioned that in terms of same-store sales growth, Canada really weighed you down. And in terms of the recovery and the overall numbers you're seeing now, with it being down 14% to 16%, is Canada still lagging versus the U.S.?
Yes, that was kind of the point in my commentary that Canada has shown a slower recovery than the U.S. And I think it was really just a more cautious approach. And as you likely know, Ontario just moved to Phase 3 within the past couple of weeks. So the recovery has been slower in Canada.
Yes, the broad answer, Furaz, is yes, to your question. And again, as Tim pointed out, I think within Canada, I think there are provinces that are slower to recover than others. So certainly, Ontario is a very slow to recover, and we have a huge presence there, and that's having an impact on the Canadian same-store sales growth.
Okay. And are you seeing demand kind of taper off as well in some of the states that are experiencing the second wave in West as well?
I think the only guidance we're really provided on that is that, thus far in the quarter, were down 14% to 16%, but we haven't commented on any regional differences in that.
Okay. Got it. And just last one for me. In terms of debt, now that things are starting to kind of normalize, do you have any plans to pay down some of your revolver -- some of your debt just to...?
We paid down quite a bit. And in fact, we disclosed subsequent to the quarter end. We paid additional USD 167.5 million, which is $225 million. So all we have outstanding revolving credit facility is just USD 150 million, and we have term loan A of $125 million. So we have $400 million fully available plus we have accordion of USD 250 million, plus we have cash on the balance sheet after paying off. You could do the math. We disclosed at the end of the quarter, we had $510 million. And after paying off $225 million, it translates approximately CAD 285 million of cash on the balance sheet. So we have ample fire power, if you will.
The next question is from David Newman with Desjardins.
I know you've got answered this margin question in many different ways, but I can ask a different way because I looked at the gross margin percentage that you had in the quarter, and when I went back, it was like the second best gross margin percentage, if I'm not mistaken, since 2011. So it was kind of a surprising gross margin, and you did well on the -- obviously, on the OpEx turning some semi-variable into variable, et cetera. But anything that, as you look beyond what you rolled up in the filings, as you kind of looked in the mirror and did a deep dive in your cost structure, anything that surprised you? And secondly, I think the Canadian wage supplement program continues into the third quarter, if I'm not mistaken. So you should be able to hold on to some of these gross margins overall. Any just high-level thoughts on -- as you looked at the cost structure?
I think our operating teams did an outstanding job at identifying the best way to manage the business and manage our labor costs, just did a tremendous job of that. So that was a benefit on the labor margin side. I don't think it's anything necessarily structural. It's just a very tightly managed business during a difficult time. We also did comment that we saw an improvement in the mix of our glass business, which the retail glass business has high overall labor margins. So those are really the contributing factors that glass sales -- retail glass sales were not as impacted as collision sales. And thus, the mix of retail glass improved.
Okay. And the benefit that you're going to see from the Canadian program -- wage subsidy program in third quarter, how much do you think that might add?
Go ahead, Pat.
If you look at the previous quarter, we had approximately $2.2 million. That's a gross amount. You have to net with the people we have retained. So there is -- you need to look at the net amount, and we don't want to get into a lot of granular details of that. The second aspect you need to think through is we had more people -- the volumes were affected more in Q2, and they'll be less affected in Q3 and the CEWS 2.0, the Canadian Emergency Wage Subsidy 2.0, I think, has the subsidies tied to the reduction in the volumes or how your business is impacted. So we expect to receive, but the amount is going to be lower than Q2.
Makes sense. And last one for me, just kind of along, not financially, but just operationally, as you sort of dug down, is there anything that I mean you guys are already well-known for your WOW Operating Way and doing things very efficiently on the shop floor. But overall, as you look at the operations, can be as you have the time to, or was there anything that you'd kind of discovered going forward that operationally you can do better?
Yes. I wouldn't say anything specific that we'll talk about. But any time you go through this sort of a crisis, you look in every corner, and we do see opportunities that we'll continue to work hard to maintain going forward. So it was a forced opportunity to take a deep look at almost everything we do. And I would say it was helpful to us in that respect.
We won't let this crisis go waste. So certainly, we have lessons learned, and we're going to implement them.
The next question is from [ Sean Luthra ] with Goldman Sachs.
This is [indiscernible] on behalf of [indiscernible]. Guys, could you perhaps give us some sense of cadence of comps within 2Q, please?
Cadence of -- I'm not sure I understood the question? What was that again?
Cadence of comps in the second quarter, monthly cadence?
We haven't provided any monthly. We did -- previously at the -- toward the end of March, we had communicated that inbound opportunities were down 40% to 50%. And then toward the end of April, we communicated that we were on the favorable end of that range. And of course, we ended the quarter down about 33%, overall. So that's -- I'd say, if you piece those together, you can get some sense for it.
Right. And then I guess my next question would be in terms of sort of understanding your cost outlook. Perhaps any sense of what portion of your employees are yet to be brought back? I guess what I'm trying to get at is what percentage of your 2Q expense reduction is temporary versus permanent? And as the business runs, how much of that cost comes back?
Yes. I think we've shown that we have good variable cost structure in place. And as the revenues have been picking up as demand has increased, we've been bringing people back to service that demand on a pretty steady basis. It has not been a onetime event. It's been slow and gradual throughout the quarter. So it's pretty difficult from that to assess exactly what is -- what's permanent. My expectation over time is that we'll be back to the -- back to around the same level of staffing that we were for the level of business that's available to us as that recovers.
The next question is from Maggie MacDougall with Stifel.
I'm going to pull on the same thread as everyone else, which I'm sure you're happy to hear. So we had a tight labor market, and it was difficult for you to get technicians heading into COVID when we were at peak sort of employment rate in the U.S. And you guys did a really good job reinvesting the U.S. tax cut into enhanced employee benefits. Now we're kind of in the opposite situation with regards to the labor market, at least at a high level. So I'm wondering if there's been any structural change to employee cost, given that the conditions in the labor market have changed significantly.
I think when you look at the segment of the market that we're looking for, the skilled labor market, while it has changed, I don't know that it's a long-term structural change in that. We still have a problem in North America with investing in the education for trades. So I don't believe that there's a long-term impact from that. We expect to continue to invest in our technician development program. In fact, as we communicated early this year, we expect to expand that. We did not do that during the height of the pandemic, but it is in our plans to continue that program and, in fact, grow that program to try and get in front of the long-term problems of skilled labor availability.
Second question relates to the competitive environment. Understand that some of your larger competitors have had some funds injected in order to shore up balance sheets. And however, that being said, still, this has been quite a challenging operating environment. And so I'm wondering if the brownfield opportunity that you discussed in Q1 has had any advancement. And then secondarily, if this has provided any change in the competitive environment?
I think Pat commented that many repairs have been propped up, especially the smaller businesses by the governmental assistance that's been available. There are some locations of competitors that have temporarily closed. We don't know if there are permanent closures, but those could create some attractive brownfield opportunities. But we've really just begun to restart exploring the growth side of it. So I'd say it's too early to know with any certainty what opportunity there might be in that area.
Yes, we'll have an increased focus on the brownfield, greenfield, as we mentioned in the past, but it's too early to say what kind of opportunities are available because of what happened with COVID.
the next question is from Jonathan Lamers with BMO Capital Markets.
You've touched on this. But just to be clear, could you update us on the pipeline of acquisition opportunities your team is evaluating now versus May, when I think activity was at a standstill and versus this time last year?
Again, we don't provide a lot of granular details of the pipeline, Jonathan. But long term, we don't see any changes. So we see the opportunities are available. And the only thing we cannot comment is impact of COVID, if the opportunities are going to be higher if small companies fail and you see an increase, but because of the PPP, we don't know if that's the case or not. So it's a little early to comment on that.
You've raised a substantial amount of capital from investors looking for you to deploy it on acquisitions. Can you elaborate at all on the signposts you're looking for to be comfortable acquiring again? Are you looking for industry revenue to go back to 2019 levels? Would minus 10% be good enough?
No, we haven't communicated any specific number on that. I think Pat did mention earlier that there were really two factors that caused us to pause on growth. One was just the significant uncertainty at the onset of the pandemic as to what the outcome of this would be. I would say, in large part, we are comfortable that we continue to have a good long-term business opportunity. And the pandemic will highly disruptive that we will get through this. And the second one was being comfortable sending our people in for acquisition integration. So I'd say the first one, we're over. The second one we believe we are working through and getting comfortable with. And that's why we've now communicated that we're back and looking at opportunities.
I'd like to ask about the margin. As you turn the fixed expenses back on, would it be reasonable to assume that the operating margin in Q3 will fall somewhere between Q1 and Q2, assuming demand at current levels?
So we have not provided any guidance on that, Jonathan. And we do not want to provide -- we don't want to comment on that. That's a forward-looking comment.
Maybe you could just comment qualitatively on how you're turning back on the fixed expenses, whether you're phasing them back in an alignment with revenue.
Yes. Like as we commented, like, we had a number of locations converted into intake centers. So with intake centers, you have very few people in those locations. So when you convert them back into production shops, so obviously, you're bringing people back. You have the store man that can support. So that's where we talked about semi-fixed cost. And in terms of occupancy, occupancy is occupancy, it's not going to change much. And then you have other element which is variable like the advertising and things like that. So that's where we have a lot more flexibility. So what we're talking is the middle layer, the semi-fixed or semi-available, how you want to characterize it. So again, that's why it's very difficult to offer guidance. It depends on recovery. If the recovery happens sort of like a V, then I think it'll ramp back up or if it's going to be slower, then we're going to be more prudent and bring them back up.
Yes, I think it is fair to say, though, that when we convert a facility back to production, it won't be at full production on day 1. It will take some time to bring the cars in and get production at normal levels, assuming the volume is there. So there is some start-up back -- some costs related to starting the facility back up.
And also some capacity utilization issues because you won't be operating at full capacity. So to that extent, you have to absorb those semi-fixed costs, so you'll have those inefficiencies.
The next question is from Zachary Evershed with National Bank Financial.
[indiscernible] Traveled impact on collision frequency or that's what you were expecting?
I'm sorry, I couldn't hear that, Zachary.
You're breaking up, Zachary.
Okay. Are you seeing any kind of decoupling between miles traveled and the impact on collision frequency? Or is it about what you were accepting?
Miles driven gets reported on a lag basis. We don't actually have data in Canada, just on the U.S., but I think there's typically a very tight correlation. The one thing that could be somewhat different now is related to traffic congestion. So I think there are -- there's less congestion during rush hour now than there would have been pre pandemic. And I think in my comments, at our opening and I did comment that both vehicle miles traveled and reduced congestion would likely have an impact on frequency.
That's helpful. And do you think there's a backlog of repairable vehicles out there, whose owners are holding off on bringing it in, given the work-from-home dynamics?
I don't think we know that. I know in past recessions, we have seen data that would suggest that some people defer and ultimately complete repairs. But this is not like a past recession. So I think it's very difficult to predict what might be happening this time.
The next question is from Daryl Young with TD Securities.
Just a couple of quick questions for me. On the insurance side and the DRP relationship, in the past, I think you've said that you're not receiving any undue pressure from the insurance companies to grow scale and have the national presence per se. Could you maybe just reiterate or provide a recap on sort of how that metric or how those metrics are today, in terms of what the key driver is, if it's the DRP performance metrics versus scale?
I think it's definitely DRP performance metrics. I mean there's still great competition out there for our services. And our clients look for us to perform at a level that earns us the opportunity for more of their work. So I think direct repair program performance is critical. Scale is also important, though, because they want to be able to solve their problem across a geographic area. And given our footprint, we can really keep their cost of administering claims or loss adjustment expense down by serving their claims across a fairly broad area. So it's really a combination but performance is critical.
Got it. Okay. And then with the additional slack in the system currently, does that change maybe the allocation of workflow from the insurance companies, given some of the larger players like yourself still have excess capacity versus?
It certainly puts us in a position of being able to bring more work in and be confident of our ability to service it. It's probably too early to know whether we gained share during that, but we continue to have really strong relationships with our insurance partners, and I think that has served us well through this crisis.
Okay. Great. And then just one last one. Has there been any change in terms of the dynamics with mobile claims submission and claims processing in terms of how your business could evolve?
Well, there's certainly been an increase in the percentage of claims that have been settled by photo during the pandemic. There's also been a reduction in claims that would be settled directly by insurance adjusters, which is probably -- so the first one could be a modest negative to a DRP program. The second one is probably a positive. Most insurers pulled their people from the field and worked harder to get their claims settled through body shops or through direct repair programs. I don't know that there's -- that, that will have a long-term impact. Photo claims settlement had been increasing fairly steadily, but I would keep in mind that many of those claims that are settled via photo are repaired indirect repair shops after the photo settlement.
The next question is from Michael Doumet with Scotiabank.
I'm just thinking about what type of deals you guys will be looking at when you restart M&A. I would think, given where utilization rates are obviously still compressed across the industry, as thinking that maybe you guys will be more focused on larger platform type deals? And if that's the case, should we think about cost synergies and strategic rationale in the case of a large deal, as you potentially consolidate some overlapping costs and focus on increased utilization in certain shops?
No. We don't want to offer guidance on the mix of small versus [indiscernible]. So certainly, our commitment in the past -- and again, we'll come with the new guidance for the growth towards the end of the year. But our commitment to grow this, obviously, has 2 drivers: You have inorganic growth through acquisitions and then you have organic growth, but we don't want to give the breakdown between the two. But in the very short term, our focus is on the health and safety. So to that extent, we look at those acquisitions, where people can travel easily, provide the integration services and minimize the risk. So that -- and also the other thing is if the opportunities are very attractive, certainly, they will get a higher priority.
Got it. I guess maybe just asking question somewhat differently. I mean, given more integration work will be completed remotely, can you discuss maybe how comfortable you are immediately utilizing those new methods on some potentially larger deals?
I'd say it's -- obviously, it's untested at this point. We haven't closed on a large deal since COVID, so it remains to be seen. But I think our team has done a very good job of building plans to provide support. We also have been very effective in putting personal safety practices in place in our shops. So we're comfortable that we understand how to protect our team in terms of protective equipment, cleaning procedures and social distancing to create a safe work environment even with the pandemic. So -- but we're untested on that yet in terms of integration.
The next question is from Matt Bank with CIBC.
Has the way insurance companies evaluate your performance changed at all during COVID? And do you have any indication in terms of how your performance has trended versus peers during this time?
To answer your first question, there's been no change in how an insurance carrier would evaluate our performance. They do not change their method of our performance abruptly. They tend to use a scorecarding system with components that we're very aware of and hold ourselves accountable to. So no change there. In terms of the relative performance, I would say that we don't see our competitors' performance. But when we have more capacity, our business performance from an operating metric standpoint for our clients tends to improve just because there's so little pressure on the system. So we feel like we performed quite well, but I suspect the market has had that same opportunity.
And then is the parts supply chain completely back to normal? Or is there any advantage versus smaller players because of your scale?
We've had very little concern expressed about parts supply disruption. Well, it has not been 0, it has not been a material driver impact to our business. And as far as I can tell, that would be true for almost everyone in the industry.
[Operator Instructions] The next question is from Steve Hansen with Raymond James.
Just a quick follow-up, if I may. It's a nuanced one and so I apologize in advance. I'm sure you can give me color. But on the M&A strategy, specifically, as you look at the landscape today, some regions are clearly still worse off than others. I'm thinking coastal versus interior, just as a general statement. But you've made inroads into California recently. You made some inroads into Texas. Those two states have very different activity profiles right now. Do you treat those states any differently, as you look to deploy this large amount of capital that you've been -- I know you now have at your hands, but do you think there's better opportunity to go after some of those states where that activity is still worse off or is that not part of your thinking?
I think that long term, we'll continue to focus on areas that we've said we've looked to grow it in the past, and that will include California and Texas. It's really where the best opportunities are right now that we'll get our initial focus. But I would say we're not necessarily shying away from or focusing on any specific area due to the pandemic. As I know we've talked about in the past, sometimes opportunities become available and we close on them fairly quickly. Other times it takes months or even years. So we have a fairly long-term outlook on this.
I'm showing no further questions at this time. I'll turn the call back to the presenters for any closing remarks.
Thank you, operator, and thank you all once again for joining our call today. We look forward to reporting our third quarter results in November. Thanks again, and have a great day.
Thanks, everyone.
Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Thank you.