Boyd Group Services Inc

TSX:BYD

Earnings Call Transcript 2018-Q3

[Operator]

Good morning, everyone. Welcome to the Boyd Group Income Fund's Third Quarter 2018 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 risk 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 14, 2018.I would now like to introduce Mr. Brock Bulbuck, Chief Executive Officer of the Boyd Group Income Fund. Please go ahead, Mr. Bulbuck.

[Brock W. Bulbuck, CEO & Non]

Thank you, operator. Good morning, everyone, and thank you for joining us for today's call. With me today are Pat Pathipati, our Executive Vice President and Chief Financial Officer; and Tim O'Day, our President and Chief Operating Officer.We released our 2018 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 www.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 fund's financial results for the 3- and 9-month periods ending September 30, 2018, and provide a general business update. We will then open up the call for questions.In the third quarter of 2018, we were, once again, able to demonstrate our ability to deliver consistent positive results in line with our growth strategy. Meaningful increases in sales, same-store sales, adjusted EBITDA and adjusted net earnings were delivered in spite of the continued challenges of a tight labor market. Our business continues to be driven by continued execution and focus on our growth and operational effectiveness strategies. We remain confident in our ability to achieve our long-term goal of doubling the business by 2020 based on 2015 metrics on a constant-currency basis. Our corporate development team continues to have a healthy pipeline of targets. So far in 2018, we've added 47 new collision locations, including 4 U.S. intake centers. Subsequent to quarter-end, we announced that we had entered into the State of Missouri, our 25th state with the acquisition of A&B Body Shop, which operates 5 collision repair locations in the Kansas City market.Looking at our results for this past quarter, our total sales were $459.6 million, a 17.3% increase from $391.9 million generated in the third quarter of 2017. This reflects a $35.5 million contribution from 49 new locations. Our same-store sales, excluding foreign exchange, increased by 4.9% in the quarter to $407 million compared to $387.9 million in Q3 2017. Normalizing for the impact of hurricanes in the third quarter of 2017, same-store sales increased 3.6% in the third quarter of 2018. The increase in same-store sales percentage was also positively impacted by approximately 1 percentage point due to same-store sales gains in the glass business.Continuing strong demand for our services, combined with strong operational execution in August and September, allowed us to meaningfully outpace the guidance we gave during Q2 reporting in August. As we had communicated, our guidance at that time was based on a very weak vacation impacted July, in which we had negative same-store sales performance. Our glass business also continued its strong same-store sales performance in Q3, which contributed to our same-store sales beat. Going forward into Q4 and Q1, in addition to normal seasonal slowdown for glass, we do expect our glass business to face some headwinds from both customer loss and a price reduction from a major customer.The quarterly results were impacted, once again, by foreign exchange. With the year-over-year increase in the U.S. dollar foreign exchange rate from CAD 1.25 in Q3 2017 to CAD 1.31 in Q3 2018. As a result, same-store sales also increased by $14.7 million due to currency.For the 9 months ended September 30, 2018, our sales were $1.4 billion, up 18.6% compared with $1.2 billion for the same period last year. Same-store sales for the same period were $1.13 billion compared to $1.09 billion in the same period of the previous year. This 4% growth is in line with the same trends we saw in the quarter with approximately 0.9 percentage points of the same-store sales increase coming from same-store sales gains in the glass business.Gross margin was 45.4% in Q3 2018 compared to 45.7% achieved in Q3 2017. Gross margin was impacted in the third quarter of 2018 primarily by a higher mix of collision sales versus glass sales. And within collision sales, a higher mix of part sales in relation to labor. Labor margins also declined slightly due to both the higher direct labor associated with some new location integration and ramp up as well as the competitive labor market. Improved margins on parts partially offset these negative impacts. Overall, margin change is within the normal range of period-to-period fluctuation.For the 9 months ended September 30, 2018, gross margin was 45.5% compared to 45.9% achieved in the same period in the prior year. The 9-month gross margin was primarily impacted by the higher sales sourcing costs in the Assured business, which was acquired in July 2017.Operating expenses for Q3 2018 were $167.5 million or 36.5% of sales compared to $143.4 million or 36.6% in Q3 2017. The decrease in expenses as a percent of sales reflect same-store sales growth leverage, partially offset by an approximately 30 basis point impact of the enhanced benefits for U.S. employees and a higher operating expense ratio during ramp up periods for new locations. You will recall that we're spending a portion of our estimated tax savings from tax reform on enhanced U.S. benefit programs.Operating expenses for the 9 months ended September 30, 2018, were $497.3 million or 36.3% of sales compared to $426.5 million or 36.9% in the same period of the prior year. The increase in expenses reflects new locations added since last year, while the decrease as a percentage of sales is primarily the result of lower expense ratios in the Assured business as well as same-store sales growth, which resulted in improved leverage of operating expenses, partially offset by the impact of the enhanced benefits for U.S. employees.Adjusted EBITDA or EBITDA adjusted for fair value adjustments to financial instruments and costs related to acquisitions and transactions was $41.2 million compared to $35.6 million in the third quarter of 2017, a 15.9% increase. Adjusted EBITDA growth was primarily due to contributions from new locations and same-store sales growth. Foreign exchange impact increased adjusted EBITDA by $1.5 million in the quarter. Adjusted EBITDA margin was 9% in Q3 2018 compared to 9.1% for the same period the previous year. The slight change reflects same-store sales growth leverage, which was more than offset by the slight gross margin decline as well as the impact of increased benefit costs for U.S. employees.Adjusted EBITDA for the 9 months ended September 30, 2018, was $125.8 million, up 21.2% when compared with $103.8 million for the same period last year. Adjusted EBITDA growth was primarily due to contributions from new locations and same-store sales growth. Changes in the U.S. dollar exchange rate in 2018 decreased adjusted EBITDA by $1.2 million. Adjusted EBITDA margin was 9.2% for the 9 months ended September 30, 2018, compared to 9.0% for the previous year. The increase in adjusted EBITDA margins reflect same-store sales growth, along with the lower operating expense ratio associated with the Assured business, partially offset by enhanced benefit costs for U.S. employees.Net earnings for Q3 2018 were $16.6 million compared to $19.8 million in Q3 2017. In 2018, net earnings were impacted by $3.3 million in fair value adjustment expenses, primarily due to the increase in unit price during the period. By contrast, in Q3 2017, fair value adjustments increased net earnings by $12.3 million. Net earnings in 2018 were also impacted by decreased income tax expense as a result of U.S. tax reform and decreased financing costs due to the conversion and redemption of convertible debentures in November 2017. Excluding the impact of the fair value adjustments and acquisition and transaction costs, adjusted net earnings were $20.4 million in the third quarter of 2018, a 63.6% increase over $12.5 million the year before. Adjusted net earnings per unit for the third quarter of 2018 were $1.04 per unit compared to $0.67 per unit in the same period in 2017.For the first 9 months of the year, net earnings were $47.7 million compared to $35.3 million for the first 9 months of 2017. Net earnings were negatively impacted by fair value adjustments to financial instruments primarily due to the increase in unit price during the period, offset by positive impacts of decreased income tax expense and decreased financing costs. Adjusted net earnings for the 9 months ended September 30, 2018, were $62.4 million compared to $41.4 million for the first 9 months of 2017. On a per unit basis, adjusted net earnings were $3.17 per unit, a 39.8% increase over $2.27 per unit for the first 9 months of 2017. The increase in adjusted net earnings year-over-year was primarily due to decreased income tax expense, decreased finance costs and contributions from both location growth and same-store sales growth.Fair value adjustments are having less of an impact on our earnings in 2018 due to the settling of the 2014 convertible debentures in November of 2017. Fair value adjustments associated with unit option liabilities also will continue to diminish and impact as unit options vest and are exercised. In this regard, the recent exercise of unit options in September may result in some insider unit sales in the near term as option holders will need to fund exercise costs and related tax liabilities on settlement or for general state planning purposes.Although, our capital expenditures during the first 9 months of 2018 were lower than our annual guidance at approximately 1.3% of sales relative to our expected annual spend. As we had previously stated, we do expect to make capital expenditures for the full year 2018 within the range of 1.6% and 1.8% of sales. Emerging vehicle technologies requiring new specialized repair equipment as well as evolving information technology requirements have resulted in this current need for this higher level of expenditure. Making proactive investments will position us to meet anticipated market needs, whereas, we expect that many other collision repairs will not be making these investments. To this end, subsequent to the quarter end, we have substantially completed our investment in and training for company-wide diagnostic repair scanning technology.In Q3 2018, we generated $7.9 million in adjusted distributable cash compared with $6.5 million generated in the same period of 2017. We paid distributions and dividends of $2.6 million, resulting in a payout ratio of 33% compared to a payout ratio of 37.2% in Q3 2017. Similar to Q3 2017, in 2018, with a high usage of cash used in noncash working capital items this quarter as a result of the timing of collections and payments in relation to quarter end, including payroll.For the 9 months ended September 30, 2018, we generated $95.3 million in adjusted distributable cash compared with $53.6 million generated in the same period of 2017. We paid distributions and dividends of $7.9 million, resulting in a payout ratio of 8.3% compared to a payout ratio of 13.3% in the same period of 2017. On a trailing 4-quarter basis, our payout ratio was 7.6%. Our approach to distributions continues to be to maintain a conservative payout ratio to provide returns for unitholders, while preserving capacity to act on growth opportunities. Based on our continued growth, the strength of and confidence in our business, we announced today that we are increasing our distributions by 2.3% to $0.54 per unit on an annualized basis from their present level of $0.528 effective November 2018. This is the 11th consecutive year that we've increased distributions to unitholders.At the end of the quarter, we had total debt net of cash of $182.2 million compared to $174.9 million at the end of Q2 2018 and $219.1 million at December 31, 2017. We continue to have a very strong balance sheet with very conservative leverage of approximately 1.1x adjusted EBITDA. When considering our cash resources, combined with our credit facility, we continue to have over $400 million of dry powder available to execute on our growth strategy.As we have disclosed in our MD&A, in 2019, with the required adoption of IFRS 16 under International Financial Reporting Standards, like with many companies, our balance sheet will look significantly different. As this standard requires that most operating leases, including premises leases we brought on to the balance sheet, thereby also reducing rent expense and increasing interest and depreciation expense. We will provide more information on the impact of IFRS 16 adoption when we report Q4.I would also now like to provide an update comment on tariffs. As we stated last quarter, based on currently available information, there should be minimal direct impact, if any, on our business. Not many of our collision parts and material requirements are subject to tariffs announced thus far. Also, should any collision parts that we use in collision repair be subject to new tariffs, for the most part, we currently have pass-through pricing to our customers. Auto glass parts are subject to announced tariffs. However, we believe, that we will have the ability to pass through tariff impacts to end users.Looking to the rest of the year, demand for our services continues to be strong. However, constraints on technician capacity will continue to limit our ability to take full advantage of this increased demand. The initial response to our enhanced benefit program has been positive, and we expect that this, along with our other recruitment and retention efforts, will have a positive impact on our technician capacity over time. Additionally, a modest increase in capacity will occur in the fourth quarter of 2018 as we have one more production day relative to Q4 2017.In closing, despite our current technician capacity challenges, we continue to be very well positioned to take advantage of the growth and market share gain opportunities within our industry. Industry dynamics continue to drive industry consolidation that is favorable to our business model. Acquisition opportunities continue to be strong throughout our network and we continue to -- we expect to continue to convert these opportunities into new locations. We remain confident that we will achieve our long-term growth goal. And as always, operational excellence remains central to our business model. And with our WOW Operating Way, we will continue to work to drive excellence in customer satisfaction and repair cycle times to ensure the continued support of our insurance partners.With that, I would now like to open the call to questions. Operator?

[Operator]

[Operator Instructions] Your first question comes from Steve Hansen with Raymond James.

[Steven P. Hansen, Senior Vice President]

Maybe just a quick one on the M&A pipeline. Brock, you've been running at a pretty good pace subsequent to quarter end. Just trying to get a sense for some additional color as to how you sort of feel the pipeline exist today? Last quarter, you've described the medium-sized opportunities as being a little bit better than the past, but any additional color you can provide would be helpful as we think about the balance of this year and into next year in terms of growth by M&A?%

[Brock W. Bulbuck, CEO & Non]

As we stated in the prepared comments, the M&A pipeline continues to be strong, healthy. We continue to have a wide variety of opportunities from both start-up opportunities, the single location acquisitions through to small and mid-sized MSOs. So the pipeline is healthy. As we stated in the past, getting them across the line can sometimes be lumpy, but certainly we feel very good about where our pipeline is now.

[Steven P. Hansen, Senior Vice President]

Very good. And just one quick one on -- and I'll jump back in the queue. Just on this idea around your capabilities in scanning diagnostics, et cetera, you described you completed some training lately. How big of a competitive advantage is that capability and/or just broader technology implementation would Boyd relative to the competition? I'm trying to get a sense for how important that will be in the next couple of years as you look to sort of enhance your market share over time?

[Brock W. Bulbuck, CEO & Non]

We believe that, as we commented, we have rolled out the technology. We rolled out the training. We're now working at consistent execution of application to that technology training in our business. We actually -- we do believe that we are ahead of the curve relative to the general population of collision repairs out there on a very important initiative related to the repair of vehicles that are growing in complexity of repair requirements. And as many of you may be aware, most OEs have now issued position papers on recommending pre- and post-repair scanning on all repairs. And we have that capability. Whereas, we believe, that the vast majority of the industry today does not have that capability. As to what kind of competitive advantage it ultimately translates into, I think, it certainly should, but I can't quantify what that competitive advantage is.

[Operator]

Your next question comes from Chris Murray with AltaCorp Capital.

[Christopher Allan Murray]

Can we go back a little bit to your thoughts around same-store sales growth as we get into Q4? A couple moving parts there. You talked about the extra production day, the customer loss and some pricing pressure on the glass side. But also, I guess, it's fair to note that Q4 last year also had it. It was a fairly weak quarter. Any thoughts around how we should think about the next, maybe, couple of quarters, especially as it feels like you may be getting ahead on the technician issue?

[Brock W. Bulbuck, CEO & Non]

We don't specifically guide as to a number or a range on same-store sales growth. We have, in the past, guided relative to what -- like in last quarter, we guided relative to what we'd experienced in Q2 because we thought that we needed to -- at that particular time, we were concerned about achieving similar levels of same-store sales growth to what we had achieved in Q2. I'd say the best response I can give to your question is the fact that we haven't guided in comparison to Q -- what we just reported, especially on an adjusted basis against normalized for hurricanes of last year is that we -- right now, we're not seeing anything different than what we've just recently experienced. But it is early in the quarter. And I will -- I think it's important to remind everyone that last quarter, when we were reporting on this call, we'd just come off a month where we had negative same-store sales. And with strong, strong demand and great execution, we were able to post healthy same-store sales growth numbers in August and September. So it's early in the quarter. We've got 1 month in this quarter and there's 2 months yet to go, and those 2 months also have some vacations associated with U.S. Thanksgiving and Christmas. So one shouldn't place too much reliance on forward guidance on same-store sales growth this early in the quarter.

[Christopher Allan Murray]

Okay. But there's nothing you're seeing right now that says it's anything unusually variable one way or another?

[Brock W. Bulbuck, CEO & Non]

Correct.

[Christopher Allan Murray]

Fair enough. Okay. The next question I have for you is just, we're starting to see some inflation pressures across a lot of different industries. And just, I guess, a couple of things on this. I mean, you talked about sort of the inflation you've got in your labor pool and trying to maintain your technician base. Kind of curious about how you're seeing and your experience with an inflationary environment, which we haven't seen in a while, in terms of the pricing that you're going to get from insurance companies for repair, thinking about parts, paint, other consumables. Just any thoughts around whether -- what's your experience been in that kind of environment? And how you think that your pricing will go? And I guess, what we're really trying to get to is should there be any concern about lagging pricing, creating some sort of margin compression as we move into '19?

[Brock W. Bulbuck, CEO & Non]

I would say generally that we don't have visibility into sort of meaningful and up margin compression at this juncture that would cause us to want to guide relative to 2019. That's not to say that we may not experience some margin compression in certain elements of our business like labor. I might remind everyone that last year, we were -- when we were in 20 -- going back as far as 2017, when we were commenting on some labor market pressure, we were getting increases from our insurance companies. And those have continued. It's just -- they don't always work lockstep with the increases that we're granting in the marketplace. But in terms of parts, generally we have pass-through pricing on collision parts, so we shouldn't experience any margin compression on parts. And as we called out in this quarter, we actually experienced some margin expansion on parts. But I wouldn't -- that could be related to the mix of parts as well, not necessarily related to a trend of expanding margins on parts. Most of the -- virtually that the primary driver of our gross margin compression, the 24 basis points of gross margin reduction this quarter was a mix issue. As we called out, we replaced more parts than we used to repair labor for. And we've a lower margin on parts relative to our margins on labor. In part, that maybe related to the growing complexity of vehicle repair. I actually think that in the current quarter, it was more related to how busy our stores were. And when our stores get busy, we fall off the focus and discipline that we have to repair damage where possible and sometimes for parts replacement which is quicker. So we don't have anything -- nothing of this quarter really causes us to believe that we're going to have any sustained continuing margin compression. As we stated, the fluctuations this quarter were viewed -- as we evaluated the causes, were viewed as sort of a normal period-to-period fluctuations.

[Christopher Allan Murray]

And to your point, you were able to pass through any parts increases pretty much realtime to your insurance partners?

[Narendra M. Pathipati, CFO, Executive VP, Secretary & Treasurer]

Correct.

[Brock W. Bulbuck, CEO & Non]

That's correct.

[Operator]

Your next question comes from Michael Doumet with Scotiabank.

[Michael Doumet, Analyst]

So just turning to the outlook, and I might be reading a little too much into this. But you removed the portion indicating that the company would be challenged by technician capacity in the short term. For the first time, I think, in a couple quarters, you don't comment that the technician shortage will impact the subsequent quarters. So just any comments there, please?

[Brock W. Bulbuck, CEO & Non]

We did comment on -- we may not have commented on that in the press release, but we did comment on that within our MD&A and in our conference call script. Technician capacity is still a constraint for us. It's not enabling us to process all of the opportunity that we have from the strong demand for our services. But I've already tried to answer the earlier question on guidance for same-store sales growth for Q4, so I really don't want to go back into that attempt. But maybe, I think, you should -- we did comment on in our call script, that technician capacity is still a limiting factor.

[Michael Doumet, Analyst]

Okay, no. Fair enough. And maybe -- I agree with that. So just maybe asking you it differently, just if you could comment on the unprocessed work, backlog, and maybe if there's a change in your view just in terms of that technician shortage that you're seeing in this quarter versus, call it, next quarter?

[Brock W. Bulbuck, CEO & Non]

In terms of backlog, our -- the amount of unprocessed work we have at the end of a month or the end of a quarter has continued to gradually increase. So we continue to have, we're now -- see, I think, last quarter, we reported that we were seeing the highest levels of unprocessed work at the end of the quarter and that level has now increased again. So we've an abundance of opportunity. I'm sorry, the second part of your question was...

[Michael Doumet, Analyst]

I mean, just if you could elaborate on the technician shortage and if that's getting better or not?

[Brock W. Bulbuck, CEO & Non]

Yes, we -- well, it's still a constraint. We still have too many open technician positions that are causing us not to be able to process all of the available work that we have as a result of the strong demand. But having said that, and we did comment in our call script that we have had a positive -- some positive reaction to the enhanced benefits that we put in place. We have grown our technician, our same-store technician count modestly in the U.S., not to the extent that we need or want, but we have grown our same-store technician count modestly.

[Narendra M. Pathipati, CFO, Executive VP, Secretary & Treasurer]

Michael, the technician shortage or the labor shortage is not unique to us with the 3.7% unemployment rate, even other industries are experiencing. So what we're confident of is the solutions we have put in place, and they're going to yield results over the longer time frame. So we're very optimistic in the long term that will solve the problem. But in the short term, we'll continue to have the technician shortage.

[Michael Doumet, Analyst]

I appreciate the color there, guys. That's helpful. And maybe just turning to the company, the comment about the company-wide diagnostic repair scanning technology. Just if you can elaborate on that and just whether it helps reduce the labor hours on the diagnostics that can now be reallocated to collision repair and if I'm thinking that correctly?

[Brock W. Bulbuck, CEO & Non]

It doesn't reduce the labor hours.

[Timothy O'Day, President, COO & Non]

It would actually increase.

[Brock W. Bulbuck, CEO & Non]

Yes, it has the potential to increase hours as if there are issues that need to be repaired or recalibrated as a result of scanning, generally that translates into some billable time to our customers and insurance clients.

[Narendra M. Pathipati, CFO, Executive VP, Secretary & Treasurer]

Typically, Michael, the majority of the problems are not displayed on the dashboard. So with this equipment, now we should be able to diagnose some more problems and ensure quality repairs.

[Operator]

Your next question comes from Matt Bank with CIBC.

[Matt Bank, Associate]

I just want to ask a bit on this technician shortage a bit of a different way. So would you say that your investments and the execution on technician retention were a factor in better same-store sales in the quarter?

[Brock W. Bulbuck, CEO & Non]

It's hard to draw that straight line. I mean, we're working on so many things and so many initiatives and that have different time lines attached to them. As I commented on, I think, on the previous question, we have grown our same-store technician count, which has had some -- obviously some -- in order to generate same-store sales, you have to generate same-store technician growth. So I -- whether that's associated with increased focus or whether it's specific to any one or a number of the initiatives that we're working on, and I suspect that it's a combination of all of them. I guess, it would result in having an impact on this quarter same-store sales growth. Whether this quarter same-store sales growth was 4.9% or 3.6% or 3%, I don't know that you could quantify the specific impact that our initiatives are having. But we think that generally they're having a positive impact.

[Matt Bank, Associate]

Great. And how would you say your -- the benefit enhancements that your group has put in compared to the rest of the industry? Is it something that you're seeing happening in a big way or this is quite a big differentiator?

[Brock W. Bulbuck, CEO & Non]

There are so many different segments to the collision repair industry. There are large multi-location operators like us. There are small- to medium-sized MSOs and there are single shops. I would say that as an -- in comparison to the industry as a whole, we believe that we now have best-in-class benefits. There will be certain tiers of that industry that might have competitive benefits relative to us, but in comparison to the industry as a whole, we believe that we have industry leading, industry-best benefits.

[Matt Bank, Associate]

Okay. Great. And I just wanted to ask on glass. Is it -- so in the quarter, you got a 0.9% same-store sales bump from glass. Is it fair to read into your comments around the customer loss and price decrease from specific customer that, that kind of benefit would not continue into future quarters? And also can you comment just on what drove the bump in the quarter? Was that more pricing or volume?

[Brock W. Bulbuck, CEO & Non]

The bump in the quarter was really a continuation of the trend that we've experienced throughout 2018. As you may recall, we had weak glass comps in 2017 as we had some customer losses in 2017, and we had some in NAGS pricing pressures. In 2018 because of the combination of the weak comps, but also because of the strong execution of sales initiatives by our glass team, we were able to -- we have been able to post strong same-store sales growth in glass essentially throughout this entire year that has provided similar levels of impact on overall company-wide same-store sales growth. Relative to the guidance or the forward guidance, we are going into both seasonal -- our seasonal slow quarters of Q4 and Q1 and additionally we will experience -- we will be experiencing some customer loss that will sort of phase in throughout Q4, but -- and be essentially in place for Q1. And we also have some pricing adjustments -- some negative pricing adjustments from a major client that will impact Q4. So the customer loss will phase in, I'd say that it will be fully -- the impact of both of those impacts will probably be fully relevant in Q1, partially relevant in Q4.

[Operator]

Your next question comes from David Newman with Desjardins.

[David Francis Newman, Analyst]

So if you look -- so if you look at the sort of unprocessed work that you have continuing, what are the -- how are your shop for KPIs faring? And any response from insurance companies, I would think to the positive because you're probably doing better than the industry, certainly the single shops. So how are the KPIs looking with the backlog? You said it's gradually increasing.

[Brock W. Bulbuck, CEO & Non]

The KPIs actually suffer as unprocessed work increases. However, we believe, because of our standardized process through the WOW Operating Way, we're able to handle that increased volume with less impact on KPIs than the industry as a whole. And as we look at our cycle time, as measured in length of rental against the industry, we've actually, although our cycle time has deteriorated over the last couple of quarters because of how busy we are, we've actually increased our gap to -- our positive gap to industry performance. So yes, I think, we're all -- the industry is as a whole is challenged when there's lots of work. But I think, we're faring better than most in dealing with that.

[David Francis Newman, Analyst]

So -- and I would assume that's been duly noted by the insurance companies and does that prompt some point to give you a bit more pricing power, vis-à-vis, I guess, the smaller guys that are out there?

[Brock W. Bulbuck, CEO & Non]

Generally, the benefit that we get from doing great work for our insurance clients is the opportunity to do more work and that's translating into the increased opportunity, the increased demand, but generally it hasn't translated into any enhanced pricing.

[David Francis Newman, Analyst]

Okay. And then, Brock, you look at the...

[Brock W. Bulbuck, CEO & Non]

Sorry, sorry. It does -- patches -- just reminded me, we do have performance pricing in place, where our price is adjusted depending upon how we do in some of those key performance indicators like customer satisfaction and cycle time.

[David Francis Newman, Analyst]

And is that absolute or relative to the industry? In other words, is that based on just some criteria that they're given you? Or is it relative to the industry benchmarks?

[Brock W. Bulbuck, CEO & Non]

In some cases, it's absolute and in some cases, it's relative. It's a bit of a mixed bag.

[David Francis Newman, Analyst]

Okay. Would you be a net beneficiary given your performance vis-à-vis the industry players?

[Brock W. Bulbuck, CEO & Non]

I don't know that we've ever looked at that at it that way, David. So I really can't answer that question.

[David Francis Newman, Analyst]

Okay. And then just switching gears over in Canada. I think insurance companies in Canada kind of called out lower claims frequency, not really seeing it in the U.S., but any discernible trends that you're seeing? And a funny question, but I mean, I would think that cannabis in Canada at some point will increase the claims frequency again. Any thoughts just on the claims frequency and the cannabis trade?

[Brock W. Bulbuck, CEO & Non]

First of all, on claims frequency, our business in Canada has been very, very strong in the east and somewhat challenged in the west, particularly Alberta. So it's a bit of a mix bag for us in Canada right now. Our business in Ontario, the Assured business, continues to have to face some of the same challenges that we're facing through many of our U.S. markets, where we have demand that we can't process due to lack of technician capacity. In terms of the cannabis question, there have been a number of studies that have been published relative to accident frequency in states that have legalized recreational marijuana, cannabis.

[David Francis Newman, Analyst]

Like Colorado, for instance.

[Brock W. Bulbuck, CEO & Non]

Right. And nine states, yes. And the average increase in accident frequency is 6%, and I think with -- I think Colorado might have been high at -- might have been 13%, wasn't it? I think, it was over 10%. So there is a study out there that does suggest that accident frequency does increase and is correlated to the legalization of cannabis.

[Operator]

Your next question comes from Maggie MacDougall with Cormark Securities.

[Maggie Anne MacDougall, Director of of Institutional Equity Research]

So just wanted to circle back on the KPI discussion that we've been having here. And I'm wondering if there is anything that you see with regards to process that you could investigate to perhaps just create some productivity without necessarily needing to add bodies in the way of new technician?

[Brock W. Bulbuck, CEO & Non]

I would say that the WOW Operating Way is really structured to do that, Maggie, and we have enjoyed some benefit of the increased technician efficiency, and therefore, capacity as a result of the WOW Operating Way. As we've commented in the past, the WOW Operating Way is a continuous improvement initiative. We have continued to improve our performance on execution of the WOW Operating Way across our network, and we expect to continue to be able to do that, which should translate into some unmeasurable at this -- some, but perhaps unmeasurable capacity increases. So I'd say our focus continues to be the WOW -- execution -- consistent execution of the WOW Operating Way, Maggie. And Tim, I think, Tim has got a couple of comments on that as well.

[Timothy O'Day, President, COO & Non]

I think one of the other initiatives we have underway is a significant focus on training, much of that being technical training, which will help educate our workforce and should also have an impact on productivity -- individual productivity.

[Maggie Anne MacDougall, Director of of Institutional Equity Research]

And a lot of the conversation has focused on U.S. labor, but curious if you've had any similar constraints that come up in any of your Canadian markets as well?

[Brock W. Bulbuck, CEO & Non]

Yes, we have similar situation, particularly in Ontario, where we have a high level of demand for our services and more demand than we have technician capacity to process. In Western Canada, the business isn't -- the demand for services isn't as strong, and we don't have the same degree of issue in Western Canada.

[Operator]

Your next question comes from Bret Jordan with Jefferies.

[Bret David Jordan, Equity Analyst]

A question on the repair scanning technology, could you talk about the CapEx involved in tooling up shops for that and maybe what kind of a hurdle that represents to the independence?

[Brock W. Bulbuck, CEO & Non]

Sure. The -- there is -- there are a variety of ways that technology can be deployed. If -- and one of which is to put OE scanning capability for every make, model into a shop, but that's probably an impractical and unlikely capital investment that anyone could or would make. There are a number of aftermarket scanning capabilities, scanning technologies that can be purchased there, and their cost is anywhere -- probably on average around $5,000.

[Timothy O'Day, President, COO & Non]

Even a little less.

[Brock W. Bulbuck, CEO & Non]

May be $3,000 to $5,000 per location. But the aftermarket scanners can't be a complete solution. What we have done with our process is that we have -- we are using a combination of aftermarket scanners in every one of our facilities, combined with an outsourced access to OE scanners, where our aftermarket scanners tell us that we have additional issues to follow up on. The outsourced capability that we're using also provides us with the much needed technical expertise that is required to correct issues that are identified in the scan process. So we think we've got a bit of a unique solution that is a -- that is both effective to position us to repair cars properly, but also do so on a cost effective way for our customers and insurance companies.

[Bret David Jordan, Equity Analyst]

Okay, great. And then a question on the backlog. I think you said it was up from the second quarter. And I think on the second quarter call, you said it was historically high. We had a record high backlog or just record high for the quarter?

[Brock W. Bulbuck, CEO & Non]

I -- what we -- we haven't really tracked that closely because as I think, we've joked in the past for most of the time that all of us have spent in this industry, we used to worry about where we were getting our work, not how we were going to process the work. So it's likely at a record high, but we can't confirm that. We don't have -- we haven't run back to look at the data.

[Operator]

Your next question comes from Michael Glen with Macquarie Securities.

[Michael W. Glen, Analyst]

So Brock, just a question. So there's been a -- I read a few articles recently about OEM certification. Is that something that you see impacting your business? Or how should we think about this potentially impacting your business going forward?

[Brock W. Bulbuck, CEO & Non]

We believe that OE certification will continue to grow in terms of -- and have an influence in where collision repair work gets repaired. And for that reason, we have had an initiative underway, it started last year, continuing into this year, to increase our penetration of OE certifications, and we are on track with that initiative. For the benefit of those that haven't done the research that you have, Michael, most of the OEs have adopted certification programs, whereby, they are qualifying certain collision repair shops to fix their vehicles. And while there is still significant -- and the majority of the influence is still with the insurance companies through direct repair programs, the way the industry is evolving is likely -- there will have to be -- insurance companies will likely have to consider the repair qualifications, including certification status of repair shops when referring work in the future. So it is a growing trend, Michael, and one that we are paying attention to and have set specific objectives for.

[Michael W. Glen, Analyst]

Are you able to disclose what your penetration of your shops might be OE certified at this point?

[Brock W. Bulbuck, CEO & Non]

No. We think that's highly competitive.

[Michael W. Glen, Analyst]

Okay. And so if we're thinking -- you talked about CapEx 1.6%, 1.8% this year. If we're looking forward on CapEx as a percentage of sales, like, what should -- I'm assuming that there's some incremental cost with this?

[Brock W. Bulbuck, CEO & Non]

Yes, the 1.6% to 1.8% this year reflects investment that we've made in equipment requirements for OE certification. As we -- as well as scanning and other technology-related investments. As we stated in March when we provided the guidance as to 1.6% to 1.8%, we really couldn't tell at that time and still can't tell today whether or not that level of investment will be required into next year and beyond. We will provide further guidance on our CapEx requirements for 2019 when we report out to you in March on our year-end results.

[Michael W. Glen, Analyst]

Okay. And then, Brock, when you look at the M&A pipeline, you've outlined the objective 2015 to 2020, you're going to double the size of the company. You appear to be well on track for that. When you look at the pipeline, how much more -- are you able to talk about how much more M&A you need to do from this point going forward to hit that objective? How active do you need to be?

[Brock W. Bulbuck, CEO & Non]

Well, we need to be active enough to continue to grow our business at 15% per year. And we're going to get some of that through same-store sales growth and the rest it we've got to get through M&A. I'd say that we have to be -- we have to continue to be as active as we've been essentially in the first 3 years of this 5-year goal, relatively speaking.

[Michael W. Glen, Analyst]

Are you able to say that what number of stores should you be acquiring on a quarterly basis? Is there a number that we should focus on?

[Brock W. Bulbuck, CEO & Non]

No. I mean, you can draw your -- we ask you to draw your own conclusion of how much of the required 15% we're going to get -- 15% growth we're going to get from M&A versus same-store sales growth. You've got historical trend of our same-store sales growth performance. If you assume 3%, then we need 12% from M&A. If you assume 2%, then we need 13% from M&A. If you assume 4%, then we need 11% from M&A. So that's really the way we think that you should look at it.

[Operator]

Your next question comes from Jonathan Lamers with BMO Capital Markets.

[Jonathan Lamers, Analyst]

Could you remind us how much lower the EBITDA contribution margins are for your glass business versus the consolidated average?

[Brock W. Bulbuck, CEO & Non]

They vary. We haven't specifically -- we said that they can be within a range of our collision margins, but Jonathan, I can't recall when we've last quantified...

[Narendra M. Pathipati, CFO, Executive VP, Secretary & Treasurer]

Jonathan, we don't disclose that information. Also, the other thing is within the glass business, we have two segments; we have the retail business and we have third-party administration business. And the margins within that vary. So given that, yes, we have not commented about the specific margins for glass business.

[Brock W. Bulbuck, CEO & Non]

I think, Pat, I think, what we've said going back a couple of years is generally our combined glass business can yield EBITDA margins that are comparable to collisions.

[Narendra M. Pathipati, CFO, Executive VP, Secretary & Treasurer]

That's correct.

[Brock W. Bulbuck, CEO & Non]

But that was before we went through the period of headwinds, where we had NAGS pricing reduction and other things that have obviously had an impact on our glass business.

[Jonathan Lamers, Analyst]

If I look at the balance sheet, the noncontrolling interest, put option and call liability, which, I believe, is primarily based on a multiple of the glass earnings. It hasn't -- like it didn't really grow year-over-year despite it had some loss in the glass sales. So I was just wondering if there were some significant margin challenges for glass looking year-over-year or quarter-over-quarter?

[Brock W. Bulbuck, CEO & Non]

Yes, the glass business has been margin challenged dating back to when we had NAGS pricing reductions. And so the other thing I'll comment on is that the put option liability or the call option liability that appears within our notes, it's a complicated calculation that considers not only the trailing earnings of the glass business, but a whole bunch of other inputs that are IFRS requirements. So it's a bit of a calculated -- it's a bit of a complex calculation.

[Jonathan Lamers, Analyst]

Okay. So the purpose of my question, Brock, is just to reconcile the declining EBITDA margin year-over-year...

[Brock W. Bulbuck, CEO & Non]

Yes.

[Jonathan Lamers, Analyst]

And like one other question on that topic, if I may. Like the mix of acquisitions that you've done year-to-date have been smaller, less productive locations. So did those amount to materially lower EBITDA margin versus the consolidated average?

[Brock W. Bulbuck, CEO & Non]

As we called out in both the call script and within our MD&A, yes, we had higher operating expenses and lower gross margin on new acquisitions contributing to this year's third quarter results. So in trying to answer your question, glass margins did not have a meaningful impact on the EBITDA margin this quarter in this year in comparison to last year Q3, but new locations, those not included in same-store sales growth did.

[Jonathan Lamers, Analyst]

Okay. And just to confirm, will Hurricane Michael have a material impact on the Q4 results?

[Brock W. Bulbuck, CEO & Non]

No.

[Jonathan Lamers, Analyst]

Okay. One high-level question...

[Brock W. Bulbuck, CEO & Non]

Just if I -- Jonathan, if I just might also add, relative to EBITDA margins, I'd like to sort of reiterate some comments that we've made previously. And that is, well, we believe we have -- we believe that we will continue to expand EBITDA margins slowly and gradually over time, they're not going to be a straight line up. There will be quarter-to-quarter fluctuations in EBITDA margins that are associated with mix change, associated with investment -- investments in our business that we need to make periodically and that's one of the main drivers in this Q3 is the 30 basis point investment that we've made in our U.S. benefit enhancements. So I mean, there are going to be some fluctuations in EBITDA margins period-to-period, quarter-to-quarter.

[Jonathan Lamers, Analyst]

Okay. And on some of your suppliers have -- well, sorry, scrap steel prices are in decline. Have your suppliers reduced their parts cost to you for that? And has that had any impact on your operations?

[Brock W. Bulbuck, CEO & Non]

No. They -- we haven't seen any price reductions as a result of that, and we, therefore, haven't seen any real impact on -- and any real impact on operations.

[Operator]

Your next question comes from Daryl Young with TD Securities.

[Daryl Young, Mining Research Associate]

Just one quick question from me. We've seen quite a few large MSO acquisitions and some small MSO acquisitions over the last few months. Has there been any change to the valuations in the space?

[Narendra M. Pathipati, CFO, Executive VP, Secretary & Treasurer]

Not really.

[Brock W. Bulbuck, CEO & Non]

No, not really. We would -- I mean, as we commented in the past, there's a wide range of valuations that are -- that come into play depending upon the size and strategic value of an acquisition, but generally we would say that we have not seen any material change in overall that landscape of valuations.

[Daryl Young, Mining Research Associate]

And do you have a target multiple valuation you look out to pay that's when...

[Brock W. Bulbuck, CEO & Non]

As we said, for single locations, we look to try to underwrite them to a 25% EBITDA return on our investment, which is 4x. At the other end of the spectrum is that when we acquired Assured, I think, we paid 9.6x, but that had -- that transaction had some unique tax benefits when we considered the net present value of tax assets, the multiple reduced to 8.3x. So we -- that's the range. And we used...

[Operator]

[Operator Instructions] Your next question comes from Elizabeth Johnston with Laurentian Bank.

[Elizabeth Johnston, Analyst]

I just want to cycle back briefly on talking with the CapEx. So is there a way that you feel that you could accelerate somehow your investments. I know you've quoted the 1.6% to 1.8% of sales at this point. But do you see there being an opportunity to maybe spend more to either help your sales or help gain market share or something along those lines?

[Brock W. Bulbuck, CEO & Non]

Well, in terms of helping our sales right now, I think that the things that we would need to do is spend money on somehow buy technicians, but I don't think that's a practical solution. So I don't know. I think that there may be -- if there was a way to maybe accelerate the OE certification program, that might be a way, but I don't know that's really possible because there's training involved that also needs to be considered. There's certification process that needs to be considered and there's onboarding. So I don't think -- an answer to your question, I would say that I don't think that there is a significant opportunity for us to accelerate CapEx in a way to create a step competitive advantage.

[Elizabeth Johnston, Analyst]

Okay. So when we think about that spending in technology, then it's sort of a two-pronged thing. You could spend the money, but because there's also training involved, spending it quickly doesn't necessarily help, if you need to take technicians out to train them. Is that a good way to think about it?

[Brock W. Bulbuck, CEO & Non]

Yes, and we have to blend in training with continuing the process work at the same time. The more people we haul of our operations to train, the greater impact it has on our ability to generate same-store sales growth and try to meet the demands for our services that we're facing.

[Operator]

Your next question comes from Steve Hansen with Raymond James.

[Steven P. Hansen, Senior Vice President]

Sorry, I apologize. Just very quickly, one housekeeping. If I recall fourth quarter last year, the EBITDA margins were skewed upwards by -- trued up to the end of the year. Should we expect anything like that again at the end of this coming year? Or should we just assume that the normalized operating margins are going to be more practical?

[Brock W. Bulbuck, CEO & Non]

It's hard to know whether or not you have that true-up lift until you actually get through the year. So it's really difficult for us to comment on that, Steve.

[Steven P. Hansen, Senior Vice President]

Okay, I think it will just assume that's regular and then if it's there, it's a benefit.

[Operator]

You have no further questions at this time. I will now turn the call back over to Mr. Bulbuck for closing remarks.

[Brock W. Bulbuck, CEO & Non]

Thank you, operator, and thank you all, once again, for joining our call today. We look forward to reporting our 2018 annual results in March. Thanks, again. And have a great day.

[Narendra M. Pathipati, CFO, Executive VP, Secretary & Treasurer]

Thank you.

[Operator]

This concludes today's conference call. Thank you for your participation. And you may now disconnect.