Boyd Group Services Inc

TSX:BYD

Earnings Call Transcript 2018-Q4

[Operator]

Good morning, everyone, and welcome to the Boyd Group Income Fund Fourth 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, Thursday, March 21, 2019.I'd 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 fourth quarter and year-end results before markets opened today. You can access our news release as well as our complete financial statements and Management Discussion & Analysis on our website at www.boydgroup.com. Our news release, financial statements, MD&A and annual information form have also been filed on SEDAR this morning. On today's call, we will discuss the fund's financial results for the 3- and 12-month periods ended December 31, 2018, and provide a general business update. We will then open up the call for questions.Overall, we are pleased with our progress and results in 2018. We remain focused on our long-term goals of operational excellence and doubling the size of our business based on revenues on a constant-currency basis over the 5-year period ending in 2020. During the past year, in addition to growth, we were able to make meaningful progress in many strategic areas of the business, including diagnostic repair scanning, technician recruitment, development and retention as well as entering a number of new markets.In 2018, we completed our investment and training for company-wide diagnostic repair scanning technology, which helps to ensure that we identify all damage, so that we can continue to complete high-quality repairs in the face of changing vehicle technologies. We also rolled out an enhanced benefit program for our U.S. employees, funded by a portion of the tax savings from U.S. tax reform that we believe better positions us to attract and retain technicians and other key employee positions. In addition, we continue to invest in technology, equipment and training programs for our employees to ensure they are equipped for continued operational execution.During 2018, we added 81 locations, which represents 16% growth in locations. And in early 2019, we added an additional 34 locations to cross the 600-location milestone. The locations added during 2018 included 8 dealer service centers and also provided entry into 4 new states of Alabama, Missouri, Texas and Wisconsin. Subsequent to year-end, we also entered the states of New York and South Carolina. These new locations not only increased our market presence, they also helped to enhance our ability to grow as they positioned us in new geographies.Consistent with the past several years, we again were able to achieve record levels of revenue, adjusted EBITDA and adjusted net earnings. Adjusted EBITDA margins had a 2 basis point improvement, thereby sustaining at a consistent level compared to 2017 despite the 30 basis point negative impact of the enhanced benefit program for U.S. employees.Looking at our results for the past quarter, our total sales were $495.1 million, a 19.4% increase from $414.6 million generated in the fourth quarter of 2017. This reflects a $40 million contribution from 86 new locations. Our same-store sales, excluding foreign exchange, increased by 6.8% in the quarter to $434.6 million from $406.9 million in Q4 2017. Foreign exchange increased sales by $14.3 million due to the translation of same-store sales at a higher U.S. dollar exchange rate. Normalizing for the impact of an additional production day in the fourth quarter of 2018, same-store sales increased 5.2% in Q4 on a per day basis.Gross margin was 44.3% in Q4 2018 compared to 45.4% achieved in Q4 2017. The gross margin percentage decrease is primarily due to a higher mix of part sales in relation to labor and reduced DRP pricing. The lower DRP pricing this quarter is the result of certain DRP performance pricing arrangements changing in a way that is currently resulting in slighter -- slightly greater variability quarter-to-quarter. Improved parts margins partially offset these negative impacts.Operating expenses for Q4 2018 were $171.7 million or 34.7% of sales compared to $146.2 million or 35.3% in Q4 2017. The decrease in expenses as a percent of sales reflect same-store sales growth leverage, along with some typical year-end expense accrual true-ups, partially offset by an approximately 30 basis point impact of the enhanced benefits for U.S. employees. These benefit enhancements include increased vacation and holiday paid for commission paid team members, including technicians, as well as doubling company contributions and shortening the vesting period for our 401k retirement savings plan.Adjusted EBITDA or EBITDA adjusted for fair value adjustments to financial instruments and costs related to acquisitions and transactions was $47.6 million compared to $41.8 million in the fourth quarter of 2017, a 13.8% increase. Adjusted EBITDA growth was primarily due to contributions from new locations and same-store sales growth, along with a lower operating expense ratio.Adjusted EBITDA margin was 9.6% in Q4 2018 compared to 10.1% for the previous year, reflecting the impact of enhanced benefits for U.S. employees and increased investment and training costs. Similar to Q4 2017, Q4 2018 benefited from some expense accrual reductions as certain expense estimates changed or were firmed up at amounts that were lower than previously estimated and accrued. These expense reductions in 2018 included workers compensation and advertising costs.Net earnings for Q4 2018 were $29.9 million compared to $23.2 million in Q4 2017. The net earnings in the fourth quarter of 2017 were impacted by the changes in deferred tax assets and liabilities resulting from changes in U.S. tax rates, which contributed a onetime tax recovery of $13.6 million. Also impacting net earnings in both the current and prior period was the recording of fair value adjustments for exchangeable shares, unit options and noncontrolling interest put option and call liability adjustments as well as the recording of acquisition and transaction costs.Excluding these impacts, adjusted net earnings for the fourth quarter was $23.2 million or $1.17 per unit compared to adjusted net earnings of $17.4 million or $0.907 per unit for the same period in the prior year. The increase in adjusted net earnings of $5.8 million is the result of the contributions of new location growth, same-store sales growth as well as lower operating expense ratios.In Q4 2018, we generated $59.5 million in adjusted distributable cash compared with $40.9 million generated in the same period of 2017. We paid distributions and dividends of $2.7 million, resulting in a payout ratio of 4.5% compared to a payout ratio of 6.1% in Q4 2017. Our adjusted distributable cash in Q4 2018 did benefit from a large favorable contribution from noncash working capital items, much of which is expected to reverse as a use of cash in Q1 2019.Now turning to our annual results for 2018. Our sales were $1.9 billion, up 18.8% compared with $1.6 billion in 2017. Same-store sales for the period were $1.5 billion compared to $1.4 billion in the previous year, representing same-store sales increases of 4.8%. Normalizing for the impact of an additional production day in 2018, same-store sales increased 4.4% in 2018.For the year ended December 31, 2018, gross margin was 45.2% compared to 45.8% achieved in the prior year. The gross margin percentage was primarily impacted by a higher mix of part sales in relation to labor as well as lower gross margins in the Assured business impacting margins for the full year in 2018 versus the half year in 2017. Labor margins declined slightly due to both the higher direct labor cost associated with new location integration and ramp up as well as the competitive labor market. Improved parts margins partially offset these negative impacts.Operating expenses for the year ended December 31, 2018, were $669.1 million or 35.9% of sales compared to $572.7 million or 36.5% in 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 higher same-store sales levels, leveraging the fixed component of operating expenses, partially offset by the impact of enhanced benefits for U.S. employees and increased training cost in 2018.The lower operating expense ratios associated with the Assured business as a result of their higher capacity utilization also positively impacted operating expenses as a percentage of sales for the full year in 2018. Adjusted EBITDA for the year ended December 31, 2018, was $173.4 million, up 19.1% when compared with $145.6 million for the prior 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 versus 2017 had a negligible overall impact on the year, increasing adjusted EBITDA by just $500,000.Adjusted EBITDA margin was 9.30% for the year ended December 31, 2018, compared to 9.28% for the previous year, despite the negative impact of approximately 30 basis points of the enhanced benefit program for U.S. employees. For the year ended December 31, 2018, net earnings were $77.6 million compared to $58.4 million in 2017.Net earnings were negatively impacted by fair value adjustments to financial instruments, primarily due to the increase in unit price during the year, offset by positive impacts of decreased income tax expense net of the increased expenses related to the enhanced benefit for U.S. employees, decreased financing costs and the contribution of new location and same-store sales growth.Adjusted net earnings for the year ended December 31, 2018, were $85.6 million compared to $58.8 million in 2017. On a per unit basis, adjusted net earnings were $4.35 per unit, a 36.7% increase over $3.18 per unit in 2017.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 will continue to have a diminishing impact on our earnings going forward, as fair value adjustments associated with unit option liabilities continue to decrease as unit options vest and are exercised and as the call option transaction to acquire the 30% noncontrolling interest in Glass America LLC was completed in early 2019.Capital expenditures during 2018 were approximately 1.4% of sales relative to our expected annual spend of 1.6% to 1.8% of sales. Lower-than-expected capital expenditures during 2018 will result in some of these expenditures being incurred in 2019. For 2019, including the carryover impact from 2018, we expect to make capital -- cash capital expenditures within the range of 1.5% to 1.7% of sales. Carryover from 2018, emerging vehicle technologies requiring new specialized repair equipment as well as image and property upgrades will contribute to this level of budgeted spend for 2019.For the year ended December 31, 2018, we generated $154.8 million in adjusted distributable cash compared with $94.5 million generated in 2017. We paid distributions and dividends of $10.5 million, resulting in a payout ratio of 6.8% compared to a payout ratio of 10.2% in 2017. Our approach to distributions continues to be to maintain a conservative payout ratio to provide returns for unitholders, while preserving capacities to act on growth opportunities.Based on our continued growth, the strength of and confidence in our business, we announced in November 2018 that we once again increased our distributions by 2.3% to $0.54 per unit on an annualized basis from their previous level of $0.528, effective November 2018. This is the 11th consecutive year that we have increased distributions to unitholders.At the year end, we had total debt net of cash of $232.1 million compared to $182.2 million at the end of Q3 2018 and $219.1 million at December 31, 2017. We continue to have a very strong balance sheet with very conservative leverage at year-end of approximately 1.3x adjusted EBITDA. Even after considering our growth capital spend in Q1 2019 to-date, we continue to have over $300 million of dry powder available to execute on our growth strategy.During 2018, our unit price increased by 12% when the TSX Composite Index was down 12%. More important, however, is the long-term value unitholders have been able to enjoy. Over the last 5 years, our unitholders have achieved a total return of approximately 254% from unit price appreciation and cash distributions. As well, Boyd Group Income Fund posted the best 10-year performance on the TSX in both 2015 and 2016 and the second best 10-year performance in 2017 and 2018, with a total return of over 5000% in the 10-year period ended December 31, 2018.Looking to 2019 and beyond, we continue to be confident that we will maintain our progress toward our long-term growth targets and operational plans. We continue to add locations in new markets and expand in markets where we have a presence today. Our people initiatives are starting to have some impact, and the ongoing investments we're making in technology, equipment, and training position us well for continued operational execution. However, we continue to be constrained by a shortage of technicians, and we, therefore, have a continued focus on our people initiatives.Specific to Q1, a modest decrease in capacity will occur in the first quarter of 2019 as we have 1 less production day relative to both Q4 2018 and Q1 2018. Additionally, we would again remind investors that our Q1 is burdened by higher payroll taxes that occur early in the year, and we are also comping against a Q1 2018 that wasn't yet burdened by the costs of our enhanced benefit program.As we have disclosed in our MD&A, with the required adoption of IFRS 16 under International Financial Reporting Standards in 2019, 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 expect to recognize right-of-use assets and lease liabilities on the January 1, 2019 effective date of approximately $450 million and $490 million, respectively, on adoption of this new standard. These values will, of course, change in Q1 2019 and in subsequent quarters for new leases being added for growth and for changes to the U.S. dollar exchange rate impacting the valuation of our U.S. leases.The fund will apply the standard using the modified retrospective approach without restatement of prior reporting periods. Since many of the fund's leases are denominated in U.S. dollars, there will be additional volatility in foreign exchange amounts recognized for revaluation to the rate of exchange in effect at the date of the balance sheet.Looking longer term, industry dynamics continue to drive industry consolidation that is favorable to our business model. Evidencing these favorable industry dynamics is the merger of Caliber and ABRA, which was announced in late 2018 and then completed in February 2019. This merger reduces the number of large industry players from 4 to 3 and is further validation of the value of industry consolidation.Acquisition opportunities continue to be strong throughout our network. And 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 repair quality, customer satisfaction and repair cycle times to ensure the continued support of our insurance partners and vehicle owners.In summary and in closing, we continue to be very well positioned to take advantage of the growth and market share gain opportunities within our industry.And with that, I would now like to open the call to questions. Operator?

[Operator]

[Operator Instructions] And your first question comes from Chris Murray of AltaCorp Capital.

[Christopher Allan Murray]

If we go back maybe to the same-store sales number in Q4, independent of the extra production day, a 5.2% print is pretty special and something that's been above some of the level that we've seen in the last little while. Just trying to understand some of the trends. I know you talked about the fact that you've got 1 last production day going into Q1, but just trying to maybe gage the health of the environment and what you're seeing out there that lets you actually hit that kind of number.

[Brock W. Bulbuck, CEO & Non]

I think as we reported at -- when we reported Q3, demand for our services at that time was strong and continued to be strong. And so we have strong demand for our services. We made some progress on our technician challenges in the latter half of the year that helped us to achieve those same-store sales growth numbers in the latter part of the year. And well, as we've reported, we still are somewhat -- we still are constrained by technicians. Those additions continue to benefit us today. So market demand continues to be strong. And while we're not out of the woods and we need to continue to work to make further progress on technicians, we at least made -- have made sufficient progress to be able to deliver the kind of same-store sales that we did in Q4.

[Christopher Allan Murray]

Okay, that's helpful. Thank you. Just a couple, maybe just some cleanup questions. Can you just give us a rough idea of the magnitude of those expense accruals that helped you in the quarter?

[Brock W. Bulbuck, CEO & Non]

Similar to our response to this question last year, we aren't going to provide that level of detail. We wish to once again focus investors on the EBITDA margins and the operating expense ratios for the full year. That takes away the impact of some quarter-to-quarter noise through expense accrual true-up. So we maintain our view that we will be able to achieve margin expansion slowly and gradually over time. And as was evidenced in 2018, we were able to absorb a 30 basis point additional expense from enhanced benefits to U.S. employees. So sorry, Chris. We're not going to directly answer that question.

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

Chris, the thing is we use our best estimate, sometimes conservative, as we go along the year. And towards the end of the year, we have the actual experience, and to that extent that we true it up. So I don't think it's a meaningful guidance for us to give because it could go either way. So we focus on the big picture at the percentage EBITDA level.

[Christopher Allan Murray]

Okay, fair enough. And then just the last one for me, just trying to maybe understand how '19 is going to shape out just in terms of the numbers. But going back to the IFRS 16 disclosures, you've given us your best idea right now of right-of-use liabilities and assets. Any thoughts around the magnitude of the EBITDA impact as operating lease expenses, I guess, get moved to depreciation and interest? I'm assuming these are going to be leases mainly for stores and things like that. So any sort of color you can give us on what you think the EBITDA impact might be at this point?

[Brock W. Bulbuck, CEO & Non]

We're not providing guidance on that at this time. We will provide that level of detail when we report out in Q1 in mid-May. At that time, we'll be providing additional detail with respect to the EBITDA impact as well as, obviously, the net earnings impact. We've -- the only thing that I might sort of suggest you do is, I think, that we've spoken before and provided information to investors that our rent and occupancy all-in, including property taxes and occupancy cost, is about 10%. So our rent -- our pure rent expenses is a factor of that.

[Operator]

And your next question comes from Michael Doumet of Scotiabank.

[Michael Doumet, Analyst]

The first question is just a follow-up to the same-store sales growth Chris asked. Just wondering if you guys could help us break that out in terms of technician productivity and increase in technician count, just to get a sense of that.

[Brock W. Bulbuck, CEO & Non]

I'm afraid we're not going to do that. We did add sufficient technicians to be able to achieve that level of same-store sales growth. And the amount of unprocessed work remained high at the end of the year, just as we had reported at the end of November. And therefore, we still believe that we had opportunity that we left on the table that we could not process because we did not have sufficient technician capacity.

[Michael Doumet, Analyst]

Okay, that's helpful. So the unprocessed work, was that relatively stable quarter-over-quarter. Did that go up just a bit?

[Brock W. Bulbuck, CEO & Non]

I would say -- I don't have the Q3, but I would say it was at relatively stable levels relative to Q3. Not meaningfully up or not meaningfully down from there.

[Michael Doumet, Analyst]

Okay, that's helpful, Brock. And maybe just flipping it over to the DRP performance pricing that you called out. Any way you can elaborate on what the drivers for the change were there? And from the outside looking in, any way you can help us better understand or forecast the variable items?

[Brock W. Bulbuck, CEO & Non]

Yes. Unfortunately -- I guess, the important message that we would like to leave investors with relative to that disclosure is we see this as variability, not a structural change in our margins. So we're relatively -- this is the first quarter that we had this impact. We're still gaining experience with it. We would expect that the volatility would diminish over time. But at this juncture, we're not prepared to sort of comment on order of magnitude. I think you see a level of magnitude in this quarter's results.

[Michael Doumet, Analyst]

Yes. That's helpful. And I mean, would it be fair for us standing where we're standing to assume that on a year-over-year basis like it's not going to have much of an impact or it would be -- the impact would be generally neutral?

[Brock W. Bulbuck, CEO & Non]

That is -- that was sort of fundamental of -- a fundamental driver of the disclosure that we made. We don't anticipate that those pricing arrangement changes will translate into a structural change in overall margins, just increased variability.

[Operator]

Your next question comes from Mark Petrie of CIBC.

[Mark Robert Petrie]

You guys have covered a lot, but I just wanted to ask about the outlook for M&A. And obviously you've been very active in terms of adding a number of MSOs over the last number of months. Does that mean that from here, the mix is very likely to be shifting back to singles? And then, I guess, related to that. How do you feel about sort of the bandwidth you have to maybe accelerate the pace of single-site acquisition, just given that you do have these sort of new platforms in new markets, and that's typically kind of been the experience so far?

[Brock W. Bulbuck, CEO & Non]

I'll try to answer the question by touching sort of on the multi-dimensions of it. But I would say, our pipeline continues to be strong, includes both multi-location acquisitions of comparable size to the number of ones that we did in Q4 and Q1. It also includes single location opportunities. And again, what we don't know beyond sort of 2019, Mark, is to what degree new MSOs will grow up. But as of right now, the pipeline continues to include a healthy number of nice-sized MSOs. And in response to the bandwidth question, again, we are confident that we have sufficient bandwidth within our corporate development team to execute on our growth plans for 2019. And of course, as we do every year, we will reevaluate those resource requirements as we move into 2020.

[Mark Robert Petrie]

Okay, thanks. And then, I guess, just related to that. I mean, the acquisitions don't typically involve a whole lot of integration, but as I said, you have done a number of MSOs and sort of a greater pace of those types of deals than you have, I think, at any point really in your history. So just wondering if that kind of accelerated pace over a relatively short period of time -- does that present any sort of unique challenges for you from an operational perspective?

[Brock W. Bulbuck, CEO & Non]

I would say, it does. I mean, the challenges -- we do have some transitional expenses associated with sending team members into the market to help with on-boarding on to some of our systems. But we believe that we have the adequate resources to be able to handle the number of MSOs that we've acquired in the last 2 quarters. Essentially, the fourth quarter transitional matters should be behind us now. So we believe that we have adequate resources. And while there will be some transitional expenses associated with the initial on-boarding and initial integration activities associated with those MSOs, there should be no other significant challenges.

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

Mark, I just want to clarify. We do integrate these acquisitions. So again, it varies from acquisition to acquisition. It could be -- if they're on a different system migrating to our system, if they are in different pay practices to ours. So, yes, these acquisitions do involve integrating into our standard practices and systems.

[Operator]

Your next question comes from David Newman of Desjardins.

[David Francis Newman, Analyst]

So besides the recent momentum in M&A, are you realizing the operational benefits from the Caliber-ABRA merger? And I'm thinking along the lines of paint deals or parts deals. And obviously, Uni-Select called out the MSO pressure in the quarter -- their quarter, and then [indiscernible] and Caliber and ABRA may have struck a new paint deal. Or technicians are you seeing any fall-out there that you can broaden your pool of technicians or insurance pricing? Maybe some of the operational aspects besides the obvious M&A opportunities.

[Brock W. Bulbuck, CEO & Non]

I'm carefully thinking how I might respond to this question because a lot of what you asked could represent competitive information. So I would say, generally speaking, that the impacts of the merger of Caliber and ABRA thus far have been neutral to slightly positive. And I think it's best if we leave it there.

[David Francis Newman, Analyst]

On all fronts?

[Brock W. Bulbuck, CEO & Non]

Again, I think it's best that we leave it there.

[David Francis Newman, Analyst]

Okay. And then just as you -- the valuations that you're seeing in the market today, obviously, the other 2 participants are somewhat absent from the market, but it's offset by, obviously, the MSOs gradually being gobbled up here. Are you seeing any change in the valuation metrics that you're -- on the new deals at all?

[Brock W. Bulbuck, CEO & Non]

No material change in the valuation metrics to what we have reported in the past. Again, we continue -- I just want to emphasize. We continue to use the full range of -- from single location to higher levels of multiples that we end up paying for strategic platform acquisitions.

[David Francis Newman, Analyst]

Okay. So the market looks very wide open for you right now from a valuation perspective and then certainly from the opportunities?

[Brock W. Bulbuck, CEO & Non]

Yes.

[David Francis Newman, Analyst]

Okay. And then on intake centers, it's been a while since we heard an update on the strategy. Is there a tipping point in terms of geographic density that you could see an uptick? In other words, as you densify your markets that it naturally makes more sense on the intake centers? Or as you look forward, what's sort of your thinking on the strategy related to that?

[Brock W. Bulbuck, CEO & Non]

As I think we've commented in the past, we think of dealer service centers as another very good tool in our toolbox to achieve same-store sales or organic growth in our existing facilities and essentially increase the capacity utilization of those facilities. The constraint of technicians is a limiting factor to our ability to use dealer service centers for that purpose, because it serves -- it really doesn't serve us in any way to open up a dealer service center to create more demand for our services if in that particular facility or the adjacent facility we do not and cannot expand technician capacity in order to service that increased demand. So I would say that -- maybe just to summarize, I would say that, in 2018, had the demand for our services not been broadly strong across most markets, we would have looked to open more dealer service centers.

[David Francis Newman, Analyst]

Got it. Okay. And last one for me, guys. You've kept your CapEx rate kind of in the 1.5% to 1.7%. And sort of beyond the scanning, which really -- wasn't really a significant CapEx spend for you guys. But as you look at the range of technologies that are out there that could further your advantage in terms of your competitive moat, is there something that you think that is out there that you need to complement what you've got in terms of technology in the shop?

[Brock W. Bulbuck, CEO & Non]

I think that the -- what -- that level of spend is really not with a focus on expanding into any next level technologies. It's continuing to invest in equipment, maybe we initially only put aluminum capability into a percentage of our facilities. We've also reported that we've been expanding our OE certifications, and that takes additional capital because many of those OE certifications have specialized equipment. So we also -- given the strong cash flow that we generated last year, we thought that maintaining -- and I guess the way I would look at the -- this year's guidance, 1 point -- last year we guided a 1.6% to 1.8%. This year we're guiding 1.5% to 1.7% with some carryover from last year. So it is a modest reduction in guidance. And we're going to spend part of that budgeted capital on image and facility upgrades as well.

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

David, to supplement, we continue to evaluate the relevant technologies, and the good news is we have the financial flexibility to make investments that are applicable for us.

[Operator]

Your next question comes from Michael Glen of Macquarie.

[Michael W. Glen, Analyst]

Two quick ones. The call option purchasing in the Gerber Glass -- is that the amount that we see on the balance sheet there? Is it about $20 million? Would that be the cash outflow for that, that we would expect?

[Brock W. Bulbuck, CEO & Non]

On the -- I'm sorry, the...

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

There are 2 elements to -- one is the third party and other one is the operator who is with us. So we settled with the third party. So there is -- there was an associated cash outflow.

[Brock W. Bulbuck, CEO & Non]

And what you see on the balance sheet remaining at -- well at year-end, so just to sort of expand on Pat's point. At year-end, the balance sheet number would reflect both the estimated call option liability to buy out the Glass America LLC interest as well as the put value -- put option liability associated with the minority interest owned by the senior manager who runs our glass business. So the -- one of the -- so that balance sheet number will diminish significantly at the end of Q1 as that call option liability on the Glass America LLC purchase has been concluded in Q1.

[Michael W. Glen, Analyst]

Okay. And did you indicate how much that -- how much you paid for that exactly?

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

We basically settled and we actually had a pickup that was associated with the settling that call option.

[Brock W. Bulbuck, CEO & Non]

I don't know that we've disclosed the breakdown.

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

We have not disclosed...

[Brock W. Bulbuck, CEO & Non]

I don't think we disclosed the breakdown of those 2, but you could assume that the largest -- that more than half of that balance sheet item would be settled because the Glass America LLC minority interest represented 30%, where the minority interest owned by the senior manager of our glass business is less than that.

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

Yes. And we'll continue to have -- I think you'll see in our balance sheet the $6.9 million with the senior manager's option.

[Michael W. Glen, Analyst]

Okay. And then for next year, is the tax rate number -- should it be about 26% or should we use a number different than that?

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

I think it's around that range. And in fact, we have in the press release, but that's a reasonable range.

[Brock W. Bulbuck, CEO & Non]

Michael, I think, with some of the benefit that we're getting, I think, it's coming in at 22% to 23%, isn't it, the effective tax rate.

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

Yes, mid-20s, yes.

[Brock W. Bulbuck, CEO & Non]

But certainly the stated rate both in the U.S. and in Canada now is 26%. We get a little bit of tax efficiency through a trust structure.

[Michael W. Glen, Analyst]

Okay. And then just to circle back on the CapEx discussion. Is there a point in time where -- when do you see -- we have a lot of technology coming to the market. You're talking about the aluminum. From where you stand now with aluminum and you think about the timing surrounding Ford F-150 coming into the market? Are you starting to see those trucks come through your shops now, now that we're kind of 3 years on, in that model year? Are you starting to see that aluminum demand for your service pick-up now?

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

Yes. I'd say it's been growing over the past few years but we began to see the F-150s -- the aluminum F-150s shortly after they were introduced. And we've seen that growing year by year. And there are other vehicles out there with aluminum content as well. So we're able to service those vehicles in our aluminum equipped centers.

[Michael W. Glen, Analyst]

So is that something that you're -- do you need to put more of that in place or are you happy with where you stand right now on aluminum?

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

I think we're happy with where we stand right now. But as the car park changes and more vehicles have higher concentrations of aluminum, we'll have to reevaluate to make sure we're able to serve those vehicles -- serve the market effectively.

[Michael W. Glen, Analyst]

Okay. And are you able to give a sense -- when you're putting the aluminum in, are you able to give an idea of what kind of return on investment you get from that type of capital deployment?

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

We haven't really looked at it that way. I think the investment that we make in aluminum really allows us to continue to serve the marketplace. It could give us the opportunity to get referrals that we might not otherwise get as other repairs aren't capable of those repairs than we are. And that would provide a return. But we have not evaluated that way today.

[Brock W. Bulbuck, CEO & Non]

Michael, I think, as this question has been asked in the past, many of these new technologies that are requiring capital investments are not providing a return in the early days. The benefit that we have as a large multi-location business is that we can share those investment resources across a number of centers. And that just positions us to be -- have the capability -- repair with capability whereas many single shops aren't able to make -- if they make those investments, they're not getting return and many, therefore, are choosing not to make those investments. So as Tim says, we need to continue to position to be able to repair all makes, all models for the most part. And I think this trend is acting as a further accelerant to consolidation.

[Operator]

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

[Jonathan Lamers, Analyst]

I apologize if I missed this. But as I'm thinking about the same-store sales outlook for Q1, it seems it's been a pretty heavy winter this year on the East Coast. Could you comment as to whether you're seeing sort of stronger demand as you head into Q1? And how the improvement in capacity offset by the less production day might be helping you?

[Brock W. Bulbuck, CEO & Non]

Yes, Jonathan, I think, when this question was asked before, I think, we said that the unprocessed work at the end of the fourth quarter was comparable to that, which we had in unprocessed work at the end of Q3. You're right. It has been -- there has been some severe weather. But as we also said when we answered the question at the start of the Q&A, really demand for services was not the key determining factor in our same-store sales performance in Q4. It was technician capacity. So technicians continue to be a constraint for us in Q4 and will continue to be a constraint for us in Q1.

[Jonathan Lamers, Analyst]

Otherwise, though, there is nothing materially different in the environment in Q1 versus Q4 other than there is the seasonal uptick from…

[Brock W. Bulbuck, CEO & Non]

Yes. But -- correct. There's nothing fundamentally different, but, said another --, we may not be able to take advantage of the seasonal uptick because we don't have technician capacity in order to do so.

[Jonathan Lamers, Analyst]

Okay. And on the -- just a quick question on the MSOs that you've acquired year-to-date. Is there -- is productivity of those shops comparable to the productivity of MSO stores that you've done in the past?

[Brock W. Bulbuck, CEO & Non]

We really don't get into that level of disclosure. I would say, there is always a range of productivity from acquisition to acquisition. And as I had commented on earlier, we do have in the early months of an acquisition we have some disruption due to integration and training and some additional transitional expenses.

[Jonathan Lamers, Analyst]

And did the same-store treatment of Assured in the second half have a meaningful contribution to the overall same-store sales?

[Brock W. Bulbuck, CEO & Non]

We're not going to -- we don't like to get into talking about same-store sales performance of any business unit. At times, we've called out glass, because it's been material. I will tell you that the same-store sales performance of Assured was not material to the overall outcome.

[Operator]

Your next question comes from Maggie MacDougall of Cormark.

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

So wanted to follow up on the call option question not to be too redundant here. But I noticed in Note 15, you provided a schedule of your liability on the call interest and then also on the put value. So if we were to consider the liability presented there, would that be representative of the cost to acquire that?

[Brock W. Bulbuck, CEO & Non]

We have to -- just let's have a peek at our notes here. The liability at the end of December -- the aggregate liability for both the call option and the liability for the put option on the senior manager's interest would both be estimates at that point in time. The settlement of the call option in Q1 would not necessarily be at that exact December 31, 2018, balance sheet number. The...

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

Yes. I think, Maggie, one way of looking at impact, if you go to press release we clarified. So the year-end reflects both the liabilities, and we settled subsequent to the year-end. So that's why we clarified subsequent to the quarter end. We completed the call-option transaction. And so there was a pick-up compared to the liability we had at the end of the year. And that pick-up went through the fair market value adjustment line on the income statement.

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

Okay. Okay, great. Thank you for the explanation. And the other question I had just related to the working capital balance that came in, in Q4. So that was a nice source of cash for you. And I'm wondering if you can provide any, just color on what that was related to. And whether or not that's something that we'll see again next year or it will just go back to normal seasonality in 2019?

[Brock W. Bulbuck, CEO & Non]

Yes. As I commented on in the prepared comments, Maggie, a lot of that is likely to reverse in Q1. I think the aggregate of that noncash working capital contribution was about $22 million, I believe, in the quarter. And I believe about $10 million of that would have been related to accrued payroll. I think we've commented in the past that because we pay every 2 weeks depending upon where the quarter end ends, we could have an accrual anywhere from 0 days to up to 10 days. So we had a maximum accrual at the end of Q4. And I think that we're going to have a -- a lot of that accrual will not be there at the end of Q1.

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

Maggie, I think, these are basically tied to the timing of the pay periods. So you may have a pickup in one quarter, but it's going to be reversed the following quarter. So one should not count those things continuing. So those are basically the timing differences.

[Brock W. Bulbuck, CEO & Non]

I think what's more relevant is the annual. And even then, we may have some timing difference depending upon where they ended the year, what the cutoff is at the end of the year.

[Operator]

And your next question comes from Elizabeth Johnston of Laurentian Bank.

[Elizabeth Johnston, Analyst]

I wanted to go back and touch on the benefits enhancements program that you referenced earlier. Can you give us a sense of how you're measuring -- if you're able to measure in terms of how it's working so far? I know you commented on -- it seems that the initiatives that you've put in place are showing results. So if you can share with us how you're measuring this? Maybe it's turnover within the shop or some other kind of metric, that would be useful.

[Brock W. Bulbuck, CEO & Non]

Well, we monitor both turnover and we monitor the number of technicians that we have within our network on a same-store basis. And as I think we reported at the end of Q3, we have made modest -- very modest improvement in our turnover. But we have been able to recruit and add at least enough same-store -- enough technicians on a same-store basis in order to be able to achieve the level of same-store sales growth that we reported the last 2 quarters. So we do monitor same-store technician counts, which we've been able to grow enough. Even though we're still constrained, we've been able to grow enough to achieve same-store sales growth. And we monitor turnover where we have seen just a very modest improvement.

[Elizabeth Johnston, Analyst]

And when it comes to being able to determine if this is something that will persist into the medium- to longer-term, do you have any kind of historical data on how long new recruits will typically stay with you, because this program has really only been in place not even a year really at this point or maybe just a year? So just wondering if we were to anniversary this, could there be a change in either the turnover improvement or the number of technicians same-store...

[Brock W. Bulbuck, CEO & Non]

I think we're on a journey. I don't think this is an anniversary analysis. I think, as we cited in our prepared comments, we continue to be highly focused on people initiatives. And we haven't enhanced our benefits and said that's going to be the solution to all of our technician challenges. We will need to continue to work on this, both looking for new and creative ways to recruit, looking for ways to continue to develop our people. I think we talked in the past about an initiative to grow more of our own through a formalized apprenticeship program that is now formalized and standardized across all of our markets. We have many, many people initiatives that we're working on. And I would say that this is going to be similar to our EBITDA margin expansion. This is going to be a slow and gradual process of improvement.

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

Elizabeth, it's difficult to correlate benefits based on historical experience because it's based on the current competitive landscape. So that's what we're dealing. In fact, the 3.8% unemployment rate in the U.S. is a pretty good indicator of the market for labor out there. So -- but we are confident these enhancements are going to yield benefits.

[Brock W. Bulbuck, CEO & Non]

And I believe they have yielded some benefits already as evidenced in our same-store sales growth.

[Elizabeth Johnston, Analyst]

Okay, great. That's very helpful. Thank you. If I could, just a follow-up on the DRP question. I know you're not going to give too much information in terms of the change in those contracts or the relationship there. But just wondering, if the -- if it's something driven by the insurer side or it's related to a particular region in the U.S. or is it really more broad-based?

[Brock W. Bulbuck, CEO & Non]

Again, to try to answer that question would, I think, get into both competitive information and potentially NDA information. So I'm afraid we can't answer that question.

[Elizabeth Johnston, Analyst]

Okay, understood. And just one brief one from me. In the aluminum investments that you talked about already in the technology, are you able to use that as a selling point to attract single-shop owners to become part of the Gerber network? In that if they couldn't afford aluminum technology, by joining Gerber, they now have access to being able to serve clients who need that without having necessarily to make the investments right away?

[Brock W. Bulbuck, CEO & Non]

Most single-shop owners that we buy leave the company. So really a single shop owner is really probably looking for an exit versus a strategic leg-up in terms of how they are going to continue to do collision repair.

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

But I think that is a factor in terms of the single shop owners in terms of looking at the capital needs of the business as these new technologies emerge. So they may not be in a position to make those investments, but then they have to determine if they want to stay in the business or sell and get out.

[Brock W. Bulbuck, CEO & Non]

But I don't think that, that it is a value -- part of our value proposition and buying businesses to say, let us buy you and your location will then have access to aluminum technology. They really don't care at that point because they're selling.

[Operator]

Your next question comes from the line of Zachary Evershed from National Bank Financial.

[Zachary Evershed, Associate]

Quick one for you guys. Given that the 1.5% to 1.7% guidance for 2019 CapEx includes the carry-over from 2018, would it be right to assume that the timing will be front-loaded to the first half of the year?

[Brock W. Bulbuck, CEO & Non]

It may or may not. So I wouldn't necessarily assume that.

[Operator]

Your next question comes from the line of Mark Jordan from Jefferies.

[Mark David Jordan, Equity Associate]

This is Mark Jordan on for Bret. I just have one quick question for you, and it's about the improved parts margin here. What's really driving that? Is it purchasing or maybe mix? And is that all in the collision business?

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

It is in the collision business, Mark, and it's really being driven by focusing our supplier relationships on specific vendors and some improved negotiation, although, really just focusing on key suppliers.

[Operator]

[Operator Instructions] Your next question comes from the line of Ben Jekic from GMP Securities.

[Ben Jekic]

I have 2 quick question. One was mostly answered, but I will just ask. So it's the one with the working capital. Your increase in payables, I guess, that's also falls under that group. So it's fair to say that, that it should reverse in the first quarter. But why was it such an increase in payables? Is that the accruals?

[Brock W. Bulbuck, CEO & Non]

No. There are accruals associated with salaries and wages due to timing of payroll. There are also accruals associated with all of our year-end bonuses for our entire leadership team get paid out in the first quarter. So I would say that most of that contribution is related to those kinds of payables and accruals versus trade payables. There may be some element of trade payables that is impacted by timing, but that would not be sort of the material component of them.

[Ben Jekic]

I understand. That's great. And my second question is on -- if I'm not mistaken, you just recently entered the State of New York. And I'm going to try not to ask it in any strategic way, but given that it's the fourth most popular state, is it just -- was there just a decision, okay, we simply have to be there? Or is there more of a something -- some dynamics interstate that's driven you to expand there? Can you maybe shed some color?

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

I think that it's really just an opportunity to expand into a state that is densely populated, a lot of opportunity for growth. And quite honestly, we had an excellent business there that was a good entry point with strong leadership that can help us grow in that market over time.

[Operator]

And we have no further questions at this time. I'll turn the call back to our presenters.

[Brock W. Bulbuck, CEO & Non]

Thank you, operator, and thank you, all, once again for joining our call today. And we look forward to reporting our first quarter results in May. Thanks, again, and have a great day.

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

Thanks, everyone.

[Operator]

Ladies and gentlemen, thank you for your participation. This concludes today's conference call, and you may now disconnect.