Boyd Group Services Inc

TSX:BYD

Earnings Call Transcript 2021-Q4

[Operator]

Good morning, everyone. Welcome to the Boyd Group Services Inc. Fourth Quarter and Year-end 2021 Results Conference Call.

Listeners are reminded that certain matters discussed in today's conference call or answers that may be given to questions asked could constitute forward-looking statements that are subject to risks and uncertainties related to Boyd's future financial or business performance. Actual results could differ materially from those anticipated in these forward-looking statements. The risk factors that may affect results are detailed in Boyd's annual information form and other periodic filings and registration statements, and you can access these documents at SEDAR's database found at sedar.com.

I'd like to remind everyone that this conference call is being recorded today, Wednesday, March 23, 2022. I would now like to introduce Mr. Tim O'Day, President and Chief Executive Officer of Boyd Group Services. Please go ahead, Mr. O'Day.

[Timothy O'Day, executive]

Thank you, operator, and good morning, everyone, and thank you for joining us for today's call. On the call with me today is Pat Pathipati, our Executive Vice President and Chief Financial Officer.

We released our 2021 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 and analysis on our website at boydgroup.com.

Our news release, financial statements and MD&A have also been filed on SEDAR this morning. On today's call, we will discuss the financial results for the 3-month period ended December 31, 2021, provide a general business update and discuss our long-term growth strategy. We will then open the call for questions.

On January 2, 2020, I was appointed President and CEO of Boyd Group Services Inc. and concurrent with this change, Brock Bulbuck moved into the role of Executive Chair. On December 31, 2021, our transition plan was completed and Brock retired from his management role. I would like to thank Brock for his many years of dedicated service to Boyd and for the great support he provided during the 2-year transition period. I look forward to Brock's continued contributions to Boyd as a member of our Board of Directors.

As was previously communicated, beginning January 1, 2021, Boyd is reporting results in U.S. dollars. This change has been made in order to better reflect the company's business activities, given the significance of U.S.-denominated revenues.

Financial results in the first half of 2021 showed steady improvement as demand for services began to recover from the COVID-19 pandemic that emerged in March of 2020. However, as demand continued to increase during the second half of 2021 and approached pre-pandemic levels in most of our U.S. markets, Boyd's ability to service this demand was meaningfully impacted by a tight labor market and supply chain disruptions. The collision repair industry is experiencing significant and unprecedented competition for talent and in particular, a limited pool of qualified technicians and estimators.

As a result, Boyd experienced increased wage costs in order to both retain and recruit employees causing pressure on labor margins and operating expenses. During 2021, we were able to add a record 127 new locations, including 101 locations through acquisition, 10 start-up locations and 16 locations operated as intake centers.

Unfortunately, these new locations are also experiencing margin challenges as a result of the tight labor market, wage inflation and supply chain disruptions as well as sales per location levels that are below pre-pandemic levels due to capacity constraints.

For the year ended December 31, 2021, we reported sales of $1.9 billion, an increase of 19.9% over the prior year, driven by same-store sales increases of 7% and contributions from 154 new locations that had not been in operation for the full comparative period.

Gross margin decreased to 44.8% compared to 46% in the comparative period. The gross margin percentage was negatively impacted by reduced parts and labor margins, a higher mix of parts in relation to labor and these impacts were partially offset by higher mix of glass sales in relation to collision sales.

During the second half of 2021, Boyd faced increasing supply chain disruptions which resulted in a negative impact on gross margins as a higher percentage of parts had to be sourced from non-primary suppliers in order to complete repairs and fewer aftermarket parts were available. Labor margins were negatively impacted by the extraordinarily tight labor market, which resulted in increased wage cost to both retain and recruit staff. The shortage of labor also resulted in a higher mix of part sales in relation to labor.

The Canada Emergency Wage Subsidy, or CEWS, was put into place on April 11, 2020, and remain in place until October 23, 2021. As was the objective of the program, Boyd continued to employ and incur costs for employees that would have otherwise been furloughed absent the wage subsidies. The recognition of CEWS related to direct labor was approximately $4 million in the year ended December 31, 2021, compared to $5.3 million in the prior year.

Operating expenses increased $120.9 million when compared to the same period of the prior year, primarily due to the growth in the number of locations as well as the COVID-19-related cost reductions that impacted the prior year.

Operating expenses benefited from the CEWS of approximately $5.8 million as compared to $7.4 million in the same period of the prior year, which helped mitigate incremental COVID-19 indirect wage costs.

Operating expenses were negatively impacted by the extraordinarily tight labor market, which, as noted, resulted in increased wage costs to both retain and recruit staff.

Adjusted EBITDA for the year ended December 31, 2021, was $219.5 million compared to $220 million in the same period of the prior year. The $0.5 million decrease was primarily the result of lower gross margin percentage and higher levels of operating expenses, which more than offset the incremental impact of location growth. We reported net earnings of $23.5 million compared to $44.1 million in the same period of the prior year. Adjusted net earnings per share decreased from $1.97 to $1.30. The decrease in adjusted net earnings per share is primarily attributed to a lower gross margin percentage and higher levels of operating expenses, which more than offset the impact of incremental location growth.

Now moving on to our Q4 results. During the fourth quarter, we recorded sales of $516.2 million, a 27.9% increase when compared to the same period of 2020. Our same-store sales, excluding foreign exchange, increased by 8.5% in the fourth quarter. The improvement in same-store sales was a result of the continued return of business following the slowdown caused by the COVID-19 pandemic that began in March of 2020.

The increase in same-store sales percentage was constrained by production challenges, including technician and administrative staffing capacity constraints as well as supply chain disruption which impacted sales levels during the fourth quarter of 2021.

Sales growth of $79 million was attributable to incremental sales generated from 131 new locations. Gross margin was 43.5% for the fourth quarter of '21 compared to 45.8% achieved in the same period of 2020. The gross margin percentage was negatively impacted by reduced parts and labor margins and a higher mix of part sales in relation to labor.

During the fourth quarter of 2021, Boyd continued to face supply chain disruptions which resulted in a negative impact on margins as a higher percentage of parts had to be sourced from non-primary suppliers in order to complete repairs.

Labor margins were negatively impacted by the extraordinarily tight labor market, which resulted in increased wage costs to both retain and recruit staff. The shortage of labor also resulted in a higher mix of part sales in relation to labor.

Operating expenses for the fourth quarter of 2021 were $167.2 million or 32.4% of sales compared to 30.9% in the same period of 2020. Operating expenses were negatively impacted by the extraordinarily tight labor market, and fourth quarter operating expenses for both periods benefited from year-end expense accrual reductions as certain expense estimates were firmed up at amounts that were lower than previously estimated and accrued.

Adjusted EBITDA or EBITDA adjusted for fair value adjustments to financial instruments and costs related to acquisitions and transactions was $57.3 million, a decrease of 5.1% over the same period of 2020. The decrease was primarily the result of lower gross margin percentage and higher levels of operating expenses, partially offset by proceeds from CEWS. In addition, adjusted EBITDA for the 3 months ended December 31, 2021, benefited from CEWS in the amount of approximately $2.3 million.

Net earnings for the fourth quarter of 2021 was $4.9 million compared to $16.3 million in the same period of 2020. Excluding fair value adjustments and acquisition and transaction costs, adjusted net earnings for the fourth quarter of 2021 was $5.9 million or $0.28 per share compared to adjusted net earnings of $14.6 million or $0.68 per share in the same period of the prior year.

Adjusted net earnings for the period was impacted by lower gross margin percentage and higher levels of operating expenses as well as location growth. Our new locations are subject to the same labor and supply challenges that Boyd is currently facing across its business. These market conditions are impacting the results that can be achieved in the short term while new location growth has resulted in increased levels of depreciation and amortization.

At the end of the year, we had total debt net of cash of $957.7 million compared to $896.9 million at September 30, 2021, and $538.5 million at the end of 2020. Debt, net of cash, increased when compared to December 31, 2020, primarily as a result of acquisition activity, including draws on the revolving credit facility as well as increased seller notes and lease liabilities.

Based on the confidence we have in our business, we announced an increase to our dividends by 2.1% to $0.576 per share on an annualized basis in Canadian dollars beginning in the fourth quarter of 2021. This is the 14th consecutive year we've increased dividends to shareholders.

During 2022, the company expects to make cash capital expenditures of approximately 1.6% of sales. This excludes those capital expenditures related to the acquisition and development of new locations and the investment in the expansion of the WOW Operating Way practices through our corporate applications and process improvement efficiency projects.

During 2021, the company invested approximately $5.6 million in LED lighting in order to reduce energy consumption and enhance the shop-work environment. Continued investment in LED lighting will not only provide environmental and social benefits, but also achieve accretive returns on invested capital.

Additionally, the company is expanding its WOW Operating Way practices to corporate business processes. The related technology and process efficiency project will result in an additional $1 million to $1.5 million investment before the project is completed in the second quarter of 2022 and will be expected to streamline various processes as well as generate economic returns after the project is fully implemented.

During the year ended December 31, 2021, the company spent approximately $4.5 million on the WOW Operating Way expansion to corporate business processes.

In November of 2020, we announced our new 5-year growth strategy in which Boyd intends to, again, double the size of our business over the 5-year period from 2021 to 2025 based on 2019 constant currency revenues, implying a compound annual growth rate of 15%. During 2021, we were able to add a record 127 new locations, including 101 locations through acquisition, 10 start-up locations and 16 locations operating as intake centers.

In the short term, we are primarily focused on addressing the labor shortage for our core business. In the long term, we remain confident in our business model and its ability to increase market share by expanding Boyd's presence in North America through new locations and organic growth from Boyd's existing operations. We are committed to addressing the labor market challenges through initiatives such as our technician development program, and we are working to more than double the number of trainees in the program to help meet our future needs. We continue to increase recruitment support staff to improve lead generation and follow-up, proactively evaluate compensation levels and make appropriate adjustments to ensure the company remains competitive in a rapidly changing environment and drive high levels of execution for onboarding and orientation programs to increase retention. We continue to work with key suppliers to source parts at normal margins, but we'll continue to use OE parts in place of aftermarket parts when necessary in order to complete repairs for our clients.

We have made progress in addressing margin challenges by securing an unprecedented number of rate increases from clients for both labor and paint materials. To date, the vast majority of our clients have increased rates and the level of increase is much higher than we have ever seen historically. However, further increases are required to reflect the current environment so that the industry can attract and retain the talent needed to properly serve our customers and complete repairs on a timely basis. We continue to actively pursue and push for the necessary pricing increases.

Given how significantly and rapidly wage costs have increased and the continued tight labor market, it will take some time to achieve all of the needed price adjustments and margins will continue to be impacted in the near term.

In addition, as price increases are received, they are applied only to new work so that the work that is already in process or that has been assigned are subject to previous pricing, which delays the pricing benefit.

By contrast, wage increases are immediately realized in our costs. And as a result, it will take time for new rates to be realized and improve gross margin. Thus far, in the first quarter of 2022, the majority of the benefits of the price increases have not been realized.

Unlike 1 year ago, demand for Boyd Services is continuing to substantially exceed capacities. The ability to service demand continues to be constrained by labor availability and part supply chain issues with the accompanying margin pressure continuing into the first quarter of 2022.

During the first quarter of 2022, the Omicron variant negatively impacted capacity constraints with increased levels of absenteeism relative to earlier periods in the pandemic. In addition, the first quarter is burdened by higher payroll taxes that occur early in the year while the fourth quarter of 2021 benefited from expense accrual reductions as certain expense estimates were firmed up at amounts that were lower than previously estimated and accrued.

The Canada Employment Wage Subsidy also ended in the fourth quarter of 2021. As a result, these factors caused operating expenses to be higher in terms of dollars and a percentage of sales compared to the fourth quarter and have a dampening effect on adjusted EBITDA and adjusted net earnings.

Throughout 2021, we've increased our focus on ESG and are proud to announce the publishing of our first ESG report this month, which outlines our priority areas in each of environmental, social and governance pillars. The report reflects our existing efforts to embed sustainability into our organization and sets a baseline for future performance as we strive to deliver against our mission to wow all of our customers with quality work and best-in-class service. We recognize that we have the potential to deliver significant positive impacts to society and the environment. Our ESG report builds on existing strengths to ensure robust environmental, social and governance principles and practices across our company. Our approach is informed by the priorities of our key stakeholders, including our employees, our investors, our customers and our communities as well as local and global developments that define the context in which we operate.

In summary and in closing, I continue to be incredibly proud of our team. We've adjusted to this new environment and are working hard to position us well for the future. With that, I would now like to open the call for questions. Operator?

[Operator]

[Operator Instructions] And we'll go first to Michael Doumet with ScotiaCapital.

[Michael Doumet, analyst]

On the negotiated rate increase to date, what are the mechanisms exactly for that to flow through the P&L? And does that get more fully reflected in the Q2? And also, any chance you can quantify the rate increase? How much more of the wage inflation to date this will cover? Or how much more you'll need for the wage inflation to date to get covered?

[Timothy O'Day, executive]

Yes, we're not prepared to answer the second question, Michael, but the mechanism for getting the rate increases into our revenue, when we get an opportunity or an assignment from an insurance company, and we write an initial estimate and schedule that out, the pricing that's attached to that estimate is whatever was in place at the time that we uploaded the estimate.

So as a result, for all the work that we've estimated and as we've noted, we've got significant backlogs, it has the previous pricing in place, not the current pricing. So we really need to work through that backlog for the pricing to show up. So what we're satisfied with the first round of increases, but absolutely need much more in the way of increases from our insurance clients. But we're satisfied it really won't be reflected significantly in Q1. I also noted that we -- our wage cost increases hit our costs immediately versus having a similar delay to what we have on the revenue side. So that's the reason that we've indicated that we wouldn't see much in the way of margin relief in the first quarter.

[Narendra Pathipati, executive]

So Michael, to supplement, yes. To answer your question, yes, it will flow through in Q2. The price increases we have negotiated, whatever we have [ in rates ] in Q1. And as we disclosed, most of them have not been. They'll flow through in Q2. We realize that.

[Timothy O'Day, executive]

And the one thing that you need to keep in mind is that the labor market is still very tight. We're working hard to build our staff and we're going to pay competitively to attract the staff that we need, which could put some near-term pressure on margins as a result.

[Michael Doumet, analyst]

Got it. Okay. And then I guess, according to the Bureau of Labor Statistics, the way they break out labor inflation in the industry does look like it's decelerating on a quarter-over-quarter basis. Again, can you confirm whether you're seeing a similar trend?

And I guess with that in mind, and it relates to the first question, are you confident that the first round of price increases can outpace the wage inflation or is enough to drive the gross margin improvement by Q2?

[Timothy O'Day, executive]

No. I think we got more work to do on price increases. We -- I think it was very difficult for insurance clients to quickly recognize the pressure the industry was under and respond to it. They have responded to it, but I would say they responded to what we were seeing in the third quarter of last year, and that's a continuing pressure that the industry has been under to attract more labor into it. So there's no question that we're going to -- and we are going back to our clients and seeking further rate relief. And we don't yet know -- I don't have good data on whether the wages have stabilized. But given the shortage of technicians and my expectation is that the market is going to be tight for some time, I don't know that we can conclude that wages have stabilized yet.

[Narendra Pathipati, executive]

Yes. We want to get to pre-pandemic levels with the price increases we have realized. We need more. That's point number one. Point number two, to keep the talent or attract the talent in the industry, we need to pay more competitive wages. So it's important to get more price increases from the clients.

[Timothy O'Day, executive]

And I think -- well, Pat said, more competitive. We believe we are competitive, but the industry lacks sufficient capacity in terms of technical talent. And we're going to have to continue to make our industry more attractive through higher wages to attract the talent we need to service the business that's really at our door now.

[Operator]

We'll go next to Chris Murray with ATB Capital Markets.

[Chris Murray, analyst]

I guess my first question, maybe just following on this a little bit. Maybe around the revenue side, thinking about just even lapping some of the year-over-year comps, certainly, we saw some pretty negative same-store sales numbers early last year. And even if you look at Q4's number, it probably wasn't quite as strong as we're thinking. Can you maybe give us an idea of how quickly you're able to start clearing some of these backlogs? And is this something -- like this, call it, this restriction, should we be expecting this is going to persist for maybe a couple of more quarters before you kind of get caught back up into normal levels?

[Timothy O'Day, executive]

There are 2 components to the building work in process. One is not having enough labor to process the work. The other is the supply chain issues. And with regard to the supply chain issues, we find that we have many repairs that are substantially complete, but missing a part and cannot be safely delivered as a result. So part of our WIP buildup is related to the supply chain challenge issues. And we've really not seen much mitigation of supply chain challenges to date. And it's difficult to say when that might happen. Some of the feedback we've received from OEs would indicate that it isn't going to happen quickly. But time will tell on that.

On the labor side, as I've said, it's a very tight labor market. We're battling every day to attract the talent we need in the organization to process the work, and we're making some progress. We've not yet made the progress that we need to make, but we're going to continue to focus on recruiting that talent into our organization, putting programs in place and executing those programs to retain it. And importantly, for the long run, building our technician development program up.

[Narendra Pathipati, executive]

Chris, you asked about the same-store sales growth, how long it takes to get to pre-COVID. If you look at the Q4 of 2020, it was like our same-store sales declined by 12.6%. And the recent quarter, we reported an increase of 8.5%. So if you adjust for those things, if you compound them, you step down by 5% compared to the pre-COVID level. And in Q1, thus far in the quarter, obviously, the quarter is not over. But thus far in the quarter, so we are seeing same-store sales growth to be consistent with what we have experienced. So if you put that, so it should exceed by the end of Q1 to the pre-pandemic level.

[Chris Murray, analyst]

Okay. That's helpful. My other question is around sort of acquisitions and acquisition strategy. And look, it's fair to say that you're not the only folks in the industry having some pressures. I think there was one of your major competitors who was dealing with either refinancing some pretty major debt or bankruptcy filing. What is this doing -- I guess, 2 parts to this question. What is this doing to sellers in terms of you guys being able to acquire? And I guess the second part of this is you've got some revisions that you put in place to your credit facility. Does that, in any way, impact the acquisition strategy this year?

[Narendra Pathipati, executive]

In terms of the acquisitions, actually, Chris, acquisitions are lumpy. We had a phenomenal year. We added 127 locations. And so we don't have to do as many this year. And we are confident about our 5-year target, so we are reiterating our confidence in meeting our growth targets. That's point number one.

Number two, relating to the trade agreements. So this is a proactive move. It's not a covenant breach issue. This is to enhance the financial flexibility by having more liquidity. That's the reason we chose to get the covenant flex in decrement.

[Operator]

We'll go next to Nauman Satti with Laurentian Bank.

[Nauman Satti, analyst]

So my first question, I think you've mentioned that most of the clients have increased the pricing. I'm just wondering, the first part, the ones that are left, is it just a matter of time that they'll do it? And the second part about the pricing is you guys just have the first round. How confident that you are that for the second round, insurance companies would be more open to the discussions the way they had for the first round?

[Timothy O'Day, executive]

On your first question, it is a matter of timing for those that have not yet provided price relief. I'm very confident that we will receive the price relief. There's tremendous market pressure for price reliefs in the collision repair industry. Our margins are not where they need to be to properly serve our clients. And the significant increase in length of repair, which is reported by Enterprise Rent-A-Car in the U.S. is very bad for insurance clients from a customer service and a rental cost standpoint. So there are some economic reasons for them to help us increase our capacity. So the -- so I believe that I'm confident that the clients that have not moved will move and should move fairly shortly.

In terms of the second round, there's really no choice. I think what will end up happening in the industry, and I believe it's even beginning to happen now, is insurance clients that haven't moved, some repairers will begin to disfavor their work in exchange of work that has higher margins. And that is an untenable position for an insurance client in the long run, so I think that will help to normalize it. Even today, we see insurance clients that have moved their rates up to levels that are more reflective of what's currently needed and others that have not. And so that will be our early target will be to normalize that. And then to continue to press for what we need so that the industry can build the talent it needs to properly service our customers.

[Nauman Satti, analyst]

Okay. No, that's great color. And secondly, could you just speak about technician shortages? How is that trending during the quarter? I mean -- has it improved in early March versus, let's say, in December or it's pretty much still the same?

[Timothy O'Day, executive]

We don't comment specifically on numbers on that. We're making slow progress towards it, and we're focused on the actions that will improve our ability to make progress on that such as expanding the size of our field recruitment efforts so that we're closer to the ground and more responsive. When we get applicants, our retention initiatives to make sure that we do a good job of onboarding and staying in touch with our team and of course, our technician development program. And we've got some other entry-level training programs so that we can bring new talent into the organization and grow it into the key positions that we're short on.

[Nauman Satti, analyst]

Okay. And maybe just one last one. So you've mentioned that some of the new locations that you've acquired, they're also facing these challenges from supply shortages and labor shortages. I'm just wondering, is the market really competitive on the M&A side that you guys have to go and do these location acquisition during this period? Or is it just that you feel that the turnaround for that new locations would be pretty quick? Clearly, the idea is to ask why be aggressive on that front if that's a place that's still challenging.

[Timothy O'Day, executive]

Yes. Well, first, we had a -- fortunately and unfortunately, we had a very good year of growth last year. So we really were ahead of maybe our internal thinking on that last year. And some of those businesses are impacted by the same forces that are impacting our business overall. We believe that there is still good growth opportunities that make sense to execute on today, even in a constrained labor environment. So we will continue to grow, but we do have a little more focus right now on integrating and getting the operating results from the growth from last year on track. And we think we have a big same-store sales or a big revenue improvement opportunity by putting some of our focus into that. So we're continuing to focus on growth. But I would say we have an intense focus on the performance of our existing network.

[Operator]

We'll go next to Maggie MacDougall with Stifel.

[Margaret MacDougall, analyst]

I apologize for the background noise. I'm sitting on an airplane here, so I hope you can hear me. My question is really just around the covenant flex that was granted, and you touched on the rationale as being essentially to enable you to access your liquidity. Can you give us an idea of the capacity that you're able to access in terms of drawdown on your credit facilities? And if this was just simply a measure out of prudence given the, I guess, uncertain outlook around inflation and pricing, especially with regards to timing or if we should think about this differently.

[Narendra Pathipati, executive]

No, I think it's -- yes, as you pointed, Maggie, the intent here is to increase the capacity. And also, I cannot give you a number because it's a moving target. It's at [ 4% ], it goes to [ 4.5% ] and [ 4.25% ]. But I can provide the framework, how it works. So first of all, the covenant [ design ], senior funded debt leverage ratio and it's measured on a pre-IFRS 16 basis. So you have to make 3 adjustments. The first one is in terms of the IFRS adjustments, so you have to back off in calculating.

And the second one is you have to back out the vendor note. We have approximately $54 million of our vendor notes. So you have to back that off. And we do get the benefit on the EBITDA side for the pro forma EBITDA too for a year or so after the time we execute. So you do get a better denominator in terms of EBITDA. So if you make those 3 adjustments, you'll see how much room we have. And again, our intent is not to provide exact information because it changes and we don't want to give a static number and keep on updating. You could easily calculate based on those 3 factors. And again, we have ample capacity at this point in time.

[Timothy O'Day, executive]

And I think the changes put us in a good position to take advantage of opportunities. To the extent that opportunities emerge from this difficult environment, we're very well positioned on that. Our balance sheet remains very strong. And so that was part of the reasoning as well.

[Margaret MacDougall, analyst]

Okay. And if I may, just one follow-up on that, Tim. Have you seen any signs that the large quantities of mom-and-pops, who I'm assuming operate at lower margins than you, are indeed looking to be [ active ] at this point?

[Timothy O'Day, executive]

I'm not sure we've seen an acceleration of it. There's always been an ample supply of single-shop operators that are interested in selling. And I would say there's still an ample supply today.

[Operator]

We'll go next to David Newman with Desjardins.

[David Newman, analyst]

In terms of parts supply, obviously, shipping rate, freight costs and things like that remain elevated and you guys are using, obviously, alternative suppliers, OE parts and things like that to solve some of the issues, and supply chain challenges still remain. And I know it's a cost pass-through to the P&C insurers. But can you dynamically pass through all that? And I'm also thinking like some of the commodity inflation we're thinking on what will end up going through the supply chain for parts, for OE parts and things like that. Or do you have -- do you get squeezed on the markup at all to share the pain in this kind of environment? Just on the parts side, I know we've killed the labor issue.

[Timothy O'Day, executive]

I think to date, the challenges we've had on the parts supply chain side are really a lack of availability, which is suspending repairs in process or delaying bringing a repair in or when the part is not available from our primary supplier, and we buy it at discount levels that aren't attractive to us.

In addition, if the aftermarket isn't available, which has been -- aftermarket supply has been more challenged than OE, although OE has been challenging, our margins on aftermarket are better than our margins at OE. So that's had a negative impact.

But to answer your question, if the part pricing goes up, which it has, we're still able to pass that through. So we're buying from a primary supplier and the part price goes up, that's a pass-through not negatively impacting margin. So the negative impact is really suppliers that don't have -- that we do business with that don't have the part and sourcing it elsewhere and the shift from aftermarket to OE. We have incurred modest freight charges that can be difficult to pass through. But I would say in the scheme of things, that's pretty insignificant.

[David Newman, analyst]

Okay. And then the second question just relates to -- we talked about the financials and the progression and some of the margins went up. But just from a shop floor productivity point of view, are you seeing any incremental improvements in terms of the work in process, maybe the length of rentals, cycle times, all that sort of thing? Are you seeing any incremental improvement as you kind of balance this equation between labor and parts?

[Timothy O'Day, executive]

I would say that we have not seen incremental improvement. And I would attribute much of that to the supply chain challenges like the rentals continue to go up. I believe, in December, it was over 19 days in the U.S., which was extraordinary. But I think that's reflective of primarily the supply chain challenges, but certainly, the labor as well. When repairs right now get vehicles towed in and there are already overcapacity, they have to balance out repairing that vehicle that they have no choice to accept with drivable vehicles that may be in process. So until we build our labor to the point where we can service this work and the supply chain disruption is reduced, I think we'll continue to see elevated cycle times.

[Narendra Pathipati, executive]

If you look at the -- not just our issues. The industry as a whole, they're experiencing these 2 challenges. And as Tim pointed out, if we look at the beginning of the quarter, it was the 17.8 days and this is for the industry. End of the quarter, it's 19.4. So that has increased because of the capacity constraint and also because of the supply chain disruption.

[David Newman, analyst]

Makes sense. And 2 quick ones for me. Just obviously, with these interest rate increases that we're seeing, and I know that private market valuations were a lot different than public market valuations, et cetera. And this has been kind of the PE theme that's kind of crept into everything in the industry recently with all the PEs acquiring some of these MSOs and single shops, et cetera. One of your major competitors, [ PE bought a PE back ], and you've also got a lot of PEs stepping and buying MSOs. With these rate increases and given that the leverage that these guys deploy, I would assume that going forward, at some point, the bandwidth of M&A that you guys have could be very, very significant.

[Timothy O'Day, executive]

I think we're well positioned versus our competitors on this.

[Narendra Pathipati, executive]

Yes. Absolutely right, David. I think you hit the nail on its head. Like if you look at the PE, their model is to have high leverage. And in the rising interest rate environment and with the compressed EBITDA margins, they'll find it difficult to continue that path aggressively unless the sponsors decide to infuse additional equity. So from that past, we are positioned much better. And if you look at the large 8 or the top 8, other than us, all of others are controlled by PEs and all of them have higher leverage than us. So we are well positioned.

[David Newman, analyst]

Okay. And last one for me. I'm selfishly going to ask one more because it's my last call with you guys from a research seat, and I look forward to supporting you from a sales seat going forward. But just the accrual reversals in 4Q, on 4Q EBITDA, Pat, maybe just kind of ballpark, what was that kind of the impact there on the reversals?

[Narendra Pathipati, executive]

And again, we don't give a specific factor or the specific numbers, David, but I'll help you here. The 3 things that are going to impact from Q4 to Q1, the first one is accruals. We take a lot of year-end accrual, so that is accretive to the EBITDA. The second one is the payroll taxes. Typically, you max out around Q3, so Q4 will have very little. So in Q1, you reset the clock for unemployment, the social security and stuff like that. So that's the second factor. The third one is the CEWS, we commented Q4 benefited by $2.3 million, so you won't see that in Q1. So those are the 3 things that are going to have a negative impact. Let me give some color. If you look at Q4 of 2020 to Q1 up to 2021, I'm not saying that's going to happen here. But just to provide the context, in Q4 of 2020, we had a 30.9% OpEx ratio. In the Q1, that was 33.5%. So it was up by almost 250 basis points. I'm not suggesting it will be 250, but I'm saying it shows the order of magnitude, the impact of the OpEx in the part of these accruals offset.

[Operator]

We'll go next to Jonathan Lamers of BMO Capital Markets.

[Jonathan Lamers, analyst]

Most of my questions were answered. One follow-up, Pat. During the Q&A earlier, did you say that at Q1 quarter end, same-store sales should exceed 2019 levels despite the technician shortages?

[Narendra Pathipati, executive]

So I was illustrating -- because the question was on the same-store sales growth, when we would get back to the pre-pandemic level. And I was illustrating in Q4 of 2020, the same-store declined by 12.6%. And in Q4 of 2021, the same-store sales exceeded by 8.5%. So if you compound the two, net-net, the same-store sales were down by approximately 5% at the end of Q4. And I told thus far in the quarter, we are seeing the same-store sales growth consistent with the fourth quarter. So fourth quarter, I'm not saying it's exactly the same. But if you add that 8.5% to this 95%, that would exceed the 100% at the pre-pandemic level. That was the point I was trying to illustrate.

[Jonathan Lamers, analyst]

Okay. That's clear. Labor shortages have been an issue for Boyd for several years now. So I think the tricky thing for investors to sort out is how far below 2019 levels are volumes now? And can you get operating margins back to historical levels, absent the throughput that really depends on the technicians?

[Timothy O'Day, executive]

Yes. I think this is not just a Boyd issue. This is an industry issue and it affects our customers. And so the solution is for the industry to build its capacity. And to do that, we have to attract new labor into the industry and to attract it from, say, the mechanical repair industry or other industries where skills -- where somebody could become proficient in our trade in a reasonable period of time. Compensation levels in our industry are going to have to go up. And in order for that to happen, insurers are going to have to pay more for the repairs. Otherwise, we won't be able to attract the labor. So we're going to continue -- and as I said earlier, it is absolutely an insurer's best interest for their customers to be very satisfied with a timely quality repair when they have a claim. Otherwise, they're very likely to change insurance companies.

So I think there is motivation all around to do the right thing so that we can attract and retain the talent in our industry. But these aren't things that happen overnight because it requires adjustments for your business. The insurers have to raise rates, which if you've been reading the news on the automotive claims front, insurers have been taking rate right and left and in significant percentages. And while collision repair isn't the only segment they're covering for in that risk, it is a sizable piece of it. So I think that, unfortunately, premiums for consumers will continue to go up. And I think that will continue to get passed through until we have stabilization of labor in our industry, which is what's necessary for us to really to service our customer properly.

[Jonathan Lamers, analyst]

One follow-up on that, if I can. So now that you've secured this first round of rate increases which were unprecedented, will the next set of negotiations or the next round of rate increases be easier? Or will those be contingent on consumer premiums going up first, for example, and they'll be a bit tougher?

[Timothy O'Day, executive]

Yes. I don't know the answer to that. I can tell you that we are going to continue to pursue increases aggressively because that's what's needed for our business to properly service our customers, and we'll help our customers understand that. I did mention earlier that when we look at the market right now, and we've been -- I think we've been -- patient is probably the wrong word, but I think we've accepted insurers moving at different paces to get their rates to where they need to be.

At some point, given the significant lack of capacity versus the demand that exists, the industry will have no choice but to favor work from insurers who are paying rates that allow us to make an acceptable level of margin.

And so I don't know that that's happened broadly yet. But it has to happen because the returns we're getting right now aren't adequate, and we have all the work we could want at our door. So I think that there will be continuing pressure, particularly from those insurers that have not yet gotten to competitive rates versus their peers, and we'll continue to push from there.

[Operator]

We'll go next to Bret Jordan with Jefferies.

[Bret Jordan, analyst]

On the parts supply chain challenges, could you talk maybe about the cadence? Are you seeing any improvement in availability and maybe carve out between OE and aftermarket? Is one looking better than the other going into Q1, Q2?

[Timothy O'Day, executive]

I don't know anything about Q2 yet. I would say thus far in Q1, we have not seen any meaningful improvement. The number of parts that are on back order across our network are at the highest levels that they've been, and we have a substantial portion of our work in process that's not -- that hasn't arrived recently that's waiting for parts to be completed.

[Bret Jordan, analyst]

And you said OE is in better shape than aftermarket. Could you maybe talk about where OE percentage of mix was this quarter versus a year ago or maybe pre-COVID? How much have you shifted back to OE?

[Timothy O'Day, executive]

We definitely have seen a shift toward OE from aftermarket. But the OE parts, quite frankly, those are the big problem because if we can't get an aftermarket part, we can use an OE part to complete the repair. So the real issue we've got with our WIP is a lack of OE part availability, and it's across the board from all manufacturers.

[Bret Jordan, analyst]

Okay. So I guess how do we think about like the mix of, obviously, the margin is better on aftermarket, but as a percentage of your parts usage, could you talk about where aftermarket is versus the prior year?

[Timothy O'Day, executive]

I don't think we disclose that. I don't have it in front of me anyway, Bret, but aftermarket usage is down relative to OE usage. And that's one of the drivers of the negative impact on our part margin because as you said, aftermarket parts typically have a higher gross margin and they are a lower cost to our customers. So it's unfortunate that there's a lack of availability, but I think fill rates on the aftermarket side, especially timely fill rates, are not what they were before the pandemic.

[Narendra Pathipati, executive]

Bret, I think you know this already. We have a majority of our parts are OE parts. So the aftermarket is a minority chunk of our usage.

[Operator]

We'll go next to Steve Hansen with Raymond James.

[Steven Hansen, analyst]

I just want to go back to your comments around the price increases not being realized thus far in Q1. I think we can all understand the concept of a delay given the backlog. But even if I look at the industry backlogs running, call it, 5, 6 weeks, which is unprecedented, I would still think that you would have some of that price benefit starting to roll through in Q1 if you had those price increases secured as of the first of the year anyways. So maybe just help us walk through what you mean by they're not rolling through as yet and whether or not it's just that the labor is running harder and faster. Or are the price increases actually running through the quarter so far? I'm just trying to get a sense for why the lag would be so material.

[Timothy O'Day, executive]

I think we've seen some benefit on the revenue side from the price increases in Q1, but we've also continued to see wage pressure. But we've certainly not seen anywhere near close to the full benefit of the rates that we've negotiated. And that 6-week lag is pretty significant. And we also have to consider that the average repair time right now is -- it used to be maybe 12 days. Now it's significantly higher than that. So we don't book the revenue until the car is gone or repair is completed. So it's -- there's a pretty good lag from the time we get a rate increase to when you'll see it in our margins.

[Steven Hansen, analyst]

Okay. That's helpful. And then just on the idea of going back to your customers again. For further rate increases, you suggest that it's going to be effectively necessary or a certainty. But how frequent is that, Tim? Is that something you're going to be doing quarterly -- on a quarterly basis for all of these customers? If you're in a rationing effect of viable capacity, I have to think you're going to be pushing hard. But is it going to be a regimented schedule that you're going to be going back on? Or is it just as you feel? I mean we're just trying to get a sense for how you protect yourself here through the balance of this year in particular.

[Timothy O'Day, executive]

Yes. I'm confident that all of our key clients know today that whatever we've gotten isn't going to cover the need and that we'll be asking for more, and we are asking for more. So I think it will be fairly constant. We'll use some analytics to identify where we think the best opportunities are and put our focus on that. But I would expect that we're going to be going back for rate for several months.

[Narendra Pathipati, executive]

And Steve, it's difficult to comment on whether it's going to go back every quarter. It depends on how much increase we're going to get because we want to be very competitive with our other industries. And that's the way we can attract and retain people.

[Timothy O'Day, executive]

Yes. And it's not a matter of taking one insurance client and negotiating them -- with them nationally. Many times or most of the time, we're looking at the rates on a market basis and then comparing it to what we need, what other clients are paying and then making our case based on that.

[Steven Hansen, analyst]

Understood. Okay. That's helpful. And then just turning back to the M&A side again. It's been suggested at least somewhat publicly that you guys have halted all M&A recently. But I clearly don't think that's the case. But just trying to get a sense of your comments on the M&A track record going forward here. I think we need to all understand that the plan has not changed and that the 5-year plan has been rearticulated here. But I want to understand just clearly that the M&A path is still one that you're continuing on.

[Timothy O'Day, executive]

Yes. As I said in my conference call script, we remain confident in our ability to double our revenue from 2019 by the end of 2025 and growth by acquisition or greenfield, brownfield opening is a very key part of that. I'm not sure where there was ever any indication that we've suspended growth. We've -- first of all, we're not doing that. Secondly, we've never publicly stated that. So to the extent that, that was out there, it was wrong. We remain committed to growth. We are very focused -- as I said earlier, we are very focused on driving the results of our core operations. But we've got separate business development resources that are focused on growth and will remain focused on growth. So growth can be lumpy, so I'm not saying that -- we added 127 locations last year. That doesn't mean we'll open 127 locations this year, but we will continue to grow.

[Steven Hansen, analyst]

Okay. Great. Helpful. And then just -- maybe just last one, I'll just ask you directly because I think we're all trying to get there. But margin improvement, again, sequentially, I'm thinking off of fourth quarter doesn't sound like it's necessarily in the cards in Q1. Maybe it's hard to tell. But I mean, maybe then I'll ask that question first is can we get any sequential margin improvement given the accrual differentials and the payroll tax issues that you've mentioned? And if not in Q1, can we get it in Q2 against sequential year-over-year?

[Narendra Pathipati, executive]

Yes. And again, Steve, well, we commented -- we cannot give exact guidance on the margin improvement, but I commented about the impact of OpEx, how it behaved in the past between Q4 and Q1 when you didn't have the benefits of accruals, when we didn't have -- when the payroll taxes had reset. On the top of that this time, we had no CEWS benefit in Q1.

So given those 3 factors, in the past, the increase was approximately 250 basis points. Again, I'm not suggesting that's the increase you expect or you should expect. But just due to the framework, it's not like a very small amount. It's a pretty meaningful amount in terms of the hit or the impact of those factors. But beyond that, we cannot give exact guidance.

[Timothy O'Day, executive]

But historically, our expenses in Q1 have been higher than they were by a meaningful level.

[Narendra Pathipati, executive]

Yes. Yes, because of those 3 factors, yes. And another one is in terms of the first store sales. So you have to see where they are now compared to where they were before and then the under-absorption of the fixed costs. Those are all the factors that contribute to the delta I just alluded to.

[Steven Hansen, analyst]

Sure. I understand that. I'm just trying to get a sense for the price increases that you've secured and the future price increases that are coming. There's no visibility at this juncture, I guess, on when and if you'll be getting sequential improvement in margins. I guess, that's the question.

[Timothy O'Day, executive]

We did say that in Q1 that you shouldn't expect to see incremental improvement in the gross margin.

[Operator]

We'll go next to Daryl Young with TD Securities.

[Daryl Young, analyst]

Just a question. Some of the insurance companies have been highlighting a need for greater integration, greater use of technology, potentially even parts procurement relationships on their side. Just wondering if you can give us a bit of color on what some of those initiatives are and whether it's a benefit or a potential risk to yourself and the large MSO model.

[Timothy O'Day, executive]

In the -- I'm not familiar with the details, but my understanding is that it's likely where an insurance carrier may develop or have a relationship with a parts supplier, that may provide some favor to the insurer directly from the parts supplier for committing to volume from that supplier. So I think those are not likely to directly impact us, although it could impact the supplier's ability to price how they price, but there's lots of competition out there. Parts is -- on a good day, parts is complex for us, and we put a lot of time and effort into it. I think it would be very difficult for an insurer to inject themselves into parts procurement decisions in a way that would be very beneficial to them. So I guess it remains to see what they can accomplish with that. But right now, I think that they're better off with us, trying us sourcing the parts and working hard to keep their costs down, which we do.

[Daryl Young, analyst]

Got you. Okay. And then just on the acquisition side, the acquisition cost per location, I know you've done some high-quality MSO acquisitions this past year, but it's certainly been marching higher on a per location cost. Should we look at sort of a trailing 12-month number as representative of go forward? Or is there anything to glean from that?

[Narendra Pathipati, executive]

No, because I think that last year, the acquisition cost per shop was inflated because of the 2 MSOs we did, namely Collision Works and John Harris. And we clearly indicated going forward, we are going to increase the emphasis on the single shops. Our single shops and brownfield, greenfields, the investment per shop is lower than the mix. So if you take the last year mix, if you look at the statement of cash flows, you see $317 million or 127 locations. So you cannot use that as an indicator. It should be lower than that.

[Daryl Young, analyst]

Got you. And then just one last one. CCC had some information out stratifying the average age of repair technicians, which would appear to be significantly skewed toward an older repairer, average repairer age. Will you see that as being a significant sort of hurdle in the future? Or I know you're working hard to bring in more technicians and up the training today, but is that a big looming concern of mass retirements?

[Timothy O'Day, executive]

It's a concern, but it's also one of the reasons that in 2018, we launched our technician development program. So we're successfully bringing in young talent to our industry and to our company to help to offset that. But I think during the pandemic, we probably saw an acceleration of retirements from that segment of the workforce that was not far from retirement. So it's a concern, but one that we're working to address.

[Operator]

We'll go next to Zachary Evershed with National Bank Financial.

[Zachary Evershed, analyst]

Most of them have already been answered, but maybe you could touch on the admin staffing capacity constraints. Is that having a material drag on same-store sales growth on a store-by-store level? And how does that really compare with the situation you're experiencing in the technician labor pool?

[Timothy O'Day, executive]

They're definitely connected. If we don't have sufficient skilled staff in the front office, then we're not able to write quality estimates and build repair plans that makes the work for our technicians both more available and more efficient. So it's a balancing act. And when we generally talk about technicians, we have similar programs in place on the estimator side, similar to what we have in the technicians. And we actually have an estimator development program that we've launched. We've actually had that underway for quite some time now. We are expanding that this year as well. But like any business, the front office and the admin side needs to be in sync with the production side to optimize results. So they're both challenges and we've got good effort going into both the front end and back office.

[Zachary Evershed, analyst]

That's good color. And then a follow-up on your training program. Approximately, how long does it take for someone to graduate? And then if you could comment on the retention rate on those graduates.

[Timothy O'Day, executive]

Yes. Well, first of all, our retention rate is quite good. And we actually are developing some additional plans right now to further improve retention because it is clearly a vulnerability. We make a big investment to bring them up to a pretty good skill level. The program -- our program is an 18-month program. But it's important to note that they do become productive and accretive to our capacity well before 18 months. And generally, in their first 3 to 6 months, they would be a drag on -- not on capacity, but a drag on margin. And then by the time they get to the end of their first third of the time in the program, they're actually additive to production capacity and should not be a negative drag on margin.

And by the time in their last third, they should be accretive to margin and accretive to production capacity in a fairly meaningful way. Once they're graduated, our experience is that they're producing at not far from the average level of productivity of a technician, and then they really need probably another 12 to 18 months to continue to build their skills and their efficiency. So it's not a short-term solution, but it is a long-term solution.

[Operator]

We'll go next to Krista Friesen with CIBC World Markets.

[Krista Friesen, analyst]

Most of them have been answered, but I was just wondering on the rate side of the equation. Are you hearing any concerns from insurance companies that for future rate increases, they have doubts of how much more they can really push through to their customer and if those can get approved from a regulatory standpoint?

[Timothy O'Day, executive]

No, I haven't heard that. In fact, I think when one of the major insurers reported 4 or 6 weeks ago, they expressed confidence in getting the rates that they needed to maintain the profitability of their portfolio and noted that they would be going back multiple times.

So I think the reality is we've got an inflationary environment, and pricing is going to have to adjust. It isn't necessarily overnight, but I think there's lots of evidence to suggest that there is pricing power in the marketplace for insurers to increase premiums to cover their loss costs.

[Krista Friesen, analyst]

Okay. Perfect. And then maybe just one on the labor side of the equation. Are you seeing a net increase in your headcount as we work through Q1 here when you factor in any sort of retention losses? Are you still increasing headcount?

[Timothy O'Day, executive]

We're not disclosing specifics on that, but we're making progress against our goals. I'd like to make faster progress, but we're making progress against our goals. And I think we have the right strategies in place to continue to make progress and build our labor capacity.

[Operator]

And at this time, I will turn the call back to the speakers.

[Timothy O'Day, executive]

All right. Well, thank you, operator, and thanks to everyone for joining our call today, and we look forward to reporting our first call results in May. Have a great day. Thank you.

[Narendra Pathipati, executive]

Thanks, everyone, for your interest in Boyd. Bye.