This morning, Tim O'Day, President and Chief Executive Officer, Jeff Murray, Executive Vice President & Chief Financial Officer, and Brian Kaner, Executive Vice President & Chief Operating Officer, presented during day three of RBC's Canadian Industrials Conference. Overall, our discussion touched on the operating backdrop, factors impacting the company's margins, the opportunity with scanning/calibration, as well as management's thoughts on new builds vs. M&A. We highlight key takeaways from our discussion below:
Mild weather impacted SSS growth in Q1 – Recall that over the past ~2-3 years the collision repair industry underwent a period of service capacity/labor constraints against the backdrop of strong demand as the salvage rate declined (in part driven by the increase in used car prices). During this period, Boyd's backlog of work was relatively elevated and the company was reporting strong SSS growth. We are now in a more normalized operating environment, and this was reflected in repairable claims being -8% YoY in Q1 (in large part driven by mild winter conditions, which has extended into Q2 as well given the lack of catastrophe events).
Continuing to negotiate pricing with insurers – While we believe Boyd has done a good job of negotiating pricing with insurers for labor-related repair work over the past few years, pricing received to-date has not been sufficient enough to offset the inflationary/ staffing pressures that Boyd has experienced (and continues to experience). As such, additional pricing will be required for Boyd's labor margins to get back to pre-pandemic levels. In comparison, recall that insurers generally buy parts (which contribute to >40% of sales) at a set list price (which has adjusted to the inflationary backdrop better than labor rates), with the parts margin in turn dictated by the cost/discount to the list price that Boyd could procure these parts at. Given this dynamic, parts inflation has been less of a contributor to margin pressure over the past ~2-3 years.
Outlining the scanning/calibration opportunity – As the prevalence of ADAS in the car park increases, Boyd is seeing increased demand for scanning/calibration services. For perspective, management outlined that the TAM for collision repair calibration services is ~$1B today and this could grow to ~$4-5B over the next few years. Historically, the company has outsourced a lot of this work to third parties, but Boyd is currently focusing on bringing this work in-house (noting the company grew its scanning/ calibration workforce by 60% in Q1), with the expectation that in-sourcing could reach 80% within the next ~2-3 years. Given outsourced work is margin dilutive, we believe that the company should see some margin benefit as it transitions toward insourcing these services. For additional information on scanning/calibration, see our deep-dive here.
Repair opportunity with EVs comparable to ICE vehicles – Management noted that the repair opportunity associated with EVs is comparable to ICE vehicles as typical repairable accidents/collisions (i.e., "fender benders") ultimately result in similar damage between the two types of vehicles. While EVs currently result in greater sales per repair, we largely attribute this to the fact that EVs currently skew toward premium vehicles and the fact that they are typically newer (in comparison, the average vehicle in the U.S. is >13 years old today). While there are some differences between the repair processes with EVs vs. ICE vehicles, management noted that they are ultimately not material. In cases where new equipment/training may be required, Boyd is able to leverage a "hub and spoke" model in various regions, where a single location (hub) can be used to deal with more specialized claims from surrounding locations (spokes).
Thinking through the build vs. buy decision – Given the evolving needs of the collision repair industry (e.g., scanning/calibration), building greenfield/brownfield locations is preferable in certain instances as it allows Boyd to configure the floorplan in a way that makes the most sense (i.e., to accommodate autobody, glass, and scanning/calibration repair needs under one roof). For perspective, management noted that 50% of vehicles are currently being calibrated statically, often requiring a dedicated vehicle bay/space to facilitate, which older locations may not be able to accommodate. Although management expects the mix of start- up locations to increase going forward, Boyd will also continue to roll-up the fragmented collision repair space, with a primary focus on single store acquisitions (noting that >50% of locations in the U.S. are owned by single shop owners). In terms of returns on capital, recall that Boyd targets a ROIC of +30% on start-up locations, which compares to a pre-tax ROIC target of +25% for single store acquisitions.