Boyd Group Services Inc. (BYD (SZ:002594)), a leader in automotive collision and glass repair services, has reported a significant increase in sales and profitability for the fourth quarter and full year of 2023. The company recorded $2.9 billion in sales for the year, marking a 21.1% increase over the previous year, with same-store sales growth of 15.8%. The fourth quarter alone saw sales of $740 million, a 16.2% increase from the same period in 2022. Despite facing challenges such as mild winter weather impacting demand and higher operating expenses from new location openings, Boyd Group remains confident in its long-term growth strategy, aiming to double the size of the business by 2025.
Key Takeaways
- Boyd Group achieved record sales of $2.9 billion for 2023, a 21.1% increase year-over-year.
- Same-store sales grew by 15.8% for the year and 8.7% in the fourth quarter.
- Gross margin reached 45.5% of sales, and adjusted EBITDA was $368.2 million for the year.
- The company plans capital expenditures of 1.8% to 2% of sales in 2024, focusing on network technology upgrades.
- Boyd Group is optimistic about future growth despite a mild winter impacting Q1 2024 and new locations dampening earnings.
Company Outlook
- Boyd Group is confident in achieving its goal to double the business size by 2025.
- Cash capital expenditures of 1.8% to 2% of sales are planned for 2024, mainly for network technology upgrades.
- The company expects to internally handle at least 80% of scanning and calibration volume within the next two to three years.
Bearish Highlights
- Mild winter weather in Q1 2024 led to reduced demand for glass and collision repair services.
- New locations are impacting earnings negatively due to higher early losses and longer ramp-up times.
- Labor margins remain below historical levels, and there is ongoing wage pressure.
Bullish Highlights
- The company has negotiated rate increases with insurance clients to reflect labor cost increases.
- Boyd Group is tapping into new labor pools, including gamers for remote scanning technicians, and has increased its tech workforce by almost 50%.
- Investments in infrastructure are set to support rapid growth and future connectivity needs.
Misses
- Operating expenses increased by $158 million due to the addition of new single locations.
- The glass business, accounting for under 10% of revenue, experienced a softer quarter, impacting gross margin.
Q&A Highlights
- CEO Tim O'Day explained the glass business sees immediate slowdowns in demand during adverse weather conditions.
- O'Day attributes margin drag in Q1 more to new store openings than weather.
- The company is working on increasing labor margins to attract and retain skilled technicians.
- Investments in network infrastructure are crucial for supporting existing and future growth.
- Rate discussions with clients are ongoing, with solid increases achieved but gaps still to be closed.
- The company is focusing on acquiring the right locations and expects greenfield and brownfield developments to mature within two to three years.
Boyd Group's strategy includes a mix of organic growth through same-store sales and inorganic growth via acquisitions and new site developments. The company is also investing in its workforce and infrastructure to support this expansion. Despite the temporary setbacks in the first quarter of 2024, Boyd Group's leadership remains optimistic about the company's trajectory and its ability to meet the demands of a changing market. The next earnings report is anticipated in May, where the company will provide further insights into its performance and strategic initiatives.
Full transcript - None (BYDGF) Q4 2023:
Operator: Good morning, everyone. Welcome to the Boyd Group Services, Inc. Fourth Quarter and Year End 2023 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 sedarplus.ca. I'd like to remind everyone that this conference call is being recorded today, Wednesday, March 20, 2024. I would now like to introduce Mr. Tim O'Day, President and Chief Executive Office of Boyd Group Services Inc. Please go ahead, Mr. O'Day.
Tim O'Day: Thank you, operator. Good morning, everyone, and thank you for joining us on today's call. On the call with me today is Jeff Murray, our Executive Vice President and Chief Financial Officer; and Brian Kaner, Executive Vice President and Chief Operating Officer of Collision. We released our 2023 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 Web site at boydgroup.com. Our news release, financial statements and MD&A have also been filed on SEDAR Plus this morning. On today's call, we'll discuss the results for the three month period ended December 31, 2023, and provide a business update and discuss our long term growth strategy. We will then open the call for questions. We are pleased with the strong financial results reported in 2023, once again achieving record sales and showing meaningful improvement in leverage and profitability when compared to the prior year. Demand for services remained high throughout 2023. We were able to continue successfully negotiating selling rate increases from our insurance company clients to better reflect the labor cost increases we've been experiencing, although further increases are necessary to bring our labor margins back into the normal range. During 2023, we added a record number of new single locations. These new locations contributed to sales but with a higher operating expense ratio, limiting the amount of earnings that could have been achieved. As new locations mature, financial performance will gradually align with the performance of the overall business. For the year ended December 31, 2023, we reported sales of $2.9 billion, an increase of 21.1% over the prior year, driven by same store sales increases of 15.8% and contributions from 186 new locations that had not been in operation for the full comparative period. Gross margin increased to 45.5% of sales compared to 44.7% in the comparative period. The gross margin percentage benefited from improved glass margins, higher paint and part margins and increased scanning and calibration. Operating expenses increased $158 million when compared to the same period of the prior year, primarily as a result of increased sales based on same store sales as well as location growth in addition to inflationary increases. Boyd has made incremental expense investments as well that are important to the long term success of the business, including investing in key support functions. Adjusted EBITDA for the year ended December 31, 2023 was $368.2 million compared to $273.5 million in the same period of the prior year. The $94.7 million increase was primarily the result of improved sales levels and gross margin percentage, which also improved leveraging of certain operating costs. We reported net earnings of $86.7 million compared to $41 million in the same period of the prior year. Adjusted net earnings per share increased from $1.97 to $4.18. The increase in adjusted net earnings per share is primarily attributed to increased sales, improvements in gross margin percentage as well as the improved leveraging of operating expenses. Certain costs, such as depreciation and amortization, are not variable and same store sales increases resulted in a decrease in depreciation and amortization as a percentage of sales during 2023. Now moving on to our Q4 results. During the fourth quarter, we recorded sales of $740 million, a 16.2% increase when compared to the same period of 2022. Our same store sales, excluding foreign exchange, increased by 8.7% in the fourth quarter. Same store sales benefited from high levels of demand for services as well as some increase in production capacity related to technician hiring, growth in the technician development program as well as productivity improvement. Although, ongoing staffing constraints continue to impact the sales levels that could be achieved. Sales also increased based on higher repair costs due to increasing vehicle complexity, increased scanning and calibration services, as well as general market inflation. The quarterly same store sales increase tapered from the levels experienced during the period following the pandemic related disruptions. Gross margin was 45.5% in the fourth quarter of 2023 compared to 44.3% achieved in the same period of 2022. Gross profit increased $54.4 million, primarily as a result of increased sales due to same store sales and location growth when compared to the prior period. The gross margin percentage for the three months ended December 31, 2023 benefited from improved glass margins, higher part margins and increased scanning and calibration. The margin for the fourth quarter ended December 31, 2023 is within the normal range, although, labor margins remain below historical levels. Adjusted EBITDA or EBITDA adjusted for fair value adjustments to financial instruments and costs related acquisitions and transactions was $94.2 million, an increase of 26.1% over the same period of 2022. The increase was primarily the result of higher sales levels and improved gross margin. Net earnings for the fourth quarter of 2023 was $19.1 million compared to $14.2 million in the same period of 2022. Excluding fair value adjustments and acquisition and transaction costs, adjusted net earnings for the fourth quarter of 2023 was $20 million or $0.93 per share compared to adjusted net earnings of $14.6 million or $0.68 per share in the prior year. Adjusted net earnings for the period was positively impacted by higher levels of sales and a higher gross margin percentage. At the end of the year, we had total debt net of cash of $1.1 billion compared to $1 billion at September 30, 2023 and $963 million at the end of 2022. Debt, net of cash, increased when compared to December 31, '22, primarily as a result of increased acquisition activity and increased capital expenditures, including startup location growth. Based on the confidence we have in our business, we announced an increase to our dividend by 2% to $0.60 per share on an annualized basis in Canadian dollars beginning in the fourth quarter of 2023. During 2024, the company plans to make cash capital expenditures excluding those related to acquisition and development of new locations within the range of 1.8% to 2% of sales. In addition to these capital expenditures, the company plans to invest in network technology upgrades to further strengthen our technology and security infrastructure and prepare for advanced technology needs in the future. The investment expected in 2024 is in the range of $14 million to $17 million with similar investments expected in 2025. These investments align with Boyd's ESG sustainability roadmap to responsibly address data privacy and cybersecurity. In November of 2020, we announced our new five year growth strategy, in which Boyd intends to again double the size of the business over a five year period from '21 to '25 based on 2019 constant currency revenues, implying a compound annual growth rate of 15%. Given the high level of location growth in 2021, the strong same store sales growth during 2022 and the combination of same store sales and location growth in 2023, we remain confident that we are on track to achieve our long term goal. Boyd continues to execute on its growth strategy. During 2023, the company added 78 locations through acquisition and 28 through startup for a total of 106 new collision repair locations. In addition to location growth, Boyd was able to achieve same store sales increases of 15.8%. Heading into 2024, the company is facing strong comparative period same store sales results. Thus far, in the first quarter of 2024, same store sales increases, while positive, are lower than the average quarterly 10 year level of same store sales growth of 5.9%. Mild winter weather impacted demand for glass services, which were already seasonally low in the fourth and first quarters of the year. The same weather is impacting demand for collision repair services. Performance of business during the first quarter of 2024 has been challenged by a number of factors. During 2023, Boyd added a record number of new single locations, including 26 locations through acquisition and 11 startups in the fourth quarter. These new locations negatively impact earnings during the first several quarters of operation and typically mature to align with the overall company performance over a two to three year period. While Boyd continues to see repricing increases, labor margins remain consistent with the previous quarter and below historical levels. This remains a key area of focus for the company impacting both the gross margin percentage and adjusted EBITDA margin that can be achieved in the short term. As in prior years, the first quarter is burdened by higher payroll taxes that occur early in the year while the fourth quarter of 2023 benefited from expense accrual reductions as certain expense estimates were firmed up at amounts that were lower than previously estimated and accrued. As a result, thus far in the first quarter, adjusted EBITDA dollars are trending slightly above levels achieved in the first quarter prior year but below the level achieved in the fourth quarter. Despite these challenges, Boyd remains positive about the future of our business and the opportunities that lie ahead. The pipeline to add new locations and to expand into new markets is robust. Boyd has made investments and resources to support growth through single location, multi-location or combination of single and multi location acquisitions. In addition, investments have been made to support growth through startup locations. Together, these investments give the company flexibility on how best to grow. Operationally, Boyd is focused on optimizing performance of new locations as well as scanning and calibration services and consistent execution of the wall operating way. Given the high level of location growth in 2021, the strong same store sales growth during ‘22 and the combination of both same store sales growth and location growth in ‘23, we remain confident the company is on track to achieve its long term growth goal, including doubling the size of the business on a constant currency basis from ‘21 to ‘25 using 2019 as our base. In summary and in closing, I continue to be incredibly proud of our team who are working hard to position us well for the future. With that, I would like to open the call to questions. Operator?
Operator: [Operator Instructions] First question comes from Daryl Young with Stifel.
Daryl Young: The first question is just around the demand environment and the weather, and I guess I would've assumed that just given how strong the demand has been and the backlogs across the year that you might have been able to continue to keep same store sales growth higher even through the impacts of weather. So just wondering if there's anything going on there? And I did note that North American collision claims are down almost 8%, so if there's any color you can give there that'd be great.
Tim O'Day: I think, first of all the, it's a combination. The weather impacts both our collision and our glass business. Our glass business is more of a demand service business where we're replacing damaged windshields fairly quickly typically within a day or two. So when that market slows down, we really see that immediately rather than being able to rely on a backlog to kind of temper that. On the collision side, I think the industry has seen reduced claims, I believe largely due to a very warm and mild winter. And I would expect that that will normalize as we move into the next seasonal period. But nothing really that we see that's different in the marketplace other than the impact of weather.
Daryl Young: And then with respect to the margin drag in Q1. Are you able to parse out for us what the impact of the accruals is versus the drag on the new locations, just so we can get a sense of the cadence of recovery across the year?
Tim O'Day: I would say the -- and Jeff, you can comment on this afterwards. But I think the bigger impact on a year-over-year basis is really related to the new store openings. And, Daryl, as you know, we opened a significant number of stores in Q4 and more of our openings are now greenfield, brownfield which have more early losses and take longer to ramp up. So I think the more significant impact is really on new stores at least on a year-over-year basis.
Jeff Murray: And I would support that comment and view as well. We typically do have true ups year-over-year and so you do see that there's variability going from Q4 to Q1 that are typically affected by that. And if you go back through the number of years, you'll see that sometimes it's less than other years. But I think more importantly is the new store opening timing that we've seen, especially with the amount of new stores opening in the fourth quarter. And brownfield, greenfields, which are also sort of a bigger component of the new stores that we've got right now and so that's also having effect.
Tim O'Day: I may even comment that on brownfield and greenfields, it would not be unusual for us to have expenses in place in the period before opening, preceding staffing, training, even rent expense. So those are more burdensome than an acquisition typically would be.
Daryl Young: And I guess then as you ramp up the number of brownfields and greenfields opening, does it -- it's going to push out your 14% your recovery to sort of a 14% EBITDA margin going forward, it'll just be kind of a nagging drag?
Tim O'Day: It could be a drag on the 14%, because we do intend to accelerate the percentage of our openings that would be greenfield and brownfield. On the positive side, we do expect greenfield and brownfield locations generally to have higher returns on capital than acquisitions.
Jeff Murray: And I think the other thing to keep in mind as well, it might be a bit of a drag to a 14% sort of level, they will be generating more EBITDA dollars. And so the more single locations and brownfield, greenfields we can generate and bring them back really to maturity level, it will drive dollars.
Operator: Your next question comes from Derek Lessard with TD Cowen.
Derek Lessard: I was curious about two things, I guess, two things with respect to your 2025 outlook. And the first part is, how do you think about the mix of organic growth versus M&A to getting to your goal of doubling that business? And I guess the second one is, how should we think about, and you might have touched on it, just in the and Daryl 's question, but how do you think about the evolution of the margin over the same period?
Tim O'Day: Well, on the growth, we've never really guided for specifics. We kind of point to our historical same store sales growth, and obviously, whatever we don't accomplish with that we need to fill in with inorganic growth, but we're pretty confident. We're obviously progressing nicely against our 2025 goal and feel quite confident with that. But I would just point to our history in terms of same store sales growth. Obviously, our same store sales have been elevated more recently, both because of the impact of the pandemic and then the impact of inflation. But repair complexity, including a growing market for calibration services, should be a tailwind towards same store sales growth. In terms of -- your second question was on margin recovery?
Derek Lessard: It was, yes.
Tim O'Day: So we expect to continue to make progress with price increases with clients. As we've been pretty clear despite achieving really good price increases from our clients, we have not yet been able to recover labor margins to historical levels and the industry has not been able to attract sufficient talent to service normal work volume. So I think we're going to continue to see the need to invest in people, the need to raise wages to attract people to the industry, and to get client pricing to help offset that and allow the industry to properly service them. I also would say that the growth of the calibration market, which is a tailwind to margin because it is a labor operation, provides us some incremental opportunity to improve margin over time.
Derek Lessard: And maybe one on your technician development program, just curious on how the new grads from the program have been performing and sort of what kind of retention rate you're seeing. And do you think the scale of the program is appropriate or do you expect to invest more to expand it?
Tim O'Day: I'm going to let Brian handle that one.
Brian Kaner: So I mean, obviously, we remain committed to developing the future generation of technicians through our technician development program. We have seen the productivity of those, we're actually very impressed with the productivity of those graduates coming out of the program, which gives us confidence in the content of the program and how we're developing people. And I would say as it relates to scale of the program itself, we think right now it's probably at about the level that we would maintain, maybe slightly high compared to what we would keep in the long run, but so far very pleased with the output that we're experiencing. And as it relates to retention, I don't think we historically have commented on retention rates. We certainly see retention rates in the early on portion of that program, maybe a little higher than what we would've -- we'd like to see but once people are graduating, we're seeing retention rates much lower than what we experienced with the general population of techs.
Tim O'Day: I think, we've commented over the last few quarters that we have an opportunity to improve retention in the earliest phase of the program through better selection or identifying people, make sure they have the right skill set. So that's a pretty big area of focus right now. It is the most expensive component of the program. So that's really an area of focus for us. But we're pleased with the program, pleased with the productivity of the individuals when they graduate from the program and with the retention rates post graduation.
Operator: Your next question comes from Jonathan Lamers with Laurentian Bank.
Jonathan Lamers: A question about the investments being made in network infrastructure first. Making these -- are you planning ahead to support a business that could be double again in overall scale? How are you thinking about those and can you describe them a little bit more?
Jeff Murray: You're referring to -- our IT infrastructure guidance?
Jonathan Lamers: Yes. So it looks like you're investing a bit more than historically there. So I'm just wondering how you're thinking about creating a platform for the next -- for a business that's larger in scale potentially as you plan that out?
Jeff Murray: Well, yes, that's absolutely a driving factor as to why we're making that investment. It's really related to the infrastructure equipment that are in the shops. And periodically that needs to be upgraded, it doesn't have an extremely long life cycle. And we're at a stage now where we need to upgrade it in order to have the connectivity, our existing connectivity, but also to support additional connectivity as new technologies come into the market that we want to take advantage of. So I would say absolutely, it's intended to give us a platform for a number of years, although, not forever because technology is always advancing. So it's an area that we'll continue to keep an eye on. But we do believe that the current investment that we're planning is going to set us up well for the next little while.
Jonathan Lamers: And Tim, I know you touched on carrier securing rate increases and where labor margins are. Would you comment on how constructive those rate discussions have been over the past few months versus the past few years, and whether it's possible for us to see another leg up in margin or same store sales stay around the current rate and greenfields and brownfields continue to be added?
Tim O'Day: We think it's very important to get labor margins back to normal levels and we're pursuing that on a consistent basis with our clients. We've continued to see solid rate increases from clients, not like it was two years ago when we were well behind where we needed to be. The gap is not as large as it was then, but there is still a gap. I believe our clients understand that and they understand that for Boyd and for others in the industry to properly serve them, we have to be able to attract and retain the skilled labor that's necessary to repair today's vehicles. So I feel very good about our clients' receptivity to further increases. It will take time but I think we've made some really good progress, but there's more work to be done. And the wage pressure, well, it's not what it was, there is still wage pressure and a work for talent out there.
Jonathan Lamers: And the question about the outlook going forward, record number of new collision centers added last year, 106. Do you think you can add a similar number in 2024? And maybe second part to the question just on mix. Do you think about three quarters acquired locations and one quarter startups is a good run rate going forward, or are you shifting to more startups similar to the Q4?
Tim O'Day: On the total number question, we're pretty focused on acquiring the right locations. So I'm thinking less about a quantity than I'm about quality and revenue acquired when we're thinking about acquisitions. We also do expect to continue to gradually increase our mix on greenfield and brownfield. One of the key benefits to the greenfield or brownfield site is that we can build a facility that meets the long term needs of our business. And what we can often find that in an acquired site, our prototype design would have dedicated space for glass and for calibration so that we can operate all of our businesses under one roof and really leverage that investment. So I think for that reason and as well as others, but that's one of the main reasons that greenfield and brownfield development will continue to be a richer part of the total mix.
Operator: Next question comes from Chris Murray with ATB Capital Market.
Chris Murray: Maybe turning back to the additional investments, the $14 million to $17 million in some infrastructure. Should we be thinking that's going to be running through the CapEx line or intangibles, or is that going to impact some of your operating costs this year?
Tim O'Day: It's primarily CapEx.
Jeff Murray: Yes, maintenance CapEx.
Chris Murray: Just wanted to confirm that. And so Tim, going back maybe to the last question about the mix of greenfield/brownfield, and I appreciate you made the comment about the utility of greenfield and brownfield stores and being able to layer in all the different service offerings. But at the same time, you've also called out the fact that these stores are slower and they have a drag both on maybe revenue and margin as they get going. Is there anything that you can do in thinking about how you launch these stores? And I'm sure this is something that comes up a around in getting those stores up to speed a little quicker, or is it really a function of you just have to let these mature over a year or two before they're really at what you would call the average run rate?
Tim O'Day: I think it's a little bit of both. There are certainly -- you know, we have done fewer of these over the last decade and as we gain experience, I think we'll refine process and do a better job of getting them up and running sooner. But even with that it will still take time to build the revenue up. So I think it's a little bit of both, Chris. We can do a better job than we've done but there is just a natural growth curve that we're going to have to live with.
Operator: Your next question comes from Tamy Chen with BMO Capital Markets.
Tamy Chen: So I wanted to go back to your comment about the comp so far in Q1. The thing is backlog, we can see industry average backlog. It's still, I think, double what it was pre-pandemic. So with milder weather, I guess, I'm still just confused why that would be called out, because the backlog should still be there and it looks like the industry backlog is double what it was pre-pandemic. So again, I still would've thought the comp could have been better so far in Q1. So are you able to just elaborate a bit more on that? I'm just still a bit confused on that part.
Tim O'Day: Well, I'm not , I haven't seen any recent industry data on backlog. So it will be interesting when CCC will probably publish something on that in the next month or two, and we will take a look at that. But I think when you think about the industry being backlogged, it doesn't mean that every single location in every market is backlogged. And while we have the ability to move some work around, I think a general slowdown will still like -- or will impact our ability to process as much work as we would like to have. The impact on that is more pronounced on our auto glass business than it is on the collision business, as I commented on earlier. But historically, kind of before this period that we have gone through over the past few years, historically, if we had a mild winter, it would have an impact on Q1 results and even spill into Q2 a bit. So I'm not sure I can completely reconcile it, Tamy. But while we remain busy, the backlogs will not be what they were or what they would have been had we had a normal winter. It was a -- and I know there were some comments that there were a lot of storms, but the storms were really concentrated mostly in the Northeast, maybe some in Colorado. But across much of the country, there was a pretty limited amount of snow activity even across Canada and much of the US and that is really what is a driver of frequency during the winter.
Tamy Chen: And then on the OpEx drag from the startup, I just wanted to clarify that. It's more a function of your mix in new locations, particularly Q4, that's what we can point to. More of that was in startups than in some of the previous quarters and because there's more startups, the absolute dollar drag from OpEx, because of the longer ramp is what you're referring to. Like it's not that the startups you're opening the underlying ramp in this cohort that you've opened in Q4 is underperforming the cadence of the ramp that you've seen in startups you opened for a couple of quarters before. So I just wanted to confirm is more of that you're just opening more, so the drag is larger. Is that the case?
Tim O'Day: I think, it's opening more. It's more greenfields/brownfields, which are going to have a greater drag than an acquisition and a lot of them did happen in the fourth quarter. We've got a very long history of acquiring or opening locations and we've watched historically the return on investment and the EBITDA margins of those grow over a two to three year period of time. And there is nothing unusual about the recent cohort that would suggest we would experience anything differently than what we've historically experienced.
Operator: Your next question comes from Gary Ho with Desjardins.
Gary Ho: Just going back to the weather question. Just wondering if you can help us perhaps kind of normalize the impact of kind of what you're seeing in Q1 versus the average quarterly 10 year level of 5.9%. Maybe give us a proxy of how that is impacting your Q1 same store sales growth so far, maybe provide some comments. Is it -- I imagine it's a combination of less frequency and the bid on the severity side as well with the repairs?
Tim O'Day: It's probably too early to comment on the severity side. Although, I do think that that's likely because there would be less weather, we're likely to see fewer severe accidents. It's primarily a frequency issue though, likely not the severity.
Gary Ho: And then the other question I had was you mentioned your pipeline for new location and expansion into new markets remain robust. You've added resources to back that. Yet, I think quarter to date you've only added 10 locations in Q1 off of a very strong Q4. Is that just the lumpiness from quarter-to-quarter, how should we think about the number? I guess you talked about the number of locations, but can you talk a little bit about the expanding into new markets?
Tim O'Day: The 10 quarter to date is absolutely just related to lumpiness. We've got lots of opportunities on the go, so really no concerns at all with that. And I would expect it'll continue to grow at a good steady pace in the -- continuing through the future. It may not be 20 locations a quarter or 25 or 15, it'll bounce around. But we've got lots of good opportunity and a number of greenfields/brownfields in the pipeline that typically take on the low end probably eight to 10 months for a brownfield to even as much as 24 months for a greenfield.
Gary Ho: Can you also comment on the new markets that I think you referenced in the outlook?
Jeff Murray: Well, maybe I can just jump in. We do have -- I was going to add, we have a lot of markets that we have build out plans for. And so we've been working on really development plans and build out plans for a number of key markets that we believe are great opportunities for us. But with that and choosing whether or not it's going to be a brownfield/greenfield or a larger location that's established or maybe a smaller location, each of those markets have their own plan and that ties back into the lumpiness is that we don't want to force any market. We're not just trying to hit numbers along the way, we're trying to build these markets out in a careful and planful way. And so sometimes that does make the lumpiness happen.
Operator: Your next question comes from Steve Hansen with Raymond James.
Steve Hansen: Look, I'll try one more time with the weather issue, Tim. Can you just remind us maybe how large the glass business is in aggregate as a percentage of the total and then just what kind of drag you've seen on that glass business specifically in the front quarter thus far? I think what we're trying to understand is just what kind of drag that's having on same sort of sales growth through Q1 and aggregate?
Tim O'Day: The glass business is a bit under 10% of our revenue and we've talked about that over the years. The one dynamic in glass that is probably not well understood is that, well in collision, our workforce is largely commission based on the hours that they produce. Our glass business has a much greater fixed labor component. And we tend to carry extra labor in Q4 and Q1, because we need that labor in Q2 and Q3 because the market is driven way up in those quarters. So when you have a softer quarter in glass, the impact on gross margin is more pronounced than it would be in collision and the operating expense side because of that reduced revenue against a higher labor and fixed cost base. Does that help, Steve?
Steve Hansen: And just to follow-up on the greenfields or brownfields. How many are planned for '24 specifically?
Tim O'Day: We haven't disclosed the number and they can be a little bit tougher to predict just because of different things that can impact the opening. But I think what you'll see is a growing mix of those over the next number of years.
Steve Hansen: And then just going back lastly just maybe to scanning calibration again, and just kind of what should we think about for the developments in that business through '24 and perhaps even into '25 in terms of the rollout of your capability set there? I think last quarter you talked about accelerating that rollout after some of your initial investments have been made to help you scale. But where are we at and where are we going for the balance of '24 and into '25?
Brian Kaner: So look, as Tim has talked about previously, we have throughout 2023 made the investments in the infrastructure needed for us to really rapidly grow that business. And so far, on a year-to-date basis, we have almost increased the tech workforce in that business by close to 50% and we'll continue to do that throughout the rest of the year. So I would expect at least the doubling of that business, the internalization of that business by the end of the year. And as we talked about it at your conference I would expect over two to three year horizon for us to be in a position where we're taking care of at least 80% of the volume that we're producing in scanning and calibration internally versus externally today.
Operator: Your next question comes from Bret Jordan with Jefferies.
Patrick Buckley: This is Patrick Buckley on for Bret. Following up on the scanning and calibration there, as you look at the typical tech there, how much more qualified or trained does that tech need to be? And how much -- how does that role compare as far as filling it, filling that position?
Brian Kaner: Right now, we're finding that the majority of our techs are coming from the mechanical space, which is, as you guys well know, is a much larger pool of technicians. What we tend to find are some techs that are finding the mechanical side to be little bit more taxing on their body, so they've got the technical capabilities but would prefer the option to be working more with a computer than the tools. The flip side of that is we also have some remote scanning technicians, which are able to do some calibration services remote. And that group of people tends to be a little less need for technical orientation and a lot more need for just very good at computer strokes, and so we've tapped into some gamer population there. Ad so it's been it's actually opened up quite a nice pool of people for us and a much less -- I would say, a much less competitive pool of people and it's given us the ability to more rapidly grow that business.
Patrick Buckley: And then how has demand for OE versus aftermarket parts trended as of late? Do you see any opportunity there for wider adoption or to shift more of your mix to aftermarket parts to help or at least sustain margins while also helping on the repair cost side?
Tim O'Day: Well, as you probably know, Patrick, there was a major US insurer that opened their program to the use of aftermarket sheet metal in the fourth quarter of last year. So that's been a positive force in terms of our ability to reduce average repair cost for that client and increase the use of aftermarket parts. I would say though that the longer term trend is probably not that direction that repair complexity more complicated parts that have maybe less of an opportunity for the aftermarket to develop in the near term could cause us to use a higher mix of OE parts absent that one program change.
Operator: Your next question comes from Zachary Evershed with National Bank.
Zachary Evershed: Could you give us a refresher on the timeline between launching in greenfields and brownfields and when they're profitable and after how long they reach full maturity and satisfactory margins?
Tim O'Day: We would expect in year three or certainly by the end of year three, we would expect them to be at mature sales and profitability levels. So that would be on the first question. In terms of when they would become profitable, it will vary, but we would expect it to be at a minimum break even before the end of the first year.
Jeff Murray: Just to clarify, that would be sort of after the build out. I mean, the build out of brownfields/greenfields can take between six to 12, even beyond 12 months too. And so during that time, as you mentioned earlier, there's also some costs that go into that as well. So there's sort of the lead up year and then there's the first year of actual performance that takes a year to get to break even and then after that.
Zachary Evershed: And in terms of industry labor rates, how much do you think is left to go to the upside to stabilize your labor margins? And on the flip side, how much do you need to attract talent to the industry to have the productive capacity you need to service existing demand? And are those the same level of pricing?
Tim O'Day: Well, on the second question, there's an organization called TechForce that does some research in this area, and TechForce believes that the industry is 25,000 technicians short right now. I'm not sure that the number is that large but there's no question we continue to be short. On the labor margin front, we've made good progress on labor margins. We're just not back to where we need to be. And we need to account for the fact that attracting labor to the industry is going to require better compensation. Some of that we can get done through improving productivity or driving the while operating way, being more effective with how we operate. But some of it's going to have to come through price. So I think that we haven't given an exact number of what we need. But I would expect that we'll make gradual progress but we're also going to see some gradual increase in our costs as well and we're going to have to outpace that to get back to normal margins.
Zachary Evershed: And it sounds like negotiations are fairly productive with clients. Maybe we could dive into the specifics with more difficult markets like New York and California. What are you seeing there?
Tim O'Day: You're really referring to the fact that the insurance carriers have struggled to get the rate increases that they've been seeking, although, they've made some good progress on those as I'm sure you've read over the past quarter or so. But I don't know that we see significant differences mark-to-market despite the insurance client pressure on rate that they would get from their customers. It's really -- the market for our services is reasonably competitive and carriers need to keep up with their peers to be able to secure the capacity that they need.
Zachary Evershed: And maybe just one last one. Investment dollars per startup in 2023 were significantly higher than 2022. Is that mostly timing the result of the investment upfront that you mentioned or are there some other factors at play there?
Jeff Murray: There are some other factors. I would say, as we build out, especially some of the brownfields/greenfields and even some of our other single locations that we acquire, we might acquire the real estate initially and then flip it to a rate after. And then there's also some construction costs that happen after the fact that relate to branding or even just improving the layout of the front area, et cetera. So there can be costs that can build up. And then we ultimately do move most of those costs to the rate and put it into the rent factor, but there can be timing differences, which I would say is the main driver right now of what you're seeing in that increase.
Operator: [Operator Instructions] Your next question comes from Derek Lessard with TD Cowen.
Derek Lessard: Just a couple of follow ups for me. I was wondering if you could maybe give us a sense around the difference in return on invested capital for new build versus M&A and then maybe some details, if you could, on what the actual startup cost or investment is in the new build?
Tim O'Day: In terms of the returns, our expectation by year three is that a newbuild or a brownfield would have a higher return on invested capital. Although, generally, I would say that they have higher occupancy expense because of the nature and cost of a brand newbuilding. But we would expect them to have -- as a portfolio to have higher returns on capital. Your other question was related to startup expenses for those?
Derek Lessard: Right.
Tim O'Day: So with those new locations that we don't acquire, obviously, we're not acquiring a staff, but it needs to be staffed the day we open, not certainly -- not fully staffed. But we would be recruiting, hiring and training people in the period prior to opening, that could be -- that probably starts about 16 weeks before opening. That doesn't mean everybody starts 16 weeks before opening but those are the types of expenses. Depending on when we get occupancy, there are also times when we're paying rent, property taxes, utilities and other expenses on the properties prior to being able to generate revenue.
Operator: Your next question comes from Zachary Evershed with National Bank.
Zachary Evershed: Just a quick follow-up on that. I think in the past, you've discussed a 25% return on capital for M&A. How much higher do you benchmark greenfields and brownfields?
Tim O'Day: I would say it we’d be targeting greenfields and brownfields typically to be 30 or above.
Zachary Evershed: And then if I could just get your opinion on the current right to repair debates going through some of the legislative assemblies off of the border here?
Tim O'Day: We certainly support right to repair but we really have access to the information today that we need to properly repair vehicles. If you look at the collision repair market, only about 15% of the revenue in the collision repair market in the US is serviced by OE dealers. The vast majority is served by the aftermarket. And it's in the best interest of the consumer and the original equipment manufacturer to make sure that we have the tools and information that we need to properly repair vehicles. So we have fairly -- well, we have ready access to OE repair procedures, which are critical. We have access to OE scan and calibration tools through our calibration business or our partners. So we support the open marketplace but it isn't really hampering our ability to properly fix cars.
Operator: Your next question comes from Jonathan Lamers with Laurentian Bank.
Jonathan Lamers: One follow-up question on the disclosure. So in the MD&A, you give us the sales contribution year-over-year from new locations and aggregate. Would it be reasonable for you to begin providing or parsing that between greenfield/brownfield locations versus acquired locations?
Tim O'Day: We'll give that some consideration. We haven't thought about that. Although, as you know, historically greenfield, brownfield has been a fairly low portion of the mix, so we'll take that away, Jonathan, and consider it.
Operator: There are no further questions at this time. Please proceed.
Tim O'Day: All right, well good. Thank you operator. And thanks to all of you for joining our call today. And we look forward to reporting our first quarter results to you in May. Have a great day.
Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
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