At present, Boyd is the only publicly traded company collision repair company in North America. The other three major consolidators are privately held, owned by various private equity groups. The company trades as a unit trust on the Toronto Stock Exchange and has a market capitalization of well over a $1 billion – $1.33 billion as of last night (all values are in Canadian dollars unless otherwise indicated). Over the next few weeks we will discuss what I discovered when I read Boyd’s 2015 Income Statement.
Boyd, or more formally, Boyd Group Income Fund, is one of the world’s largest collision repair operators. But it was not always such. Boyd started as a privately held company, a single location opened in 1990. By the end of the first quarter of this year (March 31st) Boyd owned and operated 368 facilities across the U.S. and Canada, operating under the name Boyd in Canada and Gerber in the U.S. (I’ll refer to the company collectively as “Boyd”).Boyd also has significant retail glass operations and glass claims services in the U.S.
This week we are going to review the P&L and the balance sheet and cash flow statement in following weeks (you can access Boyd’s recent financial reports on their investor relations website). A common exercise I perform with clients is to compare their numbers to companies like Boyd. This is a great way for us to quickly identify areas for improvement. I invite you to compare your business to Boyd in the same way and let me know how you stack up! The areas below are areas every business owner and manager should look at on a regular basis. And if you have questions, or just want an outside perspective on your numbers – subscribe for updates and shoot me an email and I’m happy to discuss.
Income Statement (Consolidated Statements of Loss, pg. 51)
The full P&L, formally the “Consolidated Statements of Loss” is on page 51 and compares 2015 results to 2014 results. But on page 19, management discusses in much more detail the financial results of operations.
For the first time in Boyd’s history, annual sales exceeded a billion dollars. In 2015 sales increased by 39% to a total of $1.174 billion dollars. The bulk of the growth in sales, $190 million, was a direct result of new sales generated from acquisitions. But after factoring out acquisitions (referred to as same store sales) increased by $40 million dollars, or 5.6%. The company also benefited from a strong U.S. dollar relative to the Canadian dollar, which increase sales by another $105 million. Keep in mind that references to “2015” are for the fiscal year, which coincides with the calendar year, and that total sales includes both glass as well as collision repair services.
Many smaller MSOs and single or dual location businesses find it challenging at best to expand same store sales by any amount in the current economic environment. While 2015 was generally an up year for many in the collision industry, many companies, public and private, are hard pressed to consistently achieve a 5-7% top line growth rate when excluding acquisitions. This is an ongoing testament to the attractiveness of the multi-store business model in the collision industry, even more so when taking into consideration the fact that Boyd has doubled in size and exceeded a billion dollars in revenues in a few short years.
Gross Profit Margin
Boyd reported a gross profit margin of 45.7%, a decrease of 0.5% from 2014. In 2014 gross margin Boyd reported a record gross margin as a result of a renegotiated paint contract. But in 2015 gross margin dropped slightly as a result of less profitable work mix primarily from glass network sales. While gross profit margin dropped slightly, in dollars, gross profit increased by 40% to $537 million in 2015 from $390 million in 2014. Total gross profit increased again in 2015 primarily as a result of ongoing acquisitions and increased sales at new and existing locations.
An unfortunate misconception in the industry is that the large consolidators offer heavy discounts and operate unprofitably. But, what many fail to realize is that the large consolidators have significant negotiating powers with vendors. In order to consistently maintain gross margins above 45% while providing substantial discounts is a testament to the negotiating power scale provides. (Editor’s Note: Read Brad’s recent article in Aftermarket Business world on how consolidation in the collision industry is impacting the paint distribution and jobber industry).
Operating expenses, or general overhead and administrative expenses include items such as executive and regional management, administrative personnel, rent, insurance, utilities, etc. As a percentage of sales, operating expenses decreased to 37.1% of sales in 2015 from 38% of sales in 2014. Again, a further testament to the power of scale, the relative reduction in overhead expenses as a percentage of sales was a result of higher same-store sales, thus lowering the overall percentage of overhead expense. In other words, the success of Boyd’s business model is that the company is able to grow sales at a faster rate than operating expenses, leveraging economies of scale and actually lowering their marginal cost structure the larger they become.
Adjusted EBITDA is a proxy for cash flow and stands for earnings before interest, taxes, depreciation and amortization. We will discuss the Statement of Cash Flows in coming weeks, but cash is important because it drives valuation. You also can only pay bills with cash, not profit, so it is a critical measurement when assessing the health of a business.
Boyd continued to increase both adjusted EBITDA dollars and margins in 2015. Adjusted EBITDA increased to $102 million dollars in 2015 from $69 million in 2014. Again, this increase is primarily a result of acquisitions, new stores, and an increase in same store sales. On a percentage basis, adjusted EBITDA increased to 8.7% in 2015 from 8.2% in 2014 again demonstrating the power of scale.
An average operating profit for the industry is difficult to estimate due the vagaries of owners in applying standard accounting principles as well as the tendency for special one-time discretionary business expenses on the books. Adjusted EBITDA margins for healthy, privately-owned collision repair operators can be anywhere from 8% to 18%, depending on specific cost structure and accounting policies. For a company of Boyd’s size, an adjusted EBITDA margin of 8.7% is respectable, but the ability to drive a 0.5% increase in adjusted EBITDA on top of an increase of 1.0% in 2014 is of particular note. As the company is able to continue to leverage scale and streamline operations, operating margins will continue to expand.
It is important to keep in mind the impact corporate overhead has on earnings when comparing Boyd’s financial position to smaller MSOs and single or dual location businesses in the industry. Corporate overhead would include many expenses that a smaller operator would not have, including executive management, regional and area management, human resources, legal, accounting, audit, tax, treasury, strategic planning, corporate development, information technology services, and environmental and compliance management to name a few. Put differently, one would expect a smaller company to have substantially less corporate overhead and operate at a relatively higher operating margin relative to a large multinational entity.
Net Profit Margin
After accounting for a host of additional expenses including acquisition and process improvement costs, depreciation and amortization, finance costs, fair value adjustments, and income tax expense, the company reports a negative net profit of $22 million, or a loss of 1.9%. On a percentage basis this is very similar to 2014. Many of these expenses are “non cash” or accounting expenses rather than actual expenses that are payable in a given period. The impact of these non-cash expenses creates a company that is not profitable from an accounting perspective despite its ability to generate substantial cash.
Perhaps the most significant factor in Boyd’s net loss has to do with the legal structure and accounting standards. Differences in accounting standards between the U.S. and the rest of the world require Boyd to recognize differently certain expenses (fair value adjustments) related to future financial liabilities compared to a U.S. based company. These difference can get complex quickly, but if you are interested in a wonky discussion about the differences in GAAP and IFRS and how mark-to-market accounting principles vary cross border shoot me an email via the contact page and we can geek out together.
In 2015 Boyd recognized $59 million in non-cash fair value adjustments. Factoring out these adjustments the company would have reported positive net earnings of $40 million. These non-cash expenses are a unique but significant example how accounting policy and legal structure can materially impact the reported profitability of a company, both public and private.
How Do You Compare?
When comparing your business to another, it is always important to ensure that you are comparing the same numbers. Because accounting policies vary so much company to company, I often spend a lot of time with clients identifying key accounting policies. This holds true when analyzing a company for an acquisition, a sale, or just providing general financial guidance. If you are unsure how your accounting policies may impact your financial reports shoot me an email and we can discuss.
Next week we will look at the cash flow statement, an area that says a lot both about the health of the business as well as the strength of the management team. When I was getting my MBA and working as an equity analyst, I learned that to better understand the strength of a company, it is always best to look directly at the statement of cash flows. Boyd’s cash flow statement gives the impression of a very disciplined and well-managed company.
I’m eager to hear from you. How has consolidation affected you? Have you attempted to grow like a consolidator or are you considering an exit because of consolidation? Shoot me an email via my contact page to discuss further as we explore Boyd together. I find the transformation in the industry truly fascinating and all communication is kept strictly confidential.