Recently we discussed the Boyd Group Income Fund (“Boyd”), specifically the 2015 Income Statement, and how it is both similar and different to the income statements of other operators in the industry. In 2015 Boyd generated an impressive $1.2 billion in sales but reported a net loss of nearly $22 million dollars (all figures are in Canadian dollars unless otherwise specified). Boyd is the parent company of Gerber in U.S.
Many in the industry mistakenly assume that because the company operates at a net loss it is only able to remain in business through the benevolence of Wall Street banks or some other obscure means. The reality is quite the opposite.
While earning my MBA and while working as an equity analyst, I learned that to better understand the strength of a company, as well as the motivations of management, it is always best to look directly at the statement of cash flows. The cash flow statement tells the reader exactly how much money the business generates and exactly how management is investing and spending the money they make.
Boyd, while operating at a net loss, generates millions of dollars of cash every year in collision repair in North America. And when adjusting for certain accounting idiosyncrasies unique to the legal structure and location of the firm, the company generates a respectable profit. Boyd clearly understands how to use finance to drive growth.
Boyd practices accrual accounting, meaning the company recognizes expenses as they occur rather than as they are paid. Due to the legal structure and domicile of the company (it trades as a trust domiciled in Canada) there are a number of non-cash expenses that lower the profitability of the company but have no impact on the cash the company generates.
How much cash did Boyd Generate in 2015? $82 million dollars from day to day operations – a 60% increase over 2015. But I find what the company did with all that cash to be even more interesting.
Cash from Operating Activites
While reporting a $22 million net loss, Boyd generated $82 million in cash from day to day operations in 2015. Cash from operations only includes day to day activities and does not include any cash received from taking on debt, selling stock, or divesting assets. Cash generated from operations represented a respectable 6.4% of sales. More telling, however, is comparing the results year over year. In three years the company has more than tripled the amount of cash it generates from operations annually, increasing to $82 million in 2015 from $25 million in 2013.
The ability to grow cash from operations, and sustain that growth year over year, at such an aggressive pace is further proof that acquisitions and building economies of scale is a very effective growth strategy. While many business owners are happy to increase sales by 7% or more in a given year, it is incredibly rare to find owners doubling the amount of cash their firm consistently generates every year.
Cash Provided by (Used in) Financing
A common refrain I hear is that the large consolidates are losing money but relying upon Wall Street banks to make up the difference. This is an unfortunate misconception. Rather than relying on investment banks to fund a shortfall, the company actually uses these banks as they are designed – to drive further growth through acquisitions and investments (more on that in the next section).
Financing activities include Wall Street type activities such as issuing stock or taking on additional debt. A significant reason we talk so much about the role of finance in the collision industry is to highlight the opportunities available to companies such as Boyd that actively use corporate finance to create a competitive advantage.
In 2015 the company allocated $24 million to financing related activities. $14 million in debt and long-term leases was paid down. $9 million of the $14 million were to pay seller notes (a seller note is a loan that the seller of a business gives to Boyd to finance the acquisition). An additional $9 million was distributed in the form of a dividend to stock holders (well, unitholders and other non-controlling owners to be precise).
By comparison, 2015 was a slow year relative to 2014. In 2014 the company raised nearly $200 million through the sale of stock, draws on a line of credit, and the issuance of regular and convertible debt. This was used to fund acquisitions, and also to refinance other forms of debt. But in early 2016 the company again was busy, converting virtually all of the convertible debt issued in 2014 to equity (we’ll discuss that a bit more next week).
Cash Provided by (Used in) Investing
Speaking of acquisitions, Boyd has continually and repeatedly set clear inorganic growth objectives and has executed successfully on these objectives. Inorganic growth, or the purchase of existing collision and glass repair businesses, is considered an investing activity. So too is building new developments (greenfield and brownfields) or purchasing or updating facility equipment (capex).
Boyd is a serial but disciplined acquirer and continued to invest heavily in acquisitions, albeit at a slower pace in 2015 relative to prior years (although that has changed already in 2016). In aggregate, Boyd invested $43 million dollars, net of the cash acquired, on acquisitions in 2015. The majority of acquisitions completed in 2015 were single store locations. While no longer providing guidance for single store growth, management believes that they will double the size of the company in the next 5 years through acquisitions and new developments.
More interesting, however, is that the company invested over $9 million in capex, or the purchase and/or updating of facility and equipment, as well as an additional $2.6 million dollar investment in new developments. While large in dollar figures, the total investment in new developments and capex is only than 1% of annual sales. As the industry continues to increase in technological complexity the largest companies such as Boyd will have a greater ability relative to smaller companies to significantly invest in the required tools and training to stay competitive.
Conclusion
All in all Boyd had a very profitable and successful 2015 and is primed for further success in 2016. Not only did the company generate substantial cash flows from operations, it significantly improved cash margins year over year. The company has remained disciplined in its acquisition strategy and expects to double in size over the next 5 years.
I’m eager to hear from you. How do you manage your cash flow to maximize your value? Have you considered taking on debt to grow, or perhaps even considered taking on an equity partner? If so, 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.
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