CALGARY, Alberta (November 4, 2020) — Cervus Equipment Corporation (“Cervus” or the “Company”) (TSX: CERV) today announced its financial results and operational highlights for the three months ended September 30, 2020.
Cervus generated $13 million in adjusted income before income tax, an increase of $15 million from the third quarter of 20191, driven by improved performance and profitability across all segments. In the midst of significant industry challenges, Cervus delivered 12% growth in revenue from both equipment sales and product support.
“Cervus has progressed towards our strategic performance objectives, achieving a 9% increase in overall product support revenue, a 33% increase in gross profit and continued G&A expense efficiencies. We also surpassed our used inventory turn1 objective in Agriculture and reduced inventory levels across all segments, bolstering our already healthy balance sheet,” said Angela Lekatsas, President and CEO of Cervus.
“I am pleased to share, that in recognition of the unprecedented nature of the pandemic and our role as an essential service, we are providing a pandemic bonus to our Canadian front-line employees. Our employees have demonstrated exceptional commitment to safely supporting our customers, while also implementing innovative initiatives in support of our long-term objectives. These actions have Cervus well positioned to perform in current market conditions and to take advantage of an eventual economic recovery.”
Third Quarter 2020 Highlights
- The Company reported income of $13 million or $0.84 per basic share in the third quarter of 2020, compared to loss of $1.7 million or ($0.11) per basic share in the third quarter of 2019.
- Income for the quarter includes $5 million of Canada Emergency Wage Subsidy, related to the results of the second quarter.
- Adjusted income per basic share was $0.57, and excludes the impact of the wage subsidy, compared to adjusted loss per basic share of ($0.10) in the third quarter of 2019.1
- Total revenue increased 12% in the quarter, comprised of a 17% increase in Agriculture revenue, a 6% increase in Transportation revenue, partly offset by a 21% decrease in Industrial revenue.
- Our Agriculture used equipment inventory turnover for the trailing twelve-month period ended September 30, 2020, surpassed our long-term objective, improving to 2.78 times compared to 1.65 times at September 30, 2019.1
- Adjusted free cash flow from operations was $49 million for the nine months ended September 30, 2020, compared to $14 million for the nine months ended September 30, 2019.1
- During the quarter, Cervus repaid all amounts owing under its syndicated operating facility and capital facilities, and as at September 30, 2020, had a $27 million cash balance and well positioned financial covenants.
- The Company repurchased 290 thousand shares under its Normal Course Issuer Bid at a cost of $2.1 million in the quarter and declared a dividend of $0.015 per share to shareholders as at September 30, 2020.
- The Company completed the acquisition of a John Deere dealership located in North Geelong, Victoria, Australia on September 30, 2020. Cervus plans to relocate the John Deere dealership to Colac, Victoria, with an opening planned for November 2020.
Third Quarter 2020 Results
Increased performance and profitability were delivered across all segments, accomplishing $13 million in adjusted income before income tax in the quarter, a $15 million increase compared to the prior period. The results of the quarter demonstrate progress towards our strategic performance objectives, despite the impact of COVID-19. We achieved a 9% increase in overall product support revenue, a 33% increase in gross profit, and G&A expense reductions, culminating in the $15 million improvement in adjusted income before income tax. During the year we surpassed our used equipment inventory turn objective in Agriculture and reduced inventory levels across all segments, bolstering our already healthy balance sheet and generating $49 million in adjusted free cash flow for the year to date period.
In our Agriculture segment, total revenue increased 17% with significant contributions from both equipment and product support sales. This revenue growth translated to a 56% increase in gross profit through improved margins and focused delivery of sales strategies, and an $8 million reduction in inventory impairments. Increased product support gross profit, along with sustainable cost reductions, resulted in Agriculture absorption1 improving to 94% for September 30, 2020 year to date, compared to 87% in the prior period. These results were enabled by strategic product support sales and growth initiatives, enhanced by an earlier harvest and favourable growing conditions.
Our Transportation and Industrial segments contributed a nearly threefold increase in adjusted income before income tax in the quarter, despite being most heavily impacted by the adverse economic conditions presented by the pandemic. Transportation new equipment revenue rebounded relative to a slow second quarter, as we were successful in completing truck orders previously deferred due to COVID-19. This resulted in a $55 million reduction in new truck inventory compared to the end of the first quarter. Both segments continue to manage costs in alignment with customer activity levels, while seeking areas of growth within the existing market.
During the third quarter, the Government of Canada enacted changes to the existing Canada Emergency Wage Subsidy legislation. As a result, Cervus’ Transportation and Industrial segments qualified for $5 million of wage subsidy for the months of April, May and June 2020. This has been reported in other income in the current quarter and is excluded in the calculation of adjusted income.
- Total revenue increased 12% in the quarter, comprised of a 17% increase in Agriculture revenue, a 6% increase in Transportation revenue, partly offset by 21% decrease in Industrial revenue.
- In our Agriculture segment, our sales team aligned re-conditioned and attractively priced used equipment with the needs of customers through the Western Canada harvest window, resulting in used equipment revenue increasing 22% in the quarter. Product support revenue increased 19% in the quarter, as we continue to execute on strategic parts initiatives driving towards our 50/50 balanced sales and product support goal, including the opening of our new dealership in Nipawin, Saskatchewan during the second quarter, driving increases in over the counter, on-site, and online parts revenue.
- Transportation new equipment revenue increased 12% in the quarter, as the easing of COVID-19 restrictions on the Ontario construction industry supported our focused efforts to deliver vocational truck orders in season. While showing some signs of recovery, product support revenue declined 2% in the quarter, resulting from the broader economic impacts of COVID-19.
- The 12% increase in equipment and product support revenues in the quarter, combined with the significant reduction in inventory impairments of $8 million, resulted in gross profit increasing 33%. Actions to improve our Agriculture equipment sales and trade-in practices, resulted in enhanced marketability and accelerated turnover of used equipment inventory, substantially reducing inventory impairments compared to the prior year.
G&A Expenses and Net Finance Costs
- G&A expenses, which exclude equipment commissions, decreased 1% or $0.5 million in the quarter. These costs reductions were achieved despite recognizing performance incentives and a pandemic bonus to front-line workers in 2020, compared to 2019 when no performance incentives were earned. Excluding the current period increase in performance incentives, G&A decreased 13% or $5 million in the quarter.
- Net finance costs decreased 33% in the quarter, resulting from reductions in inventory levels and interest rates.
- Income before income tax increased $21 million in the quarter, including the wage subsidy reported in other income of $5 million.
- The increase in equipment and product support revenues, reduced inventory impairments and a decrease in G&A expenses, as discussed above, resulted in adjusted income before income tax increasing $15 million for the quarter.
- Total inventory decreased $115 million from September 30, 2019, including a $95 million decrease in the Agriculture segment and a $20 million decrease in the Transportation segment. This decrease in inventory, combined with strong used sales in the quarter, resulted in Agriculture used equipment turnover for the trailing twelve-month period ended September 30, 2020 improving to 2.78 times from 1.65 times at September 30, 2019.