Wednesday, December 11, 2019


Cervus Equipment Corp
(TSX: CERV.TO) Add to Watchlist
-0.02 (-0.25%)
as of Dec 11, 2019

Cervus Announces Third Quarter 2019 Results

Cervus Equipment Corporation ("Cervus" or the "Company") (TSX:CERV.TO) announced its financial results and operational highlights for the three months ended September 30, 2019.

"The most significant factor underlying our third quarter results was the continuing headwinds facing our Western Canadian Agriculture operations," said Angela Lekatsas, President and CEO of Cervus. "Despite a sharp decline in equipment demand, our Agriculture division achieved a 13% increase in product support revenue and an 18% reduction in used equipment inventory. Consistent with our priority to rebalance used equipment inventory during a period of sustained and unusual market conditions, we experienced a decline in equipment gross profit. Our priority to strengthen the balance sheet reduces near term risk of continued inventory obsolescence and related carrying charges, while providing the opportunity for improved profitability longer-term."

Third Quarter 2019 Highlights

--  Loss of $1.7 million or $0.11 per basic share in the third
        quarter of 2019, compared to income of $12 million or $0.78 per
        basic share for the same period of 2018.

    --  Overall product support revenue increased 8% for the Company in
        the quarter, as existing machine populations continue to
        provide opportunities for growth across our operating segments.

    --  Total revenue decreased 19% in the quarter, largely due to the
        weak Western Canadian Agriculture market.

    --  Gross profit declined 28% in the quarter on reduced new
        equipment revenue, margins, and OEM incentives, along with
        margin concessions on used equipment across the industry as
        dealers work to rebalance inventory levels.

    --  A quarterly dividend of $0.11 per share was declared to
        shareholders of record as at September 30, 2019, a 10% increase
        from September 30, 2018.
($ thousands, except per

              Three month

              Nine month
    share amounts)                                              periods ended September 30             periods ended September 30


                                                        2019                                 2018        2019

                                                                                                             %                        2018
                                                                              Change                                    Change


            Equipment revenue                               228,637              (26%)      310,250     634,342              (22%)   817,763

            Product support revenue                          88,445                 8%       82,248     245,143                 6%   232,026


              Total revenue                        317,082              (19%)      392,498     879,485              (16%) 1,049,789

            Gross profit                                     42,847              (28%)       59,881     132,450              (16%)   157,079

              (Loss) income for the period         (1,675)            (114%)       12,179     (1,570)            (108%)    19,746


              (Loss) income per basic share         (0.11)            (114%)         0.78      (0.10)            (108%)      1.26

            EBITDA(1)                                         8,228              (61%)       21,284      27,104              (37%)    43,361

              Adjusted (loss) income before        (2,101)            (114%)       15,089     (2,655)            (110%)    25,923
    income tax expense(1)


Third Quarter 2019 Overview

--  The third quarter results reflect continuing headwinds facing
        Western Canadian Agriculture and recent softening in the
        Transportation industry. Despite these short-term realities, we
        are pleased with our substantial increase in parts and service
        revenues across the Company and our strong performance reducing
        used Agriculture equipment inventory.

    --  In our second quarter report, we discussed our view that
        disciplined used equipment inventory management is a critical
        success factor when navigating cyclical markets. Used
        Agriculture equipment levels across Western Canadian dealers
        remain in excess of market demand. Dealers are incurring
        inventory carrying costs of interest and obsolescence, while
        the ability to accept additional equipment trades is also
        constrained. Ultimately, these near-term barriers are relieved
        by reducing inventory levels to align with market demand.

    --  We have taken action, reducing our used Agriculture equipment
        inventory by $33 million or 18% compared to the second quarter
        of 2019, which is also below the inventory levels reported at
        September 30, 2018, and December 31, 2018. Inventory
        write-downs associated with these aggressive reductions
        increased $6.5 million in the quarter, and $4.9 million year to
        date compared to 2018. These actions have enabled progression
        towards an appropriate level of used inventory more in line
        with market demand, illustrated by our comparatively strong
        inventory turn ratios at 3.87 for new Agriculture equipment and
        1.65 for used Agriculture equipment((1)).

    --  The excess supply of used equipment, combined with
        macro-economic factors, have impacted new Agriculture equipment
        revenue and profitability in 2019. In our second quarter
        report, we announced our expectation that reduced new equipment
        revenue, margin, and incentives would impact new equipment
        gross profit by $15 to $20 million, across the third and fourth
        quarters of 2019. Consistent with our guidance, in the third
        quarter we realized $11 million of this estimated reduction and
        expect a remaining reduction of between $8 to $12 million in
        the fourth quarter of 2019, compared to the same periods in

    --  By facing the difficult industry conditions and rebalancing our
        inventory this year, we anticipate a strong balance sheet with
        capacity for both new and used equipment sales and improved
        profit margins in future years at sustainable levels, while
        also limiting prolonged exposure to inventory carrying costs
        and valuation risk.


--  Overall revenue decreased 19% in the quarter, due to a 26%
        decline in equipment sales, partly offset by an 8% increase in
        product support revenue. The majority of this decrease was from
        new equipment in our Agriculture segment as discussed above,
        while a decline in truck sales in our Transportation segment
        relative to strong sales of 2018 was a secondary factor.

    --  In our Agriculture segment, equipment revenue declined 28% in
        the quarter as the Western Canadian Agriculture industry
        continues to face headwinds, including reduced farm income in
        2018 compounded by increased input costs, reduced commodity
        prices, trade disputes and poor weather conditions. In this
        environment, producers are choosing to postpone new equipment
        purchases as they are holding late model equipment purchased in
        recent years.

    --  In our Transportation segment, equipment revenue declined 22%
        in the quarter relative to the strong sales of 2018 as dealers
        experienced increased competition, particularly in the fleet

    --  Despite the headwinds shared across Canadian equipment dealers,
        our product support revenue remained resilient, improving 8% in
        the quarter, with the largest increase in product support from
        our Agriculture segment as demand for parts and service
        continued through the harvest window, building on the busy
        winter and spring following a difficult 2018 harvest.

    --  We continue to expect consistent performance within our product
        support departments and anticipate opportunities for this
        foundational component of our dealerships across industry

Gross Profit

--  Gross profit declined 28% or $17 million in the quarter and
        includes $11 million in reduced gross profit from Agriculture
        new equipment sales due to lower revenue, margins and
        incentives from focused sales efforts on used equipment and a
        $6.5 million increase in equipment inventory write-downs
        compared to the third quarter of 2018.

    --  Gross profit as a percent of revenue decreased in the quarter,
        primarily due to compressed equipment margins combined with the
        increase in equipment inventory write-downs.

Selling, General and Administrative ("SG&A") Expenses and Net Finance Costs

--  SG&A expense decreased 4% in the quarter primarily due to a
        decrease in sales commissions and annual performance
        incentives, which was partly offset by the inclusion of the Red
        Deer Agriculture dealership acquired in the fourth quarter of
        2018 and restructuring charges of $1.3 million incurred in the

    --  The increase in net finance costs of $1.9 million in the
        quarter is primarily due to the adoption of IFRS 16.


--  Income before income tax decreased $18 million in the quarter,
        primarily the result of the decrease in gross profit of $17
        million, as discussed above. The adoption of IFRS 16 also
        decreased income before income tax by $1.2 million in the

    --  Adjusted loss before income tax was $2.1 million in the
        quarter, compared to adjusted income before income tax of $15
        million in 2018.


--  The focus on reducing our used Agriculture inventory resulted
        in a decrease of $33 million in the quarter, relative to the
        second quarter of 2019.

    --  Agriculture used equipment inventory turnover for the trailing
        twelve-month period ended September 30, 2019 was 1.65 times,
        compared to 1.75 times at September 30, 2018, and 1.78 times at
        December 31, 2018.

    --  Based on inventory levels at September 30, 2019, the Company
        had the ability to floor plan an additional $19 million of

Select Financial Information

Three month

                Nine month
                                                                periods ended September 30                   periods ended September 30

                ($ thousands, except per share                                2019                2018                         2019                     2018
    amounts)                                                                                   % Change                                         % Change
                                                                                               Compared                                         Compared
                                                                                                to 2018                                          to 2018


              Equipment revenue                                                       228,637     (26%)   310,250                      634,342       (22%)      817,763

              Product support revenue                                                  88,445        8%    82,248                      245,143          6%      232,026


              Total revenue                                                           317,082     (19%)   392,498                      879,485       (16%)    1,049,789


                Gross profit                                                42,847     (28%)    59,881                      132,450       (16%)      157,079

              Total other income                                                          766     (54%)     1,672                        3,261          8%        3,025

              Selling, general and administrative                                    (42,499)     (4%)  (44,169)                   (128,017)       (1%)    (129,511)


                Income from operating activities                             1,114     (94%)    17,384                        7,694       (75%)       30,593

              Net finance costs                                                       (3,422)     119%   (1,565)                     (9,333)       119%      (4,257)

              Share of income of equity accounted                                                   0%                                           (100%)          124
    investees, net of tax


                (Loss) income before income tax                            (2,308)   (115%)    15,819                      (1,639)     (106%)       26,460

              Income tax recovery (expense)                                               633      117%   (3,640)                          69        101%      (6,714)

                (Loss) income for the period                               (1,675)   (114%)    12,179                      (1,570)     (108%)       19,746


                EBITDA(1)                                                    8,228     (61%)    21,284                       27,104       (37%)       43,361


              Gross profit margin as a % of
              revenue                          13.5%              15.3%                       15.1%                   15.0%

              SG&A as a % of gross profit                                               99.2%              73.8%                       96.7%                   82.4%

                (Loss) income per share

              Basic                                                                    (0.11)   (114%)      0.78                       (0.10)     (108%)         1.26

              Diluted                                                                  (0.11)   (115%)      0.74                       (0.10)     (108%)         1.20

              Basic - Adjusted(1)                                                      (0.10)   (114%)      0.74                       (0.15)     (112%)         1.23


                Reconciliation of adjusted (loss)
    income before income tax expense:

              (Loss) income before income tax                                         (2,308)   (115%)    15,819                      (1,639)     (106%)       26,460


              Unrealized foreign currency loss                                            207               (730)                     (1,016)                    (57)

              (gain) included in other income

              (Gain) on sale of Commercial                                                                                                                     (480)


                Adjusted (loss) income before                              (2,101)   (114%)    15,089                      (2,655)     (110%)       25,923
    income tax expense(1)


Conference Call Information

Cervus will host its third quarter 2019 earnings results conference call and webcast on November 8, 2019 at 11:00 a.m. Eastern Time. President and CEO Angela Lekatsas and CFO Adam Lowther will discuss Cervus's financial and operating results for the quarter ended September 30, 2019, followed by questions from investors.

Interested parties may access the conference call by dialling (647) 427-7450 or 1-888-231-8191. Please connect approximately 10 minutes prior to the beginning of the call. The conference call will be archived for replay until Friday, November 15, 2019 at midnight. To access the archived conference call, dial (416) 849-0833 or 1-855-859-2056 and enter the reservation number 5287755 followed by the number sign.

The webcast of the conference call which includes a slide presentation may be accessed at: Please connect approximately 10 minutes prior to the beginning of the call to ensure adequate time for any software download that may be required to join the webcast and view the slides being presented. The webcast will be archived at the above website for 90 days.


(1) These non-IFRS financial measures do
              not have any standardized meaning
              under IFRS, may not be comparable to
              similar  measures presented by other
              issuers and are defined and reconciled
              to their most directly comparable IFRS
              measure within Cervus' Management's
              Discussion and Analysis for the
              quarter ended September 30, 2019 under
              the section "Non-IFRS Financial
              Measures", which is available
              electronically at under
              Cervus' profile.

Forward Looking InformationThis press release contains certain forward?looking information ("forward?looking information") within the meaning of applicable Canadian securities laws. Forward?looking information is often, but not always, identified by the use of words such as "anticipate", "believe", "plan", "intend", "objective", "continuous", "ongoing", "estimate", "expect", "may", "will", "project", "should" or similar words suggesting future outcomes. Forward?looking information is not a guarantee of future performance and involves a number of assumptions and a number of risks and uncertainties some of which are described herein. These risks and uncertainties include the risks identified under the heading "Business Risks and Uncertainties" in the Third Quarter 2019 Management Discussion & Analysis of Cervus Equipment Corporation dated November 6, 2019, available electronically at under Cervus' profile. Cervus believes the expectations reflected in such forward?looking information are reasonable but no assurance can be given that these expectations will prove to be correct and such forward?looking information should not be unduly relied upon. You are cautioned that the preceding list of assumptions and risks is not exhaustive. Any forward?looking information is made as of the date hereof and, except as required by law, Cervus assumes no obligation to publicly update or revise such information to reflect new information, subsequent or otherwise.

About Cervus Equipment

Cervus acquires and operates authorized agricultural, transportation and materials handling equipment dealerships. The Company has interests in 63 dealerships in Canada, New Zealand, and Australia, employing more than 1,500 people. The primary equipment brands represented by Cervus include John Deere agricultural equipment; Peterbilt transportation equipment; and Clark, Sellick, Doosan, JLG and Baumann material handling equipment. The common shares of Cervus are listed on the Toronto Stock Exchange and trade under the symbol "CERV".

The Toronto Stock Exchange does not accept responsibility for the adequacy or accuracy of this release.

SOURCE Cervus Equipment Corporation

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SOURCE: Cervus Equipment Corporation

Angela Lekatsas - President and CEO,; Adam Lowther -
Chief Financial Officer,
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