CALGARY, Alta. — Cervus Equipment Corp. (“Cervus” or the “Company”) (TSX: CERV) announced its financial results and operational highlights for the three months ended June 30, 2020.
Cervus generated $8 million in adjusted income before income tax, a nearly fourfold improvement compared to second quarter of 2019(1). This was driven by the strong performance of the Agriculture segment, supported by the profitability of our Transportation and Industrial segments despite the formidable challenges presented by the COVID-19 pandemic.
“Achieving the current results in the face of COVID-19 is a testament to the dedication of the Cervus team, the resilience of our customers across all sectors, and our ability to deliver customer value in partnership with our Original Equipment Manufacturers across all market cycles,” said Angela Lekatsas, President and CEO of Cervus. “While the results of the second quarter of 2020 have been particularly hard won, we continue to see the potential of our business as we focus on the attributes and capabilities that embody Cervus.”
Second Quarter 2020 Highlights
- The Company reported income of $9.3 million or $0.59 per basic share in the second quarter of 2020, an improvement compared to income of $2.8 million or $0.18 per basic share in the second quarter of 2019.
- Adjusted income per basic share was $0.44, compared to $0.15 in the second quarter of 2019.(1)
- Total revenue increased 4% in the quarter, due to a 16% increase in Agriculture revenue, partly offset by a 15% decrease in Transportation revenue, and a 29% decrease in Industrial revenue.
- General and administrative (“G&A”) expenses, excluding equipment commissions, decreased by 6% or $2.2 million compared to the second quarter of 2019, reflecting the ongoing efficiencies of the 2019 restructuring in Agriculture, along with COVID-19 specific cost discipline.
- At June 30, 2020, Cervus had $102 million available under its syndicated operating facility, along with a $31 million cash balance and well positioned financial covenants.
- Our Agriculture used equipment inventory turnover for the trailing twelve-month period ended June 30, 2020, improved to 2.31 times, compared to 1.62 times at June 30, 2019.(1)
- Adjusted cash flow from operations(1) increased $21 million, to $26 million for the six months ended June 30, 2020.
- A quarterly dividend of $0.015 per share was declared to shareholders as at June 30, 2020. Subsequent to June 30, 2020, and as of August 11, 2020, the Company repurchased 255 thousand common shares under the Normal Course Issuer Bid at a cost of $1.8 million.
Second Quarter 2020 Results
Increased profitability was driven by the performance of our Agriculture segment which serves producers in some of the most fertile land across Western Canada, New Zealand and Australia. This performance was enabled by the focus of our restructured team, enhanced by the right equipment models and level of inventory for our market, implementation of new product support initiatives, and sustainable cost reductions across the segment.
This improvement was partly offset by the significant impact of COVID-19 on our Transportation and Industrial segments, which remained profitable in the quarter due to disciplined expense management, despite a decrease in demand.
In response to the impact of COVID-19, we took proactive measures such as senior leadership and Corporate wage reductions, temporarily adjusting staffing levels and utilizing government work-share programs. In the implementation of these measures, our focus has been on supporting the people and families who comprise the decades of experience reflected in our customer service teams and ensuring we are ready to quickly respond to accelerating market demand when conditions ease.
Due to the strong performance of our Agriculture segment, the Company did not qualify for payments under the Canadian Emergency Wage Subsidy (“CEWS”) during the quarter, and the results of the quarter do not include any Canadian government assistance. However, subsequent to the quarter legislation was passed on July 27, 2020, which we anticipate will provide some limited eligibility for our Transportation and Industrial segments, retroactive to the second quarter of 2020.
Total revenue increased 4% in the quarter, comprised of a 16% increase in Agriculture revenue from the combined performance of our Canadian, Australian and New Zealand (ANZ) dealerships, partly offset by a 15% decrease in Transportation revenue, and a 29% decrease in Industrial revenue.
Our Agriculture equipment revenue increased 17% in the quarter, primarily driven by increased demand for used equipment in Canada as producers were cautious in committing capital following continued headwinds. Lower new equipment demand in Canada was offset by strong demand in ANZ tied to favorable short-term accelerated depreciation rules.
In our Transportation and Industrial segments, the impact of COVID-19 was significant and compounded by a weakened energy sector. While the transportation of consumer and industrial products remains essential, many subsets of the supply chain have experienced significant curtailment in transportation and logistics demand. These customers have in turn slowed or deferred acceptance of trucks previously ordered under more favorable short-term industry expectations. As a result, our combined Transportation and Industrial revenue declined by 17% in the quarter.
Product support revenue in our Agriculture segment increased 14% in the quarter, achieving strong performance despite the headwinds created by COVID-19. This was offset by a decrease in our Transportation and Industrial segments due to the impact of COVID-19 on economic activity in the quarter.
The increase in equipment revenue, combined with overall stable product support revenue and a significant reduction in inventory impairments resulted in gross profit increasing 9% or $4.2 million in the quarter.
Gross profit margin as a percent of revenue improved in the quarter, primarily due to the reduction in inventory impairments.
Total inventory decreased $96 million from June 30, 2019, including a $119 million decrease in Agriculture equipment inventory. 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 June 30, 2020 improving to 2.31 times from 1.62 times at June 30, 2019. This was partly offset by a $21 million increase in Transportation new equipment inventory, as the impact of COVID-19 has softened demand for trucks and caused customers to defer taking delivery of their orders compared to 2019.