CALGARY, Alta. — Cervus Equipment Corp., John Deere’s largest Canadian dealership group, announced its financial results and operational highlights for the 3 months ended Sept. 30, 2020.
Cervus generated $13 million in adjusted income before income tax, an increase of $15 million from the third quarter of 2019, 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 toward 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 turn 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 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 toward Cervus’ strategic performance objectives, despite the impact of COVID-19. The company 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 Cervus surpassed its used equipment inventory turn objective in Agriculture and reduced inventory levels across all segments, bolstering its already healthy balance sheet and generating $49 million in adjusted free cashflow for the year to date period.
In the 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 absorption improving to 94% for Sept. 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 favorable growing conditions.
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 the Agriculture segment, the company’s 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 the company continues to execute on strategic parts initiatives driving toward its 50/50 balanced sales and product support goal, including the opening of a new dealership in Nipawin, Sask., 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 the company’s 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 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.
- Total inventory decreased $115 million from Sept. 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 12-month period ended Sept. 30, 2020 improving to 2.78 times from 1.65 times at Sept. 30, 2019.