CALGARY, Nov. 7, 2019 /CNW/ - Cervus Equipment Corporation ("Cervus" or the "Company") (TSX: CERV) 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.

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 2018.
  
  
• 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.

 Revenue

• 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 market.
  
  
• 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 cycles.

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

Income

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

Inventory

• 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 inventory.

Select Financial Information

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: https://event.on24.com/wcc/r/2067835/762F0709198345F8EC4DB00E5FC72942. 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.

Footnotes

Forward Looking Information
This 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 www.sedar.com 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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