Message to the Shareholders
Dear Fellow Shareholders,
One of the best parts of my role at Cervus is travelling from place to place and meeting with people who want to learn more about Cervus. Time and again I find myself answering intelligent, thought-provoking questions, many of which are featured in this Q&A section. I hope – together with the rest of this report – you find the answers that follow both informative and useful.
I would like to extend a sincere thank you to our employees and Board of Directors; your hard work and dedication to ensuring the success of Cervus’ vision is both noticed and greatly appreciated. To the shareholders who consistently demonstrate confidence in our business model and strategies by investing in our vision, thank you. We remain steadfastly committed to delivering a superior return on your investment, and will continue to earn your trust and partnership.
Yours Sincerely,
Peter Lacey
Chief executive officer
Cervus Equipment Corporation
Q. What were Cervus’ key financial and operational accomplishments in 2010?
A. Cervus posted strong financial results and enjoyed organic revenue growth of 12% during 2010 on a same store basis. We also successfully welcomed the AR Williams Materials Handling team and product lines into the Cervus family, and were honoured with sales achievement awards from our agriculture, construction and materials handling manufacturer partners. Additionally, we were #16 on Alberta Venture Magazine’s Fast Growth 50 rankings and earned a prominent spot on the TSX Venture 50.
Q. You adopted new corporate mission, vision and value statements this year. Why did the Cervus leadership team feel it was important to make those changes and how are they reflected in daily operations?
A. We wanted to refresh our vision, mission and values to more accurately reflect where we are today, how we got here, and how much we have grown along the way. We canvassed our employees, board members and leadership team for their thoughts and, with their help, were able to establish a new, long-term plan for Cervus.
Q. How does the leadership team inspire Cervus’ employees to believe in its evolving company vision and mission?
A. Everyone on the leadership team – myself included – felt it was important to go directly to our employees for input. Personally, I was very proud of the number and caliber of responses we received. Our employees showed how much they value each other, our customers and the company as a whole. We searched the responses for common themes and built several statement models to try and capture the core of what our employees were saying. Then we submitted three versions to our employees for review and used their recommendations to craft the final version. Moving forward, we will develop a plan to communicate our new mission, vision and value statements with every employee, so they understand how their role in the company (both today and in the future) can have a positive impact on our long-term strategies.
Q. Last year’s report highlighted the strength of Cervus’ employee teams at the dealer level. How will the leadership team draw on that strength as Cervus grows?
A. We are optimizing our organizational structure to give individuals the opportunity to gain new experience through cross-divisional, geographic and new project development.
We also introduced an ambitious leadership development pilot project to offer our future leaders the support they need to thrive. With our help, they will evaluate themselves, clearly define their ambitions, establish what they need to learn, and design a plan to build the skills they need to meet their goals. This project will produce a strong team of leaders to support our growth in the long term.
Q. As of July 2010 Cervus officially owns 60% of Agriturf Ltd., a company with six John Deere equipment dealerships on the North Island of New Zealand. How does this new partnership fit into the Cervus growth strategy?
A. John Deere is looking to grow their business on a global scale as countries around the world begin to place a premium on growing food. As a result, we believe there will be significant growth possibilities outside of North America.
Our partnership with Agriturf has offered an opportunity for our team to enhance their international experience working with local dealerships in new countries. The business practices, as well as the language, currency and legal system in New Zealand are similar to Canada, so we have been able to get our feet wet while establishing the foundation of our global business model. In the future, we believe there will be many more opportunities for growth in other parts of the world.
Q. How have the now complete acquisitions of Ranchers Supply Inc., AR Williams Materials Handling Ltd. and Maple Farm Equipment impacted Cervus’ business in 2010?
A. Ranchers Supply was not performing at an optimum level when we acquired it in late 2009, and while there has been some improvement on the business metrics, we still have steps to take to continue its evolution. We would like its performance levels to rival our other John Deere branches within the next 12-18 months.
AR Williams Materials Handling added over $40 million in revenue growth – a notable and significant contribution. It should be mentioned that this is a lower revenue number than their previous years and likely the result of the economic downturn. In recent months, however, we have experienced improved customer optimism and increased purchasing inquiries, so we’re confident this division will start to see strong year over year growth.
Our investment in Maple Farm Equipment is working out well, although it did create an anomaly with our comparative financial results. The two branches in Moosomin, SK and Russell, MB that we provided as the purchase price for our 20% interest in Maple were previously consolidated, and 100% of their revenue was added to our consolidated revenue line. Because the investment in Maple is a minority investment, only our 20% of the earnings is captured as Equity Earnings from Significantly Influenced Companies. The bottom line is the same but the revenue looks lower this year as a result of the required accounting.
Q. How are employees at newly purchased dealerships such as these integrated into Cervus’ corporate culture?
A. Integrating acquired businesses into our corporate culture is a big job. I believe the growth opportunities we offer – including the opportunity to become shareholders – and our customer-focused strategies go a long way towards impressing new employees.
Training and leadership are important to Cervus, and the acquisition process we undertook after purchasing AR Williams Materials Handling inspired us to launch a new initiative: Cervus Leadership University. New and potential managers will complete our recruitment, selection, goal setting, performance review, and coaching training modules to earn their certification. We believe this will become a powerful tool that will help employees who have joined Cervus through an acquisition understand, deliver, and exemplify our core values and culture.
And, of course, we are in the process of communicating our revised vision, mission and values and expect them to further entrench our corporate culture.
Q. Reports suggest that Canada is slowly heading out of the financial downswing that has stalled economies worldwide. Meanwhile, Cervus has continued to post profits while significantly expanding its dealership investments. Looking back, what factors influenced Cervus’ success in the face of these obstacles?
A. Fortunately, the agricultural industry was in much better shape than other sectors including real estate and oil and gas production. And, by carefully managing inventory and expenses in our construction and material handling divisions, we were able to remain profitable.
Our success in these lean years is largely the result of geographic and product diversification. By and large, business-to-business equipment needs vary across industries, but with product diversification we are able to balance some of those highs and lows.
Q. How did CERVUS' newly combined construction/industrial division perform in 2010?
A. In keeping with the rest of the industry, we experienced a significant drop in machinery sales in 2009, followed by a small improvement in revenues in 2010. Right now, the demand for equipment is increasing and factory orders are even starting to back up as dealers react to signs of economic recovery. Inventory management and expense control was a major priority in this division last year. We saw modest profitability, successfully reduced existing inventory levels and right-sized our current inventories, which normalized turnover to reflect the lower sales levels. We also increased our sales training. Today we have better-qualified professional sales teams working in a streamlined sales organization than we had going into 2009.
Q. Across the prairies, farmers dealt with an unusually wet spring that caused a later than normal harvest in 2010, yet enjoyed increased commodity prices. How did these factors influence the year-end results in Cervus’ agriculture division?
A. Truthfully, we were concerned in June when approximately 30% of our customers in Saskatchewan had not been able to seed a majority of their land because of the abnormally wet conditions. However, crop insurance provided some assistance and drought conditions in other parts of the world caused Russia to ban grain exports in August, causing a dramatic rise in grain prices. Harvest may have been later than normal, but high grain prices drove our sales activity above the previous year’s numbers and offset the wet spring conditions.
Q. How has the current economy changed the way Cervus’ customers operate their own businesses?
A. I believe our customers – while generally more optimistic – are still cautious about capital expenditures and increasing debt levels. So long as the economy continues to improve as it has, capital expenditures should be available to meet the needs of business owners with successful bid projects or expanding distribution requirements.
Q. Near the end of 2009, Cervus transitioned from a limited partnership to a corporation. Now more than a full year later, what has been the result of that decision?
A. It was a smooth transition. Our investors welcomed the fact that we maintained our limited partnership distribution to an equivalent dollar corporate dividend. The move has opened up ownership opportunities for US investors and will make it easier for investors to compare us financially with our industry peers. Our graduation in 2011 to the Toronto Stock Exchange should improve our exposure as well.
Q. Cervus has demonstrated a commitment to paying dividends to shareholders whenever possible. Why is this important?
A. A number of our shareholders invested in Cervus because we have a history of paying dividends and the strong balance sheet necessary to keep doing so. They expect us to continue to pay dividends, and we believe we have sufficient earnings to balance funding future growth with profit distribution.
Q. In 2010 Cervus was named one of the TSX Venture 50. What factors contribute to making Cervus such a well-regarded investment option?
A. I believe our sales revenue was among the largest of all the companies listed on the TSX Venture Exchange. That, together with our history of growth, dividend payments and consistent profitability helped us earn this recognition.
Q. Looking ahead, what does the leadership team foresee for Cervus in 2011?
A. Today, we enjoy a strong balance sheet and tremendous opportunities to raise capital at a reasonable cost. We are looking to acquire new businesses, to grow organically through product additions and to expand some of our existing branches geographically.
Agricultural commodities appear to be trending upwards, which should result in a better than average profit outlook for our farm producers. Some of those profits will be reinvested into newer, more productive equipment, thereby increasing our sales. Meanwhile, the Alberta and Saskatchewan labour markets are tightening, and as new employees arrive, housing starts will once again increase. This should provide a substantial boost to our construction division.
