Message to the Shareholders
Dear Fellow Shareholders,
Throughout 2009, I was fortunate to meet and talk with many people who expressed a keen interest in what Cervus does, how we measure our success, and where we see ourselves heading in the future. The excellent questions that were raised in these conversations inspired me to prepare this Q&A based on the most frequent inquiries, with the goal of providing a closer look at our company’s strategies, philosophies and vision.
I would also like to take this opportunity to thank our dedicated employees and Board of Directors for their skill, insight and commitment to ensuring Cervus achieves our mission and vision. Thank you also to our shareholders for your confidence and belief in Cervus’ strengths. We remain dedicated to delivering a superior return on your investment, and look forward to the opportunities of the years ahead.
Yours Sincerely,
Peter Lacey
Chief executive officer
Cervus Equipment Corporation
Q. Overall, how would you rate Cervus’ performance in 2009? What were your key financial accomplishments?
A. I am quite pleased with our performance in 2009, even though our overall earnings were lower than the previous year. We successfully navigated one of the worst economic downturns since the depression and our agricultural division posted higher earnings while also increasing same-store growth.
The most negative impact of the economic downturn was experienced in our construction division, which saw machinery sales drop over 50 percent from the 2008 numbers. To counteract this, we adjusted our workforce and reduced other expenses in an effort to keep our losses to a minimum. And despite the economic upheaval, we were able to negotiate four significant acquisitions, thanks mostly to our sound business strategy and established access to capital.
Q. How has the recent economic climate changed or reinforced your existing business strategies?
A. There’s no doubt that the economy confirmed the importance of a strong balance sheet, conservative debt levels and proven safeguards – three things we’ve been building since the beginning.
I have always believed that the most important quality for a business to focus on is the ability to adapt quickly. Change usually happens quickly and the negative turnaround in 2008 was no exception. The recession tested our business model to be sure, but it also tested our ability to react in the face of a changing marketplace.
Q. Cervus recently converted from a limited partnership to a corporation – one of the first of many Canadian companies likely to make the switch. Why do you feel this was an important step for Cervus to take at this time?
A. It was well known that we had to make a change prior to the end of 2010, but our investors were uncertain of our plans and of the way our decisions would impact their investments. For investors, the idea of uncertainty is always a negative – and rightly so. And since unknowns discourage trading activity and liquidity, we chose to convert to a corporation early, thereby removing that uncertainty.
Around the same time, we began attracting investors from outside of Canada. We were certain a corporate structure would be easier for them to identify with and to invest in, so we decided to proceed with the conversion sooner rather than later.
Our shareholders were well-informed throughout the process and understood precisely how the conversion would effect their investment in Cervus. We also made it clear that the dividends they had come to expect would remain unchanged.
Q. Let’s talk about your recent acquisitions. In the last year, you have acquired four companies and also diversified to include an industrial product line. How will these decisions strengthen Cervus?
A. In 2009, we focused on creating geographic diversity. Our purchase of Ranchers Supply Inc. added three more John Deere dealerships to our fold – two in southern Alberta and another in southeastern British Columbia. In 2010, we also acquired a 20 percent share in Maple Farm Equipment with six locations in Saskatchewan and a seventh in Manitoba. Partnering with a group as accomplished as Maple will not only help us grow, but will also create exciting new career opportunities for our employees. We expect to learn a great deal from their management team and vise versa.
We also diversified our product line to include material handling equipment with the acquisition of A.R. Williams Materials Handling in 2010. True, there was some common overlay of manufacturers and geography between our two companies, but the acquisition also brought new manufacturers to the table, in addition to an opportunity to better utilize existing facilities. Most importantly, this purchase positions us for continued growth moving forward.
Our New Zealand acquisition in 2010 is our first international partnership and will open the door for more worldwide investments. We look forward to working with Agriturf, the New Zealand-based owner of two John Deere dealerships, and are confident this partnership will be a successful one. Both companies have distinct strengths; we provide capital and multi-store experience, plus proven systems and processes, while our partners in New Zealand have the local knowledge, experience and relationships that are absolutely essential for a business to thrive.
Q. Will we see any changes to your business model as a result of these investments and acquisitions?
A. We will lose some top-line revenues in our minority interest investments, but our bottom line will reflect the results of all operations. In the future, we expect partnerships to play a larger and more important role in our acquisition strategy.
Q. As you have mentioned, Cervus has a unique model that embraces partnerships with the owners, managers and employees of the dealerships you acquire. How has this strategy contributed to the growth of the Corporation?
A. People are the most important part of any business. One of the primary reasons we are a public company is to offer our employees the chance to share in the risks and benefits of business ownership. I am proud that so many of our employees own Cervus shares and I believe our investment-matching program adds real value for customers, employees and, ultimately, our shareholders.
By partnering with local teams in our markets, we can maintain the relationships that are so important in this business. Customers are able to return to the same dealership they have always known and can work directly with people they have come to know and respect, even after we have purchased or invested in the location. That kind of history is priceless.
Q. You’ve mentioned Cervus’ purchase of a 33.3% interest in Agriturf Limited, a newly formed agri-business in New Zealand. What is the strategy behind Cervus’ global expansion?
A. Our global acquisition strategy builds on our success in Canada. As was the case for our previous Canadian investments, with Agriturf we provide capital, credit, experience and established systems to our business partners — all things dealership owners throughout the world will need as they look to sell or consolidate their businesses. We firmly believe it is important to partner with local owners so we can maintain the existing customer relationships and local connections that are so valuable. We’ll also provide our dealer-partners with a succession strategy that reflects our local employee ownership philosophy.
Q. With three divisions, Cervus is engaged in the agriculture, industrial and construction equipment industries. How would you rate the success or challenges faced by each sector in 2009? What factors do you anticipate will affect the business in 2010?
A. Our construction equipment division experienced a
severe correction last year when the industry suffered over a 50 percent drop in business practically overnight. The market
is gradually improving, but it will most likely take several years to return to pre-recession levels. Simultaneously, and
on a positive note, the construction labour market improved tremendously; salary and wage demands have leveled off and our
ability to attract and retain quality employees has improved significantly.
We believe the agricultural side of our business will remain strong but, like our agriculture customers themselves, we count
on good weather, reasonable commodity prices and favourable seeding and harvesting conditions for success — all factors that
can be unpredictable. That said, the agriculture macro-trends continue to look very strong, so we’re confident.
AR Williams, our new industrial equipment division, purchased in 2010, did not experience the extreme volatility we saw in the construction equipment industry. Yes, their sales were down last year and it will take a few years to return to 2008’s sales volume, but the existing management team is highly experienced and we look forward to working with them in the years to come.
Q. With employees in various locations across Western Canada, how do you motivate and engage your team to come together behind the Cervus brand?
A. For us, there are several key factors necessary for team engagement: shared ownership, dealer autonomy and the authority to make decisions locally. As a company, we maintain accountability and openly share important information, establish clear objectives and expectations, instill employee benchmarks and provide opportunities for career growth. Combined, all of these factors create a positive work environment for all of our employees, regardless of their location.
Q. Cervus paid distributions/dividends in 2009. Why is this a priority?
A. When Cervus first became a limited partnership, distributions were key for companies looking to raise equity. When we decided to convert to a corporation, we wanted to continue to maintain our original investment strategy and provide income for our shareholders — a number of whom are long-term investors. For us, it is important to offer our shareholders a balance of income and growth opportunities and, as a corporation paying eligible dividends, the potential income from an investment in our company should continue to attract new investors.
Q. Cervus ranked highly on several important lists in 2009 including the TSX Venture 50, Profit Magazine’s Top 100 & Next 100, and Report on Business’ Top 1000 Publicly Traded Companies. Cervus also won the award for “Best Investor Relations by a TSX Venture Exchange Company” at the IR Magazine Awards. What do these honours mean to the corporation?
A. They show that our growth and success stems from doing things right. Obviously the recognition is very gratifying. I hope these rankings and awards give our existing and potential investors, our customers and our employees even more confidence in Cervus.
From an investor relations perspective, the “Best Investor Relations by a TSX Venture Exchange Company” award means we’re doing a good job of telling the Cervus story, and are maintaining our commitment to open and honest communication. We’re making constant strides on this front, from my frequent investor presentations to the recently launched news release subscription service on our website.
Q. In past years, Cervus has published the following corporate vision: “By 2015, Cervus will be the most successful global provider of business-to-business agricultural, construction and industrial equipment solutions measured by customer satisfaction, employee satisfaction and shareholder return on equity.” Have you moved towards accomplishing this goal?
A. Absolutely. At this stage in our growth, and for our assessment to be meaningful, we need to take a good long look at our industry to fine-tune how we measure the phrase “most successful” by pinpointing exactly who we are comparing ourselves to. We are in the process of adding more customer and employee satisfaction measurements to our current evaluation systems, as they are critical to the success of any company. We have begun to address the “global” aspect of our vision with our New Zealand partnership, and will continue to execute our partnership strategies with local entrepreneurs and world class manufacturers.
Q. Cervus takes a unique approach to people management by focusing on several core values. What is your approach?
A. We know that all people have inherent value, and we strive to help our employees build on their strengths so they can succeed. Simply put, if they grow, we grow.
We actively value our team members in four key ways: recognizing aptitude, encouraging learning, building a corporate community, and offering empathy and support during hard times. We take pride in recognizing our employees’ skills, and offer learning opportunities so our team members can build their careers and experience the rewards of success. Company-wide, we create a relational, trusting, and winning community that encourages belonging and shared ownership.
