Message to the Shareholders
Dear Fellow Shareholders,
I would first like to thank all of our customers, employees, original equipment manufacturers, and shareholders for their partnership during the past year. Our 2016 accomplishments have strengthened our business and advanced our vision: to be the leading full-service dealer of best-in-class, business-to-business equipment brands.
During the year, Cervus delivered on our key objectives by strengthening our balance sheet, improving service capabilities and margins, continuing to reduce costs and growing market share in our Transportation segment.
In 2016, we achieved our capital objectives and prepared our balance sheet for growth. We reduced inventory by $62.5 million through focused in-season sales and a disciplined approach to used inventory management. The sale and leaseback of 11 properties aligned Cervus' capital structure and entrusted the ownership of physical premises to a respected specialist and long-term partner. Finally, Cervus extended its $100 million syndicated committed credit facility, which now matures in December 2019. The achievement of these capital objectives enables Cervus to seize market opportunities as they arise, and supports our undivided focus on the core of our business: dealership operations.
During the year, Cervus' continued investment in Ontario produced tangible results. Our focus on making it easier for customers to do business with us was advanced, both in terms of the number of locations, and quality and efficiency of service. A critical factor for our customers in the transportation sector is proximity to and the availability of service technicians for their fleets. Since our acquisition of Peterbilt of Ontario, we have hired additional service technicians, increased the number of service bays by 29%, and opened four new locations in the province. All of these investments are complemented by our service optimization initiative, which gained traction in 2016 and increased the profitability across our service departments in 2016. These efforts have generated increased market share in our Ontario dealerships, despite lower overall equipment demand in the transportation industry in 2016.
In 2015, we made a decision to reduce costs, anticipating a challenging market to persist into 2016. I am proud of the decisions made by our managers across all segments, who have demonstrated leadership in the business they operate, reducing year over year selling general and administrative costs by $15.2 million. This was a fundamental factor in continued operational profitability through 2016 while protecting our capacity to grow with market recoveries.
Our strategic footing entering 2017 is sound. Service departments will be the primary growth focus for Cervus as our managers continue to implement, monitor and adapt service optimization across the Company. Providing our customers with the repairs they require, at the cost they expect, and in a timely manner form the foundation of our customer relationships, are core to our dealership operations and will lead our success in 2017.
President & Chief Executive Officer
Cervus Equipment Corporation
Q&A with Graham Drake, President & CEO
Q: Looking back on 2016, what was a significant achievement in the year?
The acquisitions we made in late 2014 resulted in an immediate 60% growth in the number our Canadian wholly-owned dealerships. I see two significant achievements in 2016, both critical in the integration and optimization of this rapid growth. The first is significantly strengthening our balance sheet during the year. By achieving our inventory reduction goals and aligning our capital through the sale and leaseback of 11 physical premises, our debt decreased by $149 million. This resets our capital structure for future growth.
The second achievement is the focus and delivery of process, particularly around our service departments. In our experience, when we deliver products and service at a level which increases customer uptime, demonstrate our understanding of their business realities and constraints, and deliver our commitments on time, we become a trusted partner. Progress reviewing and aligning our process was a significant achievement in 2016, and a substantial undertaking.
Q: What was the motivation behind Cervus Equipment's sale and leaseback?
The sale and leaseback is about re-aligning our capital with the roots of our business. Dealership operation is our expertise, and has always been our focus. As Cervus has grown over the years, the dealerships we've acquired often included the underlying real estate, particularly in our agricultural segment. By identifying a reputable, established and long-term partner in Skyline Commercial REIT, we retained many of the benefits of ownership while aligning our capital structure with our focus as a dealership operator, not a real estate aggregator. Deciding to sell and leaseback 11 of our dealerships, valued at $55.7 million, to Skyline Commercial REIT has not only freed up cash and reduced our debt, but brought us back to our core principle of dealership operations. In addition, we're very pleased to have gained a trusted partner.
Q: What do you see as the key focus for the company in 2017?
In 2017, the focus around streamlined operational process will continue. Efficient internal process enables informed and timely decision making at our dealerships and drives both customer satisfaction and profitability. By instilling and expanding these initiatives across areas such as precision agriculture, service, parts, rentals and training, we are continuing to advance our customers' businesses by providing effective, and efficient solutions as a trusted partner.
Q: For Cervus, what is a risk going forward and what are you doing to mitigate it?
Our customers operate in industries experiencing constant, and at many times, rapid change. Cervus must continue to offer solutions which reduce our customers' risk while enhancing their efficiency. In this regard, we are well positioned with our OEM partners, who lead the market in the innovation and development of equipment solutions. Cervus must continue to build our capacity for anticipating the business realities of our customers. Further, a strong balance sheet provides the operational flexibility required to both take and mitigate risks.
Q: What do you see as Cervus' opportunities going forward?
We see opportunities for continued growth, particularly in the efficiency of our service departments. Accelerating these efficiencies comes through instilling consistent and repeatable processes, which in turn facilitate the optimization of acquisitive growth. This directly aligns with our core values of making decisions as close to the customer as possible, investing in our people, and partnering with our OEMs.