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Edited Transcript of CVL.TO earnings conference call or presentation 15-May-20 2:00pm GMT

Q1 2020 Cervus Equipment Corp Earnings Call

CALGARY May 15, 2020 (Thomson StreetEvents) -- Edited Transcript of Cervus Equipment Corp earnings conference call or presentation Friday, May 15, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adam Lowther

Cervus Equipment Corporation - CFO

* Angela S. Lekatsas

Cervus Equipment Corporation - President, CEO & Director

* Scott Johnston

Cervus Equipment Corporation - VP of Agriculture Canada

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Conference Call Participants

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* Ben Cherniavsky

Raymond James Ltd., Research Division - MD & Head of Industrial Research

* Cherilyn Radbourne

TD Securities Equity Research - Analyst

* Jacob Jonathan Bout

CIBC Capital Markets, Research Division - MD of Institutional Equity Research

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Presentation

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Operator [1]

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Good morning, and welcome to Cervus Equipments' First Quarter 2020 Results Conference Call. (Operator Instructions) This call is being webcast, and a replay will be available on Cervus' website. You may access the accompanying presentation now by going to the Investor page of Cervus' website at cervusequipment.com. (Operator Instructions)

I will now turn the call over to Cervus' Chief Financial Officer, Mr. Adam Lowther. Please go ahead, Mr. Lowther.

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Adam Lowther, Cervus Equipment Corporation - CFO [2]

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Thank you, operator, and good morning, everyone. Thank you for joining us today to discuss the results of Cervus Equipment for the first quarter of 2020.

On the call with me is Angela Lekatsas, Cervus President and Chief Executive Officer. Also joining us today is Scott Johnston, Vice President of Agriculture Canada, who will be available for the question-and-answer portion of the call.

Before we continue, I'd like to advise listeners that this presentation may contain forward-looking statements and information that is subject to certain risks, uncertainties and assumptions. For a complete discussion of the factors, risks and uncertainties that may lead to actual results or events differing materially from those expected, please refer to Cervus' most recent annual and quarterly MD&A, which are available on our website.

Please note that during today's call, we will discuss non-GAAP financial measures, including results on an adjusted basis and key performance indicators. We have included reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures in our MD&A.

Turning to Slide 4. I I'll walk through the components of the quarter-over-quarter change in adjusted income before income tax. Overall, adjusted income before income tax increased $3.2 million quarter-over-quarter, which is seen comparing the 2 gray bars on the far left and right margins of this chart.

Moving left to right, an $800,000 increase in gross profit was primarily driven by a 15% increase in new equipment revenue in the Agriculture segment and a 46% increase in new equipment revenue in the Transportation segment against the backdrop of stable product support revenue.

General and administrative, or G&A, expenses decreased $3 million, accomplished through the restructuring activities of 2019 and increased discretionary expense discipline across all segments. Net finance costs increased $400,000 related to increased new equipment inventory in our Transportation segment. This year, we've received many of our orders in the first quarter, resulting in higher inventory levels compared to the first quarter of 2019 when factory delays limited our sales capabilities. The combination of these factors resulted in $500,000 of adjusted income before income tax in the quarter.

The first quarter is typically our slowest quarter of the year, and we are pleased to have achieved positive adjusted income before income tax, which is an improvement over the first quarter results achieved in the last 5 years. It is also worth noting that the quarter's results do not fully reflect the impact of COVID-19, as the response to the virus was primarily limited to the last month of the quarter. The impact of COVID-19 on our operations will be discussed more fully in the outlook portion of this morning's presentation.

Turning to Slide 5 and the balance sheet. Our total inventory decreased $6 million from the first quarter of 2019 as a $43 million decrease in Agriculture inventory, partially offset by a $37 million increase in inventory from the Transportation segment, as the factory backlogs experienced last year have abated and the trucks we have ordered are now on hand.

Overall liquidity increased 6% compared to the fourth quarter of 2019. And our capacity to access debt markets is strong, with a net long-term debt to total capital ratio of 12% at March 31 compared to 13% at the end of 2019. This contributes to the health of our credit facilities, where at March 31, we could floor an additional $18 million of existing inventory. We had $75 million undrawn and available under our syndicated credit facility, and $24 million in cash. We are pleased with the strength and financial flexibility our balance sheet provides as we navigate the uncertainty associated with the COVID-19 pandemic.

A quarterly dividend of $0.11 per share was declared to shareholders as of March 31, 2020.

Turning to Slide 6. Our operations are capable of generating strong cash flow across industry cycles. In the first quarter of 2020, we generated adjusted free cash flow of $4.1 million, an improvement of $6 million compared to the first quarter of 2019. We have summarized our annual adjusted free cash flow for the years 2016 to 2019 and for the trailing 12-month period ended March 31, 2020.

Adjusted free cash flow determines the cash from operating activities before changes in noncash working capital, less sustaining capital expenditures. We have excluded noncash working capital as this can be highly impacted by our decisions around the portion of inventory we choose to floor plan through short-term trade credit facilities.

Slide 7 contains a summary of the financial covenants under our syndicated facility, which remain healthy. Our fixed charge coverage ratio improved compared to the fourth quarter of 2019. And we continue to have significant operating flexibility within this ratio.

I will now turn the call over to Angela Lekatsas, President and CEO of Cervus, for some commentary and closing remarks. Angela?

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Angela S. Lekatsas, Cervus Equipment Corporation - President, CEO & Director [3]

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Thank you, Adam, and good morning, everyone. On today's call, I will be highlighting significant aspects of our first quarter performance, providing an update on how we are navigating the current environment and discussing our outlook going forward. I'll apologize in advance for the length of my comments, but there's lots to talk about today.

Before getting to the results, I would like to thank all our service employees, who have accepted the privilege and responsibility that comes with being designated an essential service. I am proud and appreciative of their continued commitment, dedication and innovation in the service of our customers through these challenging times.

Moving to our performance for the quarter. Slide 8 provides a summary of the $3.2 million improvement in adjusted income before income tax by segment. The results of the quarter demonstrate the benefits of prior year restructuring and process improvement actions that resulted in accelerated equipment sales, stable product support revenue and sustainable cost reductions across all segments.

Agriculture, particularly in Western Canada, remains a key component of service results. In the first quarter, our Agriculture segment achieved increased earnings in the face of continuing headwinds in Western Canada, such as rail disruptions, China's ongoing trade embargo, a late start to seeding activity and the onset of COVID-19.

Agriculture new equipment sales increased 15% despite a decrease in overall industry sales, as we worked with customers to accelerate new equipment purchases, and thereby avoid price increases due to the weakening Canadian dollar.

Used equipment sales performance was also very strong in the quarter, keeping pace with the record first quarter used equipment revenue reported in 2019. This increase in equipment revenue, stable product support revenue and sustainable decreases in G&A expenses resulted in a $2.6 million increase in adjusted income before income tax in our Agriculture segment.

In our Transportation segment, adjusted income before tax increased $700,000 as new equipment revenue increased 46%. This increase in new equipment sales resulted from our ability to meet demand from inventory in the current quarter compared to the first quarter of 2019 when equipment deliveries from the factory were delayed. This improvement in equipment sales was supported by a decrease in G&A expense resulting from increased discipline in management of discretionary expenses.

In our Industrial segment, adjusted income before income tax was in line with the prior year, despite a 14% decrease in revenue as the collapse of oil prices in March compounded an already prolonged period of reduced resource-related activity in Western Canada. This decrease in revenue was partly offset by a 2% decrease in G&A expense, which included some severance costs in the quarter as we reduced the segment's cost structure.

Slide 9 provides a summary of our Agriculture segment used equipment inventory levels and turnover. Amid the headwinds facing our ag segment in 2019, we set our focus on rightsizing our used equipment inventory levels. The benefit of these actions in reducing prospective interest costs and obsolescence is evident in the continued improvement in used equipment turnover of 1.89x compared to 1.78x at December 31, 2019.

Used agriculture equipment levels across the Western Canadian dealers remain in excess of market demand. Dealers who have not yet taken action are incurring the inventory carrying costs of interest, age-related devaluation and obsolescence. As a result, many dealers may be constrained in their ability to accept used equipment trades, in turn limiting their capacity for new equipment sales. The decisive actions we took last year have facilitated strong new equipment sales in the quarter as we were able to accept used equipment on trade.

Turning to Slide 10 and our outlook. COVID-19 has had an unprecedented impact on the global economy and at this time, there is no clear consensus regarding the likely duration of the virus or the short- and long-term implications of the pandemic. The company's operations have been designated as essential services, essential for food production and the transportation of essential goods in the supply chain.

Cervus is committed to supporting our customers through these trying times, while conducting business responsibly and in a regulatory compliance to complete -- sorry, to keep both our employees and customers safe. We have implemented new ways of doing business that will benefit our operations and our customers long after the immediate crisis has passed.

To the extent that some of our operations have experienced reduced activity, we have taken proactive measures as part of our business continuity plan to manage spending during the downturn. These actions include temporary layoffs, workshare programs and reduced workweek, which allow for bringing employees back to full-time work as soon as conditions warrant. The Cervus executive and corporate employees have also engaged in a salary reduction through this period, while the Board of Directors have initiated a 25% reduction in their retainer through the remainder of 2020.

In our Agriculture segment, the challenging harvest of 2019, along with continued uncertainty and trade restrictions were compounded in 2020 by rail disruptions and the broader economic implications of the COVID-19 pandemic. The rapid strengthening of the U.S. dollar relative to the Canadian dollar has increased the price of new equipment for customers. Despite the persistence of these broader economic headwinds, there are some positives. Strengthening of the U.S. dollar has supported the relative value of used equipment and supported the Canadian dollar value of producers' crops. The decline in the price of oil has also reduced diesel prices, a significant input cost for producers.

From an operational perspective, our focus on innovation and technology during this pandemic has provided us with tools that we will continue to use to improve our efficiency and the efficiency of our customers. Our team is committed to providing our customers uptime through this busy season, while ensuring the safety of our employees and the communities they work in.

Moving to Slide 11. The outlook for the truck market has been impacted by COVID-19 pandemic. PACCAR, the owner of Peterbilt trucks, acknowledged it is difficult to estimate 2020 truck industry retail sales in North America due to the uncertainty presented by the virus. In Ontario, consumer activity has been disrupted, while construction-related activity has been restricted. While lower fuel prices have reduced transportation input costs, this is not anticipated to offset the short-term decrease in transportation demand until underlying economic activity resumes. Our Saskatchewan transportation operations are more closely linked to the oil and gas sector than our Ontario dealership. The collapse in the oil price, combined with a general decrease in economic activity related to COVID-19 has partially slowed business in this region, while activity in the agriculture and supply chain sector continues to support this business. Cervus will navigate this market by continuing to service the base level of ongoing transportation activity, while accelerating actions already underway to deliver internal efficiencies.

Turning to our Industrial segment. Like much of Western Canada, this segment is indirectly tied to the oil and gas sector. The collapse in the price of oil, combined with a general decrease in economic activity related to COVID-19 is set to weigh on Alberta and Saskatchewan, who are already enduring a period of curtailed capital investment. In addition, complying with physical distancing requirements has negatively impacted certain of our industry of product support offerings, such as training and preventative maintenance, which is generally performed on-site at customer locations. A foundational level of demand will remain as consumer and industrial staples continue to move, and our dealerships are active in the support of these customers, while action is also being taken to manage costs through the pandemic.

Despite near-term industry hurdles and economic headwinds, crops will continue to be planted and harvested each year in our geographies, which includes some of the world's most fertile and politically stable growing regions. The transportation of freight and movement of physical goods remains the backbone of the world economy. We remain open for business and are committed to delivering the value and uptime our customers rely on each day including in challenging times. The current macroeconomic headwinds further validate the strategic objectives we have set and the actions already underway. This includes maintaining our strong balance sheet by managing inventory levels, examining our cost structure with a focus on profitability and continuing investment in product support opportunities.

Operator, we are now ready for the question-and-answer portion of our call.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Jacob Bout of CIBC.

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Jacob Jonathan Bout, CIBC Capital Markets, Research Division - MD of Institutional Equity Research [2]

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Curious how -- given the pandemic, how your strategic initiatives have changed, i.e., what you laid out in your Investor Day last year?

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Angela S. Lekatsas, Cervus Equipment Corporation - President, CEO & Director [3]

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Thanks for that, Jacob. So the volatility in our industry is regardless of the cause, have only served to strengthen our resolve that our long-term strategy is perfectly designed to provide resilience and sustainability at the bottom of the cycle, which is exactly what we need right now. Protecting the balance sheet by rightsizing our inventory, which we did in 2019, provided us with the financial flexibility to navigate through the challenges that we experienced in the first quarter and the challenges that are continuing from COVID-19.

Furthermore, our strategic initiative to focus on absorption and profitability, which were key components of our strategy, Jacob, produced financial returns in Q1 that we haven't seen in the last 5 years. And let's not forget our focus on innovation and technology. We saw the demand for new technology and innovation accelerated through Q1 and through this pandemic as a perfect defensive response to the need for social distancing and quarantine. In fact, our teams were able to accelerate some of our technology projects by 6 to 9 months to meet the demands of customers through this challenging time.

So our financial projections for the next 5 years will, of course, be impacted by major macroeconomic events, no matter what they are. But the strategy is the right one, and the targets provide us with our North Star. So time lines may be pushed out. They may not be -- 5 years is a long ways away, Jacob. But the -- we are on the right track, and it's absolutely confirmed in my mind that we have the right strategy.

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Jacob Jonathan Bout, CIBC Capital Markets, Research Division - MD of Institutional Equity Research [4]

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Because one of the things that I noticed was the product support in both Commercial and Transportation was actually down year-on-year, and I thought that was an area of focus.

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Angela S. Lekatsas, Cervus Equipment Corporation - President, CEO & Director [5]

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It absolutely is an area of focus. We had area of focus on, as you know, absorption, profitability, inventory turns. It's not going to all be achieved in 1 quarter. It is a 5-year plan. And our focus in the first -- last 9 months has really been on strengthening Agriculture, and we will get there on Transportation and Industrial as well.

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Jacob Jonathan Bout, CIBC Capital Markets, Research Division - MD of Institutional Equity Research [6]

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What accounted for the slightly lower product support in Commercial and Transportation this quarter year-on-year?

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Angela S. Lekatsas, Cervus Equipment Corporation - President, CEO & Director [7]

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Yes. Good question. Product support is always impacted by discretionary -- it's a discretionary spend. So when you see cash flows of our customers regardless of whether they're truckers or whether they are producers or even apprehension about what the future holds. You are going to see that discretionary spend is more conservative, and we do see that certainly on the servicing side.

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Jacob Jonathan Bout, CIBC Capital Markets, Research Division - MD of Institutional Equity Research [8]

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Okay. I guess I thought it was the other way around that new equipment was more discretionary than product support. I mean, you still have to service your vehicles, but.

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Angela S. Lekatsas, Cervus Equipment Corporation - President, CEO & Director [9]

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Well, you have to service them, but there are -- it's quite an element of servicing that is discretionary from the perspective of -- sorry, our maintenance programs, regular scheduled maintenance programs, or if you think your business is turning down, you park your truck. We saw a lot of our customers with the onset of COVID-19, the regulations that came in place, they parked their trucks as they saw their businesses go down. And in that case, you don't need servicing.

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Jacob Jonathan Bout, CIBC Capital Markets, Research Division - MD of Institutional Equity Research [10]

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Okay. And when did that start, was that at the -- in the end of March? Or was that sometime earlier?

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Angela S. Lekatsas, Cervus Equipment Corporation - President, CEO & Director [11]

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It was in March. I mean we all remember the news coming out in March about the pandemic. We saw the decline in the economy. We saw people anticipating declines. Depending which business the transportation is supporting, some of them shut their trucks down earlier than others, some went later. Some waited right until the government shut down the construction industry, for example.

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Adam Lowther, Cervus Equipment Corporation - CFO [12]

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Yes, I think, Jacob -- it's Adam. The 2% decline in product support in Transportation and Industrial and then the 5% increase in Agriculture, so the softening started pretty early in March in Transportation, Industrial, particularly in Industrial, where we do a lot of customer training and on-site preventive maintenance. So to Angela's point, it's discretionary in that it's not broken down. We're going out to check it, make sure the battery is up to date, change oil, et cetera. So where we were not able to access customer premises in March, that had an impact, and then on the trucking side, the overall slowdown. But we're not talking big declines, it's 2% in a quarter that had COVID.

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Angela S. Lekatsas, Cervus Equipment Corporation - President, CEO & Director [13]

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And don't forget the impact of the sand rail disruptions had on the whole sentiment. I think it's a 1 quarter, Jacob, and it's certainly not a long-term issue, but it is a sentiment driven by market decline.

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Jacob Jonathan Bout, CIBC Capital Markets, Research Division - MD of Institutional Equity Research [14]

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Okay. Last question just on the new equipment growth that you saw in the first quarter. Has that extended into April, May? Or how should we be thinking about that?

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Angela S. Lekatsas, Cervus Equipment Corporation - President, CEO & Director [15]

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What I'll do is I will let Scott talk about Agriculture, and then I'll come back to you on Transportation. Scott, do you want to talk a little bit about what you're seeing with the spring activity in Agriculture?

Scott, you are on mute. You might want to put your...

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Scott Johnston, Cervus Equipment Corporation - VP of Agriculture Canada [16]

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Thank you, Angela. The harvest that was carried over from 2019 has effectively been completed in Alberta and in Saskatchewan. Seeding is well underway. There was a slight amount of new sales pulled forward into the first quarter because of the anticipated increase in foreign exchange. Right now, our approach with our customers is to basically identify the operational performance and technology that they can find in new John Deere equipment which will drive down their input costs and basically, because of the iconic brand, we have the best food production system. We expect to see in the crop segment, continued positive new sales and the only segment that we see perhaps detrimentally affected by COVID-19 is the livestock production. Beef pricing is down 23%; hog, 21%. The hog industry is still facing the African swine fever impact and the trade war with China. And beef, as we know, looking at the news is COVID-19. Both are down compared to 2019. Hopefully, that answers your question, Jacob.

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Angela S. Lekatsas, Cervus Equipment Corporation - President, CEO & Director [17]

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Sure. And then I'll maybe pick up on the Transportation side. So Jacob, the way to think about Transportation is that, if you divide it into the large fleet sales, which are over the highway that were being used to transport essential services and then the vocational business, which is the -- supports the things like the dump truck business for construction, we are very strong on the vocational side in our Ontario business. And it was the vocational side that was really slowed due to COVID-19 as construction sites were shut down, people couldn't go to work. So we will see an impact from COVID-19 in April and May. We have seen it as activity just shut down. So customers who would have ordered trucks to be delivered for the spring construction season deferred their -- taking up their trucks, and we see that deferral in and around that 60 days as the season is pushed back. Now we see it's starting to pick up again. We are -- in the last week, we've heard from customers that they want to take their trucks. The season will be underway, heavy in the latter half of May. Our biggest fear was that people wouldn't be able to go back and we would miss the season. So it appears right now that we are picking up in the middle of the season, and we will be able to pick up that business. But certainly, the first half of Q2 was slowed. In Saskatchewan, we do see that the support for refrigeration trucks continues in the support of the transportation of food, but they also saw a decline in support of other areas of transportation. Does that help?

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Jacob Jonathan Bout, CIBC Capital Markets, Research Division - MD of Institutional Equity Research [18]

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It does. Yes. I mean really, what I was trying to understand here is the pull forward effect of the FX.

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Angela S. Lekatsas, Cervus Equipment Corporation - President, CEO & Director [19]

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Oh, so the FX, really, the pull forward effect was largely in Agriculture. And I think Scott spoke to the Agriculture already. Yes. So I don't -- most of the trucks that were ordered that were going to be taken in Transportation were -- they will be secured under the pricing of the agreement of when they were ordered, which was months ago. So you may see more of an impact in the second half of the year as a result of the dollar.

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Operator [20]

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Your next question comes from the line of Ben Cherniavsky of Raymond James.

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Ben Cherniavsky, Raymond James Ltd., Research Division - MD & Head of Industrial Research [21]

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A few questions, but I don't know if I'll get to all of them. The G&A reductions that you alluded to and some of the actions that you took last year, Angela, can you just maybe provide a little more clarity on what levers you pulled, how you manage to take those costs out of the business? What areas were they in? And then maybe a little bit on just how the culture of the company is pulling through this. And a lot of changes, you've -- some of them within your control on your strategic plan and then others with most recent COVID crisis? Like are you -- how many -- how are the -- how is the company feeling about the direction? And have you had any turnover in key people at this point?

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Angela S. Lekatsas, Cervus Equipment Corporation - President, CEO & Director [22]

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Okay. 2 questions. Great questions, Ben. So let me just talk about the G&A and how we achieved it. So recall that in '19, we restructured Agriculture to align the 21 locations that are in Canada as well as the 14 locations that are in Australia and New Zealand. So we aligned them both structurally and strategically, and we aligned them towards our focus on customer experience, balance sheet management and profitability. So we did take out what -- we restructured, we put new leaders in place, we aligned them functionally in the areas of business support, product support and sales. And we ended up through that process, taking out quite a few people, and we also took out quite a few of the management layer. So for example, in Australia and New Zealand, we went from 4 GMs to 2 GMs. And we did the same thing in Saskatchewan and Alberta. So I think if you -- it's not about taking out people to take out dollars, it's about aligning them structurally so that they are all focused on achieving exactly the same end results, empowering them in their position to drive those results. And most importantly, ensuring that everything is standardized from a process perspective. So you don't have 1 location that opts out for efficiencies that you're trying to drive in the company. So I would say that a big part of the G&A reductions were directly attributed to that whole restructuring.

And I think the performance that you saw in Q1 was directly related to having everyone laser-focused on achieving the same thing. We have a sales process that's standardized. We redid our commission structure. It didn't result in lower commissions. It resulted in salesmen focusing on the velocity of the turn of the use that they're taking in. We redesigned our trade book so that we were very clear on the valuation of the equipment that we were taking in. And I think that was the biggest part of it.

Culture, we started a culture initiative before I came in as CEO that we call Accelerate to Great. And that culture was all about accountability, Ben. We continued with that culture and those initiatives through the remainder of 2019. But what we added to that was the clarity on what people were accountable for. So with our 50-50 strategy and our focus on our key metrics that we put forward at Investor Day, everybody was very clear on what we were accountable for.

I think in our culture, there's been excitement and alignment. I mean everybody wants to be on a winning team. And this is our first quarter where we're feeling like a winning team. So everybody is feeling pretty good about it.

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Ben Cherniavsky, Raymond James Ltd., Research Division - MD & Head of Industrial Research [23]

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Have you had any turnover in key personnel, either through your own doing or others who just sort of don't want to be on the bus?

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Angela S. Lekatsas, Cervus Equipment Corporation - President, CEO & Director [24]

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The turnover that we've had has been purposely designed, Ben. I can tell you that we have no surprise turnover.

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Ben Cherniavsky, Raymond James Ltd., Research Division - MD & Head of Industrial Research [25]

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Okay. I'm trying to just understand the unrealized -- maybe Adam can answer this, about the unrealized -- adjustment for the unrealized loss on floor plan financing. Is that just a revaluation of the liability for your floor plan payable inventory?

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Adam Lowther, Cervus Equipment Corporation - CFO [26]

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Yes. You're right, Ben. We've got -- for the trucks that we carry for stock. So the trucks that we've imported in for a customer that a customer has agreed to purchase and put a deposit on, we'll lock that in Canadian dollars, either when it's ordered for the customer, when the customer agrees to buy it. So that our -- the customers' cost is fixed, our cost is fixed. And so that's not fluctuating. Where the unrealized FX comes out of it for the trucks that are in stock, they are floored in U.S. dollars. And the reason we do that is if a customer comes in and says, I'll take, I like the truck, while you can have one-off the lot, it's ready today. Here's the cost in Canadian based on today's FX or you can order 1 from the factory. It's going to take, however, many weeks lead time, and you're going to pay in U.S. dollars there, too. So to keep it the same for the customer who is paying basically the Canadian equivalent of U.S. spot, whether they're buying it off the lot or ordering from a factory, we floored our stock inventory in U.S. dollars. And as that moves, we have a U.S. dollar-denominated payable, but we haven't fixed a revenue line to it. So ultimately, it washes out as we commit sales to them, but in the short term, we can only have...

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Ben Cherniavsky, Raymond James Ltd., Research Division - MD & Head of Industrial Research [27]

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I guess that -- my question is doesn't it become a realized loss when that inventory moves?

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Adam Lowther, Cervus Equipment Corporation - CFO [28]

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Well, it flows through to the customer, right? So if it came in at $1.30 and now it's $1.40, the Canadian dollar cost of that truck to a customer is going to be that much higher.

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Ben Cherniavsky, Raymond James Ltd., Research Division - MD & Head of Industrial Research [29]

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You would recover it from the customer, right?

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Adam Lowther, Cervus Equipment Corporation - CFO [30]

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Likewise, if the dollar moves the other way, the customer benefits. So we're not provide the -- returning inventory on a regular basis. We're exposed for a short period of time.

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Ben Cherniavsky, Raymond James Ltd., Research Division - MD & Head of Industrial Research [31]

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Yes. I guess that's the key too is to returning the inventory, right?

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Adam Lowther, Cervus Equipment Corporation - CFO [32]

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Yes.

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Ben Cherniavsky, Raymond James Ltd., Research Division - MD & Head of Industrial Research [33]

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And -- which I suppose would lead to my next question about the inventory -- the truck inventory at the end of the quarter. In the MD&A, you said that you took some deliveries from orders that were placed previously. I think Angela talked a little bit about it on Transportation, but -- what you've seen recently. But any concerns that you ended up with maybe too much because the market changed relative to when you placed those orders?

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Angela S. Lekatsas, Cervus Equipment Corporation - President, CEO & Director [34]

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Yes, Ben, I think that's the bane of the Transportation business is that trying to anticipate exactly what the market was going to be. I think had COVID-19 not happened, we would largely have been happy with the volume of inventory that we had. I think the impact that we've seen on the fleet markets, in particular, in hindsight, we might be carrying a bit much. And the impact of getting rid of that inventory through 2020, you could see margin compression on a portion of that inventory, certainly not all of it, but a portion of it. That's what we're always trying to crystal ball is what is the market going to be. We thought that 2020 was going to be back to sort of an average year, '19 was a below year, a record sales year for trucks. And I think now the 2020, PACCAR hasn't come out with new projections yet, but they are actually going to be less than what a normal mid-cycle would be.

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Operator [35]

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(Operator Instructions) Your next question comes from Cherilyn Radbourne of TD Securities.

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Cherilyn Radbourne, TD Securities Equity Research - Analyst [36]

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I just wanted to come back to the new equipment sales in the Agriculture segment for a few minutes. Because you certainly bucked the industry trend in terms of unit sales. And just looking back, it appears that $84 million of new equipment sales in the first quarter is a historically strong result. So I'm just trying to square that with your comment that you don't think much was pulled forward from future quarters.

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Angela S. Lekatsas, Cervus Equipment Corporation - President, CEO & Director [37]

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Okay. Sure. Let me just -- I'm going to turn it over to Scott. But before I do, I want to give some kudos to our sales team and the changes that Scott has implemented in the sales process. Because you're right, we have bucked the trend, and we've done really well, and there's a reason for that. So I'm going to let Scott take you through that. So -- but just to correct you, I don't think we said we didn't pull sales forward. I think we did see large customers get pulled forward, but we expect to backfill that. Scott, do you want to sort of add some color to that to answer Cherilyn's question?

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Scott Johnston, Cervus Equipment Corporation - VP of Agriculture Canada [38]

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Absolutely. The -- many of our large producers, basically, who winter in Palm Springs are fixated on foreign exchange and recognize that the Canadian dollar is so tightly tied to the oil and gas sector that they anticipated a Canadian weakening of the dollar, and thus, the increase in new equipment. And so jumped onboard and wanted to make certain that they got in before that rise took place. The other is low interest rates allowed us to basically upgrade equipment and customers -- and keeping their semiannual payments in line. The other is that we, along with our OEM, are absolutely focused on the value-add of the technology. John Deere spends about 5:1 as far as R&D as compared to the competitors. And we believe that as long as we continue to enhance the value of the John Deere equipment, and have our producers basically roll their equipment and move up, refreshing their fleets that they will perform far better from an ROS, return on sales, standpoint. We have continued to roll out our strategic focus on whole goods sales. And we are constantly launching those programs into the marketplace, trying to basically move ahead of industry because, as you know, in the AEM Canada report, 4-wheel drive sales were down 29.4%, combines were down 34.6%, and we pride ourselves being far above the norm.

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Cherilyn Radbourne, TD Securities Equity Research - Analyst [39]

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Okay. That's all helpful color. And I apologize if I mischaracterized what you said in terms of not having pulled sales forward. I don't mean to sort of beat a dead horse, but is there any estimate you can provide of what the pull forward may have been?

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Scott Johnston, Cervus Equipment Corporation - VP of Agriculture Canada [40]

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Approximately 10%.

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Cherilyn Radbourne, TD Securities Equity Research - Analyst [41]

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10%. Okay. That's helpful. And then as I look at the shift in the gross margin percentage in the Agriculture segment, if I take new and used equipment sales together, the sales mix really didn't change hugely on a year-over-year basis. So I wonder if you could just comment on how the gross profit margin behaved by line of business and whether there were OEM incentives that would have benefited new equipment margins in Q1.

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Angela S. Lekatsas, Cervus Equipment Corporation - President, CEO & Director [42]

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Okay. Cherilyn, I'm just going to ask Adam to answer that question.

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Adam Lowther, Cervus Equipment Corporation - CFO [43]

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Sure. Cherilyn, from a sales mix, yes, you're right, it was about the same quarter-over-quarter, which is typical for kind of heading into seeding. We're not going to see a big drive one way or the other between new and used. From margins, pretty standard from a new and used mix, and they're pretty close to the same from a percentage. So we priced our inventory right and done the work to match it with the customer that needs that specific type or age or model. And so Scott has done the work to do that. When we look at OEM incentives, that's not a big factor in this Q1 and really any other Q1. That's typically a later-in-the-year thing and very difficult for us to estimate, so.

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Angela S. Lekatsas, Cervus Equipment Corporation - President, CEO & Director [44]

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Yes. And Cherilyn, can I just add one thing? As we are talking about whole goods sales being up, I think it's important to always look at the whole good sales in conjunction with the inventory turn. So we have improved our inventory turns at the same time of increasing our whole good sales. So that means that we are not just pushing through sales and taking a bunch of overvalued trade-in, we are actually managing right through the entire life cycle of a whole good sale right through to the used equipment sales. So I just thought I'd add that in, even though you didn't ask that question.

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Cherilyn Radbourne, TD Securities Equity Research - Analyst [45]

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No. I appreciate that. I think it's hard not to be encouraged by these results, and they are surprised just given what was going on in the industry and so I guess we're just all trying to kind of understand if there's something anomalous here or whether this is really kind of internally generated, if you will?

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Angela S. Lekatsas, Cervus Equipment Corporation - President, CEO & Director [46]

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Yes. I think it's a good question. We were out early in 2019, saying that there's an industry imbalance in the used equipment that's on the ground, supply and demand. And we were very proactive and out saying the things that needed to be said in Q2 and taking action in Q2, Q3 and Q4. I think everyone else is now following suit. So I think what are the benefit is we're seeing the benefit now of those actions we took last year, and we'll watch everyone else follow us.

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Operator [47]

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Your next question comes from the line of Ben Cherniavsky of Raymond James.

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Ben Cherniavsky, Raymond James Ltd., Research Division - MD & Head of Industrial Research [48]

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I just had a couple of smaller items. I wanted to address again Adam on the finance cost going up. I think your -- you had some free cash flow. So there was a reduction in debt. Is the increase in finance costs just related to more floor plans being interest bearing?

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Adam Lowther, Cervus Equipment Corporation - CFO [49]

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That's right, Ben. More floor plan on the Transportation side. About the same, a little bit higher on the ag side. Transportation has less kind of rebates that we can apply against interest costs, whereas on the ag side, we have some incentives that we can and always have applied against interest.

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Ben Cherniavsky, Raymond James Ltd., Research Division - MD & Head of Industrial Research [50]

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Well, what would be -- right now, what would be the percentage of your floor plans that are interest bearing?

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Adam Lowther, Cervus Equipment Corporation - CFO [51]

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So on the Ag side, it would be in the 20s, I believe. On the trucking side, it'd be high 80s. I can grab that number and get back to you, Ben.

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Ben Cherniavsky, Raymond James Ltd., Research Division - MD & Head of Industrial Research [52]

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Yes, sure. If you wouldn't mind maybe just shoot me an e-mail or something. And then maybe just a comment on Australia. China's ban on Australian beef and some new tariffs on barley. Do you think that has any impact on the farming sector and then in turn on your operations down there?

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Angela S. Lekatsas, Cervus Equipment Corporation - President, CEO & Director [53]

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Yes. So in chatting with our Australian folks within the last couple of days, they've had strong operations through COVID-19, but they do believe that China's ban and China's tariffs will impact their business. Just uncertain at this point, the extent of that impact.

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Ben Cherniavsky, Raymond James Ltd., Research Division - MD & Head of Industrial Research [54]

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Right. So we'll know more about that maybe next quarter?

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Angela S. Lekatsas, Cervus Equipment Corporation - President, CEO & Director [55]

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I think so. But remember that Australia and New Zealand in total are not -- I don't want to say not material, but they're not a big part of our results. So to the extent that they'll be impacted by that, it should be relatively small for the overall service, but there should -- there will be an impact.

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Adam Lowther, Cervus Equipment Corporation - CFO [56]

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And just to close off on your question, Ben. So 64% of our inventory was floored at March 31, which is up from where we were last March. December, we had about 57%, so fairly consistent. The John Deere side...

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Ben Cherniavsky, Raymond James Ltd., Research Division - MD & Head of Industrial Research [57]

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So that's interest-bearing or...

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Adam Lowther, Cervus Equipment Corporation - CFO [58]

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That's floored on the interest-bearing side. 95% of our truck was interest-bearing. And the disclosure around that's on Page 23 of the MD&A.

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Operator [59]

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Your next question comes from the line of Cherilyn Radbourne of TD Securities.

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Cherilyn Radbourne, TD Securities Equity Research - Analyst [60]

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Just a couple of last ones for me. On the Transportation side, are you able to see miles driven across your installed base as kind of a signal as to how things may start to recover?

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Angela S. Lekatsas, Cervus Equipment Corporation - President, CEO & Director [61]

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No. We are not able to see miles driven because that would be -- yes. No, it's just not possible.

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Adam Lowther, Cervus Equipment Corporation - CFO [62]

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Freight rates will be a proxy, Cherilyn. Freight rates, freight activity, freight backlog, tonnes hauled. But these are...

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Cherilyn Radbourne, TD Securities Equity Research - Analyst [63]

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Okay. So these are not effectively connected machines?

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Adam Lowther, Cervus Equipment Corporation - CFO [64]

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Right.

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Cherilyn Radbourne, TD Securities Equity Research - Analyst [65]

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Okay. And then on the Industrial side, sort of any visibility to when you may able to get back on customer sites and reactivate some of your training programs?

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Angela S. Lekatsas, Cervus Equipment Corporation - President, CEO & Director [66]

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Yes. We actually have started already. So we did put in place making some of our training virtual. So some of that stuff is continuing. We are opening up -- we actually opened up this week to training with smaller training size, smaller size classes, and implementing social distancing. So we -- that business is picking up again already, Cherilyn. It won't be as strong because we're going with smaller class sizes, but it is already picking up. There was a huge demand for it, and they're just waiting for it.

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Operator [67]

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Thank you. Ms. Lekatsas and Mr. Lowther, there are no further questions at this time.

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Adam Lowther, Cervus Equipment Corporation - CFO [68]

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Thank you for joining us this morning. Angela and myself and the service leadership team look forward to speaking with you again following the release of our second quarter.

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Operator [69]

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Ladies and gentlemen, we will now disconnect the conference call and webcast. Thank you for your participation today.