Peter Lacey - Cervus Equipment Corp.

In this episode of the Canadian Equities podcast Peter Lacey, Founder and Executive Chairman of Cervus Equipment Corp.,  joins Robert Cooper as they discuss agriculture entrepreneurs, OEMs, and technology.  For the full length version of the Canadian Equities podcast connect with us at acumencapital.com/podcast.  

Transcript

Moderator 0:01

Welcome to Canadian Equities, a short biweekly podcast series, where we speak with top business leaders and hear their perspectives on the industries in which they operate for the full length version. Find our link in the podcast notes or connect with us at acumencapital.com In this episode of the Canadian equities podcast, Peter Lacey, founder, and executive chair at service equipment joins Robert Cooper as they discuss agriculture who we and entrepreneurially. Service was founded back in 1982 with one dealer and went public in 2005 dealerships. And it's since grown to become the dominant John Deere dealer network in Western Canada, Australia, and New Zealand. In addition services acquired Peterbilt dealers in Saskatchewan and Ontario. Peter Lacey, welcome to Canadian equities.

Peter Lacey 0:48

Thank you, Robert.

Moderator 0:51

The aha moment you had, if at all, that led you to go to grow from a handful of dealerships to becoming an adult dominant player in Western camp.

Peter Lacey 1:02

we were, um, uh, private company. my brother-in-law owned, a hundred percent of the red deer store. Um, and we had, created partnerships with some of our neighboring dealerships in our model back then, and kind of what John Deere allowed was. We could, we couldn't control a neighboring dealership. we could own up to 50%. And what really, you know, the aha moment for me was we had, purchased or had an agreement to purchase the dealership in Tosha, Albert. And we had all the terms of the deal worked out and, and it was going to require$800,000 cash equity. And so our model then was, you know, we would, we would do 50% ownership and we'd look for a partner to beat the dealer principal and have a 50% ownership stake as well. And so we, uh, we made the deal, it was conditional on finding a dealer partner willing to come up with$400,000 equity. And, and, and it was a condition because I wasn't sure that we could find that person. And yeah, it was, it was very, very difficult. We spend about three months, with some of our own employees. And, and so the challenge is, is. Is, you know, having somebody, you know, young enough to be a dealer for the next 20 years, uh, willing to move to a small rural town, like thousand people. Uh, the big one was having$400,000 of, of liquid investments that you could invest in India. the, uh, equity into this deal. it was a challenge and we couldn't find anybody. We finally did. It was somebody that came from John Deere, but that's what, what sort of the aha moment was, well, who's going to buy these dealerships in the future. If we can't find a dealer partner to come in, uh, we've kind of got our backing and, you know, and as well as, as their own own cap, Uh, like who was going to buy these. And that was kind of the idea of, of bullets. The let's look at forming a public company and then therefore the equity ownership, can change every day and in micro amounts. And it's not. This typical succession strategy of once every generation, the dealership sells their business to another group for another 25 years. I wrote up a white paper, in 1999 with was sort of the concept of, of rolling in all of the companies that we were involved in five locations at that time and, and creating a public company and being able to share. Inventory and, and specialized, uh, people. so Deere was actually very supportive of the concept and, and that kind of broke away from the, the idea of, one company owning these five. It was really. Kind of a, a five-year headstart from what Deere eventually started, you know, their dealer tomorrow's strategy was, was consultanting dealerships into create more efficiencies. And so we were, five years ahead of the hit ahead of the time on that.

Moderator 4:01

What was the biggest mistake you made along the way that I guess, left an indelible mark on your feature? Decision-making.

Peter Lacey 4:10

Well, it's the bane of any, any of the especially ag dealerships is having too much used equipment. we learned that lesson early on in the, the eighties and it probably costs us a million dollars. And unfortunately, you kind of tend to repeat the, that while we had that service as well. when we had the big write down in 2019, you know, there was a lot of focus from Deere to improve market share and, and we were getting paid. You know, and on performance bonuses based on market share. And quite frankly, uh, too much inventory, uh, used inventory. And the challenge with that is that you've got, you kind of got competing interests with your sales guy. He's telling you, uh, or the, the dealership on the value of that trade in. And, and obviously the customer as well, wants to get maximum value for that trade in and. And so the thing is you really have to be strict on, on your buying policies. you can't be sort of, well, we'll make an exception here or there because it will build up. Eventually, you gotta pull the plug and, it was a million dollars in the early eighties and it was another$19 million for us, uh, in, in 2019. The, um, dealership can be successful or fail, um, all based on, how they manage their used trailers.

Moderator 5:36

Agriculture insurance has changed a lot from when you started in the early eighties, a small family farm was very rare and the farming industry is consolidated just like the dealer networks of what you speak. What's been the biggest change that you've seen occur in since you've been in the business.

Peter Lacey 5:53

Well, I think the consolidation is one thing, but, but the value of equipment is another, uh, when we bought the dealership in, in red deer from three partners in 1982, uh, so John Don, my brother-in-law and myself, I remember in the sales manager's office, there was all these plaques up on the wall that, was, was, million dollar club. And that was purchasing more than a million dollars from John Deere over the course of a year. And,, they had several of these, these up and in today. We, you know, we S w our largest combine is more than a million dollars. So we went from when in 1982, when we were recognized for, for purchasing over a million dollars from John Deere in a year, to today where, our purchases are, are probably closer to$600 million. prices where a combine was, uh, maybe a hundred thousand dollars. Back then it's now, 10 times that, uh, for the larger ones. So, so it's been quite an increase in the, in the value of equipment, part or large. Part of that is, is they're much, much larger, more capacity. Uh, labor is always a struggle on farms, especially smaller farms and because it's so seasonal. And so, you know, as much production, mechanized production, you can do the better and that's. This, uh, equipment value is, is so much higher than it was when we started.

Moderator 7:22

When you look at dealer economics and you've experienced across a number of verticals, including transport and construction, what are the keys to success? If you could distill it down to a few key performance indicators that our listeners can take away?

Peter Lacey 7:39

Well, I think again, you used inventory management is probably the most critical aspect. we always used to have a, sort of a rule of thumb that if you're, as long as your inventory was turning at least three times a year, uh, that that was a good, a good turnover ratio. when it goes below that it's probably some yellow flags and gets Mo to it should be red flag. in sort of the 2014, there was quite a run on demand on new equipment and, and, uh, you kind of compared yourself to neighbors as well. They're doing it. So, you know, two times turn is not so bad and, and, oh, well there, we, they have much more used equipment than we do. So I mean, we can have a one-time turn on combines, you know, but that's just flat wrong and you know, it's hard to go against everybody else, but yeah. The reality is, is that having that turnover of three times or greater is, is, is probably the most critical aspect, um, of, of a farm equipment dealership. the second is, you know, well sort of coincide with that is, but you know, we're really buying equipment, not selling equipment. Selling equipment is you've got to. You know, we, we make very little margin on selling new equipment. we, we do that to maintain market share and to have that future parts and service business. So when there's a trade in, that's worth 80% of what you're selling. The new, the new is pretty fixed on, you know, what we can sell it for. It's what we buy that trade-in for. And that can vary a bit based on, what do different people can evaluate? I mean, we've kind of gotten that down to a, more of a science now where we have our own guidebook and we review it every quarter and we, and we, we have to be strict about what those values that we can buy equipment that, so that's really vital. Buying your trade-ins correctly and absorption is another factor that we've been taking into account more recently. And that's where your gross margins. From your parts and service business should cover all of your expenses included in your sales department. So if you can have a hundred percent absorption, which is basically the gross margin from those two departments, cover the expenses for the whole dealership that's ideal. And when you get to like 80% absorption, then you need to be profitable, uh, in your sales department just to break it. And so that, that, that absorption factors is an important one as well. And ideally it should be a hundred to 110% for an eight dealership. And then, uh, and then return on invested capital. And that's more of a. You know, by being a public company, that's more of a measure that, that a lot of analysts use, but I, I find it very helpful in that it's, um, return on equity can be misleading if you're highly leveraged and you're paying low interest, but the risk is still a balance sheet risk there. So I like return on invested capital because it includes, you know, all of your long-term capital or loans and liabilities, plus your equity and. You add into the interest, plus your equity earnings to come up with your ROI, really pleased with, you know, our Q2 results. We were at at 23%, uh, return on invested capital on a rolling 12 months basis. And, and that's, that's our sort of was our five-year target. And we hit that now for the last two quarters. So I'm pleased with that, but that's a really other strong measures. So I would say those three are really keys to success.

Moderator 11:08

So Peter's service serves two masters in a way, the customer on the farm or on the road. And then also the. You mentioned a little bit about this and Deere market share is very important. So beyond, market share and make money, what is it that the OEMs look for and value in their dealer network?

Peter Lacey 11:28

Well, I think it's, you know, it's, it's a very much a relationship business and, we're trying to get more and more away from being just transactional to sort of, uh, being, uh, sort of value added, uh, partner with our customers, anticipate what their needs are, what, where, you know, we don't want to be selling them. Um, too much equipment than what they need, but we also don't want to sell too little. I think the biggest thing is, is that is, is the customer expectation is that, that, you know, their downtime is minimized. And, and you know, when their equipment, when you've got an, a very expensive combine, that's$300 an hour. And there's potentially rain coming, you know, uh, our customers kept pretty antsy about, about taking extra time to, to fix their repair. So that means, you know, having, you know, good stock of parts, availability, um, uh, making sure that you've got road technicians that can go out on very short notice and that you get the job fixed right quickly. from a customer perspective, I mean, they, they just, they want good equipment. Uh, there's a lot of technology changes that, you know, they want to learn about that. There's a lot of data being collected by equipment these days. And so the next phase of farming is being able to take that data and have meaningful insight as to, you know, um, management decision-making from that insight. So that's where farming has, advanced quite a bit. And I think it's up to us to be able to. You know, uh, ultimately add value to our customers and, and, and so that, uh, they can do well from, from their investment as far as the manufacturers. I mean, yes, they want you to have, you know, a good customer, Satisfaction, responsiveness and everything. So that's, that's one measure. market share, like I mentioned before is a very important, measure. It's probably the most important measure from, from the manufacturer standpoint. If we can deliver market share and deliver, you know, value added and reduced downtime, That's really what, uh, both the manufacturer and our customers. And, and one of the things that, that having a larger network is that, is that, um, that parts of it building we share amongst all of our stores, we have, uh, a specialist that basically, you know, looks after our, our daily stock orders and in our weekly, stock orders. And, and, uh, just better management ultimately leads to better customer satisfaction. And the other thing I guess, is having facilities that, you know, the equipment has grown quite a bit over the last 20 years, 30 years. And so you have to have shops that can accommodate the equipment that we're selling, which is always a challenge because we kept, you know, we're just building our, our new facility just outside of red deer. you have to have, have big enough doors and everything else like that to handle the size of the equipment these days.

Moderator 14:27

.Peter. Thanks so much for your time today.

Peter Lacey 14:30

Thank you, Robert.

14:33

Note that this podcast is not making an investment recommendation on any companies discussed. We welcome your comments on today's episode or any other episode. Connect with us at Acumen Capital dot com.