Enercare Reports Record Quarterly Revenues of $342.1 Million and EBITDA of $78.9 Million

(All amounts are in Canadian dollars unless otherwise stated)

TORONTO, Aug. 8, 2017 /CNW/ - Enercare Inc. ("Enercare") (TSX: ECI), one of North America's leading providers of essential home and commercial services and energy solutions, reported its financial results for the second quarter ended June 30, 2017.

Second Quarter 2017 Highlights

  • Second quarter revenue of $342 million, increased 40% compared to the same period in 2016.
  • EBITDA of $78.9 million, increased $10.2 million or 15%, mainly as a result of the full quarter impact of the acquisition of Service Experts, on May 11, 2016.
  • EBITDA would have increased by 24%, excluding the $6.2 million cumulative impact from the cancellation of an enterprise resource system.
  • Home Services increased heating, ventilation and air conditioning ("HVAC") rental transactions by 18% and sales transactions by 12% compared to the same period in 2016.
  • Home Services reported eight consecutive quarters of net growth in rental units.
  • Service Experts increased sales installations by 14%.
  • Sub-metering increased second quarter EBITDA by 10% compared to the same period in 2016.

Financial Highlights

(in millions of Canadian dollars except per unit amounts)1




Three months ended June 30,

Six months ended June 30,

($ millions)

2017

2016

Change

2017

2016

Change

Total revenue

$342.1

$244.1

40%

$619.9

$386.8

60%

EBITDA

$78.9

$68.7

15%

$129.4

$120.6

7%

Acquisition Adjusted EBITDA2

$84.3

$74.7

13%

$136.8

$132.8

3%

Net earnings

$21.1

$16.1

31%

$18.1

$24.2

(25%)

Basic earnings per share

$0.20

$0.17

18%

$0.17

$0.26

(35%)

Payout Ratio - Maintenance2

45%

53%

(8)*

61%

56%

5*

Payout Ratio2

66%

90%

(24)*

111%

104%

7*

Rental attrition (units)

7,300

7,200

1%

15,000

14,700

2%

Rental additions net of attrition

2,000

1,000

100%

3,000

2,000

50%

Sub-metering contracted units

1,000

9,000

(89%)

11,000

17,000

(35%)

*percentage points

John Macdonald, President and CEO, said:

"We are very pleased with Enercare's strong performance, with each of our businesses showing EBITDA growth and an expanding customer base. Our expansion into the U.S. market through the acquisition of Service Experts has been very successful, as shown by Service Experts' consistently strong performance since acquisition."

_________________

1

Unless otherwise noted, amounts are reported in thousands, except customers, units, shares and per share amounts and percentages.

2

Adjusted EBITDA, Acquisition Adjusted EBITDA, Payout Ratio and Payout Ratio - Maintenance are non-IFRS financial measures. Refer to the Non-IFRS Financial and Performance Measures section in the MD&A.

Results of Operations

Earnings Statement







Three months ended June 30, 2017

(000's)

Enercare Home
Services

Service
Experts

Sub-metering

Corporate

Total

Revenues:







Contracted revenue

$105,857

$  14,541

$30,518

$          -

$150,916


Sales and other services

7,128

182,511

1,188

-

190,827


Investment income

368

10

1

-

379

Total revenue

$113,353

$197,062

$31,707

$         -

$342,122

Expenses:






Cost of goods sold:







Commodity

-

-

22,499

-

22,499


Maintenance & servicing costs

16,721

11,281

-

-

28,002


Sales and other services

5,248

116,366

644

-

122,258

Total cost of goods sold

21,969

127,647

23,143

-

172,759

SG&A expenses

25,897

44,840

5,019

9,791

85,547

Foreign exchange

88

(222)

(39)

(16)

(189)

Amortization expense

31,396

5,320

2,021

748

39,485

Net loss on disposal of equipment and other assets

264

4,873

-

-

5,137

Interest expense:







Interest expense payable in cash





9,274


Make-whole charge on early redemption of debt





-


Non-cash interest expense





489

Total interest expense





9,763

Total expenses





312,502

Earnings before income taxes





29,620

Current tax (expense)





(6,500)

Deferred tax (expense)





(2,017)

Net earnings





$ 21,103

EBITDA

$ 65,135

$ 19,924

$  3,584

$(9,775)

$ 78,868

Adjusted EBITDA

$ 65,399

$ 24,797

$  3,584

$(9,775)

$ 84,005

Acquisition Adjusted EBITDA

$ 65,399

$ 25,070

$  3,584

$(9,775)

$ 84,278

 

 







Three months ended June 30, 2016

(000's)

Enercare Home
Services

Service
Experts

Sub-metering

Corporate

Total

Revenues:







Contracted revenue

$101,719

$    1,745

$32,387

$          -

$135,851


Sales and other services

6,270

100,464

1,162

-

107,896


Investment income

83

77

3

192

355

Total revenue

$108,072

$102,286

$33,552

$     192

$244,102

Expenses:






Cost of goods sold:







Commodity

-

-

24,811

-

24,811


Maintenance & servicing costs

16,405

1,402

-

-

17,807


Sales and other services

5,312

61,101

579

-

66,992

Total cost of goods sold

21,717

62,503

25,390

-

109,610

SG&A expenses

23,516

29,582

4,966

6,959

65,023

Foreign exchange

2

(5)

(27)

(52)

(82)

Amortization expense

30,145

3,336

1,653

662

35,796

Net loss on disposal of equipment and other assets

884

47

(40)

-

891

Interest expense:







Interest expense payable in cash





8,731


Non-cash interest expense





456

Total interest expense





9,187

Total expenses





220,425

Earnings before income taxes





23,677

Current tax (expense)





(15,259)

Deferred tax recovery





7,633

Net earnings





$ 16,051

EBITDA

$ 61,953

$  10,159

$  3,263

$(6,715)

$ 68,660

Adjusted EBITDA

$ 62,837

$  10,206

$  3,223

$(6,715)

$ 69,551

Acquisition Adjusted EBITDA

$ 60,698

$  16,899

$  3,223

$(6,141)

$ 74,679

 

 







Six months ended June 30, 2017

(000's)

Enercare Home
Services

Service
Experts

Sub-metering

Corporate

Total

Revenues:







Contracted revenue

$210,259

$  25,918

$67,664

$        -

$303,841


Sales and other services

13,674

298,888

2,892

-

315,454


Investment income

617

20

3

-

640

Total revenue

$224,550

$324,826

$70,559

$       -

$619,935

Expenses:






Cost of goods sold:







Commodity

-

-

51,994

-

51,994


Maintenance & servicing costs

32,985

20,370

-

-

53,355


Sales and other services

10,799

193,691

1,797

-

206,287

Total cost of goods sold

43,784

214,061

53,791

-

311,636

SG&A expenses

53,596

89,765

10,693

18,015

172,069

Foreign exchange

166

(225)

(78)

(16)

(153)

Amortization expense

62,276

10,470

3,791

1,347

77,884

Net loss on disposal of equipment and other assets

2,127

4,857

10

-

6,994

Interest expense:







Interest expense payable in cash





18,914


Make-whole charge on early redemption of debt





5,049


Non-cash interest expense





1,644

Total interest expense





25,607

Total expenses





594,037

Earnings before income taxes





25,898

Current tax (expense)





(11,915)

Deferred tax recovery





4,088

Net earnings





$  18,071

EBITDA

$124,877

$ 16,368

$  6,143

$(17,999)

$129,389

Adjusted EBITDA

$127,004

$ 21,225

$  6,153

$(17,999)

$136,383

Acquisition Adjusted EBITDA

$127,004

$ 21,602

$  6,153

$(17,999)

$136,760

 

 







Six months ended June 30, 2016

(000's)

Enercare Home
Services

Service
Experts

Sub-metering

Corporate

Total

Revenues:







Contracted revenue

$202,050

$    1,745

$67,604

$          -

$271,399


Sales and other services

12,368

100,464

2,065

-

114,897


Investment income

161

77

25

192

455

Total revenue

$214,579

$102,286

$69,694

$     192

$386,751

Expenses:






Cost of goods sold:







Commodity

-

-

52,558

-

52,558


Maintenance & servicing costs

32,673

1,402

-

-

34,075


Sales and other services

10,593

61,101

943

-

72,637

Total cost of goods sold

43,266

62,503

53,501

-

159,270

SG&A expenses

49,408

29,582

9,656

15,515

104,161

Foreign exchange

22

(5)

(12)

(64)

(59)

Amortization expense

60,181

3,336

3,275

1,311

68,103

Net loss on disposal of equipment and other assets

2,809

47

(34)

-

2,822

Interest expense:







Interest expense payable in cash





16,657


Non-cash interest expense





883

Total interest expense





17,540

Total expenses





351,837

Earnings before income taxes





34,914

Current tax (expense)





(27,515)

Deferred tax recovery





16,847

Net earnings





$  24,246

EBITDA

$119,074

$  10,159

$  6,583

$(15,259)

$120,557

Adjusted EBITDA

$121,883

$  10,206

$  6,549

$(15,259)

$123,379

Acquisition Adjusted EBITDA

$124,037

$  16,899

$  6,549

$(14,685)

$132,800

Revenues

Total revenues of $342,122 for the second quarter of 2017 increased by $98,020 or 40% and by $233,184 or 60% to $619,935 year to date compared to the same periods in 2016, primarily as a result of the timing of the acquisition of Service Experts by Enercare, through an indirect wholly-owned subsidiary of Enercare Solutions Inc. ("Enercare Solutions"), on May 11, 2016 (the "SE Transaction").

Enercare Home Services revenues, excluding investment income, of $112,985 for the second quarter of 2017 increased by $4,996 or 5% and by $9,515 to $223,933 year to date, compared to the same periods in 2016, primarily as a result of a rental rate increase implemented in January 2017, changes in asset mix and growth in rental HVAC units.  Contracted revenue in Enercare Home Services represents revenue generated by the rentals portfolio and protection plan contracts, while sales and other services revenue mainly pertains to one-time sales and installations of residential furnaces, boilers and air conditioners, as well as plumbing, duct cleaning and other services.

Enercare's strategy to emphasize HVAC rentals over outright sales results in significant increases in recurring revenue at the expense of sales and other services revenue.

Service Experts revenues, excluding investment income, were $197,052 and $324,806 during the second quarter of 2017 and year to date, respectively.  Service Experts revenues were lowered by $4,562 for the second quarter of 2017 and $7,960 year to date as a result of purchase accounting adjustments for deferred revenue associated with the SE Transaction.  These adjustments compare to $7,836 in respect of the same periods in 2016. Changes in foreign exchange rates during the second quarter and year to date 2017 accounted for approximately $6,400 and $8,900, respectively, of the increase in revenues compared to the same periods in 2016. The increase in revenue is primarily due to the timing of the SE Transaction in 2016 coupled with strong origination growth in 2017.

Sub-metering revenues, excluding investment income, were $31,706 during the second quarter of 2017, a decrease of $1,843 or 5%, with year to date revenues increasing $887 or 1% over the same period in 2016, primarily as a result of lower flow-through commodity charges partly offset by higher billable units. Sub-metering revenue includes total flow through commodity charges of $22,499 in the second quarter and $51,994 year to date, decreases of $2,312 or 9% and $564 or 1%, respectively, compared to the same periods in 2016.

In the second half of 2016, Sub-metering negotiated renewals with four large property management companies representing approximately 21,000 metering units.  These properties were either at or near the end of their original contracts and the renewals were completed at lower net revenue per meter point due to competitive pressures.  This resulted in a reduction in revenue of approximately $450 in the quarter and $900 year to date.  The typical term for these renewals is between 10 to 15 years.

Investment income was $379 in the second quarter of 2017 and $640 year to date, increases of $24 and $185, respectively, when compared to the same periods in 2016. The change in year to date investment income was primarily attributable to the investment of the proceeds from the $275,000 of 3.38% Series 2017-1 Senior Unsecured Notes of Enercare Solutions, due February 21, 2022 (the "2017-1 Notes") and the $225,000 of 3.99% Series 2017-2 Senior Unsecured Notes of Enercare Solutions, due February 21, 2024 (the "2017-2 Notes") (collectively the "2017 Notes"), for approximately 30 days prior to the redemption of the $210,000 4 year variable rate, non-revolving term loan facility of Enercare Solutions (the "2014 Term Loan") and the repayment of the $250,000 of 4.30% Series 2012-1 Senior Unsecured Notes of Enercare Solutions (the "2012 Notes") during the first quarter of 2017.

Cost of Goods Sold

Total cost of goods sold for the second quarter of 2017 was $172,759 and $311,636 year to date, increases of $63,149 or 58% and $152,366 or 96%, respectively, compared to the same periods in 2016, primarily as a result of the timing of the SE Transaction, which was completed in May of 2016.

Enercare Home Services cost of goods sold increased by $252 in the second quarter of 2017, and $518 year to date, compared to the same periods in 2016, increasing by 1% in both of the respective periods as a result of an increased emphasis on cost containment. Maintenance and servicing costs in Enercare Home Services primarily consist of protection plan expenses and servicing costs related to the rentals portfolio, while sales and other services expenses mainly pertain to one-time sales and installations of residential furnaces, boilers, air conditioners and small commercial products as well as plumbing, duct cleaning and other chargeable services.

Service Experts cost of goods sold amounted to $127,647 in the second quarter of 2017 and $214,061 year to date.  Service Experts cost of goods sold was reduced by $3,506 for the second quarter of 2017 and $6,197 year to date as a result of purchase accounting adjustments for the service obligation associated with the SE Transaction, compared to $6,313 in the same periods in 2016. Changes in foreign exchange rates during the second quarter and year to date 2017, accounted for approximately $4,000 and $5,700, respectively, of the increase in cost of goods sold compared to the same periods in 2016. The increase in cost of goods sold is primarily due to the timing of the SE Transaction in 2016 combined with increases in originations offset by lower costs per unit resulting from price reductions from suppliers.

Sub-metering cost of goods sold was $23,143 in the second quarter of 2017 and $53,791 year to date, decreasing by $2,247 or 9% and increasing by $290 or 1%, respectively, primarily from fluctuations in pass through commodity charges compared to the same periods in 2016. Sales and other services expenses for Sub-metering relate to Triacta Power Technologies Inc. ("Triacta") meter sales and the sale and installation of water conservation products in apartments and condominiums.

Selling, General & Administrative Expenses

Total selling, general and administrative expenses ("SG&A") were $85,547 in the second quarter of 2017 and $172,069 year to date, an increase of $20,524 and $67,908, respectively, compared to the same periods in 2016, primarily as a result of the SE Transaction.

Enercare Home Services SG&A expenses of $25,897 in the second quarter and $53,596 year to date, increased by $2,381 and $4,188, respectively, compared to the same periods in 2016. The $2,381 increase in the second quarter was primarily from increases of approximately $2,500 in professional fees partly offset by lower claims expenses of $100.  The increase in professional fees resulted from a reclassification of acquisition expenses from Enercare Home Services to Service Experts during the second quarter of 2016. The $4,188 year to date increase was primarily as a result of increases of approximately $3,000 in higher wages and benefits, driven partly by higher stock-based compensation costs resulting from an increase in the price of the common shares of Enercare ("Shares"), $1,500 in sales and marketing expenses, $1,400 of support costs, $300 in claims and $200 in bad debt expenses partly offset by a reduction in office expenses of $1,900 and professional fees of $400.

Enercare Home Services SG&A expenses included $695 in the second quarter of 2016 and $2,154 year to date of integration and business transformation costs related to the acquisition of the Ontario home and small commercial services business of Direct Energy Marketing Limited by Enercare on October 20, 2014 (the "DE Acquisition"), primarily from information technology integration activities to optimize the information technology platforms and marketing spend related to continued rebranding.

Service Experts SG&A expenses in the second quarter of 2017 amounted to $44,840 and $89,765 year to date.  Second quarter SG&A expenses primarily comprised of approximately $24,600 of wages and benefits, $11,800 of sales and marketing costs, $6,100 of office related expenses and $1,600 of professional fees.  Year to date SG&A expenses are primarily comprised of approximately $51,200 of wages and benefits, $23,000 of sales and marketing costs, $11,300 of office related expenses and $2,600 of professional fees.  Service Experts SG&A expenses in the second quarter included one-time expenses relating to prepaid software maintenance costs of approximately $1,000, which were expensed during the quarter relating to the write-down of an enterprise resource planning system. Service Experts SG&A expenses in the second quarter of 2017 included acquisition related expenditures of $273 and $377 year to date, primarily consisting of professional fees associated with the acquisitions of Hammond Plumbing and Heating Inc. and CS Operating LLC. Changes in foreign exchange rates during the second quarter and year to date 2017 accounted for approximately $1,500 and $2,400, respectively, of the increase in SG&A compared to the same periods in 2016.

Service Experts SG&A expenses in the second quarter of 2016 and year to date included $6,693 of acquisition related expenditures associated with the SE Transaction, primarily consisting of professional fees. These costs included $2,834 of pre-acquisition expenditures incurred by Enercare Home Services. Certain wage related expenditures, in the amount of $1,948 for the year to date 2017 and $1,838 during the second quarter of 2016, have been reclassified from SG&A expenses to cost of goods sold.

Sub-metering SG&A expenses in the second quarter of 2017 were $5,019 and $10,693 year to date, an increase of $53 and $1,037, respectively, over the same periods in 2016. The $53 increase in the second quarter is primarily the result of approximately $100 of higher wages and benefits, $100 increase in selling expenses and $250 of higher office expenses, partly offset by lower bad debt expenses of $400 resulting from recoveries of receivables for which provisions were previously made. The $1,037 year to date increase was primarily the result of approximately $900 of higher wages and benefits and $100 of increased selling expenses.

Corporate expenses of $9,791 in the second quarter of 2017 and $18,015 year to date increased by $2,832 or 41% and $2,500 or 16%, respectively, compared to the same periods in 2016. The $2,832 increase was primarily as a result of approximately $1,600 in higher office expenses, driven mainly by increases in software license fees, $700 of higher professional fees and $500 of higher selling expenses. The year to date increase of $2,500 was primarily as a result of approximately $1,800 of higher office expenses from increased software licensing costs and building move expenses of $700.

Corporate SG&A expenses in the second quarter of 2016 included $574 and $1,081 year to date of integration and business transformation costs related to the DE Acquisition, primarily from information technology integration activities to optimize the information technology platforms.

Amortization Expense

Amortization expense increased by $3,689 or 10% in the second quarter of 2017 and $9,781 or 14% year to date, compared to the same periods in 2016, primarily due to the SE Transaction, an increasing capital asset base from asset mix changes in the rentals portfolio and increased Sub-metering capital investments, which are amortized over a shorter life than those of the Enercare Home Services business.

Net Loss on Disposal of Equipment and Other Assets

Enercare reported a net loss on disposal of equipment and other assets of $5,137 in the second quarter of 2017 and $6,994 year to date, increases of $4,246 or 478% and $4,172 or 145%, respectively, over the same periods in 2016. The net loss on disposal amount is influenced by the number of assets retired, proceeds on disposal of equipment, changes in the retirement asset mix and the age of the assets retired. 

During the second quarter of 2017, net loss on disposal included a non-recurring write-down of $5,165 of software intangible assets related to an enterprise resource system that Service Experts had been developing that will now be superseded by a common platform implemented across both the Enercare Home Services and Service Experts businesses.  The year to date net loss on disposal also includes a non-recurring write down of $845 from the first quarter of 2017 relating to stranded technology investments resulting from going concern issues with a supplier that was developing software solutions for the Enercare Home Services business.

Interest Expense





Three months ended June 30,

Six months ended June 30,

(000's)

2017

2016

2017

2016

Interest expense payable in cash

$9,274

$7,613

$18,914

$14,242

Interest payable on subscription receipts

-

1,109

-

2,217

Equity bridge financing fees

-

9

-

198

Make-whole payment on early redemption of senior debt

-

-

5,049

-

Non-cash items:






Notional interest on employee benefit plans

226

210

452

420


Amortization of financing costs

263

246

1,192

463

Interest expense

$9,763

$9,187

$25,607

$17,540

Interest expense payable in cash increased by $1,661 to $9,274 in the second quarter of 2017 and by $4,672 to $18,914 year to date, compared to the same periods in 2016.  These increases were primarily related to the addition of the USD $200,000 from the two 4-year non-revolving, non-amortizing variable rate term credit facilities (the "2016 Term Loan"), maturing on May 11, 2020, related to the financing of the SE Transaction and the issuance of 2017 Notes during the first quarter of 2017, partially offset by the conversion of the 6.25% convertible unsecured subordinated debentures of Enercare ("Convertible Debentures") to Shares. A make-whole payment for the early redemption of the 2012 Notes during the first quarter of 2017 resulted in a one-time interest expense of $5,049.

Notional interest of $226 in the second quarter of 2017, $452 year to date, relates to the defined benefit employee benefits plans. Amortization of financing costs includes the previously unamortized costs associated with the 2012 Notes, which were redeemed on March 23, 2017, the $225,000 of 4.60% Series 2013-1 Senior Unsecured Notes of Enercare Solutions, which mature on February 3, 2020, the Convertible Debentures, the 2014 Term Loan, which was repaid on February 23, 2017, the 2016 Term Loan and the 2017 Notes. The 2017-1 Notes were sold at a price of 99.982% of the principal amount, with an effective yield of 3.384% per annum if held to maturity and the 2017-2 Notes were sold at 99.982% of the principal amount, with an effective yield of 3.993% per annum if held to maturity.

As part of the SE Transaction, Enercare issued subscription receipts (the "SE Subscription Receipts") during the first quarter of 2016 and subsequently exchanged them for Shares upon the closing of the SE Transaction on May 11, 2016.  While the SE Subscription Receipts remained outstanding, they were classified as debt, resulting in interest expense of $1,109 during the second quarter of 2016 and $2,217 year to date 2016, which were the equivalent to the dividend payments on such SE Subscription Receipts if they had been Shares.  Equity bridge financing fees of $9 in the second quarter of 2016 and $198 year to date 2016 were also incurred as part of the SE Transaction.

Income Taxes

Enercare reported current tax expense of $6,500 in the second quarter of 2017 and $11,915 year to date, reductions of $8,759 and $15,600, respectively, over the same periods in 2016. These reductions were primarily from higher taxes owed in the first half of 2016, resulting from a one-year tax deferral originated in 2015, and additional interest expense incurred in the first half of 2017, partly offset by higher taxes owed by Service Experts in 2017. The deferred income tax expense of $2,017 and recovery of $4,088 year to date decreased by $9,650 and $12,759, respectively, over the same periods in 2016, primarily as a result of temporary difference reversals in the Enercare Home Services, Service Experts and Sub-metering businesses.

Net Earnings

Net earnings were $21,103 in the second quarter of 2017 and $18,071 year to date, an increase of $5,052 and decrease of $6,175, respectively, compared to the same periods in 2016, as previously described.

EBITDA, Adjusted EBITDA and Acquisition Adjusted EBITDA

The following table summarizes comparative quarterly results for the last eight quarters, and reconciles net earnings, an IFRS measure, to EBITDA, Adjusted EBITDA and Acquisition Adjusted EBITDA.











(000's)

Q2/17

Q1/17

Q4/16

Q3/16

Q2/16

Q1/16

Q4/15

Q3/15

Net earnings/(loss)

$ 21,103

$(3,032)

$17,552

$19,332

$16,051

$8,195

$13,725

$13,124

Deferred tax expense/(recovery)

2,017

(6,105)

(5,275)

(7,522)

(7,633)

(9,214)

1,069

2,376

Current tax expense

6,500

5,415

11,534

15,332

15,259

12,256

2,784

2,169

Amortization expense

39,485

38,399

38,892

38,329

35,796

32,307

31,917

31,606

Interest expense

9,763

15,844

8,554

8,507

9,187

8,353

6,988

6,955

EBITDA(a)

78,868

50,521

71,257

73,978

68,660

51,897

56,483

56,230

Add: Net loss/(gain) on disposal

5,137

1,857

850

734

891

1,931

(1,455)

1,001

Adjusted EBITDA(b)

84,005

52,378

72,107

74,712

69,551

53,828

55,028

57,231

Add: Acquisition SG&A

273

104

603

4,854

5,128

4,293

3,028

3,946

Acquisition Adjusted EBITDA

$84,278

$52,482

$72,710

$79,566

$74,679

$58,121

$58,056

$61,177



(a) 

Historical EBITDA has been conformed to the current presentation which includes investment income and other income. 

(b)  

Historical Adjusted EBITDA has been conformed to the current presentation which includes investment income and other income and excludes net loss on disposal.

 

Outlook

The forward-looking statements contained in this section are not historical facts but, rather, reflect Enercare's current expectations regarding future results or events and are based on information currently available to management (see "Cautionary Note Regarding Forward-looking Statements" in this news release).

Enercare Home Services Segment

  • Our main priority for the business in 2017 is to grow EBITDA.  In order to grow EBITDA in the Enercare Home Services business, our key priority is to continue to grow the number of rental contracts.  We believe that we have the opportunity to continue to grow the number of contract additions in excess of Attrition throughout 2017. Other key priorities for the Enercare Home Services business include growing the protection plan portfolio, enabled by the full launch of the electrical protection plans, investing in the replacement of key infrastructure and IT systems that support our vision for sustainable growth and further enhancing our customer satisfaction levels.  We will also continue to build on the innovation of our mobile app with further enhancements to the customer experience throughout the year. 
  • Our strategy to emphasize HVAC rentals over outright sales in order to create a long-term customer revenue stream and provide valuable cross-selling opportunities continues to be successful. While this strategy has resulted in a significant increase in recurring HVAC rental revenues, we anticipate the negative short-term impact on non-recurring sales and other services revenue to continue throughout 2017.
  • Our collective bargaining agreement in respect of Enercare Home Services with UNIFOR Local 975 expired on March 31, 2017. Renegotiations began in March and are continuing.

Service Experts Segment

  • Consistent with previous guidance, cost synergies relating to the SE Transaction are estimated to be in the range of $0.05 to $0.08 per Share on an annualized basis by the end of 2017. Enercare estimates that on a year to date basis approximately half of these synergies have already been achieved with savings coming primarily from improved sourcing costs leading to lower cost of goods sold, SG&A and capital expenditures as well as lower current taxes.
  • Our key priority for the Service Experts business in 2017 is to grow revenues and EBITDA while continuing to expand the rental programs for HVAC and water heater products in both Canada and the U.S. Service Experts will also continue to explore strategic acquisition opportunities.
  • In October 2016, Service Experts introduced a rental program for HVAC products and water heaters in several centers within Canada. This rollout was completed at all 15 locations in Canada in February 2017, and while the program is still in the very early stages, Enercare is encouraged by the initial results which show an initial rental mix during the first half of 2017 of approximately 13% (ranging from 6% to 30% depending on the center) in Ontario and 7% (ranging from 3% to 11% depending on the center) in Western Canada, where the rental model is a new concept. The successful introduction of our recurring revenue rental model in Canada is part of our plan to integrate rentals throughout Service Experts residential heating and cooling operations over the next two years to create recurring revenue. During the first quarter of 2017, Service Experts extended the rental HVAC offerings through a pilot in two U.S. states and subsequently rolled out to two additional states in late March and one in early May. The U.S. rental program is similar to Enercare's existing Canadian rental program, except that due to U.S. regulations, the rental contracts in the United States will be for a definitive term, which in the piloted states is 10 years. Enercare anticipates that the form of the contract, as driven by the U.S. regulatory environment, will result in a slower adoption of the rental program in the U.S. The preliminary rental mix of total HVAC origination in the United States during the first half of 2017 was approximately 3% (ranging from 0.5% to 8% depending on the center). While the initial results in a number of these U.S. centers are encouraging, Service Experts continues to review its U.S. rental program to identify opportunities to improve its customer offerings and related rental execution processes.
  • The business of Service Experts is subject to greater seasonality than Enercare Home Services as a result of it having fewer recurring revenue sources. Revenue and EBITDA tend to be seasonally highest in the second quarter of the year, followed by the third quarter, and substantially less in the fourth and first quarters, due primarily to the geography where Service Experts operates and weather patterns. The heating season (roughly November through February) and cooling season (roughly May through August) are periods when consumers transition their buying patterns from one season to the next. In most of the states that Services Experts operates, cooling equipment as opposed to heating equipment represents a substantial portion of its annual HVAC sales and service revenue. Conversely, in the three provinces that Service Experts operates, heating equipment represents a large portion of its Canadian sales and service revenue. The sales are also impacted by seasonal weather patterns; in periods of extreme heat and cold, installation and demand service revenue tend to increase. This results in higher sales in the second and third quarters due to the higher volume in the cooling season relative to the heating season and the lowest revenue and substantially reduced EBITDA, relative to other quarters, in the first quarter. Service Experts normally generates a neutral level of profitability in the first quarter of the year and as a result the working capital needs are generally greater in the first quarter, followed by higher operating cash inflows in the second and third quarters.

Sub-metering Segment

  • In respect of Sub-metering, our priorities for 2017 will be to continue to grow EBITDA by increasing contract sales. Other key priorities include reducing the capital spend per unit for new installations and introducing new products and services.
  • During the first half of 2017, we continued to experience the trend that almost one-half of our contracted units were for thermal, gas or water sub-metering. The majority of all new construction contracts are for both electricity and water sub-metering services, which contributes to lower billing costs over time as multiple products will be invoiced on a single bill.
  • Sub-metering sales opportunities continue to be strong and skewed towards multi-commodity products within the new construction and condominium segments. During the first half of 2017, over three-quarters of the newly contracted services have come from new construction condominiums and rental properties. Although the buildings related to these contracts have yet to be constructed and as a result the bulk of the capital and all of the related revenues will occur in 24 to 36 months, once constructed, all units within these buildings will start billing on initial move-in. This is in contrast to retrofit apartment contracts for which installation starts sooner, but billing lags as it is reliant on tenant turnover.
  • In a new construction scenario, the typical lead time between the signing of a sub-metering agreement, which happens prior to construction and the on-boarding of metering customers averages three years. With the current backlog, we are expecting higher than average new construction installations in 2018 which will continue in the following years.
  • Sub-metering plans to continue to negotiate new contracts with existing clients as they approach the end of their original contracts. Each of these negotiations are unique and competitive pressure will likely result in re-negotiated fees being below those of the original contracts.
  • During the first quarter, sub-metering introduced a new commercial service offering through a controlled launch process. This offering compliments our recently launched commercial consolidation billing solution and brings additional features, such as tenant level consumption reporting and client options to purchase the meters. During the second quarter, the first contracts for this service were signed with installations scheduled for the second half of 2017.
  • Triacta has been developing the generation 5 PowerHawk metering platform, which is entering laboratory trials. This new platform has a modular architecture, allowing for a single unit to measure multiple types of commodities and utilize a variety of communications protocols. General availability of the product is expected in late 2017.

Corporate


  • Enercare has embarked on an ongoing program to increase efficiency and innovation by investing in its systems and technology. During the second half of 2017, in order to improve its customer experience, Enercare will deploy a new interactive voice response system as well as make enhancements to its mobile app. Enhancements to the mobile app will allow customers, not currently with Enercare Home Services, the ability to download the app to purchase products and services. In the third quarter of 2017, Enercare will also launch a human resource management system to automate human resource activities and processes. As well, Enercare plans to implement a customer relationship management system and an ERP system across both the Enercare Home Services and Services Experts businesses, which initiative is currently in the scoping phase. As these and other innovations are rolled out over the next few years, Enercare will continue making additional investments in both capital and SG&A expenditures.
  • Consistent with previous guidance, Enercare estimates that it will recognize approximately $23 million to $29 million in current income tax expense for the fiscal year ending December 31, 2017. This estimate assumes corporate tax rates of approximately 26.5% in Canada and 39% in the US. Taxable income is principally impacted by changes in revenue, operating expenses, potential acquisitions or divestitures, appropriate tax planning and capital expenditures through the capital cost allowance deduction.
  • Consistent with previous guidance, Enercare is targeting a range of between $167 million and $192 million in capital investments in 2017, primarily reflecting higher unit costs due to higher end product originations, higher sales volumes and higher corporate spending on platforms for innovation and growth to enable future product offerings, including smart home products for a connected home. The target ranges for some capital expenditure categories have been adjusted in the table below.





Capital Expenditure(1)

Target Range

for 2017 as of

 March 31, 2017

Adjustments

Target Range

for 2017 as of

June 30, 2017

HVAC rentals

$46M – $52M

($1M)

$45M – $51M

Water heater additions

$35M – $39M

$2M

$37M – $41M

Water heater exchanges

$32M – $36M

$2M

$34M – $38M

Sub-metering growth

$17M – $21M

$17M – $21M

In-house financing(2)

  $5M – $  8M

  $5M – $  8M

Corporate and building(3)

$32M – $36M

($3M)

$29M – $33M

Total range

$167M – $192M

 $167M – $192M(4)

(1)

Excludes acquisitions.

(2)

In-house financing represents the increase in financing receivables related to the program.

(3)

Corporate capital includes IT software and hardware, furniture and fixtures and other capital projects. The building relates to a new head office purchased in Q2 of 2016 including renovations continuing into the first half of 2017.

(4)

The target range of capital spend for the Enercare Home Services and Service Experts businesses is largely based on the number and type of equipment originated (assumed to be approximately 26,000 water heater and water treatment rental additions, 44,000 water heater exchanges and 14,500 HVAC rental additions) and the mix between rental, sales and financing arrangements similar to actual results experienced in the last 12 months of operations. The target range for capital spend in the Sub-metering business is based on the number and type of metering equipment installed during the year assumed to be approximately 18,000 units.

 

Financial Statements and Management's Discussion and Analysis

Enercare's financial statements and management's discussion and analysis for the period ended June 30, 2017 are available on SEDAR at www.sedar.com or on Enercare's investor relations website at www.enercareinc.com.

Conference Call and Webcast

Management will host a conference call and live audio webcast to discuss Enercare's financial results for the second quarter ended June 30, 2017 this morning at 10:00 a.m. (ET). John Macdonald, President and CEO, and Evelyn Sutherland, CFO, will review Enercare's results and discuss the quarter's operating highlights. 

Those wishing to listen to the teleconference may access the live webcast as follows:

Date:               

Tuesday, August 8, 2017



Time:               

10:00 a.m. – 11:00 a.m. (ET)



By telephone:

647.427.2311 or 1.866.521.4909


Please allow 10 minutes to be connected to the conference call.



Webcast:    

http://event.on24.com/wcc/r/1380369-1/E9C1AF45FCC2E0D8EF0A9D7922352F62




Note: this is a listen-only audio webcast. Media Player or Real Player is required to listen to the broadcast.



Replay:   

An archived audio webcast will be available at www.enercareinc.com for one year following the original broadcast. 



Note:    

A slide presentation intended for simultaneous viewing with the conference call will be available the morning of Tuesday, August 8, 2017 at www.enercareinc.com.

 

Cautionary Note Regarding Forward-looking Statements

This news release contains certain forward-looking statements within the meaning of applicable Canadian securities laws ("forward-looking statements" or "forward-looking information") that involve various risks and uncertainties and should be read in conjunction with Enercare's 2016 audited consolidated financial statements.  Additional information in respect of Enercare, including the Annual Information Form of Enercare dated March 31, 2017 ("AIF"), can be found on SEDAR at www.sedar.com.

Statements other than statements of historical fact contained in this news release may be forward-looking statements, including, without limitation, management's expectations, intentions and beliefs concerning anticipated future events, results, circumstances, economic performance or expectations with respect to Enercare, including Enercare's business operations, business strategy and financial condition. When used herein, the words "anticipates", "believes", "budgets", "could", "estimates", "expects", "forecasts", "goal", "intends", "may", "might", "outlook", "plans", "projects", "schedule", "should", "strive", "target", "will", "would" and similar expressions are often intended to identify forward-looking information, although not all forward-looking information contains these identifying words. These forward-looking statements may reflect the internal projections, expectations, future growth, results of operations, performance, business prospects and opportunities of Enercare and are based on information currently available to Enercare and/or assumptions that Enercare believes are reasonable. Many factors could cause actual results to differ materially from the results and developments discussed in the forward-looking information.

In developing these forward-looking statements, certain material assumptions were made. These forward-looking statements are also subject to certain risks. These factors include, but are not limited to:

  • actual future market conditions being different than anticipated by management;
  • the failure to realize the anticipated benefits of the SE Transaction, strategic initiatives and tax efficiencies;
  • the risk that the pilot and subsequent roll out of rental HVAC offerings in 5 states in the United States does not realize anticipated results as the rental model is a new concept in this industry in the United States; and
  • the risks and uncertainties described under "Risk Factors" in the AIF.

Material factors or assumptions that were applied to drawing a conclusion or making an estimate set out in forward-looking statements include:

  • the view of management regarding current and anticipated market conditions;
  • industry trends remaining unchanged;
  • the financial and operating attributes of Enercare and Service Experts as at the date hereof and the anticipated future performance of Enercare and Service Experts;
  • assumptions regarding the volume and mix of business activities remaining consistent with current trends;
  • assumptions regarding the interest rate of the 2016 Term Loan, foreign exchange rates and commodity prices; and
  • the number of Shares outstanding remaining constant.

There can be no assurance that the anticipated strategic benefits and operational, competitive and cost synergies from the SE Transaction will be realized. There can be no assurance that recent results from the introduction of the rental model to Service Experts in Canada and the United States are indicative of future results.

Readers are cautioned that the preceding list of material factors or assumptions is not exhaustive. Although forward-looking statements contained in this news release are based upon what management believes are reasonable assumptions, there can be no assurance that actual results will be consistent with these forward-looking statements. Accordingly, readers should not place undue reliance on such forward-looking statements and assumptions as management cannot provide assurance that actual results or developments will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, Enercare. All forward-looking information in this news release is made as of the date of this news release. These forward-looking statements are subject to change as a result of new information, future events or other circumstances, in which case they will only be updated by Enercare where required by law.

About Enercare Inc.

Enercare is headquartered in Markham, Ontario and publicly traded on the Toronto Stock Exchange (TSX: ECI). As one of North America's largest home and commercial services and energy solutions companies with approximately 4,500 employees under its Enercare and Service Experts brands, Enercare is a leading provider of water heaters, water treatment, furnaces, air conditioners and other HVAC rental products, plumbing services, protection plans and related services. With operations in Canada and the United States, Enercare serves approximately 1.6 million customers annually. Enercare is also the largest non-utility sub-meter provider, with electricity, water, thermal and gas metering contracts for condominium and apartment suites in Canada and through its Triacta brand, a premier designer and manufacturer of advanced sub-meters and sub-metering solutions.

For more information on Enercare visit enercare.ca. Additional information regarding Enercare is available through our investor relations website at www.enercareinc.com or on SEDAR at www.sedar.com.

Subscribe to our email alerts at www.enercareinc.com/alerts to receive our news releases electronically.

SOURCE Enercare Inc.

For further information: Evelyn Sutherland, CFO, 416.649.1860, esutherland@enercare.ca

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