Service Experts Acquisition delivers 30% distributable cash accretion(1) in first year
Raises Dividend by 4%
TORONTO, ON--(Marketwired - March 07, 2017) - Enercare Inc. ("Enercare") (TSX: ECI), one of North America's leading providers of essential home and commercial services and energy solutions, today reported its financial results for the fourth quarter and year ended December 31, 2016.
(All amounts are in Canadian dollars unless otherwise stated)
(in thousands of Canadian dollars except per unit amounts)2
|Three months ended December 31,||Twelve months ended December 31,|
|Acquisition Adjusted EBITDA(3)||$72.7||$58.1||25%||$285.1||$234.7||21%|
|Basic earnings per share||$0.17||$0.15||13%||$0.62||$0.56||11%|
|Tax Normalized Payout ratio - maintenance3||35%||48%||(1300 bps)||45%||51%||(600 bps)|
|Tax Normalized Payout ratio3||69%||80%||(1100 bps)||77%||80%||(300 bps)|
|Rentals attrition (units)||8,300||8,800||(6%)||30,000||35,000||(14%)|
|Rental additions net of attrition||3,000||1,000||200%||8,000||(2,000)||500%|
|Sub-metering contracted units||3,000||5,000||(40%)||30,000||20,000||50%|
John Macdonald, President and CEO, said:
"The successful acquisition of Service Experts exceeded our expectations, and all three of our business segments exceeded their annual objectives, driving record revenue, net earnings, and EBITDA for 2016. Looking forward, we will continue to invest in building our long-term recurring revenue. Having had a fantastic year, we're delighted to maintain our track record of returning significant capital to our shareholders, and increased our dividend by 4%."
1 Excludes transaction costs estimated to be $16.5 million, potential synergies in the SE Transaction, shares issued under the over-allotment option and has been normalized by $19 million in 2015 and 2016 to account for timing differences in taxes paid related to the OHCS acquisition. Normalized pro forma Distributable Cash and Normalized pro forma Distributable Cash per common share are non-IFRS measures. Refer to the Non-IFRS Financial and Performance Measures section in Enercare's management's discussion and analysis for the year ended December 31, 2016.
2 Unless otherwise noted, amounts are reported in thousands, except customers, units, shares and per share amounts and percentages. Dollar amounts are expressed in Canadian currency except as otherwise noted.
3 Adjusted EBITDA, Acquisition Adjusted EBITDA, Distributable Cash, Normalized Distributable Cash per Share, Payout Ratio, Payout Ratio - Maintenance and Operating Cash Flow are non-IFRS financial measures. Refer to the Non-IFRS Financial and Performance Measures section in the MD&A.
Results of Operations
|Year ended December 31, 2016 (000's)||Enercare Home Services||Service
|Contracted revenue||$410,018||$ 22,574||$142,239||$ -||$574,831|
|Sales and other services||28,600||388,161||3,750||-||420,511|
|Total revenue||$438,967||$410,763||$146,019||$ 192||$995,941|
|Cost of goods sold:|
|Maintenance & servicing costs||(66,994)||(17,711)||-||-||(84,705)|
|Sales and other services||(22,274)||(239,415)||(1,845)||-||(263,534)|
|Total cost of goods sold||(89,268)||(257,126)||(113,327)||-||(459,721)|
|Net (loss)/gain on disposal||(4,464)||(19)||77||-||(4,406)|
|Interest expense payable in cash||(32,709)|
|Non-cash interest expense||(1,892)|
|Total interest expense||(34,601)|
|Earnings before income taxes||85,867|
|Current tax (expense)||(54,381)|
|Deferred tax recovery||29,644|
|Net earnings||$ 61,130|
|EBITDA||$ 245,107||$ 38,990||$ 13,497||$(31,802)||$265,792|
|Adjusted EBITDA||$ 249,571||$ 39,009||$ 13,420||$(31,802)||$270,198|
|Acquisition Adjusted EBITDA||$ 252,964||$ 50,494||$ 13,420||$(31,802)||$285,076|
|Year ended December 31, 2015 (000's)||Enercare Home Services||Service
|Contracted revenue||$ 390,509||$ -||$133,652||$ -||$524,161|
|Sales and other services||35,962||-||3,498||-||39,460|
|Total revenue||$426,657||$ -||$137,169||$ -||$563,826|
|Cost of goods sold:|
|Maintenance & servicing costs||(61,164)||-||-||-||(61,164)|
|Sales and other services||(25,448)||-||(2,090)||-||(27,538)|
|Total cost of goods sold||(86,612)||-||(108,293)||-||(194,905)|
|Net (loss) on disposal||(5,354)||-||2,484||-||(2,870)|
|Interest expense payable in cash||(26,105)|
|Non-cash interest expense||(1,970)|
|Total interest expense||(28,075)|
|Earnings before income taxes||68,829|
|Current tax (expense)||(10,197)|
|Deferred tax (expense)||(7,677)|
|EBITDA||$ 229,726||$ -||$ 15,094||$(22,500)||$222,320|
|Adjusted EBITDA||$ 235,080||$ -||$ 12,610||$(22,500)||$225,190|
|Acquisition Adjusted EBITDA||$ 244,248||$ -||$ 12,989||$(22,500)||$ 234,737|
Total revenues of $995,941 for 2016 increased by $432,115 or 77% compared to 2015, primarily as a result of the SE Transaction.
Enercare Home Services revenues, excluding investment income, increased during the year by $12,147 to $438,618, compared to 2015, primarily as a result of a rental rate increase implemented in January 2016 and 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. HVAC sales and rentals in 2016 were significantly impacted by weather trends throughout the year. The unseasonably warmer temperatures experienced during the fourth quarter of 2015 continued into the first quarter of 2016, leading to fewer furnace breakdowns and therefore lower demand for HVAC replacements and repairs. The onset of warmer spring weather during the second quarter was also delayed, compared to historic norms, leading to lower demand for air conditioning sales and rentals in the early part of the second quarter. Demand for air conditioning sales and rentals increased significantly starting towards the end of the second quarter and continuing throughout the third quarter, which experienced 71% higher cooling degree days8 compared to the 25 year average. Warm weather trends continued during the first half of the fourth quarter before returning to more seasonable temperatures in December. The cooler weather experienced in December, combined with strong sales execution, resulted in a 3% increase in the demand for HVAC sales and rentals during the fourth quarter, compared to the same period in 2015.
Enercare's strategy to emphasize HVAC rentals over outright sales resulted in significant increases in recurring revenue at the expense of sales and other services revenue.
Service Experts revenues, excluding investment income, of $410,735 for 2016 since the May 11, 2016 acquisition date were stronger than anticipated, driven primarily by favourably warm weather conditions across the United States and higher average dollars per contract.
Temperatures across the United States during 2016 were one of the top three warmest in the past 25 years(4). Favourably warm weather conditions across the United States during the second and third quarters, led to a significant increase in the demand for air conditioning sales, service and repairs. Temperatures across the United States in June, July, August and September were each one of the top three warmest, compared to the same months, in the past 25 years4. Similar warm weather trends during the fourth quarter led to lower heating demand. Service Experts sales in Eastern Canada were also positively impacted by the same weather trends experienced by the Enercare Home Services segment. Higher revenues were also driven by Service Experts initiatives to shift sales towards higher value products, which have contributed to improvements in the average selling prices of installed units. Service Experts revenues were lower by $20,833 of 2016, as a result of purchase accounting adjustments of deferred revenue associated with the SE Transaction.
Sub-metering revenues, excluding investment income, were $145,989 in 2016, an increase of $8,839 or 6% over 2015, primarily as a result of higher billable units. The increase compared to 2015 was also impacted by revenues generated from the acquisition of Triacta Power Technologies Inc. ("Triacta"). Sub-metering revenue includes total pass through energy charges of $111,482 in the year, increases of $5,279 or 5% over 2015. The acquisition of Triacta in the third quarter of 2015 resulted in $3,431 of revenues in 2016, an increase of $1,193.
Investment income was $599 in 2016, an increase of $394, when compared to 2015. The change in investment income was primarily attributable to non-recurring interest earned in the second quarter of 2016 from the proceeds of Enercare's bought deal offering of subscription receipts (the "SE Subscription Receipts") received in connection with the SE Transaction combined with interest income from the registered pension plan, which was in an asset balance instead of a net obligation during 2016.
4 Weather trends from Weather Trends International.
Cost of Goods Sold
Total cost of goods sold for 2016 was $459,721, an increase of $264,816 or 136%, compared to 2015, primarily as a result of the SE Transaction.
Enercare Home Services cost of goods sold increased by $2,656 in 2016 compared to 2015, primarily from approximately $1,300 of non-recurring supplier reimbursements and other items recorded in the second quarter of 2015 and growth in the rentals business. 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 $257,126 in 2016 since the May 11, 2016 acquisition date. Service Experts cost of goods sold were lower by $16,549 during the year, as a result of purchase accounting adjustments for the service obligation associated with the SE Transaction.
Sub-metering cost of goods sold of $113,327 in 2016, increased by $5,034 or 5%, as a result of an increase in pass through energy charges over the same periods in 2015. Sales and other services expenses for sub-metering relate to 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 $266,350 in 2016, an increase of $122,082, compared to 2015.
Enercare Home Services SG&A expenses of $100,343 in the year, decreased by $4,515, compared to 2015. The $4,515 decrease was primarily as a result of approximately $4,900 in lower selling and marketing expenses, $3,000 of professional fees, both primarily from one time integration and rebranding activities in 2015, and $500 in claims expense, partly offset by $2,600 increases in wages and benefits, $600 in office expenses and $700 in bad debts. During 2016, there were acquisition related items totaling $930, compared to $1,400 in 2015, resulting in improvements to SG&A expense. The improvements in both periods arose from revisions to estimates.
Enercare Home Services SG&A expenses in 2016 included $2,312 of integration and business transformation costs related to the acquisition of the Ontario home and small commercial services business ("OHCS") of Direct Energy Marketing Limited ("DE") 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. In 2015, SG&A expenses included $9,168 of integration costs associated with the DE Acquisition, primarily from marketing spend related to rebranding activities.
Service Experts SG&A expenses in 2016 amounted to $114,593 since the May 11, 2016 acquisition date. Included in SG&A expenses were $11,485 of acquisition related expenditures associated with the SE Transaction, primarily related to professional fees and integration costs. The costs included $2,834 of pre-acquisition expenditures incurred by Enercare Home Services.
Sub-metering SG&A expenses in 2016 were $19,323, an increase of $2,417 over 2015, primarily as a result of $2,400 of higher wage and benefit expenses. Sub-metering SG&A expenses in 2015 included $379 of costs associated with the acquisition of Triacta, primarily related to professional fees.
Corporate expenses of $32,091 in 2016, increased by $9,587, compared to 2015. The $9,587 increase was primarily as a result of approximately $4,700 in higher wages and benefits, $500 in stock based compensation due to an increase in the Share price, and $4,200 of higher office expenses resulting primarily from increased information technology costs.
Corporate SG&A expenses in 2016 included $1,081 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 increased by $19,908 or 16% in 2016, primarily due to an increasing capital asset base from asset mix changes in the rentals portfolio, the SE Transaction 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
Enercare reported a net loss on disposal of equipment of $4,406 in 2016, an increase of $1,536 or 54%, over 2015. 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.
|Interest expense payable in cash||$30,294||$26,105|
|Interest payable on subscription receipts||2,217||-|
|Equity bridge financing fees||198||-|
|Notional interest on employee benefit plans, net||840||1,096|
|Amortization of financing costs||1,052||874|
Interest expense payable in cash increased by $4,189 to $30,294 in 2016, compared to 2015. The increase was primarily related to the increase from the USD $200,000 4 year variable rate term credit facility (the "2016 Term Loan"), maturing on May 11, 2020, related to the financing of the SE Transaction, partially offset by the conversion of the 6.25% convertible unsecured subordinated debentures of Enercare ("Convertible Debentures") to Enercare common shares.
Notional interest of $840 in 2016 relates to the defined benefit employee benefits plans. Amortization of financing costs includes the previously unamortized costs associated with the $250,000 of 4.30% Series 2012-1 Senior Unsecured 2012 Notes of Enercare Solutions, which mature on November 30, 2017, $225,000 of 4.60% Series 2013-1 Senior Unsecured, 2013 Notes of Enercare Solutions, which mature on February 3, 2020, the Convertible Debentures, the $210,000 4 year variable rate, non-revolving 2014 term loan of Enercare Solutions (the "2014 Term Loan"), which was repaid on February 23, 2017, and the 2016 Term Loan.
As part of the SE Transaction, SE Subscription Receipts were issued during the first quarter of 2016 and subsequently exchanged for Enercare common 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 $2,217, which was the equivalent to the dividend payments on such SE Subscription Receipts if they had been Enercare common shares. Equity bridge financing fees of $198 were also incurred as part of the SE Transaction.
Other income decreased compared to 2015 as a result of a one-time settlement of $580 recognized in 2015 from a supplier of sub-metering equipment.
Enercare reported current tax expenses of $54,381 in 2016, an increase of $44,184 over the same period in 2015, primarily as a result of a one year tax deferral recognized in 2015, available through a subsidiary of Enercare Solutions, and the acquisition of Service Experts. The deferred income tax recovery of $29,644, an increase of $37,321 compared to the deferred tax expense recorded in 2015, were primarily as a result of temporary difference reversals in the Enercare Home Services, Service Experts and Sub-metering businesses.
Net earnings were $61,130 in 2016, an increase of $10,175 compared to 2015.
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.
|Net earnings||$17,552||$19,332||$16,051||$8,195||$13,725||$13,124||$16,204||$ 7,902|
|Deferred tax (recovery)/expense||(5,275)||(7,522)||(7,633)||(9,214)||1,069||2,376||1,323||2,909|
|Current tax expense||11,534||15,332||15,259||12,256||2,784||2,169||2,290||2,954|
|Add: Net loss/(gain) on disposal||850||734||891||1,931||(1,455)||1,001||1,572||1,752|
|Add: Acquisition SG&A||603||4,854||5,128||4,293||3,028||3,946||1,961||612|
|Acquisition Adjusted EBITDA||$72,710||$79,566||$74,679||$58,121||$58,056||$61,177||$61,415||$54,089|
|(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.|
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.
Enercare Home Services Segment
Service Experts Segment
2017 Income Taxes
2017 Capital Investments
|Water heater additions||$37M|
|Water heater exchanges||$36M|
|Corporate & Building(3)||$23M|
|Target Range for 2017|
|HVAC rentals||$46M - $52M|
|Water heater additions||$35M - $39M|
|Water heater exchanges||$32M - $36M|
|Sub-metering growth||$17M - $21M|
|In-house financing(2)||$5M - $ 8M|
|Corporate & Building(3)||$32M - $36M|
|Total Range||$167M - $192M(4)|
|(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 early part of 2017.|
|(4)||The target range of capital spend for the Enercare Home Service and Service Experts businesses are largely based on the number and type of equipment originated (assumed to be approximately 26,000 water heater and water treatment rental additions, 42,000 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 year-ended December 31, 2016 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 fourth quarter and year ended December 31, 2016 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, March 7, 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.
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 enercare.ca 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, March 7, 2017 at enercare.ca.
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 21, 2016 ("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:
Material factors or assumptions that were applied to drawing a conclusion or making an estimate set out in forward-looking statements, including pro forma financial information, include:
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 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.
Enercare is headquartered in Toronto, Ontario, Canada and is 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 3,800 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.
Source: Enercare Inc.