Enercare Reports Strong Growth for the Year Ended December 31, 2017 and Announces a 4% Dividend Increase

TORONTO, March 6, 2018 /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 fourth quarter and fiscal year ended December 31, 2017.

"2017 was another successful year for Enercare. We increased revenue and EBITDA, driven by strong operational performance, and the synergies from the Service Experts acquisition exceeded our expectations," said John Macdonald, President and Chief Executive Officer. "In 2018, we will continue to focus on growth and invest in technology and innovation, while remaining committed to returning capital to our shareholders."

Fourth Quarter and Full Year 2017 Highlights

• Total Revenue for the fourth quarter was $312 million, an increase of $19 million, or 7% compared to the same period in 2016, and $1.3 billion for 2017, an increase of $262 million, or 26%.
• EBITDA was $73 million for the fourth quarter, an increase of 3% compared to $71 million in 2016, and $280 million for 2017, an increase of $14 million or 5%.
• Enercare Home Services had net rental unit growth of 2,000, the tenth consecutive quarter of net growth in rental units, and 8,000 net unit growth for 2017.
• Sub-metering increased contracted units by 10,000 for the fourth quarter and 26,000 for 2017.
• Service Experts increased heating, ventilation and air conditioning ("HVAC") and water heater originations by 21% in the fourth quarter, and 14% for 2017.
• Delivered annualized synergies target of 9 cents per common shares of Enercare ("Shares"), exceeding the original target estimated to be in the 5-8 cent per Share range.

Financial Highlights

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

Results of Operations

Earnings Statement

Average Foreign Exchange

Enercare's results of operations may be affected by the impact of movements in foreign exchange rates from operations whose functional currency is not in Canadian dollars. The results of these foreign operations are translated into Canadian dollars using the average exchange rates shown in the table below for the corresponding periods. Such translations predominantly relate to Service Experts' U.S. operations whose functional currency is U.S. dollars. Where relevant throughout the "Results of Operations" discussion in this news release, reference is made to any material impacts resulting from movements in foreign exchange rates on reported amounts. The following table illustrates the approximate impact of foreign exchange on Enercare's results for the year ending December 31, 2017 assuming average exchange rates during the current periods were held constant to those in 2016.

Revenues

Total revenues of $1,258,176 for 2017 increased by $262,235 or 26% compared to 2016, primarily as a result of the inclusion of a full year of Service Experts revenues in 2017.

Enercare Home Services revenues, excluding investment income, of $457,204 for 2017 increased by $18,586 or 4%, compared to 2016, primarily driven by rental rate increases and asset mix changes within the rental HVAC portfolio, partly offset by lower protection plan revenues. 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 sales and installations of residential furnaces, boilers and air conditioners, as well as plumbing, duct cleaning and other services.

Service Experts revenues, excluding investment income, were $662,346 for 2017, increasing by $251,611 or 61% compared to 2016, primarily due to the inclusion of a full year of results in 2017 compared to a partial year in 2016, higher sales volumes and acquisitions completed during the year. In constant currency, revenue growth would have been 63% in 2017, compared to the prior year. The increase in sales and rentals activity during 2017 was despite unfavourably milder weather trends throughout the first three quarters of 2017 and a lower demand, particularly in Florida, as a result of Hurricane Irma. Service Experts revenues were lower by $11,740 for 2017 as a result of purchase accounting adjustments for deferred revenue associated with 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"), compared to $20,833 in 2016.

Sub-metering revenues, excluding investment income, were $137,270 in 2017, a decrease of $8,719 or 6%, compared to 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 $99,011 in 2017, a decrease of $12,471 or 11%, compared to 2016.

Investment income was $1,356 in 2017, increasing by $757, when compared to 2016. The increase in investment income is primarily attributable to higher interest income earned from financing receivables relating to loans to customers resulting from HVAC sales.

Cost of Goods Sold

Total cost of goods sold for 2017 was $635,238, an increase of $168,584 or 36%, compared to 2016. The increase was primarily as a result of the inclusion of a full year of Service Experts cost of goods sold in 2017.

Enercare Home Services cost of goods sold increased by $3,858 or 4% in 2017, compared to 2016, as a result of the growth in HVAC sales and higher maintenance and servicing costs associated with growth in the rentals and protection plan portfolios. 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 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 $440,272 in 2017, an increase of $176,213 or 67% in 2017, compared to 2016. Service Experts cost of goods sold was reduced by $9,206 as a result of purchase accounting adjustments for the service obligation associated with the SE Transaction, compared to $16,549 in 2016. Changes in foreign exchange rates in 2017 accounted for a decrease of $4,481 in cost of goods sold compared to 2016. The increase in cost of goods sold was primarily due to increases in originations over the year and the inclusion of a full year of Service Experts cost of goods sold.

Sub-metering cost of goods sold was $101,840 in 2017, decreasing by $11,487 or 10%, primarily from lower flow-through commodity charges compared to 2016. Sales and other services expenses for Sub-metering increased by $984 and 53% compared to 2016, primarily driven by an increase of $485 from the installation of water conservation products in apartments and condominiums and an increase of approximately $450 from meter sales.

Selling, General & Administrative Expenses

Total selling, general and administrative expenses ("SG&A") were $335,843 in 2017, an increase of $76,426 or 29%, compared to 2016. The increase was primarily as a result of the inclusion of a full year of Service Experts SG&A expenses in 2017.

Enercare Home Services SG&A expenses of $106,611 in the year, increased by $6,268 or 6%, compared to 2016. The $6,268 increase was primarily as a result of increases of approximately $5,300 in sales and marketing expenses, $4,000 in higher wages and benefits, driven partly by $2,000 of higher stock based compensation costs resulting from an increase in the Share price, and $1,700 of billing and support costs, partly offset by a reduction in office expenses of $4,100, primarily due to Enercare's ownership of its corporate office, and professional fees of $470. The higher sales and marketing expenses were mainly driven by costs related to the development of localized webpages to drive improvements in both search engine optimization and search engine marketing activities, a branding refresh for our fleet of installation vehicles to promote new product offerings and marketing initiatives to drive brand awareness, as well as tests associated with a 100-person smarter home pilot initiated during the fourth quarter of 2017.

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 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 2017 of $172,687, increased by $65,027 or 60%, compared to 2016. The increase of $65,027 was primarily the result of the inclusion of a full year of Service Experts SG&A expenses in 2017. Service Experts SG&A expenses included expenses relating to prepaid software maintenance costs of approximately $1,000, which were expensed during the second quarter driven by a write-off of the Service Experts' CRM and ERP systems.

Service Experts SG&A expenses in 2017 included acquisition related expenditures of $1,107, primarily consisting of professional fees associated with the acquisitions of CS Operating LLC, Hammond Plumbing and Heating Inc. and Aramendia Plumbing, Heating & Air Ltd. In 2016, Service Experts SG&A expenses included $11,485 of acquisition related expenditures associated with the SE Transaction, primarily consisting of professional fees. These expenditures included $2,834 of pre-acquisition expenditures incurred by Enercare Home Services. Changes in foreign exchange rates during 2017 accounted for approximately a $1,721 reduction in SG&A expenses compared to 2016. Certain wage related expenditures, in the amount of $2,826 for 2017, have been reclassified from SG&A expenses to cost of goods sold, compared to $6,933 in 2016.

Sub-metering SG&A expenses in 2017 were $21,225, an increase of $1,902 or 10% compared to 2016. This increase was primarily the result of approximately $1,640 of higher wages and benefits and driven partly by $498 of higher stock based compensation costs resulting from an increase in the Share price, $740 of office expenses and $210 in higher sales and marketing expenses, partly offset by lower bad debt expenses of $540 and professional fees of $270.

Corporate expenses of $35,320 in 2017 increased by $3,229 or 10%, compared to 2016. The increase of $3,229 was primarily the result of approximately $1,200 of higher office expenses, which includes software licensing costs and expenses relating to the implementation of an ERP system, $910 of higher wages and benefits, driven mainly by $580 of higher stock based compensation costs resulting from an increase in the Share price, $790 of higher sales and marketing expenses and $300 of higher professional fees.

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

Amortization expense increased by $12,684 or 9%, compared to 2016, primarily due to the SE Transaction, which was completed in the second quarter of 2016, 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 $8,081 in 2017, an increase of $3,675 or 83%, over 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. 

The net loss on disposal includes the second quarter of 2017 write-off of $5,165 related to Service Experts' CRM and ERP systems. The net loss on disposal also includes a write-off 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

Interest expense payable in cash increased by $7,754 to $38,048 in 2017, compared to 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, the issuance of 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") during the first quarter of 2017 and increases in the 5-year variable rate, revolving credit facility with a maximum amount of $200,000 ("2014 Revolver"), partially offset by the conversion of the 6.25% convertible unsecured subordinated debentures of Enercare ("Convertible Debentures") to Shares and lower effective rates on the 2017 Notes compared to the $250,000 of 4.30% Series 2012-1 Senior Unsecured Notes of Enercare Solutions (the "2012 Notes"), which were redeemed using proceeds from the offering of the 2017 Notes. A make-whole payment for the early redemption of the 2012 Notes during the first quarter of 2017 resulted in additional interest expense of $5,049.

Notional interest of $904 in 2017 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, $210,000 4 year variable rate, non-revolving term loan facility of Enercare Solutions, which was repaid on February 23, 2017, the 2016 Term Loan and the 2017 Notes.

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 $2,217, which were the equivalent to the dividend payments on such SE Subscription Receipts if they had been Shares. Equity bridge financing fees of $198 were also incurred as part of the SE Transaction.

Income Taxes

Enercare reported current tax expense of $22,723 in 2017, a reduction of $31,658 compared to 2016. The reduction was primarily from higher taxes owed in 2016, which resulted from a one-year tax deferral originated in 2015 and additional tax depreciation and interest expense incurred in 2017. The deferred income tax recovery of $2,204 in 2017 decreased by $27,440 compared to 2016, primarily as a result of temporary difference reversals in the Enercare Home Services business.

Net Earnings

Net earnings were $55,514 in 2017, a decrease of $5,616, compared to 2016.

Non-IFRS Measures of 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, an IFRS measure, Adjusted EBITDA and Acquisition Adjusted EBITDA.

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).

Investing in Innovation

• Enercare has embarked on an ongoing program to increase efficiency and innovation by investing in its systems and technology. This program is also aimed at improving the customer experience to gain long-term customer loyalty and differentiate Enercare from its competitors.
• Enercare plans to implement an ERP system across its business as well as a cloud based CRM system in its Enercare Home Services business and is exploring a similar implementation for its Services Experts business. This initiative is currently in the early stages and implementation will be through a phased approach, starting with Enercare Home Services. The first phase of Enercare's ERP implementation went live on schedule on February 16, 2018 to support the application of IFRS 9, which Enercare will adopt during the first quarter of 2018. A limited CRM implementation is planned for the second half of 2018, with plans for more significant progress during 2019.
• Enercare Home Services has been developing and testing a new smarter home product offering that will enable customers to utilize technology to support energy efficiency savings by providing insights on heating and cooling equipment functionality. Customers will be able to use a mobile application to monitor and control their home at any time and from any place. At the outset, the solution will allow customers to manage their energy usage, monitor and control their cooling and heating appliances, detect water leaks and enable remote water shut-off amongst other things. Enercare Home Services is conducting a 100-person pilot and expects a controlled launch to customers in the first half of 2018. We believe this offering will strengthen our customer relationships as we move from a reactive to a proactive service model. Enercare will be able to notify customers when issues arise, provide insights on equipment usage, effect any repairs and ultimately help customers conserve energy and save money.

Enercare Home Services Segment

• The Home Services business continued to successfully grow EBITDA in 2017. This was achieved in part by growing the number of rental contracts, and we believe that we have the opportunity to continue to grow our contracted revenue in 2018. Another key priority for the Enercare Home Services business during 2017 was to grow the protection plan portfolio which was achieved through the full launch of the electrical protection plans combined with strong customer retention programs.
• In January 2018, Enercare increased its weighted average rental rate for water heaters by 3.09% and HVAC by 1.8%.
• Our collective bargaining agreement in respect of Enercare Home Services with UNIFOR Local 975 expired on March 31, 2017. Renegotiations began in March 2017 and are continuing with a conciliation officer having been appointed to facilitate negotiations.

Service Experts Segment

• Enercare successfully achieved cost synergies relating to the SE Transaction of $0.09 per Share on an annualized basis by the end of 2017 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.
• 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 extended the rental HVAC offering to seven U.S. states throughout 2017. In the fourth quarter of 2017, certain aspects of the program were enhanced. Our goal is to have the vast majority of the U.S. operations having the HVAC rental program available by the fourth quarter of 2018.
• In 2017, Service Experts successfully completed three acquisitions. Two further acquisitions were completed in the first quarter of 2018 and the acquisition pipeline remains robust.

Sub-metering Segment

• During the first quarter of 2017, 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. The first commercial service meters with the new offering were installed during the third quarter and a number of new customers have signed up for the offering. By the end of 2017, Sub-metering had acquired 12 customers onto its new commercial service offering, with three of these customers installed by year end.
• Sub-metering sales opportunities continue to be strong and increasingly include multi-commodity products such as thermal, gas or water sub-metering within the new construction and condominium segments. During 2017, over 80% of the newly contracted services come from new construction condominiums and new construction rental properties.
• Triacta Power Technologies Inc. ("Triacta"), our wholly owned equipment manufacturer, has been developing the generation 5 PowerHawk metering platform. This new platform has a modular architecture, allowing for a single unit to measure multiple types of commodities, and utilizes a variety of communications protocols. During the fourth quarter, beta trial units were shipped to key customers for evaluation and to various labs for certification. We anticipate approvals will be received in the United States to allow us to increase our U.S. sales. We are working towards approval from Measurement Canada for use in billing grade application by the end of 2018.
• Enercare anticipates that the implementation of IFRS 15 on January 1, 2018 will result in recognizing certain contracted sub-metering revenues related to individual suite consumption on a net basis, whereby the revenues are net of the related commodity charges associated with the service. This change will not impact net earnings or EBITDA and will be reported as such in the first quarter of 2018.

Corporate

• Enercare's current income tax expense for 2017 was $22.7 million compared to previous guidance of approximately $23 million to $29 million.
• On December 22, 2017, the Tax Cuts and Jobs Act of 2017 became effective and significantly changed the Internal Revenue Code including, among other provisions, reductions to the U.S. Federal corporate tax rate. Enercare expects that this tax reform will not significantly impact its 2018 current income tax estimates for Service Experts as the benefit relating to the lower Federal corporate tax rate will be offset by other tax reform changes. In addition, the acquisition of Service Experts was structured to permit Enercare to "step up" the tax basis of Service Experts' assets in the U.S. through a "338 election" under U.S. tax rules, which provides a significant tax shield by reducing U.S. taxable income by approximately $27 million per year for the next 14 years.
• Enercare estimates that it will recognize approximately $26 million to $32 million in current income tax expense for the fiscal year ending December 31, 2018. This estimate assumes corporate tax rates of approximately 26.5% in Canada and 26% in the U.S. Taxable income is principally impacted by changes in revenue, operating expenses, potential acquisitions or divestitures, appropriate tax planning, capital expenditures through the capital cost allowance deduction, changes in tax laws, distribution of sales and earnings by state, and regulations and administrative practices. As additional regulatory guidance is issued by the applicable taxing authorities, the assumptions used to estimate taxable income in the U.S. may be impacted.
• In 2017, Enercare's capital investments of $181 million were in line with previous guidance.

• Enercare is targeting a range of between $185 million and $207 million in capital investments in 2018, primarily reflecting higher unit costs due to higher value product originations, higher sales volumes and higher corporate spending on platforms for innovation and growth to enable future product offerings, including its smarter home offering.
• Enercare announced an increase in its monthly dividend to $0.0832 per Share, an increase of approximately 4%, effective in respect of the dividend payable to shareholders of record on the applicable date in April 2018. The increase reflects Enercare's strong overall performance and our confidence in the future of the Enercare Home Services, Service Experts and Sub-metering businesses.

Financial Statements and Management's Discussion and Analysis

Enercare's financial statements and management's discussion and analysis for the fourth quarter and year ended December 31, 2017 (the "MD&A") 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, 2017 this morning at 10:00 a.m. (ET). John Macdonald, President and CEO, and Brian Schmitt, 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:

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 2017 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 risk that the roll out of rental HVAC offerings beyond the present seven 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 MD&A.

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, 2014 Revolver, foreign exchange rates and commodity prices; and
• the number of Shares outstanding increasing as a result of the DRIP.

There can be no assurance that the anticipated strategic benefits and operational and competitive 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. There can also be no assurance as to any potential outcome of the Bureau's inquiry and the effect on Enercare's business.

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 corporate.enercare.ca or on SEDAR at www.sedar.com. Subscribe to our email alerts at corporate.enercare.ca/email-alerts to receive our news releases electronically.

SOURCE Enercare Inc.