TORONTO, Aug. 14, 2018 /CNW/ – Enercare Inc. ("Enercare") (TSX: ECI), one of North America's leading providers of essential home and commercial services, reported its financial results for the second quarter ended June 30, 2018.
"Enercare continued to deliver on its strategic objectives of continued growth, operational excellence and innovation this quarter," said John Macdonald, President and Chief Executive Officer. "I'm also exceedingly pleased with the performance of our U.S. rental program, which is a key part of our strategy to develop multiple streams of recurring revenue that will continue to deliver value."
Subsequent to the second quarter, Enercare and Brookfield Infrastructure and its institutional partners, (collectively "Brookfield") announced on August 1, 2018 that they had entered into an arrangement agreement pursuant to which Brookfield has agreed to acquire all the issued and outstanding common shares of Enercare (each a "Share") for $29.00 per Share in a transaction valued at C$4.3 billion including debt.
Second Quarter 2018 Highlights
- Total revenue for the second quarter was $343.5 million, an increase of $23.5 million or 7% compared to the same period in 2017.
- EBITDA was $87.4 million for the second quarter, an increase of 11% compared to $78.9 million in 2017.
- Adjusted EBITDA was $88.6 million for the second quarter, an increase of 5% compared to $84.3 million in 2017.
- Service Experts increased the rental proportion of total U.S. residential units sold in the second quarter of 2018 to approximately 14% compared to 4.1% in the second quarter of 2017 and double the rental mix of 7.2% from the first quarter of 2018.
- Service Experts increased heating, ventilation and air conditioning ("HVAC") and water heater originations by 9% in the second quarter.
- Enercare Home Services had net rental unit growth of approximately 2,700, the twelfth consecutive quarter of net growth in rental units.
- Sub-metering increased contracted units by approximately 4,600 in the second quarter.
Financial Highlights
(in millions of Canadian dollars except per unit amounts)1
Three months ended June 30, | Six months ended June 30, | ||||||||||
($ millions) | 2018 | 2017 | Change | 2018 | 2017 | Change | |||||
Total revenue | $ | 343.5 | $ | 320.0 | 7% | $ | 622.6 | $ | 568.7 | 9% | |
EBITDA | $ | 87.4 | $ | 78.9 | 11% | $ | 144.4 | $ | 129.4 | 12% | |
Adjusted EBITDA2 | $ | 88.6 | $ | 84.3 | 5% | $ | 147.3 | $ | 136.8 | 8% | |
Net earnings | $ | 26.8 | $ | 21.1 | 27% | $ | 31.6 | $ | 18.1 | 75% | |
Basic earnings per Share | $ | 0.25 | $ | 0.20 | 25% | $ | 0.30 | $ | 0.17 | 76% | |
Payout Ratio – Maintenance2 | 47% | 45% | 2* | 61% | 61% | -* | |||||
Payout Ratio2 | 96% | 66% | 30* | 150% | 111% | 39* | |||||
Enercare Home Services Rental attrition (units) | 7,600 | 7,300 | 4% | 14,500 | 15,100 | (4%) | |||||
Enercare Home Services Rental additions net of attrition | 2,700 | 1,600 | 69% | 4,900 | 2,700 | 81% | |||||
Sub-metering contracted units | 4,600 | 1,100 | 318% | 8,800 | 11,200 | (21%) | |||||
*percentage points | |||||||||||
_____________________________ | |
1 | Unless otherwise noted, amounts are reported in thousands, except customers, units, Shares and per Share amounts and percentages. |
2 | Adjusted EBITDA, Payout Ratio and Payout Ratio – Maintenance are Non-IFRS financial measures. Enercare changed its definition of Adjusted EBITDA in the first quarter of 2018. Refer to the Non-IFRS Financial and Performance Measures section in the MD&A. |
CONSOLIDATED RESULTS OF OPERATIONS
Three months ended June 30, | Six months ended June 30, | ||||||||||||||
(in 000's) | 2018 | 2017 | Change | Percent | 2018 | 2017 | Change | Percent | |||||||
Consolidated | |||||||||||||||
Revenue | $ | 343,490 | $ | 319,987 | $ | 23,503 | 7% | $ | 622,560 | $ | 568,683 | $ | 53,877 | 9% | |
Gross Margin | 177,175 | 169,727 | 7,448 | 4% | 327,288 | 309,041 | 18,247 | 6% | |||||||
EBITDA | $ | 87,377 | $ | 78,868 | $ | 8,509 | 11% | $ | 144,406 | $ | 129,389 | $ | 15,017 | 12% | |
Net loss on disposal | 820 | 5,137 | (4,317) | (84%) | 2,041 | 6,994 | (4,953) | (71%) | |||||||
Acquisition/divestiture SG&A | 413 | 273 | 140 | 51% | 894 | 377 | 517 | 137% | |||||||
Adjusted EBITDA | $ | 88,610 | $ | 84,278 | $ | 4,332 | 5% | $ | 147,341 | $ | 136,760 | $ | 10,581 | 8% | |
Depreciation and amortization | 40,427 | 39,485 | 942 | 2% | 80,238 | 77,884 | 2,354 | 3% | |||||||
Interest expense | 10,608 | 9,763 | 845 | 9% | 20,941 | 25,607 | (4,666) | (18%) | |||||||
Current tax expense | 5,599 | 6,500 | (901) | (14%) | 12,154 | 11,915 | 239 | 2% | |||||||
Deferred tax expense/(recovery) | 3,970 | 2,017 | 1,953 | 97% | (554) | (4,088) | 3,534 | 86% | |||||||
Net earnings | $ | 26,773 | $ | 21,103 | $ | 5,670 | 27% | $ | 31,627 | $ | 18,071 | $ | 13,556 | 75% | |
Revenue
Total revenues of $343,490 for the second quarter of 2018 increased by $23,503 or 7% and by $53,877 or 9% to $622,560 year to date, compared to the same periods in 2017. These increases were primarily a result of an increase of $15,356 or 8% and $39,024 or 12% in Service Experts in the second quarter of 2018 and year to date, respectively, driven by acquisitions net of divestitures and higher HVAC sales volumes. Enercare Home Services also increased by $6,809 or 6% in the second quarter of 2018 and $12,289 or 5% year to date, primarily from rental rate increases, net rental unit growth and asset mix changes. Sub-metering increased by $1,338 or 15% in the second quarter of 2018 and by $2,564 or 14% year to date, primarily from growth in billable units. Recurring revenue for Sub-metering is now presented net of commodity expense in conjunction with IFRS 15 changes that became effective on a retrospective basis on January 1, 2018. Refer to the "Changes in Accounting Policies" section of Enercare's management's discussion and analysis of financial conditions and results of operations for the second quarter ended June 30, 2018 (the "MD&A").
Revenue growth was lower by approximately $7,466 in the second quarter of 2018 and $13,118 year to date due to fluctuations in foreign exchange compared to the same periods in 2017, as discussed under the section titled "Consolidated Results of Operations – Average Foreign Exchange".
The continued success of the U.S. rental rollout in the Service Experts segment impacted revenue growth during the second quarter of 2018. Had the 2,200 HVAC and water heater rental unit additions been sales, as opposed to rentals, revenue would have increased by approximately $15,926 for the second quarter of 2018. This estimate takes into account the impact of lost one-time sales revenue, net of rental revenue earned during the quarter.
Gross Margin
Gross Margin for the second quarter of 2018 was $177,175 and $327,288 year to date, an increase of $7,448 or 4% and $18,247 or 6%, respectively, compared to the same periods in 2017. The second quarter increase was primarily the result of a $3,843 or 4% increase in Enercare Home Services Gross Margin, $2,324 or 3% increase in Service Experts Gross Margin and $1,281 or 15% increase in Sub-metering Gross Margin. The year to date increase was primarily a result of $8,489 or 8% increase in Service Experts Gross Margin, $6,905 or 4% increase in Enercare Home Services Gross Margin and $2,853 or 17% increase in Sub-metering Gross Margin.
The increase in Gross Margin for the second quarter of 2018 and year to date were primarily driven by acquisitions net of divestitures in Service Experts and higher overall HVAC sales volumes partly offset by higher service job volumes in Enercare Home Services and higher general liability, workers compensation and automobile insurance costs in Service Experts.
Gross Margin growth was lower by approximately $2,525 and $4,306 in the second quarter of 2018 and year to date, respectively, due to fluctuations in foreign exchange compared to the same periods in 2017, as discussed under the section titled "Consolidated Results of Operations – Average Foreign Exchange".
EBITDA
EBITDA of $87,377 in the second quarter of 2018 increased by $8,509 or 11% and by $15,017 or 12% to $144,406 year to date compared to the same periods in 2017. The increase in the second quarter of 2018 was driven primarily by a $4,404 or 7% increase in Enercare Home Services EBITDA, a $2,002 or 20% reduction in Corporate selling, general and administrative ("SG&A") expenses, a $1,115 or 6% increase in Service Experts EBITDA and a $988 or 28% increase in Sub-metering EBITDA. The year to date increase was driven by a $10,598 or 8% increase in Enercare Home Services EBITDA, a $2,597 or 42% increase in Sub-metering EBITDA, a $1,196 or 7% increase in Service Experts EBITDA and a $626 or 3% reduction in Corporate SG&A expenditures.
EBITDA was also lower by approximately $636 and $374 for the second quarter of 2018 and year to date, respectively, due to fluctuations in foreign exchange compared to the same periods in 2017, as discussed under the section titled "Consolidated Results of Operations – Average Foreign Exchange".
The continued success of the U.S. rental rollout in the Service Experts segment impacted EBITDA growth during the second quarter of 2018. Had the 2,200 HVAC and water heater rental unit additions been sales, as opposed to rentals, EBITDA would have increased by approximately $7,497 for the second quarter of 2018. This estimate takes into account the impact of lost one-time sales revenue, net of rental revenue earned during the quarter, and capitalized costs that would have otherwise been included in cost of goods sold.
The EBITDA increases in both the second quarter of 2018 and year to date were primarily driven by higher Gross Margin and lower net loss on disposal, partly offset by $3,680 or 4% and $9,210 or 5%, respectively, of higher total SG&A costs. The higher total SG&A expenses were driven by SG&A expenses added from acquisitions net of divestitures and approximately $1,900 and $3,300 of higher marketing related selling expenses in Service Experts in the second quarter and year to date, respectively. Wages and benefits increased by $684 and $2,248 in the second quarter and year to date, respectively, primarily from acquisitions net of divestitures in Service Experts and higher labour costs, partly offset by approximately $2,165 and $5,900, respectively, of lower stock-based compensation costs.
The following table shows total spending on SG&A expenses related to Enercare's implementation of its enterprise resource planning ("ERP") and customer relationship management ("CRM") systems during the three months and six months ended June 30, 2018 and 2017.
Three months ended June 30, | Six months ended June 30, | |||||||||||
(in 000's) | 2018 | 2017 | Change | 2018 | 2017 | Change | ||||||
SG&A Expenditures | ||||||||||||
Corporate | $ | 345 | $ | 544 | $ | (199) | $ | 1,108 | $ | 642 | $ | 466 |
Service Experts | 310 | – | 310 | 629 | – | 629 | ||||||
Total | $ | 655 | $ | 544 | $ | 111 | $ | 1,737 | $ | 642 | $ | 1,095 |
Adjusted EBITDA
Adjusted EBITDA of $88,610 in the second quarter of 2018 and $147,341 year to date was $4,332 or 5% and $10,581 or 8% higher, respectively, compared to the same periods in 2017, after removing from EBITDA the impact of the net loss on disposal of equipment and other assets and SG&A expenditures associated with acquisitions and divestitures. Acquisition and divestiture related expenditures of $413 and $894 in the second quarter of 2018 and year to date, respectively, were primarily associated with the acquisition of CS Newco, LLC and Finch Newco, LLC, the acquisition of Midway Services, LLC and MSICORP, LLC, and the disposition of several centers in Canada and the foundation business in the U.S. during the first quarter of 2018. Acquisition related expenditures were $273 and $377, respectively, in the same periods in 2017.
Depreciation and Amortization
Amortization expense of $40,427 in the second quarter of 2018 increased by $942 or 2% and $2,354 or 3% to $80,238 year to date compared to the same periods in 2017, primarily due to an increasing rental and capital asset base, acquisitions and Sub-metering capital investments that 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 $820 in the second quarter of 2018 and $2,041 year to date, a decrease of $4,317 or 84% and $4,953 or 71%, respectively, over the same periods in 2017. The year to date net loss on disposal includes a $331 loss on the sale of the foundation business that was acquired as part of the CS Newco, LLC and Finch Newco, LLC acquisition. This was partly offset by a $113 gain on the sale of four Service Experts centers, which was completed to address Enercare's Ontario market overlap, resulting from 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"), between the service territory of those Service Experts centers with that of certain Enercare Home Services franchisees.
The decrease in net loss on disposal is also driven by a write-down of $5,165 of software intangible assets during the second quarter of 2017. This write-down was related to an ERP system that Service Experts had been developing that will be superseded by a common platform implemented across both the Enercare Home Services and Service Experts businesses. The year to date decrease in the net loss on disposal is also driven by a write-down of $845 in 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, | ||||||||
(in 000's) | 2018 | 2017 | 2018 | 2017 | |||||
Interest expense payable in cash | $ | 10,131 | $ | 9,274 | $ | 19,989 | $ | 18,914 | |
Make-whole payment on early redemption of senior debt | – | – | – | 5,049 | |||||
Non-cash items: | |||||||||
Notional interest on employee benefit plans | 238 | 226 | 476 | 452 | |||||
Amortization of financing costs | 239 | 263 | 476 | 1,192 | |||||
Interest expense | $ | 10,608 | $ | 9,763 | $ | 20,941 | $ | 25,607 | |
Interest expense payable in cash increased by $857 or 9% to $10,131 in the second quarter of 2018 and increased by $1,075 or 6% to $19,989 year to date compared to the same periods in 2017. These increases were primarily related to an increase in the amounts drawn under the 5-year variable rate, revolving credit facility with a maximum amount of $200,000 ("2014 Revolver") and changes in variable interest rates. A make-whole payment for the early redemption of the $250,000 of 4.30% Series 2012-1 Senior Unsecured Notes of Enercare Solutions, which were redeemed using proceeds from the offering of the issuance of the $275,000 of 3.38% Series 2017-1 Senior Unsecured Notes of Enercare Solutions, due February 21, 2022 and the $225,000 of 3.99% Series 2017-2 Senior Unsecured Notes of Enercare Solutions, due February 21, 2024 during the first quarter of 2017 resulted in additional interest expense of $5,049.
Income Taxes
Enercare reported current tax expense of $5,599 in the second quarter of 2018 and $12,154 year to date, a decrease of $901 or 14% and an increase of $239 or 2%, respectively, compared to the same periods in 2017. The decrease in the second quarter of 2018 compared to the same period in 2017 was primarily from lower taxable income in Service Experts' U.S. operations due to additional tax depreciation from the acquisitions completed in the third quarter of 2017 and first quarter of 2018. The year to date increase was primarily from higher taxes owed from the sale of certain centers by SE Canada Inc. during the first quarter of 2018, partly offset by the lower taxable income from Service Experts' U.S. operations during the second quarter. The deferred income tax expense of $3,970 in the second quarter of 2018 and recovery of $554 year to date increased by $1,953 or 97% and decreased by $3,534 or 86%, respectively, compared to the same periods in 2017, primarily as a result of temporary difference reversals.
Net Earnings
Net earnings were $26,773 in the second quarter of 2018 and $31,627 year to date, increases of $5,670 or 27% and $13,556 or 75%, respectively, compared to the same periods in 2017, reflecting higher EBITDA, partly offset by higher depreciation and amortization, interest expense and income taxes.
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 "Segmented 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 three and six months ended June 30, 2018 assuming average exchange rates during the current period were held constant to those of the same period in 2017.
Three months ended June 30, | Six months ended June 30, | |||||||||||
2018 | 2017 | Difference | 2018 | 2017 | Difference | |||||||
Average exchange rate | 0.7747 | 0.7435 | 0.0312 | 0.7827 | 0.7495 | 0.0332 | ||||||
Three months ended June 30, | Six months ended June 30, | |||||||||||
2018 | 2018 Constant | Impact of | 2018 | 2018 Constant | Impact of | |||||||
Revenue | $ | 188,330 | $ | 195,796 | $ | (7,466) | $ | 319,014 | $ | 332,132 | $ | (13,118) |
Gross Margin | 64,142 | 66,667 | (2,525) | 105,523 | 109,829 | (4,306) | ||||||
SG&A expenses | 45,435 | 47,321 | (1,886) | 89,783 | 93,705 | (3,922) | ||||||
Loss on disposal | 40 | 43 | (3) | 293 | 303 | (10) | ||||||
EBITDA | $ | (636) | $ | (374) | ||||||||
* Constant currency is a non-IFRS presentation that other companies may calculate differently. It approximates the impact of foreign exchange on Enercare's results to improve comparability, assuming average exchange rates during the current period were held constant to those of the same period in 2017. |
SEGMENTED RESULTS OF OPERATIONS
Three months ended June 30, 2018 | Home | Service | Sub-metering | Corporate | Total | ||||||
Revenue: | |||||||||||
Contracted revenue | $ | 110,956 | $ | 18,074 | $ | 9,235 | $ | – | $ | 138,265 | |
Sales and other services | 9,123 | 194,313 | 1,306 | – | 204,742 | ||||||
Financing income | 447 | 31 | 5 | – | 483 | ||||||
Total revenue | $ | 120,526 | $ | 212,418 | $ | 10,546 | $ | – | $ | 343,490 | |
Expenses: | |||||||||||
Cost of goods sold: | |||||||||||
Maintenance & servicing costs | 17,879 | 14,370 | – | – | 32,249 | ||||||
Sales and other services | 7,056 | 126,309 | 701 | – | 134,066 | ||||||
Total cost of goods sold | 24,935 | 140,679 | 701 | – | 166,315 | ||||||
Gross Margin | 95,591 | 71,739 | 9,845 | – | 177,175 | ||||||
SG&A expenses | 25,927 | 50,604 | 5,298 | 7,762 | 89,591 | ||||||
Foreign exchange | (649) | 67 | (42) | 11 | (613) | ||||||
Amortization expense | 32,273 | 5,110 | 2,127 | 917 | 40,427 | ||||||
Net loss on disposal of equipment and other assets | 774 | 29 | 17 | – | 820 | ||||||
Interest expense: | |||||||||||
Interest expense payable in cash | 10,131 | ||||||||||
Non-cash interest expense | 477 | ||||||||||
Total interest expense | 10,608 | ||||||||||
Total expenses | 307,148 | ||||||||||
Earnings before income taxes | 36,342 | ||||||||||
Current tax expense | 5,599 | ||||||||||
Deferred tax expense | 3,970 | ||||||||||
Net earnings | $ | 26,773 | |||||||||
EBITDA | $ | 69,539 | $ | 21,039 | $ | 4,572 | $ | (7,773) | $ | 87,377 | |
Adjusted EBITDA | $ | 70,313 | $ | 21,481 | $ | 4,589 | $ | (7,773) | $ | 88,610 | |
Three months ended June 30, 2017 (in 000's) | Home | Service | Sub-metering | Corporate | Total | ||||||
Revenue: | |||||||||||
Contracted revenue | $ | 105,893 | $ | 14,541 | $ | 8,019 | $ | – | $ | 128,453 | |
Sales and other services | 7,456 | 182,511 | 1,188 | – | 191,155 | ||||||
Financing income | 368 | 10 | 1 | – | 379 | ||||||
Total revenue | $ | 113,717 | $ | 197,062 | $ | 9,208 | $ | – | $ | 319,987 | |
Expenses: | |||||||||||
Cost of goods sold: | |||||||||||
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 | 644 | – | 150,260 | ||||||
Gross Margin | 91,748 | 69,415 | 8,564 | – | 169,727 | ||||||
SG&A expenses | 26,261 | 44,840 | 5,019 | 9,791 | 85,911 | ||||||
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 | ||||||||||
Non-cash interest expense | 489 | ||||||||||
Total interest expense | 9,763 | ||||||||||
Total expenses | 290,367 | ||||||||||
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 | $ | 25,070 | $ | 3,584 | $ | (9,775) | $ | 84,278 | |
Six months ended June 30, 2018 (in 000's) | Home Services | Service | Sub-metering | Corporate | Total | ||||||
Revenue: | |||||||||||
Contracted revenue | $ | 220,482 | $ | 31,738 | $ | 18,364 | $ | – | $ | 270,584 | |
Sales and other services | 16,367 | 332,058 | 2,755 | – | 351,180 | ||||||
Financing income | 732 | 54 | 10 | – | 796 | ||||||
Total revenue | $ | 237,581 | $ | 363,850 | $ | 21,129 | $ | – | $ | 622,560 | |
Expenses: | |||||||||||
Cost of goods sold: | |||||||||||
Maintenance & servicing costs | 35,708 | 25,068 | – | – | 60,776 | ||||||
Sales and other services | 13,460 | 219,528 | 1,508 | – | 234,496 | ||||||
Total cost of goods sold | 49,168 | 244,596 | 1,508 | – | 295,272 | ||||||
Gross Margin | 188,413 | 119,254 | 19,621 | – | 327,288 | ||||||
SG&A expenses | 52,257 | 101,466 | 10,930 | 17,368 | 182,021 | ||||||
Foreign exchange | (1,203) | 84 | (66) | 5 | (1,180) | ||||||
Amortization expense | 63,976 | 10,210 | 4,204 | 1,848 | 80,238 | ||||||
Net loss on disposal of equipment and other assets | 1,884 | 140 | 17 | – | 2,041 | ||||||
Interest expense: | |||||||||||
Interest expense payable in cash | 19,989 | ||||||||||
Make-whole charge on early redemption of debt | – | ||||||||||
Non-cash interest expense | 952 | ||||||||||
Total interest expense | 20,941 | ||||||||||
Total expenses | 579,333 | ||||||||||
Earnings before income taxes | 43,227 | ||||||||||
Current tax expense | 12,154 | ||||||||||
Deferred tax (recovery) | (554) | ||||||||||
Net earnings | $ | 31,627 | |||||||||
EBITDA | $ | 135,475 | $ | 17,564 | $ | 8,740 | $ | (17,373) | $ | 144,406 | |
Adjusted EBITDA | $ | 137,359 | $ | 18,598 | $ | 8,757 | $ | (17,373) | $ | 147,341 | |
Six months ended June 30, 2017 (in 000's) | Home Services | Service | Sub-metering | Corporate | Total | ||||||
Revenue: | |||||||||||
Contracted revenue | $ | 210,382 | $ | 25,918 | $ | 15,670 | $ | – | $ | 251,970 | |
Sales and other services | 14,293 | 298,888 | 2,892 | – | 316,073 | ||||||
Financing income | 617 | 20 | 3 | – | 640 | ||||||
Total revenue | $ | 225,292 | $ | 324,826 | $ | 18,565 | $ | – | $ | 568,683 | |
Expenses: | |||||||||||
Cost of goods sold: | |||||||||||
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 | 1,797 | – | 259,642 | ||||||
Gross Margin | 181,508 | 110,765 | 16,768 | – | 309,041 | ||||||
SG&A expenses | 54,338 | 89,765 | 10,693 | 18,015 | 172,811 | ||||||
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 | 542,785 | ||||||||||
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 | $ | 21,602 | $ | 6,153 | $ | (17,999) | $ | 136,760 | |
Enercare Home Services Business
Three months ended June 30, | Six months ended June 30, | ||||||||||||||
(in 000's) | 2018 | 2017 | Change | Percent | 2018 | 2017 | Change | Percent | |||||||
Revenue | $ | 120,526 | $ | 113,717 | $ | 6,809 | 6% | $ | 237,581 | $ | 225,292 | $ | 12,289 | 5% | |
Gross Margin | $ | 95,591 | $ | 91,748 | $ | 3,843 | 4% | $ | 188,413 | $ | 181,508 | $ | 6,905 | 4% | |
EBITDA | $ | 69,539 | $ | 65,135 | $ | 4,404 | 7% | $ | 135,475 | $ | 124,877 | $ | 10,598 | 8% | |
Adjusted EBITDA | $ | 70,313 | $ | 65,399 | $ | 4,914 | 8% | $ | 137,359 | $ | 127,004 | $ | 10,355 | 8% | |
Revenue
Enercare Home Services revenue of $120,526 for the second quarter of 2018 increased by $6,809 or 6% and by $12,289 or 5% to $237,581 year to date, compared to the same periods in 2017. These increases were primarily driven by both higher contracted revenue and sales and other services revenue which increased by $5,063 and $1,667, respectively, during the second quarter and by $10,100 and $2,074, respectively, year to date.
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 the sale of residential furnaces, boilers and air conditioners, as well as plumbing and duct cleaning.
Contracted units outstanding and net portfolio unit activity are presented in the following tables:
Unit/Contract Continuity (in 000's)* Three months ended June 30, | 2018 | 2017 | |||
Rentals | Protection Plans | Rentals | Protection Plans | ||
Units/contracts – start of period | 1,145.6 | 552.1 | 1,136.4 | 546.0 | |
Portfolio additions | 10.3 | 19.3 | 8.9 | 18.4 | |
Purchase of assets from Service Experts** | 0.5 | – | – | – | |
Attrition | (7.6) | (18.8) | (7.3) | (17.0) | |
Units/contracts – end of period | 1,148.8 | 552.6 | 1,138.0 | 547.4 | |
Asset exchanges – units retired & replaced | 11.3 | N/A | 10.5 | N/A | |
% change during the period | 0.3% | 0.1% | 0.1% | 0.3% | |
% of units / contracts from start of period: | |||||
Portfolio additions (net of acquisitions) | 0.9% | 3.5% | 0.8% | 3.4% | |
Attrition | (0.7%) | (3.4%) | (0.6%) | (3.1%) | |
Asset exchanges – units retired & replaced | 1.0% | N/A | 0.9% | N/A | |
* | Enercare Home Services portfolio addition and attrition units/contracts presented have been rounded to thousands of units/contracts. To ensure consistency with rounded year to date and period end balances, the rounded units/contracts presented in the chart above may vary by +/- 0.1 in certain quarters from results rounded to the nearest hundred units/contracts which may be discussed in this news release. |
** | During the second quarter of 2018, Service Experts sold 508 rental units to Enercare Home Services in connection with its disposal of four service centers in the preceding quarter. |
Unit / Contract Continuity (in 000's)* Six months ended June 30, | 2018 | 2017 | ||||
Rentals | Protection Plans | Rentals | Protection Plans | |||
Units / contracts – start of period | 1,143.4 | 552.0 | 1,135.3 | 542.3 | ||
Portfolio additions | 19.4 | 36.4 | 17.8 | 37.7 | ||
Purchase of assets from Service Experts** | 0.5 | – | – | – | ||
Attrition*** | (14.5) | (35.8) | (15.1) | (32.6) | ||
Units / contracts – end of period | 1,148.8 | 552.6 | 1,138.0 | 547.4 | ||
Asset exchanges – units retired & replaced | 23.1 | N/A | 22.5 | N/A | ||
% change during the period | 0.5% | 0.1% | 0.2% | 0.9% | ||
% of units / contracts from start of period: | ||||||
Portfolio additions (net of acquisitions) | 1.7% | 6.6% | 1.6% | 7.0% | ||
Attrition | (1.3%) | (6.5%) | (1.3%) | (6.0%) | ||
Asset exchanges – units retired & replaced | 2.0% | N/A | 2.0% | N/A | ||
* | Enercare Home Services portfolio addition and attrition units/contracts presented have been rounded to thousands of units/contracts. To ensure consistency with rounded year to date and period end balances, the rounded units/contracts presented in the chart above may vary by +/- 0.1 in certain quarters from results rounded to the nearest hundred units/contracts which may be discussed in this news release. |
** | During the second quarter of 2018, Service Experts sold 508 rental units to Enercare Home Services in connection with its disposal of four service centers in the preceding quarter. |
*** | Amounts stated above for the six months ended June 30, 2018 include approximately 2,200 units of attrition related to certain plans which were not included in Enercare's condensed interim consolidated financial statements for the three months ended March 31, 2018. |
Rentals
The increases in contracted revenue during the second quarter of 2018 and year to date were primarily driven by increases in Rentals revenue of $4,670 or 6% and $9,800 or 6%, respectively, resulting from net water heater and HVAC rental unit growth, rental rate increases and asset mix changes within the portfolio.
Portfolio additions were approximately 10,300 units in the second quarter of 2018 and 19,400 units year to date. During the second quarter of 2018, portfolio additions were approximately 1,400 units higher compared to the same period in 2017, driven mainly by higher water heater rental additions. HVAC rental additions of 3,100 units in the second quarter of 2018 decreased by 200 or 6%, compared to the same period in 2017. The operational implementation of Bill 59 and fewer promotional offers for Rentals also contributed to lower rental additions during the second quarter compared to the same period in 2017. Year to date HVAC rental additions remained consistent compared to the same period in 2017. Portfolio attrition of approximately 7,600 units in the second quarter of 2018 and 14,500 units year to date were also comparable to the same periods in 2017. This represents the twelfth consecutive quarter of net rental unit growth for Enercare Home Services.
In addition to rental unit growth, Enercare Home Services is also able to grow revenue through annual rental rate increases. Enercare Home Services increased its weighted average water heater portfolio rental rate by approximately 3.1% in both January of 2017 and 2018 and in January 2018, increased its weighted average HVAC portfolio rental rate by 1.8%. This, in combination with asset mix changes, led to an increase in the average portfolio rental rate of approximately 5% from 2016 to 2017 and approximately 5% from 2017 to the second quarter of 2018.
Protection Plans
Enercare Home Services' protection plan revenues of $23,222 for the second quarter of 2018 increased by $393 and by $300 to $45,428 year to date compared to the same periods in 2017, driven by the increase in the number of protection plans partially offset by more competitive pricing from plans that were originated in 2017. The protection plan portfolio increased by 500 and 600 units during the second quarter of 2018 and year to date, respectively.
Protection plan additions of approximately 19,300 plans increased by 900 plans or 5% in the second quarter of 2018, while attrition of approximately 18,800 plans increased by 1,800 plans or 11% compared to the same period in 2017. Protection plan additions of approximately 36,400 plans decreased by 1,300 plans or 3% year to date, while attrition of approximately 35,800 plans increased by 3,200 plans or 10% compared to the same period in 2017. Fewer year to date protection plan additions were the result of the launch of the electrical protection plan during the first quarter of 2017, which was supported by promotional pricing. Fewer promotional offers upon the renewal of these electrical protection plans in the first half of 2018 contributed to higher attrition in both the second quarter and year to date.
Attrition, for the second quarter of 2018 and year to date, includes approximately 1,800 and 3,900 (2017 – 2,000 and 4,100) protection plans, respectively, cancelled as a result of those plans being replaced by rentals as part of the Enercare Home Services growth strategy.
Sales and Other Services
Enercare Home Services sales and other services revenue of $9,123 for the second quarter of 2018 increased by $1,667 or 22% and by $2,074 or 15% to $16,367 year to date compared to the same periods in 2017, primarily driven by an increase in HVAC sales. Approximately 2,700 units were sold during the quarter and 4,300 year to date, representing an increase of 42% and 30%, respectively, compared to the same periods in 2017. During the first half of 2018, the operational implementation of Bill 59 combined with adjustments to HVAC rental product offers shifted originations slightly more toward sales, compared to the same period in 2017.
* HVAC rental and sales units presented include residential, commercial and multi-residential rental additions and sales. |
Gross Margin
Enercare Home Services Gross Margin of $95,591 for the second quarter of 2018 increased by $3,843 or 4% and $6,905 or 4% to $188,413 year to date compared to the same periods in 2017, primarily driven by a rental rate increase implemented in January 2018. Gross Margin in the second quarter of 2018 and year to date were partially offset by increases of approximately 13% and 15%, respectively, in service job volumes combined with higher parts costs.
EBITDA
Enercare Home Services EBITDA in the second quarter of 2018 increased by $4,404 or 7% to $69,539, primarily driven by a $3,843 increase in Gross Margin. EBITDA of $135,475 year to date increased by $10,598 or 8%, primarily driven by a $6,905 increase in Gross Margin and lower SG&A expenses of $2,081.
Enercare Home Services SG&A expenses of $25,927 in the second quarter of 2018 remained relatively consistent compared to the same period in 2017. Year to date SG&A expenses of $52,257 decreased by $2,081 compared to the same period in 2017, primarily as a result of approximately $1,500 in lower office expenses, partly due to Enercare's ownership of its corporate office starting in the second quarter of 2017 and $600 in lower wages and benefits, mainly due to lower stock-based compensation costs. Both office expenses, which include software licensing and development costs, and wages and benefits were also lower due to the transfer of IT personnel and related costs to Corporate.
Adjusted EBITDA
Enercare Home Services Adjusted EBITDA in the second quarter of 2018 increased by $4,914 or 8% to $70,313, primarily driven by higher EBITDA excluding the increase in net loss on disposal of $510. Adjusted EBITDA year to date increased by $10,355 or 8% to $137,359, primarily driven by higher EBITDA excluding the decrease in net loss on disposal of $243.
Service Experts Business
Three months ended June 30, | Six months ended June 30, | ||||||||||||||
(in 000's) | 2018 | 2017 | Change | Percent | 2018 | 2017 | Change | Percent | |||||||
Revenue | $ | 212,418 | $ | 197,062 | $ | 15,356 | 8% | $ | 363,850 | $ | 324,826 | $ | 39,024 | 12% | |
Gross Margin | $ | 71,739 | $ | 69,415 | $ | 2,324 | 3% | $ | 119,254 | $ | 110,765 | $ | 8,489 | 8% | |
EBITDA | $ | 21,039 | $ | 19,924 | $ | 1,115 | 6% | $ | 17,564 | $ | 16,368 | $ | 1,196 | 7% | |
Adjusted EBITDA | $ | 21,481 | $ | 25,070 | $ | (3,589) | (14%) | $ | 18,598 | $ | 21,602 | $ | (3,004) | (14%) | |
Revenue
Service Experts revenue was $212,418 for the second quarter of 2018, increasing by $15,356 or 8% and by $39,024 or 12% to $363,850 year to date compared to the same periods in 2017. The second quarter and year to date increases were primarily due to $11,802 and $33,170, respectively, of higher sales and other services revenue and $3,533 and $5,820, respectively, of higher contracted revenue. Revenue growth was lower by approximately $7,466 in the second quarter of 2018 and $13,118 year to date due to fluctuations in foreign exchange compared to the same periods in 2017, as discussed under the section titled "Consolidated Results of Operations – Average Foreign Exchange". Had there been no fluctuations in foreign exchange, revenue would have increased by approximately 12% in the second quarter of 2018 and 16% year to date.
Service Experts acquired CS Operating LLC, Hammond Plumbing and Heating Inc. and Aramendia Plumbing, Heating & Air Ltd. ("Aramendia") in 2017 and CS Newco, LLC and Finch Newco, LLC, and Midway Services, LLC and MSICORP, LLC in the first quarter of 2018 and disposed of four centers located in Ontario and a foundation business in the U.S. in the first quarter of 2018. Revenue recognized from the acquisitions were $21,268 and $35,644 for the second quarter of 2018 and year to date, compared to $1,529 and $1,966, respectively, in the same periods in 2017. Revenue recognized from the divestitures in the second quarter of 2018 and year to date are nil and $1,008, compared to $7,434 and $12,634, respectively, in the same periods in 2017. These acquisitions net of divestitures resulted in revenue of $21,268 in the second quarter of 2018 and $36,652 year to date, net increases of $12,305 and $22,052, respectively, compared to the same periods in 2017.
Contracted maintenance agreement revenue increased by $3,109 or 22% in the second quarter of 2018 and $5,016 or 20% year to date, with rental revenue improving by $424 or 312% in the second quarter of 2018 and $804 and 410% year to date, compared to the same periods in 2017. Increased revenue for sales and other services mainly pertains to higher sales and installations of HVAC and water heaters, as well as plumbing.
Contracted revenue and sales and other services revenue are primarily driven by unit growth for these business activities as illustrated in the following tables:
Unit/Contract Continuity (in 000's)* Three months ended June 30, | 2018 | 2017 | |||
Rentals | Maintenance | Rentals | Maintenance | ||
Units / contracts – start of period | 3.2 | 215.2 | 0.6 | 217.0 | |
Portfolio additions | 2.2 | 31.9 | 0.6 | 30.2 | |
Sale of assets to Enercare Home Services*** | (0.5) | – | – | – | |
Attrition | – | (29.1) | – | (29.8) | |
Disposition | – | – | – | – | |
Units / contracts – end of period | 4.9 | 218.0 | 1.2 | 217.4 | |
Asset exchanges – units retired & replaced | – | N/A | – | N/A | |
% change during the period | 53.1% | 1.3% | 100.0% | 0.2% | |
% of units / contracts from start of period: | |||||
Portfolio additions (net of acquisitions) | 68.8% | 14.8% | 100.0% | 13.9% | |
Attrition | – % | 13.5% | – % | (13.7%) | |
Asset exchanges – units retired & replaced | – % | N/A | – % | N/A | |
Unit/Contract Continuity (in 000's)* Six months ended June 30, | 2018 | 2017 | ||||
Rentals | Maintenance | Rentals | Maintenance | |||
Units / contracts – start of period | 2.4 | 219.8 | 0.2 | 216.3 | ||
Portfolio additions | 3.0 | 53.7 | 1.0 | 52.2 | ||
Acquisitions** | – | 11.6 | – | – | ||
Sale of assets to Enercare Home Services*** | (0.5) | – | – | – | ||
Attrition | – | (50.6) | – | (51.1) | ||
Disposition | – | (16.5) | – | – | ||
Units / contracts – end of period | 4.9 | 218.0 | 1.2 | 217.4 | ||
Asset exchanges – units retired & replaced | – | N/A | – | N/A | ||
% change during the period | 104.2% | (0.8%) | 500.0% | 0.5% | ||
% of units / contracts from start of period: | ||||||
Portfolio additions (net of acquisitions) | 125.0% | 24.4% | 500.0% | 24.1% | ||
Attrition | – % | 23.0% | – % | (23.6%) | ||
Asset exchanges – units retired & replaced | – % | N/A | – % | N/A | ||
* | Service Experts portfolio addition and attrition units/contracts presented have been rounded to thousands of units/contracts. To ensure consistency with rounded year to date and period end balances, the rounded units/contracts presented in the chart above may vary by +/- 0.1 in certain quarters from results rounded to the nearest hundred units/contracts which may be discussed in this news release. |
** | Service Experts added approximately 11,600 maintenance agreements during the first quarter of 2018 from the acquisitions of CS Newco, LLC and Finch Newco, LLC and Midway Services, LLC and MSICORP, LLC. |
*** | During the second quarter of 2018, Service Experts sold 508 rental units to Enercare Home Services in connection with its disposal of four service centers in the preceding quarter. |
HVAC and Water Heater Sales and Servicing
The $11,802 or 6% increase in sales and other services revenue in the second quarter of 2018 and increase of $33,170 or 11% year to date were driven mainly by greater HVAC and water heater sales and increases in average selling prices from shifts towards higher value and ancillary product sales. During the second quarter of 2018, Service Experts sold approximately 21,200 HVAC and water heater units, an increase of 1% and an increase of 4% to 35,800 year to date, compared to the same periods in 2017, mainly due to the acquisitions completed after the second quarter of 2017. The year to date increase was partially offset by cooler weather trends experienced in the U.S. and Canada in the first quarter and early part of the second quarter of 2018.
A comparison of HVAC and water heater sales and rentals for the second quarter of 2018 and 2017 is outlined in the chart below.
* Prior period results have been updated to reflect revised actuals. |
Maintenance Agreements
Maintenance agreement revenue increased by $3,109 or 22% in the second quarter of 2018 and $5,016 or 20% year to date, compared to the same periods in 2017. Service Experts maintenance agreement revenue was lower by $4,562 during the second quarter of 2017 and $7,960 year to date as a result of purchase accounting adjustments of deferred revenue associated with the SE Transaction. Net of these adjustments, maintenance agreement revenue decreased by $1,453 during the second quarter of 2018 and $2,944 year to date, primarily driven by the impact of foreign exchange and dispositions net of acquisitions.
The disposition of approximately 16,500 agreements as part of Service Experts' disposal of four centers located in Ontario in the first quarter of 2018 was partly offset by the addition of approximately 11,600 from the acquisitions of CS Newco, LLC and Finch Newco, LLC and Midway Services, LLC and MSICORP, LLC during the first quarter of 2018 and approximately 2,300 from the acquisition of Aramendia during the third quarter of 2017.
Rentals
Rental revenue of $560 in the second quarter of 2018 and $1,000 year to date increased by $424 and $804, respectively, compared to the same periods in 2017, as a result of an increase in the rental portfolio of approximately 3,700 units since the second quarter of 2017. Of these 3,700 units, 2,200 were originated in the second quarter of 2018 for a total of 3,000 originations year to date. The rental proportion of total residential units sold improved in the second quarter of 2018 to approximately 13.6% in Canada and 14% in the U.S., compared to 9.4% and 4.1% in Canada and the U.S., respectively, in the second quarter of 2017.
Had the 2,200 rental additions been sales, as opposed to rentals, Service Experts' revenue and EBITDA would have increased by approximately $15,926 and $7,497, respectively, for the second quarter of 2018. This estimate takes into account the impact of lost one-time sales revenue, net of rental revenue earned during the quarter, and capitalized costs that would have otherwise been included in cost of goods sold.
Gross Margin
Service Experts Gross Margin of $71,739 for the second quarter of 2018 increased by $2,324 or 3%, compared to the same period in 2017, primarily due to $15,356 higher revenue, offset by $13,032 higher cost of goods sold. Gross Margin increased by $8,489 or 8% to $119,254 year to date, compared to the same period in 2017. Acquisitions net of divestitures contributed $6,617 and $11,175 of net Gross Margin in the second quarter of 2018 and year to date, an increase of $4,178 and $7,018, respectively, compared to the same periods in 2017.
Gross Margin growth was lower by approximately $2,525 and $4,306 in the second quarter of 2018 and year to date due to fluctuations in foreign exchange compared to the same periods in 2017, as discussed under the section titled "Consolidated Results of Operations – Average Foreign Exchange". Gross Margin was also impacted in the second quarter of 2018 and year to date compared to the same periods in 2017, by higher general liability, workers compensation and automobile insurance costs of approximately $1,300 and $2,200, respectively.
During the second quarter of 2017, purchase accounting adjustments for the service obligation associated with the SE Transaction reduced Service Experts' cost of goods sold by $3,506 and reduced year to date cost of goods sold by $6,197, resulting in lower Gross Margin of $1,056 and $1,763 for the three and six months ended June 30, 2017, respectively.
EBITDA
Service Experts EBITDA of $21,039 and $17,564 in the second quarter of 2018 and year to date, respectively, improved by $1,115 or 6% and $1,196 or 7%, respectively, compared to the same periods in 2017. The increase in Service Experts EBITDA in the second quarter was primarily the result of $2,324 higher Gross Margin and $4,844 lower net loss on disposal, partly offset by $5,764 higher SG&A costs. The increase in EBITDA year to date is mainly driven by $8,489 higher Gross Margin and $4,717 lower net loss on disposal, partly offset by $11,701 higher SG&A costs. Service Experts EBITDA was also lower by approximately $636 and $374 for the second quarter of 2018 and year to date, respectively, due to fluctuations in foreign exchange compared to the same periods in 2017, as discussed under the section titled "Consolidated Results of Operations – Average Foreign Exchange".
Service Experts SG&A expenses of $50,604 in the second quarter of 2018 increased by $5,764 or 13% compared to the same period in 2017. The increased expenditures were primarily as a result of higher sales and marketing expenses of approximately $3,000, wages and benefits of $1,500 and office expenses of $800. Year to date SG&A expenses of $101,466 increased by $11,701 or 13% compared to the same period in 2017, due to higher sales and marketing expenses of approximately $5,100, $4,000 in wages and benefits, $1,600 in office expenses and $500 in professional fees due to greater acquisition and divestiture activities during 2018.
Higher wages and benefits of $1,500 in the second quarter of 2018 and $4,000 year to date was driven by additional employee related expenses due to acquisitions during 2017 and the first quarter of 2018, partly offset by lower stock-based compensation costs. The higher sales and marketing expenses of $3,000 in the second quarter of 2018 and $5,100 year to date were mainly driven by costs related to enhancements to the rental program and associated training, which began in the fourth quarter of 2017, and higher marketing costs, to build brand awareness in the Dallas market and strengthen online search engine optimization.
Service Experts SG&A expenses in the second quarter of 2017 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 ERP system.
In the second quarter of 2018 and year to date, Service Experts SG&A included $413 and $894 of acquisition and disposition related expenditures associated with the acquisition of CS Newco, LLC and Finch Newco, LLC and Midway Services, LLC and MSICORP, LLC and the disposition of the business centers from the franchise overlap and a line of business from the CS Newco, LLC and Finch Newco, LLC acquisition.
The net loss on disposal decreased by $4,844 for the second quarter of 2018 and $4,717 year to date to $29 and $140, respectively. The decrease was driven by a $5,165 write-down of software intangible assets in the second quarter of 2017 related to an ERP system that Service Experts had been developing that will now be superseded by a common platform implementation across both the Enercare Home Services and Service Experts businesses.
The year to date net loss on disposal also includes a $331 loss on the sale of the foundation business in the first quarter of 2018 that was acquired as part of the CS Newco, LLC and Finch Newco, LLC acquisition. This was partly offset by a $113 gain on the sale of four Service Experts centers which was completed to address Enercare's Ontario market overlap, resulting from the SE Transaction, between the service territory of those Service Experts centers with that of certain Enercare Home Services franchisees.
Adjusted EBITDA
Service Experts Adjusted EBITDA of $21,481 in the second quarter of 2018 decreased by $3,589 or 14%, primarily driven by EBITDA as noted above excluding the decrease of the net loss on disposal of $4,844 in the second quarter of 2018 and a $140 increase in acquisition costs in the second quarter of 2018 compared to the same period in 2017. Year to date Adjusted EBITDA of $18,598 decreased by $3,004 or 14% as a result of higher EBITDA as noted above and excluding the decrease of net loss on disposal $4,717 and the $517 increase in acquisition costs.
Sub-metering Business
Three months ended June 30, | Six months ended June 30, | ||||||||||||||
(in 000's) | 2018 | 2017 | Change | Percent | 2018 | 2017 | Change | Percent | |||||||
Revenue | $ | 10,546 | $ | 9,208 | $ | 1,338 | 15% | $ | 21,129 | $ | 18,565 | $ | 2,564 | 14% | |
Gross Margin | $ | 9,845 | $ | 8,564 | $ | 1,281 | 15% | $ | 19,621 | $ | 16,768 | $ | 2,853 | 17% | |
EBITDA | $ | 4,572 | $ | 3,584 | $ | 988 | 28% | $ | 8,740 | $ | 6,143 | $ | 2,597 | 42% | |
Adjusted EBITDA | $ | 4,589 | $ | 3,584 | $ | 1,005 | 28% | $ | 8,757 | $ | 6,153 | $ | 2,604 | 42% | |
Revenue
Sub-metering revenue was $10,546 in the second quarter of 2018, an increase of $1,338 or 15% compared to the same period in 2017, primarily as a result of $1,216 higher contracted revenue and $118 of higher sales and other services revenue. The increase in sales and other services revenue was from higher meter sales of $365, partly offset by $228 of lower sales and installation of water conservation products in apartments and condominiums. Year to date revenue was $21,129, which was an increase of $2,564 or 14% compared to the same period in 2017, primarily as a result of $2,694 higher contracted revenue, partly offset by $137 of lower sales and other services revenue.
As a result of the implementation of IFRS 15, Sub-metering revenue in the second quarter of 2017 and year to date have been restated, decreasing by $22,499 and $51,994, respectively. The adjustment results in revenue recognition net of commodity charges associated with the provision of service. Refer to the "Changes in Accounting Policies" section of the MD&A.
Contracted revenue is primarily driven by growth in Billable units as illustrated in the following tables:
Unit Continuity (in 000's) Three months ended June 30, |
2018 | 2017 | |||||
Contracted | Installed | Billable | Contracted | Installed | Billable | ||
Units – start of period | 265.5 | 189.4 | 135.7 | 245.4 | 168.3 | 118.5 | |
Net portfolio additions | 4.6 | 3.5 | 4.3 | 1.0 | 6.0 | 3.4 | |
Units – end of period | 270.1 | 192.9 | 140.0 | 246.4 | 174.3 | 121.9 | |
% change in units during the period | 1.7% | 1.8% | 3.2% | 0.4% | 3.6% | 2.9% | |
Unit Continuity (in 000's) Six months ended June 30, | 2018 | 2017 | |||||
Contracted | Installed | Billable | Contracted | Installed | Billable | ||
Units – start of period | 261.3 | 183.5 | 130.4 | 235.2 | 165.2 | 116.2 | |
Net portfolio additions | 8.8 | 9.4 | 9.6 | 11.2 | 9.1 | 5.7 | |
Units – end of period | 270.1 | 192.9 | 140.0 | 246.4 | 174.3 | 121.9 | |
% change in units during the period | 3.4% | 5.1% | 7.4% | 4.8% | 5.5% | 4.9% | |
Contracted revenue increased by $1,216 or 15% in the second quarter of 2018 and by $2,694 or 17% year to date, driven mainly by 18,100 additional billable units in the second quarter of 2018 compared to the same period in 2017, coupled with an average rate increase of approximately 3.4%.
Of the 270,100 contracted units, 192,900 have meters installed and 140,000 of those units are billable. Contracted units increased by approximately 4,600 units in the second quarter of 2018 and 8,800 units year to date to 270,100 units, an increase of 3,500 units and a decrease of 2,400 units, respectively, compared to the same periods in 2017, primarily due to the timing of contract sales.
Gross Margin
Sub-metering Gross Margin was $9,845 in the second quarter of 2018, increasing by $1,281 or 15%, primarily from $1,338 higher revenue as cost of goods sold remained relatively consistent to the same period in 2017. Year to date Gross Margin was $19,621, which increased by $2,853 and 17% compared to the same period in 2017, primarily from $2,564 higher revenue as cost of goods sold remained relatively consistent with the same period in 2017.
Sub-metering Gross Margin in the second quarter and year to date of 2017 has been restated as a part of IFRS 15 implementation, decreasing revenue by $22,499 and $51,994, respectively, and decreasing cost of goods sold by $22,499 and $51,994, respectively. Refer to the "Changes in Accounting Policies" section of the MD&A. The adjustment recognizes revenues net of commodity charges associated with the provision of service.
EBITDA
Sub-metering EBITDA in the second quarter of 2018 increased by $988 or 28% to $4,572 and by $2,597 or 42% to $8,740 year to date. The increase in the quarter was primarily driven by $1,281 of higher Gross Margin partly offset by an increase of $279 in SG&A expenses from approximately $300 of higher bad debt expense resulting from recoveries of fully provided receivables that occurred during the second quarter of 2017. The year to date increase was primarily a result of $2,853 of higher Gross Margin, partly offset by higher wages and benefits of approximately $300.
Adjusted EBITDA
Sub-metering Adjusted EBITDA increased by $1,005 or 28% to $4,589 in the second quarter of 2018 and by $2,604 or 42% to $8,757 year to date, primarily driven by $988 and $2,597, respectively, of higher EBITDA.
Corporate
Three months ended June 30, | Six months ended June 30, | |||||||||||||
(in 000's) | 2018 | 2017 | Change | Percent | 2018 | 2017 | Change | Percent | ||||||
EBITDA | $ | (7,773) | $ | (9,775) | $ | 2,002 | 20% | $ | (17,373) | $ | (17,999) | $ | 626 | 3% |
Adjusted EBITDA | $ | (7,773) | $ | (9,775) | $ | 2,002 | 20% | $ | (17,373) | $ | (17,999) | $ | 626 | 3% |
EBITDA and Adjusted EBITDA
Corporate EBITDA and Adjusted EBITDA improved by $2,002 or 20% to a loss of $7,773 in the second quarter of 2018 and by $626 or 3% to a loss of $17,373 year to date. The improvement of $2,002 in the second quarter of 2018 was primarily from a decrease in SG&A expenses of $2,029, with approximately $900 from professional fees and $800 from wages and benefits. Decrease in wages and benefits of $800 were mainly driven by lower stock-based compensation costs, offset by higher wages and benefits primarily related to the transfer of IT personnel from Enercare Home Services to Corporate.
The year to date increase of $626 in Corporate EBITDA and Adjusted EBITDA is mainly due to a decrease in SG&A expenses of $647 from lower wages and benefits of approximately $1,400, partly offset by an increase of $400 in office expense and $300 in professional fees. Decrease in wages and benefits were driven primarily by lower stock-based compensation costs partly offset by the transfer of IT personnel and related costs from Enercare Home Services to Corporate. The increase in office expenses was also driven primarily by this transfer, as office expenses include software licensing and development costs, however, these increases were partly offset by Enercare's ownership of its corporate office which started in the second quarter of 2017. Higher professional fees were mainly driven by the implementation of new ERP and CRM systems.
Non-IFRS Measures of Gross Margin and Adjusted EBITDA
The following tables summarize the comparative quarterly results for the last eight quarters and reconcile revenue, an IFRS measure, to Gross Margin and Net Earnings, an IFRS measure, to Adjusted EBITDA.
(in 000's) | Q2/18 | Q1/18 | Q4/17* | Q3/17* | Q2/17* | Q1/17* | Q4/16* | Q3/16* | ||||||||
Revenue | $ | 343,490 | $ | 279,070 | $ | 290,993 | $ | 301,103 | $ | 319,987 | $ | 248,696 | $ | 268,354 | $ | 281,912 |
Cost of goods sold | 166,315 | 128,957 | 136,112 | 140,473 | 150,260 | 109,382 | 119,208 | 129,252 | ||||||||
Gross Margin | $ | 177,175 | $ | 150,113 | $ | 154,881 | $ | 160,630 | $ | 169,727 | $ | 139,314 | $ | 149,146 | $ | 152,660 |
* As a result of the implementation of IFRS 15, total revenue and cost of goods sold have been restated. |
(in 000's) | Q2/18 | Q1/18 | Q4/17 | Q3/17 | Q2/17 | Q1/17 | Q4/16 | Q3/16 | ||||||||
Net earnings/(loss) | $ | 26,773 | $ | 4,854 | $ | 17,289 | 20,154 | 21,103 | $ | (3,032) | $ | 17,552 | $ | 19,332 | ||
Deferred tax (recovery)/expense | 3,970 | (4,524) | (45) | 1,929 | 2,017 | (6,105) | (5,275) | (7,522) | ||||||||
Current tax expense | 5,599 | 6,555 | 5,023 | 5,785 | 6,500 | 5,415 | 11,534 | 15,332 | ||||||||
Amortization expense | 40,427 | 39,811 | 40,667 | 39,457 | 39,485 | 38,399 | 38,892 | 38,329 | ||||||||
Interest expense | 10,608 | 10,333 | 10,302 | 9,798 | 9,763 | 15,844 | 8,554 | 8,507 | ||||||||
EBITDA | $ | 87,377 | $ | 57,029 | $ | 73,236 | $ | 77,123 | $ | 78,868 | $ | 50,521 | $ | 71,257 | $ | 73,978 |
Add: Net loss on disposal | 820 | 1,221 | 444 | 643 | 5,137 | 1,857 | 850 | 734 | ||||||||
Add: Acquisition/Divestiture SG&A | 413 | 481 | 410 | 320 | 273 | 104 | 603 | 4,854 | ||||||||
Adjusted EBITDA | $ | 88,610 | $ | 58,731 | $ | 74,090 | $ | 78,086 | $ | 84,278 | $ | 52,482 | $ | 72,710 | $ | 79,566 |
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 remains focused on its strategic objectives of continued growth, operational excellence and innovation. Enercare's financial plan is focused on growing both revenue and Adjusted EBITDA, while remaining committed to providing shareholder value.
In 2018, Enercare expects to continue to grow revenue and Adjusted EBITDA in all three operating segments, excluding the impact of the U.S. rental rollout in the Service Experts segment, by focusing on the following key strategic objectives. The continued success of the U.S. rental rollout will generate long term value, however, in the short term this growth will reduce Adjusted EBITDA growth and increase capital investments in the Service Experts segment.
Enercare Home Services Key Priorities:
- Grow Rental and protection plan portfolios;
- Invest in technology and innovation to improve the service experience and help differentiate our offerings from those of our competitors;
- Emphasize HVAC rentals over outright sales in order to create a long-term customer revenue stream and provide valuable cross-selling opportunities; and
- Roll out the Enercare Smarter Home solution to enable a proactive, rather than reactive, service model.
Service Experts Key Priorities:
- Integrate rentals throughout Service Experts residential heating and cooling operations by the end of 2018 to create recurring revenue;
- Execute on strategic acquisition opportunities;
- Generate strong organic sales; and
- Launch a pilot of the Enercare Smarter Home solution in the U.S. market by the end of 2018.
Sub-metering Segment Key Priorities:
- Increase contracted and billable units.
In the Service Experts business, the percentage of rental HVAC installations in the U.S. continues to rise. U.S. residential HVAC and water heater rental additions increased tenfold during the second quarter of 2018, to 1,799 rental additions compared to 170 during the same period in 2017, as the rental proportion of total U.S. residential units sold improved in the second quarter of 2018 to approximately 14% compared to 4.1% in the second quarter of 2017. This compares to 3.2% in the fourth quarter of 2017 and is double the rental mix of 7.2% from the first quarter of 2018. Furthermore, during the second quarter of 2018, the rental rate was approximately 16% in the U.S. centers which had deployed the rental offering in 2017. The accelerated growth trajectory of the U.S. rental program is due to a number of factors, including improved sales training and marketing and streamlining of processes to enhance the customer experience. Service Experts has now rolled out the rental model to centers in 23 states and is on track to add an additional six states by the end of 2018.
Enercare has embarked on an ongoing program to increase efficiency and innovation by investing in its systems and technology. Enercare continues to invest in the replacement and modernization of its information technology systems and infrastructure to improve its customer experience and expand its product and service offerings. 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.
In addition, Enercare is targeting a range of between $185 million and $207 million in capital investments in 2018. Although this is consistent with previous guidance, Enercare expects to be at the higher end of this range, reflecting higher rental originations from Service Experts.
Enercare estimates that it will recognize approximately $22 million to $28 million in current income tax expense for the fiscal year ending December 31, 2018, compared to previous guidance of $26 million to $32 million. The change in estimate is primarily driven by lower taxable income in Service Experts' U.S. operations resulting from the increase in U.S. rental units. 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 U.S. taxing authorities, the assumptions used to estimate taxable income in the U.S. may be impacted.
On August 1, 2018, Enercare and Brookfield announced that they had entered into the Arrangement Agreement pursuant to which Brookfield has agreed to acquire all the issued and outstanding Shares for $29.00 per Share. The special meeting of shareholders to approve the transaction is currently expected to take place on September 24, 2018. See also "Recent Developments" section in the MD&A.
Financial Statements and Management's Discussion and Analysis
Enercare's financial statements for the second quarter ended June 30, 2018 and 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 second quarter ended June 30, 2018 this morning at 10:00 a.m. (ET). John Macdonald, President and CEO, and Geoff Lowe, 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 14, 2018 |
Time: | 10:00 a.m. to 11:00 a.m. Eastern Time |
Telephone: | 647.427.7450 or 1.888.231.8191 |
Please allow 10 minutes to be connected to the conference call. | |
Webcast: | https://event.on24.com/wcc/r/1792068/5C9BB2F89111AF18CB02B36F2E740841 |
To access the audio webcast please go to the "Investor Relations, Presentations & IR Events" section of enercare.ca. Media Player or Real Player is required to listen to the broadcast. | |
A slide presentation for simultaneous viewing with the conference call will be made available at https://corporate.enercare.ca/presentations-ir-events on the morning of the webcast | |
Replay: | The playback will be made available approximately two hours after the event at 416.849.0833 or 855.859.2056, access code: 4683048 |
An archived webcast will be available for one year following the original broadcast. |
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 and Enercare's condensed interim consolidated financial statements for the three and six months ended June 30, 2018. Additional information in respect of Enercare, including the Annual Information Form of Enercare dated March 22, 2018, 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. In particular, statements regarding Enercare's plans for 2018 in the "Outlook" section of this news release are forward-looking statements. 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 risks 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 23 states in the U.S. does not realize anticipated results as the rental model is a new concept in this industry in the U.S.; 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:
- management's views regarding current and anticipated market conditions;
- industry trends remaining unchanged;
- Enercare's financial and operating attributes as at the date hereof and its anticipated future performance;
- assumptions regarding the volume and mix of business activities remaining consistent with current trends; and
- assumptions regarding the interest rate of the two 4-year non-revolving, non-amortizing variable rate term credit facilities in the aggregate amount of US $200,000 and the 2014 Revolver, foreign exchange rates and commodity prices.
There can be no assurance that recent results from the introduction of the rental model to Service Experts in Canada and the U.S. 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, 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 5,100 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 Power Technologies Inc. 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.
For further information: Sophia Bisoukis, Vice President, Investor Relations, 905.943.6437, [email protected]
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