OHCS Acquisition Delivers 31% Accretion to Normalized Distributable Cash Per Share(1), (3)
TORONTO, ONTARIO–(Marketwired – March 7, 2016) – Enercare Inc. ("Enercare") (TSX:ECI), one of Canada's leading providers of essential home and commercial services and energy solutions, today reported its financial results for the fourth quarter and year ended December 31, 2015.
- Ends year with two consecutive quarters of net growth in rental units — the strongest organic growth in the rental portfolio since 2005
- HVAC rental transactions increased by 129%
- Our Home Services segment successfully completed integration of Direct Ener gy Marketing Limited's ("DE") home and small commercial services business in Ontario (the "OHCS Acquisition")
- 31% Normalized Distributable Cash per Share(1), (3) accretion in 2015 principally from the OHCS Acquisition
- Sub-metering achieved positive cash flow and EBITDA(3) growth of 89%
As announced earlier today by Enercare and its wholly-owned subsidiary, Enercare Solutions Inc. ("Enercare Solutions"), Enercare Solutions has entered into a definitive merger agreement pursuant to which an indirect wholly-owned subsidiary of Enercare Solutions will acquire, through a merger, SEHAC Holdings Corporation for consideration of US$340.75 million, excluding transaction costs, subject to customary working capital and other adjustments (the "Transaction"). For further information on this announcement please refer to the press release entitled "Enercare Signs Agreement to Acquire Service Experts – A Leading North American Provider of HVAC Services and Announces $218 million Bought Deal Offering," which is available on SEDAR at www.sedar.com.
(in thousands of Canadian dollars except per unit amounts(2))
< td style="text-align: right; width: 8%; vertical-align: bottom">0.34
|Three months ended|
|Twelve months ended|
|(millions, except units)||2015||2014||Change||2015||2014||Change|
|Acquisition Adjusted EBITDA(3)||$||58.0||$||52.0||12||%||$||234.5||$||182.7||28||%|
|Basic and diluted earnings per share||$||0.15||$||0.07||114||%||$||0.56||$||65||%|
|Payout ratio – maintenance(3)||42||%||53||%||(1100 bps||)||45||%||49||%||(400 bps||)|
|Payout ratio(3)||78||%||93||%||(1500 bps||)||68||%||80||%||(1200 bps||)|
|Rentals attrition (units)||9,000||11,000||(18||%)||35,000||42,000||(17||%)|
|Rentals additions & acquisitions (units)||10,000||8,000||25||%||33,000||24,000||38||%|
|Contracted sub-metering net additions (units)||5,000||5,000||–||%||20,000||19,000||5||%|
"2015 was a fantastic year for Enercare with record revenue, EBITDA and operating cash flow," said John Macdonald, President and CEO of Ener care. "Home Services dramatically grew its business while successfully managing the sizable integration of the acquisition from Direct Energy. Sub-metering, which continued to expand and achieve scale, achieved positive free cash flow and nearly doubled EBITDA."
Results of Operations
|Sales and other services||35,962||3,498||–||39,460||10,880||481||–||11,361|
|Cost of goods sold:|
|Maintenance & servicing costs||(61,164||)||–||–||(61,164||)||(10,600||)||–||–||(10,600||)|
|Sales and other services||(25,448||)||(2,090||)||–||(27,538||)||(7,743||)||(378||)||(8,121||)|
|Total cost of goods sold||(86,612||)||(108,293||)||–||(194,905||)||(18,343||)||(98,051||)||–||(116,394||)|
|Net (loss) on disposal||(5,354||)||2,484||–||(2,870||)||(9,859||)||(9,859||)|
|Interest expense payable in cash||(26,105||)||(27,978||)|
|Non-cash interest expense||(1,970||)||(913||)|
|Total interest expense||(28,075||)||(28,891||)|
|Earnings before income taxes||68,829||32,158|
|Current tax (expense)||(10,197||)||(27,287||)|
|Deferred tax (expense)/recovery||(7,677||)||17,405|
|Acquisition Adjusted EBITDA||$||244,057||$||12,970||$||(22,495||)||$||234,532||$||192,517||$||7,685||$||(17,497||)||$||182,705|
Total revenues of $563,826 in 2015 increased by $201,073 or 55% compared to 2014.
Home Services revenues, excluding investment income, increased by $184,137 to $426,471 compared to 2014, primarily as a result of additional revenue added through the OHCS Acquisition of approximately $176,800. The remaining increase of approximately $7,400 was primarily due to a rental rate increase implemented in January 2015, improved billing completeness, changes in asset mix and growth in rental HVAC units. Contracted revenue in Home Services represents revenue generated by the rentals portfolio and protection plan contracts, while sales and other services revenue mainly pertains to one-time sales and installations of residential furnaces, boilers and air conditioners as well as duct cleaning and other services.
Sub-metering revenues, excluding investment income, in 2015 were $137,150, an increase of $17,537 or 15% over the comparable period in 2014, primarily as a result of an increase in flow through commodity charges, Billable units and revenue assurance initiatives. Sub-metering revenue includes total pass through energy charges of $106,203 in 2015, an increase of $8,530 or 9% over the same period in 2014. The remaining increase was primarily due to approximately $2,239 of additional revenues added through the acquisition of Triacta Power Technologies Inc. ("Triacta") and $784 of increased sales and installations of water conservation products in apartments and condominiums.
Investment income was $205 in 2015, a reduction of $601 compared to 2014. The change in investment income was primarily attributable to $531 of non-recurring interest earned in 2014, from the $319,931 (net of underwriters' fees) of subscription receipts issued by Enercare on a bought deal basis in relation to the OHCS Acquisition ("Subscription Receipts").
Cost of Goods Sold
Total cost of goods sold were $194,905 in 2015, an increase of $78,511 or 67%, compared to the same period in 2014.
Home Services cost of goods sold increased by $68,269 in 2015, compared to the same period in 2014, primarily due to expenses resulting from the increased scope of the business following the OHCS Acquisition offset by approximately $1,300 relating to supplier reimbursements and other items recorded in the second quarter of 2015. Maintenance and servicing costs in Home Services primarily consist of protection plan expenses and servicing costs related to the rental portfolio, while sales and other services expenses mainly pertain to one-time sales and installations of residential furnaces, boilers, air conditioners and small commercial products as well as duct and other cleaning services.
Sub-metering cost of goods sold of $108,293 in 2015, increased by $10,242 or 10%, as a result of an increase in pass through energy charges, approximately $1,012 of increased costs added through the acquisition of Triacta and $700 of increased costs from higher sales and installations of water conservation products in apartments and condominiums, over the same period in 2014.
Selling, General & Administrative Expenses ("SG&A")
Total SG&A expenses were $144,311 in 2015, an increase of $73,333, compared to the same period in 2014.
Home Services and corporate expenses of $127,465, increased by $70,364 compared to 2014, primarily due to additional expenses resulting from the increased scope of the business following the OHCS Acquisition. The $70,364 increase was primarily as a result of approximately $35,800 in wages and benefits, $13,000 of billing and servicing costs, $12,100 in selling expenses, $7,300 in office expenses, $2,000 in bad debts and $550 in claims expenses, partly offset by $400 of lower professional fees. During the third quarter of 2015 there were one-time items totaling approximately $1,400, resulting in improvements to SG&A expenses. These im provements arose from revisions to estimates related to costs resulting from the OHCS Acquisition.
During 2015, Home Services and corporate SG&A expenses included $9,168 of integration costs associated with the OHCS Acquisition, primarily from marketing spend related to rebranding and IT integration activities. In 2014, SG&A expenses included $7,722 of OHCS Acquisition expenditures primarily consisting of professional fees associated with the entering into of the Asset Purchase Agreement and marketing related rebranding expenditures.
Sub-metering SG&A expenses in 2015 were $16,846, an increase of $2,969 over the comparable period in 2014, primarily from higher wages and benefits of $1,050, professional fees of $1,000, selling and office expenses of $530 and bad debts of $490, partly offset by lower billing and servicing costs of $100.
During 2015, sub-metering SG&A expenses included $379 of costs associated with the acquisition of Triacta, primarily related to professional fees associated with the entering into of the purchase agreement.
Amortization expense increased by $20,535 or 20% to $125,416 in 2015, primarily due to additional OHCS Acquisition related amortization from intangible and capital assets of $16,037 and $2,947, respectively. The remaining increase of $1,569 over 2014, was primarily from 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 Home Services business.
Loss on Disposal of Equipment
Enercare reported a net loss on disposal of equipment of $2,870 in 2015, a reduction of $6,989 or 71%, over the same period in 2014. The 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.
Home Services recorded a net loss on disposal of equipment of $5,354, a reduction of $4,505 or 46%, over the same period in 2014. Partly offsetting this net loss on disposal was a $2,484 gain on disposal of sub-metering equipment resulting from a customer that exercised its buy-out option, during the fourth quarter.
|Interest expense payable in cash||$||26,105||$||24,065|
|Interest paid on subscription receipts||–||3,097|
|Equity bridge financing fees||–||775|
|Notional interest on employee benefit plans, net||1,096||254|
|Amortization of financing costs||874||700|
Interest expense payable in cash increased by $2,040 to $26,105 in 2015 compared to 2014. This increase was primarily related to the increase in the new term loan related to the financing of the OHCS Acquisition, partially offset by the conversion of convertible debentures to Enercare common shares ("Shares").
As part of the OHCS Acquisition, Subscription Receipts were issued during the third quarter of 2014 and subsequently converted to Shares upon the closing of the OHCS Acquisition on October 20, 2014. While the Subscription Receipts remained outstanding, they were classified as debt, resulting in an interest expe nse liability of $3,097, which was equivalent to the dividend payments on such Subscription Receipts if they had been Shares. Equity bridge financing fees of $775 were also incurred as part of the OHCS Acquisition.
Notional interest of $1,096 in 2015 relate to the employee benefits plans acquired as part of the OHCS Acquisition. Amortization of financing costs includes the previously unamortized costs associated with the $250,000 of 4.30% Series 2012-1 Senior Unsecured 2012 Notes of Enercare Solutions, which mature on November 30, 2017, $225,000 of 4.60% Series 2013-1 Senior Unsecured 2013 Notes of Enercare Solutions, which mature on February 3, 2020, convertible debentures and in 2015 the four year variable rate, non-revolving term loan facility in the amount of $210,000.
During the second quarter of 2015, Enercare realized a settlement of $580 from a supplier of sub-metering equipment.
During the first quarter of 2014, Enercare realized a settlement of $408 from DE on account of the reclassification of certain water heaters under the co-ownership agreement to Enercare's owned portfolio, originally associated with the Toronto Hydro Energy Services Inc. portfolio acquisition.
Enercare reported current tax expenses of $10,197 in 2015, a reduction of $17,090 over 2014, primarily as a result of a one year tax deferral available through a subsidiary of Enercare Solutions. The deferred income tax expenses of $7,677 for 2015 was $25,082 higher compared to the deferred tax recovery recorded in the same period in 2014, primarily as a result of temporary difference reversals in the Home Services and sub-metering businesses.
Net earnings in 2015 were $50,955 or $28,679 higher than 2014, as previously described.
EBITDA, Adjusted EBITDA and Acquisition Adjusted EBI TDA
The following table summarizes comparative quarterly results for the last eight quarters, and reconciles net earnings, an IFRS measure, to EBITDA, Adjusted EBITDA and Acquisition Adjusted EBITDA.
|Deferred tax expense/(recovery)||1,069||2, 376||1,323||2,909||(3,222||)||(6,852||)||(3,810||)||(3,521||)|
|Current tax expense||2,784||2,169||2,290||2,954||5,949||8,924||6,335||6,079|
|Add: Net (gain)/loss on disposal||(1,455||)||1,001||1,572||1,752||2,180||2,304||2,371||3,004|
|Add: Other income||–||–||580||–||–||–||–||408|
|Adjusted EBITDA(1)||54,993||57,187||59,405||53,400||47,816||41,044||< /td>||43,106||43,017|
|Add: Acquisition SG&A||3,028||3,946||1,961||612||4,138||2,882||702||–|
|Acquisition Adjusted EBITDA||$||58,021||$||61,133||$||61,366||$||54,012||$||51,954||$||43,926||$||43,808||$||43,017|
|(1)||Historical Adjusted EBITDA has been conformed to the current presentation which includes other income and expense.|
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.
The OHCS Acquisition has been transformative for Enercare. The OHCS Acquisition has allowed Enercare to have direct access to its customers, control over all aspects of its operations and larger financial scale and the reunification of the two businesses has been successful to-date.
At the time of the OHCS Acquisition, Enercare anticipated exceeding normalized Distributable Cash per Share accretion of over 25% in 2015. Enercare is pleased to announce that this accretion was 31%(1), (3).
Growth Initiatives – Home Services
Enercare continues to experience improved results through improved rental customer retention and increased average monthly rental rates, largely as a result of our rental HVAC strategy. We continue to believe that the factors contributing to the decline in attrition, including improved customer awareness, an enhanced customer experience, Bill 55 (effective April 1, 2015) and actions taken in respect of competitive activity, will create a favourable environment for further improvement in customer retention. We are very pleased that during both of the third and fourth quarters of 2015 rental unit growth surpassed attrition, the first two consecutive quarters of net unit growth since 2006. The net unit growth achieved during these two consecutive quarters was the strongest organic growth for two consecutive quarters in the rental portfolio since 2005. In addition, net attrition for 2015, excluding acquisitions, was approximately 2,000 units, an improvement of 16,000 units compared to 2014. Our focus remains to grow our annuity contracts, including through new products and promotional offers.
In January 2016, Enercare increased its weighted average rental rate by 2.74%.
Growing the protection plan portfolio and related revenues is also a key priority. During 2015, Enercare made changes to protection plan offerings and related promotions. As a result, a number of protection plans were consolidated and pricing was adjusted. As HVAC unit additions in 2015 were more through rentals than sales, the opportunities for protection plan sales were fewer as rentals already incl ude service. Protection plan attrition also increased, primarily as a result of an increase in HVAC rental additions from customers that previously had protection plans, a higher number of terminations as a result of customer moves and non-renewals of one year promotional offers in connection with 2014 HVAC sales. Many of the changes made improved the average monthly revenue per protection plan.
In December 2015, Enercare launched a pilot program for a new rental proposition for water softeners, which is complementary to its water heater rental product. Similar to water heaters, water softeners have a useful life of approximately 16 years and have the benefits of enhancing the useful life of water heaters in hard water areas. These products will be rolled out in phases within the operating territory during 2016.
In December 2015, Enercare introduced a pilot HVAC financing program, which will be rolled out in phases within the operating territory during 2016. Approximately 20% of HVAC transactions are financed and Enercare estimates that it will invest $10,000 to $20,000 over the next 12-months on this initiative.
Enercare has developed a mobile app, which is in beta testing, that offers users an easy to use real-time tracking tool to manage their homecare needs. Enercare believes that the mobile app will provide customers with added convenience and lead to an improved customer experience.
Growth Initiatives – Sub-metering
Sub-metering successfully achieved its goal of being cash flow positive by year end by increasing new contract sales and improving productivity and operational efficiencies. EBITDA for the sub-metering business increased by $6,810, or 89%, to $14,495 in 2015.
The revenue assurance program has yielded improvements which have contributed more than $3,000 in incremental net revenue in 2015, exceeding the originally anticipated $2,000. Going forward, the program will protect the gains made to date and ensure that revenue leakage due to rate or consumption variances are minimized.
During the third quarter of 2015, Enercare acquired Triacta. Enercare intends to maximize the use of Triacta meters in new construction applications in 2016.
Enercare estimates that it will recognize approximately $46,000 to $53,000 in current tax expense for the fiscal year ending December 31, 2016. This estimate excludes the impact of the Transaction and is based on taxable income comparable to current levels, shielded by restricted tax losses and a corporate tax rate of approximately 26.5%. Enercare's current tax expense for 2015 was $10,197, primarily as a result of a one year tax deferral available through a subsidiary of Enercare Solutions. Taxable income is principally impacted by changes in revenue, operating expenses, potential acquisitions or divestitures, appropriate tax planning and capital expenditures through the capital cost allowance deduction.
Enercare has set its annual general meeting of shareholders for April 28, 2016. Jim Pantelidis, Chair of the Board, and management will provide an update to shareholders on Enercare's achievements in 2015 and strategy.
See also the press release referenced above regarding the recently announced Transaction.
Financial Statements and Management's Discussion and Analysis
Enercare's financial statements and management's discussion and analysis for the year ended December 31, 2015 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, 2015, as well as the Service Experts acquisition, this afternoon at 4:15 p.m. John Macdonald, President and CEO and Evelyn Sutherland, CFO, will review Enercare's results and discuss the quarter's operating highlights. Details of the call and webcast are as follows:
|Date:||Monday, March 7, 2016|
|Time:||4:45 p.m. (ET)|
|By telephone:||647.788.4922 or 1.877.223.4471|
|Please allow 10 minutes to be connected to the conference call.|
|Note:||This is a listen-only audio webcast. Media Player or Real Player is required to listen to the broadcast.|
|Replay:||An archived audio webcast will be available at: www.enercareinc.com for one year following the original broadcast.|
|Note:||A slide presentation intended for simultaneous viewing with the conference call will be available the afternoon of Monday, March 7, 2016 at: www.enercareinc.com.|
To automatically receive Enercare's news releases electronically, visit the investor relations section of Enercare's website at www.enercareinc.com/alerts and subscribe to email alerts.
Cautionary Note Regarding Forward-Looking Statements
This news release contains forward-looking information within the meaning of applicable Canadian securities laws ("forward-looking statements"). 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. Forward-looking statements may include words such as "estimates", "will" and "expects", although not all forward-looking statements contain these words. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations, including the matters discussed in Enercare's most recently filed Management's Discussion and Analysis and in its current Annual Information Form. 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. All forward-looking statements in this news release are made as of the date hereof and are qualified by these cautionary statements.
Enercare Inc. is headquartered in Toronto, Ontario and publicly traded on the Toronto Stock Exchange (TSX: ECI). As one of Canada's largest home and commercial services and energy solutions companies with approximately 1,000 employees, Enercare provides water heaters, furnaces, air conditioners and other HVAC rental products, plumbing services, protection plans and related services to more than 1.2 million customers. Enercare is also the largest non-utility sub-meter provider, with electricity, water, thermal and gas metering contracts for condominium and apartment suites in Ontario, Alberta and elsewhere in Canada, and through its Triacta division, 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 on SEDAR at www.sedar.com or through Enercare's investor relations website at www.enercareinc.com or www.enercare.ca.
|(1)||For the calculation of Normalized Distributable Cash per Share (as defined herein) accretion for 2015, the total number of Shares outstanding was based on the estimated outstanding Shares per the prospectus filed in respect of the offering of Subscription Receipts (as defined herein) issued in connection with the OHCS Acquisition. The estimated outstanding Shares in the prospectus were used in this calculation to eliminate the effects of the overallotment option referenced in that prospectus, timing of debenture conversions, Enercare's normal course issuer bid and the block trade purchase of Shares from DE during 2015 so that Enercare's actual results are comparable to the results initially forecasted in respect of the OHCS Acquisition. In addition, actual Distributable Cash for 2015 was reduced by approximately $19,001 to normalize for the one year deferral of current income tax expense as a result of the OHCS Acquisition.|
|(2)||Unless otherwise noted, amounts are reported in thousands, except customers, units, Shares and per Share amounts and percentages. Dollar amounts are expressed in Canadian currency except as otherwise noted.|
|(3)||EBITDA, Adjusted EBITDA, Acquisition Adjusted EBITDA, Distributable Cash, Normalized Distributable Cash per Share, Payout Ratio, Payout Ratio – Maintenance and Operating C ash Flow are non-IFRS financial measures. Refer to the Non-IFRS Financial and Performance Measures section in the MD&A.|
For further information:
www.enercareinc.com or www.enercare.ca