Enercare's (CSUWF) CEO John Macdonald on Q4 2017 Results - Earnings Call Transcript

Enercare, Inc. (OTCPK:CSUWF) Q4 2017 Earnings Conference Call March 6, 2018 10:00 AM ET

Executives

Sophia Bisoukis - Vice President, Investor Relations

John Macdonald - President and Chief Executive Officer

Brian Schmitt - Chief Financial Officer

Analysts

Nelson Ng - RBC Capital Markets

Damir Gunja - TD Securities

David Newman - Desjardins

George Doumet - Scotiabank

Elizabeth Johnston - Laurentian Bank Securities

Operator

Good morning, ladies and gentlemen, and welcome to the Enercare Fourth Quarter and Year Ended 2017 Earnings Release Conference Call and Webcast. As a reminder, this conference call is being recorded today, March 6, 2018 at 10 a.m. Eastern Standard Time.

Your host for today's call is Sophia Bisoukis, Vice President, Investor Relations. Ms. Bisoukis, you may begin.

Sophia Bisoukis

Thank you, Jody. Good morning, everyone, and thank you for joining us. Welcome to Enercare's fourth quarter and year-end 2017 earnings call. Today's call includes forward-looking statements. Please review Slide 2 for a summary of this information. We may also refer to non-IFRS measures, which are detailed in our MD&A for the quarter and year-ended December 31, 2017 and in this morning's news release.

On our call today, we have John MacDonald, President and Chief Executive Officer; and Brian Schmitt, Chief Financial Officer. John and Brian will make a short presentation on our results and performance, and then we'll answer analyst questions.

I'll now turn the call over to John, who will begin with Slide 4.

John Macdonald

Thank you, Sophia, and good morning. 2017 was another successful year for Enercare. We delivered solid financial and operational results in both the fourth quarter and for the full-year demonstrating the underlying strength of our business. Revenue increased by 26% to $1.3 billion, while EBITDA increased by 5% to $280 million. Home Services, Sub-metering, and Service Experts all increased their EBITDA and built their base of customers.

Let’s take a look at the performance of each business segment starting with Home Services on Slide 5. Rental unit growth surpassed attrition in the fourth quarter marking the tenth consecutive quarter of portfolio growth, driven by geographic expansion and customer service improvements.

Home Services once again increased its net promoter score and achieved a new record high in 2017. Our Google rating score increased by 6.6% in 2017, while we generated over 5,000 new reviews. Home Services also has an A rating from the Better Business Bureau, I’m very pleased with the results we’ve had, and I’d like to thank the team for their hard work this year.

We’re also pleased that Ontario’s Putting Consumers First Act, comes into effect this Spring. This bill bans unsolicited door-to-door sales of appliances such as water heaters, furnaces, air

Conditioners, and water filters. And it protects consumers from high pressure sales tactics. While we believe this bill coupled with our initiatives to educate consumers and enhance our value proposition, we will continue to have a positive effect on attrition in our water heater rental business.

Moving to Slide 6, our average monthly rental rate, another key driver of revenue growth

increased by 5%. And in January 2018, we increased our weighted average rental rate for

water heaters by approximately 3%, and for HVAC units by approximately 2%.

Moving to Slide 7, we now have 552,000 protection plan contracts. We added 10,000 new

contracts overall, improved our attrition by 9% and converted just over 9,000 customers to HVAC rental units during the year. This demonstrates the importance of our protection plan contracts. They give us the opportunity to establish our relationship with a new customer that we can build on.

Turning Slide 8, and looking at our Sub-metering business, we had another great sales year. We’ve had 261,000 contracted units in total, of which we are building 130,000. I am very

pleased with this healthy 2 to 1 ratio of contracted to billing back log services, because it

means we have a pipeline of strong growth to look forward to. We also expect 2018 to be a strong installation year.

Looking at Slide 9, for Service Experts. Service Experts continues to exceed our expectations. We realized synergies of $0.09 per share on an annualize basis for 2017, which is higher than our original forecast of $0.05 to $0.08 per share. And I’m very pleased with our revenue growth of 15% in constant currency.

We also realize our vision of expanding into the U.S. market and completed three acquisitions under the Service Experts brand in 2017. We’re continuing to pursue many M&A opportunities in a highly fragmented Home Services industry.

Service Experts installed 72,000 units in 2017, up 14% over 2016, of these over 2,000 were

Rentals. I’m happy with our progress on introducing the rental model to the Service Experts

Business. Our Canadian rental results exceeded expectations, approximately 15% of new

originations in Ontario in 2017 were rentals. In Western Canada, where the rental model is at relatively new concept, approximately 10% were rentals.

We’re continuing to roll-out the program in the U.S., where as anticipated, we’re seeing slower adoption. The primary rental mix of total HVAC originations during the year was approximately 3% and range from 0.2% to 12% depending on our center.

Looking forward, we will continue to build our rental business in Service Experts portfolio, which will increase our recurring revenue in the long term.

Turning to Slide 11, I’m also particularly existed about Home Services using technology to

transform the customer experience. During the fourth quarter, we launched a 100 household

pilot of Enercare Smarter Home, a Connected Home Solution that allows customers to manage and control their energy usage, to monitor their cooling and heating equipment, Detect Leaks, and Shut off Water Remotely. We look forward to launching the initial commercial offering in the first half of 2018.

Enercare Smarter Home has the potential to strengthen our customer relations as we move from a re-active service environment to a pro-active service model. Ideally, we will be able notify customers before issues arise, provide insights on equipment usage, and help customers conserve energy.

And our customers will be able to use a mobile application to monitor and control their home. These investments are part of an ongoing program to increase our efficiency and innovation by investing in our systems and technology, that allow us to be differentiated from our competitors. We also successfully implemented the first phase of this system in early 2018. These innovations will require more investments in capital and in SG&A that will position us to generate greater revenue, drive future growth, and further improve customer service in future.

I’ll now turn it over to Brian, who will review our financial performance. Brian?

Brian Schmitt

Thank you, John, and good morning. We ended 2017 with yet another solid quarter. We grew revenue, EBITDA in our rental base delivering strong results that will continue to add value for our shareholders.

Turning to Slide 13, in the fourth quarter, revenue was $312 million, up $19 million or 6.5% compared to 2016, contributing to our consolidated 2017 revenue of $1.26 billion, an increase of 26%. Each of our business segments improved in the year by executing on their objectives. In Home Services, revenue was $119 million in the fourth quarter of 2017, $6 million or 5% better than the same period a year earlier.

Revenue was $459 million for 2017, which is an increase of $20 million or 4%, compared to 2016. These improvements were primarily driven by the rental rate increases that we implemented in January 2017, the continued success of our rental HVAC program, as demonstrated by changes in our asset mix and the 10th consecutive quarter of net rental unit growth.

Service Experts revenue in the fourth quarter was $161 million, $15 million or 10% higher than the fourth quarter 2016. Revenue for the year was $662 million, reflecting the first full year of results since acquisition. On a compatible year-over-year basis, sales and rental unit volume increased by 14%, despite unfavorable weather in 2017, compared to 2016. Growth came from higher organic sales, supplemented by successful acquisitions completed during the year.

Sub-metering revenue was $32 million for the fourth quarter, and $137 million for 2017. Revenue, net of commodity increased by $1 million for the fourth quarter, and $4 million for the year, driven by a 12% increase in billable units.

Now turning to Slide 14, EBITDA for the year increased by 5% on a consolidated basis, and 1% on an acquisition adjusted basis. There are certain notable items that have an impact on our results in 2017, which I’ll address in a moment. Without these notable items, acquisition adjusted EBITDA would have increased by approximately 5%.

Let’s go to Slide 15 and discuss these items. Two notable items had an impact on SG&A. Stock-based compensation was $5.2 million higher in 2017 then 2016, primarily due to stock price appreciation. The stock-based compensation expense is affected by fluctuations in our share price, which closed the year at $20.51.

As John mentioned earlier, we made investments of $2.3 million in our new customer relationship management in enterprise of resource planning systems. Recently, we implemented part of this system to meet IFRS 9 requirements, which will form part of our financial reporting in the first quarter of 2018.

Cost of goods sold for Service Experts increased by $3.5 million for the year, driven by higher employee practices, workers' compensation and automobile insurance claims. $2.2 million of this amount was incurred in the fourth quarter. As noted in Q3, we estimated that EBITDA was lower by approximately $1 million as a result of the impact of Hurricane Irma.

Partially offsetting these items were net deferred revenue, purchase price adjustments from our Service Experts acquisition. During 2016, there was $4.3 million negative impact on EBITDA, compared to a $2.5 million impact in 2017.

Turning now to Slide 16, it is helpful to remember our strategy of converting sales to rentals has a short-term impact on EBITDA. In the Home Services segment, had all HVAC rental units added during the year been recorded as sales, revenue and EBITDA for the year would have increased by $40.7 million and $17.4 million, respectively.

Similarly, with the introduction of the rentals program and service experts starting in Canada in the fourth quarter of 2016, and the United States in 2017, the compatibility of revenue and EBITDA was negatively impacted by approximately $9.6 million and $3.6 million respectively. While there is a short-term impact on earnings we believe their rental model provides longer-term benefits.

Now turning to Slide 17. We believe we are well-positioned to grow our business and create value for our shareholders. We have maintained strong credit ratios, closing the Service Experts acquisition, and we have Triple B stable rating from S&P and DBRS. We have debt and average interest rate - we have debt with an average interest rate of 3.6%.

In the near-term, Enercare has limited exposure to rising interest rates, as two-thirds of our long-term debt is fixed rate with staggered maturities. As of year-end, we have $31 million in cash, $145 million undrawn on the revolver and our successful dividend reinvestment plan is running at a participation rate of approximately 30%.

Turning to Slide 18, I’d like to take a moment to review a few other business matters. We adopted IFRS 15 effective January 1, 2018 on a full retrospective basis, which means that our present future revenue for Sub-metering, which means that we’ll present future revenue for sub-metering net of flow-through commodity charges.

While 2017 will decrease by approximately $99 million on a comparative basis, it will also be corresponding reduction in commodity expense. This presentation will not impact net earnings or EBITDA. We expect to recognize approximately $26 million to $32 million in current income tax expense for 2018, assuming corporate tax rates of approximately 26.5% in Canada, and 26% in the United States, based upon the Tax Cuts and Jobs Act of 2017.

While the new act lowered American Federal Corporate Tax rates the impact was reduced by other tax reforms. In the longer-term, we expect to see more significant tax reductions as service experts’ taxable income increases further beyond our existing $27 million annual tax yield traded with the 388-election established upon the acquisition of the business.

Lastly, our 2017 capital investments of $181 million were in-line with previous guidance. And we’re expecting our 2018 capital investments to range between $185 million and $207 million.

With that operator, please open up the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Nelson Ng of RBC Capital Markets. Your line is open.

Nelson Ng

Great, thanks everyone. Good morning.

John Macdonald

Good morning.

Nelson Ng

Quick question on the sub-metering business. So, could you give a bit more color in terms of the process to regulate the pricing? And would it be a fair assumption to assume that pricing would likely come down?

John Macdonald

So, in terms of the process, the OEB is looking at this sector and examining it. It is a competitive market. So, we don’t expect that there will be significant changes to the total pricing. Obviously, this is a regulatory decision that we’ve been involved with supporting with information and so forth. I think for us what we’re hoping to see is that there are some items, some consumer fees associated with certain services that we could see being constrained.

In that regard, we would think this would be a good thing because you don't want to see consumers hurt, but by and large given its competitive market it’s tough to see specific price regulation. We, obviously it’s something that’s still a live issue with the OEB, but generally we’re supportive of the initiative.

Nelson Ng

Okay, thanks. And then just moving on to Service Experts, I believe rentals have been rolled out to 7 of the 29 states?

John Macdonald

That's correct.

Nelson Ng

Could you talk about the timing for the rest of the states? And then also, like would you be kind of - does it make sense to pause for a bit to see how you can improve the 3% rental mix before you roll it out to additional states?

John Macdonald

Well we had a bit of pause and that we were going to roll it out in Florida in late 2017, but due to the impact of Hurricane Irma, our operations were already feeling stressed from that and we didn’t feel it was appropriate. We have revisited a couple of our - and we’d always talked about tuning our proposition. We have done that to a certain extent, but we do continue - we are still expecting to roll-out the majority of not all the remaining states in 2018. And I think we commented, we are comfortable with where we are in terms of rental mix.

Obviously, we’d like to see it increase beyond where it is, and we’re looking next year hopefully to get the - you might characterize as sort of same-store sales ratio up, but obviously will have new states that will be introducing it to - which will - there is an adoption curve. So, overall that will probably drag our average down, but we are comfortable with where we are and obviously we’re seeking to increase it throughout 2018 timeframe.

Nelson Ng

Okay. So, this year, this is more about rolling it out to the rest of the states? And then next year, it's more about increasing the rental mix?

John Macdonald

I think we're looking to do both this year. I mean, in 2018 that is. We did have some learnings and we revisited some of our practices, try and make it streamline some of the things we're doing. So, it is, we are trying to make corrections as we go or tuning the offer that type of thing. So, it’s both this year really.

Nelson Ng

Okay, and then just one last question before I get back in the queue. In terms of your CapEx guidance of $185 million to $207 million, and comparing that to the $181 million in 2017, where do you - I presume HVAC rentals would be one area where you'd expect to see some growth, but would the corporate and building costs come down materially in 2018? And I guess what are the various kind of offsets to - for the higher guidance?

Brian Schmitt

I think generally all of the installations with respect to HVAC and sub-metering, so the lines of business will improve slightly i.e. increase slightly. The building is largely a 2016 and 2017 item, so that should be largely complete. There will be some capitalization that we’re still working through with respect to our CRM and ERP systems and we are working through that because of the service experts blueprinting face and discovery faces still underway.

Nelson Ng

Okay, thanks Brian. I will get back in the queue.

Brian Schmitt

Thanks Nelson.

Operator

Your next question comes from the line of Damir Gunja of TD Securities. Your line is open.

Damir Gunja

Thank you. Good morning.

Brian Schmitt

Good morning.

Damir Gunja

John, just wondering if you could expand a little bit on the fine-tuning of your rental product offering in the U.S.?

John Macdonald

So, it’s things like as an example, the credit metrics we use, it is just to - we have used a similar metrics to what we had perhaps used for granting credit in our Canadian operations. One of the things that hadn't really impacted us much is, we do see quite high, like very high tickets where you might have two heat pump systems being replaced, I'm just doing it for instance, you might have an average, you might have a ticker as high as $20,000, that’s uncommon in the Canadian market, but in an area where do you have a much heavier air conditioning load and a bigger home you will see a higher ticket.

So, as a very specific example, we had to relook at our credit granting for high ticket items because we felt we were missing out on opportunities where we could provide approval where we might have otherwise declined the credit or ask for a deposit or something. So as a very specific instance that was one of the tuning things we’ve done recently as to look at that. So, sales training is probably in processes, or really the focus and we do think this is a journey, you have got to take people through.

So, part of it is getting people comfortable. What we're trying to do is, never have a situation where we reduce our closing ratio when - to us this is a tool to increase your closing ratio that is the number of times you’re in front of a customer with a proposition. You want to walk away with a sale more often by having this rather than having the reverse of where you present something you are not comfortable with and you don't get the sale. So, it is a journey, so education and processes are a huge part of that.

Damir Gunja

Okay, that’s great. And maybe just switching gears, you came through the higher end of your range for synergies last year, I’m just wondering if there is potentially some more to come I guess particularly in the procurement side or are we sort of run rating at a level that you’re comfortable with?

John Macdonald

I think we’ve got more opportunity. Some of the services or products we buy have longer term contracts. One, two, three. So, we haven't had a chance to get at them. I think, we have got more than half, would be my very, very high-level estimate, but there’s definitely things out there that we continue to work on. We had a whole list when we embarked on this journey, and while we overachieved on some of those there were a couple that are stubborn and haven't really seen the moment we would like to see. So, we’re going to continue to work our way at it, but there is definitely room for further gains in this space.

Damir Gunja

Okay. And then last one from me, on the acquisition side, I think you guys have talked about during 4 to 6 tuck-ins per year, just wondering how the environment is or how you're sourcing those deals, is it competitive, could you even see that accelerating beyond 4 to 6 deals in the coming year?

John Macdonald

Yes, it is good question. So, you might have noticed that we acquired early in January three locations in Texas and then coinciding with the results literally yesterday we acquired another location in Tampa. The acquisition in Texas included Houston, which is was a key priority market for us. Houston is a large center, 6 million - more than 6 million people in the greater Houston area, but also it is a very strong air conditioning market because of the heat and humidity in that marketplace.

Tampa was also a priority market. So, we are really pleased with that. We are planning to provide a bit more information on those later this week because we just completed the one. So, we are seeing - moving on to other aspects of your question we have an internal team that we’ve been developing in our Dallas operations that are working on the sourcing, negotiation intelligence and integration, so we are building up that team.

We, right now most of the opportunities we're seeing come to us, we are known as an acquirer and so, I would say we get 1 to 2 opportunities a weak that come at us. Most of them don't fit for a variety of reasons, mean size, orientation of the market not being too involved in markets we're not interested in, but we are seeing a pretty steady stream and we’ve got a good pipeline. I’m quite comfortable with the 4 to 6 number now. I think it’s, the saying I have used in the past it’s easy enough to buy these types of opportunities.

The big trick is to get value from them, and really, it’s super important to me that that we develop that aspect of the business. So, I would rather get really good process for doing that and to do that you need to keep the cadence reasonably regular and not as quick. In future years, I think we will look at stepping up the cadence providing the opportunities there and providing we feel comfortable with that. In terms of competitive, some of them are competitive, some of them are not.

One of the things we are seeking to do is really be seen as a great company to transition once business to. Many of these businesses prolong legacy multigenerational in some cases. So, for us we take pride in the fact that we want to provide jobs for people, we want to be seen as a good company to transition that legacy to. So that’s something that’s very important to us. And we also believe it helps us in terms of having people come to us rather than just deal with this exclusively because they feel they would get a good outcome for their business.

Damir Gunja

Maybe just a small follow-on, our procurement savings typically I guess to state the obvious and near-term benefit on some of these deals?

John Macdonald

Yes, in most cases because of the size of what we procure there is usually a good improvement and most of the folks that are buying these medium-sized businesses have a reasonable deal already. So, it’s not as if it’s a massive improvement, but it is certainly something we bring to the table. The lower cost base and established relationships. We also try to get some administrative cost reductions, you know things like cost of fleet, cost of mobile technology. Again, we have large contracts for these types of things, which can often translate into benefits after acquisition.

Damir Gunja

Okay. I’ll leave it there. Thanks. Thanks for the answers.

John Macdonald

Thanks, Damir.

Operator

Your next question comes from the line of David Newman of Desjardins. Your line is open.

David Newman

Welcome Brian and Sofia, and good morning John.

John Macdonald

Good morning.

David Newman

Kind of a macro question on the pricing environment, Lennox has talked about price increases of 4% to 6% and many of the OEMs are citing raw material costs and aluminum, steel, et cetera, and passing that through to customers, what are you doing in Service Experts? Do you just pass that on? And I noticed in Ontario, you're taking the price increases on the rent, on the water heaters and then on the HVAC sort of 1.8%. So, are you passing this on? Or how should we be thinking about pricing and margins for 2018?

John Macdonald

The proposed tariffs on steel and aluminum, let me we just talked a little bit about that. First of all, the actual details are not really known to us, but a couple of things I can say to you, firstly, it doesn't really affect our Canadian procurement. In case of water heaters, a lot of them are built domestically, and so that wouldn't affect it. In the case of HVAC market in the United States it’s unclear whether semi-finished goods, so things like evaporator coils that are made from aluminum would be affected by these tariffs versus just - so it’s unclear what will happen there.

We also feel that because we can source from manufacturers and they can source from their domestic U.S. operations or Mexico or overseas, there’s an ability to have a lower cost in place. The vast majority of our contracts are fixed price for 2018, and so there isn’t a price adder for commodity charges changing. And so, generally we feel pretty well, pretty well fixed in this area as far as, if there are commodity prices pass through, we probably wouldn't feel the effect.

At high level, we think are aluminum is 0.5% of 4% of product cost with an average around two. And steel could be a little higher as much as 4% to 6% of the cost of the equipment. So, even a 25% tariff in the case of steel doesn't add a ton to the manufacturers cost, particularly if they’ve hedged their procurement and if the full 25% doesn't show up or if they can import semi-finished goods from other countries that have steel content in it. So, all-in-all I could see the manufacturers using this as an inflection point to try and increase prices, but I think we are fairly well insulated for 2018 at least.

David Newman

Okay very good. That's good. And then maybe more of a housekeeping one, but you had about $35 million in corporate costs in 2017 on the corporate line, and you're undertaking a myriad of initiatives on ERP, CRM, connected home, et cetera. How should we be thinking about this sort of corporate cost run rate for 2018? Should we be thinking about $40 million or so? Or maybe Brian, do you have any sense on guidance there?

Brian Schmitt

Corporate costs include some of the notable items that we had in our script, certainly that would include our share compensation plans, which as we noted sort of elevated the expenditure in 2017. Some of those corporate costs included our ERP systems at - we spent proportionately more in Q4. So, of the $2.3 million that we spent, 1 million in Q4, primarily to get the IFRS 9 implementation and put in the place. So, in all material respects, I think 2018 will be in-line with 2017, obviously some of these notable items could change dramatically. Clearly in the shorter term with the general market conditions and lower stock prices for ourselves, which was in-line with the market. We would expect the partial reversal for sure on the share compensation results for Q1.

David Newman

Okay. And just on [indiscernible] that $2.2 million for employee practices, workers comp and auto insurance costs, what - is that a onetime catch up? Or how should we be looking at that as you head into 2018 again? Is that - should that be more spread out? Was that an accrual catch-up? Or was there actually higher incidence?

Brian Schmitt

Bit of both. In 2016 there was actually, part of it’s in our accrual. So, in 2016 there was actually accrual reversal, a partial reversal, and in 2017 when we did the accrual with the actuaries again, it increased. So, there is going to be volatility in that. We also had a bunch of claims that settled in Q4, and many of those related to pre-acquisition is. So, you have a bit of increasing claims, but we also have some timing with respect to accrual and sort of what’s being submitted at the time or is outstanding at that time.

David Newman

Okay. So as far as run rate going forward, would it be half that we should think about higher by about $1 million in the quarter or something like that?

Brian Schmitt

Your guess is as good as ours. Insurance is one of those games where one you might get damage and next year it might be very positive. So, just wanted to point it out due to the volatility.

David Newman

Very good. And last one John, for me, just on the EBITDA for the deals in Texas and Florida, I assume you paid kind of the 5 to 7 range? What should we be thinking about for EBITDA?

John Macdonald

That’s consistent with what we’re - our perspective on the value of these types of businesses.

David Newman

Excellent. Thank you very much.

John Macdonald

Thank you.

Operator

Your next question comes from the line of George Doumet of Scotiabank. Your line is open.

George Doumet

Hi, good morning guys.

John Macdonald

Good morning, George.

George Doumet

Just a quick follow up on inflation at Service Experts, I think we had a $1 million increase in wages. Just wondering, if the cadence of that and kind of your expectations of that in general over 2018 and are we thinking about maybe taking some price there over the year?

John Macdonald

Couple of things, I would say. First is, we like to be seen as an employer of choice. So, labor market is, you know for the types of folks we use is pretty - is fairly volatile and so we have been moving up a little bit more than inflation on wages generally in order to try and reduce turnover and get the best possible people to join us. We will probably be in-line with that on the top on prize. Obviously, we’re hoping to get expansion organically. We’re really pleased with the 15% growth that we had in constant currency terms in top line revenue. It was a little bit affected by, we had a bit more business come through retail channels.

So, some of the contracts with the retailers, which typically have a lower margin. And so that did have small impact in the fourth quarter. So, the fourth quarter was sort of a mediocre sort of average whether. It was poor for most of the quarter in terms of demand and then it spiked up at the end, but quite late in the quarter. So, made it difficult to capture. So, all this to say, in that type of environment we tend to be a bit more aggressive in pricing then we would normally be. So, all this to say, I’d hope for - we’re always pushing for increasing margins and I’d hope to try and achieve that in 2018.

George Doumet

Okay. And just one last one if I may, I know it’s not the first time I asked you this John, but obviously some pretty soft GTA housing data out in 2018. Just - are we seeing any of that translate into our business maybe perhaps like an uptick in the level of inventory that when sold home move with our units, or kind of anything you can comment on that end.

John Macdonald

So, we see the CMHC reports that show long-term that there will be a lower housing formation in single family in Ontario. Multi-family, like multi-res actually seems to be quite robust, but the single-family formation looks like it will fall away somewhat over the next few years. We haven't seen anything that would lead us to like our new home construction sales seem quite robust. We had a really good year in 2017 and 2018 - we are looking quite good as well.

What I would say is that, one of the reasons we acquired the Service Experts business is it allowed us to pivot in the case of the Ontario market declining we have the other 96% of North America to get rental business from. So, it really provides a great opportunity for us to, so we can't deploy our capital Ontario and Ontario will be able to deploy in other parts of the continent. So, we don't feel pressure it’s really where we deploy our capital.

George Doumet

Okay. That’s really helpful. Thank you.

Operator

Your next question comes from the line of Elizabeth Johnston of Laurentian Bank Securities. Your line is open.

Elizabeth Johnston

Good morning.

John Macdonald

Good morning.

Elizabeth Johnston

If we can go back briefly to Service Experts, you already went through some of the kind of change that you made in terms of the role of rentals in the U.S., you mentioned some streamlined items and particularly the credit matrix, but can you just talk a little bit more about that? Is there anything else you can provide in terms of changes you may have made on the sales side, whether it's the salespeople specifically or potentially their compensation model? Any change that you had to make there?

John Macdonald

So, a couple of things. Training really looms large in this. We’ve often find - you really got to build confidence in the sales team that they, the execution will be good and this is the right long-term proposition for the customer. So that’s been a focus of our changes. We have - we did change the compensation up until recently sales reps were not getting in the U.S. not getting anything additional for rental - in part because we didn’t want to overly promote that proposition. We recently have stepped it up a little bit with the view of, you know now we're getting confidence in our processes and the things are going well.

So, we have begun to compensate them more for rental then a sale. We’re obviously conscious of that’s a balance you want to maintain. You don't want to over promote the product or cause sales close ratios to drop or to have salespeople proposing this product in appropriate situations, but we believe it’s the right move to try and increase the success rate associated with rentals.

Elizabeth Johnston

And in this model compensation you're describing with the other changes, is it more consistent now with what you have in Ontario? Or is it really very different?

John Macdonald

It is more consistent with what we have in Ontario Home Services business.

Elizabeth Johnston

Okay. And in terms of the rollout of additional service areas, are you targeting - can you provide any additional detail from which market you're targeting and if it aligns with trends related to seasonality, so would you be potentially looking at rolling out a new market and that would be strong for - air conditioners for example in the summer? Or anything like that?

John Macdonald

Yes. So, it’s great question. We do an analysis or we have done an analysis associated with a variety of factors. So, some of the things we look at are, can we build density in a specific area? Can we get a market that’s large enough? So, something - obviously there’s lots of larger markets that we don't even participate in and I mentioned not participating in the Houston or Tampa markets up until very recently. So those types of areas are important to us.

We prefer a market, which just has two strong seasons or one very strong season. So, where we don't have too strong seasons it’s tuff to - or one really strong one, it is tough to justify just the proportionate demand. We want to have one that’s not sort of isolated. So, we can build more of a strength in the local management team. So, all of those things factor into it. We have a list of, sort of top markets we are targeting now, and we’re continuing to pursue opportunities in those preferentially in those areas.

Elizabeth Johnston

And would you expect more of the launches, the roll out rather to be in the first half of this year?

John Macdonald

I think it would be weighted more towards the second half of the year. One of the challenges we face in our business, particularly in the - as you move further south is the second quarter is our big quarter, and so we’re always trying to avoid introducing programs and products in the busiest seasons because we don't want to take away from effectiveness when you needed the most.

Elizabeth Johnston

Okay, understood. Thanks. And if you can talk a little bit about connected home, can you just walk us through where you're at right now in terms of the pilot project? And where you see yourselves halfway through this year in terms of the rollout to consumers?

Brian Schmitt

Sure. It was quite interesting because when we rolled out the 100-household trial we learned quite a bit. We were surprised by how many furnaces we found because we rolled it out in the fall. How many furnaces we found that unbeknownst to the homeowner weren't operating optimally. So, the diagnostic software identified a number of them and we were able to determine that there were problems with those furnaces. So, furnace wasn't functioning properly, but the homeowner didn’t know that.

So, presumably through time they would have failed or in a very, very cold weather situation wouldn't have been able to keep up with demand. We also had the same sort of experience more than we expected in leak detection where we detected a number of leaks. In some cases, it was things like the foundation was leaking as opposed to the plumbing was leaking. So, it was interesting because we are probably more than we thought seeing that type of issue come up.

So, to my mind it demonstrates the value proposition. But we’re also getting experience on dealing with the service aspects of the product and making sure that we can support a larger base. The commercial offering that I mentioned in the first half of 2018, we were really looking to really ensure that the value proposition resonates, in other words we’re going to get that type of uptick that we’re hoping. We’ve done market research, obviously, but there is a big difference between market research and actual market experience, and I think we’re still learning, what makes the most sense.

To another dynamic, I would bring forward is that, everybody has their own application or their own story in this regard. So, some people want to ensure that their kids came home from school and that they are in the house and 50 of their nearest friends aren't in the house with them. Other people, when a package comes the front door - want to be able to open the garage and have that parcel be put in the garage, and the garage door closed. So, they can secure that parcel. There is, I have given you two examples, but there is probably half a dozen more that you can conceive of.

Everybody has their own used cases for this type of service. And so, it’s really us learning what those are and working with our customers to come up with the optimal solution. It’s not as canned, it’s not a cookie-cutter as some of our market is, but we do think it drives deep customer engagement because they’re looking at their thermostat, they're looking at their energy consumption, if they have that feature enabled. So, that’s what we are trying to do, it is build that long-term relationship with the consumer and not make it a once every few years I call you. We want an interaction literally on weekly basis, so we are their go-to-provider. So, obviously that’s to be proven, but that’s what we’re really pushing towards.

Elizabeth Johnston

So, we should expect some kind of expansion beyond the pilot program still in the first half of this year than to at least a selected group of customers?

John Macdonald

Yes, in the 100-household trial that we launched, we did have some customers in that sort of

- real customers, nonemployees that sort of thing. The 1,000 - we are adding virtually all customers, there some employees that want to take part as well. We had to limit the numbers for the 100-home trial because we didn’t want to outstrip our resources. But at the end of that we will be able to, hopefully really isolate, are we getting the right uptick and we will probably end up tuning our offers, and you know both pricing and maybe even the service proposition as we learn from our trial. The important things for me is we want to be ahead of the wave. In other words, we want to be in the market experimenting and understanding what learnings are because we think this market will move quickly and we want to be the leader in this space.

Elizabeth Johnston

Okay, great. Those are my questions. Thank you.

John Macdonald

Thank you, Elizabeth.

Operator

[Operator Instructions] Our next question comes from line of David Newman of Desjardins. Your line is open.

David Newman

Just a quick follow up guys, it looks like you had a great year on top in terms of initiatives et cetera, but you have this one niggling concern with the Competition Bureau. I see you sold four SE branches in the quarter, was that related to that? And maybe just update us on the process itself, what you're doing on your end, are you hiring consultants? And have you looked at the buyout procedures? And any sort of thoughts on, going forward with that?

John Macdonald

Yes, so I’ll deal with the sale of the branches in the Toronto area, Toronto and Ottawa areas to be specific, that was more because we had an agreement with the franchisees that we - when we acquired the Ontario home and commercial services businesses from Direct Energy, they had pre-existing agreements, franchisee agreements with folks and ultimately, we tried to find creative solutions, but ultimately the solutions that we came on that seemed to work the best was to sell those locations because of the overlap.

David Newman

Okay. Can you get value for them? Or do you think you've got pretty decent value from them to measure what [indiscernible]?

John Macdonald

Yes, we were pleased with the value we got, and you know, also equally important to us, we were sad to see them go, but we also want them to go to good hands and we think we have

accomplished that, and the buyer that acquired them is an existing local operator that has other businesses and so he’s got, you know a long experience in the business so it’s something that factored into our thinking is having that.

So, it wasn’t related to the competition Bureau that disposal. I mean I suppose it helps in terms of having less, but EPO is really driven by the franchise agreement. In respective the competition Bureau, they’ve requested some information from us. We’re in the process of putting that together for them, you know we are obviously continue to feel that we are nondominant provider, but we are willing to entertain discussion with them about resolution of that being said, we would provide an update once we know more after the information has been provided and they’ve an opportunity to digest it.

David Newman

Besides the Bright Light or the line of market share, is it some of - somewhat to do with the buyout procedures and practices that are being followed to? Because you did mention in the press release and you mentioned in the past that was actually approved by them at one point, and has it something to do with that? What could be the ramifications of it?

John Macdonald

Well it - there is a number of factors that you know would be points of discussion between us and the Bureau, but that is indeed one of them, and your right that the current contract - was discussed extensively with the Bureau in 2010 and alternatively they were comfortable with it at that time and as were we. In terms of ramifications, I’d hesitate to speculate on that. The only thing I would point to is that Reliance has a consent order that it filed as public record, you know presumably people - the bureau would be trying to get us to something like that. Right now, we have - we don't have that as a burden so to speak, but I think it’s pretty premature to speculate on what the outcome might be.

David Newman

Okay. Very good. Congratulations and look forward to a great 2018.

Brian Schmitt

Thank you, very much.

Operator

There are no further questions in the queue at this time. I turn the call back over to John Macdonald for closing remarks.

John Macdonald

Thank you. We continue to grow our business and deliver exceptional returns to shareholders. In this morning, we announced dividend increase of 4% with effect for dividends paid in April of 2018. The dividend increase reflects the confidence we have in our business. All of our business segments achieve their strategic priorities in 2017, and our goal for 2018 is to stay on course and to continue to grow both revenue and EBITDA. I like to thank all of our shareholders for your confidence, and our team for all of their hard work and we look forward to seeing you at our Annual General Meeting at the TMX Broadcast Centre on April 26 at 10 a.m. Thank you very much.

Operator

This concludes today's conference call and webinar. You may now disconnect.