Spruce Power Holding Corporation
Q1 2024 Earnings Call Transcript

Published: 15 May 2024

[Operator:]

Thank you for standing by. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to the Spruce Power First Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the conference over to Bronson Fleig, Head of Investor Relations. Bronson, you may begin your conference.

[Bronson Fleig:]

Good afternoon, and welcome to Spruce Power's conference call to discuss results for the first quarter of 2024. With me today are Chris Hayes, our Chief Executive Officer; and Sarah Wells, our Chief Financial Officer. Our call this afternoon will include statements that speak to the company's expectations, outlook and predictions of the future, which are considered forward-looking statements. These forward-looking statements are subject to risks and uncertainties, many of which are beyond our control, which may cause our actual results to differ materially from those expressed in or implied by these statements. We are not obliged to revise or update any forward-looking statements, except as may be required by law. Please refer to our disclosures regarding risk factors and forward-looking statements in today's earnings release and other SEC filings. A copy of our press release has been posted to the Investor Relations page of our website for reference. The non-GAAP financial measures discussed in this call are reconciled to the U.S. GAAP equivalent and can be found in the press release that we issued this afternoon. With that, I will turn the call over to our CEO. Chris, go ahead.

[Chris Hayes:]

Thank you, Bronson, and good afternoon to everyone. This is my first earnings call here at Spruce Power as Chief Executive Officer. And I'd like to say how excited I am to step into a new leadership position with the company. I have familiarity with Spruce, having served as an Independent Director since Spruce was acquired 18 months ago, in the reverse merger with XL Fleet. More importantly, I have been active in the renewable energy industry and project development for many years, and I'm excited to apply that expertise to our vision for Spruce. As I stepped into the CEO role, I believe Spruce is in its strongest position in its corporate history. There are three main reasons. First, our core solar business is inflecting toward positive cash generation as the benefits of 2023 M&A activity and greater scale are realized. Next, Spruce has a strong balance sheet and abundant liquidity. This positions us well to take advantage of the massive investment cycle occurring upstream in residential solar markets. Last, legacy XL Fleet overhang items are diminishing, allowing us to look forward to focusing on growing positive cash flows. My core near-term focus will center on driving Spruce to pursue capital light organic growth opportunities that can leverage our outstanding owner operator platform. This includes acquisitions of operating residential solar portfolios with attractive return profiles and a sharpened focus on extracting value from Spruce's best-in-class solar servicing technology platform. My goal is to leverage my experience in productizing several once nascent technology services businesses in renewable energy markets into businesses that today are sustainable generators of recurring revenues. I believe that Spruce's servicing technology platform is primed for optimization that can drive organic growth opportunities. I'm happy that the Board of Directors has entrusted me to unlock this value as an additional source of growth for Spruce. Spruce Servicing. So let's start there with Spruce's servicing technology platform. I want to discuss our servicing platform in more detail because it's really our secret sauce. The platform foundationally enables us to do many things well, including our ability to be the preeminent consolidator of residential solar assets through M&A. Spruce's servicing technology platform was years in the making and today stands as a mature, fully integrated business. It was crafted to provide exceptional customer service while operating residential solar assets, the most efficient manner, thus maximizing asset level cash flows. Our full wrap servicing suite includes infrastructure such as

[Sarah Wells:]

Thanks, Chris. I'll first address some housekeeping items that impact our financial reporting, specifically, an update on wrapping up legal proceedings related to legacy XL Fleet Corp. and its operations. As previously communicated, during the quarter, Spruce made a payment in the amount of $15 million to settle the Southern District of New York securities class action lawsuits surrounding the 2020 merger of XL Fleet. This matter as well as the previously disclosed SEC inquiry have been settled with legacy XL Fleet legal items diminishing, this allows us to look forward to growing the cash flow from our core business. Moving to first quarter financial results. First quarter revenue was $18.3 million compared to $18.1 million in the prior year period. The year-over-year increase is largely due to incremental revenues from the Tredegar acquisition completed in August 2023. First quarter core OpEx which we define as SG&A and portfolio O&M was $16.6 million in total as compared to $17.6 million for the prior year period. Breaking this out, first quarter portfolio O&M expense increased to $3.1 million from $1.9 million in the prior year period. The increase is largely due to timing considerations in which $2 million of accrued expenses at year-end were settled during the first quarter. SG&A expenses decreased to $13.5 million in the first quarter from $15.7 million in the first quarter of 2023. The prior year period saw impact due to legal fees tied to legacy XL Fleet lawsuit and restructuring charges. Finally, first generated a GAAP net loss attributable to stockholders of $2.5 million in the first quarter. As we discussed in our last call, management considers operating EBITDA as a key measure in evaluating Spruce's operating performance. We define operating EBITDA as adjusted EBITDA plus net proceeds from investment in SEMTH master lease, interest earned on cash investments and proceeds from buyouts and prepayments as these items represent material cash inflows from our ongoing business and strategy. Adjusted EBITDA was $3.8 million for the first quarter. Adding in the net proceeds from the Spruce Power 4 portfolio of $3.9 million brings the total to $7.7 million. Next, adding $1.6 million of interest earned on cash investments and $1.4 million of proceeds from buyouts and prepayments, operating EBITDA totaled approximately $10.7 million for the first quarter. Next, I'll address our capital and liquidity position. As of March 31, 2024, we had cash and cash equivalents of $150 million. This compares to $173 million of cash and cash equivalents as of December 31, 2023. The net change in cash is primarily attributable to XL wind down activities namely the previously mentioned $15 million net payment to settle the SDNY shareholder lawsuit. The total principal balance of long-term debt was $640 million as of March 31, 2024, with a blended interest rate of 5.8%, including the impact of hedge arrangements. As a reminder, all of Spruce's debt is non-recourse to the company and consists of project level debt that is supported by our solar lease and PPA portfolio and is non-recourse to the company. At quarter end, 97% of our debt profile was hedged with mark-to-market on our swaps of a positive $34 million. Spruce is nearest maturing facility, the SP4 facility is due August 2025. We are actively engaged with the Linden community to refinance the facility. Last, moving to full year financial guidance. which can be found on Slide 20 of our Investor Relations deck. We are reaffirming our guidance, which includes an outlook for adjusted free cash flow of breakeven to moderately positive. As a reminder, this outlook excludes impact from legacy XL Fleet items, namely legal expenses. This concludes our prepared remarks. Operator, please open the line for questions.

[Operator:]

Thank you. [Operator Instructions] Your first question comes from the line of Peter Gastreich with Water Tower Research. Please go ahead.

[Peter Gastreich:]

Yes. Good afternoon and congratulations on your results, and thank you very much for the presentation. Just a couple of questions here for starters. First of all, I've noticed in your Q1 results that you did not repurchase any shares in the first-three months. So I just would like to understand if there's any reason why the company was not proactive there? And the second question is just about your servicing platform, and you talked a bit about that in your presentation. I wonder if you could dig a bit deeper there to help us understand those competitive advantages. And in particular, if this could help to drive your revenues outside the PPAs and SLAs going forward? Thank you very much.

[Chris Hayes:]

Great. Thanks for the question. So on the share buyback question, our focus is to build a long-term durable business. And we think to be a dominant operator of solar assets over the long term and to reach greater scale, we are seeing compelling opportunities at compelling prices and to execute, we need capital. And we think that is a great element of this business, and it's driving M&A flow from an origination perspective into the business. As to your second question on the servicing platform, we've been building this over seven years, and we're doing it while managing our existing portfolio. And this is a full wrap service completely integrated technology services start to finish, and we are not aware of a more comprehensive offering than ours and having the ability to leverage our fixed cost makes this a very interesting business opportunity for us. And that's one of the reasons we're pursuing it in a capital light manner.

[Peter Gastreich:]

Thank you very much.

[Operator:]

Your next question comes from the line of Tristan Richardson with Scotiabank. Please go ahead.

[Tristan Richardson:]

Hey. Good afternoon, guys. Maybe just one for me. You talk about M&A and maybe just kind of curious, in your new role, do you see the pace of M&A changing going forward within your core TPO asset. And then curious maybe how the bid-ask spread looks today as you review deals?

[Chris Hayes:]

Well, it's a great question. You almost answered the first with the second. So we are, for sure, seeing a widening spread between bid and ask. And you look across this space and for whatever reason, there is all sorts of chaos and opportunity. And so as it relates to us being a pure play, right, I mean, we are one of the largest third-party owners. We think that is a great business model. We are a great buyer at the right price, we will be disciplined. I would love to announce a deal tomorrow, but we are going to be super disciplined and wait for the right opportunity in IRRs to come our way and then execute aggressively.

[Tristan Richardson:]

I appreciate it. Thanks, Chris and congrats on your new role.

[Chris Hayes:]

Thank you. Really appreciate it.

[Operator:]

And that concludes our question-and-answer session. I will now turn the call back over to Bronson Fleig for closing remarks.

[Bronson Fleig:]

Thanks, operator, and thank you to everyone who joined our call today. If you have any follow-up questions, please reach out to me separately in our Investor Relations team. This concludes our call. Have a great day.

[Operator:]

This concludes our call. Thank you for your participation, and have a great day.