Spruce Power Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 10, 2023

There are 5 speakers on the call.

Operator

Afternoon, and welcome to the Spruce Power Second Quarter 2023 Conference Call. As a reminder, today's call is being recorded. All participants are in a listen only mode. For opening remarks and introductions, I would like to turn the call over to Bronson Flagg, Head of Investor Relations for Spruce Power. Mr.

Operator

Flagg, please go ahead.

Speaker 1

Thank you. Good afternoon, and welcome to Spruce Power's conference call to discuss results for Q2 of 2023. With me today are Christian Fong, 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 or predictions of the future, which are considered forward looking statements within the meaning of federal securities laws. 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.

Speaker 1

Similarly, out of our control is the timing of some of the processes we will discuss today, which could impact the expectation or related statements you will hear shortly. 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, our annual report on Form 10 ks And our other Securities and Exchange Commission filings. A copy of our press release has been posted to the Investor Relations page of our website for reference. The U.

Speaker 1

S. 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'll turn the call over to our CEO, Christian Phong.

Speaker 1

Christian, go ahead.

Speaker 2

Thank you, Bronson, and thanks to everyone for joining us on the call Today, as we discuss our strong second quarter results and progress in 2023's initiatives that extend our core business of distributed generation solar power. For those new to Spruce, we have 3 primary businesses. First, we create and sell clean electricity through our growing solar power portfolio. 2nd, we deliver power services to our customers with servicing creating strong margins and business development opportunities. 3rd, we profit through participating in the related environmental commodities markets.

Speaker 2

This year, we kept our differentiated customer strategy. Rather than carry a high cost sales force, we add customers through the acquisition of existing power portfolios with long term purchase contracts and leases. It's simpler, it's flexible and it's allowed us to have arguably the lowest customer acquisition costs in the industry. We demonstrated the strength of that growth strategy by Expanding our portfolio of home solar assets and contracts by over 40% with the acquisition of the Spruce Power 4 portfolio. With the transitional tasks associated with our merger with XL Fleet mostly complete and the 1st full quarter of Spruce Power 4 in the books, What we're showing today are the results of a clean quarter.

Speaker 2

I want to break my comments into 3 focus areas. The first will be operations And then Growth Initiatives and then Capital Markets. Okay, operations. Of course, Spruce is not a financing We actually make and sell a product and provide services to our customers. We are an operating company and so our goal is operational excellence.

Speaker 2

Execution of customer billing, collections and support, asset management, system repairs and the complex technology that links all of that together for Smooth customer experience. The ultimate measure of operating excellence then is customer satisfaction. Our 2nd quarter Customer satisfaction score was 70%, right in line with our 70% target and up substantially year on year from 53% in the Q2 of 2022. This is our 3rd consecutive quarter of meeting our target, helped by several $1,000,000 of technology and personnel investments we made in customer operations. In Q2, we rolled out customized changes to our billing system, serviced by SMS text And a completely retooled customer home transfer process to bring that to a 5 star level.

Speaker 2

We continue to strive for an even better experience for our customers. Our customer focus groups have given us valuable feedback this year. They aren't asking for the latest and greatest technology, no AI Driven computer systems are a flashy mobile app with streaming data. On one hand, we're going to keep building a solid IT backbone, Developing technology and asset management tools at the pace of about $2,000,000 per year. Yet on the other hand, AI technology is incapable of empathy.

Speaker 2

Our customers place the highest value on direct interaction with our well trained U. S.-based service team, real people and real interactions. So we are also pleased to announce a new pilot program to place our own field services teams in our highest asset density areas, Starting in the Northeast, field services will lock in our own labor force, which will both get faster O and M to our customers and create more human interactions. That person to person service is key to building Spruce as a trusted brand to deliver additional products such as home batteries. Bruce is a clean energy producer.

Speaker 2

So let's hit the production numbers. Our Q2 performance ratio, which is the production compared to the theoretical maximum of the All solar panels was 95%. We achieved this despite impact from the Canadian wildfire smoke through the quarter as well as negative weather in California in June. Our weather adjusted performance ratio was a strong 103%. At 103%, Spruce's asset management team is Strongly outperforming the projections we get from top independent engineering firms who review our portfolios at the time of their acquisition.

Speaker 2

The strong physical performance of our portfolio In that, we expect an annual range of $35,000,000 to $45,000,000 ultimately leading to between $5,000,000 $15,000,000 of net cash flow after That's the exact same level as we discussed last quarter, that is, we are affirming that financial framework. Long term, our primary operations driver is our professional team. Last quarter, we announced Sarah Wells as CFO also Spruce's long time Chief Legal Sir, John Norling assumed the responsibilities of Board Secretary and sole leadership of the legal department. More importantly, we are deepening our management team with Strong hires of experienced directors and team leads, new leadership and bench strength in FP and A, M and A, collections, treasury and litigation gives us our best cross team collaboration ever. Related to team growth this All the executive team will move into our new Denver headquarters and our Houston servicing group will expand its office footprint by about a third.

Speaker 2

It's not a hiring binge, just Spruces staff shifting back to in office work for better productivity and career development. Now let me shift gears to talk about our growth and capital strategy. As I mentioned before, Spruce has a growth strategy that gives us what is Arguably the lowest customer acquisition cost in the industry. Not only do our costs continue to stay low, Spruce's M and A team finds deals that generate impressively high cash on cash returns for years into the future. So instead of talking about one time sales margins, We think in terms of multiples on our investments and our stability grows with a portfolio that has over 12 years average contract life remaining.

Speaker 2

Spruce's growth isn't the sugar rush of one time sales. We think investors are better served by the muscle building nutrition of recurring high margin cash flows. In Q2, we focused on integrating the portfolio we bought at the end of Q1, the Spruce Power IV portfolio, Which increased our rooftop solar assets and contracts by about 44%. In this initial quarter under our ownership, We actually saw the portfolio's customer payments perform about 5% better than our initial expectations due to the underlying PPA contracts, Many of which are indexed to the rapidly escalating retail electricity rates in California. We're now looking at our Next Growth acquisition.

Speaker 2

In July, we signed a letter of intent to acquire a portfolio of approximately 2,400 home solar systems, all with long term customer contracts from a publicly traded counterparty. We hope to close in the next few weeks, though of course can't comment on specifics and nothing is certain until the ink is dry. However, we can say that the transaction is underwritten to meet our mid teen levered return target, and we're excited that it bring us past 75,000 home solar assets and contracts. We expect to fund the equity portion of the acquisition with cash on hand and non recourse senior debt. It's worth noting that after the banking scare this spring, the debt markets have bounced back fast and we're seeing an abundance of debt offered to us at attractive terms.

Speaker 2

One last point on growth. We have 2 areas of organic growth that are picking up pace. The first involves actually increasing the cash Hello from our home power systems we already own by more efficient participation in the environmental commodities markets or by acronym ECM. Our ECM business is finding more efficient ways to mint and sell renewable energy credits from our assets around the nation. In Q2, we saw a strong uptick in the value and cash flows leading to quarter on quarter growth of close to 10% on a GAAP basis.

Speaker 2

The second area of organic growth is increased natural demand for retrofit battery installation, really for the first time. Spruce has offered that product for a couple of years, But the economics of a battery lease or sale was a tough sell. What we're seeing is that adjacent to California's new net metering rules, there is real demand For home battery storage from our California customers. We aren't internally budgeting material battery lease revenue for the rest of 2023 yet as we finish the Business infrastructure to begin taking advantage of it. We're working on partnerships to more quickly address that demand And also see our new field services initiative as an important long term way to meet the demand.

Speaker 2

So just to wrap up on organic growth, even as we execute on our Strategy of acquiring portfolios of assets. We're excited to see and meet opportunity for increasing revenue per customer. On capital, we have plenty of cash and even in the current debt markets with higher interest rates, we believe we are fully funded To achieve our near term goal of reaching a customer contract portfolio of 90,000 by the end of 2024. One final point before handing the call to Sarah. Every quarter, we have any number of choices of how to deploy the capital to which you've entrusted us.

Speaker 2

Naturally, an acquisition is the top choice if the portfolio is solid and the price will yield attractive cash returns. With the Board authorization of our share In our view, that stock is priced far below its fair value and is a great buy for investors, Including ourselves, we bought about 1,900,000 shares in Q2 and just keep going. Through August 4, we've repurchased about 3 point I want to bring you to a conversation we have every day here. Why is our stock sitting at a buck? Based on institutional feedback from the buy side, conversations with research analysts and investment banks, they cite the overhang of having Not a function of operations, but of the unique way we became a public company.

Speaker 2

Maybe it's just math, but fortunately, it's within our control. So last week, our Board authorized a plan to consider a 1 for 8 reverse stock split. This week, we filed the preliminary proxy with the And in the next couple of weeks, we plan to call a shareholder meeting in early October for approval. If shareholders approve, A reverse split is intended to get us well above the dollar level necessary to maintain our NYSE listing. With that, I'll hand the call over to Sarah to walk through the financials.

Speaker 3

Thanks, Christian. Before getting to quarterly results, I'd like to quickly address a few housekeeping items that impacted our financial reporting. Consistent with the prior two quarters, Legacy XL Businesses, Drivetrain and XLGrid are presented as discontinued operations within our financials. These legacy businesses were divested in the Q1 of 2023 and we do not expect any material expenses going forward related to discontinued operations. Our continuing operating results still reflect certain expenses related to XL Fleet, Notably, legal expenses related to the previously disclosed SEC inquiry and related shareholder lawsuits.

Speaker 3

We are working to close these legal matters, but do expect to incur future associated costs. As we stated in our 10 We believe the allegations in both the SEC inquiry and shareholder suits are without merit, and the company is vigorously defending itself. At this time, we cannot estimate the timing of resolution of these matters nor the impact of any related liabilities. Also, as Christian mentioned, the Spruce Power 4 portfolio acquisition closed in late March and second quarter results fully reflect this investment. However, please recall that GAAP accounting treatment for the Spruce Power IV portfolio acquisition places the majority of cash flow streams From the portfolio in the cash flows from investing section of our consolidated statement of cash flows.

Speaker 3

This item is denoted as Proceeds from investment related to SEMTH Master Lease Agreement. However, note that operating cost And interest expense tied to our senior debt supporting Spruce Power IV are reflected in the statement of operations. Moving to Q2 financial results. 2nd quarter revenue, which consisted exclusively of SPRuSE related revenue, was $22,800,000 Compared to $18,100,000 in the Q1 of 2023, revenue was higher sequentially due to more sent hours across our fleet, That's just normal seasonality as well as quarter on quarter improvement in our portfolio's weather adjusted performance ratio and the resulting impact to our PPA contracts. 2nd quarter OpEx, which includes both SG and A and portfolio O and M and excludes depreciation was $19,000,000 compared to $17,600,000 in the 1st quarter.

Speaker 3

Portfolio O and M expense increased to $3,000,000 in the 2nd quarter from $1,900,000 in the 1st quarter. The sequential increase is tied to accelerated activity in our meter upgrade campaign as we replace legacy meters across our fleet to maintain the most efficient fleet possible. SG and A expense increased modestly to $16,000,000 in the 2nd quarter from $15,700,000 in the 1st quarter. Integration costs tied to our public merger process tailed off and largely concluded in the quarter. However, SG and A continues to be impacted Certain legacy XL suite corporate items, namely legal expenses associated with the previously disclosed SEC inquiry and shareholder lawsuits.

Speaker 3

Collectively, integration costs and legal expenses totaled close to $5,000,000 for the quarter. Excluding these expenses, core Spruce OpEx We'll be closer to $11,000,000 in the quarter, which we believe offers a clearer view of OpEx for a standalone Spruce Power. On a GAAP basis, net income from continuing operations was $1,800,000 compared to a $15,000,000 loss in the Q1 of 2023. Adjusted EBITDA totaled $9,500,000 adding in the cash Flow from the Spruce Power 4 portfolio, which is called in our financials proceeds from investment in lease agreements, brings the total to $13,800,000 This compares favorably to $5,700,000 in the Q1. In measuring the value of our long term solar assets and contracts, We've provided metrics on growth and net portfolio values, which represent the present value of the remaining net cash flows Our rooftop systems and contracts discounted at 6%.

Speaker 3

As of June 30, gross portfolio value was $929,000,000 After adjusting for non recourse debt and cash balances, our net portfolio value was $477,000,000 Next, I'll speak to our capital and liquidity position. As of June 30, 2023, we had cash, cash equivalents and restricted cash of approximately $192,000,000 This compares to $205,000,000 at the end of the Q1 of 2023. The sequential decrease is primarily attributable to the seasonal timing of semiannual mezzanine debt payment and portfolio expenses. The total principal balance of long term debt was $644,000,000 as of June 30, 2023. As a reminder, all of our debt is non recourse project level debt that is supported by our long term contracts.

Speaker 3

In the current rate back We think our debt is attractively priced with a weighted average cost of approximately 5.6%. And because our variable rate Senior debt facilities are mostly hedged by interest rate swaps. Our overall debt is 97% fixed rate with the swap tenure extending well beyond the life of the loans. Bruce's earliest debt maturity is in August 2025. To date, we have primarily utilized non recourse project level debt to fund acquisitions.

Speaker 3

For context, these facilities have typically been structured with tenures of around 7 years, though the underlying contracts and associated payment streams We'll extend well beyond the tenure of the debt facilities. This structure is typical in project finance debt markets. Given the nature of our long lived cash We are confident that we will be able to refinance our debt facilities upon maturity. We have strong relationships with current and prospective lenders In renewable power debt markets, where we see the appetite for residential solar as robust. Moving next to capital allocation.

Speaker 3

As Christian mentioned, every quarter, we have any number of choices of how to deploy the capital. In addition to debt repayment, during the Q2, we purchased approximately 1 point $6,000,000 of our own stock through our share repurchase program. We believe this opportunistic investment represents tremendous value. Our repurchase program does not require us to purchase a specific amount of shares. However, we believe that the market value of our shares is well below the intrinsic value of the company.

Speaker 3

Every share purchase is accretive to our per share metrics. So we have stayed active. And from the start of the program through the end of last week, We have cumulatively repurchased approximately 3,600,000 shares for $3,200,000 I will now hand the call over to the operator for Q and A. Operator, please open the line for questions.

Operator

Thank you. Your first question comes from Joseph Osha with Guggenheim. Your line is open. Hello.

Speaker 3

This is actually Hillary on for Joe. And I just first wanted to touch on your comments during your prepared remarks on extracting the extra value of the existing systems. I'm just wondering if you could share any color in terms of how we Should I expect to see you extract any incremental value there?

Speaker 2

Sure. Hi, Hillary. Thanks for joining. When we think about, and I'll call it organic, the organic growth portion of being the owner and operator. So There's 2 ways to do it, of course.

Speaker 2

1 is just to increase revenues. And when we think about increasing revenues from the current portfolio, we have 2 mechanisms to do that. 1 of them It's pretty active right now and that is the emergence of additional SREC or environmental commodities markets really around the country. And that is through our Environmental Commodities Markets Group, ECM, and that's what we touched on as being Quarter on quarter 10% growth that those markets are increasing. It's added revenue directly from the portfolios that we already own.

Speaker 2

Then looking on into the future, you can upsell to customers, added sales and that was the battery that we're starting to see quite a bit of demand out of And so the additional sales to the customers would then increase and that would be thinking of it not as increasing The revenue from like a system, but from thinking of it as a portfolio of customers, and underlying homeowners that would purchase additional products. So that's the first way. The second way, of course, is simply to manage our costs and to make sure that on an ongoing basis, The per unit costs that we have on servicing or owning the systems continues to go down and that just increases the Net margins, our intent is to do both. We're seeing the increase in revenue. And as we increase the size of the serviced Portfolio, that's where just scale starts to kick in and we see decreased per unit costs as well.

Speaker 3

Great. And then just Just wondering if you could provide an update on kind of the competitive landscape and any color you could share on the pipeline of potential deals?

Speaker 2

Yes. As usual, we don't speak to any specific line items on our pipeline report that we would have internally. We do mention this non binding LOI letter of intent that we signed Clearly, by even mentioning on the call, we're signaling a level of confidence that we're nearing a closing in the next couple of weeks. Anything can happen. Deals are deals.

Speaker 2

But that would get us to around 75,000 home solar assets and contracts. We started at around $51,000 or so at the beginning of the year. So when we talked about going from let me just do the shorthand here, 50,000 to 90,000,000 and we're thinking we need to add about 20,000 per year. With the large Spruce Power 4 acquisition, largest in our history, record size, that got us Like a full year's growth from 50 to 70 plus. And so as we look at in Q3, the potential of adding About 2,400 systems and landing at 25,000, we're well on pace To get to 90 by the end of the year, I'm sure some folks will say, well, why don't you just go ahead and raise your target And have the team go by even more, probably premature for that, though we are just confident because we do have bilateral negotiations going.

Speaker 2

We've got bids out currently. And so rather than talk about any of them 1 by 1, let me just affirm that we are still confident that we Have enough runway in time and seeing enough deals to still feel good about that 90,000 target.

Speaker 3

Great. Thank you so

Speaker 2

much for that. Hillary, you kind of asked the second question. It will be like competitive landscape. For For the life of me, I can't figure out why other folks aren't buying because the returns that we're getting are so strong for our shareholders. And we're really happy with that.

Speaker 2

We're just always kind of looking over our shoulders saying, who else might jump in? The reality is that buying things is hard. M and A is not an easy business. Integrating is not an easy business. We've spent the last 5 years developing that called muscle memory How to bid being a low execution risk counterparty, people know that we're good for a handshake That when we say we're going to do something, we actually have the means and the expertise to do it.

Speaker 2

We believe that makes us the preferred buyer in M and A, Especially in residential solar. And so we continue to see things. Yes, there are other folks that are competing. And yet, our scale, our expertise, and I'd like to think our reputation as counterparties enable us To be the preferred buyer for a lot of potential sellers.

Speaker 3

Great. Thank you.

Operator

Your next question comes from Jordan Levy with Truist Securities. Your line is open.

Speaker 4

Hi, all. It's Henry on for Jordan here. Really great to see the inflection of positive earnings this past quarter. I know you mentioned the recent merger, but any other additional color you can provide on some of the core drivers behind that?

Speaker 3

Yes, sure. We saw really strong production from our assets in the quarter. As Christian mentioned in the prepared remarks, Our weather adjusted performance ratio was above 100%. And so our assets are operating really well. That, paired with normal seasonality, drove the top line.

Speaker 3

On the cost side, we still have some legacy Excel costs coming through, mainly legal costs, but All of the integration costs that we saw with the merger, like the people costs, although that has mostly rolled off. And so we are really excited about this And we continue to build on our improvements on the bottom line.

Speaker 4

Awesome. Thanks for that. And then I know you noted you've been active kind of in the share repurchase program in the quarter and in going forward. And so I'd love to get any color on the kind of the balance you see with acquisition opportunities, obviously the buybacks and anything else you see Going through the end of this year and then into 2024. Thank you.

Speaker 3

Sure. Going forward, the repurchase It's always going to be part of our tool chest to drive shareholder value. I don't see that going away. We do view the program as twofold. First, it has to offer value.

Speaker 3

And if that's happening, then secondly, we also benefit with Screws acting as an incremental buyer of our own stock. So I see the repurchase program and the reverse slate kind of all working towards that same goal.

Speaker 2

And Henry, just to put numbers on that, it was a $50,000,000 program. So we've still got $46,000,000 some of dry powder in the in that program.

Speaker 4

Thank you.

Operator

There are no further questions at this time. I will now turn the call back over to Bronson Fleg for closing remarks.

Speaker 1

Thank you, operator, and thank you again for joining us today and for your continued support.

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Key Takeaways

  • Spruce reported Q2 revenue of $22.8 M (up from $18.1 M in Q1), delivered a GAAP net income of $1.8 M (vs. a $15 M Q1 loss), and achieved $9.5 M of adjusted EBITDA.
  • Customer satisfaction reached 70%, up from 53% a year ago and meeting target for the third straight quarter after over $1 M in tech and personnel investments and a pilot field services program.
  • The Spruce Power 4 acquisition boosted solar assets by 44%, and a signed LOI for ~2,400 more systems is expected to push the portfolio past 75,000 contracts en route to 90,000 by end-2024.
  • Organic growth saw ~10% QoQ revenue gains from environmental commodities markets, alongside rising customer demand for home battery storage under new California net-metering rules.
  • With $192 M in cash, $644 M of non-recourse debt at a 5.6% weighted average fixed rate, Spruce repurchased 1.9 M shares ($1.6 M) in Q2 and has authorized a 1-for-8 reverse stock split to maintain its NYSE listing.
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Earnings Conference Call
Spruce Power Q2 2023
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