Spruce Power Q2 2025 Earnings Call Transcript

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Provided by Quartr
August 11, 2025

Key Takeaways

  • Positive Sentiment: Spruce delivered a 48% year-over-year revenue increase and 71% growth in operating EBITDA in Q2, driven by the NJR acquisition and SREC revenue, while cutting core operating expenses by 19% and holding over $90 million in cash to pursue positive free cash flow.
  • Negative Sentiment: Federal policy changes, including the phase-out of the 25D residential solar tax credit and safe harbor provisions, are expected to pressure cash loan deals and force some legacy installers to exit or pivot their business models.
  • Positive Sentiment: Through opportunistic M&A and a multi-year SREC forward sale, Spruce’s acquisition of 9,800 systems from NJR Resources is set to generate approximately $10 million in hedged SREC revenue through 2029, highlighting its expertise in maximizing asset value.
  • Positive Sentiment: Spruce is expanding its programmatic off-take strategy and Spruce Pro servicing platform, securing partnerships with homebuilders and third-party owners to drive steady monthly system acquisitions, double-digit IRRs, and capital-light service revenue.
  • Positive Sentiment: The company reduced O&M expenses by 52% year-over-year and implemented technology and CRM enhancements to drive sustainable cost containment and margin expansion into 2025.
AI Generated. May Contain Errors.
Earnings Conference Call
Spruce Power Q2 2025
00:00 / 00:00

There are 4 speakers on the call.

Operator

Hello and thank you for standing by. My name is John, and I will be your conference operator today. At this time, I would like to welcome everyone to the Spruce Power Second Quarter twenty twenty five Earnings Results 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

I would now like to turn the conference over to Scott Kozak, Director of Investor Relations. Please go ahead.

Speaker 1

Thank you, operator. Good afternoon, everyone, and welcome to Spruce Power's second quarter twenty twenty five earnings conference call. Joining me today are Chris Hayes, Spruce's Chief Executive Officer and Tom Cimino, the company's Interim Chief Financial Officer. Before we begin, I would like to remind you that we will comment on our financial performance using both GAAP and non GAAP financial measures. Important information about these non GAAP financial measures, including reconciliations to the comparable GAAP measures, is included in our earnings release for the second quarter twenty twenty five, which has been posted on the Investor Relations page of our corporate website.

Speaker 1

Our discussion will also include forward looking statements. These statements are not statements of historical fact, reflect our current expectations and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed. There can be no assurance actual performance will not differ materially from any future expectations or results expressed or implied by these forward looking statements. We undertake no obligation to publicly revise or update any forward looking statement, except as required by applicable law. Please refer to our earnings release and our other SEC filings for further discussion on Spruce Flowers, Risk Factors and other important information regarding our forward looking statements.

Speaker 1

All comments made during today's call are subject to that Safe Harbor statement. With that, I will turn it over to Chris.

Speaker 2

Thanks, Scott, and hello, everyone. Spruce reported a 48% increase in revenue compared to the year earlier period and a 71% year over year growth in operating EBITDA. These results primarily reflect the positive impact of the November 2024 acquisition of approximately 9,800 rooftop assets from NJR Resources as well as a sizable growth in solar renewable energy credits or SREC revenue. In addition, our core operating expenses, which includes both SG and A and operations and maintenance or O and M was $17,200,000 in the aggregate, down 19% from the year earlier period. Our balance sheet remains robust with over $90,000,000 in cash, the majority of which is unrestricted.

Speaker 2

We intend to couple continued growth and scale in our portfolio of solar installations with prudent cost containment to achieve our goal of generating positive free cash flow. I want to be absolutely clear that there is no objective more important to Spruce Power than quickly reaching positive free cash flow. All our strategic actions support this objective. I will now provide our perspective on the residential solar market. Challenges in the sector, particularly among certain installers are well known.

Speaker 2

In addition, policy changes in Washington DC are eliminating some residential solar energy tax credits such as 25D. Further, safe harbor specific to residential solar is being phased out. These changes are expected to negatively impact cash loan deals and larger projects in the residential solar space. We believe that some legacy players will not be able to adapt to this changing environment. Already some are failing while others are attempting to transition to a different business model.

Speaker 2

Fortunately, Spruce's resilient business model is fundamentally different. We are not dependent on aggressive new customer acquisition strategies, externally financed working capital or continuous growth in new installations. In contrast to those installers, our fixed costs are low, so we are not hostage to the origination treadmill. Moreover, our business does not depend on IRA tax credits. Spruce's model is designed to maximize the value of existing solar assets through operational efficiencies, maintenance and superior asset management.

Speaker 2

Today, we own and manage a portfolio of approximately 85,000 home solar assets and customer contracts. We also provide servicing to roughly 60,000 residential solar systems owned by others. As a third party owner, we buy systems after installation and after any tax credit has been monetized. The installations we acquire generate stable long term contracted cash flows. Simply put, our differentiated model does not bear the same risks as the installer model.

Speaker 2

Now let me also context on our market penetration and capacity for growth independent of market conditions. According to a May 2025 analysis from the Solar Energy Industries Association or SEIA, there are over 5,000,000 solar installations in The United States. 97% of these U. S. Solar installations are on residential rooftops.

Speaker 2

If residential solar installation growth slows meaningfully due to recent policy changes, Spruce still has significant room to grow. Again, we currently have approximately 145,000 systems in contract. Our portfolio size is small relative to the addressable market, so we can continue to grow whether new installations are growing or not. Some of the old guard industry players become dependent on tax credits and we're not ready for this inflection point. We believe more legacy players may fade or exit.

Speaker 2

However, others are already operating with revamped business models and should be able to originate new solar installations without the crutch of government subsidies. To be clear, we do not believe the solar industry has peaked. The need for power, especially distributed generation is significant and increasing in The U. S. Individuals and companies are experiencing higher costs as rates rise, driven by load growth from data centers, the electrification of everything and reshoring industrials.

Speaker 2

This underscores the need for an all of the above energy strategy. Spiking power demand, rising utility rates and a narrowing pathway for viability producing new solar benefits to third party owner or PPO channel. We expect an accelerated shift toward leases and PPA anchored by the 48E tax credit through 2027. With some of the regulatory uncertainty behind us, Spruce is executing a multi pronged strategy of scaling through the acquisitions of installed systems, programmatic off take partnerships and expanding our Spruce Pro servicing business. The first revenue I will discuss is opportunistic M and A.

Speaker 2

This is when Spruce acquires portfolios of installed systems, then sells additional services and leverages strategic partnerships to drive profitable expansion. We can command a higher return on opportunistic acquisitions because of our M and A expertise, cash discipline, relationship with underwriters and low servicing costs. These advantages coupled with a limited pool of potential buyers enable us to be selective and only pursue agreements that meet our deal terms and density objectives. The NJR acquisition that I mentioned earlier is the most recent example of this type of transaction. We anticipate that this market will continue to reward Spruce as some installers seek to recycle their capital or recognize that they do not have the expertise or resources to efficiently manage all their systems.

Speaker 2

Indeed, we have seen the bid ask spread narrow considerably over the course of 2025. In addition, some interesting assets could become distressed as the industry transitions following the elimination of certain IRA tax credits. This could lead to a renewed urgency to complete new TPO deals before the end of 2027. I also want to spotlight how we maximize value from the installations we acquire. The NJR acquisition for example included a large number of New Jersey SRECs.

Speaker 2

Last month Spruce entered into a multi year agreement to sell the company's production of SRECs in the state of New Jersey to an energy sector conglomerate. The transaction is expected to generate approximately $10,000,000 in fully hedged revenue for Spruce through 2029. This partnership is part of a broader Spruce initiative to leverage the company's platform and experience to capture the benefits of our SRECs as a low cost, low risk opportunity to generate capital light, high margin cash flow for Spruce. This transaction is another example of Spruce's expertise in maximizing value from our assets while hedging against future price movements. The forward contract provides an important ongoing hedge revenue stream and reinforces the dependability of Spruce's cash flow generation.

Speaker 2

We anticipate similar opportunities may be available to Spruce in certain Northeastern states as well as California, which we are actively pursuing. The second revenue driver is programmatic off take. As we work to secure our first programmatic agreement, our expectation for this strategy as a de risked revenue driver are high. With programmatic off take, we seek to acquire or potentially service newly installed systems on an ongoing basis as our partners complete them. These partners may include homebuilders as well as legacy solar originators that are pivoting into TPO ownership, leases and PPAs.

Speaker 2

We anticipate that our future programmatic partners will take the risk of getting systems through construction to operational status and only then will we buy or begin servicing these nearly new installations at an agreed upon price. Partnership opportunities slowed as many paused for decisions on the budget bill and IRA tax credits. We are seeing reengagement now. Some originators have been revamping their business model in recent years to eliminate dependency on IRA tax credits and are poised to deliver growth without any government support. We are far advanced in the partnering process with those pioneers.

Speaker 2

We believe that when we deploy our programmatic off take initiative, Spruce will ultimately generate double digit IRRs as we acquire a steady number of new installations each month. The third and final primary revenue driver is Spruce Pro, our third party solar servicing platform. For this channel, we leverage the company's decade plus experience in management of our wholly owned residential solar assets to offer a suite of services that can be tailored for third party owners of distributed generation assets. Customers are leveraging our experience to maximize productivity, uptime and efficiency in areas such as financial asset management, billing and collections, asset operations, accounting services, homeowner support, IT support and implementation and SREC management. We have a defined and growing pipeline of potential Spruce Pro partners that include traditional residential solar players, large owners of solar installations, developers, private equity and numerous mid size and local companies that own residential and commercial and industrial or C and I solar sites.

Speaker 2

Potential scope ranges from full wrap servicing to contact center piecemeal O and M, billing and collections, harvesting SRECs or some combination. While each of these third party agreements will be customized, we are confident the company can source other partnerships like ADT. This is a durable competitive advantage for Spruce and we are benefiting from investments the company has already made. We are delivering capital light growth through this initiative and are proud to have generated new wins including a full scope deal servicing a group of systems in San Diego that could potentially also include SREC monetization. Importantly for us and our shareholders, Spruce Pro is unlevered and there will be no debt financing associated with these agreements.

Speaker 2

We are talking with asset owners and investors that are concerned about the viability of their current servicing provider, prefer to stick to their core business and recycle capital rather than attempt to service installations or recently made a purchase and do not yet have a service partner. In addition to becoming a primary service provider, we also see opportunities to provide backup servicing to entities who may not yet need our primary capabilities. Spruce's strong reputation is opening these doors for us. This is a difficult business and most do not have the platform or experience to service successfully. Our pipeline drove our decision to hire two new professionals to support the Spruce Pro initiative.

Speaker 2

While our investments in revenue drivers have weighed on near term profitability, we are confident that they will position us to cost effectively participate in the largest and fastest growing parts of the residential solar market. Further, I want to reiterate that the revenue and cash flows generated by the installations we already own and service remain highly predictable regardless of conditions in the residential solar sector or changes to the IRA, we are confident in our ability to identify, structure and execute new agreements that add shareholder value. Next, let's discuss our second key initiative, cost containment. We are proud to report that our cash burn during the period was reduced and if not for one time non operational expenses, we would have generated cash from operations in the second quarter. Down the P and L, we drove a sequential decrease in operations and maintenance expenses for the second consecutive quarter, reversing earlier than expected O and M that began in 2024.

Speaker 2

We experienced the benefits of prior investments in technology and revamped our strategy to more efficiently evaluate and route service calls from customers. We right sized inventory on our trucks and appropriately managed to the customer contracts in the most cost effective manner possible, both resulting in lower third party contractor spend. The platform and methodical operational strategy we implemented in late February has produced thoughtful system issues management and is gaining ground. We believe these improvements are sustainable and will continue to levelize O and M expense as 2025 progresses. In addition, we are making operational enhancements through strategic sourcing and procurement and better vendor management.

Speaker 2

The company also successfully launched a new CRM platform at the June. This tool will help us better manage customer interactions and drive efficiency across the organization. We believe these collective efforts will support cost containment and margin expansion in 2025, transitioning the business toward a more sustainable model with the financial resources and liquidity needed to support our longer term strategy. Before concluding, I want to highlight that we do not need to refinance any of the non recourse debt associated with our portfolios in 2025. With that said, the lines of communication are open with creditors and we continue to receive feedback that we can roll over our first debt maturity associated with our SP1 portfolio due in April 26 on like for like terms if we choose to proceed.

Speaker 2

In addition, we have identified additional potential credit options that could be more favorable, although those other options and our ability to roll financing on a like for like basis will be subject to ongoing developments in the financing markets. Finally, taking a step back, we are motivated by the progress we are making as we execute our strategy and realize our vision. The revenue opportunities we are pursuing and the operational improvements we are driving will support efforts to deliver a combination of performance flexibility and value that is compelling to customers, partners, creditors, investors and other key stakeholders. With more certainty in the market, participants can plan accordingly. Customers and partners recognize that Spruce is a mature industry leader and low cost service provider with an established and highly functioning portfolio management and service offering.

Speaker 2

We are well positioned as the market sees more players seeking solar TPO deals both PPA and lease as individuals and companies take energy matters into their own hands in the face of escalating rates. Next, I'll pass it over to Tom Cimino who will provide a detailed review of our financial results and outlook. This will be Tom's first quarter serving as CFO at Spruce. As a brief background, Tom was appointed Interim Chief Financial Officer of Spruce in June. He has significant experience as a senior level finance executive.

Speaker 2

Tom's past experiences include serving as Chief Financial Officer, Advantage Drilling International and AEI Services and Executive Vice President of Finance and Administration for Infragen. Earlier in his career, he worked at the U. S. Securities and Exchange Commission, was a Director in PricewaterCoopers Global Capital Markets Group. He began in public accounting with KPMG.

Speaker 2

At Spruce, Tom will focus on maximizing operational efficiencies and executing growth strategies. Tom, can you please provide our financial summary?

Speaker 3

Thanks, Chris, and good afternoon, everyone. I'm excited to join Spruce's team and leverage my experience to support the creation of shareholder value in these changing times for the market. I will start by providing detail on the company's second quarter financial results and the progress we are making to strengthen our financial position and enhance our operational efficiencies. Second quarter revenue was $33,200,000 up from $23,800,000 in the first quarter and $22,500,000 in the prior year period. The 48% increase from the prior year period is primarily attributable to the NJR acquisition and resulting SREC related revenue.

Speaker 3

Second quarter core operating expense, which we define as SG and A and O and M, was $17,200,000 in total. This is down from $18,000,000 in the previous quarter and $21,200,000 in the prior year period. We are very pleased but not content with this 19% decline in our core operating expense in the prior year period. Breaking this out, our O and M expense was $2,100,000 in the second quarter, down from $3,900,000 in the first quarter and $4,500,000 in the prior year period. This represents an annual decline of 52%.

Speaker 3

SG and A expense was $15,100,000 in the second quarter, down from $16,700,000 in the prior year period. However, when considering a one time severance cost recorded in the prior year period, SG and A expense increased marginally due to the quarter driven by higher legal and other professional fees. Considering the above, Group generated a net loss attributable to stockholders of $3,000,000 compared to a loss of $15,300,000 in the previous quarter and a loss of $8,600,000 in the prior year period. Moving to operating EBITDA. As a reminder, we consider operating EBITDA a key metric in evaluating the company's financial performance, which is defined as adjusted EBITDA plus select items that represent material cash inflows from ongoing operations.

Speaker 3

Operating EBITDA was $24,600,000 up from $12,300,000 in the first quarter and 71% higher compared to the $14,400,000 in the prior year period. Again, this change was primarily attributable to the NJR acquisition, resulting in both higher lease revenues and higher SREC revenues. Our lower O and M expenses and an increase in PVIs, performance based incentives, also contributed to the EBITDA increase for the quarter. Turning now to cash flow. We're also pleased with the improvement in our cash flows from operations.

Speaker 3

For the six month period, we used $11,500,000 in cash from operations. However, when adjusting for the recurring proceeds from our SEMTA master lease agreement and proceeds from the sale of Solar Energy Systems as well as a one time legal settlement paid in the quarter, we generated $6,300,000 in adjusted cash flow from operations during the period and $9,500,000 for the quarter. While recognizing these improvements, as Chris alluded to earlier, we are not content with the results and continue to focus on efficient operations and making cash generation a primary goal. Moving further down the cash flow statement, we generated cash of $8,300,000 from investing activities, including the above mentioned proceeds from the master lease and solar system sales. Regarding our financing activities, we used $15,500,000 of cash, including $13,600,000 for debt repayment and $1,800,000 in share buybacks.

Speaker 3

Finally, let me close with a brief discussion on our capital and liquidity positions. At the end of the second quarter, total cash inclusive of unrestricted and restricted cash was approximately $90,500,000 $53,500,000 of which was unrestricted versus 61,900,000.0 at the end of the first quarter. Total debt principal was $717,100,000 at the end of the second quarter with a blended interest rate of 6.1%, including the impact of hedge instruments. Our debt principal is down from $730,600,000 at the 2024. All debt consists of project finance loans that are non recourse to the company itself.

Speaker 3

Non recourse debt is incurred at the project level. At the end of the quarter, all of our floating rate debt instruments were materially hedged with interest rate swaps extending into the early 2030s. The hedge arrangement had a net mark to market value of approximately $13,900,000 at the end of the quarter. With that, thank you very much. And now let me turn the call back over to the operator.

Operator

Thank you. And it seems that we have no further questions. That is all the time that we have today. I will now turn it back over to Frise for concluding remarks.

Speaker 2

Thank you, operator. Our focus in 2025 is on containing costs and scaling our platform, thereby driving improved financial performance and progressing toward generating positive cash flow. I hope you can join me as Bruce participates in the Canaccord Genuity Annual Growth Conference tomorrow. This will include a webcast central presentation that listeners can access via our website. The presentation is scheduled for eleven a.

Speaker 2

M. Eastern Time. In addition, on September '10, Spruce management will host meetings with analysts and investors at RE plus Renewable Energy Trade Show in Las Vegas. To schedule a meeting, please contact Spruce's Investor Relations team. Thank you for your interest in Spruce Power and for participating in our call today.

Speaker 2

We look forward to updating you again next quarter.

Operator

This concludes today's conference. You may now disconnect your lines. Thank you.

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