Spruce Energy Holding Company (SPRU) Q1 2024 Earnings Name Transcript

Spruce Energy Holding Company (NYSE:SPRU) Q1 2024 Earnings Convention Name Could 15, 2024 4:30 PM ET

Firm Members

Bronson Fleig – Head, IR
Chris Hayes – CEO
Sarah Wells – CFO

Convention Name Members

Peter Gastreich – Water Tower Analysis
Tristan Richardson – Scotiabank

Operator

Thanks for standing by. My identify is Krista, and I might be your convention operator at the moment. Presently, I wish to welcome everybody to the Spruce Energy First Quarter 2024 Earnings Convention Name. All strains have been positioned on mute to stop any background noise. After the audio system’ remarks, there might be a question-and-answer session. [Operator Instructions] Thanks.

I might now like to show the convention over to Bronson Fleig, Head of Investor Relations. Bronson, you might start your convention.

Bronson Fleig

Good afternoon, and welcome to Spruce Energy’s convention name to debate outcomes for the primary quarter of 2024. With me at the moment are Chris Hayes, our Chief Government Officer; and Sarah Wells, our Chief Monetary Officer.

Our name this afternoon will embody statements that talk to the corporate’s expectations, outlook and predictions of the long run, that are thought-about forward-looking statements. These forward-looking statements are topic to dangers and uncertainties, a lot of that are past our management, which can trigger our precise outcomes to vary materially from these expressed in or implied by these statements.

We’re not obliged to revise or replace any forward-looking statements, besides as could also be required by legislation. Please seek advice from our disclosures concerning threat elements and forward-looking statements in at the moment’s earnings launch and different SEC filings. A replica of our press launch has been posted to the Investor Relations web page of our web site for reference.

The non-GAAP monetary measures mentioned on this name are reconciled to the U.S. GAAP equal and will be discovered within the press launch that we issued this afternoon.

With that, I’ll flip the decision over to our CEO. Chris, go forward.

Chris Hayes

Thanks, Bronson, and good afternoon to everybody. That is my first earnings name right here at Spruce Energy as Chief Government Officer. And I might wish to say how excited I am to step into a brand new management place with the corporate. I’ve familiarity with Spruce, having served as an Impartial Director since Spruce was acquired 18 months in the past, within the reverse merger with XL Fleet.

Extra importantly, I’ve been lively within the renewable vitality business and mission improvement for a few years, and I am excited to use that experience to our imaginative and prescient for Spruce. As I stepped into the CEO function, I consider Spruce is in its strongest place in its company historical past.

There are three predominant causes. First, our core photo voltaic enterprise is inflecting towards optimistic money technology as the advantages of 2023 M&A exercise and better scale are realized. Subsequent, Spruce has a robust stability sheet and considerable liquidity. This positions us nicely to make the most of the huge funding cycle occurring upstream in residential photo voltaic markets.

Final, legacy XL Fleet overhang gadgets are diminishing, permitting us to sit up for specializing in rising optimistic money flows. My core near-term focus will heart on driving Spruce to pursue capital gentle natural progress alternatives that may leverage our excellent proprietor operator platform. This contains acquisitions of working residential photo voltaic portfolios with enticing return profiles and a sharpened give attention to extracting worth from Spruce’s best-in-class photo voltaic servicing expertise platform.

My objective is to leverage my expertise in productizing a number of as soon as nascent expertise providers companies in renewable vitality markets into companies that at the moment are sustainable turbines of recurring revenues. I consider that Spruce’s servicing expertise platform is primed for optimization that may drive natural progress alternatives. I am pleased that the Board of Administrators has entrusted me to unlock this worth as a further supply of progress for Spruce.

Spruce Servicing. So let’s begin there with Spruce’s servicing expertise platform. I wish to talk about our servicing platform in additional element as a result of it is actually our secret sauce. The platform foundationally permits us to do many issues nicely, together with our means to be the preeminent consolidator of residential photo voltaic belongings via M&A. Spruce’s servicing expertise platform was years within the making and at the moment stands as a mature, totally built-in enterprise.

It was crafted to offer distinctive customer support whereas working residential photo voltaic belongings, essentially the most environment friendly method, thus maximizing asset degree money flows. Our full wrap servicing suite contains infrastructure equivalent to: one, a billing and collections platform that allows seamless buyer fee providers and in-house assortment actions. Two, asset operations wherein we remotely monitor our rooftops and acquire knowledge and analytics, enabling us to effectively deploy area providers groups to service rooftops and maintain revenues flowing.

Third, home-owner assist, a set of each on-line instruments and U.S.-based name heart brokers that deal with something from primary buyer questions via system transfers in a house sale course of; and lastly, a set of many different invaluable providers. This contains instruments that use in-depth monetary evaluation and reporting to generate detailed data for asset homeowners and third-party funds on a mess of monetary and operational reporting metrics.

All these techniques are expertise pushed, such that we are able to present built-in seamless providers to each Spruce and third-party belongings. The important thing takeaway to our information, Spruce has essentially the most complete service providing out there. It is laborious to duplicate, and we consider we have created a moat in servicing. Spruce providers its personal photo voltaic belongings in addition to some third-party portfolios, a couple of of which at the moment are wholly-owned via acquisitions.

Our platform has matured such that we are able to scale this servicing enterprise to way more of these third-party portfolios. To that finish, it is essential to underscore our addressable market. Upstream to Spruce, we’re amid a large funding wave in residential photo voltaic and distributed vitality belongings in line with main business knowledge sources, round 25 gigawatts of rooftop photo voltaic has been put in in the USA over the previous 5 years.

Regardless of the transitory challenges of coverage and value of capital volatility, the magnitude of residential photo voltaic installations forward is compelling. We consider tons of of hundreds of house owners will undertake photo voltaic via the tip of the last decade.

Much more encouraging for Spruce lease and PPA paper is turning into a most well-liked shopper financing selection as this tape will be extra effectively priced by originators for the buyer on this greater for longer fee surroundings. This strong outlook creates super alternative for Spruce to supply our best-in-class servicing platform to third-party originators and, after all, the chance to consolidate photo voltaic portfolios over time via M&A.

Why? The reply is straightforward. One, from a servicing perspective, we provide what we consider is essentially the most complete and value aggressive service providing out there. Our platform is purpose-built in years within the making. So we’re competitively advantaged Spruce’s competing piecemeal choices from photo voltaic originators and financing events making an attempt to retain servicing in-house alongside asset possession.

Two, from an M&A perspective, historical past tells us that the majority originators are good at what they do, putting in photo voltaic, proudly owning photo voltaic belongings for 20 to 30 years will not be their forte. These photo voltaic installers and their companions who look to personal portfolios for both financial or tax causes ultimately look to recycle capital for future improvement actions. In truth, this has been the catalyst for a lot of of Spruce’s 13 acquisitions up to now. So on this first few weeks as CEO, I’ve begun to current our group with a objective of making worth from this super platform we now have.

Earlier this yr, we introduced the launch of Spruce Professional, which is our B2B model for advertising our servicing expertise platform to different residential photo voltaic belongings in addition to business photo voltaic and different vitality companies. Early indications of curiosity for Spruce Professional and our servicing expertise providing are thrilling and outpacing our preliminary expectations. I sit up for offering extra updates over the following few quarters.

Subsequent, I wish to talk about our philosophy and present place round capital allocation. At quarter finish, Spruce had $150 million of money. This conflict chest permits us to pursue progress by buying residential photo voltaic portfolio and thru increasing our service and buyer base. Our philosophy round capital allocation has been constant since Spruce went public by way of the merger, and we now have no intention of adjusting it. Our funding choices are pushed by a rigorous evaluation of alternative price.

At any time limit, we are going to direct our capital to the very best return various. We retain most flexibility in deciding what to do as a result of we will not predict prematurely which various might be most attractively priced as market situations are all the time altering. Sometimes, like this quarter, we could do nothing as a result of our options are equal, and we anticipate future situations to create higher alternatives.

I watched the Berkshire Annual Assembly final weekend and famous that Buffett was elevating money for a similar motive. He desires to be prepared for extra compelling alternatives he anticipate within the coming quarters. We don’t rush to deploy capital almost to spice up our progress metrics briefly.

As a substitute, we emphasize persistence, making certain that after we make strikes, they’re each strategic and prudent. This disciplined method means we’re not swayed by short-term market developments or pressures to shut offers quickly. We are able to watch for our fats pitch. The best alternative that aligns completely with our long-term aims and firm values.

The good factor is, Spruce has paved the best way. If we don’t develop our portfolio with an acquisition, we’re nonetheless amassing significant and enticing money circulation from the belongings we personal. That is in stark distinction to the broader residential photo voltaic business, who should develop or die. So we now have no motive to drive any capital allocation strikes. We are able to and might be affected person and act solely when the doubtless return is compelling and is the very best among the many options we now have.

Earlier than handing it off to Sarah, some closing ideas. I’ve loved many conversations with the funding neighborhood over the previous a number of weeks, a lot of you little question listening at the moment. I will echo the emotions that I’ve expressed in that Spruce stays head down executing on our core methods. I am excited to leverage my expertise to reinforce the worth of our underlying servicing enterprise, which provides us a sturdy aggressive benefit over the long term. Spruce may be very nicely positioned, and I sit up for constructing on the momentum our group has created up to now.

Sarah?

Sarah Wells

Thanks, Chris. I will first tackle some housekeeping gadgets that influence our monetary reporting, particularly, an replace on wrapping up authorized proceedings associated to legacy XL Fleet Corp. and its operations. As beforehand communicated, in the course of the quarter, Spruce made a fee within the quantity of $15 million to settle the Southern District of New York securities class motion lawsuits surrounding the 2020 merger of XL Fleet. This matter in addition to the beforehand disclosed SEC inquiry have been settled with legacy XL Fleet authorized gadgets diminishing, this enables us to sit up for rising the money circulation from our core enterprise.

Transferring to first quarter monetary outcomes. First quarter income was $18.3 million in comparison with $18.1 million within the prior yr interval. The year-over-year improve is basically on account of incremental revenues from the Tredegar acquisition accomplished in August 2023. First quarter core OpEx which we outline as SG&A and portfolio O&M was $16.6 million in whole as in comparison with $17.6 million for the prior yr interval.

Breaking this out, first quarter portfolio O&M expense elevated to $3.1 million from $1.9 million within the prior yr interval. The rise is basically on account of timing concerns wherein $2 million of accrued bills at year-end had been settled in the course of the first quarter.

SG&A bills decreased to $13.5 million within the first quarter from $15.7 million within the first quarter of 2023. The prior yr interval noticed influence on account of authorized charges tied to legacy XL Fleet lawsuit and restructuring prices. Lastly, first generated a GAAP internet loss attributable to stockholders of $2.5 million within the first quarter.

As we mentioned in our final name, administration considers working EBITDA as a key measure in evaluating Spruce’s working efficiency. We outline working EBITDA as adjusted EBITDA plus internet proceeds from funding in SEMTH grasp lease, curiosity earned on money investments and proceeds from buyouts and prepayments as this stuff characterize materials money inflows from our ongoing enterprise and technique.

Adjusted EBITDA was $3.8 million for the primary quarter. Including within the internet proceeds from the Spruce Energy 4 portfolio of $3.9 million brings the overall to $7.7 million. Subsequent, including $1.6 million of curiosity earned on money investments and $1.4 million of proceeds from buyouts and prepayments, working EBITDA totaled roughly $10.7 million for the primary quarter.

Subsequent, I will tackle our capital and liquidity place. As of March 31, 2024, we had money and money equivalents of $150 million. This compares to $173 million of money and money equivalents as of December 31, 2023. The online change in money is primarily attributable to XL wind down actions specifically the beforehand talked about $15 million internet fee to settle the SDNY shareholder lawsuit.

The whole principal stability of long-term debt was $640 million as of March 31, 2024, with a blended rate of interest of 5.8%, together with the influence of hedge preparations. As a reminder, all of Spruce’s debt is non-recourse to the corporate and consists of mission degree debt that’s supported by our photo voltaic lease and PPA portfolio and is non-recourse to the corporate.

At quarter finish, 97% of our debt profile was hedged with mark-to-market on our swaps of a optimistic $34 million. Spruce is nearest maturing facility, the SP4 facility is due August 2025. We’re actively engaged with the Linden neighborhood to refinance the ability.

Final, transferring to full yr monetary steering. which will be discovered on Slide 20 of our Investor Relations deck. We’re reaffirming our steering, which incorporates an outlook for adjusted free money circulation of breakeven to reasonably optimistic. As a reminder, this outlook excludes influence from legacy XL Fleet gadgets, specifically authorized bills.

This concludes our ready remarks. Operator, please open the road for questions.

Query-and-Reply Session

Operator

Thanks. [Operator Instructions] Your first query comes from the road of Peter Gastreich with Water Tower Analysis. Please go forward.

Peter Gastreich

Sure. Good afternoon and congratulations in your outcomes, and thanks very a lot for the presentation. Simply a few questions right here for starters. To begin with, I’ve seen in your Q1 outcomes that you simply didn’t repurchase any shares within the first-three months. So I simply wish to perceive if there’s any motive why the corporate was not proactive there?

And the second query is nearly your servicing platform, and also you talked a bit about that in your presentation. I ponder if you happen to may dig a bit deeper there to assist us perceive these aggressive benefits. And particularly, if this might assist to drive your revenues outdoors the PPAs and SLAs going ahead? Thanks very a lot.

Chris Hayes

Nice. Thanks for the query. So on the share buyback query, our focus is to construct a long-term sturdy enterprise. And we predict to be a dominant operator of photo voltaic belongings over the long run and to succeed in better scale, we’re seeing compelling alternatives at compelling costs and to execute, we want capital. And we predict that may be a nice ingredient of this enterprise, and it is driving M&A circulation from an origination perspective into the enterprise.

As to your second query on the servicing platform, we have been constructing this over seven years, and we’re doing it whereas managing our current portfolio. And it is a full wrap service fully built-in expertise providers begin to end, and we’re not conscious of a extra complete providing than ours and being able to leverage our fastened price makes this a really attention-grabbing enterprise alternative for us. And that is one of many causes we’re pursuing it in a capital gentle method.

Peter Gastreich

Thanks very a lot.

Operator

Your subsequent query comes from the road of Tristan Richardson with Scotiabank. Please go forward.

Tristan Richardson

Hey. Good afternoon, guys. Perhaps only one for me. You speak about M&A and perhaps simply sort of curious, in your new function, do you see the tempo of M&A altering going ahead inside your core TPO asset. After which curious perhaps how the bid-ask unfold appears to be like at the moment as you overview offers?

Chris Hayes

Nicely, it is an important query. You virtually answered the primary with the second. So we’re, for certain, seeing a widening unfold between bid and ask. And also you look throughout this house and for no matter motive, there’s all kinds of chaos and alternative. And in order it pertains to us being a pure play, proper, I imply, we’re one of many largest third-party homeowners. We expect that may be a nice enterprise mannequin. We’re an important purchaser on the proper value, we might be disciplined. I might like to announce a deal tomorrow, however we’re going to be tremendous disciplined and watch for the correct alternative in IRRs to return our manner after which execute aggressively.

Tristan Richardson

I recognize it. Thanks, Chris and congrats in your new function.

Chris Hayes

Thanks. Actually recognize it.

Operator

And that concludes our question-and-answer session. I’ll now flip the decision again over to Bronson Fleig for closing remarks.

Bronson Fleig

Thanks, operator, and thanks to everybody who joined our name at the moment. When you’ve got any follow-up questions, please attain out to me individually in our Investor Relations group. This concludes our name. Have an important day.

Operator

This concludes our name. Thanks in your participation, and have an important day.