Q1 2023 Spruce Power Holding Corporation Earnings Call

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Good afternoon, and welcome to the spruce power first 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'd like to turn the call over to Bronson flag head of Investor Relations for Bruce power. Mr. Flagged. Please go ahead.

Thank you good afternoon, and welcome to Bruce Power's Conference call to discuss results for the first quarter of 2023.

With me today are Christian Fong, our Chief Executive Officer, Donald Klein, our outgoing Chief Financial Officer, and Sarah Wells, our incoming 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. Similarly out of our control the timing of some of the processes, we will discuss today, which could impact the expectation related statements you will hear shortly.

We're not obliged to revise or update any forward looking statements, except as maybe 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-K, and 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 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 Christian Fong Cristian go ahead. Thank you, Brian and thanks to everyone for joining us on the call today spruce is in its strongest position ever with a focus on maintaining strong customer service owning a large portfolio of zero carbon clean electricity rooftop power systems and operating the long term.

High margin contracts that generate a steady stream of cash during the quarter. We essentially completed the transformation of Bruce power to a pure play residential rooftop solar company with just a few final changes left one of those is a long planned management transition at zero wells becomes our new CFO more on that later another is the <unk>.

Run off of expenses tied to the wind down of XL fleet, some of which impacted the Q1 bottom line. Those expenses are mostly encouraged so our numbers going forward will really showcase the attractiveness of our business model.

So looking ahead.

We have a substantial cash balance to drive incremental growth and value creation for shareholders and we can put cash to work to grow through acquisitions as we demonstrated at the end of March and buying the portfolio, we renamed Bruce power for that deal increased our overall portfolio by 44% a full year's customers.

Growth target in one swing.

Today I'll be presenting our operating results for the quarter and talking about some recent events in the context of the three core pillars of our strategy. The first pillar is to build the industry, leading customer experience, our first quarter customer satisfaction score was 71%, beating our 70% target and up substantially year on year from 50.

4% in Q1 of 2022, we are also on track with this year's technology roadmap to ensure month in month out reliability and system visibility to a customer base that now numbers over 72000.

For it upgrades, we successfully implemented a customized new billing software based on the Zara ecosystem and rolled out a single logging customer portal cultivating a great customer experience not only benefits individual customers. It provides an opportunity to create incremental value for spruce as people upgrade toward full.

Home power systems with battery storage and eventually newer technologies, such as EV charging we haven't broken out our battery leasing numbers, yet as retrofit batteries are still a niche market and very regional with over 80% of our leasing in California.

Our second pillar is delivering operational excellence, both in our core business of producing carbon free electricity and in generating cash from our portfolio.

As Bruce our Q1 performance ratio, which is the production compared to the theoretical maximum of the installed solar panels was 92% that's down from 95% for Q4, largely because of the historically rainy January on the West Coast, We obviously can't manage winter storms definitely over my pay grade. So we also look.

The weather adjusted performance ratio, where spruce booked a strong 102% demonstrating the efficiency and reliability of our portfolio the.

The financial measure of our operations is our ability to generate cash.

Our portfolio is robust performance as the bulk of spruce is current run rate of $110 million to $130 million of annual cash inflows, which we'll discuss later.

Moving on we pared growth and capital together as our third pillar because our growth is primarily through M&A and so we stay disciplined in our use of capital historically the cost of growth has been low enough to generate consistently strong investment returns that continued in Q1, when we hit a homerun in acquiring.

This is Bruce power for portfolio.

This transformative acquisition grew our portfolio by 44% overnight, adding contracted cash flows from over 22500 customers. During Q2, we've been integrating this acquisition is immediately improved our run rate cash flows. So we expect to see a clean view of how it's cash flow impacts the company's fine.

<unk> starting in Q2.

To refresh you on the efficiency of our M&A model versus our peers. Since 2019, we have acquired in a dozen separate transactions about 55000 residential solar systems in contracts.

Our average cost of acquiring customers is about $375 per customer. This compares favorably to last September when we reported an average cost of $421 per customer, we expect stairstep growth as we aim for 90000 customers and contracts by the end of 2024.

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As a reminder, we don't disclose or discuss the number of nature of deals that are currently under negotiation and so we can't give guidance on timing.

Before I get to the capital strategy I want to emphasize our financial headlines except for the legacy XL items that are still being wrapped up spruce power has positive cash flow in fact, Bruce finished the last quarter once again with over $200 million of cash on hand, including $173 million in totally.

Unrestricted cash and once again with no corporate level debt with that much cash we wanted to discuss how much to keep in reserve and how we intend to deploy any excess.

First having cash liquidity is a great safety net so we expect to keep at least $75 million of cash on hand through 2024, just to be clear, we're not saying that from our quarter end balance of $205 million, we actually plan to spend down to $75 million, rather we are identifying a prudent level, that's still earmarked adequate investment cash.

To reach our 90000 customer target.

In the financial section will walk through our cash run rate, yes, I would just say that given the amount of cash we're generating in our core business added to the cash we already have our capital allocation can be an all of the above strategy that means buying more assets paying down debt completing capex projects investing in our team and returning to <unk>.

Some cash to shareholders I'll expand on that last item.

A few days ago, our board approved a two year common stock repurchase program of up to $50 million of our common shares.

First we believe that repurchasing shares is an efficient way to return cash to shareholders. The program doesn't require us to repurchase any specific number of shares but it is our preferred tool to get money back to our investors.

Second reason is more immediate we look at our current stock price does see a way for us to add value on a per share basis. The market is offering to sell us or really anybody shares at a dramatic discount to what we believe is fundamental value with lots of cash on hand with positive cash flow from our core businesses with a great management team and a deferral.

<unk> business model in a rapidly growing industry.

We want this share buyback program to send a strong signal that this is a high priority use of our capital at the current stock price.

I'll now make some comments about the residential solar macro environment and our positioning long term demand for residential solar should be strong, but upstream installers and consumers face challenges, notably this includes a higher cost of capital. In contrast, Bruce is largely insulated from near term volatility in the debt capital markets.

We are attractively priced non recourse project loans with several years until the nearest maturity and we have no corporate debt at all we can be disciplined in adjusting the price of future acquisitions to maintain our target return on equity investment of an IRR in the mid teens, even as that cost change.

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Furthermore, we are seeing a notable shift in the consumers' financing decision when they choose to go with rooftop solar towards lease and PPA products and away from loans.

We know this through our relationships with installers across the United States.

Yes, it's really this benefits us as third party owned systems are our addressable market for acquisitions, we expect tailwind for further lease and PPA market penetration as clarity emerges on the ability of the tpa market to capture additional ITC others as described in last year's IRA legislation.

This should ultimately boost the competitiveness of leases and Ppas.

Simply put we believe spruce stands out favorably in the current capital and tax environments. We're excited about our progress through the public pure play investment residential solar and especially pleased with the substantial growth from the Bruce power for portfolio acquired last quarter.

Before handing the call over to Don to discuss financials I want to acknowledge that this will be his final earnings call with us as we take the next step in our post merger management transition, we announced last week. The <unk> wells will become CFO on may 19th having just brought Deloitte as our independent Auditor. This is the right time for this long planned.

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Terra has been Spruces head of sustainability and by my side, leading finance and accounting for Bruce power and its affiliates. Since 2018. She is a smart experienced and driven member of the spruce team who has played a leading role as Bruce has strong growth over the past years.

And Don I wanted to acknowledge you for your vision and dedication over the past year, serving as <unk> CFO .

You were instrumental in the business combination last fall and then helping spruce powered transitioned to a place of greatest strength as a public company on behalf of the whole company. We thank you.

I'll now hand, the call over to you and Sarah to discuss the financials for the first quarter. Thanks.

Thanks Christian before we discuss our first quarter results I'd like to walk through a few items that impacted our financial reporting.

As discussed in our last quarterly update the old drivetrain and XL grid businesses were classified as discontinued operations. The final legacy businesses were disposed in the first quarter and though there will be some cleanup items in future quarters, we do not expect material expenses going forward as it relates to discontinued operations. However.

However, our continuing operating results will reflect certain expenses related to XL fleet, namely legal expenses tied to the previously disclosed SEC inquiry and related shareholder lawsuit, we're unable to comment on the timing or outcome of this matter, but we do expect to incur additional moderate legal expenses.

And as a note on our 10-Q, we filed an expansion as we finish the technical accounting for the streets power for purchase in March, but we don't expect it to impact anything we're talking about today.

With that let's move on to results.

First quarter revenue, which consisted exclusively of spruce related revenue was $18 1 million compared to $18 1 million in the fourth quarter of 2002.

As Christian mentioned revenue was moderately impacted in the quarter by the outsized impact of weather on our west coast assets.

Partially offset by higher than expected proceeds from the renewable energy credit sales recall that the fourth and first quarters typically generate lower revenue due to weather related impacts on electrical production.

First quarter, Opex, which includes both SG&A and portfolio of O&M was $17 $6 million compared to $36 million last quarter.

The sequential decline largely reflects much lower integration costs tied to our acquisition by XL fleet also of note SG&A expense during the quarter includes approximately $8 million of expenses attributable to legacy XL fleet business, namely legal expenses associated with the previously disclosed FTC inquiry and shareholder law.

<unk> and compensation expenses for exiting XL fleet personnel.

Excluding these expenses the core opex will be closer to a $9 6 million, which is a clearer view of opex sort of stand alone Bruce power.

On a GAAP basis net loss from continuing operations was $15 million as compared to $27 7 million in the fourth quarter of 'twenty two.

Adjusted for certain items, including legal charges and the change in fair value of interest rate swaps adjusted net loss was $7 $7 million.

Adjusted EBITDA totaled $4 7 million compared to $3 5 million in the fourth quarter of 'twenty two.

As of March 31, 23.

Cash cash equivalents and restricted cash of approximately $205 million. This compares to $240 million at the end of the fourth quarter of 'twenty two.

The sequential change in cash includes approximately $10 million for principal and interest payments and approximately $23 million of net cash paid for the acquisition of <unk> four.

The total principal balance of long term debt as of March 31 was $652 million as a reminder, all of our debt is nonrecourse and backed by our long term contracts with customers that is very attractively priced in the current environment with a weighted average cost of approximately five 6%.

Including the credit facility assumed alongside our acquisition of the <unk> portfolio.

We believe it's important to underscore that all of our variable rate debt is 97% hedged through interest rate swaps. In fact, most of the swaps have long term maturities, mostly in the 2000 thirty's to extend their portfolios interest hedges well beyond the senior loan finally in measuring value of our long term solar contracts with customers, which provided metrics on gross.

Net portfolio values, which represents the present value of the remaining net cash flows of our rooftop systems and contracts discounted at 6%.

As of March 31, gross portfolio balance was $938 million adjusting for total loan balances the net portfolio value was $286 million or $313 million with the value of the swaps included with the cash we have on hand that adds up to $518 million of debt value.

I'd now like to turn the call over to <unk> to discuss this through power for portfolio acquisition.

Thank you Don and I will just add that I'm excited to begin my next chapter expertise as CFO .

Before opening the call to Q&A I'd like to further address the transformative impact of this spurious power for acquisition.

Acquisition immediately enhances our cash flow generation.

The acquired assets sit outside of our mezzanine facility, which was put in place years ago and currently claims excess cash after senior debt service of our legacy portfolios.

Bruce power floor is a cash generator.

Britain to Standalone portfolio customer billings were $21 million and portfolio EBITDA of $18 million.

With the acquisition closing late in March 2nd quarter results will reflect the first full quarter contribution from street tower floor.

I'd like to now turn accounting technicalities surrounding this transaction.

The portfolio consists of the pass through leasehold interest of about 22500 residential solar contracts and.

In other words, while we are entitled to 100% of the customer payment streams through their contractual period.

It does not own the underlying rooftop solar systems.

GAAP accounting for these leasehold interests will place the majority of the customer payment streams through the cash flows from investing section of our consolidated statement of cash flows.

Regardless of where accounting rules split the cash and the financial statements. We believe the critical takeaway is the strong cash inflows that space power for contributes to our core residential solar business to that and this is how the <unk> team internally evaluate cannabis.

With a focus on cash inflows from our long term contracts with customers or what we refer to as business cash inflows.

Because of the nuance of the county for space power for we think it is beneficial to investors for space to provide this framework to clarify the impact to the underlying business performance of our core business of both residential solar systems and the contracts tied to those systems.

When thinking about business cash inflows for space over the next 12 months, we look for a range of between $110 million to $130 million in the middle of the final cash flow remaining after opex and debt interest, where we expect an annual range of 35% to 45 million.

After scheduled principal payments, we look for a range of between five and $15 million.

Finally, with moderate levels of discretionary capex tied to improving customer experience and investing in employee tools and trains.

We will have cash left over.

In line with questions early comments regarding capital allocation, we have three good choices and how to allocate this excess cash flow first it can go back to our general cash position and support of our M&A growth strategy.

Secondly, we can deploy it to the newly authorized share buyback or finally, we can pay down our debt.

In conclusion, achieving positive cash flow in the core business, even after Capex is a proud moment for any growth company.

Look forward to executing our growth strategy and bolstering the cash generating power of our portfolio.

With that I'd like to turn the call back to the operator for Q&A operator. Please go ahead.

Thank you at this time, if you'd like to ask a question Press Star then the number one on your telephone keypad to allow everyone. An opportunity. We ask that you. Please limit yourselves to one question with one follow up we'll pause for just a moment to compile the Q&A roster. It looks like we'll have a question from Tristan Richardson with Scotiabank. Your line is now open.

Hey, good afternoon.

But all of the growth we're seeing.

Third party owned and commentary from Installers, just curious about other avenues of growth for spruce.

Is a potential avenue to partner with an installer down the road.

That source of.

Flow forward arrangement or maybe just curious about the.

The trends Youre seeing in third party owned growth and how that could lead to other growth avenues for spruce.

Sure Hi, Tristan it's Christian.

The percentage.

Installs that are now going to PPA leases.

Is going up and you can read through from.

Some of our peers that have reported this.

Already this quarter.

Long term kind of 28% is what has been reported by some of the third party.

The researchers.

And it's pushing into the <unk>, maybe 40% range. So there's a lot coming down the Pike and so your question is a fair one.

Remember that Spruces historical origins was as a as a channel partner.

And Thats, what that model would be called where you just partner with the installers provide a PPA and lease document and.

To provide the capital for that.

<unk>.

No it's actually not a bad business. It's clearly <unk> does that Sunrun does that and we used to do that about 22000 of our 72000 customers were originated through that sort of flow partnership.

Could we do it again, absolutely I just wanted to.

What I would call them real options or it's just kind of a real option that sits back there we have experienced doing it we've got the paper we're doing it. It's just that we were able to grow so fast through M&A. So.

We have return it back on yes should we turn it back on well this is where we go to the cost of a.

Acquired customer.

We had reported back in September that it was about $421 per customer is down to about $375 per customer.

When we were doing that channel partnership the cost actually was much higher there are sales teams that you had to keep.

Just the relationship management and working with those different installers. So I don't want to say that we would never do it.

Clearly just because something is super high margin. It doesn't mean that you don't look at other channels, but for right now we are meeting our growth objectives.

Barry from an industry standpoint, a very competitive cost of acquisition.

And so we'll keep at that for the time David.

Answer is yes, but simply put yes, we could.

Thanks, and then just in your script, you talked about maintaining a minimum level of cash.

Could you talk about a scenario that Mike <unk>.

Trigger or create an instance, where you spend down to that level, but it just be it.

Large opportunity.

How do you think about.

The current level of cash versus spending down to that minimum.

Sure so.

We are calling it all of the above at the moment.

Yes.

I think if we walk through like where do we come up with $75 million is because we could need the maximum size of the share repurchase program that we just announced we could take care of the about $5 million of annual discretionary capex that is mostly around customer experience.

And then when you start thinking about how much growth capital does that leave then for 155 two down to the.

Like two years worth of discretionary Capex, the 155 down to $75 million to $80 million.

Okay. So let's put that in the context of what we've just accomplished with Bruce power for acquisition, where we spent a net cash of $23 million and got 22500 customers those contracts feeding into the cash inflows. So we started thinking about it as well $1000 and that was a very very efficient acquisition.

I think we will do that every quarter.

But it leaves a lot of dry powder to grow through the customer acquisition side.

Far beyond the 90000 customer target that we've set for 2024. So it's one of those moments, where we felt very comfortable saying $75 million as a minimum liquidity threshold toward just where we are as an economy.

It's still leaving a lot of dry powder for something transformative again, if it came our way.

Okay and as a reminder, if you have a question Thats star one on your telephone Keypad next we'll go to Jordan Levy with Truest Securities. Your line is open.

Afternoon.

Congrats on the CFO role.

Maybe you mentioned earlier.

Earlier in outlook for positive cash flow, we think later this year or.

In the coming quarters. It seems like the Bruce power for acquisition is playing a big role in that maybe.

If you could just talk about what's what it is about that acquisition that makes.

That outlook for positive free cash flow more achievable.

Hi, Jordan. Thank you so much.

We have very strong cash flow coming off of <unk> and its unique behind it outside of RMS facility. Unlike our legacy asset.

Cash flows are unencumbered and then after our opex and debt interest everything else just curious.

Thanks, so much for that and maybe just as a quick follow up.

So I think I might have asked this last earnings, but I'm, just curious Christian the environment Youre seeing out there in terms of.

Deals on any competition youre seeing pop up leases.

<unk> become more prominent.

Yes.

We get most of our deals from three I'll come three buckets of sources, you've got utilities that are active sometimes out of territory.

It's a different sector, but there.

The return on capital requirements and there are inflationary pressures are pretty well known in that sector, you've got financial investors that accumulate them and then you've got the installers themselves that whether they are large and well known or part of what is.

By far is a very fractured industry, so folks all over.

The country, then maybe work in their local markets.

So.

Again, we're not going to speak to the specifics of how many bids we have out or how many bilateral negotiations we have out.

I'll just say the answer is yes to both of them.

In real time and yet these are real time negotiations and so I just want to compromise.

What might be there.

We stand behind the target of a mid teens IRR, we think that's very achievable and as we can.

Lex the pricing of the equity that we put out we're a lot less concerned about what may be happening in the debt markets.

That goes down 50 basis points, then there's always probably are just going to price it in and want the same.

Okay.

You got to split the pie so to speak when youre dealing with arm's length buyers and sellers. So yes, we are seeing things.

We expect to see them a little bit further on so let me just take the opportunity of the question to remind that so many of the deals that we see are seasoned deals.

So rather than a little bit like Tristan I'd, just ask can we partner with an installer, yes, we could and that we can get them to.

As great as they are coming off.

The construction pipelines of those installers by acquiring portfolios that are seasoned.

Let's just say that some of the teething pains as over the portfolios are performing really strongly it's why our weather adjusted portfolio ratio can exceed 100% pretty significantly.

Just that seasoning and buying really really good stuff and that means the current push toward PPA leases, that's occurring because of the rise in interest rates solar loans are.

Marginally less attractive.

It's going to feed our pipeline for the next four to five years.

Those different types of owners take their exit points.

That's great color. Thanks, so much.

Yeah.

Seeing no further questions in the queue, let me turn the call back over to Mr. <unk> to conclude today's call.

Thank you operator, and thank you again for joining us today and for your continued support if you have any questions. Please contact me or our Investor Relations team. This concludes our call today you may all disconnect.

This concludes today's conference you may now disconnect.

Yes.

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Okay.

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Sure.

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Yeah.