Q2 2024 Spruce Power Holding Corp Earnings Call

August 14, 2024

Operator: Shawn Severson, Tristan Richardson, Joseph Osha, Bronson Fleig Shawn Severson, Tristan Richardson, Joseph Osha, Bronson Fleig, Tristan Richardson, Joseph Osha, Bronson Fleig, Thank you for standing by. My name is Kayla, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Spruce Power Second Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, again, press star and 1.

Operator: Thank you for standing by.

Kayla: My name is Kayla, and I will be your conference operator today.

Kayla: At this time, I'd like to welcome everyone to the Spruce Power 2nd quarter 2024 earnings conference call. All lines have been placed on mute to prevent any background noise.

Kayla: Thank you for standing by. My name is Kayla and I will be your conference operator today. At this time, I'd like to welcome everyone to the Spruce Power Second Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise.

Kayla: After the speaker's remarks, there will be a question-and-answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, again, press star in 1.

Speaker Change: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, again press star and 1.

Bronson Fleig: I would now like to turn the call over to Bronson Fleig, Head of Investor Relations. You may begin.

Bronson Fleig: I would now like to turn the call over to Bronson Fleig, Head of Investor Relations. You may begin. Good afternoon, and welcome to Spruce Power's conference call to discuss results for the second quarter of 2024. With me today are Chris Hayes, our Chief Executive Officer, and Sarah Wells, our Chief Financial Officer. Our call this afternoon will include statements that speak to the company's expectations, outlook, and predictions of the future, which are considered forward-looking statements.

Speaker Change: I would now like to turn the call over to Bronson Fleig, Head of Investor Relations. You may begin.

Bronson Fleig: Good afternoon, and welcome to Spruce Power's conference call to discuss results for the 2nd quarter of 2024. With me today are Chris Hayes, our chief executive officer, and Sarah Wells, our chief financial officer. Our call this afternoon will include statements that speak to the company's expectations, outlook, and predictions of the future, which are considered four-looking statements. These four-looking statements are subject to risk and uncertainties, many of which are beyond our control, which make all their actual results to differ materially from those expressed in or implied by these statements. We are not obliged to revise or update any four-looking statements, except that may be required by law.

Bronson Fleig: Good afternoon, and welcome to Spruce Power's conference call to discuss results for the second quarter of 2024. With me today are Chris Hayes, our Chief Executive Officer, and Sarah Wells, our Chief Financial Officer.

Bronson Fleig: These forward-looking statements are subject to risk and uncertainty, many of which are beyond our control, which could cause all their actual results to differ materially from those expressed in or implied by these statements. We are not obliged to revise or update any forward-looking statements, except as it may be required by law.

Speaker Change: Our call this afternoon will include statements that speak to the company's expectations, outlook, and predictions of the future, which are considered forward-looking statements. These forward-looking statements are subject to risk and uncertainties.

Speaker Change: 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 Change: We are not obliged to revise or update any forward-looking statements, except as may be required by law. Please refer to our disclosures regarding risk factors and forward-looking statements in today's earnings release and other SEC filings.

Bronson Fleig: Please refer to our disclosures regarding risk factors and forward-licking statements to today's earnings release and other SEC filing. A copy of our press release has been posted to the Investor Relations page of our website for reference. The non-GAAP financial measures discussed in this call are reconciled to the U.S. GAAP equivalent and can be found in the press release that we issued this afternoon. With that, I will turn the call over to our CEO. Chris, go ahead.

Bronson Fleig: Please refer to our disclosures regarding risk factors and four-looking statements in today's earnings release and other SEC filings.

Bronson Fleig: A copy of our press release has been posted to the Investor Relations page of our website for reference.

Bronson Fleig: The non-GAAP financial measures discussed in this call are reconciled to the US GAAP equivalent and can be found in a press release that we issued this afternoon.

Speaker Change: A copy of our press release has been posted to the investor relations page of our website for reference. The non-GAAP financial measures discussed in this call are reconciled to the U.S. GAAP equivalent and can be found in the press release that we issued this afternoon. With that, I will turn the call over to our CEO. Chris, go ahead.

Bronson Fleig: With that, I will turn the call over to our CEO. Chris, go ahead.

Christopher Hayes: Thank you, Bronson, and good afternoon to everyone.

Chris Hayes: Thank you, Bronson, and good afternoon to everyone. I want to express how excited I am about the future of Spruce. I can say after these first few months as CEO, we are more confident than ever about the opportunities we have in front of us. As I mentioned in our first call together in May, our strategic priorities center on growth, both through the acquisition of operating residential solar assets and expanding our capital light third-party service offering. On both fronts, our teams are very busy with due diligence on a rapidly growing opportunity pipeline. We are intensely focused on execution to gain scale and drive an inflection of free cash flow generation.

Christopher Hayes: I want to express how excited I am about the future of Spruce. I can say after these first few months at CEO, we are more confident than ever about the opportunities we have in front of us. As I mentioned in our first call together in May, our strategic priority centers on growth, both through the acquisition of operating residential solar assets and expanding our capital-like third-party service offering. On both fronts, our teams are very busy with due diligence on a rapidly growing opportunity pipeline. We are intensely focused on executions to gain scale and drive inflection of free cash flow generation.

Chris Hayes: Thank you, Bronson, and good afternoon to everyone.

Chris Hayes: I want to express how excited I am about the future of Spruce. I can say after these first few months as CEO, we are more confident than ever about the opportunities we have in front of us.

Chris Hayes: As I mentioned in our first call together in May, our strategic priorities center on growth both through the acquisition of operating residential solar assets and expanding our Capital Light third-party service offering.

Chris Hayes: On both fronts, our teams are very busy with due diligence on a rapidly growing opportunity pipeline.

Chris Hayes: We are intensely focused on execution to gain scale and drive inflection of free cash flow generation.

Christopher Hayes: I will make more detailed remarks on our outlook. First, I want to quickly comment on our second quarter results and operations. Our core business continues to deliver solid results anchored by long-term cash flows from 75,000 rooftops. For Q2, revenue was 22.5 million and operating EBITDA was 14.4 million. Our total cash position was $150 million, a quarter end, up slightly from Q1. Sarah will give more details to the financial results in her section. During the quarter, we refinanced our nearest maturing non-recourse debt to Spruce Power for facility. We are pleased to start a new lending relationship with Bearings in this facility.

Chris Hayes: I'll make more detailed remarks on our outlook, but first, I want to quickly comment on our second quarter results and operations. Our core business continues to deliver solid results, anchored by long-term cash flows from 75,000 rooftops. For Q2, revenue was $22.5 million, and operating EBITDA was $14.4 million.

Chris Hayes: I'll make more detailed remarks on our outlook first. I want to quickly comment on our second quarter results and operations.

Chris Hayes: Our core business continues to deliver solid results, anchored by long-term cash flows from 75,000 rooftops. For Q2, revenue was $22.5 million and operating EBITDA was $14.4 million.

Chris Hayes: Our total cash position was $150 million at quarter end, up slightly from Q1. Sarah will give more details on the financial results in her section. During the quarter, we refinanced our nearest maturing non-recourse debt, the Spruce Power IV Facility.

Chris Hayes: Our total cash position was $150 million a quarter end, up slightly from Q1.

Chris Hayes: Sarah will give more details to the financial results in her section.

Sarah Wells: During the quarter, we refinanced our nearest maturing non-recourse debt, the Spruce Power IV Facility.

Chris Hayes: We're pleased to start a new lending relationship with Barings in this facility. We secured attractive terms, and institutional interest for this paper was very high across the traditional bank loan market as well as public and private credit markets, which speaks to the quality of and appetite for residential solar-backed debt structuring and Spruce's reputation as a high-quality asset manager. We expect to benefit from this deepening pool of capital in the near future. We're also proud to report a historical milestone in the Spruce customer experience. During the quarter, we achieved a Google rating of 3.0 out of 5.0, the highest cumulative rating in our corporate history.

Christopher Hayes: We secured attractive terms, and institutional interest for this paper was very high across the traditional bank loan market, as well as public and private credit markets. This speaks to the quality of an appetite for residential solar back debt structuring and Spruce's reputation as a high quality asset manager. We expect to benefit from this deepening pool of capital over the near future.

Speaker Change: We're pleased to start a new lending relationship with bearings in this facility. We secured attractive terms and Institutional interest for this paper was very high across the traditional bank loan market as well as public and private credit markets

Speaker Change: speaks to the quality of an appetite for residential solar-back debt structuring and spurses reputation as a high quality asset manager.

Christopher Hayes: We're also proud to report a historical milestone in the Spruce customer experience. During the quarter, we achieved a Google rating of 3.0 out of 5.0, the highest cumulative rating in our corporate history. Nonetheless, we will strive for even more improvement in customer service. Not only is it the right thing to do, but we get financial benefits in the form of better fleet performance, customer collections, and cross-selling opportunities. I want to sincerely thank our employees across all departments for their hard work, which led to this record achievement in customer satisfaction.

Speaker Change: We expect to benefit from this deepening pool of capital over the near future.

Speaker Change: We're also proud to report a historical milestone in the Spruce customer experience. During the quarter, we achieved a Google rating of 3.0 out of 5.0, the highest cumulative rating in our corporate history.

Chris Hayes: Nonetheless, we will strive for even more improvement in customer service. Not only is it the right thing to do, but we get financial benefits in the form of better fleet performance, customer collections and cross-selling opportunities. I want to sincerely thank our employees across all departments for their hard work, which led to this record achievement in customer satisfaction.

Speaker Change: Nonetheless, we will strive for even more improvement in customer service. Not only is it the right thing to do, but we get financial benefits in the form of better fleet performance, customer collections, and cross-selling opportunities.

Speaker Change: I want to sincerely thank our employees across all departments for their hard work.

Christopher Hayes: Next, let's discuss our near-term strategy to grow our owner-operator platform. Shifting dynamics in the residential solar market are very favorable for us. Higher interest rates and better policy incentives, such as investment tax credit adders, are resulting in a noticeable acceleration of solar lease and PPA origination. This is advantageous for spruce for several reasons. First, there is an insatiable need for long-term capital providers that can own solar lease and PPA contracts, a need that is not being fulfilled by the well-known publicly traded originators. This need presents opportunity for us in both equity sponsor capital commitments and M&A opportunities.

Chris Hayes: Next, let's discuss our near-term strategy to grow our owner-operator platform. Shifting dynamics in the residential solar market are very favorable for us. Higher interest rates and better policy incentives, such as investment tax credit adders, are resulting in a noticeable acceleration of solar release and PPA origination. This is advantageous for Spruce for several reasons.

Speaker Change: which led to this record achievement in customer satisfactions.

Speaker Change: Next, let's discuss our near-term strategy to grow our owner operator platforms.

Speaker Change: Chifting dynamics in the residential solar market are very serveable for us, higher interest rates, and better policy incentives, which has investment tax credit adders.

Speaker Change: are resulting in a noticeable acceleration of solar release and PPA origination.

Chris Hayes: First, there is an insatiable need for long-term capital providers that can own solar lease and PPA contracts, a need that is not being fulfilled by the well-known publicly traded origin. This need presents opportunities for us in both equity sponsor capital commitments and M&A opportunities. This need is exacerbated by the recent exit of a large player from this market.

Speaker Change: This is advantageous for spruce for several reasons.

Speaker Change: First, there's an insatiable need for long-term capital providers that can own solar lease and BBA contracts, a need that is not being fulfilled by the well-known publicly traded originators.

Speaker Change: This need presents opportunity for us in both equity sponsor capital commitments and M&A opportunities.

Christopher Hayes: This need is exacerbated by the recent exits of a large player from this market. Next, this acceleration of solar lease and PPA contract origination requires robust service and capabilities for at least 20 to 25 years. Solar servicing is our foundation. This need creates robust opportunity to service third-party solar and other energy assets that we do not own. Keep in mind, these opportunities are in addition to the substantial installed base of residential solar assets in the market today.

Speaker Change: This need is exacerbated by the recent exits of a large player from this market. Next.

Chris Hayes: This acceleration of solar lease and PPA contract origination requires robust servicing capabilities for at least 20 to 25 years. Solar servicing is our foundation. This need creates a robust opportunity to service third-party solar and other energy assets that we do not own. Keep in mind, these opportunities are in addition to the substantial installed base of residential solar assets in the market today.

Speaker Change: This acceleration of solar lease and PPA contract origination requires robust servicing capabilities for at least 20 to 25 years.

Speaker Change: Solar servicing is our foundation. This need creates robust opportunity to service third-party solar and other energy assets that we do not own.

Speaker Change: Keep in mind, these opportunities are in addition to the substantial installed base of residential solar assets in the market today.

Christopher Hayes: With this market context, I'll speak to how Spruce thinks about executions. As it relates to M&A, we will remain disciplined in our return hurdles. Bid-ask spreads are still somewhat wide, yet we are finding opportunities in evaluating a robust pipeline of seasoned solar portfolios in the secondary market. Also, we are evaluating what we call programmatic offtake, where Spruce would step in earlier in the asset life cycle closer to PTO as the long-term sponsor and owner of solar lease and PPA contract. To be clear, this would not involve investment in working capital or funding milestone payments. Rather, we are looking at off-taking recently installed solar systems by mature installers.

Chris Hayes: I'll speak to how Spruce thinks about execution [inaudible] As it relates to M&A, we will remain disciplined in our return hurdles. The bid-ask spreads are still somewhat wide, yet we are finding opportunities and are evaluating a robust pipeline of seasoned solar portfolios in the secondary market. Also, we are evaluating what we call programmatic offtake, where Spruce would step in earlier in the asset lifecycle, closer to PTO, as the long-term sponsor and owner of Solar Lease and PPA contracts.

Speaker Change: With this market context...

Speaker Change: I'll speak to how Spruce thinks about executions.

Speaker Change: As it relates to M&A, we will remain disciplined in our return hurdles.

Speaker Change: Bid-ask spreads are still somewhat wide, yet we're finding opportunities and are evaluating a robust pipeline of seasoned solar portfolios in the secondary market. Also,

Speaker Change: We are evaluating what we call programmatic offtake, where Spruce would step in earlier in the asset life cycle, closer to PTO.

Speaker Change: as the long-term sponsor and owner of Solar Lease and PPA contracts.

Chris Hayes: To be clear, this would not involve investment in working capital or funding milestone payments. Rather, we are looking at off-taking recently installed solar systems by Mature Installers. On the solar and energy servicing front, we've hit the ground running. In July, we announced the hiring of the general manager for Spruce Pro, Rich DiMatteo.

Speaker Change: To be clear, this would not involve investment in working capital or funding milestone payments. Rather, we are looking at off-taking recently installed solar systems by mature installers.

Christopher Hayes: The solar and energy service in front, we've hit the ground running. In July, we announced the hiring of the general manager, Spruce Pro, Rich Tomato. His team is actively developing a pipeline of servicing opportunities, and initial indications of interest remain strong. As a reminder, we've used servicing opportunities as capital light endeavors, where Spruce can leverage its existing investment in people, processes, and service technology.

Speaker Change: On the solar and energy servicing front, we've hit the ground running. In July , we announced the hiring of the general manager for Spruce Pro, Rich D'Amatio.

Chris Hayes: His team is actively developing a pipeline of servicing opportunities, and initial indications of interest remain strong. As a reminder, we view servicing opportunities as capital-light endeavors where Spruce can leverage its existing investment in people, processes, and service technology. We are well positioned to capture third party servicing customers over the near term. Importantly, Spruce is well capitalized to pursue growth; at quarter end, Spruce had $150 million in cash. Keep in mind that we are a levered buyer of assets, so we have substantial runway to fund the equity tranche of prospective transactions. Although we have not had any M&A activity so far in 2024, the opportunities that we see have never been greater.

Speaker Change: His team is actively developing a pipeline of servicing opportunities, and initial indications of interest remain strong.

Speaker Change: As a reminder, we view servicing opportunities as capital light endeavors, where Spruce can leverage its existing investment in people, processes, and service technologies. We are well positioned to capture third-party servicing customers.

Christopher Hayes: Industries. We are well positioned to capture third party service and customers over the near terms. Importantly, Spruce is well capitalized to pursue growth. At quarter end, Spruce had $150 million in cash. Keep in mind that we are a levered buyer of assets, so we have substantial runway to fund the equity tranche of prospective transactions.

Speaker Change: over the near terms.

Speaker Change: Importantly, Spruce is well capitalized to pursue growth. At quarter end, Spruce had $150 million in cash. Keep in mind that we are a levered buyer of assets, so we have substantial runway to fund the equity tranche of prospective transactions.

Christopher Hayes: Although we have not had any MNA activities so far in 2024, the opportunity set we see has never been greater. Liquidity and capital market access concerns are clearly very pervasive in the upstream installation market. That said, we will be patient and not rush to deploy capital to merely boost our growth metrics. We are focused on underwriting attractive returns and driving toward inflection in free cash flow generation. The beauty of our business model is that we can harvest long-term cash flows while we prudently evaluate investment opportunities. We are, quote, paid to wait. Given the opportunity set discussed, the ability to be nimble and opportunistic is a priority for Spruce and its Board of Directors.

Speaker Change: Although we have not had any M&A activities so far in 2024,

Chris Hayes: Liquidity and capital market access concerns are clearly very pervasive in the upstream installation market. That said, we will be patient and not rush to deploy capital to merely boost our growth metric. We are focused on underwriting attractive returns and driving toward inflection in free cash flow generation. The beauty of our business model is that we can harvest long-term cash flows while we prudently evaluate investment opportunities. We are, quote, paid to wait.

Speaker Change: The opportunity set we see has never been greater. Liquidity and capital market access concerns are clearly very pervasive in the upstream installation market.

Speaker Change: That said, we will be patient and not rush to deploy capital to merely boost our growth metrics.

Speaker Change: We are focused on underwriting attractive returns and driving toward inflection in free cash flow generation. The beauty of our business model is that we can harvest long-term cash flows while we prudently evaluate investment opportunities. We are, quote, paid to wait.

Chris Hayes: Given the opportunities that discussed, the ability to be nimble and opportunistic is a priority for Spruce and its Board of Directors. We want to preserve our cash position to be highly competitive and effective in pursuing near-term growth opportunities. We believe this approach will position us well in our pursuit of being the dominant long-term owner and operator of distributed energy assets. We will continue to assess investment opportunities, including share repurchases, on a quarterly basis with our Board of Directors. Before handing the call to Sarah [inaudible] I'll make some comments on a public residential solar installer who recently filed for Chapter 11. This event, while unfortunate, underscores the difficult operating environment for residential solar installers.

Speaker Change: Given the opportunities that discussed, the ability to be nimble and opportunistic is a priority for Spruce and its Board of Directors.

Christopher Hayes: We want to preserve our cash position to be highly competitive and effective in pursuing near-term growth opportunities.

Speaker Change: We want to preserve our cash position to be highly competitive and effective in pursuing near-term growth opportunities. We believe this approach will position us well in our pursuit of being the dominant long-term owner and operator of distributed energy assets.

Christopher Hayes: We believe this approach will position us well in our pursuit of being the dominant long-term owner and operator of distributed energy assets. We will continue to assess investment opportunities, including share repurchases, on a quarterly basis with our Board of Directors.

Speaker Change: We will continue to assess investment opportunities, including share repurchases, on a quarterly basis with our Board of Directors.

Christopher Hayes: Before handing the call to Sarah, I'll make some comments on a public residential solar installer who recently filed for Chapter 11. This event, while unfortunate, underscores the difficult operating environment for residential solar installers. However, we are hopeful that it acts as a positive catalyst for the industry to move towards a more sustainable origination model focused first on sound economics rather than growth at whatever cost. Additionally, this event allows us to contrast the high-risk business model of many large solar companies versus this Spruce model. Spruce only acquires cash-flowing rooftop portfolios. We do not have a large and costly network of salespeople and channel partners, allowing us to pursue a low customer acquisition cost.

Speaker Change: Before handing the call to Sarah.

Sarah Wells: I'll make some comments on a public residential solar installer who recently filed for Chapter 11.

Sarah Wells: This event, While Unfortunate.

Sarah Wells: underscores the difficult operating environment for residential solar installers. However, we are hopeful that it acts as a positive catalyst for the industry to move towards a more sustainable origination model focused first on sound economics

Chris Hayes: However, we are hopeful that it acts as a positive catalyst for the industry to move towards a more sustainable origination model focused first on sound economics, rather than growth at whatever cost. Additionally, this event allows us to contrast the high-risk business model of many large solar companies versus this Bruce model. Spruce only acquires cash-flowing rooftop portfolios.

Sarah Wells: rather than growth at whatever cost.

Speaker Change: Additionally, this event allows us to contrast the high-risk business model of many large solar companies versus the spruce model.

Chris Hayes: We do not have a large and costly network of salespeople and channel partners, allowing us to pursue a low customer acquisition cost. We do not have substantial working capital requirements, and we are not subject to the cost of capital risk associated with the timing lag between installation and raising project-level capital. In summary, the conservative nature of our business model should give you all great comfort in understanding the risks of our business and how we mitigate them. With that, I'll hand the call to Sarah to address the second quarter financials. Thanks, Chris.

Speaker Change: Spruce only acquires cash flowing rooftop portfolios. We do not have a large and costly network of salespeople and channel partners allowing us to pursue a low customer acquisition cost.

Christopher Hayes: We do not have substantial working capital requirements, and we are not subject to cost of capital risk associated with the timing lag between installation and raising project level capital.

Speaker Change: We do not have substantial working capital requirements, and we are not subject to cost of capital risk associated with the timing lag between installation and raising project-level capital.

Christopher Hayes: In summary, the conservative nature of our business model should give you all great comfort in understanding the risks of our business and how we mitigate them.

Speaker Change: In summary, the conservative nature of our business model should give you all great comfort in understanding the risks of our business and how we mitigate them. With that, I'll hand the call to Sarah to address second quarter financials.

Sarah Wells: With that, I'll hand the call to Sarah to address second quarter financials. Thanks, Chris. I'll provide more details related to our second quarter, 2024 financial results as well as our business outlook for the remainder of the year. Second quarter revenue was 22.5 million compared to 22.8 million in the prior year period. The modest year-over-year decrease is largely due to lower revenues from solar renewable energy credit. Second quarter core op-x, which we define as SGNA and Portfolio ONM, with 21.1 million in total as compared to 19 million for the prior year period. Breaking this out, Portfolio ONM expense increased to 4.4 million in the second quarter from 3 million in the prior year period.

Sarah Wells: I'll provide more details related to our second quarter 2024 financial results, as well as our business outlook for the remainder of the year. Second quarter revenue was $22.5 million compared to $22.8 million in the prior year period. The modest year-over-year decrease is largely due to lower revenues from solar renewable energy. Second quarter Core OpEx, which we define as SG&A and Portfolio O&M, was $21.1 million in total, as compared to $19 million for the prior year period.

Sarah Wells: Thanks Chris. I'll provide more details related to our second quarter 2024 financial results as well as our business outlook for the remainder of the year.

Sarah Wells: Second quarter revenue was $22.5 million compared to $22.8 million in the prior year period. The modest year-over-year decrease is largely due to lower revenues from solar renewable energy credits.

Sarah Wells: Second Quarter Core OpEx, which we define as SG&A and Portfolio O&M, with $21.1 million in total as compared to $19 million for the prior year period.

Sarah Wells: Breaking this out, Portfolio O&M expense increased to $4.4 million in the second quarter from $3 million in the prior year period. The increase is tied to higher non-routine servicing costs, such as expenses tied to hardware replacement. FGNA expense increased to 16.7 million in the second quarter from 16.3 million in the prior year period.

Speaker Change: Breaking this out, portfolio O&M expense increased to $4.4 million in the second quarter from $3 million in the prior year period. The increase is tied to higher non-routine servicing costs, such as expenses tied to hardware replacements.

Sarah Wells: The increase is tied to higher non-routine servicing costs, such as expenses tied to hardware replacements. SG&A expense increased to 16.7 million in the second quarter from 16 million in the prior year period. For the quarter, SG&A was negatively impacted by 1.9 million of expense related to the CEO transition. Fritz generated a gap net loss attributable to stockholders of 8.6 million. We consider operating EBITDA as a key measure in evaluating the company's financial performance. Operating EBITDA is defined as adjusted EBITDA plus net proceeds from the company's investment in the SCMTH master lease. The interest we earn on our cash investments and proceeds from system buyouts and prepayments.

Speaker Change: ST&A expense increased to $16.7 million in the second quarter from $16 million in the prior year period. For the quarter, ST&A was negatively impacted by $1.9 million of expense related to the CEO transition.

Sarah Wells: For the quarter, FGNA was negatively impacted by 1.9 million of expense related to the CEO, Tristan Richardson. Spruce generated a gap net loss attributable to stockholders of 8.6 million. We consider operating EBITDA as a key measure in evaluating the company's financial performance. Operating EBITDA is defined as Adjusted EBITDA, plus net proceeds from the company's investment in the FEMPH Masterlead, the interest we earn on our cash investments, and proceeds from system buyouts and prepayments.

Speaker Change: Sprint generated a gap net loss attributable to stockholders of $8.6 million.

Speaker Change: We consider operating EBITDA as a key measure in evaluating the company's financial performance.

Speaker Change: Operating EBITDA is defined as adjusted EBITDA plus net proceeds from the company's investment in the SEMTH master lease, the interest we earn on our cash investments, and proceeds from system buyouts and prepayments. These items represent material cash inflows from our ongoing business and strategy.

Sarah Wells: These items represent material cash inflows from our ongoing business and strategy. Adjusted EBITDA was 5.4 million for the second quarter. Adding the net proceeds from our master lease investment of 5.6 million, 1.5 million of interest earned on cash investments, and 1.9 million of proceeds from system buyouts and prepayments. Operating EBITDA was 14.4 million for the second quarter. At the end of the second quarter, total cash inclusive of unrestricted cash and unrestricted cash on our balance sheet was approximately 150 million, unchanged sequentially. Our unrestricted cash balance increased due to normal seasonality of customer collections. However, our unrestricted cash balance decreased sequentially as a result of higher O&M, partially offset by net proceeds from the refinance of our spruced power for our credit facility during the quarter.

Sarah Wells: These items represent material cash inflows from our ongoing business and strategy. Adjusted EBITDA was $5.4 million for the second quarter. Adding the net proceeds from our master lease investment of $5.6 million, $1.5 million of interest earned on cash investments, and $1.9 million of proceeds from system buyouts and prepayments, operating EBITDA was $14.4 million for the second quarter. At the end of the second quarter, total cash, inclusive of unrestricted cash and restricted cash on our balance sheet, was approximately $150 million, unchanged sequentially.

Speaker Change: Adjusted EBITDA was $5.4 million for the second quarter.

Speaker Change: Adding the net proceeds from our master lease investment of $5.6 million, $1.5 million of interest earned on cash investments, and $1.9 million of proceeds from system buy-out and prepayments. Operating EBITDA was $14.4 million for the second quarter.

Speaker Change: At the end of the second quarter, total cash, inclusive of unrestricted cash and restricted cash on our balance sheet, was approximately $150 million, unchanged sequentially.

Sarah Wells: Our restricted cash balance increased due to normal seasonality of customer collections. However, our unrestricted cash balance decreased sequentially as a result of higher O&M, partially offset by net proceeds from the refinance of our Spruce Power IV credit facility during the quarter. The total principal balance of long-term debt was $640 million at the end of the second quarter, with a limited interest rate of 5.9 percent, including the impact of hedge arrangements.

Speaker Change: Our restricted cash balance increased due to normal seasonality of customer collections.

Speaker Change: However, our unrestricted cash balance decreased sequentially as a result of higher O&M.

Speaker Change: partially offset by net proceeds from the refinance of our Spruce Power IV credit facility during the quarter. The total principal balance of long-term debt was $640 million at the end of the second quarter with a limited interest rate of 5.9% including the impact of hedge arrangements.

Sarah Wells: The total principal balance of long-term debt was 640 million at the end of the second quarter, with a blended interest rate of 5.9%, including the impact of hedge arrangements. As a reminder, all of Spruce's debt is non-recourse and serviced by customer collections of our various portfolio companies. At quarter end, all of our floating rate debt instruments were materially hedged with interest rate swaps, with a mark to market on our swaps of positive $30 million. As Chris mentioned, during the quarter, we successfully closed on the refinance of our Spruced Power for Credit Facility. We are proud of the execution, which we believe strikes a good balance of extending tenor, while providing flexibility over the medium term to capitalize on our expectation for continued strong performance of the underlying assets, which are predominantly linked to prevailing retail electricity rates in California.

Sarah Wells: As a reminder, all of Spruce's deck is non-recourse and serviced by customer collections from our various portfolio companies. At quarter end, all of our floating rate debt instruments were materially hedged with interest rate swaps with a mark-to-market on our swaps of positive $30 million. As Chris mentioned, during the quarter, we successfully closed on the refinance of our Spruce Power IV credit facility. We are proud of the execution, which we believe strikes a good balance of extending tenor while providing flexibility over the medium term to capitalize on our expectation for continued strong performance of the underlying assets, which are predominantly linked to prevailing retail electricity rates in California. The transaction represents Spruce's first rated debt issuance since 2016, with Kroll Bond Rating Agency rating the new facility A+.

Speaker Change: As a reminder, all of Spruce's debt is non-recourse and serviced by customer collections of our various portfolio companies.

Speaker Change: At quarter end, all of our floating rate debt instruments were materially hedged with interest rate swaps, with a mark-to-market on our swaps of positive $30 million.

Speaker Change: As Chris mentioned, during the quarter, we successfully closed on the refinance of our Spruce Power IV credit facility. We are proud of the execution, which we believe strikes a good balance of extending tenor while providing flexibility over the medium term to capitalized.

Speaker Change: on our expectation for continued strong performance of the underlying assets which are predominantly linked to prevailing retail electricity rates in California.

Sarah Wells: The transaction represents Spruce's first rated debt issuance in 2016, with Cruel Bond Rating Agency rating the new facility A+. We are proud of the institutional interest that's refinanced, solicited, speaking to the quality and performance of our assets, and we expect to benefit from these expanded relationships over the long term.

Speaker Change: The transaction represents Spruce's first rated debt issuance since 2016 with Kroll Bond Rating Agency rating the new facility A+.

Sarah Wells: We are proud of the institutional interest that 3Finance solicited, speaking to the quality and the performance of our assets, and we expect to benefit from these expanded relationships over the long term. Last, moving to full year guidance which can be found on slide 20 of our investor relations deck. With two quarters of the year complete, we are maintaining our 2024 financial guidance, though we are tracking towards the lower end of the operating EBITDA and adjusted free cash flow range.

Speaker Change: We are proud of the institutional interest this refinance solicited, speaking to the quality and the performance of our assets, and we expect to benefit from these expanded relationships over the long term.

Sarah Wells: Last, moving to full-year guidance, which can be found on slide 20 of our investor relations deck. With two quarters of the year complete, we are maintaining our 2024 financial guidance, though we are tracking towards the lower end of the operating EBITDA and adjusted free cash lowering. As Chris mentioned, while our M&A pipeline continues to grow, Spruce has not had any M&A activity to date in 2024. For context, the high end of our guidance ranges assumed the acquisition of approximately 6,000 solar lease and PPA contracts in the first half of 2024. We are also experiencing moderately higher operating expenditures than previously anticipated.

Speaker Change: Last, moving to full year guidance which can be found on slide 20 of our investor relations deck. With two quarters of the year complete, we are maintaining our 2024 financial guidance, though we are tracking towards the lower end of the operating EBITDA and adjusted free cash flow ranges.

Sarah Wells: As Chris mentioned, while our M&A pipeline continues to grow, Spruce has not had any M&A activity to date in 2024. For context, the high end of our guidance ranges assumed the acquisition of approximately 6,000 solar lease and PPA contracts in the first half of 2024. We are also experiencing moderately higher operating expenditures than previously anticipated. This is due to unforeseen costs tied to the CEO transition, which we earlier described as having a negative $1.9 million impact on SG&A during the second quarter.

Speaker Change: As Chris mentioned, while our M&A pipeline continues to grow, SPRUCE has not had any M&A activity to date in 2024. For context, the high end of our guidance ranges assumed the acquisition of approximately 6,000 solar lease and PPA contracts in the first half of 2024.

Speaker Change: We are also experiencing moderately higher operating expenditures than previously anticipated.

Sarah Wells: This is due to unforeseen costs tied to the CEO transition, which we earlier described as having a negative $1.9 million impact to SG&A during the second quarter. We also incurred moderate legal spending connection with a recent contest of our annual proxy and ultimately a cooperation agreement with one of our shareholders. Last, non-routine operations and maintenance expenditures have turned it higher thus far in 2024 than we originally anticipated. These are costs tied to rolling trucks to repair or replace hardware. Currently, we believe this O&M dynamic to be transitory in nature. In summary, the pace of M&A versus previous expectations and higher than expected operating expenditures combined to inform our current expectations for our financial guidance metrics to track towards the lower end of their respective ranges.

Speaker Change: This is due to unforeseen costs tied to the CEO transition, which we earlier described as having a negative 1.9 million dollar impact to SG&A during the second quarter.

Sarah Wells: We also incurred moderate legal expenditures in connection with a recent contest of our annual proxy and ultimately a cooperation agreement with one of our shareholders. Last, non-routine operations and maintenance expenditures have trended higher thus far in 2024 than we originally anticipated. These are costs tied to rolling trucks to repair or replace hardware.

Speaker Change: We also incurred moderate legal spend in connection with a recent contest of our annual proxy and ultimately a cooperation agreement with one of our shareholders.

Speaker Change: Last, non-routine operations and maintenance expenditures have turned in higher thus far in 2024 than we originally anticipated.

Sarah Wells: Currently, we believe this O&M dynamic to be transitory in nature. In summary, the pace of M&A versus previous expectations and higher than expected operating expenditures combine to inform our current expectations for our financial guidance metrics to track towards the lower end of their respective ranges. This concludes our prepared remarks. Operator, please open the line for questions. At this time, I'd like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. Our first question comes from the line of Peter Gastreich with Water Tower Research.

Speaker Change: These are costs tied to rolling trucks to repair or replace hardware. Currently, we believe this O&M dynamic to be transitory in nature.

Speaker Change: In summary, the pace of M&A versus previous expectations and higher-than-expected operating expenditures combine to inform our current expectations for our financial guidance metrics to track towards the lower end of their respective ranges.

Sarah Wells: This concludes our prepared remarks.

Kayla: Operator, please open the line for questions. At this time, I'd like to remind everyone that in order to ask a question, press star then the number one on your telephone keypad.

Speaker Change: This concludes our prepared remarks. Operator, please open the line for questions.

Speaker Change: At this time, I'd like to remind everyone in order to ask a question, press star then the number 1 on your telephone keypad.

Peter Gastreich: Our first question comes from the line of Peter Gastreich with Water Tower Research. Your line is open.

Speaker Change: Our first question comes from the line of Peter Gastrike with Water Tower Research. Your line is open.

Operator: Your line is open. Great, thanks. This is Sean Severson on behalf of Peter, who's traveling right now.

Sean Severson: Great. Thanks.

Christopher Hayes: This is Sean Severson, and for Peter, who's traveling right now. Chris, I had a question going back to the bankruptcy of the installer. Obviously, it highlights the differences in the business models, but does it change anything for you to create opportunities? I'm just wondering down the overall impact in rooftop solar if any, and specifically how Spruce might benefit from that. Yeah, thanks, Sean. I appreciate the question.

Speaker Change: Great, thanks. This is Sean Severson in for Peter who's traveling right now.

Sean Severson: Chris, you know, I had a question going back to the bankruptcy of the installer. I mean, obviously, it highlights the differences in the business models, but does it change anything for you or create opportunities? I'm just wondering about the overall impact of rooftop solar, if any, and specifically how Spruce might benefit from that.

Sean Severson: Chris, you know, I had a question going back to the bankruptcy of the installer, and obviously it highlights the differences in the business models, but does it change anything for you or create opportunities? I'm just wondering on the overall impact.

Speaker Change: and Rooftop Solar, if any, and specifically how Spruce might benefit from that.

Chris Hayes: Yeah, thanks, Sean. I appreciate the question. Really, what it illustrates to me is that our model of being a third-party owner is the best sector to be in solar. We don't have any of the origination costs associated with customer acquisition.

Christopher Hayes: Really, what it illustrates to me is that our model of being a third-party owner is the best sector to be in solar. We don't have any of the origination costs associated with customer acquisition. Rather, we grow through acquisitions of large numbers. In fact, we've got several portfolios that we're diligent at this moment. The other piece in terms of opportunity that creates we are being incredibly judicious with our capital to try and find deals that make sense for us, and we're actively in the market doing it. And as we see sort of chaos like this, we think the opportunity set is expanding.

Chris Hayes: associated with customer acquisition. Rather, we grow through acquisitions of large numbers. In fact, we've got several portfolios that we're diligencing at this moment. And, you know, the other piece in terms of opportunities it creates...

Kayla: Thank you for standing by. My name is Kayla, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Spruce Power 2nd quarter 2024 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, again, press star in one.

Chris Hayes: Rather, we grow through acquisitions of large numbers. In fact, we've got several portfolios that we're diligently looking at at this moment. And, you know, the other piece in terms of opportunities it creates. We are being incredibly judicious with our capital to try and find deals that make sense for us, and we're actively in the market doing it. And as we see sort of chaos like this, we think the opportunity set is expanding. So I think the sky's the limit for Spruce. My next question is related to Spruce Pro.

Speaker Change: We are being incredibly judicious with our capital to try and find deals that make sense for us, and we're actively in the market doing it, and as we see sort of chaos like this, we think the opportunity set is expanding. So, I think the sky's the limit for Spruce.

Christopher Hayes: So I think this guy's the limit for spruce.

Sean Severson: My next question is related to spruce pro. I know you've had a new hire there as well, but I'm trying to understand the go-to-market strategy. What is the marketing strategy around this and building awareness? I know it's still new, but what is the plan for getting the word out on this? Yeah, good question.

Chris Hayes: I know you've had a new hire there as well, but I'm trying to understand the go-to-market strategy. What is the marketing strategy around this and building awareness? I know it's still new, but what is the plan for getting the word out? Yeah, good question. So you probably heard Rich DiMatteo started this quarter. He's in the seat.

Speaker Change: My next question is related to Spruce Pro. I know you've had a new hire there as well, but I'm trying to understand the go-to-market strategy. What is the marketing strategy around this and building awareness? I know it's still new, but what is the plan for getting the word out on this?

Bronson Fleig: I would now like to turn the call over to Bronson Fleig, Head of Investor Relations, you may begin. Good afternoon, and welcome to Spruce Power's conference call to discuss results for the 2nd quarter of 2024 with me today are Chris Hayes, our chief executive officer and Sarah Wells, our chief financial officer. Our call this afternoon will include statements that speak to the company's expectations, outlook, and predictions of the future, which are considered four-looking statements.

Christopher Hayes: So you probably heard Rich Tomato started this quarter. He's in the seat; he's worthwhile to have him, and the first order of business is productizing. The second order of business is commercializing, and so while we have a few existing pipeline candidates that we're working towards closing, we're aggressively trying to pursue our distinctive confidence in this servicing space and get to a much larger audience. So we're doing all the things you'd expect. Conferences, cold calling, everything in between, and over these next quarters, we think we're going to be building a really robust pipeline. Is that something you think converts quickly, so the efforts translate?

Speaker Change: Yeah, good question. So you probably heard Rich DiMatteo started this quarter. He's in the seat. We're thrilled to have him.

Chris Hayes: He's worth thrilled to have him, and the first order of business is productizing. The second order of business is commercializing. And so while we have a few existing pipeline candidates that we're working towards closing, we're aggressively trying to pursue our distinctive confidence in this servicing space and get to a much larger audience. So we're doing all the things you'd expect. Conferences, cold calling, and everything in between. And over these next quarters, we think we're going to be building a really robust pipeline. Is that something you think converts quickly, so the efforts pay off?

Speaker Change: And the first order of business is productizing. The second order of business is commercializing. And so while we have a few existing pipeline candidates that we're working towards closing, we're aggressively trying to pursue.

Bronson Fleig: These four-looking statements are subject to risk and uncertainties, many of which are beyond our control, which make all their actual results to differ materially from those expressed in or implied by these statements. We are not obliged to revise or update any four-looking statements, except that may be required by law. Please refer to our disclosures regarding risk factors and four-looking statements in today's earnings release and other SEC filings. A copy of our press release has been posted to the investor relations page of our website for reference. The non-gap financial measures discussed in this call are reconciled to the US gap equivalent and can be found in a press release that we issued this afternoon.

Speaker Change: our distinctive confidence in this servicing space and get to a much larger audience. So we're doing all the things you'd expect, conferences, cold calling, everything in between. And over these next quarters, we think we're gonna be building a really robust pipeline.

Chris Hayes: I mean, you know what I mean, if you're out there, is this something that has a faster adoption curve, or is there a process here behind it that I'm not understanding? Yeah, so great question. These are longer sales cycle transactions, right? This is just the nature of what an ideal customer prospect looks like, the nature of the selection process, and how we fit into it. So, you know, these aren't, these aren't one or two months sales cycles. They are longer.

Christopher Hayes: I mean, you know what I mean? If you're out there, is this something that has a faster adoption curve, or is there a process here behind it that I'm not understanding? Yeah, so great question. These are longer sales cycle transactions, right? This is just the nature of what an ideal customer prospect looks like, the nature of the selection process and how we fit into it. So, you know, these aren't, these aren't one or two months, sales cycles; they are longer. And so that's why we're building out the team in a capitalite manner and aggressively starting to pursue the market to grow that pipeline.

Speaker Change: Is that something you think that converts quickly so the efforts translate? I mean you know what I mean if you're if you're if you're out there is this something that has a faster adoption curve or is there a process here behind it that I'm not that I'm not understanding?

Chris Hayes: And so that's why we're building out the team in a capitalist manner and aggressively starting to pursue the market to grow that pipeline. Right, thanks, Chris. My last question is kind of about the bigger picture.

Christopher Hayes: With that, I will turn the call over to our CEO. Chris, go ahead. Thank you, Bronson, and good afternoon to everyone. I want to express how excited I am about the future of Spruce. I can say after these first few months at CEO, we are more confident than ever about the opportunities we have in front of us. As I mentioned in our first call together in May, our strategic priority center on growth, both through the acquisition of operating residential solar assets and expanding our capital-like third-party service offering.

Speaker Change: Yeah, so great question. These are longer sales cycle transactions, right? This is just the nature of

Speaker Change: what an ideal customer prospect looks like.

Speaker Change: the nature of the selection process and how we fit into it. So, you know, these aren't one or two month sales cycles, they are longer. And so that's why we're building out the team in a capital light manner and aggressively starting to pursue the market to grow that pipeline.

Sean Severson: Right.

Chris Hayes: I think, you know, the drumbeat certainly out there that electricity demand is up and probably going to continue to go up for some time, driven by all the things we're well aware of. What I'm trying to get to is a picture of how rooftop solar fits into, let's say, the mega trend of increased demand from AI and EVs and a myriad of other things. How does that impact rooftop solar specifically and for spruce? Yeah, so great question. Look, writ large, it looks like this.

Sean Severson: Thanks, Chris. My last question is kind of is a bigger picture landscape. I think, you know, the drumbeat certainly out there that electricity demand is up and probably going to continue to go up for some time. I mean, I don't know if you're involved with things. Well aware of what I'm trying to get to is a picture of how rooftop solar fits into a state of the mega trend of increased demand from AI and EVs and a myriad of things. How does that impact rooftop solar specifically and for Spruce? Yeah, so great question. Look, writ large.

Christopher Hayes: On both fronts, our teams are very busy with due diligence on a rapidly growing opportunity pipeline. We are intensely focused on executions to gain scale and drive inflection of free cash flow generation. I will make more detailed remarks on our outlook.

Speaker Change: All right, thanks Chris. My last question is kind of is a bigger picture landscape. I think, you know, the drumbeat is certainly out there that electricity demand is is up and probably going to continue to go up for some time, you know, driven by all the things we're well aware of. What I'm trying to get to is a picture of how

Christopher Hayes: First, I want to quickly comment on our second quarter results and operations. Our core business continues to deliver solid results anchored by long-term cash flows from 75,000 rooftops. For Q2, revenue was 22.5 million and operating EBITDA was 14.4 million. Our total cash position was $150 million, a quarter end, up slightly from Q1.

Speaker Change: Rooftop solar fits into, let's say, the megatrend of increased demand from AI and EVs and a myriad of things. How does that impact rooftop solar specifically and for Spruce?

Christopher Hayes: It looks like this power costs are going to be going up over the next decade. Cost of solar continues to come down, and the economic argument for an average homeowner is super positive. They will save money with rooftop solar. So while all the originators are going to go out and chase these one-off customers to put solar on their roof. All that is doing is increasing the opportunity set for us at the Bruce Power to acquire these portfolios either programmatically or through large acquisitions, of which we've had 13 through our history. And so, as the total addressable market gets bigger, we think our kind of pure play third party ownership model is the way to go, and we're going to keep doing it.

Chris Hayes: Power costs are going to be going up over the next decade, costs of solar energy continue to come down, and the economic argument for an average homeowner is super positive. They will save money with rooftop solar. So while all the originators are going to go out and chase these one-off customers to put solar on their roofs, all that is doing is increasing the opportunity set for us at Spruce Power to acquire these portfolios either programmatically or through large acquisitions, of which we've had 13 in our history.

Speaker Change: Yeah, so great question. Look, writ large it looks like this. Power costs are going to be going up over the next decade.

Speaker Change: Costs of Solar continues to come down and the economic argument for an average homeowner.

Christopher Hayes: Sarah will give more details to the financial results in her section. During the quarter, we refinanced our nearest maturing non-recourse debt to spruce power for facility. We are pleased to start a new lending relationship with bearings in this facility. We secured attractive terms and institutional interest for this paper was very high across the traditional bank loan market as well as public and private credit markets. This speaks to the quality of an appetite for residential solar back debt structuring and spruce's reputation as a high quality asset manager. We expect to benefit from this deepening pool of capital over the near future.

Bruce Power: is super positive. They will save money with rooftop solar. So while all the originators are going to go out and chase these one-off customers to put solar on their roof, all that is doing is increasing the opportunity set for us at Bruce Power.

Bruce Power: to acquire these portfolios either programmatically

Chris Hayes: And so as the total addressable market gets bigger, we think our kind of pure play third party ownership model is the way to go and we're going to keep doing it. And to the homeowner, this becomes an economic decision, right?

Bruce Power: or through large acquisitions of which we've had 13 through our history.

Bruce Power: And so as the total addressable market gets bigger, we think our kind of pure play, third-party ownership model.

Christopher Hayes: And, and to the homeowner, this becomes an economic decision, right? This is this is, you know, electricity cost going up opportunity to lower my electricity cost straight, straightforward. Safe cost kitchen table issue. How can we lower our electricity bill? It goes up year over year, and this is the way to lower cost periods.

Bruce Power: is the way to go.

Bruce Power: and we're going to keep doing it.

Chris Hayes: This is, this is, you know, electricity costs going up, an opportunity to lower my electricity costs. Straight, straightforward, safe costs, a kitchen table issue, how can we lower our electricity bill, it goes up year over year, and this is a way to lower costs, period. And as a reminder, if you would like to ask a question, please press the star in one on your telephone keypad. We'll pause for just one more moment. And there are no further questions at this time.

Speaker Change: And to the homeowner, this becomes an economic decision, right? This is, you know, electricity costs going up, opportunity to lower my electricity costs. Straightforward.

Speaker Change: Safe costs, kitchen table issue, how can we lower our electricity bill? It goes up year over year and this is a way to lower costs, period.

Kayla: And, as a reminder, if you would like to ask a question, please press the star in one on your telephone keypad.

Speaker Change: And as a reminder, if you would like to ask a question, please press the star and 1 on your telephone keypad.

Kayla: We'll pause for just one more moment.

Christopher Hayes: I want to sincerely thank our employees across all departments for their hard work which led to this record achievement in customer satisfaction.

Speaker Change: We'll pause for just one more moment.

Bronson Fleig: And there are no further questions at this time.

Speaker Change: [inaudible]

Chris Hayes: Bronson Fleig, I will turn the call back over to you. Thanks, operator, and thank you to everyone 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. You can all disconnect. Thanks.

Bronson Fleig: Bronson flag. I will turn the call back over to you. Thanks, operator, and thank you to everyone for joining us today and for your continued support.

Speaker Change: And there are no further questions at this time. Bronson Fleig, I will turn the call back over to you.

Bronson Fleig: If you have any questions, please contact me or our best relations team.

Bronson Fleig: Thanks operator and thank you to everyone 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. You can all disconnect. Thanks.

Bronson Fleig: This concludes our call. You can all disconnect. Thanks. Thank you.

Christopher Hayes: This need presents opportunity for us in both equity sponsor capital commitments and M&A opportunities. This need is exacerbated by the recent exits of a large player from this market. Next, this acceleration of solar lease and PPA contract origination requires robust service and capabilities for at least 20 to 25 years. Solar servicing is our foundation. This need creates robust opportunity to service third-party solar and other energy assets that we do not own. Keep in mind, these opportunities are in addition to the substantial installed base of residential solar assets in the market today.

Christopher Hayes: With this market context, I'll speak to how spruce thinks about executions. As it relates to M&A, we will remain disciplined in our return hurdles. Bid-ask spreads are still somewhat wide, yet we are finding opportunities in evaluating robust pipeline of seasoned solar portfolios in the secondary market. Also, we are evaluating what we call programmatic offtake, where spruce would step in earlier in the asset life cycle closer to PTO as the long-term sponsor and owner of solar lease and PPA contract. To be clear, this would not involve investment in working capital or funding milestone payments. Rather, we are looking at off-taking recently installed solar systems by mature installers.

Christopher Hayes: The solar and energy service in front, we've hit the ground running.

Christopher Hayes: In July, we announced the hiring of the general manager, spruce pro, rich tomato. His team is actively developing a pipeline of servicing opportunities and initial indications of interest remain strong. As a reminder, we've used servicing opportunities as capital light endeavors, where spruce can leverage its existing investment in people, processes, and service technology.

Christopher Hayes: Liquidity and capital market access concerns are clearly very pervasive in the upstream installation market. That said, we will be patient and not rush to deploy capital to merely boost our growth metrics. We are focused on underwriting attractive returns and driving toward inflection in free cash flow generation. The beauty of our business model is that we can harvest long-term cash flows while we prudently evaluate investment opportunities. We are, quote, paid to wait.

Christopher Hayes: Given the opportunity set discussed, the ability to be nimble and opportunistic is a priority for Spruce and its board of directors. We want to preserve our cash position to be highly competitive and effective in pursuing near-term growth opportunities. We believe this approach will position us well in our pursuit of being the dominant long-term owner and operator of distributed energy assets. We will continue to assess investment opportunities, including share repurchases, on a quarterly basis with our board of directors.

Christopher Hayes: Before handing the call to Sarah, I'll make some comments on a public residential solar installer who recently filed for chapter 11. This event, while unfortunate, underscores the difficult operating environment for residential solar installers.

Christopher Hayes: However, we are hopeful that it acts as a positive catalyst for the industry to move towards a more sustainable origination model focused first on sound economics rather than growth at whatever cost. Additionally, this event allows us to contrast the high-risk business model of many large solar companies versus this Spruce model. Spruce only acquires cash flowing rooftop portfolios. We do not have a large and costly network of salespeople and channel partners allowing us to pursue a low customer acquisition cost. We do not have substantial working capital requirements and we are not subject to cost of capital risk associated with the timing lag between installation and raising project level capital.

Christopher Hayes: In summary, the conservative nature of our business model should give you all great comfort in understanding the risks of our business and how we mitigate them.

Sarah Wells: With that, I'll hand the call to Sarah to address second quarter financials. Thanks, Chris. I'll provide more details related to our second quarter, 2024 financial results as well as our business outlook for the remainder of the year. Second quarter revenue was 22.5 million compared to 22.8 million in the prior year period. The modest year-over-year decrease is largely due to lower revenues from solar renewable energy Credit. Second quarter core op-x which we define as SGNA and Portfolio ONM with 21.1 million in total as compared to 19 million for the prior year period.

Sarah Wells: Breaking this out, Portfolio ONM expense increased to 4.4 million in the second quarter from 3 million in the prior year period. The increase is tied to higher non-routine servicing costs such as expenses tied to hardware replacements. SGNA expense increased to 16.7 million in the second quarter from 16 million in the prior year period.

Sarah Wells: For the quarter, SGNA was negatively impacted by 1.9 million of expense related to the CEO transition. Fritz generated a gap net loss attributable to stockholders of 8.6 million. We consider operating EBITDA as a key measure in evaluating the company's financial performance. Operating EBITDA is defined as adjusted EBITDA plus net proceeds from the company's investment in the SCMTH master lease. The interest we earn on our cash investments and proceeds from system buyouts and prepayments.

Sarah Wells: Our unrestricted cash balance increased due to normal seasonality of customer collections. However, our unrestricted cash balance decreased sequentially as a result of higher O&M, partially offset by net proceeds from the refinance of our spruced power for our credit facility during the quarter. The total principal balance of long-term debt was 640 million at the end of the second quarter, with a blended interest rate of 5.9% including the impact of hedge arrangements. As a reminder, all of Spruce's debt is non-recourse and serviced by customer collections of our various portfolio companies.

Sarah Wells: At quarter end, all of our floating rate debt instruments were materially hedged with interest rate swaps, with a mark to market on our swaps of positive $30 million. As Chris mentioned, during the quarter, we successfully closed on the refinance of our spruced power for credit facility. We are proud of the execution which we believe strikes a good balance of extending tenor, while providing flexibility over the medium term to capitalize on our expectation for continued strong performance of the underlying assets, which are predominantly linked to prevailing retail electricity rates in California.

Sarah Wells: The transaction represents Spruce's first rated debt issuance in 2016, with cruel bond rating agency rating the new facility A+. We are proud of the institutional interest that's refinanced, solicited, speaking to the quality and performance of our assets, and we expect to benefit from these expanded relationships over the long term.

Sarah Wells: Last, moving to full-year guidance which can be found on slide 20 of our investor relations deck. With two quarters of the year complete, we are maintaining our 2024 financial guidance, though we are tracking towards the lower end of the operating EBITDA and adjusted free cash lowering, as Chris mentioned, while our M&A pipeline continues to grow, Spruce has not had any M&A activity to date in 2024. For context, the high end of our guidance ranges assumed the acquisition of approximately 6,000 solar lease and PPA contracts in the first half of 2024.

Sarah Wells: We are also experiencing moderately higher operating expenditures than previously anticipated. This is due to unforeseen costs tied to the CEO transition, which we earlier described as having a negative $1.9 million impact to SG&A during the second quarter. We also incurred moderate legal spending connection with a recent contest of our annual proxy and ultimately a cooperation agreement with one of our shareholders.

Sarah Wells: Last, non-routine operations and maintenance expenditures have turned it higher thus far in 2024 than we originally anticipated. These are costs tied to rolling trucks to repair or replace hardware. Currently, we believe this O&M dynamic to be a transitory in nature.

Sarah Wells: In summary, the pace of M&A versus previous expectations and higher than expected operating expenditures combined to inform our current expectations for our financial guidance metrics to track towards the lower end of their respective ranges. This concludes our prepared remarks.

Kayla: Operator, please open the line for questions. At this time, I'd like to remind everyone in order to ask a question, press star than the number one on your telephone keypad.

Sean Severson: Our first question comes from the line of Peter Gastreich with Water Tower Research. Your line is open. Great. Thanks. This is Sean Severson and for Peter, who's traveling right now. Chris, I had a question going back to the bankruptcy of the installer. Obviously, it highlights the differences in the business models, but does it change anything for you to create opportunities? I'm just wondering down the overall impact in rooftop solar if any and specifically how spruce might benefit from that. Yeah, thanks, Sean. I appreciate the question.

Christopher Hayes: Really, what it illustrates to me is that our model of being a third-party owner is the best sector to be in solar. We don't have any of the origination costs associated with customer acquisition. Rather, we grow through acquisitions of large numbers. In fact, we've got several portfolios that we're diligent at this moment. The other piece in terms of opportunity that creates we are being incredibly judicious with our capital to try and find deals that make sense for us and we're actively in the market doing it and as we see sort of chaos like this, we think the opportunity set is expanding. So I think this guy's the limit for spruce.

Christopher Hayes: My next question is related to spruce pro. I know you've had a new hire there as well, but I'm trying to understand the go-to-market strategy. What is the marketing strategy around this and building awareness? I know it's still new, but what is the plan for getting the word out on this? Yeah, good question. So you probably heard rich tomato started this quarter. He's in the seat, he's worthwhile to have him, and the first order of business is productizing.

Christopher Hayes: The second order of business is commercializing, and so while we have a few existing pipeline candidates that we're working towards closing, we're aggressively trying to pursue our distinctive confidence in this servicing space and get to a much larger audience. So we're doing all the things you'd expect. Conferences, cold calling, everything in between, and over these next quarters, we think we're going to be building a really robust pipeline. Is that something you think converts quickly so the efforts translate?

Christopher Hayes: I mean, you know what I mean? If you're out there, is this something that has a faster adoption curve or is there a process here behind it that I'm not understanding? Yeah, so great question. These are longer sales cycle transactions, right? This is just the nature of what an ideal customer prospect looks like, the nature of the selection process and how we fit into it. So, you know, these aren't these aren't one or two months, sales cycles, they are longer. And so that's why we're building out the team in a capitalite manner and aggressively starting to pursue the market to grow that pipeline. Right.

Christopher Hayes: Thanks, Chris.

Christopher Hayes: My last question is kind of is a bigger picture landscape. I think, you know, the drumbeat certainly out there that electricity demand is is up and probably going to continue to go up for some time. I mean, I don't know if you're involved with things well aware of what I'm trying to get to is a picture of how rooftop solar fits into a state of the mega trend of increased demand from AI and EVs and a and a myriad of things.

Christopher Hayes: How does that impact rooftop solar specifically and and for spruce? Yeah, so great question. Look, writ large. It looks like this power costs are going to be going up over the next decade. Cost of solar continues to come down and the economic argument for an average homeowner is super positive. They will save money with rooftop solar. So while all the originators are going to go out and chase these one off customers to put solar on their roof.

Christopher Hayes: All that is doing is increasing the opportunity set for us at the Bruce power to acquire these portfolios either programmatically or through large acquisitions of which we've had 13 through our history. And so as the total addressable market gets bigger, we think our kind of pure play third party ownership model is the way to go and we're going to keep doing it. And and to the homeowner, this becomes an economic decision, right?

Christopher Hayes: This is this is, you know, electricity cost going up opportunity to lower my electricity cost straight, straightforward. Safe cost kitchen table issue. How can we lower our electricity bill? It goes up year over year and this is the way to lower cost periods. And as a reminder, if you would like to ask a question, please press the star in one on your telephone keypad. We'll pause for just one more moment. And there are no further questions at this time.

Bronson Fleig: Bronson flag. I will turn the call back over to you. Thanks operator and thank you to everyone for joining us today and for your continued support. If you have any questions, please contact me or our best relations team.

Kayla: This concludes our call. You can all disconnect. Thanks.

Kayla: Thank you.

Q2 2024 Spruce Power Holding Corp Earnings Call

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