Spruce Power Holding Corporation

Thank you for standing by. My name is John and I'll be your conference operator for today. At this time, I would like to welcome everyone to the Spruce Power third quarter 2024 earnings conference call. All lines have been placed in 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 one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Bronson Flagg. Head of Investor Relations. Please go ahead.

Good afternoon and welcome to Spruce Power's conference call to discuss results for the third 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. These forward-looking statements are subject to risk and uncertainties, many of which are beyond our control, which may cause 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 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. 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.

Thank you, Bronson, and good afternoon to everyone. Our top priority is to grow our distributed energy platform through the acquisition of operating residential solar assets and by expanding our Capital Light third-party service offering, Spruce Pro, on both fronts. Our commercial teams are poised to convert some longstanding opportunities in our growth pipeline. We're focused on executing on these opportunities, which will enable us to further scale our owner-operator platform and drive an inflection in free cash flow generation. I'll make more detailed remarks on our pipeline and outlook shortly. First, I want to briefly address third quarter results and operations. Later, Sarah will dive deeper into financial results. Our core business delivered solid results, supported by the predictable monthly cash flows from over 75,000 solar assets and contracts. Third quarter revenue was 21.4 million, and operating EBITDA was 17.7 million. Stability and predictability of financial results is often measured by a metric known as annual recurring revenue, or ARR. Similarly, here at Spruce, management uses an internal measure called business cash inflows, which accounts for top line recurring revenue, as well as other sources of consistent cash inflows that do not flow through GAAP P&L. Our results this quarter affirm our previously referenced run rate of between 120 to 130 million of annual run rate business cash inflows. Our balance sheet is also rock solid with total cash of 150 million at quarter end unchanged from the second quarter period. Our unrestricted cash per share as of quarter end was $6.11. Our receivables are also rock solid with great collections performance due to the nature of our customers. Most of our customers own their homes and are early adopters of solar with an average system age of approximately 10 years. Our customers are highly incented to pay us because rooftop solar offers compelling economic value. Inflation in retail utility rates across our geographies means that our customers save meaningfully through the consumption of power generated from our solar systems sitting on their rooftops. Collections are also influenced by customer satisfaction, an intense area of focus for us. Spruce spent many years building an integrated solar servicing organization, which we believe is best in class. Underscoring our view, one of our project finance lenders recently stated, and I quote, Spruce Servicing is the top servicer in residential solar. Our review is also supported by continuous improvement in our customer satisfaction scores, what we refer to as CSAT. During the quarter, our CSAT score was 81%, versus 75% a year ago, a significant gain. I want to thank all Spruce employees for their dedication in making Spruce a leader in customer service in our industry. Now let's turn to an update on near-term growth initiatives. For context, the Spruce business model is unique in our sector, combining predictable high margin cash flow from our portfolio rooftops with less predictable but large step function growth through disciplined acquisitions. Our stable cash flow enables that discipline. Unlike peers who need to support a high fixed cost origination machine, we are never forced to make a bad acquisition for the sake of growth. During the third quarter, we signed a non-binding letter of intent to acquire a portfolio of close to 10,000 home solar systems, all with long-term contracts. the counterparty is a highly credible operator in consumer energy markets. We expect to close in the fourth quarter of 2024. If completed, this deal should generate impressive cash on cash returns for years to come. We expect to fund the equity portion of the acquisition with cash on hand with leverage coming from non-recourse senior debt at attractive pricing. Beyond this information, we can't comment on any more details. And always keep in mind, Nothing is certain until the ink is dry. However, we can say that we are excited about the growth and free cash flow prospects of this deal. Extending our M&A strategy, we are evaluating what we call programmatic offtake. Under this approach, Spruce would acquire solar lease and PPA contracts from installers earlier in asset life, right at the time when the solar system is installed and granted permission to operate. This opportunity is exciting because we see a substantial need for long-term capital providers that can not only own but also service solar lease and PPA contracts for decades. Looking more broadly at the M&A environment, our deal team continues to evaluate the pipeline of seasoned solar portfolios in the secondary market. These deals are in various stages of evaluation. We cannot offer any more comments on definitive timelines and conversion probabilities. On top of this M&A activity, we are now ramping up our Spruce Pro servicing business, which offers strong growth potential as we add customers and predictable revenue as we serve those customers over a multi-year contract. We're off to a strong start by cultivating a pipeline of servicing opportunities. After quarter ends, Spruce entered a memorandum of understanding with a large residential solar installer to provide servicing solutions to a portfolio with thousands of residential solar customers. The framework in place establishes visibility to recurring revenue through a multi-year servicing agreement. We expect to execute the agreement in the fourth quarter. We're excited about this milestone for Spruce Pro. The agreement is a testament to the broad capabilities of our servicing team and is a significant step in unlocking value from our investment in the platform, which until now has managed in large part only our own assets and a few third party owned portfolios. Our commercial teams remain active in developing additional servicing opportunities and indications of interest are accelerating. Strong fundamental factors underpins BrucePro. such as the increased popularity of lease and PPA financing versus loans, new market entrance with unsophisticated or lack of integrated servicing capabilities, and the permanent exit of some legacy residential solar firms. We believe Spruce is poised to capture a growing number of third-party servicing customers in the near term. Now let's discuss our disciplined capital allocation strategy. Our robust balance sheet enables us to pursue these growth opportunities. As I mentioned earlier, at quarter end, Spruce had $114 million in unrestricted cash. We intend to deploy some unrestricted cash over the near term for M&A, such as the imminent 10,000 rooftop deal, which offers an attractive yield on our equity investment. Keep in mind that we are a levered buyer of assets. So, our cash balance mostly influences the equity portion of future M&A. Our buying power far exceeds that $114 million balance. Our model is evolving from our private ownership model, which prioritized raising maximum leverage, to instead focus on more equity value, thus yielding more cash flow to Spruce. Because our business is running close to cash flow break even today, The net cash flow from any new acquisition should flow mostly to the bottom line. We are acutely focused on driving this cash flow inflection point, and this is the reason that I often state Spruce is really just at the starting blocks. Looking at our long-term capital allocation strategy, we envision a growing portfolio of long-duration cash flow generating assets that maximize our flexibility to create value. We do this through more asset acquisitions, debt reduction, and potentially other shareholder return initiatives, such as share buyback. Our flexibility enables us to pursue any of those options at any time, depending on which offers the most attractive return. In assessing our current growth opportunity set, capital position, and current trading levels of our common shares, we have decided to resume common stock repurchase activity, which may occur as early as this quarter. We expect to be opportunistic under our repurchase program, though notably we will aim to balance repurchases with retaining adequate dry powder to also execute on what we view as a strong growth opportunity set for Spruce. The amount, time, manner, and price of repurchases will be determined in our discretion, and we may affect repurchases through open market transactions, privately negotiated transactions, rule 10b-5-1 trading plans, and other means. In closing, we have our heads down, focused on execution and profitably growing our platform through M&A and aggressive expansion of our service and organization into the third-party market. Our company is naturally poised to be the number one owner-operator and servicer of residential solar assets. With that, I'll hand the call to Sarah to address second quarter financials.