Good afternoon. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to the Spruce Power Fourth Quarter 2022 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. Thank you. Bronson Fleig, Head of Investor Relations for Spruce Power. Please go ahead.

Thank you. Good afternoon, and welcome to Spruce Power's conference call to discuss results for the fourth quarter and full year 2022. With me today are Christian Fong, our Chief Executive Officer; and Donald Klein, our 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. 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 is the timing of some of the processes we will discuss today, which could impact the expectation related statements you will hear shortly. 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, our Annual Report on Form 10-K, and our 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 the 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. Christian, go ahead.

Thanks, Bronson, and thanks to everyone for joining us on the call today. Welcome to our first earnings call as the new Spruce Power. Although our Q4 and full year 2022 financials will reflect the results of the divested operations of XL Fleet, as we speak to you today, the transformation to Spruce Power is largely complete. Last quarter, we talked about our post-merger path being three steps that is finishing the strategic review of the legacy XL businesses; then transitioning the management team; and finally, resuming growth through portfolio acquisitions. With the exit from legacy XL businesses, our sole business now is owning, operating and servicing rooftop solar installations. I resumed the CEO role on February 1st, and the company is led predominantly by the executive team that built Spruce Power over the last five years. Our name has changed and our headquarters moved to Denver. In all regards, we are a pure-play residential rooftop solar company. Finally, we hit the ground running on portfolio growth. We announced earlier today that we acquired a portfolio of over 22,000 customers, more on that in a moment. Bottom line, we executed the plan we described last fall, and our future has never been brighter. Strategically, Spruce starts 2023 in a position of strength with a stable portfolio that generates significant recurring revenue. Importantly, during turbulent economic times, we have access to substantial growth capital. We started 2023 with over $200 million of cash. Furthermore, our common stock, when properly valued by the market, can be used to fund future growth. Simply put, cash is king, and we have it. Including today's portfolio acquisition, we own rooftop solar assets and contracts in 18 states, powering over 70,000 homes. We also provide billing, maintenance and renewable energy credit services to third-party clients for another 7,500 customers. We are among the top five owner-operators of U.S. residential solar companies based on 2022 revenue. With our highly differentiated growth strategy, we believe we can eventually move into the top three. What do we do differently? We don't directly originate or install rooftop systems. Instead, we purchase entire portfolios of rooftop assets from developers and other asset owners. Origination and installation are labor, sales and capital intensive. Our model enables us to achieve scale more quickly by buying systems cheaper and faster than we can build, and we don't tie up working capital. We think recent capital markets volatility highlights the stability of asset ownership versus other pass-through origination models. Importantly, our rooftops are not passive financial holdings. There are opportunities to increase revenue. We can sell through our existing customers' add-on technologies that are a part of what we call the Home Power Systems 2.0. If customers start with solar, then add other products like battery storage, smart grids, and consumer power components, as systems get complex, we can offer management of residential energy data, renewable energy credits, and other services that move customers toward greater savings and greater energy independence. For now though, Spruce’s growth is being driven by acquisitions of systems and customers. Furthermore, the recurring revenue and high margins of rooftop solar have enabled access to plentiful non-recourse project debt. We started 2023 confident that we had access to capital sufficient for growth to well over 100,000 rooftops. We set a near-term goal of over 80% growth by the end of 2024. That goal would take us to over 90,000 rooftops, creating meaningful scale. From a strategic standpoint, we expand our customer and geographic base; from a financial standpoint, we expand the operating margins on the entire portfolio, even while preserving capital for future growth. The large acquisition announced today in one step gets us halfway to our goal of 90,000 rooftops, well ahead of schedule. Rooftop solar is a customer-oriented industry, so we also intend to differentiate customer experience. We are committed to creating the best customer experience possible, which we believe also requires a great customer-facing employee team. We are dedicating resources to elevating both the customer experience and the quality of our team. We've built a Texas-based customer experience team, invested in supporting technology, leading to substantial improvements in customer satisfaction ratings. In 2022, we went from 54% customer satisfaction in the first quarter to 81% in the fourth quarter. Our customer experience improvements were driven by a strong service team committed to building their technical knowledge and deepening internal collaboration. At our recently launched Spruce University, more than half the company is now working toward a Spruce Solar certification. We expect this more knowledgeable staff to provide better, faster, and smarter answers for our customers. As a result, they should also be more effective at selling appropriate products for future upgrades. To better attract talent, we raised our minimum wage from $15 to $17. Because our interface with customers increasingly depends on technology, we are upping investment in customer-facing systems. In February, we launched an efficient new billing system. It gets monthly invoices to customers nearly a week earlier than the old system and provides our customers with a single sign-in online interface to access their account. We expect meaningful improvements in customer satisfaction and cost savings because today only 5% of our customer interactions are through virtual tools. Customer service is still primarily through live personnel. There are trade-offs, of course; personalized service can lead to deeper customer interactions. If feedback from our customers is unambiguous, they want the speed and efficiency that comes from technical tools, that's why we are working hard in 2023 to build those capabilities for an even better customer experience. Now, let me get specific in outlining Spruce Power's goals for 2023 and 2024. First, we started 2023 with the goal of growing our customer portfolio by about 80% in the next two years, which would take us over 90,000 rooftops. Beyond customer count growth, we're also looking for growth in the average number of products and services each customer uses, which improves both our share of wallet and share of mind, as customers make decisions about their home power. Since we grow through acquisition, we have a rate of return hurdles too and target an equity IRR in the teens for new acquisitions. Second, we want to maintain a balanced use of capital, especially when it comes to our mounting positive cash flow. Over the next two years, we expect to allocate 10% to 20% of our EBITDA to capital improvements for upgrades to individual systems, as well as building out the stronger customer service technologies. Beyond these critical investments, our approach to capital allocation will emphasize maximum flexibility for growth on a per-share basis. We may allocate cash flows to future acquisitions, debt repayment, or other measures that we feel best enhance returns to our shareholders. Third, we aim to steadily improve financial performance. The primary financial performance metrics that we manage toward are EBITDA and free cash flow. We also watch a handful of secondary metrics. First, the subscriber value of the owned portfolios, recurring cash flows, which we report on a quarterly basis. Secondly, our net debt level relative to EBITDA. Let's examine our goals for each of these. For EBITDA and cash flow, we intend to build long-term value for shareholders by growing predictable recurring cash flows with high credit quality customers. For subscriber value, we enable you to easily compare us to our residential solar peers by reporting the net present value of the future cash flows from our own portfolio using a 6% discount rate currently. For net debt-to-EBITDA, this size-adjusted measure is the ratio of our debt balance net of our cash and interest rate swap value divided by EBITDA. Over time, we intend to reduce this metric from the current 6.8x. However, considering recent turbulence in the banking sector, we may also seek better terms or transparency from our debt partners. Please keep in mind when valuing us that our debt is entirely non-recourse project debt with first maturity still at least three years out. Our debt was struck at attractive rates across the whole debt structure; we are paying a composite rate of about 5.5%, and I want to emphasize that we have zero corporate recourse debt. Let me make one final note on financial performance. We intend to grow recurring EBITDA by investing in redeploying cash flow into acquisitions with high IRR, yet knowing that our cash flow can also pay down debt, we always have the two good options of either growing per-share cash flows or strengthening our balance sheets. Both are good near-term outcomes. Beyond financial performance, you should also evaluate our performance in customer experience. We finished 2022 with an average customer satisfaction or what we call CSAT average CSAT score of 62% for the full year. We ended the year with an extraordinary fourth quarter score of 81%. Our 2023 goal is a full year CSAT exceeding 70%. We intend to drive improvement by investing in new employee tools, continued staff training, and we also expect to steadily improve externally reported reputation scores. Also look for wise use of new technology. Nearly 100% of our portfolio CapEx is for technologies that improve customer experience, especially as residential power shifts from a home infrastructure product to the interactive experience of a consumer good. We have two big projects underway. First, we are implementing improved asset-level monitoring systems. We have already upgraded about 65% of our original 3G-based monitoring to 4G and 5G or WiFi meters. Second, we are building our own integrated enterprise technology stack that enables our customers to interact with their Spruce Home Power System. We expect to complete both projects by the end of 2024. As we look ahead, my confidence in our 150-strong team has never been greater. I laid out hard but achievable goals, and I know our team is up to the task. If we succeed, which we fully intend to do, we will create substantial value for both our customers and our shareholders. Before I turn the call to Don to review financials, I want to discuss the exciting portfolio acquisition we announced earlier today. We acquired a portfolio of approximately 22,500 residential solar contracts across 10 U.S. states. We called this portfolio the SEMTH Portfolio. SEMTH consists of cash flows generated by high-quality residential solar systems. The systems were originated by the home builder Lennar and its legacy residential solar platform, SunStreet. This is our first large-scale acquisition as a public company and the largest in our corporate history. It grows our system ownership by 40% literally overnight, demonstrating the power of our strategy to drive step-change growth. We believe this deal immediately and substantially increases the value of Spruce. The SEMTH Portfolio has strong underlying cash characteristics with clear line of sight to substantial recurring customer collections of about $23 million annually. The portfolio is highly profitable. Underwritten portfolio EBITDA for 2023 is expected to be about $18 million, leading to an attractive rate of return with an unlevered IRR of about 10%. It also improves our visibility for long-term recurring revenue with its nearly 15-year average contract life, averaging up our existing portfolios to approximately 13 years. Finally, credit risk is solid. Customers' credit resembles our existing portfolio with an average customer FICO score of 738. The SEMTH acquisition is a great step forward for Spruce as we started as a publicly traded company, but it’s far from our last deal. We believe there’s a compelling set of growth opportunities in our market. I reiterate what I said last quarter, we can’t normally comment on specific opportunities we’re pursuing, but we do continue to expect a stair-step function in growth as we pursue both large and small portfolios in the quarters ahead. With that, I’ll now turn the call over to our CFO, Don Klein, to walk through the financials. Don, go ahead.

Thanks, Christian. Before we discuss our fourth quarter results, I’d like to walk through a few items that impacted our financial reporting. As Christian mentioned, with the completion of the acquisition of Spruce and transitioned to solar, we announced that we were pursuing strategic alternatives for our Drivetrain business. In December, we exited the Drivetrain business, including the sale of a portion of the business, which closed in January. We also explored alternatives for the XL Grid operations, which primarily consisted of World Energy Efficiency Services. In January, we completed the sale of World Energy. Because of these exits, both are treated as discontinued operations in the fourth quarter. The related operating results are presented as a single line in our income statement, 'loss from discontinued operations.' For the fourth quarter, our revenues and continuing operating results reflect the results of Spruce as well as certain corporate functions of the legacy XL operations. This gives a clear picture of our results from continuing operations, but note that the results include restructuring charges and costs that we expect to run off in 2023 as we finish up the integration of the two businesses. Starting in Q1 2023, results will more fully reflect operations of Spruce Power rooftop solar business. With that, let’s move on to results. Fourth quarter revenue, which consisted exclusively of Spruce-related revenue, was $18.1 million, compared to $5.1 million in the third quarter of 2022. Third quarter revenue had only 21 days of contribution from Spruce. Keep in mind that fourth quarter is typically a lower revenue-generating quarter for us due to weather-related impacts on solar production. Fourth quarter selling, general, and administrative expenses were $28.6 million, compared to $27 million last quarter and $11.6 million in the fourth quarter of 2021. Fourth quarter SG&A includes approximately $3.8 million in legal fees related to the previously disclosed class action complaints and SEC investigation. It also includes restructuring-related charges of $8.4 million related to our integration and transition efforts. Adjusted EBITDA totaled $3.5 million compared to negative $8.3 million in the prior year quarter. As of December 31, 2022, we had cash, cash equivalents, and restricted cash of approximately $240 million. This compares to $272 million at the end of the third quarter of 2022. The sequential change in cash includes approximately $9 million used for debt repayment and approximately $8 million for the buyout and distributions of tax equity partnerships. The total principal balance of long-term debt as of December 31 was $533 million. As noted at the time of the acquisition of Spruce, our leverage is in line with industry average for the sort of business we operate. All our debt is non-recourse and backed by our long-term contracts that provide annuity-like cash flows. The debt is very attractively priced with a weighted average interest cost of only approximately 5.5%. Our mezzanine debt is fixed rate, while our variable rate senior debt is approximately 97% fixed through interest rate swaps. Again, it’s worth noting that our first maturity is not until April 2026, providing ample flexibility to manage future capital structure and financing costs. In measuring the value of our long-term solar contracts with customers, we have provided metrics on gross total subscriber value, which represents the present value of the remaining net cash flows of our rooftop systems and customer contracts discounted at 6%. As of December 31, gross total subscriber value was $741 million. Now, we’d like to open the call for any questions. Operator, please go ahead.

Thank you. Your first question comes from the line of Joseph Osha with Guggenheim Securities. Your line is now open.

Hey, there? Can you guys hear me okay?

We can, Joe.

Hey, so thanks for this. That was really interesting. I got a couple of questions here. First, when you buy a portfolio like the one you just bought. Does that typically come? Are you bringing the existing debts along with it? And if so, what opportunities exist as you bring this business onto your platform to potentially refinance that debt?

So we did assume the non-recourse project debt for this portfolio of $125 million. It is more rare to assume the debt, but that in some ways is a function of what the capital markets and the debt markets had been. When we made previous acquisitions, we were often able to get such attractive debt that it was more favorable to get a debt release and put new debt on. That’s been our MO in the past. But clearly, with the increase in rates recently, debt that is on was favorable to leave on and as a result we could make sure that we negotiated and successfully assumed that debt.

Okay. And you’ve shared with us kind of a target IRR unlevered I assume for your portfolio. So kind of the logical question would be what is the current number and perhaps target in terms of your cost of that capital?

Sure. Well, let’s start with the overall cost of debt that we’ve got in the portfolio right now, and it’s between 5.5% and 5.6% for the entire stack. Let me say, in a bit of a debt perspective, we are often seeing spreads in kind of the 2.25% to 2.50% range, similar to what some of our other public peers have experienced. The recent turbulence may test that, but we don’t have anything further beyond that. I think what’s important to note, Joe, is that because we are acquiring the portfolios, it’s the – to a return in the teens. We simply can adjust the bids and the cost that we’re paying for the equity portion. And so there’s a natural buffer as debt costs change to still be able to get the yields that we’ve been targeting by adjusting the pricing in a similar way that, I suppose, an originator would adjust their pricing to a customer and pass that through. So in that similar way, we’ve been able to maintain the yields or the returns on the assets.

Okay. Would you go – I mean, so now you’ve got $475 million in non-recourse project debt, which is a pretty chunky number, right? Let’s assume for a minute that this Mosaic deal gets off the runway for some kind of halfway reasonable pricing here. Could we see you guys try to take this increasing sort of portfolio of business and go out and perhaps refinance the whole thing in the debt or ABS markets if the pricing was reasonable?

Yes, absolutely. We have four different tranches of senior debt, each of them – a good amount of scale for the bank loans that all four of them were. But to your point, now that we are getting into that $400 million to $500 million range, you certainly start getting large enough to support a different part of the capital markets. We continue to actively talk to the folks that would provide things like structured finance or some folks may be aware, and it’s certainly public, because of the ratings that at one point, we had looked at even doing a term loan B and had rated debt, though didn’t finish the swing and actually issuing that debt. But we’ve actively and transparently been approaching the capital markets because of that scale. We think that could be a potential opportunity, though, again, the market turbulence right now makes it hard to lock anything in.

Right. And we’ll see how Mosaic goes. Two more questions from me and then I’ll jump off. The first, you’re disclosing a gross contracted and renewal customer value, which is great. I guess I’m just wondering why you don’t go the next step and do that simple math and disclose a net number because it’s not bad, it’s 741, less 470 plus 220, right, which gets you kind of the 500 range. So why not disclose that, right, especially seeing those debt numbers are roughly five times your current market cap?

Yes. This is Don. I think that’s a good question. It’s something that we’re definitely working through the evolution from XL to Spruce with the KPIs, and that’s probably one at the top of the list and better defining, refining how we’re presenting that. But obviously that information is available as you noted.

Right. Okay. And then the last one before I go away, just looking at the operating expense, if you take that 28 million about 12 of it looks like it was kind of one-time stuff associated with restructuring or SEC and this net that, right? So if we assume, can we think about this business of having of the SG&A at kind of a $16 million run rate? Is that a reasonable assumption and is that sustainable? Can you scale the organization on that run rate? Thank you.

Yes, I think that number is directionally reasonable. But we’ve definitely had discussions of continuing to drive costs down and fourth quarters we, I said in the script and it’s in there that we pulled out certain numbers for restructuring. But there are inherently redundancies and transition costs in there. So I think some of those will fall off. We alluded to in Q1 that’s going to be a better picture. But there’ll still be a little bit of noise in there, and we’ll try to get that clear when we announce the Q1 earnings, but it’s directionally, that’s correct.

Okay. Thank you. I’ll jump back in queue here and let someone else talk. Thanks very much.

Thank you. Your next question comes from the line of Jordan Levy with Truist. Your line is now open.

Good afternoon, all. And thanks for taking my questions. And also congratulations on the acquisition announcement. Clearly, based on your announcement, there are deals to be had in the market. I am recognizing some of the volatility we’re seeing right now. Christian, maybe for you, I just wanted to get your thoughts around the current landscape and the pipeline for other deals and any recent shifts you’ve seen in sort of the broader picture there?

Yes. There’s always this cadence of looking at deals, picking the best ones, having the best characteristics, and then closing. So obviously today is the culmination of going through that cycle. We are in active discussions, so it’s not an on-off switch between finding and closing. And so those continue. I don’t want to project when our next deal would be, or how large it is. I’d just say that we are in active bilateral negotiations on things currently. I am seeing a more active market. I think when some things are shaking loose, there are well-known private installers that have gone under or are struggling trying to raise equity themselves. Sometimes instead of raising equity, they recycle the capital from selling the assets that you own. So between asset owners and developer installers needing to find capital, it is an active market right now.

Thanks for that. And maybe just as a quick follow-up on the different front, you mentioned some of the initiatives around the enterprise technology stack. Just wanted to see if I could – if we could get a little more color there on what that allows you to do from a customer servicing perspective and that sort of thing?

There’s not like dialing up a Salesforce representative and saying, 'Hey, hand me your package of residential solar tools.' This is a new industry and the tools are being invented and developed by the participants. There are pluses and minuses to that. It does take longer. So, for example, we just launched the billing platform that I talked about, and that took a lot more months than again, pulling something off the shelf and installing. So what we're working on going forward is an enterprise-wide, where all our systems of records are effectively talking to each other so that when a customer calls in or logs in again, previous I talked about a single sign-in process. Every time you build something for security reasons, you end up having a different sign and it’s a very clunky customer experience. Even the process of giving what may seem to be obvious, like you just sign in with a log-in and password, is something that has to be built inside this industry. It actually creates a moat as folks get to 30,000 or 50,000 customers; it's impossible to do things by spreadsheet with legacy older technology. All these things have to be built. What I'm happy to be able to share is that all the different portions of an enterprise technology stack have been built. And so in 2023 and 2024, by connecting them all together, a customer will be able to log in and see every aspect, whether it's the performance of the system or a bill or a customer service question, if there may be an asset component replacement or something that is going on. Their experience then becomes very real-time in being able to interact with them or to see their power that's on the rooftop and interact with Spruce. Of course, from a future sales standpoint, to be able to select and begin a sale process or an acquisition process of their own to buy the next piece of that home power system. So that's what we anticipate coming in the next two years, leading to higher customer satisfaction, better customer experiences all the way through, so, one call, one answer situations and ideally greater sales as additional components come to market.

Really interesting. Thanks for the commentary.

Your next question comes again from the line of Joseph Osha with Guggenheim. Your line is now open.

I'm back. I wanted to return to that interesting point you made, Christian about, yes, sort of some dealers being forced to sell the family jewels to stay in business. And that's quite interesting given I expect where loan pricing, in particular, is going to go again depending on what happens today, tomorrow with Mosaic and the implications for that. How big an opportunity is that? And do you have a mechanism in place to perhaps go out and start looking at who might be prospective sellers in that market?

Yes. I mean the Mosaic; we’re all watching that very closely.

Actually no, it literally just hit.

All right. Pulling back and talking about a competitor. Look, we’re watching that. And the shift to PPAs and leases was sudden, and we saw that in the discussions that we have with installers ongoing, so we can see what’s going on at their level. Yes, it is dramatic. Let’s put it that way. And I think other folks have talked about the percentage shift to PPAs versus the loans. So in terms of the opportunities, the calls are coming in to us. We’re a well-known buyer within the market. Those of us that have built the company have been doing this for five years within this company, but 15 years for many of us that have been active in solar power and wind before that. Incoming calls give us insight that there are public renewable power companies that are actively looking for buyers of blocks of their assets. Those incoming calls have given us visibility that it’s not just limited to the private markets that are always trying to raise cash and optimize what they hold versus the warehouse finance facilities that they have, but that this is extending to our public peers as well as they may be doing normal rebalancing. We don’t have necessarily the visibility into why, we just know the what. And I’ll leave it there for obvious reasons. I can’t talk about specific names.

Okay. All right. Thank you. That’s very helpful. And just I wanted to check on one other bit of simple math I was doing looking at your current financials. If you had a gross margin of $10 million, you had, I would argue, recurring operating expenses of $16 million. And then a depreciation add-back of, I think I want to say it was worth to be like $5.5 million. So on kind of an organic basis right now today, I would argue that you’re sort of running at cash flow breakeven. Is that a fair way to think of it?

Yes. I think that’s accurate. In light of the debt structure and the principal payments, I think there’s a healthy amount of scheduled principal that’s made each quarter. So I think that’s one of the legacy Spruce carryovers and something that we’ve talked about revisiting again as we look at refinancing to get more cash flow positive.

Okay. All right. Well, thank you.

Yes.

This concludes our Q&A for today. I now would like to turn the call back over to Bronson Fleig.

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.