Thank you for standing by. My name is Eric and I will be your conference operator today. At this time, I would like to welcome everyone to the Spruce Power Third Quarter 2023 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. [Operator Instructions] Thank you. I would now like to turn the call over to Bronson Fleig, Head of Investor Relations. Please go ahead.

Thank you. Good afternoon and welcome to Spruce Power's conference call to discuss results for the third quarter of 2023. With me today are Christian Fong, 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 risks 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're 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 up to the Investor Relations page of our website for reference. The non-GAAP financial measures discussed in this call are reconciled to the U.S. GAAP equivalent and can be found in the press release that we issued this afternoon. With that, I will turn the call over to our CEO, Christian. Go ahead.

Thank you, Bronson and thanks everyone for joining us today. I'm going to start with a discussion of our strategy and then turn to the third quarter. Spruce's core strategy is to be the dominant long-term owner and operator of distributed energy assets. Our business model is straightforward. First, we create and sell clean electricity through our growing solar assets. Our underlying value proposition for our customers is that we provide consistent energy savings month-after-month compared to the inflation of utility retail rates. Over time, as customer savings grow, especially in the expensive coastal markets, depreciation for solar grows too. Second, we deliver power services to our customers at high-margin economics through our integrated servicing platform. Having regular repeated touch points with customers has enabled Spruce to achieve industry-leading customer satisfaction scores. Third, we capitalize on revenue opportunities in rich environmental commodities markets across our footprint as policies in most of our 18 state markets have shifted to be even more pro solar the sale of renewable energy credits has been Spruce's fastest growing segment. This owner-operator model, combined with our low-cost customer acquisition strategy positions us both for long-term recurring revenue and for highly profitable growth across most interest rate and economic scenarios. I'll turn to the third quarter. I want to anchor my discussion with two metrics. The first is cash. This quarter, we generated positive cash combined with just shy of 500,000 shares repurchased in our share repurchase program, our net cash per share increased by 4%, excluding cash settlements that are expected to reserve on a few legal matters that Sarah will discuss, our net cash per share is $9.14 at the end of the third quarter. Over the next few quarters, we'll focus on growing both our adjusted EBITDA and free cash flow as well…

Thanks Christian. Before getting to the quarterly results, I'd like to quickly address a few housekeeping items that impacted our financial reporting. Consistent with the prior few quarters, legacy XL businesses, Drivetrain and XL Grid are presented as discontinued operations within our financials. These legacy businesses were divested in the first quarter of 2023 and we do not expect any material expenses going forward related to discontinued operations. Our continuing operating results in the third quarter reflect certain expenses related to XL Fleet, notably legal expenses related to previously disclosed SEC inquiry and related shareholder lawsuits. An update on these matters. During the third quarter, Spruce announced the resolution of the of XL Fleet. The settlements of $11 million civil penalty was paid in October. Also during the third quarter, Spruce reached an agreement in principle with respect to the previously disclosed securities class action lawsuit filed in the Federal District Court for the Southern District of New York related to the 2020 merger of Spruce's predecessor Company, XL Fleet Corp., has settled the matter for $19.5 million, subject to agreement on documentation and court approval. Additionally, Spruce determined, it is able to estimate its exposure in the previously disclosed securities class action lawsuit filed in the Delaware Court of Chancery related to the 2020 merger of Spruce's predecessor company, XL Fleet Corp. Spruce estimates a settlement amount of approximately $300,000. Collectively, these three items total cash costs and reserves of $30.8 million. Spruce expects these settlement amounts to be offset by $4.5 million of related insurance reimbursement for total cash costs and reserves of $26.3 million. Please note that these net settlement amounts have been recognized on a GAAP basis in third quarter financials. The net settlement amounts will be funded with corporate cash, which stood at $193 million…

Thank you. [Operator Instructions] Your first question comes from the line of Tristan Richardson with Scotiabank.

Hi, good afternoon. Christian, you mentioned in your prepared comments about seeing a target-rich environment and the pivot towards TPO bolsters the pipeline. Certainly, we've seen some stress in the ecosystem, particularly in the long tail, maybe with installers. Can you talk about the M&A landscape, how it's changed versus maybe a year ago and certainly in the context of your 90,000 customer goal by the end of 2024?

Sure. Tristan, thanks for joining. Look, we grew by 49% over the last year. So, clearly, that target-rich environment has enabled us to grow pretty well over the past year. Looking forward, we're about 75,000 owned systems. To measure these different numbers, we say 80,000 that's the number of service systems because it be some third-party so when I talk about getting to 90,000 by the end of 2024, which I've been consistent on since the beginning of this year. I'm going to reiterate that from that, that we're headed -- we think we get to 90,000, that's about 20% growth. And so while I continue to, hey, this is a target-rich environment, it actually would enable us to slow down growth a little bit to a more moderate 20% and still hit those numbers. In terms of what we're seeing, I think of the pipeline of installers and what they are producing on the PPA and lease that is the TPO or third-party owned approach to financing and putting these on customers' homes. And so now I'm going to draw from things that some of my, I'll call them upstream peers. The installers have identified we may be seeing some softening nationwide perhaps 10% looking forward to the next year. However, that is way more than offset by the swing toward PPAs and leases that have gone from, I don't know, 30% or 40% to upwards of 65% or 70% of that market. So, there are even more of our core business targets being created today than there were before and we anticipate that, that will continue going forward, that is the forward supply outstrips what we had a year or two ago. The final piece I would say to this is that we're currently in bilateral negotiation on over 10,000 different home systems and contracts, there is no guarantee that 10,000 will come to fruition and the deal will land. But our pipeline, we always keep it stocked. We're constantly in negotiation with various installers and owners of assets that are looking for liquidity for some reason or perhaps even setting up something programmatically for repeat sales going forward to us. So, I don't typically go into any more detail on our pipeline just because those are active negotiations but I do want to give that sort of transparency of to add 20%, that's 15,000 more with a pipeline that involves 10,000 right now, we feel pretty good.

Appreciate the context. And then maybe just to your prepared comments around field services in that initiative. Can you talk about how this helps the platform and/or the P&L? I mean, I think these are certainly capital-light customers, I assume. Did these contribute at these high-margin customers? And then how do you think about O&M perspective? Just in the context of pushing folks out into the field, making calls, rolling trucks, et cetera.

Yes, let me put this in the context of three different things. One, we are protecting revenue. One of the fastest-growing segments that we have is our environmental commodities markets, put more plainly to market insiders, that's the SRECs solar renewable energy credits. Other states have slightly different names for them. But broadly, the SRECs markets, we are seeing I'll just say millions of dollars of growth. And they're really active in those core markets that we're talking about California, New Jersey, the places where we're initially looking at field services. The reason then I say is protecting and enhancing that revenue stream is because there is a fair amount of the home systems that be nonvisible, if I can say it that way, that is the 3G meter shutdown, and we've been clear about this, getting our 3G meters upgraded to 4G, sometimes they're Wi-Fi in places where cell service isn't strong. And so getting the field services in place actually allows us to get to a home fast if we can see it. And there's a lot of reasons why you might not be able to see it may be a cell phone signal and may be a Wi-Fi signal, someone has changed their password or something. So, this is a revenue side enhancement as well. On the cost side, though, we are looking at our most dense markets because a truck rolled to a customer coughs up $300. So, if you do two or three of these a day, you're talking about $1,000 that you're going to pay somebody. When we stick with our O&M partners, the local electricians that are in the field, of course, they have to have their profit margin on top of that as well. So, when we start thinking about the utilization or asset utilization rates, the way we think about this. Our markets are going to keep small teams of our own field services folks engaged pretty much all the time because of the density of our assets that we've scaled up to. So, we see both revenue, protection, enhancement and in those markets, our O&M cost should go down as we just save on not having to go to outside parties.

Helpful. Appreciate the context. Thank you.

Thank you. Your next question comes from the line of Joseph Osha with Guggenheim. Please go ahead.

Hi Christian.

Hey Joe.

You actually touched on in your comments just now something I wanted to amplify. I would think that there would be more installers now out there looking for not just kind of moving portfolios on a one-off basis, but kind of an ongoing monetization strategy. How do you view that? And as you kind of think a year or two forward, could that approach of oil kind of just being a liquidity pipeline as opposed to being out there, having your M&A guys hunt for deal here, deal there. How important a piece of that business could that become?

This could become really significant. And it's an active enough conversation, we actually have an internal name for this that I'll just go ahead and say some markets for the first time. We call this a programmatic off-taker agreement. And we are actively talking with folks about being a programmatic offtaker. These are going to be installers that we call them super-regional installers, we're not talking about folks that are doing 200 or 500 systems a year. We're talking about some of the most dominant consolidated installers in their particular regions. For those folks we are a great partner because our M&A process is so sophisticated and replicable. Our cost of capital has only declined as we've gone from being a private to public company. And so this is a direct adjacency to our M&A core competency to do this programmatic offtaker. And we are, I'll just say, in active conversations with some of those super-regional installers about connecting with them in that way. It could be very significant, and I don't want to get out ahead of myself on where we might have success in setting up those relationships. But there to know where these assets are going and not have them on their balance sheet, I think, simply becomes more important as the cost of capital and the cost of warehousing rises for them. So, we're trying to solve a known capital markets issue for the installers by getting them off their balance sheet faster, faster turns, enhance their returns of capital, if you think about their model and get it to our balance sheet as fast as possible. We would still not be going up to prior to the installation. So, that's where we'll differentiate ourselves from what some other folks are doing in the marketplace. These are folks that are still going to be able to create and put them on the rooftop. So, by the time we acquire them, the cash flow is already going. The customer relationship is already done. The asset is already built.

Okay. That's -- I find that very interesting. And then second question, we hear a lot about how transferability might or might not impact residential. I'm just curious as to your thoughts and also whether there might be a role in facilitating ITC monetization that you guys could see yourselves pointing?

Well, again, just attaching it to that last question of we don't intend to be doing programmatic offtaker with partners and then take ownership prior to the installation. And so that tax equity moment from a policy perspective is attached to who owns it at the point that it comes into service. And so the -- those partnerships that we are in discussions with are folks that are sophisticated enough to have their own tax equity lined up or to your point, to begin to monetize the ITC and have that trade. So, we are downstream by, I don't know, it may be weeks or months from that moment. We are certainly aware and because of our environmental commodities markets group, we do have the ability to place and trade ITC as a read through. I would say we do get calls from folks that are interested in making that trade and we typically are pointing them to against some of our upstream peers that will have those ITC. But certainly, if it came down to us, we have folks that are actively reaching wanting to acquire them.

Yes, the reason is that obviously, for regular ITC world, there are lots of reasons in terms of size and lumpiness and whatnot, that doesn't make sense. But I would think transferability to extend that kind of metaphor, you just talked about might actually provide an opportunity if that moment were to move a little further downstream because it is a less lumpy exercise, I guess.

Yes, absolutely. We've sometimes thought, Joe, that 1 of the challenges to moving upstream to being an installer is the tax equity component and so kudos to the policymakers for removing the moat. Strategically, we are not ready to say, hey, let's go ahead and cross that bridge that policymakers have created for us and head up toward installation, but certainly 1 of the key moats of being an installer and that is the ability to get tax equity partners at scale. That moat just got filled in. And I think folks can reach, can compete in the installation market more readily now. We certainly could more readily and yet definitely, we're not looking at becoming an installer or getting upstream into the installer's role.

Okay. Thank you. I appreciate that.

Thank you. [Operator Instructions] The next question comes from the line of Jordan Levy with Truist Securities. Please go ahead.

Hey guys. This is Mo on for Jordan. Thanks for taking my questions. So, piggyback on Tristan's question on M&A. So, are you guys something you're talking about how low your customer acquisition cost has been, it appears that this strategy hasn't worked out well for you guys, and you did two acquisitions this year. So, I'm just wondering, are you worried about? Or have you seen any other competitors or new entrants that are trying to be a copycat of your model?

Hi Mo. Thanks for joining. We have not seen other entrants coming into the M&A space. To your point, it is extremely low cost of acquiring a customer, a CAC cost. We've been doing this for five years now. And the failure rate of the M&A is historically high for corporations that don't develop the M&A muscle memory, if you will, there's a lot that goes into M&A, whether it's technical accounting, the things that would be in Sarah's land as a CFO to make sure she gets right. This is complex stuff, the integration of multiple kinds of contracts. Installer peers may have the luxury of knowing that all of their contracts are the same. Home transfer behaves exactly the same. It's why we've actually been investing money into our IT systems and making sure that we have a consistent customer experience that is hard to do when you've got a lot of different flavors of PPAs and leases. It's work that we've already accomplished. I would say that if somebody tried to step into the market or they called them up and said, what would you -- how would you recommend we do M&A. I'd warn them off and say you need to be prepared for three or four years of really hard work, systems upgrades, service center upgrades before you try to do this. So, fundamentally, there's nothing that keeps people from it, except that really hard work of being prepared to do it. I think it would take any 1 that's tried to step into the space a number of years to get to where we are. Our moat. I'm going to say our moat sometimes is just that integrated servicing of such complex assets and diverse assets.

Great. Thanks for the detailed answer. So, Sarah, maybe just 1 for you. You affirmed your cash flow guidance of $120 million to $130 million run rate so that's great. So, can you maybe address, I mean, address the outlook and walk us through the puts and takes and your projections, anything you should be aware of? Thanks.

Sure. Hi Mo. Thanks for that question. When I think about the top of the funnel, we've got about $105 to $115 million coming in customer collections that would include the buyouts and the prepays that we see throughout the year. We have another seven to eight in renewable energy credits, the SRECs that Christian spoke about previously and then another seven to eight in interest on our cash that's invested. That gets you to the top and then circling down for O&M and SG&A gets us down to that 77 cash available for debt service that we've previously spoken about as kind of being in the middle and then after loan interest and principal payments, we land at around five to 10 of normalized cash flows before any kind of additional CapEx, IT infrastructure, or meter swap initiatives.

That’s helpful.

Thank you. At this time, there are no further questions. I will now turn the call back over to Bronson Fleig for closing remarks. Please go ahead.

Thanks, 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.