Spruce Power Holding Corporation

Good afternoon, and welcome to the Spruce Power first quarter 2023 conference call. As a reminder, today's call is being recorded. All participants are in a listen-only mode. For open remarks and introductions, I'd like to turn the call over to Bronson Flagg, head of investor relations for Spruce Power. Mr. Flagg, please go ahead.

Thank you. Good afternoon and welcome to Spruce Power's conference call to discuss results for the first quarter of 2023. With me today are Christian Fong, our Chief Executive Officer, Donald Klein, our outgoing Chief Financial Officer, and Sarah Wells, our incoming Chief Financial Officer. Our call this afternoon will include statements that speak to the company's expectations, outlook, or predictions of the future, which are considered forward-looking statements within the meaning of federal securities laws. These forward-looking statements are subject to risk 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 other Securities and Exchange Commission filings. A copy of our press release has been posted to the Investor Relations page of our website for reference. The non-GAAP financial measures discussed in this call are reconciled to the U.S. GAAP equivalent and can be found in the press release that we issued this afternoon. With that, I'll turn the call over to our CEO, Christian Fong. Christian, go ahead.

Thank you, Bronson, and thanks to everyone for joining us on the call today. Spruce is in its strongest position ever with a focus on maintaining strong customer service, owning a large portfolio of zero-carbon, clean electricity rooftop power systems, and operating the long-term, high-margin contracts that generate a steady stream of cash. During the quarter, we essentially completed the transformation of Spruce Power to a pure-play residential rooftop solar company, with just a few final changes left. One of those is a long planned management transition as Sarah Wells becomes our new CFO. More on that later. Another is the runoff of expenses tied to the wind down of XL Fleet, some of which impacted the Q1 bottom line. Those expenses are mostly incurred, so our numbers going forward will really showcase the attractiveness of our business model. So looking ahead. We have a substantial cash balance to drive incremental growth and value creation for shareholders, and we can put cash to work to grow through acquisitions, as we demonstrated at the end of March in buying the portfolio we renamed Spruce Power 4. That deal increased our overall portfolio by 44%, a full year's customer's growth target in one swing. Today I'll be presenting our operating results for the quarter and talking about some recent events in the context of the three core pillars of our strategy. The first pillar is to build the industry-leading customer experience. Our first quarter customer satisfaction score was 71%, beating our 70% target and up substantially year-on-year from 54% in Q1 of 2022. We are also on track with this year's technology roadmap to ensure month-in, month-out reliability and system visibility to a customer base that now numbers over 72,000. For IT upgrades, we successfully implemented a customized new billing software based on the Zora ecosystem and rolled out a single login customer portal. Cultivating a great customer experience not only benefits individual customers, It provides an opportunity to create incremental value for spruce as people upgrade toward full home power systems with battery storage and eventually newer technologies such as EV charging. We haven't broken out our battery leasing numbers yet as retrofit batteries are still a niche market and very regional with over 80% of our leasing in California. Our second pillar is delivering operational excellence. both in our core business of producing carbon-free electricity and in generating cash from our portfolio. At Spruce, our Q1 performance ratio, which is the production compared to the theoretical maximum of the installed solar panels, was 92%. That's down from 95% for Q4, largely because of the historically rainy January on the West Coast. We obviously can't manage winter storms, definitely over my pay grade. So we also look at the weather adjusted performance ratio where Spruce booked a strong 102%, demonstrating the efficiency and reliability of our portfolio. The financial measure of our operations is our ability to generate cash. Our portfolio's robust performance is the bulk of Spruce's current run rate of $110 to $130 million of annual cash inflows, which we'll discuss later. Moving on, we paired growth and capital together as our third pillar because our growth is primarily through M&A, and so we stay disciplined in our use of capital. Historically, the cost of growth has been low enough to generate consistently strong investment returns. That continued in Q1 when we hit a home run in acquiring the Spruce Power 4 portfolio. This transformative acquisition grew our portfolio by 44% overnight, adding contracted cash flows from over 22,500 customers. During Q2, we'd been integrating this acquisition. It immediately improved our run rate cash flow, so we expect to see a clean view of how its cash flow impacts the company's financials starting in Q2. To refresh you on the efficiency of our M&A model versus our peers, since 2019, we have acquired in a dozen separate transactions about 55,000 residential solar systems and contracts. Our average cost of acquiring customers is about $375 per customer. This compares favorably to last September when we reported an average cost of $421 per customer. We expect stair-step growth as we aim for 90,000 customers and contracts by the end of 2024. As a reminder, we don't disclose or discuss the number or nature of deals that are currently under negotiation, and so we can't give guidance on timing. Before I get to the capital strategy, I want to emphasize a financial headline. Except for the legacy Excel items that are still being wrapped up, Spruce Power has positive cash flow. In fact, Spruce finished the last quarter once again with over $200 million of cash on hand, including $173 million in totally unrestricted cash, and once again with no corporate-level debt. With that much cash, we want to discuss how much to keep in reserve and how we intend to deploy any excess. First, having cash liquidity is a great safety net, so we expect to keep at least $75 million of cash on hand through 2024. Just to be clear, we're not saying that from our quarter end balance of $205 million, we actually plan to spend down to $75 million. Rather, we're identifying a prudent level that still earmarks adequate investment cash to reach our 90,000 customer targets. In the financial section, we'll walk through our cash run rate. Yet, I just say that given the amount of cash we're generating in our core business, added to the cash we already have, our capital allocation can be an all-of-the-above strategy. That means buying more assets, paying down debt, completing CapEx projects, investing in our team, and returning some cash to shareholders. I'll expand on that last item. A few days ago, our board approved a two-year common stock repurchase program of up to $50 million of our common shares. First, we believe that repurchasing shares is an efficient way to return cash to shareholders. The program doesn't require us to repurchase any specific number of shares, but it is our preferred tool to get money back to our investors. The second reason is more immediate. We look at our current stock price and see a way for us to add value on a per-share basis. the market is offering to sell us, or really anybody, shares at a dramatic discount to what we believe is fundamental value. With lots of cash on hand, with positive cash flow from our core businesses, with a great management team, and a differentiated business model in a rapidly growing industry, we want this share buyback program to send a strong signal that this is a high-priority use of our capital at the current stock price. I'll now make some comments about the residential solar macro environment and our positioning. Long-term demand for residential solar should be strong, but upstream installers and consumers face challenges. Notably, this includes a higher cost of capital. In contrast, spruce is largely insulated from near-term volatility in the debt capital markets. We have attractively priced non-recourse project loans with several years until the nearest maturity, and we have no corporate debt at all. We can be disciplined in adjusting the price of future acquisitions to maintain our target return on equity investment of an IRR in the mid-teens, even as debt costs change. Furthermore, we're seeing a notable shift in the consumer's financing decision when they choose to go with rooftop solar towards lease and PPA products and away from loans. We know this through our relationships with installers across the United States. Naturally, this benefits us as third-party-owned systems are our addressable market for acquisitions. We expect tailwinds for further lease and PPA market penetration as clarity emerges on the ability of the TPO market to capture additional ITC adders, as described in last year's IRA legislation. This should ultimately boost the competitiveness of leases and PPAs. Simply put, we believe SPRUCE stands out favorably in the current capital and tax environments. We're excited about our progress as a public pure play investment in residential solar, and especially pleased with the substantial growth from the Spruce Power 4 portfolio acquired last quarter. Before handing the call over to Don to discuss financials, I want to acknowledge that this will be his final earnings call with us as we take the next step in our post-merger management transition. We announced last week that Sarah Wells will become CFO on May 19th. Having just brought Deloitte on as our independent auditor, this is the right time for this long-planned transition. Sarah has been Spruce's head of sustainability and, by my side, leading finance and accounting for Spruce Power and its affiliates since 2018. She's a smart, experienced, and driven member of the Spruce team who has played a leading role in Spruce's strong growth over the past years. And Dawn, I want to acknowledge you for your vision and dedication over the past year serving as Spruce's CFO. You were instrumental in the business combination last fall and in helping Spruce Power transition to a place of greater strength as a public company. On behalf of the whole company, we thank you. I'll now hand the call over to you and Sarah to discuss the financials for the first quarter.