Good afternoon, and welcome to the XL Fleet Third Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Stacey Constas, General Counsel for XL Fleet. Please go ahead.

Thank you. Good afternoon, everyone, and welcome to XL Fleet’s earnings conference call to discuss our results for the third quarter of 2022. With me today are Eric Tech, Chief Executive Officer of XL Fleet; Christian Fong, President of XL Fleet and CEO of Spruce Power; and Don Klein, Chief Financial Officer. Our call this afternoon includes 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 statement you will hear shortly. We undertake no obligation to revise or update any forward-looking statements, except as maybe required by law. We refer you to XL Fleet’s 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 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 Eric Tech.

Thanks, Stacey. And thanks to everyone for joining us on the call today. When I joined XL Fleet in December 2021, I was tasked by the Board to assess our company's current position and identify the best path forward to maintain and create value for all stakeholders. And as we've communicated for the last several quarters, I determined the most efficient path was by utilizing the significant cash position we had on our balance sheet to help execute transformational M&A. I communicated that we were looking for three main attributes in a potential deal. One, a business making an impact on decarbonization; two, a leader in a mature and growing market; and three, a company generating positive EBITDA. On September 12th, we announced the acquisition of Spruce Power. I am very proud of the team for identifying and executing on this transaction and doing exactly what we said we’d do. Let's walk through each aspect and how the Spruce Power meets, and in many ways, exceeds what we're targeting in our extensive search process. First, we look for a business making an impact on decarbonization. As a leader in residential solar, Spruce Power wakes up every day to help homeowners reduce their carbon footprint. The company’s more than 51,000 current customers utilize solar to power aspects of their everyday lives, ultimately improving the reliability of electricity grid, and advancing the energy transition. The company's sole mission is to make it easy for customers to embrace the power for renewable energy, a change that is critical today, and for generations to come. Second, we look for a leader in a mature and growing market. Spruce Power was strategically positioned as the largest privately held operator of residential solar in the U.S. And with our acquisition of the business, Spruce, now well…

Thanks, Eric. It's great to be speaking with you all again today. Before I begin, I'd like to echo Eric's enthusiasm for what we've created and express the excitement I have for the pathway ahead. We were excited to introduce many of you to Spruce Power several weeks ago. Today, I'd like to take the opportunity to emphasize who we are, and how we're positioned for continued success over the near and long-term. Prior to the acquisition by XL Fleet, Spruce Power was the largest privately held owner and operator of residential rooftop solar systems in the U.S. The company has over a decade of experience in installation, financing, owning and managing residential rooftop solar. And since I became CEO in 2018, Spruce is focused on our current strategy of owning and operating residential solar assets on behalf of homeowners. We've built a portfolio which today has more than 51,000 subscriber customers with a footprint spanning 16 different states. Our solar assets are backed by long-term subscription-based contracts, in which our customers make monthly payments to Spruce in either leases or production-linked power purchase agreements or PPAs. This contract structure allows for reliable and highly visible cash flows over a period measured in decades, not just months, quarters or even years. Our customer portfolio carries an average remaining contract life of approximately 13 years, and in total, represents more than $800 million of total gross subscriber value, using a 5% discount rate and industry standard subscriber renewal assumptions. What makes Spruce Power particularly unique is our growth strategy. We've been successful in doubling revenues since 2019, primarily driven by the acquisition of 10 rooftop solar portfolios, and a number of smaller joint venture interests over this time period. We have an exceptional team of M&A professionals identifying opportunities to acquire…

Thanks, Christian. As a reminder, our results for the third quarter of 2022 reflect full quarter contribution from XL Fleet’s legacy operations, including Drivetrain and XL Grid, as well as contributions from Spruce Power for 21 days following September 9th closing date. Beginning in the fourth quarter and going forward, our financial results will reflect the full quarter impact and benefit of Spruce Power operations. With that established, total company revenues for the third quarter of 2022 totaled $8.4 million, compared to $3 million in the second quarter of 2022 and $3.2 million in the prior year. Revenue for the third quarter included $5.1 million from 21 days of contribution from Spruce Power. Selling, general administrative expenses through the third quarter of 2022 totaled $31.3 million, compared to $12.8 million last quarter, and $12.7 million in the third quarter of 2021. SG&A expenses for the third quarter of 2022 included approximately $2.6 million in legal fees related to the previously disclosed class action complaints and SEC investigation, and approximately $50 million of transaction costs associated with the Spruce acquisition. Adjusted EBITA total negative $9 million compared to negative $11.1 million in the second quarter of 2022 and negative $14.2 million in the prior year quarter. Turning into our segment results, revenue from Spruce Power, a residential solar segment totaled $5.1 million, reflecting the period from September 9th through September 30th. Our gross customer value was $828 million at the end of Q3 on a PV5 basis. Revenue in our Drivetrain segment totaled approximately $900,000 compared with approximately $800,000 in the prior quarter, and approximately $600,000 in the third quarter of 2021. Segment loss for our Drivetrain segment was $3.6 million compared with a segment loss of $3.4 million in the prior quarter, and a segment loss of $4.9 million in…

Thanks, Don. In closing, I'm very encouraged about the progress that we've made and excited about all that we have ahead of us. Our team remains focused on creating shareholder value over the near and long-term. While we've accomplished a lot, we'll be busy over the next several months, further streamlining our platform, hopefully improving the market's ability to identify and unlock the value we've identified with Spruce Power. On behalf of Christian and the combined team, we look forward to providing updates as we have them. Before opening up for Q&A, I felt that it is important to address our current market valuation. As of yesterday's close, our stock was trading at a total market capitalization of approximately $115 million. We feel this is a disconnect for a company with approximately $240 million of unrestricted cash on its balance sheet, and significant adjusted EBITDA. We will continue to execute on our strategy to unlock the value of what we own today, and to maximize the value of our platform and resources over the long term. With that, we'd like to open up the lines for Q&A.

[Operator Instructions] Our first question comes from Joseph Osha of Guggenheim.

So a couple of questions and I apologize, I'm going to focus on the solar side. So Christian, is this 821, PV5, is that contracted and renewal or just contracted?

Thanks, Joe. Thanks for joining. The 821 is both contracted and renewal using the same PV5 metrics that our peers use.

Yes, I was kind of comping you and that makes sense. So -- and then if I wanted to get to net, I would just back out the 485, plus it looks like you've got 25 is the total non-recourse number 5, 5.10, am I right there?

Are you adding up the debt? You just net off the debt, as of 9/30. And then we would -- the 25, if you're talking about the amount of cash then that's on hand.

No, no, you've got a good portion of long-term debt of $25 million and then long-term…

Got it. Got it. It’s split between. Sure.

Correct. And the 10-Q has a debt footnote. There is an adjustment for purchase accounting. So the fair value is put on the books or that’s put on the book at fair value. So there's a delta that's really an accounting nuance, so you want to look at the principal balance so.

Okay. So it's like 320-ish net in there. Okay, that's fine. My next question I guess Christian, just to confirm I remember you had said this before. You guys are going to continue to focus on buying post flip assets? Or has that thought process evolved at all? I just want to confirm.

Yes, we've talked about getting seasoned assets. And that's been really the focus. Now, by looking at things that are post flipped, they become the most streamlined acquisitions. So you don't have to be negotiating with those tax equity partners. However, our previous acquisitions, among those 10, we did buy things that were just prior to flip often within maybe one or two years, and the tax equity has line of sight. So of the 34,000 -- of more than 34,000 that were in bilateral negotiations, actually, some of them are pre flip, but most of them the strong majority are post flip.

And then just, I'm sure you saw how that Nova deal priced GoodLeap and whatnot pretty tough, right? So, I'm curious, you know, taking that into account, as you look at new deals, just talk a little bit about the kind of capital structure, you can put around approaches of new assets at this point?

Yes, we're still seeing robust availability of senior debt capital, and the final structure that we would put on -- and let me just step back at our current structure has senior debt as well as mezzanine debt, those are done as non-recourse at the asset level. So let me not talk about the mezzanine debt on this call and what we would do on a go forward basis. I think the real question as you talk about the GoodLeap deal, some of our peers and where they priced in the public markets that are more known on the ABS side, we are seeing robust availability of bank senior debt, the pricing would be let's just say not dissimilar, I shouldn't go into exactly what the price talk is between us and our counterparty lenders. But it's not dissimilar from what's available. But I think what's key dimension is we're not seeing a shortage of that capital right now. Certainly, the acquisitions that we are looking at, we have no concerns and we believe that the availability of senior debt capital will be available for what we're looking at.

Okay, and then just kind of following on that, I can figure out, I think you mentioned five and a half for the whole loan, the all of the debt. And again, we know what sort of the marginal cost is based on what you just said. Based on what you're seeing right now, what would you say the unlevered IRR is on new portfolios? 10, 11?

Well, looking back what we did -- just did in the last quarter, we had an unlevered of 14, but that was the joint venture related to tax equity buyouts that we were executing, those are great, but there's a -- it's kind of an apples-and-oranges question. The negotiations that we're having -- I shouldn't speak to that, because these are live negotiations. And so in essence, we're setting the market in these negotiations right now. So let me not get out and actually give a number. But we continue to think that on a levered basis, just the senior loan levered basis that we'll be able to achieve that double-digits, even into the mid-teens on a levered basis.

Next question comes from [Alex Bravo] of Bank of America.

Maybe just a quick kind of follow-on and maybe I will ask it in slightly different way than kind of where Joe was going? I mean, how do you think about, right, well, we've seen like this, this sort of broad, endless discussion on discount rates, and what's the right discount rate to be assigned to these assets? I mean, you guys are -- looking as both a buyer and an owner, currently, it looks like you're using a PV5 all up, Sunrun or anyone in the industry, but how do you think about with broader rates moving up, like what's the right discount rates be using? And like, how do you think about value creation between acquiring and then looking at your assets, in sort of an equity investor mindset. Does that make sense?

Thanks for joining. And that does make sense. The 5% that the industry is using, I actually don't think is crazy. What folks should understand about our business model is that we have both an M&A engine that is acquiring things, and one might think of that a little bit more like that asset management approach of, what should an unlevered IRR be, what sort of capital can you put behind it the capital sector, the things that Joe just was just asking about. The way you're asking it, I think you're right is slightly different, because the valuation needs to also include that we actually are the owner operator of this. So the ownership side when you acquire it, has some return. But because we have the ability to get renewals, we have the ability to sell batteries and EV chargers, and very directly to right now we've got our huge operating center in Houston, which has its own economics that come off of it. And so when one thinks about it on an all in basis, the industry's guidance of using PV5, again, it's not crazy. Now, cost of capital and the capital markets, those are the sorts of things that you're living and breathing on a day-to-day basis, we're certainly watching it as well. And it would play into things like the cost of our senior debt. And though availability is great, of course, we will have to be adjusting the prices that we pay on a go forward basis to continue to get to those mid-teen returns. Now, what Spruce really likes about its business model is we are able to adjust the price that we pay. So for an upstream peer, that maybe has a bunch of things locked in and warehouse lines, et cetera. Their cost of capital or it may not be as flexible as our ability to simply adjust price to make sure that we get the returns that we need. But again, I just want to point toward we have additional value drivers that would come into effect when you start thinking about that headline rates.

I mean maybe just sort of follow-on and a little bit of the same context, slightly different questions, though. We've listened in obviously, some of your larger peers talk through their results. And I think that, there's a clear sort of wave across the industry, a push towards TPO over loans. There's clearly attractive upside on TPO as far as what you can do on tax equity going forward from an asset ownership model standpoint. I mean, how do you think about that impacting your ability to go out and acquire, right? Like, what's the marketplace going to do in 2023 if there's a broader shift towards leases, and then maybe people want to hold those leases more, how does that I guess, inform the opportunity set for you guys going forward?

Yes, I mean, certainly when we started thinking about the shift for TPO, that's a huge tailwind to us. Let me pull out some numbers from what we just put out are from the servicing side, we have about 88,000 systems that we either service or own now, what we own becomes the headline number, but let's just talk about that broader number of 88,000. About 89%, of our service portfolio is TPO. So the tailwind of moving toward -- and I'm going to say our upstream peers, as they are saying, hey, we're seeing more and more and more a TPOs, we're downstream from that, that is really good for our business model, the shift away. And I think what we're going to see from Spruce is this continued reliance on the PPAs and the leases, just because it adds so much more value that like we just talked about. On an annual basis, we may be looking at what 15,000 to 30,000 systems per year that these peers are putting on. And that just keeps ratcheting up times the number of peers that you're talking about. There's a very large addressable market, I'll use those words, a large addressable market is being created for us.

Got it. And then just one last one for me. I mean, when you when you think about, you know, sort of the landscape looking forward and like how you want to position you mentioned at the outset that, there's some headwinds in the resi solar space, what are the key ones being skilled laborin people to not only install things like batteries, and EV chargers, everything else, but also to go out and maintain them and service them, you guys obviously run a much leaner model than most, you know, asset owners that are kind of looking at that sort of scale of servicing? I mean, does that inform what you want to own and how you want to think about it going forward. I don't know if that makes you like, for example, want to own less batteries and sort of weighed that out, but curious I mean, if you can give any color there?

Yes, you bet the look, you're absolutely right, it's a much leaner model. It means that we can do things at a lower cost, I won't get into the numbers of my peers, but it's certainly something that we've got a good asset operations group in Houston, that then manages that nationwide network of O&M partners, and it's how we keep it lean. Rather than losing money in a subscale market, we can partner with someone that has that local scale to do that. So our Lean model doesn't mean that we don't cover our markets, we just do it in a way that is as streamlined as possible. The availability of does drive we want to see a certain amount of scale in markets. So when we talk about being in 16 different states, those are those are selected. We look at the density that's available in the market, the availability of OEM partners in those markets, before we jump in, and acquire into that market. That enables us to keep what we think is a cost advantage on the overall O&M costs on a per system basis, which of course just leads to higher overall operating margins, especially in those dense markets that we keep adding scale. So on a go forward basis when we talk about over 34,000 systems in bilateral negotiations, those are huge, huge majority almost entirely in the markets that we already have. And as a result, every one of those is going to continue to add to the operating profit margins.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Eric Tech for any closing remarks.

Thank you very much. And thank you for all the people that participated in the call today, as well as those that had some questions which hopefully we appropriately addressed. As I said in my earlier statement, we look forward to delivering value to our shareholders and other stakeholders in the company. We feel, we have demonstrated the ability now to have a platform with positive EBITDA, growth and with liquidity, and we're hoping that we can demonstrate that to the market going forward. Thank you.

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.