Good afternoon, and welcome to Spruce Power's Fourth Quarter 2023 Conference Call. As a reminder, today's call is being recorded. All participants are in a listen-only mode. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I will now turn the call over to Bronson Fleig, Head of Investor Relations for Spruce Power. Mr. Fleig, 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 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. Spruce's strategy is to be the dominant long-term owner and operator of distributed energy assets. We are delivering clean energy to about 80,000 households with significant cost savings to our customers and high operating margins to our shareholders. Adjacent to our renewable power technology is a servicing technology platform that facilitates long-term customer relationships, which we've improved to the point where our customer satisfaction scores routinely exceed 80%. Exceptional customer experience sets up exciting organic growth opportunities. In 2023, we grew our portfolio nearly 50% by acquiring the cash flows from about 25,000 home solar assets and contracts. We added this recurring cash flow strength in a discipline manner executing 2 acquisitions at attractive equity returns above 20%. Importantly, we did so while retaining significant cash liquidity for future growth. Excluding the cash reserve for a few legal matters that Sarah will discuss. Spruce's net cash at year-end was $156 million. In 2024, we intend to stay very disciplined acquisitions, only acquiring portfolios with high investment returns and immediate increases to our free cash flow. We have one of the lowest fixed cost platforms in the industry, which gives us flexibility and should enable us to create substantial value in the year ahead. How? First, Spruce is offering programmatic partnerships to the country's strongest installers. When installers need to solve liquidity constraints by selling assets or even exit the industry, Spruce stands ready as the industry's most experienced portfolio buyer. Second, we now offer a servicing technology platform that is unrivaled in the market. As far as we know, no one else is coming close to our 80% customer satisfaction. Last November, we announced Spruce Pro and in January we launched it to offer that platform out to other distributed…

Thanks, Christian. I'll first address some housekeeping items that impact our financial reporting, specifically an update on wrapping up legal proceedings related to legacy XL Fleet Corp and its operations. At year-end 2023, we accrued approximately $17, million in net expected legal settlement amounts. Most of this accrual amount at year-end was tied to the Southern District of New York securities class action lawsuit surrounding the 2020 merger of XL Fleet. In that class action lawsuit, Spruce made a payment in the amount of $15 million. This payment is subject to final approval and a hearing is set for this matter with the respective court in April. Moving to fourth quarter financial results. Fourth quarter revenue was $15.7 million, down from $18.1 million in the prior year period. The year-over-year decrease is a result of weather fluctuations. Fourth quarter core OpEx, which we define as SG&A and portfolio O&M, was $17.9 million in total as compared to $31.3 million for the prior year period. Breaking this out, fourth quarter portfolio O&M expense increased to $5.5 million from $2.7 million in the prior year period. The increase is largely due to timing of normal O&M spend as supply chain and labor availability allowed us to finish planned 2023 O&M. SG&A expenses decreased significantly to $12.5 million in the fourth quarter from $28.6 million in the fourth quarter of 2022. The prior year period saw outsized impact due to restructuring expenses and legal fees tied to legacy XL Fleet lawsuits. Finally, Spruce generated a GAAP net loss attributable to stockholders of 30.4 million in the fourth quarter. That said, management considers operating EBITDA as a key measure in evaluating Spruce's operating performance. We define operating EBITDA as adjusted EBITDA plus net proceeds from the investment in the SEMTH master lease, interest earned…

[Operator Instructions] Your first question comes from the line of Jordan Levy with Truist Securities.

It's Henry on for Jordan here. Thanks for taking my question. Firstly, congrats on the launch of the Spruce Pro. Just looking at that product a bit more. I know it's early days, but just can you talk to how that ramp is going to start the year? Any initial feedback among product so far.

Spruce Pro entered the market with far more momentum than we anticipated. I'll just put it that way. When we looked at this, we looked at the full building out of our servicing technology platform. That took, that was before we were public. We spent the last 4 or 5 years really getting this down, getting those customer satisfaction levels to 80%. And then saying, look, if we're doing that well in building best in class, let's just offer this as an additional product. Another firm can rent the platform, so to speak. And that's half of it. The other half of it is the SREC trading and we call that the environmental commodities markets. And in both cases, we just said there are folks outside of Spruce, outside of our own portfolio that can rent the platform. The ECM or the SREC desk, that's a fairly well-known market, and there are other players that are doing that. And so I'll just say that we are working with major owners of assets, both C&I and residential that are in some of the major SREC markets but don't have the sort of trading desks that we have. There's a few of them. They are typically institutional. We do have our first C&I contract already signed and the registration of the assets are in process. So that happened as planned. I'll put it that way. What we did not anticipate was the pain that's going on in residential solar and where that would drive external participants to try to rent a servicing platform. Our head of corporate development sometimes says servicing is what keeps the riffraff out of this industry. It's really hard and it takes a lot of years to build. So, the incoming on that, we have a fairly deep pipeline of clients that are talking with us about signing up contracts. As I said previously, it's a little bit early. We just launched this in January, 8 weeks in. We had to take the step of actually reassigning people internally into that program because the incoming interest was so strong. So, let me just leave that there. It's a little bit premature because there's no revenue. So, it's not that much fun to talk about until the cash flow starts happening.

And then another one for you, Christian. I know you've spoken recently on programmatic partnerships. I just want to dig a little bit more into that. I'm curious if these installers that have done PPA and lease origination before, are they new entrants into the market? And then some of the channel PPA players, are those branching out given current liquidity constraints?

The last quarter, we actually called this programmatic off taker, and we've gone a step further. Again, through the Spruce Pro and these are 2 major products that we can immediately launch off our platform, because of our core competencies. There's 2 ways that we filter out who we're working with. Let me add a third. Right now, there is a question of which installers, from the most national level all the way to the regional or local level, which ones are even going to survive and still be in business. So, I'll just say we are working with those that have significant enough liquidity and sponsorships that they're strong enough to be there a year from now, 2 years from now, 3 years from now. We're looking for sustainability in their business models too. But otherwise, what we're looking at our folks that can do thousand systems or more per year. This is not the old-fashioned channel partnership where you just kind of tell everyone you can use our product and whether you do 20 or 50 or 100 or 10,000, we'll take anybody. We're looking for the volume, the super regionals, if you will. The second thing and the other way that this is a little bit different than a traditional channel partnership is that we are not offering working capital. It's a way to also filter because the strongest players in the market not only can do well over thousand per year, maybe 5,000, 10,000, but they also have their own financing lined up. That way we're not having to step into providing working capital. And in our mind and in our experience because we used to do channel partnerships before we were public, that's the drag. That's the Achilles heel of that business model. We're just not stepping there. So, to answer your second question of where are they coming from, because, again, they're doing thousand plus per year, very experienced at doing PPAs and leases, depending on the market. And they are coming from existing I would say it's carefully, I don't want to name names, but they are absolutely coming from other platforms that have previously provided PPA and lease working capital style financing, and they're leaving those platforms out of a concern of whether those platforms are going to make it and they're going to a place of strength. We've got plenty of cash. We're cash flow positive. We're going to be here for the long-term. So there's a shuffling of the deck, if you will, that's going on upstream from us and we are the happy recipients of a lot of those phone calls.

Your next question comes from the line of Joseph Osha with Guggenheim Partners.

I'm wondering if you could comment a little bit on the success you've had upselling existing customers in particular on storage and also curious as to whether as part of that given some of the momentum, we're seeing for some of the products with that have integrated inverters, whether that's something that you're finding might be on the table as well?

Let me speak to the first, and I will pass on the second. we are component agnostic, let's put it that way. So I actually don't spend a lot of time looking at what are the kinds of components that are getting placed. In terms of batteries, the way that we're approaching the market would be retrofit batteries to differentiate it from someone that's getting a solar plus storage. Those attachment rates are being well reported by some of our installer peers. In terms of retrofit batteries, I'd previously spoken of the pace of about $200,000 a year of sales, revenues, leases. I'll just mix it all together. $200,000 I've always said it's just not enough to model. It's barely enough to just kind of keep a small team going to provide it for our customers. And that number has remained unchanged until California changed to the NEM 3.0 and then it went even further down. So while we have always said this is not a poor business, we'll offer it when our customers are asking for it. NEM 3.0, I'm just going to say, destroyed the economics and the incentives behind a retrofit battery system. And while we always want to be there for our customers if they're asking us for a product that they have an individual need for. For the life of me, I can't understand how it's economic for them or for anybody.

And just with regard to your answer to the previous questioner, without naming names that you are beginning, it sounds like to see some larger regional, super regionals bleed off from some of the very large partners based on some of the well reported liquidity concerns, you are saying that?

Yes, I am.

Seeing no more questions in the queue, let me turn the call back to Mr. Fong to conclude the call.

Thank you, operator, and thanks everyone for joining our call today. This is going to include the call. If you have any questions, please reach out to me or our team and we'll get back to you. Thank you.

This concludes today's call. You may now disconnect.