Q4 2019 Earnings Call
Good day, ladies and gentlemen, and welcome to the Q4 2019 Sunglass Inc. earnings Conference call. At this time all participants are in listen only mode. Later, we will conduct a question and answer session.
Instructions will follow at that time, if anyone should require assistance during the conference. Please press Star then zero on your Touchtone telephone as a reminder, this conference call is being recorded I would now like to care the conference over to host Patrick Jobin Investor Relations. Please go.
I had.
Thank you operator, thank you to those on the call for joining US today before we begin. Please note that certain remarks, we will make on this conference call constitute forward looking statements. Although we believe these statements reflect our best judgment based on factors currently known to US actual results may differ materially and adversely please refer to the company's filings with the FCC.
More inclusive discussion of risks and other factors that may cause our actual results to differ from projections made in any forward looking statements. Please also note that these statements are being made as of today, we disclaim any obligation to update or revise them.
Walter They are when George Sutton ones co founder and CEO, Bob Coleman, Sunrun, CFO and advanced or sort of runs co founder and executive Chairman the presentation today, where your slides, which are available on our website that investors dot sunrun dot com and now we turn the call them. Thanks Patrick.
We're pleased to share Sunrun fourth quarter, and full year results and progress against our strategic priority.
In 2019, we generated 102 million in cash exceeding our annual target.
We also grew our customer base by 22%, while increasing adoption of Brightbox, our solar in battery service.
We added as many customers at the next two largest residential providers combined.
In the fourth quarter, we added 15600 customers, representing 117 megawatts of deployment and 9% sequential increase from the third quarter and the highest quarterly volume and the company's history.
At a 6% discount rate, we generated $100 million than that present value and created NPV per watt other dollar 13 or over 8700 per customer.
I'm pleased to report that we have worked through most of our construction labor bottlenecks, which limited our growth last year, we've reduced the number of open positions and our installation organization from around 300 last quarter to about 100 today in line with our growing business.
Open positions in our sales organization or now over 300, and this is typically be ramp hiring into the busy summer season.
As the leading National company Sunrun offers purposeful and mission driven careers and a competitive total benefit package that allows us to stand out when we were correct.
We have aspirations to lead the development of the de centralized clean energy industry, and our building differentiation through customer reach customer experience and product differentiation.
For example, an existing big box retail partner has noted our differentiated execution capabilities and we have the opportunity to expand into another 200 stores, which could grow our <unk> footprint with its retailer by over 20%.
We're also investing in battery attachment rates and grid services business development.
With many of these grid services programs utilities will market to their customers on our behalf and our customers will have access to new sources of value by sharing their batteries, but the grid.
We have announced five grid services programs and have a strong pipeline.
Attachment rates for Brightbox sales in the Bay area were over 50% in Q4, a level that have persisted in response to poor utility reliability.
In California, they were over 35% and across all geographies attachment rates approached 20% in our direct business.
Nationally we have now installed over 9000 Brightbox system.
We expect right Cox deployments to nearly double in 2020 compared to last year.
As always we're focused on building the industry's most valuable and satisfied customer base.
We maintain discipline on unit level economics, and deliver long term value to our customers.
This is why we've achieved our market leading position and we intend to keep it.
We don't compete with dealer only businesses, who like the capability to ensure a positive customer experience and who pay unsustainable pricing.
We are exercising caution around the industry's recent acceleration of the direct selling or door to door sales channels through independent sales dealers.
I want to be very clear that this is an important acquisition channel, but it needs to have controls and management to prohibit aggressive practices that won't serve customers or investors over the long run.
The customer acquisition channels, including retail that we served with our salespeople are growing over 20% and well be durable and provide cost reductions over time.
In sum, we believe we have continued to build them out around the business have worked through our labor issues and expect to see stronger growth rates in 2020 than we did in 2019.
We continue to expect long term industry growth rates around 15% and expect we will grow at this level in 2020.
There was a groundswell building to find solutions to address the climate crisis.
Sunrun is enabling this transition today, while providing household a superior energy service.
There are significant interest from corporate looking to engage with sunrun as the category leader to invest with us and to partner with us to accelerate the transition to a decentralized energy system.
Not only us sunrun committed to environmental social and governance issues, which is core to our company philosophy in Michigan, but yes, GE awareness from capital and strategic partners is building and we'll continue to grow.
We are already a deeply carbon negative company and seek to help our customers and partners become carbon negative as well.
We have also focused on many operational initiatives to deliver best in class customer value into lower soft costs.
We launched our program called the Sunrun way of working to kick off the next phase of our operational improvement.
As part of these ongoing efforts, we're taking steps to reduce our installation cycle times. The time it takes from a customer signature through to install.
Beyond the obvious customer benefit we believe fast cycle times are the key lever for driving down costs.
International markets in Europe, and Asia have shown that was short cycle time soft costs are as much as $7000 left for customer for context. This is more than that's got <unk> I do see step down.
Our initial efforts were focused on improving installation efficiency. We completed times studies will also soliciting installer impact and the results have been significant.
In Q4 compared to the same period last year, we improved the construction labor efficiency by over 10% more than offsetting waves wage pressures, while maintaining our high quality standards and commitment to safety and despite increased battery attachment.
With these installation level improvements now standardized we've extended our focus to include the full fund all from customer signature through two scheduling the installation.
These efforts include increasing technology investment.
Optimizing processes that we can control directly for instance site inspections project management and infill scheduling as well as externalities such as permitting I'd like to highlight two examples of these changes.
First we have now implemented these the drones for site inspection the use of drums helps cut the total time by up to 50%, while reducing errors requiring revisit that and approves. The work experience of our site tax. This also at the Wow factor for customers and their neighbors.
Second in many jurisdictions pipelines are affected by the local permitting process, which can create considerable waste.
One way, we are tackling the places by driving permitting or for Theres. No reason permits can automatically be issued if they comply with industry standards as they are in leading international markets.
The solar automated permitting process campaign called solar App will create a low cost Cmos process.
Last year, the department of energy provided funding to multiple organizations to fast track permitting and interconnection, including funding to enrol to an online permitting portal and partner with leading technical building cut organization.
The online portal will be piloted in 10 locations by this summer.
I'm optimistic that over the next year or two we love improve the process in most markets.
Las Vegas is an early adopter that instituted instant permitting and interconnection last year and now the step of the profits have been reduced from 30 days in 2018 to zero in 2019 with the benefit of this change in early January we installed the 27 panel system on a home and just five days after the customer signed up.
Records are meant to be broken and by the end of January we were able to delighted customer by completing the installation just two days after sign up.
These initiatives along with a continued focus on operational excellence are laying the foundation for substantial cost reductions in the years to come along with differentiated and improve customer value.
Turning now to 2020 I'm excited about our opportunities to further pull away from the pack.
We expect about 20% of growth and our customer base and 15% growth in new solar megawatts deployed.
Also if you counted battery capacity the same way, we count solar capacity our growth rate would be about 25% in 2020.
We expect the combination of cash flow generation and that earning assets to grow faster than megawatt deployment growth for instance, about 100 million of cash generation and 190 million in that earning assets.
Due to the election other cool events and our strong balance sheet. This year, we may be selective in market timing for project finance transactions.
It's possible, we exit the year with more assets, we haven't turned out into the capital markets and if this is the case, we would see less cash generation, but more at earning asset.
I'll now turn the call over to Bob Coleman to review Q4 performance and to discuss guidance in more detail.
Thanks Glenn.
NPV in the fourth quarter was approximately $8700 per customer or $1.13 per watt.
For the full year 2019, NPV per watt was one dollar five cents.
Project value was approximately $30700 per customer or $4 per watt in Q4.
Now turning to creation costs on slide eight.
In Q4 total creation costs were approximately $22100 per customer or $2.87 per watt, an improvement of 30 cents or 10% from the fourth quarter of 2018.
I was with project value creation cost can fluctuate quarter to quarter. As a reminder, our cost dock is not directly comparable to those appears because of our channel partner business.
Blended installation cost per watt, which includes the cost of solar projects deployed by our channel partners as well as installation costs incurred for Sunrun built systems.
$2.25 per watt or 23 cents, a 23 cents improvement from the fourth quarter of 2018.
[noise] install cost for systems built by Sunrun were $1.96 cents per watt flat year over year.
In Q4, our sales and marketing costs were 69 cents per watt down 11 cents from Q3.
Our total sales and marketing unit costs are calculated by dividing cost in the period by total megawatts deployed.
Higher mix of direct business results in higher reported sales and marketing cost per watt, but it also means there will be lower blended installation cost per watt overtime due to the higher mix of Sunrun built systems at a lower cost per watt.
In Q4, DNA costs were 23 cents per watt an improvement of two cents from Q3.
Finally, when we calculate creation costs, we subtract the GAAP gross margin contribution realized from our platform services.
This includes our distribution racking and lead generation businesses as well as solar systems, we sell for cash or with a third party loan.
Our platform services gross margin was 31 cents per watt in Q4, five cents higher than last quarter.
Our cash and third party loan mix was 24% in Q4 slightly above recent levels.
Driven by increased demand ahead of the initial ITC step down which affected those systems that are customer out.
At least systems are able to benefit from safe harboring to extend the ITC at higher levels.
We expect leased deployments to return to above 80% of the total mix in Q1.
The Q4 cost that benefited from sort of seasonal and staffing dynamics.
In addition, some geo and product mix effects resulted in both lower project value and lower costs.
For 2020, we expect Sunrun built install cost to improve modestly compared to the full year 2019, despite doubling the number of batteries and installed.
We expect this benefit will be roughly offset by paying higher market rates to select channel partners, resulting in a roughly stable total cost stack.
We expect NPV to be consistent with 2019 were slightly better.
To illustrate the effect batteries are having on our cost back in 2019, Brightbox hardware costs were about nine cents per watt of total sunrun built installation cost.
In 2020, with new battery capacity more than doubling we estimate battery costs will become 20 to 25 cents per watt of total sunrun built installation costs.
If you exclude these additional battery cost we would expect to see an 8% unit cost reduction.
In the fourth quarter, we deployed 117 megawatts.
Turning now to our balance sheet.
We ended the fourth quarter with 363 million in total cash.
Quarterly cash generation was 22 million after adjusting for safe Harbor in activity of 27.5 million and the repurchase of common stock of 5 million.
We define cash generation as a change in our total cash left the change in recourse debt and other adjustments, including our safe Harbor and program business acquisitions and common stock repurchases.
For the full year 2019, we generated $102 million in cash.
Cash generation can fluctuate significantly due to the timing of project finance activities.
Moving onto guidance on slide nine.
We expect full year deployments to grow approximately 15%.
We expect unit economics, or NPV per watt to be at or above last years level.
In the first quarter, we expect deployments to be approximately 102 megawatts.
Now, let me turn it over to add.
Thanks, Bob.
Today Im going to discuss capital costs asset performance and recap our investment tax credits Safe Harbor program.
First I'm pleased to share that capital costs for residential solar assets continue to decline.
Hi, good data points now clearly support a weighted average cost of capital of less than 5%.
Measured at a 5% capital cost total net earning assets would be approximately 2 billion.
Or about 30% more then when measured at 6%.
At 5% contracted net earning assets would be approximately 580 million.
Or about 55% greater than when measured at 6%.
At 5%, our 2019 additions to net earning assets would have been 191 million.
62% greater than when measured at 6%.
And finally at 5% our full year NPV per watt would've been about $1.35.
Or $10700 per customer.
It's about 30% greater than when measured at 6%.
In addition, I'm pleased to share that MBS lenders and the key rating agency are beginning to note that our pools are performing better than peers.
Both in the loan and lease arenas.
This month, we're entering the companys 13th year.
And across all those years, we've collected 99 cents on a dollar filled.
Although it takes many years for our superior customer value proposition consultative sales practices and high construction quality to manifest themselves in long term observable data versus peers. We believed that this time it soon upon us.
Since December 2018.
We've raised 834 million in three public ABS transactions.
We expect our next transaction, we are ready for market in the second half.
However, given the election other global events in our strong capitalization, we may delay it or other transactions into 2021, if we believe doing sold result, and better execution.
We may also execute a smaller than usual transaction earlier than usual.
The company continues to generate healthy margin, which when paired with our project finance execution should lead to significant growth both in cash and book value.
Finally, I'm pleased to confirm we're successfully executing our safe Harbor acquisition in financing efforts.
Materially all safe Harbor products have been received and we continue to expect we'll be able to qualify approximately 500 megawatts of the projects at the 30% ITC level.
We are currently deploying fully safe harbor projects in our direct business and we are implementing their use in our channel business.
At December 30, Onest, our equity investment against the strategy peaked at 27.5 million or less than six cents per watt. This investment represents about one third of the incremental tax credit we expect to receive when deploying this equipment.
Inventory also helped insulate us should any corona virus related supply disruption develop.
Finally, yearend cash was 363 million total cash less recourse debt adjustments for business acquisition Safe Harbor activity in the repurchase of common stock increased 102 million in 2019.
Turning finally to our pipeline our project debt in tax equity runway each extend into the fourth quarter and with that I'll turn the call back over to one.
Thanks, Ed Let's open the line for questions. Please.
Ladies and gentlemen, if you have a question at this time. Please press the star and then the number one key on your Touchtone telephone. If your question has to be an entry are you wish to remove yourself from the Q. Please press the pound key.
Your first question comes from the line of Michael Weinstein from Credit Suisse. Please ask your question.
Hi, guys.
Hi.
Hey, Jim so it sounds like the labor shortages or are starting to a beach and I'm wondering if you could talk about the 2020 gross rate.
Checking and how much of that is impacted due to.
Ongoing problem as it as it starts to get solved this year and is there any visibility of the in this market.
Disability towards when it will finish.
So I think where we believe the labor situation has stabilized so that.
As we just described in the and the comments you know we went from 300 open positions down to 100, which is pretty normal and you know and the even 300 opening on the sales side is also pretty normal in terms of ramp rates. We've seen in the past. So you know were vigilantly vigilantly watching tight labor market, but it's nothing that we don't have that Rick.
Routers are pipeline to staff. So it's really not a feature in terms of you know restraining anything or worry for us for hitting that growth targets for the year.
And you talk a little bit about.
Cost of installing batteries and the cost of battery acquisition.
Is that well those costs expected to go down over time, so that they will.
Start contributing to MTV.
Absolutely I you know the.
We are we are thrilled with the acceleration and battery adoption. Despite the fact that they're still fairly high cost you know the value proposition strong, but they shouldn't costs what they what they do so if you just look at the cost curve of the lithium ion cells and whats happened historically, that's been pretty significant decline, but the retail.
Price of the actual boxes that we're buying has had held so there is really still a lot of margin in there and the packaging and the installation that is just learning curve scale stuff.
And with more competition coming in that obviously will help as well. So if we look out through the year, we expect to double battery deployments. Despite the fact, we're not projecting any in your pricing improvement. So I'm. So I think that just underscores how prime that this will be when we get to a place where that where the battery.
Yes.
Start to be realized.
One last question.
Considering everybody is worried about a recession right now.
Maybe you could just talk again once again about where you think the industry is going and where sunrun, what will happen sunrun and the case of a major recession.
Uh huh.
Yeah, I'll start and Eddie will I'm sure have some opinions on this as well you know what's what's interesting is that in many cases, we could be I countercyclical products. So we are a savings product for the household so sometimes one of the reasons why customers don't choose to adopt solar.
Our as they're just waiting or they're not compelled to do it now and so in moment, where people are looking to savings matter more it's actually can be a reason to create the that urgency in the sales process that we don't always see thought that that that's certainly important.
Did you went out anything I'm sure I would say on the on the financial market side I would highlight two components first.
Generally you see significantly lower interest rates manifest themselves in times of recession.
Which obviously is helpful to the company and.
We are most able to differentiate from a capital for me project finance perspective actually in adverse markets.
Most recent example of that was December of 2018, when we priced our asset backed security transaction.
Inside of the price appear had achieved at the same time in the market and with about 10 points of additional leverage I believe.
We are a bellwether in a trust issue on that issue in that market.
And tend to see our.
Spread benefits versus peers expand in slightly more adverse conditions. So I don't.
Have concerns as to capital availability or cost broadly, but obviously as you can share in the script.
We want to leave ourselves a little more flexibility than usual as to when we would perform these transactions.
Given.
Our strong balance sheet gives us that flexibility.
I think one other point you to appreciate why again the residential business. We think is so compelling is that we also raised all the capital ahead of signing up any customers. So we have the cat we know the cost of capital before we price and then fine if a customer which gives you you know you don't get stuck with that but the backlog I promise.
[laughter] and finally I would note we.
Obviously, we've been in business since 2007, we have performance data from the great recession, we collected 99 cents on the dollar through the company's history, including at that time, so feel good about that as well.
Great. Thank you very much.
Your next question comes from the line of Brian Lee from Goldman Sachs. Please ask your question.
Hey, everyone. Thanks, Thanks for taking the questions.
Maybe the first born on guidance I'm not to get to.
Bogged down on the on the shorter term trends, but the guidance of 102 megawatts for Q1 does put you at 18% growth year on year. So I guess that implies just basic math some moderation in year on year growth through the rest of the or given the 15% full year outlook can you.
Maybe talk a bit about the cadence this year, what's impacting that and you, especially since it would seem like comps are pretty easy for you in the second half given last year's labor issues.
Mhm, Thanks, Brian Yeah. So so that 18% you know I think that 18% benefit for Q1 benefited a bet from some of that.
Projects that were in the backlog in Q4 now you can only installed so much in the wintertime and you know and we do feel like we're caught up on the labor a few there. So you know we do believe that we have good visibility for the rest of the year to hit. The 15, you know I think we're you know we're just trying to.
Just stay give ourselves you know some flexibility and say discipline in terms of continuing to try to maintain our unit level economics targets continuing to really invest in the right channel that we think are really durable long time, a long term. So that's where the growth rate comes out for us.
Okay fair enough that makes sense and then.
Maybe just the second question for Ed on the the strategy around raising capital smaller deal earlier in the year or it sounds like a base case ABS somewhere in the back half of your a lot of volatility in the markets right. Now you got the election later in the year I know, there's a lot of moving pieces, you're analyzing but.
Generally speaking you don't cost and capital is pretty darn low these days.
So how much of this is is strategized being around that potentially going lower.
Markets or pricing import cuts during the year and how much of this is strategizing around just whether or not you need the capital.
Earlier in the year later in the had it sounds like you have visibility through Q4, right now with the finance that you finance and you've already secured and have term sheets on so trying to understand a little bit of the puts and takes is too.
What what pull these forward in the year over what keeps you sort of waiting till later in terms of.
The next ideas here. Thanks.
Sure Great question, Brian So.
We had a robust 2019 in the project finance area.
Having raised approximately $2.5 billion of capital across all areas of the Nonrecourse project Finance stack.
And so the you know we start 2020 in a position where were mostly filling our aggregation facilities.
Have a lot of Undrawn capital.
And so in ordinary course, you know it probably wouldn't make sense for us to do a major transaction until the third quarter.
If rates.
You know continue to be extremely attractive we might do something a little bit earlier it might end up therefore little smaller and also you know we don't want to commit to entering into a transaction two weeks after the election.
So I'm very confident there are many paths to a great outcome. This year, both because to your point we have.
A war chest of Undrawn committed capital.
And multiple opportunities to term things out into the financial markets. It's just obviously now has a unique time to be making full year projections and so we're just going to be watching things carefully and doing our best.
To be executing and as advantageous a fashion as we can.
And Brian one thing that I would just add too on the growth rate you know the way.
The way, we think about growth rate and it's really more around aggregate value that you're going to grow and so certainly the rate matters I think that that aggregate amount you grow matters, even more and if you just look at our performance historically, we installed to more than the next to.
Competitors combined in the year, so the scale our scale quite substantial and then if you just look at that per unit value. We also have superior customer unit level economics, so growth rate matters, but you know quantity times value matters as well. So we're really looking at all three of those.
Okay, Great Yep understood, maybe last housekeeping what ill pass it on the.
Creation cost of kind of jumped around year throughout the year good to see that reduction that you saw in Q4.
That was encouraging but it didn't sound like.
You mentioned there might have been some unique circumstances in the quarter that trail bid I don't know if I Miss them, but can you kind of elaborate on what those words if any of those.
Do a persist into into 2020.
Yes, Brian.
Good question. We did we did say that there were that it was somewhat unusual in Q4 that we did have some mix issues with.
Lower lower value projects that had also some lower cost we also had.
A higher than trend.
Hi, good percentage of cash systems, which also helped the cat the platform services margin in Q4, which was up about five cents over Q3 that we think it's going to revert back to more where it's been the lab. The previous couple of quarters. So yes, we we don't believe.
That said that lower rate will continue going forward.
And there were some benefits.
One thing I might add is it is typical in Q4 that you see lower selling expenses.
Because you have relatively higher installation volume than new customer origination you can see that in historical Q4 as well.
Obviously the.
Installation backlog played a factor for us there as well.
And so that cost the sales and marketing cost per unit was especially low as a result.
Okay makes sense thanks, everyone.
Right.
Your next question comes from the line of Mark Strouse <unk> from JP Morgan. Please ask your question.
Yes. Good evening. Thank you very much for taking my questions. I was hoping you could just touch on the the California, New home mandate.
Just the changes that smart is implementing.
What are your expectations as far as other utilities. Following suit can you talk about your your recent discussions with a with homebuilders since that announcement.
And then lastly, kind of what are you baking and as far as a potential impact to 2020 guidance that you sure.
First I would say the biggest impact of the California, New mandate is really not going to be the specific megawatts, we're going to develop on new homes in the next couple of years, but it's just the normalization, but it's the fact that it's going to be more common place that people aren't afraid at higher harder to sell their home that people are more comfortable with that.
That is I think that and the fact that California is committing to a decentralized Greg you know essentially with this policy that's what they have done and when you talk to you know the people who have made that decision I was quite deliver.
The in terms of our discussion with homebuilders are progressing very nicely. We're you know and discussions or engage with 20 out of the top 30 builders at this point I mean, it's not going to be immaterial amount of megawatts. This year as I've continued to say because you know pillars that had to pull permits fifth year. You know the way you went to build their over as you get one.
Unity and then you prove yourself and then you expand so it's a little bit of a slower build their you know it's something we're investing in and we want to take more sharron, but it's not a huge piece of that of the of the current plan in terms of this is my decision where I don't think this is meaningful at all.
You know first of all builders like solar they want to put solar on there if they make more money when they pencil on the right Theres. This huge misconception that a cost more money it doesn't with our solar as a service business model. It's no upfront cost a builder, it's no upfront cost to the buyer it's cheaper electricity. So it is ever.
Really attractive product and you see leaders like fund our move to 100% solar before on you know the mandate was even there because it's a more attractive product and you know the smart decision doesn't prevent builders from putting on the rule. It just allows for community solar as well, which we applaud people who can't get full around the room that's great.
You know they can they can buy it from community solar, but it's not as very specific and that they own their own generation as well. So we don't think of it out as a big issue I think the though the facts to support the fact that billers want that's and consumers want it and that will carry that I wouldn't say one thing I would add just.
As a personal prediction.
Is that as you know reliability is the key issue in California, and solar and wind homes are paired with solar and storage you get a real key differentiated sale feature that is embedded in that is that the homebuilder can use to market the home.
And so I suspect.
That particularly in the Investor owned utility service territories.
You will see builders start to move more towards storage and solar combined because that is a true differentiated an important factor that is on the mines of California homebuyers today.
[laughter] very helpful. Thank you Hi, lastly.
You touched on the five grid services projects and mentioned you have a strong pipeline just how should we think about new agreements being signed this year or are those customers kind of waiting for others partners kind of waiting for.
More evidence coming out of the existing projects you have or do you think some of those will be side over the near term.
Some in the pipeline.
They I don't think they're waiting for you know success, we already have good proof points that we can come in and share were already participating in programs in California, and in Massachusetts, where we can show data that it's working and we're delivering the capacity and aggregating the assets appropriately. So we have good proof.
It's already it's just the slow sales cycle product when you're working with utilities and our municipalities. So our strategy is really to it in parallel we just want to go direct to consumer them, but solar and batteries and get the cost as low as possible to put around as many households, as possible as you know that strategy.
For one in parallel we are working all these business development relationships with you know with the utilities and grid operators and other other.
Operated with the electricity system to open those markets up for us. So we plan to have those two strategies in parallel were not relying on the internet services programs, but they should be a good competitive advantage to us and they should also help on the customer acquisition cost because part of a feature of some of these programs is that the utility will in fact market.
To their consumers, which should help.
US acquire customers in a more affordable way.
Okay very helpful. Thank you very much.
Your next question comes from the line of Eric Lee from Bank of America. Please ask your question.
Hey, good afternoon. Thanks for taking the questions can you hear me.
Yeah. Good afternoon, [laughter], Hey, so just to discuss.
Drivers for MTV for 20 relative to 19 with your guidance for out or both.
Discuss.
What's support or not.
Just in terms of drivers you see.
Sure. So I think that there are a couple puts and takes so one of the increasing storage percentage is going to bring freeing up that that that project value as well as a little bit other cost.
But we're going to be able to moderate that cost by insulation improvements and other efficiencies. So whereas the cost back is going to look somewhat flat overall, it's actually you know the battery is becoming a if you look at the Sunrun built cost for example, the batteries, becoming about 20 to 25 sensor that cost back whereas last.
Here it was nine cents.
So you have to overcome on the cost side, you would need to overcome that with efficiencies, which is what we plan to do so that's where you're going to see that's where you're going to see the they MPV be stable if not improve from here.
Got it on with the cost reduction efforts you highlighted as far as to Itcs Safe Harbor strategy implemented how do you think about a long term sustain trajectory for MTS NPV into 21 and beyond.
From the.
Yes, let me just rephrase. The question was you know keeping in mind changes in the tax credit and also the Safe Harbor program. What do you see is the long term trend and NPV was up the question.
Yes, that's correct as well as thought given the cost reduction efforts you highlighted.
Yes, so I would say we don't we believe we can sustain the dollar flat for the entire stepped down so in our investor deck, There's a slide and know that also supports as it shows that.
What we would need to do to maintain neutrality on that is to improve cost by about 4% every year and raise pricing by about 2% each year.
So we think that you know incredibly doable. So you know that that the and not only envisions solar so it doesn't necessarily envision. The fact that consumers are willing to pay even more money to add the battery and that there's also additional sources of value that can come from bankrupt services type programs for the battery. So you know putting that.
Putting that aside we think we're well on the path to to be able to absorb those declines and have the competitive advantage you know at our scale right now we have safe Harbor I believe more megawatts than any other company. There's no reason why we wouldn't be able to continue to do that so that should be margin that we're able to capture uniquely.
Got it appreciate it.
Lastly, how do you think about cash on levels for 20 and beyond.
Maybe use of cash expectations around that.
Well they.
You know we're generating.
Cash then you mean use of cash such as buying back stock or dividend is that your question, yeah like capital allocation from that perspective, Chris.
Given the 100 million plus cash on for this year and just saw expectations for dose levels.
For pointing out beyond I know you talked about.
Repeatable levels for Dot 100 million or so.
Great. So as I mentioned, you know, we announced the stock buyback program on the Q3 call.
Which was midway through Q4 during Q4, we did repurchase $5 million and stock I believe at an average price around 13 55 a share.
Obviously capital allocation over time is dynamic.
As we consider.
Our own stock price opportunities in the market and our strategy around.
No term out in the capital markets.
We're continuing to grow into a comp even more comfortable balance sheet, and we'll probably always allocate a little cash to that effort as well. So it's a little bit difficult to give precise guidance other than that obviously, we do consider it constantly as is evidenced as is evidenced by the share buyback we did actually performing.
Before.
Thank you.
Thank you.
Your next question comes from the line of most says <unk> from Barclays. Please ask your question.
Afternoon, the decline in creation cost and the associated contracted project value decline. You noted relates to mix is this geographic mix, perhaps increasing deployments in Texas and if so why would that not continue.
It's both product mix and geographic mix and it it won't continue because you can just have anomalies best but you know based on what went into service that quarter and we have pretty good visibility and nowhere that percentage shows are coming with a product mix is coming so we have good confidence that that.
Not process.
Got it and not sure I may have missed it but the 27 and a half million safe Harbor equity investment, how many megawatts or associated specifically with Radixact spend.
500 500 megawatts.
Got it thanks.
Thank you.
Your next question comes from the line of chose O'shell from JMP Securities. Your line is now open.
This is actually Hillary.
Thanks for taking my question.
The first kind of touched on this doubling.
Right.
If you could provide a little more context aware that.
Is gonna be coming from benefits.
Buyer.
If we're going to see them.
Other markets.
<unk>.
Thank you were very excited about it so happy to talk about at the I would just want to clarify the statement. We it we said that we were going to double the aggregate number of installations not be attachment rate. So just want to make sure. We're clear on that yes. We do believe that you know, California will be a big driver.
Particularly the areas that have you know people, who have lived through that power being shut off which as you know considerable number of people.
Just to give you some support behind that if you look at Q2 in the Bay area. Our attachment rate was about 30% and you know jumped up to 60 at a stable you know this quarter was about in the mid Fiftys. So it's you're seeing just really fast interesting moving towards the battery.
And we have places in southern California, and others, where were even above 60%. So it's really one our salesforce can educate people on that as the product yeah is more appropriate for more home type.
We see no reason why the majority of California, and should not switch over to solar plus a battery.
And ER and so that's really what's supporting it is just seeing the momentum market by market.
And then.
Pardon.
Extending out.
200.
What's the timeline for that.
Oh further expansion.
Yes.
Thank you, yes, we're excited about big box retail, we you know how partnerships with both Costco in home depot as we've talked about in the past and on and the reason we bring on up on the call as we believe that the opportunity to expand into another 20% of stores with best retailer really underscores that.
Our differentiation in terms of being able to execute that channel. So we didn't give any commentary and are still working through you know working through staffing plans for that but it's a real testament to the fact that this is a differentiated channel for us.
Your next question comes from the line of Phillip Shen from Roth Capital Partners. Please ask your question.
Hey, guys. Thanks for the question.
In terms of just as a follow up to that last question you know the sales and marketing costs have remained stubbornly high yeah, when we talk to the channel.
You are things like sales guys are printing money.
So can you update us on.
How you expect to get sales and marketing costs, lower I know that expansion with a big with big box.
There is another reason is an opportunity, but given your learning with Comcast and your other channel partners.
Can you quantify how much you think you might go lower be able to lower the sales and marketing costs in 2020 or should we expect that want him to room to remain flat.
Well I'll, all I've always said and I will say again that.
Summer values, the lifetime customer value support our customer acquisition costs and you know we're delivering about over a dollar what about the beat so we're delivering almost $9000 a valley per customer and I thought a 6% discount right. So if we were to market to market today at five that would be over $10000. So we have $10000.
The value I would I would argue that a rational business would go spend another dollar to acquire more customers in order to you know in order to deliver those type of long term value. So that's a that's just an important dimension to remember is that the it's not the acquisition of not out of whack with the value.
In fact, you could maybe argue you would want to even spend more in terms of you know in terms of our.
We believe that we're developing be channels, where we're going to be able to have more customer I'm going to get it wrong weather pull versus push but more customers coming to US you know versus a lot of companies that are really relying on sales people that have more of a hunter type of type type of mentality, which is why you know they don't really.
The marketing spend to actually pull the customers in favor more reliant on the salespeople. So thats an important dimension to be aware of so when we look at some of our efforts. There. We have these relationships with the big box retailers, we have a pretty sophisticated digital marketing program. We owned lots of web properties that acquired leads.
From customers. We are how are signing up for it services programs. We're gonna have you tonys market on our behalf we have the largest installed customer base to build referral off all of these things we believe our competitive advantages for us that give us that positioning to be able to continue to drive down acquisition cost and not be subject.
Back to you know too.
Relying only on salespeople.
Okay. Thanks Lynn you know we're also hearing in the channel that you guys are more actively willing dealers I know you don't provide a breakout between your dealer in your direct business, but perhaps could you speak to the direction of that dealer business, specifically, how does your dealer volume and megawatts.
Trend in 19 year over year was it up flat down and then how do you expect that dealer volume in 2020 to try and again you expected to be up meaningfully flat or down. Thanks sure. So you know I seven this script, we expect that our direct business, where it's our salespeople.
Grow above 20%.
So so that will be growing faster than the channel partner business, but the partner business is still is still very important to us. We you know we think that we can serve that unique and how well. We can serve about population. We have a nice group of channel partners, none of which is.
More than 10% of our our order so good diversification in there and so you know that will be that'll deliver nice growth for us, but the direct will grow faster we expect.
Your next question comes from the line of Jeffrey Campbell from Tuohy Brothers. Please ask your question.
Good afternoon, and thanks for the call on an all time all the information has been providing.
First I just want to clarify the discussion around the permit streamlining does this primarily surround items preparatory turn installing the solar system or speeding up attachment to the finish the finished system to the grid or both.
It it it's typically the okay. So the example, I gave in Las Vegas handful that has an instant building permit and it all past and spent utility interconnection. That's the that's the end game that we want and that's why we've been able to cut out 30 days out of the time to install a customer.
That the first step for solar App program is really to work on the building permit fine and so what it will do as it will come up with the best practice as an online and then building portal that we can then go to the Ace shades and say Hey, This was developed with best practices why don't you signed onto that.
It'll be more efficient for you and more efficient for your constituents and that is that's the plan. So that we're in development of that that online portal right now and we're going to be piloting it with.
10 locations, mostly likely in California on this summer so we're pretty excited about it it will be a multiyear effort, but this promise says this is.
You know this is one of things I'm most excited about for that prospects of the company because it's undeniable that that's can come out huge amounts of soft costs and I believe that where the focus on climate change and the political climate right now that it will not be a huge left to get cities and.
And Ace chase to sign up to you.
Program in a process that serves their people well.
Well, thanks for that and if it's if it's maybe a little too early to try to quantify what kind of savings. We're talking about is that something that yourself.
Just got hard yeah, absolutely. So the I'm you know if you look at.
$7000 is the bogey, we have out there are $7000 per customer that's really the difference between U.S. today in Europe. So if you look at same costs of hardware same cost of labor. That's the difference just given their easier process, so that that would be that.
Bogey, you know, probably where we may not get all the way there, but that's that's what's possible Oh.
Okay, Yes, that's significant.
My second question.
More than the ITC step down so right.
Okay.
So while we're talking about the what would what do we do if the ITC falls off this could be a huge part of.
Not only compensating, but and maybe even improving.
Got it.
I wanted to ask your question about batteries or is it fair to assume that California is a competitive battery market since it seems like all the suppliers are trying to sell there and I was wondering if there are any geographies that are not so saturated that might actually be generating better margins currently or is that not the right way to think of it.
California, it's still not saturated in anyway I you know if we.
If we think about just some market research we've done in the Bay area, even a place in the center of solar many people still don't know that Florida batteries, the superior product to a generator. I mean is look at you know so if you just look at the increase in generator sales and they're not even available for nine months people people don't realize yet.
That solar matters are better more affordable and more durable. So I think we're still really really early and you know we are and we are in other markets I'm certainly as well, but we don't believe that were in.
The.
Cycle of the industry, where we're really trying to price for like a really big margin I mean, we're really trying to grow. These deployments, we believe and that we believe in the density of creating a lot of density of batteries and the communities. So that you can aggregate them and add real value to the grid. So our vision is you know where both you know capitalist spot. We're also really.
Hey, compelled by the need to be harmonize energy and the only way we're gonna Decarbonize energy is to have a huge decentralized piece and I have to be solar batteries.
So were believers in that and just one just won a couple of numbers to share to underscore that I believe last year alone something like 6 million customers were involved in a force blackout because of wildfire risk in the state of California, There are probably somewhere between 10 and 20000 installed battery systems.
Right. So he'll we're we've got a lot of ground to cover.
Right, well and as I've I've tried to make the point a one thing that's great about your installations that they're all close to load and so even as utilities may try to move more more capital into their own battery farms I don't think they're going to be able to build them in neighborhoods and that's going to protect your view your VPP. So even in that instance, so.
Yeah.
Out of the model. Thank you. Thank you we need we need all we need all of it certainly and if the plan is to electrify, there's plenty of room for us to work together and not to be at odds with one another one.
Last ask if I could ask just one last quick one is because we've been talking about safe Harbor here. So it sounds like that's the solar energy systems routes job.
Fourth quarter 19, because of the Safe Harbor capture and then you said you don't expect that to continue.
Through the bulk of here, but I was wondering is this something that could potentially repeat itself fourth quarter 20, maybe fourth quarter 21 is kind of a seasonal grabbing the remaining ITC value or do you kind of see this is more is one and done in fourth quarter 19.
This is you're talking about just.
Cash system down.
Yes, just the jump up in cash systems trying to grab the ITC.
That I think that.
Huh, possibly I think you probably still we'll see some of that but I think we'll also get more sophisticated that really educating people that they don't have to because we've already seen.
You know in the past here you know that was new this year. So I would suspect that you may not see it quite a significant but there will be probably a little uptick at the end there. Thank you.
Thank you.
Thank you.
Your next question comes from the line of Colin Rusch from Oppenheimer. Please ask your question.
Thanks, So much guidance you know just coming is simple question, but the that's a plenty of availability of capital. There's clearly a major opportunity here and compelling economics why aren't you growing faster and then you know as much of that you know would you consider organic rose as an option a you know given <unk>.
What's the level it looks like <unk>, well I would I would again point out we added as many customers in 2019 at the next two competitors combined so our scale is and you know significant here and were enough operational business and we're in a business, where we care about we really care about the quality of the assets I think we're really trying to.
Im showing we do believe that time will really prove out that you know high quality of filled matters consultative expectations matter on the sale and and so we you know we balance those and you know and we think for the long run and we see where the growth rate comes out. So you know we.
We would challenge anybody to get close to the amount of aggregate customer value that we're going to add in the year I don't I wouldn't I imagine that that would happen. So so I think we're adding a lot of value in terms of the inorganic question. We certainly always look at strategic opportunities that are available, but you know we.
I would never comment on on any M&A out opportunities or anything of that nature.
Okay, and then as you look at a growing sort of battery you know assets on the in your network.
<unk> geography, as you feel like you could have bid into the ancillary services market 2021, 2022 somewhere to what you've done in Massachusetts, <unk>, Yeah. The way the way we think about that as you know we sort of have a plan that says okay. Pete just look across the country.
What percentage of the population can we cover with great services like program.
So hopefully that makes sense, you know and and so we think that over the next three to five year period, we believe that the majority of the states that we operate in we will be able to participate in subsequent services program. So were you know we're out there setting it all up right now in order to reap the benefit of that.
Having the largest solar and battery fleet.
Okay. Thanks, so much that looks like about someone on.
Your next question is from Sophie Karp from Keybanc. Please ask your question.
Hi, I'm thinking for taking my question.
I'm just wanted to I'm asking question on the supply chain with everything that we've seen in I guess in China in global trade and considering the weather panels come from is there are tens that we'll see some significant disruption in the a in supply chain and how much a cushion do have against that.
Yeah.
Sure Sophie good question.
First off I would underscore the due to our Safe Harbor program. You know we have deep inventory in both panels inverters. So we're just exceptionally well protected there we continue to watch other areas are for our supply chain carefully.
We currently see solar manufacturing to be operating at relatively high capacity, certainly we haven't seen price increases, which one would expect to preceded any potential supply disruption.
Probably the area, we're tracking most closely as batteries to the extent to challenge where do arise our suspicion is it might be there. Although we have no current information to suggest batteries supply disruption.
And at this point, we havent detected any impact in consumer demand either.
[noise] internally, we're obviously also taking steps consistent with guidance from the CDC to minimize any potential transmission Russ.
Thank you.
Okay, I think we well sign up here, thanks, everybody and talked again next quarter.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation have a wonderful TV you may all disconnect.
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