Q4 2019 Earnings Call
Thank you William.
No there's no one of your first American English.
And they have your company name.
Thank you maybe jump remember please.
Thank you you alone will be on hold until the conference begins.
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I'd now like to turn the conference over to the Vice President of Investor Relations Rodney Mcmahon. Please go ahead.
Thank you operator, and good morning, everyone yesterday, we released our earnings press release, an earlier today posted a slide presentation to the investors relation portion of our website at investors dots Sonova dot com, which will be reference during this call. Joining me today, our Jon Berger, Synovus, Chairman and Chief Executive Officer and Rob.
Robert Lane Executive Vice President and Chief Financial Officer before we begin let me remind everyone that this call may contain certain statements that constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995. These include remarks about future expectations beliefs estimates plans.
And prospects such statements are subject to a variety of risks uncertainties and other factors that could cause actual results could differ materially from those indicated or implied by such statements such risks and other factors are set forth in our press releases and filings with the Securities and Exchange Commission, we do not undertake any duty to update such.
We're looking statements. Additionally, during today's call will discuss non-GAAP measures, which we believe could be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with yeah. A reconciliation of these non-GAAP measures to the most comparable GAAP measure.
Sure can be found in our earnings release, I will now turn the call over to John.
Good morning, and thank you for joining us for 2019 year in earnings call starting on slide three we closed out the year with another quarter, a strong operational and financial results 2019 was the year Sonova became the industry leader in growth rate throughout the year, we increased our customer base expanded our deal.
Their network lowered our cost of capital and boosted our storage attachment rates.
As a result, we were able to meet and in most cases exceed our 2019 guidance targets.
In Q4, 2019 alone we added 6000, new customers, which is a 20% increase from what was added just last quarter and an 84% increase over the fourth quarter in 2018 for all of 2019, we grew up customer base at a rate at 30%.
We're excited about the year ahead as we continue to acquire customers at a pace that has only continuing to quicken.
Due to this increasing growth rate later in the call. We will update the 2020 guidance ranges, we discussed our third quarter 2019 earnings call.
A driving force that has supported our growth has been our ability to provide dealers with the broadest portfolio solar and solar plus storage service offerings in 2019, we experienced a surge in storage attachment rates. In fact, we grew our origination storage attachment rate from 15% in Q3 2019.
To 24% in Q4, 2019, and we're seeing a similar quarter over quarter growth rate continue into Q1 batteries, which are included in our stated unit economics continue to add to synovus profitability and recurring cash flow from operations.
Storage is helping to fuel our rapid growth and is allowing us to power energy independence for our customers. It is now clear that we are witnessing an acceleration in the new energy industry technologies, such as storage continue to come down faster in price and improving operational capabilities faster than.
Previously expected.
With disasters, such as storms and wildfires and mandatory power outages continuing to take or toll on the fragility of the traditional centralized power infrastructure. The instability of regional power grids is becoming increasingly intolerable for consumers.
As a result demand for our product offerings continue to increase as consumers look for energy options that provide higher energy resiliency and reliability. Most recently the earthquakes in Puerto Rico, and the resulting loss of power across the island. Once again proved the economic and societal value of solar plus.
Storage as we were able to keep the lights on for nearly 2500 customers.
The world is continuing to evolve and the energy industry must evolve with it.
Yet the majority of Americans are relying upon an outdated 19th century technology to power their homes throughout history technology and consumer choice of always one and it's more power outages plague cities and towns across America, We believe the switch to reliable energy sources, such as solar plus storage will become inevitable.
Finally, we would be remiss in discussing our growth without mentioning our value dealers. Our dealer network is the backbone of who we are and allows us to leverage our dealers expertise managerial skills and knowledge of local markets to attract new customers at a rate above the industry average at year end the total number of.
Color in sub dealers, who partnered with Sonova reached 155 at 14% increase from the end of September 2019.
We currently have a growing backlog of high quality contractors, who are looking to become sonova dealers and an increasing number of them desire exclusivity.
Turning to slide four we provide a summary of our 2019 results, which are further expanded on slide five.
Total customers adjusted EBITDA, the principal and interest we collect on solar loans and our adjusted operating cash flow world within or above our guidance ranges for the full year.
On slide six we reflect on both our estimated net and gross contracted customer value over the previous three years using a discount rate of 4% as of December 31, 2019, net contracted customer value is approximately 1.2 billion or $14.15 per share.
This represents only our existing contracted cash flow base and excludes any upside potential from renewal value ability to up sell existing customers or any of our growth prospects.
To be clear, we subtract all debt and liabilities, both corporate and asset level from our present value cash flows to calculate our net contracted customer value.
As reflected on this slide our net contracted customer value is experiencing significant increases year over year, which translates directly into shareholder value creation, we operate sonova as a technology enabled service company, we believed that our steadfast dedication and focus on customer service.
Yes, we will continue to lead to increased growth additional upsell opportunities in a cost of capital that at below the industry average.
A happy customer is a paying customer.
Recently, we saw the capital markets recognize the unique differentiators of our model as evidenced by our $412.5 million securitization.
We saw significant demand from investors, noting our focus on service and as a result achieved an all time low cost of capital for the industry.
Services at the heart of our organization in core to our customer experience.
I would like to remind everyone that the momentum the solar industry has experienced over the last few years is opens up a new world of energy options for increasingly engaged in demanding consumers.
We continue to see evidence that change is it coming.
It's already here today, and that's an over we're helping our customers power a cleaner and more sustainable energy reality.
I will now I'll turn the call over to Rob to walk you through our financial results in greater detail.
Thanks, John starting on slide eight we recorded revenue of $131.6 million for the 12 months ended December 30, Onest 2019, a year over year increase of $27.2 million or 26%, thanks to our strong customer growth.
Adjusted operating expense, which represents the full recurring cash expenses to grow and operate our service operations also increase in response to the increasing the number of customers served to $83.3 million for the 12 months ended December 30, Onest 2019.
Our adjusted operating expense per customer was relatively flat quarter over quarter, but we expect to see that decline this year.
Adjusted EBITDA for all of 2019 was $48.3 million up from $41.1 million. During the same period last year, even with the increasing cost we experienced as a public company.
Principal and interest payments from our solar loans, which completes the customer cash inflow picture, we're $20 million and $11.6 million respectively. For the 12 months ended December 30, Onest 2019, which was more than doubled the amounts from last year.
Adjusted operating cash flow, we're in we adjust our cash flow from operations to reflect how we operate the business was relatively unchanged year over year, but was significantly above our guidance range. As we look forward to 2020, we're making a few changes to guidance, including our adjusted operating cash flow or AOCF metric.
As investors are aware, we use AOCF to adjust items that are more investing or financing in nature out of operating cash flow as well as move cash flows that are more operating in nature, but classified per GAAP as investing or financing back into operating cash flow.
These changes would have resulted in a higher AOCF for 2019, but we did not want to move the goal posts we set during the IPO.
For 2020, we are backing out realize interest rate swap breakage income and expense, we incur addus securitization as we consider this of financing costs that would not occur except for moving assets from a warehouse where term facility into a securitization.
We consider these costs in our projections for net cash proceeds from investing and financing.
We're also subtracting out cash received for inventory sales in the appendix of the Investor deck released earlier today. We are shown both our current reconciliation to AOCF as well as our updated reconciliation, which we believe gives investors a clear picture of the operating cash flows.
Estimated net contracted customer value as of December 30, Onest 2019 was approximately $892 million using the industry standard 6% discount rate up 26% from the $710 million as of December 30, Onest 2018.
Due to the timing of deployment of some of our asset level capital from Q4 2019 into Q1 2020 net contracted customer value grew at a slightly lower pace compared to our customer growth, but we expect to make that up in the first half of Twentytwenty.
Our focus as a company is on producing stable predictable and growing long term cash flows we believe that our metrics of customer additions adjusted EBITDA principal and interest from solar loans adjusted operating cash flow and net contracted customer value given investors are complete and straight forward view of the resident.
Actual solar and storage service industry.
We have been very active in the financing front in 2019 in early 2020 as illustrated on slide nine.
In 2019, we completed a number of transactions, including our IPO alone and that Tipo securitization the refinancing of our credit facilities, new tax equity funds and ended the year with a $138 million equipment facility and a $55 million convertible debt facility.
The equipment facility allowed us to fund the purchase of Inverters and batteries at the end of the year, which should allow most of our lease NPPA solar energy systems over the next two years to qualify for the 30% federal investment tax credit by satisfying the 5% Safe Harbor outlined in IRS notice 2018 Dash 59.
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The convertible debt facility was also used to fund a portion of safe Harbor inventory purchases as well as provide working capital needed to fund our exceptional growth while both the equipment facility and the convertible debt facility increase our interest expense the attractive prices, we were able to secure on the safe Harbor equipment purchases will more than offset the addition.
Total expense incurred this year.
In addition, we are reviewing multiple options to refinance the senior debt facility and have ample time to do so well in advance of of possible conversion to common equity.
We continued our financing efforts into the new year closing on a 412 and a half million dollar tipo securitization.
On this securitization, we achieved 93% advance rate a weighted average spread of 2.22% and a blended weighted average interest rate of 3.63% on an order book that was four times subscribers as John mentioned, we see this is a testament to the value of being a solar service provider as well as reflect.
During our commitment to our debt investors by retaining our cash flows we strongly believe that retaining our cash flows provides necessary alignment between ourselves and our debt investors I will now turn the call back over to John to go over our updated guidance and to provide closing remarks.
Thanks, Rob turning to slide 11, you will find our full year guidance for 2020.
As noted earlier in the call we're pleased to be able to announce an increase to our guidance ranges for 2020.
These changes include.
Customer additions increased to 28000 to 30000, adjusted EBITDA increased to 58 to 62 million.
Customer principal payments received from solar loans net of amounts recorded in revenue increased to 32 to 36 million.
Interest received from solar loans increased to 17 to 21 million adjusted operating cash flow increased to $10 million to $20 million.
Even with the recent increases in guidance, we continue to have a high level of comfort in achieving our 2020 targets at the nature of our business model provides excellent visibility into future cash flows. This visibility is reflected in the fact that 84% at the midpoint of our 2020 top.
Good revenue and principal and interest received from solar loans was locked in through existing customers.
As of January 30, Onest 2020.
Further to this point of stability and visibility of our cash flows much of our increased growth in customers. This year will result in increased growth in adjusted EBITDA principal and interest from solar loans and AOCF starting in 2021.
While we expect our quarterly results to fluctuate quarter over quarter due to the seasonality of our business. We're highly confident in our ability to hit our 2020 targets just as we did in 2019.
Based on our internal forecast, we expect to capture approximately 10% of our adjusted EBITDA and principal and interest from solar loans in the first quarter of 2020.
Increasing to 25% in Q2, 35% in Q3 and 30% in Q4 as for customer growth, we expect our customer additions to occur more evenly throughout the year with approximately 45% of our forecasted customer additions happening during the first half of the year.
While the remaining 55% will occur over the last six months.
In addition to the update to our more formal guidance. We're also updating our high level 2020 projected cash proceeds found on slide 12.
On the left you'll find our projected cash flow from an existing operations, which is our adjusted operating cash flow less corporate capex.
For 2020, we now estimate these cash flows to be between five and $15 million up from the previously disclosed range of zero to $10 million. This increase is driven by our improved 2020 outlook, which includes an increase to our adjusted operating cash flow guidance as previously discussed.
On the right are the cash proceeds from our financing activities less cash outflows from growth investments as previously calculated. This estimate includes all of our APC costs, including our dealer network bonus payments work in progress in inventory as well as all asset level finance.
As it little financing includes proceeds from tax equity warehouse drawdowns and repayments securitization proceeds at debt amortization payments not shown here, our corporate capital changes or asset sales. However, we will continue to fully and clearly disclose these kinds of transactions to.
For our shareholders, if and when they occur for 2020, we estimate these proceeds to continue to be between 15 and $35 million as the higher than expected securitization proceeds are offset by higher interest rate hedge breakage fees.
We continue to achieve and expect to continue achieving an approximate 10% unlevered asset level return in the future.
Simply put this is the unlevered IR are of the cost to put a customer into service, including all payments made to dealers against the cash flows we received as payment from the customer.
This also includes tax equity proceeds and cash payments as well as any other state or federal incentives such as solar renewable energy certificates.
As mentioned in our Q3 earnings call.
Positive recurring cash flow from operations is a milestone that we are highly focused on we view that long term contracted cash flows are very valuable and provides stability for equity investors. We believed selling these cash flows, especially at a discount to stated PV six valuations is it.
Equivalent to selling corporate equity and creates misalignment with debt investors.
Our definition of recurring cash flow from operations is to generate cash flow from long term revenues minus principal and interest on all of our debt and minus the portion of our total expenses there are allocated to our existing operations.
The remaining portion of our total expenses are allocated to our new customer origination.
At our current origination pace these expenses plus all payments to dealers plus all working capital and Safe Harbor interest costs are currently expected to be fully covered by the corresponding financial cash flows we are achieving.
Our current asset level economics allocated overhead spend for growth in cost of financing have enabled us to achieve proper operational scale to fully cover all of our costs incurred for growth.
This result is obviously a significant achievement for the company and exceeds our previous expectations.
We previously indicated that positive recurring cash flow from operations will be achieved in the 4 billion to 6.5 billion asset range by 2024, given our increased growth stable unit economics improve cost of capital and ability to refinance our older debt. We now see that goal achieved in the 3.8 to 4.8 billion.
In range sometime in 2021 or 2022.
In summary.
We now have visibility to generating sufficient cash from other operations or financing to supply the significant majority if not all of the total cash required in 2020 and 2021 with the exception of any additional working capital required for larger growth.
At the same time, we're now moving faster to generate more of our cash from recurring cash flows from operations rather than financing.
All the while we're increasing our long term contracted cash flows base as measured by our net contracted customer value metric.
We see the main two ways to create shareholder value. Our number one produced cash number to produce long term contracted cash flows. Therefore, we are focused on both for shareholders as our shareholders can hopefully see weve endeavored to disclose as much information as possible and get thoughtful struck.
Sure and guidance on cash generation and usage.
Most importantly, we have focused on including all cash expenditures and our handful of commonly used major financial metrics and in our cash metric disclosures that we have provided.
In closing 2019, with a transformative year and expect to Nova to make even larger strides in 2020.
We remain confident in our ability to continue to drive best in market growth, while achieving superior asset level in corporate financial results.
Higher global residential solar and storage industry has entered its most exciting long term face every technology and industry transformation is marked by an S curve. We've clearly entered the lower balance in the middle part of occur and the resulting change in the global energy industry will be profound.
With that operator, please open the line for questions.
At this time I'd like to remind everyone in order to ask a question. Please press star followed by the number one on your telephone keypad.
And we'll pause for a moment, while we compile the Q and a roster.
And our first question comes from the line of Air Fleet from Bank of America Merrill Lynch Go ahead. Please your line is open.
Hey, good morning, Thanks for taking the question.
From the results.
Thanks, Eric.
Maybe could you discuss.
Drivers of are substantially higher growth rate, if im looking out at mid points about 60% year over year for full year 20, and could you discuss your ability or how you perceive your ability to sustain that growth into 21 and beyond.
Certainly I think first of all just to remind everybody that we've taken a more conservative way of classifying our customer and so that customers in service and paying.
Their monthly either alone or lease or PA, and so that will create a lag of approximately about four months relative to the way that the others in the industry.
Classify a customer is an installation nothing wrong with other way. It's just a reminder, that ours is a more conservative.
Second.
In the.
Mount of dealer growth and just organically has been pretty exceptional but we've also added a number of dealers as indicated in the previous comments that we made.
And then I would have lastly say that.
Our widest product portfolio in the industry and having all the products on a single platform that really cut a lot of cost for dealers. When they don't have to flip between two like alone platform were a lease PA platform and a lot more dealers are getting a lot more smart about their business and looking to see how do I just get into one.
Single service provider platform.
Then really just a focused business model I mean focus focus focus.
We're not trying to do have multiple different channels that are in operations and so forth. We're focused on our dealers are focused on our customers and we're making sure that were.
Making sure that we can come in and provide that what they need both the dealers in the customers and Thats, obviously, a leading to a pretty exceptional growth.
Certainly could you discuss actually a bit more on to increase.
City for dealers.
That sounds like there's increasing demand for dot so would be great to hear your thoughts on whats.
What's driving that telling that yes.
Yes that would did come as a surprise that we recently had our dealer summit and this was something that was a pretty strong feedback I think.
Look, we're adding a lot of operational capabilities to the company.
And then again looking at our widest product portfolio, there really isn't it a need and certainly there is a desire to cut costs by the dealers do just plug in again to one service platform a strong financial position.
Relationships, we've proven that we're focused on.
The dealer and the customer and service. So all of that comes together is that the dealers are looking to find a home they want to be able to pick up a phone talk to the senior management, if need be because things do happen.
On both sides of the relationship and they know we're totally focused on them and so that is giving a lot more comfort to folks and here you are seeing a lot of dealers talks amongst each other that are not yet sonova dealers and saying you know what you need to come over here. This is this is home. This is the place you want to be.
This is where you can build your business over the long term.
Got it maybe one last question before I pass it along here.
I think there's a little to contribute to us.
With what's your latest Jvs and clearly 92% of penetrate weighted average go to 3.75, how do you think about the appropriate unlevered discount rate relative to the industry standard 6%. Thank you.
Yes, I think you guys put out a piece what a couple of days ago about.
Looking at the 4.5% clearly hear all end through through the cost of the stack which included.
Any of our overhead expenses as I mentioned earlier.
That was about 3.6, just a little north of 3.6% all in.
Clearly the interest rate risk free rate has dropped in the market even sense that securitization, which is hard to believe roughly by about 25 basis points.
The risk premium by the way the record lows both belong to Sonova as far as least NPPA 175 over in November of 18 on that securitization. This was 180 over on the Ace. So it looks very clearly to me that.
You guys are being very conservative on the four and a half which is.
Absolutely the right thing to do but it looks increasingly the 4% is even conservative I would also add this that a lot of investors I've spoken with particularly over the last couple of weeks are starting to see a lot of data not only from us, but the when you really provide service both to loans and leases and PPA days and then the cash.
Flows in the embedded assumptions and the value that the industry. The securitization industry uses such as the 6% such as the degradation.
And the default percentage that's given out there are really very concerned is proving to be very very conservative to the point that there.
Leaving a lot of value on the table so to speak and so if you look at the long term selling assets off of these cash flows has not in has not been a good idea you've achieved a lot more cash flow by holding onto the assets refinancing and achieving the lower default rate that was baked in and overall I think the lower the cost of capital will actually.
Continue to trend lower so I think you guys are on the right trend there.
Thank you.
Our next question comes from the line of Paul Coster with JP Morgan.
Please your line is open.
Yes, Thanks for taking my question John.
Turning 20.
Growth much we will be fueled by mentioned by further expansion of development work.
And by expansion of existing to lose can you sort of quantify for us how much of the growth through through expansion of the network.
Versus growth of food dealers themselves.
Organic growth demand.
Hello stuff to unpack the but.
Thoughts would be welcome.
And certainly thanks, Paul I would say about 90, 95% of our current to guidance is our existing dealers.
We were again seeing a large number of dealer growth. The again as we previously commented so that would be in addition to.
Have also stated that homebuilder activity is not baked in very much at all if any into our current forecast to in that stands.
And so we're we're really making sure that were being fairly deliberate and conservative as far as forecasting growth and so if there is a bias to the growth it's certainly to the upside.
Following on from the how much of the dealer acquisition is expanding territory versus <unk>.
Improving euro.
Your penetration of existing.
Territory and.
With respect to territory can you comment on the.
Tree attach rate where is happening.
How is the dealer network supports that program.
Yes.
So most of our growth is in our existing territories, we have expanded to some new states and those have been early.
Winners, but I wouldn't say they've moved the needle so to speak in certainly are not.
Baked into our 2020 forecast so right now most of our growth is really in our existing footprint. The battery has been very pleasant surprise and continues to especially at the start of this year.
Rip higher I think more more consumers are clearly seeing the benefits of the battery.
Clearly in our island markets, Puerto Rico, Guam site, Pan, Hawaii, or either add 100% attachment rates or or nearing it rapidly, California, obviously had a big boost in Q4 from the wildfires, we've continued to see that.
Move up and in this quarter.
A few that surprised me, Texas was actually sold us some storage in Texas.
I wouldn't think that the economics is really a pencil out but more more people, particularly along the coast line, we've had a lot of issues with storms and increasing frequency and intensity and so anywhere you see that youre going to see some storage pickup Florida is another one and then we're also seeing some in Massachusetts, New Jersey, and New York, a little bit. So we we expect to see.
Broadening of the storage pickup, especially as storage prices continue to fall.
Okay. Thank you very much.
Thanks, Paul.
Our next question comes from the line of Philip Shen with Roth Capital Partners Go ahead. Please your line is open.
Hey, guys. Thanks for questions Congrats as well on.
The Q4 and guide.
In terms of growth.
The strong.
One if you could provide us some of your thoughts on the balance between growth and quality.
Some might say hey growth is good but thats not the picture to what degree can you talk to us about the quality of the good that growth.
And.
And also can you find help us understand the balance between.
Maximizing that growth and then versus how does that compare to leverage. So if you can speak to growth vis-a-vis that quality and that leverage that would be very helpful. Thanks.
Okay. All right. That's a lot Phil. Thank you let me try to go through that I first of all let me say this that our unit level economics. Despite the cost of capital been been fairly stable in fact to really very stable over the last.
The year, we don't see any change in that the as the cost of capital that continues to plummet given maybe some of the issues is going on with the virus and so forth than maybe you might see a little bit of pressure on that but we haven't seen it yet and so the quality has been high we want to make sure that we're making money and I want to point out all of our costs.
Loss are included in our unit economics edit to roughly at about a 10% approximate somewhere a little bit less than that some are little bit higher than that.
Unlevered return across the product portfolio and the only cost that's not in that is roughly about it what we call an indirect cost. It was a few million dollars and and Thats roughly about only about 15 basis points to that so maybe it's a 985 you want to even a couch it too with all the cost fully in the other costs have been a portion doubt as overhead.
I have been allocated.
Towards the growth of roughly about 40% of those costs and 60% those cost to the operations and so weve accounted for every single costs, we have not pulled out one penny of cost and weighted to the side are not included in into our calculations and the way that at least the way I look at a Phil on terms of our growth and.
Look at the cash flow and if you're to look at very simple world Thomas for every $100 million of cost again, including all of our costs in there, including our safe Harbor costs in our working capital interest cost and in that number.
Of 100 million of in service customers, we generate approximately $1.5 million of cash to the equity.
Before operating expenses is generated near one and roughly about 40 million of net customer contracted value at a PV for generated over the course of the contract of 25 years from that most of our contracts. So that's a hopefully a rough rule of thumb that helps you give it a visibility into the cash generation. So then you can tell that is high.
Quality growth and when I look at the.
In further capital requirements and so forth as we move forward in time.
We in we at the end of the day, it's all about profitable growth.
We said before looking to increase our working capital to due to growth we laid out higher growth for 2020, and Theres a bias as I've mentioned earlier to the upside for further growth.
The net biases certainly to the upside. This buys does not include Generac or homebuilders are any of the partnerships or it's going to further our growth.
We're cognizant of the overall leverage as you mentioned and we want to make sure we don't overlap with the company.
We know that Thats been a problem in the past we know that at some point in time, maybe the capital markets experienced something like we saw yesterday and we'd like to.
Remain conservative than that and as we look at an increasing our working capital needs, particularly as we look to even further growth ahead than what we are guiding now due to generac and homebuilders and other or the partnerships I mentioned earlier.
We want we want to make sure that we are focused on recurring cash flow from operations and that we bring long term value to instability to shareholders means we need achieve a proper leverage and not overlevered. The company on this working capital and I'll discuss this in the past we have many options that were considering.
As we look at over the next 12 months or so including a multitude of corporate debt options again, I would mind that we only have about 50 million of a convertible corporate debt.
The corporate level, so it's pretty lightly levered.
Our options in this ends corporate debt increased in number in decreased in costs of the last few weeks.
One small part of these options could be equity, but no decision has been made and it would be small if we did anything at all and so the right now we're contemplating and looking to see what the best way to property capitalize the company's move forward.
As for any sort of.
Long term shareholders I think it's when you look out I think everybody is interested in looking at the value of the company.
But also looking at the value that the would bring to the company to increase the shareholder liquidity.
But and I would add this to it as well and you Didnt ask this fill but I'll add this into finished this question now.
I'm personally a buyer the stock at this prices.
As founder and CEO no one knows the company better than I do we're clearly humming as a company, but we can do much more and I believe that we're on a near term path for even the larger growth as I've indicated several times and to be clear I will not sell a single share here and it will only buy at any price near these levels I think we've got the proper.
Balance on leverage I know, we've got a focus on generating quality and profitable growth and I'm really excited about where the position we are sitting and right now.
That's probably more than what you're asking for but wanted to give you a complete answer.
Thanks, Sean that's great color. Thank you.
As it relates to shifting gears to the financing side the house.
You guys did your ABS back.
This month.
Looking ahead.
Can you update us on where you see ahead, how many more TBS is maybe some sense of timing asset type and so forth I think on the last call.
You guys talked about maybe doing three or four this year.
Looking at your latest thoughts.
Yeah, Phil This is Rob and we're really still on that trajectory.
We we said we were going to have four to five this year. We've clearly done one so we've got one down our plan is to get into a regular cadence is in full up our tax equity funds in our loan warehouses. So are you should expect to see us back out there in the market.
Few more times this year.
Okay, Great and one last one.
Through some of our checks it seems like electricians appear to be a bottleneck for storage installations.
Especially in California.
Our any of your dealers experiencing that to what degree.
Might you be getting the attach rates in terms of order, but perhaps theres, a delay or some lag in the installations and how might that impact the operations if at all thanks.
Hi, Phil as John ill take that one.
Look it's it differs on different parts of the country I think it's well known that California has it relatively tight labor market Theres. Some tightness in places like Massachusetts, New York New Jersey.
Other places geographies or not is in anywhere near the tightness in the in that particular labor category.
We have found no again. This this pays off of the dealer model is that that local entrepreneur that man or woman in the field knows a lot of people and people want to come worked for him or her and so while it certainly has meant a lay up we have found no real issues with our dealers hiring the people that they need.
And then on our side in the service technicians.
What I would say is is that we picked up.
Lot of hiring that we needed to do and we're on plan for that so far this year and lot of that included the information technology heads that we needed or people that we needed and we were able to pick those up in Houston, but at a.
Fairly decent pace and so as we look ahead, we're going to be hiring less.
As far as the the the overhead here in Houston necessarily but more folks in the service field and we don't see any issues at all with the labor. Our model is geared for this to address this issue and I think were deal. It's very clear we're doing this quite effectively.
Great. Thanks for all the color John I'll pass it off.
Our next question comes from the line of Brian Lee with Goldman Sachs. Go ahead. Please your line is open.
Hey, guys. Thanks for taking the questions.
Maybe just a follow up please I might have misconstrued this but.
John I think you mentioned equity capital in risk.
Question can you.
Can you qualify comment a bit more it seems like you've upped down the notion of not retaining all cash flows and that being in two years.
Selling corporate equity so just trying to square the comment and how raising equity fits into your strategy.
During 2020.
Yes, Brian it's really about if we can continue to retain our cash flows as we have been and grow that in CCB calculation, we're seeing more and more where as we naturally de lever, including our amortization schedules get more beneficial to the corporate equity our tax equity will start going into flipped.
That is here and the next couple of years and then also our solar renewable energy certificate hedges.
And the debt against that is getting paid off at a fairly rapid rate that'll flow more cash to the equity. So anytime we can keep those cash flows we should do that I think what what we're clearly pointing out is is that if it's at a substantial discount rate of four something of that nature and there's an asset sale that we could do we'll be opportunistic about that and full.
We disclosed that so it's not necessarily off the table, but anytime we can retain those cash flows when they're not when they're trading at elevated levels in terms of discount rate, we should probably do that now the other piece of that in terms of the proper leverage and that's what I was answering Phil on the balance sheet is.
The board and the management team are very focused on making sure. We don't get the company over Levered and that we are achieving the recurring cash flow positive the operational cash flow positive and so what we're looking at is given the high grade a growth in eight additional high rate of growth that we see coming.
Even on top of this guidance is that that needs to be properly capitalized and so we don't get the company into an over levered situation. We have a number of options on the corporate debt side of things.
With one of those options our portion of the small portion of those options be some equity I don't know.
This in the nearly saying that as.
The growth is considerably higher than I thought would be and we continue to see more more opportunity for that growth. That's something we're contemplating over the next year as we look out to look at further working capital raises but if you do anything it will be very small and as I indicated very strongly.
I continue to be a buyer of the of the equity so I continue to see an undervalued.
Okay fair enough that's helpful.
And then maybe just a couple of follow ups on regulatory issues.
Right.
Thats correct program in New Jersey, there's been some recent.
Update fast changes there in the process. If you could maybe comment on kind of how youre seeing that develop and if there is.
Better visibility for you in terms of the.
Station there because it's a key market for you guys, obviously and then secondly on.
Slide in the California, new homes mandate.
He's on the re community solar decision by the California Energy Commission and then.
The impact on the opportunity there and maybe also what you think.
Seeing from other utilities in the state what they might be planning in relation to that thank you guys.
Sure first on New Jersey.
We think thats going to come out to be pretty pretty favorable.
We we like the current program, it's generated quite a bit of value for our shareholders and and our customers. Most importantly, so I think the stated in new Jersey as shown excellent national leadership and I wouldn't expect that the change we've got to.
Fairly close relationships there in new Jersey, as the year, whereas in and I think that whatever that program ends up being or entering the final decision stages is at least we we understand it.
I think it will be fairly.
Fairly even be not such a.
Rough transition to a new type of program.
May actually end up being a looks like a fixed rate on the aesrx. If you will so guaranteed by the state. So in some ways. It may even be a little bit more favorable actually to growth there and given you're right. Our large presence. There we think on the margin that should be beneficial unto ourselves to our dealers and to our customers and the state in New Jersey.
On California.
Look what I would say is is that we went consumers to have choices.
I've been very clear about that I think the market in terms of the overall us power industry ought to be aligned more to consumers and giving consumers choices and not having monopolies and such.
And what I would say I find it interesting that every time, we have a utility.
Therefore, consumer choice when it's for them and they're not for consumer choice when it's against them and so I don't have any problem with the way that this choice has been given to consumers and whats muds doesn't necessarily I think it's probable that maybe other utilities in the state follow it but I want to point out another thing is our solution.
And our industry solution for residential solar and storage, especially given the wildfire impacts in California, and such they've been.
Headline grabbing and did contribute to our increase in storage attachment rate. So that pointed out earlier that is one a far cheaper solution than what smart as offer and as a far more reliable and therefore, a better service. So it's a better service better energy service at a better price and Thats why founded this company so I would.
Hope that we and our dealers can go out there and make that.
Pitch to consumers that they understand the value that what we're offering versus what a competitor in this case, a smile to offering and also would hope that the government there instead of California, which I'm confident can make sure that theres proper balance and consumers have proper choices that choose from and so I think that by and large I think giving.
Consumers more choices as fine as long as it's not even balance.
Okay. Thanks, guys.
Our next question comes from the line of Ben Kallo with Baird Go ahead. Please your line is open.
Hi, Thanks for the digital Jordan.
Just wanted to maybe dig into Generac and just kind of if you could outline.
How that impacts this year's guidance I think you most of this lot included but how we should think about that rolling out this year than going forward and that outside of general.
The feedback was.
You guys continue to expand different types of channels, what what else I guess the questions. What other type of channels should we look.
We're seeing things do work in the past, whether its home depot or are things like that.
How should we be thinking about what you're looking to do going forward. Thank you.
Thanks Ben.
Yes, that's the in terms of a question I think thats an interesting.
Point to bring up in the fact that why because by the company's business dredge from day, one to be is somebody that partners well with technology providers.
And I think that trying to I think it's very clear is we're basically in a very and getting more expensive arms race and the industry to develop more powerful cheaper technologies in this case it.
Assesses, but theres also control at Tronics generate quite generators and so in other technologies Generac and others are developing out there.
And I would say that our long term vision by the way of powering energy independence to the point of even potentially clipping. The court. So to speak is well aligned with Generac and I think more more people are seeing what seemed like crazy idea as a very real and near term opportunity over the next few years and so when we're looking out at the technology landscape.
I don't think that we certainly we're not going to poor capital into developing technologies ourselves manufacturing those technologies is or contract manufacturer ourselves. That's just not our focus we want to partner with the best.
We partner with Tesla, we partnered with.
Solaredge and phase and now Generac and there is other partnerships out there and we're going to continue to go out there and for our customers, especially and our dealers to of getting the best technology partners and work with them as they develop their product lines and then on top of that worked to see how do we generate more customer.
Leads for our dealers and therefore more customer sales generac is a marketing machine.
It's it's a company, we're very proud to be partnering up with and that will lead to additional growth. They also have a dealer model, which was one of the reasons the cultures fit so well and so.
There are going to give us access to their dealers as well, which is again further growth and again, yes, the stress that that kind of growth expected from generac or some of our other partnerships both technology and otherwise that we're working on is not baked into this current guidance and so I just don't have enough information yet to be able to do that I hope to be.
We'll do that on the Q1, certainly by the Q2 call, but I want to be very conservative before we raised expectations on these new partnerships, but I would say, we're very proud of that and look for many more to come.
Great. Thanks Cheryl.
And again as a reminder, if you'd like to ask that question. Please press Star then one on your telephone keypad and our next question comes on line of Michael Weinstein from Credit Suisse. Go ahead. Please your line is open.
Hi, guys. Thanks for taking my question.
Hi, Michael maybe hey.
Could you talk a little bit more about the split between.
The different types of customers.
Other category in there and that seems to be growing Im just wondering if that's.
Any guidance going forward, especially after 2020.
Yes sure.
Well that that other category is typically our service only customers. There are some other different types of contracts. We have I would say that I guess, a new term that I've I've seen over the last few months. These are orphaned customers as they are being termed these are typically.
Originated by the loan only companies and maybe some dealers that for whatever reason either they're not in business anymore.
Or they're not answering the phone call can the service operation and origination installation those are two very different types of businesses very different.
And so what we're saying is a pretty large opportunity to address those orphaned customers and I think that more and more of the industry will start to recognize that this is a service provider industry. This is not a product sales as a service sale those customers need to be taking care of that's what was recognized in the securitization by the capital.
Markets that will get us a lower cost of capital those costs, we passed on to our consumers and our and our dealers and so when you look at the further growth of that other category I would expect it.
Maybe not to take off so to speak this year, but certainly looking ahead to 2021 I think that we've got a number of interest and no. We do a number of interesting plans on how to to facilitate those sales through our dealers and then there's other technologies coming that will come down the path that may fit in that category as well.
Demand side technologies are really starting to come out I know, there's a lot of our technology partners that are there are gearing up into gold launch products. Later this year. So there's a lot of different sales and services that those products provide that we can provide to our consumers are customers that are starting to proliferate and thats going to go down.
To further growth and of course, the near term example of that is batteries.
One other thing that I want to point out is that we don't count in the customer account when me up sell a customer a battery and I think that may be unique to us in the industry, but that is just a further transaction count we don't count that because it's not a unique customer and those are starting to be further decent and number so as we move forward in time.
We may start to break those out for you all little bit more but those are to be battery upsells, if you will to existing customers.
Interesting so the the 50 the growth into 2020 is really just all you need unique customers not additional upsells batteries.
Correct Thats correct okay.
When you look at look further on the 2021.
No there's no guidance yet but.
We still going to be above the initial 30% level that you originally forecasted for 2020, we still going to be well above that 2021 or is it going to be thinking moderating lower than the 58.
Earlier this year.
Well I believe it or not going in this goes to the long term and just a different business model of retaining those cash flows and having visibility into the cash flow. So I believe it or not my team and our already working on 2021 budget and forecast.
And so we're we're getting more more visibility into 2021, which we'll be able to share at some point over the next few months with you all more information to help you out and then we'll we'll give guidance in Q3 call as we did last year. When it comes time later this year for 2021.
What I would say is is that at this point in time. We're we're we're not going to see I think at that large of a growth, but I could be wrong.
On that and what we're looking for is something that certainly is minimum 30%.
And it may be something that is still around the level.
That this years.
Now.
And again I haven't baked into this this thought process any additional partnerships the homebuilding the other partnerships that we're working on so all this is certainly plausible that we continue to see this kind of growth rate as we move into next year.
No signs at all on the first two months of this year that that growth rate is slowing down any at all.
So it's definitely possible.
But that is a fairly high rate of growth and but we want to make sure that we're focused more on.
Generating cash to the equity.
And making sure that that growth rate than get too high and too much away from us, but there is this a lot of growth opportunities there and we're going to choose wisely and making sure that we're running the company and growing and intelligent and conservative fashion.
Okay great.
Well my question when you think about retrofitting batteries to have.
Kind of the guidance.
Where that is growing.
21 and beyond.
It's the same territories are you asking whereas in terms of geography or or another question.
Sales are growing.
How those revenues.
Thank you about that in terms of revenues that customers.
Yes.
We haven't broken that out and we'll try to do that for you here in the next quarter to what I would say is is that anywhere in our locales like the island markets in particular, California, and but but also we're starting to see as I mentioned earlier some of the southwest in the northeast those be existing customers that will want batteries I think.
As I mentioned before this is the year the battery theres going be a lot of product launches from a lot of a very well run well capitalized companies.
In phases got a product coming out Solaredge does I know Tesla is always going to be out there, putting new products and innovating more and more we've gotten to talked about our general partnership Theres, others out there as well and all that I think we'll just lead to more and more customer awareness of the solution here and that you don't you don't need to be without power and.
Still pay.
Eight or at the same grid rates are a little bit below in some cases so.
And the prices I think are batteries are going to continue to drop in and rather precipitous fashion, particularly and get all these different products and solutions available for consumers to choose from from from Sonova. So I think that it will certainly see an increased amount attachment rate, we're looking to fee to figure out work with our dealers about how do we encourage more of those.
Upscale opportunities so that gives them more and more business and takes care of our customers and.
In a much better fashion, if I can use that phrase. One example of that is is that we've been very ernest and and looking making sure that any customer in Puerto Rico that wanted a battery can get one.
We've been doing everything we can we can't make everybody happy all the time and there is a payment for these new batteries, but we're we're going out there with our dealers in earnest and upselling batteries to those customers and a lot of those customers. We're extremely happy to say lease when the unfortunate events of the earthquakes occurred around of the turn of this year they had power when unfortunate.
Lastly, many of their friends and family in neighbors did not so we're going to continue to try to make sure that everybody that once and sees the value in and better energy service that better price with the battery has the opportunity to.
Procure that from us.
Okay, great. Thank you very much.
Thanks, Mike.
Our next question comes from the line of Sophie Karp with Keybanc capital markets. Go ahead. Please your line is open.
Hi, Sophie.
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Yes.
Yes. So the question was so everybody can here is that.
Are we talking about Securitizations, when we talk about and retaining cash flows were building cash recurring long term recurring cash flows on the business no that is debt we are talking about.
Selling off of Sameet mini do on loans, and then do asset equity sales in such a we're looking to retain those cash flows as much as we can and then look over a period of time, what we'd like to be able to do as we get closer and achieve.
Recurring cash flow from operations is to be able to delever the company and again Thats why I was talking about is the board and the management are very focused on making sure that we have a long term proper leveraging of the overall company, including both the asset level in the corporate level debt facilities. So that we can we can build something for the long term and take care of our customers.
For the long term and our shareholders for long term so no I hate the securitization.
It is simply.
The most economical way the lowest cost capital to to access the debt capital markets.
Terrific and so could you maybe speak a little bit.
To the vintage over the assets that but the Unsecuritized now I mean does does that make sense for us.
I'm going to consider that.
When we think about the advance rate in the spreads. If you may begin further down the road as you worked for your portfolio.
Sure. This last securitization had.
Some assets are a little bit older and vintage roughly about half of it and then some assets that were fairly newer and vintage as we move forward in time, we'll see a by definition more and more of those be just the newer vintage assets.
We continue to see advance rate increase is as the risk premium as I mentioned earlier soapy declines as we demonstrate the quality of the asset glass and our competitors and is done a good job in this area and demonstrating the quality of asset class as well.
And that of course overall interest rates have been and then following that enters the.
And made reference to at refinancing some of our older vintages and maybe even some are older Securitizations were taking a look at that the cost of capital drop.
Been quite significant.
Particularly over the past 12 months and so thats something that we're looking at and we feel like that we can be able to refinancing either pool cash up.
Through the balance sheet or more likely.
Make sure that more cash flows and again building up to that recurring cash flow from operations and providing more long term stability for the company.
Terrific and.
One last one if I may.
You're not talking about burning forward I guess the point in time, when you have free cash flow positive.
Brian to achieve that at the lower asset level I think I heard you save any 0.8 to 4.8 I was hoping.
Could you maybe a point in.
Give us some color on what's driving this kind of lower asset level point.
Those positive cash flow station.
Yes. So this is a follow up to the call or to the question on the last call I think it was.
Julien and Eric It asked about that and that point and to be clear about it. What we're saying is is that the larger growth so that larger than expected growth.
Is basically enabling us as we as we're financing and going and going into the term securitization market. They were able to cover our costs are allocated over to the origination side faster than we expected. So any sort of the financing cash flows that we're getting my for instance that we achieved from this the securitization.
Is going towards.
Filling any sort of the cash need that we need so there can be cash neutral well, we'd like to do is be able to get that from in terms of the other side of the costs that are on the operation side to be fully covering all those without needing to fully levered the assets as we as we did not securitization.
Or.
Not using that cash if we so chose to fully assets lever the assets in the securitization. So it gives us a lot more operational financial durability and so what I was merely discussed in describing is is that our growth and profitable growth is driving more than expected.
Cash generation, both this year and in the foreseeable future as this trend continues and so simply recognizing and updating my comment to in my answer to the question on them on the previous.
Earnings call.
Thank you for clarifying thank you congrats on a quarter.
Thank you.
Our next question comes from the line of Pavel Molchanov from Raymond James Go ahead. Please your line is open.
Thanks for taking the question.
Let me ask the slightly abstract one about the cost of capital this year remarks I believe.
And your since solar city.
Put out the 6% as kind of the benchmark and then remained.
The talking point ever since for everybody in the space.
What do you think it would pay for personnel.
Or the industry in general.
To shift to a different.
Cost of capital target, presumably something less than 6% given the kind of rates that you've been achieving.
Yes. Thanks. Thanks.
Well.
Again, Eric asked the question earlier, I guess to start off the Q in a session right and they had put out a piece on the four and a half a percent discount rate.
I think it's pretty clear, we're now sub 4%, particularly with this recent move it's anybody's guess whether this.
Low rate environment, just keeps getting lower or at some point does it reverse.
I think you need to be prepared for both but I think it's also very clear as you dig into the discounts in the assumptions used to create the values side of the equation that used in the securitization market for instance is fairly conservative and not that that's bad in any way.
I don't know if you want to change it necessarily but it certainly there's more value in retaining these cash flows at some it's simply if you look at the the last to your point 10 years, I think it's actually maybe a little bit longer than that it's been you've been better off retaining your assets for 10 year cash flows than selling them off and.
I think that that trend is going to can clearly continue if you look through this I see nothing but the risk premium and the asset class dropping it again, if you're a service provider be properly serviced the customers against goes to the happy customers are paying customer and so I think that the overall discount rate will continue to drop further further from 6%.
Barring the risk free jumping up in some unforeseen macro economic event.
When when the industry should change off the 6% and go to a more standard save maybe a 4% I don't know Thats really for me to answer I think thats more for you all to answer about when do you feel comfortable doing that in the in the investor and the lenders to answer that so I'm not going to answer that I think thats more for the market too.
To tell us what wind right time, I can tell you I and this is just the way I look at it.
Im looking at 4% being fairly conservative and Thats why I feel very good about looking ahead at $14 in 15 cents as I indicated I think you need to look at per share basis.
In terms of the value and I see in the next 18 to 24 months I can see that $14 in 15 cents growing quite significantly and so I look at that big kind of being a base conservative value, which goes from my point about the shares being undervalued here and I think it that we've got a lot of value to create and I think we hopefully we'll see the mark.
Get respond and then to indicate that in an ever increasing stock price as they've done over the last few weeks.
Yes, I appreciate the perspective on that and then secondly in terms of geographic mix or geographic footprint.
How many states are you currently in and why do you expect that number to be by the end of the year.
I think we're indicating roughly in about over 20 us states in territories.
We.
Our clearly looking at other geographies I Wouldnt say that theres can be a huge amount of geography expansion again, I want densification of customers to drive down My overall service my operating costs on a per customer basis, and so we want to be fairly conservative on that at the same time storage is really opening up a lot of different markets not just.
States, but this is a global as indicated in my comments transformation the energy business. So there's a lot of opportunity out there, but again I want to make sure that were very cautious and were very conservative both in estimating our forward growth, but also and what kind of expenditures we take on.
And to enter these new geographies I think we've been need to be very judicious with that we've continued to do that.
But we've also continued to open up new geographies and I think that methodical pace is what we will see continue over the next couple of years.
Thank you very much.
Thank you.
And there are no further questions in queue at this time I'd like to turn the call back over to John for some closing remarks.
I want to thank everybody for joining us for our 2019 conference call, we had a fantastic year and Sonova and really it was a breakout year for the company I'm very proud of everybody.
All the men and women that makeup sonova and and our view dealers did a fantastic job really appreciate all your support we've got one heck of amount of momentum coming into this year and it continues to increase got the right strategy. The right people and it's really at the right time. The industry is transforming the battery is a significant catalyst.
We're have the right amount of strategy again, we have the right folks behind us and looking forward to having a fantastic 2020, and as I indicated earlier already looking ahead to it maybe even a bigger 2021. So appreciate all of your support and look forward to your our next conference call. Thank you.
Ladies and gentlemen, we would like to thank you for joining us today, a replay for the call will be available at 11 30. Thank you you may now disconnect.
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So.
So.
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