Q3 2020 Sunrun Inc Earnings Call
Greetings and welcome to Sunrun third quarter Twenty-twenty earnings call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
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I would now like to turn the conference over to your host Patrick Jobin, Senior Vice President Finance and Investor Relations.
Thank you operator 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 S. E C for more inclusive discussion of risks and other factors that may cause our app.
Quickly at the onset of coven, increasing our digital lead generation activities.
Virtual selling capabilities and other operational efficiency initiatives.
The sales productivity increases we highlighted last call have stayed with our salesforce productivity upper up 40% compared to the same period last year.
Our cycle times from customers the venture to install have continued to improve along with our installation labor productivity.
Carpet and are excited rolled them out.
We've already been able to still excess demand and market by leveraging our combined companies cruise to maintain high scheduled them to be in system through pet.
We are rolling out Devon Fuller sales and training practices developed through their world class direct to home channel to enhance the effectiveness of are complimentary sales team.
Our channel partners are also excited about the scale, we bring in our increasing brand strength.
These partners deliver it a strong quarter and we will continue to grow this segment as it is an important part of our strategy and maximizes our market reach.
Hate them to come in quarters.
We believe that the expected growth and electric vehicles will also benefit seminar multiple dimensions.
One household will consume more electricity, necessitating larger and more profitable full or something but.
Grandson that will offer grants to community based nonprofit by black indigent at some people of color and the most polluted places in America.
This will help install source energy systems.
Before I turn it over to add I want to say, how proud I am of the sunroom <unk> pillar team.
Bringing together organizations is never easy and simple, but the passion ingenuity and dedication to our collective mission is inspiring.
Share of the asset value.
The weighted average cost of capital would be below 3.5%.
Thousand $200 in creation cost was approximately $26800, resulting in N. P V a approximately $6500 per least customer.
With higher volume in Q3 compared to cute too we improved our cost absorption. We also continued to realize benefits from our operational efficiency improvement efforts.
A quick update on visit soldiers financial and operating performance, we close the acquisition of events or on October 8th in the fourth quarter as such we will report queue for results as a combined company with partial period accounting as of the acquisition date.
During the third quarter <unk> installed approximately 47 megawatts and ended the third quarter with $404 million in total cash.
I pressed star too if you would like to remove your question from the queue.
I think you probably will see a little bit more alone at the tail end of the year just again given the you know the tax credit Delta, but you know I'm not saying that you know nothing that's going to materially change the numbers. We still believe you know that the the tailwinds in the industry.
0.2, more software as a service versus customer owned projects I think.
It's just one besides just being a better value proposition for the customer you know right now just interests are aligned where we guarantee the the power and and you know we have higher quality equipment. I think we also have a capital cost advantage. You know if you look at the third party on market.
Versus the loan market, you're starting to see it the verge in terms of.
Services revenue you won't see that for a few years, but the short term uhm value is bear uhm, it's really and the fact that we have a differentiated offered to sell our customers in these markets Uhm and then it also starts to lead the industry structure into more of a winter take most market.
And so we'll start to you know see really differentiate it on that on that consumer offering and you know again the the current contract cover about 10% of our geography that we served but the pipeline that we have covers about 50 per cent.
So you know it it again I think the next couple of years at differentiated consumer offering and the grid services revenue will follow beyond that.
Okay, and just to clarify on the Unlevered M. P. V for household on this initial contract restart your same close to $2000 there or is that something that you have to schedule one to ask.
Okay.
Perfect and then just one more quick one sorry, just the the last comment regarding the.
Acceleration in volume in 2021, just was that on a organic basis or was that just simply a function of of layering and vivid.
<unk> stepped on and or I'm sorry, yeah.
Yeah.
You know a 100% in Hawaii.
And you know we've we've said in the past you know above 30% in California. We also have the one of the benefits from the integration as well, which we didn't specify in count in the $90 million synergy number is that doesn't have been hadn't less adoption of solar and you know just in the first month we.
We've increased the attach rate in California, 20% with their sales force. So you know, we're very encouraged and we expect that to continue the battery preferred to dramatically outpaced the solar growth rate, which is you know already strong over the future.
I think also the you know one of the reasons to expand into all the markets is there is a learning curve to in terms of getting your crews trained on this educating the h. Jays and so we really want to lay the ground work for you know what we believe will be a market where in two three.
Years every solar system has a battery.
Got it excellent and if I could just quickly sold to clarify the above market on 21, what does that mean, a little bit more quantitatively.
Yeah. So we've historically said, we think the industry can grow 15% to 20%.
Over annually over the long run and we.
We think next year returns to more normal growth rates and.
Our expectation is that will grow above market given our strength.
Yes position now with the larger Salesforce stronger brand, but at an improved product offering.
Okay, all right. So that's not changing that that's that's correct.
This is too much money.
Yeah, all right. Thanks, guys.
The next question is from Brian Lee of Goldman Sachs. Please proceed with your question.
Hey, everyone. Thanks for taking the questions here and maybe just to follow on Juliens question Jerome Road.
Yeah, I know you're talking about 21, but if we if we just hone in on the Fourq you outlet.
Deployments guidance of better than 10% sequentially I appreciate you guys, giving us a baseline including the.
That actually but it implies roughly I guess, the 180 megawatts on a combined basis for Fourq, you, which is actually kind of flat to slightly down year on year, and if I recall correctly last year.
You guys are still having a little bit of a issue.
Issues around the labor side of things and so I felt like the comps might have been easier and you grew 2% year year on year in that in Threeq. You. So just wondering why why that's not maybe seeing a faster acceleration out of the ended the year here on a year on year basis.
Yes, so where we're seeing the you know 10% increase quarter over quarter important to note that day.
Others are more on cash generation this.
This year before the pandemic and so how they're just at a high level should we be thinking about cash generation is that is it adds relevant metric on the combined basis and does the business model change sort of the the economics for you when it comes to catch and exit.
Yeah. Thanks. Good. Good question couple couple of things on it here. So first we're still in the process of combining metrics as you can imagine there are a few things around the edges that we're aligning and we'll report Q4 with the combined company metrics.
Overall, a customer and volume growth as well as customer margins are NPV and the cash in any a combo I think continue to be good indicators of our overall performance. So we're largely going to.
Gravitate towards that as we as we think about a 2021.
Well again provide a bit more precise color when one of the uptick Q4, but I think the you know above industry growth rates, we expect as well as the expanded margins you know.
Will translate well into strong cash generation and or any growth dependent on the capital structure decisions that we make there where we're really focused on the integration work as Lynn mentioned, given the acquisition just closed four weeks ago, but.
Very confident heading into 2021.
Okay. Thanks, a lot compression it.
The next question is from Michael Weinstein of Credit Suisse. Please proceed with your question.
Hi, guys.
Hey, I'm sorry, if you already mentioned this but is the Q4 deployment guidance, 10% is that include Vivint solar historically or you know if it did it how to be SLR perform in Q3.
Yeah. Good question, so the 10% growth quarter over quarter is inclusive of a book to bill in solar and their deployments for Q3 were approximately 47 megawatts.
Got you.
And I don't can you talk a little bit about for two two to two and when.
I know that you know the participation in new England ISO market.
He is a lot bigger than some of the other maybe smaller contract you have with the utilities is there a timeline out there expectations you might have for other ISO.
So participation in markets.
Sure Great question, So maybe that backup for everyone on the call said that.
The FERC two to two to order.
We're excited about as you know weve already met with significant success, finding counterparties to grow our virtual power plant business and this order by opening up wholesale markets expands the number of Counterparties, we can work with.
Actually for its own press release said it pretty nicely. They had to order will help usher in the electric grid of the future and promote competition in electric markets by removing the barriers preventing distributed energy resources, some competing on a level playing field. So we couldn't agree with that more.
To your point I think it might take a year or more to fully establish all the rules bar participation.
These could often also have to be done individually and on a regional basis. So theres not going to be a very near term impact from this order, but these sorts of opportunities which are complex.
And benefit from scale really play to our competitive advantages and also exist. Obviously in this area of virtual power plants, where we're leading the industry by leaps and bounds. So we're very excited about it but.
But probably wouldn't see it increasing our virtual.
Virtual power plant business for at least a year, although we do expect significant growth from that business from the existing pipeline as Lynn mentioned earlier heading into next year.
Right.
And you mentioned earlier the tax equity is an important part of the capital or capital structure and I'm. Just wondering I know you guys are a large players in that market. So you don't really have you don't have the same concerns smaller smaller uses of tax equity might have but can.
Can you talk a little bit about what you're seeing for 2021, how that market is shaping up.
Terms of scarcity and then also any thoughts on how the election might impact.
Might be impacting that market going forward.
[laughter] well I feel like the last thing the world needs is more electronic elections speculation at the moment.
But I think that you know that the tax equity market might be a little smaller in 2021 than in 2020, which candidly probably plays to our advantage.
You know I'm quite confident that you know we have the supply that we need to support our growth and more than that.
And you know in markets like Thats, our long an excellent track record our scale, our our steady deployment cadence are attractive and frankly, the counterparties like residential because it provides smoothes GAAP earnings profiles for them as compared to utility scale, you know they can kind of deploy fund.
Whatever size they want to.
And it's fantastically diversified it's also still very much a relationship business and obviously this is a place that we have built strong relationships with counterparties.
Simultaneously, we negotiated options expiring mid November that would allow us to add to our 26% safe Harbor purchases. If we so choose to we haven't yet decided whether or not to execute those options and so I think that's probably the best time for us to provide a complete view of our safe Harbor position would be on the next call.
All right. Thanks, a lot, let Ed and.
Have a good have a good week. Thank you.
Thank you.
The next question is from Stephen Byrd of Morgan Stanley. Please proceed with your question.
Hey, good afternoon.
Good afternoon.
Congrats on the strong growth in good NPV NPV per watt progress one of my questions have been addressed I wanted to maybe focus on California for a moment just with the the blackouts that we saw in California. This summer I'm curious if you see any additional opportunities for procrit services or changes to compensation on storage or just.
Sort of other developments you're watching in a in California, given there's clearly the need for more storage.
Absolutely the the consumer interest across all the indicators is very high and like we've said previously I think that's just dealt that said you know they these outages are going to happen you know and every year and so the.
Interest it just continues to build so on so we're encouraged by that long term trend I think the you know from a California policy and regulators you know there's a lot of opportunities here to use that one to accelerate our efforts at streamlining permitting on you know the.
We estimate that with automatic permitting and our connection we can save you know $7000 off our customers contract and also that's just even that much more important when people need a solution quickly to anticipate a power outages I think you're also seeing you know.
It's likely to contribute to additional support for you know programs like the one they rolled out for batteries and disadvantaged communities that are in wildlife areas.
And that's the program we are participating in and that has been quite successful. So there's just a number of ways that you know I think this will lead to great market, there isn't necessarily something that I can specifically point to today.
You know, but there's no question that it's a strong tailwind.
Understood.
I'm going to shift to the federal level and I know, there's a lot of uncertainty even as we speak in terms of the direction of federal policy, but just stepping back if there were to be a federal stimulus bill and there were sort of some some green elements in that stimulus Bill I'd, just like to get your latest thoughts on sort of ideally what you'd like to see it.
In terms of support for for for clean energy and how that might impact. Your your gross margin potential I know, that's especially I'm just curious your latest policy thoughts there because federal level.
Yes, So I think I think first I should really underscore that consumers choose rooftop solar and batteries because it's more reliable, it's a better value proposition than grid power.
And provided by companies that deliver a better customer experience and utilities do.
You know and.
And recently frankly, the most supportive federal policy for renewables has been low interest rates, which we expect is going to persist kind of regardless of the election outcome.
And going to the fundamentals you know with more than 90% of Americans, obviously, therefore across party lines supporting rooftop solar and with rooftop solar comprising 69% of all jobs in wind and solar development.
And you know.
Our product, obviously makes unreliable power reliable and so kind of because of all these things we do expect increasingly supported policies overtime.
Will further accelerate our growth future.
You know the.
Probably the you know.
Policy that you know would be most likely to be included in a measured like that if one were would be some form of extension to the tax credit my suspicion that previously had been expanded under Republican President and Congress.
As you know always been and perhaps of late increasingly as some sort of bipartisan supported effort.
Again, as I think Ive always said, it's very difficult to predict exactly when these sorts of policies might be enacted right I think our view, taking a long term horizon.
Is that you know for sure. The fact that we're able to de carbonized make more reliable power and drive significant economic growth and employment.
Makes us an attractive candidate for government.
For the government support.
Yeah, It's a fair point that you're you know you're providing value with or without you know any change the federal policy.
One thing I guess I was thinking about in terms of solar tax credit extensions is the possibility of the Congress.
Congress is going in a direction, where they would take away that limiting factor relating to tax equity converted into something.
It's more easily monetizable direct cash payment or some other form.
But I take your point earlier to the question you answered earlier about the availability of tax equity that you're in a relatively good position, but if that were to change and there were no limit from that perspective would that have a material impact in terms of your growth I hadnt been thinking of that as a as a major limits or to your tier growth that you know as we stand now.
Just curious how you think about that.
Yes. So as you know we have a very significant policy team and we're engaged on countless Paul he topics.
This year, we have not been active asking for a refund ability, which is the term that people use to describe if you're talking about and certainly in.
In the current environment.
Do not view our growth that in any way constrained by the availability of tax equity.
And I think probably were fundability is marginally less likely to occur under a Republican Congress.
Congress not for any reason related to renewables, but just because generally Republicans don't love refundable anything.
And so you know that's not really been a topic, we've been engaged in one way or the other.
Understood Thats all I have thank you.
The next question is from Kashy Harrison of Simmons Energy. Please proceed with your question.
Good afternoon, and thanks for taking my question. So you know I know it's early on but I was just wondering if you. If you all have any expectations of where.
Net energy metering 3.0 in California may be headed you know do you think investors should be looking to Hawaii. As an example for where you know internet at <unk> and net energy metering is going into the future or maybe you have some other framework that we should be thinking about.
Yeah, Great question. So first of all it's funny I feel like if theres a cost shift to talk about.
Today, it's that utilities are earning a regulated rate of return on equity in excess of 10%.
No one anyone with the dollar to invest knows that with today's valuations and low interest rates.
As complicating net metering you end up actually ultimately returning the other the other way so.
Confident that our customers will continue to be fairly compensated for.
The energy that they create and the contribution they make to the grid.
And we'll be working through that process over the next year.
Oh, Thank you for that I appreciate it and maybe just I know tax records, we've talked about a lot, but just maybe a follow up on that at.
He can you discuss maybe some of the trends in the tax equity required rate of return you know clearly interest rates are lower and generally the markets rate of return to his move lower but I'm. Just curious if you know the the supply demand dynamics or play how those are impacting you know what.
Tax equity investors want in terms of IR ours.
Yes, we just frankly don't see any variation I mean, it wouldn't surprise me like if you look at our partnership trend that partnership flip transactions that we've entered into over 15 years, you know the highest pretax and lowest pretax capital cost or maybe 50 basis points different I mean, it's totally immaterial really what can what constrains pricing the time.
The equity market is that it has to be a pre tax rate.
Rate of return.
You know in order to clear the safe Harbor and so the after tax and trying to kind of falls out of that so we just don't see variation and the cost of tax equity.
Really ever across any economic cycle, we didnt see it in 2010, we didnt see it before Covance, we haven't seen it during covert it just really kind of always prices at the same level.
Awesome that's it for me thank you.
The next question is from Colin Rusch of Oppenheimer. Please proceed with your question.
Thanks, So much guidance as you think about the the opportunities enabled by lower cost capital can you talk about your plans to expand into new geographies and the lower cost capital influence and that's especially.
Absolutely and B you know our current our current outlook and the growth that we described for 2021 and is not dependent on any additional geographic expansion on that being said you know when we started the business we are California, only and now we're in 22 markets.
And that really was predicated on a cost reduction so when we look at you know the opportunities ahead of us with the cost reductions from.
Efficiencies from the synergies with the additional value created from batteries and grant terrible says with utility rate continue to increase and we absolutely expect that this will be a product that will be available nationwide, but again. It for next year are there isn't there.
There isn't a need to expand in order to hit the sort of growth targets and there's probably not in the next quarter or.
Geographic expansion on the horizon.
That's super helpful. And then just thinking about the.
No. It was seen that historic products and been able to sign number deals.
And you've got a couple of strategic partnerships deployments can you talk about the pipeline of potential new.
New partnerships that you guys are thinking about considering.
Not to sort of pick on Madison deal or or others that you've got as we can about what might happen and not go for Christmas.
Mm Hmm absolutely the current contracts that we have only cover or 10% of the markets that we operate in and but the pipeline, which is over $50 million includes you know would be 50% of our geographies. So it's a.
Pretty significant market development work that we that we have in process on so you know you should you should certainly expect that we continue to expand these virtual power plant purchase.
Okay.
Well I'll take it offline I get a clarification on that thanks, so much.
The next question is from a fill up.
Philip Shen of Roth Capital Partners. Please proceed with your question.
The 21 outlook.
You know if you look at Q3, you're down on a combined basis, 9% year over year.
Q4, it looks like it could be you guys should be down 6%.
So as we get into next year.
You highlighted the issues and the reasons why you know with integration so forth for Q4, but how long do you think that extends so theres a persist into Q1 do.
Do you think your flat year over year, and I know, it's tough to talk in the sense that you haven't given guidance, but any commentary on that cadence of your of your growth in megawatts that we could see on a combined basis in Q1, two and three of next year would be a fantastic. Thanks.
Yeah, Great question for.
Oh go ahead Tom.
Yeah. So we will come back with a more precise figure for the year and I think too early for us to call a quarterly cadence at this point, but you know I think the issues around you know, Illinois, Massachusetts for the you couldn't direct to home team that we highlighted earlier you know, we're working through and I think with.
Integration efforts as Lynn mentioned, adding batteries to the different teams offering.
And mortgage services partnerships, who I think we can get we feel good about where growth trends and get it through you know some of the near term elements.
It was down another potential disruptions here on on coated where I think we feel good about where that's out right now but too.
Too early to call specific quarters.
Okay. Thanks, Tom.
That said Hasan I found guys. One thing that I you know I can definitely say add one thing to that you know we're in a you know it's a it's an operational business and we manage both to grab and she margin on and I think you know if you look at the results, it's pretty they're pretty outstanding I think.
Moving you know quarter to quarter going up 40% and then you know and then into Q4, increasing bite and another 10% while doing an integration. In addition to expanding the profit margin by you know, 20%. That's you know that's pretty significant growth in there and on our scale.
You know I think in 2021, we'll probably have more profit than all competitors combined.
So you know that that sequential growth rate is quite quite strong and you know something that gives us a lot of confidence going forward.
The next question is from Sophie Karp of Keybanc. Please proceed with your question.
I am good afternoon, and thank you for squeezing me in here.
Oh, Yeah I was just wondering if you could maybe comment on no.
Different dynamics Oh, you curious is that.
Hey, guys access via different channels for 20 to 22 versus <unk> deals that you do and how soon do you think that.
A lot of revenue if you will it big enough to become maybe its own segment or its own line item.
Thanks. Thanks, that's a good question. The you know that because these contracts are you now contracted in advance you know most of them are far from Selman in 22, and 23, you won't see it in the next you know couple of years result in a meaningful way that being said it well.
Will drive meaningful business value over the next couple of years first because we'll have a differentiated offer to sell our customers and you know second because spot differential offering will enable us to create really a industry structure that is more of a winner take take most structure that.
It currently has with solar on me.
Great. Thank you and then also on that topic should we be thinking about some degree of cannibalization of cash flows between sort of you know the tradition, though we see P revenue and.
Services revenue because the same assets I'd be news Oh right. This so.
Or these strictly additive or is this kind.
Cannibalization that goes between these cash flows.
Good question and it's additive. So you know the way that you would see that roll through it would be in your net present values per customer.
You know so you know again today in Q4, we expect that to return to $8000 plus per customer and we expect to grow and services and the initial contacts the contracts support conditional 2000.
So you'll see it show up and not MTB number now some of that we you know you may pass through it as a.
You know consumers to grow adoption you know, we'll still work through all that elasticity in making those calls, but you should think of it as additive.
Got it. Thank you that's all for me.
Thank you next question is from Philip Shen of Roth Capital Partners. Please proceed with your question.
Hi, guys. Thanks for the follow up I think I got cut off but.
Anyway, I was looking into super for in terms of 21, you guys talked about growing above market at what point do you think you grow above market do you think it's do you think you end.
The year at a run rate above market or do you think you can actually grow above market for the full year 21.
Yes, well, we wait to see what we stated was well grow above market for the full year 2021 and again.
I would caution anybody too you know.
Draw a conclusion about you know one core quarter, you know sort of going forward with integration and everything but underlying it. It's absolutely you know strong result, and I think you know positions us to have out.
You know outsized growth rates for the <unk> you know the years to come.
Yes, totally get that whereas numbers get larger they are tougher on that in terms of bad no, but let me go there let me Claire let me clarify that not as we get larger I mean, you know certainly it certainly we I'm not saying that as we get larger the growth rate flow I'm, saying the opposite I believe that.
You know given the industry dynamic that continuing investment in the brand that can then continued investment in the product differentiation well enable us to exceed market growth rate, Rick because of our scale.
And then in terms of backlog you know we're hearing out there that backlogs are growing I mean, there there are some.
People talking about labor constraints, and so forth and other constraints in the in the ecosystem are you guys seeing that at all and are you seeing backlogs, increasing or are you guys able to get through that okay.
That was the question on the on Labor fell.
Yeah, just backlog and labor in general.
You know, we don't see any issues with labor in our business. We you know, we obviously will stay vigilant on that you know our expectation is that the world will embark and dramatic electrification of the home and if you look at the U.S. that would create 25.
5 million jobs, which is why it's so politically popular and so we'll always stay vigilant build a differentiated talen brand in Boston in job growth and one of the things on that as you know we use that mckenzie process to evaluate the culture is a bold sunrun and seven solar and the risk.
All was that you know very similar resolved and both in tier one on the both companies are you know are places that attract high quality employees and then we also have our channel model as well, which we which which also you know how it happened.
To the local market of the local solar installers to you know Additionally, SFL deployment.
Great. Thanks, Lynn Oh I'll pass it on.
Great. Thank you I think we're at the top of the hour I believe that's the end of the queues. So appreciate everybody's attention and well talk again next quarter take care.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
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