Q2 2022 Sunlight Financial Holdings Inc Earnings Call
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Greetings and welcome to Sun Life financial second quarter 2022 earnings call at.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded I would now like to turn the conference over to your host Lucia Dempsey head of Investor Relations. Please go ahead.
Yeah.
Good afternoon, and welcome to Sun Life Financial's second quarter 2022 earnings call.
After the close of the market today, we announced second quarter 2022 financial results and posted an earnings presentation to our Investor Relations website.
I R.
So dot com.
Before we begin I'd like to remind everyone that this webcast 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 to differ materially from those indicated or implied by such statements.
Forward looking statements include but are not limited to somewhat financials expectation or predictions of financial performance and condition.
Competitive and industry outlook.
Forward looking statements speak as of the day. They are made and are subject to risks uncertainties and assumptions and are not guarantees of performance.
But my opinion is under no obligation and expressly disclaims any obligation to update alter or otherwise revise any forward looking statements, whether as a result of new information future events or otherwise.
As required by law.
The company also refers starts picking up on this call. The press release issued by the company filed today with the SEC.
The missile presentation.
Right.
Financial and SEC filings for a discussion of the risks that can affect.
Yes.
Additionally, during today's call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance.
Presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP.
A reconciliation of these non-GAAP measures to their most directly comparable GAAP measures can be found in both the press release and supplemental presentation.
Joining me today are not metairie, well my financials, Chief Executive Officer, and Rodney or Mike Financial Chief Financial Officer.
Matt will provide an operational update them Accordingly, and then Rodney will share additional detail on our financial results.
Following these prepared remarks, we will open the call to Q&A.
It's now my pleasure to turn the call over to Matt Metairie.
Thank you Lucia and thank you all for joining us as we discuss Sun life Financial's second quarter 2022 operational and financial results I'm pleased to report strong second quarter results, including record high results in a number of metrics and free cash flow generation of nearly $9 million.
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In the second quarter sunlight funded $716 million of solar and home improvement launch, a new quarterly record and $50 million higher than our funded loans in the second quarter of 2021.
Home improvement volume was particularly strong with $112 million funded in the second quarter of 2022 more than double the second quarter of 2021 funded volume up $45 million.
We're excited about the structure of momentum we're seeing in this business as we expand our presence in the rapidly growing 400 billion dollar market.
We persistently see incredibly strong customer demand despite the inflationary environment with record numbers of credit applications for both solar and home improvement financing.
I'm pleased to have installers remained highly engaged with our platform selling our products with strong success and reinforcing the value we provide to homeowners.
All of our loans in particular had been resilient in this market as customers routinely achieved cost savings relative to their utility bills, which nationally are up 12, 7% on average from June 2021 to June 2022.
That's nearly 50% above the headline rate of inflation.
So my continues to perform well on key operational metrics as well.
We remain a leading financing choice for contractors and homeowners as our Orange platform provides a fast and frictionless process for financing solar installations in home improvement projects.
We funded loans for nearly 21000 borrowers in the second quarter up 11% from the same period, a year ago, and a new quarterly high for the company.
Average loan balances are also increasing yet again driving incremental revenue for sunlight without any additional expense.
This is driven by a combination of larger systems increase related add ons and potentially higher prices.
In particular solar loans this quarter averaged $45000 once again, the highest yet for the company.
And up 12% relative to the second quarter of 2021.
Despite lingering challenges with battery supply.
It's unlike battery attachment rate increased to 14% in the second quarter.
While this is lower than 2021, we believe that battery storage rates will increase over time as battery shortages abate and EV adoption increases supported by government et cetera.
We were pleased to have an additional 165 active contractors on our platform in the second quarter, bringing our total installer relationships to over 1750.
While our industry, leading credit quality and partnerships with depository institutions provide sunlight strategic advantages in our direct channel margins are stable.
Current market conditions will negatively impact our indirect channel in the second half of this year.
To that end, we had a pipeline of loans that were allocated to a new capital provider to be sold following their merger with the bank. However, the delay and ultimate cancellation of that merger caused us to shift the sale of approximately $85 million of funded loans from the second quarter into the second half of the year and will also increase.
Our near term reliance on the indirect channel.
In addition, we expect the recent rise in interest rates and increased volatility in the capital markets negatively impact indirect channel margins in the second half of the year as Rodney will discuss in more detail.
To address market conditions, we have implemented price increases on new credit applications and eliminated several harder to finance products. We believe these pricing actions will deliver normalized platform P levels in 2023.
A key differentiator that highlights the strength of our business model, especially in this challenging environment is our industry leading credit quality.
As we announced in June sunlight credit loss rates are significantly better than our peers are.
Our relentless focus on credit quality supports capital providers as they focus on attractive risk adjusted returns.
This is an important lever to attract and maintain a strong network of capital providers with that I'd like to turn the call over to Rodney Yoder Semite CFO .
Thanks, Matt.
Sunlight generated total revenue of $32 million in the second quarter of 2022.
18% from the second quarter of 'twenty, one primarily driven by an increase in platform fee margin.
As Matt discussed our industry, leading credit quality supports capital provider demand for sunlight loans, leading to increased platform fee margins year over year.
Our total platform fee this quarter was four 7% upsell.
Up 70 basis points from 4.0% in the same period last year.
The direct solar platform fee percentage was even higher at five 4%.
110 basis points from four 3% in the second quarter of 2021.
Adjusted net income for the quarter was $2 3 million or one cents per fully diluted share relative to $9 $3 million in the second quarter 'twenty one.
Adjusted EBITDA for the second quarter was $6 $8 million compared with $11 $5 million in the second quarter 'twenty one.
Although gross profit increased by $4 million relative to the second quarter of last year.
Revenues were impacted by the $85 million.
Unsold funded volume that shifted to the second half of this year as Matt mentioned earlier.
In addition, we had higher cost in a number of areas, including approximately $4 million of public company expense, we did not incur as a private company in the second quarter of 'twenty, one and.
An additional $1 $1 million for compensation benefits and other expenses.
We also recorded a $3 6 million dollar increase in loan loss provisions for contract or advances primarily related to a single contractor.
Overall, our advanced program has contributed to our success, winning new and deepening existing relationships with solar installers.
To date, we have advanced over $1 billion in contractor advances.
Experiencing minimal losses, and we expect losses in the future to remain very low.
Due to these higher expenses adjusted EBITDA margin decreased from 43% in the second quarter of last year to 21% in the second quarter of 2022.
While the company continues to perform strong operationally and our direct channel margins are stable the increased reliance on the indirect channel.
And the rapid change in market conditions will impact our indirect channel platform fees in the second half of 2022.
As a result of market conditions, the sudden loss of a new capital rider.
And the lead time or implemented price changes to take hold.
We are reducing guidance metrics for 2022.
Powers.
Total funded loan volume of two $8 billion to $3 billion.
Total revenue $130 million to $140 million and.
And adjusted EBITDA.
$35 million to $40 million.
We believe this is a near term impact to our long term business strategy and look forward to resuming strong adjusted EBITDA growth and normalized adjusted EBITA margins in 'twenty three and beyond.
I'd also like to provide an update on our funding strategy.
We consistently work closely with our capital providers to support their liquidity and risk adjusted return requirements, ensuring there are consistently receiving high quality assets.
In the second quarter of this year, we added a new capital provider to a platform and we regularly evaluate additional funding sources to maintain a healthy pipeline to support our growth.
As we've noted sunlight operates a profitable business model and generates significant cash flow.
In the second quarter of 2022 free cash flow was $8 9 million, representing a very attractive EBITDA to free cash flow conversion rate.
The company is also well capitalized and maintain strong liquidity with nearly $70 million of unrestricted cash and cash equivalents.
And only $21 million of short term debt on the balance sheet underscoring our cash generative capital light business model, which is particularly valuable in this environment.
Given our strong cash flow generation and capital light business model, we announced in May that we received board approval for an 18 month.
$50 million share repurchase program.
As of August 11, we have purchased over 1.5 million class a shares for a total of $5 $6 million funded with excess cash on hand and operational cash flow.
We are happy to return capital through programmatic repurchases, while ensuring efficient use of capital to drive shareholder return.
With that I'll turn it back to Matt.
Thanks, Rodney before we turn to Q&A I'd like to highlight that we were pleased with the recent passage of the inflation reduction Act, which currently includes $300 billion in clean energy investments $60 million of which is specific to growing renewable energy infrastructure work.
We are particularly excited about the 10 year ITC extension, which provides a 30% residential solar tax credit through 2032 and additional credits for low income communities. We see this as significant support for further growth in residential solar and will help even more homeowners save money with solar.
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Energy efficiency upgrades.
In addition to progress on the macro level sunlight unique advantages are driving value today and will for years to come.
Sunlight serves two large rapidly growing ESG focused markets residential solar and home improvement.
Our proprietary point of sale platform Orange is unmatched in the industry and fuels our ability to scale quickly with minimal incremental cost.
We operate a capital light balance sheet, taking on limited consumer credit risk and reducing reliance on debt and equity financing to support our growth.
This is an extremely valuable feature of our business model not just for this current environment, but for years to come.
And lastly, this marks our 14th consecutive quarter of reporting positive adjusted EBITDA, which is a testament to our consistently profitable cash generative business, while we focus on growth and expansion, we do so with profitability in mind, ensuring we generate strong returns for the business and drive value for our.
Over the long term.
Ladies and gentlemen at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad a.
Tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Your first question comes from Philip Shen with Roth Capital. Please proceed with your question.
Hey, guys. Thanks for taking my questions.
First one's on the 85 million a wanted to get a little more color on.
What happened with the bank and why they decided not to take on.
Hmm.
You had originated and you know for example was it based on.
Assets that were maybe not high enough returns to them.
Some of the $1, 99% and one dot four 9% products and if so.
And do you see a path where over time you have to move on from the 1199 and 149 offerings. Thanks.
Phil Thanks for your thanks for your question.
So that was the result of a partnership that we entered into with a company that was merging with the bank and so their inability to complete that transaction and fulfill all of the closing obligations prevented them from merging and as a result, they were unable to purchase our loan so it was completely independent.
Of anything on from sunlight or our assets I will tell you we consistently get positive feedback both from that partner and from others in the market about the credit quality of our loans.
And the attractiveness of the loans in this space, but unfortunately in this scenario. It was a situation where they were unable to close the merger and therefore unable to us to execute the deal.
Got it.
So.
What kind of risk do you see ahead for more of these.
Challenges, where youre funding actually your bank partners Don.
Take on some of the assets that you're originating.
Yes. So this was a unique scenario where we.
We expected we started to to point loans to this partner that we expected to close their transaction just to give you a little bit more context.
This transaction received approval for this merger received approval from the OCC as recently as the beginning.
Of July so it had significant momentum we expect it to close and they expect it to close unfortunately, when it didn't close.
We had this we had $85 million in loans that Rodney mentioned as well as additional loans in the pipeline, which is why I will shift.
Those loans to the indirect channel and so one of the strengths of our model that we've highlighted in the past is that we have these depository relationships and we have the indirect.
The indirect channel, which allows us to flex up and flex down and rollout new products on the direct side.
Well, if you look across the industry you do see increased loan to deposit ratios across the industry I'll tell you.
Our capital providers continued to have a lot of interest in our products.
And we've been able to with some of the recent pricing changes that we've been able to make we've been able to increase their yields to ensure they are getting attractive risk adjusted returns and continue to earn healthy margins for ourselves. So as we look out the rest of the year, while we expect pressure in the indirect channel as a result of market conditions, we expect the direct.
Channel to maintain it.
Consistent margins to what we've experienced historically.
So we continue to have a lot of optimism around that and we think the benefit of that of that channel provides us real long term strategic value.
Okay. Thanks, Matt as it relates back to the 199149 products.
The coupons seem to be below treasuries, which seem like that could be tough.
Maybe a source of margin.
Compression.
Hmm.
Do you think well what's your view on those products do you think youll maintain them or or and if you don't if you.
Remove them do you think there could be margin expansion.
And EBITDA.
As a result of that.
Yeah. So it's a great question as we've seen significant changes in that in the capital markets on the indirect side and I'll tell you we've seen those even though over the last 45 days, which is why we made some of the price changes that we've made and we've eliminated some products some of the products that we've eliminated or the lower interest rate products.
That are harder to finance and so we think these are the right prudent actions. We think the product suite that we have now I mean, especially the pricing that we have now is appropriate based on the market, but we're constantly as good risk managers as a team that's focused on ensuring assets are priced appropriately we're constantly evaluating that and if market conditions change Europe are.
Even when the market changes, we will of course take additional actions.
Okay. Thanks.
As it relates to pricing you know you guys increase pricing recently and.
And it seems like.
Some of your funding partners may also be increasing pricing.
For you guys and so.
Do you see more funding sorry, do you see more price increases.
For your customer base, maybe in Q3 or four.
Yeah, I think where we are right now we think that the pricing changes that we've made are appropriate to ensure that new loans that were credit approving have healthy risk adjusted returns for capital providers and provide us with a healthy margin.
But we will continue to monitor that and to the extent of which we need to make additional changes will will certainly certainly do so.
As Rodney mentioned in the near term, we do expect pressure on the indirect margins, but with the changes that we've made we expect to be back to historic levels on indirect.
Indirect margins in in 2023.
Okay.
And one last one for me. Thank you for taking all the questions for the $3 5 million dollar loan loss provision.
That was on I think working capital advances right with contractors and I think you mentioned to a single contract or so I.
Was wondering philosophically if you still think this is the best way to go and what can you share what happened with that contractor you know how a unique of a situation is it or do you think it might be a pattern for.
For us to express it.
Thanks.
Yeah. Thanks, Bill for the question.
Yeah. So yes, we did take a reserve.
For $3 6 million incremental potential losses for a single installer as part of our installer advanced program.
We like this program and we don't expect to take any further one time charges.
That said, we monitor each installer.
And reevaluate on a variety of factors, including financial stability.
And so you know.
This is a.
One one instance, but again we've.
Advanced over $1 billion program to date with minimal actual losses. So this is a this is a really good.
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In terms of attracting new and maintaining and deepening relationships with installers.
Getting volume commitments and improving margins so we like it.
Great Yeah. So it seems like it's a 1 billion with minimal losses are we talking about like sub 1% or like low single digits.
Yeah. It does it doesn't even show up on the on the calculator hits its very very small.
Okay. Good.
Thanks for taking my questions I'll pass it on.
Your next question comes from Jeff Osborne with Cowen and company. Please proceed with your question.
Hey, good evening, a couple of questions on my end on the indirect side I was wondering.
Percentage of funded loans in the second half how should we think about that and then what do you anticipate for 2023.
Yeah. Thanks for thanks for the question.
While we don't provide guidance for channel mix or margin specific to the direct or indirect channel.
Our the updated guidance that we did give gifts <unk> is implied or it includes what we expect the mix and the margins to be so we're not giving specific guidance there, but if you look at our funded loans and a revenue you can get to the to the overall blend.
Yes, as we mentioned as Rodney mentioned, we do expect higher alliance in the near term and indirect channel and the indirect channel, but we also have a number of new capital providers in the pipeline that we expect to bring online and in fact, we brought a new direct capital provider online.
And launch that partnership in AR in the second quarter.
Got it and then you mentioned, Matt is one of the three reasons for the lower guidance.
Ron you did on the lead time to flow through on new pricing you know what.
What is that that lead time to flow through how should we think about the changes being made during the quarter and when that will flow through I know you've talked a lot about 'twenty be returning to normal but does that happen early in the year or more on average at the midpoint.
Yeah.
We've made a number of pricing changes we made some of the product changes that we talked about talked about recently and.
And we expect as we get into 'twenty two 'twenty three.
That margins will return to historical levels.
So you know I think we're not pinpointing a quarter or time at this point, but I think based on the conversations that we had in the market based on the on the pipeline that we have as well as the pipeline.
New capital providers, we think will return we think this is a near term impact based on some of the market volatility in some of the dislocation and we think we've now been pricing new credit to a place where they'll execute in at are at historic margins.
Got it and maybe another way of asking a question.
Getting into the margins.
Is there an elongation of time from the top of the funnel to glass on the roof.
When.
And loan is put in the Orange system to when its funded is it.
Longer I know you've highlighted that on prior calls.
Yes.
So I think starting in the middle of last year, we started to see an elongation from credit approval to funded loans earlier. This year. We said that we started to see some green shoots and I think more recently that hasn't materialized.
And so we do expect that those pull through rates and the timing will return closer to normal, but we really think the supply chain needs to get healthy and we don't think it's fully there yet we need to see less pressure around labor, which is both impacting installers getting installation crews and the glass actually on the roof.
And it is also impacting the ability for them to get permits.
And so it's continuing to take to keep those cycle times longer than they've been historically. So we are seeing that that's taken into account as we're talking about margins and timing. We're looking at those those pull through curves and the funding curves.
And pulling that all the way out.
Got it and then my last question.
Don't expect just answered, but maybe just any anecdotal comments would be helpful are you seeing any change in behavior consumers around prepayments typically my understanding is then the first 18 months of your funded loan and they have the opportunity to take the tax credit and pay down the loan and then re amortize that or people elect to do that and keeping the tax credit for themselves.
Yeah. So I think what we've seen to date is.
Asset quality and prepayment speeds have remained very strong.
One of the reasons, we focus on credit was that we knew as we go through the credit cycles and other economic cycles that consumer behavior can change and so focusing on the highest credit quality customers not only helps us have very strong credit quality, but it also helps to ensure that we get strong Pete prepayments and so so far we continue.
We continue to see that to be the case.
That's great to hear thank you.
Your next question comes from Mohit <unk> with Credit Suisse. Please proceed with your question.
Hey, Thank you for taking my question. This is chandni on behalf of the heap.
I wanted to understand your direct channel funded loans were down 7% year over year could you talk to a little bit about what you're seeing on the ground.
And so it is also looking ahead.
How soon can you expand your facilities with you a dire thing Gary just sort of big Easter impacted the indirect.
Thank you.
Sure. Thanks, Johnny So when we think about direct and indirect.
The impact in the direct channel as a result of that the partnership that I mentioned earlier and the fact that those loans will be funded through through the indirect channel and I think more broadly I think it's important to note we're seeing very strong demand at the top of the funnel.
In June and in July we had record credit approvals and so we continue to have a lot of confidence in the long term growth in the long term opportunity.
Yes, the only thing I would add Matt is.
Text of if you think about the pull through rates starting to elongate.
In the back half of last year.
Certainly as we go into the remainder of this year, you'll see more comparable results combined with the fact that you just brought up with really really strong credit approvals. The top of the funnel. So we do expect to see sequential growth throughout throughout the remainder of this year.
Thanks, and just one other follow up.
Is that some sort of demand slowdown baked into your full year guidance just given that you know we're gonna see their 10 years, there is tax credit extension.
They come available and is that also part of our guidance.
Yeah. So I mean, I think where we are today we're.
Really excited for the president to sign the inflation reduction act and extend the ITC by 10 years and increased it from 26% to 30%.
But because that has not yet passed that's not implicitly included in our guidance.
What I will say is more broadly as we think about policy.
Think that the near term constraint on sales is getting salespeople out and selling solar and so certainly there could be some near term benefit body by the ITC, but we think that.
The real benefit to this extension is the fact that it provides long long term certainty.
And it allows installers to invest in their sales crews expand to new geographies and get those get the solar message out to more homeowners and so we're certainly excited there could be some near term pick up but it's really that long term value that we're most excited about.
Thank you so much and I'll pass it on.
Ladies and.
Gentlemen, we have reached the end of the question and answer session and I'd like to turn the call back to Matt for Terry for closing remarks.
Great. Thank you Hector and thank you all for joining us this evening.
This concludes our second quarter 2022 earnings call. We really appreciate all of your questions and your interest in sunlight and while there have been market channels challenges rather that are negatively impacting us in the back half of this year. We are very excited about the long term growth plan that we're executing our capital light business model. The fact.
Could that generate significant cash in what is a very rapidly growing market.
Thank you. Thank you for your time this evening and have a great night.
This concludes today's conference you may disconnect your lines at this time. Thank you all for your participation.
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