Q3 2022 Sunlight Financial Holdings Inc Earnings Call
Greetings and welcome to the Sun Life financial third quarter 2022 earnings call.
This time, all participants are in listen only mode our COO.
And the 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.
Relations. Thank you you may begin.
Good afternoon, and welcome to Sun Life Financial's third quarter 2022 earnings call. After the close of the market today, We announced third quarter 2022 financial results and posted an earnings presentation to our Investor Relations website.
Well my financials dotcom.
And I'd like to remind everyone that this webcast may contain certain statements.
Forward looking statements within the meaning of the private Securities Litigation Reform Act of 1985.
These include remarks about future expectations beliefs estimates plans and prospects.
The 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.
The statements include but are not limited to financial expectations or predictions of financial and business performance and conditions.
There's an industry outlook.
Forward looking statements speak as of the date, they are and they are subject to risks uncertainties and assumptions and are not guarantees of performance.
And I think there still is under no obligation and expressly disclaims any obligation to update I'll turn or otherwise revise any forward looking statements, whether as a result of new information future events or otherwise except as required by law.
The company also refers participants on this call to the press release issued by the company has filed today with.
The supplemental presentation because this is what I think that's what's left.
Right.
Financial filings for a discussion of the risks that can affect our business.
Additionally, during today's call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance.
The presentation of this additional information should not be considered in isolation or as a substitute results prepared in accordance with GAAP.
A reconciliation of these non-GAAP measures to the most directly comparable GAAP measures.
Can be found in both our press release and the supplemental presentation.
Joining me today are macro Terry financials, Chief Executive Officer, and Robyn yogurt, So my Chief Financial Officer.
Matt will provide an operational update on the quarter and then Robin will share additional detail on our financials.
So long in these prepared remarks, we will open the call for Q&A.
It is now my pleasure to turn the call over to Matt.
Thank you Lucy and thank you all for joining us as we discuss Sun life Financial's third quarter 2022 operational and financial results.
Despite a challenging macroeconomic environment sunlight achieved record volumes in the third quarter funding $835 million of solar and home improvement loans.
31% year over year.
Home improvement volume was particularly strong with $135 million funded in the third quarter of 2022 more than double the third quarter of 2021 funded volume up $63 million.
We are excited about the momentum we're seeing in this business as we expand our presence in this 400 billion dollar market.
It sounds like also continues to perform well on other key operational metrics.
We remain a leading financing choice for contractors and homeowners as our Orange platform provides a fast and frictionless process for financing solar installations and home improvement projects.
We funded loans for over 22000 borrowers in the third quarter, that's up 24% from the same period, a year ago, and a new quarterly high for the company.
We also continue to grow and strengthen our contractor relationships, adding 126, new active contractors to our platform in the third quarter bring.
Bringing their total installer relationships to 1880.
As disclosed in September the largest installer and our contractor advanced program that became insolvent, leading us to take a significant impairment.
Subsequently, we completed a re underwriting process for all installer partners in the contract or advanced program.
As a result of these credit reviews, we have taken a number of actions to mitigate our risk within this program, including reducing advance limits, reducing the advance rate per job increasing pricing for installers in this program and eliminating advanced eligibility for certain installers.
We also continue to proactively monitor installers in this program for changes in their risk profile.
As of quarter end, we had $64 million in advances outstanding with the largest advanced outstanding of $10 million and no other single installer greater than $7 million.
As Rodney will discuss in more detail the rapid rise in interest rates and our increased reliance on the indirect channel will have a significant negative impact on our near term financial performance.
To mitigate the impact going forward, we've made substantial pricing changes, we've eliminated certain harder to finance products and we are exploring a hedging program to protect us from interest rate volatility in the future.
Despite higher interest rates impacting the cost of systems.
Homeowners by solar to eliminate a portion of their utility bill.
With average average residential electricity prices up 25% since 2018 and up over 14% in just the last 12 months residential solar remains an attractive value proposition.
Additionally, the passage of the inflation reduction act, which increased the ITC from 26% to 30% provides increased certainty for the industry over the next decade.
On the consumer side, the solar asset class continues to perform well driven by high by a high quality borrower, who by definition owns their home and its borrowing money for a financially responsible purpose.
Sunlight loans in particular continued to outperform in terms of credit quality as our loss rates for our 2018 2019 in 2020 vintages are substantially lower than peer averages for the same respective vintages.
While industry, leading credit quality has always been our focus has become even more valuable in the current economic environment as low loss rates improved capital providers yields.
Increased demand for our assets and are 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 sunlight CFO .
Thanks, Matt.
I'm, Mike generated total revenue of $33 million in the third quarter of 2022 up 10% from the third quarter of 2021, primarily driven by an increase in platform fee margin.
Our total platform fee. This quarter was five 1% up 80 basis points from five 3% in the same period last year.
The direct solar platform fee percentage was even higher at five 5% up from 5.0% in the third quarter of 2021.
Adjusted net income for the quarter was a loss of $26 $3 million or a loss of 16 cents per fully diluted share relative to $11.6 million in the third quarter of 2021.
Adjusted EBITDA for the third quarter was a loss of $27 million compared with $11 $4 million in the third quarter 2021.
Our third quarter 'twenty two results were impacted by several key items.
The first was the $37 2 million dollar provision for losses expense, primarily due to the contractor and solvency that Matt mentioned earlier.
Which also impacted our loan loss provision calculation.
As a result of the installers bankruptcy, we determined we were unable to collect on advances by that installer and.
Took a noncash charge of $32 $4 million or advances asset on the balance sheet.
And a related provision for losses expense on the income statement.
This event also increase the average historical loss rate driving incremental provision for losses expense this quarter.
The second impact as it related to goodwill recorded on the balance sheet at the time of the business combination.
Due to challenges in the macroeconomic environment impacting our financial and market performance of the company and our peers. We believe the book value of goodwill exceeded its implied fair value. So we recorded a noncash goodwill impairment charge of $384.4 million for the three.
Months ended September 32022.
In addition, we also can continue to see interest rate increases.
Precedented speed and magnitude, which have reduced our direct capital provider capacity and increased our reliance on the indirect channel thus far.
Will affect our ability to profitably monetize indirect channel loans originated earlier this year.
As Matt mentioned, though we have been addressing these market conditions by making significant price increases over the past several months and removing low APR products leak.
We expect these actions to increase future asset yields.
Over 300 basis points relative to earlier this year delivering compelling risk adjusted returns for our capital providers and attractive margins for sunlight.
However loans in the indirect channel will be sold at a loss in the near term until the impact of these pricing increases take effect.
I'd also like to provide a short update on our liquidity and free cash flow.
In the third quarter of 2022 free cash flow was $8 $2 million and we ended the quarter with $70 million of unrestricted cash and cash equivalents.
$21 million of short term debt on the balance sheet.
In May we received board approval for an 18 month $50 million share repurchase program.
To date, we have purchased just over 3 million class a shares for a total of 10 $25 million.
With excess cash on hand, and operational cash flow.
Due to interest rate volatility and the negative impacts to sunlight near term financial performance, we have chosen to preserve preserve liquidity.
Holding excess cash on the balance sheet and have suspended share repurchases at this time.
With that I'll turn it back to Matt.
Thanks Rodney.
Despite a challenging macroeconomic environment, we continue to believe that sunlight maintains an attractive position in a very compelling market and the current share price does not reflect the intrinsic value of the company.
As a number of parties have approached the company with a range of strategic alternatives don't likes Board has commenced a process to explore review and evaluate potential alternatives that enable our business to continue to grow and maximize value for all stakeholders.
With that I'll turn it back to the operator for Q&A.
Thank you.
Ladies and gentlemen, who will now be conducting a question and answer session.
If you would like to ask a question. Please press star one on your telephone keypad in Oklahoma is still and you can't tell your line is in the queue.
You May press star two if he would like to remove your question from the queue.
All participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One month, LIBOR and poll for questions.
So first of all question comes from the line of Philip Shen with Roth Capital. Please proceed.
Hey, guys. Thanks for taking my questions, Matt I'd like to start with that last point that you just made that you guys had been fielding inbounds.
From interested parties, but was wondering if you might be able to talk through.
What some of those.
Potential combinations might look like Oh are we seeing now.
More regional banks like fifth third kind of acquiring dividend.
Or.
That could be wrong actually maybe I'll have fifth third categorize wrong.
Is it regional bank, but maybe you can talk through you know are they private equity companies I know you have some bankers there already.
Yeah, I know it might be tough to talk about but what's your sense of timing and the interest that might be a circulating. Thanks.
Great. Thanks for the question Phil.
So first I think it's important to note that both sunlight board and the management team believes that the stock is undervalued and it does not reflect the intrinsic value of the company. We've received inbounds and been approached by a number of parties, who have discussed a range of scenarios.
Or strategic alternatives and we have retained an advisor to help us evaluate those and evaluate a range of options as we get more information about those well, we'll come back and certainly provide an update but at this point I can't provide any other specific details.
Okay I can appreciate that as it relates to your covenants where your revolver.
Was wondering if you could remind us Rodney what those covenants are that are potentially at risk in and.
What might be the timing around.
Working with the bank to remain in compliance.
Thanks, Bill I appreciate the question.
We have a number of covenants for our revolving credit facility and we comply.
We discussed in our in our.
The press release, how the macro environment and the rapidly rising interest rates will impact our financial performance in the near term.
And to the extent these impact our debt covenants will work with our bank partners with whom we have very strong relationships.
Yeah.
Got it and so maybe let's talk about the front end of the business and.
You guys have talked about them a lot of pricing actions.
I count five.
And so wanted to understand you know.
Have you already gotten rid of the point 99, and 1.99% loans do you anticipate a 'twenty 'twenty three with maybe not even having 2.99 and then on average where do you do your dealer if you sit right now.
Right. They were about 20% a lot of our fees are now closer to 35 or even 40% on a blended average.
It didn't make sense to talk about in this way you know where do they stand now and looking ahead do you expect more price increases as well for your.
Installer base.
Yes.
It's a great question.
So we've undertaken a series of pricing changes really going back to the back to the spring.
And we've eliminated a number of that the harder to finance low interest rate products when.
When you look at the cumulative effect of our pricing changes, we estimate that it is increasing the asset yield by about 3%. So a really substantial increase when you think about the combination of the interest rate and the and the dealer fee and that 3% increase in yield we think position us very well to be able to ensure that our capital.
To providers on a go forward basis earn attractive risk adjusted returns and we'll be able to earn compelling margins as well.
Got it and so you know in terms of those capital providers and those are our financial partners.
Talked about how their capacity has been reduced if you think through your the number of credit unions and other partners that you have.
The amount that each one has been reduced if you add it all up on a percentage blended basis.
How much lower are we talking about is it 15, 20% lower maybe 50% lower.
Yeah. Good question, Phil So you know at a macro level.
Our depository have seen rapidly rising loaded deposit ratios limiting.
And so as a result for the near term, we expect to be more reliant upon our indirect channel.
That said due to the strong credit quality, we do believe we have an advantage versus our other originators as COO.
Capital providers do seek better better credit quality.
Right, so running to kind of put a finer point on it I mean do you think you've lost access to 20% of the capital that you typically would have expected or is there a way you can quantify it.
Yeah, So I guess.
What I will say is as you know historically, we've been more reliant on the direct channel.
In the third quarter, we sold $42 million.
Of loans in the indirect channel and we funded.
Additional 264 million. So we've got about three $300 million of unsold loans in the indirect channel and we expect to sell those in the fourth quarter.
But the rapid rise in interest rates will negatively impact the margins on those loans.
And so as we mentioned earlier, we've taken actions to significantly increase increase pricing over the past several months to improve margins on loans going forward.
Right and for those indirect loans or channel loans or the sales that you expect in the to.
To the indirect channel what kind of loss should we expect there.
Yeah, So we're not providing any any guidance.
At this time that said we have seen.
Interest in the loans and.
We will it will be a challenge and we will take a loss in the fourth quarter.
That said again, we've taken some pricing actions to deliver higher higher margins.
Going forward.
Thank you when you think about your volume and you know we're heading into the year.
End of the year and into 2023.
When do you think guidance might be possible to reinstate our you know historically.
We're able to kind of think through the.
You know future years in our.
Relative relatively constructive way, but what do you think we're just a quarter away from that or do you think it could be longer before we you're you feel comfortable putting either quarterly or annual guidance back in place.
Yeah, and so we recognize that that's an important an important question for investors to have some insight into the business. If you look at the third quarter absent.
Well it was a large impairment.
And we think the core business performed very well in the third quarter in line with our expectations. If you look at funded volumes up significantly on sequential quarters and up.
Significantly year over year, as well as really strong direct margins and Rodney spoke to some of the near term challenges and we've pulled guidance because of the volatility in interest rates and we do recognize again the importance to provide some clarity to the street and we do anticipate at some point in future, we will be re implementing guidance.
But we don't have specific timing on that right now.
Okay I appreciate that Matt thanks.
Thanks for taking all the questions I'll pass it on.
Thanks Bill.
Yeah.
Our next question comes from the line of Mohit <unk> with credit Suisse. Please proceed.
And thanks for taking our questions.
So its filling up on the previous questions.
So Q4 should we not expect any Tuesday.
Provision at all.
And as a person into this kind of slipped versus what we saw in Q3.
Okay, let's start with that and then.
So follow up on the indirect business.
Right.
Yeah no. Thanks, Thanks for the question.
So again, we won't we're not providing guide.
<unk> for the fourth quarter.
As discussed.
And so as.
As we talked about earlier.
We've seen you know.
Hum.
Challenges given the rapid increases in interest rates.
And that has caused some.
Some impact to our financials in Q4, but we won't be providing any guidance there.
Yes.
Yeah.
And how does the economics for the indirect business change versus what we saw in the past.
To sum things up.
The thoughts on fees in the generics business.
So as Louis to five 3% in the last few quarters.
Hum.
Any clarity on that.
Yeah Mohit so it's.
We think about it I think there's probably two parts to think about one is the existing loans in the pipeline, which we call. The back book as we highlighted interest rates have moved rapidly and we do expect to take a loss on those on those loans that said as we look about go forward loans as I mentioned earlier significant we've made significant.
Inefficient pricing actions over the last several months and we expect attractive margins on those on those loans going forward.
And Rodney highlighted.
In his talking points earlier, and we're also implementing a hedging program to help mitigate against interest rate volatility on a go forward basis.
And then we can still get it does kick in.
Yeah, so typically.
It takes three to four months for a loan to fund.
And so we do think it'll take and Theres, a and there is a tail to that so it will take some time for the pricing actions that we've taken over the last several months to fully pull through.
Overwhelmed.
And overwhelmed that back book.
Hi.
Yes.
Just stepping back on the Max.
Just given the.
Inflation version that got it.
The highest stocks.
Lisa you see more competition for loans going forward.
This market is shrinking.
Any thoughts on demand growth.
Got it environment.
Yeah. So certainly interest rates are higher and it's in an inflationary environment that said the significant increases in utility rates makes solar power continues to make solar an attractive value proposition.
Delighted earlier year over year utility rates are up 14%.
We believe likely to continue to increase and perhaps even even accelerate.
Plus the investment tax credit not only was it extended out a decade, which gives us some certainty in the market some certainty.
But it also increased from 26% to 30%. So it provides even even better economics to homeowners who want to go solar and so when we look at market growth and we look at the broader macro trends, we think solar is well positioned and home improvements the large market and we're really just getting started there we've had tremendous momentum in the home improvement business as well.
So we're really really optimistic about the long term trends here.
And then.
Just on the solar portion.
This is getting less accidents.
Thanks.
The key person or even higher.
Destock Covid, just north of it as a pool of loans.
In fact, the <unk>.
That makes over here.
So is it possible for you to move to a leasing structure.
So in Florida.
So the impact of loans versus leases.
Yeah, So as we talk to homeowners and we talk to solve their salespeople. They consistently continue to tell us that they like the lean the loan product over these products because of the simplicity by definition these customers own their homes and they tell us they want to own what's what's bolted to the roof.
And they they like the economics that they get with alone now there are certainly cases, where leases make more sense for an individual homeowner but.
But overwhelmingly the market today is loans versus leases.
And despite some of the some of the points that you made we do believe that loans will continue to play.
We will continue to be the vast majority of the market going forward.
Alright, thanks for the question so somebody in there too.
Thank you Pete.
Our next question comes from the line of Jeff Osborne with Cowen and company. Please proceed.
Hey, good evening.
Dig into a couple of follow ups on the prior questions.
On the Covenant side, you sort of shrugged it off I, just want to be crystal clear that the losses as expected in Q4.
Ramification to.
So the cash balance you don't anticipate tripping any Kevin covenants over the next quarter or two.
Yes. So thanks, thanks for the question.
<unk>.
So like we talked about earlier.
The loans that we sell in the indirect channel.
Fourth quarter will be sold at a loss.
And while again.
It may it may have an impact on those covenants.
To the extent that it does we'll work with our bank partners with whom we have very strong relationships.
We've been very transparent we disclose those covenants in the 10-Q.
So it's all there.
But just wanted to make sure that you had that no I appreciate it. It's all there you just seem to dismiss it so thats, what I was trying to get to the bottom of that but.
And then the the pricing.
I think bill had mentioned four to five price increases.
Matt You said you started in the spring.
Were any of those more recent I'm, just trying to get a sense of how long you'll be selling loans.
Loans at a loss.
<unk> given that three to four month lag do we do we need to wait until maybe <unk> of next year.
To start seeing a positive attribution from the loan sales.
Yes. So it's a good question. So we started making pricing changes and eliminating products late in the spring, we've continued to make take pricing actions up to and including including into the fourth quarter.
To ensure that that loans are priced appropriately. So there and there can be really is some lag from when a pricing change goes into effect when the customer is credit approved until the loan is funded so there will be a there will be a tail there but.
But certainly loans that are funding.
More recently that were credit approved earlier in the year.
Had the least favorable margins versus loans that were repriced over the last month or two.
Okay.
I got it.
And then I wanted to better appreciate the customer service side of your business.
A bit of an oddball question, but I mean, you can go to the better business Bureau site and theirs.
The litany of complaints have been against your Corporation.
Largely due to the pink energy.
Bankruptcy I just wanted to understand.
Are you staffed up to go after these people and how youre doing with loans given improper equipment that isn't working with now and solvent company.
So it's a good fit.
This.
Yeah. It's a good question and something that we take very seriously. So there are a portion of up.
<unk>, who were installed but did not have their systems peak yoder connected to the grid, we've staffed up a team internally to help assist those customers get get P. T O.
And to help support them if they may have questions regarding their systems, so definitely something that we that we take seriously.
And we've made good progress on helping.
Significant number of customers got get P. T O.
Got it and then I've asked you this on prior calls and your bit evasive on this topic as well but is the.
Duration of when someone signs alone to getting glass on the roof is that getting better or worse.
It stayed fairly consistent we've seen a little bit of compression.
More recently, but if we compare it to historical pull through curves and the time versus 2019 or 2020 for instance.
It has taken even now it does still take take longer due to supply chain.
And some labor shortages, so a little bit of improvement there, but it is elongated relative to historical averages.
Got it my last one is.
Two parter has the hedging started and then if it started as it fully in place or is it partially in place like how do you sequence in.
Hedging too.
So across the book.
Yes, good question.
So just to clarify.
On the direct side of the business, we don't take market risk as our price with a catheter rider is locked at the time of the credit approval.
On the indirect channel as we've discussed in the past, we do have market risk from the time of approval until the loan is funded and ultimately sold and we are working through a number of hedging alternatives to mitigate this risk going forward. It takes some time to get those programs established with the banks.
But we expect that to be in place for new loans in the first quarter.
And then for the loans that you offer in the fourth quarter and then we'd see the financial ramifications of that three to four months later, so my second quarter of next year as.
When things are a bit more normalized or no.
We won't give any guidance in terms of performance what I will say just reiterate as you know.
As we've seen the rapid rise in interest rates, we've made multiple price changes as Matt walked us through and that's really increase the yield on the assets as we think about.
Our risk adjusted returns for capital providers as well as our margins, we do contemplate any cost of hedging into this and so we are we are establishing pricing too to deliver.
Strong strong margins got Ya.
23.
Got it that's all I had thank you.
Yeah. Thanks, Jeff Thank you.
Okay.
Thank you. Our next question comes again from the line of Philip Shen with Roth Capital. Please proceed.
Hey, guys. Thanks for taking the follow ups.
It's back on the covenants here and I was wondering.
Rodney if you could share with us, which covenants specifically is that risk.
Yeah.
Is it.
Well, yeah, which ratio in particular, because we're trying to figure out which one to monitor.
Yeah, Yeah, I mean, they're standard profitability covenants.
Yeah.
As you can as you can see.
Yeah there is.
Standard covenants in there and it's really really around the profitability and like I said.
Sure.
You know in Q in the near term.
Given the sale of the indirect loans at a loss.
If those covenants.
We need to be addressed will work with our bank partner through that we've got really strong relationships there.
Okay. So it would be the coverage ratio.
No. So it would be more on the earnings side.
Got it okay.
As it relates to.
We've published a bunch about how.
The loan market is slowing down so I think he was asking about.
Oh sure.
Bunch of Adders, and that's making lease more attractive because the loan.
Financing does not have.
The ability to access those hours, which can get up to a 70.
70% ITC are on.
On the other side.
We've been running about how.
The originations for loans has been slowing down as well.
And and so long term I think you highlight that you have confidence in the business, but as we get into Q. You wanted to you know there is we believe a slowdown.
Because.
Our salespeople have to adjust to the shock of so many price increases in such a short period of time and so how how do you expect to deal with that.
Slowdown.
Are you seeing that slowdown as well can you see it in your leads or your your.
<unk>, leading data points, where originations are slowing down and your.
So as you look into Q1 and two would it be fair to say that that thesis is.
True.
Yeah.
Yes, Hello, I definitely appreciate the question.
Should we think loan versus lease.
One thing that I think has been true over the last few years is loans tend to be simpler for salespeople to explain to homeowners and that simplicity helps drive more customers to choose alone over a lease and so again, we continue to hear from some salespeople and from homeowners.
That they preferred alone a preferred it's going to be on their roof for 25 or 30 years.
They prefer to have alone and own that system versus lease it doesn't mean that there aren't cases, where there are homeowners that prefer but for at least for one reason or another as we think about volume and I think there are probably a few things that I can point you to first if you look at our overall funded loan volume in the in the third quarter.
Very strong loan volume up year over year and sequentially and.
Okay I appreciate the additional color thanks, guys.
Thanks, Phil.
Thanks Bill.
Okay.
Thank you ladies and gentlemen, this concludes our question and answer session.
I turn the call back to Matt Macquarie for closing remarks.
Great well. Thank you all for your questions and for your interest in sunlight and while there are certainly market challenges that will negatively impact sunlight in the back half of the year. We are excited to continue to execute on our growth plan and we believe we're well positioned to generate long term value for our stakeholders.
In this attractive market. Thank you for your time and have a good evening.
Thank you. This concludes today's conference you may now disconnect. Your lines. Thank you for your participation.