Q3 2023 Sunworks Inc Earnings Call
Greetings and welcome to your son works third quarter 2023 results conference 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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As a reminder, this conference is being recorded.
It is now my pleasure to introduce Jason box Wright Chief Financial Officer. Thank you you may begin.
Thank you operator, I'm, Jason Popp, Chief Financial Officer of some works.
We have as our entire team I'd like to welcome you to our third quarter results of 2023 conference call.
Leading the call with me today is our president and CEO Mark trial.
Today's discussion contains forward looking statements about future business.
And financial expectations.
Actual results may differ significantly from those projected in today's forward looking statements due to various risks and uncertainties.
Including the risks described in our periodic reports filed with the Securities Exchange Commission.
Except as required by law, we undertake no obligation to update our forward looking statements.
Following our prepared remarks, we will open the line for questions.
With that I'd like to turn the call over to Mark.
Thank you, Jason and welcome to those joining us today.
As detailed in our third quarter earnings release issued earlier today for the last several months have continued to be a challenging period for both Sun works and the residential solar industry at large.
We continue to believe in the long term economics of residential solar and storage, particularly as the demands of a growing population weigh on our nations aging electricity infrastructure, which we believe will result in structurally higher utility rates for our customers all the time.
During the third quarter, the combination of higher interest rates less favorable residential solar economics in California, followed the NIM 3.0 transition continues to weigh on us and the industry at large resulting in lower new installation activity and reduced fixed cost absorption.
In the period.
During a transitional period for our residential business, we've maintained an opportunistic pricing strategy in accordance with current demand conditions at the same time, we've taken decisive action to further rightsize, our cost structure, including several rounds of reductions enforced.
Well, we have retrenched and focused on markets, where we believe we have volume inefficiencies to stabilize and maintain an appropriate cost structure.
It continued to improve our internal processes with significant focus on customer cycle time improvement installation crew efficiency and cost management.
We are seeing improved conditions in supply chain availability and material pricing, which we anticipate continuing into the next quarter or two.
Turning now to a discussion of our commercial solar energy business.
Our commercial business had an outstanding third quarter as revenue more than doubled on a year over year basis, while gross profit margin rate increased to more than 16% in the period.
Customers in the commercial and industrial space as well as the municipal markets continue to seek out E. P. CS who have deep industry expertise and who have the capacity to install.
This sector should continue to grow throughout 2024 and into 2025 as the economics of solar and storage and C&I space continued to improve.
The growth in the EV charging sector continues to grow and Sun works is positioned to capitalize on that growth.
This market has been a strategic focus for us that's how it works and we are gaining traction as there's significant EPC and commercial EV charging solutions.
Looking ahead, we will remain focused on our strategic growth priorities building regional market, leading positions, while implementing market based pricing coupled with targeted cost reductions.
US closer toward achieving a positive EBITDA consistent with our long term objectives.
Given the tail winds up being inflation reduction act as well as the increased demand in the commercial space, we anticipate being well positioned to capture that momentum and are busy.
Entering into 2024.
As before the market opportunity for solar remain significant across our geographic footprint positioning Shiloh looks to play a leading role in the transition toward affordable clean and independent energy production.
With that I'll hand, the call over to Jason for his remarks.
Thank you Mark.
Beginning with a summary of our third quarter financial performance.
So on March generated total revenue of $28 $7 million in the third quarter of 2023.
A decline of 29.5% versus the prior year period as.
That's positive momentum within our commercial segment was more than offset given the ongoing market challenges within our residential segment, which mark referenced earlier.
While higher interest rates have increased the total cost of rooftop solar for homeowners. We continue to believe the long term macro trends of solar to be favorable to consumers and businesses.
Similar to last quarter higher rates remain a headwind for our business as a result residential segment revenue was $23 million, a 44, 5% year over year decline.
Within our commercial solar segment.
We continue to execute on our strategy to diversify our customer base and operate at scale.
Revenue increased to $8 $3 million over double the prior year.
Total gross profit was $8 $2 million or.
Or 28, 5% of sales compared to $19 $5 million or 47, 9%.
In the prior year quarter.
Several factors contributed to the reduction in gross margin.
First approximately 28% of our revenue was derived from our commercial segment versus approximately 10% in the prior year.
Our commercial segment's model is less focused on sales and marketing and as a result of lower gross margin profile. Additionally, gross margin within the commercial segment improved from 1% in the prior year quarter to approximately 16% in the current year quarter.
Due to improved operational execution and higher volume.
Offsetting this improvement and it's under absorption of labor costs in our residential business as.
As Lloyd originations.
Underutilized labor capacity.
Throughout Q3 and into Q4, we took action to strategically reduce markets, they're not operating at scale.
This strategy will allow us to focus our sales and marketing in key markets with favorable economics, and the ability to scale operations.
Since the end of Q2, we have reduced our labor costs by approximately $6 million annually.
During Q3, we identified children without swiftly in our residential segment.
Including the negative impact of rising interest rates and due to our market capitalization.
As a result, we incurred a $26 million noncash impairment charge to goodwill associated with the active associates acquisition.
We generated a net loss of $36 $4 million in the third quarter on slide 23.
Or 84 cents per share.
The net loss of $5 $4 million in the prior year period or 16 cents per share.
Included in net loss in the quarter is the goodwill impairment.
Which represented 60 cents per share.
Yeah.
Adjusted EBITDA was a loss of $8 $5 million during the quarter.
As of September 30th 2023.
Company had cash and cash equivalents of $2 $4 million.
Operator that concludes our prepared remarks.
It was up in the line for questions as we begin our question and answer session.
Thank you, ladies and gentlemen, we will now be conducting a question and answer session.
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Our first question comes from the line of Donovan Schafer with Northland Capital markets. Please proceed with your question.
Hey, guys. Thanks for taking the questions. So first just wanted to ask if you can give us any color on what you are expecting currently for the fourth quarter. Do you think you would be just sort of directionally up sequentially down sequentially.
And if you could break it out by residential versus a C&I that'd be great. Thank you.
We're gonna Vince Jason.
Yeah, I think we're still.
The backlog in our residential business has has declined to about $35 million at the end of the quarter. So.
At the business in Q4 will coincide with the.
Likely with the with the backlog reduction year over year.
Within our commercial business, we've been building throughout the year.
But the backlog in the business are the backlog to end the quarter at about $30 million, but.
That's giving us nice visibility into the next several quarters.
And I would say that we're still very optimistic about the pipeline of opportunities that were in the awarded contracts that we're looking to close here in the next one to two months so.
Think about that that business is going to be operating at a at a better scale.
And a couple of quarters.
Okay and then.
Follow up question, if we're talking about yeah I appreciate the update on the cash position could you talk us through maybe the next few quarters. How you think about managing sort of overall you know working capital like liquidity position, if you've got a you know a certain goal or target.
What kind of cash burn rate you might have again over the next two quarters kind of how you navigate and manage that that'd be great.
Well I think we have a few levers when it comes to cash.
Positive what are as you know a lot of the times than when we're signing contracts on these large commercial contracts that goes with those will come with deposits.
That could be anywhere from 5% to 15% of the contract value so that that could be a material it for us.
That's again, that's those tend to be lumpy in and that would likely be over the next one to two quarters.
Within our residential business.
Do you actually have the benefit of all.
Working capital improvements or benefits as your as your business declines.
Because you're still collecting on contracts from customers that you recognized revenue in previous quarters.
So that's certainly an option for us as well and one that we're that we're actively managing.
Okay and then.
With.
I guess for the.
The the backlog conversion rate I mean, you talked about it coming down for residential it does look like you know if I look back a year ago, you could kind of take the prior quarter's backlog.
Figure that something like 60% to 70% of that talking about residential would convert in the next quarter, but yeah. This quarter. It looks like it's down to about 440 per cent.
Converting the backlog is that kind of a new run rate that we're at with the way. The market is right now or is that something we should expect it to.
You know rebounded and head back up towards the 60 to 70 per cent and if so over what time period.
Yeah.
Yeah, I think there were some anomalies over the course of the next year with many of the challenges that we had in California with <unk>.
Utilities and jurisdictional approvals are post close down three point out.
So I think we're still managing through that that period.
We're seeing the approval queues shrink dramatically and reverting back to historical norms. So I think as you look at our backlog and the conversion.
That should revert to historical norms as well.
Oh, Yeah antibody can squeeze one more and I just caught my eye the mention of.
I P P customers in the C&I space.
Can we just get an update and maybe some more color there in terms of what the opportunity is how how big projects are you potentially are you in a position to potentially win there I mean, if you're talking about 100, plus megawatt projects or just any color there would be great.
Donovan this is mark.
I can probably take this one Jason but I think you know when you when you think about it our sweet spot is probably not quite up to 100 Meg.
Megawatts yet.
So we're seeing some of those come through.
But as we look to expand in and also diversify and some of the markets. There. Yeah. We're definitely trying to stay in the flow deals and where where the E. P. C demands are coming from so that's.
But it's not off the table by any means but our sweet spot seems to be just under that.
Okay. Thank you I'll take the rest of my questions offline.
Our next question comes from the line of Philip Shen with Roth Capital Partners. Please proceed with your question.
Hey, guys. Thanks for taking my questions.
I wanted to follow up on the liquidity and cash flow.
Question, specifically can you talk.
Talk about what the cash burn was for Q3, he didn't have financial statements with your release and then what do you expect it to be for Q4.
And then how do you expect.
And then I didn't hear the cash position. So what was it at the end of Q3 and and.
How do you expect that to trend as we go through Q4.
A J.
Jason You were you were talking about working capital improvements. So was wondering if you can quantify you know what the inventory at a R.
<unk> were at the end of Q3, and how much that could translate to cash as well in Q4.
Sure. We are we ended the quarter at $2 $5 million of cash I believe our Q2 was right around $4 million, we did have a.
Capital raise.
In that quarter, and we also had proceeds from our ATM.
That's on file with the FCC as well so that was that was a.
Positive from a cash flow perspective.
The Delta is.
The cash burn in the business.
<unk> capital was relatively flat.
And the EBITDA loss was about eight and a half million dollars as we we believe that many of the actions that we've taken from.
From a head count perspective, and consolidated some of these markets will reduce this cash burn and then as well as the commercial business. The revenues are growing and we're approaching a positive EBITDA in that business. So that's that's going to be a.
Tailwind for us as well.
And we did have in our filing that inventory, we still have about $10 million of of E. R. M.
Yeah, and I would say, there's a couple of opportunities and there we have our older accounts that we're just working to clean up so that we can get the P. P. L. Within our residential business. There's there's several million dollars in that category that were actively targeting to bring some cash.
And then we have a effectively.
Under utilized AR factoring line right now that we're looking to.
Expand or two to add more customers into that into that population that will allow us to free.
Free up some cash flow as well.
Inventory during the quarter was about $16 million again, we have we have quite a few of the modules that are available.
For our commercial business. So we're not having to make those purchases right now so that's that's going to be a benefit to working capital.
As well.
And then and then within our within our residential business. We are still Oh imagine sort of just in time when it comes to and burgers and module purchases. So there's there's not a lot of opportunity frankly, and not residential inventory, but I think there is in our commercial business.
Got it thanks for that detail and then as it relates to the factoring line. You said you said its underutilized can you talk through how much capacity there might be and then how much more you might want to expand that by.
We are we have a factory in line is about two and a half million dollars I don't have the number in front of me out what it was utilized at the end of <unk> at the end of Q3.
I believe it was a million and a half, but I could be I'll have to follow up with you. If that's not the correct number but it will be stated in our Q.
We think there's opportunity to expand that that that facility by $1 million to $2 million and certainly I think the business levels that would be operating that could support that so we're targeting that as well.
Okay. Thank you and then looking at margins for Q4, I heard the commercial margins for Q3 improved year over year, I think from 1% to 16, but I didn't hear the resi margins for Q3 can you share what they were and then.
What do you expect those.
Segment to be in Q4. Thanks.
Our Q3 Q3.
Gross margin in our residential business was about 43, 7%.
That is down historically, just driven by the fact that we've had many of these markets that have been underutilized and we have underutilized crew capacity.
We've made as we mentioned on the call we are.
Our prepared remarks, we've made money reductions over $6 million a past.
Four to five months that will that's it that's going to help us.
Margin improvement within within.
Within the residential business.
And then we're starting to see some some some lower cost procurement.
Cereals coming through as well.
So that that will give us a little bit of lift here probably at the end of Q4.
But again I think we're making a lot of these changes in some of these markets and not all of the benefits we baked in in Q4. So I think this is a gradual recovery into next year.
Mhm.
Okay.
So.
Margins in Q4 could be similar to what you saw.
Q3 is that a fair way of thinking about it.
Within our commercial business, but I think there there might be a little bit of upside there.
Relative to the 16%.
We're targeting a one I'm gonna according with our customers.
And holding her operations seems to carnival, but manage about 20%. So we although that over the long term, we'd like to see some improvements there.
And then in our residential business I think there'll be there'll be some left in Q4, but not materially.
Right Okay great.
You talked about exiting a few markets can you talk about which ones you.
Left and then of the remaining revenue mix on a go forward basis as expected.
What's the.
Mix of California for your business going forward for the resi business only so the California Rajeev mix.
Versus our the next biggest one thanks.
Hey, Phil it's Mark.
You know I.
In terms of some of the markets. What we did is we closed down a couple that were underperforming underutilized we had a shift in a few of our dealers are as a result of the NIM dray changing in California.
And so I think what you're seeing is kind of that transition that you're probably seeing across the industry back from loans to more of a T. P O kind of model in California, and we're going through that just like everybody else. So, California as we shift back over day, probably more G. P. O is going to probably come back where.
<unk>.
Maybe not to its pre NIM three levels quite this year, but we do expect that to come back.
California, we are still active in we're gonna remain active there.
And then really some of the markets that we've exited have been where they've been.
Less focus from our direct sales team and more focus from dealers and as dealers have lost some of their volume chosen to reduce our E. P C footprint.
I think there's a list of those and they are earning.
Earnings announcements.
A list of the markets you exited.
A list of the ones we're staying.
Okay. So it was California about 50% of your business still are or is it a little bit lesser or more it's actually less less of our business right now we're seeing actually a shift in some of the other markets have really come on strong and that's probably due to a our focus as well as.
There was a lot of backlog frankly, I think that all of US felt are in the lead up to the NIM three yeah.
We'd been working down that backlog it kind of created a normal slowing right. After nab three and so that's just kind of bouncing back.
Right. So we're probably.
We're probably about <unk>.
<unk> 30 per cent, California, right now if I, if I do some quick math.
Okay.
So given your commitment to stay in California, and given the transitions and then three and storage.
What's yours bookings momentum currently is it still down on a year over year basis. When do you expect your originations to perhaps be up year over here Sunrun has talked about you know maybe breakeven near term.
I know others are having trouble or a harder time. So just curious do you see that in Q2 next year or maybe Q3.
Or or could it be sooner.
Yeah.
So I think what we're looking at right now is as our falloff has stabilized and we're actually operating on a month over month. It seems pretty consistent so I would assume you know and I don't want to bring whether into the cage in here, but.
I would assume that we see stable through the rest of Q4 was maybe a little bit of uptick as we add some more T. P O offerings.
And then I think Q1 will kind of be stable in California, and we will see something tick up in Q2, a lot of that is due to I think the rush to get.
Get signatures before NIM three came out is over of course and now the consumers are back to normal so to speak we saw some of this in the NIM wanted them to transition where it took a couple of quarters for frankly, the consumers to return to normal and that's what we're seeing right now.
Got it and storage attach rates for the originations you have today.
That 85% level or do you think it's more like 30% or his storage basically their ticket to cause these originations now.
In California, that's going to continue.
So we are looking at yeah for California, that's that's a that's pretty normal.
Okay, Great I could keep on going guys I know Ive Monopolise time, hopefully it's helpful for people.
Are you guys.
Pass it on but I have a few others that there's nothing else I might jump back in thanks.
Yeah.
There are no other questions in the queue I'd like to hand, the call back to.
Mark travel for closing comments.
Great well, thanks, everybody and once again, thanks for joining the call today should you have any questions. Please feel free to contact us or email addresses I R. At Sun works USA Dot Com a member of our team will follow up with you and this will conclude our call today you may have.
Now disconnect.
Yeah.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.