Q3 2024 Sunnova Energy International Inc Earnings Call
Speaker Change: Hello everyone, this is Nathan Davis, a third quarter, 2024 and in the conference call will begin shortly. If you'd like to ask a question, please press star, fill up by one that we're not in a funky pad. Thank you for your patience.
Speaker Change: Good morning and welcome to Snavers, a third quarter, 2024 earning conference call. Today's call is being recorded and we have allocated an hour for prepared remarks and Q&A.
Speaker Change: At this time, I would like to turn the conference over to Rodney McMahan vice president Investor Relations at Snaver. Thank you, please go ahead.
Rodney McMahan: Thank you, operator. Before we begin, please note that during today's call, we will make forward-looking statements that are subject to various risks and uncertainties as described in our slide presentation, earnings press release, and our 2023-410K.
Rodney McMahan: Police see those documents for additional information regarding those factors that may affect these forward-looking statements.
Speaker Change: on the call today or John Berger, Son of as Chairman and Chief Executive Officer and Eric Williams, Executive Vice President and Chief Financial Officer. I will now turn the call over to John.
John Berger: Good morning everyone and thanks for joining us for today's call. I'll begin on slide four speaking to a format that should by now look familiar.
John Berger: As we committed previously, increasing cash generation remained a top priority. Underpand by our committed work with our exceptional dealer and supplier network to serve our customers.
John Berger: and I am proud of the results our team is delivering related to these commitments.
John Berger: Well, the slide is familiar. You'll see that we added a commitment to serve our dealers and suppliers who often act as the face of Sonoma, to our customers.
John Berger: Touching our each commitment.
John Berger: We provide a best and class platform to support our partners.
John Berger: The software and services we offer our dealers and the level of service we provide our customers makes an over the most attractive platform for both dealers and equipment manufacturers.
John Berger: We remain keenly focused on growing our core adaptive energy customer base.
John Berger: As we prioritize, Brock will go through higher margins and credit quality over maximizing customer count.
John Berger: and we've demonstrated that you can achieve both as through the first nine months of 2024. We added 76,600 customers of which nearly 80% or approximately 60,000 were solar customers.
John Berger: We are maximizing the asset level capital we generate, demonstrated by our success, closing securities, and tax capital commitments at significantly higher levels compared to last year.
John Berger: Tax Capital, which includes both traditional tax equity and credit transfer funds, or up 100% your every year.
John Berger: We are successfully increasing our investment tax credit or ITC at our utilization.
John Berger: Up significantly as we acted as a third quarter and focus on a strong close to the year.
John Berger: Our industry leading decision to work with our dealers to originate all leases and PPAs after September 1st with domestic content is translating into meaningful cash flow, which I will explain in more detail later.
John Berger: and finally we continue to drive cost efficiencies by right-sizing the organization with an emphasis on using technology and process redesigns.
John Berger: As you'll see in our results, since the end of 2023, we've made significant progress, reducing our operations and maintenance expenses while turning attention to GNA.
John Berger: which is now on a path to significant reductions as we enter the fourth quarter and position the business for 2025.
John Berger: Having recapped our priorities, the next few slides highlight our progress in more detail. Turning to slide five, remindful that integral to our goal of powering energy independence is a large network of dealers dedicated to the same.
John Berger: This network of entrepreneurs is the backbone of who we are and allows us to leverage industry leader expertise, managerial skills and knowledge of local markets to attract new customers.
John Berger: To ensure our dealers have the right tools to succeed, we strive to provide them with a best and class platform with a heavy focus on software and customer service.
John Berger: Giving our dealers the right tools and support helps us win together and allows us to focus on driving faster installations and service activations.
John Berger: which benefits our customers, our dealers, and Sonova. Importantly, accelerating the time from origination, replacing a system in service is better for our customer and better for our working capital.
John Berger: Additionally, in the immediate term, we've been working with our dealer network to flip the working progress or flip the whip.
John Berger: to further capture the domestic content at our on systems originated prior to our September 1st requirement for new originations and that are still pending insult. I will discuss, flip the whip and greater detail shortly.
John Berger: Turning to slide six, many of you have been following an industry for some time now and understand its seasonality.
John Berger: and how we see the greatest demands on working capital during the third quarter as heavy summer customer regulations.
John Berger: Increased dealer payments ahead of the funding we receive from our warehouse facilities and tax capital funding.
John Berger: This working capital seasonality is a primary driver for the reduction in unrestricted cash in the third quarter and even with record of regulations this summer.
John Berger: from Police that we maintained an unrestricted cash balance of over $200 million.
John Berger: We enter the fourth quarter, well positioned to return to positive cash in relation during the period. As we close within the first full week of October, a tax capital fund that provided an additional $35 million at closing.
John Berger: We expect to generate at least an additional $69 million of unrestricted cash this year, which will put us at or above our $100 million cash generation target for 2024.
John Berger: are Spendicap, a magazine is hard at work for grassing additional securities and tax capital funds.
John Berger: Mindful of the importance of transitioning in service systems from our warehouse facilities to a long-term fixed rate securityization. We closed a 4A2 private securityization this month. And look forward to closing an additional securityization, perhaps even to this quarter.
John Berger: Ultimately, several doctors moving in tandem, give us confidence in affirming our full year on restricted cash bills and a longer-term outlook for the same.
John Berger: Specifically, these factors include.
John Berger: A greater contribution from the domestic content matter, which significantly increased our weighted average IPC grade beginning in September when we instituted our domestic content, the other requirement for all new TPO originations.
John Berger: Higher margin systems originated earlier in the year receiving permission to operate. Additional cost savings and efficiencies from our technology platform and scale. And less working capital needed as we better align our growth spending with various tax capital and warehouse funding schedules.
John Berger: A Birmingham pool year in multi-year caskides.
John Berger: positions us well to address our upcoming debt maturities, which as Eric will discuss, we expect to include a combination of opportunistic pay downs and a regular way of re-financing of any remaining both of which we are currently discussing with our banking partners.
John Berger: We've included slide 7 to underscore the basis for our confidence to achieve our cash generation targets. And we thought it important to highlight the multi-year trend that reflects the success of our stated priorities and action.
John Berger: Here we have focused on the seasonally relevant third quarter of each year and are showing the spread between customer agreements and incentives, revenues and the change in unrestricted cash, excluding proceeds from the corporate capital, we raise in each of the prior third quarters.
John Berger: You can see that the change in unrestricted cash relative to the aforementioned revenue has progressed from a negative 5.8 times.
John Berger: in the third quarter, just three years ago, to nearly at parity this quarter and based on our expectations and collecting to a positive net generation as we end the year with multiple levers available to achieve this outcome.
John Berger: Attorney this Friday.
John Berger: By now you are well aware that a meaningful contributor to our cast, the duration forecast, or the IGC hours. Something we have prioritized throughout the year, even going back to close tactically funds to monetize their value retroactively.
John Berger: with Santa's Apart from others in our space.
John Berger: I'm proud of how our teams work together to stock that cash.
John Berger: and as we look ahead to Arizona's focus this quarter, all highlight two key initiatives I mentioned earlier. First, we have led the industry by working with our dealers to ensure that all of these and PPE systems originated beginning September 1st, meet the eligibility requirements to qualify for domestic content.
John Berger: Doing so has significantly increased, are weighted, ITC rate on a region by 17%.
John Berger: 22.2% October.
John Berger: versus the average Berger Lion August.
John Berger: and we expect further increases as we round out the year targeting a weighted average approximately 45% in 2025 and 2026.
John Berger: Bill recall that each one percent increase in our weighted average IEC rate on a full-year basis generates approximately $50 million of additional cash.
John Berger: Second is flipping the web.
John Berger: Whereby we add domestic content qualifying equipment systems originated, but not yet fully installed prior to our September first domestic content requirement. Today we flip systems worth $3 million of additional cash to Sonova.
Speaker Change: Rounding out my highlights of the progress you made towards our key commitments. Slide 9 shows the progress we made to reduce our ONM and G&A expenses.
Speaker Change: We're flanking the benefit of scale, amplify our focus on process improvement and use of technology. We've reduced these expenses as a percent of revenue by 48 percent and 5 percent respectively.
Speaker Change: We have additional reductions in the fourth quarter. Some significant related to GNA, they have an at on the grass that you see. These reductions increase to 65% and 35% respectively.
Speaker Change: The team is demonstrating that they can do more with less and I applaud the drive they bring to work each day.
Speaker Change: Turning to slide-in and before I turn the call over to Eric, I'd be remiss if I didn't take a moment to recognize that we're talking only days before an important election.
Speaker Change: One that has created some uncertainty around our industry, prompting many questions from our investors.
Speaker Change: You've asked me how a new administration and other side of the aisle would impact our current business in Alabama.
Speaker Change: While we all see and build a polarization.
Speaker Change: I focus on the reality more than the rhetoric.
Speaker Change: The reality is powering energy independence through the expansion of solar production enjoys bipartisan support on many levels.
Speaker Change: Investment in clean, efficient and reliable energy infrastructure that insulates consumers from electricity costs and inflation, it's just one of the many benefits and one of which we can all agree.
Speaker Change: If we look specifically at the Inflation Reduction Act as a proxy for evaluating both parties' priorities, we see many of its key provisions appeal to both sides.
Speaker Change: Whether it's the jobs it creates, the GDP growth is stimulates.
Speaker Change: The competition it provides to traditional utilities.
Speaker Change: is contribution to ever increasing demand for energy and importantly, clean energy, including that needed to power AI and data centers, improving reliability and modernizing our energy grid for the digital age.
Speaker Change: We can all agree these dynamics, positions to know that as part of a solution that both sides desire for our great country. With that, I'll turn it over to Eric.
Eric Williams: Thanks, John, and good morning, everyone. Having joined the celebrity in only four months ago in June, I can say that I've learned a lot and done so alongside the Mount St.ning professionals.
Eric Williams: As you reflect on John's comments and the materials we have shared prior to this call, I hope that that you'll see this year's hard work become the foundation of delivering on our outlook.
Eric Williams: Much of the heavy lifting is behind us, reflected in the pace of closing deals and our success capturing ITC adors. With stimulants for our transition is already largely complete.
Eric Williams: are expanded and enhanced capital markets seem to now execute more quickly and with better structures.
Eric Williams: This work highlighting that we've previously net-concentrated cash to the tune of approximately 1 billion each year.
Eric Williams: Even after investing in the netting activities, we have now positioned some of us to move beyond merely operating of cash neutral instead providing credible disability and pursuing a good-again, positive, unrestricted cash generation.
Eric Williams: I recognize the team's accomplishment is no small thing. That is, to transition from consuming cash to the significant cliff to becoming a cash neutral platform.
Eric Williams: Taking something that is cashed neutral, the cash positive often has less resistance.
Eric Williams: Having completed 10 deafenance in this year in four tech equity finance things with more in the pipeline, we have the tools we need to deliver on our 2025 and 2025 cash goals.
Eric Williams: You will call it last quarter. I've earned one of my near-term priorities, simplifying the way we articulate our business to current and digital stakeholders. That's seven-at-direction. I'm sure you've noticed fewer adjusted gap numbers with a greater emphasis on the trends you can observe in our reported results.
Eric Williams: Having joined Senate of Upper Müll and Gatth industry, where nine Gatth measures are heavily relied upon, and where many have existed for decades with many companies harmonizing around their use, I'm certainly not opposed to the concept of nine Gatth, so I understand the importance of using discretion when defining such a measure.
Eric Williams: Accordingly, we've sent that our use of adjusted evidine in adjusted objects and I'll talk more about an alternative measure that I'm tracking as I continue to get thought to help the ways the discuss our results in measure our performance.
Eric Williams: Before I dive deeper into that topic, I'll start on slide 12 with a few highlights from our reporting results.
Eric Williams: Starting with revenue, which at 235 million is up nearly 16 million or 7% sequentially and 37 million or 19% year over year. Our interesting account of nearly 40 million rose 9% and 26% sequentially and year over year respectively.
Eric Williams: With a Reft of the Sun Cast Generation and Dead repayment, we also show you a principal process of nearly 44 million.
Eric Williams: We, while they fell sequentially, do the seasonality of customer sometimes use their tax returns in the second quarter to make prepayment. We see a 3 million or 7% your regular rise.
Eric Williams: Coming up, I'll mention our full year outlook for principal proceeds and the recent increase in pre-payments, which you'll find we expect to be up year of year and trending higher.
Eric Williams: Not surprisingly, our revenues, interesting common principle payments are all higher thanks to the addition of 30% more customers and an increase in the gigawatts, the solar power and megawatts of energy storage we manage that are up 25% and nearly 60% respectively on a year of a year basis.
Speaker Change: As John mentioned earlier, we remain focused on growing our core adaptive energy customers adding just over 20,000 fish customers in the third quarter, bringing our cumulative solar customer count up to 35,000.
Speaker Change: Factory ND's addition, we now manage 2.9 giga lots of solar power and 1556 megallot hours of energy storage.
Speaker Change: Also, quite impressive, we are nearing the half million customer mark with our total customer account at just under 423,000.
Speaker Change: Finally taking into consideration our current customer backlog and will we replace and service in October we expect the fourth order to see a significant step up in customer edition.
Speaker Change: Asset, we continue to expect total gross customer additions for 2024 to fall within our guidance range of 110 to 120,000 customers. I'll be into the lower end of that range.
Speaker Change: I'm pleased to this out time given our teams intentional emphasis on originating business with strong margin, and depend best strong credit quality.
Speaker Change: Now I'll turn back to my earlier point about revisiting our key performance metrics and are used to non-gat measures.
Speaker Change: Recognizing that we constructed both adjusted of a dial-up IPC and adjusted our decks. The service measures that eliminated the value we create for our stakeholders. That's also a bit appropriate to look for an alternative, less adjusted way to convey the same point.
Speaker Change: Most importantly, the value we derive from the IPC that are not fully captured on our income statement.
Speaker Change: For those of you who found the prior performance measures useful, whether in fuller and part, we provided the appendix or our earnings slides, all of the components we previously used to calculate both measures, so please use those that are most helpful to you.
Speaker Change: At the new summer to the industry, I felt that I understand some of the business relative to other market participants, looking for both similarities and differences. What I found was interesting, in simplistic terms, I've come to understand that firms like Hours, Grey, Value for shareholders and three-way.
Speaker Change: First, through the origination of the National Paper, whether through secure desations or hexapotal, second through servicing solar and related assets, and third by retaining equity value in the long-term, cash-generating assets we installed in service for our customers.
Speaker Change: It's the latter that demonstrates John's vision at Sonova competing with traditional utilities to provide energy independence for our customers.
Speaker Change: Essentially, I see these as the three legs of Sonoma Valley Proposition.
Speaker Change: I'm sure you're familiar with how we measure the value we create or originate a financial paper, so this two is something I'm reviewing within I2 in hands, which I'll talk about shortly, and is implied as the implied spread between our fully burdened, unlevered return, less, are weighted average cost of debt.
Speaker Change: We're guarding the second. I'll share it as I was getting to know John during the interview process. I was struck by his conviction that Sonova is at its core of service company and not a financing company.
John Berger: Whether you acquire one of our systems through release or through a loan, we are committed to providing you reliable power.
John Berger: John's commitment to service is intrinsically linked to the upcoming third leg of our values story.
John Berger: Our team not only maintains our customer system, we also serve assistance for others as the never repair services or SRS, which generates strong margins and leverage some of the fixed costs associated with retaining a dynamic group of uniquely skilled and talented service professionals.
John Berger: Moving to the third value driver, the equity value we retain in the largely 25-35 year act as we install and service for our customers.
John Berger: Some peers in the sector choose to build their businesses less around this component as evidence by their selling a larger portion of the asset equity for further levering the underlying assets or outright selling their loans.
John Berger: The Novavets taken the approach of using the Lee-Success Informic Capital, which for a period was corporate debt, to invest in and retain meaningful ownership of these long-term casters of assets.
John Berger: But if you look at Sonobus' consolidated statements of redeemable 9 controlling interest in equity, you'll see what we've summarized on 513.
John Berger: Over the past four years from the third quarter of 2020 shortly after the company's IPO to this quarter, Sonova Stockholder Equity represented by the dark blue bar, is up on that to the league terms nearly 150%.
John Berger: and when adjusted for the common cheers we've issued over this period of time, our stockholders' equity is up 80% per share from just under $8 to over $14.
John Berger: is important to recognize that even as we report, GapNet losses to our consolidated statement of operation.
John Berger: Something interesting is happening within equity where certain events such as the flip of tax equity partnerships result in the transfer values from redeemable non-controlling interests for R and ZI and non-controlling interests or in ZI into Sonova's stockholders equity.
John Berger: Welfare of period of time, this long-term value sits within the jointly-owned tactical department says classified as RNCI or NCI. Importantly, Sonova has valuable interest in them as evidence by the two case studies we concluded on this slide as examples.
John Berger: In these instances, when the tax equity partnership left, Sonova added a combined 110 million or 90 cents per share to its stockholder equity.
John Berger: Importantly, under gas, this $110 million of value transferred to the Novice shareholders as an addition to retained earnings, or more specifically as a reduction to accumulated deficit, never flows through our consolidated statement of operation.
John Berger: Yet, our accumulated deficit has fallen from approximately 520 to just 1.5 million as we close the third quarter.
John Berger: If you look at some of our peers in the state, you will see the direction of travel, it's not only the inverse, but inverse in a meaningful way.
John Berger: I believe this differentiation made visible in our stockholders equity demonstrate the investment sleep made using a mix of asset level and corporate level debt, and that is significant long-term value for our shareholders.
John Berger: We will realize that value through our retained equity ownership and the cash generating asset, which provides the know of the opportunity in the future to deliver growth, yield or a mix of both for investors.
John Berger: Accordingly, I believe using the Gap measure of total stockholders equity per share is a useful one to highlight the value we create for our investors.
John Berger: As we interact over the coming weeks, I welcome your feedback and I will continue to reflect on this and other performance measures that I believe will help others understand and evaluate our business.
Speaker Change: I'm glad that I'm king to identify useful measure of focused on margins and our cost discipline. The police state team, as we potentially introduce additional measures in the future.
Speaker Change: Moving on to slide 14. I mentioned earlier that while we saw a slide dip in the quarter of a quarter of principal proceeds, it's important to remember that the sequential change is affected by a seasonal increase in pre-payment if customer user tax refunds reduce their loans in the second quarter.
Speaker Change: Importantly, you can see our full year expectations of 190 million exceed the full year, 20,3 by 20%.
Speaker Change: While Lee's and power purchase agreement customers comprise that over 90% of our current origination, as the September 30th, 2024, Sonova's largely static loan portfolio exceeded $4 billion and includes more than $1 billion of amounts largely related to original as you could count.
Speaker Change: Catalyst like Homecells, Detin Validation using Home Equity or Simple Reef in Antingles, as interest rates fall, collectively unlocked meaningful cash flow that reduces our debt.
Speaker Change: On this slide, we've included an illustrated repayment to demonstrate how they enhance our cash loads. In the line graph, hotlights that in just the last two months, the recent 50 basis point Interfrey cut acts as an implection point where we now see a 20% increase in repayment versus our forecast.
Speaker Change: We believe this trend could continue in a positive direction as we close out 2024 and look ahead to 2025.
Speaker Change: Well, while 15th, I'd like to provide a quick update on our fully burdened, unleveraged, returning in place Fred.
Speaker Change: You can see our spread dip-to-bed in the third quarter, as some of the tech equity re-originated in the quarter, price lowers in the last couple.
Speaker Change: and our last couple of secure evasions priced higher than this prior.
Speaker Change: However, you see a sharpen improvement as we enter the fourth quarter thanks to several factors, including closing a private securityization that prides nicely and plied of our last public deal.
Speaker Change: Higher contributions from tech capital as we increase our utilization and our work to accelerate in service as John mentioned earlier.
Speaker Change: Before I turn to God, it's been having discussed the relics of some of his values, story, underpinned by our heightened emphasis on serving our dealers, customers, and checking cash generation. I'd like to lean back to John's comments as they relate to how we're thinking about our 2020 sex corporate debt maturity.
Speaker Change: with confidence in our ability to grow our unrestricted catch balance through the drivers we've discussed, enhanced by the significant pre-payment opportunity. In the coming quarters, we expect you to the combination of opportunistic debt purchases and a regular rate refinancing of any remaining amount to address our upcoming journey.
Speaker Change: To this end, having added new senior leaders to my capital market team and being new to the company myself, we headed into New York last month where we met with our banking partners and began conversations aligned with this strategy.
Speaker Change: We are in the process of refreshing our corporate model with our 20-25 budget and long-range plan and we look forward to working with them to achieve a great outcome.
Speaker Change: As I round out my prepared remarks, I'll turn to slide 17, which we added in response to the request that many of you made of us, which we believe provides insight into and sensitivity to the assumptions that underpand or cash generation target. So I hope you find this useful.
Speaker Change: Ultimately, our progress driving ICC Adder's higher and doing so more quickly than expected.
Speaker Change: Coupled with our high margin core customer focus, pricing increases and more efficient call structure, position us to reiterate the cash guidance we shared last quarter.
Speaker Change: Specifically, unrestricted cash generation of $100 million in 2024, $250 million in 2025, and $400 million in That positive note I'll confirm the call back to John for closing remarks.
John Berger: Thank you.
Speaker Change: In addition to everything we discussed today, it is important to remind everyone the current macro environment is prime person over to take market share and expand its footprint in a very under-penetrated industry. Power to Man and Utility Costs are increasing.
Speaker Change: Equipment costs are declining.
Speaker Change: and catastrophic weather events, which expose the fall and abilities of the centralized grid, are driving demand for our energy service solutions.
Speaker Change: Our team continued to deliver outstanding service to our customer base while remaining focused on our key priorities and proving to our investors our ability to increase our task generation.
Speaker Change: I am confident in our ability to continue to execute on these priorities.
Speaker Change: and Smith County. We have made significant progress in our business.
Speaker Change: which has only been strengthened by the macroeconomic tailwinds that will bolster some of those industry-leading adaptive energy services. With that operator, please open the line for questions.
Speaker Change: Thank you if you would like to ask a question, please press star, fully by one or not on your telephone keypad. If you would like to remove your question, please press star, fully by two. On the parent's article question, please ensure your phone isn't muted locally.
Speaker Change: And our first question, is he Philip Shen of Ross Capital Partners? So let's please go ahead.
Philip Shen: Thanks all for taking the questions. First one is on domestic content. When you start the mandate domestic content, the regulations.
Philip Shen: You also decided to keep all the value. When do you start to pass that domestic concept on, or some of it on to some of your dealers?
Philip Shen: and props your home on a customer as well. Some of the dealers that we've been touched with have shared with us that.
Speaker Change: They expect this could happen by year end, especially as competitors start to ramp up their domestic content offerings.
Speaker Change: and they're sharing some of that benefit. What's your view of this overall and if you do plan to pass along some of this domestic content value.
Speaker Change: How much could it be and is the outer sharing fully factors into your cash generation projections for 25 and 6.
John Berger: Hey Phil, it's John, thanks for the question.
John Berger: You know, I think first and foremost, uh...
John Berger: The OEMs, the manufacturer are partners there, they have the 45X and that was...
John Berger: Part of the IRA that was going directly to set up and compensate for the higher cost of manufacturing the United States and into my knowledge. They have not shared that with any other part of the value chain.
John Berger: I want to point that that's what the purpose of that was and the equipment itself should not be of higher cost and indeed what we've seen across the board is increasingly
John Berger: Equipment, whether it's domestically manufactured or or an eye is coming in to roughly the same cost. And we expect that trend to continue and to be quite accelerated trend.
Speaker Change: The direct answer to your question is, we focus on pricing to drive a balance between our growth and our cash generation. We like for that balance is right now.
Speaker Change: that the pricing is dependent on multitude of variables, the quality of the customers that each either provides us, the local utility rates, as you know, have a big part in this.
Speaker Change: So some areas we may have to.
Speaker Change: Lower pricing to essentially gather market share there. I want to point out I'm not aware that we're in the process of doing any of lowering a price at this point in time.
Speaker Change: and so there is a multitude of reasons that we may engage in so-called price cuts.
Speaker Change: and we do those quite often as we negotiate on those variables. We are not going to focus on whether part of pricing comes out of one adder or another or the overall economics or the pricing that we set or anything else. It's all a price.
Speaker Change: and so we're quite focused on that. Then the other part, or I think your last part of your question, is, you know, do we have that conservatism baked in, we've been very clear.
Speaker Change: Very, very clear that we've had conservatism baked into 2025 and 2026.
Speaker Change: and indeed you can look at the cash flows, levert cash flows, for instance in 24.
Speaker Change: and then we did not have...
Speaker Change: Much baked in in terms of flipping the whip or prior to 911.
Speaker Change: and we've had a great deal of success as we pointed out.
Speaker Change: both in achieving the domestic content, our sales have been good and the best in the company's history over the last few months.
Speaker Change: and so we feel very comfortable where we sit right now versus the expectations that we put in or the guidance we put in on cast generation. And in fact, you'll notice the capex we dropped it down pretty meaningfully.
Speaker Change: and the Associated Lover Cash flows did not drop, accordingly, wearing wear clothes to it, and we still maintained our cash guidance. So that told you that we had a lot of conservatism built in, we still do. And so it gives us the flexibility, should we need it to be able to modify pricing, where that makes sense.
Speaker Change: Great, thanks, John, appreciate that.
Speaker Change: Shifting to the next question on Market Chair.
Speaker Change: At the end of your prepare-to-mark, you thought about being primed to take share.
Speaker Change: That said, we've run a fair amount about how some of your dealers mostly small, but not all small dealers, maybe moving away. So some might be moving away from the platform for a variety of reasons, including the mandate to domestic content meaning.
Speaker Change: It's been tough for some of these guys and also the elongated payment terms.
Speaker Change: What's your latest view on this dynamic? I know we've talked about this in the past, but do you think you've adequately and fully accounted for this in your cash outlook and what is the plan? Oh, sorry, what is the risk? You could lose more volume than you had planned.
Speaker Change: Yeah, that's always a risk that we have a balance that doesn't balance out the way we want to. It's the business itself.
Speaker Change: At something that I'm very used to dealing with as my management team as as well.
Speaker Change: Over the last over decade. And so that's really nothing new again.
Speaker Change: Fogusing just on one outer and one piece of the investment tax credit, I think is a huge mistake. One, regardless of any part of your whatever happens on Tuesday, both parties, the only thing they can agree on is domestic manufacturing, right?
Speaker Change: and so that's gonna take place no matter what.
Speaker Change: and we've seen where the IRAs actually have very good success.
Speaker Change: with bringing domestic manufacturing into our industry. We're very pleased about that.
Speaker Change: The fact that we were a little bit of head of folks and led the industry is nothing to do. We lead the industry quite frequently as you know, Phil.
Speaker Change: and so we see a lot of folks getting on board.
Speaker Change: with Domestic Content, in fact, over the next two weeks.
Speaker Change: Two weeks.
Speaker Change: We see a lot of manufacturing equipment. It's going to be available to us when we've already had a lot already available to us in our dealer. So we see quite a bit of progress in all this front. So I think that sort of pain point of finding domestic content equipment and so forth that people report.
Speaker Change: is going to fade very, very quickly hearing matter of days and weeks were confident in that. And we're not really seeing that a lot of problem with getting domestic content equipment. When you look at the overall dealer onboarding.
Speaker Change: We're very comfortable with what we sit right now. We're always looking for better folks to join us, the best in the industries, better way of putting it.
Speaker Change: but we haven't really added any dealers as you know. We're pretty comfortable. Quite candidly it was very open about a risk of moving.
Speaker Change: here over the last few months on the Q2 call, and we didn't see a lot of the risk, you know, comfort in terms of the negative fallout. So we like where we are.
Speaker Change: If things change, then we'll make changes based on that. But again, we've been very conservative in our forecast. So we're comfortable with what we said.
Speaker Change: Hey, those are just very nice just to add, you know, what the reason that we added that slide about winning together is that if you step back and you look at this more holistically, it really is about the overall value proposition that sort of provides its dealers.
Speaker Change: Yeah, I had a chance to meet many of those key dealers at the RE-plus.
Speaker Change: and understand the nature of the relationship and the positive way that Michael's team manages that.
Speaker Change: but we do have a unique platform and offer them a tremendous set of tools and technologies to win in their business and so it isn't just about price, it really is about the big picture, so hopefully we've eliminated that and I think John hit the nail in the head
Speaker Change: and this is dynamic, we're watching closely by market and what we're fond of what we need to.
Speaker Change: Thank you to that question, go to Julian D'Moulin Smith, all of Jeffries. Julian, please go ahead.
Speaker Change: and good morning team. Thank you guys very much. I appreciate it. Just stuff.
Speaker Change: Starting on the cash pass balance, obviously guys done a bunch of time on this. But let's just talk about the progress year to date here, inclusive and for cue, towards that $100 million of Rogee here for full year. Where would you stand even quarter to date against that, given the private placement we guys announced here? A, and then B, what kind of sizing do you expect for the future private placement? Just to try to set some bogeys around what we should expect as we see the things in the future?
Speaker Change: and then ultimately can you talk about the advantages or merits of pursuing these private deals versus the traditional structures that you've been pursuing in terms of coupon in terms of what kind of flexibility is the board of defense.
Speaker Change: for you to answer Eric, just want that Julian this John.
Speaker Change: You say, look, we're doing private and public. We didn't make it clear out of the way which type of transactions we would do for the balance of the quarter but Eric. Yeah, no, we're obviously, we're also a really good start in the fourth quarter. You saw that we talked about closing in tech security funds just after the end. Obviously, I'd love to have had that $35 million.
Speaker Change: Sitting on top of the $45 million cash net cash use for the quarter because we would have basically been a parody and I think that optic would have been ideal but I'll tell you that the party that we close out with is a party that is very interested in building a long-term relationship and
Speaker Change: will provide tremendous capacity. We're already work on a 2025 fund with that party, which gives us a moment when going into the fourth quarter since we'd have that first draw, closing out the year, and we have another fund behind that.
Speaker Change: but we're not just focused on the tech cycle, you decided to be equation, the team as we mentioned is working on the next securitization that will be upward-reeking only securitization, so it will close out a facility that I think you may have seen the 15G go out and we're still evaluating whether we'll make that private or public.
Speaker Change: I'm just saying I'm getting optimal firms. It's I we're being extremely nimble and part of that, you know, most executing a multiple friends.
Speaker Change: I mentioned building out the capital market steam bringing new talent in, they're quickly coming up to speed and not surprisingly hitting a lot of cylinders on a lot of fronts, whether it be tech equity, the security organizations, or looking at the corporate needs in the answer we talked about.
Speaker Change: with respect to public or private. You know, one of the reasons that we did the last one private, it was $310 million, essentially of a value.
Speaker Change: was that we had put over a billion dollars away in the first half of the year into the public space.
Speaker Change: We're working to expand our distribution so that we don't tend to fill up the pockets of those that are that have traditionally looked at our deals.
Speaker Change: But candidly, we got better pricing, which is a little counterintuitive to go to go private. That was a reversing query from parties that have looked at our public deals and Incandedly wanted larger pieces to justify allocating the internal resources.
Speaker Change: It was, we were looking at doing that with a single party and split it into two parties.
Speaker Change: The nice thing there is that both parties have the opportunity to emphasize in a meaningful way as we look at the next deal, so we'll have the optionality to go back out public.
Speaker Change: or we could pivot back to the private and just make sure that we're maximizing the value to us in reducing our cost of capital. So it was great to see that the directionality of the spread tighten.
Speaker Change: as we close got the last accusation. So that hopefully gives you a little bit of colors to how we're positioned, hitting into the round out the year.
Speaker Change: Got it. Okay, all right, and then just regularly way we can answer just to come back to the capital education question here. I mean, just what what did you intend by that comment just to look great to as a follow up here, Fidelman?
Speaker Change: and what do you want to do with the McClick? Are you actively standing down?
Speaker Change: Yeah, well, obviously we are absolutely looking hard at the best options for 2021-6
Speaker Change: Yeah, I recognize that many feel...
Speaker Change: There's a greater sense of urgency on this. You know, I'm doing the company four months ago building out a team in the midst of a really interesting time for the industry with the actors coming online.
Speaker Change: The best hand you can play with respect to navigating a pay-on or a brief and answer a combination of the two It's to demonstrate that you can execute on the plan that you put forward and so we're in the process We had then in the process of refining that that you've seen in the last two quarters worth of slides and in parallel ramping up conversations with our ordinary or ordinary course banks
Speaker Change: So that was part of the purpose going in New York. We've had that conversation or that dialogue open. We're expanding that to include the bank that know us well and banks you've seen, transact in our corporate debt before, to make sure that we're thoughtful in the way that we approach it. So stepping back, obviously, the best way to begin those conversations is to making sure that you have really tight models and tight numbers to demonstrate where we're going. So it may feel like early innings, but in my view, having a year before we're even talking about current.
Speaker Change: and having now two quarters of demonstrated ability to tap into these, the adors, the optimized cost structure, the resiliency and our price and maintaining margins, all gives us the backdrop that we need to do this and just for an air course. And not need to get a great or a punitive dinner of our existing holders.
Eric Williams: and Eric I would add to that you know you made mention about the book value of the equity is looking at a metric and Julian you keep in mind we have this corporate debt for a reason and that is 18.8 billion dollars of nominal contracted cash flow so that's no extension value or anything else that's why we were allowed to issue the bonds and as that continues to increase
Eric Williams: I think it's over a billion dollar increase from the Q2 call.
Eric Williams: that gives us more and more and a capability of going back in.
Eric Williams: and having a much easier conversation with the officiants of the new bonds to refinance both the 26s and 28s.
Eric Williams: Time is on our side with regards to building up that basic cash flow, which quite candidly, a lot of folks tend to forget that that was the reason why we were able to issue in the first place. It was not necessarily the cash generation.
Eric Williams: that we talk about, you know, the $850 on the use of adders and cost savings and such.
Speaker Change: Thank you.
Speaker Change: Thank you. The next question goes to Brian Lee of Goldman Sachs. Brian, please go ahead.
Brian Lee: Hey guys, good morning. Thanks for taking the questions. I actually wanted to focus a little bit on, you know, this key slide you guys provide every quarter, which is great, slide 17. You know, some of the assumptions here. So I guess first off...
Brian Lee: The advance rate here, you're talking about an assumption of 75% in 25 and 26, which, you know, that that seems
Brian Lee: reasonable but if we look at you know recent precedent I think it's been trending more like 70% and I think on an earlier slide where you know Eric showed off the
Brian Lee: Some of the OID math and prepayment math you're also using a 70% baseline So question would be you know, how comfortable are you with the 75? Like what are you seeing in the marketplace? And then also What what would be kind of the Delta in terms of cash? If it was 70 versus 75 just trying to you know, come stress test how
Brian Lee: and you know how this plays into the cash fees here.
Speaker Change: Yeah, it's a good question. And you're right, if you looked back at 24-2, that one, the advance rate was just south of 75%, but that was an unusual transaction for us, and whereas our traditional had been 75% or better. And that was because it had some unique laterals. We closed out some assets that were part of the Helios program that we, that didn't fit into that securitization, so that we included those. But that was, I would not consider typical of our deal. If you looked at the deal that we just closed privately, that was a 76% advance rate, and we actually went, you know, got that done on an A and a triple B minus as opposed to an A triple B flat. So, we certainly see this as very achievable as we continue.
Speaker Change: William Berger, Rodney McMahan, William Berger, Eric Williams
Speaker Change: Okay, fair enough. We'll follow up offline. Yeah, the sensitivity is on the slide. You can actually see the advanced rate sensitivity on the margin of the slide. That was $35 million for each 1%.
Speaker Change: Awesome, awesome. And then I guess on this, the gross customer addition, I mean I suppose you you maybe provide a range. Historically you've always provided a range, but you got this spot.
Speaker Change: 127K view here initially. I guess, can you give us a sense of, you know, mix that you're assuming on the $127,000 new additions for 2025 and how that compares to the $110,000 to $120,000 you have for, you know, current guidance on?
Speaker Change: Yes, this is John Bryan. Roughly, it's about a 15% increase, if my math is correct, on the
Speaker Change: You know, year over year of what we expect to do this year and what we expect on the 127 next year.
Speaker Change: I want to say roughly about 10 percent, maybe a little bit north of that, is service-only customers and then the rest would be some form of solar and such. Please keep in mind that we don't count, as we do, upsells of batteries and increasingly other...
Speaker Change: equipment to enhance our service offerings or even additional systems which is something we do now quite frequently so a single customer would have two contracts that still counts as one customer for us I know that's different for others
Speaker Change: and so this is a yeah this is one of the reasons you're seeing
Speaker Change: the capacity...
Speaker Change: and the battery amount, you know, the kilowatt hours.
Speaker Change: move up on a per customer basis quite meaningfully, and therefore the CapEx per customer is moving up quite meaningfully. There are markets, in fact, such as Florida, that we're regularly seeing $60,000 to $70,000 EPC per customer at this point with just a single contract, let alone additional upsells. So we see quite
Speaker Change: More of a focus and I think the the street has looked at more of a focus on cash generation and overall capex
Speaker Change: and that trend rather than on a count basis. And so we just felt like it would just put a single number, we'll refine it, but more importantly, we still see growth ahead of us. And again, the last few months have been record origination months in the company's history.
Speaker Change: Awesome. Appreciate that, Carla. Last one for me, again, just on this slide. You alluded to this, John, in your remarks, but I might have missed the explanation.
Speaker Change: There's a pretty meaningful step down in the EPC costs, almost like a billion dollars a year, versus the assumptions you laid out last quarter for 25 and 26.
Speaker Change: Is that just a reflection of a more moderate growth scenario than you were thinking three months ago? Is that cost optimization? I mean it looks like the
Speaker Change: The proceeds from that tax equity and recourse debt are also down Correspondingly so it seems like it's more of a growth thing But could you kind of walk us through the drivers behind the significant reduction there?
Speaker Change: Yeah, again, we're optimizing for cash generation.
Speaker Change: So, you know, when we look at, you know, where do we, you know, all things being equal, we'd love to expend less on CapEx, even with the corresponding sources of that CapEx and coming in the door. And so we've been working to optimize, you know, the cash generation forecast that we laid out. So next year, you know, $350 million, for instance.
Speaker Change: This is where we, again, I mentioned earlier in answering Phil's question.
Speaker Change: We've been very conservative, and we still are conservative, but we were able to dial that in a little better.
Speaker Change: and see a better balance. I will also add that less capex is less consumption of working capital and that's pretty dear in the marketplace and has been for a while as you know so this is all in is a good news story.
Speaker Change: All right, thanks guys. I'll pass it on.
Speaker Change: Thank you.
Speaker Change: Thank you. The next question goes to Andrew Picoco of Morgan Stanley. Andrew, please go ahead.
Andrew Picoco: Great, thanks so much for taking the question this morning. I wanted to start out with just the cadence of cash flow
Andrew Picoco: Obviously, to get to your full year number for 2024, pretty weighted towards the fourth quarter. I know there's...
Andrew Picoco: typically seasonality and working capital. There's been some seasonality and timing related issues around some of the tax transfer closings.
Andrew Picoco: I guess as we look out to 2025, should we be expecting a similar cadence in terms of seasonality to get to the 350?
Andrew Picoco: of Cash Generation, or are there things that you're doing internally, either working with dealers or being more consistent with some of your tax partners to smooth out the seasonality and the cadence of cash generation?
Speaker Change: I'll try to answer it and then Eric can correct me. Yes is the answer you should expect that the same seasonality occurs every year as for 12 years and then and secondly though this has been that seasonality has been accentuated by the adders.
Eric Williams: So, you know, that would that would level things out a bit, you know, for next year, but yeah, I think it's right. The only other thing I'd say is, if you look at the theme this year, it's been a reacceleration of our capital markets theme and the work we're doing.
Eric Williams: We're going to carry that momentum into next year, and we're going to stay not only on time, but we're going to get ahead of ourselves with respect to standing out tax equity funds, so that rather than waiting on a fund to open to grab that first tranche that can be significant working capital, we're going to have funds waiting for those systems to go in at first tranche. That will help to mitigate any of the seasonality noise.
Eric Williams: So it will always be there. We want to see strong growth in the third quarter, but I think we can do better in responding to that. And then just keeping a healthy cadence within our securitizations. And so that the market, I think that will improve our pricing if we're thoughtful as to how we're filling the capacity, get cadence there, broaden the distribution, and make sure that we
Eric Williams: are optimizing the size of each to get best pricing. But ultimately, if we can keep the rhythm right in capital markets, we should be able to do a lot to mitigate some of the seasonality on cash flow.
Speaker Change: Last quarter, John, it sounded like you were pretty firm on wanting to pay down in cash.
Speaker Change: This quarter seems like a little bit more open to going with some, at least a mix of refinancing and paying down in cash. Has something changed either in the market or just internally in terms of how you guys are thinking about that capital allocation?
John: I'll answer since that was directed at me and I'm gonna turn it over to the CFO here. The answer is no, nothing's changed.
John: Thank you.
Speaker Change: It's still the same strategy, let's get our deals done, let's get the adders in there, let's demonstrate that, and then let's go to
Speaker Change: are banking partners who we've not engaged anybody, to be very clear about it, on corporate debt at all. And when you look at...
Speaker Change: you know, a debt instrument at the corporate level.
Speaker Change: minus whatever we can pay down. So obviously the equity is extremely undervalued from our perspective and Eric laid out another compelling gap-based metric to show that with book value.
Speaker Change: Some things from some folks out there, but what we want to do is continue to execute, generate the cash, prove that out, go to market, pay down.
Speaker Change: Rodney McMahan, William Berger, Eric Williams, William Berger, Eric Williams, William Berger,
Speaker Change: when they first got in, looked at in the first place, and now it's $18.8 billion.
Speaker Change: and it keeps climbing roughly a billion dollars a quarter.
Speaker Change: So that's my answer on that. Eric, anything I left out? Yeah, no, it's a great question and one that we should answer a little bit more clearly. If you look at the slide that we've had out there that was a refresh from last quarter where we showed the three-year cash bill, $313 million going to nearly $700 million and then topping out at $1.1 billion, that matches our debt stack. Sure, the idea is to show that if the optimal path forward was a full pay down and we chose to completely remain undelivered in 2026 on that piece of the maturity, we could do that.
Speaker Change: But that would necessitate the debt going current in a meaningful way, half a billion dollars-ish going current, and I don't think anyone in the market space expects to see that. So what we've said, as a point of clarification here, is that as we build the cash, rounding out this year and or next year with strong momentum and expecting to build another $350 million-plus,
Speaker Change: Then we'll be opportunistic. You've seen the debt price higher as people are more confident in that cash build.
Speaker Change: But if there are opportunities to buy at a price that makes sense to take that number down along the path to the refinance that I think is going to make more sense as we look at the overall cost of capital, then we'll certainly do that. Something tells me that when you demonstrate that you can buy it, generally the price at which the party wants to sell it.
Speaker Change: negates the desire to do that. But we're going to stay open to what creates the most value. But we do believe, for the reason John said, and having had a strong background in IR coming in,
Speaker Change: Yeah, I think what I look forward to doing is trying to put it together.
Speaker Change: a visual that helps people understand what John's talking about. Having come from the oil and gas business, I think about the prove value of our reserves that are multi-year and there's a debt stack associated with, but you've got tremendous cash flows to cover those wells.
Speaker Change: that ultimately address that. And we can illuminate how this all fits together, that you've got more than just the adder cash flow coming back. You've got tremendous underlying value in these multi-decade systems.
Speaker Change: So we'll put that together and help crystallize exactly how we're thinking about the upcoming both paydowns opportunistically and in order to of course refinance.
Speaker Change: Great, thanks guys.
Speaker Change: Thank you. The next question goes to Pavel Molchanov of Raymond James. Pavel, please go ahead.
Pavel Molchanov: Yeah, thanks for taking the question. When I look at customer deployments, California
Pavel Molchanov: got back to pre-NEM 3.0 levels, almost 7,000. Is California actually back to pre-NEM 3.0 levels or is this just a one-off quarter?
Pavel Molchanov: It's John. Yeah, no, it's not a one-off quarter.
Pavel Molchanov: I want to issue a caution that don't take us as for the market because we've been traditionally heavily underweighted in California, as you well know, but we've experienced the market share pickup that was quite meaningful over the last few months, so we do expect that trend to continue.
Speaker Change: Okay, that's helpful. I mean, you also referenced in your prepared remarks the fact that utility rates keep going up inexorably, you know, regardless of what happens with natural gas, for example. Are you noticing
Speaker Change: demand for rooftop solar peaking up
Speaker Change: in states that historically did not have supportive economics because of what utilities were charging there?
Speaker Change: Great question, and the answer is yes.
Speaker Change: So I'll give you a couple of specifics. We're seeing pretty good demand, really really strong demand in Florida.
Speaker Change: both on from a rate standpoint, but more on the reliability. And then in Texas, as we sit here in Houston, power rates have gone up meaningfully to say the least, and we see that trend.
Speaker Change: 100% guaranteed to continue moving upwards just giving all the spending that's needed in the growth here. So those are two specific markets for you but to answer your questions, yes.
Speaker Change: Thanks very much.
Speaker Change: Thank you. The next question goes to Dylan Nisano of Forth Research. Dylan, please go ahead.
Dylan Nisano: Yeah, hey, good morning. I just wanted to touch a little bit more on the equipment front. Just, I guess, how much of a headwind or tailwind was equipment availability during the quarter to get to the domestic content mandate?
John: Yes, this is John.
John: meaningfully, you know, the trend is change to have more availability and lower pricing, I'll add.
John: almost weekly over the last really the last three three months or so.
John: And it's not in a linear fashion, which makes sense, right? You know, manufacturers have plans to put on, you know,
John: bring on manufacturing plants and sometimes they don't always go on, you know, schedule, be off schedule, you know, 15 days, 30 days, 45 days.
John: But we see quite a large amount of supply coming online here, again, and being delivered, really. So it's already online being manufactured, being delivered in the field to our dealers in the next two weeks, as I mentioned. And so the outside there is the next four weeks.
John: So we're seeing a meaningful pickup of that. Some of our suppliers have been there for years, our main supplier on the storage side of things.
John: And so, you know, we really haven't seen a whole lot of problems there with regards to what our expectations were. And in fact, I would say, to be fair to say, we've exceeded our expectations, both
John: in the speed of which the domestic content equipment has gotten into the field. And then secondly, the pricing has not
John: in terms of moving up has not moved up.
John: as much and certainly is not stuck in terms of the pricing.
John: moving back down to a non-domestic. So we see the competition in the equipment market intensifying as we move forward and bringing further pressure on the equipment side of things but also giving further margin to our dealers.
Speaker Change: Got it, thank you. And then my full look is for Eric.
Speaker Change: You know, I noticed that net contracted customer value that metric didn't really, wasn't really discussed, you know, in this discussion around key performance metrics. Just curious, you know, did you identify kind of any any inherent disadvantages to using that as
Speaker Change: Are you looking at a key metric or are you looking at potentially, you know, some other kind of metric to reflect that long term contracted value?
Speaker Change: No, it's, I appreciate the question. I, that was just pace of travel and pulling these together. I hope you see it was a pretty broad change in the way that we positioned.
Speaker Change: I love that metric and I should have gotten that in there because I think it is incredibly valuable and something that we should be highlighting. So watch for that, DeCon. We'll be adding some slides during the quarter because we're obviously ramping our deck to get out there and do the same thing on the debt side.
Speaker Change: and that's incredibly important. So there's tremendous analogies. If y'all, for those of you familiar with my background.
Speaker Change: coming from an oil and gas company that had 70,000 wells.
Speaker Change: where asset retirement obligation was the equivalent of our corporate debt stack that sat in the investor's windshield. And we get questions, how in the world are you going to address this big obligation? We would point to, you know, the value of our net proved reserves after you stripped off taxes, GNA and other, and just show that there was compelling value. So I think we can do a lot to show that that NCCB.
Speaker Change: is a compelling part of the story. So it was really just a pace issue and not getting that in, but I look forward to illuminating that.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Thank you. The next question goes to Amit Thakkar of BMO Capital Markets. Amit, please go ahead.
Amit Thakkar: Good morning, thanks for seeing me and.
Amit Thakkar: I appreciate, Eric, your comments earlier about, I guess, your...
Speaker Change: decision to kind of either refinance or pay down debt will be kind of determined on
Amit Thakkar: on kind of debt capital market conditions. But in terms of kind of running the business on a go forward basis.
Amit Thakkar: If so, what's the right kind of target range for that? Thanks.
Speaker Change: Yeah, no, I think you're you're absolutely thinking about the debt to asset ratio correctly So that's that's something that we're working towards for sure and then on the working capital side Yeah I just simplistic math if you think about being in that three and a half to four billion dollar Origination range do the math that works out to around 80 million seventy five eighty million dollars per week
Speaker Change: If you want to keep four to five weeks of just working capital presently, that would be right around our year-end exit rate, our exit level.
Speaker Change: on that $300 to $350 million range. That's when I think we start getting really comfortable that we've got the excess capacity to start opportunistically looking at.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Thank you. The next question goes to Praneeth Satish of Wells Fargo. Praneeth, please go ahead.
Praneeth Satish: Thanks, good morning. Just maybe touching on an O&M expenses, they've declined quite a bit as a percentage of revenue, as you show in the in the slides. I guess two part question here first is, are tax equity investors, are they starting to recognize these cost improvements in their fair market value calculations, or is that yet to come? And then second, you know, given the organizational changes and everything that you've made, what do you see as a sustainable long term O&M structure as a percentage of revenue? I think it's roughly 8% in the slides, but could it go lower than that over time?
Speaker Change: I'd like to stab at that and see if Eric has any other comments.
Speaker Change: You know, so first of all, we've done, as you pointed out, a very good job of driving down the services, you know, cost overall.
Speaker Change: as a percentage of revenue but really we look at it as a per customer basis it's gone down meaningfully. We still see meaningful opportunity there to drive the cost down and again I think you'll see that in coupled with more G&A cuts this quarter so when we report the fourth quarter.
Speaker Change: And then going into next year, I think you'll really like the year-over-year comparison starting again this quarter as we move into next year with regards to spending, whatever relative metric you want to use as revenue per customer, etc.
Speaker Change: So, you know, we see a solid trend there with expense reductions. In terms of the tax equity funds, that has more to do with the appraisals and such, and so I don't think that
Speaker Change: for serving the customers and they are. I think we've been the most conservative, maybe coupled with one of our other competitors, most conservative in the industry.
Speaker Change: and certainly much more conservative than others out there. So it's something that I think we've done a really good job on, and other than that, they have not had any questions on.
Speaker Change: I think you're spot on. I talked a little bit about my background. Part of the reason I was excited to join was I looked at the management team that John had put in place that I'd get to work alongside with.
Speaker Change: Many of y'all know Paul Matthews, who's our Chief Operating Officer. His background is UPS. I can't imagine a better individual looking at a cost structure than someone that comes from an organization that is focused on efficiency and running things on time as that.
Speaker Change: And so you've seen in a very short amount of time with Paul at the helm, a relentless focus on cost.
Speaker Change: that has rolled forward into the fourth quarter. And it's not just, we talked about right-sizing the workforce, and that's part of it, but part of that is reducing where it's not adding value, it's disproportionate value, but adding where there's pickup, so capital markets is where we put some additional heads.
Speaker Change: But yes, coming into the fourth quarter, you'll see, you know, those efficiencies both from process, redesign, leveraging technology, and then getting the right bodies in the right place, driving not only O&M lower, but the G&A lower in a meaningful way. So very excited about the momentum that we have.
Speaker Change: Got it. Now that that's helpful. And then maybe shifting gears that in prior calls, you've talked about, you know, kind of shifting the dealer payment structure to better align with the activation milestones.
Speaker Change: under kind of the new versus the old structure. And then finally, is any of this in the cash generation guide for 2025 or would this represent potential upside to the guide?
Speaker Change: This is John. I'll try my best to answer it. There's no rule of thumb that we've been able to come up with to to say that in terms of the working capital usage drop.
Speaker Change: But it definitely moves the needle if you think about at any point in time we have somewhere, you know, a billion and a half to two and a half billion dollars depending on the season, the time of the year, of the backlog.
Speaker Change: at cost.
Speaker Change: So the number is of meaning.
Speaker Change: When you look at 2025, is it baked in there?
Speaker Change: probably not, not to the degree that we'll see how many dealers have moved over. We're not quite done with that. We're still working with some of them, but we do expect to move 100%.
Speaker Change: to the changeover there. And again, yeah, one thing.
Speaker Change: This industry, it really, I mean, it's very strange. Payments.
Speaker Change: usually are on the short end, 30 days. And the industry got to the point where it was...
Speaker Change: trying to say that they could send money out within hours, which there's no safeguards whatsoever as far as where that money
Speaker Change: is going and where in terms of where it's
Speaker Change: That's just crazy and and these are jobs that take months not not not even days to get done so
Speaker Change: When you look at what we've done, it's really, I've talked to other industries, they're quite shocked that they're even...
Speaker Change: talking about paying, you know, much less than 30 days. So I just think there needs to be an overall reset here in terms of expectations, and we've seen that in the marketplace, and to have a better management of working capital all through the industry.
Speaker Change: and we've certainly seen that. Our better dealers are all on board. They're like, this makes total sense. It keeps out the riffraff.
Speaker Change: from the industry, so.
Speaker Change: We're seeing, you know, good consideration and better capital management, which I know
Speaker Change: will give confidence to lenders, commercial banks, and others to actually start putting more working capital back in the industry, which this industry needs to, of course, grow and get back on a growth trajectory.
Speaker Change: Yeah, and I just compliment that by saying, one, I think John's exactly right that this
Speaker Change: discipline is working its way into the dealer network as well. That's just going to step up the service that the customer sees and feels.
Speaker Change: The reason that we added slide 7 was to go, I think, more philosophically to your point. Like John said, it's difficult to quantify the exact contribution of the four priorities that we put on this slide. The lower right quadrant was the optimizing working capital, but just innocently, in all truth, if I were to pick the numbers that are probably the most relevant for this slide, rather than using revenue, I'd use origination because it really is...
Speaker Change: driving to as your originating business, what's happening to your net cash use or generation?
Speaker Change: We used revenue because that tied the financials, it was a proxy for the same thing, just making the point as the business has grown.
Speaker Change: You can see revenue going from $60 million to almost $200 million, so nearly triple as high. You've seen a tremendous contraction in the net use of cash over that period of time.
Speaker Change: And I asked myself, again, I'm reverse engineering an understanding of what this engine does.
Speaker Change: How do we do that? And it wasn't the adders, because the adders are new. The adders are helping us inflect a strong, positive position.
Speaker Change: But those are enhanced by the things that we've already been doing, which is focusing on margin overgrowth, making sure that we're pricing our business properly, that we're stewarding the resources that we have and managing our cost discipline, and optimizing cash flow. Going back and saying, hey, let's do the simple math of making sure that our inflows and outflows are matched up. The aggregate of that, you can see, is what the whole point of slide seven, to show that we've done a great job in spite of growing the business.
Speaker Change: and that EPC growth make managing cash in a much more prudent way.
Speaker Change #101: Thanks guys, appreciate it.
Speaker Change: Uh huh.
Speaker Change #100: Thank you. The next question goes to Chris Dendrinos of RBC Capital Markets. Chris, please go ahead.
Yeah, thanks for taking the question. I wanted to start here just on the prepayments and you highlighted that.
Chris Dendrinos: It's trending above forecast here. So maybe looking at 2025, what's the expectation for payment proceeds, or I guess prepayments, and then, you know, how much I guess upside is that if this trend of prepayments kind of continues?
Speaker Change #105: Yeah, thanks for asking. You know, I need to go back and actually pull that specific number. You can see that we're rounding out this year at a 20% increase over last year to nearly $200 million. I'd say trend to that about the same clip higher, with a bias to going higher if we continue to see rate cuts, because that will obviously compound the potential growth. But conservatively, we're just over that $200 million mark. And we do see this as a tremendous opportunity.
Chris Dendrinos: You know, if rates stay higher, then you've obviously got tremendous catalysts to continue to keep customers focused on leases, and that comes with a tax added benefit. But if rates trended lower, and we saw, even though I think the industry will really coalesce around the lease product, for many reasons,
Speaker Change #103: This embedded optionality within our loan portfolio unlocks as we see rates go lower, so it's a nice counterbalance. We didn't really factor that into the guidance slide. I'd say that that's just one of the many conservative levers that John alluded to that we've included in our cash guidance.
and it's John. One thing I'll add to it is remember
John: Remember that the driver of the prepayments is actually the home sale, the transaction.
and so regardless of where the mortgage rates may or may not be, at some point life events happen you have to move and we are now completing the second year of a very abysmal existing home sales market. So at some point the market's got to move up.
Speaker Change #103: We've seen signs of life, as you can see, because the prepayment rate is going up, but our loan book is actually not increasing very much at all.
Speaker Change #104: So that tells us the overall rate is moving up meaningfully and probably as highly likely as transactions picked up. Maybe home prices come off, for instance, next year, then the prepayment speed will continue its upward trajectory, as Eric said.
Got it. Thanks. And then and then maybe it's a follow-up here you highly just flip the whip and I think it was maybe 300 million I'm sorry, three million so far
Speaker Change #104: of
Speaker Change #104: proceeds from that. What's left to go and does that go into next year or is this, I guess, maybe a strategy that kind of wraps up year-end just with the timing of originations and when you get those systems online? Thanks.
Yeah, we see a meaningful upside. I would say probably the top end is $100 million.
you know and even we didn't account for anything so we're three million ahead of where we counted for and in our forecasting uh most of that probably will end up this year uh but uh you know there's there's a decent chance that some of those systems go in service in the in q1 at 25.
Got it. Thank you.
Speaker Change #104: Thanks.
Thank you. The next question goes to Corin Blanchard of Deutsche Bank. Corin, please go ahead.
Hey, good morning. Thank you for taking my question. I have two questions. The first one, could you could you talk about the attachments rate? I think it has been relatively stable since June. Maybe if you can talk about what you see in California and the other states. And then the second question would be, have you guys run any
Speaker Change #104: analysis or scenario in the case of Trump or a Republican win,
How much could that impact your cash generation into 2025 and 2026 if we see some of those, maybe the adders being removed, or if we see some of the ITC credit being fed in a way faster than currently?
This is John. I'll take the last one first. I don't want to get into the speculation of what happens in such in the IRA. I think y'all are well equipped just as me to come up with all the different permutations.
Again, our comments were that we actually see, particularly in the domestic content, which is the main adder, that both parties actually agree.
So, I think some of, again, the rhetoric versus what I see as the reality.
we see as a reality is something that needs to be considered heavily. And it's very obvious that the market's not right now. People are just absolutely beside themselves with concern about the election.
What our response would be we're gonna run the business the same way regardless who wins on Tuesday
Speaker Change #104: and what happens.
The utilities keep raising their prices, and so that gives us the ability to raise price. It goes back to my point about...
Speaker Change #104: stop looking at one piece of the value input versus others in the equation. The overall, it's very clear, utility rates are moving up, equipment prices are moving down, cost of capital is now, you know, worse sideways to moving down. That has created a nice wedge and that wedge continues to expand.
So if something were to happen to some of the adders or whatever, we'd raise price.
I mean, that's full stop. That's what it would be. And we feel good about that.
When you look at storage attachment rates, they've moved up meaningfully this year. You can see that was going back to my earlier point about CapEx per customer has gone up meaningfully. We expect that trend to continue. Part of that is California. We are seeing a pretty good attachment rate there, north of 50%, I think north of 60% actually.
Speaker Change #104: and then we have a number of important markets like Puerto Rico that have been at 100% for years.
We see a meaningful attachment rate progress in Florida. I'm starting to see some of that in Texas.
and that's based off the storm impact, most likely.
The perception is obviously that when you have storage attached, you have more price elasticity, and you also have greater certainty around customer payment. So, you know, seeing that trend higher is good on all aspects of our business.
And I would point back to, as John said, if you look at that slide 10 where we tried to show a lot of purple and the overlap, that graph on the, if you want to call it the Trump side of the slide,
that shows that 78 percent of the economic value created by the jobs sit in those districts. I think that's just really powerful to make the point that the job creation, the bringing the domestic manufacturing home and what it does for the country is just so widely viewed positively by both sides.
Thank you and then maybe if you can just talk about the attachment rights for the first question.
Do we see that trending higher? Was that the question? Yeah, it has been kind of flat since June. And I just wanted to know, do you see a higher attachment rate in California? And what are the trends outside of California? Just like high levels or maybe how we think about it into 2025.
yeah it's moved up pretty significantly so yeah we see that moving continue to move higher
Speaker Change #106: All right, great. Thank you.
Speaker Change #104: Thanks.
Thank you. The next question goes to Tashi Harrison of Piper Sandler. Tashi, please go ahead.
Good morning everyone and thank you for taking my questions. So just curious about competition on the TPO side. Are you still seeing a rational pricing from new entrants?
in the marketplace or has that calmed down a bit? And then also just following up on some of the points you were making on working capital.
John, do you see working capital as a limiter on growth rates for the industry in general? And does a TPO pivot actually make that, you know, working capital limiter more acute? Or are you, you know, still seeing aggressive working capital strategies from your competitors loan or lease? Thank you.
Speaker Change #104: Thank you. Thank you.
Yeah, so in terms of the competition, competition's great. You know, quite frankly, the power industry in the United States needs more competition, not less.
Speaker Change #104: and yes I'm speaking of the utilities, the monopolies.
So, we're a fan now, but that said, I expect our team to win the competition, right?
Right now, what we're seeing is we have the best platform, we have the best services to our dealers, best service to our customers.
and we're winning.
Speaker Change #104: and you can see that on our market share increase on slide 19 as an example of that. So we expect that to continue. I'm here to drive and create shareholder value.
And so we're going to balance that off. We're certainly not going to go into a growth-only mode that it doesn't matter how much money we make or don't make, that's not going to happen, and, you know, are some of the competitors doing that?
Speaker Change #104: Yes.
Speaker Change #104: but they have gotten better. In particular, one of them has.
In the sense of working capital, yes, I've been pounding the table on this for two and a half years, if not longer, and as you know,
Speaker Change #104: and I said this is the issue, it's not interest rates, it's working capital decline. The velocity of capital moving in this sector is evidenced by the share prices, like look at ours, it continues to decline.
Speaker Change #110: Is that bad? That is very bad. And until it picks up, then the growth of the industry is going to continue to be under pressure.
When will it pick up? I don't know. It could pick up next week, you know, when the election's over. It could do that because...
What's going to drive more capital in this industry? More cash generation, better unit economics, which we have the best unit economics we've ever seen as an industry, whether you're looking at
Speaker Change #110: a contractor, one of our dealers are looking at us. We've got really good economics and those economics are improving. Why are they improving? Utility rates moving down, equipment prices moving down.
utility rates moving up, sorry, and equipment prices moving down. It's creating that value edge. So is it exacerbated in terms of the working capital by the movement to TPO?
Speaker Change #104: Yes.
Need to be closed and be tied off and and that is very different than just having a warehouse sitting there with loans and having Loans just come through on an assembly line
It is much more difficult to do. This is why you're seeing a lot of players, going back to the aforementioned competitors, really struggle with it. It looks a lot easier than it actually is.
and the current climate.
The new adders and all this other stuff just adds more complexity to it.
Speaker Change #107: Yeah, that wasn't helpful, isn't helpful, but at the same time, overall, it accretes to the benefit of the, you know, the so-called...
big players like ourselves obviously with really just really two in the space it creates to the benefit of the platform that we have the experience we have again the the top dealer services we have and customer service we have
Speaker Change #111: Thank you. Bye.
Yeah, got it. That's it for me. Thank you.
Speaker Change #104: Thank you.
Thank you. And the last question goes to Maheep Mandloy of Mizzaho. Maheep, please go ahead.
Hey, thanks for squeezing me and two quick ones, just first on if you're seeing any shortages on batteries, maybe for Tesla, like we've been hearing somewhat of around that and if that's impacting Q4 or Q1 here.
and secondly on the service customers we talked about for next year, 10% of that 127. So is that all organic or are you assuming any acquisitions from any of the installers or dealers who went bankrupt here? Thanks.
I'll answer the last one, the heat. No, that's all organic.
Speaker Change #112: Actually, we wouldn't acquire customers from bankrupt dealers and such, but these are customers that are coming to us that may have had a bad experience with somebody else, a competitor, direct competitor, or somebody that got talked into cash only.
Speaker Change #109: Yeah, I just saw some checks suggesting there's shortages of Tesla batteries in the ecosystem here. I'm sure you or your installers have inventory at hand. I just want to understand if those shortages are impacting Q4 or Q1 for you guys.
Okay, so in terms of, we don't normally comment on a specific, and that's what I was trying to figure out, if it was more specific.
But we do have a very good relationship with Tesla. I think everybody is well aware of that.
and we've bought a lot of those little batteries over the years and we've bought a lot this year. We'll buy a lot in the fourth quarter and we don't anticipate problems. They've been a good partner to work with.
and others. Again, the equipment market is amply supplied.
and getting more so and getting more so quite quickly on the domestic side, you know, domestic manufacturing. So we got a number of valued partners there that make great equipment and new products are coming out all the time.
But we haven't seen any equipment availability issues that we didn't anticipate.
Speaker Change #108: Thank you.
Speaker Change #104: Thanks.
Thank you, we have no further questions. I'll hand back to John Berger for any closing comments.
John Berger: Thank you.
It is all about execution.
Execution on Flipping the Whip, Execution on In-Service, Execution on Asset Level Capital Closings, Execution on Efficiency.
Speaker Change #104: all coming together to drive execution on cash generation to pay down corporate debt.
Thank you for joining us, and Happy Halloween.
Thank you, this now concludes today's call. Thank you for joining, you may now disconnect your lines.