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Sunrun's (RUN) CEO Lynn Jurich on Q2 2017 Results - Earnings Call Transcript

Seeking Alpha logo Seeking Alpha 8/8/2017 SA Transcripts

Sunrun (RUN)

Q2 2017 Earnings Conference Call

August 7, 2017 5:00 PM ET

Executives

Patrick Jobin - Vice President of Investor Relations

Lynn Jurich - Chief Executive Officer

Bob Komin - Chief Financial Officer

Ed Fenster - Executive Chairman

Analysts

Brian Lee - Goldman Sachs

Collin Rusch - Oppenheimer

Earnings Call Transcripts© Provided by Seeking Alpha Earnings Call Transcripts

Vishal Shah - Deutsche Bank

Chirag Odhav - Bank of America Merrill Lynch

Joseph Osha - JMP Securities

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2017 Sunrun Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to turn the conference to Patrick Jobin, Vice President of Investor Relations, you may begin.

Patrick Jobin

Thank you, operator, and thank you to those on the call for joining us today. Before we begin, please note that certain remarks we will make on this conference call constitute forward-looking statements. Although we believe these statements reflect our best judgment based on factors currently known to us, actual results may differ materially and adversely. Please refer to the company’s filings with the SEC for a more inclusive discussion of risks and other factors that may cause our actual results to differ from projections made in any forward-looking statements. Please also note that these statements are being made as of today and we disclaim any obligation to update or revise them.

On the call today are Lynn Jurich, Sunrun’s Co-founder and CEO; Bob Komin, Sunrun’s CFO; and Ed Fenster, Sunrun’s Co-Founder and Executive Chairman. The presentation today will use slides which are available on our website, at investors.sunrun.com.

And now let me turn the call over to Lynn.

Lynn Jurich

Thanks Patrick. We’re pleased to share with you Sunrun’s second quarter financial and operating results along with progress against our priorities for 2017. In the second quarter we deployed 76 megawatts, generating $74 million of NPV, up 56% year-over-year. We gained market share and increased unit economics while maintaining our cash position above $200 million for the eighth consecutive quarter. A huge thank you to our customers and our employees for building the industry’s most soluble and satisfied customer base and delivering the financial and operating results to prove it.

We have now surpassed 1 gigawatt of deployed systems, we are most proud of what this means for our customers and deployment. We have helped families save over $150 million on their electric bills, proving that it doesn’t need to be inconvenient to help to feed extreme weather and climate change.

Our strong financial and operating results in the quarter were complimented by progress against our long-term strategic priorities and supported by an increasingly constructive regulatory environment.

Turning to Slide 6 now; Sunrun is focused on building long-term customer relationships and modernizing our inefficient and dirty $1 trillion energy infrastructure. We can both help our customers save money and better manage their energy while lowering prices for the entire electric system.

It’s a simple concept. Using the existing infrastructure of rooftop and delivering power right where it’s consumed is a more efficient model. When you add batteries and the power of the Internet, you can build a more resilient, secure, dynamic and efficient system to benefit everyone. This is starting to be realized faster than we expected, the cost improvements and innovation are stunning.

As you know, we continue to innovate with BrightBox, the first zero down solar plus storage-as-a-service offering for residential customers. Home owners benefit from backup power during power outages and can optimize when they can consume or export power to the grid. We have received over 2,000 BrightBox orders and installs are ramping nicely in Hawaii and California, more states are just getting underway.

There is also a value proposition for the electric grid at large as these resources can provide energy when and where it is needed most. Because our resources are located where power is consumed, they are at the most valuable locations on the grid and can improve stability through participation and capacity, energy in ancillary service market.

We can solve imbalances or acute congestion much more cost effectively than investing in centralized resources and transmission and distribution. And because we have a decade building customer relationships and a large install base, we are well positioned to deliver products that meet the needs of both homeowners and the utilities operating the grid. It is in fact this opportunity that we are exploring as part of a partnership with National Grid. We recently welcomed an industry veteran from Advanced Microgrid Solutions, Audrey Lee to help spearhead these initiatives as our Vice President of Grid Services.

And while we are still in the early phases of exploring monetization options, an initial analysis suggest that grid services could represent an additional 2,000 or more in net present value on top of the 7,000 value per customer today. In support of this feature, we were successful in securing grid services opportunities in PG&E’s DRAM program. While the program itself is small, our fleet of over 1 gigawatt of capacity is massive and growing.

Over the last few months we have also launched into seven new geographies, nearly doubling our available market size and establishing the foundation for long-term growth. We are particularly pleased to reenter Nevada after the state legislature unanimously approved the reinstatement of net metering. The voice of consumer is strong and clear, they want the ability to choose lower cost, predictable and clean energy options. While many view Nevada’s 2015 accident precedent-setting, the reversal sets an even stronger precedence that consumer choice for rooftop solar will be protected and regulated, but don’t get it right the first time will correct.

Retail net metering coupled with TOE rates and open-access print service markets is a sound and proven policy to encourage cost effective modernization of our grid, even up to high-levels of penetration of around 40%. In fact, over the last five years net metering has been protected or expended 32 times and only reduced 6 times. When NEM was reduced, it was often overturned when the full set of facts were appropriately evaluated.

Despite the media hype and well-funded lobbering [ph] efforts of many utilities, the adoption of distributed resources is the future. The market opportunity ahead remains massive. Residential energy sales is $175 billion annual market and there are more than 61 million single-family owner-occupied homes in the U.S., we are just 2% penetrated today, but we know the housing stock and customer interest supports much higher adoption. In Hawaii for instance, where the value proposition was first evident, 38% of houses have solar and adoption continues to grow.

I’ll now turn the call over to Bob Komin, our CFO to review Q2 performance in more details and discuss guidance.

Bob Komin

Thanks Lynn. In the second quarter we exceeded our deployment guidance and made solid progress on our 2017 goals. NPV was $1.10 per watt in Q2, resulting in aggregate NPV created of $74 million, representing 56% growth compared to the prior year. We delivered strong NPV per watt in Q2 and a solid first half of the year that sets us up well to achieve our dollar per watt target for all of 2017.

NPV per watt can fluctuate quarter-to-quarter given business mix and Q2 was somewhat favorable. We calculate NPV as project value less creation cost, so let’s go through each of the components next.

Q2 project value of $4.47 per watt was $0.26 higher than Q1, principally due to the mix of business in the quarter. As a reminder, project value is very sensitive to modest changes in geographic channel and tax equity fund mix. We expect project value will continue to decline slightly over time with cost declining more, although in the short run there can be quarterly fluctuations.

Turning now to creation costs on Slide 11. In Q2 total creation cost was $3.37 per watt, an improvement of $0.38 or 10% year-over-year. Similar to project value, creation cost can fluctuate quarter-to-quarter due to changes in geographic and channel mix. As a reminder, our cost stack is not directly comparable to those of peers because of our channel partner business.

Blended installation cost per watt, which includes both solar projects deployed by our channel partners, as well as by Sunrun improved by $0.10 or 4% year-over-year to $2.70 per watt. Install costs for systems built by Sunrun however were $1.87 per watt, reflecting a $0.40 or 18% year-over-year improvement.

Sunrun’s installation cost benefited from lower equipment cost this quarter as we worked through higher cost inventory. We expect installation cost to remain roughly stable owning to fluctuations in business as we remain on offense by investing in new geography and Grid services. We also expect the attachment rate of storage to increase which carries a higher per watt cost, but also delivers higher NPV.

In Q2, our sales and marketing costs were $0.54 per watt, a 37% improvement from the prior year, primarily driven by channel mix and our focus on the most cost-effective customer acquisition channels.

Next, G&A cost watt was $0.29 flat from Q1 and a $0.04 improvement from the prior year. These costs remain largely flat for the last several quarters. We expect to realize further operating leverage, with volume growth exceeding G&A cost increases over time, although, there can be quarterly fluctuations.

Finally, when we calculate creation costs, we subtract the GAAP gross margin contribution realized from our platform services. This includes our distribution, racking and lead generation businesses, as well as solar systems we sell for cash or with third-party loan. We achieved platform services gross margin of $0.16 per watt higher than Q1, due primarily to a slightly higher mix of solar system sales that have better gross margins.

In the second quarter, deployments increased 16% year-over-year to 76 megawatts, exceeding our guidance of 72 megawatts.The strength was primarily attributable to an increase in our channel volumes. Flexibility of our multichannel platform model continue to serve us well in the current market conditions.

As we’ve highlighted over the past year, we’re seeing more opportunities that are favorable to work with partners, while meeting our NPV and cash contribution goals. We did not manage to a specific mix for volume target, we instead prioritize realization of NPV. Our cash and third-party loan mix was a 11% in Q2, slightly higher than Q1, but in line with recent levels and our outlook of low to mid-teens. In Q2, our net bookings were 88 megawatts, an increase of 28% from the prior year. As a reminder, bookings are calculated net of cancellations.

Turning now to our balance sheet. Our liquidity position remains strong. We ended Q2 with $211 million in unrestricted cash, the eighth consecutive quarter we’ve been about $200 million. We believe we will increase our cash balance by the end of the year. Our primary objective is to maximize equity returns over the long run, while optimizing for the most efficient capital structure, balanced with near term cash generation. We plan to continue to invest in ramping new geographies and further increasing our market share.

Our cash generation outlook excludes any strategic opportunities or accelerated market entries beyond our current plan. Our primary objective is to optimize for the lowest long-term cost of capital and we focus first and foremost on the best execution of this financing, which could impact the timing of our cash balance on a specific quarter and measurement date.

Moving on to guidance on Slide 11. We remain confident in our growth trajectory with Q3 guidance of 88 megawatts, which reflects approximately 15% year-over-year growth for the first three quarters of 2017. We’re reiterating our guidance of 325 megawatts for 2017, reflecting a 15% growth rate year-over-year.

Our principal focus is generating approximately $1 of NPV per watt for the year. We continue to believe we can generate approximately $290 million in aggregate NPV in 2017, which is about a 35% increase from the prior year.

Before I turn the call over to Ed, I wanted to share an update on the independent review that we asked the Audit Committee to launch in June, following media claims about Sunrun’s historical practices relating to the timing and processing of customer cancellations. The Audit Committee completed its inquiry and determined that the claims in the Wall Street Journal report were unfounded.

Specifically, the committee concluded that; one, senior management did not instruct employees to hold back or delay the recording of customer cancellations; and two, representatives did not alter cancellation dates. Based on its review the Audit Committee expressed confidence in the company’s current cancellation processes and did not recommend any changes.

Now, let me turn it over to Ed.

Ed Fenster

Thanks, Bob. Today, I want to touch on three items. First, I will discuss gross and net earning asset figures for the quarter and how our use of cash equity with National Grid impacted these figures during the quarter. Second, I’ll report on what we see is a strong project finance environment generally. And third, I’ll provide an update on the Section 2014 trade case and how Sunrun is positioned.

Turning first to our installed asset base. We’re pleased to report that as of June 30, net earning assets rose slightly to $1.1 billion, reflecting a 29% year-over-year increase. net earning assets totaled $10 per share. As a reminder, net earning assets represent the present value of cash flows that Sunrun Inc expects to receive from our fleet of deployed solar systems after deducting our estimated operating and maintenance costs, project level debt service and distributions to cash equity and tax equity partners.

The use of cash equity capital, such as the National Grid partnership increases our corporate cash balance compared to the use of just non-recourse debt. As I mentioned last call, growth in net earning assets slows as we utilize cash equity, because the solar facilities in such partnerships are largely monetized upfront.

This quarter, we continue to contribute certain assets to the National Grid partnership, which resulted in high upfront monetization of those assets within the range previously guided. As a result, in the quarter, we generated approximately $20 million in restricted and unrestricted cash, offset by a final payment of $9 million for our 2015 acquisition of Clean Energy Experts, resulting in a net increase in total cash of about $11 million during the quarter.

We expect to be able to increase cash, while adding to net earning assets between now and year-end. Including executed term sheets, we have tax equity capacity into the second quarter of 2018 and back-leverage capacity into the fourth quarter. We continue to see robust interest from tax equity providers and lenders in providing Sunrun additional capital.

We observe improving terms for back-leverage project debt and in particular non-recourse subordinated or term loan B debt. Non-recourse term loan B debt may increasingly allow us to achieve much of the proceeds benefits of cash equity, while allowing us to maintain more flexibility in long-term upside, as capital costs continue to fall.

At the same time, there is a growing market for cash equity. Particularly, as we further improve our development margins, we see non-recourse fee loans or cash equity transactions as potentially part of our capital strategy. While we have capacity remaining within the National Grid partnership, we continuously consider options to balance our goals of maximizing long-term equity returns, minimizing our capital costs, and exposure to changes in base interest rates and providing attractive upfront cash flow dynamics.

I turn now to my final topic on Slide 14, the Suniva trade case. Sunrun is actively involved in the case to the Solar Energy Industry Association and as a direct participant in the case. A diverse group of unusual bedfellows, including the Heritage Foundation, the American Legislative Exchange Council, the Solar Energy Industry Association and many utilities have all taken actions in opposition to the petition.

America needs and the president who has promised to provide jobs that cannot be automated or exploited, and they create opportunity for all Americans. The U.S. solar industry now employees more than 260,000 workers, up almost fourfold since 2010, who reside in thousands of communities across the country. 99% of U.S. solar jobs are outside of solar cell manufacturing.

As details on the slide, the procedural hurdles for the petitioners are real and the opposing coalition is strong. That said, we have module supply secured through 2017 and have already established frameworks for a large portion of 2018 volumes and terms that remain favorable for Sunrun. We remain comfortable with our overall outlook on equipment cost reductions at about $0.15 by the end of the year.

I’ll now turn the call back to Lynn for closing remarks.

Lynn Jurich

Thanks, Ed. It is truly amazing what we can do with technology in the sun. The solar eclipse highlights just how bright the future will be. The sun is one of the most reliable and predictable energy sources in the world, just think about it. At any given place on earth, the sun on average takes a break once every 300 to 400 years, and we know about it well in advance.

In contrast, our aging fossil fuel plants are riddled with unexpected outages and our nuclear plants are being abandoned after years of delays and billions of dollars wasted. We build clean power assets in as little as one day on budget and capable of generating low-cost power within hours.

Operator, please open the line for questions.

Click here to read question and answer session

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