Sunnova Energy International Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2023

There are 18 speakers on the call.

Operator

Morning, and welcome to Cenovus' 2nd Quarter 2023 Earnings Conference Call. Today's call is being recorded, and we'll have an allocated an hour for prepared remarks questions and answers. At this time, I would like to turn the conference over to Rodney McMahon, Vice President, Investor Relations at Cinnova. Please go ahead.

Speaker 1

Questions. Thank you, operator. Before we begin, please note during today's call, we will make forward looking statements that are subject to various risks and uncertainties that are described in our slide presentation, earnings press release and our 2022 Form 10 ks. Please see those documents for additional information regarding those factors questions that may affect these forward looking statements. Also, we will reference certain non GAAP measures during today's call.

Speaker 1

Please refer to the appendix of our presentation questions, as well as the earnings press release for the appropriate GAAP to non GAAP reconciliations and cautionary disclosures. On the call today are John Berger, Sunnova's Chairman and Chief Executive Officer and Robert Lane, Executive Vice President and Chief Financial Officer. I will now turn the call over to John.

Speaker 2

Good morning and thank you for joining us. Sunnova achieved record growth in customer additions in the Q2. This outstanding performance can be attributed to the strong demand questions for our comprehensive suite of services, the continued growth of our dealer base and the expansion of our addressable market and market share. Questions. What sets Cenova apart and fuels our growth is our unique business model, exemplified by an unwavering commitment questions.

Speaker 2

While solar forms the foundation of our existing customer base, questions. We have observed a growing trend among newer consumers. We see homeowners seeking a broader range of services that go beyond panels on the roof. Questions. To meet this evolving demand, we have introduced innovative solutions such as the Sunnova Adaptive Home and the Sunnova Adaptive Business, questions which combine advanced technology to optimize energy usage for homeowners and businesses as well as Cinnober repair services questions.

Speaker 2

Underpinning our commitment to providing exceptional customer service is our 24 hour response time for our customers currently in 4 markets. We have plans to expand to 7 markets by the end of this year, questions, which is expected to cover 70% of our customer base. This rapid expansion of our 24 hour response time will help us to solidify our position as the fastest service delivery leader while expanding our Synova repair service business. Questions. Our ability to navigate macroeconomic financial conditions, regulatory changes and market trends, questions.

Speaker 2

All the while focusing on the customer is unmatched in our industry. One market trend we are actively involved in questions. In the current equipment cycle, falling prices coupled with our open equipment platform and our strong relationships with best in class manufacturers has empowered us to access top quality equipment at favorable pricing, questions, thereby enhancing our scalability and market competitiveness. To get a sense of how drastic price declines have been so far this year, questions. At the end of 2022, the average equipment stack consisting of panels, inverters and a battery for an 8 kilowatt system questions.

Speaker 2

And one of our major markets priced around $15,100 Now that same composition of equipment questions. Can be purchased for approximately $9,500 a reduction of 37%. This notable price questions. This shift translates to the equivalent of a 330 basis points decrease in the cost of capital, which will inure to the benefit of both the consumer questions in the form of lower pricing as the majority of the cost savings will be passed through to them and service providers like Cinnova questions. In the form of consumer demand upside as long as the service provider has managed their inventory properly and operate an open equipment platform.

Speaker 2

Questions. Slide 3 showcases the continued growth in Cenovus customers, solar power generation and energy storage under management, clarity and expiration date on origination and expected cash inflow over the next 12 months. During the second quarter, questions. We placed over 39,000 customers into service, which brought our total customer count as of June 30, 2023 questions. To 348,600 and brought our megawatt hours under management to 869 and total solar power generation under management to 2.1 gigawatts.

Speaker 2

As a reminder, we will count a customer only questions after they have been placed into service and we have an ongoing economic relationship with the customer. If the economic relationship ends, questions. Additionally, we will count a customer only once regardless of the number of services we provide to them. Our growth is fueled by our dedicated dealers. In the second quarter, we added another 2 16 dealers bringing the total count questions to 1592 as of June 30, 2023.

Speaker 2

Our strong customer additions questions. During the first half of the year, our continued robust originations and our conservative customer count methodology questions. Gives us the visibility and confidence to increase our customer additions guidance for 2023 by 10,000 customers at the midpoint and issue preliminary 2024 customer growth guidance of 40% over 2023. Questions. Given the timing of when these customers go into service, we expect the bulk of the financial benefit of the customer additions to accrue to Cinnova in 2024 and beyond.

Speaker 2

Questions. We are furthering our growth by upselling our existing customers additional services and are tracking this growth effort through our services per customer metric, questions, which stands at 3.5 as of June 30, 2023. We continue to target 7 services per customer by the end of 2025. Additionally, our battery attachment rate on origination was 32% in the second quarter questions. And as of June 30, 2023, we reached 3,173 battery retrofits live to date.

Speaker 2

Questions. Finally, we have updated our customer contract life and expected cash inflows. As of June 30, 2023, questions. The weighted average contract life remaining on our customer contracts equaled 22.2 years and expected cash inflows from those customers over the next 12 months increased to $597,000,000 By focusing on being an energy as a service company, questions. We have successfully differentiated ourselves and we are building a reputation for reliable and responsive service.

Speaker 2

Questions. Detailed on Slide 4, Cinnova's growth strategy is built around the following key opportunities. In the U. S, We estimate there are approximately 108,000,000 homes that could become Sunnova adaptive homes. With only a 4% solar market penetration rate, questions.

Speaker 2

There is significant untapped growth potential for Cinnova. By aggressively expanding our operations, we are determined to establish our presence questions. In all, 55 U. S. Markets by the end of 2024 to take full advantage of this untapped opportunity.

Speaker 2

Questions. Our larger footprint will also lower our concentration risk and reduce our exposure to region specific concerns questions such as the recent change in the net metering tariff in California. Of the roughly 4,000,000 homes that have solar in the U. S, questions. Approximately $2,500,000 of them lack a service provider, creating additional market opportunity for Cinnova questions through our Synova repair service business.

Speaker 2

Based on our analysis, we have determined that these systems typically require at least one truck roll every 3 years, questions, resulting in a substantial revenue potential of approximately $1,000,000,000 per year when considering an average ticket price questions of approximately $1100 While our current focus is on providing repair services to residential systems, questions. There are opportunities to expand this capability to our Sunnova Adaptive Business customers and future European customers. Questions. The Synova Adaptive business market opportunity is vast, encompassing approximately 2,600,000 businesses that could benefit from our solutions. Questions.

Speaker 2

Our goal is to expand our presence into all 55 U. S. Markets by the end of 2024, positioning Sunnova as a leading provider questions. And finally, with an average EU energy cost of €1,61,000,000 per watt and approximately 66,000,000 potential Sunnova Adaptive Homes questions. And an estimated solar revenue opportunity of €462,000,000,000 the European market presents questions.

Speaker 2

We will now begin to see a substantial opportunity for Cinnova as we look beyond the U. S. And its territories. Additionally, a move internationally will further reduce our exposure questions to U. S.

Speaker 2

Specific challenges and open Sunnova up to more regulatory and consumer choice friendly markets. Questions. We will be nimble and opportunistic about capitalizing our growth opportunities overseas and we intend to be methodical in our approach. Questions. As of now, our 2024 customer projections do not include Europe.

Speaker 2

In addition, questions. We have determined that the rapidly growing Cinnova customer base, particularly the storage and load management assets, possess substantial untapped financial potential questions as it pertains to existing accessible wholesale markets and emerging opportunities in other wholesale markets. Questions. As highlighted in Slide 5, our expanding optimization and modernization expertise extends into wholesale power, grid services and questions. Leveraging our Cinnova Sentient platform and.

Speaker 2

And employing realistic addressable market and attachment rate scenarios, we project that Sunnova Energy Services has the capability to generate cumulative revenues of $1,000,000,000 by 2,030. With our primary focus on delivering outstanding value to our customers and shareholders, questions. We continue to drive revenue growth, provide great service to minimize capital loss and strengthen our brand. Questions. Our unique model serves as the foundation for these goals, allowing us to meet our customers' expectations regarding power reliability and affordability.

Speaker 2

Questions. As we move forward, we are committed to investing in innovative technologies, operational efficiencies and logistical capabilities to enhance the quality and responsiveness of our services. I will now hand the call over to Rob, who will walk you through our financial highlights.

Speaker 3

Questions. Thank you, John. Starting on Slide 7, you will see our 2nd quarter financial results. We captured 17% of our questions. We expect that annual adjusted EBITDA together with the principal and interest we collect on solar loans in the second quarter, slightly below our guide of 20%, questions.

Speaker 3

We're also pleased to announce that we're making progress on our results. We're also pleased to announce that we're making progress on our results. We're making progress on our results. We're making progress on our results.

Speaker 2

We're making progress on our results.

Speaker 3

We're making progress on our results. We're making progress on our results. We're making progress on our results. We're making progress on our questions. Primarily due to a lower than expected contribution from inventory sales to our dealers, materially better credit terms from several vendors and questions.

Speaker 3

And a concerted effort to collect accounts receivable and lower inventory orders rationalize our working capital position, and we fully expect increased inventory gain on sale contributions in the 3rd 4th quarters. Additionally, questions. In the Q2, we recorded a $15,700,000 impairment. A portion is due to the purchase of a product that was ultimately found to be impractical for questions. The vast majority of residential rooftops and the manufacturer is no longer on our approved vendor listing.

Speaker 3

We will responsibly recycle what equipment we cannot donate to charities. On Slide 8, you can see the steps Sunnova recently took to strengthen its access to capital. Questions. Thus far in 2023, we have added $255,000,000 in additional tax equity funds as the tax equity market remains healthy. Questions.

Speaker 3

We continue to utilize tax equity partnerships. However, we are engaged in several potential transactions to sell tax credits questions in the current quarter and in the Q4 in order to diversify our funding sources. Also during the year, questions. We have expanded our warehouse capacity by $535,000,000 while securing amendments to keep pace with our evolving origination Entered into $611,000,000 in asset backed securitizations entered into a $50,000,000 secured revolving credit facility questions. We will now begin to announce a conditional commitment by the U.

Speaker 3

S. Department of Energy Loan Programs Office. Questions. Included in our $510,000,000 of liquidity as of June 30, 2023 are both our restricted and unrestricted cash as well as the available collateralized liquidity we could draw upon from our tax equity and warehouse credit facilities. Given available unencumbered assets as of June 30, 2023, this available collateralized liquidity equaled $104,000,000 questions.

Speaker 3

Beyond that, subject to available collateral, we had $215,000,000 of additional capacity in our warehouses and open tax equity funds. Questions. Combined, these amounts represent $725,000,000 of liquidity available exclusive of any additional tax equity funds, securitization closures, in the money interest rate hedges, further warehouse expansions or other sources of liquidity during the year. In addition, we expect to close at least 4 more amendments, extensions and new capital sources in the next 30 days, questions. On Slide 9, you will see our fully burdened unlevered return on new origination Increased 10.9 percent as of June 30, 2023 based on a trailing 12 months.

Speaker 3

Clarity. On a quarter to date basis, this return equaled 11.1%. We are forecasting further increases to our fully burdened unlevered return questions over the remainder of the year as we have seen positive trends as this return equaled 11.6% over the last 30 days. Questions. This more recent increase is partially driven by the addition of a limited amount of IRA adders, leaving room for further gains as adder guidance improves and equipment manufacturers establish manufacturing capabilities in the United States.

Speaker 3

Additionally, we anticipate a slightly lower tax equity cost capital in the upcoming quarters and we have recently implemented several price increases with additional price increases going into effect next month. Questions. With these combined factors, we are closing in on our target 12% fully burdened unlevered return. The implied spread for the trailing 12 months decreased questions. 4.5 percent as our weighted average cost of debt over the past 12 months increased as older securitizations have fallen away, Even though our marginal cost of debt has decreased relative to the Q4 of 2022, given the impending impact of our Department of Energy loan guarantee questions.

Speaker 3

With our continued extremely low capital loss rate and market signals of falling inflation and slowing growth, we anticipate that our marginal weighted average cost of debt is more likely to fall as we approach 2024. Slide 10 reflects the strong growth we have seen in our net contracted customer value or NCCV. Questions. At a 6% discount rate, NCCB was $2,650,000,000 an increase of 39% compared to June 30, questions. Our June 30, 2023 NCCB at this discount rate equates to approximately $7,600 per customer and $22.76 per share.

Speaker 3

As higher fully burdened unlevered returned assets start going into service, We expect this to be very accretive to MCCV in the second half of the year. Slides 12 through 14 provide our 2023 guidance and liquidity forecast questions. As well as our major metric growth plan, the triple, double, triple. As John noted earlier, our sustained robust growth and ongoing demand have prompted us to update our questions. We are increasing our guidance range by 10,000 customers at the midpoint, questions.

Speaker 3

Resulting in an updated range of 135,000 to 145,000 customer additions for the year. Questions. We anticipate that the financial impact of this increase will be fully realized in 2024 and beyond. Questions. For the past two and a half years, we have been using gain on sale activities and accelerated customer payments to complement our recurring cash flows.

Speaker 3

Questions. Coming into 2023, we expected approximately 24% of our customer cash inflows to come from these activities questions. Through a combination of cash and other direct sales such as inventory sales, repair services, new home sales, forward flow activities, credit. Based on our most recent forecast, we continue to estimate a similar contribution from these activities, questions. Although slightly more back in weighted than initially estimated.

Speaker 3

This back in weighting is primarily due to slow guidance from treasury on the ITC sales and other parts of the IRA. As such, there is no change to our full year 2023 adjusted EBITDA or principal and interest from Solar Loans guidance. Questions. As of June 30, 2023, 98% of the midpoint of our total 2023 targeted customer revenue And principal interest we expect to collect on the solar loans was locked in through existing customers as of that same day. Due to our growth exceeding expectations, questions.

Speaker 3

We're updating our liquidity forecast, which can be found on Slide 13, to include a $500,000,000 corporate capital raise by the end of this year, clarity. Primarily to fuel the outsized origination we are currently experiencing and which is driving our customer count expectations for 2024. Questions. Our current expectation is 85 percent of the potential $500,000,000 of corporate capital expected to be raised by year end We'll be debt in the form of a high yield bond and 15% of the $500,000,000 of corporate capital will be common equity. Questions.

Speaker 3

However, this may change due to market conditions. As we expect this market growth trend to continue into 2024 for 2025, questions. We felt it prudent to now plan for another potential $500,000,000 corporate capital raise in 2024, again subject to realized growth over the next year and market questions. We currently expect that raise to take advantage of the expected significant growth of levered cash flows to the equity to support an additional bond issuance. Questions.

Speaker 3

As a reminder, our capital strategy is to use a combination of corporate capital, which is primarily corporate debt supported by our contracted cash flows and questions. And asset level debt raised to the institutional asset backed securitization market. This structure gives us the lowest cost of capital with the least amount of risk. This is especially true over the past few quarters as the spreads between different credit attachment points in the ABS market are significantly wider than those observed questions. As we are refreshing our expiring S3 secondurity shelf, we will also be papering an ATM program questions.

Speaker 3

To allow us opportunistic and low cost access to equity capital with maximum flexibility over a multiyear period. Questions. In addition to the potential to utilize the ATM on an as needed basis to fund opportunistic smaller acquisitions, including potential opportunities in Europe, questions. We may also use the program for core customer growth. However, the program is used, we will be clear and transparent with the market on its potential utilization.

Speaker 3

Questions. Over the years, we have elected to primarily retain our assets and cash flows, which has benefited us in the form of default and delinquencies questions coming in well below market expectations. It has also given us the ability to receive a corporate rating allowing us to issue a corporate bond and questions. Due to these benefits, we have not sold any assets out of our securitizations, questions. A practice that will only become more accretive once our DOE loan guarantee is active.

Speaker 3

As such, it currently appears that issuing a small portion of equity and questions. And a second corporate bond by year end is the most efficient cost of capital approach to fund our rapid growth. Furthermore, scaling our operations plays pivotal role in enhancing our operating leverage. Although we have observed increases in operating expenses over recent quarters, We anticipate the rate of increases of expenditures will reach its peak by year end, resulting in improved operating leverage beginning in 2024. Questions.

Speaker 3

The revenue and margin growth is following this spending, which was and is primarily directed towards initiatives such as software development to enhance questions for the customer and dealer experience and energy services. Investments were also made to bring our service response times from multiple weeks and in some cases months questions. To 24 hours in most cases for at least 70% of our customer base. These investments are coming to an end as we expect to be at our desired service levels by year end. Questions.

Speaker 3

Before turning the call back over to John, I wanted to give more visibility on Sunnova's in CCV metric and the embedded levered cash flow profile over the next questions. For our analysis, we expect to generate $100,000,000 per year of levered cash flows for the next 10 years, questions. Increasing to $170,000,000 per year beginning in year 11. This is inclusive of our current capital loss rate and servicing our corporate and convertible bonds, questions. But does not include assets currently not in securitizations, accessory loans, service revenues and other gain on sale activities or expenses.

Speaker 3

Questions. We expect that this will cut our existing ABS debt in half by 2,031 through scheduled amortization payments and continuation of our capital loss rate, generate sufficient cash to the equity to allow even further pay downs of debt above the scheduled payments questions, expand our levered cash flow profile to follow directionally with the rapid increase of our asset base, Which is currently expected to triple by the Q1 of 2025, provide the option to monetize forward cash flows to pay down debt faster and assist in bringing our debt to asset ratio back down to our targeted 55% to 60% over time. I will now turn the call back over to John.

Speaker 2

Thanks, Rob. As we celebrate our 4th IPO anniversary this week, we reflect on the remarkable growth our team has achieved since becoming a public company. Questions. Driven by our commitment to enabling energy independence through clean, affordable and reliable energy services, Sunnova is steadfast in its pursuit of financial and operational excellence. Our dedicated team is comprised of individuals who possess extensive knowledge of the renewable energy landscape and who share a profound passion for creating a positive impact both globally and on our bottom line.

Speaker 2

Embracing our collective entrepreneurial mindset, questions. We capitalize on opportunities, expand to new markets and adapt swiftly to the evolving dynamics of our industry. Questions. Our growth has been remarkably strong, outstripping our original expectations. For example, our originated capital for June of 2023 customer growth during the same time period was 800% higher.

Speaker 2

This month alone, every 72 hours, questions. We've been originating the same amount of value that we originated during the entire month of June of 2019. Questions. Our critical advantage as an energy as a service leader is supported by service, scale and the retention of long term contracted cash flows. Sunnova's growth is propelled by multiple factors across various key areas.

Speaker 2

In terms of geography, questions. We have a goal of being in all 55 U. S. States and territories for both residential and business markets by the end of 2024. Questions.

Speaker 2

Additionally, international expansion further positions us for substantial geographic risk mitigation and growth opportunities. Questions. As a leading energy as a service provider, Sunnova offers a comprehensive, sustainable and streamlined approach to energy services for homes and businesses. Questions. We simplify an increasingly complex and multifaceted service offering.

Speaker 2

With our approach, questions. Customers no longer need to worry about the upfront costs, maintenance or technical intricacies of how they power their homes and businesses. Questions. Instead, they can rely on Sunnova as their trusted energy partner, gaining access to reliable, affordable and sustainable energy solutions. Questions.

Speaker 2

With the Sunnova Adaptive Home, we are pioneering innovative services that integrate solar power, battery storage, energy control and management technologies, electric vehicle charging, generators and more for the consumer. This comprehensive approach not only makes clean energy more affordable, questions, but also enhances reliability and resiliency, enabling us to meet the evolving needs of our customers. Questions. By providing exceptional service and addressing our customers' unique needs, we have distinguished ourselves as a leader in the market questions and are fostering lasting customer loyalty and sustainable revenue streams. This customer centric approach questions.

Speaker 2

Not only fuels the growth and prosperity of our company, but also bolsters our long term cash flows by minimizing clarity on our capital loss rate and increasing

Speaker 4

our

Speaker 2

cash flow per share. Moreover, our ability to deliver this level of service at scale questions. And an industry that has historically overlooked service issues further drives profitable growth that is capital light and highly scalable. Questions. Finally, our financing strategy contributes significantly to our growth trajectory.

Speaker 2

By adopting an agnostic approach to lease, loan or PPA contracts, we provide diverse financing options to our customers. Moreover, questions. Our software supported systems facilitate seamless transition between different contract types, empowering our dealers to adapt swiftly to market demands and questions. Our growth engines are firing on all cylinders

Operator

Our first question for today comes from Andrew Pakoco from Morgan Stanley. Andrew, your line is now open. Please go ahead.

Speaker 5

Great. Thanks so much for taking my question and congrats on another strong quarter here. I just wanted to hone in on Slide 13 and questions. And just the funding needs for 2023 2024, it looks like based on that slide you have roughly $700,000,000 or so of a funding hole Combined in 2023 2024 and you're outlining roughly $1,000,000,000 of corporate capital from here. Can you just maybe explain what the delta in that 300,000,000 will be used for is that the prefund Europe growth.

Speaker 5

If you could just maybe talk through that. And this is a quick follow-up to that. You guys are talking a lot about price declines, hardware cost declines, and passing a lot of that along to the end customer. Can you maybe just explain that rationale? Why not maybe absorb some of that yourselves and securitize more of those cash flows to reduce corporate capital needs?

Speaker 5

Thanks.

Speaker 3

Yes, this is Rob. I can go ahead and sort of cover, I think maybe both of those. The idea behind using the high yield bond to fund questions. Those deeper credit attachment points with a much lower cost of capital is to both utilize that lower cost of capital and to Unlock the cash flows and let them go to the corporate just up from the trusts. If we use the Deeper credit attachment points, not only is the cost of capital much, much higher, we're talking about a delta of as much as questions.

Speaker 3

10 points or 1,000 bps between what you could find in the corporate market versus what is potentially available In the ABS market at a BB or a single B theoretical attachment point. So it's a much more efficient use of the cost of capital questions. To use the corporate bond and even a little bit of the equity that we're looking at, that is twofold. 1, questions. It helps enhance the credit value to the rating agencies of that high yield bond and helps to maintain our credit rating.

Speaker 3

And questions. And 2, just like we've talked about, it's just good hygiene for us to be able to have that there. But the biggest thing about questions. What's the delta? Why do you show $700,000 versus $1,000 Remember, most of that high yield bond is going to be able to fund that delta questions that we would otherwise do with a BB attachment point within the securitizations, but that's also feeding into 2025.

Speaker 3

So whenever we do a corporate capital raise, it's not to fill a hole for a specific year, it is to provide growth For the stub of that year and well into the next year.

Operator

Questions. Our next question for today comes from Julien Dumoulin questions from Bank of America. Your line is now open. Please go ahead.

Speaker 4

Hey, guys. It's Alex Just questions. When we think about where the growth is coming from this year, obviously, you guys not only seeing it seems like a lot of growth in sort of your legacy segments, but also new verticals. I'm curious if you can just sort of expand on what you're seeing. I saw the breakout of service for the first time.

Speaker 4

It looks like we're seeing a lot of the Just curious as far as I mean where you're seeing the growth, what's driving it and how that's informing your view On 24 and the need for additional capital to fund all of those verticals before I guess considering Europe on top of that? Thanks.

Speaker 2

Questions. Alex, this is John. Yes, things are pretty strong across the board. I would say with the possible exception of California and questions. Running a little north of 20% down for us, but the offset there is the attachment rate is zoomed much higher.

Speaker 2

I think question rate is zoomed much higher, I think 42% or so for the quarter with some of that quarter having NIM 2.0. So I think most days we're pushing well past 50% to 60% attachment rates. So the overall capital deployed is not down as much because you're deploying more Value or capital per customer. The service business is why we broke it out is just killing it. There is So much demand out there.

Speaker 2

There's a lot of broken systems. Everybody that just took a loan from a provider needs service. And questions. And so we're cleaning up a lot of messes. There's a lot of broken systems.

Speaker 2

Power is not flowing out there. We're assisting some of our other partners as well. So there's a lot of business out there for scale operation. You have to be really big, the logistics, supply chain and the technicians questions. So the labor force plus all the software that you need to be able to operate something like this is huge.

Speaker 2

And definitely, questions. We're seeing a pretty nice pickup there. In terms of accessories, generators and EV chargers and load managers, There's a ton of demand from our existing customer base, which will hit on more and more as we move into 2024 in terms of upselling as these new products come to market as we have time to plug those new products and the data into our overall software platform. And questions. And we're also seeing a tremendous amount of growth in areas that we didn't expect, for instance, new homes.

Speaker 2

Questions. We're very bearish on new homes going into this year. That was wrong. Things have gone very well and including on bookings that We will not see until 2024. The durations for new homes is quite a bit longer than the retrofit.

Speaker 2

Questions. The other growth channels are more states, more geographies. So this questions. Power as a service is growing and it's spreading into the middle part of the country. In other states in the Southeast questions.

Speaker 2

The Southwest is strong for us. And if you look at to one of the top reasons why, questions. It's the movement from loan to lease and PPA. It is just we're dominating in the southern parts of the United States. Puerto Rico is doing very well.

Speaker 2

The Northeast is doing well. In fact, it's picking up steam. And even parts of the questions. West, if you however you consider Arizona, consider Southwest, but that's done well as well. So there's a lot of growth in a lot of areas.

Speaker 2

Business markets, Little bit slower than we expected, but still we're seeing some growth there. So again, as you said, discharging on all batteries, we're really we're hitting stride. And questions. At the end of the day, you've got a lot of growth. It's profitable growth.

Speaker 2

We continue to raise our unlevered returns. They are fully burdened. And questions. And we see the cash flows that are coming out with our levered cash flows, it needs more capital, mostly on the debt side, some on the corporate debt side, some on the asset level debt side. Questions.

Speaker 2

A little bit maybe on the equity. We'll see. It depends on what market conditions are in the corporate debt market and so forth. But I think all in all, questions. A huge amount of growth, huge guidance upside for this year, for next year.

Speaker 2

I think it's pretty much questions. And a little bit of capital that we need to go out there and raise that we didn't already have forecasted. So Pretty darn good trade.

Speaker 4

Yes, fair enough. Just one follow-up, but just on the service segment specifically noticed that the revenue stepped up quite a lot after you guys added I think over 6,000 customers in the 4th quarter. Questions. Is this sort of a heuristic we should be thinking about moving forward? I mean, I guess, what, dollars 20,000,000 revenue at 2Q, pretty impressive.

Speaker 4

Questions. I guess

Speaker 6

how should we just

Speaker 4

sort of think about revenue conversion off of that mix of customers being added? Thanks.

Speaker 2

I think we can give you a little more detail later on. But yes, we do see that business, as I said earlier, growing quite strongly. And questions. And I don't want to confuse that with the overall energy services as we term it or VPP or grid service, aggregation services. It goes by many different names, right?

Speaker 2

We have the largest book of business in that area and we see just an enormous amount of opportunity there, especially with the batteries. Questions. So it's really more focused on the megawatt hours under management than the megawatts. Megawatts kind of basically just think about it as fuel for the tank that is the battery. So battery is more critical and key into unlocking the overall energy services and realizing the integration between the behind the meter and in front of the meter.

Speaker 2

So We'll do a little bit as we get build that business up rapidly as we talked about. We expect to have about $1,000,000,000 cumulative by the end of the decade. Questions. We'll do a little more of an effort to break that out for you as well.

Speaker 4

Got it. Appreciate it. Thanks guys. Take a wrap up 1.

Operator

Questions. Thank you. Our next question comes from Philip Shen of Roth MKM. Philip, your line is now open. Please go ahead.

Speaker 7

Hey guys, thanks for taking my questions. First one is on pricing power. You questions. You talked about raising prices in your remarks. How much longer do you think you can increase prices with power prices peaking?

Speaker 2

Questions. Hi, Phil. This is John. I do think that power rates are peaking with the utilities. I will point out though that clarity.

Speaker 2

There is a growing recognition and I think regulators are a little miffed, but the utilities are not lowering rates really Pretty much across the board. In fact, many are going in for rate increases, which has a lot of people's head scratching. They really shouldn't be scratching your head. Utilities are very inefficient. They didn't raise rates as much as the fuel costs went up last year.

Speaker 2

And so by definition, they're going to questions. And we'll have an allocated an hour for prepared remarks and questions. And we'll flow through those increases in costs over a multiyear period. So, they didn't go up as much as the natural gas questions. And coal and such went up last year, but they're not going to go down as much as natural gas and coal.

Speaker 2

So there's really, I think, a large misunderstanding of how the questions. And so we could see some and we expect to see some marginal questions. As we go into the back part of this year into next year, overall, I would say that, it has never occurred where you questions. We have falling energy prices and rapidly rising overall inflation. That would be the first time in history.

Speaker 2

So I guess anything can happen, but it doesn't make any logical sense either. So that would mean that the overall inflation rate would trend off If the overall energy prices, hydrocarbon prices in particular stay very low. Now there's another phenomenon that could occur, which is the energy, specifically oil, natural gas, questions. As those inventories tighten up some more as we've seen, those prices actually rise as the economy declines due to pressures from the global central banks and questions. And you could actually have a situation where the power rates start to move up more than we think and the cost of capital drops due to the overall economy moving into recession.

Speaker 2

So in terms of what we're planning for, we're not planning for any additional rate hike and price hikes, questions. But we are expecting to see a lot more of the ITC adders coming in play, including the domestic content. In fact, we have more confidence in that even over the last 48 hours than we had before. So we see the ability to continue to move up FUBER quite nicely, questions. The fully burdened unlevered return.

Speaker 2

And we may get a little more price increases. I didn't expect to be able to do some of this next month, but It's possible that we could see some more, but I would count on we probably have seen the peak at this point in time in this cycle.

Speaker 7

Got it. Thanks, John. A couple of follow ups here. Why was your NCCV questions. Flat when GCCV went up by $600,000,000 Is it just a timing issue?

Speaker 7

And then, can you talk about the number of accessory loans, direct sales and the

Speaker 2

quarter. Thanks.

Speaker 3

Yes, I'll cover the MCCV. Part of that was that the GCCV did go up, but a couple of other things did go down. You'll notice that the net inventory came down a little bit. And questions. And then part of it was that the some of the timing of the tax equity.

Speaker 3

So the tax equity is going to be used as a source of funding, questions. But it doesn't count against the NCCV. It gets incorporated into the GCCV when it happens. And then there's also the timing of how and when things go into service and what goes into service when. So we had a lot of sort of the last of the legacy loans questions.

Speaker 3

That we had originated last year going to service, a lot of those had been stuck in certain parts of our queue. Questions. As far as the getting actually commissioned, we did a really great effort that started late in the quarter of Again, a lot of those commissioned moved into the in service block, but some of those were some of the lower FUBER like the 10% FUBER Type of assets, you see is 11% and 11.5% Fruber assets start going into service, you're going to see a much bigger pickup there In the NCCV and that's all contemplated in our projections and how we're viewing the triple, double, triple. I'll let John handle the other one.

Speaker 2

Questions. Yes, Phil. On the accessories, as price declines have been pretty significant in batteries and we expect that to continue. Questions. We're seeing a lot more consumer demand come in, which shouldn't be surprising.

Speaker 2

And then we're lighting up new products. There's an awful lot of manufacturers around the questions around the world that have come up with new innovative products. There is a it appears that there is a lot of companies making a lot of batteries Now, it doesn't mean that everybody makes a great battery, but there are certainly a ton of firms and manufacturing a questions. And then also on the solar module side, inverter side, questions. There's a lot more players, if you will, that are pretty strong.

Speaker 2

And they're also coming to play for like load management, EV charging and so forth. So questions. You should continue to see pretty rapid growth in the accessories, both in upselling the existing base and then on a forward basis. So questions. We again see that as a high growth area, part of our Cinnober Adaptive Homes, Cinnober Adaptive Business.

Speaker 2

And questions. And I think I'll just leave it at that.

Speaker 8

Great. Thanks guys. Questions.

Operator

Thank you. Our next question comes from Brian Lee of Goldman Sachs. Brian, your line is now open. Please go ahead.

Speaker 9

Hey, guys. Good morning. Thanks for taking the questions. The first one was just around some of the guidance metrics. I guess, questions.

Speaker 9

This is the Q2 in a row where you guys have raised the growth targets for this year, questions. But your EBITDA and some of your other metrics aren't changing. So I know there's a lot of moving parts here. Your customer mix is changing. You've got loans, lease, service, etcetera.

Speaker 9

Questions. Can you kind of walk us through the EBITDA implications of different types of customers? And then I guess the simple question of why having 20,000 more customers potentially doesn't move the needle this year on any other metrics. And then I have a follow-up.

Speaker 2

Yes, Brian, this is John. Questions. It's the same as it's always been. We don't count a customer until they're in service and then we recognize the revenue or the P and I if it's a loan customer questions. Over several years, 25 years mostly, right?

Speaker 2

So it's pretty simple. The closer you get to the end of the calendar year, By definition, you're going to get very little revenue out of that customer that you added to the guidance, but you'll pick up the full amount of that questions. And that's what we expect and we listed out that very clearly in the script. So questions. Nothing more than it has been for years.

Speaker 2

It's the same dynamic. In terms of questions. Some of the other pieces of revenue, gain on sale that we've planned in there upfront during the year said questions. In about the mid-20s, I think 24% or so. That's going to be lumpier.

Speaker 2

We laid that out very clearly with the ITC sales. Questions. We have either term sheets or in deeper negotiations on, at least 3 transactions and not more. And questions. That will get us if we did all of those plus maybe some others, maybe one or more other that would probably get us all the way through, I think next year even on ITC sales.

Speaker 2

Questions. Loan sales not as attractive to us because of Hestia. And so we're getting very close there, by the way, getting that where we can start using it. Nothing's done complete to be very clear about it, but we're getting very close. And so questions.

Speaker 2

That switched our gears a little bit to moving towards the ITC sales and more gain on sale and that's going to be heavily weighted to 3rd Q4 by definition because of the treasury guidance. Questions. Again, we list that in the script. The last one, I would say, in the inventory sales. Look, we've been talking about questions.

Speaker 2

Everybody was running around screaming and yelling about supply chain problems and all this last year and we're just like, hey, look, it's about to really change. And questions. Boy, were we right. We were more right than we thought. And we started destocking and telling our in the Q4, We told our dealers early in the Q1, start really making sure you're selling a lot and don't carry as much inventory.

Speaker 2

Questions. We dramatically took our inventory carriage for ourselves in multiple months to 2 weeks and I would say it's even questions. And we basically just hit the brakes and they flew right by the rest of the market. And questions. That will cause a hiccup here in the second quarter, but we'll pick it right back up.

Speaker 2

Our growth is obviously blowing the doors off, questions. Particularly, you look at the storage attachment rate and we sell a lot of the equipment there. So we could pick it up fairly easily in the 3rd Q4. Questions. Sorry about the Q2.

Speaker 2

We did hit the adjusted EBITDA plus P and I as we laid out at the beginning of the year, 30% in the first half. So We said what we would do, we hit that. I know a lot of people had it a little bit higher, but we'll pick that up in the 3rd Q4.

Speaker 3

And questions. Just one more thing to add. I mean, keep in mind Chris, just one more quick thing to add. And keep in mind that as we are increasing both Customers for this year and the customers for next year, there's a creation of those customers and that is creating a slightly higher Sales, OpEx, sales G and A and that is counterbalancing some of the pickup that we are in fact getting from the higher customer count this year. We are picking up some as John saying, but part of that's being countered by the fact that we're also doing so well in the customer growth questions.

Speaker 3

Yes, there is a burden. That's the fully burdened part of that unlevered return, but that's generally felt upfront. And questions. And so that's counterbalancing slightly, and so that's why we're not really moving the metrics.

Speaker 9

Okay. I appreciate you bringing that up, Rob. I think that's kind of the second question I had because one of the things that seems to be weighing on investor sentiment is you guys are clearly outperforming on growth and you've executed flawlessly on that front. But when we look at questions. The liquidity walk and the capital raise forecast and you run through some of the numbers.

Speaker 9

It seems like, questions. Especially if you look at Slide 13, you got 60% customer growth in 2023, 40% target in 24%, but quite a bit of a bit of a bit of a bit of a bit of a

Speaker 2

bit of a bit

Speaker 9

of a bit of a slower growth, although 40% is quite robust. So is this a function of the business getting more expensive to fund? Is growth just bringing in less cash flow? Are the customers less questions. I think there's a question as to how much are you having questions to fund here to keep this growth rate going as part of the investor sort of debate, if you will.

Speaker 9

Thanks, guys.

Speaker 2

Yes. It's John. Yes, most of that cash usage there in next year on questions. Corporate capital side is what Rob answered earlier and if he's got anything else to add for answering the operating leverage question, questions. He can add to it.

Speaker 2

But basically that capital is going into fund the stub pieces of the securitizations questions just as we laid out in our long term capital strategy. So that's you shouldn't look at that as burn. And in fact, if you look at operating leverage, questions. We continue to actually improve the amount of burden, if you look on a per customer basis, so far this year pretty rapidly compared clarity. When you look at an adjusted EBITDA basis though, it doesn't look that way.

Speaker 2

1, what I would questions. I'd say is that we've been preparing, as Rob just mentioned, a ton of growth opportunities. We've been funding those specifically on the software side things for these different businesses, but also setting up these different businesses like service, for instance. And then taking service questions. Where you had a service level that was out weeks or months and taking that down to 24 hours, we're not going to have the Maytag repairman sitting around waiting for customer to have a problem.

Speaker 2

So we're not going to have a burn issue there with the service business, but you're going to have a one time expenditure to get that service where it should be questions. In our opinion, which is industry leading at that 24 hours and then you won't pay that again. So it's a way of thinking about it is to catch up. Questions. But we are very fixated as the script said on operating leverage.

Speaker 2

I get it. I see the investment, questions. The spending and it will the operating leverage will improve as you go into 2024. That will happen. Questions.

Speaker 2

We're now reaping the benefits of these investments that shareholders have allowed us to make. We will get that money back and then some. This will further our growth and no, we're not burning a bunch of cash or anything else. And the customers that we have today are actually better questions. And then when you look at the storage attachment and questions.

Speaker 2

And what we can do in energy services, lights out more profitable. So this is a very, increasingly more lucrative business than I think most people questions. Think about putting some panels on a roof, net metered it and argue about whether you finance with a loan or lease. Those days are over. We're moving into the power industry.

Speaker 3

I'll add one more thing, which is just a bit of a timing issue with loans. You can as long as you have a critical mass of loans, you can just package those up and put them out into a securitization. And certainly we see some a lot of promise in Hestia. We may be putting a little too much gray sky in our estimates of what the Hestia securitization stack is going to look like, but

Speaker 2

we want to

Speaker 3

be a little bit conservative there as we look into 2024. But questions. You look at a lease or PPA securitization, those are a lot lumpier. You have to get all your tax equity funds closed because of a lot more movement into the lease and the PPA affects a little bit of the timing of when we do the full securitization, which we expect to be a slight pickup and questions. And our ability to use debt as well.

Speaker 3

And so, some of that is just the timing of the difference between, the warehouse debt and the securitization debt, But that's it's de minimis. I mean that's maybe 10% of it is the timing there. And then we talked about that is that's the piece of the working capital supposed to be funding.

Speaker 9

Great. Appreciate all the details guys. Thanks.

Operator

Questions. Thank you. Our next question comes from Joseph Osha from Guggenheim Partners. Joseph, your line is now open. Please go ahead.

Speaker 10

Questions. Thanks. Good morning. I have two questions. The first kind of following up on what Brian was just discussing.

Speaker 10

You talked about In your prepared remarks, dollars 100,000,000 a year of levered cash flow. I'm trying to understand what that means. Is it your assertion that following questions. This next 2 years of corporate capital raises that you'll have a business that can generate $100,000,000 of Net cash flow a year going to 170 or what exactly does that mean in the context of this corporate capital raises? Thank you.

Speaker 10

And then I have a follow-up.

Speaker 2

Hey, Joe. It's John. Yes. So what we're trying to do is get more visibility, which I think you and others have asked for in the NCCB. So think about the way we looked at it was what's the profile of NCCB?

Speaker 2

So if you have the cash inflows of the company that are under questions. Which are not the gain on sale. So this does not include the gain on sale businesses that we've talked about service, the inventory, questions. The other business the new home sales and so forth does not include the gain on sale and that's really important. When you look at questions.

Speaker 2

The profile of that NCCV, basically after you service all your debt, we're generating today on the existing base, which is about $5,500,000,000 at cost, About $100,000,000 of cash a year. And then that moves up in the year 11 and beyond to about $170,000,000 That's all due to Tax equity flips and the way that some of the SRECs work and some of the way the loans and such. And so there's some ins and outs there. Questions. But basically that is where we sit today.

Speaker 2

So where are we going? We're going to triple the capital base by Q1 of 'twenty five. We've got about $1,800,000,000 ready to securitize in our backlog right now. So it's all in service, throwing cash, questions, which is not included in that $100,000,000 number by the way. And we have about another $2,000,000,000 under construction.

Speaker 2

Questions. So we're well on our way to moving towards that $15,000,000,000 to $16,500,000,000 of assets at cost. And questions. And so when we look at where we're going to be by then, you would say that you'd probably triple that. I mean, there's some ins and outs, but looking at towards a $300,000,000 questions.

Speaker 2

A year free cash coming out to fund the expenses. So you look at how do you fund the expense of the service and questions. And then the burden of the growth is picked up in the securitizations with the corporate debt that's funding it. So questions. That growth burden is paid for.

Speaker 2

We didn't want to after we move to that 300 ish level and by 2025, We want to delever down to 55%, 60% as we've talked about our long term leverage ratio, mainly using the gain on sale businesses and cash generation from those businesses versus selling assets. That becomes a bit of a spiral downwards in cash flow, if you will. Questions. We can pay down some more debt that way, which will further increase the levered cash flows, obviously. And then if we slow growth questions.

Speaker 2

At any point in time, whether it's the market or us, we need less cash for the working capital. So that's some of that corporate capital or probably about 30% of our working capital questions. And then from there, we look to see if we pay a dividend. So this is coal hard cash coming out questions on a per year basis today.

Speaker 10

So not to put too fine a point on it, are you telling us questions. That after 2024, you're done raising corporate capital? Is that what I'm hearing?

Speaker 2

No, I'm not going to make that commitment because I didn't see this kind of growth, and especially when we went public. Questions. If you'd have told me it would have been done this, even as the entrepreneur or the founder, I would have said that that's crazy and here we are. So Look, there is a big world out there and we're changing the entire global energy business, not just stationary but transportation. So we will do what makes sense.

Speaker 2

Questions. But if there is a way to increase the leverage of the company or to not ability to pay down debt, we're going to do it for sure. But I'm not going to close this off because I have no idea how big this company can end up being. It's certainly massive now and it's going to get a lot bigger.

Speaker 3

If I can just add one thing to that real quick is that the goal is to have questions. The best cost of capital for our assets. And right now, corporate capital is providing us a better cost of capital than the deeper parts questions. The ABS stack, if we can get back to how things were at the beginning of 2021, where the spread between the AA and the BB was less than 100 bps. We go all the way back to that market.

Speaker 3

That is perfect right there. That's not where the market is today. Pardon me. So what we want to make sure that we do is to finance our growth in the most capital efficient way possible, Regardless of how we're going to label it.

Speaker 10

Okay. Thank you. And then just quickly my follow-up, unless I missed something, questions. I don't think I heard anything about the DOE credit wraparound facility. I'm just wondering if you can update us on how that's going and when we might

Speaker 2

Yes, I just mentioned that to Brian, actually, but we're questions. I think fair to say Rob, very, very close.

Speaker 3

We are imminently going to be entering into the 30 day review process with the interdepartmental review process. And then we expect questions. To close concurrent with the issuance of the first Hestia securitization sometime shortly thereafter. Questions. So it's our Okay, sorry.

Speaker 3

Yes, we are We're looking forward to it.

Speaker 11

Yes.

Speaker 6

All right.

Speaker 10

All right. Thanks.

Speaker 2

Questions.

Operator

Thank you. Our next question comes from Praneeth Satish from Wells Fargo. Your line is now open. Please go ahead.

Speaker 12

Questions. Thanks. Good morning. Maybe on the adders, you mentioned you have the most confidence on the Domestic content adder, can you maybe elaborate on, I guess, when you expect to book that benefit? I would imagine that it's a few years away, but do you see any near term questions.

Speaker 2

Yes. We actually had the most confidence in the energy communities, Adder. And so we see that we're questions. Working on getting that added into our tax equity funds now. And then we have confidence around one particular questions.

Speaker 2

A manufacturer with a particular piece of equipment that we feel pretty good about as well. I've been very conservative In our estimates, there's definitely some more upside as I alluded to. And we're going to be working with our tax equity investors to add those in now as well.

Speaker 12

Comments. You mentioned down around 20%. I guess where do you see that tracking over the balance of the year into 2024? When do you I think you could see originations in California under NEM3 turn positive again. And then I think you gave an attach rate in California, but it was kind of a blended NEM2 and NEM3.

Speaker 12

Specifically for NEM3 customers, do you have a sense of what the attach rate looks like currently?

Speaker 2

Yes. In terms of, by the way, our California quarter over quarter, sorry, year over year questions. It's actually a little bit higher. We grew it. But we have I would give these questions about California over to my creditors, they seem to be heavily invested there.

Speaker 2

And so I think they're a better litmus test for the market quite candidly than us. Questions. As I mentioned earlier, we're going to stick to our guns with the best service and providing these, actually whole home backup or partial home backup. When The power goes out because of wildfires and such. We want to make sure those customers, when they have a battery, they have the power.

Speaker 2

If If you have solar batteries on your house, you kind of when the grid utility goes down yet again, you kind of expect the power to be there. We know that from our experience. So we're going to stick to that. And questions. And if that means less sales, well, heck, we don't we're already crushing it on growth anyway, so I don't really need that.

Speaker 2

Questions. We're just going to do the right thing for the customers and making sure they've got what they think they got. In terms of the attachment rate for us, questions. As I mentioned, it was about 40 low 40 percent for the entire quarter Q2. And we see most days are around the 50%, 60% attachment quite a bit of a bit of a bit of a bit of a bit of a bit of a bit of

Speaker 4

a bit of a bit of a bit of a bit

Speaker 2

of a bit of a bit of a bit of a bit of a bit of a bit of a bit of a bit of a bit of a questions. Nothing that we're weighted into as compared to others. So I kick more of the detailed questions back over to those firms. Got it. Thank you.

Operator

Thank you. Our next question comes from Mark Strouse of JPMorgan. Questions.

Speaker 12

Yes. Good morning. Thank you very much for taking our questions. Kind of sticking with the questions here. So, understand what you said earlier about kind of Texas and Florida growing significantly year over year.

Speaker 12

Just looking at the So they did decline quarter over quarter. So I'm just curious what your guidance for the rest of the year implies questions. I thought you're increasing your guidance, so it's being offset in other areas maybe, but just kind of More color on what you're seeing in those two markets?

Speaker 2

Yes, Mark, this is John. This goes down questions. The road to hell is paved with good intentions, right? Breaking all these states out and keep getting questions like this. In fact, I think we added more states than ever, more transparency than ever.

Speaker 2

Questions. Just a reminder that those are in service customers. And so those customers were originated 2 to 3 quarters ago. Questions. So when we talk about origination, you're not going to see that flow through in the numbers for another probably another quarter, Maybe 2 quarters.

Speaker 2

It's that much of a lag. So that's the I think the straight answer to your question there.

Speaker 12

Okay. Okay. Fair enough. I wanted to follow-up on the inventory sales as well. I mean, just questions.

Speaker 12

Given what it's seemingly easier to import panels now, you mentioned the cost deflation across the value chain. Questions. Just how we should think about inventory sales going forward to the extent that it is now, I would think easier for your dealer partners questions to get that inventory themselves.

Speaker 2

We're just we're bulk purchasing. We're using our purchasing power to get a better deal and questions. Ultimately ends up we buy everything anyways, right? Loan lease or PPA. So it's a part of what we service, we work with our dealers on.

Speaker 2

And storage is in particular very and the load management side is a strategic important asset as it relates to the energy services side. So look, I think the revenues will certainly fall as the equipment prices continues to fall, but questions. We're selling a lot more. So I think overall, we're still pretty confident in that line of business. And questions.

Speaker 2

And we don't make that much money on it, but it certainly is worth doing for the amount of questions. You're making a few $1,000,000 on that. But and again, we managed the working capital that was more important and the inventory making sure we didn't get stuck with questions. $1,000,000,000 or more of inventory like we've heard a lot of folks out there and have a big write down. And so I think we've managed that.

Speaker 2

Questions. Yes. I'd like to have seen us manage it a little bit better than we did, frankly, but we managed it pretty darn well.

Operator

Our next question comes from Steve Fleishman of Wolfe Research. Steve, your line is now open. Please go ahead.

Speaker 6

Yes. Thanks. Good morning. You mentioned you're going to be filing an ATM shelf, I think soon. So just I know the 15% of equity, I guess, for this year, the $500,000,000 that would be about $75,000,000 but I assume you might questions.

Speaker 6

I want to have more flexibility than that. So just what should we expect the size of that to be?

Speaker 2

Questions. Steve, this is John. We're going to be very clear and transparent. No one else gives this kind of liquidity forecast and sources of uses of cash questions. Measured in years, by the way, than us.

Speaker 2

I think nobody discloses it at all. And so what we're trying to do is be open, questions. Let the market know what we're seeing even 2 years ahead, which is a lot to ask for and given the pace of growth of this industry as you know, and we'll update accordingly. With that said, this is what we see now. We see the math your math is obviously correct.

Speaker 2

It's 75,000,000 questions. Do we need to do this now? We're going to do this now? Probably not. We said by the end of the year, we'll do the bond and We might do the equity.

Speaker 2

If the bond comes in better, maybe we don't do the equity. I don't see that we do a lot more equity questions. And there may be some other alternatives out there. But right now, this is what we see and we don't think that's going to change questions. In terms of the $500,000,000 but if we were to use the ATM for more than what we said on this questions.

Speaker 2

Carve out this 15% to 75,000,000, we'll let you know. We're not saying we're saying that this is a tool. We're not saying anything more than $75,000,000 I wouldn't jump to the conclusion that some portion of the $500,000,000 that we've laid out next year is equity. Questions. We actually think it's going to be bond given the tripling of the asset base and the levered cash flows.

Speaker 2

So we'll be very clear. Questions. I think we've earned that in saying when things change, like a lot more growth, we've laid out where what we think is going to happen in enough time. Questions. And so I would not assume anything above the 75 whether we use the ATM or we do it in a single overnight.

Speaker 6

Okay. That makes sense. I just didn't know if you file for a bigger number. People might Misinterpret that. So that's helpful.

Speaker 2

Yes. One other question just in terms of That's appropriate, Chris. I agree with

Speaker 10

that, yes. Yes.

Speaker 6

Okay. And then

Speaker 3

questions. Just strategically,

Speaker 6

you're really ramping up growth and customer growth and geography questions. Products, kind of accelerating that just makes a lot of sense from the standpoint of opportunity, but it's also a relatively more expensive cost of capital environment than it's been. And just strategically, do you just see this as like questions. Now is the time. The opportunity

Speaker 2

is there. We got to grab it

Speaker 6

and get ahead of people. And that's why we're doing this or just maybe a little more thought process on Balancing acceleration of growth versus just the cost of

Speaker 2

questions. Yes, certainly. What I would say is that you look at the questions. Turn profile, yes, capital has gotten more expensive. Some would say a lot more expensive.

Speaker 2

I think I would agree with that. Questions. But also if you look at the fully burdened unlevered returns that we've laid out and what we're seeing, we've been able to raise price because the utilities have been jacked up prices and questions. We're keeping them there, not moving a little bit higher overall. And then we have the ITC add, right?

Speaker 2

So we have the IRA, which seems like everybody's kind of forgotten, I guess the last few weeks, but it's here. It's now starting to show itself. So we see the returns there to grow the business. And we kept all our cash flows. Again, going back to that $100,000,000 a year of levered cash flow, nobody else has that.

Speaker 2

So we prepared for this. Questions. Is it a deliberate strategy to grow through a downturn to what I see as a recession? Yes, it is. Questions.

Speaker 2

It has been. It is. If you look at others are going to have to pull back on their platform investment, their software investments and so forth, we are not. Questions. We moved ahead and we're putting a lot more software into place to fire up these different growth questions, if you will, or batteries, as I said, to modernize the saying.

Speaker 2

With that said, everything I said earlier to answer a question about operating leverage increase and questions. We invested the money. I want to see the Money Plus come back for next year, is stands. Questions. So we've made a lot of investment.

Speaker 2

I see a slowdown in that spending in terms of the rate. In some cases, like service technicians and so forth, they'll need Keep up with the growth of the business, particularly as a service only business is really booming. But in terms of more and more heads on the software development side, We don't see it. So again, operating leverage is in focus. We've made the investments.

Speaker 2

Now I want to reap the returns. Questions. Thank

Operator

you. Our next question comes from Pavel Molchanov from Raymond James. Your line is now open. Please go ahead.

Speaker 13

Thanks for taking the question. Can we get an update on the commercial initiative. I think it's now, what about a year in? What's the status?

Speaker 2

Questions. Pavel, this is John. It's doing okay. I think this year will be about what we expected in terms of a small investment questions. South of $4,000,000 or so in a net burn.

Speaker 2

And then moving into profitability next questions. Probably more likely in kind of the Q4 of this year timeframe. So I think it's questions. Largely, on track. I would like to have had a little bit more of a deal closure in the second quarter here.

Speaker 2

Questions. But we feel pretty good about where the pipeline stands for Q3, Q4. Again, it's not a needle mover necessarily, but it certainly is a growth area and certainly helpful and questions. And will be more so as we move into 2024 and beyond.

Speaker 13

And a question about Europe. You last quarter questions. You talked about having some initial dialogue with prospective partners in Germany. Is the questions. Evolution of the European market looking better or worse or about as expected given what questions.

Speaker 13

We've seen a lot of cooling off and kind of natural gas prices, etcetera.

Speaker 2

Questions. Yes. No, from my perspective, it looks better. I need something that's more stable, not going to the moon. And when you're looking at questions.

Speaker 2

Particularly for different acquisition opportunities, we need to find something that makes financial sense. We're not going to do a dump deal. I think we've proven that questions before is that we're very disciplined on the acquisition side. So we see a number of potential partners out there. Questions.

Speaker 2

Nothing I see is too large because there is a for what we do as a service provider, there is a pretty big hole. Questions. When you look at the overall market and the regulatory structure, it does differ a bit by country, of course. But questions. Overall, it's more progressive, more capitalistic, believe it or not, than the U.

Speaker 2

S. Market. And what I mean by that is the integration of behind clarity. And providing a single electricity bill to a customer with all of the solar and the batteries, EV charging, the load management and the grid power together, you can do that in a lot of those markets. That's very, very interesting.

Speaker 2

Questions. It looks a lot like the Aussies, the Australians. They're as you I know you know, they're far ahead of everybody. And questions. And the U.

Speaker 2

S. Is really behind on that and let's hope that we can get some regulatory overhaul and get those consumers freed up and be able to choose their provider.

Speaker 6

Appreciate it.

Speaker 2

Thanks.

Operator

Thank you. Our next question comes from Sean Morgan of Evercore. Sean, your line is now open. Please go ahead.

Speaker 14

Hey, guys. Thanks. So in terms of the growth that you saw, obviously, it's maybe a little higher than some of your peers. So I was wondering how much of that is sort of, if you measure it this way, sort of organic growth off of the existing questions. And how much would you attribute to sort of new dealers that have been ahead over the last few quarters, sort of like

Speaker 2

questions. Yes, Sean, this is John. Questions. I would say a large part is the new dealers as of now. Some of our bigger dealers have been up years, but nothing really huge Nothing like what we're seeing here in this kind of growth.

Speaker 2

So it's largely for new dealers. With that said, I know of a couple of the big dealers questions. We really have a lot of plans of forward growth as they move forward over the next 12 months or so. So that probably be more felt in 'twenty four, quite questions. We're going to the peak of the selling season of the entire year right now as you are aware of.

Speaker 2

So I'd say that probably balances out more to the growth of the existing base as we move into 2024. But the interest by contractors in becoming a dealer has been questions. Pretty massive. I was about to say significant, but it's massive and it continues to be. So who knows?

Speaker 2

And as we pick up more verticals, questions. Training generator contractors to be able to install solar and storage, etcetera, that's a big area for us, questions as well as some home security HVAC and such. So there's a lot going on in terms of bringing new dealers up to speed and getting them to where they can make more money and becoming a Sunnova partner. So I think largely right now it's new dealers, but We see some growth expectations of some of the big ones, but we still see a lot of huge demand for new dealers, coming in and providing that more growth. So questions.

Speaker 2

It may continue to be weighted to the new dealers.

Speaker 14

Great. Thanks, John. That's it for me.

Operator

Questions. Thank you. Our next question comes from Kashy Harrison of Piper Sandler. Your line is now open. Please go ahead.

Speaker 15

Good morning, gentlemen, and thanks for taking the questions. Questions. So first one for me, John, you're looking at roughly 200 ks customers next year, which as you mentioned is well above expectations. Questions. Can you help us think through how many customers maybe tied to more of the core solar or core solar plus storage business questions.

Speaker 15

And then maybe a follow-up question for Rob. Just what's the financing questions. Project financing strategy for some of these accessory offerings and how do the unlevered returns compare to the core solar and solar

Speaker 2

questions. Kashay, this is John. I'll answer the first one. So I think it's Pretty interesting that you made reference to the core solar plus storage business. I remember when that was a hot questions.

Speaker 2

Not too long ago about that, will that ever even work. And it certainly is not a 100% attachment rate or anything close to it, right, questions. So we got a long ways to go there. So all of it is accessories is the way to look at it. Questions.

Speaker 2

The answer is I don't know. And the only thing I really care about is I want to sell more storage. And that gives us the ability to have the optionality. So I'm more focused on megawatt hours than the megawatts of capacity. And I also want to see the demand management questions.

Speaker 2

That gives me a lot more capability in the energy services side as well. So we got the market looking at the wrong things. It's old history, megawatts this and that. That's fine. That's fuel.

Speaker 2

Questions. But at the end of the day, I just care about selling power service, the best power service to the customers. What makes that up? At the end of the day, questions. I can value the physical optionality like in the case of storage and demand side management, but I don't really care.

Speaker 2

But we'll certainly, as we move forward the budget for next year, try to give some a little bit more guidance if that's desired.

Speaker 3

And I'll try to answer what is actually a very complicated question as simply as possible, which is that when you take a look at these customers, a lot of the customers are service questions. Only customers that we're bringing in and we don't have to finance those customers at all. So their return is significant. But if you notice, when we did our disclosure, we sort of did the change in service only customers this time because some of those service only customers come in and it's a questions. We have them for maybe 18 months because we're putting on service and giving them a workmanship warranty and then others are in fact Converting into lease or PPA or loan customers because of the satisfaction with the service, they are actually becoming much bigger Cinnova customers And those have very high returns.

Speaker 3

So we didn't really have to acquire those customers. We didn't pay the acquisition costs there. As far as how we're going to be financing questions. Some of the loans and what are the returns that we're looking for on the loans that have to do with accessories, very similar to how we're using Pardon me, to how we're using the loans for the solar plus storage customers. And if you take a look out there in the market, some of our Competitors, they actually package all those loans up together into a single securitization.

Speaker 3

So while we don't expect to see those loans questions. Fall into the Hestia program necessarily. We would certainly expect to see those fall into a regular waste securitization program.

Speaker 15

That's helpful. Thanks for the responses. And then just as my second question, questions. I wanted to revisit maybe an earlier question on the Q and A session. John, you talked about the 3 clarity of the quarter.

Speaker 15

And the 30 basis points spread improvement that you're seeing for lower equipment costs. Given that your growth is already significantly above market at questions. I'm just wondering what the strategic rationale is behind passing it on passing the savings on to the customer versus just keeping it to yourself until you see some sort of impact

Speaker 2

questions. Yes, I think it's questions. Look, there's a moment in time here. As I said, we hit the brakes and the market flew right by. We have a competitive advantage.

Speaker 2

We don't have a ton of inventory at a really high cost. And so we're going to make hay while the sun shines where everybody else is in trouble. And questions. And I think it makes perfect strategic sense. If our dealers want to take some of that and help offset some of the price increases that questions.

Speaker 2

We've done and continue to do. That works for us. If they want to pass, which we expect and that's what we're seeing, the majority over to the customers to questions. Try to get this demand drop that everybody is running around screaming about in this industry that the sky is falling, questions. Then that makes a lot of sense to us.

Speaker 2

So at the end of the day, I'm going to keep our pricing and our FUBER to our cost of capital plus our cash our gain on sale businesses, the service, etcetera. We're keeping our pricing nice. Our margins are good. And questions. And look, we're not going to be as they say, pigs get fat, hogs get slaughtered.

Speaker 2

And so we need to share some of the benefit that's going on with both the customer and our value dealers.

Speaker 8

Thank you.

Operator

Questions. Thank you. Our next question comes from a Davis Sunderland of Baird. Davis, your line is now open. Please go ahead.

Speaker 2

Hey, good morning guys.

Speaker 8

Thanks for squeezing me in here at the end. Quick one for me, just circling back to the IRA and looking at the second half EBITDA guidance. Questions. Are any of the adders baked into this? And if not, maybe is there any upside that we could see from them materializing?

Speaker 8

And then any other commentary on seeing these materialize your returns over time would be helpful. Thank you.

Speaker 3

Yes. So for the IRA guidance, I mean to the extent that we questions. Have some of those adders in the ITC sales, maybe you could see some of it materialize there, but we expect most of it to materialize in fully burdened unlevered return. And I think that really sort of captures both the questions. That really is where we expect to see it happen.

Speaker 3

And Because John has just talked about the following equipment pricing is giving both the dealer and the customer a plane to chew on right now.

Speaker 8

That's helpful. Thanks, guys.

Operator

Thank you. Our next question comes from Abi Sinha from Northlands Quettal Markets. Your line is now open. Please go ahead.

Speaker 11

Yes. Hi. Thanks for squeezing me in here. Questions. If I look at the average kilowatt deployed per customer, that has been falling since last three quarters like questions.

Speaker 11

So I was just trying to get any color that you could provide on why that should not be a concern.

Speaker 2

Questions. Yes.

Speaker 3

A lot of that comes from the fact that we're just dividing it by the total number of customers. A lot of those customers have accessory loans where they may just be getting a battery, right. They're new customers to us. They're just getting a battery. Maybe they're getting some of the other solar related financing.

Speaker 3

If you go back to Even the first calls that we did, here we are 4 years anniversary from our IPO. But if you go back to our very first Conference calls that we did right after the IPO. We were talking about the fact that megawatts deployed is a very false metric in the age when questions. You're trying to understand what battery storage attachment rate and how do you apply that? Questions.

Speaker 3

As our offerings continue to expand, main panel upgrades, EV chargers, things like that, generators, Those do not get measured in megawatt hours sorry, in megawatts on the roof. So it really is just a testament to the expansion and questions. Of what's happening with our entire customer base. At the same time, I could tell you that there are different dynamics questions. Always we see folks with smaller homes wanting to get full systems and adding a battery and that increases the amount of solar that they put on the roof.

Speaker 3

And questions. And us moving into newer markets, especially in the at higher latitudes, those are actually larger systems with more megawatts on the roof. So To us, it's really a question of what is a fully burdened unlevered return. What are the returns that we're going to get for the dollars deployed and then what's the net returns we're going to get after our current cost of capital.

Speaker 2

Yes. And I would add on Page Slide 28, you can see the long term trend on the solar deployed and the solar questions. Those customers that had the solar deployed has been moving up. It's all listed out there. I think I don't think anybody else does that by the way.

Speaker 2

Got

Speaker 11

it. Thanks guys. Just one last, if I could follow-up. When you talked about in your prepared remarks that the rate quite a few questions. So I'm just trying to see here like you are increasing jobs with presence and whatnot internationally.

Speaker 11

Questions. So is it simply that base is growing and so the rate has rate will pick up or something else is going on that you're changing operation that would contain the OpEx increase?

Speaker 2

Well, I expect that you can spend the money as long as you bring that money plus some in to the door, right? And so what I'm saying is that I expect to see that, and we will see that. When I look at, for instance, the business markets, business markets are going to make money. Questions. If they don't make money, they all know, they're like, well, then we're not doing it anymore.

Speaker 2

But I expect it and I'm very optimistic about where we stand. Service only makes money questions today, and it's going to make a lot more money. And so as we build the business up, we're going to generate more of the EBITDA. If it's EBITDA negative, it doesn't last very long here.

Speaker 11

Thank you. Thanks guys.

Operator

Thank you. Our next question comes from Chris Southern of B. Riley Securities. Chris, your line is now open. Please go ahead.

Speaker 16

Hey, guys. I appreciate all the color on the corporate capital moving pieces and the growth driving that. Can you just questions. Maybe provide, is there a base of growth we should assume beyond next year where we would or wouldn't Additional corporate capital assuming the spreads you're seeing

Speaker 2

on the

Speaker 16

stubs don't change here?

Speaker 2

And questions. And we laid out, I think we went way out there, right, in terms of 40%. The good news is because of our very conservative customer accounting methodology, which I would I think everybody ought to publish their definitions of what the customer count is that they use. Questions. So we use in service, right?

Speaker 2

I think everybody else uses installation. So what that gives us is at least a 2 quarter questions. So we're booking into 24 right now with our sales, which have been, by the way, pretty strong, as we move into the end of July, really strong. Questions. So we felt very comfortable given the trajectory of giving a 40%.

Speaker 2

And In terms of anything beyond that, I don't think that we would feel comfort nor is anybody else even going to venture out to say what they're going to grow at the end of the year. So I think we've gone above and beyond. We plan for 40%. That's what we laid out in the corporate capital. If it moves slightly upwards or downwards, We'll continue to update you as we always have been doing for at least the last couple of years or so in the quarterly update.

Speaker 2

That's why that slide is there. That's why that slide will stay there.

Speaker 16

Got it. Okay. Appreciate that. And then the jump in dealers is Pretty significant and seems like that and strong growth within kind of dealers is also driving the growth here. Questions.

Speaker 16

You give that kind of regional customer additions breakdown and now there's 17 different states and territories in there, but the other group It's up pretty significantly too, more than 20% of the total. Can you give any color on what's in that other group there?

Speaker 2

Other states, I mean not to be flipped, but I'm not going to have I got so much disclosure in pages here. I mean I think this is a lot. This is too much, frankly. So I think this is enough to build off. And at the end of the day, questions.

Speaker 2

I love a customer whether they come from Puerto Rico or they come from Texas, but I don't really care what questions. Now I may start to care more. I will start to care more with the energy services. We want more densification and such. That helps us there.

Speaker 2

But clarity. Outside of that, this number by state thing is frankly just done for you all. I don't really care what state the customers lives in.

Speaker 16

Got it. Okay. Thanks.

Operator

Thank you. Our next question comes from Biju Perincheril from Susquehanna. Your line is now open. Please go ahead.

Speaker 6

Yes, good morning. Thanks for asking. This is Ian. Just a couple of quick questions. Obviously, your new dealer additions questions.

Speaker 6

Can you just give us some details on what the or how the dealer acquisition costs have trended? Is it easier to add dealers in the current environment?

Speaker 2

Yes is the answer. It's a lot easier. The ability to go from lease PPA and questions. And loan and then all the other products that go with it, storage only. And we're we have the best product set in the entire industry By far, there's no one even close to us.

Speaker 2

So that's obviously very compelling. And then the service that we provide across questions. Whether it's loan lease or PPA, I was visiting with a homebuilder CEO just a couple of days ago and questions. That's compelling. Nobody else offers that.

Speaker 2

So we've got a fantastic product set. We're never happy. We're always going to introduce some new products and questions. And keep ahead of the marketplace. We've got a couple of others, one in particular new products we'll be launching here in the next few days we're pretty excited about.

Speaker 2

Questions. So there's a lot of reason to sign up as a and being a Sunnova dealer and join the family, so to speak. And questions. I wouldn't say to the account managers at Cinnova work very, very hard. Questions.

Speaker 2

And so, I don't want to take anything away from them. They have to go out there and make the effort and then some. And questions. And then they got to care and take care of the dealers and they do a great job. With that with all that qualified, questions.

Speaker 2

I would say that it's the inbounds are pretty heavy and continue to be. So we're taking orders on dealers questions as far as like who we can bring on board. So it's a nice position to be in. I know it doesn't last forever, questions. But it's a great position to be in.

Speaker 2

And there's a lot of contractors out there that are in different areas like generators, HVAC, as I mentioned earlier, home security and so forth that want to come in And start selling the full Sonova adaptive home and we'd love to talk with them.

Speaker 6

So is there maybe can you comment on like the acquisition costs if you look at maybe in the solar type dealers?

Speaker 2

It's pretty low. It's very low. We don't spend a lot of money to acquire a dealer.

Speaker 6

Okay. Got it. Thank you.

Operator

Thank you. Our final question for today comes from a Carina Blanchard of Deutsche Quang. Your line is now open. Please go ahead.

Speaker 17

Hey, good morning guys and thank you for taking my question. Obviously, most of them have been answered. But questions. I noticed in the prepared remarks you put a lot more focus on outside of the U. S.

Speaker 17

Business, so the European market. Questions. Could you give a little bit more details, if you can, like maybe on time line? Like, should we start thinking of incorporating questions. And if you have any idea on how much cost you could bring to the business?

Speaker 2

Corinne, this is John. No, we're not going to give any more. I try to give as much visibility and I've learned that over the last questions. 4 years being the CEO of public company. I think more visibility when you can give it.

Speaker 2

You got to remind the rules, right, is always best. And so what we're doing is saying, hey, we're going to do this, we're going to do this, we're going to be methodical about it. We've talked about looking at potential acquisition so forth. We talked about moving ahead very carefully. So at this point in time, questions.

Speaker 2

I'm just communicating and saying, hey, this is where we're going. We're not going to spend a lot of money. And the 24 count growth that we laid out does not include Europe. And And I think we'll just leave it there.

Speaker 17

All right. Thank you. Fair enough.

Speaker 2

Thank you.

Operator

Thank you. We have no further questions for today, so I'll hand back to John Berger for any further remarks.

Speaker 2

This industry has changed rapidly. For a variety of macro and micro reasons, questions. Not all apparently similar companies have the same business models. I think we all see that now. We are moving from simple panels on a roof with a NIM construct to selling integrated distributed and centralized power service questions.

Speaker 2

From a product sale to a service sale, we are not a finance company. We are not an installer. Questions. We are an energy as a service company, and we are focused on delivering the best energy services to customers around the world.

Operator

Questions. Thank you for joining today's call. You may now disconnect your lines.

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Earnings Conference Call
Sunnova Energy International Q2 2023
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