Sunrun Inc. (RUN) Earnings Call Transcript & Summary

Great. Okay. Well, hi, everybody. Thank you all for joining. Welcome to the JPMorgan Energy, Power and Renewables Conference. My name is Mark Strouse. I cover alt energy for JPMorgan. Very happy to have Ed Fenster, Co-Founder and Chairman of Sunrun, joining us today. I will begin the session with some fireside chat questions. [Operator Instructions] Before we get started, Patrick Jobin, I believe you wanted to go over some safe harbor language.

Thanks, Mark. I'll read this really quickly. Please note that certain remarks we will make on this call may 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 detailed discussion of risks and other factors, including the uncertainties around COVID-19, 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. Back to you, Mark and Ed. Thanks.

Great. Thank you.

Thanks. Patrick, you could -- you can moonlight in the pharmaceutical advertising. That was perfect.

Developing a new talent, love it.

Ed, okay, so maybe just to get started for the uninitiated, can you just kind of give us a brief 2-, 3-minute overview of what Sunrun is all about?

Sure. So thanks, Mark, for having me, and thanks, everyone, for joining. We are the largest residential solar developer in the United States. And maybe what I'll do is just spend a couple of quick minutes on, like, why did we start this business 13 years ago; like, what is the product we're offering; why does it work; how do we make money. And I'll just do that very quickly. So I think when we looked at the business 13 years ago, we thought there was a sterling future for solar energy. One of the things we noticed about it, though, that was a little less common was that it actually works at a small scale whereas most forms of energy generation only work at enormous centralized scale. And if you look at the energy market, you've got a wholesale energy market, which is pretty brutally competitive. Lots of companies participate, RFPs run by purchasing managers, et cetera. And -- but sitting in between those customers and people who actually use power is a monopoly utility which, frankly, can be a little bit loaded because their financial incentives, by and large, are to kind of maximize their capital expenditures because they're on a guaranteed 10-or-so percent return on equity. And so decades and decades of that later, the cost of retail power is easily 5 -- 4 to 6x the cost of wholesale power. And so in delivering renewable energy to a customer on site, your competing product is just astronomically higher than when you're competing at a wholesale level. Combine that with the fact that to operate cost effectively in an industry like ours, you kind of have to be doing 80 megawatts a quarter or more to be, like, cash flow positive. So there are real minimum efficient scale to operate considerations. That's caused market share to be concentrated and unit economics to be high. So unlevered returns, generally speaking, in our industry, are low double digits, maybe 11 or so, potentially twice that, which you'd see in sort of utility-scale renewables development as a result. So flashing forward many, many years, we took the company public in 2015. We became cash flow positive as a company in the second quarter of 2017. As we sit here today, we have about 300,000 customers; a very clear #1 market position, both in the origination of solar and also the origination of residential solar and storage; and we do most of our business through power purchase agreements, which means that we pay to install the system on someone's roof, own the asset and then just sell electricity that is produced over time. And so it's also a much easier transaction for someone to enter into. They don't have to understand the longevity of equipment or the quality of equipment, how much power it's going to make, et cetera, it's just a pay-for-performance model, which just makes it easier to transact. So maybe I'll pause there and see if there are questions about that, that you want to add more of.

Yes. That's great. So in 2019, you added more megawatts than your 2 biggest competitors combined. Just kind of talk about your competitive advantages. Is this just a scale player? Or is there some kind of secret sauce?

Sure. So some of it is, I think, deliberately ways we set up the company to do that and some of it is disciplined. Like our industry went through a phase, in the run-up to 2015, when we had some competitors who were doing uneconomic things, growing at 100% year-over-year rates. There was a moment in time in the end of 2015 when equity investors stopped to appreciate that. And like those companies had to rightsize their business, we have kind of always had a focus on unit economics steady-as-we-grow business. And so we had the #1 market share, probably within a year of our having launched the business, through maybe 2013 and 2014. We then lost that position for a little bit, and then we reclaimed it again just with our steady growth. I think part, though, of also why we've succeeded in doing that is there are a couple of things that we've set up a little differently than some of our competitors. The first is that we have a multichannel path to market. So because we operate, when I say, in the real world, we don't just sell everything online. We feel like you need to meet customers, like, in the place that they want to be met. So some customers, that's on the phone or it's through Zoom. Sometimes they'll call us directly and engage with us. That's a great -- that's our direct channel. It's great for working with those customers who think of solar as a home energy service and see us as a leader and want to transact with us. In addition, there's a large group of customers who aren't thinking about solar energy or maybe they've heard 3 advertisements and they don't know, like, who they should choose. And so there, because of our national scale, one of the places we've really dominated is in these broad-scaled co-marketing relationships with big, national, respected companies. So examples of that might be Home Depot and Costco for us. And when we talk to someone in a Costco store, they'll give us consideration at a lower cost than if we're trying to reach them through an advertisement on radio or something. At least that would have been the case prior to February. Obviously, recently, advertising costs have come down. We've been doing less in-store sales on a temporary basis here due to COVID. And then, finally, there are some folks who think of solar as, like, a home improvement, right? And if you live in New Jersey and you think of solar like renovating your kitchen, you're probably going to reach out to, like, a local contractor in New Jersey to do that. So we work with the kind of #1 or #2 installer in our market. It's about 1/3 of our business. And I think what's unique about our business is that we kind of operate in all those channels. If we have a competitor that really is just channel-focused, we have one that's really just direct-focused. But we have this like very broad range of distribution channels, which has not only given us lower cost of acquisition over time and greater reach but actually, frankly, through COVID, where some channels are working massively better than others, like, having that diversity has been really helpful for the business as well. Then there are just some other things that I think we did differently. Just a real focus on -- I wouldn't have said probably before having this company for so long that better cost accounting could be a competitive advantage. But like, really understanding these channels' work, those geographies' work, these channels in those geographies, like, these sorts of projects have too much scope of work that you don't make money on them, being able to really segment the customers, focus on the customers who are going to be of higher value, lower cost actually convert. Like, there's a lot of data analytics in there that I think will really lead the industry on as well. We also have slightly lower capital costs, that's been helpful, and then a couple of other things around the edges. But those are probably the things that I would focus on.

Okay. So I'll come back to some of the bigger picture stuff in a bit, but can we just talk about the near term and then impacts from COVID 19? And maybe the easiest part to start is just on the supply chain, which I think is fairly back to normal at this point, but just your latest thoughts there.

Yes. So we had sort of -- there are 2 dimensions here. The first, we actually didn't have supply chain interruptions with any of our suppliers. At the same time also, we did a massive purchase of inventory at the end of last year, which gives us a longer runway at a 30% investment tax credit level. And so frankly, even if there were a disruption in the supply chain, we wouldn't have felt it this year based on our inventory position, but we haven't seen one either.

Okay. And then maybe the more difficult question is just on demand. Can you kind of talk about the trends that you've seen since April or since March and if it's possible to kind of parse that out between the different regions of the country?

That's a great question. So I would -- if you think about like how a pandemic might affect a business like ours. I would segment it into a few areas: intrinsic customer demand then the paths to the market. So like, how do you -- through what channels do you talk and interact with customers; can you permit and install a system; and then on the back end, like, if you're in a recession, like, does that influence your collections performance, things like that. So interestingly, like, our experience of demand is that, intrinsically, it might actually be higher. There was certainly, like, a couple of week period, I think, where just, like, everyone was in shock and paralyzed. But as you come through the other side of that, there are a couple of dynamics of our business that I think lead it to be, from an intrinsic demand perspective, a benefit from an environment like this. So first, just there's tons of data that show all things related to home improvement are actually benefiting. And I think some of that is at play in our business as well. You're at home, you're thinking about your home, your power bill, it's just top of mind. Second, certainly in areas of the country that have reliability considerations, the Gulf Coast but, most notably, California, the prospect of being -- trying to work from home with your kids at home, with a week's worth of food in the freezer, facing a 4-day power outage is just like terrifying. And so there's, I think, a demand boost that you get from that as well. And then the final thing, which we felt -- we operated this business through the financial crisis. And one of the other things that I think we picked up on anecdotally was that it feels good. Most people, like, feel good when they're doing something that's like consuming. Like, people feel better when they buy stuff. And there are not a lot of things that you can buy that actually result in you saving money. And so to a certain extent, in a recessionary environment, we have, I think, a countercyclical force of demand because, like, it feels good to go do something like put solar on your home. But the way we offer it, it doesn't affect your -- you don't have to borrow money. It doesn't affect your borrowing capacity. You don't have to actually spend money, and your monthly bills go down. So like, actually, I think, it's kind of maybe even a higher value-add in an environment like that. So I would say, on a top line demand basis, it's a tailwind, frankly. Then you get to the next layer, which is, okay, well, how do you reach those customers, and that's where we've been frenetically doing a lot of work. So heading into this year, we've talked before that sales in retails, like Costco and Home Depot, are not quite 1/3 of the business but have been a significant percentage of the business. And so obviously, we pulled all those salespeople out in a day in March. We started to restaff those stores now selectively on a geographic basis, but there was a period where we were doing nothing there. Well, what's fascinating, and we shared this on the earnings call that actually, in April, we had a day where we actually set a record sales day for the company, and that was despite not having any of the sales reps in Costco or Home Depot on that day. And what was really fascinating was like not -- and this may be a miss on our part or maybe the opportunity wasn't there, but we didn't really appreciate how much time our sales reps were spending driving to homes. So the number of -- like, in an environment like this where people can now -- it's normalized to transact over Zoom. And frankly, I think homeowners would rather a salesperson interact with them over video conference than, like, in their home. Salespeople can take so many more appointments in a day that their efficiency is a lot higher. We've discovered that selling online, a slightly smaller percentage of people will choose to become a customer. The ratio of appointments to customer signing is a little lower. But then, interestingly, customers signing to installation is higher. And that's really important because we incur real cost after customers signing to design systems and permit systems. And so if they don't complete, that's a cost to the business. So ultimately, like we're seeing very significant marginal cost declines. Like, our customer acquisition costs, like, in this moment in time, for all these reasons, are down significantly. And we think that will be persistent in a post-COVID environment, again, because I think the interest in transacting online will sustain. And then we're also picking up some benefits in permitting. More permitting departments are adopting online permitting. There's been software to do that for years, and we've been trying to get people take us up on it for years, and we got a big boost there. Increasing number of inspectors are comfortable, like, doing it on FaceTime. That saves our crews' time. All that, we said in the last earnings call, we think we'll get about $2,000 of costs out of the long-term marginal costs. So the major weight around the ankle that we described on the earnings call, which obviously has been abating since then, is just still, as of the date of the call, we said about 15% of jurisdictions either we couldn't pull permits or we couldn't install. We've been making a lot of progress there, making sure people appreciate that residential solar and electricity generally is an essential service that should be able -- we should be able to conduct it during a wave of the pandemic. Obviously, our crews are small in size. It's the same crews every day. They wear respirators. They don't have to go into the home 90-plus percent of the time. So it's actually a pretty low-cost -- sorry, a low-risk activity. We make sure people drive their own cars to the site now. Like, there have been definite safety improvements we've made, but they haven't been costly. And we've been able to tell that story to more and more people over time, and so that's abating. So what we said on the call was, look, we think the low point in terms of sales and margin will be Q2. It will improve. We expect a sort of normalized Q4 and have a great optimism in 2021, actually, we should start to see real margin improvement, even maybe over what our 2021 expectations might otherwise have been through these sorts of skills that we have sort of had to develop by rapid fire during COVID.

Got you. Okay. Makes sense. But what about your -- maybe touch on this a bit, your customer payments that you've noticed since March, any trend data that you can see there? And what are the longer-term implications for your cost of capital, if you can kind of prove to your creditors that you're a safe credit?

Yes. So thank you for reminding me. I guess my answer was so long winded. I didn't get to that. Yes, we published in the back of the earnings deck, people can go see it, our monthly collections data, like, over the last 6 months, delinquencies in the 30-, 60-, 90-, 120-day baskets. Our delinquencies as of April 30 were lower than at any point in time in the last 6 months. And that's differentiated, frankly, from consumer asset classes. Generally, the data I've seen elsewhere suggests as much as a 6- to 8-point increase in mortgage forbearance and maybe 2 or 3 points in rental payment, nonpayment whereas we're actually going the other way. So like, we're actually in a period right now where spreads for our business is rapidly compressing week-over-week faster than, I think, I've seen in any history in the -- any point in the company's history. And I do suspect that as we come out the other side of this, there should just be a real re-rating where it is appreciated that, like, we're fundamentally selling the electricity that's at the very top of the payment waterfall. People do not like to live in the dark. And particularly, in a pandemic when you're at home, you're consuming power, you're consuming more of it. The savings from solar are even greater. So there's real incentive to pay. And also, frankly, we have a really good relationship with our customers. We have great Net Promoter Scores. So people want to support us in an environment like this. We're not like some evil lender that they have no personal interaction with. And so that probably just emotionally helps as well. So I do suspect that as we push into next year, I would expect we should be able to get our spreads lower than they've ever been before. And the Federal Reserve is certainly saying it's their expectation and desire to keep the risk-free rate as close to 0 as they reasonably can. So you could definitely imagine that in 2021, 2022, maybe even materially, we're facing -- we'll be facing the lowest capital costs that we've experienced in the company's history, maybe a weighted average capital cost that's beginning to encroach on 4% or less.

All right. Okay. So kind of turning to energy storage, a big focus for investors lately. Can you just kind of talk about how Sunrun fits into that equation? Are there -- you offer storage today, but are you agnostic as far as all of the different technologies that are coming to market? What are your attach rates that you're seeing? And then how do investors think about kind of the value per household to Sunrun as more customers go with storage -- solar plus storage?

All great questions. So first, maybe to frame the picture, there's more residential storage being installed than anything else. And I think the reason for that is, if you think about the value of a residential storage device, it provides resiliency for the customer in the event of a backup. It can change the time of day that power is consumed, right? So it can move renewable energy from the afternoon into the evening. It can alleviate local grid congestion that means that the distribution company has to build out less infrastructure. And then it can also do that on a more broad-based level, like, for instance, if PG&E has to deactivate transmission lines in the context of forest fire risk. So we have sort of more value streams associated with our product than other types of storage. And then factor in, because we're installing them with solar systems, we also get a tax credit, like, that's why the unit -- that's why the pie is so big that you see residential storage is leading the charge for storage generally. In terms of our business, we've adopted, at this point, a technology-agnostic approach. We market our storage product as Brightbox generally. That could be a product that uses an LG battery. It might be something we co-market with Tesla's Powerwall. But the overarching product, which does time of use management and backup, we call Brightbox. And obviously, at this point, we're not like vertically integrated into battery manufacturing. In terms of the value that it brings, again, we've got a few value streams. There's the value stream from the customer. And as it is today, the storage systems that we install on average have greater customer values than the nonstorage systems we install by a little bit, but I expect that will grow very significantly over time for 2 reasons. First, just as battery storage costs come down, that should accrue to margin. I would expect battery storage costs might fall about 50% over the next few years. And in that analysis, I assume no material signs of improvement. That's just removing extra layers of inversion to increase efficiency, reduce the number of things we have to install, improve labor hours, just like basic blocking and tackling to make it a better, lower cost product. And then also increased competition in the integration market will move some of the margin, which is currently being captured by cell manufacturers, downstream to us. The other really important thing, which I think you touched on, is our grid services business. So one of the ways we realize these other value streams is to transact with grid operators like New England ISO or utilities like Hawaii Electric or Orange & Rockland or Southern California Energy (sic) [ Southern California Edison ] or East Bay municipal, just there's a long, long line of them, where we're effectively providing capacity for them at cheaper costs than they can otherwise get it. And so they'll pay us something that we've set, let's call it -- we think it varies significantly by program but maybe, on average, $2,000 a customer. So that increases our customer value. It also would allow us, if we wanted to, to offer a slightly more -- a lower-cost product to customers. But what we're also seeing in the Orange & Rockland example that, I think, we discussed today publicly for the first time, is a good example of that is that because we're able to lower the capacity cost for these utilities, they're willing to help us co market. And so that actually lowers our customer acquisition cost. So in the same way that, for instance, working with Costco means people will consider our product at lower cost, if your utility approaches you and says, look, we really think you should consider residential solar and storage, like, we have a program with Sunrun to do this across our service territory, we think it's the right program. Like, that's just -- that's a great foot in the door and validation that we might not have ourselves. And so those programs, in addition to delivering us maybe up to a couple of thousand dollars on the energy side, it might also lower our customer acquisition cost by a couple of thousand dollars at the same time and, therefore, combine to create, like, a very significant advantage. And grid services is an area where we have a commanding lead. I'm actually not aware of a competitor of ours who's announced a grid services arrangement, let alone the numerous ones that we have, both announced and in the pipeline, either contracted and unannounced or almost contracted.

So with the announcements that you made this morning or yesterday, how many of these programs are up and running? And should we think of these as kind of trial programs or pilots for the time being? And how should we think about those ramping over time?

Yes. So SCE is up and running. That was the announcement from yesterday. Orange and -- because it's also involving existing systems. Orange & Rockland is launching. And I think both are examples of utilities that have very significant grid congestion and capacity needs. So these are smaller programs initially. But their needs as organizations are large. We expect to demonstrate success quickly in these programs and expect that those programs to large -- could grow to become very large over time. But in addition, we are working with a lot of other CCA utilities to bring similar projects up and running and to announce them as well. So I think this is an area where, over the coming year, we'll be talking a lot about our progress. It's my hope that, very quickly, half of the jurisdictions in which we're offering batteries will have some sort of program like this in place.

Okay. What is the long term end state for this company? I mean do you look like a kind of a mini utility or a distributed utility, I guess? Do you expect today to pay a dividend over time? And then what should a lot of -- I assume there's a lot of traditional energy investors listening today, what does this look like 5, 10 years down the road?

Sure. So there's a customer sort of product question and a capitalization question there, so let me kind of break them into 2. So interestingly, one of the things we learned when I talked about the phase the industry went through in 2015 when the pricing came up a lot, and you noticed that customer take rates at a 40% savings and a 20% savings really weren't very different, you start to ask, well, what is it really that we're delivering? If savings isn't the key reason, there's something else, let's go figure out what it is. And one of the very key emotional drivers, frankly, is utilities have very low incumbent customer satisfaction. Americans don't -- aren't in love with the utilities. They generally don't like monopolies generally and prefer freedom in choice. And I think the real opportunity for us is to develop a company -- yes, it's important that we have a good value proposition, which we do, but like, where we really treat our customers well, offer them a good product and treat them like a customer and not a meter. I was -- I actually met recently with the CEO of a major European power company who made the interesting example. He was like -- he actually used you guys. He said, if I had to -- when I move 3 steps down the street, if I had to call it Chase to cancel my credit card and reopen a new credit card account, like, what do you think people would make of that? And so our goal is to really try to be that company. And when you think about it that way, it tells you, you really want to be a holistic energy provider. And we're doing some of this in Texas already, right? So currently, rather than say, okay, we're going provide you solar energy. It's going to be 80% to 90% of your bill. You're going to buy the remaining 10% from the utility. It's going to vary by season but, on average, you'll save plenty. What you want to do is say, look, we're going to charge you a single price for all the energy that you provide: that which comes from the grid will be renewable; that which comes from the local on site, obviously, is. We'll manage all that behind the seats from you in a single bill and a good customer value proposition. In addition, our marginal cost to make a system larger is like 1/3 of our average cost, right? So if we're going to install a 10kW system instead of a 7kW system, it's like $1, $1.15 a watt more probably cheap than the utility scale, frankly. And so we're uniquely positioned to help people electrify their heating and transportation to get that from oil and gas over into electricity because our marginal cost to sell energy -- once we've originated the customer, we're building a system that's larger, it's like a few pennies a kilowatt hour. And so that gives us the opportunity both to sell things like heat pumps but also then to really cheaply provide the power to do that. And like one of the great challenges in electrification has been that, like, the heat pump, water heater costs more to purchase than the gas one. So in order to make the numbers work, you actually have to power it with cheap electricity, which we actually can do. So I think ultimately, we'd like to own as much as possible that sort of home energy relationship, be the sort of trusted adviser that helps people electrify, make everything renewable and sell and manage all those products. And then also as people grow with us over time and add electric cars and whatever and their electric demand increases, we're benefiting from that, not just by their -- the solar system that we built 5 years ago but by their incremental grid demand. And it sort of becomes a holistic energy provider. So I'd say that's sort of the vision, the long-term vision for the company, which we're executing on currently to realize. Your second question, which is, as you start to generate more capital than you want on the balance sheet and can reasonably reinvest in growth initiatives, well, what do you do with it. There -- obviously, I'd like to think one of the things we're respected for as a company is that we're good allocators of capital. And at that point, whether you're doing a stock buyback or a dividend or investing in growth, like, I think those are things we constantly evaluate -- I would point out, actually, in Q4 of last year, we did actually start a stock buyback program. It was small. I think it was about $5 million, but we did authorize it and execute on it. And so those are certainly things that we chat about at a Board level and talk to our investors about as well.

Got it. Okay. With that, we are out of time. Ed Fenster, thank you so much for joining, and thank you all in the audience for listening. Have a good day.

Thank you.