Sunrun Inc. (RUN) Earnings Call Transcript & Summary

Thank you, everyone, for joining us at the Barclays CEO Energy and Power Conference. In this session, we have with us Sunrun. We're delighted to have Mary Powell with us, the new CEO of Sunrun. We're going to go through fireside chat questions. We'll see how much ground we can cover.

So Mary, I want to dive right in. Your -- you've just started at the role. You've come from Green Mountain Power. From sort of an outsider's perspective but really involved in retail power markets and sort of a really core area of the industry, what do you think investors or even industry players don't understand well about the residential solar industry or about Sunrun in a sense? And so like how do you view it sort of differently?

Wonderful. Well, first of all, wonderful to be here with all of you today and to have this chat. And I could not be more thrilled to join this amazing team at Sunrun. Just -- and it really ties in very well. The reason I'm thrilled it really ties in very well to your first question, which is yes, I've been in the power industry now for over 20 years. I would say that one of the things I and our team in Vermont seem to understand really, I think, significantly ahead of the pack was that we really were in the midst of a complete transformation of the energy system. That what was going to happen and is happening is that we really are transforming from a high-level perspective, how customers think about energy, how customers receive energy and the innovation and the advancements in distributed technologies has just been profound. So really starting well over a decade ago, Moses, I was very involved in accelerating what I saw as a customer-led revolution to distributed technologies. Because distributed technologies, like what the kind that Sunrun provides, which is solar plus storage plus soon, EV chargers, really, and soon, very whole home electrification, is a space that really the utilities can't be in and aren't in, which is really the transformation space. The ability to provide customers with technologies that will keep their homes a lot safer, a lot more comfortable, a lot more affordable and energy independent in a rapidly changing world from a climate perspective. So I just see it as like the most important development that has happened in energy in the last 100 years.

Yes. Yes. Yes, right. I guess since the oil revolution, right.

Yes, for sure.

And so how would you frame Sunrun's world view? There are a lot of ways to sort of put this. On the one hand, it could be we want to get as much solar plus storage and then over time, full electrification to as many customers as possible. An alternative to that might be Sunrun wants to find that low-hanging fruit customer that has the widest gap against their utility bill in terms of the potential of what you can save them and widen that customer base, but that's a more local ground game. Or you could just say it's all things, sort of in your first answer almost hinted at this, all things distributed generation in some sense or distributed energy. So wherever you need to be, you'll be, and good services is a part of that. So to some degree, it's going to be all of those, world views in a sense. But how do you view it?

Yes. So yes, 100%. It's the broad view of really being that trusted, beloved partner that helps customers transform their relationship with energy and move to the adoption of technologies that are going to, again, make their home more affordable, make their lives more affordable, just like EVs are more affordable now than fossil-based fuel driven vehicles in most areas of the country. So it is about being that accelerator of that electrification, which ties back to where we started, the bread and butter of our business, which is as consumers, as customers want to move to more electrification, we undoubtedly are going to need to provide more solar technology on their homes to power all of that electrification. So I do think, though, that sort of the beginning value proposition of sort of just running around saying, "Geez, I can save you money off of your utility bill," is somewhat -- it's pertinent, but it is somewhat yesterday's value proposition. Because I think the more sophisticated value proposition is looking into, again, all of the innovation that's happening in technology and the capability to go in and really help customers transform their lives and their relationship with energy. So as I look to the future, Moses, I see a future where we're going to be meeting customers where they are. And there are still may be some that just say, "Hey, I just want enough generation to offset or to eliminate my utility bill." Fine. But I think what we're going to find is more and more customers are going to see that the advancements in technologies and innovation as helping them to make their entire lives more comfortable, more affordable and really way more resilient. So for customers today that have an EV, they have solar, they have storage, they are -- and then they get hit by climatic events in their state. They are in a much better position certainly than any utility provided customer. But I would say than customers who just took a one kind of dimension lens to electrification.

Right. And the resilience, you had mentioned that, that's clearly the avenue that has sort of moved into parallel track, in some cases, the primary driver of why a customer might go to solar plus storage, right, wildfire in California, a hurricane in Florida. So that's very interesting. Anything in the -- whether it's the customer acquisition process or it could be any element really of Sunrun's business, the financing strategy, the grid services aspect, just tying up sort of your view coming in with a sort of fresh look. Anything there that you think is sort of a glaring misconception? Maybe there's not and the market's sort of educated a little more now, but where you think?

Well, I think the market is getting more educated. But I do still think there's a lot of misconceptions and a lot of a lack of appreciation of the -- just, again, what I view as a customer-led revolution to distributed technologies and the adoption of the kinds -- the space that we're in. And again, not really appreciating the fact that there is no -- again, I ran a utility. There is no utility solution to provide the kinds of technologies we can provide and the kind of resilience we can provide in the face of climate change and also appeal to the values-based relationship with customers where they're getting the opportunity to feel like they're having an impact on this broader issue that, for some, they can feel so powerless about. So I think there's many, many important aspects to what we're doing for sure.

Right, right, right. No, that makes a lot of sense. And then Sunrun's value prop itself, I think I still face investors that -- and maybe there are some analysts that really just don't, in my mind, at least understand the value prop. And I want to position 2 of them, sort of can talk about why Sunrun chooses a certain path. So 1 way to look at it, at least from Sunrun's business, acquiring all these assets, all these contracts on homes, is you're layering a sort of utility-like payment over time or a utility-like structure where you get to harvest off that. And to some degree, that's, by definition, going to be the case. The other way to look at this is has sort of been my understanding of how Sunrun approaches the business is you monetize enough of the asset -- Ed sort of went through this even in the last call in the update. You monetize the asset in some sense upfront or around upfront. You wedge that amount over time, lower financing on the back end, more content on a home over time so you can monetize more. And you'd still have a value -- a customer, you can upsell them grid services and so on. But it's sort of this upfront cash model. Any -- first of all, any way that you would frame that differently? And maybe you could talk a little bit about sort of the tradeoffs and why it's been beneficial for Sunrun to sort of not have to use corporate capital and prioritize that layered method of utility-like payments and more so this upfront monetization method? So sort of a long question there, but any thoughts on that?

Right. I mean I think you nailed it, Moses. That is our strategy. And kind of bending back to your other question a bit on grid services, too. I should also add that I think a huge part of our long-term value proposition is that we are an important part of this energy transformation at very different levels of the value chain. So in other words, grid services, I feel like that really appeals to me as somebody who did, again, come from the utility business because the reality is if we use these assets in a way that can make the grid work more affordably, it's better for society at large and it creates additional value streams for those of us who are in the distributed technology space. So -- but yes. So the answer to your question is, yes, the model that we have, I think, is incredibly powerful. As you know, we're positioned for significant cash flow generation with this model and this approach we've been taking. Because of our size and our scale, we have access to really good low cost of capital, as you've seen. We've also been active in the ABS market, as you've seen. And I think there's good reason to believe that we will stay active in that kind of financial approach and strategy. And again, from my perspective, what is so exciting is I see nothing but additional opportunity around value creation back to your question about all the spaces that we're in and how we're looking at this strategic electrification from a very broad perspective.

Right. Right, no. Yes, that makes sense. And with this strategy and as we -- we don't have guidance for '22, of course, yet. But as we look into next year and beyond, it's -- even with a wide range of assumptions from the investor community, it's pretty easy to land somewhere where there's significant cash generation. I'm thinking a few years ago, it was $100 million, pre-COVID in 2019 at a smaller scale business. So you could just zoom out and say, look, we see the scale of the business and where it's moving. And we don't need to know all the details yet, but there's going to be a lot of upfront cash generation, hits the balance sheet. And you've already been getting this question from last earnings call from one of my peers. But really, investors will be very quick to ask this question. What are you going to do with the money? There's going to -- there's R&D, there are buybacks, I mean there's a deeper [ roll ] in grid services. What are your thoughts?

Yes. I mean -- so I know we've disclosed that basically, yes, all of the above, right? So we have -- we've done buybacks in our history. Certainly, that's a Board decision, ultimately. We've done some really important strategic partnerships because of our ability to generate a significant amount of cash. I think the recent SK partnership is a great example of that. Again, because of our scale and I believe our capabilities to think very broadly on this topic of strategic electrification -- and again, we're doing this amazing partnership with Ford. So yes, I think it gives us great flexibility to deliver value. So...

Is -- what role will -- to get grid services sort of to the next level, you'd, at some point, need to start pushing hard on retrofitting, I guess, storage. So sort of thinking, is that going to move itself toward a priority? Does that sort of wait for constraints and on availability of storage systems and price? How do you think of tackling that?

Yes. I mean, Moses, as you know, right now, there are supply chain constraints, right? There's always actually in any space that's growing as quickly as this, you're always going to bump into -- it's always going to be bumpy at different times to support the just incredible growth happening in this industry. So yes, so there are supply chain constraints, there are challenges. But fundamentally, you nailed it. This is a space where, again, I started this work over 10 years ago of, as I said, accelerating what I viewed as a customer-led revolution to new technology. And again, I think the analogy to -- going from landlines to cell phones is one that I think people should focus on, right? It's -- we are providing new, much more flexible distributed technology. So with that, I think from a broad picture perspective, the growth trajectory for the industry feels very clear and very profound. But it doesn't mean that we're not going to have, at different times, all the different constraints and challenges and opportunities that pop up along the way. As it relates to building out the grid services, I think what you're starting to see is you're starting to see more and more utility leaders that are -- well, some could say some are enlightened and some could say some are waking up to the fact that this is happening, right? And so as they wake up to that fact, I think they will also see that, again, certain organizations like Green Mountain Power have already proven that you can create a much stronger grid system, even a traditional grid system, by leveraging these distributed technologies. So you're going to see more and more of that. We are seeing more and more customers wanting to add storage. We expect that to continue to grow. And again, there are some temporary challenges, supply chain challenges that we're all having in the industry. But because of our size and scale, we are very well positioned to have access to storage as it is available.

And I'd be remiss if I didn't ask, you have 2 primary vendors of storage, one super primary. Are we at 1/3 at any real volumes? Or are you going to have to punt that question? I'm leaving an opening in case you can't.

Yes. I think, Patrick, I would punt that to you as I want to make sure I don't run afoul of anything we've already said.

We have 2 primary suppliers, LG and Tesla for batteries. Our overall procurement strategy is to run a diversified supply chain as we do with modules, as we do with inverters. To the extent other manufacturers come to market with products, of course, we evaluate them for their feature set and price, et cetera. But nothing to report on that at this point. We picked the best technologies and have good suppliers with our current battery partners today.

Okay. No, I mean that's very clear. I don't think I need to dive any deeper into that one. So Mary, thinking about the growth of the customer base. There are multiple approaches to how you can acquire a customer. There's -- the way that it's often distilled, even though it's not as simple as a dealer model, a direct model, obviously, there are variations along the way of how that's done. And Sunrun's sort of done in all of the above. And I would say -- maybe I'm just looking back in some positive hindsight on it, but that's actually what's helped gain scale. And of course, add Vivint and there you go, that's the story of how you got to the scale you reached, among other things. Which channels -- as you're ramping up on the business and sort of seeing where the ground game is today, where do you see the greatest, either difficulties or competition? Maybe it's in dealer network, on the lease or the non-lease side? Where do you see the greatest opportunity? Maybe it's on direct. I'm sort of giving what I am guessing is the answer upfront. But I want to leave it to you, maybe there are some gaps here that we're missing.

Well, first of all, I mean, one of the reasons I'm so excited to be a part of the Sunrun team is really, to your point, we have adopted a go-to-market strategy that has us learning and active in every single way to go to market, which I think, again, with an industry that is growing profoundly, that feels like a really intellectually sound approach, right? So what I love is we are in all of the spaces. And again, we should not forget e-commerce to being important, like we're really moving into that space in a significant way, right? So we want to meet customers wherever they are. We want to create the company that is the beloved, trusted energy provider of the future. And so one of the things I'm doing, and again, it's a great opportunity as a new CEO, it's how I always learn, is I'm spending time boots on the ground in the field in every single one of those approaches, right? And I'm spending time talking to customers. And I just -- yes, so I love where we're at, Moses, in the context of what our go-to-market strategy has looked like historically and how it looks like right now because we are so perfectly positioned to strategically pivot as the industry matures and evolves. And so again, we're all in on this approach. And what we're finding is that it is -- it's proven very successful for us, as you've said.

Yes. I know. And I actually forgot e-commerce, of course, that's the sort of a growing channel. Sort of thinking on the fly on this one, is there any potential that you would sort of launch a parallel track to something -- it would be different, I'm guessing, but something similar-ish to the way Tesla started to do this 2 years ago, with mixed results, I would pass my own judgment on that. But there are maybe some things to learn there. Do you see that as a possible sort of democratization of solar even faster in terms of the customer acquisition process or the bespoke nature really is going to be the vast, vast majority for the long haul?

Well, one of the things I love about our go-to-market strategy and one of the things that I think gets lost sometimes with some organizations is I feel like it's an intimate go-to-market strategy. It really is about building customer relationships. And that's as -- again, Moses, as I look at where we are, it's like really the beginning of the growth of this space. Like we've grown so phenomenally, but it's like we are so much still at the beginning because it really is about how do we then build these relationships so that we then are building on them. And so that we're providing other forms of strategic home electrification. So I think one of the things really to be very thoughtful about, and I think we are very thoughtful about, is how do you maintain and build that strong customer relationship and connection. And so that is one of -- so as we think about, again, meeting customers where they are and meeting those customers who might not want a personal relationship, right. And they might be more comfortable with a more transactional one, we want to be able to be there to meet them for that type of relationship. But again, since we are so much at the beginning of this strategic electrification, I think, ultimately, this is a relationship business. And how we are going to really make a mark on our brand is being that customer-obsessed relationship energy provider of the future.

No, that makes sense. And then when originating different products, so often, we think of leasing PPA, of course, is the same. There aren't -- there's a nuance there, of course. And then it's really the lease bucket versus the loan bucket. And there's a constant, almost ambient level of concern that a lease company or lease product has faced since Sunrun and SolarCity were pitching this all the way until now, and it bubbles up every once in a while, where there's this fear that a loan product will sort of take over and commoditize solar in some way. What are your views on the lease versus loan? And again, that's sort of a misconception-type question, like where do you think people are missing things, in a sense?

Yes. And again, I think that what's really important is in any space and any industry is to meet the customer where they are. But also to do a good job in making sure that the customer understands the options and understands the differences in the options and what would best suit their lives. So again, I come at this from a place of abundance, like there is so much transformation to be done that, again, it's not about forcing a one solution, right? And so again, I like where we are because we can provide really either option. Clearly, I think from a customer perspective, there are some great reasons why the lease arrangement could make a lot more sense for a lot of our customers. And again, that's what's really -- what I like a lot about our go-to-market strategy is it is so personal. So we really get to have that opportunity to make customers aware of the difference and the difference in the options.

Yes. No, that makes sense. And thinking about every quarter, there's questions on attachment rate and how much storage. And I had mentioned earlier, of course, on the constraints that may have pushed up price a bit and sort of stalled the timing of how deep storage can penetrate on the near-term deployments. Even then, I think you and your peers have done quite well actually in navigating it. What's sort of that tipping point where it's no longer pitched entirely as a resilience product, but it might be actually something that customers that don't have the same economic value proposition are actually starting to tack on storage? Is it a certain price point? Maybe it depends on the types of product out there. But is it a customer -- if they pay $4,000, $5,000, $6,000 and no more than that, let's say, pre subsidy. That's the type of level that -- this is the type of thing where we start seeing it in 30%, 40%, 50% of installs, uniform, not just like Bay Area, for instance. Or is it not something we could generalize yet, we still need to sort of see in each market is its own battle?

Well, certainly, I mean, again, I want to make sure I'm being consistent with what we've publicly said on this issue before, Patrick, so if you want to help me out and take that one?

Yes. So from an attachment rate standpoint, we talked about how many batteries have been installed, and we provided outlook of growing battery installations 100% year-over-year for this year. But it really varies by market. So if you look at Hawaii, for example, attachment rates are around 100% given some regulatory structures that don't really allow energy to be compensated when exported. Although the utility is now coming back and asking for grid services programs to do just that. So California, obviously, with variable time of use rates and reliability concerns, you certainly see much higher attachment rates. But a market that has perhaps lower pricing and flat rate structures, there's less economic value to add a battery, especially today at today's battery costs. So I think you really have to look market by market before you would generalize what will attachment rates be. But we do know utility rates keep going up. We know battery costs in the long term are going to come down significantly. And so just think of what that can enable a customer to be able to do with an integrated battery when you reach certain price points. But I don't know if we can say it's $3,000, it's $4,000, but...

Right. No, that's -- it's...

Yes. No. And I agree. I just -- on the directional aspect, I mean, again, I think this is an area that we're going to really, again, continue to see exponential interest. And as more utilities again start to realize the incredible value of working with companies like Sunrun in the context of then utilizing these devices from a grid services perspective, much like -- I know we talked about that on our earnings call, that just in California, right, we had a request. But the regulator made a request to say, geez, can we utilize all of these storage devices when we were bumping into some grid challenges this summer. And you're going to see that type of thing really continue to accelerate, which then also, from a broader directional perspective, will create, inevitably, more value chains that will come for those -- for companies like Sunrun that have those devices in homes all across America and can leverage and utilize them from a grid perspective.

Great. Yes. No, that's great. And then I guess being mindful of time here, maybe you could touch a bit on policy. What are you focused on? I know, for instance, Lynn has mentioned in the past a good deal about permitting. There's the ITC. Would it get extended more? Refundability, there are all different permutations of that, stand-alone storage, investment tax credit. So a lot of different things. There's California new home policy and so on. So what's top of mind, maybe it's the standard ones? And then just also if you could touch on these perceived negative side, let's say, the net metering 3.0, some of the access to panels and how that's affecting Sunrun, if at all, from the China-U.S. debate. So sort of the positive and the negative.

Yes, I would say, so from the positive perspective, and I'm sure you're aware of just the announcement that came out, I think, the day before yesterday, the Biden administration really focusing on solar, in particular, as a really important part of hitting targets. So from a broad picture perspective, I would say we continue to move in a direction that is just 100% supportive of the growth of this space and this industry. So again, when you see what is happening at the national level, what you see what's happening trending from a statewide level, you're seeing that, again, same thing that has happened in other industry spaces. When customers want to move somewhere and in this case, you also have a climate imperative to move some place, policy tends to follow that direction. So I think directionally, we continue to be encouraged by what we see. And I think you're right that California's new home law on that, all of those pieces are really, really positive. At the same time, you're always dealing with -- you're always going to deal with the bumpiness of other kinds of modifications and changes. So I think directionally, with again, utility costs just rising. And with -- as I look to the future, I see nothing but continuing pressures for those costs to go up, right, at the utility level. You see mostly favorable trends in terms of the continued both cost of storage coming down, the technology evolving and you see policy that is, again, generally supportive. We've always prepared for a world where we have declining net metering values or we have declining ITC contributions. That said, I think we are feeling pretty positive about where we are with the ITC in the future. So again, from an all-in perspective, Moses, I see it as all the arrows are all trending up in the right direction for the industry, for Sunrun and for where Americans want to move in terms of their energy consumption.

I agree. It's quite a positive note. I'm mindful. I think we're running out of time here. So thank you, Mary. This is really great. I'm looking forward to all the earnings calls. And so thank you, Mary and Patrick.

Me, too.

It would be great.

Awesome. Thank you.

Take care.

Thanks, Moses.