Sunrun [RUN] Conference call transcript for 2022 q1
2022-05-04 21:35:05
Fiscal: 2022 q1
Operator: Greetings. And welcome to the Sunrun 1Q 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I’d now like to turn the conference over to your host, Patrick Jobin of Investor Relations. Please go ahead.
Patrick Jobin: Thank you, Operator. Before we begin, please note that certain remarks we will make on this call constitute forward-looking statements. Although we believe these statements reflect our best judgment based on factors currently known to us, actual results may differ materially and adversely. Please refer to the company’s filings with the SEC for a more inclusive discussion of risks and other factors that may cause our actual results to differ from projections made in any forward-looking statements. Please also note these statements are being made as of today, and we disclaim any obligation to update or revise them. On the call today are Mary Powell, Sunrun’s CEO; Tom vonReichbauer, Sunrun’s CFO; and Ed Fenster, Sunrun’s Co-founder and Co-Executive Chair. Following the prepared remarks we will conduct a question-and-answer session. And now let me turn the call over to Mary.
Mary Powell: Thank you, Patrick. Hi. It’s wonderful to connect with all of you again today on what Sunrun has been up to in the last quarter. It’s hard to believe it has only been about two months since our Q4 call because we have been incredibly active, and I am pleased to say we have a lot of positive developments to share. I am encouraged and excited about the progress we are making as a leading provider of clean energy. With climate-related events becoming more urgent daily, our passion and optimism about our purpose and our ability to lead a distributed clean energy revolution has never been stronger. Bottomline is we delivered results in Q1 that beat our expectations. We added over 29,000 customers in Q1, representing over 213 megawatts of solar energy capacity installed, a 27% increase from last year, and well above our guidance. We delivered a Net Subscriber Margin of over $7,100, which was also slightly above guidance with an increase from last quarter. I want to cover a few topics today before I turn the call over to Tom and Ed for their quarterly updates. First, customer demand remains incredibly strong and Sunrun is growing at a rapid rate. We are also achieving these growth levels at a scale that is 2 times our nearest competitor, while innovating and continuing to generate value from the combination of the two companies. Our customer orders grew 39% compared to last year, outpacing our still-impressive robust installation growth of 27%. These strong demand trends resulted in expected growth in our backlog of customers. We are working strategically and expeditiously to ramp our installation capacity, both internally and with our partners. We are seeing strong improvements in our internal installation capabilities and feel blessed to have some of the longest standing channel partner relationships in the business, which are strategic and valuable for not just the incredible reach they provide in the market but also for meeting additional customer demand. I fundamentally believe we are at a tipping point of adoption, where clean energy is no longer seen as a novel concept but something customers are demanding. Customers see escalating energy costs and a lack of reliable power all around them and they want the security and peace of mind that comes with energy independence. Climate change and geopolitical issues are now affecting the daily lives of so many consumers, accelerating what I have always seen as a looming consumer led revolution to a cleaner more decentralized energy future, one that is customer centric and can incorporate the more reliable, localized, and innovative way consumers are thinking about powering their vehicles and home from their rooftops. Second, we are quickly adapting to the world around us. Material costs and interest rates have increased and we have taken fast and effective action to adjust to these industry-wide dynamics, in a way that will make us faster, better and stronger. We recently increased prices across most markets, with flexibility granted to us by double-digit utility rate inflation around us. These pricing adjustments will lead to considerable increases in subscriber values and can help mitigate the recent cost pressures faced by our industry. You can see in the accompanying slide deck that the customer additions to our backlog following this price change and other changes we have made are coming at much higher subscriber values, which we expect to realize over the coming quarters, given the size of our backlog and cycle times, which vary by market. Third, we are continuing our focus on innovation. We have now deployed over 37,000 residential batteries, far more than any other energy company and are networking these batteries together to form virtual power plants in many markets. While it takes time to enter new markets and show how valuable dispatchable, distributed energy resources are for the grid, at a certain point I believe it will become self-evident to traditional utility companies and grid operators that they need to partner with us and our growing customer base. As utilities start to realize the resiliency value we can offer to the grid and their customers, regulators will undoubtedly push them to do so as well. There is no quicker way to get to a more affordable resilient grid than by embracing the rapid adoption of distributed resources. Our partnership with Ford is on track and poised for exciting things in the very near future. Ford launched production of the F150 Lightning last week, and Sunrun is now in the process of connecting with customers to facilitate the installation of the Charge Station Pro and the Home Integration System along with providing options for solar and battery systems in participating markets. Over the next few months, Sunrun expects to install thousands of these systems for F150 Lightning customers, and we will provide an update on the realized benefits of the partnership later this summer. During the quarter we also invested an incremental $75 million in equity into the venture we co-established with SK. The venture is making significant progress and expects to unveil powerful new technology by the end of 2022 with commercialization expected this year or early 2023. Sunrun currently owns approximately 37% of the venture and has preferential access to the technology being deployed. Sunrun expects the differentiated products and services will accelerate Sunrun’s business and expand the customer value proposition considerably. I am incredibly excited by the unique product offerings we will have for Sunrun customers through this partnership. Fourth, we have a strong team and we are moving fast. I am leveraging my experience transforming companies and finding ways we can make Sunrun even faster, better and stronger, adding to the foundation that has been put in place. Over the last few months, we have collapsed several layers of management structures in various parts of the business to ensure we operate nimbly and can share information and learnings from our branches and from our customers in the fastest, most streamlined way possible. We have also taken actions to expand certain areas of the business while reducing investments in others. For instance, we opted to transition a few of our sub-scale branches to a channel-partner driven go-to-market strategy and took decisive action to walk away from aspects of markets that fundamentally weren’t hitting our return thresholds. We also refined our approach to pricing home-upgrade projects and increased our investment in our customer-facing teams. With this change we are now achieving customer care agent answer times of 10 seconds on average when a customer calls with an issue. This is a big improvement from where we were in Q4 at about 3 minutes. We are always innovating and finding new opportunities for improvement, but these are a few examples of the kinds of investments we are making to make the company stronger. All of these changes were made with a laser focus on customers and the culture of customer obsession we are building together. I firmly believe that the more focused and deliberate we can be in our go-to-market strategies and organizational structure, the faster we can grow, innovate and respond to the needs of our customers and the communities we serve. Today we are also announcing that, effective May 30th, Danny Abajian will succeed Tom vonReichbauer as our CFO. Danny currently oversees Sunrun’s project finance group, where he has produced significant results for the company for nearly 12 years. He is a talented, driven and passionate member of the Sunrun team who brings a wealth of experience and knowledge to the CFO role. I look forward to partnering with him for the next chapter in Sunrun’s journey as he leads a combined project finance and corporate finance team. Tom, who has been our CFO for the last two years, will be leaving Sunrun to pursue another opportunity at a private technology company outside of our industry. I am so grateful for the partnership with Tom over the last two years, a period which included transformational changes with the acquisition of Vivint Solar and rapid growth, while navigating the challenges of COVID. Tom will remain in a consulting capacity to ensure a smooth transition for the next four months and we wish him all the best in his future endeavors. Last, but certainly not least, before I turn the call over to Tom and Ed, I want to thank our team for their hard work. Every time I am in a branch location or out in the field with our team, I am inspired by their passion, ingenuity and willingness to take on challenges. My mantra is delivering on our customer obsession faster, better, stronger, and I am proud of Sunrun’s team who is embracing this opportunity to maximize our impact for our customers, investors and the communities we serve. In addition to thanking our amazing employees, I also want to express my sincerest gratitude to our customers, they are the ones transforming our country’s energy system and helping to solve climate change, one home at a time, at a very rapid pace, it is an honor to serve them. Over to you, Tom, and again, thank you so much for your service to Sunrun and our planet.
Tom vonReichbauer: Thanks, Mary. It has been a privilege to get to work with you and so many talented and passionate Sunrunners over the last two years, and I look forward to following the company’s continued success. Turning to the results for the quarter. In the first quarter, customer additions were approximately 29,500, including approximately 22,000 subscriber additions. solar energy capacity installed was 213 megawatts in the first quarter of 2022, a 27% increase from the same quarter last year, which exceeded the guidance we provided of 195 megawatts to 200 megawatts. We saw strong customer demand for our products and services in Q1, continuing a trend we saw throughout 2021. Customer orders increased by 39% in the quarter compared to the prior year, outpacing installations, leading to a growing backlog. While this sets us up for continued strong deployment growth, the mismatch between sales and installation activities creates a drag on reported financial performance, as we have been highlighting over the last few quarters. We have now installed over 37,000 batteries and we expect battery installations to increase by more than 50% in 2022, which is twice the growth rate of overall solar installations. While battery availability constraints continue and supply chains remain dynamic, we expect to ramp up battery installations considerably in the quarters to come as supply increases. We ended Q1 with approximately 690,000 customers and nearly 589,000 subscribers, representing 4.9 gigawatts of networked solar energy capacity, an increase of 21% compared to the prior year. Our subscribers generate significant, recurring revenue with most under 20-year or 25-year contracts for the clean energy we provide. At the end of Q1, our annual recurring revenue or ARR stood at $883 million with an average contract life remaining of over 17 years. In Q1, subscriber value was approximately $37,000 and creation cost was approximately $29,900, delivering a net subscriber value of over $7,100. Total value generated, which is the net subscriber value multiplied by the number of subscriber additions in the period, was $151 million in the first quarter. This result was slightly above the outlook we provided last quarter, as we noted the continued effects of COVID on reduced installation capacity and knock-on effects for crew productivity in early Q1, and continued fast growth in orders. While demand has been incredibly strong over the last few quarters and our backlog has grown, we believe in our ability to scale fulfillment capabilities to serve this backlog as we move through 2022. As Mary mentioned, we adapted to changes in our underlying cost environment, both on higher material costs and capital costs, by increasing prices across our markets with some markets seeing double-digit increases. The underlying utility rate inflation that our customers are experiencing is in line with these pricing changes, and in many cases, utility rates are rising even faster, creating an opportunity for price increases without impairing the savings component of our customer value proposition. As you can see on slide nine, this is having a significant impact on the subscriber values we are adding to our backlog, increasing by over $3,000 per subscriber. As we work through the backlog over the coming quarters, you will start to see this flow through our reported subscriber value once installed, offsetting many of the cost pressures the industry is facing and delivering net subscriber values of more than $10,000 in the third quarter of this year. We are strategically optimizing overall sales activities and revising our policies on pricing and product mix in certain markets. These moves are already producing positive results. Turning now to gross and net earning assets and our balance sheet. Gross earning assets were $10.2 billion at the end of the first quarter. Gross earnings assets is the measure of cash flows we expect to receive from customers over time, net of distributions to tax equity partners in partnership-flip structures, project equity financing partners, and operating and maintenance expenses, discounted at a 5% unlevered capital cost. Net earnings assets were $4.5 billion at the end of the first quarter, an increase of over $200 million from the prior year but a reduction of around $150 million compared to the fourth quarter. Net earning assets is gross earning assets, plus cash, less all debt. The sequential decline is primarily due to the $75 million investment in the venture with SK, the continued consumption of working capital given the strong sales activities and growing backlog and our decision to maintain strong inventory positions in the face of a dynamic supply chain environment. We ended the quarter with $863 million in total cash. Turning now to our outlook. The strong customer demand we continue to see and success increasing our fulfillment capacity gives us confidence to revise our full-year guidance to over 25% year-over-year growth in solar energy capacity installed. Consistent with last quarter’s guidance, the volatile interest rate environment, pending California net metering policy, and proposals in Congress to extend and/or increase the investment tax credit limit our ability to provide 2022 guidance for total value generated and cash generation. Due to the rapid rise in interest rates, we now expect the projects we originated prior to the recent pricing changes to generate less proceeds than previously anticipated. The opportunity to build a large California backlog, or further changes to interest rates, and the resulting timing of project finance activities, could result in meaningful swings in total value generated and cash generation in either direction. We currently forecast total value generated for the full year 2022 will grow meaningfully faster than volumes and that net subscriber values will increase sequentially throughout the year. As I mentioned earlier, we expect to deliver net subscriber values above $10,000 in Q3. For the second quarter, we expect solar energy capacity installed to be in a range of 235 megawatts to 245 megawatts, which reflects more than 12% sequential growth and more than 25% year-over-year growth at the midpoint, well on track for our increased annual outlook. Now, I will turn it over to Ed.
Ed Fenster: Thanks, Tom. I want to echo Mary’s appreciation of Tom’s contributions and also to share my excitement for Danny’s promotion to CFO. I have worked shoulder-to-shoulder with Danny for over a decade and know he is the right person for this role. His knowledge of Sunrun and his finance capabilities are unparalleled. In his nearly 12 years at the company, Danny has also pinch hit in several other areas, for instance in corporate planning and M&A. He was instrumental to our convertible debt offering as well. Following Danny’s ascension to CFO, Stewart Bewley will lead project finance and report to Danny directly. I have been looking forward to Danny having this opportunity and I am very excited to see him open this next chapter. Today I will discuss the impacts of increases in inflation and interest rates on the company, summarize our recent capital market activities and provide an update on regulatory matters. This quarter, we have been busy positioning for increasing interest rates, for instance raising prices to new customers as necessary behind the large utility price increases that are underway. As regulated monopolies, utilities are able to pass through their higher labor, fuel, and capital costs to customers, and despite an 11% year-over-year increase in national electricity prices, this pass-through has just begun. In addition, our existing capital structure is well hedged through a mix of interest rate swaps and fixed coupon, long-dated debt securities. As Mary noted, we have implemented meaningful price increases and expect recently originated customers, when installed, to generate at least $3,000 in incremental net subscriber value, as measured at a 5% discount rate. This benefit will flow through in Q3 and is designed to mitigate the higher material and capital costs the industry is facing. On slide nine, you can see the sensitivity to subscriber values using various discount rates. We currently observe our capital costs as between 5% and 6%. Increasing the discount rate 25 basis points to 75 basis points above 5%, for instance, would reduce pro-forma subscriber values by approximately $750 to $2,100. As you may recall, several years ago we used to report the figure using a 6% discount rate and didn’t update it to 5% until we saw capital costs below 4%. While we actively monitor capital costs, we don’t plan to update the discount rate for minor fluctuations above 5%. In April we priced a $0.5 billion asset backed security senior note. The transaction was the largest solar lease portfolio placed in the ABS market ever, across all issuers in the sector. We expect to achieve proceeds on this portfolio, net of fees, from all sources, rebates, tax equity, customer prepayments, swap terminations, and senior and subordinated debt, of about 95% of contracted subscriber value, measured at a 5% discount rate. We expect to achieve a weighted average cost of capital for this pool of assets of about 4.5% including benefits from interest rate swaps, or about 5.5% excluding swap benefits. As we have shared before, we frequently enter into interest rate swaps to hedge capital costs on our newly installed customers. As we tweak our financing strategy and benefit from less robust swap terminations, we expect total advance rates to settle over the moderate term between 85% and 95% of contracted subscriber values, discounted at a 5% rate. We believe a wider range is appropriate given the current volatility in the fixed income markets. Finally, as described on the last earnings call, we retired our $250 million recourse lending facility and arranged a larger $425 million facility at enhanced terms and with a longer tenor, during the quarter we upsized that facility to $600 million on the same terms, the facility is only partly drawn. We continue to maintain a robust project finance runway. As of today, closed transactions and executed term sheets provide us expected tax equity and project debt capacity to fund over 400 megawatts for subscribers beyond what was deployed through the first quarter. The multitude of events causing massive delays in the utility-scale segment are causing several capital providers to experience unexpected short falls in 2022 transaction volumes, especially among tax equity investors. We expect this to provide a modest tailwind for us. Turning now to an update on regulatory matters. Sunrun is in a strong position to navigate a dynamic supply chain environment, most recently compounded by the uncertainty of the potential retroactive tariffs, catchily called by many the AD/CVD anti-circumvention matter. This investigation by the Department of Commerce concerns solar imports from Malaysia, Thailand, Vietnam and Cambodia using Chinese inputs. To maintain high levels of component supply, particularly solar modules, we continue to increase our inventory position. As of March 31, we held over $0.5 billion of inventory on balance sheet, up $49 million during the quarter and up $273 million since the start of 2021. We have over 100 days of supply on hand of both modules and inverters and continue to procure modules from a diversified base of manufacturers. We believe the Department of Commerce’s investigation is misplaced and contrary to the administration’s objective to encourage the transition to clean energy. Most head-scratching is that the application of tariffs against these countries would simply cause American solar developers to buy panels directly from China, which currently exports almost no product to the United States. We have entered into several supply agreements for hundreds of megawatts of solar modules in total from manufacturers unaffected by the investigation. We also expect to enter into additional agreements in the coming months. Purchases from such manufacturers may be on less favorable terms than our existing suppliers and result in increased working capital investment. Last week, the Republican Governor of Florida vetoed an anti-solar bill that was drafted by the state’s utilities and pushed through the legislature earlier this year. The vetoed bill, which was somewhat watered down as it went through the legislature, proposed certain reductions to net metering in future years and called for a regulatory proceeding to consider a fixed fee for solar customers. While also citing inflationary pressures, Governor DeSantis’s veto statement essentially said that no one should be forced to pay a utility for power the utility never produced or sold in the first place. Prior to the veto, the largest utility in Florida was granted a double-digit rate increase. We believe the read through to California is positive and the comparison was immediately taken up by the media. For instance, Politico opined, quote, DeSantis is now in the position of setting a pro-solar bar for his rival, California Governor Gavin Newsom, to clear, unquote. In addition, the massive delays in utility scale renewable development are causing elevated blackout risk in California. On April 27th, Governor Newsom wrote the Commerce Department that their investigation alone threatens our ability to maintain energy reliability ahead of the retirement of 6,000 megawatts primarily generated by aging, gas powered once through cooling plants. Utility scale projects are also struggling under pressure from unforeseen capital cost increases and permitting delays. Throttling rooftop solar and storage deployment against such a shortfall looks even less wise than it did in December. We remain optimistic that Congress may come together to pass some sort of climate legislation which includes an investment tax credit extension, but we don’t proclaim to have a crystal ball to predict when parties will come to the table, if they will reach an agreement or what the scope of any agreement might be. We will remain active in urging Congress to act, but will manage the business assuming the status quo for the time being. With that, let me turn it back over to Mary.
Mary Powell: Thanks, Ed. I am so excited about Sunrun’s leading position in this industry. I believe we are at a tipping point of adoption and starting to see a transformational change in how consumers think about energy. Before we open the line for questions, I want to stress how appreciative I am of our team, our customers, and our partners who are all helping create a planet run by the Sun. With that, Operator, let’s open the line for questions.
Operator: Thank you very much. The first question comes from Brian Lee from Goldman Sachs. Please state your question, Brian.
Brian Lee: Hey, everyone. Thanks for taking the questions and kudos on the nice execution here. I guess first question I had was just on the subscriber value. You are going from $7,000 here for the past couple quarters to now $10,000 plus in Q3. I know you have talked about pricing a ton so that I know that’s a clear driver. But I would assume there is other drivers here in terms of mix and cost improvements, more batteries. So can you kind of give us a bit of the bridge from the $7,000 to $10,000. How much is price? How much is other drivers? And then I know historically you have talked about subscriber value targets up into the $10,000 to $12,000 range. What is this sort of pull-forward here this year to get to that $10,000 range already mean for kind of the longer term targets? And then I had a follow up.
Tom vonReichbauer: Yeah. Thanks, Brian. So the last two quarters we saw abnormal effects from the drag of COVID and labor productivity challenges there at the end of Q4 and early Q1. So we saw those abate throughout Q1 and certainly having continue here into Q2. The pricing moves will be a large component of this, but continuing to increase battery attach rate as well, some of the general ongoing efficiency measures we have taken as well will show up as positive moves on that subscriber value, offset partially by rising material costs. So as we have taken on slightly more expensive components over the last couple of quarters, those start to work their way into the installed volume here in subsequent quarters. We view the greater than $10,000 number for Q3 as an outcome that we are particularly excited about and optimistic in. And I don’t think it’s a fundamental change from long-term views, maybe it sounds like to your point, it’s sooner than you had expected, but definitely the direction we have been pushing for quite a while. I think we want to see where the pricing changes land and work through our backlog. The one dynamic that we continued to work through is the incredibly strong demand we are facing that in any given period, if demand outpaces, that creates this reported margin drag, because of the timing of sales and marketing expenses versus installed volumes. So that may have some variability in there. But we are confident in the $10,000 number, feel like the majority here is moving through these pricing and product mix changes.
Brian Lee: All right. That’s great. I appreciate that. And then just the second question I had and I will pass it on was around, I guess, in the comments you just made Tom about the strong sales pipeline, the kind of not being able to keep up the healthy backlog, so high quality problem to have. But can you kind of elaborate a bit more on the sort of labor or if you are seeing any challenges there on the EPC side, if you are having to adopt any new strategies or thinking about that differently, just kind of how you are addressing the high level of backlog and trying to keep up here as you move through the year? Thanks.
Mary Powell: Yeah. Actually, Brian, it’s Mary. I can answer that one. Yeah. So, as I hit, basically a lot of what you are seeing that Tom hit that’s flowing through subscriber value is attached to not just the pricing but like are really going at the go-to-market strategy, taking decisive action in some markets where we weren’t hitting the return thresholds, we wanted to and at the same time some streamlining and improvement and putting into place a team and an approach that can help us make significant progress on the backlog in the next couple of months. So what we have is we are in a strong position from the labor perspective, we are growing fast, we are hiring people, we are finding we are a very attractive employer, we are really hiring high quality installation crews, and at the same time, we also as I was talking about are leveraging this amazing position we are in in the market with the kind of partners we have, channel partners we have, where some also want to be build partners. So we are working very decisively with them in terms of having a real approach to make sure that we are closing a lot of that backlog in the coming months.
Brian Lee: All right. Thanks a lot. I will pass it on.
Operator: Thank you. Your next question comes from Julien Dumoulin-Smith from Bank of America. Please go ahead, Julien.
Julien Dumoulin-Smith: Hey. Good afternoon. Thanks, team. Congrats to all those with the new roles here. Hey, just to come back to the core question here on the $10,000. Can you talk about like the puts and takes if you will, right? I mean obviously you know cost especially you are rolling off your inventory could be a detriment there, but can you talk about the extent of that price increase being a positive sort of like a growth thing before you net it out to that $10,000 versus where you are starting out today? And just to go back to the prior point, the sustainability and trajectory from here, any nuance we should be considering beyond 3Q here as you roll it forward?
Tom vonReichbauer: Yeah. So, the price increase is certainly our additive. Obviously, there have been modest material cost increases. As Ed noted, we have presented net subscriber value at 5% basis had had moments in time where we have been well below that on capital costs. We are now in that range. We are still going to hold that at 5%. And so, the price increases are moves that more than offset material cost increases for us. The additional moves around additional moves around higher battery attach rate and some of the changes that Mary noted that, we have made around product and pricing policy that will drive more profitable projects through. The one area, again, where we are obviously confident enough to put out the $10,000 number here for Q3, the item we have noted now for several quarters has been this backlog growth dynamic. I think with the things Mary just noted in the last question we are really confident our ability to ramp. It is worth noting we are at massive scale and still growing installation volume quite considerably, 27% year-over-year for the quarter, continuing to believe that we are going to increase at very fast rates. What appear to be you know share gaining rates relative to some of the external forecasts and we are doing that at scales. We are able to add a lot of capacity both through ourselves and through partners. There’s some chance, I guess in there, but demand continues to rip and that, again, creates a drag on reported values, but with where we are right now and what we see, we feel confident our ability to execute and get to this level.
Ed Fenster: And Julien, it’s Ed. Maybe just to add to that it’s our expectation that the improvements that we are describing are structural and not like some temporary high watermark for Q3.
Julien Dumoulin-Smith: Great. No. Indeed I am almost curious to push again in the second question here on just how far you can go with it. Not if it’s sustainable, really. But if I can actually, I mean, Professor Ed, if I can address you is that, you work on a little bit more…
Ed Fenster: Go on.
Julien Dumoulin-Smith: … could you talk about this? I hear you on the customer metric, but let’s talk about leverage value creation quickly and how you might think about the metric there, especially against this mention of lower gas rate. How do you think about that metrics evolving very specifically here against your $10,000 target and how is your financing strategy evolving more specifically? I know you laid it out in partly, I just want to make sure we have got that clear cut?
Ed Fenster: Sure. So maybe just to recap a few of the things we described on the call first. The transaction that we are in the process of wrapping up right now will have an experienced weighted average cost of capital of about 4.5%. It is benefiting from interest rate swaps. Without those swaps, we think it would have been about 5.5%. In the presentation we make the point that a subscriber value add 5.25% to 5.325% discount rate, as compared to 5%, would be worth about $750 to $2,100 less. So we see the improvements in net subscriber base that we are describing and outpacing the increases in interest rates. Obviously, that’s a moving target which we are watching carefully, including today, but one that we are staying on top of. We see, obviously, as we mentioned, significant and escalating increases in utility cost prices, which is fundamentally the -- our most significant competition. In terms of the strategy for how we finance the assets. I don’t know that we are looking at any significant differences. One dynamic worth mentioning is that the spreads that yeah, as you know, the cost of our capital that is over treasuries. Right now appears to be lower in the bank market than in the AVS markets. My suspicion for the reason of that is, there have been capital withdrawals from long-term fixed income based on the rapid increases in interest rates. And obviously, those rapid increases in interest rates haven’t caused bank deposit withdrawals. So there’s still significant excess liquidity in bank deposits and so we haven’t seen spreads in that market move. So it’s possible in the future you will see us doing more work in the commercial bank markets if the current relative spread dynamics between those markets continues to hold.
Julien Dumoulin-Smith: Got it. All right. Fair enough. I am curious to see what happens. Cheers, guys.
Mary Powell: Thanks.
Ed Fenster: Thanks, Julien.
Operator: Thank you. The next question comes from Kashy Harrison from Piper Sandler. Please go ahead, Kashy.
Kashy Harrison: Good afternoon, everyone, and thank you for taking the questions. So just first one from me, you have obviously highlighted very strong order growth here in Q1 and 39%, which is solid. The market right now is very focused on leading edge demand trends these days, just giving just the massive amount of uncertainty globally. And so I was wondering if you would maybe just give us a sense on how order growth in April is tracking? Are you still seeing that 39% year-over-year continue or are you seeing any sort of deceleration in April?
Mary Powell: Yeah. I mean, basically, again, as I hit, we feel like we are really at an incredible tipping point that’s happening from a consumer perspective. So, overall, we see the trends of adoption continuing. So that’s what informed everything that we have reported today informed our raising guidance on the year to now 25% or higher. So, yes, we are feeling like there is really sustainable demand.
Kashy Harrison: Okay. And my follow up, Ed, you highlighted in your prepared remarks that you are currently experiencing a tailwind in the tax equity market due to the AD/CVD issue. Can you give us an update on where you see the cash cost of tax equity today and maybe talk about how that’s evolved, just given the fluctuation in the interest rate market? Thank you.
Ed Fenster: Sure. It’s a good question. So I should mention. So, first, when I discussed the delays in the utility scale segment, I think it’s much more profound than the Commerce Department investigation. My suspicion is that the changes in capital costs and equipment prices would probably drive under water a third of utility scale projects even if the Commerce Department investigation was resolved with no further tariffs. So I think that, generally speaking, among capital providers who are focused on renewable projects, there’s just a lot of slippage and some people are looking for additional 2022 product and that the tax equity market is even more of a calendar year market than most markets, so you are seeing that. That said, the cash cost of tax equity continues to be up and down in the 15 -- 13 years I have been doing this really very, very close to 2% on a pretax basis, like that’s really about what it costs. And usually, when you see excess supply flush through the market, it’s usually whether it’s just bigger funds or more flexible terms on certain other things. But you don’t -- we don’t typically see very significant variation in the actual like pretax IRR in those transactions.
Kashy Harrison: Thank you.
Operator: Thank you. The next question comes from the line of Maheep Mandloi from Credit Suisse. Please go ahead.
Maheep Mandloi: Hey. Good evening and thanks for taking the questions and congratulations on the quarter and the guidance increase here. Maybe just one question from me on the price increases or potentially higher value kind of like thing for the customers going forward. Now you just think the price increases because of higher electric bills from the utilities or is that something you are kind of expecting later this year or next as we -- the utilities get into their rate base approvals? Thanks.
Ed Fenster: Sure. This is Ed. So, as I mentioned, obviously, the three major costs of utilities are all increasing fuel, labor and capital. These are reflected in different speeds in retail rates. Capital, certainly in rate cases, fuel sometime most quickly, labor in the middle and what we are describing is the clear CPI data for National Electric Energy is up 11%. And to your point, a lot of those cost dynamics haven’t yet been approved or measured or even filed for. So that’s what gives me the confidence that the 11%, which we have seen so far is only the tip of the iceberg.
Mary Powell: Yeah. And just to pile on to that, Ed, from my perspective in the utility business, one of the things I saw many years ago and I have only seen it accelerate is, we have to remember that with all of the investment you are seeing, so all of the investment in transmission distribution, all of that is creating long term systemic rate pressure. So really on top of the sort of shorter term items that that Ed has hit that are absolutely going to cause pressure, you also just have systemically these significant drivers of rate increase pressures significant drivers of rate increase pressures.
Ed Fenster: Right. On a recent call, I described, the bonanza…
Mary Powell: Yeah.
Ed Fenster: … utility capital expenditures, which are running multiples ahead of depreciation, which programmatically causes increased rate base and rates.
Maheep Mandloi: Got it. Yeah. Thanks for the color. And just the last one from me and then I will jump back in. It’s around your partnership with Ford and they talked about being more than 200,000 of reservations. But like -- could you just talk about like how should we think about upside or EBITDA contribution from that segment for this year going forward? Thanks.
Tom vonReichbauer: Yeah. So we are relatively early in the ramp, as Mary noted, production and the launch just began. We are reaching out to those early customers. You can think about a couple of different components of the business. There’s our EV charger, sale and installation business that extends to include the home integration system with the bidirectional inverter enabling home backup from the vehicle. That portion of the business on its own, you can think of as a solid hardware and services distribution business, where we are selling hardware at reasonable margins and providing our installation services. And then I think the, that will ramp as vehicle production ramps and will be a nice business in its own right. I think the larger unlock here is when those offerings then get coupled with a solar install where I think those customers are more likely to have a larger system, potentially a home battery and it might have lower customer acquisition costs because of the efficiency of coming through the Ford channel and that will have a much more meaningful impact on subscriber values. But given the shape of the ramp in vehicle deliveries, you can expect more of that to probably materialize in 2023 and beyond, although there’s definitely positive benefits this year.
Ed Fenster: And just to underscore the customer unlock, if you are a Ford customer wanting the bidirectional feature, for example, you can pay thousands of dollars to get a bidirectional charger installed, right, or you can get solar installed with it or in which case now it has a negative cost for it. You are now saving money from the solar system and you have got the home backup. So it’s like a very compelling customer value proposition.
Tom vonReichbauer: Yeah.
Maheep Mandloi: Yeah. And looks like they have to buy the backup generator from you, also the backup charger from you, right?
Ed Fenster: Yeah. We are their installation provider choice and they are going to co-develop the operation system.
Maheep Mandloi: Got you. All right. Thanks for answering the questions.
Operator: Thank you. The next question comes from Joseph Osha from Guggenheim Partners. Please go ahead, Joseph.
Joseph Osha: Thanks very much. Professor, I do now stuck with that nickname for all time, by the way. Doesn’t you know that. The -- you -- I think you commented during your prepared comments a little bit about hedging out cost of capital exposure as it relates to your pricing. Can you help me understand that a little more? I am thinking about the backlog and how that backlog continues to grow, how you manage to hedge out your cost of capital exposure? And then I have another question.
Ed Fenster: Sure. So typically how that works, Joe, is that, as we install a system, we are locking in the interest rate prevailing at the time of installation and installation could occur nine months or 12 months before term out. So in the transaction that we just completed, obviously you see the treasury rate embedded in the coupon, at the time that we issue the security. But really economically we locked in the treasury rate at the time of installation. So, all of the assets that we have developed and that are sitting in our warehouse facilities are hedged with the interest rates that were in effect at the time those projects were installed. So, certainly as Tom pointed out, there are systems that we sold late last year that haven’t yet been constructed, that we are now constructing, and the proceeds we will receive on those systems are going to be less than we forecast. But the systems that were installed prior to the large run up in rates we were able to lock in the rates on those systems, and obviously, the more recent systems which are being sold at higher rates are insulated from capital costs in that regard. So, we do have this sort of like middle zone that we need to work through. But other than that, I feel like we are pretty well matched.
Joseph Osha: But, again, that just to amplify on the question, it does sound like you have the way this works for now still some sort of open cost of capital exposure between the time when you sell the system and when you install it. Is that what you are saying?
Ed Fenster: Correct.
Joseph Osha: Okay. And is there any way to mitigate that or is that just kind of it is what it is.
Ed Fenster: I mean, you could buy options to mitigate it and therefore likely pay the expected value price of it. So, if you took a strong position, you thought interest rates were going to rise faster than everyone who trades. Interest securities like you could do that. But I think that our general approach instead is just to drive the cycle times down. That is a better customer experience. It’s a more natural process for us and that’s the way we have been handling it.
Joseph Osha: Okay. Great. Got it. And then second, much more simple question, given how all of this is washing through your business model, how do you feel not just this year, but on a sort of a go-forward basis about how cash generation for the business looks relative to growth? Thanks.
Ed Fenster: Yeah. I think over the long-term, we continue to sell a product that is in excellently high demand, right? It is lower and more certain energy cost. It is better reliability. It is environmentally clean and the tailwind there is significant, like certainly in the 13 years, 15 years we have been doing this, we have never seen a demand environment like this. And so, certainly, that’s helpful if you are experiencing increased costs, whether that’s operational or capital, we are doing our best and I think meeting with some success, getting efficiency up and costs down and all the things that you would want to do in any business anyway, but also have the ability to pass through pricing, because our competitor, the Electric Utility, turns out also capital cost is an input in their business. And so I have still a very good -- I am still very optimistic about the long-term cash flow capabilities of the business for that reason, right? It’s not like we are the only energy company that capital costs is an input too. So capital costs may go up that can pressure us, but it presses everybody up. So everyone else price is up. We price up and lo and behold, everyone still make money.
Joseph Osha: Okay. Thank you.
Operator: Thank you. The next question comes from Mark Strouse from JPMorgan. Please go ahead, Mark.
Mark Strouse: Yes. Good afternoon. Thank you very much for taking our questions. I just want to go back to the anti-circ case. You mentioned the inventory you have. You mentioned the existing agreements and then potential future agreements that you have. What kind of non-tariff supplies? Can you just kind of directly address how -- does that give you visibility to meet this greater than 25% growth target for the year? And then kind of a hypothetical follow up to that is, in the event that the your supply does become limited, I mean, what would be the strategy, do you used to for buying for China with a known tariff? Do you do you keep buying from Southeast Asia with an unknown tariff? What would be the hypothetical there? Thank you.
Tom vonReichbauer: I will take.
Ed Fenster: You start Tom.
Tom vonReichbauer: So on the general -- the first question as it relates to inventory levels and outlook, we feel very well positioned. As you can see on the balance sheet, we increased the absolute dollar of inventory that we were carrying quarter-over-quarter again now north of $550 million, triple-digit days of supply on the vast majority of the things we need and continue to have strong and steady flow of products even as we are ramping our installation volume here over the quarter and throughout this quarter. So I think the general view is we felt really confident moving up to 25% plus year-over-year growth and should be able to meet that even as things moderate, though, you have got at least a quarter that’s fully covered here. And then, as we look at the general supply picture, as Ed noted, we are continuing to look at new sources of supply from different portions of the world, looking at options here to get access to product to the extent there’s a large contraction in the available supply in the market, that obviously creates some pressure on terms that may be available for those products. But one where I think thus far we feel, yeah, reasonably well protected.
Ed Fenster: Yeah. I mentioned like, there are avenues to take to or to get the panels that are not from affected manufacturers. Those could be international manufacturers, not in Southeast Asia, it could be American manufacturers. And to your point, Commerce just very recently made clear they wouldn’t see tariffs from Southeast Asia exceeding tariffs from China. So, if you did end up with tariff, Chinese manufacturer is cheaper, so you would probably end up buying from China as compared to Southeast Asia, but there’s no reason to do that preemptively. And I think just stepping back like everyone in government has made really clear how frustrated they are by this petitioner and by this petition. And the Commerce Department has used language like our hands are tied in terms of opening the investigation. I think the chance of a negative investigation here, a negative result is very, very low. But we are very confident we can meet demand from the module side, irrespective of what direction it goes. They will be a question of around the edges, what’s the module cost like what are the days payable on it, but we will find that, we are very comfortable that we will meet our customer interest.
Mark Strouse: Okay. Very helpful. Thank you.
Operator: Thank you. The next question comes from Andrew Percoco from Morgan Stanley. Please go ahead, Andrew.
Andrew Percoco: Great. Thank you for the time. So just one quick one for me. We talked a lot about or heard a lot today about utility price increases across the U.S. Has that opened up any new markets for you guys that you don’t currently operate in today, and if so, what would be the potential go to market strategy there?
Mary Powell: I mean, we are always monitoring what is going on across the country, for sure, and evaluating strategic moves as it relates to two new territories. As you know now, we are operating in 22 states, in Puerto Rico, in Hawaii, and we are feeling very comfortable in the markets that we are in. But we are always continuing to evaluate that to your point. So, yes, I do foresee that in the years to come they are going to be other markets that again might not look attractive today, but will quickly be looking attractive because of utility rate cost pressures.
Andrew Percoco: Great. The rest of my questions have been answered, so I will just leave it there. Thank you.
Operator: Thank you. The next question comes from Philip Shen from ROTH Capital. Please go ahead, Philip.
Philip Shen: Hi, everyone. Thanks for taking my questions. I think you just filed a mix shelf along with the results today and in your Q looks like maybe of $107 million undrawn. Can you walk us through your liquidity situation and what is your view on tapping into the equity markets near-term?
Ed Fenster: That’s simply a corporate hygiene move that we periodically do. And as I mentioned, we have ample liquidity and we just increased the size of the company’s revolver, which isn’t fully drawn to where we feel very comfortable in our current position.
Philip Shen: Thanks, Ed. And then as it relates, Mary, to your comment that you collapsed several layers of management structures, can you talk about how many people left and departed the organization? And then how many more do you expect as you right size? Are the layoffs over and what you expect to head there? Thanks.
Mary Powell: So, I mean, overall, the company is we are growing fast, and so overall from, like, a overall headcount perspective, we are in a growth mode. That is -- that’s the position we are in. But, yeah, absolutely right, we did really collapse layers and look at again making sure it’s a really streamlined flat as possible close to the customer organization and we are hiring -- we are bringing in a lot of new employees. In terms of getting into specific numbers, no, that’s not really, I don’t think it’s a place I want to go. But I will tell you, overall, we are a growing organization, and again, we are hiring fast to keep up with the demand.
Philip Shen: Great. Appreciate the color. Thanks, Mary.
Operator: Thank you. The next question comes from Ameet Thakkar from BMO Capital Markets. Please go ahead, Ameet.
Ameet Thakkar: Hey. Good afternoon. Thanks for squeezing me. You guys have talked a lot about potential headwinds from higher interest rates or financing costs. But I was just wondering on kind of the other side, are you guys seeing a pickup in customers kind of opting for kind of third-party ownership models versus loans seem like loans have become a little bit more popular last year, I was just wondering if you are getting a bit of a tailwind from that?
Ed Fenster: Yeah. Hi. This is Ed. It’s an interesting dynamic, mostly speaking, it’s really the sales reps that drive interest in loans versus leases where sales reps who are looking for a simple sale with a better feature set, but kind of willing to accept the controls that we put on something, because we care about production and things like that, preferred to sell lease and those that prefer the lighter controls that tend to sell loans. The interesting dynamic in the market right now, which is that the capital costs for solar loans have gone up almost 2.5% and for the most part we haven’t seen any change in solar loan pricing, like I doubt actually the United States Treasury could make money buying solar loans from us at the moment. So it will be interesting to see how the dynamics play out in that market. But certainly right now that is an attractive customer value proposition.
Ameet Thakkar: Great. Thanks. And just one more real quick one, the battery growth of 50%, I mean, that’s pretty good off of the low base, I guess. Is some of that driven by people coming back and retrofitting their systems or is this all kind of just more availability higher attach rates?
Mary Powell: There is a little bit of that. But, again, I wouldn’t say it’s on a small base. I mean, just to remind you, we have 37,000 residential batteries deployed. I think one of the highest numbers in the country. So, yes, we are seeing just greater interest in the context of providing a lot more to customers than just the benefits of going solar. So it is we are rapidly moving into this customer obsessed place of providing customers a lot more as they think about improving their lives in their homes and what they drive. So, yes, we continue to see that attach rate go up in the future.
Ameet Thakkar: Thank you.
Operator: Thank you. The next question comes from David Peters from Wolfe Research. Please go ahead, David.
David Peters: Yeah. Hey. Good afternoon. The question I had is just on the mix of subscribers versus purchase customers this quarter, it dipped even a little lower than Q4, which I understand has a bit of a seasonal component to it being at the end of the year. But just going forward, should we expect this level to stay in the low to mid-70s or would you expect that to ramp back up?
Tom vonReichbauer: Yeah. No. Ed noted some of the short-term dynamics that are in play there. But what we saw in Q4 and Q1 here simply is a mix of what was coming out of backlog. We have seen with some of the pricing and product changes that we made of late, we have seen upfront sales mix begin to move back more in the direction of TPO or third-party own and so I think we will come off the current levels. And the points that I had mentioned there will impact maybe a little bit how long loan remains as attractive as it is at the moment. But would expect to see a return to something higher than what we were in Q1.
David Peters: Great. And then just switching gears, so the additional investment in the SK venture, $75 million, I think, you highlight. Could you maybe give a little preview of some of the initiatives you are working on through that? And when you did expect to commercialize some of these products and services, would you expect to see this flow into your net subscriber value metrics? In other words be additive to the $10,000 that you pointed to later this year?
Mary Powell: I mean make no mistake, everything we do is about how it can be additive from a customer perspective, clearly an investor perspective and a community perspective. So we are very excited about the technology that this venture is working on. But we are not in a position to give any more specifics about it at this time.
David Peters: Okay. Thank you.
Patrick Jobin: I think that’s all the time we have for questions. Appreciate it.
Operator: Yes. It is. Ladies and gentlemen, we have reached the end of the question-and-answer session. This does conclude today’s conference. You may disconnect your lines at this time and thank you very much for participating.
