Good afternoon and welcome to Sunrun's Fourth Quarter and Full Year 2023 Earnings Conference Call. All participants have been placed on mute. Please note that this call is being recorded and that one hour has been allocated for the call, including the Q&A session. [Operator Instructions] I will now turn the call over to Patrick Jobin, Sunrun's Senior Vice President, Investor Relations. Please go ahead.

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. During today's call, we will also be discussing certain non-GAAP financial measures, which we believe can provide meaningful supplemental information for investors regarding the performance of our business and facilitate a meaningful evaluation of current period performance on a comparable basis with prior periods. These non-GAAP financial measures should be considered as a supplement to, and not as a substitute for, superior to, or in isolation from GAAP results. You will find additional disclosures regarding the non-GAAP financial measures discussed on today's call in our press release issued this afternoon and our filings with the SEC, each of which is posted on our website. On the call today are Mary Powell, Sunrun's CEO and Danny Abajian, Sunrun's CFO. Ed Fenster, Sunrun's Co-Founder and Co-Executive Chair, along with Paul Dickson, Sunrun's Chief Revenue Officer are also on the call for the Q&A session. A presentation is available on Sunrun's Investor Relations website, along with supplemental materials. An audio replay of today's call, along with a copy of today's prepared remarks and transcript including Q&A will be posted to Sunrun's Investor Relations website shortly after the call. We have allocated 60 minutes for today's call, including the question-and-answer session. And now, let me turn the call over to Mary.

Thank you, Patrick. And thank you all for joining us on our call. We have lots of exciting things to talk about today. First, our team delivered on our storage first and margin focused strategy in 2023. In the fourth quarter, we far exceeded our Storage Capacity Installation guidance and landed in our guidance range on installed solar capacity. This transition to higher-value subscription offerings resulted in significant increases to our subscriber values, up 7% from Q3 and 18% year over year, and in combination with continued cost discipline, net subscriber values also exceeded our guidance. We generated $11 million in cash in the quarter and grew net earning assets to over $5 billion. We now operate a fleet of more than 1.3 gigawatt hours of storage capacity and near 7 gigawatts of solar capacity, with over 933,000 customers. We remain focused on driving meaningful cash generation in the business and are reiterating our strong cash generation outlook for the year. The fundamental demand drivers of our business continue to be robust. First, utility rates continue to rise, due to the stress and strain of climatic events on the grid and the massive utility capital expenditures. Second, solar and storage equipment costs are declining, while our install labor productivity continues to improve. Third, capital costs have stabilized and could decline. Finally, customers remain eager for clean, affordable, and resilient energy to power their lives. We are extending our differentiation by making clean, affordable and reliable energy accessible to families across America with the most pro-consumer offerings and delivering the best customer experience and service in the industry. Being the chosen, trusted provider to deliver this clean energy future is critical. As a testament to our customer-first approach, our customer Net Promoter Scores at the time of installation continued to increase,…

Thank you, Mary. Today I will cover our operating and financial performance in the quarter along with an update on our capital markets activities and outlook. Our team is delivering strong volumes, leading with storage, and financing our growth in an efficient and appropriate way. Turning first to the results for the quarter on Slide 11. We have now installed over 90,000 solar and storage systems. We expect storage installations will grow substantially in the quarters ahead. Recent sales of storage-attached systems have been approximately 48% nationally, which should continue to drive installed attachment rates higher in future periods. Our backup storage offerings carry higher margins, typically by several thousand dollars per customer. During the quarter, we installed 220 megawatt hours of storage capacity, significantly topping the high-end of our guidance and reflecting an increase of 154% from the same quarter last year, bringing total networked storage capacity to over 1.3 gigawatt hours. In the fourth quarter, Solar Energy Capacity Installed was approximately 227 megawatts and within our guidance range of 220 to 245 megawatts. Customer additions were approximately 30,000, including approximately 27,000 subscriber additions. Our subscription mix represented 92% of our deployments in the period, an increase from 89% last quarter and the highest level in many years. We ended 2023 with approximately 933,000 customers and 781,000 subscribers, representing 6.7 gigawatts of networked solar energy capacity, an 18% increase year-over-year. Our subscribers generate significant, recurring revenue, with most under 20 or 25-year contracts for the clean energy we provide. At the end of Q4, our annual recurring revenue, or ARR, stood at over $1.3 billion, up 28% over the same period last year. We had an average contract life remaining of nearly 18 years. Turning to Slide 12. In Q4, subscriber value was approximately $50,300 and creation cost was…

Thanks Danny. I am so appreciative of the work of the Sunrun team executing on our transition to a storage-first company to extend our differentiation, expand our margins, and deliver the best value to customers. Importantly, I believe our steadfast commitment to our disciplined growth strategy will maximize the value we can create in the long-run. Operator, let's open the line for questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Andrew Percoco with Morgan Stanley. Please proceed with your question.

Hi guys. Thank you for taking the question this evening. I guess just to start out with your guidance, I just want to break down your solar growth guidance for the year. You're showing some pretty impressive sequential growth within your slides. So, can you just maybe just provide some context on what you're baking into that guidance in terms of California and non-California growth throughout the year?

Yes, for sure, Andrew. Nice to hear from you. Yes, I mean what we're really seeing is that Q1, we've seen some nice sales growth volume as I hit, right? So we've seen sales growth -- sales growing 23%, California is growing 40% sequentially. And in our constant monitoring with all of our sales leaders across the company, yes, we feel very comfortable around the demand that we're seeing. As you also know, we're very, very focused on not just that solar volume, but also the storage attachment rate where we've seen, again, really, really healthy uptick in the percentage of the attachment rate as well as what we're seeing every single week from the field in the context of what the attachment rate that they're selling. So, we're feeling really good about the volumes we talked about, and we're also really expecting, again, that net subscriber value growth. tied a lot to the storage attachment rate, the retrofit work we're doing and some of the other initiatives we hit.

Understood. That's helpful context. And then maybe just switching gears a bit. This renewal pilot is really interesting. So, I just kind of want to double-click on that for a second. I guess, based on the conversations you're having with some of your debt providers, what do you need to demonstrate to start getting some of that renewal value credit within the underwriting process? It seems like this is a pretty small sample size, and you're still kind of working through it. So how far are you in those conversations and what needs to be done in order to start getting additional credit as you come to market with future securitizations?

Yes. Great question. I think it's more track record, getting the numbers that continue to build. I think there's also obviously a variety of things we can pilot and test in this period where we have customers that have the long-term relationships with them. We can go back to different subsets of customers and test the effectiveness of what works. So, I think it's really continuing at it and building the track record. I think we're encouraged with the initial results. I think from a debt underwriting perspective, it's really the track record lengthening and the numbers building.

Understood. Thank you so much.

Thank you. Our next question comes from the line of Julien Dumoulin-Smith with Bank of America. Please proceed with your question.

Thank you, operator. Good afternoon, team. Nice to chat with you guys. So, just kicking things off on cash and obviously, the ramp to meet your cash guidance. Can you talk a little bit about external financing needs beyond the sort of present context here? As you think about ramping up into that more ongoing sort of sustainable cash number, how does today's developments juxtapose against the ongoing needs presumably that you achieve by the end of the year here in terms of cash?

Yes, I would say the exercise and the activity that we've been talking about is really about taking care of at the parent recourse level, the maturities, the amount of leverage. And then at the asset level, as we talked about with the warehouse pushing out for three years, the runway of warehouse financing in line with the strategy to maximize the non-recourse level. And all of that taken together is within the kind of backdrop of, obviously, more importantly, the cash generation picture and delivering into that later this year, which is looking on track.

Got it. Excellent. And then do you want to talk a little bit more about the volumetric breakdown here? I mean what stands out to me is your commentary on sales here, even at the start of the year seems to reflect some -- as you use the word sharp uptick. Do you want to elaborate a little bit more geographically on what you're seeing out there? You talked about the enthusiasm from the field. How does that juxtapose against maybe some of the other data points that we're seeing about California specifically here, if you can elaborate. And obviously, it seems like that's really informing your second quarter expectations on installs, too?

Yes, for sure, Julien. What we're seeing is the recent trends are positive. And as we talked about before, yes, we were managing through some changes in the context of policy in California, but the trends, particularly in California are positive and growing. In fact, California is growing faster now than the rest of the country for us. So, we're feeling good about the build back in California. And again, we're seeing really good results in other parts of the country. What you see with us largely is in Q1 is a result of what I view as really important prudent decisions we made on volume that, again, is just seeing its way through a quarter that traditionally always has lower volumes. So, it's our -- it's a reflection of our disciplined focus on sustainable profitable growth. And that's, again, what drove up our net subscriber value that we talked about is really our execution of that.

Wonderful. Thanks guys.

Thank you.

Thank you. Our next question comes from the line of Kashy Harrison with Piper Sandler. Please proceed with your question.

Thank you. Good afternoon everyone. Thanks for taking the question. So, first one, just a quick financing strategy question. Mary, you as you indicated, you exited the year with $680 million in unrestricted cash, and it sounds like the cash balance is going to be higher by the end of 2024, given the cash gen commentary. So, why pursue a convert rather than just pay down since you would have had excess cash after the convert pay down?

Yes, I think I'll take that. The exercise here is obviously with a few facilities involved across the stack, maturity extension, near-term liability management, that's been driving some of the timing of the layering of financings. I think we saw, again, the convertible bonds where they're trading looked very apparently dislocated to us. We did go ahead and purchase a bit of that. I think pricing moved during that few week process that we were repurchasing. But I think generally, it was the near-term focus on the liability management. We think that's prudent, extending out the maturities and then shifting for the balance of the year with that behind us to cash generation and then optimizing the use of that extra cash as it arrives to maximize shareholder value.

Fair enough. And then my follow-up question is on the cash generation target guidance that you reiterated. Can you just remind us what the sensitivities are to interest rates, all else equal? And then maybe part and parcel with that, I guess I would have thought the project costs would be maybe closer to 7% given recent securitizations and the drop in the benchmark rate versus the time of the last 3Q call. So, I guess I'm just curious why your project finance costs only moved down 25 bps relative to the last update? Thank you.

Great questions. The first one is about 0.25 point is about 1 point in -- or about 75 basis points in advance rate move. I think we've gotten a little bit less rate sensitive as kind of the baseline of rates has stabilized higher. On an annualized basis, that's between $40 million and $50 million of cash generation change per 25-point of change in interest rates. And on the second one, that's a fair observation. I would say the 7.5% does skew a little conservative relative to what we've been seeing in the market. I think there's a possibility we'd end up a tad lower on a subsequent transaction.

Thank you. Our next question comes from the line of Moses Sutton of BNP Paribas. Please proceed with your question.

Thanks for the question. I just have a follow-up to Kashy on the convert. Just to clarify, do you expect to repurchase a majority of the $374 million 2026 convert? I get this is mostly a refi. I'm just trying to understand if the majority of that would be repurchased. And do you expect an arbitrage considering using a convert to buy a discounted convert? I'm trying to understand if there will be a pricing premium relative to the 2026?

Yes, I think I do want to just kind of refer you more to the press release. I think a repurchase was noted in the press release, and I think that's kind of use of proceeds. As to how much, I think that will come out in due time. We did note in the script that we could see leverage fall as a result of the transaction. It could go slightly up. But generally, that's the positioning on the range. But in either direction, not intending to be material.

Got it. That's very helpful. And I guess shifting to NEM 3.0, Mary, I believe you noted CA is growing faster for you now than the rest of the country, which is quite astonishing. I know it relates a lot to the storage attach rates. How much do you think it relates to the underlying NEM 3.0 return profile? We get that there's a lot of friction, 2.0 to 3.0. There was a lot of pull forward. So, it's really hard to get a real-time sense of the economics with eye-popping time of use rates, I'm curious if there is a misconception out there on how NEM 3.0 return books?

Yes, I mean, Sunrun, the storage is our differentiation because we had expertise in storage. And so again, we innovated, as you know, with a product to grab customers as soon as possible, that shift product. And then we found that really what customers were wanting across California was whole home backup and we have great expertise in that. So -- and we launched, as you know, we called 2023, the year of storage, and we were going to -- we were leading with storage and our numbers show that, that was a very effective strategy, particularly in California. So, California is for some, still probably a challenging market for companies that are selling solar only or who don't have this kind of differentiation. You also note, and it's correct that utility rates, there's nothing stopping the pressure on utility rates. So, over time, that also is certainly helpful in the context of the Sunrun value proposition with our solar plus storage offering.

Excellent. Thank you. I'll pass it on.

Thank you. Our next question comes from the line of Michael Blum with Wells Fargo. Please proceed with your question.

Thanks. Good afternoon. I wanted to go back to the program you have here to renew the contracts for customers. Can you just kind of walk through the process of turning those indications into actual signed contracts? And what are the plans to roll this program out more broadly to your customer base?

Yes, great question. We're really excited about the early results. And as you know, we were really pleased to get this renewal pilot going. We have Paul Dickson here who's led this effort. So, Paul, why don't you address some of those questions.

Yes. Thanks for the questions. I think really the focus for us, obviously, as was mentioned in an earlier question around financing these assets and securitizing the full value that we're creating with these customers. But on these initial pilots, the focus is really for us in better understanding our consumers' needs and desires and interests. And as we've dug into doing customer pulling and now actually selling customer renewals, we're finding exactly what we hope to find, which is customers love the product, they're eager to extend and renew. And there's a whole host of avenues that we can take that with adding additional products and increasing rate or keeping where they are with their steady escalator. So, there's a lot on the table for us as we open the store and extend it. But really, it's about understanding the assets that we're sitting on and taking full value of them and giving customers what they're looking for.

Great. And then you recently, as you noted, you switched from Home Depot to Lowe's. Just wondering if you can address the difference in the arrangements there? And just more broadly, maybe how you're viewing the different sales channels from--

Yes. So, we like having a strong presence in a home improvement area for retail. And as we've been focused on cash generation and driving profitable growth, and evaluated the opportunity in lows. We found some really interesting and advantageous things about that as a host site, if you will, one being a really high homeowner demographic. And two, just the general reality that there's been far less solar presence in those retail sites. And although it's only been a few days of selling in that side, it's been really encouraging. So, we're really excited about the consumer demographic and the relatively unpenetrated nature of it.

Thank you.

Thank you. Our next question comes from the line of Tristan Richardson with Scotiabank. Please proceed with your question.

Hi, good afternoon guys. Just a question on the cost reductions you're seeing on the equipment side. you mentioned 18% -- or greater than 18% off the highs. Is that just sort of what you're seeing today in terms of your product categories? And then also, you talked about realizing this over the next couple of quarters. we're hearing throughout the value chain, the pricing pressure is not completed yet. So, is there a possibility that, that 18% over the next couple of quarters could end up higher than 18%.

Yes, great question. So, definitely, the 18% is being driven by actual pricing on procurement activity we are conducting in the market. The reason we are talking about it in a lag manner, again, is the amount of inventory we've been carrying on hand has been a little bit more sticky in terms of being above target. I think it's moving towards target over the next quarter or two as we've guided to over the last couple of quarters. And as that moves through, we do have good line of sight into that greater than 18%. It could certainly be more. At this point, it's most heavily being driven by battery prices and module prices, which are the -- obviously the most significant part of the stack. But definitely, pricing has softened up a bit and remain that way, and there could be opportunity for a bit more.

Appreciate it. And then just a follow-up, I think going in the same vein around the you said greater than 100 days maybe on last quarter and today, we're approximately 100 days. Does that reflect the uptick in sales activity you guys are talking about seeing here in 1Q? Or should we expect that to accelerate downward just given what you're seeing early in the top of the funnel?

Yes. So, not yet reflected. And part of what brings it down is apart from just bringing down the gross dollars of inventory balance, the significant increase we are expecting in install activity that will follow our sales. And that's also in line with that kind of one to two-quarter guidance as our daily rate of installs will be much higher and our balance will be lower, we should naturally get to our target days.

Super helpful. Thank you guys.

Of course.

Thank you. Our next question comes from the line of Joseph Osha with Guggenheim Partners. Please proceed with your question.

Hi everybody. Two kind of interlinked questions. First, understanding that this convert was largely refi. Can you give us some ratio or set of limits that we can use to think about what the trajectory of recourse debt for the company might look like? And in that vein, when you talk about the $200 million to $500 million in annualized cash generation by Q4 of this year. Can you commit to us that, that is cash generation that occurs without the benefit of equity or equity linked or recourse debt issuance? Thanks.

Yes. Yes, to that second part, the cash generation here is really geared towards maximum use of non-recourse. So, it's really implied here is a growing amount of non-recourse that is exceeding the cost to generate the originations. So, that is the cash generation. That's obviously different. That's not a plan to raise more parent capital.

Okay. And on that first question, how can we think about what recourse debt? How we should think about that in--?

Yes. I think Yes. Obviously, with the transaction -- with the 144A transaction in the market, I will have to kind of reiterate pointing to that. But I'll kind of like reiterate the part of the prepared remarks no material movement in either direction in the amount of like net parent leverage.

That is net recourse.

Recourse, correct.

Okay. Thank you very much.

Thank you. Our next question comes from the line of Philip Shen with ROTH MKM. Please proceed with your question.

Hi all. Thanks for the questions. As it relates to renewals, I was wondering if you could share -- sorry if I missed it, but can you share from a renewal standpoint, the dollar or megawatt volume that could be up per year, this year, next year and how that might scale thereafter? Thanks.

Yes. So, this year, we have no customers that are up for renewal of proactive pilots. So, we're reaching out to customers that in three to four years from now begin to start renewing. And so we're proactively talking to them to understand what those opportunities are.

And in fact, renewing them early. So, again, like it is about learning and scaling. So, again, we're not at all thinking about this as something like we're going to sit here and wait for customers to renew. We're going to come up with programs and ways to meet their needs ahead of the end of their renewal period.

Yes, I totally get everything you said, and I don't understand the renewals are not for some time, but I was wondering if you guys had a view as to what the volume might be. That's -- I'll move to the second question here. with your flat 24-megawatt guide as a backdrop, our work with Freedom Forever, which I believe is one of your largest, if not largest dealers suggest they may be growing 60% to 100% year-over-year. So, our estimates suggest that they might -- may have contributed 250 megawatts to your business in 2023. In 2024, this could be closer to 380 megawatts and as they're splitting their volume between you and EverBright. So, our rough numbers suggest that they might be adding, what, roughly 130 megawatts to your megawatts in 2024 of your roughly 1 gig. So, given that you have guided flat year-over-year, can you give us some color on what is happening with the rest of the business if they're growing 130, perhaps our assumptions on the freedom situation are off the mark, maybe correct us if we're wrong. But maybe share with us what's going on with the rest of your dealer business year-over-year. And from a direct standpoint, how is that business going is your direct business? I know on Slide 20 -- 6 there, Slide 6, it shows that you have a direct business growing really well. but I was wondering where Freedom is categorized. Are they categorized in the affiliate program there or partner? Or is that in the blue Sunrun. So, if you can share some more color on that situation, that would be fantastic. Thanks.

Yes. So, that's what I was going to point you to is Slide 6, which really gives you a very clear picture of how we see 2024 currently. And yes, Freedom Forever, who has been a partner for quite a long time. a valued partner, shows up in the affiliate partner installations category. Currently, no affiliate partner is over 10%. And of our volume. And yes, you're right. We're seeing our direct business growing nicely.

Thank you. Our next question comes from the line of Brian Lee with Goldman Sachs. Please proceed with your question.

Hey everyone. Good afternoon. Thanks for squeezing me in. I know a lot's been covered here on the call, but maybe just one for me on this Slide 20, where you're talking about the different levers and assumptions on the cash flow generation. You mentioned it's going to be lumpy throughout the year. But can you give us a sense for, I guess, what are maybe milestones, events capital raises, et cetera, that would give you and maybe in what time frame, more visibility as to whether you hit the low, mid, high end. I mean, it seems like if I just through some of this, you're already tracking well above the storage mix that's embedded here in the assumption. I think you mentioned to a prior question, the 7.5% might be a bit conservative already here starting the year. So, just trying to understand, one of the puts and takes, but also the timeline as to when that view kind of crystallizes as we move through the year? Granted it's going to be lumpy on a quarter-to-quarter basis. Thank you.

Great question. So, I'll start -- I'll maybe highlight a few of the factors on the page. On volume, I think we talked about directionally throughout the year, picking up sequentially, considerably throughout the year and implied there is hitting that 15% year-over-year mark in the back half of the year. Of course, we also highlighted that the year-over-year comps in the first half won't look as good. We do have the Q1 sequential decline really pacing out of that. gives us a very decent return back on operating cost leverage in the business. And as we get that, that will be trending well. the backup storage mix, we believe we will exceed based on the remarks. The ITC orders, we're a little bit shy of about 34%. I think we have pathways building again, in that kind of Q3, Q4 timeframe to getting more of it. I think the two factors there would be more geo-targeting, where it relates to energy communities and low income and of course, on domestic content, the onset of that as the regulations get crystallized. And then capital costs, obviously, in a range, we are giving the range at the moment and saying 0.25 point is between $40 million and $50 million. So, there's north of 100 basis points of cushion from high end to low end of range as respect to capital costs.

All right. Appreciate the color. I'll pass it on. Thank you.

Thank you.

Thank you. Our next question comes from the line of Colin Rusch with Oppenheimer. Please proceed with your question.

Thanks so much. Could you guys talk about the maturity of the VPP monetization, obviously, with the incremental deployments of energy storage. Just want to get a sense of on a portfolio level, how you see that value potentially increasing the NPV of the portfolio?

Yes, we're really pleased with the PGD. I'm sure you saw the press release that we did with that program, where 8,500 customers participated in a program over a number of months. We think it sets up a really good framework for future virtual power plant structures that we do, that really results in like a view that over time, it would be a net subscriber value of about $2,000.

Fantastic. And then just you mentioned labor efficiency and both on the sales and installation front, I just want to get a sense of order of magnitude you're expecting to see over the course of the year and the cadence of that efficiency as we go throughout the year.

Yes, I mean, we're really pleased with the efficiency gains we've seen across the business. I would say in the installation area, particularly where that productivity has really resulted in some great benefits. CAC as a percent of subscriber value is coming down. Obviously, and that is happening despite the distortion created by some of the mix change. So, yes, we're really pleased, particularly as, again, we've moved to a solar plus storage company. So, that also, as you think about productivity gains and you think about the gains we've had, where we are, in essence, having our folks selling two products, installing two products. So, yes, we've been really pleased by the results we've seen around our kind of maniacal focus on cost in the business.

Thank you. Our next question comes from the line of Maheep Mandloi with Mizuho. Please proceed with your question.

Hi, this is David Benjamin on for Maheep. I have a question on the convert. Can you please talk or give a little bit of color around the timing? I understand that it's for the refinance, but the converts due in 2026 doesn't go current until 2025. So, just any color you could provide around that would be helpful. Thanks.

Yes, I think really in early getting out ahead and early liability management exercise, the revolver was the same thing, the warehouse was the same thing. I think we like the market conditions. We have obviously good depth especially I'm not addressing the convert directly, but across the capital spectrum. I think just deep pools of capital available to us and just wanting to be exceptionally timely in handling all of that.

Thank you. That concludes the time that has been allocated for Q&A. You may now disconnect.