Good afternoon, and welcome to Sunrun's First Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note that this call is being recorded and that 1 hour has been allocated for the call, including the question-and-answer 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 that these statements are being made as of today, and we disclaim any obligation to update or revise them. During today's call, we will 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 and 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; Danny Abajian, Sunrun's CFO; Ed Fenster, Sunrun's Co-Founder and Co-Executive Chair; along with Paul Dickson, Sunrun's President and Chief Revenue Officer, are also on the call for 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 transcripts, 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 Q&A session. And now let me turn the call over to Mary.

Thank you, Patrick, and thank you all for joining us today. We are starting the year with solid momentum in the business as our storage-first margin-focused strategy is delivering strong results. In the first quarter, we beat the high end of both our storage and solar installation guidance, set new records for storage attachment rates and delivered another quarter of strong net subscriber values. Our installation productivity and success driving of storage-first strategy is delivering strong results. At the same time, sales activities in Q1 did grow slightly slower than initially expected, coming in at 13% sequential growth in our direct business. While less than initially anticipated, this level is still consistent with our historical seasonal norm. We continue to prioritize margins over volumes, and we believe this approach will result in the highest long-term value for our shareholders. We are reiterating our full year storage capacity installation guidance and we are reducing our full year solar installation capacity outlook to down 15% to flat from our prior guidance range of down 5% to up 5%. We expect 2024 will be a strong year in terms of total value generated, which will grow by over 10%. Most important, we are reiterating our cash generation guidance of a Q4 annualized level of $200 million to $500 million. We are confident in achieving strong growth in installation activities through the year as the fundamental demand drivers of our business continue to be robust. Utility rates continue to rise, while storage and solar equipment costs are declining, and our operating efficiency continues to improve. Customers remain eager for clean, affordable and resilient energy to power their lives. In the beginning of 2023, we oriented the business to be storage-first which increases the customer value proposition and lays the foundation for future value creation…

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. Turning first to the results for the quarter on Slide 9. We have now installed over 102,000 solar and storage systems with storage attachment rates reaching 50% of installations nationally during the first quarter of 2024. We expect storage attachment rates to remain around this level throughout the remainder of the year. This higher mix of storage has driven improvements to our net subscriber value as backup storage offerings carry higher margins. During the quarter, we installed 207-megawatt hours of storage capacity, well above the high end of our guidance and almost triple the same quarter last year. Our total network storage capacity is now over 1.5 gigawatt hours. In the first quarter, solar energy capacity installed was approximately 177 megawatts, also above the high end of our guidance range of 165 to 175 megawatts. Customer additions were approximately 24,000, including approximately 22,000 subscriber additions. Our subscription mix reached 93% of deployments in the period, an increase of 92% -- from 92% last quarter and the highest level in many years. We ended Q1 with approximately 957,000 customers and 803,000 subscribers representing 6.9 gigawatts of network solar energy capacity, a 16% 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 Q1, our annual recurring revenue, or ARR, stood at over $1.4 billion, up 30% over the same period last year. We had an average contract life remaining of nearly 18 years. Turning to Slide 10. In Q1, subscriber value was approximately $50,800, and creation cost was approximately $38,900, delivering a net subscriber value of $11,891. This strong result…

Thanks, Danny. I want to again express my appreciation to the entire Sunrun team. Your continued commitment providing our customers and communities with clean, affordable energy to power their lives, and to create value for all of our stakeholders is what drives us forward. Our rapid transition to a storage-first company is extending our differentiation, driving enhanced margins and delivering the best value to customers. Operator, with that, let's open for the questions.

[Operator Instructions] Our first question comes from the line of Brian Lee with Goldman Sachs.

First one was just on the reduction in solar volume outlook for the year here. It appears, I guess, strategic, you said earlier in the slides, just kind of focusing on profitable growth in storage, but then you also alluded to some market-related weakness, I guess, sales activity being a little bit slower. Can you maybe parse those 2 pieces out? How much of it is market related? How much of it is strategic on your own part? And then were there specific areas that you kind of pinpointed had the weakness or the nonstrategic sort of focus that you wanted to pull back from? And then I had a follow-up.

Sure. Thanks, Brian. Great to hear from you. Yes, so to be clear, we really see Q1 marking the bottom, and we feel confident in the uptick in our outlook for the year. And you're absolutely right. As we have said, we continue to focus on our goals around profitability and cash generation and really being very strategic on volume. And with that, I would turn it, Paul, why don't you give a little bit more detailed response to some of Brian's questions?

Yes, great question. So we underwent kind of a final evaluation of our market economics and the various routes that we have generating volume and did a final cut of volume that did not meet our target return threshold. And so we underwent that exercise, which is a component of the volume adjustment. The other thing that we're seeing in the market is kind of this like new entrants kind of this ankle biter finance provider that comes in with aggressive pricing and it's been somewhat distracting to various channel partners or affiliate partners that we work with. And while we don't see any sustainable approach in their business model, and we've made a business practice in the past of purchasing their portfolios when they're unable to operate them because of the uneconomical approach that they take, there has been some distraction for our affiliate business.

Understood. Yes, that's super helpful. And then just...

Brian, just one last point on that. Just again, I'm sure you did notice it, but storage volume was retained, and we are really thrilled with the storage attachment rates and with our ability to retain that volume, which is very positive from a bottom line perspective.

Yes, absolutely. It seems like the reallocation of any resources or capital should further derisk the storage number. That's awesome. Maybe one for you, Danny, and then I'll pass it on. Slide 18, this is super helpful, just kind of giving us some context low to high end. I know there's been a lot of questions between how do you get to 200 versus how you get to 500. If I look at this slide and a lot of the data you provided during the quarter on where you're tracking, it seems like you're already tracking at or ahead of the low end, the $200 million annualized based on these 3 bullets. Can you help us understand kind of the frame of going from 36 to 40 capital cost 8% to 7.5%. Like how much of is each of those buckets worth? I wouldn't presume it's 100, 100, 100, but is it that simple where if you get capital costs down to 7.5%, you get storage attached up 10%. Each one of those is worth 100, maybe just kind of helping to quantify what each of those buckets is worth to the cash flow generation.

Yes. Great question. And we absolutely did want to break this out as to what assumptions are associated with opposite ends of the range as we've been getting a lot of questions around that. So we wanted to be responsive to that. As far as the magnitude of each of those primary drivers in the middle of Slide 18, capital cost are always capital costs, so not in order, but capital cost quarter point is between $40 million to $50 million depending more on the volume in the period, and that will range through the year as we grow volume. And this is most relevant to the Q4 exit rate. I would say it's probably closer to $50 million. And then the point of ITC adders is probably south of $50 million, maybe somewhere in a plus or minus $40 million range per point. And then storage attachment rate, I don't have the exact translation, but I would say the first 2 are more meaningful at this point, given we're in a smaller range on storage attachment rate relative to where we started.

Our next question comes from the line of Moses Sutton with BNP Paribas.

So the tax credit receivable of $181 million, is this transferability credit sold outside of a TE fund? Or is it still going through the typical cash flow to fall essentially partially replaced a tax equity proceeds that you would have gotten from some of those banks? And what could delay the $181 million maybe further than 2Q?

Yes. So let me -- yes, I think the general expectation is to be caught up by the end of Q2. There's a basket here of like reasons for the delay. But primarily, it's the timing of when you sell the credit out of the fund to the buyer. So in traditional tax equity structures, the tax equity bank would be willing to both take the credit and give an advance ahead of the install or around the time of the install for that credit. Whereas today, the tax equity -- the tax credit buyer rather is buying in arrears, and that can trail the time of install. And as we're migrating structures, for structures that don't involve a traditional tax equity bank, the fronting, if you will, of that tax credit monetization is not happening to the degree it used to. Now some of it also vary based on the timing of when the individual buyer is transferring over proceeds for the purchase. They might do it monthly. They might do it quarterly. They might do it annually. I think we're seeing the market move to monthly and quarterly as opposed to annually, which is kind of where we started on one of the funds we've done recently. So I would say it's really that the frequency of payment is a big driver. Obviously, the payment is for both the base tax credit of 30% plus the adders. It's predominantly timing driven, and that's in the process of being resolved, as we said in the prepared remarks, as traditional tax equity banks are figuring it out and moving into these structures, the working capital dynamics are improving.

That's very helpful. And I guess, unrelated to timing, are you seeing any reduction in the tax equity capacity that your specific you normally use because Nova is increasing its participation in the market, maybe those banks want to limit their aggregate exposure to resi solar? Just thinking through if that's a possibility.

I think we're seeing generally, we're seeing capacity in the process of expanding radically. I think the biggest thing we see is just the value that we now provide to corporate buyers who basically are getting up to 10%, high single-digit type of discount. Immediately, they can put that coupon on their taxes. And I think we're going to see a large storm of repeat buyers come in once they figure out how to do this and get comfortable. And I think that's driving the expansion. We've noted traditional tax equity now for a couple of quarters to be tight. I think that dynamic still presents to some degree. But I think as we're moving to hybrid structures, net-net, we're seeing a big expansion in capacity.

Our next question comes from the line of Kashy Harrison with Piper Sandler.

So maybe first one is for Danny. I think -- please correct me if I'm wrong, but I think you just said $40 million for ITC point for the domestic content adder. What -- and so the crust of my question is what specifically should we be looking for once the Department of Treasury releases guidance, that would say, okay, this is fully derisked?

And you're referencing the domestic content or?

Yes, for the domestic content, yes.

Yes. I think it's eligibility, it's the basis of calculation. I think we have, as we've noted before, we already -- in the case of batteries, we buy batteries that are made domestically. Module supply, I think that's in the works. So as we kind of get the domestic supply that we think based on past guidance is technically eligible, the rulemaking around how you specifically attribute things in the calculation will matter. And I don't think we have yet full clarity there. So we're in a bit of a range. And as soon as we see some additional guidance, we'll be able to narrow that range is our hope. And that's been a hope, unfortunately, too long, but we're hopeful that is very soon.

I guess maybe just asking in a little -- a bit of a different way. If batteries alone qualify, would that be enough? Or do you need batteries and modules to qualify?

Yes. We -- again, short of the guidance, we've taken a preliminary view that on most battery installs, the batteries should qualify us. However, again, we have to punch through all the details and firm up that view. And on solar only, we'll need module. And in some cases, we might also need inverter. There could be other combinations involving balance of system components like racking on the solar only to meet the test -- to meet the minimum threshold.

I appreciate the color there. And then just my second question, just again back to the discussion on the newer entrants with the uneconomic offerings. Fully appreciate the focus on cash in [indiscernible] volumes, that's definitely the right call. But just wondering how you handicap the risk that some of these headwinds either continue or potentially accelerate in 3Q or 4Q? Just -- I'm just trying to make sure that we're not having another call in August, and there's another guidance cut on the solar side.

Yes, great question. I think we feel really confident about the guidance that we're providing on the volume side and that we're taking a conservative view with the guidance range adjustment. I think in the history of the business, we've seen kind of irrational behavior in different segments throughout time as different areas have gained attraction. So we've seen really low install prices. We've seen really attractive sales commissions, and now we're seeing it in capital providers. And so it's something we have a lot of confidence in our ability to navigate. I think the key component for us is the affiliate partner business we have deep and strong relationships with a few key partners and continue to see robust opportunities with them. The rest of our business is captive sales force that's largely insulated from this competitive risk.

Our next question comes from the line of Andrew Percoco with Morgan Stanley.

So I guess just to start out, and apologies if this has been asked already, but I think it's clear that some of your peers in the space are coming under some pressure here. And I'm just curious if you've seen any impacts to your ability to find non-recourse project level capital. Have the conversations changed at all? Have the terms changed at all in those deals as a result of some of the disruptions you're seeing across the space?

Yes. Good question. We get underwritten. First, we get underwritten on asset quality. And I think asset quality has been great, and our servicing level has been great. So we also get underwritten on sponsor quality, and we've been meeting and passing those tests. So to underscore that, we did talk about, and obviously, it's been news for some time, the extension of our nonrecourse warehouse loan, which is now about $2 billion and almost 10 lenders, and lenders who -- many of whom -- well, all of whom kind of extended and several of whom also came up in size in the February time frame. And of course, that is a group of lenders that are seeing all the visibility on the turnout that we do. And of course, in that regard, we have 2 good data points recently, one involving the public market with a seasoned pool of assets. So those have been running for about 7 ,8 years in duration. They've been maintained well. They're performing and we got the spread lower from the prior transaction we did in the private market that we closed in February. So we're seeing a broadening of participation in the private credit market. We're also seeing a continuation of good track record and performance in getting deals done in the public ABS market. So we're not seeing any sort of issues in that regard.

Over the company's history, like a flight to quality mindset has generally benefited us.

Yes, definitely. Okay. That all makes sense. And maybe as a second follow-up question, maybe more of a strategy question. But just kind of curious what you see in terms of battery retrofit opportunities. Now that battery supply is more readily available, costs have come down a lot. Obviously, growth in solar has slowed a little bit. Is there an opportunity to just go back to some of your customers in that batteries? And what would that look like from a cash perspective? Would that impact? Would that be positive or negative to near-term cash generation?

Yes, great question. Yes, we totally agree and, in fact, have already launched -- at the beginning of the year, we launched a storage retrofit program that's doing very well. We also, as you know, launched our first phase of our renewal pilot. We've also launched a repowering program and a renewal program combined with storage retrofit. So yes, we see tremendous opportunity to really focus in on and grow the storage side of the business. And as I also described, the other incredible tertiary benefit of that is that also really provides us with much more value from a grid services perspective longer term because every solar customer that we then attach storage to becomes a customer that can potentially participate in grid services program. So yes, we are very bullish on it. We've rolled out programs. We're seeing good numbers and uptakes and we're excited about the impact. And one of the reasons that, again, we feel really good about our storage guide.

Our next question comes from the line of James West with Evercore ISI.

Mary -- and I hear you guys on your confidence that we bottomed here and 1Q is the low point for the year. But could you maybe provide a little color on in the states where you operate, where you're seeing the most growth, the most recovery, the faster recovery rates and maybe where things aren't recovered fast?

Yes. I think we continue to see really robust return to volume in California and believe that we're gaining market share inside that market, which is really strategic for us, obviously, from a solar volume perspective, but as well from a future grid service perspective. Another really exciting market for us is Texas, and we've been having geographic expansion inside the state and are quite excited about that market as well. So those are 2 really promising big growth markets for us. The third I would list is Illinois as well.

Got it. Okay. That makes sense. And then maybe just a quick follow-up. Danny, you gave some numbers around the equipment -- declines in equipment costs and they're still working through some higher cost inventory. By the end of the year, I think you said down 18% from the peak. Does that incorporate all the higher cost inventory being in the field and out of your inventory?

Yes. The timing for that as you continue to track our inventory balance, you've seen it fall quite a bit. And we've guided to Q2 being most of the way there in terms of realization of the lower cost purchase activity we've been seeing late last year and this year. Some of that -- there will be a residual that gets fully, fully recognized in Q3. But we're nearly there in Q2 in terms of the expense recognition of the lower cost equipment we've been buying.

Our next question comes from the line of Praneeth Satish with Wells Fargo.

So if we think about 2025, it seems like many of the assumptions that you laid out for your cash generation forecast between the low and high end seems like many of those assumptions will play out in 2025 between battery supply shifting domestic, getting more clarity from treasury and maybe interest rates coming down a bit. So I mean, I recognize you're not giving 2025 guidance right now. But maybe if you could just talk about the puts and takes to consider as we look out another year to cash generation.

Yes. I think the one we put here at the top of the assumption is those adders, right? The adders we have -- now we have energy community and low-income running. There's obviously been some movement between the buckets. And net-net, we've seen that percentage climb since the last quarter. And domestic content is a matter of time for that -- to whatever extent we get the upside and over what period, it's just a matter of time for that to arise. And we've been cautious in our planning around domestic content, but we do expect that will be a driver we carry into 2025. Interest rates, as you see here, we're expressing in a range of 7.5% to 8%. We are not assuming a set of major declines in interest rates. We've seen base rates go up. We've seen credit spreads improved recently and we've generally held for most of the last few quarters within this range. So story there, again, is carrying this range of cost of capital into 2025 will allow us to also carry the magnitude of cash generation we're planning on. And then the third one is keeping that storage attachment rate where it is and slightly growing that even more over time. And working to further penetrate markets with so far lower penetration rates in storage. I think we'll continue to push for that as well to hopefully grow the range as we move into 2025.

Great. And just to make sure we clarify one thing, the batteries that we have been installing over the course of the year are those that we expect will qualify for the domestic content adder. So while you cannot monetize those until the guidance is sufficient and obviously confirms our expectations that would then make retroactive adders possible for the 2024 installations. Now there could be puts and takes and delays in getting that retroactive credit, but we do not need to wait for domestic content and batteries to show up, we are already installing those that we expect are likely to qualify for the guidance.

Got it. No, that's helpful. And maybe just staying on batteries. I mean, you kind of addressed it, but you're 50% attach rate now, it looks like you're assuming that ratio to be flat for the balance of the year. So -- just the first question is why, how come it's not continuing to creep higher? And then second, what scenarios would you need to see happen to get it to that 60% or higher range? I mean because it does look like you're close to maxing out the attach rate in California. So what do you need to see to get the rates higher for the rest of the country?

Well, I think as we talked about, we continue to see storage attachment rate increasing. Yes, as we look to the future, I think over time, we could absolutely see them go above 50%. But what we've been looking at is landing when you look at like the entire country and all of the markets we're in, landing at about that percentage. But absolutely, like my view from a grid perspective is that you'll start to see other parts of the country moving towards a more different tariff schemes that might make storage more attractive for customers as well as grid reliability issues that will make storage more attractive for customers. But again, we also see a tremendous like attach rate storage program as well. So we're really excited about the opportunity to also go back to our existing customer base and attach storage.

Our next question comes from the line of Joseph Osha with Guggenheim Partners.

Kind of 2 related questions. First, looking at the adjusted Q1 '24 cash generation number. I see that you're talking about an adjusted number that's flat there, not to be a stick in the mud. You did have a nice tailwind issuing this 2030 converted, not taking the '26 back in. So I guess what I'm asking first question is are you asserting here that on an ongoing basis, do you think Q1 cash generation can be flattish? And then I have a follow-up.

Yes. So one clarification is the issuance of the new convert and any proceeds from that we would back out from cash generation as we've defined, we would do because we don't give ourselves credit and cash generation for any corporate capital raises. So that number, obviously, that drove the -- while that drove the cash balance, it did not drive the cash generation number because we backed it out. But what we did incur was the -- were all the fees related to the transaction. That was $51 million on the convert, which is all we're putting back in the pro forma. So I would say, as far as -- and then, of course, there's a list of other items like the warehouse facility, advance rates, older related fees. But if you look at the pro forma, 2/3 of it is the tax equity, tax credit, kind of the tax credit transfers of $181 million in the low-income ITC adder of $30 million. And we've said we do expect to recover most or all of that by the end of the quarter. So that's our plan, which would imply a quarter of substantial cash generation coming to offset that.

Okay. And then just as a follow-on, we spent a lot of time talking about this annualized 200 to 500 number, which is great. But it's not going to help as much if we just give it all back in Q1 '25. So I guess what I'm trying to understand that you put in your comments that there's going to be positive Q3 '23 to Q3 '24 generation. How should we think about that level of Q4 to Q4, Q1 to Q1, future poising. What should we think about the sustainable annualized rate of cash generation? Because again, the Q4 number is great. But if we give it all back in Q1 of '25, it doesn't help.

Yes. I think we expect that the annualized run rate delivery to be sustainable and not timing driven. I think that's the most important thing. Now there will be normal fluctuations. If you look back at our results, there is seasonal fluctuation. But over a trailing 4-quarter period, we expect to continue the number, so -- or the trend line. So I think deal timing, seasonality, those things will still matter. But if we kind of zoom out and look over 4 quarters, that's the annualized run rate kind of thinking and framework that we're bringing here to the guide.

I would also just add to that -- I would also just add to that, Danny, that we also are doing a number of things like what our retrofit program, our renewal program, that we are thinking about in the context of how we can also utilize those programs to supplement typically low quarters from a seasonality perspective. So that is also something we're thinking about and working on strategically as we think about Q1 '25 and going forward.

Our next question comes from the line of Philip Shen with ROTH MKM.

First one is on the impact of AI-based load growth on your business. For example, ERCOT power forwards have moved up 60% in the last 12 months. CAISO has been similar. When do these flow through, I mean the retail pricing and affect your pricing power?

Yes, that's a great question. From our perspective, strategically, we see what's happening with load growth as being really directionally positive, largely because there's going to be -- we already see this, but there's going to be capacity challenges at the utility level, at the regional level. And so again, growing our fleet of storage plus solar assets, we believe will provide valuable and will be a meaningful resource. Relative to how that is going to flow through from a rate perspective, I would say there's nothing we've seen so far that suggests that the rate is -- that the utility grid infrastructure has a path towards becoming more stronger from an economic perspective. So there's massive spend needed at the transmission level, at the project level and at the distribution level. So again, I think there's going to be real pressure on utility rates in the future as this happens, and it also provides an opportunity for Sunrun and our assets to be helpful in the solution.

Great. Shifting to the impact of new entrants in the lease market. I was wondering if you could give us a little bit more color. You've shared some in the past. Have you felt this increased competition offset by Nova and SunPower situations? Is there anything that has changed in the sense that these new market entrants, which are mostly corporate or PE-backed have started to enter into an asset class that was previously very fringy or not institutional quality?

Yes. I think for us, we continue to see them operate kind of how we've seen it historically. I think they're trying to figure out the business model. When you look at owning assets for 25 years and forecasting out service costs and understanding asset ownership, consumer experience, customer service, there's a lot to managing these assets, and we are extremely confident having financed dozens of billions of dollars of this stuff that we know how to price it. And while we see annoyances from these partners, we don't view it as like a durable threat. We view it as some short-term frustration to volume.

Our next question comes from the line of Colin Rusch with Oppenheimer.

Can you speak to the performance of your VPPs from a monetization perspective versus your internal expectations when you guys enter into that market?

Yes. We're really pleased. As I described, again, we're -- we've got enrolled 16,000 Sunrun customers in the CalReady program that we rolled out, 1,800 on the PowerOn Puerto Rico. Our growing experience with good services increases our conviction that we can realize $2,000 or more in per customer NPV from these assets.

And then as you see higher storage attach rates, are there meaningful adjustments to your inverter storage hardware mix that you're looking at coming down the pipe? And are there meaningful new products that you're looking forward to being able to integrate that could impact your unit economics?

Yes. I think from a core hardware perspective, the major components, we've been -- we're really comfortable with the diversity we have and the products that we're using, and we continue to forecast and see steadily declining costs in those core products. On the innovation side and new product side, we actually see a lot of exciting products coming into the market. And Sunrun's position given our large and complete distribution is a preferred option for those people. And so we view ourselves as well positioned to be a recipient of the best and most innovative exciting new products that come onto the scene and have been doing some pilots with different products. And I think as the markets mature and as the products mature, starting to make those more of a standard offering in more homes.

Yes. And of course, we're looking forward to the deployment of Lunar and their storage capabilities, and we're already working with Lunar on their grid share capabilities, which are quite powerful.

Our next question comes from the line of Maheep Mandloi with Mizuho.

Just a question on the systems and products business. I saw the gross margins were a bit weaker in the quarter, which probably led to the lower platform margins. Just trying to understand the drivers there and how should we think about the platform contribution going forward, especially after the distribution business sale you talked about a month ago?

Yes, happy to hit that. So during the quarter, we made a decision to wind down our AEE distribution business. And in connection with that, there was a onetime kind of noncash charge on inventory impairment of $22 million. So that definitely weighed heavily on the gross margin in the period. As we -- it's not about that business. We've retained the higher margin and value-generating components of that business, but that did weigh in. And as we move on, from that, that should help restore some of that margin. If we look at that line item in total, it includes our distribution business. It includes our cash sales. It includes our home upgrade business which is ancillary to the solar install. If we just look at the cash system sales component in that line -- a couple of line items, that gross margin is a healthy double-digit number.

Got it. Appreciate that. And then just on cash generation. Just looking at your Slide 14 there. The orange bar for 2Q to 4Q seem probably more in line with the $200 million cash generation exiting Q4. Is that fair? Or like we could probably see some upside to that -- those numbers starting 2Q as well with all the levers you talked about?

Yes. I think -- so what you see on the bar chart on the -- like bottom left of Slide 14 is what I think you're looking at. Obviously, that's a directional picture, but I think the illustration here is a return of a lot of the working capital we incurred in Q1, returning that in Q2. And then in Q3 and Q4, moving more towards that run rate exit rate that we see falling within our guidance range. I would say that's the general picture there. I'm not sure if I missed the part of your question.

No, just like just reading those. And it looks like for Q4, it implies around $50 million of cash generation. Does that commensurate with the $200 million? Or does that -- like the exit run rate is something else or not the Q4 number here?

Yes. Within the $200 million to $500 million range is what's implied there.

Our next question comes from the line of Dylan Nassano with Wolfe Research.

Mary, you briefly hit on the early renewal program in your opening remarks. I was just wondering if you had any more color you could share on how that program has been progressing since your last update?

Yes. So we actually -- as I described, we are going to be using this year to run a number of different approaches on renewals and then scale as we exit '24 into '25. So we concluded that program, which, again, we were really pleased with, a 70% positive interaction on early renewal. And now we're launching our repowering and renewal with add-on storage pilots, and that begins in May. So at our next call, we'll be able to update you on that next one. Super encouraged by our first one, rolling out a different flavor, seeing what the uptake will be on that and then getting ready to scale as we exit the year.

And I would just add, I'd take this as kind of like us beginning more of a concerted focus around understanding our portfolio that's now close to reaching 1 million customers and investing in providing additional products and services like the battery to these homes. And as we focus on that opportunity that's in front of us, I think there's a lot of cash generation addition that can come as we effectively manage the portfolio.

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