Vivint Solar (VSLR) CEO David Bywater on Q2 2019 Results - Earnings Call Transcript

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About: Vivint Solar, Inc. (VSLR)
by: SA Transcripts
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Earning Call Audio

Vivint Solar (NYSE:VSLR) Q2 2019 Earnings Conference Call August 8, 2019 5:00 PM ET

Company Participants

Rob Kain - Vice President, Investor Relations

David Bywater - Chief Executive Officer

Dana Russell - Chief Financial Officer

Conference Call Participants

Julien Dumoulin-Smith - Bank of America/Merrill Lynch

Praful Mehta - Citigroup

Joseph Osha - JMP Securities

Philip Shen - ROTH Capital Partners

Colin Rusch - Oppenheimer

Operator

Good afternoon. My name is Christine and I will be your conference operator today. At this time, I would like to welcome everyone to the Vivint Solar Inc. Q2 2019 Financial Results Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Rob Kain, VP, Investor Relations, you may begin your conference.

Rob Kain

Thank you, operator. Good afternoon, everyone and welcome to Vivint Solar’s second quarter 2019 financial results conference call. Joining me today to talk about our financial results are David Bywater, our Chief Executive Officer and Dana Russell, our Chief Financial Officer. This call is being webcast and a supplemental investor deck is available on the Investor Relations section of the Vivint Solar website at investors.vivintsolar.com. In addition, we will be discussing both GAAP and non-GAAP financial measures during today’s call.

We have provided non-GAAP to GAAP reconciliations in our earnings press release that was issued earlier today. This press release is also available on the Investors section of our website. Please note that a replay of this call will be available within a few hours of the call. After management’s remarks, we will host a Q&A session.

During today’s call, some of the statements we will be making constitute forward-looking statements within the meaning of the federal securities laws, including statements regarding our guidance and our expectations for our business, finances, operations and markets. Accordingly, we wish to caution you that such statements are just estimates based on current expectations and assumptions regarding future events and business performance and involve risks and uncertainties that could cause actual results to differ materially. We refer you to the registration statements and periodic reports that we will file with the U.S. Securities and Exchange Commission from time-to-time which are available on our website identifying important factors that could cause the actual results to differ materially from those contained in our projections and other forward-looking statements. We undertake no obligation and expressly disclaim the obligation to update or revise any forward-looking statements whether as a result of new information future developments or otherwise.

With that, I turn the call over to David.

David Bywater

Thanks, Rob. Good afternoon, everyone. We delivered strong results in the second quarter installing 56 megawatts, which was above the high end of our guidance. This represents 19% growth over the second quarter last year and for the first half of 2019, we have grown 16% year-over-year. Our momentum continues to build. We are seeing environment growth across all of our channels with particularly strong growth in the first half of this year coming from our internal direct-to-home sales force, our rapidly expanding dealer channel and our inside sales channel which continues to be our most cost efficient channel adding megawatts with good economics in a reliable and controllable manner.

The growth and momentum we are delivering is expected and planned. We are excluding the way that continues to build an organization that will provide benefits to consumers of solar energy and lead the revolution of clean power to greater heights. We do not expect the momentum to slow down. We will continue to be prudent and deliberate and how we grow and operate the business. We expect to see greater channel mix benefits from our expanding retail and homebuilder efforts in the latter part of this year as we have continued to focus efforts and resources into these channels. In addition to these growth engines, we continue to improve systems, processes and technology to reduce cycle times, improve the customer experience and reduce operating costs. We also continue to work to refine and accelerate our battery offering. Now, that we are delivering nicely on our operational, financial and sales growth initiatives. There has never been a better time to be a business holder. Overall, I am very pleased with our company’s progress and the exciting results we are experiencing.

Our direct-to-home sales force historically has been the core of our business. We believe that by introducing additional channels, we can reach more customers and provide flexibility to the business, while over time significantly lowering our customer acquisition costs. These other channels continue to grow as a proportion of our overall and expanding business and represented 26% of our installations in the second quarter. Although we are still early in the process and we know we will have to overcome obstacles as we learn, we believe that we are on the right track. We are now working with 8 of the top 10 builders in California and are looking forward to the growth that will come from this important channel. I am also happy to announce that we recently signed an agreement to operate in select locations with Sam’s Clubs. This marks the fourth major retailer that has agreed to work with us in delivering the benefits of residential solar to customers.

We are still early in ramping of these channels and exploring what works best for customers, our partners and ourselves. We are just starting to scale actual sales activity and do not expect significant volume until the latter half of this year as we adjust and adapt our processes to best fit the needs of these channels. We are optimistic that our presence with homebuilders and retail locations will help us to reach additional customers and we are excited by the opportunities it gets. Our inside sales team are providing capabilities that we are relying upon to deliver incremental volume and value, this channel augments the direct-to-home sales force and is the group responsible for closing leads generated by our retail and e-commerce channels. This is becoming a lower cost route to market and a larger percentage of our quarterly installation volume.

We are committed to building the infrastructure for the future and are pursuing programs to lower cost, which will allow us to open new markets and become a viable option for customers who don’t have access to residential solar today. Inside sales is an area of the business that has grown substantially over the past several quarters and we have increased its capabilities and improved our processes. We are encouraged by these enhancements and are looking forward for additional ways to magnify the efficiency of this organization. Competition for our direct sales organization has created inflation over the past several years in customer acquisition costs. This trend continues and competition for direct sales personnel continues to be intense. As a result, costs for direct sales teams have increased. Therefore, we have seen and may continue to see some increase in our overall customer acquisition costs, separate from the portion of that cost driven by compensation structure related to our dynamic pricing model. We do believe that other routes with lower costs are emerging and will continue to expand due to customer awareness of residential solar.

One of the core pillars supporting the growth of renewable energy in the United States in residential solar in particular is the investment tax credit. As many of you are aware, the ITC will be intercepting on beginning next year from its current 30% level to 10% in 2022 for commercial enterprises. On July 25, a bipartisan group of representatives announced the introduction of the Renewable Energy Extension Act that would extend the ITC at 30% for 5 years to promote clean energy investment. A companion bill was also introduced in the Senate. Public polling shows broad support for the growth of solar regardless of party affiliation, because Americans value pollution-free power, job creation and energy independence. Extending the ITC will enable solar industry to continue its growth and bring the economic and environmental benefits of renewable solar energy and solar jobs to all regions of America. Given solar has enabled more than 169,000 American families to benefit from clean affordable energy and in the process we have created more than 4,300 direct jobs at the facility plus many more in the companies that supply our materials and associated services.

Solar energy is an economic engine and extending the ITC will enable this industry to continue growing American economy and contributing to the transition to a cleaner, more resilient energy infrastructure for tomorrow. Supporting the renewable energy industry through the ITC is a proven and efficient government policy that allows for investment in the future of the country. Many American families have benefited from the growth of jobs as a result of solar adoption partially supported by the ITC. In addition, homeowners who have installed solar, energy storage and/or other residential energy upgrades are enjoying clean energy at an affordable price. The fossil fuel industry has benefited from direct and indirect support for well over a century and the renewable energy industry that is employing so many Americans deserves a level playing field.

Over the coming months, we will be vigorously advocating along with many others for the extension of the ITC that has supported enormous job growth, cheaper, cleaner energy and a more resilient grid. One significant priority for us is continuous improvement of our operational processes. We believe our operational processes are the best in the industry. I am proud of the improvements we have made, the trajectory we are on and the value we have created compared to our competition. We are relentless in our efforts to be the leader in residential solar operational excellence. We continue to refine processes, audit and verify performance and add resources to assure quality. Our operational efficiency is the competitive advantage and we believe these capabilities will continue to differentiate us in the future.

Our employees take pride in the quality of our installations and the construction services we provide. We have a meaningful quality assurance program. We believe our operational processes culminating with installation service and maintenance are among the most cost effective in the industry. Our focus on customer satisfaction and quality are paramount in our thinking and guide our actions. We retained ownership of the most of the systems we deployed. We want them to operate and perform as designed and we hold our sales percentage we think are unique in the industry, but necessary for long-term profitability and customer satisfaction. Even though we believe we are the best in the industry then clearly separated from a competition, we know we have room to improve and we are working to do just that.

As we have stated before, no one should buy solar from an organization that is not prepared to maintain and service its systems. There are far too many systems that do not have a sustainable organization maintaining them leading consumers and investors to fend for themselves. Small local dealers don’t have the capital commitment or capabilities to operate as a critical provider for the long-term as market conditions evolve and systems require maintenance or other service. We understand the evolution necessary to educate consumers and much of this will need to be dictated by financial partners who deploy capital to unqualified parties who may leave consumers exposed. Over time, we believe our investment quality of installed maintenance programs and commitment to customers will translate into more volume as consumers become educated and investors understand their potential exposure to underperforming assets. We want to be the voice of the residential solar industry because we believe we leave the market in our commitment to providing the highest quality systems with the best customer experience.

We are passionate about what we do. Our employees are our greatest resource and we operate well as a team. Our overall momentum continues to build. There is a lot to be excited about and we feel we are firmly on track with our expectation to grow at or above market growth rates in a disciplined and sustained moving pattern. We not only perform everyday. We look for ways to rate the standards, improve performance and operate with integrity. We have executed well in the first half of 2019 and are enthusiastic about the second half of the year and the tremendous opportunities we see before us.

With that, let me turn the call over to Dana to provide additional details on our metrics for the quarter.

Dana Russell

As David mentioned, we are encouraged by the performance of the company and the strength of our outstanding marketplace. We continue to grow and gain momentum in key markets as routes and we remain focused on diversifying our aftermarket in creating new opportunities to expanded growth. Our Q2 unit cost of $3.56 per watt was higher than our original guidance mainly due to financing expenses related to new funds proposed in the quarter. We are happy with the execution of our capital markets team and the overall commitment from investors. We have worked hard to provide investors with assets and performance they can have confidence in and we appreciate our relationships with them.

We are able to expedite financing structures at favorable terms and timing. As a result, we incurred some expenses related to financing activities that were anticipated to occur a little later in the year. In addition, there were some one-time expenses related to our new channel initiatives. In total, one-time expenses were $8.7 million in the quarter. To provide a better build for our current expense run-rate, excluding these items, our unit costs for the quarter would have been $3.41.

With the focus on our best markets, we continue to see improvement in our system attributes with corresponding improvement in our project values and margins. For the second quarter, our project value was $4.67 per watt, a 14% increase over the same period a year ago. The net present value created or estimated margin was just over $49 million, a 21% improvement over the same period a year ago. On a unit basis, the net present value per watt was $0.88 for the quarter. Excluding these one-time expense items would raise the net present value per watt to $1.03 per share.

We increased our net retained value by $27 million in the quarter. On a per share basis, this represents $9.62, up from $8.13 in the second quarter a year ago. Total revenue for the quarter was $91 million, up 12% over the second quarter of 2018. Revenue from systems where we retain ownership was approximately $63 million, up 16% from the year ago period. Revenue from system and product sales in the second quarter was approximately $27 million, up 5% from the year ago period. We continue to expect systems sales to represent 15% to 20% of our volume going forward.

Our liquidity and financial position remained quite strong. We finished the quarter with $278 million in cash and restricted cash. We have $153 million in undrawn loan capacity between our two forward flow agreements. At the end of the second quarter, we had about 186 megawatts in committed tax equity capacity remaining enough to take us into next year. Subsequent to quarter end, we entered into a new revolving warehouse agreement with lenders for $325 million, expandable up to $400 million. This new warehouse replaces our existing aggregation facility and serves the purpose of providing back leverage on new systems until we place them in a longer term take-out facility. The new facility lowers our cost of debt by 87.5 basis points and significantly increases the amount of upfront proceeds on a persistent basis.

As David discussed during his remarks, there was some movement in Congress towards the extending the ITC for another 5 years. We will continue to vigorously fight for an extension. We strongly believe it is the right thing for the environment, for American jobs and for the renewables industry. However, it is not definitive that the ITC will be extended this year at any point in the future. To that end, we are continuing to evaluate our Safe Harbor strategy attempting to appropriately hedge the possibility of future extension, equipment price deflation and contingent technology obsolescence against the possibility of locking in or increasing our current margins with their current level of the ITC.

Moving on, we expect our third quarter installation volume to be between 62 to 65 megawatts. We are also reiterating our full year guidance for 15% or greater growth. We anticipate our third quarter cost per watt will return to a level that more accurately reflects our current run-rate and will be between $3.36 and $3.44.

With that, I will turn the call back to the operator for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Your first question comes from the line of Julien Dumoulin-Smith from Bank of America/Merrill Lynch. Your line is open.

Julien Dumoulin-Smith

Hey, guys. Good afternoon. Thanks for taking the time and congrats on the results. First, just on the growth side, first and foremost, could we talk about the expectations for the balance of the year, I mean, obviously doing quite well already 2Q, 3Q looks pretty constructive. When you talk about your 15% guidance for the full year here, how are you thinking about that in the back half of the year, obviously 3Q looks as if it’s closer to 17% and that leaves you with less than 15 for the 4Q, is that just conservatism or are you expecting a little bit of a slowdown in 4Q for whatever seasonality?

David Bywater

Hey, Julien, it’s David. Yes, we are super encouraged by how the first half of the year has gone. We have pretty good visibility into Q3 into the guidance. And that’s why we have changed, it’s 15% or greater. You can do your math on what you can get is – we are just conservative in nature as a company, while we are feeling pretty positive, that’s going to be 15% pretty confident about that and it should be potentially higher. So, it’s trending. Well, I don’t know, Dana, if you want to add anything to that, but that’s kind of what we have had on the growth piece.

Dana Russell

Well, I think our growth has been great. We have seen some very good momentum with our traditional channels. We are seeing growth in new areas and we are optimistic that growth materialized we have talked about with retail homebuilders as well. I think we are still focused on our best markets, our best economic environments and best markets and we will continue to emphasize those markets, but we are still very good about the third quarter and that’s why we said it’s going to be 15% or greater.

Julien Dumoulin-Smith

Got it. And similarly just how you think about NPV into the back half of the year, I mean, it looks like your cost per watt guidance would indicate perhaps a little bit over $1 a watt adjusted, can you talk a little bit of value creation into the back half of the year. It seems pretty favorable, but I’d be curious what your commentary is and maybe let me just discuss the third question just little quickly, any latest thinking on Safe Harbor given slightly greater articulation from your peers on going into the last 6 months here?

David Bywater

As far as the value that we created on the system basis for unit basis, we feel good about that. That value has continued to increase as a result of emphasis on the best systems and the best markets. And we are hopeful and we think that those trends will continue. So the costs have been slightly higher and we were slightly higher than our guidance if you exclude those one-time items really as a result of just computing the marketplace in those best markets and we feel like we have taken share in the best economic markets that we are involved in. And in doing that, we have seen an increase in our attributes, in our profitability on a system basis and so we feel good about that going forward. Now, obviously this is a dynamic market things move quickly in David’s prepared remarks, he talked about the competition for our sales talent. We are very happy with and confident in the leadership of our sales organization and our sales professionals and we have had tremendous success with them in the first half of the year and we think that, that will continue, but there is competition there and we expect to meet competition and provide the best environment for our sales professionals to work in while we also develop other routes to market. As far as Safe Harbor goes, we have begun to do some things around Safe Harbor, but in the details of that, I think we are probably not going to have a lot of discussion around that, in terms of more specifics other than that we are working hard. And just as said in the prepared remarks, we are evaluating the different courses that we can’t take and that we have initiated to do the best thing in the business. And it’s a bit complicated, Julien, I mean I think as we evaluate all the potential upside and downside for taking different actions, I think there is a lot to that, but we have initiated and have begun some activity around that.

Julien Dumoulin-Smith

Alright, great. Keep going guys. Thank you.

David Bywater

Thanks, Julien.

Dana Russell

Thanks, Julien.

Operator

Your next question comes from the line of Praful Mehta from Citigroup. Your line is open.

Praful Mehta

Thanks so much. Hi, guys.

David Bywater

Hi, Praful.

Praful Mehta

Hi. So, maybe just starting with costs a little bit of a disappointment with the increase in costs relative to your guidance, I guess what people expected, so just wanted to understand a little bit, you talked about financing costs and some other one-time items, a little bit more color on exactly what those are and why they showed up now would be helpful?

David Bywater

Well, we think that our costs were pretty much in line with what we guided to. So we would have been $0.01 above the range of our cost, excluding those one-time items and the one-time items were mainly associated with financing activities, really the forward flow arrangement that we have entered into in the quarter. So, those fees are largely flow through the quarter. They were fairly substantial. We expect it to close that arrangement, a little later in the year. It happened earlier. Otherwise that would have been part of the guidance that we have given. But in terms of the overall cost structure, we feel like we are as efficient or more efficient than anyone in the industry. We certainly feel good about our operational activities. We feel good about what we are creating in terms of value. And even where we were up slightly on our customer acquisition costs, those attributes that we created in the systems values are higher than where we have been. And we feel like as high as anyone in the industry and that we were delivering great margin on them. So, we feel actually quite good about the cost structure.

Praful Mehta

Got it. So, just so I understand how would you break up the two pieces right, you said one with the financing which you said was the flow-through agreement where the fees kind of showed up unexpectedly in Q2, but if you can breakout the two components how much of the financing piece versus how much were the other one-time items?

Dana Russell

Almost all of it was financing. So, there was about $1 million in other activities, other one-time items, but most of the $8.7 million, the majority of that was financing.

Praful Mehta

Got it, okay. So, that’s helpful. And then just so again I understand context, yes, go ahead…

David Bywater

Tough one that one as well as per Dana’s remarks, we gave guidance for Q3, it’s back to $336 or $344. So, that’s our guidance for Q3 until we expect. As you can see it was that one-time that we just misadjusted on when you would hit.

Praful Mehta

Yes, I know I appreciate that. That’s helpful context. But then I guess to understand from a volume perspective if you do have volumes that are bigger and clearly you did well in terms of volumes in Q2 and you sound like you are pretty confident on volumes going forward as well. Shouldn’t that allow you to have some economies of scale and help reduce the cost per watt, how should we think about that?

Dana Russell

I think that’s exactly right, the volumes will help us reduce those fixed cost structures. And I think we feel quite good about our current equipment costs, those things are quite stable, where we have seen increases if there are some increases there, it has really been around the customer acquisition model. Some of that has been investments and these routes to market. So as we have ramped up our inside sale activities, our homebuilder activities, retail channels, those are some investments we are making where volume will follow and we expect volume as we said in the later half of the year. So, as those volumes begin to kick in, those costs that we are incurring will be offset by that volume and it should lower our overall cost per watt…

David Bywater

Yes, there are some irrational players in the market and we are trying to make sure we have all the channels needed to bring the discipline over time. So those are investments that we are making today. We feel very confident about them in the path over time. You are preparing for and working towards bringing a rational thought to the market and trying to bring them a cost of acquisition, which is the right long-term answer for this industry. So we are probably making those investments today.

Praful Mehta

Got it. That’s great. And I am glad to hear that trajectory. I guess just quickly on the last point just a clean up item, I saw your Q2 cash flow statements and there seems to be like a big $38 million one-time other non-current assets, it might be too specific for you, but in case just wanted to understand what’s driving some of that cash outflow in Q2?

Rob Kain

Hey, Praful. I think this is Rob. I think that’s more the accounting adjustment we talked about in Q1. So if you are looking at Q2 relative to Q2 last year, that’s related to adoption of the I believe its ASC 842 required us to move indirect cost from a system sales on the balance sheet down. So the other non-current assets, if you look in the deck on the investor side, we have recast the 2018 financials and you will see the more comparable number there.

David Bywater

So, it’s really just driven by an accounting change.

Praful Mehta

Got it. Well, I appreciate it guys. Thanks so much.

Dana Russell

Classification yes.

David Bywater

The accounting change as well as the classification change, so if you look at that with that reconciliation, you would see that, that really wasn’t much – there was no adjustment there really.

Praful Mehta

Understood. Thank you, guys.

Operator

Your next question comes from the line of Brian Lee from Goldman Sachs. Your line is open.

Unidentified Analyst

Hi, guys. It’s [indiscernible] on for Brian. Thanks for taking the questions. Can you share – are you seeing any labor constraints, one of your peers had mentioned that bottleneck in the near-term. So just wondering if that’s also impacting your operations or if you are seeing any higher G&A costs due to tight labor markets?

David Bywater

This is David, Rebecca. We have executed well in Q1 and Q2. We have been working through those constraints, I think pretty effectively and finding ways to enable the growth. There is the tighter market for sure and it’s challenge out there, but thus far we have been able to – we continue to work really well on our efficiency, how our operation improves and we have a larger percentage of our installs now happening with 3 and 4 person crews than we ever have in our industry with an increase in the quality. That occurs with that. So we have been pretty innovative on how we go about operational efficiency that’s given us some good momentum to make sure we can install and keep up with our sales momentum.

Dana Russell

And we feel, Rebecca, like we have the people to meet the numbers that we have talked about in the third quarter where we are in the process of hiring those people. So we don’t feel like that’s been a constraint for us, we have grown very rapidly in certain markets and I think taking share in markets and ramped up fairly aggressively with operational folks to meet our needs. And we have been quite successful with that thus far. So as far as the constraint goes, there are tight labor markets for sure, but we are not seeing with our business that we have been constrained to-date as a result of that and we anticipate to meet those numbers that we have talked about in the third quarter, which is substantial growth for us as well and not having that also be an issue or constraint for us.

Unidentified Analyst

Yes, great. That’s good to hear. And then can you just share your latest thoughts on the storage strategy, are there other things that you see as more strategically critical that you would focus on before storage?

David Bywater

No, I think for us you guys know the story for us, we have been very methodical and disciplined I think on the whole process of this company. We have been really pleased with operational improvements we have made. The expansion of channels was a big priority for us and making sure that we are delighted to customers have across the board, the whole financial structure and how we capitalize the and the creative solutions we have put in place there really have been our main focus is. We think batteries in stores are very important and they are very much the future. I think that is the next – we feel that we are all attacking. We have made a lot more progress in the last quarter on that than we have had previously. And I expect our momentum to grow. So, definitely look forward to updates on that in the coming quarters. And I think it will be more elaborate on the detail there, but I am very bullish about where we are positioned now to be able to make and build upon the progress we have actually had the last quarter or two. And I think we will step it up here by going forward. So that is the focus for us and it is very important.

Unidentified Analyst

Okay. Thanks, guys.

David Bywater

Thank you, Rebecca.

Operator

Your next question comes from the line of Joseph Osha from JMP Securities. Your line is open.

Joseph Osha

Hello there.

David Bywater

Hi, Joe.

Joseph Osha

Hi, so a couple of question. First, it’s interesting you have gotten this aggregation facility redone, you have dropped your cost of capital you have improved advanced rate, I am wondering if there is any read across there to what the how the terms are evolving for some of your take-out financing and what the sort of cash realization might look on that end? And then just mapping from that into a slightly broader question, just wondering how I might think about your cash realization over the course of the next couple of quarters here, because I see the balance that go down from Q1 to Q2?

Dana Russell

Well, I think the balance going down was more of a timing thing. We certainly could have drawn more cash and taking them and beef the cash balance up has been a focus for us. The aggregation facility allows us to take to monetize more, to leverage those assets a little bit more. And so we feel good about that on the front end of the process which should help us on cash flows as we go forward, which in fact will leave us a couple of years down the road here as we begin to put those assets in longer term facilities with a little less to get or to monetize later on. But I think the trade-off is a good one. We have got better facility in place with better terms and the monetization of those assets was a little bit more upfront, I think is an advantage to us.

Joseph Osha

Okay. And then on the back of that, obviously you did this swap or the deal middle of last year, when might we see you out in the securitization market again?

Dana Russell

It could be spring to summer kind of timeframe. So next year, we were still pretty consistent there I mean with the new ag facility in place that might slow up a couple of months more a little bit more towards summer from spring, but that kind of timeframe is still what we are thinking what our thoughts are.

Joseph Osha

Okay. Second question wondering if I can just get some thoughts from you on what the economics of this title point for businesses that you have talked about here with the homebuilder engagement, I would assume that probably the origination costs are lower, but price might be lower as well. Just wondering how it looks like that business is going to shape up?

David Bywater

Right, Joe, it’s David. We are pretty bullish about it. I think it’s actually on the higher end of our profitability in the economics relative to our portfolio, I mean, usually with the efficiencies that we have gained thus far on the homes that we have installed. And now I would add that just you avoid a whole bunch of the electrical upgrades, we are able to put the panels in the most advantageous pieces of the roof – are installed efficiencies where we can put in multiple installs per day with the same crew is by far the best. We are able to actually reduce a fair bit of the permitting costs. So there is a whole bunch of efficiencies that we are able to accomplish with that channel that puts it on the higher end of our portfolio mix. Hence that’s why we are encouraged by the progress we have made there and the backlog we have got going into 2020 for next year. We are also very encouraged by the conversations we are having. They love the fact that we own our own sell teams. They absolutely love the discipline we bring around quality. And so they compare with others. And these partners get how we run our business and they really value it. So, not only we are well positioned, not only we are very happy with the progress we have made, in a very short period of time, this has not been a historical focus for us, but we are also very encouraged by the momentum we have got going forward. So, it’s a good market. It’s a new market. It’s a profitable market and it aligns nicely with our relative strengths.

Joseph Osha

Okay. And then last one for me before I go away, we have seen your peer make a lot of noise about some of these capacity deals I have used in PCAs and whatnot, I am wondering if that we might see you all start to invest more in that element of your storage strategy as well?

David Bywater

Yes, we are little behind them on that, but as we turn our focus to it, what if we turn our focus till we make the progress on. So as I mentioned earlier on the battery stuff and with services and all those partnerships, it’s in front of us and we will announce the right time what we are doing and the products we are making, but at this point I will reserve that and not elaborate.

Joseph Osha

Okay, thank you very much.

David Bywater

Thanks Joe.

Operator

Your next question comes from the line of Philip Shen from ROTH Capital Partners. Your line is open.

Philip Shen

Hi, guys. Thanks for questions. First one is on partners, I was wondering if you could expand a bit more on goes specifically and how they are ramping the last call you talked about volumes in the back half, could we see some volume in Q3 from either one of these partners and if so can you comment on what that volume could be or do you expect it to be much more Q4?

Dana Russell

We are actually seeing volume today. So, it’s not like it’s not happening, but I think the momentum we believe is going to continue to build as we ramp before and processes and build those organizations out. And we do think it’s more toward the later half of the year we will see substantial volumes. So it’s not that we are not seeing some volumes today we are and where this is kind of as we talked about on our last quarter call, this was our first foray into the retail space. We have announced the number of partners that we are working with and we feel like it’s going well, but it’s going to be a little later in the year before we are expecting meaningful volume there.

Philip Shen

Great. Thanks, Dana. And David, you commented a lot on the ITC extension, can you give your sense of what the probability might be than extension either this year or next year before the elections or do you think what I have heard is the probability increases meaningfully after the elections and obviously depending on how the election is going 2020, but what kind of chance does the industry have in getting this past before the elections?

David Bywater

Well, I am an optimist. Obviously, it drives me. And I believe that we will get a pass, I don’t know probability on it. I do think it’s unlikely this year I hope I am wrong, we will work hard. I would love it to happen before the election that will be fantastic, but we are preparing for the scenario that will not be the case and we will be protected against that. It’s so funny, because it’s such an illogical debate we are having. When you have 90% of Americans saying, please do more so not less and was supposed to be a constituent driven government, it’s just shocking to me that the debate. So like we worked on state level when we get the consumers and voters involved, then the politicians listen. So there has never been something I know of where you have so much common support across the country for this to continue. And the despair between us and substantive list lasted for so long in other industries, right. This is just the right thing to do. So I am hoping that prevails. I think if it happens, it will happen next year. I hope it will happen sooner, but we are planning on it. We are planning on it other ways happening late next year or not happening we will work to hedge our best as best we can.

Philip Shen

Great. Thanks for the color. As it relates to modules and securing them, some of our recent conversations with industry players suggest it’s getting really tight now in terms of module availability, what kind of risk do you think there is during Q4 guide based on not being able to secure enough modules?

Dana Russell

I think the market certainly is tightening up and we are seeing this is where pricing has been elevated a bit, especially for folks who don’t deliver the kind of volumes that we have and relationships that we have. We feel quite good about our ability to have products. So we certainly purchased and purchased ahead and we have done some purchases and made some contractual commitments for panels that have extended past Q4. So, we don’t think that there is an issue with having the product to meet our needs through 2019.

Philip Shen

Great. One last question for me I believe you guys are completely standardized on the 20-year lease, would you guys – do you have any 25-year leases in PPA or PPAs, if not are you exploring this at all, what are your thoughts on potentially shifting that lease longer?

David Bywater

Well, we know that there is a list. We do deliver a longer term lease. We have not been – we have been on a 20-year contractual period and we think that, that makes them as we certainly continue to evaluate longer term structures and other products that makes sense that especially if it’s in the management facility through the company that making more offense, but today, we felt like the best product and the one that delivers the best value for consumers has been the 20-year program. And so I think for the most part, we plan on sticking with that.

Philip Shen

Great. Thanks, Dana. I will pass it on.

Operator

Your next question comes from the line of Colin Rusch from Oppenheimer. Your line is open.

Colin Rusch

Thank you so much. Guys, could you talk a little bit about the normalized G&A spend as we go forward, is there I guess some meaningful leverage there, is that going to scale up as you scale up?

Dana Russell

We won’t have any significant ramp-ups in G&A expense. There will be some as we develop more programs as we have more volume, there will be some, but it certainly won’t scale proportionate to volume increases or things like that. So, we feel pretty good about the expense structure. I think we have talked about making some investments in e-commerce and in other elements that we think are valuable for us that are investments in the future. And those are the kind of things that we will be proactive about and make investments in, because we think it will contribute and help deliver volume in a more affordable way in the future, but we don’t see any kind of significant ramp up in our G&A or back office expenses.

Colin Rusch

Okay. And then just you haven’t got an update in a while, in terms of the sales synergies with the parent company, are you seeing any real changes on that acceleration, deceleration in terms of the benefit you are getting from that relationship?

David Bywater

There is no parent company. We are standalone. We have a sister company, but not a parent company. We continue to collaborate with smart home. They have been a significant source of positive growth for us and we still have our guys selling both solutions. So, we still have a commonality and ability to sell both products in both areas. So, we are not doing it in big numbers, because most of our guys have been wanting to sell, but they do bolt-on additions of smart home solutions and we have a formal relationship in the cross-sell with both groups on regeneration of going both ways. So it’s very positive, it’s a great relationship, it’s the one that I value tremendously personally and we value a lot collectively as an organization. So, still very, very positive and something I think that’s our sales force loves having that relationship, but we do it both ways.

Colin Rusch

Alright. Thanks, guys.

Operator

Thank you. Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.