Nextpower Inc. (NXT) Earnings Call Transcript & Summary

So again, good morning, everyone. Thank you for being back. I appreciate taking the back off here with Dan Shugar from, well, Founder and CEO of Nextracker. Again, if you guys have questions, just take me here and chat, e-mail, whatever you guys want. I'm going to be up here with the laptop if you've got comments or questions, but he's going to kick things off with some opening comments, a couple of slides here, and then we'll move from there. And thank you, Dan, again. Really appreciate you taking the time here.

Absolutely. Great pleasure. Well, a tremendous pleasure to be here this morning. Good morning. I'd like to just cover, we just heard a great presentation from the ERCOT leader. I'd like to contextualize it into just the growing needs for energy, we're seeing. We use the U.S. as a case study, but it's also true internationally. So we had a long period of fairly flat demand growth in the United States, about a 1% compounded annual growth for about 15 years. Why was that? Well, we had much more efficient appliances like lighting went from incandescent to compact fluorescent to LED. So the lighting is using about a 50 amount of energy. The refrigeration uses 1/3 of the amount of energy. And you have a lot of industrial capacity in the U.S. going off to China. Well, those days are over, okay, of flat load growth, we're seeing very strong load growth happening in the United States, driven by, I'll move to electrification for appliances. For example, heat pumps are now used more often than gas for heating homes in many regions in the U.S. and same is true internationally. We're seeing electric cars being used, that's a lot of energy to charge those cars. And we're seeing re-industrialization across the United States. For example, my company, Nextracker, we've catalyzed 15 factories across the U.S. in the last 2 years that are shipping finished goods today, and these are significant facilities, 100,000, 200,000, 300,000 square feet. We're also seeing a lot of growth in data centers and AI, consuming a tremendous amount of additional energy. And at the same time, legacy power plants like coal are dropping offline, and we'll look at the actual numbers in a moment. Nuclear plants are dropping offline or at the end of their life. So we're seeing a tremendous growth for new power coming. So the Energy Information Administration is forecasting a 4.6% annually compounded growth for new power. It results in about 500 gigawatts of new power over the next 5 years and about 800 gigawatts of new power over the next 10 years. A gigawatt, like a legacy coal plant is about a gigawatt, a large one, about a gigawatt. So that's a lot of power. So where is that power going to come from? Well, the Energy Information Administration, which is historically very conservative on renewable growth is forecasting that solar will be, by far, the largest source of new power out of the grid. They're forecasting a 26% annually compounded growth for solar for the next 5 years. And within 10 years, solar being the #1 source of power for the grid, the U.S. grid. And this is based on the economics of solar. It's the lowest cost way to generate power. It's the fastest way to install power and it's the lowest risk way to put power under the grid. So when you add all that up, that's why solar has dominated new additions to the grid for the last 5 years, by far, the largest source being added to grid and why it's going to keep growing? I'm not shown on this chart, but the batteries are now here. okay. There's some 5 gigawatts operating of batteries, okay, we are going to show that chart. By the end of this year, it's going to go from 5 gigs 2 years ago to 15 gigs operating this year. 50 gigs will be operating within 2 to 3 years. If we can go back to the chart and stay there. The solar will be the #1 source of energy. So the chart on the upper right, again, EIA, the government, U.S. government, 26% CAGR was solar. Wind will also grow about 11% CAGR. All the conventional polluting stuff, negative CAGR, coal negative 10% a year, okay? As recently as a dozen years ago, coal was over 50% of the national energy mix. Today, it's under 15%. It's going to go to [ demure ] 0 within 10 years. Gas also has a negative CAGR according to the U.S. government. So solar, and this is utility scale solar, predominantly, utility-scale solar, the big farms, that's what Nextracker serves and community solar, which are serving the community, but they're multi-megawatt plants. That's what we do. This will be the dominant source of energy. So what we do at Nextracker, we don't make solar cells, or solar panels, have done that, and that's interesting fun stuff to do. What we do is we make the mechanical and electronic and control systems and software to move the panels to follow the sun, gaining up to 30% more energy that also we measure the atmosphere conditions in real time and using machine learning, we optimize the angle of the panels, so in concert with the terrain to harvest the most amount of solar energy that comes out of it. So we went public about a year ago. We've enjoyed about a 30% CAGR for 6 years in a row with the companies with our top line and appreciate the opportunity to speak today. Julien.

Awesome. Excellent. Thank you, Dan. I appreciate it. Maybe just kicking things off here, right? So I think the first question evidently from that is, how do you think about growth here in the near term, right? Because I think the 26% CAGR number you just quoted here a new and addressed directly has gotten a lot of attention, right, and especially in the context of a lot of your peers where there's sort of this question of like, is there growth this year? It's sort of the new question in the last couple of weeks. And there's this implicit question of, well, maybe it's a market share question. Do you want to tackle that directly about how you're seeing your position in this marketplace evolve? Because that's sort of at the core of a lot of the...

Sure. My pleasure, Julien. Thanks for that question. So there are headwinds and there's tailwinds. We've seen companies that are underperforming in the space, really highlighting a lot of the headwinds. Those headwinds include permitting delays, interconnection queue delays, equipment shortages, labor issues, inflation, cost of capital. Are all those things real? Definitely, they're all real. And those things can impact any individual project. That's true. But the tailwinds in totality are stronger than the headwinds. Starting with what's embodied in federal law for the last 18 months is that the investment tax credit went from 10% to 30%. And if you meet some criteria which some of our customers have been able to achieve, it's 40%. Every project happening today, utility-scale project was modeled with a 10% investment tax credit. There was a windfall for them of 20% to 30% tax credit. So let's use a hypothetical 100 megawatt plant. What's that worth? Solar plant, solar power plant. So it's 100 megawatts, dollar watt, so $100 million. So this 100-megawatt plant just got a $20 million to $30 million tailwind with the Inflation Reduction Act having this significantly higher investment tax credit, okay? Now were the inflation, did labor go up a little bit? Or did it go up? Definitely. In the context of this plant, what would the impact be? I don't know, $1 million, $2 million. Or did the interest rates go up? Yes. A couple of million bucks impact on this project? Sure. But from a financial standpoint, you're way better off today than you were 18 months ago. Clearly, okay. Now with respect to the implementation issues we spoke to, hey, it's taking longer to get things permitted. That's true. I've got interconnection queues problems with PJM or these other grids were [Technical Difficulty] but the universe of developers, the number of projects at each developer, the size of the projects at the developer owners and the universe of EPCs, engineering procurement construction companies that build these is vastly larger. So we have this huge pool of participants in the space because there's incredible profit opportunity for them. And folks are moving to they want to decarbonize. There's real goals out there with utilities and others to get this done. So in totality, you're seeing the market up into the right, which is why Nextracker has sustained a 30% annually compounded growth up through our projection, which is through the end of this, our fiscal year closes at the end of this month. And it's why the Energy Information Administration is projecting a 26% CAGR in solar for the next 5 years, roughly in line with our historic growth. So it comes down to companies that manage their business that are basically able to create expectations that are able to weather unforeseen conditions in the market to basically be able to deliver on their forecast. Nextracker for 3 quarters in a row, we've met beat our revenue and our profit guidance and our profit target for each quarter, we've taken up our guidance each quarter, including the quarter we just closed, and we had our call a few weeks ago. So we're seeing the market has never been as good for solar in the United States and the same is true internationally. Canada adopted a 30% investment tax credit, Nextracker has the largest operating system in Canada. It's a very, very exciting market. Australia, policy tailwinds. We've got over 50% of the operating fleet in Australia. Now you're seeing Oceania region developing, including New Zealand, Singapore, projects developed out of Singapore area, that whole region. Latin America, huge growth has happened over time in Brazil. and throughout Latin America, many countries, we have operating systems there. In Africa, we have the largest operating portfolio. We're seeing that's a very vibrant early but growing market. The Middle East region, we have the first operating utility scale system in Saudi Arabia, and there's a lot happening in Saudi Arabia. When Saudi goes solar, don't you think [indiscernible] is working. They're like, "Hey, it's much more cost-effective for us to sell our oil at $80 a barrel or $50 a barrel or whatever the prevailing is, than to burn it for power generation." Like say, basically, solar is much lower cost wagering power than burning oil even if the oil is their marginal value is very significant. We're seeing the largest actually solar operating complex in the world is in Dubai. We participate in that. In India, I was just there. I saw Prime Minister Modi give an electrifying speech. And basically, they're all in on solar in India. And there's a huge market there. We have our second largest office there with well over 200 people, and we have the largest legacy operating fleet there as well as 5 gigawatts of new projects we're fulfilling. I could keep going around the world, but the market conditions have never been so strong in home and abroad.

Excellent. Actually, look, maybe to that end, just to clarify some of the earlier comments that you said on the call as well as just now. How do you think about the proportion of international growth? I think you guys have this like broad heuristic of 2/3, 1/3, I think, is the numbers that you guys talked about. But the way that you're describing it right now, I mean, look, obviously, the U.S. is robust, but you've got entirely greenfield opportunities or maybe not entirely, but certainly, you've got a running start in Canada, and as you described, Canada is novel, and it's not necessarily been on your top list in international markets, for instance, right? Like a lot of new angles. How do you think about the growth in that heuristic in terms of international? Is it 2/3 1/3 this year and it's going to continue to kind of over-index international?

Well, we've been Julien, historically 50-50 overseas U.S. So we're a global manufacturer. We were manufacturing in over 30 countries. We have 9 global offices, and we're #1 on 4, 5 continents. And so we like the ability to and we don't think about some countries like the U.S., we don't think about that monolithically. There's 3,000 utilities in the United States, believe it or not. There's 50 states, 3,000 utilities. There's many planning areas we just heard from one of them that they all have different rules. And so we kind of think of those as different markets. But we like the international diversification. If there's a problem in one market, we're able to accelerate into another market or vice versa. And what we're really focused on is just adding value, right? So we'd like to find customers in these markets that are developing high-quality portfolios. We've tried to move from projects to programs. We have a commercial model we've talked about called our volume commitment agreement where instead of transacting a project by a project with a contract or what we do is our systems generate more energy, where we have a much stronger financial position than any other providers in our space. And so what we do is we enter into relationships with owners. Some of those owners operate on multiple continents. We love those owners. And so basically, we focus on owners that understand the benefits that a company like Nextracker can bring to the table. Will be competitive. It will be in the competitive range. But what that allows us to do when we move to a program type environment is just deliver a much better experience. If you're earlier in the cycle, it allows us to value engineer, save the companies a lot of money. I'll give you a perfect example. Nextracker pioneered a technology in the solar space called XTRTM terrain following tracker. So many sites that are being built out there in the world are not flat, just to get wrap your brain around this for a second. Last fiscal year, we shipped on average about 325 megawatts or 350 megawatts a week. Hey, that's a lot. That's like a small coal plant every week, okay? That's what we did last year. That's 4 square miles a week, 4 square miles every week. for the whole year. That's what we shipped. Okay. So when you build on these sites, a lot of these sites are under lighting. The way folks were building years back is that they would physically grade the sites with bulldozers, okay? That's a lot of earth work. You have to cut it, you have to fill it and you have to recede it, okay? We came up with a technology in concert with some of our customers that actually follows the terrain. So you don't have to grade, no bulldozers, sort of minimal bulldozer work. It rapidly speeds the installation process and the lowest cost and these systems also generate more power. So when you're earlier in the cycle with customers, it allows you to say, hey, our tech doesn't require the bulldozer. The other competitors don't have that. So let us work with your customers, save all this money and they get to accelerate their project portfolio.

Thanks. How do you think about the margin profile here? You talked about 50-50, 2/3, 1/3. There's been this consternation out there before of like, well, is the international market more competitive, right? You don't have the same IRA dynamics. But as you described, like you guys are a premium product, you sell something that's better, right, if you want to talk about it being notionally better or this has more adaptability, [indiscernible] training, for instance. How do you think about as you expand and lean into that international market, again, I'll take that as a premise, sustaining the margins that, again, you've been sequentially guiding up here as well, right?

Yes, I appreciate that. There are different margin profiles in different countries, different regions, and seems true in the U.S., some regions have different margins. than the others. The key thing is really having discipline about pricing, not chasing individual projects, but to really focus on the high-quality customers, and we value all customers. But what I mean by that is customers that have a more mature business process. Their projects have better entitlements with more secure offtake agreements for the energy, more better entitlement for the permitting, where they understand the value of the energy and they understand the value of a company that's operating toward an investment-grade profile as Nextracker is where we have over $800 million of liquidity. We've made money every year since I founded the company. We have very, very low debt, and we've delivered millions of traffickers around the world. The type of thing we do is sort of the skeletal and nervous system for your power plant. So if you're building, again, going back to the 100-megawatt example, $100 million plant, the tracker may be a $10 million scope. Why would you go to a Tier 2 to say even if it's like 10%, you save $1 million. And then in the U.S. after the tax at 30% tax credit and the accelerated depreciation, it might be a couple of hundred thousand dollars. So you're going to go to a Tier 2 for that. And then your whole skeletal and nervous system is dependent on a Tier 2 provider that might be undercapitalized with not a lot of tech out there in the real world. That would just be an imprudent decision. The other thing is experience really matters. I've been in the industry since the '80s doing this. kind of a dinosaur. But if you look at our executive team, we have over 20 years' average solar experience on our team.

Maybe, Dan, why don't we talk a little bit about just near-term and medium-term growth in the space. Just one more time. I mean I continue to get this down from folks... Really just... How do you think about what is sustainable growth rate is for you guys? Or how do you think about your customers? I mean there's been so much concern about delays from third quarter and fourth quarter. Basically, the bottom line is you're feeling on track even now with your existing customers for this year and more to the point you see an ability to continue to compound in a very robust way. You're talking about the 26% number. without guiding for '25.

I mean, look, the proof we've taken up our guidance 3 quarters in a row, we beat our numbers 3 quarters in a row. So I'm not saying there's not concerns or headwinds or anything like that. I'm saying the intrinsic numbers like solar, let me contextualize things for you. Okay. I did my first utility scale plant in 1993. And in that year, the capital cost was $10 a watt, okay? In today's dollars, call that $30 a watt, okay? Then in 2009, so a couple of decades later, we did the largest solar power system in the United States. It was at Nellis Air Force Base. President Obama went there. 2009, it was $7 a watt. So today, whatever, call it, $12 a watt, something like that. Today, plants run dollar a watt are down here. they're $0.50 a watt in India. Okay. The power is really, really, really low cost. And I could go through all the reasons that that's happened and also speak to you all day about all the amazing tech that's going to keep driving down the costs are. Solar has completely revolutionized power generation. And now that storage is here at scale, you're going to see unlimited growth, which is why EIA finally drink the coli gets it, why they're saying solar is going to be the #1 source of power generation in the United States within 10 years. Okay. So now solar is going to do it, all right? So just bear with me, what are the segments and applications? Well, utility scale is by far over 50% by gigawatts and a lot more than that in gigawatt hours because we track and are professionally managed. Within utility scale, the [indiscernible] tracker, Nextracker ship as much tracker over the last 7 years as our top 3 competitors combined. And we have a hell of a lot of domain expertise. We are not screwing around. So we have a vision of a world that's powered by renewables. And we have the right culture, the team and the discipline and business process is to execute. And so we're very focused on that. We're super serious. How do we keep winning and how is our margin keep going up? Because we're totally focused on the customer. Go ahead, please.

Well, actually, as you said, right, I mean, you've had this incredible run on raising expectations, not just on volumes and outlook but also on margins, right? And I think that this piece is really critical. How do you think about continuing to compound that margin here today? You were starting to get at it. But I think that's something that a lot of folks are looking at saying you've already now pushed things up to the mid-20s here on kind of a longer-term baseline. How do you think about keeping going here? I guess that these credits are out there that they're not necessarily reflected again in your core outlook. Again, you could talk about that being medium term versus long term. But how do you really elevate things from the mid-20s? I mean I think a lot of your peers talk about mid-20s as being kind of where they see things as being and I don't think that they talk a lot about being able to improve. But you're sitting here talking about I've got levers to continue to drive that higher. I got some visibility and you speak with confidence on the back of what I've already delivered, right? So if I listen to you independent of listening to your peers, it sounds like mid-20s and going.

Well, I just want to start with also what we've been able to do is meet and beat expectations. We didn't take any given quarter, like last quarter, we had a fantastic result from recognized margin, say, okay, it's up and to the right forever. We basically say, "Look, we're optimizing the business annually and that's what we're really focused on." We have to report quarterly, that's fine. But we optimize the business annually, and we try to have a plan that we can meet despite unknowns when you set the plan, by things that happen in the real world. For example, who would have thought that Houthis would start shooting missiles at ships coming through the Suez Canal or that the Panama Canal would suffer from a water shortage from an inland lake, which is constraining the amount of ships coming through the canal. Nobody forecasts that stuff. Global logistics went up. Well, we had dealt with that, we mitigated that. It impacted us but not materially because we had built out our supply chain in the U.S., in Brazil, in India and other places to be able to make locally if we need to. But we also had those types of things factored into our plan to be able to perform. Now with respect to how we've been able to maintain this lead share and have our margin profile grow over time. And for next year, that will happen after we report next quarter. It comes to the customer. How do we deliver value customer? What do they care about? It's very simple. They care about [Technical Difficulty], their unlevered return, which is driven by the levelized cost of energy. There's 3 inputs, the installed cost of the system, which is CapEx, but also the installed cost, there's how much energy these systems generate. And then there's the operations and maintenance cost of the system. That's it. So if you optimize those 3 buckets, the net result is a lower levelized cost of energy, higher unlevered IRR. And then it's basically up to us to communicate to the customers, to all the buying influences, not just the owner but the EPCs, how they're going to be able to recognize those values. Here's how we do it at Nextracker. We deliver real hardware, real software, real firmware that delivers real value that's backed up by measurement and verification with independent engineers that's proven that allows our customers to validate it. I'll give you some examples. Trackers follow the sun as the sun comes from east to west and moves in the sun. Back in 1991, with some of my peers, we came up with this algorithm called backtracking, which improved the yield of the systems about 2% to 3%. That became an industry standard, very well known. All the modeling software in my space has that built in. Well, that was good, but we knew we could do better because that old algorithm didn't allow for undulating terrain, or diffuse and [ tattered ] cloud conditions. So we developed a software at Nextracker called TrueCapture, which has an adaptive backtracking algorithm that deals with undulating terrain. In order to harvest that you need an individual row tracker that can articulate with high degree precision with embedded sensors to measure the actual angles. Just like your cell phone, when you move it, it knows the angle, all our trackers have that tech embedded in there. Our top competitor can't do that because all the roads are mechanically linked together. That's fine. We want all the companies in our space to do really well and perform reliably. But by being able to then really optimize that, we came up with this tech and you can just look at TrueCapture one word on YouTube, you have a 3-minute video of how it works. So when we launched that 7 or 8 years ago, we had already completed a year of utility scale field trials with measurement and verification data that we had socialized with independent engineers that said, "Hey, here's what we predicted. Here's how it's actually performing." In some cases, we actually sponsored them, they're like, "how do I model that? It's like, "Well, here's how we model it, let us help you develop your own model." And 10 of the 10 top independent engineers in the world on that thing will validate it. So when we do a commercial offer to the customer, it's like don't believe us, go to your independent engineer with your data, your site, your weather file, your solar panel, whatever they say, we believe put that in the model, that's our commercial offer. So then we started closing business. Today, we have over 250 utility-scale field plants using it, which is why we've been able to monetize the software business in our company. I don't know anybody else has done that. So risk repeat whatever the tech as I talked about this XTRM terrain following tracker. We have over 50 of those plants flying around over world. I don't know of any top compare that has any, maybe they do, but that reduces capital costs. The other thing it creates the energy. Then for the O&M, we have individual road trackers, so it's much easier to do vegetation management, leading the panels, et cetera. So what we've done is put ourselves in the customers' shoes, right? Understand these components, how do we deliver more value, and then we have operational excellence focus on delivering those things. So it sound basic. I think it is. But you have to understand to be in the shoes of the customer and have domain expertise in the industry and understand listen to the customers and then back, try to deliver what they're asking for, and that's basically what, it's just putting one foot in front of the other, that's what we've done.

That's incredible. Maybe just to follow up on this. I mean, is there any kind of heuristics you could share? I mean, how far you can take costs out, i.e., from here on out, what I'm hearing from you is, look, we are going to move towards a better product. And again, part of that better product is the customers are going to be willing to pay for it, right? So a, and then b, there's also an ability to bring cost out. And we've seen that right as you the about that here in the medium term, just the line of sight, you use some of these examples here, but kind of quantifying that back into, and yes, I can kind of do what I can about...