Nextpower Inc. (NXT) Earnings Call Transcript & Summary

All right. Good afternoon, everybody. Thank you very much. This is day 1 of the 9th Annual JPMorgan Energy, Power and Renewables conference. Thank you very much for coming. My name is Mark Strouse. I cover clean energy, very happy to have Nextracker . Nextracker's 1.5 years ago IPO, Stock's been a monster. Execution has been phenomenal. Happy to have Chuck Boynton, the recently appointed CFO. So Chuck, welcome back. We've worked together many years. I am assuming there's going to be some folks that are familiar with you, just given your experience. But can you just give a quick background of your history, your history in the industry, your history with Nextracker and what attracted you to take the CFO role?

Certainly Mark. Thank you. And it's great to be here. Great to be back in the renewable energy space and solar. I spent about 8 years at SunPower during a really rapid growth phase. In those 8 years, I worked with Howard Wenger, our President. Bruce Ledesma, another president of the company, knew them quite well. SunPower acquired one of Dan Shugar's companies early on right as I was joining. So I knew the team quite well and really loved working in renewables. It was that we did a bunch of cool transactions on M&A side, growth side, worked with partner with First Solar to create 8.3 Energy Partners. So I know the ecosystem really well. After SunPower, I joined a company that -- it was 2 public companies had merged and that was acquired by HP. And then most recently was the CFO at Logitech, a dual-listed company headquartered in Lausanne, Switzerland. I joined the Board of Nextracker right on the IPO, and so I've worked with the management team for the last 1.5 years. And when Dan asked me to step into the CFO role, I was thrilled and honored. I love this industry and this company is such a great company, so well run, a great management team, and I'm just really thrilled to be diving in on the operations side. It's been 2 weeks, so if I can't answer all the questions perfectly, you'll have to forgive me. But I'm just really thrilled to be here in this awesome industry.

Great. Okay. So let's get stuck into some of the topical issues here. So I think we'll talk about politics and whatnot. But can we touch on just project timing, right? So a lot of the companies in U.S. utility scale, in particular, are talking about project timing delays because of interconnections, financing, supply chain. Nextracker seems to be coming through this relatively less scathed. So I think on the last call, you talked about kind of project timing is within a normal range of expectations. Can you just kind of compare and contrast, I mean, what makes Nextracker unique? What are you seeing in the field? Why do you think that project timing is less of an issue?

Well, I think, first of all, in utility scale projects, timing is -- these are long lead times. These are projects that in many cases are planned years and years in advance. And so things do happen, projects get pushed out, projects get pulled in. There can be short-term volatility, which is why we think about our company in terms of annual cycles, less so quarterly. We really take a long-term view. In terms of our execution, the culture that Dan and Howard and the team have driven as being maniacally customer-focused and maniacally engineering focused. It's really been so apparent to me these last first 2 weeks, just how amazing the engineering talent is, Just world-class engineering, but also just totally customer-focused. And then with this business, we've scaled where we've done business in 40 countries. If you think about that 40 countries. U.S. is still the lion's share of it, where things are further ahead. But we've got a large pool of existing projects underway and the demand is strong. And so I think to the extent that there are movements, if a customer wants to delay, we will work with that customer to delay. If a customer wants to pull it in, we'll try to pull it in. And I think with that, we probably have been a little more resilient because of the size and scale and able to meet our customers' demands and really focus on on-time delivery. And so I think that's been helpful to us. And so there will be times, I'm sure in the future where things push out or pull in. But I think with the tailwinds that we've seen, we've been able to see really good year-over-year growth over the last sort of 5-ish quarters.

Okay. Can we touch on competition? Just what you're seeing in the market? I mean, there's been some newer companies in the last several years that have tried to get into the market. What you're seeing from competition? What you're seeing on pricing and kind of what your expectations for market share are going forward, both kind of domestically and globally?

Yes, certainly. I mean, first of all, it's a big market. There's lots of room for competitors, and this will -- this won't change. There will always be competition, and competition is important. It keeps us sharp. Pricing has to come down, for sure. If you look over the last 10 years, pricing goes down, and that's a good thing because pricing is a key component of driving the overall system cost down. As costs come down, solar is yet more competitive and expands the TAM. So I look at pricing going down over the long term is healthy because it increases the overall market opportunity and increases the TAM and therefore, we can grow more. And with this engineering talent that we have, driving a maniacal focus on cost reduction, that's good for the industry. Overall, there are strong competitors out there, and I don't expect that to change. I think we're unique and different. We have different technology than our competitors, and it's better in many cases. And so I can go through some of those later on if you care. But -- so overall, I do expect share internationally to improve. Our share in the U.S. is quite strong. I think we can hold share. It's hard to predict, of course. International, I do think that it's less developed and less mature than the U.S. There are more fragmented small players. And in this industry, there is an advantage to scale and an advantage to the large bankable companies. And so I do think long term that we will see international grow as a percentage of the company. Hard to say when that is. Is it a year? Is it 2? It's hard to predict the timing. But I do expect international to become a bigger portion of our overall business.

Okay. So Nextracker, a relatively new public company. So investors might not have the history that you have. Is there a rule of thumb for pricing, kind of annual declines that you think is within a kind of "normal range?"

Yes. I mean 2 weeks in, so I can't quote like the last 5 years, but I think we've been sort of high single-digit declines annually, but don't quote me on that one because it's still fairly new. The good news about overall price declines that we've seen over the last, call it, 5 years is that we've been able to outpace ASP reduction with cost reduction. And I expect that to, to be the operating model. As we drive cost reduction, we pass on part of that to our customers. And with our differentiation and great product, we're able to maintain margins and protect our margins. I'm a real firm believer and protect the operating margins. Gross margins matter for sure, but all in what matters to our investors are operating margins because operating margins are what drives free cash flow. And at the end of the day, I think that's like the most important metric for our investors is return invested capital and specifically the fundamental operating cash flow that we generate.

Okay. So about what, 4 or 5 weeks ago now, the AD/CVD investigation was put forward. I understand it's still relatively early. But can you talk about what you're seeing as far as kind of what you're hearing with your customers on, on project timing, on their ability to get panels? Are you seeing any delays to maybe 2025 once kind of customers get through inventory, any impact on pricing of those panels that might impact kind of project wherewithal?

Yes. So first of all, policy can be great. It can be terrible. We've seen in this industry over 20 years when I remember in Germany, they had a feed-in tariff. And Germany was a fairly nascent solar market. I think this may have been 2007-ish. It's hard to predict, I remember the timing. But Germany came out with this incredible like EUR 0.50 a watt feed-in tariff. And all of a sudden, Germany became the largest solar market in the world, like who would have thought? I mean, like Germany, right? And then that the -- that policy or that program was fully utilized and then Germany fell by the wayside and became a fairly small solar market. The point is that policies come and go, but what's undeniable are the long-term trends that as the cost of solar and solar plus storage comes down, you're at an LCOE advantage to many forms of conventional electricity. And that trend is not going to change. We're going to keep seeing these cost reductions that opens up the market and makes it yet an even bigger market. So whether there's the AD/CVD, the anti-countervailing duties -- sorry, still learning. Whether or not there's a few cents here there, I think that will impact project timing for sure. But I don't see it being a big impact to us. I think overall, we've got a very large backlog. We've got lots of committed customers. And I see that -- I think we can manage within our -- the outlook that we've provided. But certainly, whenever costs go up, the TAM reduces a little bit when costs go down, the TAM expands and certainly, tariffs and whatnot and subsidies pay -- play a factor in that.

Okay. So moving on to another announcement from 4 or 5 weeks ago, the Department of Treasury finally updated the domestic content guidelines on the customer side. So very clearly, not asking about 45X that you get on the manufacturing side, but the bonus [ added ] for the customers, that was clarified about a month ago. Again, only been a few weeks or so. But what are you seeing as far as kind of increase -- potentially increase in project kind of pipelines or activity from the clarity finally being there.

Well, this has been, I think, very good for us. There's now clarity and stability. If you think about what's happened with 45X, it's been great for America. It's been great for solar. This program, we were a very, very large importer of steel. If you go back 2 years ago, we were up in the very top few companies of importing steel into the U.S. And we shift a lot of that to local U.S. manufactured steel. We've opened or expanded 20 plants in the U.S. with our manufacturing partners. And that is driving U.S. jobs and U.S. Steel. So the 45X is partially offsetting that, the clarity on the program now gives more certainty to our partners, our developers and owner operators. And with Nextracker specifically, our torque tubes, fasteners are made in the U.S., we're moving more and more of our production to our manufacturing partners here. And that's been, I think, is good for the industry and good for the U.S. economy.

Got it. Okay. Can you talk about the kind of the importance of a tracker within the guidelines, right? So I think consensus seems to be that the guidelines that came out were a bit more stringent than expected. The cell is increasingly important. If that's the case, just kind of given relatively few kind of cell manufacturing today, where the tracker fits in? And then kind of over time, as the 40% threshold steps up to 55% and kind of what your -- what you might be seeing when your initial conversations with customers as far as kind of maybe some incremental kind of pricing power that you might have in the out years?

Yes, it's hard to predict the pricing power, but certainly, the tracker is the backbone of the utility scale solar project. And it represents for us about 10% of the overall pie of a landed utility scale solar projects. So it's not the biggest portion. The panel today is still the biggest portion. First Solar certainly has a great advantage with their, I think, Series 7 technology. So hats off to the First Solar team. The tracker is probably the next biggest component. And so we've been moving more and more. I do think that -- if you look at conventional crystal and silicon, there are still some headwinds of getting to those levels. And you've heard people talk about opening up more U.S. capacity. We'll see what happens there. But I do think the tracker is critically important. It's not the most important. In terms of pricing power, we're very focused on driving our own operating margins plus driving our cost down. So we increase the TAM, as I mentioned before. And so it is really important for us that we are a part of the ecosystem that we help to drive those costs down for our customers and our partners.

Got it. All right. Switching over to the 45X side. New CFO, I have to ask. Are there going to be any kind of new KPIs? Anything else that you're looking to disclose to investors? And I think one thing that we're seeing in different companies within this space is kind of the maybe the accounting treatment is not the right word, but kind of the disclosures around 45X. We spoke earlier. I think it's a very rational explanation. But kind of just can you talk about why you're maybe going to keep some of these cards close to your chest?

Yes, certainly. So this last quarter, you'll note in our P&L that there was a $145 million line of 45X. It was a cumulative catch-up that showed up on our last earnings call as a separate line. Going forward, the benefits will be included in our GAAP and non-GAAP operating results and that is partially or mostly because -- for us, it's a benefit. It's an expense that offsets our cost of goods sold. So think of it as a contra COGS line. If you look at First Solar or Enphase, they are the manufacturer of record. They are the direct beneficiary of that credit. Ours are through our manufacturing partners. So we have worked with arrangements with our manufacturing partners on how we share those economics. And again, the primary goal of 45x is to shift purchasing from international steel that we import to domestically produce steel. So the first thing is that offsets the cost increase, drives jobs in the U.S., opens up more capital spending for our manufacturing partners, and then that cost helps to offset their costs. And furthermore, we will use those proceeds to help lower our cost to increase the TAM and then we'll also use that to help protect our operating margins. So it's really -- there's no other place to put it in the P&L because it's embedded as a benefit in our cost of goods sold which is different because of how we're structured versus the manufacturer of record like First Solar or Enphase.

Is there anything else from Treasury or IRS that you're waiting on? Or do you kind of have everything that you need to know from accounting and kind of customer relationship perspective?

No, I think we're set. Again, a couple of weeks into the job here. So I might not have all the details. But as far as I know it today, I think we're all set.