Nextpower Inc. (NXT) Earnings Call Transcript & Summary

All right. Thank you for everyone sticking around for the last panel of the day. I know it's been a long day for a lot of folks. I personally started with the 07:00 a.m. intro spiel, so I can feel everyone's fatigue already. But you're in for a treat. Last panel of the day, we saved the best for last. To my immediate right here, we have CEO and Founder of Nextracker, Dan Shugar. He is an industry vet, rock star, you can put lots of different monikers on his name, but he knows solar. So if you want to learn about solar, you've come to the right panel. This is the best 35 minutes you're going to spend all day on the solar topic. So with that, Dan. Thank you for being here.

We always like to talk about outlooks at a first week of January conference. Would love to kind of hear your view on where the market is. And given that Nextracker is a very globally diversified company, clearly, there's been a lot of discussion around the U.S. market policy. We'll get into those things. But we'd love to hear just kind of around the horn how you're viewing the outlook for this year in some of your key geos.

Sure. Well, first, Brian, thank you for the invitation to participate in the conference and what you've done for the renewable energy industry. We were just sharing with our CFO, Chuck Boynton, who is here; and Sarah Lee, our Director of Investor Relations, that you helped them go public at their prior YieldCo, 8point3, in the past. So thanks for that. We're -- we feel very bullish about solar, where the industry is. I do have to contextualize my comments. We are in the middle of a quiet period, so it's right at the end of -- right after the quarter end, so the timing of the conference. But let's just talk big picture for a minute. I can then throw some numbers around with our -- the backlog as we reported on our last earnings call. So I started life as an electric utility planner in -- I'm an electrical engineer doing electric transmission planning between generation and distribution. And for my entire career, which started there in the mid-80s in the utility sector, demand has been pretty flat, kind of like 0% to 1%, plus or minus. And we've seen like really, really strong demand growth for a variety of reasons. We can get into that. At the same time, a lot of legacy power generation facilities are going off-line. So in the U.S., there's very strong demand growth. There's also strong demand growth overseas. And if you look in the U.S., power generation in the U.S. grid, which is about 1,300 gigawatts, there's like more than that of solar and solar plus storage trying to get connected. So there's 80% of the queue in the utility grid are solar and solar plus storage projects. It's staggering. Over 7,000 projects, and it spans across the country. And we've seen also utilities get a lot more involved in building out solar programs once the production tax credit became law as part of the Inflation Reduction Act. So that's been reflected in very strong demand. And let me just -- also another sort of fun fact, this was in our last investor letter. Over the last 5 years -- 5 years ago, if you look at how much was solar part of the power -- the capacity installations that were happening on an annualized basis, solar was about 10%. Last year, not 2024, but 2023, 2024 will be bigger, solar was over 50%. So we've gone from 10% to 50% in like 5 years. And the queue is dominated by solar and solar plus storage. Now if we reflect that -- that's in the U.S., and overseas, I can speak to the overseas market. We're seeing strong demand in Europe, very strong demand. The Ukraine war, the detonation of the Nord Stream pipeline. Just last week, Ukraine stopped transmitting Russian gas through their territory to Latvia and other places. So you're seeing a lot of migration to heat pumps for heating, which is creating electric demand. And you're seeing gas being exported from the United States through LNG terminals, this is like first order big stuff. So that's -- so the demand from Europe is very strong. I was in Madrid last month meeting with our team at our office in Madrid. Very strong demand in Europe in solar. We're seeing strong demand in the Middle East. Some of the largest projects in the world are happening there. Nextracker is part of that. We did the first utility scale project in Saudi Arabia. We're in Dubai, certainly Dubai Electricity and Water Authority, there's multi-gigawatt projects happening there. India is on fire from a market growth standpoint. I was in India last year also personally. Their Prime Minister Modi has very much leaned in, and there's lots of good things happening there. Nextracker has a strong position in that market. Latin America is strong. Brazil is the largest market, but throughout Latin America, a lot happening. Australia, we've had an office there for 9 years and over 100 completed projects in Australia and the Oceania region. Australia is a strong market, and Africa is also growing. So globally, there's a very strong market for solar. Now what -- the way we've expressed that in terms of backlog at Nextracker, first, we have the highest standard for backlog. Backlog for us is a signed contract, which has liquidated damages if we don't deliver or the customer doesn't take, with a deposit on a named project with a specific bill of materials and a definitive ship date. That's what backlog is. By that standard, when we did our IPO of Nextracker about 2 years ago, our backlog was about $2.2 billion. Our backlog at the end of the quarter that ended at the end of September was over $4.5 billion. So we're very confident in the overall market. We're confident in Nextracker's position. We have seen a flight to quality in terms of -- with our customers, and that's been reflected in strong share position. Nextracker has maintained #1 market share globally for 9 years in a row. And we -- our position in the U.S. feels stable. And so that's the sort of big picture, if you will, Brian.

That contextualization is great. I wanted to maybe follow up with your initial comment about the load growth, right? For utilities, we haven't been talking about 2.5% annual load growth through the end of the decade ever, at least not while I've covered this space. And so -- and even going back to when you were -- it sounded like a utility operator. So this is a new dynamic. The fundamentals just seem very ripe for all types of new generation. And as you also mentioned, solar has gone from 10% to 50%. And I think I've seen EIA stats that said during certain quarters of '24, it was as much as 70% to 80% of the new adds for that quarter. So why, I guess, in that context, isn't utility-scale solar in the U.S. growing 20%, 30-plus percent a year? You look at these third-party market forecast, whether they're right or wrong, what they are calling for is more of a steady Eddie mid-single, maybe high single-digit growth type rate. What unlocks the growth potential for, I guess, utility scale solar to more fully participate in some of the power demand trends we're seeing in the country?

Well, I can speak to the growth we've had. And look, we just said that the utility scale market went from 10% per year to 50% per year in 5 years. I think those forecasters are wrong. They've been consistently wrong. If you go back and you look at forecasts that have been made by a variety of market forecast or the Energy Information Administration, the International Energy Administration, they've all massively, massively underestimated solar growth. And I, Dan Shugar, have screwed up in my career the most by underestimating the growth of solar. It's a transformational disruptive breakaway technology that's completely revolutionizing energy, full stop, and you haven't seen anything yet in solar. So what I can speak to is what Nextracker has demonstrated in the context of that, which up until this year, we've had a 30-ish percent CAGR for like 5 years prior to this year. This year, our plan, which has been part of our -- we've shared on our earnings, is a mid-teens double-digit growth. We've -- 6 out of the last 7 quarters, we've increased our outlook in our plan for earnings. We've either increased or reiterated our revenue guidance. So we feel quite confident in our plan as we shared again in our last earnings. So solar is growing, and it's growing a lot. With respect to the 2.5% load growth, we work with a lot of utility customers. I'm hearing much larger numbers from them about stuff they see. It's not just the hyperscalers, right? There's reindustrialization happening in the United States. In Nextracker's case, I can tell you we've stood up over 20 new or significantly expanded factories in the United States for the last 3 years. And these facilities consume energy. There's the CHIPS Act with 16 huge semiconductor fabs that are consuming more energy. There's the electrification. Folks are moving toward electric vehicles and heat pumps and things like that. So these things are all contributing to this like not only load growth, but a transition from fossil fuel to electrification of everything. So we think at the same time that a lot of legacy power plants are going to be going off-line. So we think this foundational growth of energy will provide a lot of market pull, and the value of energy that we're producing is its value, but it's also existential from a keeping-the-lights-on standpoint for a number of utilities and planning areas.

And clearly, the fundamental drivers are there. They're multiple, they're secular, they're long term. On a short- to medium-term basis, there are some bottlenecks though. So maybe give us your sense of the current state of the U.S. market relative to interconnection availability of transformers bottlenecks that you have experienced as an industry but also at Nextracker?

Sure. Well, first, Nextracker isn't talking about, on any of our last earnings call or any prior, it's true project cycles take longer. That's a fact, but that's been part of the industry for a long time. And we're not talking about pushouts impacting our numbers. We've been able to perform reliably, consistently to meet or exceed every commitment we've made from the IPO time till today. Now if you look at, well, why can't solar grow even faster than it has grown? Our customers that are doing this activity, it's not Nextracker, as they perfect their project's abilities to connect to the grid, that is the single greatest constraint that we understand in the growth of solar. It seems more administrative than physical from the standpoint that there are some lines that have to get -- or substations where the capacity of the power line or substation needs to be increased, but typically, it's more administrative from the standpoint that PJM needs more planning engineers to process applications. One thing that's helpful in this, it's difficult, we're not in a position to quantify it, is the federal energy regulatory administration did Order 2023, which transitioned how applicants, to connect to the grid, are transitioning from a first in, first out to a first ready, first served standpoint. And that's in the process of implementation. And we think that could be very helpful to administratively decongesting the queue. Now there are some also physical constraints to the build-out. One of the things we've spoken about and we've connected with a number of utilities on this is there's off-the-shelf technology now with advanced conductors. So the same physical size wire on an existing transmission corridor on the same towers can carry 50% to 100% more current in some applications. And that -- those technologies have been proven. They're much more -- they're being used much more overseas. We think that's a great opportunity here. With the incoming administration, there's been a lot of concern about how it could impact the renewables industry, and we'll have to see what happens with tariffs and some other things. But I think it's also an opportunity. Part of the ethos of the new administration is like, hey, we want to see the power sector accelerate, and we want to remove red tape. And I think in this interconnection area, there's a tremendous opportunity. It seems there's also a really good opportunity for the regional transmission operators that have grown around the country, and utilities that are operating sort of these fiefdoms, if you can broaden the planning horizon, share more energy, do more day-ahead forecasting, there's an opportunity to just lower cost, but incorporate also more renewables quite quickly. So that would be my perspective.

All this being said, as you mentioned, Nextracker, you've sort of -- you've continued to fare better, live up to your billing in terms of meeting, if not exceeding expectations while being a publicly traded company versus many of your brethren who have had some challenges much more so than you. Why has that been the case? I think there's always been this sort of investor skepticism that it's only a matter of time before Nextracker will face some of the same challenges that the peers have stumbled over, and you continue to prove them wrong over and over again. How confident are you that you can kind of sustain that ability?

Okay. I appreciate the question. Well, first, we want the entire ecosystem of solar to be successful. Not just our -- the sister tracker companies that are out there, but solar panel companies, inverter companies. We do more manufacturing in the United States. We're encouraged by companies like SOLARCYCLE building a glass factory in the U.S., that's fantastic. And we welcome new entrants in all the value aspects of solar, including tracking. What we're really focused on is having a culture that's about doing the right thing, which is really focused on innovation. It's focused on customers, customer feedback to how we can improve our products and services and making -- just delivering exemplary experiences for the customer, both on the product and the service. And when we make a mistake, not only fixing it, but learning how not to make the mistake again. And then being able to continue innovating with technologies that generate more energy where the systems can be operated at lower cost, at increasing velocity where customers get good information. And this is why we've been, I think, really why we've been successful. But it's really customer-focused and understanding the customer needs. I will also just speak to my team. So we have a -- just a fantastic team that has, just in the executive staff, hundreds of years of solar experience, in part because some of us are pretty old. But also, we've really tried to work with the best and the brightest in our industry. And we've had a very stable team, which is reflective of a functional culture. And it's just like -- so I think these are the reasons why we've been successful.

And I'm going to touch on the U.S. in just a minute because I know you're doing some unique things in the U.S., but the global diversification, I think that's something that really stands out when I look at the Nextracker business model and how it compares to some of the other tracker companies. Globally, there's a number of them, right? A dozen-plus. But then when you go into each of these regions, there might be some strong players in LatAm that don't show up in the U.S., and then there might be a player that's really strong in Europe and then they're not outside of Europe. Nextracker is one of the few, if not the only, that has the breadth that you mentioned as you walk through some of the regions. What has been driving that? Is it supply chain? Is it you getting there faster than your peers? Can they not kind of duplicate some of the efforts that you've been able to be successful in doing that?