All right. Good afternoon, everybody. Thank you very much. This is day one of the ninth annual J.P. Morgan Energy Power and Renewables Conference. Thank you very much for coming. My name's Mark Strouse. I cover clean energy. Very happy to have Nextracker, Nextracker's year and a half ago IPO. Stock's been a monster. Execution's been phenomenal. Happy to have Chuck Boynton, the recently appointed CFO. So Chuck, welcome back. We've worked together many years. I'm assuming there's gonna be some folks that are familiar with you, just given your experience. But can you just kinda give a quick background of your history in the industry, your history with Nextracker, and kinda what attracted you to take this CFO role?
Certainly, Mark. Thank you. And it's great to be here. Great to be back in the renewable energy space and in solar. I spent about eight years at SunPower, during a really rapid growth phase. In those eight years, I worked with Howard Wenger, our president, Bruce Ledesma, our 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, you know, loved working in renewables. It was that we did a bunch of cool transactions on the M&A side, growth side, worked with, partnered with First Solar, to create 8point3 Energy Partners. So I know the ecosystem really well. After SunPower, I joined a company that it was two public companies had merged, and that was acquired by HP.
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. I've worked with the management team for the last year and a half. 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. I'm just really thrilled to be diving in on the operations side. It's been two 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 and in this awesome industry.
Great. Okay. So let's get stuck into some of the, the topical issues here. So I think we'll talk about, you know, 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, you know, 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 kinda compare and contrast, I mean, what makes you 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, you know, 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, you know, the culture that Dan and Howard and the team have driven is being maniacally customer-focused and maniacally engineering-focused. It's really been so apparent to me these last, you know, first two weeks, just how amazing the engineering talent is, just world-class engineering, but also just in totally customer-focused. And then with this business, we've scaled where we, we've done business in 40 countries.
Think about that, 40 countries. U.S. is still the lion's share of it where things are further ahead. But, you know, 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 customer's demands and really focus on on-time delivery. And so I think that's been helpful to us. And so I, you know, 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, you know, really good year-over-year growth over the last sort of five quarters-ish.
Okay. Can we touch on competition? Just what you're seeing in the market. I mean, there's been some newer companies 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 kinda what your expectations for market share are going forward, both kinda domestically and globally?
Yeah, certainly. I mean, first of all, it's a big market. There's lots of room for competitors, and 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's yet more competitive and expands the TAM. So I look at pricing going down over the long term as 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, you know, 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, you know, share internationally to improve. Our share in the U.S. is quite strong. We'll, you know, 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 two? It's hard to predict the timing. But I do expect international to become a bigger portion of our overall business.
Okay. So Nextracker, 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 kinda "normal range"?
Yeah. I mean, two weeks in, so I can't quote like the last five years, but I think we've been sort of high single-digit declines, annually. But I don't quote me on that one 'cause it's still fairly new. The good news about overall price declines that we've seen over the last, call it, five years is that we've been able to outpace ASP reduction with cost reduction. And I think I expect that 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 products, we're able to maintain margins and protect our margins. I'm a real firm believer in protecting 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.
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, four or five weeks ago now, the ADCVD investigation was put forward. I understand it's still relatively early. Can you talk about what you're seeing as far as kind of, what you're hearing with your customers on project timing, on their ability to get panels? Are you seeing any delays to maybe 2025 once, kinda customers get through inventory, any impact on pricing of those panels that might impact kind of project wherewithal?
Yeah. And so first of all, you know, policy can be great. It can be terrible. We've seen in this industry over, you know, 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've thought? I mean, like Germany, right? And then that policy or that program was fully utilized, and then Germany, you know, 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's not gonna change. We're gonna keep seeing these cost reductions that opens up the market and makes it yet an even, bigger market. So whether there's, you know, the ADCVD, whatever, that, anti-countervailing duties. Yeah, sorry. This is still learning. Whether or not there's a few cents here or 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, you know, I think we can manage, within our the outlook that we've provided.
but certainly, you know, whenever costs go up, the TAM reduces a little bit. When costs go down, the TAM expands. And certainly, tariffs and whatnot and subsidies, you know, play a factor in that.
Okay, so moving on to another announcement from four or five weeks ago, the Department of the 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 adder 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, you know, kind of increased, potentially increase in project, you know, kinda pipelines or activity, from the clarity finally being there?
Well, this has been, you know, I think, you know, very good for us. There's now, you know, 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 two years ago, we were up in the very top few companies of importing steel into the U.S. And we've shifted 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, the clarity on the program now gives more certainty to our, our partners, our developers, and owner-operators. And that, and with, with Nextracker specifically, you know, our torque tubes, fasteners are made in the U.S.
We're, you know, 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. The, can you talk about the, you know, kinda 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 kinda given relatively few kinda cell manufacturing today, where the tracker fits in, and then kinda over time, as the 40% threshold steps up to 55%, you know, kinda what you might be seeing when your initial conversations with customers as far as kinda maybe some incremental kinda pricing power that you might have in the out years?
Yeah. It's hard to predict the pricing power, but, you know, certainly, you know, the, 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 project. So it's not the biggest portion. The panel today is still the biggest portion. You know, First Solar certainly has a great advantage with their, I think, Series 7, technology. So hats off to the First Solar team. You know, the, the tracker's probably the next biggest component. And so we've been moving more and more. And I, I do think that, if you look at conventional crystalline silicon, there are still some headwinds of getting to those levels. And you've heard people talk about opening up, you know, more U.S. capacity. We'll see what happens there.
But I do think, you know, 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 gonna 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. It's not the right word, but kind of the disclosures around 45X. You know, we spoke earlier. I think it's a very rational explanation. But kinda just can you talk about why you're maybe gonna keep some of these cards close to your chest?
Yeah, 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 an expense that offsets our cost of goods sold. So think of it as a contra COGS line. If you look at, you know, 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 cost. And then 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. It's just different because of how we're structured versus the manufacturer of record like First Solar or Enphase.
Mm-hmm. Is there anything else from Treasury or IRS that you're waiting on, or do you kinda have everything that you, you need now from accounting and, and kinda customer relationship perspective?
No, I think we're set. I could, again, a couple weeks into the job here, so I might not have all the details. But I, as far as I know it today, I think we're all set.
Okay. Can you talk about expected use of your tax credit cash, right? So kinda the more you manufacture and sell, the more kinda incremental cash you're gonna have coming in. Are there political, political sensitivities to, to taking some of that cash and maybe paying a dividend or buying back stock, or, are you looking for M&A? I mean, how should we? Is there a way to segment kind of, you know, core kinda operating cash versus tax credit cash? Any, any comments there?
Yeah. Well, it's really, it's kinda fungible. It's not. There's not a separate accounting or pool of money. So the first thing would be we have a very prudent approach to capital allocation. Today, we can't do dividends or buybacks because of the rules under the spin from Flex. If you'll recall, the final tax-free spin for Flex was earlier this year. And there's not a bright-l ine test, but think of it as roughly two years where we can't do, you know, buybacks or those kind of activities. And in the short term, if you, you know, this last quarter, we had $150 million of debt and, you know, roughly, you know, $470 million of cash. So I think about net debt is not really being, you know, too far off where public company of our size and scale should be.
Certainly, you know, we could have, you know, a lot more leverage, but I think our kinda financial kinda conservatism, you know, we don't want to run with a lot of debt. But the net cash is really as a function of our market cap is not out of whack. And if you look at the outlook that we provided last year or last quarter, and you look at a traditional kinda conversion of free cash flow, I think we said 70% at the last earnings call. We're not gonna end the year with a number that's irresponsible. So I think, you know, with that excess cash, we'll continue to evaluate M&A and be responsible. The company's done, I think, one or two deals in the past.
and we'll continue to be prudent and think about how do we listen to our customers and go to where our customers want us to go. But I wouldn't expect any type of radical change to our capital allocation model anytime soon.
Okay. So just to be clear, the tax-free spin would prevent a buyback or a dividend. But is there anything in there about M&A?
just issuance of stock in general.
Okay.
Issuing stock, buying back stock, those are, and there's not a bright line test, but it's roughly, think of it as roughly two years from the date of the tax-free spin.
Gotcha. Okay. Can we talk about election risk, how you're thinking about kinda different scenarios in November, and what that might mean for Nextracker and kinda how you may or may not be planning around things as far as capacity or whatnot, going into that?
Well, I think certainly, it's hard to say what's gonna happen. But I think under either administration, whether it's a D or an R, the things that we're doing are germane to both, you know, driving jobs, energy independence. There is just, there's, you know, this, this is really important to both sides of the aisle. Now, does it manifest in terms of, you know, tariffs versus subsidies? It's hard to say in the long term, but what this industry is doing is good for America. And I think that my guess is on either scenario, you know, they will recognize that, and it won't be, it won't shift back to, you know, importing, you know, foreign materials and panels and whatnot. So I do think that under either scenario, it'll be good. We do have a really strong policy team.
You know, hats off to our policy team who's really in tune with the market and has helped to shape some of the policy. And under either administration, I think that will continue to be a real benefit and asset to us.
Gotcha. Any questions, sir?
Mike.
Sorry. One sec. We got a mic coming.
Thank you.
Thank you. Thank you very much. I was wondering if you could comment on the drivers that affect the penetration rate for trackers, internationally. It's way lower than in the U.S. That's one. And two, very quick one. Can you comment on the amount of the steel, the cost of the steel, as percent of revenues or something like that? So we can understand, you know, how low can prices get?
Yeah. I can't give you the exact percent of steel as a portion of our revenue, but it's, it's a material portion of what we sell is steel plus our value add. On the international side, I think about the market and how it's developed in the U.S. And I remember back when I was at SunPower, we were developing our own trackers. And it was very complicated. We, we built trackers, and it was very, very complicated. And the work that Dan and Howard and the team have done in the last 10 years has been phenomenal. Just thinking through, for example, in our trackers, we don't use screws and bolts and nuts to attach the, the torque tubes and the, and all of the components together. We use aerospace industrial-grade rivets. Why? Because they don't loosen over time.
If you think about, you've got a tracker with, you know, thousands or tens of thousands of nuts and bolts and screws, it costs more if they've specialized tools. But when they're riveted together, it holds them together forever or virtually for the life of the plant. It's, it's the right thing to do. If you go to other markets that are less developed, they're still using, you know, traditional nuts and bolts and screws and Loctite that they have to go back and re-ratchet and retighten up over time. There's a bunch of examples like that, and the market's not yet fully developed there.
What'll happen over time is owner-operators of these plants see the O&M and the cost to maintain them, that they'll recognize the value, and they'll be willing to pay a little more and get a way better return on investment from an LCOE standpoint. So there's a bunch of different examples like that that I think that, you know, it's just, it's still the early innings in fragmented markets. Over time, as you know, fragmented markets become structured and consolidated, and that's kind of happened here in the U.S. with a few players. Now, there's lots of room for competition. Don't get me wrong. This is not gonna be a monopoly. This will be a competitive market. But internationally, I expect those markets to become more structured over time like the U.S.
When that happens, it's more of a flight to quality, and I think will be a real tailwind for us.
Question? A lot of focus. Oh, sorry. One in the back.
Yeah. Thanks. I think one of your public competitors has recently sort of changed around a bit of their pricing, mechanisms, publicly stating that maybe they were a little bit they held on a bit too long. Why is that not, a reversal of what was potentially a tailwind for you when they were being a bit more resistant and maybe could pose some risk? Just if you can comment on that. And then if you can add to that, what is it that maybe does get you nervous over the next, three to six months, given the fact that it seems like you got through the worst of the macro hump, resisting many of the, many of the issues that your competitors had?
Yeah. I think the next three to six months, what I don't know is what I'm most nervous about. I had two weeks on the job, so hard to say, you know, what I should be worried about. I'm generally not worried. I think this is a great company, and it has a great track record. And so I don't expect to have issues, but you never know. It's fear of the unknown. On the competitive side, if your question is really they're lowering prices and therefore there's gonna be a price war, I don't think that'll be the case, perhaps. But generally, we sell on an LCOE basis. We sell on levelized cost of energy. Our competitors do to a degree, but a lot of them compete on upfront cost.
And when our owner-operators look at the overall benefits that we have, I think they're willing to pay a slight premium for lower levelized cost of energy. So think about that. It's interesting. They're willing to pay a little more upfront to get a better return on the investment and a lower levelized cost of energy. And so I, you know, there, again, it's a big market. It's fairly structured. There's, you know, three large competitors in the U.S. It's not like in the panel world where you've got a gazillion different players and it's perfect competition. Here, it's a market that's fairly structured. And I think so far, the industry participants have acted responsibly and haven't done, you know, crazy things on pricing.
But again, we, you know, our goal long-term is to, is to drive ASPs down to lower pricing to, to increase the TAM. And as prices come down, assuming that's led by cost reduction, we can protect our margins, settle lower price, and have a larger market to sell into.
Question?
A lot of investor focus on data centers. So I have to ask the question. I mean, to the extent that you have the visibility, can you talk about kinda historically what you've seen as far as Nextracker projects that the end customer is, you know, big tech data center, however you wanna characterize it? And I mean, is this real? Should we be talking about natural gas?
Well, one of the reasons I was so excited to join the board and then eventually join the company as the CFO was I'm just a firm believer in what's happening on a few fronts. One is the growth of EVs. I just think that, you know, I drive one, and it's just a better experience. It's a better product than a traditional ICE engine. But we need more charging and need more infrastructure and need clean energy to feed that infrastructure. And from a long-term trend, it looks like a no-brainer. It's just a better experience. The conversion of energy is overall more efficient and better, but we need more infrastructure. Two, on AI data centers, that you know, genie's out of the bottle, and it's not gonna go back in.
The energy required to run NVIDIA's processors, even the latest one, the Blackwell, is still; it's very energy intensive. The primary customers, if you look at who NVIDIA's customers are, the hyperscalers, these are folks like Google and Meta, Amazon, Tesla. These are companies that have made public statements about their energy footprint and their goal to decarbonize. I think that is just, to me, seems undeniable from a first principle standpoint that there's gonna be insatiable demand. Is it a year, two, 10 years? Hard to say. I'm sure AI's overblown, and everyone's it's too much of a hype right now. The long-term, I think, is undeniable. Then you think about the next factor, which is electrifying the rest of the world. A lot of the world still does not have access to good clean energy.
And I think that's gonna change as the cost of solar comes down from an LCOE standpoint. It becomes so much more viable in these other markets around the world, not just in areas where you're displacing coal or other forms of, of dirty energy. So I, I just, I think the tailwinds for the industry are undeniable based on math, just the levelized cost of energy being at cost parity or better and the demand of energy and that the people that are creating that demand generally care about the environment and where the world's going. So I'm sort of, I'm just super bullish on the long-term. Now, will there be periods of quarters or years where things aren't as rosy? Of course, because it's, this is the energy markets. But if you look long-term, I just think we're in such a great place.
Okay. Excellent. With that, we got a wrap.
Sure.
Thank you so much.
Thank you. Thank you all so much. Really appreciate it.