All right, now that the mic, this is on. My name is Sophie Karp. I'm the senior analyst at KeyBank, covering alternative energy and utilities, and it is my pleasure to introduce Chuck Boynton of Nextracker, CFO of Nextracker. Chuck just joined the company earlier this year after years of executive leadership in the tech and renewable energy industries, including positions at Logitech, Plantronics, and SunPower. So thank you, Chuck, for being here today.
Thank you.
I thought maybe we'd just, like, kick this off by asking you to give us a quick elevator pitch about Nextracker, what Nextracker is, and what it does, and why it's a great company.
Great. Well, I'm fairly new as the CFO.
Mm-hmm.
I was on the board and chair of the audit committee since the IPO, so I know the company.
Mm-hmm.
It's been sort of a really fast start as a CFO, knowing the company and the industry. I spent 8 years at SunPower from 2008 till mid-2015 or so.
Mm-hmm.
So Nextracker is really unique. We are the market leader in, I would call, the infrastructure of a solar plant. We make the control systems, the steel, the infrastructure that powers the solar plant. So we allow the panels to track the sun, hence the name Nextracker. Dan Shugar, our CEO, has been in solar for, you know, 30+ years. Our president, Howard Wenger, the same thing. I worked with those guys at SunPower. They've got really deep domain expertise, and I would say what we're really good at is engineering and customer-focused customer sat. We're maniacal on making sure our customers are successful, and we have really unique and differentiated technology.
A couple of those unique examples are, when you buy a solar tracker, it's a relatively small percentage of the total installed cost of a solar plant. You know, the panel's probably the largest cost. Solar is, you know, 10%-ish, could be 8, could be 15, but it's, it's a fairly small piece, but it's critically important to the operator of the plant. There are many, many unique things about, about Nextracker. A couple that I like to point out is many companies will use, screws, and nuts, and bolts to attach and build out the, the tracking system. We have built custom tools, battery-powered tools, and fasteners to rivet all the parts together.
If you think about a solar plant could run for 10 or 20, 30, 40, 50 years, these are long-term infrastructure investments, and when you have screws, you've got to go retighten those every year, and the labor on that, it just... You're paying for that over many decades. When you use rivets like we use, like an airplane would use, they're permanent. They last virtually forever. And so it costs a little more, but the value you get is really, really high. And there are many, many other advantages, like our, our battery systems. We use, you know, higher-end lithium-ion batteries. Each tracker, each row operates independently. If there's a power outage, the plant is still live, where you could deal with weather events and whatnot. We've been at this for many, many years.
Dan Shugar is an engineer by training and has really invested heavily in the technology. We've got, you know, 600+ patents, and so we believe... I sort of think generally with companies, the gross margin profile and the operating margin profile is a function of the technology and differentiation. If it's not differentiated, it's a commodity. If it's a commodity, you know, marginal revenue plus marginal cost, you don't make any money. If you're highly differentiated or you're a monopoly, you've got really, really high margins, and we've got, you know, really solid margins. And as investors, one of the things that you care about, and I care about deeply, is return on invested capital. That's, like, one of the most critical elements of thinking about a company. If you have to...
If you're an airplane company, you're buying airplanes, and you've got infrastructure for gates, it's a very, a lot of capital's deployed, and then how much money you make in your profits over that invested capital is a function of capital efficiency. We have a balance sheet light model. It's very, very unique and incredibly powerful, where we sell to our customers, they buy from us, we then place back-to-back orders with our manufacturing partners. Think of those as steel plants, steel mills, and whatnot. We make some of the stuff ourselves and have inventory, but for the most part, on these large-scale systems, we're placing back-to-back orders. The order goes from the steel plant to the job site without passing through our warehouses and creates a very capital-efficient business that is really, really powerful and super exciting.
One of the things I just love about this company is the capital efficiency and the free cash flow generation. I could keep going on and on, but I don't want to take the whole time.
Yeah. Indeed, it's hard to stop when you start talking about all the advantages that you guys have. But, like, one particular I maybe wanted to focus on is solar trackers market, and I think what's unique about it is that it's fairly concentrated, right? There's only a handful of players, and that's different from many other parts of the value chain in solar. And so as a result, you obviously have a very strong competitive moat and enjoying high return on capital. We've seen a new entrant, maybe in the U.S. recently, and I was gonna ask you to talk a little bit more about the market dynamic. Do you think those barriers to it, what, why those barriers to entry existed historically in the space, and do you think they're sustainable?
Will we see more entrants? Can, like— How do you guys think about the market dynamic here?
Yeah, the U.S. market is very structured. We're the market leader. There's two other material players-
Mm-hmm.
... and then there's a list of smaller players. I do think there are fairly high barriers to entry. You know, it seems on the surface, hey, couldn't a steel company just do this? The answer is no. The decades of experience, test, fail, learn, test, fail, learn, that cycle, is very long. The engineering is critically, critically important, but it is a big market. There's plenty of room for lots of competitors, don't get me wrong. It's a big market. Big markets attract competition. But generally, if you're a developer and you're putting hundreds of millions of dollars, sometimes billions of dollars to work, they don't wanna take risk.
Because these are long-term projects that last for decades, the idea that you're gonna have a startup who's gonna qualify and create a different tracker, and then they're gonna take that risk buying this, it's just they're not gonna save much, and the risk equation is just too high. So the U.S. is fairly structured. Globally, there are many other players. We don't do a lot in China. We're big in India. We've got very high market share in Australia. We're not the market leader in Europe yet, but there's lots of players in Europe. It's very fragmented.
I would say, in general, the smaller the size of the project, the more they're willing to go with different players, and when it becomes more established and larger, their engineering is better, the independent engineering analysis is stronger, and they tend to pick the market leaders. So I do think internationally, it's a little less structured and will become more structured. And I think the developers, the owners, the operators understand levelized cost of energy at a great detail, and they really understand what is the impact of things like, you know, weather events and things we can talk about later. But I would say in general, I would say longer term, probably fewer competitors, not more.
The U.S. will, I think, stay roughly in the structure it is today. Internationally, I think, will start to become more structured as this industry matures.
Mm-hmm. Thank you. So you guys have recently completed 2 technology-driven acquisitions, the Ojjo and SPI foundations, and I wanted to ask you to talk a little bit more about those, why they fit in the portfolio, and also maybe use this as a springboard to discuss the general direction of innovation in this space. Because when, you know, when I visit and I see your trackers in the field, it almost seems like it's a perfect mousetrap. There's nothing to improve upon, right?
Yeah.
But yet there's... There probably is. So what is, what is there to improve upon, and where are you guys taking this?
Yeah, I think, you know, there's always room to improve.
Mm-hmm.
At the highest level, the most important thing for the industry is we continue to innovate and drive down cost. That cost reduction has been super impressive over the last 20 years. It's been an amazing cost reduction across the value chain. In our business, you know, we've innovated with, you know, many different areas that I, we can talk about later. The acquisitions themselves are unique. They're fairly small. These are tuck-in acquisitions. They both are in the space of what I would, of what you call foundations. So think about the tracker is above ground, the foundations are below ground.
As you think about mainstream solar sites, where, you know, you've got a fairly open field in, let's say, Chile or in the Central Valley of California, you can go in and basically install a piling, a W-beam, or think of it as an I-beam, that they can pound into the ground. And then on top of that I-beam, you'd build the solar tracker. And that's a fairly straightforward way to do it. We do some of that, but it's. We're not heavily involved necessarily in the foundation part. As solar grows around the world, you see there's more tricky sites where they're sloped or they have rocky soils or soft soils, and both of these companies address different parts of that market. Ojjo, a company in Marin, not far from us, we've worked with them for many years.
They have a really good technology for drilling into rocky soil, so there's one pass. They'll basically do one drill, and as they're drilling, they're setting effectively a beam and then... or a tube, and then the drill comes out, and the beam stays in, and it's laser-guided and perfectly set up at the right exact angle and row within which you put the tracker on top. So we'll work on integrating our tracker into that. What are the advantages? One, it's cheaper. It costs less to do the installation. It uses less steel, and then it's environmentally better. We care deeply about the environment, so you're not disrupting the environment. If you didn't use Ojjo, you might have big drilling rigs that go in and drill. In the old days, they'd use rebar and concrete.
These are ones that you could pull out later over time, and so it's lower cost. It's not a huge part of the market, but it's really innovative, and we think this will be a really great technology to take to our customers to service our customers. On the SPI side, it's a little different. We've worked with them for a while. They're a partner, and they work really well in soft soils or areas where there's frost. When there's frost or soft soils, the posts could sink down, and then make the tracker go off skew, or you've got to go really deep, and the deeper you go, the more steel you're using, the more cost there is.
It would generally, in soft soils, take multiple passes, so it's harder on the land. And with this technology, they effectively spin a blade in, and it goes below the surface, and the blade gives it that support to build the tracker on top of. And then if there's frost above, the ground will expand and contract, but it will stay locked in below and not have frost heave. So again, these are really early days. They're fairly small companies, but they're an example of us listening to our customers, being customer first, and then, and then going to the market to buy and build out organically or inorganically, technologies that will extend the business. And over time, I think this can help improve our gross margins, improve our wallet share.
Mm-hmm.
But again, these are not mainstream across every application, but they're really unique and small, but will integrate well with our company. And these will be fully integrated into our business, so they're not gonna be standalone PNLs or different companies. They'll be fully integrated into our teams.
Great. So solar accounts, I don't know if people in the audience know that, but solar accounts for the majority of the generation additions in the queue across the U.S. It's close to like 80% in some regions. So what do you think is driving that demand? Is it sustainable? And maybe as a second part to that question, we are now hearing somewhat about local pushbacks in certain regions, you know, to solar development. So are we running out of land to build solar on, and where do you fit in that scenario?
Yeah, I mean, so first of all, this is a really, really good question. This is a tech conference, so many of you will understand this. But as a globe, we have, we're way under electrified for the demand that we need as a globe. And as you look at individual markets, today, the U.S. is 1 terawatt, with a goal to go to 2 terawatts.
Mm-hmm.
We are way underestimating the amount of electricity that the U.S. needs. China has 3 terawatts of installed capacity going to 9. Now, what's driving this demand? This is for electricity in general, not just solar.
Mm-hmm.
It's not just, you know, EVs or decarbonization. It's things like AI, rural electrification. It's, you know, standard of living and quality of living. And I think as a country, we're way underinvesting in infrastructure and the, in creating additional capacity. So I think 2 terawatts is not. We're not shooting nearly high enough for our own energy independence and energy security. I think about solar, as in many markets in the world today, is the lowest cost of electricity. Economics kinda rule the day at the end of the day, economics will drive adoption. That is what will drive adoption. And we can generate electrons in many markets with solar, lower than any other form of electricity.
And as costs come down on this curve, that gap is gonna continue to widen and will create yet even more demand for solar and solar plus storage, storage being a really important part. In the queue, solar and solar plus storage is the dominant part of the queue for North America. And I'm kind of a big believer in AI and compute power. I firmly, I just have, I really believe that these technologies are gonna be a, an absolutely super important part of humanity in the future. And if you believe that, and you look at what NVIDIA is doing, and AMD, and these companies that are coming out with new technologies, we, we don't have nearly enough electricity. And that's one of the reasons I decided to join the company as a CFO, is I just...
I'm a firm believer in this long-term trend of demand is up into the right, costs come down, the TAM expands, and we're, like, in a really, really unique place with unique technology that's not commoditized, that's differentiated.
Mm-hmm. And the scarcity of solar land?
Well, land, I mean, like-
Mm-hmm.
I love Utah, so don't take this as a pejorative thing. Love Utah. But if you covered Utah in solar panels, it would power the world.
Mm-hmm.
I mean, just think about that. Cover Utah on solar panels, it's enough electricity to power the world.
Mm-hmm.
We're not running out of land.
Mm-hmm.
There is plenty of land, and what is one of the key barriers is transmission and distribution.
Mm-hmm.
We, as a country, are falling behind on innovation in transmission and distribution. We published our first-ever shareholder letter this past quarter to make it more direct. There's a section in there on ways to solve transmission and distribution backups. But I think, you know, China is building out huge infrastructure. Most of their power plants are inland, bringing power to the coastal areas. And we have, you know, infrastructure. We can do more to leverage that infrastructure. We also need to build more. But, you know, there's not a land issue, and we're coming out with unique products that are super cool. We announced an Agri-PV product. This is really, really cool.
Back in the day, at a prior company, we were building these out in China, and we launched one of the bigger sites in the Midwest earlier this year, where you do an Agri-PV. Because solar trackers, you are not covering every square foot of the field, you generally have a gap in between the rows. So as you're tracking, you're optimizing the shading. And between those rows, you can basically do farming, grazing, cattle, livestock. You can put them further apart. It creates additional income sources for the farmers. There are many different unique ways to do combination of light on land and have a symbiotic relationship between solar trackers and farming. But no, there's not a land issue. The constraint is not land. There is some NIMBYism, for sure.
You know, people see windmills, and they're like: "Oh, I don't know, do not want a windmill over my house." But then you think about a solar field, they're much more subtle. But I don't think land is the bottleneck. In some markets like Japan, it's a bit more tricky because it's very hilly, densely wooded. It's more complicated. But for many, many markets in Spain, Australia, California, Midwest, Southeast, there is plenty of land available. That is not what I think is the constraint.
Got it. Can we talk a little bit about the government policy and how that is helping the adoption of the technology and you guys in particular?
Certainly. I'd say the first thing that you should all know is these policies are working. You know, people talk about, you know, the ITC, the IRA, 45X, there's all this kinda alphabet soup in North America. There's similar policies elsewhere. In the U.S., which is a point of discussion, the ITC, the IRA are working. And what I mean by working, with these programs, we're driving more energy projects in the U.S., clean energy projects. And the advantage of solar is basically you install the project once, and for very little work and service, it generates electricity for many decades afterwards. And so the environmental benefits are clearly obvious. You're not, you know, emitting, you know, toxic materials and whatnot.
But overall, these policies work, and what it's doing, it's driving more solar projects, it's creating more energy independence, less reliance on fossil fuel, less reliance on importing, fuel, and that is a really good thing for national security. The IRA, as it relates to us, 45X, which is effectively a tax credit for domestic content, is working incredibly well. If you went back a couple of years ago, we were a huge importer of foreign steel. We were importing steel from China and elsewhere into the U.S. to build these solar plants. Today, we've lit up... We have 20 manufacturing sites in many red states and blue states, where they're turning on more lines, they're hiring more people. And I have this kind of view that manufacturing is noble.
Manufacturing is, like, really important for the economy, and by lighting up these sites, we're employing people. There's a halo effect of more, you know, service workers that service those people, you know, truck drivers. Bringing that content, making it locally, is driving huge benefits: energy independence, jobs, domestic manufacturing, supply chain. Those things are really good for the economy. And I think when you look at solar, where it's going long term, this is not gonna slow down. It needs to accelerate. We're still under-penetrated. And, you know, with those higher costs, we have an offset with 45X to cover those additional costs and do it domestic supply. There's a lot of areas we could go into in a lot more detail, but I think given this-
Yeah
... is more of a tech conference, we can maybe keep moving on.
Yep, yep. So, what are some of the challenges you guys have, or you're facing right now as a business?
Well, I think, you know, the interconnection is one that we highlighted in our, in our white paper, our, our shareholder letter. We're effectively... You know, there's a queue, and the queue is many years long to get connected. And we need that interconnection agreements to accelerate. Dan is a real industry spokesperson and put in the, the, our paper ways to, to solve that. And so there's real practical solutions in the near term, to accelerate that queue, to add more electricity. And there are some bottlenecks, so that's one. You know, permitting can be a challenge, and so we are, you know, we... And that's, that's a local ground game. Permitting is very local, and we have teams on the ground. I think those are a couple.
You know, in general, you know, this is a great business with really high margins, high capital efficiency. Every business has their headwinds and tailwinds. Our last quarter was just, you know, fantastic. Our, you know, we've maintained our outlook for the year, and this is a really good business with, you know, healthy margins, and I, I think we're in a really, really good place going forward.
Mm-hmm. Any questions from the audience? Nope. Going once, going twice. No questions. Thank you, Chuck.
Great. Thank you all for being here. Really appreciate it.