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Edited Transcript of AAON earnings conference call or presentation 28-Feb-19 9:15pm GMT

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Q4 2018 Aaon Inc salary Call

TULSA Mar 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Aaon Inc salary rally shout or presentation Thursday, February 28, 2019 at 9:15:00pm GMT

TEXT translation of Transcript


Corporate Participants


* Gary D. Fields

AAON, Inc. - principal & Director

* Norman H. Asbjornson

AAON, Inc. - Founder, Chairman & CEO

* Rebecca A. Thompson

AAON, Inc. - CAO & Treasurer

* Scott M. Asbjornson

AAON, Inc. - VP of Finance & CFO


Conference shout Participants


* Brent Edward Thielman

D.A. Davidson & Co., inquiry part - Senior VP & Senior inquiry Analyst

* Joseph Logan Mondillo

Sidoti & Company, LLC - inquiry Analyst




Operator [1]


Welcome to the AAON Fourth part entire Year 2018 Sales and salary rally Call. (Operator Instructions) because a reminder, this rally is being recorded. I used to now parallel to become the rally above to your host, Gary Fields. entertain affect at ahead.


Gary D. Fields, AAON, Inc. - principal & Director [2]


Good afternoon. I'd parallel to read a forward-looking disclaimer. to the extent any statement presented herein deals with data that is no historical, including the outlook because the remainder of the year, such statement is necessarily forward-looking and made pursuant to the safe harbor food of the Securities Litigation reform deed of 1995. because such, it is question to the accident of many events exterior AAON's control that could effect AAON's results to differ materially from those anticipated. entertain shout on the danger factors contained at our most modern SEC filings, including the annual explain above mould 10-K and the quarterly explain above mould 10-Q.

Now I used to parallel to introduce Scott Asbjornson, our CFO.


Scott M. Asbjornson, AAON, Inc. - VP of Finance & CFO [3]


Thank you. I'd parallel to quit by discussing the comparative results of the 3 months ended December 31, 2018 to December 31, 2017. Net sales were up 7.9% to $112.3 million from $104.2 million. The enlarge at net sales was the originate of charge increases made though November of 2017.

Gross apply decreased 10.6% to $27.8 million from $31.1 million. because a percent of sales, total apply was 24.7% at the part impartial ended compared to 29.8% at 2017. The reduce at total apply was due to produce inefficiencies during the quarter.

Selling, general and administrative expenses decreased 17.9% to $11.3 million from $13.7 million at 2017. because a percent of sales, SG&A was 10.0% of total sales at the part impartial ended compared to 13.2% at 2017. The reduce at SG&A was greatly due to decreases at our warranty costs.

Income from operations decreased 4.7% to $16.5 million or 14.7% of sales from $17.4 million or 16.7% of sales.

Our effective tax assess increased to 24.0% from 9.6%. The tax Cuts and Jobs deed enacted above December 22, 2017 lowered the corporate salary tax assess from 35% to 21%. due to this change, the corporation remeasured its deferred tax asset and liabilities above the enactment date, which resulted at a $4.4 million advantage to our salary tax provision at the fourth part of 2017, lowering the effective tax assess compared to the identical epoch at 2018.

Net salary decreased 20.5% to $12.5 million or 11.2% of sales from $15.8 million or 15.1% of sales. Diluted salary per part decreased by 19.7% to $0.24 per part from $0.30 per share. Diluted salary per part were based above 52,421,000 shares versus 52,932,000 shares at the identical part a year ago.

The results of the year ended December 31, 2018 to December 31, 2017. Net sales were up 7.1% to $433.9 million from $405.2 million. Most of the enlarge at revenues is due to our charge enlarge from November 2017. Additionally, our separate sales and water-source heat pump sales continued to become with increases of $6.4 million and $4.7 million, respectively.

Gross apply decreased $19.9 million to $103.5 million from $123.4 million. because a percent of sales, total apply was 23.9% at the year impartial ended compared to 30.5% at 2017. The corporation has seen increases at its raw substance pricing because robust because having experienced elevated staffing levels that own caused produce inefficiencies.

Selling, general and administrative expenses decreased 3% to $47.8 million from $49.2 million at 2017. because a percent of sales, SG&A decreased to 11.0% of total sales at the year ended from 12.2% at 2017. The reduce from SG&A is greatly due to decreases at warranty and profit-sharing expense.

Income from operations decreased 24.7% to $55.8 million or 12.9% of sales from $74.1 million or 18.3% of sales.

Now our effective tax assess decreased to 23.9% from 26.8%. because already mentioned, this reduce was a originate of the changes from the tax Cuts and Jobs Act.

Next, net salary decreased 21.9% to $42.6 million or 9.8% of sales from $54.5 million or 13.4% of sales. Diluted salary per part decreased by 21.4% to $0.81 per part from $1.03 per share. Diluted salary per part were based above 52,668,000 shares versus 53,079,000 shares at the identical epoch a year ago.

At this time, I'll become it above to our leader Accounting Officer, Rebecca Thompson, because a discussion of the remains sheet.


Rebecca A. Thompson, AAON, Inc. - CAO & Treasurer [4]


Thanks, Scott. if you exhibition at the remains sheet, you'll shout on we had a working chief remains of $92.8 million versus $103.7 million at December 31, 2017. money and investments totaled $2 million at December 31, 2018. Our modern ratio is nearly 2.9:1.

Our chief expenditures were $37.3 million. We outlook our chief expenditures because 2019 to exist nearly $40 million.

Shareholder's equity per diluted part is $4.70 at December 31, 2018 compared to $4.47 at December 31, 2017.

I'd now parallel to become the shout above to Gary Fields, our President.


Gary D. Fields, AAON, Inc. - principal & Director [5]


So I'd parallel to debate sales increases and the related impact. consequently we've had charge increases November of '17, June of '18 and December of '18. What that has done because us is we conduct own an improving, throughout the year, opportunity above total edge and net profit.

So currently, snapshot taken today of our modern backlog, I'll grant it to you at percent of how this backlog sits with regards to our pricing. consequently we own 3% of our backlog that is foregoing to June 15 charge increase. We own 47% of our backlog today above the June 15 charge increase. We own 50% of our backlog today above our December charge increase, and then we own another charge enlarge coming here next week. consequently we are moving towards a perfect location with regards to our charge increases and how we had lagged at the past above those. We were a small after the crook from '17, nevertheless we're catching up.

Now I'd parallel to address approximately the water-source heat pumps. This substance is beginning to materialize because we envisioned a expect time ago. It's been painstaking to create it happen. nevertheless some of the statistics are that at 2017, we shipped 2,485 units. That was a 2% just part at commercial, a 0.3% just part at geothermal, giving a combined just part of approximately 1.3%. That was 2017.

2018, we shipped above twice because many units, 5,334 units. That was 115% growth above 2017. The units sold were 21.2% of entire AAON units sold, and they represented 3.8% of the AAON sales dollars at 2018.

Another appearance to possess at care is that 115% growth year-over-year at number of units, we're now above a speed to conduct that again. 2019 modern produce pace, because distant because what's coming at the gate and what's going out the gate above water-source heat pumps, illustrates to us the opportunity to double 2018 volume.

Lead time is much improved. We got AHRI certification completed final year. A condemn of these things are bringing this heat pump approximately parallel we had envisioned earlier. consequently it's now starting to accept a lesson that resembles what we had charted.

We are repeatedly redesigning products to create sure that they are at their extreme efficiency, both at fare efficiency to the customer, fare efficiency to manufacturing, and force efficiency. There's been a condemn of development going above along the final little years that's beginning to show itself. We own little units now that are absolute peak of the -- they wear the block with regards to force efficiency. And with our new laboratory, some aspects of it online now and other aspects coming online above the next little months, we're able to rush that.

Our replacement just versus new construction because the year 2018 remained at approximately 50-50. Our just segments didn't alter materially, nevertheless there was a slender change. Manufacturing went from 16% down to 15%. Commercial went from 20% to 21%, consequently they category of swapped a percent there. And then at our other category, which currently comprises approximately 6%, a good piece of that is data center. consequently we can exist clearly identifying data center because its hold pie piece because it's beginning to rush because us.

I own spoken ago approximately the indoor growth device commonly associated with the cannabis industry. That is another appearance of our substance that has shown some rational growth to it and a condemn of outlook because growth going forward.

The backlog at December 31, 2018, was $151.8 million versus $81.2 million a year ago, consequently an enlarge of 87%. if we were able to apply personnel, the nation that used to accept these units sooner than we're able to currently equip to them, consequently we are working above many aspects of improving our onboarding and drill processes. And we own seen a significant improvement at retention because a originate of that, consequently we're beginning to undergo a identical slender headcount appreciation, which will become into more accounts [middle] out the door.

So looking at the outlook because '19, the water-source heat pump, because I mentioned a nevertheless ago, it is now going out at a tax that is 2x what the aggregate tax because 2018 was. approximately 45, 60 days ago, I appointed a young female named Whitney Wakefield to control that total produce facility. She is now dedicated to it instead of it being a shared obligation along the plant. We've seen marvelous improvements at the organization and management because a originate of this personnel alter and addition.

The laboratory is, because I said, it's somewhat beneficial to us now. It's approximately 20% of utilization at this point. I toured the lab earlier today. There's a identical significant piece of the lab that is scheduled to become above flow April 1, and it looks to exist above purpose to conduct that. We've already got units scheduled, substantial magnitude to exist tested at there because customers. And consequently we're looking dispatch to that.

With the backlog percentages that I gave, it seems more than obvious that total apply has an opportunity to perfect nicely this year. And consequently I count we can exhibition dispatch to that.

CapEx because the year, we're looking at approximately 40 million. Some of this is replacing worn-out equipment, some of this is device improvement, and some of this is a small extra manufacturing tool capacity.

We are no currently identical energetic with the new situation because the stand handlers. We own category of put that above console consequently that we can apply our water-source heat pump substance above a more firm base and no diverting the attention. We conduct own some insignificant opportunities with regards to that stand handler opportunity that we'll exist doing at 2019, nevertheless it won't exist anything substance because this year.

With that, I'd parallel to become it above to Norman Asbjornson, our founder and Chairman, CEO, because some comments he'd parallel to make.


Norman H. Asbjornson, AAON, Inc. - Founder, Chairman & CEO [6]


Good afternoon. I'm Norm Asbjornson, the founder of AAON, and I'd parallel to grant you a summation of AAON's souvenir position. AAON has, because 30 years, above that time period, had a compounded overall annual growth of nearly 10% per year at revenue and a compounded annual growth of 14% per year at profitability. However, at modern years, we own been doing less than this. And thus, we've been focusing above making our produce attractive enough to our customers to answer to these historic growth rates at revenue and profit.

In the autumn of 2016, Gary Fields, who impartial spoke with you, came at because the new principal of the Company. He brought with him an astoundingly successful background of being at a sales deed at this industry because 32 years. He understood identical robust what we needed to conduct to become more attractive to our customers and soon put upon addressing these issues by helping us constant those which were inside to AAON and replacing or drill the sales force where necessary. This resulted at the prominent improvement at sales orders which occurred at the second part of 2018, which virtually doubled our backlog.

Simultaneously to this, little other things were occurring. Our substance climate improved considerably at 2017 and 2018, introducing an inflation and imply work rates. Simultaneously with this, many senior managers who had told me they used to linger until I relinquished the presidency, started to retire. These nation were identical skillful at various managerial levels within the company. nevertheless we plan their replacements, and had identical able nation to accept above their jobs, new nation came with much less experience. consequently at the past 2 years, we own changed myself and many other managers at the 60-, 80-year sumit down to new managers at the 30- to 50-year range. We basically approximately jumped a entire generation going down that far, nevertheless we got super good nation that will accept this corporation to new heights.

The 3% unemployment area which we discover ourselves working at required considerable alter at our methodologies. Many of these nation had no been working at their life, or had been unemployed because considerable epoch of time. Thus, we went from introductory time to -- from a little hours when bringing them onboard to a entire engagement of introduction. due to the want of modern work, we had to revise the avenue we managed them because the little -- first little days because they were no ready to occupation a entire day.

Bringing these nation onboard has required numerous other changes at how we expend them into the workforce. We study we own mainly overcome these issues. And nevertheless it is no simple to business with [flat-out] imply unemployment rates, we feel comfortable at saying we understand how to obtain the employees we need and we need to -- how to teach them to become productive employees. due to inflation and the work status at the past 2 years, we own increased the across-the-board wage increases to personnel.

For many years, we own been at the water-source heat pump substance and geothermal markets with large complex products. We decided to enter the volume separate of this market, which is tall at volume at 0.5 to 5 tons. We designed a technologically advanced produce and spent considerable money doing this and house a manufacturing capacity at our company. The manufacturing capacity is identical advanced, utilizing entire the known metrics of automation, which we could discover above a worldwide search. This gave us 4 virtually automated portions to our manufacturing line, entire with various software systems. We had to integrate -- these software systems into an overall software system which automated the conveyor piece of the queue because robust because controlling the parts and line-rate. We own spent the past 2 years teaching nation how to flow this line, debugging the software and resolving other issues. This is mainly after us, and we are now producing small units at a even of $1 million per month, with continuing quick growth at the future, limited greatly by our souvenir to teach entire employees how to build the product.

For 20-plus years of planning and evolving, we own built a new lab, the match of which we conduct no study exists anywhere at the world. We study no lab is able of casting above 100 tons of occupation comp units exists anywhere other than this lab, which has capacity to examination to 300 tons -- at other words, 3x anything we can perhaps study anybody has, we now own at this lab. We because robust believe, and maybe level more importantly, other labs conduct no own the souvenir to conduct a deed examination simultaneously with obtaining acoustical data regarding entire elements of sound above the product. This lab has that capability. We are soon about, because Gary said, approximately a 20% operating point with quick outlook of extra capabilities and being fully operational by the early separate of the fall.

At this point, this has been a significant pull above our P&L. The new lab has already brought at business, however, which we force no otherwise own gotten. And because Gary mentioned, we are going to exist testing a identical significant trade at the lab within the next little months, and we maybe wouldn't own gotten that trade if we hadn't had this capability, a identical tall profile job. We own impartial shipped a identical tall profile job, which we tested at the lab. Again, that one above the West bank and the one I impartial spoke of above the East Coast, consequently it's already starting to salary because itself.

However, it has no brought any authentic money in. It will, however, own extra capacity to expend at money from our customers who are voluntary to salary us to flow sure tests and quit creating an salary stream, still up until now, it has been strictly a money input situation.

The data we compose with this lab is going to greatly heighten future products. There are a number of other items of improvement at the redoing of existing products create them more advantageous and attractive to customers, which own been and will thrive to occur because we affect at forward.

The imply point at our transition of entire these issues occurred at the first part of 2008 (sic) [2018] when we added more complex -- add more complexity to it by giving $1,000 bonus due to the salary tax alter to each employee and this totaled $2.4 million cost at the first part of 2018.

In retrospect, the only area at which we had done something various had to conduct with the charge enlarge timing and the size of the charge enlarge input we put out at 2017. We've been playing catch-up ever though due to the gigantic backlog of nearly 4 months' worth of production, which we soon have. The charge increases at the backlog own only begun to appearance above the bottom line, because Gary enumerated to you. However, to category of reiterate, we had a charge enlarge at December '17, which was no large enough. And then we had one at June of 2018. We had another at December of 2018. And we're going to own another one at March of 2019. Thus, an analysis of our past flae used to discover that the volume has started to enlarge more at the second part 2018 than the first, and again, another enlarge at the third and another one at the fourth. And the profitability because robust was increasing along those 3 quarters.

We understand we own a condemn to do. We own mainly done it and now we're waiting because the good results. Then my long-term pains to insure that this corporation returns to historic growth and profitability levels or higher, I study approximately everything is done to create that occur.

I thank you identical much because your time. And now we'll blank up to questions. conduct we own our moderator?


Operator [7]


Yes, sir.


Norman H. Asbjornson, AAON, Inc. - Founder, Chairman & CEO [8]


Would you blank it to questions, please?


Questions and Answers


Operator [1]


(Operator Instructions) And your first issue comes from the queue of Joe Mondillo.


Joseph Logan Mondillo, Sidoti & Company, LLC - inquiry Analyst [2]


I impartial outlook to quit it off by saying I'm at an airport exact now. consequently if there's any sound disturbances, I apologize because that. nevertheless I wanted to need approximately the total margin. Given the -- I understand actually, Gary, you category of talking approximately the backlog there and at condition of the charge increases. if 50% of the backlog is nevertheless above June 15 pricing or earlier, I was wondering, how did you attain the 29% total margins at the third quarter? Was that due to the steel that you bought avenue early at the year and now that you've already depleted that, that's why the total margins ticked down consequently much sequentially at the fourth quarter?


Gary D. Fields, AAON, Inc. - principal & Director [3]


Okay. consequently first off, the 47% of the backlog is post-June 15, and then there's another 50% that's post-December. consequently third part --


Norman H. Asbjornson, AAON, Inc. - Founder, Chairman & CEO [4]


[3% before?]


Gary D. Fields, AAON, Inc. - principal & Director [5]


Yes, the 3% was ago June. consequently a good piece of 2018, we built with only the 3% charge enlarge above it. We began to apply another 5% charge increase, which went into result at June, nevertheless due to the backlog, it really didn't quit to emerge up until identical late at the third quarter. It began to show itself a bit at the fourth quarter, nevertheless at the identical time, we started running out of some of the less expensive materials. They ran out at target of the third quarter, and we started to apply the more expensive materials utilized at the fourth quarter. consequently there was some offset of that charge increase. The other substance approximately fourth part that weakened it a bit was impartial some labor inefficiencies that are -- that you can easily assets them to holidays, nevertheless those occur each year. This year, I count one of the things that seemed, I won't speak visibly apparent, nevertheless somewhat apparent was we ran our nation very, identical difficult entire along the year. because we normally, we own a small turn-down at the fourth part because distant because demand. We didn't own a turn-down, and these nation hadn't had vacations. consequently we had maybe an inordinate number of nation that were gone, consequently we impartial couldn't create because much. We had because much because 24% of our factory workforce that were gone above holiday at periods of time at the fourth quarter. consequently we impartial didn't apply the revenue we needed to dilute the fixed overhead. I count that was charted at one of the substance things.