AAON, INC. Q3 FY2024 earnings call

• The third quarter was a solid quarter with total revenue up 4.9% year-over-year and diluted earnings per share up 8.6%.
• Bookings in the third quarter were up mid-single digits year-over-year, and year-to-date bookings were up approximately 27%.
• Backlog at the AAON Coil Products segment was a segment record, up approximately 63% from a year ago, and backlog at the BASX segment was close to record levels, up over 100% from a year ago. Total backlog finished at $647.7 million, up 32% from a year ago.
• AAON received approximately $174.5 million of orders in October 2024 associated with a liquid cooling solution for a data center customer, to be produced at the Longview, Texas location.
• AAON has been undergoing a significant transformation with nearly all departments of the enterprise undergoing change. The data center business is growing rapidly, and capacity expansions are underway in Redmond, Longview, and Memphis.
• The AAON Oklahoma segment faced softness due to the refrigerant transition, soft non-residential construction, but is expected to see medium and long term growth.

Total revenue for the third quarter grew year-over-year by 4.9% to $327.3 million. The BASX segment realized growth of 58.8%, and the AAON Coil Products segment grew by 36.7%, primarily driven by the data center market. The AAON Oklahoma segment saw a year-over-year decline of 7.1% in sales. Gross profit decreased 1.7% to $114.2 million, with gross profit as a percentage of sales at 34.9% compared to 37.2% in the third quarter of 2023. The contraction in gross margin was due to lower volumes at the AAON Oklahoma segment and temporary inefficiencies at BASX, partially offset by strong results at the AAON Coil Products segment which benefited from a favorable product mix and increased efficiencies.

• For 2024, volume is flattish, pricing is a mid-single-digit contributor, gross margin is up year-over-year but expects Q4 seasonal softness. SG&A as a percent of sales is expected to increase 50 to 100 basis points. CapEx guidance is increased to $215 million from $125 million.
• For 2025, expects Q1 sales and earnings to be modestly down from Q4, then an acceleration of year-over-year growth in both sales and earnings moving forward through the rest of the year.

• Events outside of AAON's control could cause results to differ materially from anticipated, such as the refrigerant transition, slowdown in non-residential construction, and macroeconomic factors.
• Operational risks related to managing growth, including ensuring long-term sustainability and operational efficiencies.

Q: Hi, thanks. Good afternoon, and thanks for taking the question. I guess, first off, I wanted to start with the Oklahoma segment. And Gary, you've talked about the slowdown kind of all year, and I guess we're seeing it. And my question is, should we expect revenue in the Oklahoma segment to be down more than the 7% we saw this quarter? Or what do you mean by seeing a slowdown in 4Q and 1Q?

A: Well, we've always had seasonality. And for the last few years, we've had such a tremendous backlog because we didn't have production capacity, and we weren't able to produce in the shorter lead times. Now we're able to produce at a much faster rate. So the backlog impacts it substantially. So there could be just a slight bit more softening in Q4 and Q1 because the backlog is -- again, we've burned it down pretty good. But the pipeline is very strong. Sales channel partners tell us things are beginning to turn around. I had cited three reasons that I felt like the pipeline for that business was challenged, the refrigerant transition, the election and interest rates. Well, election is behind us. I think we did fine there. Interest rates went down another 25 basis points today. I think that points well. And the refrigerant transition will be behind us any moment now. I mean we cannot produce equipment past December 31 with the old refrigerant. And since we don't have any of our equipment going into inventory like a distributorship, then we are already shipping 454B equipment, and we will be shipping exclusively that. So I think just this -- the timing of these events has been pretty much the way I projected going back a year ago. And hopefully, that answers what you were looking for.

Q: Hi, good afternoon, guys. Thanks for taking a couple. And maybe just one on the rooftop. Just have all the states passed the necessary legislation for the new refrigerants?

A: Yes. At this point, the regulations are supporting the refrigerant transition. So we're less than two months away from the mandatory cutover date. And so from a regulation standpoint, the states are prepared for that January 1 date.

Q: Hi, everybody. Good evening. Nice job. Maybe just -- I want to dig on one point that you said in the press release. So bear with me, there's a little bit of math. But over half of your backlog right now is for data centers, and that's going to be produced and shipped in 2025. So if I just use 51% of that, that implies $325 million or so of that backlog is going to be for data centers in 2025. And then if we add the $175 million order you announced in October that adds up to at least $500 million in data center revenue next year. So I guess, is that math right? And I guess if it is, just how do you kind of -- how are you kind of set up from a capacity perspective to just kind of make sure that you can handle that type of growth?

A: Yes. So one thing I'll touch on, just with the data center revenue -- sorry, backlog that is there today, there is still a portion of that that will be manufactured past '25. So we have some stuff in our backlog that's going to be 18 months out. So not all of that is going to convert for what's in backlog today in 2025. But certainly, the $174 million, we messaged that's going to be primarily converted within the first half of '25. And we still have then capacity that we're selling in the latter half of '25 around liquid cooling products. So while not providing direct guidance, I'll just say your sentiment and what you're thinking is certainly in the realm of kind of what we see within the data center space going forward. And when we look at how do we support that, I mean, it's a fantastic question when you think about that's tremendous growth around that segment and managing that from a manufacturing and efficiency perspective is critical. So we've already wrapped up the fundamental Redmond project is wrapped up. We're still doing some work in Oregon, but the big stair step of that investment is wrapped up and is now producing product. So that was a 15% gain in square footage, which has more headroom compared to overall revenue, not a 1:1 square footage to revenue. We go to the Longview site and by the end of the year, we'll have that wrapped up. We're already setting up and actually priming production lines within that facility today. So when we hit 2025 and that facility is turned over, we're sequentially bringing those production lines on throughout the calendar year, which is providing a tremendous amount of additional capacity. So you're going to see sequential capacity in Longview coming online really from Q1, Q2 into Q3. And right as we're sitting there in Q3 is when we anticipate really starting to be able to get some inertia within the Memphis facility and producing product kind of in earnest towards the latter half of the year in '25. So all that to say, that capacity from an investment perspective, really from today throughout the end of '25 is going to be a continuous increase in capacity throughout the calendar year that's going to really allow us to support that bookings growth.