AAON, INC. Q4 FY2024 earnings call

CEO Succession

• Gary Fields will step down as CEO at the annual stockholders meeting on May 13th, with Matt Tobolski taking over. Gary will remain on the board and become a special adviser.

2024 Performance Overview

• 2024 was a year with both triumphs and obstacles. Organic revenue was flattish generally in line with projections. Basics brand had strong growth driven by data center market, while AAON brand faced challenges from nonresidential construction headwinds.

Fourth Quarter Performance

• Bookings were up ~62% and year-end backlog was up 70% to $867.1 million, mainly driven by data center equipment bookings. Sales and earnings in Q4 were softer due to AAON Oklahoma segment issues related to refrigerant transition.

Segment Details

• AAON Oklahoma segment faced temporary lull in new 454B refrigerant equipment adoption, leading to lower volumes but strong year-end backlog. AAON Coil Products segment had exceptional quarter with growth driven by Basics branded data center liquid cooling product. Basics segment had some temporary operational inefficiencies due to limited capacity but expected sequential improvement.

Strategic Priorities

• Three main pillars: being industry leader in innovation and customization, driving sustainable and robust organic growth, and being a best-in-class operator. Examples include data center liquid cooling solution and air source heat pump units.

The AAON Oklahoma segment saw a decline in the fourth quarter. The AAON Coil Products segment realized growth of 129.9%. For the Basics brand, net sales of branded equipment for the year were up 35.1%, with Basics branded data center equipment sales up approximately 85% and bookings up approximately 100%. The company total backlog finished the year up 70%. The AAON brand faced challenges due to disruption and weaker nonresidential construction activity but saw bookings up in the mid-teens and backlog up approximately 20% at year-end.

2025 Outlook

• Anticipates sales growth in the mid to high teens. Gross margin similar to 2024. SG&A as a percent of sales will decline by 25 to 50 basis points. Capital expenditures expected to be approximately $220 million, mostly related to getting Memphis facility up to speed. First quarter expected to be modestly down from fourth quarter due to general seasonality, lasting impacts of refrigerant transition, and ramp-up costs related to Memphis.

Risks

• Temporary downturn in demand following refrigerant transition for AAON Oklahoma segment.
• Production inefficiencies and margin degradation due to capacity build-out and outsourcing in segments like Basics and new facilities.
• Uncertainties in macroeconomic conditions and nonresidential construction market affecting overall business performance.

Q: Ryan Merkel asked about the first quarter outlook for the Oklahoma sales and the reason for Basics sales down year over year.

A: Gary Fields said the lead time for R410A impact and backlog conversion causes the Oklahoma sales run rate not to accelerate yet, and R410A had a lot to do with it. Matt Tobolski explained that for Basics, the segment reporting reflects Redmond production limitations, but the overall Basics brand has strong growth with demand and backlog being strong.

Q: Chris Moore asked about data center customer feedback, $1 billion target for data center revenue, and pricing of R454B solution.

A: Matt Tobolski said the data center market remains strong with increasing capital expenditures. The $1 billion target for data center revenue is in the three to four-year range. Gary Fields said R454B is no more expensive from AAON, and there was a 3% price increase on January 1st not specific to R454B.

Q: Brent Thielman asked about data center capacity, Memphis timeline, Basics margin return, and rooftop product order visibility.

A: Matt Tobolski said total capacity for data center revenue to reach $1 billion includes existing facilities and Memphis, with Memphis expected to have meaningful impact by end of 2025. Basics segment expects sequential margin improvement throughout 2025. Gary Fields and Matt Tobolski said rooftop product order visibility is beginning to accelerate with normalized growth profile reassuming.

Q: Alex Handman asked about sensor data centers and clean room end market.

A: Matt Tobolski said higher density compute in data centers drives demand for liquid cooling, and the clean room market has some volatility but strong investment in onshoring and battery facilities is supported.

Q: Timothy Wojs asked about pricing strategy for R454B and D&A increase.

A: Gary Fields said they will monitor bookings before a potential R454B price increase. Rebecca Thompson said D&A will land in both cost of goods sold and SG&A, with increases consistent with sales growth as inefficiencies are addressed and investments are made.