AAON, Inc. Q2 FY2025 earnings call

Management Statement and Operational Highlights

• ERP Implementation: Went live at Longview on April 1. Phased rollout approach. Longview produces AAON and BasX branded products and coils. Lessons learned from Longview go-live will help other sites. Anticipate full implementation by year-end 2026.
• Positive Developments: BasX data center sales strong (127% Q2, 269% YTD); liquid cooling ~40% of BasX data center sales; strategic partnership with Applied Digital; AAON national accounts orders up 163% Q2, 90% YTD; Alpha Class heat pump sales up 8% Q2, bookings up ~61%.

Segment Performance

• AAON Oklahoma: Net sales declined 18% year-over-year. Production improved month-to-month but was 6% below pre-Q4 2024 levels in July. Gross margin contracted 970 basis points, with the Memphis plant incurring $3 million in costs. Backlog was strong entering August.
• AAON Coil Products: Sales grew $27.1 million or 86.4% primarily due to a large liquid cooling project. AAON branded products declined $13 million due to ERP disruptions. Production of AAON branded equipment at Longview improved from April to July, going from down ~50% to down 37% vs. benchmark. BasX branded production was less impacted due to order uniformity.
• BasX Segment: Sales grew 20.4% due to data center solutions. Gross margin contracted 60 basis points but increased sequentially. Data center sales up 127% Q2 and 269% YTD; liquid cooling accounted for ~40% of BasX data center sales.

Guidance

• Revised full-year 2025 outlook: Low teens sales growth, gross margin 28%-29%, adjusted SG&A 16.5%-17%, CapEx ~$220 million. Second half expected to see accelerated volume growth, favorable price/cost dynamics, but with additional ERP-related headwinds. Anticipate AAON branded sales growth in second half with Q3 and Q4 sequential growth. BasX branded sales expected to increase ~40% Y/Y in second half.

Risks

• ERP Implementation Risks: Prolonged impact on production, including coil supply shortages and slower ramp at Tulsa. Overlap of external coil suppliers' ERP upgrades compounded challenges.

Question and Answer

Q: Guidance revision and ERP impact A: Drivers include ACP performance and ERP impacts; July production 20% below revenue target for AAON branded product in Longview segment, Tulsa started lower due to coil impact.

Q: Data center business health A: Strong demand, activity, and engagement; Memphis facility ramping up to increase capacity; active with Applied Digital on thermal management systems.

Q: ERP confidence and Oklahoma growth A: Guidance captures downside risk; Oklahoma to see quarter-over-quarter strength in production rates and bookings; ACP segment has lingering ERP effects in Q4.

Q: Margin parity between BasX and AAON A: BasX has growth-related pressures, but no reason it can't reach margin parity with AAON; hyper growth stage creates strains but long-term potential exists.

Q: Memphis P&L in 2026 A: 2025 sees Memphis as cost drag; 2026 will see increased revenue from orders like Applied Digital, making it a positive contributor.

Q: Working capital investment A: Working capital needs for BasX, Memphis facility stocking, expected to ease mid-Q3.