AAON, Inc. Q3 FY2025 earnings call

· Third quarter marked operational recovery and capacity expansion with improved production throughput at Tulsa and Longview facilities. · BASX brand backlog grew strongly fueled by data center market, with Memphis facility ramping up. · AAON brand sales and bookings strong, with progress in reducing backlog. · ERP implementation lessons from Longview applied to Memphis, with plans for Tulsa and Redmond rollouts. · Cash position strong, capital expenditures adjusted to $180 million from $220 million.

AAON: Net sales grew 4.3% year-over-year and 29% sequentially. Segment gross margin was 31.5%, down from prior year but up sequentially. AAON-branded sales grew 28.1% sequentially. AAON Coil Product sales increased 99.4% year-over-year. BASX: Sales grew 19.2% driven by data center solutions and initial production from Memphis facility. Gross margin contracted modestly due to indirect warehouse costs. BASX-branded backlog grew to $896.8 million, up 119.5% year-over-year.

· Expect double-digit revenue growth in Q4 driven by production recovery and pricing. · Full year 2025 sales growth mid-teens, gross margin 28%-28.5%, adjusted SG&A 16.5%-17%. · Anticipate cash flow from operations to turn positive in Q4.

· Operational inefficiencies in Longview and early Memphis ramp-up impacting margins. · ERP implementation challenges and supply chain constraints.

Q: Congrats on the quarter, a lot of things to like here. I wanted to start off with the BASX orders...

A: Yes. Great question. And to start, maybe looking back to the Q2 earnings call...

Q: The one nitpick this quarter was gross margin. Good to hear though the ERP, you're feeling strong there. The implied guidance for 4Q gross margin, 31%, you're showing a step-up. But let's just take the two pieces. So, in Oklahoma, if I add back sort of the Memphis unabsorbed and you're going to be getting the full production there soon, it sounds like, and then the price cost, which is really just a timing thing, should we think about sort of gross margins on a normalized basis for the Oklahoma segment at that 35%, 36% level? That's the first part of the question.

A: Yes. And certainly, the math you're doing is putting you in that range. So, when we back out the Memphis impact and we back out that price cost differential kind of on that near-term kind of tariff dislocation, that does put you right in that mid-30s. Certainly, we see some additional pressures that existed. When we look at the kind of year-over-year comp from '24 to '25 in Q3, certainly, you got another 200-ish basis points of kind of gap there. And really, what I would say is, we've been ramping up production, kind of meeting some near-term needs of BASX products inside the Oklahoma segment, which while profitable in its sales, it certainly is a new product introduction into that facility that just caused some manufacturing inefficiencies where production lines aren't optimized kind of to build that, but we were doing it to ensure we met customer demand. So, I'd say that mid-30s with some headroom on top of that really is where we see the Oklahoma segment kind of on a normalized basis.

Q: On the Oklahoma business, Matt, I mean, where are your lead times today kind of relative to normal? And I guess as you think about kind of converting the Tulsa facility next year on the ERP side, I guess, how are you kind of communicating that to people in the channel? And how are you preparing for any sort of, I guess, kind of order pull forward that might kind of happen as a result of that implementation?

A: Yes. Certainly great questions. And on the lead times, when we look at the Oklahoma segment, where they stand today, they're probably sitting around 50% higher than we wanted to be. And again, our focus here is really on getting that execution up, getting that volume up at that facility and really start pulling that back down. So, one thing I'd say is, well, obviously, backlog growth is a big conversation on the BASX side of the business. On the AAON side, our big driver here is, let's get that backlog down, let's get that lead time kind of back in check where we want them to be, just to be able to make sure that we're meeting the market demands appropriately. As we think about, I'll say, kind of getting ahead of things within the ERP side, we're certainly going to be substantially more proactive. Again, I'll just say lessons learned around the Longview side to make sure we get ahead of it. And provide some buffer kind of, in sort of, what we communicate to the market to make sure we deliver and these schedules that are met with our best foot forward. So, that's going to be definitely going to be part of our intentional, kind of, before go-live messaging strategy ahead of a Pulse to go-live. Exactly what that's going to look like and kind of what buffer, that's still certainly part of an operational conversation, but certainly will be something we're looking at throughout the mid part of '26.