Aaon Inc (AAON) 2025 Q3 法說會逐字稿

Thank you for standing by. At this time, I would like to welcome everyone to the AAON Inc. third-quarter 2025 earnings release conference call. (Operator Instructions)

Thank you. I would now like to turn the call over to Joseph Mondillo, Director of Investor Relations.

You may begin.

Thank you, operator, and good morning, everyone. The press release announcing our third quarter financial results was issued earlier this morning and can be found on our corporate website, aaon.com.

The call today is accompanied by a presentation that you can also find on our website as well as on the listen-only webcast. We begin with our customary forward-looking statement policy. During the call, any statement presented dealing with the information that is not historical is considered forward-looking and made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995, the Securities Act of 1933 and the Securities and Exchange Act of 1934, each as amended.

As such, it is subject to the occurrence of many events outside of AAON's control that could cause AAON's results to differ materially from those anticipated. You are all aware of the inherent difficulties, risks and uncertainties in making predictive statements. Our press release and Form 10-Q that we filed this morning detailed some of the important risk factors that may cause our actual results to differ from those in our predictions. Please note that we do not have a duty to update our forward-looking statements. Our press release and portions of today's call use non-GAAP financial measures as defined in Regulation G.

You can find the related reconciliations to GAAP measures in our press release and presentation. Joining me on the call today is Matt Tobolski, CEO and President; and Rebecca Thompson, CFO and Treasurer. Matt will start off with some opening remarks. Rebecca will then follow with a walk-through of the quarterly results, and Matt will finish with our outlook for the rest of the year and some closing remarks.

With that, I will turn the call over to Matt.

Thanks, Joe, and good morning. The third quarter marked a decisive inspection point in our operational recovery and capacity expansion. We saw substantial improvement in production throughput at both the Tulsa and Longview facilities, which drove meaningful sequential sales growth while continued strength in bookings contributed to further backlog growth. While margins in the quarter continued to be impacted by operational inefficiencies in Longview and the early ramp-up of the new Memphis facility, we continue to make steady progress and expect sequential margin improvement to continue through the fourth quarter and into early 2026, putting us firmly on track toward our longer-term goals. The BASX brand continues to perform exceptionally well, fueled by strong momentum in the data center market, where favorably priced bookings have risen sharply and the pipeline of opportunities remains robust.

BASX branded backlog grew to $896.8 million, up 119.5% from a year ago and up 43.9% from the prior quarter. Demand for both our airside and liquid cooling products remain strong, reflecting how well our custom solutions align with customer needs. To meet this growing demand, we remain laser-focused on ramping up production capacity at our new Memphis facility. This facility adds nearly 800,000 square feet of state-of-the-art manufacturing capacity which provides considerable growth to our BASX production capabilities and positions us well for continued growth. The ramp-up of the facility is progressing as planned, with large-scale production expected by year-end.

With a strong backlog and significant increase in capacity, we expect the BASX brand to deliver meaningful growth in 2026. The AAON brand continues to perform well, with sales rising substantially from the prior quarter in bookings remaining strong. AAON branded sales grew 28.1% sequentially, driven by over 20% production increases at both the Tulsa and Longview facilities and improved utilization of the ERP system, enabling us to better meet demand. Also production returned to prior year levels. In Longview, while still about 20% below last year showed strong progress.

Based on September and October exit rates, we expect Longview is nearing full recovery. Enhanced production output of AAON branded equipment resulted in a book-to-bill ratio for the brand below 1, successfully helping bring backlog in lead times of AAON branded equipment closer to normalized levels. While backlog for the brand remains higher than desired, we are making steady progress in reducing it. We are committed to achieving this in the near term, ensuring we can effectively serve our customers and restore a normal business cadence. Despite a soft commercial HVAC market and extended lead times, AAON branded bookings remain strong, while flat year-over-year due to a challenging comparison, bookings were up 15% on a 2-year stack reflecting continued strength in underlying demand.

National account wins were particularly robust with bookings up 96% in the third quarter and 92% year-to-date, representing 35% of total bookings for the year. Bookings of Alpha Class air-source heat pump equipment also continued their strong momentum, up 45% quarter-over-quarter and 46% year-to-date. As I mentioned earlier, Longview's ERP implementation has progressed considerably. While production of AAON branded equipment at the facility remained about 20% below target, output improved sequentially throughout the quarter and by quarter end, production of AAON branded equipment was approaching full recovery. Production of the new BASX branded equipment in Longview has performed exceptionally well with consistent year-to-date improvement.

Despite the improvement in throughput, we continue to work through efficiency challenges that are weighing on facility profitability. We view these as temporary and expect meaningful margin improvement in the coming quarters. In Tulsa, average production levels for the quarter reflected a full recovery. And by quarter end, we're running ahead of target. We've made strong progress in improving coal supply, which supported the higher production volumes.

And while our supply of coils remains constrained, we are effectively managing through these constraints. With the Longview implementation now well underway, we have gained valuable experience and insight, both operational and technical that will guide future ERP rollouts and greatly enhance our readiness to efficiently deploy the ERP system across our other facilities. While we continue to expect some level of operational impact as future sites transition, we are far better prepared to manage these challenges with strengthened internal processes, improved training programs and a proven framework that positions us to execute future implementations with greater speed, precision and minimal disruption. We've applied the lesson plans from Longview to the Memphis go live, which occurred on November 1, and we continue to expect Redmond to transition in the first half of 2026 with Tulsa following in the second half. I will now turn the call over to Rebecca, who will walk through the financials in more detail.

Thank you, Matt. Net sales in the quarter increased year-over-year $57 million or 17.4% to $384.2 million. The increase was driven by a 95.8% rise in BASX freighted sales due to continued demand for data center solutions, and increasing production out of our Memphis facility. AAON branded sales were roughly in line with the prior year, declining 1.5% but increased 28.1% sequentially, driven by solid production gains at both Tulsa and Longview facilities. Gross margin was 27.8%, down from 34.9% in the prior year, but up 120 basis points sequentially.

The year-over-year contraction was primarily due to operational inefficiencies associated with the ERP system implementation and unabsorbed fixed costs related to the new Memphis facility. Sequentially, the improvements reflect progress made in optimizing the new ERP system and the resulting increases in production throughput at both the Tulsa and Longview facilities. Non-GAAP adjusted EBITDA margin was 16.5%, down from 25.3% a year ago, but up 160 basis points in the previous quarter. Diluted EPS was $0.37, down 41.3% from a year ago, but up 94.7% sequentially. Below the line pressures included elevated DD&A from Memphis and technology consulting fees related to the ERP implementation.

Looking at the segment financials, starting with AAON, Oklahoma, net sales grew 4.3% year-over-year and 29% sequentially. The growth was driven by a strong backlog entering the quarter and improved production throughput that enabled higher backlog conversion. Oil supply also improved, allowing us to efficiently scale production of AAON branded equipment. Segment gross margin was 31.5%, down from 36.8% in the prior year period, but up sequentially 400 basis points. The year-over-year contraction was primarily due to approximately 4.5 million in unabsorbed fixed costs associated with the new Memphis facility.

AAON Coil Product sales increased $35 million or 99.4% from the year ago period. The year-over-year increase was driven by $46.5 million in BASX branded liquid cooling product sales, a category that was not in production during the prior year period. AAON branded sales at this segment declined $10.9 million or 31.6% due to the ERP implementation disruptions. Sequentially, AAON branded sales grew 36.2% reflecting improved utilization of the new ERP system and the resulting increase in production throughput since its go-live in April. Despite the improved throughput, gross margin declined sequentially, reflecting several discrete items which collectively impacted gross margin by 1,050 basis points in the quarter.

We expect these challenges to be resolved with our ERP progress. And over time, we expect this segment will deliver gross margin of around 30% based on the strength of pricing within the backlog. Sales of the BASX segment grew 19.2% driven by sustained demand of data center solutions as the market continues to demonstrate strong momentum, and the business captures additional market share. Initial production from our new Memphis facility played a key role in driving growth. Gross margin contracted modestly due to higher indirect warehouse personnel costs associated with operating the Redmond facility near full capacity.

Optimization efforts at this facility remain a focus and are expected to accelerate as the Memphis facility continues to ramp. Cash, cash equivalents and restricted cash balances totaled $2.3 million on September 30, 2025, and debt at the end of the quarter was $360.1 million. Our leverage ratio was 1.73. Year-to-date, we had cash outflows from operations of $18.8 million compared to cash inflows of $191.7 million in the comparable period a year ago. Capital expenditures for the first three quarters, including expenditures related to software development, increased 22.1% to $138.9 million.

We had net borrowings of debt of $205 million over this period, largely the finance investments in working capital, capital expenditures and $30 million in open market stock buybacks that we executed in the first quarter, all of which we anticipate will generate attractive returns. Overall, our financial position remains strong. We anticipate cash flow from operations will turn significantly positive in the fourth quarter as working capital, including contract assets become a source of cash, reflecting payments received on a large order that was recent started deliveries. This gives us flexibility and allows us to continue to focus on investments that will drive growth and generate attractive returns. We now anticipate 2025 capital expenditures will be $180 million compared to our previous estimate of $220 million.

The reduction primarily reflects project timing and the inability to fully deploy funds this year with the majority of these expenditures expected to shift into 2026. I will now turn the call over to Matt.

Thank you, Rebecca. As previously mentioned, backlog remains strong across both brands, giving us the confidence in visibility to stay focused on production and execution. The BASX brand remains the key growth driver of the company, fueled by exceptional demand for the data center market and the unique custom design solutions that we provide our customers. In the quarter, BASX security strong volume of new orders at attractive margins, most of which are scheduled for production at our new Memphis facility in 2026. This sets us up to ramp production efficiently next year to optimize the fixed cost investments made in 2025 and drive robust growth for the BASX brand in 2026.

The AAON brand also maintained strong momentum. Backlog at the end of the quarter was up 77.1% year-over-year, reflecting strong demand across our business. While backlog size and lead times remain extended we are actively managing this by ramping production. Despite commercial HVAC volumes being down double digits year-to-date, bookings have stayed strong, demonstrating the resilience of our business. For the fourth quarter, we expect double-digit revenue growth driven by continued production recovery and pricing actions implemented earlier this year.

This positions us well for 2026 as comparison fees. However, looking to 2026, we also plan to implement the ERP system at our Tulsa facility in the second half of the year. While we expect minimal disruption based on our Longview learnings, there may be some short-term production impact during the transition. Turning to our 2025 outlook. We now anticipate full year sales growth in the mid-teens at a gross margin of 28% to 28.5%.

Adjusted SG&A as a percent of sales expected to be 16.5% to 17%. Before I hand it off for Q&A, I just want to finish by saying, while we continue to navigate some near-term challenges, we're making steady progress across all areas of the business. Our operational execution is improving, production is ramping, demand remains robust and cash flow is trending in the right direction. As we look ahead, we are extremely excited about the opportunities that 2026 will bring. With that, I will now open the call for Q&A.

(Operator Instructions) Ryan Merkel, William Blair.

Congrats on the quarter, a lot of things to like here. I wanted to start off with the BASX orders, which I think for me is the headline. You talked about liquid cooling being strong. You talked about Memphis is fully coming to line. But just speak to fibers, speak to your confidence in your outlook for 40% to 50% growth for the BASX segment.

And then you mentioned order visibility is pretty good. I just want to get a sense that you continue to expect strong orders.

Great question. And to start, maybe looking back to the Q2 earnings call, where the sort of backlog in BASX was flat, it was obviously a point of question from a lot of individuals. We mentioned on that call that obviously, we have to have the capacity and the visibility in our ability to execute those orders in order to really start taking on large orders to support the Memphis growth. As we've kind of progressed through the third quarter, we've had a lot more traction and visibility and kind of understanding what that ramp rate looks like, which allowed us to effectively go out to the market and really start filling the coffers for the Memphis facility. That, coupled with continued strength on liquid cooling orders out of the Longview site airside solutions at both Memphis and the Redmond site, provide a lot of that backlog growth.

And so the Q3 sort of order security was really a good mix of orders in both airside and liquid side orders kind of across all of our sites, but certainly with a strong amount of focus on the Memphis facility as we look to ramp that up in late '25 into '26. As we think through the visibility, I would just say that the activity our team is having in the pipeline conversations, in projects across existing as well as a number of new customers continues to strengthen and remain very strong. And so we're having a lot of interest really across the product portfolio in tremendous amount of conversations across the sort of entire network of data center developers, but you look to really capitalize on the continued growth and align our unique value proposition to those customers. So really, we see the BASX -- the growth story is certainly being very strong, certainly have good growth in 2025. And as we go into 2016, we'll see continued good strength in converting that backlog into sales.

That's great. Okay. Perfect. And then 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.

Yes. And certainly, the math we're doing is putting 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.

Got it. All right. I'll leave the ACP questions for others, but it sounds like there's some discrete items there and 30% long term as a target. So that's kind of what I expected. Now I wanted to give you an opportunity before I turn it over to just comment on the short report was out.

I don't know if that's something you want to do. So I'll give you that out. But there were two claims that I was hoping you could respond to. One, the change in accounting has inflated revenues. And then two, a large liquid cooling gross margins are in the 20% range.

Just any thoughts there?

Yes. So just maybe to start off on that report and other way, just to hit this head on, we want to just kind of reaffirm that we take the integrity of our financial reporting incredibly seriously. And it is regularly reviewed by our independent auditors. And so these statements that are prepared and presented are fully in accordance with GAAP and with the rules of ASC 606. From a confidence standpoint, we're incredibly confident in the strength of our business and the appropriateness of our accounting practices in our operations overall.

So with that, just saying that the demand for our products, the pricing of our products remains incredibly strong, and our focus is on executing our strategy, serving the customers and making sure we deliver that long-term value for our shareholders. As we talk through the portfolio change in an accounting practice, just to state that, that is the ASC 606 standard, which is how revenue has been recognized for the BASX brand kind of throughout its history and since being acquired by AAON.

When we look at the dynamics, there was certainly an increase in contract assets in the first half relative to that one large liquid cooling order which is recognized as a custom engineered custom manufactured product recognized on a percent of completion basis. And so when we think about this in context, that one order that was acquired late in the year last year and kind of converting through it this year, it was nearly the size that single order was nearly the size of all of BASX in 2024. And so that's just mathematically is going to drive that change in a near-term perspective on the contract assets.

But in Q3, you saw those contract assets declined. You saw the receivables jump showing that conversion and shipping and doing to that customer. And so that conversion is going to drive cash strength as receivables are kind of converted to cash in and throughout the fourth quarter. The look in that -- I mean, that liquid cooled order itself, again, just to reaffirm, that is a custom engineer products developed in the standard process in which BASX support our customers over its entire history. And so just kind of reaffirming that, that is not a contract manufactured product.

It was engineered to a specification from a customer, much the same as we have executed the development and execution of BASX products over its entire history. It is priced well. It is not priced at some low margin kind of perspective. We're executing well. We're delivering for the customer.

We're delivering the quality that customer expects, and we continue to receive add-on orders for that product as well as developing and collaborating on other cutting-edge innovations for the data center space. So all that to say, I mean this is executing in accordance with regulations. It's executing incredibly well and profitably for our customers some of the ACP near-term stuff is looking to do with the price perspective on the product, its inefficiency as we've kind of rolled out some of that growth.

Noah Kaye, Oppenheimer.

Matt, Rebecca. Great to be on with you for the first time and a good quarter to be on for the first time on. I want to go to your CapEx guide lowering it to $180 million and the comments you made, Rebecca. Anything we should read or infer from that into kind of the timing of your planned capacity ramp, whether at Memphis or elsewhere in the business that we should be thinking about?

No, I don't think so. Is this a slight shift from moving some amounts between Q4 to Q1. So I don't think the lowering of that CapEx is going to slow down the ramp-up of Memphis. The Memphis facility has already really built out with most of the equipment we need to do the ramp-up right now. So next year's additional plants would just be increasing capacity for future growth.

So it should not impact those ramp-up plans at all.

Okay. And then since Ryan teased it up, I might as well ask about the discrete onetime at ACP. Can you just give a little color on that and kind of how you lap them as we go into 4Q in '26 here?

Just to start off, I wanted to maybe just take the ACP segment for a second and look at this from a quarter-over-quarter perspective, we saw really good strength in growth in the AC segment. And absent to these free items that we kind of referenced, you see a margin around 27%, which is showing good quarter-over-quarter growth in both the throughput as well as the overall margin profile. Some of these discreet items that kind of are question. I mean there's essentially operational inefficiencies, some of which are being -- or most of which will abate kind of with the optimization of the ERP, the rest of which just with some additional manufacturing process improvement. Nothing to do with pricing.

The liquid cooling order is priced at very compelling levels. And as I mentioned earlier to Ryan's question that liquid cooling order itself is a solutions-based product solution-based win was not a low-bid type situation. So priced well and really just focused on getting that execution kind of fully in order. And looking forward, we're confident when we say the segment is at least a 30% gross margin business based on what we have in the backlog, based on what we have with the margin profile in the backlog and really just focus on execution for both the BASX and AAON brands.

Yes. And is that -- is ACP where we see the most improvement sequentially into 4Q to kind of help us get to that 31% that was referenced earlier, if that's the right number for (inaudible) for 4Q?

Definitely quarter-over-quarter, you're going to see strong improvement. ACP definitely being a big driver of that improvement. But I would say, I mean, you're also going to see some incremental improvement within the Oklahoma segment as well kind of as that price cost dynamic get on the right side from the tariff impact.

Okay. Perfect. And lastly, obviously, really strong data center orders for BASX this quarter, great to see the increase in backlog. Can you talk a little bit about the customer mix and profile there? You mentioned liquid versus airside, but just give us a sense of the demand profile across the customer base.

Yes, it's a pretty broad-based actually. And I would say that when we look at the amount of interaction and conversation in the space right now, it is across sort of the entire profile of data center developers. So obviously, there's big strength and continued strength within the hyperscalers, but within a lot of the, I'll say, the contract builders, the colocation providers, the (inaudible) seeing strength really across the profile in the order activity and in the quote activity in that space.

Chris Moore, CJS Securities.

Maybe we'll shift from BASX to rooftop. Can you just talk a little bit about pricing at this point in time, the current AAON premium. And maybe just your big picture thoughts on rooftop in '26.

Yes. So from a pricing standpoint, I mean, obviously, we put on price twice this current calendar year. So early getting rate first, put in 3% and then additional 6% kind of came in through the tariff surcharge. So sitting a little above 9% compounded for the year. As we look forward, we're definitely in the midst right now of really kind of all of our analytics and kind of where cost drivers are looking as we go into 2026.

So no real guidance at this point on kind of what pricing actions are going to come in the near to midterm. But I would say that we certainly see the price premium of AAON equipment is still existing, for sure, kind of inside the space, maybe ever so slight contraction from last year to this year, but really seeing the price premium and the value proposition is still being sold kind of throughout that product ramp. Looking to your question more, I'll say, on the market perspective, I mean, certainly, the space remains soft, the commercial HVAC space remains soft. As we do a lot of our checks with our sales channel partners, a lot of the commentary we're getting is there's actually a pretty substantial uptick in bid activity but still soft in the overall order conversion. So I say that to say that as a positive indicator, certainly showing there's a lot of activity kind of brewing inside the space.

But obviously, in the near term, if not converting to actual orders, it's not converting to new projects. And so when we think about what that looks like into '26 indicates we're going to enter '26 kind of in continued softness, but I'd say that demand we're seeing with that bid activity we would look to see that sort of start converting midway through the year into sort of strengthening of the overall order cadence from a macro perspective. But that aside, with that kind of as the macro driver, we continue to remain incredibly focused on some of the unique growth drivers that are sort of providing us that outperform in bookings, things like the Alpha Class air-source heat pump product differentiation really getting out in the marketplace and ensuring that we're selling to the market and effectively communicating to the market that value proposition as well as the continued focus on that national account strategy. So we see those being the, I'll say, the levers that are allowing us to continue outperforming from a bookings perspective against the softer macro backdrop.

Perfect. Very helpful. And maybe just a follow-up back to BASX in terms of gross margins. We've had lots of discussions currently and ultimately, in terms of where the margins could be at the Investor Day, and we talked about 29% to 32%, a little bit below rooftop. And I'm just, again, trying to understand is there something structural in BASX that couldn't get to the mid-30s or it's just the rapid growth is going to make it difficult for a while to get to that level?

It's a great question. And certainly, our kind of putting it around that 30% level is really sort of setting what we see as the sort of near-term execution targets kind of within that space. From a perspective standpoint, it took AAON 30-some-odd years to really get into that mid-30s range. And a lot of that was driven by really good execution around improvements around manufacturing process, coupled with obviously pricing competitiveness. And so as we start getting more and more, I'll say, we get the ability to really kind of get some of our production lines stable, we can really start focusing on pulling the cost and putting dollars to the bottom line in those spaces.

And so I would just say from an expectation setting standpoint, that 30% range is really kind of where we want to keep everyone grounded. But certainly, we're an organization that is focused on outperforming. And so for us, looking at how do we keep driving better execution and really keep driving improvement of that is going to be something that is certainly front of mind as we keep progressing forward.

Tim Wojs, Baird.

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?

Certainly a great questions. And on the lead times, when you 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 the 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 that 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.

Okay. And speaking of operations, I mean, you just, I think, hired a COO. Could you maybe talk about what kind of those responsibilities are going to be for him in kind of maybe the near and intermediate term and kind of what he brings to AAON?

Yes. And really maybe what I'll do is I'll start by kind of just framing a perspective here, which is we've been very fortunate to go through some tremendous growth, which is incredibly exciting. It's an awesome opportunity for our organization, for our team to grow and to really thrive inside that space. And as we think about AAON five years ago versus AAON today, I mean, we've got facilities, we've got some monster growth coming out of brand new facilities. We've had massive expansion in Longview, strong investment in Redmond and continued investment inside the Tulsa facility, all of that supported by strong demand.

So the company over the last 5 to 10 years, it's really transformed. It's kind of gotten a lot of legs below it and really built itself up in stature and mass. And so when we think about what Roberto brings to the organization, it's the ability to effectively manage consistency across all five facilities. And drive best practice lean manufacturing, visible manufacturing, really across the organization and get the right ability to be able to attack the problems before they become problems. And so he's got experience operating up to 23 facilities expertly in manufacturing and really something that the operations team and the whole team of AAON and BASX is incredibly excited about as we look to continue capitalizing on the growth drivers in a very profitable fashion.

Okay. Okay. That's great. And then I guess just two questions -- two time modeling questions. I guess, first, is there any way to just quantify the free cash flow that you expect in the fourth quarter?

And then as you kind of think about bringing on Memphis, do you have like a DNA number that we should think about for AAON in 2026?

So I don't have a quantification of the free cash flows for Q4. It should be considerably up. I mean, especially you saw it turn positive this quarter. We're starting to -- we had delays in getting some of our buildings out. So we're collecting those now in the fourth quarter.

Yes. It should be up significantly, but I don't have a good estimate to give you just off the cuff. And then on -- so for 2025, we expect the year will be in the $75 million to $80 million range, and then we expect to see like another $20 million to $25 million in 2026.

(Operator Instructions) Julio Romero, Sidoti & Company.

This is Alex on for Julio. Just a follow-up on ERP. I know we talked a little bit about lessons learned alluded to that, but maybe we could get a little more specific on key lessons learned from Longview that you're applying to Memphis and maybe even what milestones you thought about before greenlighting the rollout to Memphis?

Yes. From a lesson learned, I mean, I'll say there's kind of a variety of people and process side of it. But just high level, what I would say is some of the configuration change and lesson learned that we've implemented into Longview as well as Memphis is streamlining some of the automation that can be provided in process flow inside the ERP that wasn't fully implemented, I'll say, kind of on the initial go-live that caused too much manual interaction that slowed down some of the production velocity. And so we really kind of streamline some of those processes and we've really greatly enhanced DMI hands-on training within the system. I think the lessons learned is we did a lot of training as part of the go live, but a lot of it was more classroom setting versus getting really more live hands on how you would live in the system on a day-to-day basis.

And so a lot of that kind of was lessons learned out of the Longview site. And really, that was informing the kind of go-live strategy within the Memphis site. And Memphis has been live for about a week now and really been operating in a smooth fashion, albeit lower volumes than what we have in Longview, but kind of on a go-live and a ramp-up perspective, behaving very well.

Great. I think going hand-in-hand with streamlining and ERP work might be automating with AI. So I was curious if you could touch on any sort of work with that.

Yes. I mean, certainly, as a manufacturer that greatly supports the explosive growth of the data center investment around AI, it certainly also informs kind of how we leverage AI and organizations. So there's a lot of things we're looking at. I mean everything from how we analyze warranty claims for trends, how we look at predictive analytics around unit performance. There's a lot of sort of projects going on.

But certainly, as time progresses, AI will become more and more relevant kind of in our strategy. But what I would say now is we have a lot of things that are more in the sandbox and planning phase as we look at how to leverage AI, both from a operations perspective but also from a value driver for our customers' perspective.

Brent Thielman, D.A. Davidson.

Great. I guess, question, Matt, just as you peel back the layers here within the risk top business, your thoughts on what seems to be working in terms of the share capture strategy. I heard you comment on the national accounts growth maybe how that informs how that kind of strategy is working and anything else in and around that?

Yes. So to maybe peel it back in kind of two pieces. I think when we look at what we call the more transactional type orders, the standard kind of end market orders, we see that softness kind of that you hear across the overall commercial HVAC space on the more everyday type orders. We see that kind of in our order cadence as well. And so when we look at where the growth drivers have been, I'd say two things that are big differentiators for us that have allowed us to outperform in bookings has been the Alpha Class air-sourced heat pump.

So from an innovation and sort of a product differentiation standpoint, continue to see that getting some good traction inside the space as we really have a best-in-class solution that operates in sort of your southern climate all the way to your low term climates with sort of the more Alpha Classes stream program. So that's definitely been a driver that's sort of allowing that differentiation of product to really capture the hearts and souls of a lot of organizations. And it really aligns well with that national account customer. So when we think about national account customers looking to reduce carbon footprints with portfolios of facilities all across the country. That Alpha Class product definitely is a huge conversation starter and a differentiator kind of inside the space.

And with the three tiers of that product. We rolled that out in a way that provided solid pricing points, really depending on kind of what the market is from an environmental perspective. And so we don't need to go all the way to the Alpha Class stream, low ambient air-source heat pump if I'm delivering a product in Florida. But when we look at some of the northern states, the solutions that we have in terms of efficiency, performance points and cost points really can't be beat inside the marketplace. And so that's really allowed a broad conversation on that national account space, really around air-source heat pumps, decarbonization to be able to provide really a solution across the portfolio that really can't be met by anyone else in the marketplace.

And so a lot of that on some of that conversation and growth really in both the national accounts as well as really just transactional air-source heat pumps.

Got it. And then on the BASX side, whether you wanted to talk around the orders this quarter, Matt, or kind of an immediate pipeline? I mean one of the objectives here is to try and get into maybe more of the standardized products. And I guess, question one is, are you starting to see those orders come through? Is it far too early for that?

And maybe just the diversification of customers that are reflected in these orders?

And just to maybe put a clarifying point. When we look at the productization of strategy, I wouldn't say we're going to be a standard product by any stretch. What I would say is really just envision that as the same solution or the same mindset around how AAON goes to market with a software-driven semi-custom, still very much value-driven products just in a little bit more of a wells off platform that provides some more efficiencies in how we go to market. But I just want to kind of clarify that it wouldn't really go to sort of a standardized product definition. It's still very much is highly configurable, value-driven solutions.

But I would say we're certainly starting to get into quote activity on those products. We're in the early innings, really on getting that in the marketplace. And so certainly out there having the conversation, but that backlog growth that we see right now that is reflective of the historic solution-based, the custom products that BASX brand has built itself on since its formation. Customer-wise, I mean, there's obviously, a couple of large orders that exist inside that sort of backlog growth. But I would say there's also a scattering of other smaller customers kind of in there.

So there is definitely a couple of big hitters in that backlog growth, but there's also a diversity in the customer base in what we're growing right now.

Okay. Last one. Obviously, a big chunk of orders here is to fill the Memphis capacity that comes on to, I think, just based on past conversations, Matt, you sort of want to be deliberate about that, work through any inefficiencies as that facility ramps up. I guess the question I have is do you have what you want for now? Or are you comfortable continuing to push and capture more orders for that facility even as it hasn't ramped up quite yet?

Yes, a great question. I mean, I think the -- there's definitely good backlog sitting in there right now to help ramp that facility in a measured perspective. But there also is some headroom in there, especially as we get into the second half of next year to start putting in some more demand into that facility. And so there is room to definitely keep putting orders in there as we get more and more traction. The facility as it stands today, just kind of maybe perspective, it has the ability to have seven production lines put in place.

We're sitting at three today. We're adding -- we're working to add a couple more. But there certainly is all of that five to seven production lines are not fully booked out. And so there is room to -- as we keep growing it out to keep ramping up production at that facility, but I would definitely be thinking about that from a looking statements for orders that will be coming in for start delivery in the back half of next year.

There are no further questions at this time. I will now turn the call back over to the management team for closing remarks.

Okay. Thank you, everyone, for joining us on today's call. If anyone has any questions over the coming days and weeks, please feel free to reach out to myself. Have a great rest of the day, and we look forward to speaking with you in the future. Thank you.

Ladies and gentlemen, that concludes today's call. Thank you for joining. You may now disconnect.