Aaon Inc (AAON) 2005 Q4 法說會逐字稿

Good day and welcome to today's AAON, Incorporated fourth quarter full year revenue and earnings release conference call. Just a reminder, this call is being recorded. At this time, I would like to turn the call over to Mr. Norman Asbjornson. Please go ahead, sir.

Good afternoon. Thank you for tuning in to AAON's year 2005. I'd like to introduce my CFO and Vice President, Kathy Sheffield, before we proceed.

Good afternoon. Welcome to our conference call.

Prior to entering in, I want to read a Safe Harbor statement. To the extent any statement presented herein deals with information that is not historical, including the outlook for the remainder of the year, such statement is necessarily forward-looking and made pursuant to the Safe Harbor provisions of the Securities Litigation Reform Act of 1995. As such, it is subject to the occurrence of many events outside AAON's control that could cause AAON's results to differ materially from those anticipated. Please see the risk factors contained in our most recent Securities and Exchange Commission filings, including the Annual Report on Form 10-K and the Quarterly Report on Form 10-Q. I'd like now to enter into a review of our fourth quarter and our year financial statements.

As was released this morning, you see that our fourth quarter in sales was 48,885, and our annual sales was 185,195,000. Our gross profit -- and comparatively speaking, that compared on the sales end, sales for the year, or for the quarter, were up 9.5% and for the year, they were totally up about 8%. The gross profit of 8,226,000 from 7,148,000 was up approximately 15.1%, and for the year the 35,291,000 versus 26,864,000 was up 29.9%. Looking on down through it, our selling, general, and administrative expenses were up to -- excuse me -- 45 or 4,514,000 versus 4,051,000, which is 11.4% increase. And for the year, they were 17,477,000 versus 15,214,000 or up 14.9%. Dropping all the way to net income, our net income for the quarter of 2,285,000 versus 2,086,000 was up 9.5%. For the year, our gross -- our net was up 11 -- or at 11,462,000 versus 7,521,000 or up 52.4%.

The issues that occurred in the fourth quarter and in the year kind of come down to the following: In 2004, not 2005, we had a remarkably high run up in steel costs, which came down a little bit at the beginning of 2005 to about $0.48 a pound, and we ended the year at about $0.40 a pound, so we actually had a decrease in our steel costs during the year. However, a lot of material that we bought in the way of componentry that had steel in it had not gotten -- they had not gotten as much increase in their cost of the component with steel in it as they wanted, and we did see quite a run up in component costs that had steel in it. In the case of copper, which was our other big changeable, we entered the year with about $1.72 a pound, and we exited the year with $2.21. Now, there is a good story to be told here on an ongoing basis, because we're now partway through February, and basically the steel and the copper are still holding about where they were at the end of the year.

So we've gotten a few weeks anyway into the year and don't see any continuation of those increases or decreases, as in the case of steel. We are seeing some component increases this year, however, so that still is occurring; but we're quite optimistic that that's going to be lessened during the year compared to what our component cost increases were during the year of '05. The items that were unusual for the quarter and for the year that I mentioned on the front sheet of my operating results for 2005, which were the 1.8 million loss of Canada, comes about kind of in the following way: We bought that company out of bankruptcy in May of '84. Therefore, it didn't have much sales during '84. As as a matter of fact, our total sales were 1.8 million, and we didn't have many employees, and we didn't have a lot of activity. Our net income was a loss in '84 of 300,000 -- 335,000.

In last quarter of '05, we were up to running at 3.9 million in sales, and we only managed to do one thing well, and that is to increase our loss. So we were paying a price for getting this place back up and running again. On the good side of it, it was heading down -- the loss as a percentage was heading down. And from what we've seen in January over January, which we have not closed because of closing of last year's financials, it looks like there's a probability that we're getting real close to a break even for the month of January. For the 12 months, to see how that 1.8 million came about, we actually had total sales of 11.2 million for 2005 compared with the full sales for the year of '04 of 3.3 million and a loss of 797,000 in '04 compared to the 1.4 million in '05. So again, bringing it up to speed, hiring people, teaching people, straightening out problems as we found them, was a costly thing for us.

Again, however, we are now set up to run at a run rate of something around 15 to 17 million for the year of 2006. We don't want to run at anymore than that. That is more than adequate to support the operation properly, and we're going to be doing nothing but concentrating on putting it into the black. And we have every belief to believe that that will occur during the year 2006. The problems besides material costs and general other problems were the fact that we ended up in 2005 running a lot of overtime up there because we were taking orders and we weren't able to meet customer requirements well, and so there were just a whole host of problems that we had bringing the thing back up to speed at a better rate. Those are largely historical things because, in January for instance, we're out of the overtime. Our material looks like it's coming into where it needs to be to make us a profit.

We haven't run the financials, as I said, but we have every belief to believe that our biggest problem here and our biggest hope for a major turnaround is well underway. The next item, we did start expending a lot of effort on meeting Sarbanes-Oxley in the year 2004. And being a somewhat new Company, we did have a lot of work that we needed to do in a variety of things. We didn't have major issues. As was noted, we didn't have a lot of material defects or anything. But we still did have a lot of work to do. Some of that work was not really invoiced until 2005, so it hit us in 2005, plus the fact that a very high percentage of it was done in 2005.

So we did have an abnormal amount of work there that will definitely diminish on an ongoing basis because it has already diminished on us since about the middle of 2005. It's much reduced from what it is. It will always be with us. It is just inherent in the fact that the law demands that we do a lot of things. So there will be an ongoing, but the thing I was trying to point out here was that we had an abnormally high amount of costs associated with it that wouldn't be ongoing on a long-term basis. So that's going to go away reasonably well for 2006. The material costs I've kind of covered already in telling you that the steel got under control. Copper did not, and components did not. But all of them look to be under control at this moment in time.

The repair cost, which was quite abnormal, was one, associated with the fact that we bought some very sophisticated software driven sheet metal fabricating equipment; and we started buying this new in 1997, and it was some of it -- we're running this equipment seven days a week, 23 hours a day with one hour down for maintenance. So we're putting a lot of wear on this equipment, a lot of hours on it. And we were starting to have more and more break downs and waiting for the parts to come, either from one of their parts depots or from the factory was not acceptable because it shut the machinery down for too long. And so we did a survey of our our machinery and looked at all of the things that we felt we needed to buy, either to immediately improve the quality of the machine, repair it for what we thought was an imminent breakdown, or else have on hand so that if it did break down, we would have the parts.

And we went out and had a one-time unusual purchase of $594,000 worth of parts for over $100 million worth of equipment that we have of this type equipment. We believe that that was an abnormality and will not be repeated again, because we did the repair work largely in 2005, and we still have a reasonable stock of parts for our normal breakdowns which will occur. And so it just really put us in a stocking -- a better stocking position and corrected our product. So that kind of covers the unusual things that impacted largely -- heavily in the fourth quarter as well as the year 2005. On a very positive side, business is good. Everything I see in forecasts by anybody talking about commercial buildings is quite positive at this point. And our order input is quite positive.

We have in excess of $50 million in backlog, which is kind of at an all-time high. We have been running in January at a fairly high volume, and we are in February running at a fairly high volume. And the only determining factor that we don't run at a higher volume was the fact that the customers don't want the product yet. And we're expecting that, as March warms up in more parts of the country, that we're going to be running at a higher volume, so we expect for the first time ever to exceed $50 million in a quarter. And our backlog is holding steady to gaining -- possibly gaining -- the way it looks right now, the way orders are coming in at this point in time. From the standpoint of what have we done on price increases, we did some price increase early on last year. We did another significant one -- significant meaning probably an average of 4%, maybe a little more -- in November that really wasn't all finalized until December 20th, meaning that certain pre -- did jobs were allowed to be booked during December up until the 20th, after which time everything had to be booked at the new price.

In some product lines, we have already run that product out of our backlog. Others we're in the process of doing it. It won't all be run out until probably the latter part of March. But it is starting to kick in. The price increase is beginning to be felt in our production mainly in this month and into March and then April. And after, it will be continuing to be felt. We anticipate pretty steady material costs and no great uptick there, so we probably might go for another price increase sometime this year, but it's not going to be cost driven by abnormal material costs. It will be just general cost increases, labor costs, salary increases and the normal -- what you might consider normal kinds of things. The SG&A and that -- I might touch basically on it just briefly on it to give you some feeling for that.

The bulk of that SG&A was associated with Sarbanes-Oxley for two things: For accounting professionals, namely auditors; and also for -- we did some consulting, had some consultants in to help us resolve some of our software issues faster and get them under control faster. And then one of the other large things that hit us in there -- two of the other large things, one is that we have a profit sharing program, and because we were more profitable we paid out more profit sharing to the employees. And the second thing was that bringing Airwise on-board completely with their SG&A expenses. So those were the major events that occurred on SG&A.

Looking at the one thing which we have been doing -- excuse me. That we have been doing on stock buyback, we had authorized a stock buyback back in '02 of 10% of our stock and got it underway largely in -- oh, let's say the first part of '02. 10% of our outstanding stock, which is 1,325,000 shares that we authorized to buy back. We have, as of December 31st of '05, bought back 1,244,964 shares, leaving us an authorized amount of 80,036 shares to buy back during the balance of that authorization. We are in the black-out period and not buying at this moment in time, obviously. So that kind of covers that.

We did announce that we were doing an analysis and -- about whether we would buy back more stock or do a dividend or some other issue with the Company, and that is in the final stages of being resolved, and there's no major thing to announce at this time other than it's not a sale of the Company or a buying of any other company. It's now coming down to repurchase of other stock, more stock after this falls out, and/or a dividend. And the dividend looks like it's in the lead right now. So as soon as we get that all resolved, an announcement will be made about where we're going with our excess cash once we get this all resolved. And that shouldn't be very long now. On what we're doing as far as our type of customer, when things are tight as they were in the commercial market for about three or four years prior to or up through 2004, or up into 2004, there was a lot of scrambling by all the competitors to get national accounts because they're a very highly visible, large volume type source of business.

And we had -- because the price was lower than we wanted to go, we have given up position in that. We've not lost market share. As you can see, we gained both in '04 as well as in '05. We gained position. However, it's a little different position. We now are less in the national count as a percent of our sales. We're down to less than -- or somewhere around 10% in national accounts and 90% in all others, which is everything from educational buildings, office buildings, manufacturing, other types, all kinds of businesses. So what this Company started out with, which was basically two customers, has now a major -- done a major change to where we have a very, very, very broad customer base at this point in time. And that issue is past being an issue of any sort.

Of those accounts, I can tell you that retail is reasonably healthy. Manufacturing stopped its decline -- manufacturing buildings -- and it's kind of balanced out and resumed a modest amount of growth at a much lower base than it was a few years ago. Educational is going along very well. Other types of commercial buildings and miscellaneous buildings are all doing well. So as I said when I started, the market looks very promising going forward. In the new products area, the big issues -- we're talked quite a bit about the necessity to go to green refrigerant and the fact that AAON is totally done with its engineering and is in production with all of our equipment with green refrigerants. That looks to have been a smart move, as the marketplace does seem to be moving that way fairly fast in spite of the fact that it doesn't have to by law until 2010.

It appears to be going to change over quite a bit before that time. The major thing which you may or may not have read about, which was energy efficiency and the law changing in the units down below five tons and down to require what's called an SEER, a Seasonal Energy Efficiency Ratio, of 13 compared to the previous mandated one of 10. So a 30% increase, that became effective the third week of January of this year, has not been an issue for us yet. The fallout is still undetermined. What it's going to do to our relative position in the marketplace is undetermined, but it is our belief that we will be more competitive now that it's been mandated that they get the energy up there, because we have always been up pretty high, and so we expect that our competitors' costs to get there will make us a more cost effective manufacturer in that. I mention this pretty heavily because there's a tremendous amount of dollar volume in that small tonnage, and we haven't played in that too successfully up until now, and I think we're going to be much more successful now.

The other item, which we believe is going to be mandated at some point by either the federal government or state governments, has to do with the fact that they have mandated the energy efficiency of a building, meaning that both the way you insulate the building and the way you convert the energy into cooling or into heat has been mandated by regulatory agencies, and the one thing that's been overlooked has been the cabinet on rooftop units that sits outside and processes all the air through it and is absolutely a terrible cabinet as far as energy efficiency. And so we've undertaken, starting about two years ago, to substantially improve the cabineting of our product line. We started with our very largest equipment which went on sale beginning in the spring of 2004, and in the spring of 2005 we had to totally redesign the product to bring it up to this new efficiency, and you have to foam it rather than use fiberglass insulation. We have had that, as I said, since the spring of 2004. The next size product line was brought on in the spring of 2005, and we now have three more sizes to go. It's our hope that we will be there within next one to slightly over one year from now, at which point in time I'm hoping that somebody will regulate us into a better market position where we will be able to show our customers that they can save still significantly more energy by having this better cabinet.

The one thing, which we talked about a lot and which has unfortunately been kind of a disappointment to all of us for some time, has been our efforts to start selling some residential product as replacement units only over the Internet. And our problem there came about by the fact that we got the product ready. We are selling some of the product, but our method of sales over the Internet lagged. We didn't get that set up. It was easy enough to go out and find somebody who had all the things necessary to sell over the Internet so we could buy a software package all set up for it, with the exception of two issues.

One of them was that they largely don't worry about sales tax in the various places into which they sell, but since we sell into all those areas with our direct sales force, we could not ignore it, and we had to get a software system that would automatically calculate sales tax to wherever the product was to be shipped to. And the other had to do with the freight, so that when somebody went into the Internet and ordered a unit, it would give them a retail tax or tax number as well as a freight number when they bought the product. We have completed that software. We have it into operation starting in December of last year. We are starting to move forward with it. We fully expect that we will be using that to assist us in gaining position in the residential replacement air conditioning market. We don't expect that to give us any great significant bottom line performance, however, for the year 2006.

It will, as time goes on, become a significant factor; but for 2006, it will not have a material effect, I don't believe, on our bottom line. The balance of what's going on, where are we heading for 2006? We believe that we've got significant growth going to occur in both the revenue line and the bottom line, the profit line. We're very optimistic. And I talked quite a bit a little while ago about what we've experienced in the first few weeks of this year and what our backlog is, and what is going on and what is being told to us. In addition to which, all of these new products are starting to come in the market that we have been working on for the past few years; and in general, there's just a great deal of reason for optimism around here in both the bottom line and the top line for the year 2006.

Toward that end, so you realize that it's not just optimism around here, we are spending a significant capital amount. We aren't doing a lot on buildings, although we are finishing up. We're in the final stages of some building down in Longview, Texas, and we're doing always some minor things on the building but not other significant things on any of the buildings, and we're not buying any land. But we are buying a lot of machinery, because a lot of the machinery we buy has lead times of an excess of one year, and so you have to lead the market quite a bit with your purchasing of machinery. That machinery has been coming in the end of last year. It's coming in right now. It will be coming in the balance of this year, but pretty heavily in the first half of the year; and our cap is probably going to be up somewhere around $14 million for this year.

And that is getting machinery in here so that if our fondest expectations are met, we don't run out of machinery to build our product. In the past, many times we've kind of lagged behind and we've suffered because we could have had more sales if we'd have just had the ability, and I'm tired of getting caught on the short end; and so we may be a little bit on the long end, but not greatly I don't think. That pretty well covers what I've got, and I thank you, and I open it now for questions and answers.

Thank you very much, Mr. Asbjornson. The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit 1 on your touchtone telephone. Also, if you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, if you do have a comment or a question at this time, press star 1 on your touchtone telephone. We'll pause for just a moment to assemble the roster. And our first question comes from James Gentile with Sidoti & Company.

Hello Norm, Kathy. How are you?

Just fine, James. How are you doing?

Very good. You mentioned the -- there might be some energy efficient regulations for new buildings. Do you have any sort of timeframe on that?

On this particular part, as far as the cabinet, no. If we were to go out and promote it now because we don't have it on all of our products, it would be premature. But it won't be long before -- like I say, within about a year we will be there. So I think we're going to go out and try and promote it really heavily in about a year, meaning we will let all the regulatory agents know that we do have a better energy efficient cabinet on our units, and we will, and have been on those products we already have it, promote the products. The things we've done to those two big products is certainly obvious, because they are growing at a rate substantially faster than our smaller products are. So the customer is giving us a report card, and it's very favorable.

Can we assume that sales in Q1, the March quarter of '06, will exceed $50 million?

Yes.

Given your backlog?

Yes, we can.

Okay. And price increases, in addition to volume, you know, could you kind of break that out into the four plus percent price increase plus volume, or is the price increase in addition?

The price increase is in addition.

Okay.

And in January, I don't think we've shipped but just a fraction of 1% of that price increase. In February, we probably shipped 1% of the price increase by the time we finished. In March, we're probably going to ship somewhere between 1.5 and 2% of the price increase. April, we'll be in the mid threes, I think. Three some percent of it. By May, we'll be shipping the whole price increase.

Got you.. So, you know, to assume that you'll exceed $50 million in volume increase, that's about 10% growth from March quarter, 43 million plus, call it, 2%. So it's possible to assume $52.5 million in revenue for March quarter?

That would be a reasonable expectation at this time.

Okay. With regard to any sort of overhead expectations, your SG&A line has been pretty much flat for the most part, you know, with some sort of seasonal adjustments or whatever. 4.5 million fixed. Will that be lower next year on a quarterly basis?

On 2006, it probably has a chance of being lower, not only as a percentage but also maybe an absolute because of some of the Sarbanes-Oxley issues and things that I mentioned earlier. But it is also heavily influenced by two other things: One, bad debts, which we've been doing well on. We haven't had a lot of bad debts. And so unless we have -- experience something bad there, that should be under control. The other would be our warranty costs. So the biggest factor in our warranty costs is compressor failures, and compressor failures have been diminishing for three years. We're into our fourth year of going down on warranty on compressors, and the other products. Now, there is some danger, when you're introducing new products, that you make mistakes that you have to fix; and that is a real danger, and it always catches us with some cost, but it hasn't been a substantial amount of cost.

Okay. So the biggest variables is warranty's expense moving into 2006 in your opinion?

Warranty or if something goes sour in the economy that we start having bad debt problems.

You mentioned the initiation of a potential dividend. Could you give us an idea of the payout ratio that you're considering with regard to your annual net income of, we'll call it, around $10 million in a normal lifted cyclical area?

We're -- if we're going to do it, we're going to do it substantially. We probably might go 40% of the 10.

All right.

So -- but we have for the past two years bought back up in the $4 and $5 million worth of stock.

Sure.

And so it would be just a change of philosophy. Rather than buying stock back, it would be -- it would be putting it out in the way of dividend.

Okay. And then from a competitive standpoint, could you just kind of comment? I mean, it seems like national accounts are a much lower part -- lesser part of your business now. You know, how is the pricing environment overall in the HVAC universe with regard to your larger competitors introducing pricing increases, and you know, where you guys are trying to fit into it?

Well, I think most of them are doing a fairly responsible job of putting out price increases in general, and that's the general market that we've been getting more business out of. The one place we see them being kind of foolish, in our opinion, at times has been on the national accounts.

Right.

They've really cut their price to go out to get a national account. And I suspect, because national account is always pretty tough business, I suspect -- you know, we had a large percentage of it for a long time. We got our education, and they're going to get their education. But, you know, it's hard to make money on some of that. And I suspect that that will turn around and go up as a relative percentage. In other words, we will -- over time, we'll probably gain back more in dollars in national accounts as a percentage of our business. I'm not sure that it will increase.

Okay. And then just one final question, I'm sorry. With regard to the Canadian losses, you know, following the September quarter that was reported late last year and now following year end, it appears that losses continue, and you've had indications in the first month of each of the past two or three quarters that break even is going to happen in Canada. How can we be assured that this is the case here?

Well, I wish I could assure you, but I can't for sure. I can tell you what indexes I'm looking at and the nature of them and what is occurring. Because we were so engrossed in getting the Sarbanes-Oxley in, we had to curtail working on Canada from August of 2004 until April of 2005, and that meant mainly getting the computer system to reporting things properly so we could really see where all the problems were. In 2005, we finally got it working in the April, May timeframe, and then we had to start making corrections. And corrections were all over the map of everything. But largely they were where we bid jobs too cheap on certain products because we didn't know our cost properly, and other products that we did know other cost properly on, we weren't going after that business as well as we should have.

So we changed our pricing on the stuff that we were underpricing, and we worked harder on the ones that we were pricing properly, and the net result of that comes about most critically in the material content. The material, we know that for sure, labor and overhead is always a little bit questionable as to whether you're right there or not. But material, I'll give you two numbers. In December, on our standard costs -- not on -- not including variances but standard costs -- it was 42-point some percent up there. In January, it was 29 and some percent. Those -- we did have our cost -- our standard cost -- pretty close on materials, so variances didn't change those relative positions. That's a 13 -- roughly a 13% reduction in our material costs just over a one-month timeframe. That is substantial.

Yes.

On the other side it, in December, we were still running about 60, $70,000 worth of overtime. I don't -- haven't seen January, but I'm going to say it dropped down to probably less than $10,000 with overtime. Overtime shows up in a variance column. And like I said, we haven't finished January because we've been trying to get last year finished. So in another couple weeks, or another week, I will know what January looked like. But the two big cost factors you have are your labor and your material, and both of them we know went down substantially. Not modestly, but you know, 10, 12, 13% is substantial.

Sure.

And so whether it got us into the black or not I can't guarantee. But, now, on the three product lines we have, one of them that was our biggest sales volume was in great shape on material. The other two were still back where they were. They were still kicking out standard prices that were up in the high -- you know -- unacceptably high. And so we still have some backlog to work out of in those two product lines. But the biggest volume one was running good.

Great. Thanks, Norm.

You're welcome.

At this time we have one question remaining in the queue. Again, if you'd like to ask a question or if you have a follow-up question, please press star 1 to signal. Next we'll hear from Frank Magdlen with The Robins Group.

Good afternoon, Norm.

Hello, Frank. How are you?

Good.

Good.

Looks like you made considerable progress to restoring margins.

Yes, we did. We brought the margins back up to, for the year, 19.1. We're not up to the 23, 24 yet, but it's within tossing distance, we can say. You know, I fully expect to get back up in that area at some point in the not-too-distant future, hopefully.

All right. Can you talk a little bit about the seasonality of the business? It seemed like there used to be some seasonality in the business. And did the parts components that you purchased, and did you have maintenance problems in the fourth quarter that reduced revenue in the fourth quarter?

Yes. Because we expensed that -- almost $600,000 went straight down to the pre-tax line and kicked the pre-tax line by that amount.

But that was expensed where? Under SG&A or cost of goods?

Cost of goods.

Well, cost of goods.

And did you -- then also, did you have then -- you didn't deliver as much product as you might have been able to?

No. I think we probably were able to deliver all that people would take. There was, for whatever reason, a lack of people willing to take more. We've been keeping up with customers' required shipping dates. We haven't been behind on them. So we can only push them so far, and they just won't take the product because they aren't ready to receive it.

All right.

And we're at that point right now where we're keeping up with them. We're right on top of them right now, so nobody's feeling that we're not shipping on time or something like that, because we are. The way the orders are coming in, though, and the way our backlog is, it tells us that we better get our act together and speed it up here in about another 45 to 60 days, that when warm weather goes over more of the country, we're going to have to produce more than we're doing right now.

And can you address on the seasonality of the business again?

Yes. Mainly it is a seasonal business, because you have a large part of the United States that gets cold and wintery, and those parts, they -- if they haven't got the foundation in the ground in some parts of that, they don't get it in during the wintertime, and so it pretty well shuts them down on building. They can on buildings complete them if they've far enough along, but then they're slow about completing them. So usually sometime around Thanksgiving on through till sometime in the March, maybe April timeframe is usually kind of a slow period. And we are setting -- we're going to set a record for shipment right in the middle of that this year. So that looks very promising to us that we should do very well for the balance of this year.

Okay. Kathy, how about the tax rate for the coming year?

Frank, it will be around 37.5 to 38%. The quarter was a little bit higher. It was at 40.9%. Basically, that had to do -- it was a little bit higher than it was for the year, basically because we booked a conservative tax benefit on the whole Canadian loss.

Okay. And that's why your deferred tax asset went down a bit?

That's correct.

Okay. Do you have your inventory breakdown?

She's got it here.

Okay.

Wait a moment.

That's fine.

Okay, our raw materials basically for the end of the year were 17.9 million. That is our raw material plus our purchase parts, such as motors, compressors, that type thing.

All right.

Our work in process at the end of the year was basically about two million. And our finished goods was 3.8.

Okay. All right. I think I'll go back in queue. I think you've taken care of the questions that I had at this time. And it was a nice quarter. Thank you.

Yes, it was. We were a little disappointed in it for -- because we had better expectations; but all things concerned, it was a good quarter, and it set us up really well for this year, I think.

All right. Thank you, Norm and Kathy.

You're welcome.

As a final reminder, if you have a question or comment at this time, press star 1 on your touchtone telephone keypad. Next up we will hear from Michael Coleman with Sterne, Agee, and Leach.

Good afternoon, Norm. How are you?

Wonderful. How are you today?

Doing well. Just wondering, the use of the foam in the cabinet integrity, do you have any kind of stats on what the potential savings are to the customer or the energy savings? On that versus the traditional fiberglass cabinet?

Yes. Basically, what you do in calculating it -- it's not going to be a huge thing, but as a percentage it's going to be huge. Let me tell you how that works. You have an "R" value times a temperature differential, and you calculate out how much heat loss or heat gain you've had through that cabinet, and so the "R" value is -- if it goes up in a certain percentage, it cuts that same percentage out of your heat loss or heat gain. And then you take that times your area that's exposed to the outside and the inside air. That's the catch, is that it's not a huge amount of area. The unit is not a huge unit, in other words. The difference in the heat loss through square foot of it, however, is huge.

And so to give you a feel for what I'm talking about, it's not uncommon for a house or a commercial building nowadays to have an "R" value in excess of 20. Or up around 20, somewhere in that area. It's not unusual for the air conditioner that goes on your roof, if it's -- particularly if it's a small unit, to have an "R" value of somewhere between one and two. In other words, 1/20th as good as the whole building as a whole. That's almost shameful in my opinion. If it's a big unit in our industry -- I'm just talking in generalities now, not about any given person, because we've been right in among them, too. You might have an "R" value of four or fie on a larger unit. Still it's no good.

Uh-huh.

The big unit that we re-did first has an "R" value now in the low teens. Okay? That's considerably better than one or two or even four or five. You know, it's two, three, four times as good as what's out there, what's being sold by our competition today. And then you take that times the square foot of it that's on the roof. So you could have, say, a building -- that unit would use up on a square footage basis maybe two, three, four times as much heat loss or gain as ours would. And so it's like -- almost like having a window that's single -- you're having your house with single pane windows is about what it's like.

Okay. You mentioned that you've gotten good reception from your customers in that the larger units that you've re-done are selling well. Are you -- do you have -- are you getting any kind of premium pricing for these products?

Yes, we are. We're able to get better pricing all the time. And I expect that to continue to improve as time goes on. It also has one other nice feature about it. I don't know if you've ever -- if you're familiar with ' construction, which is really what this is. The foam really adheres to both the inside and the outside sheet metal, giving you composite construction. And that's a lot more sturdy and a lot stronger. That's what a lot of things like aircraft and things like that where they have to have control of their weight and yet they need something really strong. They'll build things out of composite construction. Well, we get that out of foaming these units.

So the quality level, if you were just not too familiar with anything and you just went up and banged on the side of the unit, our unit sounds immensely better than it used to and immensely better than anybody else's. It doesn't have the tinniness that we used to have and other people still do.

How involved is the remanufacturing or the manufacturing process in terms of the foam construction when you switch over the line?

Well, there's a pretty big entry fee a to it because all of the sheet metal has to be totally redesigned, so it's a total redesign of the unit. In addition to which, you have to buy the foaming equipment, a capital expense which is fairly sizeable, and then you've got to learn how to do this, which the learning curve is expensive. We've gone through all of the learning curve. We've gone through all of the capital expense. All we've got left now is some design expense on the remaining units. And so it'll be used by everybody sooner or later.

Some people are doing it now on some of their products, but they haven't gotten on the rooftop products yet. And they're, as near as we can tell, quite a ways behind us even where they are doing it. And we're kind of -- it's one of those things where we'll get a few years benefit out of it before everyone catches up, and then we'll have to have something else. Some people might never go there, though, because it might just be too challenging and too costly for them to get there.

Okay. Thanks a lot. And good luck in 2006.

Thank you.

And it appears there are no further questions at this time. Mr. Asbjornson, I'll turn the call back over to you for any closing or additional remarks.

Okay. Well, I thank all of you for your time and your interest and hope that I've answered all your questions. I welcome any calls that you might have if you want to talk privately. I'd be glad to do so. And I'll close by saying that we're quite optimistic at this time going forward. Thank you, again. Talk with you at the end of the next quarter. Bye.

Once again, that does conclude today's call. Thank you for your participation. Have a great day.