Aaon Inc (AAON) 2007 Q2 法說會逐字稿

Good day and welcome to today's AAON Inc. second-quarter 2007 earnings conference call. Just a reminder, this call is being recorded.

At this time, I would now like to turn the call over to Mr. Norman Asbjornson. Please go ahead, sir.

Good afternoon. Before getting started, I'd like to read a forward-looking disclaimer. 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 10-K and the Quarterly Report on 10-Q.

Thank you. Before going forward, I would like to introduce Kathy Sheffield, our Chief Financial Officer and Vice President. Kathy?

Good afternoon. Welcome to our conference call. I would like to begin by discussing the results of the three months ending June 30, 2007.

Our revenues were up 20% to $70.8 million from $59.1 million. Gross profit increased 54% to $15.6 million, which equates to 22% of sales from $10.1 million or 17% of sales in 2006.

Selling, general and administrative expenses increased for the second quarter by 9% to $5.3 million, which is 7% of sales, from $4.9 or 8% of sales last year.

Operating income increased 96% to $10.3 million or 15% of sales from $5.3 million or 9% of sales. Net income increased to $6.9 million or 10% of sales from $3.5 million or 6% of sales. Our diluted EPS was $0.54 per share versus $0.27 per share for the same quarter a year ago.

Now looking at the six-month results, revenues were up 15% to $129.5 million from $112.8 million. Gross profit increased 53% to $31.3 million or 24% of sales from $20.5 million or 18% of sales. SG&A expenses increased for the first six months by 17% to $11 million or 8% of sales from $9.4 million or 8% of sales.

Operating income increased 83% to $20.3 million or 16% of sales from $11.1 million or 10% of sales. Net income for the six months increased to $13.2 million or 10% of sales from $7.2 million or 6% of sales. Diluted EPS for the six months was $1.04 per share versus $0.57 per share last year. And the earnings per share for both the three months and six months were based on 12.7 million shares.

Now looking at the balance sheet, we see that the Company's current asset ratio is 2.1. It decreased slightly due to the dividends payable that we had earlier in the year and the higher accrued expenses related to higher sales and warranty and commissions related.

Our capital expenditures for the six months were $7.2 million, and that related to new equipment purchases and some renovations at two of our facilities.

Our shareholders' equity as of June 30 is $8.11 compared to $6.71 for the same period last year. I would note we paid cash dividends, as I mentioned earlier, of $2.5 million earlier in the year and also bought back some stock, which totaled 2.9 million.

I would like to turn the call back over to Norm, who will discuss our results in further detail, along with the new products and the outlook for the remainder of the year. Norm?

Good afternoon again. Basically, we are dealing in a fairly healthy market in the commercial construction industry and the industrial construction industry. So that has helped us a goodly amount. But we are also seeing that some of the things we're doing from a marketing standpoint and from a product standpoint are also adding to our attractiveness as a manufacturer. And we continue to see a shifting in our overall dollars to larger equipment than what we had in the past. So that began a long, long time ago and has continued throughout numerous years and still is going on.

The new product lines have contributed also to that growth in the large tonnage, because that is where we employed our latest technology and introduced it to the marketplace. Basically, we've brought the product lines, the bigger tonnage, 26 tons and larger, in rooftops up into current technology and in a lot of cases, leading technology in the industry.

Some of the more significant leading industry technologies are the fact that we have double wall foam-insulated cabinets now in 26 tons and larger, and we also have a direct drive airflow blower, both of which are very important to energy improvements in the product, as well as a reduction in maintenance costs and extending of life expectancy. So that has aided us in the growth of our large tonnage market.

We are presently working on some of that in the small tonnage. However, our biggest effort has been, as we discussed before, in entering in new markets and new markets, namely the big one being air handling units, and beginning to get going more in toward the residential, both of which have progressed to the point that we're out there working on them. They have not done anything really to our bottom-line performance at this time. They are still too new.

So the air handling units -- I shouldn't say totally, but the new style, the larger ones have not moved forward. The smaller units which have been in existence for quite some time are continuing to grow and build market share.

The chillers, which we introduced a few years ago, continue to gain strength, and that of course goes into our larger tonnage equipment and has assisted us in growth in that area. The Internet is not a factor at this point. It is up and starting to operate, but it is not a factor.

On one of the issues which has been discussed before, how our custom factory in Canada was doing, it has not progressed as rapidly as we had anticipated. We did do a change in management there the first part of April and we have great expectations, but thus far, it is not materializing very well in the bottom line.

At this point in time, we have both a positive up there and we have a negative. And they are one and the same in one sense -- we have probably our best backlog up there of any of our factories. But along with that best backlog goes the factor that we have been implementing price increases as we saw them necessary, and some of that backlog still doesn't have some of the price increases in it. And therefore, we don't have a breakdown of how that is. So we can't give you a specific as to when all the price increases will flow through. It will be this year, but to say that we are going to be through in any given month would be erroneous. We don't have that ability at this point in time.

We have made significant advances in straightening out problems up there. We feel very comfortable that the orders that we're taking at this point are profitable, potentially profitable orders. And by potentially profitable, I mean that they are priced high enough that we should be able to make money.

The biggest unknown in that portion has to do with our labor efficiency. We are doing a lot to train people and to reorganize and straighten that out. But that doesn't happen overnight. Getting people to do what you want at the efficiency level you're looking for is a pretty long-term process. So how rapidly that will kick in, I don't really have a good answer for you at this time.

Gross margins -- last quarter, when I spoke about that, I told you that we had an abnormally high gross margin there because a number of the, as they say, the stars aligned themselves and we really got a lot of benefits of things we didn't anticipate when we were going into the quarter, one of the biggest ones being that some of the commodity prices declined in the first part of the year and gave us a big boost. They turned right around in the second quarter of the year and went back up. And they have been up and down, but they basically have been at a much higher level than they were, some of them, particularly copper, in the first quarter.

So that has helped change our gross margin to a less robust margin than what we had in the first quarter. And therefore, as I said then when asked the question, could we make the dollars on the bottom line be the same, I responded that it would take volume to do so. And fortunately, we were able to put the volume there and do what we had talked about.

The direct labor efficiencies now in our other two facilities, Longview and Tulsa, have continued to improve. But it is not a huge improvement because basically we are running quite efficiently now. So it has been a modest improvement.

The SG&A expenses, nothing out of the ordinary there. They are pretty well related to what I would consider ordinary changes and they reflect themselves in the fact that they are roughly staying pretty steady.

The way that we are moving in our marketplace at the present time, we have said that some of our retailer business was very cost competitive and we're not getting as much of it because of that factor. And it remains in that category. We are doing well with a lot of retailers, but we're not getting our growth of the retailing section. We are getting it out of educational areas, out of office buildings, hospitals, medical facilities and just a variety of other buildings is where our growth is basically going at this point in time.

As we have been from day one, our rep contribution continues to grow as a percent of our total sales and it is now well into the 90-some percent of our sales.

The backlog has declined, as was anticipated. At the end of the first quarter, or the second quarter, it was higher than it is today because at the end of the second quarter we did have a price increase.

And as we speak today, two things occurred -- one, we had a very good shipping month, and also the other being the fact that following a price increase, which always brings business in before the price increase is effective, because we have a 30-day guaranteed window which they normally fill up, immediately after a price increase it always diminishes -- the order input does. And it has not done anything other this year. So we have gone down into the high $50-some million, which is still an excellent backlog, but not as high as it was at the end of June, when it was a better part of $10 million better than that.

New products basically have been introduced and basically will not affect us as far as introduction costs very much. It is now up to the new products to acquire a following. And we will be doing that. We're now working on other new products, but they won't come onstream until next year. So that basically covers the way in which the Company has changed its product line.

On CapEx, we are a little over $7 million. We had told you we would probably be in the $8, $9, $10 million per year, and that is still a valid number. Most of our CapEx money was spent in the first half.

One other issue that I would like to reiterate here is the fact that we have made an announcement on July 12 that we are having a stock split. And I will read that to you again. The Board of Directors of the Company has declared a three-for-two stock split of the Company's common stock to be paid in the form of a stock dividend on August 21, 2007, to the Company's shareholder of record on August 3, 2007, with cash to be paid in lieu of fractional shares. So that is pretty much coming up on us.

Now looking at the outlook for the remainder, I made a generalized statement about the third quarter. And as you can probably appreciate, we have the backlog pretty much in house for the third quarter and actually have shipped one month of the third quarter. So it is generally going to hang in there about where it has been as far as volume and bottom line in the second quarter. I don't know that it is going to be up or down, but it is going to be in the general area.

The fourth quarter is a little bit too early to be projecting on, but we do know from historicals that the fourth quarter is always one of our weakest quarters for a number of reasons, starting out with the fact that we lose time over Thanksgiving and we lose time over Christmas and our customers shut down, so they don't accept shipments, all of which affects our ability to ship product during that time, in addition to which it is a beginning in much of the United States of a colder time, and a lot of construction starts moderating at that time.

And so the fourth quarter and the first quarter get impacted to fourth quarter because of the additional vacation times, and the first quarter next year will be impacted by weather. And we do believe very strongly, obviously, from where we are at this point, that we are going to have a record-breaking year in both volume and profitability.

There are no unknown things that are hanging around that we haven't discussed here. Everything is up that we are aware of as far as anything that could happen to the Company. There are no items that I think should be divulged, because they don't exist that I'm aware of at this point.

And basically, that concludes the majority of what I had to talk about. And I open it to questions and answers.

(OPERATOR INSTRUCTIONS). [Graeme Green, Bayers] Capital Management.

In the past you have talked about initially you are focused on the product and the manufacturing efficiency and now it is the kind of the last leg -- sales and marketing. Can you talk about how you are emphasizing that, and is anything changing with your strategy trying to sell going forward?

Well, we're putting additional manpower into our sales and marketing efforts both to generate sales aids for our representatives, which consists of both literature as well as electronic selection products so that they can accelerate their ability to price a job and be correct and look at it. So we are putting productivity enhancements in their hands as well as additional information.

We're running a lot of sales training courses whereby we bring people in that need additional training and we're giving them that additional training. We're at the present time adding to our number of direct employees to deal with these individuals in the sales avenue and as far as management of them.

That's pretty much -- that covers all the bases of what we're doing to try and accelerate the marketing.

And you say you bought back some shares during the quarter. Do you have the average price you purchased them for?

I will turn that over to Kathy.

I think we do have that here.

While she is looking for that, Norm, my last question is could you just -- what is your biggest worry? What are you most worried about?

Well, the biggest issue has to do with the economy in general and also as to where the residential problems are going and where they are going to straighten out and start moving forward, because ultimately, we build commercial buildings to support residential facilities, to a large degree. And if the residential has a severe problem, it will eventually impact the commercial. And so that is probably my biggest concern at this time.

Have you got it?

Yes, I have it. I have two numbers here for you. We actually bought back 64,875 shares that we did in the first six months on one particular program that averaged $27.73. And then with another buyback program that we have had, I don't have what we have done so far in 2007, but over 2005 to 2007 it averaged $21.97 per share.

Thanks a lot. Keep up the great work.

(OPERATOR INSTRUCTIONS). Tom Lightcap, Value Holdings.

You mentioned you're seeing some strength in the health care and education markets. Could you, one, elaborate on that strength, and also kind of piggybacking off the last question, give your forecast of how you see those markets progressing as we go forward.

The educational market seems to sometimes be a counter-cyclical market in that the government will, through various mechanisms, promote education sometimes when it is attempting to stimulate the economy a little bit to the degree that they can. For whatever reason, anyway, as the economy in the other areas get softer, it seems, through my experience, that the educational market sometimes gains strength.

Not to say that we're seeing that the other part of the market is losing strength right now, but the residential -- I mean, the first through 12th grade school buildings are definitely running very strong right now.

In the health care industry, as the people in the country age and demand more health care, it is stimulating hospital construction as well as smaller facilities like wellness clinics and medical office buildings and things of that sort. So it is becoming a bigger and bigger factor in our life all the time and has for a number of years.

And I'm sorry if I missed it, but what was your backlog for the quarter at quarter end?

I didn't run a precise number, but we are in the high $50 million area.

And you said at the current time it is down about $10 million form that, right?

From what it was on June 30, when we just had completed getting orders in before the end of a price increase which occurred on June 30, and then immediately following that, you always get a downturn because they accelerated getting orders in during that time. So this is not an unexpected change. This is totally what one would expect.

So June 30 backlog was high 50s, so now it would be somewhere around high 40s?

No, reverse. It was high 60s back at the end of June and now it is in the high 50s.

And on that price increase, was that across all products?

I think we increased everything -- to some degree they were varying, depending upon what our needs were in a particular product. But I don't think we skipped a single product to having some kind of an increase.

And just kind of a general feel for how much that price increase was -- you said it varied, but kind of average, if you can divulge that?

It ran from about 2% to 10%. And it probably averaged out in the middle of that someplace.

Thanks so much, and good luck with next quarter.

(OPERATOR INSTRUCTIONS). And it appears there are no further questions at this time. Mr. Asbjornson, I would like to turn the conference back over to you for any additional or closing remarks.

I thank all of you who attended our meeting here. Give you a little insight as to why it is now rather than later -- we managed to get our closing done sooner than what we anticipated. And then we looked at what was in the offing for next week and what we were this week, and we said there were some conflicts that we would rather avoid for next week, and therefore that was the impetus for accelerating the call.

I look forward to talking to you the next time. I believe everything is going to go on pretty much as it has. Thank you.

And that does conclude our conference for today. We appreciate your participation and ask that you have a wonderful day. You may now disconnect.