Aaon Inc (AAON) 2008 Q3 法說會逐字稿

Good day and welcome to AAON Incorporated third-quarter 2008 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.

Prior to getting started, I'd like to read a disclaimer, 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 filings, including the annual report on Form 10-K and the quarterly report on Form 10-Q. Thank you.

I'd like to now introduce our Vice President and CFO, Kathy Sheffield. Kathy?

Good afternoon. Welcome to our third-quarter conference call. I'd like to begin today by discussing the operating results for the three months that just ended September 30.

Our revenues were up 12% to $79.3 million from $70.9 million. The increased sales were attributable to an increase in our diversified customer mix, an excellent response to many of our new and redesigned products, and also the price increases.

Our gross profit increased 47% to $20 million or 25.3% of sales from $13.6 million or 19.2% of sales. The increase was a benefit of higher sales, price increases and production and labor efficiencies.

Our selling, general and administrative expenses increased for the third quarter by 33% to $7.3 million, or 9.3% of sales, from $5.5 million or 7.7% of sales. The increase was due to a number of factors primarily related to an increase in selling-related expenses, warranty expense related to increased sales, profit-sharing due to an increase in net income, and an overall increase in our general and administrative expenses.

Operating income increased 57% to $12.7 million, or 16% of sales, from $8.1 million or 11.5% of sales. Net income increased to $8.4 million, or 10.5% of sales, from $5.4 million or 7.6% of sales. The increase in net income resulted from our higher product volume and also from improved productivity.

Diluted EPS was $0.47 per share versus $0.28 per share compared to the same quarter a year ago. Earnings per share for the three months were based on 17.484 million shares versus 19.003 million shares in the same quarter a year ago.

Moving now to the nine-month comparison, revenues were up 10% to $219.5 million from $200.4 million. Gross profit increased 19% to $53.7 million, or 24.4% of sales, from $45 million or 22.4% of sales. Our SG&A expenses increased for the first nine months by 17% to $19.3 million, or 8.8% of sales, from $16.5 million or 8.2% of sales.

Operating income increased 21% to $34.3 million, or 15.6% of sales, from $28.5 million or 14.2% of sales. Net income increased to $22.5 million, or 10.3% of sales, from $18.6 million or 9.3% of sales.

The diluted EPS for the year was $1.25 per share versus $0.98 per share a year ago. Our earnings per share for the nine months were based on 18.028 million shares versus 18.976 million shares.

Moving to the balance sheet now, we see that the capital expenditures for the nine months were $5.5 million. Those expenditures related to some new equipment that was purchased, renovation of an office building here in Tulsa, and also the beginning of a building expansion in the Tulsa facility.

Our shareholders equity per share as of September 30 was $5.46, compared to $5.29 a year ago. We paid cash dividends this year of $5.8 million and also bought back stock in the amount of $24.1 million.

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

We've had pretty good sales growth so far in the year. Roughly half of the sales growth was attributable to actual improvement in the volume of products sold and approximately half of it was the result of price increases.

We have had notable change going into the green refrigerant called R410, as opposed to the old, less environmentally friendly R20 refrigerant. As mentioned before, we are totally capable in all of our products of building R410 equipment and we are probably, in our sales, based upon what the customers wish to buy, selling approximately 80% of our product dollars in R410 product.

We have had some notable events occurring. Our larger tonnage equipment continues to do particularly well. These are the products which we have in the past few years been totally redesigning, and they have been well received in what we have done with them. Our most recent redesign was in mid size of our rooftop product line, 16-ton through 30-ton, which was converted over into 2-inch wall foam construction direct drive blower this past month, and it has been well received at this point in time. We have built a reasonable quantity and all costs and everything are as were anticipated when we designed the product -- no surprises, in other words.

The incoming order rate has been a little on the soft side, as you might expect, not low because you can see we went up in our actual volume in the quarter, but we did take -- a lot of that came out of backlog. Our backlog has, at the end of 9/30 of '08, gone down approximately 5% from the corresponding period a year ago. Incoming order rate is still pretty solid. It's not what we would like it to be but it's certainly not going down, diminishing greatly either. It's holding in at or above what it was a year ago.

Gross margins, as were noted, were higher for a variety of reasons which were mentioned, including the fact that we've had some softening in some commodity prices that weren't anticipated, and therefore it [came to the] gross margin level.

We have been putting price increases throughout the year, as I've noted. Our most recent ones were put into play last month. We had a price increase at the end of September, and then we had an adjustment on our freight price during the month. Then last week, we had another price increase in the month. These are more selective price increases rather than across-the-board price increases, so they aren't necessarily additive to the September price increase -- a couple places they might have been, but for the most part, we were going in and making adjustments to what we felt we needed to do by product by product and line by line.

As you note, our gross margin is at a very high level. I don't believe we will hold it quite that high -- sustainable is more down in the 23% to 24% area, probably.

SG&A, as you note, was up for the last three months. Part of that was the fact that we go through all of our bad debt potentials, review each account individually, and make an estimate on it (inaudible) anything that is over 90 days. After we finish the analysis, we have of course a procedure we go through that the auditors use to check to see that we aren't either over or under reserved in an account like that. We talk with the auditors about it, but we basically put in a little safety factor, some more reserve that we couldn't really say where it might be needed but due to the financial conditions that we are experiencing right now, we felt there might be some unexpected problems in that area. So, we did put some money away in reserve for the unexpected.

In the warranty area, we also were cautious in our warranty costs. We know of several warranty issues that we have been pending, and we took a precautionary position on that, meaning that we increased our warranty reserves to cover the unknown in those areas, too.

In sum and substance, we are trying to be conservative and cautious in our reserve accounts, in both the warranty and the bad debt area. That's the primary cause of the increase in percentage. The absolute, of course, is, as Kathy mentioned, tied closely to sales. The remainder of the year is in the 8.5% to 9%, we believe.

We are very pleased with our operating margins. As I said, we think it will probably go down slightly, but not major. The operating for the quarter were 16%, for the year were at 15.6%.

Net income is up 21% to $22.5 million compared to $18.6 million last year. Our CapEx for 2008, we have been telling you all along it's in the $7 million to $8 million to up to as high as $10 million. We still are expecting it to be in that general range, and it's going to somewhat depend upon the shipment of some machinery which we expect to get in the fourth quarter or in the first part of the first quarter, and also the progress payments on the building which we have underway at the present time here in Tulsa, and how fast the contractor moves forward and requires money and so on in that area.

In the area of products and everything, we have, as we have been noted in the past, been moving forward on new product rather aggressively. We've moved forward in a line of smaller chillers. We've increased our air handling business. This is some of our new products, as you might note, those of you who have been with us for a while, and we are getting more involved in those two markets which are new markets to us.

Our split-system business between air handlers and condensing units is growing substantially. As we've noted, we are into the residential market but extraordinarily small. We are just basically trying to overcome any issues that we might have there because, if you follow your residential market, you'll know it's having a substantial downswing and therefore it's a tough market. So, our efforts have not been very serious in that area at this point in time. We've, more than anything, just getting our systems to work.

We have entered a new product line this past few months, what is referred to as a self-contained package variable volume unit by some people in the industry. Other people will call it a floor-by-floor unit. Basically it's building type is largely confined to high rise-type office buildings. So it's somewhere in the fringe market and it's also a portion of the market which is experiencing some difficulties at the present time. We have entered a market but it's not going to have a major impact upon us at this point in time.

Going through the various types of buildings that are out there, I've got a little bit of detail here, and I will just give you some feel. There's a group of building types which are largely governmental-related in some fashion or are driven by governmental issues. These are the education market business, which is usually 1st grade through 12th grade school buildings, although there are colleges and universities involved in it also. There are -- we call it a municipal building or government buildings in general, which is office buildings and various other military facilities and various things which are governmental-type buildings. The third one, which is pretty solid, is the healthcare, and that again is somewhat based upon what government does relative to healthcare issues.

So those three markets, which as a percent of our markets so far this year in the education, was about 24%. The governmental buildings was about 8% and the healthcare was about 11%, or a total of 43% of our market is perhaps a little stronger portion of the market than some of the others.

The other ones are kind of on the flat to slightly off -- would be launching at about 9%. Manufacturing is off; it's about 11% of our business, about 20% is retail, which is soft, and 17% of office buildings, again which is soft. So about 57% of our market is soft and 43% is not so soft.

So it really comes down then to looking forward. What will our new products and all the things we are doing marketing-wise do as far as getting us increased market share in a market that we think, from availability, is off somewhere between 5% and 10% with some of them being pretty flat and some of them being off more than that? The belief we have, at this point in time going forward, is we are going to be able to offset a large portion of that downturn. The degree we're able to is a big question mark.

Stock repurchase program -- let's discuss that for just a moment. For the year, for the calendar year, we have repurchased -- or going back last year, in the fall of the year, we authorized approximately 1.800 million shares to be repurchased. In the calendar year, we have repurchased thus far 1,171,272 shares at a cost of $24,136,467. Of that, we repurchased in the third quarter 326,474 shares at a cost of $6,813,600. So, we have been very aggressively marketing, going after the market. We have remaining 107,742 shares which are purchasable under our authorization of last year.

I now would open it up to questions.

(Operator Instructions). Frank Magdlen, The Robins Group.

Good afternoon and congratulations on a very nice quarter. A couple of questions -- short answers, I guess. What is the actual backlog? You gave us a percentage decline and I was wondering if you actually had a number in mind.

Yes, I do, just one moment here. Where do I have it? My actual backlog, as of September 30, was just about $53 million.

All right. What is maintenance CapEx now, Norm? You spent quite a bit of money on building out your plant and you new product designs, but what is the maintenance CapEx going forward?

If I pulled in everything, I could grow the Company quite a bit. By "quite a bit" I'm going to say 20%, 30% over what we are doing now without having to have significant capital expenditures. The ongoing is probably in the $2 million to $3 million area.

$2 million to $3 million is maintenance CapEx. Do you have an idea? I realize you mentioned that their CapEx for the fourth quarter, some of that might -- the physical project itself might slip into the first quarter of next year, but do you have a rough estimate of what you think you're going to spend in '09?

At this point in time, it's very cloudy because of the cloudiness of what's going to happen next year. We believe that we're going to see that 5% to 10% slippage in our served markets, but we're going to take it as it comes.

My general feeling is we would probably spend anywhere from that maintenance cost to, if we feel pretty comfortable in doing it, we've got one more building project we would like to do here for a warehouse in the Tulsa facility, and put that into the mix, we would probably be in the $7 million to $8 million next year.

Okay. Then what's happening in Canada? How did you do up there, revenue and maybe operations-wise?

Canada is still suffering from two things -- one, the exchange-rate problem, and number two, our pricing it up to where we could hopefully get it making money. It is not yet making money but it is down considerably in where we are. As far as sales at the present time, the backlog in Canada is such that we are down about $3 million to $4 million from a year ago, and that most of the difference -- we are down, I mentioned we are down about 5% in the backlog from a year ago. It's all in the Canadian backlog; it's not in the Longview nor the Tulsa backlog. They are pretty much where they were or a little bit higher.

If you could give maybe the revenues out of Canada for the quarter?

Revenues for the quarter, roughly a couple of million.

All right. I will step back in queue, but it was a very nice quarter. Thank you.

Joe Mondillo, Sidoti.

I just have one question actually -- if you could just speak on your placement business versus your new construction business, how that's been playing out lately and where you see that playing out going forward.

Well, it's been still holding in at about 45% replacement/55% new construction. It will depend somewhat upon the character of the business this coming year.

What we see happening, generally speaking, if the market gets very strong, we will tend to run more towards the new construction portion of it. If it tends to get weaker, we will run toward the replacement market; that will grow. The reason for that being, as I see it, when business is good in the new construction market, the contracting profession will be very busy doing new buildings and they won't be pursuing replacement business quite so much, because I think they do better on the new construction business than they do the replacement in general. When things are tough, they go out and pursue the replacement business more.

A lot of the contractors do service work, so they have a clientele and they have buildings that are getting older, and they are aware of jobs that need replacement. So they will go try and convince, in a downmarket, try and convince the building owner that now is the proper time to do a replacement because of the slowdown and they are not so busy and their price is a little more competitive to do the replacement at that time, as well as maybe the equipment might be a little more competitive.

So up until now, have you seen those two markets more or less performing the same?

Yes, there's been a slight direction change toward the replacement market, but it's been very minimal so far.

Okay, thanks a lot, Norm.

Jon Braatz, Kansas City Capital.

A lot of the companies that I talk to really have seen a sharp slowdown in business, in order levels, and it's a broad spectrum of industrial businesses, and a sharp slowdown from September and into October when the financial markets really plummeted. Did you see anything different in maybe your order rates, your activity levels, your interest levels, different than maybe what you were seeing prior to of all this financial mess?

Yes, I do. In talking with our representatives, who are probably our best -- we can look at the statistical things that get reported about what new permits and all those things, but the things that tell us more on an immediate basis is talking with our sales people. Basically, what they're telling us at this point in time is they are still quite busy but a lot of the jobs are not being contracted for. In other words, they are bidding the jobs; the jobs are coming on the street to be bid. They are bidding them, and they are not reaching the contracting stage where they are willing to issue orders to contractors or to suppliers for equipment. They are just being held in advance at this point in time. So we see a notable head in that direction. It has, for whatever peculiar reason, not really killed our market. We still are booking -- we booked pretty good business during October, but we hold our breath every day to see if it's going to continue doing it every day.

After those conversations with some of your salespeople, that's how you sort of come to the conclusion or the idea that maybe the markets that you serve might be down 5% to 10% next year?

Well, we use that as one of our things. We also go and look and see the activity level of the architects, how much billing they are doing, because they have -- most of the cases we are doing work with, on the new construction at least, on jobs that they are designing and we see how they're doing, how busy they are. We also check back on their activity and the consulting engineers who really do the type of equipment we are doing, find out what their activity level is from what our reps are seeing.

So we look to see a little bit further down the road that way, and then there's an FW Dodge and there's some other reporting services that tell us what permits and things are being taken out and all. We take all of that and put it together, and try and determine what I discussed here earlier about what we see in softness and what markets of ours are soft and what are our stronger ones. That's what I was trying to put together there for you.

All right, that's great. And then one last question -- you talked a little bit about additional bad debt accruals and warranty accruals. Were they significant? In particular in the warranty area, you said you had a little bit of warranty issue or I guess concern or something like that. Can you elaborate a little bit on that?

Well, you always have some jobs that have a problem, and the contractor will say the problem is so much your problem and so much my problem, and the total problem is so much. That's always somewhat a negotiable, debatable item as to who is really at fault when there is a problem. So we've been a little on the cautious side in saying, okay, if this person, sometimes they come up with these numbers by virtue of the fact that they are having financial problems, and so they try and push the stuff toward you. Knowing that's the case, sometimes somebody who would negotiate more equitably, I guess with you, becomes a little less negotiable. So we took a cautious state in that because we recognize some of these people may be having financial problems.

The additions to our reserves -- our warranty, we are in about $300,000 more than we would normally expect at this point in time. In our bad debt, we are about $0.5 million in the fear factor, okay? If, of course, as things go forward, that isn't required, it will head back to the bottom line. But if our worst fears are realized, that money will be used.

All right, Norm. Thank you very, very much.

Kyle Arnold, Tulsa World.

Norm, I was wondering if you could talk a little bit more about the commodity prices, the drops in material costs, and what kind of impact or change you see going into this next quarter.

Sure, we can. Part of our improved margin, as I said before, was due to the fact that some of our cost increases didn't occur that we had anticipated when we put the price increases into effect, so the two main places that that's really occurring is in copper and in steel. In copper, just a moment, and I will give you some actual numbers here that are more relative. In the second quarter, our copper prices were running between $3.69 and $3.94 per pound. In September, we were paying $3.14 a pound, so that's a significant copper reduction.

In galvanized, we were running, in the first 10 months of '07 for instance, at $0.45 a pound, and went up to $0.50, $0.51 at the end of last year. It went up every month in the beginning of 2008 and it got up to $0.71, and then in the third quarter, it started getting soft and we expect a further softening in the fourth quarter. So the commodity end is doing that.

On the manufactured products that we buy, like motors, compressors and those types of things, those people I think are running behind and getting the cost increases to their customers, us being their customer, that they think they need to have based upon their previous cost increases. So those people are still looking for pretty sizable price increases. So on the commodity side, it's softened, but on the finished-material part of what we buy, it is still staying in there about where we thought it would.

Thanks.

[Graham Ryan], [Barris] Capital.

Hi, Norm. Congratulations. Maybe this is a question for you, Kathy. I know you guys use a revolving credit facility to fund a lot of working capital. Is there any chance in this credit environment that you would have to revisit those terms or lose access to some of that capital?

No, we don't believe so. Usually, any borrowings that we have, Graham, on the revolver is usually just short term. As you can see, at 9/30, we had $2.4 million borrowed against that line, and yet by the October 6, we had paid that off. So a lot of times, it's just used for timing, maybe of receipts from customers and that type of thing.

Right. Is it becoming more expensive, or are the terms identical to what they were a year ago?

They fluctuate up and down, but they are closer to what they were a year ago at the end of September, the rates.

Norm, given that I think you described it as a cloudiness for next year, do you still think that the share buyback is the best use of cash at this point?

It's a good question. We are going to be doing that on a day-to-day basis on deciding just like everybody else is in the financial world right now.

If we go forward, if everything goes the way we hope to and go forward, we will be, at the end of the year, anywhere from somewhere around no borrowing to maybe a couple, $3 million, of borrowing. Some of that will of course relate to whether we buy stock. As you note, if you've priced it against where we are, we are a little less than a couple of million dollars. We will use up all the rest of the authorized stock that we have to buy.

So we haven't made any determination for sure. We are watching the market just like you and watching everything and trying to make decisions.

We don't have a lot of other places to put the money, and so, if we get the extra money, we won't be looking at putting it where there's very, very little return on it.

(Operator Instructions) Frank Magdlen, The Robins Group.

Norm, I think you answered it. I was going to ask you if you would go to the board and ask for an additional or a new authorization to buy stock back.

That was a question. We had quite a prolonged discussion because, as you notice, for the size of the company, we bought back a lot of stock this year. If you go back and take in the end of last fall when we -- since the time we authorized the buyback, it's quite a bit over $30 million worth.

So we recognize that we have to consider whether, as the other gentleman asked, is that good use of our capital? We've had that discussion in the board meeting just earlier this week, Tuesday as a matter of fact. The discussion was that there wasn't a big question right now, that we were not going to authorize any at yesterday's meeting -- that if it comes to the point of doing that, it will not be done until the next meeting, which would be in March of next year. The decision about buying back they left in my hands to make that decision based upon what I thought was a smart use of the capital or not. So that's where it was left as of yesterday.

Thank you.

[Tom Claudus], Graham Partners.

I'm new to the call. Just two real quick questions -- did I hear you correctly in that you are guiding to 8.5% to 9% for SG&A for Q4?

You did.

Okay. Then is there any way to quantify your price versus volume for the quarter?

You mean as far as how much of that increase, that 12%? Yes, well, it's kind of a rough feel. About half of it was priced-related and about half of it was actual volume-related.

Mr. Norman Asbjornson, with no further questions in the queue, I will turn the call back over to you.

Okay, well, I'd like to thank all of you for participating and listening into our third-quarter report for 2008. I look forward to talking with you again in March of 2009, and hope that we've got a good report to give you at that time.

At this point in time, you know, everything is in very good condition in the Company. Our whole concern is the same as yours -- what's going to happen in the marketplace.

So with that, I will talk with you later. Good-bye.

That does conclude our conference for today. Thank you for attending, and have a wonderful day.