Aaon Inc (AAON) 2008 Q4 法說會逐字稿

Good day, and welcome to today's AAON Incorporated fourth quarter and full-year 2008 sales and earnings conference call. Just as a reminder, today's call is being recorded. At this time, I would like to turn the call over to your host, Mr. Norman Asbjornson. Please go ahead, sir.

Good afternoon. Norman Asbjornson here, along with Kathy Sheffield.

Before going forward, I would 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 Private 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 SEC filings, including the annual report on Form 10-K and the quarterly report on Form 10-Q.

I would now like to introduce and turn over the conference to Kathy Sheffield, our Chief Financial Officer and Vice President. Thank you. Kathy?

Good afternoon. Welcome to our fourth quarter and full-year conference call. We would like to begin by discussing our operating results with you, of which those results we are quite proud.

Beginning with the three months ended December 31, our revenues were down 3% to 60.2 million, from 62.1 million. The decrease in sales was attributable to lower sales volume, related to five holidays that we had in the fourth quarter and a partial plant shutdown in December, compared to a very strong quarter that we had in 2007. Gross profit increased 9%, to 13.5 million, or 22.4% of sales, from 12.4 million, or 20% of sales. The increase in the gross profit was a result of product price increases, lower material costs that we experienced in the second half of the year, and production and labor efficiencies.

Our selling, general, and administrative expenses decreased for the fourth quarter by 13% to 4.5 million, or 7.5% of sales, from 5.2 million, or 8.4% of sales. The decrease was primarily caused by a reduction in warranty expense, related to lower sales and lower selling expenses. Operating income increased to 26%, to 9.1 million, or 15.1% of sales, from 7.2 million, or 11.6% of sales. Net income increased to 6 million, or 10% of sales, from 4.6 million, or 7.4% of sales.

Diluted EPS was $0.35 per share for the quarter compared to $0.24 per share the same quarter last year. Earnings per share for the three months were based on 17.338 million shares, versus 18.768 million shares in the same quarter a year ago. Moving now to discuss the 12 month results, revenues were up 7% to 279.7 million, from 262.5 million a year ago. The increase in sales for the year was a result of several factors, including an increased sales volume related to our diversified customer mix of products, an excellent response to many of our new and redesigned product, active marketing and price increases. Gross profit increased to 17%, to 67.2 million, or 24% of sales, from 57.4 million, or 21.9% of sales. The increase resulted from the increase in sales volume, product price increases, lower material costs, the second half of the year, and production and labor efficiencies.

SG&A expenses increased by 10%, to 23.8 million, or 8.5% of sales, from 21.7 million, or 8.3% of sales. The increase for the year was caused primarily by an increase in selling expenses, warranty expense related to our increased sales volume, profit sharing due to increased net income, and an overall increase in general and administrative expenses. Our operating income increased 22% to 43.4 million, or 15.5% of sales, from 35.7 million, or 13.6% of sales. Net income increased to 28.6 million, or 10.2% of sales, from 23.2, or 8.8% of sales. The increase in net income resulted from higher sales volume and improved productivity. Diluted EPS for the year was $1.60 per share compared to $1.22 per share a year ago. The earnings per share for the 12 months were based on 17.855 million shares, compared to 18.927 million shares last year.

Looking at the balance sheet, we see this Company's current asset ratio is approximately 2 to 1. Our capital expenditures for the 12 months were 9.6 million. Those expenditures related to new equipments that were purchased to increase our production efficiency, renovation of an office building, and also a manufacturing building expansion both of which are located in our Tulsa facility.

Shareholders equity per share, as of December 31, was $5.61, compared to $5.29 in 2007. During the year, we paid cash dividends of 5.8 million, and also bought back stock in the amount of 24.8 million.

I would now like to turn the call back to Norm who will discuss our results in further detail, along with our new and redesigned product, and also the outlook for 2009. Norm?

Our sales growth was quite good, in the year, even though there was a weakening of the marketplace, as the year progressed. And it was a difficult and challenging event. We have managed to do it primarily by what we have always done very well, taking market share from our competitors. And that has been done by meeting our customers' needs with niche products at times and with very current technological advances.

One of the primary things that is on the table in our industry right now is the conversion from an unacceptable refrigerant that is used in our type of product into a new green refrigerant. The old refrigerant being classified as a category R-22, and the new refrigerant being R-410. Which has the energy, savings characteristics also and it is a more -- a little bit more efficient refrigerant than the refrigerant which is being obsoleted. As reported numerous times in the past, we have been into this refrigerant for several years, some of our competitors are just now really getting very serious about it, because at the end of this year, it is mandated that no longer will we be building product with the are R-22 refrigerant. All of it will be with the new green refrigerant.

We had some change in our growth pattern because we have been growing our product line with new products coming out. As we talked about in the past, we have entered into more of the older style system, which is still about half of the buildings on the larger buildings, which is called a central system type, with air handling units and chiller featuring and that. And that part of our business has been growing reasonably well. We've also been redesigning our more conventional longer-term product line, which has been our rooftop. And we have been bringing that in to much higher standard of efficiency than the previous one, and bringing in several new concepts into the industry.

The backlog at 12/31/2008 was 52.975 million. Our incoming order rate has continued to be softening on us into the first quarter, not tremendously so, but it has gotten a little bit softer. It is my belief that unless things change, there will be a fairly significant slow down in the commercial and industrial building through the year of 2009, compared to 2008. Our challenge therefore is to do a better job of taking market share and consequently perhaps keeping from having to participate in the deterioration of our volume. The profitability of what is coming in is probably going to stay in there reasonably where we are. It may decline slightly in the year 2009, but we have implemented many things which are proving to be very good at improving our productivity and our ability to cut costs and enhance the product simultaneously.

Gross margins are still holding in there, as you can see they were outstanding in the fourth quarter, and we expect them to do so as we go forward here. Some relative changes, for instance, the cost of sales in the three months just concluded were down by 6.1%, even though we only were down by 3.1% in our sales volume, so we effectively got our cost of sales down beyond what just the back off of the volume was. For the year, on the other hand, our sales for the year were up 6.6%, but our cost of sales only went up by 3.6%, so you can see that we made some significant improvements in those two areas.

Relative to raw materials, copper, which is one of the primary things fluctuated throughout 2007 and continued that fluctuation in 2008. And in 2007, we were dealing with the copper between about $2.4 2 a pound and $3.65 a pound and the first quarter of 2008, it went up above 2007, and it went up to $303.80 to $3.90 a pound. Second quarter of 2008, the price was running a little -- in the same range, at about 370 to 394. The price dropped in September, for instance, down to 314. By the end of December, we had a significant drop and we were down in the $1 or something a pound. So copper was a wildcard in our cost structure during 2008. It has rebounded somewhat now, and it's back up in the $1.70 area, and is most recently been heading up so it looks like it is going to get to be more expensive in 2009. We have hedged a portion of our copper, not all of our copper, and we have already hedged a portion of it.

Galvanized steel was constant in the first 10 months of 2007 at about $0.45 a pound. Jumped up around $0.50 by the end of '07. And in '08, we were running all the way up to $0.71 a pound. Dropping back in the fourth quarter to in the 50s, and it is back down now into the $0.40 and perhaps even high $0.30 a pound. So again, looking promising.

Aluminum, which is not as big an issue to us has also dropped back in cost, so component, I mean commodity parts are diminishing in cost. I don't expect that to hang in there. In fact, it causes me a good deal of concern because of all of the various things happening in our economy, and the -- what we understand to be a backing off of production of copper, steel, and aluminum. If the economy does start to rebound, I would expect a high degree of inflation to hit us in the commodity area. Stainless steel likewise went through the same thing. It is a smaller portion of it, but it went through the same.

The only part of our material cost primarily are in component parts which are parts made up into a finished motor, a finished compressor, switchers, contractors, a variety of other things, and those people building those and selling them to us are affected by the same commodity parts that we're seeing. And consequently, we are able to at this point in time effect a little bit of price reduction by some of them, due to a lessening of material cost increases. Others, however, who don't feel that they got enough price increase when the commodities were going up are quite resistant to any backing off. So commodity -- or the component parts are kind of a mixed bag as far as where the price is going on them.

On the sales end of it, there has been a noticeable deterioration in the price, and there has been some lessening of pricing in the marketplace for the finished product. So it is all balancing out, but it all appears to me to be something that we have the ability to control reasonably well with the general trends being pretty much flat to neutral, and therefore not difficult to manage. Gross profit, let's talk about that for a little bit, we noted that in the three months we were up 12% in gross profit, and the 12 months, I mean the three months and the 12 months we were up 9.6%. It was a little talk by Kathy about the diminishing of SG&A in the third quarter, but in the fourth quarter, and primarily that is due to the fact that in the fourth quarter of 2007, we extended our warranty period time and took -- and put $300,000 of additional money into our reserve, because of extending the warranty period, and therefore, it was an abnormally high quarter, and so it really shouldn't look on the fourth quarter of '08 as being the unusual one. It was really the fourth quarter of '07 that was the unusual one. And you can see that, looking at our 12 months wherein our SG&A expenses actually increased a little bit, compared to 2007 in total.

Going on through here a little bit more, the product mix that we're experiencing right now is, as we've been discussing for quite some time, gradually expanding itself outside of our typical and traditional marketplace of rooftops, and we've gradually growing our Company into other areas of the HVAC market, and that growth has continued to occur. As you would expect, another year older, we're a little bit smarter than we were, from one end of the Company to the other end. We've become more efficient in operating the Company and doing our jobs, and therefore, have effected not just shop efficiency positively but also also overhead efficiencies have become better as we've progressed as well.

We're very pleased with our operating margins 15.1% for the quarter and 15.5% for the year. Net income being up 23% was particularly good and it reflects not just a single area but it reflects all the things we've been talking about. We work on everything and fortunately a lot of those things proved to be fruitful this past year. The strength of the balance sheet is continuing to be outstanding. We are at this point in time basically debt-free. I say basically, occasionally on a daily basis we might bob into our revolving credit but we have no long-term money out there at this point in time.

That kind of comes back to one other thing, and that is we're particularly proud of our return on our average equity, which for last year, return on equity was 29.8%. We think that is kind of an unheard of number in manufacturing environment and we're quite proud that we got there. That has been climbing ever since 2005 when we -- well, let's go 2004, we were 10.9, 15.2, 20.0, 24.8, 29.8, 29.8. I don't think I would want to promise you anything above the 29.8, though. So don't extrapolate. But we do feel very comfortable in thinking we know a lot more about how to manage the business effectively and things -- that part of it is under control. Our biggest concern is that, which I'm sure is on everybody's mind, which is the economy in general.

New products. As I mentioned, we're expanding more into the chiller world and more into the air handlers and in that regard we have expanded our product lines. We've also expanded our split systems, which is an air handler separated from condensing unit we've explained to death. We got our toe in the water and that's about all in the residential world.

And we've expanded into product line which is called the floor by floor unit by some, and what it really is, is a package water-cooled product that is a variable volume air side unit and is used very -- in very large amounts by people building high rise buildings. The majority of the buildings, say, for instance, which have been built in New York City, in the past 20 years, have used this type of a system. We just entered that market. And we have entered it a little different than those who are there already. That type of a system really became a popular system back in the early 80s. And has since grown in popularity on high rise type buildings. And what we designed was a product that was designed specifically as a retrofit product so that we can start taking advantage of the replacement market that is bound to be occurring in some of those units that were produced back in the early '80s. So it is a whole new ball game for us. And we've not been in the high rise market. We are now positioned to start participating in that market. Don't look for there to be a lot of high rises built of new construction, but we think there is a reasonable market in the replacement business.

One of the products which -- that has come on the market that we are pretty proud of is an ability to control smaller tonnage equipment more precisely and save energy with variable volume, variable volume type compressors. So it is not an on/off compressor. It is a modulating that will vary from 10% to 100% capacity. We started using that product line back in the early 2000s, and we're particularly proud of the fact that last year, consulting specifying magazine, which is geared to the consulting engineering profession that designs the electrical, the plumbing and the heating and the air conditioning parts of buildings is who the targeted audience are, and they have a group of judges that judge the best product in 11 different categories that these people deal with from lights to plumbing fixtures to air conditioning to controls and a variety of other things. And we won the HVAC part of that contest. And then they turn the total contest over to their readership, who are consulting engineers, and they vote on which of those 11 winners in those 11 categories is the most beneficial to them.

And we were fortunate in having our product chosen as the winner. And so we won, I think, the Coveted Award in the building community as far as mechanical, electrical lighting fixtures in the year 2008 with that product. We have since expanded its capabilities. Some of these capabilities. And we're moving are rapidly into areas where by we give better temperature control, better humidity control, and most significantly, much improved energy management. Energy reduction. Whatever we want to say, it looks -- it cuts significant energy out of your cooling costs. So that is an exciting thing on our part that we are into, and we're way out in front of competition in it, and it is, while it sounds simple, it is not simple, it does require some experience, which we've gained since starting to use it in 2003, and our competition by and large, we don't believe has much more than just begun using it, if they have even done that, and so they have a big learning curve to go through before they can come after us seriously, which I'm sure eventually will happen.

Business, the tone of business, where is it? Well, we will kind of go down through some of them. Commercial and retail is sad. You can read what the retailers and everything, what their life is like, and it is reflected back in their building plans.

Office buildings, it is not as sad as commercial and retail. The other portion. But it is kind of on the soft side. Then to come to one that is a happier medium, the medical and health care type buildings. That seems to be reasonably strong now. As is education. Education, and based upon what the incentives are being placed out there for education, and also the concern of backing on to the medical side, we expect those two markets to remain strong and maybe even growing.

Manufacturing on the other hand is another weakening area, as is lodging. When we get into governmental buildings, municipal buildings, state buildings, of course, there is a real push to stimulate the market by doing things in those areas. So that will all be positive. We should always remember that approximately something in excess of 50% of our marketplace is replacement business. And there are two sides to that. The unplanned where the equipment fail and the planned which is done because stuff is worn out or it is not energy efficient, or whatever. I think the energy efficiency side of the stimulation that I think is happening is going to have a positive effect on the replacement business, and as I said, that is over half of the business that our type of product enjoys, so half of our business, I look for to be strong in the replacement market, and in the new construction I've gone through that item by item and as you see, there are some significant weak spots and are parts that are pretty strong.

The outlook for '09, good question. And my ball, my forecasting probably is not much better than any of the ones I read and watch on television and in the newspaper, but generally, it is indicating that new construction portion of it will be weaker. We expect to be flat to possibly a little weaker, depending upon how well we're able to take market share.

Capital expenditures for '09 are going to be in the 7 to $8 million range. And basically where that is coming from is we are finishing off the building program which we have here in Tulsa. We've got some work to do there, and we bought one significant additional piece of manufacturing equipment that we've determined will improve our productivity, and we expect that product to be in place in the May to June time frame, somewhere out in that, and we expect the building program to be finished, sometime by midsummer, and consequently, all of our 7 to 8 million will be somewhat front-loaded in the year. Stock repurchase, new program began November '07.

We're undetermined as to exactly what we're going to go back in again. The remaining shares that we have out of that million 800,000 shares that we intended to buy, we still have an open on that 10% of 107,742 shares yet to be bought. We are authorized buy as we see fit and we will be in the market when we think that it is appropriate.

I am open to questions.

Thank you. (Operator Instructions). We will take our first question from Frank Magdlen with the Robbins Group.

Good afternoon, Norm and Kathy, and congratulations on a record-breaking year.

Thank you, Frank.

When we look at this record-breaking year, what did Canada do for you and what are your expectations for Canada?

Canada diminished considerably in volume and in importance both on the top line and the bottom line throughout the year. We have been trying to correct all the numerous issues that are up there. It hasn't yet gotten corrected. It is down to the question of, how is it going to, or isn't it going to, and that decision isn't too far off.

And is it fair to say it was not profitable in '08?

It is fair to say that.

And also in the fourth quarter?

That is correct.

And of your backlog, approximately 53 million in backlog, how much of that is from Canada?

A couple million.

A couple million only? So in spite of Canada, you had a record year?

That's correct. It would have been better if, we would have had some positive contribution up there.

Okay. Kathy, can you tell us approximately how many shares you repurchased in '08?

In '08, in total, which is both the open market and our 401K buyback program and our director buyback program, it was a total of 1,211,538 million shares in 2008.

Okay. And that's from all three sources. So of the 24 million that you spent on the open market -- but that includes your directors buyback, too, isn't it? That is everything?

Yes.

That is what the 24 million went for. Okay.

That's correct.

Well, Norm, what do you think of, your industry's practice now, you spent three or four years trying to get your margins back and I think the industry worked pretty much in unison. At least what I could see people put price increases periodically. You think the industry is of a mind set to maintain their margins?

I am of the opinion that the industry has by and large matured considerably over what it used to be. We used to have people who thought some way magically that if they had volume, they had profit, and I think that pretty much is finally gotten out of the industry. I don't see that kind of stupidity going around like it used to. It used to be prevalent. And I used to kind of wonder if I was in with a bunch of kids at times. But I don't see it any more, and I am very thankful that they fight it out, trying to be profitable, rather than just give away stuff. And so I believe that at this point in time, even though it is tough times, I haven't seen that type of tendency on the part of any of the manufacturers that we're competing with.

All right. Thank you. I will just drop back in queue. But thank you.

And we will take our next question from Graeme Rein with Bares Capital.

Hi, Norm. Congratulations on a great year.

Thank you. I got a couple of questions for you. You mentioned you just had your toe dipped in the water on the residential units. Are you -- what's your plan there? Are you just sitting on the sidelines until that market improves or are you kind of strategizing on how to take existing share right now? We're right now working the kinks out of our methodology and doing a few things just to get going. We're not putting any real push to it because the market is in such condition down there, due to the reduction in volume which is still falling in there, that we don't think we could profitably do something serious about that market at the present time, other than get ourselves in position so that when the market turn occurs, we're ready to go.

Okay. And do you feel good about the product that you have ready to go?

Oh, yes. See, we're using the product presently in the commercial world. What we lacked was not product. What we lacked was marketing methodologies. And so that is what we're cleaning up. The product itself is being sold in the commercial world on a regular basis.

Okay.

Because see, we're not in like a furnace part of it. We're' in the air conditioning portion of it. And that is equally applicable to the commercial business.

Okay. Are you worried at all about suppliers of your commodities, galvanized steel and copper, or do you have multiple suppliers you can go to when you need it?

I am worried because I hear of a lot of shutdowns by various manufacturers or miners or suppliers of those commodities. In other words, mines have become unprofitable at the present level or something, or they're going to hold on. They just park a everything and quit functioning. And so I am concerned because if will is a turn, if it is a fairly rapid turn, these people have got to crank those operations back up again, and of course, when that starts occurring, it will be a lag effect and there will be a lot of wild volatility in the price market, I'm afraid.

Okay. And then the last -- when you look at your product line, which are the products that you still have to kind of redesign and upgrade to the foam cabinets and all of the other features that have you on some of the newer products?

Well, we're down, we're all the way down from 230 tons in the rooftop line, we're from 230 tons down to 15 tons right as we speak right now, and we're taking orders on the next drop down which takes us down to eight tons. That will go into production in another 45 days. And so we're taking orders in now for it. And the last size in the rooftop which will take us from seven tons down to two tons will happen this summer, at which point in time we're completely redesigned from top to bottom in the rooftop.

On the air handlers, we're pretty much done with the basic design, all the way from top to bottom, on the air handler, but that hasn't been our strong market. That has been a new market. So we've got a very current product that has some finishing touches needing to be done occasionally and that we don't quite do some things as well as we should, and we're doing those things, but by and large, we've got a new product line already in that, and it is more marketing problem than it is a design or manufacturing product. And those are the two basic products that have that foam cabinet construction.

Okay. Great. Thanks for taking my question, norm.

Thank you.

And we will move on to Joe Mondillo with Sidoti & Company.

Good morning, Norm.

Good afternoon.

First off, you gave us a sense obviously on the new construction side of the business. Could you give us a little color on how the replacement side of the business will pan out in an environment like this?

Well, there's unfortunately -- unfortunately, our new administration is still running an election, more than they're running the business, I'm afraid, they're bad mouthing, doing a lot of bad mouthing which is causing a lot of concern on the part of a lot of people. For what reason, I don't understand. But it has caused people to close their billfold and even replacement market is affected by that. Now, people have to start getting confidence back before that market really gets going, but my suspicions are that if they can get the economy back to thinking more positively, that that market will not just go to a good market. I think it could go to a very good market. And the reason I would say that is that the new construction requires architects and engineers to do some design work before it could even begin to blossom. In other words, there is a lot of work to be done before the business can really start moving.

The replacement market on the other hand, all it has to do is get a competent owner to say I think I better replace those products now and get going and it is almost an instantaneously thing and that will get more attention by the contractors because that is something they can make money quickly once things turn. And so I look for the replacement market to be probably in total about as good as it was last year, and with the possibility if there gets to be some confidence, that it could be a booming market comparatively speaking. I don't look for the new construction to be able to reverse course that fast because of the upfront work has to be done.

It seems like a lot of companies in this environment are completely cutting back their CapEx though. Does that concern you at all if they're cutting back their spending, how does that make you think that your replacement business is going to be as good as 2008?

Well, of course, their CapEx is -- can be in two ways. It can be in new machinery, it can be in new buildings, and then it is in replacement of the existing, and I think when it gets down to it, because a lot of the things that are out there today, whether it be for Mayon or any of our competitors are much more energy efficient than the equipment that they would replace. And so the smartest place for a lot of people to put whatever CapEx out there immediately will be in the replacement portion. And that's why I feel a little more strong about that. I do recognize that there is just a general backing off all over the place, and that is obviously a concern to all of us. But I think some people will go ahead and if things turn bright, I think they will change their mind about how much they spend in their cap ex, if things get to be a little brighter picture. But first of all, it has to happen, is we have to get some more positive thought and actions. They have to make some presentations that everybody buys into better than every time they make a pronouncement, have the stock market drop by 300 points. As long as that is occurring, we're in a serious world.

All right. How much -- how about concerning the quarter that you just released? How much did pricing add to the top line?

Not really an awful lot. Because most of our pricing occurred earlier in the year. It did relatively to 2007, but as far as to the sales and everything compared to 2007, it was probably 6% or so. But as far as by the time you got to the bottom line, it wasn't really the -- that wasn't where the money came from. The money came from the productivity and the falling commodity prices is where the money came from.

So if -- so you're saying pricing added a plus 6% in the quarter?

No, from the year, from '07 to '08.

Okay.

That was about -- about 6% of it was in pricing.

Okay. And then last thing, how about your cap ex for 2009? Any idea on what that is going to look like?

Yes, 7 to 8.

7 to 8?

And that's what I said, it was -- most of it would be front-loaded. One major $1.700 million piece of equipment and the rest of it is either in routine, many things that no big issues, or finishing off the building here in Tulsa, and that will be what will comprise 7 to $8 million. So we will be not spending as much as what we're getting in depreciation. Which is more in the 9 to 10 million area.

All right. Great. Thanks a lot, Norm.

You're welcome.

And we will take our next question from John Braatz with Kansas City Capital.

Good afternoon, Norm, Kathy.

Hi, John.

Two questions. Number one, norm, you mentioned I think by the end of this year, early next year, the new refrigerant will be standard equipment across the industry, and if I'm correct -- am I correct on that?

Yes, the law says that you can't ship anything after the end of this year.

Okay.

Or can't build anything after the end of this year for the new old refrigerant rant. It all has to be for the new refrigerant.

Okay. I think you made a point that you've said that you benefited from let's say the early adapters getting ahead of the curve. Now when the change does indeed happen, your competitors will then be selling a similar product. Will that negate some of your competitive advantage? And would you see that in terms of maybe some lost sales to competitors who now are selling the correct refrigerant, so to speak?

Yes, here is what I would -- what I anticipate to happen. The changeover is a pretty demanding thing. And pretty costly thing. And it takes -- it is an educational process also. We started doing this oh, heavens, back before -- back in the 1990s, in fact, we began doing it, and by the early 2000s, we were deeply into it, and we have been working it for a lot of years. And so it is hard for me to put a dollar value on the experience or on to what all we spent doing it, but it was significant to both experience and in dollars. And for whatever reason, it appears that they have delayed several of the very large companies have delayed getting very serious about it until just recently, and therefore, they're going to compress into a rather short time frame what we spent many years doing, so I can't really valuate really well how they're going to do that but it is going to cause them a lot of problems for a period of time. How well they manage them, I don't know. And how much cost they go again, I can't really say how it is going to affect their P&L. But they're going to have problems with it.

So it is going to give us an advantage while it is going on, as it has, as we have gotten closer to the date when it had to be implemented. And so I look for the rest of this year to be beneficial to us definitely because of the things they are going to have to do to get into business and that will go on into some period after the end of this year. How long? It is hard to say. I wouldn't expect that it would go on very long. But I do expect it to go on for a little while. At which point in time, you're exactly right. They will be back, it will harm us again, so we are going to get a little bubble here for a while, and then we're' going to be right back on a level playing field and just won't have any advantage at all.

When they bring those, the new products to the market, and use the new refrigerant, are there -- and you've probably -- from your experience, are there warranty issues? Could there be warranty issues that arise that all of a sudden some of your competitors are seeing problems with their equipment? Does refrigerant cause mechanical problems so to speak? Or is that really not much of an issue at all?

Well, here is the biggest issue. The refrigerant R-22 typically runs about 50 to 60% less pressure than the replacement refrigerant R-410. And what am I saying? I'm saying that on the evaporator side, the cooling side, it is going to run in the 70, 80, 90 pounds area, much of the time, on the old refrigerant. On the new refrigerant, it is going to run up into the 120, 30, 40 pounds. And on the condensing side, where as it would run in the high 200s, low 300s, it now is running up in the 3 and 400s and not to go to 500 -- uncommon to go to 500. Well 500 pounds of pressure or 400 pounds of pressure has a number of problems affiliated with it. Number one of which you have to have -- have you to be able to pass -- you have to be able to pass some very safety tests that -- various safety tests that that vessel that has that pressure in doesn't explode. And so there are things that you have to meet. To meet that, what we chose to do, there is basically two ways on the condensing coil to do that. Because that increases the pressure to blow that tube apart. You can either increase the thickness of the wall of the tube, or you can have less probability of having safety in the tube and having it split and leak refrigerant out, or you can make the tubes smaller in some fashion. We chose to make it smaller. We went from a 3/8-inch tube to a 7-millimeter tube, and we bought a huge amount of equipment to manufacture coils that way back in the late 1990s and the early 2000s, we bought several million dollars worth of equipment, learned how to make coils with smaller tubes in it, to keep from having to put more copper in and more material into the 3/8-inch tube to keep -- to maintain our safety factor.

So they the potential of either, when they make their change, going to some kind of a smaller tube, and there are various ways to do that, there are some new methodologies that they might employ in doing that, but it is going to cost money, and it is going to take effort to do it. They can choose to not touch the 3/8 and just have a greater probability of having that tube leak refrigerant. In other words, take away some of their safety margin. Or they can choose to buy more copper into that tube. Those are the only choices. Now then, if they -- they are either going to spend money up front or they're going to take a big chance that they're going to harm their warranty costs and their reputations by using the 3/8 tube with less safety factor in it, in which case, and the new refrigerant is considerably more expensive than the old refrigerant, the old refrigerant right now, I don't know on the open market, I can speak more authority on what it costs us on the volume market, it is, a little over a $1 a pound for the old refrigerant, or around a $1 a pound. The new refrigerant is about $3.40 a pound. And on the market out in the repair market, it is a multiple of that. In other words, you don't buy it for a $1 a pound out at the distributors. You buy it for several dollars a pound. And you buy it for many, many dollars a pound on the new refrigerant. So if you have leak problems, with this new 410, it is a very costly problem.

Right.

So they've got some big problems. And they're going to have to pay money one way or the other. Either up front or else possibly have warranty problems down the line.

So it is a learning curve.

It is a learning curve.

The other question, norm, is you mentioned that you expect a very good first quarter and at the same time you were saying the incoming order rates are softening. Would that suggest to us that, for lack of a better word, the book to bill ratio is going to be less than one in the quarter?

What is going to be less than one?

Your book to bill ratio? Incoming order rates --

That is an absolute truth because it is always is. The cycle we are in the heating and air conditioning, now, is is going to be more than normal? I can't tell you at this moment in time. At this moment in time, I'm saying no, it is not.

Okay.

But that is based upon 2 1/2 months worth of experience this year. I look at that, I have a form in front of me right now, that I can read all of my incoming orders from the year 2005, by month, by product, by plant, by everything, and I can tell that you so far, we have booked business at approximately the same rate as we did 2008 for comparable months. Now, does that mean that is at the rate we're shipping? No, we always ship more than we book, in these three months.

Okay.

Because you can't ship into the northern part of the United States, because the buildings are not being built, because of the cold weather.

Yes. Okay.

But you will still get orders. Now, are you getting orders at the same rate you do later in the year? No. When I will be able to say something much more intelligently about where it is going is at the end of April, because April is normally the year, the month when order input turns up significantly. And so if it turns up significantly, in April, and so far, like I say, for the first 2 1/2 months, it has been right where it has been last year for us. Now I'm not going to speak for the industry, I'm speaking for AAON.

Right.

And if we can turn it up in April, then we're off and running. And I'm doing what I said I think we could do, is hold our own for the year.

Okay. Well, Norm, I will call you May 1, then.

Call me May 1 and I can give you a little better idea.

All right. Thank you much.

You're welcome.

And just as a final reminder if you would like to ask a question, please press star one on your telephone key pad. And we will move on to our next question from Corey McCollum with GMT Capital.

Good afternoon, Norm and Kathy. Congratulations on the quarter.

Thank you.

Thank you, Corey.

A couple quick questions here. The first of which is just a housekeeping question. Can you remind me of -- if we break down the other income line, the swing there between the fourth quarter of '07, I know there was some currency impact, but can you kind of -- if you could, Kathy, maybe break down that swing there? And kind of what we're looking at going forward after maybe some of the tenant income rolls off later on in the second quarter?

The figures I have in front of me, Corey, are basically have to do with the year. I don't really have the quarter numbers. But for the year, the currency ended up being 218,000. And as you might and might not know, the currency has been very volatile in 2009. And in 2008. Our lease expires with our leaser -- or lessee, sorry, the 31st of May, so the income that we get from that which is approximately 60,000, we will not see in the latter part of the year.

And is that 60,000 per quarter?

Per month.

Per month. Okay. Thank you. And then the last question I have is kind of helping me understand the current run rate and put together what Norm, what you said today, here on the call, versus, if I look at the backlog number that was released in the 10-K today, and kind of -- how do I take all of that and try to figure out where we're' going? I know -- and maybe you don't know until like you say, later on in April, till you really ramp up, but is there any way to kind of reconcile that or clarify, try to point me out where we're running at today?

I'm not exactly certain of the numbers you're talking about here, but I will clarify as best what I think you're asking. We're running closer to, as we always do in this time of the year, we're closing down running our backlog down. We're using it up. Because we're not booking as fast as we do in shipments are right now. It is starting to do that to us. So that's getting weaker all the time. Now what you're talking about, the 10-K, you're talking about the 52,000, or 52.974 million that I talked about earlier?

No, I believe in the -- the current backlog as of March 1 was --

45 million.

Right. Versus the prior year, somewhere around a low, low teens decline there. And is that just working backlog down or is that sort of -- could that be extrapolated to a current sales rate differential there? Or how should I look at that number? I don't want to --

We are definitely running -- it is down lower than it was a year ago, at a comparable period, by 13 million or something like that. I'm not working the total math here. That is basically that the customers are taking the product, we're delivering the product, we're ship can the product, and that's one of the -- ship can the product and that's one of the reasons why I'm saying the first quarter is going to be a good quarter.

The second quarter is becoming more reliant upon that upswing that we normally experience in April. If the upswing happens, we're in good shape. We're right where we want to be. Because where we are right now, we're right on top of our customers' orders. In other words, the day they want it shipped, we're shipping it. We're not running behind. A year ago, we were maybe a little bit further, we were running maybe a few -- a week or so behind or a couple weeks behind, where they wanted it, or the weather was such that they weren't wanting it yet. We're running much closer than we were a a year ago. No question.

Okay.

And what does it mean going forward? It means I got to have orders in April.

Okay. Well, thank you. Best of luck.

Thank you.

And we will take our next question from Josh Rozzen with Rushford Capital.

Hi, guys. Congrats on a great quarter. I had a quick question about the strength that you're seeing in health care and education. Just wondering, orders, the magnitude, how big of a portion of your revenue that is, and what gives you confidence that the strength will continue? Thank you.

It is probably, of the new construction market, now as I said, we roughly have been 45% new -- rebuild or replacement market, and about 55% of new construction. Of the 55% that is the new construction, that portion of the market is 40-some percent of our bookings and then climbing. So it may be up close to 50% of what we're doing in the new construction portion of it now.

Is health care and education together?

Correct.

Okay. And just, the confidence that those markets continue to be strong?

Everything I read about where emphasis is being put, and that is governmental money for the most part, it is influencing that, is those two areas are going to get substantial help from all of these stimulus bills in education and in the health care field. So I expect that to continue to stay healthy.

Okay. Thank you very much.

And there appears to be no further questions at this time. I would like to turn the conference back over to our speakers for any closing or additional remarks.

We appreciate your attendance at today's call. We look forward to speaking to you again in May to discuss our first quarter results.

And I would like to thank you for the opportunity of talking with you and I thank you for your support.

This concludes today's conference call. Thank you for joining us. Have a wonderful day.