Aaon Inc (AAON) 2009 Q1 法說會逐字稿

Welcome to the AAON first-quarter conference call. I will now turn the call over to your host, Norman Asbjornson.

Good afternoon. I'd like to introduce Kathy Sheffield, our Vice President and Chief Financial Officer. Kathy?

We'd like to begin by looking at a forward-looking disclaimer. To the extent that 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 SEC filings, including the annual report on Form 10-K and the quarterly report on Form 10-Q.

I'd like to welcome you also to the first-quarter conference call. And I'd like to begin by discussing the results of the three months ending March 31st. Revenues were down 2.3% to $64 million from $65.5 million. The decline in sales was primarily due to our lower net sales from our Canadian operations. Gross profit increased 7.6% to $16.9 million, or 26.5% of sales compared to $15.7 million, or 23.9% of sales. The higher margin was materially a benefit of relatively lower material costs and, additionally, labor and production efficiencies. While we are quite pleased with the 26.5% margin that we experienced this quarter, we do not believe that it is a sustainable margin and expect our margin to be more in the 24% range going forward through the year.

Selling, general and administrative expenses increased for the first quarter by 10.2% to $6.5 million, or 10.2% of sales from $5.9 million, or 9% of sales. The increase in SG&A is primarily due to an increase in warranty expense and bad debt expense as well related to the current economic environment. While the first-quarter SG&A expense was a little bit higher than we initially expected, we anticipate it to be more in the 8.5% to 9% range for the remainder of 2009.

Operating income increased by 6.1% to $10.4 million, or 16.3% of sales from $9.8 million, or 15% of sales. Net income increased by 4.7% to $6.7 million, or 10.5% of sales from $6.4 million, or 9.8% of sales.

Diluted EPS was $0.39 per share versus $0.35 per share a year ago. Our earnings per share were based on 17,335,000 shares versus 18,311,000 shares a year ago.

Going to the balance sheet now, we see that our current asset ratio was 2 to 1. Our capital expenditures for the quarter totaled $3.5 million. Those expenditures related to new equipment to increase production efficiencies, and also a building expansion in our Tulsa facility. Shareholders' equity per share increased to $5.98 compared to $5.61 last year. And we also paid cash dividends of $2.8 million.

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

Thank you, Kathy. As Kathy noted, our sales were down a little over 2%, primarily due to a reduction in sales of our Canadian operation. We considered the sales to be quite good in a very tough economic environment, primarily due to excellent response to our new products and our redesigned products. The primary strength in our various categories were really in education and medical segments of the building market. The growth that we experienced was primarily in what I talked about earlier, new products and the redesigned products area.

Backlog at the end of the quarter was $43.9 million, and that compares to a year ago at this same time of $48.3 million. You'll note that's down about almost $5 million, $4.5 million. It will also be interesting to you to note the difference in corresponding times for the first -- or the end of the year. The end of 2007 we had $65.2 million and the end of the year in this year, 2008, we had $52 million, almost $53 million.

So we had a significant downswing in the first quarter of last year, more significant than we did this year. And the reason that the more significant this year is the fact that we actually booked business at a higher rate than we did in the first quarter of last year. And therefore, we did not have as big a downturn in the normal downturn winter quarter.

Also, we had a gross margin improvement primarily due to our raw material costs, which did drop. In our purchased material area, which is a significant part of our material part, we did not have a corresponding reduction. It had some up and some down and probably a little bit totally on the upside.

Our labor and production efficiencies that we're talking about is, as I indicated, a maturing situation that has happened to our company. And what is a maturing situation? Well, basically, stability in our workforce at all levels, from top to the bottom of the personnel chart. And people are staying with us and therefore they are becoming better at their jobs. And that is creating a production efficiency. We are not having the turnover we used to have and thereby we're getting better labor efficiency of wherever we were having the turnover before. We're just becoming a more mature, better workforce from one end of the Company to the other end.

The gross margin, as Kathy said, we expect more in the 24% area than the 26.5% area or so. We don't see any dramatic cost increases on the horizon yet. And we don't see any dramatic improvement in the business climate in the near future. We still -- we see a difficult environment going forward for the foreseeable future and we think that the costs of material will stay in the same area. However, the one thing needs to be very much in everybody's mind and that is that the United States is not the big user of raw materials anymore. China is. And so one needs to watch the Chinese market to see if it's likely to pick up and drive raw material costs up. It's my belief, from what I've been reading, that that is a distinct possibility.

The SG&A expenses were 10.2%. As Kathy noted, that was due to increased warranty reserves in both the bad debt and the warranty area. Primarily all that in the bad debt area is due to the uncertainty in our economic situation, whereby we have given credit to people who we believed to be good credit risks based upon all that we know, and based upon our history with them. But, there are a lot of people turning up not to be as good a credit risk as they used to be, and so unexpected things can very easily happen. And we have made provision for the unexpected. Nothing that we know of is going to tell us we should have to have all the extra money we've put in there, but at the same time it would be imprudent not to be prepared for that possibility in our present economic environment.

The other side of it, on our warranty, we are, as I mentioned earlier, introducing a lot of brand new products that we've never been in before, as well as totally redesigned products. And any time you're in that kind of an environment of bringing out new products, the probability of having some problems with mistakes that may have been made of one nature or another increases over when you're just building the same thing you've built forever for a long time. So we've taken together, again, a prudent reserve to allow for that to occur to us.

Net income up 4.7% compared to the year-ago quarter at $6.7 million compared to $6.4 million last year. As mentioned, it's primarily due to the raw material cost and the maturing of our company's workforce.

In new products, we've had, as I mentioned earlier, more growth in that area. And what are some of those areas? Well, chillers and air handlers, split systems, and we just barely started getting into the residential because of two things. One, it is a much more difficult market than the commercial, so spending a lot of effort in that area would not be a wise decision, I believe. And the other thing is that we are taking our time to make sure we don't have any unknown problems in that area. And we're slowly moving forward in it. And as that market becomes healthier, we'll put more emphasis on it and start the growth to accelerate.

We also have gotten a little bit on our new product which is floor-by-floor equipment. And this is a type of a system which is very popular in high-rise buildings, up to 100 stories or whatever. So we've entered a high-rise market with a serious product offering and expanded our product capabilities and our market capabilities.

Let's talk a little bit about the various segments of the marketplace and I'll give you my opinion of what's taking place. The retail and general commercial building of that nature is in a bad condition. It's hurting right now. Office buildings aren't hurting -- that's another category -- aren't hurting as badly, but they are also suffering. The medical and healthcare type of facilities seem to be doing respectably well, as is the education market. Manufacturing is also in kind of a hurting situation. Lodging, pretty good, but it's still not doing real well. And then, governmental facilities -- that is both state, federal, what have you. We're seeing a lot of the money that we're all aware of that has been allocated by the federal government to be showing up and creating some opportunities there. The general other buildings is kind of a little bit on the weak and sick side. The net result of all this is generally it's a tough, rugged market, not down considerably yet, but it is down somewhere in the double digits, I think.

The outlook for '09, the balance of the year -- very hard to tell. Second quarter, because of course we're well into the second quarter and our backlog and everything is sufficient that I can say that it will be a good, not an outstanding, but a very good quarter as far as we can see at this time. And where are we going as far as after that? A very difficult thing to tell -- as I said, I think it's going to be a struggle for the balance of the year. I don't see anything immediately telling me it's going to improve, nor do I see any big downturn going to happen. But all the leading indicators, which is the workload at the architect and engineering level, has definitely been of a negative for the better part of the year. However, a lot of that negative type of building that is driving that is more of a speculative type of building, and that is one of our weaker of segments, any type of purely speculative type of building which is built for somebody other than the owner building it. The owner-driven market seems to be more solid at this time.

Capital expenditures -- you'll note that we had a significant capital expenditure, over $3 million so far. And I'm saying $7 million to $8 million for the year, and that is not a mistake. Most of it has occurred. As we've said earlier, it's a continuation of programs which we began last year, primarily an expansion of the Tulsa facility. And also, we mentioned we would do some machinery, and that machinery largely is in that first quarter. So going forward, the machinery thing will fall off considerably and the building also will be lighter going forward the rest of the year.

There is a possibility that, if things start looking up, we will initiate another building project to further improve the productivity of our facility and the ability of the facility to handle increased growth. But that is not decided at this point in time and will not be decided unless there's a change and then our financial situation gets -- stays real healthy and the business seems to be growing, we will probably embark upon another building program.

The next thing we'll do is open it to questions. So if you'd handle it now and get us questions from the audience, I'd appreciate it.

(Operator instructions.) Joe Mondillo; Sidoti & Company.

Good afternoon, Norm. First off, I was wondering if you could address the bad debt expense. I'm a little unclear here. You decreased it in the fourth quarter and then you increased it here. Are things getting worse? And then, also, could you address if it has anything to do with -- I noticed sales declining year over year, however, accounts receivable increased year over year. Is there any tie between those? And could you just address both those issues?

Okay. There was no, that I'm aware of, no reduction at the end of the fourth quarter. It pretty much was a continuation into the first quarter. There has not been any material change in our belief or what we're doing. And what took place is last fall when we saw this economic problem, we have a way in which we analyze each and every order or account receivable and determine the probability of collecting it. And then we total and come up with what we think a logical bad debt reserve should be. And that's normally, in normal times, what we run with.

Last fall we decided we weren't in normal times and we put a few hundred thousand dollars of unidentified extra reserve in there. And that has carried forward into this quarter as well. And the change in it is that we might have added a little bit more because it hasn't gotten any less uncertain this year than it was last year.

Okay. Great. Second, could you address, just maybe give a little more color in terms of your new construction market versus your replacement market that you're seeing right now?

Okay. Definitely there's been a swing in our sales to the replacement market. And most of that has been driven by the money the federal government is spending on replacing systems for energy reasons. They're out there replacing product which may still be running okay, but is not running terribly efficient because it was built many years ago when equipment wasn't as efficient as it is today. So to no one's surprise, they've released a lot of money to address those places and improve the energy efficiency of the heating/air conditioning equipment. So that has driven more of the market toward replacement market more than anything.

However, I'd also add to that the some of the retailers which are not building new buildings so much have continued to work on energy efficiency improvements and problem jobs where the equipment is pretty worn out. So they've switched their attention a little bit more to the replacement market as well. Net result is replacement market as a percent has probably gone up. Where we were before about 45% on the replacement market, we're probably in the 50%, some -- probably a little over the 50% now.

Okay, great. And then finally, and then I'll jump back in queue, could you address -- you mentioned increased productivity in your labor and your just overall production. Could you give any comments on if your lead time on your products have declined because of that?

Yes, it definitely has -- everything about the operation of the Company has, just in general, improved, not dramatically so, and not for any one given reason. And I plainly attribute it to the fact that everybody has been with us longer. They understand their job better and they do their job better. And there's also, as you might well imagine, some motivation precipitated by the economic conditions. People are more concerned with the health of the Company and they're trying a little harder to make sure we stay healthy.

So all those things combined have improved it. We haven't done anything dramatically to say here's why it happened. It's just the fact that people have been around longer and they're trying harder.

All right. So you're -- in the past you've said that order to shipment is about six to eight weeks. Is it roughly still the -- maybe slightly better?

Yes. It's slightly improved right now. And, however, we're at that turning point in the year when we would expect our order input to begin to exceed our production. And so we normally at this time of the year expect a slide-out of our lead time.

However, we are adding a few people at our facilities right now, to try and keep it from sliding out. Because we don't want to lose orders because we can't deliver when the customer wants them delivered. So we have added personnel rather than cutting personnel. And that will continue as long as the order input stays up there. And then we'll do what we normally do, is let it slide back down by just not replacing people who leave.

Okay. Great. Thanks a lot, Norm.

Graeme Rein; Bares Capital.

Hi. Kathy, is there anything unusual in the accrued liabilities? I'm just looking at the cash flow statement. The cash generation was very strong and a piece of that was the change in accrued liabilities. Is there anything unusual going on there?

Some of those things just normally fluctuate a little bit. It increased more in the first quarter. One thing that changes from time to time is our commissions. And that's just strictly based upon our sales and timing of payment from our customers. So our commissions have increased. Our warranty has increased. And then also our income tax liability, accrued liability, has increased. So those are the three primary areas.

Okay. And Norm, any changes in terms of how you're thinking about deploying cash? I mean, I guess you're carrying a little bit more than you usually do. Is it -- are you still buying back shares, or what are your thoughts there?

Well, we did not buy back significant shares this past quarter. What we bought back was primarily out of the 401. And we are not out in the market seriously going after buying shares back. We're building a cash position at the present time because of the uncertainty of the marketplace.

And we haven't stopped anything on our building program. But because we're finishing it up and now we're down into a lot of the stuff that we have to do internally to get the old building that we're taking over from our tenant ready for the new -- for our use. And the tenant still is finishing out their lease this month. And so we won't really get under way on the renovation until next month on that portion of the building. And the other, the 150,000 foot addition is just in the final wrap-up and, while there's still quite a few things to do there, it's like, if you've ever built a building, you know there's a lot of little stuff that seems to take forever. Well, we're in that little stuff taking forever phase of the building process right now.

And so we're not changing anything appreciably from what we thought about last year other than possibly the fact that we haven't bought back the stock. And we may go ahead and buy that back here in the next few months, or we may not. There's no definite -- we're taking that day by day, deciding what to do there.

Okay. And then, in terms of the new administration, are you seeing any regulatory risks that might be out there as it relates to unions or anything else that is worrisome on that front?

I'm absolutely petrified by the card check idea. I worked my first 28 years with companies that were unionized, largely unionized. And I totaled up the 12 different factories that in some way -- usually a lot of it I was remotely, in that I was a lower salaried person, or lower in the hierarchy on a lot of them. But of the 12 that I affiliated with, two of them were non-union. And at the present time, to my knowledge, only three of those 12 factories are still operable, and two of the three are the non-union ones. And I was involved in several of them that were union that ended up having to be closed. And contrary to what they like to preach about it being a matter of the salaries you pay, it isn't the salaries that I saw the problem. I saw it in the work rules and who is running the company.

And the union -- heads of the union have different motivation then management and the owners have about what they're trying to make happen. And it just positively -- I can imagine if they pass the thing, a union representative coming up to one of my employees and saying, "Sign the card," and the person declining and the union employee saying something about, "Maybe after we're union we'll remember you," or something of that nature. And they will get all the cards signed. It'll be a unionized world. And all you have to do is look at the success of unions in any area. Look at the automotive industry. Look at the steel industry. Look at the television industry. Look at anything. And it just positively scares me silly. So all the rest of things are minor and inconsequential compared to that.

Is there any steps you can take to fend off that risk a little bit or -- ?

We've hired people to educate us in how to better manage our employees. We've had classes on how to manage people better. But, all that being said, all the good management practices we can conceive of, we think we're doing most of them now and we're trying to do even better, none of it will hold -- you know, if that card check passes it won't matter. Because they'll unionize whoever they want to unionize.

Okay. Well, thanks a lot and congratulations on a nice quarter.

Frank Magdlen; The Robins Group.

Good afternoon, Norm, and thank you for another great quarter. At least your shareholders should thank you. I have a couple questions. Can you shed a little more light into what's going on in Canada? And what is the revenue coming out of Canada now?

Revenue is less than $1 million a month, significantly below $1 million a month. We've got it scaled back to just barely surviving. We've got it priced so that the orders we get are profitable potential, but because of the slow volume it's still at best breakeven. And we're sitting there wondering is it -- shall we keep it going or shouldn't we? And it's a day-to-day decision. And it's been looking more dismal every day.

All right on that. Different subject -- how many shares are left in your stock buyback plan?

107,000 roughly.

All right. So that's still available and after that you'd have to go to the Board and get a new plan. Correct?

That is correct. Now, the stock that we buy back either from stock- -- or from the directors or from the 401, that is not included in the 107,000. And we did buy back a reasonable amount out of the 401. We bought back 39,419 last quarter. But that was all from the 401. None of it was from the directors or anything.

Well, does that impact or reduce the 107,000 shares that were left?

No, it does not.

It does not. All right. So that's still available then.

That's correct.

All right. And Kathy, can you give us a little -- what should we expect on the tax rate going forward?

Okay, Frank. Going forward for 2009 it looks like the tax rate's going to be 37%. The reason for that is we are filing income tax returns in more states, and apportionment factors are different in the various states, meaning that the rate is higher in other states maybe than Oklahoma or into the areas that we are shipping in. So looks like it will be 37%.

All right.

Net-net result, if we do better in high tax states, we're going to have a higher rate.

Okay. Norm, two questions -- one, I didn't quite understand what you meant when you talked about the backlog at the end of '07,'08 and then why it dropped. And you talked something about the order intake, but I didn't quite understand what you meant to say.

Okay. Let me give you two numbers here so you'll see it. '07, December 31, was $65 million and March 31 of '08, in other words first quarter last year, it dropped from $65 million to $48 million. All right?

All right. Okay.

This year from the end of December of '08, we were at $53 million and we're now at $44 million.

Okay.

Considerably less droppage and yet we shipped almost the same. And the reason for the less droppage is we booked better first quarter this year than we booked the first quarter last year.

So bookings were much stronger?

Not m- -- yes, somewhat. Not terribly, but yes, they were definitely stronger.

All right. And when you look at what is selling, what -- are people, customers, trying to go to the higher-end product for the energy savings? Or are they -- kind of have more of a "just fix it," which would be the repair side, or, "just give me the cheapest replacement"?

Well, most of the business that has gotten hurt the most, in our opinion, is the more speculative type of building, in other words, somebody going to build an office building on the belief that they're going to put somebody in it or they're going to sell it or something like that. That market has dried up much more than, say, a building that's being built for a particular tenant. And the ones that are being built for a particular tenant, the method -- the thought structure in the person buying the equipment is different. The speculative people are primarily cost-driven people. They're trying to keep the cost down and then they'll dress the building up and try and make it look really nice, which they do, and sell it to somebody. But they're not really concerned with the long-term prospects of it, nor the operational costs of it.

So that's a harder market for us to penetrate than one where the owner is going to be concerned about the long-term on the equipment that goes on it and they're worried about the operational cost and the maintenance cost. That's a better marketplace for us. And so the speculative one is the one that's hurting more than the other and therefore we're not getting hammered quite as much as maybe the total building industry is in that respect.

As far as replacing and everything or fixing units, yes, it goes the whole gamut. As I mentioned earlier, I would say, though, that the replacement market has, relatively speaking, gotten stronger than the new construction market. But on the replacement market, again, you're dealing generally with an owner who's more concerned with energy efficiency and things like that than he is first cost. That's not to say first cost isn't important; it's just not totally the only thing that's important. And therefore, we fare better in that market than we do in the pure first-cost market.

So I guess I might have confused the whole issue here, but the repair market or replacement market is running stronger than new construction. And the owner, building-owner type market is stronger than the speculative type market.

Okay. That helps. And one last question, Kathy. What happened to "other" income? That seemed to have gone up a bit. And I think your lease is coming up soon, but what should we expect going forward?

The difference primarily had to do, Frank, with the currency translation.

Okay. So you're sticking most of your currency down there as well?

That's correct.

Or all of it?

That's correct.

Okay.

Going forward, however, yes, you're right, we're going to lose our tenant. So that's going to impact us in the quarter we're in now. And going forward we're going to lose our tenant.

Okay. And that currency also impacts the assets that you have in Canada. What do you have in the way of assets in Canada?

Approximately $2.5 million.

Okay.

Not a lot.

Okay. All right. Well, thank you very much.

We have no further questions in queue at this time.

Okay. I'd like to thank everyone who came on board with us this time. And I'd like to thank all of our supporters and stockholders who are listening. As you'll note, we have fared pretty well through this downturn. We did all of last year and we're back to faring fairly well this year. Believe we have the ability to hang in there until it turns up. And we're certainly going to be ready to go when it does turn up. We're going to be prepared in the starting blocks and ready to run.

Thank you and talk to you next quarter.

Operator? Operator? Hello? Well, goodbye.

Conference recording has stopped.