Aaon Inc (AAON) 2009 Q2 法說會逐字稿

Welcome to the AAON second quarter 2009 sales and earnings conference call. I will now turn the call over to the President and CEO, Mr. Norman Asbjornson.

Thank you, Dawn. I'd like to read a disclaimer before moving forward. 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 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 introduce Kathy Sheffield, our CFO, who is with me and will handle the first part of our conference call this afternoon and go over the second quarter numbers.

Good afternoon. Welcome to our second quarter conference call. I'd like to begin by discussing the results of the three months ended June 30th. Our revenues were down 8.3% to $68.6 million from a high of $74.8 million a year ago. The decline in sales is primarily due to the tough economic environment that we are in and lower sales from our Canadian operations. In spite of lower sales, our gross profit increased slightly .6% to $18.1 million or 26.4% of sales compared to $18 million or 24.1% of sales. Now the slightly higher margin was primarily due to the benefit of lower material costs continued labor and production efficiency. And that was achieved despite our Canadian facility closure expenses which affected the gross margin by $629,000. Our selling general administrative expenses increased for the second quarter by 11.5% to $6.8 million or 9.9% of sales from $6.1 million or 8.2% of sales. The increase in SG&A was primarily due to an increase in warranty expense that was related to higher trade sales, increase of bad debt expense and a general sales related expenses.

Our operating income decreased by 5% to $11.3 million or 6.5% of sales from $11.9 million or 15.9% of sales. Net income decreased by 9% to $7.1 million or 10.3% of sales from $7.8 million or 10.4% of sales. Our diluted EPS was $0.41 per share versus $0.43 per share a year ago. Those calculations were based upon 17,315,000 shares versus 18,145,000 shares a year ago. If we look at the six months, our revenues were down 5.4% to $132.6 million from $140.2 million. Our operating income was flat at $21.7 million or 16.4% of sales against $21.6 million or 15.4% of sales. Net income decreased 2.8% to $13.8 million or 10.4% of sales from $14.2 million or 10.1% of sales. Our earnings per share on a fully diluted basis for the six months is $0.80 per share on 17,325,000 shares versus $0.78 per share or 18,302,000 shares.

If we look at the balance sheet, we'll see there are current asset ratio was 2-1. Capital expenditures year-to-date were $5.8 million and that related to equipment purchases to increase our production efficiency. We also have a building addition and a building expansion, both of which are in the Tulsa facility. Our shareholders' equity per share increased to $6.21 compared to $5.61 last year. We paid cash dividends of $2.8 million declared dividends of $3.1 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?

Sales were down 8% for the quarter and 5% for the six months. Decrease was primarily related to lower volume in Canada and a tough economic environment. We had excellent response to our new products. The two new ones which we introduced most recently was the midsized book top unit from 16 tons through 30 tons in November of last fall. And then in June of this year we introduced the 8 through 15 ton version both of which were very well received by the industry and some of our leading volume products at the present time. We've had pretty good strength continuing in the education and the medical segment markets. No particular other segment is growing well. We have had an addition and some brand new products and new industries we've not been involved in very much before, mainly a chiller, a small tonnage chiller, out of our Longview facility and some work in our new air handling units that we've not been involved in before.

Our backlog at June 30th was $46,126,000. Our incoming order rate has been very soft. To give you a quick rundown of the year-to-date, at the end of April, we were a little over $5 million ahead of where we had been in the previous year, the corresponding time. And since then we have fallen behind and running somewhere in the 10% to 12% down for the year. So it's been a noticeable downturn since April. At the present time somewhat stable, but it's stabilized at this lower level. At the present time, I do not see an upturn occurring in the commercial building market. We've been able to negotiate the market much better than our competitors have. We've reviewed their revenue for the year and find that typically they are running somewhere around some 20% down on their revenue stream in the second quarter, all of our major competitors. And so we expect that it's going to stay down since the two sources that we also look to to determine what the forward thinking is the architectural billing numbers to show whether the architects are actually designing additional buildings more than they normally have. And the other area is to listen to our sales people and survey our sales people with great regularity to see how the type of work is that is on the planning boards at the consulting engineers and also at the design build contractor market which is not reflected in the architectural billing numbers. All of which would tend to have us believe that we're perhaps approached a level point or a bottom to the market, but does not show us any upturn for the short term foreseeable future.

Gross margins, as Kathy mentioned have been improving. We are, of course, subject to having an increase in raw material costs as demand strengthens which at some point will occur. The concern that is out there, of course, is that we're part of a world market on commodities. So the rest of the world if they start strengthening on commodities, they could increase commodity costs and thereby most of our material costs could go up. Now similarly, however, if we start improving faster than they do, it will tend to hold our raw material costs down and give us a benefit ongoing.

Labor costs are very stable at the present time as you might imagine with the unemployment climbing and the production efficiencies have remained very strong. So that portion of our cost structure is more stable. We anticipate, therefore that the gross margin based upon what we see at the present time we believe for the balance of the year we should be somewhere around 24% barring any major material costs increases or decreases.

SG&A expenses as a percent of sale were 9.9% for the quarter and 10.0% for the six months. Now this was primarily due to bad debt related additions that we put safeguarding our reserve in bad debts due to the economic environment and related sales expenses.

Now, we'll project the SG&A expenses for the remainder of the year to be approximately 9%. Net income was down 9% for the quarter and 2.8% for the six months. Our second quarter of 2009 was 7.1 million compared to $7.8 million last year. During the six months we're $13.8 million compared to $14.2 million last year. Cash position, the strongest it's ever been in the history of the Company, we're sitting at the end of the second quarter at $13.8 million. That is being kept up there due to the uncertainty of the marketplace. New products and what we're doing in those areas, we are as I mentioned, expanding our chiller line and our Longview facility into smaller chillers and complementary air handlers. We've expanded our split system which is an air handler and a condensing unit offering. As we talked many, many times, we do have our foot in the residential door, but we're not pushing forward with it because of the very competitive nature of the residential business at the present time. So, we're into the market, but we're more just in there and learning a few things and getting things straightened out. We're not pursuing it seriously because of the very competitive nature of it at the present time.

We have entered the new market as mentioned before on what is typically called a four by four unit which allows you to go after high rise buildings with one of the more popular systems that is used on very high buildings. And I'm talking buildings of 50, 60, 70 stories high. So that's a new addition to our capability. And we have been getting some orders for them and very successful jobs thus far, but the high rise building market is not booming at this point in time. So it's not a big market for us at this point in time.

Replacement market does appear to be a little stronger relatively speaking than the new construction market. As we've mentioned in the past, there's two portions to the replacement market, the plan replacement and the unplanned replacement. The planned replacement, we do quite well in. The unplanned replacement market we do not do well in. By design of our marketing effort, that is covered by basically carrier in York most seriously. And the rest of us are more in tune with the new construction market.

The tone of the various types of buildings that we're in hasn't changed materially since the first quarter, at which point I advised you the commercial retail does not look very good. Office buildings is perhaps a little better, but it's not very strong either. Medical and healthcare is pretty decent shape. Education market is pretty good shape. Manufacturing is not. Lodging is reasonably good and municipalities and governmental buildings of that nature is pretty good. The miscellaneous other types of market is miscellaneous and very tough. So the marketplace is not a very welcome thing in the commercial market at the present time.

The outlook for the balance of 2009 in sales is about where we are in the second quarter relative to last year. We'll probably be about similar situation for the balance of the year relative to last year at best. It's very difficult to see where it's going, so it could go down materially or up materially.

Capital expenditures, as we mentioned were a little less than $6 million through first six months, but we still intend to be somewhere in the $7 million to $8 million for the year in total. Question relative to our necessity to go into capital expenditures going forward, all this additional couple million dollars is doing is a little bit of equipment and basically finishing off work we're doing at renovating the building the portion of the building which previously was leased out. We're putting in new floor, putting a ceiling into it and new lighting. And that is ongoing and that will consume most of that additional capital expenditure. On a forward basis looking longer than the rest of this year, we are in a position where we could keep our capital expenditures at quite a low level and still perform very well if the market stays tough. I'd now like to open it to questions, Dawn. So if you would open it up, I would appreciate it. Thank you.

(Operator Instructions). We have a question from Joe Mondillo.

Good afternoon, Norm, Kathy.

Hi, Joe.

Hi, Joe.

Norm, it sounds like you're basically saying that you think sales have sort of approached a bottom here in your downturn. How do you come to that conclusion. If you could just give a little more color on what you're seeing, especially going into July. Sounds like you're seeing some sort of stabilization?

It appears that we are. There's a conflict there. The architectural building thing would tell us that it's still going down and yet the word we get from the people out in the marketplace is that they think they see some strength starting to occur. So I've got a couple confliction there in what I'm hearing.

Okay. Also I missed what your backlog was. Could you repeat what that is?

Yes. The backlog as of the end of the month or end of the quarter was $46,126,000.

Okay.

Which is similar level to what it was in the first, end of the first quarter, in fact, a little bit higher than it was at the end of the first quarter.

Okay. And if you could talk about are you seeing any benefits from the stimulus package at all yet?

I think as far as I can tell, it's nonexistent.

It's nonexistent. Any insight or can you tell when that's going to, when and if that's going to benefit you guys?

I would surely hope that I'd start seeing some of it, but thus far anticipation it was announced that we were going to get a big jolt and of it really going to come in big time back when it was passed and the jolt is yet to be seen. So I'm losing faith in there ever being a big jolt.

All right. Okay. And then you sort of touched on the fact, on replacement versus new construction. I sort of missed that. Could you just give a little more color there on what you're seeing in those two markets.

Yes. The replacement market, it seems to be running a little bit stronger than -- it hasn't suffered quite as much as the new construction market. Probably because the necessity to replace isn't one that they can choose to do. They pretty much for the most part have to do it because if it's a planned replacement, they can spread it out a little bit, but unplanned, of course, it needs to be done when it fails. And that seems to be happening and holding up better as the market than the new construction.

All right. And a majority of your replacement business is planned, correct?

That is correct.

Okay. And then last question, I'll hop back in queue. Kathy or Norm, could you just tell me what's going on at the other income line. It was negative the last several quarters and now it sort of switched to I think a positive number or maybe I'm saying that in reverse. But could you just tell me what's going on there and does it have to do with that rental space that you had there and will that stay like it is at this point going forward?

Other income is primarily made up of two pieces, Joe. It's the currency translation and it is the rental income from the property that we had leased to a third party. That lease expired the end of May. So that rental income we did not see in June and will not see it going forward.

Okay. And how much did that amount to about? Was that about $250,000 or $300,000?

It is about $180,000. Excuse me. It's $57,000 to $60,000 per month.

Okay, okay. Great.

We'll see about 180,000 per quarter.

Okay, great. Thanks a lot.

You're welcome.

The next question we have is from Jon Braatz.

Good afternoon, Norm, Kathy.

Good afternoon.

Kathy, I think you and Norm maybe both touched on it. You talked a little bit about warranty expenses and higher bad debt expenses. And I'm wondering if you just add it to your reserves or are you indeed taking additional hit to your current P&L on warranty and bad debt?

We did take an additional hit on the income statement where warranty's concerned. That's because even though our sales consolidated were less, our trade sales had increased. So that would drive up our warranty expense. That's the only thing that did drive up the warranty expense.

Okay. There wasn't anything unusual, then?

No, there was not.

Okay.

We in the bad debt area we did the increase our bad debt slightly in the second quarter more in the first quarter to accommodate what we were seeing in the marketplace as far as bad debt. The other thing is our sales-related expense. That was the third thing.

Right.

We invest a lot in our selling and there was an increase there. We had some activities of annual things that we have in the second quarter of sales meeting with all of our reps, so.

Kathy, maybe I didn't understand, did you actually take some additional charges to your bad debt or you just added to your reserves?

We took some charges to the bad debt?

Okay, all right.

Which equated to adding and we did add the reserve, yes.

Okay, all right. Was this -- I assume they're just sort of one off type items that took place. Any way to think about that as you go forward? Is there a pattern developing?

No. It was a one off type situation. It was some of our new products from the Longview facility that we had a pretty big job that had quite a lot of problems with it. It was a one time thing. We cleaned up the problems on going forward back when this happened. The problem was one shipped many months ago and we just cleaned it up.

Okay, okay. Was the -- I assume the $680,000 nonrecurrent charge as a result of the closing of Canada was in your cost of goods.

$629,000 was in cost of goods and the rest of it was in SG&A.

Okay.

So $51,000 in SG&A and $629,000 in cost of sales.

Okay. Now you're completely out of Canada. You moved everything to Texas. Correct?

No. We have not left Canada yet. We are in the process. We initially thought that the 23rd of July we would be out, but we actually had some orders settle and got some orders as we made the announcement. So it looks like we'll finish production the first part of September.

Okay.

What we did was we went in and took all -- we settled it out as best we could as far as determining what the costs would be and everything and we took, have taken those charges and that's what we're talking about. And so it's just minimal costs that will be incurred here as we finish off where we are now.

Okay. Now I know Canada is not a big operation, but when you look at Canada relative, when you look out next year towards moving that business from Canada to Texas, do you get sort of a natural uptick in that business just because of all the consolidation and all the stuff going on that you just should see a better revenue out of those, " Canadian revenues" when they move to Texas?

It's kind of a mixed thing. Because that was an ongoing business and the products we were building up there had been in place when we bought the Company. We had a ready going business. What we're doing into Longview and to Tulsa is bringing in the next generation of those products and since we haven't gotten them all completed at this point in time, we are going through a lull in what we're able to offer to do in the custom business. Ultimately it will be a decided plus because as these new products come into being, they are going to be much more marketable than what was up in Canada.

Okay. One last question. Kathy, what do you have remain on your share repurchase program?

We have about 82,000 shares remaining.

82,000, okay.

Yes.

It looks like you bought a little bit during the quarter.

Yes, we did. We had two or three days worth of purchases in June about.

Okay. Very good. Thank you very much.

You're welcome.

The next question is from Clayton Ripley.

Hi, good afternoon.

Good afternoon.

I know you'd talked before, Norm, about the high raw material volatility not allowing you to get into these national accounts and commit long term opportunities national accounts. Could you just talk about that? Have you seen volatility reduced at all and are you able to get, try to get into the national account space?

Well, we did two things. And that really wasn't the reason we got out of the national market. Basically our outside sales which were a little more profitable were growing very quickly. And we had to make some choices about did we retain some of our national accounts which were more competitively priced or what did we do? And we chose to price the national accounts up a little bit and we lost some of that business by doing so. We're now to the point building wise where we could handle it and, of course, due to the market conditions we can certainly enjoy some more of it. We are back pursuing more vigorously national account business. Now what we have done in that regard is if this is a difficult thing for both the national account as well as ourselves because they want to get the best price obviously and we want to give them the best price that we can and not commit ourselves to something that becomes burdensome if costs go up. We've developed a methodology by which many of our national accounts feel comfortable and giving them a formula by which they can reprice their equipment. And then we just have to say we will reprice at the certain time and here's the formula and you can calculate it and we'll calculate it. And that seems to be being received pretty well. So the raw material volatility is not going to prevent us from going after national accounts in the future I guess is what I'm telling you.

Okay. Thank you. And then on the 410A refrigerant are your competitors from a competitive landscape, are they kind of behind you or on schedule with you on that or what are you seeing from your competitors with the new refrigerator?

Since we're in the very final stages of what they have to do and get cut over into the new refrigerant by the end of this year, it's hard to say where exactly they are. From everything we can hear they're having a very heavy burden on themselves for the most part because most of them didn't get as far along as we did. We've been there for years now. And it's a nonevent to us totally, non-important to us. We're down to probably 5% or so with the old refrigerant and all the rest of our market is the new refrigerant. So it's not an issue to us, but I understand from what we're hearing that some of them are struggling pretty heavily with the problem of getting into the new refrigerants.

Okay. And then you said post 2009 CapEx you'll be able to keep that fairly low if you need to if the market dictate that. Does that mean that there's, I guess how much spending is going to be required on the buildout of the new facility past 2009? Is that going to add to CapEx or will most of the CapEx be done at that point?

CapEx for all practical purposes will be done. What will be out there will be replacement things that we need to buy or fix material that has to be capitalized. It will be very minimal. It will just be a few $2 million, $3 million, $4 million or something. I don't know, something quite small is what would be ongoing if the market doesn't go up. So we can see very little capital expenditures required beyond this year.

Okay. Thank you.

We now have a question from Frank Magdlen.

Good afternoon, Norm and Kathy.

Hi, Frank. How are you today?

Hi, Frank.

Fine. A lot of questions have been answered but I'm trying to get a feel for what you want to do with your cash flow here, your strong cash flow. You're not building your balance sheet up. You only have a few thousand shares left in your stock repurchase plan. Will you go for another plan like that or what are you thinking?

We probably, if the market would turn just a little bit, we would go out and buy stock and we'd probably up to the dividend, too. Because we know how to make money if there's just some business to be sold. The thing that bothers me the most is that our political system seems to be obsessed with spending money rather than with figuring out how to create jobs. And most of their spending plans are negative to job creation. And so I don't think we're going to see a big upswing until the political atmosphere changes and they send a different message to the small business people and the people who create buildings and create jobs. And so soon as political establishment decides to worry about jobs rather than spending money, I think we'll probably be ready to start investing in buying back stock and also increasing dividends.

All right. And then just back on the replacement plan replacement, your market plan replacement versus new construction. What, does that break out now? Is it a 50/50 split in what ear seeing or what you're shipping?

Probably. We might actually have gotten over the 50% on replacement. It's somewhere in that vicinity. I don't have a precise number for you.

All right. Well, thank you very much.

Thank you, Frank.

We have a question from Deborah Tinman.

It's Deforest Tinman.

Hi.

Hi. I just had a quick question on the closure charges for Canada that were booked in the second quarter. Are those inclusive of the runoff into September or will there be additional charges in the third quarter?

Well, depends really upon -- you won't be any real big charges of any nature, but the profitability of what we're rounding off is questionable. We are down to just a very few employees, about 30 employees left there. All of our termination costs and everything regarding those employees has already been accounted for. So it really comes down to our operating costs versus our profitability and whether we make money on what this final wrapup is or not. That's a difficult one to call. I would say we have a chance of it being balanced, but also could lose some money on us.

All right. That was all.

Thank you.

The next question is from Bill Weiss.

Oh, hi. The $46 million backlog, how does that compare to the backlog at the end of the last second quarter?

Last year second quarter, 2008 it's down about $20,000 -- $20 million, $18,809,000 I think or and.

Year over year, okay. And with -- you mentioned some softness in the order books since April. Are you having to get any more aggressive in your pricing to generate the orders you're getting now or are you holding firm there?

We're holding pretty firm. Basically there is a lot of price cutting going on as you probably can imagine. Most of our business is pretty solid and we're pretty competitively priced. So the business that we're losing we probably would have lost anyway where the big price cutting is going on. And to understand what I'm saying there, you probably need to think of it in this fashion. The customers who have specific needs of a lot of things that aren't just pure vanilla units, if you will, those orders are staying pretty solid in pricing. All the price cutting and the big shopping is going on in a speculative building market which is minimal product, minimal capabilities and everything and that's not been one of our strong marketplaces. And so therefore, we're not too far engaged in that part of the market.

Okay. And you mentioned some new markets that have opened up for you, a small tonnage chillers and air handling units. As those, if and as those grow out, how do the margins in those product lines compare to the norm?

We always price all of our product pretty much the same. And I'd run on the philosophy that if we can't sell it at that price, then we either have to decide we aren't capable of building a product there or we have to find out what's wrong with what we're doing and correct the product. So all of our products, whatever they are, are going to carry somewhere near the similar margin. So we don't play marketing games. We play with the cost of the product and then price accordingly.

Okay. Thanks for taking my question.

We have a question from Jon Braatz.

Norm, I know you had developed a new product for the residential market. Of course, the residential market has basically collapsed. But as you look about as we get into the season next year, are you planning anything differently? Do you see any reason for some optimism regarding that particular product?

Well, the product we're marketing it now, so we're obviously getting more knowledgeable about what we need to do and how to do it. And therefore, our position, our strength of our marketing strength, is improving all the time. And if the market comes back, we definitely will be able to partake in it much better than we could today.

So we're worrying what -- we're in what you might call a low cost learning situation, also low volume learning situation. And we don't see going much more vigorously after it because everyone who is in that market is struggling with the market and pricing is very, very competitive. Okay. All right. Very good. Thank you.

(Operator Instructions). We have no further questions. I will now turn the call back over to Mr. Asbjornson.

Thanks to all of you for partaking in our second quarter conference call. I look forward to seeing you again in November for our third quarter results. Without more to do, hope that we're all sitting here talking in three more months about a much more vibrant economy than we are today. Thank you. Bye.