Aaon Inc (AAON) 2009 Q3 法說會逐字稿

The conference is now being recorded. Welcome to the Aaon Conference Call. I'll now turn the call over to your host, Mr. Asbjornson.

Good afternoon and welcome to our third quarter 2009 conference call. 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 Securities Litigation Reform Act of 1995. As such it is subject to the occurrence of many events outside Aaon's control. It 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 10K and the Quarterly Report on Form 10-Q. I'd like now to introduce Kathy Sheffield, our Vice President and CFO and she is going to begin the conference call. Kathy?

Good afternoon. I'd like to welcome you to our third quarter conference call as well. I'd like to begin by discussing the results of the three months ended September 30 compared to the same period a year ago. Revenues were down 26.2% to $58.5 million from $79.3 million. And the decline in sales was attributable primarily to the current economic conditions which has negatively impacted the commercial construction markets. Gross profit decreased 11.5% to $17.7 million but was 30.3% of sales compared to $20 million or 25.3% of sales.

Now higher margin percentages were primarily due to several factors. One being the benefit of lower materials costs, improved labor and production efficiencies and a reduction in manufacturing related expenses. Gross profit was also benefited from $1 million unrealized gain from a derivative asset which was included in cost of sales. And later in the call, Norm will go into that in more detail. Gross margins excluding the unrealized gain were still an impressive all-time high of 28.6% for the quarter which was achieved also despite lower net sales and expenses incurred from the Canadian facility closure. Selling, general, administrative expenses were decreased by 27.4% to $5.3 million but was only 9.1% of sales from $7.3 million or 9.3% of sales. The decrease is primarily due to lower warranty expenses related to the lower sales in the quarter and also to sales related expenses being lower.

Operating income decreased by 2.4% to $12.4 million, but was an impressive 21.2% of sales compared to $20.7 million or 16% of sales. Operating income excluding the derivative decreased by 10.2% to $11.4 million or 19.5% of sales. Our net income decreased by 8.3% to $7.7 million but was $13.2 million of sales compared to $8.4 million or 10.5% of sales. The derivative aided net income by the tax affected amount of $633,400. Excluding the derivative, net income decreased 15.5% to $17.1 million or to a high of 12.2% of sales.

Diluted EPS was $0.45 per share versus $0.47 a year ago. The derivative increased EPS by $0.04 per share. Those earnings were calculated on 17,304,000 shares versus 17,484,000 a year ago. Moving now to the nine months discussion, our revenues were down 12.9% to $191.1 million from $219.5 million. Gross profit decreased 1.7% to $52.8 million, but was 27.6% of sales compared to $53.7 million or 24.4% of sales. Excluding the derivative gross profit margin was still an impressive 27.1% of sales.

Our goal is to sustain our margins in the mid 20% range unless we see significant increases in the raw material in the months ahead. Our selling, general and administrative expenses decreased 3.6% to $8.6 million or 9.7% of sales from $9.3 million or 8.8% of sales. Operating income decreased $0.6 million to $34.1 million and was an impressive 17.9% of sales against $34.3 million or 15.6% of sales. Excluding the benefit of derivatives the operating income decreased 3.5% to $33.1 million or 17.4% of sales.

Our net income decreased 4% to $21.6 million, but was 11.3% of sales from $22.5 million or 10.3% of sales. Excluding the benefit of the derivative asset, net income decreased 7.1% to $20.9 million or 11% of sales. Our earnings per share on a fully diluted basis were $1.25 on 17,318 shares versus $1.25 per share or 18,028,000 shares.

Moving to the balance sheet, you can see that we continue to have a strong liquidity position of $17.9 million in cash which aids our goal to stay as liquid as possible during our uncertain economic times. Our current asset ratio is 3:1. Our capital expenditures year-to-date were $8.6 million and those are related to equipment purchases, manufacturing building addition and expansion here in our Tulsa facility.

Our shareholders equity per share increased to $6.69 compared to $5.61 last year. We paid cash dividends of $2.8 million in January and $3.1 million in July.

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 our outlook for the remainder of the year. Norm?

Thank you, Kathy. Sales being down 26% for the quarter is bringing our average for the year down much closer to what the general consensus is of our industry. That brings us down to 12.9% decline for the nine months. The best analysis I've seen on our industry would tell me that we're expecting to be down 24.6% for the year. As you can see, we're not going to go down as far as the industry is expected to go down, being at 12.9% down now and only one quarter to go before the end of the year.

The outlook for the various markets and where the business is soft and where it isn't is kind of as follows. In retail and commercial it's probably the weakest part of our market. The next one that probably is following up as far as weakness would be office building market. One of the better markets that we're in is medical and healthcare and it's still pretty strong. Education, namely primary school through senior high school is quite good still. Manufacturing brings us back down to a not so very good. Lodging, however, has continued to be a little stronger than we would expect and municipalities or governmental buildings, that type of a facility are quite good. Generally, all others of the things that aren't covered in the above, it's a tough market, no other way to say it. The one bright spot among all of that in our marketing has been the reception of our new products have received. We've been introducing as I've said in the past we haven't slowed down our development costs and we still have not done that. We've not paired back our cost of going forward with either product design or with sales effort. We've maintained that and will continue to maintain that.

Some of the newer markets we're in are giving us some of the better growth percentages simply because we never had a presence there before. Chillers and air handlers are doing nicely. Split systems are doing nicely. And our recently introduced 4 X4 product has picked up fairly well. On our more long term products in the core of our business in the rooftop field, we've been bringing phone cabinet and our direct driven airport blade fan both huge energy saving issues into being starting in the largest product we've built. About five to six years ago, we brought it in. And we've been progressively increasing the delivery of smaller and smaller units incorporating this feature as the years have gone by. And we're down now into the core of the market, in other words where the real dollars are and we have this past year, last fall we introduced 16-ton through 30-ton rooftop and this spring or June I should say we introduced an 8-ton through 15-ton. And we're anticipating at the end of the year to bring it down all the way to the five-ton level. And then by the end of the first quarter, we'll take it all the way to the two-ton level. The further down you go the more dollars there are potentially in the marketplace so we're getting stronger and stronger into it.

Our analysis a few months ago indicated that the mid point of the rooftop market is somewhere around nine-tons. And so you can see, we're entering one half of the market. And so far we've introduced a lot of products in the other half of the market. So we're just introducing it to the second half of the market equal to the first half starting this fall. So we anticipate that's going to be a continued improvement in our ability to capture market share, which we have done as we have historically done. Anything particular, not really, other than the fact that what I just mentioned has helped us a lot.

One of the oddities of the world that we're living in right now is our backlog has been diminishing. At September 30th, it was standing at $38.782 million which is more likely the kind of number we would experience in the spring after the winter because the winter is historically our slower part of the year, both for orders as well as for shipments. And so the oddity that we're having is even though we're delivering product quickly because it's not staying in our backlog very long, we are still being pushed by the customers who are buying to deliver even more quickly. So it's a situation I hadn't experienced before where it's difficult to get an order but once you get it, they want the delivery very quick, faster than has been the case in years past. This all works well in one respect, in that because we don't have quite as large a backlog as we normally do. We are meeting the customers requirements much better and the negative of course is that it's harder to run the business with a smaller backlog than it is with a large backlog.

As I've told you a number of times, our backlog typically runs between two and three months of normal production. So you can see it just under $39 million kind of where we are relative to that. Incoming orders have seemingly stabilized and in our Longview facility, which was originally our coil facility. Only and where some of our newer products are coming out of namely our condensing units and smaller air handlers and the smaller chillers, they're doing quite well. Their order input is not going to be a great deal different this year than it was last year. And that's primarily due to the fact that we're now in the marketplace. And we're able to get from more of our customers who like to buy from us, we're able to get orders we never were able to get before because we didn't have the products. So that's the brighter side of it. When we come up to the Tulsa facility, we haven't done as well. But we've done much better than the market as a whole. Because you must remember that the biggest downfall we've had in our sales has been our closure of Canadian facility, which is for all practical purposes is now closed. We're down now to selling Real Estate and doing a little bit of copying of records and everything. So we have everything we need down here or in Longview in order to may have put parts out and answered questions and do the various things to support the products we were building up there.

So we're still doing that. And we've got about three people doing that who are all but finished doing it. And we've got three other people whom we are transferring, two of them to Longview and one of them to Tulsa and then the process of getting moved or getting ready to move at this point in time. So we're basically down to the facility up there and the facility is on our books for a little less than $1.6 million. We have it on the market for $2.5 million. Obviously we don't expect anymore than anyone else does when they market something to get to $2.5 million but we certainly expect to exceed the $1.6 million. So it should be a positive. We have sold all the machinery up there in an auction sale. And we realized a few hundred thousand, about $100,000 I guess a little less than $100,000 more than our book value was on the machinery that we had in the various office furniture and those kinds of things.

So our liquidation is coming to a completion there but like I say, on sales. You need to remember that we were selling a reasonable amount during last year up in Canada and that's totally vanished from the scene at this point in time. So we're expecting an upturn some time even though again looking at what the unitary market, being very specific within the commercial market. And looking at the unitary market and the three phase versus the single phase the unitary market power portion of it, the expectations are for 2010 to be down somewhere in the 8% to 9%, 10% down again next year based upon the best analysis I've seen.

I don't share that feeling about what Aaon is all about because we've historically gotten somewhere around that amount of additional market share. And we think we're better poised at the present time to realize that kind of market share increase this coming year due to the numerous products which we've been introducing and are continuing to introduce. Remember what I said, in the rooftop field, half of the marketplace is somewhere around 9-tons and down and we're going to introduce two new products between now and the first quarter of the end of the first quarter of next year. So we're expecting that plus the other new products we've got to give us quite a boost, plus we haven't done any cutting or trimming out of our Sales and Marketing effort. Our cutting and trimming which we have done considerable of has been at the factory level. Specifically, we're down approximately 30% in personnel, but you have to recognize a big chunk of that is the Canadian facility closure. However it has kept our labor in direct relationship to our order input and to our production. The other things that we probably need to talk about a little bit are gross margins and as you can see we've had the unusual situation of actually improving our gross margins and our net margins in a very down market where we're going down. I'm very proud of the people who work with us here at Aaon, for having accomplished a very formidable management feat in making that happen. It's due to the efforts of each and every person in this organization that that has happened.

The raw materials have also declined. And a little bit of talk has to be held about our hedging of copper in particular. Typically what we do is we hedge all of our products and parts and everything else by making agreements with our suppliers for as long as we think it's financially viable and as far out as they are willing to make the agreement. And we fix prices in that manner so that we don't have to deal with the inflationary issues in future years. When we got ready to hedge with our copper suppliers this year, we ran into some roadblocks that we had not experienced before. Namely the hedgers wanted us to fund their hedging which they had not requested us to do in the past. That was enough to cause you some momentary thought and examination of their balance sheets and we chose to believe that it was not a smart rule for us to finance their hedging for us and so we hedged directly on copper. Now, what that has done for and against us is as follows. We didn't change our historical pattern of operation. We've only changed how we did our hedging on copper. And what that has done is by rules, the accounting rules we had to realize a profit which is already occurred to us from the hedging operation, namely meaning that copper is more than $2.38 that we are hedged at for next year. And it had to be reported on the financial sheets which it never had before when we hedged by forward contracting with our suppliers. So the good thing of it is, of course that we're going to have that, we're showing you the profit. And the bad thing about it is of course that we're showing it to you this year and not going to show it to you next year which is where we're inching for. So it's kind of a good and bad situation we're looking at. I've got to get a little bit more (inaudible) here in order to cover mixture a little better now. On aluminum, however, we are hedged out in our normal fashion there and on all our purchase parts as best we can. We are hedged also for next year.

So the one big fly in the ointment so to speak is steel. Steel is not hedgable on the market as you probably know. And we have had moderate success at trying to hedge by forward agreements with our steel suppliers. So that's a weak link in our overall business plan that we have to live with. The other part of that of course is that all commodities are not driven by the US market. The US market is a smaller market now relative to the rest of the countries around the world. We're, depending upon which product you're talking about, which commodity we're in second, third, fourth place as far as the volume of material we use and so we're really driven by the market that exists worldwide. So if the world has a booming year coming up and we don't, we're going to be faced with a problem of having to raise prices in a sick economy. And in order to cover expenses which are going to start increasing because of a booming world economy. We're hopeful that ours will boom and will be able to offset that but that only time will tell us on that area.

The labor has been one of the brighter spots for us because as you might imagine, the people that we have retained have been more skilled and more productive and just better employees now than our total let's say a year ago. If you took an average then you'd say that we've improved our employees which is because some of the less desirable people are no longer with us. So that has helped us in productivity improvement. And some other things as far as scheduling, we've done some things in scheduling which have had a material improvement to our productivity as well. We are also beginning to realize some productivity improvement as I have advised in the past by the fact that we are expanding into these existing buildings in that we've either taken over existing buildings and/or built some addition and that is helping in our productivity. So we're still realizing things to occur which should continue to improve our productivity. We've also been watching our expenses very tightly and you can see that by our SG&A reduction. We've been able to out run the slowdown that has occurred in our selling and realize additional reductions beyond the amount associated with the reduced volume.

The derivative contract was as you see worth over $1 million to us as of the end of September and it has an additional value in it right now for the end of the year. The margin, we're still going to be, higher than it's ever been, even if we take the hedge out. It was better for the quarter by 28% verse 27.1% a year ago. If we don't have any big run up in steel, we should be very well positioned to continue to realize a good bottom line and hopeful the economy will help us realize better top line.

SG&A as I said down 9.1% compared to 9.7% a year ago even resulting partially because of the slowdown but also in spite of the slowdown we were able to reduce those which were more fixed in there as well. Net income as we spoke was down but not appropriately to the volume down. We were down 8% but we were down 26% on our volume but only down 8% for the net bottom line. Part of that was again due to the hedge. The quarter while it was down 8.4% last year down to 7.7% this year still was not down 26%. So we're very pleased with what all of the people working for this company have managed to achieve during this very difficult time interval. We have increased our cash position. And we intend to hold a good strong cash position until we get a clearer view of an upturn.

At this point, I have to say that we have not seen the upturn in the construction industry. There have been reported upturns in some portions of our society but not visible to us in the construction industry. Sales outlook for 2009 are as I've mentioned earlier forecasting down an additional 8% to 10%. I hope that's wrong but that's kind of what a lot of people who I believe have very good knowledge, are believing is going to happen. We are running a little bit over our projected $7 million to $8 million in capital expenditures this year. They're going to come in somewhere closer in the $8 million to $9 million area. Next year, they're going to be highly variable depending on what happens in the marketplace. If the marketplace does do a turnaround, we do have a need to build an additional warehouse on the Tulsa facility. And we will embark upon that at the first sign that we believe there's a strengthen the marketplace. We also have some small amount of purchasing of stock still in our authorization. And we will probably authorize to buy more stock if an upturn starts happening. So we will for sure be considering all that as we go forward with the cash which we are building up. With that I'm pretty much open now to questions and answers.

(Operator's instructions)

Our first question comes from the line of Frank Magdlen with the Robbins Group. Your line is live.

Good afternoon Norm.

Hi, Frank, how are you doing?

I'm fine, thank you. Two things. One, on what you are selling in the market, what percent of it is now planned replacement versus that new construction?

We used to say a year ago that we were 45% probably in replacement and 55% in new construction. I would guess, we're starting to get close reversing those numbers. 55% and replacement and 45% in new construction. We have about as I said something over 50% of the marketplace in our industry. Of the products we build is replacement markets. So we're starting to approach more closely what the industry has been. Although I'm sure it now has moved to a higher percentage on the replacement as well. It's not like the residential where it's a very high percentage of their marketplace is in a replacement market. The commercial is not so endowed or whatever you want to say about replacement market.

Alright. And then back to your favorite subject I'm sure is going to be the copper hedge. Can you outline, you said you showed us some of that incremental or the unrecognized gain in the first quarter of about $1 million. Where do prices have to go from here for you to keep showing a gain. And conversely what would have to happen for you reverse that gain?

Okay. There's a real positive in having gone out and hedged it ourselves. Where we make a deal with our suppliers we honor that deal. So if the cost of copper were say to plunge and we had hedged it with our supplier, we would continue to buy it even after it went below what we could buy it on the open market for. As it is, being hedged as you will appreciate, all we have to do is become convinced that we're hitting the peak and heading down and we can liquidate our hedge position and retain that profit as well as we're start enough to do. So that's a positive on it. As far as where we are, you can look back at the fact that we got $1 million of hedge out of the 238 hedge at the end of September. And take a look at the price of copper then and the price of copper today and see that we've got another pretty good chunk of money in the hedge available to us come December 31 if it stays up at somewhere around the $3.00 where it presently is. So as long as it keeps going up we keep making money on it in one respect.

The other respect is the fact that when we buy the copper on the open market, we pay for that. So we just take it out of one pocket and put it into the other pocket. But the pocket that we're putting it into is $2.38 all year long, as long as they hedge. Now, so we don't make money on the hedge any longer in one respect. But we do in another in that we're going to buy our copper at that price all year. Maybe I'm getting too far down here into it. If we don't buy as much copper for use because our business is down, then what we hedged and what we hedged when we did it, we thought we were hedging 80% of our needs for next year. In reality, depending upon how much farther down we go in sales volume, we might have overhedged or we might not have depending upon what happens to us in business next year. It's a positive no matter how you look at it as long as we manage it well from here on out. And I fully feel comfortable in saying that we might not manage it the very best but we'll manage it well.

On the aluminum of course now we have forward contracted on the aluminum. And so it likewise is doing something well for us right now because it's gone up since we made our agreement with our aluminum supplier. Steel as I said, we don't have a lot of ability to do that. We try and get agreements with the steel company and our suppliers but to some extent we succeed when we have painful times in the past when we have not. So that's a question mark. So I would say if you look at copper all by itself we're in a better position by hedging it the way we've done it than we were by forward contracting it. It just kind of plays with our Income Statement but the totality of it, it's very beneficial for us to have done what we've done.

All right.

It has less downside to it . Now I will tell you that on our pre-buying of copper last year for this year that we're in now and of aluminum has resulted because of our slowdown in our building up of copper because we're taking the copper in and putting it into inventory. Because it's priced at a price whereby we can afford to buy it now and overstock our inventory. Because if we had to buy it on the open market it's worth a lot more money and we're paying for it today. So we are going to have an inventory problem in at least copper and possibly aluminum by the end of the year.

Okay, and then a second question as you move down tonnage wise in the rooftop, how much of that is more dependent or goes through a prolonged quoting process as opposed to I just need it?

Well there's two types of replacement market which we call it. One is a planned replacement whereby the people know their product is worn out, needs to be replaced. And they say okay, as soon as it gets that that time of the year when I don't need it for heat and I don't need it for cool, I'm going to take it off the roof and replace it. Obviously we're into that part of the year and will be for a few months. And so that's the part of the replacement market that we do the best. In fact, we do probably 80% or 90% of the business in the replacement market in that venue. So it's going to be strong for us for the next few months. The unplanned replacement whereby the unit fails right in the middle of the heating or the cooling season, we don't do well in that part of the market. And so that portion of the market won't affect us much because we just don't serve it very well.

Okay, and then just very quickly, on what you're seeing in quoting, what are you quoting now. Does it mirror pretty much what you said were the strong and the weak sectors?

Yes, pretty much. Like I say I think it's gone up to about 55% on replacement versus new construction of about 45% right now and what we're doing business wise. And it's pretty well stabilized. Our downturn really began happening in the April time frame. And we had momentary bursts of seemingly improvement in those months intervening there but in total, those have been the slow months. We're into our normally slow months and they don't seem to be a great deal slower right now. In other words, I'm telling you that the stability has gotten better in the market. It's not down as much as it was during the summer months. Summer months on new orders compared to shipments were down considerably, as you can see by our backlog. The replacement orders now or the new orders now I should say compared to what we're shipping are starting to come more into balance. And number of orders we're getting now is more like what I would expect them say this summer when they were much worse than I was expecting.

Okay, thank you.

Ok.

Our next question comes from the line of Joe Mondillo. Your line is live.

Good afternoon, Norm.

Hi, Joe.

First question, you sort of touched on the replacement market. I was wondering if you can just give a little more detail in terms of where we are in that cycle. Has that replacement market started to rebound at all or what you're seeing in that respect?

I think it has.

I think there's a little more strength it. It's definitely stronger than the new construction portion of the market as evidenced by what I've said previously here. And it seems to be getting a little bit more confidence in it than the new construction. I see two big impediments to the new construction. Number one, availability of money for some of the people who need to borrow money to build a new building is more scarce than it is to an existing building owner who wants to replace his units. So I think that's going to plague us for quite some time. Plus due to the various things which are being attempted by the Federal Government right now and the lack of clarity as to what's going to happen in the tax arena and in several other areas, I think new construction is hampered a little bit more by that sense of unease and uncertainty about where things are going than is the replacement market.

So do you think the replacement market is any stronger than it was a few months ago? Has it improved?

I believe it has improved from this summer, yes.

Okay. Second thing I just wanted to ask about, with steel prices increasing you touched on that. Do you think you guys or the industry is going to be able to increase prices at all to possibly offset that even though the demand isn't too strong right now?

Well, as you might imagine, there's been quite a lot of fighting over what orders are out there presently because of the diminishing availability of orders. And so that will continue to go on. And when that's going on, there are a lot of people cutting prices and all you have to do is look at the bottom line of some of you have to do is look at the bottom line of some of my competition to see what some of them are doing with their pricing. And I've got to think that some of them are going to try and firm up their pricing. If they start trying to do that and they get a cost increase, a significant one from steel, the only choice they and we have is to increase price to offset that increased cost of steel. And I think they probably will go up. But there's been a lot of cutting of prices that I wouldn't have anticipated here in the past few months.

Okay, and then just lastly, could you talk about any word from the stimulus spending. You see anything in that according to that?

No, I don't. If you take a look at it, Joe, we've got a $14 trillion economy and the stimulus spending is $700 billion. That's not a big percentage of stimulation to a $14 trillion economy. And so I don't think people should expect too much. If it's well thought out stimulus which would accomplish something to stimulate the $14 trillion economy, then you'll get some real growth out of it, if you stimulate that. I don't think the way that it's been designed, it's stimulating the $14 trillion as much as it could. And there for, it's even having less impact than it should have. Just put the numbers in relationship to one another and you can see, at the best of times dumping $700 billion into a $14 trillion market isn't going to do a lot and then when you spread it over a couple three years it's going to do far less still. So I don't think people should hold their breath too much on the thing for the stimulus. I don't think it's going to do much.

Okay, great. Thanks a lot.

Our next question comes from the line of Kyle Arnold. Your line is live.

Hi, Norm.

Hi.

I was wondering, could you address you had mentioned the workforce reductions at your facility. Where exactly those came from and whether they were from attrition like you had mentioned before or whether you guys had any plant layoffs?

Sure. In Canada, it was all plant layoffs. Approximately 160 people went out of the Canadian facility, depending upon where your benchmark is when we started it. But then down into our Longview facility, we've cut about 25% primarily through attrition, a little bit through necessary layoffs of people who weren't performing. No just overall general lay off occurred down there. So it's been selective letting go of a few people who would have been let go or should have been let go even in good times, plus the attrition of people who leave for whatever reason and not replacing those people. When you come up to the Tulsa facility, it's been pretty much the same thing. We've had a little bit of getting rid of people who we felt should have been gotten rid of. No general lay off in the Tulsa facility. And we've dropped a couple hundred people out of it. The biggest issue, or the biggest thing we did, we did 100% myself included drug screening of the place. And unfortunately, we found that even though we have an anti-drug policy that we use in the hiring process and we use it at other times, we still ended up having quite a few people who left because of the drug screening. So no general lay off other than in Canada and the rest was just normal attrition plus the drug screening.

So what does that put you at each of those facilities in Tulsa and Longview?

We're down to about 260 in Longview and about 860 in Tulsa.

Thanks.

Ok.

Our next question comes from the line of John Braatz. Your line is live.

Good afternoon, Norm.

Hi, John.

Going back to the copper hedge, when does the financial hedge actually lapse or when would you have to renew the hedge? Does it expire at year-end?

No. What we did was we basically hedged by month through the whole year of next year. So the first hedge drops by the end of January. So some time in January we have to sell out that hedge. And so on and so fourth in subsequent months.

Okay, very good. Now, would you ever envision, obviously it's been a successful hedge, would you envision the possibility of going back to forward contracting with the suppliers?

Not now that I've gotten my feet wet. I think that this is a better way to do it, it's just that it was a big plunge for us to make that decision. And now that I've done it and viewed the pluses and minuses I think it's far more intelligent way to do it.

Okay, and then lastly, you talked a little bit about pricing and you looked at your competitors margins. And obviously there have been discounting prices a little bit. Have you been forced to do that at all or have you just stayed back and resisted it and have you lost orders maybe because of that?

Yes. We've done a moderate amount of it, very little. If you jump into that full fledge, you're on a very slippery slope and one that is extremely difficult to manage. I've been on those slippery slopes in my career and I don't think that I came out ahead when I tried to do that. In other words, the gain in revenue was more than offset by the drop in margin. And so I've got some more business and I helped the top line but I really destroyed the bottom line more than I helped the top line. And so I don't do very much of it.

Do you think you saw some of that in your sales decline, your top line decline?

Absolutely no question about it.

Any idea how much you want to guess?

Oh, I participated and held my top line firm if I wanted to get far enough down the bottom line playing with the bottom line. I don't know where the bottom line would have gone but I could have held the volume up there pretty well. Because we are pretty small part of the marketplace and when you're a pretty small part of the marketplace, you can run against the market. If you're a real big part of the marketplace you have no choice but to go down because you simply can't go up and get enough extra business. But being a small part you can if you want to cut your price to do so. But I believe I'm paid to deliver bottom line performance primarily and that's what I try and do.

So going forward we will continue to resist chasing business if conditions are warranted?

That is correct.

Okay, Norm, thank you very much.

Ok.

(Operator Instructions) Our question comes from the line of Shawn Nickelson. Your line is live.

Hi Norm, how you doing?

Very good, Shawn, and yourself?

Good, good. Can you touch a little bit on the expansion in Tulsa and understanding what new products could come out of there speaking outside of the core products. Whether it's geothermal or some other new product offering that you guys can now work on given you have the space in Tulsa to do so?

The biggest product that we can work on is the custom product which was in a Canadian facility, as far as a single entity goes. The biggest benefit to us at this point in time is improved productivity potential plus the ability to grow in the future and not have to put the capital out there to do it in a more orderly fashion. We're not pushed, in other words, to hurry up and get it done because we have to have it for productivity. So we can take our time which gives us a better cost structure in which to work when we're not pushing it hard. And it also makes us a little more certain that we're doing it the proper way and not making mistakes while doing it. I'll give you a for instance. The 26-ton through 70-ton production line presently sits online when it's fully loaded. It has 16 units on it. When we move it over into the new one, it will have about 36 units on a filled production line. What that does is it spreads your work across much longer area. And if you don't have two people or three or four people all working in the same area and having to get around each other and wait for each other to finish, you get more productivity simply because they are not crowding each other in the production process. And so it will give us definite productivity improvement, making the long production line.

We're going to move the next size product which is up through 30-tons, the 16-tons through 30 tons, we're going to move that from the east side of the building, east side building I should say to the west side building and it again will get the same kind of benefit from the move and then opening up the east side building to more capability of improving all of the products that are over there and recognize as I said earlier that half of the rooftop market is on nine tons and down. So if the dollars are half of them 9-tons and down getting to where the east side plant has a better ability to attack that market is going to improve that product line. And so it's just a lot of productivity movement, as much as it is new product capability. However, in the long term, it will be both, it will support both new products as well as productivity enhancements. We're done building the building. That's all history. We've been history for quite some time. What we're involved in now, we poured a new concrete floor in all of the warehouse which we took over. The 330,000 square feet we took over, we poured a new concrete floor in it. We're putting a new ceiling in it, new wiring in it, air compressed lines in it. We're putting assembly lines down through it. We're redoing some of the walls, insulating some of the walls. Those are the kinds of things we're doing right now. We're not building a building right now. We're really providing the facility in order to move the product in through it.

Is there a geothermal opportunity in the rooftop units?

Is there a what?

A geothermal opportunity?

A very big one. And in this new facility what I did was I buried the ground coupling portion of a geothermal system in the new building. And by that I mean we put down 40 connection holes, 250 feet deep each. And put the ground coupling, put plastic tubing down that 250-foot tube hold, those 40 holds. And we've got that all set up ready to hook on our own geothermal units here. And of course, there is a tax credit that is put into that stimulus build last year that will give us a tax credit for doing that but it will do something further. While we've been in the geothermal business modestly for many many years, we haven't focused on it. Because it had a problem that even though energy wise it's extremely good and it had a cost penalty, a first cost penalty. But in the stimulus package there's a 30% tax credit and actually, one portion of it where they will actually write a check. The Federal Government will write a check to people putting geothermal in. And that takes away a lot of that first cost disadvantage of the geothermal system. And with that happening that's what stimulated me to put the geothermal into our own building because I said this business is going to get even more serious now. And while we're in the business now we're going to have to be much more aggressive in the geothermal part of it and we are. We're well on the way to being much more aggressive in that arena, not only up here in the Tulsa facility but also in the Longview facility all the way down to 2-ton equipment for home or any place small building or whatever. We're going to attack the geothermal market. And if it grows faster than it has in the past due to the tax credits, then we're going to have positioned ourselves well for participating in that growth.

Great. Thanks Norm, I appreciate it.

Ok.

Our final question comes from the line of Pat Hart. Your line is live.

Hi, Norm.

Hi, Pat.

How you doing?

Well very good and yourself?

Fine. I'm sitting here listening and I was glad to see that the call before me brought up the geothermal applications which you're getting into. The one thing that I just want to know what your feel on it is the fact that when we see jobs come out, we notice there are more jobs that lien towards leads certification. And as a result of that, we find that the competition actually lessens. And we're in better shape at times with the AAON-type products because of all of the things you have that reduce energy. So it seems like where we used to have maybe five competitors that would bid a job and the commercial side, now we might only have one or two others because they are not as lead oriented as you are. And so therefore, I guess I'm wondering when you say construction is going to be reduced 10% next year, even if it is, can't this possibly offset it?

I believe yes, Pat. Incidentally for those of you listening, Pat Hart is one of our sales representatives. Has been for many years. What he's expressing is his views of what's happened out in the marketplace regarding us. It pretty much mirrors what we're seeing. If energy is an issue which leads is all about energy as well as if it's what they call a green building, we're one of the few people who can really address that. And we can address it better than just about anybody in the marketplace and for many reasons. And so all of the things which are occurring that are pointing toward more energy efficient needs are falling right into our marketing plan and then to our product plan. And I'll give you one which I hope doesn't happen but I fear it's going to and that's cap and trade which even by the President's own statement will cause electrical cost to go up enormously I think were his words. And if that occurs, we're going to benefit tremendously from it because we're very very well positioned in a highly energy efficient product line. And leads is one of the issues and geothermal is another method of getting there that will all help us go forward faster. I think the problem that I see with us is I think it will have a detrimental effect about killing some building activity if our electrical energy goes up considerably which is what by the President's own statements, he's expecting to have happen. So it could be a double-edged sword there on us.

One other thing along that line. When we get lead certified it seems to me if they get certified as one level, then pretty soon they want to go on to the next level which again is a plus. But along that line have you considered or is there any possibility down the pike that you might work with your sales organization in adding new salespeople, anticipating the future. Is that a possibility?

That is indeed. I'm looking at a way to stimulate our sales force to grow their manpower to give us more coverage in the marketplace. And I think that we'll have a stimulus program for our own sales force in that regard before too much longer.

Okay, Norm. That's the only questions I have. I'm off the line, thank you.

Thanks Pat.

There are no further questions in queue. I'll now turn the call back over to you Mr. Asbjornson.

Alright. Thank you for attending our sales discussion, our Income Statement discussion for the third quarter. We look forward to hopefully a happy discussion in the fourth quarter and we think that will be the case. I don't have anything more and I'll talk with you later. Bye.