Aaon Inc (AAON) 2009 Q4 法說會逐字稿

Good afternoon, and welcome to the fourth quarter and full year sales review earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. Mr. Asbjornson, you may begin your conference.

Good afternoon. Thank you for joining us for our fourth quarter and year of 2009 review.

Before getting started, I would like to give you a forward-looking disclaimer. To the extent any statement presented herein deals with information that is not historical, including the outlook for the remainder of the year, such statement is necessarily forward-looking and made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

As such, it is subject to the occurrence of many events outside AAON's control that could cause AAON's results to differ materially from those anticipated. Please see the risk factors contained in our most recent SEC filings including the Annual Report on Form 10-K and the quarterly report on Form 10-Q.

I would like now to introduce Kathy Sheffield, Vice President and CFO of AAON. Kathy?

Good afternoon. Welcome to our conference call for the fourth quarter 2009, and for our full-year end results. I would like to begin today by discussing the results from the three months ended December 31. Our revenues were down 10% to $54.2 million, from $60.2 million.

The decline in sales was attributable primarily to the current economic conditions, which has negatively affected the commercial construction market. Gross profit increased 9.6% to $14.8 million, or $27.3% of sales compared to $13.5 million or 22.4% of sales. The higher margin percentages were primarily due to the benefit of a couple of factors. One, lower material costs, improved labor and production efficiency, and a reduction in our manufacturer and related expenses.

Gross profit also benefited from a $1.2 million unrealized gain from a derivative asset that was included in cost of sales. Our gross margins excluding the unrealized gain were still an impressive 23.2% for the quarter, which was achieved despite despite our lower net sales and the expenses incurred from the Canadian facility closure.

Selling, general and administrative expenses increased 15.6% to $5.2 million, or 9.5% of sales compared to $4.5 million, or 7.4% of sales. Our warranty expenses in 2009 increased due to specific warranty items, and sales-related expenses also increased due to our expanded marketing to remain competitive in the current environment.

Our operating income increased by 5.5%, to $9.6 million, or 17.8% of sales, from $9.1 million, or 15% of sales. Operating income excluding the unrealized derivative gain decreased by 18.7%, to $7.4 million, or 13.7% of sales. Our net income increased by 3.3%, to $6.2 million, or 11.4% of sales, from $6 million or 10% of sales.

The derivative asset also aided net income by $0.8 million net of tax excluding the unrealized derivative gain, net income decreased 20% to $4.8 million or 8.8% of sales. Our diluted EPS for the quarter was $0.36 per share versus $0.35 per share a year ago. The derivative asset increased our EPS by $0.08 per share. Earnings per share were based on 17,281,000 shares versus 17,338,000 a year ago.

As we look at the 12 months, revenues were down 12.3% to $245 million from $279.7 million. Gross profit increased 0.4%, to $67.5 million, or 27.5% of sales compared to $67.2 million, or 24% of sales. Excluding the derivative, gross profit margins were 26.6% of sales. Selling, general and administrative expenses remained consistent with last year at $23.3 million, or 9.7% of sales.

Operating income increased 0.9% to $43.8 million, or 17.8% of sales compared to $43.4 million, or 15.5% of sales. Excluding the derivative, operating income decreased 4.1% to $41.6 million or 16.9% of sales. Net income decreased 3.1%, to $27.7 million, or 11.3% of sales, from $28.6 million or 10.2% of sales.

Excluding the benefit of the derivative asset of $1.4 million net of tax, net income decreased 8% to $26.3 million, or 10.7% of sales. The decrease in net income resulted primarily from the decline in sales.

Earnings per share, on a fully diluted basis, is $1.60 per share for 2009 and 2008 based upon 17,309,000 shares in 2009, and 17,855,000 in 2008. As we move to our balance sheet, we look at a very strong respectable balance sheet and we see that we have a very strong liquidity position of $25.6 million in cash, which aids our goal to remain liquid during the economic uncertainty and the economic environment.

Our current asset ratio was 3 to 1. Our capital expenditures for the year were $9.8 million as we continue to invest in new equipment, to increase production efficiency. Also, the construction of a manufacturing building addition and the beginning stages of a building expansion, all in our Tulsa facility.

Our shareholders equity per share increased to $6.85, compared to $5.61 last year. We paid cash dividends of $5.9 million during the year and we accrued dividends payable of $3.1 million. I would 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 2010. Norm?

As you can see, we had a revenue decrease last year due to the severe economic contraction of commercial nonresidential building construction. This contraction is continuing this year and from everything I can read is forecast to continue for the year in total.

It is my expectation that sometime during the year the upturn will begin occurring. The timing on that is obviously undetermined. The downturn that most projections are showing for the year goes between 8% and 11%. The income was, as Kathy said, affected by several things that gave us an upward surge in our margin, on the sales we had, to the point of offsetting pretty well the downturn in revenue.

We still have some of that going on in this Company, improved productivity, and those items, the material content, however, is highly questionable. Some of the commodities have already begun an upward spiral on us. And with the severe reduction in volume that we're living in right now, we probably aren't going to be able to affect costing or price increases very readily this year.

So, it -- we will be in a year of being squeezed to even do better on our productivity improvements. I believe we're going a long ways toward doing that, primarily by some of the high volume equipment that we sell, being redesigned and being made more manufacturable. And, therefore, I have anticipation of continued increased productivity primarily due to the change in product design.

The earnings per share last year were positively affected by somewhat the stock buyback, and at this time, we still have 82,000 shares remaining open from the previously announced stock buyback, and we have been authorized to do another stock buyback of 850,000 shares upon the completion of the previously authorized buyback.

The revenues for this year, even with the down economy, or down construction market that we work in, I think, are going to be somewhat stable for us. I don't look for any great improvement over last year in volume, but I'm anticipating that we do have an outside shot at holding the volume where it was last year due to many things we're doing to increase our market share.

So the market being down is not necessarily going to trip our revenue down, but it is going to make it very difficult for it not to be. That's for certain.

The upward push on pricing is probably going to be fairly severe, when I review as I have all of our competitors who have had a bigger problem by and large with the revenue and certainly all of them have had a bigger problem with the bottom line than we have. And so they are going to be under severe pressure to pass on price increases.

So I am not totally saying that there aren't going to be price increases primarily because it doesn't look to me like the competition can afford not to go forth with price increases if we have an increase in inflationary pressures. The other things on the market that are positive to us, we have discontinued our Canadian operation, thereby freeing up some of our personnel to concentrate more on our local economy, and our local products of the Tulsa and Longview facilities.

The backlog that we're looking at, however, has diminished compared to a year-ago, we're down approximately 10% in our backlog from a year-ago at this time. The switch has been also notable in one other situation, the Longview product is doing better than is the Tulsa product in the revenue end of it primarily because probably we have had more attractive new products introduced in the Longview product line.

The new products introduced in the Tulsa product line that I spoke of earlier in high volume lines, one of them was introduced last October/November, and one of them is being just about to be introduced as we speak now. So I do, like I say, with these things going on in our new product development do have some anticipation that we will have a better chance at holding the line and gaining market share from our competition.

With that, I don't have anything more to add in my presentation, so I'm going to open it up to questions. Maggie, are you there?

The lines are now open for questions. (Operator Instructions) We will pause for just a moment for the Q&A roster. Our first question comes from the line of Jon Braatz of Kansas City Capital. Your line is live.

Good afternoon, Norm, Kathy.

Yes, Jon.

Hi, Jon.

Hi. Couple questions. I think, Kathy, in your commentary you mentioned that in the fourth quarter, your SG&A expenses were a little bit higher because of some additional marketing costs.

Is that a new marketing spend in the fourth quarter that accounted for the increase? Or was that something that was going on throughout the year?

It was basically something that went on throughout the year. And as we got to the middle of the year, we began to accelerate that.

Okay. Okay. And that -- would you say that accounts for the -- let's say the 200-basis-point increase in the SG&A expense ratio year-over-year in the fourth quarter?

Part of that had to do with some warranty --

Okay warranty, too, okay.

Yes, those two things.

Okay. Norm, you were just talking about some of the new products. Can you just go over for me some of the new product introductions that you're looking at this year, and late last year, and what the pricing is and what the margins are and if -- what kind of mix issue that might arise should those -- should the volumes be pretty healthy in those products?

Okay. As I mentioned we have succeeded better in our Longview product line than our Tulsa product line because we have introduced more new products in the Longview line more recently than we have in the Tulsa product line.

Basically, what we're selling to the outside trade down in Tulsa, is -- I mean down in Longview, are air handling, smaller air handling units, condensing units, and a small chiller, all three of which have been redesigned within the past year, year-and-a-half. So they all were doing better than their predecessor, a bigger percentage than what we did up here in Tulsa.

We did introduce up here -- that's pretty much all of the product lines that we're building down there, the dollars probably 70% or 80% of our dollars in Longview are newer products that have been introduced in the past year or year-and-a-half as we go into this year.

In Tulsa, we have redesigned, basically in our smaller rooftop series, where a large quantity of our dollars are located, the first one that was really materially changed was introduced in the fall of 2008. So we got pretty much a good-sized part of that to benefit us during 2009.

The next two down which, in the industry, represent a huge market, in fact, probably somewhere between 55% and 60% of the industry market, is in these next two boxes, one of which was introduced, a new product was introduced last fall, in October. Another one in January of this year, and there is another one going to be introduced in the April timeframe.

And that is into about 55% to 60% of the industry's market. But in our market, it is something more in the low-20% because we're not as effective in the market as we are in the bigger market.

And so we're in hopes that this introduction of these new products will give us a decided improvement in our percentage gain in those -- in the 10-ton and down market which is where these are largely concentrated.

Would these smaller products generally have a lower gross margin then?

Yes. Particularly in the bottom end of it, that is pretty true. They do tend to have a lower gross margin. And we anticipate that happening to us as we penetrate that market.

We're hoping that the bottom line, the net result, might -- we might lose on the margin, but we will gain it back at the net line on the bottom.

Right, right okay. Then one last question, I'll get off. Can you summarize the costs that you incurred this year in the Canadian operations? I know there was some second quarter costs which I have, but I think, Kathy, you had mentioned there were some fourth quarter costs, too.

And I don't think you broke that out, but could you summarize the total costs that you might be -- might be absent this year that you incurred here in 2009 from Canada?

Yes, Jon. For the year, $0.9 million is what we lost in Canada. It was about $0.05 per share. Most of the closing costs were actually recorded in the third quarter. But there were still come wind-down costs in the fourth, but we stopped production in the third quarter.

Okay. Very good, thank you, Kathy.

You're welcome.

Our next question comes from the line of Joe Mondello with Sidoti and Company. Your line is live.

Good afternoon, Norm, and Kathy.

Hi Joe, how are you?

Hi, Joe.

Good, thanks. My first question is really a follow-up on the new product information that you were giving. Basically, I was just wondering if you have gotten any feedback on the products that you have already put out there, is it too early to tell, or have you gotten any feedback in terms of how those products are -- I guess, doing?

The best feedback, Joe, is what is happening on the order sheet. And the C box, which was basically our first introduction of the smaller sizes, which occurred a year-and-a-half ago, approximately, has decidedly improved over its predecessor product. And we're getting a higher percentage of our total volume out of that product than we would have expected based upon our older product that we obsoleted.

The [next one], which we introduced, was introduced last fall, which is our 8-ton through 15-ton one. And it is starting to show signs of doing that. But it hasn't made a strong enough showing. Now, just from a verbalization standpoint, of people talking about it, they are all speaking very highly of what we're doing with the product.

Price -- order-wise, it hasn't shown as yet on the B box. The other two, the A box, which was just introduced the first part of this year and the other one, which is going to be called the RQ, has yet to be introduced. So, we don't have any feedback on those two, really, at this point because they haven't been shown that much.

They have been put in the order form situation so that the reps can order them, but we haven't taken them out on the road and done formalized shows with wither the A box or RQ which isn't even yet available.

And is your strategy on the new product still you're offering a premium product, therefore, there is still a premium price still there? Or is it very comparative to the products that are out there from your competitors?

No, non, we're still adhering to our business plan. We're still a premium product at a premium price. What we have endeavored to do is up the premium product and lower the premium price, and but -- based upon those two things, which we have successfully done on the C box and B box, it appears we have succeeded in doing that. The jury is still out on the A box and the RQ, of course, so we don't know about that.

But we seem to have come up with a better product, considerably better product, and basically at the same price as we were at before. It is our belief, the A box we did the same thing. The A box which is basically a 6-ton through 10-ton unit was done about the same was done about the same way as the ones above it were.

The one that is going to be notoriously different is where over 50% of the market is is which is below 5-tons. That's where we will have the biggest differential in product as far as attractiveness of the unit itself, compared to the competition, and the area where we have had the biggest premium requirement.

And we're going to try and lower, unlike the previous ones, which we basically went out with the same pricing, we're going to try and lower the pricing on this one and see if we can't put out a decidedly premium product, at not too high a premium price.

All right. And in terms of your -- in terms of the rest of the market, your organic business, your backlog, it seems to have rebounded since December to March 1 which you disclosed in your K. Last year around it did the exact opposite. I guess things were deteriorating a lot of faster.

Do you think things have begun to stabilize and somewhat improve because of that rebound? Or what do you looking at that as a result of?

You're correct in your reading of that. We were going faster downslope on backlog a year-ago than we are this year, but we're still sliding a little bit this year. Up until recently, it appears that now since December, we have stabilized on backlog.

So we're, like I say, we're thinking we may be able to hold the volume level this year, and if it does get a turn-up in the latter part of the year we might even conceivably get a upswing in our sales this year. But that is all futures and ifs. A lot of big ifs in there on that.

Your backlog is up from the end of 2009, right?

That is correct.

Okay. In terms of your replacement business, could you talk about that? How is that doing?

I know that's at least half your business. Is that beginning to recover?

It appears to be somewhat healthier. There is a lot of uncertainty in the people we're dealing with as to where the world is going for them. And, therefore, there's not a lot of people running out there trying to spend money right now. But it appears that the replacement market's a little stronger than the new construction market is for us.

Okay. Thank you. I will hop back in queue.

Our next question comes from the line of DeForest Hinman with Walthausen & Co. Your line is live.

Hi, Norm.

Hi, how are you?

I think in the past you kind of talked about the staffing levels at your two different facilities. Do you see any, foresee any changes in staffing levels with your current projections for production?

Well, we have been holding -- we did take the staffing levels down commensurate with our fall off of volume, our staffing is down. However, it has been holding fairly steadily now for several months, and we're maybe even increasing a few people in a few specific areas at this point in time.

But as a general rule, until we see a strong -- a strengthening of the order input, we're not going to be staffing any higher. On the other side, we don't see any reduction in staffing at this point.

Okay. And then separately, the balance sheet is in good shape. We have a lot of cash. I guess the first question is, how much cash do you think we need on the balance sheet, and what do we do with the excess cash that we don't -- or should we be looking for share repurchase activity to pick up or some sort of dividend? Some increase?

At the present time, as I mentioned earlier, we have been authorized to do another 850,000-share purchase back after we finish purchasing the remaining 82,000 shares of our previous authorization. It is my belief that at this point in time what I have tried to do, and when I saw this coming a year-and-a-half, two years ago, I started slowing down this big expenditures of money and tried to get prepared for what appeared to be the obvious direction our business was going.

So, we built up -- if you noticed it was all last year before that, we pretty much ran lean on our dollars in the till. We sent them out as fast as they came in either to dividend increases or share buybacks. Now that we have been authorized to do a buyback, it is my anticipation that we will be doing share buyback at this point in time.

Well, I mean, do you see going forward, in the future, even in a healthier environment still wanting to keep some of that cash on the balance sheet or would you kind of --

Yes.

Go back to how it was historically?

We just finished a board of directors meeting and the uniform feeling was there was no -- nothing telling us, a strong enough message out there that we had better get rid of -- should be able to run like we used to run real close on cash. We'd better keep cash around because the uncertainty is still there in all of our directors' minds.

So we will be keeping cash on board. How much, it will probably be a fair amount of it we will keep on, but not as much as we have got right now probably.

All right. Thank you, Norm.

Yes.

We have no further questions in queue at this time. (Operator Instructions) We have another question from the line of Joe Mondello with Sidoti and Company. Your line is live.

Hey, Norm. I just had a follow-up question. I was wondering if you could just speak on, I guess, the general overall end markets out there just to give a sense of what type of customers are maybe improving a little better? If there are any customers out there, your type of customers that you're seeing that are still struggling? What do you think going into -- or going through 2010 is going to look like in terms of that?

Sure. It hasn't changed a great deal since before. The commercial and the retail market is a pretty tough market to be in. Office building is still pretty tough market to be in. On the better side, some medical and health care is still a pretty good market.

Education has a lot of needs and there is a lot of effort to do it, but as you probably are we will aware, a lot of states and local areas are having their financial problems, too, so it is a question mark. I think it is still going to stay good in the education, but there seems to be a lot of financing problems there. The lodging industry is so-so.

And municipals are same thing as I said about education. They are having struggles with money. Generally, it is a pretty tough market place. Not anything just standing out and saying it is doing a wonderful job. If I had to pick one, I would have to pick medical and health care.

How about government stimulus, have you seen anything from that? Anything in terms of energy efficiency improvements on buildings or anything like that?

Yes. There is a lot of stress on energy improvement. And the stimulus money, I think you have to put that in proper perspective. As much money as $787 billion is, it's spread over two years, and our economy is a $14 trillion market, and if you ratchet those numbers back, you find out that's somewhere around 2.5% per year. In total stimulation, 2.5% is not stimulation.

On specific areas, it is stimulation. And in those specific areas, we do notice it. We do notice it in some governmental spending on governmental buildings. We do notice it in the fact that there is pressure being put through various methods including incentives to make more energy efficient buildings and the equipment that is going on it.

So it is definitely affecting our business, but not so much because of the stimulation, because, frankly, 2.5% doesn't incentivize very much in the total. It does in specifics and that's all.

Okay. Great, thanks a lot.

We have another question from the line of Jon Braatz of Kansas City Capital. Your line is live.

Norm, what -- is the copper hedge still on?

Yes, it is.

Okay, and that goes through what period?

Well, it -- we had it purchased. We have coppers coming due every month for the whole year, however, as with anything like that, we can sell it out at any point in time.

Yes.

And I'm sitting here right now trying to decide, and if you have some brilliant offerings of which way we should go, I sure would like to hear it.

I keep those to myself.

(Laughter) How unfortunate. We're worried about whether the upside risk is bigger than the downside risk right now. And we may liquidate it at any point in time we think that the downside is a bigger risk than the upside.

So, we could see another -- we could see another plus or a hit to the cost of goods line depending on what you do?

If it goes negative on us, it does have a negative --

Right, right.

The cost. We don't want it to go negative. That's why we will get out of it if we think its going to go negative. Hopefully, we're right and I don't know how good we're going to be at this hedging, but we're going to try real hard.

Okay. And, Kathy, what was the backlog at year-end?

At year-end, it was $35.8 million.

Okay. All right. And then on March -- you reported on March it was -- I can't --

Basically $40 million.

Okay, okay that's good.

March 1.

Thank you.

You're welcome.

Our next question is from the line of Joe Mondello with Sidoti and Company. Your line is live.

Hey, Norm. Just one last quick question. I was just wondering, how -- what is the lag between the movement in raw material prices to when that hits your P&L?

Well, good question. If we're hedged out, it might not be for the rest of the balance of the year. And where is that that we're hedged out? Well, on copper and aluminum we are right now, so it shouldn't hit it unless it turns negative on us and then it will have a positive effect on what we're buying, but in the case of the copper, if we stay in the hedge, that will offset whatever we're buying. So, we would have to get out of the hedge.

On steel, we can't hedge very well. And were -- we make commitments, generally we can get a commitment for two or three months. So that is somewhere down three, say, if steel goes wild it is about three months before it really starts hitting our P&L statement.

On purchased material, of which generally will follow on to the basic commodities, that will take anywhere from a couple months to maybe a better part of a year before we have to capitulate to some of our vendors.

All right. Thank you very much.

So highly variable is what I would say. But we will start feeling it in two or three months.

We have no further questions in queue at this time.

Okay. No other questions, I would like to thank everybody for participating in our review of AAON's performance for the fourth quarter, and for the year 2009.

I look forward to seeing you again in another three months, and hope that we can give you very positive news at that time. Thank you.

That concludes this afternoon's teleconference. You may now disconnect your line.