Aaon Inc (AAON) 2010 Q1 法說會逐字稿

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

Good afternoon. Thank you for joining us for our first-quarter report. I have with me Kathy Sheffield, our Vice President and CFO, and I will turn this over to her after reading a first quarter, the 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 that could cause AAON's results to differ materially from those anticipated.

Please see the risk factors contained in our most recent Securities and Exchange Commission filings including the annual report on Form 10-K and quarterly report on Form 10-Q.

Thank you. Now I will turn it over to Kathy Sheffield.

Good afternoon. Welcome to our first-quarter conference call. I would like to begin today by discussing the results for the three months ended March 31. Our revenues were down 23% to $49.3 million from $64 million a year ago. We continued through this first quarter of 2010 to be affected by the current economic environment which we are in and that has resulted in negatively impacting the commercial construction markets.

Our gross profit decreased 23.1% to $13 million from $16.9 million. Gross profit was 26.4% of sales compared to 26.5% of sales in 2009 as a percent of sales. The gross margin percentages remain consistent as they had despite the lower sales primarily to our continuing efforts to improve labor and production efficiencies and also reduction in manufacturing-related expenses.

Selling, general, and administrative expenses decreased for the first quarter by 26.2% to $4.8 million or 9.8% of sales from $6.5 million or 10.2% of sales. The decrease was due to a lower bad debt expense which we incurred that reduced our bad debt reserve, a decrease in our warranty expenses related to fewer sales, and a reduction in our sales-related expenses.

Our operating income decreased by 21.2% to $8.2 million or 16.6% of sales from $10.4 million or 16.3% of sales. Net income decreased by 23.9% to $5.1 million or 10.4% of sales from $6.7 million or 10.5% of sales. Our diluted earnings per share was $0.30 per share for this quarter compared to $0.39 per share a year ago. Our earnings per share were calculated on 17.271 million versus 17.335 million shares in the same quarter a year ago.

Now moving to the balance sheet we see that we have a lot of cash. We have continued to hold a strong liquidity position of $15.6 million in cash which aids our goal to stay liquid as possible during the economic turns and times that we are still experiencing. Our current asset ratio was three to one.

Our capital expenditures for the quarter, we spent $3.5 million. These expenditures primarily related to the expansion and remodel of our Tulsa manufacturing facility. Shareholders' equity per share was $7.09 compared to $6.85 in 2009. We paid cash dividend of $5.9 million during 2009 and declared dividends of $3.1 million which we paid in January of 2010.

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 the remainder of the year. Norm?

Thank you, Kathy. Since the economy is so prevalent in what is happening to AAON I thought I would review a couple of indicators which we use to watch.

One is Architectural Billing Index which has remained below the 50% mark which is a neutral position compared to a previous year. It's down in the 40%s, but that is an improvement from its low point in 2009. So it is still on a continuing downtrend but it's not as severe a downtrend as it was earlier is what that tells me.

The other thing I look at is the non-residential construction put in place on the seasonally adjusted annual rate. And as I looked at the previous trend lines within that going all the way back into the 1990s and I find that fairly consistently January will be the weakest month of the quarter, of the first quarter, and pretty level some time -- it's generally, if any trend it's trending up a little bit through March.

This year it even compared to 2009. 2009 it trended up from $395,000 up to $401,000 in the first quarter. This year it trended down from $305,000 to $298,000 so not a big reversal but the trend line is still in the wrong direction.

So whether we are looking at what the architects are doing in the way of building plans or what is actually being spent, we do see the kind of reversal that we had hoped which is that the architects are not growing but they are not falling as fast as they were. But the fall-off of that of course is that the building itself follows the architect. It's doing as you would kind of expect in that it's still going down a little faster than you would expect or its direction is the wrong way.

So we are not at a bottom, which some industries are saying that they are. The non-commercial or non-residential building industry doesn't show those signs yet.

On a positive note AAON has had success with our new products at running a little better than our industry and an indication of that is our backlog. Our backlog in 2009 at this time, at the end of March, was [43,900] and the backlog at the end of 2009 December 31, was [35.756] million. It trended up to [41.398] million on the 31st of this year.

So comparing year to year the comparison is [43,900] compared to [41,400] which is a decline. However the [35,700] at the end of last year shows that we have increased our backlog by a little less than $6 million, which is a fairly significant amount. So one would ask why we would have that, what the trends or what is occurring there.

Well, what I interpret is two things. We did have a fairly severe winter in many parts of the United States this year and some of that backlog that under a more normal winter would have shipped did not ship in the first quarter.

The second thing which had occurred is that we have had a little weaker beginning to the first quarter than we had as a finish. In other words, we were accelerating our order input a little bit and therefore some of the orders came in too late to be shipped in the first quarter and therefore ended up in our backlog.

So the trend line on our bookings performance during the quarter was counter to what the business was actually doing in the way of what non-residential construction was doing. So that is a positive thing saying that we are running counter to it a little bit. Other than that since the 31st of March we have had kind of a mediocre April in that we still were still down considerably. We were down about 20% from the previous year in our bookings for that period.

But as they month wore on, as April went into May, we got a stronger position and we are definitely running a little stronger position now. So, again, on a trend line is saying that things in our camp, while they are not able to overcome all the downward trend in the industry totally, we may be coming close to it as we are moving forward.

Now what is happening within AAON to have that occur? Over half of our product line, as far as dollars -- where we get our dollars from, have been new products in the past year and a half to two years. That includes all of our rooftop products from 30 tons all the way down to 2 tons, although the 5 tons to 2 tons aren't in production yet. We are taking orders on those products now.

On our air handling units and smaller chillers out of Longview both of those products are new products. So those products have changed the character of our marketing approach and our ability to get orders. So we are on a positive company-wide growth position.

If the economy would just stop and level off and pick up and start get going we would be in very good shape I think. But that hasn't yet occurred as far as we can see, although it is definitely moderating; no question about that. So it does have signs that before too much longer it may hit a leveling and a growing position again.

Now what is it about the new products that give me this great confidence and give the customers the desire to buy our products? Well, in the case of the rooftop products we have made a very significant forward step. Energy is an extremely important thing in our economy and in the heating and air-conditioning equipment sales.

Energy is usually measured on the ability to convert energy into cooling or energy into heating. The whole industry is working hard on that and doing a very fine job, I think, of improving the production of heating and the production of cooling.

The one thing that we have added to that is there is more to it than just the production of the heating or the production of the cooling. The device, in the case of the rooftop, the box in which that heating and cooling takes place, is by our industry standards what I consider an absolutely terrible product.

It was one similar to what we used to have which is a piece of sheet metal with about one-inch of fiberglass insulation on it. And that compares to, say, your house with, who knows, eight or 10 inches of fiberglass insulation and a couple of walls and plasterboard and whatever else. So it had a very poor resistance to heat transfer.

We have addressed that and we are now marketing our entire rooftop product line with two walls of metal filled by 2 inches of foam which is on an insulating value of about twice the insulating value of fiberglass. In other words it's equivalent to the 4-inch fiberglass wall pretty much. Which while that may not be revolutionary compared to the building itself, compared to our competitors it is five, six, or seven times better box than what they are using to build their product.

The other aspect is that it's not always on heating and it's not always on cooling. Much of the time it's just moving air. In other words, the fan is on but nothing is really happening or whatever is happening is a modest amount of heating or a modest amount of cooling. So the fan horsepower becomes a bigger factor.

In much of the United States the fan horsepower sometimes can consume as much energy as the heating and cooling does because it runs pretty much continuously in much of the units and the other items are only intermittent. So moving air is of very considerable importance.

Toward that end we have eliminated V-belt drives entirely on our total product line of rooftops and we have put direct drive motors directly to the blower and the blower is a more efficient blower type and well recognized as such by our industry. A single-bladed airfoil as opposed to a forward curve, which diminishes the amount of horsepower necessary to move air.

So those two things are recognized by our customers as being important as well as the cost of producing the energy, whether heating or cooling. This is a major thing because it requires 100% redesign of one's product line and a lot of technical problems to be addressed to get to where we are. And our competitors are not there at this point in time.

So going forward we think that is going to become a more and more important factor to our customers and will give us an additional sales advantage. And that seems to be borne out by what is occurring right now. Although, in addition to changing the product, we much say that we have upped the efficiency of producing heating and cooling and we now have cooling that runs all the way up to an SEER of 19 on our smallest unit.

There are various categories that allow the reward of the owners buying high efficient equipment by some of the utilities giving rebates for the purchase of high-efficiency equipment. With two exceptions on our rooftop product line from 70 tons down where it's primarily being given, we can achieve the highest rebate possible by any of the utilities which they call a Tier 2.

So we have got a lot of things going for us in this energy environment and that is primarily the story at AAON at this present time with one other important thing. We are moving our products over into the Westside facility here in Tulsa from the Eastside. We are moving one of our primary dollar contributors over this month. And while we won't lose any production days in that move, we will slow the productivity down and hurt us a little bit on our productivity.

The second thing that will happen is we are getting out of the old two- to five-ton product business and going into the new two- to five-ton product which is an immense improvement, but it also will have an adverse affect on our productivity a little bit. So a lot of good things are happening but there are a few things that will have a negative impact on us.

Of course both of those things will be in place starting into the third quarter and will be contributing even better to us than what we are capable of doing today as far as improving productivity.

With that and the apparent opening up to some degree, not very much, of credit lines for people wanting to build commercial buildings I believe the turn in the commercial building market is very close at hand. I don't believe it's here yet but I think it's very close at hand. The question remains them how vibrant will that turn be and I can't give any idea of that.

With that, I would like to open it up to questions and answers.

(Operator Instructions) Joe Mondillo, Sidoti & Company.

Good afternoon, Norm.

Hi, Joe. How are you doing?

Good, thanks. I was wondering if you could repeat the backlog numbers. I didn't get those.

Sure can. Backlog as of 3/31 was $41,398,387.

Okay, great. In terms of looking, say, just at the second quarter what is the likelihood that we get back to what you saw in the fourth quarter of 2009? Just to try to give us some idea of what you are looking at going forward?

Okay. Fourth quarter --

In terms of sales.

-- 2009, let me see. Let me get that so that I am speaking from fact here. In general what I am looking at -- as far as comparing it I can compare to the second quarter of 2009 easy enough but to the fourth quarter it's not as easy.

We will still be down in volume from the second quarter of 2009. I think we are going to be down; I think we hit the most we will be down on a quarter-to-quarter comparison. I think our biggest down was in the first quarter. It will be less than in the second quarter. I would say materially less but not hugely less. In other words, we are not going to bumping close to last year on volume.

I feel comfortable in thinking we will be fairly close on percent profitability. I don't see any too big ripples in that other than what I spoke of about the productivity that we will suffer a little bit here. But let me see here, fourth quarter of 2009 we did $54 million in net sales. We will probably be there. We will probably be there or somewhere in that vicinity.

Okay.

So I think that we are coming out of it. We definitely are seeing improvement in this quarter as we go further into the quarter on orders coming in the door.

Okay. But it's just not accelerating at this point? You sort of see somewhat of a stabilization, just not any strength yet?

Yes, it's really hard to say because we have here and just recently had a blip of very good order input. But if it's a blip or a good solid beginning to something going to stay with us we can't tell you yet because we are still in the blip.

So if we were to extend that I would get much more optimistic. But I have had a lot of disappointments in the past year and so I am a little hesitant to tell you it's going to stay with us.

Right, okay. All the weakness is obviously coming from the non-residential construction. Do you have any clear visibility of what the replacement market is doing now? Is that accelerating or do you have any idea?

It definitely is accelerating. We are definitely getting a better position in replacement market than we are in new construction.

And that is somewhat evident if you take a look at the architectural billing address and run that down as a percent decrease from the previous year. Go back for a period of time and get that trend line you will see it's down there 30% and something. Whereas if you look at the amount of business put in place by the non-residential construction put in place, it didn't go down quite that much.

So I think some of that is money being spent on minor replacement as well as small additions. The replacement part of it probably doesn't show up in the architectural part. So I think there is a trend more toward the replacement growing better than the new construction.

Okay. Could you comment on your geothermal sales and just give us an idea of how big that is to your total sales? I guess obviously it's growing right now but just comment on that, on those sales and what you are seeing there.

As we announced in our annual, last year we were up 300% from 2008 to 2009 and that was off from a fairly small base. So it was a big percentage but not a huge dollar amount really, but it's continuing into this year. I don't know that it's at the 300% level but it's at a substantial growth over last year still.

We are of the opinion that that is going to be a very fundamental shift in building construction, primarily due to back in 2008 when that first rescue package was put out it had incorporated within it a tax credit for people building geothermal homes and also geothermal commercial buildings. And that was a fairly significant tax credit given commercial buildings of about 30%.

Definitely changed the ballgame about when you are selecting how you are going to heat and cool a commercial building. It had added an additional dimension to your thought process and probably influenced a lot of people going that way. Plus, everything in our society, whether it's the federal government, the states, or whatever, are pushing heavy on the energy issue.

Geothermal, with the exception of having a first-cost penalty, is a very efficient system. And so we think that it's going to grow and grow much faster than the rest of our business level. We have concentrated our efforts on it and we are very ready to take advantage of it.

Any idea on how much that is of your total sales base?

I am going to guess it's still in the single digits. In other words, somewhere between 5% and 10%.

Okay. Last thing, actually two more things. Could you comment on steel prices rising, what you are seeing on that and when that is going to affect you? Then also if you could also tell me how many shares you bought back in the quarter.

I will let Kathy give you the share buyback since she is the one that records those. Kathy, can you handle that?

Yes, I will. On the open market and the 401(k) buyback we purchased 94,115 shares at an average price of $21.34, Joe.

Okay, great.

On the steel, Joe, we were running around the $0.40 mark at the end of last year, $0.40 a pound. It's well into the $0.40s now so it's probably up somewhere between 10% and 15% from what it was.

We have agreements that carry us pretty well through the second quarter and well into the third quarter, but as you know we can't hedge that. All we can do is get agreements. And that is about as far as we have made commitments on so far.

I am hoping that what has happened a little bit to copper, and it has tended to soften since China seems to have slowed down its use a little bit last time I looked. I am hoping that will have some effect on steel's increase in cost as well.

Okay, great. Thanks a lot.

Jon Braatz, Kansas City Capital.

Good afternoon, Norm, Kathy. Norm, what about inflation or cost increases on purchase products like motors and things like that? What are you seeing in that regard?

There is some going on, no question about that. The backing off on prices and components that was pretty prevalent, say, a year ago seems to have pretty well ceased. It's pretty much now either a stable or slightly increasing situation. So inflation is starting to reassert itself a little bit but it's not very severe at this point in time.

Okay. To the extent that it does pick up a little -- if it worsens a little bit and with your markets being very weak do you think that you can pass those on?

It's going to be an interesting problem. As you know our profitability compared to our industry is quite good and some of our competitors I would have to think are going to be severely impacted. We are all going to be impacted but it's going to be more serious when you are down there touching whether or you make money or not.

So I would think they would start raising their prices, although I haven't seen it so far.

Okay. All right, thank you very much.

We have no further questions in queue. (Operator Instructions) William Driscoll, RMB Capital Management.

Thanks for taking the question. Just had a question regarding the gross margin level that the Company is that now versus the last time that revenue run rate was like this.

So if I look back at the history of the Company and trying to understand what the margins were like in 2004, 2005, the last time it more approached the $200 million level, what have you done structurally to make the gross margin so much higher this time around? And why do you feel it will stay at these levels, at these volumes? Thanks.

We have had a lot of things that we have bought, machinery and things of that nature, to improve the efficiency of fabricating sheet metal and fabricating things. The value-added part of our business; we have impacted that quite a bit in that respect.

We have got a more mature production department and engineering department, virtually the whole company, and we are just doing things smarter than we used to do them. So it's an increase basically in our productivity due to experience as well as the redesign of the products has been very heavily impacted by our knowledge of how to build something more efficiently. Those are things that are pretty solid in place and not likely to disappear.

Okay, thank you.

We have no further questions in queue at this time.

Okay. I thank all of you for joining us on our first-quarter report. I am anticipating being able to give you a more positive and a better outlook next time. I hope our economy has made its turn by the next time we talk and I know that AAON is going to be in better shape to address the economy and address the marketplace than we are today.

We are doing that every quarter. We are improving and it's going to improve for the next quarter. Thank you. Talk to you again.

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