Aaon Inc (AAON) 2010 Q2 法說會逐字稿

Good morning. My name is Barbara and I will be your conference operator today. At this time, I would like to welcome everyone to this morning's 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 now begin your conference.

Good morning. Norman Asbjornson here on second-quarter results for AAON. Before going forward, I'd like to read our disclaimer.

To the extent any statement presented here in 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 and our filings, including the Annual Report on Form 10-K and the Quarterly Report on Form 10-Q.

Thank you, and I'd like to introduce our CFO, Kathy Sheffield. Kathy?

Good morning. I'd like to welcome you to our conference call, too. I'd like to begin by discussing the results of the three months ended June 30, 2010 compared to June 30, 2009.

Revenues were down 6% to $64.5 million from $68.6 million as we continue to be affected by the current economic environment. Gross profit decreased 14.4% to $15.5 million from $18.1 million. Gross profit was 24% of sales during 2010 compared to 26.4% of sales during 2009.

The gross margin percentages decreased due to several factors -- lower sales, higher raw material costs, and a one-time charge related to expenses associated with the moving of one of our production lines from our East manufacturing facility to our West manufacturing facility, and also setting up additional production lines in the new Tulsa West building addition.

Selling, general and administrative expenses decreased 2.9% to $6.6 million or 10.2% of sales from $6.8 million or 9.9% of sales. The decrease was primarily due to a lower bad debt expense to reduce the bad debt reserve, a decrease in sales-related expenses; and also a decrease in profit-sharing due to the lower net income.

Operating income decreased 21.2% to $8.9 million, or 13.8% of sales from $11.3 million, or 16.5% of sales. Net income decreased 18% to $5.8 million, or 9% of sales, from $7.1 million or 10.3% of sales. Diluted earnings per share was $0.34 per share versus $0.41 per share a year ago. Earnings per share were based on 17,030,000 shares compared to 17,315,000 shares in the same quarter a year ago.

The results of the six months were revenues were down 14.2% to $113.8 million from $132.6 million. Gross profit decreased 18.6% to $28.5 million from $35 million. Gross profit was 25% for the first six months of 2010 compared to 26.4% in 2009. Selling, general and administrative expenses decreased 14.3% to $11.4 million or 10% of sales from $13.3 million or 10% of sales.

Operating income decreased 21.2% to $17.1 million or 15% of sales from $21.7 million or 16.4% of sales. Net income decreased 21% to $10.9 million or 9.6% of sales from $13.8 million or 10.4% of sales. Diluted earnings per share was $0.64 per share versus $0.80 per share for the year-to-date calculation. EPS were based on 17,150,000 shares versus 17,325,000 shares.

Moving to the balance sheet, that we still continue to have a strong liquidity position of $4.1 million in cash, which continues to aid our goal to stay as liquid as possible during today's uncertain economic times. Our current asset ratio is 2-to-1. Capital expenditures was $6.5 million, primarily for equipment purchases to set up manufacturing lines for the Tulsa building addition.

Shareholders equity per share is $6.65 compared to $6.85 for 2009, due to the repurchase of Company stock. We paid cash dividends of $3.1 million in January of 2010 and declared dividends of $3.1 million in June.

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

Thank you, Kathy. As reported, it's not a real bright first half of the year; however, there is a bright side to it, namely the fact that while our market is down somewhere in the 20% area, our sales are down less than that, indicating we've had an additional market share of what was available to us.

We also, even though we did not get a price increase, have not had one since 2008, we have been able to offset largely the cost increases which have occurred over the past two years through increased productivity, as well as a little bit of cost reduction in some of the new products that we've come out with.

The new products have been very well-received. It's noticeable that the first ones that were brought out in the fall of 2008 -- first, the next group that came out in the fall of 2009 and the others that have come out either in the spring of this year or the beginning of summer of this year have -- each one has started growing from what we would have anticipated, but the biggest growth is in the one that was out there the longest, indicating it's been in the marketplace. The customers have looked at it, liked what they have seen, and given us a disproportionate increase in sales of that particular product.

We therefore anticipate that as time goes on, these other products, which have been subsequently introduced as mentioned, will start finding a similar acceptance and gain market share for us, due to the advanced technologies and energy-saving features that these products contain. So, to staying on course during all this time of investment in R&D and new products, we believe is being very fruitful for us. And we're seeing the success of all that as we go forward.

Kathy mentioned that we did move one of our product lines from the East facility here in Tulsa to the West facility, and that has given us, obviously, a cost associated with it. We did not miss any production. We met all our customer ship dates, but it did cost us some overtime and it cost us a lot of other things associated with the move.

It immediately did not start paying off because it was a new production line and had to have the bugs worked out on it. It's much longer, much more volume-capable line than we had before, and therefore, we had a little bit of a start-up issue with it. We have, however, since the move, passed that point and we are now running at more productivity on that line than we were in the East facility. And we anticipate further improvement as we make additional adjustments to our methods that are available to us with this new product -- new production line.

We did also, in the West facility, extend two other production lines, making them longer, and spent some money doing that and disrupted our production a little bit. Again, not that we missed ship dates, but we did have additional time spent to make those changes.

So the West facility at the present time has three production lines in it, all pretty much redone and the math that we anticipate they being for several years to come. We do have additional production facilities to be installed in the West facility as future time allots and requires.

The East facility, where we removed the product out of there to move it over to the West facility, made available some space, which we've put our newest product in to production on. And it, like the ones on the West side, is a very long line for the unit and will allow us to have considerable volume increase as years go forward on all those production lines.

We still have two production lines operating on the East facility, which, in the future, will have to be revamped to give us additional capacity there for future years, but that is not a necessity in the immediate future, due to the economic conditions we're living in. But we are continuing to resolve a number of issues that allows productivity improvement in the Company in Tulsa.

We have, likewise, in the Longview facility made some adjustments down there and we're making some additional adjustments down there at the present time. We have not been introducing here in the most recent few months, new products, but we did last year and in the preceding years introduce several new products down there, all of which are growing very nicely for us. And it's one of the highlights of our Company, in that contrary to what has happened to us in the Tulsa facility, the Longview facility allow us much smaller volume in sales, has actually increased in sales for this year compared to last year.

So their issues in the Longview facilities are related to increasing capability to produce the product they're getting orders for. And most of that is related to personnel problems and various system problems of how we do things that we are working on to correct. We anticipate the Longview facility because it has grown from last year to this year in new orders. We anticipate that to continue as the acceptability of those products becomes greater out in the marketplace.

So we have the typical bad news/good news. The bad news we all know about -- the economy and how it is not doing anything really well for the building industry yet, in the commercial building industry, precisely.

On one positive side, there has been a modest improvement in the residential building and the old cliche in our industry is that somewhere, six months to a year or whatever number you want to use, after residential starts up or goes down, commercial follows. And that is a logical thing when you consider that most of the buildings we build are supporting structures for residential areas, such as schools, retail establishments, offices, and things of that nature. The only one of the major ones that aren't related to housing starts probably would be manufacturing facilities.

So, there are a few bright lights, but there's an awful lot of questions in the building industry right now, as you can read in the financial papers, some of the various things that are bothering the commercial markets -- commercial building markets.

We, however, have chosen to be cautious and make certain that we don't use up our liquidity position, but at the same time, not stop moving forward. And as mentioned, we have been moving forward in the facilities and in the new products, and we will continue to do so. We have additional equipment on order. We have also been buying back stock, as you can note in our financials.

So we are moving forward cautiously and positioning ourselves so that, as the economy turns positive, we will be in a position to take maximum advantage of that upturn. We, however, are being cautious so that if there is further difficulty in the economy, we have not expended all of our resources and we have the ability to, hopefully, contend with any additional problems which may occur.

I don't have a whole lot more to add to that, so I'll open it for questions and answers at this point in time, and see what questions you might have.

(Operator Instructions). DeForest Hinman, Walthausen & Co.

I had a couple questions. First off, can you give us an update on the current backlog? And also the orders booked for the second quarter?

Yes, I've got a backlog on June 30 of [$50,916,000]. The order position so far this year is virtually identical to last year. It has come in at different times so far, but as of the day we speak today, we're just a few dollars, and I mean a few dollars, ahead of last year in new orders. The difference in our bottom line and our performance is all related to the fact that in 2009, we went into the year with a bigger backlog than we went into the year with this year, and therefore, we have lesser shipments last year in the first half of the year than we had in the first half of this year.

But as far as new orders in the door, we are roughly identical with both last year to this year. Does that answer your question?

Yes, that was helpful. And also, can you put some dollar amounts around those moving costs you discussed, as well as the start-up costs for those new production lines?

Well, I'd like to have Kathy do it. I would caution you that it's a one-time cost, not going to occur again. So we didn't spend a lot of time analyzing it or taking care of it. We did -- what we spent our time doing is making sure we did it as efficiently as possible and with the least amount of disruption to our customers. And therefore, we didn't spend a lot of time recording everything -- the deviation from what it normally would have been. But she can give you a rough approximation of what she feels that was.

There was -- as Norm mentioned, there was labor involved, both in keeping the shipments going and the move. And there were also some other costs associated with that. But an estimate of that is about $1 million.

Alright, that's helpful. And then on the share repurchases for the quarter, can you give the number of shares?

Yes, we can. The number of shares which we bought back during -- let's say, I've got it here summarized for the year -- for the quarter was 646,368 shares and the cost was $15,473,058.10.

Alright. And then my last question was, it was nice to see the share repurchases in the quarter. You talk about you want to be cautious with the balance sheet. What level of cash are you comfortable with? And do you see yourself continuing to repurchase shares for the remainder of the year? Thank you.

Well, we're presently got quite a bit of money in hand in several different places, roughly getting close to $20 million, I guess, at this point in time. We feel comfortable enough that we have continued ordering some additional equipment to be received. A lot of this equipment won't be received until next year, but we've made financial commitments to buying this equipment and everything.

I always want to keep a reserve position of uncommitted money, in other words, future commitments I've made subtracted from what our present market position is -- I want to keep about $10 million beyond any commitments I make. And I'll vary that depending upon how I see the economy unfolding.

And then on the share repurchase front?

Right now we will probably diminish the share repurchase because we've gone into buying of equipment again.

Alright, thank you.

Joe Mondillo, Sidoti and Company.

My first question has to do with the gross margins and I was hoping you could give a little more color on where you expect those margins to go. It looks like, if Kathy's figure of $1 million on the one-time cost there of the production move, if that's anywhere accurate, it looks like your gross margins came in [high 25 point] -- [high 25's], which is still down from the first quarter.

And with the new products that you're rolling out, which are starting to gain steam, which should carry lower gross margins, do you expect still to see gross margins to somewhat decline throughout the year? Or how are you looking at gross margins? If you could give a little more color on that.

Okay. I've been saying for quite some times that our gross margin was probably a little higher than I anticipated it remaining, and I'd still sit with that position; although now that we're down into the high/mid -- or low/mid [20's] to [24] area, I think that's more realistic where it probably will go forward.

We're not being faced with any moving costs or any real big unusual costs going forward. And as long as nothing gets out of bounds on raw material costs or purchase costs, I think that our productivity will pretty much from here on, the rest of the year, should offset any minor cost increases we get. So I think we're kind of stable with where we are now.

And then in terms of the product mix, is that new product mix going to sort of lay on the margins as well?

Yes, it will, in two ways. The unit that we moved across the street was what we call our C box, which is 16 through 30 tons. It has done spectacularly well. It was one we introduced in the fall of 2008 and it obviously -- we can't give any other credit to the fact for that being disproportionately higher percentage of our business, other than the fact that the customers have received it very well and have been buying it in preference to something else they might have bought otherwise.

We anticipate that same thing -- scenario to play out on the other ones that were introduced in the fall of 2009 and the spring of 2010, and just this past couple months of this summertime now of 2010. However, they'll play out a little bit differently. The ones that were introduced last fall and early this spring, we expect them to make more money going forward as we get more efficient in building them.

The most recent introduction one was what I have told you before as a group, which is our two to six ton product line. We've taken a little bit more aggressive financial position with that product line to try and get it introduced in the marketplace -- more rapidly and more efficiently. And the reasoning for that is it's quite a change from the way that kind of a product has been designed by ourselves or our competition. And we believe it's got a lot of wonderful new features in it, but the only way that gets found is to get it in the hands of the users and let them make that judgment.

So we're taking a little bit of a financial hit on that product for the short-term, to try and get it populated out there better. And then we would expect it, likewise, to return a higher margin as we get through this introductory state with it.

So, some of the products are going to gain margin for us. One size product is going to probably harm our margin, the net result of which I think won't have a major impact upon it one way or another.

Okay. And then second question, just in terms of the order trends, could you give us a picture of how order trends played out throughout the quarter and throughout the month of July?

I will. The first four months of this year were below, not substantially, but they were below the first four months of last year. The last three months of this year have been above the similar three months a year ago. And so there's a trend line to comparing it to last year's similar months, there's a trend line toward a little bit more health occurring.

We are, however, to put a caution to that, we are going into the slower part of the year. The most -- the strongest part of our booking area is usually the second quarter. And it was a strong quarter, relatively speaking, this year, and it was stronger than the similar three months and the three months -- not a quarter really; it was May, June, and July -- were stronger than a year ago. So that would give us a little promise that we might be experiencing an upturn in new orders, but as I'd say, caution that with the fact that, normally, the last half of the year, our new orders is weaker than the quarter we just are finishing.

Okay. And then my last question just has to do with sort of an end-user demand-type question. It looks like your backlog is up about $4 million over last year. Considering new construction is continuing to decline or stabilize/decline, the environment is still weak out there. And given that your business sort of lags, given that you install a HVAC unit at the end of constructing a building, what kind of -- where is the demand coming from? Is it that replacement business? Or what are you seeing? What's driving the stronger demand?

There's no question that we're getting a higher percentage of replacement market than new construction, than has been historically the case for our Company.

We, by the way in which we go to market, have been slowly growing into the replacement market since day one of the Company as a percent of sales. Our strengths originally in the Company was primarily all in new construction and the replacement has grown as the years have gone by. We now probably have exceeded the 50% mark on our product line, selling into the replacement market as opposed to new construction.

The industry is definitely in the more replacement market now. I should distinguish between the commercial or the non-residential and the residential. Residential I'm not in, but my understanding of the residential market is it's a very high percentage of replacement markets, somewhere up in the [70's], probably, compared to new construction.

So the downturn in new homes hasn't hit them as hard as it would appear, if you were just following the new housing starts. Whereas commercial construction has, for the industry as a whole, been somewhere around the 50% market on replacement versus new construction. So there's a little difference there one should be aware of when looking at building that market and how we compare to some of our competition.

As you note, the market still has a downward trend, slight, but it's still a downward trend and the architecture is still in the downward trend on new design. So that's sort of negative. And the positive that we see is what we're gaining in market share. And then the question becomes, are we going to outrun the economy or not?

So far, we're not doing too bad a job of contending with it. I'm of the opinion that we're going to have a better chance to outrun it going forward than we've had so far.

So would you say, like, new construction is down like 15% and the replacement business is offsetting that by being up, like, 10%? Or is that sort of what's going on?

You may have a better feel for that than I. I know what ours is. Ours is not up that big of quantity, but it is definitely up some percentage. I couldn't give you a very precise number because I don't try and track it that well.

Okay. I'll jump back in queue. Thanks a lot.

Cory McCallum, GMT Capital.

A couple of quick questions, if I may. The first one, Kathy, just a bit of a housekeeping question here. Can you quantify the benefit from the reduced bad debt expense in the SG&A line? And kind of correlate what you're seeing there with -- that's allowing you to reduce that, even in the face of accounts receivables up 20% quarter-to-quarter -- is some of this older stuff? Or what's actually going on there underneath the numbers, please?

The AR is up basically because sales have been up. We were able to reduce our bad debt reserve because even though things have been so uncertain, we have not experienced a lot of write-offs. So we had some accounts that we had felt were questionable because of how they lagged out, but we were able to collect those. So just based upon the experience, we were able to reduce our bad debt.

Okay. And do you have a number for that?

Yes, actually for the quarter, it was about $300,000 and year-to-date, it was about $675,000.

Okay, thank you. And then, lastly, a little bit more of a conceptual question here and it has to do with your success gaining market share.

As I look at some of your major competitors, they claim to be up mid-single digits to high single digits in sales for the quarter. And the AHRI data for unitary shipments going of commercial size seem to be flattish in the quarter. Can you help me kind of vet out the differences there and where you're seeing the market share gains, given your sales? Thank you.

Yes, it's really because it's all relevant to last year's performance. If you look at our last year's performance compared to the previous year, and compare a lot of our competition's last year's performance compared to their previous year, you'll see they had a bigger downer last year than what we had. So they've been able to come back against last year better than what we have.

But what we're talking about, about the upswing is comparing it to our performance and how we think we should be doing and gaining market share over a longer period rather than just this year alone. We've been gaining market share now for two years.

Second quarter, also we're talking a little bit about the second quarter of last year, which was our best quarter in the Company's history. And I don't think anybody else will say their last -- the second quarter of 2009 was the best second quarter they ever had in their history; but that's the comparison we have to run against.

Thank you.

There are no questions in queue at this time. (Operator Instructions). Scott Lawson, Westwood Holdings.

Could you just add maybe a little more clarity to the direction of your SG&A level from the second quarter? I see a material drop from -- in 2009. Just trying to gauge how that works in terms of 2010?

Scott, the decrease was primarily from three areas. We've discussed the bad debt, and then also, our selling-related expenses were down, and then our profit sharing was down, due to the net income.

I'm sorry, what I was trying to get at is how to look at third quarter of 2010. Because I noticed in 2009, there was a material step-down in terms of SG&A. Wanted to get a sense of how seasonal, how controllable that would be in terms of third-quarter 2010?

Okay, thank you. Yes, we think it will hover around the 9%. So we think in the third quarter and the end of the fourth quarter of this year, that it will hover around 9% and actually be a little bit less than what it was this quarter.

Great. Thank you.

There are no further questions in queue.

Alright, well, thank all of you for joining us for our second-quarter report. I'll look forward to talking with you again in another three months. Have a good day. Bye.

This concludes today's conference call. You may now disconnect your lines.