Aaon Inc (AAON) 2010 Q4 法說會逐字稿

Welcome to AAON's fourth quarter and full-year 2010 sales and earnings conference call. I will now turn it over to your host, Mr. Asbjornson.

Good afternoon. Thank you for joining us for our 2010 year-end and our fourth-quarter report. Before beginning, I would like to read our Forward-looking disclaimer. To the extend 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 can cause AAON's results to differ materially from those anticipated. Please see the Risk Factors contained on our most recent Securities and Exchange Commission filings including the annual report on Form 10-K and the quarterly report on form 10-Q. I'd like now to introduce our Vice President, CFO, Kathy Sheffield, who will give you the numbers. Thank you. Kathy?

Good afternoon. I'd like to welcome you to our call also. I'll begin today by discussing the quarterly results for the three months ended 2010 compared to December 31, 2009. Our revenues were up 21.4% to $65.8 million from $54.2 million. Our revenues increased due to a gained additional market share primarily as a result of the favorable reception of our new products and also to increased market share. Gross profit decreased 4% to $14.2 million from $14.8 million. Gross profit was 21.6% of sales during Q4 compared to 27.3% of sales during Q4 of 2009. Our gross profit percentages decreased to the absence of a derivative that we benefited from in 2009; cost increases led by commodity prices, and our inability to implement price increases given the economic environment that we are in.

Selling, general and administrative expenses increased 14.2% to $5.9 billion, or 8.9% of sales, during the fourth quarter from $5.2 million, or 9.5% of sales. The increase was primarily due to increased bad debt expense and selling-related expenses. Operating income decreased to 13.7% to $8.3 million or 12.6% of sales from $9.6 million or 17.8% of sales. Net income decreased 6.1% to $5.8 million, or 8.8% of sales, from $6.2 million or 11.4% of sales. Diluted earnings per share was $0.35 per share versus $0.36 per share a year ago. Earnings per share were based upon 16,633,000 shares versus 17,281,000 shares the same quarter a year ago. The results of the 12 months or annual revenues were substantially level with the prior year, with only a slight 3.3% decrease to $244.6 million from $245.3 million in 2009.

Gross profit decreased 18.3% to $55.2 million from $67.5 million. Our gross profit was 22.6% of sales for the 12 months of 2010 compared to 27.5% in 2009. In addition to the reason mentioned in the quarterly discussion, gross profit was affected by one-time costs associated with relocation of production line and also the addition of production facilities. Selling, general and administrative expenses decreased 5.5% to $22.5 million, or 9.2% of sales, from $23.8 million, or 9.7% of sales. Decrease was primarily due to a decrease in profit sharing related to a lower net income. Operating income decreased 25.2% to $32.7 million, or 13.4% of sales, from $43.8 million or 17.8% of sales.

Net income decreased 21% to $21.9 million, or 9% of sales, from $27.7 million or 11.3% of sales. Diluted EPS was a $1.30 per share versus $1.60 per share. Earnings per shares were based on 16,893,000 shares versus 17,309,000 shares the same period a year ago. Our effective tax rate decreased from 37% to 33%, due to an increase and the domestic production activity tax credit from 6% to 9%, higher R&D credits than we anticipated and other domestic credits. We expect that our effective rate to be in the range of 33% to 35% for 2011.

Moving to the balance sheet, we see that we continue to have a strong liquidity position of $2.4 million in cash and no long-term debt. Our current ratio was 2.5 to 1; capital expenditures were $17.5 million for manufacturing and equipment purchases and costs to expand our manufacturing facilities at the Tulsa location. Shareholders' equity per share is $7.07 compared to $6.85 for 2009. We paid cash dividends of $9.2 million in 2010. I'd now like to turn the call over to Norm who will discuss our results in further detail along with new products and the outlook for 2011. Norm?

Thank you, Kathy. The increase of 21% in the late third quarter -- or fourth quarter in 2010 plus 2009 should also be noted that the marketplace, as near as we could tell, was down approximately 14% last year compared to 2009. So what it really meant is we took about 35% of our sales from our competitors in that quarter so we had quite a remarkable increase in market share last quarter. The new products are now pretty well all introduced as far as the rooftops are concerned and now we've turned our attention over to chilled water systems, and chillers and we're introducing new products in that area, broadening our reach into the applied products as opposed to the unitary where we have historically been.

Looking at what the business situation looks like this year, it looks to us like there's going to be a modest increase but it's -- it looks like it's going to be primarily in the latter half of the year. There's one possible major exception. There was passed at the very end of 2010, a Tax Relief Act, which allows a 100% depreciation of certain qualified asset -- capital goods and that we believe may have a big impact upon people's replacement business of air conditioners. If that comes into being, it should happen relatively soon and perhaps is already beginning happen as is reflected by our increased in new orders compared to a year ago.

Looking at the general nature of the various building classifications, I will just give you a quick rundown of my perception of it. Commercial and Retail just isn't good at all. Office buildings, a little better but not much. Medical and Healthcare is pretty good. Education is pretty good. Manufacturing is not. Lodging is not real good. Municipalities, in other words, more Governmental buildings is fairly good. In general, all other buildings is just a tough market. We think that from our peak in 2008, our general building -- new buildings market is down over 50%. The one salvation in that is, of course, is the fact that approximately that half of our business or a little bit more now comes from replacement markets and we know replacement market has moderated downturn in new construction. And as I said, if this Tax Relief Act of 100% depreciation on qualified asset capital goods really talks to other people as it does to me, we may have a much better year coming up right now than anybody really realizes and that anything I have seen predicted.

New products have just been very, very warmly received as you can see by our results in the fourth quarter. I believe that's going to continue on and so we fully anticipate continued increasing of market share. Looking at what else is going on, we've done extremely well last year in our Longview facility on split systems which is air handlers and condensing units. Those have had a remarkable growth throughout the entirety of last year and that continues. Unfortunately, it's not a -- not as big enough number to have as big an impact on total in absolute numbers as it does as percentage of growth. The percentage of growth is quite remarkable. So the split system -- the new split systems we introduced a couple of years ago have really found a willing customer base. The backlog is also indicative of upturn. In the end of 2010, our backlog was $38,370,000 compared to a year -- I mean, excuse me, that was compared to the year ago when it was -- just a minute -- compared to a year ago, $32,152,302.

The incoming order rate has -- while it's been quite good so far, we anticipate it to definitely be impacted by a product show which we held on January 31 in Las Vegas in conjunction with our industry-wide [ASH] ratio. We took about $1.5 million worth of equipment out to the show. Everybody that I spoke with and all that the reports we've gotten has been what we showed at the show was extremely well received, and we definitely expect to get an increased, lot of business to that show. We don't, however, expect that to happen very suddenly because most of the people we were showing it to were the consulting engineers who, if they feel good about it, and went back; they specify this on buildings yet to be built and the -- between the specifying and the time that we actually ship the equipment is somewhere around six months usually. So we expect this summer to be impacted by the show that we had in Las Vegas.

The margins have been diminishing. We haven't had a price increase -- a general price increase since early in 2008. We did have a price increase in November on our split systems out of Longview, 5% price increase; it went through very well. It did not disrupt our order flow very much. We have a variable price increase which is going to go into effect at the end of this month on the 31 of March. And that is variable but -- by various components in the units so I can't tell you it's a flat number because it is not. I think as a general rule, it is around 5% that we will get as an increase. But that, again, will not find its way toward bottom line until the very end of the second quarter or possibly the third quarter, since we have to work through all the backlog before we get to that price increase.

We do anticipate a continuation of commodity cost increases. The United States no longer is a big factor in a lot of the commodities. They're really a world product and as such, the world's doing better in the recovery than the United States and so the commodity prices have already been going up and I expect them to continue going up. We did not, unfortunately, have the ability to have a derivative this year in 2010, nor do we have any in the offing at the present time.

We're strictly in the market at the cost of whatever it happens to be today. We, although I think it's going up, I don't have enough confidence in that statement that I want to go out and go into the futures on it. All of our materials have increased over the past year by fairly large percentages. For instance, Copper has gone up by $2.03 as an average from down in the $2 a pound to the $3 -- $4 and something a pound. Steel didn't go up so much dollar-wise but percentage-wise, it went up quite a bit from about $0.40 a pound to about $0.45 a pound. In other words, about a 10%, 11% increase. Aluminum also wasn't -- didn't go up so much dollar-wise but as a percentage, it was pretty large. We basically went up from down around a $1 a pound up to about $1.70 something over $1.80 a pound end of 2010, so about a 70 -- 60%, 70% increase on Aluminum. That's really the driving force because a lot of our components that we buy from our vendors are made of those materials and so the vendor prices for components has also increased.

We have been fortunate in the past three years to have been able to improve productivity consistently and therefore, moderate the effect of the cost increases on our profitability. I believe that is going to continue to go and we'll be that same way for the rest of this year and for the foreseeable future. The big difference at the present time is perhaps, what I mentioned a little bit ago, about the Tax Relief Act which was passed in December of 2010. When that got passed, it appeared to me to be an absolute windfall for anybody needing to buy capital goods and therefore, we accelerated a lot of our capital goods buying for -- into 2011 which we normally wouldn't have done until 2012. And we've increased it by about over 50% to where our capital expenditures this year will be in the vicinity of $28 million, $29 million, $30 million.

And what we're basically doing is we had six of our sheet metal fabricating machines that had run long ways. They had anywhere from 70,000 hours on them up into the high 90,000 hours. And if you recognize it in a 360-day year, we'll have 8,760 hours, you get a feeling of how many hours those machines had on them. The -- we run our machines quite heavily and so we get a lot of use out of them every year. But we basically decided we would replace those machines this year and that is going to occur. They will be replacing the older machines with all of those work hours on them throughout the entire year, clear up and into December of this year. So it won't hit us at any one given time particularly; it will be across the entire spectrum of the year.

The outlook for 2011, we anticipate that we're going to have growth this year. We look -- anticipate we will have improved profitability this year. A lot of it is going to depend upon how effectively we do all of the implementation of the various capital issues that we have going on. We have comparison time a little over 200,000 square feet of additional building under construction. That building is primarily for warehouse facility which we've been in bad need of for several years. We've had stuff stored outside which should not have been outside and we'll be bringing that in. It will also allow us to become more effective in the sale of parts and our Parts business runs roughly $1 million a month and we anticipate when we get the new facility in place, it won't happen this year.

It will have no affect on us this year but next year, being 2012, we expect to have a fairly sizable increase in our parts business due to the putting this warehouse in place, in addition to which the efficiency of the whole operation will improve. And I'm sure we've got a loss factor that will be lessened once we get everything in the warehouse. So things are looking brighter for us this year but there's certainly going to struggle with a very weak marketplace we believe for the balance in the year. That pretty much concludes my formal presentation so I'll open it to questions at this point in time.

(Operator Instructions) We do have a question from the line of Jon Braatz with Kansas City Capital. Your line is live.

Good morning, Norm -- no, good afternoon.

Hi Jon.

A couple of questions. Norm, you'd -- you talked a little bit about new product introductions this year, the chillers and the chilled water and compared to your new products that you introduced in 2010, is this market segment, market niche opportunity bigger than what you saw last year? Can it make a greater impact on the business?

The total market is roughly comparable dollar-wise. Our entry into it is a lesser percentage. In other words, the number of products we're bringing into that market as compared to how many we have in the package market is going to be fewer. So we won't -- we're entering, we believe, very -- with a very strong offering. It's not going to enter as much of the market as what we are in, in the rooftop portion.

Okay. And in this past year, 2010, you absorbed some costs associated with your expansion. Can you quantify what the impact of all that might have been, and what it might be this year What you might be, quote on quote gained from a fewer expenses.

Yes, it's a very complex thing because we have -- we had two things going on last year that won't be going on this year. The first of all is the fact that going into the new product and into the new facility and putting in new production lines, trying to figure that out is very difficult because you've got so many things happening there so we don't -- we didn't give a lot of effort. We tried to do it very efficiently but we didn't try and keep track of the particular costs that associated with it. I would -- my guess would be we probably had somewhere between $300,000 and $500,000 impact on us.

Now the other one which is even harder to equate to is, the fact that when you change product lines, you have a learning curve to come up to, especially when you do a total re-design which we did. We didn't just do a modification of an existing design. We totally changed the character of the product. And so there was a learning curve for all of our assemblers on that, and that probably had a bigger impact on us than the moving of the line throughout. Both of those are behind us now. And so they won't be around plus a third thing that goes along with that, when we obsoleted the product line, we had quite a bit of scrappage, because you can never balance out your sheet metal and all your things perfectly. A lot of the things you keep over and use as repair parts but that doesn't include sheet metal.

Yes. And then finally, as you talked about air conditioners and the air conditioner replacement market this year, as we head into the hotter months, hopefully it gets hotter sooner rather than later. But the -- when do you think you might begin to be able to see exactly where this market may be going with a little bit more precision than when you are -- than what you can say at this time?

Well, I personally -- I don't know if other people view that end of the year, last year, Tax Relief Act the way I do with accelerated depreciation but I think that might be a real sleeping giant in our economy. Finally, they found -- they finally did something that I consider a stimulus as opposed to just spending money which is what I thought they did before. They just spent money. This time, they really put a stimulus out there. That's why we upped our capital expenditures this year over $10 million. It will -- better than a 50% increase because I only have to put out $0.65 for every $1 I buy. The other money I get an immediate reduction in my income tax from the Federal government. So it makes the cash flow situation much more impressive. And I would think that there's going to be a lot of people in our industry that have worn out air conditioners that are going to accelerate the purchase of them.

So my guess is that it's taken awhile for people really to realize since it was passed very late in the year what that opportunity is. But if they do what I think they're going to do, I'd expect any day and maybe it's already begun, that people are starting to do that. Because in order to affect that, you have to have the product installed and operational before the end of the years so that means you've got to start moving on it. My -- as far as the timing is concerned, we have this price increase which is going in on our rooftop products at the end of this month. I have a benchmark; I figured if I'd -- if we book $20 million this month then maybe I'm all wet. Maybe that's what I think is going to happen isn't going to happen. If we are under $20 million, it's going to bother me greatly because I think that this market is sicker than I think it is. If it goes significantly over the $20 million, then I think that we're off to the races and it could be a better year than what I anticipated.

Okay. Norm, thank you very much.

Okay.

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

Good afternoon, Norm and Kathy.

Hi, Joe. How are you?

Hi, Joe.

Good, thanks. Norm, I was wondering if you could speak about -- you talked about input costs rising. Could you talk about the dynamic between implementing the price increases and what you're seeing in the rising raw material costs and whether you can -- how much can you offset with those price increases? And what you're looking at, given that dynamic, what you're looking at for your gross margin this year?

Well, right now, of course, with what backlog we have and what we will pick up between now and the end of March, it will all be at the old price. And so we'll have to work through that before we get any price relief from Tulsa. We have a modest amount down there in that 5% that we put in at Longview. So I don't anticipate for the next quarter or this quarter or the next quarter any significant improvement in our margin. I think the 5% or somewhere in that vicinity that we are putting in to effect, if the commodity costs are not going to go up appreciably and I don't believe they are. I think they might moderately go up but it's going to be pretty small, I think, at this point. If I'm correct on that, and that increase -- that price increase will gain us back some gross margin come the third quarter; basically, this won't happen much in the second quarter. So I'm thinking that we will improve our margin may be 1% from last year or 1.5% but not much more -- in the year as a whole.

Okay. That's helpful. In terms of SG&A, how should we think about that. Can we flat line what you saw at the end of -- or in the fourth order or I guess, that actually is going to fluctuate with volume but how can we think about that line?

I think it's going to be in the lower 9%.

Lower 9%?

Somewhere between 9.3%, 9.4%, 9.5%, in that vicinity.

Okay. And then, In term -- you talked about backlog. I was wondering if you have the backlog today?

Right today? No, I do not. The closest I have was the first of the month. The first of the month, the backlog was $37,977,841.

Okay.

So it was down from the first of the year by about $400,000 or it was -- what we shipped this quarter, we've shipped $400,000 more than what we've order -- taken in orders.

Okay. And since the first of the month, has business picked up or -- ?

It seems to be still fairly steady. It's better than last year, than a year ago but it isn't really roaring. It's picked up about maybe 5%, 10% from a year ago. So far, it hasn't note -- given us a big noticeable upswing. That's why I'm watching what happens in March because if there's going to be a big upswing by this tax thing, it should start happening in March or April for sure.

Okay. And then in terms of the your replacement sales versus new construction, I guess, where would you say you are in the new construction cycle? Are you still at the bottom or where would you put yourself in that cycle that you're witnessing?

I think that the new constructions still skidding along the bottom. I don't think it's going up a lot. It may be going up very modestly but it's pretty modest at this point in time.

Okay.

Most of what I'm counting on of changing is doing the replacement market to repair replacement and obsolete units. So it'll be the replacement market where I expect the growth to really happen this year.

Okay. And then two more questions. First, I was wondering if you could -- you were speaking on the new Chiller products. A couple of your comps have mentioned introducing Chillers. I was wondering if you could give us a little more color on that market and why, I guess, you, including other competition, are attacking that market, more so than any maybe other type products? Then secondly, just in terms of municipal budget cuts, how is that going to affect the business at all, if at all?

Okay. On the first issue, we've been in the Chiller market in a modest way and in the air handler market in a modest way for several years now. What we have done in the Chiller market, however, which we introduced at the January 31 product introduction meeting at Las Vegas was a -- what's called a centrifugal chiller and it's a type of a compressor and the compressor we buy from a [product] company called Turbo Core. This compressor is state-of-the-art in the compressor world. And it is the thing in that world, that's really changing the dynamics, primarily for a couple of reasons. Number one, it's got a magnetic -- got magnetic bearings. In other words, they are mature and the compressor floats in air in a magnetic flux. It does not touch anything; does not require oil. So when you get rid of the oil, that improves the efficiencies of all your heat exchangers surfaces in the unit.

So it improves the efficiency there, plus the fact that it has no rubbing of metal to metal on bearings improves the efficiency of the motor and the compressor. And it's got all the electronic things that they could dream up in the compressor to make it even more efficient. That result of it is a very highly, efficient compressor. We have coupled the compressor with a patented evaporative condenser which we have and none of the chiller people really have that at this point. They don't build those condensers so we've got a product that is unlike anything that's in the marketplace. And coupling it to the evap condenser effectively takes the place of what is normally done in the Chiller industry of putting a chiller, and putting condenser water pumps, and putting a cooling tower, and then tying them all together in the field with piping and everything to put those three items in conjunction with each other in order to get an operating system.

We package this evap condenser, along with the compressor, in a packaged unit that comes out ready to run. So we make it a much more cost-effective way of chilling water. Chilling water is very popular in high-rise buildings and in certain types of buildings. It is roughly half of the marketplace for Commercial and Industrial marketing. This is not all of the Chillers that are available; in other words, we're not in the entire Chiller market. But we're probably into, I'm going to say, 30% or 40% of the Chiller market with this offering now plus our other offering. What is further, really interesting in this, I had talked about the efficiency of what we've got.

But what really sets it apart in the fact that, in addition to the first cost being very good, probably very comparable or lower than -- putting the other ones together, the efficiency is decidedly the highest in the marketplace because of the fact of two factors. You have one less heat exchange surface going from hot gas to water and water to air; you go directly from hot gas to air in the heat exchange surfaces and that eliminates one efficiency loser. And the second thing, we don't have to pump that water and the high cost of pumping all that water because we eliminated the water from that equation. And therefore, the total operating cost is decidedly less. It's very straightforward. It's no smoking mirrors at all. It's very understandable by anybody who understands Chillers.

So we've got a highly efficient machine that's very cost competitive and the biggest problem we've got is marketing it, going out and telling people about it. How fast we get that accomplished is going to depend upon how much of an impact it has. The -- in addition to which, now that we have finished our design work on rooftops, we've turned our attention more to Air Handlers, so now we're going to start bringing out more innovation and better ideas into the air handling world so while it's not going to have a huge impact right now because we're just getting underway with this, it will really start impacting by the end of the year or in the first of next year. And it's about 50 -- it's equal to market where we've historically been.

All right. Very [thorough]. Thank you.

You had one other question. What was the other -- ?

Yes, the municipal budget cuts and potentially, I guess, maybe potentially Federal budget cuts?

Yes, they've -- I don't know that Federal budget cuts will have some impact. The municipal hasn't been doing a lot other than in the schoolhouse. And in schoolhouses, they don't normally fall right in to the State budgets; what they normally do is they run bond issues for building schools. And so, to the extent that these taxpayers are willing to vote positive on bond issues, the School business will continue to thrive. I, obviously, think that any state that has problems now with tax, they're probably not going to be bringing out bond issues to build more schools very readily. But I don't think it's going to completely shut it down. So it is going to have a negative impact. Huge? I don't know.

All right. Well, thank you very much. Have a good afternoon.

You're welcome.

(Operator Instructions)We have no questions in queue at this time.

Okay. Well, I'd like to thank all of you for being in attendance on our fourth quarter of 2010 as well as the year-to-date. Look forward to seeing you again in another ninety days. Thank you again for attending. Good-bye.

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