Aaon Inc (AAON) 2011 Q1 法說會逐字稿

Welcome to the AAON, Incorporated, conference call covering the financial results for the first quarter ended March 31. I will now turn it over to your host, Norman Asbjornson.

Good afternoon. Before going into it, I'm going to read a forward-looking disclaimer. To the extent any statement presented herein deals with information that is not historical, including the outlook for the remainder of the year, such statement is necessarily forward-looking and made pursuant to the Safe Harbor provisions of the Securities Litigation Reform Act of 1995. As such, it is subject to the occurrence of many events outside AAON's control 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.

Thank you and good afternoon. I'd like to introduce Kathy Sheffield, our CFO, and she will go through some of the information with you.

Good afternoon. Welcome to our first quarter conference call. I'd like to begin by discussing the results for the three months. Revenues were up 22% to $59.9 million from $49.3 million. Our revenues increased as a result of the favorable reception to our new products, a successful trade show that we held in January of this year, and our ability to gain additional market share.

Our gross profit decreased 11% to $11.6 million from $13 million. Gross profit was 19.4% of sales compared to 26.4% of sales last year. Now, the gross profit percentages decreased due to a number of factors, including increased labor costs and labor inefficiencies associated with the severe snowstorm damage that we had at our Tulsa production facility in February, which resulted in 8.5 days of lost production, which also affected three production lines. Norm will address this subject in greater detail in his discussion to follow.

The decrease is also attributable to escalating raw material costs that we were unable to pass on to our customers in the first quarter and an increase in manufacturing supplies related to the increased sales.

Selling, general, and administrative expenses increased 15% to $5.5 million, or 9.3% of sales, from $4.8 million, or 9.8% of sales. The increase was primarily due to increased selling expenses related to the specific trade show that we mentioned earlier and warranty expenses related to an increase in sales, offset by a decrease in profit sharing, which corresponds to the lower net income.

Operating income decreased 25% to $6.1 million, or 10.1% of sales, from $8.2 million, or 16.6% of sales. Net income decreased 27% to $3.7 million, or 6.1% of sales, from $5.1 million, or 10.4% of sales. Diluted earnings per share was $0.22 versus $0.30 per share the same quarter last year. Earnings per share were based on 16,626,000 shares versus 17,271,000 shares.

Moving to the balance sheet, we see that our receivables have decreased $1.3 million, and that has been accomplished with higher sales. Our inventory has increased due to increased volume, increased backlog, but primarily due to pre-buying of material to avoid raw material and component part increases.

Our current asset ratio was 2.2 to 1. We had capital expenditures of $10.3 million, and that was related to some additional machinery and equipment purchases and a new building addition that we started here in Tulsa. Shareholders' equity per share is $7.20 compared to $7.09. We currently pay cash dividends of $0.36 annually, and the stock split, which we announced today, will create a dividend of $0.24 annually.

We did have some intermittent borrowing on our revolving loan agreement, and we do have investments maturing.

I'd now like to 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?

Yes. I'd like first of all to talk about our volume, or our sales, which were up 22% from a year ago. And let's compare that to what the newest Census Bureau's March report says is the situation in buildings. And I'll just read them off very quickly and tell you how that fits us.

Commercial and retail, down 6.5%; office buildings, down 13.7%; medical and health, down 3.2%; education, down 9.2%; manufacturing, down 28%; lodging, down 31%; municipalities, down 2.3%. So now we have to go up and dig into to that to say, what do we think? I would say conservatively, the markets that we were serving out of those groups were down at least 10%. If you add that to the 22% up that we are, that says we took a minimal of 32% away from the rest of the industry players in there. So we're feeling quite good about that.

That's due primarily to two factors which have occurred. As we've been talking for several past quarters, we did not slow down our Company at all during this recession. We reinvested our time in development of new products. The new products have been very well received by the industry. And as an effort to expose the industry more thoroughly to what these products are, we chose to do something which we had never done in the past, which was create our own trade show.

We did that in conjunction with an industry-wide trade show called ASHRAE, which held a meeting on January 30 through the first three days of February in Las Vegas. They also have an opening house in a trade show, but that exposes our products to everybody who wants to come to the trade show. We thought that was ill-advised, so we worked a deal out with a casino out there, rented their parking lot, put up a very large circus tent, brought six truckloads of equipment, somewhere around $1.5 million worth out, and held an all-day open house by invitation only to select personnel throughout the United States and some international, people we considered to be very influential in determining what products get purchased in our industry -- for the most part, consulting engineers.

We had somewhere close to 4,000 attendees. We started out, our initial goal was to get over 1,000, so we were immensely successful in bringing in a lot of these people.

This trade show made a noticeable difference, based upon the trend line of our sales since that trade show compared to the trend line of our -- I shouldn't say sales; I should say order entry -- the trend line of the order entry prior to the trade show. So we did do just what we tried to do. We influenced some more sales coming our direction. It resulted in giving us that 22% up from a year ago, the new products and the fact that we were able to show them to people who really needed to evaluate them.

So we're feeling quite good about where we are in the industry at this point in time. We basically have the bulk of our products are just redesigned in the past couple to three years, and we're involved in still some more work at the present time.

In that area, because we had great confidence in what we were doing, we have been embarking upon considerable building of our facilities and our manufacturing capabilities in order to take care of what we believe to be an upward trend in our sales, and we believe a healthier situation in the industry.

If we evaluate the industry, we will see that it's been on a noticeable downswing. The peak of the industry occurred in the early part of 2008, and it's been on a continually downswing, almost without any change, since that time until about October or November of last year, when we did get a little bit of a rise, only to start back down again in December on into January. However, from January of this year, we've had a slight rise going on for the first three months, so we are in that part of the industry cycle now whereby we're more or less stable. And it looks like maybe we've got a slight increase occurring.

Now, you have to recognize that what I said was in January of this year, we were coming into a further decline. So compared to January a year ago, it was substantially less. In March we have still not climbed back up to where March of a year ago is. But the general trend of it is to indicate that the probability is that the industry will pick up enough volume throughout the year so that it will somewhere near balance out with last year's volume in the industry. And we intend to have considerably more of it in our camp.

The response to the new products, and you're wondering what are we talking about? We're doing particularly well in rooftops, as our traditional place of being. But we're also doing quite well in split systems, which is primarily due to our Longview facility, and we're growing in that endeavor at a very healthy rate as well. So it's not limited to the rooftops any longer; it's also split systems.

In addition to which, we went into what is called by some people in our industry a floor-by-floor system. It's a product line which basically has been used a lot in high-rise facilities, all the way up to the highest high-rise built. And that has been growing very nicely for us.

We also are doing pretty well in the chiller business, and we've been spending some effort there as well as in our regular air handlers.

So the world is looking much broader to us than our historical rooftop-only market. We are now becoming significant in other areas. So things are looking good for that endeavor.

We are having one difficulty, however, in that because we now have gotten more capability in our ability to build equipment, we now have the ability to overrun our order input. And so we're not able to ship as fast as we want, simply because the customers at this point in time are not ready for delivery of the equipment. The forward look, however, is, of course, that those orders are going to go out this summer. So we would anticipate that the second quarter will have an upswing, and probably a further upswing in the third quarter if things continue as they are presently.

Our backlog at 3/31 of $48 million was significantly greater than our backlog a year ago. We did have, however, a glitch in our report a year ago, wherein we had some intercompany reported in the backlog that we reported a year ago. But the fact is, at the present time, correcting for that little glitch that we had, we're comparing $48 million to $36.1 million a year ago. And so that's indicative of the upswing in the orders of which I spoke, and which was represented by our 22% increase so far this year.

The gross margin has had a pretty bad beating, for a number of reasons, the effect of the snowstorm in Tulsa primarily being the biggest culprit in it. As a for-instance, things that one wouldn't normally expect, but do have effect -- a lot of our personnel took vacation time when we were shut down which, of course, depleted the reserve we had for vacations. And by the way in which we work our thing, we had to increase some $300,000 in our reserve for vacations, even though that will probably work its way back out in the future. That hit our bottom line.

We had the effects of the damage that we had on the building. Also, that had an effect on the way we ran and, for instance, the indirect labor that we had to expend that was due to the damage that we had and the problems we had. It took another pretty good chunk of our money.

Now, we also mentioned that profit was diminished by the fact that we had variances from commodities and purchased parts. Those two things combined had a net earnings per share effect, after all things were considered, of $0.03 on our profit per share. So you can see that we had a number of things to deal with.

Toward that end, we have had a price increase in our product at the end of last year in our Longview facility of about 5%. And at the end of March, we put approximately a 5% into effect on most of the products from the Tulsa facility. That won't immediately result in a change in our bottom line, however, because we have considerable backlog with previous priced product in it, so that the results of that will start finding their way onto the P&L statement some time in June, but not before. We believe that the price increases we've effected will overcome the cost increases and everything that we've had.

And we've got an additional thing which is occurring in here that's causing us cost, which is we're moving production lines around and making them more efficient. We've had a considerable amount of discussion and study going on for a number of years on how to improve our productivity, and we're embarking, and did last year or last quarter, on some of them. And we're continuing on that. We've made one change in one production line this quarter, this past quarter. We will have another one or two changes of production lines going on in the quarter we're in now. And all of these things will improve our productivity. So that also will give a help to the price increase toward putting it onto the bottom line.

If we'd had no snowstorm at all, we would have had approximately the same gross margin this year as we had last year. But that, as we both know, is not what happened to us.

So looking at what else is going on, the SG&A, of course, has slipped or gone up a little bit, and a lot of that has to do with the increased volume. Personnel-wise, we are now just passing into a new level of more personnel than we've ever had in the past. Some of that is predicated upon the fact we are hiring and training in anticipation of continued growth.

The $3.7 million for the quarter was a disappointment to us compared to the $5.1 million a year ago, but when we look at what-all we had to go through, we're still pretty proud of the situation. We're still in a good cash position at this point in time. We are borrowed some on our line of credit right now, but we anticipate most of the capital expenditures to occur fairly quickly in this year, and we'll probably be in a somewhat, a minor borrowing position for the mid part of the year, coming out of that situation toward the end of the year.

And a lot of this is all predicated upon what we spoke of a little bit before here, about improved efficiencies. We are exchanging some of our earlier computerized sheet metal equipment. We've turned it in, because we've basically warranted out, and the newer equipment that we're getting in is faster and more efficient than the equipment which we are obsoleting. And so it will give us some additional ability to lower our cost on our product.

So there's a lot going on in the Company, all predicated upon a healthier economy and healthier business climate for us and more growth for the Company.

I'd like to thank you for this time, and now I'd like to open it for audience participation. I'm now open for questions.

(Operator Instructions.) Joe Mondillo, Sidoti & Company.

So, Norm, you spoke to all the general markets that you sell into and how they're performing. I was wondering if you can talk about replacement versus new construction. What is the breakdown for the sales right now, and how big of a driver is replacement right now, and where is new construction right now?

The numbers I spoke of, of course, were all related to new construction. The replacement market has become a bigger part of our business. I don't have much more than what I've said before. I think we're now up somewhere in the 55% area on replacement versus new construction work. Historically, we had that turned around. We were usually 55% on new construction, 45% on replacement. So it has reversed itself on that.

I think the new construction is about to take and move up. However, I also think that the replacement market is moving up also. So I'm not sure that that ratio is about to change any appreciably going forward, because I think they're both starting to move in a positive direction.

Okay. And then in terms of -- I might have missed it -- but in terms of raw material prices, I know you mentioned this in the release. How significant is that and going forward, how cautious are you on that front?

That was what we were talking about, about the $0.03 earnings per share that it cost. It right now seems to have balanced out a little bit. In fact, copper is a little bit soft now compared to what it had been a little bit -- not much, but it at least stopped its climb. Steel seems to be still a question mark about going up, as does aluminum. So they're going up.

The biggest problem we really have is in purchased part, finished material like motors and compressors and things like that. Because just like ourselves, those things contain copper, steel, and aluminum. And they are running a little behind where they would like to be on their pricing, so they're trying pretty hard to get price increases. And that's probably going to cause us more problem going forward than the raw -- I sure hope it does -- more than the raw commodities.

So the $0.03 -- again, I'm sorry I missed it. But the $0.03 is just a result of locking in the price and then seeing raw material prices --

No, the $0.03 is what we figure we lost because of these cost increases. In other words, if we had not had commodity cost increases, parts cost increase, we would have had $0.03 more on our bottom line -- $0.03 per share more.

Right, okay.

That's what it cost us on a per-share basis.

Okay. And then I'm not sure if you talked about this, but in terms of April versus January, February, and March, how things have trended throughout April compared to the first quarter?

April's continued on a positive fashion. Not overwhelmingly positive, but it's in line with the first quarter. It still seems to be tracking out, and at this point, the 22% that happened in the first quarter looks like it has a reasonable expectation of doing that in the future year. I don't see any logic not to think that.

Okay. And then in terms of the new products versus your older products, it seems like the newer products are really gaining traction. Should we expect a slower ramp-up or maybe a stable gross margin as a result of those newer products carrying a lower margin? However, hopefully, your top line offsets that?

I think we're going to do some correction of the gross margin here from where it is right now. As I mentioned, some of that gross margin's been distorted pretty badly by the snowstorm, so it's hard to say where it was. As I said earlier, if we hadn't had the snowstorm, our gross margin would have been approximately what it was a year ago. But that's not what we had.

So if you just look at the new products versus your older products as a percent of sales, are the newer products becoming a larger part of total sales, so because those newer products do carry gross margin, excluding the snowstorm effects, should we expect gross margin to somewhat --

Yes, I understand, I think I understand your question now. As the newer products which, are they carrying a little bit lower margin than the historic products? Yes, they are carrying a little bit, but not very much. Are they going to carry more or less than the older products going forward? I don't think so. I think it's a temporary thing, but what is temporary? That's the question mark. As we go forward, they're going to close and become more similar to one another.

So the net result is, what's going to happen to the gross margin? I believe the gross margin's going to get healthier and get back more toward where it was, say, a year ago, and possibly go on up, depending upon the economy and what we choose to do about trying to get market share. Because some of these new products, once we expose the customers to them, so occasionally we'll hurt ourselves a little on margin in order to get an entryway with the customers so they can see the product and get some experience with it. So that will go on with the new products as we move forward.

Okay. And in terms of the snowstorm, did you have to stop taking orders at any point in time, just because you felt like you couldn't get the orders out in time because you had to close the factory for over a week?

No, we didn't. Obviously, the backlog all slipped back on production by somewhere approximately two weeks backwards. But we rapidly were able to pick that up. Because of our capacity that we have here, we were able to pick that up, even though it was a pretty rough environment. Because in those seven days, we got as much snow here in seven days as the previous all recorded history had never had in an entire winter with that much snow, and we got it all in seven days. It's our new record snowfall was done in seven days here.

And then it blew considerably. And what happened, because we had various levels on our roof, the lower levels on the roof got snow banks on them that were 10 and 12 feet deep of wet snow. And that drastically overloaded the building. And the parts of the building that fell in, the biggest part, the two that fell in all the way down on the floor, were basically a building that looked like it would stand up to anything, but it was a little over-designed for this normal situation around here. But this was so abnormal, it took the roof down on a 70-year-old building.

And so we still have one hole that's 130 feet by 140 feet that we haven't yet gotten all the structural steel and built it back. We have built back one other big hole which was 25 feet by 250 feet. And the other two problems we had were somewhat minor compared to those two.

All right. And then just the last question. In terms of the shipments that you lost because of those eight or nine days, do you feel like you expedited them by the end of the quarter?

No doubt about it. Absolutely unquestioned.

So that you didn't lose any sales within the quarter at all?

That is correct. That is correct. We picked it all up again.

Okay, all right. Great. Thank you very much.

DeForest Hinman, Walthausen & Company.

I was wondering if you guys had any type of business interruption insurance.

Did not. We had building insurance only. And building insurance had a $500,000 deductible. And we've gone over that deductible by an untold amount right now. But of course, that's all going to be on the insurance. We had no contents insurance, and we had no interruption insurance.

Did you actually have any damage to inventories or machinery that are impacting production?

Yes. We had some water-cooled machinery, one of them to evacuate the systems before we charge them with refrigerant. They're water-cooled. They froze up and broke a bunch of those, and then we have some machines that help us make the foam panels that are water-cooled, and they froze up and broke some. So we did have machinery damaged that had an effect on us.

And how much will it cost to get those fixed?

Undetermined at this point in time. We're right now trying to get ourselves all cleaned up and running and doing a lot of other things around here. And we're not putting as much effort into those things because we had enough surplus capacity in both of those areas so that we haven't had to kill ourselves. What we had to do was rearrange some of our equipment so that we could take care of ourselves. But once we did that, we have enough capacity without those that got damaged even running, so that we're not hurting. So we've put them a little bit to the back toward the repair bill, because most of that, we'll do that repair ourselves, and it has less urgency than other things around here.

All right. Thank you.

(Operator Instructions.) Sean Nicholson, Kennedy Capital.

Just on the new equipment that you guys are spending quite a bit of CapEx on, understanding it's going to help you on the efficiency side quite a bit, because I've been down there and saw the older sheet metal machines. But is there anything that they're going to bring to the table that your sales force can go out there and talk to as far as manufacturing a different way or a quicker way or a better way that gives you guys an edge versus maybe some of your competitors that may still be with some older equipment? Or I don't if they've all updated. Or is this just more an internal benefit versus an outside selling benefit?

It's really hard to put any outside selling benefit to it. It allows us to operate our Company very efficiently, but that's not to say some other people don't operate just as quick in putting out a product. The only thing is, is we believe we've got an advantage in the cost of our putting it out the door. So it's an internal thing more than an external salable item.

Okay. Okay, great. And then just on -- I know you guys don't have a huge exposure to geothermal. But as that, maybe, end market develops still further, are you guys seeing a bigger push? And do people want you to offer more products on that end? Or is that something you think would help you in terms of bringing to the market in a bigger way?

Very definitely, and we're putting a lot of effort in, and it's the fastest-growing single segment of type of system that we have in our inventory right now. And we are growing. But as a percent of our total sales, it hasn't become a huge percent of our sales. But it's definitely becoming a more important thing at a very rapid rate. And we are giving a lot of attention to it.

Okay, great. And I just wanted to say I'd like to see -- that the stock split should help liquidity quite a bit, so I think that was a good choice.

Thank you.

We have no further questions in queue at this time.

Okay. No other questions, and I thank you for your attending our first quarter results. I hope that we've satisfactorily answered your questions, and look forward to talking to you again in another three months. Thank you.

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