Aaon Inc (AAON) 2011 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the AAON third quarter sales and earnings conference call. I would like to turn the meeting over to Mr. Norman Asbjornson, CEO and President of AAON. Please go ahead, Mr. Asbjornson.

Good afternoon. Thank you. Prior to going forward, I would like 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 Securities and Exchange Commission filings, including the Annual Report on Form 10-K and the Quarterly Report on Form 10-Q.

Thank you again. I would like now to turn this over to our Chief Financial Officer, Kathy Sheffield. Kathy?

Thank you, Norm. Good afternoon. Welcome to our conference call. I'll begin today by discussing the comparative results of the three months ended September 30, 2011, compared to September 30, 2010.

We are very pleased to report that our revenues were up 14%, to $73.8 million from $64.9 million. Revenues increased due to gaining additional market share, the favorable reception to our new products, and a price increase on one specific product line.

Gross profit increased 14.1%, to $14.3 million from $12.5 million. Gross profit stayed consistent, at 19.3% of sales for both quarters. The gross margin continued to be affected by raw material and component part price increases and also by costs associated with the introduction of some new products in our Longview facility.

Selling, general, and administrative expenses increased 5.4% to $5.4 million, or 7.4% of sales, from $5.2 million, or 8% of sales. The decrease of the percent of sales was primarily due to lower bad debt, professional fees, and selling-related expenses.

Operating income increased 20.2% to $8.8 million, or 11.9% of sales, from $7.3 million, or 11.3% of sales. Net income increased 9% to $5.6 million, or 7.6% of sales, from $5.2 million, or 8% of sales. Diluted earnings per share was $0.23 per share versus $0.21 per share. Earnings per share were based on 24,844,000 shares versus 24,971,000 shares in the same quarter a year ago.

As we look at the nine-month results, we see that revenues were up 13%, to $202.8 million from $178.7 million. Gross profit decreased 8.2%, to $37.6 million from $41 million. Gross profit as a percent of sales was 18.5% for the nine months of 2011 compared to 22.9% in 2010.

In addition to the quarter detail, year-to-date margins were also affected by various manufacturing and facility problems previously reported, which we experienced in the earlier part of the year. Selling, general, and administrative expenses remained consistent at $16.7 million, or 8.2% of sales, from $16.6 million, or 9.2% of sales. As a percent of sales, SG&A decreased due to lower profit-sharing, warranty, and bad debt expenses.

Operating income decreased 14.2% to $20.9 million, or 10.3% of sales, from $24.4 million, or 13.7% of sales. Our effective tax rate increased from 29% to a more normalized 35% due to federal tax credits received in 2010.

Net income decreased 19% to $13.1 million, or 6.5% of sales, from $16.1 million, or 9% of sales. Diluted earnings per share was $0.53 per share versus $0.63 per share. Earnings per share were based on 24,902,000 shares versus 25,471,000 for the same time a year ago.

Moving to the balance sheet, we see that we had a working capital balance of $41.7 million. Our current asset ratio was two-to-one. Our capital expenditures were $31.2 million. Shareholders' equity per share was $5.08 compared to $4.72 a year ago. We paid cash dividends of $3 million in July 2011.

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. Despite a rather difficult economic situation, sales were up 14% for the quarter and 13% for the nine months. The sales increase for the three months and nine months in this rather severely contracted market compared to three or four years ago is due to greatly increased market share which we have taken.

The first part of the year, we were blessed with a substantial increase in replacement market, while the new construction market was pretty soft. And the replacement was primarily implemented by virtue of a December last year tax change which allowed 100% depreciation on certain qualified assets, which a lot of air conditioning equipment qualified for, therefore stimulated quite a bit of replacement market in the first half of the year.

We did see a fall-off in orders of that market right around the middle of the year, apparently because of the fact that in order to qualify for it, products had to be built, shipped, installed, and operating by the end of the year to be fully qualified. Therefore, people felt they had to order it in the first half of the year and, for the most part, get it shipped in the first half of the year. Thus we did get a softening, which we anticipated and had discussed at our previous quarterly meeting, due to this removal of the 100% depreciation.

The way it is structured right now, it drops back to a 50% depreciation and then extending out the rest of the depreciation on a normal scale. So we've already experienced the change that is due, the majority of the change. We are, however, still shipping some of that product that was ordered in the first half of the year, but it's diminishing rapidly. So it's not having a pronounced effect on us, particularly, at this point in time.

However, at the same time I'm saying that, there has been, in a few categories, an upswing in new construction. It's still limited and it's still not back to where it was a year ago. It's still softer than that, but it's just marginally softer than a year ago.

And the areas where we're experiencing the upturn, based upon the report that we received from the federal government on product put in place in various categories, the places where it's gotten stronger are in commercial construction and in manufacturing -- quite a nice experience, I think, to see it happening in manufacturing, which has been on a long-term downturn for several years. And we now are seeing a modest amount of growth occurring in the manufacturing arena as far as selling heating and air conditioning equipment into that marketplace.

The balance of the marketplace, which is largely office buildings, healthcare, educational, and religious, are still modestly down. The very biggest part of that entire spectrum of dollars that are expended is in the educational arena, which is down as compared to a year ago by about 3.2%, and it's down modestly from August. So it is not yet in the recovery mode that commercial and manufacturing are experiencing.

So what I'm seeing occur here at the present time is a stabilizing, a shifting back from the replacement market into the new construction market that does exist. The net result of this, even though the new construction market is just very modestly down, the backing off the replacement market is decidedly for the potential sale of products, a deterrent or a deterioration in our marketplace. Thus what we've had to do in order to offset that is take market share, which we've been able to do fairly well.

Of course, in taking market share, it's a very difficult thing on your bottom line, too, because it's a highly competitive situation out there. And while we've done very well and improved our bottom line, it has been certainly difficult to get it as far as I would like to have it recover.

However, the other really good thing is we finally have started getting ourselves out of all the problems which we started having the first part of the year due to the snowstorm collapsing our roof in three different major areas of the factories here in Tulsa. Those are now behind us.

They were very modestly affecting our performance in the third quarter, because we never really got the building all closed in until about a month ago now, the final hole was closed up. So that's all historic now, but it did have a slight effect on us, but not very much in the third quarter. So we're sort of back to where, you might say we're in a normal operating mode without all these other troublesome problems causing us to be distracted and spending a lot of time and effort and money dealing with them.

As we're going forward now, we're wrapping up the construction of the 200,000-and-some square feet of warehouse space that we're putting into this building, and this is going to have a very noticeable effect going forward. It's very hard to quantify and difficult for us to see, and it probably won't really make itself totally felt until the second quarter of next year. But what it's allowed us to do is to, when we get to using it, which as I say, will not really be fully effective until second quarter of next year, but beginning in the first quarter of next year, we will be using this building at an increasing amount.

And to give you a feel for this, the warehouse that we have been using -- overloaded and distributing stuff all over the entire building perimeter and outside into the parking lot and everything -- was probably only capable of handling about somewhere in the 30% or 40% of the dollar volume which we're presently doing, so we're badly overloading our present warehouse. And that's caused a lot of inefficiency in distributing product and distributing parts and getting them around. So you can look for an improvement in efficiencies due to this new warehouse coming on-stream next year.

The other very good thing that's coming along is the fact that this past year, and a little bit over the past year, but with a heavy emphasis on the year that we're in right now, we've expended over $30 million in capital expenditures, partially on the building but, more importantly, on our production equipment. And that was due to the fact that when that law was passed last fall, I could not see how I could afford to not replace a lot of badly worn equipment that, although it was still running, it did have a huge amount of operating hours, anywhere from 60,000-some to almost 100,000 operating hours on it. And if you take that out against 8,760 total hours in a normal year, you can see that we had used that equipment quite extensively. So we basically replaced all that older equipment this year, and instead of, as I was speaking last year at this time, thinking that I was going to do about $10 million worth of expenditure on capital goods, we're expending over $30 million.

The good thing about that is all these new machines, while the old machines were still running pretty well, they were pretty sloppy in their holding of tolerances and everything, and they did break down quite often. And furthermore, they were slower, and this slower is the important thing here. Because the new machines, while they're from the same company and the same general character, are much faster than the older machines, the older machines being somewhere between 10 years and 13 years old. And the new machines almost double the productivity of the operator. And therefore, the operating cost of doing sheet metal is going to be substantially reduced by these units.

Now, in total, what this means is we replaced and upped our productivity on somewhere around 40% of our sheet metal manufacturing equipment, so it will be significant on improved productivity next year. It will also allow us, with the new products which we have been putting into place very rapidly for the past few years, to continue to offer to our customers a superior, technologically superior and substantially improved, energy-efficient piece of equipment with all the most recent known improvements in this type of equipment.

So we're very quickly turning our troubles around from being one of a manufacturing challenge and designing new equipment to being a marketing challenge. And that is a change in the direction which we're having to go at this point in time.

If the economy were to cooperate a little better, we would, without question, have quite a booming year ahead of us. Unfortunately, everything I see in all the indexes and everything don't tell me that we're going to see a booming economy in the construction industry. To the contrary, it says that it's going to be very difficult for the construction industry to match this year's performance. So it generally shows that it will be at this year or slightly down next year, from everything that I can decipher about the industry.

However, I don't intend to participate in that. I think, with what we have done and everything we've got going for us, we are definitely going to get some growth into next year. Now, the amount of growth is highly questionable at this time, but we are optimistic that we are not going to have to follow the likely downward trend that the building industry appears to have.

The other part that is going to be encouraging is some of these new products which we have introduced and, in fact, are still introducing as we speak, are into some areas which we never really participated in before. And the biggest one of those areas probably is, at this point in time, that we still haven't introduced, is a unit that goes from 55 tons to 130 tons. And while we were in that market in the tonnage, we were in there with a high-class, highly capable product, which we will retain for that market.

But we now have brought in a lower-cost, highly competitive product for that market, and it is a significant dollar market still, although it's not the biggest one in our industry, by any means. But it will have a noticeable effect upon our volume of sales. And since it is a competitively costed product, we should be able to make a decent margin on it and do well on the bottom line with the product.

So basically, that's what's occurring in the arena of the sales, marketing and everything in the past and in the future at this point in time.

Our other aspect that I should mention a little bit is we are continuing to have growth in the geothermal market. We're having growth in the other new products that we have introduced out there. And those are into markets which we are either somewhat new in or very new in. And so there's a good chance that we can also penetrate those markets more thoroughly than we have in the past and help ourselves gain additional market share.

If I look at the building market, the one thing which does come through as being kind of negative about it, and that's primarily because there is an index out there called the Architects' Billing Index, which has been running a negative for five out of the past six months. And what that says is the architects are not charging for as much design work as they had in the preceding corresponding period, and therefore, the likelihood of there being as many buildings out there to bid on is diminishing.

However, it's not a substantial down. That five out of six is not terribly down; it's just down. Therefore, speaking to what I did before, it's probably going to give us a little bit of a negative market for next year -- the way it looks, at least, for the first half of the year -- but not a substantial downswing.

I'm basically optimistic in total for the Company because of all the things which we've done with the buildings and with the products and with the enhancing of our sales force. We have continued to upgrade our sales force, and things are pretty much on track for what our business plan is. It's just that it's a little more slow in coming to light than I had hoped it would be. As we all look at the economic situation, I'm sure I'm not saying something out of school in that regard.

So with that being said, I'd like to open it up now to questions.

(Operator Instructions.) Joe Mondillo.

The first thing I just wanted to address, so the benefits that you're receiving from investing in all this equipment or anything, is that affecting the P&L, or is that just on your tax form?

No, it affects the P&L.

So what kind of benefits are you seeing on a quarterly basis the last couple of quarters in terms of the accelerated depreciation?

Well, it's not so much the accelerated depreciation because, of course, the money that we're putting over there is being depreciated 100%. So $0.65 on the dollar, basically, is what we're putting out of our cash, and the other $0.35, instead of going to the federal government, is going to the purchase of the equipment.

Where the big savings is going to occur, Joe, is the fact that I can produce more sheet metal with fewer people and with fewer machines running. And, of course, it costs money to run those machines beyond just the people involved with running them. It costs for electricity and other things that are consumed by each of those operating machines.

In general, I would say that we're looking at something for next year, and they're just getting really -- some of them have been running now for six months, some of them have been running for six weeks. But in the total of next year, I think it's going to reduce my costs by somewhere about $1 million. Does that answer your question?

Yes. So that's starting when? Next year, you said?

It's already starting to happen now, but I've tried to put it on an annualized basis. It's going to be about $1 million. It's happening as we speak now, not as completely as it will be next year, because these are very complicated machines, and there's a lot of debugging that goes on, getting the little nuisance problems worked out of them. And we're still doing that. So it's not been quite as successful at this point as it will be by next year.

Okay. And so in terms of the tax rate, Kathy, should that maintain at 35% going forward indefinitely?

Yes, it should, Joe.

Okay. How about raw material effects, Norm? How have they been trending in terms of the effects there, and how do you expect those to play out in terms of what the price increase is and such?

They seem to be pretty stable anymore. There was an indication there for a little while that copper was going to get soft, but it came right back up again quite a bit. And so we've got a high-priced copper situation. Galvanized and everything is not. We've gained something from a year ago from where it was, but not very much. But we haven't lost ground on galvanized. Aluminum is running a little bit more money than it was a year ago -- not much right now. And stainless steel, which we use quite a bit of, is up slightly also.

The biggest increase probably has been in our component parts -- the people supplying us motors, compressors, relays, and things of that nature. That's probably been a bigger one here recently than any of the rest of them. But those seem to have stabilized, too. And in general, with the exception of the problem in the economy, everything else seems to be stabilizing.

Okay. And how about, in terms of the reconfiguration and the upgrading in the manufacturing floor, where are we in that process? Are we almost done, or how long is that going to continue to go, or when do we get everything in place?

The big, heavy replacement of production lines with new production lines and things of that nature is fairly well accomplished for what we're doing right now. And I'm going to say the total of it, however, is not done.

We still have plans, but these are longer-range plans. They're not even next-year plans now, unless the economy brightens up a little bit. They'll be the year after or whenever we start getting more. We've still got some additional building to do here, and we have some that we need to do down in Longview. But we're in the planning stage in all of those; we're not in the implementation phase.

So I can tell you that right now, we're probably 80% done with what we're going to be doing right now, and getting the benefit of about 80% of what we're doing. We still have, in the future, we probably still have another 30% or 40% more that we want to do than what we've already done. But that's going to be down the road some time. Like I say, we're not going to go spending money on those facilities right now until we see a little bit brighter future down the road. We'll just be fine-tuning and getting that last 20% of implementation of what we've already done. And so we're pretty well done with that.

Everything is smoothing out now in the operational part. The holes are gone from the roof, and the bulk of the readjustment of the building is done. Everything's pretty well in place now to continue running.

Okay. And then on a CapEx perspective, we're at about $31 million year to date. What are you looking at for the rest of the year? And do you have a budget for next year in place yet?

I don't have a budget. I can give you a guesstimate I can tell you. But it's going to run to the $32 million to $33 million by the end of the year, somewhere in that vicinity.

Okay. And that should come down considerably next year?

Yes, it will. The only reason it would go up, or not go up from there, but the only reason it would be up pretty high would be if the economy turns around. Because, like I say, we have done all the planning necessary to do some more things to the buildings that would enhance our operation and get us in better shape, but we won't be doing them unless the economy turns around.

Just a rough idea I've got, I'd say we're in the $10 million area for next year, barring anything else happening. And we might be going down from there if it gets even tougher. We could hold it down to probably $5 million, or $4 million or $5 million is what we could probably hold it down to if I saw the necessity. At this time, I'm planning on somewhere in the area, generally, of $10 million. But that's not a finalized number yet. That's just a general speaking right now.

Okay. And then in terms of the backlog, it looks like you're up 15% year over year. Talk about that, talk about your order trends, and what kind of margins are you seeing in the orders and in the backlog that you have compared to what you've seen in the past quarter?

Well, if you take a look at our past few quarters, you'll see we had a noticeable dip in the first part of this year and the latter part of last year. And you'll notice that we're getting a corrective action in this quarter. And I expect that we'll continue to get a little more corrective action as we're going forward, as I see it right now. I don't see any reason why we won't because, as I say, everything is running well and things are happening well.

The only negative thing to that is the fact that there's very difficult thing to try and get price increases. And as long as we aren't getting any great cost increases, it's not too bad, because the improved efficiency in the place will give us a little bit of growth in our margin.

Okay. So your gross margins have been sort of stable, around 19%. In that last quarter, they were 17%. But do you think they're going to stabilize around that 19%?

Yes, I think they're going to be stable to possibly a little bit above trend.

Okay. And then lastly, the month of October, could you just give an update on how that's been trending?

Well, October was a respectable month. It was pretty much in keeping with where you would anticipate it to be, based upon your most recent analysis. And we're pretty well loaded that way for November now. I don't see anything on the horizon saying that anything should change in December. There's certainly nothing unless we get a monstrous earthquake, which we now are in the earthquake zone, I guess. But so far, that hasn't done anything. And so I don't see anything but pretty much just more of the same going forward. It's a slower time of the year, but other than that, there's nothing noticeable that should prevent us from having a respectable volume and a respectable bottom line.

Okay, thanks a lot, Norm. Have a good afternoon.

(Operator Instructions.) There are no further questions at this time.

All right. Well, I'd like to thank all you ladies and gentlemen for your participation in our third quarter report. Look forward to talking to you in the fourth quarter. Hopefully, as I say, it's going to be a little better report than we had this quarter. And with that, I'd like to say goodbye and thank you for your support.

This concludes today's call. You may now hang up your line.