Aaon Inc (AAON) 2017 Q1 法說會逐字稿

Welcome to the AAON First Quarter Sales and Earnings Report Conference Call.

(Operator Instructions) And as a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Norman Asbjornson.

Please go ahead.

Good afternoon.

Thank you for coming in on our first quarter report.

And I'd like to before beginning to read a forward-looking disclaimer.

To the extent any statement presented herein deals with the 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 of 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 quarterly report on Form 10-Q.

I'd like now to introduce Scott Asbjornson, our CFO.

Welcome to our conference call.

I'd like to begin by discussing the comparative results of the 3 months ended March 31, 2017 to March 31, 2016.

Net sales were up 0.8% to $86.1 million from $85.4 million.

Sales increased primarily due to increased volume as compared to the prior year, offset by changes in product mix.

Our gross profit decreased 2.9% to $25.0 million from $25.7 million.

As a percentage of sales, gross profit was 29.0% in the quarter just ended compared to 30.1% in 2016.

Selling, general and administrative expenses increased 18.1% to $10.5 million from $8.9 million in 2016.

As a percentage of sales, SG&A increased to 12.2% of total sales in the quarter just ended from 10.4% in 2016.

The overall increase in SG&A was primarily due to increased warranty, advertising expenses and stock compensation.

Income from operations decreased 14.1% to $14.5 million or 16.8% of sales from $16.8 million or 19.7% of sales.

Our effective tax rate decreased to 29.7% from 32.1%.

The estimated annual 2017 effective tax rate, excluding discrete events, is expected to be approximately 36.0%.

Our effective rate is lower than our expected rate of 36.0% primarily due to excess tax benefits.

For the 3 months ended March 31, 2017 and 2016, the company recorded $1.1 million and $0.8 million in excess tax benefits.

Net income decreased to $10.2 million or 11.9% of sales compared to $11.6 million or 13.5% of sales in 2016.

Diluted earnings per share decreased by 13.6% to $0.19 per share from $0.22 per share.

Diluted earnings per share were based on 53,190,000 shares versus 53,593,000 shares in the same quarter a year ago.

At this time, I'll turn it over to our Chief Accounting Officer, Rebecca Thompson, to discuss the balance sheet.

If you look at the balance sheet, you'll notice we had a working capital balance of $105.1 million versus $101.9 million at December 31, 2016.

Cash and investments totaled $41.9 million on March 31, 2017.

The investment and maturities are leaning from 1 month to 4 months.

Our current ratio is approximately 3.6 to 1. Our capital expenditures were $6.1 million for the quarter.

We originally expected our capital expenditures for the year to be approximately $41.8 million, but now have raised it to $48.5 million to accelerate acquisition of sheet metal equipment.

The company had stock repurchases of $6.9 million for the quarter.

Additionally, the company's 10b5-1 plan expired on April 15, 2017.

Shareholders' equity per diluted share is $3.98 at March 31, 2017 compared to $3.85 at December 31, 2016.

We continue to remain debt-free.

I'd now like to turn the call back over to Gary Fields, our President, who will discuss our results in further detail along with new products.

Good afternoon.

So net sales for the quarter were up 0.8%.

This was increased volume in product flow.

The Water-Source Heat Pump still remains of high potential, yet we remain reserved about how we've actually released it for order input.

We're working on streamlining some of our internal processes, making sure that those are all well vetted out and in place, so that we don't innodate ourselves and miss someone's expectations.

So the tone of our business in various market segments is like this: The replacement market versus new construction.

In 2016, we saw the replacement market weaken a bit for us.

And in 2017, we've seen it rebound and begun to accelerate a bit.

We've got certain national account customers that have put in pretty substantial planned CapEx-type replacement work that we're capitalizing on.

In the commercial and retail environment, again, some of this is from our national accounts in retail, various quick serve restaurants and convenience stores and so forth.

And it's been steady to improving.

The office building market has seen very nice improvement.

Medical and health care has probably seen more improvement on our participation in that some of the products that we designed over the last couple of 3 years to specifically address certain applications in these markets has begun to gain quite a lot of acceptance as well as the fact that medical and health care seems to be a resurging market.

Education is always strong for us, particularly first and second quarter bookings for educational in the K-12 market.

I think some of our strengthening in our backlog has been as a result of that being turned loose.

Manufacturing, from my point of view and from the order book, looks reasonably flat.

Lodging has been another accelerating market for us.

And municipalities, they remain flat for us as well.

Now let's go into the Water-Source Heat Pump just a bit deeper.

We just concluded, we've introduced virtually every configuration model as far as the pass-through 5 ton horizontal or vertical.

And that's recent that we were able to complete all of those basic models.

Now those have all been introduced to our rep force, and we're seeing what the demand is on an immediate basis.

And it looks quite nice, and it looks like our expectations this second half of the year with regards to the heat pumps are very realistic.

So our backlog at March 31 was $69.2 million versus $60.3 million a year ago.

The strength going past March 31 remains quite nice.

So now I'd like to turn it over to Norm for outlook for the rest of the meeting.

As was noted, we had an unexpected slowdown in the fourth quarter last year, and a rebound found us in the first quarter of this year and brought our backlog up to where we expected, and it gave us a little lighter on the production and the sale than what we'd originally anticipated, because when we came into the year, we didn't have that backlog to support a strong January and February.

So we had weak months then and we made it up, but did not exceed last year, yet basically in March we caught up.

So it's now stabilized, and going forward, as near as we can see, we're going to have continued strength.

We hear a lot of discussion indicating the possibility of it strengthening even more, but being a little more realistic, that is talk and it's nice and optimistic, but at the present time, we're just saying that we're going to have moderate growth somewhat similar to what we've had year-over-year in that general area.

Now the capital expenditures have been moved up from $42 million to $48 million because we believe a lot of that talk is going to actually materialize in increased volume, but it's kind of like a bunch of people milling around, they haven't found their direction yet.

(inaudible) So as far as [squatters] building buildings is milling around yet and it hasn't really committed.

And so we're pretty comfortable in thinking we're going to have to get ourselves ready for additional growth.

And due to the lead time on some of our sheet metal fabrication equipment, we chose to go ahead and add another $6 million to the expenditure for additional sheet metal equipment.

So we have put that on order.

The normal lead time on that is somewhere in the 8 months, 10 months time frame.

So sometime that will come in here sometime probably in the third or fourth quarter, and get put in place, which is - gives you a hint of what our thinking is about what might happen in the third or fourth quarter of that acceleration on a year-over-year basis.

In other words, we're optimistic but we're not solidly committed.

And we know we're going to eventually need the equipment; we just accelerated.

It was in our budget for next year, and we just said let's accelerate it because it looks like the prudent thing for us to do.

I'd like to now open the discussion for questions.

(Operator Instructions) Your first question comes from the line of Brent Thielman from D.A. Davidson.

Norm, you -- you guys initiated the price increases March 1. And it sounds like the orders started really rolling in later this quarter.

Why wouldn't we see more of an impact of those price increases into the second quarter?

Backlog.

Backlog is right now at what $69 million, and we're producing product at, say, $30 million or thereabouts.

You divide it out, that's a little over 2 months' backlog.

So if I get an order in, it's 2 months out there before I'll start shipping any of it.

So if you add on to March 1, about 2 months, you'll see where we'll start shipping.

So it will start occurring in the third quarter, but the fourth quarter, it'll all be firmly in place.

Brent, this is Scott.

I just wanted to add to that, that it was a selective price increase just to make sure that everyone recalls that.

It is not an across-the-board price increase.

What we did was we did a pretty comprehensive analysis of where we -- we're already doing quite well on margin.

And we decided not to touch anything that had a really good margin on it.

We looked at some of the weaker margin items, and we tried to bring them up into a very good margin account with the belief and we think it's going to work for us, that the decrease possible in the margin is going to be offset by total sales, really resulting in actually more final dollars on the bottom line.

And as we've said numerous times, we don't manage to the margin, we manage to the final dollars.

Sometimes, that means we raise prices and go for margin, and sometimes, it means we let the margin slip and go for some more volume.

So over our entire history, we have done that and believe fairly successfully most times, and we think it's going to work for us now.

What we did was, we waited because of the softness in the market in the fourth quarter.

Now whenever it's soft, of course, you have a lot of people out there that are getting anxious, and they're starting to watch very carefully how they spend their money.

The industry, in general, went out with a price increase a little earlier than we did.

And of course, those people are sitting there thinking, can't I do better?

We did not go out with a price increase.

We think we gained some market share by doing that.

But some of these people would look at us, and say, the differential or if there was one, I think, I'm going to try AAON and they came to us.

Then after that occurred, we did, with our selected price increase, change that, but they have now had a chance to experience us, which they might not have in the past.

In other words, we were trying to gain a little more share by a little delay in our pricing increase.

We think that the net result of what we're doing is going to achieve what we're wanting, which is more dollars to the bottom line.

Understand.

Okay.

And then, Scott, the comments on the reduction in SG&A expense as the year goes forward, is that absolute basis or a percentage of sales because I think that [lift] as you sell more pump line product?

Well, certainly, as a percentage of sales.

But we have the 2 biggest items in there.

One was related to unusually high warranty accrual for the quarter, just we had a slight increase in our charges and the calculation resulted in a little bit significantly higher, 900,000 about, higher increase in accrual this year versus last year.

We aren't certain that, that is a one-time or not a one-time occurrence.

We don't see any chronic problems or changes in our behavior as far as our products.

So hopefully, it's just kind of an anomaly.

And we won't see it continuing on a perpetual or ongoing basis.

But we don't know that for a fact just yet.

The second largest one was advertising and marketing cost, mostly driven by our show in Las Vegas.

That happens only once in a while and I'm opportunistic in that particular city because it is very well situated for a large show.

And we had our Water-Source Heat Pump, which was spotlighted within that show.

We won't go again in next quarter or any of the subsequent quarters.

Got it.

Got it.

And then as you guys ramp this up in the second half of the year.

I mean, I guess from our side, are you really sort of really more kind of the fourth quarter.

Do you think some of it catches in later in the third quarter -- on the pump line, excuse me.

We're going to catch top line in the third quarter because the backlog started strengthening before January 1. Again, we've got about a 2-month lead time on average.

So we're certain by the middle of January or 1st of February, the backlog was beginning to reestablish itself.

The order rate was coming in at a better rate, and it's continued to come in at a very nice rate, so that -- I'm certain that we will be having growth on top line this next quarter.

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

I turn the call back over to the presenters.

We'd like to thank you for attending our conference on this.

We are cautiously quite optimistic, and the operation of the company is going very well, and the Water-Source Heat Pump is behaving just the way we wanted it to.

We're being very cautious, so we don't incur any warranty costs.

We're being cautious, so we don't disappoint our customers.

And when we think we've got all the software debugged -- it's mainly a software debugging, it's not relative to the [prodish] on Water-Source Heat Pump.

It's all relative to the software.

We will be bringing in much more in the way of orders and shipping much more product.

So everything from our standpoint that we can see is optimistic.

We just hope the economy goes along the way we believe it's going.

Thank you.

Pardon the interruption.

We do have one more question.

Your question comes from the line of Derrick Johnson from Constant [Goga] Capital.

Sorry about squeezing this in under the wire.

My fingers are too slow.

A quick question for you guys.

I was looking through the 10-Q, which came out.

And then what -- on the units year-over-year, we have 378 Water-Source Heat Pumps and 63 a year ago.

What was that a year ago, and maybe, just talk a little bit about that?

And what is sort of the capacity today on units?

Well, we've been in the Water-Source Heat Pump business for quite some time.

But it's been a very high tonnage, very specialty units.

We have been able to do the very difficult jobs that large units -- that we have were capable of doing in the Water-Source Heat Pump.

So those unique units we have been building for some long period of time.

The units we're bringing out now, you might say that we've gone from calculus down to the first or second grade -- only first and second grades got a huge amount of the dollar volume that's in the Water-Source Heat Pumps.

And so that's -- it's an easier, much easier thing to deal with, but it's much more volume intensive.

And so some of those units that you are seeing there reflect that.

It's not so much it's reflecting the Water-Source Heat Pumps that we're talking about building now.

We've just started...

Got you.

And AFPs on the new Water-Source Heat Pumps, that's going to be sort of in the low thousands of dollars, $2,000 something like that.

Is that about right?

Yes, see it's going to go -- probably the biggest one of those is going to be maybe $3,000 or $4,000.

The biggest of some of that other stuff might have been $300,000.

We have no further questions in the queue at this time.

Thank you, again.

We'll talk to you at the end of the next quarter.

This concludes today's conference call.

You may now disconnect.