Edited Transcript of AAON earnings conference call or presentation 27-Feb-20 9:15pm GMT – Yahoo Finance

TULSA Mar 4, 2020 (Thomson StreetEvents) -- Edited Transcript of Aaon Inc earnings conference call or presentation Thursday, February 27, 2020 at 9:15:00pm GMT

* Gary D. Fields

AAON, Inc. - President & Director

* Norman H. Asbjornson

AAON, Inc. - Founder, Chairman & CEO

* Rebecca A. Thompson

AAON, Inc. - CAO & Treasurer

* Scott M. Asbjornson

AAON, Inc. - VP of Finance & CFO

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Charles L. Myers

Good afternoon, ladies and gentlemen. Welcome to the AAON, Inc. Fourth Quarter full -- and Full Year Sales and Earnings for the Year Ended December 2019 Call. (Operator Instructions)

I would now like to turn the meeting over to Gary Fields. Please go ahead, sir.

Gary D. Fields, AAON, Inc. - President & Director [2]

Good afternoon. I'd like to read a forward-looking disclaimer to begin. 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.

Now I would like to introduce Scott Asbjornson, CFO, to discuss fourth quarter numbers.

Scott M. Asbjornson, AAON, Inc. - VP of Finance & CFO [3]

Welcome to our conference call. I'd like to begin by discussing the comparative results of the 3 months ended December 31, 2019, to December 31, 2018.

Net sales were up 9.1% to $122.6 million from $112.3 million. The increase in net sales was the result of improved production capacity and efficiencies. Gross profit increased 30.7% to $36.4 million from $27.8 million. As a percentage of sales, gross profit was 29.7% in the quarter just ended compared to 24.8% in 2018. The increase in gross profit was due to more efficient operations. Selling, general and administrative expenses increased 22.3% to $13.1 million from $10.7 million in 2018. As a percentage of sales, SG&A was 10.7% of total sales in the quarter just ended compared to 9.5% in 2018. The increase in SG&A was primarily due to professional fees related to our new market tax credit transaction that closed in the fourth quarter of 2019.

Income from operations increased 35.6% to $23.2 million or 18.9% of sales from $17.1 million or 15.2% of sales. Our effective tax rate increased to 25.6% from 24.2%. Net income increased 33.2% to $17.3 million or 14.1% of sales from $13 million or 11.5% of sales. Diluted earnings per share increased by 32% and to $0.33 per share from $0.25 per share. Diluted earnings per share were based on 52,701,000 shares versus 52,421,000 shares in the same quarter a year ago.

The results of the year ended December 31, 2019, to December 31, 2018, net sales were up 8.2% to $469.3 million from $433.9 million. This increase in sales was due to our improved production capacity. Gross profit increased $15.9 million to $119.4 million from $103.5 million. As a percentage of sales, gross profit was 25.4% in the year just ended compared to 23.9% in 2018. The company maintained a steady level of workforce throughout 2019. Company continues to improve its labor and overhead efficiencies and expects improvements to continue as new sheet metal machines were placed into service in the last quarter of 2019 and in early 2020. Selling, general and administrative expenses increased 8.1% to $52.1 million from $48.2 million in 2018. As a percentage of sales, SG&A remained constant at 11.1% of total sales. Income from operations increased 21.1% to $67 million or 14.3% of sales from $55.4 million or 12.8% of sales.

Our effective tax rate decreased to 19.9% from 23.7%. Upon completion of the company's 2018 tax return in 2019, the company recorded additional tax benefit due to higher-than-expected research and development credit of $0.6 million. Additionally, in 2019, the company determined it could take advantage of an additional 1% tax credit in Oklahoma for years in which the company's location was deemed to be within an enterprise zone. The additional Oklahoma credit, for being in an enterprise zone or otherwise allowable under Oklahoma law, resulted in a benefit of $1.2 million. Net income increased 26.9% to $53.7 million or 11.4% of sales from $42.3 million or 9.8% of sales. Diluted earnings per share increased by 27.5% to $1.02 per share from $0.80 per share. Diluted earnings per share were based on 52,635,000 shares versus 52,668,000 shares in the same period a year ago.

At this time, I will turn the call over to Rebecca Thompson, our Chief Accounting Officer, to discuss our balance sheet.

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Rebecca A. Thompson, AAON, Inc. - CAO & Treasurer [4]

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Thank you, Scott. Looking at the balance sheet, you'll see that we had a working capital balance of $131.5 million versus $93.2 million at December 31, 2018. Cash and restricted cash totaled $44.4 million at December 31, 2019. Our current ratio is approximately 3.3:1. Our capital expenditures for the year were $37.2 million. We expect capital expenditures for 2020 to be approximately $73.2 million. Shareholders' equity per diluted share is $5.51 at December 31, 2019, compared to $4.74 at December 31, 2018.

I'd now like to turn the call over to Gary Fields, our President.

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Gary D. Fields, AAON, Inc. - President & Director [5]

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Let's talk about the net sales. So we have had progressively price increases going back to 2017, but do it with the longer lead time, the backlog flow through to actual production and actual sales takes a fair while to happen. We've been working that backlog down, working our -- by increasing the production rate and so we're shortening our lead times. This will get the price increases through to the sales a little quicker. So right now, the price increases have had a positive impact on our financial performance. But more importantly, the efficiencies we've gained with the higher revenue, being able to dilute a lot of the fixed expenses, has been very beneficial. We're getting better labor efficiencies as well.

In Q4, about 53% of what we built was on our latest pricing. So that leaves about 47% to be built at the older pricing in Q4. So going forward, we're thinking that Q1 will be built predominantly on the June '19 price increase, which was 5%. And so you can do the ratio and math there and see that there was still some accretion to the gross margin available due to that price increase, somewhat offset by the 2020 wage increases. So it won't be absolutely accretive, but it will be somewhat accretive. The water source heat pumps, 2019, we had revenue of $25 million. That is versus $14 million in 2018. So '18 was double '17's revenue. '19 is up considerably again. '20, we think that, that slope will be a little shallower than it was '19 versus '18, but we're looking at a very solid business going forward with the heat pumps.

We've been working on updating a lot of our products and improving them because there is technology improvements in components and strategies. Our Norman Asbjornson Innovation Center is nearly fully utilized right now. We only have one chamber that is not totally usable. And this has allowed us to accelerate our development of new products. We received multiple awards throughout 2019 for introducing these industry-leading strategies and industry-leading efficiencies. Replacement market versus the new market still remains relatively constant for us on an annual basis of about 50% each. In Q1, we booked a fair amount of orders for replacement market, more percentage than we do new construction in Q1. That's preparing for primarily the school season where we're doing a lot of change out of units in schools.

The markets that we're participating in have remained very consistent over the last 3, maybe 4 quarters. So I don't see any particular market accelerating versus any others. The current scenario with markets is it looks like that going forward, manufacturing is doing quite well. I think we can thank the current administration for incentivizing manufacturers to be in North America -- in the United States. And we're seeing a direct result of that with people either improving the HVAC equipment on existing manufacturing plants that might have been mothballed at one time but are now being repurposed or in new manufacturing.

So let's talk about the backlog. December 31, '19, it was $142.7 million versus $151.8 million a year ago. So we decreased it 6%. While at the same time, we increased our production rate. So at this point in time, we have generated production capacity that's equal to or slightly greater than our booking capacity. We have additional sheet metal manufacturing capacity coming online as we speak. And we're also seeing bookings strengthen a bit over what they were due to our reduced lead times. So I think it will be a seesaw battle throughout 2020 to stay up with the bookings as they become more prevalent in light of the shorter lead times that we've been able to publish for people.

We're building a new 220,000 square foot manufacturing facility in Longview, Texas that supplements our existing 234,000 square foot facility there. So you can see it's nearly doubling the footprint. One of the benefits of that is there's -- about 77,000 square foot of that building will be utilized for relocating our inventory of coils that we manufacture in Longview to be used in Tulsa product. So that 77,000 square foot will be freed up in Tulsa to allow us to install some additional sheet metal manufacturing equipment here in Tulsa and delay the need for us to build a building here in Tulsa.

So now I would like to -- Norman, would you like to have any comments?

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Norman H. Asbjornson, AAON, Inc. - Founder, Chairman & CEO [6]

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Yes. Thank you. Glad to say hello to all of you again. We have traveled through a great deal of change in management of the company over the past 3 years since Gary came onboard. I've been here to help at the level I am, but all the people who I asked to stay around, a lot of the ones I asked to stay around until Gary came onboard so he would be given the freedom of choosing his replacements, have left. So we've had quite a large turnover of managerial personnel, which has caused us some problems for the past couple of years.

Those days are behind us. The new managers, all of whom came out of the existing personnel within our company, we did not have to go outside to get these managers, are coming up to the level of efficiency that we have historically had. We've had a very high degree of efficiency. And we're on the road back to it now. And I think, in my mind, I'm not going to be so much a part of it anymore, that they have the abilities to exceed the degree of efficiencies, which we -- had occurred prior to this beginning of changeover of management.

Along the way, we've dropped the average age of this management by some 20, some to 30 years. So we're not going to be looking at another change necessitated by aging out of the management. And the company has got a lot of talent in the age groups in the 30s and the early 40s now running the company, and you can see the kind of performance they're giving. I fully expect this to increase and the company to move forward at least in the rate we have historically moved forward in both profitability and revenue and then a very good chance that both of them will accelerate even more. So we're feeling very positive about the future of AAON.

And I'd like to thank all of you who have supported me during the 33 years that I was building this company to what it is. It was time I turn it over to Gary and the new management. Thank you, and hope to listen in on a couple more calls.

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Gary D. Fields, AAON, Inc. - President & Director [7]

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Do we have any questions?

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Questions and Answers

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Operator [1]

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

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Brent Edward Thielman, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [2]

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I guess maybe just starting -- maybe just around the question of supply disruptions, there's been a little bit of that in the news here lately. Update us on what you're seeing. I -- if I remember right, you're waiting on a few more sheet metal machines to come in the new year to support some of that capacity in the factory, I guess, any disruptions you're seeing there? Is everything on schedule?

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Gary D. Fields, AAON, Inc. - President & Director [3]

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So far, everything is on schedule. We've been receiving roughly 1 new machine a month for several months now. Four of those machines we have in operation, 4 of those machines are yet to be put in operation. So they'll provide us additional capacity. One of those machines should go full capacity tonight or tomorrow, 2 machines next Friday and 1 machine following in about 30 days. Those are machines that are on premises. We will be receiving another machine that's already being unloaded at the port right now that will be here next week or the following week. So the machines that we have now have us running at a production rate that's relatively in line with our bookings rate. So these other 4 machines as they can't come on will afford us additional capacity and allow bookings to increase without increasing lead time. So I think that we've got this in pretty good alignment to stay pace, production capacity increases with bookings increases and that will be the challenge that we'll see. But I don't see any interruptions at this point in time for any of the needed machines coming in.

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Brent Edward Thielman, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [4]

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Okay. That's good to hear. And I guess, Gary, just to kind of sum that up, as these new machines come in by the third quarter, you'll expect all of that capacity to be ready to support that increase in bookings?

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Gary D. Fields, AAON, Inc. - President & Director [5]

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The machines that we have now -- essentially, we're getting 1 machine per month through the end of the year. We have 8 more machines to come. And so those 8 more machines are coming approximately 1 per month. So I don't expect to get the last machine until, I think, late September, and it takes about 45 days to put those into beneficial use. So I've actually got a milestone that's dated 12/15/20. And of those 8 machines to come, one of them is being unloaded at the port right now, and 2 of them are on the water coming over. So there could be some delay in 5 -- one of those 5 machines that we've not been notified of. But I think it would be a pretty minor delay from anything that we've seen. And the other thing is, is those other machines that are not yet on the water coming over here, those are force capacity increases that we anticipate needing in mid- to late '21. I don't think any of the machines that we're depending on to meet capacity demands in 2020 are jeopardized at all.

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Brent Edward Thielman, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [6]

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Okay. Okay. And it looks like good water source heat pump sales for the year. I guess, as I was backing into it, am I right that -- were sales and revenue dollars down in 4Q?

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Gary D. Fields, AAON, Inc. - President & Director [7]

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On the water source heat pump?

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Brent Edward Thielman, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [8]

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Yes.

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Gary D. Fields, AAON, Inc. - President & Director [9]

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For Q4...

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Rebecca A. Thompson, AAON, Inc. - CAO & Treasurer [10]

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Fourth quarter...

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Gary D. Fields, AAON, Inc. - President & Director [11]

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I don't have it broken out that way right here. It looks like it could have been just slightly off, but I don't think it was anything material that I recall. So I'm not sure exactly how you're discerning that to make that assumption.

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Brent Edward Thielman, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [12]

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Just backing out what I saw in the 10-K, the prior 2 quarters. I guess what I was really getting to is I was just wondering, given that has been a little bit of a drain on the gross margin, whether that helped a bit here in the quarter since you didn't know...

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Edited Transcript of AAON earnings conference call or presentation 27-Feb-20 9:15pm GMT - Yahoo Finance