Earnings call transcript: AAON Q4 2024 misses EPS forecast, stock drops

AAON (NASDAQ:AAON) Inc. reported its Q4 2024 earnings, revealing a notable shortfall in both earnings per share (EPS) and revenue compared to forecasts. The company posted an EPS of $0.30, significantly below the projected $0.53, and reported revenue of $297.7 million, missing the forecast of $331.0 million. Following these results, AAON's stock fell by 17.75% in pre-market trading, reflecting investor disappointment. According to InvestingPro data reveals the company's strong financial foundation, with a current ratio of 3.06 and minimal debt levels, positioning it well for planned expansion. The company has maintained dividend payments for 19 consecutive years, demonstrating consistent shareholder returns despite market challenges.

Executive Commentary

"We are at the early stages of another multiyear period of robust growth," stated Gary Fields, CEO. This optimism is echoed by Matt Tabalski, President and COO, who noted, "We see the data center business growing to over $1,000,000,000 within a few years." These statements highlight AAON's confidence in its strategic direction and future growth prospects.

Risks and Challenges

• Macroeconomic uncertainty affecting non-residential construction markets.
• Operational inefficiencies in scaling new facilities.
• Transition to new refrigerant products may impact pricing strategies.
• Potential supply chain disruptions.
• Competitive pressures in the data center and HVAC markets.

Q&A

During the earnings call, analysts inquired about the impact of the refrigerant transition and the strong demand in the data center market. AAON addressed concerns about operational inefficiencies and potential pricing strategies for new products, underscoring the company's commitment to overcoming these challenges and capitalizing on growth opportunities.

Full transcript - AAON Inc (AAON) Q4 2024:

Conference Operator: Good morning, ladies and gentlemen, and welcome to the AAON Inc. Fourth Quarter twenty fourteen Earnings Conference Call. At this time, all lines are in listen only mode. Following the presentation, we will conduct a question and answer session. For the call or for this call is being recorded on Thursday, 02/27/2025.

I would now like to turn the conference over to Joseph Mandila, Director of Investor Relations. Please go ahead.

Joseph Mandila, Director of Investor Relations, AAON Inc.: Thank you, operator, and good morning, everyone. The press release announcing our fourth quarter financial results was issued earlier this morning and can be found on our corporate website, aaon.com. The call today is accompanied with a presentation that you can also find on our website as well as on the listen only webcast. Please go to Slide two. We begin with our customary forward looking statement policy.

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During the call, any statement presented dealing with information that is not historical is considered forward looking and made pursuant to the Safe Harbor provisions of the Securities Litigation Reform Act of 1995, the Securities Act of 1933 and the Securities and Exchange Act of 1934, each as amended. As such, it is subject to the occurrence of many events outside of Aon (NYSE:AON)'s control that could cause Aon's results to differ materially from those anticipated. You all are aware of the inherent difficulties, risks and uncertainties in making predictive statements. Our press release and Form 10 K that we filed this morning details some of the important risk factors that may cause our actual results to differ from those in our predictions. Please note that we do not have the duty to update our forward looking statements.

Our press release and portions of today's call use non GAAP financial measures as defined in Regulation G. You can find the related reconciliations to GAAP measures in our press release and presentation. Joining me on today's call is Gary Fields, CEO Matt Tabalski, President and COO and Rebecca Thompson, CFO and Treasurer. Gary will start off with some opening remarks. Rebecca will follow with a walk through of the quarterly results.

Matt will then provide further details on the segments and about our operational strategy. And before taking questions, Gary will finish with our 2025 outlook and closing remarks. With that, I will turn the call over to Gary.

Gary Fields, CEO, AAON Inc.: Prior to diving into the results, I want to briefly address the news that we announced last week related to CEO succession. As many of you know by now, I will be stepping down as CEO at our annual stockholders meeting on May 13, and Matt Tovalski will be taking over the role. I will remain on the Board, and I also will become a Special Advisor to the company to ensure a smooth transition. Years ago, I was very transparent that a part of my strategy with the company was to put together such a strong leadership team that my services as leader will not be required any further. We've reached that point.

The team that we have put together over the last several years has been tested in many ways and has proven to be incredibly capable. I can confidently say this is the strongest leadership team this company has ever seen. Since the end of twenty twenty three, Matt has been leading the team and fully managing the day to day operation. Over this time, I took a step back from the day to day. I could not be happier how the team performed throughout this transition, giving me the utmost confidence that this is the right timing for this.

Matt is an extremely talented individual with a huge skill set. His bandwidth is incredibly large and he is a very effective leader. I have strong conviction he will be very successful and that this transition will be extremely smooth. Now please turn to Slide three. As we look back on 2024, it was a year of both triumphs and obstacles.

Early in the year, we were coming off of a two year stretch of extremely strong organic volume growth and share gains. We said at the time that in addition to the year over year comps being tough, that 2024 was going to be a slower year due to uncertainties and challenges related to the refrigerant transition along with weaker macroeconomic conditions in the traditional nonresidential construction market. While not everything went exactly how we expected, from an organic revenue standpoint, it was a flattish year, which was generally in line with our projections. Peeling back the onion, there were a lot of puts and takes. The Basics brand had a tremendous year, driven by robust demand from the data center market and strong execution from our engineering and sales teams.

The brand made a significant impact on the data center market with the industry's first large scale development and sale of a custom designed liquid cooling solution. At the same time, sales of its Airside data center cooling equipment maintained exceptional performance. Net sales of Basics branded equipment for the year were up 35.1%. And within that, Basics branded data center equipment sales were up approximately 85%. Bookings of Basics branded equipment in 2024 were up approximately 100%.

This performance led to the company's total backlog finishing the year up 70%. The A. ON brand faced a more challenging year due to disruptions caused by the refrigerant transition and weaker non residential construction activity. These headwinds resulted in softer demand and created challenges within production planning. Despite the obstacles, sales of Aon branded equipment were down just modestly in the low single digits.

Bookings of Aon branded equipment was up in the mid teens and backlog at the end of the year of Aon branded equipment was up approximately 20%. Considering the tough year over year comps combined with the headwinds, we deem the year to be a success. Please turn to Slide four. Like the year, the fourth quarter performance was mixed. The bright shining star was that bookings were up approximately 62% and year end backlog finished up 70% to $867,100,000 This was primarily driven by bookings of data center equipment, including the large $200,000,000 plus liquid cooling equipment order we booked late last year.

We anticipate a majority of the total backlog will convert to revenue in 2025, positioning us for accelerated growth this year. Sales and earnings in the fourth quarter were softer than we were anticipating. This was primarily driven by the Aon Oklahoma segment. The fourth quarter was the first quarter in which we only accepted orders for equipment configured with the new refrigerant. Bookings of rooftop units in October and November were soft, causing us to throttle down production more than we anticipated.

As a result, volumes were lower than expected margin degradation at the segment was exacerbated. The positive is this slowdown is temporary, and we believe we're closer to the end than the beginning. The severity of the downturn since October should also result in a steeper recovery for us as we deem most of this slowdown was a push out of demand compared to most of our competition, which experienced a pull forward of demand. I will now hand it off to Rebecca Thompson, who will walk through the quarterly financials in more depth.

Rebecca Thompson, CFO and Treasurer, AAON Inc.: Thank you, Gary. I'd like to begin by discussing the comparative results for the three months ended 12/31/2024, versus 12/31/2023. Please turn to Slide five. Net sales were down 2.9% to $297,700,000 from $306,600,000 The year over year decline was largely driven by the Aon Oklahoma segment, which realized a decline of 16.1%. This was partially offset by the Aon Coil Products segment, which realized growth of 129.9.

Moving to Slide number six. Our gross profit decreased 30.5% to $77,600,000 from $111,700,000 As a percentage of sales, gross profit margin was 26.1% compared to 36.4% in 2023. The decrease in gross profit margin largely reflects lower volumes and the related deleveraging of fixed costs at the Aon Oklahoma segment. We also had a temporary decline in gross margin for the Aon Coil Products and Basic segments as we build out additional capacity for future growth. Please turn to Slide seven.

Selling, general and administrative expenses increased 0.7% to $48,200,000 from $47,900,000 in 2023. As a percentage of sales, SG and A increased to 16.2% compared to 15.6% in the same period in 2023. The increase in SG and A as a percent of sales was primarily related to an increase in depreciation expense associated with investments we are making for long term growth offset by a reduction of profit sharing expenses due to lower earnings. Moving to Slide eight. Diluted earnings per share decreased 46.4% to $0.3 per share from $0.56 per share.

The fourth quarter benefited from a large excess tax benefit of $4,600,000 relating to stock based compensation compared to $2,500,000 in the same period a year ago. Turning to Slide nine. Our balance sheet remains strong. Cash, cash equivalents and restricted cash totaled $6,500,000 at 12/31/2024, and total outstanding debt was $154,900,000 Our leverage ratio in the quarter was 0.57. We had working capital balance of $313,300,000 at 12/31/2024, versus $282,200,000 at 12/31/2023.

The increase in working capital reflects necessary inventory purchases made to accommodate production of orders in backlog for early twenty twenty five. Capital expenditures in the fourth quarter were $99,300,000 up nearly fourfold from a year ago. The increase was primarily associated with the $63,400,000 spent in December on the closing of our new facility in Memphis. In 2024, capital expenditures totaled $213,200,000 up 94.7% from 2023. In 2025, we anticipate capital expenditures to be approximately $220,000,000 Majority of our investments will be related to getting the Memphis facility up to speed for production later this year.

I'll now hand the call over to Matt Tabolski, who will speak more in-depth regarding the business segments and our operational strategy.

Matt Tabalski, President and COO, AAON Inc.: Thank you, Rebecca. Please turn to Slide 10. As Rebecca stated, much of the softness in the quarter was driven by the Aon Oklahoma segment. On the third quarter call, we cautioned that we expected a temporary low in adoption of 454B refrigerant equipment after we stopped accepting orders of the legacy 410A refrigerant equipment in September and knowing that many of the state's building codes weren't updated to allow 454B equipment until the fourth quarter. As this was the first refrigerant transition that also had building code implications, it was difficult to gauge what the impact was going to be.

The downturn in demand following the refrigerant transition proved to be steeper, causing us to slow production in the quarter more than anticipated. This resulted in lower volumes in the Aon Oklahoma segment in the quarter. We believe the downturn is temporary and was created by the refrigerant transition timing. As such, we chose to not reduce headcount significantly to prepare for the rebound demand. As a result, the impact was magnified from a profit margin standpoint.

Bookings were strong as we rounded out the year, resulting in a double digit increase in the segment's year end backlog. However, this preceded a modest price increase that went into effect on January 1, so some of this demand would be pulled forward ahead of the price increase. The positive is this suggests there is pent up demand in the market. Furthermore, as of the January, the trailing three months of bookings were up in the mid teens compared to the same three month period a year ago and backlog remains solid. We continue to believe as we move through the first half of the year, we'll see continued improvement in demand.

That said, much of the fixed costs associated with the new Memphis facility will be included in the Aon Oklahoma segment. Until production ramps up to a certain level, which will likely not occur until Q4, this will be a drag on segment profits. In the first half of the year, we anticipate incurring costs of $5,000,000 to $7,000,000 with minimal revenues to offset. For the segment as a whole, we expect the first quarter will look similar to the fourth quarter and expect sequential improvements throughout most of next year. The Aeion Coil Products segment had an exceptional quarter.

Sales and gross profits were up 129.988.9% respectively. The strength was largely driven by the commencement of production of the new Basics branded data center liquid cooling product. I'm extremely pleased with how our operations have performed here. We've added and trained a lot of people in a short period of time to scale up this operation and execute to the highest level for this customer. Due to engineering and design modifications requested from the customer, the initial ramp up of production has been delayed a couple of months.

As a result, we now expect the majority of this order will be produced and shipped in the second and third quarter of this year. That said, we should see solid sequential improvement in sales and profit in the first quarter with an acceleration starting in the second quarter. Sales and gross profit at the Basic segment were down 342.7% respectively. Over the course of last year, the facility in Oregon has been working through some growing pains. There's a lot of demand and a lot of backlog, which is positive, but there's also limited capacity at this facility.

This resulted in some temporary operational inefficiencies and is why the margins have been subpar for a number of quarters. The positive is we've been working on this issue for a while and believe we are almost at a point where we should begin to see improvement. We are taking certain initiatives that will expand production throughput while balancing our headcount appropriately. The Memphis facility should also help greatly as we will be moving some high volume production from Redmond to this facility later this year, which will result in higher production efficiency in Redmond. We expect their first quarter will look similar to the fourth quarter and anticipate sequential improvement going forward.

As we stated in the past, we expect this segment will eventually return to margins we realize in 2023. Please turn to Slide 11. I want to finish by briefly running through our strategic priorities with you and how they pertain to our tactical approach today. We see our strategy existing within three main pillars. A.

M. Foundation is and has always been built upon the being industry leader in innovation and customization, which is pillar number one. Maintaining the industry's highest class of engineers in solving our customers' problems through configurable and customized solutions is a foundational principle across the entire organization. We exemplify this today through various ways. Most notably our highly technical, fully custom developed data center solution and our cutting edge semi custom air source heat pump units.

The data center liquid cooling solution that we developed last year was a product that was uniquely configured in a way the industry had never seen before. The product we provided was the exact solution that a customer was looking for and it was something none of our competition was able to deliver. In the current time period where the scope and design of data centers are rapidly changing, these engineering and manufacturing capabilities are immensely valuable. Our AirSource heat pump rooftop units sold under AlphaClass product family is another example of innovation. Today, we are one of only two manufacturers that provide certified air source heat pump solutions that are operable down to zero degrees.

Over the course of this year, we will be introducing heat pump solutions that are operable all the way down to negative 20 degrees Fahrenheit. This is instrumental in filling the growing demands from customers who are attempting to decarbonize and electrify their footprints of buildings. These are just two examples. We have other innovations and development stages that we expect will be similarly as impactful. We look forward to sharing them with you in the future.

This leads me to our second pillar, which is to drive sustainable and robust organic growth. Today, our annualized run rate of production of data center equipment amounts to a little over $200,000,000 Given the pipeline of data center development plans and growing demand for customized solutions in this everly rapidly changing industry, we see this business growing to over $1,000,000,000 within a few years. In 2024, sales of our Alpha Class units amounted to a little over $100,000,000 and was up year over year by approximately 40%. With demand for this technology growing significantly and much of the country requiring this cold climate solution, we think this business can grow by multiples in the next few years. These two catalysts alone are going to drive significant growth and there are other initiatives we are focusing on that will also contribute to continued growth.

This brings me to our final pillar, which is to be a best in class operator. Being a best in class operator to us means to consistently achieve high operational efficiencies, quality control and on time delivery rates, all reflected by consistent gross margins. To achieve this, while generating the robust growth rates we are targeting, we must carefully manage both our current operations and our capacity expansion plans. In order to do that, we reorganized the company late last year. This new structure will allow us to quickly grow into approximately 1,000,000 square feet of new manufacturing space that we've constructed and acquired last year, doing so while maintaining efficiencies and target margins.

Gary Fields, CEO, AAON Inc.: With that, I will hand it back to Gary, who will walk through the outlook. Please turn to Slide 12. Prior to walking through the 2025 outlook, I want to take a step back and talk about where we are in our business cycle and where we are going. Matt did a good job of speaking to where we are going, but I want to frame where we are from a higher level perspective. The last five years, we have experienced tremendous amount of growth, growing organic revenue at a CAGR of 17%.

It hasn't been a straight line though, which it never is in business. In 2020, we had an exceptional year. 2021 was flattish. 2022 and 2023 were phenomenal and 2024 was flattish. Last year was an unusual year, largely disrupted by an unprecedented government regulation that the industry had never experienced.

The positive is most of the impact of that regulation is behind us. I point this out because sometimes we get overly focused on three months worth of financials and sometimes lose the forest for the trees. We are at the early stages of another multiyear period of robust growth. The fundamentals of both of our brands, Aon and Basics, are extremely strong. Basics has a huge tailwind from data center development and its leveraging of its unique engineering and custom design capabilities.

Aon also is in a strong position. Our semi custom designed equipment is of the highest quality, best performing, most energy efficient equipment in the industry. Our advanced development of heat pump technology is revolutionary. Moreover, we're proving we can build our traditional equipment more efficiently than anyone, which is reflected in a narrowing price premium and strong margins. Given the backlog and the fundamentals, we see both brands accelerating in growth over the next several years, resulting in annual growth similar to our trailing five year CAGR.

We are investing and positioning this business for the long term. The recent reorg and investments that we have made into the business to give you confidence that we will not only be able to absorb this robust growth, but do so efficiently. With that, I will now walk you through our 2025 outlook. Please turn to Slide 13. For the year, we anticipate sales growth in the mid to high teens at a gross margin similar to what we realized in 2024.

SG and A as a percent of sales will realize a decline of 25 to 50 basis points. CapEx will be approximately $220,000,000 For the first quarter, due to general seasonality, lasting impacts of the refrigerant transition and ramp up costs related to Memphis, we anticipate sales and earnings will be modestly down from the fourth quarter. In closing, I want to finish by thanking all of our employees, sales channel partners and customers. I also want to announce that we will be attending Sidoti and Company's virtual Small Cap Conference on March 13 and William Blair's conference in June. I hope to see some of you there at these events.

Thank you. And I will now open the call for Q and A.

Conference Operator: Thank Your first question comes from Ryan Merkel from William Blair. Please go ahead.

Ryan Merkel, Analyst, William Blair: Everyone, good morning. Thanks for the questions. I wanted to start with the first quarter outlook for the Oklahoma sales. I think you said flat sales versus what you just reported in 4Q. And is the reason that you're seeing that, is it still push outs because there's an inventory of R-four 10 in the channel?

Is that the main reason?

Gary Fields, CEO, AAON Inc.: Well, that's certainly got an impact on it, Ryan. We did book very nice right there at the end of the year, but the lead time being what it is, it's towards the end of the first quarter before those accelerated bookings start hitting the plant floor. So working off of the backlog, we'll say earlier in the month, earlier in Q4, that's why the run rate is still not accelerated. Four ten had a whole lot to do with it. We kept that off like we said back in September.

So everything that we have in the backlog now is four fifty four B and it has taken just a moment to get that momentum back.

Ryan Merkel, Analyst, William Blair: Okay. And then in the quarter basic sales down year over year is a little bit of a surprise. I didn't catch the reason why is that just given the big backlog?

Matt Tabalski, President and COO, AAON Inc.: Yes. So on a basics perspective, I think the one thing Ryan, we have to really frame looking forward is thinking about this more on the basics brand. And so the ACP, the strong growth in ACP that is really driven by Basics branded equipment. So when we look at Basics as a whole, we're definitely seeing strong growth coming out of that overall business within the segment reporting. So the basic segment as reported today is really reflective of Redmond production and there's just fundamental limitations of capacity within that facility that are really kind of the throttle of what you're going to see from an overall sales perspective in that segment.

But the demand to your point, the demand, the backlog from a basis branded product is extremely strong.

Ryan Merkel, Analyst, William Blair: I got it. So, yes, you're saying basics as a whole if you include coil are still strong?

Matt Tabalski, President and COO, AAON Inc.: Correct. And that's really we talk about the kind of business unit realignment and kind of future reporting, it's really trying to reflect that because as we go forward, the Basics brand is going to really be the Redmond facility, the vast majority of Longview and really the bulk of Memphis from a ramp up perspective, that is all for Basics branded product.

Ryan Merkel, Analyst, William Blair: Okay. One more and I'll pass it on. The outlook for mid teens to high teens growth in 2025, that's a little below what I was thinking. Can you just unpack some of the assumptions there? I was thinking data centers, both basics and coil could be up 75%, eighty %, again, just given that backlog.

And I think you mentioned you convert a lot of that. And then I was thinking then the Oklahoma side, you'd be up low single digits, mid single digits. So correct me if what am I missing on that?

Matt Tabalski, President and COO, AAON Inc.: Yes. I'd say the big driver is Oklahoma, I'll say, is the sort of piece that is offsetting that dynamic growth in the data center space. And so to Gary's comment earlier, coming off of the Q4 bookings into Q1, you're going to see a little bit of an expected reduction from Q4 to Q1 when you look at the bookings conversion to sales in Q1 plus traditional seasonality in that segment. So in Q1, we're just starting off at a weaker point than would be normal from in that segment. And as we look, there's still uncertainty exactly how the commercial market, the macroeconomic market and non res really recovers throughout the year.

And so we're just putting a little bit of caution in there with uncertainty around the Oklahoma segment. And so that's really where the kind of put and take is on the overall guide from top line revenue is, yes, to your point, very strong expectations of growth within the data center segment with a little bit of softness coming off of that in the Oklahoma segment.

Alex Hammitt, Analyst, Sidoti and Company: Can we just put a finer point

Ryan Merkel, Analyst, William Blair: on that? Maybe you don't want to give too much detail, but is the Oklahoma segment going to be flat in 2025?

Matt Tabalski, President and COO, AAON Inc.: We're not bifurcating down to segment guidance at this point. But definitely it's just again, when we start off kind of in that Q1, where we're starting off in Q1, obviously, it's going to put us a little behind from a year over year perspective.

Ryan Merkel, Analyst, William Blair: Got it. All right. Thanks. I'll pass it on.

Conference Operator: All right. Your next question comes from the Mr. Chris Moore from CJS Securities. Please go ahead.

Chris Moore, Analyst, CJS Securities: Hey, good morning guys. First, congratulations both to Gary and to Matt. Job well done. Maybe we can start on data center. Obviously, there's been some talk of bigger players canceling or downsizing data center construction.

What are you hearing from customers, potential customers on that front?

Matt Tabalski, President and COO, AAON Inc.: Yes, I mean, obviously, there has been a lot of noise in the market around kind of what the data center outlook looks like. What I would say just from a fundamental visibility that we have, the market continues to be strong. It continues to strengthen. When we look at the pipeline visibility that we see in the marketplace, as a whole, we see capital expenditures remaining strong and in a lot of areas actually increasing. And so from our perspective, everything we're seeing in the marketplace, everything we're seeing in various stages of conversation within the data center market and channel, the outlook, the strength and the investments continue to remain strong.

I think a lot of conversation around the deep state conversation, really we continue to be firm believers and really subscribe to the mindset that the ability to create more effective models creates demand. It creates a higher adoption of AI and will actually be continuing to strengthen the investment versus the adverse.

Chris Moore, Analyst, CJS Securities: Got it. That's helpful. And you mentioned a $1,000,000,000 target. Is that a three to four year goal? Is that a five plus year goal?

Just any way to frame that?

Matt Tabalski, President and COO, AAON Inc.: Yes. I mean, we use it I'll repeat the words as we say. It's a few years basically is what we see as being able to get that to $2,000,000,000 And so that's in the three to four year range is kind of where we see that target at.

Chris Moore, Analyst, CJS Securities: Got it. That's helpful. And maybe just a question on rooftop on pricing. So how much more expensive is your R54B solution than the legacy 410A that's currently being sold? Just trying to get an understanding if there's a big price delta or it has to do with building code changes that would influence people to continue to buy the R-410A for a while?

Gary Fields, CEO, AAON Inc.: So for us, the 410A is behind us.

Alex Hammitt, Analyst, Sidoti and Company: Exactly.

Gary Fields, CEO, AAON Inc.: We don't sell into a distribution channel where we pre stocked and preloaded a big parking lot full of units. So

Rebecca Thompson, CFO and Treasurer, AAON Inc.: there

Gary Fields, CEO, AAON Inc.: is no 410A left at Aon. That ended at the December. 455B is no more expensive from us. We had a 3% price increase that went into effect January 1. That was just our annual price increase for everything that due to inflation, we'll say.

But nothing specific to April has emerged.

Chris Moore, Analyst, CJS Securities: Got it. No, I understood you're not selling the four ten anymore, but distributors can. And I just wondering if you were going up against the four ten when trying to sell the four fifty four is really kind of what I was getting after. So Not materially, Chris. Okay.

Gary Fields, CEO, AAON Inc.: The people that buy units for a standard product like that are not our target client, never have been. It's never been material to our business. I'm not going to tell you that we don't lose a project from time to time to it, but it's not really measurable what we would lose to 410A because it's not ever been our target client that buys that style of unit. So not only the more innovative application strategies that we've put in the market for several years in like DOAS units and humidity control and building pressurization control and effective filtration, those have been our marquee applications. But the air source heat pump is gaining a lot of share within the units that we're building today.

And those are all built specifically for a project as well.

Chris Moore, Analyst, CJS Securities: Very helpful. Maybe just one last on price. So you guys have much more pricing flexibility than the average company on the four fifty four B. From a market standpoint, any sense in terms of where you're priced versus the other four fifty four Bs at this stage? Now you said you've raised prices 3% in the year.

Gary Fields, CEO, AAON Inc.: Yes. We're just now getting into that season where we have good comparative data. Oftentimes, and I've stated this many times, in the K-twelve market, which historically has been 20% plus of our utilization of our units, bid forms oftentimes will be A on basis of design and then they'll list a matrix of other manufacturers and what their pricing is. Those bids have gone back to their normal cadence of February, March, April bids resulting in June and July deliveries. So we're very soon and in fact is on next quarter's talk, I think we'll have empirical data to support where we're at with that, but we've not yet seen anything material in that regard.

Chris Moore, Analyst, CJS Securities: Got it. Very helpful. I'll jump back online. Thanks guys.

Conference Operator: Thank you. Your next question comes from Brent Thielman from Davidson. Please go ahead.

Brent Thielman, Analyst, Davidson: Hey, thanks. Good morning. Gary or Matt, just on the potential kind of $1,000,000,000 in data center revenue here over the next few years. Could you talk about the current capacity coupled with kind of Memphis coming online permit you to do that? Is there more you need to spend to get there?

And then also just a refresh on the timeline that Memphis asset becomes available

Matt Tabalski, President and COO, AAON Inc.: to you? Yes. When we think of kind of the total capacity that will be in place, I mean, obviously within the Redmond segment, we sort of said that in the low to mid $200,000,000 is really kind of where that facility's sweet spot is from a capacity standpoint. We have Longview facility that we've added. And if you really just look at that from a potential capacity of that facility, it's more than 2x the space dedicated to data center production compared to Redmond, so more or less double that.

And then Memphis is basically equal to the combination of those two. And so you start looking at that and you're talking about overall capacity sitting in the $1,000,000,000 ish billion range once that's online. So the capacity investment in Memphis is really to support that objective that we see with Headroom on top of that. In terms of when it comes online, we look at Memphis and we'll be honest, we're aggressive at trying to get production pull to push out of there. We actually built the first units at the beginning of the month in February.

I say that with excitement, but also caution because obviously when we say we built units in Memphis, we really assembled units in Memphis. And so we had a lot of parts coming from a lot of places, but really working aggressively to ramp that facility up so that by Q4, the equipment, the support equipment and the team is really built out to be running not at that full capacity, but definitely with a meaningful impact to financials by the end of the year.

Brent Thielman, Analyst, Davidson: Got it. Really helpful, Matt. Maybe just on basics, I guess, specific to the Oregon facility, it sounds like you just essentially have some things to work through inefficiencies right now.

Gary Fields, CEO, AAON Inc.: Could you just clarify when

Brent Thielman, Analyst, Davidson: you think that business sort of returns to the margins you sort of expect out of it?

Matt Tabalski, President and COO, AAON Inc.: Yes. I mean, in that segment from today's reporting perspective, we expect we're going to see sequential quarter over quarter improvement in margin throughout '25. The reality is there's just when you attempt to put too much product through a facility, there's actually a negative implication versus a positive in terms of your ability to effectively manufacture. And the incredible demand for the product and really the target for us to deliver on expectations from a lead time and a shipping perspective, we push that facility very hard to turn products for customers. And productivity in terms of number of units produced was certainly up in that last quarter, but it felt strain obviously from it it resulted in strains from a financial perspective.

So we really think throughout the calendar year, we're going to see improvement and getting into 2026, we're going to be getting closer to being in that normalized margin rate that we're targeting.

Brent Thielman, Analyst, Davidson: Got it. Just last one, Matt or Gary, I guess, we're sort of two thirds of the way through the first quarter. I just want to come back to Rooftop. And could you discuss the order visibility you're starting to see for the new product? Is it still a wait and see in terms of that coming in, excuse me, the new refrigerant product?

I'm just trying to get

Gary Fields, CEO, AAON Inc.: a sense of sort of

Matt Tabalski, President and COO, AAON Inc.: a good way to get

Gary Fields, CEO, AAON Inc.: in the quarter. No, it's beginning to accelerate. We were in Orlando at AHR just visiting with a lot of our sales channel partners. We didn't have any display there. But the general tenor was we're going to be seeing increasing orders on the normal seasonal basis that we had in years back.

So, I guess, the way to frame that up is we're confident that we've got the right product at the right price for the rooftops and we'll reassume our growth profile here shortly.

Matt Tabalski, President and COO, AAON Inc.: And just to add one piece to that too. In the prepared remarks, I want to just kind of reiterate one comment we made, which is when we look at the three months ending January 2025 compared to the year previous, so November, December, January bookings, they're up mid teens year over year. And so the normalization, the growth profile in there is certainly starting to reassume and kind of tells you where we're at

Ryan Merkel, Analyst, William Blair: from a

Matt Tabalski, President and COO, AAON Inc.: competitive perspective marketplace. Where we caution that Q1 softness again really is about backlog conversion. That bookings cadence doesn't really start hitting as Gary mentioned on the first question until the latter part of Q1 and really makes the meaningful impact into Q2. So we definitely see that product positioned well. It's just getting past that refrigerant transition to get the sales back to a normalized growth profile.

Gary Fields, CEO, AAON Inc.: Just to add one more thing to that. Going back a few years ago, when we'll say the markets were relatively normal with lead times, bid activity and so forth in their seasonality. We would see in the range of 20% variance from the low to the high. And the bookings always led that by approximately one quarter. Well, here we are at about 17% on that bookings timeframe that converts into units in Q2.

So that historic roughly 20% seasonality increase for Q2 and Q3 looks to be valid once again.

Brent Thielman, Analyst, Davidson: Really helpful color. Thank you guys.

Conference Operator: Thank you. And your next question comes from Giulio Romero, Sidoti and Company. Please go ahead.

Alex Hammitt, Analyst, Sidoti and Company: Good morning. This is Alex Hammitt on for Julio. Thanks for taking questions. I know we spoke about more efficient models driving more data center demand, But I was curious if you could talk a little bit about demand for denser data centers. I know those are typically a little bit better suited to liquid cooling.

So, we'd just love to have your take on that.

Matt Tabalski, President and COO, AAON Inc.: Yes, certainly in the data center space and really around the model development side, so the machine learning aspects of AI, that is pretty much all higher density compute that's basically producing those models. And so that higher density compute is pushing everything towards liquid cooling from a server perspective in that space. And I always like to really make sure we hammer this home because I think it's a little bit misunderstood kind of in the overall market perspective. But even when we have a true pure play as we would call it liquid cooled data center, which is what we're supporting with that Longview product, there is still a great amount of air side cooling required in that data center. And so it drives growth that investment in AI, that investment in the machine learning side at higher densities is driving growth both in liquid cooling and air side cooling.

But definitely, yes, we're seeing a huge push into higher densities within that AI space.

Alex Hammitt, Analyst, Sidoti and Company: Great. Thank you for the color. And I know we talked a little bit on the call about decarbonization and that sort of end market potential. Previously, I think you also mentioned clean rooms. So could we just get a little bit of an update on the development of that end market?

Matt Tabalski, President and COO, AAON Inc.: Yes. The clean room product is I would say, the Cleanroom market primarily has been a data center a basics driven product. So a lot of products from the basics brand have gone into the Cleanroom space, both in the semiconductor, the pharmaceutical, as well as the EV and battery production facilities. I would say just as a macro perspective that market has been a little bit lumpy. And so it definitely has some ups and downs from a quarter by quarter productivity standpoint.

Those projects tend to be large scale programs and they're not quite as consistent in growth rate as data centers. And so you definitely see a little more volatility in the orders, bookings and conversion. But we continue to see strong investment in the onshoring within the chip market, as well as build out of battery facilities that we continue to support.

Alex Hammitt, Analyst, Sidoti and Company: Great. Appreciate the color there. We'll jump back in queue.

Conference Operator: Thank you. And the next question we have from Timothy Wujes from Barrett. Please go ahead.

Timothy Wujes, Analyst, Barrett: Hey guys, good morning everybody. Maybe just on Gary on pricing with the new R54B system. It sounds like you said some price in Q1, but really just to kind of offset inflation. So could you just kind of articulate where you are in terms of the strategy around what you're going to

Matt Tabalski, President and COO, AAON Inc.: do with price specifically for R54B?

Gary Fields, CEO, AAON Inc.: Yes. We're going to monitor it a bit longer. We'd like for bookings to strengthen a bit before we hit a price increase that could potentially be related to R54B. I think with the uncertainty of the impact of tariffs, there may be price increases to offset additional costs for that. They may not be four fifty four specific.

But we will be monitoring that. We have a lot of capacity room in the Tulsa facility where we build the rooftop units, which is primarily where the four fifty four impact is at. And we want to get that plant loaded back up strongly. And if we have an opportunity to increase our price and thus our margin as a result of what others have for pricing pressure related to April, then I think we would very likely do that. It's interesting, I tried to figure out where their cost that they're declaring for April might be occurring.

And I said early on that the monitoring and mitigation device, the refrigerant leak monitoring mitigation device that's required for four fifty ks units was something that we had invented in our own facilities and invented one for us, perfected it, got it UL certified and we're manufacturing it at a very low cost relative to what we could go purchase them for. Presumably, others are buying that component as opposed to having developed their own at this point in time. One or two others on their calls have cited that device as being one of the reasons that they've gone up. So I applaud our team for being innovative enough to come up with that device early, get it developed, get it certified and put it into our system at a very advantageous price. So that was one of the areas that I've seen others cite as to their price increase.

And so that explains a little bit why we don't need the price increase possibly and they do. But I want to make sure that we get strong bookings. And once we get the bookings cadence going the direction we need to go, then we'll look at being a bit more opportunistic in price increase.

Timothy Wujes, Analyst, Barrett: Okay. Okay. That's helpful. And then I guess just from a is there a way to kind of quantify any of the inefficiencies with some of the increased capacity at Longview and just some of the inefficiencies that you saw at basics? Like is there a number that you can put on it in terms of what those costs were in the fourth quarter and in 2025?

Gary Fields, CEO, AAON Inc.: Well, I'll take the first stab at this and then let Matt fill in a few more details. While we were ramping up and while we are ramping up Longview, there are certain things that we build and produce internally that we didn't have enough capacity yet to produce because the new machinery was still coming online. So we were outsourcing. We'll say powder coat would be one of those in particular. We didn't have a powder coat facility in Longview, so we were outsourcing that.

Well, you can visualize making all these big panels and they're fairly large pieces of sheet metal, boxing them up, shipping them down the road even though it's only a few miles, but you still have the logistics of doing that, having them powder coated, bringing them back, certain percentage of them are damaged, not usable because of the transportation logistics, and then just the overall inefficiency of that process. So that was one in particular. In Memphis, as Matt spoke to earlier, we produced units there, but we have no manufacturing equipment yet commissioned and operating there. So it's strictly assembly. So we've either built components at other existing plants that we own or in some cases, we've outsourced some of that as well and brought it in.

And we did that in order to meet our delivery requirements with some of those clients. So that the combination of the two puts pressure on the margins. But Matt, go ahead and tell us more about Redmond in particular.

Matt Tabalski, President and COO, AAON Inc.: And I was going to touch on one more thing in the Longview space. And really with the growth rates that you see in Q4 and Longview and really what we're talking about into basically Q2 and Q3 with all the ramp up of production, you also have a lot of pressures in the fact that you need to onboard and train personnel ahead of when you're producing. And so all of that basically puts strain from an indirect overhead perspective as you're basically getting those team members up to speed and efficient in production. So all of that creates margin strain that definitely as we get to the volumes and we're in a more normalized state in Longview, you'll definitely see margins improve from a reduction of the inefficiencies and the extra labor cost, but also just fundamental leverage. We're going to get a lot of leverage in overhead as we get to some of those higher volumes.

So Longview definitely going into Q2 and Q3 is going to see some great improvement in overall margin. In Redmond, yes, to Gary's point, similar to Memphis, similar to Longview, with the demand and the product we were trying to get through, we just we had to leverage some outsourcing as well as a lot of just inefficiencies and basically getting projects out the door from a delivery expectation to our customers. There's one thing that we hold really, really strong and that is monitoring our commitments to our customers. And so sometimes to get deliveries out when we're a little bit behind, it takes a little bit extra work, AKA costs to get that done. So we've leveraged outsourced partners inside the Redmond space as well, and some logistics just trying to get all of that product produced that was expected.

We have and we're kind of really at a point where all the equipment that was getting installed in Redmond is now installed, is now operational and really now we start to get the incremental leverage of efficiency off of these equipment installations. So really as we look forward, we do see kind of quarter by quarter improvement in that Redmond segment, getting all that outsourced inefficiency behind us, getting the equipment performing to expectation. And really the great part is we've made the decision that Redmond is going to get to a certain point in terms of its overall throughput capacity and we're going to basically maintain that. It's not going to be a continuous growth driver, which means we then convert from a capital programs perspective to efficiency programs. And so there'll be a lot of effort throughout 2025 to drive efficiency and therefore drive margin improvement throughout the calendar year.

Timothy Wujes, Analyst, Barrett: Okay. Okay. That's helpful. And then I have two other ones. Just the first is, what is the year over year increase in D and A going to be just given the CapEx and where does that kind of land?

And then the second one is just given the data center reporting in terms of where the stuff is landing from a production perspective, I mean, I think it's actually pretty difficult for investors to kind of follow what's going on. So is there a potential or a thought process about maybe just kind of having the rooftop business be a segment and then having data center be a segment? Because, I think just some of the complexity of the reporting right now is kind of weighing a little bit on what's happening.

Matt Tabalski, President and COO, AAON Inc.: So tell you what, I will answer your second first because I know Rebecca is going to get you the solid answer on the first piece. Yes, so on your second question, I mean that is exactly why we announced the reorg kind of into this business unit philosophy going into 2025. We have some limitations in our systems today to allow the full reporting of that. But as we get through 2026, our goal is to do exactly what you're asking, which is to do financial reporting really around the Aon business unit, which is the rooftop and the commercial split systems and then reporting around the basic segment. And in doing so, you'll be able to understand the basics revenue across and basically the drivers of revenue and profitability that comes from all of our production sites.

And so that is definitely the target for the end of twenty twenty five going into 2026 to get very easier to understand financial reporting around all those segments. Okay. And then Rebecca.

Rebecca Thompson, CFO and Treasurer, AAON Inc.: Yes. So can you repeat your first question? Just so I believe it was about DD and A.

Timothy Wujes, Analyst, Barrett: Yes, yes. Just because I think D and A in the like if you look at the Q, I think the D and A number was probably up 6,000,000 or something at that 7,000,000 year over year. I guess what is that supposed to be up in 2025 as you bring on Longview and Memphis and just where does that land on the P and L in terms of SG and A or COGS?

Rebecca Thompson, CFO and Treasurer, AAON Inc.: So it's going to land in both cost and SG and A. A lot of the Memphis DD and A, that's going to be mostly in your cost of goods sold and that's part of the drag on the gross margin that we alluded to in the earnings call as far as like some of the fixed costs that are happening before we have the offset revenue. But we also have as we've kind of also noticed or alluded to in many of the calls, investments in some of the back office technology, catching up and doing automation. So you're going to see continued increases in DD and A within the SG and A portion of the income statement as well related to those investments. So I would think that the increase in DD and A in the next year it could be consistent with our increase in sales.

Timothy Wujes, Analyst, Barrett: Okay. Okay. Sounds good. I'll talk to you guys in a bit. Thank you.

Conference Operator: Thank you. All right. So I don't see any further question at this time. I will now hand the call over to Joseph Mendelio. Please go ahead.

Joseph Mandila, Director of Investor Relations, AAON Inc.: All right. Thank you everyone for joining today's call. If anyone has any questions over the coming days and weeks, please feel free to reach out to myself. Have a great rest of the day and we look forward to speaking with you in the future. Thanks.

Conference Operator: Thank you. Ladies and gentlemen, today's conference call has concluded. You may now disconnect.

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