AAON Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 6, 2023

There are 9 speakers on the call.

Operator

Welcome to the Aon, Inc. Third Quarter 2023 Earnings Conference Call. Our host for today's call is Joseph Mondillo. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session.

Operator

I would now like to turn the call over to your host. Mr. Mondillo, you may begin.

Speaker 1

Thank you, operator, and good afternoon, everyone. The press release announcing our Q3 financial results was issued after market close today and can be found on our corporate website, aa0n.com. The call today is accompanied with a presentation that you can also find on our website As well as the listen only webcast. Please turn to Slide 2. We begin our customary forward looking statement policy.

Speaker 1

During the call, any statement presented dealing with the 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 AAON's control That could cause Aon's results to differ materially from those anticipated. You are aware of the inherent difficulties, risks and uncertainties in making predictive statements. Our press release and Form 10 Q that we filed this afternoon 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.

Speaker 1

You can find the related reconciliations to GAAP measures in our press release and presentation. Joining me on today's call is Gary Fields, President and CEO Rebecca Thompson, CFO and Treasurer and Matt Tabalski, our new President of AAON. Gary will provide some opening remarks. Rebecca will then walk you through the quarterly results, and we'll then finish with Gary and Matt with some commentary on the quarter and outlook. With that, I will turn the call over to Gary.

Speaker 2

Start on Slide 3. 3rd quarter was another very good quarter for AAON. We reported record sales for 7th straight quarter. Organic volume was up year over year 11.9%. That was against a quarter a year ago where organic volume was up 26.8%.

Speaker 2

On a 2 year stack volumes were up 41.9%. Gross margin expanded quarter over quarter, another 4 10 basis points, driven by increased productivity A positive contribution from price cost. The increased volume at higher gross margin drove earnings per share growth of 70.6% Increasing production capacity to manage the robust demand. Production outpaced bookings for a 2nd straight quarter, Which we were very happy to see. Backlog declined further, allowing our lead times to continue to fall.

Speaker 2

Lead times are now finally back to normal levels, which is important for competitive reasons. Productivity across all three of our major locations improved in the quarter. Supply chain disruptions have abated, minimizing the impact of production operations. These have all been a key factor to the improved margins. I was pleased to turn to Slide 5.

Speaker 2

Market environment remains busy despite what the macroeconomic indicators have been signaling. Bookings and the book to bill improved quarter over quarter and sentiment at the ground level remains very positive. From a high level perspective, industry trends remain favorable for AAON. The high quality, high performing custom equipment we manufacture Has become a very compelling value proposition with the market that is increasingly focused on decarbonization, Energy Efficiency and Electrification. Additionally, increased regulations on the industry led to a narrower price premium Between our equipment and the competitions, increasing the value proposition of our equipment, All of which have contributed to us taking market share.

Speaker 2

As such, we continue to invest in the future. Now let's please turn to Slide 6. As you can see from our CapEx spend and headcount year to date, we are aggressively investing in production capacity. Despite what you're seeing with the general economy, several of our end markets remain strong. This includes data centers, Semiconductor Manufacturing, General Manufacturing and Education.

Speaker 2

In addition to production capacity, we're investing more in sales and marketing, Product Development and IT Infrastructure, all of this with the intent to better position us for long term growth. Our parts business also continues to be an area we focus on. In the 3rd quarter, parts sales grew 14%, That was 5.8 percent of total sales. We continue to target a strong double digit annual growth in parts And expect to increase the business by 2 to 3 times in the next 5 years. With that, I'll now hand over the call to Rebecca to go over the financial results.

Speaker 3

Thank you, Gary. Please turn to Slide 7. Net sales increased 28.6 percent $312,000,000 from $242,600,000 improved operational efficiencies, less supply chain disruptions And additional production capacity drove volume growth of 11.9%. Our Aon Oklahoma and Basic segments Particularly realized robust growth. In addition to volume, pricing contributed 16.7% to growth.

Speaker 3

Moving to Slide 8. Gross profit increased 77 percent to $116,100,000 from $65,600,000 As a percentage of sales, gross profit was 37.2% compared to 27% in the Q3 of 20 The improvement in gross profit margin was led by several factors, including increased pricing, improved operational efficiencies and Fixed Cost Absorption. Please turn to Slide 9. Selling, general and administrative expenses increased 78.2 percent to $51,500,000 from $28,900,000 in the Q3 of 2022. In the quarter, we recognized a one time settlement fee of $7,500,000 Excluding this one time expense And assuming the FX exclusion has on profit sharing, non GAAP adjusted SG and A as a percentage of sales was 14.3%.

Speaker 3

The increase relative to sales is primarily attributable to the increase in the profit sharing expenses, which is a result of the higher earnings As well as the investments we are making to facilitate long term growth. Moving to Slide 10. Diluted earnings per share increased 70 point 6% to $0.58 per share from $0.34 per share. Excluding the one time settlement expense Assuming the effects exclusion has on profit sharing and taxes, non GAAP adjusted EPS was $0.64 a year over year increase of approximately 90%. Turning to Slide 11, our balance sheet remains strong.

Speaker 3

Cash, cash equivalents and restricted cash totaled $22,500,000 on September 30, 2023 And debt at the end of the quarter totaled $78,400,000 Our leverage ratio of 0.33 was down from 0.37 at the end of the second quarter And down from 0.46 at the end of 2022. Within the quarter, we spent $25,000,000 to repurchase common shares while still decreasing our debt balance. We had working capital balance of $284,800,000 at September 30, 2023 versus $203,500,000 at December 31, 2022. Our working capital has increased due to the receipt of restricted cash And the closing of our new market tax credit in the 2nd quarter as well as an increase of higher price receivables. Year to date, cash flows provided by operating activities is up 146.8%.

Speaker 3

We expect cash flows from operating activities in the Q4 will be the strongest quarter of the year, which will help pay down debt and finance CapEx projects. Capital expenditures for the 1st 9 months of the year were $82,900,000 up 99.3% from a year ago. We now expect capital expenditures for the year to be approximately $100,000,000 We monitor our growth trajectory and capacity utilization regularly And we will continue to invest in long term growth. With that, I'll now turn the call back over to Gary.

Speaker 2

Please turn to Slide 12. As I stated in my opening remarks, bookings in the 3rd quarter improved sequentially. We also realized month to month improvement throughout the quarter, which was encouraging. On our last earnings call, we stated that we thought the Soft bookings in the 2nd quarter were not indicative of underlying demand and were more so of a temporary shift in customers' buying patterns related lead times. This played out in line with those comments.

Speaker 2

In 2022, due to robust demand and supply chain disruptions, lead times of our equipment as well as our competitors' equipment Climb significantly throughout the year. As a result, customers began placing their pre summer orders for 2023 In the Q4 of 2022. Traditionally, this doesn't occur until mid first quarter. It was a seasonal pull forward by about 4 to 5 months. To add to that, lead times peaked in early 2023 And by the beginning of the Q2, they were accelerating to the downside.

Speaker 2

This was all a result of increased production capacity and less supply chain disruption. The decline in lead times earlier this year led to temporarily slower ordering by customers. This also was a factor to the soft bookings realized in the Q2. Overall, we were happy to see bookings improve in the 3rd quarter And to see the month over month improvement throughout the quarter. Thus far, September was our strongest month of bookings in the year And October was nearly as strong.

Speaker 2

Looking to the backlog, I've stated this in the past, but I want to reiterate it because it's becoming more of a factor that you be aware of. Historically, most of our backlog was shipped in the coming 2 to 3 months. As our business and the market has evolved, We're receiving a larger percentage of orders that expect to be shipped beyond that traditional next 2 to 3 months. This is especially the case with basics, but we're also seeing it in parts of the rest of the company. Therefore, while our lead times are back to normal, you should not expect the entire backlog to turn over in the 4th quarter.

Speaker 2

Turning to the outlook. Please turn to Slide 13. Historically, due to holidays resulting in less production days, We've always recognized slower 4th quarter relative second and third quarters. However, in the last two years, We've seen very strong 4th quarters due to bloated backlogs, extended lead times. Now with lead times back to normal, We'd expect the seasonal cadence that we've historically recognized in the Q4 to occur this year.

Speaker 2

With that said, We'd expect 4th quarter sales and earnings to be modestly down from the GAAP results we recognized in Q3. Looking out to 2024. While it's still early, at this point in time, we are anticipating another solid year of growth. The backlog is healthy, especially considering the portion of backlog expected to ship next year. In fact, compared Prior years, the backlog at the end of September of this year that is expected to ship within the next calendar year It's one of the largest we've ever had compared to the same time in previous years.

Speaker 2

Furthermore, while some of the macro indicators Signaling a slowing in construction, others are still pointing to strength. Specifically, the Association of Builders and Contractors Latest monthly survey, which stated that construction backlogs remain lofty and that builders and contractors expect rising employment And expanding sales and profit margins. This is also in alignment with what we've been hearing from our sales channel. Most of our independent sales rep offices maintain a positive sentiment and outlook when it comes to the upcoming year. Although there are a couple end markets that have softened and the comps for us next year become much tougher, We'd still expect volumes to be up.

Speaker 2

Again, some of our end markets such as data centers, semiconductor manufacturing, General Manufacturing and Education will remain particularly strong. As we've also discussed on previous calls, The price premium of our equipment compared to market pricing has narrowed. We expect to continue to take market share in 2024 Due to this still relatively new competitive dynamic. Moreover, the industry next year is likely to be notably disrupted by new refrigerant regulations That will be going into effect January 1, 2025. Historically, AAON has always thrived in times of disruption And we'd expect this to be another opportunity to take share.

Speaker 2

At this point in time, all of our equipment in our electronic catalog is available with the new refrigerant. We expect some of our competitors won't be able to say that until later in 2024. With many states having already passed legislation To allow for equipment with the new refrigerant to be installed, we view this as an opportunity next year. In addition to all of those factors, we are also anticipating to recognize benefits from the recent investments we've been making in sales and marketing. To remind you, up until this year, AAON never invested much in marketing in the history of the company.

Speaker 2

This is a new focus for Aon. With new products like the Alpha class, we expect these marketing efforts will be very beneficial. Therefore, despite the concerns you're hearing related to the general economy, there's still a lot of positives that we're excited about in the upcoming year. For modeling purposes, we want to help you out how to think about pricing in the upcoming year. We're still seeing cost pressures, Which we intend will be fully offset with price.

Speaker 2

At this point in time, we would expect pricing to contribute mid single digits To net sales growth in 2024. Lastly, earlier this morning, we issued a press release related to changes we're making to our leadership team. Since my arrival to the company in 2016, there have been many changes to the leadership of this company. One of my many goals from day 1 was to successfully transition the company from the previous structure, which was very much dependent on 1 central person's leadership To a well rounded versatile team capable of running an enterprise for long term success. Today is another step towards achieving that goal.

Speaker 2

Starting January 1, Matt Tabalski will take on the role of AAON's President and Chief Operating Officer. Currently, Matt is President of Basics, the business that Matt co founded and we acquired in December of 2021. Since joining Aon through that acquisition, Matt has been an integral part of the entire company. Along with managing the basics business, he has been a key leader within our executive leadership team. By passing down the President title from myself to Matt, Matt will be more responsible for the day to day operations of the company, while I narrow my focus to strategic objectives as CEO.

Speaker 2

Dave Benson, also a Co Founder of Basics will take the role of AAON Vice President and President of Basics And Boot will be responsible for managing the Basic segment. Dave has 40 plus years of experience in the industry. We're confident he will successfully continue to grow this business into being a world class organization. Additional alignment leadership team Will occur to leverage resources and organizational efficiencies with globally focused roles and collaborative site leadership, All of which will occur starting January 1. Please see the press release we issued earlier this morning for more details.

Speaker 2

Now I'd like to hand it off to Matt Tobosky, our new President and COO for some brief remarks.

Speaker 4

Thank you, Gary. It is truly an exciting time to be a part of the AAON organization, and I'm honored to accept this new role within the company. I've always had a tremendous amount of respect for AAON well before the acquisition Basics in 2021. Aon's culture, commitment to innovation and value focused product offering align well with the Basics heritage And I've allowed the collective team to make major strides over the past 2 years. As a collaborative leader within the Aon organization, I have been continually impressed with the caliber of the team the direction of the company and my respect for Aon is only grown.

Speaker 4

As we look forward, Aon is positioned to be a world class organization and I am proud to be a part of it. I'm also excited because the company still has a lot more potential. I look forward to helping drive Aon towards sustainable growth and continued success for our team, Our sales channel, our trade partners and our shareholders. I want to thank Gary and the Board for this opportunity. Genuinely, I do not take this for granted intend to do everything possible to help make this organization as successful as possible.

Speaker 4

I'll now pass it off to Gary for closing remarks.

Speaker 2

In closing, I want to finish by thanking all of our employees, sales channel partners and customers. Thank you. To our shareholders, this company has never been more well managed than it is today, and we look forward to generating the returns that you expect of us. I will now open the call for question and answer.

Operator

Thank And our first question today will come from Brent Thielman with D. A. Davidson.

Speaker 5

Hey, thank you. Good evening. Congrats on a great quarter.

Speaker 2

Yes. Thank you.

Speaker 5

Yes. Gary, I mean, I guess, 1st and foremost, you spoke a little bit to it, but Maybe how do you think about pricing as an industry goes, as Aon approaches it moving into 2024? Gary, I mean, these are Fantastic gross margins here in the business and it looks like for the most part they sustain here over the near term. Do you think the business moves into some sort of level of normalization in the next year, as you've talked about kind of 28% to 32% or Are we at a new level of normal?

Speaker 2

Well, while I would like to declare this 37% plus A new normal, I think that's pretty strong to expect for an absolute normal. What I will say that it's in the new range. I would say that our target range has Riz, the 28% to 32% is no longer a target range for us. Reason for that is, is that we've monitored our market position Versus our competitors and what our value proposition is. And at this point in time, it will allow us a margin a bit stronger than historically.

Speaker 2

That points well to the innovations that we have come up with. Our Alpha class in particular is absolute Tremendously ahead of the market for that kind of a product. And we're seeing good Activity with it, bookings are beginning to come, but it's pretty early to declare that 100% success, but what we do know for sure is that there's a lot of major customers that looked at that strongly and it will afford us this sort of a margin.

Speaker 5

Okay. Appreciate that, Gary. And then, it looked like the Longview coil products business Ran into some hurdles as you sort of implement the basics product there. When do you expect to sort of Get that back to normal or back to the sales expectations you look for from that business?

Speaker 2

Well, we've been chipping away at that And a lot of factors. And our intercompany work with them, They have a higher percentage of copper, particularly related to the intercompany product and we probably let them fall a little behind How we should have transferred that. When you flush it all out, the business does very well. That just puts a little bit of burden on them that they probably don't deserve. On finished products, we're seeing strengthening due to efficiencies.

Speaker 2

We just now really Started hitting our stride and building basics product there. And we're probably going to flush through A good bit of what we have now and we're kind of waiting for the next tranche of that to come along. We've got some other products that Basics has That we believe fit that plant very well, but we've got some work to do before we can transfer it down there. Those orders have been very strong. Matt, do you want to say anything at all about those?

Speaker 4

Yes. Just to Gary's comments, certainly Part of our initiative right now is to continue increasing the portfolio of basis products manufactured within the Longview plant. And so there's very active engagement to broaden the amount of products that we can manufacture down there that fit very well within the long view manufacturing practice. But as Gary mentioned, spending the time to make sure we get everything properly aligned from a manufacturing process Perspective is kind of where the teams are actively engaged to keep building that portfolio.

Speaker 2

So just to summarize that Brent, I would say that we'll see continuous improvement from them Gradually throughout the next year.

Speaker 5

Okay. Gary, maybe my just my last one, I couldn't help but notice the comment in the press release, the organization has made major enhancements the last Few years, much of which is yet to be financially recognized. I'd sort of open the floor to you. I'd be interested in hearing and Yes. Some of the things in particular that you think can be leveraged here in the coming years.

Speaker 2

Well, We've already seen a lot of productivity improvement as we've been able to stabilize the workforce. If you go back to when I joined the company 7 years ago, a statement was made to me by the founder that the company could build more than we could sell. And as you'll look back historically, you'll see that wasn't the case. So we fell all over ourselves trying to figure that out. Well, we figured that out And we've become very, very efficient.

Speaker 2

And so as we stabilize these things, then we The processes, the headcount, look at this, my God, our headcount is huge. But our marketing and sales channel improvements are where we think there's a whole lot yet to be gained. The marketing building that We put together that some of you came to Investor Day and saw. Last week, we had our board meeting there. And while I was waiting for the board meeting, There were 2 regional sales managers standing there waiting on people to come in.

Speaker 2

I asked the young woman that kind of manages the schedule there and said, hey, is this unusual? She says, no, not the least bit. She says, we have more than one group on most days and we have some kind of group Almost every day of the week. Well, that far exceeds anything that I ever envisioned. I envision maybe 1 or 2 groups a week.

Speaker 2

We're seeing multiples of that. So that's all manifesting itself very well as time comes on. But the other thing is our CapEx projects are yet to show their full capability of the returns. And so we've got just an awful lot here that is in the earlier stages of recognition of what the contributions are.

Speaker 5

Understood. Thank you. I'll pass it on.

Operator

And our next question will come from Chris Moore with CJS Securities.

Speaker 6

Hey, good afternoon, guys. Congrats on a great quarter. Thank you. Certainly. So maybe I'm just interested maybe in parsing out a little bit more Kind of the competitive landscape that you're seeing now between the kind of the core rooftop and basics.

Speaker 6

I mean, specifically From a pricing trend perspective, is there much difference between the two segments What you're seeing?

Speaker 2

Little different dynamics. So I would say, Well, train, carrier, Lennox, Daikin don't make exact Part for part equipment, what we do, a lot of the competition is for the application itself For the project, once we're chosen, we typically have a supreme position because of the things that we have. But when we're competing against them and the delta between our price and their price is often discussed, that's where I'm saying historically that had been Around 15% and more recently it's maybe 8% to 10%. So a lot of the cost that went into making The competitors equipment more efficient in order to meet 2023 DOE Energy Standards, we already had that baked into our Deal, and so it narrowed. We've just had more and more data points tell us that We're correct on that statement of being in general for a general application 8% to 10%.

Speaker 2

Now basics on the other hand, I'll let Matt talk to that specifically. I think I've got a good Grasp on it, but I'd like for him to go with that.

Speaker 4

Yes, very much on the basic side of the business. There certainly still is a cost premium for the product, But much the same as legacy Aon products, we're selling a value driven product. And so typically, it is Beyond just first cost, the overall investment from a quality and efficiency perspective that kind of drives the value proposition of the product. And other huge drivers is the ease of implementation. The kind of process project management and implementation of the product Provides a huge value for the overall customer in terms of these fees and timeline with installation and basically getting equipment up and running for facilities.

Speaker 2

Yes. Well, I won't talk about this specific customer's name. I'll say a major customer came to us with an RFP, A request for proposal. They looked for a submittal in return. The submittal is all the technical details Showing that you meet and comply with the RFP.

Speaker 2

They allowed 6 weeks as I recall for that response. We've responded in 3 weeks and the comment was given that we had the most stellar response that they had seen amongst any competitors And delivered it early. So that just speaks highly of the team that we have at Basics. And Some of this alignment of leadership that was announced today is to capitalize on this, so that we have a two way communication Globally connected. So a lot of the things that Aon has done very nicely for many years It can be complemented by a lot of the things Basics has done and vice versa.

Speaker 2

So no one's yet asked About these organizational changes and I think that's probably the biggest news of the day.

Speaker 6

Got it. That's very helpful. Great color. And maybe just my follow-up. You talked about it in your prepared remarks, Gary, but The lower global warming refrigerant, it sounds like you guys are ready and I'm just trying to maybe understand the potential tailwinds here.

Speaker 6

Would it be Potential greater market share gains the second half of the year for depending on lead times, etcetera?

Speaker 2

Well, it sure looks that way. It's shaping up. And kind of our data points are that we have multiple Engineers that sit on industry councils, where all of the peers are there in the industry councils. So they're pretty talkative About where they're at with developing things like this. And from the latest, we'll call it chit chat at one of those industry Councils, it was determined that we are way far ahead as far as being ready.

Speaker 2

We have it entirely introduced in our electronic Catalog Now, we're accepting orders within the next 60 days and delivery within 8 weeks of that. And I don't think that that's why it's spread across the industry at all. So for these few states that have Put in place provisions to allow the utilization of the new refrigerant, we're going to be an early adopters Answer in those early adopted states. So we do see that as an advantage to take some market share. So let's just take one of those states and they say, I need a store built with 20, 30, 40 ton rooftop units And we're the only ones that have the new refrigerant.

Speaker 2

Walt, would you want to go if that was available in your state, would you want to use an obsolete refrigerant On a change out? Of course not.

Speaker 6

Got it. Very helpful. I will leave it there. Thanks guys.

Operator

We'll move next to Julio Romero with Sidoti and Company.

Speaker 7

Hey, good afternoon, Gary, Rebecca and Joe and congratulations, Matt.

Speaker 4

Thank you.

Speaker 7

Hey. So, Gary, you mentioned the backlog turnover is going to take longer than the traditional 2 to 3 months, especially considering Customers booking further out and the basics products factoring as well. Can you maybe level set for us how we should think about the new duration of the backlog turnover?

Speaker 2

Well, it's so complex that there's no historically, Prior to the pandemic, prior to basics, you could take our backlog divided by our latest production figures and that would give you lead time. The issue now is that because of the pandemic and because of extended lead times, people began to order with a longer Thought process. I'll give you an example. For over or close to, if not over 10 years, Aon Longview has been providing split systems for modular data centers. And we have always been hand to mouth on those.

Speaker 2

Like when they give us an order, they want them as fast as we can build them. And historically that had been around 8 weeks. Well, they got in a huge demand and we got to where we couldn't supply it And so they started ordering further and further ahead. From 2 of our clients for that, we have orders That are spaced out all the way through 2024. And here's the good news, with appropriate pricing attached, So we're not stuck with a delivery down the road without reasonable pricing.

Speaker 2

So that being the case, Julio, that was a normal for Basics. It's now becoming a normal in some It's the same customer base. It's this data center customer base. They are long term planners. I mean, I heard that this is not our company, it's not our product, but another company selling a product, air cooled chillers, They have orders that are going out 2 3 years.

Speaker 2

So again for data centers. So you're seeing A lot of this related to data centers, so as that becomes a larger portion of our portfolio, the likelihood of this continuing is great. Hope that answers it. It's just not a simple answer anymore. That's the real answer.

Speaker 7

No, there's definitely some nuance to it, but I appreciate all the color you gave for sure. Maybe asking also about the refrigerant regulation. It sounds like you're going to play some offense in 24 given the product catalog positioned well for the new refrigerant and you talked about some first mover advantage as being part of that strategy in some of the early states. Do you also expect your pricing premium to potentially narrow relative to the competition as they have to kind of Play catch up with their product portfolio and that may factor into some of your offense strategy as well?

Speaker 2

Well, it's interesting you asked that. We were at an industrial conference recently and several of the investors had come from A different conference where some of these competitors of ours were announcing how much they expected to go up on their equipment Over the next 2 years as a result of the refrigerant change. Well, we're not seeing it the same way. We're seeing that the refrigerant itself is less cost. We're seeing that the Pieces and parts.

Speaker 2

Well, let me just back up. Our vertical manufacturing vertically integrated manufacturing strategy played well for this. On Monday last week, Tuesday last week, I was at our controls manufacturing Facility in Parkville, Missouri, which part of our CapEx has gone to them. And I was there to see, it's about 90% fleshed out And being utilized. We're manufacturing our own control sensing system Related to the safety for UL60335 and everything else to do with this refrigerant And the cost of it was just tremendously beneficial to us.

Speaker 2

I couldn't be more proud of that group. It was one of those deals where 2 years ago they came to me with this CapEx request and told me all these great things they could do with it. And I said, sure. It looks good. Their business plan showed like 14 months return on investment.

Speaker 2

And I said, go as fast as you can. Well, they have that in place and they're building that product and that's going to be a major advantage for us. So I'm just loving what I'm seeing, Julio. I'm loving it.

Speaker 7

That's very helpful. And maybe just one, maybe for Rebecca. You mentioned some of The elevated SG and A in the quarter was due to profit sharing. Were there any kind of other factors that led to that? And are those factored into the 4Q guide?

Speaker 3

Yes. Those factors are included in the Q4 guidance. So we have we've talked about some of these investments we're making for long term growth For back office like technology and automation, some of that was more heavily weighted to the second half of the year. So that is why you'll see our guidance for Q4 as a percent of sales is up a bit.

Speaker 7

Okay. Really helpful. I'll hop back into queue. Thanks very much.

Operator

And your next question will come from Jon Braatz with Kansas City Capital.

Speaker 8

Good afternoon, everyone.

Speaker 4

Hi, Jon.

Speaker 8

Maybe going back to the refrigerant question. You have historically seen periods Where there's been disruptions going back a ways. And I guess Maybe to quantify it for us. If the market was going to deliver you maybe X percent Volume growth next year, how much of that might be because of the Gaining market share because of the sort of the disruption in the industry. I'm trying to better sense is what the Opportunity for you in terms of grabbing market share might be?

Speaker 2

Well, it's early. I haven't yet seen because none of these states can take that new equipment yet. They're preparing for it. Some of them are Very near term. I thought that it was not going to happen till January 1, 2025 all along.

Speaker 2

Well, That's where most of us thought. But there were some states that were very aggressive, no surprise, California, for instance, Trying to pull everything forward as far as they could. They want to be the leaders in global responsibility. And so they're pulling a lot of things forward. And the industry responded When it comes to chillers, I think they're well prepared.

Speaker 2

When it comes to packaged rooftops, doesn't appear to be so much. So that's our strong point is We don't build chillers. We build package rooftop units and we're way far ahead of everybody with being ready with the new refrigerant. I think a lot of the reason that we're ahead is that they had to develop they had to Had to allocate a lot of their resources to the 2023 energy standards and then By the time they got that completed, then they began the refrigerant changeovers, kind of the way it's been told to me. Well, we were way ahead of both, Because we had that 2023 energy standard captured 3 to 5 years back.

Speaker 2

So we were able to get a lot earlier development on this new refrigerant. So I don't know what percentage it is, John. I will tell you that we've got a lot of market drivers that are in our favor For us to take market share, I think next year of our total revenue gains, There will be some pricing, but I believe it will be our revenue gains will be more weighted towards volume than they will be price. That's my opinion. Sure.

Speaker 8

Okay, great. And then secondly, maybe for you, Rebecca, The strong gross margins in the quarter, 37%. Sometimes everything that can go right goes right in a quarter and vice versa. But I think it's obviously a lot more than that. But having said that, Was there things in the quarter that just were unusually positive and it's difficult to repeat And maybe generated those higher margins?

Speaker 3

I wouldn't say they're unusually positive. I will say, the increased revenue and our operational efficiencies that we've been seeing Has led to better overhead absorption. So sometimes that is a factor that when you get into

Speaker 8

Sure.

Speaker 3

Some of our seasonality, you have less absorption and the margins might dip just slightly, but I would say there was Nothing out of

Speaker 4

the usual for the quarter.

Speaker 8

Okay. Thank you, Rebecca.

Operator

It appears we have no further questions at this time. I'll turn the call back to our presenters for any additional or closing remarks.

Speaker 1

All right. I'd like to thank everyone for joining on today's call. If anyone has any questions over the coming days 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. Thank you.

Operator

This concludes today's conference call. Thank you for attending.

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Key Takeaways

  • AAON delivered record sales for the seventh consecutive quarter, with organic volume up 11.9% year-over-year and earnings per share rising 70.6%.
  • Gross margin expanded by approximately 1,410 basis points quarter-over-quarter thanks to pricing actions, productivity gains and reduced supply chain disruptions.
  • Demand remains robust as customers prioritize decarbonization, energy efficiency and new refrigerant requirements, narrowing AAON’s price premium and enabling market share gains.
  • Management is aggressively investing in capacity expansion (over $82 million in CapEx YTD), sales & marketing, product development and IT, while parts sales grew 14%.
  • Outlook for Q4 anticipates a modest seasonal downturn, while 2024 is expected to deliver solid growth supported by a healthy backlog, mid-single-digit pricing contributions and leadership in new refrigerant solutions.
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Earnings Conference Call
AAON Q3 2023
00:00 / 00:00