AAON Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
May 1, 2025

There are 11 speakers on the call.

Operator

This call is being recorded on Thursday, 05/01/2025. I would now like to turn the conference over to Joe Mondillo, Director of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, operator, and good morning, everyone. The press release announcing our first 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 turn to Slide two. We begin with our customary forward looking statement policy.

Speaker 1

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's control that could cause Aon's results to differ materially from those anticipated. You are all aware of the inherent difficulties, risks and uncertainties in making predictive statements. Our press release and Form 10 Q 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.

Speaker 1

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

Speaker 1

Matt will then provide further details on our operations and outlook going forward. And before taking questions, Gary will finish with some closing remarks. With that, I will turn the call over to Gary.

Speaker 2

Starting on Slide three. Prior to jumping into the results, I want to start off by reminding you of our core strategic pillars. These pillars consist of leading in innovation and custom solutions, driving sustainable organic growth and being a best in class operator. These three pillars help guide our long term strategic planning and remind us of what we are trying to accomplish when forming tactical strategies. All of these pillars did not always exist at Aon.

Speaker 2

Since our founding, leading and innovation has always been core to who Aon is. Over the past several years, our strategy has built upon this with a focus on developing ways to drive sustainable long term organic growth and being a best in class operator. All of the tactical initiatives that we've taken such as transitioning to a leadership team, putting in place succession planning, formally constructing and documenting long term strategy planning, adopting a one Aon principle, and I could go on and on. All of this was to better leverage our core to drive sustainable and efficient long term growth. This company has never had a better long term strategy with a better leadership team to execute it.

Speaker 2

What we're doing with the development of heat pumps on the Aon side of the business and custom air side and liquid cooling data center solutions on the basic side is very exciting. The strategies we're taking regarding the other two pillars ensures that we will fully leverage these innovations along with the already premier solutions we provide to drive market share gains at highly profitable levels. Now turning to Slide four. The first quarter was a solid quarter for Aon. Net sales, margin and earnings per share notably improved from the fourth quarter and backlog grew to a record level.

Speaker 2

Total net sales grew year over year 22.9. Sales of Basics branded equipment were up 374.8%. Both airside and liquid cooling solutions for data centers were driving factors. Partially offsetting this strength, sales of Aon branded equipment were down 19.1%. Production of our rooftop units was impacted by the weak bookings we received throughout most of the fourth quarter.

Speaker 2

Additionally, supply chain issues with certain components associated with the new R-454B refrigerant were also a factor. On a positive note, bookings of this equipment year to date have been strong. We also have begun to see these supply chain issues abate early in the second quarter. Total gross margin contracted eight forty basis points versus the comparable quarter a year ago. This reflected weak production volume of Aon branded rooftop units and the resulting operating deleverage effect.

Speaker 2

Gross margin at the Aon Oklahoma segment was down thirteen eighty basis points. Strong sales of Basics branded equipment along with operational efficiency improvements drove solid gross margin expansion at the AON coil products and basic segments. Gross margin at these two segments were up year over year 100 basis and three fifty basis points respectively. Total backlog finished the quarter at a record level $1,000,000,000 up year over year 83.9% and up quarter over quarter 18.4%. First quarter bookings of both Aon branded and basic branded equipment were robust.

Speaker 2

Backlog of Aon branded equipment was up quarter over quarter 23.4%. And this was the highest level since the first quarter of twenty twenty three. Bookings of rooftop units were very strong and strengthened throughout the quarter. Backlog of Basics branded equipment was up quarter over quarter 15.4%, driven by bookings of both airside and liquid cooling data center equipment. Given the backlog on both sides of the business, we are positioned well entering the second quarter.

Speaker 2

I will now hand it off to Rebecca Thompson, who will walk through the quarterly financials in more depth.

Speaker 3

Thank you, Gary. Please turn to Slide five. Net sales for the quarter increased 22.9% to $322,100,000 up from $262,100,000 in the first quarter of twenty twenty four. The year over year growth was driven by 74.8% increase in basics branded equipment sales. This was reflected in the results of the basics and AON coil product segments.

Speaker 3

Net sales at these two segments were up a 38.9287.8%, respectively. Sales of Aon branded equipment declined year over year 19.1%. This was largely reflected by the Aon Oklahoma segment, which realized a decline in net sales of 23%. Production of rooftop units were impacted by weak bookings throughout most of the fourth quarter. This was related to a temporary lull in demand as the market shifted from the legacy r four ten a refrigerant to the new r four fifty four b refrigerant equipment.

Speaker 3

Bookings have since rebounded in a strong manner, suggesting that we're becoming more competitive with the new refrigerant equipment. Also impacting the first quarter was a tight supply of certain components associated with the new refrigerants, which temporarily constricted our production rates. Supply of these new components have recently begun to improve and will enable us to increase production rates significantly in the second quarter. Moving to slide six. Gross profit decreased 6.4% to $86,400,000 from 92,200,000.0 As a percentage of sales, gross profit was 26.8% compared to 35.2% in the first quarter of twenty twenty four.

Speaker 3

Challenges from the industry regulated refrigerant transition and nonresidential construction activity significantly affected our largest segment, Aon Oklahoma, resulting in decreased volumes and lower overhead absorption. Gross margins at this segment were down year over year thirteen eighty basis points to 23.5%. As we begin to see production volumes increase in the second quarter, we fully expect gross margins to recover. Production volumes of basics rated equipment acted as a partial offset. This allowed gross margin at the basics and AON coil product segments to expand.

Speaker 3

Operational efficiency improvements at both our Oregon and Texas facilities also contributed to improved segment margins. Please turn to slide seven. Selling, general,

Speaker 4

and administrative expenses increased 13.3% to 51,300,000.0 from 45,300,000.0 in the first quarter of twenty twenty four. As a percent of sales, SG and A decreased to 15.9 from 17.3%.

Speaker 3

Depreciation and amortization was up 3,000,000 due to our increased investments in back office technology, offset by a decrease in professional fees of 3,100,000.0 due to various professional, regulatory, and legal corporate requirements in 2024. SG and A expenses also included a 2,700,000.0 fee due to our real estate broker associated with the December 2024 acquisition of our Memphis, Tennessee plan for a percentage of the incentives awarded to us by various entities. Moving to slide eight. Diluted earnings per share was 35¢, down 23.9% from a year ago. Excluding the net impact of the 2,700,000.0 real estate broker fee, adjusted earnings were 37¢, down 20% from a year ago.

Speaker 3

The decline in earnings fully reflects the lower production volumes and profits of Aon branded equipment. Our effective tax rate in the quarter was 9.8%. The company's estimated annual effective tax rate, excluding discrete events, is expected to be approximately 25%. Turning to slide nine. Cash, cash equivalents, and restricted cash balances totaled $2,400,000 on 03/31/2025, and debt at the end of the quarter was $252,400,000 Our leverage ratio was 0.95.

Speaker 3

Year to date cash flow used in operations was $9,200,000 compared to cash flows provided by operations of $92,400,000 in the comparable period a year ago. Year to date, cash flow from operations largely reflected increased investments in working capital. Capital expenditures through the first quarter of the year, including expenditures related to software development, increased 30.2% to $50,400,000 We drew down $97,500,000 on our revolving line of credit over this period, largely to finance the investments in working capital, capital expenditures, and 30,000,000 of open market stock buybacks. Overall, our financial position remains strong. This gives us flexibility and allows us to continue to fully focus on investments that will drive growth and generate attractive returns.

Speaker 3

For 2025, we continue to anticipate capital expenditures will be $220,000,000 I will now turn the call over to Matt, who will walk through operations in more detail and update you on our outlook.

Speaker 4

Thank you, Rebecca. Starting on Slide 10. Gary and Rebecca covered this pretty well, but here you will see how Aon branded sales performed relative to basic branded sales. Total revenue growth of 22.9 was fully driven by basic branded equipment sales growing 374.8%. This is driven by data center demand for both airside cooling equipment manufactured at the basic segment and liquid cooling equipment manufactured in the newly expanded space at the AON coil products segment.

Speaker 4

Basic segment sales were up 138.9% and AON coil products sales were up 287.8%. This helped drive an expansion in segment gross margin of three fifty basis points to 24% at Basics and 100 basis points to 34.6% at Aon Coil Products. At both segments, we also began to benefit from the initiatives we're taking to improve operational efficiencies, particularly at the basic segment where we're rightsizing capacity at the Oregon facility and focusing more on productivity of the facility. We expect to see more improvement at the basic segment throughout the year, especially in the second half of the year. Aon branded sales were down 19.1%, driven by rooftop production volumes being down at the Aon Oklahoma segment.

Speaker 4

Aon Oklahoma segment sales were down 23%. This was largely reflective of the weak bookings we realized throughout most of the fourth quarter. Supply chain issues with components associated with the new refrigerant also contributed to lower production volumes. This was a temporary issue related to refrigerant transition that was a challenging to manage occurrence and difficult to anticipate. As the market transitioned to production of the new refrigerant equipment, component manufacturers were challenged with keeping up with demand.

Speaker 4

In hindsight, we would have increased inventory levels for some of these components, but it was tough to predict at the time. As a result, a lack of access to certain parts caused us to maintain lower production levels despite a large backlog of bookings. The positive is that we're beginning to see improvement in the supply chain, which is allowing us to increase production rates in the second quarter. Given the size of the backlog, we anticipate production will continue to increase over the next several months. Please turn to Slide 11.

Speaker 4

Total backlog at the end of the first quarter finished a record level of $1,000,000,000 That is up year over year 83.9% and up quarter over quarter 18.4%. Backlog of Aon branded equipment was $4.00 $4,000,000 up year over year 44.9% and up quarter over quarter 23.4%. This backlog is the highest level since the first quarter of twenty twenty three. Since the beginning of the year, bookings at this side of the business have been strong. We received a lot of positive commentary from our sales channel, and we believe our competitiveness with the new refrigerant equipment has never been better.

Speaker 4

We're still trying to get an idea on exactly where our price premium lies, but it seems that we have narrowed a little. Also helping drive the backlog, we continue to realize strong demand of our heat pump configured rooftop units, otherwise known as Alpha Class. In April, we started to introduce our next generation of the Alpha Class series, which is operable down to negative 20 degrees Fahrenheit. By the end of this year, our entire product portfolio of rooftop units will be configurable with this low temperature configurability, meeting the DOE's commercial heat pump challenge two years in advance of the set 2027 goal. The strong backlog in this side of the business positions us well entering the second quarter.

Speaker 4

Our goal is to drive a lot more volume through the Tulsa facility. And as we do this, you'll see margins at the Aon Oklahoma segment begin to recover. With the supply chain issues abating and given the size of the backlog, we should begin to see production and profitability improve in the second quarter and continue through the third quarter. The fourth quarter will depend on the bookings we receive over the next few months. The macroeconomic environment remains in pretty poor shape, which is creating a lot of uncertainty on the back half of the year.

Speaker 4

For now though, we are taking market share. Despite the macro uncertainties, the sentiment across our sales channel is relatively upbeat. We're also making headway with our national account strategy and are optimistic we will see meaningful impact, especially with our industry leading alpha class air source heat pumps. These national accounts are large in volume and are multi year replacement programs. And if we're successful, it will be material to growth.

Speaker 4

Backlog of basics branded equipment was $623,000,000 up year over year 122.7% and up quarter over quarter 15.4%. Bookings of both airside and liquid cooling equipment for data centers have been strong year to date. This puts us in a great position for the rest of the year and provides much more visibility and certainty of sustainable growth into 2026. With such a large backlog in hand, we can manage production more efficiently, which you will see in the margins of the Aon coil products and basic segments. We continue to anticipate margin improvement, most notably in the basic segment as we progress throughout the year, particularly in the second half.

Speaker 4

Our capacity expansion plans continue to progress well. Production of our liquid cooling data center equipment at the Aon Coil product segment has been ramping well. In the new space, we currently have three production lines in place with plans to increase that to five later this year. At Basics, we are making great progress with rightsizing capacity. We've already begun to see these operational improvements in the margin, and you should expect to see more improvement in the second half of the year.

Speaker 4

The expansion in Memphis is also progressing. We've started to assemble equipment there at a small scale. Now it won't be as efficient as our other facilities until we get the vertically integrated production set up, but it is helping us achieve our on time delivery commitments and goals. We expect meaningful production to begin in the fourth quarter of this year with a sharper ramp up of volumes throughout 2026. Until we get this production in place, we continue to expect the facility will incur about $5,000,000 to $7,000,000 of costs with minimal revenue to offset.

Speaker 4

In the first quarter, these costs amounted to approximately $2,800,000 In addition, we realized a $2,700,000 fee associated with various incentives relating to Memphis. Now please turn to slide 12. We maintain our full year outlook. We anticipate full year sales growth to be in the mid to high teens at a gross margin similar to what we realized in 2024. SG

Speaker 5

and

Speaker 4

A as a percent of sales will realize a decline of 25 basis to 50 basis points, and CapEx will be approximately $220,000,000 For the second quarter, we look for sales and earnings to be up modestly from the first quarter. Note that the tax rate was unusually low in Q1 and that our interest expense in Q2 will be up with a higher debt balance. The implication is that operating income will be up quarter over quarter more than just modestly as indicated in the earnings guide. Finally, inclusive of the updated annual outlook is our tariff mitigation surcharge of 6%, which recently went into effect. Beldec assumes this surcharge will be in effect throughout the remainder of the year.

Speaker 4

Of course, policy is very fluid. At any moment, depending on how policy evolves, we could increase or decrease the surcharge. We anticipate the surcharge will fully neutralize the impact of tariffs on our costs and margin. Lastly, I would like to highlight that we are hosting an Investor Day on June 10 in New York City. Please find additional information on our corporate website under the Investors section.

Speaker 4

I hope to see some of you there. Now with that, I will hand the call back to Gary for closing remarks.

Speaker 2

With this being my last earnings conference call, I wanted to close by thanking all of our stakeholders. To our stockholders, our employees, sales channel partners, customers and vendors, thank you. I also would like to thank our Founder, Norma Bjornsson for giving me this opportunity. It has truly been a pleasure and honor managing this company for nearly ten years. A lot of changes taken place over the last decade, and I can confidently say the company is in a much better state than when I arrived.

Speaker 2

I always said one of my principal goals since day one was to work myself out of a job. I've done that. The day has come. The management team of this company under Matt's leadership has never been better. The growth prospects are better than ever.

Speaker 2

With that, thank you again, and I will now open the call for Q and A.

Operator

Ladies and gentlemen, we will now begin the question and answer Should you have a question, please press star followed by the number one on your touch tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the number 2. Your first question comes from the line of Julio Romero from Sidoti. Please go ahead.

Speaker 6

Great. Good morning, Gary, Rebecca, Matt and Joe. I wanted to start off. Congratulations again, Gary, for, for all your work over the years.

Speaker 4

Thank you.

Speaker 6

Maybe to start on, what you're seeing on K to 12 public bid data. What does that data tell you in terms of where the industry is in terms of pricing of equipment and where Aon's pricing delta currently stands relative to the competition?

Speaker 2

Well, we just had a national sales meeting a week or so ago, and Matt presided over that. I'm gonna ask him to respond to that one for us.

Speaker 4

Yeah. Of course. And we look at the the kind of feedback we're getting from the the sales channel partners and really from the bid activity, and all indicators definitely say the the Aon price premium is definitely contracted, which is a a positive that we're seeing from a competitive competitiveness standpoint. Certainly hasn't gotten to parity, but definitely is showing, you know, a percent or two of closure in that price premium, which is allowing us to continue taking market share and really makes it a lot easier to be able to sell that value proposition that the Aon product offers.

Speaker 6

Got it. That's very helpful. And then, you know, can you give us a sense of where your market share stands today with regards to national accounts and where you think you can take that over time by leveraging your heat pump technology?

Speaker 4

Yeah. National accounts as they stand today, I mean, there's there's definitely a a good amount of national accounts within the Aon portfolio. But a lot of the ones that exist today in our books are, I'll say, kind of smaller scale national accounts. And so when we look at, you know, the overall market share in national accounts, it's certainly low as it stands today inside the Aon portfolio. What I would say, though, is the the acceleration that we have seen with intentional effort in really positioning the product is showing a very noticeable acceleration of national account activity around the Aon brand.

Speaker 4

And, really, when you look at the kind of trajectory that we see in the national account segment, it will make a meaningful impact to the Aon brand. I mean, we're seeing a tremendous amount of activity, a lot of adoption and understanding of the value proposition. And with the AlphaFlast product and and really being able to offer an incredibly flexible heat pump solution that really offers a offers a great option, not just in cold climates, but also in warmer climates, We have a portfolio that can really check the boxes for the entire industry and for the entire national account across countries across the country. And so we're seeing a tremendous amount of involvement there. The activity that our national sales team in partnership with our sales channel is engaged in right now is tremendous.

Speaker 4

And so we see that being a meaningful impact, for Aon kind of on a go forward basis. The the one thing I always wanna point out, though, is national accounts do not just, transition overnight. I mean, it's it's a process. Because of the scale of these accounts, the sales cycle tends to be a little bit longer than, let's say, a traditional k 12 type project. And so there's a lot more conversation around the value proposition.

Speaker 4

There's a lot more positioning of the product, because we're setting up multiyear programs, not just a single project. And so why I say that is, you know, we're gonna see these materializing in '25. We'll start seeing more and more national accounts materialize. But definitely, with the trajectory, I think, you know, it's gonna be later '25, you'll start seeing the acceleration, but '26 is really the the year that a lot of today's work is gonna convert to revenue. But when we look at that alpha class solution and and really what we just announced at our national sales meeting a couple weeks ago, being able to have a heat pump solution that can operate all the way down to negative 20 degrees is a tremendous option to be able to present to our customer of the national accounts where we can handle those coldest climates.

Speaker 4

We call that the extreme series for us for the negative 20 operating condition. We're able to really capture a tremendous amount of those Northern states in a a true heat pump operation mode, but we also have what we branded the the eco and the pro series, which provide flexibility and and more cost effective solutions as you kinda move to those Southern states. And so that portfolio of alpha class products from the extreme cold temperatures to the warmer climates is really an all encompassing product portfolio that is really resonating with our national account customers.

Speaker 6

Very helpful. Thanks again.

Operator

Your next question is from the line of Ryan Merkel from William Blair. Nice

Speaker 7

quarter. And let me also say congrats, Gary. It's been great working with you. Wish you best of luck.

Speaker 2

Thank you much.

Speaker 7

So my first question is just on the core Rooftop business. You guys talked about strengthening orders through the quarter.

Speaker 4

Can you just talk about a couple

Speaker 7

of things? The pushouts that you saw last quarter, did those come back as you expected? Do you think you're taking market share just given where you're priced? And then I'm a little curious if you saw kind of a pop in March ahead of that surcharge that you put it in April.

Speaker 4

Yeah. Matt, go ahead. Yeah. So that yep. So as it relates to the pushouts, indefinitely, was there's volatility in q four and bookings, and and really a lot of that was just on the adoption cycle with that new refrigerant.

Speaker 4

You know, we talked very openly on that q four call that while the, you know, first couple of months of q four were soft, we definitely saw that, you know, reinvigoration in December, and we continued seeing strength in bookings throughout q one. And so, you know, what what that's telling us is that sort of softness and those push outs that we saw in q four are largely behind us from an overall kind of impact from the the refrigeration transition and and really see that now materializing into consistent order cadence that we're seeing and that we would expect in this kind of normal normal seasonal booking cadence. Your question definitely I mean, yeah, obviously, you you put a 6% surcharge in. There's gonna be a lot of conversation and activity trying to get ahead of that. But, you know, Ryan, one thing we were very intentional on was not allowing this to be an open ended, bring all your orders in and, you know, slam us before that that surcharge comes in.

Speaker 4

We were very open with our sales channel that we had capped the amount of orders that we would we would accept with that without a surcharge in place, really based on financial modeling and inventory levels that we had for the vast majority of components. And so while there was definitely a lot of activity ahead of that surcharge in March, there would have been a lot more if we didn't put a cap on that. And so we capped that and said, this is the amount of orders we're willing to accept prior to implementing a surcharge. And and why that's important is as we came on the back end of that surcharge I mean, obviously, the day after the surcharge went in effect, there was certainly a dip relative to the day before. But if you look at the overall orders cadence that's that's come on the backside of that surcharge being put in place, we continue seeing the traditional strengthening of orders that we would normally see within the q '2 booking statements.

Speaker 4

And so, you know, while there was a little bit of pull forward, we didn't allow that to be overwhelming to the overall operation, and we're definitely seeing a, traditional bookings cadence in the last forty five days on the heels of that on the heels of that surcharge being put in effect. And so we definitely, you know, see this, normalizing. And and, really, what it's telling us as well is relative to some of our peers, we're definitely seeing, I'll say, stronger bookings, which really tells us, number one, our price competitive definite our price positioning is definitely more competitive than it's historically been. And, also, it's telling us that we are definitely getting market share.

Speaker 7

Got it. Okay. That's encouraging, and that was the answer I was looking for, actually. So thanks for that. And then I'd like to put a finer point on the 2Q guide.

Speaker 7

The Street is about $0.60 You just did adjusted $0.37 and you're talking about up modestly. Can you just help us with that and help us think through sales and margins? I'm just wondering if there's a potentially bigger margin impact in 2Q because of the Memphis facility that maybe we don't appreciate, but just any help there would would would be great.

Speaker 4

Yeah. So I wanna start off by reaffirming the overall full year guide. And just kind of why why I wanna start there is by saying, you know, there's definitely a strong growth year and a strong performance year that you're gonna see in 2025 out of Aon. You know, q two, we're coming on the heels of q one that would impact in the Oklahoma segment with some supply chain constraints. And so, you know, as we said on the prepared commentary, yes, supply chain impacts are abating.

Speaker 4

But if you you kinda think for a second coming out of April into April, I should say, you know, those were still lingering as we entered April. And so what that does is it starts us off a little bit slow in April and slower than we wanna be relative to the backlog we have in in the overall demand for the product. So that's not giving us that immediate pop that we'd wanna see inside of the Oklahoma segment as we basically ramp up production as supply chain kinda gets to a more normalized cadence. So that is, you know, a little bit of an impact that that is built into that guide. As you also think about the the basics and the ACP segments, q one was a very strong quarter.

Speaker 4

In in q one, definitely, we we had some good good uptick in productivity, especially inside of that coil product segment. But there's also traditionally a little bit of lumpiness just on kinda how orders flow through and just based on delivery schedules of these larger orders that kind of are associated with these data center projects. So why I say that is I don't wanna set an expectation for q two to build upon q one. There's a little bit of noise, and and you might see just a slight kind of pullback in overall sales inside the ACP basic segments just coming off the heels of such a strong q one. So that's that's sort of built into that guide.

Speaker 4

But the the one part I wanna also touch on is the overall operating income is gonna be up far more than modestly, which is to your to read your comment, showing you strengthening in sales out of Oklahoma. And with that, you're gonna see good margin recovery out of the Oklahoma segment in q two. But as we kinda peel that back, you know, q one had a very beneficial tax rate that we don't anticipate in q two. And so from a bottom line flush out, you can definitely see a tax rate impact in q two you didn't have in q one, and you're also gonna have growing interest expense as we've invested in working capital with the production rates ramping up in both coil products and basics. And so, you know, if you look at the operating income perspective, you would see a great uptick in q two, and that's just being hampered a little bit by that tax rate differential and the interest rate.

Speaker 4

That's kinda what's flushing that modest guide, from an EPS perspective.

Speaker 7

Okay. That's really helpful. I'll pass it on. Thanks so much.

Operator

Your next question is from the line of Chris Moore from CJS Securities. Your line is now open.

Speaker 8

Hey. Good morning, guys. Thanks for taking a couple. And also, Gary. Thanks for everything.

Speaker 4

Thank you.

Speaker 8

Sure. In terms of you know, you you still hear some big players canceling or or downsizing, know, data center construction. Just wanted to kinda go a little deeper in terms of what you're hearing from your from your customers. How much visibility do they give you in terms of their plans over the next three to five years?

Speaker 4

Yeah. There's tremendous visibility from a pipeline perspective that we see with our customers. And large data center operators that we work with, we're typically getting you know, every month, every two months, we're getting an updated pipeline that is provided to us. And so that's giving us anywhere from a three to a seven year kind of outlook on what these big players have in their projection. Is there noise in data center industry right now?

Speaker 4

Sure. There's there's a lot of conversation around cancellations and push outs. But what I would say is the pipeline that we see has never been stronger. The orders booked that we see has never been stronger. And while there might be some near term noise, it's still on a growing base.

Speaker 4

And so, you know, we're seeing this continue to strengthen. We're we're seeing the the inquiries, the pipeline visibility. We're seeing all of that in a very strong condition, seeing it strengthening. There's definitely some near term conversations, which, you know, frankly, Chris, I think it's actually a good thing if you think about this systematically. I mean, if we if we sort of have a more normalized but aggressive growth rate as an industry, not relative to Aon, but as an industry that's far easier to manage.

Speaker 4

And so, you know, we see this continued long term strengthening cycle. We see tremendously good visibility into 2026. That's providing us confidence in that sort of next year performance continuing to build off a strong '25. And so, yes, there's noise in the industry, but I would just, you know, reaffirm that the visibility of the pipeline has never been stronger. The order activity within the the basic segment has never been stronger, and the activity with our customers, engaging with those customers has never been better.

Speaker 9

Perfect.

Speaker 8

Two the 200,000,000 plus liquid cooling order was was I know it got had gotten pushed a little bit. It was any of that or much of that in in q one?

Speaker 4

So of that order, you know, if we look at the the $200,000,000 order that we talked about last year, you know, so far, we've recognized about 80,000,000 or so of that revenue. And so that's the sort of ramp up, you know, start that started off in q four of last year. It started. Certainly had a very strong ramp in q one as we really, you know, work to get a baseline of inventory and really build up that product. That project, you know, we talked about on the q four call.

Speaker 4

Originally, we had said, hey. We anticipated that mostly converting the first half of the year with some spillover into q three. You know, I would just say that that's the overall cycle or that project has, I'll say, spread a little bit. And so really from our anticipation, you know, we've recognized 80,000,000 of that 200,000,000 to date. We anticipate the rest of that to really spread out over the rest of this calendar year, and it's kinda what we see.

Speaker 4

But we have additional follow on orders with that customer. We have a tremendous amount of visibility into that 2026 and 2027 pipeline with that customer. And so, you know, we're continuing to show that as an accelerating, demand with that customer. It's just the initial, build out and really the ramp up rate of that investment. It's just just taking a little bit longer to kinda materialize, not from a demand from their customer's perspective, but just all the construction activity that's associated with building these new AI data centers.

Speaker 4

It's just lengthened that cycle with that order just a little bit.

Speaker 8

Got it. I appreciate that. I'll jump back in line. Thanks, Matt.

Speaker 4

Yes, of course.

Operator

Your next question is from the line of Brent Thielman from Davidson. Please go ahead.

Speaker 9

Hey, great. Thanks, Gary, Relay, all the same. It's I guess first question just on the rooftop business, some of the supply chain issues you've felt here in the quarter, and it sounds like you continue to feel to some degree. Are you at the point where there's some confidence these issues are going to be behind you as you go into the second half of the year?

Speaker 9

And I guess just with that, I was curious, it didn't really seem like that impacted the Basics branded product. I'm just wondering if that could still come or you see it as a nonissue there.

Speaker 4

Yes. So where the confidence comes from and and really, I'll I'll say, Brent, the you know, where we sit today, the acceleration of resolution that we're seeing in the supply chain with these new refrigerant components, I mean, it's all trending very positive. It's really you know, as the whole industry transition with that sort of hard stop on on January 1 to go from four ten to four fifty four b, It was just a a lot of, I'll say, strains on the overall supply chain just in support of those new components because you're basically having to support the four ten a products that were being built and flushed out through 2024 with also the the impending, you know, new products that you had introduced in support of the r four four fifty four b equipment. So there was just, I'll say, some initial transition strains that were put there within the supply chain. But if we look, you know, month by month, we have continued to see these abate.

Speaker 4

And and, really, we saw the impact in q one weaning weaning, sorry, as the as the quarter kind of progressed and going into April, you know, we still have a little bit of lingering issue. But by and large, we're seeing the light at the end of the tunnel. And so that's definitely what's giving us that confidence, you know, going forward. You're not gonna be operating in this environment, you know, let's say once we get into the second half of the year, you know, these manufacturers are primarily building the four fifty four b components. And so that definitely is, you know, alleviating some of the the noise that was created in the supply chain in that first quarter.

Speaker 4

So definitely a lot of confidence that these are abating and really providing kind of the the support of our acceleration in our production levels within the Oklahoma segment in particular. That's gonna really get that that top line sales back where we want them to be as well as the the overall profit margins kind of with that volume getting back up. But relative to the basic segment, most of the products that are made in the basic segment, the vast majority of those products are not refrigerant based systems, and so they did not have those same supply chain impacts. So really, in the basic segment, we didn't see any of those impacts impacting our ability to manufacture there.

Speaker 9

Really helpful, Matt. And then maybe as a follow on, sort of beyond the issues associated with the refrigerant change and those associated components, can you talk about maybe broader exposure just now with the implementation of tariffs and what that might do to the kind of broader supply chain? How do you think Aon's positioned around that where you feel like you're fairly well positioned or not just for the things that we can't potentially see coming in terms of broader impacts of the supply chain?

Speaker 4

Yes. Certainly. I mean, tariffs tariffs definitely, we had a bet going, Brent, how long was it gonna take for a tariff question to come. So it came a little later than we expected on the overall q and a. But, you know, when we think about the the impact of tariffs within the Aon segment, I'll say one thing that we feel good about is we have a tremendous amount of vertical integration in our manufacturing process.

Speaker 4

And we also rely heavily and and I proudly rely heavily on a lot of our US partners. So the exposure to tariffs that we see from an Aon perspective are certainly less than what we see in some of our competition. So to start off, we say that, you know, certainly, we see ourselves being better positioned in a tariff ridden environment. Now, you know, we've been naive to not say they're gonna impact us somehow. I mean, supply chain, even for US manufactured components that we might buy, a lot of components that go into those components might be sourced internationally.

Speaker 4

And so there's there's definitely some tariff impact, and, obviously, that's that's reflected in our surcharge. But the the general supply chain environment that we have, there'll be some noise that we think can come out of the tariffs. But by and large, the the focus on US manufacturing, the focus on vertical integration, and really a a pretty strong US based supply chain that we rely on for the vast majority of our components puts in a position where, you know, we think those are gonna be a smaller impact to Aon, especially relative to a lot of our competition.

Speaker 2

Okay. Great. Just last one,

Speaker 9

just on the basics, branded products. Maybe more of a clarification, Matt. I think I heard you say a lot of growth certainly aligned with one of the customers out there. Could you just talk about your diversification of customers within that product line? Do you expect more diversity in the coming years, especially as you're bringing on new capacity?

Speaker 9

Just trying to get a sense around how much is aligned with a single customer versus you know, a lot of lot of different customers that are out there.

Speaker 4

Yeah. No. It's a great question, Brent. And and I'll say that the math certainly is never in our favor when you get a $200,000,000 order in terms of its impact on some concentration at least in the near term. But what I would say is while that is a great win and that's certainly something that is is helping fuel a lot of growth, it's also very front of mind for us to continue getting diversified customer base.

Speaker 4

And so if you look at the activity that we have in terms of book bidding activity, in terms of some new orders that we have, you know, large scale orders, not small little orders, there's a a continuing diversification in that customer base. There's also an acceleration of new customer interaction, You know, with the with the win on that liquid cooling product, we got a tremendous amount of inertia in the industry regarding the solutions we can provide. And so our sales and engineering teams are actively engaged with a a large spread of new customers supporting both liquid cooling and traditional colocation data center projects. And and that definitely, as we look forward, is gonna be a continued focus to continue diversifying, continue building upon the great wins we have, but be very intentional about continuing to build great wins with new customers as well. And so going forward, you know, I think you'll see our our backlog continue diversifying in a customer base perspective and and really not not having us too overleveraged on one single customer.

Speaker 9

Very good. Thank you.

Operator

Ladies and gentlemen, as a reminder, you'd like to ask a question, please press star followed by the number one. If you'd like to withdraw from the polling process, Your next question comes from the line of Tim Wojs from Baird. Please go ahead.

Speaker 5

Hey, everybody. Good morning. And just wanted to echo the same sentiments to Gary.

Speaker 4

It's been great working with you. Thank you.

Speaker 5

Maybe just I just have a couple of follow ups. So I guess on the Oklahoma business, has there been any change to how you're thinking about the full year revenue guidance? I think previously, you had kind of said maybe the full year would be flat to down a little bit. Has that changed at all? Is it just kind of more back half weighted?

Speaker 5

And then how do you think about kinda layering that surcharge part into that?

Speaker 4

Yes. The guide as it stands today has not changed. And and, you know, Tim, what I'll say is there's the uncertainty definitely in that back half of the year. Really, I'll say uncertainty more on q four side. As much as we are taking market share and we're continuing to see, you know, good order cadence here in the second quarter, there is definitely still uncertainty in an overall macro environment perspective that is is certainly front of mind for us.

Speaker 4

And so our guide definitely has has that built into it, on kinda what q four looks like. The the tariff part of it, you know, the tariff itself, while it went in place in, in March, essentially, the the reality is we're not gonna really start seeing that until the later part of q three. And so when that's gonna really start hitting the production floor, hitting the revenue side, you know, it's gonna be a q three story is where it's gonna start, and you'll see that kinda materialize in q four. But, you know, it's gonna have an impact, but, obviously, from a full year perspective, it's not like we're getting a 6% uplift. It's, you know, it's gonna definitely be more like a third of that for an overall kind of impact on on the overall sales side of things.

Speaker 4

And so, really, what I'd say is that that's that's the the tariff aspect and and just the uncertainty that's built into that q four guide. Just given the unknowns around the macro is is really where that guide is sitting today.

Speaker 5

Okay. Okay. That's helpful. And then just on the data or kind of the basics backlog, I mean, 80,000,000 to $85,000,000 sequential increase, I guess, any color on kind of the mix of liquid cooling and air side cooling within that? And then I guess just in the in the total backlog, kind of the same question, kind of

Speaker 4

the mix of liquid versus air. Yeah. Definitely, there there's more activity, in liquid cooling that that is in that backlog. Obviously, also some good run rates out of, coil products that's eating down that. So, you know, so we replenished the coffers a little bit with some more liquid cooling orders that came in in q one.

Speaker 4

There definitely, though, is airside continued acceleration of airside looking as well. A lot of activity around airside. And so why I say that is really you know, when we look at the activity that we're seeing, definitely, there's a lot of conversation, a lot of activity on the AI data center side of things, but there's also continued strength, and we continue seeing the investments made in the more traditional data centers, cloud compute data centers, and we're seeing that kind of materialize with Airside activity as well. So we definitely are seeing the the broad bookings kind of built into that backlog and into that business cadence. And, you know, there's a a good amount of backlog sitting inside of liquid cooling, but, you know, it's not the majority.

Speaker 4

It's not like it's, you know, the vast majority of that is liquid cooling. It's it's a really good pretty good spread between liquid and airside products.

Speaker 5

Okay. Okay. Thanks for the color. Good, good luck on the rest of the year.

Speaker 9

Thank you.

Operator

Your last question is from the line of Tom Sandis from Sandis. Please go ahead.

Speaker 10

Yes. I'm a stockholder. Go back to Diamond Head. And, what's the problem with Aon being listed on the New York on The Wall Street Journal? They were listed and now they're not.

Speaker 10

What's going on? How do we get the stockholders involved more stockholders involved in buying Aon stock?

Speaker 1

Hey, Tom. This is Joe. Hi. Hi, Joe. So I think good morning.

Speaker 1

I think we've probably spoken about this in the past. We have. Yes. Yeah. I I think I'm I'm still looking into that.

Speaker 1

I'm not really certain the answer, but I'll try to provide you with an answer sometime soon.

Speaker 10

Thank you.

Operator

There are no further questions at this time. I'd like to turn the call over to Joe Mondillo for closing comments. Sir, please go ahead.

Speaker 1

All right. Thank you, operator. Just want to remind everyone that we'll be attending the William Blair Conference on June 4 in Chicago and hosting an Investor Day in New York City on June 10. So hope to see some of you there. I want to thank everyone for joining the call today.

Speaker 1

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.

Operator

This concludes today's conference call. Thank you very much for your participation. You may now disconnect.

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Earnings Conference Call
AAON Q1 2025
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