Aaon, Inc. (NASDAQ:AAON) Q1 2021 Earnings Conference Call May 6, 2021 4:15 PM ET Company Participants Gary Fields - President, CEO & Director Rebecca Thompson - VP, Finance, CFO, CAO & Treasurer Conference Call Participants Brent Thielman - D.A. Davidson & Co. Julio Romero - Sidoti & Company Jonathan Braatz - Kansas City Capital Associates Operator Good afternoon, ladies and gentlemen. Welcome to the AAON, Inc. Fourth Quarter Sales and Earnings Call. [Operator Instructions]. This call will last approximatel ...

Financial Data and Key Metrics Changes - Net sales for Q4 2020 decreased by 4.8% to $116.7 million from $122.6 million in Q4 2019, primarily due to a plant shutdown for maintenance [6][8] - Gross profit decreased by 6.8% to $33.9 million, with a gross profit margin of 29.1% compared to 29.7% in 2019 [6][8] - For the full year 2020, net sales increased by 9.6% to $514.6 million, driven by increased production and price realization [8][9] - Net income for 2020 rose by 47% to $79 million, with diluted earnings per share increasing by 46.1% to $1.49 [9][8] Business Line Data and Key Metrics Changes - Selling, general and administrative (SG&A) expenses increased by 11.5% in Q4 2020 to $14.6 million, and by 16.2% for the full year to $60.5 million [7][9] - Income from operations for Q4 increased by 10.7% to $25.7 million, while for the full year, it rose by 52% to $101.8 million [7][9] - The company introduced new water source heat pumps designed for better compatibility with current installation configurations, expected to launch between late April and early June 2021 [13] Market Data and Key Metrics Changes - The backlog as of December 31, 2020, was $74.4 million, down from $142.7 million a year ago, attributed to increased production rates and slowed bookings [18] - As of February 1, 2021, the backlog increased to $103.8 million, indicating a recovery in bookings [19] - The company noted improvements in the medical and healthcare sectors, while the lodging sector remained materially down [16] Company Strategy and Development Direction - The company is focusing on enhancing indoor air quality measures in its products, aligning with industry trends for virus mitigation [12] - A new manufacturing facility in Longview has doubled production capacity, responding to increased demand for products [15] - The company is actively working on product design updates and expanding its range of air source and water source heat pumps [14] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the second half of 2021, anticipating stronger production and sales as projects that were paused during the pandemic resume [24][62] - The company is managing production capacity to align with peak demand, ensuring lead times remain stable [23] - Management acknowledged pressures from raw material pricing but indicated that contracted materials would mitigate immediate impacts [12][28] Other Important Information - The company reported a working capital balance of $161.2 million and unrestricted cash of $79 million as of December 31, 2020 [11] - Capital expenditures for 2020 were $67.8 million, with expectations of approximately $70.7 million for 2021 [11] Q&A Session Summary Question: Are you evaluating another price increase due to cost escalations? - Management indicated that current steel contracts would cover costs through Q2, and no immediate price increase is being considered [28] Question: Will you have enough capacity for new water-source heat pump products? - Management confirmed surplus capacity exists to produce new products, built to accommodate a significantly higher run rate [30] Question: What is the outlook for inquiries and bookings? - Inquiries have been stronger than anticipated, with Q4 bookings up 6% year-over-year, and the sales pipeline appears optimistic [38] Question: How will SG&A expenses trend in 2021? - SG&A is expected to increase due to higher insurance premiums, estimated at an additional $2 million [44] Question: What are the expectations for cash flow and working capital? - Management expects to fund operations from cash flow, with working capital anticipated to increase but manageable [46] Question: How is the retail side performing post-COVID? - National account customers in retail remain stable, but sporadic retail purchases have softened [67]

Financial Data and Key Metrics Changes - Net sales increased by 18.7% to $134.8 million from $113.5 million year-over-year [5] - Gross profit rose by 49% to $40.8 million, with a gross profit margin of 30.3% compared to 24.1% in 2019 [5] - Income from operations surged by 73.9% to $26.1 million, representing 19.4% of sales, up from 13.2% in 2019 [7] - Net income increased to $20.5 million or 15.2% of sales, compared to $14.3 million or 12.6% in 2019 [8] - Diluted earnings per share rose by 46.2% to $0.38 from $0.26 [8] - For the nine months ended September 30, 2020, net sales were up 14.7% to $397.9 million [9] - Net income for the nine months increased to $60.1 million or 15.1% of sales compared to $36.4 million or 10.5% in 2019 [9] Business Line Data and Key Metrics Changes - Increased sheet metal production contributed to higher sales, driven by new Salvagnini machines [5][9] - Selling, general and administrative expenses increased by 18.9% to $14.7 million, remaining steady at 10.9% of total sales [6] - The company experienced improved labor and overhead efficiencies through increased production [6] Market Data and Key Metrics Changes - Bookings for 2020 trailed 2019 bookings by 3.5%, but this gap has been closing [22] - The company noted a rise in success in the replacement market, while new construction market has tightened [22] - The medical and healthcare market has shown good opportunities for orders due to increased demand for upgraded facilities [26] Company Strategy and Development Direction - The company is focusing on enhancing its manufacturing capacity, with a new facility in Longview, Texas, expected to come online soon [28] - AAON is adapting its product offerings to meet the needs of the replacement market, particularly for water source heat pumps [24][55] - The company is implementing a price increase to counter rising material costs, effective January [20] Management's Comments on Operating Environment and Future Outlook - Management expressed concerns about the new construction market due to the pandemic and political uncertainties [22] - The company anticipates that the new product designs for water source heat pumps will be ready by April 1, 2021, to better serve the retrofit market [51] - Management is optimistic about the potential for growth in the healthcare and manufacturing sectors [26][27] Other Important Information - The company had a working capital balance of $164 million and unrestricted cash of $70.6 million as of September 30, 2020 [11] - Capital expenditures for the year are expected to be approximately $73.2 million, with significant investment in the new facility [11] Q&A Session Summary Question: Can you sustain the 30% gross margin level with the upcoming price increase and raw material prices? - Management indicated that sustaining the target gross margin is feasible if planning aligns [34] Question: What proportion of new orders is related to COVID filtration and equipment upgrades? - Management noted that specific proportions were not calculated, but there are significant opportunities in this area [36] Question: What prevents competitors from creating similar products? - Management explained that competitors rely on hard tooling, which limits flexibility and adaptability in manufacturing compared to AAON's software-driven approach [41][42] Question: What is the revenue threshold with the new capacity if fully utilized? - Management estimated that with current capacity, a 20% to 25% increase in output is possible, with further capacity increases planned [45][48]

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Securities registered pursuant to Section 12(b) of the Act: Title of each class Trading Symbol(s) Name of each exchange on which registered Common Stock AAON NASDAQ FORM 10-Q ☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2020 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ...

Financial Data and Key Metrics Changes - Net sales increased by 5.2% to $125.6 million from $119.4 million year-over-year [6] - Gross profit rose by 26.2% to $38.1 million, with a gross profit margin of 30.4% compared to 25.3% in the previous year [6] - Net income increased to $17.8 million or 14.2% of sales, up from $13.4 million or 11.2% [8] - Diluted earnings per share increased by 36.0% to $0.34 from $0.25 [8] - For the six months ended June 30, net sales were up 12.8% to $263.1 million [9] Business Line Data and Key Metrics Changes - Increased sheet-metal production due to additional Salvagnini machines contributed to sales growth [6] - Selling, general and administrative expenses increased by 23.4% to $15.9 million, primarily due to profit-sharing and a $1.25 million contribution to local schools [7] - Income from operations increased by 28.4% to $22.2 million, representing 17.7% of sales [7] Market Data and Key Metrics Changes - Backlog was $119.6 million at June 30, down from $166 million a year ago, but considered favorable due to improved lead times [24] - Architectural Billing Index has been below the benchmark of 50 for four consecutive months, indicating a potential decline in new construction [22] Company Strategy and Development Direction - The company is focusing on increasing production capacity and improving operational efficiencies to meet demand [12][24] - Strategies are being implemented to strengthen the aftermarket replacement business, particularly for water-source heat pumps [18] - The company is well-positioned to capitalize on increased demand for indoor air quality solutions due to COVID-19 [15] Management's Comments on Operating Environment and Future Outlook - Management noted a recovery in attendance and production levels after temporary impacts from COVID-19 [4][16] - Bookings in July were substantially above 2019 levels, indicating a positive trend moving forward [16] - The company expects modest growth for the remainder of 2020 and a stable backlog entering 2021, barring any unforeseen economic downturns [26] Other Important Information - The company has maintained continuous operations during the pandemic and has been involved in COVID-19 related projects [4] - Capital expenditures for the year are expected to be approximately $73.2 million, with $33.5 million spent in the first half [11] Q&A Session Summary Question: How do you feel about maintaining margins given the current environment? - Management expressed confidence in maintaining margins due to effective cost management and production efficiency [30][32] Question: Do you expect a step-up in revenue for Q3? - Management does not expect a significant increase in revenue for Q3 due to early July absenteeism impacting production [34] Question: What is the status of indoor air quality upgrades? - Most upgrades are considered full replacements of units, as older units lack the capability for higher filtration levels [40] Question: How is the company addressing the challenges in the retail and hotel markets? - Management acknowledged challenges in new construction but sees opportunities in the replacement market, particularly for aging units [54] Question: What is the outlook for raw material prices? - The company has locked in prices for many materials, and the outlook for the next six months is neutral with no significant impact expected [76] Question: Can you elaborate on the recent increase in SG&A expenses? - A one-time contribution of $1.25 million to a local school district was a significant factor in the increase in SG&A expenses [79]