AAON(AAON) - 2025 Q3 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Net sales increased by $57 million, or 17.4%, year-over-year to $384.2 million, driven by a 95.8% rise in Basics-branded sales [11][12] - Gross margin was 27.8%, down from 34.9% in the prior year, but up 120 basis points sequentially [11][12] - Diluted EPS was $0.37, down 41.3% from a year ago, but up 94.7% sequentially [13] Business Line Data and Key Metrics Changes - Basics branded backlog grew to $896.8 million, up 119.5% year-over-year and up 43.9% from the prior quarter [6] - AAON branded sales grew 28.1% sequentially, driven by over 20% production increases at both the Tulsa and Longview facilities [7] - AAON branded bookings were flat year-over-year but up 15% on a two-year stack, with national account wins up 96% in the third quarter [8] Market Data and Key Metrics Changes - Demand for airside and liquid cooling products remains strong, reflecting alignment with customer needs [6] - Backlog at the end of the quarter was up 77.1% year-over-year, indicating strong demand across the business [18] Company Strategy and Development Direction - The company is focused on ramping up production capacity at the new Memphis facility, which adds nearly 800,000 sq ft of manufacturing capacity [6] - The Basics brand is identified as the key growth driver, particularly in the data center market [18] - The company plans to implement the ERP system at the Tulsa facility in the second half of 2026, expecting minimal disruption based on learnings from Longview [20] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the operational recovery and capacity expansion, expecting sequential margin improvement through the fourth quarter and into early 2026 [5] - The company anticipates full-year sales growth in the mid-teens for 2025, with a gross margin of 28-28.5% [20] - Management highlighted the resilience of the business despite a soft commercial HVAC market, with strong bookings indicating continued demand [18] Other Important Information - Cash, cash equivalents, and restricted cash balances totaled $2.3 million, with debt at $360.1 million and a leverage ratio of 1.73 [15] - Capital expenditures for the first three quarters increased 22.1% to $138.9 million, with net borrowings of $205 million largely for working capital and capital expenditures [16] Q&A Session Summary Question: Drivers of Basics orders and growth outlook - Management noted strong traction and visibility in backlog growth, particularly in liquid cooling orders and airside solutions, with expectations for continued strong orders [27][30] Question: Gross margin expectations - Management indicated that gross margins for the Oklahoma segment could normalize to the mid-30s range as production ramps up and pricing dynamics improve [31][32] Question: Response to short report claims - Management reaffirmed the integrity of financial reporting, stating that revenue recognition follows GAAP standards and that demand for products remains strong [35][36] Question: CapEx guidance implications - Management clarified that the reduction in CapEx to $180 million does not impact the ramp-up of the Memphis facility, which is already well-equipped [42] Question: Operational efficiencies and future improvements - Management discussed operational inefficiencies impacting margins but expressed confidence in achieving a gross margin of at least 30% in the future [44] Question: Customer mix and demand profile - Management reported broad-based demand across various customer segments, including hyperscalers and colocation providers, indicating a diverse customer base [48][88]