Q2 2020 Aaon Inc Earnings Call
Ladies and gentlemen, thank you for city by and won't consider E.
Incorporated.
It's hard to see Olson or any school.
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In speakers presentation, there will be a question answer session.
A question during this session.
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I was on like Chad the conference over to your first person shooter.
Gary field.
The floor is yours you may begin.
Good afternoon like to begin by reading a forward looking disclaimer.
To the extent any statements presented here in deals with information that is not historically, including the outlook for the remainder of the year such statement is necessarily forward looking and made pursuant to the safe Harbor provisions.
Securities Litigation Reform Act of 1995.
As such it is subject to the occurrence of many events outside a arms control that could cause results to differ materially from those anticipated.
Please see the risk factors contained in our most recent SEC filings, including the annual report on form 10-K, and the quarter lead report on form 10-Q.
So now I'd like to begin with I'm, telling you a little bit about our experience with corona bars, and how it's affected our business.
First of all in.
Utmost importance is to thank our employees.
We've been able to maintain continuous operations.
As a result.
We have been able to assist with many cobot 19 projects.
We are Oh this is vital to our business as an essential business and central business supplier.
I'm very proud of the effort that our employees have gone to the maintained safety in the plant.
They are all wearing masks social distancing.
They are doing temperature scans on arrival and at any point in time throughout the day that they feel like that its oh necessary.
When they clocked in in the mornings or in the evenings whichever at the beginning of their shift.
They certify a through a wellness reporting system in our clock Ya.
So we did have some absenteeism because of grown a virus.
In June.
We had oh about the second week of Jed, we had a substantial decline in Oh attendance it bottomed out in mid June.
Oh, It was mostly restored second week of July.
Very happy to say that we had a very good results with our people returning to work healthy and.
This was a have a temporary impact oh for that period of time I described and we are mostly recovered on attendance and these people came back very healthy ready to work [noise].
[noise] I'd like to turn call over to Scott you weren't in our Chief Financial Officer.
I'd like to begin by discussing comparative results of the three months ended June 30 of 2020 ever since June Thirtyth 2019.
Sales were up 5.2% to 125.6 million from 119.4 million, that's sales for the quarter or up due primarily to increase cheap oil production from the additional self immediate machines were placed into operation that's names or price increases implemented in 2019.
Gross profit increased 26.2% for 38.1 million from 30.2 million, that's what percentage of sales gross profit was 30.4% in the quarter just ended compared to 25.3% in 2019, we continued to see overall raw material cost decrease.
Company has improved its labor and overhead efficiencies through increased production and absorption of fixed costs.
Selling general and administrative expenses increased 23.4% to 15 point Ninemillion. Some proof point 9 million in 2019. Additionally, as a percentage of sales last year in a increased to 12.7% of site of total sales in the quarter just ended from 10.8% in 2000.
Isn't 19, it's true in is up due to increases in profit sharing employee incentive driven by increased drain largely to a 1.25 million dollar contribution from China, Fred Montana Public school on behalf of more money transfer Johnson and recognition for his transition from.
You know tree executive chairman equates to roughly two and a half cent per share.
Income from operations increased 20.4% for 22.2 million or 17.7% to sales from 17 point Threemillion were 14.5% themselves in 2019, our effective tax rate decreased to 20.0% from 22.7%.
The company's estimated annual Twentytwenty effective tax rate excluding discrete events.
That's good to be approximately 25.1%.
Net income increased to 17.8 million were 14.2% themselves compared to 13.4 million for 11.2% for sales in 2019.
Earnings per share increased by 36.0% for 34 cents per share from 25 cents per share.
I wouldn't earnings per share based on 52.750 million shares versus 52.747 million shares in the same period a year ago now for the comparative results of six months ended June Thirtyth 2020 versus June Thirtyth [noise].
[noise] net sales were up 12.8% to 263.1 million from 233.3 million that's sales for the corner or up due primarily to our increased sheet metal production for me additional itself I mean, the machines that were placed into operation our gross profit increased 45.7% anyway.
1.1 million from 55.6 million as a percentage of sales gross profit was 30.8% in the quarter just ended compared to 23.9% in 2019 as already noted we have experienced decreased material costs and improved overhead absorption.
Selling general and administrative expenses increased 17.2% to 31.2 million from 26.6 million in 2019. Additionally, as a percentage of sales. This journey increased to 11.8% of total sales in the quarter just ended from 11.4% in 2019.
Income from operations increased 73.8% to 50.0 million or 19.0% of sales from 20.8 million or 12.3% of sales in 2019, our effective tax rate decreased to 20.8% from 23.1%.
The company's estimated annual Twentytwenty effective tax rate, excluding discrete events is expected to be approximately 25%.
Net income increased 39.7 million or 15.1 from Centseight compared to 22.1 million for 9.5% of sales in 2019.
Moving to earnings per share increased by 78.6%.
75 cents per share from 42 cents per share Allegion earnings per share were based on 52.885 million shares versus 52.589 million shares in the same period a year ago. At this time I'd like to turn call over to Rebecca Thompson, Chief Accounting Officer Treasurer.
Thank you Scott.
Looking at the balance sheet, you'll see that we had a working capital balance of 143.2 million versus a 131.5 million at December 31st 2019.
Restricted cash totaled 61 point Threemillion at June Thirtyth 2020, our current ratio was approximately 2.9 to one.
Our capital expenditures for 33.5 million, we expect capital expenditures for the year to be approximately 73.2 million [noise].
The company had softened purchases of 15.9 million during the six months ended June Thirtyth 2020.
Shareholders' equity per diluted share in $6.10 at June Thirtyth 2020, compared to $5. If he wants since December 31st 2019, I'd now like to turn the call back over to our CEO President Gary deal [noise].
So net sales.
Have increased Oh. This is due by and large as Scott mentioned earlier to the south in any machines that allowed us to produce the sheet metal.
Required to build our units. So once we produced the sheet metal then it becomes.
More.
Impacted by human activity.
So absent of the.
Timeframe through June and the first week or two in July we had been producing on a daily basis set a record pace the highest production numbers per day.
So once a absenteeism is stabilized, which it's begun to do quite well.
We're nearly restored on that so we we believe that.
Our production has also stabilized.
Of course, this corona viruses, such a Oh quick thing that can impact you Oh I suppose it could could occur again.
What we've done pretty well with that.
So the projects that we have produced in a in relation to krona virus, we've talked about last quarter some of those four.
New York, There's also been some other facilities that we produced equipment for that for instance stay in the state of main there's a company up there that manufacturers. The swaps that are used for testing they've expanded their facility substantially.
We've already.
Supplied a quite a few units to them for their first expansion and I think we're closing in on a an order for another expansion that they have plan. They were very happy with what we did on the first win.
So that's kind of the the jobs that are directly related there's been a lot of indirect relationship.
And that a there's been some community hospitals that have come out of mothballs that.
We've been able to provide some equipment to help renovate and update these.
There's been a myriad of facilities that are as a result of crown a virus. There was an awareness on the need to get these facilities up and going.
The other thing we're seeing a good activity on and we're very well positioned with our equipment.
For is increased vigilance on indoor air quality.
Oh, the crown a virus is well known to be a.
Aerosol transmitted virus and so if you have the ability to do two things one is capture that so that it's not re circulated and two is if you have the ability to kill that virus inside the on it.
So we have strategies that have assisted with that with higher levels of filtration and different methods utilize there's been two or three methods utilized to help reduce the live a virus that's circulated.
We were fairly unique in that regard in that our basic design of our the air side of our equipment.
Has additional static pressure capabilities to overcome those static pressure requirements of these higher filtration levels that that ASHRAE has recommended.
So this.
Again positions us very well.
Oh my.
Mentioned before that absenteeism and had an impact on production we've re stored that now so we're we're producing again at daily numbers that are on par with the best daily numbers, we've ever achieved.
Sales coming in the door bookings, we saw a decline throughout the spring in the early summer versus our expectations and versus 2019.
However July turned around substantially a we finished july's bookings a substantially above 2019 and more at alignment with our expectations prior to crown of ours.
We've also lifted activities that are in the pipeline with our sales channel partners and believe that that we're poised for a fairly solid results are going through the next.
Period of time here.
At least for another quarter or too as far as bookings think with the political.
Environment election, and so forth that there could be some.
Debate on how well that's going to occur in Q4 Q1.
And I think that.
A lot of states that that opened up early on and got some activity school and have seen a little pause in opening and some have even contracted a bit. So these are things that are very unpredictable. So it's very hard to give a solid.
Direction that things are going but our backlog remains very stable.
Very strong and its nearing our ideal point, so that our lead times are nearing their ideal point as well.
Oh, the water source heat pumps and has not been a whole lot of change in that business, we saw a little weaker demand for it so.
So far this year than than what we did in 2019.
But weve.
Began with some strategies to strengthen that in.
Primarily in the aftermarket replacement business.
Looking at what makes a more effective presentation of product for that and we're in the.
Midst of of designing some additional product that's more ideal for that backward compatible replacement market such that if somebody has a a failure that they don't want to repair the unit you've got an instant change out forum.
So that's some of our redesigned that we've done in that regard our legacy products is I would like to turn them that the products that we build in Longview, Texas the products that we build here and tell sit prior to this water source heat pump or under constant development for improvement.
We've got a multitude of.
Oh strategies and improvements that are.
Rolling out on a weekly to monthly basis, and we believe that each one of these is going to have a positive impact on our growth potential and our market.
Share growth.
So at this point in time.
We've seen everything relatively in line with with past relationships as far as size of units and so forth.
But I would like to point out that there's a couple of opportunities that we've been able to capture and I think theres more on the horizon and that is that there's some [noise].
Mission warehouses. These are warehouses that require air conditioning they tend to.
Be very large buildings that they.
Utilize larger units. So you don't have a large quantity of units you have larger tonnage and this this follows very well into our offerings. Some of our competitors are very limited on the size range. They have and so this has been able to provide us.
A really good opportunity some of those orders are already in house.
We have some more in the pipeline that are very very significant but manufacturing is the same thing.
We've seen.
Some acceleration in manufacturing project opportunities.
Some of which we've capitalized on I mentioned once before that we were awarded the contract to supply the air conditioning equipment for the new Black <unk> Decker Craftsman tools manufacturing in North Texas.
We have other manufacturing facilities, some of which are Oh, we don't want to talk about individual projects. So much when they're in the pipeline, but there are some opportunities out there that are a boating very well for us.
Office buildings are challenged Oh, I think that we're going to see particularly spec office building speculative office buildings declining coming up architectural billing index seems to support that.
New construction is going to be declining slightly we've had four months in a row that architectural billing index has been below the benchmark of 50.
So that puts more emphasis on.
As a capitalizing on some of the markets that were very strong in.
And one of the things that I've noticed a looking at the sales channel partners pipeline and talking to them is that there are more and more opportunities that are owner operated type facilities, which bodes very well for us as opposed to a speculative.
Facilities or developer type facilities, where they on them for a short period of time.
So I guess the next part of our market segments that we've talked about in the past is is lodging.
We have multiple national accounts that we work with on that.
And new starts on lodging I think are going to be very challenged Oh, we've seen a couple of projects delayed.
I haven't seen anything cancelled, but I think that new starts are gonna be challenging.
But that gives us an opportunity go through and help these people with their efforts to modernize update and refresh some existing facilities and we fit that very well.
So.
With that I'll I'll conclude the market talk our backlog was 119.6 million at the June Thirtyth.
And that was versus 166.8 billion a year ago.
No.
To sum that May look unfavorable to me it actually looks favorable because at 166 million.
Our lead time was extraordinary and lengthy and this was a restricting us from some really good opportunities. We had the turned down a lot of opportunities because we just weren't able to produce we've worked very hard and.
For about a year now maybe a little excessively year, we've been adding seven any capacity additional capacity and streamlining our operations and so now we're able to produce at a higher level and that in itself brought the backlog down and so at this point in time our balance.
Between a backlog bookings and shipments is relatively in order.
There were a handful of jobs that were delayed somewhat.
It actually coincided well with the fact that we had some K through 12 replacement business.
So that that we had units due in June and July primarily and at the same time, we were having the absenteeism rate. So we were a little bit challenged by that as it turns out those projects were all delayed because they had absentee rates for their construction workers that had delayed their progress as well.
As a school opening delays so we were actually able to satisfy all of those shipment requirements with no delay to the actual outcome.
Oh, we're seeing orders as I said in July rebounding very nicely and I think this is in response somewhat to our lead times.
So a lot of opportunities are being presented to us and one of the primary concerns has been.
When can you deliver it.
And we've been able to respond favorably to the [noise].
So.
That being the case I think 2020, we will finish the year with modest growth and I believe will begin 2021 with a.
Relatively stable backlog unless something catastrophic occurs and the overall economy that we've not yet seen.
July results were good in fact in spite of the fact that we had.
[laughter] some absenteeism for the first few days of July.
As of I think it was July 12th was the first day that I saw us produced on a daily basis.
At our highest level and we've been able to maintain that that production level. So the first 10 or 11 days course, you had two days of holiday in there, but the first 10 or 11 days of the month, where we're under performing because absenteeism, but once we hit around the 12 to July we restored that.
The balance of the year barring any unexpected absenteeism again or or anything catastrophic like that we think that we're going to perform.
Quite well for the rest of year.
One of the absenteeism issues that has been discussed didnt.
There's been a lot of effort in the community.
In our business itself to assist with how to resolve is there's schools that have not gone into session on time not planning to go on session and time and so you've got people that are having some child care issues with what do they do with their kids while there.
At work.
I think they become relatively well equipped amiss now it seems because they've been dealing with this sense.
Late in the spring.
And so I don't think we're gonna have too much a substantial impact from that just a little bit of nagging situation for a handful of people.
With that I'd like to open it up questions.
At this time I would like to remind everyone.
<unk>.
A question simply press Star then the number one among its on the phone keep that.
Hopeless, you see moments ago politicking roster.
Once again to ask that question star, one and telephone spot.
Your first question comes from the line if Brent Thielman. Your line is now open. Please ask your question.
Hello, Brent Hey, Hey, good afternoon guys.
Gary maybe first off I mean that by them at the disruption.
Seemingly rate and that made in the quarter. The gross margins are holding up.
Pretty well.
Yes, your thanks for that at least some some view on what you think sales can do through the remainder every year and I know that subject to a lot of things but.
How do you feel about.
Sort of maintaining these these margin.
These sort of levels given given all the various factors out there and barring any change in the inflationary environment.
Well, we had June we look we look at each month stand alone.
As they occur.
And June was surprisingly good.
This absenteeism that P.T. O time for those people is the crude and so it it doesn't affect us in a negative way. The thing that you don't get is you don't get the dilution of the fixed cost when you don't have the revenue.
So I think that I'm very proud of what our team did in managing cost.
And managing the people for the best outcome.
June as a standalone month was relatively representative on a gross margin basis for the whole quarters, I recall yep I'm getting to not have approval for my accounting and.
Folks here. So so June was relatively on on par with that we've not yet since we just closed out July we've not seen those numbers.
But revenue in July look fairly similar to Jim.
Yes, so so having the same sort of controls in place on the.
The efficiency and you know just the scrutiny to every little detail in the business I would expect that that July performed somewhat on par with with June.
Maybe slightly less but but somewhat on par August is starting off with really really good production.
And good attendance and so I think that August and we've got good backlog to run through September at this rate and good prospects on the horizon. So I think that the stability in.
Gross margin performance is.
He is very probable.
Okay, and Gary just to clarify I mean, I think typically third quarters, one of your stronger quarters do you do you expect a step up in revenue from the second quarter.
I don't and and it's because of those first.
Roughly 10 days of July 10, 11 days that we were below production numbers.
Because of attendance.
If that had not occurred then yes, I would say so.
HM.
If we were in the range and I've not seen the forecast yet we're just not normally about mid quarter. My production team can give me a pretty good forecast to what revenues going to look like because they've got their production schedule fairly solidified and and you know they've got their rhythm for it.
So we're about a week early for being able to determine that but I would expect Q3, probably to be in the same ranges Q2, it won't be the normal bump up that you've seen historically and again that was largely affected by that absenteeism, others first 10 or 11 days of July.
Hi.
You do you get both you agree with that I would tend to say so I think effectively they impact we have from krona virus was split half between the end of June.
July Yep.
Going to probably see somewhat of a mirror.
Yeah, that's the way I saw it as well thank you Scott.
Okay, and just to clarify the it given the lead time shortened I assume no that.
All the work in your backlog reflects most current pricing.
That's out there you don't you don't have much of it.
I have no pricing I'm trying to price increase yes, no no.
We had oh.
As I recall it was relatively across the board price increase in June of 19, that's fully.
Enabled in in the production I would say even Q2 is fully enabled.
There was a small price increase selective price increase in December.
Again, I think some part of Q2 captured that and I would say that Q3's entirely on that but that was very inconsequential to the overall game because it was on select equipment or even though it was four or 5%. It was on probably you know.
Let's see it was on this on Longview equipment in mind five for yeah. So as it was affected on somewhere around 20% of our revenue.
But we got it.
We got about half of Q2 with that price level on the plant floor.
Got it.
Last one I'll get back in the indoor air quality upgrade is that is that considered a part sale or is that a full on replacement of the unit.
Phil on replacement of unit for most of these facilities.
When you go let let's say you go to the an elementary school that was built even 15 years ago, and let's say they did not purchase a on equipment. So that the equipment that they purchase the fan that supplies the air to this the space and restart collates it doesn't.
I have the capability of overcoming these additional filtration levels that we're talking about the other thing is as those units that a lot of our competitors sold on those projects don't have the space in them for these virus killing devices.
And so our units accommodate both and that strategy and our units has been available for many years.
So we didn't have to do any new design redesign or anything like that.
We have a project that we are supplying to the Carrollton Farmers branch, Texas School District, I think there's nearly 600 units and they are adding the virus, killing device and then we added the higher filtration and so that's just one example of a school district.
Recognize this and that was all planned before Corona virus.
And they came in and added this virus, killing device once they saw the effective it with crown of ours.
Okay. Thank you guys were taking the questions on the back in line.
Thank you.
Our next question comes from the line, it's Joe Munda Leo Your line is now open. Please ask your question.
Hey, Gerry.
Oh no.
Doing well thanks, I wanted to start with following up on Brents last question and.
Just to expand on that what kind of units are you, referring too or is it water source heat pumps or rooftops and then in addition to that is or other types of units that maybe you don't a manufacturer or other types of systems that could be a substitute at all and then last.
Finally, as far as the uniqueness that you mentioned regarding the static pressure could you expand on that and how many you know how many producers out there can provide what you're referring to there.
Okay. So, let's let's divide this up a little bit.
So in indoor units virtually every competitor we have has this capability because indoor units don't tend to be.
So commoditized, they're not an in stock on the shelf kind of a unit there they're built to order. So virtually everyone. That's building indoor air handling units has the capability of providing a fan system.
That is capable of overcoming this.
Indoor air handling units to typically go with chilled water systems for the products that we produce in Longview, Texas, we have a high percentage of buyers that are what's called a split system. They also include condensing unit and they have refrigerant run through their coils, rather than the until water.
So when you're talking about those indoor split systems.
You start narrowing this down a little bit because a lot of our competitors don't have a real effective offering of this style of split system that with these kind of capabilities. So.
For many years our successes.
The split systems, we produce in Longview.
Were due to the attributes they had with some application strategies in other words, a lot of projects with till water, which are typically your larger central.
Projects.
Central plant projects, we were able to duplicate that kind of performance with a split system and scale that down so some projects need an indoor air unit, because they don't have rough structure or rough square footage available for a rooftop units so that that buys well for long view now when we're talking about pack.
Drift up units.
[laughter] pardon me when we're talking about units.
That are 25 tons and smaller than virtually all of our competitors with a small exception that would be die can their fan systems will not accommodate this additional static pressure for these higher filtration requirements. So we have essentially one competitor.
That that can match us on fan performance.
Now on these 25 ton in smaller units and that would be die can.
And when we look at it from a competitive standpoint.
That's that's quite nice to compete against them.
When we go above 25 tons then it starts sprinkling in a few manufacturers here and there between 25 and 50 tons will say that that can do these sorts of things now once we get above 50 tons. Then it becomes even more of those manufacturers are capable of doing.
So our most substantial opportunity is in the two through 25 ton.
Sized equipment that that our strategy and our value proposition are extraordinary.
Water source heat pumps.
We do have a fan capability to to step up the filtration capabilities and those that was one of our in eight designs because we recognize this ability even before corona virus that there were many applications that would desire a higher led.
Hello filtration, so as far as water source heat pump manufacturers going head to head, we do have unique capabilities once again in that facet.
Okay and have you I didn't know, which one would be maybe the most ideal fitted for sort of Colgate air quality.
If there is one have you seen any I guess just broadly have you seen any indication that you've started to see increased demand or is it.
Too early.
It really didnt.
To the increased filtration or the virus, killing devices going in the Enetts I guess, just anything related to putting in co then related systems because of air quality infiltration I think we're on the early parts of that Joe and let me tell Ya ASHRAE is our industry read.
Source for research and development and it's done on a.
All of our peers participate on these committees and on these research opportunities and so this is a a collaboration between the entire industry and ASHRAE published a paper recently, describing what they thought were best practices for how to handle this airborne.
Virus. This aerosol virus and that was increased filtration levels, it's called a merger level M E RV increased merv level filtration.
As well as coupling that with one of the three.
Strategies for virus, killing so you the lights are an obvious choice.
For killing a virus, but the problem is that to have the intensity required to kill the virus at it any speed as it goes through the end it and its normal speed.
The intensity has to be much higher than what we were accustomed to having in the past most of the v. devices that the industry has been installing in their units was to kill any surface born.
Iris isn't bacterias that might accumulate on the cooling coil.
So this strategy of increasing the intensity of UBI is rather new and it's something that ASHRAE, putting one of the recommendations Ah Theres also some ionization type.
Virus, killing devices that are getting some attention as well as a plasma oh device that will kill this virus. So there's really three technologies out there that are.
Working their way through to see which ones the most viable which ones the best value, but you couple all of these with this higher level of filtration because when they killed that virus you want to capture those particles in a throw away filter.
I see a thanks for providing that color very interesting how about as far as your co vid related end market trouble spots being retail office Haas hotels.
They make up 40% to 50% of your revenue construction is overall, 50% or so of your revenue how do you view maybe the positive.
Aspects of Kobin related demand too.
Some of the adverse effects to the to pick the pandemic in terms of those end markets.
Well.
I think what you described is relatively accurate that some of these markets are are declining.
As far as new construction there definitely.
In in Jeopardy of declining 'cause architectural billing index has been a great indicator and its four months in a row that it's been below.
The benchmark of 50 that that says things are going in a positive direction.
So there will be more emphasis on.
Replacement business, it's something that when I came here at nearly four years ago now that I recognized was a significant market opportunity for us and we've been putting strategies in place to.
Increase that it and I think we're making good traction with that our sales channel.
As a whole as we improved it some of the characteristics of the improved.
Partners that we selected.
Were due to that aspect of their business that they had a focus on this aftermarket replacement solutions type business. So I think that a lot of the improvements we made in the sales channel are going to have a beneficial impact to us shifting from 50 50.
50%, new construction, 50% replacement I would look for over the next 18 months for our ratio to change somewhat and our new construction to be a smaller percentage and our replacement business to be a larger percentage when it comes to water source heat pumps, particularly that is.
An absolute strategy that must be.
Utilized because the new construction.
Some of the biggest markets for water source heat pumps were hotels.
And high rise Oh.
Condominiums, both of which I think are going to be substantially curtailed, but on the other had if they're not build new hotels are not build new condominiums. They've got units that have got age on him that are failing that we've got to be replaced so we have had a full time effort on increasing that busy.
As for about 18 months.
In the water source heat pumps, and we've seen some configurations and equipment strategies that would make it even more make our product offering even more attractive and we're deep into the design of these additional characteristics and features that are going to enhance that.
We're looking for somewhere in Q1 to have a complete generation of equipment water source heat pump equipment.
Introduced that will be specifically to address this replacement market be back Whitley compatible.
Then the other thing to offset some of these industries and segments that are that are going downwardly trending there's some upwardly trending opportunities as well.
Some of which I've talked about before in a more vague terms that I can talk more specific now large scale conditioned warehouses.
No there are companies that have online.
Ordering.
Online processing of ordering and home delivery that are building additional facilities across North America. We've been successful in securing a one particular business. If that was was building six new facilities across North America and at this point in time, we've secured the order for.
Four of those facilities each one of them as not as an individual does not material to our business, but they're all incremental and they're all beneficial then the other thing is as we've seen some.
On shoring or re establishing of manufacturing here in North America.
We have secured some of that work already and we have some in our pipeline being developed.
One of those projects is extraordinary its in the early stages of it but it it's a one that we expect to be awarded.
Within this month and so hopefully when we're having this call next quarter, we'll be able to tell more about that but at this point in time, it's a little early but theres a lot of opportunities out there.
Now to offset the downside now overall the growth is going to be challenging.
But I think that when you looked at.
Some of our peers and the reporting that they've had a up to this point, they're reporting 20% to 25% down for the quarter, the reporting 20% to 25% down for their outlook for the year, so being our quarter was up by how many percent Scott.
Person from 5% for the quarter and that was.
Somewhat constrained by the absenteeism, we would've been up a decent amount more than that if we would have.
Not had absenteeism, so we're going in the opposite direction of a lot of our competitors and peers. We're we're gaining market share our value proposition is more appreciate it now than ever and I've always said and this is something that norm has validated for me is in these times of downturn, that's when we actually.
The flourish because people have time to consider the value proposition and we win that very often.
Okay.
Well thanks for that I just wanted to also just follow up on sort of the backlog in the effect.
What that has and you gave sort of an indication of what you're thinking for the third quarter.
I'm, just trying to think sort of further out than the third quarter.
Did did this sort of Ms top or.
Maybe not miss out, but the issues with your absent to use.
Did that affect you know where your backlog is today, which is relatively pretty high. If you look back two years ago. It still 20, 25% higher than where it was two years ago, even though it's down year over year from here.
To that extent.
How much the sorta effect going into the fourth quarter do you think say you get sort of maybe flat to modest growth in orders in the third quarter.
Well I Hungary, starting in the fourth quarter and that sort of scenario.
I think thats reasonable to to assess it that way when we look at the commentary, we're having with our sales channel partners.
While the general 10 or is that things are improving is things began to open back up things are beginning to move.
A good many of them believed that you know there's adequate opportunities out there to kind of maintain our position, but then we keep getting presented with these unique opportunities. This large manufacturing opportunity that's being presented to US right now is very lead time.
Oh sensitive and because of our increased capacity, we are absolutely able to meet their scheduled requirements and when the discussion with some of the other contenders for the project, they're all challenged by that they're not a willing.
To commit to this very aggressive schedule. So when I go back to the planning we did a couple of years ago, realizing that that we didn't have as much production capacity as we need it and we started getting things rearrange cleaned up in the plant re utilizing some space better utilizing it getting.
More salvini machines in here, we have when we built our new laboratory for instance.
No we had an existing laboratory here until so we have to manufacturing buildings here. The west building is our biggest footprint building. The east building was our original manufacturing building and its we build our smaller tonnage and it's there and but we also had our original laboratory in there well once we got the new laboratory up and go.
Going.
We demoed that space and working with our manufacturing engineering.
Group here in in the office.
We devised a whole new manufacturing line for one of our most popular products one of our products that that caused us to go out to an exorbitant lead time last year.
35, 40 weeks lead time, well, we've been able to arrest that to.
Around 16 weeks right now, but when we get this new manufacturing lined up and go on we will be able to produce these large tonnage units the ones that are more standard configuration at 150% greater rate than we do right now and when we look at that that means we'll be able to offer those units in a six to eight.
Week timeframe on a regular basis, so that opportunity with that new manufacturing line, which will come on board, they're telling me sometime in December.
Oh, so I'm kind of counting on it you know to start Q1 have that capacity available well theres opportunities out there for those style units. These are the larger units. They run a think they run 55 tons to 140 tons that right not 55 on the small it yeah 55 to 140. So these fit these lower.
And your.
Conditioned warehouses and and some some data center type battery cooling areas and things like that they fit it very well and so we're increasing our manufacturing capacity right, there and with that reduce lead time on that so many of these projects are very very sensitive.
To to lead time when these people start plant in these data centers when they pull the trigger they want to be done yesterday, and so we're going to be able to respond to that even better than we are today.
One thing just to make sure that we're all under streaming is our backlog is expected to potentially still decline in sensitive as opposed to represent roughly about two months worth of our production and that historically has been we've found to be kind of an ideal range overall for us and that may be where we end up.
By the end of the year, yes. So if we can end up the year with the across the board lead time being that eight weeks with some opportunity for some five and six week lead time on certain product groups than then that's going to put us in a very very strong position going into 2021.
Okay, well, thanks for taking my questions I'll hop back in queue. Thanks.
Once again I would like to remind everyone in order to ask questions. Please press Star then another one and funky.
We don't have only questions at this time.
We love aren't you have a follow up questions on the line. This gentleman done now your line okay.
That's a question you guys.
If you don't mind I just have a couple Falk thing I'm sure sure go ahead, John So it's just as far as capacity right now what size backlog just so we sort of have an idea.
What size backlog could you increase to where your lead times don't get extended or it doesnt cap. Your revenue I'm just wondering how much revenue kind this business sort of.
Handle at this point.
Well, it's a moving target because we continue to add manufacturing capacity.
The new building in a long view for instance, we went from 234000 square foot original facility down there we're building 220000 square feet.
They are going to turn that building over to me in late November.
What will have that capacity coming online Q1, and so we'll have more capacity for long view right now if I segment lung views backlog out there they're at about 12 weeks right now they believe they are yeah, and that's a more backlog a more lead time sensitive.
Product group than what we produce here in Tulsa.
Ideal down there is five to six weeks well rather than curtailed the orders I want to increase the the manufacturing capacity so that will come on.
Anyway first and so you know the ideal backlog today for a long view would be substantially less than what it is the ideal backlog for long view starting January 1st is gonna be about where it is right now okay. So so that's that's that moving target now Longview has traditionally been what 10.
What percent of our revenues at about right, yeah, roughly 10% to 12%. So if if the tulsa products, where to become stagnant, which they won't but if they were then longviews, we're expecting good growth opportunity out along view in 2021.
We've got multiple programs that were working on with software development to expedite the processing and.
Bill of materials generation. So we can shorten lead times to utilize that manufacturing capacity then here in Tulsa.
We still don't have all of our seven any machines installed that we ordered for accretive capacity.
We've got one machine right now that looks to be.
Probably two weeks away from coming online so that'll be some incremental capacity growth. So to answer your question today with the capacity I have today, the ideal backlog look somewhere between 90 and 100 million.
But I have increasing capacity coming on incrementally over the next few months, so thats going to be a moving target.
One of them things. We're also working on is trying to make sure that if we have capacity to deal with short lead time requests.
A growing growing effort as we move forward yeah, we gotta have headroom between demand and production capacity. If we don't have that headroom. Then you begin to discourage these people because they can't say I need. This unit in this lead time and if you have to say no. They look for either an alternative solution.
Or they just give up altogether and so having additional manufacturing capacity to have that headroom for that that peaking so.
Over the last two or three years, you've not seen the bell curve.
Oh that had existed through most of the life of the company I believe in 2021 that we're more likely to see that bell curve begin to reestablish itself and by 2022, I think it'll be firmly in place that being that Q2 Q3 have higher revenue numbers than Q.
You want to four.
Got it.
How about raw materials.
About 12, 18 months ago Youre, the spread between input prices and output prices I'm sort of squeezed your margins.
I believe that sort of started to reverse in the other direction, but now we're seeing copper is.
Pretty high his starkly some other raw materials had been rising so where are we on a price cost.
Situate situation.
I have a sheet that they give me a from our purchasing group.
That has about 70% of all of our purchase materials, rather those are fixed.
Let me know finished goods like compressors and motors or rather the raw materials like copper aluminum.
Steel and stainless steel.
Overall, that's quite stable right now we've had some things go down some things go up.
As a trend it was down just a little bit year to date.
And we were able to lock in some pricing protection on certain aspects of that for do you remember how long we were able to lock in that Steve.
Yes, so in the 12 to 18 month range on some of these materials, we've been able to to lock in a by price. So.
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If those things begin to go up and I've got this locked in price than I kinda like my my chances with that.
I think we've done quite well so.
Just to summarize that Joe I think right now, what I'm, saying and what I've been given for the next six months.
Our outlook on material pricing is it's no impact positive or negative it's neutral.
Okay. Good.
And then as far as the SGN. There I think I may have missed it but was inflated I thought I heard maybe Scott said, there was a donation and they asked yeah, you did north West Joe you Didnt Miss that so on May 12, when the board of directors So graciously.
The appointed me the CEO that is the same day, the norm was appointed executive chairman and so.
That's a next step up for both of us.
And in honor of that the board voted for and granted a one time contribution to the Winifred Montana Independent School District, which is a where norm was born and raised and I'm proud to say that norms, Scott myself and Doug which.
Men went there and presented that check in person to them for $1.25 million. So that was an SGN a expense in Q2, and if you look at that.
I, just got roughly two and a half since a share on a pre tax basis and a little bit under two cents a share on an after tax basis.
Yep Okay.
So even with even with our absenteeism. If you will make an allowance for that contribution we were pretty darn close to earnings expectations.
And our ESG and I would have been pretty much inline with what you had previously thought.
Yep.
Ah, yes, correct, even with taking that out though its testing is still up 14%, but I guess.
Profit area.
Yes.
Profit sharing don't don't forget my employees, we allocate 10% of our pretax.
Earnings.
To profit sharing we issued a check.
The check goes out Monday give me that exact amounts 12 56.
No the exact number off the top.
We didnt get you get it real quick so it was 1600 86, the first quarter and I believe the number was 1200 $56. This is per employee all employees with the exception of $1276.19 per eligible employees.
I was shorter up about $20 into.
$2.45 per regular I wont work, yes, so well that profit sharing isn't SGN I expense and it's our biggest variable the two biggest variables in our SGN a expenses typically our warranty and a profit sharing and so warranty is down and profit share.
During his up and that's the way we want it to the same period last year that amount was $1091. Kate So that's a 25% increase almost almost 27% increase over last year. So at this point in time this year on a dollars per hour basis give me that calculation it was $2.
45 cents per rig that was for the quarter for their record year to date or to 82, maybe I don't remember the exact yeah. Yeah. So for year to date, our employees have gotten $2, an 80 cents an hour year to date in profit sharing bonus.
Got it part of this DNA, we like to fee going out yeah, no for sure, but definitely makes sense well a that's all the questions I had I appreciate you taking extra ones and.
Good luck with the back half of the year. Thanks. Thank you Joe Thank you drew.
All right with no further questions.
Want to thank all of you for participating in listening today, we'll talk to you in November for our third quarter results have a nice day.
Our next.
That concludes today's call. Thank you for your participation you may not.
Probably equal Stacey.
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