Q1 2021 Aaon Inc Earnings Call
Yeah.
Good afternoon, ladies and gentlemen, welcome to the a O N Inc. Fourth quarter sales and earnings call. There will be a question and answer period. After the management's brief presentation.
This call will last approximately 45 minutes to an hour and that would've liked the trend of meeting over to Mr. Fields. Please go ahead Mr fields.
Good afternoon, welcome to our Q1 'twenty one.
Earnings announcements like to read a forward looking disclaimer to begin with.
To the extent any statement presented herein deals with information that is not historical including the outlook for the remainder of the year such statement is necessarily forward looking and made pursuant to the safe Harbor provisions of the Securities Litigation Reform Act of $19 95 <unk>.
As such it is subject to the occurrence of many events outside <unk> control that could cause <unk> 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 quarterly report on form 10-Q.
So joining me on the call today.
Norm is Jordan, our executive chairman.
Rebecca Thompson, our newly promoted Chief Financial Officer.
Rebecca is going to open by reviewing our financial performance So Rebecca.
Floor is yours, thank you Gary.
I'd like to begin by discussing the comparative results for the three months ended March 31, 2021 versus March 31st 2020.
Net sales declined 15, 8% to $115 8 million from 137 5 million. The first quarter of 2020 benefited from a high backlog that allowed the company to run at full capacity is set all time record highs for net sales in the first quarter. The order intake began to slow.
Oh in late 2020, and the company intentionally slowed production to keep its backlog at a healthy level.
Year over year decline in net sales is primarily due to lost production days in January for planned maintenance and in February due to impacts of bad weather.
Our gross profit decreased 22, 8% to $33 2 million from $42 9 million as a percentage of sales gross profit was 28, 6% in the quarter just ended compared to 31, 2% in the first quarter of 2020. The production days, we lost in the quarter resulted in unfavorable labor.
And overhead inefficiencies, including the company's ability to absorb certain fixed costs, which caused the decrease on our gross profit.
Selling general and administrative expenses decreased three 4% to $14 7 million from $15 2 million in 2020 as a percentage of sales SG&A increased to 12, 7% of total sales in the quarter just ended from 11, 1% in the first.
Quarter of 2020.
The increase in SG&A as a percent of sales was due to an increase in insurance premiums and salaries and benefits.
Income from operations decreased 33, 6% to $18 5 million or 15, 9% of sales from 20.
$27 8 million or 22% from 2020.
Our effective tax rate decreased to 11, 4% from 21, 5%. The unusually low tax rate was mainly related to a 1.8 million increase in our excess tax benefits associated with stock Award.
The company's estimated annual 2021 effective tax rate, excluding discrete events is expected to be approximately 27%.
Net income decreased to $16 4 million or 14, 1% of sales compared to $21 9 million or 15, 9% of sales in the first quarter of 2020.
Diluted earnings per share decreased by 26, 8% to 30 cents per share from 41 cents per share.
Turning to the balance sheet, you'll see that we had a working capital balance of $178 7 million versus $161 2 million at December 31, 2019.
Our unrestricted cash totaled 97 million at March 31st 2021.
Our current ratio is approximately $3 seven to one our.
Our capital expenditures were $16 4 million for the quarter, we expect capital expenditures for the year to be approximately $70 7 million.
The company had stock repurchases of $5 2 million during the three months ended March 31 2021.
Shareholders' equity.
Per diluted share is $6 93.
At March 31, 2021, compared to $6 67 at December 31, 2020.
I'd now like to turn the call back on to our CEO and President Gary fields.
Good afternoon. So overall, we're happy with the first quarter performance was in line with our expectations.
Unsurprisingly sales were down year over year, but compared to fourth quarter, if you'll recall when we had those announcements I said that a.
Good benchmark accomplishment for Q1 would be if we essentially duplicated Q4, I was because I had good visual of the backlog.
And knew we needed to slow down production.
So we slowed the production down probably.
On the intentional portion was.
The longer shut down around the holidays and that allowed us to get ahead on some pretty heavy duty maintenance, but then.
And then we had the adverse weather so we ended up a little bit.
Lower in revenue than what we actually.
Thought we were going to do as a result of that weather.
Down too.
But after the moderation in bookings in the end of 2020.
The bookings began to pick up sharply right. After the first of the year now we did have a price increase that went into effect on January 11th So that's not unusual for January.
Anytime to pick up.
Bookings.
Right ahead of a price increase but the fact that the bookings increased stayed very robust throughout the quarter.
Told me that you know it.
It was genuine growth in bookings.
Normally the pull forward from a price.
Increase runs in the range of 30% to 45 days and then it begins to kind of stabilize and see what the actual run rate is.
So I think the number was our bookings were up around 21, 22%.
In Q1 of 'twenty, one versus Q1 of 'twenty net Q1 of 'twenty bear in mind was largely unaffected by coronavirus because of the virus didn't really start slowing anything down until Q2.
So this is a very strong indicator of our bookings performance for 'twenty one.
And that booking performance has continued on that same trajectory up until right now I mean, it still continues it hasnt has it slowed down at all so there are some.
Strengthening them.
A fair amount and we're looking at backlog on May 1st was $104 5 million or you got to recognize that we've got production turned out pretty good too. So we're maintaining a really nice balance here between production levels.
Our backlog levels.
Going back.
A few quarters I said that the ideal backlog should be when we got our production capacity, where we had planned it should be real close to a 100 million so where were running along at its just almost exactly the perfect backlog right now.
Replacement business. This time of year is always stronger than new construction. This year is taking shape same as what we expected.
Lots of K through 12 schools are in the books right now are being built.
Wow.
But on the new construction side, we're seeing a fair amount with Datacenters are large air conditioned warehouses for online retailers.
Some of that stuff's really picked up and it is quite strong so the grow business agricultural growth. Some of you might know what is the cannabis business primarily what it is.
Additional states approved some measure of cannabis legalization.
The legalization back in the fall and responding to that where more of these facilities being built in more states and we are oh.
One of the companies that provided.
Best practice HVAC equipment for that industry several years ago, now and we maintain a very strong position in that industry.
So architectural billing index had.
Several months I don't want it.
I don't have it in front of me, but it's somewhere around 10 months debt were below the benchmark of 50, which said that they had lower.
Architectural billings.
Normally translates into a slowdown in business for us.
Well, we're not seeing it quite like historic because what causes billings to go down was not a normal activity. It was a very abnormal activity.
What we have witnessed for certain and we've just concluded our sales conference with our leading representatives last week and validated this further.
Numerous projects in early to mid 2020 were put on pause.
Various reasons some they couldn't man the projects because of coronavirus sub there their states wouldn't allow them to work. Some they just were uncertain what the outcome was that they had the opportunity to hit pause while those projects were designed.
Plans were on the shelf ready to be utilized.
They have hit the go button on numerous of those projects and that doesn't necessarily generate an architectural billing. So this architecture billing index doesn't have the exact correlation that it does in normal times. So we've seen a lot of projects projects come off of.
The the storage shelf.
Put into the.
The market and these have resulted in orders force that I do believe at some point in time that we're going to see a bit of a dip because of the architectural billing index because they just didn't build work for a while so it has to show up but it's not showing up in its traditional.
Down mode for the indicators the architecture billing index has turned back positive on the last month or two for sure it's been above.
Above.
The benchmark of 50 I think this last one was when they close to 50 352.8 or something like that I think it was.
So you know, it's it's beginning to strengthen our sales channel partners tell us that their pipeline is is <unk>.
Robust.
And that the orders come in to us are going to be steady.
We had anticipated maybe orders would peak Oh.
Some time.
In Q2 going into Q3, causing Q4 to slow down as we've traditionally seen with our seasonality we're not certain at this point in time, if that's going to happen because the pipeline to see pipeline seems to be pretty robust at this point on that.
Could change at any moment, but this is what we're looking at today.
So looking at our various business segments surprisingly we've.
We've had some commercial and retail business that I, frankly wasn't expecting grocery stores continue to build and an update and remodel.
Convenient stores continue to do the same thing.
Office buildings have been a bit soft although not nonexistent.
Medical and health care are definitely picking up.
Al.
Go back early in the Corona virus occurrence when it was identified that the rural communities. The outlying communities. We're very deficient in their capacity for health care a lot of those facilities had been mothballed or the region that expanded and they had not yet supported them with a localized health care.
We're seeing a very nice influx of business due to that again I had a oh some customers in here just in the last day or two.
We're focused on health care. These were end user owners with their engineers and our sales channel partner Representatives here and they they are our west coast operation and they were planning a lot of facilities and they were here to look at our equipment and they left here with a very.
Favorable impression so I expect that one to turn into something good for us.
In the education market already spoke to K 12 is very very strong one of the things that we're seeing.
There's been some bond issues recently.
In various regions debt.
As recently as a year ago. Some of these were challenging to get passed and now they're passing easily.
One of the key things in these bond issues is updating the HVAC systems to be in accordance with best practices for virus mitigation indoor air quality.
Things that are.
Very favorable for a on with the equipment that we manufacture.
Manufacturing has.
Really not had any material change to it we still continued to a.
Supply equipment from manufacturers might be slightly curtailed or curbed, but not much.
On the lodging front.
We're seeing some replacement business, but not so much new business.
I'm not seeing a lot of new hotels built a few here and there, but mostly we're seeing.
People pull forward on updating their HVAC systems again, they want to put these virus mitigation procedures into the units and their best way to do that oftentimes is update the unit.
So that's kind of where we're at with our markets right now.
Again just to recap.
Facilities.
Large warehouse Oh air conditioning on.
Both of these are are stronger than what we've seen in the recent past.
Raw materials and component prices are definitely on the rise we got a price increase in effect on January 11th we have another one that goes into effect on June 1st each one of these was 4% across the board.
And these were put in place to manage our expected.
Material and component price increases and we believe that we are in a favorable position to offset all of those material price increases.
We continue to improve our productivity here in the Tulsa facility.
We're operating now at about the most efficient.
Turning metal into profit that we've ever done I'm very proud of this team they've they've worked very hard and we share the team here that accomplish that with our other primary manufacturing facility in Longview.
We got the new facility up and going about 60 days ago now was when we manufactured the first.
Products in that area.
And it has quite a ways to go to reach the efficiency that we.
<unk> believe we're capable of but at the same team that helped.
<unk> identified all the practices that debt enabled this wonderful efficiency, we have here in Tulsa. They go down on a weekly basis. In fact is a group of them is there today.
They they go down on a weekly basis, a whole group of a does spend one day and help that team down there and we've seen very nice results from that and we look forward to continuous improvement throughout 'twenty. One in both revenue production and efficiency both of those are going to Oh.
Improve in that facility throughout 'twenty, one I don't see us reaching.
The levels that we believe we are capable of prior to the end of the year.
Our sales Rep network I mentioned earlier, we had a somewhat of a sales retreat last week brought in a lot of the key sales channel leaders.
And the overall tenor of the meeting was very upbeat.
They had a very positive attitudes about the way we were doing business. The way we were supporting them are shorter lead times were very much appreciated.
Obviously, we've seen an improvement in quality over the past few years, you see that the warranty.
Expenses continued to go down and stabilize its been very stable for about a year and a half now yeah and so they recognize that that makes their jobs a lot lot easier, bringing the lead times down too.
Very attractive levels has afforded them opportunities that they wouldn't have otherwise and so.
Overall tenor from the sales channel is very good and that's why I temper that.
Going into this year, our expectations were that Q1 would would mirror Q4 of 'twenty, but then that bell curve of Q2, and three being up in Q4, maybe being back down a bit.
In relative terms.
<unk>.
What they're leading me to believe as it might if we do have a lower demand.
Demand in Q4 in production it might not be as substantial as we first anticipated. So it's it's a little stronger out there than maybe what we anticipated back in the fall when we were doing our annual planning.
The water source heat pump business is pretty stagnant force right now.
The product and we've talked about this before but the product that we have is very favorable for new construction.
We continue to have a steady demand for that product, but it is not a.
Good fit for retrofit when there's a couple of manufacturers that had a very dominant position for 20 plus years and their units are the ones that are wearing out and needing to be replaced.
Are you on it is not a wonderful direct replacement for it just due to its configuration.
So we have designed a complete line of units to be 100% backward compatible with this huge installed base and we're.
Optimizing that it's.
Probably oh, well along towards completion and introduction it'll occur later this year and we believe that that will allow us to.
Regain our growth position with water source heat pumps, because the dominating factor of the water source heat pump market today as replacement not new construction.
Our capex investments remain as we have talked about before just a bit over $70 million.
I believe that around $40 million of that 70 is for accretive capacity.
Correct.
30 $30 million of that is for replacement.
It's worn out things on.
Looking across the street today, and a beautiful things occurring we have a crane over they're setting new E on units on our east side factory to be ahead of the curve and keep our employees well condition and these all have the latest indoor air quality virus mitigation procedures installed on them.
Indoor air quality and virus mitigation procedures remain a topic of conversation with every customer that comes in.
Contact with us today.
I think that when Ashray published their best practices guidelines.
Last summer and revised at two or three times with little tweaks that everyone took notice of that and so all replacement all new construction.
There are at least giving it the credence of thinking what should we be doing.
And it looks to me like a great. Many of these projects that they are including some for them if not all forms of the best practices for virus mitigation.
So we're optimistic heading into the.
The second quarter were in the second quarter now things are running smoothly.
Orders are coming in the door nicely and we believe that we will be in our best ratios for absorption of overhead.
And so where we had said we wanted to manage our gross profit between 28 and 32% in Q1, we were just slightly above that 28% I believe as we go through two second quarter here with the.
A better revenue better production out the door that will have better absorption.
And therefore, we'll be closer to that of <unk>.
As I target of 30% or so.
So with that I'm going to open up the call to any questions.
Thank you presenters as a reminder, free to participants you May press star one on your telephone keypad.
And we have our first question from.
Thielman from D. A Davidson your line is open.
Hello, Brett.
Hey, good afternoon.
Uh huh.
Hey, Gary you talked about the increase in replacement orders and I was curious if you had any sense sort.
How much of that could be related to debt. Some of the stuff you were just talking about the air upgrades.
Circulation medical related upgrades for system is there any way to tell from that.
It's a little difficult to give up or.
Real highly qualified definitive number on that you can have.
Sense of whats going on Brent and it looks to me like.
You know were up 22% on on bookings over last year, and I would say that a significant amount of that is attributable to the indoor air quality Oh, the virus mitigation procedures because last year.
Q1 was a very nice bookings quarter.
Very much within our.
What we had anticipated and it had the normal.
Replacement business for schools. So for this year to be up this substantially.
In bookings.
It really feels like a big part of that accretive bookings number is related to the virus mitigation procedures and people getting on top of that.
Okay.
I mean, I'm, assuming that's equipment sort of had more bells and whistles to it.
In order to meet those sorts of standards is there a way for us to think about.
The average dollar higher average value per unit from.
From something like that to address to address the sort of things that ashwin is talking about.
Well, that's the wonderful thing about the a on unit is these things are very inexpensive for us to add to our units. What it has done is our units themselves are.
Much more.
On a much better value to go address these things. So we don't have to do very much at all so for instance, our units are double wall steel panel. The interior panel of our unit is solid steel and its washable. So you don't get bacteria and viruses attaching to a fiberglass line or like the majority of our competitors.
<unk> have they don't have a steel liner and that's inherent in our units from two tons all the way up to 240 tonnes.
The next thing is is that our fan will overcome the additional pressure drop at these higher rated filters while the difference in.
Say emerge.
Eight filter, which has been the most common filter used up until now on the Merv 13 filter, which is pretty much what everybody is wanting to do the cost in that filter is insignificant.
Maybe in the two ton unit its $20 and a 100 ton unit, maybe it's $300. So it's not significant but what is significant is that our unit was designed it's.
And it's it's it's fundamental design was to overcome that additional pressure drop in a very efficient manner. So we can put these filters in we can have this nice clean interior that doesn't collect bacteria and.
And virus and allow us to accumulate they can clean these units easily then when you start putting infrared.
Lights in there.
Again, you're talking in a two ton to 10, 10 unit, which a lot of the school units. That's the range you're talking $125 on a several thousand dollars unit now the one thing that does cost a little money and we're not seeing a lot of it but we're seeing a little bit is the bipolar ionization.
That seems to be a small percentage of our customers want the better filtration. They want the b the lights Oh.
And then they want the low.
Bipolar, it's a very small percentage that want the bipolar.
Okay.
Okay.
Thanks for the color on.
We see what's going on with steel and copper market. Another rods out there. It sounds like you guys are getting ahead of it.
The one question I had with any issues just getting the materials and components you need seems like theres a lot of supply chain challenges around that as well.
Well, it's it's income.
Country right now.
As an interesting conversation.
The board met for our audit Committee meeting a couple of days ago.
And.
Every one of our board members was present, even though they're not all on that committee they still are.
Read into it.
There was a discussion about our inventory levels, our inventory is running about 15% to 17% of revenue and if you look back historically it was closer to 10% of revenue and they said you know do we see a time, when we might lower that inventory level and get back into that historic ratio.
And I said gentlemen, and ladies.
We're blessed that we have this inventory because it's keeping us from having supply chain issues. We have an abundance of materials in here now we struggled for some small things from time to time, but my purchasing department says that.
While it's a little extra work they have not.
It caused us to miss any shipments or.
Commitments for shipments because of that and so you know that.
This was kind of a blessing in disguise that we had this the other thing is is that my pricing was more stable because we have a lot of these materials bought at a better price. So as things are escalating one thing you're proud of is you've got a big inventory of lower price materials. So I was able to get my price increase extended out further June 1st.
And I won't be buying materials at that higher price until after that price increase actually hits the floor. So we're in real good shape with our supply chain I'm very proud of this team that debt, we have here and how aggressive they are and in doing that so.
For us at this point in time at least has not been an issue.
Yes, very good last one from me would just be Gary when it kind of come back to the synopsis of what Youre seeing out there in the market.
It seems to be a true reacceleration in orders.
I guess.
As we sit here today I mean, it looks like.
Through to Q3, Q I mean, we should see some favorable top line comparisons based on what you can see right now.
Yes.
Yeah.
Yes.
Q4, Q4 is coming somewhat into focus now it's still just a little fuzzy it's out there far enough that it's just a little fuzzy. So I don't want to absolutely commit that Q4 is not going to.
Rollover on it but again Q4 of 'twenty, what was substantially lower than.
It kind of resumed at bell curve that we'd had in the past you know it was much lower than Q3, I don't remember the exact numbers now do you remember what the percentage reduction was.
Anyhow.
Again, we're going to have favorable comps going forward. So this Q1 was was anticipated to be lower.
It's a very tough comp with.
Q1 of 'twenty, because we had such a huge backlog.
Coming into 'twenty.
And so we knew this one was going to be tough, we told you folks about it last quarter or even before that.
But going forward I think we'll have some some favorable comps Brent yes.
Yeah.
Okay well great.
Best of luck here in this quarter.
Thank you.
We have our next question from Julio Romero from Sidoti Your line is open.
Good afternoon Julio.
Hey, good afternoon, Gary Good afternoon Rebecca.
Afternoon.
So I guess just on that last question.
Wanted to just kind of stay on price cost I'm, just thinking about price increases.
Can you give us a refresher if maybe how often you reprice on a given year.
Do you think it's more likely than not that.
We see a few more price increases in the third and fourth quarter.
Well.
Our purchasing group.
Keeps a six month forecast a material cost in front of me at all times. So I have a rolling six months in front of me at all times.
And again going back to that higher inventory level. That's what allows me to have.
Good visual on six months out.
So I can respond quick enough that I can give our sales channel partners are very good notice so that they don't get trapped with.
Bids at a price that they can't.
Afford.
Due to a price increase so knowing the cadence you know all those years I spent on their side of the table I know the exact cadence of their activity from bid day until they place an order with us So I'll try and keep that in mind and then with our lead times now under very good control I know exactly how long it takes to get from the.
The date, we book an order at the new price to get it on the plant floor and all of that is inside of six months. So every month.
I'm looking at the six month outlook on these material cost.
If there is any change within the month, then they raised the flag quicker, but otherwise our normal activity as once a month. They furnish me on the updated report that gives me the next six months. So it's.
Our calculus as to how we do this and knowing all of the timing of events than we have this so that we can do it.
What I have as of today doesn't give me any indication for the next six months that I would have another price increase I had the one come on June 1st that covers everything that I know for the next six months plus so because we announced that what two or three months ago.
At the beginning of March beginning of March So a couple of months ago that we announced that and so.
No.
Now I've got let's say eight months runway that things are stable with what they told Theres been no no changes in our outlook for the last two months everything that I got on this latest report was captured the same two months ago. So to your point could we see other price increases as of today.
I don't see the necessity for that but this could easily change if we.
We have another big vessel lodged in the Suez Canal and can't get something here I mean, you know all kinds of things can happen quickly, but what I'm. Most proud about this team is that they now have very very good.
Data points that they utilize to provide the calculus for a necessity for a price increase.
So hopefully that answers your question.
It does and I appreciate the color on hopefully we don't see another blockage in the Suez Canal, but youre right on anything like that could happen.
So.
One other thing you mentioned I think.
You've called out K through 12, but something that youre seeing picking up on the new construction side.
What about on the replacement side is that something that should pick up in the summertime.
Some of these schools are out of session.
Are you seeing that in your bookings at this point in time.
We are so K through 12, historically for US has been about 50% planned replacement and 50% new.
So a lot of these bond issues.
Debt we are.
Beneficiary of they will do some wing additions to schools to expand the school itself they'll do some updating modernization of some existing schools and then they usually throw in building two or three new schools. So we got on order.
And we're really.
We're thrilled with this this particular school district has now been purchasing equipment from us on an annual basis for 13 years straight there in North, Texas. They purchased 811 units to be installed in 'twenty one.
And this time, they were about 70% replacement and 30% new construction, and that's where I'm, saying they they are it looks like a replacement is a bit higher than our new construction ratio that we were historically, saying that's the only one school district, but I've.
Seen a multitude of others and I.
I was made aware at the sales conference last week of.
Numerous school districts that had bond issues.
From last fall until as recently as two weeks ago on the.
Out to the voters and all of these are being an unanimous meet unanimously approved and.
The.
Format of a law.
Lot of these bond issues is more replacement than new construction.
So I think that our favorability of our equipment for that kind of.
End user is well recognized so I believe that our percentage of replacement business.
First is new construction will continue to.
Grow on the replacement side, even though this new construction market might be somewhat depressed.
We're gonna do real well with this replacement, we're already doing real well with it.
Got it and I guess, you talked about you're expecting sequentially next quarter gross margins to be closer to the mid point of your 28% to 32% targeted range.
Yes is that all kind of related to volume absorption or is there any sales mix component.
I play it it's mostly it's mostly absorption Julio it's mostly absorption I mean, you know you you've got depreciation and things that are fixed costs, you know theres. So many fixed costs that now our run rate.
Added all of this production capability that comes with a penalty called depreciation and we just put that new building in service in Longview.
One is hitting us pretty good.
On that line and we're yet to recognize the revenue from that new building debt. It's capable of now I will say that the revenue from the long view manufacturing has continued to grow as a result of the new building and as a result of the efficiency gains that this.
Traveling team from Tulsa has been able to help collaborate with them on there there.
Latest monthly.
Revenue numbers are up about.
Give me a quick calculator there.
I'll I'll hit this I'll give you an exact cause I know exactly where it is.
They've had a 21% increase in revenue as a result of the improvement in.
Technique.
On the improvement of the new building, that's what we've recognized already 21% over the best month that they'd ever had prior to these things occurring.
And we believe that there's a whole lot more to be had you know bear in mind, we put over 100% more.
Physical capability in place now you got to get the people you got to get them trained you've got to get them.
To a level of efficiency and that's why I say it'll take all year long to even approach what we dream is possible. There are what we actually know is possible because of how we've done it before.
Got it and then just last question from me here is just on the SG&A. It was up as a percentage of sales, which was expected I think you've called that out on on the fourth quarter call, but you know.
Is that kind of a 150 160 basis points or so increase representative of what we should expect throughout the year.
Well bear in mind that it could be higher.
Actual dollar number.
And we'll be because of profit sharing because that's in SG&A and recognize that in Q1, we just issued profit sharing.
Announcement yesterday, and it was lower than any quarter in 2020.
And so we're looking for.
Comparable favorable Q2 versus 20.
Favorable and should that occur then you know the actual dollar spent on SG&A would be higher now as a percent of revenue.
I haven't done the math on that yeah, I mean, I do think it'll be up a little mainly driven by our insurance premium and.
Since those went up $2 million year over year.
Well that will be a driver of our SG&A. Then also looking forward into the second half of the year as the country opens back up we anticipate our selling expenses in our travel well.
We will increase as well so well I'm proud to say Rebecca it's already started because I've had three major customer visits this week.
And I have one more today.
And we haven't had three customer visits in one week in over a year.
And these people are coming in six 810 at a time and of course, we put them on hotels, we take them to dinner and you know theres expense with that on top of the fact that we just had this sales retreat last week, we werent able to have one in 2020, we had to cancel it right right.
<unk> expenses in 2020 were extremely low just because we didn't have any of the normal activity that we will.
Sure.
Makes sense appreciate the color on thanks for taking the questions.
<unk>.
We have our next question from Jon Braatz from Kansas City capital.
Good afternoon, Gary Rebecca I know John.
A question Gary on the on the.
On water source heat pump when when you started with the water source heat pump.
The salt was you're getting into a market.
Maybe up to $500 million or something like that and and the hope was to really make take some share of that and I think last year, we did about $20 million in revenues in the water source heat pump.
Where do you stand today in terms of.
You know on our market opportunity and market potential of the all of the water source heat pump.
You know.
Just hasnt been a I guess on filling the expectations that we maybe maybe had earlier, but where do you stand at this time in terms of.
What's possible.
Well I haven't seen a summary of what today's current market dollar volume is.
The number of units on AHRI are down a few percentage points. Okay. So the $1 has to be down too.
Our number of units has been pretty steady in fact is the last month or two its growth just a bit.
So.
We had validated a little over a 5% market share last year and I believe we're holding steady at five plus now.
Could be breaking through 6%.
Won't see the final numbers on that for a few more days, but it's still in that.
In the last couple of years.
Two of them in the last year.
That have.
Really oh.
They are expert on.
The aftermarket business.
What their whole careers been there are people I've known.
Most of my career and have great respect for them and bringing those resources in to help the sales channel partners develop this.
All of a sales channel partners are with very little exception are dedicated to.
On aftermarket strategy.
They are putting their resources behind this and so I believe that when our new product that is.
Designed with the aftermarket in mind the replacement market when we get that product introduced to them I believe we will resume growth and we'll catch up relatively quickly.
The expectations so again.
We made a mistake there we admit the mistake and I'll tell you what there is no.
There's no see on in my book for making mistakes.
There's a C on in my book substantial note of not admitting them and not correcting them. While we've admitted the mistake, we've corrected the mistake and we're on the cusp of introducing net correction and seeing exactly how well that performs okay. So with that with those changes. The correction do you think is you.
Look back at 20%.
Market penetration is do you think that's still a reasonable possibility.
It's absolutely reasonable mhm.
There is nothing changed my mind on that and the reason is that the sales channel partners.
The commitment they have made and the success that they've had thus far tells me that it's very much in our grasp okay, and then sort of the timeline when when do you think we might cease some evidence of that that.
Those games.
We're not anticipating having.
A material impact on the number of units going out the door until Q4, so can okay, yeah and that might even be just a little early to to be.
Very optimistic about the new product will be available to them Q4, Okay and there are a lot of them that have said that they want to have an immediate stock in their inventory of that product because they think that's a good investment forum. So we would very likely be building units that we sell.
To them, we don't inventory them ourselves, we sell those units to them. So we could be filling their stock in Q4, and that's why I think there's a good opportunity to incur.
Increase our number of units.
Substantially and then there could be a little low.
Because they stopped all their warehouse yeah.
And then they've got to go out there and get their momentum go on so it could be that we have a kind of on the end rush queue for a little bit of a low Q1, and then we resume.
A good steady pace of business Q2 next year, but I think 22 as a year in whole if we look at the year 22 in hole then we can look for some some good growth.
Good solid double digit.
Percentages of growth like what we had the first two or three years that we were in this business I mean, the first three years, we were like 100% growth year over year, and then 70% and 57% and so we've seen how we can do that and we can supply that and a major difference now John is.
A lot of our early on time was learning how to use this manufacturing facility sure now we've got a few years of using it. This product is a different configuration, but it's not a different manufacturing process HM HM HM HM Okay, what when when when you when you look at it I don't know if you can look at it in isolation.
<unk>.
Up up until this for it is the water source heat pump.
Pain, it's way.
No okay.
No that that'd be foolish to say it was.
When I look at it no. It is not paying its way yet I mean, it is profitable it's not it's not a loser, but it is not at benchmark margins because we don't have the volume to offset the depreciation cost and the fixed cost of that facility yep.
If we were to double the volume.
We would triple the.
Percentage of.
Net profit mhm.
Because a lot of that profit comes at no additional fixed cost is your expense Yep Yep Yep and so.
We are absolutely we have to double that volume to get these things close to benchmark margin.
Margin levels.
So that the good thing about it now is even though the margin percentages lower it's not that big of a volume to where it's that big of a burden and so we have and the other thing that.
Point I was when I came here I had 30 years of experience in the sales channel on I'd been selling a on since 1990 and I did a pretty good job of it and so did my company.
But because we were so mature with our presentation of a on equipment in the markets that my company was again.
I really could visualize what the growth potential for those legacy products was in reference to.
My experience at my company.
As I began consulting for a on I began to realize that substantial number of the sales channel partners, we're nowhere near that mature in their markets.
But I didn't know exactly how that was going to come along and it's come along very nicely. These.
My efforts in consulting back there and 13.
Early 16 those of all manifest themselves.
The changes that I've made in the sales channel since I came on board here the first of 16.
Those are manifest themselves.
When I first came here.
We had six regions and the difference in performance vs expectations was little.
The lowest region was only reaching 65% of expectations the highest region was about 5% over expectations. Okay mhm.
Today, the range runs from 122% of expectations to 129% of expectations.
At this point in time, so is very much.
Very uniform effort and results across all of North America right. Now. So this sales channel improvement that we have been working on going all the way back I mean norm worked on it before me, but I put my effort into it starting in 2013.
I mean, it is paid off.
We have a good uniform.
Performing group across North America, and by the way every one of them is growing.
Every one of them.
Good okay.
That's it Gary Thank you very very much. Thank you John.
Once again totzke cause once again to ask a question. Please press Darwin.
There are no follow up questions. At this time, you may continue with the presentation.
Well I think that's all that we have for today.
And we look forward to.
Speaking to you again in August for our second quarter results and for those of you that.
Would like to attend virtually I believe that our shareholders meeting on the 11th has a webex capability and so we would welcome you to that as well.
Have a nice time, thank you very much bye bye.
This concludes today's presentation. Thank you for participating you may now disconnect.
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