Q3 2021 Aaon Inc Earnings Call
From those anticipated.
<unk> 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.
Joining me today on the call is Rebecca Thompson, our Chief Financial Officer, and Treasure, Rebecca will open by reviewing our financial performance.
Thank you Gary.
Would like to begin by discussing the comparative results at the three months ended September 30th 2021 versus September 30th 2020.
Net sales increased 2.8% to 138 $6 million from 134 8 million the year over year increase was fully driven by price increases and unfavorable product mix, partially offset by unit volumes, which are down approximately 11.2%.
The decline in unit volume is mainly a result of a very tight labor market that limited the company's ability to ramp up production.
Our gross profit decreased 11, 8% to 36 million from $48 million as a percentage of sales gross profit was 26% compared to 33% in the third quarter of 2020.
The decline in gross profit was related to increases in material costs and wages rising quicker than our price increases could counteract inefficiencies called by caused by minor supply chain disruption and COVID-19, absenteeism in the quarter, which reduced our production of coil.
Selling general and administrative expenses increased 8% to $15 $9 million from $14.7 million in 2020, as a percentage of sales SG&A increased to 11.5% of total sales from 10.9% in the third quarter of 2020.
<unk> as a percent of sales increased primarily due to the lower unit volume.
Income from operations decreased 22.9% to $21 million or 14.5% of sales from $26 $1 million or 19.4% of sales in 2020.
Are effective tax rate increased 22.5% from 21.8% net.
<unk> net income decreased 215.6 million or 11.2% of sales compared to $25 million or 15.2% of sales in the third quarter of 2020.
At September 30 of $181 8 million was up year over year of 114%.
And up 32% from the end of the second quarter.
What's really astounding is orders up year over year, 60% in third quarter.
Really impressive, especially when considering our orders were up year over year, 18% in three third quarter of 2020.
Most of the industry saw much easier comps and we did we see no sign of the demand slowing.
The replacement market demand is very strong.
New construction actually has hit the lowest point.
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Since the pandemic started.
In this quarter, but on the positive outlook is architectural billing index Dodge index construction starts all the various indexes. We look at are all very very positive.
We're looking at the new construction market to rebound, but we have gained a tremendous amount of market share.
As the year has gone on here.
We're seeing this fairly well distributed across all of our.
Traditional markets.
We've seen a little more strength.
In medical and healthcare and then grow facilities than we have in the previous past year or so.
We wanted to give you an update on the sales channel and talk to you about some product introductions, we hosted a national sales meeting in October feed.
Feedback from the sales channel was it was the most.
Appreciated and best sales meeting that Aon it ever conducted.
This tells you a whole lot about the marketing tools that that we have been building to strengthen our marketing efforts one of those we just.
<unk> displayed our new mobile marketing.
Pumps, one our original when we have named eco fit because it has the best.
Performance in the industry for its type of unit.
This new series that we introduced we call pro fit because it fits in a.
A retrofit environment like a pro it's a drop in replacement for the vast majority of units that are out there.
Our sales channel partners were.
Introduced to that at the sales meeting we had last month.
And they said that we hit the bullseye with it they're very very excited about it.
So.
This has been resolved.
The absenteeism rate now is back to historic normals. So we're in real good shape.
Sales for network sales Rep networks is strengthening quite a lot theyre getting market share gains.
I will say that not only did the innovation of our products have become more attractive.
In addition to that our lead times are the most attractive in the industry.
So people that would traditionally think of us as a niche player may be at a premium cost are now looking at us because we can satisfy their delivery requirements.
Even with the little production constraints that we've had we've been able to meet our commitments on knees and we've been able to deliver projects that many of our competitors just did not have the ability to get anywhere close.
Another interesting aspect of our business is parts sales are up year over year or 15%.
We wanted to put in place none of this really puts us in a bind.
Some of it was for additional marketing tools and they would be nice to have but they're not slowing us down.
The sustainability of <unk> is a really interesting story that we're just now beginning to learn how to tell the story.
I have been here running this company for five years now.
And I saw plenty of evidence of great sustainability.
Gee.
Things going on but we were doing a very poor job of communicating we added some very key staff that this was.
Absolutely in their wheelhouse to be able to create that communication.
And learn how we gathered the information in a very objective manner.
So we just produced our second.
Es sustainability ESG report that should have been out on the wire in the last couple of three weeks as I recall.
A lot of companies are talking about innovation of energy efficient equipment, but that is the backbone of a on its are unique semi custom production. That's allowed us to lead in energy efficiency, Our marketing Department recently did a comparative analysis of.
All of our key competitors rooftop units their best effort offerings next to our best effort offerings.
We won that Battle every comparative instance, everyone.
We have the absolute highest energy efficient rift.
Lift up units on the market.
These are all AHRI certified so this is certified data.
Oh.
We have a very diverse and inclusive workforce, we were just recently awarded.
Multiple awards actually by the state of Oklahoma, Tulsa County, the city of Tulsa. So we're being recognized for this so ESG is something we focus on a lot and we intend to share more going forward help aliyu investors fully understand what we do.
But I encourage anyone who's interested in is yet to do so to read the report that we just put on our website.
Outlook orders and backlog trends are strong as we move closer to the end of the year.
Historically, we see a drop off.
In orders somewhere towards the end of the second quarter entering the third quarter, we have not seen that.
The near term biggest concern is going to be with production. The positives are that head count is improving.
Rice cost should improve as we work through the backlog because the backlog has an improving margin profile due to previously announced and effective price increases.
Some of the production inefficiencies will go away as we solve these minor irritants of supply chain interruption, which they have not manifest themselves into a major disagree.
Disarray, they've just been irritant some of them last for a few days some of them have lasted for a week or two but nothing has been extensive but as those go away.
Have the manufacturing infrastructure, we have the head count capable of producing inaccessible expectations.
But some of these production constraints did carry end of October.
We're seeing them resolved at this point and and being resolved with.
Further resolution.
Later this month.
So are.
Fourth quarter in early 2000, 22022 outlook as compared to the third quarter, we anticipate the fourth quarter sales to be slightly down.
And expect gross margins to be modestly up.
But I want to mention.
That we.
Had the sales meeting in.
In 2020.
And we had this one here in 2021, so we're going to have probably a million dollars plus SG&A burden in the fourth quarter that won't reoccur in 22.
We only have a major sales meeting every year or so so I misstated that we did not have one in 20. This was the one that we had last month.
So as we move through the first half of the year, we anticipate production to accelerate.
We have a higher head count and we're gaining on that.
We believe that our supply chain issues are are being resolved.
There's still unpredictably, but we believe that we've got a pretty good outlook on now so with the rising production rates and the price increases we implemented including we have another one coming up on January one it's already been announced but it is effective January one we.
We didn't anticipate the gross margins to expand on the improvement that we expect in the fourth quarter.
Long term, we've never been more optimistic with all the initiatives, we've taken with our product portfolio and strengthening of our sales channel repositioning the company from being a niche player to a mainstream player. So.
We're very confident in what we're doing.
Had some some struggles that.
They.
Pretty much the whole industry dealt with in third quarter may.
May be burdened us a little bit more than we thought but it will look back.
To 2019.
And see what our performance was then you'll notice that 2021 Q3 is 22% better than 19.
Now.
It wasn't a whole lot better than than 20.
But it was 22% better than 19, I think if you look at the industry as a whole you'll find that the majority of the industry. If you compare Q3 21 to Q3 19, you'll find something closer to 11 or 12% difference maybe 14.
Won't find 22.
So with that I'm going to open the call up to questions.
Alright at this time.
Question, you wanted to press Star one on your telephone.
Again to ask a question.
Which is pressed the star one.
First question from the line.
Julio Romero.
Line is open.
Hey, good afternoon, Gary and Rebecca.
Good afternoon Hulio.
So just to start on the labor front.
At at Tulsa last quarter, I think you mentioned you were down 30 to 40 employees year over year.
Where do you stand today in terms of year on year had counted Tulsa.
Exactly flat in Tulsa, So we've gained those 30 or 40, and we're plus 12% in Longview.
Okay, great great.
And.
On the price increases I think year to date you had January June and September 1st did you have another increase post September 1st take effect.
No.
You are correct. They were January 11th June 1st September one taking effect, we announced one.
In late September that takes effect January one of 22.
Got it understood.
And.
I guess.
It looks like your lead times extended somewhat but on a relative basis.
It looks like the Delta between yearly times and your competitors has widened since last quarter is that a fair characterization.
Absolutely fair so a couple of things to bear in mind, if you'd looked at the the production rate and you looked at the absolute backlog right now our lead times would reflect a little longer than what we're actually doing the reason for that is is some of the projects can't received the equipment in accordance with our lead time, we're quicker than the project.
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There's a lot of trouble out there in the world right now getting projects to a point, where they can accept the units. So we do our best to accommodate that so it spreads our backlog out a little more than you just can't take the backlog divided by the production number and come up with the actual lead time.
But we are running 10 weeks on a lot of units 12 weeks on some more units I'd say, probably 12 weeks categorizes the majority of our.
Production for rooftop units were probably closer to 10, maybe eight to 10 weeks on our Longview products.
This compares to some of our competitors.
All of them are.
Well into the twenties and thirties, and we've even heard 50 weeks from some.
Got it that's that's a good color there and I guess just lost one for me here is.
The orders have continued to be strong and.
That's kind of in line with last quarter's commentary that you're expected orders to trend steady and.
Sounds like the outlook isn't really.
Unchanged, so I guess.
How long do you think you can't you continue this trend of.
Really robust orders.
Well, we had this sales meeting as I spoke to you about earlier here or spoke to the group earlier.
We had 500 sales channel partners attend that meeting.
And the consensus amongst them was it's never been better.
The pipeline is absolutely robust. The fact that we have products that are now attractive for the cold climate that are.
Decarbonized, 100% electric that.
That is a motivating factor this new water source heat pump that addresses the replacement market was a motivating factor.
The support that we've given them the marketing tools that we give them are all motivating factors and they said, they're pipelines very robust and they expect high.
A high percentage of closure rate on that pipeline so given that.
We're forecasting things to stay really strong so our total bookings.
Year over year are up about 66%.
Great I'll pass it on and thanks for taking the questions.
Once again, please press, Taiwan take you up for a question.
Next question from the line of Brent Tilman Your line is open.
Hello, Brad Hey, Thank you Hey.
Good afternoon.
Gary I guess, just following up on that.
Given.
Trying to think about this in the sense that given the senator shorter term challenges that you're dealing with and everybody else's dealing with.
I guess when does this cause you to pull the reins in at all at least temporarily in terms of borders or is it just the fact that the lead time in the industry are so far out you can still capture market sharing continue to take orders of H U R.
Just love some more color there.
I don't have any tendency to pull back on the reins I have a tendency to figure out how to use in the horse analogy, which you know I am a horseman.
I have attempted to lay the spurs to the production facility and get it to catch up.
We've made a lot of strides in that regard the one critical thing was back in 18.
And starting into 19, when we had these similar issues, where we had a large backlog we had production that was not meeting.
Expectations It was generated by.
Infrastructure issues, we didn't have enough salvini machines, we didn't have a lot of organizational things. We spent a lot of time correcting that you saw that in Q4 of 19, where we rebounded we came all the way through 20 very nicely. So our infrastructure still has surplus capacity.
<unk> beyond what our backlog is with ideal lead times.
So we have the manufacturing capacity, we've had a change in recruiting practices. We've had a change in leadership of the HR Department with some fresh new ideas and we're making headway with that I mean, when you say well we were down 30 or 40 people.
And now we're just up flush with a year ago, we got those 30 or 40 Bucks I promise you I have friends in other manufacturing industries that would love to be flush with how many people they had a year ago or two years ago. So, we're making headway with that and we believe that we will have adequate head.
Our concerns for.
Impacted Q3.
And will impact queue for just slightly where supply chain and they were last minute.
Notifications of supply chain issues.
But.
Given a effort of the purchasing department, coupled with the engineering department to qualify some additional vendors those were resolved. So it's a matter of those new vendors that that we obtained spooling up now they have all sample materials in here to be tested that was part of the qualifications. So that's all completed now.
So we have small shipments coming but accelerating so throughout Q4 will accelerate that supply.
Of things that were interrupted and will be fully recovered on that by the end of the year. So that's why we're saying first off Q4 has a few last production days due to all the holidays. Then does Q3 and then October was somewhat impacted by.
Supply chain.
Little interruption.
And so.
Q4.
Is probably going to look pretty close to Q3 on revenue plus or minus.
A little bit.
But the the margin will be better because the backlog.
Had better priced.
Equipment in it.
So going into Q1 I'm very very.
Happy with what's going on and we're thinking that the Q1 will be back in our target range plus on margins and we'll be back to increase increasing revenue.
And so we're we're pretty bullish on it.
That was my next question you caught that one thanks, Gary I guess.
Yeah, just just so I understand it I mean, I think you've talked about steel in wine component of most what are some of the big ticket items.
Challenging from a supply chain standpoint.
Copper tubing.
One that bit that's the one that business. So we manufacture our own are coils.
And we manufacture those in Longview and we have.
Copper supplier.
Stubbed their toe.
And we used a different copper supplier for our Tulsa facility and when we presented them the opportunity to also supply are long view facility. They stepped up and said, yes and.
So.
Then we found a couple of additional suppliers beyond them. So that we had backup to the backup if you will.
So there was a backup plan there it's just that.
We would have appreciated a little notice that they were going to have trouble deliver it not the day, it's supposed to be here. So it is not coming.
Okay, what about <unk>.
Talking on Frank.
I'm not hearing anything that's problematic.
I think they would let me know if it was.
We have the vast majority of what we ship we ship on.
We contract for the freight and we added to the invoice.
For the.
The product we ship.
We ship nearly everything truckload.
Please small percentage.
Less than truckload <unk>.
Normally it's a mixed.
It is not a dedicated truck it will all be units, but it might be two or three locations that it's going to so that company. We've had a 20 plus year relationship with and they have performed marvelously for us.
Same thing, we send them to pick up a lot of our materials.
So we use.
Actually it's two trucking companies, but one is more predominant than the other one.
We have controlled very well long relationship I don't know how they're treating their other customers. They are a very very high character high integrity company. So I bet, they're treating us all the same but they've told US we have to pay a lot more for truck drivers now than we did so this really goes back to early 2020.
They add the raise their rates to truck drivers.
I want to be quoted for sure on it but I think it was in the relative order of 25% that they had to increase their rates.
That they were paying their drivers and of course that passed on to us and we were able to pass it on but we're not having any issues that have been made aware of.
Yeah, Okay, maybe that the last one I mean, I know you've got the new introduction from the water stores keep on side, which is pretty exciting any I mean, any qualitative or if you want to quantitative start some targets for 22 for the beds Nancy.
How do you think.
Yeah.
It's too early to talk about.
That's going to do now that we have it out there I'd really like.
A quarter.
To see how that soaks in this is a real good time right now to have them I mean, it was key that we had this thing ready to go.
Here right away and so.
Will probably be better prepared to talk about how those orders are coming in.
So I know that our backlog is up 30% year over year.
On water source heat pump so.
Some things already trending in the right direction and I don't know that there was that many days that we made that product available that.
That could impact it but.
I'd really like to hold off on forecasted not because I don't want to Miss the Mark and right now the targets too blurry.
Understood. Thanks for taking my questions I appreciate it.
Thank you again once again, please press star one to queue up for question.
Again to ask a question you will need to press Darwin.
I see there are no further questions at this time please continue.
Alright, well I want to thank all of you for.
Joining us on the call will talk to you again in February with our fourth quarter results have a great day bye bye.
That concludes today's conference. Thank you everyone for participating even though all disconnect.
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