Q1 2022 Aaon Inc Earnings Call
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I would like to turn this event over to your host Mr. Joseph Modelo.
<unk> of Investor Relations Mr. Modelo. Please go ahead.
Thank you operator, good afternoon, and thank you for joining us for <unk> first quarter 2022 earnings Conference call a press release announcing our first quarter 2022 financial results was issued after market close today and can be found on our corporate website at <unk> Dot com a recording of this call will also be.
Posted on our website following the call joining me on the call today are Gary fields, our president and CEO and Rebecca Thompson, our CFO shortly I'll be handing the call off to Rebecca for her to go through the first quarter results. Gary will then provide further insight on the quarter along with our current outlook and then we'll open up the call.
The Q&A prior to that though we begin with our customary forward looking statement policy during the call any statements presented dealing with information that is not historical is considered forward looking and made pursuant to the safe Harbor provisions of the Securities Litigation Reform Act of 1095, the Securities Act of $19 33.
And the Securities Exchange Act of 1930 for each of the amended <unk>.
Much of this is subject to the occurrence of many events outside of Aam's control that could cause results.
Our results to differ materially from those anticipated you are all aware of the inherent difficulties risks and uncertainties in making predictive statements our press release and Form 10-Q.
We filed this afternoon detail some of the important risk factors that may cause our actual results to differ from those in our predictions. Please note that we do not have the duty to update our forward looking statements.
That I will turn it the call over to Rebecca.
Thank you Joe.
I'd like to begin by discussing the comparative results of the three months ended March 31, 2022 versus March 31 2021.
Net sales increased 57, 8% to $182 8 million from $115 8 million organic volume growth contributed approximately 21, 3% to net sales and the acquisition of basic solutions contributed 18, 1% with the remainder coming mainly from pricing.
Creases.
A record backlog at the beginning of the quarter, along with improved production rates drove the robust volume growth.
Record production rates in the first quarter reflect an easing of supply chain issues greater production capacity and strong performance from our operational team.
Our gross profit increased 38, 9% to $46 1 million from $33 2 million as a percentage of sales gross profit was 25, 2% compared to 28, 6% in the first quarter of 2021.
Gross margin benefited from a $1 8 million noncash income related to the extending the useful lives of some of our equipment. Excluding this item gross margin was 24, 2%.
Compared to the first quarter of 2021 gross margin was impacted by higher material costs, along with multiple wage increases and supply chain issues that continue to adversely affect operational efficiencies.
On a sequential basis gross margin improved substantially from the fourth quarter of 2021.
We are still not where we want to be but the first quarter was in line with our internal expectations and we are on track to achieving target margin target margins later this year.
Selling general and administrative expenses increased 56, 9% to $23 1 million from $14 7 million in 2021.
As a percentage of sales SG&A decreased 12, 6% from 12, 7% in the first quarter of 2021.
<unk> basics SG&A expenses totaled nine 7% of sales down 300 basis points from a year ago. Overall, we are doing a good job at managing our operating expenses, particularly in the inflationary environment. We are in.
Income from operations increased 24, 6% to 23 million or 12, 6% of sales from $18 5 million or 15, 9% of sales in 2021.
Our effective tax rate increased to 29% from 11, 4%.
The effective tax rate in Q1 of 2021 was unusually low due to excess tax benefits related to stock awards of $2 9 million versus <unk> $5 million in the current quarter.
The company's estimated annual 2022 effective tax rate, excluding discrete events is expected to be approximately 24, 9%.
Net income increased to $18 1 million or nine 9% of sales compared to $16 4 million or 14, 1% of sales in the first quarter of 2021.
Diluted earnings per share increased by 10% to <unk> 33 per share from <unk> 30 per share.
Looking at the balance sheet, you'll see that we had a working capital balance of $169 5 million versus $131 3 million at December 31, 2021.
Unrestricted cash totaled $5 6 million at March 31, 2022, our current ratio is approximately $2 $5 one.
Our capital expenditures were $14 million for the quarter. We expect we continue to expect capital expenditures for the year to be approximately $100 4 million.
The company had stock repurchases of $3 3 million during the three months ended March 31 2022.
Shareholders' equity per diluted share is $8 90 at March 31, 2022, compared to $8 68 at December 31 2021.
I would now like to turn the call over to our CEO and President Gary fields.
Afternoon.
Well first off I'd like to state that I'm very happy with the first quarter's performance in general the overall results were in line with our internal expectations.
With the organic sales excluding price increases in basic sales were up over 20%.
Definitely reflected the strong backlog, we entered the year with its also reflecting how well we're performing.
It very much like to commend our operations team as our production rates were the highest level of any quarter in the history of the company supply chain issues are these some but it's definitely still an issue. We're also ramping up our head count which comes with challenges all considered record production levels certainly reflect how well this team.
Is performing.
Margins were down year over year, but they were in line with our internal expectations and what we indicated on our fourth quarter call.
Sequentially, we saw considerable improvement.
Still not where we need to be but we're on track to returning to target margins later this year.
Considering what we're seeing with material cost. This is a very positive aspect.
To give you a sense our material and freight cost excluding the effect of organic volumes being up were up approximately 50%.
In other words, if our volumes were flat from a year ago, our material and freight costs would have been up 50%.
All things considered I was happy to see the sequential improvement in gross margins. We're also doing a good job at managing our SG&A expenses as Rebecca just walked you through.
Now the backlog March 31 was $461 4 million Thats up from $260 million at the end of December and $96 7 million at the end of first quarter 'twenty, one organically the backlog was up 305% from a year ago.
Orders in the quarter were up year over year of 150% organically, which represented an acceleration from the 67% growth we recognized in the fourth quarter and 55% growth. We saw in the year of 2020 was in fact, the year over year comp in this past quarter was the toughest we've seen in two years and we still recognize.
This significant acceleration in growth.
Growth is certainly much greater than what the market is growing so we're definitely taking market share.
Let me tell you what's enabling that.
Key driver is lead time.
Our lead times are by far the best in the industry.
Another testament to how well our operations are performing.
All the work we've done over the last 18 months with inventory management productivity improvements and increasing our manufacturing capacity, including both plant and equipment and labor is paying off.
Lead times are big factor to the share of the gains we are seeing.
It's also a handful of other factors that are playing a role.
Our sales channel is performing at a very high level the quality of our sales channel partners has never been better.
The alliance between Us and them is as strong as it's ever been and we're supporting them with more products and services than ever before so we've never been this well aligned with our sales channel in the history of the company is the best it's ever been.
But we still have a little bit of work to do there. We're working on that every day to improve that sales channel. The heavy lifting is behind this but we've got just a little tweaking to do here and there.
New products are a bit of a factor last two calls we talked about our water source heat pumps to low ambient air source heat pumps, both have been very well received by the market. So far as you may recall, we redesigned.
Introduced as a second line of water source heat pumps that we call pro fit and those heat pumps were to be backwardly compatible with the large installed base out there for replacement has been very well received moving along nicely with that the dike.
Decarbonization efforts have really picked up the interest in our cold climate capable air source heat pumps. So the macro environment is trending very positively for us.
The replacement demand is continues to be very strong.
Pent up demand from 2020 downturn and a focus on indoor air quality continue to be factors were also starting to see stimulus dollars drive accelerated demand would be in the educational vertical.
New construction demand is accelerating after a slow 'twenty one.
<unk> has been above 50, the benchmark for growth for 14 straight months, including the latest reading of 58, which is the highest since may of last year and according to American Institute of architects projects backlog at architecture firms are also at an all time high so new new construction demand is improving that's where our lead.
Times are helping us as well some of these are fast track projects.
Overall demand for all the verticals continue to be fairly broad based and consistent to what we've talked about in the recent past.
Another factor.
Diving growth, although not within our backlog is our parts business.
Sales in first quarter were up 36, 1% to the highest level of any first quarter in company history.
First quarter is usually a soft quarter for parts.
And it begins to accelerate towards the end of the quarter, but were in line with the quarterly average we saw in the last three quarters of 'twenty. One so we're really off to a great start with our parts business.
Lastly, I want to talk about our acquisition of basics. We're now almost six months since closing on the acquisition and we are very pleased with how things have progressed, thus far their backlog and order trends are strong revenue synergies seem to be progressing quicker than we even thought and like us they are being challenged a bit with supply chain issues and inflation, but overall.
They are managing well.
We're optimistic heading into the second quarter, our backlog is strong or capacity and production rates are rising price cost is improving supply chain issues are easing.
In general using first quarter as a benchmark, we foresee sales margins and earnings will improve throughout the year with the bulk of the improvement occurring in the back half.
I'd like to open it up to questions and answers.
Thank you the floor is now open for questions and answers if you would like to ask a question.
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We have our first question.
Caller Julio tornado.
Good afternoon Julio.
Hey, good afternoon, Gary and Rebecca.
So I guess to start the organic order growth is staggering.
Just talk about what the drivers of that order growth or and.
What particular product lines are seeing the surge.
Well, it's absolutely broad based.
<unk> product family wise, so having the production facility that we built in long view.
<unk>.
We just had an immense amount of production capability. There that we are beginning to realize now.
<unk>.
The final month of the quarter, we ran.
About $8 million in finished product out that quarter.
Month, and that's got to be $2 million to $3 million higher than we'd ever run in previous years. So having that production capability I have always said that the long view product was more sensitive to lead time than the Tulsa product.
And we've been able to pull that lead time down very attractive and that's proven true were getting some very very large orders.
For modular data centers. These are they look a little bit like a shipping container that we build for.
Aon split systems in Longview for and we used to get those orders in tranches of about 60 units at a time now we're getting orders for a couple of hundred units at a time, so being able to deliver and be reliable with that that's a big deal in Tulsa.
<unk>.
<unk> been building out our infrastructure here for the last few years, we finally got enough materials and we got head count.
I'll just give you an idea on the head count Julio.
Our head count in the legacy business is up 17% year over year at 457 people that we've added in the legacy business year over year.
So those people were by and large on the plant floor and so that's what's helping us with the hit with the lead times now de Carbonization and indoor Air quality are also big drivers.
So we have another question from Jean.
<unk> D a davidson.
Good afternoon, Jamie.
Hey, Gary It's Brent Thielman Davidson brand, Okay. There we go.
Our year to date, Brian showed up there but.
Yes.
Thanks for taking the questions.
Can you just talk about I guess.
I caught the end of your commentary that you expect to see this.
Book of business really ramp up in the second half of the year I guess I'm trying to get my I just haven't seen this level book of business before how do we get our head wrapped around.
Converting this backlog over the course of the rest of the year.
Well I think the.
Our percentage growth, we saw Q4 to Q1, that's not sustainable at that same acceleration right.
Were severely constrained in fourth quarter, because we didn't have materials, that's what disrupted our revenue.
I think I've stated before our revenue would have been up.
Early substantially in Q4, if we could have gotten materials, but October and November were just a wreck with that about mid December it started thorn out pretty nice we started getting a flow of those materials and really.
Each month, we've built considerable I think that the.
Pace that we're running is going to pick up another it'll be a double digit small double digit pace that will pick up.
For Q2.
In revenue production.
Obviously, we got the backlog to support that like you said, we need to burn that backlog down.
Orders are still pretty pretty strong.
It's amazing actually.
And where we've been able to manage our lead times on Mrs.
In this pandemic Arab people have gotten accustomed to ordering things much further out than than what they normally would their normal pace was they said well your lead times 12 weeks. So I'll put a couple of weeks pad on it in our order at 14 weeks ahead, while we've got projects that are people are ordering they don't want until Q4 and they're priced.
Attractive enough to be able to do that so we're placing orders to the best of our ability where people want them.
And that's allowed us to keep our lead times in check and we've actually been able to take advantage of some quick ship kind of.
It needs.
So that's how.
Hopefully that answers it if I need to add something else.
<unk> cleared up for me.
No that's great Gary.
From that commentary that you are.
I mean, youre comfortable with this backlog level given all of that.
All the things you put in place here in the last few years to support it I mean, it seems it seems to me youre comfortable here and don't see a need to necessarily draw down.
I would like to draw it down just because I like to see the revenue you know, but I don't want to draw it down from the from the fact that I'm not getting orders in the door.
If you go back two or three quarters ago. One of you guys asked me when I was going to rain in the orders and I said well. That's a great question you all know I am a horseman. So I'll use a horseman term heck no I'm not going to rain in the orders I'm going to lay the spurs to production, while that's what we did and gently though and.
Production has taken this very well the preparations have been here for a good while to do this Brent it's the materials that were giving us the biggest issue and now with the new leader.
And our HR efforts Casey Kid, well, just doing a phenomenal job getting people in the door for us in getting our retention rates improved so much our turnover rates are way way down since some of the things that he's brought in here.
And that's material because if you can get people to stay here 90 days to six months then they tend to stay here for a very very long time.
We were having tremendous difficulty priority I'm getting people to stay the first month, let alone 90 days.
So this turnover rates gone down while now those people become more efficient and we measure this by the number of people on the plant floor and how much they produce on a daily basis, and we've got that metric in mind, we look at it every day.
So with.
That's one of our efficiency measures that our production team uses and they've been able to add people and keep that number relatively linear.
When we add people, we get that much more dollars per day on a fairly linear basis.
So.
We were going over this earlier today.
Our target hiring is to hire another probably 250 people in the two locations throughout this later spring and early summer.
We look for that to.
Increase the production on a linear basis daily because those 250 people are all going on the plant floor, we're not looking to add any overhead.
Personnel at all.
Okay really helpful. Gary.
And then just getting back to that 28% to 32% margin sort of by the end of the year, yes. The overriding factor is the overriding factor there.
You've got these price increases out there that you should realize over the course of the next few quarters that catches up to the costs you're experiencing a bedroom, maybe just kind of help me understand residents.
Residents and getting back to that level, especially with so much going on out there right now, yes, we've debated that considerably and our.
Historic algorithm for inputs and outputs.
Been challenged with things that are outside the box abnormal with with.
The way cost a bit but to the best of our ability to forecast and things have begun to stabilize.
They are elevated they are stabilized in that that makes it more predictable. So now that they have begun to stabilize at least.
In our viewpoint. They have then we feel fairly confident in our forecasting and what we're doing we're going to have sequential margin percentage improvement each quarter throughout this year and that's primarily because we've got a handle on our cost.
We know where we're going with that.
A fairly high degree of confidence and then we've got this backlog that we know what price level. It is and how much of that is on the plant floor at exactly which day. So we've gone through that algorithm. We're very confident that we're going to be improving we're not going to get to that target level next quarter, but we're going to get closer to it I think that the.
Second half of the year, we're going to be right in the center of that range.
I feel good about.
Somewhere around 29%, 30% for the last part of the last half of the year.
And bear in mind.
We're doing everything we can to increase the production rate to I.
I don't want to get too excited about that because.
There are still some challenges out there that we deal with on a day to day basis, but barring anything different than what's occurred in the last several months, we've learned how to navigate a lot of potholes and this team has just done a phenomenal job of doing that and getting.
Units out the door.
Yes.
I'm confident we're on our growth.
Top line growth bottom line.
A good solid number throughout the year.
Yes.
I appreciate that last one I guess just on the SG&A.
Yes, especially the sales dollars pick up here do you expect to see a little better leverage over that as we did.
Advanced through the years as 12, five odd percent good ballpark.
I think we will get some leverage on that.
Haven't got an exact figure that we believe it's going to improve but rob.
Rebecca and I had a discussion about that earlier and she's done some preliminary work on that and we believe that we're going to begin to get some lever on it because we're holding.
Hard and fast on as much of the overhead aspects of the company as we can like I said, we're going to be adding production workers not overhead workers and when we add production workers and that that's where that leverage occurs.
Okay, well I'll pass it onto someone else. Thanks, so much for taking the question.
<unk>.
So we have color on that.
No.
Yeah.
Julio we lost you a while ago.
Nevertheless, I never left I don't know I must've gotten dropped from the queue somehow.
Thank you all for me for Gene I guess.
So.
Just a follow up here I know you've you've worked.
Qualify more vendors and improve supply chain or are there any other levers you can pull to maybe further.
Improve supply chain have you've obviously got a good balance sheet.
Just thinking about how you can derisk it in the future.
I'll let.
I was wondering how we were going to fit this in here Julio you just gave me the perfect entre.
So for the history of the company 30 years, there is a fan manufactured.
Down the road here about 50 or 60 miles that we had purchased fan wheels from.
They're a great company.
But when we bought basics one of the things that basically did was manufacture their own fan wheels.
And so we were looking at the process and how it's not all that complex, it's very much within our wheelhouse of abilities and so a bit over a year ago, even before we closed on basics I went to Acme instead I'd like to purchase from you all of the tooling.
The design.
Documentation to work documentation.
The rights to build these fans I said, you don't build them for anyone else you build of moly for US there was maybe two or three part numbers that they use themselves.
The bulk of it they were built strictly for us.
So I would like to buy that from you would you price that.
And they did eventually.
And we closed that transaction last week.
And so we will be transitioning moving.
All the production equipment in here to our plant and I think the anticipation is that somewhere late Q3 early Q4, we will be building our fan wheels well.
Over the last few years, we've been purchasing nearly 40000 fan wheels, a year, 35% to 40000 from them and of course, you see we're growing and so this is just one more place that we have we can control the destiny of.
Of the delivery the quality.
And so forth of that product plus gain the margin you know this is not an expensive product. So we're not talking anything thats going to be material to the bottom line. It will it'll help it a little bit but the main thing was is the vulnerability of someone else supplying.
While they're a great company and we had no reason to doubt that it was just something that was in our wheelhouse of abilities to add that to the vertical a thought process of we manufacture units, we don't assemble units.
It's exciting and just one more for me there was a comment in the press release.
Basics and.
You've learned that revenue synergies are better than initially estimated can you expand on that at all.
Well the part that I see is some of these clients that.
They had were kind of constraining how much they would.
Grant them in an order how much they wanted to risk with them because it was a huge percentage of their annual production for instance.
And now that they're part of a larger foundation, then theyre looking at that.
That purchase.
From basics as a percentage of the whole enterprise not as a percentage of basics. So they have already attained.
Orders for much higher dollar volume per order than anything that they'd ever experienced in the history of the company.
In fact as their backlog is up.
Nearly the same percentage as our legacy company it's up.
Let's see here.
Almost 300% year over year.
And by the way their head count is up.
75% year over year, so they've been able to get people there too.
<unk>.
But.
That was one aspect the other aspect was that there were people in <unk> legacy sales channel that had entrees to some of the customer base that is traditionally base.
Basic customer base, and we've been able to leverage those relationships and collaborate and land some work that was.
Both the legacy company provided.
Provided equipment on it and the new company basics provided so.
That's that's where we've leveraged some of that then.
Purchasing.
The legacy company.
<unk> a tremendous amount of steel for instance, and we were looking at their steel purchasing and they were not.
Able to use that purchasing power that we had until we.
We got a hold of them and we've been able to improve their cost basis on steel is just one thing and I'm sure. There's others that are less significant to me are not quite as visible.
But that's that's where I was going with that and that statement is that cleared up.
It does.
Thanks, very much for taking the questions.
Certainly.
At this point, we do not have any other questions from participants.
Alright.
Okay. Thank you.
Yes, Joe go ahead and close it out for us please.
I'm, sorry, I would like to thank everyone for joining today's call. If anyone has any further questions in the coming days and weeks please reach out to myself.
Thanks, and we look forward to speaking with everyone next time.
Thank you. This concludes today's event you may now disconnect and have a great day.
Okay.