Q2 2023 AAON Inc Earnings Call
Welcome to the NN, Inc. Second quarter 2023 earnings conference call.
Our hosts for today's call is Joe Mondello director of Investor Relations.
At this time, all participants will be in a listen only mode.
Later, we will conduct a question and answer session.
I would now like to turn the call over to your host Mr. Mondello, you may begin sir.
Thank you operator, and good afternoon, everyone press release announcing our second quarter financial results was issued after market close today and can be found on our corporate website, a H O N dot com.
Today is accompanied with a presentation that you can also find on our website as well as on the listen only webcast. Please go to slide two 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 <unk>.
Harbor provisions of the Securities Litigation Reform Act of 1995, the Securities Act of 1933, and the Securities and Exchange Act of 1934, each as amended.
Such it is subject to the occurrence of many events outside of bands control that could cause results to differ materially from those anticipated you. All are aware of the inherent difficulties risks and uncertainties in making predictive statements.
Our press release and Form 10-Q that we filed this afternoon details some of the important risk factors that may cause our actual results to differ from those in our predictions.
Note that we do not have the duty to update our forward looking statements. Joining me on today's call is Gary fields, President and CEO , and Rebecca Thompson CFO and treasurer.
Also joining to provide some insight during the Q&A is mapped to bulky president of basics.
I'll begin with Gary providing some opening remarks, Rebecca will then walk you through the quarterly results and then we'll finish with Gary for some commentary on the quarter and outlook before.
Moving to Q&A with that I'll turn over the call to Gary.
Good afternoon.
Start on slide three.
Overall, we're very pleased with our second quarter results, we reported record sales for a sixth straight quarter.
Organic volume was up year over year, 16%.
That was against a quarter a year ago, where organic volume was also up double digits.
Our operations team is doing a great job managing the robust demand by increasing production capacity quickly.
In fact production finally began to outpace bookings this quarter, allowing our backlog and lead times to fall, which we were happy to see.
Led by even greater increases in production output. We are on track for lead times to fall even further in the second half of the year.
This all reflects the investments we have made in production capacity, including workforce equipment and warehousing.
The market environment remains busy and we're optimistic bookings in the second half will remain solid as such we continue to invest in future growth.
In the second quarter, we held the Grand opening of our new marketing building also known as the exploration Center.
Our products are best in class in our industry, providing premium performance at the most attractive value proposition.
This new building located at our headquarters in Tulsa.
<unk> market alternative side by side with our products showcasing the superiority of our equipment.
An extremely valuable tool for our sales channel partners. We expect great returns on this investment as we are confident it will help gain new customers and drive bookings amongst existing customers.
Additionally, later this year.
We will be rolling out a new branding of our <unk>.
Highest performing package solutions ever the industry's most versatile line of commercial fully electric air source heat pumps.
We will call it the alpha class.
In the animal Kingdom Alpha stands for having the highest rank in the dominance hierarchy.
This is what this new equipment is dominant.
Operating down to zero degrees Fahrenheit, there is no other commercial air source heat pump like it on the market.
And the Alpha class retains the superior quality of manufacturing, but the Avon brand exemplifies.
This new equipment will revolutionize the industry paving the way for a cleaner environment, while maintaining the comfort of a premium performance.
I'll hand over the call to Rebecca Thompson to go over the financial results.
Thank you Gary.
Please turn to slide four.
Net sales increased 36% to $284 million from $208 8 million.
Volume grew 16%, reflecting the company's strong backlog at the start of the quarter as well as the sixth straight quarter of record production, which reflects the company's success of attracting and retaining employees along with further investments in production machinery.
In addition to volume pricing contributed 20% to our growth.
Moving to slide five.
Gross profit increased 98, 5% and 94 million from $47 4 million.
As a percentage of sales gross profit was 33, 1% compared to 22, 7% in the second quarter of 2022.
Realization of price increases has improved our margin profile along with the slowing of inflation, we've experienced year over year increases in the cost of materials and have implemented periodic wage increases in addition to our annual merit increases.
Order to retain employees.
The multiple price increases during 2022 and 2023 counteract these increased cost of materials and labor.
Please turn to slide six.
Selling general and administrative expenses increased 45, 8% to $39 3 million from $26 9 million in the second quarter of 2022.
As a percentage of sales SG&A increased to 13, 8% from 12, 9% in the second quarter of 2022 the.
The increase relative to sales is primarily attributable to an increase in profit sharing expenses, which as a result of the record earnings to be realized.
Please turn to slide seven.
Income from operations increased 167, 6% to $54 7 million from $20 5 million in the year ago quarter as a percent of sales operating margin expanded to 19, 3% from nine 8% in the second quarter of 2022.
Moving to slide eight diluted earnings per share increased 173, 3% to 82 cents per share from 30 cents per share in the quarter, we benefited from a onetime tax benefit of $3 1 million.
Excluding discrete events, we continue to anticipate a tax rate at 24, 1% through the rest of the year.
Turning to slide nine our balance sheet remains strong.
Cash cash equivalents and restricted cash totaled $27 7 million on June 32023, and debt at the end of the quarter totaled $78 5 million.
Within the quarter, we paid down $5 1 million on our line of credit.
Leverage ratio of three seven was down from four seven at the end of the first quarter and down 0.46 at the end of 2022.
We had a working capital balance at <unk>.
$270 5 million at June 32023 versus $203 5 million at December 31, 2022, our working capital has increased due to the receipt of restricted cash from the closing of our new markets tax credit and increase in higher priced receivable.
Along with improved earnings cash from operations will improve significantly through the rest of the year, helping pay down debt and finance capex projects.
Capital expenditures for the first six months of the year were $60 6 million up 122, 7% from a year ago.
We continue to expect capital expenditures for the year to be approximately 135 million, which equates to more than 150% year over year growth.
We monitor our growth trajectory and capacity utilization regularly and we will continue to invest in long term growth.
With that I'll now turn the call back over to Gary.
If you'll turn to slide 10, as I said in my opening remarks, we're very pleased with the second quarter.
Our operations continued to deal with manufacturing challenges and yet production output continued to grow on a quarter to quarter basis, marking the sixth straight quarter of sequential volume growth.
Organic volume was up 16% and on a two year stack. It was up 27, 6%.
We've made great strides in increasing our production capacity to allow for this growth.
Total head count was up 26, 1% from a year ago and up 18, 2% from the end of 2022.
We continue to do a great job of Onboarding new employees.
We're also investing in new equipment warehouse space that has also contributed to the increased production.
Apply chain issues have begun to improve which has helped improve output.
Lead times amongst the supply chain remain lofty, but finding the supply of materials has become less of a challenge.
Lastly, volume growth was also a reflection of our premier sales channel I will reiterate our sales channel has never been as strong as it is right now.
And we're now giving them more tools to help them be more successful than they've ever been.
Please turn to slide 11.
We were pleased to see gross margin expand in the second quarter as we indicated on the first quarter call.
As we stated on the first quarter conference call. After April 1st we lifted the regular monthly price increase that we had in effect going back to last June .
We now believe the price premium of our equipment relative to the competition is in the high single digits down from 15% to 20% that we were at historically.
This is making the value proposition of our equipment, even more compelling helping drive further share gains.
At the same time, we were able to expand profit margins. Thus, we are executing our pricing strategy very well.
We'll continue to monitor this closely particularly as we approach the end of the year.
It is likely that we will continue to see cost pressures next year, we maintain that we will continue to be disciplined with pricing.
For the second half of the year, we anticipate gross margin will continue to expand but at a slower pace than what you saw in the first half.
Now, let's move to slide 12.
Yeah.
As I stated earlier production has finally begun to outpace bookings, which were happy to see.
This has led to lower lead times, which will help us maintain competitiveness that said lead times are still higher than where we'd like to see them. So there's more work to be done.
We are making progress, though and we expect even more progress in the second half of the year overall demand remained solid bookings.
Bookings slowed in the second quarter versus the first quarter, but we do not believe this is an indication of a slowdown.
Bookings at the end of last year and in the first quarter of this year were unusually strong supply chain issues across the construction markets seemed to have led to a pull forward by a few months that resulted in the pattern that you've seen this year.
When we speak with our sales Rep partners demand and the pipeline remains strong.
In fact backlogs at most of our channel partners are at record levels and the sentiment is very positive.
Now, let's turn to 13.
The macro data is also still solid constructions.
Construction spending is now well beyond pre pandemic levels and construction starts are at strong levels, the Abi and the Dodge momentum index, which track the pipeline of nonresidential projects early in the planning stages also still imply the pipeline is still at historically high levels.
Demand continues to be fairly broad based for us datacenter markets are very strong.
The K 12 education vertical solid health care and manufacturing are all still also still very good.
We continue to see robust demand in the grow facility market, while new construction of warehouses has slowed the end market remains good for us due to retrofit work.
We're also starting to see good demand from the electric vehicle and EV battery markets. There's some pockets of softness for example, the office sector in parts of retail, but overall market demand remains solid.
Turning to page.
Slide number 14.
Although the lead times have begun to fall they remain higher than normal the investments. We've made in additional personnel new equipment and warehouse space have allowed us to maintain industry best lead times, even while lead times across the industry have fallen.
We will continue to invest in capacity to help us remain competitive capex.
Capex is expected to be up 150% this year of which the vast majority is related to increasing production capacity.
Considering that I'm optimistic that lead times and backlog will continue to decline throughout the year.
Now, let's move to slide 15.
Parts sales grew 14, 2% in the quarter and were up 24, 4% in the first half of the year.
The business.
Increased slightly to five 7% of total sales and that was in a quarter that we realized robust growth of equipment sales.
We remain optimistic through the rest of the year as the supply chain issues continue to wane this business should benefit.
Long term, we continue to anticipate this business will become a larger part of the company both on a sales and profitability basis.
Now, let's turn to 16.
Yeah.
So before finishing up handing off the call for Q&A I want to provide some information on our outlook for the rest of the year.
Based on the size and improved margin profile of the backlog and the increased production capacity and improving productivity that we anticipate we continue to expect sales and earnings will improve sequentially in Q3.
We now anticipate pricing will be a mid double digit contributor to sales growth for the year up from low double digits for SG&A as we have stated on prior calls we are making several investments that will help position the company better for long term growth.
We continue to think SG&A as a percent of sales will be higher than what we realized in 'twenty two.
Finally, capex will be approximately $135 million.
In closing I want to finish by thanking all of our employees sales channel partners and customers. Thank you I will now open up for Q&A.
Yeah.
If you would like to ask a question. Please press star one on your telephone keypad now.
You'll be placed into the queue in the order received.
Please be prepared to ask your question when prompted.
Once again, if you have a question. Please press star one on your phone now.
And our first question comes from Julio Romero from Sidoti and co.
Your line is open.
Great. Thanks, Hey, good afternoon.
Good afternoon.
Gary you talked about a potential.
Potential pull forward at the end of last year and first quarter of this year.
Were there any particular verticals that experience those pull forward or was it more in your opinion that kind of a broad based pull forward across the board.
Well, one significant with a K through 12.
Normally K through 12 bookings, we don't see them strengthen until deep into Q1.
Like towards the end of Q1.
Now we started seeing them in Q4 a.
Very very strong in December and then it stayed very strong right through Q1, so as I spoke with sales channel partners and I was looking at jobs on the bookings list and saw lots of school names I asked if there was a logical reason for this and they said of course.
The school market what sit all construction recognizes that lead times are longer so nearly everyone. That's gotta lead time sensitive project, it's trying to do it in a defined timeframe like you know K through 12 schools do an awful lot of change out work when school ends in before school starts so they've recognized.
The industry itself has longer lead times and they've changed their their actions to as a reflection of that.
There's others that have done the same but again the most significant was K 12.
Got it now that's very helpful and.
Any way to quantify how much the capacity you've brought online added to <unk> results.
Well.
We have been trying to maintain to the best of our ability in excess of 30%.
Additional infrastructure O.
Beyond what our current run rate is.
Earlier in the year, we were at about 42%.
Right now, we're probably closer to 30% because we've accelerated the growth. So much we do have a.
Several new salad and eating machines going in place as we speak some.
Some of those are replacing old machines that weren't producing oh.
Normal number of parts just due to the you know the older worn out machines don't don't they're.
They're not dispatch a bull as many hours of the day. So we've got several new machines going in to replace old machines. But then we also have accretive machines going in when we shut down the.
The small water source heat pumps are the two through six ton indoor water heat water source heat pumps, we were able to repurpose that area.
Move some things from one building to the other to consolidate for better operating efficiency, but then that opened up some area for additional salve in any machines, which are one of our most significant bottlenecks are in.
In the one of the most necessary components for our manufacturing process.
So we now have.
By the end of this year, we'll be back somewhere around 40% to 42%.
Surplus capacity.
Okay really helpful. And then just last one for me is it it sounds like the price premium between yourself and your competitor says.
Narrowed pretty dramatically.
But you expect increased cost next year is it your sense that the market demand is.
As you know strong enough that that price increases next year could be absorbed by customers.
Yeah, I think so you know when you look at all the data they they've been trying to slow inflation down, but it's not gone.
It seems that it's somewhere around the 5% range currently.
And as we look at wage rate increases.
Increases.
Anticipate what we're gonna do.
Right around the first of the year Oh, you know, we've already factored that in and we factored in what the materials are and we believe that.
There'll probably be some small price increases, but you won't see anything.
In my from E. On I don't believe Youll see anything substantial you'll just see some small incrementals will probably go back to that 1% per month that was a very good strategy at it.
Kept us from having a big pull forward of sub par priced backlog.
And yet it got our margins right, where we want it. So now it's a proven concept for us and I think we will.
Reinstitute that at some point in time, we've not made a decision yet F. P. N. I gave me an update yesterday.
And you know, we've modeled with and without <unk> and work, we're intent on maintaining our margin profile as it is or better.
Slight improvement.
But our primary thing is as we've said is is trying to maintain that price premium differential.
So.
One of the things when we were 15% to 20% premium our energy efficiency was already well above the required energy efficiency for the 2023 standards, yet we were being compared to numerous competitors that were.
Well below 2023 standards.
January one 2023 we all had to be on.
Everybody came up and so they came up to our preexisting standards, what it amounted to <unk> and there was a lot of cost to do that you don't get it additional energy efficiency free.
And so I think a lot of the narrowing was because of that aspect right there.
Really appreciate the color I'll hop back into queue.
Yes.
And our next question comes from Chris Moore from CJS Securities.
Your line is open.
Hey, good afternoon, thanks for taking a couple of questions and maybe just follow up on that that the premium conversation. So obviously, we had this conversation multiple times before but.
You're.
Youre selling at less of a premium now that has increased the willingness of some purchases to try and for the first time I'm wondering if maybe you can just comment on that trend. During Q2 are there you know are you seeing additional customers that that.
Never had use day on before that.
That have been in in the recent quarter or so.
Well, obviously there is some of that I don't have it quantified in carved out by itself what I will say, though is we.
We've had visitors to our new exploration center that I did not believe would come visit us because they were uneasy with the price differential.
And now they visited us for multiple reasons the price differential is recognized as being less burdensome to them.
The value story. This the way we present equipment in this building, where we have equipment that maybe is similar to what they're purchasing at this lower cost compared to ours and they now they can see this narrower differential and say no very good value statement right there and the next thing that's been compelling a lot.
People to come in is.
The Alpha class unit that I spoke of earlier are we we've had kind of a pre roll out with certain clients on.
On that because the testing is finished all the data is finish the you know we're actually in production on those units and have been for a bit.
And so that story is beginning to resonate with people, where we had a client in a couple of weeks ago very very major client that's got to replace thousands upon thousands of units and their board has tasked them with becoming zero emissions not net zero, but zero emissions.
And that being the case.
And electrified heating method is is required to make that happen and when you look at it.
Wide swath of North America, our Alpha class unit satisfy that need and we're the only ones currently to do that.
Okay.
Got it very helpful. Maybe.
Maybe just shift gears.
So, it's obviously doing quite well, it's just trying to understand how the average size of their orders compares with the rest of the company I was just wondering if if they are more lumpy. If you know kind of if you know what what to.
I had to look at that moving forward.
On basics, you said, yeah, there are they bigger or they could.
They are Matt Lumpier, Matt, Matt Matt on the call I'll, let him take that please.
Perfect Yeah.
It's a fantastic question and certainly the.
You know the size of the basics orders definitely is the larger kind of price per.
Her order perspective, just given the industries and kind of the scale of orders and repetitive number of units and so.
We we certainly continue seeing strong.
The increase in kind of growth in the average order size with the basics kind of Oh.
Side of the business.
With that obviously I think your comment on Lumpiness.
You know I think lumpiness as sort of a when we average it out we continue seeing very substantial growth trajectory.
We kind of isolate down on a month by month, obviously, the increasing order sizes creates a certain kind of.
Order cadence that is you might quantify is lumpy, but on a kind of quarter by quarter growth and kind of as we look at trajectory if he needs to be very strong from a growth perspective as well as from a.
Order size perspective.
Okay.
Got it I appreciate that Oh, my last pointed out.
Yes, Please look Chris let me get you one other thing here real quick so.
Hey on legacy equipment when people place the order they place it in accordance with our published lead time and they expect it to ship at that time.
On basics you because the projects are so substantial they tend to place orders that they need things you know very long term.
We're talking to people about orders that have a total delivery profile of one year now they may be month by month that they want them, but they're buying a year's worth maybe or even two years worth so it's lumpy and the fact that you book a big order, but it's not lumpy in the production stage in that they are.
Have these things.
First out so many per week, so many per month.
Got it no that's helpful Gary.
And maybe my just my last one.
You guys mentioned, it certainly and talked about it but the.
The pending regulations from the D O E on lowering our you know.
Global.
Global warming potential refrigerant. That's 2025, just trying to understand kind of how that's going to impact you guys are you're out in front as normal you are on these things and you know how how significant is that to the industry.
We just started putting it in our pricing program and we are ready to.
Take orders for it now and begin delivery as soon as January 1st of 'twenty 'twenty four.
Hmm.
While some projects don't yet have the authorization to to start that equipment up if the project has a long duration for construction. Some people are already considering purchasing early just so they don't get in a traffic jam trying to get what they need. So we're very far ahead of the curve on that we.
Have you know not the entire product line completed right.
Right now, but we're very close to having from two tons all the way to 240 tonnes completed with the new refrigerant very close.
Perfect I will leave it there I appreciate it guys.
And as a reminder, if you do have a question. Please press star one on your telephone keypad now.
And our next question comes from Brent Thielman from D. A Davidson.
Your line is open.
Hey, great. Thanks, good afternoon.
Gary just with the production capacity increasing in the lead time.
Shrinking.
Do we all kind of think about the conversion timing of your backlog as it sits today understanding that your lead times and to get.
Et cetera here, but what what what level of visibility does that offer you know based on what your capacity production capacity.
Our turns are.
Yeah. It is.
<unk> a difficult calculus in in that manner.
Historically before the pandemic. It was quite simple you could take the backlog and divide it by current production rate and that gave you the lead time.
The scenario that that people are buying committing and buying equipment, writing purchase orders for our contracts for it with we'll call it delayed delivery.
They want to get that place in line get it secured so I don't know how much of our backlog is that I don't think it's an abundance of it but it's.
It's certainly a recognizable percentage so.
I think we're currently mostly in the 12 to 16 week range on equipment. We have some exceptions. We've got a few things that are a little quicker like the products that we build in Longview I think a good many of those are down around eight weeks now.
Men are very largest.
Products, the Ari Z series I, just had a request from a sales channel partner. He he involved me because it was such a significant project and he needed 22 weeks on you know we're talking units that are a single unit on a single tractor trailer truck load.
Maybe 180 to 200 tons of capacity air conditioning capacity and he needed 22 weeks for several of those units and we were able to meet that for them. So I was really proud of the team to be able to do that.
And you know.
Again, I'd like to see overall, our lead times come down another two to three weeks.
Okay.
Yes.
Got it yes, Gary it might be a little bit early but are you beginning to see orders for 2024 or at least are the conversations you're having with the sales channel, giving you some kind of early confidence about next year just in this current climate.
Yeah. They are I'm going to tell you though.
I'm I do have I don't have a lot of concern about it but I think there's going to be some people that are anticipating that the new refrigerant is gonna be abundantly available and required January one 'twenty five.
This large client that came in to see us that wants to be decarbonize didn't zero emissions, they're trying to set up all of their supply chain for these units right now with an anticipated January one 'twenty five began to ship date, because they want the new refrigerant and.
And they said there'll be exceptions, where they're building a new store that they might be able to use the units before that but by and large. This is a replacement project to replace units that are have gas heat and have you know the current refrigerator or older. So they probably.
Aren't the only client that's already planning for 25, that's having those conversations.
I think that.
From what I can see in the pipeline everything is very robust very strong right now, but I anticipate somewhere in 24 don't know when but somewhere in 24 bookings are very likely to soften up just a little bit because they're anticipating that changeover to the new refrigerant.
Yes.
Understood.
And then the.
The growth initiatives youre, putting in place and I guess I'd be wrong view when do those start to be accretive to you or when when are you able to leverage that adding capacity.
Well, we just had.
Groundbreaking a few days ago, they've been doing some dirt work Oh, we anticipate that that building will be complete somewhere towards the end of next year. It's about a 18 to 20 month build cycle.
The manufacturing equipment for that building, we already have it.
So we'll have to relocate some of it from another part of the old plant and of the new plant we've.
We've got new equipment coming you know.
D ordered and come and so I would say.
We won't have any material.
Value of production from that building until first quarter of 'twenty five.
Yes.
Okay, and then just the last one can obviously see the underlying growth of the basics business in the results.
Just wondering if you or Matt can you just speak to.
The order quotation activity, you're experiencing it seems that I'll be here.
Lately from companies continues to be heavy data center clean room activity, just very healthy markets, just wondering well, we'll see a higher run rate of business from that business, yeah, well, while I'm very familiar with mats activities. He keeps me well informed and I go out there from time to time and in <unk>.
Kick around I'm going to let Matt take that it's I'll just give you this I'm extremely excited.
But Matt go ahead okay.
Yeah, Yeah of course, yeah. So.
I mean from your your question you're right a loaded question because exactly correct that the activity in the datacenter semiconductor world is is continuing to accelerate.
A lot of US talk you know 12 months ago about.
Not a I'm not a non growing data center market, but the data center market has slowed slightly for a bit there, but definitely with the AI.
And a big push for seeing a massive amount of attention within the industry and product.
Activity in an outlook as Gary mentioned a lot of these projects.
Our a substantial scale kind of in the overall scheme of things and so.
A lot of activity in which we're talking not just about quick turn orders, but that long term contract relation relationships could be able to kind of serve those needs are from a data center perspective.
On the semiconductor clean room side, you know we are definitely starting to see a lot of the.
No.
The results of the chips Act really starts to come to fruition with with project activity and really get good bid activity and project interest.
It really kind of coupling that cohort kind of outside of semiconductor, but still kind of a clean room style air handlers.
A huge amount of activity right now supporting EV battery plants as we can.
Seeing a huge investment with only nine states for developing battery capacity a lot of units that we manufacture from the basics perspective.
Really are tuned to serve those clean environments that are very temperature and humidity in the in kind of overall environmental control sensitive so yes.
We have strong activity I mean, I would echo gary's sentiment.
Excited from a prospect standpoint.
And really extending some great activity that we're seeing with our team on a really solid pipeline into the future.
Okay. Thanks, Gary Thanks, Matt appreciate it.
And our next question comes from Jon Braatz from Oppenheimer.
Your line is open.
Afternoon, everyone. Matt you answered most of my questions, but Gary one question. Hugh you mentioned that there were some pockets of weakness in your end markets and I guess my question is.
Well.
Did that weakness develop in this quarter or is this something that has been you've noticed over the last last few quarters.
Well.
It was more significant this quarter, we have noticed it slightly but.
But we'll go back to Q4 of 'twenty two and you know you saw just a slight decline in a couple of those markets Q1, you saw a further slide in them, but Q2 is when we normally expect things to pick up just a bit more so it was going the wrong direction for offices and retail.
In particular and I don't think that's any surprise to anybody I mean you.
You know you got.
Brick and mortar stores closing left and right and shopping malls closed and left and right and you've got office buildings that are unoccupied. So how is somebody going to have any temperament to go out and build either one of those and in abundance. There are some isolated places where it's still happening you know I live in the Dallas Fort worth area and you drive around here and there's still crane.
They're still building office buildings of all things.
And there's still some bidding and we're supplying equipment on some but if you look at it across North America, especially both coast office buildings are very very insignificant.
Market right now and retail.
It's been interesting you know quick serve restaurants convenient stores and things like that are still building at the same rate or better a couple of our big box people are still they're either renovating existing stores are still building.
But the.
They're not in the same abundance that they were.
Okay, Okay, and then Gary you mentioned earlier that.
Depending on how inflation goes that you might re institute.
That 1% price increase Uh huh.
Next year or something youre, not at all suggesting fat.
That might be 1% for.
One per cent per month for the entire year no no no no we're not suggesting that just Jon just to recover whatever that pricing whatever the inflation is.
Yeah, John So we have so much better.
Financial forecasting and modeling available to us better data acquisition and analytics than we've ever had we've built this team out over the last two or three years.
And they really you know, we we did a whole lot of spreadsheets and napkin math and all of that to try and figure it out in the past, but now we've got a very robust system that we're using.
And this gives us the ability to forecast far enough ahead, what we need to do.
So we're not gonna be reactive we're gonna be proactive so before we see a decline.
And margins, we will begin to hit it with the soft increases.
And our sales channel really appreciated our approach it was very manageable for them.
And it got us back to consistent performance consistent financial performance and.
So we don't want to be react even have some five or 7% price increase, but let's just say that 5%.
<unk> is in place and so maybe you want to do five one percenters, okay, well, if you'd leap if you'd lead those in soon enough. Then you won't have any margin degradation that you're trying to recover from by putting a big lumpy and the problem with putting a big lumpy and as we've seen them.
Believe me it was the most painful experience of my business life was putting that 7% are in back there in January of 'twenty.
'twenty two I think it was and having a 200 million dollar pull forward and so now you've got to burn through $200 million worth of backlog that sub par priced.
No.
When we meet or they see them a little at a time.
And we stay very very close to our sales channel probably closer than most and you know that was my heritage. Those are my people I know how to talk to them I know, what they're telling me when we're talking.
And so where we're confident that we can meet or they're seeing a little bit at a time and I'm not committing to two 5% right now you know at 1% or commits I'm, just saying that if if it if if inflation was 5% that would be logical that you would probably want to do something like that but well continue to monitor it and make sure.
Sure that that we we have two objectives now.
You know, formerly we had one objective our objective was to keep the margin between 28 and 32%. Our second objective now and it's actually primary is to make sure that we maintain some level of premium that we feel is a good value that we can obtain on a regular basis from our clients because we provide that value that there's.
They're not paying it to us because we're nice guys, they're paying it to us because we actually present the value to them.
And you know so we've we try and make sure that we understand what that value is we have regular conversations with the end user customers as well.
And.
Again this building we invested in the way we're presenting everything there is just a wonderful concept, it's it's resonated well with clients, it's resonated well with our sales channel.
They say a picture is worth a thousand words, well I don't know how many words, it's worth when you've got two pieces of equipment sit in front of you that are you know stark differences and there's just a small premium in it.
Price to have the much superior piece of equipment.
Yep, Okay understand.
That's all great. Thank you very much.
Yeah. Thank you John .
Okay.
Seeing no further questions I'll turn the call back over to our host Mr. Mondello.
Alright, thanks, operator, I'd like to thank everyone for joining on today's call. If anyone has any questions over the coming days and weeks, please feel free to reach out to myself.
Please have a great rest of the day and we look forward to speaking with you in the future. Thank you.
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The meeting has now concluded thank.
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The host has ended this call goodbye.