Q3 2023 AAON Inc Earnings Call
Yeah.
Welcome to the Aon, Inc. Third quarter 2023 earnings conference call.
Our hosts for todays call is Joseph Mondello.
At this time all participants are 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. Marcelo you may begin.
Thank you operator, and good afternoon, everyone.
Yes release announcing our third quarter financial results was issued after market close today and can be found on our corporate website.
<unk> Dot com.
The call today is accompanied with a presentation that you can also find on our website as well as the listen only webcast. Please turn to slide two please.
We begin our customary forward looking statement policy during the call any statements presented dealing with the information that is not historical is considered forward looking and made pursuant to the safe Harbor provisions of the Securities Litigation Reform Act of 1995, The Securities Act of $19 33, and the Securities and exchange.
<unk> Act of 1934, each as amended as such it is subject to the occurrence of many events outside of <unk> control that could cause <unk> results to differ materially from those anticipated you are all aware of the inherent difficulties risks and uncertainties in making predictive statements are pre.
Release, and Form 10-Q that we filed this afternoon detailed 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 our press release and portions of today's call use non-GAAP financial measures as defined.
In regulation G. You can find the related reconciliations to GAAP measures in our press release and presentation.
Joining me on today's call is Gary fields, President and CEO.
Rebecca Thompson, CFO, and treasurer, and Matt to Bosky.
Our new President of Aon, Gary will provide some opening remarks, Rebecca will then walk you through the quarterly results and will then finish with Gary and Matt with some commentary on the quarter and outlook with that I will turn the call over to Gary.
Let's start on slide three.
Third quarter was another very good quarter for Aon, we reported record sales for a seventh straight quarter.
<unk> volume was up year over year 11, 9%.
That was against a quarter a year ago, where organic volume was up 26, 8%.
On a two year stack volumes were up 41, 9%.
Gross margin expanded quarter over quarter, another 410 basis points, driven by increased productivity and a positive contribution from price cost.
Increased volume at higher gross margin drove earnings per share growth of 76% to <unk> 58 per diluted share.
Now, let's turn to slide four.
Our operation team continues to do a great job of efficiently increasing production capacity to manage the robust demand.
Production outpaced bookings for a second straight quarter, which we were very happy to see that.
Backlog declined further.
Allowing our lead times to continue to fall.
Times are now finally back to normal levels, which is important for competitive reasons.
Productivity across all three of our major locations improved in the quarter.
Apply chain disruptions have abated.
Minimizing the impact to production operations.
These have all been a key factor to the improved margins.
Let's please turn to slide five.
The market environment remains busy despite what the macro economic indicators have been signaling booked.
Bookings and the book to Bill improved quarter over quarter and sentiment at the ground level remains very positive.
From a high level perspective industry trends remain favorable for the.
The high quality high performing custom equipment, we manufacture has become a very compelling value proposition with the market that is increasingly focused on de carbonization energy efficiency and electrification.
Additionally, increased regulations on the industry led to a narrower price premium between our equipment and the competition's increasing the value proposition of our equipment.
All of which have contributed to us taking market share.
As such we continue to invest in the future now lets please turn to slide six.
As you can see from our Capex spend in head count year to date, we are aggressively investing in production capacity.
Despite what youre seeing with the general economy. Several of our end markets remained strong. This includes data centers semiconductor manufacturing general manufacturing and education.
In addition to production capacity, we're investing more in sales and marketing product development and it infrastructure.
All of this with the intent to better position us for long term growth.
Our parts business also continues to be an area we focus on.
In the third quarter parts sales grew 14% that.
That was five 8% of total sales.
We continue to target a strong double digit annual growth in parts and expect to increase the business by two to three times in the next five years.
With that I'll now hand over the call to Rebecca to go over the financial results.
Thank you Gary.
Please turn to slide seven.
Net sales increased 28, 6% to $312 million from $242 6 million improved operational efficiencies less supply chain disruptions and additional production capacity growth volume growth of 11, 9%.
Oklahoma and basics segment, particularly reliance robust growth.
In addition to volume pricing contributed 16, 7% growth.
Moving to slide eight gross profit increased 77% to $116 1 million from $65 6 million as a percentage of sales gross profit was 37, 2% compared to 27% in the third quarter of 2022.
The improvement in gross profit margin was led by several factors, including increased pricing improved operational efficiencies and fixed cost absorption.
Please turn to slide nine.
Selling general and administrative expenses increased 78, 2% to $51 5 million from $28 9 million in the third quarter of 2022.
In the quarter, we recognized a onetime settlement fee of $7 5 million. Excluding this one time expense and assuming the FX exclusion has a profit sharing non-GAAP adjusted SG&A as a percentage of sales was 14, 3%.
The increase relative to sales is primarily attributable to an increase in the profit sharing expenses, which is the result of the higher earnings as well as the investments we are making to facilitate long term growth.
Moving to slide 10.
Diluted earnings per share increased 76% to <unk> 58 per share from 34 cents per share excluding the one time settlement expense and assuming the effect exclusion has a profit sharing and taxes.
non-GAAP adjusted EPS was <unk>, 64% 64 cents.
A year over year increase of approximately 90%.
Turning to slide 11, our balance sheet remains strong cash cash equivalents and restricted cash totaled $22 5 million on September 32023, and debt at the end of the quarter totaled $78 4 million our leverage ratio at three three was down from $3 seven at the end of <unk>.
The second quarter and down from four six at the end of 2022.
Within the quarter, we spent $25 million to repurchase common shares while still decreasing our debt balance.
We had working capital balance of $284 8 million at September 32023 versus $203 5 million at December 31, 2022, our working capital has increased due to the receipt of restricted cash.
Housing of our new market tax credit in the second quarter as well as an increase of higher price receivable.
Year to date cash flows provided by operating activities is up 146, 8%. We expect cash flows from operating activities in the fourth quarter will be the strongest quarter of the year, which will help pay down debt and financed capex projects.
Capital expenditures for the first nine months of the year were $82 9 million up 99, 3% from a year ago. We now expect capital expenditures for the year to be approximately a $100 million we.
We monitor our growth trajectory and Kathy 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.
Please turn to slide 12.
As I stated in my opening remarks bookings in the third quarter improved sequentially.
We also realized month to month improvement throughout the quarter, which was encouraging.
On our last earnings call. We stated that we thought the soft bookings in the second quarter were not indicative of underlying demand and we're more so a reflection of a temporary shift in customers buying patterns related lead times.
This played out in line with those comments.
In 2022, due to robust demand and supply chain disruptions lead times of our equipment as well as our competitor's equipment climbed significantly throughout the year.
As a result customers began placing their pre summer orders for 2023 in the fourth quarter of 2022.
Traditionally this doesn't occur until mid first quarter.
It was a seasonal pull forward by about four to five months to add to that lead times peaked in early 2023.
And by the beginning of the second quarter, they were accelerating to the downside.
This was all a result of increased production capacity and less supply chain disruption.
The decline in lead times earlier, this year led to temporarily slower ordering by customers.
This also was a factor to the soft bookings realized in the second quarter.
Overall, we were happy to see bookings improve in the third quarter and to see the month over month improvement throughout the quarter.
Thus far September was our strongest month of bookings in the year and October was nearly as strong.
Looking to the backlog I've stated this past, but I want to reiterate it because it's becoming more of a factor that you should be aware of.
Historically most of our backlog was shipped in the coming two to three months.
As our business and the market has evolved we're receiving a larger percentage of orders that expect to be shipped beyond that traditional next two to three months.
This is especially the case with basics, but we're also seeing it in parts of the rest of the company.
Therefore, while our lead times are back to normal you should not expect the entire backlog to turnover in the fourth quarter.
Turning to the outlook, please turn to slide 13.
Historically due to holidays, resulting in less production days, we've always recognized slower fourth quarter relative to second and third quarters.
However in the last two years, we've seen very strong fourth quarters due to bloated backlogs extended lead times now.
Now with lead times back to normal we would expect that seasonal cadence that we've historically recognized in the fourth quarter to occur this year.
With that said, we'd expect fourth quarter sales and earnings to be modestly down from the GAAP results, we recognized in Q3.
Looking out to 'twenty four.
It's still early at this point in time, we are anticipating another solid year of growth.
The backlog is healthy, especially considering the portion of backlog expected to ship next year.
In fact compared to prior years the backlog at the end of September of this year.
That is expected to ship within the next calendar year. This is one of the largest we've ever had compared to the same time in previous years.
Furthermore, while some of the macro indicators are signaling a slowing in construction others are still pointing to strength.
Specifically the association of builders and contractors latest monthly survey, which stated that construction backlogs remained lofty and builders and contractors expect rising employment and expanding sales and profit margins.
This is also in alignment with what we've been hearing from our sales channel.
Most of our independent sales rep offices maintain a positive sentiment and outlook when it comes to the upcoming year.
Although there are a couple.
And markets that have softened and the comps for US next year become much tougher, we'd still expect volumes to be up.
Again, some of our end markets such as data centers semiconductor manufacturing.
General manufacturing and education will remain particularly strong.
As we've also discussed on previous calls the price premium of our equipment compared to market pricing has narrowed.
We expect to continue to take market share in 2024 due to the still relatively new competitive dynamic.
Moreover, the industry next year is likely to be notably disrupted by new refrigerant regulations that will be going into effect January one 2025.
Historically <unk> has always thrived in times of disruption and we would expect this to be another opportunity to take share.
At this point in time all of our equipment in our electronic catalog is available with the new refrigerant.
We expect some of our competitors won't be able to say that until later in 'twenty four.
With many states, having already passed legislation to allow for equipment with the new refrigerant to be installed.
View this as an opportunity next year.
In addition to all of those factors. We are also anticipating to recognize benefits from the recent investments we've been making in sales and marketing.
To remind you up until this year.
Never invested much in marketing in the history of the company.
This is a new focus for Aon.
With new products like the Alpha class, we expect these marketing efforts will be very beneficial.
Therefore, despite the concerns you are hearing related to the general economy, there's still a lot of positives that were excited about the upcoming year.
For modeling purposes, we want to help you out how to think about pricing in the upcoming year.
We're still seeing cost pressures, which we intend will be fully offset with price.
At this point in time, we would expect pricing to contribute mid single digits to net sales growth in 2024.
Lastly earlier this morning, we issued a press release related to changes, we're making to our leadership team.
Since my arrival to the company in 2016, there have been many changes to the leadership of this company.
One of my many goals from day, one was to successfully transition the company from the previous structure.
It was very much dependent on one central persons leadership to a well rounded versatile team capable of running an enterprise for long term success.
Today is another step towards achieving that goal.
Starting January one Matt <unk> will take on the role of <unk>, President and Chief operating Officer.
Currently Matt as president of basics, the business that Mac Cofounded, we acquired in December of 'twenty one.
Since joining aon through that acquisition, Matt has been an integral part of the entire company.
Along with managing the basics business. He has been a key leader within our executive leadership team.
By passing down the president title for myself to Matt Matt will be more responsible for the day to day operations of the company, while I narrow my focus to strategic strategic objectives as CEO.
Dave Benson also a co founder of basics will take the role of Vice President and President of basics and Bill will be responsible for managing the basic segment.
<unk> has 40 plus years of experience in the industry and we're confident he was successfully continue to grow this business into being a world class organization.
Additional alignment leadership team will occur to leverage resources and organizational efficiencies with globally focused roles and collaborative site leadership.
All of which will occur starting January one.
Please see the press release, we issued earlier this morning for more details now.
Now I'd like to hand, it off to Matt <unk>, our new President and C. O O for some brief remarks.
Thanks, Gary It is truly an exciting time to be a part of the organization and I'm honored to accept this new role within the company.
I've always had a tremendous amount of respect for aon well before the acquisition of <unk> in 2021.
Aam's culture commitment to innovation and value focused product offerings align well with the basics heritage and are allowed the collective team to make major strides over the past two years as a collaborative leader within the Aon organization I've been continually impressed with the caliber of the team and the direction of the company and my respect for Aon has only grown.
As we look forward and is positioned to be a world class organization and I am proud to be a part of it.
Im also excited because the companies still have a lot more potential.
I look forward to helping drive towards sustainable growth and continued success for our team our sales channel our trade partners and our shareholders.
I want to thank Gary and the board for this opportunity generally I do not take this for granted and intend to do everything possible to help make this organization as accessible as possible I'll now pass it off to Gary for closing remarks.
In closing I want to finish by thanking all of our employees sales channel partners and customers. Thank you to.
To our shareholders. This company has never been more well managed than it is today and we look forward to generating the returns that you expect of US I will now open the call for question and answers.
Thank you if you would like to ask a question. Please press star one on your telephone keypad now you'll.
You'll be placed into the queue in the order received please.
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 today will come from Brent Thielman with D. A Davidson.
Hey, Thank you good evening congrats on that.
Good quarter.
Thanks.
Yes, Gary I mean, I guess first and foremost.
Uh huh.
Spoke a little bit to it great.
How do you think about pricing as an industry goes at Aon approaches that moving into 2020 for Gary I mean, these are fantastic gross margins here in the business and it looks like for the most part they sustained here over the near term.
Do you think the business moves into some sort of level of normalization in the next year.
You've talked about kind of 28% to 32, where are we at a new level of normal.
Well, while I would like to declare there is 37% plus a new normal I think that's pretty strong to expect.
Hum.
For an absolute normal what I will say that it's in the new range.
I would say that our target range has risen 28 to 32 is no longer.
French for US reason for that is is that we've monitored our market position versus our competitors and what our value proposition is and at this point in time, it will allow us a margin a bit stronger than historically.
At that point well to the innovations that we've come up with our Alpha class in particular.
Absolutely.
Just.
<unk> ahead of the market for that kind of a product and.
We're seeing good.
Activity with it.
Bookings are beginning to come but it's pretty early to declare that.
100% success.
But what we do know for sure is that there's a lot of major customers that looked at that strongly and it will afford us this sort of a margin.
Okay.
Great that Gary and then it looked like the long view coil.
Coil products business.
Brandon hurdle sort of implement the basics product there.
When do you expect to sort of.
Get that back to normal or back to the sales.
Sales expectations as you look forward from that.
But we've been chipping away at that in a lot of factors.
Our intercompany work with them.
They have a higher percentage of copper, particularly related to the intercompany product and we probably let them fall a little behind on how we should have transferred debt when you flush it all out the business does very well.
That just puts a little bit of burden on them that they probably don't deserve.
On finished products, we're seeing strengthening due to efficiencies. We just now really starting to hit our stride and build in basics product there.
We're probably going to.
Flushed through a good bit of what we have now we're kind of waiting for the next tranche of that to come along.
We've got some other products that basics is secured that we believe fit that that plant very well, but we've got some work to do before we can transfer it down there.
Those orders have been very strong Matt do you want to say anything at all about those securities.
To Gary's comments.
Certainly part of our initiative right now is to continue increasing the portfolio basis products manufactured within the Longview plant and so there is very active engagement too to broaden the amount of products that we can manufacture down there that fit very well within the Longview manufacturing practice.
But as Gary mentioned spending the time to make sure we get everything properly aligned for manufacturing process perspective is kind of where the teams are actively engaged to keep building that portfolio. So just to summarize that Brent I would say that we will see continuous improvement from them.
Gradually throughout the next year.
Okay.
Gary maybe my just my last one I couldn't help but notice the comments in press release. The organization made major enhancements last few years much of which has yet to be financially recognize.
Sorry, I open the floor to you would be interested in hearing.
Some of the things in particular that you.
You think can be leveraged here in the coming years.
Wow.
We've already seen a lot of productivity improvement as we've been able to stabilize the workforce.
If you go back to when I joined the company seven years ago. A statement was made to me by the founder that the company could build more than we could sell.
<unk>.
As you look back historically youll see that wasn't the case. So we fell all over ourselves trying to figure that out while we figured that out and we've become very very efficient and so as we stabilize these things than we.
The processes.
Head Count look at this my got our head count is huge but our marketing and sales channel improvements or where we think theres a whole lot yet to be gained.
The marketing building that we put together that some of you came to Investor day and saw last week, we had our board meeting there and while I was waiting for the board meeting there were two regional sales manager standing there waiting on people to come in I asked the young woman that kind of manages the schedule. There I said Hey is this unusual she says no.
Not the least bit she says we have more than one group on most days and we have some kind of group almost everyday of the week well that far exceeds anything that I ever envision I envision maybe one or two groups a week, we're seeing multiples of that so that's all manifest.
<unk> itself very well.
And as time comes on.
But.
The other thing is as our capex projects or are yet to show their full.
Capability of the returns.
So we've got just an awful lot here that is in the earlier stages of recognition of what the contributions are.
Yeah.
Yeah.
Understood. Thank you I'll pass it on.
Okay.
And our next question will come from Chris Moore with CJS Securities.
Hey, good afternoon, guys congrats on a great quarter.
Thank you you may have.
Certainly so maybe I'm just interested maybe in parsing out a little bit more.
Kind of the competitive landscape that you're seeing now between you know the kind of the core rooftop and basics specifically from.
Pricing trend perspective is there much difference between.
The two segments, what you're saying.
A.
Little different dynamics.
So I would say.
Whoa.
Jane carrier.
<unk>.
<unk> don't make exact.
Part for part equipment, what we do.
A lot of the competition is for the application itself.
For the project once were chosen we typically have a supreme position because of the things that we have but when we're competing against them in the delta between our price and their prices often discussed that's where I'm, saying historically that had been around 15% and more recently, it's maybe eight.
10%, so a lot of the costs that went into making the competitors' equipment more efficient in order to meet 2023 energy standards.
We already had that baked into our.
Deal and so it narrowed.
We've.
We've just had more and more data points to tell us that.
We were correct on that statement of being in general for a general application.
10%.
Now basics on the other hand.
I'll, let Matt talk to that specifically I think I've got a good grasp on it but I'd like for him to go with that.
Yes, very much on the basic side of the business.
Certainly there was a cost premium for the product, but much the same as legacy AAM product.
We're selling a value driven product and so typically it is beyond just first cost for overall investment from a quality and efficiency perspective that kind of drives the value proposition of product and.
And other huge drivers is ease of implementation.
Kind of process.
Management and implementation of the product.
Provides a huge value for the overall customer in terms of ease and timeline with installation and basically getting equipment up and running port facilities.
While I won't talk about this specific customer's name I'll say, a major customer came to us with an RFP request for proposal. They looked for a submit will in return must submit all as all the technical details showing that you meet and comply with the RFP.
They allowed six weeks as I recall for that response, we've responded in three weeks and the comment was given that we had the most stellar response that they had seen amongst any competitors and delivered it early so that just speaks highly of the team that we have at basics.
Some of this alignment of leadership that was announced today is to capitalize on this so that we have a two way communication.
Globally connected so a lot of the things that <unk> has done very nicely for many years can be complemented by a lot of the things basics has done and vice versa. So.
No one's yet asked me about these organizational changes and I think that's probably the biggest news of the day.
Okay.
Got it that's very helpful.
Great color.
And maybe just my follow up you talked about it in your prepared remarks, Gary but.
The lower global warming refrigerant. It sounds like you guys are ready and I'm, just trying to maybe understand the potential tailwind here would it would it be.
Potentially you know greater market share gains the second half of the year for for depending on the on lead times et cetera.
Well it sure looks that way, it's shaping up and kind of our data points are that we have multiple engineers that sit on industry councils, where they're all of the peers are there in the industry Council, so they're pretty talkative about where they're at with developing things like.
This.
And from the latest one.
We'll call it chit chat one of those industry counsels. It was determined that weird way far ahead as far as being ready.
We have it entirely introduced in our electronic catalog now we're accepting orders within the next 60 days and delivery within eight weeks of that.
I don't think that that's widespread across the industry at all so for these few states that have put in place provisions to allow the utilization of the new refrigerant, we're going to be early adopters.
I answer in those early adopted states.
So we do see that as an advantage to take some market share. So let's just take one of those states.
And they say I need a store built with 2030 40 ton rooftop units and we're the only ones that have the new refrigerant. What would you want to go if that was available in your stake would you want to use an obsolete refrigerant.
Range out of course not.
Right.
Got it very helpful. I'll leave it there thanks guys.
Okay.
We'll move next to Julio Romero with Sidoti <unk> company.
Okay.
Hey, good afternoon, Gary Rebecca and Joe and congratulations Pat.
Thank you.
Hey, So Gerry you mentioned the backlog turnover is going to take longer than the traditional two to three months, especially considering.
Customers booking further out in the basics products factoring in as well can you maybe level set for us how we should think about the new duration of the backlog turnover.
Well, it's it's so complex that Theres no.
Historically prior to the pandemic prior to basics you could take our backlog divided by our latest production figures and that would give you a lead time.
The issue now is that because of the pandemic because of extended lead times people began to order with the longer thought process.
Give you an example.
For over.
Or close to if not over 10 years.
Hey on Longview has been providing split systems for modular data centers.
And.
We have always been hand to mouth on those like when they give us an order they want them as fast as we can build them and historically that had been around eight weeks.
They got in the huge demand and we got to where we couldn't supply it and so they started order and further and further ahead.
From two of our clients for that we have orders that are spaced out all the way through 2024.
And here's the good news with appropriate pricing attached.
So we're not stuck with.
A delivery down the road without.
Reasonable pricing.
So that being the case Julio.
That was a normal four basics, it's now becoming a normal in some it's the same customer base.
This data center customer base. They they are long term planners I mean.
I heard that this is not our company, it's not our product, but another company selling a product air cooled chillers there.
They have orders that are going out two and three years. So.
For data centers. So you are seeing.
A lot of this related to data centers, so as that becomes a larger portion of our portfolio. The likelihood of this continuing as is great hope that answers. It just not a simple answer anymore. That's the real no there is.
Definitely some nuance to it but I appreciate all the color you gave for sure.
Maybe.
Maybe I'm asking also about the refrigerant regulation it sounds like Youre in a play some offense and 24, given the product catalog positioned well for the new refrigerant and you talked about.
Some first mover advantage as being part of that strategy and some of the early states.
Do you also expect your pricing premium to <unk>.
Essentially narrow relative to the competition as they have to kind of play catch up with their product portfolio and that may factor into some of your.
They're all firm strategy as well.
Well, it's interesting you asked that.
We were at a Oh industrial conference.
Lee and several of the investors had come from a different conference where some of these competitors of ours, we're announcing how much they expect it to go up on their equipment over the next two years as a result of the refrigerant change.
We're not seeing it the same way.
We're seeing that the refrigerant itself is less cost.
We're seeing that the.
Pieces and parts.
Let me just back up our vertical manufacturing vertically integrated manufacturing strategy played well for this.
On Monday last week.
Tuesday last week I was at our controls manufacturing facility in Parkville, Missouri, which part of our Capex has gone to them and I wish there to see it.
It's about 90% fleshed out and being utilized we're manufacturing our own control sensing system related to the safety for <unk> 600, 335, and everything else to do with this refrigerant and the cost of debt was just trim.
Mendes sleep beneficial to us.
I couldnt be more proud of that group.
It was one of those deals were.
Two years ago. They came to me with this capex request and telling me all these great things they could do with it.
I said sure it looks good there their business plan showed like 14 months.
Return on investment and I've said go go as fast as you can well they have that in place and they are building that product and that's going to be a major advantage for us.
So.
I'm, just 11, what I'm Julio I'm loving it.
That's very helpful and maybe just one.
It might be for Rebecca.
You mentioned some of the elevated SG&A in the quarter was due to profit sharing where there any kind of other factors that.
Led to that.
And are those factored into the <unk> guidance.
Those factors are included in the Q4 guidance. So we have you know we've talked about some of these investments we're making for long term growth for back office technology and automation. Some of that was more heavily weighted to the second half of the year. So that is why you'll see our guidance.
For Q4 as a percent of sales is up I bet.
Okay really helpful I'll hop back into queue, thanks very much.
And your next question will come from Jon Braatz, with Kansas City capital.
Yeah.
Good afternoon, everyone.
Hello, Jeremy maybe.
Maybe going back to the refrigerant.
A question.
Historically seen periods, where there's been disruptions.
Going back a Y a ways.
And I guess, maybe the.
Maybe maybe to quantify it more often.
If the market was going.
Going to deliver you maybe X percent volume growth next year.
Hum.
How much of that might be because of the gaining market share because of the mix or the disruption in the industry I'm trying to better sense as what the opportunity for you in terms of grabbing market share might be.
Well, it's it's early.
I haven't yet seen because none of these states can take.
That new equipment, yet they're preparing for it some of them are.
Very near term.
I thought that it was not going to happen to January one 2025, all along well.
That's where most of us thought but there were some states that were very aggressive no surprise, California for instance.
Trying to pull everything forward as far as they could they want to be the leaders in.
Global responsibility and so they're pulling a lot of things forward in.
The industry.
Bonded.
When it comes to Chillers I think they're well prepared when it comes to package rooftops doesn't appear to be so much. So that's our.
Strong point is we don't build chillers, we build packaged rooftop units and we're way far ahead of everybody with being ready with the new refrigerant.
I think a lot of the reason that we're ahead is that they had developed they had.
I had two.
Allocate a lot of their resources to the 2023 energy standards and then by the time. They got that completed then they began the refrigerant changeover is kind of the way. It's been told to me well. We were way ahead of both because we add that 2023 energy standard captured three to five years back.
So we were able to get a lot earlier development on this new refrigerant. So I don't know what percentage. It is John I will tell you that we've got a lot of market drivers that are in our favor for us to take market share I think next year.
Of our total revenue gains there will be some pricing, but I believe it will be our revenue gains will be.
More weighted towards volume than they will be price that's my opinion.
Okay, Great and then secondly, maybe.
For you Rebecca.
Our strong gross margins in the quarter, 37%.
Sometimes.
Everything that can go right goes right in a quarter and vice versa.
But I think it's obviously a lot more than that but having said that.
Was there are things in the quarter that just were unusually positive and you know.
It's difficult to repeat in <unk>.
And maybe.
Generate at those higher margins.
Well I Wouldnt say theyre unusually positive I will say.
To increase our revenue and our operational efficiencies that we've been seeing has led to better overhead absorption.
Sometimes that is a factor that inc.
Two.
Some of our seasonality you have less absorption and the margins might be up just slightly but.
I would say there was nothing out of the usual for the quarter.
Okay. Thank you Rebecca.
Yes.
As a reminder, if he would like to ask a question. Please signal by pressing star one at this time.
And it appears we have no further questions at this time I'll turn the call back to our presenters for any additional or closing remarks.
Alright, I would 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 I have a great rest of the day and we look forward to speaking with you in the future. Thank you.
This concludes today's conference call. Thank you for attending.
The host has ended this call good.