Q2 2024 AAON Inc Earnings Call
Good afternoon, ladies and gentlemen, and welcome to the Aon Inc. second quarter of 2024 Earnings Conference Call. At this time, all lines are in listen-only mode.
Operator: of the 2024 Earnings Conference Call. At this time, all lines are in listen-only mode.
Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator.
Operator: Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, August 1st, 2024. I would now like to turn the conference over to Joe Mondillo, Director of Investor Relations. Please go ahead.
This call is being recorded on Thursday, August 1st, 2024. I would now like to turn the conference over to Joe Mondillo, Director of Investor Relations. Please go ahead.
Joe Mondillo: Thank you, operator. And good afternoon, everyone.
Joe Mondillo: The press release announcing our second quarter financial results was issued after the market closed today and can be found on our corporate website, aaon.com. The call today is accompanied by a presentation that you can also find on our website as well as on the listen-only webcast. Joining me on today's call is Gary Fields, CEO; Matt Tobolski, President and COO; and Rebecca Thompson, CFO and Treasurer. Please turn to slide two.
Joe Mondillo: Thank you, operator, and good afternoon, everyone.
Joe Mondillo: The press release announcing our second quarter financial results was issued after market closed today and can be found on our corporate website aaon.com. The call today is accompanied with a presentation that you can also find on our website as well as on the listen-only webcast.
Joe Mondillo: We begin with our customary forward-looking statement policy. During the call, any statement 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 1995, the Securities Act of 1933, and the Securities and Exchange Act of 1934, each as amended. As such, AON is subject to the occurrence of many events outside of AON's control that could cause AON's results to differ materially from those anticipated.
Joe Mondillo: Please turn to slide two.
Joe Mondillo: You are all aware of the inherent difficulties, risks, and uncertainties in making predictive statements. Our press release in 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. Please note that we do not have the duty to update our forward-looking statement. 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. With that, I will turn the call over to Gary.
Joe Mondillo: We begin with our customary forward-looking statement policy.
Joe Mondillo: During the call, any statement 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 1995, the Securities Act of 1933, and the Securities and Exchange Act of 1934, each as amended.
Joe Mondillo: Please note that we do not have the duty to update our forward-looking statements.
Joe Mondillo: 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. With that, I will turn the call over to Gary.
Gary Fields: Starting on slide three, our second quarter performance exceeded expectations. Production issues from the first quarter were largely resolved, leading to increased volume output and productivity across all three segments. This resulted in record sales, earnings, and backlog. The basic segment had an exceptional quarter. Net sales at this segment were up 58.3% from one year ago and 103.7% compared to the first quarter. This is especially notable considering that the reconfiguration of the production layout within the Redmond, Oregon facility, which disrupted operations in Q1, continued into Q2.
Gary: Good afternoon.
Gary: Production issues from the first quarter were largely resolved.
Gary: leading to increased volume output and productivity across all three segments.
Gary: This resulted in record sales, earnings, and backlog.
Gary: The basic segment had an exceptional quarter.
Gary: Net sales at this segment were up 58.3% from one year ago and 103.7% compared to the first quarter.
Gary: This is especially notable considering that the reconfiguration of the production layout within the Redmond, Oregon facility, which disrupted operations in Q1, continued into Q2.
Gary Fields: The growth at Basics has been largely fueled by the data center market. Sales of our Basics-branded data center equipment produced at both our Oregon and Texas facilities were up year-over-year by 142.4%. We stated on our Q1 call that data center sales made up approximately 10% of total net sales for 2023 and about 20% of bookings. In the first half of this year, sales in this market made up 10.5%, and in Q2, it was 13.7%.
Gary: Sales of our Basics-branded data center equipment produced at both our Oregon and Texas facilities were up year-over-year 142.4 percent.
Gary: We stated on our Q1 call that data center sales made up approximately 10% of total net sales for 2023 and about 20% of bookings.
Gary: In the first half of this year, sales in this market made up 10.5%, and in Q2, it was 13.7%.
Gary Fields: In our packaged rooftop business, which makes up most of the Aeon Oklahoma segment, we are continuing to realize growth, but at a moderated rate compared to the last couple of years. Considering our volume was up 48.7% over the last two calendar years, along with the softening micro conditions and disruptions related to the refrigerant transition, we are pleased with the performance. All of these factors make for a difficult operating environment as well. Near-term visibility is more limited than it has been in the last few years, and week-to-week orders are volatile. This makes production planning much more difficult.
Gary: In our package rooftop business, which makes up most of the Aon, Oklahoma segment, we are continuing to realize growth, but at a moderated rate compared to the last couple of years.
Gary: Considering our volume was up 48.7% over the last two calendar years, along with the softening micro conditions and disruptions related to the refrigerant transition, we are pleased with the performance.
Gary: All of these factors make for a difficult operating environment as well.
Gary: Near-term visibility is more limited than was the case over the last few years, and week-to-week orders are volatile.
Gary Fields: Despite this, the operations team has been performing exceptionally well. Total company backlog at the end of the quarter was a record $650 million, up sequentially for a third straight quarter. Compared to a year ago, backlog was up 23.5 percent, and relative to the end of the first quarter, it was up 16.4 percent. The increase was largely driven by the basic segment and the data center market. With that, I'll now hand it over to Matt Tobolski, who will speak more in depth about our operational strategy.
Gary: This makes production planning much more difficult. Despite this, the operations team has been performing exceptionally well.
Gary: Total company backlog at the end of the quarter was a record $650 million.
Gary: up sequentially for a third straight quarter.
Gary: The increase was largely driven by the basic segment and the data center market. With that, I'll now hand it over to Matt Tobolski, who will speak more in depth about our operational strategy.
Matt Tobolski: Please turn to slide four. The second quarter was an excellent quarter for the company. Many of the issues that weighed on our performance in Q1 were resolved, allowing for higher volumes and greater productivity. That said, the Corps did not go without its own challenges, which put the overall performance into an even brighter light.
Matt Tobolski: Thank you, Gary.
Matt Tobolski: The disruptions related to reconfiguring the layout of BASIC's facility in Oregon continued into Q2. Equipment was still being rearranged, and the outsourcing of parts we would otherwise produce in-house was necessary. As a result, while productivity improved from Q1, there is room for continued improvement. Despite these challenges, this segment posted record sales and record gross profit. Most of the heavy lifting and temporary disruptions related to the production layout reconfiguration and capacity expansion are behind us.
Matt Tobolski: Despite these challenges, this segment posted record sales and record gross profit. Most of the heavy lifting and temporary disruptions related to the production layout reconfiguration and capacity expansion is behind us.
Matt Tobolski: We expect the new capacity to be up and running by the end of the third quarter, positioning Basics for robust growth and improved margins in the second half of the year, driven by increased throughput and operational efficiency. Basics has a strong backlog entering the second half of the year and upbeat fundamentals among the data center market. Furthermore, beyond what is in the backlog at Basics is a robust pipeline of data center projects in which we are heavily engaged and are optimistic we'll be able to convert into bookkeeping.
Matt Tobolski: I will note the timing of backlog conversion at this segment is weighted more to Q4 and beyond than it is in Q3. This brings me to the Aon Coil Products segment, which is increasingly becoming an extension of basics as a manufacturer of geyser data center cooling equipment.
Speaker Change: This brings me to the Aon Coil Products segment, which is increasingly becoming an extension of basics in the manufacture of basic data center cooling equipment.
Matt Tobolski: Similar to basics, this segment finished the quarter with a strong backlog and a robust pipeline of future opportunities within the data center vertical. In fact, just last week, we entered a large liquid cooling order that increased the segment's backlog by over 50 percent. This order is associated with a large data center company and is the first tranche of a multi-phase, multi-year project. We are extremely excited about where this business is headed. Like BASICS, the capacity expansion project for this segment is on schedule and is expected to be finished by year-end, with production expected to commence early next year.
Matt Tobolski: The new space is allocated to Basics-branded data center products and will add an incremental 245,000 square feet of manufacturing capacity, an increase in dislocation of roughly 50%. This will help absorb the immense growth we foresee in the data center market for both airside and liquid cooling projects. It will also help improve productivity. In fact, we've already begun to see this.
Gary: The new space is allocated to Basics-branded data center products and will add an incremental 245,000 square feet of manufacturing capacity, an increase in dislocation of roughly 50%. This will help absorb the immense growth we foresee in the data center market for both airside and liquid cooling projects.
Matt Tobolski: In the second quarter, gross margin of the segment was 41.9%, up from 24.9%. And in the first half of the year, gross margin was 38.3%, up from 23.1% in the first half of 2023. Finally, the AON Oklahoma segment's performance from an operational perspective was also outstanding, particularly considering the softening construction environment and disruptions related to the new refrigerant regulation. Over the last couple of years, our Tulsa, Oklahoma manufacturing facility has transformed into what I describe as a well-oiled machine. The engineering team has never been stronger, and manufacturing is as precise and efficient as it has ever been.
Gary: The engineering team has never been stronger, and manufacturing is as precise and efficient as it has ever been. The costs this business is facing when compared to the last couple of years are very tough, and yet we've been able to maintain volumes comparable to a year ago.
Matt Tobolski: The costs this business is facing when compared to the last couple of years are very tough, and yet we've been able to maintain volumes comparable to a year ago. Furthermore, as I stated, the macro environment has become more challenging, and the new refrigerant transition has created disruption. As a result, bookings have been unusually volatile this year from a week-to-week and month-to-month perspective.
Gary: As a result, bookings have been unusually volatile this year from a week-to-week and month-to-month perspective.
Matt Tobolski: Looking at this segment through the first half of the year, revenues are up from a year ago, but the increased volatility introduces challenges when it comes to production planning. All that considered, the operational performance has been superb. As for the second half of the year, the operations team will have to remain nimble.
Gary: Bookings of this segment through the first half of the year are up from a year ago, but the increased volatility introduces challenges when it comes to production planning. All that considered, the operational performance has been superb.
Gary: As for the back half of the year, the operations team will have to remain nimble. While we still think demand will increase somewhat ahead of our phase-out dates of R410A refrigerant equipment later this year, our visibility is limited.
Matt Tobolski: While we still think demand will increase somewhat ahead of our phase-out dates for our 410A refrigerant equipment later this year, our visibility is limited. A positive thing we have going for us is that our lead times are still an industry best, which means we can likely expect orders for our forthcoming equipment later than most of our competitors. If we do see an increase in near-term demand, this could position us to have a strong finish through Q4.
Gary: A positive thing we have going for us is our lead times are still in industry best, which means we can likely accept orders for our 4th M.A. equipment later than most of our competitors.
Gary: If we do see an increase in near-term demand, this could position us to have a strong finish through Q4.
Matt Tobolski: It is important to note that this scenario could also result in a soft order book in Q4, which would result in a slow start to 2025. At this point in time, we're unsure exactly how it will play out, but the bottom line is that we expect continued volatility in the near term, and we are confident we will manage through it better than most. Looking to next year, we've been producing our 54B equipment longer than any of our competitors.
Gary: It is important to note that this scenario could also result in a soft order book in Q4, which would result in a slow start to 2025. At this point in time, we're unsure exactly how it will play out, but the bottom line is that we expect continued volatility in the near term, and we are confident we will manage through it better than most.
Matt Tobolski: That means we are best prepared when it comes to inventory and production. Additionally, for us, the cost of manufacturing new refrigerant equipment versus our old refrigerant equipment is not changing at all, potentially giving us an edge as some of our competition has experienced with its increasing costs associated with new refrigerant equipment. Regardless, we are already more cost competitive than we were years ago, as the price premium for our higher quality equipment is the narrowest it has ever been.
Gary: Regardless, we are already more cost competitive than we were years ago as the price premium of our higher quality equipment is the narrowest it has ever been.
Matt Tobolski: Beyond product evolution associated with the refrigerant transition, we continue to lead the industry in innovation and are well ahead of anyone in the development of cold climate air source heat pumps. Sales of our traditional heat pumps continue to outperform overall Aon, Oklahoma sales in Q2, and sales of our cold climate heat pumps outperform traditional heat pump sales. Overall, while the near-term sales of heat pumps may be volatile, we are very optimistic regarding the medium to long term. With that, I will hand it off to Rebecca to walk you through the financials.
Gary: Beyond product evolution associated with the refrigerant transition, we continue to lead the industry in innovation and are well ahead of anyone in the development of cold climate air source heat pumps.
Gary: Sales of our traditional heat pumps continue to outperform overall Aon, Oklahoma sales in Q2, and sales of our cold climate heat pumps outperform traditional heat pump sales.
Gary: Overall, while the near-term sales of heat pumps may be volatile, we are very optimistic regarding the medium to long term.
Rebecca Thompson: Matt, please turn to slide five. Net sales increased 10.4% to $313.6 million from $284 million in the second quarter of 2020. The year-over-year growth was largely driven by the basic segment, which realized an increase in net sales by 58.3%, a majority of which was spurred by sales related to the data center cooling system. Sales at Aon Oklahoma and Aon Coil product segments grew 3.4% and 4.3%, respectively. Moving to slide six.
Gary: Thank you, Matt. Please turn to slide 5.
Speaker Change: Net sales increased 10.4% to $213.6 million from $284 million in the second quarter of 2023.
Speaker Change: The year-over-year growth was largely driven by the basic segment, which realized an increase in net sales by 58.3%, a majority of which was spurred by sales related to the data center cooling solutions.
Speaker Change: Sales at Aon Oklahoma and Aon Coil Products segments grew 3.4% and 4.3% respectively.
Rebecca Thompson: Gross profit increased 20.3% to $113.1 million from $94 million. As a percentage of sales, gross profit was 36.1% compared to 33.1% in the second quarter of 2023. The realization of price increases, along with the slowing of inflation for raw materials at the Aon, Oklahoma, and Aon Coil product segments improved overall consolidated margin performance.
Gary: Gross profit increased 20.3% to $113.1 million from $94 million. As a percentage of sales, gross profit was 36.1% compared to 33.1% in the second quarter of 2023.
Gary: The realization of price increases along with the slowing of inflation for raw materials at the Aon, Oklahoma and Aon Coil product segments improved overall consolidated margin performance.
Rebecca Thompson: Please turn to slide 7, selling general and administrative expenses increased 16.9% to $45.9 million from $39.3 million in the second quarter of 2023. As a percent of sales, SG&A increased to 14.6% from 13.8%. The increase relative to sales is primarily attributable to an increase in investments made in technology, professional and legal fees, and increased travel and consulting expenses. Moving to slide 8.
Gary: As a percent of sales, SG&A increased to 14.6% from 13.8%.
Rebecca Thompson: Diluted earnings per share was $0.62, up 12.7% from a year ago. Our tax rate in the quarter was 22.1%. The company's estimated annual effective tax rate, excluding discrete events, is expected to be approximately 25%.
Gary: Moving to slide 8.
Gary: Diluted earnings per share was $0.62, up 12.7% from a year ago.
Gary: Our tax rate in the quarter was 22.1 percent.
Gary: The company's estimated annual effective tax rate, excluding discrete events, is expected to be approximately 25 percent.
Rebecca Thompson: Turning to slide 9, our balance sheet remains strong with a current ratio of 3.0. Cash equivalents and restricted cash totaled $12.1 million on June 30, 2024, and debt at the end of the quarter was $85.9 million. Our leverage ratio was 0.3 times. Year-to-date, cash flow from operations was $127.9 million, up from $59.9 million in the comparable period a year ago. Capital expenditures for the first half of the year, including expenditures related to software development, increased 24.4% to $75.4 million.
Gary: Turning to slide 9, our balance sheet remains strong with a current ratio of 3.0.
Speaker Change: Cash, cash equivalents, and restricted cash totaled $12.1 million on June 30, 2024, and debt at the end of the quarter was $85.9 million.
Gary: Our leverage ratio was 0.3 times.
Gary: Year-to-date, cash flow from operations was $127.9 million, up from $59.9 million in the comparable period a year ago.
Gary: Capital expenditures for the first half of the year, including expenditures related to software development, increased 24.4% to $75.4 million.
Rebecca Thompson: During the quarter, we also repurchased $100 million of shares outstanding, reflecting our confidence in the long-term prospects of the company and our commitment to delivering value to our shareholders. The combination of these capital investments and share repurchases led us to draw down on our revolving line of credit. We anticipate paying just over half of that off by the end of the year. All in all, our financial position is strong, giving us flexibility and allowing us to continue to fully focus on growth opportunities. With that, I'd now like to turn the call back over to Gary. Please turn to slide 10.
Gary: During the quarter, we also repurchased $100 million of shares outstanding, reflecting our confidence in the long-term prospects of the company and our commitment to delivering value to our shareholders.
Gary: The combination of the capital investments and share repurchases led us to draw down on our revolving line of credit. We anticipate paying just over half of that off by the end of the year.
Gary: All in, our financial position is strong, giving us flexibility and allowing us to continue to fully focus on growth opportunities.
Gary: With that, I'd now like to turn the call back over to Gary.
Gary Fields: We feel really good about our current position. The growth of the Aeon Oklahoma segment in the first half of the year was below our expected targets, but I want to remind everyone that the volume of equipment at this segment was up 48.7% from 2021 to 2023. That type of volume growth is unheard of for this industry. Furthermore, we've been operating all year with normal lead times and a lean backlog in this segment.
Gary: Please turn to slide 10.
Gary: We feel really good about our current position.
Gary: The growth of the Aeon Oklahoma segment in the first half of the year was below our expected targets, but I want to remind everyone that the volume of equipment at this segment was up 48.7% from 2021 to 2023.
Gary: That type of volume growth is unheard of for this industry.
Gary: Furthermore, we've been operating all year with normal lead times and a lean backlog in this segment.
Gary Fields: That's far different than some of our competition who are still trying to catch up since the peak of the supply chain issue. All considered, including the slowing micro environment and disruptions from the refrigerant transition, the fact we have maintained comparable volumes to a year ago is terrific. The bottom line is we have the highest quality package rooftop equipment in the industry, currently selling for the smallest price premium in our history.
Gary: That's far different than some of our competition who are still trying to catch up since the peak of the supply chain issues.
Gary: All considered, including the slowing microenvironment and disruptions from the refrigerant transition, the fact we have maintained comparable volumes to a year ago is terrific.
Gary: The bottom line is we have the highest quality package rooftop equipment in the industry.
Gary: currently selling for the smallest price premium in our history.
Gary Fields: Our sales channel continues to strengthen, and we are leading in innovation. If recent commentary coming from our competition regarding their cost of manufacturing the new refrigerant equipment is accurate, we're going to be in an even more advantageous position than we already are today. Either way, our package rooftop business is in great shape, and we expect growth will accelerate next year when some of these external issues are behind us. Matt spoke at length regarding data center opportunities at both basics and A on the core product segment. But I just want to add one comment and stress another point that he meant.
Gary: Our sales channel continues to strengthen and we are leading in innovation.
Gary: If recent commentary coming from our competition regarding their costs of manufacturing the new refrigerant equipment is accurate, we're going to be in an even more advantageous position than we already are today.
Gary: Either way, our Pocky Drift Top business is in great shape and we expect growth will accelerate next year when some of these external issues are behind us.
Gary: Matt spoke at length regarding data center opportunities at both basics and Aon core product segments.
Gary Fields: First, we are in the early stages of this cycle. The big increase in CapEx plans that our customers have announced occurred between 2024 through 2026. We're just scratching the surface.
Speaker Change: First, we are in the early stages of this cycle.
Matt Tobolski: The big increase in CapEx plans that our customers have announced occurred in 2024 through 2026. We are just scratching the surface.
Gary Fields: This is why we continue to speak of this pipeline of opportunity beyond what is already in our backlog, which is the comment I want to stress. As I always say, nothing is a guarantee until it makes its way into the backlog. However, the pipeline we refer to is not just a calculated estimate of market size or related to CapEx numbers.
Speaker Change: This is why we continue to speak to this pipeline of opportunity beyond what is already in our backlog, which is the comment I want to stress.
Gary Fields: Our customers have announced that their data centers will be built. Our sales teams and engineering departments are working very closely with these customers, helping design very unique cooling solutions for the largest data centers ever built. Many of the solutions require a lot of equipment with highly customized designs due to the size of the buildings and heat being generated.
Gary: Many of the solutions require a lot of equipment with highly customized designs due to the size of the buildings and heat being generated.
Gary Fields: The execution of everyone involved has been top-notch, and I'm confident we will benefit greatly from this pipeline of opportunities. Needless to say, I'm very excited about where our data center business is headed. Our updated outlook is as follows. In 2024, we are now looking for volume to be flattish. We continue to anticipate pricing will be a mid-single-digit contributor and that gross margin will be up year over year. For SG&A, as a percent of sales, we anticipate a 50 to 100 basis point increase, and we maintain our CapEx guidance of $125 million. In the back half of the year, we expect much of the year-over-year growth to be weighted to the fourth quarter.
Gary: The execution of everyone involved has been top-notch, and I am confident we will benefit greatly from this pipeline of opportunity.
Matt Tobolski: Needless to say, I'm very excited where our data center business is headed.
Matt Tobolski: In the back half of the year, we expect much of the year-over-year growth will be weighted to the fourth quarter.
Gary Fields: For the third quarter, we anticipate year-over-year sales growth of flat to up modestly, and we expect GAAP earnings per share will be flat to down modestly from a year ago. In closing, I want to finish by thanking all of our employees, sales channel partners, and customers. Thank you, 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 Q&A.
Speaker Change: For the third quarter, we anticipate year-over-year sales growth of flat to up modestly, and we expect GAAP earnings per share will be flat to down modestly from a year ago.
Gary: In closing, I want to finish by thanking all of our employees, sales channel partners, and customers. Thank you.
Gary: 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 Q&A.
Operator: Thank you, ladies and gentlemen. We will now begin the question and answer session. Should you have a question, please press star followed by the number on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline the polling process, please press the star followed by the two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. The first question comes from Chris Moore with CJS Securities. Your line is open.
Speaker Change: Should you have a question, please press star followed by the one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the two.
Speaker Change: Your first question comes from Chris Moore with CJS Securities. Your line is open.
Chris Moore: Hey, good afternoon, guys. Terrific quarter. Maybe I will start with where Gary left off in terms of the Q4 sales being stronger than Q3. Is it data center timing? Or is there something else that's driving that?
Chris Moore: Hey, good afternoon guys. Terrific quarter. Maybe I will start with where Gary left off in terms of the Q4 sales stronger than Q3. Is it data center timing or is there something else that's that's driving that?
Gary Fields: Production capacity coming on board, primarily for data centers. So the orders for rooftop units have been just steady, not strengthening, maybe, you know, they're up over last year, but not enough to press on very hard. But the data center bookings have been tremendous. We'll have a little bit of a struggle to get any of it built in Q3 for any material amount because of both getting parts and pieces in and getting production facilities ready to go. The production facilities are coming along nicely and on schedule, as we said in the earlier part of the call.
Speaker Change: Maybe, you know, they're up over last year, but not enough to press on very hard. But the data center bookings have been tremendous.
Speaker Change: We'll have a little bit of a struggle to get any of it built in Q3 for any material amount because of both getting parts and pieces in and getting production facilities.
Gary Fields: Got it. That's helpful. And in terms of, you know, both Oregon and Texas, sounds like you're getting there. Did you say earlier in the call that you were talking about increasing data center capacity even further beyond that? Or did I miss that?
Gary Fields: Well, the additions that we've got going in Oregon will give us considerably more production capacity there. The new addition in Longview, which is 245,000 square feet, is currently 100% allocated to data center because of the pipeline of work and the backlog of work that we have.
Chris Moore: Got it. And maybe just the last one for me.
Speaker Change: And maybe just the last one for me.
Chris Moore: So obviously, a very strong quarter for basics. Operating margin was 28.5%. Matt talked about productivity issues that are winding down.
Gary Fields: You were at, you know, the 34% range at the end of Q2, excuse me, Q3 and Q4 last year. Can you get back up to that in Q3? Or is that more of a Q4, you know, kind of target?
Gary Fields: Yeah, getting there in Q3 still definitely has some headwinds against it, and really kind of some of the depression we saw in Q2 was during the rearrangement, not just, you know, productivity challenges, but also with the rearrangement of some of the fabrication equipment. There was a lot more outsourcing kind of in there. So obviously, there's some cost pressures that come off of that. So that's going to continue waning through Q3 and definitely kind of Q4 and beyond as we kind of really start getting back towards the normalized margin profile.
Chris Moore: Terrific. I will leave it there. Thanks, guys.
Operator: Your next question comes from Ryan Merkel with William Blair. Your line is open.
Ryan Merkel: Hey everyone, congrats on a nice quarter. Thank you.
Ryan Merkel: I wanted to ask about the transition to the R454B equipment. What is the big risk, exactly? Is it that customers are going to buy R410A and not move as quickly to the new systems? And then the follow-up question is, when is this risk over? Is it 2Q25? So really, we just have to worry about 4Q and 1Q.
Speaker Change: Hey everyone, congrats on the nice quarter.
Speaker Change: Thank you. I wanted to ask about the transition to the R454B equipment.
Speaker Change: What is the big risk exactly? Is it that customers are going to buy R410A and not move as quickly to the new systems?
Speaker Change: And then the follow-up is, when is this risk over? Is it 2Q25? So really we just have to worry about 4Q and 1Q?
Gary Fields: Well, we cannot ship current refrigerant, meaning 410A, beyond December 31st. So all equipment that we ship beginning January 1st has to be 454B. Part of the hesitation on the part of our customers is that many states have not yet put building codes in place to allow the utilization of 454B. Those building codes are historically put in place in October, and every third year is when they are updated. So in October, we anticipate that the vast majority of municipal entities will be able to utilize the new refrigerant. Then comes the next part of the equation that really... I didn't anticipate quite so well, I guess.
Speaker Change: Part of the
Speaker Change: hesitation on the part of our customers is many states have not yet put building codes in place to allow the utilization of 454B.
Speaker Change: We anticipate that the vast majority of municipalities' entities will be able to utilize the new refrigerant. Then comes the next part of the equation that really...
Gary Fields: Some buildings have to modify the building slightly in order to use the new refrigerant. They have to put in refrigerant purge kind of systems if the refrigerant could get inside the building. So, it's not all buildings; it's very complicated how it works, but there are instances where putting the new equipment with 454B on causes the building to be modified. So, some of these people have been rethinking what they're doing, and we anticipate there could be a little bit of a surge, possibly, in 410A equipment here towards the end of the, call it, useful life of it. All of this will be behind us as far as order bookings and even shipments are concerned on January 1st.
Speaker Change: I didn't anticipate quite so well, I guess.
Speaker Change: Some buildings have to modify the building slightly in order to use the new refrigerant. They have to put in refrigerant purge kind of systems if the refrigerant could get inside the building.
Speaker Change: So, it's not all buildings, it's very complex how it works, but there are instances where putting the new equipment with 454B on causes the building to be modified.
Speaker Change: So, some of these people have been rethinking what they're doing, and we anticipate there could be a little bit of a surge, possibly, in 410A equipment here towards the end of the, call it, useful life of it.
Speaker Change: All of this will be behind us as far as order bookings and even shipments of January 1st.
Gary Fields: Right, but you also make R-410A, so you could... That's what the market wants, and the rest of the year, you could make that.
Speaker Change: Right, but you also make R-410A, so you could...
Gary Fields: We can, throughout 2024, then it becomes kind of a cat and mouse game. You know, if you anticipate a certain number of orders, and you have inventory of parts for that, and you have staffing for run rates that will allow you to build it before December 31st, wonderful. But then you're going to have to determine exactly when that cutoff is in order to not put at risk the ability to produce it before December 31st.
Speaker Change: If that's what the market wants and the rest of the year you could make that.
Speaker Change: We can, throughout 2024,
Speaker Change: then it becomes kind of a cat-and-mouse game.
Speaker Change: You know if you
Speaker Change: Anticipate a certain number of orders and you have inventory of parts for that and you have staffing for run rates.
Speaker Change: that will allow you to build it before December 31st, wonderful.
Speaker Change: But then you're going to have to determine exactly when that cutoff is in order to not put at risk the ability to produce it before December 31st.
Gary Fields: So we've published that table of when we're cutting off certain products. We already have our longest lead products that, you know, the components are more specialized, they're very large tonnage, you know, they're low volume in number of units, we've already cut that off. There is no more 410A for that. We have additional milestones later this month, but I think somewhere in October is our final cut-off on Friday.
Speaker Change: So we've published that table of when we're cutting off certain products. We already, our longest lead products that...
Speaker Change: You know, the components are more specialized, they're very large tonnage, you know, they're low volume in number of units. We've already cut that off. There is no more 410A for that.
Speaker Change: We have additional milestones later this month, but I think somewhere in October is our final cutoff on 410A.
Ryan Merkel: Okay, I appreciate all that. I know it's a little confusing here, and I'm talking about taking orders. We won't take orders beyond those dates. Right. Okay. And then the other question I had is just about the basics.
Speaker Change: Got it.
Speaker Change: Okay, I appreciate all that. I know it's a little confusing here. And I'm talking about taking orders. We won't take orders beyond those dates.
Ryan Merkel: I mean, a really nice quarter, well above what we were thinking. So it sounds like 3Q, the basic growth rate will slow relative to 2Q. And then 4Q, once the production comes online, it should accelerate again. And then am I right that the basic growth rate, just given the backlog, should also accelerate into 2025?
Speaker Change: Right.
Speaker Change: Okay.
Speaker Change: And then the other question I had was just on basics, I mean a really nice quarter well above what we were thinking.
Speaker Change: So it sounds like 3Q, the basics growth rate, will slow relative to 2Q, and then 4Q, once the production comes online, it should accelerate again. And then am I right that the basics growth rate, just given the backlog, should also accelerate into 2025?
Gary Fields: Yeah, certainly the kind of, as you mentioned, got a little bit of deceleration and growth. Certainly, Q3 is not going to be showing a huge backlog conversion. But really, you know, backlog conversion is going to focus on Q4, kind of what a lot of that capacity is kind of online within Oregon. And then, really, as that production capacity gets in full swing, kind of help ramp that up kind of sequentially throughout 2025.
Speaker Change: Yes, certainly the kind of, as you mentioned, kind of a little bit of deceleration and growth. Certainly Q3 is not going to be showing a huge backlog conversion.
Speaker Change: Really, you know, backlog conversion is going to focus Q4, kind of when a lot of that capacity is kind of online within Oregon, and then really kind of as that production capacity gets in full swing, kind of help ramp that up kind of sequentially throughout 2025.
Ryan Merkel: Got it. Sounds good. Thank you.
Speaker Change: Got it. Sounds good. Thank you.
Operator: Your next question comes from Julio Romero with Zadati and Company. Your line is open.
Speaker Change: Thank you.
Speaker Change: Your next question comes from Julio Romero with Siddhati & Company. Your line is open.
Julio Romero: Yes, hi, this is Alex on behalf of Julio. Great quarter. Thanks for taking questions. I wanted to follow up, yes, of course, last quarter you spoke about devoting some engineering and operations resources to develop more tailored sticky retention opportunities in data centers. Should you give us an update on those developments?
Speaker Change: Yes, hi, this is Alex on for Julio. Great quarter, thanks for taking questions.
Alex: I wanted to follow up.
Speaker Change: Yes, of course. Last quarter, you spoke about devoting some engineering and operations resources to develop more tailored, sticky retention opportunities in data center. Should you give us an update on those developments?
Matt Tobolski: Yeah, I mean, certainly some of the resources that are really focusing on developing creative and really innovative solutions in the data center market are really reflecting that single order we mentioned kind of after the quarter close that was technically booked inside the Aeon Coil product site. But, you know, that was a collaborative, custom-engineered solution for one of our data center customers within the liquid cooling space, and really, you know, tailored to a unique operating strategy and overall build strategy for that customer.
Speaker Change: Yeah, I mean, certainly some of the, I'll say the resources that are really focusing on developing the creative and really...
Speaker Change: and the NITDATE data center market are really reflecting that the single order we mentioned kind of after quarter close that technically booked inside the Aon Coil Products site.
Speaker Change: You know, that was a collaborative, custom-engineered solution for one of our data center customers within the liquid cooling space.
Speaker Change: and really, you know, tailored to a unique operating strategy and overall build strategy for that customer.
Matt Tobolski: And so that kind of engagement and really collaboration with our customers is kind of the lifeblood of how Basics operates. And so that's really driving continued, you know, pipeline visibility activity and really backlog conversion as well.
Julio Romero: Great, yeah, thank you for the color there. And, you know, following what seems like a very successful SpaceX acquisition, could you comment on how you're thinking about M&A these days and what might be in the pipeline?
Gary Fields: I don't have anything in the pipeline at the moment, but Basics was very strategic. There was a long history between the former owners and myself, so it made it fairly certain what the outcome would be. We went on kind of a proactive search to see if there was anything out there that would work in a strategic manner. Similarly, we've come up empty-handed so far, but we keep our ear to the ground, and we listen and... multiple investment bankers talk to us frequently about deals they've got, you know, running around, and we just have not yet found anything that would fit us in a strategic manner. We don't have any reason at all to purchase anyone other than that.
Julio Romero: Okay, great. Yeah, I appreciate it. That's all from us. Thank you.
Operator: Your next question comes from Brent Thielman with DA Davidson. Your line is open.
Brent Thielman: Hey, thanks. Good evening, all.
Speaker Change: Basic some kind of a data center product can you can you help me just kind of flesh out how you're thinking about the rooftop business from a sales perspective over the next couple of quarters because it sounds like maybe you think youll have some headwind overall there.
Brent Thielman: Gary, I want to come back just to the expectations through the rest of the year. It sounds like, basically, all the growth is being driven by the ramp up, the basics, and kind of data center product. Can you help me kind of flesh out how you're thinking about the rooftop business from a sales perspective over the next couple of quarters? Cause it sounds like maybe you think you'll have some headwinds overall.
Gary Fields: Yeah, I think that's reasonable. You know, rooftop sales were up 4%, which is mostly price, right? So the volume was flat, which, you know, when you look at 48% growth stacked over the last two years, it's pretty good to hang on to that. But to keep it going and growing, it's been difficult.
Speaker Change: Yeah.
Speaker Change: That's reasonable.
Speaker Change: If top sales were up 4%, which is mostly price right. So the volume was was flattish.
Speaker Change: Which when you look at 48% growth stacked over the last two years is pretty good to hang on to that but to keep it going and growing it's been difficult.
Gary Fields: You may recall that going back to nearly this time last year, I projected that it was going to be difficult. I said the refrigerant transition was going to make it chaotic. I thought interest rates were going to have a bearing on it. I thought the election was going to have a bearing. And unfortunately, it looks like my projections were correct. So I think that as we get some interest rate relief, which all of us anticipate probably coming this fall as we get the election behind us. Those two are clear.
Speaker Change: You may recall going back to nearly this time last year I projected that it was going to be difficult.
Speaker Change: The refrigerant transition was going to make it chaotic.
Speaker Change: Thought interest rates were going to have a bearing on it.
Speaker Change: I thought the election was going to have a bearing on it and unfortunately, it looks like my projections were correct.
Speaker Change: I think that as we get some interest rate relief, which all of us anticipate probably coming this fall.
Speaker Change: As we get the election behind us those two are clear the refrigerant transition is behind us.
Speaker Change: <unk>.
Gary Fields: The refrigerant transition is behind us, really January 1st, but how fast the market rebounds and accelerates, that's yet to be seen. It's just really chaotic right now for our customer base. So I think the next couple of quarters with regard to rooftops. I'm not real excited about anything at this moment saying, you know, here's a clear path to things getting back to growing like they were for the next couple of
Speaker Change: Really January one.
Speaker Change: But how fast the market rebounds, and accelerates that's yet to be seen at it.
Speaker Change: It's just really chaotic right now for our customer base.
Speaker Change:
Speaker Change: So I think the next couple of quarters with regards to rooftops.
Speaker Change: I'm not real excited about anything at this moment, saying, here's a clear path to things getting back.
Speaker Change: Back to growing like they were for the next couple of quarters. So yes, what you said is correct.
Gary Fields: So yes, what you said is correct. However, the data center business is very, very strong, as evidenced by what we've booked and the other conversations we're having with these clients about what they want to book and when we get that facility online in Texas. It's a rare thing. I mean, I've been running this business for nearly eight years, and I have not put any production facility in place yet that on day one, it was totally booked up until this when we get this facility up and running, Q1 of 25. It's fully sold out.
Speaker Change: Over the data center business is very very strong as evidenced by what we booked in the other conversations we're having with these clients about what they want to book and.
Speaker Change: When we get that.
Speaker Change: Facility online in Texas.
Speaker Change: It's a rare thing I mean I've been running this business nearly eight years.
Speaker Change: I have not put any production facility in place yet that on day, one it was totally booked up.
Speaker Change: This one.
Speaker Change: When we get this.
Speaker Change: Facility up and running Q1 of 'twenty five.
Speaker Change: It's fully sold out.
Brent Thielman: Got it. Now, duly noted on calling it a choppy year here, Gary. Well put. I guess just as a follow-up, just related to Longview, kind of a two-part question. Can you help us understand what drove the really strong margin this quarter and what's sustainable for that kind of business going forward? I mean, it looked like, year to date, you actually produced more data center products there last year than you did this year. Does that really reverse in a significant way in the second half or more into 2025?
Speaker Change: Got it now duly noted on calling a choppy year here Gary.
Speaker Change: Well.
Speaker Change: I guess just as a.
Speaker Change: As a follow up just related to.
Gary: Long view kind of two part question.
Speaker Change: We help help us understand what drove that really strong margin this quarter and what's sustainable to that kind of business going forward and then it.
Speaker Change: It looked like year to date, you actually produce more data center product there last year than you did this year does that really reversed in a significant way in the second half or more into 2025.
Gary Fields: Well, while I know the answers to every one of those questions, I think Matt's just one notch closer to it than me. I'd like for him to answer them.
Speaker Change: Well well I know the answers to every one of those questions I think Matt just one not to closer to it than me like for him to answer those.
Matt Tobolski: Yeah, with respect to the margin profile,
Matt Tobolski: Yes with respect to the margin profile certainly the margin uptick we saw in Q2 really.
Matt Tobolski: With respect to the margin profile, certainly the margin uptake we saw in Q2, one of the big things is being driven by productivity as well as product mix. We had a pretty strong run of data center products we're building out of there for one of our customers with legacy Aon products, and that product mix and the overall kind of productivity through there really helped flush out that good, strong margin profile in the quarter.
Matt Tobolski: One of the big things is being driven by productivity as well as product mix, we had a pretty.
Speaker Change: Pretty strong run of datacenter products, we're building out of the area for one of our customers with legacy <unk> product.
Speaker Change: And that product mix and a overall kind of productivity through that really help flush out that could cause drug margin profile in the quarter.
Matt Tobolski: Certainly, though, as we look forward, you know, to your second half of that question, yeah, definitely we see an uptick in the percentage of revenue coming out of Longview driven by data centers in the latter half of this year. So there's definitely a lot of activity in conversion of that order that booked kind of after quarter end, you know. We expect to convert at a high probability that backlog within Q4 of this year. So there certainly is a lot of drive in the data center market kind of coming through this back end.
Speaker Change: Certainly, though as we look forward to your second half of that question, yes, definitely we see an uptick in sort of the percentage of revenue coming out of Longview, driven by data centers in the latter half of this year. So there's definitely a lot of activity and conversion of that order.
Speaker Change: The booked kind of after quarter end.
Speaker Change: We expect to convert at a high probability that backlog within Q4. This year. So there certainly is a lot of drive in the data center market kind of coming through the back half.
Speaker Change: Okay very good thank you.
Speaker Change: Yeah.
Operator: Your next question comes from Timothy Wojcicz with Baird. Your line is open.
Timothy <unk>: Your next question comes from Timothy <unk> with Baird. Your line is open.
Timothy Wojcicz: Hi everybody. Good afternoon. Good afternoon. Hey, Gary, just on the orders in the backlog, I was just kind of curious if you could give us a little bit of, you know, kind of added color on, you know, what you're seeing on the data center side. It sounds like it's several, you know, orders, but I guess I want to kind of confirm that and maybe what parts of the business or what products are you seeing, you know, some of the bookings and the backlog kind of growing?
Timothy <unk>: Hi, everybody good.
Timothy <unk>: Good afternoon.
Timothy <unk>: Good afternoon.
Timothy <unk>: Hey, Gary just on the you know the orders in the backlog I was just kind of curious if you could give us a little bit of kind of added color on <unk>.
Gary Fields: Yeah, with regard to the data center portion. It's multiple customers. Many of these customers have been on board with this for a good while, and as we've increased our production capabilities and have prospects of more production capabilities, they've begun booking. As I said, the new building in Longview is essentially booked full right now, and it doesn't come online until January 1st, but that fits their schedule, the type of products.
Speaker Change: You know what youre seeing on the datacenter side it.
Speaker Change: It sounds like it's several orders, but I guess I want to kind of confirm that and just maybe what parts of the business or what products or are you seeing.
Speaker Change: Some of the bookings and the backlog kind of growing.
Speaker Change: Yes, with regards to the data center portion.
Speaker Change: It is multiple customers.
Speaker Change: Ill.
Speaker Change: Any of these customers have been on board with this for a good while.
Dave: And as we've increased our production capabilities and have prospects of more production capabilities Dave.
Dave: Began booking as I said, the new building in Longview is essentially full right now and it doesn't come on until January one, but that fits fits their schedule.
Gary Fields: They're both air-cooled and liquid-cooled. We have developed some unique solutions for certain clients on a collaborative basis for their liquid cooling needs, and we continue to excel with our air-cooled solutions. So we're strong in both. I would look for liquid cooling to grow at a more rapid rate than air cooling going forward, but air-cooled is not going away, and it's not going down.
Dave: The type of products there.
Dave: They are both air cooled and liquid cool.
Dave: Oh.
Dave: We have developed some unique solutions for certain clients.
Dave: On a collaborative basis.
Dave: For their liquid cooling needs.
Dave: We continue to.
Dave: Excel with our air cooled.
Dave: So.
Dave: We're strong in both.
Dave: I would look for liquid cooling to grow at a more rapid rate than air cooling going forward, but air cooled is not going away and it's not going down.
Timothy Wojcicz: Okay, okay, that's helpful. And then maybe just on Oklahoma, you know, it does sound like there is going to be a little bit more volatility on the top line in the back half of 24. How would you kind of think about the margins as you kind of cut through that? Is it just a situation where you have to, you know, kind of manage through it, you know, keep the employee base, keep everything and just get a little bit more productive? Or are there levers you can pull where you can still kind of maintain this kind of 37 to 38% gross margin?
Speaker Change: Okay. Okay. That's helpful and then maybe just on Oklahoma.
Speaker Change: It does sound like there is you're going to be a little bit more volatility on the top line.
Speaker Change: In the back half of 'twenty four.
Speaker Change: How would you kind of think about the margins as you kind of kind of kind of chop through that.
Speaker Change: Is it is it just a situation where you have to.
Dave: Kind of manage manage through it.
Speaker Change: Keep the employee base to keep everything and you just get a little bit more productive or are there levers you can pull or you can get still kind of maintain this kind of 37%, 38% gross margin.
Gary Fields: Well, those are great questions, and we discuss them frequently. At this point in time, we're able to run at a rate that allows these margins to continue. If the bookings don't strengthen here soon, then we will have to make some adjustments for that segment. I don't know, you know, historically, you could just cut off hiring because there's enough turnover at the low end of the, you know, kind of the entry-level end of the employment.
Dave: Well.
Speaker Change: Those are great questions and we discuss them frequently.
Speaker Change: At this point in time, we're able to run at a rate that allows these margins to continue.
Speaker Change: If the bookings don't strengthen here. Soon then we will have to make some adjustments for that segment.
Speaker Change:
Speaker Change: I don't know.
Dave: Historically.
Speaker Change: You can just cut off hiring because theres enough turnover at the low end of the.
Speaker Change: Kind of the entry level and have the employee appointment.
Speaker Change: But we don't have much turnover now or.
Gary Fields: But we don't have much turnover now. We're a preferred place to work, and these people come and they stay, and the turnover is so low. So, you know, there's other ways, other levers we can pull if need be. We're not at a point of making that kind of decision yet.
Speaker Change: We're a preferred place to work and these people when they come in they stay in the turnover solo so.
Speaker Change: Theres other ways other levers, we can pull if need be.
Speaker Change: We're not at a point of making that kind of decision yet.
Gary Fields: Bookings are decent. They're just not as strong as we'd like. And like I say, We kind of mentioned this in the call earlier.
Speaker Change: Bookings are decent they're just not as strong as what we'd like and like I say.
Speaker Change: We've kind of mentioned this in the call earlier.
Gary Fields: You'll run along for a few days in the first part of the month, and you go, oh my goodness, this is not good. And then it'll start strengthening, and then the month finishes out pretty darn decent. And for whatever reason, I don't know of one rep that gets paid on an end-of-the-month basis. So it's not like they're doing it for that, but for some reason, they kind of clean their desks off towards the end of the month and send the orders in. I wish they'd have a little more... a regular cadence to it, but we continue to manage through that, and I look for it to be just a little chaotic for another one or two quarters. OK.
Speaker Change: Youll run along for a few days at the first part of the month and you go Oh My goodness. This is not good and then it'll start strengthening and then the month finishes out pretty darn decent.
Speaker Change: And for whatever reason.
Speaker Change: Don't know of one ramp that gets paid on the end of the month basis. So it's not like they're doing it for that but for some reason they kind of cleaned their desk off towards the end of the month and send the orders yet I wish they'd be a little more.
Speaker Change: Regular cadence to it but.
Speaker Change: We continue to manage through that.
Speaker Change: I look for it to be just a little chaotic for another one or two quarters.
Timothy Wojcicz: Okay, okay, understood. And then just as you kind of think about... The pricing on 454B, I think there's been some chatter in the marketplace, you know, a couple of your competitors have talked about maybe 8 to 10% type price increases next year. When do you kind of solidify, you know, what you'll do with price? Is that kind of, you know, something where you go out with one big increase? Or do you think you kind of slowly, you know, kind of price yourself into where the market's going, you know, through next year?
Speaker Change: Okay, Okay understood.
Speaker Change: And then just as you kind of think about it.
Speaker Change: The pricing on on 454 B.
Speaker Change: I think there's been some chatter in the marketplace. You know couple of your competitors has talked about maybe 8% to 10% type price increases next year.
Speaker Change: When does when do you kind of solidify.
Speaker Change: What what you'll do with price is that is that kind of.
Speaker Change: Something where you'd go out with one big increase or do you think you've kind of slowly kind of price into what the where the market's going.
Speaker Change: Through next year.
Speaker Change: Well.
Gary Fields: two or three things. First off, right now, we've got great margin, and the pressures on those margins are minimal. There's more pressure related to run rate than there is to material cost at today's analysis. So, if we want to keep our margins, we need to keep the run rate up there where it is now or grow the run rate. That takes care of a lot of the fixed costs and keeps that margin where it's at. All of that looks really good for it.
Speaker Change: Two or three things first off right now we've got great margins and the pressures on those margins are minimal they're more there's more pressure related to run rate than there is to material cost.
Speaker Change: Today's.
Speaker Change: Analysis.
Speaker Change: So if we wanted to keep our margins we need to keep the red right up there, where it's at now or or grow the run rate.
Speaker Change: That takes care of a lot of the fixed cost it keeps that margin where it's at.
Speaker Change: So.
Speaker Change: All of that looks real good for us.
Gary Fields: If we are a premium to these people now, which we are, and they go up 8 to 10 percent, we don't have to. That premium largely goes away, and when you look at the value proposition of our equipment versus theirs, it becomes very intriguing to purchase Aon equipment versus the others because you get so much more value for it. And if it's not a cost thing, then we could see some real strengthening of the booking.
Speaker Change: If if we are a premium to these people now which we are.
Speaker Change: And they go up 8% to 10%, we don't have to that premium largely goes away.
Speaker Change: And when you look at the value proposition of our equipment versus theirs.
Speaker Change: It becomes very intriguing to us.
Speaker Change: Purchase a on equipment versus the others, because you get so much more value for it and if it's not a cost thing then.
Speaker Change: We could see some real strengthening to the bookings.
Gary Fields: We're not absolutely sold that that's what's going to happen, but as these competitors talk, they become more and more certain about them going to have a price increase related to the refrigerant, and we become more and more certain we're not. We have produced a decent amount of the equipment now, so we've got empirical data to support the analytics that we have in the company and we've built the equipment, and you know, it just, It's a really interesting story that I want to watch how it unfolds here. I cannot imagine how much fun it would be to be in the sales channel again, like my old days, if I wasn't a price premium. That would be outrageous.
Speaker Change: We're not absolutely sold that that's what's going to happen but.
Speaker Change: As these competitors talk they become more and more certain about them going to have a price increase related to the refrigerant and we become more and more certain we're not.
Speaker Change: We have produced a decent amount of the equipment now so we've got empirical data to support.
Speaker Change: The.
Speaker Change: Analytics that.
Speaker Change: Pricing analytics, we have in the company.
Speaker Change: And we've built the equipment.
Speaker Change: Yes.
Speaker Change: It just.
Speaker Change: It's.
Speaker Change: A really interesting story that I want to watch how it unfolds here.
Speaker Change: I cannot imagine how much fun it would be to be in the sales channel again like my old days, if I wasn't a price premium.
Speaker Change: That would be.
Speaker Change: Outrageously fun.
Timothy Wojcicz: I'll look forward to watching it too. So thanks for the thanks for the time. I'll turn it back on.
Speaker Change: I look forward to watching it too so thanks for the thanks for the time I'll turn it back.
Speaker Change: Yeah.
Operator: As a reminder, if you wish to ask a question, please press star 1. Your next question comes from John Braatz with the Kansas City Capitol.
Speaker Change: As a reminder, if you wish to ask a question. Please press Star One. Your next question comes from Jon Braatz with Kansas City capital.
Speaker Change: Your line is open.
John Braatz: Good afternoon, everyone. Good afternoon. Hello, Matt. I have a question.
Speaker Change: Good afternoon, everyone.
Jon: Hello, John.
Jon Braatz: Good afternoon, Hello, Matt I have a question and Gary touched on it a little bit.
Speaker Change: On the your liquid cooling solutions for the data market data center market can you talk a little bit about.
Speaker Change: How that market is evolving and maybe.
Speaker Change: What your competitive position within that segment of the market is.
Speaker Change: And maybe pricing and margin for that product versus the air Cool era.
Speaker Change: Cool.
John Braatz: And Gary touched on a little bit about your liquid cooling solution for the data market, the data center market. Can you talk a little bit about how that market is evolving? And maybe, you know, what your competitive position within that segment of the market is, and maybe pricing and margin for that product versus air-cooled. Air-cooled.
Speaker Change: Yes of course, so when we get down to kind of where the.
Speaker Change: The product is kind of positioned and where that competitive advantage comes from it's really driven by.
Matt Tobolski: Yeah, of course. So when we get down to kind of where the product is kind of positioned and where that competitive advantage comes from, it's really driven by the ability for us to really kind of custom-tailor solutions to applications. When we think about the evolution inside the data center market around AI, we're driving pretty substantial increases in overall density from an IT compute perspective, but we're also driving the need for, I'd say, higher capacity heat projection solutions.
Speaker Change: The ability for us to really kind of custom tailor solutions to applications and.
Speaker Change: When we think about the evolution inside the data center market around AI.
Speaker Change: We're driving pretty substantial increases in overall density for from an it compute perspective.
Speaker Change: But we're also.
Speaker Change: Driving the need for I'd say higher capacity.
Speaker Change: He projection solutions.
Matt Tobolski: And so moving towards these larger and really highly configured solutions is really the sweet spot for us to be in as an organization from developing solutions and crafting solutions. And so the market is evolving in a way that's really positioning the basic products in a much stronger light in kind of this changing dynamic. And as data center kinds of infrastructure and design concepts are changing. The overall kind of infrastructure, how we want to deploy data centers and data center cooling, the engineering know-how and resources that our team is able to provide to customers is really helping drive value in that sort of design architecture and evolution.
Speaker Change: So moving towards these larger in at really highly configured solutions is really the sweet spot for us to be in as an organization from from developing solutions and crafting solutions and so the market is evolving in a way that's really positioning the basics products in Illinois and much stronger light.
Speaker Change: And kind of this changing dynamic and as the data center kind of infrastructure and design concepts are changing.
Speaker Change: The overall kind of infrastructure and how we want to deploy data centers and data center cooling.
Gary: The engineering know, how and resources that our team is able to provide to customers is really helping drive value in that sort of design architecture and evolution and so it's strengthening bonds with existing customers. You know Gary mentioned, we're working with some new customers a lot of new customers, but we're also working with existing customers where they are.
Matt Tobolski: And so it's strengthening bonds with existing customers. You know, Gary mentioned we're working with a lot of new customers, but we're also working with existing customers where that engineering know-how and sort of thought process is really providing a very strong relationship and a really sticky relationship kind of going forward. As we think about pricing, there certainly is more price content living inside of a liquid cool data center right now from a price per KW perspective, as well as there's still, as we deploy liquid cool data centers, airside doesn't go away, so we still have airside cooling in combination with liquid cooling for a variety of ancillary equipment. So the overall kind of project opportunity for us continues to evolve and get larger from a central pricing standpoint [inaudible] Okay. Matt, thank you.
Gary: That engineering, Knowhow and sort of thought process is really providing a very strong relationship and a really sticky relationship kind of going forward.
Gary: How do we think about pricing there certainly is more price content living inside of a liquid cooled datacenter right now from a <unk>.
Speaker Change: For kw perspective, as well as theirs.
Speaker Change: They are still as we deploy liquid cooled datacenters air side doesn't go away. So we still have are cycling in.
Gary: In combination with liquid cooling.
Gary: For a variety of ancillary equipment and so the overall kind of project opportunity for us continues to evolve and get larger from a central pricing standpoint.
Gary: And then just on the margin side, it's comparable.
Speaker Change: <unk> margin to what we're doing today, so what we're selling at today, it's not.
Speaker Change: Markedly different from kind of a margin expectation perspective.
John Braatz: Okay. Matt, thank you very much. I appreciate the color.
Speaker Change: Okay, Matt. Thank you very much I appreciate the color.
Speaker Change: Of course.
Speaker Change: Okay.
Joe Mondillo: There are no further questions at this time. Joe Mondillo, please continue.
Speaker Change: There are no further questions at this time.
Joe Mondello: Joe Mondello. Please continue.
Joe Mondillo: All right, I'd like to thank everyone for joining us on today's call. If anyone has any questions over the coming days and weeks, please feel free to reach out to me. Have a great rest of the day, and we look forward to speaking with you in the future. Thanks. This concludes today's call. Thank you for your participation. You may now disconnect.
Joe Mondello: 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. Thanks.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: This concludes today's call. Thank you for your participation you may now disconnect.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Yeah.