Q1 2025 AAON Inc Earnings Call
Yeah.
Speaker Change: Good morning, ladies and gentlemen, and welcome to the a O N Incorporated's first quarter 2025 earnings release conference call at.
At this time all eyes 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.
This call is being recorded on Thursday may 1st 2025, I would now like to turn the conference over to Joe Mondello Director of Investor Relations. Please go ahead.
Joe Mondello: Thank you operator, and good morning, everyone. The press release announcing our first quarter financial results was issued earlier. This morning and can be found on our corporate website, a O N dot com.
Joe Mondello: Today is accompanied with a presentation that you can also find on our website as well as on the listen only webcast.
Joe Mondello: Please turn to slide two.
Joe Mondello: We begin with our customary forward looking statement policy during the call any statements presented dealing with information that is not historical is considered forward looking and made pursuant to the safe Harbor provisions of the Securities Litigation Reform Act of 1995, The Securities Act of 1933, and the Securities and exchange.
Joe Mondello: Jack with 1934, each as amended as such it is subject to the occurrence of many events outside of Aam's control that could cause <unk> results to differ materially from those anticipated you.
Joe Mondello: You are all aware of the inherent difficulties risks and uncertainties in making predictive statements.
Our press release and Form 10-Q that we filed this morning 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 portion of today's call use non-GAAP financial measures as defined.
Joe Mondello: In regulation G. You can find the related reconciliations to GAAP measures in our press release and presentation.
Speaker Change: Joining me on today's call is Garry field CEO, not the bulky president and CLO and Rebecca Thompson CFO and treasurer.
Gary will start us off with some opening remarks, Rebecca will follow with a walk through the quarterly results that will then provide further details on our operations and outlook going forward and before taking questions. Gary will finish with some closing remarks with that I will turn the call over to Gary.
Speaker Change: Starting on slide three.
Speaker Change: Router to jumping into the results I wanted to start off by reminding you of our core strategic pillars.
Speaker Change: These pillars consist of leading in innovation and customer solutions, driving sustainable organic growth and being a best in class operator.
Speaker Change: These three pillars helped guide our long term strategic planning and remind us of what we are trying to accomplish when forming tactical strategies.
Speaker Change: All of these pillars did not always exist at Aegon.
Speaker Change: Since our founding leading in innovation has always been core to who he is.
Speaker Change: Over the past several years our strategy is built upon this with a focus on developing ways to drive sustainable long term organic growth and being a best in class operator.
Speaker Change: All of the tactical initiatives that we've taken such as transitioning to our leadership team putting.
Speaker Change: Putting into place succession planning.
Speaker Change: Formerly constructing and documenting long term strategy planning adopting a one a on principle and I.
Speaker Change: Could go on and on.
Speaker Change: All of this was to better leverage our core to drive sustainable and efficient long term growth.
Speaker Change: This company has never had a better long term strategy with a better leadership team to execute it well.
Speaker Change: What we're doing with the development of heat pumps on the AI side of the business and custom air side and liquid cooling data center solutions on the basic side is very exciting.
Speaker Change: The strategies were taking regarding the other two pillars ensures that we will fully leverage these innovations along with the already Premier solutions, we provide to drive market share gains at highly profitable levels.
Speaker Change: Now turning to slide four.
Speaker Change: The first quarter was a solid quarter for net.
Speaker Change: Sales margin.
Speaker Change: Earnings per share, notably improved from the fourth quarter and backlog grew to a record level.
Speaker Change: Total net sales grew year over year 22, 9%.
Speaker Change: Sales of basics branded equipment were up 374, 8%.
Speaker Change: Both are solid and liquid cooling solutions for data centers, we're driving factors.
Speaker Change: Partially offsetting this strength sales of Aon, Brad branded equipment were down 19, 1%.
Speaker Change: Production of our rooftop units was impacted by the weak bookings we received throughout most of the fourth quarter.
Speaker Change: Additionally, supply chain issues with certain components associated with the news are 54, B refrigerant were also a factor.
Speaker Change: On a positive note bookings of this equipment year to date have been strong.
Speaker Change: Also had begun to see the supply chain issues abate early in the second quarter.
Speaker Change: Total gross margin contracted 840 basis points versus the comparable quarter a year ago.
Speaker Change: This reflected weaker production volume of <unk> branded rooftop units and the resulting operating deleverage effect.
Speaker Change: Gross margin at the Oklahoma segment was down 1300 80 basis points.
Speaker Change: Strong sales of basics branded equipment, along with operational efficiency improvements drove solid gross margin expansion.
Speaker Change: For our products and basic segments.
Speaker Change: Gross margin that these two segments were up year over year, 103 hundred 50 basis points respectively.
Speaker Change: Total backlog finished the quarter at a record level of $1 billion up year over year 83, 9%.
Speaker Change: An up quarter over quarter, 18.4%.
Speaker Change: First quarter bookings of both a unbranded and basic branded equipment were robust.
Speaker Change: Backlog of a unbranded equipment was up quarter over quarter 23, 4%.
Speaker Change: And this was the highest level since the first quarter of 2023.
Speaker Change: Bookings of rooftop units were very strong and strengthened throughout the quarter.
Speaker Change: Backlog of basics brand in equipment was up quarter over quarter, a 15, 4%.
Speaker Change: Driven by bookings at both air side and liquid cooling.
Speaker Change: Data center equipment.
Speaker Change: Given the backlog on both sides of the business, we're positioned well entering the second quarter.
Speaker Change: I will now hand, it off to Rebecca Thompson, who will walk through the quarterly financials in more depth.
Speaker Change: Thank you Gary.
Speaker Change: Please turn to slide five.
Speaker Change: Net sales for the quarter increased 22, 9% to $322 1 million.
Speaker Change: $262 1 million in the first quarter of 2024.
Speaker Change: The year over year growth was driven by a 374, 8% increase in basic equipment sales.
Speaker Change: This was reflected in the results of the basics and Aon coil product segments.
Speaker Change: Net sales at these two segments were up 138, 9% and 287, 8% respectively.
Speaker Change: Sales of Aon branded equipment declined year over year 19, 1%.
Speaker Change: This was largely reflected by the Aon, Oklahoma segment, which realized a decline in net sales of 23%.
Speaker Change: Production of rooftop units were impacted by weak bookings throughout most of the fourth quarter.
Speaker Change: This was related to a temporary lull in demand as the market shifted from the legacy or for 10, a refrigerant the new R 454, B refrigerant equipment.
Speaker Change: Bookings have since rebounded in a strong manner.
Speaker Change: Jesse that we're becoming more competitive with the new refrigerant equipment.
Speaker Change: Also impacting the first quarter was a tight supply of certain components associated with the new refrigerator, which temporarily constricted our production rates.
Speaker Change: Supply of these new components have recently begun to Peru, I'm, unable us to increase production rates significantly in the second quarter.
Speaker Change: Moving to slide six.
Speaker Change: Gross profit decreased six 4% to $86 4 million from 92.2 million.
Speaker Change: As a percentage of sales gross profit was 26, 8% compared to 35, 2% in the first quarter of 2024.
Speaker Change: Challenges from the industry regulator, refrigerate transition and nonresidential construction activity significantly affected our largest segment.
Speaker Change: Oklahoma.
Speaker Change: In a decreased volumes and lower overhead absorption.
Speaker Change: Gross margins at this segment were down year over year one.
Speaker Change: 1380 basis points to 23, 5%.
Speaker Change: As we begin to see production volumes increase in the second quarter, we fully expect gross margins to recover.
Speaker Change: Production volumes of basics related equipment acted as a partial offset.
Speaker Change: This allowed gross margin at the basics and Aon coil product segments to expand.
Operational efficiency improvements at both our Oregon, and Texas facilities also contributed to improve segment margins.
Speaker Change: Please turn to slide seven.
Speaker Change: Selling general and administrative expenses increased 13, 3% to $51 3 million from $45 3 million in the first quarter of 2024.
Speaker Change: As a percentage of sales SG&A decreased to 15, 9% from 17, 3%.
Speaker Change: Depreciation and amortization was <unk> 3 billion due to our increased investments in back office technology.
Speaker Change: Offset by a decrease in professional fees of $3 1 million due to various professional regulatory and legal corporate requirements in 2024.
Speaker Change: SG&A expenses also included a $2 7 million fee due to a real estate broker associated with the December 2020 for acquisition of our Memphis, Tennessee plant for a percentage of the incentives awarded to us by various entities.
Speaker Change: Moving to slide eight.
Speaker Change: Diluted earnings per share was 35 cents down 23, 9% from a year ago.
Speaker Change: Excluding the net impact of the $2 7 million real estate broker fee.
Speaker Change: Adjusted earnings were 37 cents down 20% from a year ago.
Speaker Change: The decline in earnings fully reflects the lower production volumes and profits of Aon branded equipment.
Speaker Change: Our effective tax rate in the quarter was nine 8%.
Speaker Change: The company's estimated annual effective tax rate, excluding discrete events is expected to be approximately 25%.
Speaker Change: Turning to slide nine.
Speaker Change: Cash cash equivalents and restricted cash balances totaled $2 4 million on March 31 2025.
Speaker Change: And that at the end of the quarter was $252 4 million.
Speaker Change: Our leverage ratio was <unk> 95.
Speaker Change: Year to date cash flow used in operations was $9 2 million compared to cash flows provided by operations of $92 $4 million in the comparable period a year ago.
Speaker Change: Year to date cash flow from operations largely reflected increased investments in working capital.
Speaker Change: Capital expenditures through the first quarter of the year, including expenditures related to software development increased 32% to $50 4 million.
Speaker Change: We drew down $97 5 million on our revolving line of credit over this period largely to finance the investments in working capital capital expenditures and $30 million of open market stock buybacks.
Speaker Change: Overall, our financial position remains strong.
Speaker Change: This gives us flexibility and allows us to continue to fully focus on investments that will drive growth and generate attractive returns.
Speaker Change: For 2025, we continue to anticipate capital expenditures will be $220 million.
Speaker Change: I will now turn the call over to Matt who will walk through operations in more detail and update you on our outlook.
Matt: Thank you Rebecca starting on slide 10, Gary and Rebecca covered this pretty well, but here you will see how a unbranded sales performed relative to basic branded sales.
Matt: Revenue growth of 22, 9% was fully driven by basic branded equipment sales growing 374, 8%.
Matt: This was driven by data center demand for both air side cooling equipment manufactured at the basics segment in <unk>.
Matt: Liquid cooling equipment manufacturer in the newly expanded space at the <unk> products segment.
Matt: Basics segment sales were up 138, 9% in core product sales were up 287, 8%.
Matt: This helped drive an expansion in segment gross margin of 350 basis points to 24% at basics and 100 basis points to 34, 6% coil products.
Matt: At both segments. We also began to benefit from the initiatives, we're taking to improve operational efficiencies, particularly at the basics segment were right sizing capacity at the Oregon facility and focusing more on productivity of the facility.
Matt: We expect to see more improvement in the basics segment throughout the year, especially in the second half of the year.
Matt: <unk> branded sales were down 19, 1% driven by rooftop production volumes being down at the AAN, Oklahoma segment.
Matt: In Oklahoma segment sales were down 23%.
Matt: This was largely reflective of the weak bookings, we realized throughout most of the fourth quarter.
Matt: Supply chain issues with component associated with the new refrigerant also contributed to lower production volumes.
Matt: This was a temporary issue related to refrigerated transition there was a challenging to manage occurring in.
Matt: Difficult to anticipate as the market transition to production of the new refrigerant equipment component manufacturers were challenged with keeping up with demand.
Matt: We would've increased inventory levels for some of these components, but it is tough to predict.
Matt: Right.
Matt: As a result, the lack of access to certain parts caused us to maintain lower production levels. Despite a large backlog of bookings.
Matt: Positive is that we're beginning to see improvement in the supply chain, which is allowing us to increase production rates in the second quarter given the size of the backlog. We anticipate production will continue to increase over the next several months.
Please turn to slide 11.
Matt: Total backlog at the end of the first quarter finished a record level of $1 billion.
Matt: It is up year over year, 83, 9% and up quarter over quarter 18, 4%.
Matt: Backlog of eight O branded equipment was $404 million up year over year of 44, 9% in a quarter over quarter 23, 4%.
Matt: This backlog is the highest level since the first quarter of 2023.
Matt: Since the beginning of the year bookings at this side of the business have been strong we received a lot of positive commentary from our sales channel and we believe our competitiveness with the new refrigerant equipment has never been better.
Matt: We're still trying to get an idea on exactly where our price premium wise, but it seems that we havent narrowed a little.
Matt: Also helping drive the backlog, we continue to realize strong demand of our heat pump configured rooftop units otherwise known as alpha glass in.
Matt: In April we started to introduce our next generation of the Alpha class series, which is operable down to negative 20 degrees Fahrenheit.
Matt: At the end of this year, our entire product portfolio of rooftop units will be configurable with its low temperature configure annuity.
Matt: Meeting the <unk> commercial heat pump challenge two years in advance of the set 2027 goal.
Matt: The strong backlog in this side of the business positions us well entering the second quarter.
Matt: Our goal is to drive a lot more volume through the Tulsa facility and as we do this youll see margins at the Aon, Oklahoma segment begin to recover.
Matt: With the supply chain issues abating and given the size of the backlog, we should begin to see production and profitability improve in the second quarter. It continued through the third quarter the.
Matt: The fourth quarter will depend on the bookings we received over the next few months.
Matt: The macroeconomic environment remains in pretty poor shape, which is creating a lot of uncertainty on the back half of the year for now though.
Matt: We are taking market share.
Matt: Despite the macro uncertainties the sentiment across our sales channel is relatively upbeat. We're also making headway with our national account strategy and are optimistic we will see meaningful impact, especially with our industry, leading alpha class air source heat pumps.
Matt: These national accounts are large in volume and a multi year replacement programs.
Matt: If were successful it will be material to growth.
Matt: Backlog of basics branded equipment with $623 million up year over year 122, 7%.
Matt: Quarter over quarter 15, 4%.
Matt: Bookings of both air side and liquid cooling equipment for data centers have been strong year to date.
Matt: But it's a great position for the rest of the year. It provides much more visibility and certainty of sustainable growth into 2026.
Matt: With such a large backlog in hand, we can manage production more efficiently, which you will see in the margins at the encoder products in basics segments. We continue to anticipate margin improvement most notably in the basics segment as we progress throughout the year, particularly in the second half.
Matt: Our capacity expansion plans continue to progress well.
Matt: Production of our liquid cooling datacenter equipment as the on core products segment has been ramping well and the new space. We currently have three production lines in place with <unk>.
Matt: Fans to increase that to five later this year.
Matt: That basics, we are making great progress progress with right sizing capacity.
Matt: <unk> already begun to see these operational improvements in the margin and you should expect to see more improvement in the second half of the year.
Matt: The expansion in Memphis is also progressing we have started to assemble equipment. There at a small scale now it won't be as efficient as their other facilities until we get the vertically integrated production setup.
Matt: But it is helping us achieve our on time delivery commitments and goals.
Matt: We expect meaningful production to begin in the fourth quarter of this year with a sharper ramp up of volumes throughout 2026.
Matt: Until we get this production in place we continue to expect the facility will incur about $5 million to $7 million of costs with minimal revenue to offset in.
Matt: In the first quarter these costs amounted to approximately $2 $8 million in <unk>.
Matt: And we realized a $2 7 million fee associated with various incentives relating to Memphis.
Matt: Now please turn to slide 12.
Matt: We maintain our full year outlook.
Matt: We anticipate full year sales growth to be in the mid to high teens at a gross margin similar to what we realized in 2024.
Matt: SG&A as a percent of sales, we will realize a decline of 25% to 50 basis points and capex will be approximately $220 million.
Matt: For the second quarter.
Matt: We look for sales and earnings to be up modestly from the first quarter.
Matt: I noticed the tax rate was unusually low in Q1 and that our interest expense in Q2 will be up with the higher debt balance.
Matt: The implication is that operating income will be up quarter over quarter more than just modestly as indicated in the earnings guide.
Matt: Finally inclusive of the updated annual outlook is our tariff mitigation surcharge at 6%, which recently went into effect.
Matt: The outlook assumes the surcharge will be in effect throughout the remainder of the year.
Matt: <unk> trade policy is very fluid at any moment, depending on how policy evolves, we could increase or decrease the surcharge. We anticipate the surcharge will fully neutralize the impact of tariffs on our costs and margin.
Matt: Lastly, I would like to highlight that we are hosting an investor day on June 10th in New York City. Please sign additional information on our corporate website under the investors section and I hope to see some of you there.
Gary: With that I will hand, the call back to Gary for closing remarks.
Matt: Yeah.
Gary: With this being my last earnings conference call I wanted to close by thanking all of our stakeholders to our stockholders our employees sales channel partners customers and vendors. Thank you.
Gary: I also would like to thank our founder enormous yarns and for giving me this opportunity.
Gary: It has truly been a pleasure and honor managing this company for nearly 10 years.
Gary: A lot of change has taken place over the last decade, and I can confidently say the company is in a much better state than when I arrived.
Gary: I always said one of my principle goal since day, one was to work myself out of a job.
Gary: Done that day has come.
Gary: The management team of this company under Matt's leadership has never been better the growth prospects are better than ever.
Gary: With that thank you again and I will now open the call for Q&A.
Speaker Change: Ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by the number one on your Touchtone phone.
Gary: You'll hear a prompt that your hand has been raised.
Speaker Change: Should you wish to decline from the polling process. Please press star followed based on a breakthrough.
Speaker Change: You are using a speaker phone make sure to lift your handset before pressing any case.
Your first question comes from the line of Julio Romero from Sidoti. Please go ahead.
Speaker Change: Yeah.
Julio Romero: Great. Good morning, Gary Rebecca, Matt and Joe wanted to start off congratulations again guarantee for for all your work over the years.
Speaker Change: Thank you.
Julio Romero: Maybe to start on.
Speaker Change: What youre seeing on K 12 public bid data what does that data tell you in terms of where the industry is in terms of pricing of equipment and wear aon's pricing Delta currently stands relative to the competition.
Speaker Change: Well, we just had a national sales meeting a week or so ago and Matt presided over that I'm going to ask Ken to respond to that one for us.
Ken: Yes of course, and when you look at the kind of feedback we're getting from the sales channel partners that really from the bid activity and all indicators definitely say the aon price premium it's definitely contracted which is a positive that we're seeing from a competitive competitiveness standpoint.
Ken: Certainly hasnt gotten severity.
Ken: <unk> is showing a percent or two of closure in that price premium, which is allowing us to continue taking market share. It really makes it a lot easier to be able to sell that value proposition at the Aon product offers.
Ken: Got it that's very helpful and then.
Ken: Ken can.
Speaker Change: Can you give us a sense of where your market share stands today with regards to national accounts, and where you think you can take that over time by leveraging their heat pump technology.
Ken: Okay.
Ken: Yes, that's little accounts as they stand today, I mean theres definitely a.
Ken: A good amount of national accounts within the <unk> portfolio.
But a lot of the ones that exist today in our books are I'll say.
Ken: Smaller scale national accounts, and so when we look at the overall market share in national accounts.
Ken: Certainly low as it stands today inside the Aon portfolio.
Ken: What I would say, though is the acceleration that we've seen with intentional effort and really positioning the product.
Ken: It's showing a very noticeable acceleration of national account activity around the Ann brands.
Ken: And really when you look at the kind of trajectory that we see international account segment.
Ken: It will make a meaningful impact to the brand and we're seeing a tremendous amount of activity a lot of adoption and understanding of the value proposition.
With the Alpha class product really being able to offer an incredibly flexible keep up solution that really offers a.
Ken: Offers a great option not just in cold climates, but also in warmer climates.
Ken: We have a portfolio that can really check the boxes for the entire industry and for the entire national account across countries across the country and so we're seeing a tremendous amount of involvement there.
Ken: The activity that our national sales team in partnership with our sales channel is engaged in right now is tremendous and so we see that being a meaningful impact for AI and kind of on a go forward basis.
Ken: The one thing I always want to point out there was national accounts do not just transition overnight I mean, it is a process because of the scale of these accounts the sales cycle tends to be a little bit longer than lets say a traditional K 12 type project.
Ken: There's a lot more conversation around the value proposition there is a lot more positioning of the product.
Ken: Because we are setting up multiyear programs not just a single project.
Ken: So why I say that is we're going to see these materializing in 2005, we will start seeing more and more national accounts materialize.
Ken: Labour the trajectory I think it's going to be later 'twenty five you'll start seeing the acceleration with 26 is really the year that a lot of today's work youre going to convert to revenue.
Ken: But when we look at that Alpha class solution and they really what we just announced at our National sales meeting a couple of weeks ago.
Ken: Being able to have a heat pump solution that can operate all the way down to a negative 20 degrees is a tremendous.
Ken: Option to be able to present to our customer at the national accounts, where we can handle those coldest climates.
Ken: Call that the extreme series for us for the negative 20 operating condition.
Ken: We're able to really capture a tremendous amount of those northern states and a true heat pump operation mode, but we also have what we branded the eco and the pro series, which provide flexibility and more cost effective solutions as you kind of moved to the southern states and.
Ken: And so that portfolio of Alpha class products from the extreme cold temperatures to be warmer climates is really an all encompassing product portfolio that is really resonating with our national account customers.
Ken: Very helpful. Thanks again.
Speaker Change: Your next question is from the right line of Ryan Merkel from William Blair. Please go ahead.
Ryan Merkel: Hey, everyone. Good morning, nice quarter, and let me also say congrats Gary Great working with you wish you best of luck.
Gary: Thank you much.
Speaker Change: So my first question is just on the core rooftop business you guys talked about strengthening orders through the quarter can you just talk about a couple of things the push outs that you saw last quarter did those come back as you expected do you think you're taking market share just given where your price and then I'm a little <unk>.
Gary: So if you if you saw kind of a pop in March ahead of that surcharge that you'd put it in April.
Speaker Change: Yes, Matt go ahead sorry.
Matt: Yeah, so as it relates to the push outs indefinitely. There was theres volatility in Q4 in bookings and it really a lot of that was just on the adoption cycle with that new refrigerant.
Matt: We talked very openly on that Q4 call that while the first couple of months of Q4 were soft we definitely saw that reinvigoration in December and we continued seeing strength in bookings throughout Q1 and so.
Matt: What that's telling us is that sort of softness in those push outs that we saw in Q4.
Matt: Largely behind us from an overall kind of impacts from the refrigeration transition.
Matt: And really see that materializing into consistent order cadence that we're seeing and that we would expect in this kind of normal normal seasonal bookings.
Matt: Your question definitely I mean, obviously, you put a 6% surcharge and theres going to be a lot of conversation of activity trying to get ahead of that but one thing we're very intentional on was not allowing this to be an open ended.
Matt: Bring all your orders in.
Matt: Squamous before that the surcharge comes in.
Matt: We were very open with our sales channel that we had capped the amount of orders that would be we would access with without a surcharge in place.
Matt: Really based on financial modeling and inventory levels that we had for the vast majority of its components.
Matt: And so while there was definitely a lot of activity ahead of that surcharge in March.
Matt: There would have been a lot more if we didn't put a cap on that and so we kept that and said. This is the amount of orders we are willing to accept prior to implementing a surcharge.
Matt: And why that's important is as we came on the back end of that surcharge.
Matt: The day after the surcharge went into effect there was certainly a gift relative today before but if you look at the overall orders cadence.
Matt: Come on the back side of that surcharge being put in place. We continue seeing the traditional strengthening of orders that we would normally see within the Q2 bookings cadence and so.
Matt: While there was a little bit of pull forward, we didn't allow that to be overwhelming to the overall operation.
Matt: We're definitely seeing a.
Matt: Traditional bookings cadence in the last 45 days on the heels of that.
Matt: On the heels of that surcharge being put into effect and so we definitely.
Matt: See this normalizing and it really what it's telling us as well as relative to some of our peers. We're definitely seeing I'll say stronger bookings, which really tells us number one our price competitive price.
Matt: Price positioning is definitely more competitive than it has historically been and also that was telling us that we are definitely getting market share.
Matt: Got it okay, that's encouraging and that was the answer I was looking forward actually so thanks for that.
Matt: And then I'd like to put a finer point on the <unk> guide.
Matt: Street has about 60 cents.
Matt: You just did adjusted 37 stance and you're talking about up modestly so.
Matt: Can you just help us with that and help us think through sales and margins I'm just wondering if theres, a essentially bigger margin impact in <unk> because of the Memphis facility that maybe we don't appreciate but just any help there.
Matt: Right.
Matt: Okay.
Matt: Yes, so I wanted to start off by reaffirming the overall full year guide and just kind of why I want to start there as they say you know there is definitely a strong growth year in a strong performance here that youre going to see in 2025 out of that.
Matt: Q2, we're coming on the heels of Q1 that would be impacted in the Oklahoma segment with some supply chain constraints.
Matt: And so as we said in the prepared commentary.
Matt: Supply chain impacts are abating.
Matt: But if you you kind of think for a second coming out of April into April I should say those were still lingering as we entered April.
Matt: And so what that does is it starts us off a little bit slow in April and slower than we want to be relative to the backlog, we have and the overall demand for the product.
Matt: So that has not given us that immediate pop that we'd want to see inside of the Oklahoma segment as we basically ramp up production.
Matt: Our supply chain and kind of get to a more normalized cadence. So that is a little bit of an impact that is built into that guidance.
Matt: As you also think about the basics and the ACP segments.
Matt: Q1 was a very strong quarter in Q1 definitely we have some good good uptick in productivity, especially inside of that coil products segment.
Matt: But theres also traditionally a little bit of Lumpiness, just on kind of how orders flow through and just based on delivery schedules of these larger orders that kind of are associated with these data center projects.
Matt: So I would say that its I don't want to set an expectation for Q2 to build upon Q1, there's a little bit of noise.
Matt: And you might see just a slight kind of pullback in overall sales inside the ACP basics segments, just coming off the heels of such a strong Q1.
Matt: So that's sort of built into that guide.
Matt: But the one part I want to also touch on is the overall operating income is going to be far more than modestly which is to your three year comment showing you strengthening in sales out of Oklahoma.
Matt: And with that Youre going to see good margin recovery out of the Oklahoma segment in Q2.
Matt: But as we kind of Peel that back he wanted a very beneficial tax rate that we don't anticipate in Q2.
Matt: So from a bottom line flush out you can definitely see a tax rate impact in Q2, you didn't have in Q1, and you're also going to have growing interest expense.
Matt: We've invested in working capital with the production rates ramping up in both oil products and basics and so.
Matt: If you look at the operating income perspective, you would see a great uptick in Q2, and Thats, just being hampered a little bit by that tax rate differential and the interest rates, that's kind of what's flushing that modest guidance from an EPS perspective.
Okay, that's really helpful.
Matt: Pass it on thanks, so much.
Speaker Change: Your next question is from the line of Chris Moore from CJS Securities. Your line is now open.
Chris Moore: Hey, good morning, guys. Thanks for taking a couple and I also congrats Gary Thanks for everything.
Speaker Change: Sure in terms of you're still here, some big players canceling or downsizing.
Chris Moore: Data center construction, just wanted to kind of go a little deeper in terms of.
What you're hearing from your customers how much visibility do they give you in terms of their plans over the next three to five years.
Chris Moore: Okay.
Chris Moore: Yes, there is tremendous visibility from a pipeline perspective that we see with our customers and large data center operators that we work with.
Chris Moore: We're typically getting every month every two months, we're getting an updated pipeline.
Chris Moore: That is provided to us and so that's giving us anywhere from three to seven year kind of outlook on what these big players have in their projections.
Chris Moore: Is there noise in the data center industry right now I'm sure. There's a lot of conversation around cancellations or push outs, but what I would say is the pipeline that we see has never been stronger the orders booked that we see has never been stronger and while there might be some near term noise.
Chris Moore: It's still a growing base and so we're seeing this continuous strengthening where we're seeing the the inquiries the pipeline visibility we're seeing all of that in a very strong condition seen it strengthening.
Chris Moore: There is definitely some near term conversations with.
Chris Moore: Hey, Chris I think it's actually a good thing if you think about this systematically I mean, if we if we sort of have a more normalized but aggressive growth rate as an industry not relative to a bit of an industry, that's far easier to manage and so we see this continued long term strengthening cycle, we see tremendous the good visibility into 2000.
Chris Moore: 26.
Chris Moore: It's providing us confidence in that sort of next year performance continuing to build off a strong 25.
Chris Moore: So yes, there is noise in the industry, but I would just reaffirm that the visibility of the pipeline has never been stronger.
Chris Moore: Order activity within the the basic segment has never been stronger.
Chris Moore: The activity with our customers engaging with those customers has never been better.
Chris Moore: Yeah.
Chris Moore: Perfect.
Chris Moore: Yeah.
Chris Moore: The 200 million plus liquid cooling order was.
Chris Moore: I know they can get.
Chris Moore: <unk> pushed a little bit it was any of that or much of that in Q1.
Chris Moore: So of that order if we look at the the $200 million order that we talked about last year.
Chris Moore: So far we've recognized about $80 million or so of that revenue and so that's the sort of ramp up started that started off in Q4 of last year. It started.
Chris Moore: Certainly had a very strong ramp in Q1, as we really work to get a baseline of inventory and really build up that product.
Chris Moore: That project, we talked about on the Q4 call. Originally we had said hey, we anticipate is that mostly converting.
Chris Moore: The first half of the year with some spillover into Q3.
Chris Moore: I'd, just say that that's the overall cycle or that project.
Chris Moore: It has.
Speaker Change: Okay spread a little bit.
Speaker Change: So really from our anticipation we recognized $8 million of that 200 million to date, we anticipate the rest of that is really spread out over the rest of this calendar year, it's kind of what we see but we have additional follow on orders with that customer.
Speaker Change: Have a tremendous amount of visibility into that 2026, and 2022nd pipeline with that customer.
Speaker Change: And so we're continuing to show that is an accelerating demand with that customer. It's just the initial build out really the ramp up rate of that investment.
Speaker Change: It's just taken a little bit longer to kind of materialize not from a demand from their customers perspective, but just all the construction activity that's associated with building these new AI data centers.
Speaker Change: It's just lengthening that cycle would that quarter, just a little bit.
Speaker Change: Got it I appreciate that I'll jump back in line. Thanks, Matt.
Speaker Change: Yes of course.
Speaker Change: Your next question is from the line of Brent Thielman from Davidson. Please go ahead.
Brent Thielman: Hey, great. Thanks, Gerry <unk> are the same it's been it's been a pleasure.
Speaker Change: I guess first question just on <unk>.
Speaker Change: On the rooftop business some of the supply chain issues.
Speaker Change: You saw here in the quarter and it sounds like you continue to feel to some degree are you are you at the point, where there is some confidence these issues are going to be behind you as you go into the second half of the year.
Speaker Change: I guess just with that I was curious it didn't really seem like that impact that impacted the basics branded product.
Speaker Change: I'm just wondering if that could still commerce, you see it as a non issue there.
Speaker Change: Yes, so where the confidence comes from and really I'll say Brent the.
Speaker Change: You know, where we sit today the acceleration of resolution that we're seeing in the supply chain with these new refrigerant components I mean, it's all trending very positive it's really.
Speaker Change: The whole industry transition with that sort of hard stop on January one to go from portend, a corporately for beef.
Speaker Change: It was just a lot of I'll say strains on the overall supply chain just in support of those new components because.
Speaker Change: You are basically having to support the ports and <unk> products that were being built and flushed out through 2024 with also the impending new products that you had introduced in support of the <unk> corporate support be equipment. So there was just I'll say some initial transition strains that were put there within the supply chain, but if we look months.
Speaker Change: By month, we've continued to see these abate and it really we saw the impact in Q1.
Speaker Change: Weaning waning as as the quarter kind of progressed and going into April we still have a little bit of lingering issue, but by and large we're seeing the light at the end of the tunnel and so that's definitely what's giving us confidence going forward youre not going to be operating in this environment you know let's.
Speaker Change: Let's say once we get into the second half of the year.
Speaker Change: These manufacturers are primarily building the 454 big components.
Speaker Change: And so that definitely is.
Speaker Change: Olivier eating some of the noise that was created in the supply chain in that first quarter. So definitely a lot of confidence that these are abating.
Speaker Change: Really providing kind of the support of our acceleration in our production levels within the Oklahoma segment in particular.
Speaker Change: To really get that top line sales back where we wanted to be as well as the overall profit margins kind of with that volume getting back up.
Speaker Change: But relative to the basic segment most of the products that are made in the basic segment.
Speaker Change: The vast majority of those products are not refrigerant based systems and so they did not have those same supply chain impact so really in the basic segment, we didn't see any of those impacts impacting our ability to manufacture there.
Matt: Really helpful. Matt and then maybe as a follow on.
Matt: Sort of beyond the issues associated with the refrigerant.
Matt: Change in those associated components can you talk about may.
Matt: Maybe broader exposure just now with the implementation of <unk>.
Matt: Tariffs and what that might do to the kind of broader supply chain, how do you think.
Matt: <unk> positioned around that where you feel like youre fairly well positioned or not.
Matt: Are there things that we can potentially see coming in in terms of broader impacts to the supply chain.
Brent Thielman: Yes, certainly I mean tariffs tariffs definitely we had a bad feeling Brent how long would it take for a tariff question to come. So it came a little later than we expected on the overall Q&A, but.
Brent Thielman: When we think about the impact of tariffs within the <unk> segment I'll say one thing that we feel good about is we have a tremendous amount of vertical integration and our manufacturing process.
And we also.
Brent Thielman: Rely heavily and are proud of the rely heavily on a lot of our U S partners.
Brent Thielman: The exposure to tariffs that we see.
Brent Thielman: From an <unk> perspective, or certainly less than what we see in some of our competition. So let's start off we say that certainly we see ourselves being better positioned in a tariff environment.
Brent Thielman: No.
Brent Thielman: We did I did not say they are going to attack that somehow I mean supply chain even for U S manufactured components that we might buy.
Brent Thielman: A lot of.
Brent Thielman: Components that go into those components might be sourced internationally and so there's definitely some tariff impact.
Brent Thielman: Obviously, that's reflected in our surcharge, but the general supply chain environment that we have there'll be some noise that we think can come out of the tariffs, but by and large the focus on U S manufacturing the focus on vertical integration and really a pretty strong U S based supply chain that we rely on.
Brent Thielman: For the vast majority of our components puts us in a position where we think those are going to be a smaller impact to aon.
Brent Thielman: Relative to a lot of our competition.
Brent Thielman: Okay, Great and just last one just on the basics.
Brent Thielman: Branded products.
Speaker Change: Maybe more of a clarification, Matt I think I heard you say.
Speaker Change: You know a lot of growth certainly aligned with one of the customers out there could you just talk about.
Speaker Change: Diversification of customers within.
Speaker Change: That product line do you expect more diversity in the coming years, especially as you're bringing on new capacity I'm, just trying to get a sense around how much is aligned with a single customer versus.
Speaker Change: A lot of that a lot of different tests that are out there.
Speaker Change: Yeah, No. It's a great question, Greg and I will say that the math certainly has never in our favorite when you get a $200 million order in terms of its impact on some concentration at least in the near term.
Speaker Change: But what I would say as well that is a great win and Thats certainly something that is helping fuel a lot of growth.
Speaker Change: It's also very front of mind for us to continue getting diversified customer base and so if you look at the activity that we have in terms of bidding activity in terms of new orders that we have.
Speaker Change: Large scale orders that small little orders, there's a continuing diversification of that customer base. There is also an acceleration of new customer interactions.
Speaker Change: With the with the weight in that liquid cooling product.
Speaker Change: We've got a tremendous amount of inertia in the industry regarding.
Speaker Change: Regarding the solutions, we can provide and so our sales and engineering teams are actively engaged with a large spread of new customers supporting both liquid cooling and traditional co location data center projects.
Speaker Change: And that definitely as we look forward is going to be a continued focus to continue diversify and continue building upon the grid.
Speaker Change: Wins, we have would be very intentional about continuing to build great win with new customers as well and so going forward.
Speaker Change: I think youll see our our backlog continued to diversifying and a customer base perspective, and really not not having us to over leverage on one single customer.
Okay. Good thank you.
Speaker Change: Ladies and gentlemen, as a reminder, if you'd like to ask a question. Please press star followed by the number one if you will.
Speaker Change: We throw off from the polling process. Please press star two if you are using a speaker phone. Please make sure you lift your handset before pressing any keys.
Speaker Change: Your next question comes from the line of Tim Weiss from Baird. Please go ahead.
Speaker Change: Yeah.
Tim Weiss: Hey, everybody good morning, and just wanted to echo the same sentiments to Gary it's been great working with you.
Tim Weiss: Thank you maybe just I just have a couple of follow up so I guess on the Oklahoma business.
Has there been any change to how youre thinking about the full year revenue guidance I think previously you'd kind of said maybe the full year would be flat to down a little bit has that has that changed at all.
Tim Weiss: Just kind of more back half weighted and then how do you think about kind of layer in that surcharge part into that.
Tim Weiss: Yeah. So the guide as it stands today has not changed in Tim What I'll say is there is the uncertainty definitely in that back half of the year really I'll say uncertainty more on the Q4 side.
Tim Weiss: As much as we are taking market share and we're continuing to see good order cadence here in the second quarter. There is definitely still uncertainty and an overall macro environment perspective that is certainly front of mind for us and so our guide definitely has has that built into it kind of Q4 it looks like.
Tim Weiss: The tariff part of it you know the tariff itself.
Tim Weiss: Went in place in.
In March essentially.
The reality is we're not going to really start seeing that until the later part of Q3 and so when that is going to really start hitting the production floor hitting the revenue side is going to be a Q3 story.
Tim Weiss: As far as going to start and you'll see that kind of materialize in Q4, but you know it is.
Tim Weiss: Going to have an impact, but obviously from a full year perspective, it's not that we're getting a 6% uplift.
Tim Weiss: It might be more like a third of that overall kind of impact on the overall sales side of things.
Tim Weiss: And so really what I'd say is that's the.
Speaker Change: But Eric aspect and just the uncertainty that is built into the Q4 guide just given the unknowns around the macro is really where the guide is sitting today.
Speaker Change: Okay. Okay. That's helpful. Thanks, and then just.
Speaker Change: On the data or kind of the basics backlog I mean.
The $80 million to $85 million sequential increase I guess any any color on kind of the mix of liquid cooling and air side cooling within that and then I guess just in the in the total backlog kind of the same question kind of a mix of liquids versus air.
Speaker Change: Yes, definitely there is more activity in liquid cooling, but it is in that backlog. Obviously also some good run rates out of our coil products, that's eating down that so.
Speaker Change: We've replenished the coffers, a little bit with some more liquid cooling orders that came in in Q1.
Speaker Change: They are definitely though is air side.
Speaker Change: Continued acceleration of air side, looking at as well and a lot of activity around air side, and so why do I say that is really when we look at the activity that we're seeing.
Speaker Change: Definitely there's a lot of conversation a lot of activity on the AI data center side of things, but there is also continued strength and we continue to see the investments made in the more traditional data centers cloud compute data centers and we're seeing that kind of materialize with air side activity as well. So we definitely are seeing the abroad.
Speaker Change: Bookings kind of built into that backlog and into that business cadence.
Speaker Change: And there.
Speaker Change: There is a.
Speaker Change: A good amount of backlog sitting inside of liquid cooling, but it's not the majority it's not like it's.
Speaker Change: Majority of that if it's a cool I guess, it's a really good pretty good spread between liquid and air side products.
Speaker Change: Okay.
Speaker Change: Okay. Thanks for the color good luck on the rest of the year.
Speaker Change: Thank you.
Speaker Change: Your last question is from the line of Tom Sandys from Sandy's. Please go ahead.
Speaker Change: Yes, I'm a stockholder.
Speaker Change: Go back to Diamond Ad.
Speaker Change: And what's your problem or they are being listed on the New York on a wall.
Speaker Change: Street Journal.
Speaker Change: So there's no they're not what's going on.
Speaker Change: How do we get the Coors involved more stockholders involved in buying stock.
Speaker Change: Yeah.
Joe Mondello: Hey, Tom This is Joe.
Speaker Change: I think.
Speaker Change: Good morning.
Speaker Change: I think we've probably spoken about this in the past.
Speaker Change: Yes.
Speaker Change: Yeah, I think I'm still looking into that not really serving the answer but I'll try to provide you with an answer sometime soon.
Speaker Change: Thank you.
Speaker Change: Okay.
Speaker Change: There are no further questions at this time I would like to turn the call over to Joe Mendelian for closing comments Sir. Please go ahead.
Speaker Change: Alright. Thank you operator, just wanted to remind everyone that we'll be attending the William Blair Conference on June 4th in Chicago, and hosting an Investor day in New York City on June 10, So hope to see some of you there.
Speaker Change: I want to thank everyone for joining our call today, if anyone has any questions over the coming days and weeks, please feel free to reach out to myself.
Speaker Change: Rest of the day and we look forward to speaking with you in the future. Thanks.
Speaker Change: This concludes today's conference call. Thank you very much for your participation you may now disconnect.