AAON, Inc.
Q4 2021 Earnings Call Transcript

Published: 28 Feb 2022

[Operator:]

Hello. Welcome to the AAON, Inc. Fourth Quarter 2021 Earnings Conference Call. At this time, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session. As a reminder, this event is being recorded. I would now like to turn the event over to our host Mr. Joseph Mondillo, Director of Investor Relations. Mr. Mondillo, please go ahead.

[Joseph Mondillo:]

Thank you, Andrea. Good afternoon, everyone. The press release announcing our fourth quarter financial results was issued after the market closed today and will be found on our corporate website aaon.com. On the call with me today are Gary Fields, President and CEO; and Rebecca Thompson CFO and Treasurer. Just kind of begin with our customary forward-looking disclaimer. To that extent -- to the extent any statement presented herein deals with information that is not historical including the outlook for the remainder of the year such statement is necessarily 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, it is subject to the occurrence of many events outside AAON's control that could cause AAON's results to differ materially from those anticipated. Please see the risk factors contained in our most recent SEC filings, including the Annual Report on Form 10-K and the Quarterly Report on Form 10-Q. With that, I'll turn over the call to Rebecca.

[Rebecca Thompson:]

Thank you, Joe. I'd like to begin by discussing the comparative results of the three months ended December 31, 2021 versus December 31, 2020. Net sales were up 16.8% to $136.3 million from $116.7 million. Net sales for the quarter were primarily due to price increases, which contributed approximately 10%. The acquisition of BasX Solutions, which closed on December 10 contributed about 3%. Our gross profit decreased 21.7% to $26.5 million from $33.9 million. As a percentage of sales, gross profit was 19.5% in the quarter just ended compared to 29.1% in 2020. The decline in gross profit was mainly related to supply chain issues that resulted in production constraints and operational inefficiencies. Another contributing factor was material costs and wages rising quicker than our price increases to counteract. Selling, general and administrative expenses increased 44.4% to $21.1 million from $14.6 million in 2020 -- excluding $4.4 million of acquisition-related transaction fees, SG&A expenses increased year-over-year 14.4%. As a percent of sales, SG&A excluding the fees decreased to 12.3% of total sales compared to 12.5% in the same period in 2020. SG&A as a percent of sales decreased mainly due to lower profit sharing expenses, which as a result of our lower pre-tax earnings compared to the year ago period. We had an income tax benefit of 0.8 million, due to our lower earnings in the quarter and our excess tax benefit from stock awards of 1.6 million. Adjusted net income, which is a non-GAAP measure, decreased 35.5% to $9.5 million or 7% of sales, compared to $14.8 million or 12.7% of sales in the prior year period. Adjusted diluted earnings per share, which is a non-GAAP measure, decreased 35.7% to $0.18 per share from $0.28 per share. Now for the comparative results, so the year ended December, 31, 2021 versus 31, December 2020. Net sales in 2021 were up 3.9% to $534.5 million from $514.6 point in 2020. Net sales were permanently due – net sales were up primarily due to price increases which contributed approximately 5% for the year. Volumes were down due to our plant shut down in January for planned maintenance, weather related shut down in February and various supply chain issues in the later half of the year. The acquisition of basic solutions contributed about 1%. Our gross Profit decreased to11.6%, $237.8.million from million $155.8 million. As a percentage of sales, gross profit was 25.8% in the year just ended compared to 30.3% in 2020 gross profit was down because of a handful of factors. Production constraints due to supply chain issues, and material inflation being the primary too. Selling, general and administrative expenses increase 13.4% to $68.6 million from $60.5 million in 2020. Excluding $4.4 million of acquisition related transaction fees SG&A expenses increase year-over-year 6.1% as a percentage of sales SG&A excluding these fees increase to 12% of total sales compared to 11.8% in 2020. Our effective tax rate decreased to 15.1% from 22.5%. The decrease result of a lower income tax rate in Oklahoma, along with increased excess tax benefits from stock awards compared to 2020. Adjusted net income in 2021 decreased 17.1% to $62.1 million or 11.6% of sales compared to $74.9 million or 14.6% of sales in 2020. Adjusted diluted earnings per share decreased by 17.7% to $1.16 per share from $1.41 per share. Now looking at the balance sheet, you'll see that we had a working capital balance of $131.3 million versus $161.2 million at December 31, 2020. Unrestricted cash totaled $2.9 million at December $31 2021 and total debt was $40 million. During the quarter we used $103.4 million of cash to finance the acquisition of basic solutions. And we do down $14 million on our revolving line of credit to finance working capital needs. In the first quarter, we will be closing on the real estate related to the basic sale, which will cost us $22 million. Early in the year, working capital will also be a use of cash, before reversing in the second half of the year. I anticipate net debt will come up – will climb a little more at the end of the first quarter, before beginning to come back down. Our current ratio is approximately 2.5

[Gary Fields:]

Good afternoon. Well, in the fourth quarter, there were three major positive achievements in the quarter. The backlog continued to grow at a significant rate, reaching a new record level. We closed on the acquisition of BasX Solutions, which was the company's first acquisition of substantial size in 20 years. And in October, we hosted our first sales event in several years with our independent sales channel, where we introduced a package of new products that we think, are going to be game changers. Obviously, the fourth quarter financial results were disappointing. Sales, gross margin, operating margin, earnings were all weaker than we were even taken when we last spoke to you in November. However, I believe we are going to emerge from this a much stronger company, which is going to help facilitate a robust growth trajectory. Speaking of the growth trajectory, we believe our long-term outlook remains intact. For those, who have listened to us recently, we have aspirational goals, which include growing revenue organically in the double-digits per year over the next several years. Nothing has happened over the last nine months leading us to these goals are unachievable. In fact, we're as optimistic on the outlook to see that be. The backlog reflects that and we're beginning to pull out of a lot of the issues that we're constraining our ability to produce. So, let's talk a little deeper dive and look into the quarter and then, we'll talk about the outlook. The environment our industry has been facing over the last 12 months is one of the most challenging ever, if not the most challenging in the last 30 years. Inflation is rapid, supply chain issues made managing operations extremely tough, this is all while trying to manage the challenges of the pandemic. Inflation pressures continued through the fourth quarter. We've been very disciplined with our pricing and are still confident we'll fully recoup gross margins at the 30%-plus level. We need to work faster through the lower margin backlog start producing products priced at our most recent price increases. Unfortunately, supply chain has prevented this from happening in the fourth quarter. The fourth quarter was the most challenging quarter of the year when it came to supply chain. October and November were particularly tough months. The supply chain issues led to less than optimal production rates causing operational inefficiencies unabsorbed fixed costs and an unfavorable mix of products that were priced at lower pricing than our recent price increases. So, the supply chain issues were a huge construct production but also exacerbated the inflationary effects. Now, there were some positives in the quarter, we're looking forward

[Operator:]

Thank you. The floor is now open for questions-and-answers Our first question is from Brent Thielman of D.A. Davidson. Brent, go ahead when you’re ready.

[Brent Thielman:]

Thank you. Good afternoon.

[Gary Fields:]

Yes.

[Brent Thielman:]

Yes. Maybe first it sounds like we've transitioned here into a period sort of December through February that hasn't seen the level of disruption you've seen before. Maybe you could just help us out with what's improved in particular in the supply chain, that's allowed you to pick up production rates? And what confidence you're getting from suppliers they can kind of meet the requirements medium and the short run?

[Gary Fields:]

Yes. Good question, Brent. So while we didn't have absolutism of any magnitude on our plant floors in Q4 due to coronavirus. Some of our suppliers did and some of it was in late Q3 when they were manufacturing components and things for us. So we really saw a huge took point in October. It began to improve a little bit in November and we were able to get some additional suppliers in place for some of these items. Those were fully in place and helped December a good bit; January, almost uninterrupted at all; February to this point, well today is the last day of the month uninterrupted. We do see some electronic components coming up but they're – we're managing real well around those. We got some equipment in place that helps down select alternative electronic components to put on those boards. And so they've been very nimble and very responsive. So like to say things have improved a lot. I don't know what this situation of Ukraine is going to do, I was reading earlier today that neon and palladium both of which are used in chip manufacturing, Ukraine is a huge supplier of those. And so – just the way this article talked, the electronic situation could get a little more challenging going forward. But right now I think we've seen a lot of improvements. We're in a much, much better place.

[Brent Thielman:]

Okay. And would you expect to be able to run – I mean provided all that holds able to run off kind of all the remaining lower-priced backlog here in the first quarter or is there going to be some carryover in the second quarter as well.

[Gary Fields:]

So in December, well let's just kind of dissect October, November and December. October was built completely on backlog that was booked prior to the September first price increase of 2021. November was the same way. December, we began to see a little bit of that trickle onto the plant floor. In January, 76% of what we built had the September 1 price increase, which was 5%. So we had a 4% if you do that math, that'd be 4% better margin profile related to the price increase. February, Chris we're just finishing up today but the expectation was it would be built almost 100% on that 5% higher price backlog. So I think starting the year, like I said, we just nearly got all better quality backlog. And then the 8% that went into effect January 1, with the way things are flowing, I don't expect to reach that until probably the end of next quarter. So we will have at least 4% to 5% better margin profile capability related to that price increase from September 1. And most of the pricing we've got in place for this quarter and beginning next quarter was already captured. So I look for good margin improvement related to that higher priced backlog we're using now. But in addition to that we're producing at the rate that's the highest rates that we've ever produced at in both the factory and the Texas factory. I get a daily report on that and it's the highest numbers on a daily average that we've ever achieved and this is before we factor in the higher price. So it's volume improvement. So we're getting materials out there. We're getting units built. So we're going to perform a good bit better Q1. I think you're going to be very pleased what I'm seeing so far in Q1 unless something drastic happens related to this Ukraine situation next month. I think we're good. Going forward, we're not seeing anything significant, just a little mix here and there, but we're poised to do quite well. Basics is kind of dealing with the same situations. Most of their things are flowing much better now. But there's just not clarity on what else is going to happen to us longer term.

[Brent Thielman:]

Yeah. Understood. Maybe last one for me and the organic bookings obviously super strong. I know one of the things you've talked about is, you've had more advantageous lead times perhaps versus some of your competition. I don't know if that still stands whether this is a function of just better confidence, Gary maybe among customers and the marketing efforts. Maybe if you could just dissect some of those things that are driving such a substantial gain there?

[Gary Fields:]

Sure. While our lead times went out just a little bit, we still have an advantageous position with that. But I think the improvements we've made in the sales channel, the support we've given them, the tools that we've given them are helping them become more effective. When I started here nearly six years ago, now running this place, we had regions that were very strong, but they were only a couple of them. We had multiple regions that were very weak relative to what the market capability was. Now the regions are fairly uniform in what they're doing and meeting our expectations, very significantly the Southeast which should have always been a top-performing region for AAON because it fit our equipment profile so well, it was a horrible performing region prior to me taken over. And some of the sales channel adjustments I made there with different sales channel partners have really some merit. They performed just outstanding in 2021 and beginning in 2022. So we have improved the sales channel. That's brought more business. Our lead times are certainly advantageous. Our -- the utilization of indoor air quality measures that have always been a hallmark for AAON are now more widely recognized throughout the market. So it's not just a specialty vertical that's looking to have that like it was at one point in time. Now it's more commonplace for people to ask for these things.

[Brent Thielman:]

Very good. I'll get back in line. Thank you for taking the question.

[Gary Fields:]

Yes, thank you.

[Operator:]

I'll now open up our next question from Julio Romero from Sidoti & Company, LLC. Julio when you're ready, go ahead.

[Julio Romero:]

Great. Thanks. Good afternoon Gary and Rebecca. Just staying on the order training fee organic orders still very strong about historical trends, but it's down a bit sequentially at $177 million by my math, so slightly down sequentially from the last two quarters. Can you just talk about how orders are trending? And do you see organic order trends accelerating decelerating or steady going forward?

[Gary Fields:]

Well, first off since that price increase was January 1st, we always expect that there was some pull forward. And so we expect somewhere around 40 to 50 days thereafter to be a bit softer. We have been very pleasantly surprised. It is stress outstanding what's going on with bookings just outstanding. So, I would have to say that it's ever been as strong as it's been we really began this strength late first quarter a year ago. And one of the things that I'm looking at is trailing 12 months booking and the trailing 12-month booking continues to grow continues to grow. So, that's why I say it's he can fill that right now. Yes. So, when I look at trailing 12 months, I'm just really pleased with what I'm saying. It continues to go up.

[Julio Romero:]

Got it. Makes sense. And on that point about the price increases, you went announced today effective March 31st, can you talk about how much of a price increase that was and is it across the board for your products?

[Gary Fields:]

7% across the board.

[Julio Romero:]

Got it, that's helpful. Just switching gears to labor. You talked about increased wages, new hiring initiatives. Maybe just touch on how head count at Tulsa, Longview you are compared to last quarter?

[Gary Fields:]

Yes. Let me see if I can find -- every Tuesday I get headcount. So, let's see let me go back a few days. I'll get an updated headcount tomorrow. But in general I'd say versus last quarter were up slightly in Longview and up a little bit more than the Tulsa. Here it is right here. Let me list here. All right. So, we are up -- well they gave me a prior 12 months change. So, Oklahoma is up 11% and Texas up 17% over a year ago. Now, let me go back here. That's on 2/22. So, let me look at those headcounts real quick. All right. I got those and let me go back here to December 30th, yes, we were up 7% and 19% at that point in time versus a year before then. But in absolute headcount let's see here, 19.55 versus we're up about 25 people in Oklahoma over the last quarter. And we are at 30 people in Longview. So both of them on have grown headcount our turnover ratio in Oklahoma has gone down to just a wonderful, wonderful number. And so a lot of the things that our HR department with our new leadership put in place working with some of the individuals in plant management those are proven concepts well that Director of Manufacturing that was in Oklahoma that helped put all that together. January 1st, he became the Executive Vice President in Longview. So he carries some of those things down there where we've been using them a little bit, but not quite sternly, so he's taken those down there. Also some of our HR team from Oklahoma decided they wanted to do that Longview in Texas. And so they've gone down there. So we have a very uniform approach. So that's the result of it, Julio. We're growing both headcounts. And right now headcount is not our constraining factor, it remains materials and that's gotten better as well. So like you say, we're just doing a lot better now.

[Julio Romero:]

Got it. Appreciate the color. Good to hear about the retention rate improving. Just a quick clarification on the gross margin commentary. Gary, did you say you expect gross margin challenges in the first half, but should see the recovery to 30% in the second half?

[Gary Fields:]

Yes. I'm not going to call them challenges so much, but 30% is dead center bullseye. We give a 28% to 32% range. I think we're going to be within the range of the entire year, so far what I've seen every quarter is going to be in the range, but it's going to be strengthening throughout the year, so that -- on year-end I expect to be 30% plus on the total year. But quarter-by-quarter, I look forward to strengthen each quarter and a lot of this is due to price increase coming on board offsetting more able the pricing pressures, so price cost ratios are going to be better. But in addition to that, we've really got production side of the business streamlined very well, very confident management that's now quite veteran at this. And I just see improving production. Each day that goes by production seems to grow just a bit more. So, I'm very pleased with how we'll be absorbing fixed costs better.

[Julio Romero:]

Great. Thanks very much for taking the questions and best of luck in 2022.

[Gary Fields:]

Thank you, Julio.

[Operator:]

Great. So that appears to be all the questions we have for today. Presenters, if you have any final remarks?

[Gary Fields:]

I think we're all set, Andrea. Thank you.

[Operator:]

Perfect. Well, thank you so much. This concludes today's event. You may now disconnect. Have a great day.

[Gary Fields:]

All right. Thank you. See you all.