Aaon Inc Q3 2024 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Ryan Merkel - William Blair & Company - Analyst : I guess, first off, I wanted to start with the Oklahoma segment. And Gary, you've talked about the slowdown kind of all year, and I guess we're seeing it. And my question is, should we expect revenue in the Oklahoma segment to be down more than the 7% we saw this quarter? Or what do you mean by seeing a slowdown in 4Q and 1Q?

Question: Ryan Merkel - William Blair & Company - Analyst : Yes, it does. And a quick follow-up because you said that you think 1Q '25 earnings will be down year-over-year. Is that, again, due to the Oklahoma business and some of the softness we're talking about? Or is there anything in there for data centers?

Question: Ryan Merkel - William Blair & Company - Analyst : Okay. And then let me ask one on data centers before I turn it over. The $175 million order, which I appreciate is not in the backlog, by the way, why was that order so big? And was that a new customer?

Question: Ryan Merkel - William Blair & Company - Analyst : And that leads to my last question here. When you say that, that order is a fraction of the pipeline, I think a lot of us are wondering, are there other big chunky orders out there that you have visibility to in the $100 million area? Or should we not be thinking about it that way? There's just a long pipeline of lots of kinds of orders?

Question: Chris Moore - CJS Securities - Analyst : Maybe just one on the rooftop. Just have all the states passed the necessary legislation for the new refrigerants?

Question: Chris Moore - CJS Securities - Analyst : Got it. And I know this is probably a difficult one. But since some of these solutions can be hybrid on the data center side. But if you were to look out 3 to 4 years and kind of parse the air cooled versus liquid cooled, any sense as to what percentage of the data center revenue would be on the liquid cooled side?

Question: Chris Moore - CJS Securities - Analyst : That makes perfect sense. And then one more. Just on the gross margin, BASX 27.9, obviously, down significantly year-over-year. You're still building out capacity. Looking -- as you get there and volume starts to ramp, do you expect the BASX gross margin to be the highest of the three segments?

Question: Brent Thielman - D.A. Davidson & Company - Analyst : Congrats on all the activity here. I wanted to come back to just thinking about the sheer magnitude of things you've got in orders and going to be revenue in here in the next few quarters. But I was thinking about your comment that you may be down into the first quarter on a sequential basis -- on the basis. Does that mean the bulk of this sort of new orders is going to revenue in the second quarter? I'm just trying to understand how this is going to sequence over the next -- first half of the year. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 07, 2024 / 10:15PM, AAON.OQ - Q3 2024 Aaon Inc Earnings Call

Question: Brent Thielman - D.A. Davidson & Company - Analyst : Yes. Matt, what about just the core BASX business, especially as you wrap up the projects there at that facility. How do you sort of think about the sequencing of revenue from there? Is it going to take some time to work through the kinks? Just curious because it would seem to me you've got a pretty full pipeline there.

Question: Brent Thielman - D.A. Davidson & Company - Analyst : Got it. Appreciate it. I guess my last one is understanding you've got a little bit of a lull here in the rooftop business in the short term. I guess my question around it is, is any of this induced by the refrigerant change? Or is this really just kind of a consequence more of, look, there's a lot of things going on in the end markets right now and customers are just taking a step back.

Question: Timothy Wojs - Robert W. Baird & Co., Inc. - Analyst : Maybe just -- I want to dig on one point that you said in the press release. So, bear with me, there's a little bit of math. But over half of your backlog right now is for data centers, and that's going to be produced and shipped in 2025. So, if I just use 51% of that, that implies $325 million or so of that backlog is going to be for data centers in 2025. And then if we add the $175 million order you announced in October, that adds up to at least $500 million in data center revenue next year. So, I guess, is that math, right? And I guess if it is, just how do your kind of -- how are you kind of set up from a capacity perspective to just kind of make sure that you can handle that type of growth?

Question: Timothy Wojs - Robert W. Baird & Co., Inc. - Analyst : Okay. That's really helpful. I guess on Oklahoma, Gary, just kind of if you can maybe just talk a little bit about the decision to maybe put through a little less price than your competitors are doing. Because by my math, I mean, you effectively won't have much of a premium now, at least on an initial cost basis relative to your peers. And so, I guess, how do you intend to push that in terms of marketing and sales just given the efficiency or just the much bigger efficiency that you have relative to standardized product?

Question: Julio Romero - Sidoti & Company - Analyst : Could you give us some flavor in terms of the margin profile of that $175 million liquid cooling order? And is it fair to assume that order is going to be part of the Coil segment? Or would it be BASX?

Question: Julio Romero - Sidoti & Company - Analyst : Okay. Got it. So, 2023 BASX margin. But wouldn't the majority of that order be kind of in 1 quarter in 2Q, as you said earlier? Or am I not thinking about that correctly?

Question: Julio Romero - Sidoti & Company - Analyst : Got you. Got you there. And then on the new production facility in Tennessee, you said you expect to have it running kind of towards end of the year '25. Can you just give us an idea of kind of the expected contribution of that facility on an annualized basis? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 07, 2024 / 10:15PM, AAON.OQ - Q3 2024 Aaon Inc Earnings Call

Question: Julio Romero - Sidoti & Company - Analyst : Good context there. And maybe getting ahead of myself, but is that going to be also a Coil segment facility? Or would it be different?

Question: Julio Romero - Sidoti & Company - Analyst : Understood. And then just one more for me, if I could. Maybe it's Rebecca, you said earlier that the annual tax rate -- effective tax rate for this year is expected to be 24.9%. So does that imply kind of a high 30s tax rate we should be looking at for the fourth quarter?