AAON Q3 2024 Earnings Call Transcript

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Provided by Quartr
November 7, 2024

There are 10 speakers on the call.

Operator

This call is being recorded on Thursday, November 7, 2024.

Operator

I would now like to turn the conference over to Joseph Mondello, Director of Investor Relations.

Speaker 1

Thank you, operator, and good afternoon, everyone. The press release announcing our Q3 financial results was issued after market close today and can be found on our corporate website, aa0n.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. Joining me on today's call is Gary Field, CEO Matt Tabalski, President and COO and Rebecca Thompson, CFO and Treasurer. Please turn to Slide 2.

Speaker 1

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 1955, 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 of Aon's control that could cause Aon's results to differ materially from those anticipated. 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 afternoon detailed some of the important risk factors that may cause our actual results to differ from those in our predictions.

Speaker 1

Please note that we do not have the duty to update our forward looking statements. Our press release and portions of today's call use non GAAP financial measures as defined in Regulation G. You can find the related reconciliations to GAAP measures in our press release and presentation. With that, I will turn the call over to Gary.

Speaker 2

Starting on Slide 3. The 3rd quarter was another solid quarter for AAON. Total revenue grew year over year 4.9% and diluted earnings per share was up 8.6%, both strong results for the quarter. Gross margin contracted 230 basis points versus the comparable quarter a year ago. We maintain that gross margin in the mid-30s is very healthy for this business.

Speaker 2

In fact, the gross margin this quarter represented one of the strongest quarters in the company's history. Likewise, adjusted EBITDA margin of 25.3 percent marked the 3rd strongest quarter in company history. Overall, our operations have been performing well, which is reflected in these results. From a demand perspective, bookings in the Q3 were up year over year in the mid single digits and year to date they were up approximately 27%. Demand for data center equipment remains strong.

Speaker 2

Backlog at the AAON Coil Products segment at the end of the quarter was a segment record, up approximately 63% from a year ago, and backlog at the Basic segment finished close to record levels, up over 100% from a year ago. Total backlog finished at $647,700,000 up 32% from a year ago and was comparable with the total backlog at the end of the second quarter. A significant portion of the total backlog at the end of the quarter consisted of orders of data center equipment. Furthermore, subsequent to the end of the quarter, we received approximately $174,500,000 of orders that by and large will be produced in the first half of twenty twenty five. We addressed this in a press release that we issued 2 weeks ago.

Speaker 2

These orders are associated with the liquid cooling solution for 1 data center customer and will be produced at our Longview, Texas location. In addition to these orders from this one customer, the pipeline of opportunity is very robust. While this was a big win for AAON, we foresee much more demand within the data center market going forward. AAON is becoming a leading player in the data center cooling market as a fully capable provider of highly engineered energy efficient solutions for its customers. With that, I will now hand it over to Matt Tovalsky, who will speak more in-depth about our operational strategy.

Speaker 3

Thank you, Terry. Over the last several years, Aon has been undergoing a significant transformation. And as we've addressed in recent calls, this has continued through this year. Nearly all departments of the enterprise have been undergoing some degree of change to help position the company to sustain long term growth at the rates and efficiency metrics we are targeting. At the same time, strong demand of data center equipment and external market factors associated with a slowing non residential construction sector and a refrigerant transition have consumed and challenged the operations.

Speaker 3

All things considered, I could not be prouder of how the operations executed in the Q3 year to date. The margins we have been able to record were at which are at historically high levels support my preconceived notion that the team has been operating at a very high level. Please turn to Slide 4. As we have spoken to this year, AAON is emerging as a prominent player in the data center space. Year to date through the 1st 3 quarters, bookings of equipment associated with this market have nearly doubled and made up nearly 30% of total company bookings.

Speaker 3

This compares to data center bookings in the same period in 2023, making up about 13% of total bookings. Factoring in the $174,500,000 worth of orders that we received in October, this showcases the level of prominence that the data center market has within the Aon business. The success that we have had thus far in the data center market is a testament to various factors. The team collaboration across the enterprise is an integral component. Over the last year, we have taken steps to integrate various divisions of the company to leverage proficiencies and best practices and to increase the efficiency of the overall business.

Speaker 3

In addition, this highlights Aon's superior engineering competencies. The orders we received in October were related to a highly custom designed liquid cooling solution. The bidding process of these orders were competitive and really challenged our engineering team. At the end of the day, it came down to who was able to design and manufacture the most ideal solution for this customer. AAON's customer centric solutions based approach is unique to the industry and has been critical to our success.

Speaker 3

We value our customer relationships and strive to create strong long lasting partnerships. Please turn to Slide 5. Another critical component to our execution in the data center market is related to expanding production capacity to meet the growing demand. The data center market is in the early stages of a multi year growth cycle driven by cloud computing and artificial intelligence demand. Supported by our strong customer relationships and high visibility into invested capital and detailed construction plans, our confidence of sustainable demand is high.

Speaker 3

The orders that we received to date represent a fraction of the overall pipeline of opportunity. We are committed to our customers in meeting their demands by increasing our production capabilities, while at the same time balancing our risks appropriately. This year, we have been managing 2 significant capacity expansion projects. The first has been in our basic segment in Redmond, Oregon. There, we expanded the square footage by approximately 15%.

Speaker 3

We also reconfigured much of the manufacturing layout in the existing footprint, while at the same time adding new production equipment, all of which has added production capacity and will lead to greater efficiencies. The second expansion project exists at our Aon Coil Products segment at our Longview, Texas facility, where we are expanding the square footage by approximately 50%. We are on schedule to complete this expansion project by the end of this year with production to commence in early 2025. The equipment associated with the $174,500,000 worth of orders that we received in October will be built within our Longview facility. In addition to the expansion projects in these two locations, we have entered into a definitive agreement to acquire a new 787,000 square foot facility in Memphis, Tennessee.

Speaker 3

This investment will largely accommodate incremental production of data center equipment. We also intend to move production of some of our larger, more unique equipment that we currently manufacture in Tulsa to this location, which will in turn free up space in Tulsa, further delaying any immediate expansion needs of that location. At the same time, this provides additional geographic diversification, which will mitigate certain operational risks and help better serve our data center customers. We expect this facility will be up and running by the end of 2025. All in, both the pipeline of opportunity within the data center space and our confidence of the market has never been greater.

Speaker 3

The investments we are making in capacity, people, products and customer relationships will generate attractive returns and growth. Please turn to Slide 6. Turning to our more traditional commercial HVAC business, the Aon Oklahoma segment. This segment continued to perform well in the Q3. Although sales and profit for the segment were down year over year, this is expected largely because of the tough comparison to the year ago period.

Speaker 3

Versus the Q2 of this year, sales and profits were comparable, which was in line with our expectations and consistent with historical seasonality. This year, volatility in bookings has been greater than previous years, largely associated with the refrigerant transition and softening macro environment. While we did realize a modest increase of orders in August September leading up to our phase out base of our 410A equipment, the benefit was not nearly as pronounced as what the industry experienced. A lot of the industry manufacturers standardized equipment that is inventoried within the distribution channel and sold to an end user at a later date. This zippers from Aon's strategy in which we manufacture semi custom built to order equipment and as such we do not see much of a pre buy.

Speaker 3

We think we could see a near term low end demand as customers transition to equipment configured with the new R-454B refrigerant. Furthermore, the new construction market remains soft and could take some time to turn around. As such, we expect the Q4 and possibly the Q1 of next year to soften as a segment. As we progress beyond the immediate near term headwinds, we anticipate demand will accelerate throughout next year. We expect the macro environment will improve with interest rates falling and the election being behind us, plus the refrigerant transition will have played out.

Speaker 3

Regarding pricing, we anticipate a very modest amount of pricing next year, which is very different than what we are hearing from the rest of the industry. Finally, our product remains best positioned to support secular trends associated with decarbonization, electrification and future regulations. Therefore, while this segment could see a more pronounced softening in the Q4 and Q1 than we normally do in these seasonally down quarters, we feel very good about the medium and long term at the Aon Oklahoma segment. With that, I will hand it off to Rebecca to walk you through the financials.

Speaker 4

Thank you, Matt. Please turn to Slide 7. Net sales for the quarter increased 4.9% to a record of $327,300,000 up from $312,000,000 in the Q3 of 2023. The year over year growth was largely driven by the basics and Aon Coil Products segments, which realized growth of 58.8% and 36.7%, respectively, primarily related to the data center market. Sales at the Aon Oklahoma segment declined year over year 7.1%.

Speaker 4

The year over year decline at this segment largely reflects the tough year over year comparison along with the previously discussed disruptions caused by the refrigerant transition. Moving to Slide 8. Gross profit decreased 1.7 percent to $114,200,000 from 116,100,000 dollars As a percentage of sales, gross profit was 34.9 percent compared to 37.2% in the Q3 of 2023. The contraction gross margin was a result of lower volumes at the Aon Oklahoma segment and temporary inefficiencies at basics, partially offset by strong results at the AAON coil product segment, which benefited from a favorable product mix and increased efficiencies. Please turn to Slide 9.

Speaker 4

Selling, general and administrative expenses decreased 5.5 percent to $48,600,000 from $51,500,000 in the Q3 of 2023. As a percent of sales, SG and A decreased to 14.9% from 16 point 5%. Overall, SG and A as a percent of sales continues to be elevated due to depreciation and increased investments in back office technology and automation. Professional fees decreased due to the absence of the one time $7,500,000 settlement that occurred in the same period of 2023. Moving to Slide 10.

Speaker 4

Diluted earnings per share was $0.63 up 8.6 percent from a year ago. Our tax rate in the quarter was 18.4%. The company's estimated annual effective tax rate excluding discrete events is expected to be approximately 24.9 percent. Turning to Slide 11. Our balance sheet remains strong with our current ratio of 3:one.

Speaker 4

Cash, cash equivalents and restricted cash totaled $6,700,000 on September 30, 2024 and debt at the end of the quarter was $55,700,000 Our leverage ratio was 0.19. Year to date cash flow from operations was $191,700,000 up from $107,100,000 in the comparable period a year ago. The year over year improvement in year to date cash flow from operations reflects more efficient inventory management. Capital expenditures through the 1st 3 quarters of the year, including expenditures related to software development increased 37.3 percent to 113,800,000 We also drew down $17,300,000 on our revolving line of credit over this period, largely to finance the $100,000,000 of open market stock buybacks in the Q2. In the Q3, we reduced the balance by $30,200,000 Overall, our financial position is strong.

Speaker 4

This gives us flexibility and allows us to continue fully focused on investments that will drive growth and generate attractive returns. For 2024, we now have anticipate capital expenditures will be $215,000,000 up from our previous expectation of $125,000,000 With that, I'll now turn the call back over to Gary.

Speaker 2

Please turn to Slide 12. As we approach the end of the year and begin to shift our focus to 2025, we are very pleased with the current trajectory of the company. While the traditional rooftop businesses faced multiple headwinds this year and we expect it could soften more in the immediate near term, our data center business is more than compensating. We estimate at the end of this year, we will be entering 2025 with a backlog up over 50% from a year ago, a vast majority of which will be converted in 2025. This compares to a year ago when we were entering this year with a backlog that was down year over year approximately 6.9%.

Speaker 2

Our data center business is clearly very strong. This is a rapidly evolving market and all considered, we're executing extremely well with product development, customer service, production and management of our capacity. On the traditional HVAC equipment side of the business, it's hard to be nearly as positive compared to data center. Nonetheless, we remain optimistic. We manufacture the highest quality, highest performing, most efficient rooftop units in the industry.

Speaker 2

Furthermore, as the industry attempts to improve the quality of their equipment and has increased their cost of manufacturing, resulting in us becoming more cost competitive. This year, we have generated the highest gross margins in AAON's history, while managing a price premium to market pricing at the lowest level in company history. We also continue to maintain our edge in product development and innovation as noted in previous discussions regarding our heat pump technology. Our rooftop units configured with this technology have been growing at very robust rates this year. Thus, we are very optimistic with both sides of the business.

Speaker 2

Lastly, before getting into outlook and opening up the call for Q and A, I want to take a step back and view things from a broader perspective. AAON is positioned for growth to accelerate in a transformative way over the next 12 months and that is very exciting. This kind of growth can come with risk, including long term sustainability or operational efficiencies, if not handled properly. We are focused on building an organization with the proper structure and leadership that will mitigate these risks and ensure long term sustainability and success. In tandem with managing the day to day opportunities and challenges that we have experienced this year, we are tactically restructuring the organization in a way to best manage the enterprise over the next several years.

Speaker 2

From a high level, we are restructuring leadership and the business and modifying processes throughout the organization. These initiatives will ensure that we are maximizing efficiency, minimizing risk and maintaining high returns on invested capital while the company is growing at a high rate. You'll hear more about this in the near future, but I wanted to make all shareholders aware that we are not taking this near term growth for granted and we are investing in the long term sustainability for this business. For our 2024 outlook, we maintain that our volume will be flattish and pricing will be a mid single digit contributor. We also maintain that our gross margin for the year will be up year over year, but to expect this to reflect typical seasonal softness in the Q4.

Speaker 2

For SG and A as a percent of sales, we maintain that it will increase 50 to 100 basis points. Finally, we increased our CapEx guidance to $215,000,000 up from $125,000,000 reflecting the recently announced Memphis project. As we progress into 2025, considering the timing of backlog conversion and accounting for the near term softening in the nonresidential construction market, we expect Q1 sales and earnings will be modestly down from Q4. Moving forward through the rest of the year, we anticipate an acceleration of year over year growth in both sales and earnings. In closing, I want to finish by thanking all of our employees, sales channel partners and customers.

Speaker 2

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 and A.

Operator

Thank you. Your first question comes from Ryan Merkel with William Blair. Your line is now open.

Speaker 5

Hey, thanks. Good afternoon and thanks for taking the question. I guess first off 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?

Speaker 2

Well, we've always had seasonality. And for the last few years, we've had such a tremendous backlog because we didn't have production capacity and we weren't able to produce in the shorter lead times. Now we're able to produce at a much faster rate, so the backlog impacts it substantially. So there could be just a slight bit more softening Q4 and Q1, because the backlog is, again, we've burned it down pretty good. But the pipeline is very strong.

Speaker 2

Sales channel partners tell us things are beginning to turn around. I had cited three reasons that I felt like the pipeline for that business was challenged, the refrigerant transition, the election and interest rates. Well, elections behind us. I think we did fine there. Interest rates went down another 25 basis points today.

Speaker 2

I think that points well. And the refrigerant transition will be behind us any moment now. I mean, we cannot produce equipment past December 31st with the old refrigerant. And since we don't have any of our equipment going into inventory like a distributorship, then we are already shipping 454 B equipment and we will be shipping exclusively that. So I think just this the timing of these events has been pretty much the way I projected going back a year ago.

Speaker 2

And hopefully that answers what you were looking for.

Speaker 5

Yes, it does. And a quick follow-up because you said that you think 1Q 'twenty five 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?

Speaker 2

The data centers is very robust. The data centers, the thing is there, the Longview facility, in order to produce that at the rates to make up for the slowing down in Oklahoma. It's just coming online here in a few weeks. So I don't expect to flip the lights on and produce at 100% capability right away. So I think it'll take a quarter to speed that up.

Speaker 3

And Ryan, just to clarify the we don't anticipate year over year decline in Q1. We're messaging a potential quarter over quarter decline from Q4 to Q1, which is a modest decrease from Q4 to Q1, but it will be up

Speaker 5

here in Q2. Okay. Thanks for that clarification. And then let me ask one on data centers before I turn it over. The $175,000,000 order, which I appreciate is not in the backlog, by the way, Why was that order so big?

Speaker 5

And was that a new customer?

Speaker 3

So it is an existing customer, but with this specific customer, it is the first exposure into the liquid cooling realm with that customer. The reason it is so large is it is a maybe a large scale deployment of a liquid cooling AI supporting process kind of with exposure across their fleet. So it's not a single facility, but it's providing product to support a large build out of AI capacity across the overall enterprise for that customer. And just Okay. And one thing I would just note is, we obviously message the $174,000,000 order, but even subsequent to that, I mean, the last week, tallied on another $34,000,000 in liquid cooling orders as well.

Speaker 3

So the demand around liquid cooling and the kind of strength with the product development continues to kind of showcase the value that AM provides.

Speaker 5

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 $100,000,000 area or should we not be thinking about it that There's just a long pipeline of lots of kinds of orders.

Speaker 3

Yes, I mean certainly the kind of single tranche $170 plus 1,000,000 order is it's certainly a little bit more of the unique kind of scale of orders. But I would just say, I mean, we have tremendous visibility into numerous orders that are $20 plus 1,000,000 orders within the liquid cooling and air side space. So the fundamental volume is large orders. The $174,000,000 certainly is one large tranche that's pretty unique. But in aggregate, we have substantially more visibility in pipeline to kind of overall order volume.

Speaker 5

Very good. Thanks so much. Appreciate it. Pass it on.

Operator

Your next question comes from Chris Moore with CJS Securities. Your line is now open.

Speaker 5

Hey, good afternoon guys. Thanks for taking

Speaker 6

a couple. And maybe just one on the rooftop, just have all the states passed the necessary legislation for the new refrigerants?

Speaker 3

Yes. At this point, the regulations are supporting the refrigerant transition. Mean, we're less than 2 months away from the mandatory cutover date. And so from a regulation standpoint, the states are prepared for that January 1 date.

Speaker 6

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 parse the air cooled versus liquid cooled and any sense as to what percentage of the data center revenue would be on the liquid cooled side?

Speaker 3

Yes, I mean, it's going to be a transition for sure. It's not going to be day 1, all of a sudden we flip a switch and have this massive liquid cooling kind of turnover. So 3 to 4 years out, you're really still going to be predominantly air side cooling. But I want to frame one thing up as well. When you think about liquid cooling, a pure play liquid cooling data center still has a substantial amount of air cool requirement, I mean 20 plus percent.

Speaker 3

So as you think about the flip to a higher concentration of liquid cooling with this large scale investment going on in AIML, just mathematically speaking, it's still even if you went to a today flip the switch and all that new demand with liquid cooling, the demand is growing so much that the air side cooling is still growing in that backdrop. So when we look at it 3 to 4 years out, you're probably looking you might be approaching 40%, 50% of the overall cooling demand being around liquid cooling if the investment cycle continues around the AIML investment.

Speaker 6

Got it. That makes perfect sense. And then one more just on the gross margin basics 27.9 percent 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 basics gross margin to be the highest of the 3 segments?

Speaker 3

I don't know if I go as far to say the highest of the 3 segments, but I think the Oklahoma segment provides a good target of where we're trying to work towards within the basic segment. In the to your comment on the Q3 numbers, I mean, not only the build out of capacity, but there's still if you imagine kind of all our talk around the investments we're making within Longview and talking about the Memphis facility and that build out, the goal is to really start leveraging a geographically diverse manufacturing fleet. And so as we start to leverage that, we can really optimize manufacturing efficiency and drive margins at those sites. Within the Oregon site today, the volumes going through there, it requires a tremendous amount of collaboration, but also some outsourcing that puts pressures on margin, where once we get the manufacturing fleet kind of fully in operation, that outsourcing really starts to kind of pull back and allows us to really in source as much as possible, getting that kind of additional tailwind around margin.

Speaker 6

Perfect. Thanks Matt. I will leave it there. Thanks guys.

Operator

Your next question comes from Brent Thielman with D. A. Davidson. Your line is now open.

Speaker 7

Hey, good evening guys. 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 Q1 on a sequential basis on the basis. Does that mean the bulk of this for the new order is going to revenue in the Q2?

Speaker 7

I'm just trying to understand how this is going to sequence over the first half of the year.

Speaker 3

Yes. So, great question. When you think about the historic seasonality we have in the rooftop business, coupled with the kind of macro and secular dynamics that are happening right now, the Oklahoma segment certainly is having downward pressures Q4 and Q1 being offset by the ACP and basic segment. When we talk about the kind of growth in revenue in that backlog, it definitely is accelerating quarter over quarter. And so you're going to when you think about Q1 to Q2, you've got the seasonality softening on the Oklahoma segment that's providing an uplift in revenue.

Speaker 3

Add on top of that, the acceleration of conversion of that backlog around data center space and certainly that's where Q2 is going to have a substantially stronger performance compared to Q1 from a top line revenue perspective.

Speaker 7

Yes. Matt, what about just the core basics 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 team? Because I'm just curious, it would seem to me you've got a pretty full pipeline there.

Speaker 3

Yes. So one thing to consider and this is something that as we go forward, we really have to start thinking about basics differently than we think about it today. And the reason I say that is the basics brand is truly going to leverage the geographically diverse manufacturing fleet. So when we talk about basics today, it's tied to Redmond. The walls are only so big within that Oregon facility.

Speaker 3

And so we naturally hit kind of a point where that facility is at its revenue kind of cap and we focus on at that point driving efficiency and basically margin up step kind of from there. But when you think about Basics as a whole, our big intention with the Longview expansion with this Memphis project, it has to be manufacturing that Basics branded product across that area. And so we may intentionally move things that are in Basics backlog today to be manufactured at one of those other facilities to optimize the manufacturing fleet and really drive manufacturing efficiency going forward. So it's kind of the true root answer to your question is, basically as a whole is going to really be seeing strong acceleration, leveraging that diverse manufacturing fleet. Today's style of reporting of basics is obviously only can only grow so much within our geographic walls in Redmond until we kind of help further provide the explanation of basics going forward.

Speaker 3

And so that's definitely from a reporting perspective, something we're very cognizant of is really identifying the true basics revenue that's manufactured across the fleet.

Speaker 7

Got it. Appreciate it. Hey, I guess my last one is, understanding you've got a little bit of a low 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?

Speaker 2

I think all three factors that I've been talking about for in excess of a year now are pressuring the rooftop business. The refrigerant transition is certainly one of the larger of those. I think the interest rates have kept construction starts down. If we look at ABI, it's been down for like 20 months in a row or something like that. So once these interest rates, the impact of them lowering the interest rates starts to materialize into more starts, be more opportunities and the refrigerant transition will be behind us here shortly.

Speaker 2

So the headwinds don't seem to have a whole lot of duration to them.

Speaker 7

Appreciate that Gary. I'll pass it on.

Operator

Your next question comes from Timothy Rose with Baird. Your line is now open.

Speaker 8

Hey everybody, good evening. Nice shot. 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 $325,000,000 or so of that backlog is going to be for data centers in 2025.

Speaker 8

And then if we add the $175,000,000 order you announced in October, that adds up to at least $500,000,000 of data center revenue next year. So I guess is that math right? And I guess if it just how do you 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?

Speaker 3

Yes. So one thing I'll touch on, just with the data center revenue, I'm sorry, backlog that is there today, there is still a portion of that that will be manufactured past 2025. So we have some stuff in our backlog that's going to be 18 months out. So not all of that's going to convert for what's in backlog today in 2025. But certainly the $174,000,000 we'd message that's going to be primarily converted within the first half of twenty twenty five.

Speaker 3

And we still have then capacity that we're selling in the latter half of twenty twenty five around liquid cooling products. So while not providing direct guidance, I'll just say your sentiment and what you're thinking is certainly in the realm of kind of what we see within the data center space going forward. And when we look at how do we support that, I mean it's a fantastic question when you think about that's tremendous growth around that segment and managing that from a manufacturing and efficiency perspective is critical. So we've already wrapped up the fundamental Redmond project is wrapped up. We're still doing some work in Oregon, but the big stair step of that investment is wrapped up and is now producing product.

Speaker 3

So that was a 15% gain in square footage, which has some more headroom compared to overall revenue, not a 1 to 1 square footage to revenue. We go to the Longview site and by the end of the year, we'll have that wrapped up. We're already setting up and actually priming production lines within that facility today. So So when we hit 2025 and that facility is turned over, we're sequentially bringing those production lines on throughout the calendar year, which is providing a tremendous amount of additional capacity. But you're going to see sequential capacity in Longview coming online really from Q1, Q2 into Q3.

Speaker 3

And right as we're sitting there in Q3 is when we anticipate really starting to be able to get some inertia within the Memphis facility in producing product kind of in earnest towards the latter half of the year in 'twenty five. So all that to say that capacity from an investment perspective really from today throughout the end of 'twenty five is going to be a continuous increase in capacity throughout the calendar year that's going to really allow us to support that bookings growth.

Speaker 8

Okay. Okay. That's really helpful. Thanks. 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.

Speaker 8

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 more bigger efficiency that you have relative to standardized product?

Speaker 2

Well, one of the things to kind of take note of is several of our competitors have announced that they're building inventory to put in their distributor channel that is 410A. And one of those competitors stated that they could be putting new 410A equipment in for about 9 more months. So while that's still out there, we're not going to see the real price difference because they're not getting a preponderance of 454B equipment out there yet. So it's not going to be instantaneous that we see this glaring difference in pricing show up. It's going to take a quarter or 2.

Speaker 2

We're monitoring it very closely. When we have competed with the others on 454, we have found them to be much closer to our price or above our price. So I just I want to get the momentum back into this business and not try and get the margins out of line. The margins are very, very good right now, and we've produced enough 454B equipment already to know that our margins are solid on it as well. So we will be monitoring that, Tim.

Speaker 2

I don't want to leave money on the table. Our equipment is definitely a value statement that is easily defined, and we intend to get paid for the value.

Speaker 8

Okay. Okay. No, that's helpful. I understand that. Okay, good.

Speaker 8

So I had, thanks guys. Appreciate it. See you next week.

Operator

Your next question comes from Julio Romero with Dougherty and Company. Your line is now open.

Speaker 9

Thanks. Hey, good afternoon, everyone. Could you give us some flavor in terms of the margin profile of that $175,000,000 liquid cooling order? And is it fair to assume that order is going to be part of the coil segment or would it be basics?

Speaker 3

Yes. So from a margin perspective, I would just say, I mean, it's going to be in line with what we historically have seen in the basic segment kind of before all the disruption. Obviously, there's opportunity to get margin expansion kind of given that volume, the manufacturing efficiencies that come with that. There provides headroom in there, but we're not guiding they're going to be as strong as kind of what we've been posting in the Oklahoma segment just because there's going to be pressures on that margin during the initial ramp up. And then as we get into a steady state, there's going to be opportunity for actually some upside.

Speaker 3

So I would use kind of a 2023 basics margin profile as kind of a rough expectation of really where we expect to see that come. And yes, it will that revenue will show up in our reporting within the coil product segment.

Speaker 9

Okay, got it. So 2023 basics 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?

Speaker 3

It will ramp up. I mean, you'll see that revenue kind of sequentially realistically even a little bit in Q4. So you'll see it kind of Q4 ramp up in Q1 and then ramp up more in Q2. So it will be sequential, but certainly there's going to be a high density of that sitting in Q2. Okay, got it.

Speaker 3

And that obviously going to provide some margin upside just around leverage.

Speaker 9

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 2025. Can you just give us an idea of kind of the expected contribution of that facility on an annualized basis?

Speaker 3

I mean, it certainly has a lot of room to really impact the revenue within Aon. And so we haven't really kind of put to paper publicly at least where the revenue potential is. But what I would just say is if you step back and think about what does 787,000 square feet mean relative to the data center footprint that exists inside Aon today and it's roughly doubling the available square footage to produce data center products. And so that's kind of the guidance we're giving is if you look at that and look at Redmond, you look at the ACP site with the expansion, all in you're getting roughly a doubling of that square footage to be able to kind of revenue based on our products going forward. So there's definitely upside to be able to really impact the market with that coming online.

Speaker 9

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?

Speaker 3

So near term, it will likely report into Oklahoma. But obviously, on the long term, we're going to work through reporting to be able to clearly articulate the basics versus Aon segments from their impacts to the enterprise as a whole.

Speaker 9

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 Q4?

Speaker 4

No. So the annual each of the quarters reflects discrete events, mainly our excess tax benefit that lowers it below the 24%. So it won't be like year to date, you take 24% and back out to get a higher rate in 4th quarter. It would be 24%, I assume, we'll have another excess tax benefit in Q4. So it might likely end up less than 24% when you add in some of those discrete events.

Speaker 4

So you would look at your 4th quarter results times that 24% tax rate and factor in what discrete events could be.

Speaker 9

Okay. Good clarification there. Thanks very much guys. I'll pass it on.

Operator

Thank you. There are no further questions at this time. I will now turn the call over to management for closing remarks.

Speaker 1

I'd like to thank everyone for joining me as on today's call. If anyone has any questions over the coming days weeks, please feel free to reach out to myself. Have a great rest of the day and we look forward to speaking with you in the future. Thank you.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and that you please disconnect your lines.

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Earnings Conference Call
AAON Q3 2024
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