AAON, Inc. Price & Performance (AAON)

Thank you, operator, and good morning, everyone. Press release announcing our fourth quarter financial results was issued earlier this morning and AAON be found on our corporate website, aaon.com AAON. The call today is accompanied with a presentation that you can also find on our website as well as on the listen only webcast. Please go to Slide we begin with our customary forward looking statement policy. During the call, any statement presented dealing with information that is not historical is considered forward looking and made pursuant to the Safe Harbor provisions of the Securities Litigation Reform Act of 1995 the Securities Act of 1933, and the Securities and Exchange Act of 1934 each as amended. As such, 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 all are aware of the inherent difficulties, risks and uncertainties in making predictive [indiscernible] Our press release and Form 10 ks that we filed this morning details some of the important risk factors that may cause our actual results to differ from those in our predictions. Please note that we do not have the duty to update our forward looking 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. Joining me on today's call is Gary Field, CEO Matt Tewalski, President and COO and Rebecca Thompson, CFO and treasure. Gary will start off with some opening remarks. Rebecca will follow with a walk through of the quarterly results Matt will then provide further details on the segments and about our operational strategy, And before taking questions, Gary will finish with our 2025 outlook and closing remarks. With that, I will turn the call over to Gary. Prior to diving into the results, want to briefly address the news that we announced last week related to CEO succession. As many of you know by now, I will be stepping down as CEO at our Annual Stockholders Meeting on May 13 and Matt Tibolsky will be taking over the role. I will remain on the Board and I also will become a special advisor to the company to ensure a smooth transition. Years ago, I was very transparent that a part of my strategy with the company was to put together such a strong leadership team that my services as leader will not be required any further.

We've reached that point. The team that we have put together over the last several years AAON and has proven to be incredibly capable. I can confidently say This is the strongest leadership team this company has ever seen. Since the end of twenty twenty three, Matt has been leading the team and fully managing the day to day operations. Over this time, I took a step back from the day to day. I could not be happier how the team performed throughout this transition. Giving me the utmost confidence that this is the right timing for this. Matt is an extremely talented individual with a huge skill set. His bandwidth is incredibly large and he is a very effective leader. I have strong conviction he will be very successful and that this transition will be extremely smooth. Now please turn to Slide three. As we look back on 2024, it was a year of both triumphs and obs Early in the year, we were coming off of a two year stretch of extremely strong organic volume growth and share gains. We said at the time that in addition to the year over year comps being tough. The 2024 was going to be a slower year due to uncertainties and challenges related to the refrigerant transition, along with weaker macroeconomic conditions, in the traditional non residential construction market.

While not everything went exactly how we expected, from an organic revenue standpoint, it was a flattish year. Which was generally in line with our projections. Peeling back the onion, there were a lot of puts and takes. The Basics brand had a tremendous year. Driven by robust demand from the data center market, and strong execution from our engineering and sales teams. The brand made a significant impact on the data center market with the industry First, large scale development and sale of a custom designed liquid cooling solution. At the same time, sales of its air side data center cooling equipment maintained exceptional performance. Net sales of basics branded equipment for the year were up 35.1% And within that, Basic's branded data center 85% AAON. Bookings of BASICS branded equipment in 2024 were up approximately 100%.

This performance led to the company's total backlog finishing the year up 70% AAON. The AAON brand faced a more challenging year due to disruptions caused by the refrigerant transition and weaker non residential construction activity. These headwinds resulted in softer demand and created challenges within production planning. Despite the obstacles, sales of AAON branded equipment were down Bookings of AAON branded equipment was up in the mid teens and backlog at the end of the year of AAON branded equipment was up approximately 20% AAON. Considering the tough year over year Comps combined with the headwinds we deem the year to be a success. Please turn to Slide four. Like the year, the fourth quarter performance was mixed. The bright shining star was that bookings were up approximately 62% and year end backlog finished up 70% to $867,100,000 This was primarily driven by bookings of data center equipment including the large 200,000,000 plus liquid cooling equipment order we booked late last year. We anticipate a majority of the total backlog will convert to revenue in 2025 positioning us for accelerated growth this year. Sales and earnings in the fourth quarter were softer than we were anticipating. This was primarily driven by the Aon Oklahoma segment, The fourth quarter was the first quarter in which we only accepted orders for equipment configured with the new refrigerant.

Bookings of rooftop units in October and November were soft causing us to throttle down production more than we anticipated. As a result, volumes were lower than expected, margin degradation at segment was exacerbated. The positive is this slowdown is temporary. And we believe we're closer to the end than the beginning. The severity of the downturn since October should also result in a steeper recovery for us as we deem most of this slowdown was a push out of demand. Compared to most of our competition, which experienced a pull forward of demand. I will now hand it off to Rebecca Thompson, who will walk through the quarterly financials in more depth. Thank you, Gary. I'd like to begin by discussing the comparative results for the three months ended December 31, 2024 versus December 31 AAON, 2023 AAON. Please turn to Slide five. Net sales were down 2.9 percent $297,700,000 from 306,600,000.0 The year over year decline was largely driven by the Aon Oklahoma segment, realized a decline of 16.1% AAON. This was partially offset by the AAON coil product segment, which realized growth of 129.9% AAON. Moving to Slide number six. Our gross profit decreased 30.5% to $77,600,000 $111,700,000 As a percentage of sales, gross profit margin was 26.1% compared to 36.4% in 2023 AAON.

The decrease in gross profit margin largely reflects lower volumes and the related deleveraging of fixed costs at the AAON Oklahoma segment.

We also had a temporary decline in gross margin for the Aeon coil products in as we build out additional capacity for future growth. Please turn to Slide seven. Selling, general and administrative expenses increased As a percentage of sales, SG and A increased to 16.2% compared to 15.6% in the same period in 2023 AAON. The increase in SG and A as a percent of sales was primarily related to an increase in depreciation expense associated with investments we are making for long term growth offset by a reduction in profit sharing expenses due to lower earnings. Moving to Slide eight. Diluted earnings per share decreased 46.4% AAON to $0.3 per share from $0.56 per share. The fourth quarter benefited from a large excess tax benefit of $4,600,000 related to stock based compensation compared to $2,500,000 in the same period a year ago. Turning to Slide nine. Our balance sheet remains strong. Cash, cash equivalents and restricted cash totaled $6,500,000 at 12/31/2024 AAON, and total outstanding debt was $154,900,000 Our leverage ratios in the quarter was 0.57 We had working capital balance of $313,300,000 at 12/31/2024 AAON, versus $282,200,000 at 12/31/2023 AAON. Increase in working capital reflects necessary inventory purchases made to accommodate production of orders in backlog for early twenty twenty five.

Capital expenditures in the fourth quarter were $99,300,000 up nearly fourfold from a year ago. The increase was primarily associated with the $63,400,000 AAON in December on the closing of our new facility in Memphis. In 2024 AAON, capital expenditures totaled $213,200,000 up 94.7% from 2023 AAON. In 2025, we anticipate capital expenditures to be approximately $220,000,000 The majority of our investments will be related to getting the Memphis facility up speed for production later this year. I'll now hand the call over to Matt Tibolsky, who will speak more in-depth regarding the business segments and our operational strategy. Thank you, Rebecca. Please turn to Slide 10. As Rebecca stated, much of the softness in the quarter was driven by the Aon Oklahoma On the third quarter call, we cautioned that we expected a temporary low in adoption of MU-four 54 After we stopped accepting orders, of the legacy four ten Aver Bridgerant equipment in September. And knowing that many of the state building codes weren't updated to allow four fifty four B equipment until the fourth quarter. As this was the first refrigerant transition that also had building code implications, it was difficult to gauge what the impact was going to be.

The downturn in demand following the refrigerant transition proved to be steeper causing us to slow production in the quarter more than anticipated. This resulted in lower volumes in the Aon Oklahoma segment in the quarter. We believe the downturn is temporary and was created by the refrigerant transition timing. As such, we chose to not reduce headcount significantly to prepare for the rebound demand. As a result, the impact was magnified from a profit margin standpoint. Bookings were strong as we rounded out the year. Resulting in a double digit increase in the segment's year end backlog. However, this preceded a modest price increase that went into effect on January 1, so some of this demand was a pull forward added the price increase. The positive is this suggests there is pent up demand in the market. Furthermore, as of the January AAON, the trailing three months of bookings were up in the mid teens compared to the same three month period a year ago, and backlog remains solid. We continue to believe as we move through the first half of the year we'll see continued improvement in demand. That said, much of the fixed costs associated with the New Mexico facility will be included in the AAON Oklahoma segment.

Until production ramps up to a certain level, which will likely not occur until Q4, this will be a drag on segment profits. In the first half of the year, we anticipate incurring costs of $5,000,000 to $7,000,000 with minimal revenues to offset. For the segment as a whole, we expect the first quarter will look similar to the fourth quarter and expect sequential improvements throughout most of next year. The AAON coil product segment had an exceptional quarter sales and gross profits were up 129.988.9% respectively.

The strength was largely driven the commencement of production of the new Basix branded data center liquid cooling product. I'm extremely pleased with how our operations have performed here. We've added and trained a lot of people in a short period of time to scale up this operation and execute to the highest level for this customer. Due to engineering and design modifications requested from the customer, the initial ramp up of production has been delayed a couple of months. As a result, we now expect the majority of this order looks produced and shipped in the second and third quarter of here. That said, should see solid sequential improvement in sales and profit in the first quarter with an acceleration starting in the second quarter. Sales and gross profit at the basic segment were down 342.7% respectively. Over the course of last year, the facility in Oregon has been working through some growing pains. There's a lot of demand and a lot of backlog, which is positive, but there's also limited capacity at this facility. This resulted in some temporary operational inefficiencies and is why the margins have been sub par for a number of quarters. The positive is we've been working on this issue for a while.

I believe we are almost at a point where we should begin to see improvement. We are taking certain initiatives that will expand production throughput while balancing our headcount appropriately. The Memphis facility should also help greatly as we will be moving some high volume production from Redmond to this facility later this year. Which will result in higher production efficiency in Redmond. We expect their first quarter will look similar to the fourth quarter and anticipate sequential improvement going forward. As we stated in the past, we expect this segment will eventually return to margins we realize 2023 AAON. Please turn to Slide 11, I want to finish by briefly running through our strategic priorities with you and how they pertain to our tactical approach today. We see our strategy existing within three main pillars: AAM's foundation is, and has always been built upon being industry leader in innovation, customization Maintaining the industry's highest class of engineers in solving our customers' problems through configurable and customized solutions is a foundational principle across the entire organization. We exemplify this today through various ways. Most notably our highly technical, fully custom developed data center solution and our cutting edge semi custom air source EPUC units.

The data center liquid cooling solution that we developed last year was a product that was uniquely configured a way the industry had never seen before. The product we provided was the exact solution that a customer was looking for and it was something none of our competition was able to deliver. In the current time period, where the scope and design of data centers are rapidly changing, these engineering and manufacturing capabilities are immensely valuable. Our AirSource Heat Pump rooftop units, sold under Alpha Class product family is another example of innovation. Today, we are one of only two manufacturers in the industry that provide certified air source heat pump solutions that are operable down to zero degrees. Over the course of this year, will be introducing heat pump solutions that are operable all the way down to negative This is instrumental in filling the growing demands from customers who are attempting to decarbonize electrify their footprints of buildings. These are just two examples. We have other innovations and development stages that we expect will be similarly as impactful We look forward to sharing them with you in the future. This leads me to our second pillar, which is to drive sustainable and robust organic growth.

Today, our annualized run rate of production of data center equipment amounts to a little over $200,000,000 Given the pipeline of data center development plans and growing demand, for customized solutions in its everly rapid changing industry we see this business growing to over $1,000,000,000 within a few years. In 2024, sales of our Alpha Class units amounted to a little over $100,000,000 and was up year over year by approximately 40% AAON. With demand for this technology growing significantly, in much of the country requiring this cold climate solution, we think this business can grow by multiples in the next few years. These two catalysts alone are going to drive significant growth. And there are other initiatives we are focusing on that will also contribute to continued growth. This brings me to our final pillar, which is to be a best in class operator. Being a best in class operator to us means to consistently achieve high operational efficiencies quality control and on time delivery rates. All reflected by consistent gross margin. To achieve this, generating the robust growth rates we are targeting, we we must carefully manage both our current operations and our capacity expansion plans. In order to do that, we reorganized the company late last year.

This new structure will allow us to quickly grow into a approximately 1,000,000 square feet of new manufacturing space that we constructed and acquired last year doing so while maintaining efficiencies and target margins. With that, I will hand it back to Gary who will walk through the outlook. Please turn to Slide 12. Prior to walking through the 2025 outlook, I want to take a step back and talk about where we are in our business cycle and where we are going. Matt did a good job of speaking to where we are going, but I want to frame where we are from a higher level perspective. The last five years, we have experienced tremendous amount of growth. Growing organic revenue at a CAGR of 17% AAON. It hasn't been a straight line though. Which it never is in business. In 2020, we had an exceptional year. 2021 was flattish. 2022 and 2023 were phenomenal. And 2024 was flattish. Last year was an unusual year. Largely disrupted by an unprecedented government regulation that the industry had never [indiscernible] The positive is most of the impact of that regulation is behind us.

I point this out because sometimes we get overly focused on three months worth financials and sometimes lose the forest for the trees.

We are at the early stages of another multiyear period of robust growth.

The fundamentals of both of our brands, Aon and Basics, are extremely strong. Basics has a huge tailwind from data center development and its leveraging of its unique engineering and custom design capabilities. Aon also is in a strong position. Our semi custom designed equipment is of the highest quality, best performing, most energy efficient equipment in the industry. Our advanced development of heat pump technology is revolutionary. Moreover, we're proving we can build our traditional equipment more efficiently than anyone.

Which is reflected in a narrowing price premium and strong margins. Given the backlog and the fundamentals, we see both brands resulting in annual growth similar to our trailing five year CAGR. We are investing and positioning this business for the long term. The recent reorg and investments that we have made into the business to give you confidence that we will not only be able to absorb this robust growth but do so efficiently.

With that, I will now walk you through our 2025 outlook. Please turn to Slide 13. For the year, we anticipate sales growth in the mid to at a gross margin similar to what we realized in 2024 AAON. SG and A as a percent of sales will realize a decline of 25 to 50 basis points.

CapEx will be approximately $220,000,000 For the first quarter, due to general seasonality, lasting impacts of refrigerant transition and ramp up costs related to Memphis we anticipate sales and earnings will be modestly down from the fourth quarter. In closing, I want to finish by thanking all of our employees sales channel partners and customers.

I also want to announce that we will be attending Sidoti and Company's virtual small cap conference on March 13 and William Blair's conference in June. I hope to see some of you there at these events Thank you. And I will now open the call for Q and A. Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you wish to decline from the pulling process? If you're using a speakerphone, Your first question comes from Ryan Merkel. Please go ahead.

Everyone, good morning. Thanks for the questions.

I wanted to start with the first quarter outlook for the Oklahoma sales.

I think you said flat sales versus what you just reported in 4Q. And is the reason that you're seeing that, is it still push outs because there's an inventory of R410 in the channel? That the main reason? Well, that's certainly got an impact on it, Ryan. We did book very nice right there at the end of the year. But the lead time being what it is, it's towards the end of the first quarter before those accelerated bookings start hitting the plant floor. So working off of the backlog We'll say earlier in the month, earlier in Q4, That's why the run rate is is still not accelerated four ten AAON a whole lot to do with it. We cut that off like we said back in September. So everything that we have in the backlog now is four fifty four. And it has taken just a moment to get that momentum back. [indiscernible] And then in the quarter, basic sales down year over year is a little bit of a surprise. I didn't catch the reason Why is that just given the big backlog?

Yes. So on a basis perspective, I think the one thing Ryan, we have to to really frame looking forward is thinking about this more on the basics brand And so the ACP the strong growth in ACP that is really driven by basics branded equipment. So when we look at basics as a whole, we're definitely seeing strong growth coming out of that overall business. Within the segment reporting. So the basic segment as reported today is really reflective of Redmond production and there's just fundamental limitations of capacity within that facility. That are really kind of the throttle what you're going to see from an overall sales perspective in that segment. But the demand to your point, the demand, the backlog a base of branded product is extremely strong.

I got it. So yes, you're saying base as a whole, if you include coil, is still strong.

Correct.

And that's really we talk about the kind of business unit realignment and kind of future reporting, it's really trying to reflect that because as we go forward, the basic brand is really going to be the Redmond facility, the vast majority of Longview and really the the bulk of Memphis from a ramp up perspective, that is all for basics branded product.

Okay.

One more and I'll pass it on.

The outlook for mid teens to high teens growth in 2025, AAON that's a little below what I was thinking. Can you just unpack some of the assumptions there? I was thinking data centers, both basics and coil could be up 75%, 80% AAON. AAON, just given that backlog and I think you mentioned you convert a lot of that And then I was thinking then the Oklahoma AAON, you'd be up low single digits, mid single digits. So correct me if what am I missing on that? Yes. Hey, Vivek.

The big driver is Oklahoma, I'll say, is the sort of piece that is offsetting that dynamic growth in the data center space. And so to Gary's comment earlier, coming off of the Q4 bookings into Q1, you're going to see little bit of expected reduction from Q4 to Q1 when you look at the bookings conversion to sales in Q1 plus traditional seasonality in that segment. So in Q1, we're just starting off at a weaker point than would be normal from in that segment. And as we look, there's still uncertainty exactly how the the commercial market, the macroeconomic market and non res really recovers throughout the year. And so we're just putting a little bit of caution in there with uncertainty around the Oklahoma segment. And so that's really where the kind of put and take is on the overall guide from top line revenue is yes, you're going very strong expectations of growth within the data center segment. With a little bit of softness coming off of that in the Oklahoma segment.

Can we just put a finer point on that? Maybe you don't want to give too much detail, but is Oklahoma segment contributing flat? In '25 AAON?

We're not bifurcating down to segment guidance at this point. But definitely, it's just again, when we start off kind of in that Q1 where we're starting off in Q1, obviously, it's going to put us a little behind from a year over year perspective. Got it.

All right. Thanks. I'll pass it on.

Your next question comes from the Mr. Chris Moore from CJS Securities.

Hey, good morning guys.

First, congratulations both to Gary and to Matt, job well done. Maybe we can start on data center. Obviously, there's been some talk of bigger players canceling or downsizing data center construction. What are you hearing from customers, potential customers AAON that front?

Yes. I mean, obviously, has been a lot of noise in the market around kind of what the data center outlook looks like. What I would say just from a fundamental visibility that we have the market continues to be strong. It continues to strengthen. When we look at the pipeline visibility that we see in the marketplace, as a whole, we see capital expenditures remaining strong and in a lot of areas actually increasing. And so from our perspective, everything we're seeing in the marketplace, everything we're seeing in in various stages of conversation within the data center market and channel the outlook, the strength and the investments continue to remain strong. We really I think a lot of conversation around the deep stake conversation Really we continue to be firm believers and really subscribe to the mindset that the ability to create more effective models creates demand. It creates a higher adoption of AI and will actually be continuing strengthen the investment versus the adverse. Got it. That's helpful. And you mentioned a $1,000,000,000 target. Is that a three to four year goal? Is that a five plus year goal just AAON way to frame that?

Yes. I mean, we use it, I'll repeat the words we say, it's a few years basically is what we see as being get that to $1,000,000,000 And so that's in the three to four year range, just kind of where we see that target at.

Got it.

That's helpful. And maybe just a question on rooftop on pricing. So how much more expensive is your R-54B solution, then the legacy four ten that's that's currently being sold. Just trying to get AAON understanding if it's if there's a big price delta or it has to do with building code changes that that would influence people to continue to buy the R4 for a while.

So for us, the 4TN A is behind us.

Exactly.

We don't sell into a distribution channel where we pre stocked and preloaded a big parking lot full of units. So there is no four ten AAON left at at Aon. That ended at the December. Four fifty four is no more expensive from us We had a 3% price increase that went into effect January 1. That was just our annual price increase for everything that due to inflation, we'll say. But nothing specific to four fifty four has emerged.

Got it. No, I understood you're not selling the four ten anymore, but distributors AAON. And I'm just wondering if you were going up against the AAON ten AAON trying to sell the four fifty four b is really kind of what I was getting after. Not materially, Chris. Okay. The people that buy units for a standard product like that are not our target client, never have been. It's never been material to our business. I'm not going to tell you that we don't lose a project from time to time to it, but it's not really measurable what we're what we would lose to four ten AAON because it's not ever been our target client that buys that style of unit. So not only the more innovative application strategies that we've put in the market for several years in like DOAS units and humidity control and building pressurization control and effective filtration, those have been our marquee applications. But the the air source heat pump is gaining a lot of share within the units that we're building today. And those are all built specifically for a project as well. That's very helpful. Maybe just just one last on price.

So you guys have had much more pricing flexibility than the average company on the four fifty four. From a market standpoint, any sense in terms of of where you're priced versus the other four fifty four bs at this stage? Now you said you've raised prices 3% beginning the year.

Yes. We're just now getting into that season where we have good comparative data. Oftentimes, and I've stated this many times, in the K-twelve market, which historically has been 20% -plus of our utilization of our units, bid forms oftentimes will be AAON basis of design and then they'll list a matrix of other manufacturers and what their pricing is. Those bids have gone back to their normal cadence of February, March, April bids resulting in June and July deliveries. So we're very soon and fact is AAON next quarter's talk, I think we'll have in empirical data to support where we're at with that. But we've not yet seen anything material in that regard. Got it. Very helpful. I'll jump back online. Thanks guys.

Your next question comes from Brent Tillman? From Davidson. Please go ahead.

Hi, thanks. Good morning. Gary or Matt, just on the the potential kind of $1,000,000,000 in data center revenue here over the next few years. Could you talk about does the current capacity coupled with kind of Memphis coming online of online commit you to do that? Is there more you need to spend to get there? And then also just a refresh on the timeline that meant this asset becomes available to you? Yes, go ahead and think of yes, when AAON think of kind of the total capacity that will be in place I mean obviously within the Retinin segment, we sort of said that in the the low to mid $200,000,000 was really kind of where that facility sweet spot is from a capacity standpoint. We have Longview facility that we've added And if you really just look at that from a potential capacity of that facility It's more than 2x the space dedicated to data center production compared to Redmond. AAON more or less double that And then Memphis is basically equal to the combination of those two? Please start looking at that and you're talking about overall capacity sitting in the $1,500,000,000 ish range once that's online.

So the capacity investment in Memphis is really to support that objective that we see with headroom on top of that. In terms of when it comes online, we look at Memphis AAON we'll be honest, we're aggressive at trying to get production pulled to push out of there. We actually built the first units at the beginning of the month in February. I say that with excitement, but also caution because obviously AAON we say we built units in Memphis, we really assembled units in Memphis. And so we had a lot of parts coming from a lot of places but really working aggressively to ramp that facility up so that by Q4, the equipment, the support equipment and the team is really built out to be running not at that full capacity, but definitely with a meaningful impact to financials by the end of the Got it. Really helpful, Matt.

Maybe just on basics, I guess specific to the Oregon facility, It sounds like you just essentially have some things to work through inefficiencies right now. Could you just clarify when you think that business sort of returns to the margins you sort of expect out of it?

Yes. I mean, in that segment from today's reporting perspective, we expect we're going to see sequential quarter over quarter improvement in margins throughout AAON. The reality is there's just when you attempt to put too much product through a facility, there's actually a negative implication versus a positive in terms of your ability to affect manufacture and the incredible demand for the product and really the target for us to deliver on expectations from a lead time and a shipping we push that facility very hard to turn products to customers. And productivity, in terms of number of units produced was certainly up in that last quarter. But it's self stream obviously from it it resulted in streams from a financial perspective. So we really think throughout the calendar year, we're going to see improvement And getting into 2026, we're going to be getting closer to being at that normalized margin rate that we're targeting.

Got it. Just last one, Matt or Gary, I guess, we're sort of two thirds the way through the first quarter. I just want to come back to Rook Top [indiscernible] could you discuss the order visibility you're starting to see for the new product? Is it still a wait and see? In terms of that coming in, excuse me, the new refrigerant product? Just trying to get a sense since you're No, it's beginning to accelerate. Were in Orlando at AHR just visiting with a lot of our sales channel partners. We didn't have any display there. But the general tenor was we're going to be seeing increasing orders On the normal seasonal basis that we had years back. So I guess the way to frame that up is we're confident that we've got the right product at the right price.

For the rooftops and we'll reassume our growth profile here shortly.

And just to add one piece to that too. In the prepared remarks, I want to just kind of reiterate one comment we made, which is when we look at the three months ending January 2025 AAON to the year previous, November, December, January's bookings, they're up mid teens year over year.

And so so the normalization, the growth profile in there is certainly starting to reassume and it kind of tells you where we're at from a competitive perspective marketplace. Where we caution that Q1 softness AAON really is about backlog conversion. That booking cadence doesn't really start hitting as Gary mentioned on the first question. Until the latter part of Q1.

And really makes a meaningful impact into Q2. So we definitely see that product positioned well. It should getting past that refrigerant transition to get the sales back to a normalized growth profile?

And just to add one more thing to that. Going back a few years ago, AAON we'll say the markets were relatively normal with lead times, bid activity, and so forth in their their seasonality. We would see in the range of 20% variance from the low to the high. And the bookings always led that by approximately [indiscernible] On that Dickings timeframe.

That converts into units in Q2. So that historic roughly 20% seasonality increase for Q2 and Q3 looks to be valid once again.

Really helpful color.

Thank you guys.

Thank you. And your next question comes from Julia Romero Citoti and Company.

Please go ahead.

Good morning. This is Alex Hanman on for Julio.

Thanks for taking questions.

I know we spoke about more efficient models driving more data center demand. I was curious if you could talk a little bit about demand for sensor data centers. I know those are typically a little bit better suited to liquid cooling. So would just love to have your take on that.

Yes, certainly in the data center space, really around the the model development side, so the machine learning aspects of AI, that is pretty much all higher density compute that's basically producing those models.

And so that higher density compute is pushing everything towards liquid cooling from a server perspective in that space. I always like to really make sure we hammer this home because I think it's a little bit misunderstood kind of in the overall market perspective, but even when we have a true pure play as we would call it liquid cooled data center, which is what we're supporting with that Longview product.

There is still a great amount of air side cooling required in that data center And so it drives growth, that investment in AI, that investment in the machine learning side at higher densities is driving growth both in liquid cooling and air side cooling. But definitely, yes, we're seeing a huge push into higher densities within that Great. Thank you for the color.

And I know we talked a little bit on the call about decarbonization and that sort of end market potential. Could we just get a little bit of an update on the development of that end market? [indiscernible] a lot of products from the basics brand have gone into the clean room space both in the semiconductor, the pharmaceutical as well as the EV and battery production facilities. I would say just as a macro perspective that market is been a little bit lumpy And so it definitely has some ups and downs from a quarter by quarter productivity standpoint. Those projects tend to be large scale programs and they're not quite as consistent in growth rate as data centers. And so you definitely see a little more volatility in the orders bookings and conversion. But we continue to see strong investment in the onshoring within the chip market as well as build out of batteries facilities. That we continue to support.

Great.

Appreciate the color there.

We'll jump back in queue.

Thank you. And the next question we have from Timothy Wujes from Barrett. Please go ahead.

Hey guys. Good morning everybody. Maybe just on Gary on pricing with the new R-54B, System, it sounds like you took some price in Q1, but really just to kind of offset inflation. So could you just kind of articulate where you are in terms of the strategy around what you're going to do with price specifically for R-54B?

Yes. We're going to monitor it a bit longer. We'd like for bookings to strengthen a bit before we hit a price increase that could potentially be related to $4.54. I think with the uncertainty of the impact of tariffs, there may be price increases to offset additional costs for that. They may not be $4.54 specific, But we will be monitoring that We have a lot of capacity [indiscernible] [indiscernible] [indiscernible] Tulsa facility where we build the rooftop units, which is primarily where the $4.54 impact is at. And we want to get that plant loaded back up strongly and if we have an opportunity to increase our price and thus our margin as a result of what others have for pricing pressure related to $4.54, then I think we would very likely do that. It's interesting I tried to figure out where their cost that they're declaring for forfeiture 4B might be occurring. And I said early on that monitoring and mitigation device the refrigerant leak monitoring mitigation device that's required for four fifty five B units was something that we had invented in our own facilities and invented one for us. Perfected it, got it UL certified and we're manufacturing it at a very low cost relative to what we could go purchase them for. [indiscernible] others are buying that component as opposed to having developed their own.

At this point in time. One or two others on their calls have cited that device as being one of the reasons that they've gone up. So I applaud our team for being innovative enough to come up with that device [indiscernible] to get it developed get it certified [indiscernible] it into our system at a very advantageous price. So that was one of the areas that I've seen others cite as to their price increase. And so that explains a little bit why we don't need the pricing possibly and they do. [indiscernible] I want to make sure that we get strong bookings And once we get the bookings cadence going the direction we need to go, then we'll look at being a bit more opportunistic in price increase.

Okay. Okay.

That's helpful.

And then I guess just from a Is there a way to kind of quantify any of the inefficiencies with some of the increased capacity at Longview and just some of the inefficiencies that you saw at basics? Like is there is there a number that you can put on it in terms of what those costs were in the the fourth quarter and in 2025 AAON?

Well, I'll take the first stab at this and then let Matt fill in a few more details. While we were ramping up and while we are ramping up, Longview there's certain things that we build and produce internally enough capacity yet to produce because the new machinery was still coming online. So we were outsourcing We'll say powder coat would be one of those in particular. We didn't have a powder cut facility in Longview. So we were outsourcing that. Well, you can visualize making all these big panels and they're fairly large pieces of sheet metal. Boxing them up, shipping them down the road, even though it's only a few miles, which still have the logistics of doing that, having them powder coated, bringing them back, certain percentage of them are damaged, not usable because of the transportation logistics. And then just the overall inefficiency of that process. So that was one in particular. In Memphis, as Matt spoke to earlier, we produced units there but we have no manufacturing equipment yet commissioned and and operating there. So it's strictly assembly. So we've either built components at other existing plants that we own or in some cases, we've outsourced some of that as well and we're already AAON And we did that in order to meet our delivery requirements with some of those those clients.

So that the combination of the two puts pressure on the margins. But Matt, go ahead and tell more about Redfin in particular.

AAON I was going to touch on one more thing in the long view space. And really, with the growth rates that you see in Q4 in Longview and really what we're talking about Q2 and Q3 with all the ramp up for production, you also have a lot of pressures in the fact that you you need to onboard and train personnel ahead of when you're producing. And so all of that basically puts strain from an indirect overhead as you're basically getting those team members up to speed and efficient in production, So all of that creates margin strain that definitely as we get to the volumes and we're in a more normalized state in Longview, you'll definitely see margins improve from a reduction of the inefficiencies and the labor cost, also just fundamental leverage. You're going to get a lot of leverage in overhead as we get to some of those higher volumes.

So Longview definitely going into Q2 and Q3 is going to see some great improvement in overall margin. In Redmond, yes, to Gary's point, similar to Memphis, similar to Longview, with the demand and the product we were trying to get through, we just we had to leverage and we're saying as well as a lot of just inefficiencies and basically getting projects out the door from a delivery expectation to our customers There's one thing that we hold really, really strong and that is monitoring our commitments to our customers. And so sometimes to get deliveries out AAON we're a little bit behind, it takes a little bit extra work, AKA costs to get that done.

So we've leveraged outsource partners inside the Redmond space as well and some logistics just trying to get all of that product produced that was expected.

We have and we're kind of really at a point where all the equipment that was getting installed in Redmond is now installed. It is now operational and really now we start to get the incremental leverage of efficiency off of these equip equipment installations.

So really as we look forward, we do see kind of quarter by quarter improvements in that ResMed segment getting all that outsource in a efficiency behind us, getting the equipment performing to expectation, And really the great part is we've made the decision that Redmine is going to get to a certain point in terms of its overall throughput capacity and we're going to to basically maintain that. It's not going to be a continuous growth driver, which means we then convert from a capital programs per to efficiency programs. And so there'll be a lot of effort throughout '25 to drive efficiency and therefore drive margin improvement throughout the calendar year. Okay. Okay. That's helpful. And then I have two other ones. Just the first is what is the year over year increase in D and A going to be just given the CapEx? And where does that kind of land?

And then the second one is just given the data center reporting in terms of where the stuff is landing from a production [indiscernible] follow what's going on. So Is there a potential or a thought process about maybe just kind of having the rooftop business via segment and then having data center via segment because I think just some of the complexity of the reporting right now is is kind of weighing a little bit on what's happening.

So tell you what, I will answer your second first because I know Rebecca is going to get you the solid answer on the first piece.

Yes. So on your second question, I mean, that is exactly why we announced the reorg kind of into the business unit philosophy going into 2025 AAON. We have some limitation in our systems today to allow the full reporting of that. But as we get through 2026 AAON, Our goal is to do exactly what you're asking, which is to do financial reporting really around the AAON business unit, which is the rooftop and the commercial split systems. And then reporting around the basic segment. And in doing so, you'll be able to understand the the basics revenue across and basically the drivers of revenue and profitability that comes from all of our production sites. And so that is definitely the target for the end of twenty twenty five going into 2026 AAON. To get very easier to understand financial reporting around all those segments.

And then Rebecca? Yes. So can you repeat your first question? Just so I believe it was about DD and A. [indiscernible] like if you look at the Q, I think the D and A number was probably up $6,000,000 or something like that, dollars 7,000,000 year over year. What is that supposed to be up in $25,000,000 as you bring on Longview? And and Memphis? And just where does that land on the P and L in terms of SG and A or costs?

So it's going to land in both cost and SG and A. A lot of the, Mphasis DD and A That's going to be mostly in your cost of goods sold. That's part of the drag on the gross margin that we alluded to in the earnings call. As far as like some of the fixed costs that are offset to revenue But we also have, as we've kind of also noticed, or alluded to in many of the calls, investments in some of the back office technology catching up and doing automation So you're going to see continued increases in DD and A within the SG and A portion of the income statement as well related to those investments. So I would think increase in DD and A in the next year sales.

Okay.

Okay.

Sounds good.

I'll talk to you guys in a bit. Thank you.

Thank you.

All right. So I don't see any further question at this time. I will now hand the call over to Joseph Mendelio.

All right. Thank you everyone for joining today's call. Anyone has any questions over the coming days and weeks, please feel free to reach out to myself.

A great rest of the day, and we look forward to speaking with you in the future. Thanks.

Thank you. Ladies and gentlemen, today's conference call has concluded. You may now disconnect.