Norman Asbjornson - President and CEO Scott Asbjornson - CFO.

Joe Mondillo - Sidoti & Company Brent Thielman - Davidson Jon Braatz - Kansas City Capital DeForest Hinman - Walthausen and Company.

Good afternoon, ladies and gentlemen. Welcome to AAON, Incorporated Second Quarter Sales and Earnings Review. There will be a question-and-answer period after management’s brief presentation. This call will last 45 minutes -- approximately 45 minutes. I would like to turn the meeting over to Mr. Asbjornson. Please go ahead, Mr. Asbjornson..

Good afternoon. Before proceeding, I’d like to read a forward-looking disclaimer.

To the extent any statement presented herein deals with information that is not historical, including the outlook for the remainder of the year, such statement is necessarily forward-looking and made pursuant to the Safe Harbor provisions of the Securities Litigation Reform Act of 1995.

As such, it is subject to the occurrence of many events outside AAON’s control that could cause AAON’s results to differ materially from those anticipated. Please see the risk factors contained in our most recent SEC filings, including the Annual Report on Form 10-K and the Quarterly Report on Form 10-Q.

I’d like now to introduce our CFO, Scott Asbjornson..

Welcome to our conference call. I’d like to begin by discussing the comparative results of the three months ended June 30, 2015 to June 30, 2014. Net sales were down 2.2% to $90.3 million from $92.3 million. The decrease in net sales was due to slight changes in the product mix of units sold.

Our gross profit decreased 2.7% to $27.1 million from $27.9 million. As a percentage of sales, gross profit was 30.0% in the quarter just ended compared to 30.2% in 2014. Selling, general and administrative expenses decreased 13.1% to $9.2 million from $10.6 million in 2014.

As a percentage of sales, SG&A decreased to 10.2% of total sales in the quarter just ended from 11.5% in 2014, primarily due to the $1 million charitable donation that company made in April of 2014 along with the decrease in warranty expense and advertising offset by an increase in stock compensation and sales taxes to certain states.

Income from operations increased 3.8% to $17.9 million or 19.9% of sales from $17.3 million or 18.7% of sales. Our effective tax rate increased 38.2% from 34.7%. Based on the forecasted effective rate for 2015, the company expects increases due to state income taxes and lower domestic manufacturing deductions compared to the same period in 2014.

Net income remained steady at $11.1 million or 12.3% of sales compared to $11.4 million or 12.3% of sales in 2014. Diluted earnings per share remained the same as 2014 at $0.20 per share. Diluted earnings per share were based on 54,675,000 shares versus 55,568,000 in the same quarter a year-ago.

The results of the six months ended June 30, 2015 to June 30, 2014. Net sales were down 1.0% to $167 million from $168.7 million. The decrease in net sales was a result of an increase in the number of units sold offset by a decrease in the average price per unit as of compared to 2014.

Our gross profit decreased 1.6% to $48.9 million from $49.7 million. As a percentage of sales, gross profit was 29.3% in the six months just ended compared to 29.5% in 2014. Selling, general and administrative expenses decreased 3.8% to $17.5 million from $18.2 million in 2014.

As a percentage of sales, SG&A decreased to 10.5% of total sales in the six months just ended from 10.8% in 2014, primarily due to the $1 million charitable donation the company made in April of 2014 along with the decrease in warranty expense and advertising offset by an increase in stock compensation and sales taxes to certain states.

Income from operations decreased 0.3% to $31.4 million or 18.8% of sales from $31.5 million or 18.7% of sales. Our effective tax rate increased to 37.9% from 33.1%.

The company’s income tax expense for the six months ended June 30, 2014 was decreased by $0.7 million due a change in method of accounting for state investment credits to recognize them as each annual portion of the credit becomes available for use on tax returns.

Based on the forecasted effective rate for 2015, the company expects increases due to state income taxes and lower domestic manufacturing deductions compared to the same period in 2014. Net income decreased 7.8% to $19.5 million or 11.7% of sales as compared to $21.2 million or 12.6% of sales in 2014.

Diluted earnings per share decreased by 5.3% to $0.36 per share from $0.38 per share. Diluted earnings per share were based on 54,717,000 shares versus 55,604,000 shares in the same period a year ago. Looking at the balance sheet, you’ll see that we had a working capital balance of $105.7 million versus $88.4 million at December 31, 2014.

Cash and investments totaled $50.5 million at June 30th, 2015. The investments have maturities ranging from 1 month to 13 months. Our current ratio is approximately 3.2 to 1. Our capital expenditures were $9.3 million. We expect capital expenditures for the year to be approximately $22 million.

Shareholders’ equity per diluted share is $3.43 at June 30, 2015 compared to $3.14 at December 31, 2014. We continue to remain debt free. I’d now like to turn the call back over to Norm who will discuss our results in further detail along with new products and the outlook for the remainder of the year..

Net sales down 1% for year-to-date. Sales decreased despite increased unit sales. The shift in product mix was to smaller units. Sales are not in line with our expectations. We fully thought we would see a higher amount of sales this year but a couple weather related issues that occurred to slow it down, plus a general change in the type of business.

The weather delays were the heavy snowfall in the Upper Midwest and the Northeastern part of the United States during the winter quarter and then in the spring quarter we have -- all of that is a very high marketplace for us and then we had our number one marketplace Texas had considerable flood problems in the spring, all of which slowed down construction in those areas.

There has been some effect on our business volume, the drop in on oil prices which is hard to put a quality on that but it definitely did have an effect on the building in those parts of the country where they are dependent upon oil income.

There’s been a delay in capital expenditures by some of those people who are in those areas and that was reflected in some of the sales. But if I look at what else went on in our life, we added three regional managers to the existing four, and that was 75% increase in the number of regional managers.

And this was done because we had built last year that we had gotten rid of all our choke points internally and our limiting factor had moved over into the marketing of goods. Therefore we were going to add our regional managers to help us connect to the customer base more securely than we were.

We made that decision last fall, we finally filled the first two positions with an outside -- with outside individuals in January of this year. The third one we filled in March of this year. All three people were very experienced people but did not come from the AAON family therefore have had to learn about AAON and adjust to it.

And as with all new employees, you have a learning curve and a time to come up to speed. My estimate would be, get really significant upswing it took about probably a better part of six months to make that occur which time period which is just now really occurring.

And as expected, we are seeing an upswing that has begun in the performance with these people. The other four people who were handling the entire country and all of our sales have a smaller area to be concerned with and therefore were able to be more effective on those areas.

So, our plans as far as how to increase our sales are working but they’re delayed somewhat and that it didn’t get affected the first part of the year but it’s becoming effective now giving us added optimism for the last half of the year.

What has happened however in that time, as we fully expected, some of the weaker representation we had in various parts of the country were replaced in the past six months, and with that, just adds with hiring of new individual, hiring a new sales representative has a learning curve that goes along with it.

So when we canceled out the existing sales operations, they no longer were going to be performing and the new one when they were put on will take time to come up to being effective.

To really become effective as new sales representative, it probably takes a better part of year for that to happen, although they will start selling product about 12 weeks or something like that by the time they do what they need to in order to really start producing volume.

It’s really about a year long process to really see how well we’re going to start doing. Of course like with any new entity whether a person or sales organization, if we’ve chosen wisely, they will continue to grow for future years as well.

We have done this in some of our more major marketplaces in past because we were able to get enough sales to keep ourselves as busy as we could be internally up until this past year. We had somewhat neglected the harder areas to go into and one of the harder areas to go into was the West Coast.

And so therefore we had not given it as much attention in the past as we are now.

One of the new hires, the one who came on in March lives on the West Coast and he’s very familiar with the market out there; he’s very experienced person and he has chosen to replace a significant portion of our sales offices on the West Coast, which is largely California which of course has a huge portion of the United States population and that the opportunities are quite extensive out there.

The new representation we believe is much stronger than the previous representation, but it is relatively new. And in the Southern part of the state it occurred fairly early and about the end of the first quarter. Upper in the northern part of the state of California is in process of the recruiting as we speak.

We are in a transition now from the previous representatives to the new representatives. All of which says that in that and then in the other states which are scattered all the way across the United States, we have made significant upturns in quality and expectations with sales from those areas.

Some of it has begun to show sales and some of it is still in the growth going and getting ready to start. So, we have inflicted a little bit of downturn on ourselves by an effort to position ourselves for much stronger growth.

That leads us to be able to say that we’re much more optimistic about the last half of the year than we were about the first half. We knew we had these things to go through and we’ve managed to go through most of them. And now we should start realizing the results of all the things that we’ve been changing in our marketing approach.

The other part it was not so much expected is the nature of what actually has occurred in the marketplace.

If we go into AHRI that is Air-Conditioning, Heating and Refrigeration Institute which receives the information from all participants in our industry as to what they’re doing and then keeps them quiet as far as what they got from home and they collectively put all that data together and report it back to those who furnished it thus giving us all a very clear picture of what’s going on our industry.

And if I look at AHRI’s data through June of this year, our primary product line which is rooftop air-conditioners, I find that the smaller size units have had a negative growth compared to a year ago, starting with say a two-ton unit that was down 15.3% and coming up to three plus, it 8% and then buried all the way there and then at the four-ton level, it went positive by nine tenths, it moved on up, hit high positive of about 6.5% and then it went back down to 15% to basically neutral and then went down from that point on with the exception of one size range.

So, the net result of all of that everything in the first six months was a negative 2.7% change. So, the negative was pretty much in line with us.

So that’s rather difficult thing to understand when I look at one other set of data that we watch which is the results from the government about the value of construction put in place for various types of residential and also non-residential.

Looking at the non-residential and the part which we participate in and see what’s happened, says we should have had a large volume increase in the equipment sold which doesn’t show up at AHRI.

So what happened? The only rational thing to summarize is the amount of growth we got from new construction was offset by the decline in replacement business that occurred. Otherwise these two numbers don’t make any sense.

And so what has happened in construction? Well, new construction and the buildings we’ve had has done a remarkable upswing in the past year. And the biggest one of them all, all standpoints in the thing is the manufacturing but it’s a kind of one month bump in the case but it was progressing up and it went up 62.1% from a year ago in June.

That was a large amount of -- that wasn’t all that 62% all the way across that’s a comparative number June-to-June. But that’s a huge increase. The next other huge increase we saw was lodging. Now we don’t have to have a good understanding because we don’t know in the amount of manufacturing, big manufacturing processes.

So, we have to assume that they were a few very large projects we just did not have any type of products that would fit. Because we don’t see -- we didn’t notice anything the way that we were losing. So, there is some differential in there that we can’t explain.

And it can be other types of heating and air-conditioning equipment and those types which we sell, which is probably the most logical and most likely thing. The other one that went up considerably was lodging, it went up 42.2% compared to June. However in lodging we don’t very large market share, that’s pretty modest thing.

We don’t have things for the rooms. We do have some for the public areas and we do, do business there. So, we participate in that a little bit. The next one down is in offices. Office is up 24.4% June to June. Again, why would we not see bigger there, well we have some other systems that also with beginning some of that and it would not be our systems.

The other thing that is occurring to try and understand what’s going on here is what I mentioned back when I was talking about AHRI and the upswing was in the sizes from 4 tons to 15 tons, which is more playing gem sort of unit, simple unit and is much more likely to be found on small buildings, small office buildings in which price, first cost, price is more a factor than is the capability of the product or the energy efficiency or the product in that range.

That is going to be a stronger feature which is much more for well known competitors in the industry. And so I would expect that they would flourish more from that -- it wasn’t a big upturn but really it was I would imagine that went more heavily to them. Where we have historically had our biggest strength was in the upper tonnages.

And with the exception of about 10% of -- about 5%, 6% of the dollars up there which did drop [ph] all the rest of them went down which is kind of indicative of what happened to our part of the marketplace. But if we continue looking at the various types of building up, we leave office building and go into commercial.

Commercial still had a respectable 7.6% year-to-year, June-to-June jump, going down healthcare, 6.3%. And then educational which is our biggest market by far is at 2.1%, more in line with kind of what we did.

And as you go down and all of these cases of course there are multiple other kind of products other than what we sell that can be supplying equipment to these jobs. And then when we get down religious which is almost not much remarkable, very small, it went up by 1%. So, the good thing is that there is an upswing and the markets were serving.

The fact that because of the variety of reasons which I believe were valid for what happened to us, including the change out of people and all the other things, we haven’t participated as well as one would expect from the upswing which appears to have occurred in the types of buildings that we’re in.

So that being said I’m thinking that for the reasons I said about the up -- about the changing in personnel and the additional regional managers and the additional emphasis that by itself will give us a much more positive view about what is likely to happen in the last half of the year.

We have for so many years now been fumbling along with a total lack of new construction and that appears to seized. And only negative to like I say, the only thing that makes sense is here was the different kind of a product that hits [ph] it or replacement market has diminished enough so that the equipment did not actually happen.

So, we’re feeling good about our ability that we stayed level in this change to the smaller tonnage units from the bigger ones where we had historically had our strength.

So, we are not depressed by that, we’re optimistic by the fact that we have increased the volume and that we have increased our penetration, and that even though that wasn’t where our strength was, we have increased penetration in those areas. So going forward, again, we are optimistic about what’s going to happen.

Then if we go to the backlog to see where we stand on backlog. On June 30th, we had $66 million worth of backlog compared to $67.1 a year ago, a modest downturn, not really great.

I will say that since the end of June, we have -- as it’s progressed over the days, have started to see an upswing and was very modest one in July but as we’ve entered August, it’s -- year-to-year comparison, it’s significant. What we do, so you know how where I come from and speaking this.

Every Thursday night on a computer which all the information list tells us what happened on each sales office, each one of our representatives by product, by dollars, by everything shows us how they performed.

And that is transmitted electronically to the regional managers, so they on a weekly basis, on Friday morning have a report on what’s occurred from the previous Friday morning to that date, by every one of their sales offices.

And also we give a summary one which shows what each regional manager has done and how they’re compared to their expectations of what we’ve given as far as quota for them. They are paid both on the volume and on the profitability of the company.

So, they’re very concerned with this because it has very immediate and meaningful impact on their income to get the volume but also to retain the profitability in the company. And so, they then will plot what they think they have to do to be more effective and bringing in more profitable business to us. That was a new thing for us as of this year.

Up until this year, we gave monthly report to the regional managers with that same information, but we were not giving it to them on a weekly basis as we are this year. So, all things considered, we of course see those reports, I’ll see one tomorrow morning, showing what happened this week.

And it has been as I said, so far this month been looking quite promising. I’ll now open the talk to questions..

[Operator Instructions] Your first question comes from Joe Mondillo with Sidoti & Company. Please go ahead..

So, my first question just related to sort of your initiatives to go after the market more with the increase in sales reps.

Just wondering if you could give us a little more color on -- maybe if you can quantify the amount of reps that you are at right now compared to a year ago; are you planning on adding more rep; what percent of sales was the West Coast; any other areas that you see as possible opportunities; if you could sort of expand on sort of what you think is the opportunity with increasing the sales focus and going after more market share?.

Well, we are viewed very positively by the sales people in the industry because our product is a very desirable product to sell for two reasons. One, it’s a high quality so that they can be proud to sell it and the second is the fact that if they do a good job with selling, they can make a very good income selling our product line.

So, it does attract the representatives. However, as we’re doing that we cannot be changing out too many people. And furthermore, when you get someone on, you of course have to give them a respectable amount of time to show themselves.

And we have been a little bit lax in fleecing out those non-performers or less than desirable performances simply because we were up until this year pretty busy just keeping up with what we had to do, the four people we had in other words were kind of overloaded. And they didn’t have enough time to spend by replacing people.

But by adding 75% more and the additional three regionals that gave the existing four people much smaller group of officers to work with as well as it gave the other offices to these three people, therefore allowing us to move forward with doing things we should have been doing. I’ll give you just a kind of thumbnail.

I said we didn’t do the West Coast as thoroughly as we should have in the past because we weren’t really stressing ourselves that much as far as gearing with all the business we could. Now we’re being much more serious about that part of the world.

We’re selling product to L.A, San Diego area, both of which we changed earlier by our new regional out there. I’m going to say a number of sales people in that market probably went up by probably a factor of three, in other words tripled and the general reputation of the new sales force is much more formidable than the others.

We had some very good sales people but not as many of them. So that was a major upswing. And the Sacramento, San Francisco, San Jose area of California is in the process of being changed as we speak. And the new representative has probably got 5% to 8% or times more personnel in the offices, the people that we replaced.

So, while I wouldn’t say the people better one way or another across, they are probably at least equal and the quantity of them and therefore their ability to serve the market is going to be much greater..

If I may make one comment, the reps that you’re talking about are the reps working for the rep firm. So when you look at our information later, the number of reps that we have may not appear different but the individuals working for the rep firm has increased substantially..

That’s correct. We’re still with the same quantity of rep firms; it’s the number of people that are involved in those rep firms I’m talking about right now. We have made changes throughout the Midwest and often to the Southeast.

And so, it’s not just strictly limited to what’s going on the West Coast although that’s definitely got more attention than the rest of the country because we have been doing a better job of keeping up with good reps in rest of the country than we did on the Western side of the Rocky Mountains..

So, is it largely a focus of just trying to improve the efficiency or the quality of reps as opposed to net-net increasing the total amount of net or the reps for the whole company?.

Yes, we’re not trying to increase quantity of sales offices. What we’re trying to do is increase quantity of people or the quality of people in those sales offices. And to some degree, we do that within all of our offices. As we grow, they have to add people to do that.

In some cases, we will change rep office of course strictly to get more representation in that office..

And what kind of timing do you think you’ll start to realize the benefits of this?.

It has already begun but we’re in the very infancy of it. We’re seeing it. And we know what orders some of these people have can be because we do not see the order until after they have had it and they have made a submittal to the architects and the engineers and the owners and gotten the approval of what they plan on -- what we’re going to ship.

They go through all of that before we ever see the order. They hold it in their operation and we know of these order but we don’t have them on our books. And then when they get ready that they want it shipped, they will send the order in based upon what our shipping schedule is working as.

So, when it comes to us, it’s a job that’s ready to be built and shipped. And that’s when we get it in our backlog. We don’t get orders that the reps have already gotten and have made submittals on and have sitting on their desk; those are not in our backlog..

And then one of the things that you mentioned in your prepared commentary was related to product mix and sort of your larger tonnage type units, not selling as well as sort of the smaller tonnage which carries lower margin. You mentioned that orders are starting to accelerate in July and August.

Are you starting to see a sort of a transition or a flip back to more demand from that higher margin type higher tonnage type units as well?.

I believe most of our increased volume as we can see is coming in the bigger tonnages now. So, it’s returning. I will tell you, like we see by what see box size and we have them by ABC and so on like that. The big box size that was running big last year was the C box; it diminished.

The one that’s running big this is our B box; in other words, the mix size down box is one that’s been running strong. Now the C box is kicking back up and it’s starting to get back up towards becoming dominant one again. So, we’re reversing back for whatever reason; there is an increase going back up to the bigger tonnage sizes..

And regarding your SG&A costs, if you exclude the $1 million in the second quarter of 2014, it looks like your SG&A I think if I’m correct, did not fall as fast as your revenue.

I’m just wondering if there is any sort of ability to manage the SG&A better in the back half of the year, or how are you looking at sort of that little bit above 10% SG&A as a percent of sales in the back half?.

So, our SG&A -- and Joe this is Scott speaking. You are right, did not decline quite as much. A big portion of that had to do with that sales tax that we’re going through in correction. We had some additional charges in the second quarter related to that.

At this point, we anticipate that that has largely been resolved and we should see that improving going through the balance of the year. And so, you should see us seeing some further, obviously dependent upon what revenues do, holding or improving upon our SG&A going forward..

And can you quantify how large that was in the first half of the year, that tax?.

Approximately $1 million in the first half of the year..

Your next question comes from Brent Thielman with Davidson. Please go ahead..

Thanks for the commentary at the start. I’m just trying to get me head wrapped around kind of the variances out there between companies. When you look around at other HVAC companies out there, you’re seeing sales growth anywhere from kind of mid single-digits to low double-digit ranges.

I guess judging by your commentary and beyond your changes to sales personnel, is that they are benefiting from a particular segment or segments at the market that you’re less involved in? Is that the way to think about this?.

Well, they are reporting to the AHRI statistics, the same as we are and the ones which I reported. And since our primary market, the one I was talking about was rooftops, they are in that same market. So, they are not support -- that does not support any growth by any of them. So, that must be other products that they have that fill those reductions.

Other than -- one that does which I mentioned between 4 tons and 15 tons which is somewhat of a growth. But if I go clear to the bottom and summary and that I’m reading all from AHRI, the same one that they have says that all of the above have a negative 2.7%. So, it’s not substantiated in this product line, so it has to be other product lines.

There are water chillers, there are other kinds of systems that are also used in these kinds of buildings. And so like for instance, as I said in the looking at building types, the lodging one which we don’t participate in had an enormous growth as did the manufacturing.

Now, we do have manufacturing stuff but we don’t have for the most part rooftop units. So, we’re with some other product line. Those two areas would definitely tell you that somebody has gotten a lot more business. And then when you got down in the office that 24.4%, similar story is to be told. But it’s rooftops that is doing it.

They are not doing it with the same kind of products as I’m talking about..

And when you talk about seeing some increases again in the bigger tonnages, what could we extract from that in terms of what might be fueling that in terms of end markets?.

Well, the bigger tonnages are typically a larger -- generally a larger building and a multi-storey building. The way in which they determine what -- there is a whole lot of reasons why they would chose big units or small units or vice versa. But one of the major thing is how long does a ductwork have to go in order to serve the building.

If it’s a single storey building, they’ll often times use a bunch of small units because otherwise everything is on the first floor and they would end up spending too much money or ductwork and they would rather put us more smaller units on.

If it’s a multistory where you’ve got to bring the ductwork all the way from roof down through one or two stories or three or four stories to get it to the area being served, it’s more likely going to be larger units. So, more than anything else, it’s relevant to how many storeys the equipment is serving..

And then the upcoming product introductions you mentioned.

How can we think about kind of the longer term impact of it? Does it expand or do these expand your addressable market or does it enhance your competitive position in areas you’re already in; any thoughts there?.

Well, it does. And one of the things that we’re involved right now in that midrange partially into this down to the 10 ton unit and on up to a 30 ton unit, so at least the bottom part of what we’re talking about, we are introducing a whole new product line into it. We’re in the process of doing that right at the present time.

It’s a horizontal version of the rooftop unit which we have not had in the past and now we’re going to enter that segment with the rooftop markets. So, we are doing something besides just the marketing that I’ve been talking about. But all of that will not have an immediate impact upon the bottom-line.

We’ll get the orders since we’re just starting the introduction, we’ll get the orders probably somewhere in the fourth quarter, some of it will ship in the fourth quarter but most of it will be more effective in the first part of next year..

Okay.

And then just one more, Scott, I think you mentioned the higher tax rate in the second half of the year, is 38% sort of the right range to be thinking about?.

It’s 37.9% is our actual estimate for the full year number at the present time. That’s subject to revision based upon where our sales go in the various states and the tax rates we encounter as a result..

Your next question comes from Jon Braatz with Kansas City Capital. Please go ahead..

Just to follow up a little bit. In terms of -- you talked about the education market being your strongest end market.

What kind of ability do you have and what kind of -- and what you’re talking to your salesmen about, about moving more into other markets where maybe your market share is less? And do you have an ability to really significantly improve the penetration in some of the other end markets beyond the educational market?.

We do have, but look, let me give you just the June numbers for those markets and these would give you some relevancy. I’ll just give you the first two digits in millions, lodging 22; office 55; commercial 65; healthcare 40; educational 83.

And I don’t have a number until I jump down to manufacturing which is unusual, highly unusual but it goes all the way to 89. So, we do have to find out about that manufacturing as to what we’re missing there. But the other reason that educational of those others is the biggest because it is the biggest market out there of all those other buildings.

And then manufacturing, see, last year in June manufacturing was 54 and education at that time was 82. So, manufacturing has had an enormous increase. And we haven’t participated, as I said we haven’t seen them lost it because I haven’t heard it, talked with. So it must be some other kind of system that’s been benefiting from that increase..

When you look at your revenues, how much do you think your revenues are from the educational market then?.

I think it was -- I did have a number here, I’ve got to be searching a little bit but I think we’re up around 20, high 20s..

Your next question comes from DeForest Hinman with Walthausen and Company. Please go ahead..

Hi everyone, just a couple of questions and I apologize if things have already asked or answered. On the inventory levels, your inventories are up quite a bit relative to where sales are.

Maybe could you give us some color there if any of that’s related to finished goods or raw materials or if you’re doing some pre-buy, what’s the story there?.

We can give it. In general, we buy on forecast basis because a lot of our materials take longer to be built than what we have as lead times to build our products, so we have to work out of inventory. So, we base our inventory purchase on our forecast to what we’re going to do sales-wise.

And as I said we had anticipated growth this year that didn’t occur, so we overbought based upon our formal in-house forecast. However that’s probably a smaller portion of what occurred to us. The one that was a bigger portion of it, we did two things.

On those coils which we build ourselves, we tried to level load our factory, our coil factory for the entire year, meaning that during the winter time when we weren’t as quite as busy, we’ve built more coils than we were using in anticipation of the higher usage rate this summer.

And to the degree that we overbuilt by overforecasting, we got more coils of our own manufacture, so that we didn’t get caught like with did a year ago. If you were with us a year ago, you know we got caught a little short on our own coil production. We didn’t want that to happen against. So, we are now starting to work that coil inventory down.

The other part was we transferred a significant amount of our coil business out of our own facility into a purchased coil which is all aluminum coil called a micro-channel.

And because this is a new endeavor for us and we’re dealing with new suppliers in it and the fact that this is well-known group of companies but they basically were building can air conditioning condensers for automobiles, they’ve been doing that with this micro-channel or aluminum coil for 60, 70 years.

But it hasn’t been put into the air conditioning industry until the past few years just recently. And so, we’re not -- and they have long lead times on their coils.

So, we set a limit around here that we were going to carry six months supply of coils, so that if our supplier that we chose to buy from didn’t come through, we had enough time built it into it so we could go to another supplier. So, we didn’t get shutdown totally because of lack of coils.

So, we’ve been carrying on unusual number dollars in that aluminum micro-channel coils, so that we had ample supplies. Now that we’re learning more what their capabilities are and how fast they can react, we’re starting to trend back on that inventory of coils as well. Those are really the three things which occurred to drive our coil inventory up.

You will see it coming down at the next report..

And then if you kind of give us an update on top front aluminum move down, does it make you want to buy more copper type components any more on the finished component side in terms of pricing there as well?.

Well that’s one of the speculative buys which we sometimes do. Right now, I think they are very low but so much what is connected to what goes on in China. China has become the dominant user by far of both of those commodities. And so as China goes, so goes the price.

And I haven’t read anything telling me that China has gone back into a heavier growth model than it already is. It’s still going well. But that’s the main reason for the price coming down is the world market, it’s not so much the U.S market because the U.S market relative to the world is not that significant anymore.

And to answer your question, we don’t see it being low enough that we’re going to go out and do anything on futures market or any commitments to our suppliers because we think it’s not going up for some period of time to come..

I apologize once again if this is already asked.

But on new products that you’ve mentioned in press release, can you talk about those in little bit more detail what those are?.

Surely. There is two ways in which a rooftop unit supplies the air into the building. The most prevalent one is that the air comes directly out of the building directly into the bottom of the unit and it’s supplied directly out of the bottom of the unit into the building.

However, there are a number of applications, depending on how it’s put together if where they want the air come into and out of the unit in a horizontal fashion rather than a vertical fashion. Our unit can be converted but it’s kind of costly cumbersome affair to make our down discharge unit the horizontal discharge; we saw a lot.

But what we decided to do was we thought the market was big enough that if we built a dedicated horizontal which would be less costly and still give the same quality but cost less that we would be able to pick up more volume in that horizontal market. and market.

So we’ve redesigned products from 10 tons through 30 tons to be dedicated horizontal as opposed to dedicated, almost dedicated down discharge. And so there is a whole segment of that tonnage size in the marketplace that we haven’t been participating as well as we think we will now. So that’s probably the biggest one.

The other two things we’re doing which is back on the big tonnage again, we just shipped our first job with new large tonnage unit and large tonnage calculated by units up to 200 and some tons. Very large units, they take up an entire trailer load on a semi and sometimes take two semi to hold them.

We have been redesigning that and we’re starting to bring that into the marketplace now. And we are pretty dominant in that segment of the marketplace. So, it’s a small marketplace but we will be even more dominant with this new product which we’re bringing in right now. So that’s going to start affecting.

It’s not much this year actually, it’s going to really affect us next year. The other thing is we have been in the water chiller business which is a totally different way of doing heating and air-conditioning. And it is probably if what is being used on these manufacturing buildings and somewhat is being used on the office buildings.

We had gotten much more serious in building those products and we have the product designed, we’ve got a – in fact we bought an 18 wheeler which is going city-to-city as we speak.

It has already gone through the southeastern United States, it’s already gone through the northeastern United States, it’s coming out of the Mid-Atlantic area heading back here and what it leaves here is going out back up through the mid-western, some of the mid-western cities and going up into eastern Canada.

It will take us -- it’s been on the road now since the first part of the year, it will take us probably the better part of another year before we -- it’s gone through all of the cities in the United States. And it’s 50-foot trailer. We bought a new trailer; we bought a slightly used four year old tractor in front of it.

And it will take that long to take it round. So it’s really our major effort to get into the chiller business. We’re taking the product to the customers, they are having major shows with luncheons and several other ways introducing it to the prospective customers in each of the cities.

But we will hit all the major cities in the United States by the time we’re done. In order to support that effort, what we also have to do is what is called get AHRI certification. In other words that same industry-wide body that has all these reports also certifies the energy efficiency of the product.

And we’ve had to get it tested by an outside testing lab of several versions of it and then we have to put it into a software. And the software is what they approve, because that’s what the designers will use to design around. And we’re in a process of putting that database into the softwares.

And when we get that and we’ll have a certified unit which will add to the credibility of our product to all people who are designing around it. So we’re going in that market much more seriously than we have in the past. We have an uncertified unit that was more of a niche market and we’re getting more into the crux of the marketplace.

But that again is something that it’s not going to do much on the bottom-line for another six months-eight months before we really see very much happening on the bottom-line by what we’re doing right now. So, those are some of the other things we have happening at the same time that will have an effect on going forward that’s going on right now..

[Operator Instructions] The next question comes from Joe Mondillo with Sidoti and Company. Please go ahead..

I just had a couple of follow-up questions.

I was just curious if you or your reps have or track sort of the number of construction projects that AAON could specifically target, and how that’s sort of tracked? I don’t know if you have that data or -- the only thing just wondering how the specific projects -- construction projects that you may target have been tracking..

Basically, as you might suspect, there is a huge quantity of prospective jobs. And since we’re not the ones who are going to be intimately involved in it, our representatives are. They are the ones who tend to track all that. And there are variety of different tracking mechanisms that are available to them.

They are companies specialized in furnishing that information. And virtually all of our representatives will have one of those methodologies that they will be using to track those kinds of jobs. And what it tells them is when it’s anticipated, there will be a type of a building built.

And when they see that they will be looking to see who the architect and engineer are so that they can go start seeing if they can help get a specified on that building.

And then building progresses or as the design progresses, those reporting services keep you abreast of when that is until when it’s going to be building and when it’s going to actually end up in production as putting the building together. So, they will follow a given building through one of those design services or one of those reporting services.

And most all of our reps, I believe all have one or more of those reports that they follow..

And then also I wanted to ask you regarding the parts distribution business.

Could you just update us on how that’s progressing?.

For those who may not be aware, we in the past were limiting our parts business to replacement parts on AAON equipment only. And because we didn’t have a very large warehouse, we sort of taxed merely to keep with that. And that was giving us little right out $1 million or slightly less a month in parts business.

A couple, three years ago we built a much bigger warehouse and got to set up to be much more effective in the parts business. And we hired people who knew how to run the parts business much more than we did. We were kind of doing sideline, so to speak and we got some very serious parts people employed.

And they then brought in other parts that were for other equipment, other manufacturers’ equipment and things, so that we weren’t just selling parts for our own product but we were selling parts for other people’s products.

And so at the present time we’re running a little over $2 million a month running out a year where we were somewhere around $1 million say two, three years ago. And so, we’re running virtually right at double what we were running before we made that change.

It is still growing and will continue to grow but not quite at the rapid rate it has in the past two years because as we say, we plucked all the low hanging fruit, now we have to work for it..

Okay.

And then just lastly regarding use of cash and specifically in terms of share repurchases, just wondering how you’re thinking about that the first half of the year or sort of modest purchases, sort of in line with what you did in the first half of last year, but last year we saw a pretty big acceleration in terms of your buybacks in the back half of the year, just wondering what your sort of thoughts on that heading into the back half of this year?.

Well, remember, we have announced and we’ve had approval by the board of directors to build approximately a $26 million laboratory and we’re going to run that out of our cash so. And we have a fairly conservative board of directors who always like to keep some cash so we don’t have to worry if things really got bad for whatever reason.

So, there’s a desire to keep at least a respectable amount of cash on board all the times. And we’re going to spend, when we first break ground, we’re going to spend fairly heavily for a few months on that building.

And as you know, if you’ve ever built buildings, you spend heavily for a while and then you get down to the finish work and time starts running on but the cost doesn’t run on quite as fast as that initial putting the building up that really sucks up a lot of cash.

So, we anticipate that happening in the first part of next year or by this time next year, we will spend a significant amount of that money. So the probability still exists that we will do something else. Last year we both increased the dividend and bought back quite a lot of stock.

We are going to spit off enough cash that buildings -- building is not a big deal but I think everyone’s waiting to see which way we want to go, which way we up our buyback or put our another dividend increase or whichever. Dividend increase is of course, we don’t ever dissipate [ph] back in our firm.

So, we want to make sure that we’re not putting out too far there, whereas a buyback, you can shut it off at any time. My guess would be or probably our next shot will probably be a buyback but I don’t know yet..

There are no further questions at this time..

All right, thank you. We appreciate your tuning in to our second quarter, first half discussion. Look forward to talking with you again and anticipate having much more larger sales to report the next time we do so. Thank you. Talk with you then, bye..

Thank you. This concludes today’s conference call. You may now disconnect..