Norman Asbjornson - CEO Scott Asbjornson - CFO Rebecca Thompson - Chief Accounting Officer.

Joe Mondillo - Sidoti & Companyope.

Welcome to the AAON, Inc. Fourth Quarter and Full Year Sales and Earnings Results. There will be a question-and-answer period after management’s brief presentation. This call will last approximately 45 minutes. I would now like to turn the meeting over to Mr. Asbjornson. Please go ahead, Mr. Asbjornson..

Good afternoon and welcome to AAON's call relative to the year 2015 and fourth quarter. Before beginning I would like to read a forward-looking disclaimer.

To the extent any statement presented herein deals with information which 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 would like to begin by discussing the comparative results of the three months ended December 31, 2015 to December 31, 2014. Net sales were up 14.8% to 97.2 million from 84.7 million.

The increase in net sales was a result of a 20.6% increase in the number of units sold with the offsetting decrease due to changes in our product mix. Gross profit increased 17.4% to 29.6 million from 25.2 million. As a percentage of sales gross profit was 30.4% in the quarter just ended compared to 29.7% in 2014.

The increase in the gross profit percentages due to lower prices for our copper and steel. Selling, general and administrative expenses increased 15.7% to 9.9 million from 8.5 million in 2014. As a percentage of sales SG&A remained at 10.1% of total sales in the quarter just ended and in 2014.

Income from operations increased 16.3% to 19.7 million or 20.3% of sales from 17.0 million or 20.0% of sales. Our effective tax rate decreased to 34.5% from 38.1%. The fourth quarter of 2014 had a higher than expected tax rate due to shifts in income to states with higher tax rates.

Net income increased 22.9% to 12.9 million or 13.3% of sales from 10.5 million or 12.4% of sales. Diluted earnings per share increased by 26.3% to $0.24 per share from $0.19 per share. Diluted earnings per share were based on 54.36 m shares versus 54.816 million shares in the second quarter eight year ago.

The results of the year ended December 31, 2015 to December 31, 2014, net sales were up 0.6% to 358.6 million from 356.3 million. Net sales remained relatively stable while we saw an increase in our total units sold most of the increase in our units sold came from our [indiscernible] facility which have a lower average price per unit.

Gross profit increased 0.4 million to 108.7 million from 108.3 million as a percentage of sales gross profit was 30.3% in the year just ended compared to 30.4% in 2014. Selling, general and administrative expenses decreased 7.7% to 37.4 million from 40.6 million in 2014.

As a percentage of sales SG&A decreased to 10.4% of total sales in the year just ended from 11.4% in 2014. The decrease in SG&A is primarily due to the non-recurring donations in 2014 along with the decrease in warrant expense as a result of continued improvements in quality control offset by an increase in other expense.

In 2015 other expense increased due to sales taxes to certain states. Income from operations increased 4.8% to 71.3 million or 19.9% of sales from 68.0 million or 19.1% of sales. Our effective tax rate increased to 35.9% from 35.3%. Net income increased 3.6% to 45.7 million or 12.8% of sales from 44.2 million or 12.4% of sales.

Diluted earnings per share increased by 5.0% to $0.84 per share from $0.80 per share. Diluted earnings per share were based on 54.481 million shares versus 55.369 million shares in the same period a year ago. At this time I'm going to turn it over to Rebecca Thompson, our Chief Accounting Officer to discuss the balance sheet..

Thank you Scott. Looking at the balance sheet you'll see that we have a working capital balance of 80.8 million versus 82.2 million at December 31, 2014. Cash and investments totaled 37.4 million at December 31, 201. The investments and maturities ranging from less than one month to 15 months. Our current ratio is approximately 2.9 to 1.

Our capital expenditures were 21 million for 2015. We expect capital expenditures for 2016 to be 32.7 million. The increase in capital expenditures is primarily due to construction projects related to our new research and development lab. Shareholders' equity per diluted share is $3.28 at December 31, 2015 compared to $3.14 at December 31, 2014.

The company purchased slightly more than one million shares of AAON stock under it's resumed open market buyback program for approximately 25 million during this year. I would now like to turn the call back over to Norman, he will discuss our results in further detail along with new products and the outlook for the upcoming year..

Net sales were up approximately 14.8% for the quarter and 0.6% for the year. We hired four additional regional sales manager or hired two regional sales manager, three additional to the four we already had giving it's total of seven.

We eliminated some underperforming rep firms and replaced them with rep firms which we anticipate will improve our performance in those geographical areas. We redesigned some products, [indiscernible] to increase efficiency and increase quality.

We have some new products expected in 2016 but we will not have a significant contribution until 2017 that won't contribute very much in 2016.

Take a couple of minutes to discuss about the major [indiscernible] which is totaling new is a new product line Water Source Heat Pumps, Water Source Heat Pumps as a product in the industry results in approximately $500 million to $600 million, there are a limited number of manufacturers in it and we did thorough investigation over the past four years deciding how we should enter the market whether we should try buying one of the existing manufactures or we should just go in on our own.

After concluding our financial analysis as well as analyzing what our opportunities were in buying we concluded we would be better off designing our own coming out with a new product line.

We’re -- doing that and will be introducing a product into the marketplace in production approximately August of this year and obviously we will be very modest amount of sales drop throughout the year 2016 and in 2017 we will start having an effect upon our P&L statement.

The expectations for the product line are that it will allow us to become more dominant in that product line and in any of our present product lines for variety of reasons. One of which is we already manufacture water source heat pumps in a variety of our present products namely rooftops, self-contained packages and air handling [indiscernible].

So those products we’re presently doing about $10 million in water source heat pumps. They are presently being sold by our existing rep force who also has one of the other existing tonnage water source heat products which we're going to be building starting this year.

We would anticipate that along with the $10 million that they sold of our product they sold an additional 100 million roughly of somebody else's small tonnage. So it immediately becomes available that we will probably get that $100 million coming to us rather quickly.

Nice part about that is the products which we have in the product line now with our water source heat pump.

In many cases we’re the only manufacture building that product and the other cases we are one of the very few who are building the net result is that if it's a applicable out of job, it kind of locks up the job for whoever has our product in that arena and once we bring out our new small tonnage products we will be the one who will get the other larger share of orders that we’re getting at the present time.

We also believe we are going to have the capability of manufacturing it very effectively since we’re buying a lot of capital equipment in order to reduce our cost of manufacturing. We are approaching it in fashion such that we believe we can get our cost equal to or below any of the present manufacturers.

It is definitely a change in direction for the company. We are now broadening our scope from where we would call ourselves one of the best in semi-custom manufacturing volume equipment to going into pure volume equipment, mass production of volume equipment.

So we will add a new capabilities to the company further broadening our capabilities to additionally expand ourselves into other areas as time goes by. So it's a major growth occurs for the industry or for the company into a new industry. We will also be entering an industry that has approximately 50% replacement and 50% new construction.

So it will be very similar to what is occurring in products we are today, we’re in as we explained in past years we were primarily a new construction and secondarily a replacement market which change sometime around 2009 or 2010 and we were doing more replacement market than we were doing new construction.

That has reversed itself again in this past year. The manner in which we are aware of that do happening is the Census Bureau produces information showing the number of dollars spent on various types of nonresidential buildings so we can see what the building market is doing on new construction from U.S. Census Bureau data.

That has shown, decided, upturned this past year. However when we go over to an industry statistic which is one [indiscernible] which is our industry reporting service that all manufacturers report to that shows that there has been no growth for all practical purposes, no growth in our equipment in this past year.

So the only logic to assume is as the new construction market has increased the replacement market has diminished and plus we believe it's along the same lines of what we're seeing happening on our order desk. We believe we're now back down to roughly 50% new construction and 50% replacement market. There is growth is certain market areas.

One of the big ones that is somewhat untrue in what the numbers would suggest is the manufacturing market and manufacturing market has reportedly grown considerably this past year.

However if you dig into it to find out what kind of buildings it is and everything you find that most of that has come about through things like chemical plants where they don't use air conditioning.

So it's somewhat a misleading number in that -- it doesn't have air conditioning accompanying the growth and thus it doesn't show you truly what is happening in that market. That market being put aside there is growth in other markets that we’re in and notably in office buildings and in education starting to short a turnaround.

The one that we don't see a big turnaround yet is hospitals, medical facilities. But there's no real dynamic growth nor any great production occurring is showing up at this point in time.

The [indiscernible] market is that it's somewhat disconcerting and that it's in a general growth, it is growing as I said the new construction market is growing or being offset by the replacement market but it is starting to show signs that the total market is starting to actually grow for the product in other words the AAHRs [ph] statistics or indicating a change and they are starting to look like they are getting some growth.

The commercial retail market is seemingly healthy, the office buildings are pretty healthy, medical health care as I’ve mentioned before not particularly healthy.

Education is getting more healthy, manufacturing is indicating a greater deal of health but it's not something that helps us as mentioned before because it is -- does not have air conditioning connected to it. Lodging is looking very good but we do very little of it.

So in general I would say what are we looking at? We're looking at a modest amount of growth in the industry, very modest any as far as the equipment sales are concerned. Big growth however in new construction but being offset by continued diminishing of replacement market.

We have some increase in the backlog at December 31, 2015 was $15.1 million versus $48.8 million a year ago equating to a 17% increase.

The outlook for 2016 we have got a good backlog starting into it however I would caution you in that we have seen a soft market so far this year and thus we’re working off backlog which is in not usual but we're going to probably work off more backlog than we’re off in new construction for the first quarter.

I expect that to turn around normally the turnaround starts happening in March when the market and it's seasonality starts picking up again for this year. April will be a major uptick and so it will go on and go this fall when it starts slowing down again.

With that I will tell you that our capital expenditures are going to be approximately 32.7 million. We will continue to maintain our gross profit at approximately where it is as far as we can see. We would point out to you that we have not had a price increase since March of 2013 which has is not been too unusual in our industry.

Market is very flat financially being offset in our profitability is coming out of reduction and purchase materials primarily and commodities. With finished goods, purchased materials have not diminished much in cost it's been primarily in the commodity arena.

We have improved our operations modestly and thus even though we haven't had the price increase we still are retaining our profitability very close to say -- we're not at this point and time anticipate a profit or price increase in the near future. Now I would like to open it up to questions..

[Operator Instructions]. Your first question comes from the line of [indiscernible] from Kansas City Group. Your line is open. Please go ahead..

Norman, looking at this the revenue increase in the fourth quarter I think 14% or something like that. Is there any way you can break that out as to how much that increase came as a result of some of the changes you made in your sales and marketing force versus the market dynamics themselves, growth in the market.

I know you were expecting some improvement because of the marketing changes.

I guess if you can tell us a little bit about how much you think it was a result of the sales increase there was a result of those changes and in addition did some of this impact come earlier than you expected?.

On various aspects that you’re asking there was probably about 4% to 5% of that was due to market increase, rest of it was due to additional business that we were getting from our reps.

We did do change a lot of the number of reps last year and whatever did to us, initially when you do a change out you lose market share because you basically stop sowing in that end market, any new jobs and what do you do you get really [indiscernible] which company you're dealing with the right to finish the business they were doing, close out the business they were doing that always means that they're not promoting new business.

They're just out there trying to get the orders that they already promoted on prior you cancelling it.

And then after that is done you have you turn a new representative loose in the marketplace and they have to start doing all building up of accounts to bring in orders for themselves and so there's always a diminishing of business from that geographical area when you do a change out and then the question is when do you start recovering and get back to the same level you were at before and that is very representative change out.

It's not a consistent number sometimes it happens fairly quickly and sometimes it's slow and that's where it's happening once [Technical Difficulty] past year.

The net of all that is that we lost business in the earlier part of the year, we got back to where we were now getting back most of that would be lost due to the change but we didn't get a significant boast as of this point time.

As time goes on we would expect a significant boost from those people and the other part that is probably the majority of our growth is the adding of three additional regional managers that allowed the four we already had to be limited to a smaller group of sales officers and new ones take on responsibility for sales office given up.

That probably is the majority of what we got, we got better penetration by all of our existing reps as opposed to getting additional penetration from the new ones. They really just did nothing more than get back where we were. The older reps gave us more business and that's where most of that came from..

So Norman, effectively if you were to suggest that the market was to rise x percent next year, you would think because of all these changes you would be do better than that x percent by you know let's couple of 100 basis points or something to that effect is that correct?.

That's correct. We improved our capability of taking market share and so we should have better chance of expecting that we will increase our market share now that we've upgraded our sales force somewhat and upgraded our support of the sales force..

Okay. One final question on the water source heat pump, you suggested that the market size might be $100 dollars or you might be able to capture $100 million some of that beginning in 2017.

Is that a 2, 3, or 4 process? How quickly could you think you could do that and then at the same time you were talking about being more of a mass market, mass production type of product would this heat pump have a lot of margin than your typical margins?.

Okay, first of off I early miscommunicated a little bit, the market really is 500 million to 600 million. The residential portion of it is 100 million and we're not planning on going into residential.

So that diminishes it the fact that we’re after is between 400 million and 500 million and yes it is normally a lower priced, our ability to tell that from the existing manufacturers would indicate it's not significantly lower but we can't really tell you that for sure.

Now it's my belief that the methodologies that they are using and I can get into that in somewhat detail with you.

But the methodology is that they're using are ones that they developed and perfected over the years gone by, a lot of those methodologies are really somewhat obsolete and they're kind of costly, it's a costly thing for them to change because it requires changing way they do things, in my cases to require significant capital investment, in other cases for whatever reason the industry and this is not unusual for this industry or for any company really.

There is always a little bit lagging in keeping up technologically with what is possible. Since we start with a clean sheet of paper we're going to do what is possible, so we automatically are going to be more efficient and have more up to date methodology than what the industry has that will result in improving profitability.

In addition to which we have done a work to accomplish a very much more technologically advanced product and one of the things we looked on was the weight factor and it doesn't matter whether the weight in metal or whatever the thing it is, weight cost money for something that creates that weight.

And we've been able to have a significant weight reduction in our unit up to depending upon the size of the unit we have seen some were where half the weight of the other equipment that’s out there. Now that does not equate in any way to reduction in quality.

As a matter of fact it runs the other way, we have been able to do a better job of coming up with higher quality product which also helped us in some cases to reduce the weight. So there is a lot of things that we're doing different than what's been done in the industry.

The net result of what I'm saying to you is I fully expect that once we get our learning curve over which will last for probably a year or so not much maybe a little over one year but shouldn’t be much. We should be at that point getting approximately the same profitability on this product is what we are experiencing are our other products.

And the interim starting out originally in August when we start producing it will probably have no profit but there won't be much more volume either, so it's not noticeable and then as the volume builds, the profit builds so it will have a little negative effect on profitability and yet give us volume as we go up that learning curve but it's not going to be a significant change..

Your next question comes from the line of Joe Mondillo from Sidoti & Company. Your line is open. Please go ahead..

So during the year how many -- I don't know if you look at it as independent rep firms or the staff underneath those firms or how you look at it but throughout the year how did that change from the beginning of the year to now in regarding to numbers.

I don’t know if you're looking at it in terms of firms or the staff underneath them but if you can give us an than idea of how that sort of changed in terms of numbers or maybe it wasn’t numbers, maybe it's really just the quality of the firms..

I don't have that right direction in front of me, as I recall we changed all about seven firms or seven geographical areas. The new representatives I would say have increased the number of people on the street by a factor of three or four. So maybe we had firm with 10 people, we now have a firm with 30 or 40 people.

So not all of those people are sales people but you need support people as well to do that so we have a lot more feet on the street in all those geographical areas which will result in a significant improvement in our penetration of market..

Okay. And so you said that you feel like throughout this transition, throughout the year while that disrupted some of your sales especially early in the year. Your other rep firms sort of picked up the pace and that's what sort of drove the fourth quarter numbers.

How do you think they did that? Did they take it from those regions where you were seeing the transition or was the regions where they're located they just did a good job selling in those regions?.

Probably that's one of those things, yes all the above would be appropriate answer, the thing of it is we gave them more attention because we went from having four regional managers to seven so they've got a lot more attention, a lot more assistance and that by itself added to it.

In addition to which we have been consistently growing as we become a more acceptable manufacturer to the industry and as people understand some of the things we've got going for us so they have just been able to get a normal natural growth that should be occurring for a few years yet because we haven't really explained our product line thoroughly to the industry, it's a long, long laborious process to get them to understand everything that is good about what we're trying to do..

And so as we look at the orders that you've been in taking for January and February, how does that compare to January and February orders of last year? It looked like your orders were up I think roughly 19% in the fourth quarter? What does the growth rate look like for January and February on a year-over-year perspective?.

That's what I was talking about, we saw a slack in, it's gone back it's just virtually flat compared to a year ago..

Okay.

Do you think that's just a temporary slowing or how do you sort of reconcile? What's going? Is it just a product of the market being sort of slow in general?.

Listening to what the people are telling who are out there, the market hasn't slowed down and it's a strange thing because the year ago of course we had weather problems which were giving us problem. So the weather problems really haven't been a big thing this year and so why isn't market doing it, I would say it's indecision more than anything.

The people apparent are hiring the architects and engineers because the architects and engineers are quite busy but maybe not putting the jobs for bid or when they do take a bid they don't get in a big hurry to sign contracts, whatever it is they're not ending up making orders available yet and their representatives are telling us that they are very busy out there and everything is going very well but the orders just aren't coming through.

So I'm of the opinion that time whatever it is, why it is indecision on getting orders moving has gone. We will see a continued growth because that’s the way message is from the field is we will be growing and you say why aren't we growing? Well then they give you all these various reasons why they haven't been getting more orders..

Now one of the positive things about the weather not being a problem this year is that it is allowing us to get our shipments out within the quarter and as you can tell from the backlog at the end of the year we had a higher backlog than we did at the end of 2014. So we are able to ship out of our backlog and we are doing so..

So what you're likely to see at of this quarter is a reduction in backlog and probability of growing in sales and it is going to come out of our backlog..

The other side of that is that our lead times are able to be brought in which makes us more attractive and desirable as a supplier to some of these customers..

All I guess I'm telling you is that order input is not a continuation of the fourth quarter at this point..

Okay understandable.

How about the orders that you received in the fourth quarter and the backlog that you had at the end of the quarter, how did the sort of gross margin and the profitability of these units that we’re in the backlog? Was it sort of higher than average or average or how would you characterize the type of units?.

We've only completed January and January was right in-line with the preceding months..

Okay. How about the parts distribution business, just wanted to get an update on how that spend progressing through 2015 until now/.

It is progressing but not at the rate that we had earlier anticipated, we kind of underestimated how difficult it was to get those representatives who weren’t really serious in the parts business to get serious and once they decided to get serious how long it took them to do so.

Here's what takes place, the reps would be able to order parts directly from as we get them out and they wouldn't have to stock any parts by doing that but they were a little bit slower in giving parts to the customers or they might carry small amount parts or more readily used parts.

Both of those things were really, what we’re trying to get them to do is do a full-fledged retail establishment with plenty of parts of all natures in there so that they would not only get the parts but people have to buy from us but they also sell parts that they don't have to buy from us and the parts business is a profitable business but it does require a commitment of capital and establishment of store front type operation and probably the hiring of somebody who's a full time parts person and understands the parts business better than just using whoever happens to handle it whether the one in-house people with the organization or one of the external sales people just whoever they might choose to do it.

To really get in the parts business you have to hire somebody who has put their life into selling parts because they know more than the normal person does and getting them to hire that part person and get that type of retail building establish has slowed the parts growth down and of course when we first went into it we had one another advantage because we got much better, did much better job than we would normally be doing.

We were able to pick up a lot of business and they were maybe buying from somebody else. On those people who were serious parts houses and then they switched their orders over to us and that's already pretty much been accomplished so it did slowdown from what grew at when we first started out..

Okay.

So the low hanging fruit was sort of taken and now you're sort of plugging away?.

Good analogy, yes that’s correct..

All right in terms of these new firms that you hired as your sales reps, is there any change in compensation or anything as a percentage basis?.

No I don't think there has been any noticeable thing that we can tell you that’s per -- recognize that we give a fixed cost to representatives and they have to put a markup on top of similar to what the automotive industry or any type of retail store that they buy from us on a fixed cost, so what they do you in getting more money we really don't see that much..

Okay. And so in terms of SG&A the last few years, as a percent of sales it's been in 2014 you had the charity contributions but if you exclude that you know the last couple years it's been fairly consistent in that mid 10.4 - 10.5 range even with some revenue growth back in 2014. In 2016 if you're able to see some growth on the top line.

How do we think about sort of the SG&A as a percentage of sales? Is that going to continue to still remain sort of flattish around 10.5 or so or are you going to see some leverage and see that pull down some?.

Well as sales grow obviously it will eventually start to get some leverage on it, it just has not materialized yet to our sales for the last couple years have been relatively flat. So we go forward I would expect that will come down easily percentage of sales but the dollars will probably be remaining somewhat consistent..

Okay. And in terms of gross margin what do we need to see or how challenging is it to continue to get gross margin expansion if you do see revenue growth? I mean I'm sure there's fixed costs on cost of goods sold line that you'd be able to leverage so.

I would assume that you should be able to get some increase or expansion in gross margin but there's a lot of different variables and dynamics, so how do you think about the gross margin if you're able to get some growth on the top line?.

Our overall focus is on maintaining gross margin relatively stable. We’re expecting that as we grow the business that we should be seeing as a percentage of sales, gross margin relatively stable but the dollar is growing.

Our focus is not so much on growing the percentage because we think we're already at a very healthy percentage and the larger that becomes the more attractive it becomes to competitors..

Okay.

And just lastly just wondering the tax rate for 2016, any idea what that will look like?.

Right now we’re expecting our tax rate to be about 36.5%..

Your next question comes from the line of [indiscernible] from DA Davidson. Your line is open. Please go ahead..

Is there anything particular which weighed on margin this quarter?.

There's no special events really within the quarter that adversely impacted it. We did have some additional contributions that we had into our retirement program for our employees but beyond that there were no unusual items..

And I know you just mentioned regarding the gross margins that they were going to be -- you’re expecting that to be relatively stable.

Do you also expect that margins overall for the business in 2016 to be stable or relatively flat than 2015?.

That is our expectation. We’re not necessarily trying to grow the percentages, we’re trying to grow the dollars. .

[Operator Instructions]. Your next question comes from the line of Joe Mondillo from Sidoti & Company. Your line is open. Please go ahead..

I just had one quick follow-up question, so I assume that the whole strategy and the goal is to drive the revenue top line and the whole that flows through down to the bottom while maintaining sort of your gross margin on profitability, that's what it sounds like if the industry is growing at a few hundred basis points which seems like you know is a possibility for 2016 were any stab or any idea in what you think after switching out these independent sales reps and what you're doing with everything in terms of the products and such.

Any idea what kind of revenue growth you could realize this year? Or is it just too early to tell?.

It's too early really to give you good side [ph] because like I said the input orders that we experienced in the a fourth quarter stopped happening as we turned the corner into this year although we expect them to resume that growth that have happened at this point in time.

The thing that probably is the [indiscernible] is going to depend upon what we do with water source heat pumps because it is a totally new market to us and depending upon how fast we get into the production of equity and penetrate the market.

The could be the biggest upside as far as dollars is concerned not so much this year but next year or the very end of this year and the present products we would expect the growth is whatever it is 2% to whatever, we would expect 3% to 4% growth somewhere around double what the market is growing for the industry..

As there are no further questions on the phone lines, at this time I would now turn the call back to our presenters..

Thank you, Joe. Ladies and gentlemen appreciate you’re getting on with this for report for 2015. I look forward to talking to you again about another 90 days and talk about first quarter of this year. Thank you again..

This concludes today's conference call. You may now disconnect..