Okay. Morning, everybody, and thank you for joining the Sidoti & Company March 2025 small cap conference. My name is Julio Romero, and I cover the building products, industrial, engineering, and construction sectors at Sidoti & Company. We're really pleased to be able to host AAON. Their ticker is AAON. With us today is Joe Mondillo, Director of Investor Relations, and Matt Tobolski, COO and President and incoming CEO, effective May of this year. If you have any questions for the company, this will be a fireside, but if you have questions, feel free to type them into the Q&A section at the bottom of your screen, and I'll ask on your behalf if time permits. Matt, Joe, really appreciate you guys being here. Maybe to start, if you could give a brief overview of AAON and what the company does for folks who are a little less familiar with the story. Yeah, fantastic. Yeah, good morning, Julio. Thank you so much for hosting us. When we look at AAON as an organization, looking back to the original formation of the company back in 1988, the whole premise of why AAON was launched in the first place was really to bridge the gap at the time in the industry where there were really only two ways to buy kind of a commercial rooftop product, and that was a catalog solution with little configurability and little options set to it, or the other extreme, a full custom product. The goal of AAON was to really bridge that gap with a software-driven, automation-driven, semi-custom configurable product where you can get a lot of the value that you would historically get out of a custom solution, but due to the automation, due to the software enablement tools that are in place, do it at a much more cost-effective price point. That really was the premise of AAON at its initial launch. That's really been one of the key differentiators for AAON in the marketplace is that semi-custom configurable kind of product portfolio. The company has always been driven by innovation, and so a lot of the innovation is really around providing best-in-class product performance, providing unique operating strategies that can provide tremendous value to the marketplace in application. All of that is kind of what's led AAON to be a really premium brand in the marketplace within the commercial non-res market and the rooftop market. With that, obviously, we always came at a price premium. Historically, the price was in that mid-teens kind of perspective. As time has evolved, regulatory requirements have really stepped up industry expectations around energy efficiency, which has required a lot of the industry to really kind of make their way towards AAON from an overall efficiency standard perspective. That's helped kind of close some of that gap. Where AAON used to be in a mid-teens price premium, we're now in a high single-digit price premium that's allowed us to continue becoming more exposed to more of the marketplace and really acquire more market share in the space, growing from 5% market share to 11% market share where we stand today in the commercial rooftop segment. On top of the AAON brand, through an acquisition a little over three years ago, the BASX branded product kind of came into the AAON portfolio. The BASX branded product is really a data center-centric as well as semiconductor clean room-centric product portfolio. Unlike AAON, which operated in that sort of semi-custom environment, the BASX branded product really is focused and has focused on more of a true custom engineered product, but manufactured at scale. When you think about data center opportunities, the quantity of units that we deploy in a given data center are substantially larger than what you would see in a kind of commercial non-res type market. Because of that, we're able to create custom solutions that really provide a tremendous amount of value for the application in terms of fine-tuning performance, the durability of the equipment, the maintainability of the equipment. You're able to really provide a tremendous value to customers without having the same historic price premium you would see on a custom piece of equipment because we're manufacturing at such large scale for these applications. You kind of get that benefit of customization with the cost-effectiveness at manufacturing at scale. That has really allowed our value proposition of the data center market to really expand, both in the cloud compute data center side with airside products as well as in the liquid- cooled AI space. Going forward, that's kind of the way we're operating as an organization, really around those two primary brands, with the AAON brand being that kind of commercial non-res rooftop and indoor air handling systems, and the BASX branded product segment being more on that data center and clean room applications. Excellent. Great rundown, Matt. Much appreciated. You spoke to the differences between yourself and some of your peers, semi-custom solution being one major difference. The go-to-market is another kind of key difference. Can you maybe go into that a little bit and any other kind of major differences to yourselves versus the peers? Yeah, definitely the big differentiation with AAON compared to a lot of our peers is our go-to-market strategy, and especially in the rooftop segment. We sell exclusively through an independent sales channel. If you look at a lot of our competition and peers, companies such as Trane historically have basically converted from an independent sales channel back in the 1970s and have really been converting that to a factory office kind of model. You have seen that also with companies like Daikin and with JCI, who JCI has kind of bounced back and forth a little bit between independent and factory stores. The sort of differentiation there is, number one, independent sales channels, independent sales reps maintain a portfolio of products. Why that's critically important is when a sales individual goes into a customer conversation, there's not just rooftop units sitting on the side of a project. There's exhaust fans, there's louvers, there's dampers, there's chillers. There's a variety of products that are going to go into an overall building application, and the AAON rooftop product is just one piece of that puzzle. Having independent sales channels that have a comprehensive line card provides opportunities to engage with customers from a variety of angles and get exposure to a lot more projects and be able to provide a higher level of value in the sell-through of a comprehensive solution versus just a bunch of one-off products kind of inside there. The independent sales channel has a huge amount of horsepower and being able to engage with customers and opportunities to sell solutions, comprehensive solutions that really helps AAON be a part of that large scope and really kind of specialize where our product best fits. When you think about why some of our competition has gone down the route of factory offices, a lot of it comes down to the product portfolio that they offer. Using a company that makes a centrifugal chiller as an example, AAON does not make centrifugal chillers, but if you are a company that does, a huge portion of the overall kind of revenue model in a centrifugal chiller is the aftermarket service aspect of that chiller. Most manufacturers of centrifugals, there is a requirement for that maintenance and service of that to be done through a factory-certified offering. Typically, that is done through the factory itself. In a lot of opportunities, you will see companies that manufacture chillers wanting to minimize the price point of the initial sell of that chiller to be able to guarantee that long-term annuity in the back end on the service contract. The same does not hold true for rooftop units. There is no long-term service contract required. There is service and maintenance required, but not to the same level as a chiller. That model that may work for some companies like that does not necessarily work for the overall kind of rooftop market that we do. For our goal, we are able to allow our sales channel to effectively price and position our product to motivate those sales channel members to sell the product for the initial value of that product versus companies that want to reduce the initial sales price, therefore reduce commissions for the sake of getting a long-term annuity off that contract. We are a much more attractive product to be able to sell for an independent salesperson given the opportunity from a profitability standpoint. Makes sense. I appreciate you kind of touching on all aspects of that. The holistic answer definitely helps and ties into the refrigeration stuff, which we'll talk in a second. Maybe just starting with data centers, just wanted to see if you could speak to what you're seeing on that front. On the last call, you were pretty adamant about not really seeing a slowdown in data center-related construction demand. Just help us understand kind of the disconnect in terms of the broader DeepSeek-related headlines that we all see and concerns related to CapEx slowing for data centers versus what AAON is seeing on the ground. Yeah, I mean, certainly DeepSeek has created a tremendous amount of noise in the industry and really around just trying to understand the CapEx cycle. Really the DeepSeek piece, I guess, to start with, really a lot of the noise it would create would be around how much it costs to truly make an AI large language model. So what is the development cost? What is the machine learning investment required to kind of help generate these comprehensive AI models? In DeepSeek, certainly the initial news on DeepSeek showcased what out of the initial news was an extremely inexpensive kind of methodology, which, again, it's since been sort of not debunked, I'd say, but it's certainly we say an Open AI model costs this much. The initial news on DeepSeek was way over here. The reality is it's somewhere in between. It is more cost-effective to develop than some of the other AI models. It has created a lot of question marks around, oh, is the CapEx plans completely overshot? Are we going to have this massive cliff of investment? We certainly do not see that. I mean, if we look at the engagement we are having with our customers in terms of pipeline visibility around the machine learning CapEx investment, we continue to see strength. We continue to see that strengthening, not weakening on the heels of that DeepSeek conversation. We have not seen a shift in conversation in pipeline visibility and order cadence around DeepSeek. What I'd also kind of take is while it creates noise on what it costs to develop, let's just take a hypothetical and let's say it is an extremely cost-effective model and we can reduce the AI/ML aspect on the CapEx cycle, that would create a lower price point of entry to create AI models. It would then create more cost-effective AI models for someone to then leverage for their own business. A benefit of more cost-effective models would be an easier price point, easier justification to begin capitalizing or utilizing AI models. What that would do then is drive CapEx. It would drive CapEx because utilization of AI models needs inference compute data centers to be able to actually use the models. You've got the machine learning side, which is developing the models. The inference is really the application utilization. If you did all of a sudden have this substantially cheaper model and we then have more demand for AI, there's then more demand to build inference compute data centers, therefore strengthening the overall AI investment cycle. The way we look at it is a lot of this DeepSeek conversation is really near-term noise around how much money are we going to throw at developing new models. The long-term kind of investment thesis on the AI world is around this tail that's going to be on the inference side, which is still a very good growth driver inside the AI CapEx cycle. It's also a longer tail because the more we utilize AI, the more we're going to recognize the value of AI and drive more utilization. We see it really as near-term noise, but we look at the fundamentals, number one, of being very strong on the machine learning side, but also being even stronger on the overall inference cycle as we begin to really leverage the power of AI going forward. Super helpful. Is that point you made about a more cost-effective model making the monetization conversation easier, driving greater inference usage, is that playing out from what you're hearing from customers and just folks across the value chain? I mean, we're really early in the cycle. I mean, the kind of conversation I've said is we talk about it. Someone asked me a couple of days ago, are we in the first inning of the AI cycle? I said, we're in the batting cages warming up. I mean, this is a very early kind of portion of the AI sort of growth driver that we're seeing. I mean, really starting to see the inference compute investment, I mean, we're early in that as well kind of on how it starts to really monetize and kind of come into fruition. Super helpful and good frame of reference there. Turning to the fourth quarter results, which were mixed, you had the, I guess, what we call the Oklahoma segment kind of dragging down the overall results, and there was a little bit of noise with regards to segmentation. Maybe first touching on the refrigerant transition, the Oklahoma piece, and kind of that part of it, if you could. Yeah, I mean, we messaged 18 months ago that 2024 was going to be messy with impacts from refrigerant transition, but also interest rate environments, a soft macro with ABI leading indicators showing softness, plus an election season. We had a lot of things we said going into 2024 that was going to cause disruption. As we entered 2024, we were very vocal that we were the leader in the marketplace with having commercially available 454B equipment. We led the way in the product development cycle. We were sitting here very proud to have available product day one. The challenge is the 454B transition is the first in the history of the HVAC industry that had an EPA-driven environmental driver for why we're changing refrigerants, but also an implication to the building code. The fact that this refrigerant is an A2L, a mildly flammable refrigerant, we had to modify the building code to allow the use of this refrigerant. While we entered 2024, very proud to have commercially available product, we had sort of mapped out this mindset that you're going to see this gradual adoption of 454B equipment throughout the year. The premise of that was AAON's core customer is very much a total cost of ownership conscious customer. If you're a customer that looks at what's the total investment cost of my equipment, and you say, "I can buy this new equipment," which is the new refrigerant versus the old refrigerant equipment that's being phased out, when I think about the maintainability of that equipment and the overall cost to deliver that equipment, we're sitting here saying our core AAON customer is going to look at that and say, "Of course, I'm going to buy 454B equipment," because 410 equipment over time is going to get more expensive to maintain with component availability, refrigerant costs, and a variety of drivers as time goes on. The challenge to that was the building codes were much slower to be adopted than we anticipated. While we anticipated this nice gradual transition of refrigerant adoption, we sat there in July assuming we were going to have 25% of our orders being 454B, and we were low single digits. That was just because at the time, only 18 building codes were actually only 18 jurisdictions had adopted the new building code. It really slowed the adoption of that new refrigerant throughout the calendar year. As we got to our September date where we had to basically stop accepting orders for 410 equipment to allow us to manufacture that through the end of the year, we knew there would be some noise. We closed off the 410 products. We go into October, and we saw a soft order book down about 10% year-over-year in October. We said, "Okay, that makes sense. It's just a little bit of a lull around this transition. What caught us off guard was November bookings were down 30% year-over-year. As that materialized, we come to find out a lot of that's because some disagreements between the building code and the ASHRAE design standards, some general adoption uncertainty, plus that was right when the election happened. There was a lot of just general pause that kind of happened in that November time frame. What that cost for us is we had to slow down production because as a manufacturer to order product, there's a certain cycle in our kind of order to production that requires a bill of materials kind of clarification for that exact configuration that has a set lead time to it. We can't just eat down backlog and have our lead time equivalent basically get really small. As we saw that order book slow, we had to slow production to balance that lead time backlog dynamic. The net result was volumes were down in Q4. With that volume being down, the big driver on margin was just absorption of fixed costs. That margin is just a math equation at that point on a lot of that drop that we saw in Q4 off of that volume. We kind of guided that that drove at the high level. That's what drove the Q4 slowdown. It's also what drove our Q1 guidance, which is a soft Q1 because that October, November, early December order cadence, that's really what we're building in Q1. As we saw that softness in kind of the order book, that's also what guides that softness in Q1. As we look past that and we look at the order cadence we saw at the end of December, plus what we talked about in our call, which has been day-by-day strengthening of order book in Q1, that's what kind of sets up that confidence that Q2 is getting back to that normalized behavior once we get through this kind of short-term disruption around that refrigerant transition. Got it. Very helpful there. Maybe if you could talk about the outlook going forward on the kind of rooftop portion of the business, touch on price and the price premium and also national accounts and heat pumps. Yeah, when we look at the kind of the driver and we look at the outlook, certainly if you step back and just go to the 30,000-ft view and read the headlines and look at the leading indicators, it would signal a soft non-res market. I mean, we've got ABI continuously down. We've got a lot of disruption in the marketplace just with some sort of macroeconomic turmoil, a lot of which is politically or policy-driven right now. You have got a lot of this noise. What would indicate there's going to be a down market or at least a soft market, we've got a few things that really are strong tailwinds for us to kind of offset any of that disruption. The two are price and product differentiation. On the price front, there are two unique things that are happening around price right now. Those two things are cost competitiveness with the new refrigerants and cost competitiveness in a tariff-driven environment. On the new refrigerant side of things, we've voiced consistently that based on the input cost justification, AAON does not have a price difference between a 410 product and a 454B product. I mean, minus a little bit of noise in there, I mean, it's more or less the same input cost perspective. Whereas the market has signaled anywhere from an 8%-15% cost increase with this new refrigerant. Now, we haven't really gotten to a point that we have true empirical data to say what the market is really putting in for price. What we're hearing right now is anecdotally, AAON is the most competitive it's ever been. We don't have hard data to say what does that look like. We are just now entering the traditional K-12 booking season. The benefit of K-12 bookings is it's primarily public funded, which means there's a lot more transparency in the bid process, which tends to be where we really get a lot more clarity around what price is doing. As we enter this, we're keeping a keen eye on what our price point looks like and what that price premium looks like relative to competition to determine what we might have to do on a price. If you factor on top of that tariffs, AAON is benefiting from the fact that we are a vertically integrated U.S. manufacturer. What that means is our exposure to tariffs is less than a lot of our competition because a lot of this vertical integration exists in a lot of our supply chains in the U.S. Now, there's still cost drivers. I mean, it's not like it's a neutral environment. From our perspective, we've put into the marketplace a 6% surcharge on equipment. That's to offset input cost dynamics around tariffs that are driving costs as well as some general macro things such as steel price increases around tariffs. That 6% increase compares to some of our competition that's more in the 8%-10% range. When you factor in the refrigerant price conversation plus tariffs, all of that would indicate that AAON's price position would be in the best place it's ever been in the market. We don't want to get overly optimistic because we want to really see how this materializes. A lot of this is sort of, I'll say, early rhetoric, and it's not really materialized into true what's getting put to the street. Every bit that that price premium that AAON offers shrinks, the ability to sell the value that AAON offers becomes that much easier. It puts us into an opportunity where we can balance taking some market share, which taking market share means increasing volumes, which increases absorption and naturally increases margin just on a volume play. We have that potential to grow volumes, top line, plus margin. If we start seeing too much come in from an order cadence perspective such that our backlog grows and our lead time grows, we would use price because our goal is to maintain our lead time and therefore our backlog at a 12 week-16 week kind of time frame for a commercial rooftop product. That is really around buying habits in the commercial space. We do not want to have this uptick in orders driven by a price dynamic that is quickly offset by the fact that our lead times go out and we no longer are competitive on lead times. Price would be a lever we are pulling to basically balance that kind of price premium, lead time, and overall kind of dynamic. There is definitely upside that exists around price. We are just really waiting to see how that materializes. That aside, price is certainly an exciting piece. The bigger piece that is exciting is really more, I will say, the fundamentals of why AAON is a great company. That is the innovation side of the business. That is the product differentiation that we offer. Price certainly is a unique thing driven by a lot of more macro factors and geopolitical factors. The bigger opportunity for us is really around a continued focus on decarbonization, on heat pump innovation that AAON offers. If you look at calendar year 2024, our heat pump sales were about $100 million of our overall revenue. That grew 40% year-over-year. There are definitely secular trends that are driving heat pump adoption and really a focus on decarbonization. AAON has always led the way in innovation on rooftop products. We continue to do that with heat pumps. Innovation we have around low ambient omni-climate heat pumps is a huge differentiator. As we think about strategically going forward, it's an opportunity with national accounts for AAON to really get exposed to a larger base of customers than we historically have because as these large national accounts look to decarbonize or at least reduce carbon emissions, our heat pumps that we offer are the best in class at being able to manage that desire to decarbonize and do it in a very cost-effective manner in a very logical manner in terms of some of the operating strategies that we offer in that system. Extremely helpful. Just a quick refresher on the time frame of that K-12 selling season and when you would expect to have enough of that kind of K-12 public data to be able to have more clarity on industry pricing. I mean, really, by the next time we release earnings, we'll have a lot of information, kind of true empirical evidence of where we were at competitiveness in the marketplace. Very helpful. You touched on tariffs. Want to ask about any other kind of non-tariff impacts on the new administration as it relates to AAON? Yeah, I mean, there's certainly plenty of noise on policies that kind of come and go. Realistically, there's some noise right now about some of that EPA deregulation last week that would actually undo the regulation that drove us into a refrigerant change. The reality is, even if they try in doing that, the whole industry has changed the manufacturing process around new refrigerant. Even if that regulation changes, the concept that the industry is going to all of a sudden bear the cost to switch back in the whole supply chain that is building compressors for new refrigerants, I mean, there's a lot of inertia that while there's certainly some policies and things that are creating noise, some of these, I think, ultimately will settle out and not greatly impact kind of the overall buying habits and really the regulation habits around our equipment. For sure. We have a couple of minutes left. I want to talk about the capacity additions you've been doing. Longview was just completed. You have the facility in Memphis that's expanding. Just talk about the capacity additions you're bringing on and where overall data center equipment production capacity should be once everything is kind of fully operational. Yes. I mean, if you think about a year ago, 12 months ago, I mean, primarily the Redmond, Oregon facility was data center manufacturing. That was the primary. We had a little bit of manufacturing being done in Longview under the coil product segment. Realistically, it was Redmond. Redmond, obviously, if you look at the backlog growth, a lot of that's been driven by data centers. That facility was oversubscribed. As we looked at bringing on capacity, the first step in that equation was to leverage the land we had and the building flexibility that we had in Longview to complete that expansion on sort of phase two of a building we had built a few years back. That was kind of the first step in our plan that we put into motion a couple of years ago. We turned that building over in basically the end of December of last year. We are just now starting to leverage that from a manufacturing standpoint. We are doing it very aggressively. Of that, we have already got three production lines up and running building liquid cool product for AI data centers. We have an additional two production lines coming online in the next few months. We will have five production lines at the facility building AI-specific products. We will have an additional production line building traditional cloud compute data center products at that facility. When we look at that kind of from a revenue kind of perspective, we have kind of said that the four walls in Oregon, so the actual original BASX building, those four walls, you can really get yourself to about $250 million of capacity. That is just the fundamental constraint of that space. Where Longview, you can probably get to more of a $500 million capacity range. In those two, the manufacturing capacity kind of around data centers is really in that 750 range. You bring on Memphis. If you fully dedicated Memphis and fully built up Memphis to be a data center product facility, that would add roughly another 750. All in, when those are up and running and fully built out, it's not a flip of a switch. When they were fully built out, that would represent about $1.5 billion in manufacturing capacity. Excellent. We're right about at the end of our time. There are some topics we did not get to touch on: capital allocation and resegmentation and a couple of other items. Just before we wrap up, what aspects of the AAON story are kind of overlooked and any other key messages you'd like folks to take away from today? Yeah. I think the biggest thing is when we look at getting some of the AI noise aside for a second, when we look at the fundamentals of both segments of this business, we've got AAON, core rooftop legacy business that is at the best positioning it's ever been in the history of the company in terms of price dynamics, but also product innovation and market share potential with heat pump innovation. We've got a company that in the last cycle from 2012 to 2019 grew at a 7% CAGR ahead of the industry with little price. Really just volume gain, volume share acquisition. There's nothing to say that can't continue to happen with all of these dynamics we have to make that very competitive. You layer on top of that the data center side, which even if we get rid of some of the short-term noise, that segment is going to be growing in the teens, at least from a CAGR perspective going forward. When you look at this and get rid of some of that short-term noise and look at this business on a five-year window, the fundamentals on both segments really support that good growth that we've talked about and that kind of mid-teens perspective on a consolidated basis going forward for that next five-year cycle. Doing so with improving margins and really kind of on a continued execution improvement as we go forward. The fundamentals have never been stronger and very exciting opportunity with just obviously some short-term noise that we had in Q4 and Q1 around some of this transition implications. Excellent. Joe and Matt, thanks so much for taking the time. Yeah. Thank you all. Thanks, Julio. I just want to say one last thing. I noticed that there's a handful of questions that maybe were not answered. Please find my email on the investor relations site of our website, and I'll be happy to answer those. Great. Thanks so much, guys. All right. Thanks. Thanks.