AAON Q2 2025 Earnings Call Summary and Q&A Highlights: ERP Challenges and Data Center Growth
Earnings Call
08/12
[Management View] AAON faced significant operational setbacks in Q2 2025 due to ERP implementation issues at its Longview facility, compounded by external coil supply chain disruptions. These challenges led to reduced production efficiency and impacted AAON branded sales. Despite these hurdles, management remains confident in its long-term strategy, emphasizing the strength of its Basics brand in the data center market and its national account strategy for AAON branded products.
[Outlook] Management revised its full-year 2025 guidance lower, now expecting sales growth in the low teens and gross margins of 28%-29%. Sequential production and margin recovery are anticipated in the second half of 2025, supported by price increases, tariff surcharges, and ramp-up at the Memphis facility. For 2026, management projects double-digit margin improvement, targeting long-term gross margins of 32%-35%.
[Financial Performance] - Net sales declined 0.6% YoY to $311.6 million, driven by a 20.9% drop in AAON branded sales, partially offset by a 90% increase in Basics branded sales. - Gross margin contracted 950 basis points to 26.6%, primarily due to lower AAON branded production volumes and unfavorable production mix. - Non-GAAP adjusted EPS fell 64.5% YoY to $0.22. - ERP implementation and supply chain disruptions reduced sales by $35 million and gross profit by $20 million.
[Q&A Highlights] Question 1: Could you bridge the revised guidance for the second half of 2025 versus prior expectations? Answer: The revision primarily reflects ERP implementation impacts at the Longview facility, which caused production inefficiencies and lower volumes. Tulsa also started Q3 at a lower performance point due to coil supply issues. Despite these challenges, production is improving month-to-month, and management expects sequential growth in the second half.
Question 2: What factors are driving gross margin differences in Oklahoma for the second half? Answer: Incremental costs from enhancements to end-of-line testing and laboratory work, startup costs at the Memphis facility, and temporary Basics product production at Tulsa are pressuring margins. Management remains confident in achieving long-term gross margin targets of 32%-35%.
Question 3: Why was the data center backlog flat sequentially despite strong sales growth? Answer: The flat backlog reflects strong bookings activity but is constrained by current production capacity. The Memphis facility is expected to provide meaningful capacity increases later in 2025 and into 2026, supporting future backlog growth.
Question 4: What is the significance of the Applied Digital partnership for Basics? Answer: Applied Digital is a key AI data center developer, and AAON is providing thermal management solutions, including high-performance chillers. This partnership positions Basics for multi-year growth in the AI data center vertical, with active collaboration on next-generation designs.
Question 5: What assumptions are embedded in the Q4 guidance? Answer: The guidance assumes continued production recovery at Tulsa and Longview, stable Basics segment performance, and ramp-up at Memphis. Price increases and tariff surcharges are expected to contribute positively to margins.
Question 6: How does the prolonged softness in the rooftop market impact AAON? Answer: The nonresidential construction market remains soft, but AAON's bookings outperform the industry due to its national account strategy and Alpha class heat pump technology. Management expects the market to stabilize and improve over the next 16-18 months.
Question 7: What is the margin profile of the backlog? Answer: The AAON backlog is favorably priced with embedded price increases and tariff surcharges, providing margin accretion. Basics backlog includes escalation clauses to address potential cost changes, ensuring margin stability.
Question 8: How will Memphis contribute to the P&L in 2026? Answer: Memphis is expected to transition from a cost drag in 2025 to a positive contributor in 2026, driven by Basics brand growth and increased production capacity for data center solutions.
[Sentiment Analysis] Management displayed transparency and confidence in addressing operational challenges, emphasizing long-term growth opportunities. Analysts expressed concern over ERP-related disruptions but acknowledged strong fundamentals in the Basics brand and AAON's strategic initiatives.
[Risks and Concerns] - ERP implementation challenges may continue to impact production efficiency and margins. - Supply chain disruptions could reoccur, affecting coil availability and production timelines. - Prolonged softness in the nonresidential construction market may limit growth in AAON branded products.
[Final Takeaway] AAON's Q2 2025 results reflect significant operational challenges stemming from ERP implementation and supply chain disruptions, leading to lower sales and margins. However, the Basics brand continues to demonstrate strong growth in the data center market, supported by strategic partnerships and innovative solutions. Management remains optimistic about sequential recovery in the second half of 2025 and long-term margin improvement, driven by price increases, capacity expansion at Memphis, and ERP rollout stabilization. While risks remain, AAON's strategic initiatives position it well for future growth.