AAON, Inc. Aktie

All right. Why don't we get started, everyone. Thanks for being here. This is the AAON presentation. I'm Ryan Merkel. I cover building products at William Blair. Before we begin, I need to remind you that a complete list of disclosures and conflicts of interest is available on our website.

With us today is Matt Tobolski, CEO; and Andy Cheung, CFO. Andy joined the company in April. So Andy is very new. AAON is a leading OEM of premium equipment for the light commercial and data center markets. The company wins by designing custom solutions that deliver superior total cost of ownership. We believe AAON will be one of the fastest-growing companies in our coverage list in the next few years. I'm going to turn it over to Matt. He's going to do a few minutes of introduction, and then we're going to do a fireside chat format. Matt?

Fantastic. Yes. Thanks, Ryan. And just kind of at a high level and really talking about AAON as a business, we really run the business through 2 brands. So the AAON brand, which is really the legacy of the business and the BASX brand, which is where all the data center exposure comes into play. But both sides of the business have a common theme, which is really selling semi-custom and custom solutions that provide a total cost of ownership of value sales conversation to our owner base.

And on the rooftop side of the business, we do that on the AAON brand through a highly configurable software platform that allows us to really fine-tune selections for commercial rooftop units to maximize performance for a given owner's application. And that really resonates with the owner operators, 25% of our revenue comes from the K-12 market. And a lot of the growth that we're seeing in the AAON side of the business, obviously, we have the anchor, the core of the business and our transactional side of the business, but over the last 2 years, we put a lot of investment into a national account strategy to really capitalize on that value proposition that we're selling into the national account market.

So think everything from health care markets to big box retail to warehouse and distribution centers. And so we've seen a lot of good momentum that is really providing some outsized growth and market share acquisition on the rooftop side of the business, coupled with the recovering kind of more traditional light commercial market, it's providing a lot of good growth in 2026 and beyond.

On the BASX side of the business, obviously, I think we can all acknowledge the dynamic growth inside the data center space. The BASX brand really goes to market with a customization aspect of it, which is really focused on providing a fit-for-purpose solution for our customers. And that really resonates with large hyperscale and large developers of colocation and NeoCloud facilities. And so we've seen a tremendous amount of growth and a lot of resonation with that value proposition with dynamic growth inside the BASX side of the world and capitalizing on good demand in the data center space.

The biggest piece of where we focused in the last 12 months has been beyond just the product side of it, but it's really about building out the platform to operate at scale. We rewind the clock 4.5 years ago, and AAON was primarily a single-site manufacturer out of Tulsa, Oklahoma. We've gone from 2 million square feet or under 2 million square feet of factory space to over 4 million square feet of space in 4 years. We've gone from 2,000 employees to 7,000 employees and really seen very aggressive growth inside both sides of the business.

And so a lot of the work that we've been focused on over the last 12 months is really a natural evolution of this business to operate at that scale. So we've invested heavily in our operations and our supply chain teams, bringing on Andy on board from a finance and really building out capabilities to really enhance the operating discipline and allow this business to thrive not just today, but far into the future with a much better and tighter operating discipline.

All right. Fantastic. Matt, why don't we start with a question on the macro. What's your outlook for the light commercial market in 2026? And do you expect AAON to outperform that market?

Yes. We've definitely seen signs of recovery inside the commercial HVAC market. I would start off by saying just looking at 2025 kind of coming into '26, but 2025, we had volumes that were down, but relative to the overall market, we're down nowhere near as much as the rest of the market. So we saw good strong outperformance in 2025 at the kind of light commercial side of the business. As we exited '25, and we talked about this a little bit on the Q1 call, we continue to see more and more conversations in our traditional transactional type business. So that's your more -- your everyday light commercial market.

The amount of new prospects that our sales channel partners are bringing forward continue to accelerate. So we continue to see more and more opportunities coming forth. If you ask me this in Q3 to Q4, I'd say there were signs of life, but we weren't seeing that convert to actual bookings. I would say in Q1, we saw a lot of that inertia really start translating into strength in bookings. And we are seeing signs of basically a recovery, not a fast recovery, but we're seeing signs of momentum in the right direction on the light commercial market and definitely are seeing an outperformance in our side with bookings in that transactional market relative to the greater market as a whole. So we see '26 as being a good strong recovery year for the AAON side of the business -- the AAON brand of the business and definitely see it being a market share capture year.

Okay. That's great. Great to hear. Let's talk about the last quarter. AAON had production issues in '25 and a little bit in the first quarter of '26. Are those issues behind you? And what has changed?

Yes. So when we look at the production issues of '25 and kind of what was in front of us at '26, I just want to kind of start off by saying they're different in kind of what they were. So '25, some of the production issues -- '25 had a lot of noise. I mean, I'm just going to be very open on the AAON side of the business. There was a lot of noise in 2025. We were coming out of the EPA mandated refrigerant transition, which caused a lot of noise in our bookings cadence in '24 and '25.

So that caused a lot of pressure in the first half of the year on the AAON side of the business. That was exacerbated by just supply chain constraints as our supply base changed from a -- changed to a new refrigerant and all the components. And so we had a lot of noise at the beginning of the year. We then went live with an ERP, which caused some disruption in our coil production down in our Longview site, which caused kind of reduced capacity and throughput in our Longview site, but it also bled into our Tulsa site given our internal supply of coils from Longview to Tulsa.

So we had a lot of basically operational noise kind of throughout 2025. Coming out of the year, a lot of that momentum was in the right direction, but there were still pockets of noise. In '26, I would just start off by saying Q1 and '26 on the AAON side, in the Oklahoma side of the business, we had really good strength. I mean, we were running record run rates inside of the Oklahoma segment. And so we came out of the back end of Q1 and the velocity and volumes through Tulsa, Oklahoma were at record highs, things we had never done before as a company in volume. So we've recovered well.

Now the question mark around the operational challenges then comes to margin. And the conversation on margin, we talked about this on the Q1 call, part of the margin pressure, about 200 basis points of depression in margin was outsourcing. And it was outsourcing because we were basically -- we were having to prioritize coil production in support of BASX product in Longview. And that's because of our data center customers, we have tighter quality requirements to qualify vendors that makes multi-sourcing take more time.

So we had to prioritize internal capacity in support of BASX, which meant we outsourced AAON coil. And that created a margin pressure in the AAON Oklahoma segment of the business. There was also some price/cost dynamics that we identified in Q3, Q4 of last year and have already put pricing actions in place. And so we had some temporary constraints that certainly put some margin pressures on us. But going forward, we're definitely getting a lot of better priced product flowing through the factory, which will show margin improvement.

The coil outsourcing, though, coil outsourcing will continue, and that is just a dynamic of how much growth we're seeing. We updated our guidance on the Q1 call to a 40-ish percent year-over-year growth rate from a consolidated basis. And so that rate of growth is such that the internal coil capacity is not ramping quite as fast. So we will leverage outsourcing in the near term to basically allow us to capture that volume. But the net economic effect, the net earnings growth is very, very reasonable to make those decisions.

Okay. That's helpful. On gross margins, can you talk about what will be normalized gross margins for both the AAON business and BASX in the long term?

Yes. I mean, from a long-term perspective, the AAON side of the business, that mid- to high 30s range that we've gotten to in the past is very much the target that we're driving back towards. There's going to be some good near to midterm recovery on kind of margin from Q1 of this year throughout this year. And that's given the price/cost dynamics I talked about that we have embedded in the backlog. But the outsourcing definitely will cause some pressures on a little bit more of an extended basis. So we don't necessarily expect to exit the year back at that on the Oklahoma segment, but certainly building momentum back towards that.

On the BASX side of the business, the target margin profile that we talked about is more in that 30% range. And really, part of that constraint is just the rate of growth. The BASX side of the business has doubled last year, doubling this year, doubled the year before that. And so that rate of growth has just put some pressure just on the execution of things that is pressuring margins. But as we kind of get more of this capacity to have its legs underneath it, there'll definitely be opportunity to make some intentional efforts to keep driving that forward.

Well, let's shift and talk about data centers. On the last call, you raised your outlook for data centers to $1 billion. Talk about why demand is strong? And then is most of the growth for liquid cooling?

Yes. So at a high level, I mean, the demand has been there. So the demand certainly didn't materialize over the quarter. And we talked about this really over the last 3 quarters, and that is we believe firmly in ensuring that what we sell, we deliver at the quality and delivery schedule that our customers expect. And so as we rapidly ramp up our facility capacity, it becomes an important balance for us to commit to orders that we can fulfill in the time frame that we commit to.

And so the Memphis site that we brought online, I mean, that was the first really large-scale investment that AAON has ever made from a new facility perspective. I guess you'd say 1988 when the company was founded, that might have been the first. But since then, I mean, it's all been incremental expansions have been the primary growth driver of the facility expansions at AAON. And so Memphis, adding 800,000 square feet under roof, that was the first really big stair step that we've made as an organization. And so in that, it's very easy to get excited and try to go sell through that capacity. But from a discipline standpoint, we've got to have surety of our ramp rate. We've got to make sure that we're bringing on that facility at the quality expectations that we have for ourselves. We have to make sure that we have confidence in the rate of growth that's going to come through there.

And so 3 quarters ago, when we talked about why didn't the backlog grow so much in Q3, Q2 of last year, it's because we weren't sure of exactly when that ramp was going to happen. And we wanted to get more run time underneath it. And so as we got run time in Q2 and Q3 into Q4, we knew now what we could sell and where that would convert to from a delivery perspective. And that's what's allowed us to continue now capturing more and more of that demand. And really, that discipline, even through this growth with all this new production capacity coming online, it is that discipline that we will not stray from to make sure that we don't overcommit our capacity and we do deliver what we say. And so what we've seen over the last couple of quarters is really that surety of supply that's allowed us to basically take on some more of these orders. And as we continue getting more and more run time and more and more visibility into how that facility and all of our facilities as a whole are ramping, it will allow us to continue taking on more and more of those orders.

And what types of equipment are you mainly selling? Are you selling CDUs, fan walls? Are you selling chillers? Just to give people a sense.

Yes, it's broad-based. And I think that's the one thing I always -- all the AI conversation, all of the liquid cooling conversation, to a certain extent, I feel like people forget that there still is a very large amount of demand for the traditional air side products that we built this business on in the first place. So we continue to see very strong demand for the airside products that we've always manufactured, and they go into both cloud data centers as well as AI data centers. Even a liquid cooled data center, you're still going to have to buy 30% to 40% of your capacity via air. So you're still seeing that demand basically in the marketplace. But the backlog growth that you see in Q1 is actually relatively even with airside products, chiller products and liquid cool products kind of in that order book for the quarter.

And then talk about the outlook for BASX growth in the next couple of years. Obviously, '26 is pretty strong, but should we be penciling in like a 40%, 50% CAGR over the next few years? How should we think about it?

Yes. I mean the -- going back to the comment I made earlier, it really comes into how that capacity matures and comes online. When we look at Memphis today, really maybe let's talk fleet-wide for a second. The Oregon site is relatively close to capacity. I mean, there's always a little bit of incremental capacity that we're going to be able to unlock. But Oregon, roughly in that $300 million range. That's kind of what it is. You might see a little bit of growth out of that, but not a lot.

Longview, certainly 2 years ago, a year ago, that was a lot of the growth that we saw as we brought on that new expansion. So a lot of that Longview capacity coming online has really been some of that more last year growth that you've seen on liquid cooling products. But even Longview, we haven't turned on all the production lines. So there still are production lines that we can turn on, and there's still ability to run that facility with more shifts. So that comes down to that facility continuing to mature. So we see that growing -- continuing to grow throughout this year and next year as we continue getting that operation really kind of fine-tuned from an execution standpoint.

So there's some growth that you're going to see out of that. But the biggest single site that's going to be the sort of uptick in capacity and really volume, that is the Memphis site. And we're really only running one product through that today. We're doing that very intentionally because it's a brand-new site, and so we are focused on execution. But as we get more run time within that facility, we have 4 production lines that are sitting vacant right now. So we've got 4 production lines that are sitting there ready to basically be turned on, and we will continue turning those on. You'll see some of those turn on towards the end of this year and then more into next year.

And so when we look at that ramp, we anticipate seeing basically a decent stair step in capacity come online at the end of this year, another one next year and then seeing more of a linear capacity ramp inside the Longview site. So the rate of growth, we certainly haven't guided next year, but I would just say that continued strong growth rates, not 100%, you're not going to keep seeing that in the basic side. But definitely, you're going to see meaningful growth coming through.

And how much data center revenue capacity do you have today?

Yes. In the BASX side of the business, we have over $2 billion of capacity sitting inside that fleet. Now I would say it's not a light switch. So it's not like I can just walk in and say, here's $2 billion of revenue. We are ramping these new facilities. But inside these new facilities, we know we have at least $2 billion of kind of capacity as a whole from the BASX brand. The big goal though is and really the challenge to our operations team is to really quantify how much more than $2 billion exists inside that investment.

And we were talking earlier in one of our one-on-ones, discussing cash management and talking about inventory reduction. And I joke that Andy looks at inventory reduction from a cash perspective. I look at inventory reduction actually as a lever to get more capacity. And I say that because if you walk through a lot of our facilities, especially our legacy facilities, you see racking all across the production floor. You see a lot of space taken up by storing inventory on our production floor. And as we continue to evolve and we really invest heavily in a lean transformation effort inside of our fleet, one of our big objectives there in our lean transformation is actually a reduction in inventory to free up more production space.

And if I can free up in Tulsa, just one production line in Tulsa, that is a huge amount of incremental revenue capacity that we've just gained with relatively little investment in dollars. And so that's a lot of the focus that we have is across all the fleet to say, hey, we've got $2 billion that we know on the BASX side of the business. But the challenge is let's figure out how much more, let's figure out what those rocks are that are in the way of that and let's make much smaller incremental investments and actually drive as much volume through our existing investments as possible.

Great. Who would you consider your top competitors for liquid cooling?

Yes. I mean I would say out of the gate, if anyone walks to any data center show and walks down an exhibit center, you're going to see CDUs from everybody and their brother. I mean there are CDUs everywhere out there. And I always start off by saying, just because everyone makes a CDU doesn't mean we're competing. And I mean that the same way I would say it on the AAON rooftop units. We don't go after every type of data center. We don't go after every project on a rooftop unit because we know where the value proposition resonates and where it doesn't.

And so when we think about where we go after and what do we focus on from a CDU perspective, we are not focused on selling a 500-kilowatt commoditized CDU. Like that is not even in the product road map. That's not a focus of where we go. We're talking about highly customized solutions for hyperscale operators. We're talking about large capacity CDUs, not in the kilowatts, but in the megawatts and 2, 4, 5, 6 megawatt CDUs that tends to be where we focus. And so in that space, while we may walk through a data center hall and see from a trade show perspective, 100 manufacturers of CDUs, there's only maybe 5 or 10 of those that truly are doing what we're doing inside that space. And so that's the likes we see to a certain extent, Motivair, we see certainly some on the Modine side of the business, a little bit on the Vertiv side. So we certainly see some of the big players kind of in that space. But I would also say the vast majority of CDU liquid cooling manufacturers we see, we're not really competing from a product perspective.

Got it. All right. Let's transition and talk about the ERP implementation. What is the game plan by location? And can you comment on Longview? Is that back to normal operations or not yet?

Yes. So -- at a high level on the ERP side of things, we talked about this. We basically said, hey, we're pressing pause on additional sites right now. And the reason we're pressing pause is because the rate of growth -- we updated guidance from high teens to 40% growth rate this calendar year. So that is a marked increase in the overall top line revenue that we're going to push through our facilities. And we made the decision to say we're going to pause kind of scheduling other ERP go-lives given that rate of growth. We want operational focus to be on execution and don't want to add any additional noise into that with additional go-lives.

So kind of where we sit today, we're live in Longview, we're live in Memphis. The intended next site would be Oregon and then after that would be Tulsa, but we really have no date assigned to those next 2 go-lives. The focus is to make sure the system is not only allowing us to run as fast as we want to in Longview and in Memphis, but also to put the additional work in right now and adding some additional features that weren't part of the additional go-live strategy.

So if we rewind the clock 2 years ago, the whole philosophy was we're going to go live, get all of our sites live and then add some additional enhancements along the way. What we've actually come to the realization on is those enhancements are actually pretty essential to how we want to operate. So we're going to basically focus on getting some of those additional enhancements in place in Longview and in Memphis, have all that vetted to ensure we're operating properly, and really drive as much velocity to those sites before we even have a conversation on a Longview -- or on a Tulsa or Redmond.

Makes sense. Okay. Let's transition and talk about the rooftop business. What is your price premium today versus your competitors who sell standard equipment? And is that allowing you to take market share at a lower premium in the industry?

So I always want to start off by saying there's a range of what we say standard equipment. And the reason I say that is when we talk price premium, we're talking kind of to our closest competitor, kind of in that more catalog product. And I say that out of the gate to say, there are products you can buy for 20%, 30% less than on rooftop, but the feature set is nowhere near the same. I mean, it's an apples and oranges conversation. So when we talk about this 10-ish percent premium that we sit at today, that's relative to, I'll say, a relatively close competitor that still is not doing everything that we do. And so in that case, we're selling those competitors -- sorry, against those competitors really around the energy efficiency.

We're selling it on the durability and longevity of the cabinet on the ability to configure more for indoor air quality requirements as well as just the life cycle of the product as a whole. We kind of do that math to show that, that 10% premium for an owner-operator is more than paid for within a relatively short period of time. And so there definitely is the focus on the value sale, the value proposition. And where we sit today, with that premium, we continue to see our ability to take market share. Obviously, you're seeing that in the numbers. So you're seeing us be able to take that. And that 10% premium certainly is seeming to be a pretty good kind of area. We probably dipped into the 7-ish percent for a bit there and kind of had some price discipline pushing it back up.

Talk about the Alpha Class cold climate heat pump. What is unique about it? And how is it helping you unlock a national account opportunity?

Yes. So the Alpha Class product out of the gate, it's not just one type of heat pump. So the Alpha Class really is a 3-tiered heat pump solution for rooftops. And so we have the Eco, the Pro and the Extreme series inside of the Alpha Class. And I always want to clarify that to say the Eco series, that is as close to a traditional heat pump that you buy from a competitor. So the Alpha Class Eco series, you're going to get basically a heat pump heating solution down to about 37 degrees Fahrenheit. And that's sort of the -- that's the relatively standard heat pump solution. But if I'm delivering a heat pump to, let's just say, a Southern Florida market, that's all I need.

When we move on to the Pro series, the Pro series provides heating down to 0 degree Fahrenheit outdoor ambient temperatures and the Extreme series goes all the way to a negative 20-degree Fahrenheit heat pump operating condition. So it's a platform basically of 3 series of products that provide electric heating inside a heat pump solution. And why that's important for a national account is a national account owner doesn't have all of their sites in one geographic region. A national account owner is talking about geographic diversity across the country. And so if we want to go in and talk hypothetically to a big box retailer who has sites from the northern border down to the southern border, it doesn't make sense for me to try to sell that customer the Extreme series product that works in Northern climates down in the southern climate. It doesn't make any sense from a price point standpoint.

So having that full platform of the Eco, Pro and Extreme series, it allows us to go in there with one of the national account customers and be able to provide a platform that is right-sized for the various geographic regions so that you're optimizing your price efficiency in a southern climate relative to a northern climate, but still getting the benefit of the overall heat pump solution. So it's been something we've seen resonate really, really well with our national accounts. But I would also say that the success that we have in national accounts, it's not limited. We're not selling just heat pumps into the national accounts. Our traditional units are also seeing tremendous success in the national accounts. And so yes, we're seeing great benefit of the Alpha Class product, helping us get in with national accounts, but by no means are we only winning national accounts because of heat pumps.

Got it. All right. My next question is a little more open-ended. What investments are you making, excluding the ERP to help professionalize the business? I feel like that's maybe underappreciated by investors. And maybe Andy can pitch in as well if he's got some thoughts.

Yes, I'll start at a high level, and Andy can definitely dive into the finance side. So I made the comment earlier that 4.5 years ago, AAON was really a single-site Tulsa location company. That's the way it was run, that's the way it operated. And 4.5 years ago at roughly $500 million, I think, $20 million of revenue to this year, we're talking about $2 billion of revenue. It's a markedly different company, much more footprint, much more people inside the organization, much more sophisticated customers. I mean data center customers have a level of sophistication and buying that is much different than a transactional rooftop unit customer.

So the business is fundamentally different than it was 4.5, 5 years ago. And the demands in the business, the complexity of operations, everything is markedly different. And so I've been in the seat, I guess, 12.5 months now. And in that 12.5 months, the real focus has been to not just build this organization to be successful today, but to maintain this momentum that we have and allow us to really succeed 5 years, 10 years down the road. And when we talk about $2 billion this year, we think about a $3 billion, $4 billion, $5 billion kind of organization, we've got to run it differently.

And in the last 12 months, we've been very focused on evolving this organization. I would say transform has a little bit of a kind of 4-letter word kind of connotation to it because AAON was tremendously successful. AAON built a great business, and this is a natural evolution. It's not something was broken in AAON. It's just the growth and the success that we've had is fundamentally changing the way we need to lead this business. And so we're evolving the organization to be successful.

12 months ago, we didn't have a supply chain department at AAON. We had a purchasing department at AAON. So we bought based on whatever someone told us we needed. We didn't have long-term contracts. We didn't do strategic sourcing. And we've built out in the last 12 months from the ground up, a true professional supply chain organization that is unlocking a tremendous amount of value in not just cost savings but cost avoidance in inflationary markets. But beyond that, we're getting a lot better supply surety. We're getting vendor scorecards and vendor management is getting much more sophisticated so that we know that when I say I need a part, that part is going to show up.

On the operations side, we built out and really rethought the way that we run operations. We brought in a true focus on lean manufacturing and building best-in-class multisite manufacturing model. We didn't have 12 months ago a robust KPI set for operating a 5-site manufacturing organization. So you can't fix what you can't measure. I mean a very simple principle. You've got to measure it to be able to fix it and improve it. And so we've been very disciplined on building out operational discipline and cadence and really have invested heavily in bringing in top-tier talent to help transform this.

And lean manufacturing wasn't a thing that was talked about at AAON 12 months ago. And we're seeing on our highest volume line in Tulsa, which is our 30-ton line in Tulsa, we ran through a series of 8 Kaizen events over the last -- starting back in November. We increased volume 20% on that line and reduced the workforce in that line. Just through 8 lean initiatives, just very simple, focused, low-hanging fruit type opportunities. And so we're driving that throughout the organization and then bringing in finance to then connect all the dots and understand what to focus on to drive most value.

Yes. Absolutely. I would say I have background in automotive, industrial. What AAON did in the last decade was incredible, but we are just really scratching on the surface in terms of the efficiency, the optimization. So there's a lot to be gained here, really investing in people, the training and in the process. That's what I see as the opportunity lie ahead of AAON right now. And if you just go back to the story about Matt and I look at inventory maybe a little bit differently, right? Matt is thinking about growth. I'm thinking about maximizing cash, minimizing risk. So that kind of complementary views and now we're investing in people connecting the dots is where we think that is the next return on investment.

Fantastic. Well, we're out of time. Thanks, everyone. Appreciate it.

Thank you.

Hello, and welcome to the AAON,Inc. First Quarter 2026 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Joseph Mondillo, Director of Investor Relations. You may begin.

Good morning, everyone. The press release announcing our first quarter 2026 financial results was issued earlier this morning and can be found on our corporate website, aaon.com. Call today is accompanied by a presentation that you can also find on our website as well as on the listen-only webcast. We begin our customary forward-looking statement policy during the call, any statement presented dealing with information that is not historical is considered forward-looking and made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995, the Securities Act of 1933 and in the Securities and Exchange Act of 1934, each as amended. As such, it is subject to the occurrence of many events outside of AM's control that could cause AAON's results to differ materially from those anticipated. You are all aware of the inherent difficulties, risks and uncertainties in making predictive statements. Our press release and Form 10-Q that we filed this morning detail some of the important risk factors that may cause our actual results to differ from those in our predictions.

Please note that we do not have a duty to update our forward-looking statements. Our press release and portions of today's call use non-GAAP financial measures as defined in Regulation G. You can find the related reconciliations to GAAP measures in our press release and presentation. Joining me on today's call is Matthew Tobolski , President and CEO; Andy Cheung, our new Chief Financial Officer, who joined the company in April and Rebecca Thompson, our Chief Accounting Officer. Matt will start with some opening remarks, Andy will follow with a walk-through of the quarterly results and Matt will finish up with our updated outlook for 2026.

With that, I will turn the call over to Matt.

Thanks, Joe, and good morning. Q1 was a strong start to the year and an important execution quarter for AAON. As the organizational leadership and capacity investments that we have been deliberately building began to show up more clearly in our results. In addition to delivering record sales and 37% earnings growth, we recorded a book-to-bill well above 1, resulting in backlog of $2.1 billion, more than double from a year ago and marking the sixth consecutive quarter at record levels. .

Both brands continue to demonstrate the strength of their value propositions through highly engineered, configurable and custom solutions, consistent with the strategy we have executed against over multiple years. This led to strong customer demand and translated into solid growth in share gains during the quarter. Demand remained exceptionally strong in basics, supported by the strength of the data center market and our differentiated solutions that deliver improved performance, greater efficiency and ease of maintenance. Basics branded sales grew 72% year-over-year, even against a lofty comparison and sales in the prior year period nearly quintupled. Increased production from our expanded facilities in Longview and Memphis supported a higher throughput while we also continue to increase output from our Redmond side.

Operationally, we executed well for our customers with all 3 facilities delivering record basics branded sales during the quarter. This performance reflects not just strong demand but improving execution driven by deeper leadership benches, clear accountability and more disciplined operating processes as capacity scales with a more mature operating structure. In addition to higher throughput, we delivered another quarter of strong bookings. Basics posted a book-to-bill ratio over 2, driving a record backlog of basics branded orders, up 160% from a year ago and 24% sequentially. Against the data center thermal management market growing at approximately 30%, our revenue and order growth raised supported continued market share gains at Basics. The AAON brand also performed well. gaining share even as market conditions remain soft and our extended lead times persistent.

A key positive during the quarter was a notable improvement in production rates which drove AAON branded sales growth of 42% year-over-year and 11% sequentially. These improvements contributed to shorter lead times and a sequential reduction in backlog, though further progress is necessary. With volumes within the unitary HVAC market growing just modestly year-over-year, these first quarter results suggest meaningful share gains.

Bookings of AAON branded equipment increased approximately 9% year-over-year and were up about 15% on a trailing 12-month basis. In the quarter, growth was driven by strength in our traditional transactional business while national account bookings were comparable with the prior year period. The improvement in transactional business reflects an acceleration in demand, which is encouraging considering this business was soft for much of last year. orders of alpha-class equipment, which comprise our AAON branded fully electric heat pump configurations also contributed to growth, increasing 56% during the quarter. The same strength that AAON branded bookings limited the sequential decline in AAON branded backlog even with meaningful improvements in production.

An branded backlog declined 3% sequentially and remained up 26% from a year ago. As a result, we remain focused on further ramping production to work down backlog in normalized lead times. In the midst of such strong growth, we have been intentionally investing in people, processes and tools to build a top-performing operating organization, one capable of sustaining higher growth rates while expanding margins over time. These investments are now moving from build phase to execution phase.

Last quarter, we discussed the investments we've been making in supply chain management and lean manufacturing. We continue to leverage these investments and expect to see accelerating benefits as the year progresses. Margin expansion remains central to our long-term value creation model. In the near term, we are intentionally prioritizing growth, customer delivery and system maturity over near-term margin maximization. That decision is reflected in the temporary use of outsourcing and ramp-related inefficiencies as we scale capacity.

These are conscious, disciplined trade-offs made from a position of strength and visibility not demand-driven pressure or structural resets. We view them as economically positive decisions that accelerate market share gains and long-term returns on invested capital. Importantly, these decisions do not come at the expense of [indiscernible] growth. Longer term, as capacity builds out and internal capabilities mature, reliance on these temporary measures will decline driving margin improvement through better fixed cost absorption and productivity. As a result, we now expect higher growth for the year, albeit with more modest margins near term while continuing to see directional margin improvement as the year progresses. Before handing it off, I want to welcome Andy Chang, our new Chief Financial Officer.

Andy brings a strong financial background and a proven track record of leadership across strategy, financial planning and analysis and capital management. His experience and disciplined approach will be instrumental as we continue to scale the business, enhance execution and drive long-term value creation. Andy's insights and partnership will further strengthen our leadership team and support our focus on growth, margin improvement and operational excellence. I'd also like to thank Rebecca Thompson for his steadfast service as CFO.

I look forward to her continued contributions and a return to the Chief Accounting Officer role. And with that, I will now turn it over to Andy, who will walk through the quarterly financials in more detail.

Good morning, everyone. I'll start this morning by first sharing how excited I am to join AAON and to have the opportunity to partner closely with Matt and the leadership team. I've held financial leadership roles across multiple industries in my nearly 30 years tenure, including an extensive amount of time in the industrial HVAC space with a consistent focus on driving operational efficiency. I'm pleased to bring that experience to AAON, and look forward to helping drive the next stage of profitable growth and value creation. The company's strong market position and the high growth opportunity is what initially attracted me to the role.

And as I have become more familiar with the business over the past few weeks, I've been even more impressed by the strength of the underlying fundamentals and the sizable opportunity that lies ahead. I look forward to working with the team to support profitable execution, enhance returns and deliver long-term value for our shareholders. With that, let's turn to the first quarter financial results. First quarter net sales increased 54% year-over-year to a record $496.9 million. Growth was driven by strong performance across both basic and AAON brands. supported by elevated backlog levels and recent capacity investments that enabled higher production rates during the period. Basic branded sales increased 72% year-over-year. reflecting continued strong demand for data center cooling solutions and capacity gains from higher utilization of our facilities in Memphis, Longview and Redmond. AAON branded sales grew 42% in the first quarter, driven by improved production throughput as we work to reduce lead times at both our totall and long field facilities.

Gross margin was 25.1% in the first quarter, down 170 basis points from 26.8% in the prior year period. Gross margin was impacted by an increased amount of outsourced components to drive growth and share gains and absorb fixed costs at the new Memphis facility as well as tariff-related and general inflation pressures of which are temporary, despite these lead-term margin impacts, earnings growth remained strong, reflecting our exceptional growth trajectory.As internal capacity scales, utilization and productivity increase, reducing reliance on outsourced components and resulting in better fixed cost absorption. Additionally, we have taken margin actions through pricing and mix and those actions are embedded in the backlog. SG&A expenses as a percentage of sales declined 220 basis points to 13.7%. Up 32% to $67.9 million. This reflects strong operating leverage and disciplined cost management, and demonstrates how our organizational investments are scaling as revenue grows. Driven by the strong top line performance, non-GAAP adjusted EBITDA increased 44% and from the prior year period to $78 million. Non-GAAP adjusted EBITDA margin was 15.7% compared to 17.6% a year ago.

Diluted earnings per share in the first quarter of 2026 were $0.48, representing an increase of 37% from the first quarter of 2025. Turning now to the segment financials. Beginning with AAON Oklahoma. For the first quarter, net sales increased 51% year-over-year to $244 million. This outsized growth was driven by a strong beginning backlog and improve production throughput, which supported by higher backlog conversion despite a challenging industry backdrop. Results also benefited from a favorable comparison to the prior year period, which have been disrupted by the industry's refrigerant transition, contributing to regain market share.

AAON Oklahoma gross margin was 26.3%, an increase of 120 basis points from 25.1% in the first quarter of 2025. Overhead expenses associated with the Memphis facility impacted segment margin by $9.8 million. Excluding these costs, Oklahoma margins were 29.6%. The remaining gap to our historical highs in the upper 30s is explained by 3 items: outsourcing, tariff-related pressures and general inflation none represent a structural change to Oklahoma long-term earnings power for its role as a core margin engine for AAON. All 3 have already been addressed with actions embedded in backlog, and new pricing actions.

These temporary headwinds will moderate as the year progresses. AAON coil products sales were $117.6 million in the first quarter, an increase of $23.6 million or 25% compared to the prior year period. Growth was driven by $93.2 million in base branded liquid cooling product sales which increased 40% during the quarter. This strength was partially offset by a 12% decline in AAON branded output within the segment.

AAON Coil Products gross margin was 24.1% in the first quarter compared to 31.8% in the prior year period. and up 280 basis points sequentially from 21.3% in the fourth quarter. The sequential margin expansion reflected improved operating leverage from higher throughput at the Longview facility along with a favorable mix of higher-margin basic sales. Sales at the basic segment grew 104% in the first quarter to $135.4 million. The robust growth was driven by sustained demand for data center solutions and new market share capture as basics continued its trend of strong order intake and growing backlog. Increased utilization of our Memphis facility was also a significant factor, providing additional production capacity that was additive to segment results.

BSIC segment gross margin was 23.9%, essentially flat from the prior year period. The stable year-over-year margin reflected strong volume growth offset by incremental resources and investments lead to support the future growth and share gains. As utilization continues to improve, we expect basic segment sales and margins to expand through the balance of the year, with the second half weighted more favorably as fixed cost absorption improves.

Turning now to the balance sheet. Cash, cash equivalents and restricted cash balances totaled $1.1 million on March 31, 2026, and debt at the end of the quarter was $425.2 million. Our leverage ratio improved to 1.71x, down from 1.77x on December 31. During the first quarter, cash flow from operations was a positive $34 million, the highest level since the third quarter of 2024. This is compared favorably to a $9.2 million use of cash in the prior year period and was driven primarily by higher earnings and improved working capital efficiency. Capital expenditures totaled $52.9 million, reflecting continued investment in incremental capacity to support future growth. Looking ahead, we expect continued profitability and productivity improvements throughout 2026, which we believe will drive further cash flow improvement and strengthen the balance sheet in support of future growth. I will now hand the call back to Matt.

We entered the second quarter the significant production momentum and a strong backlog that provides excellent visibility through the remainder of the year. Production throughput continues to ramp across all of our facilities, positioning the business to benefit from higher volumes and improved utilization. With this operational momentum and backlog strength, our focus remains squarely on execution and delivering for our customers. In the near term, we expect temporary cost pressures from outsourcing as we support strong growth and continued market share gains. However, these impacts are transitory and as internal capacity expands, these cost burdens will diminish, allowing margins to improve with demand remaining robust production continuing to scale and capacity investments coming online, we expect improving margins over the course of the year as operating leverage builds. We remain focused on scaling the business efficiently and strengthening margins over time, while delivering for our customers and driving long-term value for our shareholders.

For the year, we now anticipate sales growth of 40% to 45% at a gross margin of 27% to 28%. SG&A as a percentage of sales is expected to be between 14% and 15% and depreciation and amortization expenses are expected to be in the $95 million to $100 million range. These expectations reflect our confidence in demand, improving execution and the operating leverage embedded in our cost structure. Importantly, our full year outlook reflects a net improvement in both top and bottom line, with earnings up materially despite gross margins reflecting intentional timing and ramp decisions.

The additional volume we are taking on this year carry strong incremental contribution and accelerate absorption, productivity and capacity payback. This is a timing issue tied to how we're choosing to ramp and execute. Not a reset in long-term margin structure. As absorption improves, outsourcing declines and pricing flows through, margin expansion follows as these temporary factors unwind. In closing, I want to thank our employees, our customers, sales channel partners and shareholders for their continued support. We are seeing clear momentum in our operations as recent investments translate into stronger execution.

Our visibility, execution priorities and operating discipline position us well to continue improving performance and delivering long-term value. And with that, I will open the call for questions.[Operator Instructions]

Your first question comes from Ryan Merkel with William Blair.

Congrats on the quarter, very well done. So Matt, you're not going to be surprised about my first question, which is gross margin. There's a lot going on but I think it would be helpful if you could just talk about Oklahoma because the margins there, I think you said normalized for close to 30%, but the quarter was 26. So that 500 basis points, if I have that right, can you just unpack each of the temporary issues? And then the second part of the question is, how should we think about 2Q and why will 2Q improve sequentially? What are the drivers?

So touching on Oklahoma margins, just to clarify, the margin as reported includes the overhead impacts of the to Memphis investments and so when we back that out, the Oklahoma margin for the quarter is sitting around 30%. And so when we think about that 30% compared to 2024 high in the higher 30s, the 3 key drivers that are embedded in there is, first off, some intentional choices to outsource to help fuel the growth. And when we think about it from a system perspective, we've got demand coming across the entire platform for internal manufacturing resources. And so as we balance exactly where all those resources are driving kind of throughput for the overall enterprise, some of that decision, especially in coil production in places like Longview, we're centered on supporting some of the liquid cooling products we have.

So because we tied up some of that capacity in the Longview site for basics, we did some more outsourcing in the Oklahoma site, which shows up in the overall margin. But beyond that, there's a little bit of price cost dynamic and a little bit of dilutive nature from the tariff surcharge and actual costs incurred. But I want to touch on the fact that the price cost issues and the tariff impact were identified and actually pricing actions have been taken at the back half of last year. So embedded in backlog is actually intentional actions to increase that price already. and we will continue to monitor the input costs and really maintain discipline around pricing strategy.

Got it. Okay. That's helpful. And then 2Q, can you provide us any kind of color on where you think the margins will land?

Yes. I mean, Q2, we're expecting sequential improvement quarter-over-quarter in the Oklahoma segment. And so that includes both with and without Memphis. The only thing I'd touch on is Oklahoma does traditionally have seasonality in Q4 and Q1. So we anticipate seeing sequential progression in the Oklahoma segment margin in Q2 and Q3 and there still is a little bit of potential pullback in Q4 with normalized seasonality. But all in all, we expect to see consistent improvement kind of during the main peak months in the summer.

Got it. Okay. And then just quickly on basics, I mean the revenues and orders were way above what I was thinking and maybe even what you were thinking, if I go back to what you told us in 4Q. So why did basics revenue in the quarter beat so much and then what is embedded in the guide for basics growth at this point? Because I think prior, you had said 25% growth.

Yes. So, it's a good question on what changed or what allowed us to accelerate the sales and the bookings guidance. And really, what I'd say is as we look kind of within our customer base as well as new customer conversations, we continue to see incredibly strong strength in the data center market from an underlying perspective. And as we mapped out kind of our execution plan to really capitalize on the opportunity, especially with our differentiated product, we made the choice to accelerate some of the productivity or production ramp, which is part of that additional cost structure that came in on the outsourcing.

But when we saw the opportunity and we really mapped out how we can take advantage of that, we made it a point to really accelerate revenue, which allowed us to then also accelerate bookings. So as that demand really started to come online and show good legs and we gain more and more confidence in our ability to drive more volume through. It allowed us to continue adding more sales or bookings as well. So that's really the big driver of really the acceleration, both on the sales and the booking side. I would just say, high level, what's embedded in the overall guide for the year is when we zoom out and we look at kind of the new 40% to 45% kind of marker from a top line revenue perspective that implies roughly $1 billion in basics revenue for the year.

That's incredible. Okay. I'll get back in line.

Your next question comes from Chris Moore with CJS Securities.

Nice quarter. Maybe we'll start with -- on the rooftop side. So obviously, you're ramping production there, lowering the lead times sounds like you're taking some share. Just maybe you could talk a little bit about kind of what you're thinking about from the rooftop market for the balance of '26?

Yes. I mean the rooftop market as a whole, we talked through last year of obviously making some great strides in our national account success throughout the calendar year. But as we came into 2026, we continue to see good strength in the national account structure. But beyond that, what we saw was some really -- some solid movement in the more traditional transactional market. And so a lot of that growth in bookings that we saw in the quarter actually was driven by the more traditional market, which from our vantage point, it shows signs of recovery.

We look at the age or data kind of through second quarter it shows a low single digits recovery in volumes going through, which obviously we're outperforming on. So we're taking share. We're really capitalizing on the value proposition of the overall portfolio, seeing a lot of strength in the off glass heat pumps. We're seeing good strength out of in our local markets. And so we continue to expect to see ramping production in the Oklahoma segment through Q2 and Q3.

And again, a little bit of question mark in Q4 on normal seasonality, but really see good strength from our value proposition and driving good revenue and share gains through the year.

Got it. In terms of the premium pricing? Is that's still holding up?

Yes. I think one thing to point out and kind of mentioned in my response to Ryan's question, but embedded in the backlog has been intentional pricing actions that we've been taking through the back half of last year. So it's important to note, implying there obviously is we're maintaining discipline on how we price our product and maintain that premium and we continue to see strength in bookings. So with that price, we continue to see the value proposition shine through with those share gains and outperformance on the overall bookings. So, we definitely think the pricing strategy remains intact. We see the value proposition very much intact, but continued focusing on delivering innovative products to the marketplace.

Got it. And maybe just one on basics. And it sounds like you're talking about $1 billion in revenue this year. Just from a capacity standpoint, kind of where you'll be at the end of '26 and kind of what's your longer-term target in terms of data center capacity.?

Yes. I mean, we've talked in the past and again, this is sort of what's rough napkin math in the past around about $1.5 billion of capacity. But last quarter, I indicated in a lot of the conversations and really response to questions, which was we truly see a lot of upside actually beyond that. So embedded inside the initial investments that we made in both Longview and Memphis is actually more revenue potential than that original $1.5 billion. We continue to work to really quantify that. Mix is obviously a huge component of that as we continue to capitalize on the market opportunity.

But we definitely see the capacity embedded in there being above $2 billion per share.

Got it, i'll leave it there.

So we've got headroom I would just touch too. I mean there's obviously sequential investments that come along with more equipment. But I'd say the big lifts have already been embedded in the investments we've been making.

Your next question comes from Noah Kaye with Oppenheimer. .

Matt, Yes, another really strong orders quarter for basics. Can you talk a little bit about the nature of the orders you're seeing now, how that's evolving? Some of these wins is existing customers, new customers, mix -- any color on that and how that's informing your ramp at Memphis would be helpful.

Yes, a great question. So when we look at the overall kind of what is embedded inside not only the bookings but also I'd say the pipeline, which I think is also equally as important about longevity. There is a solid base, obviously, of existing customers. but we continue to engage with and secure orders with new customer base as well. And so we see the delivery and the execution and the value proposition of the product, helping anchor continued orders from our current customers, but also we see continued engagement and a lot more opportunity with broadening that customer base, which, as we've talked about in the past, is actually one of the key focuses that we have as a business. We love -- we love the customer base that we have. We also want to be very intentional about diversification and ensuring we spread out the overall kind of concentration risk within a broader customer base. And so we continue to focus on that. We continue to see it driving success in the overall results. And just kind of maybe moving one step further beyond just the customer base, I also want to just talk about the kind of overall product portfolio embedded in the conversation.

One thing we're seeing in the midst of all this is really a broad-based demand for our entire portfolio. So if not isolated on one product or another. We're seeing good strength and consistent strength in our traditional airside products that built the base brand from the beginning days. So we see the good strength in air side. We continue to see that market actually growing in demand for us, but also continued strength in the liquid cooling products with the CDUs, both liquid air and liquid conversations. But beyond that, we're also seeing really good strength and interest in our kind of AI-centric free cooling chillers. So systems that are intentionally designed to operate at optimized levels within higher fluid camps supporting AI workloads. We continue to see increasing demand and increasing success there. So really the wins both from a sales and a bookings perspective are pretty broad-based around the customer set and the overall portfolio itself.

That's helpful. And then I think you mentioned around the basic segment. There was some outsourcing also helping to accelerate sales there. Was that also coils outsourcing? Can you give us any more color on what was being outsourced?

Yes. There's a variety of things that we look at from an operational perspective to see where the constraints are. And one thing I always say is manufacturing is a world of uncovering the constraints. No matter how much you solve one problem, you move it to the next one. And so as we look at overall constraints and really map out the sort of rocks that are in the way from accelerating revenue growth, coils obviously are a conversation that we continue to invest to expand our capacity. So it's not a long-term outsourcing strategy on coils. It's just essentially as we continue ramping internal production. We're basically using that as a little bit of a short-term kind of hedge to be able to keep driving the volumes. But same thing, as we think about a Memphis coming online, we're adding a tremendous amount of internal manufacturing capacity in the Memphis site, whether it coil production, whether it's sheet metal, whether weld and coating, all these things that are part of the puzzle. And as we push to really accelerate growth, we understand kind of the ramp rates of some of those internal investments. And we balance that with outsourcing to ensure that we can drive volumes while continuing to mature the internal operating processes. So that's where we talk about. This is a temporary conversation on outsourcing. We continue to have more and more capacity internally coming online, which is what's going to help drive margin improvement as we keep getting that capacity to mature.

Okay. That's helpful. Matt. One more is just for Andy. First of all, welcome to the call. Maybe you could just talk for a minute about your priorities in the seat. It's -- it's nice to come in a quarter where an operating cash flow is inflecting. But I know with your background, you probably see some more opportunities to improve operating cash conversion. Can you talk a little bit about that and just more broadly what you're focused on here in the near term?

Yes, absolutely, Laura. I'm super excited to be joining AAON here. And as you can see, we have really strong fundamentals. In the last few weeks, I really learned a lot and starting to formulate my priorities. I would say, near term, I see 3 things as really important. One definitely is the margin discipline, the ability to grow our margin during this phase of ramping rapid growth. Second, as you mentioned, we do see opportunity in cash generation, particularly on working capital management. I think there are opportunities there. And then lastly, I think just from an overall finance function standpoint, the visibility, the connection with the rest of the management team, with our operating team, I think there's a lot that we can do to enhance the capability of the overall leadership team. So yes, I'm super excited. These are 3 things. I'm definitely going to share more of my view in the next call in the next couple of months.

And we look forward to that.

Your next question comes from Timothy Wojs with Baird.

I guess a couple of questions for me. Just on the gross margins, Matt, how much of the kind of reduction relative to the prior guide is actually the investments you're making and any changes to kind of the Tulsa guide versus just higher mix of data center revenue now being in the sales line?

Yes. When we look at -- first off, when we look at the sort of kind of prior guide expectation to really where we delivered in Q1, I would say the biggest driver of that sort of miss or dislocation is really driven by the intentional actions and decisions we made to accelerate volumes. And so the incremental cost that put on obviously affected multiple segments. But by and large, that decision to drive more volume and in doing so, relying on some more outsourcing activities certainly was a big driver in that. And so that plus the Oklahoma margin conversation around a little bit of that price cost that also had some near-term pressures -- but beyond that, the additional pieces that are embedded in there is, as we look at the opportunity ahead, we look at that growth rate and we map out what it's going to take. We've additionally made some more investments internally within our people and our process and some other investments to support that level of growth throughout the year. So there's a little bit of front load as well that kind of midway through the quarter, we undertook to really help fuel that growth throughout the year. So I mean, there's certainly a variety of factors in there. The data center margin is lower that we talked about than the structural AAON Oklahoma margin in the high 30s. But again, we knew that going into the quarter, and that really wasn't the prime driver of that disconnect.

Okay. Okay. That's helpful. And I guess if $1 billion or so of basic branded is kind of the target for 26 now. I think it implies that there's no real change in the AAON branded sales, I guess, is that math right?

Yes. I mean it's -- they're in line. I mean there's a little bit of upside, but it's not markedly different on the AAON side.

Okay. Okay. And then just the last one. Usually, you see kind of a several hundred basis point step up if you just look at also margins from Q1 to Q2. just from a seasonality and a revenue perspective? And I know you're kind of kind of chewing through some backlog. So how would you kind of specifically expect the Tulsa business to perform Q1 to Q2 relative to normal seasonality?

Yes. I mean I would say you're going to be -- we anticipate being relatively in line with that normal seasonality. And so I would say you're going to see uptick or we anticipate seeing uptick Q1 to Q2. But I would say, additionally, acceleration in that growth and margin profile really into Q3 before we expect some seasonality. So Q1 and Q2, I'd say, rough order magnitude, you're in the ballpark of what we expect.

[Operator Instructions]Your next question comes from Julio Romero with Sidoti & Company.

This is Justin on for Julia. Can you give us an update on Memphis revenue contribution in Q1 specifically and help us frame the trajectory from roughly $25 million to $30 million in to where you expect Memphis to be exiting 2026 on a quarterly revenue run rate basis?

Yes. We don't have Memphis explicitly called out in terms of that breakout of revenue. But what I would say is we anticipate -- I mean we saw a good contribution step-up from Q4 to Q1. That's obviously the big driver in some of that revenue gain for the quarter. We anticipate continuing to see growth in Memphis throughout the year. So as that facility continues to mature, and really gets more and more stability in the internal manufacturing process, it allows us to continue ramping that throughout the year. So we anticipate seeing strength and growth throughout the year. Really, the focus right now in Memphis is ensuring that we mature that operation and really drive consistent performance before we push the accelerator too hard. But we do see the opportunity throughout the year to keep driving sequential growth in that side of the business.

Very helpful.

And then with capital expenditures being deployed towards investments in capacity, can you give us a sense of where the capacity investment is being directed and whether the $190 million full year CapEx plan is still intact or whether the demand environment is causing you to revisit that number?

Yes, it's a great question. And so really, when we think about where that $190 million is spread out, obviously, there's a huge concentration in terms of facility perspective on Memphis and continuing to build out Memphis throughout the year. So last year, obviously, we had a huge year of investment in putting more and more equipment into that facility. But obviously, that continues in this calendar year as we continue to mature that operation and build the back of house to sustain that continued growth. So I want to just anchor there for one second and say that initial investment in Memphis does provide a tremendous amount of revenue potential. So it's not like there's an immediate massive follow-up of additional CapEx to support the continued growth. We have made a lot of investments over the last couple of years fleet-wide, whether Longview, Memphis and really Tulsa, Redmond and the Kansas City site as well. So we've been making investments over the last couple of years, which obviously show up in our financials. But those investments we've been making in the last couple of years have been very much framed around that forward-looking growth potential. So the investments we're making this year, obviously centered in Memphis, but the investments we've been making are going to support a lot of this growth. It's not triggering some massive investment that we have to make to be able to support this rate of growth in that $2 billion marker kind of from a revenue perspective.

And just to add on your question, we are still seeing $119 million is our current expectation for the year. Very helpful. and congrats on a nice quarter. Thanks so much. .

This concludes the question-and-answer session. I'll turn the call to Joseph for closing remarks.

Okay. We thank everyone for joining today's call. If anyone has any questions over the coming days and weeks, please feel free to reach out to me. Have a great rest of the day, and we look forward to speaking with you in the future. Thanks. .

This concludes today's conference call. Thank you for joining. You now disconnect.

Good day, everyone, and thank you all for joining this AAON, Inc. Q4 2025 Earnings Release Conference Call. [Operator Instructions] Also a reminder, today's session is being recorded.

It is now my pleasure for opening remarks and introductions to turn the floor to Director of Investor Relations, Mr. Joseph Mondillo. Welcome, sir.

Thank you, operator, and good morning, everyone. The press release announcing our fourth quarter and full year 2025 financial results was issued earlier this morning and can be found on our corporate website, aaon.com. The call today is accompanied by a presentation that you can also find on our website as well as on the listen-only webcast. We begin with our customary forward-looking statement policy.

During the call, any statement presented dealing with information that is not historical is considered forward-looking and made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995, the Securities Act of 1933 and the Securities and Exchange Act of 1934, each as amended. As such, it is subject to the occurrence of many events outside of AAON's control that could cause AAON's results to differ materially from those anticipated. You are all aware of the inherent difficulties, risks and uncertainties in making predictive statements. Our press release and Form 10-K that we filed this morning detail some of the important risk factors that may cause our actual results to differ from those in our predictions. Please note that we do not have a duty to update our forward-looking statements.

Our press release and portions of today's call use non-GAAP financial measures as defined in Regulation G. You can find the related reconciliations to GAAP measures in our press release and presentation.

Joining me on today's call is Matt Tobolski, President and CEO; and Rebecca Thompson, CFO and Treasurer. Matt will start off with some opening remarks. Rebecca will follow with a walk-through of the quarterly results. And Matt will then finish up with our outlook for 2026 and some closing remarks.

With that, I will turn the call over to Matt.

Thanks, Joe, and good morning. 2025 was a year marked by several notable achievements delivered alongside transformational investments that are building a more resilient and scalable business. Importantly, we've made these investments with clear priorities and disciplined execution, strengthening our foundation and sustaining strong commercial momentum. Robust bookings and revenue momentum underscore demand for our products and custom solutions as customers seek greater operational efficiency, supporting continued market share gains. As we enter 2026, we have clear visibility into growth drivers in a well-defined plan that positions us for improved operating performance and margin expansion as temporary headwinds fade.

The data center market continues to represent our most robust and dynamic growth opportunity. In 2025, BASX branded sales increased 143% to $548 million, while backlog grew 141% to $1.3 billion. Strong demand resulted in a book-to-bill of 2.4 for the BASX brand on the year.

Our differentiated custom airside and liquid cooling solutions continue to gain momentum as customers increasingly require highly engineered systems tailored to their specific performance and scalability needs. This dynamic aligns directly with BASX's core strength: custom engineering, thermal management innovation and speed. And it positions us well to grow with this increasingly demanding AI data center market. Our focus is now squarely on converting this demand into sustained profitable growth through disciplined program execution and capacity readiness.

AAON branded sales and bookings remained resilient in 2025 and particularly in light of a 16% decline in overall industry volumes. Despite the refrigerant transition and the ERP rollout at our Longview facility, AAON branded sales declined just 8%, significantly outperforming the broader industry. Bookings saw even stronger performance, growing approximately 12% driven primarily by national accounts, which increased 86%. This sales growth represents deliberate market share gains as customers increasingly recognize the total cost of ownership advantages our products deliver across their building portfolios. In other words, while we work through near-term friction, we continued to take share in the places that matter most and where our differentiation is strongest.

Building on the operational foundation established in prior years, we advanced several initiatives designed to drive margins to optimal levels and support durable long-term growth. These included strategic investments in people and leadership, in manufacturing capacity, supply chain management, product development and IT systems and infrastructure. Over the past 18 months, we have expanded our manufacturing footprint by more than 25% and meaningfully strengthened our leadership depth. Our investments in supply chain management will improve supply reliability, help reduce material costs and improve working capital discipline going forward. These actions are practical, execution focused and designed to improve throughput, reduce variability and enhance margin performance over time.

Our focus on innovation drove meaningful advances in product development. Most notably in support of AI data centers where we introduced unique concepts designed to enhance scale, operating efficiency and strategic flexibility. In 2025, we also became the first manufacturer in the commercial HVAC industry to commercialize rooftop units up to 40 tons with cold climate heat pumps that are capable of delivering reliable heating performance at ambient temperatures down to negative 20 degrees Fahrenheit.

We also made significant progress in upgrading our legacy ERP system, which is critical to supporting long-term scalability. As expected in a transformation of this scale, when issues were encountered, we addressed them directly and implemented a revised rollout approach that prioritizes stability, customer deliveries and execution certainty. We are sequencing remaining ERP implementations under a disciplined governance framework with Redmond scheduled for the back half of 2026, in Tulsa expected in 2027. This approach reflects control and intentionality allowing us to protect service levels while preserving the long-term benefits of the system.

Alongside these accomplishments, 2025 included several temporary challenges most notably, the industry's refrigerant transition early in the year and incremental complexity from our ERP upgrade. While these factors pressured margins in the near term, they are well understood, largely contained and do not change our confidence in meaningful margin improvement as execution continues to strengthen.

Before turning it over to Rebecca, I want to share my perspective on how we ended the year. Bookings and backlog remained strong in the fourth quarter. BASX branded bookings again reached record levels, driving backlog to $1.3 billion up 45% sequentially and 141% year-over-year. AAON branded bookings were also strong and increased 20% year-over-year with backlog up 24% sequentially and 61% from the prior year period. That demand strength paired with actions to improve execution, set the stage for a strong 2026.

Operationally, production drove record sales. BASX branded sales more than doubled year-over-year, supported by the continued ramp in Memphis and strong throughput of liquid cooling solutions in Longview. AAON branded sales increased 9.5% supported by a 42% increase in Alpha class heat pump sales and represents the strongest quarterly growth since the second quarter of 2024. Fourth quarter margins reflected differing operational dynamics across our facilities.

Margin momentum has also moderated sequentially due to normal seasonality and temporary supply chain constraints that reduced production volumes. Redmond delivered stable margins balancing productivity gains with targeted investments to support strong basis growth in Longview and Memphis. Memphis, though still a near-term margin headwind, remained on plan and achieved profitability for the first time in the quarter. Together, Tulsa, Redmond and Memphis comprised the AAON Oklahoma and BASX segments with Memphis results reflected in both. On a combined basis, fourth quarter sales grew 31% and incremental margins were a solid 25%. While incremental margins remain below our long-term target, they are improving, and they reflect temporary pressures expected with ramping a new facility.

With production volumes in Tulsa increasing materially in January and February and Memphis continuing to ramp, we expect strong growth in accelerated incremental margin going forward. At Longview, which represents the coil products segment, BASX production and profitability remained exceptionally strong while AAON branded throughput and productivity improved sequentially, margins reflected this progress, partially offset by the impacts of a 5-day closure to support a wall-to-wall inventory at year-end.

In summary, the softer-than-expected fourth quarter margin was primarily driven by lower production at Tulsa. With a strong backlog in production already approaching record levels, Tulsa is positioned to become a meaningful tailwind in 2026. Supported by robust BASX backlog in accelerating momentum in Longview and Memphis, we are positioned for 2026 to be a strong year for growth and margin expansion. We have a clear view of the drivers. Our teams are executing, and we are confident in that trajectory.

I will now turn the call over to Rebecca, who will walk through the quarterly financials in more detail.

Thank you, Matt. Net sales in the fourth quarter increased 42.5% year-over-year to $424.2 million. The increase was driven primarily by 138.8% growth in BASX branded sales, reflecting continued strong demand for data center cooling solutions and higher utilization of our Memphis facility. AAON branded sales were also additive to the year-over-year growth in the fourth quarter, increasing 9.5% driven by higher production levels at our Tulsa facility and a favorable comparison to the prior year period, which had been negatively impacted by the industry's refrigerant transition. Gross margin was 25.9% in the fourth quarter down from 26.1% in the prior year period. The modest year-over-year contraction was primarily driven by unabsorbed fixed costs with our new Memphis facility.

Looking ahead, utilization and productivity at the Memphis facility continued to increase, and we are positioned for these capacity gains to provide meaningful operating leverage in 2026. As a result of these unabsorbed costs, fourth quarter non-GAAP adjusted EBITDA margin was 15.2%, down from 15.8% a year ago and the fourth quarter diluted EPS was $0.39, up 30% from the fourth quarter of 2024.

Looking at the segment financials, beginning with AAON, Oklahoma, Net sales increased 11.1% year-over-year to $215.5 million. This double-digit growth was driven by a strong starting backlog and improved production throughput which supported higher backlog conversion despite a challenging industry backdrop. The fourth quarter benefited from a favorable comparison to the prior year period, which had been disrupted by the industry's refrigerant transition.

AAON Oklahoma gross margin was 27.5%, down from 30.7% in the prior year period as a result of incremental overhead expenses of $6.4 million associated with the new Memphis facility. AAON coil product sales increased $49.6 million or 93.6% from the year ago period, driven by $75.3 million in BASX branded liquid cooling product sales which grew 100% during the quarter. AAON branded sales of this segment declined year-over-year 1.8%, but increased 15.2% sequentially as production momentum improved. AAON Coil Products gross margin was 21.3% in the fourth quarter, up from 16.1% in the prior period and 11% from the prior quarter. The year-over-year margin expansion reflected improved operating leverage on higher throughput at the Longview facility, along with a favorable mix of high-margin BASX branded sales. This was partially offset by a full 5-day plant shutdown at Longview at year-end to conduct a wall-to-wall inventory count. In the near term, BASX will continue to be a positive tailwind in dollars but we do not expect product mix will be as favorable as we saw in Q4.

Sales at the BASX segment grew 109.1% in the fourth quarter to $106.1 million. The strong growth was driven by sustained demand for data center solutions as the market continues to demonstrate strong momentum, and the business captured additional market share as evidenced by our strong order intake and increasing backlog.

Increased utilization of our Memphis facility was also a significant contributing factor, providing additional production capacity that was additive to the segment results. BASX segment gross margin was 27.1%, up from 18.8% in the prior year period. The strong year-over-year increase was largely a result of a favorable comparison to the prior year period along with accelerated production from our new Memphis facility.

Turning now to the balance sheet. Cash, cash equivalents and restricted cash balances totaled $1.2 million on December 31, 2025, and debt at the end of the quarter was $398.3 million. Our leverage ratio was 1.77. In 2025, cash flow from operations was a source of cash of $0.5 million compared to $192.5 million in 2024. Capital expenditures in 2025, including expenditures related to software development, decreased 3.9% to $204.9 million. Overall, we made substantial capacity and working capital investments to support our expanding backlog and ongoing market share gains. As return on these investments begin to materialize, we are positioned for operating cash flow to improve significantly in 2026 driven by higher earnings and improved working capital efficiency. That flexibility supports our continued growth investments, including planned 2026 CapEx of $190 million.

I will now turn the call back over to Matt.

Thank you, Rebecca. Looking ahead, we entered 2026 with strong visibility across both brands and confidence in our ability to execute that visibility allows us to remain focused on production, prioritize throughput, improved delivery performance and convert demand more efficiently as we move throughout the year. The BASX brand remains the company's key growth driver, fueled by exceptional demand from the data center market in our differentiated custom design solutions. During the quarter, BASX Security's strong volume of new orders at attractive margins with the majority scheduled for production at our Memphis facility as it continues to scale. This demand profile and production mix position us to increase output efficiently optimize the fixed cost investments made in 2025 and drive robust growth in 2026.

As utilization improves, we are positioned for the economic benefit of that scale to increasingly flow through to margins. The AAON brand also maintained strong momentum. Backlog at the end of the fourth quarter was up 61% year-over-year, reflecting strong demand across the business. While backlog levels and lead times remain extended. We are actively managing this through production ramp-up and improved execution across the network.

Despite a soft commercial HVAC market, bookings have remained strong, underscoring the resilience of our business. Importantly, we are seeing improving operational cadence as we work through backlog and position AAON for stronger performance in 2026. 2025 was a year of meaningful structural change and strategic investment, building on AAON's strong foundation and positioning the company for sustained long-term performance.

As we move into 2026, our focus shifts squarely to execution. Leveraging that foundation, improving throughput, accelerating backlog conversion and continuing progress towards our margin objectives. For the year, we anticipate sales growth of 18% to 20% and a gross margin of 29% to 31%, with margin progression expected to be uneven by quarter as capacity ramps and product mix normalizes. SG&A as a percent of sales is expected to be about 16%, and depreciation and amortization expenses are expected to be in the $95 million to $100 million range. These expectations reflect our confidence in demand, improving execution and the operating leverage embedded in our cost structure.

In closing, I want to thank our employees, customers, sales channel partners and shareholders for their continued support. We entered 2026 with clear priorities, improving momentum and confidence in our ability to execute and deliver stronger results. With that, I'll open the call for questions.

[Operator Instructions] Our first question today will come from the line of Ryan Merkel at William Blair.

Matt, can we just start on the gross margin in the quarter, [ Amidst ] versus your expectation. It sounds like Tulsa was the reason, but just clarify that for us. And then you made some comments about recovery in 1Q, and I'm curious in 1Q '26 if gross margins can get back into the range you gave for guidance for the year kind of in that 30% range?

Yes. So first, touching on the fourth quarter margin. When we look at the driver, the single biggest driver of that margin kind of against expectation was around Tulsa volumes and so our volumes in Tulsa had normal seasonality which certainly we expected but we had some additional supply chain constraints that put some pressures on the overall throughput in velocity in the quarter.

I want to touch on the supply chain piece because I mentioned in the call and you and I certainly talked about this in the past, there's been a lot of investment that we're making to really strengthen the capacity and the sophistication in our supply chain organization. And a lot of that is to improve reliability. There's going to be economic benefits certainly from better purchasing strategies with our supply base. But most importantly, we anticipate strengthening reliability of deliveries to be one of the biggest drivers of our progress in supply chain. And so that's going to really help alleviate some of these, I'll say, speed bumps that we've had going forward.

And so as we look forward, we mentioned on the call that when I think about the Tulsa volumes in January and February, we have accelerated substantially out of Q4 within our Tulsa segment. And when we think about what that's going to mean, it's going to mean a substantial benefit from overall velocities that are going to be able to provide us some of that margin uplift that we're expecting. That will be a little bit offset in the first quarter from product mix that we'd expect to see out of our Longview site. Longview had a very large contribution of BASX revenue. But as we continue ramping the AAON branded revenue in Longview, you will see some pressures in Longview. And so net of that, there's a little bit of offset from Longview, but Tulsa will certainly be driving improvement into the first quarter out of fourth quarter.

Got it. Okay. So just to bottom line it there, the supply chain issues we've kind of been talking about, it sounds like you've got some plans there to stabilize that and we shouldn't see that be an issue going forward. Is that right?

Yes. We're getting a lot better visibility into supply chain performance. And so we, going forward, anticipate a lot of the noise that we saw in 2025 around supply reliability to abate. And so what I would say is while there were challenges in Q4 from a supply base perspective, they were substantially lower than they were earlier in the year. And so we are seeing the incremental progress in supply chain stability. And a lot of that is reflecting the efforts and investments we're making in our supply chain organization.

Got it. Okay. And then just on the guide for revenue for '26, just looking for a few more details. Obviously, BASX, the orders and the backlog is really strong. I'm curious, are you going to be in that kind of 40% to 50% BASX revenue growth in '26 that you've talked about? Or could it be a bit better?

And then comment on the light commercial market, are you assuming sort of a flat market there? And then I think you had some price increases that came in 4Q. So I'm curious how much price you have in the guide for '26?

Yes. So from a growth driver perspective, the growth in the BASX side is not really up to that 50% range. It's definitely about half of that is sort of built in on the guide. A lot of the growth is going to be coming out of the AAON brand, and in particular, coming out of the Tulsa organization. So as we enter the year, our AAON Oklahoma segment has backlogs that are extended beyond where we want them to be. That is certainly partly driven by some of the supply challenges that we've had. But really, coming out of the, I'll say, improving supply stability coupled with the improving velocity in the plant, you're going to see the AAON side of the business, provide meaningful growth inside that segment in Tulsa. We're already seeing that as we're kind of 2/3 of the way through the first quarter with AAON Oklahoma running near record volumes as we sit today. So certainly seeing the drivers being great growth out of the BASX segment, but also a really strong recovery in the AAON segment that's going to be a huge driver of growth in 2026.

And your question on pricing. So if you kind of recall last year, we had, really, two pricing actions. We had a price increase at the beginning of the year and then really I'll say, a surcharge that really was in response to tariffs but also the sort of secondary effects of price cost dynamics around the tariff backdrop. And so when we look in what was done towards the end of the year, there was really not any big pricing actions that we're taking in the back half of the year on the AAON side of the business. So really that growth that you're looking at, that is really growth in volume that we're talking about going forward in '26.

Sorry, the one piece, too, sorry, I meant to touch on is you asked the question on the commercial HVAC market and the backdrop in that sense. And to your point, I mean, the indicators and kind of how we see the market from a high-level perspective is flattish in 2026. We don't see a huge recovery in the market as a whole. But really, I would say, the intentional efforts that we have with our alpha class air-sourced heat pump, coupled with the national account strategy. That's what's driving outperformance in our bookings and what we see as being the big driver of outperformance going into 2026.

Our next question will come from the line of Noah Kaye at Oppenheimer.

Can I just follow up on that last one. Matt, I think you said, if I heard correctly, that the guided midpoint maybe assumes 25% or so revenue growth for BASX. And I'm just trying to foot that with where the backlog ended. So Am I understanding that you only expect to ship about half of your backlog in '26. Is that math right? And if so, why would that be the case?

Yes. So it's a great question. And really, I would just start off by talking about the buying dynamics in the data center market. And the data center segment space does not trade in the sort of lead time mindset that the commercial HVAC market does. And so the dynamics that we see embedded in our backlog is a combination of -- or I should say, is built upon a lot of longer duration multiphase projects and programs. And so given that dynamic, while the backlog is certainly strong and robust, there definitely is an extended period that kind of is built into that backlog, and it's allowing us to ramp with a lot of clarity, not just in 2026, but going into 2027 as well.

And when we think about that backlog, there's potential for a little bit of movement in there, not as much driven by our production throughput, but really driven by just some of the constraints. We see a little bit of movement in the market, the data center market as a whole on project deliveries just as the entire kind of supply network feels the pressure of the overall demand. So you might see a little bit of that backlog move in or move out. But fundamentally, it's really driven by these longer duration programs.

Okay. Can we talk about cash generation. I mean if I -- I'm doing my math right, you built something like $225 million of working capital in '25. Can you put some finer points around your operating cash flow generation expectations for '26, kind of how you see the cadence of that? Are you starting to collect more on accounts receivable? And how quickly do you see debt reduction? I'm just trying to figure out how to model your interest expense.

Yes. It's certainly no problem. First, I do want to point out, if you look at the cash flows on a quarterly basis, we did see improvement in our cash flows from operations to be positive Q3, Q4 with sequential improvement I would expect this positive trend to continue into 2026. So you can see like at the end of the year, you'll notice our accounts receivable is up, but in the year, highlighting our conversion of our contract assets and contract liabilities. To this point, I'll also point out the contract liability that you see at the end of the year as part of our efforts to negotiate down payments on some of these upcoming jobs so that we can better manage our working capital and liquidity. So we do anticipate cash flows to improve through our increased earnings through a lot of these supply chain improvements that Matt has talked about in our buying practices and then also through increased billings and conversion of our contract assets.

When you think about debt, it will remain elevated for most of the year. We expect it to come down a little, maybe towards the back half of the year, but interest will be higher just given the starting point at the beginning of the year with a higher debt balance, and we don't really expect that to remain elevated for most of the year.

Our next question this morning comes from Brent Thielman at D.A. Davidson.

Matt, just in terms of the composition of the BASX backlog and I guess specifically orders this quarter, is it over-indexed to one or two big orders? Is it predominantly hyperscalers? Or are you getting some more traction outside of that customer segment? Just some more color around that.

Yes, when we think about the backlog composition, obviously, we don't dive into the exact customers that are in that backlog. But at a high level, there certainly is diversity in that customer base and increasing kind of customers inside that backlog. The one thing I always point out is while it's great bookings that we see in the quarter, certainly given the scale of data center orders, there's a little bit of skew given some of the orders. So one order certainly can represent, I'll say, a concentration and a customer in that given quarter. But what we are seeing kind of on a collective basis is introduction of new customers and introduction of diversity in customer base with hyperscalers, some of these sort of build-to-suit [ whole ] location providers and colocation providers. So we continue seeing the efforts that we're focusing on to diversify our customer base pay off in the overall bookings cadence.

Okay. And then I guess on the AAON branded side, how do we think about sort of order intake going forward in that? I'm sure you're ramping up production in Tulsa, but you've had some challenges here. Are you taking a step back from -- or do you feel comfortable that production levels there are where you want them to be and you're going to continue to ramp up new order intake here going forward on that side of the business?

Yes. So on the AAON side, one thing I want to point out is certainly 2025, on the AAON side of the business, does not represent the performance expectation that we hold for ourselves. And so we certainly did not deliver the throughput and the reliability that our customers expect and deserve with us. And so when we think about going into '26, we are dedicated and focused to driving operational improvements and really increasing the execution certainty for our customer base. So that's going to result in sequential ramping up production throughout the year. So we're going to be driving productivity growth, especially in the Oklahoma and along these segments really to ensure that we get back to the lead times our customers want and need as well as ensuring that the delivery reliability is what they expect and deserve. And so you'll see strong kind of growth in the overall sales from an AAON side throughout the calendar year as we continue driving and executing on that strategy.

But I do want to point out that even with the challenges that we faced in '25, we made huge investments in ensuring the support was there for our customer base. And so we've invested heavily in customer care and customer service departments to really bolster the customer experience even in the midst of some turbulent times on the AAON side of the business. That is going to continue being things we invest in going forward to ensure the customer experience is meeting the mark for where we hold ourselves from an overall business perspective.

And so when we look at this kind of in aggregate, we had a challenging year, we're driving velocities as we enter 2026 and throughout '26 to really push more volume to our plants. But even in that challenging backdrop, you saw the bookings growth remain strong and actually increase even in the midst of that, which really kind of highlights the value proposition and the focus that we have on doing what's right for our customers even in the midst of these challenging times. And so we anticipate even in that, I'll say, flattish commercial HVAC backdrop, we anticipate seeing our bookings growth continue to strengthen throughout 2026 supported additionally by really good ramp-up in our execution and productivity at our plants.

Our next question this morning, and caller I do apologize if I mispronounce your name, we'll hear from Timothy Wojs at Baird.

Maybe just to start on the Oklahoma business, Matt. Just I guess, where are your lead times at today? And I guess if you can maybe talk a little bit about how those tracked into the back half of the year? And I guess, when would you expect your lead times in the Oklahoma business to kind of fully get back to normal?

Yes. So certainly, lead items are extended beyond where we want them to and it's hard to put an exact kind of quantification on it because it does vary based on production lines and kind of product type within our plant. But they're definitely out substantially longer than where we want them to be. For some of our more kind of high-volume lines, they might be in the mid-20 weeks kind of time frame, which is definitely beyond where we want them to be. And so our goal throughout the year is to really drive throughput, and really bring those lead times down.

Now it's an interesting balance because as we look at how we kind of rounded out the back half of the year, we have certainly shown and delivered higher productivity than we had at the beginning of the year in the Oklahoma segment and we've been pushing more and more volumes through our plant. And as we think about that in basically the first couple of months in Q1 of this year, we're running at or near record levels of volume throughput within our site in Oklahoma. Yet in that backdrop, we see our backlog continuing to creep up, which is telling us that even in the midst of our challenging environment, we're continuing to see strength in our overall product offering which is resulting in bookings exceeding some of our production volumes.

And so it's a little bit of a hard thing to kind of pin down because if we had a static input in our bookings, it'd be very easy to give you a mathematical description of where we kind of get back to normalized lead times. But as we drive our volumes up, we're continuing to see our bookings strengthen which is kind of creating a difficult dynamic to really drive them down as fast as we want them to be driven down. But it is certainly a huge focus for us is to responsibly grow the volumes within the Oklahoma segment and really in doing so, drive those lead times back to more target levels kind of within our operation, but it is going to be a balancing act of how much production volume we push coupled with kind of what the order cadence looks like.

Okay. That's helpful. And then I guess on the BASX business, I mean, you're exiting the year at $1.3 billion in backlog, I think your current footprint once it currently -- once it kind of gets fully ramped, I think you've outlined $1.5 billion as the potential revenue. I guess, a, what is the kind of expectation on your part in terms of what you need to do with capacity? And then b, does that kind of backlog versus ultimate revenue kind of throughput in your current capacity limit your ability to kind of take orders in the BASX business in the near term?

That's a great question. And really, I want to start off by maybe framing the way we look at capacity and really the investment and use of capital. We certainly made a huge investment in the last 18 months between the Longview expansion and the Memphis facility and that provides huge meaningful upside in the overall production volume that we have in our fleet.

One of the things beyond just supply chain that we invested in, in 2025 was really a strong focus in manufacturing and operations excellence within the organization and bringing in some really great talent to help take this organization to the next level and operate as a true multisite manufacturer. And I bring that up because as we sit here as an executive team and a leadership team and we stare at this investment that we've made, the challenge that we have in front of the team is to drive as much volume through these existing investments as possible before we have to have another substantial uptick kind of in the overall capital investment. And so while we look at that $1.5 billion sort of footprint capacity that we've talked about in the past, the challenge to the team and really what they're looking to do is actually unlock more capacity inside the existing investment to unlock more than just $1.5 billion of capacity and really drive better returns for our investors in doing so.

And so part of what we're doing at the end of last year into this year is truly mapping where the opportunity exists inside that footprint to better quantify how much volume we can truly put through that investment because we do believe there's more capacity than $1.5 billion there. And that really is a lot of what we're focused on here in the first part of the year is quantifying that and creating a very executable strategy to drive that forward.

So in the near term, we certainly don't see the capacity being a limit to our ability to take new orders. I would say that fundamentally, the gating mechanism is not the square footage. It's really just the ramp rate. And I say that because ramping responsibly and doing so in a way to drive margins is critically important to our execution strategy. And so we do want to kind of moderate how fast we're pushing the gas pedal to make sure we do it in a profitable, responsible and high-quality manner.

So near term, I don't see that as being really a limit -- the footprint being a limit. I see the rent rate being the limiting factor but in the long term, we're certainly looking to figure out how much more we can drive in revenue in our existing investments beyond that $1.5 billion we've talked about in the past.

Okay. That's helpful. And then just a last one. I don't know if you said it or not, but did you give the Memphis revenue contribution in the fourth quarter in the BASX segment?

Rebecca, I don't know if we have that broken out or not, if you can just double check there?

We do not.

But just at a high level, I believe -- I'd say just kind of high level, I think it's around $25 million to $30-ish million in contribution in the fourth quarter.

[Operator Instructions] We will hear next from Julio Romero at Sidoti & Company.

I wanted to ask about, at the midpoint, your 2026 sales growth guidance already implied sales dollars above what was implied by the 3-year Investor Day targets that you had for '27. Just how would you have us think about the other Investor Day targets, the gross margins and the SG&A, 32%, 35%, 13% and 14%? Are those still on track? Do you see that, that is more of a run rate for '27 and entering '28? Help us think about that there.

Yes. And yes, certainly, when we look at the revenue kind of numbers that we have certainly indicates that we're pushing harder than we kind of implied during Investor Day, which really -- I'd say a lot of that comes from visibility and clarity of our rep rates and allowing us to execute that plan with a good level of visibility and clarity going forward. So certainly, the top line number, we've had a lot of clarity on how we can drive that forward.

Margins, obviously, you're going to see a sequential margin improvement in 2026. As we think about '27 from a margin perspective, those targets are still what we're driving towards. The one thing I would say is as we're pushing the revenue kind of harder, there is certainly some level of pressure that exists in margin. And particularly, I'm going to use Memphis as an example in this piece, which is when we're pushing growth fundamentally at those growth rates, you've got to be investing ahead of the overall throughput to allow us to effectively actually drive that throughput. And so there is some pressure that, I would say, kind of pins us towards the bottom end of that, kind of how we view 2027. But certainly, there is upside as we continue driving velocity through Tulsa to sort of offset some of that.

So the margin profile certainly is something we're still driving towards in '27 and really exiting '27. But the SG&A side, that one is a little bit, I'd say, certainly a target we're driving towards, but there is some more pressure on the SG&A side as we really ramp up the facilities and get some of these investments in people and process and technology in place. And so there is a little more pressure on the SG&A side. We haven't really quantified that at this point, but I would say we see our sequential decline year-over-year to 16% in our target for 2026. And we anticipate continued leverage as we go forward. I just don't have a quantified number on that yet.

Super helpful and makes a ton of sense. And on that topic, Matt, of investing ahead of throughput and ramping responsibly, can you just touch a little bit on the IT systems and infrastructure upgrades that you talked about in the deck and not less from a quantification perspective, I'm more just trying to understand what you're doing on that front.

Yes. And in particular, the reference there is a lot around the technology investments around the ERP upgrades and I wanted to really just frame this in a sort of more perspective on really how we're focusing in 2026. So when we talk about sort of shifting out the go-lives in Redmond and Tulsa, it is not because of a lack of performance as a system. It's not because of a misconfiguration. It is solely driven by operational discipline and our hyper focus on ensuring we can drive volumes to get our lead times down. And so really, in that environment, with such strong backlog, such strong demand for the product, the focus on pushing out the ERP is to allow our operations teams to drive the volume increase to drive throughput and really execute to be able to get those lead times down and the focus is not around adding an additional kind of complexity in there with the ERP go live is to really allow us to hyperfocus on that execution to allow those lead times to get back where we want them to be throughout 2026. So that really is the focus and the commentary on the overall go live.

I would touch on -- while we had pressures when we went live in the Longview site, we haven't had the same level of challenges within the Memphis site. And so sequential go-lives are improving. And really, we're getting more and more run time with the technology systems, and we're seeing the benefits of it. It's really just a focus on making sure we drive volumes to our plants.

And we'll move next to the line of Chris Moore at CJS Securities.

So on the revenue growth for this year, 18% to 20%, just in terms of the quarterly revenue trajectory, maybe I missed it, but you expect it to increase on a quarterly basis? Or just any thoughts there?

Yes, I would say that -- go ahead, Joe.

I was just going to say, the [ year ] will start off softer as far as absolute dollars as well as year-over-year growth itself, and you should anticipate improvement as we move through the year, both on a year-over-year growth perspective but also on an absolute sort of dollar perspective. So we definitely expect that things will strengthen as we move throughout the year.

Perfect. Appreciate that. And in terms of -- you broke down about 37.8% you said was liquid cooling equipment. Do you expect that percentage to change much '26, '27? I'm just trying to get a sense, does that impact margins much moving forward?

Yes. What I would say is that 37.8% liquid cooling, obviously, that's revenue being driven through the Longview plant primarily for the BASX brand. As we layer on the Memphis site, Memphis certainly has a broader portfolio of products being manufactured there including some of our high-performance frequently killer products. And so I bring that up to say that as a percentage, that may moderate a little bit, but I would say total volume, total dollars, certainly, we don't see that going down at all. We see that being a driver of growth. And so we're introducing more volumes of broader products to the overall BASX platform that you would fundamentally think as a percentage might drive that down a little bit.

Got it. And just from a competitive kind of standpoint, that 37.8% liquid cooling, I'm just trying to get a sense of the competitive environment today versus a couple of years ago. Is that bigger percentage than you're seeing from most competitors? Just kind of understanding how the dynamics are evolving.

Yes. I mean, I'll say it's a bit of a loaded question in a sense that we broadly as an industry talk about liquid cooling products. And when I look at the competitive landscape, one of our things I'll always harp on is the AAON and BASX' brands, they're not targeted at being [ Me-too ] manufacturers. We're not chasing after what a lot of other people are doing. We're focused on differentiation and a lot of that differentiation is coming through the sort of consultative approach and how we approach the market and really that engineering and technical backbone that we have. And so the liquid cooling orders that we have, they're focused on high-performance liquid cooling opportunities driven by scalability and platform development with our customers. They're not as much about chasing kind of, I'll say, lower capacity kind of high-volume, lower-margin type orders. And so you might see others with higher percentages or others with kind of liquid cooling that might be at the same level of scale within their overall portfolio.

But I would just point out, we're fundamentally looking at the space a little bit differently and really focused on unique and kind of more high-value liquid cooling opportunity versus kind of high-volume liquid-cooling opportunities. And that's a little bit of what you see difference in the mix with us and some of our competitors.

And ladies and gentlemen, that was our final signal from our audience, and we thank each of our callers who signaled for a question today. Mr. Mondillo, I'm happy to turn it back to you, sir, for any additional or closing remarks that you have.

Yes. Thank you, Jim. I'd just like to thank everyone for joining us on today's call. And that if anyone has any questions over the coming days and weeks, please feel free to reach out to myself. Have a great rest of the day, and we look forward to speaking to you in the future. Thank you.

Ladies and gentlemen, this does conclude the AAON, Inc. Q4 2025 earnings release. We thank you all for your participation, and you may now disconnect your lines.

Thank you for standing by. At this time, I would like to welcome everyone to the AAON Inc. Third Quarter 2025 Earnings Release Conference Call. [Operator Instructions]

Thank you. I would now like to turn the call over to Joseph Mondillo, Director of Investor Relations. You may begin.

Thank you, operator, and good morning, everyone. The press release announcing our third quarter financial results was issued earlier this morning and can be found on our corporate website, aaon.com. The call today is accompanied by a presentation that you can also find on our website as well as on the listen-only webcast.

We begin with our customary forward-looking statement policy. During the call, any statement presented dealing with the information that is not historical is considered forward-looking and made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995, the Securities Act of 1933 and the Securities and Exchange Act of 1934, each as amended. As such, it is subject to the occurrence of many events outside of AAON's control that could cause AAON's results to differ materially from those anticipated. You are all aware of the inherent difficulties, risks and uncertainties in making predictive statements.

Our press release and Form 10-Q that we filed this morning detailed some of the important risk factors that may cause our actual results to differ from those in our predictions. Please note that we do not have a duty to update our forward-looking statements.

Our press release and portions of today's call use non-GAAP financial measures as defined in Regulation G. You can find the related reconciliations to GAAP measures in our press release and presentation.

Joining me on the call today is Matt Tobolski, CEO and President; and Rebecca Thompson, CFO and Treasurer. Matt will start off with some opening remarks. Rebecca will then follow with a walk-through of the quarterly results, and Matt will finish with our outlook for the rest of the year and some closing remarks.

With that, I will turn the call over to Matt.

Thanks, Joe, and good morning. The third quarter marked a decisive inspection point in our operational recovery and capacity expansion. We saw substantial improvement in production throughput at both the Tulsa and Longview facilities, which drove meaningful sequential sales growth while continued strength in bookings contributed to further backlog growth.

While margins in the quarter continued to be impacted by operational inefficiencies in Longview and the early ramp-up of the new Memphis facility, we continue to make steady progress and expect sequential margin improvement to continue through the fourth quarter and into early 2026, putting us firmly on track toward our longer-term goals. The BASX brand continues to perform exceptionally well, fueled by strong momentum in the data center market, where favorably priced bookings have risen sharply and the pipeline of opportunities remains robust. BASX branded backlog grew to $896.8 million, up 119.5% from a year ago and up 43.9% from the prior quarter. Demand for both our airside and liquid cooling products remain strong, reflecting how well our custom solutions align with customer needs.

To meet this growing demand, we remain laser-focused on ramping up production capacity at our new Memphis facility. This facility adds nearly 800,000 square feet of state-of-the-art manufacturing capacity which provides considerable growth to our BASX production capabilities and positions us well for continued growth. The ramp-up of the facility is progressing as planned, with large-scale production expected by year-end. With a strong backlog and significant increase in capacity, we expect the BASX brand to deliver meaningful growth in 2026.

The AAON brand continues to perform well, with sales rising substantially from the prior quarter in bookings remaining strong. AAON branded sales grew 28.1% sequentially, driven by over 20% production increases at both the Tulsa and Longview facilities and improved utilization of the ERP system, enabling us to better meet demand. Also production returned to prior year levels. In Longview, while still about 20% below last year showed strong progress. Based on September and October exit rates, we expect Longview is nearing full recovery. Enhanced production output of AAON branded equipment resulted in a book-to-bill ratio for the brand below 1, successfully helping bring backlog in lead times of AAON branded equipment closer to normalized levels. While backlog for the brand remains higher than desired, we are making steady progress in reducing it. We are committed to achieving this in the near term, ensuring we can effectively serve our customers and restore a normal business cadence.

Despite a soft commercial HVAC market and extended lead times, AAON branded bookings remain strong, while flat year-over-year due to a challenging comparison, bookings were up 15% on a 2-year stack reflecting continued strength in underlying demand. National account wins were particularly robust with bookings up 96% in the third quarter and 92% year-to-date, representing 35% of total bookings for the year. Bookings of Alpha Class air-source heat pump equipment also continued their strong momentum, up 45% quarter-over-quarter and 46% year-to-date. As I mentioned earlier, Longview's ERP implementation has progressed considerably. While production of AAON branded equipment at the facility remained about 20% below target, output improved sequentially throughout the quarter and by quarter end, production of AAON branded equipment was approaching full recovery. Production of the new BASX branded equipment in Longview has performed exceptionally well with consistent year-to-date improvement.

Despite the improvement in throughput, we continue to work through efficiency challenges that are weighing on facility profitability. We view these as temporary and expect meaningful margin improvement in the coming quarters. In Tulsa, average production levels for the quarter reflected a full recovery. And by quarter end, we're running ahead of target. We've made strong progress in improving coal supply, which supported the higher production volumes. And while our supply of coils remains constrained, we are effectively managing through these constraints. With the Longview implementation now well underway, we have gained valuable experience and insight, both operational and technical that will guide future ERP rollouts and greatly enhance our readiness to efficiently deploy the ERP system across our other facilities.

While we continue to expect some level of operational impact as future sites transition, we are far better prepared to manage these challenges with strengthened internal processes, improved training programs and a proven framework that positions us to execute future implementations with greater speed, precision and minimal disruption. We've applied the lesson plans from Longview to the Memphis go live, which occurred on November 1, and we continue to expect Redmond to transition in the first half of 2026 with Tulsa following in the second half.

I will now turn the call over to Rebecca, who will walk through the financials in more detail.

Thank you, Matt. Net sales in the quarter increased year-over-year $57 million or 17.4% to $384.2 million. The increase was driven by a 95.8% rise in BASX freighted sales due to continued demand for data center solutions, and increasing production out of our Memphis facility. AAON branded sales were roughly in line with the prior year, declining 1.5% but increased 28.1% sequentially, driven by solid production gains at both Tulsa and Longview facilities. Gross margin was 27.8%, down from 34.9% in the prior year, but up 120 basis points sequentially. The year-over-year contraction was primarily due to operational inefficiencies associated with the ERP system implementation and unabsorbed fixed costs related to the new Memphis facility. Sequentially, the improvements reflect progress made in optimizing the new ERP system and the resulting increases in production throughput at both the Tulsa and Longview facilities.

Non-GAAP adjusted EBITDA margin was 16.5%, down from 25.3% a year ago, but up 160 basis points in the previous quarter. Diluted EPS was $0.37, down 41.3% from a year ago, but up 94.7% sequentially. Below the line pressures included elevated DD&A from Memphis and technology consulting fees related to the ERP implementation.

Looking at the segment financials, starting with AAON, Oklahoma, net sales grew 4.3% year-over-year and 29% sequentially. The growth was driven by a strong backlog entering the quarter and improved production throughput that enabled higher backlog conversion. Oil supply also improved, allowing us to efficiently scale production of AAON branded equipment. Segment gross margin was 31.5%, down from 36.8% in the prior year period, but up sequentially 400 basis points. The year-over-year contraction was primarily due to approximately 4.5 million in unabsorbed fixed costs associated with the new Memphis facility. AAON Coil Product sales increased $35 million or 99.4% from the year ago period. The year-over-year increase was driven by $46.5 million in BASX branded liquid cooling product sales, a category that was not in production during the prior year period.

AAON branded sales at this segment declined $10.9 million or 31.6% due to the ERP implementation disruptions. Sequentially, AAON branded sales grew 36.2% reflecting improved utilization of the new ERP system and the resulting increase in production throughput since its go-live in April. Despite the improved throughput, gross margin declined sequentially, reflecting several discrete items which collectively impacted gross margin by 1,050 basis points in the quarter. We expect these challenges to be resolved with our ERP progress. And over time, we expect this segment will deliver gross margin of around 30% based on the strength of pricing within the backlog.

Sales of the BASX segment grew 19.2% driven by sustained demand of data center solutions as the market continues to demonstrate strong momentum, and the business captures additional market share. Initial production from our new Memphis facility played a key role in driving growth. Gross margin contracted modestly due to higher indirect warehouse personnel costs associated with operating the Redmond facility near full capacity. Optimization efforts at this facility remain a focus and are expected to accelerate as the Memphis facility continues to ramp. Cash, cash equivalents and restricted cash balances totaled $2.3 million on September 30, 2005 (sic) [ September 30, 2025 ] and debt at the end of the quarter was $360.1 million. Our leverage ratio was 1.73.

Year-to-date, we had cash outflows from operations of $18.8 million compared to cash inflows of $191.7 million in the comparable period a year ago. Capital expenditures for the first 3 quarters, including expenditures related to software development, increased 22.1% to $138.9 million. We had net borrowings of debt of $205 million over this period, largely the finance investments in working capital, capital expenditures and $30 million in open market stock buybacks that we executed in the first quarter, all of which we anticipate will generate attractive returns.

Overall, our financial position remains strong. We anticipate cash flow from operations will turn significantly positive in the fourth quarter as working capital, including contract assets become a source of cash, reflecting payments received on a large order that was recent started deliveries. This gives us flexibility and allows us to continue to focus on investments that will drive growth and generate attractive returns. We now anticipate 2025 capital expenditures will be $180 million compared to our previous estimate of $220 million. The reduction primarily reflects project timing and the inability to fully deploy funds this year with the majority of these expenditures expected to shift into 2026.

I will now turn the call over to Matt.

Thank you, Rebecca. As previously mentioned, backlog remains strong across both brands, giving us the confidence in visibility to stay focused on production and execution. The BASX brand remains the key growth driver of the company, fueled by exceptional demand for the data center market and the unique custom design solutions that we provide our customers. In the quarter, BASX security strong volume of new orders at attractive margins, most of which are scheduled for production at our new Memphis facility in 2026. This sets us up to ramp production efficiently next year to optimize the fixed cost investments made in 2025 and drive robust growth for the BASX brand in 2026.

The AAON brand also maintained strong momentum. Backlog at the end of the quarter was up 77.1% year-over-year, reflecting strong demand across our business. While backlog size and lead times remain extended we are actively managing this by ramping production. Despite commercial HVAC volumes being down double digits year-to-date, bookings have stayed strong, demonstrating the resilience of our business. For the fourth quarter, we expect double-digit revenue growth driven by continued production recovery and pricing actions implemented earlier this year. This positions us well for 2026 as comparison fees. However, looking to 2026, we also plan to implement the ERP system at our Tulsa facility in the second half of the year. While we expect minimal disruption based on our Longview learnings, there may be some short-term production impact during the transition.

Turning to our 2025 outlook. We now anticipate full year sales growth in the mid-teens at a gross margin of 28% to 28.5%. Adjusted SG&A as a percent of sales expected to be 16.5% to 17%.

Before I hand it off for Q&A, I just want to finish by saying, while we continue to navigate some near-term challenges, we're making steady progress across all areas of the business. Our operational execution is improving, production is ramping, demand remains robust and cash flow is trending in the right direction. As we look ahead, we are extremely excited about the opportunities that 2026 will bring.

With that, I will now open the call for Q&A.

[Operator Instructions] Your first question comes from the line of Ryan Merkel with William Blair.

Congrats on the quarter, a lot of things to like here. I wanted to start off with the BASX orders, which I think for me is the headline. You talked about liquid cooling being strong. You talked about Memphis is fully coming to line. But just speak to fibers, speak to your confidence in your outlook for 40% to 50% growth for the BASX segment. And then you mentioned order visibility is pretty good. I just want to get a sense that you continue to expect strong orders.

Great question. And to start, maybe looking back to the Q2 earnings call, where the sort of backlog in BASX was flat, it was obviously a point of question from a lot of individuals.

We mentioned on that call that obviously, we have to have the capacity and the visibility in our ability to execute those orders in order to really start taking on large orders to support the Memphis growth. As we've kind of progressed through the third quarter, we've had a lot more traction and visibility and kind of understanding what that ramp rate looks like, which allowed us to effectively go out to the market and really start filling the coffers for the Memphis facility. That, coupled with continued strength on liquid cooling orders out of the Longview site airside solutions at both Memphis and the Redmond site, provide a lot of that backlog growth. And so the Q3 sort of order security was really a good mix of orders in both airside and liquid side orders kind of across all of our sites, but certainly with a strong amount of focus on the Memphis facility as we look to ramp that up in late '25 into '26.

As we think through the visibility, I would just say that the activity our team is having in the pipeline conversations, in projects across existing as well as a number of new customers continues to strengthen and remain very strong. And so we're having a lot of interest really across the product portfolio in tremendous amount of conversations across the sort of entire network of data center developers, but you look to really capitalize on the continued growth and align our unique value proposition to those customers. So really, we see the BASX -- the growth story is certainly being very strong, certainly have good growth in 2025. And as we go into 2016, we'll see continued good strength in converting that backlog into sales.

That's great. Okay. Perfect. And then the one [ nitpick ] this quarter was gross margin. Good to hear though the ERP. You're feeling strong there. The implied guidance for 4Q gross margin, 31%, you're showing a step-up. But let's just take the 2 pieces. So in Oklahoma, if I add back sort of the Memphis unabsorbed and you're going to be getting the full production there soon, it sounds like, and then the price cost, which is really just a timing thing. Should we think about sort of gross margins on a normalized basis for the Oklahoma segment at that 35%, 36% level? That's the first part of the question.

Yes. And certainly, the math we're doing is putting in that range. So when we back out the Memphis impact and we back out that price cost differential kind of on that near-term kind of tariff dislocation, that does put you right in that mid-30s. Certainly, we see some additional pressures that existed when we look at the kind of year-over-year comp from '24 to '25 in Q3, certainly, you got another 200-ish basis points of kind of gap there. And really, what I would say is we've been ramping up production, kind of meeting some near-term needs of BASX products inside the Oklahoma segment, which while profitable in its sales, it certainly is a new product introduction into that facility that just caused some manufacturing inefficiencies where production lines aren't optimized kind of to build that, but we were doing it to ensure we met customer demand.

So I'd say that mid-30s with some headroom on top of that really is where we see the Oklahoma segment kind of on a normalized basis.

Got it. All right. I'll leave the ACP questions for others, but it sounds like there's some discrete items there and 30% long term as a target. So that's kind of what I expected. Now I wanted to give you an opportunity before I turn it over to just comment on the short report was out. I don't know if that's something you want to do. So I'll give you that out. But there were 2 claims that I was hoping you could respond to. One, the change in accounting has inflated revenues. And then two, a large liquid cooling gross margins are in the 20% range. Just any thoughts there?

Yes. So just maybe to start off on that report and other way, just to hit this head on, we want to just kind of reaffirm that we take the integrity of our financial reporting incredibly seriously. And it is regularly reviewed by our independent auditors. And so these statements that are prepared and presented are fully in accordance with GAAP and with the rules of ASC 606.

From a confidence standpoint, we're incredibly confident in the strength of our business and the appropriateness of our accounting practices in our operations overall. So with that, just saying that the demand for our products, the pricing of our products remains incredibly strong, and our focus is on executing our strategy, serving the customers and making sure we deliver that long-term value for our shareholders. As we talk through the portfolio change in an accounting practice, just to state that, that is the ASC 606 standard, which is how revenue has been recognized for the BASX brand kind of throughout its history and since being acquired by AAON. When we look at the dynamics, there was certainly an increase in contract assets in the first half relative to that 1 large liquid cooling order which is recognized as a custom engineered custom manufactured product recognized on a percent of completion basis.

And so when we think about this in context, that one order that was acquired late in the year last year and kind of converting through it this year, it was nearly the size that single order was nearly the size of all of BASX in 2024. And so that's just mathematically is going to drive that change in a near-term perspective on the contract assets. But in Q3, you saw those contract assets declined. You saw the receivables jump showing that conversion and shipping and doing to that customer. And so that conversion is going to drive cash strength as receivables are kind of converted to cash in and throughout the fourth quarter.

The look in that -- I mean, that liquid cooled order itself, again, just to reaffirm, that is a custom engineer products developed in the standard process in which BASX support our customers over its entire history. And so just kind of reaffirming that, that is not a contract manufactured product. It was engineered to a specification from a customer, much the same as we have executed the development and execution of BASX products over its entire history. It is priced well. It is not priced at some low margin kind of perspective. We're executing well. We're delivering for the customer. We're delivering the quality that customer expects, and we continue to receive add-on orders for that product as well as developing and collaborating on other cutting-edge innovations for the data center space.

So all that to say, I mean this is executing in accordance with regulations. It's executing incredibly well and profitably for our customers some of the ACP near-term stuff is looking to do with the price perspective on the product, its inefficiency as we've kind of rolled out some of that growth.

Your next question comes from the line of Noah Kaye with Oppenheimer.

Matt, Rebecca. Great to be on with you for the first time and a good quarter to be on for the first time on. I want to go to your CapEx guide lowering it to $180 million and the comments you made, Rebecca. Anything we should read or infer from that into kind of the timing of your planned capacity ramp, whether at Memphis or elsewhere in the business that we should be thinking about?

No, I don't think so. Is this a slight shift from moving some amounts between Q4 to Q1. So I don't think the lowering of that CapEx is going to slow down the ramp-up of Memphis. The Memphis facility has already really built out with most of the equipment we need to do the ramp-up right now. So next year's additional plants would just be increasing capacity for future growth. So it should not impact those ramp-up plans at all.

Okay. And then since Ryan teased it up, I might as well ask about the discrete onetime at ACP. Can you just give a little color on that and kind of how you lap them as we go into 4Q in '26 here?

Just to start off, I wanted to maybe just take the ACP segment for a second and look at this from a quarter-over-quarter perspective, we saw really good strength in growth in the AC segment. And absent to these free items that we kind of referenced, you see a margin around 27%, which is showing good quarter-over-quarter growth in both the throughput as well as the overall margin profile.

Some of these discreet items that kind of are question. I mean there's essentially operational inefficiencies, some of which are being -- or most of which will abate kind of with the optimization of the ERP, the rest of which just with some additional manufacturing process improvement. Nothing to do with pricing. The liquid cooling order is priced at very compelling levels. And as I mentioned earlier to Ryan's question that liquid cooling order itself is a solutions-based product solution-based win was not a low-bid type situation. So priced well and really just focused on getting that execution kind of fully in order. And looking forward, we're confident when we say the segment is at least a 30% gross margin business based on what we have in the backlog, based on what we have with the margin profile in the backlog and really just focus on execution for both the BASX and AAON brands.

Yes. And is that -- is ACP where we see the most improvement sequentially into 4Q to kind of help us get to that 31% that was referenced earlier, if that's the right number for [indiscernible] for 4Q?

Definitely quarter-over-quarter, you're going to see strong improvement. ACP definitely being a big driver of that improvement. But I would say, I mean, you're also going to see some incremental improvement within the Oklahoma segment as well kind of as that price cost dynamic get on the right side from the tariff impact.

Okay. Perfect. And lastly, obviously, really strong data center orders for BASX this quarter, great to see the increase in backlog. Can you talk a little bit about the customer mix and profile there? You mentioned liquid versus airside, but just give us a sense of the demand profile across the customer base.

Yes, it's a pretty broad-based actually. And I would say that when we look at the amount of interaction and conversation in the space right now, it is across sort of the entire profile of data center developers. So obviously, there's big strength and continued strength within the hyperscalers, but within a lot of the, I'll say, the contract builders, the colocation providers, the [indiscernible] seeing strength really across the profile in the order activity and in the quote activity in that space.

Your next question comes from the line of Chris Moore with CJS Securities.

Maybe we'll shift from BASX to rooftop. Can you just talk a little bit about pricing at this point in time, the current AAON premium. And maybe just your big picture thoughts on rooftop in '26.

Yes. So from a pricing standpoint, I mean, obviously, we put on price twice this current calendar year. So early getting rate first, put in 3% and then additional 6% kind of came in through the tariff surcharge. So sitting a little above 9% compounded for the year.

As we look forward, we're definitely in the midst right now of really kind of all of our analytics and kind of where cost drivers are looking as we go into 2026. So no real guidance at this point on kind of what pricing actions are going to come in the near to midterm. But I would say that we certainly see the price premium of AAON equipment is still existing, for sure, kind of inside the space, maybe ever so slight contraction from last year to this year, but really seeing the price premium and the value proposition is still being sold kind of throughout that product ramp.

Looking to your question more, I'll say, on the market perspective, I mean, certainly, the space remains soft, the commercial HVAC space remains soft. As we do a lot of our checks with our sales channel partners, a lot of the commentary we're getting is there's actually a pretty substantial uptick in bid activity but still soft in the overall order conversion. So I say that to say that as a positive indicator, certainly showing there's a lot of activity kind of brewing inside the space. But obviously, in the near term, if not converting to actual orders, it's not converting to new projects. And so when we think about what that looks like into '26 indicates we're going to enter '26 kind of in continued softness, but I'd say that demand we're seeing with that bid activity we would look to see that sort of start converting midway through the year into sort of strengthening of the overall order cadence from a macro perspective.

But that aside, with that kind of as the macro driver, we continue to remain incredibly focused on some of the unique growth drivers that are sort of providing us that outperform in bookings, things like the Alpha Class air-source heat pump product differentiation really getting out in the marketplace and ensuring that we're selling to the market and effectively communicating to the market that value proposition as well as the continued focus on that national account strategy. So we see those being the, I'll say, the levers that are allowing us to continue outperforming from a bookings perspective against the softer macro backdrop.

Perfect. Very helpful. And maybe just a follow-up back to BASX in terms of gross margins. We've had lots of discussions currently and ultimately, in terms of where the margins could be at the Investor Day, and we talked about 29% to 32%, a little bit below rooftop. And I'm just, again, trying to understand is there something structural in BASX that couldn't get to the mid-30s or it's just the rapid growth is going to make it difficult for a while to get to that level?

It's a great question. And certainly, our kind of putting it around that 30% level is really sort of setting what we see as the sort of near-term execution targets kind of within that space. From a perspective standpoint, it took AAON 30-some-odd years to really get into that mid-30s range. And a lot of that was driven by really good execution around improvements around manufacturing process, coupled with obviously pricing competitiveness. And so as we start getting more and more, I'll say, we get the ability to really kind of get some of our production lines stable, we can really start focusing on pulling the cost and putting dollars to the bottom line in those spaces.

And so I would just say from an expectation setting standpoint, that 30% range is really kind of where we want to keep everyone grounded. But certainly, we're an organization that is focused on outperforming. And so for us, looking at how do we keep driving better execution and really keep driving improvement of that is going to be something that is certainly front of mind as we keep progressing forward.

Next question comes from the line of Tim Wojs with Baird.

On the Oklahoma business, Matt, I mean where are your lead times today kind of relative to normal? And I guess as you think about kind of converting the Tulsa facility next year on the ERP side. I guess how are you kind of communicating that to people in the channel? And how are you preparing for any sort of I guess, kind of order pull forward that might kind of happen as a result of that implementation?

Certainly a great questions. And on the lead times, when you look at the Oklahoma segment, where they stand today, they're probably sitting around 50% higher than we wanted to be. And again, our focus here is really on getting that execution up, getting that volume up at that facility and really start pulling that back down. So one thing I'd say is, well, obviously, backlog growth is a big conversation on the BASX side of the business. On the AAON side, our big driver here is let's get that backlog down. Let's get that lead time kind of back in check where we want them to be, just to be able to make sure that we're meeting the market demands appropriately.

As we think about, I'll say, kind of getting ahead of things within the ERP side. We're certainly going to be substantially more proactive. Again, I'll just say lessons learned around the Longview side to make sure we get ahead of it. And provide some buffer kind of in sort of what we communicate to the market to make sure we deliver and the schedules that are met with our best foot forward. So that's going to be definitely going to be part of our intentional kind of before go-live messaging strategy ahead of a pulse that go live. Exactly what that's going to look like and kind of what buffer that's still certainly part of an operational conversation. But certainly will be something we're looking at throughout the mid-part of '26.

Okay. And speaking of operations, I mean, you just, I think, hired a COO. Could you maybe talk about what kind of those responsibilities are going to be for him in kind of maybe the near and intermediate term and kind of what he brings to AAON?

Yes. And really maybe what I'll do is I'll start by kind of just framing a perspective here, which is we've been very fortunate to go through some tremendous growth, which is incredibly exciting. It's an awesome opportunity for our organization, for our team to grow and to really thrive inside that space.

And as we think about AAON 5 years ago versus AAON today, I mean, we've got facilities, we've got some monster growth coming out of brand new facilities. We've had massive expansion in Longview, strong investment in Redmond and continued investment inside the Tulsa facility, all of that supported by strong demand. So the company over the last 5 to 10 years, it's really transformed. It's kind of gotten a lot of legs below it and really built itself up in stature and mass. And so when we think about what Roberto brings to the organization, it's the ability to effectively manage consistency across all 5 facilities. And drive best practice lean manufacturing, visible manufacturing, really across the organization and get the right ability to be able to attack the problems before they become problems.

And so he's got experience operating up to 23 facilities expertly in manufacturing and really something that the operations team and the whole team of AAON and BASX is incredibly excited about as we look to continue capitalizing on the growth drivers in a very profitable fashion.

Okay. Okay. That's great. And then I guess just 2 questions -- 2 time modeling questions. I guess, first, is there any way to just quantify the free cash flow that you expect in the fourth quarter? And then as you kind of think about bringing on Memphis, do you have like a DNA number that we should think about for AAON in 2026?

So I don't have a quantification of the free cash flows for Q4. It should be considerably up. I mean, especially you saw it turn positive this quarter. We're starting to -- we had delays in getting some of our buildings out. So we're collecting those now in the fourth quarter. Yes. It should be up significantly, but I don't have a good estimate to give you just off the cuff. And then on -- so for 2025, we expect the year will be in the $75 million to $80 million range, and then we expect to see like another $20 million to $25 million in 2026.

[Operator Instructions] Your next question comes from the line of Julio Romero with Sidoti & Company.

This is Alex on for Julio. Just a follow-up on ERP. I know we talked a little bit about lessons learned alluded to that, but maybe we could get a little more specific on key lessons learned from Longview that you're applying to Memphis and maybe even what milestones you thought about before greenlighting the rollout to Memphis?

Yes. From a lesson learned, I mean, I'll say there's kind of a variety of people and process side of it. But just high level, what I would say is some of the configuration change and lesson learned that we've implemented into Longview as well as Memphis is streamlining some of the automation that can be provided in process flow inside the ERP that wasn't fully implemented, I'll say, kind of on the initial go-live that caused too much manual interaction that slowed down some of the production velocity. And so we really kind of streamline some of those processes and we've really greatly enhanced DMI hands-on training within the system.

I think the lessons learned is we did a lot of training as part of the go live, but a lot of it was more classroom setting versus getting really more live hands on how you would live in the system on a day-to-day basis. And so a lot of that kind of was lessons learned out of the Longview site. And really, that was informing the kind of go-live strategy within the Memphis site. And Memphis has been live for about a week now and really been operating in a smooth fashion, albeit lower volumes than what we have in Longview, but kind of on a go-live and a ramp-up perspective, behaving very well.

Great. I think going hand-in-hand with streamlining and ERP work might be automating with AI. So I was curious if you could touch on any sort of work with that.

Yes. I mean, certainly, as a manufacturer that greatly supports the explosive growth of the data center investment around AI, it certainly also informs kind of how we leverage AI and organizations. So there's a lot of things we're looking at. I mean everything from how we analyze warranty claims for trends, how we look at predictive analytics around unit performance. There's a lot of sort of projects going on. But certainly, as time progresses, AI will become more and more relevant kind of in our strategy. But what I would say now is we have a lot of things that are more in the sandbox and planning phase as we look at how to leverage AI, both from a operations perspective but also from a value driver for our customers' perspective.

Your next question comes from the line of Brent Thielman with D.A. Davidson.

Great. I guess, question, Matt, just as you peel back the layers here within the risk top business, your thoughts on what seems to be working in terms of the share capture strategy. I heard you comment on the national accounts growth maybe how that informs how that kind of strategy is working and anything else in and around that?

Yes. So to maybe peel it back in kind of 2 pieces. I think when we look at what we call the more transactional type orders, the standard kind of end market orders, we see that softness kind of that you hear across the overall commercial HVAC space on the more everyday type orders. We see that kind of in our order cadence as well. And so when we look at where the growth drivers have been, I'd say 2 things that are big differentiators for us that have allowed us to outperform in bookings has been the Alpha Class air-sourced heat pump.

So from an innovation and sort of a product differentiation standpoint, continue to see that getting some good traction inside the space as we really have a best-in-class solution that operates in sort of your southern climate all the way to your low term climates with sort of the more Alpha Classes stream program. So that's definitely been a driver that's sort of allowing that differentiation of product to really capture the hearts and souls of a lot of organizations. And it really aligns well with that national account customer. So when we think about national account customers looking to reduce carbon footprints with portfolios of facilities all across the country. That Alpha Class product definitely is a huge conversation starter and a differentiator kind of inside the space. And with the 3 tiers of that product. We rolled that out in a way that provided solid pricing points, really depending on kind of what the market is from an environmental perspective.

And so we don't need to go all the way to the Alpha Class stream, low ambient air-source heat pump if I'm delivering a product in Florida. But when we look at some of the northern states, the solutions that we have in terms of efficiency, performance points and cost points really can't be beat inside the marketplace. And so that's really allowed a broad conversation on that national account space, really around air-source heat pumps, decarbonization to be able to provide really a solution across the portfolio that really can't be met by anyone else in the marketplace. And so a lot of that on some of that conversation and growth really in both the national accounts as well as really just transactional air-source heat pumps.

Got it. And then on the BASX side, whether you wanted to talk around the orders this quarter, Matt, or kind of an immediate pipeline? I mean one of the objectives here is to try and get into maybe more of the standardized products. And I guess, question one is, are you starting to see those orders come through? Is it far too early for that? And maybe just the diversification of customers that are reflected in these orders?

And just to maybe put a clarifying point. When we look at the productization of strategy, I wouldn't say we're going to be a standard product by any stretch. What I would say is really just envision that as the same solution or the same mindset around how AAON goes to market with a software-driven semi-custom, still very much value-driven products just in a little bit more of a wells off platform that provides some more efficiencies in how we go to market. But I just want to kind of clarify that it wouldn't really go to sort of a standardized product definition. It's still very much is highly configurable, value-driven solutions.

But I would say we're certainly starting to get into quote activity on those products. We're in the early innings, really on getting that in the marketplace. And so certainly out there having the conversation, but that backlog growth that we see right now that is reflective of the historic solution-based, the custom products that BASX brand has built itself on since its formation. Customer-wise, I mean, there's obviously, a couple of large orders that exist inside that sort of backlog growth. But I would say there's also a scattering of other smaller customers kind of in there. So there is definitely a couple of big hitters in that backlog growth, but there's also a diversity in the customer base in what we're growing right now.

Okay. Last one. Obviously, a big chunk of orders here is to fill the Memphis capacity that comes on to, I think, just based on past conversations, Matt, you sort of want to be deliberate about that, work through any inefficiencies as that facility ramps up. I guess the question I have is do you have what you want for now? Or are you comfortable continuing to push and capture more orders for that facility even as it hasn't ramped up quite yet?

Yes, a great question. I mean, I think the -- there's definitely good backlog sitting in there right now to help ramp that facility in a measured perspective. But there also is some headroom in there, especially as we get into the second half of next year to start putting in some more demand into that facility. And so there is room to definitely keep putting orders in there as we get more and more traction.

The facility as it stands today, just kind of maybe perspective, it has the ability to have 7 production lines put in place. We're sitting at 3 today. We're adding -- we're working to add a couple more. But there certainly is all of that 5 to 7 production lines are not fully booked out. And so there is room to -- as we keep growing it out to keep ramping up production at that facility, but I would definitely be thinking about that from a looking statements for orders that will be coming in for start delivery in the back half of next year.

There are no further questions at this time. I will now turn the call back over to the management team for closing remarks.

Okay. Thank you, everyone, for joining us on today's call. If anyone has any questions over the coming days and weeks, please feel free to reach out to myself. Have a great rest of the day, and we look forward to speaking with you in the future. Thank you.

Ladies and gentlemen, that concludes today's call. Thank you for joining. You may now disconnect.

Next fireside discussion with AAON. Really pleased to have Matt Tobolski, President and CEO, here for meetings and the chat today. So Matt, thanks so much for being here.

Maybe where I wanted to start, Matt, was a year ago, you were in COO role, now you're in the CEO role here for several months. A lot underway at AAON, a lot of it you've been engaged in really from the start. Anything different we could expect to see under your leadership here going forward?

Yes. I'd say the biggest difference, I mean, AAON has really charted a path over the last 30-plus years on really great innovation and kind of disruption in the overall HVAC space. And then we layered in, obviously, BASX and the data center growth engine, which is awesome and exciting. But it also kind of exposed the need to sort of build and invest in the future with AAON. And a lot of that is not just in capacity, but it's in systems and sort of, I'll say, maturing of the organization.

And so a lot of what we're doing in the midst of all this growth is also making sure that we have a lot of the technology, the people and the systems in place to let us win with intentionality at a much larger kind of scale. And so that's really a lot of what my focus has been on is really kind of getting ourselves aligned to not just thrive in today's environment, but really set ourselves up to really capitalize on this growth and deliver great performance and great value as a $2 billion, $3 billion, $4 billion a year enterprise.

Okay. And Matt, I mean, I wanted to spend a lot of the time today on the growth opportunities, which I think are pretty immense for you. But obviously, I think a question on a lot of people's minds is the progress you're seeing with the ERP implementation in Longview. I know you did issue an 8-K today. Maybe you could just share with us where things are at.

Yes, of course. Again, going back to the previous comment, right, the ERP is a necessary piece of the investment in letting AAON scale and grow. We were working on an ERP system that was homegrown from 1988. And so obviously, it was built and improved over the years, but the level of visibility and transparency in our own operations is limited in that technology. And so this investment in the ERP was a necessary piece to let us scale with visibility and really transparency and communication about where we're going as a business.

So I would start off by saying, am I pleased with how Q2 went out in terms of the ERP implementation? I mean, of course not. That's not the expectation we set for ourselves. That's not how we want to deliver kind of performance as a company. And so the 8-K today was really put out to answer the question we knew was going to be top of mind for everybody, which is how is that recovery going. We talked on the Q2 call about April was the low point in overall efficiency, and it was getting better month by month. And I wanted to make it a point to publish kind of the same efficiency metrics we talked about in the Q2 call and highlight how July and August actually came through for us. And so we talked in Q2 that the trajectory was positive. It was going in the right direction.

Well, if you look at the numbers we published and really on the August efficiency numbers, it shows that we're almost back to the target efficiency metrics for the AAON brand as a whole. And so what's really implied and they are built in there is that Tulsa is back to the efficiency performance targets that we expect and we want. So Tulsa is operating really from an efficiency standpoint, where it should be operating. Longview has a little bit of pressure, but Longview has still consistently been getting better. And so we're just a little bit below the efficiency metrics in Longview that we really want to be at. But by and large, we're seeing that recovery really materialize in the performance we're seeing throughout Q3.

And has the addition of that third coil supplier been impactful for you? I think that was part of the objective to get Tulsa back to where you want it to be.

Yes, it's been a combination. I would say it's a combination of Longview improving its coil performance in terms of delivery and execution. It's also our 2 previous suppliers getting back on track. I mean, I mentioned on the Q2 call and afterwards that as soon as the issues with the coil suppliers materialized, we went into very much blocking and tackling. We had personnel on site at each one of our coil suppliers driving performance and understanding exactly where we're at to be able to manage the impacts to the overall operation. So those factors plus the third supplier has provided an opportunity or an environment where coils are not the problem. coil is not impacting the Tulsa operation.

Okay. And I think the other thing that's been on people's minds, I get a lot, Matt, is just -- and you did put some definitive time lines on the implementation at the other facilities for the ERP. Maybe just talk about what you've been doing behind the scenes to kind of prepare for a smooth transition there.

Yes. And so the one thing I want to start with is the way we manage the business, we transitioned to more of a global operating mindset on the operations and manufacturing side back in January of this year. And a lot of that's because we are blending both AAON and BASX products at multiple sites across the portfolio. And so the operating strategy had to evolve from a geographically kind of defined strategy. But the other benefit you get there from an operations perspective with ERP implementation is we already have those global functions, those global teams operating inside the new ERP.

So our purchasing department, our production planning departments, the engineering departments, I mean they're already interacting and interfacing within the ERP. And so it's allowing us to get a lot more bodies in front of it than when we went live in Longview. Longview going live, that was the first time anyone in the system truly had to operate in it. And so we're getting the advantage of more bodies running through the system. We're also getting the ability to put personnel from different sites into Longview to be able to operate inside the system and getting more and more personnel that operate in the system that we can move from Longview to another site when it goes live. And so the overall kind of rollout strategy is Longview stabilization, which is getting close to where we want to be at. Memphis is the next go-live.

And again, I would say Memphis is not really an ERP transition because it's a new site. It's really just putting in an ERP. But then from there, it goes to Redmond and then it goes to Tulsa. And so by the time we get to Tulsa, which is our largest site, we are going to have 3 sites operating. We're going to have the vast majority of our global functions all touching the system on a daily basis, and we're going to have an opportunity to move personnel between sites very intentionally to kind of get through the overall system. And the other piece is you're also getting more run time to be able to figure out where are the pain points and pinch points and create very intentional strategies to train around that.

Excellent. We'll maybe moving into the growth opportunities here and start with the BASX branded product. A lot of buzz around AI investment lately with Nebius announcement and Oracle, obviously, I know you have NDAs, you don't talk about specific customers, Matt, but just your reaction to what you're seeing out there in terms of AI investment.

Yes. I mean the engagements, the opportunities, I mean, we continue to see tremendous strength. So the forecasting we see with existing customers that we have in hand, we typically see anywhere between 3 and 7 years of pipeline visibility. And again, I always say that 7 years is more directional conversation than anything that we look at as material. But the 3-year windows we tend to get with those customers, there's site locations, there's permitting, there's a lot that's already in place. So there's a lot of stability in understanding kind of those growth projections over the next 3 years. And we continue to see strengthening of those, not weakening. Our sales channel engagement is incredibly strong with existing but also new opportunities and new relationships.

And so we continue seeing a tremendous opportunity in the AI space. But I would also say it's also not weakening in the cloud space. I mean cloud data center development is still growing in this AI backdrop. The AI conversation is certainly the buzz, I mean, given the level of growth, but cloud computing data center investment is also continuing throughout the cycle as well.

Okay. And in the June Investor Day deck, you showed the evolution of BASX from sort of 3/4 hyperscaler focused today to maybe 1/2 in the future and non-hyperscalers represent the other half of the business sometime down the line. Is this sort of NeoCloud Renaissance a big part of that customer evolution in the future for BASX? Is it something else? How do we think about that?

And there's a lot of drivers to it. So part of the driver is really that productization strategy that we have. And so that allows us to access, I'll say, further into the data center kind of customer base. And if you imagine a hyperscaler who is going to spend a lot of time and energy and has a very sophisticated team in-house, they will spend a lot of time optimizing a solution in an overall system architecture. And so that's where a lot of that sort of solutions engineering, that custom type product really resonates with those customers. And they have the capacity and wherewithal to really build out unique solutions.

So that's been -- and why you see that sort of, I'll say, heavy weighting towards that type of customer today is because it's representative of all of that custom product that we build. As we kind of expand our product portfolio and add in more kind of software configurable semi-custom product solutions in there, kind of the AAON mindset of what we built AAON as a company, you start getting the ability to engage more and more customers inside that data center sphere. And that's where we see a lot of that ability to diversify kind of in that environment. So it's -- obviously, it is some of that on the NeoCloud side, but it's also really an intentional product strategy that's allowing us to really provide more opportunities to engage with a broader set of customers.

Yes. And one more just around the Investor Day and some of the targets you guys laid out, maybe there was some response or disappointment to what was implied for BASX growth going out a few years, I think sort of 20% to 25% annual growth into '26, '27. If demand stays where it's at right now, how do we think about the upside to that?

Yes. I would certainly say there's upside. The part that I would caution though is it is a conversation about capacity and demand. And from a perspective of ramping up capacity, it is also being very intentional to make sure we maintain the brand integrity throughout that growth cycle. We built a brand from day 1 about keeping true to our word and delivering the quality and the on-time delivery that our customers deserve and expect. And really, it's being intentional on making sure that as we ramp this capacity, we don't dilute that experience.

And so yes, there's upside, and it's going to really come down to how good we do at ramping and scaling. And we factor in a certain consideration of risk growing as fast as we're growing into that kind of conversation. And so I'll say the upside -- the demand is certainly there. It comes down to kind of our discipline during the growth cycle and executing properly. And if we do that and we do that as well as we think we can do that, there certainly is the ability to capitalize on more growth.

I mean that does kind of lead to the next couple of questions, Matt, is that maybe one, could you talk about the progress of the Memphis development, which is huge capacity you're adding there. And I think that facility will be mostly almost all BASX product. Are you selling that capacity now?

Yes. So we had started selling that capacity. And maybe going back, yes, I had the -- I mentioned to Brent walking in that spent the week at our Memphis plant. And so I've been on site all week with our team and kind of seeing where it's at. And it's an awesome opportunity, number one, in that in the history of AAON in the history of BASX, it's the first large-scale kind of clean slate we've had to build. If you think about BASX and AAON growth over the years, it's always been kind of patching on buildings to existing facilities, which is not the most efficient operation kind of from a manufacturing perspective. And so having the ability to really clean slate, design a large-scale manufacturing site has been awesome for the team to really leverage a lot of lessons learned over decades.

And so we bought that building in December. We started assembling products back in February. So we had a big empty box. We were able to basically ship parts and pieces in and go ahead and start building products. And we did that to be able to start training the team and start building out the kind of personnel to be able to kind of scale the organization. Where we sit today is a lot of the equipment that lets us become an actual manufacturer, not an assembler, which is the sheet metal fabrication, the fan manufacturing, coil manufacturing, coils for controls, that equipment is all getting installed. And so when you think about as we progress throughout this year, that facility is sort of transforming from an assembly site to a true manufacturing site. By the time we get to the end of this calendar year, it will be a manufacturing site. We will have the necessary equipment in place to support the production lines that we're putting online. And we'll keep adding more production lines and more equipment throughout '26, but it is progressing incredibly well in terms of actually getting the facility up and running.

We talked about the Applied Digital order that we got in Q2 earnings call, and that is the first large-scale order that will get built in Memphis. And so when we looked at -- people asked us the question kind of post Q2 was, your backlog seems flat, like is that a representation of a demand or an issue there? That was an issue or that was a result of discipline in accepting orders and making sure we can deliver them. Now that we have a much better line of sight in how Memphis is actually coming online, we can reaccelerate the conversations and sell that capacity. We now have a much better line of sight on exactly when lines will be online to be able to start delivering products. And so we will see that being a driver of backlog growth and obviously, revenue growth kind of in back half of '25 and '26.

Okay. Maybe as a follow-on to that, Presumably, I mean, you're filling the capacity now. As you get 6 months into production, do you get more comfortable? I mean it's $750 million in capacity there, I think you've talked about before. When do you get to a point where you feel like you can go all out?

Yes, it will be -- the equipment is not the hard part, right? It's the people. And we can bring in staff all day long and train them how to build our products. So I can get entry-level assemblers and machine workers very easily, and we can train them. We have a very good training program. If you look at AAON over the years, we've shown the ability to bring on bodies efficiently when you look at growth cycles and margin profile expansion. The piece that I'll caution though, and I'll say the biggest limiter is that middle level management in production floor. They need time in seat building the product to be effective.

And so -- as we get that team trained up and we start seeing the maturity of that more mid-level kind of talent, that's going to be where we can decide, hey, is this a chance to stop on the gas and start accelerating. So that will be -- as we get through the first half of next year, we're going to get a lot of line of sight on how fast we can push the accelerator.

Excellent. Something else that oftentimes comes up to me, Matt, is people want to know how or why BASX wins over competing solutions in airside and now liquid cooling. What do you think is the differentiator for you? What's allowing you to win these orders?

Yes. I mean the biggest driver of kind of success is the way we go about selling. And I always say that we sell solutions. We -- my background kind of prior to starting BASX, I was a consulting engineer. So the way you go about helping someone is asking a lot of questions and understanding what they're truly trying to accomplish. And that differs from selling widgets as an example, and again, an oversimplification, but where you're trying to figure out how to sell my product into this application. So when we engage with a lot of our customers, we go in, for lack of a better term, like with a blank sheet of paper. And we spend a lot of time understanding what they're trying to accomplish and then make sure we curate the right solution to kind of meet that need.

And so in that environment, energy efficiency is certainly a conversation piece. Cost is a conversation piece. But also you start getting into maintainability, durability, serviceability of equipment and the ability to customize and configure solutions to meet that kind of broad spectrum is where we provide a lot of value to the market, and we see a lot of that sort of success that builds long-term relationships with our customers.

Is the AAON sales network something you can leverage in selling that solution?

100%. And so that's one, I'd say, one of the maybe misconceptions around BASX was everything we did, we direct sold. We did -- we used -- we worked with sales channel partners even in the BASX days, we just happened to have some relationships that were direct, but it was kind of a blend. But everything we do in the marketplace, it's around relationships, but it's also around that consulting mindset. And that consulting mindset is the same mindset that AAON has with the highly configurable semi-custom product. And so we've leveraged that sales channel, not the whole sales channel, but a segment of that sales channel and really empowered them to go out there and tackle the data center market kind of as part of the overall kind of BASX flag bears.

Okay. What does it take to win a new data center customer? And are you effectively serving all the major hyperscalers now?

Yes. So I will say, again, going back to the solution sales mindset, it is a time and value-driven relationship that you develop with the customer. And so to win a new data center customer, it takes the -- obviously, the conversation, but it's not a quick flip of a switch because our value that we provide is in having the conversation and helping them develop a unique way to solve their problem. And so it's about getting in front of them, showcasing the value and showcasing how that provides tremendous value for them as an operator. And that typically takes a little bit of time. But the one great thing about the data center market is for as big as it is, it is incredibly small.

And so a lot of these new relationships and a lot of the way we win is we've actually had oddly enough, a competitor had an employee that used to work for them, went to go work for a data center direct and our competitors' former Head of Engineering says we should go to BASX. And we went in front of that customer based on the reputation that we have in the industry for providing value, went and then began creating and curating a solution for them that has materialized into a great relationship and kind of order.

Okay. The one more I wanted to ask on BASX. I remember when AAON purchased the business, there was a slide deck that talked about the different categories. Data centers take up a lot of the conversation, obviously. But there is seemingly a big U.S. pharmaceutical reshoring push. You've done clean room systems, things like that in the past. Is that even on your radar?

Yes, we still do it. I mean, so between pharma as well as semiconductor investment, I mean, we still are building clean room products. Obviously, the -- while they're exciting, the growth rate of that industry is just overshadowed by the data center space.

Okay. Maybe in the interest of time, move to the AAON branded side. In terms of what's sort of core to the current share capture strategy, can you talk about the price premium of the AAON product in the market right now relative to competition?

Yes. I mean we certainly have seen a little bit of price premium compression that's kind of come into play. When you factor in from 2023 and the energy efficiency standards kind of getting retooled and forcing a lot of the competition to evolve their product, that gap started to close. And then you looked at the refrigerant transition, you look at some of the tariff impacts and sort of the vertical integration and all of that kind of started taking it from a mid-teens down to maybe a high single digits. We see it bouncing around in that level. We definitely don't see -- I'd say there's a lot of rhetoric during the refrigerant transition of mid-teens price increases in some of our competitors. We didn't see that scale materialize. We saw maybe a little bit of a larger price increase kind of when you factor in all of the price increase in tariffs. So that might have gotten a little bit smaller, but we haven't seen it get anywhere near parity.

Okay. And you've had good order momentum through the first half in that brand. What else can you point to that sort of says the share capture strategy is working?

Yes. And I'll start by looking back at '24. '24 was an incredibly noisy year from a share perspective. And what I mean by that is you had the refrigerant transition, you had a lot of manufacturers building a lot of product into distribution. And it causes a lot of noise. Because if you look at straight numbers, you would say and rightfully so, you would say that AAON gave share back in 2024. I mean the data would tell you that. But again, that's a noisy backdrop where a lot of product went to the overall marketplace and distribution. You see conversations in the market last week at the WA conference around destocking inside the overall channel that's impacting new sales for some of the HVAC players. That's basically kind of a counterargument to that.

And so while you saw the noise, you might see the share giveback for us last year, obviously, if you look at bookings cadence for us this year, the converse is true. And so we're certainly seeing that sort of noise year-to-year that's kind of getting back to a positive growth story on share capture. But in the broader spectrum, I mean, the macro environment is soft. I mean, like there's no beating around that bush. Like the market, you can debate the volume deduct, but I mean it's probably down 10% this calendar year as a whole industry. And if you look at our Q2 implied bookings kind of on a backlog to sales conversion, you would see we're up 20% plus in overall bookings cadence. And so obviously, there's a big dislocation in the market as a whole and us. But we're seeing the same softness in the macro environment on a traditional transactional sale. We see that in the overall performance.

So the booking strength you see is really a result of the very intentional effort we put into developing national accounts. And we talked about that on the Q2 call where a year ago, first half of the year, national accounts represented 20% of bookings where they represented mid-30s this calendar year. So that intentional effort that we put into developing national accounts is what's really driving that kind of conversation around growth in bookings and share.

What verticals of the market would we think about that for?

It's pretty broad brush. I mean I think a lot of people might immediately think like big box retailer. And certainly, that is a piece of the national account conversation. But if you think about a rural health care provider as an example. So we think about not your core heart of the city health care providers, but you think about ones that are 2, maybe 3-story hospitals threw out across the country. A lot of those are being consolidated into single large operators. And those type of relationships are prime -- those projects are prime AAON customers. And so you have relationships like those. You have distribution centers, warehouse centers, quick serves. I mean it really runs the gamut on kind of where national accounts come into play.

Okay. And maybe just one more around the capture strategy. I mean what else are sort of differentiating factors beyond the narrowing price point, Matt, that's giving you success here? I mean anything else we're missing from the conversation? And is service parts something that you feel like you need to scale more to be more competitive?

Well, maybe I'll answer the first part first, which is, I mean, obviously, the technology innovation is the other big driver that's really fueling some of the share capture conversation. The Alpha Class heat pump, I mean, it is the industry's most capable heat pump solution from a rooftop perspective. And having a tiered solution, there's basically 3 versions of the Alpha Class you can buy -- and you go from, I'll say, a more of a commonplace air source heat pump that will operate as a heat pump down to mid-30s temperature range. That's sort of your baseline heat pump. But you go all the way to our EXTREME series where you can actually operate as a heat pump down to negative 20 degrees Fahrenheit.

So when you look at municipalities that are looking to reduce carbon footprints or you look at organizations that are looking to kind of have a strong ESG conversation around carbon emissions, that is another driver from a product mix perspective that we're seeing continue to materialize. And so the bookings growth in Alpha Class is outpacing the bookings growth as a whole.

And the Alpha Class product presumably makes the product the HVAC unit more competitive in the market?

100%. And really, when you get down to the EXTREME series, like there's very little competition that can truly do what we can do. And so it is a driver for those companies that are looking to reduce carbon emissions.

Okay. And then maybe just from a macro perspective in terms of the 410 refrigerant phaseout, which obviously took effect. What inning are we in terms of the market and the customers sort of digesting that at this stage?

I mean I'd say everything we're doing, obviously, as a build-to-suit or build-to-order manufacturer is all 454B. And so we saw some noise, obviously, in the back half of last year in order cadence that materialized in the first half of this year around that transition. But we see from an order book perspective, I mean, if you look at the bookings growth, I mean, that is all 454B. So what I would say is there is certainly some industry -- there is still inventory out there of 410 product that sits in distribution. But those that are buying that product, they're not the core AAON customer. That type of product is a commoditized standardized products. And so that is not really the core competition to AAON. Now is there a certain customer base that maybe is buying that out of the fringe of our customer base? I mean, sure, there's certainly, I'm sure, somebody that maybe would have thought about AAON that might buy that. But by and large, I mean, we see -- from our vantage point, we see a normalized 454B environment going forward.

Okay. You talked a little bit about it. I mean the macro has been volatile in terms of just end market demand. I guess any indications that that's easing? I know there's a lot out there, tariffs rates, everything else. Any signs of that?

Yes. I'd say, I mean, from our vantage point, it feels like we're bouncing off the bottom and getting ready to start coming back. And so the sentiment we're seeing in the marketplace, I think, obviously, some movement on interest rates, but also, I'll say, stabilization in price dynamics. I mean the volatility on tariffs seems to be a lot -- it's called a lot. And so it's really now a matter of the industry as a whole kind of getting used to the price structure. I mean, let's be honest, inflation -- hyperinflation in the HVAC market is a real thing over the last 5 years. I mean if you look from 5 years ago until today, a rooftop unit probably cost twice as much as it did. That's pretty big when you think about an industry that in a prior cycle might have increased 2 or 3 percentage points a year. That's a huge difference.

And so I think a lot of what we're feeling is in this near-term environment, the real impact of that kind of cost escalation plus a very expensive cost of capital relative to what it was a few years back. So as we get more time with sort of the industry just being used to the price dynamics, things start to pencil again. And you get cost of capital kind of starting to come down a little bit and some clarity on that, tariffs becoming less volatile. We anticipate kind of going into next year with a trajectory starting to turn positive. It's not going to be a quick J-curve back. I mean it's going to be -- but it's not going to keep going down and down and down. So we see the recovery kind of starting based on noise in the marketplace and really the drivers hitting a point next year where we start getting into next year with a positive kind of motion.

Yes. And then maybe a little bigger picture. I mean, in terms of the factors that could influence your margins, obviously, you get beyond some of the production issues you've had. Are we beyond some of the supply chain noise in the market? Anything else externally we need to be considering that could influence the margins?

I mean what we're seeing right now, the supply chain market has certainly stabilized a lot. I mean there still obviously continues to be noise around tariff policy here and there. That creates some pressure. But by and large, I mean, the transition to 454B components, the manufacturing supply base, I mean, they're doing a pretty good job with that transition. We're not having the same issues we had at the beginning of the year. And so really, we're not seeing challenging supply dynamics. I would also say, as a company, sort of part of that evolution and growth, we really invested in maturing our supply chain organization.

So we're also getting a heck of a lot more proactive than AAON historically has been in sort of supplier relations. And so AAON historically did a great job reacting to chaos. Our goal with some of the sort of investments we're making in sophistication and supply chain is to see the bus coming before it hits us sometimes and be a little more proactive on managing.

Okay. The last one I had, Matt, was just you financed a lot of its own growth yourself. I guess you're making big investments in Memphis that sort of finishes up this year. Are there other capital investments of significance to achieve your goals here over the next few years that you need to make?

I mean over the next few years, I mean, obviously, CapEx will still be up on the Memphis cycle going into next year as we continue putting in more equipment. So the CapEx is still elevated going into '26. What I'd say is what we have line of sight on right now and sort of the Investor Day targets, the big CapEx investments that we have kind of in motion, they support that. And so where the conversation comes down more route to your question is as we kind of start absorbing that capacity and we start looking out and kind of looking at where the demand is driving the market, that may start leading conversation around other investments, whether organic or inorganic, depending on what makes sense for the business.

Okay. Any questions?

Memphis [indiscernible].

So maybe what I -- I might answer it saying it wouldn't maybe replace capacity, but we certainly have the conversation around Memphis saying, we do have this great facility that in the history of AAON, we have the benefit of a clean slate saying, how do you truly want to flow materials and put in production lines. So -- the conversation we have internally is around the idea that are there products maybe at another facility that we could actually build a much more efficient production line in Memphis to support. But the game we would play there is then saying, in doing that, we've now freed up space, let's gut that space and then implement a more purpose-built production line. And so we have had the conversation around how do you start playing that game of chess and basically saying there are things that may make sense to move from one site to a new site. But in doing that, we now have a lot of square footage that we can really optimize.

And that's really -- when I think about the next 5 years of AAON's sort of story, we have a lot of intentionality around steering at the fleet as a whole and saying how do we squeeze as much juice out of this fleet as possible in terms of production capacity. And so there may be things -- and again, hypotheticals, but there may be things where you say, hey, we're going to make -- we might add a small addition at one of our sites to put a certain process in. But in doing that, allow us to repurpose a line or rethink a line and make it a heck of a lot more efficient. So we are mapping the overall fleet. We've got about 4 million square feet under roof now. And so we are mapping that and really looking at every line, every site, every process to say where are the sort of pinch points in that or where are the opportunities to really produce efficiency gains and look at that holistically, not just site by site anymore.

Anyone else?

[indiscernible].

It varies day-to-day, but I mean, the big players, you might imagine, I mean, we're going to bounce up against Vertiv plenty of times. Schneider on the motive air side with liquid cooling, Modine we come up against. JCI and their Silent-Aire brand. It really depends on the product type and kind of what we're going after. But I mean, definitely on the air side, it's the JCIs of the world, the [indiscernible] of the world, the Modine's of the world. The liquid side, obviously, is a much more dynamic market right now. It's just it's growing so much that you're seeing a variety of existing players and new players in the conversation kind of bouncing around. But some of those big players as well, obviously, are on the liquid side as well.

[indiscernible].

I would say, I mean, pure-play AI data centers, we've always -- what I'll say in the liquid space is -- we looked at -- people have asked us the question a lot saying, aren't CDUs is going to be a commodity product at some point in the future. That's a common question that we have people ask. And I always counter that to say, if you look at the cloud data center market, that's a mature market at the end of the day. The cloud data center market, while it's still great growth, it's a mature market. And so I would counter and say, in that market, you would argue why aren't all the cracks and craws commodity. Well, if you look at that market, there is a segment of that market that buys a commodity crack and craw. But throughout that entire time, basis has grown 40% to 50%, selling customer side solutions into the cloud space.

So even in a mature market, there's going to be room for both a commoditized product and a configurable or custom product to thrive, and we expect to see that. And so when we think about it in the liquid cooled space, when we look at a project that comes out and if someone is sitting there saying, here's my deployment strategy with a bunch of 500 or 750-kilowatt CDUs. We're going to entertain the conversation around their flexibility to rethink the architecture. But if they truly want to go out and buy a bunch of 500-kilowatt CDUs and put those into a 40-megawatt data hall on AI, that's not what we're going to go chase. We're going to talk to people about larger scale or different ways to think about kind of bringing the tech water loop and conditioning to the space. And those are the ones that we really end up thriving with and developing good relationships and solutions with.

Anyone else? Awesome. Matt, I appreciate your time. Thank you.

Yes. Thanks.

Good morning, ladies and gentlemen, and welcome to the AAON Inc. Second Quarter 2025 Earnings Release Conference Call. [Operator Instructions] Also note that the call is being recorded on Monday, August 11, 2025.

And I would like to turn the conference over to Joseph Mondillo, Director of Investor Relations. Please go ahead, sir.

Thank you, and good morning, everyone. The press release announcing our second quarter financial results was issued earlier this morning and can be found on our corporate website, aaon.com. The call today is accompanied by a presentation that you can also find on our website as well as on the listen-only webcast. We begin with our customary forward-looking statement policy.

During the call, any statement presented dealing with information not historical is considered forward-looking and made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995, the Securities Act of 1933, and the Securities and Exchange Act of 1934, each as amended. As such, it is subject to the occurrence of many events outside of AAON's control that could cause AAON's results to differ materially from those anticipated. You are all aware of the inherent difficulties, risks and uncertainties in making predictive statements. Our press release and Form 10-Q that we filed this morning detail some of the important risk factors that may cause our actual results to differ from those in our predictions. Please note that we do not have a duty to update our forward-looking statements. Our press release and portions of today's call use non-GAAP financial measures as defined in Regulation G. You can find the related reconciliations to GAAP measures in our press release and presentation.

Joining me on today's call is Matt Tobolski, CEO and President; and Rebecca Thompson, CFO and Treasurer. Matt will start off with some opening remarks, Rebecca will follow with a walk-through of the quarterly results, and Matt will then finish with our outlook for the rest of the year and some closing remarks.

With that, I will turn the call over to Matt.

Thanks, Joe, and good morning. Starting on Slide 3, our second quarter results that we reported this morning fall short of our expectations and do not reflect the high standard we set for ourselves as an organization. We remain committed to providing transparency to our investors. As previously shared during our Investor Day in June, we've experienced challenges related to our ERP implementation. In this update, we want to provide a comprehensive view of where things stand today, the key factors that contributed to the recent underperformance and most importantly, how we are moving forward. We are committed to addressing this directly and taking the necessary steps to restore your trust. I want to assure you that our confidence in the strength of our strategy remains unwavering. While we're navigating some near-term challenges, we firmly believe that the actions we're taking today will significantly strengthen the company for the long term. We don't want that bigger picture to be lost but given the challenges we faced, we will start with providing some incremental detail on what went wrong.

Please turn to Slide 4. I would like to start by giving some context to the recent events. Over the past few years, and especially following our acquisition with BasX at the end of 2021, it became increasingly clear that our existing business systems required a significant upgrade to support our growing scale and complexity. On April 1, we went live with our new ERP system at our first site in Longview. We always anticipated some slowdown in production, but we saw a more prolonged impact on AAON branded equipment and coils production. The slowdown ultimately impacted our broader operations as Tulsa procures the majority of its coils from Longview. We had a contingency plan in place. But unfortunately, both of our primary external coil suppliers were simultaneously undergoing their own ERP upgrades. This unexpected overlap significantly constrained Tulsa's ability to source coils in a timely manner, compounding the challenges we faced. The end result was that at Tulsa, while production improved month-to-month from April to July, the ramp was slower than expected.

At Longview production of AAON branded equipment was significantly impacted early in the quarter as teams adapted to the new system. However, as production and supporting functions, gained experience and familiarity, we saw a steady improvement throughout the remainder of the quarter.

Now turn to Slide 5. This slide illustrates how recent production rates of AAON branded equipment have trended compared to normalized levels, which we benchmarked against the first 9 months of 2024. This KPI measures the consolidated production of AAON branded equipment across both the AAON Oklahoma and AAON Coil Products segments and measured levels of efficiency. We've overlaid the total company gross margin on the same time line and as you'll see there is a strong correlation between production efficiency metric and the gross margin performance. The biggest takeaway here is that after bottoming out in April, the total production consistently improved month-to-month throughout the quarter. And while it's not shown here, we continue to see improvement through July. Tulsa was 6% below that benchmark pace in July. And while Longview still has some ground to make up, improvements began to accelerate starting in the second half of June.

Looking ahead, we expect production levels at both our Tulsa and Longview facilities to continue to improve from July levels. As production stabilizes and scales, we also anticipate a corresponding improvement in gross margins. Said another way, when we hit our production metrics, we deliver our corresponding gross margin targets.

Please turn to Slide 6. Here, you can see our total backlog of AAON branded equipment which are manufactured across both our Tulsa and Longview facilities. Bookings in Q2 and year-to-date remain strong. This, combined with the improving production trends, supports my earlier point regarding our expectation of a strong recovery in the second half of the year. While we entered the third quarter with production levels below our initial expectations, we remain confident in a solid upward trajectory and anticipate strong growth in AAON branded production over the remainder of the year. I'd also like to point out that our backlog is favorably priced relative to input cost. Almost all of our production in Q2 was associated with orders received prior to our January 1, 3% price increase and a 6% tariff surcharge that was put in place in March. Directionally, this will begin contributing positively to both sales and margin in the third quarter with a more meaningful impact anticipated in the fourth quarter.

Please turn to Slide 7. I want to take a moment to give you some more color on our ERP upgrade, both in terms of what we are looking to achieve and how we see the rollout mapping from here. Given the size and the growing complexity of our organization, including expanded manufacturing operations, it is evident that continuing to scale at the growth rates we target will require a more sophisticated integrated systems. After years of planning, development and preparation we went live with the new ERP system at our Longview facility on April 1. Our ERP rollout strategy was very intentional. To limit disruption and managed risk, we intentionally adopted a staged approach implementing the system in one location at a time and not moving on to the next site under the prior location is operating smoothly and meeting our performance expectations. We made the decision to begin the rollout in our Longview facility, because it produces both AAON branded and BasX branded equipment as well as manufacturers coil. A critical component not only used at Longview, but also at other sites in the production of finished products.

This approach allowed us to fully vet the ERP solution across our entire product portfolio, helping to reduce risk and minimize disruptions during future site implementations. Beyond product mix, when considering our organizational structure, where shared services support multiple functions across all sites, starting with Longview enables these teams to build proficiency with a new ERP solution before we proceeded additional site rollouts. This ensures that by the time we transition to Redmond, which produces only BasX branded equipment or to our largest site, Tulsa, which primarily manufactures AAON branded products, our shared services teams will be fully up to speed and well equipped to support a smoother and more efficient go live at these locations.

We've also gained valuable insights from the Longview go-live that will help us to ensure a smoother more efficient transition for production teams and our other sites. We brought team members from our other sites to Longview to observe best practices for sand, and we're conducting additional training at those locations to ensure they're well prepared for their own transitions. I want to remind everyone that while this transition is creating some near-term challenges, we remain confident that once fully implemented, the new system will deliver significant operational and economic benefits across the organization. We anticipate full implementation will be complete by year-end 2026. And while it's too early to discuss the outlook for '26, factoring in subsequent ERP rollouts, particularly in the quarter when we go-live in Tulsa, we expect to achieve double-digit year-over-year growth in margin improvement for the year, trending towards our long-term target of 32% to 35%.

Now please turn to Slide 8. While it's important to clearly understand the challenges we faced this quarter, we must also keep sight of the strong underlying fundamentals that continue to drive our business forward. With that in mind, here are some of the positives that we've achieved in the second quarter. First, the BasX brand continued to demonstrate strength within the data center market in Q2. BasX branded data center sales were up 127% in Q2 and 269% year-to-date. Second, our liquid cooling solutions continue to gain traction in the rapidly evolving data center market as evidenced by incremental orders we secured during the quarter. Year-to-date, liquid cooling equipment accounted for approximately 40% of total BasX branded data center sales, highlighting its increasing significance within our product portfolio.

Third, during the quarter, BasX announced a strategic partnership with Applied Digital, under which we will supply thermal management solutions for their AI factory, including custom-designed free-cooling chillers for their data centers. This partnership resulted in a significant order further reinforcing Basic's leadership in advanced cooling solutions. Fourth, our national account strategy within the AAON brand is gaining meaningful traction. National accounts orders grew year-over-year by 163% in Q2 and are up 90% year-to-date, reflecting the effectiveness of our targeted approach deeper customer engagement and the strong value proposition of our equipment, which uniquely aligns with the needs of these customers.

In the first half of the year, national accounts made up approximately 35% of total AAON branded orders up from approximately 20% a year ago. And finally, the AAON branded Alpha Class heat pump business continues to disrupt the market with its high-performance offering. Alpha Class sales grew 8% in Q2, while bookings surged approximately 61% during the same period. highlighting strong momentum and growing market adoption.

I will now turn it over to Rebecca, who will walk through the financials in more detail.

Thank you, Matt. Please turn to Slide 9. Net sales in the quarter declined year-over-year, $2 million or 0.6% to $311.6 million. The modest overall decline was driven by a 20.9% decline in AAON branded sales which was nearly fully offset by a 90% increase in BasX branded sales. The decline in AAON branded sales was driven by the impact of lingering supply chain disruptions in early April and Coil supply shortages at the end of the quarter due to our ERP implementation.

The gross margin was 26.6%, down 950 basis points. The contraction of margin was largely due to lower production volume of AAON branded equipment sales at the AAON Oklahoma and AAON Coil Products segments. Our new Memphis facility incurred $3 million in costs during the quarter, with minimal sales to offset this cost to the AAON Oklahoma segment. Non-GAAP adjusted EBITDA, 14.9%, down 1,120 basis points and non-GAAP adjusted EPS was $0.22, down 64.5% from the previous year. Also noteworthy, we hosted a national sales meeting in April that incurred costs of approximately $1.6 million. While we did not flag this as a onetime event, the last national sales meeting we hosted was in 2021. We also have elevated depreciation and amortization as well as technology consulting fees creating higher SG&A as a result of our ERP implementation.

Please turn to Slide 10. On this slide, we bridge the second quarter sales and gross margin performance to the same quarter last year, highlighting the primary drivers of the year-over-year change. We estimate the Longview ERP implementation and supply chain disruptions in early April impacted total sales by approximately $35 million or 11.1%. Together, these 2 issues impacted gross profit by approximately $20 million. Also worth noting, pricing had a minimal impact on overall sales and gross profit for the quarter. Through Q2, we have recognized only a small portion of the 3% price increase implemented on January 1 and almost none of the 6% tariff surcharge introduced in March.

Please turn to Slide 11. Looking at the segment financials and starting with AAON Oklahoma, net sales in the segment declined 18%. This decline was driven by lingering supply chain disruptions related to the refrigerant transition at the beginning of the quarter as well as Coil supply shortages towards the end of the quarter due to our ERP implementation at the Longview, Texas facility, which slowed production of coils for our Tulsa plant. Despite the year-over-year decline, production improved consistently month-to-month throughout the quarter, a trend that continued through July. Production efficiency in July was 6% below pre-Q4 2024 levels. Lower production volumes were the primary factor in the gross margin contracting 970 basis points. Also contributing to the segment's contraction of gross margin, the Memphis plant incurred cost of $3 million. Along with improving production rates, AAON Oklahoma entered August with a strong backlog.

Please turn to Slide 12. AAON Coil Products sales grew $27.1 million or 86.4% primarily driven by growth in BasX branded products of $40.1 million for a large liquid cooling project. AAON branded products declined $13 million due to disruptions caused by the change in ERP systems. The ERP implementation significantly impacted both production volumes and efficiencies of AAON branded equipment, serving as the primary driver of the 1,990 basis point traction in segment gross margin. Since April, production of AAON branded equipment at the Longview facility has improved significantly. Using the average production rate over the first 9 months of 2024 as a benchmark, Production of AAON branded equipment in April was down approximately 50%. At the end of July, we were down 37%. For BasX branded production at this segment, the impact of the ERP implementation was considerably less, largely because of the uniformity of units within the orders. Thus, production performed relatively well, and the backlog remains strong.

Please turn to Slide 13. Sales at the BasX segment grew 20.4% due to the continued demand for the data center solutions. Gross margin contracted 60 basis points from a year ago due primarily to higher indirect costs for warehouse personnel, partially offset by lower material costs. Gross margin increased sequentially for the second consecutive quarter, reflecting continued operational improvements since we initiated targeted efforts late last year.

Please turn to Slide 14. Cash, cash equivalents and restricted cash balances totaled $1.3 million on June 30, 2025, and debt at the end of the quarter was $317.3 million. Our leverage ratio was 1.4x. Year-to-date, cash flow used in operations was $31 million compared to cash flow provided by operations of $127.9 million in the comparable period a year ago. Year-to-date, cash flow from operations largely reflects increased investments in working capital. Capital expenditures through the first half of the year, including expenditures related to software development, increased 18.7% to $89.6 million. We had net borrowings of debt of $160.1 million over this period, largely to finance the investments in working capital, capital expenditures, and $30 million in open market stock buybacks that we executed in the first quarter.

Overall, our financial position remains strong. This gives us the flexibility and allows us to continue to focus on investments that will drive growth and generate attractive returns. For 2025, we continue to anticipate capital expenditures will be $220 million.

I will now turn the call over to Matt.

Thank you, Rebecca. Up until now, we've intentionally placed extra emphasis on the quarter and the challenges we faced, particularly around the ERP rollout because it's important that you fully understand what happened. That said, what matters most is where we go from here.

Starting on Slide 15. As shown here, our adjusted backlog remained strong, up 72% compared to a year ago. At this stage, the BasX brand is the primary growth engine of the company fueled by exceptionally strong demand from the data center market and the unique custom design solutions that we provide our customers. We are now producing BasX branded products at all of our major facilities, including our newest site in Memphis which we purchased just 8 months ago. Aside from effectively managing the ERP rollout, bringing this facility fully online as our top operational priority. By year-end, this facility will significantly expand the capacity of BasX branded manufacturing by nearly doubling its square footage. At that point, we'll be well positioned operationally to fully capitalize on the robust demand for the data center market. While we've seen strong growth in BasX branded production thus far, our full potential remains constrained by current capacity limitations, a challenge we are actively working to overcome.

The Longview facility which is represented by our AAON Coil Products segment is equally as important to our growth strategy with the BasX brand. At Longview, we are currently manufacturing a uniquely designed liquid cooling product for a hyperscaler. We've been steadily ramping production of this product throughout the first half of the year, positioning our manufacturing operations for a multiyear increase in volume. Since being awarded initial order late last year, we received additional follow-on orders and are actively collaborating with this customer to develop new designs for their next-generation data centers. Overall, the outlook of our BasX brand remain very strong. We produce the most sophisticated, customized thermal management equipment in what is a rapidly evolving and technically demanded industry.

Looking ahead to the second half of the year, we anticipate BasX branded sales will increase year-over-year approximately 40%. Our AAON brand is equally strong and critical to our long-term success. Despite prolonged softness in nonresidential construction market, our bookings have remained strong, particularly in the second quarter when they grew by double digits year-over-year. The recent strength in bookings highlights the value of our products and signal an opportunity to further leverage our pricing power. At the end of the second quarter, backlog of AAON branded equipment was up 93% from a year ago and up 22% from the end of March. Our top priority right now within the AAON brand is to put our customers first by continuing to ramp up production at both Tulsa and Longview facilities in ensuring that we deliver the highest quality products in a timely manner. The value we deliver our customers through our premium quality, high-performance equipment has never been more compelling, and we're seeing that reflected in strong demand even in a soft market environment.

You could particularly see this with our national account strategy with year-to-date orders to these customers up significantly. Given the progress we're making in production and the strength of our backlog, we expect AAON branded sales to increase significantly in the second half of the year with quarter-over-quarter growth anticipated in both Q3 and Q4.

Please turn to Slide 16. The due to the greater-than-expected impact of ERP implementation on our second quarter results and the resulting effect we now anticipate in the second half of the year, we are revising our full year 2025 outlook lower. We now anticipate full year sales growth in the low teens at a gross margin of 28% to 29%. Adjusted SG&A as a percentage of sales is now expected to be between 16.5% and 17%, and we continue to restrict CapEx to be approximately $220 million.

Please turn to Slide 17. On this slide, we highlight the key factors now incorporated into our full year outlook. When compared to the similar slide Rebecca walked through for the second quarter, you'll notice it reflects an expectation of accelerated volume growth in the second half of the year. This is not as strong as we were previously expecting due to lower production rates entering the third quarter, but it's still strong sequential growth. You'll also notice favorable price/cost dynamics are expected to accelerate meaningfully in the second half. At the same time, it also factors in additional ERP-related headwinds that we previously were not anticipating.

Please turn to Slide 18. Here, we illustrate and quantify what the full year outlook implies for the second half of the year. Despite the temporary challenges we are facing, we still expect a significant jump from the first half to the second half. Furthermore, if we take a step back, you can see the trajectory is positive looking back to the beginning of 2024. We are addressing the challenges we face head on and are firmly on the path to recovery. Lastly, I want to direct your attention to the table in the bottom right corner. The year-over-year growth that we now anticipate in Q3 and Q4 implies sequential growth throughout the rest of the year. Through year-end, we expect production rates to improve and the adverse impacts of the new ERP system implementation to lessen.

Before I hand it off for Q&A, it's important to note that the core fundamentals of this company have never been stronger. And once we move past these temporary obstacles, will be in an even stronger position to deliver long-term value for our customers and our shareholders. I know these results are disappointing. And believe me, I share that disappointment. For the broader context, this remains an incredibly exciting time for our company. The future is bright, and we are well positioned to emerge in this period even stronger.

With that, I will now open the call up to Q&A.

[Operator Instructions] And your first question will be from Timothy Wojs at Baird.

Thanks for all the details. Maybe just to start, I guess on the guidance in the second half kind of coming down more than you think, could you just, I guess, maybe bridge us a little bit versus the prior guidance that you have versus what you have now? And how much of that is the ERP implementation? And how much of that is just lower volumes and the under absorption associated with that?

Thanks for the question. So as we look at the kind of revision to the back half of the year on the guidance side, primarily the drivers there are going to be around the ACP performance and the sort of ERP impacts that come with that. And so with that, we ended July with a 37% performance against our efficiency metric. But just to quantify, that was at a production level, total production level that was down about 20%. So we finished off July being 20% of where we want to be from a top line revenue perspective on AAON branded product inside of the Longview segment. And we're seeing that accelerate, we're seeing that improve, but just kind of meaningfully considering that impact on the back half of the year.

And then when we kind of switch over to a lesser extent on the Tulsa side, while Tulsa is certainly performing substantially better than the ACP segment, we did start the quarter at a lower performance point just with that coil impact that we had. And so really, that's reflecting to a lesser extent, also the lower starting point that we're ramping off of within the Tulsa segment.

Okay. Okay. And I guess, when you look at kind of what's implied, I think it's probably something in the low 30s for gross margins in Oklahoma in the back half of the year yet. You're probably going to get close to the revenue numbers that you had in the first half of '24. So I guess what is the difference outside a few million dollars and things like Memphis kind of ramping between that kind of maybe low 30s number and something that was closer to 36 or 37?

Yes, great question. And so we think about the Tulsa side of the business, and I just want to start off that nothing has drastically changed kind of on the overall performance of that segment. There are some incremental costs that we've invested within the organization with enhancements to our end-of-line test procedures, some investments in additional laboratory work and really driving some of our innovation. But when we look at that, we're talking about tens of basis points, not hundreds of basis points.

So when we really think about what are the primary drivers in the overall margin on the Tulsa segment, Memphis and the start-up cost certainly is going to be one of those big cost drivers that's going to kind of add on top of those incremental costs. And then on top of that, we have been producing BasX products within the Tulsa segment. And so that production that we're temporarily doing there just to basically provide more capacity for the BasX brand, that capacity, that manufacturing is temporarily putting some strains on the overall efficiency metrics within the segment. So that really is kind of what's putting the pressure points on there. But when we look at it from an overall kind of Tulsa perspective, we truly believe that gets back into that long-term target and that 32% to 35% on an annualized basis within that margin profile.

Okay. And then I guess the last question I have, just data center backlog, I know it's been pretty good the last couple of quarters, but it was flat sequentially. Anything you would kind of highlight or call out there? I know that, that business can kind of be lumpy. But just if you could spend a minute just on the health of the data center business and how you're positioned there, I think that would be helpful.

Yes. So from a data center perspective, I just want to start off by saying it remains incredibly strong. The activity, the engagement we have within the market remains incredibly strong. And so just to put it in perspective, the overall top line sales were up year-over-year, 127% in the quarter. So when we look at that flat backlog, obviously suggesting good strength in that quarter, which means good activity on the overall booking side. And that activity and that engagement has been at least, if not stronger in both July and August. But when we step back and think about the data center market, a key aspect there is we've got to have capacity to sell. And so we have just begun selling into that Memphis investment that we had as a kind of a production capacity perspective. And we're going to start seeing the ability to sell that capacity meaningfully impact the backlog going forward.

But when we look at kind of where we stand right now, while we're ramping up production in Memphis, we also have to be realistic when we book orders to make sure that we are providing delivery within the customers' expectations. And so we're going to see that Memphis facility really provide a meaningful capacity increase at the later half or later portion of this year and continuing to accelerate within 2026. And you'll start seeing orders that are basically filling that facility start to come to fruition.

And just to maybe also give you a little bit of context, we look at the ACP performance, we look at the segment sales and really the bookings perspective on that liquid cooling order. I mentioned in the prepared commentary, but I just want to reiterate here that we continue to have active engagement with that customer, not just in the current orders and follow-on orders, but also working with them actively to develop the next-generation liquid cooling solutions for their data centers. And so we've kind of brought this up multiple times in the past, but it's a dynamically evolving market with new technology. And so the customization, the unique value proposition that the BasX brand provides to that data center market really resonates in that rapidly evolving and dynamically moving market. And so we're going to continue seeing good strength in bookings kind of coming off of all the engagement we're having within that market today.

Next question will be from Edward Thielman at D.A. Davidson.

Matt, maybe just picking up off that last question on just the Basics brand visibility in data center. I mean could you just talk about the significance of the Applied Digital partnership for the future of BasX and orders, how that fits in?

Brent, great question. So Applied Digital, it is pretty much a pure-play AI data center developer. And so really, as data center developer they're actively engaged in developing sort of really high-performance next-generation AI infrastructure. And that really resonates with the BasX brand and be able to really create solutions that optimize performance within that segment. And so when we look at that and we think about an AI data center as a whole and you think about kind of where we play inside that data center, we've got the, let's say, the thermal management systems that are going to be outside, which in this case, are chillers. We've got the airside solutions that are going to be inside, basically chilled water fan coil walls or craw units and then CDUs. And with that customer, we're engaged in conversations in all 3 of those aspects, we already have orders for 2 of the 3 of those pieces, including high-performance chillers that are really important as we think about how we're going to manage high-efficiency. Heat rejection inside of these AI data centers.

And so our team collaborated very actively with that customer to develop a solution that is optimum for AI workloads. And really, when we look at their deployment plans, we're obviously talking about their facility that they're currently building in North Dakota, but they're continuing to expand across the region. And really, from our perspective, we're actively engaged in all of those pursuits and all those collaborations. So this really is first, I'll say, first phase of first step in a long relationship with that customer managing their thermal loads as they deploy AI capacity across the country.

Okay. All right. I appreciate that, Matt. Maybe just as a follow-up, look, you look over the course of the rest of this year, you've certainly embedded some challenges here to the outlook. Just trying to get a sense, especially as we look into the fourth quarter, Matt, I mean, still implying reasonably strong growth here on the top line, high 20s. Maybe if you could just talk a little more about what you are -- you faced this comment sort of cushion in terms of the outlook. What are you embedding as we get into the fourth quarter and we're talking about significant growth towards the end of the year here?

Yes, certainly, as we look at the guidance that's implied for Q4, and really as a whole, we're showing acceleration quarter-over-quarter from Q3 to Q4. And so when you look at the implied growth that we kind of talked about in the prepared commentary, we're talking about year-over-year growth in the high 20s kind of implied in that from a top line perspective and getting back into a margin profile in the 30s, the low 30s. And so certainly building upon and kind of working their way out of challenges that we've had operationally as we've gone live with this ERP. But when we think about kind of what's built into that, I want to first start off with we have a lot of visibility in the backlog. So the back half of this year, we have a lot of visibility, both on the AAON brand and the BasX brand. And so implied in there is certainly a strong continued performance -- continued performance within the ACP segment on the BasX brand, recovery quarter-over-quarter in the AAON brand at the ACP segment.

We're building up within Tulsa, and we're going to be ramping it also substantially quarter-over-quarter with that backlog. So we've got a lot of visibility in the AAON segment, in the Tulsa segment. Sorry, the Tulsa segment with the AAON branded products that we're going to see accelerating throughout the year. And all of that is sitting there with positive price dynamic in it. And so as we mentioned in the prepared commentary, Q2 barely touched on a 3% price increase and almost none of the 6% tariff surcharge. And so all of that starts to come into play in Q3 and Q4, which is helping provide some strength, obviously, in top line as well as gross margin expansion.

And then beyond that, the BasX segment, we're expecting to see kind of stability on sort of what it performed at in Q2, but increasing efficiency and so keep driving for margin improvement in the BasX segment. And then through on top of that, we're going to start seeing Memphis come online. So that's what's baked into it, obviously, from where the caution lies or what the as you kind of call the cushion, I mean, obviously, we're still factoring in the ERP impacts within the Longview segment as we're recovering. So we're baking in, obviously, the recovery off of the impacts that we had and really also taking in the fact that Q3 for the Tulsa segment, we started off at a lower particular 1 or 2. But again, we're going to see that strong production ramp throughout the back half of the year, helping to really pop up that -- the guidance that we provided for the back half of the year.

Okay. I appreciate that. Matt, maybe just one more. I mean, very strong bookings here in the AAON branded product. Maybe just your read on that is this a direct result of share capture strategy. You've obviously discussed for several quarters now. There are other elements to that we ought to think about in terms of driving those bookings. Just be curious, you read on the booking strength in that product line?

Yes. So as we think about the AAON brand, especially within Tulsa the rooftop segment, I want to start off by saying, obviously, the market remains in a challenged position. So the overall non-risk market, probably sitting at your bottom of kind of the cycle, but certainly it's been a tough market within that side. So when you look at our bookings relative to that market dynamic, it certainly is showcasing an over -- or an outperformed relative to the kind of macro environment there. And really, we talked about a lot of the things that we're focusing on that are helping that from a share capture standpoint, but really the biggest driver that we've talked a lot about with the intentional investments we made comes down to our national account strategy. And we've invested heavily within internal resources to support that strategic initiative and really help bolster that from a growth driver for the organization.

And when you marry up that national account strategy with best-in-class pump technology in the Alpha Class, we're really seeing just unique opportunities for us to be able to capture opportunity and share within the marketplace. And so as we look at that and we think about the overall performance, when we see that kind of share dynamic, obviously, in the backlog growth, it also does have us review and really kind of look at the opportunity to leverage price within that environment as well. And so as we think about the opportunity going forward, we're showing that the value proposition, the pricing of our product in the positioning in the marketplace is really resonating and providing opportunity to continue reviewing pricing strategy going forward.

Next question will be from Ryan Merkel at William Blair.

I guess, first off, Matt, what's your confidence level that the new guide captures the downside risk from the ERP? And in the press release, you mentioned taking immediate actions to shore things up. Talk about that a little bit.

Yes. So certainly, from what's provided in that back half guidance, we spent a lot of time ensuring that we adequately cover the risk factors that we see and make sure that we're providing a target that is achievable and obviously has some upside potential to it. So when we look at the effort we put in kind of where we stand from a trajectory standpoint, a visibility standpoint and kind of where we're at from a performance and recovery standpoint, all of that's baked in adequately inside that guide to be able to provide upside against it. We certainly see that the impacts that we saw in terms of production rates within the ACP segment and then also the impact that kind of spilled over to Tulsa certainly was not what we wanted to see.

But from a recovery standpoint, both segments we look at from a metric standpoint are showing strong recovery that we talked about on the call, but Tulsa being in July is 6% below its target efficiency rate at the end of the month. So we certainly are seeing all the signs in the recovery that we expected to see, albeit the impact not -- or the impact lower than we wanted to see in the first place, but certainly, the recovery and the path of recovery is very visible for us.

When we look at the immediate actions we took and really kind of relating to some of the supply chain spillover, it was certainly an unfortunate of events as the ERP began to impact our oil production within our Longview segment, thus impacting Tulsa. As soon as the supply chain constraints were observed kind of from our third-party vendors our supply chain team was very proactive in getting boots on the ground, getting resources in place, you tactically manage what was happening at those sites and really getting the visibility to respond and mitigate the impacts of the overall operation. And so that activity is certainly part of the driver where we see the Tulsa segment sitting in a much stronger position kind of coming out of July in the reaction, the -- I'll say, the ability to react to challenges is certainly one of the strengths of AAON. And as these things have come up, our team has jumped in every single issue that's come up, got the resources in place, speak to understand what the drivers were and make sure that we create strategies to prevent them from happening again.

And so I just want to kind of stress when we look at the ERP as a whole, certainly, the impacts in Longview were larger than we wanted to see as an organization. But the decision to go-live in Longview really was very intentional to stress test the ERP as a whole. It was done to look at a site that manufactures both brands of products that manufacture coils so that we can truly test the system in all the ways that we operate this business, you stress test to break as much as possible any of the things that we could possibly bring. So that when we go live in future locations, those same issues aren't going to come up because you've already been able to see them resolve in and build the system, adapt the system to make sure that the organization can perform as expected in the future go last. So just to stress, as much as the performance at the go-live wasn't we wanted, the lessons learned and the operational strategies provide us a lot of confidence on sort of the ability to perform going forward.

Perfect. That's helpful. And then I want to put the 4Q guidance to a little context with revenue up high 20s. I don't think ERP issues will be totally back to normal at that point. So just a little context on what's assumed there? And then what does it assume about growth for Oklahoma?

Yes. I mean Oklahoma, maybe just kind of looking at it from across the board. I mean, Oklahoma, you're going to see quarter-over-quarter strength on top line bookings as we kind of keep accelerating production capacity with that facility against that backlog. I was going to point out and stress that ramping up production, it certainly is a calculated approach. I mean we can't just go from 0 to 60 from a production perspective in Tulsa. And so we'll see quarter-over-quarter strengthening of the overall production rates in Tulsa. And that's baked into the guidance from an overall recovery perspective.

In the Coil Products segment, certainly, the ERP is the guide assumes there's some lingering effect into Q4 within the ACP segment. And so while it's proving, we certainly have some consideration in there just as it continues to recover off of that performance. And so that is baked into the guide Q4 perspective. And then just from a BasX perspective, I mean, it's operating kind of nearest capacity within the Redmond location. And though basis as a whole, you're not going to see a lot of acceleration of growth off of the BasX segment as you report but you will see acceleration in the BasX brand as we begin bringing on capacity within Memphis. And so Memphis is considered to start coming online in that Q4 guide as well in a more meaningful fashion.

All right. Last one for me. So you're going to exit 4Q with the gross margin, 30%, 31%. You quantified the ERP impact this year, $55 million. We have to set a model for '26, and I know you don't want to talk about that, but in the script, you mentioned double-digit top line and margin improvement. Can you give us some sort of sense of how much margin lift we could see in '26? I know it's a bit early, but it would be helpful, any color.

Yes. So certainly, we're not getting into too much detail on '26 yet, but when we look at the overall performance from a '25 to '26 perspective, we do see the top line growth that we guided -- we provided that insight to in the overall prepared commentary. Our Q4 implied margin sitting at 30% or 31% what we're basically implying in 2026 is nearing that long-term target of 32% to 35%. And that is factoring in, while we've gone through, I'll say, the hardest implementation in the Longview facility in terms of its first site and really stress testing the system, '26 obviously we'll still have the additional go-lives within the basics and the Tulsa segment. And so there is consideration kind of in that margin profile approaching 32% to 35% from a long-term guide perspective and some stress from the kind of future rollouts.

Next question will be from Chris Moore at CJS.

Yes, so it looks like booking is pretty good on AAON. Maybe you could just talk overall about the prolonged softness in rooftop. I mean what are you thinking about the market overall in the next 6, 18 months? Is it interest rates? Is it just any thoughts you might have on the overall market?

So from a kind of overall macro perspective, if we look at everyone else that's released for Q2 results, the -- everyone is signaling, obviously, volumes are down kind of in the non-res market which we would agree with. If we look at this from an overall macro perspective, there is certainly softness probably in the 10% volumes down 10% volume as an overall industry perspective in the nonres market.

And so to put that in context, so when we look at the bookings trend, we certainly look like we're at the bottom of the trough. So we don't see it as a continued kind of deceleration in decline. We see ourselves certainly nearing the bottom, it's not at the bottom as an industry within that segment. So kind of what we're seeing, we see certainly the interest rates, obviously, are a driver. But also, I mean, interest rates at the end of the day, if they're stable, eventually, we get used to how to operate inside those interest rate environments. And so it's really the getting to a stable perspective that is, I'd say, the big driver. And so getting past some of the volatility, whether it be tariffs, whether it be interest rates, once we get to a normal operating cadence as an industry, the industry fundamentally figures out how to operate inside that new cost structure.

And so a lot of the deceleration that we've seen, a lot of the conversations that we've seen really have centered around just the uncertainty kind of in that near-term perspective. And so as we look, 12, 16, 18 months out, getting to a more stable operating condition. We're going to -- we expect to see the market as a whole beyond the upside coming out of that. So I would just point out there that as much as we talk about the softness in the macro market, to your comment, I mean, the bookings you see within AAON certainly showcased a different perfomance level against that overall dynamic. And again, that is really a lot of the strategy that we've had, whether it be Alpha Class product with bookings up above 60% in the quarter or National Accounts that are showing tremendous strength in bookings. Those really are the opportunities for AAON when we think about the nonres market to continue outperforming that market and acquire market share.

Got it. Very helpful. So maybe just going back to Investor Day, you talked about in a more normalized situation. Gross margins, 29% to 30% per basics, a little bit below rooftop. Just trying to understand, is there something fundamentally different in the rooftop market that allows a higher margin? Or is it just it's a function of the rapid growth in BasX, fully leveraging the facilities? Is there a point where you ever see them at parity or BasX will likely be lower kind of long term?

No, that's a great question, Chris. And really when we think about the margins, there's nothing that says we can't get to parity on the overall margin profile. The reason the commentary came and really we gave that commentary regarding BasX at Investor Day and kind of today as well is just as we think about its growth rate, there's inherent pressures that are created in investing ahead of that capacity. And so when you think about these strong year-over-year growth rates, we're having to put the engineering resources, the overhead resources, the -- a lot of the manufacturing staff ahead of the overall revenue to be able to support that revenue going forward.

And so that creates some strains, growing 40% year-over-year-over-year, create some strains just in operational dynamics. But certainly, we look at as those growth rates I don't want to say temper, but as we get this capacity online, we're able to start leveraging some of that. There's nothing to say we can't get our margins on parity with the overall rooftop segment. Just this hyper growth stage certainly has some pressures there.

[Operator Instructions] Next question will be from Julio Romero of Sidoti & Company.

This is Alex on for Julio. First question was just circling back to backlog. I know it's up significantly year-over-year. Could you comment a little bit on the margin profile and pricing embedded in the backlog? Really on that if these orders are sort of protected with price increases and surcharges or there's still some risk of margin compression on fulfillment?

Yes. I don't bifurcate that combination between the 2 brands because there's definitely some different dynamics that exist between the 2 different brands. But as we look at the AAON segment or AAON brand as a first starting point, that backlog certainly is favorably priced relative to the Q2 results and really getting down to that comment was made in commentary that we really just started to see that 3% January 1 price increase start hitting the overall revenue profile in Q2.

So when we look at that backlog from an AAON perspective, we've got 3% price plus a 6% tariff surcharge that we're going to see meaningfully impact the overall results in the back half of the year. And we see that being accretive to margin. When we look at the overall price cost dynamic, that price as we see it today with all the visibility we have on supply chain, there certainly is some additional kind of margin opportunity that exists inside that backlog. So on the AAON brand, it's kind of the visibility we have in the we're buying essentially our supply chain team is actively buying the overall input costs or input products to be able to manufacture that. So a lot of visibility into kind of what that dynamic looks like.

On the BasX side of the business, certainly from a margin profile, there is escalation clauses that exist in the vast majority of the backlog that is extended. And so there's opportunity if dynamics were changed drastically to be able to address that with our customer base. But we also have a lot of visibility into what the input costs are and really are securing kind of longer-term apply contracts to support that. So we see that basically being more margin neutral kind of what is built into that overall pricing in the backlog for the BasX side?

Great color. And then one more from us. Just changing gears a little bit. Curious if you're seeing any positive sentiment from customers as a result of the One Big Beautiful Bill Act? Maybe any implications for stronger demand as a result of bonus depreciation or other aspects of the bill?

Yes, I would say, I mean, certainly, from an investment perspective and especially investment in the U.S. from a manufacturing, from warehousing, from an overall capital investment standpoint, there is certainly some benefit that is improving sentiment. I wouldn't say a light switch flip kind of when that bill went into place, but certainly provide some positive trajectory, which really, as I mentioned before, when we're sitting kind of a, I'll say, the bottom of what we see is we see at the bottom of the cycle, any positive movement in sentiment, say, overall positive going forward.

Next question will be from John Bats at Kansas Capital.

Matt, I know you don't want to talk too much about 2026, but can you give us a little sense on how the P&L for Memphis might look in 2026 versus 2025, sort of the delta between the years?

Just to clarify, John, you mean specifically kind of the cost drag versus the positive kind of contribution?

Yes, yes.

Yes. So obviously, when we acquired the Memphis facility and really since we started building out the overall facility, a lot of that investment, whether it be in people and staff or capital investments, they're certainly all coming ahead of the overall revenue. And so while we are generating some revenue in Memphis in 2025, it's not offsetting kind of the overall cost structure of basically standing up that facility.

As we look into 2026 and as we think about orders like Applied Digital that we're going to be manufacturing primarily in the Memphis facility, we're going to start generating substantially more revenue to be able to offset those costs. And so the kind of way we look at Memphis in 2025 to 2026 is really going from a cost drag to an overall kind of drag on the overall financials to a positive contributor in the financials. And really, when we think about what's happening in '26, I mean, the growth of the BasX brand, that growth is going to come through Memphis in 2026. And so the demand we have for data centers, the relationships as we continue to develop these innovative solutions, all that's going to be what's driving the 2026 growth in Memphis and really allow it to become a positive contributor to the overall financial statement.

Okay. All right. And maybe a question for Joe. In your presentation, you mentioned management will provide regular updates on implementation progress. What does that mean?

I would just say that as we hit certain milestones that are significant to informing you all, we will take that approach. There's nothing in the sand today as far as exactly what and when we will be providing that information. But as we hit certain milestones, we will provide those updates.

So Joe, if you reach those milestones, you might say something between conference calls. Is that how I should understand it?

Potentially or a conference or I mean, like I said, there's no set game plan to that, but we will provide regular updates when we hit certain milestones. We're trying to be as transparent as possible in an environment that is certainly impacting the financials like you've seen.

Okay. And one last question. Rebecca, there was a significant investment in working capital in the quarter in the first half. How do you see that playing out in the second half as operations get a little bit stronger?

Well, we'll still have some working capital needs to support the Basics brand. And like Matt talked about this upcoming job with Applied Digital to the extent we have to make those investments prior to like all of the production coming online, plus you do have our Memphis facility that we do need to stock up, make the investments to supply with inventory at that location. So that's primarily been what most of those investments have been. I anticipate maybe through, I don't know, mid-Q3 back half of the year, they should start to ease.

And at this time, Mr. Mondillo, we have no other questions registered. Please proceed.

Okay. Thanks, everyone, for joining the call today. If anyone has any questions over the coming days and weeks, please feel free to reach out to us. Have a great rest of the day, and we look forward to speaking with you in the future. Thanks.

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we ask that you please disconnect your lines.

All right. Good morning, everyone. My name is Joe Mondillo, Director of Investor Relations, for those who don't know. Thank you for all for coming. I know this takes a lot of time out of your day, so we appreciate it. Those on the webcast, we also appreciate your participation.

So the last time we did one of these was 2023. A lot of people asked, when is the next time you think you'll do one of these things? And at the time, I remember saying that I think 12 months, the story doesn't change a whole lot. In 3 years, it's probably going to be too much. And I think that's exactly where we are, 2 years was the right time in my thought process. And here we are, a lot has changed with the story.

So I think this is going to be a useful worth of your time today. Before we get started, I just want to remind you of everyone of the forward-looking statement disclaimer that we have. You're all aware, we're not required to update any forward-looking statements said today.

Joining me today, the team, Matt Tobolski, CEO; Rebecca Thompson, CFO and Treasurer; Stephen Wakefield, our General Manager of the AAON business unit; Matt Shaub, General Manager of our BASX business unit. And we also have here today who will be participating in the Q&A, Andrew Edmondson, our Vice President of Sales and Marketing.

Our agenda today, it's going to be about -- it's actually going to be about a 2.5-hour presentation, give or take. We'll have a 15-minute break in the middle. We'll finish with a Q&A 30 to 40 minutes or so. So hopefully, we'll get all your questions answered. And I think that's about it.

Before I hand it off to Matt, we want to start and kick it off with a brief video for you all.

[Presentation]

So good morning. My name is Matt Tobolski, Chief Executive Officer of AAON. For those of you that don't know me, I joined AAON about 3.5 years ago as part of the BASX acquisition, a company I cofounded.

And really, it's been an awesome journey to be part of this organization through some tremendous growth, some tremendous transformation. And really from the perspective of where we're going, we've just got some fantastic technology, fantastic team and really an exciting future that we're happy to share with you all today and really happy to also answer plenty of questions afterwards on kind of where the direction of the organization is going.

I always like to start off with really kind of who we are as an organization. And when we think about the HVAC space, as my kids tell me, it's a pretty boring industry. But I'd like to remind them that we're not just an HVAC company. We're not a product manufacturer. We truly are a solutions provider, and that's a mindset that this entire organization embodies. We're not out there trying to pitch products and really put those into someone's application. We're trying to solve a problem. We're trying to take a consultative approach, and we're really trying to create value inside the marketplace.

And that mindset is really founded on this just core belief and really driving and pushing boundaries and innovating technology inside the HVAC space.

When I look at the mindset of who we are, we are a disruptor. That is the mindset of kind of how our team wakes up, how the engineering organization really looks to kind of redefine what the industry is doing. And what's really fun is it's that mindset, it's that sort of entrepreneurial spirit that's embodied inside this organization that it's really fun to sit here and say, we're a $1 billion-plus organization and the entire team, the engineering talent, like they're always sitting there kind of like a start-up mindset of how do we redefine how do we disrupt, how do we change the way things are doing.

And that mindset, coupled with an amazing best-in-class manufacturing footprint is really what's allowing this organization to outperform, to acquire market share and really create a differentiated position in the marketplace. And so it's a really fun organization to be a part of. It's really fun to be sitting here and really looking at this as not just being an HVAC manufacturer, but truly solving problems, truly providing value to our customers.

And so as an organization, for those of you that are newer to the story, so the organization is founded back in 1988. And really, it was founded with a mindset of bridging a gap between, at the time, catalog products, so kind of the no-frills, no feature product set, and the custom products. And it was really trying to blend or kind of provide that middle ground solution where you could provide a semi-custom solution, really provide a tremendous amount of value, but do it at a very cost competitive price point.

And that was really the original foundation of Norm's vision when he founded AAON. And that's really been sort of the value mindset, the driving solutions mindset that's really embodied in the organization today. It's amazing to think of where this organization over the last 37 years has evolved. 1988, 160,000 square feet of manufacturing space till today, 4 million square feet of manufacturing footprint across 5 locations. And that is backed by some of the greatest test engineers, some of the greatest product engineers that the industry has.

And we have the most capable test capabilities in the HVAC space that really supports the mindset of our engineers that are pushing boundaries and driving solutions. As an organization, we really operate under 2 brands. And this is sort of a mindset shift that's kind of been happening over the last couple of years, which is transitioning the way we think about this business into truly 2 differentiated brands, the AAON brand, the BASX brand.

And the organization, fundamentally an innovation and solutions mindset is consistent across the brands, but each brand has its own kind of unique way of delivering that value proposition. So the AAON brand really in that semi-custom mindset where the BASX brand is really kind of more in a custom mindset, serving the data center industry, clean rooms and kind of the industrial and commercial, where in the AAON space, primarily rooftop units, split systems in the K-12, educational, health care, retail markets, but both founded on a common mindset of really delivering innovation to the space.

As an organization, we talk about and kind of intro this a little bit. Today, as an organization, we report in segments. And those segments are really defined by geographic boundaries. But as we look into the future and really the conversation today, we're transitioning the mindset from those segments and really focusing the conversation around the 2 brand strategies that exist.

And so as we continue moving through time and moving kind of throughout this year, we're continuing to put more and more systems in place to be able to really provide a better lens into this organization around that brand strategy because that really is the way we're executing.

We're leveraging that manufacturing footprint, and we're no longer looking at this business really around the mindset of geographic limits and geographic boundaries from a reporting perspective. As an organization, $1.2 billion in revenue last year, but really supported by an immense amount of interest and demand for our products and solutions, which is really kind of driving that $1 billion backlog that exists at the end of the first quarter.

Really from an operations perspective, really strong operations, continuing to drive improvements in our operations and really driving investments in efficiency, which is helping really provide that kind of growth in the margin profile. But something I always focus on that's a little bit unique. When you look at the CapEx and the R&D that we reinvest into the company, this really is an organization that is driving organic growth and driving investments in kind of the value proposition that we provide.

And so a very healthy kind of reinvestment of our profits to really drive that organic growth, to drive that product differentiation and really fuel the innovation that exists within AAON.

So today, really, the conversation is going to be founded around really 5 strategic pillars that are really driving value from an investment perspective. And these are the pillars that kind of we're operating on from an organizational perspective that really drive the decision-making that we do kind of going forward. And I always start with this pillar #1, which is really the mindset of winning with that superior innovation.

#2 is really driving results and really trying to empower our leaders to really drive value delivery from our kind of custom solutions and semi-custom solutions in the marketplace. Pillars 3 and 4 really around driving growth through some secular trends, whether the data center solutions kind of off the BASX brand or a lot of the heat pump decarbonization and national account strategies inside of the AAON brand.

And then the final pillar is really the drive to be a best-in-class operator and really kind of do it in a very profitable and really solid manner. So we'll dive into these 5 pillars kind of in more detail, but this really is the overarching theme of the conversation of really where that value within the AAON kind of organization is going to derive from.

So innovation, and we could sit here and I can -- you're going to hear this conversation time and time again. You're going to hear it from me. You're going to hear it from Stephen, you're going to hear it from Matt. And you're going to hear almost beating a dead drum kind of on this conversation because innovation is the lifeblood of who we are as an organization. Innovation is something that truly sets AAON apart, both the AAON brand and the BASX brand.

And it's the mindset of pushing boundaries. It's the mindset of answering questions that the industry didn't even know to ask it. And if you look at the sort of focus that we have within our innovation, within our engineering team, we have some of the most capable, talented engineers that are looking into the future. They're looking past regulations. They're looking past kind of chasing industry trends in the background, and they're defining those industry trends. And the amazing part, and you'll hear this discuss more, especially in Stephen's section is it's supported by the most capable technical lab in the industry.

And so the ability for us to really drive new product concepts to drive new solutions kind of into the industry and actually validate and support those is something that's allowed AAON to really drive market share acquisition over the last 10 years, and it's going to continue being a major driver for us because we're able to stay ahead of those regulations, stay ahead of those trends and really redefine what the industry is chasing.

But that second pillar, and really, this is something that we introduced at the end of last year and really kind of an organizational structure kind of going forward, it's really the reorganization of this business. It's really that rethinking the way we segment the organization, rethinking the way we manage this business.

And really, it's trying to decouple the mindset of geographic locations defining how we manage the business and really looking forward to say, what is the value proposition that's delivered by both of our brands? What is the introduction of the product strategy? What is the way that we're providing value to our customers and to the industry as a whole?

And then looking at that and saying that manufacturing footprint, that 4 million square feet of capacity, that supports the brands.

That supports the brand strategy. And so the mindset is really kind of looking at that and saying, we've got this great tool in manufacturing, but let's focus the way we lead the business, let's focus the way we think about the innovation around the brand, around the product and around the value proposition that we deliver to our customers. And so that really was the reorganization and kind of the 2 business units that you'll hear Matt and Stephen both talk about.

And their job is really to define what the next-generation product looks like to look at the product management mindset, to look at the innovation mindset, the engineering and really have a hyper focus on customer care and customer delivery to really provide a best-in-class customer experience, both from a technology perspective and from a delivery perspective and then leverage that capacity, leverage that manufacturing footprint from a best-in-class manufacturing fleet to support both brands.

And so we'll talk later in this presentation about what that means.

It means we no longer look at Tulsa as being just an AAON piece of the organization. We don't look at Longview as just being a part of the AAON coil products or AAON kind of brand historically. We look at it and say, given the opportunity, given the drivers that we have as a business, how do we leverage that manufacturing footprint to really deliver value for our customers. And then obviously, with scale comes some efficiencies in the way we manage the back office.

And so really kind of providing a consolidation and providing a much more streamlined back office fueled by some technology investments to really allow us to manage this business more proactively. So when we think about the business, we've got our 2 primary brands, AAON and BASX, but I mentioned this earlier, and I'll kind of reiterate it again here.

I mean the common overlap here and part of the reason why when AAON approached the conversation with BASX 3.5, I guess, 4 years ago now in the conversation, part of the reason why we made the decision to sell was that overlap.

It was the fact that while we're 2 different businesses with 2 different kind of product types and really touching different parts of the market, that mindset of innovation, that mindset of providing a premium value, premium experience, like that is core and core to the culture of both organizations.

And that was one of the big drivers when we made the decision to actually sell BASX to AAON was because of that commonality of culture and mindset and how we actually drive value in the marketplace. Number -- the 2 brands are different. Number one, big difference, obviously, is the markets that they're really focused on.

And really, the AAON brand is really focused on the nonres commercial HVAC market, driving value with packaged rooftops and split systems in a semi-custom fashion, whereas the BASX brand is really -- it's built around a, I'll say, a high-value customer data centers, mission-critical applications, clean rooms and delivering value through a more customized approach, kind of a clean-sheet approach to really be able to kind of solve very challenging problems with products that don't exist in the industry or exact configurations and really rightsize solutions to drive tremendous value in the marketplace.

Now today, this is looking at the previous 12 months of kind of where that revenue breakdown is. So roughly 1/4 of the revenue today is coming from the BASX brand and then 75% of that, 3/4 of that is coming from the AAON brand. But as we look forward, and you'll hear this kind of repeated throughout the day and conversation, while both brands have tremendous growth opportunities, the BASX brand certainly has a huge driver in really delivering value to the data center space and delivering a lot of value and growth kind of off that data center demand.

So as we look into the future, that 1-quarter, 3-quarter split is really 3 to 5 years out, going to look more like an even playing field between 2 of these brands. And that really is kind of the story and the kind of way to think about this organization going forward is 2 equal brands kind of driving value to the marketplace.

So talking about that third pillar, and Matt Shaub is going to dive into a lot more detail around the BASX brand, the BASX value proposition. But that third pillar kind of in that growth strategy, value delivery strategy is around that BASX brand. And it's really around capitalizing on secular trends inside the data center space.

And when we kind of step back and say to ourselves, what is the value proposition, the value drivers of the BASX brand, it really comes from that kind of that far left item there. It's really that solutions-based approach. It's that mindset that we are truly solving problems. And so when we go into a customer's office to discuss a project, we're not walking in with a catalog of products that we're attempting to get applied into an overall project.

We're walking into a customer's office with a blank sheet of paper, listening to them, understanding what their drivers are, what their needs are and then really taking that and providing a solution that checks all the boxes. Matt will give an example of a case study of a project that BASX really won and provided tremendous value with. And it was exactly that mindset of basically listening, driving value and answering questions that nobody else could actually provide solutions to.

And that's all supported by the engineering teams. It's all solved by that manufacturing footprint. It's all kind of collaboratively solved by a tremendously talented team that can create solutions, validate those solutions and then manufacture them at scale efficiently.

And as we look at the past 40% growth in a market growing 10%, it's been a story about market share acquisition. It will continue to be a story about market share acquisition inside that BASX brand. Inside the space, and again, Matt will dive into more detail on the actual products. But historically, the BASX brand has been built on airside solutions. It's historically been driving growth in the data center space from a cloud computing perspective.

And I always like to just pause in this conversation because everybody is excited about AI. The drivers around the data center story is all driven and all focused on AI, at least the excitement in the marketplace. But I always pause and say, cloud computing growth hasn't gone away. Data center operators continue to invest and build cloud computing data centers.

A couple -- about a year ago, Andy Jassy from Amazon made a comment that less than 20% of services that can be in the cloud today are actually in the cloud. So there's a huge runway of basically investment that's happening around cloud, and we're layering on top of that the AI conversation. And so as we think about the BASX brand going forward, it's both the airside solutions serving cloud and AI, plus a layered approach with liquid cooling to support AI on top of that.

So tremendous growth drivers around product strategy, about innovation and really allowing our products and leveraging that custom mindset to really provide those solutions going forward.

Now I think we can all agree, data centers are growing, but also I'd like to really kind of put a pin on the fact that the BASX brand, the demand for the product, the demand for the innovation that's provided in the BASX kind of realm and BASX brand of the business is gaining tremendous drive in acquisition of kind of new customers inside the data center space.

And this backlog is kind of the example of how that demand is materializing. When we look at the first quarter, when we look at this continued increase in our backlog, that's also happening while capacity is coming online. It's happening while the revenue conversion is accelerating as well. And so we're sitting here with a tremendous amount of demand with tremendous capacity coming online, really kind of showcasing the value proposition and really how it's resonating within the data center space, allowing this to be a great growth driver for the organization going forward.

So one thing I also want to touch on is when we talk about the brand strategy going forward, and this is something that's an evolution within the BASX brand. So we talked earlier that the BASX brand was launched with this mindset of a true custom solution clean sheet. And then we talk about how AAON as an organization was founded to bridge the gap between catalog products and custom solutions.

And so a couple of years ago, as a team, we were sitting back saying this kind of aha moment of wait a minute, why don't we take a page from the playbook of why AAON was founded in the first place? And why don't we expand the reach of the actual applicability of BASX products and BASX solutions going forward. And so that mindset was basically to say, let's expand our portfolio within BASX beyond just the custom product and actually take that page from the playbook of AAON and launch a semi-custom configurable solution.

And the reason we do that, the reason that mindset is there is when you look at where the custom solutions really resonate, they resonate with those large hyperscale data center customers. They resonate with these very large developers that really understand the value proposition of that true custom solution.

But there's a lot of other players inside the data center space that maybe don't have the same level of focus on driving kind of complete unique bespoke solutions. So if we launch a software-driven configurable product, the exact same way that we launched AAON with the same manufacturing footprint to support it, we're opening ourselves -- providing access to more of the industry in the data center space and providing more ability for us to provide that value in the data center space.

And so we look at this product strategy and this evolution as an organization where we hold both custom solutions and semi-custom solutions in balance as a huge driver to really diversify our customer base and drive more growth inside the space.

So really just to reiterate, I mean, when we look at the overall BASX organization, I mean, we're sitting here as a value-driven product -- value-driven solutions provider that's really resonating within our customer base in a dynamically growing market.

We've got product portfolio evolution from airside to liquid cooling applications plus additional product introductions around that semi-custom strategy, all that are going to provide a tremendous driver of growth for the BASX brand going forward and really kind of helping support that good growth, not just today, but well into the future.

So touching on that fourth pillar. And again, I always have this conversation where we have a lot of talks during investor conferences, and we were in Chicago last week, and I think 80% of the questions, 80% of the comments and conversations were around data centers. And really, I'd like to reset the stage in the conversation because when we think about the 2 brands, we think about AAON, we think about BASX, AAON, the sort of fundamentals, the drivers of growth, the story around the AAON brand is a shining star.

The only problem is when we're looking at BASX, we're looking at the data center demand right now, you're staring at the sun. And so people start to really forget what that story looks like around the AAON brand, and it becomes a secondary conversation. But in an HVAC space, in the nonresidential commercial space, the AAON brand is and will continue to be the differentiated products inside the marketplace, huge value, semi-custom strategy that provides tremendous value to the industry in a very cost competitive level.

And it's really supported by some great secular trends around decarbonization, around heat pump -- a lot of the innovation we have in heat pumps, around a lot of the technology innovations we have kind of across the board, regulatory environments, helping compress price premium. All these things are driving tremendous growth where AAON is in the best position it's ever been.

And so we're sitting here and we're a little bit of the conversation gets lost just because of the excitement of the industry right now around the data center space, but the AAON brand is in the best position it's ever been.

And we think about those 3 drivers, those 3 secular trends, first and foremost, the desire and drive to reduce carbon emissions and electrify heating sources, coupled with the innovation that AAON has is driving a tremendous value proposition inside the marketplace, and it's going to be a huge growth driver from a product mix perspective.

Beyond that, regulations, whether it's efficiency standards, whether it's refrigerant, continue to really drive the sort of ability for AAON to be ahead of the market and really provide opportunities for us to really capitalize on great growth drivers, plus it's forcing a lot of our competition closer to where AAON has always been in terms of high efficiency standards and better performing products.

And all of that is combining itself to basically really resonate with the AAON economics conversation. The price premium gap is closing. It's allowing the TCO conversation, total cost of ownership conversation to become more and more attractive. And those will all be part of that growth driver within the next 3 years of mid-single-digit growth.

Now I just want to pause when we say mid-single because AAON historically is a high single-digit growth company. And we as a sector right now, a non-res kind of HVAC sector, it's a down year. And so when we say mid-single-digit growth, we're not saying the long-term proposition of high single digits is going away. We're just saying the 2025 calendar year has a lot of industry kind of headwinds that are going to push volumes down.

But kind of on a go-forward basis, that high single-digit growth that you've seen of AAON with that noise from the industry out of the way is going to continue to accelerate and get back to where it's always been.

So talking real quick on heat pumps, talking about the national account kind of combination, by themselves, the heat pump innovation that AAON has is a growth driver. By itself, we think about the ability for us to reduce carbon emissions and provide fantastic technology is a driver of growth. And you look at what AAON is doing in heat pumps, you look at the industry as a whole that has baseline heat pump products that go to 37, 40 degrees Fahrenheit, AAON has heat pump technology that can operate all the way down to negative 20 degrees Fahrenheit.

We have a portfolio, a 3-tiered product inside the heat pump space that can really provide electrified heating across the vast majority of the U.S. No other commercial HVAC manufacturer has a portfolio that can achieve the level of performance across the country that AAON has. So that by itself is a great driver of growth. Now you take that same conversation and you marry it with our national account strategy, and all of a sudden, you've really just provided a solution to a problem that the industry has been asking for an answer to.

You look at the ability for us to go to a national account customer and have a conversation where we say, we have the most capable heat pump, but it's 3 tiers.

We have a version that can be operating in a very cost-effective manner in the lower states. But we also have an ultra-high performance version that can provide you electrified heating in the northern states. And we can select the right product in that portfolio, the right tier in that portfolio to answer the most economical way to kind of build those products going forward. And that is a huge differentiator.

Nobody else has the ability to provide that level of performance. And so we talk about what that means. We talk about our pipeline, our visibility what we have. That -- and Stephen will talk more on this later on, but national accounts historically have not been a huge piece of the AAON story. And we're sitting here with multiple hundreds of millions of dollars of pipeline and opportunity in national accounts.

That's incremental conversation. And when we talk about where does that materialize, these are longer plays, right? These aren't the normal bid plan and spec type project where it's a relatively quick conversion from a bid to an overall order, there's a little bit more of a time line there because you're really providing solutions to really provide answers across the country.

So it's a little bit longer sales cycle. So why I'm saying that is that doesn't all materialize. A few hundred million dollars in pipeline doesn't materialize in 2025. It will start materializing in '25. But it's a '26 and beyond story when you really see these large projects, these multiyear development projects really start to be a huge driver of top line growth from a sales perspective. We've talked a lot about the refrigerant transition. I don't want to belabor this. You've heard me talk about this over and over again.

I just want to start off by saying, obviously, this is an industry-first refrigerant transition in that we had building code implications and we had a regulatory requirement from EPA. That caused a tremendous amount of noise in the industry. We've messaged that for over 1.5 years that it was going to disrupt 2024. It did.

Obviously, Q4, Q1 results really driven by some challenges on sort of the transition timing in the industry. AAON as a semi-custom manufacturer was more susceptible to some of that air pocket compared to manufacturers that are building catalog products to distribution.

But I want to say and really reiterate that was a temporary conversation. We talk about -- we look at Q1 backlog, we look at Q1 orders growth. We look at kind of how orders continue to materialize and it's showcasing the value proposition of AAON is exactly -- is stronger than it's ever been, and the overall disruption from the refrigerant transition is behind us.

There's some hangover on some supply chain across the industry, some little challenges here and there, air pockets here and there. But by and large, the big impacts of that refrigerant transition are behind us. The sales book, the cadence and the competitiveness of the product has never been better. And really looking forward, we're happy to be beyond this conversation and be able to focus on the future without this transition being a driver or sort of an impairment to the overall AAON conversation.

And so touching on that final -- touching on kind of what that means kind of a growth driver in the AAON side, I mentioned the economics perspective. The conversation around AAON and price premium has always been or historically been 5-plus years ago around this premium product that was 15% to 20% more expensive.

Through regulation, through a lot of requirements, over the past couple of years, the efficiency standard requirements that came into the industry in 2023, plus a lot of other drivers caused that price premium gap to close. Now AAON still sells a higher-quality product. AAON still delivers value, better value proposition, better efficiency, better maintainability of our product compared to our competition. But through some of that regulatory change, a lot of costs had to go into our competitors' products to be able to meet those efficiency standards.

So that helped close that gap. Well, as we look at where we're at, where we're sitting today, that gap has continued to close a little bit. There's been a lot of noise over the last 12 to 18 months around the price dynamics around this new refrigerant equipment. And at one point, there was conversation around 15% to 20% more cost going into our 454B equipment relative to 410A.

Now did 15% to 20% materialize? No. And as time progressed, the messaging in the industry went from 15% to 20% down to 8% to 10%. Is there more cost in our competitors' equipment? Yes. But that gap is closed maybe 1% or 2%. It hasn't closed. We're not sitting at price parity.

We're not sitting at some neutral position with their competition. That gap's closed a little bit. But every little bit that gap closes, the value proposition and the story of AAON becomes that much easier to sell to our competition. It allows us to acquire that much more market share.

And why I want to bring that up is as the price premium gap closes, it's not that we're sitting here getting more market share at the expense of overall margin performance. We're doing it with the ability to also execute in the most efficient way possible and getting rid of the noise of Q4, Q1 from the refrigerant transition, the actual input cost dynamics, plus that volume will provide not only more volume at a lower price premium but we'll do it at increasing financial performance.

We'll be seeing better margins delivered kind of in that environment. So it really is a unique situation where we're not giving up margin to get volume, but we're able to maintain and actually accelerate some of that. And so I started off by saying this on the intro, but really just to reiterate, I mean, as a brand, as an organization, the AAON brand is in the best position it's ever been.

The fundamentals are the strongest they've ever been in the history of this organization. And with that kind of noise around the refrigerant transition behind us, when we look forward beyond kind of a year that's a down year from a macroeconomic standpoint, when we look forward, the brand is in the best position to continue capitalizing on market share acquisition and really in a position to really continue showcasing the great value that AAON provides.

So touching on that final pillar, it's really around being a best-in-class operator, really looking at who we are as an organization. And obviously, there's some year-to-year noise in there. This little thing called COVID happened at one point in there. But when we look at the organization kind of from '18 to 2024, we've had great growth in our gross profit margins.

In the past, AAON really looked and really set pricing strategy with a desire to really deliver margins between 28% and 30%. And a couple of years ago, we were very vocal that we really reframed the way we look at margins. We want to make sure that when we're pricing our equipment, we are pricing our equipment to properly reflect the value proposition it's providing to the marketplace.

And so we rethought about the way we price our equipment. And you'll see that we actually -- we're increasing our pricing, increasing our margins while also having some of our price premium kind of sit a little bit smaller than it used to be. But we're doing that with improving margins because of the cost that we're putting into the product and really the pricing strategy, coupled with the investments we've made to be a best-in-class manufacturer.

If you look at the efficiency metrics that we stare at on a daily, weekly basis, the efficiency in the organization in terms of productivity in our production lines and really throughput and efficiencies in manufacturing are at some of the best levels they've ever been. And so that pricing strategy plus those investments in the operational strategy has allowed us to continue really moving that margin to sort of a new level within our expectations and really our expectations going forward.

We're also looking at saying from a manufacturing standpoint, how do we make sure we really support those 2 brands? How do we support the growth drivers of both brands?

And really, it's leveraging and making strategic investments to get the manufacturing footprint capable of servicing the needs of AAON going forward in the future. It's not -- as I talked about with AAON, it's not a BASX or AAON story, it's a BASX and AAON brand story.

And these investments in capacity are being made to support both brands. They're being made to say, while Memphis is a conversation that a lot of people attribute to data centers, it certainly is a huge driver of the investment we made, but it also supports the growth inside the AAON brand as well.

It's a tool to be able to leverage and provide capacity to support the national account strategy that we're focusing on. It's really looking at this and saying, we're going to make the investments ahead of where that demand is driving us so that we have the capacity to really deliver on those solutions, but do it in a very financially responsible way.

So we think about that footprint and we think about what it looks like, when Joe was putting the slide together, I laugh and I said, it will never actually look like that. But this is a mindset of the way we think about that manufacturing footprint. It's saying, hey, when we think about it today, what could that look like?

So we say, hey, based on a lens today, yes, Memphis could be mostly data centers. But guess what, if we see the traction that we know we're going to see around national account strategy, we might actually move some production from Tulsa to Memphis. So that conversation that these sliders, it becomes a conversation about how do we actually support the growth drivers on both brands.

And one of the unique things about AAON and BASX brands, the back-of-house manufacturing equipment that really drives the product and drives a lot of the value we put into our product is the same with both brands. The sheet metal fabrication, the electrical panel shops, the coating systems, the coil manufacturing, all of those systems that support manufacturing are identical between AAON and BASX brands.

And so that means that as we make the investments in really streamlining our manufacturing process and really tuning the system up to be able to transfer technology between one brand to one site to another, it becomes a huge 4 million square foot tool for us to use and leverage to really capitalize on that growth. And so when we think about capacity we're adding, just one little data point when we look at the last couple of years, kind of a unique thing.

When we look at the square footage that we've added between Longview, Texas and our Memphis investment, roughly 1 million square feet of incremental capacity has been added inside the overall AAON organization. When we look at that from a data center perspective, that's equivalent to our top 3 peers combined. And so obviously, we're making investments to get a lot of square footage in there, but we're doing it in a way where we're fiscally responsible.

The building itself is relatively cheap in the grand scheme of things. And for us to be able to have that footprint to be able to leverage the investments in back of house that we're making to support manufacturing and leveraging the leadership talent at that site is very intentional. And we look at the building and buying a bigger building being a very intentional piece of our strategy because it's easier for us to then grow into that than try to have a bunch of smaller disparate locations across the country.

To us, building and getting this large square footage provides us a very good platform to really grow into, to put investments into in equipment and fabrication systems and other things but do it in a way where we have the leadership concentration already there versus having to really look at that limited resource.

We look at people as being our biggest bit of sort of value drivers inside the organization. The manufacturing pieces, the facilities, they're critically important to what we do, but the people are the most important part of what we have in this organization and leveraging top-tier leadership talent is one of the biggest parts of our strategy and part of why we actually made some of these bigger investments and bigger square footage facilities to really provide us a leverage off of that talent.

So just to reiterate and really, you'll hear these drumbeats kind of hit throughout this entire conversation, but just reiterating, number one, first and foremost, we are an innovative company. We are driven by innovation, driven by disrupting the industry. We look at those semi-custom and custom solutions as being huge value drivers that are really unique to the organization and unique to the story about how we deliver value to our customers.

The secular trends, decarbonization, data centers, those are what's going to drive that great robust growth, and we're going to do it in a very profitable manner with improving efficiencies and strategic investments to support that demand.

As Joe mentioned, our last Investor Day was a couple of years ago in Tulsa. I certainly appreciate a lot more people made the track to New York than to Tulsa. I think we're probably 3 or 4x more people here than we had in Tulsa. But at that 2023 Investor Day, we talked about the conversation being a 10-plus percent growth story. And in that same period from '22 to '24, we delivered 16% growth kind of in that time frame.

And we had set that bar where we reset the conversation where margins used to be 28% to 30% sort of the target within AAON. And we kind of reset that conversation to say, hey, at 2022 -- sorry, 2023 Investor Day, that 30% that used to be the ceiling is now the floor of our expectations in margin, and we delivered 33% during that 2024 calendar year.

As we look forward and kind of look at that next 3-year target, so looking at growth coming off of that 2024 calendar year, top line organic growth in that 12.5% range. Now that's made up of mid-single-digit growth in AAON and about 40% growth in the BASX brand.

But I do want to just pause once again to say that mid-single-digit growth in the AAON brand in that 3-year period, it has 1 year in there with a relatively soft market. So while the current year has some headwinds against it, when we look to next year and beyond, we're back to that high single-digit growth expectation. And so it's a point in time that's kind of skewing that number a little bit.

But when we think about margins, where in our 2023 Investor Day, we had reset that floor to be that 30% range. We're kind of moving that needle again. So you'll see we've reset the expectations from our last Investor Day 2 years ago and boosted our -- about 250 basis points more in our kind of top line growth story and kind of expectations and also 200 basis points in our overall margin profile that we look at kind of going forward.

So we really do look at this being a tremendous growth conversation from an industrial perspective, driven by 2 great brands and really some great differentiation from a manufacturing standpoint that's going to be a great kind of overall growth story in the industrial space and the HVAC space going forward.

So with that, we're going to lead in and before Stephen comes up, have a little video here on the AAON business unit. And then from that, Stephen will come up. But look forward to more conversations.

[Presentation]

Good morning. I was just sitting here thinking I could have told my mom I could have been a movie star. So my name is Stephen Wakefield. I'm the GM of the AAON business unit, and I've been with the company since the 1990s, more than half my life.

And for me, I just thought I'd take a moment to make it crystal clear to everybody in the room that AAON is not a job for me. It has been a part of my life. These are people that are my family. We bled, sweat and cry together to build this company. And I just want you to all know that before I even start. Technical presentations, like I can do that, motivate you to go to war to build air conditioners. That's my thing. So I just wanted to start with that.

I've had the pleasure of getting to work for all 3 CEOs now in the company's history.

And I can tell you to go from kind of a wild west in the 1990s to being able to attract a CEO like Matt Tobolski, that's strong evidence, really strong evidence for people that are in your shoes looking at investing in our company. Key takeaways make this very succinct to start with. Innovation is our thing. Everything that we do, we're thinking outside of the box. We're thinking how can we do something that breaks barriers, and we're okay with learning from a mistake and pushing forward.

We're not afraid to change how the industry does things. We're going to push. We're solutions-based, best-in-class operator. And we've got this magical thing happening right now where our price premium is narrowing. The trends that are happening in the world are playing into our hands. And then on top of that, we've got a history of very capable leaders that were very much salesmen in their former lives before coming to AAON and therefore, knew how to attract and build the very best sales organization in our industry.

And I witnessed them do this, and it was not easy, and they demanded supreme excellence and a business partner type of mentality with our company.

So we have that in spades today. So please take with you today from my part of the presentation at least these key takeaways. A quick brand overview. The AAON brand has about $1 billion in revenue. 80% of that is rooftop units. That's our bread and butter. It's complemented with air handlers and condensing units and parts. And 88% as of right now of the AAON brand is built in the Tulsa facility. And then the other 12% is in Longview.

So these are our gap bridgers. These are the products that we build that are not custom and not cookie cutter. And if you look at these and you look at them through an engineer's eyes like I do, you see that this is a tremendous amount of diversity for a catalog set of products. Any one of these products on here has dozens and dozens and hundreds and maybe even thousands of different versions and options that can allow a very capable salesperson to apply a particular version of our product to a customer's particular need.

What makes AAON brand special? Well, this is what I like talking about. We were born with a fearless innovative DNA. And I mean that. The man that started this company, he didn't know how to spell fear. He scared all of us because he didn't know what it meant at times, but he taught us how to absolutely push the limits in that a lot of times, customers don't even really know what they need.

Back in the 1990s, it was a thing just to put piano hinges on air conditioner doors. So here we are 25, 30 years later, and we have created expectations by things that we did even that long ago that have affected what a customer expects in an air conditioning unit. We have a very personal cherish culture at AAON that inspires great things to happen. And we demand that. We expect that. Every person that interacts with another person at AAON, we pay attention to how that's done.

If it's not done in a way that advances our company and makes great people like the people in this front row want to come be a part of our team, and we're going to correct that. And then we have dynamic products. They're very flexible, very dynamic. And on top of that, they're also industry-leading when it comes to performance. It's a combination that's really hard to do both. It's easy to do one or the other. It's very difficult to do both.

Why we can't be replicated? This is probably my best slide. So everybody paid real close attention to this one. This is the one I got to sell.

This is why they pick me to talk about this because you might be thinking how can we replicate -- why can't another company just replicate what you do? Why can't they just do that? Well, the reason why is because our entire foundation of how we think, how we draw a part, how we put a bin on a piece of sheet metal, how we move parts through our factory was completely undone in the very, very early days of the company because we had an epiphany of a way of doing things that has still not been replicated 30 years later, and we built -- we undid and rebuilt everything because we were a small company, so we could do it.

We could -- here again, that fearless DNA, we could redo set up everything that we do based on this method. And if you can imagine that method like sparking a fire and becoming something that was like, wow, this actually works better than we thought and us building relationships with vendors that started creating special machines just for us based on our needs. And then we built everything on top of that -- Oh, I see Jerry back there. Jerry. Good to see you, bud.

So our entire way of doing things, the engineers' mindset when they look at their computer, our fabricator's mindset when they touch a button on a machine, it is all built on this method that we came up with all those years ago.

So to replicate that, they could hire half the AAON team talking about a competitor, and they could say, go replicate AAON. And what that team would come back and say is, okay, let's stop doing everything we do, let's undo it all and start over. Nobody is going to do that. It's going to be an unbelievable undertaking because it affects so many things. Think overhaul of everything you do and learn as you go, all the mistakes that AAON learned when we were a much smaller company and we could afford to do so.

Here's a basic table of us versus them. When it comes to production, our competitors are going to be mass produced. They're going to be standard processes. We're going to have soft tools that are automated. So we can say, "Oh, we don't like that one little thing. We're going to adjust it a little bit. We can do it that fast. Whereas a competitor, it's an arduous process that they got to go through to change any particular little thing.

We can drop the whole thing and change it. I can recall a time in 2005, where we released a product and we just flat out didn't like it. We redid the entire thing, start to finish in 60 days. And I can tell you just engineer redid the whole thing.

I know the person very well, 60 days, redid the whole entire product. This is our method. Price. Our competitors are going to be a budget-friendly affordable price. AAON is going to be a premium price because of the higher quality. Now here we are in this very fortuitous environment where that price premium is shrinking. Durability, a novice can go put their hands on an AAON unit versus a competitor unit, and they can tell real quick that an AAON unit is going to last a whole lot longer. It is built considerably different than a typical high-volume competitor product.

Customization, competitors aren't going to do that. It's going to be very limited. An AAON product is very customizable right out of the catalog. And on top of that, we have an applications engineering team that can help you do something special to our already semi-custom product, and we do that every day. Maintenance, here again, this is one of the special sauces that was part of the early days of AAON. We decided we were going to design products around being maintainable.

Now the theme, the concept, the common opinion in the HVAC industry in the 1990s is nobody is going to pay for that and the service tax can deal with it.

Well, our team decided, no, we're going to serve the service tax and that word is going to get back to the people making decisions to buy the product. So our products are designed from the get-go for ease of maintenance. Now we talk about innovation, we talk about innovation, we talk about innovation. For a long time, we figured out a way to do that with maybe limited tools. Well, that changed when the NAIC, which is a 134,000 square foot innovation supercharger, when that was commissioned.

So now we have more capacity to test than the big famous third-party testers in our industry. We have the ability to go really fast now because it's in our DNA to go fast. We have a method of doing it. And now we have a way to proof it very quickly that we're in control of. This decreases risk. This laboratory is world-class. There's nothing in the industry like it. It has formidable specs. It's got the largest reverberant sound chamber in the entire world. And it's also third-party accredited by -- certified by third parties like AMCo and ISO.

Now on top of that, you're going to hear a lot of theme today about us equipping our world-class sales channel and in the early days of the company, we really depended on talented salespeople and gave them a particular niche way of selling our products.

But in today, modern day AAON, we are investing tremendous amounts of energy and dollars in giving that sales team tools to dominate with, not to win with, we want them to dominate with. So we have now commissioned the Gary D. Fields Exploration Center. And what this is, is it's an absolutely beautiful showroom that has AAON products and competitors' products sitting in the showroom with no propaganda. There's no propaganda necessary.

You can walk in there as a novice and you can tell very quickly what differentiates an AAON product from a competitor product. I talked about the sales channel. In the early days of the company, when we didn't have a lot of leverage, we struggled to have just a few good outlets for our products. Today, under the leadership of Norm and Gary Fields and now Matt, we have a sales channel partnership, if you will. These are the very most premium companies on the sales side of the business, independent sales reps that look at AAON like business partner.

I called several of the owners of our rep channel a few months ago because of an issue we were having. And I expected them to be upset with me, and it was a very temporary thing. But instead, what I got back, the feedback I got back from every one of them was, we're your business partners, we're in this with you, it will be just fine. in a nutshell.

So we have this extraordinarily equipped, extraordinarily capable business partner mindset sales channel in full action.

So here we are today with the most equipped, most capable sales channel we've ever had. We have a parts and service strategy that is relatively new. We have this customer exploration center. We have mobile experience, which is a $1 million semi-truck that can go anywhere and basically represent AAON products. We have world-class new training academy under construction right now. We have invested in director-led customer experience focused leadership that is completely focused on improving our customer experience from start to finish.

And then on top of that, and you can take it from me, the old school AAON person in the room that we have a newfound supercharged marketing effort that is unlike anything I've ever seen in my career.

All this is happening at the same time. Market opportunity. This is real simple. There's tons of more market for us to get, 6% total market share right now. Lots of room here to grow for the company.

Now let's talk about this -- I look at this as kind of like a fortuitous situation. All of a sudden, the secular market trends that are happening are pushing the HVAC industry towards what AAON has been doing for 30 years. It's like, well, that's kind of a gift because we already know how to do it. We're already very experienced doing this. When it comes to decarbonization, we've all heard about -- heard this word a lot. Well, AAON is emphatically leading the HVA (sic) [ HVAC ] industry when it comes to heat pump technology.

There's no comparison. Nobody can do what we can do. Energy efficiency, we've been doing that since the 1980s. We know how to create a product that will perform very efficiently, not just by a couple of numbers that are labeled like when you buy a new pickup truck and it says, this is what your gas module is going to be. We all know that, that's limited and what that really means.

Our engineers are both brilliant and practical, a combination that I can tell you is not normal, and they know how to make a product that has a complete total cost of ownership focus. Now on top of all this, the government has been regulating to push product towards -- the government has been pushing product towards doing things that we were already doing.

I've now experienced both refrigerant transitions, the last one being in 2010. We were 2 years ahead of that, and it was totally smooth. The last one that just happened, like Matt had mentioned before, was not simple because it affected building codes.

Good time to get something caught in your throat.

So this particular time, you've got a mildly flammable refrigerant, which, of course, has got everybody worked up and building codes are different in every state. And so AAON is ready to go right out of the gate. Early 2024, you can order products from us that are R-454B, this new refrigerant. But the industry was spooked a little bit. The customer spooked. And what happened is that it was late adopted, which, of course, was like throwing a monkey wrench in our system.

They dried us out and then they overwhelmed us. Well, you can't turn the titanic in a minute. And this is why Matt emphatically said, this is going to be temporary. It's temporary. And we're great at dealing with things like this, but it's still painful in the meantime. So we've been doing this a long time, folks. Competitors are now having to learn how to do it. And what's resulting is a narrowing price premium and more of a spotlight on what we do great because they're a long way away from being able to give a presentation like this.

And then on top of all that, the cherry on top is while our competitors were working on catching up to what the government is now regulating and now they're probably trying to catch up when it comes to decarbonization movement. We decided, well, let's get more efficient while they're doing that. So under Gary Fields, we compiled a team of people that completely attacked our operational efficiency. I mean, attacked it. And you can see the proofs in the pudding and tremendous improvements in our gross margin in a short period of time.

This slide, what more can I say, I've been with the company so long, I can tell you that it's always thought outside of the box and had innovation at the forefront. And I can tell you, as a former design engineer that would sit at a computer and look at a design, my mindset was it's okay if I get this wrong, if I'm thinking in such a way that I'm going to break barriers and do something different than nobody else has done before.

Our culture motivated me to do that. It did not motivate me to be scared about making a mistake. It motivated me to do something that would change the industry. And from our first day, 1988, having configurable semi-custom products to 2025 releasing the most advanced heat pump in the industry that no one else can do, we have a history of innovation, and we've proved it.

The Alpha Class heat pumps, you're going to -- you've probably already heard a lot about this in 2023. We broke barriers, released air source heat pumps that can operate at 0 degrees Fahrenheit. 2025, we, I think, shocked everybody when Matt released this at our national sales meeting, we upped it again and said, not only do we have a line of heat pumps that can operate at 0 degrees, but now we can operate at negative 20 degrees Fahrenheit. This is an extraordinary thing that we believe is going to gain us market share.

A great way that, that could happen, Matt's already alluded to this, is that the very early days of the company, we had a few national accounts and we were smaller, but that has not been the focus of our company since probably 2000 or so. So here we are today with secular trends pushing large customers towards products that we exclusively have. And what's happening is that we're getting this huge pipeline of potential national account customers that is quite extraordinary in how it's looking right now.

Let's talk about current day and going forward. This refrigerant change has just been extraordinarily challenging. I believe in my heart that AAON is the best in the industry at dealing with outside world chaos and change. And I can tell you that the industry and the market, both were not really prepared to deal with mildly flammable refrigerant. But let me emphasize that we weathered this storm. We did it with gusto on the inside and did not panic in any way, shape or form, but it certainly affected us in the short term, but it's temporary.

It is absolutely a temporary thing. This will not last. Here's proof of that. You can see that our backlog has already started to recover from the challenges of the spook of the refrigerant change.

So here to finish, I want to reiterate what we started with. Innovation is how we think. It's not a word that's on a wall inside the walls of AAON, the buildings. This is a way of thinking that everybody has ingrained in them as an AAON employee. We are here to provide solutions to our customers, and we intend to be a best-in-class operator, and we prove that, and we also prove that we don't accept where we're at. We want more. We want to continue to improve.

This narrowing price premium situation is absolutely real, and it's kind of remarkable. And then because of our innovation, because of our narrowing price premium, because we can do things others can't do, here we are sitting on a pipeline of opportunity with national accounts that's unprecedented in the history of our company.

All right. Now I get to tell you that you get to take a 15-minute break, and then we will reconvene.

[Break]

All right. We're going to get going if everyone can take their seats. Prior to Matt Shaub, our General Manager of BASX coming up and presenting the BASX BU. We're going to start with the video of BASX leading in.

[Presentation]

Good to be with you this morning. Matt Shaub, and I have the privilege of leading our BASX business unit. I'm new to BASX, having just started in this role in January, but I'm not new in the industry. I spent the first 25 years of my career in product management, strategy, M&A and business unit leadership at another prominent OEM in the HVAC space. And I saw an opportunity with AAON really to be at the forefront of innovation in the market. And also to join a company, and as Stephen alluded, I perceive this was a top-notch culture. It has not disappointed. It's exceeded my expectations in every way. And so I just couldn't be more thrilled to lead BASX into this next season of growth.

What I hope to convey here in the next few minutes is just a bit about who BASX is, what makes us special and then really how that distinct value proposition translates into economic benefit for the company and our shareholders. You'll see a few things. First, as you've heard time and again, we're a fully custom solutions provider. So we're tailoring our offerings to the exact requirements of our customers. We thrive on tackling challenges that others steer clear of. We're hyper focused on our customers. And so we really believe that we deliver a premier customer experience in the industry. And it's that combination of solution selling capabilities and our focus on the client that's allowed us to aggressively capture market share in industry and in particular, in the fast and growing data center market, which will be a focus in the conversation here this morning.

We'll be sustaining that robust growth in the mid- to long term. And one of the reasons we can do that is because of the additional manufacturing capacity that we're bringing online really across our entire fleet of factories, but we'll zero in with emphasis on the recent investment we've made in Memphis, Tennessee.

The history starts in 2014 with the founding of BASX by Matt Tobolski and Dave Benson. It was founded as a fully custom solutions provider in the HVAC space. And while most of our business here in the last few years has been concentrated in data centers, our experience really traverses the full gamut of applications from commercial and industrial applications to clean room systems to other mission-critical environments. We finished 2024 with $225 million in top line sales. You'll see the vast majority of that executed out of our Redmond, Oregon facility. And our backlog as of Q1 here was north of $600 million. So that's up 123% versus the same period last year. So that's certainly a real thrill for us. I'm going to talk about our strategic plan, and we'll really talk kind of in 3 lenses. We'll talk about our platform, which is distinct in industry. It's also very complementary to AAON. We'll talk about our capacity and manufacturing will come up a lot in this conversation, not just the Memphis facility, the new space we're bringing on, but also productivity and operational improvements in our existing plants that allow us to maximize throughput and meet the demand from our customers.

And then finally, we'll just touch on our offerings. Of course, we lead with customized solutions, but we also have a growing number of configurable products that are helping us to win and capture more share. So what makes us special? And I recognize that the BASX business unit may not be as familiar to this audience as is the AAON segment. So let me just touch off on a few fundamentals. We'll just think of this as our BASX 101 course. And so it all starts with customized solutions. Literally, when we engage with a client, we start with a blank sheet of paper and a customer problem statement. That's how the conversation begins. From there, we iterate around potential concepts to address that need. We're solving for potential solutions in equipment and applications to try to address the concerns. And there could be any number of variables that the customer is concerned about.

Generally, we're providing a fully customized solution that solves for the lowest total cost of ownership for that particular client. We employ the highest quality manufacturing. And of course, one of the cool things for BASX is that since the acquisition by AAON, we've got all the benefit of AAON's advanced manufacturing automation paired with the legacy of BASX custom craftsmanship in this space. And so it's a really, really neat marriage. And then finally, we'll talk a lot about customer experience. You've heard it from Matt. You heard it reemphasized by Stephen, but BASX is equally committed to delivering the premier customer experience in the industry that spans presale and post sales. So we're equally committed to that aftermarket experience, walking with the client through the life cycle of that project. Now you don't get to be an industry leader in solution selling if you don't have elite engineering capability.

And so BASX has some of the most creative, innovative and experienced engineers driving both our solutions development with clients as well as our product development initiatives as well. And in addition to the people, our customers love that we've got dedicated R&D space that facilitates concept ideation as well as prototyping and validation of those designs with customer witness testing. But really, what sets us apart is the fast-paced and entrepreneurial culture, and that hails from our founders. It's embodied by every single employee in the team. Everyone understands our mission. We want to move quickly. We want to respond aggressively to the toughest challenges in the industry, and it really sets us apart.

I mentioned already, we go to market primarily through customized solutions. And very frankly, customers often seek us out because they discover that an off-the-shelf product just misses the mark in some way. It either falls short in the area of performance, perhaps it's efficiency in the data center space, power utilization is a key conversation, right? And so if an off-the-shelf product fails to satisfy the power requirements in a facility, it can blow up the job. And so we step in and we solve that problem with a customized offering. Generally, for that client, we're solving for the lowest total cost of ownership, but we can optimize and customize around any and all of the variables that are of importance to the client. And generally, for the facility, we're providing a product that looks superior and is built to last for many years to come. The hallmark of BASX manufacturing starts with superior fan technology as well as exceptional quality in our cabinet design. I would put our products up against any manufacturer with regard to overall workmanship, quality, fit and finish and durability. And so that's certainly our pedigree. We also, with the acquisition by AAON, have obtained a higher degree of vertical integration content. And so that includes our thin tube coils that we produce down in Longview, Texas, as well as controls that are produced in Kansas City. So an increasing number of basics designs are having the opportunity to incorporate some of that content.

As you'll hear Rebecca talk about, controlling our supply chain is a really important aspect of our go-to-market strategy. We think it gives us resilience in the market, allows us to serve our customers with consistency. I talked about the automated manufacturing. No one does automation like AAON with regard to sheet metal and a number of our basics designs have benefited from the capabilities that have come on board with the acquisition by AAON. From a customer perspective, again, we're hyper focused on customers, and we have a unique sales and delivery model that really creates stickiness, not just with our reps, but with the end clients as well. And in the relatively small data center market, and that might sound like an oxymoron, the number of folks that are actually shaping the market and driving the industry forward, it's a small cast of territories. We know very many of them. And many of those have migrated from company to company. They're advocating for basics. The word is spreading. So demand for basics equipment, our capabilities and our solutions is continuing to expand and garner repeat business for our team. And that's a real exciting thing for us. We go to market through the AAON independent national sales network. And so in addition to sales support, these reps are also supporting our customers with installation and service, which, again, in the data center industry, it's essential for winning in that segment. And the last thing I'll just mention is another aspect that sets us apart is our dedicated project management.

So from day 1, when we engage with a client, we assign a project manager to walk beside them and to really narrate and manage every aspect of that engagement with the client. So from purchase order through project build, shipment, installation, startup, commissioning, that entire experience, we've got project managers that are walking hand-in-hand with the customer to really curate and deliver a fantastic experience. And I regularly get accolades from clients with regard to the capabilities of our project managers. Here's a case study that many of you will have heard about. This really showcases how our innovation and solution selling allowed us to win with a prominent hyperscaler in the data center space. And it goes back to 2023 when we were first engaged to respond to an RFP for a custom liquid cooling solution for a new data center design. And in the ensuing 3, 4 months, we engaged with the customer in technical discussion, a lot of problem solving, a lot of roll up the sleeves, meetings where we were trying to address, first to understand their needs, then to address those problems with a potential equipment solution. This happened to be a liquid air application. And the result was BASX was selected as the exclusive partner for this project, and it precipitated us winning $175 million. That was a record order for us. And as a note, that project is now being built in our Longview, Texas facility, okay? So that's where we're producing that.

And of course, that was a thrill for the whole team. But actually, the cool part of the story is what happened when we began to perform, right? Because at that point, it was all just design work. But as we began to perform, that's where we began to follow through on the customer experience, deliver on our commitments. And it was that performance that actually allowed us to win some pull-through work and several of those are of significant size. So the add-on work has been growing our backlog and allowing us to continue to serve that customer.

Let's turn our attention to the market. And specifically, we'll focus in on the data center market where north of 80% of our sales are concentrated. So no surprise, the data center industry is large. It's growing at every single turn. It continues to surprise us with regard to its pace of change and just the opportunities that are presented. And really, it doesn't matter what metrics you pay attention to. In this case, we're utilizing U.S. Census Bureau data. And so if you look in 2024, the put in place construction has the North America data center market at around $35 billion in total size. Now our internal estimates would put about 20% of that or roughly $5 billion to $7 billion for total cooling and infrastructure, right, total cooling equipment and infrastructure. Now that includes scope that goes beyond what BASX provides. But we estimate about 40% of that figure is thermal management equipment that's specifically addressable by BASX. And so if you just follow that math, we would estimate that we have roughly 7% of a $2.5 billion to $3 billion addressable market. And much of that share, we've picked up in the last 12 to 14 months.

BASX is uniquely positioned to capitalize on a really important trend that's taking place in the industry today, and it's a shift away from air cooling applications to more efficient liquid cooling applications. Matt touched on this earlier. When I say a shift away from, that's based on pure mix. But the actual total number of air cooling installations is still growing, and that's just based on the sheer demand in industry based on the data center installations. But today, if you look at the mix of thermal management equipment, it's about 85% air cooling. It's the technology that's been utilized for years to condition cloud compute data centers. Even for a power-hungry AI data center, they still need air cooling. You're not going to have a facility that's a 100% liquid cooling application, they still need air cooling for their racks and other ancillary electronic equipment. And so the case for continued investment in air cooling remains strong. Now some of these data centers have matured in recent years. Some of these products have become a bit more commoditized. And so one of the responses that BASX is leading with is beginning to standardize some of these products for the masses to allow us to attract and win some of this business at more sensitive price points.

Another major trend for the market is just the overall growth in the installed base, and that's both in terms of the number of projects as well as their size. If you look to total installed capacity from 2023 to 2024, we saw a doubling from 2 to 4 gigawatts of installed capacity. The experts are projecting another doubling here in the next few years, where annualized put-in-place construction is going to be in the range of 8 to 12 gigawatts of installed capacity, which is a staggering figure. But the macro construction pipeline supports the trend, even if you discount it by 50%, which we're inclined to do when we think about our projections and scenario planning, it's still huge opportunity for BASX.

And of course, as the market continues to roll forward and grow, so does the BASX backlog. I believe we saw this picture earlier. We finished Q1 with north of $600 million in backlog. The other really important statistic just to bear in mind is that in addition to this backlog, we've got well over $1 billion in qualified high potential opportunities in our funnel. Those are projects that we're actively cultivating with clients, many of them hyperscalers, a good number of colocation customers as well. And so that's -- the funnel is as robust and it's hot as it's ever been.

Of course, the demand in industry exceeds what BASX can provide. I suspect it exceeds what all of us can provide put together. And it puts us in a position where we can be selective. We can and must be selective in the jobs that we want to take. We want to work with the customers that we want to work with. We want to take the jobs that are ultimately going to deliver value for the company and our shareholders. We want to grow responsibly. It's not just about growth for growth's sake. We want to deliver top line growth, but we're also paying attention to margins and improving our bottom line results as well. We're in a great position to continue to aggressively grow market share. And of course, that's made possible by our comprehensive lineup of thermal management products and solutions. And so from our air handling units to our heat rejection chillers to our most recent product, our cooling distribution unit, or CDU, that's one of our latest liquid cooling solutions that we've taken to market. Really across the board, we're in a position to serve our data center clients with just about any product or solution they might need inside this space. And when we add it all up, we see the addressable market opportunity for BASX to be on the order of $1 billion to $1.5 billion per installed gigawatt of future capacity.

Now as I mentioned, air cooling has been the prominent application. It's been the main driver for BASX success here over the last 3 years. And air cooling continues to be really, really important in the industry going forward. It's an important part of our business. And again, even those liquid cooling applications that are serving AI data centers are not going to be sufficient to cool that data center in total. You're still going to need air cooling to support that data center. The big opportunity for BASX, though, is in serving customers with liquid cooling. And this is driven by these AI data centers that have 10x the capacity of your typical cloud compute data center. And BASX has stamped out a leadership position as evidenced by that case study very early on in aligning with an early adopter, one of these hyperscalers. We've proven our capabilities, and now we're having the opportunity to deliver on that.

Why the shift though? Well, liquid cooling is by nature, far more efficient than air cooling at conditioning these chips that are generating tons of heat and it really could look 1 of 2 ways. It could be a liquid-to-air application as was the example in the case study or it could be a liquid-to-liquid application as supported by the CDU here that you see on the screen. Now there was a lot of talk last quarter after DeepSeek, which is a Chinese AI company. They broke their news as to their low-cost AI training models. And of course, there were a lot of questions swirling. I don't doubt that many of you were paying attention and asking some of those same questions. And in a matter of days and next couple of weeks after that announcement, we saw a lot of value in the marketplace just evaporate as there was concern around where was the industry going and how might this news impact us. We asked some of the same questions. Would these U.S. hyperscalers pull back on their capital spend? What was going to happen to the basics backlog. And of course, since that time, we've become convinced this is a great thing for the industry. We think it's a good thing. We believe low-cost AI attracts more players into this space that are going to continue to innovate and disrupt and drive the market forward. It reduces the barriers to entry. And so from our perspective, we welcome this. We see it driving more data center construction as well as increased demand for basics equipment and solutions.

There's another trend that's taking place right now, which is the shift from AI training models to AI reasoning models. So these are the models that are actually drawing inferences. They're actually getting at the heart of application and use cases for consumers and businesses alike. And we've barely begun to scratch the surface here with regard to what that total demand profile is going to look like here in the coming years because we can barely imagine what the application and use cases will become. And so again, we see the number of data centers that will be supporting application and inference dwarfing the number of data centers that were put in place to support AI training.

BASX has the lineup of thermal management equipment to be able to support those customers and continue to capture market share as that growth moves forward. And of course, with the rise of AI and this continued growth, we've been investing aggressively in manufacturing capacity to make sure that we can perform and win at scale. And so I just want to talk about our manufacturing strategy. If we look at our mix of production, looking at 2024, the vast majority of what we produced was built in our Redmond, Oregon facility. That was the original BASX founding location. We had Longview, Texas supporting. In 2025, Longview is taking on a larger portion of our mix. from an overall production perspective. And Memphis is coming online. Memphis, as you'll see along that top shaded color, I can't tell you what that color is, but that top row, Memphis becomes the dominant producer, we expect of BASX branded product here in the next few years.

Overall, we are doubling our basics production capacity. So we're doubling it here in the next few years. And Memphis becomes that really important player in the mix. The other thing, I think, Matt, you may have touched on this, we're also retooling our processes and our staff to make sure that we have the flexibility to leverage the fleet and build BASX branded products at any AAON factory. Why is that important? It gives us flexibility. It gives us optionality with how we serve customers, whether it's on a regional basis or to simply adjust as we have demand, and we think that really gives us a competitive advantage. We drill down on these 3 sites, Redmond is full. Make no mistakes about it. We are at capacity. And so our strategy in Redmond, which is roughly 240,000 square feet of available production capacity, our strategy there is maintain top line, continue to enhance margins, focus on throughput, productivity and drive improvements in our bottom line position. So that's essentially the play in Redmond right now.

In Longview, Texas, we've just come off a major expansion there. And so we put 250,000 square feet in place dedicated to basics production, capable of supporting about $500 million in annualized revenue. We're only utilizing about 70% of that capacity right now. And so of course, in the next 2, 3 years, our plan is to continue to push, expand that, sell that capacity, optimize those lines for performance. Memphis, of course, is the new story. We acquired this facility back in December of 2024, and we're already in the process of trying to build that out. 490,000 square feet of dedicated manufacturing space to data centers today. And so we fully expect this is going to have the potential to outperform the other 2 put together based on how we're setting it up, and we've just barely begun to utilize the space. We'll be ramping that here over the next 3 to 5 years.

Now how does this manufacturing strategy support economic benefit for the company? It's no secret we've been investing a lot in manufacturing expansion. We're now beginning to reallocate demand to these new facilities that have space available to support our strategy, but there's a cost associated with moving products around. There's a cost associated with starting up new production lines, and our margins of late have reflected this pressure. Throughout 2025, Longview, again, growing in its manufacturing capacity, taking on more of the mix from a basics production perspective. They'll be optimizing their margin performance. Redmond, again, continuing to improve coming off of a challenging 2024 as we had a lot of CapEx investment there. We saw a marked improvement in throughput from Q4 of last year to Q1 2025 in Redmond. And so our manufacturing build-out and our progress in each of these facilities is tracking to our expectations. But the key year to pay attention to will be 2026, where volumes are hitting their stride. We're achieving productivity in Memphis. That's when we believe we'll be getting back to our 30-plus percent margin targets. I've touched on Memphis now a couple of times.

I can't hide my enthusiasm for this facility and just the overall program of standing this up. It's obviously central to our basics growth strategy. And it's just going to be a fantastic asset for AAON. I'm convinced it's going to be one of our flagship facilities. Not only is it centrally located in the U.S., it's in a vibrant labor market. We're just thrilled with the talent we've been able to place there. We've got several directors that we've placed that are top-notch in their field that have a long track record for performance. So we're really excited about the team we're building there. The facility itself has great bones. It's going to facilitate our manufacturing. And of course, we have a blank canvas to work with and optimizing it for data center production. And so that's thrilling as well. It's in a prostate business. We've got a fantastic chamber there that's been very supportive. We've got new manufacturing and technology partners that are moving into the market because they're excited about all that's happening in the Memphis area. And so we're thrilled about our choice to be in Memphis. We'll achieve meaningful production by the end of this year. That's our goal. But we actually began producing in February, which was far sooner than we imagined, and that was really just in response to the extreme demand we had in our Redmond facility. And so we had to shift, move some product down to Memphis to be able to capitalize on the space that we had. And of course, it actually serves as a great runway and ramp-up for training of the staff that we're hiring there. I also want you to note, of course, the facility is 787,000 square feet. I mentioned that roughly 500,000 is committed to basics. That means we've got approximately 300,000 that's reserved for flexible future use. And that could be additional data center business. It could be additional solutions and products under the BASX business or as Matt mentioned, it could be that we utilize that space for national accounts and other AAON opportunities. And so we're looking at this with kind of an arms open approach to say where are we going to steer this business going forward? We've got optionality. And of course, we're really pleased that we purchased a facility that gives us some flexibility for future growth.

Now to understand our growth trajectory, I do want to step back and just look a bit at the clients that we serve. So the data center market broadly segments into 3 classes of customer. We've talked about the hyperscalers already. You know these guys by name. These are the Googles and the Microsofts. They dominate the headlines because of their massive investments, right, as well as the massive power that's required to run their facilities. And of course, they love us because we solve problems for them that no one else does. We approach those problems with a solutions mindset. We're delivering custom solutions to address the specific challenges that they have. The colocation customers are the ones that are essentially leasing their spaces to others, other data center users. What's important to them is versatility and flexibility in the infrastructure. And so they look to basics to support them with the unique challenges that come around that flexibility.

Finally, you have enterprise customers, which essentially are small hyperscalers. Their data centers are owned and operated by a single facility for their own use. I mentioned hyperscalers, and I want to focus on them here because today, a disproportionate amount of our business is actually concentrated around a few large hyperscalers. And again, they love us for what capabilities we can bring to bear in solving their problems. We love them because they bring us a lot of volume. And so make no mistake, it's been a real win-win relationship for us. And in addition, partnering with the hyperscalers has actually put BASX at the very tip of the spear where we're partnered with early adopters where we get to learn and iterate through technology, which we can then leverage with some of our other customer conversations. So it's been a fantastic partnership. But as we look forward, we are intentionally expanding and diversifying our customer base to bring on new and oftentimes smaller customers such as those in the colo space or even enterprise clients. That's made possible because we've got additional manufacturing footprint to work with. We'll also talk about some of the configurable products that are actually going to serve some of those clients at more attractive price points.

And of course, the one big advantage, a theme that's ringing through all of our presentations is the strength of our AAON national sales network, and that's the channel that's going to avail us of some of those new relationships. I've talked a lot about data centers. I do want to remind you that the BASX foundation, our hallmark is really in custom solutions of all kinds, regardless of industry, and our experience traverses multiple end markets. Yes, 83%, I believe 83% of our business is in data centers in 2024. We still have an important segment of our business that's focused on clean room. We did 13% of our sales in clean room systems in 2024. And so here, we're serving pharmaceutical and medical. We're serving the semiconductor and chip fab markets. And of course, that business has been dwarfed by the shiny object of the growing data center business, but we remain committed to staying diversified and continuing to diversify both the portfolio of offerings as well as the end markets that we're serving. And one of the opportunities is in commercial, where we've only got about 4% of our business today. We've got engineering teams that are actively working at solving for new configurable products that would allow us to increase our exposure and serve that market in a stronger way.

And while BASX is all about custom solutions, that's not going to change. We do see productization as a path toward achieving greater scale and achieving that diversification that I talked about. And so there's really 2 ways that this is taking shape inside the company. One, we are beginning to cost reduce and standardize some of the data center offerings, right? Again, we're a custom solutions provider, but we've seen the opportunity to standardize some of those offerings, which we think puts us in a position to serve a more price discriminate customer, such as perhaps some of the small colo guys. And you'll see examples on the page here of our air side, our fame cooling wall as well as the liquid cooling solution, our CDU. The second opportunity, though, is with the semi-custom configurable air handler that Matt alluded to earlier. And so here's a case where pursuing this project puts us in a position to grow our presence in the commercial space, which would put us in a position to penetrate more health care, higher education, say, some government end markets, which would be analogous to some of the end markets that we're serving on the AAON side.

And here, again, we're taking a page from the AAON playbook. We're leveraging Parametric/3D design, automated manufacturing to deliver a feature-rich, very configurable mass customized product. We put that in the hands of the most capable sales channel in the world and now all of a sudden, some really special things can happen that allows us to achieve scale without necessarily needing to task all of our custom solutions engineering, which is a very high-touch support model. So I trust I've been able to convey a bit about what makes BASX special, who we are and really how that distinct value proposition is helping us win in the market and aggressively capture share. Just to summarize again, we're a fully custom solutions provider. We deliver the premier customer experience in the industry. And it's really that one-two punch, the combination of those 2 things that's allowing us to aggressively grow our market share, specifically in the data center space. We're in a great position to sustain that winning track record and to continue to grow, continue to gain share. And a big piece of that is the manufacturing strategy that we're executing right now, which includes significant improvement in all of our facilities with the expansion and doubling of our footprint that supports BASX. All of that's going to contribute toward us sustaining that 40% plus CAGR here into the next few years.

At this point, we're going to queue up another video before I invite Rebecca Thompson, our CFO and Treasurer, to the stage.

[Presentation]

All right. Good morning. Is this working, okay? All right. So I'm Rebecca Thompson. I'm AAON's Chief Financial Officer and Treasurer. I've been with the company since 2012. I came in as our Chief Accounting Officer and then transition into my role as CFO in 2021.

And I do want to take a moment just to note not just how far we've come as a company, but also how far our finance organization has come. So one of the most notable things that this group will have seen is the hiring of Joe Mondillo and really just the increased shareholder engagement we've had in the past several years. Joe has really taken our Investor Relations to that next level. So we're doing these events like today, Investor Day. We're doing investor perception studies, and we're participating in conferences throughout the year.

Another thing that we've never done is closing on the BASX acquisition. This was the largest acquisition in the company's history, and it really gave us a chance to create a playbook for future M&A opportunities. And if you've listened to any of our earnings calls in the past several years, you will have heard Gary talk about standing up an FP&A team. Now while this primarily serves us internally, it has also improved the quality of our earnings calls and the clarity of the information we're able to put out to the public. The last thing I want to touch on is our treasury. When I became Treasurer in 2017, AAON had a $30 million line of credit that we never used, and we were just building this war chest of cash.

Well, you fast forward till today, we just closed on a new $500 million syndicated loan agreement. That's really setting us up for our future growth that we've been talking about this whole day. So that's all to say that we're not just growing and investing in our products, but we're growing and investing throughout the whole organization. And with our new organization structure, moving into the 2 business units and the creation of shared services, we're going to be able to drive those best practices throughout the whole company, which will create value for us as organizations, but also value for our shareholders. So our key takeaways for today. As we already discussed, the AAON and BASX brand will drive us to a new 3-year CAGR of 12.5%. We have a new margin target of 32% to 35%. By the end of 2027, you'll see the leveraging of SG&A down to 13% of sales. And while our capital allocation strategy will remain consistent, you will see lower CapEx dollars after 2025 upon completion of our expansion projects.

When you look at this slide, you can see that we consistently deliver results. When we completed the sale or the purchase of the BASX company in 2021, from '21 to 2024, our revenues increased 125%. And during this time frame, we have been able to maintain healthy gross margins in some of the most challenging times of the company. When you look at 2020, we won during COVID. We were an essential business, and we were able to deliver products with superior indoor air quality during a pandemic when all of our competition was shut down. Now we did struggle with inflation and supply chain disruption in '22 and '23 -- or sorry, '21 and '22. But as you can see, we rebounded nicely in 2023 with record gross margins. All of this to say that we provide a healthy return on our shareholders' investments. So we want to reaffirm our outlook that we gave at our first quarter earnings call for 2025. Sales will grow in the mid- to high teens. Gross margin is expected to be consistent with 2024. SG&A, you'll see leverage slightly 25 to 50 basis points, and CapEx is still expected to be elevated with an estimated $220 million.

I do want to take a quick moment to provide an update on Q2. We've talked a lot about these investments in technology, and one of those investments is a new ERP. Now our strategy for going live with our ERP is to go live site by site. So on April 1, we went live with our Longview, Texas location. Now we were intentional in picking Longview, Texas because it represents a good cross-section of the company and that it produces the AAON brand, the BASX brand and coils. Now while the solution is technically sound, it has caused some disruptions and slow production at that facility. As a result, we do anticipate our Q2 will be softer than what we guided to. So when we're affirming our 3-year targets, Stephen talked about our opportunities of the rooftop market are boundless. The AAON brand is well positioned to take market share with our Alpha Class heat pumps that can lead the industry in energy efficiency and decarbonization as well as they're positioned for national accounts. These opportunities will grow the AAON brand in the mid-single digits.

The opportunity in the BASX brand in the data center market will grow the BASX brand approximately 40%. Together, these will result in our new CAGR target of 12.5% plus. Now when you look at our new margin target and the puts and takes to get there, we've been doing expansion projects for the past couple of years at all our locations. As these projects become complete, it will be less disruptive to our production facilities, and you'll see increased growth, increased revenues to leverage those fixed costs and drive margin expansion. Additionally, we'll continue to rightsize our headcounts. And with our new reorganization structural to have a global shared manufacturing service, we can drive best practices and efficiencies across all locations. Now while we can't control everything, and we anticipate there could be some headwinds like inflation and supply chain disruptions and volatility in government rules and regulations. We have policies in place to quickly identify and address these so that we can preserve our target margins.

Lastly, as I just talked about, we are wrapping up some of our large technology projects that have weighted heavily on SG&A in '24 and '25. As these projects are completed, we can expect to see the leveraging of SG&A down to 13% of sales by the end of 2027. So a couple of things I'd like to point out about this slide. The first thing is that all these numbers are organic growth. The second thing is that we have a history of setting ourselves up for future growth. So when you look at 2021, we are focused on creating solutions to deal with hyperinflation and pressures on our gross margin while also negotiating and completing the acquisition of BASX and making strategic changes in leadership. All of these things set us up for double-digit growth in '22 and '23. Now again, when you look at 2024, we've had an intentional focus on reorganizing the company, completing the integration of BASX and expanding our facilities to accommodate future growth.

You can see here in the past 5 years, we've been able to take market share a lot of this is what I referred to earlier with the beginning of COVID and being able to operate and deliver product while the rest of our competition was shut down. And then as Stephen has talked about, our price premium in recent years has narrowed, accelerating those share gains. And then as Matt touched on, the BASX strong CAGR is a result of its solution-based approach, leading to deeper customer relationships and better outcomes. Over the past 5 years, the rooftop business has -- or AAON's share of the rooftop business has increased from 5% to 7%. We are well positioned to continue to take market share given the high efficiency standards and increasing focus on superior air quality.

Additionally, our shrinking price premiums makes our product more competitive and more mainstream. When you look at the BASX brand, a lot of that growth comes from the acquisition with AAON. So prior to the acquisition, BASX had relationships with many customers, including hyperscalers but because of their size, they could only get orders in the $5 million to $10 million range. After the acquisition, with the AAON name behind the BASX brand, they became a much less risky option for those customers. And as a result, are now able to get opportunities in the $30 million to $200 million range. As we discussed, the rooftop market is expected to be slightly down to flattish in the coming years. And this is primarily driven by current macroeconomic factors such as higher interest rate and slower construction starts. But we still believe that we can take market share during this down market.

The AAON brand will gain this share through its national accounts and our Alpha class product that is well positioned to take advantage of the growing interest in highly efficient units with zero carbon emissions. We also look to price our premium -- price our product to the market. So we've talked about this historical price premium of 28%. And in the past several years, our competition has put in much larger price increases for inflation, for compliance with the DOE standards in 2023, for the new refrigerant change in 2025 and all their price increases were much larger than ours. With a smaller price premium, we'll be able to accelerate our share gains and maintain our new target gross profit. And then as Matt has already discussed for the BASX brand, cloud computing will continue to drive data centers on the air cooling side, while AI data centers will drive even more growth for liquid cooling solutions. We ended the first quarter with a record backlog of over $1 billion. And this is split pretty much about $400 million with the AAON brand and $600 million with the BASX brand. Now that represents a 45% and 123% year-over-year increase for the AAON and BASX band, respectively. When you look at the AAON backlog, we traditionally like to see a quarter's worth of sales.

Now at the end of the first quarter, that was slightly extended due to supply chain disruptions with the refrigerant change, but we anticipate that brand will be able to ramp up in the back half of the year, bringing down our lead times and bringing down that backlog to a more normalized level. Now the basic backlog is slightly different from the AAON backlog and that customers are looking to secure future production given the data center demand. That business can also be lumpy in nature. We anticipate as that business grows and as that backlog grows, we'll be able to smooth some of that business out and also have the flexibility to schedule that production across our entire fleet of locations.

So when you look at our margin expansion opportunities, all of our expansion projects in Redmond, Longview and Memphis will provide increased sales that will leverage our fixed costs and provide margin expansion. The reorganization of the company to drive manufacturing best practices across all locations will create improved productivity and efficiencies. You'll also see a shift in our product mix to more BASX product and national accounts and those high-volume orders will drive higher revenues and better overhead absorption. All of these things together will lead to our new margin targets of 32% to 35%.

So let's talk about our capital allocation strategies. We always like to reinvest back into the company with CapEx. We like to increase our shareholder value through dividends and stock repurchases. And while we have traditionally not been an acquisitive company, we are always on the lookout for an opportunity that has a strategic fit and purpose. Our top priority has been and still is investing dollars back into the company through CapEx. When you look at the time line that we have here of our continuous investment in the company, it starts in 2020 with the build-out of a new building for Longview, Texas that added 220,000 square feet. When you fast forward to 2024, we doubled that building, adding another 250,000 square feet.

Also in 2024, you had additions in Redmond for a new wealth shop and additional office space. And then at the end of 2024, with this large $200 million data center order, it created the need for additional capacity, and that's when we sought out our plant in Memphis, Tennessee, which closed in December of '24 for $64 million. Now in '25, we're wrapping up our expansion projects in Redmond and in Longview and really looking to get that Memphis plant up and going. Going forward, we expect that these projects will normalize and we will have a lower level of spending in CapEx.

So over the years, we've clearly demonstrated that our investments in growth have certainly paid off. When you look at our ROIC, it has increased every year until we took a dip in '21 with the acquisition of BASX. But you can see it recover in '22 and '23 as we get the return on that acquisition until again, we make a significant investment in 2024 for the plant in Memphis. We evaluate all our capital projects and look for an internal rate of return of 20%. We have a long-term strategy for capital, and we're not looking for short-term gains. We continually evaluate the capital needs of the business and look to balance our uses of cash. So we do not like to provide a specified dividend payout ratio. Instead, we'd rather look to provide consistent and regular increases in our dividend. We also look to do share repurchases when we have excess funds on hand and when we believe our stock to be undervalued, providing yet another good return on your investment.

Under our current authorization for share buybacks, we have $70 million remaining. We do plan to take a different approach to M&A. We are formalizing our M&A strategy to help us assess the market, identify potential targets and develop those relationships that could lead to opportunities in the future. We don't want growth just for growth's sake. We want to be intentional with our acquisitions and find opportunities that will complement our current product portfolio and help us do what we do best. Lastly, we love vertical integration. So I know like one of the things Gary always says is we don't assemble units, we manufacture them. So any opportunity that we have to purchase or improve our vertical integration will always be a consideration. So one of the ways AAON has also always won is through our strong balance sheet. Being conservative and low levered has put us well in times of financial stress and allow us to take on opportunities when our competitors could not. Now we have taken on borrowings in recent years, but you can still see that it's very conservative, and we're lowly levered at less than 1x EBITDA.

As we grow, we will have additional working capital needs, and we will have this increased CapEx that we discussed that will cause temporary borrowings to increase but still be very conservative. We prioritize the paying down of debt above dividend increases and share repurchases. We also continue to evaluate our business needs for current -- for future liquidity and the future growth of the company. So in summary, our new 3-year CAGR target is 12.5% plus. We set a new target margin of 32% to 35%. We'll proactively manage the business to see leveraging of SG&A down to 13% of sales by the end of 2027, and you'll see a more normalized CapEx spend starting in 2026 as we've completed our expansion and investment projects.

With that, I'll now turn it over to Mr. Tobolski to wrap things.

[indiscernible] investments. From the #1 piece, and again, just hammering this home, it is that innovation. It's that drive on product differentiation that is core to who we are, that is core to why we grow, it's core to why we differentiate ourselves in the market. That really materializes itself in that premium product offering and really a value-driven sale in the organization. When we look about the growth opportunities in front of us, again, really looking at this from a brand perspective, what is making up that 12.5% kind of growth target -- 12.5-plus percent growth target. When we think about that and bifurcate that, that mid-single-digit growth, one thing I want to touch on that doesn't really build into it the assumption that our tariff surcharge goes forward.

And again, I say that just because there's a lot of uncertainty from a political policy standpoint. So our 6% surcharge is essentially assumed at some point to come back off. It's not assumed to be kind of in perpetuity given the volatility we've seen and sort of also some of the stabilization of some of the pricing dynamics. So that's not baked into that from the sort of mid-single-digit growth mindset in the AAON brand. that mid-single-digit growth is really looking at it from a standpoint of a relatively stable flat year within 2025 and then going forward, getting back to that high single-digit growth rate from a market share acquisition standpoint. To put it in perspective and just thinking about the AAON conversation for a minute, this is a challenging market from an overall kind of general commercial nonres perspective.

As a data point, commercial rooftop sales volumes as an industry were down 24% in the first quarter, with AAON picking up share against that. And so the share dynamic that occurred, the disruption that occurred in 2024 around the refrigerant transition is behind us. And when we look at where AAON stands in a 2025 conversation, it's in a position where we have an attractive price point, a differentiated product and we will outperform and get back to a market share acquisition story kind of in that 2025 calendar year. And then beyond that, getting back to that normalized high single-digit growth rate perspective. And when you look at that and you kind of look for certainty in that, I really do think that the bookings cadence and the backlog that you see at the end of Q1 and the bookings cadence that we see going into Q2 continues to reaffirm that positioning and that kind of growth and stability within the AAON side of the business.

As we look to the basic side of the business, really driving 40-plus percent growth rate inside that fully organic growth rate over the next 3 years, that's driven by that product differentiation and the strategic investments that we're making inside the overall capacity inside the space. And so that 40% growth rate inside of the data center segment is well beyond the growth rate of the data center segment. So once again, reaffirming the conversation that, that differentiated product and that value proposition that product provides is really fueling that 40% growth over the next few years. When we think about then how does that materialize itself into that sort of margin profile, really, again, 32% to 35%, well above the historic kind of mindset of AAON, well above what we set from a '23 target. But keep in mind, as we grow, there's pressures on margin on that basic segment. So as that basic segment continues to grow, there's just some pressures along the sort of, I'll say, margin pressures ahead of the capacity coming online as you ramp production.

And so what you'll see throughout that 3-year period is continued improvement inside the BASX segment margin, but really a very strong and stable AAON performance in that mid-30s range with that BASX segment kind of growing and impacting the business as well as growing in kind of its margin performance. But that's when you look at this from a holistic standpoint, where this sort of conversation around margin is coming from. It's a very strong and stable AAON margin. It's a growing and strengthening margin within the basic segment on a dynamically growing business kind of over that 3-year period.

But really, when we look at that from an industrial perspective, from a peer group perspective, really looking at this from a strong growth perspective, strong growth story inside the HVAC space driven by the 2 best brands in the marketplace within the AAON and BASX brand and really, from a standpoint of this 3-year story and beyond, getting back into that great strong growth, that great financial performance, operational excellence and really outperforming the marketplace going forward.

So with that, we're going to spend a couple of minutes and just get some chairs set up here for Q&A. So just give us a couple of minutes to get the room set up, and then we will get the group up here to answer your questions.

All right. Before we get started here, I just want to mention specifically to the webcast participants, there is opportunity for you to ask a question. I'll be managing that. So if anybody on the webcast has a question, certainly put that through, and we'll try to get that in. And we'll just get things going, whoever wants to start. Let's start over here with Tim, and we can go with Ryan next.

Tim Wojs with Baird. Thanks for all the information today. Just maybe 2 questions. On the data center growth, I mean, if you take 40% plus out a couple of years, it gets you to like a $600 million, $650 million business. I mean, that's effectively your backlog as of Q1. So maybe you can just talk about what you see in that kind of out year because, I guess, mathematically, it does imply some slowing in the data center growth in '26 and '27? And I just want to kind of confirm if you're trying to say that or not.

Yes. I guess the way to think about it is the '25 calendar year obviously has a large uptick that you're going to see kind of in the materialization. That backlog kind of a data center space, I mean, it's representing out to 18 months kind of in a backlog perspective. And so you're going to see a huge impact in 2025 with the sort of materialization of the Longview capacity coming online.

You certainly won't see that again. I mean, if you get down to like the math, I mean, roughly looking at that 1 order, it more or less tells you that you're doubling year-over-year from '24 to '25. Part of the reason why that can happen with bringing capacity online and seeing that come that quick is because Longview was a facility that had a lot of infrastructure in place.

So just to kind of use that as a baseline, when you think about Memphis, yes, you drop in 787,000 square feet. But it's not a plant that's been operating. It doesn't have a lot of that system in place. And so its ramp to revenue is different than that. And so to your point, yes, it implies that, hey, we're going to see a big uptick in '25. It's going to slow, but it's still going to be 20-plus percent kind of growth rates going forward off of that new base.

And when you look into the sort of that carrying out, it still kind of gets back to the same conversation of in that 3- to 4-year period, getting the data center sort of segment -- the BASX segment around $1 billion in revenue. That still does kind of drive that same conversation. We're not changing that outlook. It's just sort of the way this capacity is going to come online to support that. It's not going to be quite as a flip of a switch that you see in the Longview capacity coming online.

Okay. And then I guess just on national accounts within the AAON business, hundreds of millions of dollars of pipeline is pretty significant. It's a lot bigger than I would have thought. What does pipeline mean to you in terms of like what it is definitionally? And how would you kind of judge success in converting that pipeline to revenue?

Just high level, I'll touch on the pipeline first and let Stephen kind of dive into some of this as well and Andrew as well. Pipeline to us is basically defined as value of active conversations. And so it's people in which you're engaged in a conversation with. Now we certainly don't expect to see all of that materialize. We look at that and say there's a certain amount, but that's sort of like scale of conversations that you're having.

And so in a traditional commercial HVAC market, non-national accounts, 30% success rate is considered a relatively good success rate in converting an order, pipeline to order. We think national accounts obviously have bigger impact there. But that's sort of at least how we frame the pipeline conversation. And I guess, Andrew, I guess you can dive in first on success and what success looks like?

Yes, sure. So I mean that's the current -- what we have visibility to, like Matt described in terms of customers that were speaking with, that our reps are coordinating and communicating our value proposition to. Certainly, the win rates in that area are much higher than the typical planted spec. We're not 1 bidder of 4 or 5, but rather we're having a detailed conversation around total cost of ownership, carbon goals, to what degree they want to achieve carbon reduction and balance their total cost of ownership.

So those are very rich, deep conversations where we're already in close alignment with helping them make that value proposition decision. So therefore, the win rates are much higher. At the same time, coming out of our national sales meeting, which was referred to earlier today. We had a lot of conversation with our reps about the opportunity to grow into national accounts and out of that has gained a lot of momentum with additional national accounts being pursued. So while that's the current visibility we have, we have listed accounts and opportunity size that's continuing to grow as well.

I'll touch on the kind of operational side of that question, and that is whatever percentage comes in, the way that's turned, the way I look at this very much from an operational perspective is when you have a national account, you have considerably less diversity. And so what happens is, is that the management of that allows us to offset our very diverse product line that we have, and you can take a plant like Memphis or an area in the plant in Tulsa and you can do something very consistent. It will allow you to buffer tank, manage and set up quickly to execute that product, if that makes sense.

Ryan Merkel, William Blair. Thanks for all the details, really helpful. I want to start on gross margins, which I think is probably the main issue today. So can you talk about the assumptions that you're making at the low end for the 32% and then also the 35%? And Matt, you mentioned BASX is going to have some pressures as the factories are ramping. I think that might be what the Street has missed here. So specifically, what are you assuming for BASX in the outlook for gross margins?

It's a great question. I think the -- I will start off by saying, and as Stephen talked about in his presentation, the AAON side of this business, it's finished last year at 35%. It's got a great strength kind of inside that operational strategy. It's had pressures on volumes, but give it to that noise for a second, that organization, the process, the pricing strategy, all that is going to drive that mid-30s margin inside the AAON segment.

And so today, over the last 12 months, that represents 75% of the revenue, BASX represented 25%. But over that same kind of window, the BASX segment is more in the high 20s, low 30s level. And so as we think about that is reflective of some of the manufacturing investments and frankly, manufacturing efficiencies that exist at BASX. And so when we rewind and say, let's think about a growth cycle, the growth cycle was going to put pressures because if I say I'm going to turn a manufacturing line on, to do that means I have brought in personnel well ahead of that line producing revenue that is going to put pressures on the margin. I'm going to have investments in D&A that is going to show up and hit the books before it's at 100% utilization.

And so those things create pressures on the margin that you're seeing inside the BASX segment. And so as you think about that 3-year period where BASX is ramping at 40% relative to a mid- to high single-digit conversation year-over-year kind of in the AAON world, that is going to put pressure on the consolidated margin.

When we think about like this in a future state perspective, how did AAON get to 35% margin? You got there by having stability. AAON -- in Tulsa, we weren't putting on 200,000, 300,000, 700,000 square feet of capacity. They got to 35% margin, to Stephen's point, by having the time available to drive efficiency programs inside there to really make those materialize.

And when you look at the BASX side, yes, we're learning from all that. We're taking a lot of that logic around the efficiency programs that we're building into these investments in these new facilities. But during the ramp, there's just fundamental pressures that exist from a financial statement perspective that really burdened a little bit of that BASX side. And as it grows, it becomes more relevant. That's where that I'll say the lower end of 32% kind of gets to.

Now as we look forward, there's no reason BASX can't get to a margin profile that is looking similar to AAON. There's no reason that all the things we've learned inside the AAON organization over the last 37 years can't materialize in margin improvement. But you just have to get past that dynamic growth cycle to be able to truly sit there and capitalize on that.

Okay. Great answer. And my second question, you mentioned 2Q is a little softer. Could you be a little more specific? And did those orders just push then into the second half?

No. So to dive into it, I think most people in this room, if not everyone in this room knows, we made investments in technology. One of those being an ERP implementation. And so we were very calculated on how we launched our new ERP. We were very calculated to go 1 site at a time. And so we went live in Longview with a very intentional method because Longview is actually the most complicated site because Longview has both AAON Business Unit and BASX Business Unit product, plus the vertical integration with coil manufacturing.

So we went live the first day of Q2 in Longview with the new ERP system in Longview only. That did -- fundamentally, the solution is correct. But I think we can all acknowledge, any time you roll out a large systematic change in technology, there is a learning curve, and that learning curve is going to slow productivity. And so it put a little bit of pressure kind of inside the Longview segment.

But I will say -- and the counter to that, it reaffirmed the strategy that we took, which said, let's only go live at 1 site, let's minimize the blast radius, let's minimize the impact of that kind of go-live strategy, which it certainly did. But it did impact some of the productivity in Q2 and put some pressures on that Longview kind of throughput, primarily in the AAON branded products. And so there's a little bit of pressure that's in there.

And so that's just why we're saying there's a little bit of, I'll say, a little bit of headwind kind of inside the Q2 conversation. And frankly, we want to make sure we get that out here today and just have that conversation. It's not a drastic like massive impact. It just has a fundamental impact inside the Longview kind of operation.

Okay. But you reiterated the year, so it's contained?

100% contained, yes.

It's just pushed?

And we're being very, very strategic, very intentional in how we roll out any other site to ensure that the lessons learned, the process, everything is kind of built to minimize impact going forward. So yes, we look at this from a yearly perspective and say, yes, some of that softness that we're seeing, some of the delays, if you will, and the reduction in productivity in Longview is just going to extend kind of the overall delivery schedule in that product. But fundamentally, on the overall year, we don't have a change in kind of runway.

Over here, Brent.

Great. Thanks. Brent Thielman with Davidson. Just wanted to come back to BASX. I appreciated the slide where you ultimately won and hit a broader swath of customers into the future. My question was, over the next 3 years and within that 40% sort of growth rate you described, how much of that is still dependent on the few kind of key large hypers that you have? And if you get number -- hyper #4, #5, is it incremental to that growth rate?

Why don't you take that one, Matt, if you want.

Yes. So I would say at least 30% to 40% of that is still going to be focused on hyperscalers. We're intentional about trying to expand our customer base. And going back to Stephen's comment about national accounts, these hyperscalers allow us to deliver a consistent product, built time and time and time again. We're intentionally expanding customers because we think it derisks our business, but the variation in design, the changeover from model to model to serve these expanded customers does look different when you're operating inside a factory. But we see the benefit of continuing to serve those hyperscalers. That's where a lot of the demand remains. But whereas today, with 50% to 60% of our business concentrated with hyperscalers, we would see that pulling back to perhaps 30% to 40%.

Okay. And second question, Matt, for you, just really sort of officially taking this over to talk about possibility of acquisitions. How does that look like under you relative to the prior 2 CEOs, how mature is the pipeline? Any flavor for the size of businesses you might be looking at?

Yes. So it really -- I want to start off on the conversation around M&A to reset 1 thing, which is you're not going to see a major acquisition in the next 12 months, probably not even 24 months. I mean, just to -- we're going to build out the -- I'll say, the process and some of the tools inside to really more proactively be looking at opportunities. And the reason I say that is if you look at that organic growth opportunity, you look at kind of what we have going on as an organization, it would be, frankly, irresponsible to make a big acquisition right now. It would dilute the ability for us to execute on the organic strategy, it would dilute the ability for our leadership team to be able to really manage the growth and drive best practice in this new operating model. So the next 12 to 18 months, it is 100% focused on executing on really refining our operating engine that exists inside this organization and then building the tool set to be strategic and be able to start proactively looking at opportunities.

Now to the 1 comment we recommend, if something falls in our lap around, especially a vertical integration conversation, that is something that we would always be looking at because we do truly look at the vertical integration play being something that does differentiate AAON. And so whether it's coils, whether it's controls, whether it's fans, these are things that drive kind of a unique differentiator inside of our products and our manufacturing strategy. So we're always eyes open to those type of opportunities. They're just smaller in scale relative to kind of a bolt-on.

But really, when we think going forward and sort of the midterm kind of conversation, that's when we're going to be proactive on looking at what is in the marketplace from an M&A perspective. And the lens we look at M&A around kind of in that sort of the growth driver in organic kind of conversation, it's really around the similar mindset and culture, right? You think about gating gates that you had to go through and the sort of product style, the product strategy has got you aligned with kind of how we go to market. The sort of ability to leverage our very strong independent sales channel, like those 2 things, those are the initial gates.

And then it comes down to what do we look at. We don't look at growth for growth's sake. We don't look at trying to buy market share. That's not sort of the mindset. We're looking at what can we add that's been a similar flare in product strategy. So is there a tangential product that we don't have in our portfolio that we can leverage our sales channel. Is there a market that we're not heavily engaged in that can be a great growth driver or diversifying kind of the overall exposure inside the marketplace. Those are the big conversations in the way we think about M&A from an inorganic kind of growth perspective. But again, that's going to be a couple of years out, so you should expect to see that kind of materialize.

Julio?

Julio Romero, Sidoti & Co. Thanks so much for all the color today. My first question is on CapEx. It sounds like Memphis won't come close to capacity anytime soon. And you talked about that undedicated space, I guess that implies CapEx steps down in 2027? Or are there going to be machines, equipment, marketing and other CapEx initiatives that would drive CapEx as a percentage of sales to kind of remain at a double-digit percentage run rate?

Yes. I'll touch on the Memphis for a second, Rebecca can kind of follow on that. But when we think about -- to your comment, like we can't flip a switch and bring on 787,000 square feet. We could do it, don't get me wrong, we can do it very irresponsibly, and you would see a heck of a lot more margin conversation around that.

And so when we think about how that looks over the next couple of years, we'll be aggressive, 100%. We're going to be aggressive to bring on Memphis. We already are, as Matt alluded to and actually assembling product there back in February. But you think about the machinery and what truly makes a manufacturing facility a manufacturing facility, that takes time to come in place. And so we're progressively putting in more machinery throughout this year.

But some of the lead times -- I mean, when we talk about strategy and increasing our vertical integration capacity, increasing our coil manufacturing capacity, that's a longer play. That's not a 6 month to get all that equipment. That's an 18-month conversation. So you're going to see that's where in that '25 and '26 calendar year, you're going to see elevated CapEx kind of around the build out of Memphis. A lot of that is able to still support that additional 280-some-odd thousand square feet. Again, we have commonality and manufacturing process, which lets us leverage that. So there might be some incremental kind of accretive investments that happen in '27 and beyond. But from an overall scale perspective, when we think about the existing fleet, there's definitely basically a reduction in overall CapEx kind of in '27.

Yes. So I would just say, when you talk about growth versus maintenance CapEx, right? So '24 and '25, most of our CapEx has been for growth. And going forward, we're looking more at a maintenance mode until, say, like, we have -- we need additional capacity in the other building. So you're really looking for that to come down as a percentage of sales starting in '26.

Great. And my second question is around cleanroom products. So those products are more complex, larger, longer product duration. Just talk a bit about how you price those cleanroom products, talk a little bit about the margin differential between cleanroom and data center. And then would it ever makes sense to expand cleanroom manufacturing beyond Redmond? Would that make sense in a place like Memphis?

Yes. I'll touch on it, and then Matt, you can definitely dive in. One of the things, when you think about pricing and strategy perspective, again, some of the discipline that we talked about that we're adding in, we talked about we're fast, we're agile, but we're backing that up with some kind of process improvements and sophistication in the organization. And some of that is around pricing. It's around product management. It's around understanding the value proposition.

And so when we look at cleanroom environments as an example, it is a market with fewer players with higher kind of value that's kind of driven into it. And pricing reflects higher margin. So we do historically price cleanroom products to reflect that sort of unique nature of the product. When we think about growth strategy going forward, I think you made a great comment that they're bigger products, they're bigger projects. And that is a fundamental constraint. We think about that 13% of revenue in the BASX business unit that you saw in '24, that's reflective of exactly that comment that they are bigger. And fundamentally, they're slower moving products to build.

And so as we balance market dynamics, we just fundamentally didn't have the space to really support that. If you looked at it and said, blinders on for a second, hey, the margin that we would sort of bid in the project on a cleanroom may look higher, it would actually end up netting if we tried to reprioritize some of the Redmond space. It would have netted lower margins as an overall segment because you wouldn't be able to push the volume through. It just moves slower. And so when we think about blending that, there's an opportunity for sure to leverage the right space that's built for purpose around cleanroom products.

And Memphis is a conversation that we've certainly had. I mean, we -- and I wouldn't even just say Memphis, I'd say we rewind all the way back and say, we've got 4 million square feet across multiple sites. Where is the right spot? And that's part of the evaluation. But we do see cleanroom continuing to be a meaningful conversation inside of our business. And we're going to continue -- we made investments in Redmond actually on a separate satellite building to support some of the cleanroom environmental controls in kind of its own space, really driving its value proposition. But going forward, yes, we're going to keep looking at that on a business perspective, saying where is the right spot to build this stuff and really make sure that we do kind of maintain diversification of the overall brand strategy.

Yes, I think the only thing I would add -- and this is something that Andrew and I have to solve for here, but as we continue to build relationships with the AAON rep channel and understand where they have gaps and opportunity for selling cleanroom solutions, I mean that's part of how we want to try to win with our reps as well as understanding how BASX can bring more capabilities to bear to help them grow their firms.

And so it's balancing manufacturing. Of course, we didn't touch on engineering, but we've got limited engineering bandwidth, and you see our priorities where we're allocating focus today, which includes also productizing news and like custom air handlers and capabilities. So cleanroom is important to us. We want to keep diversified. We've committed some dedicated manufacturing space, which I think is the right play for now. And then we're going to have to assess the demand from our rep side and how we can best complement and build that into our growth plan.

We do have a question on the webcast. Does the target of mid-single-digit percentage organic growth within AAON segment include any potential market share gains within national accounts?

Yes. I mean I would say it includes market share gain fundamentally. So built into that is market share gain. But again, I just rewind. I mean we look at the current year, the soft macroeconomic environment, volumes down 24% and in a quarter is pretty substantial in the commercial HVAC rooftop market. I mean that is a big downturn. That is going to be a little bit of an anchor on kind of the year's growth rate. We're guiding to a flattish kind of overall performance, which is telling you we're seeing market share acquisition in this year in that backdrop.

As we think going forward, yes, definitely, the national account is a piece of that. The national accounts, a couple of hundred million dollars in pipeline. Again, we don't assume we get all of that, but we certainly see there being potential to get a couple of good wins in there that will provide some opportunity. And certainly, if we get some bigger wins in there, there's upside to the conversation for sure.

And just a quick follow-up related to national accounts. Would this be an incremental revenue stream or cannibalistic to your existing business at all?

It's 100% incremental. I mean, we -- when you look at what AAON is doing today, we have some national accounts. But I mean, if you look at the scale of national accounts, they're very small. They're quick trip type locations like fast-serve locations, things like that. And so some of these large wholesale locations, some of these large distribution warehouse owners, these large retail owners, that is incremental. These are customers that we don't play with today. And so it is an add kind of an incremental perspective.

Adam Seessel with Gravity Partners. Matt, Rebecca, Joe, thanks for a very helpful day. Two quick ones for me. I was somewhat surprised to hear you say that industry volumes would be flattish over the next few years. What are some of the headwinds that are there?

Yes. And I would just, again, go back to the current calendar year. I mean if we look at this calendar year '25 and we look at the ABI, which is a 12-month kind of leading indicator, we look at construction starts and how that's actually materializing in material spend and material kind of growth, they are both showing a slowing market, not a growing market in the current calendar year. If you take that plus a lagging indicator in the AHRI rooftop data being down 24% in the first quarter, then that tells you that the current calendar year is the depressing starting -- not depressing, it's the anchor that is slowing down that growth rate.

And so being down, if you look at that data, that data suggests that this current calendar year is going to be down in volumes, high-single digits. Just mathematically is what that data would tell you in the commercial nonres rooftop market. So that is where we say that, that's your starting point, and then we anticipate the rebound off of that. But just that on a 24 starting base relative year is just the math that's going to drive that sort of conversation.

Good. And then...

[Audio Gap]

but somewhat not. I see on your LinkedIn page that you are a commercial helicopter pilot. Anything we should be worried about there?

[Audio Gap]

was academy bound. And unfortunately, back in the day, LASIK was still considered experimental. And so my lack of vision was kind of a deterrent. And so that was a little passion fill, kind of just trying to balance the original life goals in the world. I don't fly too much, unfortunately.

Right here, I probably should. I think I'll bide my time.

We do have another question on the webcast, if no one else has one. Can you expand on the emerging productization of your BASX offering? What does that exactly mean? And how big of an opportunity can this be? And is this primarily data center related or outside of the data center?

Matt, wouldn't you kind of handle all this? Because...

Yes. So specific for data centers, we really have 2 projects afoot. One is, there are a handful of our air cooling solutions that we are standardizing what I say, for the masses. And the way we'll go to market with these is through pre-engineered, configurable offerings that are predesigned. They're supported with selection software, collateral and tools that our independent sales channel can use to self-perform the design, selection, pricing, submittal process.

So we're able to get scale in that way because there's very little of that workflow that's going to have to travel through our solution engineering department, right? So we can continue to be focused on delivering high-value contributions with our hyperscalers or other [ colo ] customers that are looking to us for customized solutions. Meanwhile, we're able to get leverage in our fleet of factories by growing product sales through our national sales reps.

Not all of our customers are going to respond to that type of an offering, but we like the diversification and some optionality that gives us. And so it's a heavier engineering investment upfront because we have to predesign and think through all the configuration, flexibility and features, but then it's a relatively lower support model thereafter once it gets in the hands of our reps. So that's the first piece that's kind of data center oriented.

The second piece, which takes us outside of the data centers it's really a complement to the work we would do in the data centers. That's the semi-custom air handling offering, which we believe could support data centers, but actually moves us and opens up further penetration in the commercial space. Same concept, though, preengineered using all of the automation and manufacturing and the capabilities that we can muster. And we think through that offering with the hand of our reps with a flexible offering that is going to appeal to the consulting engineers, the contractors that are serving more of that commercial space. And we think that gives us more diversification in end markets and product capabilities. So those are really the 2 major projects that we have that are kind of in that productization category.

Any other questions in the room? We do have another webcast question. For the AAON business, you lost share in 2024. How have orders trended through the early part of this year? Specifically, how has that continued into 2Q? Do you expect to regain the share that you lost in 2024?

Yes. I mean the simple answer there is yes. But when we think about the order trend, we look at the end of December orders, $150 million came in, in a 5-day period in the end of December. And then you look at the continued uptick in orders and backlog really inside of Q1, which continued to show strengthening order cadence kind of coming off of that disruption kind of on that refrigerant transition.

And so we look at that and really shows good strength in kind of the value proposition of the order cadence. The -- what I'll say is the orders continue to stay in a good position kind of in Q2. There's obviously -- again, there's some dynamics in the macro market. And certainly, it's not an explosive growth conversation, but it's stability is what I would say in Q2.

And we have 1 last webcast question. You spoke of how it's very difficult for your peers to mimic your business model. Can you please explain that again and provide a few factors of why that is, especially given your company -- competitors, sorry, are so much larger and have more capital?

I feel like there's no one better to take this patch and answer than Stephen.

If I feel like they heard me say this is my slide and want me to do it again. Let me try to use a metaphor that makes this clear. Imagine you're building a 20,000 square foot super house. And the foundation that you pour under that, you realize that there's a better way to do the foundation when you finish framing the whole house.

So what you would have to do to mimic AAON is you'd have to remove all the framing, take the whole thing down. All that cost, all that time, all those red tape, convincing that you've got to do. You have to go back, break the foundation up, rebuild it with this new method and then reframe it. So imagine the bigger the house gets, the more difficult it is to undo and redo.

And because when AAON came up with this method, it was not anything anyone else was doing. The machinery required -- the manufacturers of such never thought of doing it that way. We kind of developed it with them when we were small and able to implement it in such a way that it didn't show up that much to the outside world. It was just kind of blood, sweat and tears. And when I say kind of blood, sweat and tears, I mean it. Blood, sweat and tears to develop the system internally.

We had a check and balance system that a design engineer would come up with something and then it would go through this filter, and that filter would push back. And it's funny because 1 of those filters is now a very good friend of mine because we've worked together for so long. But back then, he wasn't nice to me. And he would come back and he would say, can't do this, can't do this, can't do it. So you had a very difficult dynamic between human beings to manage. You had a whole lot of undoing to build a new kind of method or foundation to your entire design process, fab process and assembly process for the finished product.

So why is it hard to replicate? Well, because you've got to undo everything you do, break up your foundation, learn how to build the foundation, this other kind of secret way we do it and then start all the way over again.

Question over here?

Kevin Zhu with Ranger Investments. Your ERP rollout in Longview on April 1, I'm expecting you guys are going to roll it out to the rest of your facilities at some point. Do you guys have an update on that timing?

We don't. I mean, from our perspective, it is being very -- driven by -- ensure there's 100% stability and the impacts are all resolved in 1 site before you go to the next one. And so while it's easy to get excited and start thinking about what each 1 of those steps looks like, the internal discipline that we have is we don't make those moves until not only have we gotten the facility that went live operating how it should, but also all of those lessons learned built into the solution at the next site, including the training and sort of try to make each one a less impactful conversation.

And really maintaining that discipline is something that Rebecca and I have very often with some of our team. Because the ERP, they really get down to it is going to enable a lot of great things within AAON. There's a lot of excitement around this ERP because it's going to provide us visibility that we've never had into this business. I mean if you get right down to it, forward-looking, the ability to do a lot of things from a financial visibility and understanding perspective, they just don't exist in sort of some of that legacy ERP that we have.

So there's a lot of excitement on getting it on and getting it online, but really making sure that we don't make those decisions, make those moves until the previous site is fully stable, operating as it should, and everything has been trained out from a lessons learned perspective.

We have another question on the webcast. For BASX, are there any holes in the portfolio that customers would like you to fill? What is your exposure to direct-to-chip versus immersive cooling? And how do you see those technologies growing? Are you agnostic from a price and margin standpoint?

What was the last question?

Are you agnostic from a price and margin standpoint?

Do you want to get that first, Matt?

Yes. So let me start with -- the first part was around liquid cooling, I want to say.

Does your sales channel -- do your customers feel like the portfolio is well rounded? Or do you -- is there any products to fill?

Yes. So I would say as we're working with our AAON channel, they have other partners on their line card besides BASX. And of course, we're fighting for more wallet share at every single quarter. Generally, we've largely filled all of the holes that are most important to them. And remember, we approach solving problems with custom solutions. So it's not so much that we've got a menu or a catalog of offerings that they choose from and they identify, we've got 2 or 3 gaps. They bring us challenges, we put pen to paper and we solve those problems, and that's how so many of our offerings today have proliferated over the years. And so generally, we're plugging those holes as the opportunities come forward.

With regard to liquid cooling, the majority of what we're involved in supporting today is direct-to-chip liquid cooling. And that seems to be where most of our customers are orienting either current designs or the designs that we're partnering with them to engineer for their facilities. And I would say -- if the question is around, are we agnostic to pricing margin, meaning might we entertain offerings, products or solutions that would challenge us or stretch our margin expectations, we take a look at those on a case-by-case basis. But ultimately, you saw our goal to be delivering blended margins of 30% plus. And all of that includes both our data center solutions plus the configurable products plus the cleanroom offerings that we continue to manage. So we look at it on a blended basis.

Just to add 1 little piece there, too, is there stuff that our customers say, "Hey, I love if you made this." Of course, there is. But we're also very pragmatic in ensuring that we're not chasing #1 growth for growth's sake, and we're not kind of throwing good money after things that really are kind of not the right opportunity.

And so 1 example of that conversation. We've had many a customer come to us and say, man, I love if you mass produce an air-cooled chiller.

That's a great example.

Great if you look at it and you look at our peers and [ JCI ] and train, I mean, a lot of their growth in data centers is on air-cooled chillers. And so there's a lot of commentary saying we love it if you went after that. But when we step back and say, where is the market going, right, run where the ball is going to be thrown, not where it's sitting today, that's a conversation that we really get into with them because as you move into liquid cooling, the thermal management strategies look different. And the conversation around chillers looks different because when we move to liquid cooling, we're actually changing the way we actually design thermal management solutions, we're moving the fluid temperatures higher is really kind of a backbone of that. And in doing that, you start saying to yourself, there's a point in time where an air-cooled chiller isn't the right answer.

And when we sit here and say how much money do you want to throw trying to build out capacity around air-cooled chillers in an evolving market where we don't see the long-term play providing the same growth story, that's the wrong investment strategy. And so when we have those conversations where they say, "Hey, there's a hole, we love if you fill this." We're going to be very open at where we see the opportunity, and we're going to make the smart investments and develop strategies to answer where the market is going. Because yes, could we make a chiller? By all means, we can make chillers. But we don't see the return on capital deployed in building out chiller production capacity being a long-term growth conversation for the overall BASX brand. And so we're focusing the energy of our capital, of our talented team on the opportunities that we see really where the market is evolving to, not where it's at.

Anyone else have any other questions? Nothing on the webcast. So going once, going twice. All right. Well, I just want to say thank you, everyone, for attending. We appreciate everything. And if you have any other follow-up questions, need to get ahold of us, my information is on the website if you don't already have it. So thank you and safe trip home.

Okay. Thanks, everybody.