AAON, Inc. Aktie

Thank you for standing by. At this time, I would like to welcome everyone to the AAON, Inc. Second Quarter 2026 Earnings Release Conference Call. [Operator Instructions]

I would now like to turn the conference over to Joe Mondillo, Director of Investor Relations. The floor is yours.

Thank you, operator, and good afternoon, everyone. The press release announcing our Second Quarter 2026 Financial Results was issued earlier this afternoon 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 our 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 and 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 afternoon 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 Andy Cheung, our CFO. Matt will start off 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 afternoon. Q2 was another strong quarter, building on a momentum established in Q1 and reflecting continued execution across the business. Higher throughput across all 4 of our major facilities resulted in substantial volume growth, demonstrating the value of recent investments we have made across the organization, including supply chain management, lean manufacturing operational excellence initiatives, expanded capacity and leadership development.

These efforts translated into our fourth consecutive quarterly revenue record with sales increasing 101% year-over-year and 26% sequentially. EBITDA more than doubled from the prior year period, a generated substantial earnings growth while converting backlog at a much faster pace across the enterprise. These results are tangible evidence that the investments we have made are translating into measurable operating progress. For an industrial manufacturing company, this level of organic growth and operational scaling is exceptional, and it reflects the strength of our markets, our strategy and our people.

Despite the substantial increase in production rates during the first half of the year, backlog remains nearly double prior year levels. Sequentially, backlog declined because production and shipments increased significantly across the enterprise resulting in accelerated backlog conversion that is exactly the outcome we have been working to achieve. Customer engagement remains strong. Our pipeline of opportunities remains healthy and backlog continues to provide meaningful visibility into future growth.

Let me begin our brand discussion with BASX. The long-term market opportunity remains compelling supported by continued investment in data center infrastructure and the differentiated solutions we provide to the market. BASX branded sales were a record, increasing 216% year-over-year in the quarter and 501% on a 2-year stack. For the first half of the year, sales were up 137% year-over-year and 570% on a 2-year stack. Achieving and sustaining this level of growth requires coordination across engineering, operations, supply chain, manufacturing and our field teams. Production increased across our facilities and I hope all of our stakeholders appreciate the significance of what our teams have accomplished.

As we have scaled at an unprecedented pace, maintaining high standards across quality delivery and customer support has remained a major focus. We continue to see meaningful improvement as the systems, processes and teams we have been building become more mature and effective. The progress is translating into better outcomes for our customers and stronger execution across the enterprise. BASX branded bookings were below the unusually elevated level of experienced in recent quarters. However, we do not view that as a change to the long-term opportunity. These projects are large in scale and can generate quarter-to-quarter variability in booking activity and award timing. Customer engagement remains strong. Our opportunity pipeline remains healthy and backlog continues to provide substantial visibility into future growth opportunities. More importantly, our ability to support customers continues to improve as throughput increases, lead times come down and additional capacity comes online. The underlying market opportunity remains very favorable, and we continue to see substantial long-term opportunities for growth.

Turning to the AAON brand. The AAON brand continued to perform exceptionally well, gaining market share despite a relatively soft commercial HVAC market. AAON branded sales increased 40% year-over-year and 5% sequentially, reflecting improved production throughput, strong demand and continued execution improvement across the business. These results point to meaningful market share gains and reinforce the strength of our product offering, sales channel and customer relationships. Increased production volumes also drove further lead time improvements during the quarter, although additional improvement remains a priority as we continue increasing throughput.

Bookings of [ AAON-branded ] equipment increased approximately 16% year-over-year during the quarter and were up approximately 45% on a 2-year stack. Year-to-date, bookings increased 12% year-over-year and 25% on a 2-year stack. Growth was primarily driven by continued strength in our traditional transactional business, which is particularly encouraging given the softness we experienced throughout much of last year. National account activity remained healthy and generally consistent with prior year levels.

We also continued to see strong momentum with Alpha Class, our fully electric heat pump platform. Alpha Class orders increased 50% during the quarter and 54% year-to-date, and customer adoption continues to build. This platform is an important long-term growth opportunity as customers increasingly focus on electrification, sustainability and energy efficiency. Strong AAON-branded bookings resulted in a 6% sequential increase in AAON-branded backlog despite significantly higher production rates. As a result, we remain focused on continuing to drive throughput. Work from backlog, shortened lead times and deliver for our customers.

Turning now to margins. As we have discussed for several quarters, the level of demand we are experiencing has required us to scale the business rapidly. We have expanded our manufacturing footprint, brought new capacity online, invested in equipment and infrastructure, strengthened our supply chain capabilities and significantly increased talent across operations, engineering, manufacturing and support functions. These actions have been deliberate. They allow us to better serve customers, convert backlog faster capture market share opportunities and build the operating platform required for the company AAON is becoming.

Importantly, the underlying economics of the business continue to improve. Oklahoma's core operations are performing well. Memphis continues to perform meaningfully ahead of our expectations and production throughput across the enterprise continues to increase. Consolidated margins remain pressured by the mix impact of exceptionally strong growth, ramp-up activity associated with new capacity and price/cost timing dynamics. We continue to expect margin improvement through higher facility utilization, productivity gains, sourcing initiatives, improved price/cost realization and a continued maturation of recently added capacity.

The key point here is that we are not simply growing revenue. We are building a stronger operating company with scale, infrastructure, systems and discipline to support higher revenue, stronger execution, improved margins greater cash generation and durable earnings growth over time. We are confident in our ability to continue demonstrating the earnings power of this business as we move through the balance of 2026 and into 2027.

And with that, I will now turn the call over to Andy.

Thank you, Matt, and good afternoon, everyone. Second quarter net sales were a record $627 million an increase of 101% year-over-year. Growth reflected robust BASX and AAON brand performance as well as enhanced manufacturing throughput enabled by strategic capacity investments and ongoing productivity initiatives. BASX-branded sales increased 216.2% year-over-year reflecting the combination of sustained momentum in data center cooling demand, higher production output and greater utilization of recently added manufacturing capacity. AAON-branded sales grew 39.3% in the second quarter, driven by a healthy backlog and improved production throughput as we work to reduce lead times at both our [ Total ] and [ Longview ] facilities.

Gross profit in the second quarter increased 84.3% to $152.5 million compared with $82.7 million in the prior year period reflecting the company's strong revenue growth. Gross margin was 24.3%, down from 26.6% in the second quarter of 2025. Results reflected the impact of ramping recently asset manufacturing capacity, including the Memphis facility, along with the increased use of outsourcing to support a [indiscernible] to growth and ongoing inflationary cost pressures. Importantly, these factors are temporary and largely reflect deliberate investments to support long-term growth. As throughput and utilization continue to increase, productivity improves and better [ backlog ] is converted, there is clear sight into gross margin improvements in the coming quarters.

SG&A expenses as a percentage of sales declined 570 basis points to 13.3%, demonstrating strong operating leverage as revenue growth outpaced our continued investments in the organization. On a dollar basis, SG&A increased $24.5 million to $83.6 million as the company continues to make intentional investments to drive long-term growth.

Non-GAAP adjusted EBITDA increased 102.3% from the prior year period to $94.2 million. Adjusted EBITDA margin was 15.0% compared to 14.9% a year ago. Adjusted diluted earnings per share grew 213.6% to $0.69.

Turning now to the segment financials. Beginning with AAON Oklahoma. Second quarter net sales increased 42% to $262.3 million driven by strong execution against a robust beginning backlog and accelerated conversion enabled by production improvements. Results also benefited from favorable price realization and the beneficial comparison to the prior year period, which was impacted by the industry refrigerant transition and other operational challenges.

AAON Oklahoma gross profit increased 18.9% to $63.6 million. Gross margin was 24.3%, a decline of 460 basis points from 28.9% in the second quarter of 2025. Overhead expenses associated with the Memphis facility impacted segment margin by $18.1 million compared with just $3 million in the prior year period. Excluding these costs, Oklahoma margins expanded approximately 60 basis points to [ 31.2% ] compared to 30.5% last year. Adjusted for Memphis overhead expenses, the increase in AAON Oklahoma gross margins was largely due to increased production rates. These gains were partially offset by elevated outsourcing levels and inflationary pressures, both of which are temporary and do not change the long-term margin profile of the segment. These factors have been addressed in recent quarters with actions embedded in backlog and new pricing actions. We expect these temporary headwinds to moderate as the year progresses.

AAON coil product sales were $146.7 million in the second quarter, an increase of $88.2 million or 151% compared to the prior year period. Growth was driven by $126.6 million in BASX branded liquid cooling product sales, which increased 208% during the quarter. This strength was also supported by a 15.1% increase in AAON branded output within the segment. AAON coil products gross profit increased 130% to $23.5 million. Gross margin was 16.0% in the second quarter compared to 17.5% in the prior year period. The margin contraction reflected temporary inflationary pressures that we expect will moderate in Q3 and Q4. The segment continues to deliver strong profit growth supported by higher sales volumes that are expected to continue throughout 2026. Along with the expected margin improvement, we expect profit growth will accelerate in the second half of the year.

BASX segment sales grew 221% in the second quarter to $218 million. The outsized growth was driven by sustained demand for data center solutions and a robust backlog. Increased utilization at the Memphis facility contributed meaningfully to quarterly results by expanding production capacity, evaluating backlog conversion and driving higher sales volume. BASX segment's gross profit increased 244.2% to $65.3 million compared with $19 million in the prior year period. Gross margin was 30.0%, up from 27.9% in the prior year period. The improvement in margin reflected strong volume growth partially offset by incremental resources and investments to support future growth and share gains.

Lastly, a quick update on the Memphis facility. We understand the accounting treatment can make performance difficult to evaluate, and we intend to provide greater clarity going forward. When considering the facilities revenue generation to date, and fully burdening results with all associated expenses, including overhead currently allocated to the Oklahoma segment, Memphis is performing exceptionally well ahead of time. Production and revenue have significantly outpaced expectations and margins have expanded for 2 straight quarters. reaching levels well ahead of where we expected them to be at this point in the facility's development.

Now turning to the balance sheet. Cash, cash equivalents and restricted cash balances totaled $12.7 million on June 30, 2026, and debt at the end of the quarter was $435 million. Our leverage ratio improved to [ 1.48 from 1.71 ] on March 31 and [ 1.77 ] on December 31. In the first half of 2026, cash flow from operations was a positive $55 million, a significant improvement compared to a $31 million use of cash in the prior year period. This was driven by higher earnings and improved working capital efficiency. Capital expenditures totaled $102.6 million year-to-date, reflecting continued investments in incremental capacity to support future growth.

Looking ahead, we continue to see significant opportunities to improve productivity, profitability and working capital efficiency. We expect these initiatives to support stronger cash flow generation and continued balance sheet improvement, providing a solid foundation for sustained long-term growth.

I will now hand the call back to Matt.

Thank you, Andy. We entered the second half of the year with strong momentum across the business. Production throughput has increased significantly backlog remains at elevated levels despite record revenue conversion and demand across both brands continues to be healthy. Importantly, the [ backlog ] we are converting today carries a more favorable margin profile than the backlog during the first half of the year, combined with higher production volumes, improving facility utilization, pricing actions, sourcing initiatives and continued operational improvements, we believe the building blocks for margin improvement are firmly in place.

Turning to our outlook for 2026. We now expect sales growth of 55% to 60%, gross margin of 25% to 26%, SG&A expense of 13% to 14% of sales, and depreciation and amortization expense of $95 million to $100 million. Our updated outlook reflects stronger-than-expected production, backlog conversion and execution across the enterprise. While we continue to see operational improvement across the business, our consolidated margin outlook reflects the mix impact of exceptionally strong growth from recently added capacity, continued ramp-up activity and price cost timing.

As we sit here more than halfway through the year, I want to provide a few thoughts on how we're thinking about the business beyond 2026. First, we continue to feel extremely positive about the long-term outlook for both the AAON and BASX brands. Both businesses continue to gain market share, supported by differentiated products, strong customer relationships, our industry-best sales channel in highly engineered solutions that are difficult to replicate.

Second, we continue to see substantial opportunity to improve margins over time. The drivers are straightforward and well understood. Higher utilization of recently added capacity, improved fixed cost absorption, increased productivity, continued sourcing improvements and pricing actions already embedded within our backlog. We expect to see progress through the balance of the year and a more meaningful benefit as we move into 2027.

Third, we see a significant opportunity to improve cash generation. We have already started to see encouraging progress with operating cash flow improving meaningfully during the first half of the year. As margins improve, growth investments begin to normalize and working capital efficiency continues to improve, we expect cash generation to become more visible component of the AAON story. The business has undergone significant transformation over the past several years. We have expanded capacity, strengthened leadership, invested in supply chain and manufacturing capabilities, broadens our product portfolio and build the operational infrastructure necessary to support a much larger company. Those investments are increasingly showing up in the results.

Today, we are seeing stronger throughput, faster backlog conversion, improved sales growth, expanding operating leverage and improving cash flow. These are the outcomes we expected to see as the investments we have made across the business matured.

The key point is that we are not simply growing revenue. We are building a stronger operating company with the scale infrastructure, systems and discipline to support higher revenues, stronger execution, improved margins, greater cash generation and durable earnings growth over time. We still have work ahead particularly around margin improvement, but the direction is clear. The long-term opportunity remains strong and the actions required to improve margins and cash generation are underway. We are proud of what the team has accomplished, confident in the opportunity ahead and focused on demonstrating the earnings power of this business as we move through the balance of 2026 and into 2027.

In closing, I want to thank our employees, customers, sales channel partners and shareholders for their continued support. Our employees have accomplished an extraordinary amount. The growth we are delivering today is a direct result of their efforts, discipline and commitment to serving customers while building a stronger company. We remain focused on execution, disciplined in our approach and excited about the opportunities ahead.

And with that, I will open the call up for questions.

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

I want to start with the data center orders in the quarter. They were a little bit weaker than I think some of us were expecting. So Matt just put a finer point on that, if you would. I know you mentioned the pipeline is healthy. And then could you provide any color on if you think orders will improve in the third quarter?

Yes. Ryan, and certainly a great question. One we anticipated it was going to come out today. So -- just I want to start off to me by stepping back for one second and just looking at the kind of trajectory that we've had in our data center bookings over the last 4 quarters.

So at a high level, when we look at the momentum that we have going into this quarter, the prior 4 quarters had a book-to-bill approaching 3 over that time period. So we've had exceptionally strong bookings as we've been ramping up capacity. And we think about it from the standpoint of that trajectory that we see really highlights that differentiated offering that we have in the data center space has certainly been resonating within the marketplace. And so there's been a lot of great momentum, a lot of great trajectory and tremendous amount of pipeline opportunity.

Now when we look at the size and the scale of the orders, it's important to kind of go back and recognize that these tend to be large orders. And so there is potential, as we talked about in prior quarters and really highlighted that there's potential for there to be a little bit of lumpiness around how that flows through to actual backlog and bookings. But really just at a high level, the amount of activity that we have in the data center space, the amount of volume we're putting through, there's a tremendous amount of momentum that we have around our products and our orders and really, it's a timing conversation around how that pipeline opportunity is converting to overall bookings.

But the pipeline itself is the strongest that it's ever been and it would be important to highlight that it's not just strength with existing customers. There's great strength to our existing customer base but our pipeline continues to expand in terms of diversification of our overall customer base. So really, from an outlook perspective, we're incredibly excited about the opportunity. We've seen acceleration in conversations and activity with our sales channel engagement in the overall market. So while this quarter certainly had a little bit lighter bookings, we don't see that as indicative of anything in the overall market opportunity for our product.

Okay. That's helpful. And just a quick follow-up there just because it's an important topic. Was there a large order that slipped because of the timing issue? Or is it just the lumpiness that you talked about and the pipeline is still healthy?

Yes, it's just lumpiness. There's no specific order pushout or movement. There's -- again, it's just really lining up the overall bookings in a given quarter.

All right. And then moving to gross margin. You cut the gross margin for the year, 200 basis points. And my question is, I'm curious what changed versus when we spoke to you in May, it almost seems like you accelerated throughput and you were willing to eat the higher costs, but just tell us what happened.

Well, let's maybe kind of unpack this for a bit. And so when we look at margin as a whole, looking at Q1 to Q2, I want to start off by saying, operationally, the margin in the Oklahoma segment is improving, and the BASX [ Redmond ] segment is improving, and the Memphis segment is improving, and there's a little bit of pressure from a price cost perspective in the ACP segment.

But I want to start by framing there that the progression that we see operationally is improvement in the overall margin profile of this business. Now what is driving that conversation is the accelerated backlog conversion that we have within our Memphis site. And so from a mix perspective, the increasing revenue volume that we're driving through Memphis while ramping that facility is at a lower margin point than the Oklahoma segment. And so as we're driving more volume through that Memphis segment, on a consolidated basis is pulling the margin down, but providing a net positive impact to the business. And more importantly, it's helping us build a stronger foundation to continue serving data center customers.

And so us pushing a little bit harder in our Memphis site and really ramping this facility is giving us a foundation to then drive more business through, allowing us to turn on more production lines and continue growing the overall volume to our Memphis site. And so that mix conversation is one of the biggest drivers of kind of that consolidated margin coming down in the quarter.

I see. So of the 200 basis point cut, it was mix and lower margin data centers accelerating and then it was price cost and then still a bit of outsourcing.

Correct. I mean we think about bringing up the top line outlook for the year up about 20%. Obviously, the vast majority of that is coming through Memphis. And so there's a lot of drive that we're getting in throughput through Memphis. But obviously, it is burdened by a little bit more ramp pressure and outsourcing and other things. Again, this facility, just point of reference, in the quarter Q2 we did roughly half of the total year 2025 revenue that BASX did out of Redmond. And so in one quarter, a brand-new facility did almost half of what an established mature facility was doing. And so there's inherently going to be some pressures to margin kind of as we ramp that from a productivity standpoint, onboarding new staff and really outsourcing some of the production as a lot of the new equipment continues to come online throughout that facility. And so really, that is the bigger pressure. It's not a fundamental structural pricing issue, it's just ramping a large facility from scratch.

Your next question comes from David Tarantino with KeyBanc Capital Markets.

Could you give us some color on what the sales outlook now embeds between AAON and BASX branded product sales and maybe some thoughts on what's informing the confidence on your ability to deliver that growth relative to the capacity ramp that's ongoing?

Yes. No, great question. And so from a kind of a branded perspective, the 2026 guide is assuming approximately 20% growth year-over-year in the AAON brand. And so then back in hand, that implies that BASX will again more than double in the year. And so just in perspective, the overall data center market last year and this year is growing around 30%. And so more than doubling BASX, again, after having a 140% growth rate the prior year, continue showing a good growth outperforming the overall market. So really strong acquisition from a market share perspective.

When we look at confidence in supporting and executing that growth, you've seen us be intentional and disciplined around trying to not overcommit too much growth until we see the sort of legs get below it in the Memphis site. And so as we get more and more run time in Memphis, we get more and more visibility and confidence in that rate of ramp. And that's really what helps guide our approach to that backlog conversion and the messaging around the overall growth rates. You take that and kind of add in all the investments we've been making in our operational model and execution within manufacturing, within lean manufacturing process, continuous improvement and supply chain discipline, and really, it's making meaningful results and the overall ability for us to execute.

Now I will say there certainly is a level of caution that is growing this rate in this environment certainly has a little bit of pressure. And so when we look at the implied growth rate in the back half of the year, obviously, it's not some acceleration beyond Q2 in the back half of the year. It's showing a relatively moderate kind of performance in the back half and that's just recognizing that this rate of growth is going to have some level of pressures, whether it be supply chain or operationally. But that's embedded into our outlook. That's embedded into our guidance and really from our standpoint, we're intentional, and we're also clear eyed about some of the realities about growing this fast.

And then just to follow up on that last comment, is that supply chain pressures and/or other pressures that you're seeing today? Or is that just conservatism?

I mean I'd say there's always -- there's always challenges that pop up. I mean, Q1 and Q2, there's certainly been a variety of issues we've tackled and continue to tackle. So there's nothing new or meaningful that's in there, but it's just a reality of this market that we're not wanting to dismiss the reality of some of the supply chain sensitivities and operation in this kind of environment today.

Okay. Great. And then maybe back on gross margins. Could you just give us the key buckets driving the second half improvement versus the first half, particularly between the better absorption and maybe improving price costs? And then maybe kind of give us some color on how they should progress between both 3Q and 4Q?

Yes. So at a high level, the biggest driver of margin improvement in the back half is price cost. That certainly is the biggest driver. We messaged us back in the Q1 call as well. But at the very end of last year, we certainly noticed some price/cost challenges that we intentionally took action on from a pricing perspective. And so the backlog that we have today is at a substantially different price point than the backlog that we executed in Q1 and Q2. And so that certainly is the biggest driver of margin improvement in the back half. But certainly, beyond that, productivity gains will certainly continue to be a positive from an overall margin perspective.

Looking at Memphis as an example, as there's more run time, productivity gains will begin to materialize in overall margin profile but the progression from Q2 is really improving in Q3, but Q4 certainly is the back half load of that overall margin improvement.

Your next question comes from Noah Kaye with Oppenheimer.

Maybe just double clicking on margins. Can you help us understand the margin trends in ACP where we saw sequentially lower margins and liquid cooling was, I think, over 85% of the segments. So how should that segment, particularly the liquid cooling side of it profile from a margin perspective? What happened in the quarter? And what is sort of embedded for improvement from here?

Yes. The biggest driver in the ACP segment, but first off, [indiscernible] Noah. The biggest driver in the segment margin kind of quarter-over-quarter was really on price cost driven by inflation. So whether it's the kind of raw materials kind of inflationary pressures, a lot of freight pressure from a costing perspective. Really, those are the biggest drivers in the quarter. And to be frank, we were behind on pricing actions to recover those. And so there's been a lot of work done in the ACP segment around pricing to basically make sure that inflationary pressure is captured properly.

And I would just say, as we continue investing in our organization sophistication, whether in Andy's organization from a finance perspective or our supply chain organization. We're getting more and more visibility, which is allowing us to make more and more forward-looking actions to stay ahead of these inflationary pressures. And so this sophistication and investments we're making to really drive improvements in our operating model. We'll continue to make meaningful impact in the overall margin profile to help capture this ahead of time. But the reality is we were behind on the overall pricing against the inflationary costs. And those actions have been taken and continue to be monitored and taken appropriately going forward to capture that.

Yes, Noah, I will also just add that given the actions that we've taken, [indiscernible] going to be towards the end of the year for us to see some meaningful rebound there. There's a bit of a backlog there as well. So -- but we knew what it is, and we've been taking action. So I think to Matt's point, now that we have a more certificated view of our costing product cost. So now we will be able to do more timely actions but we knew that a lot of the actions already in place.

Very helpful. And then, I guess, just to double click on David's point. So I think you talked about 4Q being kind of where some of the margin improvement is weighted towards so should we not assume kind of fairly ratable sequential margin improvement in 3Q and 4Q. And I think we can get there within 120 bps or so improvement quarter-over-quarter for the next couple of quarters. Do you think it's going to be more back-end weighted?

Yes, you'll see modest improvement in Q3, but really Q4 is going to be where the more noticeable improvement is going to be weighted.

Okay. And then just on the orders because to agree with Ryan, that was a big focus today. I just want to see if we can get some clarity here. Were there large orders or meaningful improvement in orders in July and early August versus the 2Q level? Can you share anything on that? Because you mentioned the pipeline expanding and certainly, we know industry activity is very good. Can you just talk about trends quarter to date, to the extent you can share?

I would just say quarter-to-date, I don't have specifically in front of me the overall bookings. But what I would say is, from a pipeline perspective, with visible and high confidence conversions, there is a tremendous amount of pipeline with existing customers for '27 and '28 orders. And so there's a lot of work going into those existing relationships and really they're planning for '27 and '28 deliveries that just didn't hit the books in Q2. But again, part of our normal planning process this time of year is where a lot of that planning actually begins to materialize into orders for the next year and beyond.

So I would just keep reiterating that the amount of activity that we have is a tremendously high very strong with existing customer base. And again, we're continuing to turn on production capacity in Memphis, which is allowing us to beyond that existing customer base, really accelerate new customer relationships from a diversification play. So the amount of activity that is out there that we're involved in with a lot of high probability closures of existing customers and new customers is as high as it's ever been.

Yes. And that would be very consistent with kind of how the calendar year works where some of those '27, '28 commitments would start to flow through to your orders. So that would make sense.

And Matt, just to follow up on that last point. You mentioned the diversification progress here. I'm not sure whether it was in the bookings this quarter or any other metrics, but what can you share with us around where you feel you're making real progress on that diversification what are customers looking for? What wins have you had or what feels reasonably high probability?

Yes. What's been great is it's relatively diverse across our product portfolio. So we're not looking at pipeline activity and new relationships just in one specific product. So whether it's liquid cooling products, whether it's air side products, [ tiller ] products, the conversations are happening across the entire portfolio and really it's a pretty good weighting across all of that. So it's not weighted like it's all 95%, one or the other, it's actually pretty evenly spread across that product portfolio with new customers. And so really showing that, that portfolio really resonates across a broad spectrum of customers.

Your next question comes from Timothy Wojs with Baird.

Thanks for all the details. Maybe just my first question. Just when you look at the Oklahoma segment and we talked about kind of mid- to high 30% gross margins and having visibility to that? I mean, I think we've kind of been talking about that for really the last 18 months. So we've still kind of been kind of hung up in this kind of 30%, 31% range. So I guess could you put a little finer point on kind of when you would expect to get to that kind of mid- to high kind of 30s percent level? Or do you have backlog today that is kind of clearly at that level? Just some color on the timing and the visibility to when we'd actually start to see that?

Yes. First off, good afternoon Tim. Yes, so on the Oklahoma segment, obviously, we talked about this in the Q1 call where we noticed some definite price cost dislocation at the end of last year and pricing actions started to get put in place. Well, that was getting put in place when we had a pretty healthy backlog. And so as that pricing went in, it takes time for that to really start hitting the overall production floor. But those actions, we're really starting to see movement, obviously, in this quarter. But really, we think about that meaningful pricing is going to really come in Q4. You'll see some very meaningful price impact hitting the Oklahoma margins then into 2027.

So we anticipate with the overall pricing structure and our productivity gains that we're seeing across that facility, that Q4 is in 2027 is when we're going to really expect to see that kind of start to flow through as that mid- to high 30s.

Okay. Okay. And can you just step back and talk about what -- I mean, we've got some kind of trailing kind of price cost pressures in ACP. We've got it in Memphis, in Oklahoma. Can you just kind of step back and talk about what you've done over the last 6 to 9 months so that we're not as behind on price cost as we've been here in the last 6 to 9 months?

Yes. It's a very fair question, and we've talked about this really for the last few quarters, which is the evolution of the investments we're making in the sophisticated how we run this business. And so as -- whether it comes down to the supply chain strategy, whether it comes down to the overall finance organization and partnership with the business and better insights and kind of forward-looking information to the business. All these investments we're making are really being made to provide better forward-looking visibility and better confidence in execution. And you and I have certainly talked about this and I've made these comments before around the scaling, the rate of scaling at AAON, it's pretty phenomenal to think that 5 years ago, the revenue was a bit above $500 million and certainly substantially higher than that in this calendar year, more than 4x in this calendar year.

So when we look at that dynamic, there was a lot of evolution that had to happen in the business to really provide the infrastructure and the discipline to not only run that SaaS, but to do it successfully and reliably time and time again. So the investments we're making in really the operational improvements and sophistication of this business are really driven on that idea of getting better visibility and foresight into our execution and allow us to have actionable insights well in advance of when we have to make decisions. And so all of those investments are being made to allow us to see these things coming so that a year down the road, I'm not saying, "Hey, Tim, we didn't see this coming." Like we're going to be able to say, "Hey, we saw this coming, which is why we made these actions, which is why you see the margin means getting where it's at."

Yes. Tim, I'll add that to Matt's point. So now that we have a handful of new finance leader joining us and we organized a bit a couple of months ago. So every executive now is partnering with finance insights and allowing us to do much more analytics to inform the actions faster and this is going to really go beyond gross margin as well. So we really have a lot of insight now into managing working capital. A lot of process change already been kicking off. So I'm pretty bullish that we'll quickly see some fruits coming out of these investments. So definitely, we have a mixed level of insight guiding the business right now.

Okay. Okay. That's helpful. And then just I'll sneak one last in. Just the basic backlog I know you ran through production more than you thought and you had some order lumpiness. But would you expect that backlog in BASX to be higher at the end of the year than it is today?

Certainly, we anticipate there being. Yes, I guess, what we all say is 2 parts. So first off, I want to just kind of keep reiterating that some of this acceleration in conversion it is building us a stronger foundation to build off of. And so the faster we can convert, the better visibility and clarity we get into the ability to execute at scale and then we build more production capacity, more lines out from there. So it's allowing us to really continue taking this opportunity in the market and capturing as much as possible.

And so that conversion of backlog acceleration of conversion, certainly makes the bookings become a big balancing point. But our goal is to get that operating foundation in place to keep growing it and then continue driving sales based on visibility into our ability to execute against the overall demand of the market.

So we talked about this in the past that the balance of confidence and execution in bookings kind of go hand-in-hand. And so as we keep getting this foundation built, it allows us and our sales team the opportunity to more aggressively go after the orders. And so just to say, I mean, the growth and the execution of our operations team is driving is pretty phenomenal. When we think about all of this organic growth and the scale of growth and the pace of growth. And so that is then arming our sales channel to go out there in the marketplace and really drive more bookings. And so we certainly anticipate that being very, very good ammunition for our sales channel to keep driving more order cadence into the overall backlog and really keep driving it up as we go into 2027.

So that to us should be a driver to continue capturing more and more of the opportunity and driving more and more backlog into the business.

Your next question comes from Chris Moore with CJS Securities.

Maybe one more on gross margin. So recognizing that you're not giving specific guidance on '27, but what would be maybe the puts and takes that would make it possible or make it difficult to improve the 25% to 26% gross margin range in '26 by, say, 400 basis points in 2027.

Yes. So I guess when we look at the margin trajectory through 2026. And again, we've talked about the fact that Q4 is certainly going to be the strongest margin quarter for the overall organization. That certainly means that we're entering 2027 at a much higher than 25% to 26% margin profile. So starting off to say, we're ending the year at the high watermark and then driving that momentum into 2027.

When we look at how do we drive that margin? Again, people ask the question around when do we get back to that 30-plus percent, my starting point is to say, well, we're exiting the year actually at a pretty healthy margin when you run the math on the momentum in the guidance. And really, the upside to keep driving beyond that comes down to higher volumes to absorb the fixed costs, continued discipline around price cost and continued overall focus on improving productivity across the business. And so all those things what allow us to keep driving that margin higher and getting ourselves back into that 30-plus percent profile from a consolidated basis.

I will just say that, obviously, mix is certainly a conversation. So as that BASX brand. But again, it's got improving margin quarter-over-quarter. But certainly, as we keep driving more volume through there, mix can be a little bit of a factor. But again, we anticipate on that side of the business as well to continue seeing progress and margin profile throughout the year.

Got it. That makes sense. And as you said, Q4 is going to be the high on the margin side. I wasn't sure what you said earlier, Matt, in terms of -- from a revenue perspective, Q3 versus Q4. Is that relatively balanced? Or is Q3 meaningfully a bit higher than Q4. I'm just not sure how we should be looking at that.

No, they'll be relatively balanced, but one thing I want to point out is we have holidays in Q4. So a balanced top line revenue Q3 to Q4 actually implies higher productivity just the holidays tend to certainly slow down production levels.

So sales per day should be up, but the overall top line, relatively flat quarter-to-quarter.

Got it. And maybe just last one for me. I mean many of the data center HVAC players dealing with significant supply chain issues. One of the bigger challenges being the sourcing of certain fans. I know you guys made a decision a couple of years ago to vertically integrate a little further, specifically with regard to [indiscernible] fans for your own HVAC units, external sales. Can you talk a little bit more about the current impact of that decision and just kind of overall supply chain challenges that you're seeing at this stage?

Yes, just a data point. I mean, certainly, on the AAON side of the business, we brought in the manufacturing of [ Sands ] a couple of years back. But just as a data point, the BASX business from the day we started that business, we manufacture our own [ fans ]. And so whether recently through some of our current supply chain challenges or during the COVID supply chain challenges, the in-sourcing of fans continue to be a competitive benefit for us with some of the overall volatility.

Now that said, we still do buy fans, not -- we still use fans out other than just our own. So we do also get a good eye into the overall marketplace. And and recognize that [ SANS ] as an overall market, certainly have some constraints around the amount of available capacity in the marketplace. And so there is some pressure kind of on the [ sand ] side, but we continue to look for opportunities to manufacture our fans or to multisource stands. I would say that the data plan and the continued focus around supply chain resiliency that our supply chain organization is focused on continues to look at ahead of being hit by a supply chain constraint. We tend to be looking at as many leading indicators as possible in driving multi-sourcing strategies or alternate vendor selections as early in the process as possible to mitigate the overall challenges.

So I would say that at a high level, Chris, I mean supply chain challenges certainly exist in this market. There are definitely are constraints, and our team continues to very actively and proactively manage those constraints. We've actually had some very good success in mitigating the overall impact to our overall volumes. That said, we also recognize there is potential for those to create some noise in the coming quarters. And so our focus is to continue looking as far ahead as possible to look for constraints in the overall supply base as soon as we can see them and really drive sourcing strategies to mitigate the overall impact as soon as possible.

Your next question comes from Julio Romero with Sidoti.

Matt, based on the comment earlier in the Q&A of the revised full year sales guide embedding AAON-branded sales that 20% growth. I think that implies, if my math is right, second half BASX branded product sales of roughly [ $290 million to $330 million ] a quarter, and that would be below the $345 million of BASX branded sales you just did in the second quarter. Is that right, Matt? And if so, kind of help us understand the -- why the step down there?

I'd say more flattish on the BASX of kind of sales kind of quarter-over-quarter in Q2, 3 and 4. So relatively flattish, I wouldn't say a big step down. And so just from that standpoint, I would say our focus and our drive is certainly to continue driving volume through our facilities but also embedded in there is recognition that while we've had very good success in mitigating supply challenges, we're also not blind to the potential that there could be issues. And so we're looking at this from a standpoint of open eyes and reality around the overall market.

And the reality is growing the business as fast as we are growing this business in a market that has some of the constraints that it has is not without challenge. And so embedded in that sort of back half on the basic side is some recognition of some of that potential impact to the business. But I would just say that our focus every day that we wake up is to mitigate those impacts and really drive the volume through that factory and continue delivering. But that really is the focus from an execution standpoint.

Got it. Okay. That is helpful. And then you did see some pretty good leverage on the SG&A line this quarter. Is that -- is that -- is there room for further leverage as kind of revenue continues to scale, especially as we head into '27?

What I would say is we certainly rewind the clock last year and the year before, we've been making investments, very intentional investments to prepare this business to operate at the scale that is operating at. So we're seeing some of that leverage show through in the quarter, obviously, which is great. But I would say there continues to be some investments that we have to make.

So to really kind of get all of the parts and pieces in place. So I wouldn't expect, at least in the next quarter or 2 to see substantially more leverage. But what I would say is these investments that we're going to be making in the near term take a fact and we keep driving revenue beyond that, we would anticipate seeing that kind of lever up or lever down, I should say, in the future in more than 2027 calendar year.

That concludes our Q&A session. I will now turn the conference back over to Joe Mondillo for any closing remarks.

Thank you, operator. I'd like to 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 myself. Have a great rest of the day, and we look forward to speaking with you in the future.

This concludes today's call. Thank you for attending. You may now disconnect, and have a wonderful rest of your day.

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.