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AAON, Inc. (NASDAQ:AAON)

Q2 2008 Earnings Call Transcript

August 6, 2008, 4:15 pm ET

Executives

Norm Asbjornson – Chairman, President and CEO

Kathy Sheffield – VP, CFO and Treasurer

Analysts

Jon Braatz – Kansas City Capital

Frank Magdlen – The Robins Group

Joe Mondello – Sidoti & Company

Graeme Rein – Bares Capital

Shaun Nicholson – Kennedy Capital

Corey McCullum [ph] – GMP Capital

Operator

Good day and welcome to today’s AAON Incorporated second quarter earnings performance conference call. Just as a reminder, this call is being recorded. At this time, I would like to turn the call over to Mr. Norman Asbjornson. Please go ahead, sir.

Norman Asbjornson

Good afternoon and welcome to AAON’s second quarter report. With me is Kathy Sheffield, but before we embark upon this I’d like to read the forward-looking disclaimer to you.

To the extent any statement presented herein deals with information that is not historical, including the outlook for the remainder of the year, such statement is necessarily forward-looking and made pursuant to the Safe Harbor provisions of the Securities Litigation Reform Act of 1995. As such, it is subject to the occurrence of many events outside AAON's control that could cause AAON's results to differ materially from those anticipated.

Please see the risk factors contained in our most recent Securities and Exchange Commission filings including the annual report on Form 10-K and the quarterly report on Form 10-Q. Again thank you and I will turn it over to Kathy Sheffield our Vice President and in charge of finance. Thank you.

Kathy Sheffield

Good Afternoon and welcome to our second quarter conference call. I’d like to begin today by discussing the operating results for the three months ended June 30 compared to the three months ended June 30 2007. Revenues were up 6% to $74.8 million from $70.8 million. The increase in the sales was attributable to an increase in our volume, our diversified product mix, an excellent response to many of our new and redesigned products and also to price increases.

Gross profit increased 15% to $18 million or 24.1% of sales from $15.6 million or 22% of sales. The increase in the gross profit was a result of higher sales, our price increases and also production in labor efficiencies. Selling, general and administrative expenses increased for the second quarter by 15% or $6.1 million or 8.2% of sales from $5.3 million or 7.4% of sales.

The increase in the SG&A was primarily related to an increase in selling related expenses, warranty expense related to the higher increase sales; profit sharing, that’s also related to increased net income and an overall increase in general and administrative expenses.

Our operating income increased 15% to $11.9 million compared to 15.9% of sales from $10.3 million or 14.6% of sales. Net income increased to $7.8 million or 10.4% of sales from $6.9 million or 9.7% of sales. The increase in the net income resulted from our higher sales volumes and improved productivity.

Our diluted EPS was $0.43 per share versus $0.36 per share compared to the same quarter last year. Our earnings per share for the three months were based 18,145,000 shares compared to 19,336,000 shares in the same quarter a year ago.

Moving now to the six months results revenues were up 8% to $140.2 million from $129.5 million. Gross profit increased 7% to $33.6 million or 24% of sales from $31.3 million or 24.2% of sales.

Selling, general and administrative expenses increased for the six months by 9% to $12 million or 8.6% of sales from $11 million or 8.5% of sales. Operating income increased 6% to $21.6 million or 15.4% of sales from $20.3 million or 15.7% of sales. Net income increased to $14.2 million or 10.1% of sales from $13.2 million or 10.2% of sales. The diluted EPS was $0.78 per share versus $0.69 per share a year ago. Earnings per share for the six months were based on 18,302,000 shares compared to 19,492,000 shares.

Looking at the balance sheet we see that the company’s current asset ratio is approximately 1.7, that was due primarily to our dividends payable, our higher accrued liabilities and part of the higher accrued liabilities were based increased warranty expenses, accrual and our commission.

Capital expenditures for the six months were $1.4 million of the expenses related to new equipment and also office renovation in the Tulsa location. Share holders equity per share as of June 30 was $5.23 compared to $5.29 last year. We also pay cash dividends of $2.9 million and also back stock at the amount of $17.3 million.

I would now like to turn the call back to Norm who will discuss our results in further detail along with our new products and the outlook for the remainder of the year; Norm.

Norman Asbjornson

We are very pleased with the sales performance we’ve had. The economy is a little bit soft in the commercial end. It has been for most of the year and doesn’t have any defined direction at this point whether it’s going to get stronger or not, but it appears that it’s pretty stable at this point.

The energy issue has become more and more important and we have done a lot of things to address energy in a positive fashion and it’s helped our sales effort. Probably the one that is more changed than anything though is because of Montreal Protocol which the U.S. is adhering to and the things out of our older type of refrigerant by the first of January 2010 and with a new more environmentally friendly refrigerant called our 410. There’s been a dramatic switch over to 410 by all our customer base and so there has been a bolt of benefit and the problem here the benefit being that we were totally ready for it and therefore probably got some sales because we were ready for it.

The negative being of course it’s a massive change in engineering on every product we use as refrigerant not because we haven’t done the engineering, we have but it’s just the conversion from largely using one kind of refrigerant to largely using the other and the change in some of the componentry that had to change to make that happen. So we are very pleased that it has pretty much happened in AAON and we are rapidly getting to a point where only our 410 refrigerant is being bought by our customers.

We continue to have growth in some of our new product offerings, some of those are in the split system market out of our Long due facility, air handlers and condensing units as well as increasing the chillers made up in Tulsa added considerably to it. We’ve been talking about the residential issue for sometime and we are into selling that now on a very modest scale and the reason for that is the residential market is under severe stress as you are no doubt aware of and therefore it is not a good time to go in there and do a lot of work to try and get what business there is there and we are better spending our time in the commercial market which is a much more healthy market place.

There’s been a definite decided change in the product that we’re selling to some of those new products and also going into some of our larger tonnage products and diminishing a little bit in our smaller tonnage products and that’s primarily due to being a soft market.

The competition is very strong at this point in time, but also the new things which we’ve been introducing have been into our new larger tonnage equipment and they are defiantly technologically advanced products more so than the industry is and so it’s been a more appealing part of our product line.

We are at this point in time moving that technology down and we are in the present process as we speak of going into about another 20% of our business with some of these more technology, which will mean that once we get there which will happen by October we would have gone from somewhere around 40% of our market being with basically foam construction and direct drive blowers is the main two things which effect both our roof tops and our air handlers.

Roof tops are just in the two larger sizes right now. The third size is presently being introduced into the market place, which when it’s into the market place we’ll be shipping in October. We will at that point somewhere around 60% of our dollars will be with newer products and so we are progressing very well in that area.

Our backlog at this point in time, at the end of June was $67,110,000 which is about $10 million less that it was a year ago. The primary reason for being about $10 million less that a year ago is the fact that as I spoke earlier, the market has not been real strong, but the more defined answer to why we are sitting where we are is the fact that our capability of building product has improved considerably from a year ago and so we’ve been able to ship our product more when the customer wants it and therefore diminish our back log by shipping more when the customer wants it.

To give you a feel of how much that has changed; during the month of June we shipped a little bit over $30 millions which annualized of course will be $360 million plus and if we had pushed it a little bit, we could have probably made it annualized at $400 million. So our capacity is as we’ve been speaking for a long time in improving and with all the new product we’re hoping that we will be able to utilize more fully all that capacity.

In order to do that $30 million in June, we did not have to run a lot of overtime and we did basically without a lot more people than we’ve been doing say a year ago due to the improved productivity of the company. Our productivity has been enhanced considerably over the past year somewhat by the new equipment and others just by learning how to help people better and people learning what they’re doing more than they did before.

As was noted in Kathy’s talk, a lot of things were up and down a little bit in the margin area and the sales and the price increases. A reasonable amount of that increased sales of course was due to the price increases that we put out, but the other part of it probably was primarily due to the productivity increase.

We probably didn’t increase our prices as fast as what our material costs were because they have been coming pretty strong and they are continuing; in fact they appear to be moving up, accelerated at this point in time. We have been notified of price increases on significant components that we buy of up to 15% to occur yet this year. So it’s a very inflationary environment that our industry is living in and what effect that will have upon future sales one doesn’t know, we are in an inflationary environment.

The SG&A expenses basically as you can see were running along at the 8.2% for the last three months and 8.6% for the six months. We see that running somewhere between 8.5% and 9% for the remainder of the year, so no significant change in that area. Operating margins were 15.9 for the quarter and 15.4 for the year. Net income was up 8% to 14.2% compared to 13.2% last year.

The CapEx was only about 1.4 so far and we are still sticking with somewhere in the $7 million to $10 million for equipment and the Tulsa building expansion. The building is just beginning to come out of the ground now, so it’s just beginning to start using a lot of money to pay for building. Anyhow when it’s competed it’ll further improve our productivity and obviously give us more future capacity that even we have at the present time.

The one other question that come up is, what about is happening to the Canadian facility? And as we spoke the last time we have raised the price considerably for all business we did in the United States due to the exchange rate between the Canadian dollar and the U.S. dollar changing very substantially in the latter part of last year and that of course raised our price to our U.S. customers by a considerable margin and in addition to that we raised it enough so that we should have a change to make some money up there which we weren’t making and the net result is a great drop off of U.S. orders which was the majority of our business.

The net result is that we’re down to producing approximately one third of what we were seeing a little over a year ago and we’ve diminished the size of the operation accordingly. We were real close to breaking even at it, but the jury is still out as to whether we’ll be able to make any money there, where we’re going. It does seem to be stabilized at about this much and it does seem that we’re getting orders at about this levels, so the longer that occurs the more likely it is that we are going to be able to get the thing of making money, but that’s not for certain.

New products and everything, we’ve talked about a little bit. On the big issues is on the energy issue. We’re doing a lot of things which are quite new to the industry and quit effective on improving efficiency. We have some test jobs out that look like they’ve improved our energy efficiency and some new technology by somewhere up to may be 20%. We’re still analyzing our position on that and making sure that what we believe is happening, is truly what is happening.

If look at our business segments, retail is pretty soft, office buildings are not too bad, medical heath care is pretty good, education is quite strong, manufacturing is probably so-so and other is going along pretty well. No real signs of any increase or decrees in those at this moment in time.

The outlook for the stock purchasing program is that starting Friday we will be back in the market again. We now are down out of that initial 1,800,000 shares roughly that we have authorized in November of last year. We have remaining to be purchased about 330, 000 shares out of that.

The biggest concern I have at this point was pointed out on the front page of the Wall Street journal on August 1, last Friday. There was a big article headlined relative to Wal-Mart and warnings they have about a bill which had past Congress but had not gotten through the Senate last year, Wal-Mart called Employee Free Choice Act which would make it possible for unions to unionized by simply getting in 50% of the individuals to sign a card and never have a secrete ballet which almost assures that if that passes and according to what Senate Obama is saying that he will do is that he will have that passed within the first 100 days of his administration.

If that is going to occur, that’s going to effectively unionized the United States all the way down to very small companies and I have real (inaudible) about where that’s all going, because the history of unionization compared to the world economy has been very bad in the past 15 years in the United States, were we’ve been heavily unionized in whatever industry it seems to have moved offshore, so that is by far my biggest concern with the future everything else is quite manageable.

With that I will turn it over to you for questions-and-answers.

Question-and-Answer Session

Operator

(Operator instructions) And first, we will hear from Jon from Kansas City Capital.

Jon Braatz – Kansas City Capital

Good afternoon, Norman, Kathy.

Norman Asbjornson

Good afternoon.

Kathy Sheffield

Hi.

Jon Braatz – Kansas City Capital

There were a number of things that you talked about that had an impact on your margins on the quarter. The mix, some productivity improvements and so on, I am trying to get a better handle on what maybe more permanent and long lasting, obviously mix can shift but what do you see out there in terms of heading more permanent increase in type of gross margins. How sustainable are these margins I guess?

Norman Asbjornson

I think we’re probably about where we might have a chance to sustain and I don’t think there is a lot of upside left. The productivity improvements I think are ones that will stay with us. That has happened without any special things going on, I guess it’s improvements we’ve made and methods that we do things and the improvements and the machinery to then with and education of our people and improvements of that nature, so probably pretty solid.

The biggest unknowing in this whole thing has to do back with the material side of it. We’ve been able to manage that reasonably well with our price increases this past year to where we may have lied a little bit and we may have napped and picked it up with our labor improvements is the way it kind of looks, but it’s definitely still with us and we’re still going to have to be going forward with fairly significant, fairly regular, price increases as we have, and maybe even increasing the size of the them or may be increasing the frequency of them. Because as I said we have been notified of a component cost not steel or not copper nor aluminum but some of the components we use are some fairly significant increases about to fall on us right now and they have been all year but they are not being any less now, that are being a greater percentages.

Jon Braatz – Kansas City Capital

How much do you anticipate prices might have to be raised in the subsequent months here to offset that and do you think they’ll continue to be a little bit of lag here or how proactive are you going to be on passing those cost increases through?

Norman Asbjornson

We just put through a cost increase, the last one was affective the first part of June, and if it looks like this we are going to have to have another one maintained at about the next 60 days, we are debating about the magnitude of it right now, we are collecting our data as to how much we are going to have to have and. So I’m a little premature to talk, be a minimum of 3% might be up to 5%.

Jon Braatz – Kansas City Capital

Will some of those cost increase that are coming, will that influence the profitability on some of the orders that are in the backlog.

Norman Asbjornson

Obviously the cost increases that come along are going against it, already predetermine price on the product. So there is going to affect it. We’ve had an improved situation from that last price increase and if you were to draw two curves they are going to cross here someplace, exactly where I don’t know, but we’ve got a little more costs price increase than what we’ve used up, again costs increases right as up this moment in time, but that’s obviously switching everyday that goes by and we will be running behind and our costs increases that we put in back in may want be adequate for what we’ll be shipping here in another month or so and then we will have another one going in, and it will go through the similar type of the cycle. We had done well, as you can see from our numbers that are holding our own, but not gaining great grounds, but considering that it is a pretty competitive environment we are living in w are very pleased with it.

Jon Braatz – Kansas City Capital

Okay, thank you.

Operator

And next, we’ll hear from Frank from Robins Group.

Frank Magdlen – The Robins Group

Congratulations, Norm, a very nice quarter on you and your entire staff.

Norman Asbjornson

Thank you, Frank.

Frank Magdlen – The Robins Group

Can you expand on Canada a little bit, I’m a little bit lost now as to what type of revenue numbers your really expecting to come out of Canada?

Norman Asbjornson

0.5 million to 700,000 a month.

Frank Magdlen – The Robins Group

Okay and that’s probably for the balance of this year and maybe what did you do in the first half?

Norman Asbjornson

We did a little over $3 million in the first half.

Frank Magdlen – The Robins Group

And Kathy, can you help us a little bit, with what we aren’t to expect in round numbers for share account going forward with the repurchases in the weighted average and sort of what beyond me?

Kathy Sheffield

Okay, well it’s kind of hard number to give an exact number to Frank, because there is so many things that feed into that number based upon the buyback stock option exercises the market price, but if were to through a dart it we would guess approximately $18 million by the end of the year.

Frank Magdlen – The Robins Group

By the end of the year. It's done a little bit from the current quarter for the third and fourth quarters now.

Kathy Sheffield

Yes.

Frank Magdlen – The Robins Group

And back to Canada, Norm. I would imagine having say a 0.5 million to 700,000 a month is a little bit below your expectations, given you can breakeven at that level?

Norman Asbjornson

On last months run-rate we lost about $20,000, so very close to break even, not quite. Obviously the overhead states becoming more and more significantly, we’ve gotten the price up to where, if we can get a little bit more volume will make money. The whole question is how much volume can we get at price level we have to have to make money and right now it seems like we can get about somewhere between 0.5 million and three quarter of a million and that seems to be about where we are running. It looks real good until you get picking up the overhead part of that company and then it doesn’t looks so good.

If it gets up, below three quarters of a million start four million, and we hold the price relative to our material and labor cost on the factory and where it is now. We are definitely be making money, if we can’t do that and it looks like it’s getting sicker, worst case we’ll have to close it done. So, we’re sitting there wondering where it’s going ourselves, but we know what we have to do both ways.

Frank Magdlen – The Robins Group

And Kathy, the shares repurchased in the quarter and (b) while Kathy is looking at that, Norm, I took your comment on the backlog, do you mean that the lead time to shift something and bigger, bigger products now is less than it used to be so we should expect you to work with a, say a little small backlog going forward?

Norman Asbjornson

That is a correct statement. In the past what is happen, because there is a little cyclic-ness in our marketplace. We would normally get a big surge of orders in the second quarter and somewhat into the third quarter and we would fall behind a little bit and our backlog would build and we would be extending our lead time out.

With the equipment we’ve been buying and the things we’ve been changing, we didn’t have that occur to this year. If the customer wanted it shipped in six weeks, we shipped it in six weeks and so, consequently we didn’t get the backlog build up because of our inability to ship. We were able to ship when they wanted it which from a standpoint of the healthy company is obviously more attracting because the customer after, will satisfy hem ultimately, we’ll give them more business them even if we’ve always a little bit late with our shipments.

Frank Magdlen – The Robins Group

Okay.

Kathy Sheffield

On the share buyback, Frank. On the open market in the second quarter we purchase 697,358 shares, however if you add our 401K buyback program and our director buyback program the total ended up being abut 742,000.

Frank Magdlen – The Robins Group

All right, and how much money on that 14.4?

Kathy Sheffield

14, for the quarter. Yes, well over 15.

Frank Magdlen – The Robins Group

All right, thank you very much and we are looking forward to your success.

Norman Asbjornson

Thank you.

Operator

And next question from Joe from Sidoti & Company.

Joe MondelloSidoti & Company

Good afternoon Norm, Kathy

Norman Asbjornson

Hi, Joe.

Kathy Sheffield

Hi, Joe.

Joe Mondello – Sidoti & Company

Norm, could you talk about the response on price increased and if its effecting your sales volume at all or that you anticipate any volume decrease on any level and maybe especially on the replacement side of the business?

Norman Asbjornson

Well we are fortunate Joe, I’ve been in the industry an awful long time and the industry acted very immaterially for many, many years. It's now acting like we got more well informed business people running out competitors because they all are raising prices like we are. So their situation is not a great deal different than ours and we are all kind of going up hand and glow, because of the necessity to have it and we all see it very similarly as it appears and therefore we aren’t handicapped by the fact that we have to work with our price.

So I don’t see that as being an issue, in the past may times people didn’t recognized that they were getting in trouble until after they were in big trouble and that doesn’t appeared to be happening any more. The thing that we think is going to be our big help to improve our competitive situation is what we are doing with energy and with better quality product.

We are making some very significant scribes particularly in the energy area and while that’s on everybody play, we believe we are out running the competition in that area at this point in times. We feel that our ability to take market share I going to be enhanced as we go forward.

Joe Mondello – Sidoti & Company

Okay, great and your sales growth sequentially slow down quite a bit quarter-to-quarter, was the labor shortage anything to do with this and if so how much did that have to do with it or was it just mostly market related?

Norman Asbjornson

It was mostly market related. The labor thing had us deeply worried for a long time because in Oklahoma, area which is where more of our stuff is built. We were running done in the two point some percent unemployment, earlier this year and it has gradually moved up into the veracity of 4% or maybe slightly over 4% and as it moved up we’ve been able to slowly get some good quality people to work for us, but what we did due to position we were in earlier in the year.

We analyzed everything we were doing about how could we do it better, and we found a number of ways to do things better and that’s what gave us the productivity increase which means we have dint need the people as madly, so the people shortage or the peoples ability to grow from people did not really heard us very much, it’s basically been the market conditions that’s held us where we are volume wise.

Joe Mondello – Sidoti & Company

And Kathy, your gross margin increased about 200 basis points. Do you have any idea of how much that was affected or how much volume and price increases and product mix, if you could give a percentage on each of those out of the 200 basis points? Do you any idea to you how much that breaks up?

Kathy Sheffield

I’m sorry, but I don’t have any numbers to break it down for you.

Joe Mondello – Sidoti & Company

Okay. How about the 4/4 products anything new there or any increased interest?

Norman Asbjornson

No, we put out a preproduction run of the whole quantity of three for about 50 sum thousand dollars so far and we’ve continue to finish off and get everything better for manufacturing of it. To the point that we have a trailer with three products, three new products on it running in the United States at the present time from seller city to city and products we’re showing on there one of them is the 4/4 unit, which seems to be getting a very good reception. So, we think if that’s going to be very good, one of the catches is as we don’t clearly have any production line set up for it yet, if fact its going to be put up in the new building.

When we do that later this year we can’t built it however, but not in a really good environment to build, not in a real high productivity methodology because it want be on a line that’s it’s designed to be built on. The other two products that are on the trailer is a small tonnage competitively priced water chiller built in our Longview facility and then the third one is what I spoke of earlier the new 50 or 60 through 30 ton Roof Top unit with impaling the tonnage form and the direct dry bowler and a whole a lot of other new innovations in it. Those three items are on the trailer going from City to City as we speak.

Joe Mondello – Sidoti & Company

Finally how much does your new products make up, say like last three years the new products are – however you track that, a makeup of our total sales?

Norman Asbjornson

Well we’ve got several different ones to talk about and it depends upon what timeframe we are getting in. It is user a three year thing that will be shorter time frame that some of the new products, some of them have been out there four years now or four or more now, but within the three year time frame we’ll probably be building about 30% of our dollar volume in those new products right now.

Joe Mondello – Sidoti & Company

Okay, great. All right, thanks a lot guys.

Norman Asbjornson

Thank you.

Operator

And next we’ll hear from Graeme from Bares Capital.

Graeme Rein – Bares Capital

Congratulations, Norm.

Norman Asbjornson

Thank you.

Graeme Rein – Bares Capital

Just looking at your cash flow generation. Its very strong obviously, could have been stronger with the AR hadn’t have increase, is there anything unusual going on with the AR?

Kathy Sheffield

No, Graeme, they really isn’t. The main issue with the AR being higher is just because of the volume that we had in June.

Norman Asbjornson

Volume, of course, tells us how much money we have to put in reserve for bad debts and reserve for well warranty and all of the other issues that we have to be concerned with and it doesn’t necessarily reflect that we’ve had the problems, because the problems are the anticipated problems that we put it in, but that surge of orders we’ve had, that we’ve produced basically in June drove it up.

Graeme Rein – Bares Capital

Okay, that makes sense. And then, Norm how does the order growth look in July and the first part of August are you still comfortable with how that’s progressing?

Norman Asbjornson

We started out as I’ve mentioned that in the first quarter that we had kind of a weak order input and has modestly improved since that time and still appears to be modestly better than it was a year ago, whether it’s more than our price increases very much, it’s not a lot more than the price increases, but it does appear to be a little bit more than what our price increases would reflect from year-to-year. So, at this point in time, it looks pretty solid where we are. It doesn’t us show a sign of going up and looking at some of our competitors who have had a little bit of the downturn that it appears we are doing well in the marketplace.

Graeme Rein – Bares Capital

Okay and then the last thing, I know you’ve said you’re sticking with the $7 million or $10 in capital spending for the remainder of the year. What about next year? I mean how much of capital is required to kind of complete this renovation or expansion. Just trying to get a feel for what next year’s CapEx might look like?

Norman Asbjornson

Well, from an equipment standpoint, it’s going to be modest just like it’s been very modest this year and as I said we have the equipment now we are on a run rate, we could manufacture $400 million a year, with what we’ve got at the present time. So it’s going to be very modest whatever we spend on the equipment next year it will again comeback to weather our confidence level of what's going forward, we’ll tell us we should go ahead and straighten out some of our building needs or whether we shouldn’t.

We are in a point weather if we felt it was necessary we could run on a very low CapEx if we had to, f we think that the things still look pretty good and things are going to go forward fairly well, we’ve got to build another section of our building up, because we’re stressed out pretty well on the warehouse for purchase material, we’ve got a lot of that stuff in fact sitting outside as a matter of fact and that we don’t feel comfortable with that.

So that would be another thing that we would like to get underway, but it will be depended upon how we see the future of the year. Net result to answer your question, the CapEx won't be anymore than it was this year, even on the optimistic side and it could be less by quite a bit.

Graeme Rein – Bares Capital

Okay and then one more thing for you. Given your strong balance sheet, you guys are as far as innovation probably a ahead of most of most of the competition and given your small-size it seems like you might be a logical acquisition target for the larger player, is there been any activity on that front and what’s kind of your interest level in having those types of discussions?

Norman Asbjornson

Well, I’m paid to look out for the interest of the stock holders, and if somebody comes along and offered what appeared to be a very good price for it, they would be able to own it. If they come along and look for a bargain there are going to get it, and so far there have been a lot of people who want to talk to us, but they are all bargain vendors and so being a major stockholder I’m not about to want to give my money away and I don’t want to give your money away, and that’s kind of where it is.

If they really get serious, and want to pay what this company’s worth and they will get the company as for us, but if they think that there is bargain here, because everything we’re doing is long range and we have a lot of very, very advanced things going on in this company far ahead I believe, what a lot of those people are doing and I’m not going to give all that away, because we’ve spent a lot money getting the lot of it.

Graeme Rein – Bares Capital

All right, okay, great, thanks a lot, Norm.

Operator

And next we’ll hear from Shaun with Kennedy Capital.

Shaun Nicholson – Kennedy Capital

Hi, how are you?

Norman Asbjornson

Very good, thank you.

Shaun Nicholson – Kennedy Capital

Just one question, I was talking to few people in the retail industry about Wal-Mart and you mentioned energy as your focus and according to them Wal-Mart is extremely serious about that almost versus the cost of putting potential units on their buildings, they want more energy efficient units. Have you seen anything on that end?

Norman Asbjornson

Well it’s kind of the funny thing because we raised our price more than Wal-Mart wanted to pay for. We did loose their day-to-day business for the most part and yet on the six prototype stores which have been built for their very, very concerned energy as you say, we build them all.

We are right now getting ready to build some more foam. We have meetings with them about this, because we are from an energy standpoint more capable apparently in their opinion than anybody else could do what they think needs to be done, so they’re buying that from us which ultimately wouldn’t say that if somebody else can copy what we’re doing and do it cheaper then you won’t get the business that they choose to go forward with which appears they are going to go.

If nobody else can figure out how to do it for what we can afford to do it for then we will get the business, so that’s where it is at this point in time. We’ve built 60% of normal very advanced energy saving ideas that they’ve been wanting to do. So, in that area, as I say we are very advanced in knowing what to do with energy.

We have small, let’s say fast food store that we’ve done for one of the big national fast food people and we’re having a hard time coming to grips with it, but we have a lot of the energy saving going on at the meter. Every month it gets metered and they check how many KW they were using and it’s very, very good and so it’s not just the big stores and big things that we’re getting ourselves lined up for.

Some of this is brand new to us, it’s brand new to the industry and we’re just getting organized really to go after it very well at this point in time. If people really want to get serious about energy, we’re there with them and we can do something for them.

Shaun Nicholson – Kennedy Capital

Great, thanks for the color.

Operator

(Operator instructions) and next we will hear from Cory [ph] from GMP Capital.

Corey McCullum – GMP Capital

Good afternoon, Norm and Kathy. Congratulations on another strong quarter.

Norman Asbjornson

Thank you.

Kathy Sheffield

Thank you, Cory.

Corey McCullum – GMP Capital

Just two housekeeping questions here and one would just be if you have a backlog number and then two if there is a breakdown on your top-line growth here between price and units for the past quarter, I’ll hang up and listen.

Norman Asbjornson

Yes, I gave the backlog here a little bit ago, its $67,110,495 million as of June 30, okay and that’s for all three facilities. If we were to break it down, the backlog is pretty much steady in the Tulsa facility from the year-ago; the backlog is up from the year-ago and now it’s about balanced out on the Longview facility and that all the short fall in backlog is connected to our Canadian facility and by that our short fall what I’m talking about, I also mentioned that we’re down by $10 million in backlog for last year and virtually all of that that’s in backlog is in Canadian facility.

Corey McCullum – GMP Capital

Thank you for the clarification there and then any color you can give on the breakdown in the top-line growth?

Norman Asbjornson

Yes, I would say about somewhere around 75% of it is price differentials and 25% of it is real growth.

Corey McCullum – GMP Capital

Okay, thank you.

Operator

And it appears we have no further questions. I’d like to turn it back to Mr. Asbjornson for closing remarks or comments.

Norman Asbjornson

Okay. Well, I thank you very much for being interested and joining me on this conference call. Kathy and I appreciate your interest. We don’t see any real bumps in the road as far as you probably are familiar with. The business environment well it’s a kind of rocky right now. It doesn’t appear to be heading one way or another that we can notice and as I expressed earlier, my big long range concern has to do with this possibility of the United States basically being unionized, that worries me tremendously, but beyond that we have optimism that for sure we’re going to do like we said and we’re going to have a strong third quarter and as far as we can see, it will be a record breaking year for us in both volume and bottom line. Kathy?

Kathy Sheffield

Yes, thank you for attending the call today and we’ll speak to you again in November when we have our third quarter results.

Norman Asbjornson

Okay, thank you people.

Operator

And that does conclude today’s conference. We do thank you for your participation and ask that you enjoy the remainder of your day.

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Source: AAON, Inc. Q2 2008 Earnings Call Transcript
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