AAON's (AAON) CEO Norman Asbjornson on Q4 2016 Results - Earnings Call Transcript

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AAON, Inc. (NASDAQ:AAON) Q4 2016 Results Conference Call February 23, 2017 3:30 PM ET

Executives

Norman Asbjornson - CEO

Scott Asbjornson - CFO

Gary Fields - President

Analysts

Joe Mondillo - Sidoti & Company

Brent Thielman - D.A. Davidson

Operator

Good afternoon, ladies and gentlemen. Welcome to the AAON Inc. Fourth Quarter and Full Year Sales and Earnings Call. There will be question-and-answer period after management’s brief presentation. This call will last approximately 45 minutes to an hour.

I would like to turn the meeting over to Mr. Asbjornson. Please go ahead, Mr. Asbjornson.

Norman Asbjornson

Good afternoon, Norman Asbjornson here. I'd like to read this forward-looking disclaimer before proceeding. 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 occurrences 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 SEC filings, including the Annual Report on Form 10-K and the Quarterly Report on Form 10-Q.

Now, I’d like to introduce our CFO, Scott Asbjornson. Scott?

Scott Asbjornson

Welcome to our conference call. I’d like to begin by discussing the comparative results of the three months ended December 31, 2016 to December 31, 2015. Net sales were down 5.7% to 91.7 million from 97.2 million. The decrease in net sales was result of changes in our product mix while units sold remained relatively unchanged.

Gross profit decreased 10.4% to 26.5 million from 29.6 million. As a percentage of sales, gross profit was 28.9% in the quarter just ended compared to 30.4% in 2015. The decrease in gross profit was the result of decreased sales and changes in product mix as already discussed. Selling, general, and administrative expenses decreased 12.4% to 8.6 million from 9.9 million in 2015. As a percentage of sales, SG&A was 9.4% of total sales in the quarter just ended compared to 10.1% in 2015.

The decrease was due in part to lower compensation as the Company did not achieve its opportunity budget, bonuses to key employees and other benefits were lower as a result. Income from operations decreased 9.3% to 17.9 million or 19.5% of sales from 19.7 million or 20.2% of sales. Our effective tax rate increased to 36.3% from 34.5% the fourth quarter 2015 at a lower than expected tax rate as the tax extender bill was passed in late-December and resulted in the entire year's R&D credit and Indian Employment credit appearing in the fourth quarter.

Net income decreased 11.8% to 11.4 million or 12.5% of sales from 12.9 million or 13.3% of sales. Diluted earnings per share decreased by 12.5% to $0.21 per share from $0.24 per share. Diluted earnings per share were based on 53,420,000 shares versus 54,036,000 shares in the same quarter a year ago, the results of the year ended December 31, 2016 compared to December 31, 2015.

Net sales were up 7.1% to 384 million from 358.6 million. The increase in net sales was primarily due to increased volumes as compared prior year offset by changes in product mix. Gross profit increased 9.4 million to 118.1 million from 108.7 million. As a percentage of sales, gross profit was 30.8% in the year just ended compared to 30.3% in 2015.

Selling, general and administrative expenses increased 2.9% to 38.5 million from 37.4 million in 2015. As a percentage of sales, SG&A decreased to 10% of total sales in the year just ended from 10.4% in 2015. The increase in SG&A is primarily due to increased compensation cost due to better operating results offset by a decrease in warranty expense as a result of continued improvements in quality control and a decrease in other expenses. Income from operations increased 11.6% to 79.6 million or 20.7% of sales from 71.3 million or 19.9% of sales. Our effective tax rate decreased to 33.3% from 35.9%.

The Company early adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, applying the changes for excess tax benefits and tax deficiencies prospectively. As a result, excess tax benefits and deficiencies are reported as an income tax benefit or expense on the statement of income rather than as a component of additional paid in capital on the statement of equity. Excess tax benefits and deficiencies accreted as discrete items to the income tax provision in the reporting period in which they occur.

For the year ended, the Company recorded 2.1 million in excess tax benefits as an income tax benefit. Net income increased 16.7% to 53.4 million or 13.9% of sales from 45.7 million or 12.8% of sales. Diluted earnings per share increased by 19% to $1 per share from $0.84 per share. Diluted earnings per share were based on 53,450,000 shares versus 54,481,000 in the same period a year ago.

Now, looking at the balance sheet, you'll see that we had working capital balance of 101.9 million versus 80.8 million at December 31, 2015. Cash in investments totaled $43.7 million at December 31, 2016. The investment has maturities ranging from less than one month to seven months. Our current ratio is approximately 3.6:1. Our capital expenditures were 26.6 million. We expect capital expenditures for 2017 to be approximately 41.8 million.

The increase in capital expenditures is primarily due to construction projects related to our new research and development lab Water-Source Heat Pump production line drove us other internal development projects. Shareholder's equity per diluted share is $3.85 at December 31, 2016, compared to $3.28 at December 31, 2015.

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

Norman Asbjornson

Good afternoon. I would like to speak a little about Water-Source Heat Pumps since that’s the main issue that has been discussed as far as anything new in the Company. We are pretty much on target as we have been reporting over the time. Everything is going forward in a normal traction, nothing really unusual.

For those of you who maybe tuning in and new let me give you little bit more background on it. In August of 2015, we have decided to go into the Water-Source Heat Pump business and do the entrance on our own by designing our own product, building our own manufacturing capabilities and introducing product. We have made a enormous strives very quickly, much faster than what we expected in the product of this complication and where this would be probably still in the formative stages, we are starting to round into the middle production stages of the products.

We presently have under construction building product on hold up per units, one half ton to price tons. We haven't yet begun on a vertical unit and then we have other larger tonnage units yet to be done in the future as well as other products. But it is to the point where we have taken very few orders and shipped a very orders insignificant amount as far as the income statement is concerned.

We are slowing ramping up and we are doing it very carefully because this is a product where due to its cost of somewhere between $1,000 and $3,000 typical for a unit size, we cannot afford to be paying the rates, they're being charged by service personnel on field to fix little minor or not so minor problems, and so our goal is to prefer this unit out. We are holding very tightly to that. We are making very certain at everything coming off the underlying is as flawless as it can possibly be.

So, we are not speeding up to this get into production, we are -- in the other way, we are holding back until we are absolutely certain of the quality of the product we're producing up the door. It has been progressing very rapidly however even in spite of that. The other problem that there has been playing us and getting up to speed, which one we anticipated all along and we had been built into our excellent market place [Technical Difficulty]. We decided, when we decided how to presume manufacturing and how we could have gone into manufacturing in pretty conventional way with the equipment we already had and with knowledge we already have.

We decided that with the financial condition in the Company being what it was, we would say what we could really do, if we stretch to the further ounce of bringing into production and most advance technologies we can find anywhere in the world to do types of things, we have to do. Thus we search the worldwide and we ended up buying equipment from six different countries around the world, and that result of what this gave to us was a product line where the manufacturing of it virtually all automated despite the items which need to be manufactured. Specifically, what I am talking about is all the sheet metal is manufactured totally automatically. The copper production is automated and the cutting of the insulation on the unit is automated.

In addition to which the delivery system to deliver the component parts is also pretty well automated and pre-done delivery system. Then that result of all this is these products all have contained within them a software system designed to make functional in an automatic fashion. So, we have four different software systems, and the components we're using to build these products. To that, we have to take all those software systems and put them into a common software system, which will run the entire system as a unit, and that is up to us of course what I described, you can well appreciate this is not something you go on and buy this software. This is one of the unique capabilities of AAON and then we do have extensive software driving capabilities at a very high level for manufacturing. And thus, we decided we have that capability and embarked upon that.

We've been very successful going overall the major hurdles and we have not run into any of that we haven't been able to clear up. It has at times slowed us down and therefore in order to keep cost down, we’ve been running it a very low volume. So, we don’t -- when we do shut down to correct the problem, we don’t have a lot of people standing around when we're doing that. We are in the process now starting to speed up more and more, as we're getting further and further down the road as far as cleaning up all the little items, which might stop up from being very serious volume production. So, we're rapidly starting to come.

Now, what does that do to as far as what we're going to be seeing on the income line, well, we're into this first quarter pretty well and by the time we get this done and really get in, we will probably be not doing anything as far as materially on P&L statement until sometime in the second half of the year probably the mid to later part of the second half of the years when it will be noticeable on P&L statements. So, that’s going to where we are in it. We are very pleased with where we are, it’s not a matter of having problems, getting orders to the contrary. We are holding orders out. We are not -- we don’t want orders pushing in. We’ve been very selective so that we don’t harm a customer by not delivering in time because of our caution in our introduction of the product to make sure we are delivering perfect product.

So, with all that said, I’d like now to turn it over to the newest party on our management structure. Gentleman, I've had the great pleasure of knowing since the early 1980s before AAON was today -- AAON, my preceding place of employment. He was also selling those products and I've watched his evolution and have been very pleased that we’ve been able to add, Gary Fields, as President of the Company AAON. Gary?

Gary Fields

Good afternoon. So, I would like to first talk about fourth quarter sales a bit more. As you saw, the sales were down 5.7% for the quarter. There was a lot of political situation going on with election and things that maybe delayed people, so going ahead and issue in contracts. We have however in the first quarter seen a substantial turnaround, our bookings rates are running at a record level now. So, we are doing quite well on the rebound for the bookings. Those don't turn into actual shipments for the duration of our lead time. So, we’ll see first quarter will be okay. So, what are the things that kind of helped turn that around was, we continued to look through our reps force and determined reps that are in, markets that are, they’re underperforming.

So, one of the things that I did for the Company for the previous three to four years was consulted with these representatives. And from that, I tried to basically coach then up to a level that would be a level of excellence that we believe we deserve. For the very few exceptions which they have been very few that we were not able to achieve those results then we have replace that, to not extensive percentage wise at all, but we have replaced a couple of more. So the replacement market versus the new construction market is another thing I would like to discuss. While replacement market here, few years ago was very, very strong, primarily driven by refrigerant change, we’ve had no such occurrence in the industry for a few years, and we saw that the replacement market was not a strong percentage.

While now we’re beginning to see equipment that is due to age becoming eligible for replacement. This happens in the K-12 market for certain, amongst others, and that is a very strong area of participation for AAON. So, we've had some particular product that we're seeing some growth in. Some of things where I term as pull-through business, so we have had the pleasure of introducing the half through 5 ton horizontal and vertical Water-Source Heat Pumps. We also went back and figured out that in 2016, we produced about $17 million or 11,000 cooling tons of capacity of Water-Source Heat Pump configured equipment in our traditional equipment.

And that is creating pull-through opportunity for the new product that have through 5 ton horizontal and vertical, but it's also bringing more visibility because of our marketing efforts on heat pumps. So, the ton of business for the various segments coming up, the office buildings percentage change for the most recent quarter was very minimal change, and we're looking at -- actually, I'm sorry, I missed the column by one. It's a 31% this year versus the same time last year. The commercial market is at 12%, healthcare is at 7.1% and educational is at 5%. Those are all key areas for us as well as lodging which is at 19.9%, which we participate on a lower percentage because some of those are done with little small terminal units turned termed PTAC units.

So, with that being said, I want to go in and talk about a few of the things that have been going in the four months since I've become President. First off, the transition of duties from Norm to myself has been surprisingly smooth, not surprising to me or to Norm, but maybe to those that are around the Company. Norm's style and mine differs a bit which is fine and it's being received quite well. My working relationship with Scott and the aspects of the business that he saw adeptly takes care couldn't be better. I'm very proud to be able to get along with everyone here and we've had no pushback from any front at all. Of course, I came from over 32 years in the independent reps side of the business. That being the case, we expect that the representatives to embrace my leadership with the Company and that has been an understatement of how its occurred.

So, please recognize that our marketing channel is through a group of independent representatives, so they are not direct employees. They also represent other manufacturers, not competing with us, but other manufacturers that we would compete for their time. So, we have to be an attractive manufacturer for them to want to spend their time on us. They very much see that the addition of myself to the Company brings their point of view in house, and they're already making positive comments about how this company is becoming more attractive for them to spend their time with. We've had a great two way communication with that group of people, and that alone I believe is going to garner us some nice steady increase in sales.

Over the last three to four years, AAON has utilized outside consultants to help in the next phase of development of organizational structure. The consultants that we brought in are very noteworthy and have done an excellent job of helping putting corporate structure in place, not to the degree of being owners, but to be organized and efficient. One of the things that we have internally taken from that was the need for leadership development. So, we have many layers deep that we have enabled people to attain the leadership development courses, formal courses. And then we also between Norm, Scott and myself provide considerable amount of mentoring to these people, so that they understand that we need them to develop as leaders, so that we can get to the next well with this company.

With that in mind, that gives us the opportunity for succession planning, rather than discuss succession planning from Norm to my and whatever might occur beyond me. We are working on succession planning all the way through the organization, down to at least middle management and even beyond that in some cases. We want to make sure that we are not vulnerable to any particular aspect of the Company, not being well staffed with qualified individuals and that we have a good continuity in leadership in the Company.

I guess the last thing that I would like to bring up is exactly how long that I think that I signed on for this exciting adventure, and that’s exactly what it is. With the excitement of having a company that has no debt, it's profitable, has money in the bank and has a start of intellectual property and intellectual capacity with the individuals here. This is so exciting that I cannot imagine a time when I won't be here, but from a practical standpoint, I can see that easily I’ll be here for the next 9 to 10 years. That’s all I have for today.

Norman Asbjornson

Okay. We would like to thank you all for attending our annual review of the year 2016, and look forward to with the first quarter of 2017 when -- as we said earlier, we had a weakness in the market place that we can only attribute to the elections since there is nothing else that we are aware of that would allow for the reduction and order input that we experienced in the fourth quarter. But one other thing I should be may have noted here because we came into the year with that weak order input in the fourth quarter, we came in with a weaker backlog, therefore the first quarter started out with a much weaker backlog than we did with on the first quarter of last year. So relative to [Technical Difficulty] this quarter to last quarter difficult is going to be difficult.

But as Gary spoke, the order input has been very dramatic and coming in, what that means is that kind of reverses it from last year of the first quarter. First quarter last year, we stated that was a strong backlog, and we actually diminished it little bit during the year, and we slow down little in the first quarter. This year, we started out slowing the first month of this quarter, and we are speeding up as we go. How far we speed up is yet to be determined, but in that result is while we will do well this quarter. We are still going to be encumbered a little bit by the fact that we started by the weak backlog.

As we go into the year ago, our anticipation is that we are still going to do pretty much as we expected and we are going to have the lack of yield this year, in both revenue and profitability. And the really exciting part is that everything we are doing internally to the companies, working so well from the Water-Source Heat Pump progression into manufacturing to the rooftop and all other product lines coming along very nicely also. So, we are quite optimistic toward the year 2017. I feel that we will launch into the next generation of growth for this company.

Thank you for attending our meeting and I open it for questions.

Question-and-Answer Session

Operator

[Operator Instruction] Your first question comes from the line of Joe Mondillo from Sidoti & Company. Your line is open.

Joe Mondillo

So, my first question, just regarding the product mix because that, not only did you see sort of weak volume in the fourth quarter, but product mix seem to weigh on your gross margins. Just wondering with the strong bookings that you are seeing through the first couple of months, how is that sort of product mix sort of look like? And if you could give any color on what's sort of the fourth quarter sort of meant to you regarding that product mix? And how are transitioning into this year? It will be helpful.

Norman Asbjornson

Well, the product mix went toward smaller equipment for the biggest part of it. It was also had little bit on the options, but the size of the equipment also have an effect. And but all you can attribute that to is worked for whatever reason, some of the larger buildings were at being built and some of those smaller buildings were being built and therefore we were able to bring in the number of units pretty much where they were, but there is smaller units on those smaller buildings. I kind of think of might have gone wrong somewhat with the hesitancy we saw in the political arena where people were issuing everything except the contract to build the building. They were having the architects, engineers, designers jobs. They were bidding the jobs and we were hearing all this, but then the orders weren't coming in because they were signing the contracts. We believe from what we seen so far that that further substantiated by the fact that right now of all the orders that we're getting in the door we're getting a new quite strong on some of the bigger tonnage use once it weren't happening in the fourth quarter of last year.

Joe Mondillo

And regarding the bookings that you've seen, have you seen any sort of change or transition to larger more customized option units at all?

Norman Asbjornson

That is what I'm speaking of the larger units, yes. With that, they're more customized, I would to say that that so much is showing up, but the larger units are showing up, yes.

Joe Mondillo

Okay. And then in terms of steel prices, did that way at all on margins in the quarter? Do you anticipate any changes positive or negative going forward with that?

Norman Asbjornson

Steel did ad jump galvanized steel in the fourth quarter, just a small amount. We do anticipate a continuing to increase during the course of this year. But again, as we have said before, we don't expect it to be any same in excess of most of 1% of sales impact.

Joe Mondillo

Okay. And a lot of the industry is talking about price increases. Could you comment on that? And I know usually price increases get reinstated around the March/April time period. If that's the case, do you think, if you are implementing some price increases, do you think that any of the strong bookings that you're seeing is sort of a pull-forward effect where buyers are coming in before the price increase?

Gary Fields

All right. So, this is Gary. We did have a selective price increase that goes into effect on March 1st. And it was my -- I really look through the data carefully as far as correlating the price increases to where the orders are coming in, and it's had a little to no effect that I can identify. So, products that did not have a price increase are coming in at the same strength is products that did have a price increase. Now, to take an isolated project or two and say the affected it well, very probably did, but it's not widespread whatsoever.

Joe Mondillo

Okay. And I know it's sort of early on and it's tough to tell, and I'm not sure if you probably can't quantify anything, but just wondering regarding the ramp up of the order Water-Source Heat Pump business. Are there cost to a significant effect that is affecting the bottom line right now that should maybe or sort to just upfront cost related to ramp up and that will go away? Or will maybe not go away, but certainly will be leverage over the volume, but are there costs that are weighing on the earnings near term at a significant level?

Norman Asbjornson

Yes, ever since we decided go into the business, we've been expanding research development dollars, and we've been expanding other expense dollars, now for year and half and behalf of the Water-Source Heat Pump. So, that's all where the historic. As far as going forward, they're not going to increase appreciably the expenses are not with one exception. When we first get into the marketplace we're not going to be realizing market the twice for that product that we will a year from now wherefore we've been in the market for a while.

So we're beginning a smaller margin. Now while there is very little volume happening right now, as it starts ramping up that additional volume lower margin business will start having an effect on that business. But along with it of course goes back that we're adding dollars to it which should give us a potential for even a greater growth what we're anticipating. So it's kind of a trade off and then by this time next year we will be at a point where we expect we'll be running about the same margin on that product as we are with our other products.

Gary Fields

And, Joe just to add the clarity around your question, there is some assets that were not being depreciated previously and just started being depreciated as we started into production with the Water-Source Heat Pump area. And so those costs will continue and we do our depreciation is straight line. But that is taking place right now and so, of course, as you have low revenue that is a higher impact on the financial statements as we ramp up the revenue and that also started in the fourth quarter.

Joe Mondillo

And what about warranty expenses within a new product like this? Is that going to be taking effect at all?

Norman Asbjornson

Well, our work in general, we're running down below 1%. So, we're very, very -- we're way, way, way better than what this anticipated as the standard in this industry. And so, if we have very much of anything of course it will have an impact. But what we've been talking about from day one around here and what we're hearing to very much is, in the past we've had what you could see good enough quality wherein if we have a little bit of a quality problem that we fixed will go minor one where we thought that was good enough.

This product because it's a low cost product in other words selling between 1,000, 3,000, we cannot afford any cost on it. So, from day one around here we've been talking about, how are we going to produce the perfect product which has no problems in it at all other than whatever components are going to up there. But as far as everything weak and -- that by doing proper job of manufacturing we will get no warranty. And now that's a little bit of a dream of course, but it's our anticipation that warranty issues are not going to be an issue on Water-Source Heat Pump.

Joe Mondillo

Okay. And last one from me. Gary, I wonder if I can get your point of view over the last year, year and half with increased regional sales managers and sort of I think broaden some new independent sales reps. Just wondering, if you can give a your overall take on that whole process, trying to take market share by doing all the things that you've implemented regarding all that. Just wondering if you could give your point of view on that?

Gary Fields

Absolutely. So, first off as you know year before last we went from four regional sales managers to seven. Last year was the first full year of having all seven of them. And so there was a lot of the consulting work that I have done prior to taken over as president of the company was in conjunction with those regional sales managers trying to make sure that they worked as proficient as possible on AAON's behalf. So having spent a lot of time with them, they were very much coming up to speed. Just last week I had all seven of them in here and we have a bit of a color to refresh our course on what we have gone over the previous year. And so their level of engagement their level of success is growing rapidly and I believe that we as good set of regional managers as anyone in the industry at this point

And recall that it my former company I had many manufacturers that I represented so I have quite a viewpoint of what regional sales manager is having had maybe 20 or 25 of them that we've reported to in my previous company. The rate firms that we brought onboard with little exception have come up to speak quite well. We had one that quite frankly we stepped our toe with the selection of this one particular force maybe over couple of years ago, and we changed again just a few months ago. And now we have a very contiguous group of people on the entire West Coast, and a very cooperative collaborative group of people. This one that was in the middle was kind of a missed step, if you will.

So, we don't make perfect choices every time, but when we do make a less than ideal choice then we're not watchful about correcting the action on that. So, we have just completed that going back to the first part of December. And we are very excited about the possibilities and we are already seeing positive results from it. The market has reached out to me directly because some of those people knew me, and we had interactions from projects and it told us what a great decision we made. So, [Technical Difficulty] I possibly recall, we changed that for the previous year. They have all come up and are performing quite nicely now.

Our Las Vegas market was one that we had changed out. We had had a very paltry participation in the Las Vegas market for quite a few years. Now, we are having a very substantial participation rate in Las Vegas market. They have done real well for helping our western region. So, I am quite pleased with all that we have chosen, let's say out of the five that were chosen a bit over a year ago, four of them performed anywhere between good and great and one even we recently replaced.

Operator

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

Brent Thielman

Norm, I think I caught that comment that you thought on Water-Source Heat Pump that the margin would be relatively similar by the beginning of next year to the core business. But I am curious with -- excuse me -- but the technologies and streamlining you are embedding into this process, does that change your longer term deal, that kind of the profile of these products, relative to the core business and maybe we see something about the core average?

Norman Asbjornson

Well, we are going to have the decision. We are going to have to make somewhere around a year from now. What we have done as far as manufacturing as eliminated tremendous amount of labor from that product and so as it comes up at margin wise we are going to have to decide, because we don’t focus on percentage of margin. What we focus on is the total dollars we put to the bottom line, and so we are going to come to a point where the combination of our capabilities as far as manufacture with the market, how much to the market place we can take. And what level we take it at, what gross margin, what is a relationship of all those things that there is going to put most dollars to the bottom line.

Let me just kind of give you a quick summary here, summary problems that we are -- these are very positive problems. I might say, they super of the problems, but there not be a problem nevertheless. Our present representative force as Gary pointed out has other products available, approximately one half of that may already selling some other manufactures Water-Source Heat Pump. We believe those people are selling somewhere around $100 million to those other manufactures heat pump. We have been told by -- we are going to get a substantial part of that once we have the capability of dealing.

Now, we also have been told that because of the characteristics of our new product that they expect to be able to penetrate the market more deeply than they are with what they are selling today. All that consideration as we are looking at a 100 million maybe a little over that, that’s available for NIM. And we still have the other half of the representative force who do not have the Water-Source Heat Pump product line today of the day two we're bringing out. Some of those people are very capable people, all of them are very people, but we are not saying that they are not as capable as one who already are in a business, so we don’t know how much more of those markets will be able to take with that group of people.

Then that result and with the knowing what we have got in a way of product and knowing with what we are going to put into risk the labor on the product, we have got a situation facing as we are -- we can possibly increase the volume considerably over a $100 million in the next few years of time. If whether that's a wiser thing for us to or whether the wiser for us to increase the margin on it, is the decision that we are going to have to face in this company, starting about a year from now. And so, to try and tell you whether we're going to take higher revenue or more margin as kind of difficult, but it looks to us like both of them are within our capabilities.

Brent Thielman

Okay. And just to clarify with what you've invested already. Do you have the capability to support $100 million? Or does that take more investment to get there?

Norman Asbjornson

We're hitting close to. No, we got enough to make the $100 million right now, but what to work with has happened is from the things, the conversations and everything the way things have gone so far. We're already looking very hard at putting a second line. Now, this isn't something we work intending. We have always planned on have more than one line. However we're kind of getting a little bit more anxious and problem with it is we don't want to make the commitment to the nature the new line until we're absolutely certain. We understand the capabilities with the line we've already put in because as I said this is totally a new concept in the way you manufacture, and we've made judgments which may or may not be totally accurate as to the capability of each of those components and how they go together in a production line.

So, what we're trying to do is hold off making final commitments on the next production line until we have proven some of those things and we can make a better judgments about the relationships solved between sheet metal manufacturing, copper manufacturing, inflation, assembly, testing and all of those things. So, we don't overbuild one component of that or under build one component of that. And so, we're anxious to get underway of ordering more components of putting the second line together and we haven’t yet decided whether what are we're going to do. We're going to do some of the before very long and start ordering because of course a lot of these components have pretty long lead times.

Gary Fields

And with the $100 million with our existing capital expenditures we already have would be stretching it to, it's kind of ultimate limit at the present time in our estimation. So, to make sure we have comfort there and the build back up in case something failed or there is breakdown in the machinery. We would need some additional capital expenditures as discussed.

Brent Thielman

Okay. And the agents I think that you said are already selling the product that $100 million odd worth. It can may switch over almost immediately and sale. I mean to the extend do you have the capacity or is there are they under certain agreements where they can't do that?

Gary Fields

No. the majority of them they have nothing to risk. So with that's with our broad based manufacturer a Markey component of their sales operating with our historic equipment. The Water-Source Heat Pump lines that they represent those that compete with us are strictly Water-Source Heat Pump Lines. So, when they are comfortable that we are the supplier of choice then they flipped that over. I am done at least with emails on a daily basis. I've been asking, are you ready at, I've got this order. I got one just about 30 minutes ago. He says, I have 82 units ready to go. Are you ready, so that I can pull the trigger, now that particular one I said, yes. We're ready for it. So they're having no qualms about switching us. Their loyalty lies with us and I think that the relationship with that I've had with the rep force over the years does nothing, but strengthen that that we have a very open dialog.

We know what's at risk for them so we're not making any demands of them we are saying this is available. We appreciate the support when you think you're ready for it and that's going to vary. You're always going to have people that are what you called early adopters and that they want to get on board with this product. Once, there is a little bit of a proven track record. They order them we ship them on time they installed them they ran in accordance with their expectations. That's when I think the hockey stick looking growth curve is going to occur for us. Because it won't take very long at all for the world to get around amongst this very tight group of people these independent representatives that whether real deal and we're delivering what we said we're going to deliver. Once we get that track record it's going to be quite impressive.

Norman Asbjornson

It will be quite difficult for us because then we have to make sure we don't over commit take on more orders and we are capable of producing and that could happen really quickly to us we can get some merging orders and so. We've got a problem here that we have to balance because recognized we're new at manufacturing. So, we're manufacturing a new methodology. So, we're making judgments we don't have historical data to backup or historical knowledge on. And we're saying yes, we can do it and we don't want to say yes, we can and then not fulfill the need because that will do damage to them. And do damage to a customer and we don't want that. So we're going to have as we don't have a problem getting orders we're going to have a management problem with manager this growth curve that we're looking at.

Brent Thielman

Okay, this is great. I guess maybe last question I would have is now all the progress you guys are having the acceptance obviously the idea that you want to be careful about ramping that up and I know this is kind of a ramp up year. When you think about that 2018 I mean, can you get half of that $100 million pre-quarter of that $100 million? And what do you guys think is doable next year?

Gary Fields

I don't want to give you an overly optimistic view, but I'm pretty bullish on our opportunity here. The $100 million available to us as soon as we prove d that we're capable of handling it we will have it. I'm very confident that as things developed through the summer we'll be able to give you an update on how that's occurring. But I'm going to be very surprised and disappointed, if I can tell you that 2018 we can pull the trigger and do $100 million.

Operator

[Operator Instructions] Your next question comes from the line of Jon Braatz from Kansas City Capital. Your line is open.

Jon Braatz

Good morning everyone, and good afternoon everyone, and Gary welcome to Board. Pretty much everything has been, my questions have been answered. But Gary you had mentioned that you're seeing -- you're going to have the selective price increases effective March 1st. Can you tell us a little bit about how much those price increases and how broad they are across the product line?

Gary Fields

Yes, they ranged from 3% to 4%, and it was probably in the range of 20% to 25% of our historic volumes. Those products affect that amount.

Jon Braatz

And secondly and maybe for Scott. You said the CapEx is going to be about $41 million this year or $40 million. As you look that's pretty big number, as you look into 2018 and understanding that maybe you might need some more additional spending to support even the support Water-Source Heat Pump. But does the spending begin to level off on that level off been through begin to decline from that $41 million as you move into 2018, 2019.

ScottAsbjornson

It definitely would. On last year, we had projected about a five-year spent of around $30 million, and we're trying to update our five-year window and we had projected last year that we would have done $32 million in CapEx. We only did $26 million. Right now, we're projecting $42 million for the coming year. We may end up following short of that in the coming year, but our five year projection has moved from a $30 million level to about $36 million level for the five years on average. Based upon trying to upgrade and replace aging sheet metal equipment as well as our major expenditure around our lab and the additional Water-Source Heat Pump equipment.

Operator

There are no further questions in the queue. I'll turn the call back over to the presenters.

Norman Asbjornson

Okay, we'd like to thank all of you for tuning in on our 2016 report. We're very optimistic and here as you probably gathered with some hesitancy about all of the turmoil that's been occurring out in the general economy. We hope that the general economy will support our anticipation of the great things to come that we have in here regarding AAON. Talk with you later. Thank you.

Scott Asbjornson

Bye bye.

Gary Fields

Thank you.

Norman Asbjornson

Thank you.

Operator

This concludes today's conference call. You may now disconnect.

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