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edited transcript of aaon earnings conference call or presentation 2-may-19 8:15pm gmt

by:NULITE     2019-09-23
CallTULSA\'s 2019 Aaon earnings in the first quarter of May 23, 2019 (
Thomson StreetEvents)--
Thursday, May 2, 2019, at 8:15:00 in the afternoon, the editorial record of the conference call or presentation of Aaon Inc. earnings
Fartsane company-
President and Director * Norman H.
AsbjornsonAAON, Inc. -
Rebecca A. founder, chairman and CEO
Thomas sonaaon, Inc. -
Cao & Treasurer Scott M.
AsbjornsonAAON, Inc. -
Vice President of Finance and conference call for chief financial officer Zane Adam KarimiD. A. Davidson & Co.
Research Department-
Research assistant = = = speech--------------------------------------------------------------------------------Operator [1]--------------------------------------------------------------------------------
Welcome to AAON, Inc.
Sales revenue call for the first quarter. (
Operator instructions)
As a reminder, this meeting is being recorded on Thursday 5/2.
I would now like to hand over the meeting to our Mr. moderator. Gary Fields.
Please continue. --------------------------------------------------------------------------------Gary D.
AAON, Inc. -
President and Director2]--------------------------------------------------------------------------------Good afternoon.
You are welcome to participate in the first quarter earnings announcement of AAON investor conference call 2019.
First of all, I would like to read a disclaimer.
This is a forward.
Look at the disclaimer
If any statement submitted here deals with non-historical information, including the outlook for the rest of the year, the statement must be forward --
Search and production under the safe harbor provisions of the Securities Litigation Reform Act of 1995.
Therefore, it is affected by the occurrence of many events outside the control of AAON, which may result in a significant difference between the results of AAON and the expected results.
Please see the risk factors included in our recently submitted SEC document, including the annual report for Form 10
Quarterly Report on table 10Q.
Now I want to hand it over to our CFO Scott asbjösen. --------------------------------------------------------------------------------Scott M.
Asbjornson of AAON company-
Vice President and Chief Financial Officer3]--------------------------------------------------------------------------------
Welcome to our conference call.
First of all, I would like to discuss the comparison results for the three months ended March 31, 2019 and March 31, 2018.
Net sales increased by 14. 9% to $113.
From $99 to $8 million.
Last issue 1 million--preceding year.
Due to the price increase we started in 2018 and the increase in sales of roof units, net sales increased in the quarter.
Our gross profit has increased by 67. 6% to $25.
8 million from $15. 4 million.
Sales gross profit accounted for 22.
Compared to 15, the quarter has just ended by 7%. 5% in 2018.
The company continues to face challenges in acquiring and retaining talented employees --level.
Increase in Sales, general and administrative expenses 7. 7% to $11.
From $10 to $0.
2018 2 million.
However, SG & a fell to 9 in sales.
7% of the total sales for the quarter have just gone from 10. 3% in 2018.
Business revenue grew by 180. 2% to $14. 5 million or 12
7% of sales are from $5. 2 million or 5.
2% of sales in 2018.
Our actual tax rate has increased to 24. 8% from 18. 7%.
Not including discrete event the company is expected to every year 2019 of effective tax rate is about 27%.
Compared to 2018, the company received a larger excess tax offer related to our stock rewards in 2019, which resulted in a lower effective tax rate for the quarter than expected.
Net income increased to $10. 9 million or 9.
Sales accounted for 6% compared to $4. 3 million or 4.
3% of sales in 2018.
Diluted earnings per share increased by 13. 0% to $0.
$21 per share, from 0. 08 per share.
Diluted earnings per share are based on 52,397,000 shares in the same period a year ago, not 52,910,000 shares.
At this point, I will transfer the call to Rebecca Thompson, our chief accountant and treasurer, to discuss our balance sheet. --------------------------------------------------------------------------------Rebecca A.
Thompson, AAON, Inc. -
[CAO & Treasurer]4]--------------------------------------------------------------------------------
Thanks, Scott.
If you look at the balance sheet, you will find that our liquidity balance is $102.
$8 million to $92
December 31, 2018 for 8 million.
Total cash is $7.
March 31, 2019 for 1 million.
Our current ratio is about 3. 3:1.
Our capital expenditure is $8. 8 million.
We expect capital expenditures to be around $40 million this year.
The company bought back $5 in shares. 1 million year-to-date.
Diluted shareholder equity per share is $4.
Compared to $4, it was $95 in March 31, 2019.
December 31, 2018, 70
We keep on debt. free.
I want to transfer the call to our president, Gary Field, now. --------------------------------------------------------------------------------Gary D.
AAON, Inc. -
President and Director5]--------------------------------------------------------------------------------
So, the first thing I would like to talk about is net sales and what we are currently looking.
The number of roof units sold in the first quarter of 19 increased by 8.
Compared with the first quarter of 18, 5%.
The condensing unit dropped slightly, not the material.
Air-handling personnel rose 8%.
The outdoor mechanical room was reduced by 3. Water-
The source heat pump has increased by 42%.
The overall number of units increased by 16%.
So we see an increase in production in the first quarter of 18.
In our backlog of goods, the price went well.
Of the backlog we are investigating so far, about 28% of the backlog is at our price level in June 15, 5% higher than the previous level.
So essentially, what we set up in the first quarter was the price level in June.
But at 28%, you can calculate that it will run out by half the time. to-late Q2.
48%. our backlog is based on our pricing in December 5, plus 4% crossthe-
Boards and some small parts up to 5%.
Then we raised the price again in the third quarter, and according to the price in the third quarter, we currently have a backlog of 24%.
So my expectation is that the third price increase for almost all goods is 2%;
5% of some selected items.
So my prediction is that in Q2, we\'re going to see half of the price up 4%, maybe 1/3 to half of the price up 4%, the bottom line or the factory workshop, this will affect the bottom line in a positive way.
Then, as we enter the third quarter, we will begin to see a 2% increase in prices in the third quarter and will remain stable on prices in December.
As a result, our backlog will continue to increase.
We just got past the backlog.
The price backlog in June 18 is what you see, about most of the fourth quarter, and most of the first and first quarter. So the water-
The source heat pump business is progressing smoothly.
I told you it was 42%.
I will give it to you in an accurate unit.
We shipped 2,289 units in Q1 and 1,614 units in Q1 in 18 years. So the back --the water-
The source heat pump is still a small part of the total revenue, but it starts to increase as we had expected before.
If you want to call it an existing legacy product, we will continue to improve the design of the existing product, but this is the core product of the company.
These are very attractive to the market.
As you can see, our backlog has increased again.
So will our backlog. -
Well, I want to get back here. we\'re going to raise the price.
It appeared in the first part of June, which is another 5%, and one is comprehensive.
Therefore, the quality of the backlog continues to improve, and the quality is quite good at present.
Back to the redesign of the product.
We have started using our new lab to accelerate the development of our products.
We have seen a very beneficial aspect in-
Compared to our previously limited facilities or outsourced houses.
Our alternative market remains fairly stable compared to the new construction market, which is about 50%.
We see some growth in the cannabis market.
I would like to inform you that due to Canada\'s nationwide adoption of cannabis products, there may be more opportunities and growth in Canada.
We see that the US economy is still accelerating. S.
Markets in certain areas where cannabis is mainly legalized for medical purposes.
Our data centers remain stable.
They grew significantly in 2018 than in any previous year, a very stable proportion.
The overall tone of the business is that we saw the building Bill index below 50 for the first time in 14 months.
So we talked with our sales channel partners to see what substantial impact this might have on them, and so far there have been no reports of a slowdown.
View the annual sales results of our bookingto-
Our current booking sales account for about 97% of our forecast compared to the dates we predicted, which we also predicted.
So we don\'t see any weakness in any particular market.
The backlog today in March 31 was $166.
6 million, which is the highest backlog the company has ever had.
Obviously, the lead time has been extended a bit because you can see that we won\'t be shipping $0. 166 billion per quarter, which is supposed to be.
Historically, the company\'s backlog represents 2 months, perhaps 3 months of production.
Therefore, when our production speed is accelerating, the order enterprising rate has exceeded the speed of going out.
Continue this way.
But what we do is manage these projects and the expectations of our customers very actively.
While I do not want to announce that everyone is 100% satisfied with the result, I would say that this is manageable and we are very grateful to the very loyal customers who have been with us for many years, they continue to send us large orders.
So for the rest of 2019, water
The output of the source heat pump will continue to accelerate.
Our ability has now surpassed our ability.
It was not until recently that we balanced the order to the door roughly in line with the order we were able to roll out. So the water-
Source heat pump is a dazzling star in the product family group that can meet or exceed the market\'s expectations for the lead time.
Our Longview products, which hold almost the same good position for orders entering the door and for orders going out.
Only in the last 60 days will their orders be faster than the ones they are able to roll out.
Part of the work in the R & D lab has not yet been completed.
However, we have made useful use and occupation of some of its functions.
Over the next 30 days, we will start using the tent section of the lab, our 108,000 cubic feet acoustic room, the mixer room, which is located at the top of 2 50,000 cubic feet mixing rooms.
We will test a unit 72 feet long for acoustic, thermal, and airflow performance.
This will be the first time in the world to test its type, especially in units of this size and capacity.
So the lab has shown its beneficial aspects and we have shown other immortal things in 30 days.
The job name is the Jacob Javits Center in New York City.
They increased the building by about 50%. -
To the current footprint.
AAON got most of the HVAC equipment.
Our laboratory testing capabilities play an important role in ensuring the safety of the project.
We are less than 2 to 3 weeks away from opening a new parts store in the Tulsa area.
There are two main purposes of doing this: one is to serve the local market more thoroughly than what we are currently doing, but the other is, this is the prototype we expect our sales channel partners in North America to replicate in one form or another.
This is a good example of the best practices for the part store business.
We are confident that our gross profit will improve throughout the year. over-
Quarter, direct impact from the price increase I described earlier and the impact relative to the backlog.
We think the price of most materials has stabilized.
Although there are still some people walking around, nothing in front of us tells us that there will be any adjustments when we impose tariffs, etc.
Labor, we plan to carry out some small upgrades on the labor rate of the factory workshop to keep up with the market demand, so that we can continuously introduce qualified personnel for our expansion, and keep these people.
I think this year\'s salary is fixed and stable, so we don\'t see anything there.
So there\'s some upward pressure
The level of any new employee we may need.
2019 of capital expenditure still looks like $40 million.
However, as is normal, the lead time for some of these things is slightly longer, so they don\'t actually get the bill, so I\'m hesitant to say that we\'re going to extend $40 million.
However, in order for this to happen, we have indeed written the purchase order.
So now, for any other comment he might make, I\'m going to hand it over to Norm. --------------------------------------------------------------------------------Norman H.
Asbjornson of AAON company-
[Founder, Chairman and CEO]6]--------------------------------------------------------------------------------
Many of you are very concerned about the turnover of my management to new management.
I am very satisfied with what happened.
Not only did I quit, but I had already quit, and I was still suggesting, but didn\'t do the heavy work Gary was doing now.
But there are also a lot of people who join us, who were retired or are no longer around us.
So we have done quite a bit of transformation and generation transformation in some areas that are critical to the company.
I am happy to say that we are probably 90% of the next generation management approach across the company and have been working for the last 2 years. 5 years.
So it\'s a problem for many people who care about when this will happen, and it\'s already happening.
Now, there are some weaknesses.
Most of the problems we still have are related to productivity.
We have lost a lot of talent and people who know how to get the most out of people and companies.
We\'re rebuilding, and, of course, this is a very important moment-Sensitive issues
You have been studying this for several years.
This is not something that has been taught or learned.
How to manage the employees of any company is a very personalized situation.
Our new management will be able to do this soon.
Therefore, we expect that productivity will continue to rise over the next year or so, as effectively as price increases.
So, if you \'ve been following up on the labor costs we\'re selling relative to us, you \'ve noticed that in the last two or three years, when we\'re going through this shift, we have seen some declines.
We are happy to tell you that we have gone through this and now that we are in the upward phase, our productivity should start to bring additional benefits to our bottom line.
Of course, this is not an instant or quick solution. This is a long-term thing.
But this is a big deal, the company has now done all the practical purposes and there is no major change that will have a significant impact on the bottom line [1]particular]way.
So we are almost caught up in the day-to-day management challenges that make things happen, and we are very optimistic about our ability to get ourselves back to historical profitability.
We have added a lot of capabilities to our ability to get orders, which is good-
On behalf of the increase in our backlog, our customers are satisfied with the information we send and have given us great growth in this regard.
So, as I said, the process of transitioning from a group to the next group has been done very well.
In the process, we have strengthened the accessibility of our product line and our products to our customers.
Our biggest challenge at this point is internal management to restore our productivity.
I want to open it with it. --------------------------------------------------------------------------------Gary D.
AAON, Inc. -
President and Director7]--------------------------------------------------------------------------------
Let\'s answer the question now.
Questions and Answers--------------------------------------------------------------------------------Operator [1]--------------------------------------------------------------------------------(
Operator instructions)
Your first question is Joe\'s. --------------------------------------------------------------------------------
Unknown analyst [2]--------------------------------------------------------------------------------
So I was wondering if you could talk about the biggest factors driving orders and backlogs, what do you think is driving such strong growth. --------------------------------------------------------------------------------Gary D.
AAON, Inc. -
President and Director3]--------------------------------------------------------------------------------
Joe, I think we have been working in all aspects for almost 6 years. In mid-to-
At the end of 2013, Norm recruited me to consult with sales channel partners in North America.
There are 62 individual companies;
I consulted 32 of them.
It was an attempt to share with them the success of my former company, which performed well in the industry.
The company was not only admired by AAON, but also by all the other manufacturers represented by the company.
So we started consulting.
In doing so, we identified 5 of the 32 companies whose inherent behavioral traits and DNA were inconsistent with AAON\'s expectations for growth opportunities.
So I was appointed president over time and I replaced 5 of them.
My replacement of their company is a company that is more in line with our goals, which is a sustained and long-term growth.
There is a key strategy for those sales channel partners to achieve this.
This is my experience of 30 years.
So I think it\'s very important to help these people understand why Texas airlines succeeded in keeping people consistent.
So this goes back to the years that have laid some foundation for this.
I think the next thing that happens is that some people don\'t want to connect most of their business shares with AAON, what\'s going to happen when nom retires or move on
Thus, uncertainty gives them a reservation to dedicate their energy and time to AAON.
Once the succession plan was revealed, they found that not only myself, but also the other major leaders, became more visible, Scott, right next to me, and then the rest of the company as a whole, when they start to see this succession plan, they start to have confidence in these people, and then they have the confidence to spend more time, energy and dedication on behalf of AAON.
Because remember, these people are independent, they are representative.
So when they get up in the morning to go to work and sell air conditioning equipment, they have multiple options, not all of which must be competitors for AAON products --to-
They were competitors at the time.
As a result, AAON has become a company that is well worth the effort and is very rewarding for them.
So I think that\'s the key.
The next thing is that when I come here, in terms of sales channel partners, I think some aspects of AAON are very low
Hanging fruit, we can improve the areas through reasonable efforts and become more attractive to these Manufacturer Reps or sales channel partners.
So these three aspects are very important.
Without the huge economy that the current US government has relaxed, these will improve the company. S.
The government, they cut taxes and relaxed some heavy regulations.
So you have a better business environment to operate, you have a better economy to operate, but you have been prepared for 6 years, and this is with the strengthening of our sales channel partners, themselves, the norms that started by strengthening their planning and activities made our company the most attractive company for them to sell and act as agents. --------------------------------------------------------------------------------
Unknown analyst [4]--------------------------------------------------------------------------------Okay.
So one of the things I\'m trying to understand or figure out is huge--
I mean, you guys have seen incredible growth in the last 5 or 6 quarters.
If you look at your quarterly order and quarterly backlog, it really starts to accelerate in 2017. And I --
At about the same time, it\'s correct when we start to see very significant inflation and when your peers start to be very positive about price increases.
These peers, in the past year or so, have not seen anything compared to the growth rate you have seen.
I know you were behind in early 2018 and since then you have started to pick up and obviously you have done a good job of raising prices.
But I guess I just want to figure out one thing and I want to know what you think, what is your price during this time-
The gap between your price and your peers has changed a lot, which has driven a lot of demand we \'ve seen in the last few quarters? --------------------------------------------------------------------------------Gary D.
AAON, Inc. -
President and Director5]--------------------------------------------------------------------------------
I would initially say that if you want to go back to the fourth quarter of 17, when you see this trend starting to accelerate, yes, the peers do rise in front of us at a much larger price.
This is one of my things. -
I will redo it if I have a mulligan.
But somewhere in June where prices went up, we started to align with our history on pricing levels and peer pricing levels.
At that point in time, we began to catch up with them.
So I don\'t think there is any advantage for our sales channel partners to have a lower price after the price increase in June, 18
Products related to prices in their history.
Then, as we continue to raise prices, we actually give up the overall price increases for these peers.
So they are still able to get these orders.
Well, like I said, some of these things are just that they are more willing to take the time to sell our products.
However, we have also improved our products in terms of efficiency, operational strategy and quality.
You have seen a reduction in the cost of the warranty.
It peaked in the early days, and then it has been moving in a positive direction, which shows that we have made some efforts in redefining what we call quality.
We are fulfilling this promise.
So I don\'t think I\'m going to classify our growth as we\'re lagging behind price increases and we \'ve given up some of the premiums we \'ve used in our history. --------------------------------------------------------------------------------
Unknown analyst [6]--------------------------------------------------------------------------------Okay.
I want to ask. I know you\'re still there. -
The price cost issue is still a problem, but it will improve over the course of the year.
Productivity should increase over time.
I\'m just curious, is there any structural change that you can\'t go back to the peak of 31%, such as gross profit margin, operating profit margin of 21%?
Is there any change in structure?
Or, can we just assume at some point in time on 2020 or 2021 that in the end, we\'re going back to those levels, hopefully? --------------------------------------------------------------------------------Gary D.
AAON, Inc. -
President and Director7]--------------------------------------------------------------------------------
I am confident that we will return to these levels no later than what you have just said.
I believe that when I look at the overstocked price, we will see the value-added measures there and our gross margin percentage will continue to accelerate.
The other thing is that we didn\'t achieve the ideal number of employees in the factory until the last few weeks.
Although the turnover rate is still higher than we would like, it has improved a lot compared to 12 months ago.
Our induction training has been greatly improved.
So I believe there are already signs of improvement in our productivity.
We looked at some recent and yesterday figures that tell me that we are making progress in this regard.
So with the increased pricing status, and some results from our training and onboarding programs, and the ideal number of employees, I believe we are on the right path to achieving it all, back to the height of history.
Our goal is to keep a gross margin of 28% to 32%.
The next thing I want to say about this is that historically, in any given year, demand rates and productivity in the fourth and first quarters have fallen by 20%, compared with the third quarter
Well, with this powerful input, we don\'t see these drops
In terms of demand rate, off, Q4 and Q1.
You have seen an increase in the backlog, so you know that it will increase if the demand rate does not reach the historical path of peak at 2 and 3.
One reason I don\'t think it\'s easy to understand and anticipate is mechanical magnets.
Historically, when we fell in the fourth quarter, it was much easier to arrange a major overhaul, overhaul of some of our highly automated sheet metal equipment.
This will go to Q1 and these machines will be in the prompt state
The top condition is the complete fleet of machines, operating at a higher level in the second and third quarters.
Well, we are now running at the highest speed in every quarter, and in fact, every quarter needs to be accelerated.
Therefore, we find ourselves a little behind in how to overhaul and maintain a machine running at 100% of the required capacity.
So not only do we try to revise this, but we also try to put in more residual manufacturing capacity so that we can provide 100% of the required paper
Metal parts, but the mechanical capacity is less than 100%. --------------------------------------------------------------------------------
Unknown analyst [8]--------------------------------------------------------------------------------All right.
And then I--
I mean, maybe something to do with what you\'re saying right now, I \'d like to ask about this incredible increase in the backlog and the fact that you\'re trying to push production as much as possible through the factory.
Are there any risks in the next few facilities? -
To sort out your internal forecast for a few quarters because of the productivity issues you are still dealing with, which may be because of this, or because you have to pay overtime to determine the delivery date or something like that, is it possible to achieve a certain increase due to higher costs or productivity issues, as there is so much production in the plant. --------------------------------------------------------------------------------Gary D.
AAON, Inc. -
President and Director9]--------------------------------------------------------------------------------
Joe, I think there\'s always a risk.
I think we have to be keen on managing these risks.
Now, the risk of overtime may not be great because we operate the plant 24 hours a day, 7 days a week, most of them. So we do have --
We currently run only 12 hours a day and assemble 7 days a week as we do not have the ability to provide enough sheet metal to assemble 24 hours a day.
So one thing I\'m talking about is increasing sheet metal manufacturing capabilities.
Part of the $40 million capital expenditure is additional automated sheet metal manufacturing equipment.
Salvagnini machine, we have been talking about it for many years.
We placed quite a few orders.
We have machines coming in when we talk.
I think all the machines that we order now will be put into use in 2019 and they will provide us with additional capacity, so we expect that by the end of this year, we will go to the rally 24 hours a day in the first half of the week.
Our second half of the week will still maintain a 12-hour daily shift in the short term of the next year or so.
But this will allow us to have about 25% more assembly time than we currently have.
So this is another area where we identify what obstacles are or can take advantage of them.
This is a sheet metal machine that needs more and has--
They don\'t have a dispatch rate of 100%, which means they don\'t run for 12 consecutive years, 24 hours a day, 365 days a year without crashing.
You have to have some scheduled time, so we are looking at some ratios about what we think is a reasonable dispatch rate, and we are building more machines to achieve that.
When we do this, we are also looking at our growth forecasts based on all the intelligence gathering we can do with our sales channel partners and what is happening now, and make these decisions regarding the purchase of these devices in order to make way for this particular chokepoint.
Then, once we find the sheet metal device, this happens when we talk, and the next thing is to arrange an assembly person in the first half of the weekm. to a. m. shift.
In the past year, we have made considerable progress in this area. -
Not assembly, but other necessary functions of the company, such as brazing, wiring and painting, we are already running.
We\'re running painting 24/7 right now, right? --------------------------------------------------------------------------------Scott M.
Asbjornson of AAON company-
Vice President and Chief Financial Officer10]--------------------------------------------------------------------------------Not fully.
We have about 75% people. --------------------------------------------------------------------------------Gary D.
AAON, Inc. -
President and Director11]--------------------------------------------------------------------------------Okay.
So we have taken quite a bit of the way to get some extra capacity through the 24/7 feature. --------------------------------------------------------------------------------Operator [12]--------------------------------------------------------------------------------(
Operator instructions)
Your next question is from Zane. --------------------------------------------------------------------------------
Zane Adam KamiA. Davidson & Co.
Research Department-
Research assistant [13]--------------------------------------------------------------------------------
This is Zane Karimi from Brent Tillman. Just thinking --
First of all, I hope to know more about the laboratory in detail.
Do you have the resistance to energy gains and losses?
Like, does this put pressure on profit margins?
I am trying to get a better understanding of the basic business there. --------------------------------------------------------------------------------Gary D.
AAON, Inc. -
President and Director14]--------------------------------------------------------------------------------
Well, we have R & D staff at the staff--
I don\'t know what time period to expand the exact number of positions.
We do divide the functions of the lab into our own departments.
So we know exactly how many people are inside.
The last time I saw it, the population was--
What is under 50, isn\'t it? --------------------------------------------------------------------------------
Representative of the company [15]--------------------------------------------------------------------------------(inaudible)--------------------------------------------------------------------------------Gary D.
AAON, Inc. -
President and Director16]--------------------------------------------------------------------------------Yes.
So I don\'t know what a clear definition is for you historically.
There is no doubt that the costs associated with running the lab exist.
Depreciation of these assets will incur costs.
As we bring more features on board, the cost of utilities associated with it will be higher.
Therefore, it is naive to think that it has no effect on it.
But again, I think that everything we do to increase the opportunity for sales reps to sell more equipment at this high price, and I think the lab has greatly improved that.
Due to laboratory facilities, we have seen evidence of multiple projects awarded to AAON.
Jacob Javitz of New York, Nike World Headquarters in Willoughby Building, New York.
These projects are definitely awarded to us because we are able to show them and develop for them in the lab.
So this is a cost in this regard ---
Sales expenses, which is the burden of indirect expenses.
Then, about 1/3 of the activities of the laboratory are to maintain our certification with the certification body AHRI.
So AHRI has multiple programs, some of which select the device from your factory floor and then ship the device to their lab and test it.
Well, you want to make sure that you have confidence in the performance data that you publish, so you have to test your device to make sure that is.
Another thing is that AHRI is here to prove the performance of the equipment in our lab.
For example, this is mainly the way they do the cooler.
So we only had the ability to test to 200. ton chiller.
Now, we have the ability to test to 540-ton chiller.
So we can do this in our facilities.
Therefore, it is expected that about 1/3 of the activities will be used in the development of new products, or--
AHRI proof of concept is expected to receive £ 1/3.
Then, 1/3 is dedicated to the activities I mentioned with Jacob Javits, Nike and Willoughby and the projects of this nature.
That\'s all the activities ---
We charge.
So it will have some direct income. --------------------------------------------------------------------------------
Zane Adam KamiA. Davidson & Co.
Research Department-
Research assistant [17]--------------------------------------------------------------------------------Okay.
Then, it appears that design company contractors and other product manufacturers are generally positive about the situation in the non-residential building market.
But you already ran 50-
50 new projects were replaced.
Do you think your portfolio can be substantially transformed into a new construction market in 2019?
Are you actively controlling this mix? --------------------------------------------------------------------------------Gary D.
AAON, Inc. -
President and Director18]--------------------------------------------------------------------------------
In fact, I think there are a lot of alternative business opportunities that have not yet been developed in our sales channel partners.
We just recently--
We hired a gentleman for about a year.
Five years ago, he focused on some strategic accounts.
Just recently, I gave him additional tasks and he will consult with our sales channel partners on alternative business and assist in the sales process.
So what I\'m going to tell you is that where the new building business hasn\'t shown any weakness yet, but if you put the index of building bills as any kind of indicator, their latest figures show a slight weakness in the market.
So you usually have 9 to 10-
From publishing data to seeing the lead time of the month that has any material impact on the business.
So in this case, I want to be prepared in advance to develop more strategies for alternative markets.
I don\'t believe our sales channel partners are very good at this as a whole.
I think they did a good job, but not very well.
There are some representative companies that do a good job. But across-the-
The board, I think there is room for opportunity and improvement. --------------------------------------------------------------------------------
Zane Adam KamiA. Davidson & Co.
Research Department-
Research assistant [19]--------------------------------------------------------------------------------Got you.
Then one.
In this concept.
Can you discuss geographically where you think the product is growing and the demand is fastest?
How much is the internal effort to increase penetration compared to the regional demand environment? --------------------------------------------------------------------------------Gary D.
AAON, Inc. -
President and Director20]--------------------------------------------------------------------------------Okay.
I have not seen any substantial changes in the regional demand environment.
But internal efforts, some of our improved companies, on both shores, are weaker than what we wanted five or six years ago.
So we put more effort on these two shores than anywhere in the middle of us.
The central part of this country is better.
Meet the needs of AAON.
West Coast to--
There is no percentage in front of me, but there is a big percentage.
What I\'m going to say is that it\'s probably 2 in the last 5 years.
In relative order, it is 5 times the original.
During that time, the annual compound growth rate on the East Coast was roughly between 15% and 20%.
So these two coasts provide us with more results.
AAON\'s equipment is particularly attractive in Southeast Asia, but we don\'t see the success we think should be seen in these markets.
A large number of representative companies that have been replaced are located in the southeast.
It\'s a hot and humid area,-
It is very suitable for our products.
Then, most importantly, it\'s not hot and humid at all except Canada.
In the past two or three years, we have changed two representative companies in Canada.
One of them in Montreal, Canada.
They are dealing not just with Montreal, but with the location of their headquarters.
They have been on the job for two years, and their number is four times that of their predecessor for two years. So we have --
I call it an internal effort because we get better sales channel partner engagement and we also get better sales channel partners in areas we think are weak. --------------------------------------------------------------------------------Operator [21]--------------------------------------------------------------------------------
There is no further problem on the phone. --------------------------------------------------------------------------------Gary D.
AAON, Inc. -
President and Director22]--------------------------------------------------------------------------------All right.
Thank you for listening to us today.
We look forward to discussing our second quarter results with you again in August. Good day. --------------------------------------------------------------------------------Operator [23]--------------------------------------------------------------------------------
This is the end of today\'s conference call.
You can disconnect now.
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