Aaon Inc 2026 Q2 Earnings Call

The floor is yours. Thank you operator, and good afternoon, everyone.

The press release announcing our second quarter 2026 financial results was issued earlier this afternoon and can be found on our corporate website, aaon.com. The call today is accompanied by a presentation that you can also find on our website as well as on our listen-only webcast. We begin with our customary forward-looking statement policy. During the call, any statement presented dealing with information that is not historical is considered forward-looking and made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, the Securities Act of 1933, and the Securities Exchange Act of 1934, each as amended. As such, it is subject to the occurrence of many events outside of AAON's control that could cause AAON's results to differ materially from those anticipated.

You are all aware of the inherent difficulties, risks, and uncertainties in making predictive statements. Our press release and Form 10-Q that we filed this afternoon detail some of the important risk factors that may cause our actual results to differ from those in our predictions. Please note that we do not have a duty to update our forward-looking statements. Our press release and portions of today's call use non-GAAP financial measures as defined in Regulation G. You can find the related reconciliations to GAAP measures in our press release and presentation. Joining me on today's call is Matt Tobolski, President and CEO, and Andy Cheung, our CFO. Matt will start off with some opening remarks. Andy will follow with a walkthrough of the quarterly results, and Matt will finish up with our updated outlook for 2026. With that, I will turn the call over to Matt.

Thanks, Joe, and good afternoon. Q2 was another strong quarter, building on the momentum established in Q1 and reflecting continued execution across the business. Higher throughput across all four of our major facilities resulted in substantial volume growth, demonstrating the value of recent investments we have made across the organization, including supply chain management, lean manufacturing, operational excellence initiatives, expanded capacity, and leadership development. These efforts translated into our fourth consecutive quarterly revenue record, with sales increasing 101% year-over-year and 26% sequentially. EBITDA more than doubled from the prior year period, and we generated substantial earnings growth while converting backlog at a much faster pace across the enterprise. These results are tangible evidence that the investments we have made are translating into measurable operating progress.

For an industrial manufacturing company, this level of organic growth and operational scaling is exceptional, and it reflects the strength of our markets, our strategy, and our people. Despite the substantial increase in production rates during the first half of the year, backlog remains nearly double prior year levels. Sequentially, backlog declined because production and shipments increased significantly across the enterprise, resulting in accelerated backlog conversion. That is exactly the outcome we have been working to achieve. Customer engagement remains strong. Our pipeline of opportunities remains healthy, and backlog continues to provide meaningful visibility into future growth. Let me begin our brand discussion with BASX. The long-term market opportunity remains compelling, supported by continued investment in data center infrastructure and the differentiated solutions we provide to the market. BASX-branded sales were a record, increasing 216% year over year in the quarter and 501% on a two-year stack.

For the first half of the year, sales were up 137% year over year and 570% on a two-year stack. Achieving and sustaining this level of growth requires coordination across engineering, operations, supply chain, manufacturing, and our field teams. Production increased across our facilities, and I hope all of our stakeholders appreciate the significance of what our teams have accomplished. As we have scaled at an unprecedented pace, maintaining high standards across quality, delivery, and customer support has remained a major focus. We continue to see meaningful improvement as the systems, processes, and teams we have been building become more mature and effective. The progress is translating into better outcomes for our customers and stronger execution across the enterprise. BASX-branded bookings were below the unusually elevated levels experienced in recent quarters. However, we do not view that as a change in the long-term opportunity.

These projects are large in scale and can generate quarter-to-quarter variability in booking activity and award timing. Customer engagement remains strong. Our opportunity pipeline remains healthy, and backlog continues to provide substantial visibility into future growth opportunities. More importantly, our ability to support customers continues to improve as throughput increases, lead times come down, and additional capacity comes online. The underlying market opportunity remains very favorable, and we continue to see substantial long-term opportunities for growth. Turning to the AAON brand. The AAON brand continued to perform exceptionally well, gaining market share despite a relatively soft commercial HVAC market. AAON-branded sales increased 40% year over year and 5% sequentially, reflecting improved production throughput, strong demand, and continued execution improvement across the business. These results point to meaningful market share gains and reinforce the strength of our product offering, sales channel, and customer relationships.

Increased production volumes also drove further lead time improvements during the quarter, although additional improvement remains a priority as we continue increasing throughput. Bookings of AAON-branded equipment increased approximately 16% year over year during the quarter and were up approximately 45% on a two-year stack. Year to date, bookings increased 12% year over year and 25% on a two-year stack. Growth was primarily driven by continued strength in our traditional transactional business, which is particularly encouraging given the softness we experienced throughout much of last year. National account activity remained healthy and generally consistent with prior year levels. We also continued to see strong momentum with Alpha Class, our fully electric heat pump platform. Alpha Class orders increased 50% during the quarter and 54% year to date, and customer adoption continues to build.

This platform is an important long-term growth opportunity as customers increasingly focus on electrification, sustainability, and energy efficiency. Strong AAON-branded bookings resulted in a 6% sequential increase in AAON-branded backlog, despite significantly higher production rates. As a result, we remain focused on continuing to drive throughput, work down backlogs, shorten lead times, and deliver for our customers. Turning now to margins. As we have discussed for several quarters, the level of demand we are experiencing has required us to scale the business rapidly. We have expanded our manufacturing footprint, brought new capacity online, invested in equipment and infrastructure, strengthened our supply chain capabilities, and significantly increased talent across operations, engineering, manufacturing, and support functions. These actions have been deliberate. They allow us to better serve customers, convert backlogs faster, capture market share opportunities, and build the operating platform required for the company AAON is becoming.

Importantly, the underlying economics of the business continue to improve. Oklahoma's core operations are performing well. Memphis continues to perform meaningfully ahead of our expectations, and production throughput across the enterprise continues to increase. Consolidated margins remain pressured by the mixed impact of exceptionally strong growth, ramp of activity associated with new capacity, and price-cost timing dynamics. We continue to expect margin improvement through higher facility utilization, productivity gains, sourcing initiatives, improved price-cost realization, and a continued maturation of recently added capacity. The key point here is that we are not simply growing revenue. We are building a stronger operating company with scale, infrastructure, systems, and discipline to support higher revenue, stronger execution, improved margins, greater cash generation, and durable earnings growth over time. We are confident in our ability to continue demonstrating the earnings power of this business as we move through the balance of 2026 and into 2027.

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

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

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