AAON, Inc. (AAON) Earnings Call Transcript

[Presentation]

Good morning. Welcome to AAON's 2023 Investor Day. My name is Joe Mondillo. For those who are not familiar, I'm AAON's Director of Investor Relations. Thank you for all coming today. We really appreciate it. We know Tulsa is not the easiest place to get to, and your time is very valuable. So we really respect that, and we really appreciate it. For those on the webcast that couldn't be here in person, we also appreciate your attention. So really excited for what we have in store for you guys today. Yesterday, I think, was very educational. You really had a chance to see the product, see the facilities, get a chance to see our new exploration center, which is our marketing center, the laboratory and the manufacturing. Today is really all about who AAON is, where we've come from, where we're going and really showcasing our leadership team that's leading the company's strategy. So with that, I'd like to introduce -- actually, sorry, want to just give some information regarding -- in case of emergency, there's some exits on the left and right, just in case. You are all familiar with our safe harbor statement. There are inherent risks to the things we say today or predictions we make. We have no obligation to update or revise our statements today as you're aware. Our agenda will kick it off with our President and CEO, Gary Fields. We will then introduce the business segment leaders of the 3 segments that we have. We'll then have a Q&A session. We'll move to marketing and branding our sales channel strategy and market updates, capacity expansion plans, and then we'll finish with a financial overview by our CFO, Rebecca Thompson. And then we'll finish with one last Q&A. Our executive leadership team, most of them you will be hearing from today. And leading off is Gary Fields, President and CEO of the company. Thank you.

Good morning. I want to kind of go over a little bit of the history of the company real quick to kind of set the foundation for where we're at and what we've done. So first off, AAON has a little over 2.5 million square feet of manufacturing space total. We have just short of 4,000 employees. The company started in 1988 as a spinout from John Zink Company. That's when Norm founded it. And as Joe set the foundation for this conversation, he said we were -- the video actually did, we're trying to bridge the gap between fully custom equipment and semi -- normal commercial equipment that has no customization to it. So this is all done with semi-customization, highly configurable equipment with a lot of flexibility. What this has allowed us to do is to create solutions for a lot of the applications that are demanding such as indoor air quality, demand ventilation, makeup air and things like that, that we've been able to pioneer, applications that are affordable and flexible. So talking about our financial aspects of the company. The cap value is currently just over $5 billion. Our EBITDA margin runs around 22% to 25%. Currently, it's at 25%. Trailing 12-month sales are $972 million, so we're approaching that $1 billion mark. Our 3-year CAGR is 25%. I think the longer-term CAGR was in the 13% range over the last 5 years or so. Return on invested capital is 18%. And then I want to talk about our markets real quick. So we are primarily a North American U.S. market. We have some penetration in Mexico, Canada and a little bit in the Caribbean. That only comprises about 3%. The legacy company, as we call it, primarily manufactures rooftop equipment, commercial and industrial rooftop equipment. The company, the segment in Longview, Texas primarily has indoor air handling units and condensing units. Some of those indoor air handling units are chilled water as opposed to direct expansion refrigeration. And then the acquisition that we made in December of '21 of BasX allowed us to address a much broader vertical market of data centers and clean rooms, and that's a hugely growing aspect of our business. The base business had participated in data centers for many, many years, but in a support manner, probably encompassing 10% to 15% of the HVAC needs of that project. And the acquisition of BasX allowed us to attack the entire project, very, very accretive to the whole overall effort. So from about 2012 through '17, the CAGR for the company was about 6%. And then it began to rise significantly once we got a foundation of new leadership empowered. And it is currently for the last 5 years, 13.8% stretched at over 10 years, it's 11.4%. So that's pretty significant. We have put a lot of things in place to keep that moving along sustainably in this leadership team that you're going to be introduced today. When I came here nearly 7 years ago, most of these people were here. They were very, very talented, yet they had not yet been fully developed as autonomous leaders. And now they have a very strong track record, wonderful accomplishments. Little history. The company started in '88, as I said, along about '92 was when they acquired the Coils Plus business in Longview that became AAON Coil Products. Around '98, we finally exceeded $100 million in revenue. As we kind of march on through there, I think it was about 2012. We finally got to about $300 million in revenue. When I took over in 2016, we were just a little above $300 million. And as we've gone along here, we've introduced not only new products, the acquisition of BasX and things like that, that have empowered us to grow at a much more rapid rate. One of those was in 2020 when I became the CEO, we were able to bring in the entire team. Prior to that, I had everything except finance and accounting, IT and HR. That allowed the whole team to be under one leadership, call it, methodology and brought a lot of collaboration throughout the entire company. Then we have marched right along here, and we've opened up the Norm Asbjornson Innovation Center, which is the most capable laboratory, HVAC laboratory of its type in the world, has the largest acoustic chamber, has the only reverb acoustic chamber that will measure simultaneously airflow and thermal performance. Most acoustic chambers will measure airflow and acoustics, but not thermal performance. This is a very significant thing. This laboratory also has unit size capacity beyond what anyone else currently has. The AHRI Certification Program goes to 63 tons for rooftop units. The logic for that was that no one had testing facilities larger than that. We have also a 100-ton and a 300-ton thermal chamber for testing these units. This means that we have empirical data to support what we say our equipment does as opposed to modeled data that is extrapolated off of that 63-ton limit. So there's 2 core platforms that this company was founded on, semi-customization being primary to that. The way that we went about utilizing computerization to assist this and then the overall manufacturing strategy lends itself very well to the semi customization. I look at, say, the automotive industry, for instance, you can have a plain white pickup truck with rubber floor mats, all the way through a luxury truck with a moon roof and power windows and door locks. And that's the semi customization that the automotive did in there. Yet that truck will only do the one thing. It pulls trailers or hauls loads. Ours, we're able to do many things with many different strategies for end use such as single zone VAV, full VAV, dedicated outside air systems, pressurization systems, temperature and humidity control systems. All of these different operational strategies that are required and all the complex facilities that we serve, medical facilities, laboratories, office buildings, schools, hotels, just a long list of things that each have their own individual application. And we're able to bridge that gap where the standard manufacturers can provide basic heating and cooling, but they do not, in general, control pressure, temperature, humidity all simultaneously. Energy recovery is also something that we pioneered in rooftop units. We had the earliest patented application of combining DX packaged rooftop unit with energy recovery. Now it's become the de facto way of doing things in this energy-conscious world. Our innovation goes all the way back to the beginning. The fact is I worked with Norm Asbjornson when he was at a company before he was at AAON and he was also highly regarded for his innovation with that company. So this has been his history for a very, very long time. He set the foundation under this and it's allowed us to expand on the foundation that he put in place. So innovation allows you to reach out and serve and provide new solutions that other people have not yet even thought about. Some of our notable innovations. In '89, we introduced 200 to 140-ton rooftop units. Well, in that era, most of the commercial rooftop units stopped at around 20 or 30 tons. You had to go to a highly customized unit. It was very, very expensive in order to gain these larger-sized capacities. '97 backwardly inclined fans in small commercial units. Well, again, in the large custom units, this has been used for many years. It had a characteristic that it was more efficient, quieter and had more capability to overcome higher pressures, all while maintaining that higher efficiency. This has never been done in these size units, all the way down to our little 2-ton unit has this style of fan. In 2001, we introduced evaporative condensed units which is a way of combining air cooled and water cooled in order to have the highest efficiency possible in a DX system. This was another one that had only been available in the highly customized offerings at a much, much higher price. So we brought that to a very affordable price and the applications began to expand considerably. In 2002, along this same time frame, the outdoor air requirements per person had been raised understanding that this enhanced indoor air quality, it would mitigate virus as much better if you diluted with more fresh outside air. While this brought in the challenge of controlling temperature and humidity, this had been done with very complex systems in the past, and we brought this to packaged rooftop units by using hot gas reheat that modulated so that we could maintain a very level temperature humidity value. In 2003, we introduced foam panel construction units. Now this doesn't sound like anything significant, but it is very, very significant. I want you to think about the old Styrofoam coolers that you used to keep your Coca-Colas in when you went on a trip and when the Yeti cooler was invented and how much more robust it was. And you remember them saying you could put your bag of ice and your Coca-Colas in there and 3 days later, open it up and they were still in their nice and cold. While this is exactly why we did what we did because we were trying to maintain a higher degree of energy efficiency at that point without losing the work that the unit had done. This has been a foundation for going forward with the most energy-efficient equipment of its type in the whole industry. We introduced digital scroll compressors and some other technologies of modulating the refrigerant flow at this same time. This was a huge improvement in maintaining stable temperatures. When you turn a compressor off and turn a compressor on, they have a minimum time that they can be on and off. This causes temperature swings. So having this modulating capacity compressor technology was just wonderful with regards to stable temperature and humidity in the space. 2015, we introduced low leakage dampers, again, to enhance the energy efficiency so that we can control exactly how much air you wanted in certain aspects of the unit, whether it was outside air coming in, exhaust air going out or return air. These dampers have been highly acclaimed, won lots of awards for their quality and doing what they say they're going to do. But primarily, their efficiency for leakage is many times better than what we had been using prior to that and what any of the competitors currently use. Our most significant recent advancement, our air source heat pumps capable of operating down to very low ambient temperatures. We're currently operating down to 0 degrees with very good efficiency, very good capacity. This is in contrast to most of our competitors. If they even have an air source heat pump available, it usually goes down to around 30 degrees capability at the most. So we've been winning with premium equipment offerings for many, many years. I myself came from the sales channel and understood clearly what it took to win. I understood clearly what solutions we were trying to solve for and was always assistant to AAON in bringing voice of the customer back here so that we knew that we stayed on track with a high-value proposition that would be a great solution for a lot of the recognized problems out there. AAON is recognized as having the lowest total cost of ownership over the whole lifespan of the equipment. When you look at the durability of the cabinetry, when you look at the durability of the components, when you look at things like direct drive fans in all models with variable speed control on those as opposed to having a belt that you have to maintain, a belt that also costs you 3% to 5% efficiency and contributes dirt into your system, much like the brake dust you find on the wheels on your car. AAON'S energy efficiency has been setting the bar for others to follow. AHRI is a third-party watchdog organization that measures your equipment performance to make sure that it meets what you've produced in your literature. In looking at AHRI's public information, there is no size rooftop unit that anyone exceeds AAON'S energy efficiency. And fact is they rarely meet our energy efficiency. In 2023, there was a huge upgrade in energy efficiency requirements. We'll call it equivalent to the miles per gallon in your car, increasing around 25% versus what it was prior to that. AAON had already been producing equipment for many years that was above that level. So we had no additional cost content in order to bring it to that level. We've seen significant cost or price increases from our competitors, and we believe a significant portion of that is related to bringing it up to the 2023 energy standards. So our current portfolio of equipment shown here on the screen. In the top left, that's an indoor compressorized water-cooled air handling unit, it's either an SA or SB model often used in mid- to high-rise office buildings. On the left side is our DBaC Series unit that goes up to about 70 tons across the bottom there. The very bottom unit is RQ unit. It's a 2 to 6-ton unit. It is one of the most admired units, highly regarded units for K-12 schools. To the right of that is our RZ custom unit that goes all the way up to a little over 250 tons air cooled, nearly 300 tons of app condensing. Walking around the clock, their counterclockwise, that's an M2 air handling unit. A significant amount of those are configured as water-source heat pumps customized with energy recovery, with pressurization control, with economizer control. That's an indoor air handling unit that has more flexibility than any other air handling unit in the market in regards to being able to provide economizer operation, ground source heat pump or water source heat pump operation in addition. Above that is an H3 air handler. That's an indoor air handler, direct drive fans, backwardly inclined plenum fans that are very, very efficient. This unit can be configured with hot water, steam, chill water or DX. And right above that is a condensing unit, a CF model condensing unit. And should you want to have a DX split system, those 2 top right corner devices coupled together through field piping. Some of our favorable secular market trends that have really played well for us are decarbonization. We've seen the world shifting its thought process towards electrification. We see electric vehicles being a topic conversation every day. We see certain states saying on a date that they will no longer allow internal combustion engine automobiles to be sold in their state. Well, let's flip over to the building side, these same people are saying, we don't want any natural gas, propane, oil-fired heating medium in your buildings. We want it to be an electrified medium. So when you look at the commercial market, you'll find that the competitors to us have very large centralized systems that are capable of some of these things. But when they come into the midsize market, with packaged rooftop units, for some reason, they are absent of participating significantly in this effort. We find a few competitors have air source heat pumps, but again, they're only capable to about 30 degrees. And there's a huge swath of North America that is below 30 degrees, a good bit of the wintertime. Ours are currently certified for use down to 0 degrees Fahrenheit. We have, in our development laboratory down to minus 20, just awaiting the updated components for the new refrigerant. So decarbonization, electrification are huge secular driving trends. Government regulations. I mentioned 2023, things went up significantly. Well, they're already working on the next round of regulation changes for 2029. And we have people that sit on those committees and they give us feedback as to what that's going to be. Currently, a substantial portion of AAON'S portfolio already meets this new 2029 standard. And all of the other competitors sitting in the room says, "Oh my gosh, we just got to 2023," and they're like hanging on to that rung of the ladder and saying we didn't realize there was more rungs of the ladder to climb. And so they've got quite a little challenge on their hands here, trying to get to this next level for 2029. At the same time, January 1, 2025, we have a need for new refrigerants, as mandated by the government trying to lower the global warming potential of our current refrigerants. So these new refrigerants -- well, this is speaking to the energy efficiency regulations here. Like I said, it led to a lot higher cost of manufacturing for many of our competitors. For us, we were already above that bar, so there was no additional cost content that went into that. We've worked on our pricing strategy through this pandemic, this inflationary time, this regulatory change time. Historically, AAON was a 15%, maybe 20% premium versus the closest alternative. Now they were never apples-to-apples. They were just the closest alternative. And so it was our duty to explain why there was a value to spend 15% to 20% more. While as a result of this higher energy regulation for 2023, that gap has narrowed. We're now seeing a gap that is closer to between 8% and 10%. And then when you put these units side by side like we've done out in our new customer exploration center, then the value of this 8% to 10% difference is easily seen absent of even a technical evaluation. When you do a technical evaluation, it's even more proof in the pudding that our value is the best it's ever been in the history of the company. So the net outcome of this is we're driving market share. If you look at our historical performance over the last 3 to 5 years, you'll see that we've gained significant market share each and every year. There's additional regulations coming along, as I said, with the refrigerant. We have selected R454B as our primary refrigerant for rooftop units to replace 410A. The vast majority of the industry has announced the same refrigerant. It has a very low global warming potential of 467 as opposed to the current refrigerant 410A now has a 2088, and GWP stands for global warming potential. So there's a lot of effort to change this over. One of the primary things is, this new refrigerant that we've all are going to is called an A2L. This modification to the nomenclature, bringing 3 letters into -- 3 digits into it was because this is a mildly flammable refrigerant. Now you have to put an open flame on it in order to keep it burning and it has a very slow burn rate. If you remove the flame, then it will immediately extinguish. So in other words, a spark will not ignite this stuff. So it's not explosive. It's just mildly flammable. What that's done though is required UL to update their safety standards and they have prescribed that we have to have refrigerant leak detection in the unit that will shut the unit down and alarm that there is a leak. So all of this has caused a lot of development in the equipment. And there's a huge effort time-wise bandwidth-wise, in order to do this. And what we've seen from industry peers is that they're fully absorbed and trying to do this. And so they're not so available in their R&D efforts for further innovation, advancing things like a cold climate capable air source heat pump in this configuration. We believe we're going to have that space to ourself for a period of time here. These cold climate capable air source heat pumps, we began producing these to the market in Q4 of '21. And I'll have to say that our utilization of the Norm Asbjornson Innovation Center, again, one of the most capable laboratories in North America, allowed us to provide empirical data and absolute evidence of the success of this strategy. This is not something that we modeled and we're going to use you as a guinea pig and a test to bait on. This is all done right here. We have chambers that can snow 2 inches an hour, rain 8 inches an hour, below 50-mile an hour wind. These units were subjected to all of this kind of ambient terror, if you'll call it that. And they survived it. So you say, how in a laboratory can you make it look like a blizzard? We have that chamber to do that. And it's just a blast to watch it, by the way. But we've gone through this very, very carefully. The units are actually capable of operating much lower than what we've certified them to. We took them to their destruction point, and it's much lower than 0 degrees. So unit is just not going to fall off the roof at 0 degrees or less. ESG has been something that we -- as a result of our innovation and our application strategy have been very, very participant in. The fact is that in commercial buildings, 16% of their total carbon come from the HVAC systems from electricity. 40% of those are from the HVAC systems. So you can see that the HVAC systems contribute substantially to the carbon emissions of a building. Our higher efficiency that we have had in our application strategies have made it such that we have the best ESG footprint of any of the manufacturers that have packaged rooftop equipment. We've been able to attract a lot of new talent in the last few years. Our head count is now up 27% from a year ago. We think that being good stewards of the ESG model has been a good reason for this. We're one of the most desirable places to work. In 2022, AAON was awarded the top manufacturer in the state to work for, and we were awarded in the top 5 of all employers in the state of Oklahoma. I would say that our employment strategy for Missouri, Texas and Oregon is exactly the same. We just have not yet been measured on the same benchmark, but the performance is the same. So we're very consistent across all of those. Our total addressable market is many, many times what we are now. So if you're thinking we've grown a lot and we're getting close to the glass ceiling, that's the furthest thing from the truth. We've probably got the ability to grow a very substantial percentage on a CAGR basis going forward for the next very long time, 5 to 10 years because the total addressable market is somewhere around 10 to 12x greater than our current production rates. We've never been more aligned with the sales channel than we are now. And the sales channel has never been as capable as it is now. That was my heritage. I spent 32 years there. The firm that I was with set the bar for what best practices looked like. As I departed that company after the 32 years, I was engaged as a consultant for AAON to help understand how we established these best practices. As I began to share that, they began to absorb that their improvement was substantial. As I came and took over the company, we were able to push forward with lots of programs, training programs that assisted them even more. The fundamentals are very, very strong for this company. Decarbonization, electrification, as I said earlier, these are topics of conversation in all circles now. We talk about this with automobiles. We talk about this with buildings. This is going to drive a lot of interest in AAON becoming a mainstream manufacturer as opposed to what was formerly perceived as a niche manufacturer. Regulations are favorable to our approach. Our approach is to set the bar as high as possible. Our total cost of ownership is best in class. These cold climate capable heat pumps are driving a lot of this. As I mentioned earlier, the pricing premium is narrowed because now these other people have to provide energy efficiency that's closer to what we were already doing. We have a huge addressable market that we can yet expand into. Our sales channel continues to strengthen. Our investment in marketing is evident by the new building that some of you were visiting yesterday. I think this is probably one of the most contributory tools for sales -- for our sales channel that we could have ever envisioned. We've had a lot of exposure to a lot of attractive sectors such as data centers and semiconductor manufacturing with the acquisition of BasX. What we envisioned there for BasX when we brought them in that the collaboration and the ownership of BasX by AAON would provide, we have achieved already far in excess of what we ever envisioned. This is why our backlog has grown so substantially. If you go back to 2016, it was around $50 million to $60 million. We were growing substantially, pandemic hit and slowed us up for just a moment. And that was really supply chain related, and people not at work for a little while. It took a little while to kind of sort things out. And then boom, here we go and look at that growth in '21 and '22. I mean, is that magnificent or what? We continue to grow. Backlog continues to rise. There will be a time when the backlog will peak out and begin to roll over as a result of increased manufacturing capacity that we're putting in place. We would actually like for the backlog to back down just some to help us with shortening our lead times, not through fewer orders coming in, but through greater production going out the door. With that, I'd like to introduce Stephen Wakefield our Chief Operating Officer.

Thank you. Good morning. My name is Stephen Wakefield. I'm the COO here at AAON. And anybody that knows me knows that I love to talk about our company, something very important to me. My friends at the table last night, very respectfully said, we won't ask you too many questions because you're eating, and I said, bring them on like this. So we had a good time last night. I've been with the company since the late 1990s. And it's been quite the ride. It's been a blood, sweat and tears of fair; definitely blood, definitely sweat, definitely cried. But all in all, it's been a wonderful overall experience. And the reason I'm up here today is to tell you about that. I have a unique perspective on the history of AAON because I've kind of seen it all. So today, we're going to start with an overview of our Oklahoma segment. I want to try to keep this from being boring, but it's important that you know. This is our flagship manufacturing location about 1.5 million square feet. We also have, in addition to that, our NAIC, which Gary eloquently described and I will attempt to as well and also our brand-new Customer Exploration Center. This is where we build our rooftop units. This is kind of the bread and butter of our product lines. And those make up 75% of our sales and about 73% of our gross profit. So this is a bird's eye view of the AAON campus. The blue box in the middle, that was the original facility here in Tulsa. That's the facility we were in when I started here in 1999. And we used about, I'm going to say, 2/3 of that building that you see in the picture today. So over time, we moved across Yukon, which is to the west. And I don't know what color it is, but they're bigger box, the green color, right next door. If you look close, you can see that the roof is patch worked together. That's because we would add to the building and then decide, oh, no, we need more room, and we did it over and over and over for years, so much so that we ate up all of our parking lots and created a parking challenge for a little while. Just to the west of that, the red or orange or brown box is our NAIC. You can see it's very large relative to our manufacturing facility over 100,000 square feet. But maybe most importantly, what I want to show you today is our plans for expansion. The land to the west of the NAIC there at 30 acres, we own that. That is something that we have plans for, for expansion. We don't know exactly what it will be just yet, but we have a multitude of plans on paper that we're working on. In addition to that, very recently, we added 14.9 acres due east of our East building of the original building. So the significance of this is it adds a third access road to our campus. So now we have the original Yukon Avenue. We also have the constructed AAON Avenue, which is just north of the 30 acres. And now we have the addition of Union Avenue. So our facility is becoming a campus. In addition to that, in the northeast corner of this picture, you can see that we've just recently obtained office buildings. These will be for the administrative part of our company, HR and accounting and whatnot. And then in addition to that, we've purchased another manufacturing building that we can use for a multitude of things. The plan today is to increase our vertical integration. We'll talk about that a little bit more, things that make us independent and allow us to control our own destiny. Gary mentioned this already, but these are our flagship products that are built in Tulsa, the RQ series and RN series, they range from 2 to 70 tons and their all-foam injected construction, which we're going to talk about at depth. My new friend back here at Houston asked me a great question about that last night. So I got to test my -- pretest my presentation. It seemed like it worked. Innovation is the key, is the foundation of how we think here at AAON. We think laterally, we think outside of the box, we think in a very challenging way. So we have a mission and vision for this, to provide premier HVAC solutions that bring long-term value to our customers and owners. By leading the HVAC industry and innovation, we create tomorrow's solutions today. So it's very much our mindset. We don't go to the drawing board with preconceived ideas here at AAON. We invest in the future. We invest in something new. Matt mentioned in the video earlier that we almost intend to fail. We know that if we push the limits we're going to fail, we're going to learn from that and ultimately learn how to correct that failure. We invested in a world-class NAIC. This was a very large investment. We also invest in the best R&D staff in the industry. Our R&D investments consistently make up over 3% of sales, which is well ahead of our industry average. Let's talk for a minute about some specs on our NAIC. Gary has already mentioned some of this, but this way, it's in writing. It's over 100,000 square feet, uses up to 7.25 megawatts, has 12 chambers. It's been in operation since 2019. It now runs 7 days a week, 12 hours a day, has 43 test technicians in it, 30 engineers, and these people are basically very capable people that have the tools they need to be at their best. That's the environment in our lab. It also has the largest sound chamber in HVAC industry. We can test like Gary mentioned, a 300-ton unit and do a sound test on it at the same time, so we can get sound data off of the unit in operation. And then finally, the coolest part about it is we have an environmental chamber where we can create all kinds of weather. We'll have a rep or sales reps will come here, and we'll send them in there in their coats and let them experience a blizzard, while it's summertime here in Tulsa, it's 100 degrees outside. Let's talk about our engineering team for a little bit. It's important that you know that AAON'S philosophy when it comes to our workforce, whatever department they're in, is that we very much believe in connecting people's passion, their passion, their skill set to their responsibility. This creates an experience that's unparalleled for a person working at their desk. Then what we do is we give them great tools and we turn them loose. We empower them to use them. This creates leading capabilities in our departments. It creates an attraction for great people to come on to be part of that. Our team is very experienced in creating highly customizable, but yet cost-effective equipment with our standard offerings. This is part of our secret sauce. We're going to talk today about AAON secret sauce. A portion of that is the fact that we can make such a diverse product very effectively. Our engineering department also is very flexible. I think you'll find this is uncommon. Our Director of Engineering is sitting in this room, and he is one of the most brilliant people you'll ever meet, but yet he's also very practical. He also works very well with his peers. He can go into our Director of Operations office and help her solve a problem. We don't have an ivory tower in our engineering department. I think this is a very important fact and a very unique thing about our company. As Gary mentioned, we stay ahead of regulations around here. We don't adjust our products to match regulations. They kind of adjust them to match our products. We want to be ahead on that. We have industry-leading performance when it comes to our products. It is not easy to mimic. Automated fabrication is AAON secret sauce. We mastered semi-customization, which is required these days to meet the new demands. We did this 25 years ago. This was some of the very innovative thinking that happened around here. We decided that we were going to design for manufacture and then make the end product be its very best rather than design for the end product and then figure out how to manufacture it. This is a very key difference, a very big part of AAON secret sauce. And I will tell you, it's considerably more difficult to do. I can tell you that unequivocally because I was a part of that, I was a design engine here for 15 years and led that effort for 10. So I personally experienced that. I don't use my right hand for my mouse control at my computer anymore because I did so much design work with it that I kind of ruined it. I've learned how to use my left hand to use my computer. Now I don't do any work anymore, but back then, for sure. So we have this fully automated process that is extraordinarily difficult to mimic. This was one of the great questions that Houston asked me last night here in our audience. So I hope that I've got a good answer for you here because this, I think, is really important that you understand. What does it take to mimic what AAON does? Well, I broke this down into 3 gauntlets, if you will. The first one is you have to make the investment in the particular kind of machinery, which is massive. You have to have an engineering team, an operations team, a programming team that understands how to use that equipment, which I will tell you it personally took me 5 years to master that of working on it every day, all day long, from 6:30 a.m. to 5:30 p.m., I did that for years, all day long design and parts. There's a gentleman that works here that has been in charge of our program for, I don't know, 30 years now. And he'd have this big grin on his face and walk down the hall with all these papers to show me what I did wrong what we couldn't do. And we had a situation where we had that litmus test, that filter and he would bring it back, and I would redo what I did, I wouldn't say or we wouldn't say as a company, you got to figure out how to make this. So we reversed the system, if you will. And because we were a smaller company back then, and we had hundreds and hundreds of parts rather than thousands of thousands, we were able to force that to happen. We had a law in this company that we were going to design parts for manufacturer even though most of us barely even knew how these machines work. They're very complicated machines. They're not something that you can learn how to use in a few weeks. So as I explained to my friend last night, you can take a very simple part, flat part. You can put bins that or what we call positive on 2 sides of it, and then you can attempt to put bins on the other 2 sides of a plain square part that are negative and you cannot make that part. That's the difference between a very cumbersome, labor-intensive fabrication of a part versus a very smooth untouched by human hand fabrication of a part. So when you attempt to mimic what AAON has, you have to go down to every single part, document it and program it and understand how to make it on this machine, okay? That's gauntlet #1. This is something that if you had a large product line would take, I don't know, dozens and dozens of capable engineers and other support staff that actually understood how to do it years to do. Gauntlet #2. Let's say that you figure out all that and you spend all that money and you take all that time. Gauntlet #2 is you can make beautiful parts on these machines, beautiful parts that are difficult to assemble. It is likely that if you use this method, you're going to increase your part count. Now in manufacturing, when you say we're going to increase our part count, it's almost synonymous with, we're going to increase our cost. Gauntlet #2 is designing parts that come through gauntlet #1, they're actually efficient to assemble. If you don't save labor rate gauntlet #2, you've already lost, so you have to have parts that are easy to put together. When we redesigned our equipment to use this method, when we redesigned it again to use this method plus used foam injected panels, we had to get through these gauntlets all over again and we had to make sure that our labor rate actually went down at gauntlet #2. Otherwise, it would have cost too much. It would have put us out of business. We actually I'm going to say, screwed it up on one of our lines and did not pass gauntlet #2, and it was a very painful summer. And I can tell you I experienced that firsthand. I probably aged a couple of years that summer. Gauntlet #3. Let's see you get through those first 2. Gauntlet #3 is, you made beautiful parts on this machine. You figured out how to efficiently put them together, but the final product is a piece of junk. It is very easy to get the first 2 things right, but the third one wrong. Third gauntlet is the parts have to make a great assembly. They have to make a great product. They have to last 20 years. They have to do what they're supposed to do. So if you think about what it takes for an engineer to design every single part to go through step 1, step 2 and step 3 versus an engineer deciding how to make a part that goes directly to step 3, then you understand the difference and how difficult it is to mimic what we do. Let's talk about management, especially in a post-pandemic situation. It comes down to 3 things, starting with people. People are our most important asset at AAON. We make sure that they know that. It's a big reason why people want to come work here and why our head count has increased and why we have such a great culture here, it starts with people. Then we're going to talk about parts and infrastructure. When it comes to people, since the end of the first quarter in 2021, the Oklahoma segment has added over 750 employees or 42%. I can tell you since this presentation was written, which just a few days, it's already more than that. We also decided that we were going to make a tremendous focus on people by hiring staff that did that very thing. And our new VP of Administration is evidence to that. He's sitting right here in the room. We like him most of the time. He's done a really great job, basically like putting rocket fuel in your tank when it comes to what we were doing here in Tulsa. So a lot of people ask me, how do we add so many people in such a short period of time and not disrupt efficiency? Well, I'm not going to give away too many secrets, but I'm going to tell you this. We focus on what people need here. And when you understand what people need and you provide people what they need, you get a whole different person than if you don't do that. Then you throw in a tremendous amount of opportunity, which everyone can feel and then you find that great people attract more great people. It's a system that has worked very well for us that I think is very unique. Next, let's talk about parts. Parts has been a very difficult challenge over the last few years, as you can imagine. There's still constant challenges. They're more minor than they were a year -- even a year ago, but they're still there. I will tell you that we're dealing with it. We have a system to deal with it. It's working. We have an independent rep council, as most of you know, that has, I should say, an independent sales rep force that has a rep council and these are very capable people that represent our congress of our rep force, and we work directly with them on major issues. And because we have a great relationship, we have been able to navigate together the biggest challenges rather than just shutting down. We don't just shut down. We don't panic. We find a way to navigate. And by being able to work with this rep congress, if you will, it has made it all that much easier. I also tell you that our vendors are treated like business partners. We don't call and yell and scream and threaten our vendors. We treat them very well. We understand what they're dealing with. And what we found is a lot of them have come to us for help. You might be surprised if I told you all the details of some of the visits we've had with our vendors. In many cases, our team has helped them solve their problems. So when that happens, you can imagine who they prefer to work with and who they want the parts to go to. We've also been able to hold our inventory through historic supply chain disruptions. At times, it even went up, the volume of it. This was a major accomplishment to be able to continue to grow and take care of our customers through a pandemic. And then as I mentioned before, our engineering resources have the mentality to help the company navigate such issues. They are not sitting on an ivory tower and too good to help redesign a simple product for a part that's available so that we can continue to move forward. Infrastructure and capacity. Well, you saw the Tulsa campus overview earlier. You saw that we are not intending to stop growing. We've made big investments to be able to continue to grow. But that's not happening just in Tulsa. And you'll hear more about this from my colleagues here in a little bit, but we're also expanding in Longview, in Kansas City and in Redmond. And not only are we just increasing our space, but we're also improving our space. Those are 2 different things. We have teams of people focused on improving how we use our space. These teams of people have increased the efficiency in usable space in the Tulsa campus alone by 30% or 40% over the last 3 years, an astronomical number but something that is absolutely factual. These automated fabrication machines that I referred to earlier, we have plans to add 8 more machines here in Tulsa alone in 2023. Several of them are already here and online. We also are expanding our fan operation. As you know, our friends at Redmond, BasX, manufactured fans when we partnered up with them. And we took that as a motivation to do that ourselves. And we have begun manufacturing fans here in Tulsa. By the end of the second quarter, we will probably be nearly 100% capacity here in Tulsa. And of course, we have a mindset to vertically integrate. We have vertically integrated when it comes to coils and controls and fans and many other things. This is a mindset that we have. Like I said before, the more independent we are, the better. And of course, we have a continuous improvement mindset in this company. We are not one to sit on our laurels. In fact, sometimes I wonder, is it ever going to be enough? And then I quickly answer that with, no, it's not going to ever be enough. The day I retire, that might be it. We don't have the mindset to be that's good enough around here. And that's a wonderful thing. Okay. Now let's talk about something that's near and dear to my heart that I experienced firsthand, probably have a unique perspective on relative to anyone that works at AAON because of my tenure here and the fact that Norm and I had such a great relationship and when Gary came along, the same thing happened very quickly, and I was able to kind of be a middleman in a lot of cases. So let's talk about the transition of leadership that's happened to AAON over the last few. Many of you know, I figured it out at dinner last night about our founder and how capable he was and really maybe the most talented individual contributor I've ever seen. But because of that and because of his passion for the company, many, many things ran through him. We used to tease that he approved our toilet paper purchases. And because of that and because of his talent, the company had tremendous success. But what happened is he still is just one man. And we hit a ceiling with that, and he certainly recognized that, which is why he brought in Gary. And to go from that mindset, a person that was very passionate and loved our company to his soul, he would still be here every day probably if he could. For him to hand over that much responsibility and that love for what he did, like he did was an exceptional thing. A lot of people didn't think he could do it but he did do it. And I will tell you that it was very rough. You can even see in our numbers that it was rough there for a few years. The formability, the strength of our CEO, Gary Fields, to go through what he did there and lead us through that, something I will never forget. A team was born out of that. That is like something I have never seen in my 24-year career. We have an exceptional gifted team here in Tulsa and in Longview and in Redmond and in Kansas City today. In a very short period of time, this has turned. I believe from your perspective, you can see that. We went from an exceptionally good idea and way of doing things to an exponential function of that in a very short period of time, and I witnessed it firsthand. I can tell you we are no longer limited by a few people or by some gut feelings. We have a wide swath of talent that cares about each other. They work together like a well-oiled machine. They're not perfect, but they are absolutely exceptional as a whole. And if any one person was to be gone, you wouldn't notice it. So to me, this is one of the most amazing things I've ever seen in my career for this to happen in such a short period of time. The company has never been better managed. We have never had the more perfect fit people in the right spots throughout the company. We have an executive leadership team now that is empowered. We have a senior leadership team that is empowered. We have a management team under that that's empowered. We have a supervisor team under that's empowered and you can fill it throughout the company. I gave Matt a plant tour yesterday, and I took him out to our new unified tool crib. This is a -- one of the many improvements that we've made to how we manufacture in the last few years. And the gentleman that runs that is a former marine and a former Assistant plant manager in our plant. This is not a person that walks around smiling. He's all business, okay? He's a formidable person. But his skill set matches managing tools much better than it does managing people. So we moved him into this role. How often was he smiling yesterday? The whole time? Didn't stop smiling the whole time. Usually, he had been all business and talking to a President of a subsidiary, all business, but he just had a grin on his face all time. And I told Matt, that's the evidence that cannot be tricked. There's no acting there that basically solidifies what's happened here at AAON. The culture at AAON is it one of teamwork and collaboration where people care about each other and they work to make things better for everyone. And it's just a great joy to be a part of it. And my last slide, Joe, wanted me to put this in here as a proof in the pudding slide. You've already kind of seen this, but here's my proof in the pudding slide. So I hope you see this and recognize that this is a legitimate thing. This is something we're very passionate about here at AAON. And I'm just thrilled to be able to get up and tell you this story. It's just a really wonderful thing for me. At this point, I'm going to turn this over to Doug Wichman, President of our Coil Product Facility in Longview, Texas.

Thank you, Stephen. He's kind of a tough act to follow, but I'll try here. So my name is Doug Wichmann. I've been with AAON for 10 years. I actually cut my roots here on the Tulsa location and it was about 1.5 years ago. I was asked to kind of take over the Longview operation. So moved down there and transitioned pretty seamlessly. Talking little bit about AAON coil products. We referenced that as ACP internally quite often. So I may say that phrase quite a bit, that's what I mean. We were acquired in the -- actually, the assets were acquired in '91. We moved into a facility -- original facility down there in '92. It's in Longview, Texas, approximately 500,000 square feet. There's 675, 680 employees down there. Just under 500 of that is dedicated to unit production. As Gary and Stephen kind of covered, down in Texas, we produced the condensers and air handlers, self-contained units, modular units as well as our coils. We produced a majority of the coils for our Tulsa and our Longview operation in Longview, Texas. We represented about 12% of our top line revenue and kind of share that same percentage for our margins. So a little bit of history down there, purchased the assets in '91, and '92 we moved into the original facility. In '99, we did a significant addition to the original facility down there to actually initiate unit production in Texas. It was about a 20-year gap before we actually did any major expansions, but we did break ground on a new facility in 2019. We occupied that facility in 2021 which essentially doubled our manufacturing capacity at that time. To date, we -- in 2023, we're actually the fifth largest employer in Longview, Texas. We also started a collaboration with our BasX partner this year as well, and we'll talk a little bit about that in a couple more slides. So here's a campus image to the right there, that nice shiny white building that is the new facility. We began producing out of it in 2021. The building on the left, much like our original Tulsa operation. You can see it's kind of patchwork together just to kind of fit more things in there, right? Overall, that is 500,000 square feet. If you look at the new facility, to the right of that new facility, kind of keep that in mind, I will be talking about a further expansion that will be added on to that new facility and kind of what that entails. So when we talk about ACP, we really have 2 business operations in one there. We have the coil shop side, and we do have the unit production side. Even with the new facility in play, we are still operating -- we're still building unit production on both sides of the street. We only produce coils in the original facility. Our unit side, we are a feature string driven product much like Tulsa. There is -- we do our commercial split systems for those that think of a single-family residential home, you have your outside unit, your inside unit very much like that just on a larger scale. These go up to 70 tons. With self-contained units. We talked about the SASB and the M2 product lines. Those are more of a marginal configuration. You'll see those more on an interior mechanical room in large high-rise buildings. We kind of had a history in Longview of kind of utilizing our capacity and our geographical location for advantage for the overall organization. I mentioned a little bit about this BasX collaboration that I'll talk to here in a couple of slides, but we've got a history of doing that down there. If we have capacity or resources or maybe long -- Tulsa has the needs, We have a very flexible team down there that can actually adapt to that. Coil shop, just an example of some of the vertical integration, it's mostly internal demand driven. Because we produce semi-custom units, we have to produce semi-custom coils that go along with that. So when we talk about coal manufacturing and the automation process that go into that, there are a lot of things that can be automated, but there's also a lot of things that cannot be automated. So it is very heavily manually labor process on some aspects of that. But this is also where a lot of our capital expenditures for Longview have gone in the past 18 months to expand that capacity. New leadership investments and kind of a culture change. On that kind of time line slide, we saw that large gap between '99 and 2019. I will feel -- I will say that the Longview operation kind of felt siloed, I would say, in that time period. Very siloed, very operationally on their own until Gary's leadership actually kind of changed that transition into more of a collaborative effort. We look at the leadership style that we have today versus even 3 years ago. There's a lot of multi-location management structure in place. So we don't have separate engineering departments. We don't have separate maintenance departments even. It is all kind of rolled up into one umbrella and the communication has far exceeded our expectations on those. This allows us to cross-pollinate our teams. It allows us to garner best practices when we're looking at whether it's design or process or even on the purchasing aspect for procurement. We've been able to kind of capitalize on the unique resources from all of our locations and now we're getting definitely organ in the mix of this as well with their BasX sites. So on culture, that's just kind of the what has formed out of this. I reside in Longview, Texas. A lot of the ELT resides here in Tulsa, but we don't skip a beat when we're around each other, devising, developing and laying out the future because we do collaborate a lot on a frequent basis. We are multisite minded now. This was not the case maybe a few years ago. We were more segmented and didn't think of the overall impact and the overall resource that we actually had at play and how we could utilize that and leverage that to the best of our abilities. Talking about collaboration. So one of the, I guess, the funnest things that we kind of experienced this year is we right out the gate noticed some synergies between Longview, Texas, and our BasX partner in Oregon. That kind of allowed us to leverage the BasX sales and engineering applications team with the Longview capacity. I know we disclosed in Q2 of the '22 earnings, but there was a $16-plus million initial order for a single customer for a product type that master really well with the production methodology for Longview. We have since started building those units, this single customer. This was a single phase out of many phases, and there are still ongoing talks with many customers and similar projects for similar product types. So this is not something that's going to be going away quickly. It allowed -- it provided us with a geographical win. You got to imagine shipping from Oregon to the East Coast. East Coast is a lot more expensive than it would be from Longview, Texas. So right there is a win and also kind of lent the way -- led the way into us sharing best practices on the build standards and design and process when you're looking at a full custom manufacturer, bringing into a semi-customer manufacturer, there are differences. And our teams definitely learned how to elevate our expectations and just the overall product. Another great example of what we do to partner to meet our consumer needs. A little bit about the financial performance for Longview segment. I mentioned the future is bring, the time is now. It is exciting times down here. It's exciting times. Also it's exciting times at all of our campuses really -- I mentioned to keep that new facility in mind. That's one of the things I'm talking about is we are expanding that facility, essentially doubling that facility. This was an expectation that we had when we originally built that facility knowing that we're going to double it sometime down the road. At that time, it was a 5- to 7-year time period that has accelerated drastically because of the synergies we've recognized right away. Our current footprint utilization is at about 60%. Once we get to operational steady state with our collaboration product, we expect that to be in the 85% range. Hence, the need for a new building down there. Now this new facility will be a 40% increase of square footage. But that's not the only win of that. It's going to expand our manufacturing square footage, but it will also allow us to bring all of unit production under one roof. That's going to be an immediate efficiency gain not only on the management side, but also because it's going to be a purpose-built facility. Remember how cobbled up that original facility is. A lot of the lines had to work around, whether it's columns or just infrastructure and the way in this new facility, that was not the case. We'll centralize unit production, but also allow for coil production growth in the original facility. So it's all square footage that's going to be kind of traded, but it's also going to allow us to up our capacity levels. This new facility will also allow us to capitalize on future collaborative efforts whether it is from the Tulsa product line or from the BasX collaboration. It just gives us a kind of a clean slate space to actually produce more out of that location. And with that, I'm going to hand it over to Matt Tobolski, the President of BasX.

All right. Well, thanks, Doug. I met a lot of you in the past as well as last night. But Matt Tobolski, President and Co-Founder of BasX, kind of I keep laughing thinking, oh, it's been about a year since we've been part of the AAON family. And I was realizing last night, it's actually about 1.5 years. So time certainly flies when you're having fun. So BasX is headquartered out in Redmond, Oregon. So for those of you that don't know, it's about a 3-hour drive kind of southeast of Portland on the east side of the Cascades. We call it, God's country. It's a high desert, and it's one of the most beautiful areas to live. The photo we're seeing here is the South building. So right prior to the acquisition by AAON, we had just wrapped up completion of a brand new 75,000 square foot purpose-built manufacturing facility. So high bay, overhead cranes, efficient material flow, you kind of can see in the right corner there, the actual original building that we operated out of was actually an old Walmart building that we're able to pick up at a steel kind of in the downturn of the market back in 2013. But one of the huge changes in bringing in that new building was purpose-built manufacturing that really drove manufacturing efficiency and allowed us to produce probably the far greater velocity at a far more efficient manner, which really helped drive bottom line performance. So BasX as a manufacturer, I would like to put my finetics up there, not bass X, not base X, but BasX. The whole company's name was founded on a principle of getting back to the basics. And really, it was about looking at the industry, looking at how we deliver products and solutions to our customers and really being a people-focused organization, recognizing that taking care of our team, our customers and their trade partners is really what allows us to win and be successful as an organization. And that's really where the name came from. It was about getting back to that mindset and really delivering great quality with the fantastic performance to our overall end users. One of the differentiators we talk about from a BasX perspective versus a legacy AAON perspective is the transition from a semi-custom to a true-custom manufacturer. And so when we look at -- and we've heard both Steve and Doug talk about feature string-based product specification, it's basically an environment where there's huge flexibility within the AAON product to fine-tune a product in a given chassis, as Gary called it, for an application. When we talk about BasX, one of the key differentiators is being a true kind of clean sheet custom manufacturer. So we're able to basically take a product demand, product specification and requirement and develop a solution for that customer kind of around an overall platform-minded construction manner. So there's a huge amount of automation that we have in there, huge amount of standards that allow us to do that in an efficient, cost-effective manner, but obviously comes with a price premium as compared to a semi-customs product. But the whole logic there is driving long-term value. So when we deal with customers in the semiconductor and the clean room markets that are operating 24/7, 365 days a year, saving 5 percentage points in efficiency equates to real dollars to the overall investment. And so the value proposition provided by a true custom-tuned solution, something we can really help sell to a customer and show the value it provides and show the cost premium is made up in a very short term. And so you'll see a lot of the stuff BasX does is driven around owner operators, so the semiconductor and data center markets where customers tend to develop and own the property, that value proposition is very important and really rings true from an investment strategy perspective. The facility in Redmond, it has been growing kind of throughout the process. But the whole concept here is about building not just a facility, but building a team and building a process that allows us to be successful in delivering solutions to our customers at scale. So within Redmond, we've got between the factories and some lease properties off-site, we have just over 260,000 square feet footprint within the Central Oregon region, and just over 500 team members within that location. The team is very well mature from a standpoint of a lot of our senior leadership members that are in the BasX team have been in the customary handling market for 20, 30 years. So a very seasoned team, a very focused team on delivering innovative solutions to our customers as well as developing and fine-tuning the automation process that can flow information through our manufacturing process. One of the first big investments we made as BasX about 5 years ago in driving automation was very much in line with AAON, which was the investment in Salvagnini sheet-metal fabrication equipment, again, allowing us to utilize soft tooled equipment, but minimize the amount of human intervention and really drive efficiency in the manufacturing and fabrication process. One of the key examples that we talked about after we got the equipment online is we had a specific product that was very large. It was a data center product that was a single piece construction that was roughly 14 feet wide, 55 feet long, 13 feet tall. And that piece of equipment before investing in Salvagnini equipment required about 400 labor hours in our metal fabrication department to basically manually produce all those parts. As we invested and implemented the new equipment focused on automation and really driving manufacturing efficiency, it took that same project down to under 80 hours of actual human intervention time in processing all those parts. So really, it wasn't just about the cost savings perspective, but it was really about driving manufacturing velocity. So reducing the amount of time involved and really driving the overall throughput of parts allowed us to manufacture that many more units and drive that much more revenue through the production facility. As we look at who BasX is, I was really focused on we are a solutions provider. And our goal is to be a trusted partner with our customers. So one of the things that we really focus on is not trying to sell a product to an end user, but sell a solution to an end user. We want to understand what the overall requirements are, understand the pain points and develop and present a solution that provides the best value to our customers in the long term from energy efficiency, durability and life cycle perspective of the equipment. Our team has been doing this in various fashions for many, many decades. And through BasX, the last 10 years, consistently proving our ability to deliver innovative solutions, cost-effective solutions and high-value, long-term value solutions to our customers. Innovation is something that is heavily focused or a heavy focus within the BasX family. It's one of those huge things that align with the AAON mindset. We are an innovation-driven manufacturer. We want to provide technology that advances the needle within the HVAC market. And for the past 30, 40 years, our team has consistently moved that needle in the HVAC market whether through fan technology, whether through innovative ways to provide free cooling for data center applications, consistently looking at pushing that needle, pushing the boundaries and developing solutions that push us beyond what our competition can do. One of the huge other aspects of BasX that is really unique to our company is decades-long relationships in very key markets. So when we think about data centers, as we think about the clean room markets and especially let's talk semiconductor for a second. Semiconductor over the decades has been a marketplace that sees huge investment and then a huge offshore investment in a lot of the relationships and talent within the U.S. market weren't as strong as they were as a lot of the investment was made outside the U.S. Our team has been heavily involved in that marketplace since the 70s. And those decades-long relationships uniquely position BasX as the reshoring of semiconductor manufacturing occurs to position us with the owners, the engineers and the contractors to leverage and maximize the opportunity for us to be a huge impact within that market as the investment is brought back to the U.S. We also focus very heavily on vertically integrating our products. And as we talk through supply chain disruption over the last 2.5, 3 years, that vertical integration has been one of the areas that has allowed us to excel in the midst of one of the most chaotic supply chain markets we've ever experienced. I'll talk a little bit about it once I get to the data center slides, but we are one of the few manufacturers in the HVAC market that manufacture our own fans. And it may sound trivial to a certain extent, it seems like a relatively small piece inside the overall cabinet. But that's the lifeblood of the HVAC solution. That is the device that is providing air and moving air through that system. And without it, you can't sell air handing units. So as supply chain became chaotic and a lot of our competition had moved to motor technology and fan technology that was highly disrupted in the European market, lead times went out exorbitantly due to that constraint. While our engineering team being driven with the DNA of true innovation and customization quickly pivoted to alternative technology from motor technology reapplied our fan in that technology, it was able to provide and continue providing solutions to our customers and data center market throughout all that chaos. And that was a huge ability for us to gain leverage and market share within the data center market during that dynamic time. But as the acquisition has gone through and we have the new relationship with AAON, one of the biggest aspects that we've been able to leverage is scale. And we talk about the scale in leveraging Doug and the AAON Coil Products facility down in Longview, Texas. But it's not just using that manufacturing footprint. It's talking about leveraging the engineering teams, engineering talent, collaborating across all of our locations to continue moving the needle, looking at this not from a -- here's a little window in BasX, but what is the overall opportunity to leverage the capacity and the talent of this organization to push this company further, continue acquiring market share, continue innovating the product and in this 1.5 years, there has been substantial movement in the overall innovation of the product, the manufacturing philosophy, and leveraging of capacity and scale from a sales perspective. So the 2 prime markets that we operate in, the data center market and the clean room market represent the lion's share of what we do as BasX. As we look at the data center market and where we are today as BasX as a manufacturer, we continue to be a small piece of a very large market. And so when we talk about the opportunity for us to grow, we have huge headroom from a market share acquisition perspective that positions us well to continue growing within the data center market and leveraging capacity from a manufacturing perspective within the Longview facility. But beyond that, it's a marketplace that continues to grow. So the demand for data center development continues to be strong and robust, certainly has a little bit of volatility in the short term, just with some of the market dynamics that are happening, but the long-term outlook and investment strategy for data centers continues to be a very strong end market with continued growth. And so we have a couple of benefits where we've got a strong growth market with a very high ceiling for us. And so we're able to grow substantially greater than what the overall marketplace is growing. And we've shown that year after year from our overall revenue growth in data center sales. I talked a little bit about the supply chain risk, but the more we vertically integrate our process, the better position we are to manage disruption in chaos within the supply chain market as well as drive innovation. So as we look at alternate motor technologies and additional ways to drive efficiencies by manufacturing our own fans, provide us ways to leverage new technology faster than a lot of our competition can. This marketplace is also driven with long-term contracts. And so as we look at some of what the supply chain dynamics have done, pre-COVID, everyone loved the idea of just in time manufacturing and just in time purchasing. Obviously, the pandemic has really shifted that mindset. And so a lot of the development contracts we have with large data center operators and owners, are focused on multiyear contracts looking out with very good level of visibility in the production demand well into the future, which positions us well to be able to make smart, strong investments to support that growth into the future. From a product standpoint, we offer a pretty broad range of products within the data center market. When we look at the overall product portfolio, you can kind of break it down into indoor and outdoor units, the vast majority of what we provide and sort of where the market has shifted, is really going into split systems where we have indoor air handling products, providing key rejection of the data -- the server heat and then transferring that to some outdoor unit to then project that into the atmosphere. We have very strong, very competitive products that we're leveraging manufacturing across multiple plants to be able to support within those indoor air handling products. So whether fan coil products, which essentially is a product where you have chilled water air handling units that essentially surround the perimeter of the overall data hall and essentially are providing cooled air, pulling the hot air back through a return and continuing a closed-loop cycle within the data center, but at very large scale. So fan coil walls are a huge part of our product portfolio, direct evaporative cooling, which is using a similar logic, but instead of evaporating water to provide heat rejection within the space, downflow craw units, similar concept, just different configuration. But we also do provide outdoor units. So we provide units such as indirect free cooling chillers. We provide those coupled with air handlers. So we have a lot of customers we use where we're providing a packaged system which is a high-efficiency air cooled free cooling chiller system that provides complete cooling to the overall facility and then a variety of other customized solutions that we provide within that market. But the whole goal in our manufacturing process is to be able to provide these customized solutions at scale at a very cost competitive point. And we're very aggressive in the marketplace to be able to -- our pricing is very aggressive to be able to provide that customization in a cost-competitive fashion at a very large scale projects. The secondary -- the second prime market that we live in is the cleaner market. And obviously, right now, there's a huge investment to reshore the manufacturing of semiconductors within the United States. And our team is very well positioned to provide not just air handling products, but also air filtration, air delivery solutions to that industry as that market grows. Our team has been in this marketplace for decades. So very strong relationships as well as very good track record within the overall BasX organization. When we look at the velocity of growth within the semiconductor world, we have seen very good growth within the BasX product portfolio in the last 5 years in growing that overall segment within our business. One of the unique things about semiconductor manufacturing and providing solutions to semiconductor manufacturing is there's very limited competition. There's a very deep moat around that industry from an overall manufacturing perspective because the specifications and the requirements while similar, are very different than what a traditional commercial air handling unit is required to provide. So the finish and manufacturing standards required to provide units to a semiconductor plant are very unique to that industry. And a lot of our competition -- or a lot of the other industry competition doesn't quite understand the level of detail required to build those units, which provides very limited competition in that marketplace as we look at that reshoring investment coming to the U.S. So from an overall product portfolio in a clean room inside, in the lower left there is the most obvious, we provide air handling units to the clean room market. And that is makeup air units providing outside air into the data -- into the clean space as well as recirc air handling units to the clean space. But we also provide plenum and grid in modular clean room systems. And so we talk about plenum and grid, we look at the ceiling and we have distributed air distribution in this building. When we go to a lot of semiconductor manufacturing, that same grid may be providing 100% covered, highly filtered air to a clean space to ensure there is very solid contaminant-free air coming into that space. And so we manufacture that entire air delivery solution as well. And then we take that same technology and shift that into a smaller scale and provide that same level in high fidelity filtration to operating rooms across the country. And so we have a partnership with one of the largest medical device manufacturers in the world providing that style of solution to operating rooms across the country on a contract manufacturing basis. That is the same technology at a very different scale, but at a large volume. So I mentioned at the beginning of the slide -- our presentation, but it's been 1.5 years since the acquisition occurred. And as we look at things we talked about and everything sounds great during a negotiation and a discussion of a sale, but we all talk about revenue synergies and cost synergies and pontificate about what they may be. But we've been extremely pleased to actually witness the synergies come to fruition. From a revenue perspective, leveraging AAON's scale and growing orders with our existing customer base. One of the things we talked about is before the sale, we were under $100 million in revenue. And if we look at what we are as a combined organization with the Q1 results annualized, we're over a $1 billion organization. That provides a much different conversation when you talk to some of our customers in terms of scale and providing overall volume of orders to us just given the overall balance sheet kind of strength within that organization. So that's allowed us to kind of continue to accelerate order growth within our existing customer base. We've been able to cross-sell products where we'd be able to sell legacy AAON products coupled with BasX products to operators on variety of data center and semiconductor projects. Obviously, the manufacturing capacity, utilizing in-place capacity with the Longview plan has been a huge boost for us to be able to capitalize on the opportunity within the data center market as well as we're using and collaborating with certain sales channel partners within the AAON sales channel to further accelerate sales opportunities within the semiconductor and data center markets. So there's a very select few of our sales channel partners that have extremely strong relationships with certain owners and customers that we've been able to capitalize on and continue to accelerate the overall order interest within that marketplace. But from a cost synergy standpoint, there's -- a lot of work has been accomplished, there's a lot of work to be accomplished within leveraging the overall cost efficiencies from a manufacturing and a buying power perspective between AAON and BasX. We're going to continue looking at how do we capitalize the investments we make and the capacity that we have across the overall fleet to basically maximize the utilization and drive demand to all of our plants within the BasX product. And by doing that, help to improve the overall overhead leverage and really take advantage of previous investments. And then we are spending a lot of time collaborating and utilizing and capitalizing on the human capital across the organization. So whether it's the overall kind of corporate services aspects of the business down to the engineering aspects, we're spending a lot of time with our teams collaborating and utilizing the talent across the overall organization to our overall benefit. So kind of in summary, we've had extremely strong demand for BasX, extremely strong growth at BasX. 5-year CAGR has been 47%. In a year-over-year perspective, we've had 143% backlog growth in the last 12 calendar months with a 55% growth in our team and continued investment to support that growth well into the future. So when we look at the overall opportunity that sits in front of us with BasX, especially coupled with the AAON team. The future is extremely bright from not only a growth and opportunity perspective, but in a profitability perspective and driving overall bottom line dollars and leveraging the investment that has been made across the fleet to really meet the needs of our customers. So with that, I'm going to take a short break, and then we're going to come back with the first session of question and answers. [Break]

[Operator Instructions] So we have a couple on webcast. We'll start with those. You talked a lot about the transition that the company has been undergoing over the last several years. Have we fully realized the benefits of that? Or can we expect more benefits going forward?

That's a perfect question. We've seen a lot of it. But I don't want to misconstrue this, there's a lot yet to be gained. The team has gained a lot of confidence. They had a lot of ability. It was the need for recognition of their ability to make decisions, be held accountable to decisions in a very meaningful way such that it was not corrosive to what we were trying to do. We've been able to build this collaboration as various leaders have already talked about today very successfully, but we're growing the company fast enough now that we have good coverage of everything we're doing today. Where I want to see us continue to grow is build our bench deeper and deeper so that we don't become bandwidth limited by any individual in the leadership team, myself included. One of the things I've tried to do is leverage what I was doing through empowering all these that are sitting around me and that are involved in the executive leadership team going down into senior leadership team. So it's continuous evolution. Anyone that ever says, well, yes, it's as good as it can be. Well, I think those are foolish people. I think there's always room for improvement no matter how good you are.

Okay. Thank you, Gary. Second question. You stated that upcoming regulations are going to consume a lot of R&D and engineering resources over the next few years, limiting a significant amount of innovation across the industry. How does this affect AAON versus others when it comes to the innovation?

Well, I can speak directly to AAON'S efforts there. We develop -- we have a product development road map that we maintain for our accountability to what we're doing, how we're going to do it and when we're going to do it. One of the reasons that we discontinued the WHWB line, for instance, was, there were a bit over 14,000 hours of laboratory time required to convert that to the new refrigerant required in January of 2025. When we looked at the income potential, both current and future for that product line, we realized that, that was not a great investment of our R&D time, was not a great investment for the company overall. And we've been able to repurpose that into things that are much, much more beneficial. So just removing the need for that 14,000 hours opened up a channel for us to rededicate that time for things such as the cold climate capable air source heat pump, which currently is capable of 0-degree ambient, but we've already developed strategies to go to minus 20 degrees, which when we reach the minus 20-degree point, we will have captured all of North America the significant number of hours. The number of hours in the year that are below minus 20 anywhere in North America are very, very minimal, and they're pretty much unpopulated areas.

[Operator Instructions] Another question online. Your current product portfolio has realized tremendous growth in recent years. Are there opportunities to further diversify the portfolio? And would you expect that being through organic investments? Or would it require M&A?

We maintain a 5-year strategic plan, including the outlook on product portfolio development. When we acquired BasX, that was very strategic and that we had aspirations to be in the commercial and industrial custom air handling unit market. It was a small portion of what their current business was but the knowledge base was there to grow that substantially. So we recognized there were certain developments primarily to do with software in order to get from a user interface all the way to the plant floor with software as opposed to stopping in the middle with sales application engineers or other kind of engineers time required. So that is an organic growth opportunity that we're working on at this moment. Software is being developed. It's moving along actually ahead of schedule. We're looking at production facilities to make sure that we can service what we are able to book. We want to make sure that we're absolutely prepared there. So that's one of the product portfolio areas that we've been very open about our intent to move into. There are things within the existing portfolio that will continue to be refined. Yet these things might not be visualized as an absolute expansion. As far as number of boxes that we produce discretely or uniquely, there'll be more like innovations within the box. So that is very much a strategy that we have planned out with both tactical and strategic plan documentation. M&A is something that I would have said prior to BasX that we didn't have a strong appetite for. BasX was a company that had a lot of -- I had a lot of knowledge of the people there from my prior activities as my other company had a lot of confidence in them. So it was a real easy thing. It's kind of like marrying someone that you went to high school with. So it was quite easy in that regard. You didn't have to go out and go to the other high school and try and go shopping for somebody. It was just a wonderful thing. And that acquisition has allowed us to create a playbook for how we do this, the integration, all the back-office systems that were required to be integrated. We've created a documentation of all of this. We continue to work on further documentation. And so I would say that another opportunity might not be as daunting as this one was. And what kept that one from being overly daunting, was this familiarity aspect that I mentioned. So the next time we might be able to go outside our comfort zone a little bit where we don't know the company to that degree and look at something. But there would be some gates that we have to go through with any M&A. Cultural aspects are primary to that sales channel integration next gate it has to go through, manufacturing strategy next gate it has to go through. So you're not going to find us going out and saying, oh, well, we are great at sheet metal fabrication, maybe we ought to build washing machines. I mean, they are just sheet metal and they do have motors and pumps in them. Well, that would make zero sense for us. If we were to pursue another acquisition, it would be one of those, oh, yes, absolutely, that makes sense for AAON because of these gates that I just described, we would go through.

Peter, I think you have a question?

Yes. This is Peter Psallidas from Rockefeller. I just wonder, you guys, obviously, we saw so much around the capacity expansion plans, which is great. I'm just wondering how you guys balance that -- this multiyear outlook that necessitates that with what we would -- what it would look like should we enter a period of more material macro softness that actually impacts you guys even though we really haven't seen it yet, would you take the foot off the gas a little bit? Would you maybe opt in? I know you've sort of seized on price for a little bit right now. Would you rather kind of go that route and just sort of maintain current capacity? Just wondering how you guys think about being nimble with the macro spending?

So what we look at is what is the projected growth rate of the company, keeping in mind that it takes 3 years roughly from the day you say I need more production facility footprint than what I have today. It takes 3 years to make that decision, flesh out the plans, build it and put it into production. So we have to keep a minimum of a 3-year outlook in front of us what we think our projections are. Now 3-year outlooks are much easier to digest than 5- and 10-year outlooks. I think 1 year, you absolutely know what's going to happen; 2 years, you've got a very good idea of what's going to happen; 3 years, maybe not quite as good an idea, but you're looking at some macroeconomic data that's a little longer forecasting and saying, what do we think is going to happen in 3 years? Going out beyond that is a little harder. So the answer to that question is, we'll continue to monitor what our production expansion capability is, knowing that we've got to plan for additional facilities when we reach that ceiling that says with forecast and projections for the next 3 years, we're going to reach the maximum production rate. Right now, we have in excess of 3 years in Tulsa available to us is direct result of 2 things primarily. One is the group we call Space Force. They continue to amaze me with their ability to find more efficient ways to add more capacity to this existing footprint. Each and every time that I think that they have fleshed it out as far as they can go and actually declare this is as far as we can go. It doesn't seem like much time expires and they tell me, hey, we just found a way to put more production capacity in this footprint. So I'm very proud of the group's Space Force and what they've been able to accomplish. They've now recovered over 40% of this facility here in Tulsa for beneficial manufacturing from the day they started. That's considerable when you're talking about 1.5 million square feet. That's a lot of space that they found that we didn't need to build a new building because of that. The next thing was with proper business analysis of product portfolio and understanding what is sensible for us to build, what generates best revenue, best profits, most consistent growth opportunity, not just on today, but what are we looking for 3 to 5 years out, what are we doing with these products. So this is one of the reasons that we discontinued the WHWV. It did not have good alignment with our goals going forward, it was utilizing space that was better utilized for the other product lines. That probably in itself, that one decision gained us in the range of 1 to 1.5 years of additional growth opportunity in the rest of the portfolio. So that's how we look at things. We're not wanting to build buildings just to have more buildings. We want to make sure that we've got a 3-year reasonable growth rate, reasonably certain growth rate captured in our production ability before we pull the trigger. So let's go to Longview, for instance. We went years and years and years without building a building. Our lead times were way too long. Our ability to continue to grow and supply Tulsa with coils was being compromised. So we jumped in. We built a new building. Two years ago, back in February is when it went into production. We envisioned that it had a 5- to 7-year life expectancy before we had to expand again. We built the building with the intent that we could double it. There was 3 permanent walls, 1 temporary wall. Well, long and behold, along comes this opportunity to buy BasX. And as Matt described in his talk a while ago, we were able to easily integrate some of that space in Longview for a BasX product. Well, they used up about 2 years of our expansion with that opportunity, which is a great thing. What it showed us was we didn't have 3 years left of growth opportunity in that facility as a result of what we added for him. That's why we pulled the trigger and are starting the new building. Okay?

One more question on the webcast. If anyone has any other questions in the room, please just raise your hand, and then we'll take a break. This question is actually for Stephen. It seems -- you stated that the supply chain issues definitely still persist. If and when supply chain returns to pre-pandemic normal, how significant would this be to productivity and margins?

What a great question. I'd really like to know who came up with that question. That's an answer that I absolutely don't have, but I'm very excited about. I'm very optimistic about. I can tell you that our race car runs over speed bumps constantly. And I really believe in my heart that we don't really know what this factory will do until those speed bumps are gone. Even though we have years of metrics and a lot of talent running it, the idea that our shop would be fed at a rate where they were never hungry tells me that the number is probably going to surprise me. But I would -- if you need a guess, I would say there's at least 10% or 15% efficiency to be gained without such problems.

I want to add to that just a little for Stephen. I watch numbers on a daily basis, they give me production numbers. On the days that the production numbers don't meet expectations, I don't even need to call and ask. I know we had a supply chain disruption. The days that we don't have a supply chain disruption, I start seeing what the rhythm is. When they get 8 or 10 days in a row of no supply chain disruption that 10% to 15% efficiency you're talking about is absolutely there empirical evidence of it. So I just wanted to give you some confirmation. He's not just swagging this out of thin air that we have empirical data that I observed that supports exactly what he said.

Okay. Great. We're going to take a break right now, about 10 minutes -- oh, I'm sorry. I guess we have another question from the audience.

Bob Mitchell from Conestoga. Maybe building on that question about the supply chain. How confident given the growth that you see in the supply chain keep up with you? And how much change have you seen in your partner supplier base as a result of that growth that you've seen over the last several years, have you had to qualify a lot more, et cetera?

Well, we're very confident that we can continue to grow and the supply chain problems can be handled, if you will. And this is very much relative to our process of dealing with it. There are certain higher-risk items that we have built a buffer tank on that gives me a higher level of confidence of that. But our relationship with our vendors is the main reason why I'm answering that way, which answers your second question. We had -- have always had a very good relationship with our vendors because frankly, we pay very quickly and we've treated them well. But during this time where they've struggled, where they've had challenges like they've never seen before and then they saw us having success with it and then our response to them was, what's -- it was not what's the matter with you, we can do it, why can't you? It was let us help you with this. And it was a very interesting situation. For several months, they did not believe us. And we tried to get into their factories, we tried to get them into our factories, and they just didn't want to get yelled at. But at the end of the day, we broke through that barrier and we began helping them. And many, many, many of them saw immediate impact to their situation. So I would say that bond, that business partnership is exceptionally good. And because of the challenges of that, it's that much better. So I feel very confident that, that ceiling, there's still a considerable amount of head space there. Does that answer your question?

I'd love for you to real quickly tell the story about the factory that burned down and what we did for them so that they get a better flavor for this. Not everyone in this room understands that story. And this would be one example how you've gone about helping vendors be great suppliers for us.

So we have a particular vendor that's a very unique vendor. They make a part that is -- there's not a lot of other options in the industry. So that means that a lot of companies like AAON are very much dependent on this company, and it's a great company, but they were dealing with the same challenges everyone else was. And then all of a sudden, 75% of their factory burned down, just like that. 75% of their factory is gone, they're in dire straits. We reach out to them to help them. They didn't believe us for a minute. We aggressively reached out to help them. And long story short, we found a way to help them produce their product, which we are doing today in our factory, and we are now a vendor of theirs. So we supply them with parts that they could not make so they could supply us with parts that they couldn't make so that we didn't have to not have parts. It was like an immediate solution. We never had a single shortage with that company, even though they were in such dire straits and they're extraordinarily grateful for this, obviously, because we kept them in business, frankly, at the end of the day.

This is Jean Ramirez from D.A. Davidson. So I have a 2-part question. Looking at long-term targets at the Longview facility, could you provide some color on how much revenue can come from BasX? And looking at AAON as a whole, what is the totality revenue for this business, what is it capable of? And are we looking at past $3 billion, $5 billion or $7 billion, you provided 3-year targets or 5-year targets, so?

Well, let's start with the first one there. The BasX opportunity built in Longview. What do we think on that, Matt?

Yes, I'd say, the opportunity is pretty immense. The key and as we develop the additional space and work with our engineering teams to basically identify additional products in our data center portfolio, the headroom is far greater than what the revenue is today in Longview. There's substantial growth for headroom many times what we're doing today because one of the great things about these products is when we talk about what the scale of these projects are, data centers continue getting larger in the overall scale of construction. And so the project size that then gets realized from an HVAC manufacturing perspective is very substantial. And it's single designs, high repetition. That is the best opportunity to leverage the talents within the Longview facility. And so when we talk about a $16.2 million order, that's a phase of a project. And there's many projects like that. And so when you kind of start pulling that together and what the marketplace looks like, the ability to leverage that manufacturing capacity with additional product lines that we can leverage that manufacturing skills with, we can be manyfold what we're doing today from Longview.

Speaking to the overall company. My group says, this first billion has been pretty hard to get to. It's taken us 35 years to get there. But boss, we think that next billion is going to be much easier to get to. There's a lot of things put in place that are scalable. We're constantly looking at the production capability, as I mentioned earlier and how we think of that. We're also looking at the investment required from a human capital standpoint, the development. We have extraordinary leadership development programs here within AAON, we interface with entities such as Oklahoma State University, Spears School of Business to help us develop some of these programs. So you can put physical infrastructure in place and if you don't have human talent to operate that structure, you can't grow. This is something that we have very intentional plans that we've been executing on. You've seen a lot of evidence of that sitting right here next to me, as well as others that you'll speak to. So we're very aggressive with that. Our ability to grow headcount on the plant floor as well is proven. There are no other manufacturing companies like us that have been able to grow headcount in this pandemic era the way we have. I can't imagine how nice it's going to be when we get into normal times. I mean just think of how we've grown in some of the most demanding times that give us normal times, kind of like you asked about supply chain, like Stephen answered, we've developed programs that are wonderful with being able to scale the personnel. Sales channel is the next thing that is very, very important to us to be able to continue to grow because we don't directly sell anything other than part of BasX portfolio to primarily clean room and chip manufacturing and that sort of thing. So we're highly dependent on the independent sales channel. Well, that was a role that I spent many years of my career in and have great deal of understanding of that and have established a team here. Andrew Edmondson right here, bringing him aboard understands the sales channel development as well as I do. So we've got a great team of leaders within AAON to help the sales channel to continue to develop. Our expectations are clearly communicated to them that if you're not growing, we're not growing, you must be growing. And how do we help you do that? So we've put in training programs. This room that all of you are sitting in here. We hold a 1-week training class that goes on for 6 months. It's one week a month -- one week each month for 6 months called Masters of HVAC. We've graduated over 500 sales channel partners through that training program. I was speaking to our technical training leader this morning, and he says he graduates over 500 service technicians per year currently, but he's working on a plan to increase that to $800 per year. So being able to scale all aspects of the business, you have to sell it, you have to produce it, you have to service it so that it is meeting everyone's expectations and operations. If you don't have all pieces of that puzzle prepared to grow together, then you cannot grow. That's why it's been very difficult to get alignment to get this first billion behind us. Once we got all of this infrastructure in place and understood what it took to get to that, then it becomes much more scalable. So I don't know what the ultimate number is, but I know when I look at just the legacy rooftop business has the ability -- we are -- last year, we were $550 million in packaged rooftop units in many billion dollar, what was it, $6 billion addressable market. There's 11x right there. For us to get up in a 25%, 30% market share in packaged rooftops is very, very achievable. Then when you look at all the other growth opportunities. Indoor air handling units. Our current total addressable market of indoor handling units is a larger exponential number than package rooftop units. This is one of the driving factors for why we're investing more in Longview and why we continue to look at how to invest for indoor air handling units. Data centers, clean rooms, oh my goodness, there's just so much opportunity out there. I don't know where this thing is going. I know that we have the team in place. We have the strategy in place to grow at a very, very strong level, stronger than historic. If you look at the long-term past, I think that our compounded annual growth rate in actual volume will continue to strengthen as we go forward. And I think it's very, very sustainable.

Okay. We'll have more time for questions and answers later this morning. We're going to take a quick 10-minute break, and then we'll get back to it. [Break]