Image source: The Motley Fool.

Date

Monday, Aug. 11, 2025, at 9 a.m. ET

Call participants

  • Chief Executive Officer and President — Matt Tobolski
  • Chief Financial Officer and Treasurer — Rebecca Thompson
  • Vice President, Investor Relations — Joseph Mondillo

Need a quote from a Motley Fool analyst? Email [email protected]

Risks

  • CEO Tobolski stated, "our second quarter results ... fall short of our expectations," citing an ERP implementation that "impacted our broader operations as Tulsa procures the majority of its coils from Longview," which contributed to a slower-than-expected production recovery.
  • CFO Thompson reported, "Net sales (GAAP) in fiscal Q2 2025 declined year over year by $2 million or 0.6% to $311.6 million," with AAON(AAON -10.46%) branded sales falling 20.9% year over year due to supply chain and ERP disruption, leading to a gross margin (GAAP) of 26.6%, down 950 basis points, and a non-GAAP adjusted EPS down 64.5%.
  • Management revised full-year 2025 guidance lower, now expecting "full-year sales growth in the low teens at a gross margin of 28% to 29%," due to a greater-than-anticipated ERP impact.
  • Year to date 2025, operating cash flow shifted to a use of $31 million from an inflow of $127.9 million in the comparable period a year ago, primarily driven by increased working capital, higher capital expenditures, and $30 million in share buybacks in the first half of 2025.

Takeaways

  • Net sales-- Net sales in the quarter declined year over year by 0.6% to $311.6 million as AAON branded sales fell by 20.9%, partially offset by Basics branded sales increasing 90% year over year.
  • Gross margin-- 26.6%, down 950 basis points, primarily driven by reduced AAON branded volumes and unfavorable production mix.
  • Non-GAAP adjusted EBITDA margin-- Non-GAAP adjusted EBITDA was 14.9%, down 1,120 basis points compared to the prior year.
  • Non-GAAP adjusted EPS-- Non-GAAP adjusted EPS was $0.22, a 64.5% drop from the prior year.
  • ERP implementation impact-- Longview system launch and simultaneous external supplier disruptions reduced sales by $35 million (11.1%) and gross profit by $20 million.
  • Segment: AAON Oklahoma-- Sales declined 18% for the AAON Oklahoma segment, with production efficiency in July 2025 remaining six percent below pre-Q4 2024 levels; gross margin contracted 970 basis points.
  • Segment: AAON Coil Products-- Sales grew $27.1 million (86.4%), driven by a $40.1 million Basics product increase, while AAON branded product sales declined $13 million; segment gross margin contracted by 1,990 basis points.
  • Segment: Basics-- Sales grew 20.4%, and gross margin contracted 60 basis points year over year; gross margin increased sequentially for the second straight quarter.
  • Backlog-- Adjusted backlog increased 72% compared to a year ago; AAON brand backlog rose 93% year over year and 22% sequentially from March at the end of fiscal Q2 2025 (period ended June 30, 2025).
  • Data center-- Basics branded data center sales rose 127% in the quarter and 269% year to date through fiscal Q2 2025, with liquid cooling equipment accounting for approximately 40% of total Basics branded data center sales year to date.
  • National accounts-- AAON brand national account orders surged 163% year over year; approximately 35% of total AAON branded orders came from national accounts in the first half of 2025, up from about 20% in the first half of 2024.
  • Alpha class product-- Sales increased 8%, and bookings increased approximately 61%.
  • Gross margin outlook-- Management expects price increases (three percent in January, six percent tariff in March) to benefit sales and margin beginning in fiscal Q3 2025, with "more meaningful impact" in fiscal Q4 2025.
  • Capital expenditures-- Management reiterated fiscal 2025 capital expenditures guidance of $220 million. Capital expenditures increased 18.7% year to date, reaching $89.6 million through June 30, 2025.
  • Memphis facility-- Incurred $3 million in costs with minimal revenue during fiscal Q2 2025, but is expected to turn accretive in 2026.

Summary

The earnings call outlined a significant operational setback stemming from the April ERP system rollout in Longview, compounding coil supply chain issues and resulting in a material contraction in both revenue and profitability across AAON's core brands in fiscal Q2 2025. The ERP disruption and related supply interruptions resulted in $35 million lower sales and $20 million lost gross profit, directly pressuring margins and prompting management to lower its full-year sales and profitability outlook. Despite these challenges, underpinned by new data center wins, rapid product mix shifts, and expanded customer reach through national accounts, management anticipates sequential production and margin recovery in the second half of 2025, supported by catch-up of previously lagging price increases and the ramp-up of the Memphis facility, while cautioning that ERP-related inefficiencies will continue to weigh on results short-term.

  • CEO Tobolski projected double-digit margin improvement in 2026, targeting a long-term gross margin of 32%-35%, contingent on subsequent ERP rollouts.
  • The partnership with Applied Digital resulted in a significant order in fiscal Q2 2025 and positions Basics for multi-year growth in the AI data center vertical.
  • Working capital investments will remain elevated through mid-fiscal Q3 as inventory is built up in anticipation of rising production at Memphis and to support major data center projects.
  • Management confirmed that price increases and tariff surcharges are now reflected in backlog and will materially lift margins in the AAON brand through the remainder of 2025.

Industry glossary

  • ERP (Enterprise Resource Planning): Integrated software platform used to manage a company’s core business processes, including manufacturing, supply chain, and inventory.
  • ACP (AAON Coil Products): Segment responsible for coil manufacturing and, as referenced, a key site affected by ERP rollout with both AAON and Basics products.
  • Alpha class product: AAON’s high-performance heat pump platform designed for efficiency and advanced applications.
  • National accounts: Large multi-site or national customers targeted with specialized sales strategies and solutions.

Full Conference Call Transcript

Joseph Mondillo: Thank you, and good morning, everyone. The press release announcing our second quarter financial results was issued earlier this morning and can be found on our corporate website, aaon.com. The call today is accompanied by a presentation that you can also find on our website, as well as on the listen-only webcast. We begin with our customary forward-looking statement. During the call, any statement presented dealing with information that is not historical is considered forward-looking and made pursuant to the safe harbor provisions of the Securities Reform Act of 1995, the Securities Act of 1933, and the Securities and Exchange Act of 1934, each as amended.

As such, it is subject to the occurrence of many events outside of AAON's control that could cause AAON's results to differ materially from those anticipated. You are all aware of the inherent difficulties, risks, and uncertainties in making predictive statements. Our press release and Form 10-Q that we filed this morning detail some of the important risk factors that may cause our actual results to differ from those in our predictions. Please note that we do not have a duty to update our forward-looking statements. Our press release and portions of today's call use non-GAAP financial measures, as defined in Regulation G. You can find the related reconciliations to GAAP measures in our press release and presentation.

Joining me on today's call is Matt Tobolski, CEO and President, and Rebecca Thompson, CFO and Treasurer. Matt will start off with some opening remarks. Rebecca will walk through the quarterly results, and Matt will then finish with our outlook for the rest of the year and some closing remarks. With that, I will turn the call over to Matt.

Matt Tobolski: Thanks, Joe, and good morning. Starting on Slide three, our second quarter results that we reported this morning fall short of our expectations and do not reflect the high standard we set for ourselves as an organization. We remain committed to providing transparency to our investors. As previously shared during our Investor Day in June, we've experienced challenges related to our ERP implementation. In this update, we want to provide a comprehensive view of where things stand today, the key factors that contributed to the recent underperformance, and most importantly, how we are moving forward. We are committed to addressing this directly and taking the necessary steps to restore your trust.

I want to assure you that our confidence in the strength of our strategy remains unwavering. While we are navigating some near-term challenges, we firmly believe that the actions we are taking today significantly strengthen the company for the long term. We do not want that bigger picture to be lost. But given the challenges we faced, we will start with providing some incremental detail on what went wrong. Please turn to Slide four. I would like to start by giving some context to the recent events.

Over the past few years, and especially following our acquisition of Basics in 2021, it became increasingly clear that our existing business systems required a significant upgrade to support our growing scale and complexity. On April 1, we went live with our new ERP system at our first site in Longview. We always anticipated some slowdown in production, but we saw a more prolonged impact on AAON branded equipment in coils production. The slowdown ultimately impacted our broader operations as Tulsa procures the majority of its coils from Longview. We had a contingency plan in place, but unfortunately, both of our primary external coil suppliers were simultaneously undergoing their own ERP upgrades.

This unexpected overlap significantly constrained Tulsa's ability to source coils in a timely manner, compounding the challenges we faced. The end result was that at Tulsa, while production improved month to month from April to July, the ramp was slower than expected. At Longview, production of AAON branded equipment was significantly impacted early in the quarter as teams adapted to the new system. However, as production and supporting functions gained experience and familiarity, we saw steady improvement throughout the remainder of the quarter. Now turn to Slide five. This slide illustrates how recent production rates of AAON branded equipment have trended compared to normalized levels, which we benchmarked against the first nine months of 2024.

This KPI measures the consolidated production of AAON branded equipment across both the AAON Oklahoma and AAON Coil Products segments and measures levels of efficiency. We've overlaid the total company gross margin on the same timeline, and as you'll see, there is a strong correlation between the production efficiency metric and the gross margin performance. The biggest takeaway here is that after bottoming out in April, the total production consistently improved month to month throughout the quarter. And while it's not shown here, we continue to see improvement through July. Also, it was 6% below that benchmark pace in July, and while Longview still has some ground to make up, improvements began to accelerate starting in June.

Looking ahead, we expect production levels at both our Tulsa and Longview facilities to continue to improve from July levels. As production stabilizes and scales, we also anticipate a corresponding improvement in gross margins. Said another way, when we hit our production metrics, we deliver our corresponding gross margin targets. Please turn to Slide six. Here, you can see our total backlog of AAON branded equipment, which are manufactured across both our Tulsa and Longview facilities. Bookings in Q2 and year to date remain strong. This, combined with the improving production trends, supports my earlier point regarding our expectation of a strong recovery in the second half of the year.

While we entered the third quarter with production levels below our initial expectations, we remain confident in a solid upward trajectory and anticipate strong growth in AAON branded production over the remainder of the year. I'd also like to point out that our backlog is favorably priced relative to input costs. Almost all of our production in Q2 was associated with orders received prior to our January 1, 3% price increase and a 6% tariff surcharge that was put in place in March. Directionally, this will begin contributing positively to both sales and margin in the third quarter, with a more meaningful impact anticipated in the fourth quarter. Please turn to Slide seven.

I want to take a moment to give you some more color on our ERP upgrade, both in terms of what we are looking to achieve and how we see the rollout mapping from here. Given the size and the growing complexity of our organization, including expanded manufacturing operations, it has become evident that continuing to scale at the growth rates we target will require more sophisticated integrated systems. After years of planning, development, and preparation, we went live with the new ERP system at our Longview facility on April 1. Our ERP rollout strategy was very intentional.

To limit disruption and manage risk, we intentionally adopted a phased rollout approach, implementing the system one location at a time and not moving on to the next site until the prior location is operating smoothly and meeting our performance expectations. We made the decision to begin the rollout in our Longview facility because it produces both AAON branded and Basics branded equipment, as well as manufactures coils, a critical component not only used at Longview but also at other sites in the production of finished products. This approach allowed us to fully vet the ERP solution across our entire product portfolio, helping to reduce risk and minimize disruptions during future site implementations.

Beyond product mix, when considering our organizational structure, where shared services support multiple functions across all sites, starting with Longview enables these teams to become proficient with the new ERP solution before we proceed with additional site rollouts. This ensures that by the time we transition to Redmond, which produces only Basics branded equipment, or to our largest site, Tulsa, which primarily manufactures AAON branded products, our shared services teams will be fully up to speed and well-equipped to support a smoother and more efficient go-live at these locations. We've also gained valuable insights from the Longview go-live that will help us to ensure a smoother, more efficient transition for production teams at other sites.

We brought team members from our other sites to Longview to observe best practices firsthand, and we're conducting additional training at those locations to ensure they're well-prepared for their own transitions. I want to remind everyone that while this transition is creating some near-term challenges, we remain confident that once fully implemented, the new system will deliver significant operational and economic benefits across the organization. We anticipate full implementation will be complete by year-end 2026.

And while it's too early to discuss the outlook for 2026, factoring in subsequent ERP rollouts, particularly in the quarter when we go live in Tulsa, we expect to achieve double-digit year-over-year growth in margin improvement for the year, trending towards our long-term target of 32% to 35%. Now please turn to Slide eight. While it's important to clearly understand the challenges we faced this quarter, we must also keep sight of the strong underlying fundamentals that continue to drive our business forward. With that in mind, here are some of the positives that we've achieved in the second quarter.

Joseph Mondillo: First, the Basics brand continued to demonstrate strength within the data center market in Q2. Basics branded data center sales were up 127% in Q2, and 269% year to date. Second, our liquid cooling solutions continue to gain in the rapidly evolving data center market, as evidenced by incremental orders we secured during the quarter. Year to date, liquid cooling equipment accounted for approximately 40% of total Basics branded data center sales, highlighting its increasing significance within our product portfolio. Third, during the quarter, Basics announced a strategic partnership with Applied Digital, under which it will supply thermal management solutions for their AI factory, including custom-designed free cooling chillers for their data centers.

This partnership resulted in a significant order, further reinforcing Basics' leadership in advanced cooling solutions. Fourth, our national account strategy within the AAON brand is gaining meaningful traction. National accounts orders grew year over year by 163% in Q2, and they're up 90% year to date, reflecting the effectiveness of our targeted approach, deeper customer engagement, and the strong value proposition of our equipment, which uniquely aligns with the needs of these customers. In the first half of the year, national accounts made up approximately 35% of total AAON branded orders, up from approximately 20% a year ago. And finally, the AAON branded Alpha class heat pump business continues to disrupt the market with its high-performance offering.

Alpha class sales grew 8% in Q2, while bookings surged approximately 61% during the same period, highlighting strong momentum and growing market adoption. I will now turn it over to Rebecca, who will walk through the financials in more detail.

Rebecca Thompson: Thank you, Matt. Please turn to Slide nine. Net sales in the quarter declined year over year by $2 million or 0.6% to $311.6 million. The modest overall decline was driven by a 20.9% decline in AAON branded sales, which was nearly fully offset by a 90% increase in Basics branded sales. The decline in AAON branded sales was driven by the impact of lingering supply chain disruptions in early April and coil supply shortages at the end of the quarter due to our ERP implementation. The gross margin was 26.6%, down 950 basis points. The contraction of margin was largely due to lower production volume of AAON branded equipment sales at the AAON Oklahoma and AAON Coil Products segments.

Our new Memphis facility incurred $3 million in costs during the quarter with minimal sales to offset this cost to the AAON Oklahoma segment. Non-GAAP adjusted EBITDA was 14.9%, down 1120 basis points, and non-GAAP adjusted EPS was $0.22, down 64.5% from the previous year. Also noteworthy, we hosted a national sales meeting in April that incurred costs of approximately $1.6 million. While we did not flag this as a one-time event, the last national sales meeting we hosted was in 2021. We also have elevated depreciation and amortization, as well as technology consulting fees, creating higher SG&A as a result of our ERP implementation. Please turn to Slide 10.

On this slide, we bridge the second quarter sales and gross margin performance to the same quarter last year, highlighting the primary drivers of the year-over-year change. We estimate the Longview ERP implementation and supply chain disruptions in early April impacted total sales by approximately $35 million or 11.1%. Together, these two issues impacted gross profit by approximately $20 million. Also worth noting, pricing had a minimal impact on overall sales and gross profit for the quarter. Through Q2, we have recognized only a small portion of the 3% price increase implemented on January 1 and almost none of the 6% tariff surcharge introduced in March. Please turn to Slide 11.

Looking at the segment financials and starting with AAON Oklahoma, net sales in the segment declined 18%. This decline was driven by lingering supply chain disruptions related to the refrigerant transition at the beginning of the quarter, as well as coil supply shortages towards the end of the quarter due to our ERP implementation at the Longview, Texas facility, which slowed production of coils for our Tulsa plant. Despite the year-over-year decline, production improved consistently month to month throughout the quarter, a trend that continued through July. Production efficiency in July was 6% below pre-Q4 2024 levels. Lower production volumes were the primary factor in the gross margin contracting 970 basis points.

Also contributing to the segment's contraction of gross margin, the Memphis plant incurred costs of $3 million. Along with improving production rates, AAON Oklahoma entered August with a strong backlog. Please turn to Slide 12. AAON Coil Products sales grew $27.1 million or 86.4%, primarily driven by growth in Basics branded products of $40.1 million for a large liquid cooling project. AAON branded products declined $13 million due to disruptions caused by the change in ERP system. The ERP implementation significantly impacted both production volumes and efficiencies of AAON branded equipment, serving as the primary driver of the 1990 basis point contraction in segment gross margin. Since April, production of AAON branded equipment at the Longview facility has improved significantly.

Using the average production rate over the first nine months of 2024 as a benchmark, production of AAON branded equipment in April was down approximately 50%. At the end of July, we were down 37%. For Basics branded production at this segment, the impact of the ERP implementation was considerably less, largely because of the uniformity of units within the orders. Thus, production performed relatively well, and the backlog remained strong. Please turn to Slide 13. Sales at the Basics segment grew 20.4% due to the continued demand for the data center solutions. Gross margin contracted 60 basis points from a year ago due primarily to higher indirect costs for warehouse personnel, partially offset by lower material costs.

Gross margin increased sequentially for the second consecutive quarter, reflecting continued operational improvements since we initiated targeted efforts late last year. Please turn to Slide 14. Cash, cash equivalents, and restricted cash balances totaled $1.3 million on June 30, 2025, and debt at the end of the quarter was $317.3 million. Our leverage ratio was 1.4. Year to date, cash flow used in operations was $31 million compared to cash flow provided by operations of $127.9 million in the comparable period a year ago. Year to date, cash flow from operations largely reflects increased investments in working capital. Capital expenditures through the first half of the year, including expenditures related to software development, increased 18.7% to $89.6 million.

We had net borrowings of debt of $162.1 million over this period, largely to finance the investments in working capital, capital expenditures, and $30 million in open market stock buybacks that we executed in the first quarter.

Matt Tobolski: Overall, our financial position remains strong.

Rebecca Thompson: This gives us the flexibility and allows us to continue to focus on investments that will drive growth and generate attractive returns. For 2025, we continue to anticipate capital expenditures will be $220 million. I will now turn the call over to Matt.

Matt Tobolski: Thank you, Rebecca. Up until now, I have intentionally placed extra emphasis on the quarter and the challenges we faced, particularly around the ERP rollout, because it's important that you fully understand what happened. That said, what matters most is where we go from here. Starting on Slide 15, as shown here, our adjusted backlog remains strong, up 72% compared to a year ago. At this stage, the Basics brand is the primary growth engine of the company, fueled by exceptionally strong demand from the data center market and the unique custom design solutions that we provide our customers.

We are now producing Basics branded products at all of our major facilities, including our newest site in Memphis, which we purchased just eight months ago. Aside from effectively managing the ERP rollout, bringing this facility fully online is our top operational priority. By year-end, this facility will significantly expand the capacity of Basics branded manufacturing by nearly doubling its square footage. At that point, we'll be well-positioned operationally to fully capitalize on the robust demand for the data center market. While we've seen strong growth in Basics branded production thus far, our full potential remains constrained by current capacity limitations, a challenge we are actively working to overcome.

The Longview facility, represented by our AAON Coil Products segment, is equally as important to our growth strategy with the Basics brand. At Longview, we are currently manufacturing a uniquely designed liquid cooling product for a hyperscaler. We've been steadily ramping production of this product throughout the first half of the year, positioning our manufacturing operations for a multiyear increase in volume. Since being awarded the initial order late last year, we received additional follow-on orders and are actively collaborating with this customer to develop new designs for their next-generation data centers. Overall, the outlook of our Basics brand remains very strong.

We produce the most sophisticated, customized thermal management equipment in what is a rapidly evolving and technically demanding industry. Looking ahead to the second half of the year, we anticipate Basics branded sales will increase year over year by approximately 40%. Our AAON brand is equally strong and critical to our long-term success. Despite prolonged softness in the nonresidential construction market, our bookings have remained strong. Particularly in the second quarter, they grew by double digits year over year. The recent strength in bookings highlights the value of our products and signals an opportunity to further leverage our pricing power.

At the end of the second quarter, the backlog of AAON branded equipment was up 93% from a year ago, up 22% from March. Our top priority right now within the AAON brand is to put our customers first by continuing to ramp up production at both Tulsa and Longview facilities, ensuring that we deliver the highest quality products in a timely manner. The value we deliver to our customers through our premium quality, high-performance equipment has never been more compelling, and we're seeing that reflected in strong demand even in a soft market environment. You can particularly see this with our national account strategy, with year-to-date orders to these customers up significantly.

Given the progress we're making in production and the strength of our backlog, we expect AAON branded sales to increase significantly in the second half of the year, with quarter-over-quarter growth anticipated in both Q3 and Q4. Please turn to Slide 16. Due to the greater than expected impact of the ERP implementation on our second quarter results, and the resulting effect we now anticipate in the second half of the year, we are revising our full-year 2025 outlook lower. We now anticipate full-year sales growth in the low teens at a gross margin of 28% to 29%. Adjusted SG&A as a percentage of sales is now expected to be between 16.5% and 17%.

And we continue to expect CapEx to be approximately $220 million. Please turn to Slide 17. On this slide, we highlight the key factors now incorporated into our full-year outlook. When compared to the similar slide Rebecca walked through for the second quarter, you'll notice it reflects an expectation of accelerated volume growth in the second half of the year. This is not as strong as we were previously expecting, due to lower production rates entering the third quarter, but it's still strong sequential growth. You'll also notice favorable price-cost dynamics are expected to accelerate meaningfully in the second half. At the same time, it also factors in additional ERP-related headwinds that we previously were not anticipating.

Please turn to Slide 18. Here, we illustrate and quantify what the full-year outlook implies for the second half of the year. Despite the temporary challenges we are facing, we still expect a significant jump from the first half to the second half. Furthermore, if we take a step back, you can see the trajectory is positive looking back to 2024. We are addressing the challenges we face head-on and are firmly on the path to recovery. Lastly, I want to direct your attention to the table in the bottom right corner. The year-over-year growth that we now anticipate in Q3 and Q4 implies sequential growth throughout the rest of the year.

Through year-end, we expect production rates to improve and the adverse impacts of the new ERP system implementation to lessen. Before I hand it off for Q&A, it's important to note that the core fundamentals of this company have never been stronger. And once we move past these temporary obstacles, we'll be in an even stronger position to deliver long-term value for our customers and our shareholders. I know these results are disappointing, and believe me, I share in that disappointment. But in the broader context, this remains an incredibly exciting time for our company. The future is bright, and we are well-positioned to emerge from this period even stronger.

With that, I will now open the call up for Q&A.

Operator: Thank you, sir. Star followed by one on your touch-tone phone. You will then hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press 2. And if you're using a speakerphone, we ask that you please lift the handset first before pressing any keys. Please go ahead and press 1 now if you have any questions. And your first question will be from Tim Wojs at Baird. Please go ahead, Tim.

Tim Wojs: Thank you. Thanks for all the details. Maybe just to start, I guess, the guidance in the second half, kind of coming down more than you think. Could you just, I guess, maybe bridge us a little bit versus the prior guidance that you have? Versus what you have now? And how much of that is the ERP implementation and how much of that is lower volumes and the under absorption associated with that?

Matt Tobolski: Yes. Good morning, Tim. And yes, thanks for the question. So as we look at the kind of revision to the back half of the year on the guidance side, primarily the drivers there are going to be around the ACP performance and the sort of ERP implement impacts that come with that. And so with that, you know, we ended July with a 37% performance against our efficiency metric, but just to quantify, you know, that was at a production level, total production level that was down about 20%. So we finished off July being 20% of where we want to be from a top-line revenue perspective on AAON branded product inside of the Longview segment.

And we're seeing that accelerate. We're seeing that improve, but just kind of meaningfully considering that impact on the back half of the year. And then when we kind of switch over to a lesser extent on the Tulsa side, while Tulsa is certainly performing substantially better than the ACP segment, we did start the quarter at a lower performance point just with that coil impact that we had. And so really, that's reflecting to a lesser extent also the lower starting point that we're ramping off of within the Tulsa segment. Okay.

Tim Wojs: Okay. And I guess, when you look at kind of what's implied, I think it's probably something in the low 30s for gross margins in Oklahoma in the back half of the year. Yet probably going to get close to the revenue numbers that you in the '4. So I guess what is the difference outside a few million dollars and things like Memphis kind of ramping between that kind of maybe low thirties number and something that was closer to 36 or 37?

Matt Tobolski: Yes. A great question. And so we think about the Tulsa side of the business and just want to start off that nothing has drastically changed on the overall performance of that segment. There are some incremental costs that we've invested within the organization with enhancements to our end-of-line test procedures, some additional laboratory work, and really driving some of our innovation. But when we look at that, we're talking about tens of basis points, not hundreds of basis points. So when we really think about what are the primary drivers in the overall margin on the Tulsa segment, Memphis and the startup cost certainly is going to be one of those big cost drivers.

That's going to kind of add on top of those incremental costs. And then on top of that, we have been producing Basics products within the Tulsa segment. And so that production that we're temporarily doing there just to basically provide more capacity for the Basics brand, that capacity, that manufacturing is temporarily putting some strains on the overall efficiency metrics within the segment. So that really is kind of what's putting the pressure points on there. But when we look at it from an overall kind of a Tulsa perspective, you know, we truly believe that gets back into that long-term target and that 32% to 35% on an annualized basis within that margin profile. Okay.

Tim Wojs: And then I guess the last question I have, just data center backlog, I know it's been pretty good the last couple of quarters, but it was flat sequentially. Anything you would kind of highlight or call out there? I know that business can kind of be lumpy. But just if you could spend a minute just on the health of the data center business and how you're positioned there, I think that'd be helpful.

Matt Tobolski: Yeah. Yeah. So from a data center perspective, you know, I just want to start off by saying it remains incredibly strong. The activity, the engagement we have within the market remains incredibly strong. And so just to put it in perspective, the overall top-line sales were up year over year by 127% in the quarter. So when we look at that flat backlog, obviously, suggesting good strength in that quarter, which means good activity in the overall booking side. And that activity and that engagement has been at least, if not stronger, in both July and August.

But when we step back and think about the data center market, you know, a key aspect there is we've got to have capacity to sell. And so we have just begun selling into that Memphis investment that we had as a kind of a production capacity perspective. And we're going to start seeing the ability to sell that capacity meaningfully impact the backlog going forward. But when you look at kind of where we stand right now, while we're ramping up production in Memphis, we also have to be realistic when we book orders to make sure that we are providing delivery within the customer's expectations.

And so we're going to see that Memphis facility really provide a meaningful capacity increase at the later half or later portion of this year. And continuing to accelerate within 2026. You'll start seeing orders that are basically filling that facility start to come to fruition. And just to maybe also give you a little bit of context, you know, we look at the ACP performance. We look at the segment sales in the way the bookings perspective on that liquid cooling order.

I mentioned in the prepared commentary, but I just want to reiterate here that we continue to have active engagement with our customer, not just in the current orders and follow-on orders, but also working with them actively to develop the next-generation liquid cooling solutions for their data centers. And so we've kind of brought this up multiple times in the past, but it's a dynamically evolving market with new technology. And so the customization, the unique value proposition that the Basics brand provides to that data center market really resonates in that rapidly evolving and dynamically moving market.

And so we're going to continue seeing good strength in bookings kind of coming off of all the engagement we're having within that market today. Okay.

Tim Wojs: Okay. Sounds good. Appreciate the time. I'll hop back in queue.

Matt Tobolski: Thanks. Thanks.

Operator: Next question will be from Brent Thielman at D.A. Davidson. Please go ahead.

Brent Thielman: Yeah. Thanks. Good morning. Two Hey, Matt. Maybe just picking up off that last question on just the Basics brand visibility and data center. I mean, could you just talk about the significance of the Applied Digital partnership for the future of Basics and orders? Know, how that fits in?

Matt Tobolski: Yeah. Good morning, Brent. And I had great questions. So Applied Digital, you know, it is pretty much a pure-play AI data center developer. And so really, as a data center developer, they're actively engaged in developing sort of really high-performance next-generation AI infrastructure. And that really resonates with the Basics brand and being able to really create solutions that optimize performance within that segment. And so when we look at that and we think about an AI data center as a whole, think about kind of where we play inside that data center, you know, we've got the let's say, the thermal management systems that are going to be outside, which in this case are chillers.

We've got the air side solutions that are going to be inside. So, basically, chilled water fan coil walls or crawl units. And then CDUs. And with that customer, we're engaged in conversations at all three of those aspects. We already have orders for two of the three of those pieces, including high-performance chillers that are really important as we think about, you know, how we're going to manage high-efficiency heat rejection inside of these AI data centers. And so our team collaborated very actively with that customer to develop a solution that is optimum for AI workloads.

And, really, when we look at their deployment plans, you know, we're obviously talking about their facility that they're currently building in North Dakota, but know, they're continuing to expand across the region. And really, from our perspective, we're actively engaged in all of those pursuits and all those collaborations. So this really is, you know, first, I'll say, first phase of or first step in a long relationship with the customer, managing their thermal loads. As they deploy AI capacity across the country. Okay.

Brent Thielman: Alright. Appreciate that, Matt. Maybe just as a follow-up. You know, look. You look over the course of the rest of this year, certainly embedded some challenges here into the outlook. Trying to get a sense, especially as we look into the fourth quarter, Matt. I mean, still implying reasonably strong growth here on the top line, high 20s. Maybe if you could just talk a little more about what you are you've raised this comment sort of cushion in terms of the outlook. What are you embedding as we get into the fourth quarter and we're talking about fairly significant growth, you know, towards the end of the year here.

Matt Tobolski: Yeah. Certainly, as we look at the guidance that's implied for Q4 and really as a whole, we're showing acceleration quarter over quarter from Q3 to Q4. And so you look at the implied growth that we kind of talked about in the prepared commentary, and we're talking about year-over-year growth in the high 20s kind of implied, and that's the top-line perspective, in getting back into a margin profile in the 30s, the low 30s. And so certainly, building upon and kind of working our way out of the challenges that we've had operationally as we've gone live with this ERP.

But when we think about kind of what's built into that, you know, I want to first start off with we have a lot of visibility in the backlog. So the back half of this year, we have a lot of visibility both in the AAON brand and the Basics brand. And so implied in there is certainly strong continued performance or I should say, continued performance within the ACP segment on the Basics brand. Recovery quarter over quarter in the AAON brand at the ACP segment, we're building up within Tulsa, and we're going to be ramping in Tulsa substantially quarter over quarter with that backlog.

So we've got a lot of visibility in the AAON segment and the Tulsa segment. Sorry, the Tulsa segment with the AAON branded products that we're going to see accelerating throughout the year. And all of that is sitting there with positive price dynamic in it. And so as we mentioned in the prepared commentary, Q2 barely touched on a 3% price increase and almost none of the 6% tariff surcharge. And so all of that starts to come into play in Q3 and Q4, which is helping provide some strength, obviously, in top line as well as gross margin expansion.

And then beyond that, you know, the basic segment we're expecting to see kind of stability on sort of what it performed at in Q2, but increasing efficiency and so keep driving for margin improvement in the basic segment. And then throw on top of that going to start seeing Memphis come online. So that's what's baked into it. Obviously, from a from, you know, where the caution lies or what the as you kind of call the cushion. I mean, obviously, we're still factoring in the ERP impacts within the Longview segment as we're recovering. So we're baking in, obviously, the recovery off of the impacts that we had.

And really also taking in the fact that Q3 for the Tulsa segment, we started off at a lower point than we wanted to. But again, we're going to see that strong production ramp throughout the back half of the year helping to really top up that or the guidance that we provided for the back half of the year.

Brent Thielman: Appreciate that. Matt, maybe just one more. I mean, fairly strong bookings here in the AAON branded product. Maybe just your read on that is a direct result of the share capture strategy. You've, obviously, discussed for several quarters now. Are there other elements to that we ought to think about in terms of driving those bookings? Just be curious to read on the booking strength in that product line.

Matt Tobolski: Yeah. So as we think about the AAON brand and especially within Tulsa, the rooftop segment, I want to start off by saying, obviously, the market remains in a challenged position. So the overall nonres market, you know, probably sitting near the bottom of kind of the cycle, but certainly, it's been a tough market within that side. So when you look at our bookings, relative to that market dynamic, it certainly is showcasing an over or an outperform relative to the kind of macro environment there. And really, you know, we talk about a lot of the things that we're focusing on. That are helping that from a share capture standpoint.

But, the biggest driver that we've talked a lot about with the intentional investments we made comes down to our national account strategy. And, you know, we've invested heavily within internal resources to support that strategic initiative and really help bolster that from a growth driver for the organization. And when you marry up that national account strategy with, you know, best-in-class heat pump technology in the Alpha class, we're really seeing just unique opportunities for us to be able to capture opportunity and share within the marketplace.

And so as we look at that and we think about the overall performance, when we see that kind of share dynamic, obviously, in the backlog growth, it also does, you know, have us review and really kind of look at the opportunity to leverage price within that environment as well. And so as we think about the opportunity going forward, we're showing that the value proposition, the pricing of our product, and really the positioning in the marketplace is really resonating, providing opportunity to continue reviewing pricing strategy going forward. Okay. Great. Thank you. I'll pass it on.

Operator: Next question will be from Ryan Merkel at William Blair. Please go ahead, Ryan.

Ryan Merkel: Hey, y'all. Thanks for the questions. I guess, first off, Matt, what's your confidence level that the new guide captures the downside risk from the ERP? And in the press release, you mentioned taking immediate actions to shore things up. Talk about that a little bit.

Matt Tobolski: Yeah. So, certainly, from what's provided in that back half guidance, you know, we spend a lot of time ensuring that we adequately cover the risk factors that we see and make sure that we're providing a target that is achievable and obviously has some upside potential to it. So you know, when we look at the effort we've put in kind of where we stand from a trajectory standpoint, a visibility standpoint, and kind of where we're at from a performance and recovery standpoint, you know, all of that's baked in, adequately inside that guide to be able to provide upside against it.

We certainly see that the impacts that we saw in terms of production rates within the ACP segment and then also the impacts that kind of spilled over? Is it also certainly was not what we wanted to see. But from a recovery standpoint, you know, both segments we look at from a metric standpoint are showing strong recovery that we talked about on the call with Tulsa being in July percent below its target efficiency rate at the end of the month. So know, we certainly are seeing all the signs in the recovery that we expected to see.

Albeit, you know, the impact not as or the impact lowers than we wanted to see in the first place but certainly, the recovery and the path of recovery is very visible for us. When you look at the, you know, the immediate actions we took and really kind of relating to some of the supply chain spillover, it was certainly an unfortunate state of events as the ERP began to impact our coil production within our Longview segment, thus impacting Tulsa. As soon as the supply chain constraints were observed kind of from our third-party vendors, you know, our supply chain team was very proactive in getting on the ground, getting resources in place.

Do you tactically manage what was happening at those sites? And really getting the visibility to respond and mitigate the impacts to the overall operation. And so you know, that activity is certainly part of the driver where we see the Tulsa segment sitting in a much stronger position kind of coming out of July in you know, the reaction, the I'll say the ability to react to challenges is certainly one of the strengths of AAON.

And as these things have come up, you know, our team has jumped at every single issue that's come up, got the resources in place, speak to understand what the drivers were, and make sure that we get create strategies to prevent them from happening again. And so I just want to kind of stress. When we look at the ERP as a whole, certainly, the impacts in Longview were larger than we wanted to see as an organization. But the decision to go live in Longview really was very intentional to stress test the ERP as a whole.

It was done to look at a site that manufactures both brands of products, that manufacture coils, so that we can truly test the system in all of the ways that we operate this business. To you know, stress test, to break as much as possible any of the things that we could possibly break so that when we go live in future locations, those same issues aren't going to come up because we've already been able to see them, resolve them, and build a system or adapt the system to make sure that the organization can perform as expected in the future go-lives.

And so just to stress, as much as the performance at the go-live wasn't what we wanted, the lessons learned and the operational strategy has provided us a lot of confidence and sort of the ability to perform going forward.

Ryan Merkel: Perfect. That's helpful. And then I want to put the 4Q guide into a little context with revenue up high 20s. I don't think ERP issues will be totally back to normal at that point. So just a little context on what's assumed there. And then what does it assume about growth for Oklahoma?

Matt Tobolski: Yes. I mean, Oklahoma maybe just kind of looking at it from across the board. I mean, Oklahoma, you're going to see quarter over quarter strength on top-line bookings as we kind of keep accelerating production capacity within that facility against that backlog? You know, I always I'd like to point out and stress that ramping up production, you know, it certainly is a calculated approach. And we can't just, you know, go from zero to 60 from a production perspective in Tulsa. And so we'll see quarter over quarter strengthening of the overall production rates in Tulsa. And that's baked into the guidance from an overall recovery perspective.

In the coil product segment, you know, certainly, the ERP is the guide assumes there's some lingering effect into Q4 within the ACP segment. And so while it's improving, we certainly have some consideration in there just as it continues to recover off of that performance. And so that is baked into the guide from a Q4 perspective. And then just from a Basics perspective, I mean, it's operating kind of near its capacity within the Redmond location. And so basically, as a whole, you know, you're not going to see a lot of acceleration and growth off of the Basics segment as you report. But you will see acceleration in the Basics brand.

As we begin bringing on capacity within Memphis. And so Memphis is considered a start coming online in that Q4 guide as well. In a more meaningful fashion.

Ryan Merkel: Alright. Last one for me. You're going to exit 4Q with the gross margin 30%, 31%. You quantified the ERP impact this year, dollars 55 million. You know, we have to set a model for '26, and I know you don't talk about that. But in the script, mentioned double-digit top line and margin improvement. Can you give us some sort of sense of how much margin lift we could see in '26? I know it's a bit early, but it would be helpful. Any color.

Matt Tobolski: Yeah. So, certainly, know, we're not getting into too much detail on '26 yet, but when we look at the overall performance from a '25 to '26 perspective, you know, we do see the top-line growth that we guided or we provided that insight to in the overall prepared commentary, you know, our Q4 implied margin sitting at the 30 or 31% what we're basically implying in 2026 is nearing that long target of 32% to 35%. And that is factoring in, you know, while we've gone through, I'll say, the hardest implementation in the Longview facility in terms of its, you know, first sight and really stress testing the system.

'26, obviously, will still have the additional go-lives within the Basics and the Tulsa segment. So there is consideration kind of in that margin profile approaching 32 to 35%. From a long-term guide perspective and some stress from the kind of future rollouts. Alright.

Ryan Merkel: Thanks for the color. I'll pass it on.

Matt Tobolski: Thank you.

Operator: Next question will be from Chris Moore at CKS. Please go ahead, Chris.

Chris Moore: Hey. Good morning, guys. Yeah. It looks like booking's pretty good on AAON. Maybe you could just talk overall about the prolonged softness in rooftop. I mean, what are you thinking about the market overall in the next six to eighteen months? Is it, you know, interest rates? Is it, you know, just any thoughts you might have in the overall market?

Matt Tobolski: Yeah. So from a kind of overall macro perspective, know, if we look at everyone else that's released for Q2 results, the you know, everyone is signaling, obviously, volumes are down in the nonres market. Which we would agree with. You know, if we look at this from an overall macro perspective, there is certainly softness probably in the 10% volume down to 10% volume as an overall industry perspective in the nonres market. And so to put that in context, though, know, when we look at the bookings trend, we certainly look like we're at the bottom of the trough. So we don't see it as a continued kind of deceleration and decline.

We see ourselves certainly nearing the bottom, if not at the bottom as an industry. Within that segment. So that's kind of what we're seeing. We see certainly the interest rates obviously are a driver. But, also, I mean, interest rates at the end of the day, you know, if they're stable, eventually, we get used to how to operate inside those interest rate environments. And so it's really the getting to a stable perspective that is, I'd say, the big driver.

And so getting past some of the volatility, whether it be tariffs, whether it be interest rates, once we get to a normal operating cadence as an industry, the industry fundamentally figures out how to operate inside that new cost structure. And so a lot of the deceleration that we've seen, a lot of the conversations that we've seen really have centered around just the uncertainty kind of in that near-term perspective. And so as we look well, sixteen, eighteen months out, you know, getting to a more stable operating condition, we're going to we expect to see the market as a whole, you know, be on the upswing coming out of that.

So I would just, you know, point out, though, that as much as we talk about the softness in the macro market, to your comment, I mean, bookings you see within AAON certainly showcase a different performance level against that overall dynamic. And, again, that is really a lot of the strategy that we've had, whether it be the Alpha class product with bookings up, you know, above 60% in the quarter, or national accounts that are, you know, showing tremendous strength in bookings. Those really are the opportunities for AAON when we think about the nonres market to continue outperforming that market and acquire market share.

Chris Moore: Got it. Very helpful. So maybe just going back to Investor Day, you talked about, you know, in a more normalized situation, gross margins, 29% to 32% for Basics, you know, a little bit, you know, below rooftop. Just trying to understand it. Is there something fundamentally different in the rooftop market that allows a higher margin, or is it just, you know, it's a function of the rapid growth in Basics, know, fully leveraging the facilities. Is there a point where you ever see them at parity or Basics will likely be lower, you know, kind of long term?

Matt Tobolski: That's a great question, Chris. And really, when we think about the margins, there's nothing says we can't get to parity on the overall margin profile. The reason the commentary came and really to give that commentary regarding Basics at Investor Day and kind of today as well. It's just as we think about its growth rate, there's inherent pressures that are created in investing ahead of that capacity. And so we think about these strong year-over-year growth rates, we're having to put the engineering resources, the overhead resources, a lot of the manufacturing staff ahead of the overall revenue to be able to support that revenue going forward.

And so that creates some strains, you know, growing 40% year over year over year. Create some strains just in operational dynamics. But, certainly, we look at as those growth rates, you know, I don't want to say temporary, but as we get this capacity online, we're able to leverage some of that. There's nothing to say we can't get our margins on parity with the overall rooftop segment. Just this hyper-growth stage certainly has some pressures there.

Chris Moore: Oh, helpful. Alright. We'll leave it there. Thanks, guys.

Joseph Mondillo: Thank you.

Operator: A reminder, ladies and gentlemen, to please press 1 if you have any questions. Next question will be from Julio Romero at Sidoti and Company. Please go ahead.

Alex Handman: Good morning. This is Alex on for Julio. Thanks for taking questions.

Matt Tobolski: Good morning.

Alex Handman: First question was just circling back to backlog. Yeah. I know it's up significantly year over year. Can you comment a little bit on margin profile and pricing embedded in the backlog? And, you know, really, I'm asking if these orders are sort of protected with price increases and tariff surcharges or there's still some risk of margin compression on fulfillment?

Matt Tobolski: Yeah. And I'll bifurcate that conversation between the two brands. Because there's definitely some different dynamics that exist between the two different brands. But as we look at the AAON segment or AAON brand as a first starting point, know, that backlog certainly is favorably priced relative to the Q2 results and really getting down to the comment was made in commentary that we really just started to see that 3% January 1 price increase start hitting the overall revenue profile in Q2. So when we look at that backlog from an AAON perspective, we've got 3% price plus a 6% tariff surcharge that we're going to see meaningfully impact the overall results in the back half of the year.

And we see that being accretive to margin. When we look at the overall price-cost dynamic, that price, as we see it today with all the visibility we have on supply chain, there certainly is some additional kind of margin opportunity that exists inside that backlog. So on the AAON brand, you know, it's kind of the visibility we have in the you know, we're buying essentially our supply chain. Team is actively buying the overall input costs or input products to be able to manufacture that. So a lot of visibility into kind of what that dynamic looks like.

On the Basics side of the business, certainly from a margin profile, there are escalation clauses that exist in the vast majority of the backlog that is extended. And so there's an opportunity if dynamics were to change drastically to be able to address that with our customer base. But have a lot of visibility into what the input costs are and really are securing kind of longer-term supply contracts to support that. So you know, we see that basically being more margin neutral kind of on what is built into that overall pricing in the backlog for the Basics side.

Alex Handman: Great color. Thank you for the context. Then one more from us, just changing gears a little bit. Curious if you're seeing any positive sentiment from customers as a result of the one big beautiful bill act? You know, maybe any implications for stronger demand that, you know, as a result of bonus depreciation or other aspects of the bill.

Matt Tobolski: Yeah. I would say, I mean, certainly, from an investment perspective and especially investment in the US, from a manufacturing, from a warehousing, from an overall capital investment standpoint. There is certainly some benefit that is improving sentiment. I wouldn't say, you know, a light switch flips kind of when that's going into place, but certainly, provide us some positive trajectory, which really, as I mentioned before, when we're sitting kind of on, I'll say, the bottom of what we see is or we see is the bottom of the cycle, you know, any positive move in sentiment, say, overall positive going forward. Thank you very much.

Alex Handman: Thank you.

Operator: Next question will be from Jon Braatz at Kansas Capital.

Jon Braatz: Good morning, everyone.

Matt Tobolski: Good morning.

Jon Braatz: Matt, I know you don't want to talk too much about 2026, but can you give us a little sense on how the P&L for Memphis might look in 2026 versus 2025, sort of the delta between years.

Matt Tobolski: Just to clarify, Jon, I mean, specifically, kind of the cost drag versus the positive kind of contribution.

Jon Braatz: Yes. Yes. Or more from yeah.

Matt Tobolski: So obviously, when we acquired the Memphis facility, in the way since we started building out the overall facility, a lot of that investment, whether it be in people and staff or capital investments, you know, they're certainly all coming ahead of the overall revenue. And so while we are, you know, generating some revenue in Memphis in 2025, it's not offsetting kind of the overall cost structure of basically standing up that facility. As we look into 2026 and as we think about, you know, orders like Applied Digital that we're going to be manufacturing primarily in the Memphis facility, we're going to start generating substantially more revenue to be able to offset those costs.

And so kind of the way we look at Memphis in 2025 to 2026 is really going from a cost drag to an overall kind of drag on the overall financials to a positive contributor in the financials. And really, when we think about, you know, what's happening in '26, I mean, the growth of the Basics brand, that growth is going to come through Memphis in 2026. And so demand we have for data centers, the relationships as we continue to develop these innovative solutions, all that's going to be what's driving the 2026 growth in Memphis. And really allow it to become a positive contributor to the overall financial statement.

Jon Braatz: Okay. Alright. Thank you. And maybe a question for Joe. Your presentation, you mentioned management will provide regular updates on implementation progress. What does that mean?

Joseph Mondillo: I would just say that as we hit certain milestones that are significant to informing you all, we will take that approach. There's nothing, you know, in the sand today. As far as exactly what and when we will be providing that information, but as we hit certain milestones, we will provide those updates.

Jon Braatz: So, Joe, if you reach those milestones, you might say something between conference calls. Is that how you should understand it?

Joseph Mondillo: Potentially. Or a conference or I mean, like I said, there's no set game plan to that, but we will provide regular updates when we hit certain milestones. We're trying to be as transparent as in an environment that is, you know, certainly impacting the financials like you've seen?

Jon Braatz: Okay. And one last question. Rebecca, there was an investment in working capital in the quarter, in the first half. How do you see that playing out in the second half as operations get a little bit stronger?

Rebecca Thompson: Well, we'll still have some working capital needs to support the Basics brand. And, you know, like Matt talked about, this upcoming job with Applied Digital to the extent we have to make, you know, those investments prior to, like, all of the production coming along. Plus, you do have our Memphis facility, that we do need to, you know, stock up, make the investments to supply with inventory at that location. That's primarily been what most of those investments have been. I anticipate maybe through, I don't know, mid-Q3, back half of the year, they should start to ease.

Jon Braatz: Okay.

Matt Tobolski: Alright. Thank you, Rebecca.

Operator: Thank you. And at this time, Mr. Mondillo, we have no other questions registered. Please proceed.

Joseph Mondillo: Okay. Thanks for joining the call today. If anyone has any questions over the coming days and weeks, please feel free to reach out to us. Have a great rest of the day, and we look forward to speaking with you in the future. Thanks.

Operator: Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we ask that you please disconnect your lines.