AAON - Earnings Call - Q1 2025

Transcript

Operator (participant)

This call is being recorded on Thursday, May 1st, 2025. I would now like to turn the conference over to Joe Mondillo, Director of Investor Relations. Please go ahead.

Joseph Mondillo (Director of Investor Relations)

Thank you, Operator, and good morning, everyone. The press release announcing our first quarter financial results was issued earlier this morning and can be found on our corporate website, aaon.com. The call today is accompanied with a presentation that you can also find on our website as well as on the listen-only webcast. Please turn to slide two. We begin with our customary forward-looking statement policy.

During the call, any statement presented dealing with information that is not historical is considered forward-looking and made pursuant to the safe harbor provisions of the Securities Litigation 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 the duty to update our forward-looking statements. Our press release and portion of today's call use Non-GAAP financial measures as defined in Regulation G.

You can find the related reconciliations to the GAAP measures in our press release and presentation. Joining me on today's call is Gary Fields, CEO, Matt Tobolski, President and COO, and Rebecca Thompson, CFO and Treasurer. Gary will start us off with some opening remarks. Rebecca will follow with a walkthrough of the quarterly results. Matt will then provide further details on our operations and outlook going forward. Before taking questions, Gary will finish with some closing remarks. With that, I will turn the call over to Gary.

Gary Fields (CEO)

Starting on slide three, prior to jumping into the results, I want to start off by reminding you of our core strategic pillars. These pillars consist of leading in innovation and custom solutions, driving sustainable organic growth, and being a best-in-class operator. These three pillars help guide our long-term strategic planning and remind us of what we are trying to accomplish when forming tactical strategies. All of these pillars did not always exist at AAON.

Since our founding, leading in innovation has always been core to who AAON is. Over the past several years, our strategy has built upon this with a focus on developing ways to drive sustainable long-term organic growth and being a best-in-class operator.

All of the tactical initiatives that we've taken, such as transitioning to a leadership team, putting in place succession planning, formally constructing and documenting long-term strategy planning, adopting a One AAON principle, and I could go on and on. All of this was to better leverage our core to drive sustainable and efficient long-term growth. This company has never had a better long-term strategy with a better leadership team to execute it.

What we're doing with the development of heat pumps on the AAON side of the business and custom air side and liquid cooling data center solutions on the BASX side is very exciting. The strategies we're taking regarding the other two pillars ensure that we will fully leverage these innovations along with the already premier solutions we provide to drive market share gains at highly profitable levels.

Now, turning to slide four, the first quarter was a solid quarter for AAON. Net sales, margin, and earnings per share notably improved from the fourth quarter, and backlog grew to a record level. Total net sales grew year-over-year 22.9%. Sales of Basics branded equipment were up 374.8%. Both air side and liquid cooling solutions for data centers were driving factors. Partially offsetting this strength, sales of AAON branded equipment were down 19.1%.

Production of our rooftop units was impacted by the weak bookings we received throughout most of the fourth quarter. Additionally, supply chain issues with certain components associated with the new R-454B refrigerant were also a factor. On a positive note, bookings of this equipment year to date have been strong. We also have begun to see these supply chain issues abate early in the second quarter.

Total gross margin contracted 840 basis points versus the comparable quarter a year ago. This reflected weak production volume of AAON branded rooftop units and the resulting operating deleverage effect. Gross margin at the AAON Oklahoma segment was down 1,380 basis points. Strong sales of Basics branded equipment along with operational efficiency improvements drove solid gross margin expansion at the AAON Coil Products and Basics segments.

Gross margin at these two segments were up year-over-year 100 and 350 basis points respectively. Total backlog finished the quarter at a record level $1 billion, up year-over-year 83.9% and up quarter-over-quarter 18.4%. First quarter bookings of both AAON branded and Basics branded equipment were robust. Backlog of AAON branded equipment was up quarter-over-quarter 23.4%, and this was the highest level since the first quarter of 2023.

Bookings of rooftop units were very strong and strengthened throughout the quarter. Backlog of Basics branded equipment was up quarter-over-quarter 15.4%, driven by bookings of both air side and liquid cooling data center equipment. Given the backlog on both sides of the business, we're positioned well entering the second quarter. I will now hand it off to Rebecca Thompson, who will walk through the quarterly financials in more depth.

Rebecca Thompson (CFO and Treasurer)

Thank you, Gary. Please turn to slide five. Net sales for the quarter increased 22.9%-$322.1 million, up from $262.1 million in the first quarter of 2024. The year-over-year growth was driven by a 374.8% increase in Basics-branded equipment sales. This was reflected in the results at the Basics and AAON Coil Products segments. Net sales at these two segments were up 138.9% and 287.8% respectively. Sales of AAON branded equipment declined year-over-year 19.1%.

This was largely reflected by the AAON Oklahoma segment, which realized a decline in net sales of 23%. Production of rooftop units were impacted by weak bookings throughout most of the fourth quarter. This was related to a temporary lull in demand as the market shifted from the legacy R-410A refrigerant to the new R-454B refrigerant equipment.

Bookings have since rebounded in a strong manner, suggesting that we're becoming more competitive with the new refrigerant equipment. Also impacting the first quarter was a tight supply of certain components associated with the new refrigerants, which temporarily constricted our production rates. Supply of these new components has recently begun to improve and will enable us to increase production rates significantly in the second quarter. Moving to slide six, gross profit decreased 6.4% to $86.4 million from $92.2 million.

As a percentage of sales, gross profit was 26.8% compared to 35.2% in the first quarter of 2024. Challenges from the industry-regulated refrigerant transition and non-residential construction activity significantly affected our largest segment, AAON Oklahoma, resulting in decreased volumes and lower overhead absorption. Gross margins at this segment were down year-over-year 1,380 basis points to 23.5%.

As we begin to see production volumes increase in the second quarter, we fully expect gross margins to recover. Production volumes of Basics-branded equipment acted as a partial offset. This allowed gross margin at the Basics and AAON Coil Products segments to expand. Operational efficiency improvements at both our Oregon and Texas facilities also contributed to improved segment margins. Please turn to slide seven. Selling, general, and administrative expenses increased 13.3% to $51.3 million from $45.3 million in the first quarter of 2024.

As a percent of sales, SG&A decreased to 15.9% from 17.3%. Depreciation and amortization was up $3 million due to our increased investments in back office technology, offset by a decrease in professional fees of $3.1 million due to various professional, regulatory, and legal corporate requirements in 2024.

SG&A expenses also included a $2.7 million fee due to our real estate broker associated with the December 2024 acquisition of our Memphis, Tennessee plant for a percentage of the incentives awarded to us by various entities. Moving to slide eight, diluted earnings per share was $0.35, down 23.9% from a year ago. Excluding the net impact of the $2.7 million real estate broker fee, adjusted earnings were $0.37, down 20% from a year ago.

The decline in earnings fully reflects the lower production volumes and profits of AAON branded equipment. Our effective tax rate in the quarter was 9.8%. The company's estimated annual effective tax rate, excluding discrete events, is expected to be approximately 25%. Turning to slide nine, cash, cash equivalents, and restricted cash balances totaled $2.4 million on March 31, 2025, and debt at the end of the quarter was $252.4 million.

Our leverage ratio was 0.95. Year to date, cash flow used in operations was $9.2 million compared to cash flows provided by operations of $92.4 million in the comparable period a year ago. Year to date, cash flow from operations largely reflected increased investments in working capital. Capital expenditures through the first quarter of the year, including expenditures related to software development, increased 30.2% to $50.4 million.

We drew down $97.5 million on our revolving line of credit over this period, largely to finance the investments in working capital, capital expenditures, and $30 million of open market stock buybacks. Overall, our financial position remains strong. This gives us flexibility and allows us to continue to fully 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, who will walk through operations in more detail and update you on our outlook.

Matt Tobolski (President and COO)

Thank you, Rebecca. Starting on slide 10, Gary and Rebecca covered this pretty well, but here you will see how AAON branded sales performed relative to Basics branded sales. Total revenue growth of 22.9% was fully driven by Basics branded equipment sales growing 374.8%. This was driven by data center demand for both air side cooling equipment manufactured at the Basics segment and liquid cooling equipment manufactured in the newly expanded space at the AAON Coil Products segment. Basics segment sales were up 138.9%, and AAON Coil Products sales were up 287.8%.

This helped drive an expansion in segment gross margin of 350 basis points to 24% at Basics and 100 basis points to 34.6% at AAON Coil Products. At both segments, we also began to benefit from the initiatives we are taking to improve operational efficiencies, particularly at the Basics segment, where we are right-sizing capacity at the Oregon facility and focusing more on productivity of the facility. We expect to see more improvement at the Basics segment throughout the year, especially in the second half of the year.

AAON branded sales were down 19.1%, driven by rooftop production volumes being down at the AAON Oklahoma segment. AAON Oklahoma segment sales were down 23%. This was largely reflective of the weak bookings we realized throughout most of the fourth quarter. Supply chain issues with components associated with the new refrigerant also contributed to lower production volumes. This was a temporary issue related to refrigerant transition that was a challenging to manage occurrence and difficult to anticipate.

As the market transitioned to production of the new refrigerant equipment, component manufacturers were challenged with keeping up with demand. In hindsight, we would have increased inventory levels for some of these components, but it was tough to predict at the time. As a result, a lack of access to certain parts caused us to maintain lower production levels despite a large backlog of bookings. The positive is that we're beginning to see improvement in the supply chain, which is allowing us to increase production rates in the second quarter.

Given the size of the backlog, we anticipate production will continue to increase over the next several months. Please turn to slide 11. Total backlog at the end of the first quarter finished at a record level of $1 billion. That is up year-over-year 83.9% and up quarter-over-quarter 18.4%.

Backlog of AAON branded equipment was $404 million, up year-over-year 44.9% and up quarter-over-quarter 23.4%. This backlog was the highest level since the first quarter of 2023. Since the beginning of the year, bookings at this side of the business have been strong. We received a lot of positive commentary from our sales channel, and we believe our competitiveness with the new refrigerant equipment has never been better.

We're still trying to get an idea on exactly where our price premium lies, but it seems that we have narrowed a little. Also helping drive the backlog, we continue to realize strong demand of our heat pump configured rooftop units, otherwise known as Alpha Class. In April, we started to introduce our next generation of the Alpha Class series, which is operable down to -20 degrees Fahrenheit.

By the end of this year, our entire product portfolio of rooftop units will be configurable with this low temperature configurability, meeting the DOE's Commercial Heat Pump Challenge two years in advance of the set 2027 goal. The strong backlog on this side of the business positions us well entering the second quarter. Our goal is to drive a lot more volume to the Tulsa facility, and as we do this, you'll see margins at the AAON Oklahoma segment begin to recover.

With the supply chain issues abating and given the size of the backlog, we should begin to see production and profitability improve in the second quarter and continue through the third quarter. The fourth quarter will depend on the bookings we receive over the next few months.

The macroeconomic environment remains in pretty poor shape, which is creating a lot of uncertainty on the back half of the year. For now, though, we are taking market share. Despite the macro uncertainties, the sentiment across our sales channel is relatively upbeat. We're also making headway with our national account strategy and are optimistic we will see meaningful impact, especially with our industry-leading Alpha Class air source heat pumps.

These national accounts are large in volume and are multi-year replacement programs, and if we're successful, it will be material to growth. Backlog of Basics branded equipment was $623 million, up year-over-year 122.7% and up quarter-over-quarter 15.4%. Bookings of both air side and liquid cooling equipment for data centers have been strong year to date.

This puts us in a great position for the rest of the year and provides much more visibility and certainty of sustainable growth into 2026. With such a large backlog in hand, we can manage production more efficiently, which you will see in the margins of the AAON Coil Products and Basics segments. We continue to anticipate margin improvement, most notably in the Basics segment, as we progress throughout the year, particularly in the second half.

Our capacity expansion plans continue to progress well. Production of our liquid cooling data center equipment at the AAON Coil Products segment has been ramping well. In the new space, we currently have three production lines in place with plans to increase that to five later this year. At Basics, we are making great progress with right-sizing capacity.

We've already begun to see these operational improvements in the margin, and you should expect to see more improvement in the second half of the year. The expansion in Memphis is also progressing. We've started to assemble equipment there at a small scale. Now, it won't be as efficient as our other facilities until we get the vertically integrated production set up, but it is helping us achieve our on-time delivery commitments and goals.

We expect meaningful production to begin in the fourth quarter of this year with a sharper ramp-up of volumes throughout 2026. Until we get this production in place, we continue to expect the facility will incur about $5-$7 million of costs with minimal revenue to offset. In the first quarter, these costs amounted to approximately $2.8 million. In addition, we realized a $2.7 million fee associated with various incentives relating to Memphis.

Now, please turn to slide 12. We maintain our full year outlook. We anticipate full year sales growth to be in the mid to high teens at a gross margin similar to what we realized in 2024. SG&A at a percent of sales will realize a decline of 25-50 basis points, and CapEx will be approximately $220 million. For the second quarter, we look for sales and earnings to be up modestly from the first quarter.

Note that the tax rate was unusually low in Q1 and that our interest expense in Q2 will be up with a higher debt balance. The implication is that operating income will be up quarter-over-quarter more than just modestly, as indicated in the earnings guide. Finally, inclusive of the updated annual outlook is our tariff mitigation surcharge of 6%, which recently went into effect.

The outlook assumes this surcharge will be in effect throughout the remainder of the year. Of course, trade policy is very fluid. At any moment, depending on how policy evolves, we could increase or decrease the surcharge. We anticipate the surcharge will fully neutralize the impact of tariffs on our costs and margin. Lastly, I would like to highlight that we are hosting an Investor Day on June 10th in New York City. Please find additional information on our corporate website under the Investor section. I hope to see some of you there. Now, with that, I will hand the call back to Gary for closing remarks.

Gary Fields (CEO)

With this being my last earnings conference call, I wanted to close by thanking all of our stakeholders. To our stockholders, our employees, sales channel partners, customers, and vendors, thank you. I also would like to thank our Founder, Norm Asbjornson, for giving me this opportunity. It has truly been a pleasure and honor managing this company for nearly 10 years. A lot of change has taken place over the last decade, and I can confidently say the company is in a much better state than when I arrived.

I always said one of my principal goals since day one was to work myself out of a job. I've done that. The day has come. The management team of this company under Matt's leadership has never been better. The growth prospects are better than ever. With that, thank you again, and I will now open the call for Q&A.

Operator (participant)

Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the number one on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the number two. If you are using a speakerphone, make sure to lift your handset before pressing any keys. Your first question comes from the line of Julio Romero from Sidoti. Please go ahead.

Julio Romero (Analyst)

Great. Good morning, Gary, Rebecca, Matt, and Joe. I wanted to start off, congratulations again, Gary, for all your work over the years.

Gary Fields (CEO)

Thank you.

Julio Romero (Analyst)

Maybe to start on what you're seeing on K-12 public bid data, what does that data tell you in terms of where the industry is in terms of pricing of equipment and where AAON's pricing delta currently stands relative to the competition?

Joseph Mondillo (Director of Investor Relations)

We just had a national sales meeting a week or so ago, and Matt presided over that. I'm going to ask him to respond to that one for us.

Matt Tobolski (President and COO)

Yeah, of course. We look at the kind of feedback we're getting from the sales channel partners and really from the bid activity, and all indicators definitely say the AAON price premium has definitely contracted, which is a positive that we're seeing from a competitiveness standpoint. It certainly hasn't gotten to parity, but definitely is showing a percent or two of closure in that price premium, which is allowing us to continue taking market share and really makes it a lot easier to be able to sell that value proposition that the AAON product offers.

Julio Romero (Analyst)

Got it. That's very helpful. Can you give us a sense of where your market share stands today with regards to national accounts and where you think you can take that over time by leveraging your heat pump technology?

Matt Tobolski (President and COO)

Yeah. National accounts, as they stand today, I mean, there's definitely a good amount of national accounts within the AAON portfolio, but a lot of the ones that exist today in our books are, I'll say, kind of smaller scale national accounts. When we look at the overall market share in national accounts, it's certainly low as it stands today inside the AAON portfolio. What I would say, though, is the acceleration that we have seen with intentional effort and really positioning the product is showing a very noticeable acceleration of national account activity around the AAON brand.

Really, when you look at the kind of trajectory that we see in the national account segment, it will make a meaningful impact to the AAON brand. I mean, we're seeing a tremendous amount of activity, a lot of adoption and understanding of the value proposition.

With the Alpha Class product and really being able to offer an incredibly flexible heat pump solution that really offers a great option, not just in cold climates, but also in warmer climates, we have a portfolio that can really check the boxes for the entire industry and for the entire national account across the country. We are seeing a tremendous amount of involvement there.

The activity that our national sales team in partnership with our sales channel is engaged in right now is tremendous. We see that being a meaningful impact for AAON kind of on a go-forward basis. The one thing I always want to point out, though, is national accounts do not just transition overnight. I mean, it is a process.

Because of the scale of these accounts, the sales cycle tends to be a little bit longer than, let's say, a traditional K12-type project. There is a lot more conversation around the value proposition. There is a lot more positioning of the product because we're setting up multi-year programs, not just a single project.

Why I say that is we're going to see these materializing in 2025. We'll start seeing more and more national accounts materialize. Definitely, with the trajectory, I think it's going to be later 2025 you'll start seeing the acceleration, but 2026 is really the year that a lot of today's work is going to convert to revenue.

When we look at that Alpha Class solution and really what we just announced at our national sales meeting a couple of weeks ago, being able to have a heat pump solution that can operate all the way down to -20 degrees is a tremendous option to be able to present to our customers and national accounts where we can handle those coldest climates. We call that the Extreme series for us for the negative 20 operating condition.

We're able to really capture a tremendous amount of those northern states in a true heat pump operation mode. We also have what we branded the Eco and the Pro series, which provide flexibility and more cost-effective solutions as you kind of move to those southern states.

That portfolio of Alpha Class products from the extreme cold temperatures to the warmer climates is really an all-encompassing product portfolio that is really resonating with our national account customers.

Julio Romero (Analyst)

Very helpful. Thanks again.

Operator (participant)

Your next question is from the right line of Ryan Merkel from William Blair. Please go ahead.

Ryan Merkel (Analyst)

Hey, everyone. Good morning. Nice quarter. Let me also say congrats, Gary. It's been great working with you. Wish you best of luck.

Gary Fields (CEO)

Thank you very much.

Ryan Merkel (Analyst)

My first question is just on the core rooftop business. You guys talked about strengthening orders through the quarter. Can you just talk about a couple of things? The push-outs that you saw last quarter, did those come back as you expected? Do you think you're taking market share just given where you're priced? I'm a little curious if you saw kind of a pop in March ahead of that surcharge that you put in in April.

Joseph Mondillo (Director of Investor Relations)

Yeah, Matt, go ahead.

Matt Tobolski (President and COO)

Yeah. As it relates to the push-outs, definitely there's volatility in Q4 and bookings. Really, a lot of that was just on the adoption cycle with that new refrigerant. We talked very openly on that Q4 call that while the first couple of months of Q4 were soft, we definitely saw that reinvigoration in December, and we continued seeing strength in bookings throughout Q1.

What that's telling us is that sort of softness and those push-outs that we saw in Q4 are largely behind us from an overall kind of impact from the refrigeration transition and really see that now materializing into consistent order cadence that we're seeing and that we would expect in this kind of normal seasonal booking cadence. Your question definitely, I mean, yeah, obviously, you put a 6% surcharge in.

is going to be a lot of conversation and activity trying to get ahead of that. Ryan, one thing we were very intentional on was not allowing this to be an open-ended bring all your orders in and slam us before that surcharge comes in.

We were very open with our sales channel that we had capped the amount of orders that we would accept without a surcharge in place, really based on financial modeling and inventory levels that we had for the vast majority of components. While there was definitely a lot of activity ahead of that surcharge in March, there would have been a lot more if we did not put a cap on that.

We capped that and said, "This is the amount of orders we're willing to accept prior to implementing a surcharge." Why that's important is as we came on the back end of that surcharge, I mean, obviously, the day after the surcharge went into effect, there was certainly a dip relative to the day before. If you look at the overall orders cadence that's come on the backside of that surcharge being put in place, we continue seeing the traditional strengthening of orders that we would normally see within the Q2 booking Cadence.

While there was a little bit of pull forward, we didn't allow that to be overwhelming to the overall operation. We're definitely seeing a traditional bookings Cadence in the last 45 days on the heels of that surcharge being put into effect. We definitely see this normalizing.

Really, what it's telling us as well is relative to some of our peers, we're definitely seeing, I'll say, stronger bookings, which really tells us, number one, our price positioning is definitely more competitive than it's historically been. Also, it's telling us that we are definitely getting market share.

Ryan Merkel (Analyst)

Got it. Okay. That's encouraging. That was the answer I was looking for, actually. Thanks for that. I'd like to put a finer point on the 2Q guide. The straight is about $0.60. You just did adjusted $0.37, and you're talking about up modestly. Can you just help us with that and help us think through sales and margins? I'm just wondering if there's a potentially bigger margin impact in 2Q because of the Memphis facility that maybe we do not appreciate, but just any help there would be great.

Matt Tobolski (President and COO)

Yeah. I want to start off by reaffirming the overall full year guide. Just kind of why I want to start there is by saying there's definitely a strong growth year and a strong performance year that you're going to see in 2025 out of AAON. Q2, we're coming on the heels of Q1 that was impacted in the Oklahoma segment with some supply chain constraints. As we said in the prepared commentary, yes, supply chain impacts are abating. If you kind of think for a second, coming out of April, into April, I should say, those were still lingering as we entered April. What that does is it starts us off a little bit slow in April and slower than we want to be relative to the backlog we have and the overall demand for the product.

That's not given us that immediate pop that we'd want to see inside of the Oklahoma segment as we basically ramp up production as supply chain kind of gets to a more normalized cadence. That is a little bit of an impact that is built into that guide. As you also think about the Basics and the ACP segments, Q1 was a very strong quarter.

In Q1, definitely, we had some good uptick in productivity, especially inside of that coil product segment. There's also traditionally a little bit of lumpiness just on kind of how orders flow through and just based on delivery schedules of these larger orders that are associated with these data center projects. Why I say that is I don't want to set an expectation for Q2 to build upon Q1.

There's a little bit of noise, and you might see just a slight kind of pullback in overall sales inside the ACP Basics segments just coming off the heels of such a strong Q1. That is sort of built into that guide. The one part I want to also touch on is the overall operating income is going to be up far more than modestly, which is through your comment showing you strengthening in sales out of Oklahoma.

With that, you're going to see good margin recovery out of the Oklahoma segment in Q2. As we kind of peel that back, Q1 had a very beneficial tax rate that we do not anticipate in Q2. From a bottom-line flush-out, you're going to definitely see a tax rate impact in Q2 you did not have in Q1.

You're also going to have growing interest expense as we've invested in working capital with the production rates ramping up in both Coil Products and Basics. If you look at the operating income perspective, you would see a great uptick in Q2. That's just being hampered a little bit by that tax rate differential and the interest rates. That's kind of what's flushing that modest guide from an EPS perspective.

Ryan Merkel (Analyst)

Okay. That's really helpful. I'll pass it on. Thanks so much.

Operator (participant)

Your next question is from the line of Chris Moore from CJS Securities. Your line is now open.

Chris Moore (Analyst)

Hey, good morning, guys. Thanks for taking a couple. I also congrats, Gary. Thanks for everything.

Gary Fields (CEO)

Thank you.

Chris Moore (Analyst)

Sure. In terms of you still hear some big players canceling or downsizing data center construction. Just wanted to kind of go a little deeper in terms of what you're hearing from your customers. How much visibility do they give you in terms of their plans over the next three to five years?

Matt Tobolski (President and COO)

Yeah, there's tremendous visibility from a pipeline perspective that we see with our customers. Large data center operators that we work with, we're typically getting every month, every two months, we're getting an updated pipeline that is provided to us. That is giving us anywhere from a three-to-seven-year kind of outlook on what these big players have in their projections. Is there noise in the data center industry right now?

Chris Moore (Analyst)

Sure.

Matt Tobolski (President and COO)

There's a lot of conversation around cancellations and push-outs. What I would say is the pipeline that we see has never been stronger. The orders book that we see has never been stronger. While there might be some near-term noise, it's still on a growing base. We're seeing this continued strengthen. We're seeing the inquiries, the pipeline visibility.

We're seeing all of that in a very strong condition, seeing it strengthening. There's definitely some near-term conversations, which, frankly, Chris, I think it's actually a good thing if you think about this systematically. I mean, if we sort of have a more normalized but aggressive growth rate as an industry, not relative to AAON, but as an industry, that's far easier to manage. We see this continued long-term strengthening cycle.

We see tremendously good visibility into 2026 that's providing us confidence in that sort of next-year performance continuing to build off of strong 2025. Yes, there's noise in the industry, but I would just reaffirm that the visibility of the pipeline has never been stronger. The order activity within the Basics segment has never been stronger. The activity with our customers, engaging with those customers, has never been better.

Chris Moore (Analyst)

Perfect. The $200 million-plus liquid cooling order, I know it had gotten pushed a little bit. Was any of that or much of that in Q1?

Matt Tobolski (President and COO)

Of that order, if we look at the $200 million order that we talked about last year, so far, we've recognized about $80 million or so of that revenue. That is the sort of ramp-up. That started off in Q4 of last year. It started. Certainly had a very strong ramp in Q1 as we really worked to get a baseline of inventory and really build up that product.

That project we talked about on the Q4 call, originally, we had said, "Hey, we anticipated that mostly converting the first half of the year with some spillover into Q3." I would just say that the overall cycle or that project has, I'll say, spread a little bit. Really, from our anticipation, we recognize $80 million of that $200 million to date.

We anticipate the rest of that to really spread out over the rest of this calendar year. It is kind of what we see. We have additional follow-on orders with that customer. We have a tremendous amount of visibility into that 2026 and 2027 pipeline with that customer. We are continuing to show that as an accelerating demand with that customer.

It is just the initial build-out and really the ramp-up rate of that investment. It has just taken a little bit longer to kind of materialize, not from a demand from their customer's perspective, but just all the construction activity that is associated with building these new AI data centers. It has just lengthened that cycle with that order just a little bit.

Chris Moore (Analyst)

Got it. I appreciate that. I'll jump back in line. Thanks, man.

Matt Tobolski (President and COO)

Yeah, of course.

Operator (participant)

Your next question is from the line of Brent Thielman from D.A. Davidson. Please go ahead.

Brent Thielman (Analyst)

Hey, great. Thanks, Gary. Relay, all the same. It's been a pleasure. I guess first question just on the rooftop business, some of the supply chain issues you've felt here in the quarter, and it sounds like you continue to feel to some degree. Are you at the point where there's some confidence these issues are going to be behind you as you go into the second half of the year? I guess just with that, I was curious. It didn't really seem like that impacted the Basics-branded product. I'm just wondering if that could still come or you see it as a non-issue there.

Matt Tobolski (President and COO)

Yeah. So where the confidence comes from, and really, I'll say, Brent, where we sit today, the acceleration of resolution that we're seeing in the supply chain with these new refrigerant components, I mean, it's all trending very positive.

It's really, as the whole industry transitioned with that sort of hard stop on January 1st to go from 410 to 454B, it was just a lot of, I'll say, strains on the overall supply chain just in support of those new components because you're basically having to support the 410A products that were being built and flushed out through 2024 with also the impending new products that you had to introduce in support of the R-454B equipment.

So there was just, I'll say, some initial transition strains that were put there within the supply chain. If we look month by month, we've continued to see these abate. We saw the impact in Q1 waning, sorry, as the quarter kind of progressed and going into April. We still have a little bit of lingering issue, but by and large, we're seeing the light at the end of the tunnel. That is definitely what's giving us that confidence going forward. You're not going to be operating in this environment, let's say, once we get into the second half of the year.

These manufacturers are primarily building the 454B components. That definitely is alleviating some of the noise that was created in the supply chain in that first quarter. There is a lot of confidence that these are abating and really providing kind of the support of our acceleration and our production levels within the Oklahoma segment in particular.

That's going to really get that top-line sales back where we want them to be, as well as the overall profit margins kind of with that volume getting back up. Relative to the Basics segment, most of the products that are made in the Basics segment, the vast majority of those products are not refrigerant-based systems. They did not have those same supply chain impacts. Really, in the Basics segment, we did not see any of those impacts impacting our ability to manufacture there.

Brent Thielman (Analyst)

Really helpful, Matt. Maybe as a follow-on, sort of beyond the issues associated with the refrigerant change and those associated components, can you talk about maybe broader exposure just now with the implementation of tariffs and what that might do to the kind of broader supply chain? How do you think AAON's positioned around that, where you feel like you're fairly well positioned or not, just for the things that we can't potentially see coming in terms of broader impacts to the supply chain?

Matt Tobolski (President and COO)

Yeah, certainly. I mean, tariffs definitely. We had a bet going, Brent, how long was it going to take for a tariff question to come? It came a little later than we expected on the overall Q&A. When we think about the impact of tariffs within the AAON segment, I'll say one thing that we feel good about is we have a tremendous amount of vertical integration in our manufacturing process. We also rely heavily and proudly rely heavily on a lot of our U.S. partners.

The exposure to tariffs that we see from an AAON perspective is certainly less than what we see in some of our competition. To start off, we say that certainly we see ourselves being better positioned in a tariff-ridden environment. We've been naive to not say they're going to impact us somehow.

I mean, supply chain, even for U.S.-manufactured components that we might buy, a lot of components that go into those components might be sourced internationally. There is definitely some tariff impact. Obviously, that's reflective in our surcharge. The general supply chain environment that we have, there will be some noise that we think will come out of the tariffs.

By and large, the focus on U.S. manufacturing, the focus on vertical integration, and really a pretty strong U.S.-based supply chain that we rely on for the vast majority of our components puts them in a position where we think those are going to be a smaller impact to AAON, especially relative to a lot of our competition.

Brent Thielman (Analyst)

Okay. Just last one, just on the Basics branded products. Maybe more of a clarification, Matt. I think I heard you say a lot of growth certainly aligned with one of the customers out there. Could you just talk about diversification of customers within that product line? Do you expect more diversity in the coming years, especially as you're bringing on new capacity? Just trying to get a sense around how much is aligned with a single customer versus a lot of different customers that are out there.

Matt Tobolski (President and COO)

Yeah. No, it's a great question, Brent. I'll say that the math certainly is never in our favor when you get a $200 million order in terms of its impact on some concentration, at least in the near term. What I would say is, while that is a great win, and that's certainly something that is helping fuel a lot of growth, it's also very front of mind for us to continue getting diversified customer base.

If you look at the activity that we have in terms of bidding activity, in terms of some new orders that we have, large-scale orders, not small little orders, there's a continuing diversification in that customer base. There's also an acceleration of new customer interactions. With the win on that liquid cooling product, we've got a tremendous amount of inertia in the industry regarding the solutions we can provide.

Our sales and engineering teams are actively engaged with a large spread of new customers supporting both liquid cooling and traditional colocation data center projects. That definitely, as we look forward, is going to be a continued focus to continue diversifying, continue building upon the great wins we have, but be very intentional about continuing to build great wins with new customers as well. Going forward, I think you'll see our backlog continue diversifying in a customer-based perspective and really not having us too over-leveraged on one single customer.

Brent Thielman (Analyst)

Very good. Thank you.

Operator (participant)

Ladies and gentlemen, as a reminder, if you'd like to ask a question, please press star followed by the number one. If you'd like to withdraw from the polling process, please press star two. If you are using a speakerphone, please make sure you lift your handset before pressing any keys. Your next question comes from the line of Tim Wojs from Baird. Please go ahead.

Timothy Wojs (Analyst)

Hey, everybody. Good morning. I just wanted to echo the same sentiments to Gary. It's been great working with you.

Gary Fields (CEO)

Thank you.

Timothy Wojs (Analyst)

Maybe I just have a couple of follow-ups. I guess on the Oklahoma business, has there been any change to how you're thinking about the full-year revenue guidance? I think previously, you had kind of said maybe the full year would be flat to down a little bit. Has that changed at all? Is it just kind of more back half-weighted? How do you think about kind of layering that surcharge part into that?

Matt Tobolski (President and COO)

Yes. The guide as it stands today has not changed. Tim, what I'll say is there's the uncertainty definitely in that back half of the year. Really, I'll say uncertainty more on the Q4 side. As much as we are taking market share and we're continuing to see good order cadence here in the second quarter, there is definitely still uncertainty in an overall macro environment perspective that is certainly front of mind for us.

Our guide definitely has that built into it on kind of what Q4 looks like. The tariff part of it, the tariff itself, while it went in place in March, essentially, the reality is we're not going to really start seeing that until the later part of Q3.

When that's going to really start hitting the production floor, hitting the revenue side, it's going to be a Q3 story as where it's going to start. You'll see that kind of materialize in Q4. It's going to have an impact. Obviously, from a full-year perspective, it's not like we're getting a 6% uplift. It's definitely going to be more like a third of that from an overall kind of impact on the overall sales side of things. Really, what I'd say is that's the tariff aspect and just the uncertainty that's built into that Q4 guide, just given the unknowns around the macro is really where that guide is sitting today.

Timothy Wojs (Analyst)

Okay. Okay. That's helpful. Thanks. Just on the data, kind of the Basics backlog, I mean, the $80 million-$85 million sequential increase, I guess any color on kind of the mix of liquid cooling and side cooling within that? I guess just in the total backlog, kind of the same question, kind of the mix of liquid versus air.

Matt Tobolski (President and COO)

Yeah. Definitely, there's more activity in liquid cooling that is in that backlog. Obviously, also some good run rates out of coil products that's eating down that. I'll say we've replenished the coffers a little bit with some more liquid cooling orders that came in in Q1. There definitely, though, is airside continued acceleration of airside bookings as well and a lot of activity around airside. Why I say that is really when we look at the activity that we're seeing, definitely there's a lot of conversation, a lot of activity on the AI data center side of things. There's also continued strength, and we continue seeing the investments made in the more traditional data centers, cloud-compute data centers. We're seeing that kind of materialize with airside activity as well.

We definitely are seeing the broad bookings kind of built into that backlog and into that business cadence. There's a good amount of backlog sitting inside of liquid cooling, but it's not the majority. It's not like it's the vast majority of that is liquid cooling. It's a pretty good spread between liquid and airside products.

Timothy Wojs (Analyst)

Okay. Okay. Thanks for the color. Good luck on the rest of the year.

Matt Tobolski (President and COO)

Thank you.

Operator (participant)

Your last question is from the line of Tom Sandis from Sandys. Please go ahead.

Yes. I'm a stockholder. Go back to masthead or Diamond Hill. What's the problem with AAON being listed on the New York on the Wall Street Journal? They were listed, and now they're not. What's going on? How do we get the stockholders involved, more stockholders involved in buying AAON stock?

Joseph Mondillo (Director of Investor Relations)

Hey, Tom. This is Joe.

Hi, Joe.

I think good morning. I think we've probably spoken about this in the past.

Matt Tobolski (President and COO)

We have, yes.

Joseph Mondillo (Director of Investor Relations)

Yeah. I think I'm still looking into that. I'm not really certain the answer, but I'll try to provide you with an answer sometime soon.

Thank you.

Operator (participant)

There are no further questions at this time. I'd like to turn the call over to Joe Mondillo for closing comments. Sir, please go ahead.

Joseph Mondillo (Director of Investor Relations)

All right. Thank you, Operator. Just want to remind everyone that we'll be attending the William Blair Conference on June 4th in Chicago and hosting an Investor Day in New York City on June 10th. Hope to see some of you there. Want to thank everyone for joining the call today. If anyone has any questions over the coming days and weeks, please feel free to reach out to myself. Have a great rest of the day, and we look forward to speaking with you in the future. Thanks.

Operator (participant)

This concludes today's conference call. Thank you very much for your participation. You may now disconnect.