AAON Q2 2025: Cuts FY Guidance 20% on ERP Rollout Delays
- Favorable Backlog Pricing: Management emphasized that the Aon branded backlog is favorably priced—with the recent 3% price increase and 6% tariff surcharge embedded in orders—suggesting improved margin outlook in upcoming quarters.
- Operational Recovery from ERP Challenges: Despite short‐term ERP disruptions, executives noted strong recovery in production at both the Tulsa and Longview facilities with proactive supply chain and operational responses, positioning the company for robust performance later in the year.
- Robust Data Center Demand and Strategic Partnerships: The Q&A highlighted significant momentum in the data center market—with Basics branded data center sales up 127% year over year and a key partnership with Applied Digital—which supports a bullish view on future revenue and margin expansion.
- ERP Implementation Disruptions: The company’s phased ERP rollout has led to persistent production delays and supply chain issues, notably impacting coil production at the Longview facility and, in turn, reducing production efficiency in Tulsa. This raises concerns that the ERP-related disruptions could persist longer than anticipated, negatively affecting revenue and margins.
- Margin Pressure from Underperformance: The operational challenges—including lower production volumes and additional costs such as those from the Memphis facility startup—have contracted gross margins. The Q&A highlighted that these issues, coupled with the dilution of production efficiency, could continue to put pressure on margins, making margin recovery slower than expected.
- Short-Term Cost Drag from Capacity Investments: Significant capital investments and working capital requirements, particularly in the newly acquired Memphis facility, are currently acting as a cost drag without being fully offset by revenue. This scenario raises a bear concern that until the facility ramps up effectively, profitability may be further pressured.
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Sales Growth | FY 2025 | mid- to high teens percentage range | low teens | lowered |
Gross Margin | FY 2025 | expected to be similar to the gross margin realized in 2024 | between 28% and 29% | no change |
SG&A Expenses | FY 2025 | decline by 25 to 50 basis points | 16.5% to 17% | no change |
Capital Expenditures | FY 2025 | approximately $220 million | approximately $220 million | no change |
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Guidance Revision
Q: How is full‑year guidance revised?
A: Management explained that the new guidance reflects challenges from the ERP rollout at Longview and a lower production start in Tulsa, resulting in a 20% shortfall that is expected to improve sequentially as operations normalize. -
ERP Mitigation
Q: Does guidance account for ERP risks?
A: They expressed high confidence that the revised targets fully incorporate ERP-related headwinds and noted immediate supply chain and operational measures are already mitigating these issues. -
Oklahoma Margin
Q: What gross margin is expected in Oklahoma?
A: Management anticipates Oklahoma’s gross margins will settle in the low 30s, with modest incremental costs offset by steady production recovery, in line with a long‑term target of 32–35%. -
Backlog Pricing
Q: Are backlog orders margin‑protected?
A: They clarified that the Aon backlog is favorably priced—embodying a 3% price increase and a 6% tariff surcharge—while basics orders include escalation clauses to safeguard margins. -
Memphis Outlook
Q: How will Memphis perform in 2026?
A: Management indicated that the Memphis facility will transition from a cost drag in 2025 to a positive contributor in 2026, driven by robust demand for data center solutions and higher order volumes. -
Market Outlook
Q: What is the non‑residential market outlook?
A: They observed about a 10% volume softness in the non‑residential segment but expect the market’s bottoming out soon, with bookings and production picking up over the next 16–18 months. -
Bill Act Impact
Q: Has the bill boosted customer sentiment?
A: Management noted that the One Big Beautiful Bill has provided a modest uplift in customer sentiment regarding capital investment, though it isn’t a dramatic catalyst by itself.
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