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Operator
to the Aon Inc. Second Quarter 2023 Earnings Conference Call. Our host for today's call is Joe Mondillo, Director of Investor Relations. At this time, all participants will be in a listen-only mode. Later, we will conduct a question-and-answer session. I would now like to turn the call over to your host, Mr. Mondillo. You may begin, sir.
Joe Mondillo
Thank you, Operator, and good afternoon, everyone. Press release announcing our second quarter financial results was issued after market closed today 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 go 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 AON's control that could cause AON's results to differ materially from those anticipated. You all are aware of the inherent difficulties, risks, and uncertainties in making predictive statements. Our press release and Form 10-Q that we filed this afternoon detail some of the important risk factors that may cause our actual results to differ from those in our predictions. Please note that we do not have the duty to update our forward-looking statements. Joining me on today's call is Gary Fields, President and CEO, and Rebecca Thompson, CFO and Treasurer. Also joining to provide some insight during the Q&A is Matt Tobolsky, president of BASICS. We'll begin with Gary providing some opening remarks. Rebecca will then walk you through the quarterly results, and then we'll finish with Gary for some commentary on the quarter and outlook before moving to Q&A. With that, I'll turn over the call to Gary.
Gary Fields
Good afternoon. Start on slide three. Overall, we're very pleased with our second quarter results. We reported record sales for a sixth straight quarter. Organic volume was up year over year 16%. That was against a quarter a year ago where organic volume was also up double digits. Our operations team is doing a great job managing the robust demand by increasing production capacity quickly. In fact, production finally began to outpace bookings this quarter, allowing our backlog and lead times to fall, which we were happy to see. Led by even greater increases in production output, we are on track for lead times to fall even further in the second half of the year. This all reflects the investments we have made in production capacity, including workforce, equipment, and warehousing. The market environment remains busy, and we're optimistic bookings in the second half will remain solid. As such, we continue to invest in future growth. In the second quarter, we held the grand opening of our new marketing building, also known as the Exploration Center. Our products are best in class in our industry, providing premium performance at the most attractive value proposition. This new building, located at our headquarters in Tulsa, displays market alternatives side by side with our products, showcasing the superiority of our equipment. This is an extremely valuable tool for our sales channel partners. We expect great returns on this investment as we are confident it will help gain new customers and drive bookings amongst existing customers. Additionally, later this year, we will be rolling out a new branding of our highest performing package solutions ever. The industry's most versatile line of commercial, fully electric air source heat pumps. We will call it the Alpha Class. In the animal kingdom, Alpha stands for having the highest rank in a dominance hierarchy. This is what this new equipment is, dominant. Operating down to zero degrees Fahrenheit, there is no other commercial air source heat pump like it on the market. And the Alpha class retains the superior quality of manufacturing that the Aon brand exemplifies. This new equipment will revolutionize the industry, paving the way for a cleaner environment while maintaining the comfort of Aon's premium performance. I'll now hand over the call to Rebecca Thompson to go over the financial results.
Rebecca Thompson
Thank you, Gary. Please turn to slide four. Net sales increased 36% to $284 million from $208.8 million. Volume grew 16%, reflecting the company's strong backlog at the start of the quarter, as well as a sixth straight quarter of record production which reflects the company's success of attracting and retaining employees along with further investments in production machinery. In addition to volume, pricing contributed 20% to our growth. Moving to slide 5, gross profit increased 98.5% to $94 million from $47.4 million. As a percentage of sales, gross profit was 33.1%, compared to 22.7% in the second quarter of 2022. Realization of price increases has improved our margin profile along with the slowing of inflation. We've experienced year-over-year increases in the cost of materials and have implemented periodic wage increases in addition to our annual merit increases in order to retain employees. The multiple price increases during 2022 and 2023 counteract these increased costs of materials and labor. Please turn to slide 6. Selling, general, and administrative expenses increased 45.8% to $39.3 million from $26.9 million in the second quarter of 2022. As a percentage of sales, SG&A increased to 13.8% from 12.9% in the second quarter of 2022. The increase relative to sales is primarily attributable to an increase in profit-sharing expenses, which is a result of the record earnings we realized. Please turn to slide 7. Income from operations increased 167.6% to $54.7 million from $20.5 million in the year-ago quarter. As the percent of sales operating margin expanded to 19.3%, from 9.8% in the second quarter of 2022. Moving to slide eight, diluted earnings per share increased 173.3% to 82 cents per share from 30 cents per share. In the quarter, we benefited from a one-time tax benefit of 3.1 million. Including discrete events, we continue to anticipate a tax rate of 24.1% through the rest of the year. Turning to slide 9, our balance sheet remains strong. Cash, cash equivalents, and restricted cash totaled $27.7 million on June 30, 2023, and debt at the end of the quarter totaled $78.5 million. Within the quarter, we paid down $5.1 million on our line of credit. Our leverage ratio of 0.37 was down from 0.47 at the end of the first quarter and down 0.46 at the end of 2022. We had a working capital balance of $270.5 million at June 30, 2023 versus $203.5 million at December 31, 2022. Our working capital has increased due to the receipt of restricted cash from the closing of our new markets tax credit and increased in higher priced receivables. Along with improved earnings, cash from operations will improve significantly through the rest of the year helping pay down debt and finance CapEx projects. Capital expenditures for the first six months of the year were $60.6 million, up 122.7% from a year ago. We continue to expect capital expenditures for the year to be approximately $135 million, which equates to more than 150% year-over-year growth. We monitor our growth trajectory and capacity utilization regularly and we will continue to invest in long-term growth. With that, I'll now turn the call back over to Gary.
Gary Fields
You'll turn to slide 10. As I said in my opening remarks, we're very pleased with the second quarter. Our operations continue to deal with manufacturing challenges, and yet production output continued to grow on a quarter-to-quarter basis, marking the sixth straight quarter of sequential volume growth. Organic volume was up 16%, And on a two-year stack, it was up 27.6%. We've made great strides at increasing our production capacity to allow for this growth. Total headcount was up 26.1% from a year ago and up 18.2% from the end of 2022. We continue to do a great job at onboarding new employees. We're also investing in new equipment and warehouse space that has also contributed to the increased production. Supply chain issues have begun to improve, which has helped improve output. Lead times amongst the supply chain remain lofty, but finding the supply of materials has become less of a challenge. Lastly, volume growth was also a reflection of our premier sales channel. I will reiterate, our sales channel has never been as strong as it is right now, and we're now giving them more tools to help them be more successful than they've ever been. Please turn to slide 11. We were pleased to see gross margin expand in the second quarter, as we indicated on the first quarter call. As we stated on the first quarter conference call, after April 1st, we lifted the regular monthly price increase that we had in effect going back to last June. We now believe the price premium of our equipment relative to the competition is in the high single digits, down from 15 to 20% that we were at historically. This is making the value proposition of our equipment even more compelling. helping drive further share gains. At the same time, we are able to expand profit margins. Thus, we are executing our pricing strategy very well. We'll continue to monitor this closely, particularly as we approach the end of the year. It is likely that we'll continue to see cost pressures next year. We maintain that we will continue to be disciplined with pricing. For the second half of the year, we anticipate gross margin will continue to expand, but at a slower pace than what you saw in the first half. Now let's move to slide 12. As I stated earlier, production has finally begun to outpace bookings, which we're happy to see. This has led to lower lead times, which will help us maintain competitiveness. That said, lead times are still higher than where we'd like to see them, so there's more work to be done. We are making progress, though, and we expect even more progress in the second half of the year. Overall demand remains solid. Bookings slowed in the second quarter versus the first quarter, but we do not believe this is an indication of a slowdown. Bookings at the end of last year and in the first quarter of this year were unusually strong. Supply chain issues across the construction markets seemed to have led to a pull forward by a few months that resulted in the pattern that you've seen this year. When we speak with our sales rep partners, demand in the pipeline remains strong. In fact, backlogs at most of our channel partners are at record levels and the sentiment is very positive. Now let's turn to 13. The macro data is also still solid. Construction spending is now well beyond pre-pandemic levels and construction starts are at strong levels. The ABI and the Dodge Momentum Index, which track the pipeline of non-residential projects early in the planning stages, also still imply the pipeline is still at historically high levels. Demand continues to be fairly broad-based for us. Data center markets are very strong. The K-12 education vertical is solid. Healthcare and manufacturing are also still very good. We continue to see robust demand in the Grove facility market, And while new construction of warehouses has slowed, the end market remains good for us due to retrofit work. We're also starting to see good demand from the electric vehicle and EV battery markets. There's some pockets of softness, for example, the office sector and parts of retail, but overall market demand remains solid. Slide number 14. Although lead times have begun to fall, they remain higher than normal. The investments we have made in additional personnel, New equipment and warehouse space have allowed us to maintain industry-best lead times, even while lead times across the industry have fallen. We will continue to invest in capacity to help us remain competitive. CapEx is expected to be up 150% this year, of which a vast majority is related to increasing production capacity. Considering that, I'm optimistic that lead times and backlog will continue to decline throughout the year. Now let's move to slide 15. Parts sales grew 14.2% in the quarter and were up 24.4% in the first half of the year. The business increased slightly to 5.7% of total sales, and that was in a quarter that we realized robust growth of equipment sales. We remain optimistic through the rest of the year. As the supply chain issues continue to wane, this business should benefit. Long term, we continue to anticipate this business will become a larger part of the company, both on a sales and profitability basis. Now let's turn to 16. So before finishing up and handing off the call for Q&A, I want to provide some information on our outlook for the rest of the year. Based on the size and improved margin profile of the backlog and the increased production capacity and improving productivity that we anticipate, We continue to expect sales and earnings will improve sequentially in Q3. We now anticipate pricing will be a mid-double-digit contributor to sales growth for the year, up from low double digits. For SG&A, as we have stated on prior calls, we are making several investments that will help position the company better for long-term growth. We continue to think SG&A as a percent of sales will be higher than what we realized in 22. Finally, CapEx will be approximately $135 million. In closing, I want to finish by thanking all of our employees, sales channel partners, and customers. Thank you. I will now open up for Q&A.
Operator
If you would like to ask a question, please press star 1 on your telephone keypad now. You will be placed into the queue in the order received. Please be prepared to ask your question when prompted. Once again, if you have a question, please press star one on your phone now. And our first question comes from Julio Romero from Sedati & Co. Your line is open.
Julio Romero
Great, thanks. Hey, good afternoon. Good afternoon. Gary, you talked about a potential pull forward at the end of last year and first quarter of this year. Were there any particular verticals that experienced those pull-forwards, or was it more, in your opinion, it kind of a broad-based pull-forward across the board?
Gary Fields
Well, one significant was K-12. Normally, K-12 bookings, we don't see them strengthen until deep into Q1, like towards the end of Q1. And now we started seeing them in Q4. Very strong in December. And then it stayed very strong right through Q1. So as I spoke with sales channel partners, and I was looking at jobs on the bookings list and saw lots of school names, I asked if there was a logical reason for this. And they said, of course. The school market said all construction recognizes that lead times are longer. So nearly everyone that's got a lead time sensitive project that's trying to do it in a defined time frame, like you know, K through 12 schools do an awful lot of change-out work when school ends and before school starts. So they've recognized the industry itself has longer lead times, and they've changed their actions as a reflection of that. There's others that have done the same, but again, the most significant was K-12. Got it.
Julio Romero
No, that's very helpful. And, you know, any way to quantify how much the the capacity brought online added to HEW results?
Gary Fields
Well, we have been trying to maintain to the best of our ability in excess of 30% additional infrastructure beyond what our current run rate is. Earlier in the year, we were at about 42%. Right now, we're probably closer to 30% because we've accelerated the growth so much. We do have several new Salvinini machines going in place as we speak. Some of those are replacing old machines that weren't producing a normal number of parts just due to the older worn-out machines. They're not dispatchable as many hours of the day. So we've got several new machines going in to replace old machines, but then we also have accretive machines going in. When we shut down the small water source heat pumps, the two through six ton indoor water source heat pumps, we were able to repurpose that area, move some things from one building to the other to consolidate for better operating efficiency. But then that opened up some area for additional Salvinini machines, which are one of our most significant bottlenecks and one of the most necessary components for our manufacturing process. So we now have, by the end of this year, we'll be back somewhere around 40-42% surplus capacity.
Julio Romero
Okay, really helpful. And then just last one for me is, it sounds like the price premium between yourself and your competitors has narrowed pretty dramatically, but you expect increased costs next year. Is it your sense that the market demand is strong enough that price increases next year could be absorbed by customers?
Gary Fields
Yeah, I think so. When you look at all the data, they've been trying to slow inflation down, but it's not gone. It seems that it's somewhere around the 5% range currently. And as we look at wage rate increases, anticipate what we're going to do right around the first of the year, we've already factored that in. We factored in what the materials are. And we believe that there'll probably be some small price increases, but you won't see anything. In my opinion, From Aon, I don't believe you'll see anything substantial. You'll just see some small incrementals. We'll probably go back to that 1% per month. That was a very good strategy. It kept us from having a big pull forward of subpar priced backlog, and yet it got our margins right where we wanted. So now it's a proven concept for us, and I think we'll reinstitute that at some point in time. We've not made a decision yet. FP&A gave me an update yesterday. And we've modeled with and without. And we're intent on maintaining our margin profile as it is or better, slight improvement. But our primary thing, as we've said, is trying to maintain that price premium differential. So one of the things, when we were 15% to 20% premium, our energy efficiency was already well above the required energy efficiency for the 2023 standards. Yet we were being compared to numerous competitors that were well below 2023 standards. January 1st, 2023, we all had to be on, you know, everybody came up. And so they came up to our pre-existing standards, what it amounted to. And there was a lot of cost to do that. You don't get additional energy efficiency free. And so I think a lot of the narrowing was because of that aspect right there.
Brent Thielman
Really appreciate the caller. I'll hop back into queue. Yes.
Operator
And our next question comes from Chris Moore from CJS Securities. Your line is open.
Chris Moore
Hey, good afternoon. Thanks for taking a couple questions. Maybe just follow up on that premium conversation. Obviously, we had this conversation multiple times before, but you're selling at less of a premium now that has increased the willingness of some purchasers to try Aon for the first time. I'm wondering if maybe you can just comment on that trend during Q2. Are you seeing additional customers that never had used Aon before that have in the recent quarter or so?
Gary Fields
Well, obviously there's some of that. I don't have it quantified and carved out by itself. What I will say, though, is we've had visitors to our new exploration center that I did not believe would come visit us because they were uneasy with the price differential. And now they visited us for multiple reasons. The price differential is recognized as being less burdensome to them. The value story, the way we present equipment in this building where we have equipment that maybe is similar to what they're purchasing at this lower cost compared to ours, and now they can see this narrower differential and say, you know, very good value statement right there. And the next thing that's been compelling a lot of people to come in is the alpha class unit that I spoke of earlier. We've had kind of a pre-rollout with certain clients on that because the testing is finished, all the data is finished. We're actually in production on those units and have been for a bit. And so that story is beginning to resonate with people. We had a client in a couple of weeks ago, a very, very major client that's got to replace thousands upon thousands of units. and their board has tasked them with becoming zero emissions, not net zero, but zero emissions. And that being the case, an electrified heating method is required to make that happen. And when you look at a wide swath of North America, our alpha class units satisfy that need, and we're the only ones currently that do that.
Chris Moore
Got it. Very helpful. Maybe just shift gears here. It's obviously doing quite well. Just trying to understand how the average size of their orders compares with the rest of the company. I'm just wondering if they are more lumpy, how to look at that moving forward.
Gary Fields
On basics, you said?
Chris Moore
Yeah. Are they bigger? Are they lumpier?
Gary Fields
Matt's on the call. I'll let him take that, please.
Chris Moore
Perfect.
Matt
Yeah. It's a fantastic question, and certainly the size of basics orders definitely is a larger kind of price per order perspective, just given the industries and kind of the scale of orders and repetitive number of units. And so we certainly continue seeing strong increase in kind of growth in the average order size within the basics kind of side of the business. With that, obviously, I think your comment on lumpiness, I think lumpiness is sort of a, when we average it out, we continue seeing a very substantial growth trajectory. As we kind of isolate down a month by month, obviously, the increasing order sizes creates a certain kind of order cadence that you might quantify as lumpy, but on a kind of quarter by quarter growth and kind of as we look at trajectory, it continues to be very strong from a growth perspective as well as from a order size perspective.
Chris Moore
Got it. I appreciate that. And my last one is just... Yes, please.
Gary Fields
Well, Chris, let me get you one other thing here real quick. So Aon legacy equipment, when people place the order, they place it in accordance with our published lead time and they expect it to ship at that time. On basics, because the projects are so substantial... they tend to place orders that they need things very long-term. We're talking to people about orders that have a total delivery profile of one year. Now, they may be month by month if they want them, but they're buying a year's worth maybe, or even two years worth. So it's lumpy in the fact that you book a big order, but it's not lumpy in the production stage in that they have these things parsed out so many per week, so many per month.
Chris Moore
Got it. That's helpful, Gary. Maybe just my last one. You guys mentioned it, certainly, and talked about it, but the pending regulations from the DOE on lowering global warming potential refrigerants That's 2025. Just trying to understand kind of how that's going to impact you guys. Are you out in front as normally you are on these things, and how significant is that to the industry?
Gary Fields
We just started putting it in our pricing program, and we are ready to take orders for it now and begin delivery as soon as January 1st of 2024. While some projects don't yet have the authorization to start that equipment up, If the project has a long duration for construction, some people are already considering purchasing early just so they don't get in a traffic jam trying to get what they need. So we're very far ahead of the curve on that. We have not the entire product line completed right now, but we're very close to having from two tons all the way to 240 tons completed with the new refrigerant. Very close.
Chris Moore
Perfect.
Brent Thielman
I will leave it there. I appreciate it, guys.
Operator
And as a reminder, if you do have a question, please press star 1 on your telephone keypad now. And our next question comes from Brent Thielman from DA Davidson. Your line is open.
Brent Thielman
Great. Thanks.
spk04
Good afternoon. Gary, just with the production capacity increasing and the lead times shrinking, how do we all kind of think about the conversion timing of your backlog as it sits today, understanding that your lead times are going to continue to get better here? But what level of visibility does that offer you now based on where your production capacity returns are now?
Gary Fields
Yeah, it remains a difficult calculus in that manner. Historically, before the pandemic, it was quite simple. You could take the backlog and divide it by current production rate, and that gave you the lead time. The scenario that people are buying, committing and buying equipment, writing purchase orders for it, contracts for it, with, we'll call it delayed delivery. They want to get that place in line, get it secured. I don't know how much of our backlog is that. I don't think it's an abundance of it, but it's certainly a recognizable percentage. So I think we're currently mostly in the 12 to 16 week range on equipment. We have some exceptions. We've got a few things that are a little quicker, like the products that we build in Longview. I think a good many of those are down around eight weeks now. And then our very largest products, the RZ series, I just had a request from sales channel partner. He involved me because it was such a significant project and he needed 22 weeks on, you know, we're talking units that are a single unit on a single tractor trailer truck load, you know, maybe 180 to 200 tons of capacity, air conditioning capacity. And he needed 22 weeks for several of those units, and we were able to meet that for him. So I was really proud of the team to be able to do that. And, you know, again, I'd like to see overall our lead times come down another two or three weeks.
Brent Thielman
Yep. Got it.
spk04
Gary, it might be a little bit early, but are you beginning to see orders? for 2024, or at least are the conversations you're having with the sales channel giving you some kind of early confidence about next year just in this kind of current climate?
Gary Fields
Yeah, they are. I'm going to tell you, though, I don't have a lot of concern about it, but I think there's going to be some people that are anticipating that the new refrigerant is going to be abundantly available and required January 1st, 2025. you know, this large client that came in to see us that wants to be decarbonized and, you know, zero emissions, they're trying to set up all of their supply chain for these units right now with an anticipated January 1st, 25 begin to ship date because they want the new refrigerant. And they said there'll be exceptions where they're building a new store that they might be able to use the units before that. But by and large, this is a replacement project to replace units that are have gas heat and have the current refrigerator or older. So they probably aren't the only client that's already planning for 25 that's having those conversations. I think that from what I can see in the pipeline, everything's very robust, very strong right now. But I anticipate somewhere in 24, don't know when, but somewhere in 24, bookings are very likely to soften up just a little bit. because they're anticipating that change over to the new refrigerant.
Brent Thielman
Understood.
spk04
And then the growth initiatives you're putting in place and I guess belongs to you, when do those start to be accreted to you or when are you able to leverage that added capacity?
Gary Fields
Well, we just had groundbreaking a few days ago. They've been doing some dirt work. We anticipate that that building will be complete somewhere towards the end of next year. It's about an 18 to 20 month build cycle. The manufacturing equipment for that building, we already have it. So we'll have to relocate some of it from another part of the old plant into the new plant. We've got new equipment coming, you know, already ordered and coming. So I would say
spk04
we won't have any material value of production from that building until first quarter of 25. yep okay and then just the the last one um can obviously see the underlying growth of the basics business and the results um i'm just wondering if you or matt can just speak to the order quotation activity you're experiencing it seems that all we hear you know, lately from companies continues to be, you know, heavy data center, clean room activity, just very healthy markets. Just wondering if we'll see a higher run rate of business from that business.
Gary Fields
Yeah. Well, while I'm very familiar with Matt's activities, he keeps me well informed and I go out there from time to time and, and kick around. I'm going to let Matt take that. It's, I'll just give you this. I'm extremely excited, but Matt, go ahead.
Matt
Yeah. Yeah, of course. Yeah. So, Certainly, I mean, from your question, right, loaded question, exactly correct that the activity and the data center semiconductor world is continuing to accelerate. You know, I think a lot of us talked, you know, 12 months ago about not a non-growing data center market, but the data center market slowed slightly for a bit there. But definitely with the AI kind of big push, we're seeing a massive amount of attention within the industry and you know, product activity and outlook. As Gary mentioned, a lot of these projects are of substantial scale kind of in the overall scheme of things. And so a lot of activity in which we're talking not just about, you know, quick turn orders, but long-term contract relationships to be able to kind of serve those needs from a data center perspective. On the semiconductor clean room side, you know, we are definitely starting to see a lot of the you know, results of the CHIPS Act really start to come to fruition with project activity and really good bid activity and project interest. And really kind of coupling that forward kind of outside of semiconductor but still kind of our clean room style air handlers. A huge amount of activity right now supporting EV and battery plants as we continue seeing a huge investment within the United States for developing battery capacity. A lot of the units that we manufacture from the basics perspective really are tuned to serve those clean environments that are very temperature and humidity and kind of overall environmental control sensitive. So, yeah, strong activity. I mean, I'd echo Gary's sentiment, you know, very excited from a prospect standpoint and really some great activity that we're seeing with our team on a really solid pipeline in the future.
Brent Thielman
Okay. Thanks, Gary. Thanks, Matt. Appreciate it. Yep. Mm-hmm.
Operator
And our next question comes from John Bratz from Oppenheimer. Your line is open.
John Bratz
Good afternoon, everyone. Matt, you answered most of my questions. But, Gary, one question. You mentioned that there were some pockets of weakness in your end markets. And I guess my question is, Did that weakness develop in this quarter, or is this something that you've noticed over the last few quarters?
Gary Fields
Well, it was more significant this quarter. We have noticed it slightly. We'll go back to Q4 of 22, and you saw just a slight decline in a couple of those markets. Q1, you saw a further slide in them. But Q2 is when we normally expect things to pick up just a bit more. So it was going the wrong direction for offices and retail in particular. And I don't think that's any surprise to anybody. I mean, you know, you got brick and mortar stores closing left and right and shopping malls closing left and right. And you've got office buildings that are unoccupied. So How is somebody going to have any temperament to go out and build either one of those in abundance? There are some isolated places where it's still happening. You know, I live in the Dallas-Fort Worth area and you drive around here and there's still cranes up and they're still building office buildings of all things. And there's still some bidding and we're supplying equipment on some. But if you look at it across North America, especially both coast, office buildings are very, very insignificant market right now. And Retail, it's been interesting, you know, quick serve restaurants, convenience stores and things like that are still building at the same rate or better. A couple of our big box people are still, they're either renovating existing stores or still building, but they're not in the same abundance that they were.
John Bratz
Okay. Okay. And Gary, you mentioned earlier that depending on how inflation goes, that you might reinstitute that 1% price increase sometime next year or something. You're not at all suggesting that it might be 1% per month for the entire year. No, no, no. You're not suggesting that. No, no, no. Just to recover whatever the inflation is.
Gary Fields
Yeah, John. We have so much better financial forecasting and modeling available to us, better data acquisition and analytics than we've ever had. We've built this team out over the last two or three years. We did a whole lot of spreadsheets and napkin math and all that to try and figure it out in the past, but now we've got a very robust system that we're using. And This gives us the ability to forecast far enough ahead what we need to do. So we're not going to be reactive. We're going to be proactive. So before we see a decline in margins, we will begin to hit it with these soft increases. And our sales channel really appreciated our approach. It was very manageable for them. And it got us back to consistent performance, consistent financial performance. And So we don't want to be reactive and have some 5% or 7% price increase. Let's just say that 5% inflation is in place, and so maybe you want to do five 1%ers. Well, if you lead those in soon enough, then you won't have any margin degradation that you're trying to recover from by putting a big lump in. And the problem with putting a big lump in is we've seen – Believe me, it was the most painful experience of my business life was putting that seven percenter in back there in January of 22, I think it was, and having a $200 million pull forward. And so now you've got to burn through $200 million worth of backlog that's subpar priced. So when we meter this in a little at a time, and we stay very, very close to our sales channel, probably closer than most. And that was my heritage. Those are my people. I know how to talk to them. I know what they're telling me when we're talking. And so we're confident that we can meter this in a little bit at a time. And I'm not committing to 5% right now at 1% increments. I'm just saying that if inflation was 5%, that would be logical that you'd probably want to do something like that. But we'll continue to monitor it and make sure that we have two objectives now. Formerly, we had one objective. Our objective was to keep the margin between 28% and 32%. Our second objective now, and it's actually primary, is to make sure that we maintain some level of premium that we feel is a good value that we can obtain on a regular basis from our clients because we provide that value. They're not paying it to us because we're nice guys. They're paying it to us because we actually present the value to them. And so we've we try and make sure that we understand what that value is. We have regular conversations with the end user customers as well. And again, this building we invested in, the way we're presenting everything there is just a wonderful concept. It's resonated well with clients. It's resonated well with our sales channel. They say a picture is worth a thousand words. Well, I don't know how many words it's worth when you've got two pieces of equipment sitting in front of you that are you know, stark differences, and there's just a small premium in price to have the much superior piece of equipment.
John Bratz
Yep. Okay. I understand. That's all, Gary. Thank you very much.
Gary Fields
Yep. Thank you, John.
Operator
And seeing no further questions, I'll turn the call back over to our host, Mr. Mondillo.
Joe Mondillo
All right. Thanks, Operator. I'd like to thank everyone for joining on today's call. If anyone has any questions over the coming days and weeks, please feel free to reach out to myself. Please have a great rest of the day, and we look forward to speaking with you in the future.
Brent Thielman
Thank you. The meeting has now concluded. Thank you for joining, and have a pleasant day. The host has ended this
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