AAON, Inc.

Good morning, ladies and gentlemen, and welcome to the Aon, Inc. second quarter 2025 earnings release conference call. At this time, note that all participant lines are in the listen-only mode. Following the presentation, we will conduct a question and answer session. And if at any time during this call you require immediate assistance, please press star zero for the operator. Also note that the call is being recorded on Monday, August 11, 2025. And I would like to turn the conference over to Joseph Mandillo, Director of Investor Relations. Please go ahead, sir.

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 a customary forward-looking statement policy. The 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 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 gap measures in our press release and presentation. Joining me on today's call is Matt Tobolsky, CEO and President, and Rebecca Thompson, CFO and Treasurer. Matt will start off with some opening remarks. Rebecca will follow up with a walkthrough of 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.

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're navigating some near-term challenges, we firmly believe that the actions we're taking today will significantly strengthen the company for the long term. We don't 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. We 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 at the end of 2021, it became increasingly clear that our existing business systems required a significant upgrade to support our growing scale and complexity. On April 1st, 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 Aon-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 Aon-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 a steady improvement throughout the remainder of the quarter. I turn to slide five. This slide illustrates how recent production rates of Aon branded equipment have trended compared to normalized levels, which we've benchmarked against the first nine months of 2024. This KPI measures the consolidated production of Aon branded equipment across both the Aon Oklahoma and Aon coil product segments in measured levels of efficiency. We've overlaid the total company gross margin on the same timeline. And as you'll see, there's a strong correlation between 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 with 6% below that benchmark pace in July, And while Longview still has some ground to make up, improvements began to accelerate starting in the second half of 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 Aon 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, anticipate strong growth, in Aon-branded production over the remainder of the year. I'd also like to point out that our backlog is favorably priced relative to input cost. Almost all of our production in Q2 was associated with orders received prior to our January 1st 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 the 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 1st. 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 was operating smoothly and meeting our performance expectations. We made the decision to begin the rollout at our Longview facility because it produces both Aon-branded and Basics-branded equipment, as well as manufacturers' coil, a critical component not only used at Longview, but also at other sites in the production of those 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 build proficiency 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 AM 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 our 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 face 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. 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 continued to gain traction 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 Aon 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 Aon branded orders, up from approximately 20% a year ago. And finally, the Aon branded AlphaClass heat pump business continues to disrupt the market with its high performance offering. AlphaClass sales grew 8% in Q2, while hooking surged approximately 61% during the same period, highlighting strong momentum in growing market adoption. I will now turn it over to Rebecca who will walk through the financials in more detail.

Thank you, Matt. Please turn to slide nine. Net sales in the quarter declined year-over-year 2 million, or 0.6% to 311.6 million. The modest overall decline was driven by a 20.9% decline in Aon-branded sales, which was nearly fully offset by a 90% increase in Basics-branded sales. The decline in Aon branded sales was driven by the impacts 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 Aon branded equipment sales at the Aon Oklahoma and Aon coil product segments. Our new Memphis facility incurred $3 million in costs during the quarter, with minimal sales to offset this cost to the Aon, Oklahoma segment. Non-GAAP adjusted EBITDA was 14.9%, down 1,120 basis points, and non-GAAP adjusted EPS was 22 cents, 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 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 1st and almost none of the 6% tariff surcharge introduced in March. Please turn to slide 11. Looking at the segment financials and starting with Aon, 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 with 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, Aon, Oklahoma entered August with a strong backlog. Please turn to slide 12. Aon Coil product sales grew 27.1 million, or 86.4%, primarily driven by growth in basic-spread products of 40.1 million for a large liquid cooling project. Aon-branded products declined 13 million due to disruptions caused by the change in ERP systems. The ERP implementation significantly impacted both production volumes and efficiencies of Aon-branded equipment. serving as the primary driver of the 1,990 basis point contraction in segment gross margin. Since April, production of Aon 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 Aon branded equipment in April was down approximately 50%. At the end of July, we were down 37%. For basics-branded production at the 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 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. Overall, our financial position remains strong. 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.

Thank you, Rebecca.

Up until now, we've intentionally placed extra emphasis on the quarter and the challenges we face, particularly around the ERP rollout, because it's important that you fully understand what happens. 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, which is represented by our Aon coil product 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 multi-year increase in volume. Since being awarded the initial order late last year, we've 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 BASIS brand remains very strong. We produce the most sophisticated, customized thermal management equipment in what is a rapidly evolving and technically demanded industry. Looking ahead to the second half of the year, we anticipate basics branded sales will increase year over year approximately 40%. Our Aon brand is equally strong and critical to our long-term success. Despite prolonged softness in the non-residential construction market, our bookings have remained strong, particularly in the second quarter when 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, backlog of Aon branded equipment was up 93% from a year ago and up 22% from the end of March. Our top priority right now within the Aon 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 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 could 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 Aon 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 respect 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 the beginning of 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.

Thank you, sir. Ladies and gentlemen, if you do have any questions at this time, please press star followed by one on your touchtone phone. You will then hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by two. 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 star one now if you have any questions. And your first question will be from Timothy Walsh at Baird. Please go ahead, Timothy.

Hey, guys. Good morning. Thank you. Thanks for all the details. Maybe just to start, You know, I guess on the guidance and the second half, you know, kind of coming down more than you think, could you just, I guess, maybe bridge us a little bit, you know, versus the, you know, 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 just lower volumes and the underabsorption associated with that?

Yeah, good morning, Tim, and thanks for the question. So as we look at the kind of revision to the back half of the year and the guidance side, primarily the drivers there are going to be around the ACP performance and the sort of ERP 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%. We finished off July being 20% of where we want to be from a top line revenue perspective on Aon 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, you know, 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. 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 You're probably going to get close to, to the, to the revenue numbers that you had in the first half of 24. So I guess what is the difference, you know, 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. Yes.

A great question. And so we think about the, the Tulsa side of the business and just want to start off that nothing has drastically changed kind of 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 investments in 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 Tulsa perspective, 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.

And then I guess the last question I have, just data center backlog, I know it's been pretty good the last couple quarters, but it was flat sequentially. Anything you would kind of highlight or call out there? I know that 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. Thanks.

Yeah. Yeah, so from a data center perspective, 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, 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 – least, if not stronger, in both July and August. But when we step back and think about the data center market, 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 have as 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 we 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. And 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, we look at the ACP performance. We look at the segment sales and really 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 that 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.

Okay, sounds good. I appreciate the time. I'll hop back in queue. Thanks. Thanks.

Next question will be from Aaron Hillman.

at DA Davidson. Please go ahead.

Thanks. Good morning. 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, you know, how that fits in?

Yeah, good morning, Brent. Yeah, great question. So, Applied Digital, you know, it is a – 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 be 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, And you 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 airside solutions that are going to be inside, so basically chilled water fan coil walls or CRA units, and then CDUs. And with that customer, we're engaged in conversations on all three of those aspects. We already have orders for two of the three of those pieces, including high-performance chillers that that are really important as we think about 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, we're obviously talking about their facility that they're currently building in North Dakota, but they're continuing to expand across the region. And 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 or first step in a long relationship with that customer managing their thermal loads as they deploy AI capacity across the country.

Okay. All right. Appreciate that, Matt.

Maybe just as a follow-up, you know, look over the course of the rest of this year, you've 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, you know, reasonably strong growth here on the top line, you know, high 20s. Maybe if you could just talk a little more about what you are, you've made 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 very significant growth, you know, towards the end of the year here.

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 when you look at the implied growth that we kind of talked about in the prepared commentary, 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. you know, 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 Aon brand and the Basics brand. And so implied in there is certainly a strong continued performance or I should say continued performance within the ACP segment on the Basics brand and recovery quarter over quarter in the Aon 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 Tulsa segment with the Aon 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 the 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, 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, we're 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 long view segment as we're recovering. So we're baking in obviously the recovery off of the impacts that we had and really also baking 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 the guidance that we provided for the back half of the year.

Okay. Appreciate that.

Matt, just one more. I mean, very strong bookings here on the Aon-branded product. Maybe just your read on that as a direct result of that. the share capture strategy you've obviously discussed for several quarters now. Are there other elements to that 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.

Yeah, so as we think about the Aon brand, especially within Tulsa, the rooftop segment, I want to start off by saying, obviously, the market remains in a challenged position. So the overall non-res 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 outperformed 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 really the biggest driver that we've talked a lot about with the intentional investments we made comes down to our national account strategy. And 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 best-in-class heat pump technology and 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 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 and providing opportunity to continue reviewing pricing strategy going forward.

Okay, great. Thank you. I'll pass it on.

Next question will be from Ryan Merkle at William Blair. Please go ahead, Ryan.

Hey, 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.

Yeah, so certainly from what's provided in that BATCAP guidance, we've spent a lot of time ensuring that we adequately cover the 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 and 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, you know, the impacts that we saw in terms of production rates within the ACP segment, and then also the impacts that kind of spilled over into Tulsa, you know, 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 6% below its target efficiency rate at the end of the month. So, you 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 we look at the, you know, the immediate actions we took and really kind of relating to some of the supply chain spillover, you know, it was certainly an unfortunate chain 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 boots on the ground, getting resources in place to 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. And, you know, the reaction, I'll say the ability to react to challenges is certainly one of the strengths of Aon. And as these things have come up, you know, our team has jumped on every single issue that's come up, got the resources in place, speak to understand what the drivers were, and make sure that we 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... to look at a site that manufactures both brands of products, that manufacture coils, so that we can truly test the system in all the ways that we operate this business. You 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 you've already been able to see them, resolve them, and build a system or adaptive system to make sure that the organization can perform as expected in the future go-lives. 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.

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 is it assumed about growth for Oklahoma?

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, that was something 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 basics 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 brands. as we begin bringing on capacity within Memphis. And so Memphis is considered to start coming online in that Q4 guide as well in a more meaningful fashion.

All right. Last one for me. So you're going to exit 4Q at the gross margin, you know, 30%, 31%. You quantified the ERP, you know, impact this year, $55 million. You know, we have to set a model for 26. And I know you don't want to talk about that. But in the script, you 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?

Yeah, so certainly, you know, we're not getting into too much detail on 26 yet, but when we look at the overall performance from a 25 and 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 to 31%. What we're basically implying in 2026 is nearing that long-term target of 32% to 35%, and that is factoring in, while we've gone through, I'll say, the hardest implementation in the Longview facility in terms of its first site and really stress testing the system, 2026 obviously will still have the additional go-lives within the basics and the Tulsa segment. 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.

All right. Thanks for the call. I'll pass it on.

Thank you. Next question will be from Chris Moore at CKS.

Please go ahead, Chris.

Hey, good morning, guys. Yeah, so it looks like Booking's pretty good on Aon. Maybe we could just talk about overall about the prolonged softness in rooftop. I mean, what are you thinking about the market overall in the next six to 18 months? Is it, you know, interest rates? Is it, you know, just any thoughts you might have in the overall market?

Yeah, so from a kind of overall macro perspective, you know, if we look at everyone else that's released for Q2 results, the Everyone is signaling, obviously, volumes are down in the non-res market, which we would agree with. If we look at this from an overall macro perspective, there is certainly softness probably in the 10% volumes, down 10% volume as an overall industry perspective in the non-res market. To put that in context, when we look at the bookings trend, we certainly look like we're at the bottom of the trough. We don't see it as a continued kind of deceleration and decline. We see ourselves certainly nearing the bottom. It's 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, 16, 18 months out, uh you know getting to a more stable operating condition we're going to we expect to see the market as a whole you know beyond the upswing coming out of that so i would just you know point out though that as much as we talk about the the softness in the macro market uh to your comment i mean the bookings you see within aeon certainly showcase a different performance level against that that overall dynamic and 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 percent in the quarter or national accounts that are showing tremendous strength in bookings, those really are the opportunities for Aon when we think about the non-res market to continue outperforming that market and acquire market share.

Got it. Very helpful. So maybe just going back to investor day, you talked about in a more normalized situation, gross margins 29% to 32% for basics, a little bit below rooftop. Just trying to understand, 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, you 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?

That's a great question, Chris. And really, when we think about the margins, there's nothing that says we can't get to parity on the overall margin profile. The reason the commentary came and really we give that commentary regarding basics at Investor Day and kind of today as well is just as we think about its growth rate, there's inherent pressures that are created in investing ahead of that capacity. And so when 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. That creates some strains, you know, growing 40% year over year over year, creates some strains just in operational dynamics. But certainly we look at as those growth rates, you know, I don't want to say temper, but as we get this capacity online, we were able to start leveraging some of that. You know, 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.

We'll leave it there.

Thanks, guys.

Thank you.

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

Good morning. This is Alex on for Julio. Thanks for taking questions. Good morning. First question. Good morning.

First question was just circling back. to backlog, you know, I know it's up significantly year over year. Could you comment a little bit on the 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?

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 Aon segment or Aon brand as the first starting point, you know, that backlog certainly is favorably priced relative to the, you know, Q2 results and really getting down to that comment that was made in commentary that, we really just started to see that 3% January 1st price increase start hitting the overall revenue profile in Q2. So when we look at that backlog from an Aon perspective, we've got 3% price plus a 6% tariff surcharge that we're gonna 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 Aon brand, you know, it's kind of the visibility we have and, 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 basic side of the business, certainly from a margin profile, There is escalation clauses that exist in the vast majority of the backlog that is extended. And so there's opportunity if dynamics were to change drastically to be able to address that with our customer base. But we also 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 basic side.

Great color. Thank you for the context. And 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.

Yeah, I would say, I mean, certainly from an investment perspective and especially investment in the U.S. 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 bill went into place, but certainly provided 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 the bottom of the cycle of you know, any positive moving sentiment, say, overall positive going forward.

Thank you very much.

Thank you. Next question will be from John Batts at Kansas Capital.

Please go ahead, John.

Morning, everyone. Good morning. 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 the years?

Just to clarify, John, you mean specifically kind of the cost drag versus the positive kind of contribution? Yes, yes. So obviously when we acquired the Memphis facility, 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. The kind of 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 what's happening in 2026, I mean, the growth of the Basics brand, that growth is going to come through Memphis in 2026. And so the demand we have for data centers, the relationships as we continue to develop these intermittent 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.

Okay. All right. Thank you. And maybe a question for Joe. In your presentation, you mentioned management will provide regular updates on implementation progress. What does that mean?

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.

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

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 possible in an environment that is, you know, certainly impacting the financials like you've seen. Okay.

And one last question, Rebecca, there, there was a significant 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?

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 in line. plus you do have our Memphis facility that we do need to stock up, make the investments to supply with inventory at that location. So 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.

Okay. All right. Thank you, Rebecca. Thank you.

Thank you. And at this time, Mr. Mandela, we have no other questions registered.

Please proceed.

Okay. Thanks, everyone, 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.

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