Good afternoon, ladies and gentlemen. Welcome to the AAON, Inc. 4th Quarter Sales and Earnings Call. There will be a question and answer period after the management's brief presentation. This call will last approximately 45 minutes to an hour.
And I would now like to turn the meeting over to Mr. Gary Fields. Please go ahead, Mr. Fields.
Good afternoon. Welcome to our Q1 2021 earnings announcements. I'd like to read a forward looking disclaimer to begin with. To the extent any statement presented herein deals with information that is not historical, including the outlook for the remainder of the year. Such statement is necessarily forward looking and made pursuant to the Safe Harbor divisions of the Securities Litigation Reform Act of 1995.
As such, it is subject to the occurrence of many events outside AAON's control that could cause AAON's results to differ materially from those anticipated. Please see the risk factors contained in our most recent SEC filings, including the annual report on Form 10 ks and the quarterly report on Form 10 Q. So joining me on the call today, Norm Bjornson, our Executive Chairman Rebecca Thompson, our newly promoted Chief Financial Officer. Rebecca is going to open by reviewing our financial performance. So Rebecca, the floor is yours.
Thank you, Gary. I'd like to begin by discussing the comparative results of the 3 months ended March 31, 2021 versus March 31, 2020. Net sales declined 15.8 percent to $115,800,000 from 137,500,000 The Q1 of 2020 benefited from a high backlog that allowed the company to run at full capacity to set all time record highs for net sales in the Q1. The order intake began to slow in late 2020 and the company intentionally slowed production to keep its backlog at a healthy level. The year over year decline in net sales was primarily due to lost production days in January for planned maintenance and in February due to impacts of bad weather.
Our gross profit decreased 22.8 percent to $33,200,000 from $42,900,000 As a percent of sales, gross profit was 28.6% in the quarter just ended compared to 31.2% in the Q1 of 2020. The production days we lost in the quarter resulted in unfavorable labor and overhead inefficiencies, including the company's ability to absorb certain fixed costs, which caused the decrease in our gross profit. Selling, general and administrative expenses decreased 3.4% to $14,700,000 from $15,200,000 in 2020. As a percentage of sales, SG and A increased to 12.7 percent of total sales in the quarter just ended from 11.1% in the Q1 of 2020. The increase in SG and A as a percent of sales was due to an increase in insurance premiums and salaries and benefits.
Income from operations decreased 33.6 percent to $18,500,000 or 15.9 percent of sales from $27,800,000 or 20.2 percent sales in 2020. Our effective tax rate decreased to 11.4% from 21.5%. The unusually low tax rate was mainly related to a $1,800,000 increase and our excess tax benefits associated with stock awards. The company's estimated annual 2021 effective tax rate, excluding discrete events is expected to be approximately 27%. Net income decreased to $16,400,000 or 14.1 percent of sales compared to $21,900,000 or 15.9 percent sales in the Q1 of 2020.
Diluted earnings per share decreased by 26.8 percent to $0.30 per share from $0.41 per share. Turning to the balance sheet, you'll see that we had a working capital balance of $178,700,000 versus $161,200,000 At December 31, 2019, our unrestricted cash totaled $97,000,000 at March 31, 2021. Our current ratio is approximately 3.7:one. Our capital expenditures were $16,400,000 for the quarter. We expect capital expenditures for the year to be approximately $70,700,000 The company had stock repurchases of $5,200,000 during the 3 months ended March 31, 2021.
Shareholders' equity per diluted share is $6.93 at March 31, 2021 compared to $6.67 at December 31, 2020. I'd now like to turn the call back over to our CEO and President, Jerry Fields.
Good afternoon. So overall, we're happy with the Q1 performance. It was in line with our expectations. Unsurprisingly, sales were down year over year. But compared to Q4, if you'll recall, When we had those announcements, I said that a good benchmark accomplishment for Q1 would be if we essentially duplicated Q4.
Because I have good visual of the backlog and knew we needed to slow down production. So we slowed the production down probably the intentional portion was The longer shutdown around the holidays and that allowed us to get ahead on some pretty heavy duty maintenance. But then we had the adverse weather. So we ended up a little bit lower in revenue than what we actually
thought we were going
to do as a result of that weather shutdown too. But after the moderation in bookings In the end of 2020, the bookings began to pick up sharply right after the 1st of the year. We did have a price increase that went into effect on January 11. So that's not unusual for January or any time to pick up bookings cadence right ahead of a price increase. But the fact that the bookings increased, stayed very robust throughout the quarter told me that it was genuine growth in bookings.
Normally, the pull forward from a price increase runs in the range of 30 to 45 days, and then it begins to kind of stabilize and to see what the actual run rate is. So I think the number was our bookings were up around 21%, 22% In Q1 of 'twenty one versus Q1 of 'twenty. Now Q1 of 'twenty, bear in mind, was largely unaffected by coronavirus Because the virus didn't really start slowing anything down until Q2. And so this is a very strong indicator of our bookings performance for 2021. And that booking performance has continued on that same trajectory up until right now.
I mean, it still continues. It hasn't slowed down at all. So They're strengthening a fair amount. And we're looking at backlog on May 1 was 104,500,000 You got to recognize that we've got production turned up pretty good too. So we're maintaining a really nice balance here between production levels and backlog levels.
Going back a few quarters, I said that the ideal backlog should be when we got our production capacity where we had planned, it should be real close to $100,000,000 So we're running along at Just almost exactly the perfect backlog right now. Replacement business this time of year is always stronger than new construction. This year is taking shape same as what we expected. Lots of K-twelve schools are in the books right now being built. But on the new construction side, We're seeing a fair amount with data centers, large air conditioned warehouses for online retailers.
Some of that stuff's really picked up and is quite strong. So The Grow business, agricultural Grow, some of you might know it as the cannabis business, primarily what it is. Additional states approved some measure of cannabis legalization back in the fall. And responding to that were more of these facilities being built in more states. And we are one of the companies that provided best practice HVAC equipment for that industry several years ago now, and we maintain a very strong position in that industry.
So Architectural Billing Index had Several months. I don't want to I
don't have it in front of
me, but it's somewhere around 10 months that were below The benchmark of 50, which said that they had lower architecture billings. This normally translates into a slowdown in business for us. Well, we're not seeing it quite like historic because What caused those billings to go down was not a normal activity. It was a very abnormal activity. What we have witnessed for certain that we've just concluded a sales conference with our leading representatives last week and validated this further.
Numerous projects in early to mid-twenty 20 were put on pause. Various reasons. Some they couldn't man the projects because of coronavirus. Some their states wouldn't allow them to work. Some they just were uncertain what the outcome was.
We had the opportunity to hit pause. While those projects were designed, the plans were on the shelf ready to be utilized. They have hit the go button on numerous of those projects. And that doesn't necessarily generate an Architectural Billing. So this Architectural Billing Index doesn't have the exact correlation that it does in normal times.
So we've seen a lot of projects come off of the storage shelf, put into The market and these have resulted in orders for us. Now I do believe at some point in time that we're going to see a bit of A dip because of the Architectural Billing Index because they just didn't bill work for a while. So it has to show up, but it's not showing up In its traditional down mode for the indicator. Now architecture billing index has turned back positive The last month or 2, for sure, it's been above the benchmark of 50%. I think this last one was When you're close to 53, 52.8 or something like that, I think it was.
So it's beginning to strengthen. Our sales channel partners tell us that their pipeline is very robust and that the orders coming to us are going to be steady. We had anticipated that maybe orders would peak sometime in Q2 going into Q3 causing Q4 to slow down as we've traditionally seen with our seasonality. We're not certain at this point in time if that's going to happen because the pipeline seems to be pretty robust at this point. That could change at any moment, but this is what we're looking at today.
So looking at our various business segments, surprisingly, We've had some commercial and retail business that I frankly wasn't expecting. Grocery stores continue to build and update and remodel. Convenience stores continue to do the same thing. Office buildings have been a bit soft, although not non existent. Medical and healthcare are definitely picking up.
Go back early in the coronavirus occurrence when it was identified that the rural communities, the outlined communities were very deficient in their capacity for healthcare. A lot of those facilities have been mothballed or the region had expanded and they had not yet supported them with Localized healthcare, we're seeing a very nice influx of business due to that. Again, I had some customers in here just in the last day or 2 that were focused on self care. These were end user owners with their engineers and our sales channel partner representatives here. And they are a West Coast operation and they were planning a lot of facilities and they were here to look at our equipment and they left here with a very favorable impression.
So I expect that would turn into something good for us. In the education market, I already spoke to K-twelve. It's very, very strong. One of the things that we're seeing, There's been some bond issues recently in various regions that As recently as a year ago, some of these were challenging to get passed and now they're passing easily. And One of the key things in these bond issues is updating the HVAC systems to be in accordance with best practices for virus mitigation into air quality.
These are things that are very favorable for AAON with the equipment that we manufacture. Manufacturing has really not had any material change to it. We still continue to supply equipment for manufacturers might be slightly curtailed or curbed, but not much. On the lodging front, we're seeing some replacement business, but not so much new business. Not seeing a lot of new hotels built, a few here and there.
But mostly, we're seeing people pull forward on updating their HVAC systems. Again, they want to put these virus mitigation procedures into the units and their best way to do that oftentimes is update the unit. So that's kind of where we're at with our markets right now. Again, just to recap, grow facilities, large warehouse, air conditioning, Both of these are stronger than what we've seen in the recent past. Raw materials and component prices are definitely on the rise.
We got a price increase in effect January 11. We have another one that goes into effect June 1. Each one of these was 4% across the board. And these were put in place to manage our expected material and component price increases, and we believe that we are in a favorable position to offset all of those material price increases. We continue to improve productivity here in the Tulsa facility.
We're operating now About the most efficient turning metal into profit that we've ever done. Very proud of this team. They've worked very hard and we share the team here that accomplished that with our other primary manufacturing facility in Longview. We got the new facility up and going about 60 days ago now was when we manufactured the first products in that. And it has quite a ways to go to reach the efficiency that we believe we're capable of.
But the same team that helped identify all the practices that enabled this wonderful efficiency we have here in Tulsa. They go down on a weekly basis. In fact, there's a group of them there today. And they go down on a weekly basis, a whole group of them does spend one day and help that team down there. And we've seen very nice results from that and we look forward to continuous improvement throughout 2021 in both revenue production and efficiency.
Both of those are going to improve in that facility throughout 2021. I don't see us reaching the levels that we believe we're capable of prior to the end of the year. Our sales rep network, I mentioned earlier, we had a somewhat of a sales retreat last week, brought in a lot of the key sales channel leaders. And the overall tenor of the meeting was very upbeat. They had very positive attitudes about the way we were doing business, the way we were supporting them, our shorter lead times were very much appreciated.
Obviously, we've seen an improvement in quality over the past few years. You see that the warranty expense has continued to go down and stabilize. It's been very stable for about a year and a half now. Yes. And so they recognize that, that makes their jobs have otherwise.
And so the overall tenure from the sales channel is very good. And that's why I temper that Going into this year, our expectations were that Q1 would mirror Q4 of 2020, but then that bell curve of Q2 and Q3 being up and Q4 maybe being back down a bit in relative terms. What they're leading me to believe is it might if we do have a lower demand in Q4 in production, it might not be as substantial as we first anticipated. So it's a little stronger out there than maybe what we anticipated back in The fall when we were doing our annual planning. The water source heat pump business is pretty stagnant for us right now.
The product, and we've talked about this before, but the product that we have is very favorable for new construction. We continue to have a steady demand for that product, but it is not a good fit for Retrofit, when there's a couple of manufacturers that had a very dominant position for 20 plus years and their units are the ones that are wearing out and needing to be replaced. And our unit is not a wonderful direct replacement for it just due to its configuration. So we have designed a complete line of units to be 100% backward compatible with this huge installed base. And we're optimizing that.
It's probably well along towards completion and introduction. It will occur later this year. And we believe that that will allow us to regain our growth position with water source heat pumps Because the dominating factor of the water source heat pump market today is replacement, not new construction. Our CapEx investments remain, as we have talked about before, just a bit over 70,000,000 I believe that around $40,000,000 of that $70,000,000 is for accretive capacity.
Correct.
And $30,000,000 of that is for replacement maintenance, worn out things. I'm looking across the street today and a beautiful thing is occurring. We have a crane over there setting new Aon units on our Eastside factory to be ahead of the curve and keep our employees well conditioned. And these all have the latest indoor air quality virus mitigation procedures installed in them. Indoor air quality and virus mitigation procedures Remain a topic of conversation with every customer that comes in contact with us today.
I think that when ASHRAE published their best practices guidelines last summer and revised it 2 or 3 times with little tweaks Everyone took notice of that. And so all replacement, all new construction, They're at least giving it the credence of thinking what should we be doing. And it looks to me like of great many of these projects that they're including some form, if not all forms of the best practices for virus mitigation. So we're optimistic heading into the Q2. We're in the Q2 now.
Things are running smoothly. Orders are coming in the door nicely. And we believe that we will be in our best ratios for absorption of overhead. And so what we had said we wanted to manage our gross profit between 28% and 32%. Q1, we were just slightly above that 28%.
I believe as we go through 2nd quarter here with better revenue, better production out the door that will have better absorption. And therefore, we'll be closer to that bull's eye target of 30% or so. So with that, I'm going to open up the call to any questions.
And we have our first question from Brent Thielman from D. A. Davidson. Your line is open.
Hello, Brent.
Hey, good afternoon. Gary, you talked about the increase in the replacement orders, and I was Curious if you had any sense sort of how much of that could be related to the some of the stuff you're just talking about, the air upgrades, kind of circulation medical related upgrades for systems. Is there any way to tell from that?
It's a little difficult to give A real highly qualified definitive number on that. You can have a sense of what's going on, Brent. And it looks to me like We're up 22% on bookings over last year. And I would say that a significant amount of that is attributable to the indoor air quality, the virus mitigation procedures. Because last year, Q1 was a very nice bookings quarter, very much within our what we had anticipated And it had the normal replacement business for schools.
So for this year to be up this substantially in bookings, It really feels like a big part of that accretive bookings number is related to the virus mitigation procedures and people getting On top of
that. Okay. I mean, I'm assuming this equipment sort of adds more bells and whistles to it in order to meet those sorts of standards. Is there a way for us to think about The average value or higher average value per unit for something like that to address the sort of things that Ashway is talking about?
Well, that's the wonderful thing about the AAON unit is these things are very inexpensive for us to add to our units. What it has done is our units themselves are much more a much better value to go address these things. So we don't have to do very much at all. So for instance, our units are double wall steel panel. The interior panel of our unit is solid steel And it's washable.
So you don't get bacterias and viruses attaching to a fiberglass liner like the majority of our competitors have. They don't have a steel liner and that's inherent in our units from 2 tons all the way up to 2 40 tons. The next thing is that our fan will overcome the additional pressure drop of these higher rated filters. Well, the difference in, Say a MERV-eight filter, which has been the most common filter used up until now, a MERV-thirteen filter, which is pretty much what everybody is wanting to do. The cost in that filter is insignificant.
It's maybe in a 2 ton unit, it's $20 in a 100 ton unit maybe is $300 So it's not significant. But what is significant is that our unit was designed in Its fundamental design was to overcome that additional pressure drop in a very efficient manner. So we can put these filters in. We can have this Nice clean interior that doesn't collect bacteria and virus and allow it to accumulate. They can clean these unit safely.
Then when you start putting infrared lights in there, again, you're talking in a 2 ton to Ten ten unit, which a lot of these school units, that's their range. You're talking $125 on several $1,000 unit. Now the one thing that does cost a little money and we're not seeing a lot of it, but we're seeing a little bit is the bipolar ionization. That seems to be a small percentage of our customers want the better filtration, they want the lights And then they want the bipolar, it's a very small percentage that want to bipolar.
Okay. Okay. Thanks for the color on obviously, we see what's going on with steel and Copper market and other raws out there. It sounds like you guys are getting ahead of it. The one question I had was any issues just Getting the materials and components you need, seems like there's a lot of supply chain challenges around the industry.
Well, it's a
country right now.
It's an interesting conversation. The Board met for our audit committee meeting a couple of days ago And every one of our board members was present, even though they're not all on that committee, they still read into it. And there was a discussion about our inventory levels. Our inventory is running about 15% to 17 percent of revenue. And if you look back historically, it was closer to 10% of revenue.
And they said, do we see a time when we might Lower that inventory level and get back into that historic ratio. And I said, gentlemen and ladies, We're blessed that we have this inventory because it's keeping us from having supply chain issues. We have an abundance of materials in here. We struggle for some small things from time to time, but my purchasing department says that while it's a little extra work, they've not caused us to miss any shipments or commitments for shipments because of that. And so This was kind of a blessing in disguise that we have this.
The other thing is, is that my pricing was more stable because we had a lot of these materials bought at a better price. So as Things are escalating. One thing you're proud of is you got a big inventory of lower priced materials. So I was able to get my price increase extended out further June 1, And I won't be buying materials at that higher price until after that price increase actually hits the floor. So we're in real good shape with supply chain.
I'm very proud of this team that we have here and how aggressive they are in doing that. So for us, at this point in time at least, has not been an issue.
Yes. Very good. Last one for me would just be, Gary, I want to kind of come back to the synopsis of what you're seeing out there in the market and Seems to be a true reacceleration in orders. I guess, as we sit here today, I mean, it looks like Go through 2Q, 3Q. I mean, we should see some favorable top line comparisons based on what you can see right now?
Yes. Yes. And Q4 is coming somewhat into focus. Now it's Still just a little fuzzy. It's out there far enough that it's just a little fuzzy.
So I don't want to absolutely commit that Q4 is not going rollover on us. But again, Q4 of 2020 was substantially lower than It kind of resumed that bell curve that we'd had in the past. It was much lower than Q3. I don't remember the exact numbers now. Do you remember what the percentage reduction was?
Well, anyhow, so again, we're going to have favorable comps going forward. So this Q1 was anticipated to be lower. It was very tough comp with Q1 of 'twenty because we had such a huge backlog coming into 'twenty. And so we knew this one was going to be tough. We told you folks about it last quarter or even before that.
But going forward, I think we'll have Some favorable comps, Brent. Yes.
No. Okay. Well, very good. Best of luck here this quarter.
Thank you.
We have our next question from Julio Romero from Sidoti. Your line is open.
Good afternoon, Julio.
Hey, good afternoon, Gary. Good afternoon, Rebecca.
Good afternoon.
So I guess just on that last question, wanted to just kind of stay on price cost and just thinking about price increases. Can you give us a refresher of maybe how often you reprice in a given year? And do you think it's more likely than not that we see A few more price increases in the 3rd Q4.
Well, our purchasing group keeps a 6 month forecast of material cost in front of me at all times. So I have a rolling 6 months in front of me at all times. And again, going back to that higher inventory level, that's what allows me to have a good visual on 6 months out. So I can respond quick enough that I can give our sales channel partners very good notice so that they don't get trapped with bids at a price that they can't afford due to a price increase. So knowing the cadence, All those years I spent on their side of the table, I know the exact cadence of their activity from bid day until they place an order with us.
So I try and keep that in mind. And then with our lead times now under very good control, I know exactly how long it takes to get from the date we book an order at the new price to get it on the plant floor. And all of that is inside of the 6 months. So Every month, I'm looking at the 6 month outlook on these material costs. If there's any change within the month, then they raise the flag quicker.
But otherwise, our normal activity is once a month, They furnished me an updated report that gives me the next 6 months. So it's a calculus as to how we do this. And knowing all of the timing events, then we have this so that we can do it. What I have as of today doesn't give me any indication for the next 6 months that I would have another price increase. I have the one coming June 1 that covers everything that I know For the next 6 months plus.
So because we announced that, what, 2, 3 months ago?
It was Beginning of March.
Beginning of March, so a couple of months ago that we announced that. And so Now I've got, let's say, 8 months runway that things are stable with what they told me. There's been no changes in our outlook for the last 2 months. Everything that I got on this latest report was captured the same 2 months ago. So to your point of could we see other price increases?
As of today, I don't see the necessity for that. But this could easily change if We have another big vessel lodged in the Suez Canal and can't get something here. I mean, all kinds of things can happen quickly. But what I'm most proud about this team is that they now have very, very good data points that they utilize to provide the calculus for A necessity for a price increase. So hopefully that answers your question.
It does. And I appreciate the color. And hopefully you don't see another A blockage in the Suez Canal, but you're right, anything like that could happen. So one other thing you mentioned, I think, is You called out K-twelve is something that you're seeing picking up on the new construction side. What about on the replacement side?
Is that something that should pick up in the summertime? Yes, some of these schools are out of session. And are you seeing that in your bookings at this point in time?
We are. So K-twelve, historically for us has been about 50% planned replacement and 50% new. So a lot of these bond issues that we are a beneficiary of, they will do some wing additions to schools to expand the school itself. They'll do some updating modernization of some existing schools and then they usually throw in building 2 or 3 new schools. So we got an order, and we're really we're thrilled with this.
This particular school district has now been purchasing equipment from us on an annual basis for 13 years straight. They're in North Texas. They purchased 8 11 units to be installed in 2021. And this time, they were about 70% replacement and 30% new construction. And that's what I'm saying, they It looks like our replacement is a bit higher than our new construction ratio that we were historically seeing.
That's only one school district, but I've seen a multitude of others. And I was made aware at this sales conference last week of numerous school districts that had bond issues from last fall until as recently as 2 weeks ago on the out to the voters and all of these are being unanimously approved and the format of a lot of these bond issues is more replacement than new construction. So I think that our Favorability of our equipment for that kind of end user is well recognized. So I believe that our percentage of replacement business versus new construction will continue to grow on the replacement side, Even though this new construction market might be somewhat depressed, we're going to do Real well with this replacement. We're already doing real well with it.
Got it. And I guess You talked about you're expecting sequentially next quarter's gross margins to be closer to the midpoint of your 28% to 32% targeted range. Yes. Is that all kind of related to volume absorption? Or is there any sales mix component at play?
It's mostly absorption, Julio. It's mostly absorption. I mean, you've got depreciation and things that are fixed cost. There's so many fixed costs that Now our run rate, as we've added all of this production capability, it comes with a penalty called depreciation. And we just put that new building in service in Longview.
That one's hitting us pretty good on that line. And we're yet to recognize the revenue from that new building that it's capable of. Now I will say that the revenue from the Longview Manufacturing has continued to grow as a result of the new building and as a result of the efficiency gains that this traveling team from Tulsa has been able to help collaborate with them on. Their Latest monthly revenue numbers are up about
Give me a quick calculator there.
I'll hit this. I'll give you an exact because I know exactly where it is. They got a 21% increase in revenue as a result of the improvement in technique and the improvement of the new building. That's what we've recognized already, 21% over the best month that they'd ever had prior to these things occurring. And we believe that there's a whole lot more to be had.
Bear in mind, we put over 100% more physical capability in place. You got to get the people, you got to get them trained, you got to get them to a level of efficiency. And that's why I say it will take all year long to even approach what we dream is possible there or what we actually know is possible because of how we've done it before.
Got it. And then just last question for me here is just on the SG and A. This is up as a percentage of sales, which Which was expected, I think you called that out on the Q4 call. But is that kind of 150 basis points, 160 basis points or so increase Representative of what we should expect throughout the year?
Well, bear in mind that it could be
a higher
actual dollar number and will be because of profit sharing because that's in SG and A and recognized it In Q1, we just issued profit sharing announcement yesterday, and it was lower than any quarter in 2020. And so we're looking for a comparable, Favorable Q2 versus 2020, favorable. And should that occur, the actual dollar spent on SG and A will be higher. Now as a percent of revenue, I haven't done the math on that.
Yes. I mean, I do think we it will be up a little, mainly driven by our insurance premium.
Yes.
Since those went up $2,000,000 year over year. So that will be a driver of our SG and A. Then also looking forward into the second half of the year, as the country opens back up, We anticipate our selling expenses and our travel will increase as well.
So Well, I'm proud to say the bucket has already started Because I've had 3 major customer visits this week, and I have one more today. And we haven't had 3 customer visits in 1 week in over a year. And these people are coming in 6, 8, 10 at a time. And of course, we put them in hotels, we take them to dinner and there's expense with that. On top of the fact that we just had this sales retreat last week, We weren't able to have one in 2020.
We had to cancel it.
Right, right. Our sales expenses in 2020 were extremely low just because we didn't have any of the normal activity that we will this year.
Makes sense. Appreciate the color and thanks for taking the questions. Absolutely.
We have our next question from John Ratz from Kansas City Capital.
Good afternoon, Gary, Rebecca.
Hello, John. Question, Gary.
On a water source heat pump, when you started With the water source heat pump, the thought was that you're getting into a market Maybe up to $500,000,000 or something like that. And the hope was to really make take some share of that. And I think last year, we did about $20,000,000 in revenues in the water source heat pump. Where do you stand today in terms of market opportunity, market potential of the water source heat pump. It just hasn't been, I guess fulfilling expectations that we maybe had earlier, but where do you stand at this time in terms of what's possible.
Well, I haven't seen a summary of what today's current market dollar volume is. The number of units on AHRI are down a few percentage points.
Okay.
So the dollars have to be down too. Our number of units has been pretty steady. In fact, it's the last month or 2, it's grown just a bit. And so we had validated a little over a 5% market share last year, And I believe we're holding steady at 5% plus now, could be breaking through 6%. I won't see the final numbers on that for a few more days, but it's still in that mid single digit range.
It's not the 20% that We believed we were capable of obtaining. Our biggest miss on that business was Our marketing intelligence was what do people want and everyone we were listening to was expert in new construction. And our sales channel just was not expert in replacement. And so we position this product very well for new construction. It's very much appreciated.
And so we've had that steady business. It grew at a very brisk pace at one time and then kind of leveled out. And The new construction market itself went down. And for us to stay steady tells me we're getting an even higher percentage of the new construction business. However, this replacement market, our sales channel partners were not well attuned to that market.
And so we put in several support services to help them with that. We've hired 3 people in the last couple of years, 2 of them in the last year that have Really, they are expert in the aftermarket business. That's what their whole career has been. They're people I've known most of my career and have great respect for them and bringing those resources in to help the sales channel partners develop this. All the sales channel partners are with very little exception are dedicated to an aftermarket strategy and they are putting their resources behind this.
And so I believe that when our new product that is Designed with the aftermarket in mind, the replacement market, when we get that product introduced to them, I believe we'll resume growth and we'll catch up relatively quickly to the expectations. So again, we made a mistake there. We Admit the mistake. But I'll tell you what, there is no, there's no sin in my book for making mistakes. There's a sin in my book, a substantial note of not admitting them and not correcting them.
While we've admitted the mistake, we've corrected the mistake and we're on the cusp of introducing that correction and seeing exactly how well that performs.
Okay. So with those changes, that correction, Do you think as you look back that 20% market penetration, do you think that's Still a reasonable possibility?
It's absolutely reasonable. There's nothing changed my mind on that. And the reason is That the sales channel partners, the commitment they've made and the Success that they've had thus far tells me that it's very much in our grasp.
Okay. And then sort of the timeline, When do you think we might see some evidence of that, those gains?
We're not anticipating having a material impact on the number of units going out the door Until Q4. Until Q4. Okay. Yes. And that might even be just a little early to be Very optimistic about it.
The new product will be available to them Q4.
Okay.
And there are a lot of them that have said that they want to have An immediate stock in their inventory of that product because they think that's a good investment for them. So we would very likely be building units that we sell to them. We don't inventory them ourselves. We sell those units to them. So we could be filling their stock in Q4.
And that's why I think there's a good opportunity to increase our number of units substantially. And then there could be a little low because they stopped all their warehouses. And then they've got to go out there and get their momentum going. So it could be that we have a kind of an in rush Q4, a little bit of a low Q1 and then we resume a good steady pace of business Q2 next year. But I think 2022 as a year in whole, if we look at of the year 2022 in whole, then we can look for some good growth, good solid double digit percentages of growth, like what we had the 1st 2 or 3 years that we were in this business.
I mean, the 1st 3 years, we were like 100% growth year over year and then 77% and 57%. And so we've seen how we can do that and we can supply that. And a major difference now, John, Yes. A lot of our early on time was learning how to use this manufacturing facility. So now we've got a few years of using it.
This product It's a different configuration, but it's not a different manufacturing process.
Okay. When you look at it,
I don't know if you can look at it in isolation, is the up until this point, is the water source heat pump Paying its way. No. Okay.
No, that'd be foolish to say it was. When I look at it, no, it's not paying its way yet. I mean, it is profitable. It's not a loser, but it is not at benchmark margins because we don't have the volume to offset the depreciation cost and the fixed cost of that facility. Yes.
If we were to double the volume, we would triple the Percentage of net profit. Because a lot of that profit comes at no additional fixed cost expense. Sure.
And
so we are absolutely we have to double that volume to get these things close to benchmark margin levels. So The good thing about it now is even though the margin percentage is lower, it's not that big of a volume to where it's that big of a burden. Yes. And so we have and the other thing that I'll point out is when I came here, I had 30 years of experience In the sales channel, I've been selling AAON since 1990 and I did a pretty good job of it and so did my company. But because we were so mature with our presentation of Aon equipment in the markets that my company was in, I really could visualize what the growth potential for those legacy products was in reference to my experience at my company.
Well, as I began consulting for AAON, I began to realize that substantial number of the sales channel partners were nowhere near that mature in their markets. But I didn't know exactly how that was going to come along. And it's come along very nicely. These My efforts in consulting back there in 2013 to early 2016, those have all manifest themselves. The changes that I've made in the sales channel since I came on board here the 1st of 2016, those manifest themselves.
When I first came here, we had 6 regions and the difference in performance versus expectations was The lowest region was only reaching 65% of expectations. The highest region was about 5% over expectations, Okay. Today, the range runs from 122 percent of expectations to 129 percent of expectations at this point in time. So it is very much very uniform Effort and results across all of North America right now. So this sales channel improvement that we have been working on going all the way back, I mean, Norm worked on it before me, but I put my effort into it starting in 2013.
I mean, it is paid off. We have a good uniform performing group across North America. And by the way, every one of them is growing, Everyone else. Good. Okay.
That's it, Gary. Thank you very much. Thank you, John.
There are no follow-up questions at this time. You may continue with the presentation.
Well, I think that's all that we have for today. And we look forward to speaking to you again in August for our Q2 results. And for those of you that would like to attend virtually, I believe that our shareholders meeting on 11th has a WebEx capability. And so we would welcome you to that as well. Have a nice time.
Thank you very much. Bye bye.
Concludes today's presentation. Thank you for participating. You may now disconnect.