Good afternoon ladies and gentlemen. Welcome to AAON Inc. First 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. I would like to turn the meeting over to Mr. Gary Fields. Sir, the floor is yours.

Good afternoon. I'd like to start by reading a forward-looking disclaimer. 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 provisions 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-K and the quarterly report on Form 10-Q. Now, I'd like to turn it over to Scott Asbjornson to discuss the first quarter numbers.

Welcome to our conference call. I'd like to begin by discussing comparative results of the three months ended March 31st, 2020 versus March 31st, 2019. Net sales were up 20.8% to $137.5 million from $113.8 million. Net sales for the quarter are up due primarily to our increased sheet metal production from the additional Salvagnini machines that were placed into operation. Our gross profit increased 68.9% to $42.9 million from $25.4 million. As a percentage of sales, gross profit was 31.2% in the quarter just ended compared to 22.3% in 2019. We continue to see overall raw material costs decrease. The company has improved its labor and overhead efficiencies through increased production and absorption of fixed costs. Selling, general, and administrative expenses increased 11.2% to $15.2 million from $13.7 million in 2019. Additionally, as a percentage of sales, SG&A decreased to 11.1% of total sales in the quarter just ended from 12.0% in 2019. Income from operations increased 142.3% to $27.8 million or 20.2% of sales from $11.5 million or 10.1% of sales in 2019. Our effective tax rate decreased to 21.5% from 23.5%. The company's estimated annual 2020 effective tax rate excluding discrete events is expected to be approximately 25%. Net income increased to $21.9 million or 15.9% of sales compared to $8.8 million or 7.7% of sales in 2019. Diluted earnings per share increased by 141.2% to $0.41 per share from $0.17 per share. Diluted earnings per share were based on 52,871,000 shares versus 52,370,000 shares in the same period a year ago. At this time, I'll turn it over to Rebecca Thompson, our Chief Accounting Officer and Treasurer, to discuss our balance sheet.

Thank you, Scott. Looking at the balance sheet, you'll see that we had a working capital balance of $132.8 million versus $131.5 million at December 31, 2019. Unrestricted cash totaled $35.7 million at March 31st, 2020. Our current ratio is approximately 3.1:1. Our capital expenditures were $21.9 million. We expect capital expenditures for the year to be approximately $73.2 million. The company had stock repurchases of $5.1 million during the first quarter. Shareholders' equity per diluted share is $5.79 at March 31st, 2020 compared to $5.51 at December 31st, 2019. I'd now like to turn the call over to Gary Fields, our President.

I'd like to talk about some of the sales activity and some of the general environment that we're working in right now. So, AAON was a company that was deemed an essential manufacturer, so we've continued to operate through some of the shutdowns that have occurred for others. Our essential nature was proven when we were tasked with providing over 4,000 tons of air conditioning units - a total of 80 50-ton units - for two projects in New York. Stony Brook was one of them and Westbury was the other one. We received the request for that equipment on the 29th of March, and within nine days all of it was on-site. So that was a rather heroic effort by all of our AAON employees and all of the sales channel participants that had to work their portion of the project. We've continued with a total of 124 units that have gone to the specific coronavirus emergency temporary facilities. But beyond that, we're seeing some new activity recently for support facilities going into the future. We received an order just this week for a project in the state of Maine, it's called Puritan. And it's -- these people make the swabs that we've heard so much about from President Trump's coronavirus task force that are used in the quick turnaround testing. That project also required us to manufacture specific units for the specific application and provide those in about a week or 10 days. So, the order came in just a couple of days ago and it will go out in the next couple of days. Now, I want to talk about our water-source heat pumps a little bit. So, our numbers of water-source heat pumps in Q1 were less than what they had been on a quarterly basis. We had some growing pains in that heat pump business. Some of those growing pains were related to components that we selected from some material suppliers; some of them were just the growing pains that occur when you're developing at a quick rate a new product. So, we lost just a little bit of momentum. But we began to regain that. The lead time is very short so all of this happened rather quickly. At the end of April, bookings on water-source heat pumps strengthened considerably, so the momentum is going the right way. So, we've reestablished our momentum and we look for that to get back on track to improving. But at the same time, we evaluated the entire team that we have here on staff at AAON realizing that this was a product that was a bit different than our legacy product and recognizing that we didn't have as broad-based of experienced and knowledgeable people in that area to flesh out our entire strategic plan for that. So, we've been negotiating with some people that we are in the final stages of negotiating with, who have extensive experience in water-source heat pumps to join our team. We expect in the next week or 10 days to have these people join our team. This will allow us to execute the strategic plan that we put together and achieve things that we had talked about for quite a while with this. The next thing I want to talk about is our Norman Asbjornson Innovation Center. Those of you that have followed us for a few years know that we built a magnificent laboratory, and we've had a grand opening of it and so on and so forth. The physical facility itself is unequaled in the world. The capabilities of that are just not available anywhere else. We had a core group of people that had been with the company for many years that had great experience with that, but they didn't have enough bandwidth in order to utilize that laboratory to its full capabilities as far as production capacity. For the last two years, they've been building that knowledge base in that team. We finally got to a spot where we could spread those experienced people out time-wise and put on more shifts. We are in the next few days enabling an around-the-clock, seven-day-a-week operation of the Norman Asbjornson Innovation Center. This goes hand in hand with our efforts to accelerate our footprint with water-source heat pumps. All of this dovetails very nicely together. From a timing standpoint concerning the innovation center, we are doing it just in time; we didn't wait too long; there was really no effective way to do it any quicker than we did due to construction schedule and training and so on and so forth. So we're very excited about the potential of compressing our product development roadmap. The schedule that we have will be accelerated greatly by this new activity. I've spoken with our Director of Sales and he's pooled all of his regional sales managers. They have updated me. They maintain a very close relationship with the sales channel. I’ve had a lot of personal phone calls with the sales channel myself just to assess the situation. This coronavirus has caused a lot of anxiety in the world. As of the end of Q1, we were at 90% of our plan on booked orders. So there was a slight impact from it, but it wasn't substantial. When they pooled these people to see whether those projects were canceled or merely delayed, the overwhelming response was that they were delayed, not canceled. There have been very few cancellations in the pipeline. Essentially, there have been no cancellations that I'm aware of in our backlog. There was one or two projects that I was made aware of that they had anticipated being July, August, September projects that they have delayed until 2021, but they are very insignificant in the overall scope of things. As I read through the regional sales managers' comments, the market strength for commercial, health care and industrial is very good; however, the market strength for hospitality has been hit the most. We have been fortunate over the years to participate in many hotels and casinos. Some of the casino projects that we knew were out there in the future are on hold; some of the hotels have hit the pause button as well. I think that's very understandable. We've spoken over the last few quarters about the grow market. The grow market according to our sales managers remains neutral. K-12 has been neutral to increasing. In the Northeast, things are a little more constrained than in the rest of the United States, as the schools are even at a pause right now. I did talk to one of the major players in our sales channel; he's in Philadelphia and Harrisburg, Pennsylvania. He informed me last night that they have quite a few schools that they are about to be able to get released. So it’s not exactly as dire as what the initial thoughts might have been. Overall, we are looking at bookings for the remainder of the year, maybe not being exactly on plan, but not being substantially lower-than-planned either. There could be modest fluctuations in those numbers. When I look at the various markets I just described, one thing that I want to emphasize is that I've seen some clarity regarding health care. In this coronavirus situation, it was recognized that while in urban areas, they have large hospitals and were able to construct some temporary facilities using large convention centers, such as the ship in the case of New York City or the tents that we participated in, when you got into more distributed areas across North America - the rural areas and suburban areas - there was a substantial weakness. Over the last several years, there has been a lot of consolidation in health care facilities to these urban areas, leaving people to drive maybe as much as 150 miles to receive appropriate care. We're already seeing activity in these areas to reestablish some of those facilities that were mothballed, which gives us an opportunity to update them. So, I'm not sure how we were interrupted there. The story on health care is that we're going to see a lot of facilities that were mothballed that are going to be renovated and put back in operation. Some of these have sat dormant for quite a while, and it will be a good replacement opportunity. This is an area in which AAON participates substantially with our legacy products. So, I want to discuss the backlog next. As of March 31, it was $119.6 million versus $166.6 million a year ago. The $166.6 million, while it seems attractive, was actually a bit detrimental. The crux of that was that we didn't have our production rate high enough to meet demand, resulting in accumulated orders and lengthened lead times. With the addition of all the Salvagnini machines and appropriate labor force efficiency gains, we have been able to increase our production rates considerably. Thus, we have been able to reduce the backlog, which is favorable so that we can align it with lead time expectations. Since the beginning of Q4, we have begun reducing lead times. Our published lead times have been reduced multiple times. I would say today we are probably ranging about 60% shorter lead times than we were a year ago. Our goal is eight weeks, and we have some products that are currently 6 to 8 weeks right now. If you consider the entire range, we are probably closer to 10 weeks overall. While our goal is not to bring in fewer orders, it's to produce more. We've put a lot of those Salvagnini machines into operation, and we have four more on the way throughout the year. Our production capacity has not yet peaked. We will be monitoring both order volume and production capacity, which is very manageable. Moving on to the supply chain, we've had some minor, I'll call them dust-ups, with the supply chain; however, they've all been manageable. One of the primary things that occurred was that we have various models of compressors available in our units, going from a base model to at least three upgraded models of various capacities. We've had a few units that we've upgraded, but we were able to produce the equipment despite some issues with availability. Speaking with our purchasing department earlier today, the outlook is fairly stable, but it's not without its challenges. The next topic I’d like to cover is attendance and disruptions. Early on in the coronavirus pandemic, at our Longview facility, we had one employee in the office that began to show symptoms. That person quarantined themselves promptly and ended up testing positive. Fortunately, they came through it just fine. We contact-traced everyone that individual had been in contact with, and we quarantined those people, and there were no further positive cases. We experienced only one case, and that was in the Longview facility, which has fewer than 500 employees. The rules set by the government have been very favorable for our employees, allowing them to take time off while being compensated nicely by these programs. Our attendance dipped to a low of 42%. However, as of today, we're back up to 80% and it's been trending upward for the last two weeks, and we're expecting that trend to continue. Additionally, while we had the opportunity to feature on television news stations regarding our participation in nursing homes and hospitals, our newly appointed President of AAON Coil Products, Gene Stewart, was interviewed and he announced that we were hiring and needed to hire 100 people to meet our production requirements. Within four or five days we received 400 applicants. The only challenge is that, due to social distancing, it has been very difficult to interview and onboard these candidates in the same way as before the pandemic. We have been working on that diligently. Although we're only at 80% of our targeted attendance right now, in addition to those people expected to return, we'll be hiring more people on top of that, and that effort is progressing quite well. In Tulsa, we have recorded zero cases of coronavirus at this time. On April 1, our attendance was between 92% to 95%, which is our historic range since there are always individuals out for vacation, standard illnesses, or other reasons. Our attendance dipped to a low of 64% on April 25, but as of today, we're at 89%. I understand that substantial attendance is expected to return next week. Earlier, we planned to hire approximately 100 more individuals in Tulsa as well. We were able to meet our production expectations for April despite the lower attendance, and I’m proud of our efficiency improvements. Q1 financial metrics reflect our efficiency levels returning to the numbers you've come to expect from AAON of the past. That concludes my statements, and I would like to welcome Norm to share a few remarks.

Welcome. Many of you I've been speaking with for several years. I would just like to refresh your memory and give you a feeling for where we are. When we acquired the John Zink Company on October 1, 1988, we bought 92 employees along with it. We were doing about $10 million worth of manufacturing and about a similar amount of contract work. We were in the process of transitioning out of the contract business at that time. Fast forward to today, we now have slightly over 2,400 employees and, you know, our sales figures have expanded significantly. We have enjoyed some spectacular success other than the first three months when we had a losing time; we have never had another losing quarter since October 1, 1989. We've seen some of the highest success ratios in the history of the heating and air conditioning industry. If you looked at what we just produced for the quarter, we achieved an all-time high profitability. That's due to numerous shifts in the past year. We've returned to an inflationary environment, and while we were navigating the transition from one managerial team to another, we saw a significant change in management. Training the new staff was challenging because many of the nuanced skills known by long-standing employees are not easily transferable. Nevertheless, we are past those challenges. The new individuals have now adapted well and exhibit strong skill levels. The company has successfully transitioned from one generational group to another and has reduced the average age of our management. We now have a younger managerial group than we had three or four years ago, which positions the company much better for the future. The vigor characteristic of younger individuals has propelled us forward in our methodologies and the documentation of what needs to be done. Our infrastructure is stronger than ever, corresponding with financial stability across the board. In other words, we're at the peak of our company's capabilities. It gives me great pleasure to pass my managerial responsibilities and assume a consulting role, as I believe greatly in the potential for future growth. However, we do acknowledge that we have formidable challenges against the virus, and we all are learning to adapt to this situation. It's unlikely that these conditions will be contained until the medical community improves treatment protocols. We believe that we are equipped to handle this situation effectively and do not foresee anything detrimental negatively impacting the company’s future. Provided the industry and economy remain stable, which I believe they will—considering we exited the onset of the virus with the strongest economy we’ve seen in the construction industry. As I reach the end of my 60th year in this industry, I can confidently say that the outlook is promising, with only one major uncertainty being the economic damage caused by the virus. I genuinely hope it won't cause significant harm, as I believe that the strength built prior can still be reclaimed with ease. We acknowledge many challenges lie ahead, but I believe AAON has it under control. We know how to navigate these circumstances, and I think we are well-positioned for growth moving forward. I appreciate everyone who has played a role in making this company as reputable as it is today, and I look forward to staying engaged with you all in the future. Thank you.

With that, we'd like to open it up to questions.

Absolutely. Thank you, sir. [Operator Instructions] Presenters, your first question will come from the line of Mr. Brent Thielman from D.A. Davidson. Sir, please go ahead.

Hello, Brent. How are you today?

Good afternoon. Congrats on the quarter in these challenging times, and congrats on the transitions, I suppose, officially kicking off as well.

Thank you.

Yeah, I guess there's a lot to talk about. Maybe I'll just start with the orders that were deferred; I think you only mentioned one or two. I can't imagine that’s more than a few million dollars of that. I'm just curious, when you guys see that, does that stay in the backlog? Do you keep it in the backlog for something that shifts out beyond the year? How do the mechanics of that work?

The ones that I talked about as deferred were not in the backlog. Those were in the pipeline for the sales channel. They mentioned that they were pending orders. We had one small order for a grow facility that they had in the backlog and put a hold on long before coronavirus. I told them it was time to either fish or cut bait here about three weeks ago, and they decided to cancel that order and the representative immediately replaced it with two more. So that's the only cancellation that I'm aware of. It was an order for, I think it was around $500,000, if I remember right.

I don't recall the number.

Okay, yeah. My recollection was that it was about $500,000. But again, he replaced it within a couple of days with another one. So the only order cancellation in our backlog I’m aware of is that one.

There are some orders which have been delayed due to shutdowns in construction in various states, and those because the equipment has not left our facility and has not been shipped still are reflected within our backlog.

Right. And can you remind me, I guess this is really more specifically to new construction projects, the timing of when someone comes to you with an order. Is it preceding when there's a hole in the ground, or is it sometime after that? Just trying to understand the timeline there?

Well, it varies just a bit based on the pace of the project. If it's new construction like you just asked, then the traditional process is the owner solicits bids from general contractors or construction managers. They solicit bids from subcontractors who in turn seek bids from our sales channel; pretty much all the bids come together on the same day. It usually takes them a 30 to 45-day timeframe to analyze those bids. Then, when contracts are awarded, we go through a submittal process that takes about another 45 days. So about 90 days after the bid is when there's an award, and then usually within about 30 to 45 days of that is when we receive a release to manufacture. If it's a high-rise building where your unit goes up on the top floor, then a lot of times, you'll see three to four floors of steel or structure that are up before we see the order.

Okay, okay. That's helpful, Gary. And then it sounds like January and February— I mean, just thinking back to the previous call, things were trending along fine. It sounds like you might have seen a relatively steep drop in March, but it sounds like April has returned to normal. Just from an order intake perspective, is that the right way to characterize it, Gary?

It's not quite normal. It's just a little short of that. However, we could feel when people started reopening their states because things became more efficient. All of our sales channel partners, when we talked to them, said they didn't quit working; they have been working remotely from home, but it was very inefficient with time because it’s hard to gather everyone together to make decisions that need to be made. For instance, I talked to one of the sales channel partners yesterday who intended to send us orders for a bunch of K-12 schools for the replacement of units that were slated for summertime work. They had intended on submitting those to us in early April. However, we just received the first of them this week, and they said by next week we'd have all of them. So their paperwork is running about 20 to 30 days behind schedule.

Okay. Maybe one more, and I'll get back in line. The hospital-related orders, what's the revenue contribution of that, Gary?

I think our traditional slice of the pie is around 9% of our revenue goes to hospitals.

He's talking about the whole market, not just the specific two jobs we did.

Well, I guess that's helpful. You said 9% for, I think, hospitals, but the two jobs, I’d be interested to hear about them too if you're able to share.

Well, those two jobs in New York that we delivered within one week's time were about $4 million.

Okay, great. I'll get back in line. Thanks.

All right. Thank you.

Thank you, sir. [Operator Instructions] Presenters, your next question will come from the line of Mr. Joe Mondillo from Sidoti & Company. Sir, please go ahead.

Hello, Joe.

Hi, everyone. Good afternoon actually. I hope you're all doing well.

Doing well.

So Gary, I just wanted to ask regarding your comments on attendance, employee attendance and that you finished with production in April meeting your expectations. Were those expectations sort of pre-COVID? Have you changed the expectations based on the economic downturn or was that sort of pre-COVID April expectations and they’re meeting your expectations despite the employee attendance? Could you just clarify the expectations that you're referring to?

I am talking pre-COVID. We have not had any re-slating of our expectations at this point. With our backlog the way it is, we have not re-slated anything yet.

We're not to the eight-week goal yet.

Okay. So that brings me to the lead times and backlog. You mentioned that your lead time goal is eight weeks. What would your ideal backlog size be in relation to that? I want to get a sense of where should backlog sort of stabilize on an ideal size given your current capacity?

It would be like two-thirds of a quarter would be the ideal backlog. Understand that our production rate is increasing. That's a moving target. So if I took a snapshot in time today and did two-thirds of $137 million, it’s about $100 million, right? If you look back at transcripts from the past, I was asked this question a year ago and said if I had the ideal backlog at the end of 2019 what would that be? And I said at that point in time it was about $100 million. So we're aiming for an ideal backlog between $100 million and $110 million because that serves our clients best with lead time and reflects our increased production capacity. Now, while we’re talking about backlog, I want to clarify that the backlog consists of units ordered to be built-to-order. We also have a substantial inventory of water-source heat pumps that we sell directly from inventory. Those don't appear in backlog because we ship them within one or two days from the time the order is received so they are inconsequentially related. Our parts business has also begun to materialize as a substantial revenue stream which does not factor into backlog.

If I may, those would show up in backlog to the extent that the order was in-house and had not shipped at the end of the period. So they do appear in the backlog, but only for a very brief time.

Correct. That's what I was trying to convey because of the two-day shipping.

All right. Got it. And so going back to your April expectations and your mention of hiring 100 people in Tulsa and I believe 100 at each facility?

Yes, 100 in Longview.

I would assume your expectations relative to pre-COVID, which I guess are maintained, would be that orders would be rising in April seasonally up until June, which I suppose implies that's why you're hiring in anticipation of an increase in order rates. Is that fair?

The order rate has been stable, but we are working a significant amount of overtime, particularly in Longview. For an excess of a year, we've been operating our plant floor with probably over 20% overtime. We'd prefer to gain the efficiency of standard 40-hour weeks and have more employees rather than wearing out current staff, as productivity can decline with too many overtime hours. Tulsa has some overtime as well, and we're committed to reducing that. We still want to increase capacity.

Okay. So I guess that brings me to gross margins, which finally seem to be on track. I guess congratulations on that!

Yes.

One of your best quarters in a long time. How does this translate into gross margin? You are bringing on more people, but then your overtime is coming down. Hopefully, your productivity increases as well. How are you viewing gross margins at this point in time, especially relative to the 32% goal you mentioned in a seasonally light gross margin quarter being the March quarter? You’re almost there.

I've mentioned that historically we target a range of 28% to 32%. In fact, I actually targeted 30% as ideal. We have already surpassed that benchmark and while it can fluctuate slightly, as I stated earlier, we are adding some overhead staff to develop more water-source heat pump products, for instance. If we can gain efficiency by reducing overtime and replace it with more personnel who can develop product for the future, I can maintain our 30% goal. So, I have a balancing act going on where I'm trying to keep things sustainable while funding future growth.

Got it. I also wanted to ask about revenue in the first quarter relative to near-term expectations. Usually, we see a head and shoulders shape where the out quarters show slightly less, while June and September quarters may be a bit higher. Is this an abnormal year? You mentioned that orders are stable, so is this year unusual in a way that June could be comparable to the first quarter, or do you still expect to see the typical seasonality?

No. You categorized it first by calling it abnormal. We've been in an abnormal situation for a couple of years now. We've had more orders than we could produce. We went into the first day of 2020 with a backlog that was much higher than what was ideal. We kept production at full capacity. Therefore, Q4 and Q1 were both up. I would say, if we could duplicate Q1 in Q2, that would be a significant achievement. Normally, you would anticipate a 10% to 20% increase in Q2, but I don't want to raise expectations too high as I just don't see that happening. I don't expect any drastic decline either; it’s going to be close to Q1.

Okay. Yes, I just wanted to clarify that because I wasn't sure. I have one more question. I’ll keep it brief.

No. You go ahead.

The CARES Act benefit that I read about in the 10-Q is a tax benefit where you can retroactively take full depreciation or something related to going back to 2018. I thought your tax rate would benefit, but you stated guidance of 25% which I believe you've been discussing over the past year or so. Is there a chance that could be lower than 25%?

No. What we would be doing is getting accelerated depreciation on the qualified improvement property. It's a timing difference between our current payable and our deferred tax liability. So it doesn't impact our overall effective tax rate, just the timing of when we would be paying those taxes.

Okay. So your cash taxes? Okay. Got it. All right. Thanks a lot. I’ll hop back in line.

Thank you, Joe.

Thank you, Joe.

Thank you, sir. Presenters, your next question will come from the line of Mr. Brian Gaines from Springhouse Capital. Your line is now live. Please proceed.

Hey, Brian. How are you?

Thank you. Good, good. Yourself?

Good.

I just – you had a nice quarter in terms of pricing of the rooftop units. Are we kind of through the cycle of price increases? You're kind of catching up to where you had to be to get to the margin, or is there still further pricing to come?

We have not announced any further price increases. We don't see any need based on our current outlook in the near-term. We do track nine substantial materials that we purchase, including copper, steel, aluminum, stainless steel, heat exchanger tubes, brush coils, and compressors. Currently, this is down 0.8% as a whole versus a year ago, and they comprise approximately 70% of all our materials. The other 30% are more difficult to scrutinize at that level, but we believe that they are slightly up. Therefore, I would characterize our material cost as flat for now. One thing I want to mention about price increases is that we had two categories of equipment that went through price increases in December of 2019, one from the Longview facility, which is still a smaller part of our revenue. The other was the larger tonnage units, which have also undergone a price increase. That said, we are anticipating very small adjustments entering Q2 from those price changes but no additional ones on the horizon.

Got it. And you feel pretty good competitively? I know you've had significant price increases, but I’d imagine the industry has followed suit so you’ve effectively kept up?

Yes. We've performed very well. We had a rep council meeting where we gathered six regions and selected two or three representative organizations from each region. We normally evaluate performance in those meetings bi-annually. We just held our most recent meeting virtually last week. There was one rep who discussed some competitive pressures concerning a specific unit. The rest of the group chimed in on recommendations to overcome that situation without needing to discount. So I would say overall, the pressure for discounts is fairly minimal. Our primary driver has been lead time. Until we got this lead time down to a desirable number, we have seen no issues with pricing.

Okay. Is there any way you can provide us with the dollar value of orders in March and April compared to the same periods year-over-year?

No. That’s sort of forward-looking information that we don’t disclose.

Okay. Can you give any expectations for Q2— kind of overall what you’re thinking?

I already mentioned previously that the company generally sees a decline in Q4 and Q1, with Q2 and Q3 being higher. Since we saw more orders than we could produce, we went into Q4 and Q1 ahead of expectation. I would say if we're able to duplicate Q1 in Q2, that would be impressive. We anticipate that any improvement will be modest; we don’t expect a drastic decline. So, it will be neck-and-neck with Q1.

I understand. Thank you.

And presenters, you do have a follow-up question from Mr. Brent Thielman from D.A. Davidson. Sir, please proceed.

Hey, Brent.

Gary, the water-source heat pump sounds like a category you've mentioned you've made changes to; I appreciate the comments on what you're doing there. I don't think you mentioned this, but are you expecting that product line to get back to growth mode here in the coming quarter, or is it going to take a bit more time to get there?

I’m going to tell you it will take a little while, primarily because the coronavirus has affected that product category significantly—much more than others. The largest target market for us in terms of our existing product offerings has been high-rise condominiums and hotels, both of which will come under pressure moving forward. However, I do have the story of why we got into water-source heat pumps and how we thought we could leverage our legacy product. Our sales representative in Albuquerque sent in a significant order for water-source heat pumps. Half of that order involved products configured as water-source heat pumps. They were unique operating characteristics including being 100% outside air - called dedicated outside air water-source heat pumps - and roof-mounted. It was coupled with a good group of indoor units, which are what we've been discussing. Previously, other manufacturers were getting that business and now they are starting to give it to us. So I was extremely pleased to see such a good order come in. They even published a case study on LinkedIn which is how I discovered it.

Got it. Maybe one quick follow-up. This goal and target lead times you discussed, do you anticipate meeting that in the second quarter?

It's going to be very close. I walk the plant floor nearly every day. The teams are working hard, even though we're a little understaffed. They nearly met our expectations for April, so that helps a lot. As the orders slowed a bit to around the 92% level, that doesn’t bode well for those expectations. However, those orders are beginning to come in now; we have school orders and others that are signaling growing demand as the world reopens. I saw a new Salvagnini machine on-site that was just brought in and will enhance our production capability. Provided we continue to see our people returning, which is what we are anticipating, everything looks favorable that by the end of Q2 we will align our operations to meet our desired lead times.

Okay. And by virtue of that, I would expect sales to mirror the order trends more closely?

That would be ideal. That would be the goal. Thank you, Brent.

Thank you, sir. Presenters, there are no further questions at this time. Please continue.

Well, we want to thank you for joining us. We will talk to some of you again next week when we have our annual meeting of our stockholders on May 12. Until then, have a nice week. Stay safe. Bye-bye.

And again, thank you everyone for participating. This concludes today's conference. You may now disconnect. Have a lovely day and stay safe.