Good afternoon, ladies and gentlemen, and welcome to the AAON, Inc. Third Quarter of 2024 Earnings Release Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. This call is being recorded on Thursday, November 7, 2024. I would now like to turn the conference over to Joseph Mondillo, Director of Investor Relations.

Thank you, operator, and good afternoon, everyone. The press release announcing our third quarter financial results was issued after market close today 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. Joining me on today's call is Gary Fields, CEO; Matt Tobolski, President and COO; and Rebecca Thompson, CFO and Treasurer. Please turn to Slide 2. We begin with our customary forward-looking statement policy. During the call, any statement presented dealing with information that is not historical is considered forward-looking and made pursuant to the Safe Harbor provisions of the Securities Litigation Reform Act of 1955, the Securities Act of 1933, and the Securities Exchange Act of 1934, each as amended. As such, it is subject to the occurrence of many events outside of AAON's control that could cause AAON'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 afternoon detail some of the important risk factors that may cause our actual results to differ from those in our predictions. Please note that we do not have the duty to update our forward-looking statements. 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 GAAP measures in our press release and presentation. With that, I will turn the call over to Gary.

Starting on Slide 3. The third quarter was another solid quarter for AAON. Total revenue grew year-over-year by 4.9% and diluted earnings per share were up 8.6%, both strong results for the quarter. Gross margin contracted by 230 basis points versus the comparable quarter a year ago. We maintain that a gross margin in the mid-30s is very healthy for this business. In fact, the gross margin this quarter represented one of the strongest quarters in the company's history. Likewise, the adjusted EBITDA margin of 25.3% marked the third strongest quarter in company history. Overall, our operations have been performing well, which is reflected in these results. From a demand perspective, bookings in the third quarter were up year-over-year in the mid-single digits, and year-to-date, they were up approximately 27%. Demand for data center equipment remains strong. Backlog at the AAON Coil Products segment at the end of the quarter was a segment record, up approximately 63% from a year ago, and backlog at the BASX segment finished close to record levels, up over 100% from a year ago. Total backlog was $647.7 million, up 32% from a year ago and was comparable with the total backlog at the end of the second quarter. A significant portion of the total backlog at the end of the quarter consisted of orders of data center equipment. Furthermore, subsequent to the end of the quarter, we received approximately $174.5 million of orders that, by and large, will be produced in the first half of 2025. We addressed this in a press release that we issued two weeks ago. These orders are associated with a liquid cooling solution for one data center customer and will be produced at our Longview, Texas location. In addition to these orders from this one customer, the pipeline of opportunity is very robust. While this was a big win for AAON, we foresee much more demand within the data center market going forward. AAON is becoming a leading player in the data center cooling market as a fully capable provider of highly engineered, energy-efficient solutions for its customers. With that, I will now hand it over to Matt Tobolski, who will speak more in depth about our operational strategy.

Thank you, Gary. Over the last several years, AAON has been undergoing a significant transformation. And as we have addressed on recent calls, this has continued through this year. Nearly all departments of the enterprise have been undergoing some degree of change to help position the company to sustain long-term growth at the rates and efficiency metrics we are targeting. At the same time, strong demand for data center equipment and external market factors associated with a slowing non-residential construction sector and the refrigerant transition have consumed and challenged our operations. All things considered, I could not be prouder of how the operations executed in the third quarter and year-to-date. The margins we have been able to record, which are at historically high levels, support my preconceived notion that the team has been operating at a very high level. Please turn to Slide 4. As we have spoken to this year, AAON is emerging as a prominent player in the data center space. Year-to-date through the first three quarters, bookings of equipment associated with this market have nearly doubled and made up nearly 30% of total company bookings. This compares to data center bookings in the same period in 2023, making up about 13% of total bookings. Factoring in the $174.5 million worth of orders that we received in October, this showcases the level of prominence that the data center market has within the AAON business. The success that we have had thus far in the data center market is a testament to various factors. Team collaboration across the enterprise is an integral component. Over the last year, we have taken steps to integrate various divisions of the company to leverage proficiencies and best practices and to increase the efficiency of the overall business. In addition, this highlights AAON's superior engineering competencies. The orders we received in October were related to a highly custom-designed liquid cooling solution. The bidding process for these orders was competitive and really challenged our engineering team. At the end of the day, it came down to who was able to design and manufacture the most ideal solution for this customer. AAON's customer-centric solutions-based approach is unique to the industry and has been critical to our success. We value our customer relationships and strive to create strong, long-lasting partnerships. Please turn to Slide 5. Another critical component to our execution in the data center market is related to expanding production capacity to meet the growing demand. The data center market is in the early stages of a multiyear growth cycle driven by cloud computing and artificial intelligence demand. Supported by our strong customer relationships and high visibility into invested capital and detailed construction plans, our confidence in sustainable demand is high. The orders that we received to date represent a fraction of the overall pipeline of opportunity. We are committed to our customers in meeting their demands by increasing our production capabilities, while at the same time, balancing our risks appropriately. This year, we have been managing two significant capacity expansion projects. The first has been in our BASX segment in Redmond, Oregon. There, we expanded the square footage by approximately 15%. We also reconfigured much of the manufacturing layout in the existing footprint, while at the same time adding new production equipment, all of which has added production capacity and will lead to greater efficiencies. The second expansion project exists at our AAON Coil Products segment at our Longview, Texas facility, where we are expanding the square footage by approximately 50%. We are on schedule to complete this expansion project by the end of this year with production to commence in early 2025. The equipment associated with the $174.5 million worth of orders that we received in October will be built within our Longview facility. In addition to the expansion projects in these two locations, we have entered into a definitive agreement to acquire a new 787,000 square foot facility in Memphis, Tennessee. This investment will largely accommodate incremental production of data center equipment. We also intend to move production of some of our larger, more unique equipment that we currently manufacture in Tulsa to this location, which will, in turn, free up space in Tulsa, further delaying any immediate expansion needs at that location. At the same time, this provides additional geographic diversification, which will mitigate certain operational risks and help better serve our data center customers. We expect this facility will be up and running by the end of 2025. All in all, both the pipeline of opportunity within the data center space and our confidence in the market has never been greater. The investments we are making in capacity, people, products, and customer relationships will generate attractive returns and growth. Please turn to Slide 6. Turning to our more traditional commercial HVAC business, the AAON Oklahoma segment. This segment continued to perform well in the third quarter. Although sales and profits for this segment were down year-over-year, this is expected largely because of a tough comparison to the year-ago period. Versus the second quarter of this year, sales and profits were comparable, which was in line with our expectations and consistent with historical seasonality. This year, volatility in bookings has been greater than previous years, largely associated with the refrigerant transition and softening macro environment. While we did realize a modest increase in orders in August and September, leading up to our phase-out dates of R-410A equipment, the benefit was not nearly as pronounced as what the industry experienced. A lot of the industry's manufacturers standardized equipment that is inventoried within the distribution channel and sold to an end user at a later date. This differs from AAON's strategy in which we manufacture semi-custom build-to-order equipment. As such, we do not see much of a prebuy. We think we could see a near-term lull in demand as customers transition to equipment configured with the new R-454B refrigerant. Furthermore, the new construction market remains soft and could take some time to turn around. As such, we expect the fourth quarter and possibly the first quarter of next year to soften in this segment. As we progress beyond the immediate near-term headwinds, we anticipate demand will accelerate throughout next year. We expect the macro environment will improve with interest rates falling and the election being behind us, plus the refrigerant transition will have played out. Regarding pricing, we anticipate a very modest amount of pricing next year, which is very different from what we are hearing from the rest of the industry. Finally, our product remains best positioned to support secular trends associated with decarbonization, electrification, and future regulations. Therefore, while this segment could see a more pronounced softening in the fourth quarter and first quarter than we normally do in these seasonally down quarters, we feel very good about the medium and long term prospects at the AAON Oklahoma segment. And with that, I will hand it off to Rebecca to walk you through the financials.

Thank you, Matt. Please turn to Slide 7. Net sales for the quarter increased 4.9% to a record of $327.3 million, up from $312 million in the third quarter of 2023. The year-over-year growth was largely driven by the BASX and AAON Coil Products segments, which realized growth of 58.8% and 36.7%, respectively, primarily related to the data center market. Sales at the AAON Oklahoma segment declined year-over-year by 7.1%. The year-over-year decline at this segment largely reflects the tough year-over-year comparison, along with the previously discussed disruptions caused by the refrigerant transition. Moving to Slide 8. Gross profit decreased 1.7% to $114.2 million from $116.1 million. As a percentage of sales, gross profit was 34.9% compared to 37.2% in the third quarter of 2023. The contraction in gross margin was a result of lower volumes at the AAON Oklahoma segment and temporary inefficiencies at BASX, partially offset by strong results at the AAON Coil Products segment, which benefited from a favorable product mix and increased efficiencies. Please turn to Slide 9. Selling, general and administrative expenses decreased 5.5% to $48.6 million from $51.5 million in the third quarter of 2023. As a percent of sales, SG&A decreased to 14.9% from 16.5%. Overall, SG&A as a percent of sales continues to be elevated due to depreciation and increased investments in back-office technology and automation. Professional fees decreased due to the absence of the one-time $7.5 million settlement that occurred in the same period of 2023. Moving to Slide 10. Diluted earnings per share were $0.63, up 8.6% from a year ago. Our tax rate in the quarter was 18.4%. The company's estimated annual effective tax rate, excluding discrete events, is expected to be approximately 24.9%. Turning to Slide 11. Our balance sheet remains strong with a current ratio of 3:1. Cash, cash equivalents, and restricted cash totaled $6.7 million on September 30, 2024, and debt at the end of the quarter was $55.7 million. Our leverage ratio was 0.19x. Year-to-date, cash flow from operations was $191.7 million, up from $107.1 million in the comparable period a year ago. The year-over-year improvement in year-to-date cash flow from operations reflects more efficient inventory management. Capital expenditures through the first three quarters of the year, including expenditures related to software development, increased 37.3% to $113.8 million. We also drew down $17.3 million on our revolving line of credit over this period, largely to finance the $100 million of open market stock buybacks in the second quarter. In the third quarter, we reduced the balance by $30.2 million. Overall, our financial position is strong. This gives us flexibility and allows us to continue to fully focus on investments that will drive growth and generate attractive returns. For 2024, we now anticipate capital expenditures will be $215 million, up from our previous expectation of $125 million. With that, I'll now turn the call back over to Gary.

Please turn to Slide 12. As we approach the end of the year and begin to shift our focus to 2025, we are very pleased with the current trajectory of the company. While the traditional rooftop business has faced multiple headwinds this year, and we expect it could soften more in the immediate near term, our data center business is more than compensating. We estimate that at the end of this year, we will be entering 2025 with a backlog up over 50% from a year ago, a vast majority of which will be converted in 2025. This compares to a year ago when we were entering this year with a backlog that was down year-over-year approximately 6.9%. Our data center business is clearly very strong. This is a rapidly evolving market, and all considered, we are executing extremely well with product development, customer service, production, and management of our capacity. On the traditional HVAC equipment side of the business, it's hard to be nearly as positive compared to the data center. Nonetheless, we remain optimistic. We manufacture the highest quality, highest performing, most efficient rooftop units in the industry. Furthermore, as the industry attempts to improve the quality of their equipment, it has increased their cost of manufacturing, resulting in us becoming more cost-competitive. This year, we have generated the highest gross margins in AAON's history while managing a price premium to market pricing at the lowest level in company history. We also continue to maintain our edge in product development and innovation, as noted in previous discussions regarding our heat pump technology. Our rooftop units configured with this technology have been growing at very robust rates this year. Thus, we are very optimistic about both sides of the business. Lastly, before getting into outlook and opening up the call for Q&A, I want to take a step back and view things from a broader perspective. AAON is positioned for growth to accelerate in a transformative way over the next 12 months, and that is very exciting. This kind of growth can come with risks, including long-term sustainability or operational efficiencies, if not handled properly. We are focused on building an organization with the proper structure and leadership that will mitigate these risks and ensure long-term sustainability and success. In tandem with managing the day-to-day opportunities and challenges that we have experienced this year, we are tactically restructuring the organization to best manage the enterprise over the next several years. From a high level, we are restructuring leadership and the business and modifying processes throughout the organization. These initiatives will ensure that we are maximizing efficiency, minimizing risk, and maintaining high returns on invested capital while the company is growing at a high rate. You'll hear more about this in the near future, but I wanted to make all shareholders aware that we are not taking this near-term growth for granted, and we are investing in the long-term sustainability for this business. For our 2024 outlook, we maintain that our volume will be flattish and pricing will be a mid-single-digit contributor. We also maintain that our gross margin for the year will be up year-over-year, but we expect this to reflect typical seasonal softness in the fourth quarter. For SG&A as a percent of sales, we maintain that it will increase by 50 to 100 basis points. Finally, we increased our CapEx guidance to $215 million, up from $125 million, reflecting the recently announced Memphis project. As we progress into 2025, considering the timing of backlog conversion and accounting for the near-term softening in the non-residential construction market, we expect Q1 sales and earnings to be modestly down from Q4. Moving forward through the rest of the year, we anticipate an acceleration of year-over-year growth in both sales and earnings. In closing, I want to finish by thanking all of our employees, sales channel partners, and customers. Thank you. To our shareholders, this company has never been more well-managed than it is today, and we look forward to generating the returns that you expect of us. I will now open the call for Q&A.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Your first question comes from Ryan Merkel with William Blair. Your line is now open.

Hi, thanks. Good afternoon, and thanks for taking the question. I guess, first off, I wanted to start with the Oklahoma segment. And Gary, you've talked about the slowdown kind of all year, and I guess we're seeing it. And my question is, should we expect revenue in the Oklahoma segment to be down more than the 7% we saw this quarter? Or what do you mean by seeing a slowdown in Q4 and Q1?

We've always experienced seasonality. In recent years, we had a significant backlog due to limited production capacity, which resulted in longer lead times. Now we are producing much more quickly, which has substantially impacted the backlog. There might be a slight softening in Q4 and Q1 since we have reduced the backlog considerably. However, our pipeline remains strong. Sales channel partners are indicating that things are starting to improve. I previously mentioned three challenges affecting the business pipeline: the refrigerant transition, the election, and interest rates. With the election behind us, I believe we managed well. Interest rates decreased by another 25 basis points today, which is a positive indicator. Additionally, the refrigerant transition will be resolved shortly. We cannot produce equipment with the old refrigerant past December 31. Since we are not holding inventory like distributors, we are already shipping 454B equipment and will continue to do so exclusively. The timing of these events has largely aligned with my projections from a year ago. I hope this addresses your inquiry.

Yes, it does. And a quick follow-up because you said that you think Q1 '25 earnings will be down year-over-year. Is that, again, due to the Oklahoma business and some of the softness we're talking about? Or is there anything in there for data centers?

The data centers is very robust. The data centers, the thing is there, the Longview facility in order to produce that at the rates to make up for the slowing down in Oklahoma, it's just coming online here in a few weeks. So I don't expect to flip the lights on and produce at 100% capability right away. I think it will take a quarter to speed that up.

And Ryan, just to clarify, we don't anticipate a year-over-year decline in Q1. We're messaging a potential quarter-over-quarter decline from Q4 to Q1, with just a modest decrease from Q4 to Q1, but it will be up.

Okay, thanks for that clarification. And then let me ask one on data centers before I turn it over. The $175 million order, which I appreciate is not in the backlog, by the way, why was that order so big? And was that a new customer?

So it is an existing customer, but with this specific customer, it is the first exposure into the liquid cooling realm with that customer. The reason it is so large is it is a basically a large-scale deployment of a liquid cooling AI supporting process kind of with exposure across their fleet. So it's not a single facility but is providing product to support a large build-out of AI capacity across the overall enterprise for that customer. One thing I would just note is we obviously messaged the $174 million order. But even subsequent to that, I mean, in the last week, we've tallied on another $34 million in liquid cooling orders as well. So the demand around liquid cooling and the kind of strength with the product development continues to showcase the value that AAON provides.

And that leads to my last question here. When you say that, that order is a fraction of the pipeline, I think a lot of us are wondering, are there other big chunky orders out there that you have visibility to in the $100 million area? Or should we not be thinking about it that way? There's just a long pipeline of lots of kinds of orders?

Yes. I mean, certainly, the kind of the single tranche, $170-plus million order is certainly a little bit more of the unique kind of scale of orders. But I would just say, we have tremendous visibility into numerous orders that are $20-plus million orders within the liquid cooling and air-side space. So the fundamental volume is large orders. The $174 million certainly is one large tranche that's pretty unique. But in aggregate, we have substantially more visibility and pipeline to kind of overall order volume.

Your next question comes from Chris Moore with CJS Securities. Your line is now open.

Hi, good afternoon, guys. Thanks for taking a couple. And maybe just one on the rooftop. Just have all the states passed the necessary legislation for the new refrigerants?

Yes. At this point, the regulations are supporting the refrigerant transition. So we're less than two months away from the mandatory cutover date. And so from a regulation standpoint, the states are prepared for that January 1 date.

Got it. And I know this is probably a difficult one. But since some of these solutions can be hybrid on the data center side. But if you were to look out three to four years and kind of parse the air-cooled versus liquid-cooled, any sense as to what percentage of the data center revenue would be on the liquid-cooled side?

Yes, it will certainly be a transition. We won't just switch to massive liquid cooling overnight. Over the next three to four years, air cooling will still make up a large portion of our systems. It’s important to note that even in a purely liquid cooling data center, there will still be a significant need for air cooling, likely over 20%. As we move toward increasing liquid cooling investment due to the growth in AI and machine learning, the demand for air cooling will still rise significantly. Looking ahead three to four years, we could see liquid cooling making up around 40% to 50% of the total cooling demand if the current investment trend in AI and machine learning continues.

That makes perfect sense. One more question regarding the gross margin, BASX at 27.9 is significantly down year-over-year. As you continue to build out capacity and as volume starts to increase, do you anticipate that the BASX gross margin will be the highest among the three segments?

I wouldn't necessarily say it will be the highest of the three segments, but the Oklahoma segment serves as a good benchmark for what we aim to achieve within the BASX segment. Regarding your question about the Q3 numbers, it's important to consider not only the build-out of capacity but also our investments in Longview and the Memphis facility. Our objective is to leverage a geographically diverse manufacturing fleet, which would enhance manufacturing efficiency and improve margins at those locations. Currently, the Oregon site is handling high volumes that require significant collaboration and some outsourcing, which impacts margins. However, once our manufacturing fleet is fully operational, we expect to scale back on outsourcing and focus on insourcing, which should provide a positive impact on margins.

Perfect. Thanks, Matt. I will leave it there. Thanks, guys.

Your next question comes from Brent Thielman with D.A. Davidson. Your line is now open.

Hi, good evening, guys. Congrats on all the activity here. I wanted to come back to just thinking about the sheer magnitude of things you've got in orders and going to be revenue here in the next few quarters. But I was thinking about your comment that you may be down into the first quarter on a sequential basis. Does that mean the bulk of this sort of new orders is going to revenue in the second quarter? I'm just trying to understand how this is going to sequence over the first half of the year.

Yes. So great question. And when you think about the historic seasonality we have in the rooftop business, coupled with the kind of macro and secular dynamics that are happening right now, the Oklahoma segment certainly is having downward pressures in Q4 and Q1 being offset by the ACP and BASX segments. But when we talk about the growth in revenue in that backlog, it definitely is accelerating quarter-over-quarter. When you think about Q1 to Q2, you've got the seasonality softening on the Oklahoma segment that's providing an uplift in revenue. Add on top of that, the acceleration of conversion of that backlog around the data center space. Certainly, that's where Q2 is going to have a substantially stronger performance compared to Q1 from a top-line revenue perspective.

Yes. Matt, what about just the core BASX business, especially as you wrap up the projects there at that facility? How do you sort of think about the sequencing of revenue from there? Is it going to take some time to work through the kinks? Just curious because it would seem to me you've got a pretty full pipeline there.

Yes. One thing to consider, and this is something that as we go forward, we really have to start thinking about BASX differently than we think about it today. The reason I say that is the BASX brand is truly going to leverage this geographically diverse manufacturing fleet. When we talk about BASX today, it's tied to Redmond. The walls are only so big within that Oregon facility. And we naturally hit kind of a point where that facility is at its revenue cap, and we focus on driving efficiency and basically margin upstep from there. When you think about BASX as a whole, our big intention with the Longview expansion and this Memphis project is to be manufacturing that BASX branded product across that area. We may dial in facilities to optimize the manufacturing fleet and really drive manufacturing efficiency going forward. So the true root answer to your question is BASX as a whole is going to really be seeing strong acceleration, leveraging that diverse manufacturing fleet. Today's style of reporting for BASX can only grow so much within our geographic walls in Redmond until we provide the explanation of BASX going forward. That's something we're very cognizant of as we move forward.

Got it. Appreciate it. I guess my last one is understanding you've got a little bit of a lull here in the rooftop business in the short term. I guess my question around it is, is any of this induced by the refrigerant change? Or is this really just kind of a consequence more of, look, there's a lot of things going on in the end markets right now and customers are just taking a step back?

I think all three factors that I've been talking about for in excess of a year now are pressuring the rooftop business. The refrigerant transition is certainly one of the larger of those. I think the interest rates have kept construction starts down. If we look at ABI, it's been down for like 20 months in a row or something like that. Once these interest rates, the impact of them lowering the interest rates starts to materialize into more starts, there will be more opportunities, and the refrigerant transition will be behind us here shortly. The headwinds don't seem to have a whole lot of duration to them.

Appreciate that, Gary. I'll pass it on.

Your next question comes from Timothy Wojs with Baird. Your line is now open.

Hi, everybody. Good evening. Nice job. I want to focus on a point made in the press release. Over half of your backlog is for data centers, set to be produced and shipped in 2025. If I take 51% of that, it suggests around $325 million of that backlog is for data centers in 2025. Adding the $175 million order announced in October, we could see at least $500 million in data center revenue next year. Is that math correct? If so, how are you positioned from a capacity standpoint to accommodate that growth?

Yes. I want to mention that within our current data center backlog, some of it will be produced beyond 2025, with items expected to be 18 months out. Therefore, not everything in our backlog is set to convert by 2025. However, the $174 million we indicated is expected to primarily convert in the first half of 2025. We also have capacity for selling liquid cooling products in the latter half of 2025. While I’m not providing specific guidance, your thoughts align with what we see in the data center space moving forward. Supporting this significant growth requires careful management from a manufacturing and efficiency standpoint. We've completed the fundamental project in Redmond, which is now producing. This project resulted in a 15% increase in square footage, offering more potential for overall revenue, not a direct correlation. At the Longview site, we're set to wrap things up by year-end and have already started setting up production lines. As we enter 2025, these lines will be progressively operational throughout the year, providing much-needed capacity. You'll notice the sequential rise in capacity at Longview from Q1 to Q3. By Q3, we expect to gain momentum in production at the Memphis facility, with products becoming available in the latter half of 2025. Overall, from now until the end of 2025, our capacity will consistently increase throughout the year, enabling us to support this growth in bookings.

Okay. That's really helpful. Thanks. I guess on Oklahoma, Gary, just kind of if you can maybe just talk a little bit about the decision to maybe put through a little less price than your competitors are doing? Because by my math, I mean, you effectively won't have much of a premium now, at least on an initial cost basis relative to your peers. And so I guess, how do you intend to push that in terms of marketing and sales just given the efficiency or just the much bigger efficiency that you have relative to standardized product?

One of the things to take note of is several of our competitors have announced that they're building inventory to put in their distributor channel that is 410A. One of those competitors stated that they could be putting new 410A equipment in for about 9 more months. While that's still out there, we're not going to see the real price difference because they're not getting a preponderance of 454B equipment out there yet. So it's not going to be instantaneous that we see this glaring difference in pricing show up. It's going to take a quarter or two. We're monitoring it very closely. When we have competed with the others on 454B, we have found them to be much closer to our price or above our price. I just want to get the momentum back into this business and not try and get the margins out of line. The margins are very, very good right now. We've produced enough 454B equipment already to know that our margins are solid on it as well. We will be monitoring that, Tim. I don't want to leave money on the table. Our equipment is definitely a value statement that is easily defined, and we intend to get paid for that value.

Okay. No, it's helpful. I understand that. Okay, good. Go ahead. Thanks, guys. Appreciate it. See you next week.

Your next question comes from Julio Romero with Sidoti & Company. Your line is now open.

Thanks. Hi, good afternoon, everyone. Could you give us some flavor in terms of the margin profile of that $175 million liquid cooling order? And is it fair to assume that order is going to be part of the Coil segment, or would it be BASX?

Yes. From a margin perspective, I would just say, it's going to be in line with what we historically have seen in the BASX segment kind of before all the disruption. Obviously, there's opportunity to get margin expansion kind of given that volume, and the manufacturing efficiencies that come with that provide headroom in there. But we're not guiding that they're going to be as strong as kind of what we've been posting in the Oklahoma segment just because there's going to be pressures on that margin during the initial ramp-up. As we get into a steady state, there's going to be opportunity for some upside. I would use kind of a 2023 BASX margin profile as a rough expectation of really where we expect to see that come. Yes, that revenue will show up in our reporting within the Coil Products segment.

Okay, got it. So 2023 BASX margin. But wouldn't the majority of that order be kind of in 1 quarter in 2Q, as you said earlier? Or am I not thinking about that correctly?

It will ramp up. I mean, you'll see that revenue kind of sequentially, realistically, even a little bit in Q4. So you'll see it kind of in Q4 ramp up in Q1 and then ramp up more in Q2. So it will be sequential. But certainly, there's going to be a high density of that sitting in Q2. That's obviously going to provide some margin upside just around leverage.

Got you. Got you there. And then on the new production facility in Tennessee, you said you expect to have it running kind of towards the end of the year '25. Can you just give us an idea of kind of the expected contribution of that facility on an annualized basis?

Yes. It certainly has a lot of room to really impact the revenue within AAON. We haven't really kind of put on paper publicly at least where the revenue potential is. But what I would just say is if you step back and think about what does 787,000 square feet mean relative to the data center footprint that exists inside AAON today, it's roughly doubling the available square footage to produce data center products. That's kind of the guidance we're giving: if you look at that and look at Redmond, and you look at the ACP site with the expansion, all in, you're getting roughly a doubling of that square footage to be able to revenue data center products going forward. There's definitely upside to be able to really impact the market with that coming online.

Good context there. And maybe getting ahead of myself, but is that going to be also a Coil segment facility, or would it be different?

So near term, it will likely be reported into Oklahoma. But obviously, on the long term, we're going to work through reporting to be able to clearly articulate the BASX versus AAON segments from their impact on the enterprise as a whole.

Understood. And then just one more for me, if I could. Maybe it's Rebecca, you said earlier that the annual effective tax rate for this year is expected to be 24.9%. So does that imply kind of a high 30s tax rate we should be looking at for the fourth quarter?

No. The annual results for each quarter reflect specific events, primarily our excess tax benefit that brings the rate down below 24%. Therefore, you can't just take 24% year-to-date and extrapolate that to suggest a higher rate for the fourth quarter. The effective rate will remain at 24%. I expect we will see another excess tax benefit in Q4, which could result in a rate lower than 24% when accounting for these specific events. You should apply the 24% tax rate to your fourth quarter results and consider the potential impact of any discrete events.

Okay, good clarification there. Thanks very much, guys. I'll pass it on.

There are no further questions at this time. I will now turn the call over to management for closing remarks.

I'd like to thank everyone for joining us on today's call. If anyone has any questions over the coming days and weeks, please feel free to reach out to myself. Have a great rest of the day, and we look forward to speaking with you in the future. Thank you.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.