Earnings Call Transcript - AAON Q1 2025

Operator, Operator

Good morning, ladies and gentlemen, and welcome to the AAON, Incorporated's First Quarter 2025 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, May 1, 2025. I would now like to turn the conference over to Joe Mondillo, Director of Investor Relations. Please go ahead.

Joe Mondillo, Director of Investor Relations

Thank you, operator, and good morning, everyone. The press release announcing our first quarter financial results was issued earlier this morning and can be found on our corporate website, aaon.com. The call today is accompanied with a presentation that you can find on our website as well as on the listen-only webcast. 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 1995, 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 morning detail some of the important risk factors that may cause our actual results to differ from those in our predictions. Please note that we do not have the duty to update our forward-looking statements. Our press release and portion of today's call use non-GAAP financial measures as defined in Regulation G. You can find the related reconciliations to the GAAP measures in our press release and presentation. Joining me on today's call is Gary Fields, CEO; Matt Tobolski, President and COO; and Rebecca Thompson, CFO and Treasurer. Gary will start us off with some opening remarks. Rebecca will follow with a walk-through of the quarterly results. Matt will then provide further details on our operations and outlook going forward. And before taking questions, Gary will finish with some closing remarks. With that, I will turn the call over to Gary.

Gary Fields, CEO

Starting on Slide 3. Prior to jumping into the results, I want to start off by reminding you of our core strategic pillars. These pillars consist of leading in innovation and custom solutions, driving sustainable organic growth, and being a best-in-class operator. These three pillars help guide our long-term strategic planning and remind us of what we are trying to accomplish when forming tactical strategies. All of these pillars did not always exist at AAON. Since our founding, leading in innovation has always been core to who AAON is. Over the past several years, our strategy has built upon this with a focus on developing ways to drive sustainable long-term organic growth and being a best-in-class operator. All of the tactical initiatives that we've taken, such as transitioning to a leadership team, putting in place succession planning, formally constructing and documenting long-term strategy planning, adopting a One AAON principle, and I could go on and on. All of this was to better leverage our core to drive sustainable and efficient long-term growth. This company has never had a better long-term strategy with a better leadership team to execute it. What we're doing with the development of heat pumps on the AAON side of the business, and custom airside and liquid cooling data center solutions on the BASX side is very exciting. The strategies we're taking regarding the other two pillars ensure that we will fully leverage these innovations, along with the already premier solutions we provide to drive market share gains at highly profitable levels. Now turning to Slide 4. The first quarter was a solid quarter for AAON. Net sales, margin, and earnings per share notably improved from the fourth quarter, and backlog grew to a record level. Total net sales grew year-over-year 22.9%. Sales of BASX-branded equipment were up 374.8%. Both airside and liquid cooling solutions for data centers were driving factors. Partially offsetting this strength, sales of AAON-branded equipment were down 19.1%. Production of our rooftop units was impacted by the weak bookings we received throughout most of the fourth quarter. Additionally, supply chain issues with certain components associated with the new R454B refrigerant were also a factor. On a positive note, bookings of this equipment year-to-date have been strong. We also have begun to see these supply chain issues abate early in the second quarter. Total gross margin contracted 840 basis points versus the comparable quarter a year ago. This reflected weak production volume of AAON-branded rooftop units and the resulting operating deleverage effect. Gross margin at the AAON Oklahoma segment was down 1,380 basis points. Strong sales of BASX-branded equipment, along with operational efficiency improvements drove solid gross margin expansion at the AAON Coil Products and BASX segments. Gross margin at these two segments were up year-over-year 100 and 350 basis points, respectively. Total backlog finished the quarter at a record level of $1 billion, up year-over-year 83.9%, and up quarter-over-quarter 18.4%. First quarter bookings of both AAON-branded and BASX-branded equipment were robust. Backlog of AAON-branded equipment was up quarter-over-quarter 23.4%, and this was the highest level since the first quarter of 2023. Bookings of rooftop units were very strong and strengthened throughout the quarter. Backlog of BASX-branded equipment was up quarter-over-quarter 15.4%, driven by bookings of both airside and liquid cooling data center equipment. Given the backlog on both sides of the business, we're positioned well entering the second quarter. I will now hand it off to Rebecca Thompson, who will walk through the quarterly financials in more depth.

Rebecca Thompson, CFO

Thank you, Gary. Please turn to Slide 5. Net sales for the quarter increased 22.9% to $322.1 million, up from $262.1 million in the first quarter of 2024. The year-over-year growth was driven by a 374.8% increase in BASX-branded equipment sales. This was reflected in the results of the BASX and AAON Coil Products segments. Net sales at these two segments were up 138.9% and 287.8%, respectively. Sales of AAON-branded equipment declined year-over-year 19.1%. This was largely reflected by the AAON Oklahoma segment, which realized a decline in net sales of 23%. Production of rooftop units was impacted by weak bookings throughout most of the fourth quarter. This was related to a temporary lull in demand as the market shifted from the legacy R-410A refrigerant to the new R454B refrigerant equipment. Bookings have since rebounded in a strong manner, suggesting that we're becoming more competitive with the new refrigerant equipment. Also impacting the first quarter was a tight supply of certain components associated with the new refrigerants, which temporarily constricted our production rates. Supply of these new components have recently begun to improve and will enable us to increase production rates significantly in the second quarter. Moving to Slide 6. Gross profit decreased 6.4% to $86.4 million from $92.2 million. As a percentage of sales, gross profit was 26.8% compared to 35.2% in the first quarter of 2024. Challenges from the industry-regulated refrigerant transition and non-residential construction activity significantly affected our largest segment, AAON Oklahoma, resulting in decreased volumes and lower overhead absorption. Gross margins at this segment were down year-over-year 1,380 basis points to 23.5%. As we begin to see production volumes increase in the second quarter, we fully expect gross margins to recover. Production volumes of BASX-branded equipment acted as a partial offset. This allowed gross margin at the BASX and AAON Coil Products segments to expand. Operational efficiency improvements at both our Oregon and Texas facilities also contributed to improved segment margins. Please turn to Slide 7. Selling, general and administrative expenses increased 13.3% to $51.3 million from $45.3 million in the first quarter of 2024. As a percent of sales, SG&A decreased to 15.9% from 17.3%. Depreciation and amortization was up $3 million due to our increased investments in back-office technology, offset by a decrease in professional fees of $3.1 million due to various professional, regulatory, and legal corporate requirements in 2024. SG&A expenses also included a $2.7 million fee due to our real estate broker associated with the December 2024 acquisition of our Memphis, Tennessee plant for a percentage of the incentives awarded to us by various entities. Moving to Slide 8. Diluted earnings per share was $0.35, down 23.9% from a year ago. Excluding the net impact of the $2.7 million real estate broker fee, adjusted earnings were $0.37, down 20% from a year ago. The decline in earnings fully reflects the lower production volumes and profits of AAON-branded equipment. Our effective tax rate in the quarter was 9.8%. The company's estimated annual effective tax rate, excluding discrete events, is expected to be approximately 25%. Turning to Slide 9. Cash, cash equivalents, and restricted cash balances totaled $2.4 million on March 31, 2025, and debt at the end of the quarter was $252.4 million. Our leverage ratio was 0.95. Year-to-date, cash flow used in operations was $9.2 million compared to cash flows provided by operations of $92.4 million in the comparable period a year ago. Year-to-date, cash flow from operations largely reflected increased investments in working capital. Capital expenditures through the first quarter of the year, including expenditures related to software development, increased 30.2% to $50.4 million. We drew down $97.5 million on our revolving line of credit over this period, largely to finance the investments in working capital, capital expenditures, and $30 million of open market stock buybacks. Overall, our financial position remains strong. This gives us flexibility and allows us to continue to fully focus on investments that will drive growth and generate attractive returns. For 2025, we continue to anticipate capital expenditures will be $220 million. I will now turn the call over to Matt, who will walk through operations in more detail and update you on our outlook.

Matt Tobolski, President and COO

Thank you, Rebecca. Starting on Slide 10. Gary and Rebecca covered this pretty well, but here, you will see how AAON-branded sales performed relative to BASX-branded sales. Total revenue growth of 22.9% was fully driven by BASX-branded equipment sales growing 374.8%. This is driven by data center demand for both airside cooling equipment manufactured at the BASX segment and liquid cooling equipment manufactured in the newly expanded space at the AAON Coil Products segment. BASX segment sales were up 138.9% and AAON Coil Products sales were up 287.8%. This helped drive an expansion in segment gross margin of 350 basis points to 24% at BASX and 100 basis points to 34.6% at AAON Coil Products. At both segments, we also began to benefit from the initiatives we're taking to improve operational efficiencies, particularly at the BASX segment where we're rightsizing capacity at the Oregon facility and focusing more on the productivity of the facility. We expect to see more improvement at the BASX segment throughout the year, especially in the second half of the year. AAON-branded sales were down 19.1%, driven by rooftop production volumes being down at the AAON Oklahoma segment. AAON Oklahoma segment sales were down 23%. This was largely reflective of the weak bookings we realized throughout most of the fourth quarter. Supply chain issues with components associated with the new refrigerant also contributed to lower production volumes. This was a temporary issue related to refrigerant transition that is a challenge to manage and difficult to anticipate. As the market transitioned to the production of the new refrigerant equipment, component manufacturers were challenged with keeping up with demand. In hindsight, we would have increased inventory levels for some of these components, but it was tough to predict at the time. As a result, the lack of access to certain parts caused us to maintain lower production levels despite a large backlog of bookings. The positive is that we're beginning to see improvement in the supply chain, which is allowing us to increase production rates in the second quarter. Given the size of the backlog, we anticipate production will continue to increase over the next several months. Now, please turn to Slide 11. Total backlog at the end of the first quarter finished at a record level of $1 billion and was up year-over-year 83.9%, and up quarter-over-quarter 18.4%. Backlog of AAON-branded equipment was $404 million, up year-over-year 44.9% and up quarter-over-quarter 23.4%. This backlog was the highest level since the first quarter of 2023. Since the beginning of the year, bookings at this side of the business have been strong. We received a lot of positive commentary from our sales channel, and we believe our competitiveness with the new refrigerant equipment has never been better. We're still trying to get an idea on exactly where our price premium lies, but it seems that we have narrowed a little. Also helping drive the backlog, we continue to realize strong demand for our heat pump configured rooftop units, otherwise known as Alpha Class. In April, we started to introduce our next generation of the Alpha Class series, which is operable down to negative 20 degrees Fahrenheit. By the end of this year, our entire product portfolio of rooftop units will be configurable with this low-temperature configurability, meeting the DOE's commercial heat pump challenge two years in advance of the set 2027 goal. The strong backlog on this side of the business positions us well entering the second quarter. Our goal is to drive a lot more volume through the Tulsa facility. And as we do this, you'll see margins at the AAON Oklahoma segment begin to recover. With the supply chain issues abating and given the size of the backlog, we should begin to see production and profitability improve in the second quarter and continue through the third quarter. The fourth quarter will depend on the bookings we receive over the next few months. The macroeconomic environment remains in pretty poor shape, which is creating a lot of uncertainty on the back half of the year. For now, though, we are taking market share. Despite the macro uncertainties, the sentiment across our sales channel is relatively upbeat. We are making headway with our national account strategy and are optimistic we will see meaningful impact, especially with our industry-leading Alpha Class air source heat pumps. These national accounts are large in volume and are multiyear replacement programs. And if we're successful, it will be material to growth. Backlog for BASX-branded equipment was $623 million, up year-over-year 122.7%, and up quarter-over-quarter 15.4%. Bookings of both airside and liquid cooling equipment for data centers have been strong year-to-date. This puts us in a great position for the rest of the year and provides much more visibility and certainty of sustainable growth into 2026. With such a large backlog in hand, we can manage production more efficiently, which you will see in the margins of the AAON Coil products and BASX segments. We continue to anticipate margin improvement, most notably in the BASX segment as we progress throughout the year, particularly in the second half. Our capacity expansion plans continue to progress well. Production of our liquid cooling data center equipment at the AAON Coil Products segment has been ramping well. In the new space, we currently have three production lines in place with plans to increase that to five later this year. At BASX, we are making great progress with rightsizing capacity. We've already begun to see these operational improvements in the margin, and you should expect to see more improvement in the second half of the year. The expansion in Memphis is also progressing. We've started to assemble equipment there at a small scale. Now, it won't be as efficient as our other facilities until we get the vertically integrated production set up, but it is helping us achieve our on-time delivery commitments and goals. We expect meaningful production to begin in the fourth quarter of this year with a sharper ramp-up of volumes throughout 2026. Until we get this production in place, we continue to expect the facility will incur about $5 million to $7 million of costs with minimal revenue to offset. In the first quarter, these costs amounted to approximately $2.8 million. In addition, we realized a $2.7 million fee associated with various incentives relating to Memphis. Now, please turn to Slide 12. We maintain our full-year outlook. We anticipate full-year sales growth to be in the mid- to high-teens at a gross margin similar to what we realized in 2024. SG&A as a percent of sales will realize a decline of 25 to 50 basis points, and CapEx will be approximately $220 million. For the second quarter, we look for sales and earnings to be up modestly from the first quarter. Note that the tax rate was unusually low in Q1, and that our interest expense in Q2 will be up with the higher debt balance. The implication is that operating income will be up quarter-over-quarter more than just modestly as indicated in the earnings guide. Finally, inclusive of the updated annual outlook is our tariff mitigation surcharge of 6%, which recently went into effect. The outlook assumes this surcharge will be in effect throughout the remainder of the year. Of course, trade policy is very fluid. At any moment, depending on how policy evolves, we could increase or decrease the surcharge. We anticipate the surcharge will fully neutralize the impact of tariffs on our costs and margin. Lastly, I would like to highlight that we are hosting an Investor Day on June 10 in New York City. Please find additional information on our corporate website under the Investors section. I hope to see some of you there. Now with that, I will hand the call back to Gary for closing remarks.

Gary Fields, CEO

With this being my last earnings conference call, I wanted to close by thanking all of our stakeholders. To our stockholders, our employees, sales channel partners, customers, and vendors, thank you. I also would like to thank our founder, Norman Asbjornson, for giving me this opportunity. It has truly been a pleasure and honor managing this company for nearly 10 years. A lot of change has taken place over the last decade, and I can confidently say the company is in a much better state than when I arrived. I always said one of my principal goals since day one was to work myself out of a job. I've done that. The day has come. The management team of this company under Matt's leadership has never been better. The growth prospects are better than ever. With that, thank you again, and I will now open the call for Q&A.

Operator, Operator

Your first question comes from the line of Julio Romero from Sidoti. Please go ahead.

Julio Romero, Analyst

Great. Good morning, Gary, Rebecca, Matt, and Joe. I want to start off, congratulations again, Gary, for all your work over the years.

Gary Fields, CEO

Thank you.

Julio Romero, Analyst

Maybe to start on what you're seeing on K-12 public bid data, what does that data tell you in terms of where the industry is in terms of pricing of equipment and where AAON's pricing delta currently stands relative to the competition?

Matt Tobolski, President and COO

Yes, of course. And we look at the kind of feedback we're getting from the sales channel partners and really from the bid activity, and all indicators definitely say the AAON price premium is definitely contracted, which is a positive that we're seeing from a competitiveness standpoint. Certainly hasn't gotten to parity, but definitely is showing a 1% or 2% closure in that price premium, which is allowing us to continue taking market share and really make it a lot easier to be able to sell that value proposition that the AAON product offers.

Julio Romero, Analyst

Got it. That's very helpful. And then, can you give us a sense of where your market share stands today with regards to national accounts, and where you think you can take that over time by leveraging your heat pump technology?

Matt Tobolski, President and COO

Yeah. National accounts as they stand today, I mean, there's definitely a good amount of national accounts within the AAON portfolio, but a lot of the ones that exist today in our books are, I'll say, kind of smaller-scale national accounts. And so when we look at the overall market share in national accounts, it's certainly low as it stands today inside the AAON portfolio. What I would say, though, is the acceleration that we have seen with intentional effort in really positioning the product is showing a very noticeable acceleration of national account activity around the AAON brand. And really, when you look at the kind of trajectory that we see in the national account segment, it will make a meaningful impact to the AAON brand. I mean, we're seeing a tremendous amount of activity, a lot of adoption and understanding of the value proposition. And with the Alpha Class product and really being able to offer an incredibly flexible heat pump solution that really offers a great option, not just in cold climates, but also in warmer climates. We have a portfolio that can really check the boxes for the entire industry and for the entire national account across the country. And so, we're seeing a tremendous amount of involvement there. The activity that our national sales team in partnership with our sales channel is engaged with right now is tremendous. And so, we see that being a meaningful impact for AAON kind of on a go-forward basis. The one thing I always want to point out, though, is national accounts do not just transition overnight. I mean, it's a process. Because of the scale of these accounts, the sales cycle tends to be a little bit longer than, let's say, a traditional K-12 type project. And so there's a lot more conversation around the value proposition. There's a lot more positioning of the product because we're setting up multiyear programs, not just a single project. And so, why I say that is, we're going to see these materializing in '25. We'll start seeing more and more national accounts materialize. But definitely with the trajectory, I think it's going to be later '25, you'll start seeing the acceleration, but '26 is really the year that a lot of today's work is going to convert to revenue. But when we look at that Alpha Class solution and really what we just announced at our national sales meeting a couple of weeks ago, being able to have a heat pump solution that can operate all the way down to negative 20 degrees is a tremendous option to be able to present to our customers and national accounts where we can handle those coldest climates. We call that the extreme series for us with the negative 20 operating conditions. We're able to really capture a tremendous amount of those northern states in a true heat pump operation mode, but we also have what we branded the ECO and the Pro series, which provide flexibility and more cost-effective solutions as you kind of move to those southern states. And so that portfolio of Alpha Class products from the extreme cold temperatures to the warmer climates is really an all-encompassing product portfolio that is really resonating with our national account customers.

Julio Romero, Analyst

Very helpful. Thanks, again.

Operator, Operator

Your next question is from the line of Ryan Merkel from William Blair. Please go ahead.

Ryan Merkel, Analyst

Hey, everyone, good morning. Nice quarter. And let me also say congrats, Gary. It's been great working with you. Wish you best of luck.

Gary Fields, CEO

Thank you much.

Ryan Merkel, Analyst

So, my first question is just on the core rooftop business. You guys talked about strengthening orders through the quarter. Can you just talk about a couple of things? The pushouts that you saw last quarter, did those come back as you expected? Do you think you're taking market share just given where you're priced? And then, I'm a little curious if you saw kind of a pop in March ahead of that surcharge that you put in April.

Gary Fields, CEO

Yeah, Matt, go ahead.

Matt Tobolski, President and COO

There was definitely some volatility in bookings in Q4, primarily due to the adoption cycle of the new refrigerant. We noted in our Q4 call that although the initial months were weak, we experienced a resurgence in December, and this positive momentum in bookings continued into Q1. This indicates that the softness we observed in Q4 due to the refrigeration transition is mostly behind us, and we are now witnessing a consistent order flow that aligns with typical seasonal patterns. Regarding the 6% surcharge, we anticipated a lot of discussions and activity leading up to it. However, we intentionally limited the number of orders we would accept without a surcharge based on financial assessments and inventory levels for most components. This cap helped manage the activity before the surcharge came into effect. While there was a noticeable dip in orders the day after the surcharge started, the subsequent order cadence has shown the usual strengthening we expect in Q2 bookings. Although we saw some order pull forward, it did not overshadow our overall operations. Over the past 45 days since implementing the surcharge, we are seeing things normalize. Compared to some of our competitors, we are observing stronger bookings, which suggests our pricing is more competitive than historically and indicates that we are gaining market share.

Ryan Merkel, Analyst

Got it. Okay. That's encouraging, and that was the answer I was looking for actually. Thanks for that. And then I'd like to put a finer point on the 2Q guide. The Street is about $0.60. You just did adjusted $0.37 and you're talking about up modestly. Can you just help us with that? And help us think through sales and margins. I'm just wondering if there's a potentially bigger margin impact in 2Q because of the Memphis facility that maybe we don't appreciate, but just any help there would be great.

Matt Tobolski, President and COO

Yeah. So, I want to start off by reaffirming the overall full year guide. And just kind of why I want to start there is by saying there's definitely a strong growth year and strong performance here that you're going to see in 2025 out of AAON. Q2, we're coming on the heels of Q1 that would impact in the Oklahoma segment with some supply chain constraints. And so, as we said in the prepared commentary, yes, supply chain impacts are abating. But if you kind of think for a second, coming out of April into April, I should say, those were still lingering as we entered April. And so, what that does is it starts us off a little bit slow in April, and slower than we want to be relative to the backlog we have and the overall demand for the product. So that's not given us that immediate pop that we'd want to see inside of the Oklahoma segment as we basically ramp up production as supply chain kind of gets to a more normalized cadence. So, that is a little bit of an impact that is built into that guide. As you also think about the BASX and the ACP segments, Q1 was a very strong quarter. In Q1, definitely, we had some good uptick in productivity, especially inside that Coil Products segment. But there's also traditionally a little bit of lumpiness just on kind of how orders flow through, and just based on delivery schedules of these larger orders that kind of are associated with these data center projects. So, why I say that is I don't want to set an expectation for Q2 to build upon Q1. There's a little bit of noise, and you might see just a slight kind of pullback in overall sales inside the ACP BASX segment just coming off the heels of such a strong Q1. So that's sort of built into that guide. But the one part I want to also touch on is the overall operating income is going to be up far more than modestly, which is to your comment, showing strength in sales out of Oklahoma. And with that, you're going to see good margin recovery out of the Oklahoma segment in Q2. But as we kind of peel that back, Q1 had a very beneficial tax rate that we don't anticipate in Q2. And so, from a bottom line flush out, you can definitely see a tax rate impact in Q2 you didn't have in Q1. And you're also going to have growing interest expense as we've invested in working capital with the production rates ramping up in both Coil products and BASX. And so, if you look at the operating income perspective, you would see a great uptick in Q2, and that's just being hampered a little bit by that tax rate differential and the interest rate. That's kind of what's flushing that modest guide from an EPS perspective.

Ryan Merkel, Analyst

Okay. That's really helpful. I'll pass it on. Thanks so much.

Operator, Operator

Your next question is from the line of Chris Moore from CJS Securities. Your line is now open.

Chris Moore, Analyst

Hey. Good morning, guys. Thanks for taking a couple, and also congrats, Gary. Thanks for everything.

Gary Fields, CEO

Thank you.

Chris Moore, Analyst

Sure. I would like to explore the recent trend of major companies canceling or reducing their data center construction plans. Can you share more about what you are hearing from your customers and how much insight they provide regarding their plans for the next three to five years?

Matt Tobolski, President and COO

Yeah, there's tremendous visibility from a pipeline perspective that we see with our customers and large data center operators that we work with, we're typically getting every month, every two months, we're getting an updated pipeline that is provided to us. And so that's giving us anywhere from a three- to seven-year kind of outlook on what these big players have in their projections. Is there noise in the data center industry right now? Sure. There's a lot of conversation around cancellations and pushouts. But what I would say is the pipeline that we see has never been stronger. The orders book that we see has never been stronger. And while there might be some near-term noise, it's still on a growing base. And so, we're seeing this continue to strengthen. We're seeing the inquiries, the pipeline visibility. We're seeing all of that in a very strong condition. We see it strengthening. There's definitely some near-term conversations, which, frankly, Chris, I think it's actually a good thing if you think about this systematically. I mean, if we sort of have a more normalized but aggressive growth rate as an industry, not relative to AAON, but as an industry that's far easier to manage. And so we see this continued long-term strengthening cycle. We see tremendous good visibility into 2026 that's providing us confidence in that sort of next year performance continuing to build off a strong '25. And so, yes, there's noise in the industry, but I would just reaffirm that the visibility of the pipeline has never been stronger. The order activity within the BASX segment has never been stronger and the activity with our customers engaging with those customers has never been better.

Chris Moore, Analyst

Perfect. The $200 million-plus liquid cooling order was pushed back a bit. Did any of that or much of it occur in Q1?

Matt Tobolski, President and COO

So, regarding the $200 million order we discussed last year, we have recognized about $80 million of that revenue so far. The ramp-up began in the fourth quarter of last year and saw significant growth in the first quarter as we established inventory and built up that product. Initially, we expected most of this to convert in the first half of the year with some carryover into the third quarter. However, this project has slightly extended beyond our original timeline. To date, we have recognized $80 million of the $200 million, and we expect the remainder to be distributed throughout the rest of this calendar year. Additionally, we have further follow-on orders from that customer and a strong visibility into their 2026 and 2027 pipeline, indicating increasing demand. The initial build-out and the pace of investment are taking longer due to the construction activities tied to building these new AI data centers, which is slightly lengthening the order cycle.

Chris Moore, Analyst

Got it. I appreciate that. I'll jump back in line. Thanks, Matt.

Matt Tobolski, President and COO

Yeah, of course.

Operator, Operator

Your next question is from the line of Brent Thielman from Davidson. Please go ahead.

Brent Thielman, Analyst

Hey, great. Thanks. Gary, I relay all the same. It's been a pleasure. I guess first question, just on the rooftop business, some of the supply chain issues you've felt here in the quarter, and it sounds like you continue to feel to some degree. Are you at the point where there's some confidence these issues are going to be behind you as you go into the second half of the year? And I guess just with that, I was curious, it didn't really seem like that impacted the BASX-branded product. I'm just wondering if that could still come or do you see it as a nonissue there.

Matt Tobolski, President and COO

The confidence we have now stems from the improvements we're seeing in the supply chain regarding new refrigerant components. Overall, the trends are very positive. The industry's transition, especially the switch from 410 to 454B starting January 1, created significant strains on the supply chain as we had to manage existing 410A products while also introducing new products for 454B. Initially, there were some challenges, but month by month, those issues have been lessening. We noticed the impact from the first quarter decreasing as the quarter progressed, and while some lingering issues remain as we enter April, things are looking much better. By the second half of the year, manufacturers will primarily focus on producing 454B components, which should ease the earlier supply chain disruptions. This gives us great confidence as it allows us to ramp up production levels in the Oklahoma segment, which will help boost our sales and profit margins. Regarding the BASX segment, most products there are not reliant on refrigerants, so we haven't faced the same supply chain issues that impacted other areas. Thus, we haven't seen any manufacturing challenges in the BASX segment.

Brent Thielman, Analyst

Really helpful, Matt. And then maybe as a follow-on, sort of beyond the issues associated with the refrigerant change and those associated components, can you talk about maybe broader exposure just now with the implementation of tariffs and what that might do to the kind of broader supply chain? How you think AAON is positioned around that, where you feel like you're well positioned or not, just for the things that we can't potentially see coming in terms of broader impacts to the supply chain?

Matt Tobolski, President and COO

Yeah, definitely. We were actually betting on how soon a tariff question would arise, and it took a bit longer than we thought during the Q&A. However, when considering the impact of tariffs on the AAON segment, we are pleased with our extensive vertical integration in our manufacturing process. We also proudly depend on many of our U.S. partners. As a result, our exposure to tariffs in the AAON segment is significantly lower compared to some of our competitors. Overall, this puts us in a better position in a tariff-heavy environment. Still, we recognize that tariffs will affect us in some way. Even for components made in the U.S. that we purchase, many materials used in those components are sourced internationally, which means there is some tariff impact. This is reflected in our surcharge as well. While we anticipate some noise from tariffs in the supply chain, our commitment to U.S. manufacturing, vertical integration, and a strong U.S.-based supply chain allows us to believe that the impact on AAON will be smaller, especially when compared to many of our competitors.

Brent Thielman, Analyst

Okay. Just last one, just on the BASX-branded products. Maybe more of a clarification, Matt, I think I heard you say, a lot of growth certainly aligned with one of the customers out there. Could you just talk about diversification of customers within that product line? Do you expect more diversity in the coming year, especially as you're bringing on new capacity? Just trying to get a sense around how much is aligned with a single customer versus a lot of different customers that are out there.

Matt Tobolski, President and COO

Yeah. No, it's a great question, Brent. And I'll say that the math certainly is never in our favor when you get a $200 million order in terms of its impact on some concentration, at least in the near term. But what I would say is while that is a great win, and that's certainly something that is helping fuel a lot of the growth, it's also very front of mind for us to continue getting diversified customer base. And so, if you look at the activity that we have in terms of both bidding activity, in terms of some new orders that we have, large-scale orders, not small orders, there is a continuing diversification in that customer base. There's also an acceleration of new customer interactions. With the win of that liquid cooling product, we've got a tremendous amount of inertia in the industry regarding the solutions we can provide. And so, our sales and engineering teams are actively engaged with a large spread of new customers supporting both liquid cooling and traditional colocation data center projects. And that definitely, as we look forward, is going to be a continued focus to continue diversifying, continue building upon the great wins we have to be very intentional about continuing to build great wins with new customers as well. And so, going forward, I think you'll see our backlog continue diversifying in a customer base perspective and really not having us to over leverage on one single customer.

Brent Thielman, Analyst

Very good. Thank you.

Operator, Operator

Your next question comes from the line of Tim Wojs from Baird. Please go ahead.

Tim Wojs, Analyst

Hey, everybody. Good morning. Just wanted to echo the same sentiments to Gary. It's been great working with you.

Gary Fields, CEO

Thank you.

Tim Wojs, Analyst

I have a couple of follow-up questions. Regarding the Oklahoma business, has there been any change to your outlook for the full year revenue guidance? Previously, you mentioned that the full year would likely be flat or slightly down. Has that assessment changed? Is it mainly more weighted toward the second half of the year? Additionally, how do you plan to incorporate the surcharge into that?

Matt Tobolski, President and COO

Yeah. The guide as it stands today has not changed. And Tim, what I'll say is there's the uncertainty definitely in that back half of the year and really, I'll say, uncertainty more on the Q4 side. As much as we are taking market share and we're continuing to see good order cadence here in late second quarter, there is definitely still uncertainty in an overall macro environment perspective that is certainly front of mind for us. And so our guide definitely has that built into it on kind of what Q4 looks like. The tariff part of it, the tariff itself, while it went in place in March essentially, the reality is we're not going to really start seeing that until the later part of Q3. And so, when that's going to really start hitting the production for hitting the revenue side, it's going to be a Q3 story is where it's going to start, and you'll see that kind of materialize in Q4. But it's going to have an impact, but obviously, from a full-year perspective, it's not like we're getting a 6% uplift. It's going to definitely be more like a third of that from an overall kind of impact on the overall sales side of things. And so, really, what I'd say is that's the tariff aspect and just the uncertainty that's built into that Q4 guide, just given the unknowns around the macro is really where that guide is sitting today.

Tim Wojs, Analyst

That's helpful. Thank you. Regarding the BASX backlog, can you provide any details on the $80 million to $85 million sequential increase? Specifically, what is the mix of liquid cooling and airside cooling within that? Also, I would like to know about the overall backlog and the mix of liquid versus air.

Matt Tobolski, President and COO

There is definitely increased activity in liquid cooling reflected in the backlog. Additionally, there are positive run rates from coil products that are contributing to that. We've received some new liquid cooling orders in Q1, which have helped replenish our supplies. There is also a notable acceleration in airside activity, indicating strong interest in that area. When we examine the overall activity, there's considerable discussion surrounding AI data centers, but we're also witnessing ongoing investment in traditional data centers and cloud compute facilities, which is leading to increased airside activity as well. As a result, we're seeing a healthy accumulation of bookings that are enhancing our backlog and operational rhythm. While there is a significant amount of backlog in liquid cooling, it does not dominate; there is a balanced distribution between liquid and airside products.

Tim Wojs, Analyst

Okay. Thanks for the color. Good luck on the rest of the year.

Matt Tobolski, President and COO

Thank you.

Operator, Operator

Your last question is from the line of Tom Sandy. Please go ahead.

Tom Sandy, Analyst

I'm a stockholder. Can we discuss the issue with AAON's listing on the New York Stock Exchange and the Wall Street Journal? They were listed and now they are not. What’s happening? How can we encourage more stockholders to buy AAON stock?

Joe Mondillo, Director of Investor Relations

Hey, Tom, this is Joe. I think we've probably spoken about this in the past.

Tom Sandy, Analyst

Yes.

Joe Mondillo, Director of Investor Relations

Yeah. I think I'm still looking into that, not really serving the answer, but I'll try to provide you with an answer sometime soon.

Tom Sandy, Analyst

Thank you.

Operator, Operator

There are no further questions at this time. I'd like to turn the call over to Joe Mondillo for closing comments. Sir, please go ahead.

Joe Mondillo, Director of Investor Relations

All right. Thank you, operator. Just want to remind everyone that we'll be attending the William Blair Conference on June 4 in Chicago, and hosting an Investor Day in New York City on June 10. So I hope to see some of you there. I want to thank everyone for joining the call today. 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. Thanks.

Operator, Operator

This concludes today's conference call. Thank you very much for your participation. You may now disconnect.