Good afternoon, ladies and gentlemen. Welcome to the AAON, Inc. Fourth Quarter and Full Year 2017 Sales and Earnings Call. There will be a question-and-answer period after 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. Please go ahead, Mr. Fields.

Good afternoon. Thank you for joining us. Today is February 27th we’re going to be doing annual and fourth quarter coverage. So, I want to start with 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. So, now I would like to introduce Scott Asbjornson, CFO to go over fourth quarter numbers.

Thank you, Gary. Welcome to our conference call. I'd like to begin by discussing the comparative results of the three months ended December 31, 2017 to December 31, 2016. Net sales were up 13.6% to $104.2 million from $91.7 million. The increase in net sales was a result of increases in our production slightly offset by changes in our product mix. Gross profit increased 17.2% to $31.1 million from $26.5 million. As a percentage of sales, gross profit was 29.8% in the quarter just ended compared to 28.9% in 2016. Selling, general and administrative expenses increased 58.9% to $13.7 million from $8.6 million in 2015. As a percentage of sales, SG&A was 13.2% of total sales in the quarter just ended compared to 9.4% in 2016. The increase in SG&A was due to increases in our warranty costs along with smaller increases in our salaries and benefits compared to the same period in 2016. Income from operations decreased 2.9% to $17.4 million or 16.7% of sales from $17.9 million or 19.5% of sales. Our effective tax rate decreased to 9.6% from 36.3%. The Tax Cuts and Job Act enacted on December 22, 2017, lowered the corporate income tax rate from 35% to 21% in 2018. Due to this change, the Company re-measured its deferred tax assets and liabilities on the enactment date, which resulted in a $4.4 million benefit to our income tax provision. Net income increased 38.1% to $15.8 million or 15.1% of sales from $11.4 million or 12.5% of sales. Diluted earnings per share increased by 39.4% to $0.30 per share from $0.21 per share. Diluted earnings per share were based on 52,932,000 shares versus 53,420,000 shares in the same quarter a year ago. The results of the year ended December 31, 2017 versus December 31, 2016. Net…

Thank you, Scott. Looking at the balance sheet, you'll see that we had working capital balance of $103.7 million versus $101.9 million at December 31, 2016. Cash and investments totaled $30.4 million at December 31, 2017. The investments have maturities ranging from less than one month to five months. Our current ratio is approximately 3.1:1. Our capital expenditures for the year were $41.7 million. We expect capital expenditures for 2018 to be approximately $53.2 million. The increase in capital expenditures is primarily due to construction projects related to our new research and development lab, water-source heat pump production line as well as other internal developmental projects. Shareholders' equity per diluted share is $4.47 at December 31, 2017, compared to $3.85 at December 31, 2016. I would now like to turn the call back over to Gary Fields, our President

Good afternoon. So, let's talk about the upcoming year 2018. So, in 2017, we had the retirement of significant management of manufacturing and the plant, and it took pretty much the third quarter thing started, accelerating for those young folks that took over fourth quarter you obviously see the results that are published today and you see that they got on firm footing and they got some profitability headed their direction. They did quite a lot with getting the production back in line. One of the key things is that we got a handle on our warranty expenses, and this was due to, we cleared that in the first part of the year, we cleared out some old things that for whatever reason haven't come to the surface and then we also had a couple of issues with vendors and a process that through the middle part of the year. We've cleaned that it all up and our warranty is now trending back closer to historic values. So, I think in the upcoming quarters, you are going to see where we have made the statement that we believe SG&A will get back on reasonable footing towards historic values, warranty being the biggest adversary to that having happened last year. So, we have definitely got that taking care of trending in the right direction. The next thing is we went into 2018 with a very bloated backlog, it was $81.2 million. That backlog was caused by a couple of things. One was we had a price increase on November 15th, while those people didn't want delivery until 2018 and by our standard lead times that was in line. So the huge swell a fair amount of that was because people got the orders in really a little earlier than they wanted…

[Operator Instructions] And your first question comes from John Brats.

Gary, you've characterized early on the backlog number being somewhat bloated, and it reflects the price increase in November. Does it all -- do you sense any increase in the backlog because of general market conditions you see any evidence that there's some momentum building in the market in general?

I do. The backlog right now is at 21% over its historic numbers. That's about 10 million, and so it looks like that's going to be our new normal because like I said we have pretty much got everything back in the line of delivering on customers' expectations so the backlog is somewhat normalized at this moment.

And I guess, I guess probably doesn't take a genius to figure out that the backlog at year end implies a pretty healthy first quarter sales number?

I like the way we you terminate -- termed that, yes.

Turning to the water-source heat pump, you have not received accreditation yet, I believe and…

That is correct.

And when might you expect that? And do you think that's having any negative consequences on your sales and marketing efforts?

So, all right, first off, the AHRI certification it's called, and listing, they began to have -- we've sent units to them on August 27th of '17. Their testing schedule is quite full, and they began testing, but they had not been able to complete. They pulled seven pieces of equipment to test. They have completed four of those. There's -- the fifth one is in right now, so looking at their schedule that's not really expeditious the way I see it, but it's looking eminent that we should have all that testing completed very soon. As far as its impact on sales, I think it'd be naïve to say otherwise, it has had an impact because I spent entirely too much energy talking about the certification, which means that people have some reservation about moving forward until that occurs. There's always customers that will move forward because they know and trust AAON. And the fact that all of our other products are certified and the fact -- this is kind of like the equivalent of patent pending, the certification, we have submitted the index that they other being tested. And so the vast majority of really understand it but when there's an entity such as an energy provider that's providing rebates, well you are not getting any rebates with that certification. So those projects that are driven by rebates are definitely out of our reach, in general at this point.

And just sort of a moving target but what is sort of your expectations now for the water-source heat pump in 2018? I'll have to go back and look out, I know it's -- and you thought it would grab this much market in the first year and second year. Can you sort of update us a little bit on your expectations?

Our goals are to reach 5% market share this year and then each year that goes after this to add an additional 5% market share.

The market is about 500 million, correct?

It was in 2017 and that's why I am more willing to term it in percent of market share because if the market goes up then I hope to get more. And if the market goes down then I'll get a little less. But our goals have been stated to be 5% market share 10, 15, 20, 25.

And your next question comes from of Brent Thielman.

Scott, just want to be clear on the warranty expense, caught us off guard again last quarter a bit. So that should started normalized here in the first quarter, is that the way to think about this?

Sure, we currently believe we’re on trend at the moment with first quarter of '17. Hopefully, as the quarter progresses it will come down even beyond that, we don’t know of any major problems that are outstanding that are needing to be resolved. So, our expectation is that over the course of the year we should see that improved significantly over the last year.

Got it. Okay. And then I guess just another question on the pump line. Did you guys offer the sales dollar impact for the fourth quarter?

No, we did not.

Okay.

It’s not real hard to figure out it was 2128 units may average little over $1200 units, so it was run $2.6 million, $2.7 million was totaled 2017 impact of the WH, WV. We recognized another fact. We make heat pumps, water-source heat pumps and all of our other will call them legacy products, the rift out products and those have been run an around 16 million, 17 million a year, but we’re not talking about those in conjunction with this conversation. All the conversations about the water-source heat pumps that we’ve had have all been about the new product which is model WH and WV those are the small indoor units.

And then Gary I just want to dig a little bit more on the indoor annoying unit I think you said sort of the $22 million to $24 million business per year.

Yes.

Can you just explain on what you guys are exactly evaluating and where you think that business go over the next few years the too related numbers around that?

Well, I’m not ready to put numbers around it per se because we’re in the planning stages right now. We’re planning what the product line would look like. We’re planning what the manufacturing pro tests would be. We’re utilizing a lot of what we learned on the small water-source heat pump to cross that over into this air handling unit business. There is a lot of things in that regard that we’re just now in the infancy of building that plan out. The fact is tomorrow is my first substantial committee meeting with the various stakeholders in the business that have influence on how that will occur. So the bottom line is just that last time I looked air handlers were about $2.2 billion annual market and we believe that there is room for us to grow and expand into more of that market because currently like I say we’re about $22 million to $24 million in that. There are manufacturers that have been bought by consolidators and there is various things that their sales channel partners are nervous about. So a lot of our sales channel already participates in this market. One of the driving factors for getting into the water-source heat pump was our sales channel was already selling around $75 million, $80 million of that type product and the manufacturers that we’re supplying them were leading room for improvement. And so they encouraged us to get into this business and said that when we got them at the way that they envision that they would be on board with us. While we know that our same sales channel partners are extraordinarily involved in the air handling unit business way beyond the $75 million, $78 million fact is my former company Texas Air Systems as around close to $40 million and their handlers just themselves in the state of Texas. So it’s a significant opportunity for us. It’s one that I had in excess of 30 years of experience with in sales channel side and I very much understand that market and it very much placed to the strengths of what we do here day on. What we learned on the water-source heat pumps as far as how to automate several of the manufacturing processes how to automate going from the user interface all the way through to product control for scheduling that software that we develop, all of that will be utilized in this new expanded air handling unit business. So, yes, I'm very excited about the possibilities there, but it's very early to be talking about any kind of numbers. What we can say is that it's a business we have extensive experience with we're already established in it and this is an expansion of how we do what we did.

And we have a follow-up from John Brett.

Gary in your own commentary, you'd mentioned that you expect the -- you hope the water-source heat pump. You’re talking about gross margins and gross profit. To make a contribution to the gross profit, are you referring to maybe -- contribute to a gross margin increase, I mean, it's contributing the gross profit, am I correct?

Yes, we’re not selling them, lacking some profit, but it's not as profitable as we expected to be, it’s not as profitable as the benchmark for the whole company.

Right, okay. Okay, fine. Okay. And the other thing on the warranty, last year 2017, we had a big warranty expenses. Is there something new or different at the company or you have a couple people that are retired? Is that something -- is there something at the company that and the way you're doing, handling things that may have contributed to the warranty expenses because we really haven't had issues like this in the past, but is there something new and different that might be adding to the -- might have added to the warranty expenses in 2017?

We had -- in our sales department we had leadership in there that was making little situations where somebody would make a warranty claim. He wouldn't weight it out real well and maybe would give them a discount on a project in order to make them happy, more like a sales concession. So it really wasn't officially a warranty item, but it kind of had a little look to that. So some of that was discovered when we replaced that person. And so, we cleaned up a little of that that was a little of it, but more often than not what it was is we had mainly our sales channel partners that would go out there and fix problems and in some instances, they didn't even turn the bills into us for an extended period of time. And basically, I set my foot down and said look, you've got to get these bills in here and get this cleaned up, you can't just leave it sitting out there dangling forever. We've got to address this directly and clean it up. So, it was just some people that had a little bit of a lackadaisical towards resolving the issues, and they were making decent money on the sale of the product and they just kind of went along happy go lucky, if you will. And then what would eventually get around clean in it up. So I can’t put a timeline on, I mean, it’s anything that's 90 days old or older I'm not going to consider, so you better get it cleaned up. So that was a good part of what was happening. Then at the same time when these young guys came in, they wanted to make an impact, not only in product as far as production rate,…

One last question, when line 6B begins or starts up in September, August, September, it seems like 6A took a long time to fine tune and get running smoothly. Do you think it would take line 6B to that type of time like the time to move into full production?

No, so let me clarify this, 6B is actually going to come online in the next 30 to 45 days.

Okay I am sorry yes. Okay.

Yes, 6C, Charlie, won't come online until about September. The 6B, 6bravo will be coming online in next 30, 45 days and that is to build some larger product up to 30 tons horizontal and vertical, we are developing that product but some of that we have to get the line finished in order to be able to build the product, we don't have anywhere to build that larger book, water-source heat pump, so yes it's going to take some time in 2018 to develop the product, we have the engineering completed on some of these additional larger sizes but until we build and prototype and run them through there then we can't really test them out and perfect them. So, it won't take as long as 6A, because we have established procedures on a lot of the construction methods already. For instance we don't have to learn how to use the induction brazing equipment, we already know how to use that and we just extended down to this line. A lot of the other functions that occurred in the learning process of 6A, we don't have to relearn them, we only have to extend them. And one of the most key things, Norm talked about this extensively throughout the year was the development of the software. So we had to take multiple manufactures with their own unique software language and integrate them into one common software language that we could operate as a system and have that all integrated and it has to be very well sequenced because when you punch the button to start a product through there, then everything has to happen at vey choreographed exact sequence otherwise you will end up add a point on the line, where you don't have the parts that you need, because they -- this is the true definition of just in time manufacturing. When we start the product on the manufacturing line, there's nothing from the fabrication standpoint prebuilt like we do in the rest of the plant. The rest of the plant we have sheet metal and assemblies and about a three day inventory on average, this we have zero when you start it. So, we have streamlined that software a whole lot, every now and then we get a little hiccup in it, but it's -- it's, and every now and then, I mean mostly this line runs very smooth now and so we will able to take that same concept and just extend it on down to 6B, so that learning curve has been accomplished and won't be a problem going forward.

And we have no more questions in queue.

Well thank you very much, we appreciate it. And we will speak to you again in May for our first quarter results. Have a nice day.

This does conclude today's conference call, you may now disconnect.