Good afternoon, ladies and gentlemen. Welcome to the AAON Inc Second Quarter Ending June 30th 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’d like to turn the meeting over to Mr. Asbjornson. Please go ahead, sir.

Good afternoon. Thank you. Before going forward, I'd like to read 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 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. Thank you. I’d like now to introduce Scott Asbjornson, our CFO.

Thank you, Norm. Welcome to our conference call. I would like to begin by discussing the comparative results of the three months ended June 30, 2016 to June 30, 2015. Net sales were up 13.3% to $102.3 million from $90.3 million. Sales increased due to increased volume as compared to the same period in 2015. The gross profit increased 20.8% to $32.7 million from $27.1 million. As a percentage of sales, gross profit was 32% in the quarter just ended compared to 30% in 2015. Selling, general and administrative expenses increased 14.8% to $10.6 million from $9.2 million in 2015. As a percentage of sales SG&A increased to 10.3% of total sales in the quarter just ended from 10.2% in 2015. The overall increase in SG&A was primarily due to increased compensation and profit sharing expenses due to better results versus the same period last year. The increase was partially offset by a decrease in other expense, which was higher in 2015 due to sales taxes to certain states. Income from operations increased 23.7% to $22.2 million or 21.7% of sales from $17.9 million or 19.9% of sales. Our effective tax rate decreased to 35.6% from 38.2%. The Indian Employment Credit and Research and Development Credit were not extended until December of 2015 for the 2015 and 2016 tax years. As such, the effective rate for the three months ended June 30, 2016 is reduced for the impact of these credits while the effective rate for the three months ended June 30, 2015 does not reflect these credits. The estimated annual 2016 effective tax rate, excluding discrete events is expected to be approximately 36.0%. Net income increased to $14.3 million, or 14.0% of sales, compared to $11.1 million, or 12.3% of sales in 2015. Diluted earnings per share increased by…

Thank you, Scott. Looking at the balance sheet, you'll see that we had a working capital balance of $91.5 million versus $80.8 million at December 31, 2015. Cash and investments totaled $44.6 million at June 30, 2016, the investments and maturities ranging from one month to 13 months. Our current ratio is approximately 2.7 to 1. Our capital expenditures were $15.8 million for the six months ended June 30, 2016. We expect capital expenditures for the year to be approximately $32.7 million. Shareholders' equity per diluted share is $3.65 at June 30, 2016, compared to $3.28 at December 31, 2015. We also continue to remain debt free. In June 2016, the company executed a 10b5-1 repurchase agreement in accordance with the rules and regulations of the SEC, allowing the company to repurchase an aggregate amount of $25 million or a total of approximately 2 million shares from the open market. I'd now like to turn the call back over to Norm, who will discuss our results in further detail, along with new products and the outlook for the remainder of the year.

Net sales were up $13.3 million for the quarter. Sales increase was only due to volume increase, we have not had any price increases. Water-source heat pump is in line. I would like to take a moment to talk about that. We decided approximately one year ago in August to go into the water-source heat pump business. We have started out with an extremely aggressive plan to both design product and put in place manufacturing facility. We have accomplished approximately 60% of the design of all the products we’re going to be needing to do that achievement and we have got – we’re down to the commissioning level of commissioning our manufacturing facility, which will then allow us to go into production around the end of this month. In one year’s timeframe that is an extraordinary accomplishment. I am extremely proud of the people in AAON for accomplishing it. It would normally be a multi-year process we have accomplished in one year. I’ll now talk a little bit about the total business [Audio Dip] business segment. The replacement market seems to be the unknown and difficult one to judge. The new construction market is by ABI, Architecture Billings Index running at a positive pretty much consistently throughout the year. So that means 6 to 9 months forward looking there are increased numbers of buildings being put on the market. There is still many of the people who are paying for having them design go ahead and contract for production of the buildings. The AHRI the industry reporting service on equipment is showing that in the commercial sector we are getting growth recurring and there seems to be some disconnect between the percentage of growth from AHRI and the industries reporting to this sets this Census Bureau on the number of…

Yes what we anticipated at the present time is that a worst case scenario is the increase in steel price could diminish our gross margin by an amount equivalent to approximately 2% of sales. We are working on a project to bring it below 1% of sales but that is still in the works of the present time. So our worst case scenario that we are predicting at the current rate is at 2% of sales impact to gross margin. We anticipate we can bring it in below that but we are not certain. And it's not finalized as of yet turn that back over to Norm.

Okay, now there’s but against that we have three small areas which can positively affect. The first one that most likely comes to everybody's mind is well raise your price, I would point out that we are by far the most profitable company in the industry. And if we are the sole price increaser some people would think you’ll love us for being that. So it is a little bit nebulous on that basis and at this point in time we've not seen although we have heard that some our competitors are intending to raise the price because of steel but we have not seen this happen yet. So that's not a decided factor as to whether we should employ that or not. The next to both of which have been occurring to us throughout the past year has been increased productivity. We continue to believe that our productivity is going to increase and so that will diminish that effect on our P&L. The mix think of it as if we continue growing the business three quarters we’ll somewhat over absorb our fixed overhead. So those two things will be modifiers to the cost increases well. At this point in time it’s certainly nothing out there that is causing us panic it's just causing us a little discomfort. And then we’ll until we find the – determine that we’re going to have some way to over come it. The biggest unknown in the whole scenario that we’re not discussing too much, although I’ve mentioned so far is water source heat pumps. This is an unusual situation for me. I’ve been in this industry a very long time. And generally speaking, what I just start out in some venture, there is a number of bad things happened a long way just…

[Operator Instructions] Your first question comes from the line of Brent Thielman from D.A. Davidson. Your line is open.

Hi, good afternoon.

Good afternoon.

Some of the comments on the markets staffing, I appreciate all that different viewpoints there. I’m wondering are you seeing evidence of that maybe more specific in the regions or markets where you haven’t made significant sales managers, sales channel changes?

We always have weakness for your personnel [indiscernible] strong as they are in some of the other areas. And so yes that is true for instance big change we did last year putting those regional managers and they’ve had varying degrees of success but by and large they’ve been successful but there is no question that’s been varying degrees. And also in the change out of the sales of people if we had out there the manufacturers’ reps. They have been coming on but when we got rid of the other people they worked of course doing nothing and so its taken a while for those others to even get back to equally what the other ones were doing. So both of those were negatives on us last year, really heard us in the second and third quarter of last year and kind of disappeared in the fourth quarter of last year and the first quarter and the second quarter this year. All of those people are coming up to speed better. What I think we are seeing to some degree is improvement that we have made in both the regional managership as well as the sales offices and the corresponding additional efforts we’ve been able to get to our existing offices is kind of offsetting some of this weak situation we are seeing in the marketplace. And that’s why we are still performing fairly well. I think that’s what we are hoping that – from what we see it on the forecast that we get from the PL, we get forecast from them on a regular basis showing what they anticipated by the due for the next few months. And so far it’s still looking fairly promising in that respect.

Okay, that’s encouraging. And then – yes, your comments on the steel cost impact, I appreciate the color there, were some of the things that you are doing that kind of counteract that? Is that how we are going to see that in the third quarter or is that going to be more than fourth quarter event?

Well, here’s the way we see at the present time. We were using a 100% U.S. manufactured steel. What happened when the duty was applied, very, very big duty that the government applied to the Chinese steel, they did not apply it to all manufacture’s steel from all countries throughout the world. And so to varying degrees, of course, as would normally be when the scarcity appears, which happened, the U.S. manufactures immediately raised their price significantly. Some of the foreign get to some degree, but not this much. And basically the chain of supply and everything got altered by the nature of the restrictions specific to the Chinese steel, and some of our suppliers were accustomed, working with some other foreign countries as well as the domestic ones. And so some of our supply chain immediately said we can give you foreign steel at a diminished cost, and then in some cases we’ve taken them up on it. Recognize, we always forward price as much as we could do, and we're just now getting to the point where we're starting to get close to running out of that pre-bought steel. So our increases are starting to happen, but it looks like what is going to happen to us is we model a little bit of high – you might call high priced steel, that’s going to happen to us over the next two or three months. And then because we're getting ourselves in better shape to know how to buy foreign steel and also because that there's the old pendulum always swings too far one way or the other, the U.S. steel manufactures are starting to break down. And so we're thinking there's going to be a little bit of cost increase more in the later part of the – maybe in the fourth quarter and then it's going to diminish again as it was going into the first quarter, that's kind of – what we kind of think is going to happen. All of this of course is somewhat supported by what is occurring to us and some of it is speculation.

Got it. Understood. Sounds like it’s still kind of a fluid situation.

It is.

On the Water Source Pump line, as you start to introduce this quarter, and obviously in the future quarters, does that going to meaningfully move SG&A from here?

I don't expect its going to have a great deal of effect on the SG&A, although it will have some because we're going to be hiring some dedicated sales personnel to sell Water Source Heat Pump because the knowledge of selling that kind of product is not present very well in our present organizational structure. So we're bringing dedicated people in, and then of course, it will take a few months for them to really pay for themselves. And so it will trip us up for a little bit.

Okay. And then just one last one for me on the pump line. Are we going to start to see that that show up in backlog or do you plan to include that in there going forward?

It will include in backlog, it is another company product, and so it will be pulled right in. We work just like we do internally now. We carrying individual profit and loss on various product lines and we’ll do the same on the Water Source Heat Pump. So we have no way how it's doing and how’s it’s contributing, but what you will see out there will be a combined Water Source Heat Pump and all of our past and existing product lines, you will not see it as a separate item.

Understood. Thanks for all the color and best of luck this quarter.

Thank you.

Your next question comes from line of Joe Mondillo from Sidoti & Company. Your line is open.

Hey, guys, good afternoon.

Hi, Joe.

So just – I just wanted to follow-up with some of the commentary that we've been talking about regarding the steel prices. So the first half of the year you were able to roughly expand your gross margins by roughly about 200 basis points year-over-year, and you're talking about how the back half could be a maximum of 200 basis point headwind, and with all the productivity improvements you're seeing that are going to offset that. Could we still see gross margin expansion in the back half of the year on a year-over-year basis?

Look, if you are comparing the full year, then you'll still get the benefit of what's already taken place in the first half of this year, so you would see that, certainly. And as far as continuing to see the – say, the third quarter better than just what the third quarter by itself of last year, I would anticipate that as well, because a lot of the third quarter is still going to have an expensive steel in it. The more challenging one is going to come up when we get to the fourth quarter.

Okay. And…

And we just talked about being somewhat fluid.

Right. And then if you look at that fourth quarter, you're also seeing a tough comp on the top line or the volume side of things. So the fourth quarter could be difficulty whereas the third quarter maybe not as much.

That would be our take on it.

Okay. And then – sorry.

We just have – we have weak – somewhat weak third quarter last year and a strong fourth quarter.

Okay. Right. So looking at your backlog the last two quarters; if you compare the revenue growth in a quarter relative to the backlog growth of the previous quarter, you were able to outperform the backlog growth, which tells me that the first month of that next quarter you’ve received a pretty good order intake. So I was wondering how – I guess the month of July has looked for you guys so far in terms of overall.

The month of July – the order input on the month of July was weak. The order input so far in the month of August has been strong.

Okay. All right. And then in terms of the SG&A, last year you had some of that – some tax situation that was a one-time type of item in the SG&A line. So if you exclude that in the second quarter of last year you were out of roughly about 9.7% and sort of similar in the first quarter, which makes the SG&A, the percent of sales for the first half of this year higher than it was last year even though you're seeing much better revenue line. Just wondering why the percent of sales SG&A is rising. I understand on an absolute basis, but as a percent of sales, I would think it would fall.

Look, part of what we have that goes into that SG&A is we have sales incentive payments, bonuses as we payout, and we also have profit sharing. Those are two big components of what have increased, is obviously we've been doing fairly well on our sales side this year, though our salespeople compared to last year at the same time are getting more significant compensation, so that we're seeing the compensation largely to our salespeople and the infinite plans going up.

So is the compensation or the commission rates – are the rates actually going up as well?

Well, they have a formula that’s driven by their achievement towards our budget for their regions. And so some of them are doing better than others and that had a progressive increase. So it’s a little bit better than ado, it will get to be a higher value for them as a percent of their base compensation.

Okay. And then just lastly and I don’t if you mentioned this regarding the water-source heat pump, actually I got a couple of questions regarding water-source heat pump. In the second quarter, did you realize any cost that significantly affected the bottom-line at all?

Relative to the water-source heat pump?

Yes.

No for the most part what we have been doing is being captured for capitalization when the lines start up.

Okay. And just in terms of your outlook of that market, I know it’s, I think relatively slow, just given energy prices. You mentioned in the past that you think you may be able to, low-hanging fruit upwards of may be 20% of the market share, which I think is roughly around $100 million you’ve talked about. Do you still think that’s a possibility in the next two years call, or is that going to be tough? I’m sure you’re going to shoot for it, but is that going to be challenging to get to 20% market share in just a matter of a couple of years?

No question to be tough, next year would be impossible, the second year in 2018 it would still be quite a stretch, but we think that we’ve got enough things going for us that is going to be kind of like when you start learning to run and walk, you kind of stumble every now and then, you didn’t intend to. I suspect that’s going to cause us so many problems as we try and ramp this whole thing up, we’ll occasionally stumble a little bit too much. And then that will prevent it. As far as the ability to take the market, I don’t think that is going to be the big problem for us, I think, we’ve got the salesforce that’s necessary to do it, I think we have the product that’s necessary to do it, I’m sure that we’re putting in place the production facility necessary to do it, but the stumbling, I think is going to happen.

Okay. And then I just actually have one last question. In terms of your CapEx budget this year what are you exactly looking that to be – looking for that to be?

We have budgeted $32.7 million. We still anticipate that we’re likely to spend somewhere close to that, but we don’t have an updated figure that shows any changes in any direction up or down, but we’re anticipating the $32.7 million is pretty solid.

Okay great, thanks a lot. I appreciate you taking my questions.

Thank you.

[Operator Instructions] Your next question comes from the line of Jon Braatz from Kansas City Capital. Your line is open.

Good morning guys – good afternoon. Most of my questions have been answered, but Norman correct me may be I'm wrong, but in your press release you talk about, on the water-source heat pump, a profit impact – not a significant profit impact until 2018. Has that changed at all, because I thought maybe we were looking for something possibly more in 2017, late 2017?

We're looking to start impacting it in 2017, obviously it will be occurring. It may start occurring a little bit in 2016, but what we’re saying in 2018 it would be a very major part of our profit. If we get there as we spoke earlier, if we get in very close to the $100 million in revenue, we’d better be doing a pretty good job on the bottom line or we made a bad mistake in someplace. And we don't think we have made any mistake. But we think until then it's just going to be a growing thing because this is – as my reference to the stumbling occurs the stumbling is going to be cost negative it's going to be hurting us whenever we do stumble for whatever reason. And so during 2017 that's probably going to happen. Now how much is going to happen? Oh I wish I knew. If I knew how to do it, I wouldn’t stumble. But I’m just cautioning historically my experience is that things don't always go quite the way you think there are going to go. And I fully expect that will be the case here. I will say that I’ve been very, very pleased with all the performance of the people within the company at what's been going on so far, they have nailed things down remarkably well, and right no schedule, right on every aspect of what they're doing. We made a presentation to our Board of Directors this week. I think they came away positively blown away by what they saw and the way we’re putting this thing together. The manufacturing, just to refresh some people's minds, may not. We set out 28 ago with two distinctly strong beliefs, we had to be to be successful, we’ve…

I understand. Scott you talked a little bit about some actions that you might initiate to reduce that 2% number that you mentioned and mitigate the higher cost of steel. What might some of those actions be? And do you just – is it simply buying and sourcing your steel from different areas and different firms, or is it more than that?

No it is doing better sourcing and sourcing from outside of the United States.

Okay, okay. Will that include...

So that’s…

I've always – I’ve heard about problems with Chinese steel, would that include Chinese steel?

No.

No.

Okay.

We will be getting steel from other parts of the world.

Okay, thank you.

The big problem we have is we have not had organizational set up in the purchasing of steel from mill site. And so we're having to develop those sources of steel, in areas prove them and make sure that we’re getting the quality we want. So we’re doing a lot of work in areas that we’re not accustomed to.

Thanks for that.

Thank you.

Thank you.

There are no further questions at this time.

All right I’d like to thank the audience. See you again in November for our third quarter and end results. And we are very optimistic we’re going to have a very nice time in November. Talk to you then. Thank you.

This concludes today's conference call you may now disconnect.