Good afternoon, ladies and gentlemen. Welcome to the AAON Inc. Fourth Quarter and Full Year Sales and Earnings Call. There will be 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. Asbjornson. Please go ahead, Mr. Asbjornson.

Good afternoon, Norman Asbjornson here. I'd like to read this forward-looking disclaimer before proceeding. 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 occurrences of many events outside AAON’s control that could cause AAON’s results to differ materially from those anticipated. Please see the risk factors contained in our most recent SEC filings, including the Annual Report on Form 10-K and the Quarterly Report on Form 10-Q. Now, I’d like to introduce our CFO, Scott Asbjornson. Scott?

Welcome to our conference call. I’d like to begin by discussing the comparative results of the three months ended December 31, 2016 to December 31, 2015. Net sales were down 5.7% to 91.7 million from 97.2 million. The decrease in net sales was result of changes in our product mix while units sold remained relatively unchanged. Gross profit decreased 10.4% to 26.5 million from 29.6 million. As a percentage of sales, gross profit was 28.9% in the quarter just ended compared to 30.4% in 2015. The decrease in gross profit was the result of decreased sales and changes in product mix as already discussed. Selling, general, and administrative expenses decreased 12.4% to 8.6 million from 9.9 million in 2015. As a percentage of sales, SG&A was 9.4% of total sales in the quarter just ended compared to 10.1% in 2015. The decrease was due in part to lower compensation as the Company did not achieve its opportunity budget, bonuses to key employees and other benefits were lower as a result. Income from operations decreased 9.3% to 17.9 million or 19.5% of sales from 19.7 million or 20.2% of sales. Our effective tax rate increased to 36.3% from 34.5% the fourth quarter 2015 at a lower than expected tax rate as the tax extender bill was passed in late-December and resulted in the entire year's R&D credit and Indian Employment credit appearing in the fourth quarter. Net income decreased 11.8% to 11.4 million or 12.5% of sales from 12.9 million or 13.3% of sales. Diluted earnings per share decreased by 12.5% to $0.21 per share from $0.24 per share. Diluted earnings per share were based on 53,420,000 shares versus 54,036,000 shares in the same quarter a year ago, the results of the year ended December 31, 2016 compared to December 31,…

Good afternoon. I would like to speak a little about Water-Source Heat Pumps since that’s the main issue that has been discussed as far as anything new in the Company. We are pretty much on target as we have been reporting over the time. Everything is going forward in a normal traction, nothing really unusual. For those of you who maybe tuning in and new let me give you little bit more background on it. In August of 2015, we have decided to go into the Water-Source Heat Pump business and do the entrance on our own by designing our own product, building our own manufacturing capabilities and introducing product. We have made a enormous strives very quickly, much faster than what we expected in the product of this complication and where this would be probably still in the formative stages, we are starting to round into the middle production stages of the products. We presently have under construction building product on hold up per units, one half ton to price tons. We haven't yet begun on a vertical unit and then we have other larger tonnage units yet to be done in the future as well as other products. But it is to the point where we have taken very few orders and shipped a very orders insignificant amount as far as the income statement is concerned. We are slowing ramping up and we are doing it very carefully because this is a product where due to its cost of somewhere between $1,000 and $3,000 typical for a unit size, we cannot afford to be paying the rates, they're being charged by service personnel on field to fix little minor or not so minor problems, and so our goal is to prefer this unit out. We are holding very…

Good afternoon. So, I would like to first talk about fourth quarter sales a bit more. As you saw, the sales were down 5.7% for the quarter. There was a lot of political situation going on with election and things that maybe delayed people, so going ahead and issue in contracts. We have however in the first quarter seen a substantial turnaround, our bookings rates are running at a record level now. So, we are doing quite well on the rebound for the bookings. Those don't turn into actual shipments for the duration of our lead time. So, we’ll see first quarter will be okay. So, what are the things that kind of helped turn that around was, we continued to look through our reps force and determined reps that are in, markets that are, they’re underperforming. So, one of the things that I did for the Company for the previous three to four years was consulted with these representatives. And from that, I tried to basically coach then up to a level that would be a level of excellence that we believe we deserve. For the very few exceptions which they have been very few that we were not able to achieve those results then we have replace that, to not extensive percentage wise at all, but we have replaced a couple of more. So the replacement market versus the new construction market is another thing I would like to discuss. While replacement market here, few years ago was very, very strong, primarily driven by refrigerant change, we’ve had no such occurrence in the industry for a few years, and we saw that the replacement market was not a strong percentage. While now we’re beginning to see equipment that is due to age becoming eligible for replacement. This happens…

Okay. We would like to thank you all for attending our annual review of the year 2016, and look forward to with the first quarter of 2017 when -- as we said earlier, we had a weakness in the market place that we can only attribute to the elections since there is nothing else that we are aware of that would allow for the reduction and order input that we experienced in the fourth quarter. But one other thing I should be may have noted here because we came into the year with that weak order input in the fourth quarter, we came in with a weaker backlog, therefore the first quarter started out with a much weaker backlog than we did with on the first quarter of last year. So relative to [Technical Difficulty] this quarter to last quarter difficult is going to be difficult. But as Gary spoke, the order input has been very dramatic and coming in, what that means is that kind of reverses it from last year of the first quarter. First quarter last year, we stated that was a strong backlog, and we actually diminished it little bit during the year, and we slow down little in the first quarter. This year, we started out slowing the first month of this quarter, and we are speeding up as we go. How far we speed up is yet to be determined, but in that result is while we will do well this quarter. We are still going to be encumbered a little bit by the fact that we started by the weak backlog. As we go into the year ago, our anticipation is that we are still going to do pretty much as we expected and we are going to have the lack of yield this year, in both revenue and profitability. And the really exciting part is that everything we are doing internally to the companies, working so well from the Water-Source Heat Pump progression into manufacturing to the rooftop and all other product lines coming along very nicely also. So, we are quite optimistic toward the year 2017. I feel that we will launch into the next generation of growth for this company. Thank you for attending our meeting and I open it for questions.

[Operator Instruction] Your first question comes from the line of Joe Mondillo from Sidoti & Company. Your line is open.

So, my first question, just regarding the product mix because that, not only did you see sort of weak volume in the fourth quarter, but product mix seem to weigh on your gross margins. Just wondering with the strong bookings that you are seeing through the first couple of months, how is that sort of product mix sort of look like? And if you could give any color on what's sort of the fourth quarter sort of meant to you regarding that product mix? And how are transitioning into this year? It will be helpful.

Well, the product mix went toward smaller equipment for the biggest part of it. It was also had little bit on the options, but the size of the equipment also have an effect. And but all you can attribute that to is worked for whatever reason, some of the larger buildings were at being built and some of those smaller buildings were being built and therefore we were able to bring in the number of units pretty much where they were, but there is smaller units on those smaller buildings. I kind of think of might have gone wrong somewhat with the hesitancy we saw in the political arena where people were issuing everything except the contract to build the building. They were having the architects, engineers, designers jobs. They were bidding the jobs and we were hearing all this, but then the orders weren't coming in because they were signing the contracts. We believe from what we seen so far that that further substantiated by the fact that right now of all the orders that we're getting in the door we're getting a new quite strong on some of the bigger tonnage use once it weren't happening in the fourth quarter of last year.

And regarding the bookings that you've seen, have you seen any sort of change or transition to larger more customized option units at all?

That is what I'm speaking of the larger units, yes. With that, they're more customized, I would to say that that so much is showing up, but the larger units are showing up, yes.

Okay. And then in terms of steel prices, did that way at all on margins in the quarter? Do you anticipate any changes positive or negative going forward with that?

Steel did ad jump galvanized steel in the fourth quarter, just a small amount. We do anticipate a continuing to increase during the course of this year. But again, as we have said before, we don't expect it to be any same in excess of most of 1% of sales impact.

Okay. And a lot of the industry is talking about price increases. Could you comment on that? And I know usually price increases get reinstated around the March/April time period. If that's the case, do you think, if you are implementing some price increases, do you think that any of the strong bookings that you're seeing is sort of a pull-forward effect where buyers are coming in before the price increase?

All right. So, this is Gary. We did have a selective price increase that goes into effect on March 1st. And it was my -- I really look through the data carefully as far as correlating the price increases to where the orders are coming in, and it's had a little to no effect that I can identify. So, products that did not have a price increase are coming in at the same strength is products that did have a price increase. Now, to take an isolated project or two and say the affected it well, very probably did, but it's not widespread whatsoever.

Okay. And I know it's sort of early on and it's tough to tell, and I'm not sure if you probably can't quantify anything, but just wondering regarding the ramp up of the order Water-Source Heat Pump business. Are there cost to a significant effect that is affecting the bottom line right now that should maybe or sort to just upfront cost related to ramp up and that will go away? Or will maybe not go away, but certainly will be leverage over the volume, but are there costs that are weighing on the earnings near term at a significant level?

Yes, ever since we decided go into the business, we've been expanding research development dollars, and we've been expanding other expense dollars, now for year and half and behalf of the Water-Source Heat Pump. So, that's all where the historic. As far as going forward, they're not going to increase appreciably the expenses are not with one exception. When we first get into the marketplace we're not going to be realizing market the twice for that product that we will a year from now wherefore we've been in the market for a while. So we're beginning a smaller margin. Now while there is very little volume happening right now, as it starts ramping up that additional volume lower margin business will start having an effect on that business. But along with it of course goes back that we're adding dollars to it which should give us a potential for even a greater growth what we're anticipating. So it's kind of a trade off and then by this time next year we will be at a point where we expect we'll be running about the same margin on that product as we are with our other products.

And, Joe just to add the clarity around your question, there is some assets that were not being depreciated previously and just started being depreciated as we started into production with the Water-Source Heat Pump area. And so those costs will continue and we do our depreciation is straight line. But that is taking place right now and so, of course, as you have low revenue that is a higher impact on the financial statements as we ramp up the revenue and that also started in the fourth quarter.

And what about warranty expenses within a new product like this? Is that going to be taking effect at all?

Well, our work in general, we're running down below 1%. So, we're very, very -- we're way, way, way better than what this anticipated as the standard in this industry. And so, if we have very much of anything of course it will have an impact. But what we've been talking about from day one around here and what we're hearing to very much is, in the past we've had what you could see good enough quality wherein if we have a little bit of a quality problem that we fixed will go minor one where we thought that was good enough. This product because it's a low cost product in other words selling between 1,000, 3,000, we cannot afford any cost on it. So, from day one around here we've been talking about, how are we going to produce the perfect product which has no problems in it at all other than whatever components are going to up there. But as far as everything weak and -- that by doing proper job of manufacturing we will get no warranty. And now that's a little bit of a dream of course, but it's our anticipation that warranty issues are not going to be an issue on Water-Source Heat Pump.

Okay. And last one from me. Gary, I wonder if I can get your point of view over the last year, year and half with increased regional sales managers and sort of I think broaden some new independent sales reps. Just wondering, if you can give a your overall take on that whole process, trying to take market share by doing all the things that you've implemented regarding all that. Just wondering if you could give your point of view on that?

Absolutely. So, first off as you know year before last we went from four regional sales managers to seven. Last year was the first full year of having all seven of them. And so there was a lot of the consulting work that I have done prior to taken over as president of the company was in conjunction with those regional sales managers trying to make sure that they worked as proficient as possible on AAON's behalf. So having spent a lot of time with them, they were very much coming up to speed. Just last week I had all seven of them in here and we have a bit of a color to refresh our course on what we have gone over the previous year. And so their level of engagement their level of success is growing rapidly and I believe that we as good set of regional managers as anyone in the industry at this point And recall that it my former company I had many manufacturers that I represented so I have quite a viewpoint of what regional sales manager is having had maybe 20 or 25 of them that we've reported to in my previous company. The rate firms that we brought onboard with little exception have come up to speak quite well. We had one that quite frankly we stepped our toe with the selection of this one particular force maybe over couple of years ago, and we changed again just a few months ago. And now we have a very contiguous group of people on the entire West Coast, and a very cooperative collaborative group of people. This one that was in the middle was kind of a missed step, if you will. So, we don't make perfect choices every time, but when we do make a less than ideal choice then we're not watchful about correcting the action on that. So, we have just completed that going back to the first part of December. And we are very excited about the possibilities and we are already seeing positive results from it. The market has reached out to me directly because some of those people knew me, and we had interactions from projects and it told us what a great decision we made. So, [Technical Difficulty] I possibly recall, we changed that for the previous year. They have all come up and are performing quite nicely now. Our Las Vegas market was one that we had changed out. We had had a very paltry participation in the Las Vegas market for quite a few years. Now, we are having a very substantial participation rate in Las Vegas market. They have done real well for helping our western region. So, I am quite pleased with all that we have chosen, let's say out of the five that were chosen a bit over a year ago, four of them performed anywhere between good and great and one even we recently replaced.

Your next question comes from the line of Brent Thielman from D.A. Davidson. Your line is open.

Norm, I think I caught that comment that you thought on Water-Source Heat Pump that the margin would be relatively similar by the beginning of next year to the core business. But I am curious with -- excuse me -- but the technologies and streamlining you are embedding into this process, does that change your longer term deal, that kind of the profile of these products, relative to the core business and maybe we see something about the core average?

Well, we are going to have the decision. We are going to have to make somewhere around a year from now. What we have done as far as manufacturing as eliminated tremendous amount of labor from that product and so as it comes up at margin wise we are going to have to decide, because we don’t focus on percentage of margin. What we focus on is the total dollars we put to the bottom line, and so we are going to come to a point where the combination of our capabilities as far as manufacture with the market, how much to the market place we can take. And what level we take it at, what gross margin, what is a relationship of all those things that there is going to put most dollars to the bottom line. Let me just kind of give you a quick summary here, summary problems that we are -- these are very positive problems. I might say, they super of the problems, but there not be a problem nevertheless. Our present representative force as Gary pointed out has other products available, approximately one half of that may already selling some other manufactures Water-Source Heat Pump. We believe those people are selling somewhere around $100 million to those other manufactures heat pump. We have been told by -- we are going to get a substantial part of that once we have the capability of dealing. Now, we also have been told that because of the characteristics of our new product that they expect to be able to penetrate the market more deeply than they are with what they are selling today. All that consideration as we are looking at a 100 million maybe a little over that, that’s available for NIM. And we still have…

Okay. And just to clarify with what you've invested already. Do you have the capability to support $100 million? Or does that take more investment to get there?

We're hitting close to. No, we got enough to make the $100 million right now, but what to work with has happened is from the things, the conversations and everything the way things have gone so far. We're already looking very hard at putting a second line. Now, this isn't something we work intending. We have always planned on have more than one line. However we're kind of getting a little bit more anxious and problem with it is we don't want to make the commitment to the nature the new line until we're absolutely certain. We understand the capabilities with the line we've already put in because as I said this is totally a new concept in the way you manufacture, and we've made judgments which may or may not be totally accurate as to the capability of each of those components and how they go together in a production line. So, what we're trying to do is hold off making final commitments on the next production line until we have proven some of those things and we can make a better judgments about the relationships solved between sheet metal manufacturing, copper manufacturing, inflation, assembly, testing and all of those things. So, we don't overbuild one component of that or under build one component of that. And so, we're anxious to get underway of ordering more components of putting the second line together and we haven’t yet decided whether what are we're going to do. We're going to do some of the before very long and start ordering because of course a lot of these components have pretty long lead times.

And with the $100 million with our existing capital expenditures we already have would be stretching it to, it's kind of ultimate limit at the present time in our estimation. So, to make sure we have comfort there and the build back up in case something failed or there is breakdown in the machinery. We would need some additional capital expenditures as discussed.

Okay. And the agents I think that you said are already selling the product that $100 million odd worth. It can may switch over almost immediately and sale. I mean to the extend do you have the capacity or is there are they under certain agreements where they can't do that?

No. the majority of them they have nothing to risk. So with that's with our broad based manufacturer a Markey component of their sales operating with our historic equipment. The Water-Source Heat Pump lines that they represent those that compete with us are strictly Water-Source Heat Pump Lines. So, when they are comfortable that we are the supplier of choice then they flipped that over. I am done at least with emails on a daily basis. I've been asking, are you ready at, I've got this order. I got one just about 30 minutes ago. He says, I have 82 units ready to go. Are you ready, so that I can pull the trigger, now that particular one I said, yes. We're ready for it. So they're having no qualms about switching us. Their loyalty lies with us and I think that the relationship with that I've had with the rep force over the years does nothing, but strengthen that that we have a very open dialog. We know what's at risk for them so we're not making any demands of them we are saying this is available. We appreciate the support when you think you're ready for it and that's going to vary. You're always going to have people that are what you called early adopters and that they want to get on board with this product. Once, there is a little bit of a proven track record. They order them we ship them on time they installed them they ran in accordance with their expectations. That's when I think the hockey stick looking growth curve is going to occur for us. Because it won't take very long at all for the world to get around amongst this very tight group of people these independent representatives that whether real deal and we're delivering what we said we're going to deliver. Once we get that track record it's going to be quite impressive.

It will be quite difficult for us because then we have to make sure we don't over commit take on more orders and we are capable of producing and that could happen really quickly to us we can get some merging orders and so. We've got a problem here that we have to balance because recognized we're new at manufacturing. So, we're manufacturing a new methodology. So, we're making judgments we don't have historical data to backup or historical knowledge on. And we're saying yes, we can do it and we don't want to say yes, we can and then not fulfill the need because that will do damage to them. And do damage to a customer and we don't want that. So we're going to have as we don't have a problem getting orders we're going to have a management problem with manager this growth curve that we're looking at.

Okay, this is great. I guess maybe last question I would have is now all the progress you guys are having the acceptance obviously the idea that you want to be careful about ramping that up and I know this is kind of a ramp up year. When you think about that 2018 I mean, can you get half of that $100 million pre-quarter of that $100 million? And what do you guys think is doable next year?

I don't want to give you an overly optimistic view, but I'm pretty bullish on our opportunity here. The $100 million available to us as soon as we prove d that we're capable of handling it we will have it. I'm very confident that as things developed through the summer we'll be able to give you an update on how that's occurring. But I'm going to be very surprised and disappointed, if I can tell you that 2018 we can pull the trigger and do $100 million.

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

Good morning everyone, and good afternoon everyone, and Gary welcome to Board. Pretty much everything has been, my questions have been answered. But Gary you had mentioned that you're seeing -- you're going to have the selective price increases effective March 1st. Can you tell us a little bit about how much those price increases and how broad they are across the product line?

Yes, they ranged from 3% to 4%, and it was probably in the range of 20% to 25% of our historic volumes. Those products affect that amount.

And secondly and maybe for Scott. You said the CapEx is going to be about $41 million this year or $40 million. As you look that's pretty big number, as you look into 2018 and understanding that maybe you might need some more additional spending to support even the support Water-Source Heat Pump. But does the spending begin to level off on that level off been through begin to decline from that $41 million as you move into 2018, 2019.

It definitely would. On last year, we had projected about a five-year spent of around $30 million, and we're trying to update our five-year window and we had projected last year that we would have done $32 million in CapEx. We only did $26 million. Right now, we're projecting $42 million for the coming year. We may end up following short of that in the coming year, but our five year projection has moved from a $30 million level to about $36 million level for the five years on average. Based upon trying to upgrade and replace aging sheet metal equipment as well as our major expenditure around our lab and the additional Water-Source Heat Pump equipment.

There are no further questions in the queue. I'll turn the call back over to the presenters.

Okay, we'd like to thank all of you for tuning in on our 2016 report. We're very optimistic and here as you probably gathered with some hesitancy about all of the turmoil that's been occurring out in the general economy. We hope that the general economy will support our anticipation of the great things to come that we have in here regarding AAON. Talk with you later. Thank you.

Bye bye.

Thank you.

Thank you.

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