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Aaon Inc (AAON) Q1 2019 Earnings Call Transcript

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Aaon Inc (NASDAQ: AAON)
Q1 2019 Earnings Call
May. 02, 2019, 4:15 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the AAON Incorporated First Quarter Sales and Earnings Conference Call. At this time, all lines are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded Thursday 5/2/19.

I would now like to turn the conference over to our host, Mr. Gary Fields. Please go ahead.

Gary D. Fields -- President, Director

Good afternoon. I'd like to welcome you to the AAON Investor Conference Call 2019 first quarter earnings announcement. I'd like to read a disclaimer to begin with. This is 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 statements 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.

Now I would like to turn it over to Scott Asbjornson, our CFO.

Scott M. Asbjornson -- Vice President, Finance, and Chief Financial Officer

Welcome to our conference call. I'd like to begin by discussing the comparative results of the three months ended March 31st, 2019 versus March 31st, 2018. Net sales were up 14.9%, to $113.8 million from $99.1 million in the preceding period -- preceding year. Net sales for the quarter are up due to our price increases from 2018, along with increases in the volume of rooftop units sold. Our gross profit increased 67.6% to $25.8 million from $15.4 million. As a percentage of sales, gross profit was 22.7% in the quarter just ended compared to 15.5% in 2018. The Company continues to experience challenges in obtaining and retaining talented workers at the entry-level.

Selling, general and administrative expenses increased 7.7% to $11.0 million from $10.2 million in 2018. However, as a percentage of sales, SG&A decreased to 9.7% of total sales in the quarter just ended from 10.3% in 2018. Income from operations increased 180.2% to $14.5 million, or 12.7% of sales from $5.2 million, or 5.2% of sales in 2018. Our effective tax rate increased to 24.8% from 18.7%. The Company's estimated annual 2019 effective tax rate excluding discrete event is expected to be approximately 27%. The Company had a larger excess tax benefit related to our stock awards in the first quarter of 2018, compared to 2019 that caused the effective rate for that quarter to be lower than expected.

Net income increased to $10.9 million, or 9.6% of sales compared to $4.3 million, or 4.3% of sales in 2018. Diluted earnings per share increased by 13% to $0.21 per share from $0.08 per share. Diluted earnings per share were based on 52,397,000 shares versus 52,910,000 shares in the same period a year ago.

At this time, I will turn the call over to Rebecca Thompson, our Chief Accounting Officer and Treasurer to discuss our balance sheet.

Rebecca A. Thompson -- Chief Accounting Officer and Treasurer

Thank you, Scott. If you look at the balance sheet, you'll see that we had a working capital balance of $102.8 million versus $92.8 million at December 31st, 2018. Cash totaled $7.1 million at March 31st, 2019. Our current ratio is approximately 3.3:1. Our capital expenditures were $8.8 million. We expect capital expenditures for the year to be approximately $40 million. The company has stock repurchases at $5.1 million year today. Shareholders' equity per diluted share is $4.95 at March 31st, 2019 compared to $4.70 at December 31st, 2018. We'll continue to remain debt free.

I'd now like to turn the call over to our President, Gary Fields.

Gary D. Fields -- President, Director

So the first thing I'd like to talk about is net sales and what we're looking at so far. The number of rooftop units sold in Q1 of 2019 was up 8.5% versus Q1 of 2018. Condensing units were slightly down, not material. Air Handlers were up 8%. Outdoor Mechanical Rooms were down slightly by 3 total rooms. Water Source Heat Pumps were up by 42%. The overall increase in number of units was up by 16%. So we're seeing some increase in production over Q1 of 2018. The price increases have come along nicely in our backlog. We are looking at a current backlog as of today of about 28% of our total backlog is at our June 15th price level, which was 5% above the level before that. So, essentially what we built in Q1 was at June price level, but at 28%, you can do the math and figure that that's going to be exhausted by mid to late Q2. 48% of our backlog is based on our December 5th pricing, which was plus 4% on across the board and as much as 5% on some small portion. Then we had another price increase in March and we currently have 24% of our backlog based on this March pricing. So my anticipation is the March price increase was 2%, on nearly all items 5% on some select items. So my anticipation is that in Q2, we will see about half of that 4% price increase, maybe one-third to a half of that 4% price increase hit the bottom line or hit the plant floor which will affect the bottom line in a positive manner.

Then as we move into Q3, we'll begin to see that additional 2% from the March pricing and we'll be solidly on the December pricing. So we're going to have escalating value of our backlog going forward. We're just about past the sub-par backlog and the June 2018 price backlog is what you've been seeing roughly most of Q4 in all of 2018 and Q1 of 2019. So the water-source heat pump business is coming along nicely. I told you it was 42%, I'll give it to you in exact units. We've got 2,289 units that we shipped in Q1 versus 1,614 in Q1 of 2018. So the water-source heat pump is still a small percentage of the overall revenue, but it is beginning to increase as we had anticipated earlier.

We continue to refine the design on existing legacy products, if you like to call on that, but the core products for the Company. These are very attractive to the marketplace. As you can see our backlog increased again nicely and our backlog will also -- well, I'm going to back up here. We've got a price increase coming up. It was announced to comes up the first part of June, and that's another 5% and that when it is across the Board. So the backlog continues to improve and its quality and it's a reasonably nice quality at this moment. Back to the redesign on products, we have begun to use our new laboratory or accelerated development of products and we're already seeing a very beneficial aspect to having this ability in-house as opposed to our former limited facilities or outsourcing it. Our replacement market versus new construction market remains fairly stable at roughly 50%. We have seen some growth again in the cannabis market, I'm going to tell you that there is probably more substantial opportunity and growth in Canada, due to their nationwide adoption of the cannabis product. We are seeing still some acceleration in the US market for the certain areas that have cannabis legalized for primarily medical purposes.

Data centers remain stable for us. They had grown substantially in 2018 over any previous year and that percentage is very stable. The general tone of business is, we saw architectural billing index for the first time in 14 months go below 50. And so we talk to our sales channel partners to see what material effect that might be having on them and there's been no reported slowdowns as of year. Looking at our booked sales performance year-to-date versus what we forecast we're currently at about 97% of our forecast on booked sales and again that was on our forecast. So we're not seeing any weakness in any particular markets.

The backlog number today, March 31st at $166.6 million represents the highest backlog that the company's ever had. The lead times have obviously stretched out some because you can see that we're not shipping at a $166 million per quarter rate, which is -- would have been historically the company's backlog represented too, maybe a stretch three months of production. So while our production rates are accelerating, the rate of order intake is outrunning what's going out the door. Continues to be that way. But what we've done is very aggressively managed these projects and the expectations of our clients and while I don't want to declare that everybody is 100% happy with the outcome of that, I'm going to say it's been manageable and we are very appreciative of our very loyal customers that have been with this for many years that continue to send us substantial orders.

So for the remainder of 2019, the water-source heat pump production will continue to accelerate. Our capabilities now exceed what's coming in the door. We had only recently been balanced to where the orders coming in the door was about in line with what we were capable of putting out the door. So the water-source heat pump is the one shining star in the product family group that is able to meet or exceed the market's expectations for lead time. Our Longview products, they maintain almost as good a position with regards to orders coming in the door versus what's going out the door. Only in the last 60 days have their orders coming in the door outpaced what they're capable of putting out the door.

The R&D lab remains with a portion is yet to be completed. Yet, we have had beneficial use and occupancy of certain functions of it. In the next 30 days, we will begin using the Marquis portion of the lab, which is our 108,000 cubic feet acoustical chamber, reverb chamber that sits on top of 2, 50,000 cubic feet reverb chambers. And we will be testing a unit that is 72 feet long for acoustical, thermal and airflow performance. It will be the first test of its type in the entire world, and especially of a unit of this size and capacity. So the lab is already shown beneficial aspects to it and we're within 30 days of demonstrating something else that's monumental.

That job name is Jacob Javits Center, New York City. They are adding approximately 50% to the building to its current footprint. AAON was awarded the majority of the HVAC equipment for that and our laboratory testing capabilities played a big part in securing that project. We are within two weeks to three weeks of opening a new parts store here in the Tulsa area. There's two primary purposes with that; one is to serve the local market more thoroughly than what we currently do, but the other one is so that this is a prototype of what we expect our sales channel partners across North America to duplicate in one form or fashion. It's a great example given best practices for parts to our business.

Our gross profit, we believe will be improving throughout the year, quarter-over-quarter with direct impact coming from the price increases that I described earlier and how they are affected relative to the backlog. We believe that the majority of material prices have stabilized. While there could still be some that are moving around a little bit, there's nothing on the immediate horizon telling us there's any shakeup like there was back when we had the tariffs and so forth imposed.

Labor, we have some small escalation planned in our labor rates on the plant floor to keep pace with the needs in the market, so that we keep bringing in qualified people for our expansion and that we retain these people. Salaries I think are set for the year and are stable, so we're not seeing anything there. So there's some upward pressure in entry-level. So there's some upward pressure on entry level for any new hires that we might need. CapEx for 2019 is still looking like $40 million. Like normal though, some of these things are a little longer lead times that they don't actually get the bill in, so I'm hesitant to say we'll actually get the $40 million extended, but we've certainly written purchase orders to occur.

So, now I want to turn it over to Norm for any additional comments that he might have.

Norman Asbjornson -- Chief Executive Officer, Director

A lot of you were quite concerned about the turnover of my management new management. And I'm very pleased with what has taken place. Not only was I backing out, which I've done, and I'm still advising, but not doing every work that Gary is doing now. But also many of the people who have joined us originally retired or are no longer with this. And so we've had quite a changeover in a generational changeover in a number of areas with critical importance to the company. And I'm pleased to say that we're probably 90% in the way toward the next generation of management throughout the entire company and it's been affected over the last 2.5 years. So that's been an issue for many people concerned about when that was going to occur as it has already occurred.

Now it's not without some weakness that, that occurs. The majority of our problem, which is still with us has to do with productivity. We've lost a lot of talent and people who knew how to get the maximum results out of the personnel and the company. And we're rebuilding that, and of course, that's a very time-sensitive issue. We were in that over a number of years, that's not something that's taught or learned already. It's a very individualized situation and how to manage people look with any given company. And our new management is picking up on that quickly. So we are expecting to see over the next year or so continued improvement in productivity, which is just as effective on the bottom line as is the price increases. So, if you've been following us on the cost of our labor relative to sales you've noticed that we've had some slip-ins for the past two years or three years, while we've been undergoing this transition. And we're pleased to tell you that we're through that and now we're on the upswing and our productivity should start realizing additional benefit to our bottom line. This of course is not an instantaneous quick fix. This is a long-term thing, but it is a major thing which the company has now completed for all practical purposes, and there are no major changes that are going to have a material impact on the bottom line in a particular way. So we're pretty much into a routine management challenge to make things occur, and we are very optimistic about our ability to bring ourselves back up to our historic profitability level. And we've added lot of capability to our ability to get orders, and that's well-represented by our increase in our backlog, which our customers have been pleased with what we've sending and have given us a great deal of growth in that. So the transition from the one group of people to the next is, as I said very well competed. Along the way, we've enhanced our product line and our desirability of our product to our customers. And our biggest challenge at this point is internal management and to gain our productivity back.

With that, I would like to open it up.

Scott M. Asbjornson -- Vice President, Finance, and Chief Financial Officer

And we'd like to open it up to questions.

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from the line of Joe.

Joe Mondillo -- Sidoti & Company -- Analyst

Hi, good afternoon guys.

Gary D. Fields -- President, Director

Hi, Joe.

Joe Mondillo -- Sidoti & Company -- Analyst

So I was wondering if you could talk about the driving factor, the biggest driving factor to the orders and the backlog, what you see that's driving such robust growth?

Gary D. Fields -- President, Director

Joe, I think we've been working on various aspects or nearly six years now. In mid to late 2013, Norm recruited me to consult with the sales channel partners across North America. There are 62 individual firms; I consulted with 32 of those firms. This was an attempt to share with them the successes of my former company which was a marquee performer in the industry, company that was admired not only by AAON, but all the other manufacturers that, that company represented. And so we began that consulting. In doing so we identified 5 firms out of those 32 firms, that didn't have it in their inherent behavioral characteristics in DNA to be in alignment with AAON's expectations for growth opportunity. So as time went on, and I was appointed President, I replaced 5 of those firms. And the firms that I replaced them with were firms that were more in alignment with our objectives and that is continuous and perennial growth. And there's a key strategy for those sales channel partners that enables that to occur is something that I had 30 years of experience with. So I think helping those people to understand why Texas Air was successful in getting people in alignment what was very instrumental. So that goes back quite a few years to laying some groundwork for that.

The next thing that I think occurred was that there were people that were unwilling to tie a major stake of their business to AAON in the face of the unknown about what was going to happen when Norm retired or moved on. And so that uncertainty gave them reservation to dedicate the effort and time to AAON. Well, once that succession plan was revealed and they saw not only myself, but other key leaders become more visible. Scott, right here next to me, and then other people throughout the company, when they started seeing this succession plan and they started gaining confidence in these people, then they had confidence to spend more time, effort and dedication on AAON's behalf. Because keep in mind these people are independent and they are representatives. So when they get up in the morning and go to work to sell air conditioning equipment, they have multiple choices. Not all of which are necessarily competitive to AAON product-to-product, they're competitive for the time. So AAON has developed a reputation as being a company that is very worthwhile spending their efforts on very rewarding for them. So I think that was key.

Then the next thing was, is when I came in here having been on the other side on the sales channel partner side, there were aspects of AAON, that I saw as low-hanging fruit, areas that we could improve with a reasonable amount of effort and become more attractive yet to these manufacturers, reps or sales channel partners. So those three aspects right there are significant. Those would have improved this company absent of this great economy that has been loose by the current administration in the US government with their reduction of taxes and their relaxation of certain onerous regulations. So you've got a better business environment to operate in. You've got a better economy to operate in. But then you've got 6 years of preparation that Norman initiated with strengthening our sales channel partners, themselves strengthening their planning and activities and making our company the most attractive company on their line sheet to sell and represent.

Joe Mondillo -- Sidoti & Company -- Analyst

Okay. So the one thing that I'm trying to sort of grasp or figure out is the massive, I mean, you guys have seen incredible growth over the last five quarters, six quarters. And if you look at sort of your orders on a quarterly basis, in the backlog on a quarterly basis, it really started accelerating in the fourth quarter of 2017. And I -- that was right around the same time when we started seeing very significant inflation and when your peers and such started to put in very aggressive price increases. And those peers over the last year or so have not seen anything compared to the growth rates that you've seen. And I know you guys have fallen behind early in 2018, and you've since started picking up and obviously, you've done a good job with price increases. But I guess the one thing that I'm just trying to figure out, and I was wondering your thoughts on are over this period of time, have your pricing that the gap between your pricing, your peers changed at all considerably that have been driving a lot of this demand that we've seen over the last handful of quarters.

Gary D. Fields -- President, Director

I would say initially, if you want to go back to Q4 of 2017, when you saw this begin to accelerate, yes, the peers did get out in front of us with more substantial price increases. That is one thing that I -- if I had a mull again to go over, I would redo that. But somewhere around the June 2018 price increase, we began to be in that same alignment that we had historically been with regards to our pricing levels versus our peers pricing levels. We started catching up with them at that point in time, so I don't think beyond that June of 2018 price increase, I don't believe that there was any advantage to our sales channel partners and having a lower priced offering relevant to what they've had historically.

And then as we continued to increase the prices we actually passed up the overall price increases that these peers had. And so they were still able to get these orders. While -- like I said, some of these things were them having just more dedication to spend in time on selling our products. But we've also improved the products both with efficiency and operating strategies and quality, you've seen the warranty expense being reduced, it peaked out early on and then it's consistently been moving in a positive direction, which shows that we put some efforts into redefining what we meant by premium quality and we're delivering on that promise. So, I think that I would not categorize our growth as being that were behind on price increases and we've given some of the premium that we had historically employed.

Joe Mondillo -- Sidoti & Company -- Analyst

Okay. And I wanted to ask, I know you're sort of still -- the price cost issue is still weighing on things, but that's going to improve as the year goes along. Productivity should, over time improve. I'm just curious, has anything structurally changed that you cannot get back to sort of those peak 31% say gross margin 21% op margins? Has anything changed structurally or can we sort of assume at some point in time, in 2020 or 2021 eventually, we'll return to those levels, hopefully?

Gary D. Fields -- President, Director

I believe that we'll return to those levels, no later than what you just stated. I believe that when I look at the price of the backlog that we see accretive measures in there, and that we're going to continue to see an acceleration in our gross margin percentage. The other thing is that we've only recently in the last few weeks achieved an ideal headcount at on the plant floor, while the turnover rate is still higher than we'd like for it to be, it's substantially improved over what it was 12 months ago. Our on-boarding and training has improved substantially. So, I believe that our productivity is already showing evidence of the improvement. We looked at some figures that came in as recent as yesterday and those tell me that we are making progress in that regard. So with the improved pricing position and seeing some results from our training and on boarding initiatives and having an ideal headcount, I believe that we are on the right path to make all of this happen to get back to historic levels. We're targeting, maintaining between 28% and 32% gross margin.

The next thing I want to say about that, it is somewhat related is historically Q4 and Q1 in any particular year, whereas much as 20% lower demand rates, production rates than were in Q2 and Q3. With this strong input, we've not seen those drop-offs, Q4 and Q1 as far as demand rate. You've seen the backlog increase. So you know that the demand rate is increasing if it's not having its historical path of a peak in two and three. One of the fallouts from that, I don't think it was easily understood and anticipated was machinery maintenance. When we would have the falloff in Q4, historically, then it was much easier to schedule doing major overhauls, major repairs on some of our highly automated sheet metal equipment. And that would go into Q1, and those machines would be in tip-top condition as a complete fleet of machines to perform at that higher level for Q2 and Q3. Well, we are now running at maximum rates in every quarter, actually acceleration required in every quarter. So we found ourselves a little behind the curve on how we went about overhauling and maintaining a machine that was running at a 100% required capacity. So we've been working hard on not only revising that, but also in putting in more surplus, manufacturing capability, so that we have the ability to provide a 100% of the required sheet metal components, but at a less than 100% capability of the machinery.

Joe Mondillo -- Sidoti & Company -- Analyst

All right. And then so -- I sort of -- I mean, maybe sort of related to what you're saying right now. I wanted to ask about just sort of this incredible growth and backlog and the fact that you're trying to push through as much volume as possible through the plant. Is there any risk over the next several quarters to sort of your internal projections that because of sort of the productivity issues that you're still dealing with that maybe because of that and maybe because of, you have to pay over time to achieve certain delivery dates or anything like that? Is there a risk to achieving sort of the margin improvement because of higher costs or productivity issues because there's so much volume going through the plant?

Gary D. Fields -- President, Director

Well, Joe, I think there is always risk. And I think that we have to be astute at managing those risks. Now the overtime risk is probably not substantial in the fact that we run the plant, the vast majority of it, 24 hours a day, 7 days a week. So we do have -- we only run assembly currently, 12 hours a day, 7 days a week, because we don't have the ability to supply enough sheet metal to assemble 24 hours a day. So one of the things that I was speaking to was adding sheet metal manufacturing capacity. Part of that $40 million CapEx is additional automated sheet metal manufacturing equipment. We've talked about it for years, the Salvagnini machines. We placed considerable orders. We've got machines coming in as we speak. I think that all of the machines that we have on order now will be in operation in 2019, and they will supply us with additional capacity, such that we're anticipating before the end of the year, we're going to go to 24 hours a day assembly on our first half of the week shift. Our second half of the week shift will still remain 12 hours a day, probably for the near-term, within the next year or so. But that will give us roughly 25% more assembly time than what we currently have. So that's another area where we've identified what the hurdles are or the chokepoints are to being able to employ that. And it was the sheet metal machines, meaning more of them and having -- they don't have 100% dispatch rate, meaning they don't run for 12 years, 24 hours a day, 365 days a year without breaking down. You've got to have some scheduled time, and so we're looking at some ratios that makes sense as too far as to what kind of dispatch rate we think is reasonable and we're building AAON additional machinery to achieve that. While we're doing that we're also looking at our growth projections based on all the intelligence gathering we can do with our sales channel partners plus within the house now and making these decisions on purchasing this equipment in order to get this particular chokepoint out of the way. And then once we get that sheet metal equipment chokepoint out of the way, which is occurring as we speak, then the next thing will be getting an assembly crew put together for that first half of the week PM to AM shift. And we've already made considerable strides with that over the last year in putting other -- not assembly, but other functions of the company necessary such as brazing, wiring and painting. We're already running that. We're running painting 24-7 is that correct?

Scott M. Asbjornson -- Vice President, Finance, and Chief Financial Officer

Not fully. We're probably about 75% in there.

Gary D. Fields -- President, Director

Okay. So we've moved quite a ways toward getting some additional capacity through the 24/7 function.

Joe Mondillo -- Sidoti & Company -- Analyst

Okay. Well, thanks for taking my questions. I have a couple of more, but I'll let time someone else have a chance. Thanks.

Scott M. Asbjornson -- Vice President, Finance, and Chief Financial Officer

Thank you, Joe.

Operator

(Operator Instructions) Your next question comes from the line of Zane.

Gary D. Fields -- President, Director

Hello, Zane.

Zane Karimi -- D.A. Davidson -- Analyst

Hey, good afternoon guys. This is Zane Karimi on for Brent Thielman. Just thinking -- starting things off, I was hoping to get a little more detail on the lab specifically. Can you quantify the drag on P&L. Like, is that putting pressure on the margins? I'm trying to get a better feel of the underlying businesses there?

Gary D. Fields -- President, Director

Well, we have had research and development personnel on staff. I don't know the exact number of expanded positions over what time period. We did segregate the lab function into its own department. So we know definitively how many people are in there. And the last time I looked the population was -- what was it, just under 50, isn't it.

Norman Asbjornson -- Chief Executive Officer, Director

(inaudible)

Gary D. Fields -- President, Director

Yeah. And so I don't know historically what that's been to give you a clear definition. There's no doubt that there's expense related to running the lab, there's going to be expense related to depreciation of those assets. As we bring more and more functions on board, there will be higher utility cost related to it. So it would be naive to believe that it didn't have some effect on it. But once again, I think that what we've done to grow the opportunity for our sales representatives to sell more equipment at this premium price, I think the lab enhances that a lot. We have already seen evidence of multiple projects that were awarded to AAON because of the lab facilities. Jacob Javits in New York City, the Nike World Headquarters in Merchandising Building, One Willoughby tower in New York City. These are projects that were absolutely awarded to us because of what we were able to demonstrate to them and develop for them in the laboratory. So it is -- in that regard, an expense -- a sales expense, which is a burden to the overhead. Then about one-third of the activities of the lab is maintaining our certifications with the certification agency AHRI. So AHRI has multiple programs some of which they select equipment from your plant floor they ship it to their laboratory and tested. Well, you want to make sure that you have confidence in your performance data that you published, so you have to test your equipment to make certain of that.

The other thing is there are certain categories of equipment that AHRI comes here and certifies the equipment performance here in our laboratory, that's primarily the way they do chillers for instance. So we formerly only had the ability to test that to a 200 ton chiller and now we have the ability to test up to a 540 ton chiller. So we're able to do that here in our facilities. So about one-third of the activity is anticipated to be for development of new product or -- and one-third is anticipated to be for the AHRI proof-of-concept and then one-third is dedicated to activities such as I mentioned with Jacob Javits and Nike and one will be in projects of that nature.

Zane Karimi -- D.A. Davidson -- Analyst

Great.

Gary D. Fields -- President, Director

And those are all activities that are -- that we charge for. So it will have some direct revenue.

Zane Karimi -- D.A. Davidson -- Analyst

Okay. And then it seems like design firm contractors and other product manufacturers are universally positive about the state of the non-residential construction market. But you've been running around 50-50 replacements in new construction. Do you think your mix can materially shift toward the new construction market in 2019? And are you guys actively trying to control that mix?

Gary D. Fields -- President, Director

Actually, I think there is a lot of untapped opportunity among our sales channel partners for replacement business and we just recently -- well we have gentlemen that we hired about a year, year and a half ago to focus him on some strategic accounts and just recently I gave him additional assignment. that he was to consult with an assist in the sales process with our sales channel partners for the replacement business. So I'm going to tell you that where the new construction business has not shown any weakness yet, but if you use Architectural Billing Index as any kind of an indicator, the latest data from them showed a little softening of that market. So you normally have about a nine months to 10 months lead time from that data being published to see any kind of material effect on your business. So that being the case, I wanted to be well ahead of this and work on developing additional strategies for replacement market. It's one that I don't believe our sales channel partners as a whole are extremely adept at. I think they do a good job, but not a great job. There are certain representative firms out there that are great examples for doing a great job of it. But across the Board I think that there is room for opportunity and room for improvement.

Zane Karimi -- D.A. Davidson -- Analyst

Got you. And then a follow-up on that notion. Can you discuss geographically where you're seeing the fastest growth in demand for the products? And how much of that is more internal efforts to improve penetration versus the regional demand environment?

Gary D. Fields -- President, Director

Okay. I'm not seeing any material change in the regional demand environment, but the internal efforts some of the firms that we improved is both coast were weaker than we desired going back five years, six years ago. So we spent more effort on both coast than we did anywhere in the middle. The middle of the country was relatively well positioned for AAON's needs. The West Coast has grown at -- I don't have the percentages in front of me, but a huge rate. I'm going to say in the last five years, it's probably 2.5 times what it was in that relative order. And the East Coast has grown probably at about 15% to 20% compounded annual growth rate over that period of time. So both Coast have provided a lot more results for us. In the South East region was where AAON's equipment was particularly attractive, but we weren't seeing the success that we believe we should see in those markets and a substantial number of those rep firms that were replaced were in the Southeast region. That's a hot and humid region that really sit -- it sits real well with our product offerings. Then of all things, it's not humid at all, but Canada we had two representative firms that we changed out in Canada over the last two or three years. One of those in the Montreal section of Canada they handle more than Montreal, but that's where they're headquartered. They have been on board for two years now and they are four times the volume, their predecessor was, in just two years. So we have -- I call those internal efforts in that we got better sales channel partner engagement and we also got better sales channel partners in those areas that we saw as weak.

Zane Karimi -- D.A. Davidson -- Analyst

Got you. Well, thank you. And I'll jump back in queue.

Operator

There are no further questions from the phones.

Gary D. Fields -- President, Director

All right. We thank you for your listening to the call today. We look forward to talking to you again in August for our second quarter results. Good day.

Operator

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

Duration: 49 minutes

Call participants:

Gary D. Fields -- President, Director

Scott M. Asbjornson -- Vice President, Finance, and Chief Financial Officer

Rebecca A. Thompson -- Chief Accounting Officer and Treasurer

Norman Asbjornson -- Chief Executive Officer, Director

Joe Mondillo -- Sidoti & Company -- Analyst

Zane Karimi -- D.A. Davidson -- Analyst

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This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

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Motley Fool Transcribers has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


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