AAON (NASDAQ:AAON) Q3 2026 Earnings Call

0:00 I would now like to turn the conference over to Joseph Mondillo, Director of Investor Relations. Please go ahead.

0:08 Thank you, Operator, and good afternoon, everyone. The press release announcing our third quarter 2026 financial results was issued earlier this afternoon and can be found on our corporate website, theayongroup.com. The call today is accompanied by a presentation that you can also find on our website as well as on the Listen Only webcast. We begin with our customary forward-looking statement policy. During the call, any statement presented dealing with information that is not historical is considered forward-looking and made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995, the Securities Act of 1933, and the Securities and Exchange Act of 1934, each as amended. As such, it is subject to the occurrence of many events outside of the AN group's control that could cause the AN group's results to differ materially from those anticipated.

0:58 You are all aware of the inherent difficulties, risks, and uncertainties in making predictive statements. Our press release and forms 10-Q that we filed this afternoon detail some of the important risk factors that may cause our actual results to differ from those in our predictions. Please note that we do not have a duty to update our forward-looking statements. Our press release and portions of today's call use non-GAAP financial measures as defined in Regulation G. You can find the related reconciliations to GAAP measures in our press release and presentation. Joining me on today's call is Matt Tobolski, President and CEO, and Andy Chandler, CFO. Matt will start off with some opening remarks. Andy will follow up with a walkthrough of the quarterly results.

1:43 And Matt will then finish up with our updated outlook. With that, I will turn the call over to Matt.

1:49 Thanks, Joe, and good afternoon. Before getting into what was a great quarter, I want to address the accounting corrections and material weakness we disclosed today. During our third quarter reporting process, we self-identified errors that resulted in revenue being understated in the first half of 2026. We have restated those periods and concluded that a material weakness existed in our internal control over financial reporting. The company has grown tremendously in a relatively short period of time, and our financial processes and controls did not keep pace with that growth and complexity in some areas. We take responsibility for that. Over the past year, we have been strengthening the finance organization, systems and review processes. That work helped surface these issues and we are moving with urgency to correct the underlying control gaps. The corrections increased previously reported first half revenue by $10.7 million and diluted EPS by 9 cents. That is important context, but it doesn't change the fact that our controls needed to be better. Andy will cover the details in remediation efforts shortly.

2:58 Now, let's talk about the business, because this was an exceptional quarter. The Aon Group net sales reached a record $707 million, up 84% year-over-year and 10% sequentially. Operating income more than doubled to $100 million in deluded ETFs More than doubled to $0.83. We made meaningful progress in profitability. Gross margin improved sequentially to 26.7%. Adjusted EBITDA increased 100% year-over-year to $127 million. And adjusted EBITDA margin improved 100 basis points sequentially to 18%. And through nine months, operating cash flow reached $147 million.

3:44 compared with a use of $19 million over the same period last year. I'm proud of these results, but I'm even more encouraged by what's underneath them. For the past couple of years, we've been deliberate about building the capabilities required to support a much larger company. We've invested in people, manufacturing capacity, supply chain, systems, and how we operate. That hasn't always been easy, and building ahead of growth brings cost and complexity with it. but we weren't just adding capacity, we were building capability and we're seeing it work. We're producing more, lead times are coming down, productivity is improving, margins are moving in the right direction, we're getting leverage from the investments we've already made and significantly more earnings are converting into cash. There is still plenty of room to improve, which frankly excites me.

4:37 This is starting to show what this company is capable of. As we look at our brands, I don't want the strength of Aon getting lost in all the attention around data centers. Aon had an outstanding quarter. Aon branded revenue increased 20% year over year to a record $310 million. Orders grew 10%. Backlog was approximately 18% above last year at $499 million, and national account orders increased nearly 70%. That's happening in a commercial construction market that remains soft. We are not being carried by the market. We are taking share. We have differentiated products, an incredibly strong sales channel, and deep customer relationships.

5:23 We're continuing to innovate, and the manufacturing investments we've made are allowing us to improve speed and service. National Accounts is a great example of what happens when those pieces come together. The closer we get to customers, the more we understand the problems they're actually trying to solve. that creates opportunities to bring our engineering products and operating capabilities to them in ways that are difficult to replicate. That's customer intimacy and practice. It's not a sales program. It's how we want to operate. And then we have to execute. Backlog declines sequentially during the quarter because we are converting it faster and getting product to customer sooner. That's exactly what we wanted our operations initiatives to do. When I look at Aon today, I see a business growing 20% in a weak commercial market with orders growing, national accounts accelerating, and service improving. That's a really strong business getting stronger, and I'm incredibly proud of what the team is accomplishing.

6:23 Basics also had an exceptional quarter. Basics branded sales increased 218% year over year to a record $397 million. Order activity increased 116% sequentially and backlogged into the quarter at approximately $1.4 billion, up 51% year over year. There's obviously been a lot of noise around data center investment recently, and we'd be foolish not to pay attention to it. But we are staying grounded in what we're actually seeing from our customers. Engagement remains strong. The opportunity pipeline remains healthy. and the level of activity we are seeing with customers gives us good visibility into the near to medium-term opportunity. This would include the expectation of a strong seasonal demand in Q4, similar or better than what we saw in a year-ago period.

7:16 We have not seen a meaningful change in the demand environment or in the longer-term plans customers are sharing with us. And I think it's important to put that against the backlog already in hand. We ended the quarter with approximately $1.4 billion of basics-branded backlog, even as we substantially increased production and converted more of that backlog into revenue. The underlying problems our customers are trying to solve continue to get harder. Compute density is increasing, power availability remains constrained, efficiency matters more, and thermal management becomes increasingly more important as these systems become more power dense. That plays directly to where basics is differentiated. We are at our best when we're working closely with customers to solve difficult thermal management problems where engineering, efficiency, speed, and execution matters. We are focused on the opportunities where those capabilities create the greatest value for our customers. That's where we win, and what we're seeing from customers continues to give us confidence in the opportunity ahead.

8:24 When I step back from the individual businesses, this is where I get particularly excited. A, I'm seeking share in the commercial HVAC market. Basics of scaling into a significant funnel management opportunity, and we're getting better at running the company. Total backlog finished the quarter at approximately $1.9 billion, up 40% year over year. Gross margin improved another 60 basis points sequentially. Underneath that, we are seeing tangible progress. Aon Coil Products' gross margin improved from 19.1% in Q2 to 25.8% in Q3. Adjusted gross margin at Aon Oklahoma reached 32.8%, and the basic segment more than tripled revenue and profits year over year.

9:10 Higher utilization is helping, labor productivity is improving, price costs have moved in the right direction, and our supply chain work is producing real results. for improving sourcing and resilience while supporting tremendous growth. But there's still work ahead, and we'll continue actively managing this area as we scale. I'm pleased with the progress our teams are making. I'm also excited about the continuous improvement discipline taking hold across the company. We're getting more rigorous about finding problems, getting to the root cause, and making improvements stick. We still have facilities with more utilization available, teams that will continue getting more productive, opportunities in sourcing, outsourcing, and working capital. I don't look at a quarter like this and think we're done.

9:55 I see proof that the work is taking hold with a lot more still available to us. And with that, I'll turn the call over to Andy Chung.

10:04 Thank you, Max, and good afternoon, everyone. Let me provide some additional context around the accounting revisions for the first and second quarter. As disclosed in our amended 10-Q filings, the revisions primarily relate to revenue recognition and accounting for software subscriptions. In aggregate, these items increased first half 2026 revenue by $10.7 million, gross margin by 71 basis points, and diluted EPS by 9 cents. Importantly, the errors were identified through enhanced review procedures and management's ongoing efforts to evaluate and strengthen our internal controls.

10:50 Although management concluded that the aggregate impact on certain quarterly periods was material, the errors were largely timing related in nature and did not affect the economics of the underlying contracts. We have begun implementing remediation actions, including enhancing the design and operations of existing controls. implementing new control over the revenue process and identifying opportunities to reduce reliance on manual controls. We remain committed to executing these actions while driving operational performance and shareholder value creation. For more information, please see disclosures in our press release, presentation, with data 10-Q filings for the first and second quarter, and in our 10-Q filing for the third quarter.

11:46 Turning now to our third quarter financial results. Third quarter net sales increased 84% year over year to a record $707 million. Strong performance from both the Basics and Aon brands, combined with greater manufacturing efficiencies delivered the outside growth. Aon branded sales growth of 20% was driven by a strong backlog and increased production throughput as we continue to drive lead times lower at both our Tulsa and Longview facilities. BASIC's branded sales increased 218% year over year, reflecting the combination of sustained momentum in data center cooling demand, increased production outputs, and greater utilization of recently added manufacturing capacity.

12:43 Gross profit in the third quarter increased 76% to $189 million, driven primarily by strong revenue growth and improved operational execution. Gross margin was 26.7%, down 110 basis points from the year-ago period, and up 60 basis points from Q2. The year-over-year decline in margin was driven by a 300-plus basis point brand-mix headwind, partially offset by improved price-cost and volume liftage. Sequential expansion in consolidated cross-margin was driven largely by the Aon Coil product segment and our Tulsa operations, as both benefited from favorable price-cost trends and higher capacity utilization.

13:40 SG&A expenses as a percentage of sales declined 400 basis points to 12.5%. A strong top-line growth more than offset continued investments to support the company's strategic priorities. On a dollar basis, SG&A grew $25 million to $89 million, reflecting purposeful investments in people, systems, and processes that position the business for sustained growth and enhanced operational efficiency. Long-gap adjusted EBITDA increased 100% from the prior year period to $127 million. Adjusted EBITDA margin was 18% compared to 16.5% a year ago. Adjusted diluted EPS grew 124% to 83 cents.

14:39 Turning now to the segment's financials. Beginning with Aon Oklahoma, third quarter net sales increased 19% to $283 million, driven by strong operational execution and increased production throughput, which enabled accelerated conversion of a healthy beginning backlog. Higher pricing also contributed to growth. Aon Oklahoma adjusted gross profits increased 12% to $93 million, adjusted gross margin of 32.8%, declined 210 basis points from the prior year period, but increased 160 basis points sequentially, reflecting improved price-cost dynamics and higher capacity utilization on increased production volumes.

15:35 Aeon Coil Products segment sales increased 174% to $193 million. Growth was primarily driven by Basics branded liquid cooling product sales of $166 million, an increase of 256%. Was further supported by a 14% increase in Aeon branded production within the segment, Aon Coil Products' gross profit increased 542% to $50 million. Gross margin was 25.8% compared to 11% in the prior year period. The significant margin improvement was largely driven by improved price-cost dynamics along with higher production volume and better overhead absorptions.

16:31 Basic segment sales grew 207% to $231 million. Results benefited from robust demand for data center solutions and a strong backlog. Enhanced utilization of the Memphis facility drove higher production capacity and throughput, enabling faster backlog conversion and contributing to stronger sales performance. Basic segments, sales growth profit increased 227% to $66.4 million, while gross margin expanded to 28.7% from 27% in the prior year period. Margin improvement was driven by strong volume growth, partially offset by incremental resources and investments to support future growth initiatives and share gains.

17:28 Now turning to the balance sheet. and restricted cash balances total $4 million on September 30, 2026. And that, at the end of the quarter, was $387 million. Our leverage ratio continued to improve as it has each quarter this year, declining to 1.0 at September 30 compared to 1.8 at the beginning of the year. Our cash flow performance improved significantly. For the first nine months of 2026, cash flow from operations totaled $147 million, compared to a use of cash of $19 million in the prior year period.

18:18 The third quarter also marked our first free cash flow positive quarter in two years. The substantial improvement was driven by strong earnings growth and enhanced working capital management. Working capital as a percentage of churning 12-month sales declined to 30% from 39% a year ago, extending a four-quarter trend of sequential improvement. While the trend is moving in the right direction, we are not yet satisfied with the current level and continue to see substantial room for improvement. Capital expenditures today total $147 million in 2026, reflecting continued investments in strategic growth initiatives.

19:08 Although cap-backs remain elevated, we are approaching the end of our multi-year investment capacity expansion program and expect spending to step down meaningfully next year. We continue to see substantial opportunities to improve operational efficiency Optimize pricing and sourcing strategies and enhance working capital and capital management. Looking ahead, we expect strong earnings growth, improved working capital turns, and lower capital expenditures to drive significantly stronger free cash flow generation for next year. I will now hand the call back to Matt.

19:54 Thank you, Andy.

19:55 The results Amy just walked through reinforce the operating progress I talked about earlier and give us increased confidence in the outlook. Based on our third quarter performance, production outlook, and backlog, we are raising our full year outlook. We now expect 2026 sales growth of 72% to 75%, up from our previous expectation of 55% to 60%. We expect gross margin of approximately 26%, STNA of approximately 13% of sales and depreciation and amortization of approximately $100 million. That's a significant move from where we were three months ago. We are producing more, converting backlogs faster, and executing better. We're also seeing the benefit of the pricing actions we've taken, both on new orders and through pricing improvements we've been able to secure within portions of our existing backlogs. combined with better utilization for activity and sourcing that's contributing to the margin progress we're seeing.

20:58 We've built for this growth. We're now delivering it, and increasingly we're seeing the operating leverage that should come with it. We're not providing formal 2027 guidance today, but I do want to share how we're thinking about what comes next. When I look forward, what excites me is how much opportunity remains in the capabilities we've built. We have attractive opportunities to continue growing, capacity to produce more, teams that continue getting stronger, and significant opportunity to improve productivity in returns from the investments we've already made. That gives us multiple ways to drive value through growth, margin expansion, and cash generation. At Aon, we're not assuming the commercial market suddenly gets easier.

21:43 Our performance this year shows we don't need it to. We have a differentiated business that's taking a share, and we see plenty of opportunity to continue doing that. As basics, I'd like to come back to what we're actually seeing. We have approximately $1.4 billion of backlog. Order activity increased significantly during the quarter. Customer engagement in the opportunity pipeline remains strong, and the activity we're seeing gives us good visibility into the near- to medium-term opportunities. Our projects are geographically diverse, that were not dependent on any single state or market. And the vast majority of our backlog is with well-capitalized customers with strong balance sheets. Beyond the backlog, the depth of our customer relationships gives us visibility into development plans that extend years into the future.

22:31 More importantly, those relationships put us close to the problems our customers are working to solve and where their needs are going. As compute density continues to increase, power and water remain constrained and Efficiency continues to monitor. With federal management becoming increasingly more important as these facilities become larger and more power dense. These are exactly the problems BASICS was built to solve. We're close to our customers. We understand their applications and engineer around their specific requirements. We move quickly, solve difficult problems and execute at scale. That's where BASICS is differentiated. And that differentiation is winning with customers today and is what gives us confidence in the long-term opportunity ahead.

23:16 I'll finish here. I'm incredibly proud of this quarter. We delivered record revenue, operating income and earnings per share more than double, margins improved sequentially, cash generation improved significantly, and we're raising our four-year outlook. Those results reflect years of investment and incredible amount of work by our team. We're seeing that work translate into performance. We also self-identified a financial reporting issue this quarter that resulted in previously reported first-half revenue and earnings being understated. It exposed areas where our controls weren't good enough. We own it, and we're fixing it. I'm incredibly proud of what our team delivered, and when something isn't good enough, we're going to be equally direct about fixing it. That's how I want us to run this company. What gives me confidence looking forward is pretty simple. We're closing to our customers, we're executing better, Thank you.

24:09 We will now begin the question and answer session. If you would like to ask a question, please press star then the number one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. Your first question comes from Ryan Merkle with William Blair. Your line is open.

24:50 Hey, everyone. Thanks for the questions and nice job this quarter. I wanted to start Wanted to start on the data center orders, if I could. It's nice to see, you know, basics orders back above 300 million. Matt, can you talk about timing, variability, and basics orders that you called out in the press release? Are you still waiting on some larger orders, or did you see those in the third quarter?

25:17 Well, certainly, I mean, there was great momentum in the third quarter compared to Q2, but that momentum continues to strengthen into Q4. And so, as we look at Q4, and then the prepared remarks made the comment that We expect the bookings in the basic side to be at or above what we saw in the same quarter in 2025.

25:37 So there's been continued strength in bookings.

25:40 And actually, as we've been on this call, I've been getting texts from our team as additional orders keep flowing through. So we've had a lot of flow through of orders, especially around our kind of annual program releases to some of our larger customers.

25:54 Got it. That's great. Okay. And then it was a big beat on revenue, and it came from both segments. Where did the surprise come from? Was it the increased throughput? Was it share gains? Was it price? Just unpack that a little bit.

26:08 Yeah, no, it's been exciting to watch the strength in both sides of the business. And obviously, the basic side has been growing tremendously strong over the last many quarters. But really, the Aon brand has just been as strong as it's ever been. So we look at the differentiation in that product. It's allowing us to take share on the Aon brand. and all that's being supported by continued strengthening of our operations and our execution. And that's really allowing us to capture that share on the Aon side. On the basic side of it, you know, it's continued operating rhythm and really driving performance in our existing investments. We're seeing the coil product segment continuing to ramp up with the good margin progression and really good operating performance, as well as seeing our Memphis investment continue to make great returns as we increase productivity.

26:56 It's really been pretty broad-based. The market's been strong for us. The differentiation of the products has been strong. Our operations have been allowing us to execute well, and our supply chain team has been doing a tremendous job ensuring the parts and pieces are showing up when our team needs them.

27:13 That's great. Okay, and then one quick one on gross margins. 4Q is implied down slightly from 3Q. Can you just talk about why that is? Are you seeing any cost inflation that might be causing a little bit of a squeeze?

27:26 That's a great question. And you're reading kind of what the guidance implies correctly. I think just to clarify, the big driver on the kind of sequential short downturn from quarter three to quarter four is really being driven not by inflation. It's really just calendar days working. And so when we look at holidays, traditional production schedules, as well as our traditional year-end wall-to-wall inventory counts, those just reduce the overall days of production significantly. So we're seeing increase in productivity and price cost through the quarter, but those are just being offset a little bit by the overall production news.

28:04 All right. Thanks for the call, and I'll pass it on. Good luck in 4Q. Thanks, Brad.

28:08 Thank you. Your next question comes from Julio Romero with Sedati and Company. Your line is open. Good evening, Matt, Andy, and Joe. This is Justin on for Julio. I wanted to start on the restatement. As you've previously signaled a move towards reporting AON-branded and BASICS-branded results as separate segments, does the restatement or the controls work tied to it change the timing? And would the new segments come with recasted historicals that match the corrected basis provided today?

28:52 Yeah. I would say, first off, these correction and the control steps that we find will not affect our plan from a resegmentation standpoint. Right now, we're still targeting, you know, Q4 earnings call. We will be providing a new look based on the true brand concept that we've been talking about. So this quarter's discovery will not have any impact on it. and we're also anticipating that shortly prior to the resegmentation in Q4, we will be providing a recast of the historicals so that you can see what the historical trend is and it will be reflecting the restated Q1 and Q2 financials.

29:42 Got it. Thanks. And then turning to margins, You mentioned the year over year gross margin decline was mainly due to less mature, lower utilization facilities, which I assume is primarily Memphis. So I'm curious, where is Memphis utilization today? And when do you expect Memphis to reach the margins of your established plants?

30:05 Yeah, let me start with clarifying, yes, because of the growth of our basic business, particularly in Memphis. but it's also reflecting, remember, I think we talked about in the past, there is a mixed impact as we continue to outpace the growth between basics and the Aon brand. So that's roughly we estimated to be more than 300 basis points in brand mix headwind. So these are really the driver. And in terms of the utilization, say that the utilization we previously mentioned that we approximately a portion of our foot utilized in our Memphis location and we still have lots of room to continue to grow that business.

30:54 And I would just touch, I mean, it's a very intentional rate of growth in how we turn on more capacity inside that facility. And so, you know, this is a very substantial roundup investment for us and it's a very intentional growth trajectory for us. to ensure that we continue delivering not just the top-line dollars but the quality growth and margin as well as at the quality and delivery expectation we have for our customers. And so while the other two-thirds of capacity sits there from an overall square footage standpoint, we'll be intentional about how we ramp that over time to ensure the quality growth is delivered not just to the street but also to our customers. And so, you know, we're talking about, you know, quarters and years of time to basically fully ramp that facility intentionally.

31:42 Great. Thanks for all the color there. I'll turn it back. Your next question comes from Noah Kay with Oppenheimer. Your line is open.

31:54 Hey, good afternoon, guys. And I'm sure investors listening to this call are cheering right now around the resegmentation. So looking forward to that. And, you know, great to see you moving forward with it. Matt, you sound great about the health of the business, especially the data center side, and your comments around the expectations for orders this quarter, 4Q suggests to me, at least, that you've got a good amount of that already. Can you talk about the nature of these orders a little bit more? Give us a sense of composition. You know, what's the same? What may be changing? Customers, any new customers? Just help us understand how the orders book is shifting here.

32:42 Yeah, good afternoon. Great question. So when we look at the overall order trend in Q3 and Q4 as well, certainly there's a broad-based kind of portfolio booking growth in there, so a lot of great Success in liquid cooling orders with existing customers as well as with new customers. Continue to see growth in the airside products as well alongside that. And that continues to be with a diversifying customer base. And so when we look high level at really where that growth is coming from, we have a really good base of existing customers that continue to not only kind of order existing products that we manufacture with them, but we continue to evolve the products with them going forward based on how their deployments shifting over time.

33:28 So kind of a continuous evolution in the overall products that we're manufacturing for existing customers. But really, you know, also some great strength on new customer wins and diversified customer wins. So it's really been a pretty broad-based success in the quarter Q3 as well as quarter to date in Q4.

33:47 Okay. You know, I'm sure you're getting these questions. We're getting them a lot from investors, you know, post-elections. because you touched on in your prepared remarks your confidence in the backlog with respect to the counterparties and the geographic exposure of the project. Can you just give us a little bit more color on that? When you look at what's in your backlog, I would imagine the vast majority of it is on projects that are already permitted and probably under construction, but just what gives you that confidence in the firmness of the backlog?

34:23 Great question, and yes, to your point, it's certainly been a question that's been asked plenty of times post-election. When we look at the overall geographic diversity, we're talking about less than a third of our backlog is sitting in states with any level of pressure around data centers. In those states, the majority of the conversation is more around regulation around who's putting the bill for a lot of the investments in utilities and other things like that. From a geographic perspective, good strength that we're seeing in where we're deploying projects. But we also continue seeing new orders come in within a geographically diverse set of states. And so we continue to see strength with our customer base. A lot of our hyperscale customers have exposure all across the country, so they're not levered into one state substantially. So really seeing the geographic part be kind of a non-issue, at least, of what we're seeing in our existing backlog.

35:18 And to your point, These are existing permanent projects. They're not speculative projects. Beyond that, you know, just touching on the overall health of the business, well over 80% of what's in our backlog is with customers with incredibly strong balance sheets. And so when we look at the kind of risk factor, I mean, there's a certain small amount of consideration in there, but by and large, there's very strong protections in the customers and the locations that we're providing product to.

35:47 That's helpful, Collin. Thank you. I want to ask one more about margins, if I may. You know, that ACP margin improvement sequentially was pretty stark. Was there any one-time benefit? Because you mentioned some pricing improvement. Did revised contract prices generate any kind of catch-up revenue or margin benefit under percentage of completion accounting? Or is this the kind of margin that we should sort of expect for 4Q?

36:16 Fair question, and it does not include any catch-up revenue. So that margin is for product that was manufactured and shipped during the quarter. So that is reflective of kind of where we're building upon going forward. And I would just touch on, you know, we have spent a tremendous amount of energy in the Longview site beyond just a pricing perspective on really driving the operational efficiency of that factory. You know, when I think about things that excite me, it's not just the top-line dollars we're getting, but it's the improvements we see on the shop floor every day, and we expect those to continue to make a meaningful impact in the margin as we drive forward.

36:52 Yep. All right, congrats. Great quarter. Thank you.

36:56 Thanks, Noah. Your next question comes from Tim Woj with Baird. Your line is open.

37:05 Hey, guys. Good evening. Nice job. um hey maybe hey maybe just to start on the um you know Matt just on the Oklahoma business I mean um I mean the order activity there has been good year to date but but you are kind of um you know I'd say burning some backlog or kind of catching up on some of the lead times so I know you're not giving 27 guidance but as you as you think about Oklahoma next year is there any sort of and many more. Thank you very much.

38:01 When we look at the booking strength in Q3 from a seasonality perspective, we actually look at it as being a strong bookings quarter, all things considered. So it's really giving us the opportunity to continue driving the backlog down and therefore driving down the lead times in our product as we prepare for the end of Q4 and Q1, which tends to be the strongest bookings quarters. So really from that vantage point, it's a very intentional decision to drive the production rates where we're at. with the goal of getting our lead times basically where we want them to be as we enter the strong booking season.

38:35 Okay. Okay. And then I guess as you think about, you know, just the lead times within basics, is there any way, probably varies by product and program and things, but is there any way to kind of give us a sense of where the lead times are in that business today versus maybe where they were six or nine months ago, just Trying to think of, you know, kind of the order activity in Q4, you know, you'll probably ship most of that backlog in 2027. But just if you could actually take orders and ship orders as you kind of get into next year, if that kind of falls into 2028.

39:05 Yeah, I think to start off, your statement at the beginning is very correct, which is very much varied by program and by product. There's been a lot of moving pieces that really go into it in terms of how we're driving throughput within existing programs and really balancing kind of line rates to meet demand. So a little more complicated aspect of some of these longer duration programs. But by and large, on the kind of, I'll say the more traditional type programs that are going through our production on the basic side of business, the simplest way to say it is, yes, lead times have come down. But lead times have come down as we continue getting more maturity in our production operations across the entire fleet. So really the driver of lead times coming down is a balance of more production capacity coming online as a lot of the investments continue to mature, thereby allowing us to put in more demand into the system.

40:02 And I will say, you know, for us, and you've heard me say this for multiple quarters now, we are very intentional about when we turn on the capacity to the market because one of our key, you know, Prime focus areas for us is ensuring that when we commit to delivering it to customers, we hit them. And so that means being very intentional about the level of confidence we have in that production coming online at the rate we need to to meet the demand of the market. And so as capacity matures more and more, it allows us to more confidently go to the market with accelerating lead times and more capacity to sell. And so really, I think on a broad-based perspective, the The lead time movement is very much reflected around the operational maturity that continues to come into place with any existing investments that we've been making.

40:49 Okay, that's helpful. I mean, is it fair to say that that pace today is faster and ahead of schedule relative to what you thought at the beginning of the year?

40:59 Yeah, I mean, I'll just say simply that our supply chain teams, our operating teams, They continue to impress me on a daily basis with the progression that they're making. They continue to drive performance across as business and an execution perspective. The evolution of our operating model within our production floors and our supply chain organization is incredibly impressive to see where it is today as to where it was a couple years ago. And that discipline, that cadence for improvement, I mean, all of that is what's allowing us to deliver the improving production throughput. and ultimately allow us to drive more products to our factories.

41:37 Okay. Okay. And then just the last one I had. I think this year just to help kind of get some of the lead times worked on in Oklahoma, you guys did have some enhanced outsourcing arrangements. Is it still the plan as you go into 2027 that some of those outsourcing arrangements would come back in-house?

41:58 Yes, we're being very intentional around the balance of the outsource-insource conversation, but we are driving a lot of volumes through our insourcing vertical integration production capabilities inside our plants. And so today we continue to see the amount of insourcing that we're doing increase, but we're also being very intentional to balance the outsourcing to ensure customer delivery. So as we progress into 2027, we do expect there to be some outsourcing that is still sitting there to support our operations. But our goal is to continue bringing more and more of that capacity in-house and obviously get the margin uplift that comes with it. Awesome. Thanks for your time, guys. See you in a couple of days.

42:40 Thanks, Daniel. Your next question comes from David Tarantino with KeyBank Capital Markets. Your line is open.

42:51 Good afternoon, everyone. Maybe just starting on putting a finer point on the margins and the coils business. You gave some color on it, but could you give some color on what drove the better margins between better throughput and better price cost? And maybe on the pricing front, can you give us an update on how those conversations with your customer has progressed this quarter?

43:17 Yes, so from an overall kind of margin impact, the pricing certainly is the majority of the uplift that we saw in Q3. So definitely the productivity improvements are in there, but pricing would be the bigger driver in the quarter-over-quarter progression. So when we think about the pricing conversations and how those are going with our customers, a lot of our large hyperscale customers or large customers that are sitting in our longer-duration programs, sophisticated conversations around the drivers of the cost and really what we're doing to mitigate costs. And so the conversations are being met openly and really the expectation that we hold ourselves to is that we can clearly articulate the drivers and everything we're doing to minimize the impacts.

44:02 And in doing that, allowing us to have a very structured conversation to ensure that we're delivering the appropriate value point. Really, from a how it's going standpoint, there's an expectation, obviously, around discipline from our standpoint, as well as, you know, doing everything we can to mitigate the overall cost increase. But at the end of the day, those conversations are being met with open arms. And really, obviously, as you can see in the price pulling through and backlog, it's sitting there in the books, and it continues to show up in future orders at higher levels as well.

44:39 Okay, great. And maybe a similar line of questioning, but on Oklahoma, it looks like the adjusted margins here are making some solid progress, but remain below the long-term target. So maybe could you just update us on the headwinds here and maybe give us your thoughts on if you think there's enough price in the backlog to return to that targeted mid to high 30s margin, and when should we expect that to show through?

45:05 Yes, that's a great question. And we look at the Oklahoma segment, and we've obviously talked about the price-cost kind of mismatch in prior quarters. And really, a lot of action has been put in place to really get the price-cost dynamic in check to really ensure that we're staying ahead of the overall inflation and getting ourselves back towards our target margin level. So all that to say that the progress you're seeing quarter over quarter throughout this year is very much reflective around that pricing discipline. sitting in the backbone today is increased pricing relative to what we produced in Q3. So there is continued price-cost benefit that sits inside our backbone. And really from a going-forward basis, we continue to have a level of discipline in our process, really where we're looking at inflation, not just that's showing up in our books today, but really within a supply chain perspective, getting much better visibility into forward-looking price expectations or cost expectations, I should say,

46:03 and ensuring that we're putting price into the market to counteract those and really drive the margin to our target levels.

46:09 So are we able to flip a switch and get back to the overall target margin levels? No, it takes a little bit of time. But as we get through next year, we will expect to continue seeing movement and margin from the Oklahoma segment in the right direction.

46:23 Okay, great. And if I could speak one more in here, and apologies if I missed it, can you just update us on what the sales outlook now embeds between the Aon and Basics branded product growth?

46:34 Yeah, we don't have an explicit kind of definition for the quarter in Q4. I just say thinking about it on a relative basis, it's going to be relatively in line from a ratio perspective to Q3 is what you'll expect to see in Q4. So that implies from a basic side of the business growth of around 140% for the overall year. Okay, great. Thanks, Dan. Your next question comes from Chris Moore with CJS Securities. Your line is open. Hey, good afternoon, guys. Maybe we'll stick with the data center sales a little bit. So the liquid cooling, $166 million within the coil segment. Can you kind of compare these sales to the data center sales within the basic segment, for example?

47:23 Are they more customized? Is the average size of these projects much different? Are the lead times much different?

47:31 So I guess just maybe the differentiating point that I would bring up regarding the coil segment liquid cooling products is really just recycling them there is a long-duration customer relationship and program. So kind of sitting inside there, there's some very bespoke products that have been designed and were manufactured specific to the customer's applications. So really kind of on the custom product side of things, we have similar products that are sitting in other facilities, whether Memphis or the basic segment. But I would just say the relative scale of the sort of relationship in the ACP segment is just a larger relationship and a longer duration relationship compared to some of the things in other plants. Got it. And my line's a little fuzzy. I might have missed it. But just in terms of the kind of data center capacity at the end of 26 versus, you know, I know CapEx will step down in 27 versus where you'll be at the end of 27.

48:29 Can you talk to that?

48:32 Yeah, certainly a lot of capacity is still sitting kind of there to be able to bring online over time. So we've messaged, obviously, that capacity of the overall basic side of business is in excess of $2 billion. We haven't put a fine-tooth comb in exactly, you know, where we see that ceiling. But certainly throughout 2027, as we continue bringing on more production capacity, it'll allow that to continue increasing throughout the year. Do we finish the year at that $2 billion capacity? Probably not, but certainly there's going to be more opportunity over time as we enter 27 into 28 as well. Sounds good. I will leave it there. Appreciate it. Your next question comes from Matt Somerville with D.A.

49:20 Davidson. Your line is open.

49:24 Hi, this is Peter Halperin. I'm from Matt Somerville. Just one for me. Given the recent pullback in shares, can you talk about the potential to buy back shares at these levels and kind of how you're thinking about that? Thank you.

49:41 Yes, good afternoon. Yeah, very obvious question. I think when we look at the share pullback, certainly come into mind is the fact that we still have $70 million of authorization for buybacks that are sitting inside of prior board approval. That concludes our question and answer session. I will now turn the conference back over to Joseph Mondillo, Director of Investor Relations, for any closing comments.

50:23 All right. Thank you, everyone, for joining today's call. If anyone has any questions over the coming days and weeks, please feel free to reach out to me. Have a great rest of the day, and we look forward to speaking with you in the future. Thank you. This concludes today's call. Thank you for attending. You may now disconnect and have a wonderful rest of your day.