Aaon Inc
NASDAQ:AAON

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Earnings Call Transcript

Earnings Call Transcript
2018-Q1

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Operator

Good afternoon, ladies and gentlemen. Welcome to the AAON, Inc. First Quarter Sales and Earnings Call. There will be a question-and-answer period after management's brief presentation. This call will last approximately 45 minutes to an hour.

I would like to turn the meeting over to Mr. Ash Pearson [ph]. Please go ahead, Mr. Ash Pearson.

U
Unidentified Company Representative

Good afternoon. I'd like to read the forward looking disclaimer. To the extent any statement presented herein deals with information that is not historical, including the outlook for the remainder of the year, such statement is necessarily forward-looking and made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995. As such, it is subject to the occurrence of many events outside AAON's control that could cause AAON's results to differ materially from those anticipated. Please see the risk factors contained in our most recent SEC filings, including the annual report on Form 10-K and the quarterly report on Form 10-Q.

I’d like now to introduce Scott Asbjornson, our Chief Financial Officer.

S
Scott Asbjornson
CFO

Welcome to our conference call. I'd like to begin by discussing the comparative results of the three months ended March 31 2018 versus March 31 first 2017. Net sales were up 15.1% to $99.1 million from $86.1 million. New sales for the quarter mainly due to the increases in our rooftop and water source heat pump products.

Our gross profit decreased 38.4% to $15.4 million from $25.0 million. As a percentage of sales, gross profit was 15.5% in the quarter just ended compared to 29.0% in 2017.

In January of 2010 18, the company paid all employees a one time bonus of $1000 per employee as a result of the Tax Cut and Jobs Act, the act which lowered the federal corporate tax rate from 35% to 21%. This bonus increased cost of sales by $1.9 million, excluding taxes and benefit.

Additionally, the company typically has seasonality in its sales and workforce with the fourth and first quarter being lower in production. The company maintained a higher level of workforce through the end of 2017 and beginning of 2018 in anticipation of ever growing business.

The company's water source heat pump business also has a lower profit margin and given it is still in early stages of production this part of the business is not yet as profitable as our other products.

Selling, general and administrative expenses decreased 3% to $10.2 million from $10.5 million in 2017. As a percentage of sales SG&A decreased to 10.3% of total sales in the quarter just ended from 12.2% in 2017. The overall decrease in SG&A was primarily due to the decrease in advertising expense and profit sharing.

Income from operations decreased 64.2% to $5.2 million or 5.2% percent of sales from $14.5 million or 16.8% of sales. Our effective tax rate decreased to 18.7% from 29.7%. The company's estimated annual 2018 effective tax rate, excluding discrete events is expected to be approximately 28%. The decrease in our effective rate was due to the Tax Cuts and Jobs Act that was enacted on December 22nd 2017 lowering the federal corporate rate to 21%.

Net income decreased to $4.3 million or 4.3% of sales compared to $10.2 million or 11.9% of sales in 2017. Diluted earnings per share decreased by 57.9% to $0.08 per share from $0.19 per share. Diluted earnings per share were based on 52,910,000 shares versus 53,190,0000shares in the same quarter a year ago.

I'll now turn things over to Rebecca Thompson, our Chief Accounting Officer and Treasurer.

R
Rebecca Thomson
Treasurer and Chief Accounting Officer

Looking at the balance sheet, you'll see that we had the working capital balance of $97.4 million versus $103.7 million at December 31 2017. Cash and investments totaled $23.1 million at March 31 2018. The investments have maturities ranging from one month to four month. Our current ratio is approximately 2.71.

Our capital expenditures were $8.5 million. We expect expenditures for the year to be approximately $53.2 million. We purchased substantially all the operations and assets award [ph] last year for $6 million.

The company has stopped [ph] the purchases at $4.9 million year-to-date. Shareholders equity per diluted share is $4.12 at March 31 2018 compared to $4.47 at December 31 2017. We continue to remain debt free.

I’d now like to turn the call over to Gary Fields, our President who will discuss the results and further detail, along with new product and the outlook for the remainder of the year.

G
Gary Fields
President

Net sales increased 15.1% for the quarter, our first quarter was fraught [ph] with various issues of which we've clearly identified and implemented corrective actions. I'd like to talk about some of those details.

In the first quarter of 2017, we were unable to hire plant workers quick enough to meet the demand. So coming into the first quarter of 2018, we retained a much greater plant workforce in anticipation of a stronger order input than actually occurred.

In January versus forecast, we were down 40%. In February versus forecast, we were down 17.5%. March we were down 15%. So these orders weren’t coming in the door near the rate that they were forecast. Now these are not comparative to any other time period. These are only comparative to forecasts.

The one bit of good news is that in April that we were 9% above forecast. So that loop of going down turned and went all the way up to in positive territory. But through the end of April we were still just a bit short of forecasts. It is trending in the right direction.

I want to make note that the Architectural Billing Index has been in the mark of 50 consistently over the past many months. This supported the forecast that our sales channel was providing to us. Our sales channel further confirmed that the orders were in the pipeline as forecast, but slower to release than originally expected. April somewhat confirmed that assertion.

The next I want to go over is the timing of price increases. So in November of 2017 we had a 3% price increase, approximately 50% of what we've built in the first quarter had that price increase applied to it. The other 50% was backlog that accumulated before the price increase. Beginning right at the 1st of April, all product is being built on the new price that was established in November.

So component prices increased mostly beginning January 1st, so that 50% of the backlog that was built in the first quarter had pressure on it because those component prices did increased, yet we had not been able to effectively implement our price increase.

While our steel costs are committed well into the third quarter, some commodities such as aluminium were not and they've had some impact at this time. It's not a great impact, but it was some impact.

Probably the greatest impact was our elevated headcount. We had this forecast from our sales channel partners that looked viable with all the other checks and balances that we utilized. So we maintain that that headcount. We've had approximately 30% surplus headcount versus that same amount the year before.

Another pressure on us is our new laboratories coming online. We've hired several people who are learning how to operate the lab at this point. But the lab itself is not yet operational. Portions of the new lab will be commissioned and operational early next month, with additional chambers coming online each month until final handoff in November. We have to train these people, it's essential to our immediate success upon completion of the lab. Yet today they're not showing any measurable contribution.

The next thing I want to discuss is the product mix. If you you'll notice in the 10-Q, we built approximately six fewer rooftop units the first quarter of this year. Yet the revenue was up 12% on those rooftop units. The result was we'd build units of greater complexity, but at a much lower margin. These very large complex units are very unique and they don't allow you to established a whole lot of rhythm as you go down through the production line.

We have certain product sizes that we've positioned for aggressive market share capture. We've been achieving our goals with market share capture, but those came at a lower gross margin than benchmark. At the earlier stages of this effort the diluting effect to the overall margin was minimal, but the negative impact on the first quarter this year was sizeable.

Our water source heat pump business while ramping up, we shipped over 1600 units in the first quarter of 2018 compared with 2485 units the entire year of 2017. So while this is still a start up business with all the birds [ph] expected of the start up business, the product offering is accelerating and will gravitate towards profitability throughout the year.

We're on track to be significantly complete with the development of the products and manufacturing resources by the end of this year. And HR certification testing is ongoing at the seven units that were selected for testing, four of them have successfully completed the testing. There is a fifth one in the test chamber at this time, so we're getting closer and closer to achieving that final goal. We don't have any determination of exactly when that will be, but we are well past the halfway mark at this point.

I'd like to summarize with a few thoughts, while the lab is currently putting pressure on the bottom line, [indiscernible] development and refinement of technology solidifying our very enviable position as a market leader. Long- term the lab will prove to be a great investment.

All the units produced in the second quarter will be in accordance with the price increase in 2017. We won't have that 50-50 dilution. Then we have another price increase that’s effective June 15 [ph] That is forecast to offset many of the cost pressures previously discussed. It will principally show up in production in the fourth quarter.

Many processes have been revised and improved, product mix is becoming more favorable. Water source heat pump effort is beginning to mature. The plant workforce has been right size to meet customer shipment expectations and improve efficiency.

The architectural billings index remains above 50 indicating the strength in the construction market for the balance of the year. All these factors considered, we expect to see our margins improve over the fourth quarter - over the first quarter. We're targeting historic levels over the next year.

I'd also like to point out that March 31 2018, our backlog was at $74.1 million versus $68.9 million for the same period a year ago.

So now I will open it up to any questions.

Operator

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

B
Brent Thielman
D.A. Davidson

Hi, good afternoon.

G
Gary Fields
President

Good afternoon.

B
Brent Thielman
D.A. Davidson

Hey, I guess, back on that gross margins and you had a lot of moving pieces there. I'm trying to think about all of that. But Gary, I think you said – you expected to get kind of back to those historical levels, correct me if I'm wrong over the next year. As you think about it from here. Is it kind of a progressive sort of stair step up as we move through ’18 and then maybe we get there by the first quarter of ’19? Am I thinking about that right?

G
Gary Fields
President

That's exactly the way we're thinking of it Brent, the same way, yeah.

B
Brent Thielman
D.A. Davidson

Yes, okay. And from the materials side of things and just trying to weigh all the different things going on in there, is that really the biggest impact here at the end of the day?

G
Gary Fields
President

Not in the first quarter. We had component prices, as I said we had increasing component prices that they announced their price increases last fall, same as we did. And the kind of the lesson I had to learn was how long it takes from the time I invoke a price increase until it actually hits my plant floor due to the backlog and the timing of that. I probably didn't lead that quite far enough and that's why only 50% was built at the new price. While I had some escalation in component prices.

Steel, we still had plenty of steel available at the price prior to any tariff announcement or any of that. Aluminum was a little bit different, but aluminum is just a very small percentage of the cost of our overall product. So as we go forward now, as we look at that, we've got enough steel in poundage that – and our current production rate it'll carry us deep into the third quarter, maybe all the way through the third quarter.

While our price increase that goes into effect in June, the very first unit that hits the plant floor first day of fourth quarter should be at the new price increase. We believe that with the steel prices that they're talking about right now, which by the way are up 56%, not 25% like the tariff that was spoken to be, they're asking 56% premium.

We vandalise that and if the prices stay that high, which we've got reason to believe that they may subside a bit, but if the steel prices, if the aluminum prices stay that high, that – and the 5% price increase that goes into effect will use up in excess of 3% of that 5% on those materials. So that's going to leave us something less than 2% for escalation of wages and miscellaneous.

And I think Scott gave me a number earlier today that wages are looking at about 2.7%.

S
Scott Asbjornson
CFO

That’s what the general inflation trend is.

G
Gary Fields
President

General inflation to 2.7%. So you know, when we couple all of that together, the 5% price increase is kind of a hold your own, not really at this point in time anticipated is any good ahead measure. But at least the timing of it appears to be much more in line with when these additional costs are going to occur.

Mike said that the price increase that I did November 15, if I had a do over on it, I would have done at September 15. And that way I would have full effect of it when I started seeing these escalated components.

B
Brent Thielman
D.A. Davidson

Right. Okay. I mean, it sounds like you should have some pretty good volume coming through here and we see in the coming quarters. Is that - is that going to be enough to offset these pressures and still grow gross profit relative to last year. I mean, I know you guys don't guide, but little gravity there?

G
Gary Fields
President

Well, yes, we have a very strong backlog, strengthening every moment. Like I said, the forecast - and the forecast was not relevant to another quarter, the forecast was actually quite aggressive by the rep force. I mean, if they would have achieved forecast on my gosh, this would have been a heck of a lot different phone call, but it is what it is.

In April, we were up 9% above their forecast, so it felt like a lot of those orders that we thought we were going to get in January, February and even in March got pushed out a little bit and then they started flooding in here in April.

Well, you know, it's a curse on one hand that we get that workforce as big as we did, thinking that that work was going to get in here sooner than it did. But now it might be as they call the silver lining in the cloud. And that - I actually do have enough workforce by and large to build what we need build and meet people's expectations and get some revenue through this place. So I'm very confident at this point with what we see - that we're going to have a real good effect of recovering from what occurred in the first quarter.

B
Brent Thielman
D.A. Davidson

Got you. One more, like I'll turn it over. I apologize, did you talk about the certification status for the water source heat pump, if you did…

G
Gary Fields
President

I did. I did, but I don't mind going over it.

B
Brent Thielman
D.A. Davidson

Okay. Okay.

G
Gary Fields
President

AHRI chose seven units to test for certification, four of those have been tested successfully completed, the fifth one is in their lab as we speak. We have confidence - there's much confidence in the – the one in the lab now and the other two yet to be tested as we did the first four. So our confidence in achieving that certification is sooner, is strong. We are at their mercy as we've always spoken about them testing when they do.

Now one of the key things to keep in mind, of the seven units that they chose, only two of them are what we categorize as the new product, the WH and WB [ph]. The other five were products that we had made for years before. There was no reason to certify those in the past though because we were essentially the only ones building them. And that's been a little bit of a challenge for AHRI, is figuring out exactly how to test some of those.

So the majority of those have now been completed. I think there's one left. It's a challenging test for them, but at the three left to test, I think only one of them is anything that's extraordinary for them, otherwise I believe they will tested a normal testing pace.

The other thing to recognize about AHRI with their testing, all of us that belong to the AHRI program, all of our equipment, which there's multiple sections that you're listing equipment here, AHRI pose a certain percentage of units from your production line every year and test them for a continuous maintenance type confirmation of your certification. That is probably the most substantial use of their lab time.

So when you open up a new section then it has to work around all of those other tests and you're very much a secondary effort for them. So that's what makes it so difficult to open up a new section. And the other thing is until all seven units have been tested and passed you can't certify any of that. It's a one or you know it's all or none actually.

B
Brent Thielman
D.A. Davidson

Okay. I appreciate it. I'll pass it on to someone else.

Operator

Your next question comes from the line of Joe Mondello.

G
Gary Fields
President

Good afternoon, Joe.

U
Unidentified Analyst

Hi, everyone. Good afternoon. I wanted to ask about the personnel headcount, in terms of the volume that's going through the plant today. Are you at optimal levels yet? Or do we need to still ramp up through the seasonal period to where you say, okay, our headcount now is optimal relative to volumes going to the plant?

G
Gary Fields
President

We are a little bit understaffed to equal right now as at today.

U
Unidentified Analyst

Okay. So…

G
Gary Fields
President

I'll get confirmation on this, we're not have an agreement.

S
Scott Asbjornson
CFO

What Gary means is that at our pace of production at the end of this quarter, we would likely need additional staff, but where we're at - at the moment we are adequately staffed.

U
Unidentified Analyst

Okay. So that's not going - in terms of costs absorption, relative to optimal headcount. That's not going to be a factor at all in the second quarter then?

S
Scott Asbjornson
CFO

You will see significant improvement from what we can predict at this point in terms of our headcount versus our production levels within two.

U
Unidentified Analyst

Okay. And then what is raw materials/components make up of cost of goods sold?

G
Gary Fields
President

All materials are typically at 40% or less of cost of goods sold.

U
Unidentified Analyst

And the bulk with steel is what 25% - 10% then, 25% of the 40%?

G
Gary Fields
President

Its 10% of the cost of goods sold.

U
Unidentified Analyst

Right. So the 30% is really where you're seeing the inflation?

G
Gary Fields
President

Yes.

U
Unidentified Analyst

Okay. And so just to go over and clarify, is that's going to be the biggest factor this quarter, the personnel headcount, is seems like that's sort of behind us and really raw materials and just getting ahead of pricing is really the biggest factor?

G
Gary Fields
President

Yes.

U
Unidentified Analyst

All right. And then so looking at your gross margins, you did you know, 16%, 15.5% in the first quarter, you did 31% in the second quarter comp, meaning last year. Do you have any sense of where you know - where you think you fall out to? You know, I know you don't guide, but you know, whether it's going to be low 20s or you know, it's certainly going to be year-over-year down it sounds like. But any idea of you know, anywhere just given the wide gap, it's tough for us to sort of pinpoint?

S
Scott Asbjornson
CFO

Correct and there are enough moving pieces that it is difficult to project that. But if I were going to make my best estimate, just at the moment, I would tend to say your initial thought of low 20 range is probably at the better end of where we’re likely to be. We could be high teens, but it's somewhere right in that range.

U
Unidentified Analyst

Okay. And could you quantify. You highlighted this, so I am apt to ask the question, could you quantify the - how much the effects of the costs related to the lab amount to?

G
Gary Fields
President

I don't have any exact numbers, but there's 47 people affiliated with R&D in the lab, some of which have been here prior to the lab. But those 47 people some of them are productive now, but there's a substantial portion of them that are solely being trained and developing additional capacity in the lab.

U
Unidentified Analyst

And how much is that - how much does that changed over, you know, call it end of 2017?

S
Scott Asbjornson
CFO

Our engineering expense in total year-over-year is up about 1% of sales. So the percentage that represented last year versus this year has increased by about 1%.

U
Unidentified Analyst

And then…

G
Gary Fields
President

Numbers those are [indiscernible] with lab.

U
Unidentified Analyst

Okay. And then in terms of product mix, could you talk about where we were in the first quarter and how that's sort of trending in terms of margins of product mix?

G
Gary Fields
President

Yes. That the primary products that I'm talking about there comprised about 20% of all production first quarter. And historically they have been closer to 10%. And so they provided twice the dilutive effect as to what they had in historic perspective.

The bookings backlog it is down to less than 15% closing in on 12% as of last night and what's in the backlog. So we look for that product mix to improve throughout the year.

And this is - it's really influenced by two things. One was that this larger product that we don't make as much margin on, we did a pretty stellar job of cleaning up various aspects of the product to make it more attractive. So sales of that product has gone up 3x over recent history. And the other products have not accelerated quite as fast. So it became a bigger percentage.

Well now some of the other products are beginning to move ahead with better percentage advancements and getting that back into a more favorable ratio.

S
Scott Asbjornson
CFO

The other thing about it, because it did triple in quantity, it us put behind the guns [ph] first thing able to manufacture. So it's lead time – when the lead time goes out, people don’t buy, they won’t wait that long. So that was a reduction in the quantity.

But what also happened was it loaded into the beginning of this year with all those extended lead times and all that adoption [indiscernible] slow down in volume in [Technical Difficulty] in volume. And then the rest of our product line had normal slow down to first quarter.

U
Unidentified Analyst

Okay. In terms of the April orders, you said they were 9% of how the forecast. How did they compare to the April orders of last year?

S
Scott Asbjornson
CFO

So we can tell where we are…

G
Gary Fields
President

First quarters were up 24% versus last April and our backlog is current [indiscernible] as of today.

U
Unidentified Analyst

I would imagine your expectation is that demand probably will be fairly strong headed into the price increase, it was ahead of the November price increase?

G
Gary Fields
President

Yes, I believe it will be. We've not seen anything. It's too early to obtain any pull forward from the two price increases presided over, it looks to me like the pull forward until almost the week of the price increase that the earliest one week ahead of that.

So possibly you know, what happens of June, through June 15 will be a huge anomaly, but let’s just say a nice average looking day around here in the Tulsa operation is around a million six or seven a day. Let's say the day on November 13th we booked 8. So you know you pulled five or six days or easy look right there.

U
Unidentified Analyst

Okay. Just in terms of the water source heat pump, obviously a very big ramp. You did sort of think that you could see the total amount and not you know, about 2100 that you saw in terms of units last year, you got 1600 in the quarter, again that was good improvement. But how was that sort of trending and should we expect units sold to ramp up from 1600 in the second - starting in the second quarter?

G
Gary Fields
President

I think it will continue to ramp up. It's going to stair steps based on certain things happening. First off, our second segment of the manufacturing process will allow us to build some bigger units. We have un-step designs finished for those, but we don't yet have them fully vetted out ready for manufacturing. We didn't have the facility to do it.

That facility comes online within the next couple of weeks. So probably over the next few weeks we'll have some additional sizes available, which means that there are projects that we've been blocked out of because we didn't have the range of sizes that will start coming in.

So when we introduce this next two sizes the 6 and 8 unit that'll stairs plus up a good bit as far as availability, once we get the AHRI certification which cross my fingers happens almost simultaneous with getting the additional product that will stair step us up.

So we've got two significant stair step opportunities probably where in this quarter - the early next quarter. But things are ramping up. We're having one aspect of it is that we had some early adopter type operations went out there and sold some units and some other people that are standing around watching to see how those jobs win, whether its getting favorable view, but now these other people beginning to engage more readily. So everything starting to move loose at the thing.

U
Unidentified Analyst

Okay. And the timing of the production line from what -what's the update on that. I think before you we're looking at maybe in August, September, its finished…

G
Gary Fields
President

Still are – yeah, its still on target to be finished sometime in August.

U
Unidentified Analyst

Okay. And last question for me. I think you were looking at sort of a 28% tax rate, that seems really high considering that most of your volume is U.S. derived. I am wondering what the puts and takes from the 21%, how do you go from 21% up to the 28%, really its going to be higher than 21%, but 28% seems high?

R
Rebecca Thomson
Treasurer and Chief Accounting Officer

So Joseph, this is Rebecca Thomson. We had our income shift state the higher income tax, so our state income tax rate now is showing 6 8%. So the 21% [Technical Difficulty].

U
Unidentified Analyst

Okay. So the state tax is almost 7%?

R
Rebecca Thomson
Treasurer and Chief Accounting Officer

Yes.

U
Unidentified Analyst

Okay. And so is that a new rate because if the federal goes from 35 to 21, which is a 14% difference and your rate was about 30, so its falls about 8%. Where is the difference between 14 and 8, at 6% - did your tax - state tax rate go up that much?

R
Rebecca Thomson
Treasurer and Chief Accounting Officer

Yes. So the state tax rate [Technical Difficulty] how big or small benefit is.

U
Unidentified Analyst

Okay. And that domestic tax rate, can you repeat how much that - that was a benefit and now you lost that, how much was that?

R
Rebecca Thomson
Treasurer and Chief Accounting Officer

I'm sorry, can you repeat that.

U
Unidentified Analyst

The domestic manufacturing tax credit that you used to get, how much was that - that you lost. You know, essentially it's an offset?

R
Rebecca Thomson
Treasurer and Chief Accounting Officer

About 3%.

U
Unidentified Analyst

About 3%, okay. Okay. All right. Thanks for taking my questions.

Operator

And your next question comes from the line of John Brewster.

U
Unidentified Analyst

Good afternoon. Gary?

G
Gary Fields
President

Yes.

U
Unidentified Analyst

I think it was in 2016 that you first started talking about the water source heat pump and you know the operating margin in 2016 was 20.7% and ‘17 it was 18.3%. And you know, the first quarter it was down to 5.2%. I guess my question is has the water source heat pump consumed so much of your attention - management's attention that the legacy of their core business has been short changed a little bit. And there are some things that have happened in the core business that maybe would not have happened had it not been for the distractions for the water source heat pump?

G
Gary Fields
President

I don't think, we want to ignore the fact that there's been a considerable effort put into the water source heat. A lot - probably more so than - probably the thing that's happened to the legacy product most significantly is that we've not continued to advance at the same rate that we were advancing at because we only had the ability to develop so much at one time part.

Part of our additional overhead and addition in engineering was adding more people so that we could do more parallel projects at the same time and that's had some learning curve to it. It's had some ramp up time to that. So I would say that in the earlier stage of it, it was probably more disruptive than it is currently. But I would say that you know, there is some validity in your assertion.

U
Unidentified Analyst

Okay. And then secondly, I was reading the first quarter numbers from Linux and their gross margins were up a little bit and they felt some raw material costs - cost pressures, but they were able to implement some price increases.

When you look at the year price increases over the past you know, past year and also the upcoming one, in retrospect we are a little bit late in announcing these price increases and would you have done a little bit differently?

G
Gary Fields
President

If you give me ado [ph] over, I'm not only going to be a little earlier, but I will be a little stronger too.

U
Unidentified Analyst

Okay. All right. So is the price increase in June strong enough?

G
Gary Fields
President

I doubt it.

U
Unidentified Analyst

Okay.

G
Gary Fields
President

Very likely I'll hit it again in October.

U
Unidentified Analyst

Okay. Well, which begs the question if it's not - if it's not strong enough now in June why don't - why didn't you implement a bigger increase or larger increase in June?

G
Gary Fields
President

Well, the tariffs are - a real question as to what the actual impact was going to be. You don't want to curb sales to the point that - you don't want to go up so much that you cut off the growth. So it's a bit of a calculated risk either way. You calculate what you think you can get it. And again Norm [ph] has been a great adviser to me on this, but he's kind of left me alone on this too. So I had to suffer in my own soup.

And so like I said, if I happened over it, yeah I'd do it a little earlier and do a little stronger. And at this point in time, I believe what we've done going forward is correct. And we'll just continue to keep a further watch, further down the road as to the way things are occurring.

The most significant thing more so than the amount that I raise prices, the more significant thing was the timing. And in my past 32 years of career when I put a price increase and I saw it hit the bottom like much, much faster. And so at this juncture it was a little hard to understand how it was so much longer before it got through the entire process and got to the bottom line. Well, I have clear understanding on that now. I assure you.

U
Unidentified Analyst

Okay. All right.

S
Scott Asbjornson
CFO

John, one of the things [indiscernible] company over to somebody is you can't tell them what to do all the time, they don't learn by being told everything they should do. So sometimes you have to suffer a little bit in silence and hope it doesn't have too much of a negative effect.

So there - part of what's going on and it's not just the fact that I'm backing out of the picture. We've had the vice president's manufacturing here to a place the construction to senior vice president and innumerable other people at the same age level, literally on myself have left in the last 18 months we've had a considerable change in upper level management and all of these people naturally do not have the years of experience which tell them to move quickly.

And so they all a little bit hesitant, they all move a little more gingerly than what maybe a more experienced person would do so. So you collectively put all those people together and it gets the new people. Now you ask yourself, how do these people measure up to the old people?

I'm going to admit something, I think Gary's due to be a better person in this position than me in the long-term, because he starts at a different level and he didn't have to do all the heavy lifting that had to be done to get us to this point. So I'll start right there and I'll then make a presumption across the board all the people who retired I think have been replaced by at least comparable and in most cases superior potential person. But these potential person people aren't where they are potentially, they're just rising to that point. So there is been – a lot of that has been very hidden in our problem areas that we didn't realize problems as quickly, we didn't respond as quickly, nor anything else.

The other side of this was we got misled a little bit by the duties, the duties of 25% on steel and 10% on aluminium, the actual fact is as we sit here right today, both of them are up somewhere in the mid 50s, they are up 56%, 57%. But we didn't - we didn't think it was going to go that far.

But the commodity people when they get an opening, they do like everybody else ask for more than they really expect to get. But initially for a while they won't get that price. So you're really seeing here kind of floundering, wondering what the real numbers going to be once it settles down. And we don't know that at this point in time and neither do our competitors.

So we're all guessing, we’re playing a guessing game and a timing game. It's quite different than it's been for many, many years. It's been very, very you know, we haven't had much excitement in the industry. We haven't had very much change and everything's been very predictable.

So this duty that was thrown out everybody says okay, got to go for 25 and 10, long, way long. And so we all have been trapped a little by what's actually occurring out there and I know from his history, but that it is not a long, they all come out that way and then purchaser's finally figure a way to get around them a little bit and they'll get that lowered down. But we never know how much they'll come down.

So we're still a little bit in the dark about what's going on for the future here. And if that kind of settles out, we're going to see how much more we need and we will implement that adjustment to that.

Right now, I think we're good because even though we're at open market price on aluminum we're at - we've got a fixed price all the way through some time August, September on steel. So we're not being – the steel thing isn't hitting us on the commodity, it is hitting us on the components however, because the people who we buy components from may not have that protection under steel. And so they had to raise their price on components.

U
Unidentified Analyst

Sure. Okay. Okay, Gary, one final question. The laboratory is going to be a nice showcase for your clientele and I guess my question is how much of incremental revenue generator can that be? How much new business or new market share might you be able to - you think you could generate with that new laboratory and when it comes on stream?

G
Gary Fields
President

All right. So let's talk about the intangible versus tangible. The tangible component of it is that we've got a product development roadmap that is currently moving at a slow pace because of the number of lab chambers that we have available to develop product.

So we will have several times the number of chambers available to us when the new lab is completed. So rather than having this slow pace of product development we'll be able to accelerate that probably around four or five times.

And the reason I'm not able to give you an exact on that is because these people that we're training now you know, again we've got to get people trained. Just because you have a chamber available doesn't mean that we've got qualified people to operate. So we're trying to lead that situation by training some people now in our existing lab chambers, so that they'll be ready to go.

So from a tangible standpoint we'll be able to accelerate the development of products. We have plenty of ideas on our product development roadmap that the constraint -the primary constraint is available lab chamber time. So that's tangible.

The next thing is we already have three projects that our sales channel have secured because we will be able to test their product for that project in our lab and bet [ph] out all the operational characteristics and prove you know the airflow thermal and acoustical performance of these.

There are several channel partner in New York City. So apparently it's a new high rise building because it has 26 units that go one per floor is the typical arrangement and they sold that with the fact that we will be testing those units in our lab to demonstrate exactly what they need to do for acoustical mitigation in that space. So it will be a sales enhancement tool related to certain projects, as well as developing products.

U
Unidentified Analyst

Okay. All right Gary, thank you very much.

G
Gary Fields
President

All right. Thank you.

Operator

And we have no questions at this time sir.

G
Gary Fields
President

All right. Thank you. We look forward to talking to you at the next conference call. Good day.

Operator

And this conclude today's conference. You may now disconnect.