Greetings. Welcome to the Haynes International Incorporated Second Quarter Fiscal 2023 Financial Results Conference Call. At this time, all participants have been placed on a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. Please note this conference is being recorded.

I will now turn the conference over to your host, Controller and Chief Accounting Officer, David Van Bibber. You may begin..

Thank you very much for joining us today. With me today are Mike Shor, President and CEO of Haynes International; and Dan Maudlin, Vice President and Chief Financial Officer. Before we get started, I would like to read a brief cautionary note regarding forward-looking statements.

This conference call contains statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities and Exchange Act of 1934. The words believe, anticipate, plan, and similar expressions are intended to identify forward-looking statements.

Although, we believe our plans, intentions, and expectations regarding or suggested by such forward-looking statements are reasonable, such statements are subject to a number of risks and uncertainties, and we can provide no assurances such plans, intentions or expectations will be achieved.

Many of these risks are discussed in detail in the company's filings with the Securities and Exchange Commission in particular, Form 10-K for the fiscal year ended September 30, 2022. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

With that, let me turn the call over to Mike..

Thank you, Dave. Good morning, everyone. I've also noted that we've made fundamental and sustainable changes to our business. I'll start off with my comments today highlighting those changes and talking through the positive impact they've had on this organization.

First, we are distinctive in the combination of products and services we offer provide our customers with a value. That we believe is difficult to be delivered consistently by others in the industry.

Our value proposition includes our meal and service intercommentation, our outstanding people providing technical and sales service, our deep and in many cases long-term relationships with our customer base. Our excellent alloy development and application engineering expertise, our ability to produce and ship small volumes of unique alloys and sizes.

Our consistent product quality, our ability to ship cut pieces and near net shapes out of our service centers and our just in time inventory capability, because our customers truly need and value these services and product attributes, we have been able to continue to price our products based on the value we provide.

Next, our alloy and application development capability give us a valuable access to engine developers and plan engineers will provide uncommon and in many cases proprietary alloy solutions to the current and future needs of the end users of our products.

Our technical capabilities help us work with our customers and the end users so they can identify high quality, the long term and cost effects effective solutions for their processes.

As I've stated on previous calls, the best news here is that our current pipeline of new alloys and applications under development is as strong as it's ever been and involves new potential alloys across all of our major markets.

Continuing on, our effort related to variable cost reductions through process change and yield improvement continue at all of our facilities. We are often asked if we are near the end of our cost reduction initiatives or collective view is that we have so much more that we can do.

We all believe that we have the technical engineering and operations talent to continue to increase our yields and improve our process efficiency and cost.

Including my intro, our financial goals for almost five years ago were to significantly improve both our gross margin and our breakeven point and establish the fundamentals to allow our company to be consistently profitable.

We have now accomplished what we set out to do via alloy and application development, product mix enhancements, variable cost improvement and pricing for the high value differentiated products and services we provide. I'm proud of our team for performing very well and for achieving our goals.

Our gross margin has gone from high single digits and very low double digits to at neutral raw materials now consistently being over 21% and our breakeven point is now confirmed to be 25% below where it was when we started our improvement journey. Now transitioning to our second quarter performance.

Year-over-year our revenue increased 30.5% with strong gains in each of our markets. In addition, our water entry was close to $190 million for the quarter which drove our backlog to a record $446.7 million up over 59% from last year. Our book-to-bill based on revenue was 1.3 plus quarter led by aerospace and IGT which were both 1.4.

Our gross margin was 20.2% and when removing the raw material headwind impact our calculated raw material neutral gross margin was 21.3%. This all resulted in net income for the quarter of $12.3 million up 45% year on year.

From a market perspective in our aerospace market, our second quarter year-on-year revenue improved by 25.9% with volume up 9.6% and our average selling price up $4.34 per pound or 14.8%. For the first six months of the fiscal year, our year-on-year revenue increased 29.4%.with volume increased 13.5%.

In addition, aerospace backlog increased, increased 11.5% as I said, a book-to-bill of 1.4 over the quarter. Our backlog now stands at $277 million in our aerospace market. We continue to believe that we will set a revenue record for aerospace in fiscal year 23. A few other points worth noting here.

Single-out bill schedules remain high with leap engine bills projected to set a new record in 2023. In addition, we are beginning to see demand increases for the components. We supply for multi aircraft engines. Finally, we believe the majority of the aerospace product being shipped by Haynes today is being consumed immediately.

A little to no safety stop being built at this time. For our IGT market, our second quarter year-on-your revenue improved by 30.8% with volume up 1% and average selling price increasing $5.16 per pound or 29.5%. For the first six months of the fiscal year, our year-on-your revenue increased 48.4% and volumes increased by 22.8%.

Our share gain and new alloy initiatives had a significant and long-lasting impact on this market. It's important to point out that according to the U.S.

energy information administration, as coal and nuclear generating capacity continue to be retired natural gas is projected to remain one of the most consumed sources of energy in the United States through 2050.

For our CPI market, our second quarter year-on-year revenue increased by 25.2% with 2.9% lower volumes, but a $7.59 per pound or 28.9% increase in average selling price.

These numbers confirm our strategy of supplying high-value differentiated products and services, selling less of the commoditized portion of our mix, and focusing on the sale of high-value specialty alloys and products within this market.

A significant component of this involves sales of our special project orders based in our continued strong applications development efforts. Wrapping up my comments, I'll touch on additional components of our business that are worth noting.

As far as safety, our leaders and teams are working to continuously improve our safety performance within all of our facilities.

Some of our current activities include enhancing our safety suggestion system, pre-shift safety meetings, on-going monthly safety type of training, new employer orientation on safety, continuing work to audit and update our safety procedures, safety-related capital spending, and a continued emphasis on accountability for actions.

Next, as far as manpower, I'm focusing my comments today on our cook operations, where we have added 113 production of maintenance employees over the past year, including 10 maintenance apprentices, which represents 20% relatively new employees in our Kokomo operations workforce.

We now believe we are nearly fully staffed at our Kokomo facility to handle the unprecedented demand coming in from our customers. These new hires are now trained on both of their manufacturing processes and the safe work practices required in our plans.

With these employees in place, we are now beginning to hit our stride as far as volume improvements required to meet the needs of our customers. As an example, in March, we produced over 1.25 million pounds of cold finished flats, our core error-space product form, which is 22% higher than the average volume produced over the prior six months.

In addition, we have now increased our vacuum induction melting or VIM capacity by over 10% via utilization of outside conversion VIM melting. Based on our team's efforts, our momentum with an operations is clearly increasing. Next, as far as monthly shipments, our revenue was over 50 million dollars in March.

That's only the third time in the last decade that we've exceeded 50 million dollars in revenue in a month. We now expect to average over 50 million in sales over the second half of our fiscal year.

Part of this increases obviously help by the impact of raw materials, but the most significant part of this story is that we believe we will achieve this level of revenues of being at a gross margin level assuming neutral raw materials consistently at or above 21%.

Related to our most recent ESG initiatives, we continue to provide and complete ESG-related surveys and collect and report additional ESG data. In addition, our second solar installation, a 300 megawatt rooftop installation at our Locate Arcadia, the Louisiana 2 plant, is now operational.

Next, Haynes Innovative Alloys and Applications are at the heart of our company and represent both the core competency and a long-term differentiator. We develop and bring the market niche, highly differentiated products that are the result of long-term research and applications development efforts.

Four of our newest alloys are at different stages of commercialization and have shown clear signs of market acceptance. They are for your information. Haynes 233 Alloy Haynes 244 Alloy, Asteroid, Hybrid BC 1 Alloy and Haynes HR-235 Alloy. I would do our Alloy and Application Development efforts at this service but didn't also mention Haynes 282 Alloy.

Haynes 282 has had tremendous success in many aerospace space, industrial gas turbine, automotive and power generation industry applications.

Most recently, an improved newly patented heat treatment for Haynes 282 Alloy has resulted in greater intermediate temperature toughness, opening the door to new potential applications for hot gas bad engine components and other power generation applications.

In addition, due to the acceptance of 282 Alloy into the American Society of Mechanical Engineers or ASME Code, the Alloy is on the verge of getting specified in clean emerging technology such as supercritical CO2 and waste recycling projects. One final point on our Alloy and Application Development efforts.

You've heard us mentioned that we have our proprietary alloys already specified into the Pratt & Whitney1,000 series engine and in the GE-9X engine that powers the 777X. Wrapping up my comments as an example of what our team can accomplish. On April 4, the south side of our Kokomo plant was hit with what we call a severe wind event during the storm.

We lost much of the roof on one large manufacturing building and much of the sighting on a second building. The very good news is that nobody was injured. In addition, our team pulled together and the operations impacted were back in full operation one week later by Tuesday April 11.

Thanks to our team, we expect no impact on quarterly shipments because of this event. Okay, I'll now hand this over to Dan for his comments on our business and our financial results..

Thank you Mike. We continued to see strong profitability leverage as our volumes and average selling prices grew. This quarter's pound ship to 4.7 million pounds with an overall average selling price per pound of $32.74 translated into a gross margin as the percentage of sales of over 20% and solid net income of $12.3 million.

Volume ship to 4.7 million pounds was at a level that we previously would have struggled to make money. Now with our lower breakeven point, 4.7 million pounds resulted in a 12.3 million net profit. That's a big change. And we expect this profitability leverage to continue as volumes increase over the balance of the fiscal year.

When we look at the potential impact of higher volumes on our gross margins, we view this from a contribution margin or incremental margin perspective. Depending on product mix, our incremental margin is roughly 40% before considering any fixed costs.

Of course, as we continue to grow, we likely will experience some step up of fixed costs along the way. But regardless, the profitability leverage on higher volumes is certainly a favorable driver. As Mike mentioned with production employees in place, we are now just beginning to hit our stride as far as the volume improvement.

The example he provided of the month of March cold finish flats production being 22% higher, the average volume produced over the prior six months, is significant. He specially combined with a future utilization of outside conversion, then melting to help.

The momentum with an operation is increasing and is expected to dry up higher production and sales volumes in the second half of the fiscal year. Our investment in inventory combined with this increase in production rates provide an optimistic forward view, especially given our record high backlog level.

Next we have talked a lot about the volatile raw material prices for nickel and cobalt and the impact it has had on our results. Last year was a significant benefit which we pointed out during each of those quarterly calls.

This year was the opposite with Q1 a significant unfavorable headwind of $5.6 million and Q2 a more moderate headwind of $1.7 million. We were forecasting Q2 to be neutral by the end of the quarter, however cobalt continued to fall causing the $1.7 million headwind. Nickel was neutral for the quarter.

These estimates were derived from a model developed by the company to measure how the commodity prices change and how those flow through net revenues and cost of sales. Our press release schedule 4 shows the result of this raw material impact on gross margins and describes this non-GAAP measure fully in schedule 6.

The key takeaway is our adjusted gross margins which are neutral of this raw material impact have been greater than 21% for the past four quarters showing our core margins are solid. This margin strength combined with the projected higher second half volumes and revenue is expected to drive improving second half earnings.

This is expected even in light of significant cost inflation in items such as electricity, water, natural gas, property insurance and labor cost. Our goal continues to be offsetting inflationary pressure with price increases and or cost reductions such as improving yields, productivity enhancements and profit improvements.

Our solid margins show that it's working. Our SG&A including research and technical expense was 9% of net sales for the quarter as compared to last year's Q2 of 10.9%. SG&A dollars were a bit higher than expected with an uncollectable receivable from a small U.K. customer and sequentially higher foreign currency costs.

Operating income were $17.1 million this quarter which is over 50% higher than last year's second quarter. Our effective tax rate for the second quarter was 21% driven slightly down due to stock compensation investing and option exercises.

Current estimates for the remaining quarters of fiscal 2023 are moderately higher in line with federal and state statutory rates. All of this resulted in net income of $12.3 million up 45.6% from the same period last year. I would also like to provide a status of our U.S. pension plan strategy.

As we previously commented, our net liability and funding percentage has improved significantly over the past few years. A couple years ago in early fiscal year 2021 our net liability was 166 million with a funding percentage of 68%.

Over the course of fiscal 2021 both investment returns and interest rates were favorable at that point we implemented a customized liability driven investment approach which matched the duration of individual bonds with cash flows coming out of the plan.

Therefore our bond assets now move in tandem with liabilities this helps secure the funding percentage. Today that previous $106 million liability is now about $18 million and the funding percentage which was 68% is now 93%. This funding percentage has held up well during significant market volatility.

We continue to evaluate additional actions to make progress towards a fully funded plan. As mentioned earlier, the company experienced continued high levels of order entry over the past quarter.

Backlog with at a record $446.7 million at March 31st 2021, an increase of $38.6 million or 9.4% from the first quarter of fiscal 2023 and then increase of $166.1 million or 59.2% from the same period last year. Given this higher backlog we continue to melt at high levels to meet demand.

We are now beginning to achieve the higher revenue numbers that better match with our investment inventory that we have made over the past year. We believe that our 108 million in borrowings against the revolver has reached its peak and should begin to moderately decline over the second half of the fiscal year.

Therefore cash generated from operations is expected to meet or exceed our projected capital expenditures and dividend payments. We believe our expanded $160 million credit facility, our on-hand cash of $16.9 million and increasing cash flow provides strong liquidity moving forward.

Capital spending during the first six months of fiscal 2023 was $7.3 million and total planned capital expenditures for fiscal 2023 are expected to be between $18 million and $22 million. Outlook for next quarter and full fiscal year 2023.

Given the strength of the company's record backlog along with the workforce additions and work and process inventory investment, the company expects revenue and earnings in the third quarter of fiscal 2023 to be higher than the second quarter of fiscal 2023.

Further the company continues to expect the full year of fiscal 23 to be 15 to 20% higher than fiscal 22 or both revenue and earnings. In conclusion, it is exciting as we transition into the second half of fiscal year with three notable significant factors. Number one, improving production momentum including expanded VIM capacity.

Number two, strong demand that our primary markets as evidenced by our 190 million order entry and our record backlog and three, pricing and gross margins strength.

These factors fuel our optimistic view of continued growth and are expected to continue to provide the return on invested capital higher than our cost of capital which is a key driver in shareholder value creation. Mike with that, I will now turn the discussion back over to you..

Thank you, Dan. Our team continues to be encouraged by both progress we've made and the future potential of our business. Thanks to all of you for your continued interest in our company and with that Holly, let's open to call to questions..

Certainly. [Operator Instructions] Your first question for today is coming from Mark Reichman at Noble Capital Markets..

Good morning and thank you for taking my question.

With a strong order backlog, would you please comment on additional investments you may need to make also SG&A expense trends and then your plan to pay down the revolving credit facility?.

Sure. On the capital side what this company did leading upto 2020 is make significant investments where we felt we had constraints. And we significantly expanded two key areas. Our cold finished flat area which is mainly aerospace and our titanium tubing area. So we wanted to prepare for the future.

We didn’t want to say no to customers, so two areas really ahead of the game, we expanded our capacity. As we sit here today, there are two areas that we watch very carefully as far as capacity. One is the cleaning line called the ANK line. That line we’ve already allocated and the board’s approved a little under $6 million in capital.

So towards the end of the year we will start that project to expand the capacity there. And the other issue was vaccum induction melting and – as we mention on the vaccum induction melting side, we are utilizing right now outside conversion capacity to supplement what we can melt inside to expand there. Beyond that we are in very good shape.

So we feel very good about being able to keep up with what’s coming at us. Before I hand it over to Dan on the SG&A side, we feel an investment in people is critical. And we will continue to invest in people in our company. We've done that but we've begun that and we've done that pretty much across the board.

And even with increased spending of dollars a percent of SG&A is down fairly significantly year-on-year..

Yes, 9% SG&A including a research and technical cost I combined that together, is much better than it has been certainly with the increase in revenue driving that down. As far as corresponding, there's some components of SG&A that are somewhat variable. There's distribution shipping costs, commissions and those types of things.

But we do expect, SG&A going forward to not quite be as high as Q2 necessarily but close. A little down from the 173, I'm sorry, the 13 7 [Ph] that you saw this quarter. You would also mentioned cash and cash flow over the year and the paying down of the revolver.

As I mentioned, we do expect to be a bit more in balance with our melting versus our sales with the higher sales in the second half of the year. That combined with, raw material prices generally stabilizing a bit from where they once were. That's going to help our cash generation over the second half of the year.

So we expect a moderate decline in the in the revolver. Backlog keeps surprising us, backlog keeps going up. So we certainly want to keep up with that and keep melting at that level. But we do expect generally to generate cash in the second half of the year and begin to pay that down over the second half of the year..

That's very helpful. Just one follow up, there were just a couple of anomalies in terms of, when you listen to like the Airbus and Boeing calls, for example, I think Airbus said they've got like 72 to 150 planes, a backlog and I think for Boeing it was 4500. But like when you look sequentially in the aerospace market pricing was high was up.

But volumes sequentially were down a little bit. And then if you look at like the other markets, the volume was up. I mean, other markets was a small as a small, part of it. But pricing was down, which was kind of odd given the volumes were up.

And so I was just kind of wondering, the sequential and the year-over-year revenue trends have been a standing.

But based on sequential and leading edge shipments by market and the average selling, price per pound kind of what are your expectations for the remainder of the year for each of those segments?.

We continue to pursue in the two markets you mentioned incremental price increases wherever possible. Sequential is a difficult way to look at it because of the lumpiness of certain orders what comes in in the mix of products within there.

We were, we were very pleased in other markets because what happened in other markets is our largest piece of that quite frankly, this is commoditized as it gets, which is what's called the flu gas to sulphurization market. And that was down for us intentionally fairly significantly.

But we solve significant increases and what we see as incubator or growing markets for us, such as automotive electronics, nuclear, where and even some waste incineration..

And one thing I would caution on looking at average selling price, certainly pricing is in there. But product mix can move those numbers around quarter to quarter as well. So when you see an average selling price, maybe stepping down a little bit, that's likely more product mix than anything else.

We have different alloys and different product forms that have a very different margin profile. So it really depends on what we ship that particular quarter and that can move the average selling price around quite a bit..

That's very helpful. Thank you very much..

Thank you, Mark..

Your next question is coming from Steve Ferazani at Sidoti..

Morning, Mike. Morning, Dan. I appreciate all the color on the call this morning. When I think about the cadence of shipments last year, IGT peaked in 2Q and then I know that's lower ASP came down in the second half and then we saw much stronger aerospace, which is the higher ASP.

Would you expect that type of trend in in 23?.

We expect the second half of the year, volumes overall to be up fairly significantly from the first half of the year. The thing that Dan and I both touched on in the call is our main product in aerospace called cold finished flats. And we've had to get manpower in here. We now feel we're either at or very close to fully staffed.

And when we talk about a 20% increase in one of our major product forms in aerospace that as far as production, that's fairly significant force. And on the power generation market, two things have happened there. We've talked about the sheer gain we're seeing that come through.

And the other part of power generation, which we believe will continue to power it for us, if you will, is positive substitution of our alloys. There's an alloy that we have that I mentioned in the call called 282, which is being substituted because of its increased temperature capability for some that are in there.

So we expect growth in the second half of the year..

And certainly as we look at inventory levels, we have ramped up melting rates quite a few months ago. And that's increased our inventory of course that stays in whip and so might finish for quite some time. Since we just produce kind of a high end type alloys, it takes quite a long time to produce through the mill.

So now that we've made that investment in inventory along with these headcount increases, that really is going to be a positive driver for the second half of the year as Mike mentioned. And obviously the strong backlog, the orders are there. So we are optimistic on what we can do in the second half of the year..

When I think about the average selling price, what you have in backlog and then the assumption being inflationary pressures are easing. How should we think about what this can do to margins, or is it that you work through more of the lower, lower ASP in the first half..

One of the things that we have pushed very hard on is that we are not going to allow inflation to be the reason for margins to come down. So we have continued to push that whatever inflation we face and every business is facing inflation that we need to at least offset if not be greater than the inflation with our pricing actions.

With that, we continue to pursue incremental gains. We’re thrilled with where we are with gross margin. You looked at our non-raw material impact it grows margin 21% compared to others who do what we do. It's at the top of the list. So we're thrilled with that, but we think we can incrementally gain from there..

Great. In fact, if I could just squeeze one more and I know you guys are always closely watching. Cobalt and nickel prices.

What how are you thinking about second half of the year given price trends?.

Price trends in particular in nickel are so variable it's very difficult to project. And so what we continue to do in our raw materials is through our sales organization. We continue to make sure that we have the adjusters we need which can offset any increases which could occur and then obviously also deal if they would go down.

So we we're very prepared for whether it goes either way. Cobalt, I'll tell you the truth, I've been very surprised on how far it's come down.

But we will, we as we always do will deal with the ups and the downs of this and follow it along as best we can but what I'm very confident in is in is the pricing mechanisms that our team has in place to make sure that raw materials because of pricing we follow up we follow down and make sure that we are getting what we need to get to related to our pricing related to raw materials..

Thanks Mike, thanks Dan..

Your next question for today is coming from Samuel McKinney at KeyBanc Capital Markets..

Good morning, Sam..

Hi, good morning guys. Firstly for me to achieve that guidance of the 15% to 20% year-over-year growth is there any way you can frame how much of that is reliant upon volumes versus the contributions from the price increases you guys have instituted..

I'll give you general answer, we'll start there. We have very strong average selling price in our backlog. We have very strong average selling price in the bookings that are coming in. But also the key for us is getting back to five million pounds a quarter. It's combination of the two.

We everyone coming out of COVID had issues related to manpower, we did also. I've been so darn proud of our ability to hire people and we can now say we're fully staffed but it takes a while to get those people trained.

We now feel really good based on what we saw in March about the volumes going up incrementally from what we reported this past quarter. So I really think it's combination the two..

I agree and the -- as we look over the second half of the year the unknown is what will commodities do and how that might impact headwinds or tailwinds on that as well. So Q1 was difficult with that 5.6 million headwinds. It’s moderating and if that stays stable for the second half of the year that's great.

If it turns into a headwind which who knows where raw materials may go that could make things more challenging but of course it could go the other way as well. So that's the big wild card I think going forward, but I think volume is a key contributor.

I think are our sales pricing and cost reductions are showing its great effect already and the profitability leverage that I was speaking of in my script really is driven by that higher volume that we expect..

Okay thank you. And then on that volume side with backlogs at record levels the demand for your product obviously there but when you expect to eclipse that 5 million pound quarterly volume rate.

Do you think that's achievable this year?.

We definitely think it's achievable in the second half of the year. We've got the backlog, I know you didn't ask about cash and I know we've already dressed cash, but what's been fascinating for this business is the fact that we've been booking well over 50 million dollars a month.

But it wasn't until March of the last quarter that we started shipping $50 million. So we now have gained significant momentum and our gaining momentum so we feel that it is very achievable in the back half of the year..

Okay thank you. And then lastly for me, the release last night mentioned some higher spending on outside cost related information systems. Could you provide any cadence on that spending for us and if that's expected to be a recurring charge..

What our company continues to do is we want to make sure we have the proper tools and the hands of all of our employees to be able to manage our business effectively.

We've got an IT system right now that's 10 years old, and so we have been analyzing what makes the most sense as we move forward as far as next step with ERP and this was an expense to continue to do that..

All right. That’s it for me. Thank you..

Thank you..

Your next question for today is coming from Chris Olin at Northcoast Research..

Well hello there..

Hello Chris.

How are you?.

I'm good. I'm going to say it's been great to watch this last five years play out so congrats to you guys..

Thank you..

So I want to touch a little bit on the surprising back long strength that you referred to and looking at the turbine and aerospace markets in particular.

I guess I was wondering first, I don't know, kind of measure a bit, but in terms of the IGT strength is there a way to think about how much of that is coming from core demand versus market share or I think you refer to like the mature placement..

I think there's, there's three ways Chris. Two or three items that are involved with the increase in IGT. We a couple years ago we're able to secure significant share that we've talked about on calls and that has helped us significantly that part one. Part two is what I've talked about with the positive hourly substitution.

And I mentioned it in my script as far as 282. That is an alloy which continues to replace older alloys because it's has the ability which will allow these engines to run cleaner. And the third thing in IGT Chris is from my view, for the first time in a long time, everyone is talking about it's single digit.

It's low single digit but its growth in the in the power generation sector. People are no longer saying that wind and turbines are going to replace natural gas power generation. It's certainly going to replace coal and potentially nuclear, but we see the market training up to achieve it. So I think it's a combination of the three..

Got you, got you. And that aerospace. I think everyone's pretty familiar with kind of the underlying story there but you referenced the GE9X [Ph] And then your content win there. I was wondering if that volume is reflecting from backlogs or would you have this potentially here a second tailwind to think about in the future..

I would say it's not material enough right now to say it's really in the backlog. I would say it's coming and starting but I would not say it's there yet..

Okay..

Just one point. But in general, we are seeing a pick up in double hour drift. Okay, we're seeing a fairly significant pick up in double hour [Indiscernible] and that we’re seeing is part of something very good. So it should continue to add on what we have..

You differentiate between aftermarket demand on this [Indiscernible] for OEM..

In general what we're saying about 15% is MRO balance is original equipment. That's a general statement. It's very difficult for us to refine these numbers because again, we're selling typically to those that are that are bending the metal making the metal parts that go into the aircraft. And so it's tough to differentiate sometimes.

But in general, it's about 15%, 85%..

Okay. So a little bit of a switch here. The special revenues business. I know that's a lagging indicator, I guess for your business and it's been down because of what’s happened in the past. I was wondering if you could talk a little bit about the pipeline though and kind of how we should think about that turning around or – revenues..

Sorry Chris, was that you're talking about special projects?.

Oh, yes, sorry..

We feel good about where we are with special projects.

There as I talked about this Chris, this is where application engineering people research people excel being able to bring these things in and I look at special projects really is an incubator for us, but when you take a step back and look at what's happening they are growing year-on-year okay in special project. It is higher than typical margins.

And when you take a step back and look at where it's being used, [Indiscernible] aviation to see the gas projects, plastic manufacturing, clean energy, linear generators, refinery, new processes for refineries. There's so many new applications coming at us. And as you know, they start small.

What we get excited about is when companies can turn in a much large....

Okay, good. It's helpful. Thanks again. And then I guess just just lastly for me, I know you are touching on this capacity and expansion. Just wanted to make sure on the tubing side. You did expand capacity. You still have sufficient capacity for the rest of cycle.

And is there any potential issues with sourcing titanium?.

No, no issues with sourcing titanium. We have long-term contracts agreements. We have an excellent relationship with our supplier that. And we have done is we have both of the capacity that the air-frame manufacturers have said to Dave needed for the hydraulic tubing..

Great. Looking forward to next five years..

Thanks, Chris..

[Operator Instructions] Your next question is a follow-up question coming from Mark Reichman. Mark, your line is live..

Thank you. I just had two follow-ups. The first is the percentage of undistributed income allocated to the common shares. I think it was 99.2% this quarter. Some quarters they have spent 100% it's kind of bounced around at 99%. I was just kind of curious.

It's kind of a small question, but what would kind of be your expectation for the remainder of the year on that?.

Yes. It would be similar to what you're seeing this quarter. I think when you see it back at 100% that it really depends on the size of the net income. And in those years, many years ago, when it's negative, in that loss, then you're going to see 100% there as well.

So what you saw in this quarter should be pretty indicative of what you'll see going forward..

Okay. And then the second question is at the meeting, I guess, investors voted on the five directors. And then you basically announced two new directors or two new director appointments. I have just wondering if you could just comment on the board composition..

Sure. The outside directors we had just four. And we wanted to make sure that we had the breadth of knowledge that we needed. Both directors that we brought in have financial expertise. And we are thrilled to have a board of now six plus six outside directors. So feel good about what the people that have come in.

In fact one just completed a full day of touring and meeting in in Kokomo and the other one is set up for at some point in the next six very weeks..

So seven with six outside directors..

Ending. Yes. Seven..

Okay. No, I looked like very very well qualified directors, but I was just kind of curious on the decision to add the two additional. Well, this has been a very helpful call and very informative and I really do appreciate it..

Thank you. Thank you for your interest..

We have reached the end of the question-and-answer session and I will now turn to call over to Mike Shor for closing remarks..

Thank you Olle. Thanks everyone for your time today and thank you for your on-going interest and support of our company. We'll talk to again in a quarter. Thanks everyone..

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation..