Haynes International Inc. Q2 2023 Earnings Call
Okay.
Greetings and welcome to the Haynes International incorporated second quarter fiscal 2023 financial results Conference call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation if.
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Please note this conference is being recorded.
I'll 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 I'd make sure 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 21 E of the Securities and Exchange Act of 1934, the words believe anticipate plan and similar expressions are intended.
Mid 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 32022.
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 have made fundamental and sustainable changes to our business.
I'll start off my comments today, highlighting those changes and talking through the positive impact they've had on this organization.
First we are distinctive and that the combination of products and services, we offer provide our customers with the value that we believe it is difficult to be delivered consistently by others in the industry.
Our value proposition includes our mill and service Center combination.
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.
What pieces in your net shapes out of our service centers and our just in time inventory capability.
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.
Alloy and application development capability give us a.
Valuable access to engine developers and plant engineers will provide uncommon and in many cases proprietary alloys solutions to the current and future needs of the end users of our products.
Our technical capabilities to help us work with our customers and the end users. So they can identify high quality long term and cost effects of 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 efforts related to variable cost reductions through process change in yield improvement continue at all of our facilities.
We were often asked if we are near the end of our cost reduction initiatives. Our collective view is that we have so much more that we can do well.
We all believe that we have the technical engineering and operations talent to continue to increase our yields and improve our process efficiency and costs.
Including my intro, our financial goals for almost five years ago.
Or to significantly improve both our gross margin and our breakeven point and establish the fundamentals to allow our company to be consistently profitable.
We've 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 improved.
Journey.
Now transitioning to our second quarter performance.
Year on year, our revenue increased 35% with strong gains in each of our end markets. In addition, our order 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 three last quarter led by aerospace and IGT, which were both one four.
Our gross margin was 22% 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, and our aerospace market, our second quarter year on year revenue improved by 25, 9% with volume up nine 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 volumes increased 13, 5%.
In addition, aerospace backlog in cruise increased 11, 5% with as I said, a book to Bill of one four 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 'twenty three.
A few other points worth noting here single aisle build schedules remain high with leap engine builds projected to set a new record in 2023. In addition, we are beginning to see demand increases for the components, we supply for multi aisle aircraft engines.
Finally, we believe the majority of the aerospace product being shipped by Hanes today is being consumed immediately with little to no safety stock being built at this time.
For our IGT market, our second quarter year on year revenue improved by 38% 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 year 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 continued to be retired.
Gas is projected to remain one of the most consumed sources of energy in the United States through 2015.
For our CPI market, our second quarter year on year revenue increased by 25, 2% with two 9% lower volumes, but at $7.59 per pound or 28, 9% increase in average selling price.
These numbers confirm our strategy of supplying high valued 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 on our continued strong applications development efforts.
Wrapping up my comments I will 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 <unk>.
Pre shift safety meetings ongoing monthly safety type of training new employee 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 Kokomo operations, where we have added 113 production and maintenance employees over the past year, including 10 maintenance practices, 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 our manufacturing processes and the safe work practices required in our plans with.
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 finish flats, our core aerospace 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 V. I am capacity by over 10% via utilization of outside conversion V. I am melting.
Based on our team's efforts our momentum with in operations is clearly increasing.
Next as far as monthly shipments our revenue was over $50 million in March.
It's only the third time in the last decade that we've exceeded $50 million 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 increase is obviously helped 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, while 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 of 300 megawatt rooftop installation at our locate Arcadia, Louisiana to plan.
Is now operational.
Next Haynes.
Haynes innovative alloys and applications are at the heart of our company and represent both a core competency and a long term differentiator, we develop and bring to market niche highly differentiated products that are the result of a long term research and applications development efforts for of our newest alloys or a different.
Stages of commercialization and have shown clear signs of market acceptance. They are for your information Haynes 233 alloy Haynes 244 alloy past deploy hybrid <unk> alloy and Haynes HR 235 alloy.
I would do our alloy and application development effort to Dis service. If I didn't also mention Haynes two waiting to alloy aim.
Haynes 282 has had tremendous success in many aerospace space industrial gas turbine automotive and power generation industry applications.
Most recently and 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 path engine components and other power generation applications. In addition, due to the acceptance of 282 alloy.
And the American Society of mechanical engineers or a S. M E coat. The alloy is on the verge of getting specified and clean emerging technologies, such as supercritical cotwo and waste recycling projects.
One final point on our alloy and application development efforts, you've heard us mention that we have our proprietary alloys already specified into the Pratt and Whitney 1000 series engine and in the GE 90 next engine that powers the 777 X.
Wrapping up my comments as an example of what our team can accomplish on April 4th the South side of our Kokomo plan 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 deciding on a second building.
The very good news is that nobody was injured.
In addition, our team pulled together and the operations impacted we're back in full operation. One week later by Tuesday April 11th 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 continue to see strong profitability leverage as our volumes and average selling prices grew this quarter as pounds shipped of $4 7 million pounds with an overall average selling price per pound of $32 74.
Translated into a gross margin as a percentage of sales of over 20% and solid net income of $12 3 million.
Volume shipped to $4 7 million pounds was that 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 cost.
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 as 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, you provided of the month of March cold finish flats production being 22% higher than the average volume produced over the prior six months is significant especially combined with the future utilization of outside conversion then melting to help.
The momentum was in operations is increasing and is expected to drive 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 in 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 our 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 scheduled for shows the result of this raw material impact on gross margins and describes this non-GAAP measure fully and scheduled to fix that.
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 our 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.
Items, such as electricity water natural gas property insurance and labor costs.
Our goal continues to be offsetting inflationary pressure with price increases and or cost reductions such as improving yields productivity enhancements and process improvements.
Our solid margins show that it's working.
Our SG&A, including research and technical expense was 9%.
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 uncollectible receivable from a small U K customer.
And sequentially higher foreign currency costs.
Operating income was $17 1 million this quarter, which is over 60% higher than last year's second quarter.
Our effective tax rate for the second quarter was 21% driven slightly down due to stock compensation vesting and option exercises current estimates for the remaining quarters of fiscal 'twenty three 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.
Yes.
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 of years ago in early fiscal year 2021, our net liability was $106 million with a funding percentage of 68%.
Over the course of fiscal 'twenty, one 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 plant.
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 experienced continued high levels of order entry over the past quarter backs.
Backlog was at a record $446 7 million at March 31, 21, an increase of $38 6 million or nine 4% from the first quarter of fiscal 'twenty, three 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 in 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, our 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 'twenty, three was $7 3 million and total planned capital expenditures for fiscal 'twenty three are expected to be between 18 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 in process inventory investments the company expects revenue and earnings in the third quarter of fiscal 'twenty three to be higher than the second quarter of fiscal 'twenty three.
Further the company continues to expect the full year fiscal 'twenty three to be 15% to 20% higher than fiscal 'twenty two for 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 and.
Improving production momentum, including expanded V iam capacity.
Number two strong demand in our primary markets as evidenced by our $190 million order entry and a record backlog.
And three pricing and gross margin 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.
With that I will now turn the discussion back over to you. Thank you Dan.
Our team continues to be encouraged by both the 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.
Open the call to questions.
Certainly at this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue for participants using.
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Your first question for today is coming from Mark Reichman at noble capital markets.
Yeah.
Good morning, and thank you for taking my question good.
The strong order.
With the strong order backlog.
Would you. Please comment on additional investments you may need to make you know.
Also SG&A expense trends and then your you plan to pay down the.
Revolving credit facility.
Sure on the capital side, what this company did.
Leading up to 2020 as make significant investments, where we felt we had constraints and we significantly expanded our 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 those two areas really ahead of the game we.
We ended our capacity as we sit here today there are two areas that we watch very carefully as far as capacity. One is a cleaning line called the a N. K line that line, we've already allocated and the boards 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 vacuum induction melting and us.
Use me as we mentioned on the vacuum induction melting side, we're utilizing right now outside conversion capacity to supplement what we can melt inside to expand there beyond that we're 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 or percent of SG&A is down fairly significantly year on year.
Yeah.
9%.
SG&A, including research and technical costs I combine that together is.
Better than it has been certainly with the increase in revenue driving that down as far as core spending there are some components of SG&A that are.
Somewhat variable, there's you know 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 17, three or I'm sorry, the $30 seven that you saw this quarter.
You would also mentioned cash Ah <unk>.
And the cash flow over the year and the paying down on 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 this year.
That's very helpful. Just one follow up you know there were just a couple of anomalies in terms of you know when you listen to like the Airbus and Boeing calls you know for example, I think Airbus said, they've got like 72.
<unk>.
And 50 planes, you know our 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. You know the volume was up I mean other markets was a small there's a small part of it.
But but pricing was down which was kind of odd given the volumes were up and so I was just kind of wondering you know the the sequential and year over year revenue trends have been outstanding, but based on sequential and leading edge shipments by market and the average selling.
Price per pound are 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 as a difficult way to look at it because of the lumpiness of certain orders what comes in and the mix of products within there.
We were we were very pleased in other markets because what happened in other markets as our largest piece of that quite frankly is as commoditized as it gets which is what's called the flue gas to sulfur is Asian market and that was down for us intentionally fairly significantly, but we saw significant increases in what we see is <unk>.
Beta are 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.
Stepping down a little bit that's likely more product mix than anything else, we have different alloys in different product forms that have very different margin profile. So really depends on what we shipped to that particular quarter and that can move the average selling price around quite a bit.
That's very helpful. Thank you very much.
Mark Thanks, Mike.
Your next question is coming from Steve Farris Zani at Sidoti.
Good morning, Mike morning, Dan I appreciate all the color on the call. This morning.
When I think about the kind of the cadence of shipments last year IGT peaked in <unk> 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 that type of trend in 'twenty.
'twenty three.
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 finish flats, and we've had to get manpower manpower and here, we now feel we're either at or.
We're very close to fully staffed and we talk about a 20% increase in one of our major product forms in aerospace that's as far as production.
That's fairly significant for us and on the power generation market two things have happened there we've talked about the share gains 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 theres 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 are quite.
Quite a few months ago, and that's increased our inventory of course that stays in web and semi finished 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.
Head count 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 and 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 do you have in backlog and then the assumption being no inflationary pressures are you seeing how should we think about what this can do to margins or is it did you work through more of the.
Lower lower I S P.
In the first half.
One of the things that we have pushed very hard on is that we are not going to allow inflation that would be the reason for our margins to come down. So we have continued to push that but whatever inflation. We face in every 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.
Non raw material impacted gross margin of 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 and if I could just squeeze one more in I know you guys are always closely watching.
Nickel prices.
Well how are you thinking about second half of the year given price trends.
That price trends in particular in nickel are so variable, it's very difficult to project.
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 were very prepared for whether it goes either way.
I will tell you the truth I've been very surprised.
On how far it's come down.
But we will we as we always do we'll deal with the ups and the downs of this and followed 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.
When you are getting what we need to get to related to a pricing related to raw materials.
Okay.
Thanks, Mike Thanks, Dan.
Thank you.
Yeah.
Your next question for today is coming from San meal Mckinney at Keybanc capital markets.
Good morning, Hi, good morning.
Hi, good morning, guys.
Firstly for me to achieve that guidance at 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 a general answer we'll start there.
We have a 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 that 5 million pounds of quarter.
It's a combination of the two.
<unk>.
Everyone coming out of Covid had issues related to manpower. We did also I had 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've reported this past.
Quarter, So I really think it's a combination of the two.
I agree and the.
As we look over the second half of the year. The the unknown is what will commodities do and how that might impact headwinds or <unk> on that as well so.
Q1 was difficult with that $5 6 million headwind.
It's moderating and if that.
<unk> 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 wildcard 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.
<unk> already in 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 do you expect to eclipse that 5 million pound quarterly volume rate do you think that's achievable this year.
Well, we definitely think it's achievable in the second half of the year, we've got the backlog.
I know you didn't asked about cash and I know, we've already addressed cash, but what's been fascinating for this business is the fact that we have been booking well over $50 million 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 are 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, you mentioned, some higher spending on outside costs related to information systems.
Could you provide any cadence on that spending for us and if that's expected to be a recurring charge.
Yes.
Our company continues to do is we want to make sure we have the proper tools in 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 the next step with ERP and this was an expense to can to continue to do that.
Alright, 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 kokomo.
Hello, Chris I'm.
Good and would you say, it's been great to watch this last five years to play out so congrats to you guys. Thank.
Thank you.
So.
Want to touch a little bit on the surprising backlog strength that you referred to.
Looking at a turbine and aerospace markets in particular, I guess I was wondering.
First pet.
Initial a bit but in terms of the I T E.
Shrinks.
A way to think about how much of that is coming from core demand or market share or I think you referred to like a material replacement.
I think I think there is.
There are three ways Chris.
Two or three items that are involved.
With the increase in IGT, we couple of years ago, we were able to secure significant share that we've talked about on calls in and that has helped us significantly. That's part one part two is what I've talked about with positive alloy substitution.
And I mentioned it in my script as far as 282 that has an alloy which continues to replace older alloys because of its temperature capability, which will allow these engines to run leaner and the third thing and IGT, Chris is for my view.
For the first time in a long time, everyone is talking about it's single digits, it's low single digit, but it's growth in the power generation sector people or are no longer saying that wind and turbines are going to replace natural gas powered generation.
It's certainly going to repay place colon and potentially nuclear but we see the market trending up boutique.
So I think it's a combination of the three.
Gotcha Gotcha.
Aerospace I think everyone's pretty familiar with kind of the underlying story there but.
You referenced.
The GE <unk> and Gen <unk>.
<unk> content when there I was wondering if <unk>.
That that volume is refunding backlogs or would that be.
Potentially.
Second tailwind to think about.
In future I.
I would say, it's not material enough right now to say, it's really in the backlog I would say, it's coming it's starting but I.
I would not say, it's there yet.
Okay.
Just wondering.
But in general we are seeing a pick up and double aisle aircraft. Okay. We're seeing a fairly significant double aisle aircrafts.
We're seeing the start of something very good so it should continue.
Continue to add onto what we have.
Yes.
You differentiate.
Differentiate between aftermarket demand.
Doug do aisles or OEM.
In general.
What we're saying about 15% of MRO.
<unk> balanced as original equipment as a general statement its 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 to ensure the special revenues business.
I know, that's a lagging indicator I guess for your business and it's been down because of kind 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.
Cost of revenues.
Sorry, Chris was that Youre talking about special projects.
Sorry.
We feel good about where we are with special projects.
There as I talked about in the script. This is where application engineering, our research people itself being able to bring these things in and I look at special projects really is.
As an incubator for us, but when you take a step back and look at what's happening with our growing year on year, Okay and special projects.
It is higher than typical margins and when you take a step back and look at where it's being used hypersonic aviation acetic acid projects plastics manufacturing clean energy lender linear generators.
Binary new processes for refineries, there's there's so many new applications coming at us and as you know they start small, but what we get excited about is when some of these compare it into much larger items.
Yes.
Okay got it.
Helpful. Thanks again.
Just lastly for me I know you touched on a lot of unused capacity expansion just wanted to make sure on the tubing side you did expand capacity you still have sufficient capacity for the rest of the 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 what we have done is we haven't booked to the capacity that the airframe manufacturers have said the data needed for the hydraulic tubing.
Great looking forward to the next five years.
Thanks, Chris Thanks Chip.
Once again, if there are any questions or comments. Please press star one on your phone at this time.
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 <unk>.
The percentage of undistributed income allocated to common shares and I think it was 99, 2% this quarter some quarters, it's been 100% kind of bounce around at 99% I was just kind of curious as kind of a small question, but what would kind of be your expectation for the remainder of the year on that.
Yeah, It would be similar to what Youre seeing this quarter I think when you see it.
At 100% that it really depends on the size of the net income and in those years, many years ago and win win when it's negative.
Net loss than Youre going to see a 100% there as well. So what you saw this quarter should be pretty indicative of what youll see going forward.
Okay and then the second question.
Is.
The meeting I guess investors loaded onto the five directors and then you basically announced two new directors are two new director appointments, but I was just wondering if you could just comment on the 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 director. So feel good about what the people that have come in in fact, one just completed a full day of touring and meeting in Kokomo and the other one is set up for at some point in the next.
Six to eight weeks.
So so seven with six outside directors ending Henry yes.
Hum.
Okay, No I looked at looked like very very well qualified directors, but I was just kind of curious on.
The decision to add the two additional so well.
Well this has been a very helpful call in a very informative and I really do appreciate it. Thank you organize the interest.
We have reached the end of our question and answer session and I will now turn the call over to Mike shore for closing remarks. Thank you Holly thanks, everyone for your time today and thank you for your ongoing interest and support of our company will talk to you again in a quarter. Thanks, everyone.
Yes.
This concludes today's conference and you may disconnect your lines at this time. Thank you.
<unk> seen a partial completion.
Okay.
Yes.
Yeah.