Orion Engineered Carbons SA

NYSE:OEC

Earnings Call Transcript 2023-Q1

[Operator]

Welcome to the Orion Engineered Carbons' First Quarter 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce her host, Wendy Wilson, Head of Investor Relations. Thank you, ma'am. You may begin.

[Wendy Wilson, Head of IR]

Thank you, operator. Good morning, everyone and welcome to Orion Engineered Carbons conference call to discuss our first quarter 2023 financial results. I'm Wendy Wilson, Head of Investor Relations. With me today are Corning Painter, Chief Executive Officer and Jeff Glajch. Chief Financial Officer. We issued our press release after the market closed yesterday. And we also posted a slide presentation to the Investor Relations portion of our website. We will be referencing this presentation during the call.

Before we begin, I'd like to remind you that some of the comments made on today's call are forward-looking statement. These statements are subject to the risks and uncertainties as described in the company's filings with the SEC, and our actual results may differ from those described during the call. In addition, all forward-looking statement are made as of today May 5. The company is not obligated to update any forward-looking statement based on new circumstances or revised expectations.

All non-GAAP financial measures discussed during this call are reconciled to the most directly comparable GAAP measures in the table attached to our press release.

I'll now turn the call over to Corning Painter.

[Corning Painter, CEO]

Thank you, Wendy. Good morning, everyone. And welcome to our earnings conference call. We're off to a great start for the year, having delivered the higher rubber pricing to the bottom line coupled with sequentially much stronger specialty results.

I believe this reflects how our position in the economy has been transformed, with significant customer investments and onshoring, higher barriers to entry and a trend towards deglobalization. We're one of the few manufacturers on track for a stronger 2023 compared with 2022. Thanks to out to the motivated and hardworking Orion team for the foundation we've built over the past years. And for the progress that we're making in achieving our short term and long-term goals.

We delivered record first quarter adjusted EBITDA of approximately $101 million, a 21% increase year-on-year and 55% sequentially, adjusted diluted EPS of $0.74, up 30% year-over-year was also record, with rubber pricing resetting in-line with our expectations and specialty outperforming these expectations.

We have some timing benefits and a few non-repeating items in the quarter, which helped our results. Our underlying adjusted EBITDA run-rate was $92 million to $93 million, which would have been record results all the same. We also delivered strong first quarter operating cash flow, cutting the net debt ratio to just below 2.5 times. We expect to drive that lower throughout the year. Jeff will discuss this further.

This morning, we announced that the board has authorized a new share repurchase plan. We will complete our previously announced share buyback program later this month, and this new authorization will extend through midyear 2027. Combined with a soon to be completed repurchase authorization, the company has the potential to purchase up to 15% of its outstanding shares. Of course, we're going to take a balanced approach between allocating funds for growth and productivity opportunities, reducing debt further into our target leverage ratio range and supporting the second buyback authorization.

Let me highlight two additional key accomplishments for this quarter. First, our Greenfield facility in Huaibei China is completed and shipping sample materials to customers. We expect to be ramping production and sales over the course of this year. Second, to our knowledge, we're the only carbon black producer to completed three air emissions control projects in the United States at this point, with our Borger, Texas plan upgrade now online. We have one more plant to go, which we expect to complete in the second half of 2023.

Before I turn the call over to Jeff, I'd like to introduce an important additional metric on Slide 4. As you can see, we have achieved exceptional gross profit per ton growth and record of adjusted EBITDA. I'd like to point you to our also exceptional ROCE progress over that same period of time, despite the substantial air emission controls investment. The ROCE levels, which we achieved are significantly in excess of our weighted average cost of capital. This is an indicator of our ability to generate significant shareholder value, as we profitably invest in our business.

Business is not just about growth, it's about profitable growth and return on investment. This key metric keeps us aligned with our shareholders as stewards of their capital and the long-term sustainability of the company.

With that, Jeff, perhaps you could provide some more color on our financial results.

[Jeff Glajch, CFO]

Thank you, Corning. On Slide 5, you can see the consolidated results in the first quarter. The contractual price improvements in rubber and mix improvements and specialty far outweighed the lower volume, most of which occurred in the specialty business. The EBITDA increase of $18 million, and adjusted EPS increase of 30% to $0.74 are a result of the aforementioned improvements in pricing and mix. Please note that all key metrics in the first quarter showed solid sequential increases.

One thing I would add, regarding the first quarter results, is that there were some timing impacts and smaller non-repeating items which benefited the quarter. This is one reason why we are not changing our guidance for the year.

On Slide 6, the declining Q1 volume versus last year was expected and is primarily in our specialty business. However, we continue to see strong gross profit per ton gains in both businesses, this helped us achieve the record adjusted EBITDA. These margin gains are from contractual base price improvement in rubber, mix in specialty, as well as the timing and non-repeating items I noted earlier.

On Slide 7, looking at specialty in Q1, volumes decreased, but were up 14% sequentially, as demand held up well despite the overall economic conditions. Adjusted EBITDA increased 50% sequentially while decreasing 12% year-on-year. Note the gross profit per ton continues to be strong and growing, both in the quarter and the trailing 12 months and is now above $900. Finally, we saw gains across all key metrics on a sequential basis.

Slide 8 shows the key factors affecting adjusted EBITDA for the specialty business compared with last year. As noted earlier, the volume reduction was significant. However, that volume reduction was nearly offset by improved pricing and mix. You can achieve this when you don't try to chase volume in a soft market.

Slide 9 looks at the rubber business with improvements to all metrics on a year-over-year basis, except for a modest volume decrease. Also it is important to note here, that all financial metrics in rubber including volume were up substantially.

Gross profit per ton, was up from $321 to $467 in the quarter. I believe a good ongoing comparison is the 2022 full year average of $336. You should expect GP per ton to be in the mid-400s throughout 2023. We believe approximately $100 of this gain was due to pricing. This improvement reflects the 2022 pricing cycle, which was driven by our requirements to achieve a market return on capital including our air emissions control related investments.

We continue to believe that we and our shareholders deserve to achieve a market return on those investments.

Higher pricing enables plant reliability investments and supports our customers. We are confident with the progress we have made in rubber pricing is sustainable due to the continuing trend toward localization or deglobalization, as well as the customer -- the significant customer investments in onshoring. Furthermore, there are ongoing regional supply demand imbalances in the robber markets in both North America and EMEA.

Slide 10, shows the key factors adjusting, -- affecting adjusting -- adjusted EBITDA for the robber business. Strong base price, as discussed earlier, is a key -- is clearly the key driver.

Before I pass, the call back to Corning I'd like to provide an update on our share buyback and debt level. With strong cash flow in Q1, we were able to fund $29 million in share buybacks in the quarter. As of the end of the quarter, we have completed approximately two thirds of our $50 million share buyback program at an average price of $22 per share. We also reduced our debt by $36 million to $822 million. Our debt-to-EBITDA ratio now stands at 2.49. We expect this ratio will continue to decrease across 2023, with our improved EBITDA the levels and likely further debt reduction. I would expect we will end the year in the middle of the 2 the 2.5 range.

As announced earlier this week, we achieved the emission targets tied to short term loans. And with a 10-basis point decrease in interest rate for those loans, we expect to save approximately $650,000 over the next 12 months. The strong cash flow was driven by earnings, but also by improved payment terms. We believe the improved terms contributed $40 million of cash in Q1. This step change will stay with us going forward and I expect some additional benefit in Q2. We now expect to complete the current buyback in the next couple of weeks, and we'll initiate the new buyback afterwards. We will pace the new buyback slower and prioritize growth and profit enhancing projects first, and as long as we stay in or near our debt rage, we will opportunistically repurchase shares with a portion of our free cash flow.

I will turn the call back Corning to discuss our 2023 guidance for the rest of the year.

[Corning Painter, CEO]

Thanks, Jeff. Turning to Slide 12. As we said earlier, we benefited from timing impacts in the quarter, while Q1 was stronger than expected customers pulled back in April. Macroeconomics is almost exciting these days hard landing soft landing no lending. Against this backdrop, we are confident about our business and what we can control and our reiterating our 2023 guidance of $350 million to $380 million, up 17% at the midpoint. Our adjusted EPS guidance range continues to be $2.30 to $2.60 per share up 25% at the midpoint.

In closing, I'd like to leave you with a few thoughts. First, the pricing we have achieved in our rubber business is sustainable and is our new baseline for future expansion. Global trends like onshoring and deglobalization, combined with higher entry costs have accelerated the reset that was already underway in this market. The rubber business is not a commodity and our specialty business will continue to be special.

Second, although tire demand is not immune to the business cycle. Tires are consumable, and they're not really a discretionary item. Well, no one knows the type of economic landing we're heading for. We believe the tire demand will be relatively resilient. One indication of this is that the 2024 pricing cycle has already begun.

Third, global demand for our highly differentiated specialty products will return with the business cycle. Our focused investments in developing new innovative products such as conductive and sustainable grades will help us fuel that demand. Meanwhile, we will not destroy value by chasing volume. Fourth, our [Indiscernible] conductors project in the Houston area is on track. We expect to start the plant up in 2025, with commercial product shipping in the second half of the year. We continue to see the conductive carbon market driven by growth in electric vehicles as a great opportunity.

Fifth you've seen that we increased ROCE and other key metrics in the face of what was for us heavy environmental spending. And we're on our way to reach our growth goals for 2023 and beyond. I don't know about you, but that does not sound like a six to seven times business to me. I see an exciting future for Orion. We have spent the past five years working to get us where we are today, we lay the foundation for sustained profitable growth, free cash flow and exceptional returns for our shareholders. The next phase of the journey is upon us, I expect to achieve strong growth and profitability and cash flow over each of the next three years, as discussed in our 2022 Investor Day.

Thank you. Operator, please open up the line for questions now.

[Operator]

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Josh Spector with UBS. Please go ahead.

[Josh Spector, UBS]

Yeah, hi, thanks for taking my questions. And congrats on a strong quarter here. I just wanted to follow up on specialty and just some of the onetime items there. Just curious, you could comment on a onetime some of those are, if there's any potential for the mix to hold and higher. And if there's any change to kind of how you thought about specialty, versus your outlook, a quarter above?

[Corning Painter, CEO]

Sure. So most of the non-repeating items we had didn't really play out in specialty that was more a factor for us and rubber. So you're seeing really more of the clean performance of the specialty business. And I think as the market has evolved, since the last quarter, we probably see specialty turning in a little stronger than what we have suggested last time, rubber really not based on pricing, as you can see, but just that underlying demand may be a little bit weaker.

[Josh Spector, UBS]

Okay, that's helpful. And just, I mean, within rubber. And I mean, I think since the last earnings call, Europe's announced additional kind of controls against Russian carbon black and really looking kind of towards the import ban potentially mid-2024. Just curious if that's resulted in any change with customer conversations there? Any increase in early discussions to prepare for that? And if Europe can really be effective in basically implementing a full-on ban against Russia?

[Corning Painter, CEO]

Yeah, that's absolutely was noted in the industry. As we said, we are currently in negotiations for 2024 last year, we also early on got into negotiations for 2023. But I'd say both years a bit earlier than is typical. I think it's on everybody's mind. I think they'll do it. I think they're committed to doing it. They cut back somewhat on Russian carbon black. But it's clearly an opportunity for everyone, first of all, as capacity in Europe just stands to gain from that.

[Josh Spector, UBS]

Okay, thanks. I'll leave it there for now.

[Corning Painter, CEO]

All right. Thank you, Josh.

[Operator]

Next question comes from Chris Kapsch with Loop Capital. Please go ahead.

[Chris Kapsch, Loop Capital]

Yeah, just to follow up on some of the commentary around trends and specialty and there were some of the volume year-over-year volume comp there was associated with the stocking, I think is what you said. And then, but you're also saying that it's looking overall, it's looking better than you had anticipated?

So I'm just wondering if you could talk about how, if the destocking has concluded what in what parts of the channel, was that more pronounced? And how that's playing out kind of best far into the second quarter?

[Corning Painter, CEO]

Sure. In general, I'd say, Chris, that customers see the volatility in oil and banking and everything else. Nobody wants to have a lot of inventory. So I'd say there are certainly some signs with certain customers like they they're just looking at their order pattern, they're back in at this point. So they've practiced destock to the point where they want to be, but I think people are going to be careful about restocking, at least for a couple more months till they see where things go.

That said overall, if you look at this quarter in terms of volumes, it was stronger than we expected. I'd say we saw that pretty broad based with the exception of perhaps ink, you probably get less junk mail these days. And I think people like advertising, that sort of thing is the kind of discretionary item where you see businesses cutting back. But it was fairly broad-based. But to be clear, still down from last year, but just the trend, maybe you say, the second derivative a little better than we had expected.

[Chris Kapsch, Loop Capital]

Got it, and then just sort of had a question about the board's endorsement of another buyback pretty good magnitude. I'm just curious about, just maybe could provide a little bit more color on the thinking behind that. And also, in parallel, I think we can kind of based on the guidance and the assumptions that you provided, we can kind of get to pretty accurate free cash flow generation number for metric for '23.

But I'm curious about '24, I know, I don't think you provided their talks about CapEx for next year. But directionally, it looks like there'll be a big step up and free cash flow, does that feed into the appetite or the willingness, I should say, of the board to recognize the value here and expressed in this buyback? Thank you.

[Corning Painter, CEO]

Sure, well, first of all, as a lux company, we have to get an authorization from our shareholders conceptually around doing a buyback. And we did that last year, and that was 15%. So what we've said, basically, in this announcement is over the length of that authorization from our shareholders, that we now as management has authorization from the board to basically use that full amount.

To be clear, we would put growth, we would put certain investments and sustainability productivity ahead of exercising on that. We would do it opportunistically and so how much we're going to do next year is going to depend on how we see the growth opportunities and so forth as they come out. I would not expect to do this at the same pace that we did the first one. Jeff, anything you'd like to expand on that?

[Jeff Glajch, CFO]

Sure, Chris. I think the board looked at our multiyear, cashflow expectations, and looking at those and looking at the growth opportunities that we have and the ability to keep our data at a good level realize that we would still, despite some really good growth opportunities, have some cash available for a buyback. So rather than doing this piecemeal going forward, they took the approach of let's look at this over a multiyear basis. And again, we will purchase opportunistically, but as Corning said those growth, those sustainability investments, those profit, enhancements investments, those will go first.

[Corning Painter, CEO]

Maybe one final comment, I think it just reflects that, we -- the company, the Board, management, we all see our share price is significantly undervalued. And that's another reason why that just have this open for us.

[Chris Kapsch, Loop Capital]

Got it. And kind of just one quick follow up though, just on the benefits regarding the -- what you just sort of characterizes timing in the first quarter in the rubber business. Does that become a negative issue for second quarter? I mean, with some of that -- you haven't characterize it with me just wondering if that was like a pull forward in demand? Or how to think about that in terms of the second quarter. Thank you.

[Corning Painter, CEO]

Yeah. So there's always second quarter, thank you. There's often some timing impacts. We didn't talk about it. But in the fourth quarter, net timing impacts were negative a little bit. They're positive this time. I mean, we wanted to call that out, because just to be clear, the 101 isn't a clean run-rate. I think it's 90 to 93 is still a really big step up for us something we're proud of, I think it shows we're on track. But we just wanted to kind of get that and discourage a one-on-one times four kind of approach when people think about the year just because I don't think that's accurate at this point.

Some of that sure will reverse in April was a little bit weaker. So you can imagine us being I don't know down in we don't do guidance, but you can imagine this being down a little bit from where our -- our actual run rate was for the first quarter.

That said, I mean, none of that is the [Indiscernible] give it the nor take us with these timing effects. None of that affects how we see the overall year playing out the overall strength of our underlying business, we see ourselves is still very much obviously on track for the full year guidance that we provided.

[Chris Kapsch, Loop Capital]

Thank you.

[Operator]

Our next question comes from Jon Tanwanteng with CJS Securities. Please go ahead.

[Pete Lukas, CJS Securities]

Yes. Hi, good morning. It's Pete Lukas for John. You guys have covered most of my questions. I guess just maybe if you could update us on China and how demand utilization there is expected to trend in the short term going forward here, or short or medium term?

[Corning Painter, CEO]

Sure. Well, two things about China. If we think about the specialty market in that it's going to really trend with their economy and their exports, which for some areas are, I'd say, a little bit slow right now, in general in China. For rubber and Chinese automotive, again, a little bit slower than the run-rate. The question or the opportunity for China in terms of rubber carbon black, though, is Europe in 2024. And I think part of the solution for Europe next year will surely involve some exports from China into Europe. And so I think that's a sort of a positive in terms of longer term outlook for China.

[Pete Lukas, CJS Securities]

Very helpful, thanks. I'll jump back in queue.

[Corning Painter, CEO]

Alright, thanks, Pete.

[Operator]

Our next question comes from Jeff Zekauskas with JP Morgan. Please go ahead.

[Jeff Zekauskas, JP Morgan]

Thanks very much. In the quarter, your cost per ton in rubber black, decreased about $110 sequentially. And for specialty blacks, it was about 250 a ton. What's going on there? Because you had had sort of relatively stable cost per ton. And then what happened in this quarter? Is that really came down to that mix, or is that something else?

[Jeff Glajch, CFO]

Or are you looking at the lots where we showed --

[Jeff Zekauskas, JP Morgan]

Not, calculating it from your tonnage?

[Jeff Glajch, CFO]

Okay, well, maybe one approach, though is to look at, for example, we're going to look at --

[Jeff Zekauskas, JP Morgan]

You said there's a $10 million benefit and costs in your EBITDA slide. What's going on in that $10 million drop at costs?

[Jeff Glajch, CFO]

Right, so if we're going to look at the specialty waterfall slide, for example. A lot of that is the timing of impacts. So what happens in terms of how our pricing formulas work out? That was a negative for us, and for our past that sort of thing, when there's a sudden move in the input costs, that's where I can give you a dislocation there in the cost factor. There is no like fundamental step change in our underlying costs or our fixed costs, for example.

[Jeff Zekauskas, JP Morgan]

So with the onetime items, I don't know. $10 million in the quarter, how much were they?

[Corning Painter, CEO]

So Jeff, there is a onetime items, the combinations of timing. And the onetime items were about $8 million to $9 million in total, of which about a third of that were onetime items and two thirds were timing.

[Jeff Zekauskas, JP Morgan]

And how would you allocate it to the two businesses?

[Corning Painter, CEO]

The onetime items were essentially all in rubber for the specialty. The timing, I think there was a mix of probably a little bit more in specialty.

[Jeff Zekauskas, JP Morgan]

Okay, so because a lot of real strength was in specialty rather than a rubber in the quarter. Okay.

You talked about the pricing negotiations beginning to open up. Is that true of both Europe and the United States or only Europe? And does that have to do in Europe? Does that have to do with the disinclination of customers to buy from Russia?

[Corning Painter, CEO]

So I'd say for next year, because this band plays out mid-June, but that's midyear, and most of this pricing is done longer term commitments. Maybe some people would take some for half a year and think, I'll buy spot from China, but I think that that's not going to be a popular approach. I think people are going to want to be totally free on January 1. That would be my read of it. And yeah, I'd say there's certainly more energy and emphasis and concern around the European situation. Though the U.S. market is also tight.

[Operator]

Our next question comes from Lawrence Alexander with Jefferies. Please go ahead.

[Unidentified Analyst]

Hey, good morning. This is [indiscernible] on from Lawrence. Thank you for taking my question. So you touched quite a bit on this already about being confident about your outlook. But I guess what sort of downside scenarios are you sort of weighing? And I guess in the event of a recession in the back half of the year, it's 2024. I guess I'm just curious what levers you can pull in pull the cycle just sort of to mitigate any deteriorating volumes, et cetera? Just curious, how your business could fail or an event of a downside scenario?

[Corning Painter, CEO]

Well, let me say this, I'd say our current guidance, we think we could hold the, let's say, a mile recessionary impact. So say, I don't know 5%-ish on our on our volumes, I think the second half of the year. The customers started out the year very bullish for the second half of the year. That's always a little bit concerning. I say right now, confidence is having a little bit in that regard for the second half. But again, we think we've got that ability to take that in our current guidance.

[Unidentified Analyst]

Okay, thank you very much.

[Operator]

Our next question comes from Laurence Alexander with Jefferies. Please go ahead.

[Corning Painter, CEO]

Lawrence, maybe you're on mute?

[Laurence Alexander, Jefferies]

I apologize. I think we had both of us in the queue. So I guess the question, then I'll just take advantage of it. The question I'll ask is, it's about specialty blacks? If there isn't a demand shock, can you characterize how much of a mix you can see, depending on which end markets accelerate strongest? Or what's driving the mixed effects? In other words, could you have over the next few quarters, profit per tons decline purely on mix or would you be to just the demand shock for that to happen?

[Corning Painter, CEO]

So, our end markets, we price based on the value we're creating for our customer. We have some very, very different wide range of production technologies. So mix is always going to be a large thing for us. So if we saw really, really strong demand surge, for example, suddenly lower end grades, some of the master batch grades. Yeah, you for sure see, mix deteriorate in that scenario, doesn't really reflect the strength of the underlying business. But you have to look at, let's say, the TTM a longer term trend, and you can see the impact of new products and so forth in that trend. But absolutely, you can see that move down and it doesn't only move up.

[Laurence Alexander, Jefferies]

Thank you.

[Corning Painter, CEO]

Let me just clarify. I mean, therefore, any given quarter I think with the new products that we're driving and with the conductors we continue to see this upward trend. But there's room for noise in that.

[Laurence Alexander, Jefferies]

Got it.

[Operator]

Our next question comes from Kyle Mowery from Grizzly Rock. Please go ahead.

[Kyle Mowery, Grizzly Rock Capital]

Good morning. And thank you for taking my question. My question is a follow up to Chris's question around the buyback versus growth projects. Some of your growth projects in the last few years have been extremely high in terms of ROIC, the bottleneck CapEx is easily and come to mind. What sort of when the board's sitting there looking at buyback versus growth, and you're prioritizing growth? Are you willing to sort of break out the types of returns. I mean, how many more of like 25% plus ROCE projects are there to be done?

[Corning Painter, CEO]

Well, so in the area of conductors, one element of our business is just access to the acetylene to be able to make that move. And we do see additional sources. But I'd say there's a limit to that. And I think that's a real benefit for people who want this particular product with this sort of very low level of impurities, high level of conductivity, and so forth. It gives us a little bit of a moat around the business in terms of capacity can come online.

So as we do those, that's an area that can be there. We have been very cautious for many, many years. I'd say even before we got carved out as a separate company, around plant investments, and as a result, there's opportunities to do things like the cogen unit that just came on and other investments like that, where we could also just upgrade old plant equipment and get to a step change in capacity or quality out of it.

So we have more of those. But I would say even if something was Kyle in the 15% range. So that's still substantially above our cost of capital. And we would support that. So way to understand this buyback is number one, we see the share price is significantly underbalanced, we see the ability to take a balanced approach as we look at these different ways we can allocate capital moving forward.

And finally, that we've got much better cash flow moving forward. So the board wanted to give us just, let's say, a longer range, flexibility without needing to go to the board to set up up and implement plans to make share purchases. As Jeff said, we don't plan to do this on anywhere near the speed what we did in the first tranche of share purchases that we just had. Does that help?

[Kyle Mowery, Grizzly Rock Capital]

Absolutely. Those sounds like great investments in the business. Thanks for taking my question.

[Operator]

Our next question comes from Josh Spector with UBS. Please go ahead.

[Josh Spector, UBS]

Yeah, thanks for letting me back in here. A couple of follow ups, I want to ask, just on kind of the earnings cadence. I think Corning you talked about, you think 2Q to be slightly below your run-rate level in first quarter? Typically, there's a sequential step up in your earnings, I'd say. So, from your comments on a rubber, do you think some of your customers over ordered in first quarter and now there's some normalization? So you expect volumes down more than the 3%? Or is there something else driving that?

[Corning Painter, CEO]

I think a couple things. Number one, we just share right? April was a little bit weak. Actually, may looks pretty good so far as we go through it. I think if you look at the indicators of rubber demand, let's just look at the U.S. So we saw trucking activity drop a bit in March. On the other hand, you saw gasoline consumption, coming up with things like miles driven are nice, but they tend to be a lagging metric. So it's a little bit of a mixed picture, what's happening in the marketplace.

But all in all, I think, given April, it's going to be a little bit weaker for this quarter on that front. We'll do our best to make up that on the specialty side. That's what's nice about having the two sides of the business. But I think in general, we probably a little bit softer than we're underlying rate was for the first quarter. But again, I don't think any of that is really big and structural. Sometimes some of those onetime events are also going to reverse. If oil prices stay low, there'll be an inventory reduction. So our repricing of the inventory. So those are the kinds of things that can kind of create some of this noise quarter to quarter.

I just stress, I think the underlying business remains really strong. But I do think the second quarter is going to be a little bit weaker than the first one.

[Josh Spector, UBS]

Okay, no, I appreciate that. And I wanted to ask Huaibei. You had some comments in the front end of the deck about, commissioning its trials now. But I think you said, first commercial product in 2024. Was that a change versus what you expected previously? Are you ramping that up more slowly or am I reading too much into that?

[Corning Painter, CEO]

No, if I said that that was a miscommunication. I mean, we've done some commercial sales already out of that site. We're doing a real focus on getting your qualification samples out, especially on the specialty lines, but meanwhile, selling out some of that capacity into others, like easier qualification markets. So now we have commercial sales right now and to be totally clear. That's not like that. Big contribution right in the second quarter, I think we'll see that more in the third and the fourth. But none of that's up and running.

[Josh Spector, UBS]

Okay, yeah. And I was actually more going the other way and trying to think if there's a cost burden baked in that it has that facility fills up that we should be considering as we look to next year. I mean, would you say there's much of a drag or is it not meaningful enough to really consider?

[Corning Painter, CEO]

I hope so first of all, it's all in our guidance that we've given. We have probably had most of the fixed costs of that site. You've probably saw most of that in this last quarter. It would be a modest step up perhaps in the second quarter.

[Josh Spector, UBS]

Okay, all right. Thank you.

[Operator]

Our next question comes from Jeff Zekauskas with JPMorgan. Please go ahead.

[Jeff Zekauskas, JP Morgan]

Thanks. You talked about some demand weakness in April. Should specialty volumes be sequentially stronger in the second quarter than in the first or the same or weaker?

[Corning Painter, CEO]

Well, so, these are predictions about the future. But I think specialty in the second quarter could build a little bit on where it was in the first quarter just on the trends we see.

[Jeff Zekauskas, JP Morgan]

And are your sequential prices lower, because of changes in raw materials? And that narrows your margins a little bit? That part of the onetime items stuff?

[Corning Painter, CEO]

No, no. The one time is more like as an input costs moves quickly, it can -- and it moves down, it can move more quickly than the price index. To be clear and for all my customers, hey in Q4, it was the other way around. So it's just a little bit of noise. We don't always go into it. But again, we just had a number of these items all tipped towards the favorable side. And I just wanted to clarify, one-on-one isn't like our clean run rate right now.

[Jeff Zekauskas, JP Morgan]

Thanks so much.

[Jeff Glajch, CFO]

Hey, Jeff. Jeff, I just wanted to clarify one thing on your earlier question lower costs, versus Q1 of last year --

[Jeff Zekauskas, JP Morgan]

Fourth quarter, versus the fourth quarter.

[Jeff Glajch, CFO]

Okay. Okay. Nevermind. Okay. I was [Indiscernible 0:41:16]

[Jeff Zekauskas, JP Morgan]

All right.

[Operator]

There are no further questions at this time. I would like to turn the floor back over to Corning Painter, Chief Executive Officer for closing comments. Sir, go ahead.

[Corning Painter, CEO]

Thank you, everyone, for joining us today. And a big thank you to our analysts and our investors for your questions, some of them very insightful and piercing and engaging good and further information out to the broader investment pool. We appreciate that. We believe we can deliver further appreciation to you our investors as the restructuring in our marketplace continues to play out. And we appreciate your continued support. Thank you all very much.

[Operator]

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