Orion S.A. - Q1 2023
May 5, 2023
Transcript
Operator (participant)
Good evening, and welcome to the Orion Engineered Carbons first quarter 2023 earnings conference call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce our host, Wendy Wilson, Head of Investor Relations. Thank you, ma'am. You may begin.
Wendy Wilson (Head of Investor Relations)
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 statements. 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 statements are made as of today, May 5th.
The company is not obligated to update any forward-looking statements 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. 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 in onshoring, higher barriers to entry, and a trend towards de-globalization, we're one of the few manufacturers on track for a stronger 2023 compared with 2022. Thanks go 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-over-year, 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 those expectations. We had 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-$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 mid-year 2027.
Combined with the soon-to-be completed repurchase authorization, the company has the potential to purchase up to 15% of its outstanding shares. We're gonna 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 have completed three air emissions control projects in the United States at this point with our Borger, Texas plant 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 four. As you can see, we have achieved exceptional gross profit per ton growth and record 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 five, you can see the consolidated re-results in the first quarter. The contractual price improvements in rubber and mix improvements in 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 six, the decline in Q1 volume versus last year was expected and is primarily in our specialty business.
We continue to see strong gross profit per ton gains in both businesses. This helps 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 seven, 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 that gross profit per ton continues to be strong and growing both in the quarter and the trailing 12 months, and is now above $900. We saw gains across all key metrics on a sequential basis. Slide eight shows the key factors affecting adjusted EBITDA for the specialty business compared with last year. As noted earlier, the volume reduction was significant.
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 nine looks at the rubber business, with improvements to all metrics on a year-over-year basis, except for a modest volume decrease. 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 requirement 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 that the progress we have made in rubber pricing is sustainable due to the continuing trend toward localization or de-globalization, as well as the significant customer investments in onshoring. There are ongoing regional supply-demand imbalances in the rubber markets in both North America and EMEA. Slide 10 shows the key factors affecting adjusted EBITDA for the rubber business. Strong base price, as discussed earlier, 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 levels and likely further debt reduction. I would expect that we will end the year in the middle of the 2.0-2.5 range.
As announced earlier this week, we achieved the emission targets tied to our term loans, and with a 10 basis point decrease in interest rates for those loans, we expect to save approximately $650,000 over the next 12 months. The strong cash flow is 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. As long as we stay in or near our debt range, we will opportunistically repurchase shares with a portion of our free cash flow. I will turn the call back to 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 landing. Against this backdrop, we are confident about our business and what we can control, and are reiterating our 2023 guidance of $350 million-$380 million, up 17% at the midpoint. Our adjusted EPS guidance range continues to be $2.30-$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 de-globalization, combined with higher entry costs, have accelerated the reset that was already underway in this market. The Rubber business is not a commodity. 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. While 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 conductives and sustainable grades, will help us fuel that demand. Meanwhile, we will not destroy value by chasing volume. Fourth, our Kappa Conductives project in the Houston area is on track.
We expect to start the plant up in 2025, with commercial products 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 have seen that we increased ROCE and other key metrics in the face of what was, for us, heavy environmental spending. 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 6-7x 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 laid 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 in 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 (participant)
Thank you. We'll now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. An information tone will indicate your line is in the question queue. You may press star two if you would like to remove yourself from the question queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Josh Spector with UBS. Please go ahead.
Josh Spector (Executive Director of Chemicals Equity Research)
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 one-time items there. Just curious for you to comment on how one time some of those are, if there's any potential for the mix to hold in higher, and if there's any change to kind of how you thought about Specialty versus your outlook, a quarter ago.
Corning Painter (CEO)
Sure. Most of the non-repeating items we had didn't really play out in Specialty. That was more a factor for us in Rubber. You're seeing really more of the clean performance of the Specialty business. I think as the market has evolved since the last quarter, we probably see Specialty turning in a little stronger than what we had suggested last time. Rubber really not based on pricing, as you can see, but just underlying demand maybe a little bit weaker.
Josh Spector (Executive Director of Chemicals Equity Research)
Okay. No, that's helpful. Just, I mean, within Rubber and, I mean, I think since the last earnings call, you know, 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? If Europe can really be effective in basically implementing a full-on ban against Russia?
Corning Painter (CEO)
Yeah. No, that, you know, 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. 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've cut back somewhat on Russian carbon black. You know, it's clearly an opportunity for everyone, first of all, who has capacity in Europe, you know, to stands to gain from that.
Josh Spector (Executive Director of Chemicals Equity Research)
Okay, thanks. I'll leave it there for now.
Corning Painter (CEO)
All right. Thank you, Jeff.
Operator (participant)
Our next question comes from Chris Kapsch with Loop Capital. Please go ahead.
Chris Kapsch (Managing Director and Senior Equity Research Analyst)
Just to follow up on some of the commentary around trends in specialty, there was some of the volume year-over-year volume comp there was as-associated with the stocking, I think is what you said. But you're also saying that, you know, overall it's looking better than you had anticipated. I'm just wondering if you could talk about how if the destocking has concluded, what parts of the channel was that more pronounced and how that's playing out kind of thus far into the second quarter?
Corning Painter (CEO)
Sure. In general, I'd say, Chris, that customers, you know, see the volatility in oil, in banking, and everything else. Nobody wants to have a lot of inventory. I'd say there are certainly some signs with certain customers, like they're just looking at their order pattern, they're back in at this point. They've perhaps destocked to the point where they wanna be. I think people are gonna 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, I think people like advertising, that sort of thing, is a kind of discretionary item where you see businesses cutting back. It was fairly broad-based. To be clear, still down from last year, but just the trend, maybe say the second derivative, a little better than we had expected.
Chris Kapsch (Managing Director and Senior Equity Research Analyst)
Got it. I just sort of had a question about the board's endorsement of another buyback, pretty good magnitude. I'm just curious about just maybe you could provide a little bit more color on the thinking behind that. In parallel, I think we can kind of based on the guidance and the assumptions that you provided, we can kind of get to a pretty accurate free cash flow generation metric for 2023. I'm curious about 2024. I know, I don't think you provided or talked about CapEx for next year. Directionally, it looks like there'll be a big step up in free cash flow.
Does that feed into the, you know, the, the appetite or the willingness, I should say, of the board to, you know, to recognize the value here and expressed in this, in this buyback? Thank you.
Corning Painter (CEO)
First of all, as a lux company, we have to get an authorization from our shareholders conceptually around doing a buyback. We did that last year, and that was 15%. What we said basically in this announcement is, over the length of that authorization from our shareholders, that we now, as management, have authorization from the board to basically use that full amount. To be clear, we would put growth, we would put certain investments in sustainability, productivity ahead of exercising on that. We would do it opportunistically. 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 cash flow expectations and looking at those and looking at the growth opportunities that we have, and the ability to keep our debt at a good level, realized that we would still, despite some really good growth opportunities, have some cash available for a buyback. Rather than doing this piecemeal, going forward, they took the approach of, "Let's look at this over a multiyear basis." Again, we will purchase opportunistically, but as Corning said, those growth, those sustainability investments, those profit-enhancing investments, those will all 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 as significantly undervalued. That's another reason why to just have this open for us.
Chris Kapsch (Managing Director and Senior Equity Research Analyst)
Got it. One quick follow-up though, just on the benefits regarding, you know, the, what you just sort of characterized as 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 characterized it with. I'm just wondering if that was like a pull forward in demand or how to think about that?
Corning Painter (CEO)
Yeah. there's.
Chris Kapsch (Managing Director and Senior Equity Research Analyst)
In terms of the second quarter. Thank you.
Corning Painter (CEO)
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, you know, $92, $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, you know, kind of give that and discourage a $101 times four kind of approach when people think about the year, just 'cause I don't think that's accurate at this point. Some of that, sure, will reverse when April is a little bit weaker, so you can imagine us being, I don't know, you know, down in.
We don't do guidance, but you can imagine us being down a little bit from where our actual run rate was for the first quarter. That said, I mean, none of that, and the Lord giveth, the Lord taketh 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 as still very much, obviously, on track for the full year guidance that we provide.
Josh Spector (Executive Director of Chemicals Equity Research)
Thank you.
Operator (participant)
Our next question comes from Jonathan Tanwanteng with CJS Securities. Please go ahead.
Speaker 10
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 gonna 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 typical run rate. The question or the opportunity for China in terms of rubber carbon black, though, is Europe in 2024. I think part of the solution for Europe next year will surely involve some exports from China into Europe. I think that's a sort of a positive in terms of a longer-term outlook for China.
Speaker 10
Oh, very helpful. Thanks. I'll jump back in queue.
Corning Painter (CEO)
All right. Thanks, Pete.
Operator (participant)
Our next question comes from Jeff Zekauskas with JP Morgan. Please go ahead.
Jeff Zekauskas (Equity Analyst)
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? You know, because you had sort of, relatively stable cost per ton, and then what happened in this quarter is that it really came down. Is that mix, or is that something else?
Corning Painter (CEO)
Are you looking at the WACC where we show.
Jeff Zekauskas (Equity Analyst)
No
Corning Painter (CEO)
the waterfall?
Jeff Zekauskas (Equity Analyst)
I'm not. No, I'm calculating it from your tonnage.
Corning Painter (CEO)
Okay. Well, maybe one approach, though, is to look at, for example, if we were gonna look at.
Jeff Zekauskas (Equity Analyst)
For example, you said there's a $10 million benefit in costs in your EBITDA slide.
Corning Painter (CEO)
Mm-hmm.
Jeff Zekauskas (Equity Analyst)
What's going on in that $10 million drop in costs?
Corning Painter (CEO)
Right. If we were gonna look at the specialty waterfall on slide eight, for example, a lot of that is the timing of impacts. What happens in terms of how our pricing formulas work out, that was a negative for us in for the past, that sort of thing. When there's a sudden move in the input costs, that's what can give you a dislocation there in the cost factor. There's no fundamental step change in our underlying costs or our fixed costs, for example.
Jeff Zekauskas (Equity Analyst)
Were the one-time items, I don't know, $10 million in the quarter? How much were they?
Corning Painter (CEO)
Sure. Jeff, the one-time items. The combination of the timing and the one-time items were about $8 million-$9 million in total, of which about a third of that were one-time items and two-thirds of it were timing.
Jeff Zekauskas (Equity Analyst)
How would you allocate it to the two businesses?
Corning Painter (CEO)
The one-time items were essentially all in rubber, very little in specialty. The timing, I think there was a mix, but probably a little bit more in specialty.
Jeff Zekauskas (Equity Analyst)
What. Well, okay. Because a lot of the real strength was in specialty rather than in 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? In Europe, does that have to do with the disinclination of customers to buy from Russia?
Corning Painter (CEO)
I'd say for next year, because this ban plays out mid-June, but that's mid-year and most of this pricing is done, you know, longer-term commitments, maybe some people would take some for half a year and think, "Oh, I'll buy spot from China." I think that's not gonna be a popular approach. I think people are gonna want to be totally free on January 1st. That would be my read of it. 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 (participant)
Our next question comes from Laurence Alexander with Jefferies. Please go ahead.
Kevin Estok (Equity Research Senior Associate)
Hey, good morning. This is Kevin Estok on for Laurence Alexander. Thank you for taking my question. You've touched quite a bit on this already about, you know, you being confident with your outlook. I guess, what sort of downside scenarios are you sort of weighing? I guess in the event of a recession in the back half of the year into 2024, I guess just curious what levers you could pull.
Josh Spector (Executive Director of Chemicals Equity Research)
Pull the cycle to sort of to mitigate any, you know, deteriorating volumes, et cetera. Just curious to know how your business could fare, in the event of a downside scenario.
Corning Painter (CEO)
Let me say this. I'd say our current guidance, we think we can hold with, let's say, a mild recessionary impact, so say, I don't know, 5% on our volumes. I think the second half of the year. You know, customers started out the year very bullish for the second half of the year. That's always a little bit concerning. I'd say right now, you know, confidence is ebbing a little bit in that regard for the second half. Again, we think we've got the ability to take that in our current guidance.
Josh Spector (Executive Director of Chemicals Equity Research)
Okay. Thank you very much.
Operator (participant)
Our next question comes from Laurence Alexander with Jefferies. Please go ahead.
Corning Painter (CEO)
Laurence? Maybe you're on mute.
Laurence Alexander (Equity Analyst)
I think we're. I apologize. I think we had both of us in the queue. I guess the question then, I'll just take advantage of it. The question that I'll ask is just 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 mix effects? In other words, could you have, over the next few quarters, profit per ton decline purely on mix, or would you need just a demand shock for that to happen?
Corning Painter (CEO)
Our end markets, we price based on the value we're creating for our customer. We have some very different wide range of production technologies, so mix is always gonna be a large thing for us. If we saw a really strong demand surge, for example, some of the lower end grades, some of the masterbatch grades, yeah, you'd for sure see mix deteriorate in that scenario. Doesn't really reflect the strength of the underlying business. I think 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. Absolutely, you could see that move down. It doesn't only move up.
Laurence Alexander (Equity Analyst)
Okay. Thank you.
Corning Painter (CEO)
Maybe just to clarify, I mean therefore any given quarter. I think with the new products that we're driving and with the conductives, we'll continue to see this upward trend, but there's room for noise in that.
Laurence Alexander (Equity Analyst)
Got it.
Operator (participant)
Our next question comes from Kyle Mowery with GrizzlyRock Capital. Please go ahead.
Kyle Mowery (Founder and Portfolio Manager)
Good morning. 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, de-bottleneck, Kappa Acetylene come to mind. 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)
In the area of conductives, one element of our business is just access to the acetylene to be able to make that move. We do see additional sources, but I'd say there's a limit to that. 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 and income online. 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.
As a result, there's opportunities to do things like the cogeneration unit that just came on and other investments like that, where we could also just upgrade old plant equipment and get a step change in capacity or quality out of it. We have more of those, but I would say, you know, even if something was, Kyle, in the 15% range, that's still substantially above our cost of capital, and we would support that. The way to understand this buyback is, number one, we see the share price as significantly under-balanced. We see the ability to take a balanced approach as we look at these different ways we can allocate capital moving forward. Finally, that we've got, you know, much better cash flow moving forward.
The board wanted to give us just, let's say, a longer range flexibility without needing to go to the board to set up, 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 (Founder and Portfolio Manager)
Absolutely. Those sound like great investments in the business. Thank you for taking my question.
Operator (participant)
Our next question comes from Josh Spector with UBS. Please go ahead.
Josh Spector (Executive Director of Chemicals Equity Research)
Yeah. Thanks for letting me back in here. A couple of follow-ups I wanted 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. From your comments on 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 it's a couple things. Number one, we just shared, 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. We saw trucking activity drop a bit in March. On the other hand, you saw gasoline consumption coming up. Things like miles driven are nice, but they tend to be a lagging metric. It's a little bit of a mixed picture what's happening in the marketplace. All in all, I think, given April, it's gonna 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.
You know, I think in general, we're probably a little bit softer than where our underlying rate was for the first quarter. Again, I don't think any of that is really big and structural. You know, sometimes some of those one-time events are also gonna reverse. If oil prices stay low, there'll be an inventory re-reduction or repricing of the inventory. 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 gonna be a little bit weaker than the first one.
Josh Spector (Executive Director of Chemicals Equity Research)
Okay. No, appreciate that. I wanted to ask on Yeosu. You had some comments in the front end of the deck about, you know, commissioning its trials now, but I think you said, the 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 was a miscommunication. I mean, we've done some commercial sales already out of that site. We're putting a real focus on getting your qualification samples out, especially on the specialty lines. Meanwhile, selling out some of that capacity in, into others, like easier qualification markets. No, we have commercial sales right now, to be totally clear. I mean, that's not like a.
Josh Spector (Executive Director of Chemicals Equity Research)
Okay, got it.
Corning Painter (CEO)
A big contribution, right, in the second quarter. I think we'll see that more in the third and the fourth. No, that's something wrong.
Josh Spector (Executive Director of Chemicals Equity Research)
Okay. Yeah, I was actually more going the other way and trying to think if there's a cost burden baked in that as 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)
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 probably saw most of that in this last quarter. It would be a modest step up, perhaps, in the second quarter.
Josh Spector (Executive Director of Chemicals Equity Research)
Okay. All right. Thank you.
Operator (participant)
Our next question comes from Jeff Zekauskas with JPMorgan. Please go ahead.
Jeff Zekauskas (Equity Analyst)
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)
You know, 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 (Equity Analyst)
Are your sequential prices lower because of changes in raw materials, and that narrows your margins a little bit? Is that part of the one-time items stuff?
Corning Painter (CEO)
No. No. The one time is more like, if an input cost moves quickly, it can, and if it moves down, it can move more quickly than the pricing index. To be clear and for all my customers, hey, in Q4, it was the other way around. All right? It's just a little bit of noise. We don't always go into it. Again, we just had a number of these items all tip towards the favorable side. I just wanted to clarify, you know, one-on-one isn't like our clean run rate right now.
Jeff Zekauskas (Equity Analyst)
Great. Thanks so much.
Corning Painter (CEO)
Hey, Jeff. Jeff Glajch. I just wanted to clarify one thing on your earlier question on lower costs versus Q1 of last year. If you think about it-
Jeff Zekauskas (Equity Analyst)
No, fourth quarter versus the fourth quarter. Sequential.
Corning Painter (CEO)
It's fourth quarter. Okay. Okay. Never mind. Okay. I wanted to point the-
Jeff Zekauskas (Equity Analyst)
Okay. Yeah. Yeah. I understand
Corning Painter (CEO)
a little bit deeper.
Jeff Zekauskas (Equity Analyst)
Yep.
Corning Painter (CEO)
Got it. All right.
Operator (participant)
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. Please, sir, go ahead.
Corning Painter (CEO)
Thank you, everyone, for joining us today. A big thank you to our analysts and our investors for your questions, some of them very insightful and piercing, and they're getting 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. We appreciate your continued support. Thank you all very much.
Operator (participant)
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.