General Dynamics Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 5, 2023

There are 11 speakers on the call.

Operator

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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Wendy Wilson, Head of Investor Relations.

Operator

Thank you, ma'am. You may begin.

Speaker 1

Thank you, operator. Good morning, everyone, and welcome to Orion Engineered Carbon's conference call I'm Wendy Wilson, Head of Investor Relations. With me today are Corning Painter, Chief Executive Officer and Jeff Gleich, 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.

Speaker 1

Before we begin, I'd like to remind you that some of the comments made on today's Call our 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 5. 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.

Speaker 1

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

Speaker 2

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 in on shoring, higher barriers to entry and a trend towards deglobalization.

Speaker 3

We're one

Speaker 2

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 1st quarter adjusted EBITDA of approximately $101,000,000 a 21% increase year on year and 55% sequentially. Adjusted diluted EPS of $0.74 up 30% year over year was also a record with rubber pricing resetting in line with our expectations and Specialty outperforming these expectations. We had some timing benefits and a few non repeating items in the quarter, which helped our results.

Speaker 2

Our underlying adjusted EBITDA run rate was $92,000,000 to $93,000,000 which would have been record results all the same. We also delivered strong Q1 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.

Speaker 2

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. 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 2nd buyback authorization. Let me highlight 2 additional key accomplishments for this quarter. First, our greenfield facility in Weiwei, China is completed and shipping sample materials to customers.

Speaker 2

We expect to be ramping production and sales over the course of this year. 2nd, to our knowledge, we are the only carbon black producer to have completed 3 air emissions control projects in the United States at this point with our Borger, Texas plant upgrade now online. We have one more plan to go, which we expect to complete in the second half of twenty twenty three. 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 adjusted EBITDA.

Speaker 2

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 significant 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.

Speaker 2

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

Speaker 4

Thank you, Corning. On Slide 5, you can see the consolidated results in the Q1. 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 $18,000,000 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 Q1 showed solid sequential increases.

Speaker 4

One thing I would add regarding the Q1 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 decline in Q1 volume versus last year was expected and is primarily in our specialty business. However, we continue to see strong gross profit per tonne gains in both businesses. This helps us achieve the record adjusted EBITDA.

Speaker 4

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 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 Finally, we saw gains across all key metrics on a sequential basis.

Speaker 4

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.

Speaker 4

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 $3.21 to $4.67 in the quarter. I believe a good ongoing Comparison is the 2022 full year average of 3.36. You should expect GP per tonne to be in the mid-four 100s throughout 2023. We believe approximately $100 of this gain was due to pricing.

Speaker 4

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 deglobalization as well as the customer the significant customer investments in on showing. Furthermore, there are ongoing regional supply demand imbalances in the rubber markets in both North America and EMEA.

Speaker 4

Slide 10 shows the key factors adjusting 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 $29,000,000 in share buybacks in the quarter. As of the end of the quarter, we have completed approximately 2 thirds of our $50,000,000 share buyback program at an average price of $22 per share.

Speaker 4

We also reduced our debt by $36,000,000 to 822,000,000 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 to 2.5 range. As announced earlier this week, we achieved the emission targets Tidore 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.

Speaker 4

We believe the improved terms contributed $40,000,000 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 And 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.

Speaker 2

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 $350,000,000 to $380,000,000 up 17% Our adjusted EPS guidance range continues to be $2.30 to $2.60 per share, up 25% at the midpoint.

Speaker 2

In closing, I'd like to leave you with a few thoughts. 1st, The pricing we have achieved in our Rubber business is sustainable and is our new baseline for future expansion. Global trends like on shoring 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. 2nd, although tire demand is not immune to the business cycle, tires are consumable and they're not really a discretionary item.

Speaker 2

While no one knows the type of economic planning 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. 3rd, Global demand for our highly differentiated specialty products will return with the business cycle. Our focused investments in developing new innovative products Conductives and sustainable grades will help us fuel that demand. Meanwhile, we will not destroy value by chasing volume.

Speaker 2

4th, our Capa 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. 5th, you have 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 6 to 7 times business to me. I see an exciting future for Orion.

Speaker 2

We have spent the past 5 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 3 years as discussed in our 2022 Investor Day. Thank you.

Speaker 2

Operator, please open up the line for questions now.

Operator

Thank you. We will now be conducting a question and answer session. Our first question comes from Josh Spector with UBS. Please go ahead.

Speaker 5

Yes. 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 if you could comment kind of 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?

Speaker 2

Sure. So most of the Non repeating items we had didn't really play out in specialty. That was more a factor for us in 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 trending in a little Stronger than what we had suggested last time, Robert, really not based on pricing as you can see, but just underlying demand maybe a little bit weaker.

Speaker 5

Okay. No, that's helpful. And just 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-twenty 24. 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?

Speaker 2

Yes. No, Absolutely. It 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.

Speaker 2

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. But it's clearly An opportunity for everyone, 1st of all, who has capacity in Europe, that stands to gain from that.

Speaker 5

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

Speaker 2

All right. Thank you, Josh.

Operator

Our next question comes from Chris Kaddish with Loop Capital. Please go ahead.

Speaker 6

Yes. Just to follow-up on some of the commentary around trends in specialty and there was Some of the volume year over year volume comp there was associated with destocking, 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 Stockton has concluded what parts of the channel was that more pronounced and how that's playing out kind of thus far into the Q2?

Speaker 2

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

Speaker 2

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 a 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'd say the

Speaker 6

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 you 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 a Pretty accurate free cash flow generation number for metric for 2023, but I'm curious about 24, I know, I don't think you provided or talked about CapEx for next year. But directionally, it looks like there'll be a big Step up in 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.

Speaker 2

Sure. Well, first of all, as a Luxe 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 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.

Speaker 2

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?

Speaker 4

Sure, Chris. I think the Board Looked at our multi year 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. So 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

Speaker 2

We all see our share price as significantly undervalued, and that's another reason why to just have this open for us.

Speaker 6

Got it. Can I just one quick follow-up that would just on the benefits regarding what you just Sort of characterize this timing in the Q1 in the Rubber business? Does that become a negative issue for Q2? I mean, with some of that, We haven't characterized it with, just wondering if that was like a pull forward in demand or how to think about that?

Speaker 2

Yes. So there's often some timing impacts. We didn't talk about it, but in the Q4, 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.

Speaker 2

I think it's Yes, 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 Kind of give that and discourage a 101x4 kind of approach when people think about the years because I don't think that's accurate at this point. Some of that, sure, will reverse and April was a little bit weaker. So you can imagine us being, I don't know, down and we don't do guidance, but you can imagine Being down a little bit from where our mid our actual run rate was for the Q1. 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

Speaker 6

Thank

Operator

you. Our next question comes from Jonathan Monteng with CJS Securities. Please go ahead.

Speaker 7

Yes. Hi, good morning. It's Pete Lucas 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 For a short or medium term?

Speaker 2

Sure. Well, two things about China. If we think about the specialty 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 typical run rate. The Question of the opportunity for China in terms of rubber carbon black though is Europe in 2024.

Speaker 2

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 Sort of a positive in terms of longer term outlook for China.

Speaker 7

Very helpful. Thanks. I'll jump back in queue.

Speaker 2

All right. Thanks, Steve.

Operator

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

Speaker 8

Thanks very much. In the quarter, your Cost per ton in Rubber Black decreased about $110 sequentially. And for Specialty Blacks, it was about $2.50 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 it really came down, is that mix or is that something else?

Speaker 2

So are you looking at the walks where we show the

Speaker 8

water per month? No, I'm calculating it from your tonnage.

Speaker 2

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

Speaker 8

So for example, you said there's A $10,000,000 benefit in costs in your EBITDA slide. What's going on in that $10,000,000 drop in costs?

Speaker 2

Right. So if we were going to look at the specialty waterfall On Slide 3, 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 in prepayment past that sort of thing. And 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 like fundamental Step change in our underlying costs or our fixed costs, for example.

Speaker 8

So were the one time items, I don't know, dollars 10,000,000 in the quarter? How much were they?

Speaker 4

Sure, Jeff. The one time items and the combination of the timing and the one time items were About $8,000,000 to $9,000,000 in total, of which about a third of that were one time items and 2 thirds of it were timing.

Speaker 8

And how would you allocate it to the 2 businesses?

Speaker 4

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.

Speaker 8

So then what okay, so because a lot of the real strength was in specialty rather than in rubber 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.

Speaker 2

So 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 longer term commitments. Maybe some people would Takes them for half a year and think, oh, I'll buy spot from China, but I think 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 yes, I'd say there is Certainly more energy and emphasis and concern around the European situation, though the U.

Speaker 2

S. Market is also tight.

Operator

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

Speaker 9

Hey, good morning. This is Kevin Estock on for Laurence. Thank you for taking my question. So you touched Quite a bit on this already about you being confident with your outlook. But I guess what sort of downside scenarios are you sort of weighing.

Speaker 9

And 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 and pull the cycle to sort of mitigate any deteriorating volumes, etcetera. Just curious to know how your business could fare in any event of a downside scenario?

Speaker 2

Well, 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 ish percent on our volumes. I think the second half of the year, customers started out the year very bullish for the second half of the year. That's Always a little bit concerning.

Speaker 2

I'd say right now confidence is ebbing a little bit in that regard for the second half. But again, we think We've got that, the ability to take that in our current guidance.

Speaker 9

Okay. Thank you very much.

Operator

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

Speaker 4

Laurence? Maybe you're on mute.

Speaker 3

I think 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 that I'll ask is just about Specialty Black. 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?

Speaker 3

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?

Speaker 2

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, some of the lower end grades, some of the master batch grades. Yes, you'd for sure see Mix deteriorate in that scenario.

Speaker 2

It 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 See the impact of new products and so forth in that trend, but absolutely, you could see that move down. It doesn't only move up.

Speaker 3

Thank you.

Speaker 2

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.

Speaker 4

Got it.

Operator

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

Speaker 10

Good morning and thank you for taking my question. My question is a follow-up to Chris' 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, debottleneck, kappa acetylene come to mind, what sort of when the Board is 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 CE projects are there to be done?

Speaker 2

Well, so in the area of conductives, 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 People 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 molt around the business in terms of capacity that 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.

Speaker 2

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 can also just upgrade old plant equipment and get 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, that's still substantially above our cost of capital And we would support that. So the way to understand this buyback is number 1, 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.

Speaker 2

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 meaning to go to the Board to set 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.

Speaker 4

Does that help?

Speaker 10

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

Operator

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

Speaker 5

Yes. 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 Q1. Typically, there's a sequential step up in your earnings, I'd say.

Speaker 5

So From your comments on rubber, do you think some of your customers over ordered in Q1 and now there's some normalization, so you expect volumes down more than the 3%? Or is there something else driving that?

Speaker 2

I think a couple of things. Number 1, 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 A rubber demand.

Speaker 2

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. Things like miles driven are nice, but they tend to be a lagging metric.

Speaker 2

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're probably a little bit softer than where our underlying rate was for the Q1. But again, I don't think any of that is really big and structural.

Speaker 2

Sometimes some of those one time events are also going to reverse. If oil prices stay low, there will be an inventory reduction, so or 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 Q2 is going to be a little bit weaker than the first one.

Speaker 5

Okay. No, I appreciate that. I wanted to ask on Wabe. You had some comments in the front end of the deck about commissioning and trials now, but I think you said the first commercial product in 2024. Was that a change versus what you expected previously?

Speaker 5

Are you ramping that up more slowly? Or am I reading too much into that?

Speaker 2

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 put a real focus Into others like easier qualification markets. So now we're we have commercial sales right now to be totally clear.

Speaker 2

That's not like a big contribution, right, in the second quarter. I think we'll see that more in the 3rd and the 4th. But no, that's something wrong.

Speaker 5

Okay. Yes. And I was actually more going the other way and trying to think if there's a cost burden baked in that has that facility filled 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?

Speaker 2

So first of all, it's all in our guidance that we've given. We have probably had most of the fixed Cost 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.

Operator

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

Speaker 8

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?

Speaker 2

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 Q1 just on the trends we see.

Speaker 8

And 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

Speaker 4

No, no. The one

Speaker 2

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, Right. 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.

Speaker 2

I just wanted to clarify, 101 isn't like our clean run rate right now.

Speaker 8

Great. Thanks so much.

Speaker 4

Hey, Jeff Glick, I just wanted to clarify one thing on your earlier question, lower costs Versus Q1 of last year. No, first of

Speaker 8

all, it was Q4 versus the Q4 sequential. For the Q4. Okay. Okay.

Speaker 4

Never mind. Okay. I wanted to point

Speaker 8

the Yes. Yes. I understand.

Speaker 2

Got it.

Speaker 5

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. Please sir, go ahead.

Speaker 2

Thank you everyone for joining us today and a big thank you to our analysts and our investors for your questions. Some of them are very insightful and You're saying that I gave good and further information out to the broader investment pool. We appreciate that. We believe we can deliver Further appreciation to you, our investors, is 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.

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General Dynamics Q1 2023
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