Venator Materials Plc (VNTR) CEO Simon Turner on Q1 2019 Results - Earnings Call Transcript

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About: Venator Materials PLC (VNTR)
by: SA Transcripts
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Earning Call Audio

Venator Materials Plc (NYSE:VNTR) Q1 2019 Earnings Conference Call May 9, 2019 8:00 AM ET

Company Participants

Jeffrey Schnell - Director, Investor Relations

Simon Turner - President and Chief Executive Officer

Kurt Ogden - Executive Vice President and Chief Financial Officer

Conference Call Participants

Eric Petrie - Citi

David Begleiter - Deutsche Bank

John McNulty - BMO Capital Markets

Matt Skowronski - Nomura Instinet

Duffy Fischer - Barclays

Josh Spector - UBS

Steven Haynes - Morgan Stanley

Jim Sheehan - SunTrust

Steve Byrne - Bank of America

Adam Bubes - Jefferies

Hassan Ahmed - Alembic Global

Roger Spitz - Bank of America

Operator

Good day and welcome to the Venator First Quarter Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jeffrey Schnell, Director, Investor Relations. Please go ahead.

Jeffrey Schnell

Thank you, Andrew. Good morning, everyone. I am Jeffrey Schnell, Director of Investor Relations for Venator Materials. Welcome to Venator’s first quarter 2019 earnings call. Joining us on the call today are Simon Turner, President and CEO and Kurt Ogden, Executive Vice President and CFO.

This morning, we released our earnings for the first quarter of 2019 via press release and posted the release and accompanying slides to our website at venatorcorp.com. During this call, we may make statements about our projections or expectations for the future. All such statements are forward-looking, and while they reflect our current expectations, they involve risks and uncertainties and are not guarantees of future performance. You should review our filings with the SEC for more information regarding the factors that could cause actual results to differ materially from these projections or expectations. We do not plan on publicly updating or revising any forward-looking statements during the quarter. We will also refer to non-GAAP measures, such as EBITDA, adjusted EBITDA, adjusted net income, free cash flow and net debt. You can find reconciliations to the most directly comparable GAAP financial measures in our earnings release, which has been posted to our website.

It’s now my pleasure to turn the call over to Simon Turner, President and CEO of Venator.

Simon Turner

Thanks, Jeff and good morning everyone. It’s my pleasure to welcome you to our earnings call. Let’s begin on Slide 3. The global economic and TiO2 industry environment in the first quarter of 2019 was challenging, characterized by stable demand in North America, modest growth in Europe and weakness in Asia mostly due to weakness in China. Notwithstanding these challenges, Venator delivered $60 million of adjusted EBITDA, a $15 million gain versus the prior quarter as higher TiO2 volumes and improved operational performance offset a convergence of average TiO2 selling prices and tough year-over-year comparisons in our Performance Additives segment.

Turning to Slide 4, our Titanium Dioxide segment, in the first quarter, our Titanium Dioxide segment generated $61 million of adjusted EBITDA compared to $125 million in the first quarter of 2018 after excluding the lost EBITDA from our Pori, Finland facility, which was reimbursed through insurance proceeds. Excluding foreign currency, average selling price declined 6% compared to the prior year and declined 3% compared to the fourth quarter of 2018, in line with our expectations. Pricing for functional TiO2 products was most impacted in Europe, which was the highest price region in the prior year period as average selling prices converged the lower annual stable North American region. Asia prices also moved lower driven by lower demand in China.

We continue to see higher and more stable pricing dynamics for our specialty TiO2 products compared to functional TiO2 products. Titanium dioxide volumes increased 3% compared to the prior year period, in line with our expectations and driven primarily by advanced purchases of pigment ahead of a potential hard Brexit, increased availability of higher value specialty TiO2 products and the introduction of new differentiated products.

Specialty volumes grew 11% year-over-year, underscoring our commitment to transferring production from Pori to other sites in our network, strengthening our leadership position in these higher-value applications. By region, we saw clear differences in demand. In Europe, which is our largest market, modest growth was augmented by the impact of Brexit and higher sales of specialty TiO2. In North America, where we sell mainly to smaller customers and into non-slurry applications, demand appears to be stable. And in the large but fragmented Asian market, demand remains sluggish, mostly due to weakness in China. We are encouraged by our order book and conversations with customers, supports our view that the impact of customer de-stocking, which began in the third quarter of 2018, has largely run its course.

As we look into the second half of 2019, we expect TiO2 volumes to better reflect historical seasonal patterns. In the first quarter, we incurred higher variable cost inflation, including raw material and energy costs, which were partially offset by a $2 million benefit from our Business Improvement Program. We envisage these inflationary pressures will continue in 2019 particularly for high grade rutile and slags, and we are taking action to mitigate these costs.

Turning to the TiO2 outlook, in the near-term, performance will be influenced by regional dynamics and be characterized by price and volume stability in North America, modest demand and largely stable pricing in Europe and stable price and weak demand in Asia. We expect to benefit from higher production of our specialty TiO2 products and efficiency actions as part of our Business Improvement Program, which partially offset raw material cost inflation. Notwithstanding an apparent soft economic backdrop in 2019, longer-term TiO2 industry fundamentals remain favorable. We continue to implement measures with our customers to reduce our price and margin volatility, including tailored customer agreements, inventory controls and production plans that align with our customer commitments.

Turning to Slide 5 on Performance Additives, revenues declined 17% compared to the prior year period driven primarily by a 14% decline in volumes, a 2% decline in average selling prices and a 2% headwind from foreign currency. Sales volumes declined broadly across all businesses compared to a strong prior year quarter. Color pigments volumes were impacted by prior plant closures as part of our 2017 Business Improvement Program and softer demand in construction-related applications due in part to adverse weather conditions in North America that have delayed the season. We expect to recover some but not all of this volume in the second and third quarters. Pricing was flat on a local currency basis after excluding the prior restructuring actions. In timber treatment, volumes were down compared to prior year due to larger sales to a large customer as a result of a tender in the third quarter of 2018. Pricing in timber treatment was roughly flat compared to the prior year period.

In functional additives, we saw a continuation of lower demand in auto and electronics-related applications, which began in the fourth quarter of 2018. Pricing declined low single digits due to adverse mix within the functional additives business. The Performance Additives segment generated $15 million of adjusted EBITDA in the quarter, down from $24 million in the prior year quarter but a sequential improvement of $12 million. The year-over-year decline in EBITDA is primarily attributable to low volumes in all businesses due to the aforementioned headwinds. Lower direct and indirect costs due to our business improvement programs partially offset these items. We have taken significant steps to streamline our cost structure in the Performance Additives segment yet the transformation is still ongoing. Notwithstanding these challenges, we continue to expect Performance Additives EBITDA in 2019 will exceed that of 2018.

Moving on to Slide 6 in our business improvement programs, we are intensely focused on strengthening our business and improving our cash flow. We commenced our 2019 Business Improvement Program in the fourth quarter of 2018. This program is designed to generate $40 million of EBITDA improvements, building on the $60 million we delivered as part of the prior program. We intend to complete all the actions necessary to deliver on our target by the end of 2020, ending the year at a full run rate level. We captured an additional $3 million of EBITDA benefit from our 2019 Business Improvement Program in the first quarter. We expect to continue to build on and report the benefits from this program in the subsequent quarters.

I will now pass the call over to Kurt to discuss our financials.

Kurt Ogden

Thanks, Simon. Let’s go ahead and turn to Slide #7. Total adjusted EBITDA declined $72 million compared to the prior year period after excluding the impact of Pori and the carbon credits we sold in the first quarter of 2018. The majority of the decline is attributable to lower selling prices in our Titanium Dioxide segment. Higher TiO2 volumes were more than offset by lower sales volumes in our Performance Additives segment. Additionally, our Business Improvement Program partially offset expected raw material cost pressures and foreign currency. Compared to the prior quarter, total adjusted EBITDA increased $15 million. Higher sales volumes in both Titanium Dioxide and Performance Additives were the largest contributor to the improvement. Average TiO2 selling prices were down approximately 3% compared to the fourth quarter of 2018 and the aggregate average price in Performance Additives was flat. Contribution from our Business Improvement Program partially offset raw material cost pressures and foreign currency.

Turning to Slide 8, Venator continues to have an attractive financial position. At the end of the first quarter, we had liquidity at $344 million. Our cash balance was $80 million and the undrawn availability under our asset-based revolving lending facility was $264 million. Venator ended the quarter with net debt of $666 million, translating into an attractive net debt leverage of only 2x our trailing 12-month EBITDA. Structurally, we continue to enjoy relatively low tax rates. This is primarily a function of the countries where income is generated, the $1.1 billion in net operating losses from which we benefit and tax valuation allowances. Our quarterly effective tax rate will be higher in the near term and vary from quarter-to-quarter due to the mix of income earned in the valuation allowance countries. However, we continue to forecast our long-term adjusted effective tax rate will be between 15% to 20%, with the near-term cash tax rate of 10% to 15%.

Turning to Slide 9 in our cash bridge, total free cash flow used in the first quarter was $82 million. This was significantly impacted by a typical seasonal working capital use and the timing of Pori-related expenses, both of which were in line with our expectations. Our outlook for 2019 uses of cash remains unchanged and is as follows: we expect total CapEx of $130 million, which includes capital expenditures related to the specialty technology transfer. Cash interest is expected to be $40 million to $45 million, and cash taxes are expected to be within our long-term range of 10% to 15%. Restructuring expenses are expected to be approximately $30 million to $35 million, which includes approximately $15 million of cash restructuring for our 2019 Business Improvement Program. We expect cash pension and other expenses in 2019 to be $60 million to $70 million. Working capital was a use of approximately $48 million in the first quarter of 2019. This was expected due to normal seasonality in TiO2. Actions we are taking are designed to deliver a $60 million reduction in working capital compared to 2018 and will be weighted significantly to the second half of the year. That being said, the closing of the European laminates business, which occurred on April 26 of this year will provide for an additional use of working capital as we initially build inventories. We expect the impact to be $5 million to $10 million in 2019, which we will try to offset. Finally, our Pori-related expenses are expected to be a total of $65 million to $70 million, including approximately $45 million of project wind down and closure costs as well as $20 million to $25 million of other operational costs. We are pursuing additional measures to further reduce these costs.

With that, I’ll turn it back over to Simon for concluding remarks.

Simon Turner

Thank you, Kurt. Before moving to the final slide, I’d like to provide an update on our acquisition of the European paper laminates business and the break fee resulting from our exclusive key agreement with Tronox regarding Ashtabula. On April 26, we completed the acquisition of the European paper laminates business from Tronox for total consideration of €8 million, €1 million paid upfront and the remaining split evenly on the first and second anniversary dates, respectively. With the closing of the laminates transaction, a break fee of $75 million is now due and payable from Tronox in full under the exclusivity agreement no later than May 13, 2019. Venator at all times acted in good faith during its efforts to reach a definitive agreement to purchase the Ashtabula site and will seek judicial relief to compel Tronox to comply with this obligation to pay the break fee if necessary. We will not be commenting further at this time and appreciate your understanding in the matter.

Moving to Slide 10, the first quarter of 2019 was challenging, characterized by stable demand in North America, modest growth in Europe and weakness in Asia. We continue to implement tailored measures with our customers that limit that our price and margin volatility and to operate our assets at corresponding utilization rates that deliver those committed volumes with the ability to increase our production when market conditions warrant. Customer de-stocking in TiO2, which significantly impacted the second half of 2018, is largely complete and we expect to return to more normal seasonal patterns in the second half of 2018. Our specialty TiO2 business is performing very well with increased volumes and higher and more stable pricing dynamics than our functional TiO2 products. The performance of our specialty TiO2 in the first quarter and throughout the second half of 2018 underscores our strategic priority and commitment to this business, and we are advancing with the transfer of technology and the preparation for the intended closure of the Pori facility. These actions will strengthen Venator’s leading position in high-value specialty TiO2 applications.

We have made good progress on our Business Improvement Program designed to further strengthen our cost structure, reduce working capital and pursue a range of measures that all improve our cash flow generation. We expect to continue to deliver on our targets in the coming quarters. We are encouraged by the medium and long-term industry fundamentals across our portfolio. The range of measures we are implementing now will better position Venator to execute on its targets and deliver shareholder value.

With that, we thank you for your continued interest in Venator. We would now like to open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from P.J. Juvekar of Citi. Please go ahead.

Eric Petrie

Hi, good morning. This is Eric Petrie on for P.J.

Simon Turner

Good morning.

Kurt Ogden

Good morning.

Eric Petrie

So I wanted to ask you said that you are taking actions to reduce inflationary costs of energy and raw materials. Could you remind us how much chloride or purchases you make following the Pori volume transition and are you looking to do a JV in that mine or are you extending your purchases of longer term contracts or could you give us a sense of those actions?

Simon Turner

Yes, I think we have run through a number of times before, our mix of ores. This is Simon here. Clearly, we buy less high-grade chloride feedstock, chloride slag and rutile than our competitors and the majority of the materials are sulfate ilmenites and either sulfate slag. As regards your questions around our plans, at this time, we don’t have any plans to currently integrate into mining operations. We said for some time that we have a very wide and broad slate of feedstock types. We have a very broad range of suppliers, and we have a lot of shorter term contracts in the sulfate feedstock purchasing area. And it’s in our interest to continue to get the best possible pricing in those areas, which we think continues to show up o our results relative to some others. As regarding changing contracts, what I would say to you is that we’re obviously very alert to dynamics in this market. Clearly, there has been, for a little while, a situation where higher grade chloride materials are a little bit tighter than some of the sulfate materials. But at this time, we continue to see typical contract lengths and negotiations around price around the 6-month level and that’s been something that’s been in the making for some time.

Kurt Ogden

Eric, just to give you a little bit more detail for your modeling. As it relates to the tonnage that we purchase and consume, it’s approximately 750 to 800 kilotons annually that we purchase and/or consume. Now keep in mind that nearly half of that is ilmenite, which has only about a 50% TiO2 content. And so the actual ore consumption or purchase from a volumetric standpoint looks pretty high. I would also add to that, that as we have indicated in the past, we see a broad set of inflationary pressure on our ore feedstocks. We think that’s in the range of $35 million to $40 million, 2019 over 2018.

Eric Petrie

Thanks. Helpful. And then it seems like your major end-markets for TiO2 are stabilizing, are you seeing modest improvement? So I wanted to ask, first, are you expecting restocking in the chain in second half and secondly, what are your thoughts on restoring Pori’s functional TiO2 capacity?

Simon Turner

Yes, I think in a nutshell, we kind of always position ourselves as cautiously optimistic about the second half of the year. Clearly, we saw that large de-stock in the second half of ‘18. As it relates to Pori, at this time, we have not altered our stance around focusing on the transfer of our specialty products from Pori and have no current plan to do anything different on our functional products.

Eric Petrie

Thank you.

Operator

The next question comes from David Begleiter of Deutsche Bank. Please go ahead.

David Begleiter

Good morning. Simon, you guys did have a price increase in North America with implementation in May 1, is it fair to say that, that increase was not successful? And that’s my first question.

Simon Turner

Yes. So I think that in response, you are quite correct, I would remind you, I guess that we are one of the smaller producers in North America, the smallest in timber production facility. We had hoped with what we see is pretty stable demand in North America, so it’s a push for price, and we will only be – have some partial success in that regard and potentially later in the quarter I think is the way I would respond to that.

David Begleiter

Very good. And just have you gained any share due to either lack of Chinese imports or some of your – one of your competitors perhaps being a little more aggressive on their contract stance?

Simon Turner

Sorry, could you clarify the second part of the question? I am note sure – I understand the first half but the second part...

David Begleiter

I want to understand one of your competitors, because of their contract stance they put in place here have given up some share and you are perhaps wondering if you have gained any share due to a lack of Chinese imports or from one of your competitors who have been a little more strict on their contract implementation?

Simon Turner

Yes. I mean look, I think it’s clearly there is some quite divergent and different data points amongst the range of producers. I think what we would say about the situation is the following. We have a very different market position for the other large scale producers and certainly, the large scale chloride volumetric producers. In many ways, we have the least like than the other producers. For example, we are more specialized. We have got a broader application mix. We are much lower exposed to large decorative coatings. We have no exposure to automotive coatings, where clearly there has been some real headwinds and we have a very limited presence in China. So I think that if you look at Venator of its market position and its geographic footprint, a couple of comments I would call out. Our specialty volumes are up by 11% year-on-year, so clearly that is something we’re pleased about. We continue to focus on higher, more stable prices. If you think about our position in North America and Asia, we’re generally pretty small. In North America, we sell to smaller customers. We’re not in slurry, and we’re pretty much sold out, so there’s no question that we would not be able to, even if we wanted to, gain share in North America. And you can take that comment in Asia as well off of our TK plant in Malaysia supplemented by specialty volumes. It’s a highly fragmented market. We’ve seen Chinese producers agitate for price there despite the fairly weak situation, so which just really leaves Europe. And so if you look at the math around some of these kind of, like, share loss numbers that are out there with the various participants, it’s true we saw a bit of full forward Brexit effect in Europe in the first quarter, which would pull forward demand probably from 2Q into 1Q. We did have some new product introductions that have been very well received in more specialty sales. And the way we would see it is while it’s pretty hard to disentangle and quantify each of these drivers, the feedback from customers is destocking is largely an end. Our sales were in line with expectation. Pro forma for Brexit were pretty flat year-on-year. So, if we gained any share in Europe, really, we’re talking about a couple of thousand tons. And that is frankly, a very small number compared to the kind of numbers that you have to kind of, like, look at to account for some of these deltas of the other players. So, what I would further add to this to kind of, like, shore up the position I’ve just articulated to you is that we are running our assets in the kind of mid to high 80%. We have not planned our inventory. We’ve got normal, slightly high probably inventory going into the second quarter, and we are focusing on matching our production to the commitments we’ve made to our customers it in a focused and rational way.

David Begleiter

Thank you. Very helpful. Thank you very much.

Operator

The next question comes from John McNulty of BMO Capital Markets. Please go ahead.

John McNulty

Yes, good morning. Thanks for taking my question. So, with regard to the rising raw material cost, and I guess the market being in better shape, do you see a need for increased pricing as you kind of look into the back half of next year and to 2020?

Simon Turner

You mean the back half of this year or...

John McNulty

Yes. Back half of this year and then looking to 2020 as well, basically to offset some of those raw material and energy cost escalations that you’re highlighting.

Simon Turner

Yes, certainly. I mean we would see that since there’s a scope for us to improve margins in a focused and responsible way. We’ve got these headwinds. We are partially offsetting some of these headwinds. But we have to get through this recovery period from the destock last year through the first half of this year. And as I said, we believe midterm in better fundamentals and that would involve high price points.

John McNulty

Got it. And then when you think about the deviation between your specialty pricing and kind of the more generic pricing, I guess how was specialty pricing up in the quarter or was it flat? Was it just off a couple of percent? I guess how should we think about that compared to the down 6% for the total business?

Simon Turner

It was up slightly sequentially, but the way we think about it is it’s largely flat because it’s we set out for stability in those markets. Typically, those prices, because they’re elevated against the functional peers, we have for some time been we have contracts in place that run longer and there’s less movement quarter-on-quarter, which is the situation we desire.

John McNulty

Got it. And then just the last question, just regarding Asia. I think in your commentary, you indicated you, kind of expected price stability and weak volumes or weak demand. I guess how are you thinking about how that weak demand has an impact on the overall pricing? And I guess my concern would be do we see any risk of some of those volumes making their way to Europe the way they have in the past when there was a big disconnect between Asian pricing and European pricing? How should we be thinking about that?

Simon Turner

Well, the way obviously, I can’t tell how you should think about it, but quite happy to comment how we would see it. So, we saw this 25% destock in the second half of last year. And as would be typical, we’ve got weaker demand particularly in Europe and Asia. We see price convergence. And you’ll recall a year ago, European dollar prices was significantly higher than U.S. prices and that accounts for most of the mix difference in our price down on a year-on-year basis because you get that convergence. Now as we look into 2Q, we are looking at a far more stable situation across the piece in terms of pricing. And the way we see this is that we’ve been calling out for some time the rationality of Chinese producers even in a weak demand Asian environment have been pretty disciplined in putting in price increases, putting a floor under any market falls even in weak conditions and being responsible about how much they’re shipping out of China into Europe and North America.

And we see in the first quarter of 2019 meaningful declines in export out of China into both North America and into Europe. And to us, that is continued evidence of kind of rational behavior by Chinese producers so we’re not saying there’s not a risk. But what I’m saying to you is that there’s more and more evidence of rationality. And I believe that the kind of pricing levels we’re at here in Venator in the second quarter are higher than we would have seen in previous cycles due to the kind of rational actions that we’re taking and, I guess, the Chinese are as well.

John McNulty

Great thanks very much for the color.

Operator

The next question comes from Aleksey Yefremov of Nomura Instinet. Please go ahead.

Matt Skowronski

Good morning. This is Matt Skowronski on for Aleksey. You mentioned that customers were accelerating purchases ahead of Brexit in the first quarter. Do you expect this pull forward of demand to have a meaningful impact on your volumes in 2Q?

Simon Turner

Look, I do think it will have some impact in 2Q in Europe here. There has been a bit of a pull forward. The way to think about it is probably the dominant component of our volumetric year-on-year difference. It doesn’t account for all its relatively small but it will be pulled forward out of 2Q. And so, while we would say to you that you could expect in Europe a seasonal uplift in volumes over 1Q, it may not be quite the level we’ve historically seen or would wish. That’s the way I’d characterize it.

Matt Skowronski

And then Kurt, as my follow-up, can you quantify the bridge between 1Q and 2Q with respect to price, volume, raw materials and other?

Kurt Ogden

Boy, if I did that, I’d be giving pretty specific guidance on the second quarter, right? So, I will tell you that generally speaking, as we think about the bucket into the second quarter, we expect some volume uplift on a sequential basis that will lift our EBITDA. Price for the most part is going to be flattish for TiO2. And for performance, we may continue to see some surprising headwinds in the additives business. Corporate and other is going to be pretty flat and then we’ll on board some inflationary pressure and cost of goods sold as we consume some of these higher-priced raw materials and other feedstocks. So, I don’t know that, that gives you a lot of clarity other than to at least give you just directionally how those buckets are shaping up.

Matt Skowronski

That’s helpful thank you.

Operator

The next question comes from Duffy Fischer of Barclays. Please go ahead.

Duffy Fischer

Yes, good morning guys. I was wondering if you could just help me break out a little bit on TiO2 on the price. With more specialty, the mix effect should have been, I would think, quite positive in that. So, something in there was down quite a lot to get down 6% if you’re up 11% volume on specialty. You said price for specialty was flat. That looks like it means the functional pricing was down mid-teens or something along those lines. Could you just kind of break out how all those numbers fit together?

Simon Turner

Yes. Look, we don’t break out the difference in the volumes and the prices, Duffy, but I will say to you is that the types of numbers you quoted there is it’s not of that scale because the specialty is relatively small. So, it depends on what you include in your kind of weighted mix, but it’s relatively small.

Duffy Fischer

Okay. Because I mean just optically, when you look at the numbers, I mean, what the numbers look like is you cut price to run for volume. And when you look at what your big competitor did on volume, what it looks like is you run the risk of maybe breaking their business model, which I would argue is good for the industry. So can you just – I mean obviously there’s some put and take, you addressed that a little bit, but do you think looking at these numbers, you run the risk of kind of provoking the bigger player in the space to maybe having to do the same thing to fight back and take some market share back?

Simon Turner

Yes. Look, I think I tried earlier, Duffy, and I’ll have another go with it, to reiterate that we just don’t see it like that. Because we clearly have spoken for some time now about our own actions primarily, which is clearly, we can’t talk about details of others or speak on behalf of the industry, but we can speak for ourselves. And we’ve laid out for you the situation opposite our regional and manufacturing footprint. So, the we have not been running our plants flat out.

If you do the math about one large competitor, let’s say, and look at that kind of like volumetric losses, we’re talking about a number towards 100,000 tons. I’ve set out for you a situation whereby we are constrained in Asia and North America with smaller positions. We go to the market competing mainly in a broader range of applications, broadly speaking, less exposed to coatings. We are not big in China. So, I hope you can see why it’s less than likely that it’s Venator that is kind of jumping into high-volume sales with this market and manufacturing footprint it has. Now if we come into Europe, there has been some pull forward effect of Brexit. As I said earlier, we have been focusing on the way we manage our commitments to customers and focusing on insisting that they honor their side of the bargain and we honor our side. We’ve been very disciplined with our manufacturing, our operating rates and our inventories, and we have not been out there trying to gain and neither have we anything like a kind of share that would account for these large-scale numbers.

Now I have seen some at least one other data point that would suggest that there’s been there could be others that are doing that. I want to be very careful here. I mean we are not spokesmen for industries. I don’t want to get into a discussion about what’s good for the industry and so forth. But what I can tell you is good for Venator is that way we’re prosecuting our business makes sense for our manufacturing and market footprint. And we do not believe to any degree of size that we have been the beneficiary in the first quarter of any share. So, I guess we’ll need to see the full picture as it emerges, and it will be for people like yourselves to decide how that all fits together but that’s where we sit. And we are agitating to make sure there’s less volatility in our business with our pricing and monetary arrangements with our customers in a rational way that makes sense to Venator. So, I think that’s probably, Duffy, the best that I can say. I don’t really feel comfortable getting into, trying to represent what’s good for the industry and so forth. But that’s how it is for our business.

Just turning to price, what I would say to you is while it maybe, tempting to jump to the conclusion that the price volume hangs together as an equation, what you’ve got to allow for is the significant exposure to Europe that we have and the fact that the European selling price in dollars 12 months back was hundreds of dollars higher than the U.S. market. So, we have further to fall in the 20 in the 25% destock environment in the second half. I would argue that as we come into the second quarter, we’ve been successful to our actions in putting a stop under price falls. And in fact, we’ve been more successful than in previous cycles, so that would be how, I guess, refute that position.

Kurt Ogden

So, Duffy, let me just add to that to underscore what Simon has already said. More than half of our functional sales volumes, in fact, approximately 60%, are in Europe. We exited the fourth quarter of 2018 where average selling prices in Europe were above North America. We have been talking about price convergence for some time now as European prices have been coming down and converging towards North American prices. In the first quarter, now we’re at a point where we have convergence of those respective regional prices, but we saw that effect in our results here in the first quarter. And I believe that’s what Simon has been speaking to.

Duffy Fischer

Terrific. That’s very helpful answer. Thank you guys.

Operator

The next question comes from John Roberts of UBS. Please go ahead.

Josh Spector

Hi guys. This is Josh Spector on for John. Good morning. So just a question, follow-up on the mix side of things, so as specialty grows, and I understand the mix is still relatively small, but if you were to look at last year ex Pori versus your thoughts on this year, what does the mix look like between the 2 years?

Simon Turner

So, there’s clearly going to be an increase in overall sales volume in 2019 over ‘18 because of the second half factor. So, that kind of distorts the pictures somewhat because clearly, you’re going to expect a higher volume. And in all likelihood, there’ll be a pro rata – large jump in, in functional cells. But nevertheless, if you peel back and look at our specialty sales of ‘18 and our forecast specialty sales of ‘19, we would see a pretty nice increase in 2019 as we start the process and prepare to reenter and build up our position in those markets.

Josh Spector

Okay. I guess along the same lines with that, as you start to rebuild your presence in those markets, I mean, you’ve been pretty clear on the $15 million incremental for next year. Does some of what you’re getting this year bite into that or are you thinking about those as totally separate programs?

Simon Turner

Well, they’re not separate programs, but I think if it’s by Venator, it’s only a small amount, right? So, in other words, it’s not a speed up, it’ll be a slight buildup.

Josh Spector

Okay, alright. Thanks guys.

Operator

The next question comes from Steven Haynes of Morgan Stanley. Please go ahead.

Steven Haynes

Hi, guys, thanks for taking my question. You guys talked a little bit about China being a bit more rational. I was just curious if this is also being driven by kind of any environmental kind of regulatory changes there following some recent plant explosions? Thanks.

Simon Turner

Yes, I think the situation in China, we’ve taken great pains to explain that we believe that the playing field is leveling between the larger multi-nationals and many Chinese participants in the sense that the environmental and quality-based issues lead to increased cost structures in China. And I think that those increased cost structures, which are driving Chinese producers to push through price increases in Asia and that’s predominantly the dynamic that’s in play here. We will expect to see capacity grow in China at a lower rate, of course, but really, we’d like to basically stress that Chinese cost structures are going up and they are managing that into their pricing accordingly.

Steven Haynes

Yes, thank you.

Operator

The next question comes from Jim Sheehan of SunTrust. Please go ahead.

Jim Sheehan

Thank you. Good morning. Could you comment please on where you see TiO2 inventories currently in the industry versus normal?

Simon Turner

Yes, Jim. I think it’s pretty hard, as I said earlier, to speak on behalf of the industry. And it feels to us that as we ran our plants at mid-to-high-80s in the first quarter, that certainly our inventories are a little bit higher than we’d like going into the second quarter and we think they’re a little bit higher than industry level. So, if I were to take a view on that coming into the second quarter, I’d say, industry levels around the 55 daymark.

Jim Sheehan

Terrific. And could you also talk about how you’re thinking about your business portfolio in terms of strategic options?

Simon Turner

Yes, look, I mean, I think there’s no change from a last timeout. We like the businesses we have. We see optionality to improve them and that is our default plan as it comes into the now new Business Improvement Program and there will be further opportunities out there. Of course, we will always be opportunistic. And should situations arise that we deliver better value to shareholders and , of course, we’d always look at those.

Jim Sheehan

And in Performance Additives, what do you look at as a normalized EBITDA level for that business?

Simon Turner

Yes, so, look, I think it’s fair to say for these past couple of years, our internal targets to get this business up to a kind of triple-digit EBITDA mark, and we have not yet reached that goal. We had quite a setback in the fourth quarter of last year, we covered on our previous call. We did see a pretty healthy rebound in 1Q this year from 4Q going from $3 million in 4Q into $15 million in 1Q. I think it’s fair to say, Jim, that some of the automotive electronics destock and weakness has fed through to our Functional Additives, and a little bit of a delayed season in the little color pigments. So, there’s – that $15 million is still a couple of million light of where we’d like to be. And certainly, we were not going to get to the $24 million of the year prior. So, look I think it’s not $100 million. There is some heavy seasonality in the business. I think you’d have to say that with our comment on where we were last year, we’d expect to get up above the $70 million mark, which would represent an advance on last year.

Jim Sheehan

Thanks, Simon.

Operator

The next question comes from Steve Byrne of Bank of America. Please go ahead.

Steve Byrne

Yes, thank you. On that 11% volume increase year-over-year in specialty TiO2, what would you say was your organic volume growth as opposed to the inventory pull were the product pull from Q2? And how would you characterize your volumes relative to that overall end-market? Are you gaining share? And if so, what do you think is driving that?

Simon Turner

So, I’m just clarifying that those questions relate – the first question relates to specialty. Does the second question relate to all sales?

Steve Byrne

It was really in specialty, Simon.

Simon Turner

Okay. So, in specialty, it’s pretty straightforward that we had higher production in specialties, strong demand for those products. We don’t see a lot of that as pull-forward. We see that as underlying demand.

Steve Byrne

And are you gaining share from your competitors as you’ve increased your production rates?

Simon Turner

Look, it could be some nominal share gains, but it’s a fairly small part of our base. I would say it’s more related to underlying demand than share.

Steve Byrne

And then just one last one on your corporate expense, up year-over-year. Is there anything else going on in there other than currency effect?

Kurt Ogden

No, it’s – Steve, it’s primarily FX, and so as – and the real key currency movements to keep track off are the U.S. dollar relative to the euro and the pound. We’re long euro, short pound. And, so to the extent that we have less volatility in those FX rates moving forward, we wouldn’t expect anything outside of the normal corporate expense through the remainder of the year. So, we think about corporate on an annual basis as approximately $50 million to $55 million annually.

Steve Byrne

Okay, thank you.

Operator

The next question comes from Laurence Alexander of Jefferies. Please go ahead.

Adam Bubes

Hi, everyone, Adam Bubes here on for Laurence Alexander. I just had one quick question today. You’ve talked about the unexpected end of customer destocking in TiO2. But I was wondering, when you think about overall order patterns, does it support any potential green shoots in Europe or Asia? Thank you.

Simon Turner

Look I – sorry, was the question finished or –

Adam Bubes

No, that’s it.

Simon Turner

So, the question is does it support a view of any green shoots in what Europe and Asia?

Adam Bubes

Correct.

Simon Turner

Yes, look, I’m finding it hard with what we see in Europe to kind of like talk about green shoots. I think that there was some pull- forward demand into the first quarter. I think we’re going to see a bit more of a muted or subdued second quarter. There is still growth. It’s pretty low; it’s pretty modest. It’s still there, but on the other side of the ledger. The macros in Europe still look very challenging. And I would say the same in Asia. I mean, in Asia, we had a pretty slow start to the year. We got through the Chinese New Year, things picked up and then things slowed down again. And just very recently, it’s been a bit stop start and I would describe it as – as similarly sluggish. So, I think it’s hard to characterize yet as green shoots.

Adam Bubes

Okay, thank you.

Operator

The next question comes from Hassan Ahmed of Alembic Global. Please go ahead.

Hassan Ahmed

Good morning, Simon and Kurt.

Simon Turner

Good morning, Hassan.

Kurt Ogden

Good morning.

Hassan Ahmed

I know you guys have talked a fair bit about sort of the underlying demand trends and the like. But apologies if I’m sort of repeating this, but just truly trying to get a sense of what global underlying demand has looked like thus far in this year? I mean, obviously, we’ve seen a bunch of moving parts, some companies out there losing share, some gaining share. You obviously rightly pointed out some of the sort of not specific to you guys, but some issues with Brexit, some issues with the auto end-market and the like. So, the question is, globally, what has demand growth look like, underlying demand growth look like this year? And what’s your expectation for the remainder of the year in a trade war resolution environment, as well as if this whole trade war thing lingers on as well?

Simon Turner

Yes, look, I mean, there’s a lot in that question there, Hassan. So, I don’t want to be speculative and I’d rather confine my remarks to what we kind of see than what we might see. I think we said in terms what we might see was we would just broadly say, we were still cautiously optimistic about the second half and certainly around the medium-term particularly as we recover from this destocking phase. But come back to some of the areas around world, we are going to sell more volume year-on-year than we did last year. It’s not going to be massive increases, but we expect us to grow more. We would just like to say that in Asia particularly, just hold in mind, you hear a lot about China. We are only – we represent less than 10% of imports into China.

We are not – we don’t have a large direct exposure, and this is where we’re quite different from some of our peers, and neither do we participate in automotive. And so we are – our window on the world and that is a meaningful segment in TiO2. And so we have – can’t tell what’s going on other than what we hear, what’s going on in that market. So, I think what we see in Asia is continued sluggishness that seems to be driven by China. We are encouraged though by the rational responses we’re seeing in the market generally in Asia. In North America, I think we’re covered. It’s pretty solid, it’s pretty stable, but we’re tapped out.

Certainly, of course, in our specialty business both in America, Europe and Asia, we’d expect to do better and that’s our strategic focus. I think we’ve covered enough on that call about why we’re still infused about that. So, in Europe, the Brexit effect, which we’ve heard from customers directly, the UK is a significant market for many of our larger customers particularly not just in terms of sales, but in terms of manufacturing footprint, so there was quite a lot of activity. We suspect that unwinds in the second quarter. But while it is significant, it’s not a massive, so big that it would obscure any kind of destocking. We truly believe in Europe that we kind of like coming to the end of destocking and what we’re seeing now is real demand. We continue to be consumed by things like German exports, some of the macros coming out of Italy, et cetera, but there is still growth in Europe and it might be nominal, but we still see that. And it’s just not sufficiently strong to characterize it in our opinion as green shoots. And we do have a pretty big position in Europe.

Hassan Ahmed

Very helpful. As a follow-up, Simon, it was brought up earlier as well the explosion in Jiangsu. What are you guys seeing in terms of current sort of operating rates in China keeping sort of the explosion in mind? From a variety of other companies, we’ve heard that there is obviously heightened checks from the government, from the authorities and the like. So, what are you guys seeing in terms of operating rates at some of the smaller TiO2 facilities out in China? And what are you guys seeing in terms of the new builds that we all have been talking about for the last couple of quarters? Has the pace slowed down?

Simon Turner

Yes. I think that if you mean the pace of builds, I mean, I think that in the chloride area, really, there’s 1 producer that’s been quite crystal about what they’re trying to do in their delays in their processes, and we’ve got – they will have better information. You probably have better information than us in terms of the delays therein. In the sulfate area, there are – their downs and their ups. We’ve often said we don’t expect there to be a net 50,000 tons in that bucket over these coming years, but what does run will be at a higher cost.

We believe that the top 10 producers are still running at pretty decent utilization rates in China, but they’re probably – that’s probably offset somewhat at least by lower utilization rates at the smaller producers, and that’s what we’re seeing. And as I said earlier, quarterly trade stock suggests that while there are – while there are continued exports was going into broader Asia on a year-to-date basis, those numbers have dropped against last year in both Europe and North America and quite significantly.

Hassan Ahmed

Very helpful, Simon. Thank you so much.

Simon Turner

No problem.

Operator

The next question comes from Roger Spitz of Bank of America. Please go ahead.

Roger Spitz

Thank you. Good morning. For performance products, could you review the drivers of why you expect – the drivers of like 2019 EBITDA should be up year-over-year? You’re starting down, of course, $9 million after Q1, maybe you can review those drivers? Thank you.

Simon Turner

Yes, certainly, I mean, you talked about $9 million against Q1, but that’s against obviously the previous year’s comp. And we think about it in terms of what we delivered for the full-year last year against what we will deliver this year. Now that said, you’re right. And as I’ve said on a previous question, the $15 million of 1Q was still a couple of million light where we hope to be in 1Q. We are not changing our view at this time yet around the full-year. And the reason for that predominantly is because we continue to find opportunities to help ourselves both with our ‘17 running restructuring program, which filters into this year by the way benefits and our fresh new ‘19 program.

So it’s that, that gives us the confidence. Obviously, within that, there is this assumption that the later destocking we saw in Functional Additives business 4Q and now 1Q kind of like similarly comes to an end like we’re seeing in TiO2, and that is one area we do have some exposure to automotives and electronics. So, it’s that which gives us the confidence I believe. And if you look at the color pigments, of course, while there has been some impacts in 1Q, that’s more of a delay issue rather than a demand disruption issue.

Roger Spitz

From that should I be thinking that it’s more cost savings or is it maybe a little bit of volume improvement or is it – is there price or price be a headwind? I’m trying to think of volume – in terms of volume, price, cost – raw material cost and cost savings as may be as the 4 key metrics. Is there a way to think of it along those lines as how you would make the movement? Thank you.

Simon Turner

Yes. I think that look, we would need to go into a bit more detail to break that out in absolute terms. But what I can tell you is the majority of that uplift is coming out of cost savings improvement or direct mainly improvement.

Roger Spitz

That’s what I was looking for. Thank you very much. Appreciate the help.

Simon Turner

No problem.

Kurt Ogden

Thanks, Roger.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Simon Turner for any closing remarks.

Simon Turner

Okay. Thank you for joining the call today. I hope we were helpful in being able to provide some color to your questions. Just to mention, Kurt, Jeff and I are going to be on the road in these coming weeks and in the second quarter. I look forward to meeting with you as many of you as possible as usual. Naturally, in the interim, please feel free to reach out to Jeff with any additional questions you might have. Thank you very much for your attendance on the call at this time.

Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.