Apr 30, 2018
Executives
Jerry Bialek - VP and Treasurer Bradley Hughes - CEO Ginger Jones - CFO
Analysts
Christopher Van Horn - B. Riley FBR Ryan Brinkmann - JPMorgan Bret Jordan - Jefferies John Healy - Northcoast Research Anthony Deem - Longbow Research
Operator
Good morning, and welcome to Cooper Tire & Rubber Company's First Quarter 2018 Earnings Call and Webcast. At this time all participants on the call are in listen-only mode.
Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.
I would now like to turn the conference over to Jerry Bialek. Please go ahead, Jerry.
Jerry Bialek
Good morning, everyone, and thank you for joining the call today. This is Jerry Bialek, Cooper's Vice President and Treasurer, and I am here with our Chief Executive Officer, Brad Hughes; and Ginger Jones, our Chief Financial Officer.
During our conversation today, you may hear forward-looking statements related to future financial results and business operations of Cooper Tire & Rubber Company. Actual results may differ materially from current management forecasts and projections.
Such differences may be a result of factors over which the company has limited or no control. Information on these risk factors and additional information on forward-looking statements are included in the earnings release we issued earlier this morning and in the company's reports on file with the SEC.
During this call, we will provide an overview of the company's first quarter 2018's financial and operating results, as well as our updated business outlook. Our earnings release includes a link to a set of slides that summarizes information included in the news release and in the 10-Q that will be filed with the SEC later today.
Please note that we will reference certain non-GAAP financial measures on this call. The linked slides include information about these measures and a reconciliation to the most directly comparable GAAP financial measures.
Following our prepared remarks, we will open the call to participants for a question-and-answer session. Now, I'll turn the call over to Brad.
Bradley Hughes
Thanks Jerry and good morning everyone. Before we begin I want to quickly congratulate Ginger.
As recently announced she has decided to transition later this year from a full time executive career to focus on serving on public company boards. Ginger is fully committed to remaining actively engaged in Cooper and helping us deliver on our plans.
She will remain in place until a successor is identified and assimilated into the company assuring a smooth transition. I would like to publicly thank Ginger for her contributions to Cooper, including playing a key role in the development of our long-term strategy and business priorities and wish her the best in your future endeavors.
With that I will begin our call with a brief overview of our first quarter 2018 financial results and then provide an update on Cooper's progress towards our strategic priorities. I will also discuss our business outlook for the remainder of the year.
After that, I'll turn the call over to Ginger for a more detailed discussion of our first quarter performance and capital allocation. I will return for a fewer more remarks before we take your questions.
Let's now talk about the first quarter 2018 results. The first quarter was in large part a reflection of the U.S.
tire market performance. Our U.S.
light vehicle volume performance in the first quarter was a decline of about 6% compared with the same period a year ago, which was more aligned than recent quarters with the USTMA trends, which continued to be weaker than expected with a decline of over 5%. Global net sales for first quarter were $601 million, down about 6.5% compared with the same period last year.
Operating profit for the first quarter was $26 million or 4.4% of net sales, which is a decrease of $32 million from the prior year. The decrease in our first quarter operating profit, adjusted for one-time items, was more than explained by weaker volume and higher manufacturing costs as we made production adjustments to keep our inventories in line with the current market conditions.
It is clear that the challenging industry conditions of 2017 carry forward into the first quarter of 2018 and impacted the tire business as a whole, including Cooper. While the tire business navigates through this period of weak demand, we at Cooper focused on what is within our control, taking actions to effectively manage our inventories and reduce costs.
For example, we restructured corporate headcount in the U.S. and reduced the production schedule and workforce in Mexico to align with market demand.
In addition, we are underway with several initiatives to drive unit volume growth and profitability, which we will detail during our Investor Day on May 11th. I can tell you that these initiatives around -- revolve around key strategies, such as speeding up the cadence of new product introductions and operating with a new consumer lead product development process.
One important product line developed using this new approach is the all new A/T3, which have taken industry-leading product to even greater performance. We will begin shipping the new A/T3 in a few weeks.
We will have more product news at our upcoming Investor Day. In addition, our strategy involves entering new channels to represent opportunity for Cooper where our considerable brand strength can be leveraged in new ways to expand into channels such as e-commerce, auto dealerships, general merchandisers and continued OE penetration.
To accelerate our commercial initiatives, we are excited to have a new President of North American Tire Operations, Chris Ball, who joined us in mid-March. Chris comes to Cooper following 15 years at Whirlpool Corporation, where among other posts he lead the company's largest business unit and the KitchenAid small appliance business.
Chris is a talented global executive with significant commercial experience and we look forward to the fresh perspectives, energy and positive change, he will drive going forward. As we have said previously our actions will take some time to manifest in our results, but we expect our performance to improve as these efforts take hold and as the industry rebounds in the future, supported by strong macroeconomic factors.
We do not believe that current industry conditions represent a new normal for the tire business. Ultimately, we believe that positive trends such as employment levels, gas prices, miles driven and others will result in an overall improvement in the industry and we expect to participate in such a recovery in the future.
Going forward, we expect operating profit margin performance in the second quarter to be similar to the first quarter as we continue to navigate through a challenging market environment. However, we expect industry demand to improve in the back half of the year.
We expect that this improvement along with our actions to drive volume and reduce costs will result in operating profit margin approaching our stated 9% to 11% range for the second half of 2018. It is important to recognize that apart from all of the industry challenges in the light vehicle tire market, we are very pleased with the volume performance of our truck and bus radial or TBR tire business, which was up 25% in the first quarter, well above the industry trend.
In March, we announced a Cooper branded TBR product line to leverage the opportunity we have, particularly in the fleet space. This new Cooper brand complements our successful Roadmaster brand, which has provided quality products primarily to owner operators and trailer manufacturers for more than a decade.
In addition to our success in the TBR segment, we are highly encouraged by profitability within our International segment, which more than doubled versus the same period a year ago. This growth continues to demonstrate the value of our strong global footprint.
Now I will turn the call over to Ginger for an update on the financial results and capital allocation.
Ginger Jones
Thank you, Brad. I will start with our first quarter financial review.
Net sales were $601 million compared with $643 million in the first quarter of 2017, a decrease of 6.5%. First quarter net sales were negatively impacted by $39 million of lower unit volume and $20 million of unfavorable price and mix, partially offset by $17 million of positive foreign currency impact.
Operating profit was $26 million or 4.4% of sales compared with $58 million or 9% of sales in 2017. Our 2017 operating profit has been restated to reclassify $9 million of other pension and postretirement benefit costs out of operating profit, as a result of the adoption of Accounting Standards Update 2017-07, which changed the U.S.
GAAP accounting for pension and other postretirement benefit costs. First quarter operating profit as compared with the same period in 2017 was impacted by the following factors, which are summarized on Page 6 of the supplemental slide deck.
$12 million of higher manufacturing costs due primarily to lower production volumes and $11 million of lower unit volume. This was partially offset by $6 million of favorability resulting from; first, $14 million of favorable raw material costs, partially offset by $8 million of unfavorable price and mix.
As expected our raw material index sequentially increased during the first quarter from 153.1 in the fourth quarter of 2017 to 156.7 in the first quarter of 2018, as shown on Page 5 of the supplemental slide deck. While up sequentially, this was 5.8% lower than our index of 166.4 for the first quarter of 2017.
There were also multiple unique items that impacted the quarter. $22 million of unfavorable variances relates the reversal of preliminary TBR tariffs which were incurred in 2016 and reversed in Q1 of 2017.
This was partially offset by $7 million of costs related to tornado damage at a North American distribution center in 2017 and $3 million of net insurance recoveries in the first quarter of 2018 related to the same event. In addition there were $3 million of higher other costs related to restructuring in the U.S.
and reduction in the manufacturing workforce in Mexico where we went from a seven to a six-day operating pattern as well as startup costs related to two new U.S. distribution warehouses, both of which will be operational later in 2018.
We delivered earnings per share $0.16 compared with $0.57 in the first quarter of 2017. Moving to our segment performance, I'll start with Americas tire operation.
Segment sales for the first quarter were $485 million, down 8.7% from $531 million in 2017. This decrease was a result of $30 million of lower unit volume, $19 million of unfavorable price and mix, which was partially offset by $3 million of favorable foreign currency impact.
First quarter operating profit in the Americas was $31 million or 6.4% of net sales compared with $71 million or 13.3% of sales in the same period last year. Operating profit was impacted by $10 million of lower unit volume, $12 million of higher manufacturing costs, which reflects our decisions to match production volume to demand and control inventory levels, and $14 million of favorable raw material costs offset by $14 million of unfavorable price and mix.
As mentioned previously there were multiple unique items that impacted the quarter in this segment. The $22 million unfavorable variance relates to the reversal of preliminary TBR tariffs, which were incurred in 2016 and reversed in Q1 of 2017.
This was partially offset by $7 million of costs related to tornado damage at our North American distribution center in 2017 and the $3 million of net insurance recoveries in the first quarter of 2017 related to the same event. In addition there were $6 million of higher other costs, which included expenses related to workforce actions in Mexico, as well as startup costs related to two new U.S.
distribution warehouses which will be operational later in 2018. You can see the full profit walk for the Americas on Slide 7 of our supplemental slide deck.
Now turning to our International tire operations. Net sales for the first quarter were $161 million up 13.6% from the first quarter of 2017, as a result of $13 million of favorable price and mix, and $14 million of positive foreign currency impact, partially offset by $8 million of lower unit volume.
Unit volume in this segment was 5.4% lower in the first quarter of 2018, compared to the prior year as a result of decreased volume in Europe, which more than offset a slight increase in unit volumes in Asia. In Europe, we had a difficult comparison as the first quarter of 2017 had significant buying ahead of announced price increases.
Our Asia business remains strong and we still expect double-digit domestic unit volume growth for the balance of the year. The International segment operating results increased compared with last year, with an operating profit of $7 million in the first quarter compared to $3 million in the same period a year ago.
These results were driven by $6 million of favorable price and mix, which were partially offset by $1 million of lower unit volume and $1 million of unfavorable other costs. You can see the full profit walk for the International operations segment on Slide 8 of our supplemental slide deck.
Now turning to some corporate items. The effective tax rate was 27.8% for the first quarter compared to 30.7% in 2017.
The first quarter 2018 tax rate includes discrete items related to the accrual of additional uncertain tax positions relating to previous years. The rate is based on forecasted annual earnings and tax rates for the various jurisdictions in which the company operates.
We estimate the full year 2018 effective tax rate will be in a range between 23% and 26%. More detail on our taxes is available in the Form 10-Q filed with the SEC later today.
Moving to cash flows and the balance sheet, cash and cash equivalents were $213 million at March 31, 2018 compared with $365 million at March 31, 2017. Capital expenditures in the first quarter were $60 million.
We continuously evaluate the appropriate level of capital spending in the current environment, remaining prudent, while also evaluating the capital needs to support our ongoing modernization, mix transformation and automation initiatives, in addition to investments in capacity to align with our global strategic growth plans. As a result, we are lowering our full year capital expenditure projection for 2018 to be between $200 million and $220 million.
We continue to earn solid returns on our investments, delivering a 12.3% return on invested capital for the trailing four quarters, excluding the impact of unique fourth quarter 2017 tax activity. Moving to capital allocation; in February 2017, our Board extended and increased our share repurchase program by authorizing the repurchase of up to $300 million of the company's outstanding common stock through December 31, 2019.
During the first quarter, approximately 470,000 shares were repurchased for a total of $15.6 million at an average price of $33.15 per share. As of March 31, 2018, $208 million remain of the $300 million authorization.
Since share repurchase began in August 2014, the company has repurchased a total of 15.2 million shares at an average price of $34.38 per share. Of note during the quarter, we extended the maturity dates of both our revolving credit and accounts receivable securitization facilities to maintain our strong financial flexibility.
Cooper believes our existing cash, cash flows and potential leverage are more than sufficient to support our capital allocation priorities. We define those priorities as supporting our ongoing commitment, capital to support organic growth and margin improvement initiatives, acquisitions and partnerships and [funding] our dividend and share repurchase goals.
We believe our long-term operating performance, our sustained high level of ROIC and our demonstrated commitment to delivering on our strategic plan, including our balanced approach to capital allocation delivers long-term value to our shareholders. I will now turn the call back to Brad for perspective on the balance of the year.
Bradley Hughes
Thanks, Ginger. Before we take your questions, I want to say that despite tough times in the tire industry and for Cooper, we are optimistic about Cooper's future.
In the near term we expect operating profit margin performance in the second quarter to be similar to the first quarter as we continue to navigate through a turbulent market environment. However, we do expect industry demand to improve in the back half of the year.
We expect that with this improvement, our actions to drive volume and to reduce costs will result in operating profit margin approaching our stated 9% to 11% range for the second half of 2018. We have a strong brand with great consumer loyalty and attractive value proposition and exciting new products that will be coming out at a faster cadence.
We believe that long-term Cooper will continue to be a strong global tire competitor that delivers value to our shareholders. That's all we have for our formal remarks.
Let's move on to your questions. Operator, will you take the first question please.
Operator
Certainly sir. We will now begin the question-and-answer session.
[Operator Instructions] Your first question will come from Christopher Van Horn of B. Riley FBR.
Please go ahead.
Christopher Van Horn
Good morning, thanks for taking the call and congratulations, Ginger.
Ginger Jones
Thank you, Chris.
Christopher Van Horn
I just -- to start off, could you comment on the North American environment specifically on pricing. Is the competitive threat increasing?
Are you seeing more promotional activity? Just some more detail on the pricing dynamics here in North America.
Bradley Hughes
Sure, thanks Chris. I think that the way that we would describe the environment in North America right now is frankly similar to what we saw in the second half of last year.
You will recall in the first part of last year, especially in the first quarter raw material prices began to increase rather sharply. There were some market on pricing events that took place.
Starting in the first quarter, we announced our increasing in March and into the second quarter. And then as the industry softened through the year or continued to be relatively soft, especially in the second half of the year, we did see a pickup in promotional activity.
I don't think that we have seen increase in that level of activity as we get into the first quarter, but we have certainly seen a continuation of it. So I think it's relatively consistent with what we were experiencing in the second half of last year on -- I know we are very focused on making sure we keep ourselves in an inventory position where we are not forced into doing things that we don't want to do on the promotional or price side.
You see that coming through the results in the first quarter and our manufacturing costs. And in general as we look at the market again, I'd say that it's relatively similar to what we were experiencing in the second half of last year.
Christopher Van Horn
Okay, got it. And then you seem fairly confident that the margins of 9% to 11% in the back half of '18, is there any one or two things that you are just seeing out there.
It sounds like there is an industry opportunity, there is a volume opportunity and a cost opportunity. But is there one or two overwhelming things that you see that are going to drive the bulk of that or is it a combination of many, many factors that could get you that 9% to 11%?
Bradley Hughes
Well I think there are many factors but there are certainly a few that I highlight within that Chris. We do expect that industry demand in the U.S.
which is obviously extremely important for us is going to pick up in the second half of the year, all signs point to that and we believe that that will be the case. We believe that we are extremely well positioned to take advantage of that right now.
In particular, I mentioned in the comments earlier that we are coming out with our new A/T3 which is extremely important and has been very successful for us over time and yet we are positioned to take even more advantage of the market with this new and improved A/T3 coming online. So we do expect volume and Cooper's performance relative to the market to be a contributor in the second half of the year.
We also do believe we did -- we took some actions. We talk about the things that we can control and we can control costs.
We took actions beginning in the fourth quarter and continuing into the first quarter of this year to restructure our corporate headcount and SG&A. So we've reduced costs there and we'll begin to see more contribution from that as we move forward.
And importantly in the manufacturing footprint, we've downsized specifically in Mexico on our capacity in order to make sure that we are aligned to demand. And we had costs associated with that in the first quarter this year, both of those events, and we should see benefits from those as move into the second half of the year.
Christopher Van Horn
Okay, great. And then just a final one from me.
TBR obviously is a -- continues to grow very well. Can you just give us a little more rationale around the Cooper branded tire, because I know Roadmaster has been taking some share and getting a lot of good customer feedback?
So I am just wondering about the rationale around it, another kind of branded TBR tire?
Bradley Hughes
Yes, the real rationale there is, Roadmaster has been and will continue to be a fantastic product for us. It competes in specific segments within the TBR industry, so the owner operators and the trailers OEs have been a space that has driven that success for Roadmaster.
On Cooper, it's going to allow us to enter other segments of the TBR market, specifically the fleet portion of that market which right now is a terrific place. The timing of this introduction of the Cooper brand couldn't be better with what's going on in the TBR industry in the U.S.
and our entry into that part of the market. We really look forward to seeing the results from that moving forward.
Operator
The next question will be from Ryan Brinkmann of JPMorgan. Please go ahead.
Ryan Brinkmann
Hi, good morning. Thanks for taking my questions.
I just wanted to probe a little bit on the U.S. consumer replacement market.
Firstly, in your earnings release there's some mention of a softer sell-out, although on the Goodyear earnings call last week, I recall them saying that they experienced softer sell-in but were more bullish on the back half because of what they saw as positive trends in sell-out. So can you let us know what you are seeing in terms of sell-out and de-stocking within your own channel and if you are [not] seeing those same positive trends in sell-out?
Bradley Hughes
o clearly the sell-in is soft for the industry and we were in line with USTMA but what was with a weaker industry for sell-in. Anecdotally, we are hearing that there has been some evidence of stronger sell-out and frankly with some important customers of ours, we've heard that Cooper sell-out has been good within some of those improvements that they see.
On -- looking back on the first quarter in whole and then carrying back even into the second half of last year, the trend that we have seen and believe has existed through the second half of last year and at least into the first part of the first quarter were weaker sell-out trends. Whether we are hearing anecdotally that there may be a turn in that right now, we'll see.
Ryan Brinkmann
Okay, thanks. And then just secondly, I guess a broader question on your outlook for the market improving in the back half of the year.
I would agree with you that the macro fundamentals are quite strong and it should support incremental demand, but it seems like the macro fundamentals have also been strong over the past years, so including when we haven't seen that incremental demand. So is your thinking more along the lines of, like the macro fundamentals are strengthening the back half of the year relative to the first half or is it more like the macro fundamentals are likely turning similar and the fact that we have undersold what we had ordinarily expect to have seen previously means that something is just sort of got to give and the shipments need to catch up with the fundamentals.
I ask in part because it does seem like the miles driven, numbers have begun to rise at a bit slower rate than before and there is some thought to rising gas prices this summer.
Bradley Hughes
I think it's a bit of both Ryan. I do believe that there has -- the macro environment suggests that the people are utilizing their tires.
And at some point that need -- they are going to need to replace those tires as we move forward and I don't think we are wrong, believing that that time is coming sooner rather than later and we are talking about it in the context of the second half of this year. I would also say that there are some newer contributors to that when you look at the implications from the reduced tax environment in the U.S., which should put more money into people's pocket paycheck to paycheck and also coming through the first round of tax filings this year.
We didn't see it in the first quarter. You see the same numbers we do, where consumer durables were down a bit in the first quarter and savings levels were up.
But eventually as people are utilizing their tires, they are going to need to replace and they should be in a better position to do so financially.
Ryan Brinkmann
Okay. And then just last question, relative to the recent developments with TireHub, just curious on if you could share what your wholly-owned versus third-party distribution looks like and what your overall strategy is relative to distribution?
If you think you are impacted by this transaction at all and if there is opportunity to [frequently] resource yourself or ATD, et cetera?
Bradley Hughes
So without commenting specifically on some of the recent announcements or specific customers to putting into context for Cooper, our distribution -- the wholly-owned part of our distribution is largely to service into our wholesale distribution customer network. So we are partnered with wholesale distributors of all sizes, from the very large national representatives to large regional representatives down to smaller independent wholesalers and distributors.
And we believe going forward that that's still the right model for Cooper to continue to work with our customers as our fulfillment arm to deliver customers, when they want them, where they want them and at the value they want them going forward. That we are better off taking our capital and investing it in new products and plants and our people and leaving the fulfillment part of our business to our customers who we have strong relationships with.
Having said that, we also believe that with the changes and the disruption that its bringing to the market in the U.S. that it provides unique opportunities for Cooper.
We are looking at that more holistically. We think we are really well positioned right now with the strength of the Cooper brand and where we are at with the freshness of our portfolio as we stand today and as we introduce the new A/T3 that I have been talking about.
That there are opportunities that will present themselves to Cooper as a result of some of the changes that are happening in the U.S. market right now.
Operator
The next question will be from Bret Jordan of Jefferies. Please go ahead.
Bret Jordan
A quick housekeeping to start, did you restate accounts receivable, I think the Q last year had you at 428 and its saying that last year's ending balance was 482 in the report this morning?
Ginger Jones
Yes. That's a restatement related to the implementation of the revenue recognition standard and so there will be -- there is some more detail about that in the Form 10-Q that we filed today.
Bret Jordan
And then on the new product introductions, are you going to change R&D as you speed up the cadence or is the spend levels going to remain relatively constant?
Bradley Hughes
We may see -- we've seen a little bit -- or we had a little bit of an increase and we may continue to increase our R&D resources. Having said that, part of the reason that we went through the restructuring that we did at the end of last year was to ensure that we could keep SG&A levels in total and cost of good levels to the extent on the fixed part of that in line with what we've been spending historically.
But to be in a position to invest in some of the things that we need to invest more in like R&D capability to support our product cadence and to support the part of our business of OE which is beginning to flourish.
Bret Jordan
Okay, great. And what was the growth rate in Asia?
I think you said it was -- I think you said slight in the press release but I think prepared remarks you said strong.
Bradley Hughes
Well I'm not -- Bret you're going to get me on those words, I am not sure which ones were used. But frankly it was about flat just up slightly in the first quarter but that is a little bit of a timing on things.
We are still expecting double-digit growth in third-party sales in Asia this year.
Bret Jordan
Okay. Is that -- is Asia really just because it's lumpy around OE contracts?
Bradley Hughes
It's a little bit of that. It's a little bit of when on the New Year fell this year relative to the way that OEs order, so it was really more timing than anything.
Bret Jordan
Okay, great. And then one final question just a quick.
On an earlier question on ATD, is that TireHub creation again maybe a lot more focused on some of brands like yours in the wholesale channel as they create their own supply chain?
Bradley Hughes
Again without commenting specifically on any of the announcements that have come out at the beginning part of this year, we really believe that this is an opportunity for Cooper, Cooper's brand to take even a bigger position in some parts of the market and we're actively working on those right now.
Operator
The next question will be from John Healy of Northcoast Research. Please go ahead.
John Healy
Thank you and thanks for taking my questions. Brad I wanted to try to understand some of your outlook comments a little bit more, specifically two points.
First thing, the margin expectation in Q2 being similar to 1Q. I am just trying to understand what the moving factors would be in terms of why you are expecting a similar rate if the sell-out is getting a little bit better potentially at retail, if your inventories are lean and you have some of these benefits of some of the headquarter and just manufacturing realignment?
So trying to understand that point. And then secondly, trying to understand a little bit more on how -- what's embedded in your view that volumes for the year can still grow for the company given the slower start to 1Q and at least triangulating the margin view in 2Q and these adjusting volumes will still be down.
But then just trying to understand what's embedded to get to that volume recovery number? And the comments you've made about dealerships and e-commerce and general merchandisers, is there an expectation that you are going to be able to fill the channel to get to that growth in volume for the year as opposed to just the market picking up?
Bradley Hughes
Related to the timing, the second quarter versus the second half, it is a little bit driven by our expectation about the market rebound. And again, we have also received anecdotal comments and evidence that there might be some turn in the sell-out volume which could impact the sell-in.
Part of the sell -- while our inventories may be in a good position, it doesn't necessarily mean that all the channel inventories are in good position, and that there might need to be -- there may be some time or priority in order to fix that in the channel in general that could impact the timing of when we all begin to see the benefits of a stronger market in the U.S. in particular.
So the volume part of that is really the biggest contributor to the comments related to the second half versus the second quarter. As we do move into the second half of the year, beyond the expectations that we have for a stronger market in the U.S.
We do believe that that's when we're going to begin to see benefit from some -- from the A/T3 product launch. While we will shipments of that on in this quarter that will really begin to impact our sell-in, if more so in the third quarter and for the balance of the year.
And we believe that we're going to be in a much better position with regard to our manufacturing situation and filling that backup when we get into the second half of the year. Those are the -- really the two biggest contributors to our expectations are for the second half.
John Healy
May be if I could ask just on the headcount reductions and the realignment benefits, is there a way to quantify what those might be on some of the tailwinds in 2Q's report here?
Bradley Hughes
Look we haven't provided specific guidance on that and we will see some benefit I think. And I would also reinforce that we will take up on the SG&A side of that.
In particular, we will be reinvesting a portion of that into some skill sets and capabilities that we need to deliver the strategy that we have going forward. So we will be a little bit, partially offset, but we do expect that there will be improvements from that as we get into the second quarter and beyond.
Operator
The next question will come from Anthony Deem of Longbow Research. Please go ahead.
Anthony Deem
A few questions here. First the inventory jumped meaningfully here in the first quarter, I'm just wondering if the second quarter outlook on margin is mostly related to production curtailment or if there is maybe some other specifics you can share on segment income assumptions for the second quarter?
Bradley Hughes
While first of all the inventory, so the inventory is on, I will let Ginger provide some more specifics on this, but it's an increase in the dollar level of inventory that we have. Actually the unit level of inventory we have is down in the quarter even with some important events like the prebuild the stock for the A/T3 launch and the transition that we are making with our TBR warehousing approach in the United States to better service our customers.
But Ginger, you want to comment on that.
Ginger Jones
Yes I will. So the dollar value of inventory is year-over-year, although units are down.
Tire inventories are down year-over-year and as Brad said, really that's about building some inventory of high value items for the A/T3 launch and the TBR inventory that we're stocking into some of our new mixing warehouses. But Anthony was you question also about margins in the second half and what's driving our assumption around margins?
Anthony Deem
Yeah. While I was just looking for additional granularity on second quarter margin drivers and the cost weakness that was mostly related to production downtime or not?
Ginger Jones
So we certainly do continue to balance the production levels with inventory and assuming that we see the pick up that we think we will see in the second half at the year I think, our hope is that we will have less manufacturing costs. I think it also goes back to the point Brad made a couple of minutes ago, with our planned launch of the A/T3 and our hope that the market picks up in the second half of the year.
And finally, the programs that we are driving internally, the cost savings and some of the actions we've already taken, those are the big drivers of what's going to impact our margin in the second half. Brad, anything you want to add?
Bradley Hughes
Yes. There are some things that I should add because it relates to the first part of your question is, some of the areas where we're expecting volume growth around the A/T3 and around TBR are, will be favorable to mix as well, as we get to the second half of the year.
It richens the mix of the products that we'll be selling. It will be begin in the second quarter but you are going to really see a bigger impact from that in the third and the fourth quarter.
Anthony Deem
That's helpful. Thank you.
So bigger picture, in the past, we viewed Cooper as a company that can maintain or gain market share in the U.S. like the your replacement market over time and I am just kind of wondering if you can discuss [your views] on any potential structural issues to consider that might be limiting the company's successes?
Would you attribute it to maybe the lack of OE exposure or the territorial distribution issues and at what point do you think market share might be able to inflect positive again?
Bradley Hughes
We believe that that time is near and there's a couple of things to highlight here and I appreciate the question because it will allow us to do that. One is, and we've mentioned this in our last call and stopped because we are largely through it.
But over the last few years we had dramatically reduced our exposure to private brand wholesale on sales in the United States in particular over 5 million units. Again, we are largely through that transition now and we have opportunities to grow in the other parts of our business.
In the other parts of our business, the areas that we have highlighted where we don't have an appropriate share of the market for Cooper is -- are in e-commerce, it's in auto dealerships, it's in general merchandisers, among others. But those are three areas that we really are emphasizing right now that we need to increase our exposure.
That will be helped by some of the OE relationships that are developing for us right now and that we will be able to talk about more as we actually begin to supply those starting later this year.
Anthony Deem
Good. And then just last question from me, thanks for taking my questions.
Cooper still has a very strong balance sheet. I am wondering can we expect you all to potentially take a more aggressive stance towards share repurchase activity at these levels?
And thanks again.
Bradley Hughes
Yes, we are going to -- we do continue to have a strong balance sheet and are pleased to be in that position. We will continue to balance on what we are investing into business to deliver our strategic priorities versus other ways that we can return to shareholders obviously.
We will be looking at share price among other variables to make those decisions. We do plan on having a more thorough conversation around capital allocation at our Investor Day on May 11th, so I'd leave it there for the moment.
Operator
And ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Brad Hughes for his closing remarks.
Bradley Hughes
Okay. Thank you, operator.
And thank you all for being with us on the call today. As I said earlier in the call, we do not expect that the current industry challenges represent a new norm for the tire industry.
Macro trends do remain positive and should ultimately drive improvement. The programs that we have already started combined with our strong business model and global footprint position us well to benefit over the longer term.
We look forward to speaking to you soon at our Investor Day on May 11th. And as always, please reach out to Jerry with any further questions or comments.
Thank you.
Operator
Thank you, Mr. Hughes.
Ladies and gentleman the conference has concluded. Thank you for attending today's presentation.
At this time you may disconnect your lines.