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Cooper Tire & Rubber Co  (NYSE:CTB)
Q4 2018 Earnings Conference Call
Feb. 19, 2019, 10:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Good morning, and welcome to Cooper Tire & Rubber Company's Fourth Quarter and Full Year 2018 Earnings Call and Webcast. (Operator Instruction) As a reminder this call is being recorded. I would now like to turn the conference over to Jerry Bialek. Please go ahead.

Jerry Bialek -- Vice President and Treasurer

Good morning everyone and thank you for joining the call today. This is Jerry Bialek, Cooper's Vice President and Treasurer. I'm here today with our Chief Executive Officer Brad Hughes; and Chris Eperjesy 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 fourth quarter and full year 2018 financial and operating results as well as the company's 2019 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-K 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.

Brad Hughes -- President and Chief Executive Officer

Thank you Jerry and good morning everyone. Before I start the call I would like to introduce our new CFO Chris Eperjesy who joined Cooper in December. Chris is an accomplished finance executive who brings three decades of global financial leadership across a diverse set of public and private companies to Cooper. We are very pleased to have him in our team and all of you will get to know him as we move forward. With that I will begin today with a brief overview of our fourth quarter and full year 2018 financial results. After that I will turn the call over to Chris so he can review our financial performance in greater detail. Then I'll return to talk about our 2019 outlook and we will conclude by taking your questions. Now let's move to our 2018 results. We are pleased to have delivered results that were a bit better than the outlook we provided when we released our third quarter results. Our fourth quarter operating profit margin excluding a goodwill impairment charge exceeded what we achieved in the third quarter excluding the benefit from an adjustment to our product liability reserve model in that quarter.

Also on a year-over-year basis revenue as well as adjusted operating profit and operating profit margin improved compared to the same period last year. Raw material cost improved sequentially but were up on a year-over-year basis by nearly 8% slightly less than our projection. Operating profit margin improved throughout the year as our strategic initiatives began to take hold again delivering on our expectations. Unit volumes in the U.S. improved throughout the year ending 2018 with two consecutive quarters of year-over-year volume increases. As we have discussed previously our exit from nonstrategic private brand distributor business had an impact on our 2018 U.S. volume comparisons. Excluding this impact we would still have underperformed the total industry but would have outperformed the USTMA with unit volume growth in 2018 compared to 2017. A word about our volume performance in Asia.

We started the year strong in that region, however, beginning in the third quarter economic conditions created weakness in the OE auto market and tire industry. As a result we told you that we expected to see a moderate headwind in our fourth quarter 2018 OE unit volume in Asia. While we did see this softness our business performed as planned and I'm pleased by the work from our team to ensure that we are doing comparatively well in some challenging conditions. According to the China Passenger Car Association, China's retail passenger vehicle sales were down 17% in the fourth quarter of 2018 compared to 2017. For the full year sales were down nearly 6% year-over-year. If this trend were to continue into 2019 it could have an impact on our business. However, it does appear that Chinese government is beginning to respond with broader efforts to increase market liquidity and is potentially considering actions to stimulate the automotive industry which we would of course welcome. Regardless, we still feel good about the long-term prospects for our Asia business as we continue to diversify our customer base. You may also recall that at our Investor Day last May we provided a slide showing where we thought certain key market variables were headed as we move through the balance of 2018. As we look back on those projections we weren't too far off.

We talked about four things. Demand for tires, capacity relative to demand, raw material costs and pricing dynamics. In terms of demand in the U.S. market we expected to see improvement as we moved into the second half of the year and that turned out to be largely true. With respect to capacity versus demand, we noted that the supply and demand environment in 2018 were stable and that we continue to believe there was good balance on a global basis. Going forward, we expect this balance to continue largely due to global growth for demand in tires and the impact of larger more complex tires as it has had on reducing throughput of currently installed capacity. Also at the time of our Investor Day, we thought we would see modest sequential increases in raw material costs. As the year progressed the tire industry dealt with the raw material cost that rose somewhat faster than expected. As we enter 2019 raw material cost seem to have stabilized. In terms of pricing, the price increases that we and many other tire manufacturers implemented in September and October of last year have remained intact. With that backdrop our financial results for the full year 2018 included net sales of $2.81 billion down 1.6% from last year. Unit volume decreased 2.4% year-over-year. Operating profit was $165 million and operating profit margin was 5.9% of net sales. Excluding the goodwill impairment charge operating profit would have been $199 million or 7.1% of net sales. Diluted earnings per share were $1.51 Excluding the goodwill impairment earnings per share would have been $2.18 in 2018. Cooper achieved a 10% return on invested capital for the year excluding the impact of the fourth quarter goodwill charge.

Before I turn it over to Chris, let me talk about two recent announcements. First on December 12, we announced an agreement to form a joint venture with Sailun to build a manufacturing plant in Vietnam with the capacity to produce more than two million truck and bus radial tires annually. Subject to closing in government approvals Cooper will own 35% of the new venture. Construction of the facility is expected to begin soon with tire production commencing in the first half of 2020. This JV agreement and the tariff environment with the two most important contributing factors to the GRT goodwill impairment in the fourth quarter. Also please recall that we have an existing offtake agreement with Sailun which will provide some of our TBR tires for the U.S. market from Vietnam until the new JV is up and producing. This JV is another step forward in Cooper strategy to expand and diversify our TBR tire production globally giving us capacity to help serve our growing original equipment and replacement TBR business around the world.

We are very pleased to build on the great relationship we have with Sailun to help us address opportunities in the global TBR market. With recent tariffs news maximizing our offtake agreement and accelerating the JV operation are even higher priorities. Second, on January 18 Cooper Tire Europe announced the decision to move forward with its previously announced proposal to seize light vehicle production at the Melksham, England facility. This action is geared to help Cooper Tire Europe enhance its competitiveness in the global tire industry. Production will be phased out over a period of approximately 10 months at the site with an estimated 300 roles eliminated. Cooper Tire Europe will obtain light vehicle tires to meet customer needs from other sites within Cooper's global production network. Approximately 400 roles will remain in Melksham to support functions that will continue there including motor sports and motorcycle tire production, our materials business, Cooper Tire Europe Headquarters, Sales and Marketing and the Europe Technical Center. This action was part of our assessment of our sourcing footprint for the region. Recall that we have also completed the Asia component of this assessment and confirmed that we are in line with our needs in terms of capacity, technology and capabilities, cost and the potential for capital-efficient expansion. We are in the midst of a review of our Americas component. With that I will turn the call over to Chris for an update on the business environment, financial results and capital allocation.

Chris Eperjesy -- Senior Vice President and Chief Financial Officer

Thank you Brad. I'm delighted to be part of the Cooper team and to join my first earnings call as CFO. Two months into the role I'm fascinated by the industry and excited about the opportunities Cooper has to grow our business and improve profit margins. I've had the opportunity to meet several of you and look forward to interacting with you further in my role. Now moving to our results beginning with the full year. Sales for 2018 were $2.81 billion a 1.6% decrease from 2017. Net sales were impacted by lower unit volumes of $67 million partially offset by $17 million of favorable foreign currency impact and $3 million of favorable price and mix. The company's 2018 operating profit was $165 million or 5.9% of net sales. Diluted earnings per share were $1.51 per share. As Brad noted earlier excluding the impact of the $34 million goodwill impairment charge recorded in the fourth quarter operating profit was $199 million or 7.1% of net sales and earnings per share would have been $2.18.

This compares with an operating profit of $309 million or 10.8% of net sales and diluted earnings per share of $1.81 in 2017. The 2017 results included discrete tax items of $68 million. Excluding this impact earnings per share would have been $3.10 in 2017. Moving to consolidated fourth quarter results. Sales were $770 million up from $757 million in 2017. This 1.8% increase was driven primarily by favorable price and mix offset by lower unit volume. Operating profit was $25 million or 3.2% of sales compared with $56 million or 7.4% of sales in 2017. Excluding the goodwill impairment charge, operating profit would have been $59 million or 7.6% of net sales. Fourth quarter operating profit compared with 2017 was impacted by the following factors which are summarized on Page six of the supplemental slide deck. $34 million of noncash goodwill impairment charge resulting from goodwill impairment testing in the fourth quarter of 2018. As Brad mentioned we announced a joint venture agreement with Sailun to build new truck and bus radial tire production plant in Vietnam.

The capacity created by this plant facility would decrease expected production growth requirements for Cooper's GRT joint venture in China resulting in the impairment charge. While there is an impairment charge we are excited about this addition to our manufacturing footprint which diversifies our sourcing to protect against risk including tariffs. Operating profit also included $12 million favorable price and mix primarily offset by $11 million of unfavorable raw material cost. Operating profit also included lower product liability cost of $6 million $2 million of lower unit volume higher SG&A expense of $2 million higher manufacturing cost of $1 million and lower other cost of $1 million. Diluted loss per share was $0.01 compared with the loss of $0.82 in the fourth quarter of 2017. Excluding the impact of the goodwill impairment charge earnings per share in the fourth quarter of 2018 would have been $0.60. Earnings per share in the fourth quarter of 2017 including the impact of tax reform and other discrete fourth quarter tax items was $0.50. Now moving on to our segment performance starting with the Americas tire operations. Segment sales for the fourth quarter was $664 million up 3% from $645 million in 2017.

This was a result of $21 million of favorable price and mix partially offset by $2 million of unfavorable foreign currency impact. Segment unit volume was essentially flat compared to the prior year with a unit volume increase in North America offset by a decline in Latin America. Fourth quarter operating profits in the Americas increased to $70 million or 10.6% of net sales compared with $68 million or 10.6% of sales in 2017. The major drivers of the increase were $9 million of favorable price and mix offset by $9 million of unfavorable raw material cost. The quarter also included $6 million of favorable manufacturing cost and $6 million of lower product liability cost. These were partially offset by $11 million of unfavorable SG&A cost including increased incentive compensation cost. Other costs decreased by $1 million. You can see the full profit walk for the Americas segment on Slide 8 of our supplemental slide deck.

Now turning to our International Tire operations. Net sales for the fourth quarter were $149 million down 7.8% from the fourth quarter of 2017. This result was driven by lower unit volume and unfavorable foreign currency impact partially offset by favorable price and mix. Segment unit volume was down 12.3% with decrease unit volume in Europe and Asia for the reasons that Brad explained. In Europe, third-party sales were up slightly year-over-year, however, this was more than offset by lower shipments to the U.S. from Serbia as we continue to execute our near sourcing strategy. Fourth quarter operating loss in our international operations was $33 million compared to an operating profit of $7 million in 2017. The decrease was primarily driven by the goodwill impairment charge of $34 million additionally the segment experienced $2 million of favorable price and mix which was more than offset by $3 million of increased raw material costs.

The quarter also included $3 million of lower SG&A, $6 million of unfavorable manufacturing cost and $2 million of lower unit volume. You can see the full profit walk for the international operations on Slide 9 of our supplemental slide deck. As noted during the third quarter call in October, we anticipated our raw material index would be about 10% higher in the fourth quarter compared with the same quarter a year ago. Our actual index increased 7.8% from the fourth quarter of 2017 slightly less than anticipated. The raw material index decreased sequentially from 168.6 in the third quarter of 2018 to 165.1 in the fourth quarter of 2018 as shown on Slide 7 of the supplemental slide deck. As Brad mentioned raw material cost appeared to have stabilized. Therefore, we expect our first quarter 2019 raw material index to be down nearly 3% sequentially but up nearly 3% year-over-year. Turning now to some corporate items. The effective tax rate was 96.3% for the quarter compared with 206% last year. Excluding the goodwill impairment charge the fourth quarter 2018 effective tax rate would have been 25.2%.

The fourth quarter 2017 effective tax rate including the impact of U.S. income tax reform and other discrete tax items was 30.7%. The tax rate for the fourth quarter of 2018 includes the benefit of a lower blended U.S. statutory tax rate as a result of U.S. income tax reform offset by approximately $2 million of net discrete expense items related to the approval of additional uncertain tax positions. For the full year the effective tax rate was 29.4% compared to 60.3% in the same period the prior year. Excluding the impact of the goodwill impairment charge the 2018 effective tax rate was 22.6%. The decrease in adjusted effective tax rate reflects the benefit of lower blended U.S. statutory tax rate as a result of U.S. income tax reform. More detail on our taxes will be available in our Form 10-K that will be filed with the SEC later today. Turning to cash flows and some balance sheet highlights. Cash and cash equivalents were $356 million at December 31, 2018 compared with $372 million at December 31, 2017. As discussed throughout 2018, we have focused on cash flow improvement actions including aligning production to demand managing inventory levels and other working capital actions.

As a result of this focus and the strong work of our team we're able to achieve significant working capital improvements in 2018. We improved working capital by over $20 million compared to 2017. As part of this improvement we're able to meaningfully reduce the number of inventory units in the Americas by over 10%. We believe this positions Cooper to enter 2019 with the right level of inventory and we will continue to focus on working capital in 2019. Capital expenditures in the fourth quarter were $49 million compared with $54 million in the same period last year. Full year capital expenditures were $193 million compared with $197 million in 2017. Return on invested capital excluding the impact of the goodwill impairment charge in the fourth quarter of 2018 were 10% for the trailing four quarters.

Moving to return of capital to shareholders. During 2018, we repurchased over one million shares of the company stock for approximately $30 million at an average price of $29.65 per share. As of December 31, 2018 a $193 million remains of the $300 million authorization. Since share repurchases began in August 2014 through December 31, 2018 the company has repurchased a total of 15.8 million shares at an average price of $34.11 per share. Additionally, Cooper distributed over $20 million in regular quarterly dividends during 2018. Returning capital to our shareholders remains an important priority for us. We are committed to supporting our quarterly dividend but will pursue share repurchases more opportunistically in the near term as we balance attractive opportunities to invest in our business.

We are currently evaluating the refinancing of our $174 million senior notes which are due in December 2019 which could provide an opportunity for additional financial flexibility as well as interest rate savings. As we assess our debt pension and other obligations relative to financing sources we were considering consider borrowing more than the amount of the maturing bonds to increase the liquidity of the offering take advantage of attractive borrowing rates and fund some very good opportunities for reinvestment back into the business.

These include the previously announced joint venture with Sailun in Vietnam and other potential manufacturing footprint investments. I'll now turn the call back over to Brad.

Brad Hughes -- President and Chief Executive Officer

Thanks Chris. As I mentioned earlier we are making good progress on the strategic initiatives identified at our 2018 Investor Day and I want to thank all of our employees around the world for their contributions. Cooper will continue to execute on these strategic priorities such as entering additional sales channels making inroads into the global OE business outside of our already strong OE presence in Asia introducing new products at a faster pace and other initiatives focused on driving growth especially with respect to volume in The United States. We continue to build the Cooper brand and emphasize our strong value proposition to consumers. As our brand becomes even more recognized our retail expansion strategy becomes more important. A great example of this is an exciting new partnership Cooper has with which as many of you know is a leading growth-oriented U.S. auto service and tire retailer with approximately 1200 retail locations across 28 states. With this new relationship Cooper tire will now be available in a number of Monro stores as they continue to expand the retail footprint.

We are excited that Cooper and Monro two organizations that show a strong commitment to the consumer to continued growth and outstanding service in the tire industry are coming together to make our great products and services available to an ever wider audience of consumers. We are very pleased to be teaming up with Monro to further our strategic initiatives. We are optimistic about 2019 as our business model was strong and our strategic initiatives are well under way. As a result we expect the full year 2019 to include modest global unit volume growth compared to 2018 improving operating profit margin throughout the year with full year operating profit margin exceeding 2018 an effective tax rate in a range between 22% to 25% and finally capital expenditures to range between $190 million and $210 million. This does not include any capital contributions related to Cooper's pro-rata share of the previously announced joint venture with Sailun Vietnam or other potential strategic manufacturing footprint investments.

However, there are some unique items along with typical seasonality that we expect will impact the first part of the year. These include charges related to the decision to see slight vehicle tire production in Melksham, England. We estimate that this action will result in $10 million to $15 million in restructuring charges the majority of which will occur in the first quarter. In addition recently an active tariffs including the 10% Section 301 tariffs on tires and raw materials and the 42.16% duties on TBR tires imported to the U.S. from China. Also economic conditions in China that continued to be challenging reflecting weakness in OE as well as the replacement tire market. As a result we expect our first quarter 2019 operating profit margin to be lower than the first quarter 2018.

We continue to expect operating profit margin to improve throughout the year and full year 2019 to be better than 2018. Again these expectations include tariffs already in place but do not include any rate changes or additional tariffs that are under consideration but not yet imposed. Let me elaborate a little more regarding TBR tariffs. You may recall that in February 2017 there was a ruling by the U.S. International Trade Commission or ITC not to impose anti-dumping or countervailing duties on truck and bus radial tires imported in The United States from China. The United Steelworkers appeal that ruling and the U.S. Court of International Trade ordered the ITC to reconsider it. On January 30, the ITC reversed its earlier decision.

As a result duties on TBR tires imported into the U.S. from China were implemented on February 15. The rate for Cooper is 42.6% which is generally consistent with most other Chinese TBR producers. Given that this decision was made just a week ago it's not clear how the market pricing will be impacted. As we've said before Cooper believes that there is not enough domestic supply to meet demand for TBR tires in the U.S. and the majority of the excess supply is coming from China. We expect there will be pricing actions to help offset the cost of the tariffs, however, there may be a time lag.

Given the Cooper is on rifle (ph) accounting we will see the negative tariff impact immediately. As a result we would expect a disproportionate impact in the first part of 2019. Let me reinforce that Cooper is committed to our TBR business. Our existing offtake agreement and recently announced joint venture with Sailun Vietnam our steps we have taken to provide alternative capacity to help serve our TBR business around the world. We are working to maximize the units from our offtake agreement as well as to accelerate the time line for the new joint venture in Vietnam. We are confident that our strategic plan remains the right path to achieve our goals and help drive shareholder value. Cooper has a good track record of delivering solid returns on our investments and remain confident in the strength of our business model. Overall, we believe that with industry conditions improving Cooper is well positioned for the future. We have work to do yet are confident that Cooper will as we have far more than 100 years continue to succeed in the long term.

With that let's move to your questions.

Operator will you please take the first question?

Questions and Answers:

Operator

(Operator Instructions) Our first question comes from Rod Lache with Wolfe Research.

Rod Lache -- Wolfe Research -- Analyst

I was hoping just first of all to get a better sense of your expectations for U.S. market share going forward. If I look at the quarter you were up about 0.5% in the market that was up 1% to 3% depending on the source and you also talked about taking some inventory down. So I guess in a nutshell are you thinking that some of these new accounts that you signed up like ATD and Wal-Mart are just not sufficient to move the needle on market share?

Brad Hughes -- President and Chief Executive Officer

Rod, we feel good about where we're headed with regard to our performance in the U.S. market on volume. Again I hope this is the last time we're going to highlight this but as we move through the course of last year we were continuing to reduce an exit from the nonstrategic private label business that we have out there and that impacted not only the year but also the fourth quarter on where excluding that we would have been above the USTMA and closer to the industry with regard to our volume increases. As we transition into 2019 we continue to focus on retail expansion. That's going to allow us to continue to build on the conquest program that we had in place starting last year we were adding dealers and then again that volume will come online overtime and we are looking at other channels where we feel like we're underrepresented. We've highlighted the general merchandiser category which is you highlighted Wal-Mart but that's also Costco and Sam's Club and we do think that we're going to make progress in that channel this year. And we're continuing to build out our retail customer portfolio. So it's an expansion across the board where we're building on the conquest program from a year ago. We're adding on new entries and new customers in other channels. So as we get into 2019 I think we're feeling pretty optimistic about our volume.

Rod Lache -- Wolfe Research -- Analyst

Okay great. And could you also talk about the new labor contract and whether there is any material impact on the numbers looking up to 2019?

Brad Hughes -- President and Chief Executive Officer

No, I would say two things Rod. One is we think on the financial implications of that are fairly neutral as we look over the course of the next few years and clearly we are glad to have that behind us and have the agreement in place as we move forward with an important plant down in Texarkana.

Rod Lache -- Wolfe Research -- Analyst

Okay great. And just lastly your pricing looks like it's been pretty good but the industry still hasn't recovered the shortfall from 2017 just thinking about price mix versus the raw materials? Do you think that there is some momentum behind the pricing environment? Do you think the industry continues to move toward recovering that over the course of the coming year?

Brad Hughes -- President and Chief Executive Officer

I think I'm going to break it into a couple of discussions here Rod. One is on the TBR front I think everything that we see there is setting itself up that we would anticipate that there is going to be pricing. We are already in a position where the U.S. market was is likely going to be challenged from a supply perspective relative to the demand that we are expecting for TBR tires across both the OE and the replacement markets there. You add into that some of the cost factors including the tariffs now where a lot of the tires that are being imported in the U.S. are coming from China. We would expect that in that segment there is definitely going to be some pricing action that would be our expectation and anticipation. In the light vehicle market and again I'm focused on the U.S. here right now I think it's going to depend a little bit.

We've talked about this couple of times in conferences that if we see on a rise in raw material price costs I do think that the industry will be ready to pounce on those as a reason to increase pricing at the top line. So gross pricing on the invoice. If we don't if we continue in the stable market we may see some pricing. However, I think the other factor here that we all need to pay attention to is that there are still a lot of promotional dollars in the market that are carryover from 2017 where the industry attempted to price and then backed off. The backing off in some cases was a rollback of the gross price but in many cases it was an offset with promotional dollars which largely are still in the market and that's where we're going to paying a lot of attention to what the competitors are doing is to see if there is any movement there in terms of backing off of some of that as another way to improve the average selling price.

Operator

Our next question comes from Chris Van Horn with B. Riley FBR.

Christopher Van Horn -- B. Riley, FBR -- Analyst

Could you elaborate a little bit may be the puts and takes if you will on your full year 2019 guide on modest unit volume? Maybe could you get you into a little bit more what you're seeing regionally and then same on the operating profit line? Could you elaborate -- it seems like you're going to see a little bit more in the back half is that more mix improving new product launches some cost reductions you might see any more detail there would be great?

Brad Hughes -- President and Chief Executive Officer

Good. Thank you for allowing me to elaborate on the volume on outlook here because we are calling it modest on a global basis but that the global view includes what we're looking at in China right now in the OE market which we saw another month of vehicle sales decline for January here recently. And so we are cautious with regard to our outlook in China. We do think that from a Cooper perspective that we get opportunity on the replacement side there for some growth and that we will likely navigate as well as anybody on the OE market. But if that market continues to be soft especially through the first half of the year that clearly was included in the way we were looking at volumes for that market. Latin America again there is a lot of things moving around on down there both economically and politically.

And so we are a bit cautious on our outlook for that market. Europe while the team has done a really nice job in Europe of improving the mix of the products we're selling over in that market because of the production on situation that we are in there and the transition that we're now going to need to make with the product that was formally produced at Melksham, that is moving into other parts of our footprint we're really focused on having the right mix of product over there. And so it's less of a near-term volume opportunity in terms of growth in 2019 and it's more of a continuation of this strength and mix where we are focused on 4X4 and a high value-added products. So you look at those three markets and we are relatively benign in terms of the outlook that we've got for 2019 which would suggest to you that our confidence around volume growth has been built of what our expectation is in the U.S. market where we do think that we do have a number of initiatives that are going to start to contribute this year on both in light vehicle and in TBR.

So that will transition me to the bottom line profit look. Mix is clearly one of the things both product and geographic mix are going to be positive as we think as we move into 2019. The other big factor Chris that I would point to is 2018, we faced a bit of a headwind with regard to manufacturing costs part of it was giving the supply aligned to the demand and at the same time we thought we had an opportunity to run our business more efficiently from a working capital perspective including last finished tire inventory which the team did a great job of addressing. And we now enter 2019 in a good position we think from both a demand and inventory perspective. So our plant should have a better performance from a cost perspective in 2019 compared with 2018 as well.

Christopher Van Horn -- B. Riley, FBR -- Analyst

Great. That's really helpful. Thanks for all that color. And then just my follow-up is congratulations on the Monro relationship and just curious, is it similar to some of your other customers in terms of product lineup? And is that maybe if you could elaborate on the timing of it? And do you launch with the number of tires right away? Or just a kind of ramp throughout the year and into next year?

Brad Hughes -- President and Chief Executive Officer

This is we've actually gone a bit further than this with agreement for Monro because we are both very excited to get this partnership going and let people know about it. I'd say the things that I highlight Chris are that it's the Cooper brand. It's going to be a relatively good portfolio of products that we're expecting to start with there and we would believe that it's going to build as we move forward and both get our feet underneath us with regard how we're going to make this -- the opportunity we think it can be both for us.

Operator

Our next question comes from Anthony Deem with Longbow Research.

Anthony Deem -- Longbow Research -- Analyst

So few questions from me. First quarter specifically so far using indexed data Chris I think you just shared. I am -- to about a $5 million year-over-year headwind and when I assume year-over-year price mix benefit percentage sort of similar to what we saw in the fourth quarter. I'm getting to about a $10 million positive impact there. So price mix overall is $5 million positive I'm just wondering if that's a good framework of how we're thinking about the first quarter guidance which essentially would mean many of the other income drivers are generally lower year-over-year. Is that a good framework?

Brad Hughes -- President and Chief Executive Officer

I think the one thing we captured tariffs in our raw material cost and there are tariffs in place in the first quarter that we didn't have in place a year ago and we highlighted on the ones that are in place and in effect right now as the ones that are going to affect the first quarter. So be in the 301 (inaudible) tires and on material and then on at least for a significant portion of the quarter on the anti-dumping countervailing duty tariff that just went into place on TBR tires. So that's incremental to the raw material index that we talk about and our important numbers in the way that you're looking at that. Those came into play -- the 301 tariffs came in over a period of time and with different effects on it. So over the course of the year but they were not in place in the first quarter a year ago.

Anthony Deem -- Longbow Research -- Analyst

So that's driving raw material cost higher year-over-year. So I think 3% was a number that was shared X tariffs as it is flat or something along those lines?

Brad Hughes -- President and Chief Executive Officer

Well. I will go back to your original question with regard to the framework and I don't see anything fundamentally out of line with the framework you started with I just wanted to highlight the other impact that you see in raw materials.

Anthony Deem -- Longbow Research -- Analyst

That's fine. And I apologize if I missed this. Did you share the exact tariff impacts on operating income in 2019 that affected your margin guidance?

Brad Hughes -- President and Chief Executive Officer

No, we didn't. It's factored in and frankly it would be probably premature because obviously we did try to emphasize that we do have an expectation that there will be pricing to offset a portion of that. So the net impact is just given the freshness of that news a little bit difficult to project at this point.

Anthony Deem -- Longbow Research -- Analyst

Fair enough. And then on rightsizing your inventories. So fourth quarter 2018, pretty significant drop in the balance sheet for inventory. You can blame down some seasonality that's what you've seen historically, but I'm wondering in terms of overhead absorption for the first quarter specifically, is there going to be a negative impact similar to the fourth quarter?

Brad Hughes -- President and Chief Executive Officer

Again I think as we move into 2019 we are going to be running our plants more full right from the start relative to what we did during 2018. We actually even had a little bit of turn on that in the fourth quarter already in terms of the manufacturing contributions. So we think we're in a pretty good shape coming out of the gate Anthony.

Anthony Deem -- Longbow Research -- Analyst

Got you. And just last question for me. Just for product liability expense as that's a key variable for your earnings. I'm just curious if you can help us with 2014 modeling with your expectations?

Brad Hughes -- President and Chief Executive Officer

Yes. Anthony, when we in the third quarter announced the adjustment to our reserves was about $31 million we indicated that the go-forward impact on our annual expense would be about $5 million annual reduction. So you'll have to adjust for not having that one-time product reserve on our product liability reserve adjustment but on an ongoing basis if you look at it overtime the annual expense should be down about $5 million compared to where it had been running.

Anthony Deem -- Longbow Research -- Analyst

And then just for clarification X that benefit are we looking at like a $50 million run rate for 2018? Is that fair?

Brad Hughes -- President and Chief Executive Officer

I haven't done that math to be honest with you. We can get back because with the combination of what we guided and what's available in the soon-to-be file 10-K we should be able to get you pretty close to that number.

Operator

Our next question comes from John Healy with Northcoast Research.

Kyle Patterson -- Northcoast Research -- Analyst

Good morning everyone. This is Kyle Patterson on for John Healey. Thanks for taking my question. So I appreciate the guidance that you guys gave for the full year 2019 in terms of the volume outlook. So I'm just taking a more micro view I was wondering if you guys could just discuss what you've seeing in the first half of Q1 in terms of industry sell-in and sell-out? And just how you would characterize industry inventory levels overall?

Brad Hughes -- President and Chief Executive Officer

Okay. Well Kyle, I think the industry data that is available out there for January as we look at it suggest that January is holding in there with a relatively decent market. We exited last year with the second half of the year in the U.S. focused most on at this point with reasonably strong volume over that time frame including in the fourth quarter and from what we've seen in the industry published data that looks like it's continuing into January. And again I know from our perspective on and I think this is a bit broader than that as we exited last year I think the industry I certainly know Cooper both our own inventory and what we are aware of in terms of channel inventories that Cooper were in pretty good position coming into the year which is nice to start the year without any kind of an overhang. In the other markets I think generally the trends in the early part of the year are pretty consistent with the way we exited last year.

There continues to be softness in China driven by overall economic concerns and specifically some weakness in the automotive industry although it does appear that the government there is taking some steps to try and address both the broader economic and potentially the automotive industry specifically Latin America with some of the political changes that are under way in those markets along with some variability in the economic circumstances. We're looking at that pretty cautiously in terms of our optimism around volume growth. And then for us Europe again last year was ended up somewhat of a flattish year and that looks to be the way we starting this year. Our opportunity there is going to be governed a little bit by our ability to produce the tires that will be demanded. So we're focused on making sure that we're building the appropriate mix of product to continue to move and strengthen that portfolio.

Kyle Patterson -- Northcoast Research -- Analyst

And then also just on the relationship with Walmart, was just curious if you could provide a little more color on the evolution of that relationship? And I know there has been some expansion in that relationship on the e-commerce side and I was just wondering if there was any movement that in 2019 we could see the relationship expanded to brick-and-mortar locations?

Brad Hughes -- President and Chief Executive Officer

Yes. So what we had talked about Kyle is we have talked about the fact that their e-commerce platform we are now and have been selling tires across that platform starting for the second half and in place of the second half of 2018 we are thrilled with the way that that's going for the most part and in terms of type of products that we're selling and the price positioning of those products that are being sold. So that's been a very good experience. The other thing that we've talked about is part of our retail expansion which is a much broader effort is general merchandise. we highlighted it fair amount last year because it was a part of the market that we were clearly underrepresented in and we put a significant attention and effort around that we haven't talked specifically about customers within the channel than more focused on the channel but we have made progress and we do think we're going to begin to see on some activity there in the first half of this year and believe that we will build on that activity as we go through the course of this year and into next.

Operator

Our next question comes from Bret Jordan with Jefferies.

Bret Jordan -- Jefferies -- Analyst

Can you give us an update I guess maybe where we stand with the ATD transition? And was that a positive from a unit standpoint in the end of 2018?

Brad Hughes -- President and Chief Executive Officer

So ATD a lot of -- we're there as a company is available publicly as a result of -- through a bankruptcy proceeding to come out of the other side with a much healthier balance sheet. And while I was never I think I said this out loud on the previous call a lot of things keep me up at ATD paying us was never one of them now we certainly feel very comfortable with what they have done to improve their balance sheet. It did create and it wasn't only with ATD and I want to continue to reinforce that. When that along with some other changes occurred through consolidation to the wholesale distribution channel in the United States our team here looked at it and actually put a great plan in place and executed really well against a conquest program to go out and try and sign up more customers for Cooper that would be service through these large in many cases national distributors including ATD. There is no doubt that ATD the business that we have through that organization benefited from this conquest program and we did grow through through that.

And frankly we would expect that there is additional opportunity again more broadly with this conquest program as we move into 2019. Not only did it continue to sign up new customers that we didn't have these as of last year, but actually to grow the volume for a full year with the new customers that we did sign up last year and to put it into context we signed up about 2.5x the number of new customers in 2018 as we signed up in 2017. So there are more customers out there that are going to be ordering Cooper products and are going to have that experience. We just think just opportunity to continue to build on that.

Bret Jordan -- Jefferies -- Analyst

And then in your prepared remarks I think you quick -- in passing said you're reviewing America's production component. Are you looking at change in the footprint? -- detail on that?

Brad Hughes -- President and Chief Executive Officer

Yes. In our Investor Day what we said at that time and we had just completed the Asia review and we are well through the European review. We're going market-by-market. We have a near sourcing strategy where we want to build the majority of tires we sell into our market in or near that market. And so we wanted to go through regionally geographically regionally to make sure that we had the right footprint from being able to build the right kind of tires to being able to have the right levels of technology and capability in our plants to write cost is clearly part of that. We're looking to make sure that we've got a footprint that we can support with efficient CapEx spending going forward and looking into the future. And we didn't have any changes in Asia. The Melksham announcement came out of the review of Europe and it's premature to make any remarks about what would happen in the Americas footprint as we're looking at that right now.

Operator

Our final question comes from Ryan Brinkman with JPMorgan.

Ryan Brinkman -- JPMorgan -- Analyst

Firstly on the margin outlook. You mentioned the guide for lower year-over-year margin in 1Q it takes into account the wind down cost in the U.K. Does that mean then that outlook for higher year-over-year margin and full year 2019 also takes into account the various GAAP items including the 4Q 2018 impairment charge? Do you expect margin to rise year-over-year on an adjusted basis? And how should we think about the potential for higher margin on an underlying adjusted basis as 2019 progresses?

Brad Hughes -- President and Chief Executive Officer

Yes. When we are giving that guidance Ryan it is on an adjusted basis. So not only it does suggest out the $34 million goodwill impairment charge in the fourth quarter. So the underlying business we are expecting to have an operating profit margin improvement. We're calling it adjusted but I think it's reflective of what we believe kind of the ongoing business looks like.

Ryan Brinkman -- JPMorgan -- Analyst

Perfect. And then a question on China. Clearly the new vehicle production there is under significant pressure I think the trend in production is atypically important for you there. What is happening there with the aftermarket in China? How do you see the impact on replacement shipments netting out from I guess the cyclical headwinds but also there should be some pretty good structural tailwinds there too right relative to that sort of recent increase in units and operation et cetera?

Brad Hughes -- President and Chief Executive Officer

Yes. We really continue to feel very positively about our long-term strategic plan for Asia which is always been that we were going to emphasize OE in a way that we aren't in other parts of the world are at least we started that emphasis there early and it is a bigger part of our business there now but that was with the intent of building a long-term replacement market business over there that will end up being more like it is in mature markets for all of us around the world. And so we are at a point now I think when you look at the replacement market over there in general for tires that it is we should start to see significant growth. I'm not sure we quite seen the peak in terms of the build out of the vehicle park where you kind of plateau there a little bit and then it begins to age as those cars become used and passed to other consumers. But I do think that we are at a point now where we're going to start to see the pull through in the replacement market for the growth that we've seen in the vehicle park. Certainly, we believe that for Cooper we are at about that point. And so a big focus for us is I am making sure that we get a replacement network where we can make tires available to the people that want them in the replacement market for us in China. And again while this is a little bit of a dip in what have been a terrific market for tires particularly OE for a period of time long term as you look at the replacement market there it still looks very attractive I think for the industry and I think particularly for Cooper.

Ryan Brinkman -- JPMorgan -- Analyst

I see. And then just lastly do you expect tires to be included under the definition of autos and auto parts under any potential Section 232 action? And how would this layer and relative to the existing tariffs already in place on imported tires such as the recent TBR tariff(ph)?

Brad Hughes -- President and Chief Executive Officer

Yes. I would say it's a good question Ryan. We've heard different views from people that we respect on both sides of that, will they or will they not be included. Clearly if they were to be included our understanding is that those tariffs are incremental. The difference on these is that they are on tires coming from all markets unless those markets or those countries are excluded from the application of those 232 tariffs. And so it would be a really substantive impact on the market in The United States. For those of us that have a footprint that's largely in place in North America including in the U.S. to support our market here we could become pretty popular pretty fast but it will be very disruptive for the industry for a period of time. And while we would do what we could to make sure that we're building long-term relationships but also taking recognizing what the conditions are in the market at any point in time. It's long term. It's pretty disruptive if something like that were to happen. So we'll see.

Jerry Bialek -- Vice President and Treasurer

I think that's it with regards to questions, Operator.

Operator

This now concludes the question-and-answer session. I would like to turn the call over to management for any closing remarks.

Brad Hughes -- President and Chief Executive Officer

Yes. I'm going to just make some closing remarks quickly. Again I want to thank the Cooper team around the globe for their 2018 efforts. They delivered good results in a challenging environment including two consecutive quarters of volume growth in the U.S. Good progress on both our global OE and TBR businesses and a fourth quarter with year-over-year revenue growth and higher adjusted operating profit and margin. Looking forward we expect improvement to full year operating profit margin as we just described as we continue to progress our strategic initiatives such as our retail expansion in the U.S. which will build on the successful dealer conquest program we had starting a year ago and continuing by expanding into new channels and by partnering with new customers. At the same time we are improving our manufacturing footprint and that includes our new TBR JV in Vietnam. So while industry remains challenging we are optimistic about how we are positioned at Cooper to compete. And with that we'll close it and thank you for your participation today. Thank you.

Operator

The conference has now concluded. Thank you for attending today's presentation. And you may now disconnect.

Duration: 58 minutes

Call participants:

Jerry Bialek -- Vice President and Treasurer

Brad Hughes -- President and Chief Executive Officer

Chris Eperjesy -- Senior Vice President and Chief Financial Officer

Rod Lache -- Wolfe Research -- Analyst

Christopher Van Horn -- B. Riley, FBR -- Analyst

Anthony Deem -- Longbow Research -- Analyst

Kyle Patterson -- Northcoast Research -- Analyst

Bret Jordan -- Jefferies -- Analyst

Ryan Brinkman -- JPMorgan -- Analyst

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