Q2 2019 Earnings Call

Good morning.

So the Cooper tire <unk> rubber company's second quarter earnings call.

At this time all participants on the call.

Only about later.

<unk> session and instructions will follow.

If anyone should require assistance during the conference. Please press Star then zero under telephone.

As a reminder, this conference is being recorded.

Oh, no, let's turn the conference over to Gerry.

Please go ahead.

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 separate Jesse 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 <unk> 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 FCC.

During this call we will provide an overview of the company's second quarter 2019 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-Q that we filed with the FCC 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.

Thank you Jerry and good morning, everyone I will begin today with a brief overview of our second quarter results. After that I will turn the call over to Chris for a few of our for a review of our financial performance in greater detail then I'll return to talk about our outlook and as always we will conclude by taking your questions.

Now, let's talk about the quarter net sales decreased 2.8% to $679 million.

Unit volume decreased 4.9% compared to the second quarter of 2018.

Operating profit was $32 million or 4.7% of net sales a sequential improvement compared with the first quarter.

The Americas segment operating profit was up 16% year over year, despite the impact of new TBR tariffs.

Our international segment was challenged by conditions within the China, new vehicle market and a weak replacement tire market in Europe .

The process of phasing out light vehicle tire production at our melting facility is nearing completion and will result in a Cooper tire Europe that is more cost competitive.

We're now sourcing more tires TBR tires from our Vietnam off take agreement with say Loon and progress on construction of our new joint venture TBR tire production facility in Vietnam is on schedule, both actions diversify our TBR sourcing footprint outside of China.

And our business relationship with Mercedes Benz is going well.

Let me comment on the unit volume, specifically, the U.S. resolve which underperformed the U.S. Tms and the industry.

Well, we are not satisfied with the result, we remain confident that the strategic growth initiatives, we are executing well make a more visible impact in 2020 as we've been saying.

Also we do not believe the second quarter performance is indicative of underlying demand for our products.

While industry sell out data is not complete with the information. We do have we believe Cooper sell out was in line with the overall us market for the first half of 2019.

However, as you know customers make inventory adjustments from time to time, which can impact sell into results as we believe happened in the second quarter.

With that I'll turn it over to Chris Thank you Brad.

Moving to the consolidated second quarter results sales were 679 million down from 698 million in 2018.

This 2.8% decrease was driven by $34 million of lower unit volume and $6 million of unfavorable foreign currency impact, which were partially offset by $21 million a favorable price and mix.

Operating profit was $32 million compared to $33 million in the second quarter of 2018, resulting in an operating margin of 4.7% of sales.

This was achieved despite $13 million in costs related to new tariffs on products imported into United States from China, as well as $2 million of restructuring costs related to Cooper tire Europe's decision to cease light vehicle tire production in Melksham, England.

Let me provide an update with respect to tariffs last quarter, we indicated that for the full year 2019, we expected the costs of the new TBR tariffs implemented on February 15th to be around $50 million.

Our expectation was that there would be price increases on TBR tires in the us market to help offset these costs, what we and others implemented price increases we have yet to see the broad industry pricing that we expected.

Cooper will remain market facing with our TBR pricing and we continue to believe that strong demand for TBR tires relative to supply will eventually result in industry pricing.

However, we do not expect that pricing actions will occur as quickly as previously assumed.

We're making good progress on our TBR sourcing footprint diversification, we are beginning to receive tires and are ramping up the number of tires, we receive from our commercial off take agreement with say loan Vietnam.

At the same time, the construction of the new joint venture TBR plant with say Loon is on track with tire production production expected to commence in the first half of next year and we continue to evaluate opportunities to further diversify our TBR sourcing footprint.

In early May the U.S. administration announced a further increase in section 301 tariffs from 10% to 25% on certain Chinese imports.

Given that Cooper is on the LIFO accounting method in the US we experienced the negative tariff impact immediately this incremental rate rate increase was not included in our previous outlook.

This tariff applies to both our passenger car and TBR tires imported from China as well as some raw materials.

And as we have updated our estimates for recent rate and sourcing changes and other variables our expectation for the full year impact of gross expenses for all newly implemented tariffs in fiscal 2019 is $50 million.

As Brad indicated earlier, the Melksham transition is nearing completion, a little ahead of schedule, which resulted in approximately $2 million restructuring charges in the second quarter.

This amount was in line with our projections and we continue to expect full year 2019 restructuring charges to be in the range of 8 million to $11 million as we approach conclusion of this transition we experienced slightly more volume and manufacturing disruption than expected.

Yet when completed this action will more fully leverage the remaining plants in our manufacturing network benefiting Cooper in Europe and globally.

Now, let's take a look at our second quarter operating profit walk.

Total company operating profit compared with 2018 was impacted by the following factors $13 million of new tariffs enacted in 2019 and projects products imported into United States from China.

$2 million and restructuring costs related to ceasing light vehicle tire production in motion.

$17 million, a favorable price and mix.

$15 million of favorable raw materials, excluding the new tariffs.

The quarter also included unfavorable volume of $6 million.

Higher SGN, a $4 million, primarily related to incentive and stock based compensation.

Increased product liability costs of $1 million and $7 million of higher other costs, primarily due to higher distribution costs, including the nonrecurrence of the Albani warehouse tornado insurance recovery in 2018.

Diluted earnings per share was 18 cents compared to 30 cents per share in the second quarter of 2018.

Now turning to our Americas tire operations segment sales for the second quarter were $582 million down 0.4% from $584 million in 2018, as a result of $22 million of lower unit volume, partially offset by $20 million, a favorable price and mix.

Segment unit volume was down 3.8% compared to the same period a year ago.

Our us light vehicle unit volume decreased 4%, while the us to me decreased by 1.5% and total industry increased by 0.7%.

Second quarter operating profit in Americas increased to $47 million or 8% of net sales compared compared with $40 million or 6.9% of sales in 2018.

Operating profit included $13 million of new tariffs enacted in 2019 and products imported into the U.S from China.

$22 million, a favorable price and mix $12 million of favorable raw material costs, excluding new tariffs.

$3 million and manufacturing improvements.

$6 million of unfavorable SGN any costs $5 million of lower volume.

$1 million of higher product liability costs and other costs that increased by $5 million, primarily due to higher distribution costs, including the nonrecurrence of the Albanian warehouse tornado insurance recovery in 2018.

Now turning to our international tire operations net sales for the second quarter were $139 million down 17.5% from the second quarter of 2018.

This result was driven by $25 million of lower unit volume and $6 million of unfavorable foreign currency impact, which were partially offset by $2 million a favorable price and mix.

Segment unit volume decreased 15.1% with unit volume decreases in both Asia and Europe , driven in large part by challenging new vehicle market in China and weakness in the European replacement tire business.

The second quarter operating loss in our international operations was $1 million compared to operating profit of $6 million in 2018.

The decrease included charges of $2 million related to melksham.

Melksham, England restructuring.

$3 million of lower unit volume.

$2 million of unfavorable price and mix.

$3 million of higher manufacturing costs and $1 million of higher other costs.

Which were partially offset by $3 million of lower raw material costs and $1 million of lower SGN a cost.

Our raw material index decreased 1.2% from the second quarter of 2018 raw material index increased sequentially from 160.4 in the first quarter of 2019 to 161.8 in the second quarter of 2019.

This was in line with our expectation to be up slightly on a sequential basis, but down slightly year over year.

For the third quarter, we expect our raw material index to be down on a sequential and year over year basis.

Turning now to corporate items other pension and post retirement benefit expenses increased $2.3 million versus the prior year similar to the first quarter. This increase is primarily the result of lower estimated return on plan assets compared to 2018.

As we have made strides in improving the funding status of our pension plans. The portfolio is taking less risk in order to protect the funded status, which results in a net increase quarterly expense.

The effective tax rate was 30.8% for the quarter, 38.7% for the quarter compared to 12.6% last year.

The tax rate for the second quarter of 2019 includes $2 million of discrete items related to the accrual of additional uncertain tax positions pertaining to previous years.

The second quarter of 2018 included eight included $1 million of net discrete tax items favorably impacting the tax rate.

In conjunction with restructuring decision related to the Melksham facility. The company is examining its entity structure in the region in order to ensure effectiveness from a tax planning perspective, we estimate the full year 2019 effective tax rate, excluding significant discrete items will be in a range between 23 and 26%.

The effective tax rate is based on forecasted annual earnings and tax rates for the various jurisdictions in which the company operates.

More more detail on our taxes will be available in our Form 10-Q that will be filed with the SEC later today.

Turning to cash flows and some balance sheet highlights.

Unrestricted cash and cash equivalents were $112 million at June Thirtyth 2019, compared with 180 million at June Thirtyth 2018.

Capital expenditures in the second quarter were $45 million compared with $38 million in the same period a year ago.

Also as of the second quarter. The company has invested $49 million in its new joint venture with saloon Vietnam.

Return on invested capital excluding the impact of the goodwill impairment charge in the fourth quarter of 2018 was 9.3% for the trailing four quarters.

On June 27, 2019, Cooper executed an amendment to its existing bank credit facility, which extended the maturity date to June 27.

2024, and increased the borrowing capacity to $700 million.

The amended agreement is comprised of a $500 million revolving credit facility and a new $200 million delayed draw term loan.

The proceeds from the new loan will be used primarily to retire the existing 8% senior notes that mature in December of this year.

The Amendment provides cooper with additional financial flexibility to fund some very good opportunities for reinvestment back into the business.

At the same time, given the attractive borrowing rates, we will be able to save approximately $7 million of annual interest savings beginning in 2020.

Before I turn it over to Brad I want to reiterate that returning capital to our shareholders remains an important priority for us as demonstrated in the second quarter, we're committed to supporting our quarterly dividend dividends.

But we will pursue share repurchases more opportunistically in the near term as we balance attractive opportunities to invest in our business I will now turn the call back over to Brad.

Thanks, Chris clearly the industry is facing some near term challenges as we have described yet even with these headwinds we were able to improve total company operating profit margin from 4.3% in the first quarter to 4.7% in the second quarter and in the Americas segment, we improved profitability by 16% year over year, even after absorbing the impact of the new tariffs.

We continue to make progress on executing our strategic initiatives, including our retail expansion efforts and expect that these initiatives will drive more meaningful improvements in our business starting in 2020.

We have work to do but we remain confident about the future and where we are headed.

Increased us tariff costs and delayed timing of anticipated commercial truck.

Tire price increases as well as weakness in the China, New vehicle and Europe replacement tire markets are expected to impact the remainder of this year.

The Americas segment, excluding TBR tariffs is still generally in line with the previous expectations.

On a consolidated basis, we anticipate improvement throughout the year in operating profit margin.

Cooper is adjusting expectations for the full year as follows given first half volume performance and the lack of clarity regarding the China, new vehicle market Cooper no longer expects full year unit volume growth compared to 2018.

Operating profit margin will improve throughout the year with full year operating profit margin in line with 2018 reported margin of 5.9%.

Capital expenditures will range between 180 and $200 million. This does not include capital contributions related to Cooper's pro rata share of its joint venture with say when Vietnam or other potential manufacturing footprint investments.

Our effective tax rate, excluding significant discrete items will range between 23, and 26% and finally charges related to the Melksham, England restructuring will be in a range of $8 million to $11 million.

In summary, while the short term outlook has been affected by the conditions. We've described we continue to believe the Cooper is doing the right things to build our business and drive improvement, which will support sequential operating profit margin improvement this year and positive momentum going into 2020.

With that let's move to your questions. Operator will you take the first question. Please.

Absolutely and as a reminder, ladies and gentlemen, if youd like to ask a question. Please press Star then one on at this time.

Today's first question comes from Rob Owens from Wolfe Research. Please go ahead.

Good morning, everybody right.

Had a couple of questions. One is just kind of high level. If you divide your your performance into the variable contribution items. So if you think about volume price mix raw materials and tear ups on the year over year basis. It was actually up 13 million year over year.

And that was offset by the.

As seen a restructuring distribution, another which was negative 14.

I was hoping you could maybe talk a little bit more about how those structural costs. Those other items flow as you look into the back half.

Of this year, you will be Comping again.

I think it was $5 million of higher distribution costs costs for.

Distribution facility you had last year.

And on the West Coast, and there was a 34 million our goodwill impairment in the fourth quarter, which shouldnt recur.

Yes, that's that's correct right and I don't have exactly the math in front of me that you use but directionally. It does seem correct around the variable improvement in some of the structural things that are many of them are not going to recur as we go forward. So a couple of examples there within the distribution cost there are on up 2.8 million I believe of non recurring insurance recoveries that we had in last years on results that that we don't have this year. So there's almost $3 billion. There that is contributing to that distribution something else in there that's on a little less obvious on.

Is that we are actually manufacturing more tires in the United States.

And and Mexico for this region and it actually moves where we reflect those distribution costs into distribution costs were some of the sea freight when they were being imported previously were not recorded in the same category.

In not a huge number but another contributor to that distribution cost.

They are and then as you are correct. We began two in the second half of last year and and most importantly, I think are.

The bigger piece of that was in the fourth quarter.

Had the new warehouses online and so began to incur some of those costs and we will not have that difference as we as we move forward this year.

On the EPS DNA side I'd point out that there is a couple of things that are going on in the in the compensation category on one is with deferred compensation related to stock shares on the price.

Look at the move in the price a year ago versus the move in the price of the shares this year and that was a negative contributor to the S. DNA and frankly, a year ago, we were on adjusting our projection for the full year payout on incentive comp down and we did not have a similar on reduction. This year. So there are several things in there to your point on that are non recurring as we move into the second half of this year and we would think that we'd see a better year over year performance. Rob. This is Chris just one other thing I would add in terms of items that occurred last year that won't be recurring in the second half of the year as you'll recall in the third quarter. There was a $31 million benefit related to product liability the adjustment of our model so that kind of come out all the one onetime items.

Right right.

Okay. That's helpful and just two other things one is can you just remind us on what the aggregate.

Volume will be from the.

The Vietnam Offtake agreement once that that ramp.

To what extent are you offsetting the 10 million or so units that you're bringing in on commercial tires from China.

And.

Any update on what happened to the ramp from Eightd, Walmart and some of the other new accounts that that seem to be coming in the back half of last year. When some of those accounts be be ramping up inventory.

Yes, so on first to the question on Vietnam, We haven't given specific numbers about the number of tires that were bringing in we are ramping up against the commercial off take agreement that we have and that will be we will have more units coming from that in the second half of the year, certainly compared with the first half, but more meaningfully as we get into the joint venture next year and begin to produce. They are then you will see a a larger number of payers coming from Vietnam on on over the course of next year and we'll continue to highlight that because that's a big opportunity against the tariff costs that were impact we're incurring right now on and then with regard to the to the business that came on line last year. We are seeing some of the benefits of that this year and as we tried to highlight in the the comments previously on.

We as we look at sell out, which ultimately determines what the sell in will be over a longer period of time, we think that actually we are on increasing at about the same level that the market is in the us on unfortunately on the timing of some inventory adjustments that were seeing from some customers right. Now is offsetting a portion of that but we believe that over the longer term and certainly as we get into 2020 on.

As we get through some of those inventory adjustments will move around from quarter to quarter et cetera, and we've got more impactful contributions from some of the new business that we have been putting on the books that you really start to see that contribute to the bottom line with growth.

Okay. Thank you.

And our next question today comes from James scenario.

Keybanc capital markets. Please go ahead.

Hey, good morning, guys.

Can we just.

Kind of focused on the operating margin guidance revision there.

Going from greater than 7.1% to now 5.9.

And we've got if you have just bridge the items, so weve got lower volume.

We've got raw materials look a little bit better.

Hi, just curious with the with the major buckets are in terms of the variance.

The gross tariff impact remains at 50 million, so maybe the netting of that.

Has change it sounds like pricing is a bit delayed so yes. If you could just help walk through this ferry incident in the full year expectation that would be helpful. Thank you. Yes. That's you just identified one of them James there, which is the TBR tariffs on and again there is a lot of moving pieces in there both in the gross cost and in the pricing side, specifically the timing of when we anticipate there to be pricing, but the combination of those factors, including the the three old one tariff going from 10% to 25% on and now a revised outlook as to when we're going to see pricing on in that market. Even though we continue to believe that the the dynamics of that supply and demand situation will ultimately create a very favorable.

Background for price increases, but we are moving those out so that the tariffs, including the timing for the pricing is an element of that we are on seeing a continued slowdown in the new vehicle market in China. So we've extended that to affect the full year on which is a little bit different front. We had previously and then frankly the slowness the weakness in the replacement market in Europe is probably the third major factor that I would refer to with regard to the change in the guidance for the full year.

Thank you for that how about the inventory.

Realignment with the key customer in the us does that persist as well.

Well.

The Thats all timing, great and it can be one quarter is not necessarily just one customer on the <unk> that is a timing element in it and I I.

I make that comment because different from what we were saying about the private brand wholesale business, which was a structural change to the way that we were going to market in which tires, we were selecting to sell and to whom we that is behind us. This sell in sell out on as as inventories are adjusted from quarter to quarter or period to period is really a timing and we're trying to become more focused on the sell out and we feel pretty good about where we are tracking through the first half of the year relative to market in the U.S.

Got it and just a housekeeping one on the tariff side. So the 301 tariffs did step up from 10% to 25%. So what's what's allowing you guys to keep that gross tariff exposure to $50 million as opposed to something higher.

Well. So there is little again lot of moving pieces, there and including the fact that we are continuing to resource certain products to to two new.

Countries that are not affected by the tariffs and so that the volume the which markets, we're selling them into all contribute to that on but I wouldn't lose sight of the sourcing changes well within that.

Thanks.

Thank you.

And our next question today comes from Chris Van Horn.

Ravi FBR. Please go ahead.

Good morning, Thanks for taking the call Hi, Chris.

I just wanted to dig a little bit further into the comment around unit growth unit volume growth for 2020 is part of it just a reversal of maybe what you see in the back half of this year.

Or is there is there are other moving pieces that we should think about.

On top of that or more weighted than that.

Well I think there there are a couple of things, but most importantly is the respect retail expansion.

Initiatives that the team has been pursuing in North America, specifically on are going to begin to show themselves in greater numbers and have more of an impact on the total overall volume and growth next year.

That combined with on some changes to that if we get to a more consistent.

Sell out Selwyn.

Type of environment, which we would expect in certain with certain customers next year that would also give us a little bit of a tailwind as we move into next year with regard to volume, but the most important thing is that the the efforts around retail expansion are going to contribute more next year than they have today, just as we grow into those new relationships.

Okay got it and then you know you have identified eight eight to 11 million of additional spend on the on the motion restructuring can you remind us on what you on what you foresee that being as a benefit in the out years in terms of cost savings and controls et cetera.

Yes, we havent given specific numbers on that yet, but clearly it is going to contribute to a benefit to the bottom line, we're moving out of our highest cost.

Facility into one of our lowest cost facilities melksham disk to Serbia, which is going to absorb the most of that volume that is being moved but it's also going to put additional volume into the rest of the footprint, which will benefit our overall utilization. So we haven't quantified that yet and you'll begin to see more of that as we get into next year, obviously, but.

It clearly will contribute to lower costs for total company and most importantly for Europe .

Okay got it and last for me.

Just maybe an update on the OEM launch.

Here in the US you any any foreseen.

Unexpected costs or is it going as planned.

Just any update there no ongoing largely as planned on the relationship is very good with Mercedes we're adding additional platforms as we move along here and.

And continue to.

Seemingly perform pretty well based on all the feedback that we've received.

Okay, great. Thanks again for the time thank you.

Our next question today comes from Bret Jordan with Jefferies. Please go ahead.

Hey, good morning, guys.

Hi, Brad.

I guess just a question on the timing of the new relationships I mean, obviously you I guess you expanded your volumes with Eightd Walmart picked up Monroe.

As far as the affiliate as most of you.

Loading up those new relationships done and now it's a matter of selling out or are there incremental.

New customers that you are adding to the list going forward.

Well I think there's two categories here, there's there's on the first category or some of the new opportunities that we started to experience through our conquests program last year. When there were some changes in the distribution landscape on and we went out and tried to use that as and successfully used that as an opportunity to increase the number of selling points that we had specific primarily with the independent dealers and retailers that are serviced through some of the large national distributors on that the initial sell in that resulted from that is is largely in place right now and now it's a matter of growing the number of payers that were selling through those retail points that we added last year again, the smaller independent.

Retailers and dealers that are serviced by those large wholesale distributors then you've got some of the newer larger retail national retail general Merchandiser accounts, where we are adding additional opportunity to sell in different parts of the us and those are still building right now when you go through the pilot phase, which can last different lengths of time, depending on which one you're talking about on but seemingly we are progressing with those and and those will continue to grow on this year and more importantly, we really think next year is when you're going to start to see some of that new activity show up on the bottom line.

Okay, Great and then a question.

The commentary about being more opportunistic in the near term on the share repurchase program is that more as that being more aggressive I guess I think you'd said it in conjunction with a discussion about reinvesting in the business, which.

They are radically take away from the buyback.

What is your thought on the share repurchase going forward here.

Yes, so we've been saying for on.

A few quarters now that we think that there are new and good opportunities to reinvest in the business and so that will be something that we're considering to do on we obviously are going to need to continue to look at where the share price is as we look at the.

Any opportunity to buy back but for right now we do think that there are some new and better opportunities than we've had over the last couple of years with regard to reinvesting in the business.

Okay, great. Thank you.

And our next question comes from John Here.

This research. Please go ahead.

Thank you.

Wanted to ask a question about the Americas segment, I think you guys called out the $6 million.

As DNA cost in terms of the operating income for the segment.

Like a big number to me just given the relative size of that size question for you guys.

I was just hoping you could give us a little bit more color what was going on there.

Well I'll, let Chris supplement this a little bit as we if I Miss something here, but again a couple of the big pieces. There are one the two pieces of what I would describe as compensation. One is anything that's related to deferred stock compensation is you market to market period by period and sort of a change in the first quarter to the second quarter in terms of the share price a year ago compared with the magnitude of the change in the share price.

From quarter to quarter. This year is a meaningful contributor to that in addition to that we also a year ago adjusted our.

Accrual for the full year incentive compensation based on our outlook for the year relative to our targets we aren't doing that this year at this point and so that was a reduction in ESG in a last year that.

Credit, if albeit call it and when we don't have that this year. So those were two big pieces of it Chris anything else in order the noting in there that was the majority Brad It was the stock based comp and the overall incentive compensation and then the adjustment to the accrual last year.

Gotcha.

And I just want to ask maybe just kind of on a broader picture.

Standpoint, you look at the Americas segment, and we think about 80 in Monroe and Walmart.

Just got a surface level it.

Most of US think it should be a really good thing for Cooper and then you guys should be growing volumes.

The volumes there are still on the soft side.

Can you help us.

To close that gap and maybe provide a timeframe for when do you think that we might be done what kind of some of this overhang of the private label business just trying to understand when when do you think thats a reasonable time that 2% start.

Perform in line with the U.S. TMR members are or maybe even better than that given some of the share opportunities.

Well I think on.

It's hard to call up quarter to quarter, John but I would certainly indicate and confirm as we've been saying that we think as we get into 2020 that you're definitely going to start to see on a different level of performance as this new business begins to contribute more on.

Before that it's it's just again as we get you move quarter to quarter and you look at on sell in activity, which is what we're measuring as opposed to sell out activity with the numbers that the U.S.T. M&A reports and that we compare ourselves to on is can move up and down quarter to quarter based on on some of the buy in and sell out timing, we think that as we get through the balance of this year that will kind of even itself out we have a lot of customers out there that we're not alone I'd say the industry is doing a much better job of managing their inventories both for.

Which will better align the sell in to the sell out.

On and and so as that begins to trickle through it will be reflective of what the sellout demand is for our products in terms of the sell in that we're reporting and we think through the first half of the year. We were about the same as the industry on into US and we think as we move forward with some of the new initiatives as we get into 2020 that should improve and show itself on the sell in data that we report against.

Great and then just last question for me on the Vietnam opportunity when you look at the TBR.

Yes.

Is it reasonable that.

Most of those tires.

That you're bringing into the U.S. can be sourced through Vietnam and on his money or do you think you will still be using.

We'll reach an approach to bringing those tires in the U.S.

It's it's there's definitely going to be a continued transition during 2020 as we exit the year. There is no doubt that we will be in a position where the majority is coming.

Assuming everything stays on track and we're well on track right now so I should say.

Should use the term no doubt, but we're highly confident that by the time, we exit 2020, the majority of those tires will be coming on from outside of China.

Whether or not we get there for the full year on I don't know, but it's on everything is on track and that will be a big help next year.

If the current tariff environment remains in place.

Great. Thank you guys.

And our next question today comes from Ryan Brinkman of Jpmorgan. Please go ahead.

Hi, Good morning. This is Roger propel in for Ryan.

Just had a question on the manufacturing improvements bucket in the margin bridge.

Particularly in America, I mean, you continue to see some good improvement there.

Last quarter, you had highlighted some easy compares you saw some lumpiness out and brought on board.

I'll do you feel about the inventory levels currently and then how should we think about benefit from manufacturing going forward, especially in the second half and as we implement alignment and I will follow up.

Okay, well on the on the manufacturing question, specifically well one thing to note is that when you look at it on a consolidated basis.

As we were working our way through the tail end of the cessation of light vehicle tire production in Europe , we did experience some minor complications relative to what we thought we were going to incur.

Now, we're pretty much done with that that along with making sure that we are not overbuilding in China relative to the OE market caused us to adjust our production schedule there and in combination those did have an offsetting impact on what we were able to achieve in the Americas. As we look forward, we still think for the balance of the year. When you look at it in total that we will continue to have better utilized facilities in North America.

And so when we get into the second half of the year, we do see that continuing.

Got it and then just on the margin guidance for the full year.

What kind of industry or company specific volume expectations is that based on now I mean is there.

Is there could you give us a range or sensitivity.

How that margin might move.

Volume is coming better or worse than expectations.

Well those are global expectation, so we need to think about it globally and as we indicated we are on now viewing that the China OE market on the new vehicle market and then the European what replacement market will remain soft for the balance here of the year. The the severity of that continuation and how that happens could have some impact on the guidance that we provided I would suggest that if we stay in the range that we're in right now for an industry on.

Placement industry volume in North America that.

That would.

There wouldn't be any change to our guidance relative to what we just provided so I would say kind of as is in the Americas in and.

Continued weakness in Europe , and China with the one caveat there that China. If it were to continue to be really really severe through the balance of the full year.

John might have some further impact.

The last and then just lastly, Chris noted this earlier last year in that 5.9% for the full year. There were two offsetting almost offsetting equally onetimers with regard to the product liability benefit and the goodwill write off 31 and $34 million respectively.

This year, we've got not only the restructuring costs that we've indicated for many auction of $8 million to $11 million as the range and the new TBR tariffs that were incurring.

$50 million roughly in the <unk>.

In the profits that we're talking about those are two pretty big hurdles to be overcome overcoming and.

Still to achieve the same reported operating profit margin guidance, which just highlights that there is progress being made in the underlying business.

Got it makes sense. Thank you.

Thank you.

And this concludes our question and answer session I would like to turn the conference back over to the management team for any final remarks.

Thank you very much and before we close I want to reiterate some key points first on is I was just describing the new TBR tariffs and milk some restructuring costs that negatively affected our near term results. Excluding these our operating profit and operating profit margin would have improved year over year for both the second quarter and the first half.

Regarding our TBR business, we have sourcing initiatives well underway to mitigate the current tariff impact as we move into 2020, and we believe market conditions will be favorable in the future for pricing.

In China, while there has been near term weakness in the new vehicle market. We continue to believe that China is a strategically important part of our business given given the size of the car park and the growing which should be a growing replacement market.

Moving to Europe , we believe near term near term softness in the replacement market will ultimately improve and the actions we've taken it melksham will make us more cost competitive, particularly in Europe .

Lastly, as we said in North America, our retail expansion plans are moving forward and we expect to see more from them in 2020.

We will continue to implement our strategic initiatives, while evaluating incremental opportunities to improve our business and results going forward.

Thank you for being on the call today.

Thank you Sir This concludes today's conference. We thank you all for attending today's presentation. You May know Scott your lines and have a wonderful day.