Cooper Tire & Rubber Company
Q4 2019 Earnings Call Transcript

Published: 24 Feb 2020

[Operator:]

Good morning, and welcome to the Cooper Tire & Rubber Company's Fourth Quarter and Full Year 2019 Earnings Conference Call and Webcast. At this time all participants on the call are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time [Operator Instructions]. As a reminder, today's conference is being recorded.At this time, I would like to turn the conference over to Jerry Bialek. Please go ahead.

[Jerry Bialek:]

Good morning, everyone and thank you for joining the call today. This is Jerry Bialek, Cooper's Vice President, International Finance 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 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 2019 financial and operating results, as well as the company's 2020 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 the information about these measures and 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:]

Thank you, Jerry and good morning everyone. I want to start with an update on the progress we've been making on the strategy we shared with you in May of 2018 at our Investor Day. We talked about increasing our retail presence, which is to make Cooper products available at a greater number of retail points where consumers want to shop for tires. This effort is progressing extremely well. In the U. S., we have added thousands of additional points of sale over the last 18 months and we will continue to find ways to provide consumers with easier access to our brands and products.We have added or expanded business with Monro and Walmart in addition to others, including independent retailers. In fact with the addition of Monro and Walmart, Cooper tires are now available in all of the top-five retailers in the U. S. Additionally, we have seen strong growth on e-commerce platforms, including tirerack.com and walmart.com among others. At our Investor Day, we also talked about improving our mix and you will note in our reported results that for the full year 2019, mix significantly contributed to profit improvement, supported by the continued consumer transition to larger rim diameter tiers. Cooper enhanced its capabilities to deliver these high value added products. For instance, at the end of 2017, 44% of our U. S. sales for tire rims with diameters of 17 inches or higher. At the end of 2019, nearly 60% of our sales were in this size category.Speaking specifically about the Cooper brand, it continues to be in line with the overall U. S. market share of high value added products at approximately two-thirds. We talked at Investor Day about selectively pursuing strategic original equipment fitments and have since announced multiple OE fitments with the luxury auto brand, Mercedes Benz. We also talked about expanding our truck and bus radial tire lineup to include Cooper brand to augment our Roadmaster brand. This Cooper brand launch got off to a strong start. In fact, Cooper brand TBR tires are standard original equipment on Blue Bird school buses, which transport children to and from school every day across North America.In 2018, we also described how we were evaluating and upgrading our global manufacturing footprint to have the right technology and capabilities with the right production capacity in the right locations with a competitive cost structure. Following this review, in Europe, we seized light vehicle player production at our high cost Melksham plant and shifted production to other lower cost facilities. In Latin America, we recently bought out our joint venture partner in Mexico to take full ownership of the plant there to better leverage that low cost facility. Finally, in Asia, we launched a joint venture truck and bus tire plants in Vietnam.At Investor Day, we also talked about accelerating our new product launch cadence to ensure that Cooper has fresh, compelling products for key segments and we've been delivering with products like the AT3, Solaris and EnduraMax. Building out a digital marketing capability, which is now up and running. Building Cooper brand awareness, we know that when Cooper is part of the consumer consideration set for replacement tires, we win more often than not. Our consumer brand awareness efforts are in full swing and include television, digital and print advertising, featuring our new Uncle Cooper spokesperson.All of these accomplishments were achieved by our global team, which continues to be strengthened with key management appointments, including new leadership of our global technical organization and our Asia operations, as well as our finance function. We also made additions to our Board of Directors to support our board refreshment process as we prepare for planned succession. Cooper is also making progress on diversity and inclusion. We recently earned 100% score on the Corporate Equality Index, and we were recognized by two different organizations for the representation of females on our Board of Directors.We continue to focus on these efforts as well as sustainability initiatives, and are proud to be one of the founding members of the Tire Industry Project or TIP. TIP is a global initiative by leading tire manufacturers who work together under the World Business Council for Sustainable Development to support a sustainable tire industry. Overall, we are very pleased with the momentum of these important strategic initiatives at Cooper, and are continuing to pursue them aggressively.Importantly, as our teams were accomplishing all of these improvements to our future business, we're able to deliver improved financial results in 2019 compared to 2018, specifically operating profit and operating profit margin improved versus the prior year despite headwinds from net new tariffs and restructuring costs. Operating profit margin improved throughout the year from 4.3% in the first quarter to 8.5% in the fourth quarter. Operating cash flow improved by $32 million and we refinanced our $174 million of senior notes, which added financial flexibility, as well as interest rates savings. We will begin to see in 2020.With respect to volume, as we have discussed previously, customer inventory actions in the U. S. had an impact on our 2019 unit volume performance. Excluding this impact, which we believe is behind us, we would have had unit volume growth in 2019 compared with 2018. In Asia, despite a challenging passenger vehicle market, our full year 2019 third party sales in the region were flat compared to the prior year. Focusing on the fourth quarter, our operating results were in line with our expectations. Fourth quarter operating profit margin improved on both a year-over-year and sequential basis. While we saw volume declines in all regions in our core U. S. market, light vehicle tire volume was about flat and in line with the industry. In Asia, third party sales were up compared to last year. Let me sum up by saying our team responded well to a challenging 2019 to deliver progress on our strategic initiatives and improved results compared with 2018.With that, I'll turn the call over to Chris Eperjesy to review our financial performance in detail.

[Chris Eperjesy:]

Thank you, Brad. Moving to consolidated fourth quarter results. Sales were $750 million, down from $770 million in 2018. This 2.6% decrease was driven by $20 million of lower unit volume. Operating profit was $64 million or 8.5% of sales compared to $25 million or 3.2% in 2018.Fourth quarter operating profit compared with 2018 was impacted by the following factors, which are summarized on Page 9 of the supplemental slide deck; plus $34 million benefit from non-recurrence of a goodwill impairment charge in the fourth quarter of 2018; $10 million favorable net tariff impact. This $20 million benefit from duty drawbacks partially offset by $10 million of higher costs related to near tariffs on products imported in U. S. from China compared to the same period a year ago. I will discuss the duty drawbacks in a moment. $24 million of favorable raw material costs excluding the new tariffs and $1 million of favorable price and mix. This was partially offset by $19 million of higher manufacturing costs, $3 million impact of lower volume, $3 million of higher product liability expense, $1 million of restructuring and $4 million of higher other costs. Diluted earnings per share was $1.02 compared to loss of $0.01 for quarter in the fourth quarter of 2018.Let me provide a little more color regarding the benefit from duty drawbacks. The duty drawback provision allows a manufacturer to be refunded for the duties or fees to import goods so as long as it also exports the same sort of goods. Previously there were very few Cooper products that qualified for duty drawbacks. However, there was a policy change in late 2018 that qualified more Cooper products to be eligible. Our team worked hard to analyze this and we were able to submit for duty drawback dating back to 2015. This resulted in $20 million benefit in the fourth quarter with $8 million of it applicable to 2019. Moving forward, we would expect an annual benefit similar to the portion applicable to 2019. The Section 301 tariffs are eligible to be offset under this program, but anti-dumping and countervailing duties or not.Now moving onto our segment performance, starting with the Americas Tires Operations. Segment sales for the fourth quarter were $655 million, down 1.4% from $664 million in 2018 as a result of $15 million of lower unit volume, partially offset by $5 million of favorable price and mix and $1 million of favorable foreign currency impact. Segment unit volume was down 2.2% compared to the same period a year ago, primarily driven by Latin America. Our U. S. light vehicle unit volume decreased 0.1%, while the U. S. TMA was flat and the total industry increased by 0.1%.Fourth quarter operating profit in the Americas increased to $84 million or 12.9% of net sales compared with $70 million or 10.6% of sales in 2018. Operating profit included $2 million of favorable price and mix, $16 million of favorable raw material costs, excluding new tariffs and $1 million of lower SG&A. The quarter also included $10 billion favorable net tariff impact resulting from $20 million benefit from duty drawbacks, offset by $10 million of higher costs related to new tariffs. This was partially offset by $11 million of unfavorable manufacturing due to lower-than-expected production and higher year end maintenance costs, $3 million of higher product liability expense and $1 million of lower volume compared to the same period a year ago.Now turning to our International Tire Operations. Net sales for the fourth quarter were $119 million, down 20.1% from the fourth quarter of 2018. This result was driven by $25 million of lower unit volume, $3 million of unfavorable price and mix and $2 million of unfavorable foreign currency impact. Segment unit volume decreased 16.9% with unit volume decreases in both Asia and Europe, driven primarily by lower intercompany shipments. In fact, third-party sales in Asia were up slightly versus the prior year.The fourth quarter operating loss in our international operations was $6 million compared to an operating loss of $33 million in 2018. The quarter included $7 million of favorable raw material cost, offset by $8 million of unfavorable manufacturing, primarily due to cost related to our footprint actions in Europe, $2 million of volume, $1 million of price and mix, $1 million of restructuring and $2 million of other costs compared to the same period a year ago. The fourth quarter of 2018 also included $34 million goodwill impairment charge, positively impacting the year-over-year comparison.Moving to raw materials. Our raw material index decreased 9.3% from the fourth quarter of 2018. The raw material index decreased 4.6% sequentially from 157.1 in the third quarter of 2019 to 149.8 in the fourth quarter of 2019. For the first quarter of 2020, we expect our raw material index to be down on a year-over-year basis but slightly up sequentially.Now to some corporate items. Other pension and post retirement benefit expenses increased $6.4 million versus the prior year. This was primarily driven by the pension settlement charges related to our restructuring actions in Melksham. Additionally, similar to prior quarters, there was an increase due to the result of lower estimated return on planned assets compared to 2018. As we've 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 increased quarterly expense.The tax rate for the fourth quarter of 2019 included $19 million discrete tax benefit resulted from planning actions involving the company's European tax structure. As a result, the effective tax rate was a negative 19.3% for the quarter compared with 96.3% last year. Excluding this discrete tax item, the effective tax rate would have been 22.7% in the fourth quarter of 2019. Excluding the goodwill impairment charge in the fourth quarter of 2018, the effective tax rate would have been 25.2%. The effective tax rate is based on forecasted annual earnings and tax rates for the various jurisdictions in which the company operates. 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 flow and some balance sheet highlights, unrestricted cash and cash equivalents was $391 million at December 31, 2019 compared with $356 million at December 31, 2018. Capital expenditures in the fourth quarter were $47 million compared with $49 million in the same period a year ago. Our full year capital expenditures were $203 million, which included investments in Serbia compared with $193 million in the same period a year ago. In addition, during 2019, we invested $49 million into ACTR Company Limited, our new joint venture with Sailun Vietnam.Return on invested capital was 8% for the trailing four quarters. I want to reiterate that returning capital to our shareholders remains an important priority for us. As demonstrated in 2019, 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. However, we have extended our current share repurchase program through December 31, 2021 to allow us flexibility. Approximately $193 million remains on our board's $300 million existing authorization. As Brad indicated earlier, we ended the year in a strong balance sheet position. I want to recognize the hard work of our team and efforts around our working capital improvements and refinancing.Now moving to our full year results. Sales for 2019 were $2.75 billion, a 2% decrease from $2.81 billion in 2018. Net sales were impacted by lower unit volumes of $110 million and $15 million of unfavorable foreign currency impact, partially offset by $72 million of favorable price and mix. The company's 2019 operating profit was $174 million or 6.3% of net sales. This compares with operating profit of $165 million or 5.9% of net sales in 2018.There were many moving parts in both 2018 and 2019 that impacted the year-over-year operating profit comparison. Slide 6 of our supplemental slide deck provides each item, but I will discuss the key items to note. In 2019, we experienced favorable trends in price mix and raw materials. This was partially offset by lower unit volumes along with coinciding higher manufacturing costs, as well as an increase in other costs, such as SG&A and distribution. Factoring in just these items, we would have experienced significantly higher operating profit compare to 2018. However, there were two additional unique items negatively impacting our 2019 results, a net $32 million impact from tariffs and $9 million of restructuring cost. Even with these items, we delivered higher operating profit and higher operating profit margin.I'll now turn the call back over to Brad to review our 2020 outlook.

[Brad Hughes:]

Thanks, Chris. Overall, we were pleased with our execution in 2019. For 2020, we are optimistic about the year ahead as our business model remains strong and our strategic initiatives continue to gain momentum. However, there will be some unique items we will need to work through in the beginning of the year. We anticipate operating profit margin to improve throughout the year with the second half better than the first half and the full year exceeding 2019. We expect the first half of 2020 operating profit margin, w expect first half 2020 operating profit margin to be impacted by typical seasonality and certain unique items, which include higher manufacturing costs related to both market conditions and our footprint actions.As previously noted, in Latin America, we have acquired full ownership of our COOCSA facility, which previously operated as a joint venture. As we assume full ownership of the facility, it is important that we take advantage of the opportunity presented by the conversion. We therefore temporarily shut down the plant after the deal closed and have re-hired the workforce as Cooper employees. We are now in the process of ramping production back up, as we relaunch the plant. As part of this relaunch, the Cooper production system will be fully implemented requiring employees to be trained. Throughout the year, we will also be upgrading equipment and processes and adding new employees. As a result, we expect some elevated costs as we ramp up production throughout 2020.We also expect to incur approximately $10 million of restructuring charges related to the Mexico transition, which will primarily occur in the first quarter and are in addition to the manufacturing costs inefficiencies. Similarly in Europe, we ceased light vehicle tire production at our Melksham, England plant and we'll produce many of these units at our Serbia plant. As we continue to move production to the Serbia facility, we expect to experience some ramp up costs. Longer-term, we expect these strategic footprint actions to result in lower manufacturing costs. However, they will be a negative short-term impact, particularly in the first half of the year.In addition to the higher manufacturing costs and restructuring charges, we anticipate higher SG&A, primarily due to the impact of the timing of advertising expenses as we accelerate our new advertising campaign. Excluding the Mexico restructuring charges in the first quarter, we expect 2020 first quarter operating profit and margin to be similar to first quarter of 2019 with second half 2020 operating profit margins to approach our stated midterm target of 10% to 14%.In addition, for the full year, we expect a modest global unit volume increase compared to 2019, including in the U. S., an effective tax rate, excluding significant discrete items of approximately 25% and capital expenditures that will range between $260 million and $280 million. This includes manufacturing footprint investments in Serbia and Mexico as we enhance both of these low cost facilities. At this point, we have not attempted to include any financial impact related to the corona virus in our outlook. Our first concern is ensuring the safety and wellbeing of our employees.Our GRT manufacturing plant we started operations on a limited basis on February 10th to support TBR customers. Meanwhile, our CKT manufacturing plant restarted operations on a limited basis last week. While we expect an impact from the corona virus, we cannot reasonably estimate the nature or size of the impact of this time, because the situation remains very fluid. As circumstances surrounding the corona virus stabilize, we will provide an update as appropriate.With that, let's move to your questions. Operator, will you take the first question please?

[Operator:]

[Operator instructions] Our first question today comes from Chris Van Horn from B. Riley FBR. Please go ahead with your question.

[Chris Van Horn:]

So a number of tire manufacturers have talked about price increases coming through the system. And I was wondering how you view those and what you might be using in some of your planning for 2020?

[Brad Hughes:]

Well, I think the way I describe the market right now, Chris, is that the pricing environment has been relatively stable through the fourth quarter in particular and that's talking about both the combination of pricing actions and promotional activities. So I think things have been -- market position has supported stability. As we move into the first quarter, there have been some announcements regarding pricing and we're always actively looking for opportunities to look at our portfolio for any opportunities to adjust pricing in line with staying competitive for customers.

[Chris Van Horn:]

And the retail presence that you've been able to increase over the past 18 months has certainly been significant and part of your strategic plan. And I'm wondering as we look out through 2020 and maybe even into 2021. Is there still a lot of space for you to expand that as aggressively as you have in the past 18 months?

[Brad Hughes:]

Yes, we still believe that we've got good opportunities in front of us. Clearly, over the course of the last year to year and a half, we've made significant strides. So the base is getting larger as we speak, but there are definitely additional opportunities as we look forward through 2020 and into 2021 at least.

[Chris Van Horn:]

And last from me, free cash flow really strong for the year. And just wanted to know if anything to point out there, working capital management seems to be going well and anything to maybe cite for the reason of that strong free cash flow?

[Brad Hughes:]

Yes, lot is on hard work on, first of all, identifying opportunities for improving our free cash flow position, a lot of that by working on working capital specifically, reducing our inventories. I'm sure that the folks have noted that in the fourth quarter, we did have an unfavorable contribution to our profitability compared with last year relative to manufacturing, but that was all we're very much in mind, trying to make sure that we had the right inventory positions coming into 2020 to create an opportunity for growth. Having said that, not all of the initiatives that the team has identified have been implemented and so we'll continue working towards improving free cash flow and working capital into 2020.

[Operator:]

Our next question comes from James Picariello of KeyBanc Capital Markets.

[James Picariello:]

Brad, you’ve provided some really important detail I think at the end of your prepared remarks. I just want to make sure that I heard that all correctly. So in the first quarter if we exclude the $10 million restructuring spend in Mexico, margins, consolidated margins will be up year-over-year excluding that spend and then for the second half of 2020, you're expecting consolidated margins in that targeted range of 10% to 12%, 10% to 14%?

[Brad Hughes:]

So what to try and make sure that I, and be setting it clearly and I did stated clearly. First of all, for the first quarter if you exclude restructuring costs, we think that consolidated margin will be about the same as the fourth quarter of 2019. We expect that we will have improving profit margins over the course of the year with the second half being better than the first half, a lot of that based on some of the items that I was citing earlier in the call. And then lastly on full year up in 2020 relative to 2019 as we referenced operating profit margin and in the second half of the year that we're approaching the 10 to 14 midterm guidance that we've provided for operating profit margin. Did I get you to where you wanted to be?

[James Picariello:]

And so regarding the Mexico restructuring spend, you're obviously renovating that facility. What’s just your general outlook in terms of the potential throughput benefits of transitioning more volumes to that facility? What's the timing look like there? And then can we expect any formal restructuring actions in the U. S. tied to maybe more volumes now flowing through this Mexico facility?

[Brad Hughes:]

So with regard to the Mexico facility, it's important to understand the process that we were required to go through here in that. It was a joint venture, the employees there, the operators, the folks that do the hard work on the line every day we're actually employees of the cooperative representing the joint venture. We had to take those people off role and then hire them as Cooper employees that allowed us an opportunity to begin to better institutionalize the way that we go about manufacturing products with safety, processes, the effect -- the efficiency of the plant. And so we're going through that ramp up process right now. And as we do that and as we are confident that we're making progress, we will be in a position to add more employees and to add more volume into that facility. Alongside of growing the capability of the team there, we will be introducing some new equipment as well to upgrade the capability and expand the portfolio of products that they can manufacture in that facility.I think a lot of that on growth and increase in the portfolio of products will happen over the course of the second half of this year, but will have it over the second half of this year and can continue into the future and into next year. So there's a lot of that going on. We do continue to evaluate what our footprint needs to look like and there's nothing that we're prepared to comment at this point in time and we're focused right now really on making sure that we execute against what we've done in the UK in Serbia and what we're doing in Mexico right now. And if there was anything to talk about at some point in the future, we certainly will do so.

[James Picariello:]

And just to clarify regarding your second guidance expectation, the framework there. Would that include any additional pricing actions for this year in U. S.?

[Brad Hughes:]

That would have in it our best view on where we see the market going and so it would be included in that second half.

[Operator:]

Our next question comes from Ryan Brinkman from JP Morgan. Please go ahead with your question.

[Ryan Brinkman:]

Thanks for the comments earlier on pricing, just a couple more questions around that, including if you could maybe comment on the step back and year-over-year benefit to EBIT in 4Q from price mix amidst if you call a relatively stable pricing environment. And I recognize the year-over-year comparisons from 3Q to 4Q, so that's likely a component. But is mix another component? I assume mix is positive given your comments about rim size, but I don't know maybe there was a lower mix of TBR tires or something offsetting from pricing tailwind. And then -- so any color there would be helpful. But then just going forward too, you know I'm curious if your 2020 margin outlook, if it includes the anticipated impact of the industry of the recently announced 7% price increase by Michelin scheduled to take effect on March 16, or if that could provide any additional potential upside to the view being communicated today?

[Brad Hughes:]

First of all, you're pretty well spot on the fourth quarter with regard to price and mix. Mix has been a very strong tailwind over the course of 2019 compared with ‘18. In the fourth quarter we did have a year ago a fairly high mix of TBR tires and as people were responding to anticipated tariffs, tariffs that had been announced, et cetera. And we did not have a recurrence of that in the fourth quarter of this year. And so we'll be moving into a more stable and comparative mix environment as we get into 2020. So I think overall your assessment of that situation was correct.With regard to pricing, again, we're always looking at the market on our competitive set, anything that's going on with those folks that are helping to drive pricing in the marketplace and looking for opportunities. Again, we're in a good stable environment in the North American market right now. And so it creates a backdrop where the industry can consider pricing. Some people have acted and we will do the same as we as we think we can, making sure that we're keeping our competitive position for our customers.

[Ryan Brinkman:]

And then just finally from me, you know circling back to the comments from corona virus, which I know it’s not in the guide. Could you talk about what impact, if any, you're seeing on the ground there in terms of demand or in terms of your ability to source tires for export elsewhere? And then could you also just remind us, because I know there've been some changes over time in terms of what is the latest, when it comes to the sourcing of your TBR tires from North America, from different Asian countries? Thanks.

[Brad Hughes:]

So with regard to -- I think it's important to make a couple of points here. One is Asia is an extremely important part of our business, especially when you look at the opportunity for growth in the future. Right now it is a relatively smaller contributor to our overall business and financial results. And so we want to keep that in perspective as we're looking at that market. Also, over time our plant CKT, which makes light vehicle tires, has become much more of a plant to support the local markets. So it is most of the production there is for sale in China and other parts of Asia as opposed to be exported to other Cooper markets. And so the impacts that we will understand better overtime from the corona virus will likely be mostly affecting the Asia business there.With regard to what we can see, we've got a good line of sight on our plants now. I talked about the fact that our GRT facility, which produces truck and bus radial tires as a joint venture, is up and running as of February 10th. CKT, our light white vehicle plant I guess referred to in Kunshan went back to starting to produce and ramp up last week. So we've got good line of sight on our facilities and feel relatively confident that we've got a good handle on how we can bring those online. The other parts of this with regard to the demand environment over there, some of the supply chain elements of what will affect business over all over there, are not as clear right now and what makes it quite difficult to put a reasonable estimate on it at this point. So that's corona virus.With regard to our TBR footprint, we do continue to bring tires to the United States from our GRT joint venture in China. However, we are in the process of beginning to ramp up the tires that we're bringing to the U. S. from Vietnam, both from the off take agreement that we've had in place there for a period of time and importantly as we ramp up the joint venture that we have in Vietnam. We will begin to receive more and more tires from that facility over the course of the year. So I hope that answers your questions.

[Operator:]

Our next question comes from John Healy from Northcoast Research. Please go ahead with your question.

[John Healy:]

I wanted to ask just a question on the global manufacturing. I feel like you guys have had a lot going on over the last 12 months. So when I think about the moves in Mexico, when I think about what's going on in the Serbian market and with the UK facility and then even the kind of the movement of volumes from China to Vietnam. If you kind of put it all together, what do you think the net impact is in terms of costs for 2020 flow on a net basis still be negative or will these manufacturing realignments be a net positive? And at what points do you think it will be in the minute positive camp?

[Brad Hughes:]

Overall, obviously, we think these are going to be favorable towards the future of our footprint. As we laid out at our Investor Day, we were really focused on making sure that we have the right capabilities in our plants that we have the right plants servicing the right markets. We’re trying to make sure that we've got a diversified footprint so that whether it's tariffs, or earthquakes or viruses that we've got a footprint that we can flex and continue to support our customers with great products that are cost competitive.And at each one of these is did making a step in that direction. I think as we look through the first half of this year that we're still going to be getting over the hump with regard to having some inefficiencies related to some of these movements but as we get into the second half of the year that we should start to see those flow through in terms of positives relative to where we've been with our manufacturing cost footprint. And clearly, the more tires that we bring from Vietnam for the TBR market in the United States, the better, because they will not be affected by the heavy duty on those tires coming out of China. So, again, the benefits over the course of the year I think first half yet it all up that it's still going to be a little bit of a drag but as we get to the second half, we do begin to see the favorable contributions from the footprint.

[John Healy:]

And I wanted to ask a little bit about some of the growth initiatives. You had mentioned some of the success you have been having on the ecommerce platforms. Can you maybe talk to what the e-commerce partners are sharing with you in terms of how the Cooper you know potentially is performing relative to other brands? And then additionally the Walmart relationship, I know walmart.com has been a place for you guys and maybe some stores. But I was kind of curious to know if how broadly the store base of Walmart is now up and running with Cooper product?

[Brad Hughes:]

With regard to the ecommerce platforms, we do receive some information from the partners that we had in that space. And I would just say that overall, we feel very positively about that business. We feel positively about the types of tires that we're selling on that. We feel positively about the mix of products that were selling on those platforms. And we feel positive about the revenue and profit that those are generating, even by comparison to our base book of business. So it's exciting, I mean, to watch that happen as it grows, continues to be a positive for us.We're not going to get into a lot of specifics in terms of the in store activities of any of our big retail partners. Suffice to say that we have made step forwards in terms of our presence with some of those big customers relative to where we were a year ago. We continue to believe that that's going to continue into 2020 and beyond. And so that there's good growth opportunities for us with those partners as we look forward, and we're excited to watch it grow.

[Operator:]

Our next question comes from Rod Lache from Wolfe Research. Please go ahead with your question.

[Rod Lache:]

I’ve had a couple questions. First, you're clearly expanding her significantly from a distribution perspective. And I can sense the excitement that you guys have about that. But at a high level, can you just give us a sense of what is the reason then why the volumes in the U. S. are just performing in line with the industry? Should they be actually outperforming the industry just based on the magnitude of your expansion? And if you can maybe then also clarify that these new accounts that and new points of distribution. Have they contributed any unusual volume tailwind just from channel filling at this point?

[Brad Hughes:]

So again, as we had restructured our business beginning back five, six, seven years ago where we wanted to exit some of our nonstrategic private label brand business, that obviously was a big impact, millions of tires in terms of volume coming off the books that we were fighting against. Last year, we had a relatively unique situation with regard to some inventory adjustments in our customer base, both of which we think are behind us at this point in time. So we now feel like we are in a position and I think that we were pretty consistent over the course of last year that we were indicating that the volume growth would begin to materialize as we move into 2020. And so actually hitting an inflection point where we were with the market in the fourth quarter on we view as a positive step as we transition to the opportunities that we see in front of us in 2020.Part of the -- I wouldn't say that there's any significant inventory loading that we’ve seen or are going to see a lot of these adds, whether they're independent retailers or if they are some of the big retail customers, neither one of those, the independent retailers that just happens one small piece at a time but builds over a period of time to be something that's a meaningful contributor. And with some of the large retailers, they do an outstanding job of managing their inventory and we do a great job with some wholesale distributor partners in terms of managing that inventory to make available to them, so that they're meeting consumer requirements that none of us are overloaded on any kind of tire inventories relative to what might have been the practice even just three or five years ago.

[Rod Lache:]

And could you just also maybe talk a little bit about these manufacturing inefficiencies. If you exclude the goodwill from last year's fourth quarter and the duty drawback from this year's fourth quarter, looks like your EBIT would have declined about $15 million, but that's more than explained by this $20 million of manufacturing efficiencies. If you take a step back for the year, what was the magnitude of what you would consider to be unusual inefficiency? And does that represent a significant tailwind as you look into 2020?

[Brad Hughes:]

We haven’t externally quantified specifically what I would describe as unusual efficiencies over the course of the year. But I would highlight that the Europe situation which we went through at the UK facility at Melksham in terms of that wind down and building inventories there and then moving product into the rest of the footprint with a lot of it going into our Serbia facility, clearly created some inefficiencies within our manufacturing cost footprint. And again, we do think that there will be a little bit more of that in the first half of this year and then we've got a new situation that will end up being a very good thing for Cooper beginning in the second half of the year, but with the Mexico facility that we now own 100% of that's clearly going to be unusual. So I guess I’d just reiterate what I said earlier that we do have a little bit of a headwind in the first half of this year, but these actions are going to start to contribute positively when we transition into the second half of the year.

[Rod Lache:]

And then just lastly wanted to just hone in on the TBR market. Was the volume of tires you took out of Vietnam last year and what do you expect the ramp to be this year? And then more broadly, when you think about the U. S. TBR market, a lot of that supply comes from China, including yours. But any thoughts on just the state of the market, what the inventory position is in the U. S. and whether there's any broader industry implications of what we're seeing within China?

[Brad Hughes:]

Again, we haven't been specific about the number of tires that we brought in last year and wouldn't do so this year again from Vietnam. However, I would say that we definitely believe that we will be bringing in more tires from Vietnam without the impact of the duty this year relative to last year. And that the number of those tires will grow over the course of the year as the production capacity comes online at our joint venture in Vietnam. So year-over-year, it should be a benefit to us in terms of the volume unaffected by tariffs.Overall, the TBR market went through a year last year with the OE part of that market began to slow over the course of the year, starting off similarly this year bit it's not going to be a -- it's not been a very -- a real strong on OE market for TBR tires in the U. S. And so that will have some impact. But as the tires on these vehicles begin to wear, because they are being used and all that new equipment that had brand new tires on it, we do think that there should be some building demand in the replacement market this year and that we're well positioned to participate in that.

[Rod Lache:]

It doesn't sound though like you expect any significant supply disruptions for the U. S. market from a corona virus just broadly aside from Cooper?

[Brad Hughes:]

At this point, no. Based on what we've been able to accomplish, both in Vietnam and importantly at our GRT facility but we're going to have to continue to monitor, because again that's a pretty fluid environment right now that that may change.

[Operator:]

Our next question comes from Brett Jordan from Jefferies. Please go ahead with your question.

[Bret Jordan:]

I guess we're hearing talk about the tier one guys maybe even looking at some price increases. Do you see anything I guess in the tier two, some of the imports that have been kind of aggressive, like Hankook or Yokohama looking at taking prices up?

[Brad Hughes:]

We have not seen anything specifically from those two yet, but we have seen some pricing from other tier twos. And so again, I think the good news is that the market is either, I mean worst case we're saying it stable, maybe our conservative position on it at this moment in time. But as we started to see these actions, it gives us opportunities to look at our portfolio and making sure that to the extent that there are opportunities for Cooper or other brands within our portfolio that we're able to do that without disrupting our competitive position with our customers.

[Bret Jordan:]

And then I got the question on the marketing focus, it sounds like you're going to go in new program. Are you thinking about new channels as well? I think a lot of your support has been through like things like Professional Bull Riders historically. But are you thinking sort of major media programs in the first half of ‘20?

[Brad Hughes:]

Again, as I was saying the we are looking at multimedia approach, including television, digital and other forums where we think that this new ad campaign that we have, which so far seem to really be hitting the mark, we want to get it out there in places that we're going to see folks. We are looking at pulling ahead some of the spending on that relative to what our typical calendarization might work like. We've got a big political season coming at us later in the year and getting it out in front of that, or at least trying to is part of the strategy as we look at that.

[Bret Jordan:]

And have you said what the unit capacity of Mexico was, I think maybe an Investor Day years ago, you might've talked about what your expansion potential was there. But could you just sort of size now that you own all of it like you could put out of that plant?

[Brad Hughes:]

I don't think we've sized that in the past. There clearly is opportunity within the footprint that we have today with some additional people and an upgrade with the equipment base that we have there. And I would suggest that there's probably more opportunity there today given we own 100% of it relative to what it looked like previously.

[Operator:]

And ladies and gentlemen at this point, we'll end today's Q&A session. I’d like to turn the conference call back over to management for any closing remarks.

[Brad Hughes:]

Yes, just very briefly. Again, we feel very positively about the accomplishments that we've had against the strategy that we laid out at Investor Day in 2018, even with all the work that was being focused on those efforts to be able to improve our financial results last year and to project it, that's what we're expect to see this year we feel very positively about. So thank you for your time. As always, Jerry and Jacob are available if you have follow up questions.

[Operator:]

Ladies and gentlemen, that will conclude today's conference call. We do thank you for joining today's presentation. You may now disconnect your lines.