聯合包裹運送服務公司 (UPS) 2014 Q3 法說會逐字稿

Ladies and gentlemen, good morning.

My name is Stephen and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the UPS Investor Relations third-quarter 2014 earnings conference call.

(Operator Instructions).

It is now my pleasure to turn the floor over to your host, Mr. Joe Wilkins, Investor Relations Officer.

Sir, the floor is yours.

Good morning and welcome to the UPS third-quarter 2014 earnings call.

Joining me today are David Abney, our CEO; Kurt Kuehn, our CFO; along with International President, Jim Barber; President of US Operations, Myron Gray; and Chief Commercial Officer, Alan Gershenhorn.

Before we begin, I want to review the Safe Harbor language.

Some of the comments we'll make today are forward-looking statements that address our expectations for the future performance or results of operations of the Company.

These anticipated results are subject to risk and uncertainties, which are described in detail in our 2013 Form 10-K and 2014 10-Q reports.

These reports are available on the UPS Investor Relations website and from the Securities and Exchange Commission.

In our remarks today, all quarterly and full-year comments and comparisons will refer to adjusted results.

In addition, we will discuss UPS's free cash flow, which is a non-GAAP financial measure.

The webcast of today's call, along with a reconciliation of free cash flow and adjusted results, are available on the UPS Investor Relations website.

And just a reminder, as on previous calls, please ask only one question so that we may allow as many as possible to participate.

Before I turn it over to David, I want to remind everyone of our investor conference on November 13.

UPS senior leaders will update you on our latest technology, customer solutions, as well as our long-term strategy and targets.

In addition, we will provide 2015 guidance.

For those registered, I look forward to seeing you at the conference.

And for everyone else, the event will be webcast and available on our website.

Now we'll turn the call over to David.

Thanks, Joe.

Good morning, everyone and welcome to our third-quarter earnings review.

Before I get into the business results, I want to take a moment to express my personal sadness about the tragic shooting that took place at one of our facilities in Birmingham, Alabama.

We are a close-knit team at UPS, and this incident has touched all of us.

Our thoughts and prayers go out to the family and loved ones of those involved.

The safety and well-being of all 400,000 UPSers is a high priority for us, and I'm extremely proud of how our people responded to this tragedy, especially those in Birmingham.

Now I would like to discuss our third-quarter results.

Balanced performance from all three segments delivered a record third quarter for UPS.

Earnings improved 14% over last year to $1.32 per share.

Total shipments increased 6.9% to 1.1 billion packages, the most ever in a non-peak quarter.

The strong performance for the small package team provides momentum as we head into the fourth quarter.

Overall, the global economic outlook has been mixed with primarily good news coming out of the US and Asia while disappointing reports have recently surfaced in Europe.

Trade between countries is a primary catalyst for economic growth.

As part of my participation on the President's Export Council, I just returned from a visit to Poland and Turkey where we discussed practical ways to increase US trade with these two important countries.

UPS is a strong advocate for free trade agreements such as the Trans-Atlantic and Trans-Pacific trade pacts currently in negotiations.

The key to advancing such trade agreements is the passage of trade promotion authority.

This legislation gives the administration the ability to negotiate trade agreements and present them for an up or down vote.

We urge Congress to take action on this critical legislation.

Looking more specifically at UPS, current market trends have provided a favorable environment for growth and we've been active this quarter enhancing our portfolio and expanding our capabilities.

Earlier this month, we announced the acquisition of i-parcel.

This cross-border e-commerce company facilitates the globalization of online retail.

i-parcel dramatically simplifies cross-border trade by helping businesses localize their website, providing consumers in over 100 countries a seamless buying experience from US and UK-based retailers.

Cross-border e-commerce sales are expected to triple by 2018 to more than 300 billion.

We're excited about the unique capability this acquisition brings to advancing the UPS global retail strategy.

We also announced the expansion of two solutions aimed at enhancing the consumer's experience.

Following a successful US launch, UPS My Choice is now operating in 15 additional countries in Europe and North America.

International consumers can now receive the personalized home delivery experience that 11 million US members currently enjoy.

Also, we expanded the UPS Access Point alternate delivery network to New York and Chicago with more US cities to follow.

By the end of 2015, we plan to increase the number of locations from 12,000 in Europe to more than 20,000 worldwide.

This is a great example of how UPS continues to implement innovative ways to increase B2C profitability and improve the customer experience.

In addition to these new solutions, UPS continues to invest around the globe.

We announced new locations in Poland, expanded our forwarding and distribution networks in Myanmar and Thailand while opening facilities in Mexico and Canada.

Here, in the US, we have increased network capacity to support our growth.

These enhancements benefit UPS throughout the year and continue to prepare us for peak season.

In a moment, Myron will take you through our peak plans and expectations.

We are continuing to invest in our network, enabling UPS to capitalize on sustained growth.

Let me assure you UPS is ready for the opportunities and challenges we expect to face this year.

Now I would like to turn it over to Myron.

Thanks, David and good morning.

UPS has been preparing for peak season 2014 since December 26 last year.

We've made significant investments in new technology, as well as both permanent and temporary capacity.

The improvements we're making will produce benefits for UPS far beyond this year's peak season.

Our people have been working hard to get everything ready for the holiday volume surge that typically starts during Thanksgiving week.

This year, the National Retail Federation is forecasting a 4.1% increase in total retail sales, a full 100 basis points higher than 2013.

More importantly, for UPS, online retail sales are expected to jump between 8% and 11%.

This continued surge in Web-based sales is not only fueled by online retailers, but also by the rapid adoption of omnichannel solutions.

In fact, according to a survey conducted by Hay Group, 47% of retailers will have an omnichannel strategy in place compared to only 14% last year.

These trends create opportunities and challenges for both retailers and for UPS.

That's why we've focused on increased collaboration with our largest retail customers.

Agreements on shipment volume during peak season are critical to meeting both customers' and UPS expectations this year.

During these discussions, customers have expressed their confidence in our ability to meet their peak season needs.

At UPS, we're gearing up for this growth.

We have added a full operating day on Black Friday in the US and are bringing 49 additional hub sorts online.

In time for peak, we will have 47 new, expanded or temporary facilities around the country.

This added capacity provides the flexibility to handle higher volumes more efficiently.

For example, we've opened expanded facilities outside Los Angeles and two in the Houston area.

We also announced the opening of two new buildings in the fast-growing Dallas market.

North Bay, our first retrofit automated hub, will be operational in November.

We've also made improvements to our two largest facilities, Worldport and our Chicago consolidated hub adding sort capacity and unload doors.

In addition, UPS has invested in the development of approximately 30 new technology solutions.

These applications will improve package visibility, volume forecasting and customer communication.

The UPS network and technology systems are ready for the wave of shipments we expect this peak season.

In fact, for the month of December, deliveries are projected to increase 11% over last year.

If current expectations are too optimistic, we will make adjustments to align network capacity to lower demand.

Before I turn it over to Kurt, I've been visiting UPS facilities across the country talking to our people.

I walk away even more convinced of the great skills and passion our employees have.

We are well-prepared to handle the holiday surge and provide world-class service to all industry sectors.

UPS is ready for peak.

Now we'll turn it over to Kurt to discuss our results.

Kurt.

Well, thanks, Myron and good morning, everyone.

After three tough quarters in a row, it's great to be discussing positive results again.

In fact, revenue growth was the highest we've seen in three years, up 5.7% over the third quarter of 2013.

Global shipment volume of more than 17 million packages per day was 6.9% higher than last year.

Operating profit increased 8.3% with growth across all segments.

Operating margin expanded 40 basis points to 13.7%, our best non-peak results since 2007.

Earnings per share of $1.32 were up 14% aided somewhat by a slightly lower tax rate.

Overall, a solid quarter across the board.

Now I'll take you through the segment details, looking first at US Domestic.

Revenue increased 5.3% to $8.7 billion, resulting from a 6.9% increase in daily packages.

E-commerce continues to be the catalyst for growth; however, B2B shipment gains of 3.4% were the highest we've seen in several years.

Operating profit of $1.3 billion was 7.8% higher and margin expanded 30 basis points to 14.7%.

Revenue per package declined 1.5% as product and customer mix changes offset base rate improvements.

The primary reason for the yield reduction was the more than 50% jump in UPS SurePost volume.

Total cost per package decreased by 1.9% leading to positive operating leverage.

Several factors drove our cost per piece lower.

We benefited from improvements in productivity, wage rate deflation and reductions to workers' compensation expense.

These gains helped to offset the additional peak-related projects and excess cost created by continued rail disruption.

Now looking at our International segment, total revenue improved 5.5% to $3.2 billion.

Daily shipments increased by 6.7% with all regions of the world showing solid growth.

Operating profit was up more than 10% to $460 million and margin expanded by 70 basis points to 14.5%.

Local revenue and cost initiatives contributed to the margin expansion while favorable currency and fuel prices also added to the bottom line.

Average daily export shipments jumped by 9.4%, the result of robust growth out of Asia and Europe, up 16% and 14% respectively.

Volume from Asia to both the US and Europe benefited somewhat from high-tech product launches at the end of the quarter.

Non-US domestic shipments improved by 5% with Canada, the UK and Italy leading the way.

Revenue per package currency-neutral declined by 1% as a result of a 3.5% yield reduction in export products.

High demand and shorter trade lanes and product mix continued to pressure yields and offset base rate increases.

Non-premium products grew by 16% while our premium products grew by 5%.

Turning to Supply Chain & Freight, revenue improved 7.4% to $2.4 billion with gains from all three business units.

Operating profit of $215 million represented a 7% increase and operating margin was the same as last year at 8.9%.

Forwarding and Distribution revenue increased 7.4%.

Forwarding benefited from higher air freight tonnage, primarily in the government and high-tech sectors.

In Distribution, increased demand from retail and healthcare sector customers added to revenue gains.

Our Forwarding operating profit was down.

The spread between third-party providers and customer rates out of Asia continued to pressure operating profit growth.

Distribution operating profits improved as growth offset investments in acquisitions, technology and new facilities.

UPS Freight revenue was 7.9% higher due to LTL shipment increases of 4.7%.

Both operating profit and margin improved and ground freight pricing growth has contributed to these positive results.

Now for an update on our cash position.

Through the first nine months of 2014, UPS generated $2.8 billion in free cash flow.

Adjusted for one-time items, free cash flow was $4.6 billion.

The Company has paid $1.8 billion in dividends so far in 2014, representing an 8.1% increase per share.

UPS has also repurchased nearly 21 million shares for approximately $2.1 billion.

Year-to-date capital expenditures reached $1.4 billion and we do anticipate more than $1 billion in additional CapEx in Q4 as a significant number of projects will be completed in the fourth quarter.

Looking at our expectations for the fourth quarter, as Myron told you, we expect to see higher demand for UPS services and we are ready for the increased volume.

In the US, we expect average daily volume to increase between 5% and 6%.

Yields should be down about 1% as a result of the continued SurePost product gains.

Operating profit is expected to increase 11% to 13%.

As we've previously mentioned, we expect approximately $115 million in additional operating costs in the fourth quarter due to Black Friday operations, temporary capacity additions and the ORION implantation costs.

For the International segment, reported growth rates are projected to slow in Q4 as a result of a number of large wins late last year and the addition of one extra US operating day this year.

Average daily volume and total revenue are expected to grow between 3% and 4%.

International operating profit is expected to improve by 10% to 12% over the fourth quarter of 2013.

In Supply Chain & Freight, we expect mid to high single digit revenue growth with similar operating profit gains.

Our tax rate is forecast to be 35% for the fourth quarter.

So in summary, UPS produced solid performance this quarter and we're maintaining our full-year guidance for earnings per share to be in a range of $4.90 to $5.

We look forward to sharing our outlook for 2015 and beyond when we meet in New York next month.

This completes our prepared remarks and we're ready to take your questions.

I'll turn it back to the operator.

David Vernon, Bernstein.

Good morning and thanks for taking the question.

David, could you talk a little bit about how the profit profile or the contribution from B2C growth has been changing over time and whether it's reasonable to believe that the steps you guys are taking are making that business a little bit more attractive at the margin?

Just trying to get a sense for how the profile of that business has changed over the years.

Okay, well, first, I'll tell you that it's certainly a journey and we've seen our B2C business grow and we've announced that it's up to 45% this year.

One of our focuses though has been to prepare for this trend.

A lot of the technology that we have implemented has been focused around not only B2C, but B2B.

So ORION is a good example of that.

Hub automation, again, is another example.

But then, Alan, in just a minute, will talk about some of the expansions we've made in products that will not only reduce our costs, provide better service, but will also help us adjust to this changing trend even more.

So Alan?

Yes, I guess, first, I'd say that you guys know that most of our growth these past few years has come from B2C and overall profits and margins have improved.

And along with creating the value for the retailers and consumers, obviously, achieving acceptable levels of profit is absolutely central.

And if you take a look at all of our newer services and solutions, they're all designed to drive down costs by improving stop and/or delivery and pickup density economics.

So you've got SurePost and SurePost Redirect that improve delivery density and lowers delivery cost.

UPS My Choice, which I think David mentioned, launched in 15 more countries, helps us reduce those unsuccessful delivery attempts and then, obviously, UPS Access Points, which right now most of what we're doing there is delivering to the access point after the first delivery attempt, but the ultimate goal is to have shoppers be able to pick access points right from the retailer's website and get it directly to the Access Point or UPS My Choice customer directing it directly to the access point and that obviously changes residential stops into commercial and improves delivery density.

Thomas Kim, Goldman Sachs.

Good morning.

Thank you for the time here.

I was wondering if you could elaborate and share your thoughts on the potential impact of Amazon's sort facilities for the coming quarter and how is it affecting your planning around the peak season, but also more importantly, as Amazon focuses increasingly on not just the sort facilities, but obviously the fulfillment facilities, how that sort of shapes your views on CapEx going forward?

Thank you.

Thomas, we don't comment specifically on any specific customer, but, clearly, we're working very closely with all our major shippers and it's an evolving market and UPS is continuing to adapt to that, but the suite of capabilities we have we think continue to make us a tremendous player in this space and will continue to.

Brandon Oglenski, Barclays.

Good morning, everyone and congratulations as well on the first quarter and wow, it feels a lot better here.

Thanks, Brandon.

I want to talk about pricing because obviously you have a unique service here along with your peer as you go into peak season.

It sounds like you've put a lot of preparation into delivering a better service outcome.

So I think historically you've talked about 2% to 3% as your avenue for core price gains.

Can you talk about where that's been trending this year and what you hope to do?

And I know you're going to provide guidance later at the analyst meeting, but just longer term where do you hope to get that price and what are the aspects that are going to drive that gain?

Clearly, we pride ourselves on being very disciplined over the long term on pricing and this year, the priority has been added capacity, meeting customer needs and having the superior quality we're known for.

I'll turn it over to Alan a little bit to talk though about the revenue management process and the rate announcements we've made recently.

Yes, so, first, I think we all know that the market continues to change with B2C volume making up a bigger concentration of our business and that is really driving down the lower yields due to the lighter weights and shifts in product and customer mix.

As you know, we stick to that 2% to 3% annual base price increase.

This year, we've been much closer to the 2%.

Next year, we plan to take that up.

Certainly the rate change we just announced at 4.9% for Ground and Air, as well as the dim weight initiative, are great examples of addressing the yields due to the shifts to the lighter weights.

Chris Wetherbee, Citi.

Great, thanks.

Good morning.

Thanks for taking the call.

Question about the guidance, particularly for the fourth quarter.

When you think about last year and some of the expenses that you have that were specific probably to that year and you think about where it might -- looks like it's trending this year, it feels like the implied growth is on the low end.

I'm trying to get a rough sense of sort of how you guys are thinking about it, whether there is implied conservatism baked in there or if we're thinking that sort of the dynamics of this holiday may be different than ones in the future.

I guess I just want to get a rough sense of maybe how you guys are thinking about incremental margins around the holiday because it would seem that that guidance number is a little bit on the light side.

Well, there is a lot of noise in the comparisons for Q4 this year and last year and if you peel those back a little bit and look at some of the extraordinary events that happened last year and what we're doing this year, it makes a little more sense.

We are looking to spend approximately $115 million in peak and project-related expenses in Q4 and so that does reduce the year-over-year increases we'd be seeing otherwise.

But if you take that out, I think you'll see we've got a good core margin, approaching 15% and solid improvement.

So this year is focused on capacity and capabilities and we do think we'll have a good profit quarter, but we are spending some unique expenses this year to make sure things happen.

Ken Hoexter, Merrill Lynch.

Great, good morning.

And just wanted to follow up, it sounded like you mentioned, David, earlier some sort of cap on volumes as you moved into peak season with some of the large customers.

Can you talk about that, talk about how the discussions have gone as you prepare for the peak in terms of ensuring that you can get your kind of next day and second day delivery done around that potential cap that you talked about?

Yes, Ken, this is Kurt.

I'll link this one together.

Really this is a twofold process.

We have a control tower process for peak and I'll let Myron talk about the operational alignment on that and then Alan talking about the customer alignment.

So Myron, maybe you could start off on our operational connectivity this year.

So Ken, early in the year and all of this year, we've worked very closely with the high impact customers to assess what they think their volume needs are going to be for the fourth quarter.

So we have worked with them to determine their shipping needs, as well as we've implemented new technology that will give us a view into what their shipping patterns are.

So if they exceed the projected volume quotas that they've given us, then we have an advanced opportunity to go back to them and mute what they're giving to us.

And this control tower will be managed by senior leaders in the organization, so I'll give Alan an opportunity to address that.

Before he does, I wanted to just talk a little bit more about this control tower and this is certainly a byproduct of the increased visibility that we're going to have this year.

So we're going to have a much better idea of not only our volume but of the planning process and this control tower will also allow us to do just the opposite.

If we see we have capacity on a certain day and we've got a key customer that wants to give us more than we forecast, we have this visibility, we make that decision and we will certainly take that additional volume.

And it can be the same way for some other shippers that need to surge one way or the other.

So good visibility, good planning, it allows us to make decisions on a day-to-day basis, and we see it as a real capability to be able to take care of our customers' needs.

Alan?

Yes, I would just add quickly that the collaboration with the customers this year, as well as the forecasting tools that we have in place is unprecedented.

The primary focus is on delivery reliability with the customers.

Again, they talked a lot about this control tower.

It's made up of engineering ops, sales and revenue management and we'll assess capacity and we'll determine rates and surcharges as needed, but the primary focus here is on network reliability and then after that certainly what we get paid for -- right volume at the right price.

Just so I understand what you're saying, have you ever said that's a cap for a customer before?

Is this a new thing or is this a regular kind of ongoing thing or is this changing how you operate in terms of taking business?

Yes, Ken, I think the best way to look at it is to say it's a refinement with increased visibility and increased collaboration, both internally and externally.

So we're moving forward.

Thanks.

Wonderful, thank you.

Art Hatfield, Raymond James.

Good morning, guys.

This is Derek Rabe on for Art.

Thanks for taking my question.

As we exit the peak season and head into 2015, obviously coming off a strong year of investment into the network in 2014, how do you feel like the network will be from a capacity perspective coming off of the peak season?

Will there be a lot of excess capacity that will need to be fielded such that we'll see some pressure on pricing coming out of the peak?

I can speak to that.

Clearly, we're seeing continued growth.

This is not by any means just a peak issue or fourth quarter, so we've shown some of the strongest growth both domestically and internationally we've seen in a while.

So this is not by any means just a peak season event.

It's just we're talking about peak right now because it's that time of year.

We think that the changes in e-commerce and omni-commerce are here to stay.

And you have to remember that some of the capacity that we're putting on this peak is temporary affordable capacity that we can turn on and off, but any of the major hub expansions or modifications will be utilized throughout the year.

Bill Greene, Morgan Stanley.

Hi, good morning.

I was curious if you can share a couple of data points with us.

Maybe where is B2C running so far this year?

Where do you think it will be in the fourth quarter?

But probably the most important question is where does that max out?

How high does this number go as a percent of total?

How do you think about that?

Well, Bill, we'll be talking quite a bit about the long-term outlook in a few weeks both on, as David said, how we're adapting our operating model; as Alan talked about, how we're enhancing service to be profitable.

We were about 45% B2C in the US in the third quarter.

Certainly that number is continuing to grow, although we are seeing, as we've mentioned, good strong robust growth in B2B as the industrial base of the US picks up.

So more to come on that.

We are not making any forecasts right now, but clearly we will be talking about the long term in a few weeks.

It's materially higher though in the fourth quarter, is that right?

Yes, yes.

Jeff Kauffman, Buckingham.

Thank you very much and congratulations on the solid quarter.

I want to ask you a little bit about Kiala or I guess UPS Access Point as we call it.

What did you learn as you expanded it in Europe and how -- other than just being a place where customers can get packages on a more convenient basis, what role do you see it playing here in the US and how do you think it affects you financially, whether it's lowering the cost of delivery, whether it's resulting in a different revenue yield?

How should we think about Access Point as it rolls out within the US?

That's a great question and Jim Barber was there to help implement when we did our first acquisition at Kiala and so he helped to establish that and Jim, why don't you talk a little bit about what we've done and what we've learned.

Sure, Jeff.

I think the value of that investment in the US will be very similar to what we had and continue to develop in international.

Effectively it had seven or eight different value points of which I'm not going to go over all of them on the line.

We'll do that in New York when we are with you, but it does create different economics in a B2C or retail package that we think help both the customer and UPS to scale the investments and go forward.

So we love the investment and I think New York you'll see the same thing that we see today.

Okay, as this rolls out though, I guess as I'm thinking about it from a modeling perspective, is it more of a cost-reduction opportunity for you in terms of reducing the amount of failed deliveries or is it more of a revenue opportunity for you in terms of an easier delivery front to the customer?

How should I think about the financial impact?

Let me start and then I'll take both sides and give it to Alan for a little bit more color as well.

It's both to be honest with you.

It allows the B2C economics to move much more towards a B2B set of economics, so you've got the cost side of it as well, but from a revenue perspective, it allows different pickup origin points and access points for customers, which gets into the revenue management side as well and I think Alan will add a couple points to that.

Every delivery angle has better economics, whether we deliver it directly to the access point or we deliver it after the -- send again to the consumer's house.

But the way I would think about Access Points and we'll talk about this more at the investor conference is in totality with the whole ecosystem, with UPS My Choice and now even i-parcel.

So we're the only ones with an Access Point and UPS My Choice network on two continents and now with i-parcel, we're going to be able to enable domestic retailers in the US and the UK to basically have access to consumers in over 100 countries around the world and those consumers will be able to shop seamlessly just like they're shopping in their own country.

Kevin Sterling, BB&T Capital Markets.

Thank you.

Good morning, gentlemen.

Maybe switching gears here looking at the International sector, we saw very good tonnage and shipments, but I think you still highlighted you're still seeing some yield pressure.

As we look at that, what do you think is putting more pressure on your International yields?

Is it the growth in non-premium products still or maybe the strength you're seeing in some of the shorter-term trade lanes?

It's really both of those, Kevin, but I'll let Jim talk a little bit to some of the activities going on in our International Express business.

Yes, so it really is both of them.

If you saw the growth rates, we had some very, very strong export growth rates and some reasonable domestic growth rates in the middle single digits in some of our bigger countries.

So the combination of those put pressure on the yield, but ultimately the job is to match the network to the yield and create operating margins and leverage and continue to invest in the network.

So we're comfortable with that.

We told you last quarter we had to make some improvements in Europe.

You can start to see those economics come sequentially across the quarters and we will continue to do that.

So it's a combination of the yields and obviously the operating efficiency in the network.

Scott Group, Wolfe Research.

Thanks, good morning, guys.

Just a small question, can you help us think about the impact of fuel and currency in the quarter?

Not sure if they were small helps or big helps or what and then maybe how you're thinking about those two items in the fourth quarter.

Yes, fuel was a slight positive for the international, not much on the domestic side.

Currency, clearly, has been very volatile.

Fortunately, with some hedging, it actually was a little bit of a support in Q3.

Although as we looked at Q4, our comps year-over-year for currency, especially the euro, will be a drag.

So both of those were a mild positive for this year, but we do expect some currency headwinds as far as profits are concerned in Q4.

Allison Landry, Credit Suisse.

Good morning.

So I wanted to ask about your guidance for SCS for the fourth quarter in terms of mid-single digits, high single digit revenue and operating profit growth.

If I think about the guidance you gave for 3Q, you had called for low double digits for operating profit growth and came in somewhat less than that.

And as I think about the fourth quarter last year, the comps were pretty easy.

So I was wondering if you could maybe provide some commentary on what's going on there.

Yes, I think we're pretty pleased with the progress of most of the segment there.

The Distribution group is continuing to show solid growth in upper single-digit margins.

UPS Freight is on a controlled growth strategy with improving margins.

The International Air Freight has been the primary challenge and we did see a pickup in demand in tonnage, but the market is such that still our sell rates and revenue generation are not able to offset some of the increasing rates out of Asia.

So a little bit of a classic margin squeeze.

It wasn't severe, but it was a challenging quarter and we expect that that will mute results a little bit in Q4.

Although, clearly, Jim and his team are doing a lot of work on broadening our base for Forwarding.

Jim, have you got any thoughts on that front?

Yes, I would say it's one of those issues that, with tonnage and shipment kilo growth in the middle teens, that's a good problem to have.

It tells you our customers like our solutions.

They like the fact that we're connecting their supply chains across the globe.

The buy/sell rates have moved very quickly in the third quarter.

We've actually -- and we've talked about this a number of times over the quarters -- and internally, we've kicked off an internal working team to look forward over the next couple years to look at how we do this and make sure that our speed and flexibility changes to the environment and we look at other value drivers to get to other customers to kind of change the mix in the network as well.

So again, we'll probably talk about this as well in New York, but it's an area that we think is a good opportunity for us to improve going forward and we plan to do that.

Keith Schoonmaker, Morningstar.

Yes, thanks.

I'd like to ask about purchase transportation, which looks like it moved up a bit faster than revenue, up 15% from last year.

What's behind this?

And related, have you had to shift volume off of rail to truck the past couple of quarters to maintain the service you want for your customers?

Yes, Keith, thanks.

We did see a big increase in purchase transportation, very similar to what we saw in Q3 and the factors there are multiple actually because there's a lot of different moving parts in that.

The biggest one clearly is increased forwarding expense.

As I said, we did see a large increase in tonnage, double-digit tonnage, which does drive up the PTE.

In addition, our SurePost product that has rapid growth, that's where the payments for third parties show up, so the growth in that is included in that.

Some of the international expenses for delivery for the final mile show up there with outside contractors.

So it's a number of issues.

We are certainly seeing some inflation in the over-the-road rates and as we mentioned in the second quarter, we have taken some volume off the rail and that does show up then driving some increases in purchase transportation.

So a lot of moving parts; some of it driven by revenue growth and some in some other conditions.

Ben Hartford, Robert W. Baird.

Good morning, guys.

Just wondering if you could provide any sort of update in terms of where you are with regard to the appeal with the EC's decision, the interpretation of market dominance that stemmed from the TNT bid.

Are you expecting any sort of final resolution here in the coming months?

No, we think that's still a long ways off and as we said, our primary purpose of that appeal is just to avoid having a precedent set that creates a very narrow definition of the market.

So that's an important one we think because it may be used in other areas more than this specific transaction.

Scott Schneeberger, Oppenheimer.

Thanks, good morning.

You guys have addressed your flexibility for the seasonal peak.

I'm just curious delving into the hiring capacity, since last year, obviously, you ended up hiring a lot more seasonal folks than originally planned and the number above what you did last year.

Could you address just on the human capital capacity your abilities to flex there?

Yes, we have stated that we expect to hire 90,000 to 95,000 this year in the US and that's against an actual hiring of about 85,000 last year.

So it is an increase, but not totally out of the range.

Myron, maybe you could talk a little bit about how we manage that.

Good morning.

We have experienced to date no issues with bringing on additional personnel throughout the US, but in addition to that, our capacity to train has been enhanced by adding additional Integrad training sites across the country.

We have added five additional Integrad sites that should ease the burden of training additional employees and as we ramp up throughout the peak season, we foresee no issues at all.

I think one significant difference between last year and this year is, last year, we had to reactively, near the end of peak, try to put on a lot of extra employees.

This year, because we've got increased volume going into peak and because we have such better visibility in forecasting, we're actually putting these people in place a little bit earlier and they are trained and they are ready to go so that when peak does fully engage, they will be able to pull their weight.

So much more of a proactive view this year versus reactive.

Rob Salmon, Deutsche Bank.

Good morning.

Thanks.

David, you had talked a little bit about Europe earlier.

Could you give us an update in terms of what the trends you are seeing month-to-date in October?

And then, Kurt, as we look out to 2015, can you give us a sense of how the movement of the euro will impact the P&L and to what extent you've already hedged at this point?

Yes, I'll start off with the hedging and we have gone out a couple of years actually on the euro.

Although last year, we were at about a $1.36 and our hedge is at about a $1.33 for the fourth quarter.

So we're in decent shape going out for the next couple of years, but it depends where currencies moves and the volatility does create some challenges.

So I'll let Jim maybe talk a little bit about the trends in the business he's seeing.

Sure, thanks, Kurt.

As some of the opening comments alluded to, we have a fourth quarter that's going to wrap over some big wins in the fourth quarter last year.

So that will actually kind of dampen some of the growth, but the growth is fine.

It's exactly where we plan it to be.

It's controlled growth, it's a combination of continuing to invest in the network and the revenue management practices that you can see starting to come through.

So we're off to a good international peak as well and we plan to continue to manage that as such.

So fourth quarter looks good so far.

So have you seen any deceleration with some of the reports of weakening in Europe?

Well, with regard to the economics of Europe, that's one thing, but I think if you look back over the years, the economics there versus the way UPS performs don't actually have that big of a correlation.

We continue to go in and put the brand where it needs to be and invest in that market and we will continue to do so.

Thanks for the color.

Kelly Dougherty, Macquarie.

Hi, thanks for taking the question.

I was wondering if you could give us a little bit more magnitude on the growth you're seeing on the B2B side.

Also if you're seeing more activity in B2B outside of retail.

I know that's been the key driver for you guys before, but some of the other companies that have reported have talked about growth being more broad-based.

So wondering if you're starting to see that yet in B2B volumes outside of retail?

Alan?

Yes, so as Kurt reported there, our B2B growth has been the strongest this quarter at 3.4% and while we do get some nice B2B growth out of B2C or retail, which is really part of our overall B2C strategy, we are seeing much more broad-based growth.

Industrial manufacturing is certainly growing much stronger than it has and our solutions are really resonating in that area and our sales and solutions teams are winning.

Should we start to then -- can you help us think about what the operational leverage -- you finally seem to have B2B coming back.

Is there any way to think about what that does from a profitability perspective?

Well, certainly, if those trends continue, then it's good news because it increases the density and just helps the network overall.

We do think that there is an industrial renaissance of sorts in the US.

And so as low energy and other advantages that the US has continue, that does bode well for balancing our network.

So nothing specific right now, but, clearly, we're pleased to see some of the revitalization.

Helane Becker, Cowen.

Thanks very much, operator.

Hi, gentlemen.

Thank you for the time.

I just wanted to -- had this question.

With respect -- today, in today's Wall Street Journal, your pilots took out a full-page ad that I thought was kind of surprising to me because I'm not sure what message they're trying to send.

And I'm just wondering what you're -- if you can comment at all without necessarily negotiating publicly what your takeaway from that is.

Well, first, you just have to consider that we are in negotiations and the big thing that I would want you to take from that ad is the quote that they remain committed to delivering your holiday in 2014.

That's what they're paid to do, that's what our contract covers that they would do and that's what we would expect them to do and we appreciate the fact that they made that commitment.

But we're going to continue to negotiate in good faith and we're going to do what's right for the Company, we're going to do what's right for our pilots.

And we are not going to discuss the specifics of negotiations here because we think that it's best left at the bargaining table.

We just want to remind everyone that we are covered under the Railway Labor Act, so these contracts do not expire.

They become amendable and the contract terms stay in force.

The National Mediation Board, the IPA and us asked the NMB to get involved in the negotiations and they did so six months ago and they are now controlling the pace and timing of those negotiations.

Great.

That's very helpful.

I appreciate that color.

Thank you.

David Ross, Stifel.

Yes happy Friday, everyone.

UPS Freight, I wanted to talk about that for a second.

The tonnage accelerated in the third quarter, looked pretty good while yields decelerated.

The first half of this year, you had flattish volumes, but yields were up 3% to 4%.

What was driving that?

Was there an increase in bundling activity in the third quarter or another change in the market approach?

We've been -- very strong results on the yield front if you look over the last couple of years, so some of that is really just wrapping some of the industry-leading improvements we've seen.

I'll let Myron talk a little bit about our continuing focus on the middle-market and leveraging our connectivity to grow the business profitably.

Good morning, David.

The Freight group continues to see steady improvement year-over-year, but as we have professed before, they will continue to see opportunities for growth.

We'll have a continued disciplined growth strategy focused on profit and not necessarily marketshare.

We'll focus on the middle-market customers utilizing our Ground salesforce, as well as the continued expansion in technology that we'll utilize to see growth with.

So we expect to continue to see steady improvements in our Freight group.

Bascome Majors, Susquehanna.

Yes, thanks for taking my question.

I want to follow up a little bit on an earlier question on pricing and specifically around the peak.

So if e-commerce growth does continue at this double-digit pace going forward and the customer behavior doesn't drastically change about wanting the packages coming to the door, when do you start to invoke price as a primary lever in driving margins higher around the peak?

And maybe talk a little bit about what sort of future approaches to peak season pricing you're seriously considering today.

Thanks.

Yes, we're certainly watching closely market dynamics and we do over time convinced and sure that we will be able to get paid for the value we create.

Although this year the priority was on enhancing our capabilities.

We do price for peak, in some cases anyway and I'll let Alan talk a little bit about that, but we prefer to set long-term contracts with customers and then adjust around that.

But, Alan, maybe you could expand a little bit about the conditions in which there is peak pricing.

So certainly, as we look at our customers' forecasts and what we agreed to on a year-round basis, as well as peak, there's some variability in what a customer wants to give us.

Certainly there's always the opportunity to put in some sort of a peak surcharge for that additional business.

And I think that your comments are certainly something that we're taking a very close look at.

We've got to manage this business on a year-round basis and we certainly understand that peak season is becoming more and more of a step-up phenomena, then we can't build a network or as Kurt always says, we can't build the church for a day.

So more to come on that front.

David Campbell, Thompson Davis & Company.

Thank you very much for getting me in.

I just wanted to delve in a little bit into the same-day delivery business.

This is a business that seems to be, by Google and Amazon and other companies, accelerating.

How does that impact UPS?

Doesn't it take business away from Next Day or Ground business as people get more and more deliveries the same day?

Yes, David, thanks for your question and that certainly is generating a lot of press.

Other than drones, I can't think of anything else that seems to grab the headline.

There are some markets where that same day is an important element and we'll talk about this at our investor conference, but we think that the majority of Internet shopping anyway happens late afternoon and evening and that the real hotspot is going to be local next-day delivery and that's something we're working very closely with a number of brick-and-mortar retailers on to be able to fill from stores that have inventory in that metropolitan area and make deliveries the next day.

That's where the bulk of the demand is.

That's where the economics make sense.

So more to come and we'll be talking about this at our investor conference.

Thanks for your call.

I would now like to turn the floor back over to Mr. Wilkins.

Thank you, Stephen.

Appreciate all the questions today and we look forward to seeing you in the investor conference, and I'll turn the floor over to David Abney for final comments.

All right, thanks, Joe and thanks to all of you for participating in my first earnings call as the CEO and the results discussed this morning represent the effort of more than 400,000 UPSers and they are working very diligently to develop, test and implement new technologies and they are really making good progress and we have set high expectations and our people are real excited and they are ready for the upcoming challenge.

I'm confident that they will make a real difference.

You can see we're adapting to the rapidly changing marketplace.

The growth opportunities are many and we look forward to reviewing them with you during the New York conference.

We'll update you at that time on our long-term strategy and of course, I'm looking forward to sharing my vision for UPS at that time.

So thanks again for joining us and have a good Friday.

Thank you.