聯合包裹運送服務公司 (UPS) 2015 Q1 法說會逐字稿

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 first-quarter 2015 earnings conference call.

(Operator Instructions)

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

Sir, the floor is yours.

Good morning and welcome to the UPS first-quarter 2015 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; Chief Commercial officer, Alan Gershenhorn; and Richard Peretz, Corporate Controller and Treasurer.

Before we begin I went 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 statements are subject to risk and uncertainties which are described in detail in our 2014 Form 10-K.

This report is available on the UPS Investor Relations website and from the Securities and Exchange Commission.

The webcast of today's call along with a reconciliation of non-GAAP financial measures are available on the UPS Investor Relations website.

Just a reminder, please ask only one question so that we may allow as many as possible to participate.

Thanks for your cooperation.

Now I will turn the call over to David.

Thanks, Joe.

Good morning everyone and welcome to our first-quarter 2015 earnings review.

We'll talk in a few moments about the CFO transition announced this morning but first we're going to review the quarter.

I'm pleased to report UPS produced solid performance across all segments.

Earnings per share increased more than 14% led by International.

This segment continues to demonstrate positive momentum as our unmatched integrated network generates high returns and significant value for customers around the world.

The US Domestic segment performed as planned.

Our actions on revenue management and pricing drove revenue per piece higher during the first quarter.

The pace of volume moderated as we chose to forgo some lower yielding opportunities.

In the Supply Chain & Freight segment revenue and operating profit improved over last year as all three business units made progress.

The first quarter's results demonstrate that we are on track with our core business initiatives both for the remainder of 2015 and for our long-term financial targets.

Last year at the investor conference we outlined five key investment areas.

These include improvements in capacity, efficiency and our strategy for growth markets.

In addition, we've detailed our industry-specific focus and the One UPS initiative.

We are moving forward in all five areas.

In terms of greater efficiency, we improved productivity and operating leverage during the quarter.

Investments in hub automation and route optimization projects are on schedule.

In fact we expect the accelerated deployment of ORION will reduce 100 million miles annually once fully implemented.

We are on plan to complete 70% of driver routes by the end of this year.

To support the core business initiative of expanding industry-specific solutions UPS enhanced two services to assist healthcare customers.

We introduced our new Temperature True packaging service which includes expert consultation and exclusive packaging options.

These shipping containers are pre-qualified for use in our network and designed to fit our customer's budget and risk requirements.

Next was the expansion of our International Special Commodities program to 20 new destination countries.

This allows UPS customers to ship biologic samples and specimens to more than 50 nations.

These solutions will provide growth opportunities with new and existing healthcare clients.

Our third initiative is capitalizing on growth markets as demonstrated by our International segment, especially the strong growth we continue to produce in Europe.

The multiyear investments we've made there have positioned UPS to extend our 10-plus years of near double-digit growth rates for the region.

Another great example of a growth opportunity for UPS is online retail.

To strengthen our position as the e-commerce shipper of choice we are expanding the Access Point network, our unique network of retail locations that both improves the consumer's experience and provides better stop economics.

In January we increased the US footprint to include the more than 4,400 UPS store locations.

In May we will add non-UPS store locations in the Boston, San Francisco and Washington, DC Metro markets.

These expansions will bring the total Access Point locations to more than 20,000 by the year-end.

This unique channel is a key component of our global B2C strategy.

As I reviewed at the investor conference, combining the many capabilities of UPS to meet customers' supply chain needs is the foundation of our One UPS strategy.

To increase awareness we began a campaign to highlight the breadth of services that differentiates UPS in the marketplace.

The tagline says it all, We are UPS, and to customers we are united problem solvers.

This play on our name and the entire campaign invites shippers to experience the can-do customer-centric problem-solving culture of UPS.

The goal is both the new customer acquisition and deeper collaboration with existing shippers.

These five investment areas are key to achieving our financial targets.

I want to reinforce that UPS is intensely focused on creating and enhancing long-term shareholder value.

This will be achieved by providing differentiated solutions delivered by highly skilled UPSers.

Our belief in both the UPS business model and the execution of our strategy was conveyed by the recent 9% dividend increase.

We have a 46-year history of providing UPS investors an increasing or stable dividend.

When combined with share repurchases we expect total returns to share owners to exceed 100% of our net income again this year.

This quarter clearly affirms that we are moving in the right direction and on track to achieve our financial objectives.

Now Kurt will take you through the details.

Well thanks David, and good morning.

The first-quarter results show good progress across all segments.

The US performed well and is successfully implementing a disciplined pricing strategy.

International continues to produce strong momentum with the balance of growth, pricing and operating performance and Supply Chain & Freight achieved solid results considering the turbulence created by the port disruption.

As David mentioned UPS earnings per share improved more than 14% over last year.

Digging into the numbers the impact of currency and fuel price changes have made comparisons to last year complex.

But we'll try to make it clear as we move through the segment results.

Let me begin with the US Domestic segment which reported revenue gains of 3.8% as a result of volume growth and improved pricing.

Average daily package volume increased 2.4% driven by Deferred Air growth of more than 12% and UPS SurePost gains of 7%.

Shipment growth rates were a little bit slower as the Company chose not to pursue some lower yielding contract renewals.

During the quarter we saw balanced growth in both B2B and B2C shipments.

Revenue per package increased 1.3% as base rate improvements overcame about a 200 basis point reduction in fuel surcharges.

Ground yield was up 3.1% primarily due to the dim-weight change and other revenue management actions.

Operating profit grew 11% to more than $1 billion.

Margin expanded by 70 basis points supported by productivity improvements.

Direct labor hours grew at a slower pace than volume.

Now for the International segment which continues to make substantial gains around the world.

Revenue on a currency adjusted basis increased 2.4% over last year.

International operating profit was up 14% to$498 million.

Margin expanded 280 basis points to 16.8%.

Volume growth, pricing initiatives and a benefit from the lag in fuel surcharges all contributed to margin expansion.

In addition our currency hedging strategy also aided results.

Daily shipments were 4.6% higher led by export products up 6.7%.

This gain was driven by impressive growth in Europe, up more than 9%, and we expect strong volume growth there to continue.

Base rates improved across all regions and products, although they were masked by currency and changes in product mix and about a 300 basis point impact from lower fuel surcharges.

Mix shift changes continued as transporter volume grew faster than intercontinental shipments and deferred products continued to outpace express products.

Now turning to Supply Chain & Freight which performed about as expected.

Revenue increased 1.3% to $2.2 billion driven by growth in distribution and UPS Freight.

Excluding the impact of currency revenue increased by 4.2%.

Operating profit increased to $151 million and margin was 6.9%.

The Forwarding unit improved operating profit and expanded margin over the same period last year.

Congestion at West Coast port terminals created challenges for many Ocean Freight customers.

But the multimodal flexibility of the UPS portfolio allowed customers to accelerate their Ocean Freight or reroute to non-affected ports.

Looking at distribution where revenue was up at a mid-single-digit pace this unit continues to deliver top-line growth as more customers in the healthcare and retail sectors seek out our industry-specific solutions.

Continued investments in technology and infrastructure pressured margins.

UPS Freight revenue increased by 2.3%.

LTL shipments per day increased 3.5% over the prior-year period.

LTL revenue per hundredweight increased by 1.1% but was negatively impacted by almost 500 basis points due to lower fuel surcharges.

The unit is focused on providing midmarket customers with broader solutions and technology they value.

Now for an update on our cash position.

The Company generated $2.4 billion in free cash flow continuing our strength and providing flexibility to fund our growth projects.

Regarding share owner distributions, in addition to the dividend increase that David mentioned the Company repurchased more than 6.7 million shares for approximately $680 million.

As we look at our 2015 guidance the first quarter did come in a little better than anticipated with some help from fuel.

Remember as I said on the last call first and fourth quarters' earnings growth would likely be higher than the year's average while comparisons with the second and third quarter will be below the year's average.

Basically, though, the 2015 quarterly results should return to the more typical UPS annual profit distribution.

US Domestic volume growth should increase about 3% with revenue growing at a slightly faster pace.

We expect base rates to be up approximately 3% at the top of our typical target range.

However, lower fuel surcharge revenue will continue to weigh on reported yields.

And last our international revenue on a currency-neutral basis is expected to be up 2% to 3%.

In summary our full-year earnings per share guidance is unchanged at $5.05 to $5.30, up 6% to 12% over last year.

With that I will turn a back over to David.

As you know UPS issued a second press release announcing the retirement of Kurt Kuehn and the appointment of Richard Peretz as CFO.

Kurt has served UPS for nearly 38 years and has been CFO for the last 8. I have come to rely on his leadership and support over many years.

I've also worked with Richard in previous assignments, especially when we were on the front lines of expanding UPS's international footprint.

He has brought financial leadership experience in operations and corporate across many aspects of the finance area.

He is well-prepared to take on this elevated responsibility.

Kurt will be with us as CFO until July 1 in order to assist Richard and the UPS team with the transition.

An important part of that transition will include visits with investors for Richard to gain further insights into our Company and markets.

Following the Q&A period I'm going to turn the phone over to Kurt for closing remarks.

But now I'd like to introduce Richard.

Thanks David for this opportunity and thanks Kurt for your support throughout my career and now as I enter this new role.

I'm looking forward to the challenge and I'm honored to be part of the team leading this great Company for the future.

I'll soon be hitting the road with Kurt and the IR team.

I'm intent on listening and learning and then integrating those perspectives into my own.

I'll save my comments for future meetings after I've spent a little more time adjusting to the job and the new responsibilities.

Kurt?

Well great.

Congratulations again Richard.

Richard and I have worked together for more than 20 years on many of the most important Company developments throughout our shared history.

I think you'll learn that he has tremendous ability to simplify complex business issues and develop a sound financial perspective even on the most difficult transaction issues.

He is a capable leader who's ready to take on the critically important job of guiding the Company's financial strategies and leading the financial team.

I can't help but note, Richard, that since this is your first appearance on an earnings call it will also be your easiest.

I'm still going to take point on answering questions for this quarter but Q2 will be yours and with David's leadership and the rest of the management team of course to help.

David, I'll turn it back over to you.

Okay, operator, let's --

Wait, David let me do this last one, okay?

Okay, Kurt, be my guest.

Okay, great.

Okay, operator, it is my pleasure for the last time to say we're now ready to take questions on the quarter.

Please open the line.

David Vernon, Bernstein.

Thanks for taking the question and congratulations to both Kurt and Richard.

A little bit about pricing, can you talk about the progress and results you guys have seen in implementing dim weight in the domestic segment?

And provide any kind of additional insight into customer feedback on peak pricing initiatives that were discussed last call?

Sure.

Clearly you can see on our reported yields that even with the headwinds of fairly substantial fuel surcharges we showed substantial gains.

So the dim weight is one piece of that.

Alan, maybe you could talk a little more about revenue management and where we're headed.

Yeah, Kurt.

Pricing has been a real positive story.

We're certainly proud of our sales and marketing team discipline and the values selling.

As you can see we're 200 basis points better than last year's year-over-year growth rate with even a much larger fuel drag.

So the impact came in at the high-end of our expectation range and certainly the dim weight along with other revenue management practices contributed to that.

Also on the call previously Kurt's and I believe David's comments they talked about us not renewing some lower yielding customers.

Switching to peak real quickly, we've got a comprehensive strategy in place that's already begun to increase the revenue from customers that surge during the peak season and then also drive additional operating expenses.

The price increases again are going to be generally applied to the residential products and other high cost areas but they will vary by customer.

And those revenue initiatives are already built into the guidance.

Thanks.

Just as a clarification, as far as the number of customers that are paying a dim weight are there is there a large percentage of shippers that have maybe gotten a waiver and that's going to be out there in the future or can you give us a sense for what percentage of customers actually took that dim weight chart this year?

Yes, David, we will save that for the next questioner.

Let's move on.

Tom Wadewitz, UBS.

Yes, thank you and Kurt congratulations to you.

I've worked with you for a long time.

Remember back when you were head of IR and it's really been a pleasure working with you over the years.

So congratulations on the retirement and Richard congratulations to you as well.

Let's see, so I think I want to ask a little bit more on the pricing strategy.

How much is this a change in terms of the yield management that you would expect to affect things going forward?

Are we going to hear more about yield management and turning away business and perhaps even acceleration in pricing from what we've seen in first quarter or was this more of a one-off where it was a particular piece of business that was kind of a one-time thing?

No, I think we're pursuing a consistent revenue management strategy.

We had talked last year that following peak season we were going to migrate into being more price disciplined and so this is not a one-time issue.

It's just a continuation of our strategy.

You know our revenue management initiatives certainly are gaining traction.

We expect that to continue but we have to remember this is a multipronged strategy.

Yes we are working on pricing initiatives and especially along peak season lines but we are also focusing on creating unique solutions for our customers that brings additional value.

And then of course focusing on operating efficiencies that will give us the results we want to.

So it's a multipronged strategy and it is something that will be throughout the year.

Thanks.

Ken Hoexter, Merrill Lynch Bank of America.

Great, thank you and good morning and again I will echo that.

Congrats, Kurt it's been great working with you for almost 15 years and welcome to Richard.

If we could just jump over to International a bit, you posted an increase in profitability up about 280 basis points on the margin.

You talked a lot about the cost, David, on the domestic side and what you've put in place but a big upside surprise on the International side.

Can you walk us through where -- what caused you focus on there, was it more the volume side or was it the cost side that enabled that increase?

Well I think you'll find it's a blend of all of those but Jim, why don't you take us through the quarter a little bit.

Sure I would, appreciate the question.

I think it is a blend.

I think if you start in Europe you've heard us talk for a couple of quarters about the growth there and some of the challenges we had and the group has done a great job over the last couple of quarters to put that into the network and you also heard us discuss the expansion of the network and European investment.

That's starting to pay off as well in some of the operating efficiencies.

I think the other big one for us in the quarter is out in Asia.

Even with some of the slower growth I think the team has done a very good job to cut the network and balance it with what's going into the network.

And I would say those are the two biggest drivers especially in the intra-Asia network and the European network as well to drive the numbers this quarter.

Thanks.

I appreciate the insight.

Kevin Sterling, BB&T Capital Markets.

Thank you and Kurt, let me say my congratulations as well on your pending retirement.

I've enjoyed working with you over the years and best of luck to you.

Maybe can you guys talk a little bit about some of the trends you're seeing in April, particularly on the International side and LTL are you still seeing some benefit from the West Coast port diversions and congestion?

I think a lot of that has cleared up.

Myron, any particular trends on the LTL side you think are notable on the volumes?

We've seen the same thing happen in April that we saw in the first quarter with stable improvements.

We expect that we'll have 3% to 3.5% growth in the freight market moving forward so no particular issues there.

Yes, barring a little labor disruption on the ports of course given the latest headlines.

Ok.

Thank you.

Art Hatfield, Raymond James.

Thank you.

Me likewise, Kurt, congrats and it's been great working with you.

I'm glad that you finally decided that you had enough of us.

It was a full dose.

I'm sure.

Going back to the comment on your pricing strategy real quick and being more disciplined, can you talk a little bit about what you see in customer actions that when you decide to walk away?

What's your history with that?

Do you see customers coming back to you after a short period of time when you do something like this asking you to come back because they miss the service?

And really aren't they ultimately going to see higher pricing in the long run and why would they allow you to walk away from them at this point in time?

That's certainly pricing decisions are complex and it depends a lot on the relationship and the nature of the volume that's being tendered to us.

But, Alan, maybe you could talk a little more about our approach.

It really all comes down to I think what David talked about, the balance as well as the value that we're creating for the customers.

So we're very focused on creating value for the specific industries that we're targeting and yes in some cases we do see those customers come back.

But I just want to reiterate that we're firm in our strategy to further align the revenue with the cost throughout the year including peak season.

And I think I would probably word it just a little bit different than maybe on the question as far as walking away.

I think it's more that we do choose sometimes not to pursue some of these lower yielding contract renewals.

But we're constantly working with our customers on how we can add value and how we can optimize our network for them.

So it's not like we just walk away.

We tried to give options, we tried to show the value.

There are some cases that we choose not to pursue.

Great.

Thanks for your time this morning.

Bill Greene, Morgan Stanley.

Hi there, good morning.

Kurt, congrats again, wish you all the best.

Richard, congrats but my condolences.

So I wanted to ask a little bit more of a broader question.

Of course we've seen FedEx take action in Europe and they will spend some time absorbing TNT now integrating it.

Can you talk a little bit about how you see the broad global landscape now after that change?

Obviously in the interim you'll try to win I'm sure some share in Europe but does this make other aspects of the world, other areas of the world more attractive?

Should we think more about growth in Asia given the changing playing field in Europe?

Can you talk a little bit about how you see that evolving?

Thank you.

Yes, I certainly can.

First I will just remind everyone that the FedEx/TNT deal that is a complex deal and we expect that regulatory agencies will be as stringent on this deal as they have been on previous deals.

Yes then when you talk about opportunities obviously Asia and emerging markets we're always pursuing those opportunities.

But let's don't forget the fact that we've experienced just great returns from our Europe markets and we certainly don't expect that to change.

Over the last 10 years our Europe export average daily volume has more than doubled and we've previously announced a 5-year capital deployment plan that's approaching about $2 billion.

So we're adding capacity, we're expanding our capabilities.

We have a real good business in Europe and we expect it to continue to grow and we're as excited as we have been at any time about Europe.

David Ross, Stifel.

Yes, good morning gentlemen.

Just a follow-up on the question regarding Europe, the exports were certainly strong driven by the weak euro but domestic Europe was also up year over year.

Can you talk a little bit about the overall European market, what you see in terms of the European economy right now and going forward?

Jim?

Sure, David I guess I'll just hit on trade flows real quickly, kind of the balance of the network.

It certainly at this point with the strength of the dollar we are seeing a move of imports to exports.

Europe is a big piece of that.

We kind of right now after the first quarter have a gap of about 6% between growth of imports and exports.

We'll balance that, we have to balance the network, we'll look at how we rate export/import rates across the world but that's just part of the normal running of the business.

The domestic in Europe specifically, that's just as a continuation of the investments over the last decade as David referenced.

We've continued to do that and invest in some of those.

The acquisitions we've made over the previous year has helped us grow, so the solutions that are in place are paying off and they will continue to pay off going forward.

Ben Hartford, Baird.

Good morning guys.

Jim, I guess I'm interested in the comment you had made about better balance in Asia.

And I'm curious about your perspective as it relates to outbound Asian airfreight post-Chinese new year and as we look into 2Q and 3Q with the US West Coast situation presumably normalizing.

Do you expect further cuts or would the next step be to add incremental capacity in that trans-Pac lane and just outbound Asia generally?

As we look into 2015 there's been a lot of debate about a demand outbound China here year to date, I'm interested in your perspective there.

So if I look at April compared to the first quarter it continues on and remember in the Freight segment we're in that transition of a very targeted growth plan.

You can see that in some of the numbers coming through.

So you'll see lower growth, more targeting of the freight that's in the network.

We'll continue that.

The West Coast port stoppage in the first quarter gave us some lift, that's mitigating as we speak.

But we have to balance that network obviously with the small package network.

Chinese new year we had a really good new year this year.

We had some great alignment of the network to the volume.

That will continue.

And so it's just a continuation in our minds of balancing the right network with the right volume at the right levels going forward.

And I think the first quarter was a success and we see the same thing starting off the second quarter.

Chris Wetherbee, Citi.

Good morning guys, this is (inaudible) in for Chris and congrats to Kurt and to Richard.

My question is really on the volume side on Domestic.

I was wondering if there's anything -- how much of the volume changes are to be attributed to seasonal patterns, was there some seasonality at play and any other factors you'd like to call out maybe in terms of what we're seeing on the domestic side in terms of volume?

Clearly yields and revenue management are fantastic but just wanted to get your thoughts around the volume side there.

Alan.

So yes we're actually encouraged by the progress we're making in balancing the volume growth and yield.

We did actually see a dip in the average daily volume in February that aligns with some of the bad weather in the Northeast and other areas of the country and also some of those pricing decisions not to renew the low yield agreements.

Scott Schneeberger, Oppenheimer.

Thanks, good morning and congratulations Richard and Kurt.

Just following up on that last question, in the first quarter it sounds like the B2C and B2B were both strong, could you add a little bit on each please?

Alan, go ahead.

Yes, so for the first time in a very, very long time our B2B growth was actually a bit stronger than our B2C.

And as you know our deferred volumes were also strong and the SurePost while still strong certainly year over year slowing down as that product becomes more mature.

Just keep in mind that this is just one quarter of data and we're still expecting about 3% growth for the year.

Kelly Dougherty, Macquarie.

Hi, thanks for taking the question.

I just want to follow-up on that last one, I was going to talk about the B2B versus B2C growth and wonder how you think about maybe some UPS-specific initiatives?

Because some of the macro data that's been out recently has been underwhelming from an industrial production or manufacturing perspective, so thinking about how that factors into maybe what you're expecting earlier this year.

Yes so a couple of things.

We're very focused on industry-specific solutions that we're building for the high-tech, the healthcare, the automotive industrial manufacturers out there so that we can win more, win faster in those specific areas.

Certainly e-commerce, though, is also driving a significant amount of our B2B growth through returns as well as manufacturers that ship B2B going more into the e-commerce realm.

So it's really a mix there.

So we're pretty excited about the fact that e-commerce is beginning to generate some significant B2B business.

Is there any way to separate out I know great that B2B is growing faster than the B2C at this point.

Is there any way to separate out traditional B2B versus what retail might be driving?

Yes, Kelly it is becoming pretty blurred these days.

So at this point we're really not adding anything to that.

Tom Kim, Goldman Sachs.

Thanks very much.

I wanted to ask with regard to trading down on International, it was a very impressive performance last quarter and I was wondering to what extent there is actually further opportunities just depending on how trading down may be shifting?

Those trends have been pretty consistent.

We've seen our standard and deferred products grow faster than our premium express products for a number of years.

So with our aligned network it's not a big deal.

One thing, though, that I guess I do want to highlight as you look at the yields that there was certainly some impact from the shift of products but the biggest issue on yields by far is the currency impact.

And so we do have on page 3 the schedule of revenue per piece that we've always had there.

But with Rich coming in as our Treasurer he decided to give a little gift you guys and we actually created a new schedule on page 3 there that shows total Company revenue adjusted for currency.

So Rich, maybe you could talk a little bit about currency.

Sure.

We use hedges to minimize the volatility of currency and allow the business to concentrate on the fundamentals of growing the Company.

Our current hedge strategy is protected through the end of 2016 for all the major currencies that we operate in.

There are some non-hedge currencies that we saw larger shifts than we've seen historically and that is because the dollar strengthened so much during this first quarter of 2015.

Our strategy is to use a collar approach and it really is there to make sure that we're protecting the currency while the business continues to grow.

So that's really been the biggest issue on reported revenues.

The trade down is a small piece of it.

But anyway we thought being transparent on just what is happening with currency was an important element there.

We are fortunate to have locked in a couple of years worth of coverage on the euro and the pound.

That's certainly helping to keep the financial results solid for the foreseeable future.

Robert Salmon, Deutsche Bank.

Thanks, and Kurt and Richard my congrats to both you guys as well.

If I could turn it back the discussion back to dimensional pricing, can you give us a sense of how much of the full impact that you guys realized in the first quarter?

And how we should be thinking about that stepping up as we look out to 2016 and 2017 for some of the longer-term contracts that you have?

I think one way to look at it and I'll let Alan talk a little bit about the contracts but certainly the initial impact of dim weight has been primarily on the revenue side.

But ultimately we're working with a large number of customers to adjust their packaging.

That's the real intent of this.

So if anything as we have said the revenue impact will moderate a little over time and the economic benefit of less air in our feeders will come through.

So we did see a big benefit in the first quarter and as we work with customers to reduce their cost then that will migrate.

Certainly with some long-term contracts there are some other ramifications.

Yes I think it's a combination of both.

So you've got our customers that we're working with to get smarter on their packaging which obviously helps us out on the cost side but will take the revenue down a bit and then we've got some longer-term contracts that will be able to capture a bit more of the dim-weight opportunity going forward.

What we're looking at this year is we already stated that we're at the high-end of the 2% to 3% base rate that we look for and our expectation is that that's going to continue through the year.

Brandon Oglenski, Barclays.

Good morning everyone.

And Kurt as well congratulations, just make sure you watch out for Andy Dolny on the golf course when you're back out there.

Right, he's dangerous.

I've heard.

I can't let you off that easy, so I do want to ask a question on domestic margins.

I guess it's two parts, I hope I'm not cheating on the one-question rule here.

But can you first quantify the fuel impact on margins for us if possible?

But then can we walk through the puts and takes here because obviously you have a pretty strong pricing outlook, but what are the cost additions of the capacity initiatives we have again and I think you have $180 million of pension headwind.

Should we still be thinking that margins domestically are going to be roughly flat with last year or even slightly up which I think was the prior guidance?

Yes, I will let you cheat just as a final farewell question here.

I'll let Myron talk about the margin enhancement activities.

In general just to highlight the impact of fuel a little bit for the International business there was a benefit of fuel of about $30 million or so.

In general coverage for fuel in International is not 100% so as fuel dropped we got a benefit, although the lag accounted for a lot of that.

On the Domestic side actually fuel was relatively neutral for us in the quarter.

Traditionally there's a benefit from the lack is it drops, but with fuel dropping frankly to unexpected levels our coverage ratios at the very low end of the fuel curve were not complete and that in effect offset the lag.

We did tweak the curves a little bit in February and so that will be relatively neutral going forward.

But we did not get a material benefit on fuel in the first quarter.

So Myron, maybe you could talk a little bit of about the margin enhancing activities we're working on.

Yes, Brandon, keep in mind that US Domestic really is a year-over-year comp story as we also have a drag of almost $200 million in pension expense that I want to bring to your attention.

In addition to that as David Abney earlier alluded to we made progress operationally on several fronts.

We will continue to deploy operational technology.

We've tightened up our operations from a dispatch perspective and we continue to add capacity in selected markets as well as our hub mod projects.

The first quarter just really affirms that we are moving in the right direction and that we are on track with our financial objectives.

And we really had solid performance across all three of the segments.

Jeff Kauffman, Buckingham Research.

Thank you very much, and Kurt best of luck and Richard really looking forward to working with you.

Although I do reflect on the fact that Kurt you've been promoted a number of times, now you're retiring and I'm in the same job.

So here's my question.

The International growth you talked about 2% to 3% ex-currency but in the current quarter you did 2.4% ex-currency and as I look around the world I'm looking at get some big markets for you like Europe that seem to be gaining in momentum.

So can you tell us through your eyes what's going on and how the levers are moving globally and are there any aspects of the global environment that you are kind of downgrading to stay at this level in terms of your forecast for the year?

From a macro point of view and then I will turn it over to Jim.

But International growth is not expected to be quite as strong as previous estimates.

It's now 2.8% GDP growth versus 3.0%, so the outlook is really mixed at the regional level.

In Europe the growth is estimated to be 1.9%, so previously forecasted at 1.7%.

And that's really driven by Germany and one key point here I think is for the year the real UPS, excuse me, EU real exports are forecasted to grow at 4.8% this year in 2015.

So Jim, turn it over to you to talk about the specifics.

Yes, I would add probably three quick points to that and we already touched on one.

One is the balance of trade here and how that plays out relative to some of the currencies moving in the world.

I think you also have fuel in here that is one of those wildcards that we're not sure how that's going to work.

We also have to look at a little bit of China slowing in this discussion, we can't forget that at any time.

And I think the last part is that as we've gone through this we have purposely said that we're going to slow some of the growth until our investments catch up with it and then we'll fire the engine up faster again.

So this is one of those purposed slowings to let the investment catch up, reinvigorate it and keep moving forward.

So we're going to dip it down a little bit from a revenue or a volume revenue be very targeted in our revenue management activities to do that.

So that's our plan.

Scott Group, Wolfe Research.

Hey, thanks, good morning guys.

So first Kurt when you were giving the fuel impacts I didn't hear you give one for Freight if you can give that.

And then just my bigger question is on Europe and you talked about you've had this kind of sustained track record of growing double digits, and wondering given the FedEx/TNT deal how you think that plays out and whether or not you think that will accelerate in the near-term and do you think that once the deal closes do you think you'll be able to sustain double-digit growth in Europe?

I'm not sure how many questions that was, Scott, but we will humor you a little bit.

Certainly fuel was a significant drag on reported revenues and Freight, almost 500 basis points.

The P&L impact was modest but not significant because of the dramatic change in coverage ratios once again as we move down to those levels.

David?

We feel real good about Europe this year and we do have a great track record.

We are investing heavily to expand our business.

But there is a little bit of transition going on with some of the players in the market and we are certainly going to emphasize our message that we have a fantastic service offering.

We meet our customers' needs there and we are going to continue to invest and grow in this important part of our business.

Allison Landry, Credit Suisse.

Thanks, good morning.

In terms of the hub modernization, how many of the 30 major US sorting facilities are now automated?

And given expectations for continued strength in e-commerce whether it's B2C or B2B do you see any need to further accelerate investments in the network and within that context should we read anything into their cash builds during Q1?

I will start with the last piece of that once again.

The cash build in Q1 is more just typical seasonal from Q4 where we have a lot of receivables coming at the end of the year through Q1 where our CapEx is usually low that we do see the balance sheet swell.

So if you go back to last year you'll see similar trends.

No, we're on track for our guidance of about $3 billion in CapEx this year and certainly continuing to modernize hubs is important.

And Myron maybe you could talk a little bit about the status and benefits of that.

Allison, there is a five-year plan that's in place to either add capacity or modernize all of our top 30 hub locations.

At the end of this year we will have four projects that will be totally completed with adding capacity in two locations and hub mods in two others.

And certainly they are put in place to increase our throughput and our productivity.

Jack Atkins, Stephens.

Good morning, guys, thanks for the time.

So I guess just for my question you're thinking about the US economy, there's a lot of concern out there that we're beginning to see things perhaps slow down a little bit.

Can you give us a sense for what you're seeing in your underlying business in the US and what you are learning in your conversations with your customers as it relates to freight demand for the balance of the year?

Okay, first when it comes to the US the outlook is certainly mix.

There were some recent disappointing employment news in March and we've seen IP and the retail data maybe not as positive as we would have thought.

There are some headwinds.

We've talked a little bit about the West Coast ports.

Don't know if that's going to fade away pretty quickly or if that's going to continue.

But the strengthening US dollar and the cautious consumer when it comes to spending and but then on the bright side you see that ESMO has gotten off to a strong start this year.

January over 14% and February almost at the same level.

So I would say that it's just a mixed performance.

We are focused on maintaining our strategies and I think it was a good solid performance for the first quarter.

But there are some headwinds out there.

David Campbell, Thompson Company.

Yes, hi, thank you, Kurt, congratulations and thanks for all your help over the years especially at our analyst conferences.

I wanted to ask you about the West Coast port disruption in the first quarter.

I couldn't tell whether that was a help on cargo revenues or international shipments or both?

I think depending on which segment of the business you talk to they either enjoyed it or struggled with it.

So Jim, maybe you could talk a little bit about the West Coast disruption in general and how that impacted results.

Sure.

I think David it's in all segments.

I think from a cargo perspective our first quarter was very big, no question about that.

That was up heavy double digits and that actually runs through obviously the impact of the small package network we had freight up from into the air segment from our Freight business and we also had some moving into the small package business.

I think Kurt has framed it at somewhere between $5 million and $10 million impact to the first quarter.

That's a lift in total.

We don't see that continuing long term, therefore we kind of pulled that out, but that's kind of the impact from the segments.

Bascome Majors, Susquehanna.

Yes, thank you.

So to follow-up on David and Rob's questions on the domestic dim-weight implementation can you give us a little color on how much of the portfolio that you got on the dim-weight schedule for 2015 and whether that's a two- to three-year implementation to get to 100 or close to 100?

Or how you see that playing out from a delayed gratification perspective for some of these customers over the next year or two?

We're not sure in specific numbers but Alan maybe you could talk about the general approach.

Again so all the packages in the US package portfolio are now dim-weight eligible.

So it really becomes a question where you're talking about really is what's under the covers in the contracts.

And I think again you're going to see with the work that we're doing with our customers to improve their packaging, to reduce the size of their packages will probably be an offset to some of the gains we get from contracts expiring and being renewed with stronger dim-weight language.

Helane Becker, Cowen.

Thanks very much operator and gentlemen thanks for the time, Kurt and Richard congratulations.

Kurt I will miss you.

I look forward to working with Richard.

Just a question on the tax rate.

Given how big your international opportunities are is there an opportunity to lower your tax rate at all by shifting revenue around the world?

Well unfortunately we're not a manufacturer that has a lot of discretion.

So certainly we continue to look at our tax structure and the very high statutory rate of the US is a drag on US companies and certainly we're a great example of that.

So David constantly asks me that question and we do what we can.

But to some extent we're a business where you have to operate where the volumes are, so there's not a tremendous amount of discretion.

But as the International business continues to grow and we expand across the globe that does have a somewhat beneficial effect.

It lowers it slightly but still in the main the majority of that does get hit with US taxes.

That's why we are big proponents of a more rational US tax platform and that would be a good step for us and help us compete more effectively across the globe.

Okay, thank you very much.

I would like to turn the conference back over to Mr. David Abney.

Okay and thanks for all your questions.

I think that you can see today that our answers were really focused about creating unique solutions to our customers to create more value on our pricing initiatives and obviously on increasing our operating efficiency.

But now we're going to cut it a little bit short today to give Kurt a chance to say a few final words before closing out the call.

Like many long-time UPS employees Kurt began his career as a package car driver while in college and progressed quickly through management.

Whether working on international growth, expansion into the industry segments or integration of several strategic acquisitions, Kurt has contributed exceptional judgment and fresh perspectives.

His partnership, character, and capacity to find solutions has helped UPS advance through many challenges while remaining true to the needs of our customers, share owners and employees.

Kurt is just a great example of a business executive first and a finance executive second.

I appreciate his thoughtful candor and welcome his knowledge and broad perspective.

While I'll personally miss Kurt as a partner and as a friend I'm happy to also announce Richard's appointment.

Richard has been with the Company nearly 34 years.

I believe he'll contribute the right mix of experience and new thinking to help UPS continue to attain profitable growth.

So Kurt it's all yours.

Well thanks, David, and thanks for letting me get the final word here.

It's been a wonderful career at UPS and I've been privileged to tackle a number of major projects working for this great Company.

Certainly one event that comes to mind is when I first met many of you on the call which was our IPO in 1999 and got the unique opportunity to be UPS' first Investor Relations Officer after a history of 92 years as a private company.

I was a bit overwhelmed at first but was extremely proud to represent this great Company.

As we migrated from the private Company we were to the public markets and would like to thank a number of you on the call there for your professionalism over the years of giving us the benefit of the doubt and helping us communicate the UPS story.

There have also been a lot of other highlights along the way.

And in every case my recollections will be strongly enhanced by the memory of working with such a great team that we have here at UPS.

I've had the great fortune from starting as a package driver to assuming the CFO roll back in 2008 to have an incredible breadth of assignments.

And clearly it's truly transformed both me and my view of the world.

And so I've been honored to have served and helped position this Company for the future.

But I do know it's now time to get out of the way and allow more capable executives like Richard to take over, a little younger, a little faster, a little smarter.

He joins a dynamic management committee that has been assembled by David and together they have both the vision and the dedication that will take UPS to new levels of success.

As the official old-timer on the UPS team I am already dreaming about having some leisure time to do some of the other things I love.

Maybe learn how to play piano, get in shape and certainly work on my bass fishing will be good places to start.

In the near-term I'm looking forward to seeing many of the participants on today's call in the upcoming meetings or conferences that Richard and I make visits during this transition.

So thanks to everyone for your well wishes today and I look forward to seeing many of you as a part of our upcoming meetings.

With that our call is adjourned.