聯合包裹運送服務公司 (UPS) 2015 Q2 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 second-quarter 2015 earnings conference call.

(Operator Instructions)

Please note we will take only one question from each participant to accommodate more analysts during the call.

Thank you for your cooperation.

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 second-quarter 2015 earnings call.

Joining me today are David Abney, our CEO; Richard Peretz, 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 statements are subject to risk and uncertainties which are described in detail in our 2014 Form 10-K and 2015 10-Q.

These reports are available on the UPS investor relations website and from the Securities and Exchange Commission.

As a reminder, in the second quarter last year UPS completed the transfer of post-retirement liabilities for certain Teamster employees to defined contribution healthcare plans.

As a result, the Company recorded an after-tax charge of $665 million, reducing second-quarter 2014 diluted earnings per share by $0.72.

In our remarks today all quarterly and full-year comments and comparisons will refer to 2014 adjusted results.

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

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

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

Thanks for your cooperation.

Now I would like to turn the call over to David.

Thanks, Joe.

Good morning everyone and welcome.

We are pleased to share results of another solid quarter and I want to thank the UPS team for their efforts.

This is the second consecutive quarter of double-digit EPS growth which demonstrates we are successfully executing and generating improved performance.

UPS grew operating profits and expanded margins across all three segments.

In the US we remain focused on growing the business, effective revenue management and delivering operational improvements.

Although the economy slowed somewhat we made progress on executing our plan.

Our International segment continues to have positive momentum with our operating profit up more than 17% primarily led by strong results in Europe.

Our ongoing investments and integrated operating model are driving increased customer demand around the world.

Our Supply Chain & Freight segment also had a solid increase in operating profit.

The result was led by Forwarding as it continues to pursue a disciplined pricing strategy across key trade lanes.

Clearly we're making good progress this year.

We're highly focused on executing our strategy to create unmatched value for UPS customers and UPS shareholders.

We will accomplish this by continuing to build on the strategies guiding our business.

They are expanding our network capacity, improving operational efficiency, focusing on high-growth markets, and delivering industry-specific solutions.

In the area of expanded network capacity, we made key announcements during the quarter.

In Germany we doubled the capacity of the UPS hub in Nuremberg.

This automated facility is ideally situated to link Eastern and Western European trade lanes.

We announced an expansion of UPS Worldwide Express Freight service, adding five emerging markets in Latin America and three in Europe.

This guaranteed services designed for urgent, high-value and heavyweight international shipments.

In another high-growth market UPS implemented several enhancements throughout Asia to improve service coverage and network speed.

The moves accelerated intra-Asia transit times by up to one full day connecting 41 key markets.

These improvements will position UPS to further capitalize on the fast-growing intra-Asia marketplace.

We continued to make good progress expanding UPS industry-specific solutions.

To broaden our global healthcare network we announced two new facilities in the Netherlands.

These new sites add capacity and simplify customer access to our global distribution network.

We also opened an automated distribution facility for Pratt & Whitney in New Hampshire.

This facility is a great example of how we collaborate with aerospace companies by offering specialized solutions that provide them with competitive advantages while these investments help UPS grow strategic acquisitions, speed the implementation of new capabilities across our global network.

In fact, UPS Capital recently acquired two specialized high-value logistics companies, Parcel Pro and IPS.

They enhance our global small package network for secure shipment and insurance solutions for high-value goods in Europe, Asia and the US.

Another great example of acquiring capabilities in one region and implementing them globally is our purchase of Kiala which we have referenced in the past.

We've refined and improved this unique e-commerce delivery solution and launched it globally as the UPS Access Point.

In the US we had very positive results in five initial markets.

Today I'm excited to announce we are accelerating the rollout of this delivery option to more than 100 US cities.

By year-end we'll have more than 8,000 locations in the US and more than 22,000 globally.

The UPS Access Points location provide a convenient and secure alternative to home delivery in order to enhance the e-commerce delivery experience for consumers.

This is an important part of our strategy to offer unique customer solutions and improve e-commerce profitability.

Before I turn it over to Richard, I would like to applaud the passage of the US Trade Promotion Authority bill.

TPA will help facilitate trade agreements that provide growth opportunities for UPS and our customers.

We all know that trade is vital to the US economy, supporting global growth and spurring job creation.

I understand that negotiators are making headway on the Trans-Pacific Partnership agreement.

We urge them to resolve final outstanding differences and for the US Congress to approve the agreement.

We also encourage negotiators to make progress on TTIP, another critical agreement that will enable international trade.

To summarize, I'm pleased to say that we're on track with our earnings growth and pace of investment.

Based on our recent performance we fully expect to attain the higher end of our guidance range.

Our progress to date, especially in the International segment, makes us confident in our strategic direction and four-year plan.

Richard will now take you through the details.

Thanks, David, and good morning.

I'm glad you could all join us this morning.

It's great to speak with you on my first official earnings call.

I've had the opportunity to meet many of you, the analysts and investors, who know our Company so well.

Those meetings gave me a better appreciation for the market perspective on UPS as an investment.

I heard the importance of execution in the current business model as well is looking for future opportunities to grow this business and create value.

Your open and honest feedback is appreciated by me and it will be useful as we move this great Company forward.

Now let's turn to the second-quarter results.

UPS delivered better-than-expected results.

The International group continues to show strong momentum with key initiatives around the world contributing to our success especially in Europe.

The US Domestic business is on track with its revenue management and efficiency gains; however, we are seeing some softening in the economy.

Our Supply Chain & Freight results were lifted by improvements in the Forwarding unit.

Market pricing and customer mix drove better-than-expected results.

Together the segments produced earnings-per-share growth of 12%.

Turning our attention more specifically to the US Domestic segment where operating profits increased to $1.2 billion.

The operating margin expanded to 13.6% as a result of the pricing initiatives and productivity improvements from technology implementations such as ORION that we've talked about in the past.

Packages per day were up 1.8% driven by a 15% increase in Deferred Air Products and UPS SurePost growth of over 8%.

On the other hand total average daily volume comparisons were lowered by 50 basis points versus last year due to a second-quarter benefit in 2014 for a large catalog shipment.

This year UPS experienced balanced commercial and residential growth.

The pace of B2C expansion continued slowing while B2B gains were due to omnichannel and return services in the retail sector.

Reported yields were flat with last year as solid base rate increases were offset by the product mix changes and more importantly about a 300 basis point decline in fuel surcharge revenues.

Turning to International, and this is where the segment set a new high in second-quarter operating profit, our profit rising more than 17%.

Our results are due to a balanced approach, a balance of export shipment growth, network efficiency gains and a strong focus on revenue management initiatives.

These areas also drove significant expansion of our operating margin but keep in mind it was magnified by the weakening of the non-US currencies.

Looking at the top line in the segment, International revenue adjusted for currency increased 1.5% over the prior year.

I received a lot of positive feedback on the transparency of the new currency schedules we added last quarter.

We kept the schedules that showed the impact of currency changes on our reported revenue.

Revenue management initiatives have boosted base rates across the globe.

However, there is about a 350 basis point headwind due to lower fuel surcharges in 2015.

Looking at yields, there is some impact on shift of products as reported revenue per piece on a currency adjusted basis decreased 2.4%.

Although the biggest impact to reported yields is due to fuel surcharges, if we factor out fuel revenue per piece was slightly positive.

The International success is due to robust export volume growth that remains strong at 5.5% growth driven by an intra-Europe shipment growth of over 8.5%.

The strength of the US dollar contributed to greater US import shipments primarily from Europe while exports out of the US were down slightly as the dollar increased in value.

Looking at the Supply Chain & Freight segment operating profit jumped 18% to $207 million and margins expanded to over 9%, driven primarily by the improvements in the Forwarding unit.

The Forwarding unit is executing a disciplined revenue management strategy focused on profitable trade lane growth.

As a result, revenue declined as certain lower yielding contracts were not renewed.

Market conditions in the International Air Freight business allowed the unit to capitalize as buy rates dropped quickly, providing improved pricing spreads during the quarter.

Operating profit increased and margins expanded to high single digits.

The distribution unit continues to expand its industry-specific solutions in order to win more and win faster, opening new facilities around the world like the ones David mentioned earlier.

Revenue growth was led by Mail Services, healthcare and aerospace gains.

UPS Freight revenue declined 2.5% primarily due to lower fuel surcharges and a drop in the LTL tonnage.

Pricing discipline in the unit was evident as we saw LTL revenue per hundredweight increase 1.4%.

Now let's turn and talk about our cash position.

For the six months ended June 30, UPS generated $3.3 billion of free cash flow after reinvesting in the business with capital expenditures of about $1 billion.

In terms of shareholder distributions so far this year UPS has paid $1.3 billion in dividends, an increase of 9% per share.

We've also repurchased more than 13.5 million shares for just under $1.4 billion.

Note that our second-quarter tax rate decreased to 34.5%, primarily due to a one-time tax credit.

Now let's turn and discuss our guidance for the rest of the year.

Total Company first-half results came in a little better than anticipated, primarily due to the improved International performance.

As we previously guided, third-quarter earnings per share is expected to be up modestly due to tough comparisons with the same period last year.

Earnings-per-share growth in the fourth quarter should be slightly above our guidance range.

Now let's turn and talk about the individual units.

In the US we expect Domestic volume to increase between 2% and 3% as a result of the slowing pace of growth in the economy.

Revenues should grow at a slightly faster pace as base rate pricing remains strong.

However, lower fuel surcharges will continue to weigh on the reported yields.

US Domestic operating profit in the third quarter should be flat with last year.

It's due to the tough comparisons created by lower Worker's Compensation cost in 2014.

Fourth-quarter operating profit is anticipated to grow in the low double digits.

Full-year operating guidance remains unchanged at 5% to 9%.

In the International segment, we expect to see positive momentum continuing the second half of the year with operating profits at the high-end of our 6% to 12% range.

Revenue growth in International will continue to be challenged by currency changes and lower fuel surcharge revenues.

We are confident of the International guidance because of our balanced approach of growing the business, creating network efficiencies and strong revenue management initiatives we have implemented.

In Supply Chain & Freight groups second-half operating margins are predicted to continue to be around 9%.

Top-line growth will be muted in Supply Chain & Freight as the Forwarding unit continues to implement their initiatives and change their customer mix.

To summarize the quarter's results positive progress is being made across all segments of our business.

All segments improved profitability and margins.

The investments we are making in new capacity and capabilities are starting to pay dividends.

We are successfully executing our strategy today while we continue to identify both organic and new accretive growth opportunities for the future.

The confidence we have in meeting those objectives is demonstrated by our move to the higher end of the guidance.

Thank you.

Now I will ask the operator to open the line.

Operator?

(Operator Instructions) Nate Brochmann, William Blair.

Yes, good morning everyone and thanks for taking the question.

I'm just wanting to talk a little bit on the domestic side with the comments of things slowing a little bit.

One, is that relative to just expectations for the start of the year or is something really going on currently?

And how do you disassociate that from whether any of your other customers might be doing a little bit more themselves and if that's taken an impact?

And if indeed you believe that slowness to continue for the year, will that hurt any of your expectations going into peak season in terms of the benefits on profitability, particularly expectations for greater route density both real and synthetic?

This is David.

That is a heck of a question.

I will start the answer and then I'll hand it over to Alan, you can talk a little bit about it from our customer standpoint.

But to get to the economy, recent economic news has just been mixed and it's caused us to be cautious.

The continued strength of the US dollar and I think this impending rate hike by the Fed appears to be holding back some US growth.

You know, if you just look at in January the GDP forecast we thought was going to be about 3.1% and now the thinking in July is about 2.3%.

So that's a pretty significant decrease.

Retail has been uneven we saw it soften a little bit in June and so that's the reason that we're cautious.

Obviously we had a good first quarter and a good second quarter but a little bit cautious about the US economy.

Alan, do you want to talk a little bit about from a customer standpoint?

Yes, Nate, a couple of things to keep in mind.

Remember back in the second quarter of 2014 we got some tough comps.

We had some of our best Ground growth in 2014 for the second quarter, up above 8% growth.

So when you look at the two-year growth comparison we're up about 9% versus 2Q 2013.

Also we had a very large catalog shipment last year that was about a 50 basis point positive impact on the second quarter last year.

While the overall growth this year was just shy of 2% we have had some really strong Deferred Air growth at 14% and even with lapping some 60% year-over-year growth on SurePost for the first half of 2014 we still had excellent SurePost growth at 8%.

Tom Wadewitz, UBS.

Yes, good morning.

I wanted to ask you on the pricing side and just I guess a question on how that came through in the numbers for Ground yield.

I know there was fuel surcharge impact, but if I look at Ground yields were up about 1%, 1.1% in second quarter, they were up 3.1% in first quarter.

So I don't know if you could give some color on why there is that deceleration and if the core price still looks pretty strong?

And then in terms of any thoughts on peak season surcharge whether that's likely at this point or whether we should be cautious on our view on that?

So on the broader pricing front, thank you.

Yes, so on the Ground you can see the RPP showing plus a little over 1% and what you've got there is a fuel surcharge drag of a couple hundred basis points.

That's putting a drag on that as well as the large customer versus small customer mix and obviously we're growing our SurePost faster than our Ground residential.

Then you've also got the omnichannel there where we've got some shorter zone.

But on the base rates we are absolutely at the high-end of the 2% to 3% range and our tactics of creating value for customers along with the revenue management associated with the GRI, dim weight and other value added asset stories are all working.

And we're obviously very, very pleased with the yield.

As far as peak goes we're certainly focused on improving the residential profitability year around.

And like I said we're at the higher end there, the 2% to 3% and that's going to have an impact on residential and peak.

And we are going to continue to address peak on a customer-by-customer basis, really understanding what their needs are, the value of the solutions and market conditions and price them accordingly.

Ben Hartford, Baird.

Yes, thanks.

Maybe Richard this is probably directed to you since you are b since this the first time at the helm for you at the call.

On the heels of some of the recent industry news speculation with regard to your acquisition strategy, specifically targeting a large truck broker, I won't ask you to comment on that specifically, but maybe generally speaking can you provide some context to your perspective on how you view the business from an acquisition standpoint?

What are some targets are goals and really how do you view your industry-leading return on invested capital?

And could your focus change a little bit to broaden the scale or opportunities as it relates to acquisitions going forward, some perspective there would be helpful?

Okay, Ben, this is David.

I will take the first part of that question, then as you accurately predicted I'll turn it over to Richard.

But really first when it comes to any rumors that may be out there, obviously we can't respond to rumors as you know and UPS does not discuss M&A activities just due to confidentiality and competitive reasons.

But getting back to the more general understanding of what we're looking for it's really in three different areas.

First is what are new opportunities that would allow us to expand our portfolio and allow us to give additional value to our customers?

We also look at geography, are there certain geographies that we can strengthen our offering?

Then third we look at what capability does our network presently need that we don't have and where there is an adjacent industry or whether it's a different service offering.

So that's in general the way that we look at it.

Richard, do you want to talk a little bit about the ROIC and our expectations?

Sure.

So when we're thinking about the acquisitions we look at not only how the business stands alone but also as we integrate into our business what it does.

And so obviously over time what happens with our acquisitions is that the ROIC becomes closer to the characteristics of the UPS ROIC as it expands the capabilities David talked about.

And such as Kiala where it started out as a standalone with a very small ROIC and now its value to the UPS network is much greater.

So we look at is growing it into the UPS network also increases and is important to the acquisition -- it takes on the attributes of our financial discipline as well.

Thanks for the question.

Tom Kim, Goldman Sachs.

Good morning and thanks for your time.

Congrats on the quarter.

I wanted to obviously we appreciate your confidence guiding toward the higher end of the range.

It certainly seems that you're bucking the trends on global Air Freight trends and frankly indicated that we've been looking at having to curatings, it's good to see you guys outperform there.

And I know we've talked previously about how Europe is driving all of that.

My question is around China.

As you know concerns around to that market have only increased recently with a market selloff and as I think about your business I believe it's predominantly exposed to China exports and if that's fair I'd certainly love to hear that affirmation.

But I am wondering to what extent you can provide color around your exposure to China imports and the domestic market which obviously would be more impacted by a slower China.

Thank you.

Tom, this is Jim.

I'll pick that one up.

I think obviously the last couple of days in the market have been unique to say the least.

I think we look at that, though, as really more of a domestic phenomenon as opposed to really aligning to our business.

We still are firmly in the export-import business in China.

Most recently we were up about 5% to 6%.

We continue to focus on the middle market and so we continue to be in China for the long term.

So really those factors that are going on as they moved to more of a domestic GDP consumption we have to keep an eye on it but our business is aligned to grow almost regardless of that through the import/export and the Supply Chain and Forwarding business.

So that's kind of the way we look at it right now.

Ken Hoexter, Merrill Lynch.

Great, good morning.

Can you dig into the comments on the slowing B2C just a little bit, maybe flesh that out?

Is that a slowing overall market?

Are you losing volumes to other modes and I guess if you compound that with your thoughts on a slowing economy do you now need to get out ahead of this and cut costs, eliminate trade lanes, lower CapEx, is there anything you need to react at this point?

But I guess primarily thoughts on the commentary around the slowing B2C.

Thanks.

Ken, this is Alan, I'll take that.

Certainly we're about where we thought we'd be.

We think the economy was certainly slower for sure.

The B2C pace, I think the secular trends are still in place although if it is slow again you've got to remember we had those tough comps from last year.

I'd also say that the B2B side as a demonstration of e-commerce, the omnichannel and the returns are still very, very strong.

This is David.

Alan talked about the tough comps.

You just have to look back.

And if you look at two years ago and compare what our volume is today you actually see an increase of 9%.

It's just that when you compare them to the comps of last year that you get a little bit different perspective.

So good question.

Thank you and operator, we're ready for the next question.

Kevin Sterling, BB&T Capital Markets.

Thank you and congratulations on a nice quarter gentlemen.

You talked about UPS Forwarding benefiting from improved market conditions and customer mix.

Maybe could you expand a little bit more upon the improved market conditions commentary?

Is that more function of better buy rates or is that in conjunction with maybe a pickup in volume?

Just maybe a little more color around those improved market conditions you're seeing in Forwarding.

Thank you.

Okay Kevin it's Jim.

So first let me start with the overall Forwarding results are really balanced.

I'll get to the IAS specifically in a second.

But when you look at the North America Freight network, ocean brokerage, NIF, they all had really solid quarters for us.

We've told you guys back in 2014 we've come into this with a very focused go-to-market strategy of the right tonnage, the right customers and our balanced network.

We did that.

With specifics to the market right now what's going on is the way we see it we've got about 12% more capacity in the market than we thought.

What that does is drop obviously the buy rates and it opens it up a bit.

We think that will last about 3 more months, maybe 2.5 as we come up into the retail peak season.

At that point we'll continue to adjust.

But we did get some tail wind.

I would say the majority of the results are really because of the right focus, the right customers and the right tonnage in the network, the balance of that is some tail winds on the market.

David Vernon, Bernstein.

Good morning guys and thanks for taking a question.

So if we look at the leverage that UPS is getting in International, can you help us to understand what's driving the upside?

I'm specifically trying to figure out if it's the benefits from maybe better profitability in the longer haul, cross-ocean package business?

Or maybe you guys are just getting a lot more leverage on the high rates of intra-European growth than maybe we would have expected?

Just trying to look at it from the inside out, are you getting better growth out of the cross-ocean business or more intra-European?

Yes.

I'll start with that.

So look, let me just say this, we talk a lot about Europe but we also over the last year and a half have really done some good work in Asia as well, largely around our intra-Asia network.

David made some of those references in the opening comments but we've really had to kind of get that intra-Asia network built up after we built it to the right place and the team has done a great job.

Europe continues to do very well.

So really the Asia-Pacific that has intra-Asia and the trunks back to Europe and US are performing very nicely.

Europe as we've said it's about a balanced mix of product mix, yield mix and then cost management on the back of the capital that we've talked about and putting that extra $1 billion of capital into that part of the UPS network.

So it's really a combination of those two.

And then I would say the same time I would ask you not to lose sight of as these results come out we're also taking advantage of actually investing in emerging markets and continuing to expand as we said in the opening comments and some of the other capabilities.

So we're kind of blending it all together and that's kind of what you see on the bottom-line results.

We do see a lot of strong momentum in our International business.

And one of the key factors is definitely the pan-European network that we put in place maybe a few years before its time, before the market started shipping to a pan-European inventory replacement model.

And now that that transition is happening we've just got the right network in the right place at the right time.

And Jim and his team is just doing an excellent job with it.

Thank you and next question please, operator.

Allison Landry, Credit Suisse.

Thanks, good morning.

I was wondering if you could discuss the impact of fuel and lower buy rates in the Forwarding division that you saw on the purchase transportation expense line item?

It looked like there was a more pronounced sequential decline as a percent of sales than the historical average.

So any color that you could provide with respect to this and maybe how to think about it going forward.

Thank you.

So I think I'll start by talking about the impact of fuel in total and then I'll turn it over to Jim to talk a little bit about the Forwarding group specifically.

When we look at the total Company and adjust for fuel we're talking about a growth rate of about 1.5% versus what's been reported.

So fuel this quarter had of the biggest year-over-year change that we expect or that we've had in 2015.

So because of the large 300 basis points in Ground and 350 basis point difference in Air it had a big impact on reported revenue.

And you see that in the revenue number.

In fact, it's worth mentioning that we're pretty happy with where our revenue growth has been but it's being masked by both fuel and currency.

Those two combined would take revenue growth to almost 4%.

So there's something around the neighborhood of $700 million difference in reported revenue versus the commodities.

Jim, why don't you talk about the Forwarding?

Yes, Allison, the only thing I would remind you and come on the back of that was what I just mentioned a minute ago, and that is that we come at this with a very targeted approach.

Last year we grew effectively tonnage almost double digits quarter over quarter over quarter, which obviously hits the top line.

This one has been much muted.

It's about flat tonnage year-over-year.

But the product mix and the tonnage we're bringing in you can see how it affects the bottom line as well.

And as I've said or we talked about that buy rate we figure is down about 7% where we thought it would be coming into the year.

That translates also to the bottom line and I've spoken how we see that going forward.

So that's kind of how we manage the results.

Chris Wetherbee, Citi.

Thanks, good morning.

I wanted to touch a little bit on the guidance, specifically around the fourth quarter as you expect sort of a ramp back up to low double digits on the domestic side.

I guess when you think about e-commerce customers and preparing for the peak season, you have about four months to go.

How far through the process are you in terms of talking to customers, getting them prepared for what they might need to do from both an operational perspective as well as a pricing perspective as you're at this point in the game?

I just want to get a sense of how far you are through that process, maybe what else needs to be done as you go through the next four months in advance of peak.

Thank you.

This is Alan.

Our peak season planning for 2015 started right after peak 2014, so we've been having discussions with our customers on the solutions that we need to put in place, the capacity planning, the visibility we need, the forecasting and so on and so forth.

So this is an ongoing process that happens throughout the year.

As you know we don't discuss the individual customer pricing but we do have comprehensive peak pricing initiatives underway to increase revenue from the customers that surge and ultimately drive significantly greater cost at peak.

And this solutioning and pricing is really separate and distinct from our year-round revenue management and solutioning.

And it's helping us better align our revenue with our cost.

And maybe Myron you want to talk a little bit about what we're doing on the operations side?

So Chris, this is Myron.

We're certainly on plan as it pertains to operations.

Earlier Alan alluded to Access Points, so we're going to deploy them in over 100 cities and we will have over 8,000 Access Points by the end of the year.

It's a win for the customer, for the companies and certainly for UPS as we'll be able to drive delivery density.

Along with that we'll continue to deploy operational technology at a faster pace.

We'll have over 70% of our drivers deployed on ORION by the end of the year.

There are 10 projects that we certainly are addressing that either allude to hub modernization, automation or expanded capacity.

And our flow-through at the end of peak season will be enhanced by over 6%.

And then we are also going to as I've alluded to before tighten up operations.

We'll extend our drivers' delivery day a bit and will not use as many drivers as we've used in the past to lower our costs.

We're on plan and we're pleased with where we are today.

This is David.

Everyone in our organization is focused on making sure that we have a good peak for investors, customers and employees.

And we absolutely feel like that we're on track and where we need to be at this time and we're focused on where we need to go between now and peak.

So thank you for the question.

John Barnes, RBC Capital Markets.

Hey, thank you.

Just to follow-up on that, I mean you mentioned capacity planning, I know last year you made a concerted effort to overresource the network for a period of time to ensure the service came through.

How do you balance the capacity planning with some of the comments you've just made on maybe seeing some slowing in B2C, some signs that maybe the economy is a little softer, retail has obviously been a mixed message?

How are you walking through this process of figuring out that capacity planning and resource planning when you've got this backdrop that maybe is a little softer than you anticipated?

So as Alan alluded to earlier we've been collaborating with our customers since the beginning of the year and this is much even earlier than what we've done in the past.

So we're certainly going to stay close to what their projections are and we'll flex the system based on what we believe the volume pinch points may be.

I also alluded to the projects that we have in place this year to expand capacity.

And if you'll remember last year our pinch points were network related and not delivery related.

So we'll flex our drivers based on the capacity that we see.

And we believe that these expansion and capacity projects that we have in place will improve our flow-through to the point that we can control our costs.

Thank you.

Jack Atkins, Stephens.

Good morning and thanks for taking my question.

I was wondering if you could comment on the competitive landscape in the US Ground segment.

Given the Postal Service wants to become a bigger player with some of the larger e-commerce shippers and you're seeing certainly a more competitive dynamic among the regional players out there, what are you seeing as you try to implement these above-trend pricing increases?

And are you seeing any disruptors in the marketplace given a more sluggish domestic economy?

The US market has always been competitive but I would tell you that where we're seeing the growth right now in the e-commerce area, nobody has a better solution out there than UPS with our e-commerce ecosystem whether it's omnichannel or synchronized delivery solutions, returns our SurePost and SurePost Redirect, UPS My Choice, UPS Access Point that Myron talked about.

So we're real confident in our ability to achieve our plans from both a top- and bottom-line perspective.

And one of the reasons that we're so confident, this is David, is that the unique solutions that we continue to focus on that are going to help us not only during peak season but throughout the year to remain competitive and to provide the value to our customers that are looking for Access Points I think is a great example that we get the benefits during the year.

And this is something that started on an acquisition that we did a few years ago in Europe and now we're implementing it across the US in over 100 cities.

And these Access Points combined with UPS My Choice just gives us a real differentiator to offer the marketplace.

So thank you for the question.

Jeff Kauffman, Buckingham Research.

Thank you very much.

A lot of my questions have been answered so let me follow up more on the investment side.

You're now rolling out Access Point, you had accelerated ORION, you're seeing a little bit of a softer patch domestically on the retail side.

Have you given any thought to the capital spending for the next one to two years?

Jeff, this is Richard, thanks for the question.

You know when we think about investing in our network we think about the long-term benefits and we think it's important that we continue to manage this network and the highly integrated parts of the network for the long term.

And so as we look at what's happening with volume there might be little tweaks but overall we're adding capabilities and enhancements that are going to help our customers for the long term.

Thank you.

Scott Schneeberger, Oppenheimer.

Thanks very much.

Over in the Supply Chain & Freight category I'm just curious can you elaborate a little bit on the mail services with distribution.

And then as a follow-up, just Freight pricing in Freight if there's a little bit of slowing growth in the market what you can do there?

Thanks.

Yes, Scott, it's Jim.

The mail services as most of these products are designed to do is provide a solution to a customer that the other products in the portfolio don't.

Obviously it's if you will an asset-light business that we're glad we're in it.

We'll continue to invest in it the right way.

We've got a lot of customers that are using all of our products.

And so it's not one product versus the other.

But obviously we have the SurePost on the other side as well as Mail Innovations.

But it's a product that we are glad to be in and we plan to continue to invest in it and it just complements all the other products that we have for our customers.

You know, from our Supply Chain & Freight perspective overall we are seeing good growth and had a good quarter.

And we've got a good focus and expect that we will continue to see good results.

Brandon Oglenski, Barclays.

Good morning everyone.

Congrats on the better quarter here.

Richard, I want to come back to a near-term question because I think it's important here, but can you comment on the FX impact in International's quarter?

Because it would seem to me that if you're translating foreign currency into a shorter dollar it would actually be negative on earnings.

So is there some hedge impact that we should be thinking about?

And if I extrapolate your guidance in the back half of the year it sounds like you're talking for a sequential deceleration in International margins.

Is that the right way to think about it?

Let's first talk about currency because currency really has an impact on the top line and the bottom line for UPS.

On the top line obviously there's lower reported revenue as the dollar strengthened and in the schedule I had referenced earlier there's about $320 million less revenue.

On the bottom line our hedges are protecting our profits, not creating profits, and the hedge allowed us to make sure our profit levels stayed the same.

But we did have about a $15 million drag for the unhedged currency and that's part of that unhedged currency drag that we talked about for the year.

It had a minimal impact but at the same time there are currencies that are moving very quickly and exposures aren't large enough for us to take a position on those.

The second question was about the second half of the year.

On the second half of the year our guidance really is at the higher end of our where we expect it to be and it's really driven by the fourth quarter that you mentioned but in the third quarter there's some tough year-over-year comps.

In the third quarter we had a very high earnings per share, 14%.

We talked about the volume that drove that and there were some wage deflation productivity improvements and we expect some of that to continue but there was also a true-up of Worker's Comp.

with a credit and we just don't think the credit will be quite as large in the third quarter.

So when you put them together we're growing our profits in both the third and the fourth quarter.

And we expect to hit the high end of our guidance.

Scott Group, Wolfe Research.

Thanks guys, good morning.

So I just wanted to follow up on a couple of items with you, Richard.

The currency hedge impact that you talked about in the second quarter, how should we think about that hedge benefit in third and fourth quarter and then into 2016?

And then also on the fuel side you gave good color on the revenue impact.

Can you just help us think about the net impact on profitability for each of the segments in the quarter?

Sure.

First we'll talk about the currency hedge.

One of the things we talked about in previous calls as well is we took a multiyear approach to the hedge.

We really did that as the currency was at the 1.35, 1.33 range.

So we have coverage on the currency all the way through the end of 2016.

And because of that we don't think there's an impact that you should be thinking about on that.

In terms of the fuel and the net fuel, when you think about fuel there's a lot of ups and downs but the bottom line is it's almost neutral to the profit line.

There is a slight drag in the domestic in the second quarter but it's not enough to really talk about at this point.

But overall our fuel surcharge is meant to be a natural offset to the changing volatility of fuel prices so that it's taken into account.

Kelly Dougherty, Macquarie.

Hi, thanks for taking the question.

I know there's been a lot of discussion about slowing B2C growth, so I'm just curious if you can estimate for us how much of the business is industrial-related versus consumer-driven?

And I'm pretty sure it's pretty different within the segment so any comments on that.

And then maybe just a big picture insight into how you see industrial versus consumer parts of the economy moving?

And maybe how you might have to make some adjustments to the network if that's changed since you first put out the operating plan for this year.

Okay, I'll take the second part of the question about the economy and then turn it over to Alan.

So we have talked about seeing B2C the pace slow down just a little bit.

We don't at all want to leave people though with the impression that the B2C is not going to continue to grow.

And it is but just the pace of growth has slowed just a little bit.

And the other part from the industrial, the manufacturing side we've seen four quarters of increase from the manufacturing sector but really this quarter we saw that I was going to call it even but it was just a slight decrease.

So that's one of the reasons that we're a little cautious about the remainder of the year in the US.

We just want to see if the manufacturing sector rebounds.

I will turn it over to Alan for the first part of your question.

Yes, Kelly, the split right now in the US is about 45% B2C, 55% B2B.

And like David said the manufacturing and some other sectors that were related to B2B have slowed down a little bit.

The B2B this quarter was primarily driven by retail with returns and omnichannel.

David Ross, Stifel.

Yes, good morning everyone.

I wanted to talk a little bit about UPS Freight.

Shipments were flattish year-over-year and little down probably reflecting the industrial economy that you just talked about there, David.

But when I look at yield adjusting for weight per shipment it looks like yield was down year-over-year unless something went on with average length of haul.

Was average length of haul up, down?

What was the impact and there and what was kind of true pricing like in LTL?

Good morning, David, this is Myron.

Overall as you know the US freight market is down 1.5% to 2%.

However, our base rates and bottom line continues to be supported by a disciplined strategy which is our focus on the middle market.

So the average tonnage was down but revenue per ton continued to actually grow because of rate actions that we're taking on some lower yielding customers.

And we see it coming through in our business, so we're actually pleased with where we are.

Where was average length of haul?

It's about the same.

Rob Salmon, Deutsche Bank.

Yes, thanks for taking the question.

We heard a lot of talk a couple of weeks ago with regard to July Black Friday events and I was curious if you could talk a little bit about how that volume if we should be expecting any sort of meaningful impact in the third quarter?

And could you talk about the performance during that kind of summer peak-type volumes and if there were any incremental resources that you added to the network?

Hey, this is Alan.

Look, as we all know there was a number of retailers out there that had a number of similar events.

And we're actually excited about this innovativeness that's going to continue with e-commerce.

It obviously drives significant small package growth and redefines how business is done.

And UPS will benefit and continue to benefit from those type of promotions.

And certainly our ability to develop the solutions that I talked about earlier with our e-commerce ecosystem gives us the ability to flex our integrated interoperable network to support those kind of promotions very cost-effectively.

The last thing I'll say is that I think it's also a demonstration of the potential to drive and shift demand that there's going to be some definite new learnings from.

For example, we've talked on prior calls about the U-shaped volume between Thanksgiving and Christmas.

And certainly if we can better level that working with our retailers that's going to help out our retailers and UPS alike.

David Campbell, Thompson Davis & Company.

Thanks for taking my question.

Congratulations on a good quarter.

I just wanted to ask about the last six months.

Someone mentioned I think that operating profit in the International operations would be up 15% but I'm not sure I got that right.

Could you please clarify that for me?

Sure, this is Richard.

What we have guided to for the next six months is that the operating profit in International would be at the high end of the range that we've given at 6% to 12%.

And that's what we expected in the guidance and was in my talk.

So that rate of growth is also in the last six months, 6% to 12%?

That's right.

At the high end of that range.

Matt Troy, Nomura Securities.

Yes, thanks.

I just wanted to ask a broader question, the same-day fulfillment market is one that's been receiving a lot of attention in the press.

You've got Amazon launching in 14 major markets.

Just wondering to the extent you could update us on your thoughts and your tests in the same-day market?

That would be extremely helpful and what you might look at the market size as going forward.

Yes, Matt, this is Alan.

We've been in the same-day market for about 20 years with on the B2B side with our Express Critical and Forward Stocking Location network primarily aligned to high-tech and healthcare.

As you know there's a tremendous amount of innovation going on in the retail e-commerce space including same-day.

And we all know why that is is because retail is expected to grow four times the GDP.

We saw an announcement this morning about one of the operators closing down their same-day operations.

And quite frankly I think we all know that the challenge is having a valid economic model for low-cost shipping offers.

Currently the same-day free e-commerce has challenges with consolidating density on single piece stock economics that create profitability issues.

So we continue to monitor the space and look for cost-effective solutions that are profitable that can serve the needs of our retailers.

Hey, Matt, this is David.

Because of the time that most of these e-commerce orders are made which is later in the afternoon we're really seeing much more of a demand for giving our retailers, especially those with an omnichannel network, giving them late pickups and then giving them local delivery the next day.

And we've seen a lot of interest there and that's part of our business is growing and we expect that that will continue to grow at a pretty rapid rate.

Thanks for the question.

Bascome Majors, Susquehanna.

Yes, thanks for taking my question.

I was hoping you could give us a brief overview of your existing truckload brokerage operation?

And just a little color on the overall size, where you regionally are customer focused, the growth rates you've been able to achieve and your desire to gain scale a bit more quickly through acquisition?

And ultimately is this business more strategically important to UPS as part of the bundle you can offer customers or really is a way to drive a greater line haul efficiencies in your parcel and LTL businesses?

This is David.

I would talk about the full truckload brokerage, we do have an existing business that's part of our UPS Freight business.

And we do have asset-light businesses today that are part of this broad portfolio.

As far as speculating where we may or may not want to go with that business, especially as it may or may not be anything that I'd say would be tied to rumors that are out there, that's really as far as we can go, that we have an existing business.

And we just like any other part of our business expect to grow that business and thank you for your question.

I appreciate it.

I would now like to turn the conference back over to our Chief Executive Officer Mr. David Abney.

Please go ahead, sir.

Yes, I would just like to close with a couple of things.

One, very pleased that all three of our business units met planned performance or exceeded it and led to the results that we got to talk about today.

We are clearly moving in the right direction to achieve our year-long financial objectives.

And we do see strong international momentum and we do have confidence that we're going to hit the upper end of our guidance range.

Thank you.

Ladies and gentlemen, that does conclude our conference call for today.

On behalf of today's panel we'd like to thank you for your participation.

Have a wonderful day.

You may now disconnect.