聯合包裹運送服務公司 (UPS) 2015 Q3 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 third-quarter 2015 earnings conference call.

(Operator Instructions)

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

Sir, the floor is yours.

Good morning and welcome to the UPS third-quarter 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 will 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 10Qs.

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

In our remarks today all 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.

In mid-August UPS closed on its acquisition of Coyote Logistics.

For the remainder of 2015 the business results of Coyote will be reported in the Supply Chain & Freight segment.

Revenue will be included in the Forwarding and Logistics unit on our web schedules.

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

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'd like to turn the call over to David.

Thanks, Joe.

Good morning everyone.

UPS continued its positive momentum with the third consecutive quarter of improved growth in earnings per share.

This is consistent with the outlook we provided during our Q2 call.

During the third quarter our International segment again produced double-digit growth in operating profits.

The US Domestic and Supply Chain & Freight units performed as planned.

We are pleased with the results this quarter, especially given the uneven global economy.

We remain on track to achieve the higher end of our full-year earnings per share guidance.

Looking closer at the global economy, GDP growth in the US has remained relatively unchanged.

E-commerce has continued to expand but the strong dollar has contributed to lower industrial production growth and softer exports.

Global GDP forecasts for the second half of the year have come down in leading European markets including Germany, Poland and the UK.

Asia has also come down slightly, primarily influenced by lower China output.

In other global trade developments during the quarter, we were encouraged that an agreement was reached on the Trans-Pacific Partnership, an accord that is expected to establish the rules of 21st-century trade.

In the US it now waits congressional review and approval.

We expect the agreement to cut the customs red tape and allow faster clearance of shipments.

TPP should also create a more level playing field for private companies when competing with government-supported entities.

Additionally tariff cuts and transparency measures will provide benefits to companies on both sides of the Pacific.

We continue to promote TPP with Congress to help ensure the many benefits of the agreement are fully understood.

Our key strategies have positioned us well to help UPS customers, especially small and midsize companies as they and we capitalize on expanded global trade and other new growth opportunities.

We continue to invest in these key strategies which include focusing on high-growth markets, expanding network capacity, improving operational efficiency and developing custom solutions for targeted industries.

During the quarter we announced the largest expansion ever of our Worldwide Express portfolio.

UPS extended this time and day definite service to more than 41,000 new postal codes, many in high-growth markets.

This product is now available in countries that comprise more than 90% of global GDP.

We have also expanded capabilities for UPS customers with the recent acquisition of Coyote Logistics.

This strategic investment brings UPS a high-tech asset light entry into the fast-growing truckload brokerage market.

Jeff Silver and the pack add a tremendous amount of value to the UPS portfolio, providing growth opportunities for Coyote and UPS.

In addition the acquisition of Coyote will enable us to better manage UPS backhaul capacity and purchase transportation spend.

We anticipate this combination to create more than $100 million in unique synergies.

We are already reaping the benefits of the Coyote acquisition.

In October the UPS Freight Brokerage team transitioned to Coyote's world-class order management platform known as Bazooka.

The migration went smoothly and customers tell us they are pleased with the results.

Coyote will also play an expanded role by supporting our US peak season operations this year.

Speaking of peak, our plans include a multifaceted strategy.

We're implementing selective pricing initiatives, adding new capacity that is aligned with customer needs and installing innovative technology solutions.

In a moment Alan Gershenhorn will provide further details on our peak plans.

UPS is working closely with customers to ensure we have the operating plans in place that will provide excellent service at an appropriate cost.

We expect peak season to provide great value to UPS customers and investors.

I am encouraged by the progress we're making on our strategic initiatives and impressed by the dedicated efforts of our team.

UPSers around the world are gearing up for an exciting holiday season and I want to thank them in advance for their efforts.

Now I will turn it over to Alan.

Thanks, David, and I welcome the opportunity to update you on our global peak season plans and expectations.

The growth of online shopping and returns continues to redefine peak season at UPS.

And this year between Thanksgiving and New Year's we expect to complete about 10% more deliveries compared to the same period last year.

Then on our planned peak day, December 22, we are scheduled to deliver about 36 million packages worldwide, more than twice a typical day.

Now looking at the market the National Retail Federation expects holiday retail sales to increase 3.7%.

And online sales are forecast to rise between 6% and 8%, similar to last year but still very strong growth.

As David just mentioned we have broadened our strategy for peak this year and these actions are producing year-round benefits.

And UPS is focusing right now on three areas both to improve customer experience and also the financial results of our business.

We're collaborating with customers to align our capacity with their needs, we're installing world-class technology solutions and we're also implementing selective pricing initiatives.

Our first area of focus is to continue to deepen collaboration with customers by jointly developing operating plans that provide the capacity and service levels they expect.

And to support our customers' need for flexibility, we will again employ our control tower this year.

The primary goal is to optimize the network capacity by providing creative solutions to our customers' unique requests.

This allows UPS to further say yes to our customers.

In addition customers have more options this year including increased adoption of omnichannel distribution and the use of our expanded Access Point solution.

In fact, about 60% of retailers will have an omnichannel strategy deployed this peak.

At the same time UPS will have 8,000 Access Point locations open in the US and more than 22,000 globally.

And this December 20 million UPS My Choice subscriber households around the world can link to the Access Point network for delivery solutions that will provide them even more market-leading choice, control and convenience.

Looking at our second area of focus, all our constituents will benefit from several key technology and facility automation projects this year.

New and updated hubs in the US and Europe will increase sort capacity and reduce cost.

And we have a multiyear plan to modernize or replace all of our major sorting facilities.

And on the road our delivery dispatch will be even more efficient during peak with the acceleration of ORION.

This year 70% of our US drivers will be utilizing this world-class dispatch technology, up from 45% last year.

These technology advances allow us more flexibility to efficiently and effectively adapt to changing customer volume levels on a daily basis.

Now finally looking at pricing, package sizes continue changing due to the e-commerce trends.

As a result we have adjusted prices to ensure they are aligned to the value of the services that we provide.

For lightweight packages as you know earlier this year we expanded dim weight charges for Ground shipments.

This change encourages our customers to optimize their packaging.

At the same time we've continued to see an increase in very large packages.

These shipments require special handling and minimize the opportunities for automated processing.

As a result we've increased the surcharge for these packages.

Ultimately these changes provide an economic incentive for customers to enhance packaging and/or choose the appropriate UPS network.

In summary, the UPS team is ready to provide customers around the world with world-class value and service during this upcoming holiday season.

And the steps we are taking will deliver year-round benefits for both UPS customers and our share owners.

Now I will turn it over to Richard.

Thanks, Alan, and good morning.

Our business units continue to execute well and our third-quarter performance delivered solid operating results.

Reported revenue was slightly lower in the third quarter.

Top-line revenue growth was reduced by about $700 million as a result of the year-over-year currency and fuel surcharge changes.

The International segment generated double-digit profit growth for the third consecutive quarter of the year.

And the US Domestic and Supply Chain & Freight segments continue to perform as expected.

Overall UPS generated earnings per share of $1.39, an increase of 5.3%.

Let's move to the segment details.

Starting with the US Domestic business where revenue increased 1.9%.

Fuel surcharges lowered total reported revenue by about 250 basis points, or $200 million.

Strong base rates were offset by fuel surcharges and changes in product and customer mix.

Average revenue per package was essentially flat to last year.

Customers continue to choose our Air services with elevated demand for Deferred Air Products up over 13% and Next Day Air up 4%.

In the US Ground volume slowed this quarter.

Overall daily package volume increased slightly.

The pace of B2C growth increased in the third quarter and offset the declines in B2B shipments.

Additionally tough comparisons to last year combined with a softening macro environment have muted growth.

Operating profit was in line with expectations but down slightly to last year.

Results were affected by higher pension expense and a slight drag from fuel.

Operating margins came in at 14.2%.

Let's move to the International segment.

We have some good news here.

I'm pleased to say our momentum continues.

We've set new highs in third-quarter operating profit increasing more than 10%.

These results demonstrate our ability to adapt in a shifting global economy.

Revenue on a currency neutral basis was up four-tenths of a percent.

In addition fuel surcharges reduced growth by about 350 basis points.

Base rates expanded their highest pace so far this year, reflecting the continuation of our yield improvement initiatives across the globe.

Export daily packages increased 1.2% over last year.

It was driven by two factors.

First, we have worked to ensure we have the right packages in our network to increase operating leverage.

Second, gains in European transborder and US imports were offset by a further decline in US and Asia exports.

In our International Domestic business, shipments were down 3.4% primarily due to slowing economic conditions in Canada and Germany.

Also this quarter we took some rate action on a few low yielding accounts in Europe.

Turning to the Supply Chain & Freight segment I will remind you that with the close of Coyote we have included their revenue in the Forwarding and Logistics unit.

Additionally we booked a charge of about $20 million for transaction-related cost.

The Freight Forwarding unit continues to benefit from diversifying its customer base and improving revenue quality.

Operating profit was higher and margin expanded as revenue and tonnage declined in the quarter.

We are using a controlled growth strategy that is translating into improved profitability.

A softening market and our decisions to pass on certain low yielding contracts contributed to the change in tonnage.

The revenue growth in the distribution unit was masked by the change in currency.

The unit continues to invest in the future, expanding their industry-specific solutions.

Aerospace and healthcare expansions in 2015 contributed to the growth.

UPS Freight revenue was down 8.6% from the prior year.

Fuel surcharges contributed about 600 basis points of the decline.

A combination of soft market demand and selected pricing actions resulted in the tonnage reduction but revenue per hundredweight increased slightly.

Now let's turn to our cash flow.

UPS continues to generate healthy free cash flow.

Through the first nine months we produced $4.6 billion after investing $1.7 billion of capital expenditures.

In addition UPS repurchased 20 million shares for approximately $2 billion and paid out another $1.9 billion in dividends, up 9% per share over last year.

Looking at our tax rate we recorded a few discrete tax adjustments that lowered the effective rate to 34% for the quarter.

On an ongoing basis we expect our tax rate to be 35.25% and that's due to the mix of US and international profits.

Now let's discuss our guidance.

We expect earnings per share at the higher end of our full-year guidance of $5.05 to $5.30 per share.

In fact, for the fourth quarter we expect operating profit to increase at double-digit pace in all three of our business segments.

In the US we expect higher average daily volume growth in the fourth quarter to be around 4% to 5%.

We anticipate fourth-quarter operating profit will be at the highest growth rate of the year in the low double digits, supporting our guidance for full-year operating margin.

International momentum will continue in the fourth quarter with operating profit growth at the high end of the range.

Currency and fuel surcharge will again weigh on top-line reported revenue growth.

Underlying base rates will remain strong.

Looking at fourth-quarter volume growth it will be flat to last year.

This is driven by the weakness in the global economy and the ongoing revenue management initiatives we've implemented.

In Supply Chain & Freight fourth quarter revenue is expected between 7% and 9%.

The revenue actions we are taking in the Forwarding unit will be outweighed by the addition of Coyote revenue.

Operating margin is expected to be about 8%.

Before we open up for questions I want to take a moment and summarize our current position.

Our strong execution is generating positive momentum.

We are managing our capital efficiently.

We have experienced positive returns from our investments and additional capacity and capabilities producing, strong free cash flow.

And at the same time we have closed on our largest acquisition to date.

In addition through three quarters we have returned over 100% of net income in the form of dividends and share repurchases.

Going into the fourth quarter with three consecutive quarters of earnings per share growth and the peak preparations that Alan talked about this morning we are confident in achieving our full-year 2015 guidance.

That concludes our prepared remarks.

Now I would ask the operator to open the lines.

Operator?

(Operator Instructions) Ken Hoexter, Merrill Lynch.

Great, good morning.

If I could just follow up on the outlook for a moment, your EPS jumps from mid single digits to the low teens in the fourth quarter if we take the top end of your range but you noted US volume growth is going to be 4% to 5% next quarter after Ground volume declined for the first time in 16, 18 quarters or so.

Can you maybe talk about what's in that, in the expectation, what you see in the market?

Is that driven by B2C outpacing the B2B or is do you expect a pick-up in the economy?

I just want to understand what's built into your outlook.

Sure, Ken, good morning, this is Richard.

And you know when we look at where our guidances we look at both internal and external vectors.

And obviously we have a mixed bag in the economy with the negative IP the last quarter and it doesn't look like that's changing going into the fourth quarter.

However, at the same time you have B2C that looks like it's going to have a solid quarter, e-commerce is still expected to be strong and then when you look internally we look at what are we doing the preparation.

We're making all the right moves.

We made the adjustments in our operations to calibrate the expectations of what our customers are expecting.

We're working with customers to ensure that the volume comes in on the times we're expecting the days of the week.

And we've aligned our revenue and cost, and so when you put all those factors together we expect that our bottom-line growth will come and that our Company's performance the last three quarters will continue into the fourth quarter.

Thanks, Richard.

I appreciate it.

Tom Wadewitz, UBS.

Yes, I wondered if you could comment a little bit on I know you were asked about the fourth quarter but just maybe broader comment on how you see the economy developing.

Like did it get weaker within third quarter or it was kind of just stable at a lower level in terms of B2B?

And do you think that that's going to continue to deteriorate?

Or is it just a little bit of a lower level in terms of -- I think there are a couple of different areas where you saw a bit of a change, so obviously Domestic B2B and then international export.

I know you had yield management but I guess those were the two areas and LTL where it seemed like there was some additional weakness in the economy.

So maybe a little more commentary to understand that how that developed and the outlook on that.

Thank you.

Okay, good morning, Tom.

This is David and I'm going to take the first part of this question then I will hand it over to Alan to talk a little bit from our customer base.

But we have seen some softness in the US economy.

And in the third quarter B2B faded a little bit and really we've just seen mixed signals and we are seeing growth from the consumer side, so B2B especially online retail continues to outpace overall retail.

But there is definitely softness in the manufacturing sectors.

International production as we talked about in the second quarter declined.

In the third quarter we've seen acceleration of that decline.

And we do estimate that IP is going to be negative in the fourth quarter.

But part of that is the continued strength of the dollar, certainly affecting exports.

And then it's just soft global demand whether it be in China, Asia or wherever.

So that's what we're seeing across the US economy.

Again it's mixed.

Alan, would you like to talk a little bit about the customer base?

Yes, thanks David.

I guess first like Rich said we're seeing continued improvement in the B2C.

So quarter over quarter, first quarter to third quarter, our B2C results continue to improve in terms of volume growth and that's even with some tough comps from last year on some SurePost wins in the third quit.

We're also seeing very positive growth in our Air Products, Next Day Air group 4% and our Deferred products are growing double digit again despite tougher year over year comps.

So we think on the B2C side for peak season that we're sitting really well in terms of what the growth projections are and we're going to finish the year in line with the volume expectations we set out at the beginning of the year.

Ben Hartford, Baird.

Thanks, good morning.

Alan, maybe just continuing that point in the context of some of the weakness that you've seen domestically and globally during the third quarter, domestic yields continue to be strong.

Obviously there is an effort here this year to recoup to drive yields higher.

How confident are you that that bias can continue, that we can continue to see strong that yield growth?

Obviously not necessarily in the fourth quarter but in 2016 if we do continue on this trajectory of soft economic growth domestically and globally?

Well, let me just say that first our rate change for 2016 is in line with what we've done historically as well as in line with the market.

So while we've implemented the dim weight this year and we will be lapping that next year we're confident that the value that we're creating for our customers along with ensuring they understand why we need to increase those prices based on the value and the solutions we're providing for them that we're expecting some strong yield results in the fourth quarter and into 2016.

And you know we certainly have a focus on yield.

We have had all year but I just want to remind everyone that we are always looking for a prudent balance between volume and yield.

And of course the ultimate goal is to grow the long-term economic profit.

Tom Kim, Goldman Sachs.

Good morning and thanks for your time here.

You've talked a lot about some very encouraging strategies around the improving peak season execution and your capacity and pricing initiatives are certainly well noted.

I guess the one thing that wasn't entirely clear to me was you're willingness to limit volumes around the peak season surge days.

And I'm wondering to what extent are you willing to walk away from business should demand exceed your expectations and your customers?

Thanks.

Yes, so like last year we're going to be beefing up our control tower for (technical difficulty) and that control tower is going to allow us to work together with our customers to maximize the value we provide and reduce the total cost.

So the bottom line is the idea here is to optimize the network capacity and it's going to allow UPS to say yes more to our customers for the unplanned volume.

David Vernon, Bernstein.

Good morning and thanks for taking the question.

Maybe David or Richard, as you think about the longer-term outlook on the domestic margin side, obviously we see a little bit of pressure now, as we saw some of the implementation costs fuel is a little bit of a head wind.

How confident are you that that were to point where the productivity initiatives and maybe the better market discipline or better pricing in the domestic segment is good allow you to put a floor into that domestic margin and avoid any further margin compression over the next couple of years?

David, this is Richard.

I will take it and then in a minute I will turn it over to Myron to talk a little bit about some of what's going on.

We're making the improvements that we've guided when we spoke last November.

We talked about a multiyear process and we're making those improvements in our operations and at the same time we're balancing the alignment of cost and revenue together.

And as we've done that we've got ORION with 70% of our drivers this peak and so that will continue into 2016.

We have the multiyear update and replacement that we will be doing.

So putting it all together we're right in line with where we expected we'd be right now.

And we're working to the same plan that we covered with you guys just about a year ago.

And with that I will turn it over to Myron to talk a little about what's going on operationally right now.

So this fourth quarter and moving forward the underlying factors to maintain good margin growth will be additional capacity, enhancing our customer experience and of course cost control.

And I will start with cost control first.

Richard just alluded to the continued deployment of technology in our field operations.

And as he alluded to we expect to have 70% of our drivers deployed on ORION this year and we will complete that by the end of 2016.

And our progress to date continues to show very good progress.

We will continue to modernize our hubs.

We plan to fully automate our top Tier 1 hubs over the course of the next five years.

And in addition to that we will continue to deploy technology in our inside operations to help control cost as well.

Alan has alluded to the deployment of Access Point.

This year by the end of year we expect to have over 8,000 Access Point in the US which helps us to improve delivery density which also is a cost control measure but at the same time enhance our customer experience.

So we're very confident that moving forward we can continue to extract cost, improve the experience of our customers and have a good profit margin in the US.

Brandon Oglenski, Barclays.

Good morning everyone and thanks for taking my question here.

So I want to come back to the fourth order because obviously there's a lot of implicit volatility built in here just given the outcomes with peak.

And David or Myron, there's a lot of uncertainty heading into 4Q just with the economy and you even have some labor issues with your pilots.

I know the Teamsters have talked about that as well as well.

But let's just say that things are better or even worse.

What's the flexibility on the cost structure right now with this peak season capacity?

And are some of these things concerning where you're going to have flexibility to dial that back or is it pretty much locked-in at this point from a cost perspective?

So Brandon let me start with your first question first.

We're confident the negotiations will be completed with our pilots without any disruption to our customers just as it has been in the previous four negotiations with our pilots.

UPS and IPA are still bargaining in good faith at the table under the direction of the National Mediation Board.

In that vein it's not possible for a strike without the NMB's permission.

And even if they were to get permission it would only be given after exhausting a lengthy series of safeguards.

And the next round of negotiations are already scheduled in November and December.

In regards to cost containment in the fourth quarter we're certain that we can adjust the network and be flexible enough to take the cost out.

For example, while we have added capacity of 6% across the network we'll have 35% fewer sort days than last year even though we will have 44 additional sorts.

We're able to accomplish that by starting the sorts much later in the season than a year ago.

Last year the workday that we had with Black Friday operations we felt like the delivery network was underutilized and we're making the needed adjustments there.

Our purchase transportation expense should be considerably less than a year ago based on our acquisition of Coyote.

So we're also going to have improved production with our drivers.

We're tightening up our dispatch.

We will bring helpers on at the same rate as we did last year but we're bringing them on much later and we'll extend our driver's day to reduce over time.

So to just wrap up that question we certainly have a good plan that we've worked on all year.

We know there's going to be audibles that are going to occur different conditions.

And we believe we have the flexibility to respond to those.

Most of that flexibility is in this multi-pronged strategy that we talked about.

We've really been working hard with our customers collaborating.

This control tower that you've heard us talk about is going to help us say yes and how to many customers.

On those last few days, though, if we have customers that greatly exceed the amount of volume that they have committed to us then we certainly would be willing to enforce caps but that's not our intention.

Our intention is to work with customers on how we can move volume around in earlier days or take advantage of weekends.

And then this increased technology that we keep adding is just going to give us a lot more flexibility including Access Points, ORION and the other things that you've talked about.

The good thing about all this is it gives us year-round flexibility as well as helps us flex for peak.

So we're confident that we have a plan and that we're going to execute to that plan.

Thank you.

Nate Brochmann, William Blair.

Yes, good morning, thanks for taking the question.

I found it interesting that we saw the pickup in the Air business and I'm assuming part of that is that some of those B2C customers are needing increased service levels which might be a little bit of shift away from everybody just worrying about the lowest price point.

I was wondering if you're seeing a real trend there?

And if that's an opportunity longer term to gain market share away from some other potential vendors that can't offer that kind of same level of service.

Thanks for the question.

This is Alan.

Yes, we are in fact seeing strong growth in the Next Day Air and Deferred products and it is driven by the largely by e-commerce.

And specifically in that area we believe we are gaining market share.

And earlier I think David in his opening remarks talked about the expansion of our time of day delivery commitments for Worldwide Express and we have done the same for Next Day Air and our early a.m.

and Express Plus products.

And we have the leading coverage in the United States by time of day and certainly worldwide.

And we're continuing to focus on being a leader in that area.

Thanks.

Chris Wetherbee, Citi.

Good morning.

I wanted to come back to some of the comments around peak and some of the outlook for about 10% growth during the peak season relative to Myron's comment about 6% capacity.

I don't know if those are apples to apples sort of numbers but I just wanted to get a rough sense is how you guys think about balancing that equation of growth relative to the existing capacity.

I would have maybe expected those numbers to be a little bit closer but maybe there's something I'm missing there.

If you could give us some color that would be great.

This is Alan.

I'll take the first part of that and I will turn it over to Myron to speak specifically about the capacity.

You got to remember that we have one more day than last year to spread that volume out a little bit.

And as far as the growth goes again on the B2C side of the business we are experiencing a quarter-over-quarter growth in that regard.

So we're pretty confident with what the projections are for e-commerce sales in the market and what our customers are telling us that we're going to be seeing that 10% volume growth between Thanksgiving and New Year's Eve.

Myron?

So in addition to that the 6% capacity is a network number spanning our Ground transportation as well as Air.

So on the Ground we've concentrated on 10 specific projects that encompass both automation, modernization or expansion of our facilities.

We opened two brand-new air sorts, one in Ontario, California as well as one in Columbia, South Carolina.

We added additional capacity in Dallas Texas.

If you will recall Lester we opened up a brand-new facility with 20,000 an hour capacity.

That has since been expanded to 40,000 an hour.

We modernize one of our hubs in Chicago, Illinois.

And in addition to that when you look at Worldport where obviously is our Air home we've added additional capacity to increase our feeder only which is our long trailer unload capacity from 70,000 an hour to 100,000 an hour.

And going back to Alan's opening statement if you'll recall the retailers are expecting about 4% overall growth during the period so we think we're fully covered.

Art Hatfield, Raymond James.

Good morning, thanks for my question.

Just a quick question on the LTL segment.

Can you elaborate on your comment about selective pricing initiatives?

Is that you trying to push price higher within your book or are you seeing competitive actions by other people in the industry?

We've seen rate action being taken by everyone in the industry but specifically for UPS Freight.

We've worked to shed some unprofitable customers all year long so we'll continue to do that by focusing on the small package market, specifically as working very diligently with Coyote.

Scott Schneeberger, Oppenheimer.

Thanks, good morning.

With regard to dimensional weight pricing, could you please elaborate on what benefit of revenue contribution you expect this year and how it's going to contribute from your conversation in the peak season?

And just as a follow-on there you mentioned larger packages getting priced higher too.

Is that having any effect on your capacity?

Yes, we're still projecting our yields to be at the higher end of the 2% to 3%.

We certainly came in that way in the third quarter and we're expecting similar results for the remainder of the year.

And it's really a combination of dim weight, the GRI and also selective pricing actions with customers.

And certainly we've noticed an uptick in the amount of large packages in our system and we're making sure that we're being compensated appropriately for the value that we're seeing with those packages.

Scott Group, Wolfe Research

Thanks.

Good morning guys.

So I want go back to just the fourth-quarter guidance, so if I look at low double-digit operating income growth in the US, that implies pretty flat sequential earnings, at least US package earnings from third quarter to fourth quarter.

So we typically see a lot better than that outside of the past two years.

So I guess my question is do you feel like there's conservatism in that low double-digit guidance or is it that even with the changes that we've made for peak this year something has changed and we're not expecting to see much sequential improvement in earnings from 3Q to 4Q anymore?

Scott, this is Richard.

And you know first of all when you think about our fourth-quarter number there is growth in all three segments as we talked earlier actually I think in my talk I said that there's going to be double-digit growth and profit for all three segments of our business.

Part of that is because we spent the last year working and our peak plans that Myron has talked about and David and Alan this morning.

But in the third quarter we also talked a little bit about the economy and what was going on with it.

We still feel that peak season will be strong because of the growth of e-commerce and that's reflected in the guidance and the guidance does have the total Company actually growing double-digit growth in profits for the fourth quarter as well.

Hey, Scott, it's David.

When you talk about the peak seasons of the past just have to remember that prior to this big growth in B2C e-commerce that our average peak day was increasing volume somewhere around 50% over a typical day.

Now with e-commerce last year we approached 75% over.

So the nature of the business has changed.

We certainly see we're going to see big improvements over last year.

But the relationship between third and fourth quarters has just migrated a little bit just over this B2C group.

Thank you.

Jeff Kauffman, Buckingham Research

Thank you very much and congratulations.

I want to follow up on Scott's question.

Did I hear correctly that you said the package margins could be the strongest of the year in fourth quarter?

No, what I actually said was that our profit level would be the highest in the year in the fourth quarter.

Okay, so profit level.

And then I just want to hit International margins.

Normally the seasonal change is about 200, 250 basis points stronger fourth quarter versus third quarter on the International side which would imply a pretty big number on International margins.

You did mention slowing in the global economy.

Is it possible that you could be looking at 18%, 19% margins on the International product or is there a reason why that normal seasonal margin difference would not happen?

So Jeff, if you look across the year we've actually had about the same margins all year and we don't expect that to change.

At the end of the day we're balancing our strategy around revenue management and growing the business with what's going on around the globe and the economy and it is changing a little bit.

So that's not really changing.

Where we think we'll be at the end of the day the fourth quarter we expect to be at the high-end of the guidance for what we've given on International.

Okay.

And the impact to Coyote on SCS in the fourth quarter, is that going to show more as a benefit to the SCS margins or is that going to show more as a benefit to the package margins as you're going to be using them as a capacity source for the holidays this year?

Hey, Jeff, this is Joe.

We're going to take just the one question and then come back again okay.

One other thing, too, just while I've cut in here just.

So you know at 9:20 today there's going to be a peak season press release that goes out that kind of summarize what Alan just said.

Just so you're aware of that during the call the press release it's not anything new, it is just a summary.

So we'll go to the next question.

Thanks, Jeff.

Alex Vecchio, Morgan Stanley.

Please go ahead.

Hey there, good morning, thanks for taking the question.

So there's obviously been increasing reports out there recently about Amazon and their efforts to develop their own full-blown transportation network.

So maybe David or Myron you don't have to comment on Amazon specifically but can you maybe talk to how you see the parcel competitive landscape evolving over the next few years?

And how do you make sure that you're guarding against the potential outcome where your customers might increasingly become competitors?

This is Alan.

Thanks for the question.

Look, I think we've been successful because of our integrated network that creates the efficiencies in the value proposition that's very difficult to match.

And you've got to keep in mind that's from pickup through delivery where we're almost making 1 million pickups a day and obviously delivering millions of packages a day.

And our customers are actually receiving the benefit of that scale efficiency of the integrated network.

At the same time we're cognizant of the competition out there as well as investing in new technologies to improve both service and efficiency.

You're well aware of some of the things we're doing on the e-commerce side with UPS My Choice, UPS Access Point, UPS SurePost, UPS SurePost Redirect, our synchronized delivery service, iParcel so on and so forth.

So we're continuing to monitor the space but not only monitor the space, execute and continue to hone our offering to ensure it's the best in the business.

So the key to us is really just focusing on value to our customers.

We have unmatched capabilities and systems and people.

And if we stay focused on taking care of the needs of our customers and providing that value then we don't have to worry nearly as much about what the competitors are doing because we're listening to our customers and focusing on that value.

Thank you.

Allison Landry, Credit Suisse.

Goodwin, thank you.

I was wondering if you could talk about the recently announced third-party fees that are being imposed on retailers that are using the account of a larger entity to basically gain more favorable rates.

Has this been an increasing trend you've seen amongst your smaller customer base of the last two years and could you give us a sense of what percentage of your business that the surcharge applies to?

First, it is increasing amongst the customer base and it's a very valuable service that's in high demand and we certainly want to continue offering that service and expand it with customers that use it today.

And really no one out there provides better third-party pickup service than UPS from the planning, the implementation and the execution.

And for shippers what it does is it can be very significant to them in terms of inventory handling and transportation savings associated with the service as well as an ability for them to offer a broader line of products in both businesses and household consumers.

So that's what we're really looking at out there with the third-party billing service.

Rob Salmon, Deutsche Bank.

Hey, good morning and thanks for taking my question.

If I could turn the discussion back a little bit to the cost side within the US Domestic Package segment, clearly we've had two major changes as I'm looking at the landscape.

One is that rail services has improved quite a bit from a year ago and more so from two years ago and in addition you guys have got the now completed acquisition of Coyote.

So if you could talk a little bit about what the optimal rail mix is as part of your purchase transportation network what that looked like in 2013 and 14 and provide some comments about how you see Coyote changing your truckload needs whether it be from a pricing or an optimal mix perspective for UPS?

Thanks.

Okay, thank you.

First I would say that when you start talking about especially 2013, a little bit of 2014 our balance between rail and road did have to change.

And it had to change because the rails had serious operating problems.

Part of it was too much volume.

Part of it was infrastructure and we have always valued on the service we can give our customers.

That service started being threatened a little bit with the rail difficulties.

So we put more on the road.

Now we have seen that the rails have improved and they can provide the service that we need and when they do that it makes it easier to put some of the business on the rails.

And also with this acquisition that we've just completed it's one of the areas that Coyote can help us on especially during peak when it comes to putting additional loads on the road is that's something that they can provide and help us decide the best Company to use, the best agent, the best way to backfill.

So we think it's one of the real value points that they bring and it's one of the key synergy areas when we decide to do the deal.

And the Coyote acquisition is going very well.

It's according to plan.

Our customers and employees are reacting very positively and we do believe they are going to help us make a difference during the peak of this year.

Thank you.

David Ross, Stifel.

Good morning, gentlemen.

I wanted to talk about the Forwarding segment for a second.

Last call you mentioned the Trans-Pac Airfreight market was pretty good and you saw some favorable buy rates.

Did you see those buy rates in 3Q and any commentary you can give around just Trans-Pac Airfreight volumes would be great?

Thank you.

Okay, David, it's Jim.

A couple of things I guess the quarter we just finished and kind of looking forward at the same time.

What we saw in the third quarter was really just an expansion of the supply in the market.

We saw it collectively globally going up about 4%.

Demand is not keeping pace with that, hence the market conditions that you just reference.

If you move into the fourth quarter what we see is it really depends on the lane you're talking about.

APAC to the US we think will be strong APAC to Europe not some.

Middle East will be strong so it really depends on the mix of the freedom where you have it relative to the question about supply and demand.

But obviously the Forwarding numbers for the third quarter as a business were very strong relative to our strategy and we'll continue that in the fourth quarter.

Bascome Majors, Susquehanna.

Yes, thanks for taking my question here.

A lot of questions on peak but looking beyond the peak into 2016 what critical variables are out there that that could put you above or below your longer-term expected EPS growth rate of 9% to 13%?

And generally speaking from where we sit today do you think this range is going to be appropriate for next year?

Sure and this is Richard.

You know when we look at our guidance and when we set our guidance for this year and last year when we talked about the five years the variables are obviously the economy and what's happening externally in the economy and at the same time that's why there's a range.

At this point given everything we're doing internally to create network efficiencies and manage and ensure that our cost and revenues are aligned properly as we see a structural change in some of the volume/mix we think the range is appropriate.

We expect it will continue and next quarter we'll talk about 2016.

John Barnes, RBC Capital Markets.

Hey, good morning.

Thanks for taking my question.

Just with your commentary around the global outlook and some softness domestically and I recognize that the assets you're investing in our long-lived assets but can you just talk a little bit about how you're balancing maybe the capital spending going forward based on what you're seeing?

You've talked about the $1 billion potential investment in Europe and just some of those dollars and how they are allocated given what you're painting as a pretty soft backdrop.

Thanks.

John, this is Richard again.

When we think about our investments we're not thinking about what's happening in the next six months but it's really what's can happen for the next 10 years.

And we're investing to continue to grow this business in the long term.

And so when we're thinking about those assets are there slight tweaks?

Yes.

Year to year we might make some decisions that are more ad hoc but for the most part it's a longer-term process.

We started the year I think closer to $3 billion in CapEx and I think right now we think it's closer to $2.8 billion for the year.

That's a slight change but that's not changing our reinvestment in automated buildings in making the network as efficient as possible because as we do that we also bring down our operating cost.

And so that helps our value proposition to our customers and we think that in the long run we will continue to keep investing to make sure that this business keeps growing as strong and as fast as we can get it to grow.

Due to time constraints our last question will come from the line of Kelly Dougherty, Macquarie, followed by closing remarks from the panel.

Please go ahead.

Good morning guys.

Thanks.

Obviously Europe has been pretty strong for you guys.

I just wanted to think about talk about how you think about growth in Europe assuming FedEx TNT goes ahead as expected does it change your game plan at all or maybe perhaps open up some additional opportunities for share gains between now and then?

And then if you could comment maybe on what the pricing environment looks like in Europe?

Obviously it's pretty stable in the US but you have at least some pockets of it maybe not be quite as rational over in Europe.

Okay, this is David.

We've been in Europe almost over almost 40 years and we continue to see great opportunity there and we've been growing our business at a rapid rate and we continue to believe we will do so.

Nothing has changed our strategy to invest and to grow and to grow at a pace exceeding the market rate.

So yes we are investing more than $2 billion in Europe which we announced at last year and we are executing on that strategy.

It's a lot about adding capacity, it's about modernizing our business, it's about implementing technology.

All of the things that you would do if you've got a very growing vibrant business.

So we feel very comfortable about Europe.

Jim do you want to follow up a couple of things?

I think two points worth mentioning, Kelly.

First, if you've seen the quarter we just came through Internationally you saw the volume was down a little bit but the revenue when you clean it up for currency and fuel was up 3.8%.

So that really speaks to the pricing environment and the rationality as far as we go to market.

Obviously we have to do that in a competitive landscape but we feel like we're doing that pretty well.

And the other comment worth mentioning is this quarter we just finished saw our strongest yield improvement in our domestic product in over two years.

So those two points for us tend to point to a market that we believe is it really kind of in a balanced growth market but we believe we have to strike the right price to go to market and we'll continues to do that.

Thanks.

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

On behalf of today's panel we would like to thank you for your participation in today's teleconference call.

Thank you.

Stephen, we are going to have closing comments by David Abney.

Okay, well first I'd like to thank everyone for their interest in our Company and for your questions.

I just would like to emphasize that again at this time our quarter was in line with our expectations.

We felt good, it was a solid quarter.

Year to date all three quarters so far have been in line and we've either met or exceeded expectations.

That momentum gives us confidence in peak season.

We have good plans.

We have the people to execute those plans and we have the discipline to do that.

And once we do those three things then we'll see a successful peak season and a successful fourth quarter.

I would like to thank our people in advance because I know they are going to make that happen.

And just look forward to the call in February.

Thank you very much.