聯合包裹運送服務公司 (UPS) 2017 Q1 法說會逐字稿

Good morning.

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

At this time, I'd like to welcome everyone to the UPS Investor Relations First Quarter 2017 Earnings Conference Call.

(Operator Instructions)

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

Sir, the floor is yours.

Good morning, and welcome to the UPS First Quarter 2017 Earnings Call.

Joining me today are David Abney, our CEO; Richard Peretz, our CFO; along with International President, Jim Barber; President of U.S. 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 and address our expectation for the future performance or results of operations of our company.

These statements are subject to risk and uncertainty, which are described in detail in our 2016 Form 10-K.

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

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

(Operator Instructions)

Webcast users can submit live questions during today's call.

We will attempt to answer questions of a long-term, strategic nature.

Callers are asked to submit only one question so that we may allow as many as possible to participate.

Now I will turn the call over to David.

Thanks, Scott, and good morning, everyone.

At our investor conference in February, we laid out our investment strategy for the next 3 to 5 years.

The cornerstone was accelerating investment in our smart global logistics network, which represents the most sweeping transformation of our network in decades.

We're stepping up the pace of investments now to enable UPS to better participate in the vast opportunities we see ahead.

The benefits from new revenues and improved productivity will be fully realized in the coming years and quarters.

As these investments become operational, the market dynamics and customer demand experienced in the first quarter deepened our confidence that we are on the right track.

Looking more closely at the first quarter, we're very pleased with the revenue gains achieved in each of our 3 operating segments.

While revenues were strong, our operating margin in the first quarter was affected by some known and some unanticipated headwinds.

Richard will discuss these items in more detail during his remarks.

Turning briefly to the economy.

The U.S. economic outlook has improved over the last few months, and the growth is expected to move slightly higher for the remainder of the year.

Consumer confidence is at a 15-year high, and the labor market has tightened.

Economists have included additional growth in their forecasts, from the administration's efforts to modernize trade agreements, reform tax policy and upgrade infrastructure.

We support efforts that boost trade, remove unnecessary regulations and stimulate real GDP expansion.

Overall, global economic forecasts are largely unchanged, with economists still projecting faster expansion in the near term and an accelerated pace of global trade.

We are already seeing those trends at work in our results in Europe and in Asia.

While the economy is showing positive momentum, at UPS, we are focused on generating growth by expanding our capabilities in ways that fully leverage our network.

For instance, we've announced the construction of 2 large, highly automated regional hubs during the quarter.

These projects will add nearly 2 million square feet of capacity in the Salt Lake City and Dallas areas.

UPS has 23 global modernization projects in the works.

These investments, along with other network optimization in data connectivity initiatives, are part of our broad strategy to use technology to add capacity and to improve our operating performance.

We also use technology to enhance the customer experience at UPS, and we're excited about the recent successful launch of our new ups.com website and the related digital marketing capabilities.

These capabilities enable us to present relevant problem-solving information, combined with the UPS shipping offer, to existing and prospective customers via the web.

We expect to provide customers a more personalized experience, while growing incremental revenue.

Given our significant investments and rapidly changing technology, UPS is creating a new Advanced Technology Group, comprised of leading IT and engineering experts.

The Advanced Technology Group will be responsible for the research, testing and development of new innovations and the application of those technologies.

They will also help us strengthen collaboration with technology companies and academic institutions to bring the best solutions to UPS.

We will advance the use of the latest technologies, like artificial intelligence and machine learning, to improve customer service and make operations more efficient.

I'm really excited about the potential of this group to transform our company even further to the benefit of our customers and to our investors.

Beyond technology, we are also adding to our service portfolio.

We're making great progress rolling out our new U.S. Saturday Ground operations.

In addition to the 3 cities tested in 2016, we've recently started operations in 15 Metropolitan areas, including the 3 largest markets, New York, Los Angeles and Chicago.

One of the many benefits for our customers is the ability to tend their Ground shipments to UPS on Saturday and have the package arrive on Monday.

The initial results have been promising.

New shipments picked up on Saturday have been balanced across our product line, and we remain on plan to expand coverage across nearly 4,700 cities by the holiday season, later this year.

Another example of how we're upgrading our service portfolio is the expansion of our dangerous goods shipping capabilities.

We now accept more than 400 new commodities in our global air network and more than 300 additional products for Ground shipments across Europe.

As we expand our portfolio, we are also improving our service levels to provide customers with the most timely service available.

We've shortened delivery times all across our inter-Europe Ground network.

In fact, we're cutting a full day out of our delivery times between more than 350 cities in 26 countries.

Over the last year, we've improved transit times for virtually the entire Ground network, serving the 28 EU countries, plus Switzerland and Norway.

These enhancements are clearly driving forward our business in Europe.

In fact, we achieved another quarter of double-digit gains in European cross-border shipments, and UPS's total export growth rate is the highest we've produced since 2010.

Our International business continues to lead the industry while growing market share around the world.

Turning to the Supply Chain & Freight segment.

The integration of Marken continues to show very good progress.

The business opportunities in customer acceptance have been outstanding.

The pharma industry recently recognized Marken and UPS by ranking us #1 in clinical trials logistics.

Together, these actions demonstrate the commitment UPS is making to grow our business throughout the world.

While we've been making great progress, we plan to announce additional strategic moves in the coming weeks.

During the quarter, UPS was once again named as one of the World's Most Ethical Companies by the Ethisphere Institute.

Customers and investors alike should know their reputations are being protected by a company with high ethical standards.

Before I turn it over to Richard, I want to take a moment to recognize an elite group of UPSers.

We now employ more than 9,300 drivers, who have each driven at least 25 years without an accident.

That means that nearly 1 out of every 10 UPS drivers have qualified for the UPS Circle of Honor.

That is an incredible accomplishment and testament to our training and the quality of our people.

I want to express the gratitude of our entire company for their outstanding representation of UPS and congratulate all UPSers that work behind the scenes to ensure we safely navigate in the communities we serve.

Now Richard will provide more details on our results.

Richard?

Thanks, David, and good morning, everyone.

UPS produced strong first quarter revenue growth of 6.2%, and adjusted for currency, we were up 7.5%.

Top line improvement was balanced across all 3 segments.

Looking at the highlights of the quarter, earnings per share came in at $1.32, up almost 4% over last year.

Total operating profit was almost $1.8 billion and currency-adjusted operating profit was $1.9 billion.

The U.S. Domestic segment improved package yields in all products, with solid revenue growth.

International delivered excellent results, with double-digit growth and contributions from all products and all regions.

And finally, Supply Chain & Freight had a remarkable quarter, growing both top line, tonnage and shipments, while producing higher operating profit.

The core performance in the business was slightly ahead of plan, however, some known and some unexpected headwinds affected bottom line performance in both the U.S. and the International segments.

Let me make a few comments on the effects of these items before covering the quarterly highlights.

As previously disclosed, the currency hedge transition weighed on International results in the quarter.

To provide additional transparency, we've included an enhancement to the currency neutral web schedule, including operating profit on a currency-neutral basis.

Currency impacted operating profit in the quarter by $119 million in the segment, and we still anticipate a drag from currency to be about $400 million for the full year.

Net fuel was a drag this quarter on operating profit as well.

The fuel surcharge for January was based on lower fuel prices in November of 2016.

This timing lag created an almost $30 million shortfall in the U.S. Domestic segment.

Actual fuel prices increased from November.

In early February, we reduced the lag between revenue and expense from 2 months to 2 weeks.

This mitigates net fuel timing issues moving forward.

Start-up expense for investment projects and service enhancements will continue to weigh on operating profits for the remainder of 2017.

However, as new areas of the country come online for Saturday delivery, new revenue will begin to offset deployment costs later this year.

Also notable during this quarter, were the irregular growth rates across the months.

Specifically, there was a pause in consumer spending activity in February, likely driven by a number of factors, including some weather and the delayed income tax refunds.

And lastly, with the adoption of the new accounting standard for stock awards, we recorded a tax credit this quarter.

This process will be a first-quarter-only annual tax event.

In February, we outlined this change in our 10-K and at the Investor Conference.

Now let's turn to the details of each segment.

U.S. Domestic revenue was up 5% to $9.5 billion.

Revenue for package increased 2.4%, with yield growth in Air and Ground products.

Higher fuel surcharges this year added approximately 50 basis points.

We are continuing to develop and will implement initiatives around surge pricing to ensure revenues properly aligned with cost to serve throughout the year.

In volume, our average daily volume was up 2.6%, led by Air products, as Next Day Air and Deferred both grew by approximately 4%.

E-commerce demand drove to continue in ship in product mix.

B2C shipments increased about 7%.

On the commercial side, B2B shipment growth improved quarter-over-quarter, but remained down slightly on a year-over-year basis.

We are seeing signs of rebounding activity in many of the industrial production sectors.

However, brick-and-mortar retail customers continue to adjust their business model to service more online purchasing and many are closing stores.

As they move through this transition, UPS is investing in solutions to take advantage of these shifting market trends.

Turning to our operating costs, we are affected by fuel and operating penalties associated with 17 major projects currently under construction and the expansion of 15 major metropolitan areas through the deployment of Saturday delivery.

And lastly, we had several late-winter storms.

We put the combined effect of these items to be around $85 million, and estimate about 60% of that are onetime in nature.

Given these headwinds, operating profit was $1.1 billion.

Looking now at the International segment, total revenue increased almost 5% to $3.1 billion and was up nearly 11% on a currency-neutral basis.

Exports jumped more than 14%, with strong growth across regions and products.

Export gains in Asia, Europe and the Americas were all around 15%, and Europe cross-border shipments increased more than 15%.

Non-U.

S. Domestic shipments were up nearly 11%, driven by double-digit growth in Poland, Italy and France.

Importantly, we are seeing faster growth in both the established and emerging markets of the world.

Our International portfolio is performing remarkably well.

We are creating value for our customers while expanding global solutions, with the execution of our investment strategy.

The European lane enhancements that David mentioned are contributing to the market share gains.

Operating profit was $529 million, down about 7.8%.

Adjusted for currency, operating profit was $648 million, up almost 13%.

This quarter, our results were produced through a balanced approach.

First, we have market leading growth across all products.

Second, we have improved network efficiency in all regions of the world.

And finally, globally, we continue to focus on creating customer-driven solutions.

Turning to Supply Chain & Freight, it was a great quarter.

The best first quarter operating profit in our history.

We had broad-based improvements across the segment.

Revenue increased 13% on tonnage growth in Forwarding and UPS Freight.

Operating profit climbed 22%, and the margin expanded 50 basis points.

Driven by high demand for middle market customers, the Forwarding unit experienced around 10% growth in tonnage across all major products as the market conditions improved.

Distribution revenue grew at mid-single digits due to the increased demand from Healthcare, Retail and Aerospace customers.

Operating profit and margin improved significantly over the prior year.

UPS rate revenue was up more than 8% on LTL revenue for hundredweight gain and tonnage improvements.

We are extremely pleased with the progress the Supply Chain & Freight units are making.

Now let's turn to our cash flow.

UPS ended the quarter with $3.7 billion in cash and marketable securities.

We used capital this quarter to invest in growth opportunities, fund our pension and distribute returns to our shareholders.

First, we've accelerated our pace of investments into the business for capacity, capabilities and flexibility.

And as a result, our capital expenses were up to $938 million for the quarter, and we are on track to reinvest 6% to 7% of revenue this year as we have guided.

Second, cash from operations was used to take advantage of rising PBGC premiums and lower future operating expense.

We advanced our planned and discretionary funding to the first quarter and have no plans for further contributions in 2017.

And lastly, we have distributed funds to shareholders through the repurchase of more than 4 million shares for about $450 million, and paid out nearly $800 million in dividends, up 6% per share over last year.

This quarter, our effective tax rate was about 32% as we disclosed in the 10-K and mentioned at the investor conference, we adopted the change in stock-based compensation accounting standard during the first quarter.

As a result, we expect our tax rate to be 35% in the upcoming quarters and the effective rate for 2017 in total to be around 34.5%.

Looking forward, we remain committed to the original guidance for this year, with earnings per share in the range of $5.80 to $6.10, including about $400 million or $0.30 per share unfavorable impact of currency.

In summary, customer demand for UPS services' increasing.

We are moving forward fast.

Using our financial strength for our investment and growth opportunity to ensure we capitalize on this expanding market in our industry.

Thank you for your time today.

Now I'll ask the operator to open the lines so we can take your questions.

Operator?

(Operator Instructions) Our first question will come from Scott Schneeberger with Oppenheimer.

It looks like some very strong B2C growth in the quarter and solid in B2B, could you speak to what you see in margins in the Ground business going forward with this mix shift dynamic that you cited?

Sure, this is Richard.

And I think, we should start by saying that when we look at 2017, we are early in the investment cycle as we transform the network into the smart global logistics network.

This quarter, we did have some costs that we weren't expecting, and we called those out on both in my talk and then in the press release, but there was about $35 million that was driven by almost 5 million square feet of development of new buildings currently under construction and the Saturday operations.

But when you put all that together, we still expect us to have leverage this year.

We knew that some of the start-up costs would be early in the year, and the other important thing to remember here is that we did see a pause in consumer demand in February.

Fortunately, March came right back, and we are seeing the same trends in April.

So we still expect that what we talked about at the investor conference and continue to see slight improvement, we'll continue to see in 2017.

This is Alan, I just want to add that I think we reported back in the fourth quarter that B2B growth was negative, and while it was still slightly declining in the first quarter, it came -- the quarter-over-quarter results are really a big improvement, and we saw that across more of the industry segments.

Rich did mention the brick and mortar slowdown.

We've got a great strategy moving forward to bring B2B back to positive.

David talked about dangerous goods expansion.

We've got some great things going on in Healthcare.

And certainly, the returns portfolio continues to generate great B2B.

Our next question in queue will come from Tom Wadewitz with UBS.

I wanted to also ask on Domestic Package margin.

Richard, you identified, I think, the $50 million that you said was unusual.

If I add that back in, I still get I think, something like a 30-basis-point decline in Domestic Package margin.

How would you think about that going forward?

I mean, you commented a bit.

Should we model margin improvement in second quarter or second half in Domestic Package?

And is that cost falling off or volume's accelerating?

So I guess just more kind of perspective on how the Domestic Package margin may play out this year?

Sure.

Tom, as I had mentioned a moment ago, we still expect to see leverage.

We knew going in that the start-up cost for Saturday would be a little heavier in the first quarter because you have to put the investment in, in order to get the customers to bring in the volume that they need delivered on Saturday.

And when we think about Saturday, we're thinking about not just deliveries, but we look at it as Saturday operations because we are also doing pickups, which will actually leap some time in transit for some of our customers.

So when we put the year together, we do see an improvement in margin.

We see leverage coming.

We did know the first quarter, you would have more the start-up costs, but we also understand that through the year, we're investing to create the network and transform it, and we're going to see that happening through the year, but we're also seeing revenue coming in to offset it.

So I would look at the first quarter as being an example of how the margin looks -- I would look at it as the dollar amount of investment is something that we will continue to have, but you'll see revenue continue to grow as well.

We're going to take an online question here.

And this question comes from Jack Atkins.

Jack's question is about the Freight Forwarding business.

So, Jim, can you give us some color around Freight Forwarding business?

Sure, Jack.

This is Jim.

On the Forwarding businesses, as we kind of opened with some of the opening comments, this is a really good quarter for us in Supply Chain & Freight all-around.

Specifically, in the Forwarding business, though, I think most of us would recognize the last couple of years have been challenging.

And I think we use that as an opportunity at UPS to look at the business, restructure a bit, work on some overheads and take a look at segmentation in the market and go at it differently.

And what you saw then in the first quarter was about 1.5 years' worth of work, and we see it continuing quite frankly.

We're looking at really strong growth in the middle market that is important for the mix.

In that product offering, we've got balance across Air Freight, Ocean and North America as well, all growing double digits, so it's a very, very balanced distribution in Forwarding, with bottom line profitability approaching 20% year-over-year growth.

So we don't need a bunch of top line growth, we need just the right growth in the model for it to produce in the UPS Forwarding unit.

And so we're pretty pleased with the first quarter.

Our next question in queue will come from David Vernon with Bernstein.

David, I wanted to ask you perhaps a governance question.

I was wondering if given the importance of managing this transition and stabilizing the Domestic margin if you and the board had any conversations about creating the proper incentives for management, for the employees to actually kind of achieve that target and whether we can expect you to maybe be talking about that in the future as far as helping to give investors some confidence that there's more skin in the game in terms of actually executing against what is a challenging transition for the business.

Well, David, to answer that question, obviously, the board and myself, we are always looking for ways to tie in the best interest of the company but also the best interest of the leadership.

And so our compensation packages are highly oriented towards results.

The variable pay is a much higher percentage than it is in many companies, and we feel like that we certainly are incenting the right things.

We look at it on a year-over-year basis, because things do change, and when they do, we would make those adjustments.

But we focus on the top line.

We focus on the bottom line, and one thing that makes our company a little bit different is we incent for results all the way down to the supervisor level.

So we have our profit plan and we agree to that.

We hold people accountable to it.

It goes all the way down to that line supervisor.

So I'm very comfortable that we have it aligned correctly.

But thank you for the question.

Our next question will come from Chris Wetherbee with Citigroup.

I wanted to ask sort of about some of the comments in terms of the investment on the Domestic side and regarding the view that you will incentivize growth as you're building out the network here.

I guess you also need to get price right too, so I guess I'm just kind of wondering how you will manage sort of that balance between making sure you get the growth that you're building for but also managing the price piece of it, obviously, to make sure the returns on this new incremental investment are as good as what we normally expected from you over the years.

Chris, this is Alan.

Thanks for that question.

Yes, look, I mean, I think the pricing actions that we discussed on the last call were certainly visible in this quarter's results, and we also generated some good volume growth with Next Air up 4, Deferred up over 4 and Ground over 2. The first quarter U.S.-based pricing came in at the higher end of our 2% to 3% range.

And some of the things we're doing, the annual GRI, we brought in the U.S. Domestic DIM divisor from 166 to the 139.

The additional handling, the over maxes, the new fuel surcharge, it's all being managed very, very tightly and well, and we are very, very pleased with those results.

I'd also just let you know, Richard talked about peak and surcharge pricing that ensures pricing is aligned to cost to serve whether it's peak or in other parts of the year.

And we've got a significant focus in that area also.

And just a little color there on some of the objectives where we're really looking to set the market expectations for pricing to match the supply and demand.

We're looking to cover the additional costs that we incur in those periods that lead up to and including peak as well as other periods of time where volume surges and we are very, very focused on maintaining and improving the margins during peak and then, bottom line, always ensuring that we are protecting the integrity of the network for our customers with the great service that they've grown accustomed to.

Thanks for the question.

Our next question will come from Scott Group with Wolfe Research.

So first thing, I just wanted to clarify, in the press release, in the International segment when you talked about currency-neutral operating profit, does that suggest that currency is hurting first quarter 2017 results and the base is a lot higher?

Or is it that it helped first quarter '16?

I just want to understand so we know to base to model for next year.

I just wanted to clarify that, because I was confused.

And then more just broadly, can you just talk about the pricing in International and at LTL, because it looks like really good volume growth in the quarter, but maybe pricing, a little bit softer?

Yes, thank you for the question.

It's quite a bit to that question.

So Richard why don't you start the first and then, Jim, if you follow up, I'd appreciate it.

So the question around the currency neutral is there is an accounting standard as to how you have to state those.

And the accounting standard is that you use the last year, because that's a published number.

And so what you'll see there is that's restating this year to last year.

So for your models, you'd probably need to talk with Scott, but you would actually probably do it slightly different than what the accounting standard is.

But the most important thing is, is that when you look at the International business, it's really a story of what we've seen the last 2 years.

Jim talked a minute ago about the broad-based growth in Supply Chain, and we are seeing the same thing in the International business.

And with that, I'm going to turn it over to Jim to talk about it.

I think, Scott, you also wanted to kind of touch on pricing in Forwarding.

I would say that there was an event in the first quarter in the Asia market, with about 20% of the capacity coming out of the Shanghai market when 5 air carriers were put down with about 50 segments a day.

So that actually allowed us and others to actually tighten up and focus on the margin and to price a little bit stronger.

And then it also saw business moves from forwarding into small package and back and forth.

So with respect, to end the first quarter in the pricing environment of Forwarding, I would say it was the best for us in about 2 years.

Our great margins continue to go way up, the bottom line continues to expand.

We'll continue to do that, and we'll talk more, I think, in the upcoming calls about pricing in the small package around peak as well.

We talk a lot about that in the domestic markets, but International has a role and responsibility to play there as well, and we are evolving and maturing in that segment as well.

So we'll talk more about that as we approach peak.

So we're going to take an online question.

This one is regarding, can you talk more about Coyote and how the business is growing in the marketplace?

Yes, this is Alan.

So yes, Coyote is really continuing to see strong year-on-year double-digit growth rates in loads.

The UPS customer base is certainly highly predisposed to the truckload services that Coyote is offering.

Service levels are really remaining consistently high.

As I think, most of us know, the truckload market remained soft we are seeing some signs of tightening, but this asset-light model really does provide great flexibility in the up-and-down cycles.

Synergies are on track.

We expect to get about $100 million of that for 2017, and we're seeing them across the board in procurement, backhaul, asset utilization, cross-selling, and some of that's dropping obviously to the Domestic and Supply Chain Freight segments.

The last thing I'll say is that we've landed on the European continent with our Freightex acquisition, where we're really excited about that.

And we've expanded into Mexico also in addition to Canada.

So we're really excited about taking the European -- or the Coyote model abroad, and things are going very, very well.

Thanks.

Next question will come from Ken Hoexter with Merrill Lynch.

It sounds, David, like you were talking a bit about the accelerated rollout.

I just want to understand, are you speeding up the time frame or is this the same time we talked about back in February, in terms of the 17 facilities?

And is that something that you could accelerate?

And similarly, on your Saturday delivery, you talked about going from 15 metro areas to 4,700 cities.

Is that a hiring move or scheduling for drivers that takes time to roll that out?

All right, I'll take the first part of the question, and then Myron will answer about the Saturday delivery.

The theme of our recent management conference was about going forward fast, and we're looking at every bit of our strategy in seeing where can we ramp up facilities, where can we ramp up implementation of technology in all of our investments.

We feel like the schedule that we have -- and we're right on top of that schedule.

Rich talked about what the CapEx was for the first quarter, and it leads up right to the yearly average.

So we have -- we're right on plan there.

But if we can open up some of these buildings a little earlier, that is our focus.

We're going to do them right if we're going to implement them right.

But we are looking in all regards to be able to answer our customers' needs and to do it as quickly as possible.

And Saturday Air is a good example of that.

We've got a pretty aggressive plan and, Myron, you want to talk about that?

Yes, Ken, we're actually on schedule for our deployments.

We opened up 40 buildings in the first quarter that impacted 15 major metro areas, and we hope to -- well, we will complete over 200 scheduled facilities for Saturday in the back half of this year.

Early adoption from our customers has been extremely positive.

But we like to look at it as full Saturday operations, and the combination of picking up on Saturday and delivering on Monday has proven to be a real market advantage for all of our customers.

Particularly, though, when you look at a number of fulfillment houses that are locating closer to their customer base, they're telling us that this added capability is really working very well for them.

So we're pleased with our progress to date, and if we can speed up, we certainly will.

Next question will come from Brian Ossenbeck with JPMorgan.

So I think the Pulse of the Online Shopper reports that UPS puts out are pretty informative and we've seen recently one of the big-box retailers offered discounts for items online.

Purchases online that aren't in the store, if the consumer is willing to pick it up in the store, they will get a discount off of that.

So just wondering how you see consumer behavior moving throughout your forecast period here, and if you expect shippers will start to offer similar discounts to consumers, and if that's something that you expect will kind of help with density and help relieve some of the B2C pressure across all of the networks that we are seeing recently.

Yes, Brian, this is Alan.

Yes, I think that one of the takeaways from the Pulse of the Online Shoppers are that the consumers want to get their packages when and where they want to when they are ordering online.

And that program you talked about, the base of that program has been out there for quite some time, and now folks are beginning to put promotional programs around that model, and that will drive potentially more and more ship-to-store type of volume for UPS, which certainly B2B, which is great business for us.

We're really focused on what the needs and the wants are of these consumers that we can tailor our services for the retailers so that they can win and that really comes back to our omnichannel strategies, which have ship-to-store, ship-from-store, store-to-store, our returns portfolio, along with UPS Access Points and My Choice.

And I think, Saturday delivery and Saturday operations would pick up is just another great example of how we're working to build that e-commerce value stack to make sure that we're capturing share in that particular piece of the market profitably.

Our next question will come from Ben Hartford with Baird.

I don't know if Juan's on the line.

If not, maybe this question is for Jim, but curious about kind of the emergence of blockchain technology.

And any sort of implications it may have for the International business, for Freight Forwarding specifically?

And I guess, most specifically, customs brokerage, I know you guys have a large presence there.

So any perspective you might have on the implications from blockchain, either negatively or positively, how you see that developing would be helpful.

Sure.

I would say then, the whole Hyperledger that sits beneath it, does have application in many parts of our business.

And I think, obviously, we had questions.

David has so far about some of the investments and other ones we're looking at and how we speed those up.

There is a rhythm to this, obviously.

We are the world's largest customs broker.

That's a big business that -- it needs to be innovated and blockchain is one of along with the likes of artificial intelligence and obviously, we've got the trade facilitation agreement that now has come across underworld trade organizations.

So yes, it's in there.

It's in many pieces of our business, including other parts of forwarding.

We don't want to get too far out of our -- ahead of our skis here and talk about today on the call, but I think as it evolves and we put more of it into the market, we'll point to that in the calls and how it's really impacting both customers and the bottom line of the business.

And I think Rich has a couple of comments as well.

Yes, when you think about the potential of blockchain, we see a tremendous amount, not just in the areas Jim talked about, but also even in how customers and suppliers, our customers who are fulfilling, transact.

And so we do think there's a lot of potential there.

And that's one of the reasons that David actually created the Advanced Technology and Engineering group, is to make sure we stay in front of the latest in technology, figuring out where the best business uses are, sometimes there will be many.

We may start with one, and then apply it differently across the entire network.

So we are watching that very carefully.

And between our Advanced Technology Group as well as our strategic enterprise one, we will find where the best use is, but one of the things we have to make sure is the right and proper controls in the ownership of the data is there before we can start putting it into the integrity of our systems.

We're going to take an online question.

This comes from Dave Ross.

And it's about the International volumes and how we should think about it being related to specific market share gains and the global economy, broadly.

So, Jim?

So, David, I guess before I go right to the answer, I want to kind of drop back because I think for us internationally, this is a pretty unique quarter for us.

It was, what I consider the culmination of a couple of years of work and it's got a long run way ahead of it to continue.

We talked a little bit about this at the conference.

I did specifically at the investment conference in February about the fly wheel effect and that's exactly what's going on in the business right now.

It's the combination of the right investments in the network over the last couple of years.

We put some new governance models in place to run the business in really good opportunity places like the Middle East and North America.

We've got new partnership models that are running in our emerging markets and really pretty strong senior leadership cadence in the International today.

I'm pretty -- very, very satisfied with that.

So when you go back to your question on where is the growth, is it economic, Is it the model, I'd say it's 90% model right now in UPS.

And the reason I say that is if you look at places like Europe, for instance, we just completed the first quarter and saw over 15% intra-European growth, which is most of that piece of the business stays on -- in Europe.

That's not economic.

That's just a model producing great benefits for customers who are choosing UPS at faster and faster rates than they ever had before.

So we do see it continuing.

We've got emerging markets going forward as well and we had a really strong quarter in both China and all of Asia Pacific, and it's balanced.

Really, if you look at across all of International right now, in my 15 years, I've never seen so many double digits in so many places at the same time.

And finally, I think we've got in the new governance model in our U.S. North America export operation, it's starting to move like it hasn't in the past as well.

So I think it's the business model.

I think it's leadership at UPS out in the field.

And also, working with Myron's folks in the U.S. as great partners, because it has to come in and out of U.S. at the same time.

So we are pretty pleased with the first quarter and we expect it to continue going forward.

Your next question will come from Allison Landry with Credit Suisse.

This is Danny Schuster on for Allison.

Historically, you discussed returning about 100% of net income through dividends and buybacks.

So just wondering while you're in your investment phase, what do you think is a more reasonable range to expect?

And do you plan to get back to 100% after the investment cycle is completed?

Danny, this is Richard.

I think the first thing that when we're looking at the use of capital, we are trying to think about what's the best use, given all the different opportunities in front of UPS to continue to grow the business.

So of course, with our high return on invested capital, our first goal is to reinvest in the business, grow the profits and for the next 3 to 5 years, we did call out a higher CapEx.

We also think it's important to have a strong return to our investors.

And we have called out that our dividends are 50% to 55% of net income, and that still is a priority.

And then we've kind of given you a range on the buybacks between $1 billion and $1.8 billion.

And the reason we gave the range was because as opportunities are created, we have to make sure that we're evaluating what's in the best interests long term for the investors.

Continuing to harvest the return on invested capital, growing the base, creating more value or returning it to the shareholders.

So as we get through this next cycle, we'll see what new opportunities come, and we'll make the appropriate decision and through that process we'll continue to do what we've always done in that share with our investors.

Our next question will come from Brandon Oglenski with Barclays.

So, David, I guess following up off of the response to that question and something you talked about earlier with a balanced top line and bottom line focus.

We can definitely see in your Domestic business, if we go back 4 years, I think your revenue is up 15%, if we go back even farther, we can call it 30%, 40% growth.

But we're just not seeing it translate into the bottom line.

So clearly, from our perspective, it looks like there's a very sharp market share focus at UPS.

But why not maybe take a little bit more of that top line in price?

Why not slow down the volume growth until you can get some of these initiatives in place?

I guess, educate us from an outsider's perspective why we should care so much about volume and lower margins today and hope that these investments can drive better returns in the future.

Okay.

Well, I'll start up that question and then we'll go to Richard.

But first, I had to tell you that we look at it a little bit differently than you do.

So I appreciate your opinion, but we believe that there needs to be a very balanced approach.

We have talked today, and Alan shared, that we were at the top end of our range that we are looking at, the 2% to 3% of increasing our pricing.

But he also talked about the surge pricing, and what we're going to do there to make sure that our costs are covered, especially during those high points of the year, where capacity is tight.

So I don't believe we are putting less emphasis on pricing.

I think that we have wrapped up the emphasis on pricing.

We have also shared with you that we are going to see positive operating leverage in the U.S. this year.

We knew that we were going to have some investment costs at the beginning of the year that would not have as much revenue coming in as it will in the later part of the year.

Well, we really feel -- the key is we have to be balanced.

We have to continue to work on the cost.

We want to grow the business.

We want to grow it in the right direction and we're putting a lot of businesses in that area and we're going to make sure that we are pricing right.

So Richard, I may not have given you a lot of wiggle room, but go ahead and follow up on a couple of the things.

Sure.

When we look at how we're doing and what we're doing today, we are investing in the network and we're not investing the network for the next quarter or the next year.

It's really about generationally and about the long term.

There has been a fundamental shift in how our market has been created for small package.

The time period you were talking about, you can go back and see there was a much larger B2B, the number of people buying online was much lower, and so our market is expanding but the way people are receiving merchandise is different.

And we're preparing this company and our network to make the adjustments for that.

And then the other thing that I don't think we expected to see the last few years was, really, how slow the IP was.

Now we do see IP starting to recover, but we're also balancing that with a lot of brick and mortars, redoing their model and adjusting.

So it's really about the investment getting the $800 million to $1 billion in savings in avoidance we called out, and we think over the long term, and as we complete the transformation of the network, you'll see that all of the efforts we put in, not only bring back the return on invested capital at the highest in the industry, but the margins are appropriate as we have guided at the investor conference as well.

We're going to take an online question.

We have another question that's come in on what the corporate tax rate of 15% that is being mentioned in the press.

So, David?

We heard this yesterday, so we're not prepared to quantify what the advantage for us would be, but I can tell you it would be very, very positive.

And we are a high-taxed corporation.

We told you that we expect our rate to be at 35% -- effective rate, 35% this year.

So we are very encouraged by what we are hearing.

We know we are early in the process, but we support, and have supported for a long time, comprehensive tax reform.

We certainly felt like the tax rate needed to be lowered.

We have competition based in other countries that are paying a much, much less tax rate, and we do believe that a competitive international tax system was extremely important.

So the initial results we got from yesterday, we feel good about it.

We look forward to working with Congress and the administration on this legislation, but we think that it will help American companies be more competitive, we think it will drive jobs, and we are very excited about the potential.

So thank you for the question.

Our next question will come from Ravi Shanker with Morgan Stanley.

A couple of questions.

First, can you specifically, quantify the impact of the facility fire in the quarter?

And second, on last mile warehousing, as B2C becomes a larger part of your business going forward, do you see the need to shift your operating footprint or your warehousing footprint to be closer to the customer?

And if you can elaborate some of the initiatives you're taking in your investment plan to do that?

So I'll take the first part of the question around the fire, and then I'll pass it off to Jim to talk about the distribution question.

But, Ravi, if you look at what we put out, and I think when you see this quarter, we tried to give as much transparency as possible and full visibility to the onetimes, what was happening with fuel as prices changed and increase as well as what was going on with the currency.

But at the end, you can kind of pretty much figure that the big change in both the weather and the fire combined was about $20 million.

And that's to be laid out based on the math that we have there.

And those were things we weren't expecting.

Fortunately at the same time, we had another benefit in the tax to kind of offset that.

But at the end of the day, those 2 combined kind of washed out.

But the fire wasn't something we expected.

The operation has made all the proper repairs, the building is back open, and the business is continuing to run in that facility.

But it was something that we did feel like we need to call out.

And I'll take the second part.

This is David and not Jim.

But on warehousing and the need for it to be closer, I'll give you a couple of things.

First is -- and Alan talked about our omnichannel strategy earlier, and we do believe and especially some of the brick-and-mortar companies, they're looking at how they can compete with large e-commerce companies, and so working with us on being able to hit the customer the next day or in 2 days, and we have a lot of good discussions, and we believe that we are the best answer when it comes to those retail solutions that's out there.

Another thing, though, that we are certainly seeing progress is these midsized customers.

If they really want to be able to compete with that time-in-transit, they could never build warehousing in order to do that.

So that has been our focus over the last few months and will continue to be, is how we can use our available facilities, and give these midsized customers, there is some more coverage to what the larger companies would have, and that would be based on our small-package network, but it's based on Jim's distribution and warehousing network and we see that as a very good opportunity for us.

And we're continuing to work with our customers in those areas.

So thank you for the questions.

We're going to take another online question.

This question comes out, some news that came out here this morning, late yesterday afternoon, about the Defense Department awarding UPS contract for services.

Alan?

Yes, look, we're certainly excited to have been awarded that shipping contract for the next 5 years.

The contract is for small-package, global shipping and custom services and covers the U.S. military and a host of other government agencies and will commence in the fourth quarter of 2017.

We're actually one of the leading providers to the U.S. government today, and this enables the U.S. government to continue receiving the value they get from those UPS services.

And it's also going to provide us with some significant opportunities to grow our business with the U.S. government, while helping them create better efficiencies and value for them and their customers.

So we're really excited about that opportunity.

Thanks.

We're going to follow up with another online question about synthetic density, and what we're doing to create synthetic density in our business models as we build off these investments.

We've talked about synthetic density and how it is important to improve the residential stop density.

And we've got quite a few initiatives that we're focusing on there.

We've seen some improvements, and we think there is a lot of potential.

So it is something that we talk to our customers about especially the large shippers, the large e-commerce, the large brick-and-mortar shippers.

So, Alan, you want to get into a little bit more detail about synthetic density?

Yes.

I would just start out by saying that when you look at our -- really our whole UPS e-commerce value stack, almost everything we're doing there has a component of creating synthetic density, while at the same time providing great value to the retailers and the consumers that enjoy those services.

We all know about SurePost and SurePost Redirect, and Redirect was up about 10% for the quarter, year-over-year, quarter-to-quarter.

Some of the other services like UPS Access Point, where the shipper from their web portal can direct their consumers to UPS Access Points, both for their convenience or for the retailer to achieve a lower cost, while UPS ends up with a more profitable shipment.

They can also -- our 35 million now My Choice users are redirecting a lot of their packages to these Access Points.

And then, obviously, our not-in ones with an issue at home, we're redirecting those to Access Points.

So that's kind of a -- like I said before we're the Swiss Army knife of getting consumers' deliveries in a profitable way.

We've rolled out -- we're rolling out about 300 lockers in the U.S. We've already got 200 of them out there and they are another way for us to make that synthetic density.

And you've heard us talk about SDS, Synchronized Delivery Solutions, where the match is created before the package ever leaves the shipper.

And then last but not least is returns, which we're going to continue to drive.

We've just added Optoro to our industry-leading returns value proposition, and that's going to enable customers to optimize the value for disposition of those returned goods.

And then last, but not least, is that 1/10 of a piece per stop on delivery density increases our operating profit by $200 million.

So we're extremely focused on continuing to drive this synthetic density.

That concludes our Q&A today.

Now I'll turn the program back over to Scott.

I want to thank everyone for the questions today.

We really appreciate it.

David?

All right.

Just a couple of closing comments.

We are making good progress on our building of the smart global logistics network.

We continue to see strong growth opportunities for UPS.

We've just seen great performance in International and the Supply Chain & Freight this quarter.

You heard that from Jim and from others.

We've made it very clear today that we expect U.S. Domestic to have positive leverage in the quarters ahead.

It's going to happen by we're going to continue to increase our effectiveness, focusing on technologies, focusing on our processes and procedures, but also focusing on our pricing initiatives to make sure we carry those out.

We are transforming and growing this business.

We're going to continue to do that, and we have more strategic announcements on the way, and we just like to finish by thanking each of you for joining us on the call.

Really appreciate it.

Thanks.