聯合包裹運送服務公司 (UPS) 2017 Q3 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the UPS Investor Relations Third 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 third 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.

Also joining us today is Kate Gutmann, our Chief Sales and Solutions Officer.

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 risks and uncertainties, which are described in detail in our 2016 Form 10-K and 2017 10-Qs.

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.

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

We will focus on answering questions of a long-term and strategic nature.

(Operator Instructions)

Now I will turn the call over to David.

Thanks, Scott, and good morning, everyone.

Again, this quarter, we are reporting solid UPS results, with revenue gains and good execution in our segments.

Our performance is driven by UPS' high-value solutions, broad portfolio of services, efficient global network and strategic investments.

Let me first take a moment to recognize the difficult conditions created by several recent natural disasters and the incredible way our team responded to these challenges.

Some of the communities we serve have been severely impacted, and we've been focused on restoring service to those areas.

I want to express my personal appreciation to thousands of UPSers around the world for their dedication, working side-by-side in their communities and on their routes delivering life-sustaining supplies.

In addition, the UPS Foundation committed more than $3 million to support the relief efforts throughout the U.S., Caribbean and Mexico.

I can't emphasize enough how proud we are of the UPS team and their great work.

It's this kind of teamwork that gives me confidence that we're well prepared to carry momentum forward to deliver a successful peak season.

Kate Gutmann will provide details on peak at the conclusion of my comments.

Now let's take a look at the company's performance.

During the quarter, our focused execution, combined with our ability to capitalize on market opportunities, enabled UPS to meet our financial expectations.

Our e-commerce and cross-border solutions helped UPS deliver strong revenue growth of 7% or a 4.6% increase in daily shipments.

In the U.S., increasing demand for UPS Next Day Air and Ground products drove revenue growth.

The focus on fundamentals, combined with the benefits of recent investments, produced good results, especially when you consider the unexpected headwinds we faced.

The International segment continues to serve as a growth engine for the business, producing record third quarter operating profits.

Several actions taken this quarter were designed to accelerate that growth in the future.

In Europe, UPS' enhanced network capabilities enabled market share gains, clearly about 20% growth, and intra-Europe export shipments is evidence of that success.

In Asia, our joint venture with SF Express was approved.

We're moving forward with plans to develop a co-branded, highly competitive export product for Chinese businesses shipping to the U.S., positioning us for more growth in the small and medium-sized customer base.

We will expand this offering to other markets in the future.

To ensure UPS has enough international air capacity to meet growing needs, we took delivery this month of 2 747-8 aircraft, with another on the way this year.

We are quickly putting them into high-demand transpacific routes in time for peak season.

Another encouraging development this quarter was the early initiation of contract talks.

We've worked with the Teamsters for more than 80 years, with the objective of providing industry-leading service to our customers, so we can create new jobs and reward employees for contributing to the company's success.

We expect the negotiations to move forward in a constructive manner, and we know that when employees are engaged, connected and committed to the company's priorities, UPS customers, shareowners and employees all will benefit.

As we move into the fourth quarter, the macroeconomic environment looks solid.

In the U.S, in the third quarter, we saw a slight reduction in economic growth forecast.

As a result, industrial productions slowed in the third quarter.

But forecast for the coming months have a more optimistic outlook that should bode well for B2B demand.

We also remain confident about the holiday season, as consumer sentiment remains elevated, although there are some inflationary pressure on wages due to high employment levels.

Looking outside the U.S., global growth projections have moved higher, as performance in Europe and China continues to exceed expectations.

While the economic outlook remains fairly promising, we see further upside potential from U.S. tax reform, which we strongly support.

The current proposal will provide great incentives for companies to both reinvest and create jobs at home.

Against this backdrop, we're well prepared to capitalize on growth opportunities and serve UPS' customer needs as we head into our peak season.

And to give you an update on the preparations, planning and expectations for peak, I'll turn things over to Kate.

Kate?

Thanks, David, and good morning, everyone.

It's great to be here to review our strategies for the 2017 peak season.

Our peak strategies are designed to efficiently and reliably serve all UPS customers, whether those who experienced the highest seasonal spikes in demand, to small and medium-sized customers as well as our B2B customers, like those in health care.

The UPS team has worked throughout the year to prepare for the e-commerce growth we anticipate this year.

In fact, between Thanksgiving and New Year's Eve, we expect to complete a record 750 million deliveries worldwide, about 40 million more than last year.

In the U.S., the National Retail Federation expects total holiday retail sales to increase between 3.6% and 4%.

They also expect nonstore retail or online sales to be higher this year, up between 11% and 15%.

At UPS, we're focused on delivering a successful peak season for customers and investors through more collaboration, more capacity, better control and a strong commitment to service.

First, we're focused on improved collaboration with customers for better forecast, so we can collectively smooth work across the network.

We are helping customers optimize the experience they provide their customers, from the first click to the final delivery.

More extensive collaboration this year will better align UPS solutions and capacity with seasonal promotions and fulfillment strategies.

We worked closely to obtain daily shipping estimates by location and even by product.

We've built up rating and communication plans that allow us to respond to changes quickly.

A second area of focus this year is expanding capacity.

UPS customers will benefit from several facility expansions and the technology investments that we've made throughout the year.

We've increased UPS delivery capacity through a combination of permanent and temporary facility expansion.

Across the U.S. network, we've increased both package delivery and sorting capacity by about 6% over the past year.

This represents the addition of more than 1 million square feet of added permanent and automated capacity available for peak.

The permanent facilities are located across the country in key locations like Los Angeles, Chicago and Kansas City.

The deployment of Saturday operations with both pickup and delivery provides us with new and more efficient capabilities to serve customer growth.

We will also take advantage of the flexible solutions from our partners at Coyote Logistics again this year.

The third focus area is control, both control of deliveries for UPS customers and control of the UPS network.

UPS My Choice will provide greater control to more than 40 million global members, an increase of 10 million from last year.

Through My Choice, more than 1 in 4 U.S. households communicate directly with UPS to enhance their delivery experience.

The combination of My Choice and UPS Access Point creates a highly efficient solution that provides customers with the assurance of on-time delivery and higher first-attempt delivery completion.

To enhance customer support and our network decision-making, we will, again, operate control towers in the U.S., Canada and Europe.

And this year, we've added this process in Asia as well.

As on-plan customers need to rise, the control towers will make a timely assessment of available network capacity, and ensure we are properly compensated.

Revenue management is an ongoing exercise at UPS, as demonstrated by our 2018 general rate increase of approximately 4.9%, which was announced yesterday.

In addition, we have introduced our first peak season surcharge, and customer acceptance is progressing as planned.

These surcharges target specific residential, heavy volume periods and large items that require special handling.

This strategy is designed to encourage moving the volume across the period between Thanksgiving and Christmas, and ensures we are appropriately compensated for the value provided to customers.

The final area of focus for UPS is commitment.

The entire UPS team will work diligently to provide world-class value and service during this upcoming holiday season.

Global markets are evolving and customer demands are ever-increasing.

So developing optimal peak season plans is a dynamic process each year.

We take future expectations and learnings from previous peak seasons and apply them to continually improve the company's service levels and financial results during this critical time of year.

Our plans are comprehensive, our networks and employees are prepared, and we are ready to deliver.

Thank you for your time today.

Now I'll turn it over to Richard.

Thanks, Kate.

UPS had another successful quarter.

Our results highlight the flexibility of the global UPS business model and the power of our investments.

We've managed through headwinds in the U.S., delivered broad-based strong growth in the International business and continued generating excellent results in the Supply Chain & Freight group.

The UPS team's execution this quarter generated earnings of $1.45 per share, driven by sustained revenue expansion in all segments.

Looking closer at the business segments.

In the U.S., revenue and costs were negatively impacted by natural disasters in Texas, Florida and California, creating a drag of about $50 million of operating profit.

However, growth in package volume was positive, up 3.4%, with revenue up nearly 4%.

We've had strong growth in our business going back to mid-2016.

Higher growth in both Next Day Air and Ground products was driven by e-commerce demand, as average daily shipments increased 8% for Next Day Air, while Ground was up 3.4%.

Package yields improved 2% year-over-year, and base rates came in at the higher end of our 2% to 3% range.

Fuel surcharges added to the yields by approximately 40 basis points.

Fuel and base rate improvements completely offset a drag from customer and product mix this quarter.

The U.S. operating profit came in at $1.2 billion.

After adjusting for the unplanned events, our profits were in line with our expectations.

Results this quarter include 1 less operating day, about $40 million of costs from our previously discussed ongoing investments in new buildings and the deployment of Saturday operations.

Now let's turn to the International segment.

It was another great quarter.

The third quarter reported profits were up almost 9%.

And on a currency-neutral basis, operating profit was up 20%, making this the 11th straight quarter of double-digit growth.

The largest operating profit gains were in Asia and Europe.

Revenue increased more than 11% in the third quarter.

Growth was evenly balanced across the world, between premium and deferred products, both increasing at double-digit pace.

Export shipments jumped nearly 20%, led by robust cross-border shipping.

Growth was higher in all regions and all major products, driven by expanded portfolio of services and market-focused strategies.

This story was similar for the domestic shipments in the international.

Growth was broad, up about 6%, with year-over-year gains in all key countries we serve.

Currency-neutral International Package yields were up 2.3%, as base rate improvements and fuel offset trade lane and product mix.

Our global investments are allowing us to grow faster than the market by expanding capabilities across the region.

We are adding aircraft to support our export products, and we're about halfway through the 5-year, $2 billion investment in the European network.

Our International strategies produced another successful quarter, driven by strong volume growth and expanding yields, moving on our optimized integrated network.

Now turning to the Supply Chain & Freight group, which produced another great quarter of growth in revenue and operating profit.

Revenue increased 13% with gains in all the major business units.

Forwarding, Coyote and UPS Freight had the highest growth in the quarter, and they were assisted by the concentration of our middle-market customer wins.

In the Forwarding group, revenue growth in the international and North American air freight markets were elevated by high single-digit tonnage gains.

UPS Freight increased revenue 11% on LTL tonnage growth of nearly 6%, combined with a 3.6% improvement in LTL per hundredweight pricing.

In the distribution unit, revenue management and efficiency fueled double-digit operating profit expansion, driven by the aerospace and retail sectors.

Operating profit in this segment increased $20 million or 10% over last year, making this the best third quarter ever and one of the most profitable quarters in our history.

Now looking at the balance sheet.

Through the first 9 months of 2017, UPS generated $4.4 billion in cash from operations, paid $2.1 billion in dividend and repurchased more than 12 million shares for about $1.4 billion.

On a year-to-date basis, the company made capital expenses of $3.7 billion, as we transform our network for tremendous growth opportunity, more efficiency and long-term value.

Our investment strategies will help ensure we achieve the $800 million to $1 billion in cost savings and avoidance that we have laid out earlier this year.

Now I'll turn to guidance.

Let me start by level-setting the year-over-year comparisons in the fourth quarter.

First, we received about $40 million of benefit from discrete tax events in the fourth quarter of 2016, benefiting last year's adjusted earnings per share of $1.63 by about $0.05.

Next, we have a potential currency drag in the fourth quarter of 2017 of around $100 million or about $0.07 adjusted earnings per share.

The final currency effect will depend on what the rates do in the coming months.

Turning to the business.

We have performed well through September, as global e-commerce strategies are evolving with increased seasonality.

We expect this to continue moving forward.

In the U.S. segment, recent economic news is encouraging.

Consumer, retail and business conditions hold promise, but we also see some caution as the effects from the natural disasters linger into the fourth quarter.

Additionally, we are seeing some cost pressures on temporary peak hiring and purchase transportation in specific markets and locations in the U.S. And lastly, we project continued strong volume and revenue growth for the remainder of the year.

Turning to the International segment.

We expect positive momentum as we move forward, allowing market share gains to continue, yet at the same time, currency will remain a headwind.

And in the Supply Chain & Freight segment, we're well-positioned to take advantage of firming rate conditions and support peak season small package strategies.

We anticipate the segment's growth trends will continue.

At the total company level, revenue growth is expected to be at the high end of our full year guidance of 5% to 7%.

We now anticipate fourth quarter taxes should remain around 35%.

Considering our current momentum and reviewing all the economic data and our internal initiatives, we are confident as we're moving higher in our full year guidance range.

We now anticipate 2017 adjusted earnings per share to be in the range of $5.85 to $6.10, which includes currency transition of approximately $0.30 per share or $400 million.

Before I open the line, let me summarize.

UPS is focused on making the necessary adjustments to adapt to current conditions as we implement our long-term strategy.

As Kate mentioned, UPS is bringing new capabilities into this year's peak season, Saturday operations, new surcharges and more efficient capacity.

These initiatives position us for success.

As we look ahead, these investments we are making today will serve as a springboard to deliver new solutions and long-term value for years to come.

Before I turn it over to the operator, I want to remind you that the webcast users can submit live questions during today's call.

Thank you for taking the time this morning, and now I'll ask the operator to open the line.

Operator?

(Operator Instructions) I will now turn the program back over to our Investor Relations Officer, Mr. Scott Childress.

Please go ahead.

Thank you very much.

Our first question, we're going to take an online question from Dave Ross of Stifel, Nicolaus.

David's question is, now that the SF Express joint venture has received regulatory approval, what are the next steps?

What is the expected impact, if any, on the business from the JV in 2018?

Okay.

This is David, and I'll take the first part of that question.

Then I'll pass it over to Jim.

We were excited that we did get approval -- an approval on a timely basis.

The reason that's so important to us is there's just so many opportunities between China and the U.S., and this joint venture just combines SF Express' deep China presence with our UPS integrated global network.

So we just see it's a very good combination.

That being said, Jim, why don't you give a little more detail?

Sure, I'll be glad to.

So David, I think on the back of David's comments, we've been working on this for well over a year, by the way.

I'd tell you, it's very significant in our mind as a big step for us inside and crossing borders in and out of China.

Really what it does for us is it gets us and gives us the ability to go to new places, to reach new customer segments with new products that we haven't had in this market, obviously, for 110 years at UPS.

It's going to synergize with our forwarding business, and it's going to really continue to let us grow in cross-border trade.

Just a data point for you that I get very excited with, is in the network that SF and their team has, are 173,000 touch points in China that are made up of couriers and service centers and retail stores that will be able to actually participate very differently going forward than we have in the past.

And I think the other thing, lastly, because, obviously, specifics of what's going to happen in 2018 and beyond will become more apparent as we move, I would say that we plan them to be material, obviously.

But the team at SF as well, I think, partners very nicely with our team in Asia, and I think we can't undersell that partnership concept as well.

So I appreciate the question.

We're going to take another online question.

This question's coming from Brandon Oglenski from Barclays Capital.

Fourth quarter results have been volatile in the past year, with both service and cost challenges impacting profitability for UPS.

With another strong peak season expected, can management discuss how the additional resources and costs added this quarter can be better scaled to actual volume demands, while still meeting service commitments?

Okay, Brandon.

Thank you for that question.

And I'm going to -- we're going to spend a little time on that to scope just a few different angles.

So I'll say a few words, and then we're going to hear from Myron and Jim from their business units, and then Kate from a customer and revenue perspective.

But I believe we're well-positioned to have a successful peak season, both from a customer standpoint and an investor standpoint.

And it's coming quickly.

We've been working a long time on this.

And I think there's a lot of confidence throughout the group.

So that being said, why don't you go ahead with you, Myron?

Good morning.

There are several factors that give us confidence in our ability to perform this peak season, considering the tremendous amount of time that's been spent with our customers to develop accurate forecast, preparing to hire and train seasonal staff as well as expanding our permanent and seasonal capacity.

We believe that Saturday deployments of our operations will have a tremendous impact on this peak.

It will give us 5 additional delivery days.

We're planning to process 40% more volume on Saturdays, and 80% of the volume we plan to deliver over the weekends will be through the facilities where we've already established Saturday operations.

Once again, we plan to hire 95,000 seasonal helpers, in which 35%, over the last 3 years, have later been hired into permanent jobs with UPS.

The onboarding process will be significantly improved through new technology advancements.

It will also help increase productivity through our mobile delivery apps as well as our abilities to give dynamic-sought instructions through Wi-Fi capabilities.

We've also added an additional 1 million square feet under roof that will allow us to have additional sort capacities.

And we've implemented 10 additional peak hubs, so we feel like we are positioned for success.

It's Jim.

I'm going to add a couple of points that I think are material in nature outside the U.S. I'll start in Europe, and then I'll go quickly to Asia.

Europe, quite frankly, has been one of those years that we've had kind of peak volumes all year long, which is one of the advantages to go on into this peak season.

Our growth in Europe all year long has approached double-digits every quarter.

So we've had to add, obviously, both human and capital investment to support that.

We've opened 3 new hubs this year, 170,000 pieces an hour in Europe.

Obviously, we've had -- the unfortunate situation of a cyber attack in the middle of the year that pushed volume into our network that we needed to respond to.

We've added lift in Cologne.

So that Europe infrastructure as we move into this fourth quarter, I feel like, is in a very unique and positive position.

And then we go out to Asia.

Obviously, we've talked about the arrival of the 747-8s.

The first one we took on the ground in Hong Kong on October 18.

The next one is October 28.

We get another one on November 24, and then we move into next year.

So they also have had a year of very high demand out of Asia that we've had to scale the network.

And so on both cases, as the kind of front end of the engine, I think we're in great shape, honestly, for a great peak season that connect back, obviously, with Myron's network as well in the U.S.

From a customer perspective, I would add that as I mentioned in the opening, collaboration is critical, deep and broad, and the UPS team has now considered trusted advisers to our customers.

We've gone through an extensive forecasting process and also enhanced by some of the learnings from last year.

We do this now by location, by product.

And we've gone further within our customers' organizations, so that we encompass merchandising, marketing, fulfillment as well as transportation.

All of that leads to mutual success.

We've jointly agreed upon special operating plans to help smooth out some of the peak periods, such as the Monday spikes that would be leveled off by operations opening on Cyber Weekend as well as Super Weekend.

And the customers are absolutely participating in that, better utilizing for the first time Saturday delivery and Saturday pickup, which is market-leading, and has been embraced by our customers.

And then, of course, the control tower, which we've continued to enhance over the years, finding ways to say yes more often to unforecasted needs and aligning it with the availability in our network.

And along those lines, we've continued to reinforce that it's important to align the price with cost of delivering this value.

And customers are working to ship volume into weeks to minimize the impact of the surcharge.

But if needed, in those weeks, the surcharge applies to those packages.

So a joint effort and, again, one that we're confident and will lead to success at peak season.

We have a question from the line of Chris Wetherbee, Citigroup.

I wanted to ask about some of the cost headwinds that we've seen in the Domestic segment.

It looks like you're pulling forward maybe some costs into the fourth quarter with $60 million, which is up from the third quarter's performance.

I guess, I just wanted to get a sense how we should be thinking about maybe beyond fourth quarter.

It sounds like you're ramping up for peak season.

But as we start to move into 2018, how should that cadence, the sort of these cost headwinds, as you roll out Saturday and build up the domestic network look?

Sure.

Chris, this is Richard.

And I think, first, it's a little early to guide because we are just putting all of our plans together for 2018.

But we did, earlier this year, say that this $100 million to $200 million operating penalty would be ongoing for the next 3 years, as we continue to not only open the Saturday operations.

And the reason the fourth quarter is larger is because that's when you have most of the operations open.

But it's also -- as we operate new buildings and start construction or operate a new building, there are some penalties as we get these buildings up to the same standard from when they first start to the UPS full implementation because it's a step-function.

So again, on the next call, we'll talk about 2018, but we did call out that there would be between $100 million and $200 million for each of the next of the few years.

When you look beyond this peak season, Brandon (sic) [Christian], take into consideration that we'll be continuing to implement Saturday operations next year.

At the onset of peak this year, we will have deployed Saturday operations in over 200 locations.

We would expect that to be a bit greater than 90 locations for next year as well as the additional capacity that we will add for next year.

We're going to bring on 5 million additional square feet that we'll bring into the network next year.

So it will be the onboarding of those locations and the additional headcount associated with it.

We have a question from the line of David Vernon, Bernstein.

So it looks like the underlying sort of growth is accelerating here as international and supply chain are happening, but I do want to kind of get some feedback from you guys on the direction of the domestic margin as you think over the next 2, 3 years.

You've got the implementation costs kind of in the base over the next couple of years.

Should we be expecting that the operating profit and domestic is going to be growing kind of with the top line from here?

Or do you think there is still some possibility that 2017 or 2018 could be a little bit lower on the domestic margin side?

Again, it's a little early because we are just putting these plans together, David.

This is Richard, obviously.

But I think the first thing you should think about is that next year, with 5.5 million square feet of buildings opening, it will be muted as well next year, but it really is part of a deliberate plan.

One of the things, as we've been looking at buildings and trying to do this as fast as we can, and we've said all along, we are balancing the opening of the buildings with the disruption to the network.

And so we have seen that putting about 1 million square feet in this year and next year it's 5 million, so the velocity is a little different than we originally planned.

But at the same time, as we get our plans finalized, we'll share that.

But I would expect that it would be a little bit muted on the lower end of where we guided for next year.

But we're still putting plans together, so it's a little early for me to say exactly where we're going to land.

Yes.

No.

I'm not looking for like an exact number.

I'm just trying to think, like I think what's keeping a lot of folks nervous about the stock, quite frankly, is either a lack of commitment or a feeling that there is a lack of controllability about where that domestic margin is going to go over the next kind of 2, 3 years.

Year-to-year, quarter-to-quarter is not the issue.

The issue is really, is the management team feel like they can get a flat to up domestic margin?

And what is the -- what are the incentives around that to make sure that actually happens?

So I think the first thing is we're looking at this much longer-term.

I mean, we are investing in order to build out our network, not just for the next year or two, but really for the next generation.

And that plays into it.

And if we can move a little faster, it's always going to be the best thing we can do because our highest return is going to be, of course, reinvesting in the business.

And not all growth is going to be linear, because look at our revenue line right now, we're having some of the fastest revenue growth that we've had in over 5 years.

And we think that that's healthy, and we'll continue to adjust the network for that kind of growth, because we, historically, have not had that kind of growth.

So I would tell you that you should be thinking about we're preparing this for the future.

We're looking at the return on invested capital, and all of our goals are in line with making sure that we continue to increase value and bring the profit return, not only for UPS, but for our investors going forward.

We're going to take an online question from Scott Schneeberger of Oppenheimer & Co.

Can you please address the drivers of the recent improvement in global air freight markets and global trade?

How is UPS positioning strategically to capitalize on this momentum?

Okay.

This is David.

I'll start there, and then hand it to Jim.

But we are encouraged by the recent improvements in global trade, and we think that the global economy certainly has a part with that.

But exports are growing pretty much throughout the world, and this is just an important part of our growth strategy.

We see Jim's international unit as really a primary growth engine, and this is feeding a lot of that growth engine.

Jim?

Yes.

Scott.

I would add 3 points to what David has said.

First, obviously, inventory levels continue to be at levels that are going to push more through that, the supply chain, both -- and I'm talking kind of airfreight and ocean in this discussion.

In the most recent quarter, the data that we see has the ocean utilization at over 97%.

So you have a high-high demand environment now with capacity really becoming tight.

Obviously, that's driving the rates up, and you can see that across the industry and across, obviously, the players.

And then you get up in the air, this is the fourth consecutive quarter, where you really had demand outpacing capacity.

Obviously, it started with pilots coming out of the air.

In China, capacity came with it.

The air freight rates have tightened.

Obviously, we all have to manage through that, and then manage the connections.

But then in the middle, the third event obviously is weather.

When all of that -- those 3 combinations hit, you get an airfreight and an ocean market that exist as it is today.

Obviously, we'll drive transpiration rates up, and we have to respond to that.

So -- and I think, actually, the UPS team, beginning in Asia moving back out to the West, has done a great job.

So we look forward to the fourth quarter as well.

I appreciate the question.

We have a question from the line of Tom Wadewitz of UBS.

So I'll maybe stick with that topic of international strength.

And it's pretty impressive the acceleration export volume growth.

I was wondering if you could give us a little more perspective on some of the pieces of that.

I know, obviously, you don't talk about market, but how much of that is kind of benefit from TNT cyber attack, that volumes come over in the future, maybe how much you think we ought to consider the SF Express stepping things up?

I'm just trying to get a sense of kind of what might be temporary and what might be.

You ought to put into the model a double-digit export volume growth for the next couple of quarters or couple of years.

Okay, Tom.

That's a broad question.

I'll do my best to skinny it down.

First of all, let me start with -- I think Rich had some opening comments to David.

I think that the way we think about this is this is just another step that our customers are choosing UPS, who had 11 quarters in a row of continued momentum.

This one, obviously, we see 19% export volume growth, that is certainly a big one.

You've pointed to Europe, but if you take a look at Europe back in 2016, when we started this, the growth has been accelerating for almost 2 years now.

The intra-European growth started in early 2016 at 6%, and then the quarters went up.

From there, they went to 8%, 11%, 15%, 12%, now 19%.

So this has been a very deliberate investment in that market.

With all of the dynamics that were going on we started in early 2016, yes, there is some additional lift in the most recent quarter from the malware event, no question about that, but we -- but this growth is more than just Europe.

This is a broad-based growth.

Richard touched on it as well.

We're really growing across the globe.

I can't tell you what to put in your models.

But certainly, from my perspective, this is about many years into the future, not just the next quarter.

So we're pretty pleased with we are, and we look to the future and tomorrow to keep it going.

The numbers you mentioned, just the total international export, are those for Europe numbers?

You mentioned...

Those were intra-European export numbers.

Overall, exports grew in all regions.

And it actually was pretty much aligned to both, the number we had for intra-Europe for all exports.

And Tom, we recognize that there probably was a little extra in this quarter.

But to Jim's point, we've been on a 2-year improvement, and we still expect that.

Obviously, it doesn't mean that we'll stay at these current levels because of what happened in the third quarter elsewhere, but we do expect to continue to grow strongly.

And we've had -- we've guided that International is an important part of the growth story, and it's something Jim and his team has done a really good job doing in the last few years.

Yes.

Just to expand on Richard's comments about the 2-year story.

This has really been about a 10-year story.

And then we committed to the $2 billion a couple of years ago, and we're probably 40% of the way through that.

But we've had big, big success in Europe and in our International exports for the last 10 years.

So it's just been a very consistent story, all right?

Thanks, Tom.

We're going to take another online question.

This question comes from Brian Ossenbeck of JPMorgan.

How has the first 747-8s performed in the early testing, which customers are utilizing the domestic air service most frequently?

And can the service become more cost-effective when cascading the international fleet to the domestic routes?

This is Jim again.

As I mentioned, the kind of rollout plan of the 747s, the 10/18 was the first one.

And then the next one's coming in the next few weeks, which is great timing for us.

With respect to how are they performing, obviously, as you would know that any time you do get new aircraft, you've got to make sure that they perform properly.

The airline led by Louisville did a great job to make sure we tested them as quickly as we could.

And when they came off the line, we advanced that knowing the demand and the capacity issues that we had.

So to get the first one there on 10/18 was a bit earlier than we had seen when we started.

The actual first flight that left, those 747-8s can carry 288,000 pounds, and that one carried 288,000 pounds.

So it was full to the brim, as they say, with small package revenue.

They couldn't come at any better time because we've been running if you look at our block hours, year-over-year increases of almost 5% in our block hours to actually take care of this demand.

And so for the bigger ones to come that can carry the extra payload in a more effective and efficient way, it is great for every participant in the actual supply chain.

The customers love it.

Obviously, we do.

The economics love it, and the service loves it as well.

So I think Myron wants to add a couple of points from the airline perspective and/or Alan does.

Brian, this is Alan.

Yes, from a domestic perspective, to your question about the customers, I would just say that we've been gaining air share each quarter during the last 3 years, and we emerged as the air share leader.

And part of that is our expansion of our 10:30 and noon and Next Day Air early service to more postal codes than any other carrier here in the United States.

And we're doing that similarly with our international Express and our international Express Plus services around the globe.

And that's very, very attractive to our -- to health care and high-tech and professional services industry segments.

And then on the e-commerce side, we're obviously growing that quite well also with our Next Day Air saver as well as our deferred services.

And you can see the strong growth that we had in Next Day Air this past quarter at 8%.

Thanks for the question.

More question from the line of Scott Schneeberger of Oppenheimer.

Just if I could follow up on those international questions from earlier.

Could you please elaborate?

You called out the revenue growth of 11% driven by premium products.

Could you specify?

Was that uniquely in any one area?

You've talked about broad-based, but curious about the premium products.

And then also nice movement on yield growth in the quarter in international.

Could you speak about that, particularly export yield growth?

Let me start with the yield growth.

I guess, is that I appreciate you noticing that because there's a lot of hard work that goes into that.

Certainly, we recognize -- over the last couple of quarters, we thought we needed to do a bit better job there to match it.

Kate's talked about that in her openings comments.

So that yield movement was purposeful and a couple of quarters in the making, and we think it's right for us long-term and the shareholders.

With respect to the balance, look, I mean, it's -- I think the team's doing a great job.

Its growth in Mexico.

Its growth in Canada.

Its growth in Europe.

Its growth in Asia.

Its growth in our intra-Asia networks.

And obviously, you start to layer in the likes of partnerships of the SF Expresses in the future in the Middle East investments that we've made.

We feel like we've got some good momentum that we'll continue.

So I think the keyword is balance.

And hopefully, you can see that across the talk we're having today, and then the continued dialogue we will have in the future.

We're going to take an online question.

This comes from Kevin Sterling from Seaport Global Securities.

Purchase transportation cost, as a percentage of revenue, has been creeping up over the past 2 years.

Can you talk about your purchase transportation cost jumping as a percentage of revenue during the quarter?

Sure.

This is Richard, Kevin.

And obviously, I'll take this question.

I think the first thing you have to do is think about the last 2 years.

And while purchase transportation cost is up, there are 2 big buckets of purchase transportation, because what we do internationally, and Jim just talked about how revenue has grown, and we've been on a 2-year really continued improvement plan that him and his team had been working.

And then the other side of the Supply Chain & Freight.

And to give you an example, if you go back and look at our history prior to last year, our revenue growth from the Supply Chain & Freight group has been pre-muted.

But yet last year, we grew at 8%.

And year-to-date, we'll be -- we're right now just under 13% growth.

Obviously, as Coyote, Freight Forwarding, those all play into the purchase transportation.

And so I think when we look at purchase transportation, we think it's healthy.

This quarter alone, over 60 -- between 60% and 65% was really driven by International and Supply Chain & Freight.

And then when you get into what's going on in domestic, there's a piece of it, because SurePost is growing a little faster than the average domestic.

And then there's just the normal increases that you would expect.

So when we look at it, I know it's a big number reported change.

But if you look of what's going on with the business underlying it, I think you see that goes right in line.

And that's why you've seen both international profit growth, and then what the Supply Chain & Freight segment has done and really called out in January that we will continue to see improvement this year.

And that's what's happened as well.

We have a question from the line of Ken Hoexter of Bank of America Merrill Lynch.

David, can -- or Richard, can you talk about the accelerating CapEx?

You talked about adding new aircraft, and now you're jumping from 1 million square feet to 5 million square feet.

Maybe talk about the scale going forward.

And did your original CapEx targets account for the switch from upgrading your service at your sort centers to the building of new ones that you now plan?

I sure can.

This is Richard.

Obviously, we just talked about, and hopefully, everybody on the call is getting that part of this is about growth.

And the emphasis that growth -- we talked about it in February.

I've said on the call, we think we're going to be at the higher end of the range for revenue for the total enterprise.

And so when you think about year-to-date, 7% growth across the entire enterprise, that's better than we've seen in over 5 years.

Really, really coming out of the recession was the only other time we saw this kind of growth number.

And it's about growth today and going into the future.

So we are building and expanding the network, optimizing the investments to look for what's best for UPS.

Very early in the CapEx, we said we would continue to tweak, understanding we could disrupt the network too fast because you still need to provide the right service for our customers, but we wanted to go as fast as we could.

In the first earnings call in April of this year, we did move forward, the 747-8 that we actually have in operation today.

And then we bought some land over the last year that's really for buildings going all way until the next 5 years.

And that's because, strategically, it was right place and the right sizes, and we did not want to lose that land because we knew what our roadmap plans where.

When you put all that together, we likely think we'll be closer to 8% or around 8% instead of our initial guidance.

But given the return on invested capital, and when we do put new assets and investments in the business, the return they get, we think it's the best use, not only in UPS, but for our investors as well.

Our next question will come from Dave Ross.

And Dave's questions are, are you more or less positive on 2018 UPS and global economic perspectives than you were during the last call in July?

This is David.

I'll answer that.

And from a macroeconomic standpoint, I would say that a little bit more positive about 2018.

And just a couple of things.

We talked about global trades seems to be growing.

Europe is holding up well.

There's concerns about Brexit.

But for now, Europe's holding up well.

China has kind of been better than expected.

And then exports, in general, are growing.

And then from the U.S. side, you see a couple of things.

Obviously, the consumers is still driving the economy.

And especially from e-commerce, we think that's just going to continue to grow.

But there is also optimism about tax reform and what that can do to stimulate the economy, and we believe that, that is getting more and more interest.

And the last part was the industrial production.

We expect that a little bit this quarter by the natural disasters, maybe it won't bounce back completely in the fourth quarter, but we certainly think that will continue the first part of next year.

So good question.

I think we are a little more positive.

Thank you.

Next question will come from the line of Ben Hartford of Baird.

Just maybe for Alan and Myron on the new peak season holiday surcharge, interested in what the receptivity from the customers have been.

Have we seen any changes in behavior yet?

What are the planning discussions like in the context of that new holiday peak season surcharge program?

How do you expect flows to play out?

Do you expect customers to largely avoid that and shift volumes into some of the months or some of the weeks, sorry, not governed by the surcharges?

Do you expect behavior to be unaffected?

And maybe in the context of all of that, any sort of incremental risk or concern regarding access to capacity in December, given the looming ELD mandate on the truckload side?

Thanks, Ben.

This is Kate.

I'll actually address the question.

We've been working extensively with customers tied to the peak planning.

And so to address some of the points in your question, definitely, consumer demand being what it is, some of it can be steered to other weeks, but others will actually, of course, maintain in the period.

So there will be a mix with the surcharge, but customers are looking at things like self-gifting.

And if somebody's buying something for themselves at the holidays, if it can take extra time, and then they will actually activate that to smooth the volume out of, say, something like a Cyber Monday.

That helps their fulfillment centers.

It helps also the level of peak spike that occurs.

So that's one of the mechanisms of the surcharge to help stir some of that controllable aspect of consumer demand, while other aspects, of course, are committed times and needing to flow as committed.

So that's some.

And then the operating plans and the use of Saturday delivery and pickup, as I mentioned previously, are items that are helping to steer where possible, activating our Saturday pickup, which is market-leading, enables packages to be delivered on Monday from ship on Saturday.

And that's proving to be popular with customers and very positively received.

Thank you.

We're going to take an Internet question from Allison Landry.

Allison's question is, how much B2C growth did you see during the quarter with brick-and-mortar?

And is it outpacing growth from Amazon?

What are you expecting?

Are you expecting these trends to continue in the upcoming peak season?

Okay.

This is Alan.

I'll take that.

Yes.

So as you saw in our results, we had another strong quarter of B2C growth, up high single digits in U.S. Domestic.

But I do want to also note that it's up mid-teens in our international business, and we certainly expect this to continue.

The customers out there, both in the U.S. and internationally, are responding well to the UPS industry-leading e-commerce value stack.

And that's broad-based growth.

It's really coming from the bricks-and-clicks -- brick-and-mortar retailers, along with the e-commerce pure plays.

And it's also coming broad-based from a customer size perspective and middle market, small, medium businesses and also enterprise.

Some of the solutions out there that are really resonating are newly created, Saturday operations that includes Saturday pickup in addition to Saturday delivery that expedite shipments from Monday delivery.

And then, obviously, our My Choice, our UPS lockers, our marketplace shipping tools and access points.

And the one thing I want to note that this past quarter, we launched our UPS Returns manager, which is a pre-online tool that enables merchants of all sizes to customize their consumer return services and processes.

And our consumers get hassle-free return services.

And we launched that in the U.S., plus 43 countries around the world.

So we're building that e-commerce value stack, both in the U.S. and internationally.

Thanks for the question.

Our next question will come from the line of Pat (sic) [Scott] Group of Wolfe Research.

It's Scott.

So I apologize if this is a repeat.

I've been bouncing around a couple calls.

And hopefully, you can coordinate better next time.

But Richard, just on the fourth quarter guidance, since it's a decently wide range here, I just wanted to clarify.

Are you expecting domestic margin improvement in the fourth quarter?

And are you still expecting domestic margin improvement for the year?

And then did you say if -- on the TNT benefit in the third quarter, if you're expecting any of that to continue in the fourth quarter?

Sure, Scott.

First of all, I think you asked specifically first around our fourth quarter EPS guidance.

And at the end of the day, in my talk, and you can pull the transcript, I went through unveiling the one-offs that occurred in 2016 around the tax, and then the impact of the currency this year.

And if you pull those out and do the math, the underlying growth is one of the stronger quarters we've had.

That's the first point.

The second point is we recognize that we'll continue to see both in international and supply chain about what we expected.

But we also know in the U.S., IP's come down a little bit post-hurricane.

We looked at Sandy and Katrina and saw recovery was about a 6- to 12-month process.

And so overall, we think the domestic is about where we expected it to be.

And it's about where we expected to be, given the one-time hurricane and weather.

And year-over-year, for the fourth quarter, we do expect operating margin to increase for the U.S. Domestic.

So we've put it all together.

And we feel really comfortable, and that's why we've moved up our range.

And at the end, as Kate and Myron and Alan have talked about, we spend a lot of time planning and working with our customers to ensure the fourth quarter is good and we deliver a good peak season for customers and investors.

Thank you.

So just if I'm clear.

So if we kind of normalize for the hurricane, you're still expecting domestic package margin improvement for the year?

Well, you've got to normalize for the call.

There was also some other quarters where there were some one-times.

But overall, we think we're right on plan if you go back and look at what we've talked about.

We have another question from the line of Brian Ossenbeck of JPMorgan.

I just wanted to come back to the topic of facility expansions.

I know you said you added 1 million square foot this year and looking 5.5 million next year.

If you can just remind us over the next 3 to 5 years, I think, Richard, in the last call, you mentioned that it was about 28 to 35 million square footage that you might need to add.

So potential of that could come down as you get better efficiency built into these facilities?

And what sort of capital investment do you think that -- fully deploying that square footage might entail over the next 3 to 5 years?

Brian, So I'm going to specifically talk about where we are right now.

We have moved forward some of our specialty outer-year land purchases.

But what we're also seeing in the growth rate, this is the higher end of where we originally guided to.

And so I think we said all along, there are tweaks, as I mentioned a moment ago, based on how volume comes in, capabilities.

Technology keeps changing.

And as technology changes, there's additional capabilities we have to think about in terms of how do we automate it.

Because any time we can automate that, it helps the efficiency and the movement in the network.

It's a little early to talk about the 3- to 5-year other than what we've guided.

But I think as we close out the planning for 2018, I'll come back to it.

The one thing we should talk about, though, is if you look at that Next Day Air and the international growth rates, obviously, the air capacity, we've now grown probably closer to 25% since we last bought a plane in either the international or the domestic.

So we keep looking at that to make sure that we have the right capital.

Because at the end of the day, those are great returns, and investment in the business is the right thing to do.

Thank you.

That concludes our Q&A segment for today.

I would now like to turn the program back over to Mr. Scott Childress.

Please go ahead, sir.

I'll hand the call to Richard for some comments.

Yes.

I just wanted to make a few brief comments around some of what's going on, on tax reform because with the potential that's unique for UPS is where our taxpayer that pays between 34% and 35%.

So because of that, we continue to look at how do we optimize based on knowing the changes that might occur and what's in front of us.

And what that means is we continue to look at all of our strategies and make sure we're making the necessary adjustments.

So we'll continue to do that.

David's actively engaged, along with the rest of the senior management team, in getting our story out about why we think the competitiveness in the U.S. improves when you bring the tax rate down because we create jobs, and we also can invest in a different way than we currently are.

So there's a lot more to come in this area, but I thought it was important for you all to hear our view that, obviously, with this change, it's a generational thing, and we're planning forward and thinking about it in the right way.

And with that, I'll turn it over to David.

Okay.

Thanks, Rich.

As you can see, we are transforming our network for growth and long-term value.

We're making great progress, especially in our Smart Logistics Network.

Our strategies and investments are paying off, providing good positive returns, and we continue to see good growth opportunities for UPS.

And of course, for the next month or 2, we're focused on delivering a successful holiday, both for our customers and our investors.

And thank you for joining the call.

Appreciate it.

See you.