聯合包裹運送服務公司 (UPS) 2017 Q4 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 Fourth 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 now yours.

Good morning, and welcome to the UPS fourth 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; Chief Commercial Officer, Alan Gershenhorn; and 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 operation of our company.

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

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

During the quarter, UPS recorded a noncash after-tax mark-to-market pension charge of $607 million.

The charge resulted from lower discount rates and was partially offset by higher asset returns.

Also in the quarter, as a result of tax legislation in 2017, we recorded a onetime income tax benefit of $258 million.

In the prior year period, UPS recorded a noncash after-tax mark-to-market pension charge of $1.7 billion.

The charge resulted from lower discount rate, somewhat offset by asset returns.

More details on the mark-to-market accounting are available in a presentation on the UPS Investor Relations website.

GAAP diluted earnings per share for the fourth quarter 2017 was $1.27.

Excluding the impact of mark-to-market pension charges and the onetime tax benefit, adjusted earnings per share for the quarter was $1.67, while fourth quarter 2016 GAAP diluted earnings per share was a loss of $0.27 and adjusted earnings per share was $1.63.

Unless stated otherwise, discussions today will refer to adjusted results.

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

(Operator Instructions)

Now I will turn the call over to David.

Thanks, Scott, and good morning, everyone.

In 2017, UPS made significant progress on our strategic initiatives, expanding our capabilities, implementing new technology and further penetrating high-growth markets.

The successful execution of our growth strategies was apparent in the strong revenue gains made across all segments of the business.

In the fourth quarter, we produced one of the highest revenue growth rates of the last decade.

Revenue grew by more than 11%, to nearly $19 billion, and we generated healthy returns on capital investments.

The International and Supply Chain & Freight segments exceeded our expectations.

They're well-positioned as favorable market conditions and strong execution are driving their results.

The International segment generated their 12th consecutive quarter of double-digit growth in operating profit.

The Supply Chain & Freight business delivered over 20% revenue growth and expanded operating profit more than 50%.

Demand in our U.S. segment reached record levels, with revenue up more than 8% during the quarter.

However, headwinds from capacity constraints due to cyber-period volume surges, weighed on our results.

Following my remarks, U.S. Operations President, Myron Gray; and International President, Jim Barber, will provide additional comments.

I just returned from the World Economic Forum in Davos.

I left more optimistic about the global economy and the opportunities that exist.

Given the favorable economic outlook and the momentum we've carried over from 2017, we expect demand for our services to be robust throughout 2018.

To support this growth, we're bringing our largest network expansion in recent history online this year.

Another reason for optimism is the passage of the Tax Cuts and Jobs Act, which is already producing economic growth and improving U.S. competitiveness around the world.

We applaud Congress and the President for taking bold action to boost the U.S. economy.

The savings we're realizing from tax reform will enable us to unlock significant resources across the organization.

UPS will increase investments in our people, technology, fleets, facilities and our portfolio.

This will generate more value for our customers, more opportunities for our people and greater returns for our shareowners.

The growth in e-commerce, cross-border trade and the needs of our customers for specialized services are creating unprecedented demand for our domestic and international air services.

Given the benefits from the Tax Act and our tremendous growth opportunities, we're announcing the purchase of 14 additional 747-8 aircraft and 4 new Boeing 767 freighters.

While we are investing and transforming our global network, we have also expanded the scope of transformation at UPS.

Our team is rapidly moving through the evaluation stage and identifying additional multiyear value creation opportunities.

We look forward to sharing more information with you later this year.

Looking at global market conditions, the healthy mixture of consumer spending, manufacturing activity and business investment should lead to a strong 2018.

In the U.S., economists have raised their views of 2018 GDP growth by 50 basis points above last year and now expect industrial production growth above 3%.

Outside the U.S., growth is expected to remain elevated in 2018, driven by the increased pace of global trade.

I am encouraged by the progress we're making on our strategic initiatives and by the direction of the global economy.

Before I turn it over to Myron, I'd like to recognize 2 management changes.

First, I want to welcome Scott Price to the UPS team.

He's leading our new enterprise-wide transformation initiatives and heads our corporate strategy team.

He brings broad experience in international trade, retail and the logistics industry.

I also want to wish Alan Gershenhorn the very best in retirement.

Alan has made an enduring impact on UPS for the past 38 years.

He helped us grow from a $3 billion small package business to a more than $65 billion global leader.

Alan, thanks for your many contributions.

I also want to personally thank the 435,000 UPSers around the world for their extraordinary determination, efforts and achievements throughout 2017.

Myron?

Thanks, and good morning.

UPS hit record volume levels during peak, demonstrating continued strong demand for our services.

We made 762 million deliveries worldwide, which was 7% more than last year and 12 million more than our initial plan.

In fact, we delivered more than 30 million packages on 90% of the days between Thanksgiving and Christmas.

By comparison, just 2 years ago, only 20% of peak days were over 30 million.

While growth was strong, variability of digital demand created challenges during the peak period as volume accelerated above our projections.

In fact, in the U.S., online orders created during the record-setting Cyber Weekend resulted in nearly 20% more package volume than last year.

Coming out of the weekend, volume growth continued to be strong.

The early surge pushed our U.S. network above its maximum capacity.

The added cost increased operating expense by about $125 million.

We recovered well after managing this initial surge, with improvements in a broad range of measures, including cost per unit and on-time service.

Our strategies and investments are focused on operating our network with a higher degree of real-time flexibility.

Using the latest technology, we're optimistic about the future as we move quickly to bring new capabilities online and adapt UPS operations.

Our actions will strengthen the operational leverage that generates long-term value for investors.

This year, you will see a significant shift in technology-enabled volume processing, with the phase in of much more highly automated capacity.

Worldwide, we expect to open 18 new retrofit facilities in 2018.

This includes 3 major U.S. ground hubs, the first major ground hubs we've added in more than 2 decades.

The overwhelming majority of these facilities will be here in the U.S. in key geographies that were constrained during peak.

In total, these new permanent facilities will add more than 5 million square feet of flexible, technology-driven capabilities.

In 2018, we're adding 6x more sorting capacity and 3x as many car positions as we added last year.

Additionally, we're enhancing the efficiency of our air network in 2018, adding 9 incremental aircraft to the UPS fleet, including 6 747-8s and 3 converted 767s.

Also in the air network, we're upgrading our regional air hubs to greatly enhance throughput efficiency.

These hubs will help Worldport better manage weather and spread peak volume surges to more locations.

In 2018, customers will get more Saturday options at UPS and will reach a total of 5,800 cities and towns when the rollout is complete later this year.

In the area of enhanced technology, we have several key initiatives coming online.

We're implementing the next-generation release of UPS Network Planning Tools and starting the initial rollout of dynamic ORION technology in 2018.

We are also expanding our virtual assistant and help center technologies to improve accuracy, while also streamlining customer support.

Mobile technology will expand with dynamic sort and new delivery applications, and we are implementing smart trailer technology across 100% of our fleet, which supports digital real-time location and greatly improves utilization.

All of these tools will enable our facilities and our network to more efficiently manage package flow and growth.

Additionally, we are focused on other actions to help manage yields and to ensure our pricing is aligned with our cost to serve.

I am encouraged by what stands before us, the vast growth opportunities and network enhancements that enables UPS to fulfill the high demand for our services.

UPS operates a global logistics network connecting the world.

And now Jim will share his comments on our international businesses.

Jim?

Thanks, Myron, and good morning.

As David mentioned earlier, the International segment and the Supply Chain & Freight segment generated excellent top and bottom line results during the fourth quarter.

Our international value proposition is to offer a powerful global network and portfolio that connects buyers and sellers through seamless cross-border movements at the right time and price for their needs.

This positions us to benefit from strong year-end demand typical of peak season.

In fact, this year, we flexed our capacity during peak to deliver about 35% to 40% more volume versus our average daily levels.

As a result of our team's strong execution, the International segment generated revenue growth of nearly 13% in the fourth quarter with balanced growth across all markets.

Operating profit increased 19% on a currency-neutral basis, our 12th consecutive quarter of double-digit gains.

These results are really the outcome of work begun 4 years ago.

In Europe, the $2 billion investment cycle is allowing to reach the increased network speed and capacity.

In the fourth quarter, Pan-European exports increased more than 20%.

This year, we will have even more capability for growth as we open new hubs in Paris, London and the Netherlands.

In Asia, we are driving greater market access and capability expansion in China and other markets.

We've built the customer base to fill the new air capacity coming online from the new 747-8 freighters.

We're serving key lanes, leveraging our Shenzhen air hub for access into and out of the region with high utilization rates.

In 2015, the Supply Chain & Freight segment rebuilt our foundation for success by strengthening cost management, aligning with customers who committed to grow with us and positioning the business for the overall market rebound.

On these pillars, the global forwarding and distribution units delivered an impressive fourth quarter, with revenue up more than 25% while both approaching double-digit margins.

Like the International segment, this group also built a series of improved quarterly performances through 2017.

While the power of our network, portfolio and people are largely responsible for our results, we know that to stay on the path for profitable growth, we also need to expand our relationships and capabilities.

We completed 4 strategic acquisitions and aimed to new alliances during 2017 that are providing new solutions and connectivity for customers worldwide.

First, we established a joint venture with SF Express, the leading logistics provider in China.

Together, we are leveraging our complementary networks and we've launched a great lower cost international solution that's gaining strong customer acceptance.

UPS was also selected as the official logistics partner for Expo 2020 Dubai.

We've already expanded our network to support our growing customer base in the Middle East, including a new direct flight between Dubai and Worldport.

The company made great regional and local market capability acquisitions in Europe with Freightex and Nightline Logistics.

These deals brought local knowledge and market savvy, plus gave us access to a broader customer base.

Integration is going according to plan, and these units are already making solid contributions to the business.

In summary, our international business is operating in an opportunity-rich market, populated by cross-border commerce.

I'm very optimistic about our prospects for continued strong top and bottom line contributions to UPS' overall business.

Thanks, and now I'll turn it over to Richard.

Thanks, Jim.

During the fourth quarter, UPS produced outstanding revenue growth of over 11%.

Top line gains were balanced across all business segments.

Earnings per share came in at $1.67 and full year EPS was $6.01, despite an almost $0.30 headwind from currency.

As you heard, significant network enhancements are forthcoming.

We're executing well on our growth strategies, and the scope of transformation has expanded.

The new tax reforms recently passed provides UPS with unique opportunities, and the economic outlook is calling for synchronized global growth, all good things for our business.

Now turning to the segments in the quarter.

In the U.S., revenue increased $922 million or 8.4%.

Ground and Deferred Air revenue were up both over 9%.

Volume growth was up 5.4%.

Nearly all industry sectors grew.

Average daily ground shipments improved by 5.7%, and Next Day Air was up almost 5%.

Product yields were strong, as total revenue per piece increased nearly 3%.

Base rates were above our target range of 2% to 3% and helped offset product and customer mix.

The segment was affected by operating cost associated with known projects yet to come online by about $60 million.

As David and Myron have discussed, cost around the cyber-period was above our expectations in the quarter.

We estimate the impact of the additional expense to be about $125 million.

Domestic operating profit was slightly below $1.3 billion for the quarter.

Now looking at the International segment, which produced outstanding results.

With revenue growth of almost 13% on continued strong export shipments, the segment overachieved on our financial targets.

International revenue per package increased 4.2% as yield initiatives drove strong base rates.

Premium products grew faster than nonpremium as they have done all year.

The segment's operating profit was $760 million, up 7.6%.

Adjusting for currency, profit increased almost 19%.

Let's turn to Supply Chain & Freight.

Total revenue increased 21%, with gains across all business units.

The operating profit was up more than 50% to $270 million, the highest ever for the segment.

And operating margins expanded to 8.3%.

Forwarding and distribution revenue increased more than 25% to $2.3 billion.

UPS Freight revenue climbed 11% on higher shipments, solid tonnage growth and disciplined pricing strategies.

The unit's focus on profitable middle-market growth contribute to solid operating profit gains and margin expansion.

Prior investments and active strategies in the Supply Chain & Freight as well as the international segment produced outstanding returns.

We expect similar results in the U.S. Domestic segment as the investments go live and we implement key growth and pricing strategies.

Now let's turn to the balance sheet.

In 2017, we used our strong cash flow to reward shareowners and took opportunistic action to lower risk.

First, the company paid a growing dividend to $2.9 billion and repurchased more than 16 million shares for about $1.8 billion.

And second, we significantly lowered our long-term pension risk in plan redesign early in 2017.

And at the end of the year, we made a tax-efficient contribution to the pensions of $5 billion as a result of the new tax legislation.

The funding allows us to optimize the tax benefit, lower ongoing expense and further unlock cash flow moving forward.

The company made capital expenditures in 2017 of $5.2 billion to advance our strategic investments, and it positions UPS to capitalize on the additional growth opportunities before us.

Now I'll turn to our guidance.

Overall, the positive economic outlook and the benefits from tax reform will push our EPS guidance for 2018 above our long-term target.

The full benefits of these tailwinds will be dampened by lower discount rates, the timing of projects coming on line and using some of the tax benefit strategically in the second half of the year.

Also, the effect of the new transformation initiatives are not included in our guidance.

Moving to the segments.

In the U.S., we expect revenue growth of 5% to 6%.

Operating profit will include a drag of approximately $200 million, resulting from lower pension discount rates.

Additionally, incremental upfront operating penalties, associated with opening new buildings and the expansion of Saturday operations, will be an additional $50 million.

The timing of projects and go live open dates will create larger drags in the first and second quarters.

Turning to the International segment.

We are planning an outstanding year of industry-leading financial results, with revenue and operating profit at the high end of our targeted range.

Revenue growth should be between 7% and 9%.

Operating profit is projected to grow between 10% and 12%.

And in the Supply Chain & Freight segment, we anticipate the current momentum to continue, with top line improvements of 6% to 8% and operating profit growth of 10% to 12%.

With contributions from all the business units, we expect another year of outstanding results in this segment.

At the total company level, let me begin by talking about the recent tax change.

These changes have a material impact on UPS' net income and cash flow given our prior 35% tax rate.

A number of detailed regulations are still being finalized.

We'll continue to monitor and update our expected rate if needed.

Currently, we estimate our 2018 tax rate to be between 23% and 24% and the first quarter to be about 200 basis points lower due to the stock compensation accounting.

Further, we expect to use around 20% of the benefits from tax reform to fund strategic initiatives in the second half of the year to enhance the value of our business for our customers, employees and shareowners.

Ultimately, the net impact of the tax benefits to EPS is expected to be between $0.80 and $0.85.

Our capital priorities remain the same.

First, as a result of the new tax laws and our growth outlook, we are moving up our capital investment level.

In 2018, it will be between $6.5 billion and $7 billion.

These levels assure we have significant improvements in our global network over the next several years, all while maintaining our industry best return on invested capital of between 23% and 28%.

Second, we plan to reward shareowners with another year of growth in dividends, subject to board approval, and we're planning share buybacks of approximately $1 billion in 2018.

Overall, company performance will be strong.

As a result, we are forecasting adjusted earnings per share to be in the range of $7.03 to $7.37, which includes additional expense for pension, Saturday expansion and startup costs of new automated facilities as well as the strategic investments we'll make in the second half of 2018.

As we look at the quarters, we anticipate the first quarter EPS growth to be between 15% and 18%, as U.S. domestic expands Saturday operations and increases expense for other projects.

EPS growth rate will accelerate in the second and third quarters as project benefits increase.

This year, there are 2 new accounting changes that will be implemented.

Overall, these changes do not impact earnings per share growth.

However, they will affect the segment results.

We will provide you with additional details and recast prior periods to reflect the adoption of the new accounting standards throughout 2018.

Our current investment cycle is similar to other periods in our history, where we invested to build an airline, a global business model and our supply chain capabilities.

The initial short-term costs are soon replaced by long-term shareowner value.

The multiyear strategy we laid out is in motion.

UPS is in the right growth market.

Our solutions are resonating with our customers around the world, and the opportunities before us are vast.

Thank you.

And now I'll ask the operator to open the line.

Operator?

(Operator Instructions) Our first question...

I'm sorry, Steven.

We'll go online question for -- the first, we've got a question from Allison Landry from Crédit Suisse.

How confident are you in your ability to improve domestic margins in 2018?

Can you help us bridge the margin gap between that and your long-term targets?

Sure.

Allison, this is Richard, good morning.

Overall, when we look at 2018, the first thing we know is the growth in the U.S. remains strong.

And that's strength we saw not only in the fourth quarter, but really we sequentially have seen it in '16 and '17, and it's both on the volume side as well as the yield being at the higher end.

We also know that some of the efficiencies that we're getting in operations were [masked], both by our investment dollars and the penalties we've talked about, but also from the higher cyber-period volume levels.

In 2018, it's not just all the new buildings that we're opening, but it's really also the beginning of some of the technology that's going to power the global Smart Logistics Network going forward Myron talked about in his talk.

So we expect 2018 to have some challenges because of the investment dollars.

But probably the biggest challenge we'll have domestically is the unplanned discount rate change.

If you look over the last 2 weeks of December, we saw fluctuations in discount rates of between 20 and 40 basis points to where we ended up at the end of the year.

And that has a big impact on the net operating cost.

We also know that since the year started, the longer-term interest rate is starting to get a more normalized shape on the curve.

And that's going to help us as we remeasured pensions going forward in the future years.

But this year, we don't know if that drag of around $200 million is going to be something that we're going to have to deal with.

But at the same time, the underlying business remains strong, we're putting the initiatives in place and we're implementing the technology that's really going to drive the savings of the $800 million to $1 billion we laid out for the global Smart Logistics Network.

We're going to take another online question.

We've got a number of questions, 4 or 5, about the international business, Brian Ossenbeck of JPMorgan, Scott Schneeberger from Oppenheimer, Jack Atkins.

And really, it's about how large can the international segment become?

Are we positioned given the growth and the optimistic outlook that we're seeing?

And then can you tell us what the real potential there is?

Okay.

Brian, it's Jim, I guess -- and Jack and Scott.

Look, we talk about this quite often within the management committee.

With 95% of the consumers outside the United States, a good piece of that in emerging markets which aligns to one of our Tier 1 strategies, personally, I think that at some point in the future, as our business continues to diversify, international will probably become bigger and larger for our shareholders in domestic.

We can't say when.

We certainly want to continue to invest in and keep the U.S. domestic business growing because it's the foundation of UPS, and we don't want to lose that.

But the world continues to move, cross-border continues to grow 7x as fast as most the domestic economies.

The trick is to be there at the right time and at the right place.

When you get to competition, it gets a little more complex from my perspective.

In each of the countries you go into, you go heads up against a post usually, a national champion, another integrator and maybe some new entrants.

And so the trick for us is to get to the right place at the right time.

You've seen that over the last couple of years.

We'll continue that strategy, and we hope all of our businesses continue to grow with pace.

But hopefully, international continues to speed up and deliver for us.

So thanks for the questions.

A question from the line of Tom Wadewitz of UBS.

Richard, I wanted to see if you could add some more perspective on cash flow and how you're thinking about uses of cash, probably like 20 -- maybe both 2018 and if you want '19?

The CapEx number, obviously, is a bit higher.

What are your thoughts on is there another big contribution to pension?

Is there remaining room for share buyback?

Or do you kind of put share buyback on hold as you look at the higher CapEx spend and, however, pension we've been for that?

Sure.

So to step back for a moment, Tom, our priorities haven't changed.

The #1 priority is still to reinvest in the business.

We maintain and continue to perform a return on invested capital that is the best in the industry.

We also think the dividend is an important component of our capital structure.

And as I've mentioned in my talk, with board approval, we expect to keep growing the dividend.

And at the same time, flexibility is important in the balance sheet.

The way I look at it is, we made the $5 billion contribution at the end of the year really for 3 reasons, and one of them was it was tax-efficient.

That contribution was made at a time when you write it off at the higher tax rate of the legacy rate versus the new rate.

Second, it improves cash flow, not only this year, but likely for the next few years.

And then third, it lowers cost.

If you think about the rising PBGC premiums, which are going to be 380 basis points that you'll pay on unfunded pension, my borrowing cost is more than 150 basis points below that.

So we're going to continue to manage responsibly.

We continue to believe that the strong cash flow from operations allows us to do all of these and at the same time taking advantage of the new tax laws, with the CapEx that's really used to continue to grow our business, but also we get the 100% deduction for the next 5 years.

So when you put it all together, the pricings aren't any different.

We expect the same amount of return.

And I guess the last thing is, if these discount rates do start coming back up, it's a dramatically different view of both the liability side and the entire pension world.

It's just been like almost 9 or 10 years since we've been in a normalized discount rate environment.

No one expected them to be in what really are all-time lows to more than 20, 30 years.

Our next question will come from the line of David Vernon of Bernstein.

One of the core issue here seems to be being able to price and get the productivity that you need to get earnings leverage in the Domestic segment.

Are you guys going to be making any changes commercially to how you approach the market in terms of the aggressiveness on fee increases or surcharges based on what looks like another sort of tough year in terms of getting operating leverage to the Domestic segment?

David, this is Alan.

Thanks for the question.

First of all, as you know, our strategy has been, for quite some time, to target base price increases in the range of 2% to 3%.

And certainly, in the fourth quarter of '17, we did a phenomenal job with that.

We actually finished with our base pricing above the high end of the target.

And it's one of the strongest consolidated RPP growth quarters that we've had in the last decade.

And it has been aided by some of the revenue management initiatives that we've put in place.

We're certainly doing a lot more with surgically managing our contracts.

Dim weight has been a nice tailwind.

And this year, we've now expanded that to the under [1 cube].

And again, we've -- we're focused really on the management of accessorials, including the additional handling fees, large package surcharge and you may have noticed that we've more than doubled the price of overmax.

So yes, so we're really focused on managing the yield and keeping it between that 2% to 3%.

And I think what's really exciting is the fact that we were able to achieve those yield gains with some of the higher volume growths that we've seen.

And by the way, that's happening both domestically, internationally and in our supply chain segments as you can see with the fantastic revenue growth we had this past quarter.

Given that we are getting that accelerating volume into the accelerating pricing, do you feel like you have a better opportunity there to use price to get ahead of this?

Yes.

Certainly, we're going to continue to manage the enterprise customers and the middle market and with the goal of achieving those target-based price increases in the 2% to 3% range.

This is David.

And to summarize, Alan, no doubt about it.

We're always analyzing our pricing alternatives.

We want to make sure that we get compensated for the value that we provide.

We believe that this year was a good step on that journey.

We also believe there's more work to be done, and we're going to continue to focus in those areas.

We're going to take an online question.

This question comes from Jairam Nathan from Daiwa Bank.

How would Amazon's entry into pharmaceutical impact UPS' prescription delivery operation?

Okay, this is David Abney.

Thanks for the question.

First, I'd have to tell you that we don't know exactly what Amazon is going to do in this area.

There's been a lot of rumors and there's been some indications, but we'll have to wait and see.

What we can tell you is that a few years ago, we identified health care as a Tier 1 initiative.

We saw that there are capabilities lined up very well with the needs of the market.

And we have been customizing solutions, not only in the pharmaceutical side, but in the other aspects of health care.

And whether it's coming directly from manufacturers or if it's using distributors, it's just an area that we see our expertise, the complexity of the sub-supply chain, the fact that it's global and pharmaceutical is a good example of that, and it's been a good opportunity for us.

As new players may come into the market, we believe they will take advantage of our capabilities.

And we'll continue to improve our capabilities in that area.

Thank you.

We're going to take another online question.

This one is from Allison Landry of Crédit Suisse.

How much additional revenue did UPS generate from peak surcharges in the fourth quarter?

And how successful have your surcharges been in moving customer demand?

Great.

Good morning, Allison, this is Kate.

Thanks for the question.

So with our peak season surcharges for residential deliveries and large packages, we achieved our revenue targets, and we were able to better align price with our cost to serve.

We applied, as you may be aware, the residential during specific high-volume periods and large packages for the full peak period.

We've also announced in our 2018 peak surcharge plan for the -- in our GRI, and that's helping our customers to budget.

As David mentioned, we have further to go overmax, which is package characteristics outside of our weight and size limitation did enter the network.

We see that as an opportunity to go further.

As Alan indicated, we are in 2018, and we're working with our customers to address that specific area.

Thank you.

This is David.

Just to add to what Kate said.

I do believe also that these peak surcharges did help us to some extent, shape the volume around the period, especially peak week.

We were able to get packages moved into the week before and noncritical packages moved the week after.

We'll say that around Cyber Week, we didn't have quite the success that we thought we would in shaping, and we're going to look at that.

And that will be an area of focus for this year.

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

I wanted to talk about the CapEx for a moment and take a look back over the last many years we haven't seen anything sort of approaching this.

But I get your point about sort of building out the year of fleet in previous decades.

Maybe you can put into some context maybe the duration of the spend.

We've seen a really rapid ramp-up from a fairly stable level a couple of years ago.

How long would you anticipate sort of these elevated levels?

And if you can give us any sort of benchmarks to use as a percent of revenue or maybe absolute dollars for that period of time, that would be helpful.

Sure.

Again, Chris, this is Richard.

And I think the first thing you have to look at is there are -- and we talked about between 25% and 30% growth from 2013 until this year when we finally first took another plane.

If you think about the value creation of our air products and our international products, and it's apparent that that's an area where we want to invest as much as we can, as often as we can, because it does bring return very quickly to the bottom line.

And so now we're going to have a total of almost 28 747s as well as about 7 767s that we've announced.

At the end of the day, the next few years, we expect this kind of level of somewhere between 9% and 10%, 8.5% and 10% of revenue to stay.

In fact, our plans right now for the next 3 years are to stay pretty much at this kind of levels.

And it's accretive to the business.

And then, you get the 100% deductibility for your investments.

If you go back a few years, we kind of announced almost something similar in the international business.

We're about -- by the end of this year, we'll be about 75% of the way through the investments.

And we're all seeing the kind of results we're getting out of that.

So we see that as a good proof point.

And with that, the technology and what we're doing in the business, we believe that these are the right places to put the dollars, it's got the best return on invested capital and it's going to bring the return that we expect.

And just one small point to add is that if you've been following us for quite a while, then you do know that we've had this kind of elevated CapEx percent of revenue before.

It's just that over the recent 5 or 6 years, we've been at this lower level.

But if you looked at a longer timeframe, you're going to see that this is not really an exception.

This is -- it's maybe slightly higher but very close to what we have average.

So yes, for the next few years, we are really growing our international export business and our premium products.

We see that this is an opportunity to take advantage of that, and we are certainly going to do so.

We're going to take another online question, this one from Bascome Majors at Susquehanna.

Bascome has, what led to the external executive hire of Scott Price, Chief Transformation Officer?

What objectives has management set?

And is there any time horizons that you can give us?

Okay, this is David, I'll answer that.

And we are very happy to have Scott, with his experience, come and join us.

We have brought people in from the outside on many occasions from outside the company.

We never, at this level, but we believe with the pace of change and that is just good to maybe add to our expertise with a little bit of external perspective, although Scott has been in the industry for quite a while.

Our focus is going to be on growing the business, on finding efficiencies throughout the business and creating opportunities for our company and our employees.

And -- but we have to examine all parts of our business.

So if there's one thing that I made very clear to Scott is that there's an open canvas here, there's nothing protected and we examine all parts of our business.

We're rapidly moving through our evaluation stage now.

I focus on rapidly because Scott has been here 6 weeks or so, and he's really made a lot of gains and he's working quickly with our team.

We're identifying multiyear value-creation opportunities, and we will be sharing more later in the year, really excited about this opportunity.

And Scott has the full support of the entire management team.

Thank you.

Now we've got another online question here, this one from Scott Schneeberger of Oppenheimer.

Can you give us some more updates on the efficiencies generated with ORION and the other technologies that you're implementing?

Yes, so this is Myron.

And we're implementing key operations technologies that's a multiyear process.

We anticipate that when fully deployed, these technologies will result in $800 million to $1 billion annually at full implementation.

This includes ORION, NPT, EDGE as well as a facility automation.

As we continue to build out this network of the future, it'll certainly provide us with greater flexibility, greater connectivity to our customers and capacity and efficiency.

This year, we'll continue to rollout Phase 2 of ORION, which, obviously, is dynamic route optimization to over 130 centers and 1,400 drivers.

Phase 1 of ORION, we netted greater than our expected targeted savings of 6 to 8 miles per driver and over $410 million.

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

So just looking back the last few years, you talked a lot about that control tower through peak season to ensure you didn't get swamped again.

It sounded like there were some capacity issues in the beginning.

What -- in hindsight and then going forward, what needs to be changed or adjusted on that ability to control the volumes?

Or is it if volumes come, we just need to take it and scale the network as quick as possible?

Maybe you can talk a little bit about that, David?

Thank you, Ken, this is Kate, I'll take that.

You're correct.

The collaboration as well as the control tower and forecasting that we did with our customers this year actually increased in collaboration.

Also, we added location level planning to this.

And for the peak period, it actually worked very well.

The forecast were aligned.

And the control tower, which is the request for the large customers to go above their forecasts, worked well.

The example of that is.

Peak week, as David mentioned, worked especially well during those critical last few days to do the wrap-up and gave us a strong finish.

But Cyber Week and Weekend was the exception and definitely more demand in the market than planned.

You may have seen that the National Retail Federation noted that holiday retail sales came in 5.5% or almost 45% higher than their forecast.

And that marks the fastest pace of growth in the post-recession era.

So definitely more demand in the market, and as a result, more demand than we forecasted at UPS and then our customers forecasted.

We did have some customers that we're able to shift volume into the 2 weeks after Cyber Week through self-gifting promotions and even giving promotion dollars back to customers.

And we are going to emphasize that initiative with additional retailers to help move some of that demand into the latter weeks.

But as Myron noted earlier, we did deliver over 90% of the days.

We're over 30 million packages, so that increased demand.

And we'll take all these learnings for Cyber Week and apply them to 2018 and just as we've been able to really make some significant impact in the other weeks of the peak period.

Yes, just one last thing on Cyber Week.

There's an old saying that rising tides lift all boats.

That's the thing that we were facing.

If it was 2 or 3 large customers, the control tower -- if it's 20 large customers, the control tower can be very effective in those regards.

But this was not just the large customers, this was throughout the network.

And this is something that was in our network, but it was in the other networks throughout the country too.

So that's why we've got to really take a look at Cyber Week.

One of the things since we've added a lot of additional capacity this year that has been covered and much more than in 2017 and we've added more technology.

So I know that we're being in much better shape from that regard.

But we're going to take a good look at the control tower and what we need to do around Cyber Week, and we'll be talking about that further in the year.

We're going to take an online question.

This comes from Jack Atkins of Stephens.

Do the benefits of the Tax and Jobs Act to the economy, combined with improved trade, lead you to believe that you should be positioned to exceed your long-term earnings per share targets?

Okay, this is David.

I'll take the first part of that question, then I'll hand it over to Rich.

First, we want to applaud the President and Congress for passage of the Tax Cut and Jobs Act.

We really believe that it's going to stimulate the economy and create jobs.

And those jobs are going to create more shipments, which creates more jobs and more opportunities for UPS.

Certainly, it makes the American companies more competitive.

And we're also encourage about the trade.

Trade last year did exceed the percent growth of GDP.

And at the same time that we are encouraged, we're a little cautious too.

We have (inaudible) that is being negotiated now and we certainly hope and expect that it will be modernized, but it will stay in place.

And we hope that other trade agreements, Brexit and those things, that they have a pretty smooth conclusion so that they will continue to be a boost of trade and not the opposite.

So that being said, I'll turn it over to Richard, company-specific.

Sure.

So Jack, First, we've put our guidance.

It's somewhere around 20% EPS growth.

And we also told you that between $0.80 and $0.85 of that is for the net benefit of tax, which in essence tells you that somewhere around 1/3 of it is underlying business.

That's even with a hit for the discount rate that we had called out.

So if you think about it, we're already seeing that economic activity, our guidance on the revenue numbers in all the segments are at the higher end of our range that we laid out last year.

And so we do believe that the tax reform is creating economic growth.

We also believe that we're participating in that.

Unfortunately, some of that's mass because of both the discount rate and the investments we are making.

But at the end of the day, we're seeing a pretty good growth rate even taking the headwinds that we mentioned.

We're going to take another online question.

We've got a number of questions coming in about the competitive landscape in Europe and our ability to continue to win share in that market.

Okay, Scott.

This is Jim, by the way.

I think that -- and we get this question quite often.

Frankly, it's about the TNT situation and the cyber attack.

And again, I'll keep reiterating this as long as I'm around that I don't wish that on anyone, any competitor, any business in this world.

It did happen and it created opportunity for us.

If I look at the last couple of years, I just would also like, though, to reflect on the fact that we were building capabilities in Europe and European network since we announced the $2 billion acquisition.

Rich talked a minute ago about, at the end of this year, we'll be 75% of the way through.

That's a capacity play.

We also have launched international dangerous goods in the region to complement that.

And at the same time, we continue to expand in our Trans-Border network to basically have 80-plus percent of that network touch in 2 days every buyer and seller on the continent.

So we have invested, in my mind, nicely irrespective of the competitive landscape.

You have to pay attention to it.

Very specifically, when the cyber attack did hit, we saw more customers coming to us.

There's no question about that.

But I also would tell you that if I compare the fourth quarter of this year to the fourth quarter of last year, we continue to grow.

So there was a spike, but the -- and then the last thing I would tell you is it's our job to keep those customers.

And quite frankly, from what we see on our side, those -- the vast majority of those customers are staying with UPS because when they come in and start to feel the benefits of the network, they choose to stay with us.

So hopefully, we'll get into 2018 and beyond and prove that the cyber was a onetime deal for everyone quite frankly in the market, and we just go compete and take the UPS brand to market in Europe, so...

We have a question from the line of Scott Group, Wolfe Research.

So I want to try and marry some of the pricing comments and the CapEx comments.

So it sounds like we're still targeting 2% to 3% pricing.

I guess I would ask why not target 4%, 5% pricing just to pick a number, something significantly higher than what you're targeting, I think a little less volume growth.

And I think as we get less volume growth, you maybe need to spend less on CapEx.

So as you talked about like transformation initiatives, if something like that, a major change in strategy of more price, less volume, less Capex, is that something that is being talked about?

Is that on the table in any way?

Or is that just sort of not the plan right now?

First of all, there's a tremendous opportunity in the market right now, with the growth in the market and also the ability to grow with that market.

And we continuously monitor and analyze the supply and demand and work to price for the value of our network and the portfolio of services that we have.

And then we also surgically ensure that we're pricing to our cost to serve.

And I think some great examples of that is what we've done with dimensional weight last year and what we're doing with it this year, what we're doing with additional handling, with the peak surcharge, with our cell-by-cell GRI assessments.

They're all kind of great examples of that.

So yes, so we're continually to monitor the market and analyze that and make sure that we're pricing our services for the value that we're providing and certainly returning that back to the shareowners.

With that, I'll give it over to Richard.

Yes, Scott.

So in addition to what Alan said, we're -- if you go back a few years, our yield on a per package basis was 0.5%, 1%.

So we have taken a much more thorough look and continue to look at the yield side.

But if the other side of it is also the total profit growth and how we're creating value, because, in total, as we grow profits, if we're bringing back 20% to -- or 23% to 28% return on invested capital, we know we're creating more value for the shareholders.

So this tremendous amount of effort not on both the top line and the bottom line, we have a plan in each business unit that's very specific.

And a few years ago, this same question could have been asked by about the other 2 business units.

And now you're seeing the results of really the strategies we've put in place for each of those.

And so we have a delivered strategy.

In the U.S., we think at the end, the shareholders will be very happy with the return we're getting.

And it's really about putting all the pieces together just as we've done in the other segments.

And just to recap, and both have covered it very well.

Let's don't get confused about the target pricing with a cap on pricing.

Because as the opportunity creates itself, obviously, going to the top end of the target pricing or exceeding that as long as we're providing the value and the market will hold that, we certainly look to that area.

A lot about these CapEx increase that we are doing is also about bending the cost curve, reducing our cost, adjusting to this new e-commerce world that is rapidly migrating.

So it's a combination.

We're not looking at pricing on one side and then separate from that, we're looking at CapEx and how we can take cost out.

This is an integrated model that we're constantly looking at all aspects of.

Ladies and gentlemen, this does conclude our Q&A session for today.

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

Please go ahead, sir.

All right.

Yes, I would like to thank you.

And then I'll turn it over to David for his closing comments.

Okay.

Before I get into my closing comments, Richard is giving me hand signals.

So Richard's got something he'd like to cover and then I'll close.

I just want to real quickly mention that as we move into 2018, there are 2 accounting standards that will change segment reporting.

There's the revenue recognition and the pension accounting, I call it the geography of where pension accounting will break up the pieces of it and some of it will stay in operating margins and other pieces will move below the line.

So we'll have an impact on the margins going forward.

Before the next call, we'll probably put out some kind of schedule on the web page to give an understanding.

But, ultimately, all these changes do not impact EPS.

But they will impact operating margin by business unit, and some of those will become more volatile based on what's happening in discount rates.

So for example, you could see anywhere from 125 to 250 basis point change in domestic.

You can see anywhere around 40 to 70 in international, and in supply chain between 100 and 150.

A lot of it has to do with how you recognize revenue and then how the pieces of pension get moved around, but it's something in 2018 we will be adopting.

We will be recasting last year's numbers.

But it's something that, going forward, we'll need to talk about as we get to 2018 actuals.

And as Richard said, those puts and takes, they do not affect EPS.

It's just the way we look at the business units.

We are, as you've heard, transforming our network for growth.

And we're doing it now and we're basing it on providing both value now and long-term value to our shareholders.

2018 is a big year for our Smart Logistics Network.

We're adding significant capabilities, both in buildings and aircraft and technology.

We continue to see strong growth opportunities for UPS.

We're focusing on advancing our strategies, and we're doing it for our customers and for our investors.

So with all of that being said today, thank you for joining us on the call.

Ladies and gentlemen, that does conclude our call.

We'd like to thank you for your participation today.

Have a lovely day.

You may now disconnect.