聯合包裹運送服務公司 (UPS) 2018 Q2 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the UPS Investor Relations Second Quarter 2018 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 second quarter 2018 earnings call.

Joining me today are David Abney, our CEO; Richard Peretz, our CFO; along with Chief Operating Officer, Jim Barber; Kate Gutmann, our Chief Sales and Solutions Officer; our Chief Information and Engineering Officer, Juan Perez; and Scott Price, our Chief Strategy and Transformation 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 expectations 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 2017 Form 10-K.

This report is available on the UPS Investor Relations website and from the Securities and Exchange Commission.

During the quarter, UPS recorded a pretax charge of $263 million.

The charge resulted primarily from the successful and well-received Voluntary Retirement Plan offer that closed in June.

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.

Unless stated otherwise, financial results discussed today will refer to adjusted results.

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

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

(Operator Instructions)

Before I turn it over to David, please note that UPS will present details regarding the company's multiyear transformation plans at a conference on September 13 in New York.

A registration link can be found on the UPS Investor Relations website.

Thank you.

And now I'll turn the call over to David.

Thanks, Scott, and good morning, everyone.

We're pleased to announce another quarter of improved profitability and strong cash generation.

This quarter, earnings per share increased 23% to $1.94.

Throughout the enterprise, UPS is executing strategies for targeted global growth and improved operating efficiency that create value for shareholders.

Once again, this quarter, the International and Supply Chain & Freight segments reported exceptional performance, generating double-digit growth in revenue and operating profit.

The U.S. Domestic segment realized above 6% revenue growth, driven by yield improvement across all products.

While operating profit is not currently where we wanted to be, there are several initiatives underway to improve the bottom line results.

And clearly, the segment will also benefit as we advance our transformation strategies.

This quarter, we made further progress on our transformation initiatives, which touched all aspects of our business.

These initiatives will drive greater operating efficiency, improve returns and continued growth in key targeted segments.

As part of transformation, we launched a Voluntary Retirement Plan in April, and participation levels met our expectations.

This program is just one of a number of initiatives to be launched under our transformation strategies.

We look forward to sharing additional details about our plans in September.

We had several other significant accomplishments during the last few months.

Recently, UPS and Teamster leadership reached tentative master agreements covering employees in our U.S. small package and freight units.

In addition, we reached handshake agreements on local supplements, covering most U.S. employees.

The parties are working hard to finalize the remaining locals.

These contracts will reward UPSers for their contributions to our success.

They also enable the business to remain flexible to meet customer needs, increasing shareowner value.

We've recently added more efficient capacity in UPS' European network by opening 2 large automated facilities in London and Paris.

These key locations will support continued growth across Europe and provide UPS' highly efficient network with more than 70,000 packages per hour of sorting capacity.

And in the U.S., we'll soon open our second largest domestic ground hub in Atlanta.

At full capacity this year, it will sort over 100,000 pieces per hour, more than double the hub sorting capacity we added all of last year.

The new hub will begin operations over the next couple of weeks and incorporates the latest automated sortation and network control technologies.

It is a showplace of UPS' network capabilities being deployed in several new regional hubs.

Finally, we reached another milestone by surpassing 50 million UPS My Choice members, adding a staggering 12 million new subscribers over the past year.

UPS' customer-facing technologies provide consumers with more convenience and options, building stronger relationships with end users and enabling more efficient deliveries.

Our pipeline of innovation, built around My Choice and other customer-facing digital platforms, allows UPS to offer new services and create more value for our customers.

In addition, we continue to strengthen our leadership team, welcoming Kevin Warren to our company as the Chief Marketing Officer.

UPS will clearly benefit from Kevin's wealth of knowledge and broad business perspective.

Turning to the external environment.

The global economy remains healthy, despite some emerging discord around trade.

Current global and U.S. real GDP forecast call for annual growth to remain at or above 3%.

In the U.S., the economy is benefiting from tax reform and reduced regulations, helping to drive positive consumer confidence and higher retail sales.

The outlook for the industrial economy remains solid, despite recent volatility in the U.S. dollar.

Conditions are also favorable in other parts of the world.

In Europe, positive fundamentals in the Central Bank stimulus remain in place, helping to offset concerns about Brexit and other issues.

And in Asia, recent economic reports show growth continues to be strong, with China leading the way, despite rising trade-related concerns.

UPS has long supported the advancement of free trade principles.

We're advocating for future trade discussions to produce balanced and fair agreements for all parties, so that cross-border commerce is easier for businesses of all sizes.

While we expect continued growth in global trade, we're closely monitoring the changing trade landscape.

UPS customers can count on the flexibility of our network and scope of our business model to help them adapt to changing dynamics.

No matter the outcome, we are well prepared in the event rising tensions impact our cross-border business.

Before I turn it over to Richard, I want to recognize the efforts of the entire UPS team as we move through transformation.

The company has a long and effective history of transforming itself to capture new market opportunities.

I especially want to acknowledge those UPSers who have accepted the VRP.

We appreciate your contributions and wish you the very best in your retirement.

In summary, we are confident that our core business strategies will enhance growth and improve our efficiency.

UPS remains the industry's leader with the highest margins and return on invested capital as well as producing excellent free cash flow.

Thanks for the time today.

Now Richard will take you through the quarterly results.

Richard?

Thanks, David, and good morning.

UPS produced strong revenue, as pricing and targeted growth initiatives drove improvement and top line results across all 3 business segments.

The company's performance was in line with our expectation and positions us well to achieve our full year financial targets.

In the second quarter, earnings per share increased 23% to $1.94.

Total revenue was up nearly 10%, and we continue to see good balance growth across all segments.

One of the highlights of the quarter was the improvement in both the U.S. and international revenue per piece.

Simply put, we are taking pricing actions to better align our cost to serve with the value we create for our customers.

As a result, yields expanded in each of our major products.

International and Supply Chain & Freight segments both recorded strong performance with solid growth and expanded margins.

At the same time, U.S. Domestic segment advanced network projects that will improve efficiency and service.

Overall, we're making good progress on our initiatives, and we're energized about the opportunities that lie ahead.

Now for the segment detail.

In the U.S., revenue increased 6.3% to $10 billion.

The revenue gains were driven by higher yields and good growth.

Average daily shipments were up 2.6% led by Ground and Next Day Air.

Year-over-year comps for Deferred Air were tough this quarter.

However, over the last 2 years, we're up nearly 9%.

While B2C continues to outpace B2B, we're seeing positive trends from several industry verticals, including the manufacturing, technology and automotive sectors.

Average revenue per piece increased 3.6%, our best improvement in the last few years.

Pricing initiatives and higher fuel surcharges more than offset the headwinds in mix.

Base rates accelerated to 3.3%, reflective of the recent pricing actions we've taken.

U.S. Domestic operating profit totaled $1.1 billion, and operating margin was at 11%.

As expected, higher pension expense and project-related costs weighed on the segment's results this quarter.

As David mentioned, we're bringing on substantial capacity this year, which is driving additional expense.

Looking forward, the efficiency gains from these projects, as they come online, combined with the transformation initiative, will improve U.S. performance.

Now turning to the International segment, which continued to deliver outstanding financial results due to the broad UPS product portfolio and superior network.

Revenue was 14% higher.

And export shipments per day were up about 10%, with mid-teen gains in the U.S. to Europe trade lanes.

We're also experiencing robust interregional growth in both Asia and Europe.

Our network improvements across inter-Europe continued to deliver outstanding results.

Those investments in new capacity, automation and speed have allowed us to enhance transit times in thousands of lanes.

In fact, about 80% of our cross-border ground volume is delivered in 1 to 2 days.

As a result of favorable product mix and disciplined revenue management, international currency-neutral revenue per package increased 3.8%.

Operating profit jumped 15% to $654 million, resulting in this segment's highest second quarter profits ever.

On a currency-neutral basis, we produced 14 consecutive quarters of double-digit growth and operating profit.

Now let's look at the Supply Chain & Freight segment.

Total revenue was up 16% with solid growth across all business units.

Operating profit increased nearly 17% to $247 million, the highest profit for this segment ever reported.

Forwarding revenue jumped 23%, driven by higher tonnage and improved pricing.

International Air Freight and Coyote truckload brokerage led the business unit with high top line and bottom line growth.

The distribution and logistics unit drove revenue up more than 9% on higher demand for health care, retail and manufacturing sectors, all contributing to good profit gains.

The unit expanded warehouse capacity by more than 1 million square feet in the second quarter.

UPS Freight revenue climbed 13%, as LTL revenue per hundredweight elevated 7.4%, which includes about 280 basis points of increase from fuel.

The unit remains focused on serving middle-market customers and improving yields.

Overall, we are pleased with the Supply Chain & Freight segment's performance this year.

The team across all the major business units are executing on these strategies, and we're seeing great results.

In fact, operating profit has grown 43% in this segment over the last 2 years.

Now turning to the balance sheet, where UPS generated $4.4 billion in free cash flow in the first half of this year, despite CapEx of $2.8 billion.

This quarter, free cash flow gains were driven primarily by an improvement of about $900 million in net working capital.

We're adopting a more global approach to our working capital and accounts payable.

This represents one of the many procurement deliverables within UPS' transformation initiative.

We're improving the efficiency of our working capital that ultimately contributes to our industry-leading return on invested capital.

As a result, we are raising our free cash flow target to $5 billion, the top of our original range.

The company distributed $1.6 billion in dividends, which represents a nearly 10% increase per share.

And we repurchased 1.4 million shares for just over $500 million.

Our effective tax rate for the quarter came in about 23% due primarily to favorable state and local tax legislation enacted during the second quarter.

As a result of recent U.S. tax reform, both the U.S. Treasury Department and certain states are still defining their tax regulations.

And our rate is subject to change as these items become final.

Currently, we still expect our tax rate to be between 23% and 24% for the remainder of the year.

Now turning to guidance.

Looking across the remainder of the year, we're well on our way to achieving our financial targets, and we're reaffirming our 2018 adjusted earnings per share guidance of $7.03 to $7.37, an increase of 17% to 23% over 2017's results.

In the third quarter, we expect to produce EPS growth toward the top of our previous range of 22% to 26%.

For the fourth quarter, we expect to have a good peak season.

However, the calendar works against us with 2 less operating days in December.

At the same time, we're bringing on significant capacity, adding planned cost to the fourth quarter and opening several larger new facilities before peak that will provide benefits going into the future.

As a result, as previously guided, fourth quarter earnings per share growth is expected to be in the mid-teens.

As a reminder, the new transformation initiatives are not included in our guidance.

Looking forward, we remain confident in our ability to balance the transformation of the organization, increase yield and, ultimately, deliver improved financial return for our shareholders.

We look forward to meeting with you in September to discuss the transformation initiative that we've begun to lay out for you today.

Thank you.

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

Operator?

(Operator Instructions)

Our first question is an online question.

It comes from Chris Wetherbee of Citibank.

Can you give us a sense of scope of the transformation plans beyond the VRP?

Does it include operating methods approach to pricing and capacity?

Thanks, Chris, for the question.

This is Scott.

The VRP was the first step in our transformation process.

We think of transformation in 2 ways, both cost and growth.

It's a framework by which we are reexamining our way of operating.

And so of course, it would include operating methods, pricing and capacity.

In September, when we have our New York conference, we'll share a little bit more detail around how cost leverage, reducing our non- operating cost, procurement working capital and those growth initiatives all come together to a pretty substantial multiyear program.

Thank you.

This is David.

Just want to add a little bit to that.

And Scott Price was brought in to this company to really help us to transform.

And he also was coordinating our strategy, and we have made a lot of progress in this area.

You will certainly hear about it at a later meeting.

But what's equally impressive is the way that UPSers, in general our people, have really taken to the need to continue to transform our business.

And with Scott's leadership, very happy with what we've seen so far.

We have another online question.

This comes from some multiple analysts on The Street.

And let me just -- have you seen any impact for your International business related to the trade and the tariffs?

Okay.

This is David.

And yes, there is a lot of interest.

Based on the number of questions that we're submitted about this, I can tell you that we've seen no significant impact at this time.

Now are we closely monitoring the trade landscape?

We absolutely are.

Are we having more frequent discussions with our customers about, if this continues, what they may or may not need to do?

So if this trade work continued -- or these actions continued, there would always be some exposure or risk to our business, but then exposure is very much limited.

And the reason that it is, is because we really see it as our duty to utilize our flexible global network and our broad portfolio to help our customers adapt to any changing trade dynamics.

And I'm going to ask Jim if there's anything he wants to expand here.

But the -- but I think it's a key point that you need to remember when you think about these headlines.

This is Jim.

Let me add 2 points to that.

First of all, because there are some other online questions that get at growth in International and specific trade lanes and, obviously, you've got the U.S. to China discussions going on and many others, but the other obligation, as David talked about to growing this business, is to lean into other emerging markets that we haven't really gone deep into.

And quite frankly, if you look at our growth in the second quarter, Southeast Asia happens to be one of those markets where we're growing in a very different pattern right now.

So as trade pattern shift, yes, we have obligations to keep moving the network.

We do that, obviously, through the typical pattern of bid cycles.

We also have the advantage of the products, as David pointed out as well.

So we can balance our forwarding with our small package and the bid cycles to go forward and make sure that, that's just part and parcel of running a global express network.

So we'll -- as David said, we'll keep a closed eye on it and monitor it and keep the business growing no matter what happens to the trade patterns.

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

I wanted to ask you about price and volume in domestic package.

You saw some slowing in the pace of growth in domestic package volume in second quarter.

I -- my understanding is there may have been pricing actions that were taken.

So just wanted to see if you could help us to understand what pricing actions you took and how we might think about the kind of volume outlook relative to what you're doing on price and maybe kind of how far along you are on pricing.

Thanks, Tom.

This is Kate.

I'll take that question.

And I'll start with the volume side of it.

We continue to see solid volume growth.

If you look at the 2-year stack for both the first quarter and second quarter, it's over 7%.

Do note that Easter moved between the quarters, which I think is the impact you're referring to.

But we continue to see that solid volume growth and across all sectors, health care, industrial as well as consumer goods.

Tied to the pricing actions, we also saw strong pricing this quarter with U.S. base rates up 3.3% without fuel.

And in the quarter, to your point, we implemented more pricing actions, really focused on oversized and large residential packages, which drive higher cost to serve.

And just as an example, LPS's 2-year stack on pricing action has been 18.5% because of that cost to serve.

And we, in July, added a length dimension, So a length over 96 inches as well as residential delivery charge as well.

Just those 2 examples.

So we are seeing those as specific targeted rate actions.

We do not see an impact on volume.

And we continue to see solid results in both areas.

Thanks.

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

I know you guys are kind of in the process of finalizing the labor agreements.

And outside of kind of specific numbers, can you give us a sense for how the addition of some of the part-time driving roles is going to affect the business?

Like, what impact it could have on things like overtime rates, driver productivity and how this affects, so how we should expect cost to grow going forward ones -- assuming that the contract has been released out there is ratified?

David, I'll start anyway.

This is Jim.

I think -- look, I think this is really a forum to be doing forward forecasting given the things not -- contract is not ratified yet.

I think what I'd rather just update you on is where we are.

And when the time is right, we'll walk you through all that, obviously.

But we, absolutely, feel like we're in a pretty good place right now because at this point, really, we have tentative agreements on the National Masters in freight and package.

And we are just a handful away of the locals and the supplements.

And we really believe that kind of the time line, which, I think, we all do is important is in early August.

We believe that Teamsters will get to cook the communication and begin the process to -- of ratification and the voting process.

So after that concludes, I think would be the more representative time to talk about the final details of the contract and how that might play into any financials going forward.

Yes.

Until that point, just want to emphasize that we're fully aware there are people, and especially our drivers, since they're the ones that see our customers face-to-face.

They are our ambassadors to our customers.

And one of our goals in this contract will reward our people.

We absolutely feel that's important.

We also believe that we have to have the flexibility to respond to our customers' needs.

And that if we take care of that, that we cannot only ensure that our existing employees are enjoying those rewards.

But we can set the foundation for the future, so that generations of UPSers can continue to enjoy those benefits.

So we've got multiple goals that we wanted to get accomplished, and we are pleased with the progress.

But this contract has got to be ratified.

So let's get that ratified and then we will go from there.

But thank you for the question.

We have an online question from Ravi Shanker of Morgan Stanley.

The first half free cash flow of $4.4 billion implies a much lower second half.

Can you walk through the timing of the cash flow generation through the year?

And this is Richard.

Ravi, I think the important thing to remember is throughout time, UPS' free cash flow has seasonality to it.

And what I mean by that is, obviously, in peak season, we have more spending.

And then we collect those revenues in the first quarter of each year.

So we always nationally have a seasonality that doesn't allow for free cash flow to be as linear as our CapEx spending or the rest of our expense spending goes.

But that being said, when you look at the free cash flow and the improvement in working capital, it's really driven by specific activities around transformation and -- which have been in both procurement and payables.

And it's really goes to the strength of UPS in terms of generating a lot of free cash flow.

That all being said, we continue to work through these initiatives.

I think there's more to come.

And so we're real comfortable given all the facts that moving up from the $4.5 billion to $5 billion, all way to $5 billion is that the success of our working capital improvements are shown up on the bottom line.

Thank you.

We're going to take another online question.

This question comes from the line of Dave Ross.

Can you add more color on the International Package growth?

How did Asia do?

Why were the U.S. and Europe strongest for UPS in the sector?

Dave, it's Jim again.

Let me talk about it.

I started to touch on this a second ago, as well.

As -- if look at it, we did highlight, obviously, communication U.S. to Europe.

To get at that, it's obviously both ways.

We commented over a few calls over the last couple of years about our focus on the U.S. a few years ago and a relaunch of that trade lane because we didn't feel like we were performing outbound in the U.S. at our highest levels.

The team has been put together.

It's been in place 3 years.

And we are seeing our highest growth in the U.S. in many, many years.

And we know we're winning share in the U.S. That's driving the outbound leg coming back home, obviously.

Those investments we talked about in Europe, yes, they drive growth intra-Europe, but they're driving it right back to the U.S. as well.

So those 2 trade lanes, I think, are easily identifiable over the kind of years of investment.

But as I mentioned a second ago, Southeast Asia now, our emerging market strategy is kicking into play here.

We're having some new countries grow as well.

Eastern Europe and the Nordics is performing very nicely for us.

So it really is moving kind of across the world right now.

But that U.S. to Europe trade lane, I think, is powered by a number of investments in human capital and capabilities the last couple of years.

Ken Hoexter of Merrill Lynch.

Can you talk a little bit about on the domestic margin side, what's in there from the facilities cost given in your 200 basis point decline?

Just -- how do we start framing the opportunities you have to improve margins?

And within that discussion, I don't know if -- Kate, if you can return on the pricing, is that driven by the renewed peak season surcharges?

Or is that more, I don't know, Richard, on the facilities cost side?

Yes.

So I'll start and I think Kate will then pick up on the second part of the question.

But I think when you look at the U.S. margin and -- underlying margin is being muted by both the change in the pension and the discount rates.

And then the operating cost penalty, that's really about what's going to happen in the future.

When you think about new buildings and what we've been talking about, almost 400,000 pieces now, our expansion going into the second half of the year in our network, it's about a 15- to 20-week process to get a building all the way up to a full run rate.

And so you've got these startup cost.

You've got training.

You've got management cost.

And so that plays into the results.

We know going into next year that it really is about improving yield.

It's about these new buildings and running at full capacity once the initial startup period is over.

And it's also about layering some of the transformation initiatives.

They all will drive better margin improvement.

And with that, I'll turn it over to Kate to talk a little about the specific pricing.

Thanks.

And Ken, tied to the pricing, just to expound a bit on the mid-quarter changes that we did, those did kick in immediately.

And as for instance, overmax, which are the packages outside of our weight and size limits, we changed the published rates for each day throughout the year, so not just peak to $650 published.

And then on top of that, a peak season surcharge would kick in.

Again, these larger packages drive higher cost to serve.

And we need to ensure that the alignment with the value we have to our customers make sense.

But also, we had other actions, as I mentioned, on the large packages.

We did address corrections.

So all of those are the mid-quarter.

And then to your question about the peak season surcharge, as you know, UPS was the market leader in implementing that.

It is similar to last year, though with an increase that the residential products are the ones on certain days and weeks that will have the peak season surcharge, and then larger packages throughout the whole period.

And we did notify our customers of the peak surcharges in January, so that they could better prepare this year.

So we see a balanced approach, both throughout peak as well as nonpeak period.

Thanks much.

Our next online question, we've gotten a few questions around peak.

And so we know you've been planning for peak season all year.

Do you see anything different about this year versus last year and even in the prior years?

Yes.

Very good.

Thank you for the question.

And the statement around peak planning being an all-year round process is absolutely correct.

This starts right as we are working on the current peak.

Richard mentioned that we have 2 less operating days in December versus last year.

We are working through the plans to adjust for that particular change, so that's something that is different.

We are adding significant sorting capabilities online this coming peak.

We will have an excess of 350,000 of additional -- thousand packages per hour of additional sorting capabilities this coming peak season, and that will definitely help.

We're also planning to hire additional seasonal helpers.

We are planning on introducing better technology, again, to facilitate the movement of packages across the network.

Two applications that come to mind are the mobile delivery app that simplifies the onboarding and the delivery of packages for all the seasonal helpers we bring on and also the use of technology, such as dynamic sort instructions that, once again, make things easier for people to be able to sort packages across the network.

By this peak, our Saturday operations will be at full deployment, and that will further help us smooth out the volume throughout the peak period, creating additional capabilities.

So multiple enhancements and improvements this year.

Okay, Juan, That was Juan Perez.

He's our Chief Information and Engineering Officer.

And then there was another part of the question, Kate, you want to address.

Absolutely.

So with the collaboration with our customers continues and has been a key component, especially during peak season, which is a market constrained period on certain days, and we continue to work with our customers on joint strategies to smooth demands.

And when I say that, I mean moving volume into lower, lighter days.

And many of them are identifying self-gifting that goes on, that they're able to modify transit times with.

So benefits all leads to higher service and also less overtime for their DCs, so they can staff more consistently.

So these long-term relationships we have with our customers really lends to that collaboration.

Let me add one question to what Kate said, which is service is that what -- it's not lost on us at UPS that we're constructively dissatisfied with our service levels the last couple of peaks.

And so all the things that we're investing in also have to culminate in better service for our customers, and we plan to deliver that as well.

Our next online question comes from Brian Ossenbeck at JPMorgan.

What interaction have you had with the U.S. Postal Service Task Force in information that they're expected to release in the next month?

Okay.

This is David.

First, let me emphasize, we have a unique relationship with the Postal Service.

We're a customer.

They're a vendor.

We're competitors.

And we support a healthy and viable USPS.

We have -- we are concerned -- have been concerned about funding from monopoly products that are supporting competitive products.

And we believe that is one of the issues that the postal task force should be addressing.

They're going to be addressing multiple issues.

We have certainly been involved with them and -- just like we have with other entities about what we believe should happen here.

And we do feel like that they're actively addressing the issues.

We have no idea what their conclusions are going to be.

At the same time, there's a very important piece of legislation that's coming across, and this is the STOP Act.

And its original focus is about preventing opioids and other illegal substances from coming in to the U.S. The STOP Act would impose the same high import standards that the private -- that companies, integrators and other companies would be -- do impose and make sure that all foreign post follow those same guidelines as it comes into the U.S. It's been approved in the House.

The same bill of mirror image is being addressed.

And the Senate and Administration has indicated that they would support it if it goes through the Senate.

So a lot of things happening on postal reform, a lot of headlines.

Our focus has really been on the facts and making sure that we provide the information that we feel we need to do.

So thank you for the question.

Chris Wetherbee of Citi.

Wanted to come back to transformation again and sort of think about if you think there will be -- I guess, maybe a bigger picture about the timing of it, do you think there will be impact to 2019 beyond the VRP?

Or how should we think about sort of the time frame that you're targeting here?

Is it a multiyear effort, 1, 3, 5 years?

Could you -- any color would be helpful.

This is Richard.

And I think the first thing is everything you said is about right.

We're going to cover in the conference in September a little broader picture of what it is that we're going to accomplish, similar to what Scott had talked about in answering a previous question.

But also what that means over the multiple years kind of where we think this is headed financially as well and what it means to each of you and into our investors.

So I would say, stay tuned.

The September conference is really strictly about transformation and the journey we're on and what it's going to mean long term.

Our next question comes from Jack Atkins at Stephens.

Can you expand on the factors behind the strong top line growth within your Freight Forwarding operation?

And how much is market-driven versus individual company initiatives?

Jack, it's Jim.

And then Kate is going to add on with me here.

Obviously, you've kind of talked about top line and bottom line.

Rich mentioned in his opening the supply chain 2 years.

The bottom line has grown by 43%.

A couple of business units, I think, were kind of going through real quick.

Our forwarding business, quite frankly, last quarter, the revenue was up 23%.

That's 3 quarters in a row of double digit.

And really, it's about the dynamic changes we're making over the years, really focused on customer experience, winning in the middle market, Kate will talk about that as well, and continuing forward in revenue management initiatives.

We don't talk much about Coyote, the acquisitions we made about 3 years ago.

It's performing very nicely, quite frankly.

They continue to really lean into truckload brokerage with great service.

Last quarter, their revenue grew right at 40%, so that's a pretty impressive number, obviously, in a business like that.

And they continue to expand geographically.

Heading into the South boarder between the U.S. and Mexico, we had expanded the business into Europe.

And then finally, logistics, before I hand it over to Kate, really great quarter.

Almost 10% revenue growth.

Profit growing at 25%.

Many industries, health care, obviously, leading the way for us.

Post sales doing well.

And quite frankly, in that business, we have a pipeline in logistics now we haven't seen in many years to keep it going forward.

So that's kind of some dots on the map before I hand it to Kate.

Thanks.

And Jack, I'll just expound on the forwarding middle market reach that -- and success we've been having.

We, through our sales force and solutions group, have been able to really penetrate into the middle market supply chain, so not just their U.S. small package strictly, but also where they're sourcing their product and movement throughout the whole supply chain.

So I think as cross-border trade has developed as well as more offshoring for product sourcing, we're finding greater need in that small and medium-sized business, which, again, ties very well to the way we approach the market.

And then the revenue management, we've streamlined our processes, so it adapts to the market more quickly.

And we've seen a lift from that as well.

Thanks for the question.

Scott Schneeberger of Oppenheimer.

In international, could you please discuss customer demand for premium products and help us think about the export yield growth on a go-forward basis?

Well, I guess, maybe Kate and I will talk about it together again.

It's Jim.

Look, I think, the -- obviously, we've talked a lot over the years about Europe and the investment there.

And how you defined premium is interesting in a discussion like this.

We consider our Transborder Standard product in Europe a premium product because of some of the capabilities we've added.

But we're talking about double-digit export growth for many, many quarters in lots of segments and sectors and lots of geographies.

So the demand is there.

That 's, obviously, what tied us into the airplane acquisitions and those agreements.

We had -- we really hadn't any capacity since 2013.

And since that time, our volume has grown by 30%, if you call it, in the premium and export segment.

So the demand is there.

The world wants it.

Customers want it.

And we continue to support that with our infrastructure and service.

Kate, by the way, wants to add a few things as well.

Yes.

Just to add, we've nearly doubled the export average daily volume, rather, over the last 10 years.

And as Jim mentioned, we're seeing a correlation with the faster time in transit.

You have seen the impact of Europe now being UPS the fastest on the ground and in the air.

We're also the earliest to deliver throughout the world with our express products, and very much seeing lift with Dubai and our fastest time in transit there as well.

So going into more and more these emerging markets.

So that is absolutely a driver tied to that.

And then I'll reinforce, cross-border trade is expected to have 5x the GDP growth in the future.

And so the opportunity in front of us has -- is as exciting.

Thanks.

We've got an online question and it's really about the -- quite actually is transferable between the international and U.S. in terms of best practices and strategic planning.

So this is Jim again.

I'll start, and if David wants to, obviously, add or anybody else.

The answer to this question, quite frankly, comes from being back in the U.S. after 15 years of international in my career and having completed really the first quarter with the team.

So framing it within that perspective, I would say, there is a lot of similarities.

Now the business models, quite frankly, are different, but the timing of where we are and the way that, at least, I, certainly, and the team are looking at this is that we had similar issues in Europe in 2013 and '14 when we needed to add capacity and add capabilities in speed.

And we did that in Europe.

That's when we announced the $2 billion investment.

You've seen that play out.

We're 70% of the way through.

And you've seen what that has done in that piece of the business.

So here, in the U.S., obviously, it's just bigger.

I just want to make sure Juan has given a few comments.

I want to size one of them specifically and that is if you look at 2017 for us and what we added with the CapEx, we added about 53,000 pieces of hour -- pieces an hour sort capacity and about 700 car positions, and I'll stay out of the automated small sorts.

This year, we're adding 7x that capacity this year.

So 350,000, that's what's in Richard's guidance numbers going forward, the continued investment.

Takes a little bit of time to catch that going forward, but the efficiency is there, 30% to 40% more efficient in these building.

So going forward, that's kind of the way we look at this.

And a lot of what we learned in international, the things that we are able to bring back, and it's both operational and Kate talks about revenue management and pricing and all of that, is matching all that together to really drive the margins.

And my first quarter coming back, I can quite frankly tell you, I'm very confident we can do that.

We know where we are on the journey.

We know where this quarter is and where it's going to come.

And we're pretty confident you'll be able to see this all come together in the near term.

So...

Matt Reustle of Goldman Sachs.

Just a follow-up on free cash flow a bit.

It sounds like the working capital improvements are driven primarily by improved payable terms.

I mean, should we think about that as a structural improvement for your cash conversion?

And I know you haven't given the formal 2019 guide, but would it improve that 2019 guide with the changes?

Yes.

Matt, this is Richard.

And absolutely, we're looking at this working capital improvement as -- we're on a journey.

There are certain commodities and contracts that you can do in a very efficient, very fast pace.

There are other geographies and other contracts that's part of the negotiation process.

So we see this as something that really is going to be the foundation of improvements for net working capital in the company.

Just as we've always managed our DSO on the receivable side, it's really putting a lot of discipline and a lot of consistency around the world, using the same methodology.

And it all started when we -- with this transformation initiative.

And I think it's something that will pay dividends not only this year, but going forward as well.

We're going to take an online question here.

This comes from Scott Schneeberger of Oppenheimer Research and it's a clarification.

When do you anticipate achieving the full run rate savings from the VRP initiatives?

And I'll take that call -- sorry, that question as well.

And I think the thing that you have to remember here is that what's going to happen with the transformation on the voluntary retirement is it's a staggered departure.

And it's really about business continuity as well as the planning that we had started for peak season as we were developing this.

So it's really over the next 10, 11 months that we'll see the future retirees leave UPS.

So what happens is the full run rate really occurs, call it, post June of 2019.

But we'll start seeing more people leave as we get further into the calendar.

And as a result, of course, the savings will start building up.

When we get to 2019 guidance, we'll give you a little bit better picture.

But suffice it to say that when we look at the NPV of a project like this, we did have a $263 million charge, but the annual run rate savings is $200 million, which is very positive.

And when we come together in September, we'll talk about these kinds of things in a little bit more detail.

Our next online question comes from Brian Ossenbeck from JPMorgan.

What functionally do the new hubs have aside from increasing automation?

And are you able to build out to handle more oversized or heavy goods throughout your hub networks?

Yes.

This is Juan, again.

Thanks for the question, Brian.

In any new facility, we could be implementing new technology.

And we continue to take advantage of any new data, any new capabilities that we can use in those facilities.

Just to give an example, we keep implementing state-of-the-art automated small sorts to process our small more effectively.

We keep implementing advanced irregular package systems in our facilities.

And something that is different from what we used to do in the past is we're leaving room in these new facilities to be able to implement future innovations in automation, things such as robotics and, of course, additional advanced irreg processing systems that can be ready for UPS at different points in time.

And of course, Richard, you have a couple of other points to make.

Yes.

And I think the other important point is that when we look at the investments we're making against the return on invested capital, we're maintaining the industry-leading invested capital returns at between 23% and 28%.

And that's all layered in with the capital guide that we've given here really for the next few years.

And it's about what technology is doing to the operations and how that helps to improve the operating margin that we see going long term.

Let me add one thing.

This is Jim.

I think that another way to think about it, obviously, within an integrated network like UPS is it's not one unique discrete piece of technology.

It's the connection of all of them together.

And when Juan talks about it, we'll talk next year as we get together and go forward to the next guidance.

So projects like in EDGE and NPT and the next phase of ORION and how that connects to all of the pieces of technology, I think that's where the synergies come together in our network that might be different than someone else's network with similar technology.

Our next online question comes from the line of Ben Hartford, R.W. Baird.

Please provide perspective on likely outcomes from the E.U. court citing with UPS that challenged the attempted acquisition of TNT.

Does the decision change UPS' acquisition or operating strategy?

Okay.

This is David.

We are pleased that the advocate general's opinion that was released this morning supports our position, which, of course, has been that we do not believe that the UPS-TNT merger should have been bought in the first place.

Now we understand, this is a nonbinding opinion by the advocate general.

And we'll await the final decision of the European Court of Justice, we believe, later this year.

What's really important, though, is from the point of that decision, we made a commitment that we were going to continue to invest in Europe.

We said we were going to invest $2 billion, and we are 70% or so of the way through that investment.

It has paid off.

Jim just spoke earlier about the success that we're having in Europe.

And we are very dedicated to growing our business in Europe.

We think it is a real strength of our network and the -- and that part will not change based on any decision.

So thank you for the question.

Our next online question comes from Kevin Sterling of Seaport Global.

As you take additional aircraft, do you think you will have enough capacity of what appears to be a robust peak season and we have to charter aircraft and the timing of the delivery matching the demand in the marketplace?

It's all started.

And then, obviously, some others may chime in.

The aircraft and how we run peak season is just a normal part of peak season planning.

I do want to go back to -- and we should have the capacity, obviously, to meet the demand.

Kate and her team do a great job of connecting with the customers, so that we can really forecast that, which is becoming, in this world today, it's a very different world than we grew up.

So forecasting the demand, getting it right, where it's going to come from is a very important part of the process.

I mentioned a little while ago that we hadn't added aircraft in some time, even though our express and International businesses have grown.

The nice part of where we are right now is we've got 6 747-8 in the network now.

And remember that a part of the plan, all along, has been the cascading of aircraft back into the U.S. Typically, that tends to be MD-11s at times.

It can be 767s.

By the end of this year, we'll have 9 of the -8s in play.

And we're going to have 3 new 767s in play as well.

So the timing of that with the leased aircraft at peak and the cascading, we feel like supports, obviously, this peak season.

But remember, this is a multiyear.

We're going to do this for the next years to continue, continuing to take 6 -8 every year and the number of the 767s to keep the capacity aligned with the demand.

Our next online question comes from Ravi Shanker of Morgan Stanley.

It looks like Amazon is taking further steps to expand this in-house logistics.

Have you seen -- or do you expect to see any impact?

This is David.

First, it's not uncommon for large companies to make decisions to in-source, outsource portions of their transportation network, so this certainly did not surprise us.

It absolutely increases their supplemental growth capacity.

We also believe that -- and they will have to speak for themselves, but that existing partners remain a very important part of their business model.

So we closely monitor all of our customers, especially our larger customers, and any competitor announcements.

We're not going to be naïve and not -- or ignore things that people or entities are doing.

We really evaluate all market moves and the impact that it will have on our core business.

And we feel very comfortable in our ability to compete in our core businesses.

And we just think the UPS value proposition is very difficult to match.

And we will continue to be the best-in-class e-commerce vendor of choice.

And so that's really our view here.

And thank you for the question.

We're going to take an online question.

This question comes from us from Brian Ossenbeck with JPMorgan.

Do you project the recent rally in oil prices could push some customers to trade down their volume services in the future?

So Brian, this is Kate.

I'll take that question.

Actually, we see more of a tie to business models with our customers and inventory placement, and that typically drives their selection of service.

Oftentimes, even within their inventory, they'll have different valued items and some of those are marked for higher premium services than ground.

So no, we don't believe this will cause a shift and do know that there is fuel surcharge on both the air and the ground products.

Richard?

Yes.

And I think it's important to remember that earlier this year, we did make some -- I'm sorry, earlier last year, we made some changes to take into account the volatility of fuel in the pricing.

And actually, what you've seen in the last 2 or 3 weeks is fuel prices actually come down again.

And you see it in almost -- right away in our pricing with our customers.

But the fuel surcharge is designed to protect against price changes.

It impacts our LTL business.

It impacts our small package, both ground and air.

And there has been volatility in price.

And really, we're making those adjustments in real time.

And so it helps both our customers and it helps UPS to make sure that our actions are aligned.

And we're changing the -- as we're purchasing in real time, the effect that it has on both the cost side and the revenue side.

That concludes our Q&A for today.

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

Please go ahead, sir.

We appreciate your time today.

And David, your closing comments.

As you could tell on this call and, I think, on other interactions with UPS that we are in a new phase in our investment cycle.

The Atlanta hub and other projects have begun opening, adding new capacity and capabilities.

And you're also starting to see some early transformation initiatives, VRP and the way that we've affected the cash flow.

We look forward to sharing more details on our multiyear transformation plans on September 13.

We think that will be a session.

UPS continues to see strong growth opportunities as we help our customers with value-added supply chain solutions that cover the strategy.

We are successfully executing our strategies that benefit our customers and our shareowners.

So thank you for joining us today.

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

We'd like to thank you for your participation, and have a wonderful day.

You may now disconnect.