聯合包裹運送服務公司 (UPS) 2019 Q1 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 First Quarter 2019 Earnings Conference Call.

(Operator Instructions)

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

Sir, the floor is yours.

Good morning, and welcome to the UPS First Quarter 2019 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 2018 Form 10-K and other reports filed with the Securities and Exchange Commission.

These reports are available on the UPS Investor Relations website and from the SEC.

During the quarter, UPS recorded a pretax charge of $123 million or $0.11 per share on an after-tax basis.

The charges resulted primarily from transformation-related activities.

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

Unless stated otherwise, financial performance 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) Thank you.

And now I will turn the call over to David.

Thanks, Scott, and good morning, everyone.

Today, I will share results from the first quarter and update you on our transformation progress.

I will also discuss the strength that's building in our strategic growth imperatives and share our views on the external business environment.

During the first quarter, we executed well on our strategies and are bending the cost curve, creating momentum for future quarters.

All business units generated an improved revenue quality and successfully executed cost management strategies while building on high levels of service.

As our smart global logistics network becomes even more flexible, I'm pleased to say that we are achieving the efficiency goals we expected by automating more of our network.

As we open new highly automated facilities, we remain confident that we will achieve our goal of 30% to 35% efficiency improvement when compared to more traditional buildings.

With the progress we've made, we are reaffirming adjusted diluted EPS guidance in the range of $7.45 to $7.75 for 2019.

Turning back to our results.

We achieved another quarter of consolidated volume growth, generated high-quality revenue and expanded network efficiencies for improved financial performance.

Supply Chain & Freight delivered outstanding operating profit, highlighting the agility and power of our asset-light business models.

International achieved record first quarter profit and increased volume, currency-neutral revenue per piece and operating margins.

And the U.S. Domestic segment generated improved revenue quality and grew average daily volume across all products, led by our Air services.

More customers in retail and manufacturing are demanding faster delivery times.

Building quality growth from SMB customers is one of our strategic growth imperatives.

We continue to see solid yields led by customers in health care and those engaged through our digital marketing programs.

In addition, returns with SMB grew by double digits driven by strong holiday e-commerce returns that lasted into February and March.

UPS is the industry leader with innovative returns solutions that enable our customers to reduce complexity and deliver a positive customer experience.

Looking forward, our aim with SMB is to anticipate and quickly respond to the changing needs of our customers, creating solutions that are easier to use, easier to understand and quicker to implement that will increase our share of high-quality volume and revenue from this key market.

To that end, we have recently introduced UPS eFulfillment.

Our new platform gives more insight and control to SMB shippers selling across multiple marketplaces and web stores.

Our solution allows them to streamline order fulfillment, inventory management and UPS shipping.

In the coming months, we plan to launch other new platforms and innovative solutions along the value chain to further grow SMB revenue.

We continue to recalibrate our network to strengthen our market position in the fastest-growing economies around the world, which is another of our strategic growth imperatives.

We see ongoing growth potential internationally, with the middle market outpacing the enterprise segment, especially in B2B.

As trade environment changes, we regularly identify opportunities to adjust our network for increased efficiency and flexibility.

For example, we recently announced the deployment of new aircraft to service major trade routes between Hong Kong and Europe.

These larger aircraft enable growth on this important trade lane and unlock greater efficiencies and capacity within our global network.

Serving the needs of the health care industry is another important growth strategy for UPS.

We are accelerating the launch of the innovative solutions for the most complex and most urgent health care needs.

We're particularly excited about our latest announcement.

A few weeks ago, we made history with the first FAA sanctioned use of a drone for revenue flights when UPS and our partner, Matternet, successfully delivered medical samples across the WakeMed Hospital campus in Raleigh, North Carolina.

UPS continues to operate multiple daily drone deliveries at WakeMed, eliminating transit delays for time-sensitive medical samples.

This solution opens the door for how drones can be used to improve transport services in hospitals and other large campuses around the world.

Turning to the external business environment.

Forecast for global growth are not expected to be as strong as 2018.

However, the company is still growing and creating opportunities.

We're seeing continued growth in areas of the world less affected by the trade relationship between the U.S. and China or by the uncertainty surrounding Brexit.

The flexibility of our smart global logistics network is uniquely tailored to help customers adapt to changing trade dynamics, minimize supply chain disruptions and deliver high-quality growth for UPS.

Forecast for the U.S. economy in 2019 remain in a growth mode but at a slower pace.

Importantly, consumer confidence continues to be strong, bolstered by a healthy job market and lower inflation.

But signs are mixed with industrial production forecast to soften in the back half of the year.

UPS is well positioned to benefit from consumer and macroeconomic trends as we are focused on attracting higher-quality revenue and share growth.

Our unmatched and diverse portfolio of services and increasingly agile network help our customers counterbalance the effects of macro trends.

Before I close, I want to congratulate the 1,436 UPS drivers recently inducted into the UPS Circle of Honor.

We now have more than 10,000 drivers that are accident-free for 25 years or more.

Congratulations to each of you for your achievement, and thank you for your commitment to safe driving.

UPS is on a structured path to enhance performance, create the future of the company and take advantage of growth opportunities.

We remain steadfast in successfully executing our transformation initiatives.

We made great progress in 2018.

2019 is a year of continued transformative investment in facilities and technology in our smart global logistics network, which enable even greater efficiency.

2019 will also be a year of high-quality revenue growth as our transformation efforts will free up resources to gain share in the most attractive markets.

Now Richard will take you through our financial performance for the quarter.

Richard?

Thanks, David, and good morning.

Let's begin the first quarter call by talking about our strategies and initiatives that are driving additional network efficiency and flexibility and are having a positive impact on our revenue quality.

We see additional opportunities for growth across the segments in all of our businesses, combining our expanded portfolio of services and flexible integrated network to continue to deliver unmatched value to our customers.

I'll begin with a summary of our consolidated performance and highlights from each of the segments.

In the first quarter, earnings per share was $1.39.

This includes $0.23 of expected year-over-year headwinds we had previously guided.

Additionally, we experienced an unexpected impact from severe weather of about $0.07 earnings per share.

Considering this, performance of the U.S. Domestic segment was just above our plans.

We had good cost control in the quarter and limited the increase in cost per piece growth to about 2.7%, including an impact of fuel of about 30 basis points.

In addition, we made positive gains in revenue quality.

International performance in this dynamic environment was strong.

In fact, we expanded operating margins by improving currency-neutral revenue yields and leveraging the flexibility of the network.

Supply Chain & Freight outperformed our expectations with great execution to generate outstanding gains and operating profit.

We achieved the highest first quarter profit in the segment's history.

Now I'll turn to the segments and give you greater detail.

In the U.S., weather impacted all 3 months of the quarter and with a drag on both the top line and the bottom line results.

Nonetheless, volume and revenue for all products grew in the quarter.

Average daily volume growth was led by the Air services at nearly 8%.

Total revenue quality improved on a year-over-year basis driven by continued growth in B2B volume and gains from smaller customers that we targeted with digital engagement strategies.

UPS Ground revenue per piece increased almost 3% driven by the balance of growth in B2B and B2C deliveries that we saw this quarter.

While Air volume was up, package characteristic, customer mix and weather lowered revenue per piece yields.

Overall, we continued to make progress in transitioning to a higher-quality revenue mix from target growth industries, like health care, manufacturing and e-commerce.

On the expense side, investments in our network are starting to pay off, reducing growth and expense compared to recent periods.

As a result, the U.S. Domestic segment achieved its lowest unit cost growth in many quarters.

U.S. Domestic operating profit was $694 million.

We estimate that weather diminished this quarter's operating profit by about $80 million, impacting operating margin by about 70 basis points.

We are making progress with our investments in the U.S. as the new automated facilities brought online in late 2018 delivered increased efficiency to the network.

Now let's take a look at the International segment.

We delivered strong profit results while facing headwinds from the changes in global trade and significant prior year growth.

International delivered its best first quarter operating profit of $612 million in part due to the efforts of managing cost tightly.

High growth in export daily volume in the first quarter of last year created tough comparisons.

On a 2-year stack basis, International exports achieved volume growth of nearly 12% led by Europe and the Americas.

Europe's growth was primarily driven by inter-region volume although results were impacted by the uncertainties around Brexit as well as revenue management initiatives we implemented on low-yielding volume.

Asia also delivered positive volume growth driven by gains on virtually all lanes except the Asian and U.S. trade lane.

On a currency-neutral basis, revenue per piece improved by 2.2% for export packages and 3.9% for international domestic.

These improvements were driven by Asia and the Americas, the disciplined yield management and specific actions we took to shift customer mix.

Most importantly, operating margins expanded to 17.7% when compared to last year, and on a currency-neutral basis, margins expanded to 17%.

Our results were a great balance of 3 things.

First, our ability to help customers adapt to the changing conditions; second, our efforts at flexing our global network; and finally, our success in controlling costs.

Together, enabling great improvements in our bottom line results.

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

The strong execution of our strategy, which includes many asset-light services, enabled Supply Chain & Freight to expand its margin by 150 basis points on lower year-over-year revenue.

This segment delivered excellent financial performance.

Operating profit jumped more than 24% to $211 million.

Profit contributions were broad among the units with particular good results from Forwarding.

Looking at the individual business units.

The Forwarding unit, as a whole, exhibited terrific execution of cost management strategy.

International Air Freight revenue was down in the quarter primarily on outbound lanes from Asia through the slow recovery from the Lunar New Year.

However, the team successfully expanded the buy/sell spread, both sequentially and year-over-year, resulting in stronger profits.

Additionally, Coyote truckload brokerage proactively adjusted their strategy due to the current capacity in the market while continuing to deliver high-quality service to our customers.

Market rates on purchase transportation expense were down for the quarter.

In response to the changes in the market condition, Coyote implemented a disciplined approach cost management, leveraged the use of technology and continuing to focus on high-quality loads to produce outstanding profit growth.

For UPS Freight, improved revenue quality and growth in middle-market segments drove unit increase in revenue per hundredweight, up by 5.4%.

Overall, the Supply Chain & Freight team delivered robust profit to the company by leaning in on our asset-light model to tightly control costs, which help offset volume and revenue softness.

Now let's turn to the balance sheet.

UPS generated $2.3 billion in cash from operations and about $760 million in free cash flow during the quarter.

And that is with capital investments of about $1.5 billion, which mainly support network enhancements.

We are on track to meet our free cash flow target of $3.5 billion to $4 billion in 2019 with potential for additional upside produced from our working capital initiatives.

It should be noted, as part of transformation, we have adjusted the seasonality of free cash flow based on our working capital initiatives that we implemented throughout the last year.

In fact, payments from the fourth quarter of 2018 have shifted somewhat into the first quarter of 2019.

We saw the benefits in the fourth quarter of 2018, and we expect this pattern to continue moving forward.

UPS distributed $867 million in dividends, which represent about 5.5% increase on a per share basis.

Over the same period last year, we repurchased 2.4 million shares or about $250 million.

Our effective tax rate for the quarter came in at 23%.

We expect our tax rate will be between 23% and 24% for the rest of 2019.

Now moving on to guidance.

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

2019 is a year of investments in our network and executing our strategies to improve operating cost and deliver higher-quality revenue growth despite uncertain conditions.

Full year EPS is expected to be in the range of $7.45 to $7.75 as we have previously announced.

We view 2019 as a year of real progress with operating profit growth in all 3 segments up by low double digits.

Turning to quarterly guidance.

We want to help you better understand our plan and how they unfold across the year.

For example, last year, we brought over 90% of our new U.S. capacity online during the fourth quarter.

But this year, we expect to bring nearly half of our new sort capacity online by the end of the third quarter, giving us the ability to deliver more benefits in the second half of the year.

We optimized our plans to enable us to open about 30% of our new capacity for 2019 within the second quarter.

In comparison, during the same period last year, no new facilities were opened.

The year-over-year expense related to the opening of these new facilities will affect second quarter results and will provide benefits throughout the remainder of the year.

Total operating profits should grow in the mid-single digits, and adjusted EPS is expected to be relatively flat to last year, largely due to the planned pension financing cost, which sit below the line.

Third quarter EPS is expected to be elevated due to a variety of material tailwinds, including 1 additional operating day worth approximately $60 million to $70 million of profit.

Additionally, we expect benefits from: first, the automated facilities that come online this year along with the escalating efficiencies from the 2018 investments and facilities; second, the year-over-year International benefits from 2018 commodity headwinds that should not repeat; and finally, transformation gains from programs like the Voluntary Retirement Plan that hits its full run rate in July.

The combination of these positive items will lift EPS to around 28% of the full year guidance midpoint.

In summary, during the first quarter, we made progress on our plans, and each business unit demonstrated gain in our strategies, which improved efficiency and revenue quality.

And our investments in our smart global logistics network are starting to pay off, providing enhanced productivity and more real-time flexibility.

As the year unfolds, we expect to expand margins and improve profits as we build on our momentum.

Thank you.

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

Operator?

(Operator Instructions) I will now turn the program over to our IRO, Mr. Childress.

Please begin.

We're going to take an online question, starting off here.

This question comes from Scott Schneeberger of Oppenheimer.

Please share your view of the U.S.-China trade dynamics and its influence on global trade in your business.

All right.

Scott, this is David, and then I'm going to hand it over to Jim to talk about some specifics.

UPS, like most of the U.S. multinationals, we certainly advocate for fair and balanced trade.

And the China-U.

S. trade uncertainty is prompting softer industry forecast in the region.

We certainly encourage leaders of the 2 countries to find solutions that support increased two-way trade but also by ensuring many U.S. companies have access to export to China.

Our customers have -- some of our customers have adjusted their supply chains, using the flexibility of the UPS global network to adapt to changing trade dynamics.

And Jim, I'm going to ask you to talk about a couple of specific instances.

Okay, David.

Thanks.

So I think David hit on it a couple times on this uncertainty word.

And I think that's an issue when you run a global network that you've got to balance and deal with.

With regard to China specifically, David also talked about in his opening remarks our addition of one of the 747-8s from Hong Kong into Europe.

We still believe in China.

We're going to trade in and around China.

And how China evolves in the world, we'll move our network to support it.

Keep in mind, we're still bringing the 747-8s.

And very specifically as well, I'd like to add that position of our South China hub in the Guangdong province connecting to Hong Kong, connecting to the other growth markets really continue to power our APAC network across the globe.

In fact, this quarter that we just finished, we actually had 3% more express on our airplanes out of APAC than we did last from the same quarter to the U.S. and 2% more to Europe.

So we adjust the network.

We get the utilization rates right.

We're putting the right volume and the right network, and we'll continue to adjust as trade develops in the world in front of us.

So I appreciate the question.

We're going to take another online question.

This question comes from multiple people, including Ben Hartford at R.W. Baird.

Given UPS' recent introduction of marketplace shipping systems, can you give us an update on where to go in the other initiatives?

Yes.

Thanks for the question.

Scott here.

So as we announced last year, e-commerce is one of our 4 strategic imperatives for growth.

It's focused upon supporting B2B growth as well improving our profitability of B2C e-commerce, focused on the SMB segment and supporting marketplace growth.

We've announced a number of important initiatives.

I'll quickly cover 2 on the B2B and then pass to Kate for 1 recent announcement on B2C.

So Shopify and Ware2Go are both in early stages of their rollouts but progressing well, in line with our expectations.

They both provide unmatched experience for our customers in the B2B and segment SMB.

Shopify is one of the new shipping integration solutions that covers 1 million SMB companies so with its web shop tech solution serving mainly B2B- and B2C-type merchants.

And overall, we have added over 100,000 new customers to UPS with this tool.

Ware2Go, which we announced, I guess, last year, is progressing very well.

We call it the Airbnb of warehouse and fulfillment.

So it's progressed now.

The platform allows online technology that matches excess capacity of warehouse to merchants who are looking for transparent inventory and fulfillment in final mile through UPS.

Initially, this is focused on serving B2B customers.

We have a lot of interest from warehouses around the United States and are quickly building a national 2-day fulfillment network.

I'll now pass it to Kate to talk about a B2C initiative.

Thanks.

Yes.

I'll start with the customer.

Our small- to medium-sized customers really needed help with managing the complexities of bringing their product to market as they brought it through different channels and marketplaces.

So UPS eFulfillment, which we announced recently, actually connects them to 21 marketplaces through just 1 easy UPS login.

We bundled the fulfillment and transportation services and give them 2-day time in transit, which helps them better compete in the market.

It also opens up opportunities for us as a company in different revenue streams.

So this, along with what Scott covered, has given us a wide array of offerings for the customers.

And we have additional exciting new products coming soon.

Yes.

So all of these products that Scott and Kate talked about and then the ones in the future that Kate kind of inferred, all of these are about giving our small and midsized customers a platform to really punch above their weight.

So a lot of these smaller businesses to actually compete with larger retailers but without having all the infrastructure and the costs that would burden them.

So this is really where we can give them an alternative solution.

It is a big focus of our SMB imperative, and we're really excited about it and have gotten excellent participation feedback so far.

So thank you for the question.

We have a question from the line of Tom Wadewitz.

Yes.

I wanted to ask you about your view on domestic package and kind of how you think things will play out this year.

Your second quarter guidance is flat earnings.

It's different from what TheStreet has been looking for.

But I don't know if that reflects any change in your view of how domestic package is going to perform during the year.

Or is that just kind of a timing difference The Street didn't recognize?

So I just wondered if you could talk about that and also about visibility to improve within domestic package margin if you look at second half.

Sure.

Sure, Tom.

This is Richard.

I'll start the question, and then Jim will talk a little bit about it.

If you look at the actual guidance, we do see 2019 as a year of real progress.

The quarters are changing a little bit, but they were in our plans that way.

But we wanted to make sure that you had the right visibility and understanding.

With transformation, the quarters changed because we're opening new buildings in the second quarter that drive benefits in the second half of the year.

In the third quarter, we've got those new buildings.

We see escalating efficiency in the buildings we opened in late 2018.

We have the extra workday.

We have the commodity tailwind versus last year.

And we have the VRP at full run rate in the third quarter.

Those are all good proof points of why the year sets up well in the second half.

Operating profit growth will lead to the double-digit operating growth that we expect for 2019 in the U.S.

Tom, it's Jim.

Let me add something to what Richard opened with.

And just to remind you that this year, when we came out of the gate, we said 2019 in the U.S. is about creating operating leverage, and you can start to see that in the first quarter if you look at the cost structure.

To remind you of a couple other points that are beneath that, that we think are important, first of all, hand in hand with that comes our service.

Our service is at very high levels relative to the competition and even to ourselves over the last couple of years.

We're pretty proud of the service.

And by the way, that leans into cost as well because when you do things right the first time, it's actually cheaper.

And we provide the customers a great service.

We'll keep on the revenue quality.

Kate and others will talk about that as we go forward.

The transformation on UPS is coming through.

The efficiencies are coming through.

We're going to -- we're focused on almost 80% of our network touching automation by the end of this year, which is very good going forward.

Remember, we've got 323 grounds.

Saturday operations running in full flight this year, and you just keep going.

And then you'll hear more in the future about peak season.

So for us, as we move forward and to the margins Rich talked about, you should start to see us perform better and better and better on operating leverage in the U.S., and that's our commitment to our shareholders this year.

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

If I could just follow up, I guess digging into that a little bit further.

Can you talk about the cost of those new centers, maybe the magnitude?

And I guess in that vein, I just want to understand -- I know Amazon is always a topic of discussion, but they've been getting bigger and bigger in in-sourcing.

And we've heard from whether New England Motor Freight or XPO that they've brought business in.

Is that any part of pulling volumes in as to why Ground was up less than, call it, GDP levels in the quarter?

Is that start -- is any of that starting to have an impact?

Or is that related to other items?

So I'll first talk a little bit about the unpacking of the guidance and the revenue.

And let's actually start with the revenue, and then David is going to talk a little bit on the second part of your question.

When you look at the revenue, especially in the U.S., what we see is underlying growth of about 4.5%.

But we recognize we had weather, an operating day change as well as movement of Easter.

So the organic growth was strong.

When you look at what we're doing and opening new buildings, we've called out in the past, as we open buildings, we do have certain startup costs that go into those buildings.

By opening that 30% in the second quarter and a total of 50% by the end of the third quarter, what we're really doing is making sure that as we move into the fourth quarter, the efficiency gains that we're seeing right now in the new buildings, we're also seeing in this year, in the second half of the year as we especially go into third and fourth quarter.

Those startup costs are around the things that you would expect as we hire and train people, as we put in the last bit of supply tools and needs, things like that.

So those are all part of what we've put into the second quarter, what we expect out of the third quarter and fourth quarter.

It's very deliberate that in the third quarter, you see benefits from these new buildings as well as the other things I've called out.

And with that, I think that kind of tells you about why guidance and why we believe 2019 would be so well.

And I'll turn it over to David.

Yes, Richard.

When it comes to Amazon, we have to remember they're a large company.

They in-source and outsource different portions of their transportation network.

As they grow, they continue to change and have those vendors.

We do not believe that there's been a decrease in our volume levels due to them making a switch from 1 company to another.

We still have a mutually beneficial relationship with Amazon, and we feel that while we continue to focus on serving their needs, that there is so much more to e-commerce than Amazon.

And we also have shared how we're focusing on working with these other companies, SMBs.

And so we've shared that at the end of last year.

And it's just a continued focus on improving the revenue quality.

And we're going to continue to do that.

Thank you for the question.

We're going to take a live question -- or an online question.

This is -- question comes from a multiple of analysts: Fadi Chamoun from BMO; Kevin Sterling from Seaport; and Chris Wetherbee from Citi.

The question is can you discuss the regional demands or what you're seeing in the International business related to Europe?

And anything -- any dynamics that you're seeing from the customer side in that marketplace?

Let me start, and then -- and I'll give it to Kate to -- I mean, certainly, as we mentioned a minute ago, the trade setup for this year has changed a little bit coming in -- that we saw coming in, but that's our job to adjust to that.

So we've got situations in all the regions that we're adapting our global network out in Asia as I talked about a minute ago with David.

It's moved -- keep in mind, what I didn't mention at that time is that our block hours are down.

So that's how we end up creating operating leverage.

Ultimately, Rich talked about the margins, and we've talked about the movement of that.

I mean when you really get behind International and how we are on our maturity, we've got great options to continue to grow no matter what products our customers choose from us.

They'll migrate between products based upon their needs and growth aspirations.

Our job is to get the network right.

We did manage some customers, as Rich talked about, some low-yielding ones in Europe this quarter that kind of masked some of the results and put some of that intra-region growth in the mid-single digits.

Absent that, you look to the bottom line profitability and the margins, it was a really good quarter for us, and we plan to continue that.

I'll ask Kate to add a few comments to that.

Yes.

I'll just add that for the 14th consecutive quarter, we did see export growth in our International regions.

And also as Jim mentioned before, in Asia, as an example, more express on the airplanes and, again, exports in Europe continuing.

So we are -- our portfolio allows the customers to trade up and down, and many are doing some of each.

Thanks.

And we have a question from the line of David Vernon.

I have a general question on revenue quality.

It looks like the top line came in a little bit lighter certainly than TheStreet was expecting.

And I think in your commentary also, maybe there was a little bit of a lighter start to the year on revenue.

Can you talk a little bit about how maybe core price or shipment weights have been shifting in -- particularly around the express and the deferred products where the RPU was kind of down a little bit year-over-year?

Well -- and if that's just kind of a surprising result?

And just like to sift this and adding color on the mix trends within express.

Yes.

David, this is Kate.

I'll take that.

So overall, we improved the revenue quality.

And again, I'll just note the changes that -- or points that Richard made on weather impact and the underlying outperformance.

That also impacts revenue per piece.

But Ground RPP was actually at 2.9% in the U.S., strongest quarter we've had first quarter growth in 4 years.

And then if you look to where, to your question, we had above-market Air growth rates, which we actually saw a broad base of customer usage, small medium-sized business, health care-related as well as, of course, retail.

And yes, to the question on mix, seen -- or saw a more stable growth specifically within the Next Air product, and that can impact revenue per piece as well as a shortened zone, which impacts that.

But it's just less of a flightpath that the package takes.

So that's what we see.

We do continue our focus, unchanged and remain committed to both quality revenue as well as maintaining market share.

Thanks.

Is there any sort of metric around sort of distance-neutral, weight-neutral pricing that you guys kind of tract or can talk to, to help us then understand that?

So we do look at that then -- over -- one quarter doesn't define how that product is moving.

Generally speaking, if I take the last 4 quarters combined, the characteristics haven't been as pronounced as this quarter.

But I think you have to also remember weather has an impact.

Because when you start having weather impacts, small and medium-sized customers lose that day of business where your larger customers, when it gets to customer mix, can move it around the country and avoid the weather.

And we saw some of that in the numbers this quarter.

If it's appropriate at the right time and if it's really changing, we would give you that color as well.

All right.

We're going to take an online question.

This online question comes from Scott Schneeberger over at Oppenheimer.

Please address the progress in your recent completed of automated facilities.

And can you provide an update on ORION NPT and the other technologies you're bringing online?

All right.

Scott, Juan Perez here.

Thank you for the questions.

Let me start first with the first part of the question related to automation.

A couple of parts to that question.

In 2018, to your point, we opened 22 new retrofit automated facilities globally that represented an addition of about 5 million square feet globally, 4 million in the U.S., 1 million in International.

And we ended up opening a number of regional sortation facilities that provided great benefit to the organization this past peak, and we continue to see that now in Atlanta, Salt Lake City and a couple of other parts of the organization.

In 2019, we will be bringing on an additional 20 new or retrofit automated facilities globally.

That also represents roughly 5 million square feet or 400,000 packages per hour of automated sortation capacity in the organization.

And these expanded automated facilities are in Tennessee, in California.

We'll have some in Kentucky and Ohio as well.

And we'll go to Germany as well this year.

Now the -- looking at the benefits of that technology, certainly, we're seeing significant improvements in our productivity in those automated facilities as they continue to reach maturity.

To the second part of your question related to some of the operational technologies we've implemented, we are on track on getting the expected benefits of our ops technology.

They're all part of the Smart Logistics Network strategy that we've defined in the organization.

We're already in deployment of ORION DIAD navigation in almost 10,000 drivers across the network, seeing significant benefits in terms of miles reduction related to the technology.

When it comes to EDGE, the EDGE initiatives are in deployment.

We're now seeing improvements in consolidation of operations reducing expense, work simplification.

And lastly, as we look at the future, we continue to find other opportunities to continue to improve our network.

We're well on our way on our small package initiative.

That is going to provide great benefit to UPS in the years to come.

New automation solutions as well.

And by the way, I don't want to forget about this.

We're also very excited about the types of customer technologies that we're bringing on to the mix.

New solutions that we're deploying today, but as Kate alluded earlier, we're also building new solutions to support our customers across the network.

Thank you.

And we have a question from the line of Scott Group of Wolfe Research.

So I wanted to go back to the third quarter guidance, if we could.

So Richard, so second quarter, you're guiding to a mid-single digit profit growth.

And it looks like implied for the third quarter now is like mid-20% profit growth.

So I mean, I get the operating day get you like 4 points of extra growth, but can you bridge the rest?

Like is there any way to quantify the commodity tailwind you're talking about and the headcount reductions you're talking about?

Can you put some numbers around that, so we can get a little bit more comfort with that guidance?

And then maybe it'll be helpful if you can sort of directionally talk about third quarter by segment, if you can.

Sure.

So Scott, I think the first thing is -- I'll just knock out the easiest one first.

We called out a specific number around commodity FX headwinds in the third quarter principally driven by the Turkish lira last year that lost something like 60% during the third quarter and came back a lot of it in the fourth.

And we've called that out as well.

In terms of the workday, we've given you the information on that.

And then the VRP full run rate is also something we gave the range of annual savings in the low 200s.

And so now we get a full quarter of that run rate.

So those are all very specific dollar amounts.

And then when you look across the International business, separate from the commodities, you also are lapping the benefits we saw from some market activity based on some cyber attacks that occurred with one of our competitors.

And so this first and second quarter, we're still lapping that year-over-year.

But in the third and fourth, we don't.

And then in Supply Chain & Freight, we continue to see the benefits we're seeing in this quarter.

We do expect to continue to see mid-double-digit growth there as we called out in the first quarter.

So third and fourth quarter are better returns, and they're better returns for very specific regions -- reasons that we had set out both in the U.S. because of what we're doing.

And today, I actually mentioned that the third quarter earnings per share should be about 28% of the annual guide number that we called out earlier the year.

Thanks.

We're going to take an online question.

This question comes from Allison Landry over at Crédit Suisse.

She wanted to ask about the growth rates of B2B and B2C.

Last quarter, we called the growth rates out.

Can you provide an update this quarter in the growth rates on the B2B side?

Allison, this is Kate.

I'll take that question.

So B2B growth, as you noted, was strong and the best first quarter growth in several years as well as we saw similar rates of growth with B2C, so a nice balance between the 2. When we look further into it, we continue to enhance our leadership position in B2B.

And our solutions are resonating with health care customers, for instance, hospitals and labs, and seeing the growth there throughout all of the segment.

And then also in retail, expensive returns.

Shipments going through, say, the UPS Store and our other access points to distribution centers and return centers grew quite well.

So we continue to focus on growing both and just will continue to fortify the mix that we see.

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

I wanted to ask a question, I guess, on free cash flow and CapEx and maybe how you're thinking about sort of excess cash for shareholders as you move through the rest of the year.

So I think, Richard, you mentioned that the cadence of free cash flow is changing to some degree.

The guidance is the same.

You've mentioned that there's potential upside from working capital initiatives.

I guess when will you have a little bit more confidence or color around the ability to maybe see some upside there?

And then how do you think about sort of CapEx this year?

Is the cadence of CapEx changing?

Do you think that there's potential upside or downside to what the guidance you've given us?

I just want to get a sense of kind of how you're thinking about all of that.

Sure.

So I think the first thing we look at is UPS generates strong operating cash flow.

We think 2019 will be another good year.

Last year, we started doing initiatives around working capital, and we saw that benefit.

Those working capital initiatives, we have additional ones on the list that we're continuing to complete.

And as we complete those, we will share the results and the go-forward look of that.

Now you did hit on this permanent shift.

And what that means is we actually have better cash flow in the fourth quarter going forward because of the long-term value of the transformation initiatives we've put in place.

But most importantly, as we do see upside potential, we're implementing initiatives.

And as they come through, we'll start sharing that a little bit more.

In terms of the CapEx side of it, our CapEx really is about improving the efficiency of our network, and at the heart of that is both the technology and the buildings that we're creating.

And so this year, we expect to spend about $7 billion.

We spent $1.5 billion in the first quarter, which is right in line with where we expect it.

And we'll continue to lean into that.

We talked about this year's level being about where we just talked about a moment ago.

And it is really about driving efficiency and lowering costs in the network over the long term.

And we do expect -- and we are seeing some of that now, and we'll see even more of it in the second half of the year.

And no real change to the way you're thinking about the long-term CapEx?

I guess through the next couple of years, your guidance range as a percent of revenue, that hasn't changed?

Well, I think we've given you guidance for the -- we're in the middle of the 3-year process at an appropriate time.

And we continue to look at that and evaluate that.

We'll come back to you with the right numbers.

We're going to take an online question here.

This question comes from Helane Becker over at Cowen Inc.

How is the economy looking from your perspective?

And can you speak to pockets of growth that you're seeing?

Yes, Helane.

This is David.

Let's start with the U.S. And U.S. forecast reduced slightly.

There's a few mixed signals, but we still see growth and we see opportunity there.

So starting out with what's driving the economy in -- the solid consumer spending and inventory replenishment.

And so we're certainly focused on those 2 areas.

When I said mix, the manufacturing activity has slowed a little bit, and we're predicting a little bit lower industrial production in the second half.

And while small, the 8% of increase has been reduced for 2019.

There's still plenty of opportunity there.

And that's where our e-commerce strategic imperative is focused.

And then let's switch to the global economic environment.

It remains in a growth mode, a slightly slower pace.

And in Europe, the Europe GDP has been lowered for 2019, in part, because of manufacturing slowness.

And then Brexit, of course, remains a risk.

We certainly have plans in place to handle however that turns out, but -- so we are preparing this against our customers.

In Asia, China is still strong, maybe not as strong as in previous years, but Jim talked about some of those opportunities we see.

They're including into the U.S. and from the U.S. to China, but also China and the Rest of the World.

And so there's a lot of developments there that sometimes gets lost in the China-U.

S. discussions.

So that's where we see the economy.

We think that it gives us plenty of opportunities to focus and to apply our strategic imperatives.

We feel good about the economy for the rest of the year.

We have a question from the line of Allison Landry of Crédit Suisse.

Could you tell us how much the efficiencies from the facilities that opened up last year helped first quarter Domestic margins or cost per piece?

And when would you expect the productivity benefits from the automation and new store capacity to begin to outpace the startup costs from the newer facilities?

And is this something that could occur by the end of this year?

Yes.

So Allison, we are in the middle of really 3 years of opening some large amount of additional capacity.

The timing across quarters can be a little different.

Because what we're seeing is the benefits are apparent.

Our cost per piece ex fuel grew about -- just under 2.5%.

And if you adjust for weather, it's actually around 2% growth, which is the lowest it's been in several years.

That's principally driven by the efficiencies that we're getting out of the network.

We now have somewhere between 55% and 60% of eligible volume going through automated facilities.

That will keep growing.

We've called out not only the facility automation, but when we made the implementation of the ORION 2.

And I'm actually -- I'll hand it off to Juan to talk a little bit about it.

But it's all part of what we laid out as our margin growth and getting to double-digit operating profit growth for the U.S. for 2019.

So Rich, I'm going to take it from Juan because I think just to -- I want to package it together with some of what Juan mentioned on the first time he spoke.

I think it's important to remember that we're within the transformation.

You hear Scott and us talk a lot about non-op and procurement and the other benefits.

But make no mistake, because we invest in this network and put the capital in, there are efficiency gains that are material in this business that will come through between now and this run rate of 2022 as we go forward.

And they are not insignificant.

And we are in the early innings of that, 2018 peak with step 1. You start to see the cost mitigate in Q1, and the leverage we're talking about in this pivot year is there's a material piece on the cost side.

It's not just revenue quality.

And you'll see that unfold as we go quarter-by-quarter by quarter, Allison.

And it's in all facets of the business.

That's the thing.

When you get to hub and spoke opened, back up, the efficiencies come on the inbound side, in the hubs, in the network, on the road.

And you put ORION and you put EDGE and you put all the other technology Juan talks about, it is material.

And as we go quarter-by-quarter and we actually put this on paper for you, I think we'll do a really good job of laying out for you more and probably the cost per piece example than we are right now in the first quarter.

We're going to take a live question -- or an online question here.

We've got multiple analysts asking about the drone program that we launched and some of the activity that we're doing around this innovative solutions.

Yes.

Thanks for the question.

Scott here.

We're really very proud to have the very first FAA sanctioned use of a drone for routine revenue flights, which, as David mentioned, took place at the WakeMed medical campus.

That certification from the FAA is very important.

And we're really pleased to see that they've quickly began to embrace other opportunities with subsequent approvals.

But we're early in the process.

We -- in the United States.

We announced yesterday that we have launched a continuation of a 13,000 program that we had launched in Rwanda, taking medical samples across the country.

And today, now, in Rwanda, 13% of -- 30%, sorry, of Rwanda's blood supply are done through these drones.

So we will continue to see in the United States opportunities to expand this to campuses, in particular, focusing upon health care.

The economics, we'll -- we do see in the future to be positive.

And we will scale these and see that the opportunity to reduce our costs on this type of campus programs is quite positive.

There's a supporting platform value to this as well.

Juan?

Great.

Thank you, Scott.

We've learned a lot through our tests with drone technology.

One-off drone solutions are not scalable.

To complement our already robust delivery network with drone deliveries, it requires an effective ecosystem of solutions.

So what we're doing for that is we're bringing the great expertise we've built over the years in analytics and operations research to be able to do a few things to support this ecosystem.

The first one is we're using analytics to identify how to best utilize this technology.

We're applying operations research expertise to determine how to maximize the value of this solution within the network that we already have, which is very efficient.

And lastly, we definitely believe that these are required to have a solid approach to optimizing the value of this technology in the future, and we believe we have that.

We have a question from the line of Brandon Oglenski of Barclays.

I want to come back to the longer-term CapEx outlook because I think at prior events, you guys have spoken about spending in the 8.5% to 10% of revenue range for the next few years.

And I really want to put that in the context of these facility investments you are making.

I think in the past, you've said that you have somewhere between like 30 to 35 major package hub facilities in the U.S. I was wondering if you could update us on just how many of those have actually been updated with the automated technology.

And then what is the outlook over the next couple of years for how many should get retrofitted looking forward?

So Brandon, this is Richard.

And I think on the CapEx side, I'll take that part, and then I'll have Juan talk a little bit about the actual buildings.

But on the CapEx side, you're right.

We've talked about a 3-year peak of CapEx, and then it's moderating down.

We're still on plans for that.

It's just a little early to give you what we're going to do in 2020 and 2021.

But we'll continue to look at different options and alternatives based on the flow of packages and, really, the benefits we're getting out of these buildings, which are slightly better than we originally thought even.

So it's a little too early to give that.

But at the same time, what we've guided in terms of 3 years and then it coming down, that moderation will occur.

And at the appropriate time, we'll give a better feel for that.

But I'll turn it over to Juan to talk about the actual buildings.

Sure, Richard.

Close to 60% of our planned building automation projects by 2022 are already completed.

That's on the large building automation-type projects.

And as David alluded earlier, we're already seeing the types of benefits that we get from this automation in the network.

Close to 65% of our small sort automation projects that we've targeted by 2022 are also completed.

And in both scenarios, we're actually on track to get to the targets that we defined to have solid automation across our network to provide benefits to the organization.

That concludes our Q&A session for today.

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

Please go ahead, sir.

Thank you very much, Steven.

So we'll leave with closing comments from David.

So as you heard during the call, UPS is adding innovative solutions and using technology to enrich our integrated network.

Our transformation initiatives are improving efficiency and revenue quality.

And we've made good progress this quarter in a dynamic environment.

Strong execution in Supply Chain and International.

Our U.S. Domestic investments are driving momentum.

Our built facilities are coming online earlier this year, creating earlier benefits.

And we continue to see growth opportunities that Kate has talked about earlier.

So in summary, we had a good start to the year, and we have momentum to embrace our future performance.

And thank you for joining us this morning.