聯合包裹運送服務公司 (UPS) 2019 Q2 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 Second Quarter 2019 Earnings Conference Call.

All lines have been placed on mute to prevent any background noise and after the speaker remarks there will be a question and answer period.

It is now my pleasure to turn this 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 2019 Earnings Call.

Joining me today are David Abney, our CEO; Richard Peretz, our CFO; Kate Gutmann, our Chief Sales and Solutions Officer; along with Chief Operating Officer, Jim Barber; 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 operational results of our company.

These statements are subject to risks and uncertainty, 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 $21 million or $0.02 per share on an after-tax basis.

The charge is primarily from transformation-related activities with the majority allocated to the U.S. Domestic segment.

In the prior year period, UPS recorded a pretax charge for transformation cost of $263 million or $0.23 per share on an after-tax basis.

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.

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

Thank you.

And I will turn the call over to David.

Thanks, Scott, and good morning, everyone.

During the quarter, we continued making significant progress executing our strategies.

As expected, our transformation initiatives are producing positive operating leverage and improved profit, signifying an important turning point for UPS during 2019.

These initiatives, combined with the strength of our underlying business and scale of our global network, are creating strong results.

We generated more than 3% consolidated revenue growth and greater than 6% growth in operating profit.

In fact, we grew profit in all 3 segments and generated the most profitable quarter in the history of our company.

Our transformation is also creating greater efficiency and agility and funding reinvestment in new state-of-the-art solutions.

This will enable UPS to capture profitable growth opportunities at an even higher level.

This morning, I will share a few quarterly highlights.

Kate will introduce numerous market-making solutions focused on driving higher-quality revenue growth, and Richard will cover the financial details.

Yesterday, we announced the latest wave of new services and solutions, and there are more coming.

These services will provide our customers new levels of speed, visibility, control and market access, especially our SMB, e-commerce and health care customers.

This is an exciting and momentous time at UPS as we leverage the exceptional power of UPS technology and innovation to bring to market new industry-first capabilities.

On the efficiency front, our transformation initiatives are enabling a faster, more flexible network.

In the U.S., we opened 3 major automated hubs in the quarter, adding more than 2 million square feet of new, highly automated sortation.

The modern facilities brought on in 2018 and 2019, along with significant changes we're making to our network, are improving transit times on key lanes for improved local, national and global customer service.

We are also adding highly efficient aircraft in the U.S. and in other major international trade lanes, in line with shifting volume levels.

Between 2017 and 2022, we will add 44 new aircraft, which creates more than 10 million pounds of additional air capacity in the network, the largest air capacity expansion in the industry in recent history.

In fact, this year, we will add the most annual capacity in our multiyear program by deploying 11 new 747-8s and 767s.

And the timing of our actions couldn't be better with the largest e-commerce shippers adopting next-day and often moving from our competitors' 2-day options to our 1-day services.

This structural change is creating opportunities for UPS.

Our additional air capacity and modern integrated network offer unmatched flexibility and position UPS well to serve changing customer needs.

In the quarter, average daily volume for UPS Next Day Air surged more than 30%, the strongest growth in more than a decade.

Our air market share growth is accelerating, and we are strengthening our industry leadership.

UPS is in a unique position to enhance financial performance as we create new solutions that enable shippers of all sizes to meet accelerated delivery expectations of their customers.

Turning to the trade environment.

UPS has long supported free trade, making cross-border commerce easier for all businesses.

I recently met with top trade officials from the U.S. and from China.

And while I'm encouraged by the commitment of the negotiating teams, we need to see more measurable progress towards a comprehensive agreement.

At the moment, the global business community is facing prolonged trade uncertainty in Europe and elsewhere, and forecasts are softening.

Global industrial production was lowered at about 1.5% for the year.

Additionally, world exports are now forecast to grow at a slower pace than global GDP.

Nevertheless, UPS is using the flexibility of our network to help our customers optimize their supply chains and take advantage of continued growth opportunities.

The U.S. economy appears to be in better shape with lower unemployment, healthy consumer demand and forecast for improved U.S. GDP.

The concern for the U.S. is industrial production.

The IP outlook for the fourth quarter is forecasted to be slightly negative on a year-over-year basis.

Regardless of external conditions, our transformation initiatives are making UPS more competitive and more proficient in helping our customers.

The progress in our operations and exciting new solutions we announced yesterday were made possible by 3 things: our strategies, investments we are making and the execution by our people.

I would like to thank our employees worldwide for their tremendous contributions to our success.

Momentum is building.

We remain confident our strategies and initiatives will drive even stronger revenue quality, create further efficiencies and improve company profitability.

We will continue to accelerate our initiatives in 2019 and beyond.

Now I will turn it over to Kate to share more details about our new services and solutions.

Thank you, David, and good morning, everyone.

Last September at our Transformation Conference, we unveiled key initiatives designed to generate growth.

We're excited to announce the most extensive rollout of innovative, new solutions in recent history.

Our customer-first strategy targets an optimal customer mix that will yield high-quality revenue across all of our strategic growth imperatives: small and medium-sized businesses, health care, international growth market and B2B and B2C e-commerce.

These solutions were created to leverage the expanded automated capacity we have added to our network, which will empower our customers to do more, move faster and go further.

UPS aims to be an indispensable partner for SMBs.

To that end, SMBs can now leverage the breadth, speed and information in the UPS network like never before.

First, with growing demand for next-day deliveries, UPS is improving time-in-transit in my many key lanes and across all products in our broad U.S. portfolio beginning in the second half of this year.

These faster transit times connect the places where more than 80% of the population resides, enabling faster delivery for all shipments.

Second, beginning in January, UPS will offer customers pickup and delivery services 7 days a week.

We're expanding our current Saturday residential and commercial pickup and delivery services and adding new Sunday option.

As the only major carrier with Monday through Saturday pickup offerings, this service significantly expands our market coverage on the weekend, providing customers added speed and convenience.

We plan to efficiently leverage the combination of the UPS integrated network, Access Point locations and UPS SurePost in collaboration with the USPS to deliver this new capability.

Third, we are providing later pickup for next-day ground delivery, enabling SMB shippers to process more orders in a day.

Later pickup times are available now to hubs covering 85% of the U.S, solidifying UPS' leading market position in next-day ground coverage.

And additionally, building on the tremendous success of UPS My Choice for home, we are excited to announce UPS My Choice for business available Monday, July 29.

Participating companies will join the nearly 60 million consumers worldwide enjoying the benefit of UPS My Choice for home.

Small businesses will now have unprecedented levels of visibility and control over both their inbound and outbound UPS shipments, advantages that can enable SMBs to provide better customer service and improved planning for staffing and equipment need.

Health care has long been a priority for UPS and we continue to develop unique solutions.

To rapidly scale our recently announced drone operations on the WakeMed campus in Raleigh, North Carolina, we created UPS Flight Forward, a subsidiary formed to operate commercial drone deliveries.

This fall, we expect to receive Part 135 certification, the highest level of certification from the FAA, which will enable UPS to complete routine flights beyond line of sight day or night.

UPS is leading the industry and intends to stay at the forefront of commercial drone aviation.

This certification will pave the way for service expansions to other hospitals and medical campuses in the U.S.

Cross-border e-commerce is growing fast and is a significant opportunity for our customers and for UPS.

To help our customers tap into this opportunity with an affordable and easy-to-use international service, we created UPS Worldwide Economy.

This new service has been designed specifically to enable SMBs to send lower-value cross-border shipment using an economical deferred service to the top e-commerce markets around the world.

UPS Worldwide Economy is now available in Canada, China, Hong Kong, the U.K. and the U.S. with more European and Asian markets coming soon.

And finally, understanding how busy small businesses and consumers are every day, we are dramatically increasing the number and variety of locations that enable access to UPS services.

We're excited to announce Advance Auto Parts, CVS pharmacy and Michaels Stores are joining the UPS Access Point network.

Collectively, over the coming months, these retailers will add more than 12,000 locations nationwide when fully implemented, bringing our U.S. total to 21,000 locations where consumers can conveniently pick up or drop off their UPS packages including returns close to their homes and offices.

We remain the e-commerce shipper of choice, providing unmatched support to meet our customers' needs.

Together with the UPS My Choice for home app, consumers have broader choice, visibility and control over when and where their UPS deliveries are made.

And like with all other Access Points, UPS attains further geographic reach and greater delivery density, driving increased efficiency.

UPS is a global industry leader with more than 78,000 points of contact, including retail locations and drop boxes around the world.

Soon, more than 90% of U.S. consumers will find an Access Point location within just 5 miles of their home, offering a remarkable new level of convenience.

UPS is poised to capture an even greater share of the fast-growing B2C market by making pickups and drop-offs close by and convenient for virtually all customers.

In closing, UPS is actively enhancing the customer value chain from top to bottom by leveraging the power of our integrated network, state-of-the-art technology and expanding Access Point network.

We are helping our customers to be even more successful.

This rollout of exciting new services, along with innovative platforms like eFulfillment and Ware2Go, are just the beginning.

Many other industry-first solutions and partnerships are in development.

Envisioned to empower customers and enhance efficiency in new ways, they are being enabled and accelerated by our transformation initiatives and the power of the UPS Smart Global Logistics Network.

Now I'll turn it over to Richard to move into the financial results and outlook.

Richard?

Thanks, Kate, and good morning, everyone.

We had a good performance in the quarter, driven by our planned multiyear investments, our transformation initiatives and strong execution within a dynamic environment.

The enhanced leverage we are building is evident in our performance.

All 3 UPS segments grew profits during the period.

Consolidated operating margins were 12%, an expansion of 30 basis points year-over-year.

Today, I will cover performance of the segments and provide an update to our forward guidance for 2019.

Let's look at the segments.

One of the most notable elements for the quarter was the performance we delivered in the U.S. Average daily volume was up more than 7% with strong growth across all products, both in B2B and B2C.

Next-day volumes were up more than 30% as we seized the market opportunities with large e-commerce shippers who are early adopters of faster delivery to their customers.

Our air sorts are completely automated.

Plus with the investments we've made in our integrated ground and air network, UPS is well positioned to meet the market shift towards next-day delivery and grow profits.

Reported next day yields were lower due to higher growth with large customers and end-of-day Saver products.

The good news is undermined base rates increased 3.4% and air profitability and operating margins improved on a year-over-year basis.

Ground volume grew over 4% and revenue increased more than 5%.

Base rates for ground also improved almost 2%.

And although customer and product mix weighed on reported yields, ground showed a solid increase in profitability.

In the U.S. Domestic business unit, costs were up 0.5% this quarter, the lowest increase in several years, contributing to positive operating leverage in the business.

The results would have been even stronger without the start-up costs of an additional 2 million square feet of new automated sorting capabilities.

We are gaining efficiency and becoming more agile, enhancing UPS' ability to scale rapidly and adapt to capture market opportunities and generate higher levels of profit.

As a result of our actions, total U.S. revenue was up 7.7%, operating profit grew 8% to over $1.2 billion and we produced a margin of 11%.

Now let's turn to the International business.

In the quarter, we leveraged the strength and flexibility of our global network to deliver operating profit growth and margin expansion as the segment adjusted to the challenging trade environment.

Revenue quality was driven by disciplined yield management.

On a currency-neutral basis, revenue per piece for the International domestic increased 5.6% and revenue per piece for the entire segment was up nearly 2%.

Although volumes were down slightly, we are seeing growth in a number of trade lanes.

Asia experts are growing to virtually all regions of the world except the U.S.

U.K. exports and imports continue to be down on a year-over-year basis, driven by the uncertainty around Brexit.

However, UPS is growing exports within the European continent.

In this segment, we generated $665 million in operating profit, a record for the second quarter, and expanded margins by 80 basis points compared to last year.

Turning to Supply Chain and Freight.

We had another strong profit result.

We're up almost 11% as the segment delivered its best second quarter operating profit in the company's history.

Operating margins expanded 90 basis points to 8%, in large part due to the effective execution of our strategies.

Multiple units within Supply Chain and Freight contributed to strong results by leveraging the flexibility of our asset-light businesses.

Looking at the highlights of some of the individual units in Supply Chain.

International Air Freight achieved robust profit growth on lower tonnage.

We generated higher-quality revenue, expanded the buy/sell spreads and executed prudent cost controls, all of these offsetting the softer demand on the China-U.

S. lane.

Coyote, our truckload brokerage division, continues to outpace others in the market.

They had another outstanding quarter enabled by productivity gains and optimization actions.

Revenue was down, driven primarily by the overall market rates, but profit increased significantly and operating margins expanded.

Across the 3 segments, we are pleased with the progress we are making.

Each of these businesses is executing well, and showing gains in operating profit.

Now let's turn to the balance sheet.

UPS generated $4.2 billion in cash from operations and about $2.2 billion in adjusted free cash flow, and that's with capital investments of about $2.9 billion year-to-date.

We're well on our way to meeting our free cash flow target with potential for additional upside.

As expected, we made an opportunistic contribution of just over $800 million to the pensions, resulting in lower ongoing costs and an increase in our funding status.

Our timing was good as long-term interest rates were significantly below the PBGC premiums.

So far this year, UPS distributed nearly $1.7 billion in dividends, which represents a 5.5% increase on a per-share basis over the same period last year, and we repurchased 4.8 million shares for about $500 million.

Moving to tax.

As we work through upcoming filings, there's a potential for a favorable benefit that could lower our effective tax rate likely in the third quarter.

As a result, we expect our full year tax rate to be between 22% and 24%.

Now before we move to guidance, let me take a moment and expand on what Kate shared with you.

The new solutions, including My Choice of business, improvements in transit time and the extended hours pickup and others that activate in 2019 are all embedded in this year's guidance.

As we roll out our targeted weekend operations to expand Saturday coverage and add Sunday in 2020, we will leverage the combination of our highly efficient network, expanded UPS Access Points and UPS SurePost.

This brings together the efficiency of our great partnerships, proven technology and utilizes our new weekend driver category to produce higher levels of asset utilization and enhanced services for our customers across all 7 days.

The actions announced yesterday are part of our broader transformation and are included in our long-term targets.

For the remainder of 2019, although external conditions have changed, we are reaffirming our annual guidance.

As David mentioned, forecasts for world exports and U.S. industrial production have been lowered, and we remain concerned about the growing headwinds from trade uncertainty.

Working on our favor, UPS has a number of company-specific tailwinds: first, positive momentum from the capacity and efficiency created inside the network, especially in the U.S., as well as the new product and services we are introducing; second, profit gains from the structural movement to more next-day delivery; third, the benefits from previously discussed items like the completion of our VRP program, wrapping of currency headwinds from last year, among others.

And as I mentioned earlier in my talk, we will likely see a favorable tax benefit predominantly in the third quarter, which will help offset forecasted headwinds.

Putting everything together, as momentum builds as expected, the results in the second half of the year will be considerably stronger than the first half.

Based on our positive momentum and the current economic outlook, we remain on track to achieve our full year adjusted earnings per share guidance at $7.45 to $7.75.

We are making visible progress on our strategy and remain confident that transformation and our other initiatives will produce gains.

And now I ask the operator to open the line.

Operator?

(Operator Instructions) I will now turn the program over to IRO, Scott Childress, to start the Q&A segment.

Please go ahead, sir.

Thank you.

Let me reiterate what Steven just said.

We've got a lot of ground to cover today so callers are asked to submit and ask only one question so we may get through as many as possible.

So our first question comes from Scott Schneeberger from Oppenheimer.

Please discuss your progress in growing share with the small and medium businesses.

Great.

Scott, this is Kate.

I'll take that one.

SMB is the key priority within our strategic growth imperatives, and they're going well.

We handle more SMB business than anyone and we continue to innovate.

And the solutions we actually announced were foreshadowed at our Transformation Conference, so the strategy is unfolding as we speak.

They are a holistic strategy as we aim to win more business Monday through Saturday meeting all of our customers' needs and making it easy for them like the market-leading My Choice for business where we've provided unprecedented visibility and control for their inbound and outbound shipments; and enhancing our network with faster time and transit and meaningful ways, hitting lanes that actually will cover 80% of the population; and 7-day service expanding Saturday and adding Sunday options to win even more SMB from the full week; leveraging the combination of UPS integrated network, Access Point locations and SurePost in collaboration with the Post Office.

We also extended -- have our extended hours next-day ground service, enabling SMBs and large customers to process orders later in the day and reaching more than 85% of the population.

We're also proud of the Access Point expansion and the partnerships with CVS, Michaels and Advance Auto.

That adds more than 12,000 locations nationwide, bringing in the U.S. total to 21,000 and 40,000 globally.

Further helping SMB take advantage of the cross-border trade opportunity, we've announced Worldwide Economy.

This is an economical and deferred service designed for their low-value cross-border goods.

And it's available in Canada, China, Hong Kong, U.K. and U.S. with more coming soon.

Further with SMBs as well as larger health care accounts, we have our drone service staying at the forefront and rapidly scaling our drone operations on the campus of WakeMed and other hospitals to come.

So we're very excited about our SMB initiative and priorities, the strategy that we've laid out for you at the Transformation Conference and being able to bring more to you with details, and we remain committed to the strategic growth imperatives.

So just a quick recap, this is David.

You have to look at all these announcements that we made not as individual projects, but this is a holistic approach to basically enabling small- and midsized customers to swing above their weight.

And so the focus is on this group of customers so that they can compete with the larger companies that are out there and the excitement that we have seen for this is just incredible, and we're very confident that we will continue to serve that small- and midsized customer in ways that none of our competitors can do.

And this small My Choice for business is just unique in the industry.

There's no one that can match that and we expect the same enthusiasm as we had My Choice for home, which is 60 million members, and we believe we'll get that same kind of traction with My Choice for business.

Thank you for the question.

Our next question comes from Ben Hartford of R. W. Baird.

Based on global trade trends, do you have any clarity on your stated long-term EPS targets of 5% to 10%?

Okay.

I'll start the question and David will comment as well.

First, to start, our long-term targets are built around different economic cycles.

When you look at this year, we call for a year of real progress.

We saw it in the second quarter results.

And in the second half, we look for even stronger performance.

It's driven by many of the factors Kate and David just covered as well as some of the items that I talked about in my prepared remarks.

But we're really starting to play offense when you think about the network benefits, what cost per piece is doing as well as the capabilities that we're bringing to the market that are adding to the top line.

And it's important to remember, embedded in our guidance is all those items that we called out that we've talked about earlier in the year as strategic initiatives and now we have announced.

David?

Yes.

Great question, Ben.

And I'd just say, let's look real quick, obviously there are headwinds and tailwinds.

There always are.

But when you look just quickly at the second quarter, we had our best quarterly performance we've ever had in the history of this company and had positive operating leverage in our U.S. business.

Our International and Supply Chain and Freight businesses had the highest second quarter that they have ever had, and this is under a dynamic trade environment.

It's really a turning point in our profitability, and we have momentum going into these -- the rest of the year.

And when you look, our transformation initiatives that we talked about a year ago are really kicking in and we're getting the efficiency and the gains.

And then you add on top of that these innovative solutions that will help our customers to deal with all of the exchanges that we're all seeing and we have a lot of confidence here that in spite of what may or may not happen within the trade environment, that we can flux our systems, flux our network and then we can continue to take care of the needs of our customers.

So we feel confident in that second half of the year and going into next year.

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

Congratulations on the strong results.

I had to look 2 or 3 times when I saw the 30% grow on Next Day Air.

I don't think I've seen a number like that before.

So strong results.

How would you think about the greater growth in e-commerce and in presumably in that Next Day category, looking forward -- or continued growth as you saw in the second quarter and how that might affect the margin outlook in domestic package?

I know you talked about at the Transformation meeting that mix was a factor and focused more on B2B.

So as you had this really strong e-commerce growth, does that affect how we think about margin improvement in second half and 2020 in domestic package?

Tom, this is Kate.

Thanks for the question.

We do see a structural change in the market, the 2-day commitment to the shift to 1-day commitment drives air and ground as we've just talked about that extended next-day ground coverage that we give and you see the growth that occurred in both.

We believe SMBs are going to follow and they're going to be empowered by some of these solutions.

So the growth, while at the levels that caught your attention this morning, may not be the same in the future, we do believe the structural change continues and it will be strong growth in the future.

Richard, you want to answer the margin?

So when you think about margin, we do and we continue to call for improvement in operating margins for the U.S. business.

It's driven by the efficiency across the network, both the ground and the air, with the new buildings and you saw what cost per piece this quarter and that 0.5% is among the lowest it's been in several years, and we expect that to continue.

We are calling for low double-digit operating profit growth in all 3 segments for the entire year.

And so when you put it all together, we expect the second half to be well.

We do believe that the Next Day will continue to grow, but that growth started really in the first quarter if you look at our growth numbers there.

It was a little higher in the second quarter.

We don't expect it to stay that high through the rest of the year, but we do expect to continue to win share based on the solutions we had in the market and will help margins.

David Vernon of Bernstein.

Richard, I wonder if you could talk a little bit about how the investments in service go into 7-day, speeding up the road network, which I would presume means taking something off the train and putting it onto a truck.

How is that going to affect the trajectory of Domestic margins in the next year?

Is this a case where you guys are taking some of the leverage you would have had in the business and reinvesting it?

Or should we expect some margin pressure in 2020 against whatever 2019 comes up to be?

I'm just wondering about that pace of investment and where it's being funded from.

Sure.

So let's take those 2 boxes, I'll go very quickly.

In 2019, everything that we said we would start earlier in the year, we talked about strategic initiatives we would announce was embedded in the guidance.

The announcement here is the improvement in time-in-transit that starts now.

In terms of 2020, what we have is we have targeted Sunday operations.

It's the combination of SurePost, expanded Access Point and the use of the new part-time driver -- I'm sorry, the weekend driver category.

It's all part of transformation and what we committed to reinvest in this business to make it grow even more.

And so as we get to 2020 guidance in a few months, we'll come out and explain to you how that all plays out.

But it was all part of the plans we initially had.

Okay.

So nothing incremental to the cost guide then?

That's right.

2019, it's all embedded in.

All right.

We're going to take an online question here.

This question -- we've got multiple questions, Helane Becker of Cowen and Chris Wetherbee of Citi.

Can you give us an update on the transformation initiatives?

And are there benefits beyond the VRP in 2019?

Yes, this is Scott.

Thanks for the question.

So as you recall last year, we kicked off the transformation program with the Voluntary Retirement Program and procurement.

These are really just of the 2 early initiatives that are helping us to reduce our cost to fund both growth and innovation.

A significant number of additional cost reduction programs are in the pipeline focused on modernizing our systems and as well helping us to create the funds to invest both in some of the programs that were announced yesterday that Kate mentioned that give us a fearless market-leading position in many customer-facing areas as well investing in innovation like our drone announcement, which is just one of many that we expect in the future.

We continue to invest those savings both in terms of our investments in growth, but also reiterate our commitment to $1 to $1.20 of incremental EPS in 2022.

Let me just quickly turn this over to Juan to talk a little bit more about the modernization.

Thank you, Scott.

And absolutely, all points connected to technology.

We are well on our way in executing our digital transformation and our digital strategy in the company.

We continue to make investments in 4 key technology areas: customer technology as you've heard some of the announcements yesterday and today, those announcements are supported by technology at UPS; operational technologies; technology modernization; as well as transformation.

All of these areas in which we're making technology investment are transformational.

And in 2019, we have already gone through multiple back-office technology modernization projects.

We have made enhancements in our technology to support our 4 strategic growth imperatives.

We will continue to do that.

We've expanded use of our operations technology, best-in-class operations technology that's out there.

And of course, we continue to make investments in advanced analytics.

The last point I'll make, Scott, is that we have a great solid history of effective implementation of technology in our company and we intend to continue to do that.

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

Great job on the performance, but can you talk a bit about the share gains?

Is this a market share shift that you see from whether it's the post office or FedEx leaving Amazon?

Or just looking at the 30% without a degradation in ground, is that just a share gain from retail?

Is this -- maybe you can detail the speed enhancements in terms of changing patterns -- shifting patterns.

Absolutely.

Thanks, Ken.

This is Kate.

So I would say, first of all, what Richard indicated, we've had growing of air growth early first quarter and beyond and we have it across a broad base of customers, and we do expect even more to go.

There's a structural change in the market.

As I noted, it does drive a 1-day footprint, whether it be air because of inventory placement or ground and you saw that in our 13% ground resi growth.

And then the Next Day Air, of course, continues to be strong.

So we've actually had the wins throughout the last year, and we are the air market share leader for the last 3 years.

Our next question will come, it's an online question, from Allison Landry of Crédit Suisse.

Do you expect cost per piece to decline outright going forward as efficiency gain continues in your automation investments?

Allison, it's Jim.

I think, obviously, from a unit cost perspective in Q2, I think the market sees that we're at an inflection point and it really did drive operating leverage in the U.S., which has been about 4 years since the last time we did it in this kind of capacity.

Rich talked about the future.

We see it going forward.

We see the momentum as well, David is his talk, that we continue to look forward.

There are going to be quarters where we absolutely will drop unit cost going forward.

There might be other ones who would choose to invest some of the transformation dollars and go back and grow the business differently.

In the end, it's a combination of revenue per piece and cost per piece that drives operating leverage and we'll manage it, too, going forward and talk about the margins as Rich insinuated in his guidance.

So appreciate the question.

Yes.

As Jim mentioned and do want to recognize the Domestic U.S. team just did an excellent job this second quarter of bending that cost curve.

And as a credit to their execution, to their efforts, it also is reflected by all these investments we've been making in these automated buildings and in our strategic imperatives.

So a good job there, and we expect momentum will continue.

Scott Group, Wolfe Research.

It's Rob Salmon on for Scott.

A quick clarification question regarding the announcements yesterday.

You were very clear we wouldn't see any additional costs show up in '19.

Should be also be assuming that the costs in '20 were part of the original plan?

And then from a longer-term perspective, given the change that we're seeing in the small package market, how should we think about incremental margins in Next Day deferred in ground as we look forward?

Yes, so Rob, this is Richard.

And first, we haven't actually given any guidance for '20.

But what I did say was that when you think about what we're investing in for '20 and beyond, we talked about transformation savings both being savings and accretive to EPS, the $1 to $1.20, and part of it for reinvestment.

And so when we come to guiding, we'll go through that.

I think it's really important to think about the second quarter.

When you look at the U.S. profit growth of 8%, it was almost evenly divided between ground and air, which means that the incremental cost per piece that is coming in is coming in much lower because of technology, because of structural change and distance and weight and zones.

And so we do see incremental profit improving.

We also see cost per piece coming down.

And all of that comes together in what we guided for '19 and when we get to '20.

Our next question is coming from Jairam Nathan of Daiwa.

We are seeing new competitors coming into the freight brokers unit.

Can you discuss what UPS Coyote is doing in the market?

Jairam, it's Jim.

I'll pick that one up.

So a couple of things harking back to the acquisition.

First, we bought Coyote.

First thing out of the gate we saw when we acquired was their service level and that hasn't changed and we believe we've got the best service in the industry, and that's just flat competition capability.

Secondly, we are in a protection mode in Coyote.

We've doubled the business already.

We're headed to tripling the business, and competition will continue to force us to invest in new technology, which the team is doing.

We've already geographically expanded into Europe.

We'll keep doing that to grow the business.

And probably, the one I think you should think about the most is that Coyote is the only one in the UPS family.

And the synergies that, that affords us at peak season and then the rest of the year through the cross-selling of the portfolio, I don't think the new competitors kind of have that leg up.

So we're pretty proud of the acquisition.

Thanks.

Allison Landry, Crédit Suisse.

All right.

We'll go through an online question.

The online question comes from Brian Ossenbeck.

Will the new UPS My Choice for business have a premium subscription service level similar to the home product?

Great.

And Brian, this is Kate.

So the -- My Choice for business goes on the heels of My Choice for home, of course, with 60 million strong and customers with higher customer satisfaction than any other part of the business.

And so we see that same tie with My Choice for business.

And we will deliver new solutions through that mechanism.

We will be focused on the general subscribers as well as the premium.

And just as we are doing in the release, you can see unprecedented visibility and controls so that customized experience with UPS for these SMB customers really helps to give a deeper connection and we will continue to go further with it, and again, deliver new solutions through that mechanism.

Next question will come from Chris Wetherbee of Citigroup.

James on for Chris.

Just wanted to ask about the International outlook and given the macro.

Should we be thinking about volumes being down across the rest of the year?

So the International business and the impact on the macro was their question.

I'll pick it up.

Look, in David's opening comments, he talked about the trade picture, it's kind of different coming to this year than we saw it.

But remember a couple of things about the international business as it moves through the globe is that it is both a growth and diversification engine for us.

And when you talk about that, you have to have the ability to move it as trade moves.

What you've seen in this really challenging trade environment is that they just recorded record profits again.

And so at the very end of the day, yes, there are trade wins, but there's also tailwinds in this world, and when we find those, we try and lean into them.

We get the network, right?

We've talked about the second half is going to speed up, that's going to include International.

And really, at the end, when you say you're to going to run this globe's largest logistics network, no matter what happens to the macro, things are going to come and go over time and our job is to move this network where the customers see opportunity, and we believe we can provide it to them.

So International continues for a long time in the future for us at UPS.

Our next question is coming from multiple analysts and the question is, is UPS adding air capacity?

And are their contingency plans related to a hard Brexit that we've set up?

So David mentioned in his opening comments our air capacity.

We started back in '17 when we went out and made our statements with the 747-8.

Remember, though, from that position, we talked about a bump and roll in the network and moving assets through the globe and where the opportunities existed.

So yes, we're going to move capacity toward this.

And remember the flexibility in the way we do it, that comes from labor contracts, it comes from business units, it comes from different products and suites that we offer.

We've got a lot of levers to pull.

And when you can see the Next Day grew like it did in the quarter we just ended, that meant we had to move capacity to it to do it.

And so we're moving it and we will continue to move it as the opportunities to grow present themselves to us.

Jack Atkins with Stephens.

Congratulations on a great quarter.

Jim, a question for you about peak season planning.

I guess looking at the calendar, I believe there are 6 fewer days between Thanksgiving and Christmas this year.

Can you talk about what you're doing to prepare the network for that?

And does that more compressed calendar increase the execution risk as you guys think about the holiday season?

So look, I think you've got it right on the calendar.

Last time we saw a calendar like this was about 5 years ago, and so quite frankly, we've been in preparation for this for some time.

One of the points most people don't really get right now is with the air growth we've seen right now, we're in peak season air growth numbers right now from last peak.

And we feel like, last peak, we proved to the market we could take a step forward and we plan to do it again this peak season.

Yes, it's more challenging, but we're stronger and better.

And our airline is more fit for duty and so are the people that run inside of it.

So our ability to do what we're doing right now gives us really strong confidence.

The other thing that most people can't see from the outside is when we put our buildings up in '18 to get ready for peak of '18, the majority of those buildings, 80% came online in the fourth quarter.

'19, 80% come on in the first 3 quarters.

So we've flipped the model around that we're really going to be fit for duty we feel like for our customers going into '19 peak regardless of really the days that they're presenting on the calendar we'll get through it just nice .

We're going to take an online question from multiple analysts.

This question comes with the color of our Freight Forwarding business and the ability towards health care in that industry and our health care strategies moving forward.

Yes, thanks for the question.

Very much related to the health care initiative, 1 of our 4 strategic initiatives in yesterday's announcement on the UPS Flight Forward.

As you recall, we have a preliminary approval and we've leveraged that at Wake Forest in their medical center.

That is a single operator who moves some goods from one part of the campus to another.

Our FAA 135 filing that we have made is a very exciting development.

That, with approval from the FAA, and we believe we could be one of the first, if not the first, fully licensed airlines with a certificate that will allow a single operator to not only do beyond visual line of sight, but also night flights.

So we see it as a major opportunity for us to continue to grow share in the health care vertical.

Scott Schneeberger of Oppenheimer Funds.

One of the -- pursuing international high-growth markets was one of the strategic imperatives highlighted in the transformation comments last year.

Could you please discuss the progress there and tie in this new Worldwide Economy product that you've just announced?

Sure, I think and right now we kind of come forward since the Transformation Conference to focus on 10 markets.

I think given the structure of the call, I won't take you through all of them.

Certainly, by the way, China will be one of those.

We know that, that trade lane to the U.S. is a bit challenged.

But remember, it grows in other ways.

And so that's what the global network does.

So going forward, the year-over-year export also has some issues in it related to cyber last year.

The second half will pick back up as we've talked about.

So look, we're going to continue to move forward in the Worldwide Economy product.

What it really does is allow us to enter this really fast-growing market that we know has been growing 6 to 8x as fast as anything else over the years and enter a different price point with product set that we haven't really put in our network before.

So it is a very big move for us.

And you've seen the way we're going to bring it to the market in a very low cost way with Incoterms that allow customers to choose.

So we're -- we believe that will definitely add fuel into the growth markets as we go forward.

Yes.

So you think of this as a complimentary service.

It's not really something that's going to take away from our existing Express, but it does open up to these marketplaces, the small businesses an opportunity for a deferred shipping option at a much lower cost, which means we're going to see a lot of traction there.

So we believe this is a very important part of our International portfolio.

We're going to take an online question.

This question comes from Fadi Chamoun of BMO.

Can you help us understand more on the U.S. Domestic mix, both the B2B and B2C growth?

Yes good morning.

Fadi, this is Kate.

So our B2B grew 2.5% and continues the growth sequencing that we've had for the last 3 quarters.

And these solutions actually that we've announced are both for B2B and B2C.

I'll highlight UPS My Choice for business.

Sometimes folks will think that, that is primarily only for the business to the consumer, but in truth, a lot of SMBs are empowered now through unprecedented visibility and control to better address their business customers as well.

And of course, the 7-day, we've got the Saturday commercial.

And then Access Points, also micro-small businesses are one of the largest shippers out of our Access Point locations.

UPS Store, of course, having -- they're being located right in their communities and driving a lot of that B2B volume.

And then, of course, our Returns portfolio, is what I would also emphasize.

Returns come with B2C growth and we've seen the benefit of that as well.

So we are continuing to focus on growth across our products as you saw in this quarter.

David Ross of Stifel.

Just wanted to focus back in on the expansion of the air network and the fleet, adding 44 new planes and 11 this year, really to see how the supply curve matches up with the demand curve.

So if you could talk about I guess any network changes that are going on as you add the new planes?

Are they catching up with existing demand?

Or is it going to kind of -- is the capacity going to lead and the demand going to follow at some point?

Okay.

I'll start.

This is David to answer your question and give it over to Jim.

I can tell you that our timing could not be any better with the addition of the aircraft and the flexibility that we have whether we want to implement these aircraft internationally or if you want to bring them to the U.S. So we have the capacity at the same time there's a very real structural change occurring.

So just couldn't have that lineup any better than it has.

And now we're taking advantage of it.

And Jim, you want to talk a little bit more about the capacity?

Well, I do think you said it very well, David, in that the 11 that we're bringing on this year, the 11 that we're bringing on next year of 7 4s and 7 6s, it's time for everything.

I mean we spent a lot of time talking about a couple of trade lanes in the world, but we should also focus on what this world is doing crossing borders and growing and our participation in this global network.

Remember, everything that we're flying around this world end up in the United States of America.

There's a lot of South-to-South trade that goes involved in this and we can move the assets there.

We have the flexibility as we talked about.

And when it moves, in this case, potentially the structural change in the U.S., we can move the assets.

And of course, it's not all physical.

It's also block hours.

I would also say that if you look at this year back to the efficiency metric, it's not just about buying more of them.

Our block hours were up about 50% as high as our volume in the U.S. this year.

So that's another efficiency metric.

And if you look at our utilization rates, they're higher this year than last year.

So we think the timing, as David said, is really spot on perfect.

We're going to take another online question.

This is from multiple users.

Is the USPS able to handle the additional delivery with the standing -- expanding U.S. services?

This is David.

And I'm assuming this is talking about Sunday delivery where we're utilizing our own network.

We're utilizing Access Point and we're utilizing USPS from SurePost expansion.

And I can tell you that I've personally gotten a commitment from the top of USPS that they understand our requirements and the needs of our customers, and they're absolutely committed to work with us to make sure that this is going to be a very successful offering.

So I couldn't be any more confident in our Sunday delivery capabilities, all 3 parts of the strategy including the commitment from USPS to perform at the levels we need.

Thank you.

Helane Becker, Cowen.

I just have a question about your carbon footprint because you guys are kind of leading-edge in sustainability and things like that.

And you went with 4-engine 7 4s versus 2-engine 777s.

And I'm kind of wondering if you can just discuss the difference between the two.

Why the 7 4s make more sense for your network than a 2-engine aircraft would have in the context of keeping your carbon footprint low?

A few points on that one.

First, of course, we bought those aircraft based on the efficiency that those particular aircraft bring to the overall network.

We believe that they're extremely efficient and that they will continue to help us provide the necessary value to the organization.

Now when we look at sustainability, it's more than just the aircraft.

Sustainability is important to us.

We design our buildings, we design our vehicles, we select our aircraft with sustainability in mind.

And especially as we continue to build our Smart Logistics Network, making sure that we do it in a sustainable way is extremely important to us.

And we've published the objectives for sustainability.

They are widely documented, you can see them.

One that I want to highlight is that we've said before that by 2020, 25% of our total vehicles purchased annually will be of alternative fuel.

We're actually on path to make that objective.

It's the first one that we have in 2020.

There are more coming on in 2025.

We expect to meet our targets.

Yes.

Just to focus a little more on the aircraft side.

I want to tell you when we made the decision for the 747-8, that was certainly one of the perspectives we looked at.

And this very modern aircraft, it's very efficient.

And the big thing you have to keep in mind, though, is the size of this aircraft.

And when you put -- fly 1 plane versus 2, you're going to gain from sustainability all day long.

So the key is to have it utilized to where you are able to do that.

Eliminate aircraft because you have larger aircraft.

An excellent question, and it was certainly high on our priority list when we made the decision.

And we've been very pleased with how that has worked out for us.

So thank you for the question.

That concludes our Q&A today.

Now I will turn the program back over to Mr. Childress.

Please go ahead, sir.

Thank you very much, Steven.

David, closing comments?

Yes, Scott.

We're making significant progress in executing our strategies.

And from the questions today, I can tell that there's a lot of people in this call that agree with that.

Our transformation initiatives are improving efficiency and they're enabling new innovative solutions like the ones we covered yesterday.

And there are more to come.

So I don't want anyone to think that this is what we have for this year and for next year.

We have a lot of smart people that are having good conversations with our customers.

And we're going to continue to enhance our service and we're all excited about it.

We're becoming, as a company, more agile.

And the timing of our investments could not have been any better.

The structural change in the market for next-day delivery is favorable for UPS.

It's favorable for our customers and for the consumer, but it is certainly favorable for us.

The U.S. Domestic segment has good momentum and we're going to continue that momentum.

We continue to see growth opportunities in the U.S. and also internationally and in our Supply Chain business.

So in summary, we expect strong profit growth ahead, and we'll continue to accelerate our initiatives and move at a faster pace.

So thank you very much for joining us today, and appreciate the time.

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

We'd like to thank you for your participation.

Have a wonderful day.

You may now disconnect.