UPS Q1 Earnings Conference Call: Full Transcript

Operator:

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 2016 Earnings Conference Call. All lines have been placed on mute to prevent any background noise and after the speakers’ remarks there will be a question-and-answer period. Please note we’ll take only one question from each participant to accommodate more analysts during the call. Thank you for your co-operation.

It is now my pleasure to turn the floor over to your host Mr. Joe Wilkins, Investor Relations Officer. Sir, the floor is yours.

Joe Wilkins: Investor Relations:

Good morning and welcome to the UPS first quarter 2016 earnings call. Joining me today are David Abney, our CEO; Richard Peretz, our CFO; along with International President Jim Barber, President of US Operations Myron Gray and Chief Commercial Officer Alan Gershenhorn. Also joining us today is Norm Brothers, our General Counsel.

Before we begin, I want to review the Safe Harbor language. Some of the comments we will make today are forward-looking statements that address our expectations for the future performance or results of operations of the company. These statements are subject to risk and uncertainties, which are described in detail in our 2015 Form 10-K. This report is available on the UPS Investor Relations website and from the Securities and Exchange Commission.

The webcast of today’s call along with a reconciliation of non-GAAP financial measures are available on the UPS Investor Relations website. And just as a reminder, please ask only one question so that we may allow as many as possible to participate. Thanks for your cooperation.

Now I will turn the call over to David.

David P. Abney: Chairman and Chief Executive Officer:

Thanks, Joe. I’m pleased to be here this morning to review another excellent quarter. I want to take a moment to say thank you to UPS employees around the world for their hard work and dedication in delivering more than 13% earnings per share growth this quarter.

The International segment sustained its momentum with its fifth consecutive quarter of double-digit operating profit growth. The US Domestic business also expanded operating margins as efficiency gains enhanced bottom-line results while supply chain and freight performed slightly ahead of our expectations. Our accelerated investments in the UPS network are improving business results. This is enabling us to deliver strong financial results despite the current mixed macro environment.

In the US, GDP forecasts continue to be revised downward, yet consumer spending remains the primary catalyst for growth in the economy and e-commerce sales have again exceeded expectations. On the other hand, industrial production remains below 2015 levels.
In Europe, economic expansion has slowed slightly, but the pace of growth remains healthy. While in Asia the major economy showed positive signs of stabilization as exports from China improved in March.

Despite these mixed economic conditions, we remain committed to making investments for growth and efficiency. We will continue to implement our enterprise strategy, providing UPS customers with increased choice, convenience and control. During the quarter, we launched enhanced products to support customers’ needs for earlier delivery. Our Next Day Air Early now serves almost 30% more ZIP Codes, strengthening our leadership position and offering the earliest next day deliveries.

We also increased our Worldwide Express small package offering to 23 new countries and territories. UPS now offers guaranteed noon delivery on the next possible business day to 88 countries around the world. In addition to broadening our service portfolio for growth, we also are investing in our infrastructure with innovative technology and major facility expansions. The ability to combine our integrated network with the latest operating technology helps UPS deliver industry-leading margins and provides tremendous value to our customers.

ORION is a great example of how we use predictive analytics and big data to improve service while bending the cost curve lower. Our future plans for ORION will enhance the benefits for UPS and our customers. In fact, I recently had the great honor on behalf of all UPSers to accept the prestigious 2016 Franz Edelman Award recognizing ORION and UPS’s leadership in operations research.

In addition to innovation in on-road technologies like ORION we are making major investments in new capacity and modernized facilities both in the US and Europe. In the US, we’re expanding major facilities in Metro LA, Denver, Chicago, and other areas around the country. In Europe as part of our $2 billion European investment plan announced in 2014, we opened a larger automated hub in Lyon, France, tripling our capacity in the area and we also announced an automated facility expansion in Harand Germany.

Adding to these examples is our innovative infrastructure is our commitment to global leadership in alternative fuel. This quarter we announced an additional $100 million investment to expand compressed natural gas in our delivery and facility network.
Our alternative fuel vehicles are now 6% off our global fleet and have helped UPS reduce its annual use of conventional fuel by 10%. We are well on our way to achieving our goal of driving 1 billion miles worldwide by 2017 with our alternative fuel vehicles.

As we invest in the US and abroad, the ability to grow our business is accelerated by global trade. Recently the President signed the Trade Facilitation and Trade Enforcement Act. This important legislation is designed to modernize, strengthen and streamline cross-border trade, facilitating clearance of goods into the US.
The UPS strongly supports the expansion of free trade around the world. We are developing additional solutions that assist buyers and sellers to transact business across borders.

So, in summary, the first quarter results demonstrate the differentiating value of our integrated network and global portfolio. Our investments and technology and capacity are producing network efficiencies and giving us more control over the cost drivers in our business and this is providing improved financial results. At UPS we are innovating and investing to ensure we anticipate the needs of our 10 million customers. Before Richard covers the quarterly financial results, I’ve asked Norm Brothers, our General Counsel, to provide an update on developments surrounding the Central States proposed benefit reduction plan.

Norm?

Norman M. Brothers: Senior Vice President, General Counsel and Corporate Secretary:

Thanks, David and good morning. This is a topic that we first disclosed in our third-quarter 2015 10-Q. The Central States Plan proposes to make retirement benefit reductions to its participants including certain UPS employees. When UPS withdrew from the fund in 2007 as part of our collective bargaining agreement with the International Brotherhood of Teamsters we agreed to provide supplemental benefits in the event that certain benefits were lawfully reduced.

As a reminder, in December 2014 Congress passed the multi-employer Pension Reform Act, which for the first time ever allowed multi-employer pension plans to reduce benefit payments to retirees subject to specific guidelines, written into the statute and government oversight. As a result of this law, the Central States Pension Fund submitted a benefit reduction plan for approval to the US Department of Treasury in the fall of 2015.

As we explained in our 2015 10-K we are challenging the Central States Plan because we firmly believe that it does not comply with the law. According to this new statute we currently expect a decision from the Department of Treasury on or before May 7th unless there’s some agreement to delay the process. Of course treasury could reject central state’s proposal, confirming our position. If this happens, the benefits paid from central states will not be reduced without further action.

In the event this plan is approved as proposed, we fully intend to continue challenging it and pursue all legal remedies available to UPS.

As we gained additional information during the quarter, we continue to assess the possibility impact of treasury’s review of the plan on UPS. This is a new law and the first time the approval process has ever been used. And as I stated, we firmly believe the proposed benefit reduction plan does not comply with the law. We recognized there are a lot of unanswered questions, but without treasury’s decision we’re not going to speculate. However, we still thought it was important to provide you an update on the process.

Now, I will turn it over to Richard for a financial review of the issue.

Richard Peretz: Chief Financial Officer:

Thanks, Norm. We estimate that if central states plan is approved as proposed and implemented, we will be required to record a charge of approximately $3.2 billion to $3.8 billion later this year. Our estimates are based on the information currently available to UPS, and assumes among other things that the plans implementation is not delayed. If this charge is necessary, we expect it will be treated as an interim mark-to-market pension charge and will be reflected in this year’s financial results.

In addition, there may be an increase in the ongoing pension expense that could impact 2016. Following our call today, we will provide a presentation on the IR website regarding this subject.

Now, let’s move on to business and how it continues to perform. As David said, the consumer is driving the economy and that translates into opportunities for UPS. During the quarter, we turned e-commerce growth into expanded margins and increased operating profit in the US domestic segment. This combined with momentum in our international business and slightly better-than-expected performance in Supply Chain & freight segment produced another strong quarter.

Now let’s go a little deeper into the results; starting with the US Domestic segment. Where operating profit increased $78 million or almost 8% and operating margin expanded 50 basis points to 12.1%. Revenue was up 3.1% over last year to $9.1 billion. However, lower fuel surcharges were a drag of about 120 basis points on the growth rate. Average daily volume increased 2.8% with the ground products up 3.3% and Next Day Air up 3%.

After five continuous quarters of double-digit growth deferred products declined slightly. E-commerce customers drove both B2C and B2B shipments higher with B2C up more than 6%. Interestingly supporting B2B growth during the quarter online purchases drove demand for UPS’s best-in-class return services portfolio which grew double digit this quarter. Base rates increased about 2% but were offset by changes in package characteristics and the mix of product and customers.

There were the 120 basis point drag from lower fuel surcharges that weighed on the reported deals. As a result, total revenue per piece was down 1.3% from the prior year.

This quarter, the margin expansion was driven by the excellent cost management demonstrated. Cost per piece was down 1.9% compared to last year. Network efficiencies continue to improve and we are seeing those improvements in our bottom line.
At the foundation of our success this quarter is the continued benefits of the UPS integrated network overlaid with our unique technology.

Looking at our key daily statistics, and this is where we’re seeing good improvement, is the expansion of ORION lower driver miles by about 1% despite the fact that total stops grew by about 6%.
In addition, overall productivity gains held direct labor hours to an increase of 1.8%, well below the average daily volume growth. As these trends continue, UPS is improving the stop economics of e-commerce.

Now let’s turn to the International segment. As David said, we are reporting our fifth consecutive quarter of double-digit operating profit growth. International operating profit increased more than 15%, reflecting the impact of disciplined pricing, better network efficiencies and in-country cost control.

Revenue on a currency neutral basis was slowed this quarter by management actions we implemented in the third quarter of last year. In addition, lower fuel surcharges negatively affected the growth rate by about 200 basis points. Currency neutral revenue per piece was up 1.6% with Domestic products up 2.8%. Strong base rate improvements were across all regions of the world and contributed to the best yield growth in more than two years.

Revenue management actions also affected International volume, mainly the non-US Domestic products. Meanwhile we saw increased demand out of Asia and Europe into the US offsetting lower US exports. Export volume has started recovering from the revenue management actions we started in mid-2015. Fewer local operating days, mostly due to the timing of the Easter holiday, lowered the growth rate by about 200 basis points.

Now let’s discuss the supply chain and freight segment where operating profit was better than anticipated, but slightly less than last year as the segment managed through a tough economic backdrop. Total revenue on a currency neutral basis was up more than 11%, driven by the addition of Coyote Logistics. The asset-light truckload brokerage businesses managing well even in a market that remains soft and the synergies remain on plan. In addition, market conditions remain weak both in the Air Freight Forwarding and UPS freight markets.

In the Freight Forwarding unit, international airfreight kilos were down and it’s due to a combination of re-pricing efforts in 2015 and an overall softer market. Margins expanded as the unit held firm with rates and achieved higher buy-sell rate spreads. Distribution revenue on a currency neutral basis was up around 7%. Supported by our industry-specific solutions we had double-digit gains in healthcare, aerospace and industrial manufacturing sectors.

UPS freight remain committed to disciplined revenue management. LTL revenue per hundredweight increased 2.1% as the unit continued to focus on serving higher yielding middle market customers, yet total tonnage declined as market conditions remain challenging.

Now for an update on our cash position. The company generated $2.2 billion in free cash flow after investing almost $400 million in capital expenditures. UPS improved its quarterly dividend by almost 7% during the quarter and paid about $670 million in dividends and the company repurchased 6.8 million shares for approximately $680 million.

Now I’d like to update you on our guidance for 2016. The first quarter results continued our momentum from last year and we remain on track for 2016. Economic conditions around the world remain mixed. However, our business model is adapting well in this environment.

In addition, international and supply chain and freight will lap certain pricing actions we took last year. Based on our current performance we reaffirm our 2016 full-year guidance of $5.70 to $5.90 adjusted earnings per share.

This guidance does not include any impact for the department treasury decision on the benefit reduction plan. Regardless of how UPS chooses to respond to treasury’s decision we still expect to remain within our 2016 guidance. However, if the plan is approved and implemented without delay, the ongoing expense could possibly push us towards the lower end of the range. As we stated earlier, we fully intend to continue challenging the plan if it is approved by treasury.

To summarize, this quarter is an example of how our accelerated investments are providing benefits across the company. We are adapting to the changing market conditions, bending the cost curve and at the same time producing strong financial results. We are well positioned to continue to make progress through the rest of 2016.

And now I’ll ask the operator to open the lines for the questions. Operator?

Question & Answer

Operator:

As to remind you, please only ask one questions so that we may accommodate more callers in, please feel free to get back into the queue and we will take more or second question time permitting. Our first question comes from the line of Ben Hartford, Baird. Please go ahead.

Ben Hartford: Robert W. Baird & Co., Inc.:

Good morning, guys. I just wanted to know your thoughts on yields given the competitiveness that we’re seeing in truckload rates in particular during 2016. That 2% base rate within Domestic, what is the likelihood that that meets or exceeds that level as we move through 2016?

Alan Gershenhorn:

Hey, Ben. This is Alan. First of all, we saw some really good volume growth in the US that certainly was in line with our expectations and we continue to align the revenue the value we create and with the cost incurred. The first quarter ‘16 we certainly continued our successful base rate strategy and we did achieve a base rate increase between the 2% and 3%.

It was offset by about 120 basis points to lower fuel surcharges as well as continuing to still see some significant changes in the customer and the product mix and the package characteristics that are also weighing on that base rate increase.

Just one quick example here. SurePost, it’s the lowest revenue piece product in our portfolio by its nature, it achieved double-digit growth this quarter. It also has some of the highest delivery density in our network and it generates excellent profitability and it’s even more profitable when we combine that with our SurePost redirect. We’ve got a lot of examples where we’re focusing on driving profits where the revenue to cost ratio is, where the RPP is actually lower than average.

Like STS, UPS Access Point, returns, they are all significant density creators. Rich do you have some comments?

Richard Peretz:

Yes, Ben, the other thing that I think that’s important to understand as we make the adjustments for how the characteristics are changing, the benefits that we’re seeing on how we’re handling within our network and the implementation of our technology is showing up in the bottom line and as you saw the cost per piece actually reduced almost 2% and that created the margin expansion in the US.

Ben Hartford:

Okay, if I could just ask a clarifying comment there. Is there enough disconnect in terms of the customer conversations that B2C and e-commerce growth can be viewed separately from the broader kind of freight fundamentals, specifically the pricing on the truckload, such that you can continue to get positive and healthy yields with regard to B2C in particular even though broader freight rates in 2016 appear to be much weaker than that?

Alan Gershenhorn:

I think there’s definitely two distinct markets there. It’s certainly a competitive market but we focus our pricing consistent with the value we provide to our customers and we’re continuing to enhance our efficiencies like Richie said and our value proposition with what David mentioned on UPS Early Express and so on and so forth. So we’re confident in being able to achieve the range of 2% to 3% going forward.

Joe Wilkins:

Thanks Ben, this is Joe. Just as we move forward, let’s just keep it to one question so that we get as many on as possible. Thanks, Ben. Next question.

Operator:

Tom Wadewitz, UBS. Please go ahead.

Tom Wadewitz: UBS:

Yes, good morning. I just wanted to ask around the international margin improvement. So congratulations on the strong margin improvement there. I was wondering if you could give us the sense of I guess you talked about some of the key drivers but does the pace of that accelerate, does it kind of sustain in terms of some of the things you’re doing to drive that 300 basis point margin improvement just so we have kind of a way to look at it going forward in the next couple of quarters? Thank you.

Richard Peretz:

Sure, Tom, this is Richard. I think the first thing, it was a very strong quarter but our focus is really on our earnings or growth in earnings and economic value more than the margin because there are fluctuations in the network and which products are growing stronger year in and year out.

The other thing to keep in mind is that the hedge program that we’ve really had in place for multiple years does aid the margin. Even if you adjust out for that you are still talking about almost a 17% margin which is the best in the industry. I am going to ask Jim to actually comment on a few of the initiatives that are driving the improvements in International.

Jim Barber:

Thanks, Richard. So Tom I think it’s really a two-part question for me. One is backward looking how we’ve done, you’ve seen the last five quarters we feel good about that. I think the other side to it is that at the same time right in line with our overall growth strategy we’re able to invest in some of these growth platforms we’ve talked about over the last year, year and a half like Access Point, like Southern and freight lane borders across the world in emerging markets.

So that ultimately it’s the here and now you see the margins and you hear Rich’s comments with respect to the lift in currency and so on and so forth.

But the general operating efficiency and base rates is holding us but at the same time we feel really good, I do, about the investments we’re making for the long term at the same time. So I appreciate the question.

Operator:

Next question will come from the line of Ken Hoexter, Merrill Lynch. Please go ahead.

Ken Hoexter: Bank of America Merrill Lynch:

Great, good morning. Maybe just a little bit of clarification on the pension exposure you talked about at the opening of the call, the $3.2 billion to $3.8 billion. Is that cash a one-time charge, is that a cash expense that you would have to pay out and then more on the ongoing level you talked about, can you talk about the ongoing impact and what the ongoing cost exposure could be? You talked about moving to the lower end of the range but just maybe give us some parameters on what the ongoing expense would be. Thanks.

Richard Peretz:

So I think the first question you asked was whether it was a one-time payout. Actually the way this, first of all it’s a complicated topic and there will be a deck I mentioned out on the website to explain it a little bit better, but it really isn’t something we’re paying to a third party. It would be a liability that we would have to take on. But that being said, we’ve looked at many different scenarios and we feel comfortable that even if this was approved and why we go down the path of looking at our other options legally that it would have a operating income impact but it would still keep us within the range that we gave at the beginning of the year.

So there’s a lot of unanswered questions that we just don’t know until we know more from Treasury’s decision but at this point that’s really all we can share with you.

David Abney:

And this is David Abney. I just want to remind people that we do not know how Treasury is going to decide. We’re expecting a decision between now and May 7, May 8 but they could reject or they could accept. We just felt it was important to get the information out that just gives you an idea if they did accept the plan. But we really don’t have an idea of which way they are going to decide so we don’t want to send any other impression out there.

Operator:

David Vernon, with Bernstein. Please go ahead.

David Vernon: Sanford Bernstein:

Good morning guys. Just Richard, maybe a question for you on the productivity side. It seems like the mix was a little bit weaker in the quarter, I’m just wondering if that’s a fair assessment?

And then as you think about that decline of 190 basis points year-over-year in the unit cost for the Domestic segment was that influenced in any way by the mix? Did you get some help there for some of the lighter weight or lower cost products versus kind of pure productivity? Is there any way to think about sort of break it up that 190 basis points in relation to mix? Thanks.

Richard Peretz:

Sure. Because we run an integrated network and when you think about the activities that occur, mix has a little bit of play when SurePost grows faster. But I would tell you that we expected SurePost to grow faster this year. Last year we talked about the two year stack and we knew that SurePost would continue to grow.

But that being said, when you look specifically at what we’re doing in the US with how direct labor hours are being managed because of really the overlay of Orion and what we’re able to do with reducing miles at the same time as increasing stops. It’s something we’re starting to see in the last few quarters and it’s something we still expect to continue to see and I’m actually going to ask Myron to talk a little bit about some of the initiatives that he seen from Orion and what’s happening in it because the expansion of the margin really was something that we did expect and we continuing to do expect.

Myron Gray:

So David, it’s really a combination of a number of activities that we’re undertaking to continue to bend the cost curve. Richard has referred to Orion and, yes, while our stops grew almost 6% we were able to reduce our miles by 1%. But when you add in SurePost redirect coupled with access point it allows us to build greater densities that we’re taking advantage of it. You’ve also heard us talk about SBS and Edge which we will talking about more about later this quarter, this year.

Those activities combined regardless of the mix has allowed us to continue to bend that cost curve. Then you couple that with some of the automation projects that we have in place, it’s not only allowing us to bend the cost curve but it’s also ramping up our service to our customers.

Operator:

Chris Wetherbee, Citi. Please go ahead.

Christian Wetherbee: Citigroup Global Markets:

Hey thanks, good morning. I wanted to ask about the ground volume growth which was impressive in the quarter, we definitely saw a re-acceleration and I think in the comments you mentioned that the B2B side benefited probably from e-commerce returns.

I just wanted to get a sense if you could parse out maybe sort of how the industrial side of your business is sort of trending and maybe if you expect that ground growth to continue through the rest of the year here outside of what we saw from e-commerce which is probably at least partially holiday-related so any comments there would be helpful.

Alan Gershenhorn:

Yes, thanks, Chris, this is Alan. As you said, we had a really strong quarter B2C growth and our customers are really responding to the choices we’re providing. The e-commerce customers drove both B2C and B2B shipments higher with the B2C up more than 6% and by the way that was our best B2C growth in the last five quarters and like Rich said we even achieved margin expansion with that growth of B2C. The online purchases are continuing to drive demand for UPS’s best-in-class return services which are essentially a business delivery and we did see mid-teens return growth there.

We think as B2C grows we’re going to continue to see very strong returns growth there that is going to help our B2B segment. So overall B2B is still in positive territory, but it’s still being impacted by the softness in industrial production. But we’ve been positive on B2B growth for the last few years now with the exception of one quarter. So the economy is certainly soft out there when it comes to industrial production, but we think the combination of our B2C and our B2B value proposition to the non-retail segment is going to allow us to continue to grow that B2B business.

Operator:

Nate Brochmann, William Blair.

Nate Brochmann: William Blair & Co:

Yes, good morning everyone. Thanks for taking the question. You know obviously this has been well-publicized in terms of a very high-profile customer kind of maybe doing some more things in-house and I know we’ve talked about the value proposition for UPS a lot of the years. But have you seen probably the majority of what they plan to do already taken in-house in terms of that already kind of being behind you and has that impacted at all kind of the density benefits that maybe we were on previous trajectory to be able to get and do you have to do anything to circumvent that?

David P. Abney:

Okay Nate, this is David. I will just start off with saying that high-profile customer I think because of the scale and the scope gets a lot of attention and everything that they do obviously can appear under the microscope. I can tell you, though, that we value our mutually beneficial relationship and obviously we evaluate any market moves that any company or customer makes and we look at it from a competitive standpoint.

Where I really want to focus is our integrated network creates efficiencies and just gives us a value proposition that is very difficult to match. Our diverse customer base also just from a density standpoint no single Company is going to be able to match that. So we add value with global scale and scope, we continue to invest in technology to deliver high-value solutions and there are going to be customers that are going to utilize us as a single source. There’s going to be other customers that are going to adjust and sometimes go single source, sometimes go multiple vendors and sometimes they will bring some work inside of take it in-house and that’s going to adjust as conditions adjust.

But we feel we have a good relationship with that customer and feel that we will continue to add value for many, many years to come. Thank you.

Operator:

Our next question will be from the line of Brandon Oglenski, of Barclays. Please go ahead.

Brandon Oglenski: Barclays Capital:

Good morning everyone and thanks for taking my question. So can we come back to the economic picture? You guys will talk a lot about how you moved 6% of US GDP in your network every day. How do we read the divergence in industrial production and consumer growth plus really weak international trade but you are still seeing premium expansion in your network? What does this all mean for GDP and IP looking forward and have your customers given you any view on expectations heading into the back half of the year on inventories and growth?

David P. Abney:

Okay, Brandon, thanks for the question. It’s David and our customers are giving us a lot of views and I’ll give the same impression to that that I would to the -- and that’s that it’s very mixed and US GDP has obviously weakened. Even today the numbers that came out quarter-over-quarter has showed weakness and year-over-year a slight deterioration. But again, you can look and you can find bright spots and you can find things that worry you.

On the one hand consumer spending continued to be the primary economic driver in the US. On the other hand industrial production has been disappointing some recent data on manufacturing that is showing some sign of expansion. On the one hand, again, online retail is continuing to grow much faster than many expected. On the other hand especially brick-and-mortar retailers have not done so well.
Again, on one hand inflation and unemployment have stabilized, although wage growth of course has been muted. And when you look at it internationally I think the same thing, you’re going to see positives and you’re going to see things that concern you.

From the European Union we still expect to see that economy grow at a fairly solid pace compared to the recent past but there are signs of slowing, especially in some countries. Emerging markets, you see some concerns there especially in Brazil and Russia. China, though, the GDP forecast has stabilized.

You look at US exports because of the strength of the dollar that of course has weakened but when you look at European exports imported into the US that has been pretty solid. But my final point, and I think it’s what’s led to our success the last four or five quarters and will continue to lead to it, is that regardless of these challenges we have to make challenges opportunities.

And it’s how we execute our investments, our strategic initiatives. If we continue to execute we have proven and we’ll continue to prove that we can have success in this mixed economic department. So thank you for the question, I appreciate it.

Operator:

Our next question will be from Scott Group, Wolf Research. Please go ahead.

Scott Group: Wolf Research:

Hey, thanks, morning guys. Just one quick question, just going back to the pension issue for a second, if this thing happens does it have any impact on capital allocation, share buybacks either for this year or next year?

Richard Peretz:

The short answer is it does not have any impact on 2016. We continue to allocate capital the way that we planned. For everything for 2016 we continue on the plan. There’s a lot of unanswered questions we talked about, but that won’t change what we’re doing for this year and for 2017 later in the year when I guide we will go through there.

As I told you we’ll have gone through multiple scenarios and certainty will be understood a little differently and then we’ll make the appropriate plans because there are different things and different tools available to us as well. So I just think it’s too early to look at that but 2016 will continue as is.

Operator:

Our next question will come from the line of Allison Landry, Credit Suisse. Please go ahead.

Allison Landry: Credit Suisse:

Thanks. Good morning.. In terms of your comments that you’re improving the stop economics of B2C, first can you carve out the impact of productivity gains versus fuel and the 2% improvement and then curious if the rapid growth of e-commerce is finally starting to lead to density increases in local and regional markets? Thank you.

Richard Peretz:

Sure. So Allison, again this is Richard and the interesting thing is you’re right, fuel is lower, it does have an impact on both the cost and the revenue. But if you pull those out we still had negative comps per piece growth and so we are seeing that the benefits of everything that we’ve been really building the last two years showing up in the bottom line and we actually talked about the margin expansion and that plan is a multi-year plan. And so that will continue as we expected it to and that’s it. Thank you.

Operator:

Our next question will from Jack Kauffman, Buckingham Research. Please go ahead.

Jeff Kauffman: Buckingham Research:

Hey everybody, good morning, it’s Jeff. I just wanted to ask a question about CapEx and free cash flow. I mean it was tremendous free cash generation this first quarter so congratulations. But you threw up almost $2.6 billion in free cash and I was modeling about $5.5 billion for the year.

Have you changed your capital plan at all or is there a reason free cash might be a little stronger than expected this year, obviously holding off for anything that may or may not happen with this pension situation?

Richard Peretz:

Sure, again, this is Richard. When you actually look at our cash position and where we’re at as company after the first quarter we’re about where we were last year. In fact, our cash is slightly about $100 million less than last year at this point. So when we look at our plan it’s about the whole year and I want to also remind you that a large portion of our cash, about 40%, is offshore and repatriation would cause additional tax and we need that money offshore for the investments we’re making in Europe and Asia as well.

So our plan was built at the beginning of the year and it’s something that we’re working that plan and that plan really is built to return to shareholders what we’ve been doing previously. We’re investing $2.8 billion in CapEx and we actually spent about 20% more the first quarter of this year than we did last year so will not continue working that plan.

David P. Abney:

Yes, this is David. I just want to clarify a little bit that we are clearly opposing central states plan and that shouldn’t indicate any change on our part to our long-term capital expenditure plan. So again, this is something that has not happened.

We don’t know if it will or it won’t. So we don’t want anyone to read into comments that maybe we’re adjusting our strategy based on this. We continue to execute this capital plan just as we originally planned. Thank you.

Operator:

Our next question will comes from Art Hatfield, Raymond James.

Art Hatfield: Raymond James:

Good morning. Thanks for taking my question the smiting. With one of your competitors getting ready to make for hopefully making an acquisition for them in Europe, have you seen any changes in the marketplace over there any customer dislocation any risks or opportunities ahead of that?

David P. Abney:

Art, this is David, and in Europe it does look like that acquisition is going to be approved and the things that I wanted to cover on that is that we have a very strong position in Europe. We’ve been winning in Europe for some time now and we’ve certainly been sprinting over the last several years. We haven’t changed our strategy we are going to continue to invest and grow in Europe and we’re certainly seeing the benefits of that in 2015.

We’re in the beginnings of our five year $2 billion network investment and we’re already seen benefits from that and just to give you an idea, you know that Europe is a key part of our strategy and we’ve just had great momentum we’ve had five consecutive quarters of double digit operating profit. So what we’re hearing from our customers is that we continue to provide value and they continue to give us more of their share of business. So we think it’s a very positive environment for us.

Jim Barber:

It’s Jim. I think a couple of other points on the back of what David just mentioned is that we just talked over the last year and a half about the capital outlay plan of $2 billion. I think it’s important to note, especially in line with our top-line growth discussion, is that we’ve only touched 19 of our planned almost 70 facilities that we plan to expand throughout the network.

So we won’t be done until 2018. We’re going to be doing that much in line with as you pointed out what is the customer’s expectation in Europe post-merger? We’ve had our eyes on that for some time obviously on the road we traveled. So we are kind of looking at our customer solution specifically and our network and making sure that it leans into those risks and opportunities that any merger brings forth. So we’re looking forward to the years to come in Europe.

Thanks.

Operator:

Jeff Atkins, Stephens. Please go ahead.

Andrew Hall: Stephens Inc:

Yes, thanks guys, it’s actually Andrew on for Jack. Richard, just going back to the International business for a second and the impressive operating income growth there, can you just clarify kind of the puts and takes of that growth? How much is related to lower fuel prices and positive currency translation as opposed to the operational efficiency improvements you guys are seeing?

Richard Peretz:

Sure, Andrew. First let me start by saying that I had mentioned that even adjusting our currency we’re talking about almost a 17% operating margin. So it’s a very positive and it’s actually the best margin in the industry.

The other big thing to remember is, and we talked about it I think in my talk a little bit, was when you look at the yields for International it was the strongest yield we’ve seen in quite some time both in the non-US Domestic and in the International exports as well and your question also mentioned fuel and let me also remind you that we don’t use fuel as a profit center so it does impact the revenue line but there’s really not a big impact to what happens on the bottom line.

This quarter is really about great cost control and the quality of revenue and it was really something that Jim and his folks started mid last year when we took on some revenue management initiatives and we know we will wrap that in the second half of the year. We guided that way at the beginning of the year and so this was really a very balanced profit picture and a return for the quarter for International.

Operator:

Scott Schneeberger, Oppenheimer.

Daniel Mittag: Oppenheimer & Co.:

Good morning guys this is Daniel in for Scott. Premium product is growing faster than non-premium products. Can you elaborate on the drivers there and what you expect going forward?

Alan Gershenhorn:

Hey, this is Alan. Thanks for the question.
Yes, so as you stated our premium Next Day Air products grew more than 3% and I think part of that is the customers responding and enjoying our continual expansion of our Next Day Air and our Next Day Air Early as well as our Express services that David talked to in his opening comments. We certainly are establishing a beachhead there, a leadership beachhead in Express and premium Next Day Air and certainly the healthcare, high-tech and professional service segments are in need of those type of services.

Operator:

Bascome Majors, Susquehanna. Please go ahead.

Bascome Majors: Susquehanna Financial Group:

Yes, good morning. I know it’s only April but as we look out to 2017 can you remind us of how much of the FX hedge protection that you had in 2015 and 2016 is going to roll off next year? Just how should we think about the impact of the loss of some of those hedges from a sensitivity perspective, either if that’s looking at your International segment margins or maybe an overall EPS impact on the Company?

Richard Peretz:

This is Richard again and the first thing I want to remind everyone is that we do use a multiyear hedge strategy and it’s worked very well for the last two years and underlying that is really the strength of our business because the core business is running very well.

Right now we’re in the middle of a process we continue to look at different opportunities because of the volatility of currency to go in and do different hedging to protect and minimize the change. It’s really a little too early to talk about what it’s going to be because we’re still in the middle of that and yes we know the euro went from $1.35 down to today’s rates. But we’re also looking at what other initiatives across the entire enterprise we can move forward to offset some of that. So we’ll continue to work on those two efforts and at the appropriate calendar time we will update you on 2017.

Operator:

Kelly Dougherty, Macquarie. Please go ahead.

Kelly Dougherty: Macquarie Capital Securities:

Good morning guys, thanks for taking the question. I just want to follow up on an earlier economic question. Is there any way to break down how much the adjusted 7% to 11% EPS growth you’re expecting this year comes from external macro-like factors versus some of the internal yield and process efficiency things you’re doing just to get a better sense of maybe how much of the growth story is within your control despite what happens in the macro environment?

Richard Peretz:

Sure. So when we make our guidance at the beginning of the year and we monitor as the year goes we have a certain assumption of what’s going to happen with economic indicators and they have come down. If you go back to January and you look at what GDP was doing and what expectations were around the globe those have all come down. On the other side, what’s happening in UPS and what we’re seeing is a continued margin expansion, the things that we talked about in both international and domestic around both from a cost and network efficiency standpoint as well as making the adjustments as the volume looks different.

So today I’d say it’s more about what’s happening at UPS but we also have to continue to think about what’s happening externally because that does have an impact. But because one is a little bit better than it was going to be at the beginning of the year and the other is a little weaker, you put it together and we think where we are having guidance is the right place.

David P. Abney:

And this is David, just to reinforce, Rich, it’s nice to have tailwinds and obviously you’d prefer not to have headwinds but that’s not the world we live in. But what we had been able to do over the past five quarters or so is to deal with the hands that we have dealt and make the most of it and our management team throughout the world is focused on absolutely that and what’s important is that we stay disciplined and focused on our strategic initiatives. As long as we do that we’re back going to be in good shape and real proud of what the team has been able to do.

Thank you.

Operator:

David Ross, Stifel. Please go ahead.

David Ross: Stifel, Nicolaus & Company, Inc.:

Yes, good morning gentlemen. I want to talk a little bit about the pilots that have been in the news. Any comments you have on the current IPA talks which seem to be I guess heating up a little bit after about five years of discussions and then also the Cologne strike where the pilots didn’t fly the planes this week due to their sympathy strike with Verdi.

Myron Gray:

Yes, David, this is Myron. It’s not unusual to see some of the recent headlines that have been pretty robust on behalf of the pilots. But let me assure you that there is no real threat of a strike. We remain along with the pilots union at the bargaining table and we believe as usual that there will be a win-win negotiation at the end of this for both the pilots and UPS.

And also as a reminder, we’re at the negotiating table with the National Mediation board and it would take action on their behalf to release both parties in order to have something happen and the reality is that’s not going to happen anytime soon. So we’re going to get this thing done.

Jim Barber:

David, it’s Jim. On the Cologne situation, just a couple of points I’d like to reinforce. First of all, there are work stoppages that happen or manifestations that they might be called in the world especially in Europe that we have to deal with day in, day out in our business. The specific situation, to be very clear, Verdi’s stance in Germany in the state of North Rhine, Westphalia was really not even in the logistics sector, it was in the government sector which has a whole another set of views to it.

The IPA and the pilots took their stance on that. Our job is to run the network and I would tell you over the last 48 hours the guys have done a heck of a job over there just like the last time the ash cloud appeared and that power of the ground and the air network came through and tonight our network will be just as normal, tonight, Thursday night in Cologne and we expect to provide great service going forward. So I will stop on that and I appreciate the question.

Operator:

Ravi Shankar, Morgan Stanley. Please go ahead.

Ravi Shankar: Morgan Stanley:

Great, thanks everyone, good morning. You bought a stake in Deliv in February of this year. Can you just talk about the rationale behind that, what you’ve learned so far and also how you see the omni-channel retail shift as a potential opportunity or threat just being a general disruptor in the e-commerce channel. Thanks.

Alan Gershenhorn:

Yes, this is Alan. As you guys know we’ve been in the same day business for a long time with express critical and our world-class service parts logistics network. But certainly there’s a lot of buzz with e-commerce with same day and the real challenge is obviously low cost e-commerce delivery because the consumers are looking for a low cost option there. Currently as you know same day for e-commerce has challenges with consolidating density and single piece stop economics that could create profitability issues as these companies look for the low cost model.

The Lyft goal is pretty unique. It consolidates multiple deliveries on one driver with pickups from multiple stores at a mall, for example, so we’re looking to get some key learnings there. So we made that STS investment into Lyft to better understand the economics demand and value proposition and certainly they are leader in that particular space.

At the same time, we believe that because of the lion’s share of shopping takes place in the late afternoon and evenings there’s much more demand for local next day which really speaks to the latter part of your question about omni-channel and we’re very focused on those local store solutions that enable us to take evening orders that are dropped to these stores, let the stores fulfill them locally that same evening and with a UPS late night pickup we can get next day or morning deliveries. So we can it make the delivery in as little as 10 to 12 hours from the time the order is dropped into the checkout and you combine that again with our industry leading e-commerce platform and we are really leading the way in the B2C e-commerce market. Thanks for the question.

Operator:

We have a question from the line of Helane Becker, of Cowen and Company. Please go ahead.

Helane Becker: Cowen & Co.:

Thanks very much operator. Hi everybody, thank you very much for the time here. Not sure how many employees at UPS are minimum-wage employees but there’s this move especially in California to push the minimum wage up and I’m just kind of wondering how will that affect your compensation, your outlook for keeping costs under control on that line and any comments you can make would be appreciated?

Richard Peretz:

Sure, this is Richard and I think the one thing that’s important to understand about UPS is that many of our wages are part of our national bargaining agreement. So there are very few employees where the start rate would be at something that would be affected by the minimum wage change.

That being said, in some states where there is a slight change it would impact only the people that are first coming onto the payroll with UPS because there’s a progression schedule. So it’s a very small impact. We’ve looked at it and I’m talking hundreds of thousands of dollars kind of thing because it’s not, it’s just not something that is our value proposition as an employer and given the full benefits and rates we pay aren’t things that are going to drive additional cost for us in any meaningful way.

Operator:

We have a question from the line of Rob Salmon, of Deutsche Bank. Please go ahead.

Rob Salmon: Deutsche Bank:

Good morning guys and thanks for taking the question. You know, piggybacking on the e-commerce question which had come up basically prior to me from Ravi, if I think about the local delivery opportunity from a UPS perspective historically I have always thought of that as a tougher market to compete in particularly when there’s some crowd sourcing opportunities given your cost structure. Could you talk a little bit about the attractiveness or not of that marketplace from your perspective and more broadly what are the markets that you think make the most sense to attack from an e-commerce perspective given your returns and margin profile?

Alan Gershenhorn:

This is Alan and thanks for the question. Look, it’s really about the whole e-commerce platform and UPS but certainly all of our brick-and-mortar retailers are also in the e-commerce business so it’s about providing them a total solution and omnichannel is a growing trend in the retail industry.

We’re seeing 30% year-over-year growth in UPS accounts in 2015 and that means at the store level we’ve got about 120,000 ship-from-store locations that are shipping or have the potential to ship.
We’re starting to see this phenomena start to take place also outside the US in our International business. So we think it’s a real advantage for the retailers to optimize for a number of things. Sometimes it’s inventory saving the order because the order is not in the e-commerce Fulfillment Center but it’s in the store. Other times it’s to speed up the delivery, other times it’s to get to the lowest-cost option.

So it’s really about the whole platform that we offer with UPS My Choice, UPS Access Point, omnichannel, the SurePost, returns, the marketplace tools we provide, so on and so forth, that we’re out there selling along with obviously the power of our whole product portfolio aligned to the integrated network that’s really driving that success.

I guess the last thing I’d say is that kind of one of the questions earlier about the density creation, where we’re really creating this density synthetically through all those e-commerce solutions that I just spoke of because all of them both drive customer and consumer convenience as well as density for UPS and you combine that with some of the things we’re doing on the efficiency side with ORION and automation and things that Myron talked about we really believe we’ve got a great platform for e-commerce for both retailers, consumers and to continue to enhance UPS profitability.

Operator:

That was our last question. I would now like to turn the conference back over to our panelists for any closing remarks. Please go ahead, gentlemen.

David P. Abney:

Okay, this is David. I just like to review quickly. UPS had another excellent first quarter.

We are very effectively implementing our strategic initiatives and we’re investing in new capabilities in the right places which will ensure that we remain the world’s premier logistics provider.

Lastly, though, I would like to make an announcement that would be interesting to many of the people on this call. Joe Wilkins will move into the role of Vice President and Corporate Controller and Scott Childers will replace Joe as the Vice President and Investor Relations Officer.

I will speak for myself and the Company, we’re very fortunate to have two very extraordinary qualified and seasoned professionals and I’m confident that each of them will be just as successful in their new roles since they have been in their prior roles. So we really would like to congratulate Joe and Scott. Appreciate what you guys have done and I’d like to thank everyone on the call for joining us today. Thank you.