Q3 2019 Earnings Call

Good morning, My name is Stephen and I will be your conference facilitator today at this time I would like to welcome everyone to the U.P.S. Investor Relations third quarter 2019 earnings Conference call. All lines have been placed on mute to prevent any background noise.

And after the speaker's remarks.

There will be a question and answer period. It is now my pleasure to turn the floor over to your host Mr., Scott Childress Investor Relations officer, Sir the floor is yours.

Good morning, and welcome to the U.P.S. third quarter 2019 earnings call, joining me today, or David Abney or CEO , Brian Newman, our CFO , who joined US in September Richard parents are former CFO Gutman or chief sales and solutions officer, along with our Chief operating Officer, Jim Barb.

For our Chief information in Engineering Officer, one parameter 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. We're operating results of our company.

These statements are subject to risk 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 U.P.S. Investor Relations website and from the FCC.

During the quarter you'd be us recorded a pretax charge of $63 million or six cents per share on an after tax basis. The charges are primarily from transformation related activities with the majority split between the U.S. domestic and international segments in the prior year.

Period, U.P.S. recorded a pretax charge for transformation cost of $97 million or nine cents per share on an after tax basis.

Webcast of today's call along with the reconciliation of non-GAAP financial measures are available on the U.P.S. Investor Relations website, unless stated otherwise discussions today, we'll refer to adjusted financial results webcast users can submit live questions. During the call. We will attempt to answer questions of a lot.

Long term strategic nature callers are asked to submit only one question. So the we may allow as many as possible to participate. Thank you and now I'll turn the call over to David.

Good morning, everyone.

Today, I'm going to provide highlights from the quarter and discuss several of the exciting industry burst solutions, we recently announced.

I didn't jumbo outline our actions for success will be and Richard and Brian will cover the financial details.

Embarked I'd like to welcome Brian Newman till the goal is our CFO .

He brings broad international business experience and I'm very happy he is drawing you'd be a.

I also want to think Richard for his numerous outstanding contributions over his 38 year career you Pos.

Richard staying through the remainder of the year to ensure a smooth transition.

Now turning to the results.

Again this quarter were reporting strong performance in a dynamic environment.

Our transformation investments continued to deliver benefits.

Urban bar are highly efficient and expanding global network.

Our focus on targeted growth from the most attractive opportunities and solid execution of our initiatives.

Our innovative solutions, our differentiated U.P.S. from others in the industry.

As a result consolidated revenue grew 5% and operating profit grew more than 20%, creating strong operating leverage and the highest quarterly operating profit in the company's history.

Margins expanded in all three segments, a testament to the quality of our strategies and disciplined execution.

Our integrated network is running well and widespread adoption of next day delivery is an excellent for expanded their and ground capabilities.

As you are aware trade uncertainty continues to create macro challenges for businesses, we're working closely with our customers to help them a just well also making the most efficient use of our upsides.

Here in the U.S. the consumer continues to drive the economy strong retail healthcare and e-commerce cells bolstered by solid consumer economic conditions.

Our strategy is resonating with customers despite the slow down in industrial sector.

As evidenced by B to B volume growth in other sectors for the fourth consecutive quarter.

We are benefiting from improved SMB customer mix and expect it will continue as we prepare boy it another record peak season.

We have recently announced several new capabilities and solutions that support our strategic growth in periods.

Small and medium sized businesses international growth markets E Commerce and health care.

In the healthcare and life Sciences, there I'm pleased to introduce you Peos Premier.

A new technology enabled health care shipping solutions.

We're adding next generation own package sensors, and special tracking technology to provide pinpoint location information on each package.

In addition, we hope a priority handling program for these shipments that further improves reliability the sensor technologies and special handling plant provide a higher values solution for great visibility and special contingency actions for critical packages.

E Commerce and the rise of online marketplaces and platforms offers boundless opportunities for customers.

And for U P S.

B to C and B to B sellers of all sizes benefit from the convenience of platforms to reach customers and manage their business.

Our digital access program, we're making it easier for Smbs to use U.P.S. services by embedding our shipping solutions directly into the leading e-commerce platforms.

On these platforms, our customers already hosting web sites managing orders for <unk> and other times.

For example, we just know stay new agreement with stamps Dot Com, where are you Pos is presented as a preferred shipping partner to their more than 700000 customers.

We have a presence so many other platforms and have more to comp.

This strategy will enable U.P.S. student increase our market share.

Hi, good quality B to C and B to B E Commerce packages.

As you have seen in recent media coverage you be us <unk> became the first company to oversee ballpark 135 standard approval from the up a to operate a commercial drawn network.

We are working to quickly scale, and just announced a new health care campus delivery program at the University of Utah in partnership with matter not we will transport samples specimens and other cargo via drone instead of using careers.

This new deployment is similar to our initial program launch that wake Med in North Carolina.

And another Floyd forward development. We're also partnering with CBS help to establish other drawn deliver use cases in bobbing deliveries to residential locations.

Together, we will define and implement shipping solutions for urgent deliveries, including pharmaceutical or other Cvs health merchandise.

These solutions leveraged the speed and point to point delivery capabilities of our flight forward drug delivery network. This is an important expansion Cvs health is the first retail partner for U.P.S. Floyd forwards programs.

You. Pos is also working with Amerisourcebergen to utilize drones for delivery of pharmaceutical supplies on hospital campuses or by the company.

We're pleased to help amerisourcebergen develop improved operating efficiency and timeliness among other benefits realized by drone deliveries.

We have also begun a new program with Kaiser Permanente to develop drawn delivery operations at several of their hospital campuses.

Together, we will identify solutions to improve patient outcomes and increase overall operational efficiency, we envision U.P.S. drones offering innovative delivery solutions for many industries again more to come.

Through our investments were strengthening our core business as demonstrated by our operating results.

These actions also further position us to accelerate performs.

Before I turn the call over to Jim Disco speak I want to make a few comments.

This morning, we announced the gym Barber, our Chief operating officer has decided to retire or the end of this year.

Jim and his team, we'll maintain our strong focus on several U.P.S. transformation projects and we'll guide our peak efforts. He has served U.P.S. 35 years and like many of our people. He grows through the rights to an important leadership position.

He has made tremendous contributions during his many domestic and global assignments.

I wish Jim a happy and healthy retirement, and now I'll turn the goal over to Jeff.

Thank you David you P.S. presented many exceptional opportunities that led to remarkable experiences over the course of these 35 years.

I've made enduring relationships with many global customers and I've enjoyed working with many except you P.S. people, who will become lifelong friends.

I've also had the great fortune to be involved was extraordinary philanthropic causes that make the world a better place.

All these experiences have shaped who I am I will be forever grateful to past and current U.P.S. partners, who guided me worked alongside me and gave their best effort to expand and sustain this wonderful company you P.S. has a great future ahead.

That being said our focus is on putting our customers first engaging our dedicated people and creating value for our shareholders. So that brings me to peak 2019, and our plans to handle another record holiday season with Great service and great operating performance, we're very confident our plans will.

Able us to successfully execute peak again like last year.

Our global strategy is focused in three key areas implementation of the proven tools and best practices from last year.

Full utilization of our expanded network capacity and deeper collaboration with customers for joint development of daily volume expectations.

We expect another record peak season, barring any unforeseen weather events retail sales are forecast to grow more than 5% and online holiday retail sales are likely to reach a new huh.

Our network operations are running extremely well with industry, leading on time performance and excellent operating efficiency gains, giving us great momentum as we move into the holiday season.

We had a highly successful peak last year, it was well planned and cleanly executed.

We are building on that approach, but have even more assets to reinforce our confidence in dependable performance.

Since last peak, we've taken delivery of nine new aircraft with two more on the way in support of growing demand for air services.

We will have added another nearly 5 million square feet of highly automated facilities, including another 400000 pieces for our automated sort capacity.

About two thirds of that sort capacity is already online and operational compared to last year when almost all of our new capacity came online in the fourth quarter. We also improved the ground network widening the reach of our next day ground capabilities and speeding transit times you key lanes.

And we expanded the use of technology, providing our expert planning and operating teams with enhanced tools to improve execution and efficiency.

In addition to help support the expected increase in package volume, we are adding about 100000 seal employees and have shortened their ramp up time with enhanced mobile train we expect the holiday shipping season to start the week of Thanksgiving, then rise sharply during cyber week and remain heavy through Christmas.

We're also planning for heavy returns volumes following cyber week, and then again after Christmas through mid January .

Overall during peak 2019, we expect a greater than 5% increase in daily global deliveries above last year.

Yes, we estimate will deliver more than 32 million packages per day around the world an increase of more than 50% over a regular daily volume.

What's more due to e-commerce structural changes air volume continues to grow at near historic levels.

And we expect demand to be strong during peak as next day delivery increasingly becomes the new standard for B to C and B to B E Commerce.

Our preparations also include deeper collaboration with our customers.

Our joint forecasting process, which runs through out peak helps us identified planned and unplanned daily ground and air volume then we align it with available network capacity for increased utilization and operating efficiency. He was a proven approach from 28 team that we know improve service to our customers and helps them take it.

Manage of our network flexibility.

In summary, we are ready to deliver another successful peak season, our smart global logistics network enabled by our advanced technology and run by talented U.P.S. worldwide isn't top four.

And we are fully committed to providing high quality service for all customers and delivering healthy financial returns to our shareholders.

Now I'll turn it over to Richard to discuss our results.

Thanks, Jim and good morning, everyone you'd be has delivered solid performance in the quarter, reflecting significant progress on our initiatives.

This morning, I'll review, a summary of our third quarter results and Brian will discuss our outlook.

For the company operating profit grew more than 20% on 5% revenue increase operating margin expansion was substantial up 150 basis points.

Our results are indication that our strategy and investments are improving the fundamentals of the business, especially in the U.S.

What's more the strategic growth and cost management actions, we're taking our helping to offset the headwinds from a weakening global economic environment and slower U.S. industrial production.

Now, let's turn to review each of the segments.

We continue to see progress in the U.S. with clear gains in the top and bottom line results driven by our ability to adjust the network and anticipate changes in demand.

Revenue increased nearly 10%, but next day and defer grew by double digits and ground revenue was up nearly 8%.

Total volume across all products grew more than 9% next day volumes up nearly 24% and deferred was not far behind up more than 17%.

Our growth and air was diverse across multiple industries ground volume was strong up nearly 7% led by retail and healthcare and mix is now just over 50% residential deliveries.

Reported yields were a bit softer but were more than offset by a decrease in unit cost, which we'll talk about in a moment.

The declines in yield were due to a rapid adoption of faster delivery services by large e-commerce customers, coupled with an increase in lighter weight shipments with average weight per piece down about a half a pound.

Going forward, we expect yields to grow is our new SMB solutions pick up speed and a broader variety of customers and industries adopt this new standard.

Most importantly for the quarter unit cost was down 2.5% driven by productivity gains efficiency in our new automated buildings and benefits from other transformation initiatives. The combination of strong revenue and enhanced cost efficiencies generated substantial bottom line results this quarter operating profit.

<unk> was up nearly 26% and operating margin expanded 130 basis points.

As you see domestic is performing well and we expect momentum to carry us into peak and the upcoming quarters.

Looking at the International segment International delivered good performance with operating profit increasing more than 20% to $693 million.

We saw lower than expected benefit from currency and the business felt the effects of the softness in the global economy.

Both of which were partly offset by gains on a property. So were approximately $40 million, which was above what we had anticipated to mass changes in geographic demand, we frequently made changes and adjustments to the network and our localized strategy. As a result total export volume was flat ASER exports continue to grow virtually all.

Major non U.S. regions of the World and we grew exports within the European continent.

We continue see volume weakness into and out of the UK and on the age of the U.S. Lane and we had slight domestic growth overall with a number of countries, increasing including Mexico, France, Spain, and notably UK on a currency neutral basis domestic revenue per piece increased 2.3% forever.

Export product and lean mix weighed on reported revenue per piece international operating margins expanded over 300 basis points. This quarter. Our performance was driven by the combination of successful execution continued structural changes in the network and our ability to target growth markets.

Now, let's turn to look at supply chain and for the segment continue to adapt in a dynamic environment with disciplined cost control by targeting smbs and with gains in a number of the business units, putting it all together operating margins expanded on lower revenue and slightly lower profit.

Comparisons are difficult to last year's third quarter. As a reminder, profit grew over 33% in 2018 Ocean Air freight and truckload brokerage revenue were lower this quarter with gains coming from market and the logistics unit.

Logistics increased revenue more than 7% and generated solid profit led by customers and healthcare retail and the manufacturing sectors.

The profit side health care, LTL, and logistics were bright spots with marketing and U.P.S. freight growing profits by double digits overall you'd be has delivered good performance in the third quarter, our investments to modernize our global network are improving our results and momentum will continue.

Well that was the last time I'll cover results, what a good quarter end on.

I've had an exciting new fulfilling career here, yes, it's surprising how quickly 38 years can go by.

It's been an honor to represent you PST and this great company each quarter.

The outlook for the company is bright and now I'll turn it over to Brian . Thank you Richard and good morning, everyone I'm very grateful for the opportunity and excited about the growth prospects, which you'd be us represents I was fortunate to have gained broad experience with one global company and now I'm humbled to join U P. S.

I've been very impressed by the U.P.S. team and I'm eager to meet our investors as they hit the road over the next few weeks.

Now all share the update on our cash position and outlook one of the hallmarks of U.P.S. is our ability to generate cash year to date, you PS is generated $5.7 billion in cash from operations and adjusted free cash flow was $3.2 billion, which includes capital investments of about four and a half billion dollar.

Yes.

Looking at capital expenditures are projects are generating greater benefits than anticipated.

Plus we have made gains and deploying our capital more efficiently.

Projects have been standardized and we continue to optimize procurement practices.

As a result, we are lowering planned capex by about $500 million for 2019, and again in 2020, all while maintaining our network automation targets and other transformation goals. We are also raising our adjusted free cash flow target for 2019 to over $4 billion predominantly driven by adjusted cap.

Next and working capital efficiencies.

Now, let's turn to shareholder returns.

So far this year, you P.S. distributed more than two and a half billion in dividends, which represents a 5.5% increase on a per share basis over the same period last year.

And we repurchased 7 million shares for $753 million.

Moving to tax our effective tax rate for the quarter came in just under 21%.

Richard discussed on the second quarter call there were anticipated onetime benefits in the third quarter.

Accordingly, we anticipate our fourth quarter and full year tax rate will be between 22 and 23%.

Turning to guidance 2019 is a year of significant progress across the segments.

Transformation investments are becoming much more visible in our performance and we expect this momentum to carry forward.

Looking at the fourth quarter across all the segments, we expect the U.S. consumer to remain strong and the structural shift for faster ecommerce delivery to drive elevated demand for our services.

Offsetting the current slowdown in U.S. industrial production.

This year, we added more capacity to the network.

All 400000 pieces per hour of new capacity will be ready ahead of peak.

As a result of our positive growth and efficiency factors, we expect strong operating profit improvement and margins to expand on a year over year basis.

In the International segment, we continue to make network adjustments to optimize asset utilization and deficiency.

In addition, we will further grow in targeted trade lanes and within the international domestic markets and so we expect international operating profit to continue to grow.

Turning to supply chain in freight.

We expect double digit operating profit growth.

Gains and logistics health care, and EPS freight will more than offset market headwinds in forwarding and truckload brokerage.

Also of note.

Last year, we had a drag on profit driven from the U.P.S. freight contract ratification process.

On the whole we have confidence in all of the factors within our control.

And we expect to be well within our full year adjusted earnings per share guidance of 745 to 775.

Despite weakening macro conditions throughout the year, we've maintained our initial guidance range.

Our strategy and network investments are generating positive returns as evident in our profit margin gains.

However, our guidance is based on the continuation of current conditions should external conditions deteriorate, our outlook could be negatively affected yet remain within the range.

I'd like to close by echoing Jim's comments, we are fully prepared to deliver a successful peak season with healthy returns for our shareholders and great service for our customers.

Now I'll ask the operator to open the line for questions.

I will now turn the program back over to I are all Mr., Scott Childress to start our culinary segment. Please go ahead Sir.

Thank you Stephen.

A couple reminders. Please only one question per person. So we may allow as many as possible to participate and during that call. Richard we'll take questions on the actual results and Brian will take questions on our outlook.

Our first question comes from Chris Wetherbee of city.

With the efficiencies from transformation and the benefits from the SMB initiatives.

I think that cost per piece can move lower in the future.

Hey, Chris This is David Thanks for the question.

We do believe that a that costs will continue to be lower than last year and it's our growth in cost initiatives are gaining momentum.

It's a combination of our strategies of our investments of course, our automation.

Our execution has been very good, especially this quarter, our transformation initiatives and there's a structural changes that were seeing what's next day air.

Positive operating leverage two quarters in a row.

This quarter, just very strong positive operating leverage our cost per unit was down to.

Yes.

You have to go back a long long ways to see that kind of performance then.

You Es operating profit was up nearly 26%.

At our operating margin expanded 130 basis points. So.

Very successful third quarter or we have momentum we expected will continue and we do believe that we will continue to have lower costs and than the previous year.

Thanks for the question.

Our next online question will come from Allison Landry of credit Suisse.

How is that your P.S. network positioned to benefit from the structural shift in both shortened zone and next day.

Thanks, Allison U P. S is positioned very well, we continue to gain the benefits from the structural change in the market and we've seen increased demand for faster E Commerce.

Yes, delivering positive operating leverage.

Air grew double digits.

Next day air nearly at 24% and deferred at 17.

And we also see our growth in e-commerce as well as broadly in health care, Hi, Tech and threw out small and medium sized businesses as well.

That's structure change also means faster shorter zone ground.

And we have had strong ground growth at nearly 7%.

By our solutions like our leading next day extended ground service.

Which is enabled by the flexibility in power of our network, which one will talk to thanks, Kate. Thanks Allison for the question. We continue to work very actively on building or Smart logistics network and I will tell you about the U.P.S. network is really well positioned to accept multiple changes in the market as we can do to see them.

As a result over a number of investments we've made you've heard Jim and David talk about some of those investments, but they all come together in the smart logistics network additional automation in our network that's definitely paying off when we have additional plans to continue to enhance our automation moving forward.

Offsetting our facilities is providing unprecedented flexibility to the U.S. network, we expect them to continue to be the case investments in technology to improve efficiency definitely the case on were not stopping there. We can do to make investments in advanced technologies that are going to continue to make the network more flexible more capable. So we're excited as to where we.

Today, and where we're going in the future adding capabilities to support the business.

We have a question from the line of Mr., Tom Wadewitz WPS. Please go ahead.

Hi, good morning, and congratulations on a strong results in particular, the domestic programs seems very good and international margin and just wanted to say congratulations also the gym and Richard you guys have had a great run at the company and Oh look forward to working with you, Brian So <unk> I guess.

On the domestic package improvement story, you know it seems like your early on in that you had you know first quarter of pretty substantial gain in domestic margin. How do you think about that going into 2020, <unk> with the kind of soft industrial but a lot of momentum in your retail is it reasonable to think that you know your early on it.

Domestic package margin improvement and a lot of momentum going into next year or should we be somewhat cautious you know given that soft a macro backdrop. Thank you.

Hey, Tom I'm going to start and Brian is going to take us into 2020, a bit look I think that as we talked about this was this pivot year for U.P.S. and we continue to pick up pace. The most recent quarter you really have about five or six levers that are that are coming together here to look at to bring us to what David talked about the.

Hoping comments and his first question and that's the leverage it we've got you've got transformation, that's a tailwind yet procurement the tailwind the extra capacity that we've talked about the automation that we've talked about you've got operational execution. Our operators are executing at a very very high level and then the last point I think we continue to talk about.

The power of the integrated network and were able to put the air and the ground and the international through at the same time at these high rates. It produces what you see on this piece of paper, so spend a great quarter for us and Brian will talk about the future for say yeah. Thanks, Jim and thanks, Tom for the question. So Q3, a as Jim mentioned, we saw a nice pop of one.

30, Bips. So it was a good margin expansion, we're looking for good margins in in the fourth quarter, but as we look out to 2020, what we're really focused on as it relationship between the revenue per piece of the cost per piece and making sure. We drive that leverage so we'll come back to you and talk more about operating margin expectations in the on the January call Tom. Thanks.

A question from a line of David Vernon Bernstein. Please go ahead.

Well Mike.

Things are just starting to turn here, you're starting to get the leverage we want and I don't want to sound to indelicate or anything like what could you talk a little bit about the thought process about why now is the right time to.

To maybe step down and then David could you talk a little bit about kind of whats. Your plan is from a management standpoint, as I said standpoint, as we're making some changes at the sea level to make sure that the momentum we have here.

Some of the Investor programs is going to continue into 2020 and beyond.

And this is David we're very excited about the the progress that we have made it and we're going to continue to make.

And the U.S. I think.

Well deserved a recognition, but it was due to the transformation initiatives and due to the investments that we have made and those are going to continue.

I think we've done a an excellent job with our management team. We've got a blend of people that long term you passers like.

Rich and Jim and then we also have brought in some very good people from the outside I see that continuing we have a strong bench.

And and secession planning is something that a week cost only focus on.

And this is a natural progression we have many people the spend their entire yours it careers.

Yes.

And we appreciate that and then we have others that are ready to step into that and so we're excited about those opportunities. So feel good about where we are we have the team.

Doug will handle and that will.

Bring transformation initiatives all the way through I missed Cobb news I can be about the.

Thanks, David further cost.

Our next question is an online question there was a from multiple analyst.

Can you provide an update and some color around your capex guidance.

So thanks Scott.

Look you P.S., it's been a good steward of capital and if you look at a the returns from an oral IC perspective, we're roughly double the industry average we lowered our capex guidance as you saw a by 500 million a this year at a similar amount next year and that offer three points or in terms of reflection. One is the reductions due largely to efficiency gain.

Gains in buildings across the network in procurement standardization second the change does not affect our transformation or capacity initiatives and then lastly, Ah. The capex reduction has enabled us to actually raise our adjusted free cash flow to north of 4 billion for 2019.

An important thing here is we're just getting more done with less and.

And this is what transformation was intended to do and we're very happy.

Take place.

Next question will come from a line of kit Hexter of Bank of America. Please go ahead.

Hey, good morning.

Dod Jim and Richard Thank you for a it's all your help over the years and and as Brian Welcome.

But maybe David talk about the deceleration and then in the next day Air last year, you or last quarter, you up about Oh, I'm, sorry last year, you up about 100000 packages sequentially. This year up 35000. So I'm wondering if it is this amazon taking some of the share back is it a deceleration in the underlying growth and maybe that transition.

To your multiple comments on on if the economy decelerate or deteriorate is that something you're already seeing given that the multitude of your commentary on that.

Well when it comes through a to what talk about the air business first and and what we're seeing is this is an acceleration it is not due to the economy. Although the U.S. economy is a consumer driven and ER and is providing a lot of opportunities, but but when.

You look at those quarter, we have taken flight to success US absolutely sure because our next day Air volume is up 24%, our second day or deferred is up 17% and it's a structural or change and Dan.

It's more than just one customer and Kate would you like to talk a little bit about other absolutely. We're excited because we're seeing it in e-commerce and a across all segments in E Commerce.

Customers of all size, but that's the air growth. So this meeting is definitely occurring whether it be two to one or ground to add to the air mode. And then we're also seeing that ground short selling so this structure change is resonating and were seeing the benefits operating leverage.

But I'm, sorry, I'm not the Gary I don't think you have said the I guess I'm seeing a deceleration in growth from sequential.

Is that not kind of pointed toward the economy or.

Or a customer shifting in volumes just from Twoq to Threeq you.

No I think a this is Richard obviously, you have to and we actually called out during the second quarter. There are different seasonality is an average volume per day impacts and we actually called out the during the second quarter, especially earlier in the quarter. Your volume levels aren't the same as they are in the third quarter and so we took advantage where we thought it was.

Appropriate getting the right return as you see in the bottom line results, but there's going be seasonality and and opportunities from a from a just a level of business based on how each quarter operates across the entire the U.S.. There's just more business activity say in the fourth quarter than the first and more in the third and then second so they've got it. Thanks.

Already there Oh sorry.

Richard.

Our next question comes from a Brian Ossenbeck at JP Morgan what are some of the services and partnership sub contemplated under the new digital access program.

Thank you. This is Kate we're excited about that digital access program, it's a continuation of our small and medium sized business strategic imperative in the investments we've been making so just to crystallize. The thought we are investing to ensure that we enable you P.S. solutions and integrate them for easy shipping.

I mean wherever our small and medium sized business sellers and go to sell as well as where consumers go to shop, and we have already integrated with.

Anything other than meaning meaningful size with marketplaces and platforms.

And excited about the most recent announcement on stamps dot com.

Just to put it into a more quantified format.

Samson Shopify alone, we actually reaching over a million small and medium sized businesses and theres more to come. We continue this partnership strategy, It's got to do I want to Linda.

I think or just the core investments that we've made to the transformation program. Some some of the areas or improve time and trends at the announcement of our seven day network and of course expansion of our access points of all of these solutions full nicely on those transformation investments are improving in our core.

We have a question from the lightest Scott group of Wolfe Research. Please go ahead.

Hey, Thanks morning, guys.

Can you clarify just because I haven't heard it can you clarify what the actual capex guidance is for this year and next year and then on the U.S. margin side I know, we're not guiding to 2020 margins, yet, but Jeff maybe some longer term thoughts on where you think U.S. margins can go once we get through sort of the full.

Two years of transformation.

Hi, Scott, we're going to take one of those questions. So please make sure. It's only a single question for.

So from its Brian from a Capex perspective, we had guided for this year and next to be 8.5% to 10% in terms of sales are in terms of revenue as a capex as a percentage of rep. So within that guidance, what we deferred if you take it from the midpoint, we were guiding down a 500 million in 2019 and a similar amount in 2020.

Thank you.

Our next online question comes from Scott Schneeberger of Oppenheimer.

In international package can you offer some perspective.

We're seeing in the surfaces and across the globe.

Scott as Jim So couple of things that are probably worth talking about first of all you've heard from everybody on the call about some of the changing trade dynamics. It certainly effect, if you want to call the premium versus non premium we see it all as a premium service offering on what I think from an export perspective, and Richard talked about it you got a low.

Lot of lanes growing across this world. There's a couple of power lanes that are slowing down and when that happens we got to adjust the also heard will lean into domestic where our ground networks have have great capabilities and then and then we backstop that with an operating leverage state of mind when all three business units in this kind of dynamic are able to create operating leverage.

Than we do that and we continue forward and grow the business with some of the factors that we're talking about here. So we're pretty proud of it it will grow again and we will continue if you look at our historic rates over the last two five and 10 years, we're proud of the premium and it will continue to grow in the future as trade dynamics allow it. So appreciate the question.

<unk>.

We have a question from the line of Allison Landry. Please go ahead.

Good morning. Thanks.

Last quarter, you talked a little bit about leveraging the U.S. post office I was wondering if you can provide an update on that and you know where you see those trends going how much capacity you think that could free up in your network. Thank you.

Okay. Thanks for question. This is David and Yeah. There's a couple instances of or the can talk about first is a from a weekend delivery. We've talked about that one of our options will be using Surepost, then Ah onez enhance Saturday and also Oh.

On Sunday, So we see a good indications there.

We also see opportunities when you talk about this combined so up another question, but.

But that we received the from the well but is the fact that.

The U.P. you and the changes that that have been made there and how that affects the postal service how it affects us and obviously, we applaud the administration for their efforts to modernize the U.P. use terminal dues as structure. What it does is it raises the floor and then.

It opens opportunities for America and SMB is.

To grow and a and of course that falls right into our worldwide economy expansion and our SMB initiatives. So Oh, we do have a unique relationship the postal service, where a supplier or there are so far more competitors at the same time we.

I do believe there's ways that we can leverage their network for the last mile delivery at the same time add additional capabilities to our own. Thank you.

Our next online questions coming from Chris Wetherbee of city can you provide an update on your hub automation initiatives will you reach 80% of eligible volume in 2019.

The work very actively on our automation on facility modernization efforts.

By the end of 2019 were definitely on track to be ride below 80% of our U.S. ground eligible volume to be processed through automation and the plans are for 2020 to get to a 85%. So we can do to be on track with that as you heard earlier. We are this year, we have 20 on new or retrofit automated facilities going online.

Both of them beyond that by the way. We're also putting on almost all with all of them now about seven additional automated small swords across the facility each and every one of those keeps adding overall processing capacity to the network and you go back goes back to the a question that was asked earlier all these automation keeps adding network flexibility to pro.

Right. All these different types of services on capabilities to our customers. So we're well on track out to get our targets and we definitely have the commitment with the organization to continue to make the right investments to get there. Thank you.

We'll now take alive question from the lightest Mr., Chris Wetherbee as well with Citi. Please go ahead.

Hey, Thanks, and good morning.

I wanted to ask about somebody comes you've made earlier in the year about double digit growth in the operating profit of all the segments that are still tar those targets still goes we think about sort of last quarter of the year.

And if they have changed a little but could you talk a little but the factors that might have impacted them. Thank you.

This is Richard and I'll start the question and then Jim will talk about the business use but overall, we expect the total enterprise to have operating profit growth in the double digits <unk> at this point each of the business units have plans in place there was set at the beginning of the year and.

You saw what we've done in the last quarter in a and the international in the domestic and we expect the momentum to continue and in the supply chain. We also as we called out during my talk that there are some year over year comps, it's going to continue to show a good improvement in operating profit.

So it's Jim I would just I say agree with that I mean, obviously, you've seen the quarter now we've got one quarter to go you've seen what a weird reaffirmed today and then ultimately its a situation of it is a little bit of a different year than when we started no question about that but the double digit is clearly still inside and then we move on to 2020, so at some about all.

The factors and this operating leverage is real key for us to be able to to make it in all three business units and that's what we plan to produce at peak. So appreciate it.

We've got another online question here as from multiple analysts can you give some color around your global procurement that you highlighted and please discuss if.

How that's a filling out into the transformation initiatives that you discussed the conference.

So I'll take the first part of that and then kick it over to Scott from a transformation perspective, we spend roughly 25 billion a year in a global procurement and we're going through multiple waves of the up the coverage negotiations we are seeing benefits a as evidenced a in in the the margin expansion and we're continuing to.

The big pushes and Dsos and depot, So Scott do you want to hit the transmission side.

Yes, we launched a the procurement capability and grew out took a basically category by category. We are now fully implemented and I think you see the result of that not only in terms of the operating expense that is covered in the ability to support the lower reduce cost per piece a in the U.S., but also a the announcement to that.

Our our ability in capex.

To be able to overall operate more efficiently and continue to do 100% of our transformation program, so with less capex.

We have a question from a line of Jack Atkins of Stephens. Please go ahead. The morning. It. Thank you for taking my question I guess just to go back to the macro for for a moment just asked the question directly, but but David or Jim you are you seeing anything in your business or leading indicators within your business that make you more or less.

Concerned about that direction or the U.S. or global economy, just any thoughts there I think we very helpful. Just given your role in the global supply chain. Thanks.

Okay. This is David and ER and I'll certainly talk about it the global economy remains in growth promote it's just as a slower pace and risk or more acute and ER.

And you know global industrial production has as lowered or.

And and we're watching closely to see these trade developments at the same time, though that Oh, we say the softness we continue to gain and execute opportunities as is evidenced by our international.

Results and our domestic Brazil, it's it's the flexibility of our strategy in our network. A good example that is we had one of our new large aircraft southern far seven Dasha. It there was scheduled to operate from China to the U.S., we looked at changing trade for.

As we moved it from a China to Europe and those are the kinds of a proactive steps that are that we will take.

We also have to realize there are some raise of sunshine that are that are coming across the horizon.

Ah if you compare what we're saying about Brexit now to the last quarter. You know the fact that there's been some negotiations between Arlon then the UK and between the UK and and new you, it's still not unfold, but where if say this phase one negotiations between the U.S. in China there are some.

Raise of Sunshine, there too that that we're looking at much more to be developed the important thing is regardless of those macroeconomic conditions, we have the flexibility in the agility of our network to meet our customers' needs and ER and we're confident we will continue to do.

So thank you for the question.

We're going to take a online question from Tom waterway, so you'd be us how does your expanded drone delivery capabilities fit into the strategies that you've got for growth.

As David mentioned in his introduction, we are the first a to receive the F. a part 135, Oh, we're the first and still only I'm fully certified drone airline in the United States are we actually begin investing in drones that several years ago since our very first residential trial flight.

Actually in February of 2017.

We are make moving fast we're quickly scaling a building on the week Med program, we have announced yesterday University of Utah similar campus, but we see greater opportunity beyond that we've announced than three partnerships CBS Kaiser Permanente and Amerisourcebergen a in partnership with those.

<unk> companies, we are looking for new services and solutions, we're very excited about the opportunity and we see much more to come in this area as we progress. Thank you yeah. This a flight forward and as strong a strategy. This is just indicative of our transformation initiatives that we're going to.

George forward with new technologies, and we're not taking a bag see to anyone we've made that clear from the start.

But the fact that we've already made 1500 commercial flights were doing it on a day in day out basis, and a and you're going to continue to hear much much more from us I really want to command Scott and his team, but this is you P.S. embracing the future and we're very excited.

Uh huh.

We'll take a quest for the light of Jack Atkins of Stephens. Please go ahead.

Mr. Atkins your line is open.

I'm sorry, my questions have been asked answer thank you.

We'll move onto a lot of Mr. Scott Schneeberger of Oppenheimer. Please go ahead.

Thanks, Good morning, Congratulations, Jim and Richard and Brian It David or Jim <unk>. It seemingly in for peak season, a condensed calendar a much shorter period between Thanksgiving and Christmas Eve just wondering if you could discuss so how do you feel your you're prepared to.

To face that challenge I'm heading into this year out on what you know what you've learned from years past and how how your how are you prepared for this condensed calendar. Thanks.

Yes, Oh, you would love to talk about got lot of momentum going into peak. It is a a shorter peak season, there's no doubt about it but that didn't just happened over the last few weeks right. I mean, we've known that for years and so the capacity that we've added.

For the past couple of years, we've a that a 5 billion square feet. We've a that a 400000 packages of our capacity over the last.

Two years and and whether it's Jim a one we can talk a little bit more about the peak network and justice socket, but but the fact that we help buildings in place we have the ER. The plants are the people and the fact that we've got momentum feel really good about.

That then or.

Yeah, and thank you David a another couple of points here, we continue to refine our delivery models to improve our overall capacity. This year, we will be using an extended.

Werent more impactful personal vehicle driver model across the network that will add capacity for delivery. In addition to that all the investments we can do to make on technology like Orion navigation will make a significant impact in the way that we're going to manage delivery capacity. These here because that type of technology just adds additional efficiencies. So the way that we comply.

Our delivery so to David's point capacity in our facilities combined with capacity on the delivery side puts us in a really good position to execute well.

We're going to take a online question. This question comes from a met silver Deutsche Bank.

He wants to ask about U P. S is relationship with Amazon and Oh, the company's ability to lean into Amazon volume.

Yeah. This day, but I will say that a years ago. We made the decision to lean into E. Commerce and there is no doubt about that and and at a time that a though I think others. We're we're considering or had other plant.

When we say laying then though we're talking about across the E. Commerce Echo system. So it is small and midsize businesses is other retailers some retailers and that includes Amazon, but it is not specific to any one company.

When it comes to dealing with large customers that have a lot of volume and that they do some in sourcing them subs is really in how you negotiate the deal and how you structure that contract and how you set your pricing.

That you can help in flaws behavior that you want to drive, but the real key to E. Commerce and you can see it in our innovative solutions that we just rolled out with the digital as access program.

And the way, we're expanding worldwide economy is helping small and midsize companies worldwide.

Compete with the big retailers and need to us and that is sticky.

Our success and that's why we're driven to lean into more than any other areas. So E. Commerce is here to stay we've embraced it and we've got a head start and we'll continue it. So thank you for the costs.

We all Tenneco question from a lined up Amit Malhotra of Deutsche Bank. Please go ahead.

Hey, Thanks, operator, hi, everybody I just wanted to understand the a year on year improvement and domestic margins. Yeah. Some of that I would imagine just reflects the operational penalties you had last year, reflecting the facility build out. So just one domestic margins have expanded you know.

Excluding some of those onetime related costs next last year, and just get given that dynamic what would we expect a piece of.

Excuse me you're on your expansion to maybe moderate Nextera because you don't have both tailwind from the operational penalties.

Yes. So this is Richard and I think the first thing tour.

To remind you is this year in last year, we opened up as David said 5 million square feet in each year, so the operating penalties.

For this year in 2019 or about the same as they were in 2018. So the margin improvement was directly related to better efficiency gains in the new buildings as well as opening those buildings earlier, which we called out in the first quarter that we would have so much of it opened in the second and third quarter and Jim mentioned almost.

Two thirds of it is opening as of today last year was the ended the year. That's part of it part of it is the improvement in the productivity and the operation execution.

In the U.S. business.

And that's inherent in the numbers earlier someone asked about fourth quarter cost and we said it we would continue to see improvement, but you have to remember the up their percentage improvement differs by seasonality.

It differs by things that are happening inside the business. Because we also has seen a different kind of packages and we're growing more e-commerce and slightly less industrial because of what the macros doing but most importantly, it's all fall into the bottom line and we expect that to continue.

Let me add one thing to it I think it hasn't come up as much as I think it. It's important is that we've talked about the structural change in the air network, David talked about some of the aircraft remember we bought the whole strategy was to bump and roll bigger aircraft back through the network. We brought big aircraft back to the U.S. to help us handle this and the real fact is that there.

Its record air volume, we're handling and this integrated network is being put away beautifully and that's the secret to the margins is when they run together like they are and the operators take care of at World for does a great job the margins come so that's where we kind of see the whole thing coming together getting ready for peak.

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Oh, we're gonna take a one more online question. This question comes from Ben Hartford, or R.W. Baird. Your SMB products are making progress, but a yields continue to little lower or can you give us some color around the mix in those yield headwinds yeah. Absolutely. This is capex spend a lot.

Separate the two a bit <unk> SMB, we are seeing solid momentum you're as you've heard of the innovative solutions My choice for business early traction everyday hundreds of enrollments and just as a point, 40% increase month over month or two months and and on track.

So our solutions are resonating with SMB, then separately tied to the yield <unk> question do note that with the structure change that's occurring in the market. We are seeing a lighter weight product as many as keys are being added to this short is down a and also a next today.

Type delivery wet weather on on in the air on the ground Ah, but as I noted before air growth is occurring broadly and across that are small medium sized businesses health care high Tech and operating leverage is the the answer that Jim just noted that is inside that score.

At the end of the game and that's what we posted.

We have a question from the line of David Ross of Stifel. Please go ahead.

Yes. Thank you for squeezing me in before Jack Atkins again.

Got a question on a comments you made that I found interesting that next day is becoming the new standard for B to B and B to C.

We heard mostly about the next day growth in the B to C world, how much of that 24% year over year growth in the quarter. Do you think came from B to C versus b to B in any other color on the B to B growth. The next day.

So thanks, so much as Kate I'll take that question I'll start first of all with our B to B growth overall, three to four 3.4% and that's despite some of the economic slowdown with industrial production. So we do see a solid air growth in high Tech and health care and some of the examples would be a distribution.

And to the hospitals and ER and then E. Commerce also there is that returns component that is a b to b, they're very turns down tend to be in the air but on the health care in high Tech side, we are seeing b to b growth and our solutions continue to enable our customers to move faster.

And it's a it's resonating now what gets lost in the mix is a many of our large Ah b to C. Shippers are also a b to b shippers and ER and so that's having a big effect there, but this trend is not just to the end consumer I mean it.

It is absolutely a b to b at the same time would just probably don't talk about it as much.

I'll now turn our conference back over to Mr. Childress. Please go ahead Sir.

Thank you very much Steve and then David closing comments.

Well you pass is making significant progress as you've heard in executing our strategies.

Especially in the U.S. and we'd like to call out a George well as the president of our U.S. operations and his team as they have worked with Jim in the rest of the management Committee and have really implemented these initiatives that we've asked them to do.

These transformation initiatives helped turn to.

Our results around their improving efficiency and their enabling these new innovative solutions that we've covered the last couple of Ah earnings calls and ER and they're just going to continued via an important part of the future we see growth opportunities.

Regardless of the of the environment around us and both in the U.S. and internationally and in summary, we expect a another successful peak season for customers and our shareholders and we will continue to accelerate initiatives to move forward.

Fast and just stood at the ever faster pace and Ah. Thank you for joining us today appreciate it.

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