Q4 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 fourth quarter 29, <unk> earnings Conference call.
All lines feel placed on mute to prevent any background noise and after the speaker's remarks, there will be a question and answer period. It's 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. fourth quarter 2019 earnings call joining me today or David Abney, Our CEO , Brian Newman, our CFO government, our chief cells and solutions Officer, one with international President Dando Cicerone, President of U.S. operations, George Willis Archie.
Keith information in Engineering Officer, one grows and Scott price, our chief strategy and transformational concern before we begin and I want to remind you that some of the comments, we'll make today are forward looking statements within the federal securities laws and address our expectations for the future performance, we're operating results of our come.
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 when filed are available on U.P.S. Investor Relations website and from the FCC.
During the fourth quarter 2019, U.S. GAAP results included a non cash after tax mark to market pension charge of $1.8 billion, an after tax transformation charge up 39 million and U.S. domestic after tax legal contingency and expense charges.
As of 91 million predominantly related to the New York cigarette case. The after tax total for all three items is $1.95 billion, an impact to fourth COVID-19 as of $2 in 23 cents per diluted share the mark to market pension charge includes the effect of note.
Doubly higher than anticipated asset returns and the unfavorable movement to lower discount rates. It also includes an updated estimate of potential benefits related to the central States pension fund.
In the prior year period, the company's GAAP results included a non cash after tax mark to market pension charge of $1.2 billion or $1.42 per diluted share.
More details on the Mark to market accounting will be available in a presentation posted to the Investor Relations website. Later today unless stated otherwise discussion today refer to adjusted results. The webcast of today's call along with a reconciliation of non-GAAP financial measures are available on.
The U.P.S. Investor Relations website.
Web cash users can submit the live questions. During the call. We will attempt to answer questions about 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 its David.
Good morning, everyone.
I'd like to welcome men Dawn George to the call.
They oversee our two largest segments each have deep knowledge of our business grew more than 30 years of U.P.S. experience. This morning, I'll share my thoughts about the fourth quarter and to your head.
Brian will then review the by natural they told the corner and 2020 guidance.
During the fourth quarter, we continue to successfully execute our strategies and deliver on our commitments revenue growth.
Improved network efficiency to drive operating leverage and tenure as transformation to stay ahead of market changes are most of your investment strategies positioning us well to support the needs of our customers generate profitable revenue growth.
Water sure owners and create opportunities for our employees.
I want to thank the 495000, you Pos is around the world for their efforts steered peak.
We delivered more than 1.6 billion packages and the fourth quarter, including a record level of residential packages. This exceeded our expectations and resulted in a near 8% increase in volume over last year also we were recognized by third parties.
For providing industry, leading own time service for this remarkably high peak bye.
<unk> execution over the holidays benefited from increased capacity and automation throughout the network.
Our effective use of proven tools and enhanced technology.
And deeper collaboration with our customers to align volume what network capacity. Our operating teams took advantage of the 20, new aircraft and the additional 10 million square feet of automated capacity, we added turn that work in 2018 and 19.
Which enabled us to provide great service for our customers will allow us to peak season, and many of the technologies and processes. We employed during peak will carry forward to make our normal daily operations more efficient era.
Or the company in the fourth quarter revenue grew 3.6% operating profit was up nearly 14%.
And margins expanded in all segments.
As a result fourth quarter adjusted EPS was $2, an 11 cents, a nearly 9% increase over last year.
We're continuing to focus on our strategic growth imperatives, SMB is e-commerce healthcare and the international growth markets.
Our transformation strategies and investments anticipated growing significance of global E Commerce and position your peers well to capture opportunities from all customers, where embracing the e-commerce structural shipped up faster delivery, which bought a surge.
And next day air volume of more than 22% in 2019.
An increase we will well equipped to handle with greater efficiency, our investments drove productivity gains and lowered your net cost on a year over year basis generating positive operating leverage in the fourth quarter and for the year.
We also proved that our integrated network provides you peos and our customers tremendous flexibility to more efficiently burst on to the best pace of change and smart.
Oh looking ahead to 2020.
I just returned from the World Economic Forum and the votes were discussions with customers and policy leaders reinforced our current outlook for this year.
The 2020 economic backdrop will provide opportunities for you PS.
Consumer demand remains healthy globally and in the U.S. and we're positioning solutions to grow commercial deliveries.
Despite weakness in the industrial sector.
<unk> GDP estimates called for slower growth than the first half the year were for your growth that 2.5%, finishing about the same as last year, which is below what many consider a normal growth rate.
On a positive note advancements were bureau straight are encouraging.
The pros as recent signing of the U.S.M.C.A.
And the U.S., China Phase one trade agreement and historic of that I had the privilege to witness each is a big step in the right direction for global trade.
I NAMIC economic conditions and structural shifts in the market you guess, taking aggressive steps forward by investing for growth speeding up our network and introducing new SMB centric solutions that help them compete and grow.
Our customers rely on speed to market as a competitive differentiator and we believe there's additional growth opportunity for you pay us as we accelerate our network and further broaden weekend operations.
This year with significantly expanding extended hours pickup, but next day ground caliber and industry, leading 98% of the U.S. population.
We're also expanding weekend delivery services.
For Saturday deliveries were bringing online more operations doubling the amount of volume we handled in 2019 to reach an additional 40 million US consumers was we remain the only integrated care that offers commercial and Rosen.
Central pickup and delivery on Saturday.
We are initially launching Sunday delivery to the majority of the U.S.
With an economy product and will expand throughout the year to provide our customers a wide range of delivery options covering all seven days a week.
We will also further expand our integrated network by adding more than 5 million square feet of new automated capacity, most notably we recently announced plans for a super hub in Harrisburg, Pennsylvania.
Marketing opportunities and speeding up the network in the Midwest and northeast corridor.
We see tremendous opportunities and we're taking advantage now are reinvesting a portion of our transformation savings to speed time, and transit and introduce unique new products and services.
These actions generate long term revenue growth and enable further diversification among our growing SMB customer base.
Yesterday, we announced several new solutions to continue to help our SMB customers. We're expanding my choice for business in 30 countries and by the end of 2020, 96% of you. Pos is global small package volume will be eligible to be tracked and country.
Roll through my choice for business and we're enhancing you pass dotcom simplify cross border trade.
Website will guide customers through estimating duties and taxes and determining customer requirements, making it easier for smbs to ship internationally. We also had to do several next generation technology expense.
Drone delivery service from your peers Boy forward will soon begin at the University of California, San Diego help.
We will assume close on an equity investment in a reasonable.
A leading a luxury vehicle manufacturer along with our commitment to purchase 10000 at Vas ebay Delude rebate.
And we are deploying dynamic Orion continuously optimizing morality in the U.S. as we progress to make the fastest most technology enabled company in the industry.
We've made great strides expanding and further automating our smart global logistics network.
And in creating new solutions to grow revenue.
The impacts of our transformation of becoming more visible in our operating performance, even as we invest a new capabilities.
All of the network investments and SMB initiatives were discussing reinforce our confidence in achieving our transformation iOS commitment of one dollar to dollar 20.
Decisions had investments were making.
Especially with our SMB initiatives and pulling forward actions to speed up our network will uniquely positioned you Pos in the industry entered the designed to ensure continued success well into the future.
Now Brian will take you through our results.
Thanks, David and good morning.
Today, My remarks will cover our quarterly performance and the full year for 2019.
Then I'll finish with our 2020 outlook, both our fourth quarter and full year results were enabled by strategies execution and investments in our smart Global logistics network.
First flight growth is the result of making the right trade offs as we continually adapt to the changing environment.
During the quarter, we generated positive operating leverage and grew operating profit and margins across all segments.
As a result for Q1 9 diluted EPS grew nearly 9% and full year EPS was 753 per diluted share.
Moving into the segments in the U.S., we continued to see strong volume growth.
The additional aircraft capacity and automation, we added enabled our operators to adjust the network and efficiently meet the surge in demand for our services, allowing us to take on new customers during the height of peak season.
You asked domestic revenue increased nearly 7% driven by volume growth across all products next day air volume increase nearly 26% deferred was up almost 16% and ground volume rose more than six growth came from B to C and b to B shippers, producing the fifth consecutive quarter of B to B growth.
Customer and product mix dynamics decreased revenue per piece by 2% driven by lower average weight per piece and larger e-commerce customers adoption of faster delivery options.
Most importantly unit costs was down 3.2%, which in turn generated positive operating leverage the result of productivity improvements from the investments we've made over multiple quarters.
U.S. domestic operating profit was more than 1.2 billion a significant increase in more than 20%.
Now looking at the International segment strong execution and continued cost management enabled another quarter of profit growth and margin expansion.
Which helped to count or a 1.7% decline in revenue primarily due to conditions in the macro environment total export volume was down slightly in the quarter as gains on intra Europe intra Asia and U.S. export trade lanes did not fully offset the declines into and out of the UK and on the Asia U.S. Lane, we adjusted goal.
Blair capacity to match demand, where and when needed driving high levels of asset utilization.
We lowered international block hours by about 3% and in total unit costs decreased by 2.8%, while navigating within the challenging environment. We grew operating profit nearly 4% and expanded margins 110 basis points, reaching 21.5% outperformance further demonstrates our ability to leverage our capability.
And continuously adapt to grow profit.
Now, let's turn to supply chain and freight.
Even with the macro challenges and forward and operating profit was up 17% and margins expanded 120 basis points, primarily due to the diversity of our portfolio. Our continued focus on Smbs and lapping last year's profit impact during labor negotiations for the freight business looking at the individual business units.
Just Ics, yes, freight and Mark and were bright spots. All three grew revenue with profit up double digits, helping to offset the softer business conditions faced by Coyote and forwarding.
Now, let's turn to cash and shareholder returns.
Yes continues to generate strong cash from operations, enabling further investment and rewards for our shareholders.
As I guided last quarter, we lowered our 2019 capex due to increased capital efficiencies. The result was capital investments of 6.5 billion. Additionally, we returned 4.3 billion shareholders, including about 1 billion of share buybacks and 3.3 billion in dividend distributions.
Now, let me comment more broadly on 2019, we made strong progress with our transformation, we closely monitor market changes and make quick imprudent adjustments throughout the year.
Example, we continually adjusted our integrated network aligning our capacity with changes in market demand, resulting in a lower cost structure that drove strong operating leverage across our business. We launched numerous innovative solutions to help grow b to b and B to C volume as well as when new SMB customers and we took advantage of structure.
Rule changes in the market like the rapid adoption of faster delivery driven by E Commerce, a benefit to EPS in 2019.
The strength of our network allowed us to capitalize on the structural shift in the market for next day delivery and help all customers embrace this trend.
Yes was also able to increase our business with Amazon through competitive wins and the structural shift next day delivery when combined with the revenue declines in the international and supply chain in freight segments Amazons percentage of total company revenue rose to 11.6% for the year on the whole, we managed to nearly 6% incur.
He's in annual volume and at the same time, we generated double digit increases in operating profit and expanded margins.
And we were able to deliver EPS within our guidance range, despite a dynamic market environment.
Now looking to 2020.
We expect full year adjusted diluted earnings per share to be in the range of 776 to 806.
Our outlook reflects forecasted year over year declines in us industrial production and other global softness. However, there is growing optimism due to the recent trade agreements that could move us higher.
Another external factor that will affect our results is lower pension discount rates for this reason operating profit specifically in the U.S. will be muted.
However benefits below the line in other income and expense will more than offset the impact to operating profit we provided a new table in our financial information that holds pension discount rates neutral on operating profit on a year over year basis, giving investors additional transparency in this area.
Now let me review the key drivers of our 2020 EPS guidance at the total company level, starting with 2019 EPS of 753 first strong underlying segment performance is anticipated to produced year over year EPS growth between six and 10%.
Supporting this growth or several company specific tailwinds, including growing adoption of our new solutions increased efficiencies from our expanding automation and the proven value of our integrated network that provides us and our customers flexibility to adapt to changing environment.
Working against US this year as the impact to operating profit from lower pension discount rates I mentioned earlier. This is equivalent to a drag on EPS of 26 cents. In addition, there is a 33 cents EPS headwind from the SMB network initiatives, we have elected to implement SMB initiatives to speed up our network across multiple lanes and broaden our weaken.
The operations.
This will result in tripling the rate of improvement we made in 2019, making time in transit faster for 80% of residential and commercial customers in the US clearly this will improve EPS is competitiveness and further diversify revenue, creating more opportunities for SMB growth.
These initiatives will drive both startup cost and revenue growth in 2020.
And in the coming years revenue is expected to grow significantly.
In 2021, we expect as end margin accretion from these initiatives.
Turning below the line total other income and expense will be a positive for the company primarily because in 2019, we generated more than 17% returns on pension assets, leading to a favorable impact in 2020.
Lastly in 2019, we enjoyed tax benefits from discrete items that are not anticipated to repeat muting EPS by 10 cents.
2020 tax rate is expected to be between 22, and a half and 23.5%.
Well it altogether full year 2020, adjusted diluted earnings per share will be in the range of 776 to 806, another year of solid EPS growth.
Strong underlying segment performance builds on prior year gains and gives us confidence in our ability to deliver our long term targets, which includes an incremental dollar to dollar 20 of EPS by the end of 2022 from transformation initiatives diving deeper into the segments.
In the U.S., we forecast revenue to increase 4% to 7% driven impart by continued adoption of faster delivery services and the new solutions we've introduced.
We anticipate ground will grow in the low single digit range with healthy growth in air shipments keeping in mind that we will be lapping elevated next day growth over the last three quarters. We're also planning for improvements in customer and product mix as well as growth in base rates.
As I mentioned, we are further broadening our customer base through network and product initiatives.
We also expect incremental efficiencies throughout the year from previously opened in new automated facilities that come online during 2020.
Given all these factors us domestic operating profit on a pension discount rate neutral basis should grow into low single digit range.
This includes the impact from the SMB initiatives that we chose to accelerate and expand in 2020 to capture the tremendous growth opportunity.
Moving to international.
We will continue to adapt to changing conditions target high growth market opportunities and adjust the network to balance capacity with demand average daily shipments will increase in the low single digits in revenue will increase 4% to 6%.
We will maintain our industry, leading margins and we expect to generate operating profit growth in the mid to high single digits on a pension discount rate neutral basis.
Finally, the supply chain and freight segment will continue to execute its SMB and cost management strategies.
The diversity of our supply chain and free business unit will again help us manage through cyclical moves in the market.
We expect gains within our health care unit and truckload brokerage should rebound in the second half of the year.
For the segment revenue is anticipated to grow between four and 6% and operating profit is projected to grow between five and 7% on a pension discount rate neutral basis.
Looking at the shape of EPS across the quarters, we expect 2022 somewhat resemble 29 team.
The first quarter, we expect EPS to be in the range of 17% to 18% of full year adjusted EPS midpoint.
Driven by tougher year over year supply chain and freight comps softer macro conditions as well as the significant initial cost associated with our SMB initiatives.
The remaining quarters will be fairly balanced in a range between 27% to 28% of the full year adjusted EPS midpoint with the fourth quarter at the top end of the range.
Capex for 2020 is planned to be around 6.7 billion.
These investments which include automated buildings and technologies continue to expand the efficiency and flexibility of the smart Global logistics network.
Adjusted free cash flow is anticipated to be between 4.3 and 4.7 billion.
We plan to reward shareholders with growth in dividends subject to board approval and anticipate share buybacks of around $1 billion for 2020 similar to the last few years in conclusion, the transformation investments, we're making and the actions we are taking better positioned us to capitalize on growth opportunities.
And if macro conditions turned more positive we could see additional upside potential for the year.
And now I'll ask the operator to open the line operator.
Good morning.
They tend to teleconference. We just want to let you know out who asked a question you will be pressing one zero.
Okay.
Well.
Scott. So this is Scott Childress with GPS.
Please.
Allow me well elegant allow one question from each speaker. So we may as low as many as possible to participate. Our first question is the online question, we've got multiple analyst.
Todd Fowler from Keybanc as well as potash loan from BMO.
Mentioned that you are fast tracking initiatives in 2020 to capitalize on market opportunity can you elaborate on this.
Certainly Ken this is David I would say, we are faster fast tracking initiatives and Tony Tony We've had positive momentum in 2090, and we see it in the underlying performance in 2020.
We have clear visibility to some structural shifts that we really want to take advantage of next day.
And and seven days and so we just see tremendous opportunity, especially with us and these so we have a liked it made a conscious decision we will have to pull forward some transformation initiatives into 2020.
It would speed up our network significantly and take advantage of these opportunities that are being presented.
And so we're focusing into error two main areas, our time and transit in the we started improving time in transit, making the quicker in 2019 will go to triple that rate of improvement in the 2020. It by the you pay US network, we will be.
Stir by the end of this campaign for 80% of the U.S. population that we were before we started so 80% significant improvements and then of course weekend seven day deliveries.
Just so important to consumers today, and we're going to double our delivery volume and the in weekends on Saturdays, we're going to reach 40 million new consumers and whats important is seven days is important not just for Residentials football commerce.
Total deliveries to we have SMB, saying, what about us we need seven days.
Delivery and and we're focusing in that regard to.
And then Sunday, we started out with an economy sarvis that's over the majority of the population and we're going to expand Sunday offerings throughout 2020 to give a wide wide range of delivery options. So these are two starts or shows that we see that run the hand in hand, our SMB store.
Right.
And the good thing about the is there not capex sabby there're opex it costs that were putting in opex in 2020.
But these initiatives when you look at them together going to be in accreted in 2020, more it's going to give us much higher asset and lay in utilization.
To give us better competitiveness and more pricing power.
Got to give us additional business lowest continue.
Our lower cost.
And.
I just really excited about this opportunity now is the time, we seized the moment and we believe investors expect us to seize these kinds of opportunities and thus far we're doing Brian will talk a little bit more.
About the effect.
2020, and then of course, we've often said accretive in 2021, so yes, I as faster and we're going to continue to be.
Speeding up our network for our customers face for the costs.
Our next online question comes from Ben Hartford of RW Baird as transformation has progressed, how confident are you and you asked his ability to either realize the stated dollar to dollar 20.
Or get it earlier or even exceed the initial estimates.
I'll take that Scott. Thanks spend for the question is Brian , but we're confident in the dollar to dollar 20 incremental EPS.
Given the investments we've made already retarding, we're looking at margin expansion across all three segments in 2019, and it's just building on the momentum so I think Mike by choosing to invest accelerate and expand the investments in SMB that David referenced we see opportunity to capture.
Accretive growth going into 2021 and beyond.
We have a question from a line of top water with WPS. Please go ahead.
Yes, good morning.
Wanted to get your thoughts about competitive environment.
Yeah, I think fedexs.
Celebrated their kind of quickly doing 16 seven days so it seems it there.
Competing harder in e-commerce .
Obviously your.
Getting a lot of traction in the market getting strong growth in domestic package and.
Turning more aggressively as you announced today do you think that these investments accelerate your volume growth looking forward or is this something where you just have to spend more to compete in kind of keep the momentum.
Do you think about competitive dynamic.
How that translates to volume.
Thank you.
Yes, we will Tom this is David they'll look take to follow up.
Well I can tell you that we're focused on serving the entire E Commerce Echo system and the and that includes large.
Etailers that includes the large retailers and that includes the SMB is the thousands and thousands of SMB is that the.
We help to compete at punch above their weight with the with the larger companies just a few days to point out when it goes to the major retailers over 90% of the larger retailers utilize our innovative services and we've seen their businesses.
So I'll just give you a few examples of that target.
Cure rate retail group Macy's gap coals.
By Overstock, I mean, all of those companies.
I've seen our innovative solutions in the.
And we have grown but where are real passion is there is allowing and then they blame small and midsize businesses to compete against the bigger companies and the and US where you saw just a string of announcements yesterday, we made.
More product and service announcements in 2090.
We've made my entire career.
And we are following it up.
This year and Kate I'll turn it over to you to highlight a few that you're going to focus so yes, absolutely in line. So clearly we are the e-commerce provider of choice and David just brought life to that and focused on the SMB is exciting part of our solutions is that we actually are leaning in both on b to B and B to C.
The speeding up the time and transit helps both.
And fast means through the weekend.
Yes only.
The commercial offering for our Custer customers, helping the SMB to actually speed through the weekend and also replenish inventory so very impactful.
These customers have told us it's about pace.
Speed and ease and the ease is helping them to connect whether they're already existing.
That is with digital access thats exactly what that does it brings together the community.
Buyers with the SMB sellers and attach my choice for business on that and help them to control not only their outbound whether imbalance and the more you can do that USAID staffing is save cost and then that helps them to reinvest into their business as.
We do see these investments as accelerating growth and we're excited that it is that with this structural shift in the air also the speed on the ground and very excited yes. There is just too that I want to tell it was we've been the E Commerce show for the choice for or years. This is something that.
We concentrated on the six seven years ago, and we have put the network in place and the and will continue but just two days that take is worth drawing out as we talk a lot about the structural change of next day.
Air.
The next day in general and.
And our extended hours next a program, where we can pick up late pickups, and we can actually serve.
98%.
The population for our brick and mortar retailers that within 150 miles of their locations. We can cover 98% that is industry, leading and those giving them a competitive advantage allows them to hit next a through their ground network.
And.
And then the so that was very important the other one that we've made a lot of announcements about but we are just speeding through and thats access points and we are adding in the press release. Another 1500 access points to package Express centers, what makes us unique.
Is this is a lot of rural areas people that don't have a lot of auctions and by the time. These get implemented with the others, we've announced 92% of the population of the us will be within five miles of our access points. Just gives you some good examples.
What we're doing to maintain our status as the ecommerce shippers Jules Thank you.
And we offer question from those type of Kid Hexter.
Of Bank of America Merrill Lynch. Please go ahead.
Great Good morning.
Dave I.
Yes, Brian that was great information on the breakdown in terms of the 610% outlook, but but then what the pension and other network rollout. So looking at that $380 million. So pre tax expense you're spending on on accelerating the network can you maybe talk about the split between rolling out weekend delivery and what the other actions that are that youre spending money.
And then and within that shift from today to next day to now Inter region. Dave was just talking about how do you play in that world does that require any additional network shifts or investment as you do that.
So thanks again for the question look where we're looking at the SMB initiatives in total as I broke it out it's a it's a 33 cents total investments with two objectives, we're trying to accelerate the the time in transit we're going to reach over 80% of our customers and then in addition expanded weekend coverage so rather than.
Break out the 33 said, we're looking at it in totality as a program we see it accretive to 2021 and beyond maybe I'll, let one take a stab at gets sharing some of the details of the two programs. Yeah. Thanks, Brian I'm going to US we think about the expansion over the weekend delivery services. We started that already into Q4 are the advantage that we have is that we have a well defined.
Integrated network that gives us unprecedented capabilities to be able to enable these services, we are going to leverage the relationship where we have with the Usbs David made reference to the access point network that we have network thats in place we've already built the technology that supports the integration between some of the access points that would make it really easy for us to be able to.
Expand us winning those areas and again, we will continue to provide services through the network that we've already built with a great people that we have supporting those those operations.
Our next question is an online question coming from Scott Schneeberger of Oppenheimer.
Please address GPS is progress in driving us domestic b to b share growth and the potential to further expand in 2020.
So Mike this is Kate.
So first we're proud to be the B to B market leader and also to say that we grew to be for the fifth consecutive quarter.
This quarter's need to be growth was fueled by retailer returns returns growing 6% with our unmatched portfolio. So you can actually have the flexibility of returns whether it be label as package lists and also right available on your mobile application.
So very excited about the progress that we've seen in that space and then b to B a critical component of that is our health care strategy as well as our SMB with a large majority of Bobby to be tied to those also David mentioned the structural shift.
Structural shift comes with businesses speeding and that also impacts the so everything you see us doing with speeding time in transit re the weekend all that nets to continuing our success with me today. Thank you.
Our next question will come from the line of Jordan The Challenger of Goldman Sachs. Please go ahead.
Hi, good morning.
Just sort of wondering can you talk a little better I know, there's the pension headwinds, but a little bit about your thoughts on managing the cost per piece and the revenue per pace in the domestic business and.
Managing to sort of that spread differential on and what we should think about in terms of cost per piece going forward. Thanks.
Okay sure I'll start with revenue per piece first of all love we were excited to deliver the positive operating leverage and George will speak more about that aligning our cost per piece with revenue per piece.
As we've noted revenue per piece was affected by weight therapies and customer mix as we leaned into this structural shift that's going on in the market and we will continue to do so with that we're seeing is meeting whether it be in the air services you saw our air growth very strong.
Three consecutive quarters over 20% with this past quarter at 26% for next day and double digit for deferred a lot of which by the way it's coming from a very broad customer base.
Heavily SMB in that area and then David mentioned that surround solution that we have which is our extended hours next day ground.
The coverage that we gain.
90% of the population by activating brick and mortar that will continue so shorter zone, some less weight, but solutions that gain the whole portfolio air and ground from our customers, which will help RPP and then we remain committed to growing up price as aligned to our value.
And our cost therapy.
Jordan This is George will listen the thanks for the question so far as a cost per piece goes our investments have significantly lowered our structural costs. So in answer. Your question do you think there's going to continue to drop we can see we continue to see an improving as well.
We are driving productivity gains and we're lowering our unit cost we did that last year, we expect to do the same thing. This year, we're creating excellent leverage as Kate just talked about earlier and it was I actually exhibited last quarter in the fourth quarter. This was evidenced by our cost per piece actually going down 3.2% in the.
Fourth quarter, so we see the benefits our new facilities, we're going to continue that we're consent. We also see the continuous improvement on road and in our Air network, driven by the new technology and automation.
Our next year.
Our next online question comes from Scott Group of Wall as.
As well as a few of the other analysts. Please provide an update on your relationship with your major customer. There is always much discussion of their plans and how that could impact you PSS business over the next few years.
Okay. This is David and I will end, the and our business did increase with them over 2000 and the night.
In the part of which was due to a structural change and this focus on the next day and.
We first saw that change and we had the lift available and we really took advantage of but not only.
The large retailers, but with other companies that are matching at the same structural change. We also had competitive wins with large retailers and the.
And the others and we saw a little bit of a muted growth topline from international and supply chain due to macro conditions and of course that made the.
The per said revenue a little bit larger, but one of the things we want to focus on is at same time, we took on additional volume that to that we did bring our cost for piece down significantly in the U.S. operations for fourth quarter in fact on adjusted basis by more than.
3% from the year before.
And also.
That other customers able to take advantage of some of this capacity in structure. So so other retailers and small and midsize companies have been able to take advantage of same way as long as well if any of a big customers as long as there's a mutually beneficial relationship.
Then we will continue it will find ways to win together, but we also find ways to continue to help our small and midsize companies and others to compete against those large opportunities, whether it's through where to go or E fulfillment or access points or.
There are options. So that's kind of a rundown about where we stay thank you.
Our next question will come from a line of Chris Wetherbee of Citi. Please go ahead.
Hey, Thanks, good morning.
It looks like the guidance for the first quarter suggests basically flat earnings, although you're expecting growth throughout the rest of the year can you talk a little bit about.
The cadence of the investments that you're making the SMB initiatives and others.
That's sort of front end weighted and is that a driver that sort of weaker than the average first quarter.
We think that there is sort of introducing new seasonality to the business potentially sort of the growth in your largest customer as percentage of revenue just want to get a sense of sort of how we should be thinking about the cadence of the growth and the expenses, particularly in the first quarter.
Yes, Brian Thanks, very much for the for the question. So it has less to do with a changing of the seasonality it's more about the phasing and cadence of the investments we announced the 33 cents opex.
Investment EPS headwind other we're putting in the revenue lags those start up costs. So as you think about Q1 and launching the investments revenue comes a bit later and Thats why were muting EPS. In addition in the supply chain of freight business given the macro backdrop us that there were expecting some rebound in the middle to late part of the year. So those are the two elements and Pat.
Joining us the phasing of the guidance.
Thanks.
Our next question is an online question that comes from Allison Landry of credit Suisse can you discuss the announcement of the construction of a super hub in Pennsylvania.
The is the construction embedded in your three year Capex and can you tell us how the super hubs will differ from your other major sort facilities.
Yeah listen this is one press. Thank you for the question just a couple of points. Let me first clarify the 1.4 billion, but that we announced these for not just one facility in Pennsylvania is a total of four facilities in Pennsylvania. The largest those is the super hub, we will be building in Harrisburg, Pennsylvania.
As you've heard us talk about the smart logistics network a number of times. The part of this model just six network is building critical capacity to support the needs of our ecommerce customers. We continue to build that capacity would be very effective that capacities, yielding the expected results.
Question on next talks about how we continue to improve the the facilities that we built we have this philosophy of GPS that every time, we build a new facility that facility is going to have the next generation of advanced technologies that will help us continue to build capabilities improve what automation, we lose our hours in this particular building we expect to see some really.
These technologies more data analytics that will provide better insights on how the facilities running of course, how we can help the overall network and we also expect this new facility to use the latest and greatest automation technologies that we have.
The Capex is included in our three year plan. So this is something that we have been planning all along as we continue to build our smart logistics network. We're excited about what we're building in the northeast critical corridor, where youve, yes.
We have question from the line of David Vernon of Bernstein. Please go ahead.
Hi, Good morning, Brian maybe could you could you talk a little bit about how the 33 cents is going to be kind of.
Earned back into 2000, 2000, 2021 is that something that we should be expecting to be.
Basically just go away as a one time item or is just going to take a little bit of time to grow through and as you think about the next three year view on Capex. Obviously these investments announced in the last couple of days have have had been significant but it sounds like there part of the capital envelope has your thinking as you're thinking on reinvestment changed at all as far as kind of.
Our next three year view on on Capex going forward. Thanks.
Hi, This is David I'll take the first part of that question, then I'll turn the capex over so.
So from an opex standpoint own speeding up the initiatives.
This is really about how to increase the asset and lane utilization of.
Of our transportation network, it's about competitiveness, it's about the pricing power. When you have a a much faster network you don't have to discount as much. We also don't have to have a customized solutions. So we'll go to be able to take several of those that we.
Have put over the years to help speed the network, we're going to give or take that up.
But we really see that we're going to get additional businesses and that was the thing that got our attention. So much less year is when we put these first ones that we weigh exceeded the return of additional packages that we will go into good. So when you put this infrastructure in place it's not been.
The utilized at first it takes a while to grow but based on what we've seen last year, what we expect to see this year.
The revenue.
And the pricing power from this move is go to more than take care of the operating Codexis why we are boldly, saying that this is a creative ines creative than 2021.
And we've got the so far this examples to show that so lets turn it over to the Capex side and this too Brian Thanks, David and Dave. Thanks for the question so with respect to Capex, you're right. The investments we talked about the sporting Harrisburg et cetera, those are all embedded within our capital guidance Anvil.
So David talked about.
The opex investment, but in terms of where we're headed on Capex. You saw we're guiding to about 6.7 in 2020, that's really coming from a lot of efficiency being driven as we saw in 2019 as well as 2020, we see a glide path eventually moving down towards our historic average of 7% and.
Ultimately, we look at the ROI C, which is among the leading industry and really it's a good investment for the company in terms of the return. So hope that gives you a little insight on on the Capex guidance.
We've got a couple of questions on international Tom Wadewitz from U.S. as well as Scott Schneeberger.
From Oppenheimer.
Yes realized a 150 basis point margin improvement in international package in 21. Despite small declines is there room left for further margin improvement and does the recent phase one of the China deal help in that regard alright ill talk about phase one of the chip.
To do and then then Doe will go further than that we think the U.S., China phase one though was historic agreements.
As much for what it Kelly from happening with additional Atos being implemented plus what was covered in the actual agree but and certainly look forward to working with governments on both side both for phase two but a positive start there when you take a look at that end user.
So take a look at the terminal dues.
James that is going into effect this year, which is go allow us flip our worldwide economy servers to really compete in the post global E Commerce Cross border I Should've said the ecommerce.
Shipments that we haven't been able to do before because of the very low cost of terminal do so that Scott the dress and.
So we do see some positive momentum and I'll turn it over to you and then to talk about the.
That business.
Sure. Thanks for the thanks for the question of course, when we look at trade obviously concerns exist.
We focused.
Really strongly on making sure that we're growing our operating profits regardless of the macro backdrop, we were able to execute industry, leading margins create positive leverage of course continue our profit growth during the quarter.
I also want up just bank international staff globally for the work and how they accomplished all of those things in a very challenging environment.
What we saw the volume coming in a little bit differently of course, we feel very comfortable about the cost reductions and the cost control and how we manage expense, namely the network efficiency, our revenue quality, but also cost efficiency, we executed 2.8% decrease across all cost categories in international.
Long term targets or 16% to 19% we're at 21.
Higher margins are not exactly the primary goal, but maximize our profit certainly so thanks for the question.
Our next question will come from the live as Scott Group.
Research. Please go ahead.
Hey, Thanks morning, guys. So can you just share what the air and ground volume expectations are for this year and then on the dollar 10, I just want to make sure I understand the numbers.
How much you think you've got in last year, what's assumed for this year I just wonder what's left for 21.
Sure. So I'll take the first part of that kick over to cages talk on the air outlook. So from a in a dollar to $1.20 in terms of what's what's in there we basically anything over the seven and a half percentage terms of 5% to 10% guidance.
Is.
Think about putting a deposit down so we posted pretty strong operating growth in the 2019 results. We basically earned about 25% to 30% of that that EPS upside. So the balance would be left to come in 2021 in 2022. So Kate you want to take the air piece, She does though and we talked.
When the transformation started that that we had targeted 800 million into a billion of cost savings and the.
And our a smart logistics network initiatives and we're certainly on try we may get another question on them. We can talk about that but we're on track there too. So then Kate you want to talk about the air side, Yes, absolutely I mean, it's a good.
So to say that we are their market share leader and.
We saw this anticipated this change is structural change going on in the market.
Leaned into it with our solutions and as a result, you've seen the stronger growth three consecutive quarters over 20%, we do expect to continue to see healthier growth.
Long side related to what Brian was laying the ground comes hand in hand. So we're seeing next day air today are resonating across our customer base.
Whether be from health care SMB Etailers large retailers, we have expanded capacity additional plains all of that tying together to this strategy and then we've talked about the unmatched GPS network and the ability to cover 150 miles of one day ground.
Yes.
Really activating our retailers in our SMB brick and mortar to help them to better compete in the market, So flexing where their inventory is.
Menus in whichever of our products that fits for that need so healthy future as well so key part the Cape brought up earlier by really and we gained significant market share last year in the and our USA or network.
We've been gaining market share in that.
Dr.
At least for the last five years, if not five of the of the five years. So so we've been constantly investing in aircraft been and have 11 more that we're putting in this year that benefit their international the Cascade is cascades to the.
Domestic so this is something that we offer a clear differentiated.
Well, you advantage to our customers and they or rewarding us and those going very well ports. Okay. What take another online question, there's multiple analysts asking this.
Did how did your peak season returns compared this year to last year Im pleased to discuss you. Yes. This process to handle this.
Okay.
Yes first of all.
Two.
Thank you.
All of our partners as service providers in the us for a very good peak season.
It was driven primarily because of several things first our collaboration with our customers.
Second.
First of our people.
And third the use of technology in our automated facilities.
As a result of this.
Through third parties, we led the industry again as service for the second consecutive year.
We delivered over 32 million packages 16 of the 18 delivery days between Thanksgiving and Christmas.
Majority of our volume.
You heard us talk about investments.
In handle that growth will see year over year was done in our automated facilities.
Our network responded and was very responsive and we continue to be agile our operators make good decisions during peak and now for the technology part one just a couple of quick statements folks. The first one that I think it's important for you guys did though is that at the end of 2019, 75%.
The where us eligible ground volume, what's actually sorted through automation.
Vision to that we have completed the rollout of GPS Orion navigation that gave us significant benefits, especially as we bring seasonal workers on and they needed that type of technology to improve their overall delivery capabilities and of course, we now know that we're introducing additional technologies on the dispatch on delivery side that are going to continue to help us throughout our peak season.
The benefit of automated facilities cannot be understated, we actually exceeded throughout the year and certainly throughout the season. The expected production improvements that we get from automation, we introduced new solutions as well in terms of autonomous vehicles in our automated facilities to support the movement of bulk all those solutions proved extreme.
The valuable in executing our success will peak season, and we're already planning for 2020, that's the way that we buy now approach shopping season for a number.
We're going to take one more online question.
And then well up close it out the question is from multiple analyst.
Asking about what technologies are in front of us as well as our drone technologies, how we see that playing out. Thanks. Thanks for the question. So as we as we mentioned transformation helps us bend the cost curve to help us invest in growth.
Some of the growth opportunities, we see in particular in support of.
Our customers in the area of leverage of drones. So you have slight forward, which was launched last year a number of trials, we announced the San Diego, where we're able to move across campus speed up for critical care, our support to customers. We also announced the Waymo in Waymo has an interest.
Before us it allows us to test a new model for later pick ups at U.P. of stores that supports our SMB customers, who get than later cut off in a competitive ability to do late orders and fulfillment for next day. So all of these technologies are helping us to grow and at the same time vendor cost curve. Thank you.
That concludes our culinary I will now turn the program back over to Mr. Scott children.
Thank you Steven David.
Got it Scott.
No I'm sure you could say on this call that a that we're making significant progress in executing our strategies.
You US was certainly an excellent example that the through the fourth quarter, we are leaning in to Smbs. The great majority of the solutions that.
Solutions that we've announced 2019 2020 is to assist these SMB is to be more effective and to be able to compete with the larger companies and our transformation initiatives there driving efficiency and there are.
Allowing us to provide these new innovative solutions. These studies are it or related they go together.
And the lastly, I wanted to head about our call. Today is we are absolutely speeding up our network.
And and expanding our weekends, we see a unique opportunity you here in the market.
And we are going to take advantage of it will go to make those investments from an opex standpoint.
And we do feel strongly it will be accretive in the 2021 and we absolutely are convinced us the right thing to do so we're going to continue to accelerate move at a faster pace for the benefit of our customers our shareholders and our people. So thank you for joining us.
Today.
That concludes our conference call for today. Thanks for your participation have a nice day you may now disconnect.
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