Q1 2020 Earnings Call
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Ladies and gentlemen would like to say good morning to you and my name is Steve It and I will be your conference facilitator today at this time I would like to welcome everyone to U.P.S. Investor Relations first quarter 2020, <unk> earnings 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. first quarter 2020 earnings call joining me today or David Abney, Our CEO, Brian Newman, our CFO Gutman, our chief sales and solutions officer, along with International President Nando Cicerone, President of U.S. operations, George well our.
Nation, and Engineering officer, one purposes, it's got price, our chief strategy and transformation office your.
Before we begin 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 expectation for the future performance or operating results of our company. These statements are subject to risk and uncertainty which are described in detail in our 2019 form 10.
And other reports filed with the Securities and Exchange Commission. These reports we filed our available on U.P.S. Investor Relations website and from the FCC.
During the quarter GAAP results include at a pretax charge of $45 million or four cents per share on an after tax basis.
The charge resulted primarily from transformation related activities.
Hi, good adjusted results exclude it a pre tax.
After reaching cost 243 million or 11 cents per share on that.
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Unless stated otherwise our comments refer to adjusted results what types of today's Oh, along with a reconciliation of non-GAAP financial measures are available on U.P.S. Investor Relations website Webcasts users can submit live questions. During the call. We will attempt to answer questions My long terms.
Strategic nature callers are asked to submit only one question. So that we may allow as many as possible to participate.
Thank you and now I'll turn the call over to David.
Thank God and good morning, everyone.
I would first like to thank you Peter <unk> worldwide, we're going above and but YOD during the corona bars and done.
So I suppose crisis, but again, we've been operating as a critical infrastructure businesses leveraging the strength of our global network to keep supply chains moving around the world.
People, we're counting on U.P. has more than ever before and I am proud of their homework actions of our employees throughout this pandemic.
Of course is touches all parts of our business and we have been methodical in our response.
Our actions prioritize safety focus on our customers ensure our liquidity position.
And position U P S four additional opportunities as conditions improve.
Regarding safety.
We have adjusted our health and safety protocols throughout our company.
With increased social distance me, which includes.
Waving customers signature woodcarvers, where possible.
More personal protective equipment or TV for people.
Frequent cleaning of our facilities and equipment and total working bar employees where feasible.
Those who just some of the safeguards we've implemented to protect our people and customers and we will continue to address those conditions change.
I also want to recognize the extraordinary efforts health care professionals and everyone on the front lines and the communities, where we live and work.
On behalf of you'd be yes, we are grateful for their efforts and sacrifice.
Yeah. This is one of the few companies with the logistics expertise in global infrastructure to keep critical health care is other supply chains moving.
We've embraced our leadership role supporting Primo both project gear bridge and the other healthcare related admissions by managing charter barge to deliver billions of pounds of BP.
And test kits from around the world dedicated U.P.S. distribution space outside wallboard.
There were providing overnight delivery locations throughout the U.S.
Yes, it's also assisting other federal and state government agency and supporting customers like Green.
Hi.
Henry Schein, Mckesson and Samar as they quickly adopt their supply chains to manufacture and distribute PB and other supplies.
Many companies are coming together, we've ingenuity and speed to solve the most urgent income parks healthcare challenges of this crisis.
For example, we have the distinction or partnering with GE and then take life systems to provide transportation and logistics services for their advanced technology Ventilators now being produced in G. UBS retooled manufacturing so.
And Oh add that we're doing all of this small U.S. domestic is delivering industry, leading on time performance.
As China began to recover in March.
Our Asia about business accelerated both airfreight and small package.
Including the healthcare Hi Tech in E Commerce sectors, we quickly added capacity to keep critical supply chains movie and commerce flowing.
And outbound demand from Asia has continued what's more as part of pretty much as project or bridge and other healthcare related admissions. We increased the number employed by over 200 to transport critical lifesaving cargo to the U.S. in Europe.
Countless companies are relying on U.P.S. to help keep their businesses rotting.
And to support their kimono bars response efforts.
One by an example is to E commerce support we're providing to target.
When the Corona bars pandemic forced millions of Americans to stay at home.
Communities across the country turned to target and target turned you'd be yes.
Consumer E commerce demand for central and necessary goods surge.
Yes has been there.
With excellent on time delivery.
Several years ago, we identified health care and E. Commerce is two of our strategic growth imperatives, and we've been investing in innovative solutions to enhance our capabilities.
In health care, we're expanding U.P. as for me or our next generation own package sensor and visibility technology for critical health care shipments.
Starting in May in cooperation B. I pay you peers flight board, our drones subsidiary well deliver prescriptions from a CBS store in the villages, which is the largest U.S. retirement community.
And is located in Florida.
With our new health care unit, we are well position to continue to assist our customers.
It's more countries move into recovery in demand for health care of supplies about.
And in ecommerce our digital access program for SMB is one of our strategic imperatives greatly increases their E commerce market bridge.
And we continue to deploy you'd be as Matt.
The latest enhancement to our proprietary Orion navigation software.
Yes, no further supports our drivers with the increase in residential volumes.
These solutions in many more.
Will enable us to build upon our existing customer relationships and foster new opportunities what bothers.
During these challenging times.
In fact, you guess is poised and ready to help all customers large and small resume business as markets reopened.
In late January we provided our 2020 guidance, which did not include any impact from Corona bars. It was early the and no one could have seen those significant impact it would have on our customers and the global economy.
In fact over my 46 year career, yes, I have never seen the level demand variability in the markets, we serve and among our customers that we are now experiencing.
Throughout the quarter, we adjusted our networking controlled costs.
Well, we were not able to fully offset the unprecedented swift changes in market demand and mix.
Business closures and stay at home restrictions.
Fortunately affected SMB is.
We're seeing a dramatic shift in consumer shopping behavior.
By late March residential deliveries approached nearly 70% of our volume.
And drove increased delivery caused.
They trend we're seeing continued in April.
Brian will add more detail on this in a moment.
Most economists are currently predicting a recession, but there's broad disagreement on the leap in shape of the recovery.
Main economic indicators U.S. industrial production U.S. retail.
Global industrial production.
And global exports are all forecasted to declined significantly.
Due to the uncertainties ahead.
We're unable to predict the business impact independent or reasonably estimate our financial performance in future quarters.
As a result will what drawing 2020 guidance.
Importantly, you PS generating good cash flow and first quarter and our liquidity remains strong.
We continue to make prudent financial decisions.
And have additional options available to ensure ample liquidity.
In addition.
Our dividend remains a high priority and is a hallmark of our financial strength.
We are confident our actions will continue to enable us to on the business and support shareowner interest.
As a result in changing business conditions, we analyze our 2020 capex projects and have Reprioritized our spending.
Those key investments necessary to support transformation, we're reducing capex by $1 billion.
This decision was governed by two priorities first we will continue to make investments that best position the company to seize future opportunities as conditions improve.
And second we are prioritizing investments in spending the yield the greatest long term benefits to the company.
For example, we remain on track to speed up the U.S. ground network and expand weekend operations.
These efforts will bolster our competitive position and help all customers meet the demand for faster delivery.
Oh, So we will continue expanding our integrated network by adding about 5 million square feet of automated capacity this year.
More automation reduces our cost enhances our network flexibility and enables the creation of innovative solutions for customers.
Before I turn it over to Brian I want to congratulate Carol told me on being named U P. S is 12 CEO.
Taro has great knowledge of U.P. us from serving on our board for 17 years.
And she has a proven track record of leading a global organization.
Through volatile economic cycles.
She brings a best understanding of retail E.
E Commerce strategy and the extensive financial background to the company.
Tariffs the right person to guide you'd be us at this time in our history.
She officially takes over on June 1st, but the transition is well underway.
We've been working closely on all aspects of our business.
Including nucleus is response to the Corona bars fandom.
Harold Unbridled enthusiasm and passion comes through naturally and our daily interactions. She has hit the ground riding and I have great confidence and her ability to lead our company into the feature.
And now Brian will take you through the details for the quarter.
Good morning, everyone.
During the quarter U.P.S. saw unprecedented and rapid change in customer and volume fundamentals as a result, we faced a challenging and uncertain environment.
I'll begin today by describing the factors that contributed to our results.
Then cover the strength of our liquidity.
And wrap up by sharing the trends, we see in our business.
Let me start with how the quarter unfolded.
First as David mentioned, leading economic indicators have turned negative.
Historically, the small package industry highly correlated with GDP.
But with two important variations.
A small package industry typically grows faster than GDP over the long run, especially in a strong E commerce environment.
And second during a recession demand volatility is elevated.
During the quarter, our business rapidly change due to the Corona virus pandemic and declines in global economic activity.
Let me begin with Asia.
China average daily volume was down 16% in January and February on a local day basis.
And then partially rebounded in March growing 23%.
Europe, followed a different pattern with January and February average daily volume growth slightly positive.
And then down mid to high single digits in March.
Declines in economic activity trailed the spread of the Corona virus as it emerged in new locations.
And then surfaced in the U.S.
The virus spread quickly, making it difficult for our customers to know how to respond well make adjustments to their businesses.
Yes, as global networks, and solutions enabled flexibility and support to our customers.
However, we experienced an overall decline in commercial packages of around 2% for the quarter.
But in March the decline was actually 8.9%.
It's also important to recognize that businesses were affected differently throughout the quarter.
For example, many small and medium sized businesses with limited alternatives, we're more likely to temporarily halted their operations or move exclusively online. Consequently, U.S. SMB volume growth was flat a reversal of a positive multi quarter trend.
The impact across sectors was also somewhat unique.
Consumer shopping migrated online triggering a surge in volume growth led by multiple large GPS customers internationally, we saw E commerce volume growth of almost 12% and domestically ecommerce grew 19% for the quarter.
Health care was another sector with accelerated volume growth we are in the U.S. It increased 8.9% with significant contributions from personal protective equipment testing and lab supplies.
Sums that are critically needed to curtail the virus and protect health care providers and the general public.
So what it all this means to you as well you P.S. generated more than $18 billion in revenue and about $1 billion net income during the quarter.
We were down nearly 17% or 200 million in the quarter.
This was driven by three after tax items.
The impact of the Corona virus was a drag of about $140 million.
Second casualty self insurance accruals were higher than anticipated by about 110 million, which we are addressing with targeted safety training design for prevention.
Continued implementation of incident avoidance technology.
And finally data analytics to enhance proactive driver coaching.
And then finally the impact of one additional operating day. This quarter is a tailwind of approximately $50 million.
We are confident however that we can take advantage of the opportunities in front of us and it will be well prepared for the recovery when it comes regardless of its shape.
Now, let me make a few comments about the segments.
You asked domestic delivered strong volume and revenue with average daily volume up 8.5% across all products.
Oh volume growth softened as we move toward the end of the quarter.
Our automated hubs perform well. However, these benefits were not enough to offset the rapidly changing and significant customer and product mix headwinds we faced.
Specifically commercial deliveries turned negative ending five consecutive quarters of growth.
BDC volume spiked early in the period to high teens, which drove an increase in overall miles driven of nearly 10% and about a 15% increase in total average daily stops.
By the end of the quarter BDC approach, 70% of our volume.
And average package weight decreased by about a third of a pound.
The U.S. generated $401 million and operating profit, which was 293 million below last year.
Profitability was primarily affected by the Corona virus with an impact of around 100 million.
Higher than anticipated casualty self insurance accruals of about 130 million and the pension discount rate of $62 million.
Turning to the international segment international executed well through various peaks and valleys of the client of ours pandemic spread across the world business closures and stay at home restrictions led to a decline in commercial volume and downward pressure on volume growth.
We had slightly positive average daily volume growth in January and February.
But as I previously mentioned volume declines came in March with the month, finishing down 6.5%, mainly driven by Europe.
We took advantage of certain growth opportunities and leverage the flexibility of the network to manage costs to help offset the significant change in mix.
We reduced block hours by nearly 6% well below our export volume decline overall international cost per piece was lower by half a percent primarily from the impact from currency.
One of the bright spots in the quarter occurred in mid March as China began its recovery.
March export volume from Asia was up around 15% on a local day basis.
We quickly added capacity to support pent up demand out of Asia from a variety of sectors, including healthcare, Hi Tech and ecommerce.
International generated $558 million, an operating profit and even with the headwinds operating margin was 16.5%, which includes an impact of around $70 million from the Corona virus.
Now, let's review the supply chain and freight segment.
Despite the difficult macro environment revenue for the segment was down less than 1%.
Segment faced Corona virus challenges as mentioned earlier, however, we saw some positives as the quarter progressed.
International Air freight tonnage rebounded in March and was up more than 15% primarily on Asia outbound lanes as the China recovery took hold.
Logistics grew operating profit led by Us health care, and marking and market had a strong quarter of double digit revenue and operating profit growth.
On the downside US road freight softened during the quarter pushing profit results within Coyote and EPS rate lower on a year over year basis by around $50 million.
Additionally, Ocean freight North American Airfreight, and brokerage were lower during the quarter total operating profit was 158 million.
Overall impact from the current of ours was a drag of around 10 million and tough year over year comps were headwinds to profit growth.
Moving to liquidity.
We haven't disciplined and balanced approach to capital allocation.
Capital management and dividends remain high priority, we're starting from a position of strength cash from operations was about 2.6 billion and adjusted free cash flow for the period was 1.6 billion consistent with our first quarter average over the last three years to date, we strengthened our liquidity with the debt issuance of 3.5 billion in March.
Which more than satisfies our debt obligations for 2020.
We are taking a strict approach to working capital and cost controls across the company.
Working capital improved by around 80 million on a year over year basis.
We actively engaged with policymakers on stimulus packages to help support small businesses consumers and corporate cash positions.
And finally, we expect to lower our use of cash in 2020 by nearly 1.8 billion by suspending share buybacks and reducing capex.
Our capex reduction will not impact our automation targets.
About 50% of $1 billion in Capex reduction is from adjusting buildings in facilities projects and the other half comes from Rephasing vehicle purchases and we're finding that some projects are coming in at a lower cost.
We want to thank the U.S. Congress for providing the cares act to help companies across the country. We have elected not to participate in the program as we are confident in our ability to manage EPS is liquidity through this cycle.
We will however continue to monitor business conditions and make additional adjustments as needed, including further potential reductions in capex or operating expenses.
Our ongoing transformation is extremely important.
Right now as we managed through the current crisis and to further position us as global conditions improve in the future.
In fact into first half of the year, we will add approximately 80000 pieces per hour of new automated sort capacity to the us domestic network, increasing efficiency and agility within our network.
Let's turn to what we're seeing now we view the current global situation as having three distinct stages.
Pre corona virus pandemic.
Stay at home restrictions and then a recovery phase.
The U.S. began to stay at home stage in March and it has continued into the second quarter.
At this time, we're not able to determine the duration or depth of this stage or the resulting recession.
We will leave those debates to the economists and instead, we'll focus on keeping our employees safe, serving our customers and ensuring ample liquidity for our shareholders.
Well I can tell you is that our business was performing well coming into the year in the pre Corona virus stage.
And as I shared we encountered rapidly changing and significant mix headwinds as we entered the stay at home period, because averages can be misleading. During these times, let me provide you with some of the trends we're seeing.
Asia appears to be stabilizing with strong outbound demand.
Europe remained in transition and is weak economically, especially on the industrial side and in the first half of April International average daily volume is down about 8%.
In the U.S. at the end of March BDC made up around 70% of our weekly volume and that trend has extended into April.
Healthcare continues to be a positive with growth in commercial and residential deliveries.
No industry verticals had positive commercial growth in March except for health care and these trends have continued into April so far in April US average daily volume has grown mid single digit driven by ground residential and Surepost and air shipments are up about 1%.
Importantly, commercial ground volume is down significantly from last year.
Productivity and service levels remain high.
And delivery stops and miles driven continued to be elevated putting pressure on our delivery density.
I know that it's difficult to see all the moving pieces from outside the company. So I hope this provides a helpful glimpse inside.
We know will move into a recovery phase, we just don't know when.
So we can provide guidance for the remainder of the year at this time.
But as we move forward, we will continue to prioritize investment and operational decisions that put us in the best competitive and financial position for the recovery.
It is also likely that future consumer and business behavior may change as a result of this crisis.
And you PS is transformation initiatives will help bridges, two new market realities by delivering more automation increased network flexibility and new technology enabled solutions that position us well for the future.
Thank you and operator, please open the lines.
Our first question will come from a lot of Ken Hoexter of Bank of America Merrill Lynch. Please go ahead.
Great Good morning.
David of ranking can you talk a bit about perhaps that domestically at three and half percent margin. Despite the network transformation.
Residential is at 70% of volumes, but only for March and if we now see state on lasting maybe April may.
Do you expect an additional pressure on those margins are you seeing any benefit from increased density in the in the residential deliveries.
Sure Ken Good morning, it's Brian Thanks for the question so from a domestic margin perspective, as you mentioned, 3.5%. There were three three items that weighed on the margin in the us in the quarter.
The Corona virus as I mentioned was about 100 basis points.
We had auto liability impact of about 130 basis points.
And then the.
The so the extra day was actually positive can by about $50 million. So.
One other piece I Didnt mentioned was the SMB initiatives that we previously invested that was about an 80 point impact we're continuing Ken to make those investments through the quarter, George maybe I'll toss it over to you for a little color on the U.S. business.
Thanks, Brian and Ken Thanks for the question.
And before answer a light to first of all I would like to thank all the users for their heroic efforts and their leadership through this crisis and as we look into the us.
Despite the headwinds we were able to continue to drive efficiency gains in our youth in the operations.
Brian just spoke to the 100 million dollar impact on Corona was $130 million for insurance $62 million for free pension.
Despite the strong volume and revenue results investment efficiency gains, we were not able to offset the impact of the current of ours and some other headwinds.
Operating leverage was down for the first quarter since first quarter 2019, but it was driven by elevated miles, which was about 10% and daily stops, which was up about 15% as a result of that elevated b to C.
Rapid changes in customer in the product mix in the quarter.
Those were mostly closed businesses. So we didnt make progress in our transformation initiatives.
We generated exceptionally high service levels as David said, we led the industry and we helped our customers adapt their supply chain.
Thanks, George and the and this is a good question and want to spend just a little more time on it and I think it just absolutely verifies importance transformation and what we've been doing what we have in place in what we will be doing Scott you want to add just a little more color to that thanks, David So I think.
It's important I understand in the quarter that so we are continuing to shift resources to the future of U.P.S., which is faster nimbler.
We have continued to target high quality growth opportunities, improving our operating leverage with efficiency initiatives disguised by some of the.
Issues that Brian raised with the focus on long term, earning power of the company because of the work that we've already done and transformation. We believe that we are better prepared to weather the crisis and as we continue to implement and invest in projects. This year. We think that we will continue to see very very solid numerous better benefits in the future as well.
We're going to take a online question here. This question comes from multiple analysts Jordan Algiers over at Goldman Sachs and Chris Wetherbee over at Citi.
Do you think the Corona the Covance 19 pandemic will change the long term dynamics of small medium businesses and part of the strategy.
Alright, Great question this is David and.
Prior to the Corona Vars Essen base were and are a strategic imperative for you PS and recent events were certainly speed up.
Our SMB stride.
And we're prioritizing our strategies investments to take advantage of these opportunities as market conditions improve in order to get the greatest long term.
Benefit.
And we're seeing unprecedented and swift changes in market demand. So our SMB customers at the same time and more and more they're seeing the value of our network. Many of these SMB is especially those that have had a temporary close.
Our actively seeking other avenues and other platforms to conduct their business and to reach new markets and K ones you share a few stories on what we're doing in this regard with US and is absolutely. Thank you.
So as David said SMB is there a priority and they are really our solutions are resonating with the SMB is as we all find ourselves in these unprecedented times from a demand generation connection we've got our digital access program. So as some of the demand shifts away.
From the store onto a further on line.
We actually are seamlessly integrated into where SMB sell through this program stamps dot com Shopify Amazon marketplace.
And we see vast opportunity in front of us as well.
So ensuring they still have mechanisms to reach their consumers likewise.
This time, they need fulfillment assistance, and we're seeing our fulfillment and where to go solutions really resonating to help them.
To keep up with the demand on the the fulfill side of the house and then of course that critical time and transit piece of that they reach their customers a in a timely manner were speeding time and transit as we've said to over 80% of consumers in the market and through the weekend.
This is really helping the SMB through this difficult time to take advantage of online business.
And of course, while the the pandemic is upon us SMB did face a disproportionate headwind with the shutting of their businesses with stay at home restrictions you PS is here to help them as they recover when the markets open.
We're going to take a our next online question. This question comes from Dave Ross Silver at Stifel.
What are you seeing in terms of capacity and demand out of Asia and Europe I'll take that thank you David It's nando, just I'll start with Asia and really what we saw was.
Our average daily volume for the quarter was down 2%, but we saw a bounce back in March to offset early softness and we still see strong demand today.
In the quarter, we were successful at using our broad portfolio freight cargo small package to better utilize our aircraft and serve our customers. We created capacity by reallocating aircraft from other parts of the world to where the demand was and currently is.
And we created capacity with purchased transportation, where it made sense.
We did these things to be where customers needed us to be and we did it with industry leading margins.
And we're certainly seizing the opportunity that is in front of US right now in Asia.
A little bit of a different story in Europe, we see Europe is still in recovery, so still very hard to predict demand at this point.
Capacity demand and but I can assure you that the team in Europe is positioned for whatever comes next.
Oh. This is a great example of the need to show agility and in a changing.
Work environment, and a and this is a very dynamic environment and many of US we were kids.
Musical chairs well in this case ran into play musical airplanes, you know, we're having to move these aircraft. So where are the moment very quickly, making these decisions and just absolute proud of the way that we've been able to do that but is not stopping for was going to continue to be that way and we.
Just had to be responsive for the needs of our customers and we will continue to do so.
Our next question will come from a line of David Vernon of Bernstein. Please go ahead.
Hey, good morning, guys. Thanks for the time.
So Brian when you call out the added cost for chronic buyers and self insurance is there are those costs. It should start to come out as we move through the rest of the year are those going to be recurring and then I guess a broader question kind of strategically for the company would be that even if you were to back out some of those costs. The decrementals here on the ecommerce driven growth.
There are pretty negative is there a point, where you really feel like you need to have to change the way you're pricing that business.
Offset that decremental margin and cases mix shift does does kind of stay with us for a while I guess I'm just I'm surprised that the lack of operating leverage even ex some of those costs.
So David just in terms of the cost your first part of the question. The the impact of the Corona virus was felt in two ways. One was from a reduction in the SMB business and the shift to be to see that came through in customer and product mix, which was worth about 120 basis points in terms of the U.S. RPP.
We also incurred some some costs associated with pp in other other associated Opex expense safety equipment for our folks as well in terms of continuation look we're going to do whatever it takes to keep our employees safe and we've been preparing for some time for the shift ecommerce, we'll monitor to that as it comes in and adapt accordingly.
Thanks, Dave.
And the second part the second part of the question on on on changing our approach to pricing some of the residential.
All right.
David we're trying to get as many questions as possible and my question is going to come out we've got a nave email question. This very similar to that so we'll get to that in just a moment, but thank you.
We're going to take a online question real quick from.
Finally, shimon over at BMO.
Would you consider scaling back the dividend if necessary.
So look from a dividend perspective, Scott the dividend remains very important to our investors were aware of that.
Yes, as good liquidity and we do not expect impact the dividend we review it quarterly with our board.
The first priority in our businesses to reinvest in the business, we have a very strong ROI C and there continue to be a number of levers that we can pull to further strengthen our liquidity. So hopefully that answers the question.
Our next question will come from the line of Jordan Outlander. Please go ahead.
Yes, Hi, you spoke a little bit about the transformation program I think remaining on track just curious it give more color around facilities. The planned on opening this year pulling forward extending the cost for the weekend delivery and then once once we get acting as a side of this you expect the leverage to get you back line.
Tracks in the margin standpoint, I know in terms of what you're thinking about 20 plenty to both from a margin recovery standpoint, and additional S standpoint, as a lot of moving parts than any color on that would be helpful.
Yes, absolutely Jordan. Thank you for the question I'll start first with the facility investments, we're making this year as Brian noted in his opening comments, we will continue to make investments and building capacity across the network. We still are on plan to be able to process, 85% will be eligible volume in automated facilities in 22.
20, which is a significant milestone for us we're not changing the view that by 2022, 100% of our eligible volume will be flowing through automation that will provide significant benefits to argue yes. This year as it relates to a capacity we will continue to build capacity we plan on having off roughly 350000 packages.
For our of new retrofit automated capacity in our network, that's going to prove very useful during peak season again, all that capacity will be available before peak. The majority of it will be done by the third quarter, given us an opportunity to optimize the utilization of that capacity and then we are still making improvements in the way that we run vault.
I mean, our existing facilities through the implementation of new technologies are this year, we're still on path to implement more autonomous guided vehicles in our facilities to be able to automate the movement of irregular large size packages and we're also in the process of implementing more automated small sorts across the network. Scott in addition to investing in costs.
We also invest in new solutions that will continue to help us drive higher quality revenue a few examples Kate mentioned reduce transit time, making is very competitive with smbs.
Seven days a week operations as we continue to expand our Saturday and Sunday. The EPS flight forward at an announcement made yesterday in terms of expanding that and Cvs, but as Keith mentioned to you PS digital access program, it's powerful for Smbs, It will drive that higher quality revenue and importantly cement GPS.
His position as truly the the long term ecommerce provider of choice.
We're going to take a live question. This question comes from Rick Patterson Overlook capital in January you reported that Amazon accounted for about 11.6% of your total revenue what is Amazon's percentage of total sells over in the first quarter.
Thanks, and this is David than we were view.
Amazons for side of our global revenue on on annual basis, and so we announced in January as Elevensix, what I can tell you is that there for said.
In the first quarter of Tony Tony.
It really been consistent with their run right from the start the next phase structural shift that we announced in the second quarter of last years, So that trend second third and fourth quarter of last year has been very consistent going into the first quarter. This year.
I also would like to say that the growth of E commerce, whether it's a amazon or other large customers does make it pretty difficult for any of them to completely in source all their transportation needs and it does show the value of existing partners. We believe that we just.
Roughly that value of the databases. So thank you and we'll go to the next question.
Tom water, which you vs. Please go ahead.
Yes, good morning and.
David Congratulations on the retirement and I know you.
Driven probably a lot more changes.
And we would see from the outside so congratulations on all of things you've done overtime.
Yeah.
As the leader.
Why don't you I apologize for kind of in near term question, Brian, but just some having difficulty with visibility here.
Do you think that given the big changes ended the quarter that things are meaningfully tougher from a domestic perspective in second quarter.
Or are there is there room for some adjustment and.
You know the would improve or some seasonality.
I'm wondering I kind of operating income in domestic second versus first or margin or any framework you'd care to provide.
So I'll start that and then Brian if there's anything that you want to jump in than you can certainly do so.
What we've seen in first quarter at the end of the first quarter has been pretty consistent with what we've seen in April and but we can't tell you. What we think that's going to be the rest of the even the rest of the quarter or certainly the rest of the year. What we've seen in March and April is a reflection of this call.
Oh sure condition that were in at some point in time, we're going to see that to bounce back. We just don't know when if we don't know how far it's going to bounce back, but as businesses start to open new go to see more b to B increase.
And as far as fee to say, though the wherever get back to the what we'd call the old normal, but we're not ready to declare what we see today is a new normal either so.
It's really about as much color, we can put on it I wish to heck, we knew more and I wish we could the could predict what's going to happen. We just had to deal with where we are today and then we will adjust accordingly.
Our next question, we're going to take an online question from Scott Schneeberger over at Oppenheimer, what steps have EPS take into balance volume and price in the current environment.
Great. Good morning, Scott So I wanted to start with the of course, our continuous position that we ensure that we get proper returns for the value we create for our customers through this unprecedented time, we saw significant changes in characteristics will which I'll get you, but we also implemented surcharge.
He is on our international worldwide products from China, and Hong Kong origin.
We're also in the U.S. addressing characteristic and pricing changes on a customer by customer basis. So when you look at based pricing outside of the characteristic change we're still within our range of 2% to 3%.
And.
I do want to zoom in a little bit more on those characteristics changes.
The drop in weight with the with essential is unnecessary good really largely purchased online as well as of the large essential shippers with that that demand coming their way and then as David mentioned the stay at home restrictions and the shutdown of the commercial.
Businesses.
I would actually impact largely that b to b to C mix with 19% growth and B to C and negative, 2% and B to B.
So those are all impacting the the view, but the pricing.
That I noted continues through the period as well as into the future.
So pricing is going to be dynamic just like everything else and.
And what the world projected to go into a recession and with a lot of indicators that we follow a forecasted to go down we just have to be very careful and watch what we're doing here and as a.
The demand indication as our we continue to prove our value obviously.
Our goal is to maximize.
Our pricing at the same time.
Keeping our network utilize so.
More to come on that but we're very attuned to into it and we will make adjustments accordingly.
We have a question from the line of Chris Wetherbee of Citi. Please go ahead.
Hey, Thanks, good morning.
Maybe thinking a little bit about some of the longer term transformation targets. It would seem that are result of what we're seeing now would be acceleration of E commerce growth and sort of a build within your mix towards BDC versus b to b or acceleration of that how do you think that impacts your ability to hit some of the longer term transformation targets and are there things that you're going to need to do.
Either from a capex perspective, or an opex perspective to be able to sort of adapt to that because it seems like it's happening maybe quicker than we would've expected pre corona virus.
Yes, we Scott here. Thanks for the question, Chris So we continue to reaffirm our transformation target.
Importantly, I think that transformation as I mentioned earlier. This has set us up for success, we do believe that our previous estimates of acceleration of ecommerce.
Probably increase as we think over the next five year period of time, therefore, the investments, we're making an automation the investments we're making inefficiency, we believe will help us deliver those long term transformational targets.
We're going to take a out online question from Todd Fowler, all very key bank.
Discuss what you're seeing in the secular shifts.
Rig around Cobot, 19, and how you PS will positions itself to the response of the shifted coming out in the recovery side.
Okay. This is David again, and and first I can tell you that the going through this pandemic, our highest priority certainly been the health and safety of our people and ER and the key to our customers and the communities that.
We do since we adopted a lot of new health protocols and procedures in place to make sure that Oh, we have helped on the right things there.
And and then of course that it really is focusing on what are the opportunities that the that we believe that are happening here in the ships that are taking place and it's really open this up and to immediate opportunities that also.
Happened to be our strategic imperatives, and it has ramped up our initiatives. These areas. So could you want to talk about the little bit yes, absolutely I'll start with health care. We have I noted previously that healthcare is one of our strategic growth inherited we last year set up that healthcare division includes.
Our acquisition of marketing and we are really involved in the recovery for our customers that community at large.
Through this this time.
We also saw high growth in health care pre Corona period, as well and do expect that to continue but we're engaged in a with companies like going some minor Cvs and Medtronics and Henry Schein and really helping them as they participate in this.
Recovery.
David noted earlier, the involvement and became a both with the transportation from Asia to the U.S., but also in the fulfillment services and the dedicated space that you PS has within healthcare, we have 8.1 million square feet dedicated.
And that's really resonating resonating and then the other one I wouldn't hit on of the strategic growth imperative, the SMB and that just that critical area of our business. Both now and in the future I took you through our solutions that are resonating, helping them to grab the online opportunity through this time and in the future and giving them faster time and trends.
Is it more seamless integration to platforms.
As we help them too.
To make the most of this situation.
Our next question will come from the line of Scott Group with Wolfe Research. Please go ahead.
Hey, Thanks morning, guys. So I just want a follow up I think I heard mid single digit volume growth in the U.S. and April can you share the what the b to B and B to C trends are and maybe you know any color on like number of stops.
That you're seeing and then I know most of the focus has been on domestic but any thoughts on on international and and how you think mix and mix is trending and how margins typically hold up in a recession here. Thank you.
So Scott. Thanks. This is Kate I would say that what we saw as those stay at home restrictions started at the end of March have continued into April and so.
We saw the double digit growth of B to C. The negative growth on B to B as companies were closed and that continues so.
We also the air a softening both from the Colgate impact and then also from the wrap that we noted in Q2 of last year with these structural change in the market. So we are seeing a continuation of that end of March period in April that's a lot.
Finally, the U.S. comment, but nando I'll pass it for international Yeah sure. So we're seeing similar dynamics on the residential side, but not as pronounced of courses US business. We do have a selective ecommerce strategy.
That is really focused on cross border products.
And making sure that were being compensated for the service, we're providing and in turn the margins as you saw with all the.
Changes in the quarter still maintained a pretty decent level, we think that the investments that we made in our European network.
The efficiency gains from that but also the deployment of our some four seven dash eights really have created a lot of great unmatched capabilities and play well into our E Commerce Cross border strategy.
Thanks for the question.
We're going to take an online question. This question comes from multiple analyst, including flattish amount to be ammo.
President Trump has suggested that you Sps should raise rates, Florida fivex as part of the broader postal reform what any implications for U P. S.
Yes. This is David again.
And obviously, we can't make any comments on our competitors rates, but as we stated before we do support a healthy in a viable yes, fios and we have a unique relationship with the where a customer there is there a customer of ours were also compete and where we are a concern.
Those are use of a funding from declining monopoly products subsidizing competitive products.
And the and we were certainly an agreement with the most all of the positives postal task force recommendations. They were aligned with many of our priorities and wait they get from many of them had been implemented.
There may be a different situation today regarding the postal service than what exists.
We do support the President's via the stimulus grants do not saw the underlying issues at the U.S.P. us at the post office.
And we think that any government financial support must be a cop accompanied by import a business model and cost accounting reform. We don't believe the roll a government is to pick winners and losers and when you look at the $10 billion of funding in stimulus three you look at the seven.
The 5 billion this being as for in the next stimulus package if that was left unfettered.
It would create a very on level playing field. So oh, we're very supportive of the postal test for us recommendations and the and do believe that there needs to be a focus on own reform at the same time.
We have a question from the line of Scott Schneeberger. Please go ahead.
Thanks, very much good morning.
Could you please discuss volumes and particularly pricing you've encountered on the international export parcels and why did the fluctuating level of commercial airlines flying cargo and then belly space over the past few months, so due to the cone of ours impact. Thanks.
Okay.
Yes, just I'll start off its nando. Thanks, just talked about belly capacity for a second.
You know we know it's limited right now and for a period of time into the future.
The industry is down around 80% at this point in time and approximately 70000 daily time, so quite a bit of capacity that's been taken out of the market.
Not sure how long the conditional last but certainly a recovery will most likely happen when businesses business travel and tourist travel begin again into the future and that's really the big question Mark for now we have added aircraft. We have added flights, where we see and it's appropriate in terms of profitability we will purchase.
Transportation.
But we are dealing with that.
That capacity, that's not available as it was in the past and allowing us to make sure we run our network as efficiently as possible.
Ill just add on the pricing side of it the market rate.
China and the Asian origins have gone up as well as we've implemented surcharges during this period to address that as well.
Our next question is alive question from our eye on line question from Brian Ossenbeck over JP Morgan.
One other measures to preserve cash our capital are under consideration at available TPS.
Thanks very much for the question, it's Brian look we feel good about our liquidity today in terms of preservation of capital that priority is to stay liquid reinvest in the business and fund the dividend we have taken as mentioned and continue to evaluate several actions to ensure a liquidity we recently.
Did a 3.5 billion debt issuance, which satisfied our upcoming refinancing needs. We suspended the share buybacks for the rest of the year, which gave US a use of funds the reduction of about 800 million working capital is a focal point for our teams. We saw good results in Q1, and then finally CP in international markets remain open at attractive. So yes. Finally has good at.
Access to financial revolvers and event of any unforeseen risks. So I feel so feel good about our liquidity and I feel like we're taking the right measures in terms of preservation of capital. Thanks Scott.
Our next question will come from a line of David Ross. Please go ahead.
Yes. Good morning, everyone. Just a question on the cost side of things the self insurance accrual headwind of 130 million was.
A significant and so if you could just talk a little bit more about that kind of surprised because of weather was milder winter that from some nuclear verdicts.
And does that drive a change in either your insurance policy or self retention levels. And then also saw repairs and maintenance is up 30% year over year.
Any comments on that.
Thanks for the question, it's it's Brian So in terms of the the casualty auto liability a severity really was the driver of that.
We are implementing corrective actions to address in the short term.
I would say that the the trends would probably continue over the next couple of quarters.
Specifically, what are we doing targeting safety training installing accident avoidance technology leveraging data analytics. All of these things are sort of proven to address the the auto liability risk, but net net once once we implement those three initiatives, we'd expect to see significant improvements over time.
We're going to take a online question. This comes from Alison over at Wells Fargo as the wave in the virus moved globally.
Any lessons learned that you've been able to apply and adjust that help you in a positive way.
Yes, and I talked about low earlier, the first it's got to take care of your people and.
Make sure not only that you're doing the right.
But the euro communicating.
And and making sure people realize that part of being a critical infrastructure business is we were able to operated and and we have learned a lot from that and then second this is such a changing environment and one thing that we have learned from Asia and.
Our learning in Europe, and obviously in the United States is that the needs of our customers change in change quickly and ER and if you're going to be a player that you have to be able to change with them. So we bid to be a.
Very dynamic in our approach in the and listen and Kate and her group at the I've spent more time talking to our customers and finding out just exactly what they're changing needs are and it can be for one week to the next and so we've had to adjust to that and another one that's been very interested.
Saying that applies threw out is that.
A lot of governments with the best of intentions have been changing a lot of the rules and regulations and and we have learned that first you talked to him about the effects of those rules and regulations and the and try to get them to say, sometimes there's a full size the story that needs to be.
Considered but then second as you know just a new collaborate than you'd come polite and the and if you do that and the we've had 113 years of changing rules, maybe not to the speed that we're seeing now and we have learned that you adjust to those quickly.
And then sometimes you have to bake aboard.
Extra people and other times you you move your assets around but.
Just got to be very attentive to what's going on and then very very positive at the same time. So there are challenges theres no doubt about it but there are opportunities, but those opportunities only come to the people that the third or go to be assorted and are going to turn.
Read these things quickly and then response, so that pace of change that we've been talking about since we've been a undergoing transformation.
Has never been any more true than what it is right now.
So thank you for that question.
We have a question from the line Malhotra.
Of Deutsche Bank. Please go ahead.
Thanks, Operator, hi, everybody. Thanks for taking my question I appreciate it.
I think it would just be helpful to get a sense of how you think about the structural margin profile of the domestic business over the long term I'm not talking about obviously this year or next year, but really four or five years from now.
What do you think is an achievable domestic margin and what needs to happen between now and then for you to be able to achieve that obviously that question is in the context of.
Seemingly accelerating BDC volume mix, but then also overlaid with some successes you've had bending the cost curve really in the back half of last year from a cost for peace perspective. So we didn't just talk about kind of the four five your what's achievable from a domestic margin perspective. Thank you.
Why don't I take the outlook portion and then I'll kick it to K for a little color.
Look we went through our guidance. This morning, So I don't think it's appropriate to be talking about that looking down three or four years in terms of what the margins will do well come back to you with that when the timing is right, but Kate you want to give some color yeah, absolutely. So our pricing strategy overall of course is to match the the pricing with the value that we delay.
For our customers now what you're seeing and we're all seeing in this time as big shifts with characteristics.
So I dressing, though is that when I think characteristics weight when people are buying essential that come out of each is at a single you'll see a big weight drop and ensuring that we continue to help customers with a heavy weight solution density solution, you've heard us about talk about synthetic density that's a part of the pricing structure a industry.
Energy because the more you can get people to match up at our expansive access point network, then, it's a commercial delivery and lower costs lower price for them.
So we maintain a the our focus on revenue quality through through the future and then also have learned quite a bit of course with the characteristics swings that we see currently so the key to margins and whether it's five months five years or.
Two years down the road right, it's going to be the value that you provided to customers and the services that we offer and how we price those and then it's going to be on looking at our cost structure and those for the big things that.
That a transformation has focused on and it will continue and Scott you want to just talk a little bit more about a little bit longer term, what we're focusing on from a transformation standpoint yep. Thanks, David So the transformation program is multi year and as I mentioned before it's focused on how we enable and invest in higher.
Revenue business, but also how we protect margin through reductions in costs. So one covered the reduction in costs that were making through automation and technology. We also continued to invest in a more efficient business overall, our cost per piece in the long term, we see as an opportunity to continue to invest to reduce.
We have continued to invest over these periods of times in our competitiveness. Both in terms of revenue and cost and we'll continue to do that with the expectation that.
Net total shareholder value will increase.
We're going to take an online question. This comes from Jordan counter over at Goldman Sachs.
Do you expect to see more growth potential from E Commerce post the pit damn make.
Due to the consumers moving more to online orders.
Thanks, Jordan, So I would say that yes, we expect it to see more online orders, regardless, even prior to the pandemic I'd just as more and more consumers are shifting online as well as then sellers have migrated interconnect into different platforms and the like for ease to reach their.
Consumers and then of course with the pandemic their various reports out there, saying that online purchasing at will be migrating.
Advance of four to five years dependent on a way to report you go too. So we do see an increase there and we're well positioned through our solutions such as digital access platform and Scott.
You want to expound on that yes. So I think what's important is that we have tracked over the last several years.
Number of market dynamics, but I think substantially the brick and mortar world has had as a reset what that reset will mean into the long term.
Is not yet clear until we emerge into recovery, but I think that there is now a behavior that is baked in we continue to assess now what our estimates are going to be one the penetration of retail in terms of digital platforms, and then what volume that creates for U P. S.
We have a question from the line of for Jack Atkins. Please go ahead.
Good morning. Thank you very much for taking my question. So I guess this is directed towards Kate could you talk for a moment about how you see supply chains.
Perhaps structurally changing as we sort of emerged from the Corona virus pandemic, especially.
On the heels of betrayed War you do you think we could see more near shoring activity moving forward, maybe more on the demand for more safety stock and more inventory.
I'm, just curious how you'd be assets being positioned for what could be some larger structural changes here. Thank you yeah, absolutely. Thanks, so much Jack for the question you know, we do see a shift and even prior to with the different tariff discussions that were going on in the world aren't customers more than ever were reaching out to us and we were doing.
Solutions read to read redesigned globally for them.
Let me evaluate how they would be more protected by having a production in different parts of the world. So I think that continues it only magnifies with any situation like a pandemic.
What we bring to them as a first of all our solutions approach, having engineering and design time, when when they may not have resources available, but then our networks imports our portfolio and help them right from origin throughout the globe.
Well, the forwarding moves whether ocean or air and then fulfillment has really taken off I think the answer is clearly us through this pandemic, especially with small and medium sized businesses that didnt have fulfillment options and didnt need to pivot we've seen a really big uptick there as well as the time and try.
And that that we know is so critical fastest in the world.
Fastest in Europe, and then also with our enhanced time and transit in the U.S.
All of those position us well for this continued trend of looking at a customer supply chain.
So we have this team of a supply chain solutions experts and.
That really focus on solutions.
And.
And we also have an advanced technology group that is going to play a.
Even greater role and and with the agility. This is going to be required you see those two teams working together well along with our engineers and then the day of will listen to our customers. If we will.
Take a look at how we can make a difference and if we make sure that we're looking forward the down the road than just immediate needs. Then we can continue to to add to the value that we provide great question.
And we have a question from a line of Brandon Oglenski. Please go ahead.
Hi, Thank you for taking my question. So David I, just wanted to come back to the pricing discussion.
Especially with the comments you guys made on your international.
Selective ecommerce growth strategy, where you do have higher returns.
You know what is different about the U.S. market because as we've seen D to C get bigger over the past decade. She has been a pretty strong correlation with lower profitability. So that's something about the competitive landscape potentially with the post office or you know that potentially Amazon in sourcing more in the future that has you a little bit more fearful.
Or is it even something with your since their cost structure that just doesn't allow you to extract greater return on that B to C traffic.
Yes, a Brandon this is Kate I'll address that.
For the U.S., specifically with the pricing I do want to underscore 2.2% was the base pricing increase and we are actually implementing.
Pricing changes and also a solutions that will impact characteristics, but we're doing a customer by customer. If you think about the U.S. smbs are most impacted by this stay at home with business is closing and then we see the large customers who are actually gaining that.
And for the essential products, especially and that's why we've decided to selectively through customer by customer pricing increase that and then achieve that 2.2 that characteristic change that's going on in math that and that's why I wanted to make sure I clarified that anyway.
Right and it's really a balance you ought to take advantage of the opportunities and you want to certainly price for the value that you break at the same time, though you have to look at utilization of the network and with these with this recession is being predicted globally, yeah and theirs.
So many of US out there that we just don't know what's going to happen, but if demand drops.
And the due to the recession that we have to make sure. We responded accordingly, there too. So it will be extremely hard is why we withdrew guidance to to give any kind of a future.
Prediction on what we're going to do work we're pricing. This further out than where we are now a lot of its going to depend on what we see unfold over the next.
A few months hopefully, but could go further than that so we'll have to just take a look into it.
But the appreciate the question is something we ask ourselves on a regular basis and in case referred to this range. There were talking about 2% to 3%. She's also made it clear that we never see that as a as a barrier that the value that way.
We provide the gives us opportunity weve of course with the increase non operated above the range that's for sure.
That concludes our Q on A. I will now turn the program back over to Mr. Childress. Please go ahead Sir.
Thank you, Steve and then David closing comments.
No Thanks, Scott and.
Certainly a dynamic environment, then somebody had asked me a couple of years ago, if we'd be facing what we are today or if I would be facing all my life store earnings call talking about the withdrawing guy that's no uncertainty that we have seen.
I just wouldn't have believed that but it is the world that were in your passes responded well not only to the needs of our customers, but also to governments around the world and I'm really pleased with the response of the U.P. us.
I am truly grateful for the walk wonderful career that you pay US is enabled me to have unlike many follow you Pos past and present.
I have gotten a chance to live the American dream through the opportunities. This great Great company and throughout my journey from a part time package handler and Mississippi years ago to becoming CEO is just spend a real privileged to have worked alongside you for those 46.
Yes, and to our customers and busters and brands.
Truly value that relationships that have made over the years, many of which have turned into long lasting friendships and I've never counted the number of earnings calls I know some lump sum do but does that I've participated on as COO or CEO.
What's most important spin on honored to speak with in here from all of you over the years Carol will lead the notes starting school I'm, absolutely confident you will be in great has river.
And just wanted to thank everyone for joining us today.
And urge you to stay safe and stay healthy and that's the into vertical. Thank you.
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