Q2 2020 United Parcel Service Inc Earnings Call
[music] Your conference will begin momentarily please continue to hold.
Good morning, My name is Stephen and I will be or facilitator today I would like to welcome everyone to the U.P.S. Investor Relations second quarter 2020, <unk> earnings Conference call.
All lines have been placed on mute to prevent any background noise and after the speaker's remarks, there will be a question and answer period. It is now my pleasure to turn the floor over to your host Mr., Scott Childress Investor Relations officer, Sir the floor is yours.
Good morning, and welcome to the U.P.S. second quarter 2020 earnings call. Joining me today, our Carroll to May our CEO and Brian Newman our CFO.
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 risks and uncertainties, which are described in detail in our 2019 form 10-K subsequently filed form 10-Q's, and other reports we file with the Securities and Exchange Commission.
These reports when filed are available on the U.P.S. Investor Relations website and from the FCC.
During the quarter GAAP results included a pre tax charge of $112 million equivalent to 10 cents on an earnings per share. The charges resulted from transformation related activities in the international and U.S. domestic segments.
In the prior year period GAAP results included a pre tax charge for transformation cost of 21 million equivalent to two cents on an earnings per share.
Unless stated otherwise our comments, we'll refer to adjusted results, which excludes transformation cost the webcast of today's call along with a reconciliation of non-GAAP financial measures are available on U.P.S. Investor Relations website.
Following our prepared remarks, we will take questions from those joining us via teleconference. If you wish to ask a question press. One then zero on your phone to enter the Q.
Please ask only one question. So the we may allow as many as possible to participate you may rejoin the queue for an opportunity to ask an additional question and now I'll turn the call over to Carol. Thank you Scott and good morning, I'm honored to be hosting my first you P.S. earnings call before I begin I would like to thank.
Hi, David Abney, who after 46 years I've service do you P.S. pass the Baton to me on June 1st we wish Dave and all the best.
Yes, and they special company with a unique culture.
Powered by more than 528000, do you P.S. or is around the world.
Through this time of global pandemic, and social unrest U P. S is keeping the world's moving.
We have taken measures to ensure the safety of our people, while delivering critical shipments and everyday essentials, where and when they are needed I.
I am extremely proud of the efforts of our people to serve our customers our communities and each other.
Who all you'd be answers. Thank you.
During the quarter our team did a great job adjusting the network to respond to the needs of our customer.
At the beginning of the second quarter, we assumed demand would slow.
Instead, we saw just the opposite.
Due to ongoing cobot related sheltering in place retail store closures and changes in U.S. consumer spending fueled by the economic stimulus.
We experienced unprecedented demand and record high volume level.
As a result, our second quarter performance was stronger than we expected.
Consolidated revenue rose, 13.4% from last year to $20.5 billion.
Operating profit grew 7.4% from last year to $2.3 billion led by outstanding results in the international segment.
While our U.S. operating margin declined by 170 basis points from last year, largely due to certain expense items that Brian will explain.
We were pleased with 580 basis points of sequential improvement from what we reported in the first quarter.
Let me share with you how I've been spending my time since Onboarding as CEO I.
I thought I knew you P.S. after 17 years on the board.
But I've been diving in and believe me when you get to dive deeper. This company is even more impressive then I imagine.
Our global network is best in class and our people are the hardest working people I've ever met.
We also have many opportunities.
And our 113 year history, you'd be has become a trusted global logistics leader.
But what got US where we are today will not get us to where we need to go into future.
Customers are changing our competitors are changing and the rate of change is accelerating.
As we evaluate new market realities, we will be making decisions faster based on data and analytics.
With an emphasis on optimizing our existing network and the investments we've made.
We will have a laser focused on creating value for our shareowners with the goal of increasing the rates of return on the capital we invest.
It's all about becoming better not bigger.
We have five core U.P.S. principles that underpin our action.
Our first principle is our values.
These values were established by our founder Jim Casey and give us an enduring foundation for success.
Our values include integrity.
Safety teamwork and service.
And our the core of who we are and what we do.
Our second principle is our dividend, which is a hallmark of our financial strength.
We are committed to continuing nearly 50 years of stability and growth in the dividends we pay.
Our third guiding principle is retaining a strong investment grade credit rating, ensuring that we have financial flexibility needed to competitively run our business.
Next is brand relevance.
By relevance, we mean, leading by example.
Taking actions to support our customers and communities promote diversity and inclusion sponsor racial equality and shape a healthier planet.
And finally, our fifth principle is the importance of employee ownership, which supports valuable and lasting employee and retiree engagement.
Outside of these five core principles everything else in our portfolio is under review and I mean everything.
Well it is early in the process. The good news as that we already have the right strategy in place.
Customer first people led innovation driven.
Customer first is about removing friction when doing business with EWP yeah.
Speeding up time, and transit and improving the moments that matter, so we create greater loyalty.
To be measured by gains and our net promoter score.
In support of this effort, we have accelerated our plans to improve time and transit, making the U.S. ground networks faster and thousands of the most important lanes by the end of this year.
Further we are continuing our expansion of weekend operations, including Sunday, Surepost, and our market, leading Saturday commercial delivery and pick up services.
Before our 2020 peak season, nearly 75% of the U.S. population will get Saturdays round to residential service.
Buyer estimate both our time and transit and weekend enhancements drove roughly $100 million of incremental revenue in the second quarter.
People that is at the core of our success.
Measured through the employee experience and specifically how likely an employee is to recommend at U.P.S. as a place to work.
We are focused on diversity and inclusion and fighting for racial justice and reform.
I cannot say enough about the power of our people, including the nearly 40000, new U.P. Ssrs, we've added to our U.S. small package business in recent months.
During this time, we've provided additional sick leave benefits to U.P. ssrs, who may have been impacted by cope with 19 and to further invest in our full time management teams for their extraordinary efforts, we are providing additional financial incentives.
Moving to the last leg of our strategic platform.
Innovation, driven will be measured by the value we create for our shareowners.
We will leverage our technology and portfolio of services to drive greater cash generation and higher returns on invested capital.
Today, we are focused on increasing network efficiency as well as more permanent actions to improve revenue quality, including pricing that reflects the value we create.
For example on May 31st we introduced new surcharges on certain volumes.
We are developing specific actions and metrics against our strategic efforts and once finalized we'll share them with you. So that you can measure our progress.
Looking to the back half of the year. Most scenario suggest continued uncertainty which is likely to yield a more gradual economic recovery.
This is due in part to the recent surgeon Cobot 19 cases.
New containment measures and the status of fiscal stimulus programs.
Well, we would expect continued strong b to C demand, it's hard to know how our b to b demand will unfold.
Recovery will continue to be extremely difficult to predict until the spread of the virus is better controlled and a vaccine is widely available.
I've led through difficult economic cycles, before and I know the power of making the right decisions to pivot toward opportunity.
Our leadership team is focused on enabling success for all your p. officers and creating value for our shareowners.
We will control what we can control while taking action to write the next chapter of the U.P.S. story.
We look forward to updating you on our progress.
And with that I'll turn the call over to Brian.
Thanks, Carol and good morning.
Today, I will discuss our quarterly performance and current trends in our business, which the teams are navigating will.
Before I start I want to point out the expanded disclosure in our web schedules.
To improved transparency, we brought the 10-Q balance sheet and cash flow Stephens forward and have included them into materials release today.
Through the second quarter, we faced challenges from the growth of ours pandemic and resulting recession.
Global real GDP, and global industrial production or estimated to be down, 9.3% and 14.6% respectively.
And then the U.S. real GDP and industrial production decline with unemployment, reaching historic highs.
In response, we adjusted our network to support our customers' needs, we manage cost and leaned into three significant changes in demand in the markets we serve.
First our ability to shift air capacity to where it was needed enabled us to meet the strong demand out of Asia, using both our own assets and asset light solutions.
We met the demand for more capacity by flying about 635 extra flights using both Brownsville and third party aircraft.
Next during the quarter, the U.S. ecommerce market jumped 34.4%.
And SMB is quickly adapted to participate in.
In fact through our digital access program, we captured 120000, new customer accounts, a significant increase from recent trends.
And finally, our health care expertise in global portfolio of services enabled us to meet the urgent need for pp encoded 19 testing suppliers and provide support for vaccine and treatment studies, all of which contributed to our results in each of our three segments.
For the quarter consolidated revenue increased 13.4% to $20.5 billion.
Net income rose, 8.8% to $1.9 billion, and operating profit totaled $2.3 billion or 7.4% higher than last year.
The operating margin for the company was 11.4% below last year by 60 basis points.
Diluted earnings per share was $2.13 up 8.7% from the same period last year.
Now moving into the segments.
In U.S domestic market demand for residential deliveries surged in the quarter driving total average daily volume up to 21.1 million packages in increase of 22.8%.
Sure posted increased 96.6% and represented 53% of our total us domestic volume growth.
Volume approached peak levels with May and June significantly above April.
The surge created some network constraints and some regional dips and service levels.
However, the additional 39000 employees, we hired together with our expanded weekend operations enabled us to process the increase in volume.
Ground residential volume, excluding Surepost was up 63.8%.
Without exception all industry sectors grew the residential volume.
In fact, BDC volume jumped 65.2% year over year, which is 5.8 million additional pieces per day and B to C represented 69% of total volume.
Conversely, given the downturn in the industrial sector B to B volume declined 21.9% or 1.8 million pieces per day from the same period last year.
However, we did see b to B volume begin to recover in the quarter.
As a percentage of total volume B to B shipments were 27% in early may and if the ended the quarter beautifully shipments had climbed to 37% of total us volume.
For some context, the full year 2019 split was 46% b to B.
While average daily volume growth was led by many of our larger customers smbs rebounded over the quarter.
From a decline of 7.2% in April to growth of 17.8% in May and 22.4% in June.
Revenue was up 17.3% to $13 billion, driven primarily by ground products.
Revenue per piece declined, 4.4% or 440 basis points driven by two significant factors.
Lower fuel prices, which were a negative impact of 180 basis points and the magnitude of Surepost growth pulled revenue per piece down 410 basis points.
Excluding surepost and the fuel surcharge revenue per piece was higher than last year and was also a sequential improvement from the first quarter.
Our expenses increased in the quarter by 19.5% and were in line with activity levels, including volume growth.
Our expenses also includes several items that we did not have last year, which I'll cover in a moment.
Cost per piece was down 2.7% year over year and decreased sequentially, 8.4%.
Driven by lower fuel costs, and our ability to scale and flex the network as volume surged.
The U.S. generated $1.2 billion, an operating profit, which was $11 million or 0.9% below last year.
Operating margin declined 170 basis points year over year, However, sequential margins improved 580 basis points.
You asked domestic operating profit includes the following expense items Kuroda virus direct expenses minus the cares act federal excise tax benefit lower profit by $44 million, a lower pension discount rate decreased profit by $63 million.
Additional employee incentives reduced profit by $51 million and working in our favor were lower fuel cost for a net fuel benefit of $61 million. We're operating in a very difficult environment and we have more work ahead of us to increase profit per piece, which was down 19.3% on a year over year basis.
Moving forward, our focus is on improving network efficiency.
Optimizing the volume, we bring in and better aligning pricing with the value we provide.
Moving to international.
I'd like to take a moment to congratulate our entire international team for delivering a very strong quarter. Despite a tough operating environment.
Our performance demonstrates the agility of our global integrated network.
Asia was the first region to face the pandemic and was also the first to reopen.
Which led to a strong increase in export volume and revenue as we came out of the first quarter.
Asia outbound volume Rose in April peaked in May and moderated in June.
Overall Asia outbound volume grew 46.8% in the quarter and went up by double digits to all major regions of the world.
Total export volume grew 11.4% driven by two factors.
First we quickly leaned into the opportunity created by the reduction of passenger ability space.
We also added capacity surcharges to help us managed demand.
In total we added 335 flights and utilized our higher capacity fleet of 747, aircrafts, which enabled us to handle more volume on fewer flights versus other carriers in the market.
The second factor was the 95% increase in residential volume led by cross border B to C. In Europe, doubling our BDC volume, while expanding profits is an encouraging sign for the future revenue rose 5.7% to $3.7 billion.
Revenue per piece was down 3.9% and included a decline of 480 basis points from fuel and 100 basis points from currency.
On the expense side cost per piece declined 8.2%, primarily due to lower fuel costs and greater network efficiencies.
International generated operating profit of $842 million, an increase of 26.6%.
And our operating margin expanded 370 basis points.
Looking at supply chain in freight.
Results across the business units were mixed total revenue grew 8.5% to $3.7 billion and expense rose, 9.4% to $3.4 billion.
Profit declined $6 million or 2.2%.
In general the parts of our business that aligned to sectors with elevated demand did very well.
For example, airfreight led the segment due to the surge in market rates out of Asia.
Sparked by the sharp decline in passenger belly space.
The team was responsive to our customers needs, including FEMA and resource will in securing about 300 charters out of Asia.
We also saw gains from cobot testing and vaccine and treatment studies.
The portions of the supply chain and freight segment more aligned to industrial activity so weakness during the quarter.
LTL and truckload brokerage faced excess capacity and reduced demand early in the quarter.
Both markets began to see some recovery later in the quarter, but remain under pressure.
Looking at the overall enterprise you PS generated operating profit of $2.3 billion up 7.4%.
A few other items on the income statement include other pension income, which was $327 million driven by last year's 17.5% return on pension assets and lower discount rates.
We also had $183 million of interest expense.
And lastly, our effective tax rate came in at 25% compared to 23.5% in the second quarter of last year and is higher mainly due to unfavorable changes in our uncertain tax positions.
Now, let's turn to cash and shareholder returns.
Our cash flow remains strong.
For the first six months of the year, we generated $5.9 billion in cash from operations and about $3.9 billion in free cash flow included in our results is $370 million from the federal payroll tax deferral.
Capital investments totaled $2.1 billion in the first half of the year.
We expect full year capex of $5.6 billion and remain on track with our automation targets for this year.
So far this year EPS has distributed $1.8 billion in dividends, which represents a 5.2% increase on a per share basis over the same period last year.
Now I'll make a few comments regarding the back half of the year.
First we remain unable to predict the extended the business impact or the duration of the Corona virus pandemic or reasonably estimate you PS 2020 revenue and diluted earnings per share.
There are however, a few items that are likely to occur in the second half of the year that we want you to know about.
You estimate stick average daily volume growth is expected to be lower than what we saw in the second quarter.
We expect demand for residential packages will continue in the us and around the world.
We also expect Asia outbound demand and yields to be positive year over year, but we'll continue to moderate versus the second quarter.
For modeling purposes, our teams to employees will get their annual wage increase in August.
And in the third quarter of 2019, we had a $40 million gain on the land sale in the international segment that will not repeat.
And in the second half of 2020 us domestic will face difficult year over year comps, including the impact of our new hires anticipated to receive full benefits.
Time, and transit and weakened operations expense preceding the full run rate of revenue.
And other gains from last year that will not repeat.
The economic recovery remains uncertain.
We are paying close attention to the consumer financial health.
Unemployment levels and the continuation of fiscal stimulus programs given all these factors the U.S domestic margin could be lower in the second half of the year relative to the first half.
International supply chain in freight will continue to adapt to market dynamics.
Meanwhile, as Carol said, we will focus on controlling what we can control.
Among the positive and negative effects ahead of US we remain confident in our ability to improve us margins on a long term basis.
Our liquidity is very strong we ended the quarter with more than $8 billion in cash and equivalents on the balance sheet, which is enabling us to invest through this unique environment and navigate the economic uncertainty.
Thank you and operator, please open the lines.
Thank you.
We will now conduct a question and answer session and as a reminder, for our teleconference. Participants. If you would like to ask a question. Please press one that Vince zero on your telephone keypad.
Our first question will come from the line of David Ross of Stifel. Please go ahead.
And Carol you picked a good call to start off with.
Hi, good morning.
Wanted to see how you guys are thinking about peak season.
In the quarter, you talked about a mini peak or peak like conditions, where you had some network constraints.
If.
Some of that strength continues and then we have on top of that a holiday surge.
How are you talking about it with your customers what are you thinking about it from a network investments standpoint, any any bottlenecks that may emerge there.
Thanks for the question on peak.
At the leadership team. We've agreed we are going to have an outstanding peak season I participated in life Onest Peak planning committee several weeks after I joined the company and very impressed by how we are planning to manage through like could be a very picky season, it's about making sure that we've got our network aligned both on the.
Hi end and on the low end because it's uncertain out there. So we are building an optionality in terms of how we're going to run the network and then Kate with her team they're talking to our customers.
Customer by customer on how we will best managed through take.
Our next question will come from the light of Scott Group.
Wolfe Research. Please go ahead.
Hey, Thanks, and congrats Carol So first if you can just clarify the second half margin comment is that lower than the second quarter are lower than the fall.
First half and then just Carol just bigger picture I wanted to just get your perspective on how you're thinking about the growth algorithm effort for us in the US business. So the last few years, it's been volume outpacing revenue and margins falling do you think we see more or less.
Yes volume growth going forward.
We've seen you've historically talked about 2% to 3% place does that meaningfully change and then I guess do you think you can when do you thinking it back to a double digit margins I know theres a lot there, but any any perspective would be great. Thank you yeah, absolutely happy to share some perspective as Brian said it's.
Our operating margin in the U.S domestic business could be lower end up back half of the year than what we reported in the first half of their lot of uncertainty in the marketplace of course, but we thought it was helpful for Brian to kick out some of the expense related items that were pretty Sarah will happen because we're not terribly sure about that dramatically.
Right now is longer term. This is where we're very excited about what we're going to deal with our company in my prepared remarks, I talked about it's all about being better not bigger what do I mean by that well just a couple of things as maybe a longer winded answer then you're looking for but I'll go ahead and take the opportunity to share with you what I mean by the.
But we mean by that first we are an engineering driven company you would expect us to bay, but like any company, who is 113 years old we've over engineered much of what we've done and I'll give you. An example of that just depending on how you define products, we have between four and five hundredd products, we kicked off a tab.
For us to say really.
Really are we selling all of those products because when you think about it if you have between four and 500 products you have to build systems and technology to support those products you have to build accountants to account for those products you have to have auditors to audit for those products. Then you have to up sell staples to sell those products as we looked at it and it's very early days, we found out last.
Sure there were over 100 on those products that we didn't even sell so we're going to rationalize our product offering to make it simpler for our customers and and reduced expense here as we think about optimizing the network to your specific question on volume, it's about being better not bigger well we have.
Don and that past is built capacity or bought capacity and I hope that demand with follow and we would take demand at any cost or any price if you will.
Not necessarily nutritive demands. So let me give you. An example of a change that we've just launched this this year.
Well, we love our air fleets and in fact about 11% of our air our Air Fleet.
Wide body planes. These are 747 planes and we took advantage of the those wide bodies in the second quarter, we were able to fly demand out of Asia I did a very effective cost because they are wide bodies, we didn't have to flies many claims.
So we had an opportunity to buy more of those 747th because they're coming up predicts production and the question that we asked ourselves is well won't that create excess capacity and what we find that will need to fill that capacity. It perhaps not nutritive ways and the answer to that question was yes. So we passed on that invest.
Nice that in the past we might have made so we're going to really look to sweat the assets that we have to get more also that investment that we've made over time, we will look tip head that the that customer Andy.
The way, we go to market to optimize the network and I hope that answers your question.
Chris Wetherbee of Citi. Please go ahead.
Okay, great. Thank you very much.
Yes, I really wanted to kind of make sure I understood sort of how does that answer pertains to sort of profit growth on the domestic side. So lots of rather do lots of demand stands right now.
Pat.
Couple of quarters.
Third quarter.
Profit growth.
Context to the revenue growth that we're seeing because the revenue Saudi spectacular in the second quarter and the domestic side, we actually thought process down a little bit just wanted to kind of get a sense what are those are step.
Get that profit to grow in line with right at least closer.
Yeah, the easy way to think about profit growth is of course with pricing increases and as you know we did take some shirt a surcharge increases at the end of may but it's much more than pricing, it's really about optimizing the network and leaning into the custer's customer segments that that.
Oh, you the end to end network that we offer and one of those segments is small and medium sized businesses and you heard Bryant.
Talk about the growth that we saw in that space in the second quarter up 11%.
As I look at our small and medium size customer base, we divided into four big segments, a de one through de for.
Yeah, that's based on on customer size, our de one in FY two customer segments, we've got pretty good market share there, but in Ddrthree and Ddrfour, we're underpenetrated relative to our competitors, we have an opportunity to grow into that space, but we need some enabling capabilities the number one enabling capability to grow and.
To that space is time and Transat. So when I came onto the company and I looked at our time in transit activities, we used to call that panthera, we now called our fastest time, our fastest ground at the work I saw that we were planning to conclude that investment in June of 2021, I asked the team well, what's getting the in the way.
What's getting the way of going faster and they said money unlike level without money. So will accelerate the investment we pulled that investment into 2020, we will complete time in transit by October of this year and that's a big deal because 46% of our SMB customers or potential customers tell us time in transit.
Is the number one thing on their mind when we're done we will that be at parity or better and 20 of the 25 markets that matter and the U.S., we will reach 90% of the U.S. population in three days, 75% of the U.S. population will have Saturday delivery and then of course, we have Sunday delivery through our surplus product this matters and why am I thought.
As seen on SMB, because the SMB customer value is our end to end network and they pass for it as we think about leaning into Smbs. It's not just about time and transit. However, it's also about a better customer experience, it's those back to being better not bigger we had a couple of pilots.
We launched to really understand that customer and what their wants needs and desires work.
We listen to them, we operationalized, what they wanted and in the pilots we saw a two percentage point reduction in churn.
That matters because in this segment for every reduction in churn, it's $170 million in revenue and that rather new as a much better quality than other revenue. So as we think about moving the U.S. operating margin up there's a real opportunity to lean into a different customer.
Our segment and to make sure that we're getting value for the services. We provide that's on the revenue side, but I must talk about the cost side to for a moment because we have opportunities there as well we've talked to you in the past about transformation, one dot out and we're well down the path of transfer it transformation.
One dot out and in fact, if you look at at life to date on a net basis. After investing a we have delivered over $1 billion of savings and transformation.
One dot Oh, that's on a cumulative basis, if you tax effect that and you see outstanding shares. It's about 95 cents, an EPS on a cumulative basis, we're not done productivity and efficiency must be the hallmark of U.P.S. So we have initial plans from transformation to dot Oh and Threed.
Got Io, which when they are finalized we will share those with you.
Also our using technology to drive productivity and efficiency in our operations and I can just give you a comment on how we're seeing that perform we've talked to you in the past about our Ryan we have Orion three dot Io outlets were seeing a reduction in a miles that our drivers are driving and a reduction in the.
Piece cost now.
This is virtuous is continuous but the combination of rightsizing, the revenue and driving productivity and efficiency gives us a path to drive operating margin expansion in the U.S. This is a big company that turn you can't do it overnight, but if you look through 2020 into.
21, and beyond you should expect the margin to start to go into right direction.
Jordan Gallagher of Goldman Sachs. Please go ahead.
Yeah, Hi, thanks.
International May have had its strongest margin quarter ever and I know, there, obviously outsized gains and in Asia and what have you I'm just curious.
How do we think the basket longer term marketing and international or maybe even as we move forward from here given the strong performance in second quarter.
Yeah. We were we were thrilled wish our performance in our international segments, and we expect them to have a very good back half as well that model is a very different model than the one we run in inside the United States, It's an asset light outside service provider model. So the margins will always be.
Stronger outside the United States than they are inside the United States, and we view that as a competitive opportunity for US candidly. We've identified 10 growth markets that we will grow into we'll be updating you well as those opportunities present themselves and the second quarter. We did enter into an alliance with us affirm in Mexico.
Very excited about that because that's one of our top 10 growth markets and we will now have leading capabilities in Mexico, both inside Mexico and exporting out so look for good things to come out of our international segment and Jordan. If I can just add the the BDC growth in Europe in the quarter or in international the quarter was up 95% and so I think the combination of.
The shift towards B to C and their ability to expand margins was it was another proof point of why we're confident in that in a model.
Thank you.
Revvy Schenker of Morgan Stanley. Please go ahead.
Thanks, Good morning, everyone Carol.
What love if you could share any learnings or takeaways from your prior stand.
A CFO at a ecommerce slash consumer retail focused company that can bring to U.P.S.
And also in the context of.
Customer concentration you have a pretty large number one customer can award or your thoughts on that and how do you see that evolving over time. Thanks.
Happy to do so.
First let me talk about my learnings during the last recession, which was a housing led recession my former employer, we felt it hard I'm they lost 25% of the topline during that recession.
Two key learnings during that time.
One and that's through the crisis.
No better opportunity if you have the financial wherewithal to do so to invest through the crisis. So that when things settle down you are positioned to take share and that's what we're doing the time and transit our time in transit investment. This year is $750 million. We could have we could have capital that we said no we're going to pull that.
Right and we're going to invest through the crisis. My second learning is to invest in your people.
No. It doesn't mean that you don't have fewer people in a downturn, but for those people that you have you need to invest and and if you looked at our population WPS or is actually were down in supply chain in freight as you would expect because the demand softened up there but for the people who are left behind we are investing in them because it creates loyal.
LT and better experience and better service for our customers. So we're investing and incentives for our people we've been promoting people. It pays huge dividends. If you stay true to your people those are very good learnings in a downturn learnings as a retailer is that when cost increases come your way.
If you are a large retailer you can pass those costs increases across the SKU base and the customers don't know so while retail makes squad that price increases that come their way large retailers have a way to spread that across and nobody knows so there's an opportunity here on the pricing side to do what we need what.
We need to do from a customer concentration perspective.
Looked at our top 20 customers and their performance in the second quarter and other those top 20 customers.
All but one group the only one that didn't grow was government and I can't tell you why but it did it grow.
But if I look at our top 20 customers, who are retailers, who are predominantly store based retailers.
Who when their stores closed and demand shifted online well for those customers. They had triple digit growth in the second quarter, our largest customer did not have to triple digit growth. So that gives you some perspective on how we manage through customer concentration and Howard.
Thank you know about optimizing the portfolio long term.
Thank you.
Alice Allison Poliniak of Wells Fargo. Please go ahead.
Hi, Good morning, and you had mentioned aired talked about a little bit about the mix between b to B M. B to C. The within B to C. Could you talk about any mix challenges that you faced in the quarter and how they may have progressed that could have paying hindered margins there as well.
Well, maybe I'll start Ryan you can chime in I would I just looked at our ground business and Weve leap break our ground business into four segments Theres hundred weights and commercial so that's more industrial vendors ground read the which is gonna be predominantly b to C and surepost, if I look at the profitability of ground Revvy, which now makes up for.
44% of our total ground business in the U.S. the profitability was up year on year.
<unk> actions acts away to drive profitability.
Yes.
Yeah, just as we appeal that business support.
I had mentioned it in my script, but as we as we extract the surepost product.
Gives us an encouraging signs for the underlying pricing health of the business within B to C. Because pricing if you exclude excludes surepost Carol and fuel, we were up 1.5% and thats better than the last three or four quarters. So it's encouraging signs for for how we're managing due to sick.
Our next question comes from the line of Scott Schneeberger of Oppenheimer. Please go ahead.
Thanks, very much community.
Curious I know the visibility isn't that great specifically envy to be on U.S. and clinically everywhere. It's just how did you see that evolve through the quarter. What are you seeing ended this quarter. How are you managing in competitive repositioning onto trying to try and be.
Well positioned as hopefully that comes back and then you discussion that end markets that are particularly strong or weak over in that category.
So maybe I'll take that one's got a carol can chime in the the B to B growth was down 22% in the quarter in terms of the evolution, we actually saw that number get better. It was still down overall, but April may June as it progressed, we started the quarter down 38% got a little better down 20 finished June at down eight.
In terms of how we're seeing it play out into this next quarter that we're holding at about the June levels down nine ish in the month of July as we think about the b to B business. So.
Smbs, which were also very focused on a they were up 11% in the quarter. So as we think about our small and medium businesses. We're seeing those June trends of of growth continue into July and the high teens range Carol anything to add.
I think this stability.
Yes, not getting.
Getting better, but it's not getting worse on the on the pure between.
Brian Ossenbeck of JP Morgan. Please go ahead.
Hi, good morning, Thanks for taking the question because that went on capacity in US domestic there was this type of volume essentially at the same holiday peak. There's a couple of years ago close is the U.S. network to Maxine.
Pasadena, you said, you expect volumes to moderate a bit in back half a year, but can you focus on revenue quality to help some of that that moderation or do you think theres, a multiyear potential capital investment program around the corner and I guess in general can you just talk about what you think of the.
Capital intensity, rather of incremental B C from here in the U.S. Thank you.
Again, our theme as better not bigger optimizing that capacity that we have and we have capacity to handle the peak volume that we are anticipating this year.
There are capacity constraints in the United States.
Which gives the opportunity to manage through with pricing.
Also opportunities to manage with our customers as a former retailer I know this very well how to manage through when you have promotions. How long you have promotions. How you use your store base, how you use our access points don't forget that we have over 15000 access.
We can be.
Address that capacity is.
So we are feeling very good about peak this year and as we look forward, it's about rightsizing optimizing the investments that we had before we think about continued investments in capital, it's about being better not bigger.
Maybe I'll just add on on the Capex piece, which we spent the last three years building capacity in automation and so we're now reaching 85% in the U.S. system. So we feel pretty good about our ability to manage that that volume and as we're not chasing any volume or any any package at any price. We think will be selective in terms will go what goes through.
The network.
Thank you very much.
Ben Hartford of Baird. Please go ahead.
Hey, good morning, Carol just interested in your perspective on.
The multiyear transformation efforts.
You may or May not change would you like or don't like about what's been undertaken to date.
Just a pathway as you kind of finish up here over the next year and a half related to that maybe Brian could you provide any perspective on.
On the previous guidance. So you had provided in terms of the incremental benefit by 2022 with dollar to dollar Tony.
So given some of the changes here.
Year to date.
You know what changes are improvements.
Number thank you.
Well on transformation, one dot Oh, I think that's what you're referring to.
And that in 2018 and on a gross basis like to date, we recognize two and a half billion dollars of savings we have reinvested a good piece of that on a net basis, a $1.1 billion and savings and tax affected it's about 95 cents EPS on a cumulative basis.
That's not enough candidly, it's great take credit for that it's not enough. We have initiatives are underway, we're calling at trance formation with auto and Threed auto to drive continued productivity and efficiency in our.
Part of this will be enabled by technology.
We are moving from a company as an example.
That's what was really stuck in a static business logic environment.
That resulted in a lot of overhead doing a lot of report looking through the rear view mirror to drive the company. We're moving into analytical decision science is one and his team built out our digital factory and that's going to free up productivity.
Absolutely free up productivity until this year.
I believe it or not we only had two I T releases a year.
We now are moving into a continuous release it as we move into a more agile environments and that's critically important in terms of taking cost out.
We used to hold everything ourselves.
Three applications running on a mainframe.
We now only have for applications running on our mainframes and are moving everything up to the cloud we have 25 systems or applications in the cloud another 20 in flight and more to do this will get rid of some of the tech that that we carry and free up expense dollars, there's a lot going on and the ability to transform the way riera.
On our business.
Hang that either the sir.
[noise] hours, we need to drive more leverage and our payroll given it's the largest expense that we have no I T will help with that and its search.
Only has helped but we need to double down on how we can automate the inside of our facilities to drive more productivity. For example, I recently saw an automated label application by robot was pretty cool, it's not ready for primetime to cost curve isn't right, but it was pretty cool because the productivity of that arm was.
Yes.
At about 50% higher that human being so imagine what we could do if we can drive some productivity and leverage in our payroll it would be transformative. So expect to hear us talk about that overtime and then just to follow up I think Carol answer the second half of your question on the dollar to dollar 10, we're approaching a dollar we have a year left in that transformation one.
I am so we're we're on track to deliver I think the more exciting focus now is transpiration 2.0 at 3.0, how do we really changed the game on a profit per piece linking back to the the productivity.
Amit Malhotra of Deutsche Please go ahead.
Thanks, operator, good morning, everybody Taro, a congrats on the appointment as CEO, if it sounds like it PSR for use yet, which which maybe the case.
Yes in that context, I was hoping you can expand on the commentary of excess costs that can be removed.
500 million is it a billion just any sense of how much is being left on the table so to speak because of the over engineering and whatever the commentary or you just mentioned that directly and how fast can you just the cost structure, given the size and scope.
And then also you know capacity in capital, it's a big focus area for you should we expect you know near term cuts in Capex intensity, you know capital spending for you I don't need to tell you have decreased $5 billion in the last four years, but the domestic margins have contracted 500 basis points. So.
Is that something we should also expected to address those points. Please.
Yes, I'm happy to do so TSR for U P. S is the name of the game. We are all in and edit leadership team. This is what we talk about as we get together on a weekly hourly basis, how can we get more out of the assets that we have invested so thank you for a mentioning that you know I came to us for a few reasons one.
Because I love this company too because I want to make an impact on a people on three I want to get the stock price movement, it's all about creating value for our shareholders and you do that through effective capital allocation. It starts with how you allocate capital and I will say that we have not gotten the returns that we should have delivered on some of the capital investment.
That we made for a whole kind of all whole kinds of reasons and it's not we don't need to look back for those reasons, but looking forward. It's going it's just we're gonna have a different lands on how we allocate capital as Weve talked this out. This morning I gave an example of not buying aircraft to have excess capacity that would have been value, destroying so we opted not to make that capital investment.
We will get the network right Ed before we think about investing more dollars in the network that suggests lower capital intensity going forward to your question about well, okay, great I get the capital, which is the denominator side, how do you fix the numerator or how much cost can you take out like if you're going to fill.
The revenue how are you going to get the cost out.
I don't like anything unless it starts with a b.
Yes, it's just not worth our time you know we're focusing on the wildly important here. So if it's not worth of if not doesn't start with a b. We're not doing that so that gives you a sense of the cost that were looking to take out.
Allison Landry of credit Suisse. Please go ahead.
Good morning, Thanks for taking my question, so I wanted to.
A little bit more follow up question, you know a conversation up of capital efficiency and typically.
Libertarian incremental invested capital so I mean.
<unk> session that at least for the near to midterm.
Do more with last translate into perhaps some lower capex level.
But it maybe think about longer term and what could be you know that.
Requirement that the business that technology or or something else network.
I mean, you think relative to what Youve. He has had a historically deliver from a return on incremental domestic capital standpoint can you get back to you.
You know, maybe prior peak or or is that not the right way.
So before any thoughts on capital efficiency would be great. Thank you.
Well, so maybe I'll start that from a return on invested capital a look we've gone down about 400 basis points. So as we look back last couple of years on ROI see we're very focused on moving out and the into in the opposite direction moving it up were down in the low Twentys right now.
I think you're referring to the peak, where we were in the high Twentys it'll take some time to get back into words that trajectory, but there's a base level of capex that we're going to need to spend call. It two and a half to 3 billion on maintenance and thats ongoing but everything above that that we've been spending on capacity in gross is getting looked at through a different lens in Carol alluded to it from.
The TSR, we're very focused on a cash returns and looking at the annual payback and how long. The payback is so I think you can look for us to drive improved ROI see I think the pace will give you some more clarity on that when we come out with the with guidance Carol would you add anything the only thing I would add is that die is defined by what the customers willing to pay for.
And if we're spending on capital on enabling capabilities.
Services or products that they're not willing to pay for I don't know why we would spend that capital. So we are bringing differently.
As defined by with the customers.
Thank you very much.
Ken Hoexter of Bank of America. Please go ahead.
Hey, great. Good morning, Charlie again, congrats and welcome.
Brian look forward to working with the both you mentioned it just real quickly you mentioned the weaker domestic in the second half you mentioned some longer term thoughts international.
Did I hear you say that international will stay at these levels in the second half I just want to clarity on that and then digging into the second half domestic margins. Brian is that time in transit is that are these kind of the startup costs and that's going away or are you looking maybe Karl your thoughts on on your long term thoughts on get.
Back to that double digit margin or or is it beyond that.
Given these moves you're talking about.
So Ken Thanks for the question the ill start with the domestic piece in terms of the back half, yes, Carol alluded to the investments in time in transit and we think Thats a critical investment to to continue to invest to drive the the service for our customers and speed up time in transit.
We've got a handful of of one off items that I think I alluded to there's a land sale fuel excise tax management incentive those are all laps, but they add up to a couple of hundred million dollars. So it's it's a meaningful number there's also a benefit a catch up but in terms of expense. We put on about 40000 heads to handle the volume surge in the second quarter, so that'll be coming back in terms of Ben.
If it's if you are full time of your benefits kick in at 30 days, you're part time it kicks in about six months. So you'll see those creep up but that's why I I provided that the caution on the back half of your longer term, though I think the steps, we're taking will drive the the overall improvement in domestic margins on the international side I think you saw a.
Large peak in the middle to quarter are coming out of Asia with the additional flights and so I think that would moderate about a year and Ken.
As we've talked before I think the focus in international it's on EBIT dollars, because I think the team really have an opportunity to drive their share at those elevated margin level. So margin may not stay at this level, but as you as you think about the future EBITDA will and there certainly to exit domestic margins are very attractive growth Carol anything to add on domestic or international.
I'm just perhaps on the the growth side, our volume will be up in the back half <unk>. It's just the growth rates won't be the threat that and I just want to make sure. We're really clear on that doesn't have any confusion there and on the international aside I think our margin will be quite healthy.
Yeah.
Thanks, Ken.
Thanks appreciate that.
Jack Atkins Stephens. Please go ahead.
Good morning. Thank you for taking my question. So just wanted to focus on the growth that you're seeing a within b to b and ecommerce and your international markets and maybe E commerce adoption in international markets as well as to what degree is this potentially headwind to profitability margins internationally as we sort of look forward as.
Is there some sort of C. C E commerce, a BDC grow there or are there some differences in terms of how that market is structured or how your network is structured that would make that not the case.
Yep.
International business is quite different than the domestic this.
Asset light outside service provider and many other markets in which we.
We actually like this cross border opportunity to grow beat it PTC business and the margins.
Hey, This is Scott we've got time for one more question before we wrap up.
Our final question will come from the line of Bascome majors. So Susquehanna. Please go ahead.
Yeah, Carol your 17 years, only if you fast forward you witnessed several substantial changes in the competitive landscape for the company and you've been part of steering the board strategy to bring in some more outside perspectives are your senior management, which is certainly seemed to reach a new level.
Joining us CEO here can you give the investors some board level perspective on that evolution in thinking you PS is store strategy from committee.
Promoting from within.
You know any thoughts on where the cultural shift at U.P.S. is headed over the next several years of here.
Thank you.
Yes.
We are a big believer as a board and the company's culture, because we think it is a competitive.
Weight of differentiation.
As the board looked at CEO succession, they came up with a I qualification. If you will have what the next CEO should that in terms of experience in terms of just knowledge in certain areas and they map that up against.
Both internal and external candidates, obviously I wasn't part of that [laughter], but there was a search committee that was formed and they looked at here that qualifications of the next CEO and they looked at our internal team as well as external team and decided to go outside for their role and I was delighted that they asked me to take the role.
It's because of the time that were and if I look to the future of U.P.S. My goal is to get CEO succession ready tend to date.
So then it when it's time for me to move on and actually retire because I have been retired but when it's time for me to move on you know we have ready now candidates inside the company to promote the big believer and investing in people to help them get to their highest potential what ever it may be so don't expect to see.
A big cultural shift just because I came in for this time.
And I am delighted to be here, it's an awesome leadership team there in the room with me today, giving me supports this we're answering your questions. We really do appreciate all the thoughtful questions that came to Brian and made today. So thank you for that and Scott I'll turn it back to you.
A final comment so we just want to thank you for joining US today, we wish you a very good remainder of your day and then we look forward to speaking with you next quarter and that concludes the call. Thank you.
Oh.