United Parcel Service, Inc.

Good morning. My name is Steven, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the UPS Investor Relations second quarter 2019 earnings conference call. All lines have been placed on mute to prevent any background noise, and after the speaker's remarks, there will be a question and answer period. It is now my pleasure to turn the floor over to your host, Mr. Scott Childress, Investor Relations Officer. Sir, the floor is yours.

Good morning, and welcome to the UPS second quarter 2019 earnings call. Joining me today are David Abney, our CEO, Richard Peretz, our CFO, Kate Gutman, our Chief Sales and Solutions Officer, along with Chief Operating Officer Jim Barber, our Chief Information and Engineering Officer Juan Perez, and Scott Price, our Chief Strategy and Transformation Officer. Before we begin, I want to review the Safe Harbor language. Some of the comments we'll make today are forward-looking statements, and address our expectations for the future performance or operational results of our company. These statements are subject to risk and uncertainty, which are described in detail in our 2018 Form 10-K and other reports filed with the Securities and Exchange Commission. These reports are available on the UPS Investor Relations website, and from the SEC. During the quarter, UPS recorded a pre-tax charge of $21 million or two cents per share on an after-tax basis. The charge is primarily from transformation-related activities with the majority allocated to the U.S. domestic segment. In the prior year period, UPS recorded a pre-tax charge for transformation cost of $263 million or 23 cents per share on an after-tax basis. The webcast of today's call, along with the reconciliation of non-GAAP financial measures, are available on the UPS Investor Relations website. Unless stated otherwise, financial performance discussed today will refer to adjusted results. Webcast users can submit live questions during today's call. We will attempt to answer questions of a long-term strategic nature. Callers are asked to submit only one question so that we may allow as many as possible to participate. Thank you. and I will turn the call over to David.

Thanks, Scott, and good morning, everyone. During the quarter, we continued making significant progress executing our strategies. As expected, our transformation initiatives are producing positive operating leverage and improved profit, signifying an important turning point for UPS during 2019. These initiatives combined with the strength of our underlying business and scale of our global network, are creating strong results. We generated more than 3% consolidated revenue growth and greater than 6% growth in operating profit. In fact, we grew profit in all three segments and generated the most profitable quarter in the history of our company. Our transformation is also creating greater efficiency and agility and funding reinvestment in new state-of-the-art solutions. This will enable UPS to capture profitable growth opportunities at an even higher level. This morning, I will share a few quarterly highlights. Kate will introduce numerous market-leading solutions focused on driving higher-quality revenue growth and Richard will cover the financial details. Yesterday, we announced the latest wave of new services and solutions, and there are more coming. These services will provide our customers new levels of speed, visibility, control, and market access, especially our SMB, e-commerce, and healthcare customers. This is an exciting and momentous time at UPS, as we leverage the exceptional power of UPS technology and innovation to bring to market new industry-first capabilities. On the efficiency front, our transformation initiatives are enabling a faster, more flexible network. In the U.S., we opened three major automated hubs in the quarter, adding more than 2 million square feet of new, highly automated sortations. The modern facilities brought on in 2018 and 2019, along with significant changes we're making to our network, are improving transit times on key lanes for improved local, national, and global customer service. We're also adding highly efficient aircraft in the U.S. and in other major international trade lanes in line with shifting volume levels. Between 2017 and 2022, we will add 44 new aircraft, which creates more than 10 million pounds of additional air capacity in the network, the largest air capacity expansion in the industry in recent history. In fact, this year, we will add the most annual capacity in our multi-year program by deploying 11 new 747-8s and 767s, and the timing of our actions couldn't be better, with the largest e-commerce shippers adopting next day and often moving from our competitors' two-day options to our one-day services. This structural change is creating opportunities for UPS. Our additional air capacity and modern integrated network offer unmatched flexibility and position UPS well to serve changing customer needs. In the quarter, average daily volume for UPS next year surged more than 30%, the strongest growth in more than a decade. Our air market share growth is accelerating, and we are strengthening our industry leadership. UPS is in a unique position to enhance financial performance as we create new solutions that enable shippers of all sizes to meet accelerated delivery expectations of their customers. Turning to the trade environment, UPS has long supported free trade, making cross-border commerce easier for all businesses. I recently met with top trade officials from the US and from China And while I'm encouraged by the commitment of the negotiating teams, we need to see more measurable progress towards a comprehensive agreement. At the moment, the global business community is facing prolonged trade uncertainty in Europe and elsewhere, and forecasts are softening. Global industrial production was lowered to about 1.5% for the year. Additionally, world exports are now forecast to grow at a slower pace than global GDP. Nevertheless, UPS is using the flexibility of our network to help our customers optimize their supply chains and take advantage of continued growth opportunities. The US economy appears to be in better shape with lower unemployment, healthy consumer demand, and forecasts for improved US GDP. The concern for the US is industrial production. The IP outlook for the fourth quarter is forecast to be slightly negative on a year-over-year basis. Regardless of external conditions, our transformation initiatives are making UPS more competitive and more proficient at helping our customers. The progress in our operations and the exciting new solutions we announced yesterday were made possible by three things. our strategies, investments we're making, and the execution by our people. I would like to thank our employees worldwide for their tremendous contributions to our success. Momentum is building. We remain confident our strategies and initiatives will drive even stronger revenue quality, create further efficiencies, and improve company profitability. We will continue to accelerate our initiatives in 2019 and beyond. Now, I will turn it over to Kate to share more detail about our new services and solutions.

Thank you, David, and good morning, everyone. Last September at our Transformation Conference, we unveiled key initiatives designed to generate growth. We're excited to announce the most extensive rollout of innovative new solutions in recent history. Our customer first strategy targets an optimal customer mix that will yield high quality revenue across all of our strategic growth imperatives. Small and medium sized businesses, healthcare, international growth markets, and B2B and B2C e-commerce. These solutions were created to leverage the expanded automated capacity we have added to our network, which will empower our customers to do more, move faster, and go further. UPS aims to be an indispensable partner for SMBs. To that end, SMBs can now leverage the breadth, speed, and information in the UPS network like never before. First, with growing demand for next day delivery, UPS is improving time and transit in many key lanes and across all products in our broad U.S. portfolio, beginning in the second half of this year. These faster transit times connect the places where more than 80% of the population resides, enabling faster delivery for all shipments. Second, beginning in January, UPS will offer customers pickup and delivery services seven days a week. We're expanding our current Saturday residential and commercial pickup and delivery services and adding new Sunday options. As the only major carrier with Monday through Saturday pickup offerings, this service significantly expands our market coverage on the weekends, providing customers added speed and convenience. We plan to efficiently leverage the combination of the UPS integrated network, access point locations, and UPS SurePost in collaboration with the USPS to deliver this new capability. Third, we are providing later pickups for next day ground delivery, enabling SMB shippers to process more orders in a day. Later pickup times are available now to hubs covering 85% of the U.S., solidifying UPS's leading market position in next day ground coverage. And additionally, building on the tremendous success of UPS My Choice for Home, we are excited to announce UPS My Choice for Business, available Monday, July 29th. Participating companies will join the nearly 60 million consumers worldwide and join the benefits of UPS My Choice for Home. Small businesses will now have unprecedented levels of visibility and control over both their inbound and outbound UPS shipments, advantages that can enable SMBs to provide better customer service and improve planning for staffing and equipment needs. Healthcare has long been a priority for UPS, and we continue to develop unique solutions. To rapidly scale our recently announced drone operations on the Wake Med campus in Raleigh, North Carolina, we created UPS Flight Forward, a subsidiary form to operate commercial drone deliveries. This fall, we expect to receive Part 135 certification, the highest level of certification from the FAA. which will enable UPS to complete routine flights beyond line of sight, day or night. UPS is leading the industry and intends to stay at the forefront of commercial drone aviation. This certification will pave the way for service expansions to other hospitals and medical campuses in the U.S. Cross-border e-commerce is growing fast and is a significant opportunity for our customers and for UPS To help our customers tap into this opportunity with an affordable and easy-to-use international service, we created UPS Worldwide Economy. This new service has been designed specifically to enable SMBs to send lower-value cross-border shipments using an economical deferred service to the top e-commerce markets around the world. UPS worldwide economy is now available in Canada, China, Hong Kong, the UK, and the US, with more European and Asian markets coming soon. And finally, understanding how busy small businesses and consumers are every day, we are dramatically increasing the number and variety of locations that enable access to UPS services. We're excited to announce advanced auto parts CVS Pharmacy, and Michael's Stores are joining the UPS Access Point Network. Collectively, over the coming months, these retailers will add more than 12,000 locations nationwide when fully implemented, bringing our U.S. total to 21,000 locations where consumers can conveniently pick up or drop off their UPS packages, including returns close to their homes and offices. We remain the e-commerce shipper of choice, providing unmatched support to meet our customers' needs. Together with the UPS My Choice for Home app, consumers have broader choice, visibility, and control over when and where their UPS deliveries are made. And, like with all other access points, UPS attains further geographic reach and greater delivery densities, driving increased efficiency. UPS is the global industry leader with more than 78,000 points of contact, including retail locations and drop boxes around the world. Soon more than 90% of U.S. consumers will find an access point location within just five miles of their home, offering a remarkable new level of convenience. UPS is poised to capture an even greater share of the fast-growing B2C market. by making pick-ups and drop-offs close by and convenient for virtually all customers. In closing, UPS is actively enhancing the customer value chain from top to bottom by leveraging the power of our integrated network, state-of-the-art technology, and expanding access point network. We are helping our customers to be even more successful. This rollout of exciting new services along with innovative platforms like eFulfillment and Where2Go are just the beginning. Many other industry-first solutions and partnerships are in development. Envision to empower our customers and enhance efficiency in new ways. They're being enabled and accelerated by our transformation initiatives and the power of the UPS Smart Global Logistics Network. Now I'll turn it over to Richard to move into the financial results and outlook. Richard?

Thanks, Kate, and good morning, everyone. We had a good performance in the quarter, driven by our planned multi-year investments, our transformation initiatives, and strong execution within a dynamic environment. The enhanced leverage we are building is evident in our performance. All three UPS segments grew profits during the period. Consolidated operating margins were 12%. an expansion of 30 basis points year over year. Today, I will cover performance of the segments and provide an update to our forward guidance for 2019. Let's look at the segments. One of the most notable elements for the quarter was the performance we delivered in the U.S. Average daily volume was up more than 7%, with strong growth across all products, both in B2B and B2C. Next day volume jumped more than 30%. as we seize the market opportunities with large e-commerce shippers who are early adopters of faster delivery to their customers. Our air sorts are completely automated. Plus, with the investments we've made in our integrated ground and air network, UPS is well positioned to meet the market shift towards next-day delivery and grow profits. Reported next-day yields were lower due to higher growth with large customers and end-of-day saver products. The good news is, Underlying base rates increased 3.4%, and the air profitability and operating margins improved on a year-over-year basis. Ground volume grew over 4%, and revenue increased more than 5%. Base rates for ground also increased almost 2%. And although customer and product mixed weight on reported yields, ground showed a solid increase in profitability. In the U.S. Domestic Business Unit, costs were up 0.5% this quarter, the lowest increase in several years. contributing to positive operating leverage in the business. The results would have been even stronger without the startup cost of an additional 2 million square feet of new automated sorting capabilities. We are gaining efficiency and becoming more agile, enhancing UPS's ability to scale rapidly and adapt to capture market opportunities and generate higher levels of profit. As a result of our actions, total U.S. revenue was up 7.7% operating profit grew 8% to over $1.2 billion, and we produced a margin of 11%. Now let's turn to the international business. In the quarter, we leveraged the strength and flexibility of our global network to deliver operating profit growth and margin expansion as a segment adjusted to the challenging trade environment. Revenue quality was driven by disciplined yield management. On a currency-neutral basis, revenue per piece for the international domestics increased 5.6%, and revenue per piece for the entire segment was up nearly 2%. Although volumes were down slightly, we are seeing growth in a number of trade lanes. Asia exports are growing to virtually all regions of the world, except the US. UK exports and imports continue to be down on a year-over-year basis, driven by the uncertainty around Brexit. However, UPS is growing exports within the European continent. In the segment, we generated $665 million in operating profit, a record for the second quarter, and expanded margins by 80 basis points compared to last year. Turning to supply chain and freight, we had another strong profit result. We're up almost 11% as this segment delivered its best second quarter operating profit in the company's history. Operating margins expanded 90 basis points to 8%, in large part due to the effective execution of our strategies, Multiple units within supply chain and freight contributed to strong results by leveraging the flexibility of our asset-light businesses. Looking at the highlights of some of the individual units in supply chain, international air freight achieved robust profit growth on lower tonnage. We generated higher quality revenue, expanded the buy-sell spreads, and executed prudent cost controls, all of these offsetting the softer demand on the China-to-the-U.S. link. Coyote, our truckload brokerage division, continues to outpace others in the market. They had another outstanding quarter enabled by productivity gains and optimization actions. Revenue was down, driven primarily by the overall market rates, but profit increased significantly and operating margins expanded. Across the three segments, we are pleased with the progress we are making. Each of these businesses is executing well and showing gains in operating profit. Now let's turn to the balance sheet. UPS generated $4.2 billion in cash from operations and about $2.2 billion in adjusted free cash flow, and that's with capital investments of about $2.9 billion year-to-date. We're well on our way to meeting our free cash flow target with potential for additional upside. As expected, we made an opportunistic contribution of just over $800 million to the pensions, resulted in lower ongoing costs and an increase in our funding status. Our timing was good, as long-term interest rates were significantly below the PBGC premiums. So far this year, UPS distributed nearly $1.7 billion in dividends, which represents a 5.5% increase on a per-share basis over the same period last year, and we repurchased 4.8 million shares for about $500 million. Moving to tax. As we work through upcoming filings, there's a potential for favorable benefits that could lower our effective tax rate, likely in the third quarter. As a result, we expect our full-year tax rate to be between 22% and 24%. Now, before we move to guidance, let me take a moment to expand on what Kate shared with you. The new solutions, including My Choice for Business, Improvements in Transit Time, and the Extended Hours Pickup and others that activate in 2019 all embedded in this year's guidance. As we roll out our targeted weekend operations to expand Saturday coverage and add Sunday in 2020, we will leverage the combination of our highly efficient network, expanded UPS access points, and UPS SharePost. This brings together the efficiency of our great partnerships, proven technology, and utilizes our new weekend driver category to produce higher levels of asset utilization and enhance services for our customers across all seven days. The actions announced yesterday are part of our broader transformation and are included in our long-term targets. For the remainder of 2019, although external conditions have changed, we are reaffirming our annual guidance. As David mentioned, forecasts for world exports and U.S. industrial production have been lowered and remain concerned about the growing headwinds from trade uncertainty. Working in our favor, UPS has a number of company-specific tailwinds. First, positive momentum from the capacity and efficiency created inside the network, especially in the U.S., as well as the new product and services we are introducing. Second, profit gains from the structural movement to more next-day delivery. Third, the benefits from previously discussed items, like the completion of our VRP program, wrapping of currency headwinds from last year, among others. As I mentioned earlier in my talk, we will likely see a favorable tax benefit predominantly in the third quarter, which will help offset forecasted headwinds. Putting everything together, as momentum builds as expected, the results in the second half of the year will be considerably stronger than the first half. Based on our positive momentum and the current economic outlook, we remain on track to achieve our full-year adjusted earnings per share guidance of 745 to 775. We are making visible progress on our strategy and remain confident that transformation and our other initiatives will produce gains. And now I'd ask the operator to open the line. Operator?

As a reminder, please ask only one question so that we may accommodate more callers. Feel free to get back in the queue, and we'll take a second question, time permitting. I will now turn the program over. over to IRO Scott Childress to start the Q&A segment. Please go ahead, sir.

Thank you. Let me reiterate what Stephen just said. We've got a lot of ground to cover today, so callers are asked to submit and ask only one question so that we may get through as many as possible. So our first question comes from Scott Schneeberger from Oppenheimer. Please discuss your progress in growing share with the small and medium businesses?

Great. Scott, this is Kate. I'll take that one. SMB is a key priority within our strategic growth imperatives, and they're going well. We handle more SMB business than anyone, and we continue to innovate. And the solutions we actually announced were foreshadowed at our Transformation Conference, so this strategy is unfolding as we speak. They are a holistic strategy as we aim to win more business Monday through Sunday, meeting all of our customers' needs. And making it easy for them, like the market leading My Choice for Business, where we've provided unprecedented visibility and control for their inbound and outbound shipments. And enhancing our network with faster time in transit and meaningful ways hitting lanes that actually will cover 80% of the population. and seven-day service, expanding Saturday and adding Sunday options to win even more SMB from the full week. Leveraging the combination of UPS integrated network access point locations and Shore Post in collaboration with the Post Office. We also have our extended hours next day ground service, enabling SMBs and large customers to process orders later in the day and reaching more than 85% of the population. We're also proud of the access point expansion and the partnerships with CVS, Michaels, and Advance Auto. That adds more than 12,000 locations nationwide, bringing the U.S. total to 21,000 and 40,000 globally. Further helping SMB take advantage of the cross-border trade opportunity, we've announced Worldwide Economy, This is an economical and deferred service designed for their low-value cross-border goods, and it's available in Canada, China, Hong Kong, U.K., and U.S., with more coming soon. Further with SMBs as well as larger healthcare accounts, we have our drone service staying at the forefront and rapidly scaling our drone operations on the campus of Wake Med and other hospitals to come. So we're very excited about our SMB initiative and priorities, the strategy that we laid out for you at the Transformation Conference, and being able to bring more to you with details. And we remain committed to the strategic growth imperative.

Just a quick recap. This is David. You have to look at all these announcements that we made, not as individual projects, but this is a holistic approach to basically enabling small and mid-sized customers to swing above their weight. And so the focus is on this group of customers so that they can compete with the larger companies that are out there. And the excitement that we have seen for this is just incredible. And we are very confident that we will continue to serve that small and mid-sized customer in ways that none of our competitors can do. And this small, this My Choice for Business is just unique in the industry. There's no one that can match that, and we expect the same enthusiasm as we had My Choice for Home, which is 60 million members, and we believe we'll get that same kind of traction with My Choice for Business. Thank you for the question.

Let's move on. Our next question comes from Ben Hartford of RW Bayard. Based on global trade trends, do you have any clarity on your stated long-term EPS targets of 5 to 10?

Okay, I'll start the question, and then David will comment as well. First, to start, our long-term targets are built around different economic cycles. When you look at this year, we call for a year of real progress. We saw it in the second quarter results. And in the second half, we look for even stronger performance. It's driven by many of the factors that Kate and David just covered, as well as some of the items that I talked about in my prepared remarks. But we're really starting to play offense when you think about the network benefits, what cost per piece is doing, as well as the capabilities that we're bringing to the market as they're adding to the top line. And it's important to remember, embedded in our guidance is all of those items that we've called out. that we talked about earlier in the year as strategic initiatives, and now we have announced. David?

Yes, great question, Ben. And I'll just say, let's look real quick. Obviously, there are headwinds and tailwinds. There always are. But when you look just quickly at the second quarter, we had our best quarterly performance we've ever had in the history of this company and had positive operating leverage in our U.S. business. Our international and supply chain and freight businesses had the highest second quarter that they have ever had. This is under a dynamic trade environment. It's really a turning point in our profitability. We have momentum going into the rest of the year. When you look, our transformation initiatives that we talked about a year ago are really kicking in, and we're getting the efficiencies and the gains. And then you add on top of that these innovative solutions that will help our customers to deal with all of these changes that we're all seeing. And we have a lot of confidence here that in spite of what may or may not happen with the trade environment, that we can flex our systems, flex our network, and that we can continue to take care of the needs of our customers. So we feel confident in that second half of the year and going into next year.

We have a question from the line of Tom Wadowitz of UBS. Please go ahead.

Yeah, good morning and congratulations on the strong results. I had to look two or three times when I saw the 30% growth in Next Day Air. I don't think I've seen a number like that before. So, you know, strong results. How would you think about the greater growth in e-commerce and presumably in that Next Day category looking forward or, you know, continued growth as you saw in second quarter and how that might affect the margin outlook in domestic package. You know, I know you talked about at the transformation meeting that mix was a factor and focus more on B2B. So as you have this really strong e-commerce growth, does that affect how we think about margin improvement in second half and 2020 in domestic package? Thank you. Great.

Tom, this is Kate. Thanks for the question. And we do see a structural change in the market. The two-day commitment to the shift to one-day commitment drives air and ground, as we've just talked about that extended next-day ground coverage that we give, and you see the growth that occurred in both. We believe SMBs are going to follow, and they're going to be empowered by some of these solutions. So the growth, while at the levels that caught your attention this morning, may not be the same in the future. We do believe the structural change continues and it will be strong growth in the future. Richard, do you want to answer the margin?

When you think about margin, we do and we continue to call for improvement in operating margin for the U.S. business. It's driven by the efficiency across the network, both the ground and the air with the new buildings. You saw what Cost Per Piece did this quarter. That half a percent is among the lowest it's been in several years, and we expect that to continue. We are calling for low double-digit operating profit growth in all three segments for the entire year. And so when you put it all together, we expect the second half to be well. We do believe that the next day it will continue to grow, but that growth started really in the first quarter if you look at our growth numbers There, it was a little higher in the second quarter. We don't expect it to stay that high through the rest of the year, but we do expect to continue to win share based on the solutions we have in the market, and it will help margins.

Thank you.

David Vernon of Bernstein, please go ahead.

Hey, good morning, guys. Richard, I wonder if you could talk a little bit about how the investments in service go into seven-day, speeding up the road network, which I would presume means taking something off the train and putting it onto a truck. How is that going to affect the trajectory of domestic margins in the next year? Is this a case where you guys are taking some of the leverage you would have had in the business and reinvesting it, or should we expect some margin pressure here? in 2020 against whatever 2019 comes up to be? I'm just wondering about that pace of investment and where it's being funded from.

Sure. So let's take those in two boxes. I'll go very quickly. In 2019, everything that we said we would start early in the year, we talked about strategic initiatives we would announce was embedded in the guidance. The announcement is the improvement in time and transit that starts now. In terms of 2020, what we have is we have targeted Sunday operations It's the combination of SurePost, expanded access points, and the use of the new part-time driver category, I'm sorry, the weekend driver category. It's all part of transformation and what we committed to reinvest in this business to make it grow even more. And so as we get to 2020 guidance in a few months, we'll come out and explain to you how that all plays out. But it was all part of the plans we initially had.

Okay, so nothing incremental to the cost guide then?

That's right. For 2019, it's all embedded in.

All right. We're going to take an online question here. This question, we've got multiple questions. Elaine Becker of Cowan and Chris Weatherby of Citi. Can you give us an update on the transformation initiative and are there benefits beyond the VRP in 2019?

Yeah, this is Scott. Thanks for the question. So as you recall last year, we kicked off the transformation program with the voluntary retirement program and procurement. Those are really just two of the early initiatives that are helping us to reduce our cost to fund both growth and innovation. A significant number of additional cost reduction programs are in the pipeline focused on modernizing our systems and as well helping us to create the fund to invest both in some of the programs that were announced yesterday that Kate mentioned that give us a peerless market leading position in many customer facing areas as well, investing in innovation, like our drone announcement, which is just one of many that we expect in the future. We continue to invest those savings, both in terms of our investments in growth, but also reiterate our commitment to the dollar to a dollar 20 of incremental EPS in 2022. Let me just quickly turn this over to Juan to talk a little bit more about the modernization.

Thank you, Scott, and absolutely all points connected to technology. We are well on our way in executing our digital transformation and our digital strategy in the company. You know, we continue to make investments in four key technology areas. Customer technologies, you've heard some of the announcements yesterday and today. Those announcements are supported by technology at UPS. Operational technologies, technology modernization, as well as transformation. all of these areas in which we're making technology investment are transformational. And in 2019, we have already gone through multiple back office technology modernization projects. We have made enhancements in our technology to support our fourth strategic growth imperatives. We will continue to do that. We've expanded the use of our operations technology, best-in-class operations technology that's out there. And, of course, we continue to make investments in advanced analytics, The last point I'll make, Scott, is that we have a great, solid history of effective implementation of technology in our company, and we intend to continue to do that.

We have a question from the line of Ken Hexter, Bank of America. Please go ahead.

Great. Good morning. Great job on the performance. But can you talk a bit about the share gains? Is this a market share shift that you see from whether it's the post office or FedEx leaving Amazon or just looking at the 30% without a degradation in ground? Is that just a share gain from retail? Maybe you can detail the speed enhancements in terms of changing patterns, shifting patterns. Thanks.

Absolutely. Thanks, Ken. This is Kate. And so I would say, first of all, What Richard indicated, we've had growing air growth early first quarter and beyond, and we have it across a broad base of customers, and we do expect even more to go. There is a structural change in the market. As I noted, it does drive a one-day footprint, whether it be air because of inventory placement or ground, and you saw that in our 13% ground resi growth. And then the next year, of course, continues to be strong. So we've actually had the wins throughout the last year, and we are the air market share leader for the last three years.

Our next question will come. It's an online question from Allison Lander at Credit Suisse. Do you expect cost per piece to decline outright going forward as efficiency gains continue in Europe? automation investments?

Hi, Allison. It's Jim. I think, obviously, from a unit cost perspective in Q2, I think the market sees that we're at an inflection point, and it really did drive operating leverage in the U.S., which has been about four years since the last time we did it in this kind of capacity. Rich talked about the future. We see it going forward. We see the momentum as well, David and his talk, that we continue it forward. There are going to be quarters where we absolutely will drop the unit costs going forward. There might be other ones where we choose to invest some of the transformation dollars and go back and grow the business differently. In the end, it's a combination of revenue per piece and cost per piece that drives operating leverage, and we'll manage it, too, going forward and talk about the margins as Rich insinuated in his guidance. So I appreciate the question.

As Jim mentioned and do want to recognize the domestic U.S. teams, just did an excellent job the second quarter of bending that cost curve and as a credit to their execution, to their efforts. It also is reflective of all these investments we've been making in these automated buildings and in our strategic imperative. So a good job there, and we expect momentum will continue.

Scott Group, Wolf Research. Please go ahead.

Hey, good morning, guys. It's Rob Sammon on for Scott. A quick clarification question regarding the announcements yesterday. You were very clear we wouldn't see any additional costs show up in 19. Should we also be assuming that the costs in 20 were part of the original plan? And then from a longer-term perspective, given the changes that we're seeing in the small package market, how should we think about incremental margins in next day deferred and ground as we look forward?

Yeah, so Rob, this is Richard. And first, we haven't actually given any guidance for 20, but what I did say was that when you think about what we're investing in for 20 and beyond, we talked about transformation savings both being savings and accretive to EPS, the $1 to $1.20, and part of it for reinvestment. And so when we come to guiding, we'll go through that. I think it's really important to think about the second quarter. When you look at the U.S. profit growth, of 8%. It was almost evenly divided between ground and air, which means that the incremental cost per piece that is coming in is coming in at much lower because of technology, because of structural change in distance and weight and zones. And so we do see incremental profits improving. We also see cost per piece coming down, and all that comes together in what we guided for 19 and when we get to 20.

Our next question is coming from Geron Nathan of Daiwa. We are seeing new competitors come into the freight brokerage unit. Can you discuss what UPS Coyote is doing in the market?

Hi, Geron. It's Jim. I'll pick that one up. So a couple of things, harking back to the acquisition. First, we bought Coyote earlier. First thing out of the gate when we saw them, we acquired them with their service level, and that hasn't changed, and we believe we've got the best service in the industry, and that's just flat competition capability. Secondly, you know, we aren't in the protection mode in Coyote. We've doubled the business already. We're headed to tripling the business, and competition will continue to force us to invest in new technology, which the team is doing. We've already geographically expanded into Europe. We'll keep doing that to grow the business, and probably the one I think you should think about the most is that Coyote is the only one in the UPS family. And the synergies that affords us at peak season and then the rest of the year through the cross-selling of the portfolio, I don't think the new competitors kind of have that leg up. So we're pretty proud of the acquisition. Thanks.

Allison Landry, Credit Suisse, please go ahead. Ms. Landry, your line is open.

All right, well, we'll do an online question. The online question comes from Brian Ostenbeck. Will the new UPS My Choice for Business have a premium subscription service level similar to the home product?

Great, and Brian, this is Kate. So the My Choice for Business goes on the heels of My Choice for Home, of course, with $60 million strong. and customers with higher customer satisfaction than any other part of the business. And so we see that same tie with My Choice for Business. And we will deliver new solutions through that mechanism. We will be focused on the general subscribers as well as the premium. And just as we are doing in the release, you can see unprecedented visibility and control so that customized experience with UPS for these SMB customers really helps to give a deeper connection, and we will continue to go further with it and, again, deliver new solutions through that mechanism.

The next question will come from Chris Weatherby of Citigroup. Please go ahead.

Hi, guys. James on for Chris. Just wanted to ask, about the international outlook and given the macro, we should be thinking about volumes being down across the rest of the year.

So the international business and the impact on the macro was their question.

I'll pick it up. Look, in David's opening comments, he talked about the trade picture. It's kind of different coming into this year than we saw it. But remember a couple things about the international business as it moves through the globe is that it is both a growth and diversification engine for us. And when you talk about that, you have to have the ability to move it as trade moves. What you've seen in this really challenging trade environment is that they just recorded record profits again. And so at the very end of the day, yes, there are trade wins, but there's also tailwinds in this world. And when we find those, we try and lean into them. We get the We get the network right. We've talked about the second half's going to speed up. That's going to include international. And really, at the end, when you say you're going to run this globe's largest logistics network, no matter what happens to the macro, things are going to come and go over time, and our job is to move this network to where the customers see opportunity, and we believe we can provide it to them. So international continues for a long time in the future for us at UPS.

Our next question is coming from... multiple analysts, and the question is, is UPS adding air capacity, and are there contingency plans related to a hard Brexit that we've set up?

So David mentioned in his opening comments our air capacity. We started back in 17 when we went out and made our statements with the 747-8s. Remember, though, from that position, we talked about a bump and roll in the network and moving assets through the globe and where the opportunities existed. So, yes, we're going to move capacity to where it is. And remember the flexibility in the way we do it. And that comes from a labor contract. It comes from business units. It comes from different products and suites that we offer. We've got a lot of levers to pull. And when you can see the next day grew like it did in the quarter we just ended, that meant we had to move capacity to it to do it. And so we're moving it, and we will continue to move it as the opportunities to grow present themselves to us.

Jack Atkins of Stevens, please go ahead.

Hey, guys. Good morning, and congratulations on a great quarter. Jim, a question for you about peak season planning. I guess looking at the calendar, I believe there are six fewer days between Thanksgiving and Christmas this year. Can you talk about what you're doing to prepare the network for that, and does that more compressed calendar increase the execution risk as you guys think about the holiday season?

So, look, I think you've got it right on the calendar. Last time we saw a calendar like this was about five years ago. And so, quite frankly, we've been in preparation for this for some time. One of the points most people don't really get right now is with the air growth we've seen right now. We're in peak season air growth numbers right now from last peak. And we feel like last peak we proved to the market we could take a step forward and we plan to do it again this peak season. Yes, it's more challenging. But we're stronger and better, and our airline's more fit for duty, and so are the people that run inside of it. So our ability to do what we're doing right now gives us really strong confidence. The other thing that most people can't see from the outside is when we put our buildings up in 18 to get ready for peak of 18, the majority of those buildings, 80% came online in the fourth quarter. Nineteen, 80% come on in the first three quarters. So we're very flip the model around. that we're really going to be fit for duty, we feel like, for our customers going into 19 peak, regardless of really the days that they're presented on the calendar. We'll get through it just nicely.

We're going to take an online question from multiple analysts. This question comes with the color of our freight forwarding business and the ability to put health care in that industry and our health care strategies moving forward.

Yes, thanks for the question. Very much related to the healthcare initiative, one of our four strategic initiatives and yesterday's announcement on the UPS flight forward. As you recall, we have a preliminary approval and we've leveraged that at Wake Forest and their medical center. That is a single operator who moves goods from one part of the campus to another. Our FAA 135 filing that we have made is a very exciting development, that with approval from the FAA, and we believe we could be one of the first, if not the first, fully licensed airlines with a certificate that'll allow a single operator to not only do beyond visual line of sight, but also night flight. So we see it as a major opportunity for us to continue to grow share in the healthcare vertical.

Dr. Schneeberger of Oppenheimer Funds, please go ahead.

Thanks. Good morning. Pursuing international high-growth markets was one of the strategic imperatives highlighted at Transformation Conference last year. Could you please discuss the progress there and tie in this new worldwide economy product that you've just announced? Thanks.

Sure. I think right now we've kind of come forward since the Transformation Conference to focus on 10 markets. I think given the structure of the call, I won't take you through all of them. Certainly, by the way, China will be one of those. We know that that trade lane to the U.S. is a bit challenged. But remember, it grows in other ways. And so that's what the global network does. So going forward, the year-over-year export also has some issues in it related to cyber last year. And the second half will pick back up, as we've talked about in the past. So So, look, we're going to continue to move forward in the worldwide economy product. What it really does is it allows us to enter this really fast-growing market that we know has been growing six to eight times as fast as anything else over the years and enter a different price point with product sets that we haven't really put in our network before. So it is a very big move for us, and you've seen the way we're going to bring it to market in a very low-cost way with Incoterms that allow customers to choose. So we believe that will definitely add fuel into the growth markets as we go forward.

Yes, so you should think of this as a complimentary service. It's not really something that's going to take away from our existing express, but it does open up to these marketplaces, these small businesses, an opportunity for deferred shipping options, at much lower cost, which means we're going to see a lot of traction there. So we believe this is a very important part of our international portfolio.

We're going to take an online question. This question comes from Fadi Shimon of BMO. Can you help us understand more on the U.S. domestic mix, both the B2B and the B2C growth?

Good morning, Fadi. This is Kate. So our B2B grew 2.5% and continues the growth sequencing that we've had for the last three quarters. And these solutions, actually, that we've announced are both for B2C and B2B. I'll highlight UPS My Choice for Business. Sometimes folks will think that That is primarily only for the business to the consumer, but in truth, a lot of SMBs are empowered now through unprecedented visibility and control to better address their business customers as well. And, of course, the seven-day, we've got the Saturday commercial, and then access points also. Micro-small businesses are one of the largest shippers out of our access point locations, UPS store, of course, having businesses They're being located right in their communities and driving a lot of that B2B volume. And then, of course, our returns portfolio is what I would also emphasize. Returns come with B2C growth, and we've seen the benefit of that as well. So we are continuing to focus on growth across our products, as you saw in this quarter.

David Ross of Stiefel, please go ahead.

Yes, good morning. I just wanted to focus back in on the expansion of the air network and the fleet, adding 44 new planes and 11 this year, really to see how the supply curve matches up with the demand curve. So if you could talk about, I guess, any network changes that are going on as you add the new planes. Are they catching up with existing demand, or is the capacity going to lead and the demand is going to follow at some point?

Hey, I'll start. This is David to answer that question and give it over to Jim. I can tell you that our timing could not be any better with the addition of these aircraft and the flexibility that we have, whether we want to implement these aircraft internationally or if we want to bring them to the US. So we have the capacity At the same time, there's a very real structural change occurring. And so you just couldn't have that line up any better than it has, and now we're taking advantage of it. And, Jim, you want to talk a little bit more about the capacity?

Well, I do think you said it very well, David, in that the 11 that we're bringing on this year, the 11 that we're going to bring on next year of 7.4s and 7.6s, It's time for everything. I mean, we spent a lot of time talking about a couple of trade lanes in the world, but we should also focus on what this world is doing, crossing borders and growing, and our participation in this global network. Remember, everything that we're flying around this world doesn't end up in the United States of America. There's a lot of south-to-south trade that goes involved in this, and we can move the assets there. We have the flexibilities we talked about. And when it moves, in this case, potentially the structural changes in the U.S., You can move the assets. And, of course, it's not all physical. It's also block hours. I would also say that if you look at this year, back to the efficiency metric, it's not just about buying more of them. Our block hours were up about 50% as high as our volume in the U.S. this year. So that's another efficiency metric. And if you look at our utilization rate, they're higher this year than last year. So we think the timing, as David said, is really spot on perfect.

We're going to take another online question. This is from multiple users. Is the USPS able to handle the additional delivery with the expanding US services?

This is David. I'm assuming this is talking about the Sunday delivery where we're utilizing our own network. We're utilizing access points and we're utilizing USPS from a SharePost expansion. And I can tell you that I've personally gotten a commitment from the top of USPS that they understand our requirements and the needs of our customers, and they're absolutely committed to work with us to make sure that this is going to be a very successful offering. So I couldn't be any more confident in our Sunday delivery capabilities, all three parts of the strategy, including the commitment from USPS to perform at the levels we need. Thank you.

Elaine Becker, Cowan, please go ahead.

Thanks very much, Operator. Thanks for the time, you guys. I just have a question about your carbon footprint because you guys are kind of leading edge in sustainability and things like that. And you went with four-engine 7-4s versus two-engine 777s. And I'm kind of wondering if you can just discuss the difference between the two, why the 7-4s make more sense for your network than, you know, a two-engine aircraft would have in the context of keeping your carbon footprint low?

A few points on that one. First of all, of course, we bought those aircraft based on the efficiency that those particular aircraft bring to the overall network. We believe that they're extremely efficient and that they will continue to help us provide the necessary value to the organization. Now, when we look at sustainability, it's more than just the aircraft. Sustainability is important to us. We design our buildings well. We design our vehicles. We select our aircraft with sustainability in mind. And especially as we continue to build our smart logistics network, making sure that we do it in a sustainable way is extremely important to us. And we've published the objectives for sustainability. They are widely documented. You can see them. One that I want to highlight is that we've said before that by 2020, 25% of our total vehicles purchased annually will be of alternative fuels. We're actually on path to make that objective. It's the first one that we have in 2020. There are more coming on in 2025. We expect to meet our targets.

Just to focus a little more on the aircraft side, I want to tell you when we made the decision for the 747-8, that was certainly one of the perspectives we looked at. This is a very modern aircraft. It's very efficient. The big thing you have to keep in mind, though, is the size of this aircraft. When you fly one plane versus two, you're going to gain from the sustainability all day long. The key is to have it utilized to where you are able to do that. Eliminate aircraft because you have larger aircraft. Excellent question, and And it was certainly high on our priority list when we made the decision, and we've been very pleased with how that has worked out for us. So thank you for the question.

Thank you.

That concludes our Q&A today. Now I will turn the program back over to Mr. Childress. Please go ahead, sir.

Thank you very much, Stephen.

David, closing comments? Yes, Scott. We're making significant progress in executing our strategies. And from the questions today, I can tell that there's a lot of people on this call that agree with that. Our transformation initiatives are improving efficiency and they're enabling new innovative solutions like the ones we covered yesterday. And there are more to come. So I don't want anyone to think that, that, that this is what we have for this year and for next year. We have a lot of smart people that are having good conversations for our customers, and we're going to continue to enhance our service, and we're all excited about it. We're becoming, as a company, more agile, and the timing of our investments could not have been any better. The structural change in the market for next-day delivery It is favorable for UPS. It's favorable for our customers and for the consumer, but it is certainly favorable for us. The U.S. domestic segment has good momentum, and we're going to continue that momentum. We continue to see growth opportunities in the U.S. and also internationally and in our supply chain business. So in summary, we expect strong profit growth ahead and will continue to accelerate our initiatives and move at a faster pace. So thank you very much for joining us today and appreciate the time.

Ladies and gentlemen, that does conclude our conference call for today. We'd like to thank you for your participation. Have a wonderful day. You may now disconnect.