United Parcel Service, Inc. (UPS) Q2 2016 Earnings Report, Transcript and Summary

Good morning. My name is Stephen and I will be a conference facilitator today. At this time I would like to welcome everyone to the UPS Investor Relations Second Quarter 2016 Earnings Conference Call. [Operator Instructions]. 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 2016 earnings call. Joining me today are David Abney, our CEO; Richard Peretz, our CFO; along with the International President Jim Barber, President of U.S. Operations Myron Gray and Chief Commercial Officer Alan Gershenhorn. Before we begin I want to review the Safe Harbor language. Some of the comments we will make today are forward-looking statements that address our expectations for the future performance or results of operations of our Company. These statements are subject to risk and uncertainties which are described in detail in our 2015 Form 10-K. This report is available on the UPS investor relations website and from the Securities and Exchange Commission. The webcast of today's call along with the reconciliation of non-GAAP financial measures are available on the UPS investor relations website. 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. Thanks for your cooperation. Now I will turn the call over to David.

Thanks, Scott and good morning everyone. I'm pleased to report another quarter of strong financial results that demonstrate the power of UPS' diversified business model. Again this quarter the International segment led the way. This is the sixth consecutive quarter of double-digit operating profit growth. The U.S. Domestic business is growing operating profit on higher B2C demand. Supply Chain & Freight continued to execute in a challenging macroenvironment. Turning to the economy, the consumer market in the U.S. remains healthy and e-commerce forecasts have been elevated for 2016. And we're seeing that growth. On the other hand, our B2B volume is affected by the continuing weakness in industrial production. In fact, global GDP and industrial production growth forecast have been downgraded slightly. Delayed inventory drawdowns and soft export demand likely will remain headwinds in the latter part of 2016. Additionally, we're mindful of the current political commentary on trade. Increased trade not only bolsters business but also produces jobs here in the U.S. and abroad. Historically, following ratification of trade deals we have seen about a 20% increase in U.S. exports to the countries involved. UPS is a steadfast proponent of trade and supports agreements that minimize friction in the global supply chain. Trade legislation to accelerate economic expansion like the Trans-Pacific Partnership is vital to the health of the U.S. economy. We encourage our political leaders to support and pass pending trade legislation. Turning to our business, the strategic initiatives implemented over the last two years are ensuring we remain on track to achieve our long term financial goals. We continue investing in four priority areas. We're adding network capacity, achieving greater efficiency through technology, deploying industry-specific solutions and expanding in high-growth markets. In Europe we have completed about one-fourth of the projects associated with our $2 million capital investment plan. During the second quarter we announced new automated facilities in Belgium and France. In addition, we began an extensive program that would dramatically improve time-in-transit in our intra-Europe ground network with some trade lanes improving by as much as two business days. The majority of the benefits of these investments are still ahead of us and will guarantee our position as a market leader in Europe for many years to come. We're also investing heavily in our U.S. operations and in a few minutes Richard will update you on our technology and capacity projects. A pillar of our strategy in the U.S. is deploying industry-leading e-commerce capabilities that help online retailers take advantage of consumer trends. We recently released the fifth annual U.S. Pulse of the Online Shopper study that highlights some of these changing trends. This year's survey revealed that most shoppers prefer home delivery while also expressing an interest in an alternative delivery location. To provide more delivery options, UPS is expanding our Access Point locker program in several major U.S. markets. These automated pickup locations augment our more than 8,000 existing U.S. retail locations in the more than 25,000 Access Points worldwide. We're providing more convenient alternatives for urban online shoppers. New technology features were also introduced for the 24 million My Choice users in the U.S. For example, members can now use the Follow My Delivery feature to track their package using real-time maps. These new capabilities are unique solutions to create value for our customers and further differentiate their online offering. Our investments are broad-based and targeted for the needs of customers in multiple industries. This quarter we announced a specialized set of global services for healthcare companies performing clinical trials and in Europe we expanded our field stocking locations for medical device distributors. UPS healthcare customers are gaining additional alternatives for shipping their sensitive materials globally with the assurance of our guaranteed services. UPS also launched a market-leading partnership with SAP and Fast Radius to support end-to-end 3D printing solutions. This capability is linked to more than 60 UPS Store locations and the urgent delivery capabilities of the UPS network. This partnership is enabling UPS to expand into an adjacent market with great growth potential. We entered another adjacent industry in 2015 with the acquisition of asset-light, truckload brokerage services of Coyote Logistics. The combination of Coyote's capabilities and the UPS integrated network is providing customers with unmatched flexibility. Next month will mark the one-year anniversary of the acquisition. The synergies in procurement, asset utilization and cross-selling remain on track to achieve our 2017 targets. In fact, cross-selling has already produced several great wins. Before I turn it over to Richard I want to take a moment to recognize a milestone we will achieve in August. UPS marks our 40th year in Germany and our entrance into Europe. Over that time our business has matured rapidly and the European operations have become a cornerstone for our integrated network. Today we operate in every European country generating more than $6 billion in annual revenue using our best-in-class pan-European network. The expansion in Europe and the growth of our business around the world are made possible through the hard work and dedication of UPSers. As our strong momentum carries into the second half of the year I want to thank all of our employees around the globe for helping make and maintain UPS as the market leader. Now Richard will review the financial highlights.

Thanks, David. The second quarter operating results demonstrate the value of our flexible business model as we had another solid quarter. Additionally, we're seeing high-growth in the e-commerce and healthcare sectors while the LTL and forwarding markets remain challenged. Even with these dynamics currency-neutral revenue growth increased 4% while fuel surcharges were a drag of around 120 basis points. Second quarter earnings per share were in line with expectations. Our performance reflected the gains from our investment strategies despite the mixed macroenvironment. The International segment outperformed while U.S. Domestic was on target. And finally, Supply Chain & Freight was slightly below expectations. Now for some details by segment, U.S. Domestic revenue increased 2.4% as lower fuel surcharges reduced total revenue growth by about 100 basis points. Average daily volume increased 2.5% led by Next Day Air products which were up about 6%. The Next Day Air gains were produced by customers of all sizes. Demand was consumer-based as more online retailers are providing faster delivery options to stay competitive. During the quarter Ground products increased 2.4% over last year as B2C expansion outpaced B2B by more than 5 to 1. Base rates accelerated slightly from last quarter. Lower fuel surcharges reduced yield growth by about 100 basis points. The higher base rates were able to compensate for some of the changes in product and customer mix. Operating profit increased about 3% and operating margin expanded to 13.7%. Enhanced productivity and lower fuel cost resulted in operating cost per piece declining 2/10 of a percent. Once again we're seeing good improvements in our daily operating statistics. Despite the fact that delivery stops were up over 3% ORION lowered driver Miles by 3/10 of a percent. In addition, overall productivity gains continued as direct labor hours grew less than the volume. Our investment in ORION is bending the cost curve. And we remain on track to complete Phase 1 implementation later in 2016. We're continuing our multiyear investment strategy in hub automation in the U.S. operations. So far in 2016 we have announced new projects in California, Colorado, Illinois and Texas. These facilities are adding increased capacity and improved productivity. Now turning to the International segment which had another remarkable quarter with operating profit expanding more than 11%, on a two-year stacked basis operating profit is up more than 30%. Export daily volume increased almost 4% as improvements in all international regions offset slower U.S. exports. Europe led the way with significant gains in cross-border products and export growth to all regions of the world. In fact, the Europe to U.S. Lane grew at double-digit pace this quarter. Cycling out of the revenue management initiatives that we started in the last half of 2015 we have seen good non-U.S. domestic daily shipment growth which is up 4.5% while at the same time currency-neutral revenue per piece increased 1%. We saw higher base rates. However, they were offset by changes in product and trade lane mix. Currency-neutral revenue for the segment increased 1.5%. The lower fuel surcharge did impact revenue growth by about 170 basis points. The cost and productivity improvements held operating down during the quarter. As a result, operating margin expanded to 19.9%. The International segment had a record second quarter with its highest second quarter delivery volume, operating profit and one of the best margins ever. Now let's turn and look at Supply Chain & Freight. Total revenue increased more than 13% due to the addition of Coyote Logistics. The new truckload brokerage revenue offset tonnage shortfalls in international forwarding and the U.S. LTL business. Freight Forwarding revenue and operating profits declined as we wrapped last year's rate actions. Cargo capacity continues to outpace demand, contributing to the weak market conditions I mentioned earlier. Expansion of the buy-sell rate and cost-containment efforts led to the operating margin expansion. The unit remains focused on growing the more profitable middle market. In the Distribution unit we experienced strong revenue growth in the healthcare, aerospace and automotive sectors this quarter. In fact, this quarter healthcare became the top revenue sector within the contract logistics business. Distribution operating profit jumped more than 10% and the margin expanded. The UPS Freight business remains disciplined on pricing with revenue per hundredweight up 3%. The unit's execution of revenue quality initiatives is driving higher shipment yields. Total tonnage was lower by about 10% due in part to the weak LTL market conditions. Now to update you on our cash position, for the six months ended June 30, UPS generated $3.7 billion of free cash flow, a 13% increase over last year. And this was after spending $1 billion on CapEx. The Company paid just over $1.3 billion in dividends, an increase of almost 7%. In addition, we purchased over 13 million shares for more than $1.3 billion. Combined we're on schedule to meet our return to shareholders goals we set for the year. Looking at the rest of the year, our strong International performance and the return on investments we're making in our network give us confidence in our ability to achieve our full-year earnings guidance of $5.70 to $5.90 per share. As I discussed in February, we expect 2016 operating profit by quarter to follow the same pattern as it did in 2015. We still expect the fourth quarter operating profit growth to be above our annual guidance, somewhere between 9% and 11%. The additional workday between Thanksgiving and Christmas, the continued strength in e-commerce and our strategic investments position us well for another solid fourth quarter. Looking at the segments, in the U.S. Domestic we expect strong fourth quarter results. However, we will face tough comparisons in the third as a result of one less operating day and lower Worker's Compensation cost last year. Therefore, we anticipate third quarter operating profit to be relatively flat year over year. For the International segment we expect to continue into the second half of the year the progress we have made with operating profit growth in the 8% to 12% range. The Supply Chain & Freight segment is where we anticipate the current market trends in International Air Freight and the U.S. trucking markets to remain soft. In addition, lower fuel surcharges will weigh on reported revenue growth. Therefore, total annual revenue growth for the segment should be around 10%. Now let's look at taxes. The faster growth of our profits from the International segment means that we will have a slightly lower tax rate in 2016. In summary, UPS' financial performance this year clearly demonstrates the value of our diverse business. We're embracing the opportunities created by the evolution of the global e-commerce marketplace as it expands beyond the traditional retail base. We continue investing in strategic technologies, systems and expanded capacity and by our execution we're strengthening our leadership position. At the halfway point of the year our business is responding well to the changing macroenvironment and we're confident about the remainder of 2016. Thanks for your attention today. Now I will ask the operator to open the line. Operator?

[Operator Instructions]. Our first question will come from the line of Ken Hoexter, Merrill Lynch. Please go ahead.

I just want to follow-up. Richard, thanks for the overview on the International side there. And the strength you are talking about continuing it. Maybe some of the advances you've made, you talked about advancing two days on some of the service deliveries. What is accelerating that pace and how are you achieving that operating margin gains?

We've talked over the years about the network in Europe. David referenced it in his opening comments. I think the key to our success in Europe has been and will continue to be making sure the network and the service and product offerings are best-in-class. And so that means always maintaining the network, putting the speed in and making sure that the customers feel the benefit of that. And as you've seen over the years they have said that. Obviously the marketplace is changing in Europe. We know that as well, so it forces us to continue to relook and reevaluate everything we do. The margins, they've always been strong. I think I will flip it to Richard to talk a little bit about the margins, as well.

I do want to point out that the margin of 19.9% is very strong and it does include that multiyear hedge that we've talked about on the call the last few quarters. So I want to remind you that even adjusting for that we're still over a 17.5% margin which is the highest of any player in the industry. And along that route if you recall the currency we've been using a multiyear hedge strategy and what happened is in 2015 you saw a lot of volatility and the euro go to the dollar from $1.35 down to $1.11. So 2017 will be a transition year where we expect to have somewhere around $300 million impact for the change in the currency. We have moved to a different hedge strategy because of the volatility has increased so much on currency where we're using more of a rolling average so that year over year going forward will not see these dips if you see a lot of volatility in currency. But overall that 17.5% is really a result of all the efforts of Jim and his folks really putting together and making adjustments in the network and at the same time the quality of revenue that we're bringing in.

Our next question will come from the line of Chris Wetherbee of Citi. Please go ahead.

I wanted to ask about some of the comments around the third quarter Domestic side relative to the fourth quarter. So I'm guessing there's probably some level of investment that needs to happen in advance of TPP that you guys really start to shore up and get ready for that surge again. Just thinking about it on a European basis I guess I just want to make sure I understand the comment around the tougher comps from the third quarter Domestic side. Are there specific cost items that we might expect this year that we didn't have last year? I just want to make sure I understand that cadence of Domestic in 3Q and 4Q. Thank you.

I think the first thing to keep in mind here is that we continue to see margin expansion. Because of operating days, how holidays fall, things like that, it's not a linear movement of the expansion of the margin but over the year to year we have kind of guided that we continue to see improvement and expect to see improvement going forward, as well. When you look at the third quarter specifically, there is one less workday and that does have an impact, as well as last year we had some Worker's Comp. credits that won't repeat this coming year. So when you take all of that into account you have to look at and we did at the beginning of year understanding how the quarters would look and what we saw is that we need to make sure that you guys had some transparency to understand that workday shifts some of the profit around. And if you look at this quarter this quarter we had a good improvement and that improvement was really driven by the operational improvements. Even though we saw so much volatility in fuel this year in the second quarter, we actually saw a 25% increase in fuel from April to June. So we were chasing the revenue. But when you step back and look at what we expect for the fourth quarter we're going to have a strong fourth quarter. We're putting our plans in place and we look forward to completing 2016 very much like we told you we would at the beginning of the year.

Our next question will come from the line of David Vernon, Bernstein. Please go ahead.

Maybe just following up on Domestic, Richard, I guess the step below trend long term guidance growth in that Domestic segment obviously going down this quarter to 3% and then an expectation for flat in 3Q. Maybe as you think over the course of the next sort of one, two, three years and that rate of margin change how should we be expecting that to happen to get to that longer term 15%? And what do you think is going to be different about next year and the year after that will let you get back to that kind of 8% growth that you guys have put out for a long term target in Domestic?

So, first, if we step back if you recall when we guided this year and what we've seen through the year is we have seen some softness in the macro measures. Everything has kind of come down each quarter of this year and so we take that into account, obviously, with how we think about this year. The good part about this year is even with that softness we're putting initiatives and investments in that are bringing returns. And that's why we're able to leave our guidance right where we expected to be at the first part of the year. That being said, we're in a multiyear process of investments both in the ORION that David talked about in his talk as well as the hub automation and how that will continue. So all of those things are about putting together the multiyear process of where we're going to improve the margin that we laid out really at the end of 2014. We're putting those investments in. Those investments are paying the return we expected. And we just expect as we get more of that integrated into our network we will continue to see the benefits of that. So we feel very comfortable where we're at. We know we're on a roadmap for the next few years and we're following that roadmap.

All right. Thank you very much for the extra color on that. Thanks.

Okay, this is David and we're going to take an online question. This one is from Nate Brochmann. And as a large e-commerce shipper takes over more of its own delivery within the denser cities, does that change the density equation at all and the need to retrofit all of the regional sort facilities and how is that project progressing and what have you learned thus far in terms of benefits heading into another peak? So Nate got his bang for his buck in that question. And I will start and address the first part of it, then I'm going to turn it over to Myron to talk a little bit about the retrofit and peak. And it's not unusual for any of our large shippers to make decisions whether they are going to outsource or in-source different parts of their business. Our focus is our diverse customer base, just makes it so difficult for any one company to be able to match our density no matter their size. So with our integrated network that creates efficiencies, we're constantly increasing our value proposition. So we always believe that even our large customers would have more density with us than going in another direction. So we feel very confident in our strategy from that regard. Why don't you talk about the retrofit and peak preparation, Myron?

So Nate, the process itself is going well and we continue to realize 20% to 25% productivity improvements as we go along. Keep in mind this is a multiyear, multiphase implementation. And you've heard about some of the cities that we introduced earlier in Richard's comments. Our goal is to automate the top Tier 1 hubs and there is approximately 30 of them in the U.S. That process is as much as 60% of our volume. Three of those automated hubs are in our air operation and the remainder will be in the ground. All new hubs moving forward will be built using an automated design and the second phase of it will be to go to the Tier 2 hubs and automate them, as well. So we feel very good about the progress that's being made and we're on plan and a go-list to get it completed no later than 2020.

Our next question will come from the line of Tom Wadewitz, UBS. Please go ahead.

I wanted to ask a bit in specific about ORION. I know Richard you offered some comments on high-level multiyear productivity and so forth. But is 2017 or are you starting to see this year where there is the reduction in the rollout costs and really getting some of the cost savings coming in in a bigger way? Are you starting to see that or is that something which would be maybe a bigger support for Domestic margin performance in 2017? And then you've mentioned a Phase 2, I don't know if you want to comment on that, I know that's a couple of questions. Maybe just some perspective, a little more detail on ORION. Thank you.

Sure, Tom. What I will do is I will start off and then I will hand it off to Myron to talk specifically about the benefits he's seen. But when you think about the investment and when we've been on the road talking about ORION we have talked about that later this year we will complete, call it, the first phase of ORION. And then we're investing the dollars in, call it, Phases 2 and 3 and 4. But on top of that it's not just the investment in ORION, it is also the investment in hub automation and what that does to the network. So we're using those investment dollars and the additional expense that we were using to train up for ORION in other ways so that we get the end result. And that's kind of what we talked about at the end of 2014 and we continue to talk about each year. We're investing in our network and it's pulling through when you see the reduction in miles and things like that. But the next phase is additional capabilities that will save money and then additional features by having the hub mod and then there are some other things that we're working on, as well, that is just a little too early to go into. With that I'm going to send it to Myron to talk just a little bit about what he's seen operationally with the results of ORION.

Tom, let me start with we expect to be 100% fully deployed by the end of 2016 with ORION. And we will continue to see the benefits that we've alluded to earlier, more than eight miles per driver in savings. For example, this quarter we saw our delivery stops growing more than 3% on 2.5% average daily volume gains. However, we were able to reduce our miles driven by 3/10 of a percent which helped keep our costs per piece down by 2/10 of a percent. So as the volume continues to grow our wages are growing at a lesser pace than the volume. So we're continuing to see benefits and that's Phase 1. Phase 2 will actually begin in the back half of this year, well into 2017 and we hope to have the Phase 2 completed by 2017 when we hope to see additional benefits from ORION. And, again, that's just one of many technology projects that we will continue to roll out that should help us continue to bend the cost curve, so we're real pleased with what we're seeing.

Our next question will come from the line of Scott Group, Wolfe Research. Please go ahead.

Actually I just want to follow-up on the ORION question. So I understand the savings this year but there's probably some implementation cost. Can you quantify what the implementation costs are this year and if ORION has been a net positive or tailwind to earnings this year? And do you think that next year, how do you think about next year given the savings from Phase 1 but maybe the cost from Phase 2, any color there would be helpful.

And we're seeing the savings and if you just step back for a moment and look, year over year we continue to see the margin expansion. The margin expansion is a direct result of all the things Myron just talked about. We will continue to see those improvements. And it is a net positive but we also are spending some of the savings in order to invest in the next phase and the next capability. Those are all important pieces. And that's why my comment a few minutes ago about the margin will improve year over year, it won't always be linear by quarter. And so that's an important part because we're investing for new capabilities and to continue to bend the cost curve because of the investments we're making and the plans we have for the next few years.

This is David. I just want to stress that ORION is one of these things that it's the gift that keeps on giving. So what we have seen with ORION is we're seeing benefits that are greater than what we originally believed and that continues to reinforce itself every year. We have a lot more we're going to accomplish through ORION with the later versions and taking it to various countries. So we're very positive about ORION of the returns that we're getting and investments that we're making are certainly worth it. All right, next question.

Our next question will come from the line of Brandon Oglenski, Barclays Capital. Please go ahead.

As we look out, can you talk about where the pricing is falling in the U.S. Domestic market and why with this tremendous growth in B2C that we're not seeing a little bit more traction on yields which I think could also talk or this discussion on Domestic margins? Because obviously we've talked a lot about cost, but what are we doing on the revenue side and is there ability to take more price?

So for the quarter we achieved our 2% to 3% range in our base pricing and the core pricing actually remains firm. We actually saw a bit of an acceleration from the first quarter. Keep in mind that some of the other phenomena we're seeing out there is the offset of about 100 basis points due to lower fuel surcharges and we're continuing to see changes in the customers and product mix and specifically the package characteristics as we bring more lightweight into the business. The other thing I would say is that we saw even with some of those package characteristics and customer product mix challenges we did see margin improvement overall in the U.S. Domestic business. So we think the base rate improvements remains steady and they will continue to remain that way and core pricing right now is firm. Thanks for the question.

Our next question will come from the line of Scott Schneeberger, Oppenheimer. Please go ahead.

Just curious, here at the midpoint of the year, obviously reiterating the guidance range I'm curious looking out over the second half what do you view as the swing factors that would put you toward the high end or the low end of the range? Thanks.

This is Richard. I think when you start and you look at where we're at year to date first of all on earnings per share we're at about 8.5% growth in earnings per share on a target of 5% to 9%. So we're pleased with where we're for the first half of the year. We're actually right in line with where we expect it to be. But when we look at guidance there is really two factors we're looking at. The first is the external and what's happening on the external measures. Because our volume does have some correlation, especially when you get to B2B, to what's happening with both domestic GDP, things like industrial production and things like that. And they all have softened somewhat from first quarter to second quarter. The other side of it, of course, is what's happening internally, the things Myron has talked about in his operation and those improvements that we're seeing. So we put all that together and we say do we have economic assumptions are realistic and how are we benefiting from the initiatives that we have implemented. So we think we balance all that. And that is what we're seeing in 2016, we're seeing a nice balance where we're making up for some softness externally with what we're doing internally. And that's allowed us to grow our earnings per share for six quarters in a row and we will continue to work those plans for guidance going forward.

So just to add to Richard's answer, it's our investments and strategies that have allowed us to offset some of this economic shifts that we've seen in the last year and a half. And we feel very comfortable about our strategic initiatives. We're extremely focused on them and it's allowing us to overcome some of those headwinds. We'll take the next question. We will do an online question. This is from Helane Becker. And it's are you seeing any signs of weakness in the UK related to anything including Brexit? Jim?

So David, thanks for that one and Helane, as well. I think I get this question every day quite frankly over the last couple of months. But to give you a little bit of backdrop on it I go back and just remind you of something here. Back in 2008 when we bought LYNX it was our choice in the UK to strengthen that market, to feed the network we talk about a lot and obviously also feed that country and the consumers. It took us a couple of years to get it done. We were done in 2010 and although we don't talk much about country-level performance I think this question will get us pretty close to it. I could just tell you that from the years 2010 through 2015 that UK operation for us is best-in-class in many ways that we measure our business. So that acquisition and integration that took us about three years has paid dividends for many, many, many years now. Brexit we don't see changing that for that market, quite frankly. Our job is to continue that priority, number one, to take care of that economy and the consumers, our employees and the shareholders and link it into that European network. So that is priority one. The issue obviously becomes what the free-trade agreement is set up to be. Don't forget a couple of things from my perspective, one is there are many, there's a number of free-trade agreements in that union, as well. You've got the Norway model, you have got the Swiss model and you've got the EU model. So how it unfolds we will see but there are various models that could unfold. We've analyzed scenarios as far left as the WTO setup all the way back to something close to what they have today. In the end I think our priority is to advise and advocate and support consumers at the free-trade agreements are finalized in the coming years and then continue to whatever happened support that market in the network. I think we could easily say there will be somewhat more complexity but I think our job is to simplify the complex in a network for consumers and continue the great service. And that's what we plan to do as that unfolds.

Our next question will come from the line of Ben Hartford, Baird. Please go ahead.

Just wondering what your point of view is today on the acquisition environment as you start to lap the Coyote acquisition. Obviously taking into account what you've said historically about acquisition criteria, are there specific segments or verticals that you're more interested in? And I guess I'm leading you into UPS Freight in particular given some of the softness that we see in that LTL market. Do you think that business is a sufficient scale today or are there potential acquisition opportunities in that segment specifically? Thanks.

And I will answer the first part and then you talked a little bit about Coyote so I will ask Alan to briefly hit that and then the LTL environment and Myron will take that. From an acquisition standpoint we have an active process and we're really looking in what I will call just three general buckets that we're always taking a look at. First is new opportunities, new opportunities that would help us to add more value to our customers. And then anytime that we can expand capability within our network, so if it's something that we don't feel as strong about as we'd like to then that would be that second criteria. And then third, the trade lanes are shifting throughout the world and so geographic presence is always important. Over the last few years the emerging markets has been a place that we've put a lot of attention on. So adjacent markets which is what we did with the Coyote acquisition, is key on our mind. But at the end of the day whether it's organic growth or its inorganic growth our focus is on growing this business and at the same time having profitable returns. So, from a Coyote standpoint, Alan?

Just a quick update on Coyote, certainly their customers and our customers and new customers are responding very well to the new Coyote and UPS combined value prop. For the quarter we continue to see strong year-over-year growth in loads and our gross margin has also expanded for the quarter. As I think we all know the truckload market remained soft but certainly this asset-light model has provided some great flexibility in the up-and-down cycles. And then just lastly, I will say that as far as the synergies related to the acquisition we're seeing some good work happening there in procurement, asset utilization, cross-selling and then organizational synergies that are benefiting both Coyote and also our U.S. Domestic and Supply Chain & Freight segments and we're on track. And I guess I will turn it over to Myron to talk a little bit about the LTL.

Ben, as you are well aware the LTL market for the last 16 consecutive months has experienced softness. And our customer base is telling us that they have high inventory levels. In addition to that with high inventory levels the opportunity for restocking is soft as well. All those things considered, we believe that we have the appropriate scale at UPS Freight. We will have and continue to monitor the market and make the appropriate adjustments and make the right business decisions moving forward in terms of whether or not to expand our scale. Thank you.

Our next question will come from the line of Allison Landry, Credit Suisse. Please go ahead.

Could you speak a little more to your earlier comments about U.S. consumer interest in alternative delivery methods? I wanted to understand how well penetrated it is even in the urban areas and specifically how much you think it would need to increase from here in order to move the needle on density. Thank you.

This is Alan. There are a number of things, first of all, that we're doing to improve density. And it's really part of the whole e-commerce value proposition and ecosystem that we've put in place. The UPS Access Points, UPS My Choice, the Synchronized Delivery Solutions and certainly SurePost Redirect which is now at about the 30% of those packages are being redirected back into the Ground network. On Access Points right now we will probably finish the year at about 27,000 Access Points globally and we continue to expand there. So when you think about bending the cost curve, I guess the 1/10 contributes to about $200 million in bottom-line cost if we when we increase the density by 1/10. And then I guess the last thing I will say is we continue to be bullish about Access Points and we're expanding the current model. And as you probably saw we invested in our locker expansion after some tests we ran last year and we're laying in 300 lockers into the United States. And your point about urban America and urban anywhere in the world, lots of consumers out there have challenges receiving packages at home in urban areas and the Access Points and the lockers is a great solution for them and it also benefits UPS.

Our next question will come from the line of David Ross, Stifel. Please go ahead.

You talked a lot about the U.S. and also about Europe. Can you talk a little bit more about Asia and the rest of the world and what you're seeing going on there from a trade perspective?

Certainly the Asia market it also continues to change. It's the biggest market out there from a China perspective, we currently quite frankly are seeing very, very nice and actually momentum picking up in our middle-market growth based upon the solutions we're providing to the Chinese consumer as their model shifts at the same time. Certainly the network that we have in place has served us well for many years. This quarter overall I think the block hours were down about 0.5%. You saw in the early opening comments of the call this morning and the releases that the export volume continues to grow at UPS. That includes our Asia-Pacific region as well as our Latin America region at the same time. So we continue on. One of our big focuses out there is our intra-Asia network. It's a great opportunity for us. We laid that in in 2010. We think it has lots more upside. We will continue to do that and really align that, as well, to the emerging markets strategy that David just referenced a minute ago that we continue to invest in and I'm confident we will be referencing on the calls to come. So I appreciate the question.

Our next question will come from the line of Jack Atkins, Stephens. Please go ahead.

So I was wondering if you could expand for a moment on your comments around B2B trends. You referenced in the press release that B2C group grew five times that of B2B but could you maybe comment exactly what the growth rate was for B2B in the quarter, what portion of your U.S. Domestic Package business B2B makes up now and what customer verticals are you seeing particular strength and weakness on the B2B side? Thank you.

On the commercial B2B side we did see a slight increase. The good news is we've seen a slight increase the last few quarters there. It's mainly being driven actually by the retail sector and returns but we're seeing some growth in some other areas. Wholesale, healthcare and professional services are some of the other areas and then also consumer and home goods. As you know industrial production, as David indicated, was pretty soft and B2B is really being driven now by retail and some of those other sectors that I have spoken about. I think our investments really in some of these sectors including healthcare are helping us gain share in that particular area. So kind of outrun the economic challenges. Then, lastly, our B2C business is about 45% of our business today.

Okay, the next question will come from online. And the question and this was from the buy side, is do you see any long term opportunities to expand streamlined delivery routes with the ride sharing programs. So Alan?

I think again everyone knows on a call that we made a strategic enterprise fund investment a few quarters back in a company named Deliv which is a retail-to-consumer same-day B2C delivery company that actually uses the excess capacity out there in the market with people that have vehicles that want to participate in that program, similar to what's happening on the ride sharing part of the economy there. They are a leader in this new space and we're excited to learn more from that. The other thing I would say is that Coyote is really a technology platform that's doing the same thing. It's matching up excess capacity in the marketplace from thousands upon thousands of carriers that have backhaul excess capacity and we're providing a similar service with Coyote. So we're excited about that in the heavier truckload type business as well as for prospects potentially on the pickup and delivery side.

Our next question will come from the line of Kelly Dougherty, Macquarie. Please go ahead.

I just wanted to think about the U.S. domestic volume growth. Obviously it seems like prime are driving demand for more premium products, but would love to get some insight on how other retails are pursuing e-commerce, if they are offering free shipping on some or all spending levels. Do you expect that will show up more in your Deferred offerings? That certainly didn't seem to be the case this quarter. I'm just trying to get a sense of what you think the volume and maybe the revenue mix will be as e-commerce grows.

A couple of points on your question. First the holiday offerings here in July were pretty widespread amongst a whole number of retailers. And I think we will see more and more of that, certainly in this summer time frame but also in other parts of the year, to drive growth in the e-commerce sector for these retailers which is critically important for them. Certainly the e-commerce growth drives significant growth in our Ground business and our SurePost business and then on the overnight and Deferred side mainly in the Saver and the Second Day Air business. But the key here is that we've got this great portfolio, so when a customer absolutely has to have it they are usually willing to pay for that and we have the full gamut of services to get those goods to them when they want it and we have the more economical alternatives along with some of the value ads like UPS Access Point, UPS My Choice and omnichannel that really drive those retailers and those consumers to UPS. Thanks for the question.

Our next question will come from the line of Rob Salmon, Deutsche Bank. Please go ahead.

I guess this is a piggybacking on Kelly's question. Can you walk us through some of the factors that were impacting U.S. Domestic Package Deferred volume and yield trends which have diverged a little bit from the rest of the U.S. Domestic portfolio with volumes down a little bit but yields up year on year? And if you could specifically address if we're seeing the impact of any large customers changing their delivery methodologies that are impacting Deferred trends?

First, our premium Next Day Air products grew at nearly 6% and the Ground was up more than 2%. So certainly our customers are responding to the continual expansion of our Next Day Air and our Next Day Early service to more postal codes. In fact, all of our Next Day Air services experienced growth. On the other hand, Saver, Ground and SurePost and certainly Deferred are focused more on the e-commerce and retail customers. And so on the Deferred side you really need to look at it on a two-year stacked basis we almost grew 15% following strong double-digit growth in 2015. Thanks for the question.

And the last question in queue at this time will come from the line of Ravi Shanker of Morgan Stanley. Please go ahead.

I'm going to try and squeeze in two follow-ups if I can. The first one is on 2017, so between the FX hedges rolling off and the Ground growth costs do you think EBIT can be higher in 2017 versus 2016? And the second question is on Amazon do you feel like your delivery share with them has held constant or is it up or down in the last 12 months?

This is Richard and I will start with the first question on the guidance for 2017. I think the important thing is as we had said that as we move forward we have continued initiatives that will continue to improve the operating margin. That being said obviously different segments things will happen and growth rates might have to be adjusted. It's a little early to talk about exactly what's going to happen. And that's really because there's a lot of things going on in volatility of currency, too. So the year here we're in end of July we have time still and if you tell me where in November the dollar/euro is or the sterling/dollar that will be a lot about the story of how much variation, that's why we say the plus or minus numbers. An important thing is that we have a plan, it will improve by segment. Our first priority is to reinvest in this business because of the strength of the Company. We continue to deliver the highest ROIC and the highest margins in the business and our plan is to continue to do that. We will continue to do that while at the same time having dividends of over 3% or around 3%. So as we get closer to the 2017 I will guide you appropriately but we're in the middle of putting all those plans together. And your second question around the percentage of our share of any one customer is something that we obviously continue to win customers based on our strategy to win customers. We don't comment on any one customer but you can see our volume growth for the U.S. was up about 2.5%. You adjust for fuel we saw revenue growth about 3.4%, so it was a strong quarter. We laid out for you how we think the fourth quarter is going to look and that's another strong quarter. And we're going to end up delivering on the guidance numbers that we gave you at the beginning of the year and I think that's the most important thing.

Okay, we have one last question and this is an online question from Tyler Brown. And it's about return logistics, reverse logistics and kind of two parts. Could you talk about what kind of growth rates you're seeing in return volumes? And talk a little bit about our capabilities on this front and do we need to do something to add to our capabilities. So Alan, if you would take that.

As I said earlier returns growth has been strong, it's in the mid-teens. And as you all know returns is very good business for us because customers tend to drop those packages off, so we have high density pickups at those drop-off locations and then high density deliveries back to the retailers. UPS has some of the most technology-advanced transportation return services with things like Returns on the Web, RS1, RS3 print label return. So when it comes to label generation, shipping, tracking, visibility, enabling speedy refunds for the consumers for customer experience we've got some of the best returns solutions in the business. Combine that with the UPS Stores, the UPS Access Points, the lockers, the other alliance partners, UPS drop boxes, there are millions of packages being returned or being delivered to those drop-off locations casting that wide net. And again I just tie that back to the whole e-commerce ecosystem that we have that really benefits retailers and consumers and makes UPS the e-commerce transportation Company of choice. Thanks to the question.

I would now like to turn the program back over to Mr. Childress. Please go ahead, sir.

Thanks, Stephen. I want to thank everyone for submitting an online question today and for your interest in UPS. If you submitted a question that did not get answered please reach out to the investor relations team or myself after the call. Now I will turn the call to David for his closing comments. David?

So UPS performed well in the second quarter. We expanded our margins in our International and in our Domestic small package business. And very importantly we're investing today to ensure our future performance. So we're at the halfway point of the year. So to UPSers, this is half-time. And we have had a good first half, we were on plan but it's very important and we're all committed to our plans and confident in our 2016 guidance. So on behalf of the 435,000 UPSers around the world, thank you for your time today and for all of you thank you for investing in UPS. Thank you very much.

That does conclude our call. Have a wonderful day. You may now disconnect.