UPS 4Q16 Earnings Call Notes

United Parcel Service (UPS) Q4 2016 Results

David P. Abney

Global economic growth remains generally positive

“Now looking at 2017, the global economic outlook remains generally positive, and forecasts have risen modestly over the last few months. In the U.S., GDP growth for 2017 is forecast to be slightly higher than last year. The expansion of e-commerce is expected to continue, with another year of double-digit growth. On the commercial side of the economy, industrial production outlook has gone from negative to slightly positive. That favorable move is a good sign for the manufacturing sector. However, U.S. exports are expected to face continued headwinds from a strong U.S. dollar. Global growth estimates for 2017 have been largely unchanged. The outlook for both Europe and China has rebounded slightly, although economists are still expecting slower year-over-year growth.”

A new political era has begun

“In the U.S., a new political era has begun, and we look forward to working with the Trump administration and Congress. We expect the economy will be center stage, along with efforts to strengthen U.S. competitiveness. There are opportunities for progress on a number of critical issues that impact economic growth.”

Capex will be higher to grow the business faster

“That all being said, I think how you should think about the CapEx is for the next several years, we’ll be a little higher than we have been, say, the last six or seven years. But it’s all about continuing to create value, continuing to grow this company a little bit faster than historical norms. And that’s why we also guided on the revenue the way we did. So we’ll again talk a little bit more about our CapEx and where we’re headed at the Investor Conference, but I think that gives you a pretty good picture of where we’re headed.”

Trade agreements definitely lead to more volume

“And I can tell you that in every country where the U.S. in the last 10 years has reached a trade agreement, we have seen an actual real increase of packages entering our network going out to these countries, U.S. exports, of a 20% increase. And 20% increase, whether you get the benefit from many bilateral agreements or one multilateral agreement, you can see how that adds up.”

President Trump is not against trade agreements

“And you know in spite of the headlines, and there’s been quite a few, President Trump is really not against trade agreements. Now, he’s made it very clear he wants trade agreements to be fair from a U.S. perspective. And he also has made it clear that versus multilateral agreements, that he’s much more focused on bilateral agreements.”

We are encouraged that the US will focus on trade agreements

“We did get a separate question, and it was concerning TPP and how disappointed are we that the U.S. has withdrawn from TPP negotiations? And obviously, UPS is a big supporter of TPP, and we thought it was a modernized trade agreement for the 21st century. And so, yes, we would like to see multilateral agreements like that get approved. But I can tell you that if you follow the President’s strategy, and you do a series of fairly quick bilateral agreements with the major countries that are involved in TPP or that may eventually have been included in TPP, we think you can still get there, maybe not as quickly as you would in this manner, but we are encouraged that the U.S. is going to focus on trade agreements.”

UPS 3Q16 Earnings Call Notes

United Parcel Service (UPS) Q3 2016 Results
David P. Abney

Global growth has continued to be modest

“Turning now to the economy, where global growth has continued to be modest. In the U.S., consumer fundamentals remain healthy and account for most of the economic expansion while the outlook for industrial production remains weak. Overall, global GDP forecasts are slightly down. For the balance of 2016, we continue to see mixed economic signals across some industrial markets. ”

Kathleen M. Gutmann

Total holiday sales are expected to increase by 3.6%

“In the overall U.S. market, the National Retail Federation expects total holiday retail sales to increase 3.6%. They’re also estimating non-store retail sales growth between 7% and 10%.”

Alan Gershenhorn

Our ecommerce value prop is second to none

“as we all know, our customers, and specifically our ecommerce customers, have a number of different channels that they can access in order to market and transport their goods. And there’s Fulfillment by Amazon, there are marketplaces out there, and obviously direct from their website. We really support our customers in all three of those areas. And I think, like David said, our ecommerce value proposition is really second to none, and it’s convincing both the bricks and clicks type of etailers in the ecommerce pure plays to give more and more of their business to UPS. So we’re excited about the overall prospects of ecommerce in the marketplace, and we’re making the necessary adjustments to essentially support all the various channels that our customers use to bring their goods to market.”

Still seeing softness in industrial out there

“Yeah, so as we said, our B2B is up about 2%. It’s best growth we’ve had there in five quarters. As you know, the B2C is very strong at double-digit. Specific to your question, on the returns, returns growth in ecommerce is also very strong. It’s growing in the mid-teens. Again, you got to keep in mind that returns is a small part of our B2B market, but it’s a large part of the growth that we’re seeing today. As concerns the remainder of the B2B market, we’re still seeing the softness in industrial production out there. ”

One in six e-com packages are returned and those are highly profitable packages for us

” when you look at the ecommerce market, it could be one in five or one out of every six packages that are shipped to a consumer get returned. So the growth in that particular market tracks very closely to the growth in ecommerce on that one to five, one to six ratio. Those packages are highly profitable. First of all, many of those packages get dropped off and don’t have to be picked up because the consumer finds it more convenient to drop them off at UPS stores or UPS Access Points or hand them to a UPS driver. So there’s very little cost when it comes to pick-up. And then obviously, the deliveries are going back to businesses, and we could be delivering tens or hundreds of packages back to these businesses. So it’s a highly profitable B2B delivery with very little pick-up cost.”

Myron A. Gray

Answer on automation question

“When it comes to the use of drones as well as vehicles that allow us to have autonomous trucks on the road, we have experimented with drones with a number of vendors. You should’ve seen an announcement where we launched our first try in the Northeast earlier this year. It was very successful, as well as our use in delivering medications in Africa. So we’ll continue to experiment until we get the ability to use it. As it pertains to vehicles, we’re continuing to work with a number of vendors to explore what works best for us. We have what we term as a rolling laboratory. We have over 6,500 vehicles in the U.S. right now that are considered CNG, LNG, and the sort. Of course, all of this will require the approval from the National Highway and Traffic Association.”

FedEx 1Q17 Earnings Call Notes

FedEx’s (FDX) CEO Frederick Smith on Q1 2017 Results

TNT’s express freight capabilities were a key attraction

“The attraction of TNT was many-fold but I have to tell you that one of the key attractions was their unduplicated express rate network in Europe. And of course Europe is a high density of population and their ability to move these pallets very fast throughout Western Europe was a tremendous advantage.”

Thoughts on effects of autonomous vehicles

” In terms of UAVs in particular, we have five separate, I think it would be not fair to call all of them projects but work streams or projects in both aviation and automated vehicles. The difference with us and a lot of other people we’ll just prefer to keep working those issues and tell you about them when they make a meaningful difference in the company. I will say this much. I think our philosophy and we know a lot about these technologies. After all, our auto pilots in our 777 airplanes are among the most sophisticated robots in the world. They can take off, land the plane and taxi to the gate and turn themselves off if that’s what we chose to do so. But it’s very difficult in the foreseeable future to substitute for the well trained pilot or driver or person. And we look at the use of automation more as an opportunity to improve the productivity of those types of experts within our system to make their job more comfortable and easy and above all to increase safety. So those five work streams are underway. You’ll hear a lot about them I’m confident in the next few years. But important in our philosophy maybe slightly different than a lot of other people that think that right over the horizon, everything is going to be an automated vehicle or some sort of UAV. We think that is unlikely and that this technology like most technologies particularly aviation technology will evolve incrementally over time with a great emphasis on safety first.”

T. Michael Glenn

Moderate growth in the global economy

On the economic front, we see moderate growth in the global economy. Our U.S. GDP growth forecast is 1.6% for calendar ’16, 20 basis points lower than our last forecast in the last quarter and 2.3% for calendar ’17 led by gains in consumer spending. Our global GDP growth forecast is 2.2% for calendar ’16, 10 basis points below last quarter and 2.6% for calendar ’17. We expect industrial production to decline 0.7% in calendar ’16, 10 basis points lower than last quarter and increase 2.2% next year.

Raising rates by 3.9%

” we will be raising rates effective January 2, 2017. FedEx Express rates will increase by an average of 3.9%. Rates for FedEx Ground and FedEx Freight will increase by an average of 4.9%. We will also change the dimensional weight divisor for FedEx Express and FedEx Ground from 166 to 139.”

Shift in peak delivery to Mondays

“Beyond just the dramatic rise in volume, there are several other shifting industry dynamics. Holiday promotions and buying patterns have increasingly shifted which has resulted in heavy demand for package delivery on Mondays during the peak. The intensity for demand on Monday has accelerated in recent years, as more and more retail locations have started serving as fulfillment centers for e-commerce orders. We expect each of the four Mondays during the upcoming peak period to be among the busiest in our company’s history.”

Increased demand for larger and heavier packages

“We have also experienced increased demand for transportation of larger and heavier packages. As e-commerce grows, there is demand for online ordering and delivery of everything from large screen TVs to mattresses and trampolines. We’ve engineered our network’s sortation and delivery capacity for these larger packages, including entire temporary facilities dedicated to the sortation of oversized packages, which will be critically important this upcoming peak season.”

Adding 50,000 seasonal workers

“Across the FedEx portfolio, we expect to once again add more than 50,000 seasonal positions to help the holidays arrive. Based upon growth expectations and network expansion, many of these seasonal team members will have an opportunity for full-time work at FedEx after the holidays.”

Alan Graf

Earning projected at $12.35 in FY 17

“According to our corporate outlook based on the moderate economic forecast that Mike discussed and the momentum we have, we project adjusted earnings to be $11.85 to $12.35 per diluted share for FY ’17, which excludes TNT integration, outlook restructuring costs, TNT intangible asset amortization and year-end mark-to-market pension accounting adjustments.”

David J. Bronczek

TNT’s crown jewel was the best ground network in Europe

Yes, this is Dave again. The jewel in the crown always at TNT was the very best ground road network in all of Europe. It’s great service. They have great people, great cost structure. So with that now in our portfolio around the world, customers have always asked us for a solution for e-commerce to move across the world and mainly into Europe. Now we’ll have that opportunity to do that very successfully. Thank you.

UPS 2Q16 Earnings Call Notes

United Parcel Service’s (UPS) CEO David Abney on Q2 2016 Results

B2C strong B2B not as much

“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. ”

Mindful of political commentary on trade

“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.”

Consumers want alternative delivery locations

“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. ”

Brexit adds some complexity but our job is to simplify the complex

” 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.”

Alan Gershenhorn

Seeing a slight increase in B2B

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.

FedEx FY 3Q16 Earnings Call Notes

FedEx’s (FDX) CEO Fred Smith on Q3 2016 Results

We do things that increase earnings cash flows and returns

“We buy airplanes because they increase earnings, cash flows and returns over a period of time. We add automated ground facilities because they do the same thing. So there is no motivation inside FedEx to do anything other than to achieve those results at the corporate level and sometimes we decide to be aggressive in one segment because we are achieving our corporate goals”

TPP is going to be harder to pass with the leading candidates against it

“I don’t think there is any question about the fact that TPP is going to be harder to pass given that the leading republican and democratic candidates were presenting United States are against it. Free trade and opening markets has been American policy since 1934 when Roosevelt and Hull passed the trade agreement act that overturned the absolutely disastrous Smoot-Hawley Tariffs, those were two republicans that in 1930 put in a lot of tariffs to protect America. So trade contracted by 66% and the Roosevelt Hull action in 1934 turned it around but there is no question that those tariffs created with a big part of the cause of the depression.”

Trade makes everyones standard of living better

the thought that trade is not been a great thing for the world and America is absolutely belied by facts. Now have they been in merchant list, of course they have Japan and China in particular. But to lump in all trade with the trade practices of a couple of trading partners is like putting leaches on you and bleeding the way they used to do during the old days and think you’re going to get better. I mean it’s a self inflicted problem and in the case of Mexico, the NAFTA agreement has added hundreds of billions of dollars which is traded with Mexico, yes we do have a modest trade deficit with Mexico but the benefits of trade are always dispersed, lower iPhones, lower TVs, lower priced T shirts, lower automobile cost, on and on down the line which makes everyone standard of living better whereas the pain is always localized”

The key to the delivery business is route density and revenue per delivery

“the essential thing in the delivery business is route density and revenue per delivery stock. And that is why he said virtually the same thing that we have said that in all likelihood the primary delivers of e-commerce shipments for the foreseeable future will be UPS, The U.S. Postal Service and FedEx because input costs even though you might have a local operator over the thousands, it might talk about are trumped by the delivery density and the revenue per stop characteristics of the big carriers.”

It’s Metcalfe’s law

“And remember, we are not delivering from 50 fulfillment centers or 100 stores or 60 stores, we have the capability to pickup, transport and deliver an item from 95% of the human beings on the planet much less every business on the world within one to two business days, door to door customs cleared. So that’s known as Metcalfe’s law, everybody understands this in the telecommunication business, it’s the number of nodes on the network squared. If you run the hub-and-spoke system, it’s in times and minus one. So whether you’re a big box retailer or you’re an e-tailer that puts their fulfillment centers which is a surrogate for the store delivers the items individually or how you come into the store, the economics are the same. It’s network density and revenue per delivery stop that are the determinant of who is going to deliver these packages in the years to come.”

Doubling up packages leads to greater revenue per delivery stop

“The postal service delivers to a 140, 154 million addresses every day and so like way the e-commerce packages are perfect for the postal service because they can put them in with a mail and deliver on two residents”

This misunderstanding is leading people to misunderstand the future evolution of the markets

“it’s that misunderstanding that the drivers are network density and revenue per delivery stop that have led to a lot of the misunderstanding about the future evolution of the markets.”

Mike Glenn

2015 peak season was historic

“The 2015 peak season was historic by many measures and it was driven by the continued growth of e-commerce. Demand for residential deliveries across the industry surpassed expectations as consumers increased online shopping in record numbers, not only with their higher volumes, but the types of goods purchased online increased.”

E-commerce is now enabled as a full scale retail revolution

“It is very clear that e-commerce is now enabled the full scale of retail revolution. There are several important trends worth noting. First, referring to a specific peak day is quickly becoming a thing of the past. As evidenced this year, there were multiple days where volumes exceeded 25 million packages as consumer buying habits are changing. We view this as a positive as Mother Nature can sometimes play habit with last minute e-commerce shoppers. Smoothing sales throughout peak season is a trend that will benefit retailers and transportation companies alike. We believe online shoppers will have increasing incentives to order earlier in the holiday season”

More and more retailers shipping from store

“Second, more and more retailers are fulfilling e-commerce orders from individual stores or what we call store to home delivery. FedEx is well positioned to service this growing market in the years ahead with our broad portfolio of services including metro delivery and same day services.”

Seeing more non-traditional items purchased online

“Third, we are seeing a significant increase in non-traditional items now being purchased online, mattresses to new swing sets and big screen TVs just to name a few. ”

It would be a daunting task to try to replicate existing delivery networks

“Large retailers have long had their own transportation capabilities, primarily to enable movement and positioning of inventory across their store and fulfillment locations. While recent stories and reports of a new entity competing with the three major carriers in the United States grabs headlines, the reality is it will be a daunting task requiring tens of billions of dollars in capital and years to build sufficient scale and density to replicate existing networks like FedEx.”

Amazon’s strategy is to build distribution closer to the end customer

“I think Amazon’s strategy is clear, the more distribution facilities they put up the more they would like to be close to the end consumer which by definition makes more deliveries on a local basis. Having said that, all of the conversation about new entrants into the local delivery market, I mean there are hundreds and thousands of local delivery companies in every market in the country delivering parcels.”

Dave Bronczek

China not causing any problems because for the most part multinational customers

Yes thanks Fred, and thanks for the question David. Obviously, China is a very important to us, but they are not more important than all the rest of the world. I mean they are a part of the rest of the world for us. There’s a lot of multinational companies that are in China that we do business with in China and exporting out of China. So, I would say that we’re always watching how the economy is in China, but it is not causing us any problem or any concern right now because our customers there are for the most part multinational customers.

Alan Graf

Fuel prices ticking up could work against us

“You never know, fuel prices are ticking up a little bit and so that could possibly work against us on a year-over-year basis, so we’re watching that very carefully.”

UPS 4Q15 Earnings Call Notes

United Parcel Service’s (UPS) CEO David Abney on Q4 2015 Results

We feel like we delivered the peak

“A year ago, we laid out a plan for successful peak in 2015. This year, through the extraordinary efforts of UPS’ around the globe, we delivered the high quality service that customers deserve and the financial discipline that shareowners expect.”

Collaboration with customers was key

“I want to spend some time discussing how we capitalized on our peak season opportunity by managing the challenges it creates. I can sum it up in three words: collaboration, control, commitment. Expanded collaboration with customers combined with key investments were central to our success.”

Global economic conditions remain uncertain

“Looking at the global economy, conditions remain uncertain with the first half of 2016 continuing the mixed economic trends from the last half of 2015. Across Europe and Asia, GDP growth was modest in 2015. However, slight improvements are expected this year. At the same time, we continue to see challenges in emerging markets in 2016.”

Richard Peretz

Expecting 6-8% revenue growth in 2016

“We expect 2016 to be another good year at UPS. Revenue should increase between 6% and 8%. Looking more closely at the segments, in the U.S., the domestic segment average daily volume should increase about 2% to 4%, driving revenue up 4% to 6%. ”

Alan Gershenhorn

Delivered 612m packages over the peak period

“Hey, Tom, this is Alan. Yes, certainly, it was a solid peak season. We delivered more than 612 million packages over the peak period. It’s the most in the company history, up about 7%.”

Inventory to sales ratio has come down slightly but is still elevated

“as you probably all know, the U.S. inventory sales ratio has come down slightly but it still remains elevated, certainly indicating we got continued overhang of inventories in the economy. And customers are obviously attempting to work them down.”

We can manage through weak IP better than in the past because we are up to 60% residential deliveries

“I think the story with industrial production has been happening now for quite a while. Certainly, it’s trending more negative than it has been. Our business today, as Rich said, even at peak season, we were up to 60% residential, so about half of our business is on the retail e-commerce side now. And I think we are going to be able to manage through that real well. I think the value proposition that we have in place for both retail and the other industry segments, including industrial manufacturing, high-tech and healthcare bode well.”

Jim Barber

Load factors do appear to be turning up recently

“If you look at about the last year, what we have seen is a continued gap of demand and capacity, but I would say in the last two months of data, what we started to see is some load factors turning up. So as that moves forward, now we also have Chinese New Year coming on us right know, so that will give us our second read. But from that perspective, I think as some of the guys mentioned earlier, the buy/sell spreads, which is reflective of capacity and demand have been at its widest point through 2015. But early indications, there is a little bit of turn towards the end of 2015.”