Good morning. My name is Steven and I will be your conference facilitator for today. At this time, I would like to welcome everyone to the UPS Investor Relations Fourth Quarter 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. And after the speakers' 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 fourth quarter 2018 earnings call. Joining me today are David Abney, our CEO; Richard Peretz, our CFO; along with Chief Operating Officer, Jim Barber; Kate Gutmann, our Chief Sales and Solutions Officer; 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 results of operations of our company. These statements are subject to risk and uncertainties, which are described in detail in our 2017 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 non-cash, after-tax, mark-to-market pension charge of $1.2 billion. The charge includes the effects from lower-than-anticipated asset returns, partially offset by higher discount rates. It also includes a partial liability from the performance of The Central States Pension Fund. In the prior-year period, UPS recorded a non-cash, after-tax, mark to market pension charge of $607 million. The charge resulted from lower discount rates, partially offset by higher asset returns. Also, in 2017, we recorded a one-time income tax benefit of $258 million due to the adoption of new tax legislation. More details on the mark-to-market accounting will be available in a presentation on the investor relations website later today. GAAP diluted earnings per share for the fourth quarter 2018 was $0.52. Adjusting for the impact of the mark-to-market pension charge, earnings per share for the quarter was $1.94. Fourth-quarter 2017 GAAP diluted earnings per share was $1.26 and adjusted earnings per share was $1.66. Unless stated otherwise, discussions today will refer to adjusted results. The webcast of today’s call, along with a reconciliation of non-GAAP financial measures, are available on 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. Thank you. And now, I’ll turn the call over to David.

Thanks, Scott. I welcome this opportunity to share our positive fourth-quarter results and our plans for continued improvement throughout 2019. On today's call, I’ll share highlights for the quarter, our transformation progress and our views on the macro business environment. Jim Barber will discuss our peak and Q4 results and our drive to improve operating leverage. Richard will then review the financial details of the quarter and 2019 outlook. First, I'm going to take a moment to applaud the nearly 500,000 UPSers who completed a successful peak season. Thanks to their hard work and commitment, we delivered industry-leading on-time servers and solid earnings growth. We also thank our customers as we work together for our mutual advantage, by optimizing UPS' network utilization to ensure reliable service to their customers. During peak, we produced good volume and revenue gains, as well as orchestrated improved revenue quality. But, most important, we effectively managed the total network and drove productivity improvements, while processing high peak volume levels. As a result, we successfully delivered on our consolidated financial targets for earnings growth. We realized the benefit of several transformation initiatives, including strong SMB growth and yield management and the highest B2B growth in several quarters. For the total company, we lifted revenue by 5.2% on a currency-neutral basis, generated solid operating margins, had excellent free cash flow and, in 2018, awarded shareowners with $4.2 billion in dividends and share buybacks. I'm pleased with the improvements we've made across the company and with our strong Q4 EPS growth of 17% to $1.94. Our domestic business performed as planned, successfully processing the record volume that came into our network. International grew both top line and bottom line in a changing economic environment, while supply chain and freight delivered strong results in the Forwarding and Logistics and…

Thanks, David. I want to reinforce your comments on the work of the UPS team during peak. The dedication to customer service that is ingrained in our culture was on full display. Several factors led to our service and performance success. We coordinated closely with customers for improved forecasting, expanded air and ground capacity with higher levels of automation, refined staffing and training plans, introduced new technology to align incoming volume with available capacity and, finally, we implemented pricing actions to better control shipment characteristics. We developed comprehensive peak plans and executed successfully. I'm very proud of the entire UPS team. Most important, these and other actions will carry forward into our normal daily operations throughout 2019. As David mentioned, we realized benefits from several transformation efforts during the quarter. As noted previously, the US domestic segment will be the greatest beneficiary of our enterprise-wide transformation. The first major transformation strategy is growth and higher-quality revenue. Our commercial actions to align pricing, volume and mix were very successful. In Q4, RPP [ph] increased nearly 5% in the domestic segment and 4.6% overall on a currency-neutral basis. That's the best RPP gain we’ve generated in many years. We also simplified pricing and enabled our sales force to provide small and medium-size customers with quicker quotes, often on the spot. And we generated strong digital marketing results with streamlined product offerings and pricing programs aimed at small and occasional shippers. These commercial actions also helped drive SMB growth, the best in recent history. B2B deliveries grew by about 3%, reflecting our customers’ favorable reactions to our marketing and pricing strategies. In addition, to better connect buyers and sellers in today's digital world, we recently partnered with two new B2B and B2C e-commerce platform companies, Inception and ShopRunner. With Inception, UPS offers attractive…

Thanks, Jim. And good morning. Today, my prepared remarks will cover two areas. First, the quarterly performance of our segments; and second, our 2019 outlook. In the quarter, UPS demonstrated great execution. We delivered industry-leading on-time performance, improved revenue quality and we generated excellent free cash flow. As a result fourth-quarter 2018, EPS grew 17% and full-year EPS was up nearly 21%. Moving into the segments. In the US, we delivered on average more than 21 million packages a day and our growth was led by next-day air. Revenue was robust, up more than 6%. Early in the quarter, we experienced some softening of package demand due to labor negotiation headwinds. As we moved into December, we saw sequential improvements in our financial results, while maintaining outstanding service levels. The strong peak performance offset the majority of the labor headwinds, producing a full quarter profit result slightly below our own expectations. Our strategies to better align pricing with the value we create pushed base rates up 3.3%. In addition, and most noteworthy, we saw positive trends in product and customer mix. The combination drove revenue per package to expand by almost 5% as we leaned in to create higher-quality growth. As Jim discussed, we accelerated our SMB and business-to-business deliveries with the best gains in recent history. This is a strong proof point that our initiatives are working virtually. Every industry vertical showed volume improvements and higher revenue per package. US domestic operating profit was about $1 billion. As expected, this quarter's profit was lowered by the planned opening of 14 new facilities, one less operating day and higher pension operating costs. Now, turning to the international segment. We posted strong results, demonstrating the strength of our business model and the value that UPS solutions offer to global buyers and…

[Operator Instructions]. I will now turn the program back over to our IRO, Mr. Scott Childress. Please go ahead, sir.

Thank you. We’re going to take an online question this morning. We’ve got multiple questions. Fadi Chamoun from the BMO, Scott Schneeberger from Oppenheimer, Jack Atkins from Stephens that ask, it appears UPS did not experience the full impact of economic headwinds. Can you elaborate a little bit on what you're seeing in terms of demand in your international business?

Okay, this is David. And thank you all for that question and there are many more questions about international. I think we could spend an entire call on international. I would just say, the way we look at headwinds is from our perspective. And do we see global headwinds? Absolutely. We see many of the ones that have been identified by others. But what's not talked about near as much is the tailwinds and the opportunities that we believe are out there. And those tailwinds really are strategic imperatives. And those where we’re going to make our investments, continue to make our investments and take advantage of these opportunities. So, we still think, with all the trade discussion, that there are global growth markets that we can certainly expand in. e-Commerce is providing all kinds of opportunities. Small and mid-size businesses that don't get talked about nearly as much as larger e-tailers, are certainly playing a big role in this market. And then, healthcare and life sciences. So, all of those, we think, are just good, good opportunities. And when you look at our fourth-quarter results, as was briefly mentioned, currency neutral, our operating profit in our international business was up 10% and our operating margins over 20%. This is our best performance international ever and it is during some of these headwinds and opportunities that we talk about. So, that – we’d like to discuss a little bit more about Europe specifically. Jim, would you like to do that?

Sure, I’d love to. So, two opening comments, I guess, is we continue to see international, and not just express business, but supply chain as well, is a growth and diversification engine. No question about that. I think we’ve seen that over time. Europe, obviously, is one of those parts of the world that Brexit seems to win the day. And, certainly, from our perspective, we want that to be solved properly. But in the midst of that, our European business managed to grow revenue in the high-single-digits, keep expense to about half that growth and grow profits about 15%. David talked about some of these factors. Obviously, some years ago, when we didn't win our way with the TNT merger, we had a choice and we moved on to a $2 billion organic investment strategy. We stay absolutely true to that. Our job is to win in both organic or inorganic moves in the market. Right now, in Europe, it is very much an organic growth story. And in the end, our job is to be able to create leverage in almost any environment that we’re dealt. Macro changes will come and go over time. And at the very end, our job is to run the business and create leverage. In Europe, we feel like, had a nice quarter. We talked about in the third quarter that we’ll continue forward. Fourth quarter did that. And we can see similar actions and initiatives going forward in 2019. So, that’s the international European from our perspective.

We’re going to take another question from multiple analysts – Brian Ossenbeck from J.P. Morgan, Ben Hartford from RW Baird, and Kevin Sterling over at Seaport Global. Can the US domestic segment grow volume and expand margins or are the two mutually exclusive, given the headwinds in B2C?

So, this is Richard. I'll start and then I'll turn it over to Jim as well. I think you look at the fourth quarter and it's indicative of some of the transformation around growth that we’ve talked about. We had revenue per piece in the US up almost 5%. During my talk, I mentioned, and Jim mentioned about, the SMB, the small medium-sized business, and also the positive product and customer mix. We do see 2019 as a pivot point. If you go through the numbers, you'll see that operating profit is growing, which means that we are creating leverage and it really is the start of something that we talked about would happen as we had our investments come in line, transformation as well as improving operations throughout the country. And with that, I’ll turn it over to Jim.

Yeah, yeah. I had a few key points to it. I think when you sit down and you think about the year that we’ve just entered, you've heard a lot about revenue quality, obviously, throughout the call. I know Kate’s going to talk about that more. But the continued focus on that. And Kevin, obviously new, is going to support as well. Non-op leverage and procurement savings coming through. Scott will talk about that today some more as well on the call. But at the end of the day, we haven't talked as much about the capacity adds. Juan will do that as the call goes on, but certainly the 22 facilities we built last year and the 18 we’re going to add this year really allow the integrated networks to perform and perform at much higher levels, which is the key to success at peak as well. How we execute peak in 2019, we’re going to continue to refine that strategy and move that forward. There’s already ground for us. We’ve expanded it. We added about 100 buildings in 2018. So, as we enter 2019, we are in 323 buildings in the US. And, quite frankly, the operating leverage that we saw in the fourth quarter of 2018, we see moving us out and starting in 2019 and going forward. So, that really is the pillar underpinning the dialogue and the turn as we move into 2019 and we’re anxious to get on with it and move through the quarters as Rich described.

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

Yes, good morning. And congratulations on the strong peak season performance and results as well. I wanted to ask, Jim. You just commented a bit on domestic. I wanted ask you a little bit more on that. Richard, first, if you can just kind of review the comments you made about the vesting change in impact and then kind of the – I guess the lower discount benefit, if you can just review those comments? And then, within domestic packets, how do we think about the impact of that favorable mix into SMB, B2B? Is that going to continue? And then, productivity, how much flows in? So, I think just a number of things to understand. How we would think about the drivers of domestic package margin performance in 2019?

Tom, what I'm going to do is I'm going to cover the MIP and the discount rate and then I'm going to turn it over to Kate to talk a little bit about where we’re headed with some of the initiatives around our customer and product mix. Specifically, around the vesting, it really is about a short-term stock equity program that 40,000 employees participate in. The legacy was, it was a five year vesting and it wasn't meeting the market. And it’s transformation we continue to look at. How do we make UPS attractive place to work, get the right talent and also make sure we’re delivering appropriately from a compensation standpoint? So, part of that was making the change. It really is no overall impact when you go through the five years. There is a little bit heavier charge now and then slowly dissipates to zero by the fifth year. In terms of the discount rate, that $250 million is pretty much offset by the benefit we saw in the operating line on discount rate. So, in the press release, we call out the below-the-line portion. And while it’s not entirely the same as the MIP, a large portion of the MIP is offset by that. And that's because the service cost portion is accrued differently when the discount rate rises. So, that’s all inside the operating line. But, most importantly, I think when you look overall, the operating growth in the low double digits is a big improvement for the US and it's not just what’s happening in the operating leverage, but what we’re doing with revenue and Kate will talk about that.

Thanks. And, Tom, I’ll just add, both customer and product mix was positive in the quarter and, yes, tied to our strategy of revenue quality. And we continue to align value price and cost. And going further with different industries, different segments, further with small and medium-size businesses, and be more selective with large customers. So, the strategy is playing out and will continue to do so.

Great, thank you.

And we have a question from the line of Scott Group, Wolfe Research. Please go ahead.

Hey, thanks. Morning, guys. So, I wanted to ask – the guidance for profit is low teens. If I if I heard you right, Richard, for first quarter, it sounds like it implied more like low to mid-single digits. So, maybe help us think about why – what's changing and why it doesn't show up in the beginning of the year and why it comes more in the back half of the year? And then, can you just walk us through the pieces? $6 billion of free cash flow last year and $3.5 billion to $4 billion this year. What are the drivers for the delta?

Okay. Scott, I'll start with the guidance specifically. I think you're calling out the first quarter. The two big factors in the first quarter are, first, the workdays and Easter move from the first quarter to the second quarter. So, if you go back and look in history, there's a volume run up prior to Easter, and that plays into it. And then just the workday. There's one less workday in the first quarter. And when you do the math to the third quarter, you'll see the pickup because there’s an extra workday in the third quarter. In terms of when you think about the free cash flow, we had called out some working capital initiatives that we’re going to continue and we talked about that, but also we know, in 2018, there were some past benefits that we called out in March, both for the tax rate change as well as a big refund. So, when you kind of normalize for that, we’re going to have an excellent year of free cash flow again. We’re going to continue to try to build that. And we talked about additional opportunities to grow it through some of the initiatives. And as we do daily in 2018, we’ll share those accomplishments and what it means to free cash flows as the year goes.

Yeah. Just to follow up on the first quarter, there are no business fundamental issues with the first quarter. Rich certainly pointed out the two things about the calendar. The other thing is these discrete tax items that hit the first quarter of last year that don't this year. So, other than that, we see the first quarter with the same momentum as the rest of the year.

We’re going to take an online question here. This comes from Scott Schneeberger from Oppenheimer. Did you progress in your pursuit of growing share with small and medium-size businesses this peak season?

So, thanks, Scott, for the question. This is Kate. And the answer is yes. Our strategy is working. Our small and medium-size business growth was the best we've seen in recent history in the US as well as throughout the world and across different industries. And you can see that demonstrated in our notable B2B and B2C growth. The sales and marketing teams continue to work very well together to win more in the market. And it is notable that we’re the market leader already in small and medium-size businesses, but we’re delivering more solutions to go even further. Just to give you a little flavor, Where To Go, we’ve talked about, but there is strong demand as we build out our merchant network. UPS My Choice just hit an amazing 56 million of happy consumers and we’re going to be extending that to UPS My Choice for Business later this year. So, very excited about that. And then, also, the alliances Jim mentioned in the opening, the Shopify integrating UPS services into that system, ShopRunner bringing two-day delivery across the country for different retailers, Inception and then Optoro on the return side. And continuing to enhance how we reach these small and medium-size businesses globally through digital solution. So, SMBs are the growth engine for economies throughout the world and we are very well positioned to continue our success in that segment. Thanks so much.

And this is David. Just a quick summary about the importance of SMBs. They are 95% of the firms and they are 50% of US GDP. So, when Kate talks about all these initiatives, it’s because that’s such an important selector and, of course, it is one of our strategic imperatives.

We’re going to take another online question. This question is from Ravi Shankar from Morgan Stanley and Amit [ph] at Deutsche Bank. What percent of your US volume is being sorted manually today and what do you see going forward? As well as, can you give us an update on the 22 facilities you brought online this year? Great. Good morning. This is Juan Perez. Thanks for the question. We continue to make significant progress in expanding our automated capacity across the network. And just as a reminder, that is a key component of the buildout of our Smart Logistics Network, which we’re really proud of the progress we've be making up to this point. Now, to tell you how that progress has materialized, at the end of 2018, we had nearly 70% of our ground eligible volume going these automated facilities. In 2019, we expect that number to grow to almost 80%. And to put it in perspective, back in 2017, we were only at about 50%. So, continued progress in that area. Now, to do that, we successfully – and Jim mentioned it, we successfully completed our 22 automated facility projects in 2018. That was a global project footprint. They accounted for more than 5 million square feet in capacity across the network. For those who are in the US, 1 million was in international. That added 400,000 packages per hour of capacity in one year across the network. The regionals in Atlanta and Salt Lake City in Phoenix, they just provided excellent capacity support in these areas. And on top of all that, we added 2,300 car positions to the US network, again, giving us additional capacity to support the Smart Logistics Network. In 2019, that would be another busy year for us in building capacity. We’re excited about it again. Jim mentioned 18 US facilities that will be coming online. In total, we’ll have 20 because we have some international facilities as well coming online. Seven automated small sorts. We will be adding an additional 400,000 packages per hour of capacity. And critical areas where we see significant growth will see additional capacity as well. Tennessee, California, Kentucky and Ohio. So, we continue to move forward with our strategy. We feel pretty solid about it.

We have a question from David Vernon of Bernstein. Please go ahead.

Hey, good morning, guys. So, Richard or David, I wanted to talk a little bit about the returns on this CapEx program. We’re about a year-and-a-half, two years in. CapEx has stepped up. It’s going to go on for another two years. And it feels like within the guidance, you guys are getting some of the productivity that you are expecting, some of the return on these investments, but they're being offset by the below-the-line pension, they're getting offset by this change in the stock comp at $0.51 that you’ve called out. How should we be thinking about the return on this investment program? Should we be expecting that $0.51 to maybe not be there in 2020 and you're going to get that catch-up into that next year? Or will there be additional sort of offsets that are coming up? I guess what I'm trying to figure out here is when does the benefit that you guys are getting from these investments going to show up actually in the EPS number.

Sure, David. This is Richard. And I think the first thing that we have to think about is, if you just look at what happened really the stock market in the last six weeks of the year, that's predominately what's driving a tremendous amount of the pension below-the-line impact. So, I'd love to sit here and tell you that we’re not going to see – we’re going to see a positive market that’s X, Y or Z, but I do understand that what we look at – what December looks like, it was a stock market that was, for the month, worse since, I believe, the Depression. And so, that had a big impact at the end of the year that wasn't expected. I don't expect that to repeat. And because of that, I do believe – and if you think about the underlying real story here, it is that we have double-digit low teens growth in all three segments. And it's been many years since you've seen that. We are at the pivot point of the benefits from transformation, the investments. And, most importantly, our return on invested capital remains within our range.

So, as you think sort of like the 2020 build, right, you're getting the return on the investments you've been making. It’s just getting offset a little bit and then that should still ladder up into that 2020, 2021 timeframe. Is that right?

That's right. I kind of think of the below-the-line as some things we have to deal with, but at the end of the day it's not what we’re doing on the top – on the operating profit and continue to improve that year-over-year.

This is Jim. The question that we’re kind of dancing around a little bit, Tom asked it a minute ago, was are we getting the productivity improvements from these investments. And the answer is yes. In fact, there’s other investments in this integrated network that come to life once you get these hubs effectively moving the way they. And you saw some of that in peak and you’ll see that in the years to come as well.

All right. And maybe just as a quick follow-up, you guys talked in the past about the CapEx resting back down to that 6% range following the facility buildout. Is that still kind of how you're looking at the world in a post sort of 2021 timeframe?

So, Dave, we, obviously, expect that it will eventually come down as we’ve talked about. We’ll guide to outer years as appropriate. But we know for the next few years, the advantages from the investments are getting the return and we’ll come back to that. And I’ll cover some of that with you offline as appropriate.

All right. Thank you, guys.

Thanks, David. Just make sure that we’re following only one question, so we can move on. Our next question is an online question from Brian Ossenbeck, JP Morgan. There was a mention on Central States during the prepared remarks. Can you give us the latest update on that from a UPS standpoint?

So, this is Richard again. And I'll start by – and I think David will finish up on this one. But the first thing to remember here, when we withdrew from Central States in 2007, and today it was the right decision. In 2014, some legislation passed that allowed for pension reductions and it opened up new accounting considerations we had to look at, as we disclosed that a few years ago when that law passed. If you look at the requirements under GAAP, we have to evaluate outcomes based on the current legislation. When you look at the multi-employer area on pension. There's over million participants in 5,000 employers that are impacted by plans that are in declining status. The industries are vast. In fact, UPS is less than 2%. That being said, we continue to work with all the appropriate parties to find the right solution. And I think David wants to talk a little about some of those efforts.

I do, Rich. And in 2018, a joint select committee made up of equal members of Democrats and Republicans, equal members from the House and the Senate, and they made very good progress in finding solutions for these failing multi-employer pension plans. We’re talking about Central States here, but this problem is much bigger than Central States. There's hundreds of these plans that we are not involved in as a company that are in this critical and declining status. So, that’s why this is a nationwide issue. While they made good progress, they did not meet the statutory deadline of reaching a bipartisan solution by the end of the year. Really believe that Congress does understand the sense of urgency and that they will continue to make this a priority this year. And we are certainly going to continue to advocate with both Congress and the administration on why this needs to be addressed, how it affects many employees throughout the country, and how it can also have an effect on employers in – not as much on the big companies. There is a lot of smaller companies out there that have employees in these plans. And if this situation doesn't get fixed, it could certainly have a negative effect on them. So, it’s an important issue. We’ll continue to work on it.

We’re going to take an online question here. This question comes from Chris Wetherbee at Citi, as well as Todd Fowler from KeyBanc. The question is about an update on transformation. Is transformation mostly a cost reduction initiative or, from the high-growth side, strategic standpoint, how is UPS getting at this?

Thanks, Chris and Todd, for the question. So, as we mentioned in the fall investor conference, transformation supports and funds the business strategy. So, it's a combination of both cost and growth. And you've heard that as each one of the speakers explained progress in their areas as the transformation very much is supporting all sides. On the cost end, we've made some really good progress. The voluntary retirement program, we had a very good take rate. Centralized global procurement to leverage our global scale and buying power. And we’re moving back office work and transactional work to our global business services and BPO to reduce our overall cost and investing those back in technology. We’re investing in a lot of growth. Kate mentioned quite a bit about SMBs and the platforms that in partnerships that we’re building to support B2B e-commerce. We’re capturing international, as Jim touched on. Healthcare is an important area for us and we see an opportunity for helping our customers to increasing regulatory compliance challenges, cost pressures. We think that our network is well-positioned. We have home healthcare opportunity, direct to patient, lab specimen, clinical. And then, of course, we’re building on our synergies with Marken. We set aggressive goals in 2018; we achieved them. We have many new initiatives in 2019, with just as aggressive goals. I'm a little over a year now with the company and I continue to be impressed by how the organization is able to adapt and agilely transform itself, while also continuing to deliver our very, very high levels of customer service, as you saw in peak.

And we have a question from the line of Allison Laundry of Credit Suisse. Please go ahead.

Good morning. Thanks. I wanted to ask about the operating penalties and where they came in for the full year 2018. And then, also, in terms of the domestic cost per piece, if you could parse out what the efficiency gains were during the quarter, maybe the operating penalties themselves and fuel and any other components? And then, how should we think about cost per piece inflation in 2019?

Sure, Allison. This is Richard. I think the first thing, we did call out a number for the year for operating penalty. It came in pretty close to where we had expected. We had called it out during the quarters. And if you look at December, while we’re slightly below where we expected to be, mostly because of what happened in November with a really strong December, those penalties that we expected, they came. We expect some penalties again this coming year because we’re opening up almost the same number of buildings, but it’s not going to be as much of a drag because we’re getting the benefits, and we talked about the year-over-year. In terms of the cost per piece and the changes, I think with what we've given you, you can calculate the cost per piece. You can see the inflation numbers or the increases coming down. You could even look at our operating expenses this quarter and it was among the lowest that we've had in the last two years. With that, I think perhaps getting into the model and the numbers, I think we can take this conversation offline and talk about the incremental pieces that you’re asking.

Okay, thank you.

We’re going to take an online question from Scott Schneeberger as well as Tom Wadewitz from UBS. The question is, can you give us an update on your returns that you saw around peak and how they affected your business, as well as how you view your pricing as you think out into 2019?

Absolutely. This is Kate. I will start with overall peak because returns is one component that comes along with the business. But with the quality revenue that we delivered, as you've noticed the last few quarters, we have delivered base pricing over 3% as we further align our value that we’re delivering to customers with our pricing, gaining that leverage and ensuring that we’re addressing our cost to serve. So, we do see that continuing. That is absolutely the strategy. And then, as you say, enhancing our customer and product mix returns is a key component of that. It is a very valuable business with high density delivery and we saw a notable growth. We also have the most expensive returns portfolio in the marketplace and we are furthering that. So, we've got everything from mobile returns where small and medium-size businesses can actually manage their own returns policies then to consolidated returns for large customers in an alliance with Optoro, which helps them to turn their returns dollars into revenue dollars, so that in the moment selling of returns really helps them to reclaim the value and for us to then leverage that to ensure higher value equals higher price. So, we’re confident about our strategy and we will continue to deliver on that.

We have a question from the line of Chris Wetherbee of Citigroup. Please go ahead.

Hey, thanks. Good morning. I wanted to ask about transformation benefits and sort of understand if we’re getting transformation benefits in 2019 and the guidance from the VRP or other initiatives that you have. And then, beyond 2019, how we should expect the cadence of that $1 to $1.20 type of – how that should roll in post 2019?

Sure, Chris. This is Richard and I’ll start; and then, Scott will talk a little bit about some of our plans and where we’re headed. But inside transformation, we talked about the VRP and the full run rate happening in the last half of the year. That is, in essence, what’s in the guidance. We had a successful program. We’re making the adjustments. On the revenue side, both Kate and Scott have talked about the growth side of transformation. You see it in our revenue per piece. You see it in our growth in SMB. And you see it in our customer and product mix, which, let me remind you, was positive contribution to revenue per piece. And that's really the first time we've had that in a number of years. And so, it’s a foundation of transformation. It’s not just about how do we reduce costs, but it’s the customer mixed and making sure we have that appropriate. Scott?

So, I think you can look on the shape of the 2019 guidance that there’s a very significant amount of activity going on in terms of the transformation program. We’re talking hundreds of initiatives. And I think what you're saying is a reflection of those initiatives funding significant investment in technology and capability and as well platforms and partnerships to drive that mix change. We've made that guidance in terms of by 2021, and we continue to confirm that. In the shape of 2019, you're seeing a pretty important and pivotable year for us to continue to drive down these costs and change the shape of our growth and revenue mix through many of the savings being reinvested back into the business.

Okay. But to be clear, it’s the VRP in 2019 specifically. That's really what we should be focused on?

Yeah. The 2019 VRP absolutely does continue to flow through. And we continue to use those savings for investments in other areas. Kate mentioned Where To Go, that is an area that we’re investing in, to be able to drive SMB e-commerce. So, it’s a combination of cost reduction programs. We’re using those to investing as well to ensure that there's a flow through to the bottom line. One area that I also would to highlight is the 2018 program. You're also seeing in 2019 was the progress we're making in procurement, centralizing our global buy and really leveraging that spending power as we reduce our cost to operate and reinvest.

Okay, thank you.

We’re going to take an online question. This question is coming in about our fulfillment partnership. And can you please provide some color around UPS’ long-term strategy around what we’re doing to help mid and small customers?

Thanks for the question. This is Scott. So, if you look at the transformation programs in terms of the overall approach, we do see that there is an enormous opportunity to leverage the megatrend of small and midsize businesses, both in the B2B, but as well B2C e-commerce. Kate mentioned a couple of the relationships that we've established in exception [ph], ShopRunner. Those are beginning to support our customers and we see that as an enormous opportunity for us to continue to build SMB B2B market share, which is part of our overall revenue mix. We will see those platforms in the future coming together and creating quite a powerful proposition. And Kate?

Yeah. And I would just add, Sarah, tied [ph] to fulfillment, we see the macro trend with small/medium-size businesses partaking in e-commerce, needing help with that fulfillment option in the marketplace. And we have both our e-fulfillment strategies, where the smaller customers can grow into out of their garage or what have you and then graduate to what Scott is talking about with Where To Go. So, we do intend to meet the full spectrum of needs for our small and medium-size businesses to ensure that we stay market leader.

I’d add something to both what Scott and Kate just mentioned, is that remember in David’s opening remarks, we have just brought Philippe Gilbert on to really help us look now from an outside-in perspective at things like an LLP provider and how that works in distribution these days, how supply chains are moving across the world and, ultimately, that's his first task with us, was to help us make sure that our distribution strategy continues to be and stay connected to the core businesses and create value going forward. So, we’re happy to have Philippe on board to help us assess those going forward as well.

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

Obviously, thank you for joining us today. And, David, if you’ve got any closing remarks.

I do, Scott. Our plan going in today is to show that UPS is on a different path than some other companies. Our transformation initiatives are underway – well underway. They're enabling our strategy. And we’ve made great progress this quarter. Strong, strong international results. The revenue yields, the expansion that was led by our US business and how they performed during peak from a service and a cost standpoint, and really how our investments are just really timed the way they should be and they're adding efficiency and flexibility to our network. So, we continue to see strong growth opportunities. And, again, I'm more convinced than ever that UPS is on the right track to create that value that’s so important for our shareholders and for our customers and, of course, for our people. So, again, thank you very much for joining us.

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