Good morning. My name is Steven, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the UPS Investor Relations first quarter 2016 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. Please note we'll take only one question from each participant to accommodate more analysts during the call. Thank you for your cooperation. It is now my pleasure to turn the floor over to your host, Mr. Joe Wilkins, Investor Relations Officer. Sir, the floor is yours.
Good morning, and welcome to the UPS first quarter 2016 earnings call. Joining me today are David Abney, our CEO, Richard Peretz, our CFO, along with International President Jim Barber, President of U.S. Operations Myron Gray, and Chief Commercial Officer Alan Gershenhorn. Also joining us today is Norm Brothers, our General Counsel. Before we begin, I want to review the safe harbor language. Some of the comments we'll make today are forward-looking statements that address our expectations for the future performance or results of operations of the company. These statements are subject to risks 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 a reconciliation of non-GAAP financial measures, are available on the UPS Investor Relations website.
Just as a reminder, please ask 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, Joe. I'm pleased to be here this morning to review another excellent quarter. I want to take a moment to say thank you to UPS employees around the world for their hard work and dedication in delivering more than 13% earnings per share growth this quarter. The international segment sustained its momentum with its fifth consecutive quarter of double-digit operating profit growth. The U.S. domestic business also expanded operating margins as efficiency gains enhanced bottom-line results, while supply chain and freight performed slightly ahead of our expectations. In the U.S., GDP forecasts continue to be revised downward, yet consumer spending remains the primary catalyst for growth in the economy, and e-commerce sales have again exceeded expectations.
On the other hand, industrial production remains below 2015 levels. In Europe, economic expansion has slowed slightly, but the pace of growth remains healthy. While in Asia, the major economies showed positive signs of stabilization as exports from China improved in March. Despite these mixed economic conditions, we remain committed to making investments for growth and efficiency. We will continue to implement our enterprise strategy, providing UPS customers with increased choice, convenience, and control. During the quarter, we launched enhanced products to support customers' needs for earlier delivery. Our UPS Next Day Air Early now serves almost 30% more zip codes, strengthening our leadership position in offering the earliest next-day deliveries. We also increased our UPS Worldwide Express small package offering to 23 new countries and territories. UPS now offers guaranteed noon delivery on the next possible business day to 88 countries around the world.
In addition to broadening our service portfolio for growth, we also are investing in our infrastructure with innovative technology and major facility expansions. The ability to combine our integrated network with the latest operating technology helps UPS deliver industry-leading margins and provides tremendous value to our customers. ORION is a great example of how we use predictive analytics and big data to improve service while bending the cost curve lower. Our future plans for ORION will enhance the benefits for UPS and our customers. In fact, I recently had the great honor, on behalf of all UPSers, to accept the prestigious 2016 Franz Edelman Award recognizing ORION and UPS's leadership in operations research. In addition to innovation in on-road technologies like ORION, we're making major investments in new capacity and modernized facilities both in the U.S. and Europe.
In the U.S., we're expanding major facilities in Metro L.A., Denver, Chicago, and other areas around the country. In Europe, as part of our EUR 2 billion investment plan announced in 2014, we opened a larger automated hub in Lyon, France, tripling our capacity in the area. We also announced an automated facility expansion in Herne, Germany. Adding to these examples of our innovative infrastructure is our commitment to global leadership in alternative fuels. This quarter, we announced an additional $100 million investment to expand compressed natural gas in our delivery and facility network. Our alternative fuel vehicles are now 6% of our global fleet and have helped UPS reduce its annual use of conventional fuel by 10%. We are well on our way to achieving our goal of driving 1 billion miles worldwide by 2017 with our alternative fuel vehicles.
As we invest in the U.S. and abroad, the ability to grow our business is accelerated by global trade. Recently, the President signed the Trade Facilitation and Trade Enforcement Act. This important legislation is designed to modernize, strengthen, and streamline cross-border trade, facilitating faster clearance of goods into the U.S. UPS strongly supports the expansion of free trade around the world. We're developing additional solutions that assist buyers and sellers to transact business across borders. In summary, the first quarter results demonstrate the differentiating value of our integrated network in global portfolio. Our investments in technology and capacity are producing network efficiencies and giving us more control over the cost drivers in our business, and this is providing improved financial results. At UPS, we are innovating and investing to ensure we anticipate the needs of our 10 million customers.
Before Richard covers the quarterly financial results, I've asked Norm Brothers, our General Counsel, to provide an update on developments surrounding the Central States proposed benefit reduction plan. Norm?
Thanks, David, and good morning. This is a topic that we first disclosed in our third quarter 2015 10-Q. The Central States plan proposes to make retirement benefit reductions to its participants, including certain UPS employees. When UPS withdrew from the fund in 2007, as part of our collective bargaining agreement with the International Brotherhood of Teamsters, we agreed to provide supplemental benefits in the event that certain benefits were lawfully reduced. As a reminder, in December 2014, Congress passed the Multiemployer Pension Reform Act, which for the first time ever, allowed multi-employer pension plans to reduce benefit payments to retirees, subject to specific guidelines written into the statute and to government oversight. As a result of this law, the Central States Pension Fund submitted a benefit reduction plan for approval to the U.S. Department of the Treasury in the fall of 2015.
As we explained in our 2015 10-K, we are challenging Central States' plan because we firmly believe that it does not comply with the law. According to this new statute, we currently expect a decision from the Department of the Treasury on or before May 7th, unless there's some agreement to delay the process. Of course, Treasury could reject Central States' proposal, confirming our position. If this happens, the benefits paid from Central States will not be reduced without further action. In the event this plan is approved as proposed, we fully intend to continue challenging it and pursue all legal remedies available to UPS. As we gained additional information during the quarter, we continued to assess the possible impact of Treasury's review of the plan on UPS. This is a new law and the first time the approval process has ever been used.
As I stated, we firmly believe the proposed benefit reduction plan does not comply with the law. We recognize there are a lot of unanswered questions, but without Treasury's decision, we're not going to speculate. However, we still thought it was important to provide you an update on the process. Now, I will turn it over to Richard for a financial view of the issue.
Thanks, Norm. We estimate that if Central States' plan is approved as proposed and implemented, we will be required to record a charge of approximately $3.2 billion-$3.8 billion later this year. Our estimates are based on the information currently available to UPS and assumes, among other things, that the plan's implementation is not delayed. If this charge is necessary, we expect it will be treated as an interim mark-to-market pension charge and will be reflected in this year's financial results. In addition, there may be an increase in the ongoing pension expense that could impact 2016. Following our call today, we'll provide a presentation on the IR website regarding this subject. Let's move on to business and how it continues to perform. As David said, the consumer is driving the economy, that translates into opportunities for UPS.
During the quarter, we turned e-commerce growth into expanded margins and increased operating profit in the U.S. domestic segment. This, combined with momentum in our international business and slightly better than expected performance in Supply Chain and Freight segment, produced another strong quarter. Let's go a little deeper into the results, starting with the U.S. domestic segment, where operating profit increased $78 million or almost 8%, and operating margin expanded 50 basis points to 12.1%.
Revenue was up 3.1% over last year to $9.1 billion. However, lower fuel surcharges were a drag of about 120 basis points on the growth rate. Average daily volume increased 2.8%, with the ground products up 3.3% and Next Day Air up 3%. After five continuous quarters of double-digit growth, deferred products declined slightly. E-commerce customers drove both B2C and B2B shipments higher, with B2C up more than 6%. Interestingly, supporting B2B growth during the quarter, online purchases drove demand for UPS's best-in-class return services portfolio, which grew double digits this quarter. Base rates increased about 2%, were offset by changes in package characteristics and the mix of product and customers. There was 120 basis point drag from lower fuel surcharges that weighed on the reported yields. As a result, total revenue per piece was down 1.3% from the prior year.
This quarter, the margin expansion was driven by the excellent cost management demonstrated. Cost per piece was down 1.9% compared to last year. Network efficiencies continue to improve, we're seeing those improvements in our bottom line. At the foundation of our success this quarter is the continued benefits of the UPS integrated network overlaid with our unique technology. Looking at our key daily statistics, this is where we're seeing good improvement, as the expansion of ORION lowered driver miles by about 1%, despite the fact that total stops grew by about 6%. In addition, overall productivity gains held direct labor hours to an increase of 1.8%, well below the average daily volume growth. As these trends continue, UPS is improving the stop economics of e-commerce. Let's turn to the international segment. As David said, we are reporting our fifth consecutive quarter of double-digit operating profit growth.
International operating profit increased more than 15%, reflecting the impact of disciplined pricing, better network efficiencies, and in-country cost control. Revenue on a currency-neutral basis was slowed this quarter by management actions we implemented in the third quarter of last year. Lower fuel surcharges negatively affected the growth rate by about 200 basis points. Currency-neutral revenue per piece was up 1.6%, with domestic products up 2.8%. Strong base rate improvements were across all regions of the world and contributed to the best yield growth in more than two years. Revenue management actions also affected international volume, mainly the non-U.S. domestic products. Meanwhile, we saw increased demand out of Asia and Europe into the U.S., offsetting lower U.S. exports. Export volume has started recovering from the revenue management actions we started in mid-2015.
Fewer local operating days, mostly due to the timing of the Easter holiday, lowered the growth rate by about 200 basis points. Let's discuss the supply chain and freight segment, where operating profit was better than anticipated but slightly less than last year as the segment managed through a tough economic backdrop. Total revenue on a currency-neutral basis was up more than 11%, driven by the addition of Coyote Logistics. The asset-light truckload brokerage business is managing well, even in a market that remains soft, and the synergies remain as planned. Market conditions remain weak both in the air freight forwarding and UPS Freight markets. In the freight forwarding unit, international air freight kilos were down, and it's due to a combination of repricing efforts in 2015 and an overall softer market. Margins expanded as the unit held firm with rates and achieved higher buy-sell rate spreads.
Distribution revenue on a currency-neutral basis was up around 7%. Supported by our industry-specific solutions, we had double-digit gains in healthcare, aerospace, and industrial manufacturing sectors. UPS Freight remained committed to disciplined revenue management. LTL revenue per hundredweight increased 2.1% as the unit continued to focus on serving higher-yielding middle-market customers, yet total tonnage declined as market conditions remained challenging. For an update on our cash position. The company generated $2.2 billion in free cash flow after investing almost $430 million in capital expenditures. UPS improved its quarterly dividend by almost 7% during the quarter and paid about $670 million in dividends. The company repurchased 6.8 million shares for approximately $680 million. I'd like to update you on our guidance for 2016. The first quarter results continued our momentum from last year, and we remain on track for 2016. Economic conditions around the world remain mixed.
Our business model is adapting well in this environment. International and supply chain and freight will lap certain pricing actions we took last year. Based on our current performance, we reaffirm our 2016 full year guidance of $5.70-$5.90 adjusted earnings per share. This guidance does not include any impact for the Department of Treasury's decision on the benefit reduction plan. Regardless of how UPS chooses to respond to Treasury's decision, we still expect to remain within our 2016 guidance. If the plan is approved and implemented without delay, the ongoing expense could possibly push us towards the lower end of the range. As we stated earlier, we fully intend to continue challenging the plan if it is approved by Treasury. This quarter is an example of how our accelerated investments are providing benefits across the company.
We are adapting to the changing market conditions, bending the cost curve, and at the same time, producing strong financial results. We are well-positioned to continue to make progress through the rest of 2016. Now I'll ask the operator to open the lines for the questions. Operator?
As a reminder, please only ask one question so that we may accommodate more callers, please feel free to get back into the queue and we'll take more on second question time permitting. Our first question will come from the line of Benjamin Hartford, Baird. Please go ahead.
Good morning, guys. Just wanted to know your thoughts on yields given the competitiveness that we're seeing in truckload rates, in particular during 2016, that 2% base rate within domestic. What is the likelihood that that meets or exceeds that level as we move through 2016?
Hey, Ben. This is Alan. First of all, we saw some really good volume growth in the U.S. that certainly was in line with our expectations, we continue to align the revenue to the value we create and with the costs incurred. The first quarter 2016, we certainly continued our successful base rate strategy, we did achieve a base rate increase between the 2% and 3%. It was offset by about 120 basis points to lower fuel surcharges, as well as continue to still see some significant changes in the customer and the product mix and the package characteristics that are also weighing on that base rate increase. Just one quick example here. SurePost, it's the lowest revenue piece product in our portfolio by its nature. It achieved double-digit growth this quarter.
It also has some of the highest delivery density in our network, it generates excellent profitability and ROIC, and it's even more profitable when we combine that with our SurePost Redirects. We've got a lot of examples where we're focusing on driving profits where the revenue to cost ratio is, where the RPP is actually lower than average, like SDS, UPS Access Point returns. They're all significant density creators. I don't know. Richie, you got some comments?
Yeah. Ben, the other thing I think that's important to understand that as we make the adjustments for how the characteristics are changing, the benefits that we're seeing on how we're handling within our network and the implementation of our technology is showing up in the bottom line. As you saw, the cost per piece actually reduced almost 2%, and that created the margin expansion in the U.S.
Okay. If I could just ask a clarifying comment there. Is there enough disconnect in terms of the customer conversations that B2C and e-commerce growth can be viewed separately from the broader kind of freight fundamentals, specifically the pricing on the truckload side, such that you can continue to get positive and healthy yields with regard to B2C in particular, even though broader freight rates in 2016 appear to be much weaker than that?
Yeah, I think there's definitely two distinct markets there. It's certainly a competitive market, we focus our pricing consistent with the value we provide to our customers, and we're continuing to enhance our efficiencies, like Richie said, and our value proposition with what David mentioned on the UPS Early Express, so on and so forth. Yeah, we're confident in being able to achieve the range of 2%-3% going forward.
Thanks, Ben. This is Joe. Just as we move forward, let's just keep it to one question so that we can get as many on as possible. Thanks, Ben. Next question. Thomas Wadewitz, UBS, please go ahead.
Yeah, good morning. I just wanted to ask around the international margin improvement. Congratulations on the strong margin improvement there. I was wondering if you could give us a sense of, you talked about some of the key drivers, does the pace of that accelerate? Does it kind of sustain in terms of some of the things you're doing to drive that almost 300 basis points margin improvement, just so we have a kind of a way to look at it going forward the next couple of quarters? Thank you.
Sure, Tom, this is Richard. I think the first thing, it was a very strong quarter, our focus is really on our earnings or growth in earnings and economic value more than the margin because there are fluctuations in the network and which products are growing stronger year in and year out. The other thing to keep in mind is that the hedge program that we've really had in place for multiple years does aid the margin. Even if you adjust out for that, you're still talking about almost a 17% margin, which is the best in the industry. I'm going to ask Jim to actually comment on a few of the initiatives that are driving the improvements in international.
Thanks, Rich. Tom, I think it's really a two-part question for me. One is backward-looking, how we've done. You've seen the last five quarters. We feel good about that. I think the other side to it is that at the same time, right in line with our overall growth strategy, we're able to invest in some of these growth platforms we've talked about over the last year and a half, like Access Points, like southern and trade lane borders across the world in emerging markets. That ultimately it's the here and now, you see the margins, and you hear Rich's comment with respect to the lift in currency and so on and so forth.
the general operating efficiency and base rates is holding us, but at the same time, we feel really good, I do, about the investments we're making for the long term at the same time. Appreciate the question.
Next question will come from the line of Ken Hoexter, Merrill Lynch. Please go ahead.
Great, good morning. Just maybe a little bit of clarification on the pension exposure. You talked about at the opening of the call, the $3.2 billion-$3.8 billion. Is that cash a one-time charge? Is that a cash expense that you would have to pay out? Then more on the ongoing level you talked about, can you talk about the ongoing impact and what the ongoing cost exposure could be? You talked about moving to the lower end of the range, just maybe give us some parameters on what the ongoing expense would be. Thanks.
Sure. I think the first question you asked was whether it was a one-time payout. Actually, first of all, it's a complicated topic, and there'll be a deck I mentioned out on the website to explain it a little bit better. It really isn't something we're paying to a third party. It would be a liability that we would have to take on. That being said, we've looked at many different scenarios, and we feel comfortable that even if this was approved and while we go down the path of looking at other options legally, that it would have an operating income impact, but it would still keep us within the range that we gave at the beginning of the year. There's a lot of unanswered questions that we just don't know until we know more from Treasury's decision.
At this point, that is really all we can share with you.
This is David Abney. I just want to remind people that we do not know how Treasury is going to decide. We are expecting a decision between now and May 7, May 8, but they could reject, or they could accept. We just felt it was important to get the information out that just gives you an idea if they did accept the plan. We really don't have an idea of which way that they are going to decide, so we don't want to send any other impression out there. Okay.
David Vernon with Bernstein, please go ahead.
Good morning, guys. Just, Richard, maybe a question for you on the productivity side. It seems like the mix was a little bit weaker in the quarter. I am just wondering if that is kind of a fair assessment, and then as you think about that decline of 190 basis points year-over-year in the unit cost for the domestic segment, was that influenced in any way by the mix? Did you get some help there for some of the lighter weight or lower-cost products versus kind of pure productivity? Is there any way to think about sort of breaking up that 190 basis points in relation to mix? Thanks.
Sure. We run an integrated network, and when you think about the activities that occur, mix has a little bit of play when UPS SurePost grows faster. I would tell you that we expected UPS SurePost to grow faster this year. Last year, we talked about the two-year stack, and we knew that UPS SurePost would continue to grow. That being said, when you look specifically at what we're doing in the U.S. with how direct labor hours are being managed because of really the overlay of ORION and what we're able to do with reducing miles at the same time as increasing stops, it's something we're starting to see the last few quarters, and it's something we still expect to continue to see.
I'm actually going to ask Myron to talk a little about some of the initiatives that he's seen from ORION and what's happening in this, because the expansion of the margin really was something that we did expect and we continue to expect.
David, it's really a combination of a number of activities that we're undertaking to continue to bend the cost curve. Richard has referred to ORION, and yes, while our stops grew almost 6%, we were able to reduce our miles by 1%. When you add in SurePost Redirect coupled with UPS Access Point, it allows us to build greater densities that we're taking advantage of. You've also heard us talk about SDS and EDGE, which we'll be talking more about later this year. All those activities combined, regardless of the mix, has allowed us to continue to bend that cost curve. You couple that with some of the automation projects that we have in place, it's not only allowing us to bend the cost curve, but it's also ramping up our service to our customers.
Chris Wetherbee, Citi, please go ahead.
Great, thanks. Good morning. Wanted to ask about the ground volume growth, which was impressive in the quarter. We definitely saw a re-acceleration. I think in the comments you mentioned that the B2B side benefited probably from e-commerce returns. Just wanted to get a sense if you could parse out maybe sort of how the industrial side of your business is sort of trending and maybe if you expect that ground growth to continue through the rest of the year here, outside of what we saw from e-commerce, which is probably at least partially holiday related. Any comments there would be helpful.
Thanks, Chris. This is Alan. As you said, we had a really strong quarter of B2C growth, and our customers are really responding to the choices we're providing. The e-commerce customers drove both B2C and B2B shipments higher. With the B2C up more than 6%. By the way, that was our best B2C growth in the last 5 quarters. Like Rich said, we achieved margin expansion with that growth of B2C. The online purchases are continuing to drive demand for UPS's best-in-class return services, which are essentially a business delivery, and we did see mid-teens return growth there. We think as B2C grows, we're going to continue to see very strong returns growth there that is going to help our B2B segment. Overall, B2B is still in positive territory, but it's still being impacted by the softness in industrial production.
We've been positive on B2B growth for the last few years now, with the exception of 1 quarter. The economy is certainly soft out there when it comes to industrial production. We think the combination of our B2C and our B2B value proposition to the non-retail segment is going to allow us to continue to grow that B2B business.
Nate Brockman, William Blair.
Yes, good morning, everyone. Thanks for taking the question. Obviously, this has been well-publicized in terms of a very high-profile customer kind of maybe doing some more things in-house, and I know we've talked about the value proposition for UPS a lot over the years. Have you seen probably the majority of what they plan to do already taken in-house in terms of that already kind of being behind you? Has that impacted at all kind of the density benefits that maybe we were on previous trajectory to be able to get? Do you have to do anything to circumvent that?
Okay, Nate, this is David. I'll just start off with saying that high-profile customer, I think because of the scale and the scope, gets a lot of attention in everything that they do, obviously can appear under the microscope. I can tell you, though, that we value our mutually beneficial relationship, and obviously, we evaluate any market moves that any company or customer makes, and we look at it from a competitive standpoint. Where I really want to focus is our integrated network creates efficiencies and just gives us a value proposition that is very difficult to match. Our diverse customer base also, just from a density standpoint, no single company is going to be able to match that. We add value with global scale and scope. We continue to invest in technology to deliver high-value solutions.
There are going to be customers that are going to utilize us as a single source. There's going to be other customers that are going to adjust and sometimes go single source, sometimes go multiple vendors, and sometimes they will bring some work inside of take it in-house. That's going to adjust as conditions adjust. We feel we have a good relationship with that customer and feel that we will continue to add value for many, many years to come. Thank you.
Our next question will be from the line of Brandon Oglenski of Barclays. Please go ahead.
Hey, good morning, everyone, and thanks for taking my question. Can we come back to the economic picture? You guys will talk a lot about how you move 6% of U.S. GDP in your network every day. How do we read the divergence in industrial production and consumer growth, plus really weak international trade, but you're still seeing premium expansion in your network. What does this all mean for GDP and IP looking forward? Have your customers given you any view on expectations heading into the back half of the year on inventories and growth?
Okay, Brandon. Thanks for the questions. It's David. Our customers have given us a lot of views, and I'll give the same impression to that that I would to the and that is, it's very mixed. U.S. GDP has obviously weakened. Even today, the numbers that came out quarter-over-quarter has showed weakness and year-over-year of slight deterioration. Again, you can look and you can find bright spots, and then you can find things that worry you. On the one hand, consumer spending continued to be the primary economic driver in the U.S. On the other hand, industrial production has been disappointing. Although I can say there has been some recent data on manufacturing that is showing some sign of expansion. On the one hand, again, online retail is continuing to grow much faster than many expected.
On the other hand, especially brick-and-mortar retailers have not done so well. Again, on one hand, inflation and unemployment have stabilized, although wage growth, of course, has been muted. When you look at it internationally, I think the same thing. You're going to see positives, and you're going to see things that concern you. From the European Union, we still expect to see that economy grow at a fairly solid pace compared to recent past. There are signs of slowing, especially in some countries. Emerging markets, you see some concerns there, especially in Brazil and Russia. China, though, the GDP forecast has stabilized. You look at U.S. exports, because of the strength of the dollar, that, of course, has weakened. When you look at European exports imported into the U.S., that has been pretty solid.
My final point, and I think it's what's led to our success the last four or five quarters and will continue to lead to it, is that regardless of these challenges, we have to make challenges opportunities. It's how we execute our investments, our strategic initiatives. If we continue to execute, we have proven and will continue to prove that we can have success in this mixed economic environment. Thank you for the question. Appreciate it.
Our next question will be from Scott Group, Wolfe Research. Please go ahead.
Hey, thanks. Morning, guys. Just one quick question, just going back to the pension issue for a second. If this thing happens, does it have any impact on capital allocation, share buybacks, either for this year or next year?
The short answer is it does not have any impact on 2016. We continue to allocate capital the way that we planned. For everything for 2016, we continue on the plan. There's a lot of unanswered questions we talked about, that won't change what we're doing for this year. For 2017, later in the year when I guide, we'll go through that. As I told you, we've gone through multiple scenarios, certainty will be understood a little differently, then we'll make the appropriate plans because there are different things and different tools available to us as well. I just think it's too early to look at that. 2016 will continue as is.
Our next question will come from the line of Allison Landry, Credit Suisse. Please go ahead.
Thanks. Good morning. In terms of your comments that you're improving the stop economics of B2C, first, can you carve out the impact of productivity gains versus fuel and the 2% improvement? Curious if the rapid growth of e-commerce is finally starting to lead to density increases in local and regional markets. Thank you.
Sure. Allison, again, this is Richard, the interesting thing is you're right, fuel was lower. It does have an impact on both the cost and the revenue. If you pull those out, we still had negative cost per piece growth. We are seeing that the benefits of everything that we've been really building the last two years showing up in the bottom line, we actually talked about the margin expansion, that plan is a multi-year plan. That will continue, as we expected it to. That's it. Thank you.
Our next question will come from Jeff Atkins, Buckingham Research. Please go ahead.
Hey, everybody. Good morning. It's Jeff. I just wanted to ask a question about CapEx and free cash flow. There was tremendous free cash generation this first quarter, congratulations. You threw off almost $2.6 billion in free cash, I was modeling about $5.5 billion for the year. Have you changed your capital plan at all, is there a reason free cash might be a little stronger than expected this year? Obviously, holding off for anything that may or may not happen with this pension situation.
Sure. Again, this is Richard. When you actually look at our cash position and where we're at as a company after the first quarter, we're about where we were last year. In fact, our cash is slightly about $100 million less than last year at this point. When we look at our plan, it's about the whole year. I also want to remind you that a large portion of our cash, about 40%, is offshore. Repatriation would cause additional tax, and we need that money offshore for the investments we're making in Europe and Asia as well. Our plan was built at the beginning of the year, and it's something that we're working that plan, and that plan really is built to return to shareholders what we've been doing previously.
We're investing $2.8 billion in CapEx, and we actually spent about 20% more in the first quarter this year than we did last year. We'll continue working that plan.
Yeah, this is David. I just want to clarify a little bit that we are clearly opposing the Central States plan, and that shouldn't indicate any change on our part to our long-term capital expenditure plan. Again, this is something that has not happened. We don't know if it will or it won't. I don't want anyone to read into comments that maybe we're adjusting our strategy based on this. We continue to execute this capital plan just as we originally planned. All right, thank you.
Our next question will come from Arthur Hatfield, Raymond James.
Hey. Morning. Thanks for taking my question this morning. With one of your competitors getting ready to make an, or hopefully, making an acquisition for them in Europe. Have you seen any changes in the marketplace over there? Any customer dislocations, i.e., any risks or opportunities ahead of that?
Art, this is David. In Europe, it does look like that the acquisition is going to be approved. The things that I wanted to cover on that is that we have a very strong position in Europe. We've been winning in Europe for some time now, and we've certainly been sprinting over the last several years. We haven't changed our strategy. We're going to continue to invest and grow in Europe, and we're certainly seeing the benefits of that in 2015. We're in the beginnings of our five-year, $2 billion network investment, and we're already seeing benefits from that. Just to give you an idea, you know that Europe is a key part of our strategy, and we've just had great momentum. We've had five consecutive quarters of double-digit operating profit.
What we're hearing from our customers is that we continue to provide value, and they continue to give us more of their share of business. We think it's a very positive environment for us.
Thank you.
Art, it's Jim. I think a couple other points on the back of what David just mentioned is that we've talked over the last year and a half, about the capital outlay plan at $2 billion. I think it's important to note, especially in line with our top-line growth discussion, is that we've only touched 19 of our planned almost 70 facilities that we plan to expand throughout the network. We won't be done until 2018. We're going to be doing that much in line with, as you pointed out, what is the customer's expectation in Europe post-merger. We've had our eyes on that for some time, obviously, on the road we've traveled. We are looking at our customer solutions specifically and our network and making sure that it leans into those risks and opportunities that any merger brings forth.
We're looking forward to the years to come in Europe. Thanks.
Jack Atkins, Stephens, please go ahead.
Yeah, thanks, Scott. It's actually Andrew on for Jack. Richard, just going back to the international business for a second and the impressive operating income growth there. Can you just clarify the puts and takes of that growth? How much was related to lower fuel prices and positive currency translation as opposed to the operational efficiency improvements you guys are seeing?
Sure, Andrew. First, let me start by saying that I had mentioned that even adjusting out currency, we're talking about almost a 17% operating margin. It's very positive, and it's actually the best margin in the industry. The other big thing to remember is, we talked about it I think in my talk a little bit, was that when you look at the yields for international, it was the strongest yields we've seen in quite some time, both in the non-U.S. domestic and in the international exports as well. Your question also mentioned fuel, and let me also remind you that we don't use fuel as a profit center, so it does impact the revenue line, but there's really not a big impact to what happens on the bottom line.
This quarter is really about great cost control and the quality of revenue, and it was really something that Jim and his folks started mid last year when we took on some revenue management initiatives. We know we'll wrap that at the second half of the year. We guided that way at the beginning of the year. This was really a very balanced profit picture and a return for the quarter for international.
Scott Schneeberger, Oppenheimer.
Good morning, guys. This is Danny laying for Scott. Premium product is growing faster than non-premium products. Can you elaborate on the drivers there and what do you expect going forward?
Hey, this is Alan. Thanks for the question. As you stated, our premium Next Day Air products grew more than 3%. I think part of that is the customers responding and enjoying to our continual expansion of our Next Day Air and our Next Day Air Early, as well as our Express services that David talked to in his opening comments. We certainly are establishing a beachhead there, a leadership beachhead in Express and premium Next Day Air. Certainly, the healthcare, high-tech, and professional service segments are in need of those type of services.
Thanks.
Bascome Majors, Susquehanna, please go ahead.
Good morning. I know it's only April, but as we look out to 2017, can you remind us of how much of the FX hedge protection that you had in 2015 and 2016 is going to roll off next year? Just how should we think about the impact of the loss of some of those hedges from a sensitivity perspective, either if that's looking at your international segment margins or maybe an overall EPS impact on the company?
Sure. This is Richard again. The first thing I want to remind everyone is that we do use a multi-year hedge strategy, and it's worked very well for the last two years. Underlying that is really the strength of our business because the core business is running very well. Right now, we're in the middle of a process. We continue to look at different opportunities because of the volatility of currency to go in and do different hedging to protect it and minimize the change. It's really a little too early to talk about what it's going to be because we're still in the middle of that.
We know the EUR went from 135 down to today's rates, we're also looking at what other initiatives across the entire enterprise we can move forward to offset some of that. We'll continue to work on those two efforts, and at the appropriate calendar time, we'll update you on 2017.
Kelly Dougherty of Macquarie, please go ahead.
Good morning, guys. Thanks for taking the question. I just want to follow up on an earlier economic question. Is there any way to break down how much of the adjusted 7%-11% EPS growth you're expecting this year comes from kind of external macro-like factors versus some of the internal yield and profit efficiency things you're doing, just to get a better sense of maybe how much of the growth story is within your own control, kind of despite what happens in the macro environment?
Sure. When we make our guidance at the beginning of the year and we monitor as the year goes, we have a certain assumption for what's going to happen with economic indicators, they have come down. If you go back to January and you look at what GDP was doing and what expectations were around the globe, those have all come down. On the other side, what's happened is what's happening in UPS, what we're seeing is the continued margin expansion, the things that we talked about in both international and domestic around both from a cost and network efficiency standpoint, as well as making the adjustments as the volume looks different. Today, I'd say it's more about what's happening at UPS, we also have to continue to think about what's happening externally because that does have an impact.
Because one is a little bit better than it was going to be at the beginning of the year and the other is a little weaker, you put it together, and we think where we're at in guidance is the right place.
This is David. Just to reinforce Rich, it's nice to have tailwinds, and obviously, you'd prefer not to have headwinds, but that's not the world we live in. What we have been able to do over the past five quarters or so is to deal with the hands that we are dealt and make the most of it. Our management team throughout the world is focused on absolutely that. What's important is that we stay disciplined and focused on our strategic initiatives. As long as we do that, we're going to be in good shape and real proud of what the team's been able to do. Thank you.
David Ross, Stifel, please go ahead.
Good morning, gentlemen. I want to talk a little bit about the pilots that have been in the news. Any comments you have on the current IPA talks, which seem to be, I guess, heating up a little bit after about five years of discussions, and then also the Cologne strike, where the pilots didn't fly some planes this week due to their sympathy strike with ver.di?
Yeah, David, this is Myron. It's not unusual to see some of the recent headlines that have been pretty robust on behalf of the pilots. Let me assure you that there is no real threat of a strike. We remain, along with the pilots union, at the bargaining table, and we believe, as usual, that there will be a win-win negotiation at the end of this for both the pilots and UPS. Also, as a reminder, we're at that negotiating table with the National Mediation Board, and it would take action on their behalf to release both parties in order to have something happen. The reality is, that's not going to happen anytime soon. We're going to get this thing done.
David, it's Jim. On the Cologne situation, just a couple of points I'd like to reinforce. First of all, there's work stoppages that happens or manifestations, as they might be called in the world, especially in Europe, that we have to deal with day in, day out in our business. This specific situation, to be very clear, ver.di's stance in Germany in the state of North Rhine- Westphalia was really not even in the logistics sector. It was in the government sector, which has a whole other set of views to it. The IPA and the pilots took their stance on that. Our job is to run the network.
I would tell you, over the last 48 hours, the guys have done a heck of a job over there, just like the last time the ash cloud appeared and that power of the ground and the air network came through. Tonight our network will be just as normal, tonight, Thursday night in Cologne, and we expect to provide great service going forward. I'll stop on that. I appreciate the question.
Ravi Shanker, Morgan Stanley, please go ahead.
Great. Thanks, everyone. Good morning. You bought a stake in Deliv, I think, in February of this year. Can you just talk about the rationale behind that, what you've learned so far, and also how you see the omnichannel retail shift as a potential opportunity or threat, just being a general disruptor in the e-commerce channel? Thanks.
Hey, Ravi. This is Alan. As you guys know, we've been in the same-day business for a long time with Express Critical and our world-class service parts logistics network. Certainly, there's a lot of buzz with e-commerce with same day. The real challenge is obviously low-cost e-commerce delivery because the consumers are looking for a low-cost option there. Currently, as you know, same day for e-commerce has challenges with consolidating density and single P stop economics that could create profitability issues as these companies look for the low-cost model. Deliv's goal is pretty unique. It consolidates multiple deliveries on one driver with pickups from multiple stores at a mall, for example. We're looking to get some key learnings there. We made that SEF investment into Deliv to better understand the economics, demand, and value proposition, and certainly they're a leader in that particular space.
At the same time, we believe that because the lion's share of shopping takes place in the late afternoon and evenings, there's much more demand for local next day, which really speaks to the latter part of your question about omnichannel. We're very focused on those local store solutions that enable us to take evening orders that are dropped to these stores, let the stores fulfill them locally that same evening, and with a UPS late night pickup, we can get next-day or morning delivery. We can make the delivery in as little as 10-12 hours from the time the order is dropped into checkout. You combine that again with our industry-leading e-commerce platform, and we're really leading the way in the B2C e-commerce market. Thanks for the question.
We have a question from the line of Helane Becker of Cowen and Company. Please go ahead.
Thanks very much, operator. Hi, everybody. Thank you very much for the time here. Not sure how many employees at UPS are minimum wage employees, but there's this move, especially in California, to push the minimum wage up. I'm just kind of wondering, how will that affect your compensation, your outlook for keeping costs under control in that line? Any comments you can make would be appreciated.
Sure. This is Richard, and I think the one thing that's important to understand about UPS is that many of our wages are part of our national bargaining agreements. There are very few employees where the start rate would be at something that would be affected by the minimum wage change. That being said, in some states where there's a slight change, it would impact only the people that are first coming onto the payroll with UPS because there's a progression schedule. It's a very small impact. We've looked at it, and I'm talking hundreds of thousands of dollars kind of thing because it's just not something that is our value proposition as an employer, and giving the full benefits and the rates we pay aren't things that are going to drive additional cost for this in any meaningful way.
Great. Thank you.
We have a question from the line of Robert Salmon of Deutsche Bank. Please go ahead.
Hey, good morning, guys, thanks for taking the question. Piggybacking on the e-commerce question, which had come up basically two prior to me from Ravi, if I think about the local delivery opportunity from a UPS perspective, historically, I've always thought of that as a tougher market to compete in, particularly when there's some crowdsourcing opportunities, given your cost structure. Could you talk a little bit about the attractiveness or not of that marketplace from your perspective? More broadly, what are the markets that you think make the most sense to attack from an e-commerce perspective, given your returns and margin profile?
Yeah. This is Alan, thanks for the question. Look, it's really about the whole e-commerce platform of UPS. Certainly, all of our brick-and-mortar retailers are also in the e-commerce business, so it's about providing them a total solution. Omni-channel is a growing trend in the retail industry. We're seeing 30% year-over-year growth in UPS accounts in 2015, and that means at the store level, we've got over 120,000 ship from store locations that are shipping or have the potential to ship. We're starting to see this phenomena start to take place also outside the U.S. in our international business. We think it's a real advantage for the retailers to optimize for a number of things. Sometimes it's inventory saving the order because the order's not in the e-commerce fulfillment center, but it's in the store. Other times it's to speed up the delivery.
Other times it's to get to the lowest cost option. It's really about the whole platform that we offer with UPS My Choice, UPS Access Point, Omni-Channel, the SurePost, returns, marketplace tools we provide, so on and so forth, that we're out there selling along with obviously the power of our whole product portfolio aligned to the integrated network that's really driving that success. I guess the last thing I'd say is that, to kind of one of the questions earlier, about the density creation. We're really creating this density synthetically through all those e-commerce solutions that I just spoke of because all of them both drive customer and consumer convenience as well as density for UPS. You combine that with some of the things we're doing on the efficiency side with ORION and automation, and the things that Myron talked about.
We really believe we've got a great platform for e-commerce for retailers, consumers, and to continue to enhance UPS profitability.
Thank you.
Time constraints. That was our last question. I would now like to turn the conference back over to our panelists for any closing remarks. Please go ahead, gentlemen.
Okay, this is David. Just like to review quickly. UPS had another excellent first quarter. We are very effectively implementing our strategic initiatives, and we're investing in new capabilities in the right places, which will ensure that we remain the world's premier logistics provider. Lastly, though, I would like to make an announcement that would be interesting to many of the people on this call. Joe Wilkins will move into the role of vice president and corporate controller, and Scott Childers will replace Joe as the vice president and investor relations officer. I'll speak for myself and the company. We're very fortunate to have two very extraordinary qualified and seasoned professionals, and I'm confident that each of them will be just as successful in their new roles as they have been in their prior roles. Really would like to congratulate Joe and Scott.
Appreciate what you guys have done, and like to thank everyone on the call for joining us.