United Parcel Service Inc (UPS) Class B UPS
Q1 2013 Earnings Call Transcript
Transcript Call Date 04/25/2013

Operator: Good morning. My name is Stephen, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the UPS Investor Relations First Quarter 2013 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. Please note we will 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. Andy Dolny, UPS Treasurer and Investor Relations Officer. Sir, the floor is yours.

Andy Dolny - IR: Good morning, and welcome to our first quarter earnings call. Joining me today are Scott Davis, our CEO; and Kurt Kuehn, our CFO; along with Chief Operating Officer, David Abney; International President, Dan Brutto; President of U.S. Operations, Myron Gray; and UPS Chief Sales and Marketing Officer, Alan Gershenhorn.

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 anticipated results are subject to risks and uncertainties which are described in detail in our 2012 Form 10-K report. This report is available on the UPS Investor Relations website and from the Securities and Exchange Commission.

During the quarter, we reported a $36 million after tax net gain related to our attempted acquisition of TNT. This is made up of two components, a $213 million after tax currency gain from the liquidation of a foreign subsidiary and a $177 million after tax charge for the termination fee and other transaction-related costs. These adjustments resulted in an after tax benefit of $0.04 per share. Ignoring the impact of this gain, diluted earnings per share for the first quarter were $1.04.

In our remarks today, we will refer to UPS first quarter 2013 results excluding these one-time items. We believe this is the most accurate picture of the Company's performance. Reconciliations to comparable GAAP measures and free cash flow, which is a non-GAAP financial measure, are included in the schedules that accompany our earnings new release. These schedules, along with the webcast of today's call, are available on the UPS investor relations website.

Finally, as a reminder, our goal is to allow as many as possible to participate on today's call. We weren't able to do that last quarter. So, please ask only one question, and then get back in the queue. For those of you, who like five-part questions, don’t be surprised when we select which part to answer. Thanks for your cooperation.

Now, let me turn it over to Scott.

D. Scott Davis - Chairman and CEO: Thanks, Andy, and good morning. We enter 2013 in an environment of global uncertainty, yet confident in our strategies and ability to execute. UPS delivered another quarter of growth, reflecting the management discipline and earnings consistency you have come to expect.

The U.S. domestic business continues to expand margins, a testament to the ability of our integrated network and operations technology to serve the fast growing B2C market profitably. We continue to raise the bar, differentiating our service in unique ways. Just last week we deployed a new enhancement to UPS My Choice, allowing our 3 million subscribers to upgrade to UPS Ground from SurePost, increasing their visibility and improving time in transit.

Although the international Supply Chain & Freight segments are facing macro challenges, we are adapting our strategies to keep UPS on the path to long-term growth. In emerging markets, B2C and industry specific solutions like healthcare have enormous potential and UPS continues to invest in them.

For example, during the quarter UPS became the first global express delivery Company to have wholly-owned operations in Vietnam, a dynamic, export-oriented economy. This investment reflects our growing commitment to emerging markets, which will generate the bulk of global growth in coming decades.

In addition, leveraging the Kiala business to retail model, we launched UPS Access Point locations in the U.K. to better serve the growing European B2C market. We expect 1,500 locations there by the end of the summer. Continuing this B2C strategy, in May we will begin recruiting partner stores in Germany, and expect to have more than 2,000 by the end of the year and more than 4,000 by the end of 2014. Most recently, we announced the acquisition of the medical logistics company CEMELOG. We expect the transaction to close in June. It will add about 250,000 square feet of dedicated healthcare space in Budapest, Hungary, and enable UPS to further offer customers expanded access to regional expertise, reaching new patient populations. This is yet another piece of the comprehensive capabilities we are building for our healthcare customers across Europe and the world.

While expanding capabilities, UPS also remained dedicated to collaborating with policy leaders around the world to promote global trade and support our customers' growth initiatives. For example, in the important U.S. to Canada trade lane, the recently increased custom ceiling for low value shipments will enable faster clearance of goods. Also, talks were launched on a trans-Atlantic trade and investment partnership, an opportunity to increase trade between the U.S. and EU member states. UPS sees the strengthening of this relationship as a way to improve U.S. and European economies.

Speaking of economies, although the U.S. economy is poised for growth, it has been restrained somewhat by the tax increases and sequestration implemented during the first quarter. This will be a drag on 2013 GDP expansion, with current expectations for about 2% growth. However, we expect the small package market to grow faster than the economy. Around the globe, the Eurozone remains sluggish, but UPS volume continues to show steady growth, again outperforming the economy. In Asia, uncertainty has increased. After the strong fourth quarter, China's GDP and industrial production growth appear to have slowed a bit. Regardless of the mixed economic recovery, you can be sure that UPS will remain focused, execute our strategy, and deliver consistent results.

As I wrap up, there are a few items I want to address related to our most important assets, our people. First representing all UPSers, I want to extend my sincere gratitude to Dan Brutto, President of UPS International, who is retiring after 38 years of service. Under Dan's leadership, we've introduced innovative services and technologies to help solve the needs of our customers. His contributions will have a lasting impact on future generations of UPSers. Dan, we wish you well in retirement.

The international business will be in good hands with Dan's replacement, Jim Barber. Jim began his UPS career in 1985, and has been a senior executive on the international management team since 2004. Most recently, he served as President of UPS Europe.

Continuing on the topic of dedication and service, in March UPS demonstrated our commitment to the mission of supporting those that serve our country. UPS already employs about 25,000 veterans and members of the National Guard and Reserve. As a result of our participation in the Joining Forces program, there are 25,000 more American veterans whom we plan to make UPSers over the next five years.

Lastly, I want to provide an update on our labor negotiations. UPS and the Teamsters have made significant progress. We have resolved the most important issues in the contract, and are optimistic that we'll reach a deal very soon. We are eager to move forward, working in unison with all our employees to deliver unique, innovative products and services that help our customers prosper and enable UPS to deliver superior and consistent results.

With that, I'll turn it over to Kurt to cover the financials.

Kurt Kuehn - CFO: Thanks Scott, and good morning, everyone. The first quarter exemplifies how the UPS business model delivers earnings growth in a mixed global economic environment. The U.S. domestic business continued to perform well, while the international and supply chain segments faced some challenges.

Let's review our results by segment. In the U.S. Domestic, January started out of the gate fast, with the post-holiday season fueling first quarter results. Strong demand for UPS Ground products led to daily package volume growth of 4.4%, increasing operating profit 9% and expanding operating margin by 70 basis points. As expected, we did experience increases in pension and healthcare costs, although this quarter they were mostly offset by reduced workers' compensation expense, the result of ongoing improvements in our safety programs.

UPS results continue to be lifted by e-commerce, as omni-channel strategies are playing a bigger role and increased focus by traditional retailers on using their brick and mortar locations as distribution sites is creating more pickups at retail locations for ultimate residential delivery.

As we noted last call, B2C growth and differentiated products like our returns portfolio produced surprisingly strong January volume levels. However, daily package growth for the remainder of the quarter came in pretty much as forecasted. Revenue in the U.S. segment increased 3.3%, with balanced daily package growth across all products. UPS base rate pricing remains consistent and in line with our long term objectives although it's not fully apparent in our reported yields. The ground revenue per piece increase of 1.5% reflects the continuing trend of higher growth in both our lighter weight B2C products and our returns portfolio. Air revenue per piece was impacted by reduced fuel surcharges and changes in both product and customer mix, but overall the U.S. domestic is adapting successfully to the explosive growth in e-commerce.

Through the use of proprietary technology, systems can now seamlessly merge UPS SurePost packages with other UPS packages at the point of delivery. This and other enhancements like UPS My Choice are helping to expand margins and at the same time empowering consumers with tools to better manage their incoming shipments.

Now let's cover International. Export volume per day grew nearly 4% in the quarter. Asia exports were up about 8%, European exports increased about 3%, while the U.S. was up just slightly. On a currency neutral basis, export yields, down 2.5%, continue to be pressured by lighter weight packages and an increased reliance on non-premium products. We expected operating profit to be flat year-over-year. However, currency and fuel created a headwind of about $30 million as we ended the quarter $17 million below last year. As expected, comparisons were negatively affected by the timing of Easter, resulting in fewer local operating days on a year-over-year basis.

In order to address current conditions, we are implementing a number of programs to bring in-country costs in line with yield growth, generating positive operating leverage. In the UPS Air network, past changes we've made provided benefits. During the first quarter, our international block hours were down 2.5%, although our exports grew by 4%. We also responded to customers' needs with air service enhancements in Panama and Malaysia. Keep in mind the UPS network efficiency is a long term trend. In fact, since 2008, international volume has grown significantly while block hours have remained flat.

Moving on to the Supply Chain and Freight segment, frankly it was a tough quarter. Revenue grew just 1%, as increases in UPS Freight and Distribution were nearly offset by a decline in forwarding. Profit in the segment was down $23 million, although we did maintain a respectable operating margin of 6.5%.

Keep in mind that last year we did have a very strong quarter and benefited from the sale of a surplus facility. As a result of overcapacity, the forwarding market remains under pressure, especially in the trans-Pacific trade lanes. UPS Asia air freight tonnage and yields were down and we had an overall 9% decline in revenue. Cost containment and growth in our ocean business could not make up this shortfall.

In the distribution business, UPS's integrated services, global reach, and specialized capabilities supported a revenue increase of about 10%. The healthcare segment remains a growth engine, although margin expansion was limited by the deployment of technology and investments in infrastructure, including new healthcare facilities in both North America and Europe.

At UPS Freight, shipment and yield growth, combined with productivity improvements, helped grow profits and expand margins. However, profitability in this business unit is still not where we'd like it to be.

Now let's review our financial strength. UPS generated $1.4 billion in free cash flow this quarter, after capital expenditures of $453 million. In the quarter, we paid $572 million in dividends, an increase of almost 9% per share. In addition, we repurchased 12.2 million shares for approximately $1 billion.

In February, reflecting confidence in our cash outlook, the board of directors reauthorized UPS's share repurchase program for $10 billion, and we are on track to achieve our target of $4 billion for 2013. We anticipate an average share count of about 952 million shares for the second quarter.

Lastly, let's discuss guidance. Even though there are some mixed economic signals, we are reaffirming our full year guidance for earnings per share of $4.80 to $5.06. As you've just heard, the first quarter results were a little better than we'd expected due to the strong January in the U.S. domestic segment. However, we anticipate that that benefit will be pretty much offset going forward due to the negative trends in global freight markets. As a result, in Supply Chain & Freight, we are reducing our full year guidance for revenue, and are now expecting low to mid-single digit growth. We anticipate operating margin of approximately 8%.

To give you some shape on the second quarter, we expect low single-digit earnings per share growth. In the U.S. domestic segment, operating margin and profit should be relatively flat, due to the continued headwind from pension expense and a significant benefit last year from the fuel surcharge lag. Keep in mind, as we get beyond the second quarter, we expect profit growth and margin expansion in the segment.

In Supply Chain & Freight, we expect operating profit will, most likely, be down on a year-over-year basis, but for international, we anticipate both profit growth and margin expansion over last year, as we see some pull through from our continued network optimization and in country initiatives. So to wrap it up, UPS will continue to work hard and adapt, demonstrating the power of our business model across a wide range of economic conditions and changing market dynamics, therefore, we're maintaining our guidance and anticipate full year earnings per share to grow 6% to 12% over 2012.

With that, we'd now like to open the call up for your questions.

Transcript Call Date 04/25/2013

Operator: Brandon Oglenski, Barclays.

Brandon Oglenski - Barclays Capital: I wanted to ask about your domestic profitability and how, even with the change in UPS My Choice, being able to ship SurePost packages to your ground network, how is that increasing the efficiency for you guys and the profitability outlook for the segment?

Kurt Kuehn - CFO: The My Choice is kind of a win-win situation. It's a positive for customers in that it gives them control, and it's a positive for our operations, because it allows us to pre-notify customers that packages are arriving. Myron, maybe you can talk a little bit about how that's helping operations.

Myron Gray - President, U.S. Operations: In a previous call, we talked about how technology has continued to enable us to adapt and adjust and keep strong margins. One recent one that we spoke about was residential consolidation, where in the fourth quarter we were able to adjust in approximately 15% of our SurePost packages were then redirected with a UPS driver, which certainly enhanced our customer experience and allowed us to continue reduce cost.

Kurt Kuehn - CFO: So we’ll be continuing to leverage technology to both delight customers and maintain our economic profitability.

D. Scott Davis - Chairman and CEO: The real focus there is just increasing density, and we are doing a very good job of increasing density on the B2C.

Operator: Kevin Sterling, BB&T Capital Markets.

Kevin Sterling - BB&T Capital Markets: Kurt or Scott, maybe you could just touch on the type of trends you are seeing, particularly on the international package side in April?

D. Scott Davis - Chairman and CEO: Well I'd say generally the international package volume flows have picked up in the fourth quarter last year and really carried through the first quarter, and we expect some of the same going forward the rest of the year. The big change in the middle two quarters last year we had negative trade flows. This year we're seeing – we think, global trade growing faster than global GDP and we saw both in the fourth quarter and in the first quarter strong growth out of Asia, upper single digit growth, both to the U.S. and to Europe. So those trade flows were very weak last year. They're better this year. So on the package side, we feel pretty good. The international air freight side, while the tonnage is growing slightly, still way too much capacity and the yields are weak.

Operator: Tom Wadewitz, JPMorgan.

Alexander Johnson - JP Morgan: It's Alex Johnson on for Tom. So congratulations on the healthcare acquisition. Just was curious if you can give us an update maybe pro forma. You talk a lot about healthcare. What is the mix of healthcare in your business and kind of what is the growth rate that we should be thinking about?

Kurt Kuehn - CFO: We've seen healthcare in aggregate grow double digits now really for the last several years, since we targeted this as an initiative. One of the things we like most about healthcare is that it does fully utilize really the entire breadth of the Company. On the distribution side, we've got 1 million square feet of healthcare compliant space. We've developed healthcare compliant forwarding with cold chain capabilities and re-icing at airports and all kinds of good stuff. Then our world-class small package network with things like delivery intercept and proactive notification, we can maintain high quality oversight and even our UPS Freight group is benefitted from it. So it's a very diverse and broad set of products, and that's one of the things that keeps us so excited about it, is that it allows us to bring the entire breadth of the Company for customers' benefit.

D. Scott Davis - Chairman and CEO: We see really the next 10 years' growth similar to the last 10 years, and CEMELOG really is just another piece of the puzzle that's going to help us in Central and Eastern Europe. We're very excited about it.

Operator: Art Hatfield, Raymond James.

Arthur Hatfield - Raymond James & Associates: Just a real quick one. Kurt, in your guidance, you had commented on a bunch of different things, but I thought I heard you say that you expected low single-digit growth in EPS in Q2. Did I mishear that and if so, can you correct me, what I should have heard?

Kurt Kuehn - CFO: We do think the second quarter will show profit growth, but it will be in the low to mid-single digits. The international as we said, we expect to see a good strong bounce back. Supply chain is still facing some challenges. There's a bit of a year over year comp issue on the domestic side, where second quarter of last year, on the domestic side, we had some benefits, variable comp reductions and some of those things but in general, we're still cranking along just fine. We just wanted to give you guys a little bit of the quarter-to-quarter shape.

D. Scott Davis - Chairman and CEO: We had a fuel benefit last year too in the second quarter, right?

Kurt Kuehn - CFO: Yeah.

Operator: Ken Hoexter, Bank of America Merrill Lynch.

Ken Hoexter - Bank of America Merrill Lynch: Kurt, I have one question, but 12 parts.

Kurt Kuehn - CFO: Ken, that gives me lots of choices then.

Ken Hoexter - Bank of America Merrill Lynch: Maybe Scott, we're hearing a lot of maybe some of these etailers you're talking about the growth of e-commerce and a lot of announcements about same day deliveries from some of these etailers or potential of it. Maybe you can address the potential for UPS to participate in that market, or if you've got trials or anything of that sort?

D. Scott Davis - Chairman and CEO: I'll start it off Ken, and then let Alan maybe kick in, but we certainly have experimented with this, with certain customers. I think that's what it is right now, as an experiment, trying it out. I'm not sure yet that the economic feasibility is going to be there for this to be a big service ongoing. But Al, you may want to dig into that a little bit?

Alan Gershenhorn - Chief Sales, Marketing and Strategy Officer: Yes. I think same-day is really going to be a niche offering that's out there. The real story is about omni-channel. We've got about 25 or more major retailers that are either using or moving to the UPS omni-channel solutions. It's really about leveraging UPS' shipping and visibility technologies. It helps enable a seamless connectivity between the retailer's website, the fulfillment warehouses, the brick and mortar stores, and the consumers and returns. It also – for the retailer, it enables inventory optimization and less markdowns, and for the consumers, it enables faster click to deliver times and greater access to retailer inventory and a broader variety. So that's really one of the big stories that's driving e-commerce and why customers are coming to UPS.

Operator: Chris Ceraso, Credit Suisse.

Christopher Ceraso - Credit Suisse: I'm wondering if you guys are having any issues with the FAA in air traffic control disruptions because of sequestration. Is that having productivity impact on your U.S. business at all?

D. Scott Davis - Chairman and CEO: Yes, we'll have David respond on that.

David Abney - COO: So far it's had very limited impact, and we have been working with the FAA and working with the Department of Homeland Security to make sure that continues. We do disagree with the furloughing of the air traffic controllers, and we also disagree on certain closing of night operations. We think there are more efficient ways that they can cut cost that will not impede commerce, and I think that more and more people are agreeing with that as we go through.

D. Scott Davis - Chairman and CEO: It sounds like there may be some breakthroughs overnight too, so hopefully we'll see some corrections on that in the near term.

Operator: David Vernon, Bernstein.

David Vernon - Bernstein: When you think about the capital budget kind of looking forward from here, what types of projects are you guys prioritizing either internally or from an organic perspective? What should we be thinking about from uses of capital outside of the increased buyback going forward?

Kurt Kuehn - CFO: Clearly our top priority for capital deployment is to grow the business. As you know, our physical capabilities – our aircraft are in great shape, and we have limited need for replacement assets. So we're very focused on growth capital. You saw some examples of that in our announcement with the purchase of the CEMELOG, the healthcare company. So that's our top priority, and we're going to be opportunistic around the world really to build a platform in emerging markets and other areas.

D. Scott Davis - Chairman and CEO: I think emerging markets (is a core) area that we're going to invest in. You saw us buy our partnership out in Vietnam, we're 100% owned in the Vietnam in the quarter. There is more opportunities like that as we go forward, and like the previous question, global B2C gives us lots of opportunities. We'll see areas where we can make investments and new acquisitions to help enhance that product.

Operator: Kelly Dougherty, Macquarie.

Kelly Dougherty - Macquarie: Just wondering if you can give us some color on the scenarios due to the high versus the low end of guidance, maybe what you're thinking about from a macro backdrop to get you to one under the other, for the full year?

Kurt Kuehn - CFO: Sure, Kelly. Certainly, the overall global economic environment will be a huge driver of it. Domestically, we're fairly confident that the U.S. economy will be stable, if unexciting. Internationally, the trade flows have been very volatile, and so we have to stay attuned to that. So, I think the broad economic environment would be the biggest single driver of the variability, although the other is certainly the attitude of consumers as B2C becomes a bigger part of our business. Then growth in that environment becomes increasingly important.

D. Scott Davis - Chairman and CEO: I think the way we talked about it earlier too is international air freight market, while the tonnage is growing slightly, we'd like to see that get more balanced with capacity. Dan, you may talk about it. It's a challenging market right now.

Daniel J. Brutto - President, UPS International: Right now, certainly out of Asia, there's more capacity. So, customers are taking advantage of obviously spot rates. I think we still have the best option for our customers, in that we can move some of that freight into our own aircraft to fully utilize, and right now certainly our margins are up because we're fully utilizing our aircraft. We're still running a 13.1 margin in the difficult marketplace, and that's primarily internationally, because of the utilization of our own aircraft in this hybrid model where we can move in our forwarding business when we need space on our aircraft and move it back when the market expands.

Operator: Jeff Kauffman, Sterne Agee.

Jeff Kauffman - Sterne, Agee & Leach: I want to follow-up on an earlier question. You're announcing a healthcare acquisition every other quarter. We talked a little bit about Kiala in the beginning of the quarter. Could you help put together the whole mosaic for us in terms of what you're doing in Europe, what you're doing in healthcare, and kind of what the bigger picture looks like down the road in terms of how this helps drive shareholder value and earnings?

D. Scott Davis - Chairman and CEO: I think, Jeff, we talked about – I think those are two of the big areas that we're going to continue to expand in. We know the global B2C market's going to grow at a ferocious pace for the next couple of decades, and there's lots of opportunities. The U.S. is leading the way and certainly we are leading the way with answers to that marketplace with My Choice and other offerings. But Europe is starting to – the percentage of business that's B2C is starting to grow. Asia will grow at a very fast pace. So we just need to put together the pieces of the puzzle to fill out the customer needs. We are doing that. We are doing that in the U.S. We did it with Kiala in Europe. We are taking some of the Kiala applications to other places around the world, and we'll utilize that, so lots of opportunities. Dan, would you like to?

Daniel J. Brutto - President, UPS International: Yes. I would say on the whole healthcare, we are building out primarily on the backs of our customers that are forcing us into other areas of the world, and CEMELOG's a great example of that. Many of our large multinational healthcare customers have requested certainly that we get into areas such as Central and Eastern Europe. We also opened up in Australia. I'm going to be at a ribbon cutting for a building later this month in Hangzhou, China. So as our healthcare expands out throughout the world, we will follow where our customers' needs are, and many of those needs are in emerging markets and certainly we'll set up a platform to serve them around the world in those areas.

David Abney - COO: With the acquisition of CEMELOG, we now have over 6.5 million square feet dedicated to healthcare, and that is spread out throughout the world.

D. Scott Davis - Chairman and CEO: We are in the early innings in that.

Operator: Chris Wetherbee, Citi.

Christian Wetherbee - Citi: Maybe quick question on B2B, just kind of curious how B2B volumes trended during the quarter? Maybe what do you think about the outlook for the rest of the year? Do you see that coming back at all as you move out into the second half of 2013?

Kurt Kuehn - CFO: Yes. B2B volume remains fairly sluggish, and so that's an area that clearly we are hopeful that the industrial base of the U.S. catches fire a little more. We think there are some fundamentals. The other thing we are seeing though is that the omni-channel that Alan referred to actually when it's done well, does drive B2B volume, because in effect your forward stocking inventory in the stores has to be replenished. It shrinks shipment sizes, and so the state of the art retailers are now actually doing more frequent deliveries to stores to keep inventories balanced.

D. Scott Davis - Chairman and CEO: In the segments we saw the growth in the last couple of quarters were retail and fire, and some healthcare. Manufacturing we think that for B2B primarily has been weak and still negative and even though what we see a Renaissance in manufacturing coming in the U.S., it's not quite there yet.

Operator: Justin Yagerman, Deutsche Bank.

Justin Yagerman - Deutsche Bank: I wanted to ask; you referenced e-commerce returns in the release, and just wanted to get a sense of how that business is growing and really how the economics compare to the original leg of that trip. Is it better or worse? When you think about the final mile, obviously the customer is bringing that to you, so I would think that there might be better economics there, but just kind of curious how you guys think about that and how that differs?

Kurt Kuehn - CFO: It is certainly an area that we're very focused on. We've invested a lot of money and technology to create a very comprehensive set of solutions for retailers. Alan, maybe you could talk a little bit about it.

Alan Gershenhorn - Chief Sales, Marketing and Strategy Officer: As you heard earlier, the vast majority of our growth was driven by ecommerce in the first quarter and easy returns are obviously an important part of driving consumers to shop online at a retail website. We've got a very robust portfolio that provides maximum efficiency, visibility, and control for the retailer. Returns are essentially, like you said, a B2B move, that's created by B2C. Most of the time, these returns are dropped off by the consumer at a UPS drop box or at a UPS store, so you have very dense pickups and then you obviously have very dense deliveries back to the retailers. I would just add that our returns are up about 10% year over year in the first quarter.

D. Scott Davis - Chairman and CEO: As you know, Justin, dense is good.

Operator: William Greene, Morgan Stanley.

William Greene - Morgan Stanley: I wanted to follow-up on Scott, some of the comments you made on sort of working with some of these e-commerce retailers on same-day delivery and what not. Some of the questions I get asked though are whether the same retailers are going to try to build a network that doesn't incorporate the current parcel carriers in ways that they could actually end up being a competitor. Can you just comment – how do you think about that risk and how do you address it?

D. Scott Davis - Chairman and CEO: We always evaluate risk, and we've always looked at how do we serve our customers the best way possible? We certainly evaluate that. I think it's very difficult to replicate the network that UPS has built over the 105 years we've been around. So, while we're not complacent, saying there's not better solutions out there, we'll continue to invest in the technology and have the best offering out there and right now, we're working very closely with all the large customers you're talking about and providing the solutions. Alan, you work with it every day. Any thoughts?

Alan Gershenhorn - Chief Sales, Marketing and Strategy Officer: I'll just say that maybe even to the earlier question about what we're doing with B2C and retail and healthcare, we've got a very focused strategy on the industry segments where we're seeing most of the growth in the opportunity, and certainly the retail and healthcare are two of those. So we're very focused on creating solutions for both brick and mortar and (ETL-only) retailers out there. On this whole omni-channel, getting back to that, what the retailers really like about the UPS solution, in addition to the networking of the technology for shipping and visibility at all their stores is the one driver pickup. UPS can come in there at the end of the day, or really any time during the day or evening, and pick up or they would do their round there and their SurePost packages and provide, in the local area, next day delivery for them. So we still do think we've got a real advantage there.

Kurt Kuehn - CFO: I think Alan highlights it there. We think that the real issue will become more next day fulfillment rather than same day. Although clearly we will help customers do whatever they need.

Operator: Ben Hartford, Baird.

Ben Hartford - Robert W. Baird: Can you guys maybe provide a little bit of perspective on the weakness and the declines in the tonnage market that we see within freight forwarding and the weakness out of Asia that's expected relative to the growth of 8% in the International Package segment, specifically the daily export volume growth? Clearly the divergence has been there for several quarters, but I'm just wondering if there's anything specific to what you guys are doing that's causing that divergence? Are you parcelizing more freight, putting it into the export volume market or is there something else going on that would help characterize that discrepancy?

Daniel J. Brutto - President, UPS International: First, I would say that there's overcapacity out of the market primarily in Asia because of the belly space that the 777s have allowed, so you've now got upsized newer planes that have belly space. So at this stage of the game, that would be one issue. That would describe kind of the price pressure. The second issue is that manufacture out of Asia is not what it was. Things are lighter, so there's not as much freight. If I look at comps last year, there was a couple of big releases on the technology side that drove up freight. Those releases did not occur in the first quarter of this year. Going forward, we think that that's probably going to continue for the short and medium term. On the other hand, an area that doesn't have overcapacity is ocean, and our ocean business is very robust. In fact, on the lesser container load, that business is up over 26%. For the first quarter we added 300 more destinations as of February. So we think that that's certainly not going to make up the variance in international air freight, but we think that that's a good product that we put in the market. So all-in-all, we think that it's going to be a little rocky road for at least the next quarter in international air freight until the manufacturing gets back and the capacity and the marketplace gets back to more normal.

Operator: Nate Brochmann, William Blair & Company.

Nate Brochmann - William Blair & Company: Just to follow up on that question, and I think that's kind of good thought provoking thing, a little bit longer term. Certainly like you say, Dan, the manufacturers kind of a little bit weak and a lot of that's probably tied to consumption near term. But longer term, how do you think about the international air freight market in terms of how much of the pressure today is cyclical versus secular in terms of how far down the curve are we on these lower package weights, or the ship from air to ocean, or just a change in behavior as it relates to maybe some U.S. (near shoring). Just kind of wanted to get your bigger picture thoughts on where we stand with all that.

Daniel J. Brutto - President, UPS International: So, Nate I would say that the whole idea of innovative products is always going to continue and those products are going to require air freight to move those around the world, as the world shifts. We look at what's manufactured in China, now we see a lot of that manufacturing going down to Vietnam, after Vietnam, could be Indonesia, after Indonesia, India. So we're very bullish on the fact that there will be manufacturing all around the world. Global trade will certainly increase, although it's been a little choppy here for the last few quarters, and that will require air freight, and that's perfectly in our sweet spot. The other thing that I would say is when the market does contract as it has; we have our own air fleet. So we can move freight into our air fleet. When the market picks back up, we'll move that same freight and serve our customers through the use of flying on other folks' planes. So we're very bullish in the future about air freight continuing to be a big part of our portfolio.

Operator: John Barnes, RBC Capital Markets.

John Barnes - RBC Capital Markets: Quick question, just a follow-up on the B2C discussion, can you just talk a little bit about the e-commerce customers that you're working with, how much success are you having in making UPS the sole shipping option for that retailer versus just being thrown up as one of a portfolio of companies that offer the service to the end customer?

Kurt Kuehn - CFO: Certainly it's our goal to differentiate, and I think we think we've done a great job with that, being out a year and a half ahead of our competitors with something like My Choice. So that's the ultimate solution to that, but Alan, any other thoughts you have on that?

Alan Gershenhorn - Chief Sales, Marketing and Strategy Officer: Certainly something like UPS My Choice is out there to drive consumer preference. It's extremely relevant to both our retailers and our consumers and unlike our competitor; most of our residential packages get delivered by a UPS driver. Scott mentioned I think in the opening here that our My Choice consumers now have the option to initiate a SurePost upgrade to UPS ground residential service. So now essentially all UPS residential deliveries, whether they are air, ground, or SurePost, are eligible for My Choice delivery options and that's really the power of the UPS integrated network. The other point I'd make is that the offerings like Kiala, which is now being rebranded as UPS Access Point that we have over there in Europe. That also begins to create that preference and you'll see UPS Access Point branded on the retailer's website and consumers able to pick that particular service under the UPS brand. So we are very focused on establishing both consumer and retailer preference for UPS Services, really through value creation.

Operator: Peter Nesvold, Jeffries.

Peter Nesvold - Jeffries & Company: I was hoping to clarify the guidance. For the year, the midpoint implies about 9% EPS growth. If I look at the first tier results, and I take into perspective the second quarter outlook, it seems to suggest that you have to grow kind of 12% to 14% in the back half of the year to hit the midpoint of the range. Clearly, the year ago comps are easier in the second half. Is it primarily – would the acceleration in growth year-over-year be primarily on the easier year ago comps, or is there something that sequentially you should see more than a normal seasonal uplift?

Kurt Kuehn - CFO: We've been seeing, historically, Q4 get stronger and stronger, as B2C plays a bigger role, and so that is part of a seasonal evolution to where we are seeing that happen. We do have an extra working day in Q3. The International group's got a lot of initiatives that are being rolled into place. Air network, we've done a lot of adjusting to, and now that we're doing a number of things on the in-country cost. So, no, your arithmetic is correct. That absolutely we're maintaining our full year guidance, and we do expect to see stronger and stronger results as the years go on based on all those factors.

D. Scott Davis - Chairman and CEO: I think particularly, forwarding, we had a good start to last year on the forwarding side, and had a bad finish. We expect to have good comparisons on the forwarding side second half of the year.

Operator: Scott Group, Wolfe Trahan.

Scott Group - Wolfe Trahan: Hoping for a little bit more color on some of the mix and trade down issues going on in international package. Is there a way we can think about – what percent of package now internationally is these non-premium products, and where do you think it goes? Maybe along those lines, what can you do to mitigate the impact of that, or maybe even change the customer behavior?

Kurt Kuehn - CFO: I'll let Dan expand a little bit, although you do have to be careful. When we talk about non-premium products, those are defined – against a lot of our competitors, those are still time or day definite, what would be considered express products. So we do offer a broad portfolio and we've seen customers move up and down. So I wouldn't put too strong a point on that. It’s a long term issue. But, Dan?

Daniel J. Brutto - President, UPS International: Yeah, I guess, Kurt, just to expand a little bit; we call a non-premium product our trans-border product in Europe, which for us is very profitable and growing very well, even in a tough European economy. Our premium product, Worldwide Express, I think worldwide we've seen some trade down for customers to use our worldwide expedited product. But by all means, we're very successful in our standard product. They’re profitable, they're strong, and we're confident that the Worldwide Express products will come back as the world economy strengthen over the year.

Kurt Kuehn - CFO: I think, Scott, maybe just to put a final point on it. UPS's success has been on finding cost effective, yet profitable, ways for us to meet the customers' needs when they do need to trade down. So we're not trying to upsell; we're building an integrated network, and if the customer gives us an extra day to get the product somewhere, we'll take advantage of that, either through leveraging other forms of transportation or taking advantage of that from an economic perspective. So give us a little time to adapt and the integrated UPS network will continue to generate high returns.

Scott Group - Wolfe Trahan: Do you think that there's more of that to go, though, in terms of more shifting to some of an extra day kind of business?

Andy Dolny - IR: Scott, I think we made it pretty clear. We'll move on to the next question.

Operator: David Ross, Stifel, Nicolaus & Company, Inc.

David Ross - Stifel, Nicolaus & Company, Inc.: UPS Freight saw very nice tonnage per day growth in the first quarter, taking market share. Can you talk about what drove those gains, and what still needs to be done to get back to your target LTL margin level?

D. Scott Davis - Chairman and CEO: Great, I'll let Myron talk to that.

Myron Gray - President, U.S. Operations: While we did experience continued growth in our Freight segment, we continue to be disappointed in that business unit. We've grown it by offering integrated solutions for that customer segment, and we continue to expect slow, but steady growth in the Freight group.

D. Scott Davis - Chairman and CEO: Clearly, the technology that UPS has integrated is being a real differentiator on the market side. Having shipping systems, visibility systems, pick up conformation, the ability to have AM guaranteed deliveries, all of those things that we've been so successful with in our package environment is differentiating us on the freight side, although, as Myron says, we’ve still got some work to do to get the margins up to our targets.

Operator: Scott Schneeberger, Oppenheimer.

Scott Schneeberger - Oppenheimer: In U.S. domestic, congratulations on your 70 basis points of operating margin expansion. Could you speak to the stronger driver being B2C or B2B, just a little more elaboration on that? Then was weather much of an impact in U.S. domestic in February or March?

Kurt Kuehn - CFO: Well, given my executive privilege to pick one, I'll let Myron talk about weather.

Myron Gray - President, U.S. Operations: Fortunately this is pretty much an all-weather business, and we have the ability to adapt to changing situations and the U.S. operating unit has done a very good job of making those adjustments every year. In terms of B2B or B2C, as we spoke earlier, the technology that we've deployed has just continued to enable us to adapt to a changing business, whether they are heavyweight packages or small B2C retail customers, and continue to expand margins. So we feel very confident about our abilities moving forward.

Kurt Kuehn - CFO: Yes. Myron is being humble. This was one of the hardest quarters in recent history for weather and operations. Just continued storms, just about everywhere, and even April we are suffering with the floods a bit. But they managed to execute really well in that environment.

Operator: Keith Schoonmaker, Morningstar.

Keith Schoonmaker - Morningstar: Normally we thought of Europe as representing about half of your International business, quite material even with the current standalone network. Would you share your observations on the evolution of consumer shipping trends in the two markets, U.S. versus EU, at these different stages of maybe adaption and recovery, perhaps also including the B2B, B2C split?

Kurt Kuehn - CFO: Clearly we've seen tremendous evolution and innovation in both areas. We do think that Europe is migrating very quickly, perhaps at a little earlier stage as far as the maturity of the market. I know Dan, you could talk to that.

Daniel J. Brutto - President, UPS International: I would say Europe is probably three to five years behind the U.S. in the whole B2C, depending on what country you're in. I think there are some countries in Europe, such as France, U.K., are moving a little quicker, and I think that's primarily the reason we bought Kiala, because technology and turning a B2C into a B2R is very important for us to be successful. So we're certainly, from an operational standpoint and a customer standpoint, preparing for more B2C growth in Europe. We think there will be some acceleration and certainly we are preparing operationally, and through our technology, to take advantage of that when it comes up.

D. Scott Davis - Chairman and CEO: To Dan's point, we're over 40% B2C in the U.S. right now and probably our biggest countries in Europe are maybe 25% B2C. So that gives you a flavor for where they are at this point in time.

David Abney - COO: I was just going to add that our early adoption of having trans-border services throughout Europe has certainly paid significant dividends over the years, and how we're connecting the countries, and certainly in the B2C market, with solutions like Kiala and other ones to come, our ability to network those countries so that shoppers can shop in any country and receive it back in their home country is going to be a really advantage for us, and that's what we're focused on.

Operator: Jack Atkins, Stephens.

Jack Atkins - Stephens: Just, if we could kind of go back to the Freight Forwarding business for a moment, you talked about the challenges you're facing there. Could you maybe comment on the profitability trends you've been seeing on a per-shipment basis? We've heard of increasing competitive pressures from other forwarders in this market, especially in the trans-Pacific. I'm just sort of curious if that's part of the headwinds you're facing and if so, how do you address that?

Daniel J. Brutto - President, UPS International: The profitability in the air freight has obviously been squeezed. I think a lot of customers, because there's overcapacity in the market, have gone out with spot rates and outside the contract, just because of the capacity that's in the marketplace. We see that continuing at least through the next quarter but think that it will get back to more normalcy at the end of the year. On the other hand, our Ocean profit has been doing very well, not enough to make up the international air freight, but this premium less container load Ocean product we think is very successful. We have a supplier management. Again, we coupled technologies, so a customer can, instead of getting a whole container load get less than container load. We have a great road network in the U.S. that we can feed and accelerate the time that the Ocean shipment actually gets into the U.S. market and even the European market.

Operator: Helane Becker, Dahlman Rose.

Helane Becker - Dahlman Rose: Does your guidance for the rest of the year include any changes in compensation or productivity as a result of the Teamster contract being concluded?

D. Scott Davis - Chairman and CEO: Helane, no, we've really not factored in anything dramatically different. We've kind of trended as if the ongoing numbers were similar to previous trends in our basic guidance and maybe Scott can talk a little bit on the status of the contract negotiation.

D. Scott Davis - Chairman and CEO: No. I think we are quite pleased with the progress to-date on the contract. We've told our customers that we want to get this done earlier than usual. The Teamsters agree, it's important for our customers to get it done. We've taken on the tough issues, issues like pension, issues like healthcare, particularly. We are getting very close to getting this thing done and we feel good about the outlook. But we'll hopefully have something to announce before you know it.

Operator: David Vernon, Bernstein.

David Vernon - Bernstein: Dan, you had mentioned the capacity issue on belly space. I guess I wanted to get your guys' perspective on the main deck freighter capacity in the trans-Pacific. With rates being where they are, you'd think that that capacity would start to come down. We know FedEx took its service down. You guys did some belt tightening. Are you starting to see any of the main deck freighter operators in the trans-Pacific respond to that lower rate environment and if not, how long do you think that will take?

Daniel J. Brutto - President, UPS International: Yes. I mean, as of this point, there are, outside of some Chinese carriers such as Jade that have got four 747-400s sitting on the fence at Shenzhen. There is a lot of talk. I know Cathay has certainly talked about it. There's been some large carriers that have talked about if the rates continue to be low, obviously we had that situation in 2009 where you saw some folks take down some aircraft. It's not at that stage yet. I would say from the UPS standpoint, we've taken 10% of our capacity year-over-year out of the trans-Pacific lane, and that's also 20% down from the first quarter in 2011. So I think everyone is adjusting more frequencies today instead of taking whole planes down.

Operator: Kelly Dougherty, Macquarie.

Kelly Dougherty - Macquarie: I just wanted to see if you could give us a sense, obviously with the 70 basis point improvement in the U.S. domestic business this quarter, how much more do you think you can improve in that business, kind of given the B2C mix, but then some technology and other initiatives you guys have in the works?

Kurt Kuehn - CFO: Kelly, clearly we set out long term targets at our investor conference, of margins of 14% to 15%. We're making good progress towards that. There's no specific numbers other than that I'm going to share with you, although you're seeing great changes, you're seeing innovation driving both customer satisfaction and improved margins. We'll keep investing deeply in operations technology. There's a lot more good stuff to come on that that we'll be sharing with you. So there's still more to come, and I think we feel pretty good on the business overall.

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

Andy Dolny - IR: I'm going to turn it over to Scott.

D. Scott Davis - Chairman and CEO: I think we got off to a good start in 2013. But as you probably detected from a lot of our answers, we're still constructively dissatisfied. We want to do better, and we expect to do better as we go forward. But since this is Dan's last call, I'm going to let Dan Brutto have the last word today. Dan?

Daniel J. Brutto - President, UPS International: Well, thanks Scott. It's been a great 38 years with UPS, starting in Chicago in 1975, when we were essentially just a ground delivery company and what a journey it's been to now be an international company serving 220 countries and territories with air products, freight boarding products, distribution products, brokerage products. So it's been an outstanding run. The foundation of UPS is solid. We have a great management team, and I'm very confident Jim Barber and our international team will lead us on to more growth and certainly better opportunities with our great customer base. Thanks, Scott.

Andy Dolny - IR: All right. That's the end of our call, and thanks for joining us today.