聯合包裹運送服務公司 (UPS) 2002 Q2 法說會逐字稿

Good day everyone and welcome to the United Parcel Service second quarter 2002 earnings release conference call. Today's call is being recorded. We will now have a question and answer session after the presentation. If you would like to be placed in the queue, you may press *1 at any time during the presentation. At this time, for opening remarks and introductions, I would like to turn the conference over the Vice President of Investor Relations, Mr.

. Please go ahead, sir.

Thank you and good morning everyone to our

second quarter conference call. The past few weeks have certainly been eventful for UPS. First, our announcement two weeks ago about package volume

, then notification of our inclusion of the S&P 500 index, which was followed by our accelerated announcement of topline earnings results for the quarter. Quickly after that, we received a handshake agreement with the Teamsters, settling a new six-year labor contract. This last Friday, we saw unprecedented trading in the stock and advance of our inclusion in the S&P 500 and finally now, we have today the in-depth look at second quarter results and what we see in the future. These past weeks in particular, and the last couple of months in general have been both exciting and challenging for employees, customers, and investors alike. Both Scott and I would like to personally thank you and the investment community for the support and trust in the company that many of you showed in sticking with us through these turbulent times.

We are now at the point where everyone's energies can be focused on the future, revving the engines up on big ground, and really taking the growth of business going forward. With me today, of course, is Scott Davis, our CFO, who will provide insights on how the quarter turned out, remarks about the labor contract, and some thoughts on our view of the third quarter and the future. Our earnings release and our accompanying summary information are available on UPS's Web site in the Investor Relations section. In addition, this conference call is being Web cast and can also be accessed on our Web site. Before we begin elaborating though on the quarter's results, please bear with me for a few moments while I review our favored safe harbor language. Some of the information you will hear today may be considered forward-looking statements, as defined by the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks and uncertainties that could cause our actual results to differ materially from our statements today. These include, but are not limited to, our competitive environment, economic and other conditions of the markets in which we operate, strikes, work stoppages and slowdowns, or customer behavior in anticipation of such events, governmental regulations, increases in aviation and motor fuel prices, cyclical and seasonal fluctuations in our operating results, and other factors identified in the company's form 10-K and other documents we file with the Securities and Exchange Commission, all of which are available from the SEC. Having said that, we can now move forward to something a bit more interesting, and at this point, I will turn the mike over to Scott.

Thank you

and good morning everyone. I want to echo

remarks. Especially the events over the several weeks have been gainful for UPS. In particular, reaching a handshake with the Teamsters was of great importance to UPS and to our customers. Being added to the S&P 500 Index is a milestone we've all eagerly waited for. Inclusion in the index has broadened the range of potential investors in UPS. We are looking forward to meeting them. And briefly, second quarter results with earnings per share of $0.54 in the face of continued economic weakness and labor uncertainty is a tribute to

everywhere . In a nutshell, we are pleased with the company's second quarter performance. UPS managed the business well and sustained a healthy operating margin of 13.4 percent.

We are particularly pleased with the performance of international operations, which continued to grow substantially in excess of the market to post strong increases in profitability. As you know, softness occurred in the domestic segment where for lack of a contract with the Teamsters resulted in some package diversion. In April and May, the package volume was down approximately 2 percent, as we anticipated, primarily due to the sluggish economy. Volume in June was up 4 percent, driven by package diversion and increased into July. The first half of July volume was down approximately 5 percent, with about 4 percent of that due to diversion.

For second quarter, total U.S. domestic volume was down 2.6 percent versus last year with Next Day Air,

and Ground products performing similarly. Even though the

remained firm at 1.4 percent, even with a 0.6 percent reduction in the fuel surcharge. We also continued to focus on cost control at all levels of the organization. As a result, we were able to limit margin decline to 100 basis points even with a very tough June. And now for the international segment. International turned in a stellar performance in the second quarter. Excellent volume increased almost 9 percent, significantly in excess of the market. And operating profit was more than double last year's results. This performance was led by volume gains of 17 percent in Asia and 15 percent in europe, reflecting continued global firming. In fact, we see the firming of all areas of the world, except out of the U.S., which we believe was impacted by the unresolved labor issue in the quarter.

International revenue fees increased a substantial 7.4 percent and with a strong 5.8 percent, restated for the impact currency. A number of factors drove this strong improvement including faster growth of export versus domestic volume, accelerating growth in Asia, a strengthening euro, and our continued revenue management initiatives. Most of the volume growth in Asia was due to our new intra-Asian service. Countries impacted by these

posted 20 percent growth, with China up 32 percent. This service is a key to unlocking additional business with our Asian customers, offering enhanced intra-Asia transport along with Asia export service, significantly extends UPS range of services in that part of the world.

In fact, we are again making network enhancements via our 757 to provide additional service between Taiwan and Korea. In addition, we plan to add a sixth around the world location in response to growing demand for export volume to europe. During the quarter, we were pleased with our independent survey of the european business to business parcel network, which provided UPS with the best overall network for express parcels in europe. The

survey has now 650 leading businesses to link Deutsche Post, DHL, FEDEX, TMT, Consignia,

through price, innovations, flexibility, service range, rapid coverage, and information technology capabilities. But we are also a bit inspired in the european country. It is gratifying to know that so many shippers think we are the best.

Turning now to our non-package segment operations, of which the two biggest components are UPS logistics and freight services. The revenue in this segment was up 37 percent. Operating profits in this segment increased $16 million, reflecting continued improvement in freight services and progress in our logistics group. Lets look first at Logistics. For the second quarter, revenue increased 40 percent with 31 percent due to acquisitions, mostly in europe. Growth in acquisition was slowing, but organic growth remained steady. Our

operation experienced over 25 percent of organic growth in revenues. This part of the business continues to make progress and investment in IT and infrastructure is supporting increased business in existing plans and improving market penetration. The freight services business continues to expand. The

is now showing revenue momentum to post a year over year growth of 6 percent.

Revenue acceleration should occur as the U.S. economy begins to strengthen, as our U.S. sales force hits its stride, and selling the ciomplete portfolio of services UPS offers in the vertical supply chain solutions markets. Freight services operating profit continues to increase as a result of cost control, reduced IT expenditures, and facility consolidations. Effective July 1, our total total brokerage rate of acquisitions were unified under one legal entity. Regulatory system changes will be completed this month. After

to the public for this service and operate from an integrated IT platform.

Now, I want to make a few comments on several other topics. Specifically, our share repurchase program, our labor contract, the growth volume, and of course our outlook. As of the end of June, we have approximately $750 million remaining from our authorized funds for our share repurchase program. You may recall, typically repurchase and retire shares equivalent to what we issue under our stock award programs. As of the end of the second quarter, we had 405 million B-shares outstanding.

Following the trading around our inclusion in the S&P 500 Index, we expect the total number of B-shares will be about 445 million, a costly 40 percent of the total shares outstanding. Only a limited number of additional A-shares traded beyond the 32.5 million shares replacement. With respect to the labor contract we announced last week, by now, as most of you know a good deal of the particulars in the contract, most significant of which is the unprecedented six-year term. The combination of wage and benefit increases is about 4 percent annually over the life of the contract. Our employees' hard work contributed significantly to the success of the company. This contract rewards them for that effort. At the same time, it preserves our ability to compete effectively and sustains all the flexibilities we need to operate our business as we have always have. In addition, we expect to achieved continued productivity gains over the life of the contract. Six years from now, we believe the level of drama over our next labor contract will be far less than was the case this year.

The risk of the business will be reduced since we are now back to business as usual with the Teamsters, which has characterized almost all of our 85-year history with them. Throughout 2002, our sales and marketing team have put in a great deal of effort to track and develop volume and find a little

, and grow business. To,

, our customers about our agreement we gained a

and a handshake, although the actual number of customers with diverted volume was limited, within 48 hours we had communicated personally with over 175,000 of our customers. We expect over half of diverted volume to return fairly quickly. Some will take longer due to the designing multi-month contracts with other shippers. A small portion may not return at all.

The entire UPS organization, from our drivers to our CEO, who are working hard to strengthen relations with our customers and grow volume. Many customers diverted reluctantly and many who have returned to us have said that service reliability UPS offers are important to them and they're gladly back with us. These UPS qualities will play a vital role in bringing back much of the lost volume. We have worked very hard to provide service that exceeds even our old high levels, which brought these customers to us in the first place.

UPS appreciates the support and confidence in the company so many customers showed during the recent weeks as we neared the end of negotiations. Now, for some insight into the future. We are very pleased to have

an agreement in advance deadline. We expected it to get it done a few weeks earlier. Because negotiations went into July and diversions continued, there will be an impact on profitability for July of $0.04-0.05 per share, which will cause a temporary reduction in our earnings growth. We believe we should be able to show increment volume trends, with overall third quarter volumes slightly below last year's level.

With that in mind and due to the $0.04-0.05 July impact, we anticipate earnings for the third quarter to be in the range of $0.50-0.55 per share versus $0.50 the last year

. Whether we end up within this range will determine our success in recapturing lost volume and what happens to the U.S. economy. Except for the July impact, UPS will have likely been on track for low-teens earnings growth in the quarter. More importantly in the third quarter, I think, are the longer-term prospects for the company. Investments in technology and productivity enhancements will help drive profitability improvements in the domestic business. International operations are poised to capture increasing business as economies around the world begin to pick up, and our supply chain solutions unit continues to evolve under a low-light powerhouse of capabilities.

We sense that underway trends, certainly outside the U.S., may be strengthening. Assuming that continues, and the U.S. follows, UPS should be outperform our strong EPS growth rate of 15 percent in 2003. In closing, I want to recognize UPS employees, who did a wonderful job of staying focused on the day-to-day requirements of customer service. The last couple of months were particularly not easy. The UPSers throughout organization maintained their dedication. All of them should be proud of our efforts and the consequent resiliency the company demonstrated during trying times. Thanks for your attention and now

and I will be pleased to answer your questions.

If you have a question and have not already placed yourself in the queue, please press *1 on your touchtone keypad. And we will take our first question from Edward Wolfe with Bear Stearns.

Hi, Scott and hi Kurt. Good morning.

Good morning Ed.

If you have any insights now as to when some of the volumes will start to come back, I mean, since you announced the tentative agreement, have you seen some customers come back or some contracts that were in advanced signed, if not do you expect that to occur when the ratification occurs? What is the timing for volumes to come back in?

Well, Ed we are very excited about the response from our customers. I mean we saw that on the night of the agreement on the 15the, we reached out to many customers and notified them and some of who were going to divert stopped it immediately. Beyond that, we saw volume coming back as early as the 16th and 17th. We would expect to get at least half of that volume to be back by the end of July. So, a great progress so far. Beyond the end of July, there are some multi-month contracts out there. So, we will see in August or September continue to win back some of that volume throughout the end of the year, but we are very excited about the prospects so far.

Ed, if I could add one thing about the ratification. I mean we - certainly the handshake with the biggest went through for us. We feel pretty confident that employees will overwhelmingly ratify this contract. Both the Teamsters and the company are supporting it and pretty much - there is no example in history in which we have had a master contract in which both the Teamsters and the company support it, but it was not ratified. So, we don't see that as a big step down for us.

OK, switching gears for a second, congratulations on the S&P 500 inclusion. Now that you are there and you have generated so much cash, how you are going to use that for the shareholders going forward? Do you think we might see an ongoing stepped up repurchase program?

Obviously, we have been working a balancing act with trying to get liquidity up and still buy back the shares for our incentive programs. And I guess that answer is same as it has always been. We are going to look at our cash flow. We will spend it prudently and we are going to pay down debts, win acquisitions, doing share repurchases and paying dividends. So, I don't think that will change in the future.

OK and Scott FEDEX just filed a 10-K and in it they talked about costs for pensions - their plans going up quite a bit. You guys have been using a 7.5 percent discount rate and a 9.5 percent assumed return on plan assets. Do you see any need to take up some assumptions or costs for pensions in the upcoming year?

First of all, you know, we have had great success in managing our retirement plans and we have had great returns over the years and they are fully funded. As far as evaluating the discount rate, which is probably the most important of the two, we will certainly look at that at our year end - planned year end at September 30. We are at 7.5 percent today, a quarter point reduction would be about a penny a share to us and certainly depends on where rates are at that point in time and we will evaluate that.

But not until the end of the year, you don't think?

No, this year our actual retirement plan expense is about $40-50 million more than it was a year ago. '02 will be that much more than '01.

OK and one last little thing on purchase transportation as a percent of revenue seems to keep coming down. Is some of that due to the freight diversion and using less rail. Or if that is sustainable, what is going on there?

Well, certainly there have been good reductions in the

. We have managed our rail expenses very well, but in addition to that, you know, we have added a fair amount of airplanes the last couple of years and we have taken down an awful lot of charter expense. In the last quarter, we actually reduced, I think, 32 chartered and leased aircraft. So, we are seeing depreciation up a little bit, we have seen purchase transportation down.

So, it will just stay in that range below 5 percent?

Again, it depends on volume, the volume growth.

OK, thanks a lot for the time.

You bet.

And our next question comes from Gregory Burns from J.P. Morgan.

Hi guys, hi Scott and

.

Good morning.

Just a quick question looking at the volumes, it looked like Deferred volumes in the quarter domestically underperformed the overnight or the Next Day and that is following pretty much most of '01, where Deferred volumes were holding up better than your Next Day volumes. I am wondering Scott whether you think that cyclical mix shift to less time sensitive shipments has sort of run its course and maybe people have shifted as much as they can, or do you think that is reading too much into it?

I think Greg a lot of what you say in the second quarter on the Deferred as wrapping some big contracts that we had won a year ago. So, I think we had some big wins in the second quarter a year ago. So, you saw a little bit of a change in year over year comparisons. There has probably been some trade down to the ground service from Deferred Air, but I would not anticipate that would get any worse in the future. I think that would stabilize and probably get better.

So, going forward though do you think the Next Day will track comparable to Deferred or do you have expectations between those two?

Well, I think you will see Next Day Air outperform Deferred Air going forward and that is a big question as to how fast Express business will come back as the economy comes back, but clearly even in the third quarter you will see certainly some good growth in September particularly because of September 11 last year. Because we were very weak in September last year.

OK and on the international side, particularly international domestic where you got a nice increase in yields, I guess, you have not been happy with the pricing in that market and you mentioned currency, maybe I missed it. Was there a currency impact to that and what is driving the increase in the international domestic yields?

Well, an awful lot of this is revenue management, you know, we have been working very hard at getting the right packages in that mix and I think we've done - the operators have done a great job of improving the mix there. Currency did have bit of a role in it. I think we were like 3.9 percent currency without the currency adjustments, but there was an impact versus 6.8 percent without the currency impact. So, there was a good improvement. I attribute it mainly to good management.

Greg, we also see a firming environment in general with pricing in europe, especially in Germany, so that we do see those favorable trends.

My understanding of that market has been, you know, there are some competitors to the pricing aggressively from subsidized competitors, are you - should we read into it that maybe those type of competitors have become less aggressive because basically you cannot really raise prices unless your competitors are doing the same. I mean, are you basically saying that the competitors are becoming more rational there?

Well, I think the european commission has helped move that along with some pretty significant volumes, obviously the Deutsche Post. And I think that sends a signal to all the postal operators that you cannot cross subsidize. So I think it does tell for a much more rational pricing market going forward. So, we are certainly pleased with the decision by the EC.

Great and just one follow-up question on the diversion, are you assuming that, or perhaps you know, that did most of the diverted business go to postal or majority of it, is that sort of why postal does not have any sort of contractual obligations - is that what you are so bullish on the business coming back so quickly?

I think it is a mixed bag. I think that all the competitors sold pretty heavily against, you know, our potential work stoppage and they probably all gained some volume in that situation. But obviously we are talking to our customers and the customers are telling us they are coming back. They appreciate the service and reliability UPS has offered for so many years and there is nobody else to match that.

Great, thanks a lot.

We will now hear from James Valentine with Morgan Stanley.

Hi guys, a really good quarter given the circumstances here. I was wondering if maybe you could help us out - I had a sound quality on your formal remarks, you may have answered this. But it seems like the international operating margins improved, you have already discussed some of that, but then the domestic operating margins did not make the kind of sequential improvement we usually see from the first and second quarter and I am just trying to understand how much of that was maybe a one-time issues due to diversions and things you had to do internally and if maybe we can quantify that in terms of millions of dollars and how much of it was maybe just something else going on that is not real obvious?

Well, first of all on the international front, you know, we are making progress. We have got a lot farther to go. I mean as I said many times in the past, you know, we were in the 7-8 percent marginal range in 2000 internationally. There is no reason that in the next 10 years international margins should not get to the domestic levels. So, we are on the way, on the track to get the margins where they really should be. So, we are pleased with the progress. Domestically, it is related entirely to diversions. We were down 4 percent volume in June and people have done a great job managing with only a 100 basis points decline in margins for that kind of drop off in June. You will see the margins improve domestically as the volume comes back.

OK, good. And can you give us an update on the IRS case in terms of may be the timing and on when you can look for resolution and remind us with the clock ticking against the government here - how much will that amount now is kind of sitting in their bank right now?

Well, again Jim we have deposited $1.8 billion with the IRS back in 1999 ...

Right, that is accruing interest there right?

It is accruing interest. And where we are right now, you know, the

decision is fine, it's back in tax court. Tax court is obviously making a decision under the transfer pricing code sections. We have filed briefs with the tax court, both IRS and ourselves have filed those briefs. Also, we have said all along that there is a parallel path. We also had been having settlement discussions with the IRS. In fact, we are involved right now in some voluntary non-binding mediation with the IRS. That does not mean it will get resolved that way, but it is certainly one of the ways to get it resolved quicker. But still the timing around resolution and the amount of money we get back is uncertain. There is a big gap between zero and $2 billion and it is going to be somewhere in the middle there. If it won't be zero it will be $2 billion.

OK, and one last question, once again forgive me if you said this, but the timing and logistics becoming profitable?

We are still confident that logistics will be profitable in the second half of this year.

OK, good thanks.

Thank you.

Jordan Allinger with Goldman Sachs has our next question.

Yeah, just two quick questions. One, just on the diversion side, maybe you suggested this, of the three domestic product segments, which was the one on sort of the year over year percentage basis that might have got impacted worse. I'm wondering if it is the Deferred, and then secondly can you just comment on the general - what you are seeing from the general domestic price environment, if things are still relatively rational overall?

Yes Jordan. I think all products were hit pretty similarly in the quarter and you could see that they were all down about the same levels. You know, I think the biggest change in the last couple of years has certainly been in the Express product, but that is more of the economy than it was diversion. As far as pricing, we are very excited about the pricing environment, you know, it has held very strong through this period. There is nothing to say that it is going to change in the near future. So, we are confident that pricing will stay rational domestically.

Thank you.

We will now hear from Daniel McKinley with McDonald Investments.

Hey guys, good to have the Teamsters behind you. I wonder if you could talk a little bit more about the economic assumptions that you are building into your guidance for the third quarter and maybe talk about your preliminary looks at the fourth quarter for the economic assumptions?

Dan we are looking pretty much at the third quarter and the fourth quarter and our own assumptions are going to stay somewhat similar to what we have seen in the last couple of quarters. And obviously, we have seen the economy bottom out, we think, but we have still not seen that much-awaited upturn arrive yet. So, we are pretty much presuming that third quarter and fourth quarter are going to stay somewhat similar to what we have seen and that is the way we are managing the company. In the third quarter, obviously, you are going to have some help because September was so weak last year with the tragedy on September 11th. As we go out for 2003, we are expecting that we are going to go along with the consensus economists view about 3.5 percent GDP growth.

Great thanks. Can you talk a little bit about the powerhouse and explain what kind of growth you define a powerhouse to be in supply chain?

Well, I just think that we have put together a tremendous offering between the logistics and the variety of companies that have been logistics and freight forwarding. I think it is an offering that, that is very appealing to our customers. We are seeing strong revenue growth in those areas. You know, the service parts logistics business is the one where we have built a network. We grew 25 percent organically in the second quarter. That growth is going to continue. We are not going to have to add much technology. We have got the networks set up and we are going to probably double the volume without adding any technology dollars. So we are postured quite well as the economy comes back to turn those around and show profits.

And did you say that you all your

are on the same IT platform?

Dan, that's the - the brokerage units are all on a common license now, which will allow us to fully integrate them. Up to this point, those various acquisitions have really not been able to operate as a single entity.

OK, it is a licensing platform, not ...

Yeah, but the technology will follow.

OK, great thank you.

And we will now hear from John Barnes with Deutsche Bank.

Hi, good morning guys. Thanks. Scott can you talk a little bit, I saw that you provided some commentary in your press release concerning intra-Asian air hub in the Philippines and if you have talked about this, I apologize. I got on a couple of minutes late - can you just share with us, what was your total investment in ramping up that intra-Asia hub and I noticed that there were discussion about you potentially increasing frequencies in and out of that hub. Can you give us an update on that as well?

John the capital investment was somewhat limited. You know the actual hub itself was in the single digit millions or $1 or $2 million-type. The biggest addition has really been the aircraft additions that we have added and we have added several aircraft over there. So, that has been the primary, I guess, capital needs. So it has not been too great. As far as the service offering, it has been fantastic. It is really improved our intra-Asia service tremendously. We really have service offerings that match or are better than any of the competitors at this point in time. It has also improved the transit time from Asia to europe by a day. So, it has been a tremendous offering. It has been well received. The volume is up over 20 percent. So far, it has been a home run.

OK, can you bring us up-to-date on where you stand in streamlining the logistics offering? Can you

You are cut out there a little bit on me. I only heard the streamline logistics operations. I think we have made an awful lot of progress. We are continuing to consolidate the overhead and cut the general and administrative expenses down, and we are getting into a position that, as we said, would be profitable logistics later this year and we will continue to keep the SG&A, and reduce the SG&A as a percentage of sales. The progress is excellent there.

OK, thanks for your help.

And our next question comes from Gary Yablon with Credit Suisse First Boston.

Hi, gentlemen how are you?

Good morning Gary.

I want to stay on the Logistics topic just for a second ... when you look at growing the Logistics business making for a more diverse product offering and as you talk about adding to the base package growth rate of the company, could you parse out for us what areas within the Logistics, either in product-type, may be even in geography that are higher on the scale than others?

First of all, in all of those businesses, we are looking for connectivity to the core business, the package business. If you want to pick particular areas that generate more package business, clearly the service part of Logistics arena where you are moving critical parts on a time sensitive basis generates an awful lot of package business, but we are seeing capital ports generate an awful lot of connectivity. Certainly the supply chain solutions side generated an awful lot ...

Then in the international Gary, I think certainly the forwarding and some of the more sophisticated supply chain managements solutions are very powerful because it is part of a global distribution process. So, it differs a little bit based on he geography also.

Could you talk a little bit about buy versus build? We have seen a lot of people buy it as opposed to try and build it, but you have got scale that others don't have. Can you touch on that?

Well it depends, I mean, each circumstance is different and in every endeavor we look at buy versus build and in some areas it makes more sense to build. Obviously, when we got into the freight forwarding area, the answer was to buy and not just to buy but also to buy a global footprint company, a bigger company. So, it obviously as we look at economics and what makes more sense sometimes you are going to get there quicker, so buying makes more sense. In the case of freight forwarding, you know, we are very confident that the acquisition of

was the right answer. In other areas, build will be the right answer.

OK, and if this came up earlier when I missed it, I apologize. But now that you don't have to worry so much about liquidity issues post S&P 500 inclusion, Scott can you talk philosophically about how you think about share buyback piece of the using capital to make acquisitions?

It did come up Gary, but I will say it again that it is not going to change dramatically our philosophy. The only thing that it may change is that in the past we have been more focussed on when we bought shares back for our programs, we have tried to buy A-shares back, so we keep the B-shares outstanding. Now that we are in the S&P 500 there is probably not much reluctance to go the B market and buy shares back.

Fair enough. OK, thanks guys.

And

with U.S. Bancorp. has our next question.

Thanks. Regarding the export package business, the average price per piece was up 1.3 percent year over year for the second quarter versus numerous quarters on the decrease - what has really changed there that has allowed for the price increase?

It is again, you know - on export, you're saying, that is primarily the mix, a lot of it's the mix, a lot of it is going to be the - Asia is growing at 17 percent in the quarter. Those are high revenue for piece packages. Clearly, euro has helped, with the strengthening of the euro, and that is going to strengthen more in the third quarter obviously. We averaged about three or four euros higher in the second quarter. It is going to be more like 12 or 13 percent euros higher in the third quarter. That is going to be a big piece of it and it is good price environment.

And regarding the improvement in international margins, is that mostly from volume leverage or is it actually cost cutting?

A combination, I mean, we are managing the operations tightly, but clearly the mix in export products continues to grow at a quick pace. That will help margins and certainly Asia is a good profitable area for us.

OK, and can you give us an idea of how much of business or what type of business might have been sitting on the sidelines waiting for you to come to an agreement with the union?

It is a very good question and there is some - clearly I think that that was - up until June where diversion was fairly moderate. That was probably the biggest impact to our growing this volume revenue. In fact, it is hard to win new business with that contract hanging out there. Now, that the contract's done, certainly there is some of that out there. I am not sure I can quantify it yet, but there are several opportunities for us. For example, in the postal rate increase, I think, we saw a lot of customers who are going to shift some of the volume from the post office wanted to wait until the handshake was done before they would do that.

OK, thank you.

And moving on, we will now hear from Donald Broughton with A.G. Edwards.

Good morning Scott and

.

Good morning Donald.

One more thing on the internation package export, essentially then should I estimate that the currency effect was similar to what you stated it was on domestic? You had a 2.9 percent positive effect of currency or is it different?

No, it is a little different. Actually, there is a schedule in our detailed sheet Don that can help you. The revenue per piece for export was up 1.3 percent ...

Right, but how much of that was benefitted by the currency?

Right, unadjusted for currency, it was up 0.2 percent. So, there was about a 1 percent impact. So, it was not a huge amount. Certainly, the euro was the biggest impact, but that did not happen until the June really and against the total mix of our export business, it was only about 1 percent impact.

OK great. I noticed cargo volume was up, any lane in particular, international cargo that drove that improvement?

Clearly Asia lane was the strongest in the cargo area.

In and out of Hong Kong or any other place?

Pretty much throughout. Hong Kong was strong, but throughout Asia was strong. Japan was probably the only weak link.

Very good, thank you.

Thank you.

We will now hear from

with Legg Mason.

Yes good morning

and Scott.

here. A question for you regarding the segmentation of your customer base and how those various segments have been performing. My sense is that you do business with just about all segments of the economy. Which segments have been the slowest to show any signs of a rebounding, both in the States and perhaps even within europe?

Again

it is the same answer. As I said for the last three or four quarters I am tired of it, but pretty much all segments are not doing well. Manufacturing certainly was the weakest. Manufacturing and wholesale, they have bottomed out and maybe just eeking up a little bit. The areas that were the bright lights over the last few quarter - the services area that has slowed down as mortgage refinancings has slowed down. So, we are not seeing really any retail. We are not seeing any segment that really is strong at this point in time. I think they are all bumping along the bottom and maybe starting to see a very, very slight upturn.

Thank you.

We will now hear from

with Merrill Lynch.

Hi, great, thanks, and good afternoon Scott and

. How are you doing? Just on the international strength that you alluded to, can you talk to us about what we should expect going forward on the growth? And then Scott, you were talking about the margins going from 7-8 percent now going up to domestic levels and when we talked before it was a decade time process, what should we expect over the next couple of years if you can kind of give us a hint there and then just a last question on the tax rate, if you could kind of give us a clue going forward. Should we stay at the 38.5 percent level? Thanks.

on the tax rate, I have just presumed 38.5 percent going forward for your models. International strength, clearly we are anticipating continuing momentum even with this kind of relatively weak economic climate,

, that we are certainly looking to be able to continue to grow units at or above double-digit rates there. So, it is a little uncertain given the composition of the economy and the U.S. is really the only area that we are not seeing firming right now.

The one area - Asia is going to continue strong, that has been a good trend all throughout starting December of last year. europe, the transport of products will stay strong, I think, with the weakening of the dollar, the europe exports will probably slowdown a little bit in the near term. On the other hand, I would think the U.S., which really was down maybe 1-2 percent in volume in the second quarter, which is not bad considering the labor contract hanging over our head, we would expect that to strengthen some as we move into the third and fourth quarter. Particularly with the contract behind us.

Great and then on the margins?

The margins, I think that nothing has changed. I think in our minds we are going to get to the domestic margins over the next 10 years. I would presume pretty much a pro rata growth. It is not going to happen in one year or two years, but we have room to maybe - because of the international weakness we saw in 2001, and it is starting to strengthen in 2002, there is probably room for little more improvement a little quicker for the next couple of years.

Just a quick followup if I may, is the growth in the Asia and european business due to growing of scale and taking from competitors, or can you give us a clue as to where it is coming from based on, kind of, relative to the U.S. slowing as an economic base overall?

I think certainly the markets out of Asia is growing faster than what we have seen in the rest of the world, in particularly China, you know, which has showed some high GDP growth going forward. I think we are growing faster than the market, but I think it certainly has got a stronger market as a base than what we are seeing in the rest of the world.

And

, I think in europe, this story continues. Clearly, europe's economy is not cooking at double-digit rates, but we are continuing to gain share there and a lot of it is just conversion of how customers have learned to use Small Package. The european market is not as mature as far as the use of Integrated Small Package. So, it is not all a zero sum game from our direct competitors. Some of that is conversion from freight and other more fragmented modes.

Great, good point. Thanks a lot, guys.

And moving on, we will hear from Helane Becker with Buckingham Research.

Thanks very much operator. Hi, gentlemen. I just have a question. You talked about, Scott, in your outlook about outperforming the 13 percent historical earnings growth rate, so can you tell me how you get there without a U.S. economic recovery or is that what you are betting on?

We are presuming that you will see the GDP grow around 3.5 percent in 2003. So, obviously, we are expecting to have some - we are not economists, we are not indictors, but we are relying on economists in this situation and I think by 2003-2004, you should have, from what we can see, growing economy again. Clearly, comparison against 2001 and 2002 will be easier.

Right, OK and what are you looking for in terms of growth for international?

We still see the double-digit volume growth internationally going forward. There is no reason that, that should slow down.

OK and then the other question I have is you just said you were growing faster than the market. What were you referring to that was faster than the market overall?

I think the question was on international marketplace ...

OK and that's where - you are thinking international exports are growing faster than the market?

Correct.

And that is because you are taking share?

We think that for growing faster than the market, we will probably be taking share.

OK, thanks for your help.

Thank you.

We will now hear from

with

.

Good morning. I just had a question about your domestic, the growth before the downturn the idea was that your growth would exceed the growth of the economy and the growth of freight in general, we obviously are seeing growth this year in the economy, we are seeing airfreight, trucking freight up, rail freight. And you are not growing, so I wonder if you could explain that?

Obviously a big issue in the last quarter has been the contract. I think as you look at the overall market and you look at on the ground package side of things, if you look at the post office priority mail which is down double-digits, if you look at the LTLs, where they have been, I don't think that our market has been growing at a rapid pace the last six months. It has not been growing at all.

The airfreight has been, some trucking freight has grown, and

freight has grown, the economy is growing, but you are not growing.

Not the package business. You know may be some of the cargo is growing, but you are not seeing the Express package business growing over the last six months. We think it is going to grow going forward, but not in the past.

Hey,

, this is

. Clearly there has been a little bit of disconnect between some of the longer-term historical linkages we have seen. Clearly, inventory got lay over. Businesses in general though have not been seeing what would look like GDP growth. So, we see ourselves tracking very much as most businesses have been seeing, which is not showing economic growth even though the GDP stats may show it. Certainly, the consumer has continued to hold up the economy whereas business-to-business transactions have not. So, it is clearly not a perfectly typical slowdown and there has been more impact on Small Package than typical. But we still feel pretty confident that, this is a growing industry in general. Really, our share has been a little more volatile in the last quarter with the labor uncertainty, but we feel real bullish on the outlook for the whole sector and that Small Package is going to continue to outperform the economy.

Thank you.

And we have a followup from Edward Wolfe with Bear Stearns.

Hi, Scott we just did not see any cash flow information with the release we got. Can you take us a little through the cash flow from operations, the cap ex spent in the quarter, and if there is any more cap ex guidance going forward?

Yes it has always been my favorite topic, you know that.

Yes, cash, cash, cash ...

So, we will concentrate on cash here. First of all, for the first six months we have had a very strong year of cash flow. Operating results have not been stellar as far as the improvements, but cash flow has been stellar. We have generated about $1.9 billion of free cash flow the first six months of this year. That would be 2.9 billion cash from operations and about $1 billion in cap ex spent. Beyond that, we have spent - we have paid down debt about $300 million. We paid $400 million in dividends and bought stock back for about 400 million. So, cash is up about $800 million in total for the first six months. As far as cap ex going forward, you know, we still are comfortable that our cap ex spend will come in under $2 billion this year and we are working on the 2003 forecast. Maybe by the next quarterly call, we will be able to talk about that. It should not be out of the range, you know, the 5-8 percent revenue range we have seen certainly over the last several years.

Terrific, thank you for the update.

Thanks Ed.

I think we have pretty much covered the calls from what you have told us. Certainly, this has been a very busy period for us. There is an awful lot of moving parts with us getting great teams for contracts, getting the business back on track, and moving forward and we have got a lot of hard work to do, but certainly the whole UPS organization is very focussed on getting back and rebuilding customer relationships and moving forward going into the future. So, we look forward to chatting with you in the next couple of months and if not we will see you on the next call. Thank you.

And that concludes today's conference. Thank you for your participation.