聯合包裹運送服務公司 (UPS) 2005 Q2 法說會逐字稿

Good morning and welcome to the UPS Investor Relations second quarter earnings release conference call.

At this time all participants have been placed on a listen-only mode and the floor will be open for questions following the presentation.

It is now my pleasure to turn the floor over to your host, Theresa Finley, Vice President of Investor Relations.

Ma'am, you may begin.

Good morning, everyone.

Thanks for joining us today.

We're very pleased with the results we've reported.

Our small package business performed extremely well with impressive gains in all areas of the world resulting in the 22% increase in earnings.

It was an active quarter in terms of new product launches, service expansions and Overnight acquisition.

All of which Scott will review shortly.

The first matter of business, of course, is the Safe Harbor language.

Some of the information you'll here 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 in the markets in which we operate, strikes, work stoppages, slow-downs, government regulations, increases in aviation and motor fuel prices, cyclical and seasonal fluctuations in our operating results, and other factors identified in our 10K and other documents we file with the Securities and Exchange Commission.

All of which are available from the SEC.

As always, this call is being Webcast and will be available on our investor relations website for a couple of weeks.

Before turning the program over to Scott, I want to point out that there are no adjustments to any second quarter numbers, either this year or last year.

Everything is according to GAAP.

However, when we discuss outlook, we do base our comments on an adjusted diluted earnings per share of $0.70 for the third quarter last year, and $2.90 for the 2004 full year.

We believe that these measures are important indicators of our recurring operations.

The GAAP equivalent earnings per share results were $0.78 per last year's third quarter and $2.93 for the full year of 2004.

Now, I'll turn the program over to Scott for comments on the quarter and the rest of 2005.

Scott?

Good morning.

In the second quarter UPS set new highs in financial performance.

Operating profit of over $1.5 billion is the highest quarterly profit UPS has ever achieved.

Our international business posted operating profit of almost $400 million up over 40%.

Global volume for the quarter increased 4.1% or 557,000 packages per day.

Worldwide average revenue per piece was up a strong 4.7%.

International export volume increased over 18%.

Our U.S. domestic business also showed momentum with volume up 3.2%, an increase of 387,000 packages per day.

In the supply chain segment produced organic growth of 11%.

We were very active in all fronts to grow our business.

This included enhancing service coverage, launching new products and technology tools, and, of course, announcing a major acquisition, the largest in our history.

The acquisition of Overnight will result in a broader range of guaranteed ground freight solutions for customers throughout North America.

As you're probably aware, all that remains before we can close the transaction is the vote by Overnight shareholders, which is scheduled for August 4th. (inaudible) the transaction will be approved and will close on August 5th.

We also anticipate Overnight will continue to produce the same strong results after it becomes a UPS company, as it did prior to the transaction.

Contributing about a penny per share to earnings in the third quarter.

Over time we expect to increase returns by cross-selling small package transportation services to LTL customers and by increasing the LTL business to the strength of the UPS brand.

Let's start today's review with the international business where UPS is clearly outpacing market growth.

That continued superior performance from international segment is driven by an integrated ground and air network that supports seamless access to a broad portfolio of services, superior customer technology, and a linkage to a wide range of supply chain services that meet the global needs of our customers.

Export volume was very strong with double digit gains in all three of the major export regions of the world.

Volume from the U.S. was up 10%, Europe up 17%, and Asia up 40%.

With particular strength continued out of China where volume doubled once again.

Our international domestic growth increased nearly 10 %, as well.

The European domestic operations posted excellent growth.

Driven in large measure by the impact of our new operation in Poland, the Stolica acquisition was closed in the second quarter.

In Asia, we're vigorously pursuing our growth strategy.

Our customers are seeking more efficient and reliable ways to access markets there.

And we intend to bring in the broadest portfolio of capabilities of any carrier.

In the second quarter, we announced facility expansions.

We're tripling the sorting capacity of our intra-Asia hub in the Philippines.

In our supply chain side in Singapore, we launched an agressive effort to extend new freight and logistics options for our intra-Asia customers, with construction of a 400,000 square foot distribution and logistics hub at Changi Airport.

Certainly China is the keystone of our Asia strategy.

During the quarter, UPS launched the first non-stop express air service between the U.S. and Guangzhou, which is already meeting all of our expectations.

A few weeks ago we announced plans to build a new hub in Shanghai that will handle at least 72 weekly take-off and landings before it becomes operational in 2007.

We we also inaugurated direct service between Shanghai and Japan six days a week in between Shanghai and the U.S. through Japan five days a week.

Finally, we're taking advantage of the fact that UPS is the first global package delivery company to establish large scale, wholly owned operations within China.

Building on this advantage, UPS introduced domestic next day air service in China's major metropolitan areas which will be fully implemented in September.

All of these actions and more to come support our intention to provide the most extensive package delivery and supply-chain offering to, from and within China.

Turning now to the U.S. domestic operations.

We have a highly dedicated U.S. team that is quickly refocused on the middle market customer and we are encouraged by the results.

Ground package volume was up 3.3%, or 340,000 packages a day.

In addition, the air market performed well.

Deferred volume posted a 4.6% gain from last year, while total next day package and letter volume was up about 1%.

Next day letter volume slowed somewhat during the quarter, however, there was an uptick during the last few weeks of June as the services and financial sectors strengthened.

Pricing in the domestic segment remains firm, as evidenced by increase in total average revenue per piece of 2.4%.

Operating profit increased over 13% and operating margin improved 110 basis points to 16.1%.

Once again, we realize profit improvement stemming from the change in our management incentive plan, which we introduced earlier this year.

And, of course, we continue to be pleased with the benefits coming from our package flow technology, as well as a semi-variable cost initiatives we put in place in the first quarter.

We did, however, realize some cost increases during the quarter.

Health care expenses were higher this year and rail transportation expenses increased somewhat.

In both areas, we're working on initiatives to moderate these costs over the long run.

UPS is not sitting still in the domestic business, either.

We're focused in the longer term needs of our US business, and how we can continue to strengthen the value proposition we bring to customers.

In that vein, during the quarter we announced a number of new and expanded service offerings, as well as innovative technology solutions.

First, UPS unveiled an enhancement to the quantum view suite of services that automatically notifies customers of all their inbound packages.

This service provides unparalleled visibility, enables customers to better manage delivery activities, such as staffing, receiving and stocking.

Second, UPS became the only package carrier to accept ground return packages at 40,000 drop-box locations.

Which has made possible by our unique network of integrated, air, ground and international operations.

Third, last week, UPS increased geographic coverage for early morning guaranteed delivery service by 50%.

This move extends UPS's leadership for early morning delivery, with service to over 19,000 zip codes across the country.

And, finally, we'll be significantly expanding our transportation portfolio in the U.S. with time definite air freight products from the Menlo acquisition and expanded LTL capabilities from the pending Overnight acquisition.

Turning now to the supply chain segment.

Revenue increased almost 85% reflected in the impact of Menlo Worldwide Forwarding.

Organic revenue growth in this business was a healthy 11%.

Air freight forwarding exceeded market growth, with particular strength in Asia and Latin America.

Ocean freight grew at high single digits, while road freight improved to a double-digit growth rate, with an increase in our dedicated contract carriage product.

The Menlo integration is proceeding on schedule.

Technology migrations have been successfully completed in many locations.

Transition of freight stations and opening of gateways are on target.

Plans are on track to open our Louisville facility in mid-2006.

Integration costs negatively impacted profitability for the quarter.

However, let me remind you that the synergies we expect from this acquisition remain exceptional.

We anticipate achieving 50 to $100 million in savings in 2006, and at least $200 million in 2007.

Before providing insight into our expectations for the balance of 2005, I want to point out that we entered the quarter with $5.5 billion in cash and investments.

For the first 6 months of 2005, UPS has paid $1 billion in dividends, spent $1.4 billion to repurchase shares, invested 1.1 billion in capital projects.

Free cash flow for the first half of 2005 was $3.1 billion.

UPS has aggressively repurchased shares since the beginning of the year, about 19 million shares, reducing our shares outstanding of 1.5% since the end of December.

Now, some comments on our outlook.

Overall, we see a steady economy.

We're very confident we'll achieve the 2 to 3% growth in domestic volume we targeted for the year, despite the lack of growth in the first quarter.

International operations should continue to demonstrate the strength we've seen so consistently over the last few years.

In the supply chain operation, we'll make steady progress in expanding the service offerings, as well as improving it's financial performance as integration efforts conclude.

For the third quarter, we anticipate earnings of 81 to $0.87 per diluted share.

For the full year, we're raising the low end of our previous guidance from 16 to 18%.

We now expect diluted earnings per share to increase 18 to 20% over the adjusted $2.90 we reported for 2004.

At our investor conference in May, we told you about a company that's on the move around the world.

My guess, we've stated, we have two short-term tasks; execute and grow.

You said we must execute well every quarter.

And we will grow in all markets across all continents.

I believe results for the second quarter speak for themselves.

UPS is doing just that.

Thanks so much, and now we'll take your questions.

Thank you, the floor is now open for questions. [OPERATOR INSTRUCTIONS] Your first question is coming from Jordan Alliger with Deutsche Bank.

Good morning.

Quick question.

You had some really solid improvement on the domestic margin side this quarter, and I sort of know the general reasons, there is the management change, incentive plan, package flow, the other cost controls that you talked about last quarter, et cetera.

Can you maybe talk about, sort of the--the packaging-- the principle drivers behind that?

Is it, how much did package flow contribute?

How much was the other cost saves?

And where do you go from here?

Jordan, the package flow is right on schedule from what we talked about at the investor conference.

We showed about probably $15 million net benefit in the second quarter and that compares to last year, if you recall, we had about $60 million drag.

So good solid improvement there.

Semi-variable costs, we made good progress there, probably 30 to $40 million in reduction, so, for all of 2005, we feel pretty good about the $200 million target.

So, again, I feel we're working very well.

We had a few headwinds we talked about in some of the health-care costs, some of the rail costs going up, but I think the progress we made on package flow, the MIP change, and semi-variable somehow upset that.

And you'd mentioned the economy is generally steady as you sort of walk through the second quarter, and I know it's early in July, is it fairly steady month-to-month?

Was June sort of the pickup like we've heard from others?

I think the economy has been steady really all year outside of March.

March with the Easter swing had impact, I think, on the results, early part of April very strong because of the Easter comparisons.

But we feel good about the economy, it stayed steady really all six months.

The manufacturing is not growing quite at the rate we saw a year ago but it is still positive, so that's important.

Great.

Thank you very much.

Thanks, Jordan.

Thank you.

Your next question is coming from John Langenfeld with Robert W. Baird.

Good morning.

On the international side, how much of that is being driven from the new rights out of Asia?

And, obviously, it looks like you're taking some pretty decent share in the international side.

Can you give a little bit more flavor to that?

I actually think, John, that we're doing it across the world right now.

I think that the volume growth we saw to the U.S. at 10%, the 17% export volume growth out of Europe is probably better than anybody else is producing.

So, I think we're growing really faster than the market in all three of those major regions of the world.

So, I really do believe it's back to the network, the supply chain solutions capabilities and our technology that really helping differentiate UPS.

And, how do you evaluate, then, with the share gain versus profitability gains moving forward?

Do you continue to address that?

Any change of thoughts there?

As we said all along, I think our philosophy is to--is to maximize international operating profit growth, which means you're going to blend the right amount of margin growth with that, and I've said before, we're not locked into an 18% margin or 20% margin or 22% margin.

We're going to figure out the right spot, the sweet spot to maximize that operating profit growth.

I see nothing in the way of slowing globalization down in the future, so I really think that this segment's going to show strong growth for many years to come.

Okay.

And then, finally, on the UPS Store side, we've been hearing some noise from some of the businesses out there from the franchisees not being able to make it based on the changing business mix that they're receiving.

I guess, how do you look at that issue, and how are you addressing that?

We certainly work very closely with our franchisees and do everything in our power to help them succeed.

I think overall the UPS Store network is doing very well.

You're seeing good growth in same-store sales.

Frankly, there's a few areas that are challenged, but I think overall the network is doing fine.

Thanks for your time.

Nice quarter.

Thanks, John.

Thank you.

Your next question is coming from John Barnes with BB&T Capital Markets.

Good morning, guys.

Good morning,.

Scott, given where you are in terms of your run rate on, I guess, the semi-variable costs, you said it was 30 to 40 million?

Correct.

And you expected to hit your goals for the full year of '05?

We do.

We felt that, semi-variability as time moves along you get more benefit, so we think it will improve each quarter.

All right.

Given the success thus far at taking those costs out, is management already looking at is there another slug that you can do, or you guys already have great margins, are you kind of exhausting your effort on that side?

No, absolutely not.

We're not complacent.

We've been working on 2006 initiatives for probably the last six months.

So, we've been dialed in on 2006 and we think there's areas that we can improve on in 2006.

Okay.

You commented in the press release on synergies from the Menlo deal, a little bit better than I had thought.

Are you ready, yet, to provide any kind of insight into the Overnight acquisition, yet, and to what extent synergies will play a part there?

I know you've said that there's not near as much but can you give us some color as to what you think you can take out?

We're certainly excited about the Overnight acquisition, and obviously pleased to see the results they announced yesterday.

The momentum they had last year has certainly carried right through today.

It's a great management team we're taking on board, so we're excited to have that prospects.

Clearly there are some cost savings we can do on the G&A side, clearly.

There certainly is purchasing power benefits, bringing in the scale of UPS will help us (indiscernible), reducing health and welfare benefits that type of thing.

Productivity improvements, I think that we'll see volume improvements in the LTL side and I think that with the volume improvements the UPS brand coming in to reinforce Overnight's business will increase volume, and increased volume should help the productivity here.

So we're excited about the synergies available.

We also think that the cross-selling of the LTL business with small package will reinforce the small-package business.

It's a strong business.

I know people have been concerned about our returns.

We think it'll probably generate economic profit out of Overnight within a two to three-year time frame.

Okay.

And, lastly, just given the growth you're seeing still out of China, are you prepared at all to accelerate additional projects there, similar to what you're doing in Shanghai, are you prepared to go ahead and put new facilities in place and to take advantage of this growth?

And then, I guess, as another part of that, are there additional frequencies that are being decided now, I mean, what do you see as in terms of frequencies between here and say the end of the decade?

Well, I think there will be more opportunities.

I think we've made great progress in the last few years, and obviously, we're going to get [20] more in 2006.

I think that we have a strategy team that's been in place in China for several years now looking at ways to grow the business.

We've been very successful to date as you have seen from the results.

Now, even in the news this morning, the reevaluation, it's a good first step.

I don't think it's going to have a dramatic impact on the trade flows initially.

They moved the, probably the peg about 2%.

But if we continue to move, they readjust in the future, the exchange rate, we think that could be a good opportunity to increase exports to China and that'd be good for the United States, it'd be good for Europe and it'd certainly be good for UPS.

So we're keeping our eyes on it, John.

Okay.

Thanks for your time, guys.

Thank you.

Your next question is coming from Scott Flower with Smith Barney Citigroup.

Good morning,.

Good morning.

Just a couple questions.

I that you already had a question, I just want to get a sense.

What are going to be the integration or training costs that will have to go relative to the Overnight transaction?

I mean, obviously, you already gave us a sense that it's accretive to third quarter over all.

But, I just trying to get a sense of how much training and or integration costs, or is it going to be minor in the broad scope of things?

Obviously, the integration costs in Overnight will be pretty minor, because for the most part, Overnight will be run as an independent company.

We will certainly do the back-office type of consolidation.

And we'll do a lot of cross-selling, there'll be a lot of training on the sales side, but I think overall, Scott, the integration costs for Overnight will be fairly minor.

Has there already been any training on the sales force side or is that after close?

We can't do that until we close the business on August 5.

Okay.

And then, I'm just curious, on international, I know you talked about getting to the sweet spot and obviously looking at the different mix of variables to maximize that, but yet margins keep accelerating.

I mean, what do you keep doing so well, or are there still even further opportunities to accelerate volume growth further?

I'm just curious, also, within that, how much did the Euro hurt this quarter's results as it came off?

I think overall the Euro came off some, but we still had -- we only had two moving parts on currency in the quarter.

We had a currency gain of approximately $20 million in the normal transactions, but then we also have a FAS52 (light)ph balance, which, basically, talks about money you are going to settle within 90 days on your balance sheet.

You have to revalue.

Since the dollar strengthened between the end of the first quarter and the second quarter, we had about a $17 million hit.

So, the net currency impact was fully in profit 3 million for the quarter.

As far as as the sweet spot in growing the business, I think we have to continue to invest in technology, come up with new product offerings, our trade direct operating, I think, is sort of changing the way business is being done.

Continuing to work our supply chain people with our small package solutions is winning business and providing customers a different way to do business.

And then just the last quick question for me.

If you could give us any color, I know you said you were pleased, but how are initiatives having an impact in the middle market?

Are growth rates getting to where you want them?

Are they above or below corporate averages?

I must trying to get any kind of bracket you can give us on how the progress is working in that area of the customer set.

I think that is generally one of the big driving forces of the improvement, second quarter versus first quarter.

We announced these initiatives in January.

We said it'd take a little time to take place.

Obviously, the fact we grew the domestic volume a little faster than we thought we would in the second quarter, says they're kicking in pretty quickly.

If you look at the economy, first quarter to the second quarter, good economy, second quarter economy was certainly no better than the first quarter.

I think you have to attribute most of the improvement to the middle market initiatives.

Okay.

Terrific.

Thank you.

Thank you.

Your next question is coming from Thomas Wadewitz with J.P. Morgan.

Yes, good morning.

Hi, John.

I have, I guess two different questions for you.

What is on the yield side?

You characterized the yields as being pretty good.

We look at ground yields today, we're up nicely.

How much of that is really the implementation of the ground-fuel surcharge, and how much of that do you think is really actual price that's flowing through to the customer?

Well, the ground-fuel surcharge was up a little over 2% in the second quarter, and so certainly part of the 3.3% increase was fuel surcharge-related.

I think overall our revenue piece increase on the ground was similar to the first quarter so you really didn't see any degradation there.

Both the first quarter and the second quarter this year are a little tough on comps of last year's.

Last year the manufacturing business was growing at a faster pace.

Those are generally heavier packages which will increase the revenue per piece.

So we have seen a little lighter package the first half of this year.

Some of it assigned to manufacturing they're stabilizing the last month or so, so hopefully we'll see better improvement going forward.

So, I mean, if you're going to break it out, would it have been -- I mean, was over half of that yield due to fuel surcharge or was it more evenly split in terms of price mix and surcharge?

I'd say that if you had 3.3% increase in revenue per piece we got about 2% on the fuel side of it, so little over half of it was fuel related.

Okay.

And then, in terms of the margin performance in the growth, they both, for domestic packaging and international, they both look quite strong for the quarter.

I'm wondering if you can give me any sense of why this -- these levels of growth in margin wouldn't be sustainable as we look to second half, or do you think that this is you're back on track, given the focus on mid-sized customer, they got the cost initiatives in place, you can stay at this type of run rate for a while?

Yes.

I think we can stay at this run rate.

There is some seasonality in it, Tom, where the third quarter, historically, with the holidays in Europe and the Fourth of July in the U.S. and maybe not quite as strong over the years as the second quarter and fourth quarter, so there may be a little challenge, particularly internationally, I think, on the margins in the third quarter, but that's normal Q3 seasonality.

Going forward, though, I see no reasons why we can't maintain these margins, again, I'll reiterate, their focus is on expanded domestic and international operating profit.

And in terms of year-over-year growth, taking out the seasonality, you should be able to continue it at that type of rate?

Yes, I think so.

Again, our focus will be on operating profit expansion.

Right.

Okay.

Great.

Thank you for the time.

Thank you, your next question is coming from Ken Hoexter with Merrill Lynch.

Great.

Good morning.

Just on the sales focus to the mid-market customers, I'm wondering, first, can we see that actually rebound a little bit better than the GDP focus that you've got since you were able to get such a quick turn around to over 3% growth in the quarter?

Well, I think that we felt that that--we're going to continue to expand this growth throughout the year, our statement earlier in the year was, we thought we would still grow a little less than the market in the second quarter, but by the end of the year get back to market growth.

And I think we're well trendy a little ahead of that at this point in time and of course we're going to do every effort to grow at or above the market as we move forward.

And then, just, I guess, refresh my memory, is the post office set to raise rates still at the beginning of '06?

They're still at a rate case, Ken, that looking for 5.4% rate increase.

I think that the desired date is January 1st.

I'm not sure that'll happen or not.

Okay.

And then just coming back to your $200 million run rate expenses, if I remember right last quarter you had $15 million toward that 200 million goal.

Was that correct?

I think it was 15 to 20.

Now you're looking at 30 to 40 and it looks like it's increasing in speed.

Can you--do you think you'll end up topping that $200 million target?

Our target right now is still the 200 million, Ken, so I think that's still a reasonable target.

Okay.

And then, on the international side, I guess, looking at the air cargo data we saw, I guess last month was slow on a glob-- I think it was actually down a point, as far as growth went.

What is going on that you're able to continue to increase that penetration while the market is continuing to slow down?

Is it just the increase in penetration, increase in market share or is there something more going on there?

I think it's what we talked about, I think that we've made a concerted effort.

We think we have the the best integrated ground and air network in the world right now.

We think our supply chain capabilities is reinforcing the small package business and helping us win business.

Products like Trade Direct are certainly helping us as we build this business.

In China, investment there, we're the only integrator who's got direct ownership, direct control over the business in China at this point in time.

We think that gives you superior delivery and pickup capabilities.

I think that the investment that we've made internationally is paying off and we expect that to continue to pay off.

Thank you.

Your next question is coming from Ed Wolfe with Bear Stearns.

Thank you.

Good morning, Scott.

Hi, Ed.

I wanted to--I'm just trying to get a read, in May at your analyst meeting, when you said volumes were tracking well above 2%, they came in at 3.2% domestic volumes, is that what you were having in mind or did they slow down a belittle bit from that period when you made that comment?

No.

I think that the first couple weeks tracked a little better than that but that was the Easter comparisons.

So we -- I think we came in certainly a little above where we thought we'd be, and you didn't see any tail-off in June.

The volumes have stayed steady.

So, again, the first two weeks of April, a little distorted by the Easter impact.

But throughout the quarter they stayed steady and did a little better than we expected.

Thank you.

Your next question is comes coming from James Valentine with Morgan Stanley.

Great.

Thanks.

Very impressive with international results, especially in the face of some of these decelerating industry trends that Ken talked about.

I was wondering if we could just jump back to the domestic for a second, that, in the most recent three-months period respectively for the companies, UPS, FedEx and the Postal Service have all seen ground volume growth well above GDP and industrial production as a collective group.

And I guess I'm trying to understand what might be causing this.

There aren't any other major traditional ground competitors out there, so it appears like the industry is seeing accelerated growth, as opposed to market share gains from somebody else.

And I guess along these lines if you could also maybe touch on how you think the air fuel surcharge of 9.5% might be impacting this?

Well, I think the air fuel surcharge is reasonably capped at a 9.5%.

Towards the end of last year we saw some impact.

We had 15.5% surcharge in December of last year.

And we felt that was getting high enough that it was driving some air business to ground.

So we put a cap on it.

We really have not seen material trade-down of air to ground this year, in our opinion.

I think as far as the market, the market has been strong overall.

Which is we're pleased with, and we've said all along we think the small-package market still should perform well.

The B to C trends, the direct to consumer trends certainly favor the small-package business, so we're pleased with that.

And, if you look at some of the competitors' numbers , the postal numbers are strong.

A lot of the priority mail pieces at those areas we don't compete in, so you aren't -- you can't -- some of that is-- are light-weight letter-type packages where we can't compete against that, 3.85 -- $3.85 letters.

Until you get more detail in the priority mail I can't tell how much of that is really small-package compatible.

Your next question is coming from Scott Flower with Smith Barney Citigroup.

I just had a couple of follow-ups if I could.

The repurchase activity slowed modestly, is that, obviously, an anticipation of the cash you you had to put out relative to the Overnight?

Because, obviously, the share prices are such I thought you might have been, perhaps, a little more opportunistic?

It was pretty steady, Scott, between first and second quarter.

It didn't change much and the Overnight transaction will not change our share repurchase philosophy.

We generated $3.1 billion of free cash flow in the first half of the year so that will not change our philosophy on share repurchase.

We will continue the same trend.

Thank you.

Your next question is coming from Art Hatfield with Morgan, Keegan.

Good morning, Scott.

Just one quick question, a follow up on the yields.

You had mentioned that a little bit over the half of the yield growth on ground was due to the fuel surcharge.

Could you comment on what it was with regards to the Overnight domestic and some of the international yield growth?

The air side of things you're saying, okay.

Yes.

I suppose if Overnight the LTL carrier?

Yes.

Yes, sir.

Okay.

On the air side of things there's a couple of things going on.

I think, on the deferred air, where you saw an actual decline, deferred air is a kind of--our most volatile product segment, and we saw good volume increases in the quarter, but we had a lot of large wins that involved light-weight products, so it was definitely a situation of lighter-weight products and shorter zones, so the mix changed that.

On the air side, we still showed a good, similar revenue piece increase we saw in the first quarter on our Next Day air.

So it looked okay.

There is some mix change there, also.

We do offer a product, our major next-day product is a package product that arrives 10:30 in the morning.

We offer a Saber product that arrives at a customers at about 3:00 in the afternoon for a less price.

We saw that product growing at a faster pace than a.m. product.

So that has some impact on the next-day air, we feel.

Thank you.

Your next question is coming from Jason Seidl with Credit Suisse First Boston.

Quick question on your capital spending plans for the second half of this year, what are they for the remainder of the year?

And, also, in terms of capital deployed in Asia, how do you think China is changing currency today, is it going to impact that going forward?

I think the the capital spending has not changed.

Our CapEx plan is still for about $2.5 billion of spend for the year.

Which again is around 6% of revenue at our normal low percent --normal low spend.

Going forward, I think you're going to see the same thing.

I think we'll be at the low end of our normal range in CapEx spend, which is normally 5 to 8%.

I don't see a big change there.

As far as the investment in China, I don't think the announcement today will have much impact.

Again, it is a nice first step.

It's really not going to have a dramatic impact, in my mind, on trade flows in the near term.

If there's more dramatic moves in the future, that could have an impact.

Thank you.

Your next question is coming from David Roth with Legg Mason.

Quick question for clarification on the Overnight acquisition.

You talked about adding a penny to earnings in the third quarter, probably a couple pennies in the fourth quarter, is that in your guidance you're currently giving?

It is in the guidance we're currently giving.

And, remember, we're going to have -- if it closes on August 5th, we'll basically have little less than two months of Overnight in the third quarter, that is included in the guidance.

Okay.

Then, also, you updated the status of your pilot negotiation, (I know your last contract proposal).

What is, I guess, your feeling on how that will be resolved, any feedback you heard from the customers on nervousness over the outcome?

Okay.

I'd say on the pilot negotiations, obviously we're in a recess at this point in time.

We, as a Company, are ready, willing and able to meet with the pilots at any time, but the timetable for the next meeting will be set by the National Mediation Board.

We're still in mediation and they have not set the next date at this point in time.

It's our intent, as we've said all along, to reward our pilots, but we also need a contract that (indiscernible) give us the flexibility to grow the business as we move forward.

Regarding the impact to our business, there's virtually been no impact to date.

You have to recall that most of the industry at this point in time is at some point in negotiations, you've got DHL will be influenced by the Northwest situation.

Federal Express is involved in negotiations likely heading into mediation.

So, the whole industry is in some state of negotiations at this point in time.

And, the impact has certainly been minor to the business at this point in time.

Thank you.

Your next question is coming from (Duane Kenmore)ph with First Capital Alliance.

Congratulations on a fine quarter.

I had a question.

How, what progress have you seen DHL make in competing with UPS on a domestic level?

Well DHL was, as they talked about themselves, was pretty aggressive in 2004, had some problems with their ground service levels and that really slowed down some of that aggressiveness in 2005.

And I think they've stated themselves, they are going to slow down and try to get their network in place and their service levels up.

So, again, I think that they're a, certainly a viable competitor out there, but they've pulled back with trends a little from what we saw in 2004.

Your next question is coming from Ed Wolfe with Bear, Stearns.

Yes.

I'm going to throw a couple out in case I get cut off, again.

You said that there's a penny in third quarter for your guidance for Overnight.

What is in for the full year or what's in fourth quarter, should we just assume?

I would say similar, Ed, but we'll totally give more detail when we finish the acquisition in August, and the next call we'll give a lot more detail.

But, I think, at this point I might assume the same as the third quarter.

Okay.

Can you give a sense of what the impact, positive or negative, of fuel overall was in the past quarter?

I think it's similar to what we've seen in the past.

I think the fluctuations in fuel costs do not have a dramatic impact quarter to quarter.

As we all know, there is a lag.

We probably had a slightly negative impact in the second quarter, but it wasn't dramatic to us.

And just with the lag impact it made a good help in the third quarter, but it depends where your prices go.

Overall, as always, our big concern on energy prices is what it may do to the economy going forward.

Sure.

Your domestic volume assumptions in your third quarter guidance, are they slightly above where we are in second quarter?

I would say that -- I would say in general domestic you're going to see the trends continue on ground and deferred, and I would think we'd see the next-day package improve closer to the ground levels.

Okay.

Thanks a lot.

Thank you.

Your next question is coming from James Valentine with Morgan Stanley.

Thanks.

I may also try to get two questions in here, if it's okay.

I'm trying to better understand the organic, domestic margin change and exclude that one-time initiative.

And that is, if we take out the benefits of the incentive compensation year-over-year impact of (inaudible) technology which appears there are economic benefits, but I kind view them as initiatives that we can isolate.

It looks as though domestic margins would have been down slightly even though your volumes were up about 3.2% domestically.

I'm trying to understand how much volumes would need to go up in order to achieve operating leverage, or is it a function of having seeing pricing better than that 1, 1.5% we saw in the first quarter.

First of all, I think these initiatives we have will continue into next year, and we'll still continue to have the savings on the management bonus plan, package blow ought to be bigger savings next year and semi-variable costs are not one time initiatives.

I think we can continue to make progress there.

I think the biggest issue we had in the second quarter, again, we talked about, we saw some very significant increases in health care costs, health care costs also impacted workers comp costs, with healthcare inflation component in it, and some of the rail costs.

So, we think that that we can continue, as I said, with the trends we're seeing of the expanding domestic operating profit, focuses on that as opposed to expanding the margins, but there is (indiscernible) to say that we cannot keep these types of margins going forward.

Okay.

Great.

And, second question is, with respect to international, is three -- can you provide us any color on which industry feeds are providing some of your best international growth?

Is it, pack, apparel, industrial goods, where do you seeing some of the best strength?

Jim, it's, certainly, it's different in different regions of the world.

The technology space has certainly been big on the Asia side.

We're fairly broad based and it somewhat represents in the U.S. side cross manufacturing and the services sector is actually strengthening during this last period.

Okay.

Great.

Thanks.

Thank you.

Your last question is coming from Scott Flower with Smith Barney Citigroup.

I just had a couple of quick follow-ups.

I wondered, first, if you could give us just some more details on package flow in terms of how is the retraining of the bottom groupings and getting up to speed?

Are you comfortable with the all-in savings numbers for the year?

And then, just the second question is, how much more displacement of freight versus international package do you think is available in the network, because obviously that has a wonderful operating leverage effect towards margins on that division?

On the package flow question, I think that that we're on target.

Our goal, again, was to get 65% of the sites deployed in 2005.

And we're on target there.

The sites that we redeployed, I think we're making great progress there, we're seeing--measuring them very carefully, but I think a lot of the redeployed sites are on their own now, they've fixed a lot of the issues.

Our goal this year, the 50 to $100 million benefit is we feel good about that.

We think we'll achieve that.

So, I think, everything that we talked about in depth at the investor conference is coming to fruition.

Scott, as far as the capacity, we still have room.

It moves lane by lane, obviously.

But we still think we've got a fair amount of room to displace heavy freight and to add packages, and, again, they'll move lane by lane, but as a macro standpoint there is still plenty of room there.

Thank you.

Okay.

Thank you very much.

UPS is clearly firing on all cylinders.

We're excited about the opportunities we see in each of our business units that should benefit our customers, our employees and our shareholders.

Thank you for joining us today.

We look forward to seeing you soon.