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Operator
Good morning. My name is Lynn and I will be your conference facilitator today. At this time, I would like to welcome everyone to the UPS Investor Relations second quarter 2006 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 one question and one follow-up question from each participant. Thank you. It is now my pleasure to turn the floor over to your host, Ms. Teresa Finley, Vice President of Investor Relations. Ma'am, the floor is yours.
Teresa Finley - IR
Good morning, everyone. Thank you for joining us today. Shortly, Scott Davis, our CFO, will provide insight into the Company's second quarter results and our expectations going forward. Before I turn the program over to Scott, I'll first 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 2005 Form 10-K and first quarter 2006 10-Q reports. These reports are available on the UPS Investor Relations Web site, or from the Securities and Exchange Commission. This conference call is being web cast and will be available on our Investor Relations Web site for a few weeks.
Speaking of the IR Web site, I want to point out to you that it has recently been updated. If you have occasion to visit the site, we'd appreciate hearing what you think. I also want to remind you of our investor conference scheduled for November 8th here in Atlanta, Georgia. You'll hear more about it as we get into the fall, but please be sure to mark your calendars and save the date.
Now, I'll turn the program over to Scott.
Scott Davis - CFO
Good morning. The 2006 second quarter was solid, in spite of unexpectedly higher fuel costs. U.S. volume gains were again strong, reflecting a robust small package market. The international package business posted good growth, despite three fewer offering days in Europe. Our supply chain and freight segment improved its performance over first quarter results and our cash position once again was excellent.
Before I talk about the results of operations, I want to take a minute to highlight a few of the awards UPS received during the quarter. They underscore our commitment to do the right thing in all areas of our business based on the principles and values established within UPS nearly 100 years ago.
UPS was named the country's top business brand in the American Brand Excellence Awards for 2006. Business Ethics and Black Enterprise Magazines recognized the Company for corporate citizenship and diversity. And EPA gave UPS its Clean Air Excellence Award for our work in alternative fuel programs and fuel conservation. And Sears named UPS as supplier and carrier of the year. We're pleased that these recognitions span so many different aspects of corporate life -- brand, ethics, people, service and the environment.
Now let's review operations. In our U.S. business, small package volume posted an excellent 4.7% increase with all product categories contributing. Firm pricing was evident in the 2.7% increase in revenue per piece. The business generated a 10.4% increase in profitability, plus 7.5% revenue increase and an operating margin of 16.5%. This is the third consecutive quarter in which operating margin improved.
Overall, it was a good quarter. However, results were constrained by increased rail, health care and pension costs, as was the case in the first quarter. In addition, exceptionally high fuel prices reduced profits. It's important to remember that fuel surcharges lag real price changes by six weeks. As a result, in quarters where fuel prices spike, such as this quarter, operating profits are negatively affected.
Among this quarter's highlights was the announcement of our new contract to transport mail for the U.S. Postal Service. Through this three-year agreement, UPS aircraft will move first class and priority mail between almost 100 cities. This contract allows us to further optimize the use of our aircraft.
We also made normal progress on the labor front, including a tentative agreement with the Independent Pilot's Association and an agreement to start negotiations early with the International Brotherhood of Teamsters. The voting process on the IPA contract, which will run through 2011, should take until the middle of September to complete. We have an agreement with the IPA not to disclose contract terms until the Union has fully communicated with all crew members. Suffice it to say, we have been anticipating this event and it will not nave a negative impact on our financial results in 2006.
We also agreed to open negotiations early on our next contract with the Teamsters, who represent over 200,000 employees in our package operations, even though our current contract extends until July 31, 2008. By starting early, we should have plenty of time to discuss complex issues, such as pensions, health care and other matters important to UPS and to our employees.
Now let's review our small package business outside the U.S. At first glance, the international results for the quarter may seem disappointing, but in fact, the performance is well in line. Profit growth was significantly impacted during the quarter by the reduced number of operating days in Europe, effectively three fewer than in the same quarter last year.
If we look at six-month performance, to neutralize the operating day impact, we see more typical UPS results -- revenue up over 14% and export volume up over 11%.
International profit increased $809 million for the six-month period and operating margin was an exceptional 18.4%. During the second half of this year, we expect to achieve even stronger results with solid revenue growth and margin expansion. Revenue per piece declined due to the same change in mix we've seen in the last few quarters. The number of non-U.S. domestic packages increased substantially as a result of acquisitions in Europe and strong growth in Canada. Remember -- the average revenue per piece for non-U.S. domestic products is about $7, versus $38 for [total] export.
Our export business is experiencing a higher mix of European and North American trans-border products. These are package movements that cross borders within a continent. Both the non-U.S. domestic and trans-border products have a lower revenue per piece, but are quite profitable. The UPS small package business is a powerful physical and information infrastructure that spans local, regional and global markets. This integrated network supports the global portfolio of products and technology services. This portfolio is the cornerstone for creating solutions that help our customers grow their businesses.
Now for the Supply Chain and Freight segment. The increases in revenue and profit are attributable primarily to our LTL acquisition, completed last August. The Forwarding and Logistics business produced breakeven performance due to the initiatives put in place during the quarter. Revenue management and account profitability efforts are producing results and we're seeing an improvement in customer retention in our Forwarding business. However, we still have to work to win back business we lost in the first quarter.
As to an integration of the airfreight forwarding network, I'm pleased to report that it was completed on June 30th as planned and we expect to achieve at least $50 million in cost synergies from this acquisition in the next six months.
In our UPS Freight business, efforts during the quarter focused on integrating technology and enhancing service. We realized gains in on-time delivery, reduced claims and improved time in transit. Now rebranding the former Overnite Company to UPS Freight and transition of that business into UPS is continuing and generally proceeding smoothly.
Before I talk about our outlook for the rest of the year, I want to review our financial position. Our Board of Directors authorized another $2 billion in funds for the Company's ongoing stock repurchase program. Since the inception of our repurchase program in 2000, UPS has purchased a total of almost 150 million shares. In the first half of this year, we repurchased 17.8 million shares. Year-to-date, we generated almost 4.1 billion in cash from operations, invested 1.4 billion in capital expenditures, spent 1.4 billion to repurchase shares, paid dividends of $1.2 billion and still ended the first six months with 2.9 billion in cash and investments. Our year-to-date free cash flow was $2.7 billion.
Now for our outlook for the rest of the year. For the third quarter, we anticipate that diluted earnings per share will be within a range of $0.87 to $0.91, compared with $0.86 a year ago. This guidance in part recognizes that there will be one less operating day this quarter than there was last year. In the U.S. domestic business, one less operating day reduces profits by about $50 million.
In addition, July 3rd fell on a Monday this year, significantly lowering pickup volume as customs extended the holiday weekend. This will reduce operating profits by about another $25 million. Combined, these two days will negatively impact earnings per share by approximately $0.04 to $0.5. And again, the increased rail, health care and pension costs will also negatively impact the bottom line. As a result, U.S. domestic profit growth for the quarter is expected to be minimal versus last year's third quarter.
As I said earlier, our international business should improve, resulting in excellent revenue and operating profit growth. Performance of the supply chain and freight segment should also continue to improve in the third quarter. We expect a strong fourth quarter performance, coincident with our peak season, but at this point in time for the entire year, we anticipate earnings-per-share growth will be at the low end of the 11% to 16% range we originally set for 2006.
We have had an exciting and at times challenging six months, transitioning for acquisitions into the UPS fold. These investments, along with our focus on expanding the product portfolio, investing in sales training and managing costs, will continue to help us grow our business and position us well for 2007 and beyond.
Now I will be happy to answer your questions.
Operator
(OPERATOR INSTRUCTIONS). Tom Wadewitz, JP Morgan.
Tom Wadewitz - Analyst
Good morning. I wanted to ask you if you could give us a few further thoughts in terms of a breakdown for the change in the guidance here, giving a little bit softer full year guidance, setting aside the third quarter timing issues. Is it more of a cost pressure issue, or is it more on the revenue side? Can you give us any sense of those two? And then I guess also, whether you've factored in a slowing economy within that, or if economic outlook isn't really a factor in that?
Scott Davis - CFO
Tom, I think it's a combination of things. I think first of all, the second quarter came in at the low end of our estimate, so it had an impact on the entire year. Beyond that, supply chain is still really trying to catch up to its original forecast, threw off some revenue during integration in the first quarter–. We're showing strong improvement and expect so, so in the second half of the year, but probably not enough to get back to the original target. Also, I'd say the economy is a factor. We expect it to moderate and I wouldn't say we're going to a real bad economy, but we expect it to moderate some of the fast growth we saw in the first half of the year. We still expect small package growth to be growing faster than the economy. So I think there's a slight impact on the economy.
Tom Wadewitz - Analyst
Is it fair to think of it more as a cost pressure issue then, and is the cost pressure a little more than fuel?
Scott Davis - CFO
The cost pressure in the second quarter was primarily fuel. If you look at the second quarter, when we started the quarter, fuel price was actually -- jet fuel jumped 14% from the start of the second quarter to the end of the second quarter. Diesel fuel increased 11%. That actually ended up costing us about $25 million in costs, additional costs, versus what we had forecasted or projected at the beginning of the quarter. And as you know, that fuel surcharge lags about 45 days. So we will eventually catch up to this whenever fuel prices come down again, whenever that happens. It will happen one of these days. We also had a cap on our fuel surcharge in April and May on the Express business that had an impact on us. That cap was removed in June, so it will have a lesser effect as we move forward. As I said earlier, SCS, while making a good improvement, still had ground to make up from the integration efforts in the first quarter.
Tom Wadewitz - Analyst
Okay, thank you.
Operator
Jordan Alliger, Deutsche Bank.
Jordan Alliger - Analyst
Just on the international front, you mentioned you sort of expect excellent growth internationally in the third quarter. Care to give some sense directionally how that could look, given the perhaps lighter results, at least than we anticipate, in the second quarter?
Scott Davis - CFO
I think the second quarter results from international were definitely explainable by the three less operating days. We lost two days for Easter and one day for May Day, which really has a big impact. I think if you took those, if you normalized the operating days, you would have seen much better operating profit improvement and you probably would have [seen] expanded margins over the good margins that we had a year ago.
As we move forward in the second half of the year, we do think that we're going to see expanded margins in the third and fourth quarter versus year ago margins, and certainly much better operating profit improvement than what you saw in the first half of the year. If you recall the first quarter, certainly we had a big impact with currency comparisons and we don't expect the currency headwinds in the second half of the year. Expect double-digit export growth to continue as you saw for the first six months, and certainly growing revenue. So we're optimistic on the international side, and expect good results.
Jordan Alliger - Analyst
And then just in terms of the third quarter and sort of the expectations, the year-over-year growth is obviously less than your longer target of 11 to 16% or so. I guess that could be explained sort of by the less days. But is there anything else that is mitigating some of it, because I just wonder if that was sort of contemplated a quarter or two ago when you started giving original thoughts for the year. In other words, I assume the days were sort of expected in there, so I'm just wondering -- is it the supply chain falling short versus the initial expectations that is putting the drag sort of more on the third quarter than one would have thought?
Scott Davis - CFO
I would say we always saw the third quarter as being a tough comparison because of one less operating day, and then July 3rd could not fall on a worse than for us. When it's on a Monday, the holiday is on a Tuesday, you have to operate, but you have an awful lot of businesses closed. So your pickups are much less than a normal day. A big impact there. I would say that probably the one factor, the supply chain is making good progress. The integration of the heavy air freight network is complete, on schedule at June 30th. So we'll see some nice cost synergies throughout the second half of the year. But as I said earlier, we're still battling back some of the revenue we lost in the first quarter and it's going to be very difficult to get back to our original guidance. So that's a part of the factor in the third quarter.
Jordan Alliger - Analyst
Okay, thanks.
Operator
Edward Wolfe, Bear Stearns.
Edward Wolfe - Analyst
Hey, Scott, I just want to make sure I'm here you right. What I'm hearing is that fewer operating days and inflation is basically the issue, and that your guidance has maybe a piece of an expectation for moderation in the economy. What are you seeing in the economy today, in July and June and May? Have you seen any signs of a slowdown in the economy, or is it just, there are signs out there of high fuel and so forth, so you're bracing for it?
Scott Davis - CFO
I think there are a lot of signs out there that indicate that we're going to moderate. Now I'm not saying we're heading into a recession or anything like that, but it's likely to be of a little bit of a slowdown from the pace we have seen in the last 12 months. We've seen a very strong pace the last 12 months. So I think you're going to see some slowing there. Our volume is still pretty steady, up until June or July. You can't tell a lot because July 3rd distorts it a little bit. But I think that in general, as you will see from 4.7% volume growth we had in the second quarter, volume stayed pretty steady through the second quarter. And that would have been even better without the Easter comparisons. Domestically, the Easter comparison probably cost 0.5%. So it probably grew, without the Easter comparison, a little over 5% -- 5.2, 5.3%.
Edward Wolfe - Analyst
But did volumes grow year-over-year better in June than they did in April?
Scott Davis - CFO
It was pretty steady through the quarter, nothing dramatic throughout the quarter.
Edward Wolfe - Analyst
Just a follow-up. When did the operating day comparison, if you have fewer days this quarter in Europe and you have fewer days next, when do you gain those days back? In the fourth quarter, do you have extra days?
Scott Davis - CFO
No. We have the same number of days, it's just the way the calendar falls this year, Ed, and it does have an impact. We have gone back over the years and you can see the revenue we lose versus the variable cost that we save generates -- results in about a $50 million operating loss for losing an operating day.
Edward Wolfe - Analyst
Thank you for the time.
Operator
Mike [Halloran], Robert W. Baird.
Mike Halloran - Analyst
On the international export side, could you talk about the trends that you saw through the quarter, and then also the strengths of the various regions, you know, recognizing the lighter number of days in Europe? Was [there absolutely] an impact there?
Scott Davis - CFO
Yes, I think that that - again, you really almost have to look at the six months in total for international export, primarily because of Europe. Europe was in the single-digit area growth-wise. We always look at -- the 6.5% growth is done on U.S. days. We always put all of our volume on U.S. days. So if you look at local days in Europe, the growth would have been much higher. U.S. export was, in Asia, still held pretty strong. U.S. export was double-digit in the quarter, driven a lot by trans-border products. But I think that you have to look at the six-month period to really get an idea of where export volume is going and we're confident that we'll see double-digit export going forward.
Teresa Finley - IR
Remember, Mike, that Europe is about half of our business internationally, so it does have an impact.
Mike Halloran - Analyst
Great. And then just on the international side again, we were a little surprised by, you didn't get a little bit more operating leverage there. What sort of cost headwinds were you facing on that side? Was there still a lot of that hangover from the acquisitions that we saw over the last couple of quarters?
Scott Davis - CFO
I'll go back and hang it on the European operating days. If you just normalize Europe on the same number of operating days, you would have seen expanded margins for the second quarter international, which is what you saw a year ago. The fuel costs, you have a little bit of impact on the same thing you saw domestically on fuel costs because the surcharge lags and we had a cap on it. But I think in general, there's nothing to be alarmed about in the margins internationally. And we expect expanded margins going forward.
Mike Halloran - Analyst
Thanks for the time.
Operator
(OPERATOR INSTRUCTIONS). Ken Hoexter, Merrill Lynch.
Ken Hoexter - Analyst
Good morning. Scott, it looks like you're lowering your synergy expectation on the supply chain side to 50 million from 50 to 100. Is something going on there? Aside from the first-half impact, it looked like you were targeting the back half to bounce back a bit?
Scott Davis - CFO
I still think, Ken, we have the cost synergies that we had predicted all along, and the network was complete on time. I said a minimum of 50. Just to I guess remind people that there is still -- the revenue we lost in the first quarter that we'll win some of it back in the second quarter and we'll win more back throughout the second half of the year with this improved service offering that we have. But it does have an impact going forward. So we'll get the cost synergies, but we still have -- it's going to take awhile to get back the revenue we lost in the first quarter.
Ken Hoexter - Analyst
Just a follow-up if I may, on the days in service, going back to kind of Easter -- I'm sorry -- Christmas last year when the days were a little bit surprising. What happened here that would not have been in kind of your targets? I mean, the days seemed kind of fixed. I'm just wondering why you would not have expected the softness on the international going into the quarter?
Scott Davis - CFO
I think that international actually, results came in pretty much what we expected for the second quarter. The shortfall, the low end of the range resulted primarily from the fuel expense we talked about and a little bit of shortfall on the supply chain from where we originally thought we would be. But it had nothing to do with international.
Ken Hoexter - Analyst
Great, thanks.
Operator
Gary Chase, Lehman Brothers.
Gary Chase - Analyst
Good morning guys. Just a quick question, Scott. You made a couple of comments around what you were seeing out there. You said some signs of the economy is moderating. I was wondering if there was any customer segment color worth noting; and in particular, I'm interested in technology. Last quarter, you talked a little bit about retail. Was technology an issue this quarter, and is there anything else there that we ought to be aware of?
Scott Davis - CFO
No. I would say, if I were to go back and look at the quarter, what we're seeing today is that the manufacturing sector has stayed pretty strong. And if you look at manufacturing in IT, it's expected to stay strong at least through the third quarter. So we're happy with the strength in that sector. I'd say business services stayed strong; you can see that in our deferred air products, and the strong growth there. I would say retail in general is mixed right now and we're seeing some doing well and some not doing so well. The one area that stays strong though is the e-tailing, the B to C. We're not seeing much slow-up there. So it's just, every indication says that there's some challenges and headwinds out there in the economy. We are not saying the sky is falling in, but we're saying it's likely to moderate from the growth we have seen.
Gary Chase - Analyst
But it doesn't appear evident in what you're saying in terms of customer results (inaudible)?
Scott Davis - CFO
Not in -- other than some retail mixed results we're seeing at this point in time. But I would say the manufacturing arena, that's staying strong at this point in time.
Gary Chase - Analyst
Okay. And just to ask you to clarify on the synergy expectations for Menlo, when you said at least 50 million and sort of figuring out the difference between at least 50 and 50 to 100, was that just the revenue lost in the quarter? Because you're saying you still could get the 100 million in synergy, but there's some revenue loss to offset it -- am I reading that right?
Scott Davis - CFO
I think that's correct. I think we lost some business in the first quarter when we got -- we talked about it last quarter. We got a big process and technology changes in the integration. We're starting to win some of that business back in the second quarter, but probably will not get back to the levels we thought we would be when we gave our original guidance at the start of the year.
Gary Chase - Analyst
Sorry, Scott, let me just ask that question a little bit better. Your second-half expectation for SCS is down slightly because of what happened or --?
Scott Davis - CFO
Yes. Supply chain will still show good improvement in the third and fourth quarter versus a year ago.
Gary Chase - Analyst
Okay, so no change to the outlook there?
Scott Davis - CFO
Right. A little less than what we said at the start of the year, but certainly, we expect good improvements third and fourth quarter.
Teresa Finley - IR
Yes, Gary. If you recall, we said that the supply chain and freight unit in total were double profits. So because of the performance in the first, and although we improved in the second, then obviously, the year-end guidance is affected by that.
Gary Chase - Analyst
Okay, thanks guys.
Operator
John Barnes, BB&T Capital Markets.
John Barnes - Analyst
Hey, good morning, guys. Scott, just given I guess the integration issues with supply chain, does this change your philosophy on acquisitions, at least in the near-term? Would you slow it down and just digest what you've undertaken thus far, or are you still as active in the market as ever?
Scott Davis - CFO
I feel very confident in our integration abilities. I think that that -- it was a massive integration effort on the Menlo side that we certainly hit the timetable on it. But -- and did a very good job I think getting the freight networks built, and obviously moving from the dedicated 32-airplane network at Menlo to the UPS network done on time; we're very pleased with that transition. It was a tough challenge. And I think trying to change processes, get products unified, change in technology, it was a big change. And unfortunately, we lost some business in that process. It's behind us, we had a better product offering than we've ever had before, we feel very good about that, the whole supply chain network. And the other big acquisition and integration is Overnite, and we're doing very well on that. UPS Freight product is moving along at a good pace.
John Barnes - Analyst
I know you announced I guess in the press release this morning further authorization on share repurchase. Given the price action today, do you think you should go back to the Board and ask for even further authorization?
Scott Davis - CFO
Well as always, this is -- 2 billion is at the level we've been at for the last year and we replenished the $2 billion as we've done -- have been pretty active in the market. It's still our intention to alter our capital structure, but we're going to pick the optimum time to do that. And as we've said always in the past, as we alter the capital structure, it could be via the acquisition route reinvested in the business, or it could be via increased distributions. But likely, we'll be active in the market.
John Barnes - Analyst
Thanks so much for your time.
Operator
Scott Flower, Banc of America Securities.
Scott Flower - Analyst
Good morning all. Just a couple of quick questions. I know that -- and you talked about it earlier, but I just wanted to maybe dimension it, the rail, health care and pension costs -- have those costs further accelerated, or are they just staying at the same rate as 1Q? I'm just trying to get a sense, if you could give us some color on the impact 1Q versus 2Q on those particular areas of inflation?
Scott Davis - CFO
I think they are pretty much on target, what we expected. The pension costs are pretty well locked in when you pick the discount rate based on your actuarial date, so they're locked for the year. We expect maybe some tailwinds next year if interest rates stay, it could be helpful. The rail, clearly, the cost may be a little higher because of the surcharges we paid on the [topsy], so it's slightly higher, but not way out of line from where we expected. Health care is pretty much in line with what our plans were at the start of the year. We knew there would be headwinds, and they are, but not materially different from where we expected them to be.
Scott Flower - Analyst
And then I guess the second question I had, if you could maybe give us an update on where you are on package flow in terms of both implementation as well as retraining the bottom third et cetera, et cetera, about how that's going, where that sits in the domestic process.
Scott Davis - CFO
We are on target, making a lot of progress. We're about 70% [of our way] as far as getting drivers deployed at this point in time. Our goal as you recall for this year was to be 75% at the end of the year. So we're making very good progress there and we're seeing great productivity improvements. We're seeing the net delivered pieces per hour improve at a good pace. We're saving miles, as you saw last peak season. So we're pleased with the productivity improvements. The one thing that's even surprised us is you see sites that have been up for two years, you're still seeing more improvements; after they've been up for two years, it gets better. So we're excited about the progress on the package flow.
Scott Flower - Analyst
Thank you.
Operator
Jason Seidl, Credit Suisse First Boston.
Jason Seidl - Analyst
A couple of quick questions. If we can go back to the comments about, Scott, still the intention to alter the capital structure. With obviously getting back to John's question, the move in the share price today, does that influence your decision on how to alter the capital structure at all, or is it going to be more so? What potential acquisitions could pop up to grow the business going forward?
Scott Davis - CFO
It's obviously, Jason, a combination of the above. Our first choice obviously is to reinvest in the business in the right areas that fit our strategy. So that's still our number one objective. We'll continue to evaluate share repurchase. We're convinced that we're going to alter the capital structure. We're going to pick the optimum time and I think we have the best insight here as to when the optimum time is.
Jason Seidl - Analyst
Does a slight slowing of the economy alter one of your previous statements I think you made on the last call that you're not opposed to a large acquisition, or does that still hold?
Scott Davis - CFO
No, I think it has always been that if we find the right acquisition that fits our strategy and meets our financial hurdle rates, we're interested in doing it. So the economy, the moderation of the economy will not impact that decision-making.
Jason Seidl - Analyst
And it sounds like the moderation of the economy is something that you have noted, but it doesn't sound like something that has really shocked you. It sounds like you sort of expected it and you're still looking at your business to grow.
Scott Davis - CFO
I think every indication start of this year when you look at all of the challenges out there that the economy would moderate, and then it's probably going to happen. That's not bad necessarily for the economy. A little moderation might make for more healthy growth a year from now. And again, the exciting thing for us is this small package market has continued to outgrow the U.S. economy. So we don't feel too bad about the outlook.
Jason Seidl - Analyst
If we could turn to next year, obviously we had some negative headwinds with the days in the quarter. Are you going to make that up next year as we model out?
Scott Davis - CFO
I think next year, as I recall, the days are pretty much the same. I have to go back and look, but I think they're pretty much -- actually one less day, I'm not even sure which quarter it is, for the year, though.
Jason Seidl - Analyst
Okay, thank you guys.
Operator
Helane Becker, Benchmark.
Helane Becker - Analyst
Scott, can you just discuss a little bit what you're seeing coming out of China and Asia? And also, I think you have 21 weekly flights over there. Could you just talk about how the capacity is and what your plans are in terms of adding -- I don't remember where you are in the government's queue to add more flights. So if you could review that, that would be of helpful.
Scott Davis - CFO
We are, Helane, at 21 flights right now. We just this year added three flights from Shanghai to the U.S. Also added a flight from Shanghai to Europe, so we're pretty excited about the prospects there. As you read in the press, the Chinese economy is not slowing down with about 11% GDP growth reported a week or two ago. We're still seeing strong demand out of China. We think that we expect revenue to increase over 30% again out of China this year. We don't see any slowing down.
As far as future rights, I think that discussions are being had right now. There's no determination at this point in time as to how the next rights will be awarded. But there likely will be more rights awarded over the next 12 months.
Teresa Finley - IR
Helane, the 21 breaks down 15 Shanghai and 6 in Guangzhou.
Helane Becker - Analyst
Great, thank you. And then just one follow-up on this whole day issue. When you were giving the original guidance in the first quarter, these days were known, weren't they, that you would have fewer days in the quarter?
Scott Davis - CFO
Right (MULTIPLE SPEAKERS).
Helane Becker - Analyst
So I just want to understand that the shortfall is not necessarily the days as much as it's the lag in the fuel surcharge? Or is it the day?
Scott Davis - CFO
The shortfall, as I said earlier, it really had nothing to do with the days. We knew the days, and actually, the third quarter is not far off what we originally thought it would be at the beginning of the year. We did come in a little [under] our estimate in the second quarter, which hurts us a little bit for the annual guidance. Supply chain obviously had the revenue loss in the first quarter which got us behind schedule and we're not going to be able make up that shortfall to get to the original target. And then a little bit of moderation in the economy for the second half of the year versus what we originally thought. But those are the major drivers.
Helane Becker - Analyst
Okay, thank you for explaining that.
Operator
David Ross, Stifel Nicolaus.
David Ross - Analyst
Good morning. I just had a question on UPS Freight segment. What are your growth goals there? And could you talk to us about how, you said rebranding is on track, but when is that planning to be completed?
Scott Davis - CFO
Well, we are well along on that rebranding process and it will be complete this year. Showed nice improvements in UPS Freight in the second quarter. Revenue was up. We didn't have it last year, but if you look at the last year's numbers, up over 7%. We did trim some volume, low margin volume, out of the network. We have a strong pipeline of UPS customers looking at the freight network that we think is going to add to our profitability in the future. So we did prune some freight out from existing customers at a low margin, but we're very optimistic about the growth in that business going forward.
David Ross - Analyst
What is your outlook for fuel for your third-quarter and year-end guidance? Are you assuming a stable fuel price environment?
Scott Davis - CFO
We generally use the forward curve to build our estimates and the forward curve is pretty high. The forward curve in the next couple of months goes up $80 a barrel. That's what we're building it on.
David Ross - Analyst
Okay, thank you very much.
Scott Davis - CFO
Sure.
Operator
David Campbell, Thompson Davis.
David Campbell - Analyst
I just wanted to make sure your estimate for the year is 11 to 12% at the low end of the range, your former estimates growth for the year. Is that versus the 347 base last year?
Scott Davis - CFO
That would be versus 347 base last year, correct.
David Campbell - Analyst
You seem to be implying better earnings growth in the fourth quarter than the third, given the low end of that range, you know, $0.95 last year going up significantly more than you're saying for the third quarter. Do you see some differences in the fourth quarter than the third that would give you reason to be more optimistic about the fourth?
Scott Davis - CFO
We think we're going to have a solid peak season domestically. Again, the third quarter is dramatically impacted -- I don't want to keep using these days -- but it dramatically puts a lot of pressure on domestic operating profit. You'll see domestic operating profit improve in the fourth quarter. International is going to stay strong. We said we're going to expand margins, we're going to grow operating profit at a good pace. And supply chain, again, when we're farther into the integration, we'll be seeing more cost synergies in the fourth quarter. We're excited about the prospects in supply chain. So it's a combination of the above. But we're excited about that. The $0.95 also was reduced some by tax expense last year, higher than normal tax expense.
David Campbell - Analyst
Okay, Thank you very much.
Operator
Tom Wadewitz, JP Morgan.
Tom Wadewitz - Analyst
Just a quick follow-up or I guess two follow-ups if I can. On the fuel, is there any way that at a high level you can quantify when you look at surcharge collected and increase in expense, what that may have caused, whether that was a penny or a couple of pennies in the quarter? And is it fair to think if we have some stabilization in prices that there would also be some catch-up that might benefit you at some point?
Scott Davis - CFO
Absolutely. The way the surcharge works, Tom, is, as you know, there is a 45-day lag between when we set the prices and you actually collect your surcharge. So as fuel prices come down, and they eventually will come down, we will have a benefit there. The question is -- when is it going to come down? -- I cannot tell you that at this point in time. But there is a benefit. And again, the number we have to look at in the second quarter is versus how we built our guidance for the second quarter, and that's what the $25 million increase in fuel costs where you didn't get the offset on the surcharge hurt us. So the 25 million would be the number of the real cost in the second quarter.
Tom Wadewitz - Analyst
Is that 25 net of the increase in surcharge, or that's just 25 --?
Scott Davis - CFO
That would be 25 net.
Tom Wadewitz - Analyst
25 net, okay. And then I guess one question on '07. I know that's looking out a ways, but do you think that cost pressures could moderate somewhat in '07, given some of the factors you see this year that are pressuring -- setting aside fuel, because that's a tough one, but do you think the cost pressures could moderate and give you some potential for domestic package margin improvement in '07, or what would your thoughts be on that?
Scott Davis - CFO
At this point in time we're optimistic on 2007. I think clearly a couple of the -- hopefully the onetime cost headwinds we face this year, the FAS 123(R), $40 to $50 million expense we talked about earlier where we had to recognize people who were eligible for retirement options earlier. There was a onetime hit this year that won't impact us next year. Clearly pension we think is -- who knows where interest rates will be at the end of the year, but likely -- versus a $120 million headwind this year, you'll probably have a benefit in 2007. In addition to that, we think we're going to see strong improvement in the supply chain because we have the network up and running. International is going to continue the strong growth, globalization is not slowing down at this point in time. So again, we're optimistic that we should get back to our normal growth rates in '07.
Tom Wadewitz - Analyst
Okay, thank you.
Operator
Edward Wolfe, Bear Stearns.
Edward Wolfe - Analyst
Scott, just on the fuel surcharge, just for a clarification on Tom's question, when I do the math, I actually see a little bit more year-over-year surcharge revenue than cost? But you're saying versus what your guidance was, there was a $25 million difference, not versus the year-over-year comp?
Scott Davis - CFO
Exactly. The surcharge revenue came in where we planned it, because we pretty much knew the surcharge for April, May and June when we gave the guidance. What we didn't know was the fuel expense, so we built our fuel expense based on the forward curve. And as I said prices went up -- jet fuel went up 14% from the start of the quarter to the end of the quarter, diesel 11%. The forward curve did not call for that, so that's where we got caught.
Edward Wolfe - Analyst
And then on the pilots, I know you don't want to talk about specific terms, but just generally, assuming there's some onetime bonus payments to make up for the time that there has been no contract, I'm guessing that that kind of thing wouldn't be in your guidance range if that were to occur for the '06.
Scott Davis - CFO
We know, based on what we have a handshake on, it's built into our guidance. That will not have a negative impact.
Edward Wolfe - Analyst
So you're saying that there is none of that kind of onetime big payments that will have an impact, not that you wouldn't include that in your guidance?
Scott Davis - CFO
Everything regarding the handshake we have for the pilots is built into our guidance.
Edward Wolfe - Analyst
Okay, thank you very much.
Operator
Jordan Alliger, Deutsche Bank.
Jordan Alliger - Analyst
Just a real quick follow-up. I know you mentioned moderation in economic growth in the second half. I'm just curious -- what are your economists looking at? Can you pin a specific GDP type of number?
Scott Davis - CFO
I guess I'm the economist. I think that we're generally going with consensus. We're a very good real-time indicator of the economy. We're not a good leading indicator. But I think that the consensus as far as growth right now is probably slightly below trend going forward, 3% or a little bit below that. As I said, Jordan, I think you can translate our volume growth is a little bit higher than that because the small package market is growing faster than U.S. economy. And we'll certainly, as we have done in the past, at least keep market share in that market.
Jordan Alliger - Analyst
Thanks.
Teresa Finley - IR
Okay. To echo Scott's remarks, the first six months of 2006 were certainly exciting. With most of the transitioning and integration work behind us, we're looking forward to reaping the benefits of our expanded service portfolio for our customers and for our share [owners]. Thank you for joining us today.
Operator
Thank you. That does conclude today's UPS Investor Relations conference call. You may disconnect your lines at this time and have a wonderful day.