聯合包裹運送服務公司 (UPS) 2007 Q1 法說會逐字稿

Good morning; my name is Shanita and I will be your conference facilitator today.

At this time I would like to welcome everyone to the UPS Investor Relations first-quarter 2007 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question-and-answer period.

(OPERATOR INSTRUCTIONS).

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, you may begin your conference.

Good morning, everyone.

Thank you for joining us today.

Shortly Mike Eskew, our CEO, and Scott Davis, our CFO, will discuss first-quarter results and our expectations going forward.

Before they begin however I'll briefly 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 2006 Form 10-K report.

This report is available on the UPS Investor Relations website or from the Securities and Exchange Commission.

Today's call is being webcast and will also be available on our Investor Relations website.

You have undoubtedly noticed that there were two charges the Company took in the first quarter that affected operating profit and income before taxes.

The first is an impairment charge of $221 million on Boeing 727 and 747 aircraft and related engines and parts due to the acceleration of the planned retirement of these aircraft.

$159 million of that charge applied to the U.S.

domestic package segment and $62 million applied to the international package segment.

The second was a $68 million charge to expense related to the special voluntary separation opportunity offered in the fourth quarter last year to 640 employees in nonoperating functions.

195 employees accepted the offer.

The charge reflected the cash payout, stock compensation and certain retiree healthcare benefits.

$53 million was charged to the U.S.

domestic package segment, $7 million to the international package segment and $8 million to the supply chain and freight segment.

The after-tax impact of these charges was $184 million or $0.18 per share resulting in earnings per share of $0.78.

Without these charges diluted earnings per share were $0.96 compared with $0.89 one year ago.

The impacts from these adjustments are explained in the schedules that accompanied our earnings new release this morning.

The schedules are also available on the UPS IR website in the financial section; they reconcile non-GAAP to comparable GAAP measures.

In his remarks today Scott will focus on results from operations excluding these charges.

To begin our review of the quarter I'll turn the program over to Mike for opening comments.

Thank you, Teresa, and good morning, everyone.

The first quarter of 2007 was a solid start for the year.

The global small package business was fueled by strong growth outside the U.S.

Our international operation performed very well posting a 10% increase in export volume led by excellent growth out of Asia and Europe.

We also saw progress in our supply chain and freight segment with the second consecutive quarter of improved performance.

In the U.S.

a slowing economy created challenges for small package volume growth; however, economic cycles are temporary, long-term fundamentals support a different and favorable outlook.

Globalization is accelerating in and borders are no longer the impediment to businesses they once were.

The result, more and more products are being designed in one country, sourced for raw material in another and manufactured in yet another country.

And customers continue to migrate toward direct to consumer distribution models; supply chains are longer and more complex.

Our strategy is to reduce this complexity for our customers by offering a comprehensive portfolio of services and technology solutions.

How we execute against this strategy is once again evident in the quarter as we offered important new capabilities to our customers.

We are leveraging the advantage of our integrated network and technology to both differentiate and extend our product portfolio.

Let me give you an example.

In March we rolled out a new service called Delivery Intercept which epitomizes this approach to product development.

It enables a shipper to reroute the package already underway to an alternative delivery destination and is the industry's only web-based automated interception service and is made possible by our package flow technology.

We're already capturing new volume because of this feature.

During the quarter we also unveiled global technology enhancements to our shipping and billing systems that added freight functionality.

Customers now have the same ease of shipping, visibility and billing for their freight as they've had for small package shipments and all at the same place.

These enhancements expand our value proposition and enable our sales teams to position a seamless portfolio to our customers.

Finally, an event of note in China.

UPS is committed to be the premier package delivery and logistics provider for China.

To that end we have been aggressively investing in our wholly-owned operations there.

Two weeks ago UPS signed an agreement with the government of China that opens the way for construction of an international air hub at the Pudong Airport in Shanghai.

UPS is the first U.S.

airline to qualify for hub status under a U.S.-China air services agreement signed in 2004.

Our objective in gaining this status is to capitalize on operational flexibility.

One of the key rights is having unlimited frequencies between the U.S.

and Shanghai as well as the ability to move beyond Shanghai to other points in China.

China is a growth engine for global trade; that is why we have invested approximately $600 million in China over the last five years.

The construction of the Shanghai hub is yet another major step in our effort to enable global commerce for our customers.

The dynamics of the global marketplace are creating compelling growth opportunities for UPS and we remain dedicated to the building the capabilities that will meet the future needs of our customers.

Now I'll turn the program over to Scott for insight into first-quarter results and second-quarter outlook.

Thanks, Mike, and good morning, everyone.

Earnings per share of almost 8% is solid performance in today's business environment.

Consolidated operating margin was a healthy 13.8%, an increase of 30 basis points despite flat volume growth in the U.S.

domestic business.

Strong results from the international segment reflect the strength of our balanced global network.

And I am very pleased with the improvements in our supply chain and freight segment.

Let's begin our segment discussion with the U.S.

Clearly the economy has slowed more than we anticipated three months ago.

For instance, the fracturing inventory to sales ratio was at its highest level since 2003.

Business investment or capital goods orders continued a sharp decline which began last summer.

And the rate of growth in retail sales moderated substantially in the quarter.

These trends were evident in our business with slowing growth in both our B2B and B2C segments.

The quarter was somewhat of an anomaly in that the small package market appeared to under perform the overall economy.

In the long-term we do expect the U.S.

small package market to outperform GDP.

For UPS we believe first-quarter U.S.

package volume against strong growth comparisons should be the low point for the year.

Aside from economic impacts our operations performed well in a difficult environment.

As in the past, semi variable costs were controlled effectively.

And pricing remains firm as we execute our plan to take more pricing through our base rates.

Rev per piece increased a strong 3% on ground products.

On air products, adjusting for the decreased fuel surcharge rate, rev per piece increased about 1.5%.

This was certainly a challenging order for the domestic business.

Going forward our focus is on running efficient operations, reducing semi variable costs, maintaining price discipline, and growing our business by offering a premium portfolio to our customers.

Let's turn now to the international operations.

This high growth part of our business was terrific.

Export volume was up 10% with Asia posting over 20%.

Intra Asia, Asia to Europe and China today U.S.

all had similar strong growth rates.

In fact, exports out of China were up over 25% for the quarter.

Europe was robust as well with double-digit export growth.

And the U.S., a bit slower, still increased mid single digits.

Rev per piece adjusted for currency was up about 1.6%.

These results continue to include a higher mix of transborder business in Europe and across the NAFTA borders.

Profit increased to $440 million, our second strongest international quarter ever.

And operating margin was an exceptional 18.4%, up 10 basis points.

The multiple strengths UPS has honed over many years -- a comprehensive product portfolio, leading technology, global network and a premium brand -- are all playing an equally important role in meeting the needs of our international customers.

Turning now to the supply chain and freight segment, we were pleased to see a nice improvement in operating profit from breakeven in the fourth quarter to an operating margin of 2.7%.

The forwarding and logistics unit did an excellent job controlling expenses as a result of restructuring begun last year.

Staff rationalization is essentially complete.

We are pursuing specific strategies in this business.

In North America airfreight we're focused on generating higher returns by improving the utilization of our aircraft and the efficiency of our overall network.

The international airfreight market offers a compelling growth opportunity for UPS.

Our focus is on improving value to customers as we migrate to a high touch service environment.

At the same time, generating new business in 80 trade lands is a top priority.

We're not yet back to market growth rates, but expect to be later in the year.

The logistics business, defined as distribution and post sales activities, produced gains in revenue and profitability.

We're bringing on new customers who meet specific criteria.

First, each new customer must fit into one of our multi client solutions.

And second, each solution must have a transportation component.

Now for the LTL business.

Our ground freight unit performed well given current soft market conditions.

The LTL revenue increased over 4% with shipments per day also showing positive growth, particularly in the middle market segment.

We're building this business for the long-term, therefore we continue to invest in quality and service improvements.

DIADs were deployed to all freight drivers and sales training on the new visibility and billing tools for freight customers was largely completed.

At this point I want to address our use of cash in the quarter, starting with share repurchase activity.

We bought back over 8.9 million shares and have $1.6 billion remaining under our current authorization.

Additionally, in February the quarterly dividend was increased 11% to $0.42 a share.

Over the last four years dividends per share have doubled with a current dividend yield of 2.4%.

During the quarter dividend payments totaled $828 million.

We also invested $675 million in CapEx to still close the quarter with $2.4 billion in cash and investments.

Free cash flow for the quarter was $1.9 billion; once again an excellent quarter for cash flow.

Before taking your question I have a few comments on our expectations for the second quarter.

In the U.S.

domestic business we anticipate total package volume growth to be up slightly as comparisons will become a bit easier.

Growth should improve in the second half of the year.

We're managing costs prudently which should help offset some of the impacts of a sluggish U.S.

economy.

International volume and operating profit are expected to remain strong.

The supply chain and freight segment should improve year-over-year in the second quarter with accelerating gains in the second half.

That said, earnings per diluted share should be within the range of $1.00 to $1.05 for the quarter.

And I believe the Company is on target to achieve our goal for 2007 of adjusted earnings per share growth between 6 and 10% over 2006 results.

Now we'll be happy to address your questions.

(OPERATOR INSTRUCTIONS).

Jordan Alliger, Deutsche Bank.

Just wanted to ask a question on the China opportunity again with this hub in Shanghai.

Did I hear correctly that once this hub is built you'll have unlimited frequencies, no approvals needed?

And does this give you a launching pad to then do sort of an intra China business?

Did I read that correctly from a time definite standpoint?

Jordan, you've got that right.

We will have unlimited frequencies from U.S.

to Shanghai and we will have -- beyond flights from Shanghai.

As soon as the hub is open basically?

Yes, that's right.

That gives us a lot of flexibilities, Jordan, that we didn't have previously.

And then just a second question.

Obviously the U.S.

economy has continued to stay on the softer side and you sort of noted that.

You mentioned attacking semi variable costs as a way to offset volumes -- volumes probably not being as strong as when you gave sort of an outlook I think for 2 or 3% three months ago.

I'm just wondering, are there specific areas domestically in the semi variable bucket that you feel comfortable in attacking to offset it so you can go ahead and reiterate the 6 to 10% guidance?

Yes, Jordan, absolutely.

And we're going to go after both, both operating and non-operating costs in the semi variable area.

We talked before about the shared services approach.

Clearly we're moving along and we'll see more benefits as the year goes on as we get into 2008, but areas like training, collections, communications we're clearly going to centralize and use shared service as an approach.

Operationally a variety of initiatives, things like small package, trailer on flatcar network -- we're converting trailers now to rail containers where possible.

This really eliminates the need to reposition empty trailers which was costing the Company quite a bit of money.

Frankly this approach is a win-win for both UPS and the rails.

The UPS freight network is actually looking at opportunities to increase the use of rail which we think is cost efficient for the Company.

On air and ocean freight forwarding area we're looking at consolidating pickup and delivery operations.

And as always during slow growth periods we look at hundreds of initiatives in the shorter term to reduce costs, things like relocations, that type of thing.

So again, we're prudent and we're vigilant and I think that's the reason you saw us still hit the middle of our guidance in the first quarter despite a slightly weaker economy.

Tom Wadewitz, JPMorgan.

Good morning.

Let's see, so I guess to start with, what gives you confidence, what are you seeing that you feel comfortable making the comment that first quarter will mark the low point in terms of volume growth?

Did you see things pick up during the quarter or what's behind that comment?

I think actually, Tom, the first quarter in our opinion, the economy was a little weaker than we saw at the start of the year, but I think even more surprising was the small package network, which from all the data that we look at it looks like that market was pretty flat in the first quarter.

We don't anticipate that to stay.

Even if the economy stays where it is, maybe it's a 2% GDP, we would expect going forward throughout 2007 for small package to grow at or better than the economy.

The trends that really have driven this performance just in time -- direct to consumer, online purchasing -- aren't going away.

Those are macro trends, they're here to stay for many years.

So we think that small package in the first quarter was somewhat of an anomaly; it will get better.

Also our own comps, UPS comps get easier as we move through each quarter.

So we're pretty optimistic that you'll see that the first quarter was a low point for UPS package volume.

Okay.

And then I guess the follow-up on that would be you've maintained the earnings guidance range despite a little bit softer volumes in first quarter.

And I'm wondering, does that mean that you're -- are you essentially back end loading it a little bit more?

Are you expecting more from supply chain?

That seemed to perform quite well in the first quarter in terms of the improvement.

So how might we look at the differences within that guidance range given that you're maintaining it?

Again, I think domestic will get better as the year goes on due to the reasons I just went through.

International, again another terrific performance, we talked about that.

I don't see anything that's going to slow that down as we move throughout '07 and into '08.

Supply chain and freight, clearly an excellent performance in the first quarter driven primarily by the supply chain.

Freight forwarding and logistics did an excellent job.

The LTL side of the business is going to have negative comparisons versus last year in the first and second quarter, but starting in the third quarter we expect positive comparisons in operating profit going forward.

So clearly that will help us in the second half of the year.

William Greene, Morgan Stanley.

Just as a quick follow-up, on the question of the economy what gives you any confidence that it will accelerate in the second half?

I'm not basing our guidance on accelerating the economy.

I'm basing it on the fact that the small package market I think will outperform what it did in the first quarter.

And we think the small package market was somewhat flat in Q1.

Even if the economy stays at a 2% level for the rest of the year we'd expect small package to grow at least 2% throughout 2007.

So I think that will be the bigger change you see (multiple speakers) the economy gets better, but I'll let consensus figure that out.

Okay.

And then on supply chain, it looks like a lot of the improvement was mostly cost related.

Is that something that you think we can continue to have happen for the rest of the year or have we seen sort of the best of that in this quarter?

I really think we're going to see that continue.

In fact, we should make that better the rest of the year.

We've integrated; we're through those kinds of things, there's still work to do.

We've aligned our activities, we're executing.

We've rationalized, as Scott said, our staffing and we're working on repeatable models of things that connect the transportation.

So I expect that to get better.

The freight forwarding distribution arena really generated the improvements we saw in the first quarter and will continue to improve as we go throughout this year.

I think you'll start seeing the revenue areas grow, particularly in international airfreight and ocean freight, as we move into the second half of the year which will also help I think us improve margins.

In LTL, as I said earlier, you'll see better improvements -- better comparisons in the second half of '07 due to all of the investment we made in 2006.

Jon Langenfeld, Robert W.

Baird.

Just the sequential change on the volumes were quite dramatic.

I'm wondering how much weather you think had to do with that.

And specifically, as you look at your network, can you give us an idea of how much weather impacted you on the cost side as well?

Jon, I think that fact of life in the first quarter of every year weather is a problem.

And so February was a nasty month for weather, but usually every first quarter you challenge those types of issues.

It may have cost us a penny or so in cost, but I think it's something that we really didn't point out because it's something really you battle through in January and February of almost every year.

What impact it had on customers and volume, that's hard to determine.

But I'd say maybe a penny impact due to whether.

If you think of your competitor and their growth in ground still being very, very strong, what gives you the confidence that the market was flat and you're not losing share there?

And I guess in that context, it looks like you were pretty firm on the pricing side.

So I'm wondering if there's any mix impact in that 3% yield growth you had in ground.

I think that was just -- the trends we've shown over the last several quarters as we're getting more of our base rate -- keeping more of our base rates, I think you saw that in the first quarter as expected.

As far as the market, all the data is not in yet from all the competitors.

But our best effort putting together the trends we're seeing out of competitors, we think that basically the ground market, the overall market was pretty flat.

So we think some of the competitors were losing volume while some of the competitors gained some volume in the quarter.

Edward Wolfe, Bear Stearns.

Scott, just a follow-up.

If I look at the GDP, it was very similar to your total U.S.

volumes in fourth quarter, but you're flat to slightly down and GDP is supposed to come in, according to consensus, almost 2%.

Is it your sense the economy is weaker than the economists realize or is it that you've been a little bit firmer on pricing maybe this year and so you give up a little bit rather than chase it?

I think the economy -- and there are a lot of economists out there who've got -- they've always got a different opinion.

I think the economy is a little bit weaker than people thought going into the first quarter and I think it's going to -- my guess is it's going to stay at this level for a quarter or two.

So I think it's primarily the economy.

I think that the pricing I think is really not far off our historical norms, so I don't think that drove it.

And in April do you see any difference from what you were seeing in the first quarter in terms of the economy or demand or anything and maybe some parts of the world versus others have changed versus first quarter?

Can you comment on that?

I think we're seeing a lot of the same.

I think it's hard to get a good look at the U.S.

because of the way Easter fell in a different week, so each week gyrates a little bit right now.

But I think that clearly the global trends we've talked about are staying strong, we don't see any changes there.

Europe, Asia quite strong.

U.S., I don't see a real change coming up.

Everything you read -- the retail environment is going to be quite weak in April.

I think retail got a little bump in March because of early Easter, so I think it's going to be a little bit weaker in April, probably get back to norm in May.

Retail is still growing, but clearly not at the pace it was previously.

Ken Hoexter, Merrill Lynch.

Good morning.

I want to talk about international for a second on the domestic business.

It looked like you had some fairly weaker than expected volumes, I guess weaker than the trend, although you said international was strong.

So I just want to understand that, because it looked like yields initially were really robust.

So it looked like you might have been doing a little bit of business shift.

But if I understand your ex currency comments it looked like yields might have been up just about 1.5 points.

So can you talk about what's going on internationally on the domestic side?

I don't think it was far off expectations.

I think that we -- the real change there was Europe had one less operating day and Europe is still -- most of our non-U.S.

domestic volume occurs.

If you add that day back it would have been about 3.5% growth which is kind of in line with the 3 to 4% we'd expect for non-U.S.

domestic volume.

All right, that's great.

We also wrapped those two acquisitions.

This is the first quarter I think you've seen that we wrapped both LYNX and Stolica.

I misheard that, you said you wrapped them?

That's correct.

That's good; that's what I thought.

My follow-up question would be on the Next Day Air side.

It looks like we have both weak pricing and volumes there.

Is that economic, is that just are we done with the kind of taking of market share on the Next Day Air side?

Can you talk about what your plans are for that part of the business or do you see that rebounding with the economy as well?

Actually I think on a yield standpoint it's probably the strongest you've seen in the last maybe six quarters.

And the fuel surcharges were down 3% year-over-year.

So you take that out it was positive, and that's despite the fact we're still growing the saver product -- the afternoon product faster than the morning product which penalizes you from a mix standpoint.

I think as we said back in January, that industrial production is much weaker this year than it was a year ago as an indicator of where the premium products should go.

So we really anticipated somewhat flattish next day volume growth until IP picks up.

Scott Flower, Banc of America Securities.

Not to beat a dead horse, but I did want to try to understand I know that I think you talked about 1Q being the low point in volumes.

But yet if I looked at your 2Q guidance on earnings growth and I would assume that volumes obviously helped the domestic network in terms of leverage and productivity, the guidance range at the top end gets to the same kind of EPS growth you saw in 1Q.

And obviously, again, you're not going to complain about weather, but it was a little bit more difficult year-over-year comp on weather that shouldn't be quite as tough as 2Q.

I am just wondering why the earnings range would presuppose a growth rate that would be at the low end markedly below 1Q, at the high end about the same, giving you confidence on volumes.

I think number one, we're still cautious on the U.S.

economy until we see it pick up.

So we're being cautious on the U.S.

side of the business.

From the supply side chain or freight side, particularly on the LTL side, we have a strong second quarter a year ago.

So we will have negative comparisons to the second quarter on LTL, which will hurt the overall segment comparisons for second quarter.

They will still be positive, but not as positive as the first quarter.

As you get into the third quarter, we expect to see (technical difficulty) all cylinders on LTL (technical difficulty) logistics and freight forwarding.

So you will see better comparisons there.

Those are the two drivers that probably impact the second quarter.

Okay.

Then the other question is, and I know that you talked about this as part of how you are working the nonpackaged operation, but when you talk about having a transportation component, I am just wondering the companies that have logistics or supply chain or forwarding that are non asset-based would argue that part of the flexibility of the model is that you can choose what you think is right for the customer.

Do you end up positioning ourselves in a way that customers think that the folks either in the supply chain solutions or forwarding or etc.

end up having to go a direction that presupposes a solution that they may or may not want?

I am just wondering if you just brand yourself in the marketplace that way and that gets held against you.

(technical difficulty) customers (indiscernible) solutions.

And we're able to offer them a full package of solutions, which includes the transportation component.

And I think we've proven that with that dependability and we can do the whole thing, that's what customers are looking for.

Jason Seidl, Credit Suisse.

A quick one here.

The yields in ground were stronger than anticipated, at least [the way I did it] at 3%.

Now you said you were having more success in the base rate.

With fuel coming up here recently, should we expect that to slide a little bit sequentially on success or do you think that rate could continue throughout at least the next quarter?

I would think that the fuel -- the costs are going up a little bit, if that fuel surcharge goes up that will help the yield somewhat.

Clearly I think we expect the rates -- nonfuel surcharge to stay the same in the recovery, but as the surcharge goes up that will certainly add to the yield.

But the overall base rate, Scott, should that go down a little bit now that fuel is going back up?

I don't think so.

I think we should able to maintain the base rate recovery we saw.

Jason, also let me point out that in times of slower volume growth we have the majority of our contracts on what we term as revenue tiers.

So as our revenue falls off our incentives change and we're able to protect the pricing on that edge.

So there is an ability of an adjustment in our pricing contracts to help us maintain strong revenue per case (multiple speakers).

Okay, fair enough.

My follow-up question, could you guys talk a little bit about the bundling offering you're doing now between LTL and package and the success that you're having?

As we've worked with our salesforce that's one bright spot.

I think our salesforce has been delighted to be able to go to those same customers that make the decision for small package and with freight.

And we've started training our salesforce around the country on how to be able to do that.

About 80% of the people that make the decision for small package also make the freight decisions, and when we can do that and offer them an integrated technology approach with both the DIAD that drives it but also tracking and shipping, it's terrific.

Jason, we had a lot of conviction when we started this year saying that we're going to outperform the market in the LTL area because of this.

And I think you're starting to see it.

You saw an out performance in the first quarter and you'll see that as the year goes on.

David Ross, Stifel Nicolaus.

First question is just on the --

David, you're breaking up.

David, your line is live.

David, can you hear us?

The question is on UPS Store volumes.

If you could just remind us I guess how much The UPS Store, in general the total network contributes to ground volumes.

And then if you could comment a little on same-store sales growth at The UPS Stores and also overall growth of The UPS Stores.

Yes, David.

The UPS Store certainly contributes nicely to our B2C growth.

We don't break it out specifically but it certainly mirrors the B2C type growth that we have in our business.

And we have increased the stores and plan to increase the stores a bit in 2007.

Okay.

In terms of same-store sales growth at the stores?

I'd say mid single-digit, David.

Okay.

And then on the LTL side, the yield was up a nice 5.1%.

Can you comment a little bit on the mix change there verses real pricing?

I think the mix hasn't changed dramatically.

I think you saw that the weight has gone down a little bit and I think that's just the environment -- that TL has a lot of capacity and some of the TL goods that moved to LTL in the peak period has gone back to TL, so you've seen the weight down a little bit.

But I think otherwise the mix hasn't changed dramatically, maybe a little more long haul than prior year.

And I would add that our growth is in the middle sized type customers in the LTL, so that's certainly helping the pricing as well.

David Campbell, Thompson Davis & Co.

Thank you very much.

Two questions.

One, the first is on the international.

China exports -- China business in the first quarter, didn't you see some impact in March from the much later Chinese New Year this year, first time in 10 years it's ended in March?

Yes, but for the quarter, David, you have to blend it all out.

So March may have been a little bit weaker than February, but overall we're certainly pleased with 25% type of growth.

Probably the most visible thing out of Asia the first quarter was that heavy freight showed a little more weakness I think.

But our package volume was great, small package volume was great.

But it could have been impacted in March, but --?

Right, but not much impact in the quarter.

Right.

And the second question is on the LTL profitability.

I'm surprised to see you talk as though it didn't contribute to growth in the first quarter.

Given the fact that the revenues were up from the fourth quarter, I mean it was a tremendous revenue performance.

Is it a lot of money you're spending on new systems or what's doing that?

We made certainly heavy investments in 2006 as we put the networks together and brought technology on board.

We were profitable in the LTL in the first quarter.

But you've got to remember, the first quarter of 2006 was still a real strong LTL market and I think all the LTL carriers were making a lot of money at that point in time.

So comparisons were difficult.

We think that despite -- we aren't sure how quick the LTL market turns around, but even notwithstanding if the market stays weak we'll still show good comparisons the second half of the year based on the new customers we're bringing on board.

Andy Chu, Credit Suisse.

Good morning.

Just one question, please.

Just in terms of acquisitions, I guess we've seen some real improvements and progress in terms of integration.

And as I guess you become more comfortable and confident with the integration progress, is that in some way basically form the way for acquisitions?

And I guess I wonder if you can just spend a few minutes talking about your acquisition strategy.

I'll put my 2 bits in and Mike can certainly kick in.

But I think that we said earlier this year that our objective on the supply chain (technical difficulty) was to go out and execute and obviously improve the margins.

We think it takes more than one quarter to prove to our investors and shareowners that we're going to execute and improve margins.

So we're going to focus on that for the near-term, execute, prove those margins, look for some economic profit returns down the road on supply chain and freight and then evaluate more acquisitions in that arena.

As I said before, the international package is still an area that we're interested in and certainly there are alternatives we'll continue to look at there.

The only thing I'd say is that I'm not uncomfortable with making acquisitions.

I don't think we were and this turnaround is not -- didn't surprise us as we anticipated making this turnaround.

Thanks very much.

Tom Wadewitz, JPMorgan.

Good morning again.

So one of your competitors talked a lot about recently their expansion efforts in China and money spending on a domestic express network in China.

Can you give us a little more sense of how your approach might be different from theirs and how your approach might evolve over time?

Comments on the hub are helpful, but in terms of a domestic express where do you stand and what would your strategy be there?

We certainly have got into the domestic express market about two years ago I think, Tom, and it's something that we're going about cautiously.

Frankly, it's not a huge spend to establish that network.

We have a partner over there that we supply the goods with.

So it's something that I think we're going to go about cautiously.

We'll continue to invest and see how the market grows and also see how we work with the government over there.

And we do have the ability now with this -- beyond points and we've always had the ability, by the way, to be able to connect China to itself.

We did expand during the quarter; we're now in about 330 of the largest cities; we serve about 85% of the export volume GDP.

So we're well-positioned and, like Scott said, we did that a couple years ago.

Edward Wolfe, Bear Stearns.

Good morning.

This Michael [Beard], his associate.

Just wanted to know if we can give did a quick update on the labor situation?

We think both sides are approaching these discussions that we're having right now and have been having for a couple months very conscientiously.

I think both sides are ready and willing to do a deal if we can put it together.

We're about 16 months earlier than we were at the last contract and we're exchanging serious proposals.

Our position is we want to be financially responsible so we're able to compete in the future, but we also want to reward our people for their contribution to our success and I'm optimistic.

Adam Thalhimer, BB&T Capital Markets.

Just a quick question here.

It looks like fewer people took the voluntary separation agreement in Q1.

That being said, how will you move forward on that front?

Will you look to do another one of those or maybe something more dramatic?

No, I think, Adam, that that wasn't far off our expectations.

We offered it to 640 people.

We did it as part of this one corporate office as we were putting some offices together had some redundancy.

I think we were not far off expectations as far as who took it.

I think going forward as we continue to approach the shared services way of doing business, most of it will be taken care of through attrition as we move forward.

So we do not plan another one of these.

Okay, that's helpful.

And then on the freight side, it looks like you restated a lot of your Q1 results.

What was the cause for that -- Q1 '06?

Adam, we've done some restatements earlier last year in terms of some of the statistics.

But we didn't do anything here recently.

We can help you with that after the call if you like.

(OPERATOR INSTRUCTIONS).

Scott Flower, Banc of America Securities.

This is a quick one and I understand the quick math.

But with the euro strengthening so much and I know that formulaically that that helps international profitability.

But on the ocean side I'm hearing this big kick up in North American exports to Europe.

Do you foresee that helping your balance or are you seeing any shifts in some movement because of the strong movement in currently so far this year?

I don't think we're seeing dramatic -- you'd expect to see more out of the U.S.

obviously, and that was the underperforming region due to the economy here.

We grew mid single digits, which still is not bad I think in this environment.

But when you're growing Europe double digits and Asia 20 plus percent.

I would expect going forward you'd think that U.S.

exports would be helped, Scott, with this weak dollar, but we haven't seen dramatic help yet.

Okay, thank you.

Okay, thank you very much for joining us today.

Just to summarize quickly, our international operations continue to post excellent results.

The performance in our supply chain and freight segment is trending in the right direction as we expect it should.

And as we work through our slow growth U.S.

economy and difficult comparisons with last year's results, we certainly expect the business to pick up in the upcoming quarters.

Thank you for joining us today and we look forward to seeing you soon.

Thank you.

This does conclude today's UPS Investor Relations conference call.

You may now disconnect and have a wonderful day.