聯合包裹運送服務公司 (UPS) 2008 Q1 法說會逐字稿

Good morning.

I'll be your conference facilitator day.

I'd like to welcome everyone to the UPS Investor Relations first quarter 2008 earnings conference call.

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

(OPERATOR INSTRUCTIONS) We will take one question and one follow-up question from each participant.

It is my pleasure to turn the floor over to your host, Mr.

Andy Dolny, Vice President of Investor Relations.

Sir, the floor is yours.

Good morning, everyone.

Thanks for joining us today.

In a moment, Scott Davis, our CEO; and Kurt Kuehn, our CFO will discuss first quarter results and 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 risk and uncertainties which are described in detail in our 2007 Form 10-K report.

This report is available on the UPS investor relation's website or from the Securities and Exchange Commission.

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

Before I turn the program over to Scott and Kurt, I want to point out that there were two charges in last year's first quarter that reduced operating profit and pretax income.

The first was an aircraft impairment charge of $221 million.

The second was a $68 million charge related to the special voluntary separation opportunity.

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

Without these charges, adjusted earnings per share would have been $0.96.

This is the amount to which Kurt will compare current results in his remarks today.

The impacts from these adjustments are explained in the schedules that accompanied our earnings news 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.

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

Thanks, Andy, and good morning everyone.

UPS's first quarter results illustrate the dramatic slowing in the U.S.

economy.

At our investor conference on March 12, we told you that volume growth in January had been up 3%.

But in the six weeks prior to the conference, it had been negative.

We also said if these trends persisted through March, we would not achieve the earnings guidance we had provided for the quarter.

Those trends did continue.

In fact, many indicators are pointing to a contraction in the U.S.

economy.

They have become sharply more negative in the last two months.

For example, GDP and industrial production forecasts for both this year and next have been revised down significantly.

Manufacturing and service sector indices are contracting.

Nominal retail sales are growing slower than inflation and consumer confidence is at its lowest point in more than 15 years.

The great unknowns are the severity and the duration of the current economic slowdown.

Many of our customers have tightened their belts resulting in a shift away from our premium air products to ground shipments.

Our broad service portfolio provides customers the flexibility to select the most appropriate level of service and manage our costs.

In these tough economic times, we remain focused on enhancing profitability.

We intend to maintain our outstanding service levels, remain disciplined with respect to pricing, control costs with an emphasis on semi-variable and capitalize on growth opportunities as they become available.

Before turning the program over to Kurt, let me reiterate that I am still focused on the three goals that I shared with you at the investor conference.

One, to lead the Company effectively in executing our strategy and growing the business.

Two, to create a better global balance for our enterprise with a steadily increasing proportion of profitability generated outside the U.S.

And three our focus on economic profit, return on invested capital and long-term share owner value.

The challenges of today's business environment underscore how critically important these goals are.

With that, I'll turn the program over to Kurt.

Thanks, Scott, and good morning everyone.

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

Domestic Package operations.

While revenue increased nearly 2.5%, package volume was slightly negative.

Next Day and Deferred Air experienced volume declines of 3.8% and 2.9% respectively.

Ground volume, however, did increase slightly.

These results reflected a noticeable tradedown in service levels from Express to Saver, Saver to Deferred, and Deferred to Ground.

As customers worked hard to reduce their costs.

Trade down was evident across all customer sectors but was most prevalent in retail.

This is a tell tale sign of a progressively worsening economic environment.

In addition, the timing of Easter had a negative impact on average daily volume.

U.S.

domestic revenue per piece growth was 3% or more for all service levels.

So clearly, pricing remained rational.

Fuel cost rose substantially in the quarter, even though this additional expense is passed along to our customers, there is a two month delay between when we incur the expense and when it is reflected in the fuel surcharge.

Therefore, with constantly rising fuel costs, we've been playing catch-up.

The combination of lower volumes, tradedown within the product portfolio, and higher fuel costs all put pressure on domestic operating profits.

As Scott mentioned, we have put an action plan in place to address the impact of economic slowing on our U.S.

business.

We will, one, use the expansiveness of our service portfolio to help our customers navigate through these challenging times.

Two, exercise discipline with respect to investment, supporting only those projects that are essential.

And three, remain diligent in managing variable and semi-variable costs.

With regard to the last point, we have a number of initiatives in place.

We are restricting hiring, except in the sales arena.

We are stopping all non-critical projects.

And limiting discretionary spending including business travel, relocations and consulting services.

The objective is to run the business as tightly as we possibly can, while not reducing expenditures in areas that will provide future growth.

Now let's move on to the international segment.

If you'll recall, three months ago we told you that we expected the first quarter would be the most difficult one of the year for our international operations.

Export volume growth was 7.8% using U.S.

days, which is how we typically report international volume.

However, since Easter occurred in the first quarter, there were two fewer operating days in many European countries.

From the perspective of local operating days, Europe, Asia and the U.S.

all posted double-digit volume increases, with overall export volume up 10%.

The decline in international domestic volume was also impacted by the timing of Easter.

Adjusting for this, volume growth would have been up 1.5% for the quarter.

However, our Canadian domestic business was weak, due to that country's slowing economic environment.

All in all, international revenues increased almost 16%, driven by export volume growth and favorable currency trends.

Revenue per piece, adjusted to reflect the impact of currency, increased 4.4%.

Operating profits, however, declined 4.3%, as a result of the reduced number of operating days, the cost impact of our latest around the world flight, and higher than expected fuel expense.

We fully expect the performance of this business segment to return to more normal results in the second quarter, and for the year we're confident we can achieve a 10% increase in export volume and low to mid-teen operating profit growth.

We will continue investing in international expansion and new products and services that help customers better meet their global shipping needs.

For example, in China we are proceeding with plans to initiate air service between Shanghai and Nagoya next month, in conjunction with expanding our presence at Pudong International Airport in Shanghai.

We've added express morning delivery to five new countries and are adding over 1,000 morning postal codes in existing express locations.

We've also made expedited service available in nine middle eastern countries.

As you know, UPS raised the bar when we rolled out paperless invoice and return service for international shippers in January.

These services have been extremely well-received and we're expecting great things from these industry-leading offerings.

Now for the Supply Chain and Freight segment.

This segment posted a a substantial profit improvement, more than doubling on a nearly 11% revenue increase.

Forwarding and logistics drove most of the positive performance in the segment with revenue up almost 13%.

We're very pleased with the positive reaction to the streamlined UPS Air Freight portfolio that we launched in January.

And customers are responding very well to this enhanced product offering.

In addition, service levels in forwarding are at an all-time high and we've seen a significant reduction in churn rates compared with previous years.

In the logistics unit, both distribution and post sales performed well, controlled growth and revenue management are driving consistent profit gains.

UPS Freight results slowed in the quarter, in reaction to the economy.

Although LTL revenue increased 4%, both shipments and weight per shipment declined.

Such declines are typical in a soft economic environment.

Revenue per 100 weight increased over 13% helped by fuel, customer mix and a general rate increase that went into effect in February this year versus late March last year.

We remain disciplined in the face of a more competitive pricing environment.

Going forward, we intend to expand market share while maintaining a balance between growth and yield improvement.

UPS Freight has developed one of the best value propositions in the industry, through a combination of improved service levels and superior technology, all backed up by a no fee guarantee.

We anticipate this business will pick up momentum as the economy stabilizes.

Now I want to review our use of cash in the quarter, starting with share repurchases.

We have accelerated our share repurchase activity in line with the $10 billion that the Board authorized in January, supporting our new financial policy.

In the quarter, we purchased over 17 million shares for about $1.25 billion.

At this pace we are on track to complete the repurchases by the end of 2009.

In February, our Board raised the quarterly dividend 7% to $0.45 per share.

Dividends per share have more than doubled in the last five years, and in the first quarter we paid $893 million in dividends.

The payout ratio has gradually increased to about 40% in 2007.

And the UPS dividend yield is approximately 2.5%.

We also spent $661 million in capital expenditures and closed the quarter with 1.5 billion in cash and investments.

Free cash flow for the quarter was $1.6 billion.

This amount excludes the $850 million received as a a federal tax refund related to the Central States Pension Plan withdrawal.

Turning now to our outlook for the second quarter and the rest of the year.

At this point, we see no immediate signs of economic improvement.

In addition, most forecasters are not predicting economic recovery until 2009.

In that scenario we expect the U.S.

small package market to be flat to down 1% this year with the third quarter being the weakest.

UPS volume should follow a similar pattern, which means domestic margins will be under pressure for the rest of the year.

On the international front, cross border trade remains robust, despite pockets of economic slowing.

Therefore, we are confident that we can maintain our goals for the year of 10% growth in export volume, with low to mid-teens operating profit growth.

We believe this is possible because of our well balanced global presence and extensive portfolio.

For the Supply Chain and Freight segment, we are reconfirming our guidance of an operating margin in the 4 to 5% range, even with the slowness in the LTL market.

Taking all this into consideration, we anticipate earnings per share for the second quarter to be within a range of $0.97 to $1.04.

We're also revising our annual earnings guidance to a range of $3.90 to $4.20 per share.

This range reflects the significant uncertainty that currently exists in the economic environment.

Managing a tight ship through these stormy seas will take both vigilance and dedicated effort.

UPS has shown in the past that we can rise to the challenge and we're confident that we can do so again.

Scott and I will now be happy to answer your questions.

(OPERATOR INSTRUCTIONS) We'll pause just a moment to compile the Q&A roster.

Your first question comes from Gary Chase of Lehman Brothers.

Good morning, guys.

Good morning.

Hi, Gary.

Wanted to just ask, Kurt, you had sized the impact of fewer operating days in Europe at I think at about 50 million, kind of similar to what you were looking at in the domestic business.

Yes, about that in total for the Easter impact.

And we do get those back, so that's part of the double-digit growth, I assume.

We get three -- we get a three day good guy in the second quarter and then I think an additional two days through the remainder of the year.

That's part of the op profit growth you're forecasting, right.

Yes, it is.

That's part of the reason we communicated those numbers in local days also Gary, to show that the momentum is continuing steadily there.

We'll recover most of that in the second quarter and we remain confident that over the course of the year we will be able to deliver the numbers that we've said.

Well, given the day changes, I guess, and I've heard your commentary on it.

I guess what I'm curious about is does the 12 to 15% goal for international, does that suggest that we're not going to see a slowdown in that arena or is that consistent with kind of a decoupling where the brunt of recession is felt here in the U.S.

and not beyond?

We're seeing certainly changing trade flows and U.S.

imports are slowing, but at the same time, U.S.

exports are increasing.

Asia to the U.S.

is perhaps not as robust as it was but Asia to Europe remains robust.

So it's -- there's clearly moving pieces to the puzzle and that's part of why our strategy has been to build a comprehensive balance network so that we can catch the ball whichever direction it's going.

Gary, in Europe, even though there's been some weakening of the economy, our transporter products there are staying strong.

We're seeing no declines there whatsoever.

You think there's offset here to the potential weakness, is that fair?

Absolutely.

The U.S.

export will help offset the slower imports into the U.S.

from Asia.

Clearly, if there's a global economic slowing, we're not immune to that.

If it's a matter of one theater changing a little bit and the other picking it up, then we feel pretty good.

Appreciate it, guys.

Thank you.

Your next question is coming from Jon Langenfeld of Robert W.

Baird.

You talked about the initiatives in place to manage the semi variable costs.

Can you give us some idea how -- what the progression of that looks like, if we go back to the early 2000s when you did that, it took a quarter or two to kick in.

But then when it did kick in, you were able to recover quite a bit in terms of lessening the down side of profit year-over-year.

So could you talk a little bit about how long it takes to manage some of those things through?

Yes, we try to aggressively manage variable costs really on a daily basis, Robert.

Adjusting our dispatch, the hours our people work and realigning the network and certainly the more persistent the slowdown is, the better we get at that.

But then on the semi variable side, it does take us a quarter or two and it's a broad range of issues.

One thing we have done this year is we did reduce the number of operating locations within the U.S., our districts, leveraging technology to increase our people's span of control a business.

We've done some of the traditional work with constraining relocations and minimizing travel.

So those things kick in over time and, it's not an immediate reaction but we're -- we've done this a few times and we're pretty confident that we can right-size the expenses.

The added benefit Jon, we have this year is the labor contract on the operating side too, it kicks in in August.

We'll start seeing the benefits from this new contract in August, which will add I think to help with the non operating cost savings.

And would you -- is there any reason to think that, at least at this point that the downturn and how you manage through the downturn domestically is any different than how you did it in the early 2000s?

I know fuel is different here.

But I'd be interested in your thoughts there.

I think the wild card is fuel.

I think the downturn we're in right now, none of us know where we're going to end up.

My own opinion is we'll probably end up being slightly positive or slightly negative in the economy for the year.

We're projecting slightly negative domestic volume for the year.

It's pretty similar to what we saw in 2001.

2001 you saw -- actually in 2001, 2002, we saw negative air, Next Day Air volume growth.

Both those years snapped back in 2003 to 7% growth.

I don't see anything really different about this one, other than the energy cost, which is still a wild card for all of us.

Great.

Thank you.

Thank you.

Your next question is coming from Tom Wadewitz of JPMorgan.

Yes, good morning.

Let's see.

Wanted to ask a little more about what you've got in the guidance.

If you just look at the first quarter earnings decline, off about 9% and then you compare that to I think on a continuing basis, if you take the midpoint of your full year guidance, it's off about 1.5%.

How much -- do you you have any improvement in volumes later in the year baked in or is the improvement that's implied in this purely the cost side actions and maybe if you could just give some comments on that?

We have clearly ramped down the view for the remainder of the year, Tom.

We're expecting basically kind of a steady state, but sluggish view, which seems to be the increasing consensus with most economists not looking for a significant recovery until '09.

So a significant amount of the improvement is the cost adjustments we're making.

As Scott mentioned the benefits of the new labor contract begin to kick in.

There is a view that industrial production will bottom out in Q3.

Clearly that's a big driver of our volume.

So there may be a little bit of a bump-up in Q4, based on the economic statistics we're looking at but we're not -- this isn't a hockey stick forecast.

The other wild card is, we talked about international.

International is going to get better for the rest of the year.

We got penalized with Easter falling where it did this year.

We'll see international turn around, get back to normal growth trends which obviously will help the overall Company results.

Supply Chain and Freight should continue to show improvement through the year.

Fuel remains a wild card.

It continues to break through at unprecedented levels.

As I said, we're playing catch up so there will be a little bit of volatility with that.

That's kind of where we sit.

Okay.

And then one follow-up on the cost side, you talked a little bit about it in response to some of the earlier questions.

But can you give us any further thoughts on the magnitude of some of the bigger cost savings initiatives, is it, $100 million that you're looking at from some of the items you talked about or is there room for a lot more than that when you look at your cost reduction activities?

No, Tom, we've got plenty of opportunities, we think, and it's a big base of expense.

We're not really ready to hang a specific number out at this point but there's a lot of activities and we'll remain constructurally dissatisfied until we do the best we can.

Okay.

Great.

Thanks for the time.

Thank you.

Your next question is coming from Jason Seidl of Credit Suisse.

Jason, please go ahead.

Sounds like we lost him.

Hello?

Let's move on to the next one.

Next question is coming from Ed Wolfe of Wolfe Research.

Good morning, guys.

Good morning,.

Hey, Ed.

Just as follow-ups to questions that have been asked a couple times, the cost savings target, when we compare this to what you did I guess it was in '02, does it feel like it's a tighter clamp-down or does it feel similar or is it just different?

That would be one thing.

On the international side, I wasn't clear, you said there's $50 million from the two days.

If that included domestic and international or just international?

That's both domestic and international, although international feels the impact more than the domestic side did.

I mean, even if you gave them the full 50 at international, you would have had 7% EBIT growth and you're projecting 12, 13% kind including that 7.

What's so exciting in international besides those two days?

Why are you so confident in that?

The last thing that I would just throw at you, is interest expense occurred at $34 million with a lot of moving parts, can you comment give or take what we should be modeling for that going forward?

Maybe I'll start out with the international.

Certainly, the Easter impact was a material one.

But we've got a couple other headwinds, Ed, that we see mitigating.

Number one, the around the world flight begins to cycle over in the second quarter and that flight is moving along well but it certainly has added a cost base that's substantial and the continued chasing the fuel on its way up has also created a headwind.

So we've -- some of those things we think we can manage pretty well and we do remain quite confident.

We know this is a big swing, Q1 to the rest of the year.

We did have a similar condition like this several years ago and I think we had the same case, that market was concerned about our performance in Q1 but the calendar showed that it was just a transitory issue.

On the interest expense, clearly we -- we've increased our debt with the issuance we did the second week of January with $4 billion increased debt level.

So those are levels we would expect going forward and that's all part of the recapitalization plan we're doing with repurchasing shares and we did mention that we repurchased 17 million shares in the quarter.

So that's a natural outgrowth of that.

And I guess the cost cutting environment, doesn't seem that dissimilar to what we saw, Ed, in 2001, 2002.

We do feel, Ed, that margins in the domestic also will be improving over the course of this year, from Q1 forward so you'll see the impact of some of those things over time.

Thanks, guys.

That's helpful.

Thank you.

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

Hey, guys, good morning.

Following-up on your comments on some of the cost base with these new growth initiatives like the around the world flight, I mean, at what juncture do you get concerned enough about the economy kind of lingering at this pace that some of those growth initiatives you may have to pull back on.

I mean, would you consider pulling back on the number of the around the world flights you're doing and trying to shrink the cost base that way or do you view growth initiatives like that as too important, just something you'll have to deal with in the near term.

John, when it comes to international growth initiatives, we see no reason to pull back.

I mean, we feel like we're doing great.

We feel like we built really a superior value proposition.

We raised the bar as I said with several new to industry capabilities with paperless invoice, international returns.

There's just a whole bunch of stuff that keeps the momentum going there.

So a little bit of a headwind for a few quarters with added capacity is a good investment for us.

On the domestic side, clearly, with our size the economy is going to impact us and that's where we're going to be the most cautious.

Okay.

And then you made the comment about significantly ramping up the share repurchase activity and that type of thing.

Can you give us order of magnitude, what you're talking about in terms of a significant ramp-up?

I mean, do you have a dollar amount in mind that you're committed to spending every year or have you shortened the duration of the buyback in order to complete it much earlier than originally anticipated?

We purchased about 17 million shares in the first quarter, about $1.25 billion which puts us right on target to complete the repurchase by the end of '09.

So that's fairly steady state.

We reserve the right to speed up or slow that down based on either market conditions or other factors but we're on target and we'll keep you posted.

Very good.

Thanks for your time, guys.

Thank you.

Next question is coming from Ken Hoexter of Merrill Lynch.

Good morning.

Can you clarify when you talk about cutting out some of these expenses, are you looking to reduce capital expenses in any way?

I guess you've still got a $3 billion target out there.

Yes, we do.

Certainly capital's a critical part of running the business and we remain very focused as Scott mentioned on returns to capital.

We already did give the capital budget a bit of a haircut prior to our $3 billion guidance but we will continue to really scrutinize that.

Most of the aircraft we have are committed and also the ones we'll be taking are primarily the 74, 7400s, which are primarily for international capacity.

So that will continue.

Another large expense we have for 2008 that won't be mitigated is the expansion of the World Port hub, that expanding capacity there, that's another great linchpin in our global capabilities.

And then also the opening of the Shanghai hub, which will allow us to have more frequencies and more access in China.

We mentioned that we're linking Shanghai to Narita in Japan, also.

So a lot of the CapEx right now is focused internationally.

On the domestic side, certainly there's a number of capacity expansions, additional vehicles that we will scrutinize very carefully and those we're more flexible with.

So we'll keep moving along, Ken, to the extent we think we will.

We do go back and revisit all projects.

We're doing I guess what you might call value engineering in our IT, looking at projects.

And rather than perhaps totaling canceling them, challenging the users to go back and strip out the 20% of the project, maybe that adds the least amount of value.

So it's just a -- it's across the Company.

It's something we've done a few times through a few cycles and we'll remain diligent.

In total, Ken, we're still going to be below the 6% of revenue which is a low compared to the historical spend, so keep it below 6%.

Also we improved our return on invested capital in the quarter despite the anemic earnings.

If I could get my follow-up on the currency exchange, I just want to understand this a bit, maybe pure pricing if you can on the export side which I think your printed number was 7.5% yield increase but if I look at your currency adjusted page it might have been about 0.3% I e ten strip out -- is that with rev fuel surcharges?

If we strip that out, can you give us a look at that?

And then a minor technical question.

I hope it's not a follow-up question, but you keep talking about these two Easter days.

Are you also adjusting somehow for the fact that you got the bonus leap year day, so was that also kind of -- so is it actually three days or is it two day impact?

No, it's two day impact, total days to total days, working days.

Shouldn't it be one if you get the extra day for leap year in there.

Not if you add up the calendar.

It's just the way it works.

So it's total days in the quarter, we did see a couple less.

That's why we gave numbers both with or without those days.

We grew 7.8% in exports including the total quarter, but if you look at it using the proper working days in each of the major regions then we show 10% in each of those regions.

So it's a working day.

Okay.

Thanks.

Fuel is in the yield numbers, although certainly on the P&L it's a drag.

The trends we're seeing on our yields internationally, we feel pretty good about.

The overall average for export did show just modest increases and that continues to be the factor we talked to a few times, which is the -- a little bit of a mix issue, where we're seeing the fastest growth in our trans border products that move within continents and that has certainly a lower revenue per piece.

But each of the products on their own are doing quite well and just like in the U.S., where customers mix up and down, move through premium to standard, we're also doing the same thing across the world to help customers optimize.

We feel very comfortable.

We're managing that.

We expect margins to continue to look great in the international theater.

Understood.

Thanks, guys.

Next question is coming from William Greene of Morgan Stanley.

Kurt, just one quick question.

You mentioned the retail weakness.

How are BC volumes in the quarter?

Still positive but certainly slower than they have been over the last couple years.

The consumer is definitely feeling it and both in the -- both our direct to retail business volume and our direct B to C is showing the impacts.

So it's a tough environment out there right now and we're doing a lot of specific work with the big retailers and finding ways to manage their businesses.

Hopefully the rebate checks on the taxes will give consumers a little bit extra spending money and should provide a boost if it works right.

Okay.

And then just domestic volumes in the first few weeks of this quarter, they're down, I assume.

They're following similar trends as the end of the first quarter.

It's a little whacky because of the Easter impact.

Just as we had a headwind with Easter being early and in the first quarter we're seeing some comps that are easier in April.

But in general we don't see any real trend changes right now.

Thanks for your help.

Thank you.

Next question is coming from David Ross of Stifel Nicolaus.

Good morning, gentlemen.

Good morning.

Question first on the ground side.

You've seen a shift from the premium products down to the ground in tough economic times but also I know that you've taken a lot of steps in your ground product to reduce transit times and increase the reliability of the ground shipments.

What percent of your packages in the ground network in the U.S.

would you say are delivered next day?

What percent would be two day deliveries?

And what percent are three day?

I don't have the exact percentages handy.

But clearly the majority of volume moves within a one to three day configuration.

It's really for competitive reasons in the past have not disclosed the details there.

As a follow-up, the repairs and maintenance expense line item declined year-over-year on an absolute basis.

Is this due to fewer vehicles in the fleet?

A newer fleet?

Fewer miles?

Something else going on there?

No, it's part of it's just effective cost management.

We do have a little bit of a benefit because we're overlapping the first quarter, in which we still had some repairs on the 727s that we retired.

So there's a little bit of a comp benefit there.

But that -- I wouldn't expect that to continue to decline.

It just there was a little bit of a boost in Q1 from that.

Thank you very much.

Thank you.

Your next question is coming from David Campbell of Thompson Davis and Company.

I just wanted to ask about the international picture, specifically the Asia Pacific region.

Seems to be significantly better growth there in March in the industry than it was in January and February, some attribute it to the China weather and loss of traffic in January, February, from that situation.

There also seemed to be a fairly big pickup in imports from Asia Pacific in the United States in March.

I wondered if, first, if you had seen that.

And two, is that one of the reasons why you're more optimistic about the second quarter international results?

David, it has been a little bit of a bumpy ride in Q1 and certainly the unprecedented weather in Asia did delay some capacity or some goods coming to market.

But if you factor that out and you also have the Chinese New Year that bumps around, I don't -- we don't see that as a change a trend.

I think we see those more as just minor short term distortions.

We're seeing actually more strength in the China and Asia to Europe arena where their currency remains strong and the Asia to U.S.

is steady and strong but it's not really driving the show right now.

I think it will take the U.S.

economy to strengthen to really see that, get back to the robust growth rates we saw the last several years, Asia to the U.S.

As Kurt said, Asia to Europe and intra Asia have been quite strong go and we are seeing a great pickup also with our new freight portfolio, David, that's allowing us to help customers no matter which direction they're moving the goods, pretty seamlessly, pick the level of service and the lanes that they need so that's coming in handy for us as things shift a little bit.

And the last -- the second question is, I mean, the air freight forwarding business seems to be significantly better than the small package business, particularly in the Asia Pacific region.

Is that true?

And of course you're attributing it to individual initiatives in your case, but and the industry seems to be better.

Do you have any explanation for that?

I think we're doing very well in both the package and the heavy freight side out of Asia still.

We're not disappointed with Asia results.

They've been strong.

Maybe we're not growing at 40 and 50% out of China like we were but we're still growing at very high rates and still double-digit export package growth rates out of Asia.

I think, as Kurt said, I on the freight forward and heavy freight side I think our new offering has helped our business growth dramatically in the last quarter.

Yes, really.

One of the most notable things in the quarter was the substantial enhancement, improvement in the Supply Chain and Freight segment.

We're pretty excited that we've found the sweet spot and our strategy is starting to execute with this new portfolio, with the alignment organizationally across the world, the integration of our management teams, the visibility in the technology linkages.

We saw great results in the Supply Chain and Freight on both the top line and the bottom line.

So there is -- it's a firm market out there, David but we also feel like we're making some headway.

Sure sounds like it to me.

Thank you very much.

Thank you.

Your next question question is coming from Robin Byde of HSBC.

Good morning, everybody.

Just a question on pricing in domestic and international package.

With this slowing trading environment, is competition starting to or likely to start to compete more on price?

And what do you see on pricing back in 2001, 2002?

Thank you.

Yes, clearly we are very sensitive to the pricing environment and to the behavior that can happen in weak economic times.

The -- probably the most notable area with pricing pressures is the LTL arena and I think you've seen a number of carriers talk about that.

We were pretty fortunate and kind of sticking to our guns and starting to leverage the value proposition.

So we showed a substantial improvement in yields in the first quarter, although that certainly was helped by the earlier rate increase that overlapped in the first quarter.

So we're going to strike a balance on the LTL side of continuing to grow share, but also be prudent on the pricing side.

On the package side, the market continues to be rational.

One thing we have seen in the air especially that has impacted the yields a little bit is that the average weight of our packages has been reduced.

Next day air, it's down 5 to 6%.

As there's less widgets per box.

That has mitigated the yield increases a bit.

Also we've seen some tradedown from our a.m.

service to our p.m.

service and from the next day to deferred.

These are all natural reactions and actually this is where we can add value to customers if we work through this.

In general, we continue to feel that both domestically and international, the pricing market is rational.

I think all the players in this industry are seeing significant cost pressures and high variable costs with fuel.

So we're going to be disciplined and we expect the market will.

Okay.

Thank you.

Your next question is coming from Donald Broughton of Avondale Partners.

I heard you in the beginning say how focused you were on cost control as demand slows.

So with the softness in Domestic Package and in Domestic Freight, have you furloughed or laid off any workers?

nd if not, how weak and for how long would that weakness have to last before you would begin to chip away at what is your largest line item?

Yes, we've -- on a daily basis, Don, we do adjust the number of employees in our operations and the hours they work.

So certainly we have some of the more junior employees that are perhaps just working a couple of days a week.

If demand is there.

We're adjusting the hours on those people also.

From the overhead perspective, as I mentioned, we have done some realignment to reduce the non-op costs in the field with realigning some of our districts and regions.

And that reassigns people or we aren't replacing them as some of our UPSers retire or move on.

We're being very careful on that side.

Also, across the globe as we mentioned, we've done a fairly significant alignment of our freight, our distribution and our package management structure that's beginning to show some real synergies.

Over the longer term, another big priority that we're working on as the dust settles with the new expanded capabilities we've got is beginning to drive all of the non-operating process into a major shared services environment to really get the economies of scale and align our global processes.

So there's short term, there's medium term and there's long-term activities, Don.

Well, I guess this is more of a philosophical question, then.

I was going back to the releases and Company presentations you made during the last economic slowdown and what struck me was how much you pointed to the flexibility of your model, the non cyclicality of your ability to produce results and indeed that for the most part turned out to be the case.

Now the economy is slowing and it's directly hurting your ability to produce results.

So what's changed?

Is it you?

Is there something structurally about the Company that's changed?

Is it the competitive environment?

Or is this a different slowdown than we saw in the 2000, 2001 time frame.

I think, Don, one of the things that changed is energy prices.

Energy prices keep cranking up.

That put pressure on us in the first quarter that we didn't see in 2001.

Clearly, the Easter comparison hurt us a little bit domestically and internationally in the quarter.

Some of it's calendar, some of it's energy.

Some of it's a little bit of a surprise in how fast the volume declined in February.

You saw us at the March conference.

We were growing volume pretty nicely in December and January.

It fell off pretty quickly.

Particularly in the semi-variable area, harder to react quickly when volume falls that quickly.

We did, if you go back to '01 and '02, during tough times we show some margin compression and I think if you look at our guidance for this year, we're going to continue to execute.

There will be some margin compression.

But it's certainly not highly volatile.

Good luck in the coming quarters.

Thanks.

Thank you.

We have a follow-up question coming from Gary Chase of Lehman Brothers.

Hey, guys.

Just a quick one on supply chain.

Kurt, in response to a question a little while ago you were describing how that was really starting to hit on all cylinders.

At least as I look at it, the first quarter was a very good performance, feels like almost acceleration, despite the tough environment.

If memory serves, you've not really changed the outlook for the full year.

Just wondering if you had any additional color on what might be behind that.

Is that conservatism or is there something there that you're more concerned about?

I guess if there's anything we're concerned about it would be the LTL environment.

That's -- it's a tough sector right now.

We're very excited about the Company-specific story with the no fee guarantee.

We've integrated LTL into world ship to give shippers the ability to move seamlessly between package and freight.

Long-term we're very bullish about the LTL but certainly in the near term it's a tough market.

So that is embedded in that supply chain and freight segment and we remain cautious there.

We feel pretty good that we're starting to hit on all cylinders in the forwarding and logistics arena.

It's been a long path with a lot of investment many and hard work.

We're starting to see great response from our customers.

Okay.

Guys.

Thanks.

Thank you.

We have a follow-up question coming from Tom Wadewitz of JPMorgan.

Yes, my follow-up is on fuel.

You've obviously talked about this quite a bit on the call.

I didn't catch any kind of a quantification of year-over-year impact on fuel on earnings in the first quarter.

Is it in broad terms, are we talking $0.01 or $0.02 or was it more like a $0.05 to $0.06 a share impact when you consider fuel surcharge and increase in expense year-over-year.

It's probably $0.02 to $0.03, Tom.

Although, if you take a little more expansive view, if you add in tossy surcharges and utilities and some those other things, you can get to a pretty big number.

There's both the direct fuel, there's things like purchase transportation which you'll see is up substantially.

That's largely driven by fuel.

So it's clearly a headwind and, at least $0.02 to $0.03 as far as our calculation and could be more if you take a little more aggressive view of the indirect impact.

And if you look at the impact on yields, was that -- I mean, I know it would be different for ground and air, but if you comment on each of those, how much do you think fuel surcharge boosted yields year-over-year in let's say air express overall and in ground package?

Yes.

The ground impact is more mitigated, couple percent.

On the air, there's a lot of moving parts.

We're seeing it impact in a benefit from the surcharge.

Somewhat offset by the 5 to 6% reduction in weight, which directly drives revenues and some of the tradedown factors.

So certainly as fuel gets to these high levels and the surcharges reach 20% and more, it is a very large factor and to some extent it's become a part of the negotiation process.

So it is an area our customers are worried about.

We're concerned about and we're trying to find the best way we can to help them deal with that.

In terms of the ground, you're saying like something like 2 percentage points impact on yield, something like that?

Yes.

Okay.

Great.

Thank you.

Thank you.

We have time for one question.

It's a follow-up from David Ross of Stifel Nicolaus.

I want to follow-up on UPS Freight.

You talked about the soft LTL market, and saw significant decline in shipments, but heavy yield improvement.

Can you just talk a little bit about where the pricing pressure is.

Are you actively just calling accounts that are asking for price reductions?

Just give a little more color on what's going on there.

Yes, some of it is just our customer mix is changing a little bit also.

Clearly, the ease of use and the value proposition we have put out there is very compelling for small and mid-sized customers, being able to use the same world ship environment that they've used for years to process transactions and with a flick of the wrist manage their LTL in the same environment is a pretty good arrangement.

So as customer mix shifts and the middle market grows faster than some of the larger accounts there is a benefit on average yield.

We're trying to find a balance on this.

We're certainly working with our customers to reduce their cost and we're not actively culling customers at all.

At least for now, we showed some great results and we're going to continue on the yield side, although clearly we'd love to show some growth.

So we're going to continue to manage that.

We feel confident in the long-term but there is a lot of noise in the industry right now and we don't want to get too caught up in it.

Thanks again.

Thank you.

I would like to turn the floor back over to your host, Mr.

Andy Dolny for any closing remarks.

Just to summarize, we expect second quarter earnings per share within a range of $0.97 to $1.04.

For the full year earnings per share are expected to be in the range of 3.90 to 4.20.

We expect to watch our costs diligently while continuing to invest in the business to capitalize on global growth opportunities.

Thank you for joining us today.

And we look forward to seeing you soon.

Thank you.

This concludes today's UPS Investor Relations first quarter 2008 earnings conference call.

You may now disconnect.