聯合包裹運送服務公司 (UPS) 2010 Q1 法說會逐字稿

Good morning.

My name is Robert and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the UPS investor relations first-quarter 2010 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, 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 will briefly review the Safe Harbor language.

Some of the comments we will 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 2009 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.

I want to remind you about three adjustments we made to first-quarter results -- a $98 million pretax restructuring charge related to the reorganization of the US Domestic Package segment, an $38 million pretax loss on the sale of a supply chain business and a $76 million non-cash charge to income tax expense resulting from a change in the tax filing status of a German subsidiary.

These charges reduced net income by $175 million and diluted earnings per share by $0.18.

In addition, in last year's first quarter, there was a $181 million aircraft impairment charge, which resulted from the retirement of our DC-8 fleet.

The after-tax impact of this charge was $116 million, or $0.12 per share.

In their remarks today, Scott and Kurt will refer to UPS results excluding the impact of these charges since we believe this is a more accurate picture of the Company's performance.

Reconciliation of these adjustments to comparable GAAP measures is explained in the schedules that accompanied our earnings news release this morning.

The schedules are also available on the UPS investor relations website in the financial section.

In addition, during the call, we refer to free cash flow, which is a non-GAAP financial measure.

A reconciliation is included in the news announcement this morning and is available on the UPS investor relations website.

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

Thanks, Andy and good morning, everyone.

Last quarter, I mentioned that UPS was well-positioned to take advantage of improving global economic trends.

Now we had the ability to manage effectively in response to changing market conditions.

This quarter, UPS started to prove it.

Economies around the world are showing signs of recovery.

Experts are providing more upbeat forecasts than they were a few months ago.

Conditions are slowly starting to improve and UPS's first-quarter results illustrated our ability to take advantage of these trends.

In the quarter, UPS achieved better-than-expected growth in volume, revenue and profit.

In particular, the International Package segment really shined.

You are seeing how our global product portfolio provides benefits to our customers and our shareholders alike.

Our strong management team quickly capitalized on this growth while still controlling costs.

And we saw the operating leverage inherent in the UPS network.

Also in the quarter, two significant infrastructure projects came to fruition.

These strategically enhanced our network.

We opened the second phase of our Worldport expansion ahead of schedule and under budget.

This enables UPS to continue to reduce operations in regional air hubs and fly larger, more fuel-efficient aircraft.

In addition, we began operating our new intra-Asia air hub in Shenzhen, China.

This hub allows UPS to better serve our customers by reducing time in transit for hundreds of city pairs in the area.

These projects require significant capital commitments and will enhance customer service, provide better access to international markets, and improve efficiencies for UPS around the globe.

In February, the administration announced a national export initiative, which UPS strongly endorses.

It has always been our firm belief that increasing global trade is the best way to stimulate economic recovery and to create jobs.

We intend to work with the President's team in any way we can on this new important endeavor.

Since the beginning of the year, UPS has received wide-ranging recognitions.

The Company was named most admired in our industry by Fortune, one of the top 10 most reputable companies by Forbes, one of the 100 best corporate citizens and one of the top 10 global companies in climate innovation.

UPS was also recognized for our work with women and minority-owned companies.

Now while words are gratifying, what is important to us is the scope of what is being recognized.

These accolades are testaments to the UPS culture that benefits all our stakeholders.

They are also a testament to our people.

I want to take a moment to commend UPSers around the world for their focus during the quarter.

Our US domestic restructuring is well underway and the new region and district structure is operational.

Everyone is doing a tremendous job managing the business through these changes.

Let me also recognize our European and airline partners for the outstanding work they did over the last two weeks in response to the challenges caused by the volcanic eruptions in Iceland.

Our product portfolio and extensive European air and ground network enabled us to modify operating plans and limit customer inconvenience.

This was a job well done.

Now I will turn the program over to Kurt to review the operations.

Thanks, Scott and good morning.

Well, it is certainly enjoyable to have a quarter like this one to discuss with you.

Revenue was up 7%, operating profit up 31% and earnings per share up 37% with margin expansion in every segment.

The better-than-expected results stem from stronger operating performance in each segment than we'd anticipated, yield improvement and operating leverage across the enterprise.

I am pleased with our ability to manage costs and increase productivity as volume began to increase.

Compensation and benefit expense increased only 1.7% while our consolidated volume was up 2.7%.

Now let's look at the segments starting with the US Domestic Package operations.

Operating profit jumped 17% on a 2% revenue gain.

This increase was driven by higher yields, stabilizing volume, network enhancement and good execution.

As a result, operating margin was 9.3%, an increase of 120 basis points.

While average daily volume increased less than 1%, this was the first quarter since the end of '07 with positive year-over-year growth.

The increase in US domestic volume was driven entirely by ground, outperforming the air products as expected.

The 2% improvement in revenue per piece was the strongest since the third quarter of 2008.

It reflects retention of a greater portion of the general rate increase and higher fuel surcharges.

Base pricing was up in both air and ground and we expect this positive trend to continue through 2010, especially in our air products.

Once again, our operations team demonstrated our ability to further optimize our network by reducing direct labor hours, miles driven and block hours.

And this was accomplished while going through a significant restructuring within our US operations.

In the quarter, UPS continued using technology to improve efficiency and provide even better customer service with the introduction of UPS Smart Pickup.

This industry-first application ensures that UPS drivers stop for packages only when a customer actually needs that service.

The process is easy, automated and transparent for customer and driver alike and will eliminate an estimated 8 million miles of driving annually.

Let's turn now to the international business where operating profit soared 45% to $427 million on an 18% increase in revenue.

Operating profit for this segment approached our historical first-quarter peak.

In the quarter, UPS experienced balanced growth across all geographies and products, a combination of higher volumes from existing customers and new customer wins.

Total average daily volume was up 18% with export volume increasing more than 9%.

All major regions of the world experienced export volume improvements.

Asia led the way, up over 20%, followed by the US and Europe, both of which showed strong year-over-year gains.

During the quarter, we also experienced a lengthening of our trade lanes as interregional trade picked up as evidenced by the 37% volume increase in our Asia-to-Europe lane.

Yields improved 5%, reflecting firm pricing, positive currency impact and increased fuel surcharges.

The 24% gain in non-US domestic volume was helped by our acquisition in Turkey last August.

However, organic growth was 13% powered by strength in our core European markets.

This strong improvement was against the backdrop of a weak euro zone economy.

UPS's presence in domestic markets outside the US also enables many opportunities to gain export volume.

In fact, a substantial percent of our non-US domestic customers also used UPS for their export needs, taking advantage of our broad portfolio.

International operating margins increased 310 basis points to 16.2%.

This resulted from leverage due to increased volume and benefits from network and productivity improvements implemented last year.

Good control of both operating and non-operating costs produced leverage in our results.

Now for the Supply Chain and Freight segment.

Revenue increased 14% and operating profit more than doubled.

The logistics business was the primary driver of the profit increase.

Logistics continued to experience strong growth and profitability gains in healthcare and high-tech.

During the quarter, we were proud that Data Monitor recognized UPS as number one in supply chain outsourcing for 2009.

This award validates the progress that we have made in building our unique supply chain management capabilities.

Forwarding experienced strong tonnage increases; although demand moderated slightly from the fourth quarter.

The industry capacity constraints did lessen slightly, resulting in sequential improvements in operating margin.

We implemented revenue management plans in the quarter, which will improve margins going forward.

On the LTL front, UPS Freight remains committed to its strategy of targeted growth in the middle market.

As a result, revenue per hundredweight increased 10% and LTL revenue was up almost 6% even with modest declines in both shipments and tonnage.

This business unit showed solid improvement over last year; although it still operated at a slight loss.

We expect it to be profitable for the year.

Now, as I usually do, I want to emphasize the very strong financial foundation that supports UPS.

In the quarter, we generated $1.3 billion in free cash flow, even after $630 million in accelerated pension contributions over last year.

UPS also invested $280 million in capital expenditures, paid dividends of $470 million, reflecting a 4.4% dividend increase and spent $260 million to repurchase over 4 million shares.

Lastly, we ended the quarter with $3.1 billion in cash and marketable securities.

Because of the strong first quarter and improvement in the global economic outlook, we raised our expectations for earnings per share this year to a range of $3.05 to $3.30.

This is a 32% to 43% increase over last year's results.

The year-over-year change in earnings should remain fairly consistent across each quarter with the fourth quarter showing a lower increase due to a more challenging year-over-year comparison.

Looking at the segments, for the full year, US domestic average daily volume should improve gradually with ground outperforming air.

We expect yields to strengthen as the year progresses, resulting in significant margin expansion for 2010.

Keep in mind though, as we continue with the US restructuring, we will incur additional costs for relocation and training, most of which will occur during the second quarter.

These items, which are included in our guidance, will negatively impact earnings by $0.03 to $0.05 in the quarter, constraining margin improvement somewhat.

In our International segment, we anticipate UPS export volume to continue outpacing market growth.

Non-US domestic growth should remain strong, but remember, we will lap the date of our Turkish acquisition in August.

We expect International operating profit to show strong growth and reflect typical seasonal patterns.

Our Supply Chain and Freight segment should generate gradual sequential improvement in operating margin with a full-year margin of at least 5% on about 10% revenue growth.

To summarize, we had an excellent quarter in which we successfully transitioned from a recessionary to a recovery environment.

Going forward, we are determined to sustain the enhancements we have made to our cost structure.

We will continue to invest for the future while remaining focused on disciplined, profitable growth and we are very confident that our diversified global portfolio will help us capitalize on the many growth opportunities ahead.

Thanks for your attention and now Scott and I would be happy to answer your questions.

(Operator Instructions).

Gary Chase, Barclays Capital.

Good morning, everybody.

Kurt, when you were talking about the yield outlook in domestic package, you noted base gains on the air side.

And I think the comment you made was you expect those to continue through the remainder of the year and you said especially in air.

Wonder if you could just elaborate a little bit on what you think is driving that.

Well, Gary, clearly, as you know, stabilizing our yields and rationalizing our pricing has been a big priority of ours and it is an activity that is well underway and we feel pretty confident in the results.

You are starting to see some of the benefits of that.

We have also seen in our Next Day Air business some strengthening on the weights and typically our Next Day Air package business is one of the most economically sensitive.

So that also should add to the top-line yields.

But we are continuing with a disciplined process of looking at customers and making sure we are pricing for value and at the same time growing the business.

So we feel pretty comfortable that the environment on pricing will remain rational and clearly, we are executing towards that.

And then on the expense side, if we take a look at the expenses you reported in the quarter, and I am assuming that the $38 million loss on sale from SCS was in the other expense line.

It looked very low for the quarter.

Just wondered if you could give us a sense of what drove that and if it is sustainable looking forward.

Are we on a new run rate?

Well, we implemented a number of initiatives over the last 18 months or so in response to the economic conditions.

And so we do feel pretty good that our other expenses are in good shape.

Depreciation and amortization is up a little bit as we operationalized Worldport, some of the investments we have got.

The big growth areas in general in our other costs are purchased transportation and fuel, which is, one, related to a lot of expense in our freight forwarding and the other just the commodity costs.

The other expenses has a lot of line items.

If you take out the one-time events, it is probably down about 8% and that is things like expense accounts, claims as our network runs very efficiently, supplies.

It may not maintain at that level, but we do certainly intend to sustain the reductions we have made and control all those cost items.

So that is the balancing act that we are managing right now.

Yes, last year, Gary, that other other expenses had that aircraft impairment in it too, you've got to recall, about $180 million.

Nate Brochmann, William Blair & Co.

Good morning, gentlemen.

I wanted to talk a little bit -- you had mentioned particularly in the International business, talking about benefits from both new customers, as well as existing customers.

I was wondering if you could give us a little bit of flavor in terms of the balance between the two and kind of what you're seeing, particularly on the trends out of the existing customer base.

We have been thrilled with the substantial growth we have seen really across the globe and we have really had two big initiatives in our sales execution internationally.

One is focus more on conversion sales than perhaps in the past.

We still remain a small player, typically 10% to 15% share in most markets.

So there is tremendous upside for us to help customers migrate over to UPS and we have seen great momentum there.

And then the other is to increase our share of wallet.

The advantage of our broad integrated portfolio is customers can move up and down that portfolio and we have also seen that happening as things begin to firm.

So even with the economies still suspect, especially in Europe, we are seeing very good organic growth on existing customers as they begin to use a greater portion of our portfolio.

Great.

And also next question in terms of just talking about -- if you could talk about what fuel surcharges kind of added into the total yield for the quarter and also how you think that that might impact the ability to push along those price increases that you kind of mentioned earlier.

Fuel surcharges were a modest benefit to revenue.

Really on the P&L side there was no benefit, actually a slight headwind because of the increase in the commodity costs.

It will be more substantial in Q2 because actually, at this time last year, there were zero surcharges on the air side.

So there will be much more substantial comps in Q2.

But right now, with surcharges in the single digits, it really isn't a significant effect on demand or customer pushback.

Clearly, a couple of years ago when things spiked, then it became a much bigger deal in the overall equation.

But right now, we think things are pretty stable on that front.

Ken Hoexter, Bank of America-Merrill Lynch.

Kurt, can you talk a bit about maybe the pent-up use of Express and now that you talked a bit about the transition?

What levels could we see that Express temper down while you start to see that growth in the ground again?

Well, right now, we are seeing some trade-up, especially in our Next Day package environment.

Actually our Next Day letters is slightly negative.

Things like refinancing and some of those activities are down.

So on the product side, the Express package, we are seeing pretty good growth and that, we think, is part of perhaps the beginning of some restocking and some increased urgency.

So we feel that that will remain performing above the average of the product, the package will.

The ground side is a little more coincidental.

We have seen that pick up sequentially, but it should move more in line with the overall economy.

I'm sorry.

Maybe I didn't say it clear enough because it sounds like you're saying that it was up, but it was -- Next Day Air was down almost 4%, right, so --.

The package performed much better.

The majority of that decline really was the letter impact with things like refinancing and some of the financial industry (inaudible).

Understood.

Understood.

My follow-up question would be on the LTL side.

Your yields were up, your volumes were down in a period where you would have anticipated the ability to take significant share.

But you also noted profitability would be there.

Can you talk a bit about the strategy and how much volumes you can see in that market or what you turned away?

Talk a bit about your strategy there.

Well, Ken, we have been pretty consistent, I think, following a very disciplined strategy of targeting what we consider to be the sweet spot of UPS, which is the broad middle segment of customers with ease of use, technology access.

And so what you're seeing is a mix shift in which the smaller customers are growing and some of the larger ones perhaps are not.

So yes, we are very proud of the revenue per hundredweight of 9.5% positive.

Even with fuel surcharge, it is still substantially positive.

So we feel very comfortable this is not a time to aggressively gain share and as you have seen, most of the players suffer from that.

So we are going to remain focused on the knitting.

We think we have got a superior value proposition.

We find the ability for customers to move seamlessly between our ground, our hundredweight and our LTL services as a real value and allows them to save money.

So we are being careful in this industry and there is risks if you get too aggressive.

Certainly, Ken, the LTL industry has struggled and it is still struggling.

We see signs of it starting to stabilize and starting to improve, but we are going to stay with rational pricing and wait until this market starts to stabilize.

Edward Wolfe, Wolfe Research.

Thanks, good morning.

Kurt, just back to the last question, if I look at domestic air volumes, they are down 2.2 and they were up 3.5 and 1.2 the prior two quarters year-over-year.

I know you are saying on the letter side, but did something change because it feels like the market, if anything is getting less worse, maybe you are getting more disciplined and culling some of that that DHL business out or how do we think about that?

Well, Ed, I wouldn't put too fine a point on one quarter datapoint.

We did successfully grow last year and gain share.

We are being a little more disciplined.

So on the increment, there may be some accounts that come or go as we look at that.

But we feel very good about our positioning in the air market.

We have lapped the DHL departure, so we do expect the overall air business to underperform the ground.

So it is a combination I think of yield management and also just the overlapping of the tailwind from the DHL departure.

Okay, and share repurchases, you have talked about having less CapEx and more free cash.

Can you talk a little bit about the timing of when you might get more aggressive on buying back stock?

Yes, I mean our overall goal for this year is to buy enough share to offset dilution.

We did accelerate a little bit of purchases into the first quarter and bought a little over 4 million shares, which is above our burn rate.

But our goal still for this year anyway is basically to purchase at that level.

I think as we look towards the end of the year, clearly, if the momentum continues, the cash flow we are generating and our earnings are increasing at the substantial rate then we clearly will revisit that policy.

So it would be something we would look towards towards the end of the year and perhaps give guidance in 2011.

Both share repurchase, Ed, and dividend policy and reinvesting the business both balance all those as we move forward, but the cash flow outlook does look extremely good.

Robin Byde, HSBC Securities.

Just on this issue of purchase transportation costs, [these] were up 24% year-on-year.

How much of this cost is air freight forwarding-related and what are you seeing in April?

Are buy-in rates starting to soften again after the mini-boom?

Yes, the purchase transportation -- clearly, the Supply Chain and Freight is the majority of that, 70% to 80% probably and that is a combination of increased tonnage and the substantial increase in buy rates as you mentioned, Robin.

We have seen rates stabilize I guess so at least some of the big spike like we saw at the end of the fourth quarter has moderated.

But it is still a very healthy market right now and we are seeing the benefits of that on our asset base side and we are managing through it on our forwarding side.

So we aren't really seeing a decline in rates and clearly the disruptions in Europe perhaps created a blip in the short term anyway on that front also.

But we do expect the rates to remain fairly strong this year.

On the other side of the equation though, Robin, we are doing a better job of getting the rates on the sale side in forwarding.

The other side of the equation, we are seeing some strengthening also.

Sort of balances itself out?

That's correct.

Tom Wadewitz, JPMorgan.

Good morning.

I wanted to ask a question about I guess the demand outlook.

It seems that the transport datapoints have been pretty firm in first quarter and particularly in acceleration in March and a good outlook in April from a lot of the other transports.

I wonder if you could talk about maybe the progression through the quarter and if you're seeing a similar trend that would lead you to more optimism about the domestic package volume growth in second quarter?

As always, Tom, there were a few blips during the quarter that make the trends a little harder to separate out.

February had some fairly severe whether, especially in the Northeast, that depressed it.

Some of that rolled into March.

In general, we have seen a gradual improvement over the course of the quarter and really that momentum has continued into April.

But it isn't a -- I wouldn't call it a dramatic improvement.

I think it is just this slow recovery and I am speaking primarily in the US.

So we are seeing things firm, but at a fairly measured pace.

In general, Tom, in the US, we are still not in a robust economy.

It is getting better.

You are probably going to see 2.5% year-over-year GDP in the first quarter and probably similar on the IP side.

But for the year, we are pretty optimistic.

We think the industrial production should grow over 4%, so it should improve as the year goes on.

Conversely, we have seen very strong results on the global trade side.

Our shipments out of Asia were up over 20% this quarter and exports for both US and Europe remain strong.

So we are very pleased to see the global trade linkage.

I mentioned the dramatic increase, almost 40%, in Asia to Europe.

It is good to see those lanes coming back strong.

So we are going to adapt our network and be where the action is on those things.

You have seen, I think, a pretty dramatic demonstration of our ability to capitalize on this improving growth both within our domestic operations outside the US and in our export operations.

I guess to follow up on the yield side, I know there are a number of moving parts in your yields, which sometimes makes it a little trickier to kind of figure out what base price is doing.

Can you give any sense on the Air Express yields in particular?

What was the greatest impact in terms of base price, fuel surcharge and mix?

We are seeing positive base price trends on both the air and the ground side, so that is an improvement certainly on both and most notably on the air side.

The weight was up modestly on the Next Day Express.

I talked to that and that is positive, so that contributed somewhat and then fuel surcharge gave a bit of a boost, probably between 1%, 1.5%, something like that on the net fuel surcharge for the air.

We think all three of those trends, Tom, will continue stronger into the year.

We think our revenue management efforts will continue to pay dividends.

We think weight will improve in the air and also we expect to see more weight on the ground and we have been very pleased with our progress on the revenue management side.

So that is why we feel pretty bullish on domestic pricing across all the products.

Scott Malat, Goldman Sachs.

If we take a step back, it just seems that -- many are surprised that you're able to leverage improving volumes as well as you are.

Can you just help us put into perspective this cycle maybe versus some historical where maybe the incremental margins might not have been as strong as you are seeing here?

I think it is a couple factors.

I think frankly one is that we took a bigger hit this year.

The recession we are coming out off was by far more severe than any in recent history.

So the degree of the penalty was substantial and we also feel that, as a result of that, there is more bounceback.

Also, I think we have worked extremely hard to find all the areas of refinement we can in the network.

We have got new technology in place operationally, we have got new assets in place.

The Worldport has done substantial improvements on our network and a very strong focus across the Company.

So we feel pretty confident that, with a little bit of tailwind from the economy and our operational changes, we will see great benefits.

And you definitely saw it in International.

Clearly, we showed tremendous leverage in the quarter nearing peak first-quarter operating earnings in the first quarter, so that is a great improvement.

Domestically, in the US, as I said earlier, we have not seen that robust economy.

You didn't see a lot of volume growth.

So we got some benefit on average wage rates, but we will get a lot more as we get into bigger growth.

So if IP does grow at 4%, which leads to better domestic volume, you'll see lower effective wage rate increases, which will obviously lead to better domestic margins down the road.

That's helpful.

Thanks.

Just the other one that I had was just on Asian regulatory.

Just been a number of signs that China policy is making it more difficult for foreign companies to work in China.

It seems like the import/export business would be the one that the Chinese government would be less apt to overregulate.

But can you talk about working in and around China, what are your expectations for the regulatory environment?

I think that it really has not changed much in import and export.

I think that we have had a good relationship working with the Chinese government in that area.

As you've seen by the volumes that have been generated in the Express industry, I think all the multinationals are doing pretty well.

Kurt talked about our strong growth, 20% last quarter.

It is a little more difficult when you compete domestically.

I think there is more protectionism, if you will, when you compete within the borders of China and that is going to be a challenge.

As we've talked about in the past, we are going to go about that deliberately and patiently, but we will compete domestically down the road.

Jon Langenfeld, Robert W.

Baird & Co.

Hi, this is Ben Hartford in for Jon.

I wonder if we could just conceptually talk about the operating leverage this quarter.

The way that you guys look at it, what was the primary driver?

Is it split evenly between pure volume growth, pricing and the cost takeouts or did one have a greater impact this quarter than the other?

Certainly the story is a little different in the different business units.

I think for International it is showing what strong volume growth does through an efficiently set up network and that is why we saw really the breakthrough results there.

Domestically, there was not as much of a tailwind on the volume side, so we made up for it with productivity and network refinements.

Our overall direct labor hours were down 4% and that is again slightly improved volumes.

Our miles driven with our network alignments were down 3% and we had almost a 10% reduction in block hours in our domestic network.

So a lot of changes, a lot of tightening and so we are seeing substantial margin improvement even without the tailwind of substantial volume growth.

And as Scott mentioned, if the US economy continues to firm, then that just gives us another tailwind and we are able to leverage some other economies like the wage rate improvement in the growing environment.

Okay, great.

And on the domestic side, I think you have alluded to you expect shipment weights to improve through the balance of the year.

Was there a meaningful change during the quarter?

Did we see a trend either way in shipment weights?

Really the story for the quarter was stabilizing weights on the ground and firming rates in our Express package environment.

So we do expect that the ground will begin to show positive growth sequentially going forward.

Bill Greene, Morgan Stanley.

I just have a couple of questions on datapoints.

Domestic growth in B2C, how much was that, how much was UPS Basic up as well?

B2C modestly outperformed B2B, Bill.

Actually, most notable has been the recovery of B2B and actually that is one of the drivers of improved margins within our domestic business for the quarter.

That business --.

Sorry, but you said B2C was up more than B2B nonetheless?

Yes, historically, it has been by a substantial amount.

That gap narrowed this quarter.

So the combination of Basic and our traditional residential services were up above average for the ground, but the gap has in some cases been double-digit and it was much tighter this quarter.

So we are continuing to see modest growth on our B2C.

That business is very well-positioned, but more exciting for us is the commercial volume showing more signs of life.

When you talk to your customers about where their inventory levels are, do you sense that they are far along in their efforts to restock or where do you think they are in that process?

This is Scott.

I think there is quite a ways to go still.

They are in the early stages of restocking and I think that just based on demand and based on what we are seeing that people are urging to get shipments there.

We are seeing a little bit more demand on the Express side.

I think we've got a ways to go.

We're in the early stages of restocking.

Helane Becker, Jesup & Lamont Securities.

I have two very unrelated questions.

One, I was wondering if you could just comment on the volcanic ash and the closings in Europe.

I didn't see anything in what you put out this morning about that, so maybe you could comment on that.

And my other question is completely unrelated to that.

Yesterday, the Wall Street Journal had an article or an editorial about brown bailout, which your competitor referred to as brown bailout.

I was wondering if you could just comment on that at all and kind of your thoughts with respect to position on what is going on with FedEx being so aggressive in trying to get that provision changed.

Helane, this is Scott.

I will start off with the volcanic ash and clearly, the period from April 14 to April 20 was quite turbulent, as we all know.

We were able to continue to provide pickup and delivery service and rerouted open flights to other parts of Europe that were open during that period.

And we really are blessed with having an extensive European ground network that allowed us to really continue to provide transport or domestic service with really minimal delays to our customers.

April 21 we actually opened up our Cologne hub and actually had unprecedented volume.

It was above last year's peak, as you would expect, trying to catch up for the period where you couldn't get goods into and out of Europe.

At this point in time, we really are now caught up and we are back on track.

So I think we have done a very good job.

Our customers are pleased with the service offerings, being able to help them through this period, but it was quite turbulent, I've got to say the least.

The actual financial impact, it is too early to tell.

We think it is somewhat immaterial to the Company, but it's -- how much volume is lost, how much production was lost during that period of time, I think it's going to take us a few weeks to figure that out.

We will certainly talk about that in the next earnings call.

The second question, the RLA issue, I guess let me start by saying UPS supports the passage of the FAA reauthorization bill as quickly as we possibly can.

This bill is important to the entire country.

As you know, it provides funding for more than 150,000 jobs.

And also much needed safety and aviation system modernization initiatives.

So it is really important that we get this thing done for the country.

Regarding the RLA amendment, I think this audience clearly knows the two companies, knows UPS, knows Federal Express and knows that our companies provide similar services and provide services to similar customers and do a lot of the same things.

It's actually illogical that the two companies should be governed under different labor laws.

Our point here clearly is that the Express drivers do the same jobs for both companies, they should be governed under the same law.

What will happen, what will be the outcome of this legislation?

It is still not clear whether it is going to a conference committee or will be handled differently through Congress.

But certainly we are optimistic we will get this thing done.

But most important is we get this FAA reauthorization bill passed.

Justin Yagerman, Deutsche Bank.

Hey, guys.

Appreciate you taking the time.

I guess the first question is on domestic restructuring.

You talked a little bit about the potential impact to the second quarter.

But I was wondering, as we look out over the year, whether there are other significant costs that we should be thinking about as we move through the remainder of this or does it basically curtail at the end of the second quarter?

Justin, clearly, the second quarter will be the big predominant expense.

That is really the time at which the vast majority of our people that we have repositioned will be relocating.

Substantial amounts of retraining expenses and other realignments and facilities changes.

So that is why we have really pulled out second quarter and said that it will be about a $0.03 to $0.05 headwind in the second quarter.

Having said that though, following that, the costs will begin to taper down; it will not be as material and would likely not be called out at all and the savings for the third and fourth quarter will significantly offset any remaining expenses.

So it is a big deal for us in Q2.

We were very pleased though with the fairly seamless process that happened in Q1.

That was one of our areas of concern about our ability to operate through Q1 effectively.

And I know that there was some discussion about our guidance in Q1.

So we have been thrilled with how smooth that went, how well our operations continued even with this major change going.

So Q2 will be the time that we get the majority of the knitting done and the expenses and then after that, we will be in good shape going forward and we do expect for 2011 that it will give us at least a $0.10 a share tailwind for our domestic business.

Got it.

And then looking at the LTL yield, obviously an impressive number given the environment.

But just curious if you could comment around -- weight per shipment was down 1.5%, so obviously that was somewhat helpful to the yield number.

And I am just curious, you kind of alluded to the ability for customers to trade around between your hundredweight product and your LTL product.

How much of domestic ground do you think is kind of making its way on the lighter end -- on the heavier end of domestic ground and on the lighter end of LTL into the LTL network and maybe providing some of that benefit there?

It moves both ways frankly.

That is the whole point is giving customers the ability to choose.

So as you look at the very light end of the LTL business, those shipments tend to not be very profitable or effective in LTL and they are much better served in package.

And conversely, as you get shipments 500 pounds or more in the package, it frequently is better to move those in a palette.

So not a real big pull either direction.

The issue of the yield is primarily that we are targeting small to midsize customers that we have been very disciplined frankly not chasing the marketshare grab that has wreaked havoc in the industry and that we are creating some very substantial value, guaranteed shipments of superb visibility, integrated shipping systems.

We really think we are building a very high-value process and it is great to see the validation of that.

Matt Brooklier, Piper Jaffray.

My question pertains to the International Package division and the operating margins there.

If we look at the continuing op margin at International Package in the first quarter, it was actually down very modestly from fourth quarter.

It looks like and it feels like volume has actually strengthened throughout first quarter.

I was wondering if there is anything, any incremental costs that you guys incurred during first quarter, potentially maybe adding some flights into the network as volumes strengthened or anything incremental from a cost side that would have hindered you guys doing a better margin than International Package during first quarter versus fourth quarter.

So the first biggest issue is just the normal seasonal fluctuations.

I mean Q1 is not usually your bang-up quarter for transportation and international is the same.

So I would factor that out.

And I think comparing quarters to quarters, actually Q1 was higher performance.

As I think Scott mentioned, we got very close to peak operating profits in Q1 compared back to our strongest period.

So we feel very good about that.

We did indeed add in some block hours.

I think our international block hours are up something like 8% over last year at this time, but that is a good thing.

Those are filled with revenue and we are happy to do it.

It's a combination of some routine routes added back in and also a significant number of extra segments as we talked about the crunch on demand for air cargo.

Fortunately, we have been able to take advantage of that.

The fourth quarter was more dramatic.

The capacity squeeze out of Asia was real dramatic in November and December, which obviously helped rates tremendously.

Right.

Just a follow-up question.

What are your thoughts in terms of adding capacity to the International Package networks, specifically on the export side going forward?

We are happy to do it when demand justifies.

That is part of this disciplined profitable growth strategy.

We have got the assets if needed.

We're continuing to invest in the business and there is no better return for investors than a plane full of our international volume.

On the other hand, we're not going to get too far ahead of the game, so we will continue our controlled approach growing as we see fit.

Chris Ceraso, Credit Suisse.

Good morning.

This is Allison Landry in for Chris.

I have got a couple of questions related to the implied year-over-year profit improvement for this year.

How much of the profit growth or the incremental operating margin is related to the cost-saving efforts as opposed to strengthening volume and yields?

I mean both of those are a piece of it.

Although if I had to pick one, I think it has more to do with the operational changes we have made during the declining time and now that the economy has at least stabilized, you're starting to see some of the benefits.

So domestically, it is clearly a story of operating leverage and the benefits of the big changes we have made and frankly, we are waiting for the tailwind of the economy to kick in.

We are looking for modest growth over the course of the year, so that is not betting on the come.

Internationally, it is a positive positive.

It is a story of great operating efficiency and tremendous boost from both the economy and share gain across the globe.

So we feel very positive frankly on all of our segments.

As you look across every segment at UPS right now, we have got good potential for improvement.

The Domestic business has seen the benefits of improved productivity and streamlining.

The International business is enjoying strong growth.

Our Forwarding business took a little bit of a hit in Q4 with the demand crunch, but we have stabilized that, done some revenue management and that is in good shape.

Our Logistics group is showing great momentum and even the UPS Freight, which is in a very tough environment, is showing substantial improvements year-over-year in profitability and we do expect it to be profitable this year, even with the extreme challenges across that industry.

So it is a combination of improving trends or at least lack of economic headwinds and a lot of hard work within the Company.

Okay.

And then I guess my follow-up would be just to that point with given the network restructuring and cost productivities, where do you see long-term consolidated operating margins going say in 2011 or 2012, where do you guys think you can get to?

We are not ready to lay out a hard forecast on that.

I mean it depends on certainly the shape of the recovery.

Is there a new normal in economic activity?

We are still holding back a little bit on that.

Clearly, our international is getting back closer to peak margins very quickly.

As we said, at least our peak -- our earnings in the Q1 were close to our peak earnings.

Margins on international, we will see.

We are growing our domestic business internationally much more rapid.

So the goal isn't margins, it is maximizing operating profit.

Allison, we will go so far as to say better.

So more to come, but we're working hard to make sure we are taking full advantage of the environment that we are in.

David Campbell, Thompson, Davis & Co.

Just wanted to ask you about the $0.03 to $0.05 charge in the second quarter that you have mentioned.

In the first quarter, you have signaled out the charge for voluntary retirement, severance payments and so forth, but I take it, in the second quarter, you will not consider that to be a nonrecurring charge or you won't separate that out?

Absolutely.

No, that is just part of the operating earnings from here because that relates to repositioning active employees.

That is not part of our one-time exclusion.

The charges we took in the first quarter are related to our enhanced retirement offers and the costs related to employee benefits to leave the Company maybe a little bit earlier than they planned.

But going forward from here, it will all be cooked into our guides and operations.

Okay.

And the second question is, in the third and fourth quarters, some of these costs will continue, but you feel they will be offset by savings from the repositioning?

Yes, the lion's share of the relos will be completed in the second quarter.

So there will still be some expenses, but it gets to be minimal and really not material.

So we will stop highlighting that as a headwind once we get through Q2 and talk more about the benefits and the savings of it.

David Ross, Stifel Nicolaus & Co.

Good morning, gentlemen.

I just have a question on the Worldport expansion.

You talked about increasing capacity 19% on the short side and that you reduced I guess the flights in the network by passing some regional hubs, loading up bigger aircraft, going in and out of Worldport.

Can you talk about where that leaves the network in terms of capacity utilization, whether there is -- I guess how much room is left to expand before you have to go back into those regional hubs and how full those bigger planes are going in and out of Louisville?

Yes, we think it is going to be a long time before we would need to use the regional hub.

We have added a substantial amount of capacity.

Reducing the number of aircraft in the air improves our availability, it improves the efficiency.

So barring multiple years of very strong growth, we have got a decent amount of time to enjoy this current capability in the network.

So this is not a short-term benefit by any means and we are continuing to find ways to better lever it and take advantage of it.

So it has been really a flawless opening, it operated well through peak on about half the added capacity and then in the quarter then, we brought it fully up to speed and now it is able to do over 400,000 pieces an hour, which is just tremendous.

And we did spend over $900 million for this expansion, but those benefits pay back very quickly with reduced aircraft purchases and with reduced operating expenses in the air.

So that has been a great investment for us even in the midst of the worst recession in any of our careers.

So these new larger aircraft are maybe more fuel-efficient, reduced number of block hours and so you're already getting savings from using fewer aircraft and those aircraft still have a good amount of room to go on capacity in terms of adding more packages?

Absolutely.

We do have some additional 767s coming online over the next three to four years that will naturally slide in and scale up against some of our existing 75s and A300s.

So it is a very seamless and productive upscaling as growth comes in.

Effective on fuel and certainly carbon efficient.

Ladies and gentlemen, that concludes our question-and-answer for today.

Now, I will turn the program back over to Andy.

Yes, I am going to turn it over to Scott for some closing comments.

Thanks, Andy.

Let me say that I am enthusiastic about UPS's future.

We made the right decisions and took the right actions last year to capitalize in today's improving economic conditions.

And while we are on the right path, there is certainly room for constructive dissatisfaction.

Still so much more we can accomplish.

2010 will be a better year for customers, for employees and for investors.

It is only the first step in our recovery.

Thanks so much for joining us today.

This concludes the UPS first-quarter earnings call.