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Operator
Good morning.
My name is Stephen, and I will be your conference facilitator today.
At this time, I would like to welcome everybody to the UBS Investor Relations second-quarter 2010 earnings conference call.
All lines have been placed on mute to prevent any background noise.
After the speakers' remarks, there will be a question-and-answer period.
Please note we will take one question and one follow-up from each participant.
Thank you.
It is now my pleasure to turn the call over to your host, Mr.
Andy Dolny, Vice President of Investor Relations.
The floor is yours, sir, please go ahead.
Andy Dolny - VP IR
Good morning everyone.
Thanks for joining us today.
In a moment, Scott Davis, our CEO, and Kurt Kuehn, our CFO, will discuss second-quarter results and our expectations going forward.
Before they begin, however, I want to 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 risks and uncertainties which are described in detail in our 2009 Form 10-K and first-quarter 2010 10-Q reports.
These reports are available on the UBS 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 remind you of an adjustment we made in the second quarter of 2009 for certain foreign currency obligations which did not qualify for hedge accounting treatment.
The after-tax impact of this charge was $48 million, or $0.05 per share.
In the remarks today, Scott and Kurt will refer to UPS' second-quarter 2009 results excluding the impact of this charge.
Additionally, all 2010 full-year references and comparisons to 2009 will refer to adjusted results.
We believe this is a more accurate picture of the Company's performance.
Reconciliation 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 IR website in the Financial section.
Finally, during the call, we refer to free cash flow, which is a non-GAAP financial measure.
A reconciliation is also included in the news announcement this morning and is available on the UPS Investor Relations website.
To begin our review of the quarter, I will turn the program over to Scott.
Scott Davis - Chairman, CEO
Thanks Andy.
Good morning everyone.
We continue to see strong momentum in 2010, as evidenced by our results announced this morning.
UPS earnings jumped 71% on revenue growth of 13% with improvement across all business units.
Now, this was achieved despite the fact that mixed economic signals continue to dominate the headlines.
The US is witnessing strong corporate earnings and moderate GDP growth, although employment and housing data remain weak.
The debt crisis in Europe has kept everyone's interest, with stock markets around the globe reflecting this uncertainty.
Yet, we are pleased that our European business showed solid growth again this quarter.
And Asia continued to experience significant economic expansion.
Our export volumes in the region grew over 40%.
UPS has succeeded in this environment while also investing to further strengthen our global network.
In the quarter, we enhance and built new relationships with partners in Asia.
UPS expanded the reach of our services through strategic alliances in Vietnam and in Malaysia, providing greater access to customers in these important emerging markets.
In May, UPS announced a significant new partnership in China with Alibaba, the world's largest small business e-commerce company.
The agreement benefits UPS by giving us access to small and medium-size wholesalers through their new online marketplace.
This platform provides easy use of our services for Chinese suppliers and eventually will be available to users around the globe.
Our approach to international expansion using alliances, service partners and acquisitions has proved to be successful.
The evidence can be seen in the strong international growth UPS has delivered over the years.
We are confident in this strategy.
In fact, during the quarter, UPS was recognized as the market leader in Poland by industry trade magazines and the local press, accomplishing this in just five years, following our acquisition of Stolica.
Poland has become a key manufacturing center and distribution point for Europe.
I am equally confident in our US domestic strategy.
Our reorganization effort has started to pay dividends.
UPSers have embraced the need for change and quickly adapted to the new organizational structure.
Through the superb acquisition execution of our people, significant network efficiencies have been achieved.
Our go-to-market strategy is beginning to bear fruit.
In the midst of one of the most substantial changes in our history, the US domestic segment reported 57% improvement in operating profit.
We are not yet where we need to be, but we are moving in the right direction.
Earlier this month, I was honored when President Obama asked me to serve on his Export Council.
I look forward to working with the administration and other business leaders to help achieve the objective of doubling US exports in the next five years.
To support the Export Council initiative, UPS announced several key undertakings to help US small businesses compete globally.
Only 1% of US small and medium-size businesses export products, and most to only one country.
Since 96% of consumers live outside the US, it's important that we help our customers expand their businesses and compete in the global marketplace.
Before I turn it over to Kurt, I want to say that I am encouraged by our performance as we realize the benefits of our efforts.
We made the right decisions, took the right actions, and are confident of UPS' ability to substantially improve results during this moderate economic recovery.
Kurt?
Kurt Kuehn - CFO
Thanks, Scott, and good morning.
It's good to talk to you today, especially after turning in great results like this.
UPS global revenue was up 13% with operating profit skyrocketing 57%.
This is despite a mixed global economic environment.
The operating leverage we demonstrated in the first quarter has continued, as witnessed by our margin expansion of 320 basis points.
For the third quarter in a row, our compensation and benefit expense grew at a slower rate than volume.
The numerous changes that UPS has made and the investments in our global network are paying off.
Our progress on these has led us to increase our 2010 earnings guidance.
Now, let's look at the segments, starting with US Domestic Package.
Operating profit is up 57% on a 7% revenue gain.
This increase was driven by yield improvements, increased volume, network efficiencies, and superb execution.
As a result, operating margin was 10.3%, an increase of 330 basis points.
Average daily volume increased more than 1% with ground up 2%.
We are also beginning to see UPS customers trade up to premium services, and that is encouraging.
While volume in our Next Day Air was flat overall, we saw solid growth in Next Day Package, although this was offset by a decline in our letter products.
This positive mix shift helped drive our 11% improvement in Air yields.
Total domestic revenue per piece increased 6%, driven by stronger base rates and higher fuel surcharges.
Our focus on yield management is clearly showing results.
The US operations team executed this quarter to near perfection with improved productivity, service, and cost management.
With an increased volume, UPS direct labor hours, miles driven and block hours were all down, a job well done when you also consider the challenges presented by our US restructuring.
We experienced substantial relocation and training expenses for the restructuring during the quarter.
The impact was partially offset by reductions in payroll.
As a result, the net affect overall was approximately $0.02.
Now, for the International segment, where operating profits soared 78% to $521 million on a 23% jump in revenue.
Volume increased 20% with exports up 15% and non-US domestic up 24%.
We've seen International volume exceed 2 million pieces per day for three consecutive quarters and, for the first half of the year, UPS international profits were the best in our history.
During the quarter UPS experienced strong export growth in all regions with Asia up more than 40%.
Both US and Europe export volumes were up more than 10%.
Operating margin climbed to 18.8%, an increase of 580 basis points.
The improved margin was driven by higher yields and effective management of our network by the operations team.
For example, during the quarter, our in-country cost per piece declined over 4%.
Over the past few months, there've been questions about how currency fluctuations will impact UPS results.
Due to our hedging positions, currency did not have a material impact during the quarter.
This will likely change as the year progresses, and I will talk about that later.
Export yields are up 9% due to stable pricing, fuel surcharges and positive changes in product mix as customers traded up to higher service levels.
For example, in our premium product, Worldwide Express, volume growth was more than 20%.
Non-US domestic volume increased 24% driven by core countries in Europe and Canada.
These results are also impacted by our August 2009 acquisition in Turkey.
Organic growth was equally impressive, up 13%.
The value of the domestic and export portfolio continues to resonate with customers.
Our results in Europe are impressive considering the disruption caused by the volcanic ash cloud, and I want to recognize the great effort our team made during the quarter.
Our customers told us that UPS saved the day by acting quickly to ensure dependable service.
We leveraged our extensive pan-European ground network and kept our goods moving.
UPS technology enabled us to provide accurate and timely visibility throughout this challenging event.
Financially, the impact of the volcano was not material.
UPS recently announced significant upgrades to several of our international shipping systems.
These enhancements improve ease-of-use, visibility, and provide importers with greater control of their shipments.
We will continue to introduce innovative products and solutions that help our customers compete in the global marketplace.
Now, for the Supply Chain & Freight segment, revenue increased 21% on the strength of the forwarding and logistics business, with operating margins over 6%.
Keep in mind that last year's operating margin benefited by about 100 basis points from the sale of the international MBE business.
Forwarding experienced improved results this quarter with strong tonnage growth led by high tech.
Industry capacity continues to be constrained, putting some pressure on our margins.
We remain focused on revenue management and expect to see margin expansion as the year progresses.
As expected, UPS Freight has returned to profitability this quarter, a result of our targeted growth strategy.
Freight revenue per hundredweight increased 9%.
This will again be one of the industry's best results.
Though we had modest declines in shipments and tonnage, weight per shipment improved.
Our Logistics business unit continues to experience strong results from the healthcare and the high-tech industries.
Solutions created within this unit enable us to add value for our customers, benefiting through the alignment of multiple UPS capabilities.
This is unmatched in the industry.
Once again, the unique UPS operating model produced significant cash.
Year-to-date, we have generated more than $2.5 billion in free cash flow.
In addition, we have invested $690 million in capital expenditures, paid dividends of $910 million, reflecting a 4.4% dividend increase, spent $425 million to repurchase approximately 7 million shares, and UPS ended the period with over $4 billion in cash and marketable securities.
UPS' cash position remains strong.
We will continue to follow our current stock repurchase strategy of offsetting the impact of dilution from stock-based compensation.
We will consider changing this strategy once the S&P outlook for UPS is modified.
I am confident of meeting their targets by the end of this year.
This quarter, we did mark down certain auction rate securities to their market value.
The write-down was $21 million and is reflected as an offset to our investment income.
Now, for some comments on our outlook, looking forward, even when we consider expectations for a slow economic recovery in the US and the uncertain outlook in Europe, we are more confident than we were earlier in the year in UPS's ability to grow and generate substantial profits.
This leads us to raise our full-year 2010 guidance to an expected range of $3.35 to $3.45 per share.
This represents a 45% to 50% increase over last year's results.
Looking at the segments, in the Domestic segment, volumes should grow in line with GDP for the remainder of the year.
The third quarter will show better results due to easier comps and the way the Fourth of July holiday fell last year.
We expect to continue seeing significant year-over-year margin expansion.
In our International segment, for the second half of the year, we do expect to see export growth rates moderate but still outpace the market.
The rate of volume growth will somewhat depend on whether the Asia export market continues to grow at its current lofty pace.
Also, year-over-year comps will become more challenging, particularly in the fourth quarter.
We do expect a headwind from currency in the second half of the year of approximately $25 million per quarter.
Based on these assumptions, we expect International profits for the remainder of the year to reflect typical seasonal trends with the third quarter lower than the fourth.
The Supply Chain & Freight segment should produce full-year margins of approximately 6% on revenue growth in the low teens.
All in all, UPS had a tremendous quarter, led by a significant margin expansion on strong revenue growth in our US Domestic and International Package segments.
We are very encouraged by the accelerated growth we are seeing in revenue and profit across all business units.
Our ability to generate cash, coupled with an outlook for moderate capital requirements, will ensure that UPS continues to generate significant shareowner value going forward.
Thanks for your attention.
Now, Scott and I would be happy to answer your questions.
Operator
(Operator Instructions).
Jon Langenfeld, Robert W.
Baird.
Jon Langenfeld - Analyst
Good morning.
Can you talk a little bit about your weight per shipment in the ground side as well as on the Domestic Express site?
Kurt Kuehn - CFO
Great.
The weight per shipment was a positive trend across most of the businesses.
It was definitely notable in our International Express services as heavier goods moved.
In the Domestic, it's a little bit of a mixed picture.
We saw it very notably in our Next Day Air Package segment, as a growth began to kick in, and also rates went up.
The ground business was up moderately but not materially.
But clearly the rising weights is a positive leading indicator and we are pleased to see that.
Jon Langenfeld - Analyst
It sounds like there's still room to go on the Domestic side.
Scott Davis - Chairman, CEO
Jon, I think that we are still pretty optimistic on industrial production to continue to grow, really outpacing GDP this year.
That's the best barometer for us.
If manufacturing kicks in, we should see heavier products both in the ground and air.
Operator
Gary Chase, Barclays Capital.
Gary Chase - Analyst
Good morning guys.
I was curious to get a little bit more color on, Kurt, you were talking about in-country costs internationally going down 4%.
I wondered if you could just give a little bit more color on what you're doing there to drive that, and sort of how far along in that process we are.
Kurt Kuehn - CFO
Gary, this really was the catalyst for this was the downturn we had as the economy began to hit the skids.
We did shift gears pretty dramatically from what had been a decade of unimpeded growth to tightening up, and just challenging our network.
So the recession was a challenge in our international business, but it also gave us an opportunity really to go in and streamline and make more efficient some of our processes.
So, what you're seeing now is a more highly-tuned network with volume back up dramatically, so we are getting economies of scale and we've got the core efficiencies that we can hang onto.
Gary Chase - Analyst
Then just a quick one, the $25 million in headwind that you referred to, is that net of hedges?
Can you tell us how much the hedges are offsetting it, if it is?
Kurt Kuehn - CFO
Yes, that is certainly net of hedges.
We use a collar strategy where we protect most of the downside and give up, in some cases, some of the upside.
So certainly the euro has been very volatile; that is by far our largest exposure.
The $25 million estimate basically assumes the euro stays in the upper 120s where it is today.
We do have protection if it gets much worse, so we don't think the currency could get much worse than that.
But certainly that is something we are very active with, and we constantly hedge to reduce some of the volatility.
It did that for the second quarter.
Third and fourth will see some headwinds, but still much less volatile than it would be otherwise.
Operator
Tom Wadewitz, JPMorgan.
Tom Wadewitz - Analyst
Good morning.
Congratulations on the really strong results and the good guidance as well.
Let's see.
On the yields, I was wondering if you could give a little sense of how much of the yield in air and ground is base price increase, and how much is fuel surcharge and mix.
I guess then in terms of the price, whether that accelerates going forward, so I guess a question on yield and price.
Kurt Kuehn - CFO
Yes, it's a little different story for each of the products.
In the ground, certainly the majority of the yield increase is base pricing, as we've not seen as much of a tailwind from weight.
So that is probably the best indication as far as the status.
There is some tailwind.
On the air side, somewhere around half would be fuel, and there is a little bit of a mix benefit we talked about that Package is growing substantially more than letters, which are declining.
Clearly, with the very low numbers of new home sales and year-over-year negatives on refinancing, the letter business is being challenged.
So -- but the weight did help on the air also.
But no, we feel very good about our yield management campaign.
As we've said, we've made that a priority, and so it's a gradual process but we are pleased to see the benefits of that.
Tom Wadewitz - Analyst
Then the follow-up -- you were pretty helpful with the comments in currency impact in the second half, $25 million a quarter.
If the euro and exchange rates stay where they are today, what would the impact be in 2011?
Presumably there is somewhat of a headwind.
Is that another $50 million headwind, or more or less than that?
Kurt Kuehn - CFO
We are pretty well hedged for next year, although clearly, over multiple years, we can't be indifferent to it.
So there is some risk to that.
We are not ready yet to give any specific numbers.
But the goal that we have is to not be indifferent to it.
We think it's too expensive to try to hedge away all volatility.
But also to make sure that it never becomes the primary story.
Scott Davis - Chairman, CEO
Our practice for the last decade has been to try to hedge a year in advance, and we've stuck with that practice.
Tom Wadewitz - Analyst
Great, thanks for the time.
Operator
Edward Wolfe, Wolfe Trahan.
Edward Wolfe - Analyst
Thanks, good morning guys.
I hate to pick apart a nice-looking quarter, but if there is one thing that I look at here, the domestic volume up 1.2% -- how do you think about that and particularly the air obviously, which domestically is weak?
What's in your guidance going forward in the second half for your volume expectations domestically?
Kurt Kuehn - CFO
Ed, we do -- we did guide this year that we thought that the air business would underperform the ground business.
Clearly, last year, we had the benefit of the overlap with DHL's retreat from the domestic market.
Our guidance is not assuming any dramatic economic uptick; that was one of the things we wanted to make clear.
But we do think we will see our volumes somewhere around GDP growth rates for the remainder of the year.
We get a little bit of a tailwind, frankly, in Q3 with the way the calendar hit Fourth of July last year, added an operating data to us without much extra volume, so there is a little bit of a tailwind there.
So we do see third-quarter volumes improving over the second quarter, and then the fourth quarter will depend a lot certainly on how the holidays turn out.
But all in all, we are pretty confident that our volumes should be growing at GDP rates.
Scott Davis - Chairman, CEO
On the air side, I think the numbers are a little misleading because, frankly, our next-day package business was pretty good in the quarter, where our next-day letters were down fairly significantly.
So the package business on air side was better than the overall results showed.
Edward Wolfe - Analyst
Can you give some numbers around that?
Scott Davis - Chairman, CEO
Next Day Package was up about 2%, so it actually did show some growth.
Operator
Scott Malat, Goldman Sachs.
Scott Malat - Analyst
Thanks.
Good morning.
Following up on Ed's question a little bit, I wanted to better understand what you see kind of as the elasticity of demand.
Maybe if you could help us think about as -- I think the volumes are fine where they are, but as you take up price, how are those accounts' volumes versus accounts that you haven't addressed yet, or are there any buying pattern changes in those accounts that you've addressed price?
Kurt Kuehn - CFO
No, so far, we've had pretty good success, we think.
We are --- as we said, our top priority for this year is stabilizing the pricing environment.
So, on the increment, there may be some accounts, plus or minus, but in general we have been pleased with our ability to sustain rate increases without significant impact from our customers.
So, we do think the market will continue to grow gradually.
We have been forecasting this being a gradual economic recovery, and I think clearly it's playing out that way.
But we feel pretty good about our ability to sustain modest but substantial rate increases and at the same time continue to grow with the economy.
Scott Davis - Chairman, CEO
I think, generally, the small package market didn't drop as much as the overall economy did during the recession into the recovery.
I think you'll start seeing the small package market catch up to GDP and IT levels as we move through this recovery.
So you'll see it get better.
Scott Malat - Analyst
Following up just on the volumes, maybe on inventory restocking, last quarter you said you were in the early stages.
Is this -- should this be a tailwind as we continue to go forward, or are most of the benefits behind us?
Where are we in that?
Scott Davis - Chairman, CEO
I think we are partly through this game.
I think the inventory-to-sales ratio has gone up some but is still well below the pre-recession levels.
So I would think you are going to still see more restocking.
I think saw not quite as much in the second quarter as we saw in the first.
I expect to see that in the second half of the year continue.
Operator
Ken Hoexter, Merrill Lynch.
Ken Hoexter - Analyst
Scott, Just following up on that, where is the confidence of the shippers?
Are they moving to really start increasing that?
I'm just wondering.
As we look forward to peak shipping season, what are your discussions like as shippers start to prepare for that?
Scott Davis - Chairman, CEO
I'll tell you it's early to talk I think on peak season in the US.
I think you're starting to see some talk on the ocean side, in heavy freight, you're starting to see that pickup.
I think there's pretty good confidence out there.
Certainly, the technology companies have had a banner 12 months, and I don't see that letting up in the near term.
So I think it feels pretty good.
B2C stayed strong.
We saw more improvement in B2B over the last quarter or two.
So despite Chairman Bernanke saying all of the unusual uncertainty out there, I think, overall, our shippers feel pretty good.
Ken Hoexter - Analyst
Can you break down -- I guess when I look at the growth at the ground, the 1% or 1.8% volume growth, is there a difference between what we are seeing on that parcel direct, the kind of direct-to-home versus what you're seeing on standard packages?
Kurt Kuehn - CFO
Historically, the B2C, the direct-to-home, has significantly outgrown the B2B.
We've actually seen those two growth rates equalize more and more.
This has been more of a B2B recovery.
That's evidence of what Scott's talking about with industrial production and some of those things.
So this is probably as close as the two have been in a number of years.
Operator
Robin Byde, HSBC.
Robin Byde - Analyst
Good morning everybody.
Just to follow-up on yields, on international domestic yields, if we've got our numbers correct, I think these fell by about 5% in the quarter year-on-year.
If that is correct, could you just explain the reasons for that please?
Kurt Kuehn - CFO
We've got one big event in there that makes it a little hard to really yield back what's going on in that, and that was our acquisition in Turkey that has dramatically increased our growth rates.
The average yield in that country is far below the more developed markets of Europe and Canada.
If you took out Turkey, we would actually show a slight positive for yield on our domestics.
So we're very comfortable with the pricing in our domestics.
We've actually been thrilled to see the substantial demand, even with Europe being the lion's share of that for our services.
So that will wrap around next quarter.
You'll have -- third quarter, you'll have half of Turkey comped in there and the other half.
Then I think, once we get past that, you'll see a more stable maybe slightly increasing yield in our domestics.
So it's certainly not through price that we've been gaining this outsize shared.
Robin Byde - Analyst
Great.
Thank you.
Operator
Bill Greene, Morgan Stanley.
Bill Greene - Analyst
Just a quick question -- can you give us the percentage of the business in the domestic market that is B2C?
Kurt Kuehn - CFO
Domestic US or international?
Bill Greene - Analyst
Yes.
Kurt Kuehn - CFO
It runs about a third.
Bill Greene - Analyst
So it hasn't really grown?
Because I thought it had been growing faster.
In the past, we'd sort of said it got 1% or so a year in share, if you will.
Scott Davis - Chairman, CEO
I think that's about right.
I think it's been, over the last probably 20 years, has been going about 1% a year, so I don't think it's changed dramatically.
Bill Greene - Analyst
How's that compared to Europe?
Kurt Kuehn - CFO
As I said, right now, we are actually seeing B2C and B2B grow fairly similarly, given the current economy.
Bill Greene - Analyst
True.
Fair enough.
Kurt Kuehn - CFO
Yes, Europe would be at lower percentages, I don't have exact numbers, but it's certainly much lower.
Our focus there has been more business-to-business, more focused on export which tends to be more business oriented, although clearly there's a lot of companies in Europe and a lot of global companies that are looking more and more B2C, and that is a rapidly growing area.
Bill Greene - Analyst
Just a question on cash -- I realize that you run a conservative balance sheet.
But you're sitting on a lot of cash.
Even some of the railroads are buying back more stock than you are, and I don't think we could say that they are more cash positive than UPS.
So I just don't understand that conservatism that you're having relating to sort of stock buybacks and return of capital.
Kurt Kuehn - CFO
Thanks for that question.
I tried to be explicit on it in my prepared remarks.
Right now, our intention is to get our S&P outlook improved.
They had concerns, given last year's results of our funds flow from operation to debt margin.
They gave us the benchmark.
We are very confident we will meet that benchmark this year way ahead of schedule.
Until that point, our strategy is to repurchase enough stock to avoid dilution through our stock compensation.
After that, we will revisit that.
Certainly we have a commitment to return capital to shareowners.
Of course, given where taxes are may make a difference also.
Scott Davis - Chairman, CEO
Absolutely.
Certainly, our distribution policy has been strong.
We've distributed most of our earnings the last several years.
We will watch very closely what happens in Congress through the end of 2010 and figure out what happens on tax policy.
That certainly could impact dividends versus share repurchase.
Operator
Matt Brooklier, Piper Jaffray.
Matt Brooklier - Analyst
Thanks.
Good morning guys.
Two questions, one international, the other domestic.
You guys had some cautious commentary in your press release regarding kind of your outlook in Europe.
I was just wondering if you could provide some more color there?
Is it just you positioning yourselves for the potential for a slowdown, or are you currently seeing a slowdown within that part of the world?
Scott Davis - Chairman, CEO
I actually think that Europe has been somewhat of a pleasant surprise based on all the media highlighted this year in certainly the sovereign debt crisis.
I think that -- I just came back from a conference with about 100 CEOs and we talked about Europe, and all of us are guarded about Europe just because of the unknown.
But I think all of us are seeing pretty good business in Europe.
In reality, I think the outlook for the euro zone GDP has probably dropped from like 1.5% growth rate to a 1% growth rate through all of this hoopla on the sovereign debt issue.
So I don't think it's changed that dramatically.
Certainly, our business has been very strong.
We talked about the double-digit growth in our European export products.
You saw the growth in the domestic, European domestic product.
So it actually feels pretty good over there.
We are going to be watchful, see what happens, but right now it feels pretty good in Europe.
Matt Brooklier - Analyst
On the Domestic Package side, I think Kurt mentioned some cost benefits and some cost minuses during the second quarter.
I think I heard a $0.02 number.
Can you talk a little bit about what the net impact was there from a cost perspective and how do we think about operating margins at Domestic Package going forward?
Kurt Kuehn - CFO
Yes, we did execute the lion's share of the restructuring, and we did see a significant amount of expenses in the second quarter, things like relocations and training, although we also were able to get some of the labor savings a little quicker than our plan.
So the net impact for Q2 was about a $0.02 headwind overall of cost.
That will improve in the third quarter, where the amount of relos begin to taper down.
So it will be a very modest positive in the third quarter and then, in the fourth quarter, we will see more of the benefit.
But we do continue to estimate about a $0.10 a share benefit from the domestic restructuring that will be manifest for 2011.
Clearly, it's one of the things we have going into next year that will be a positive.
So the overall restructuring was the net positive $0.02 a share, a little better than, frankly, we thought.
But on top of that is just the ongoing benefit from the wide array of cost initiatives and network enhancements we've made.
That's why we are seeing three quarters in a row now where an aggregate or comp and benefits are increasing at a slower rate than our package volume.
Matt Brooklier - Analyst
Okay, thank you.
Operator
Kevin Sterling, BB&T Capital Markets.
Kevin Sterling - Analyst
Good morning, gentlemen.
Thanks for your time.
A little bit about -- you've been talking a lot about your international growth.
As you talk to your customers, do you think we are seeing a modal shift from ocean to air in how they think about managing their supply chain?
Kurt Kuehn - CFO
Yes, there's a little bit of that going on right now.
I think, right now, there is somewhat of an ocean squeeze; containers are hard to get.
That, combined with the fact that there were a number of shippers last year that really got stressed late into the holiday season, that's why there was such an explosion in the forwarding activities.
So, we are seeing, I think, shippers plan ahead a little more, perhaps plan to use a little more air.
Clearly, the air forwarding and our Air Express businesses are growing very rapidly.
So in general, my guess is there will be a little heavier concentration of air this year for the holidays too.
Kevin Sterling - Analyst
Okay, thank you.
A follow-up question, you've talk about your customers trading up and maybe it's along the same lines.
Do you think this is a function of your customers really managing lean inventories and try to manage their inventory situation?
Kurt Kuehn - CFO
Yes, I think we are getting more back to a more normal environment.
It's great to run very tight; it's great to use lower, lower cost modes.
During the midst of this recession, that was the priority.
Customers had to reduce their balance sheet; they had to reduce their cost.
Now that things are a little more stable, shippers are looking back at how do I optimize?
How do I make sure I've got availability for goods without over-investing in inventory?
So, that's where the more rapid services come in.
So we are pleased to see that.
Scott Davis - Chairman, CEO
Clearly, we talked earlier about inventory-to-sales ratios.
Frankly, they were pretty low going into the recession.
They are a lot lower now than they were when we went into the recession.
I think that will drive some of the trade-up.
Operator
Helane Becker, Dahlman Rose.
Helane Becker - Analyst
Thanks very much.
Hi gentlemen.
So, I appreciate all of the responses that you've given, and I kind of think most of my questions have been answered.
Just one clarification -- do you think that you are seeing somewhat of an uneven recovery with industrial businesses growing and consumer-related businesses maybe growing not as fast, or consumers slowing down the corporations growing faster?
Scott Davis - Chairman, CEO
I think the feeling is a pretty good consensus that this will be a business-led recovery.
I think that there were pleasant surprises probably in the first quarter on retail sales and the strength of the consumer.
In fact, the consumer is probably doing a little better than any of us thought a year ago at this time.
But I think clearly this is a business-led recovery.
You'll see industrial production continue to grow faster than GDP overall.
That's driven by the -- up to the manufacturing side.
Helane Becker - Analyst
Okay, thanks for your help on that.
Operator
Art Hatfield, Morgan Keegan.
Art Hatfield - Analyst
Good morning.
Just real quick -- most of my questions have been answered.
But I wanted to get your commentary on if you're seeing anything unusual in any of the markets from any competitors that you have, anybody who has introduced new services, if they are being aggressive about how they are trying to maybe take some market share?
Kurt Kuehn - CFO
No, Art, I think the market has been very rational.
I think, internationally, we've seen stable pricing.
I think all players had some challenges, and they have been very rational.
Domestically, the market is sluggish, I guess, the demand is not robust, but the pricing is rational.
Clearly, the post office is wrestling with its financial issues.
On the service side, FedEx has been expanding their global network.
They are making a big deal of the 777; it's a game changer.
I mean that makes great press but, frankly, we're very comfortable with our 747 400 assets, so we can pretty much go toe to toe.
The 747 costs 40% to 50% less than a 777 from a capital perspective.
Frankly, anything less than 4500 miles, it has a substantial payload advantage, and it pretty much matches the 777 for, say, Asia to Europe.
So -- but it's good.
We want to compete on service and speed and quality, so that's what makes the market a healthy one.
So we see competition continuing normally.
We are continuing to reinvest with technology, capacity and merging all of our capabilities.
That's one of the big stories where I think we are really succeeding these days, is all of the pieces of the UPS puzzle coming together.
So all in all, we think the competitive environment is very positive.
All providers are competing like crazy but also being rational.
We don't expect robust economic recovery, and that's what we tried to make clear, both in our prepared comments and our press release.
But we think, even in this modest environment, we can prosper and continue to raise profits substantially.
Scott Davis - Chairman, CEO
Art, probably the one area of the world that we are still paying attention to is China, and there's a lot of things going on in China.
For example, the Chinese government is talking about consolidating to three airlines cargo operations over there.
While that wouldn't have much impact on the small package side of things, it could impact our freight forwarding business where we use those airlines.
So those are things that are kind of in the process of change they'll pay attention to.
Art Hatfield - Analyst
Great.
Thank you for your comments.
Operator
Justin Yagerman, Deutsche Bank.
Justin Yagerman - Analyst
I appreciate you taking my call.
I wanted to ask you about operating leverage.
Obviously, a very strong quarter for operating leverage here.
You guys are showing more than you have in the past.
I would imagine things like trading up in products and some of the repricing and DHL business is helping that out.
Can you talk a little bit to where we are in terms of those events in particular, and then also kind of where you think we are in terms of you guys being able to display this kind of operating leverage on a consistent basis in terms of costs coming back in the cycle?
Kurt Kuehn - CFO
Thanks for the question.
Clearly, the environment stabilizing is a great help.
I think we did numerous initiatives, and we talked about us being able to keep the majority of those cost savings.
We meant it and I think you're seeing it.
So, we've been very pleased with the direct productivity with the network changes having the highly automated [hot] with tremendous capacity and Worldport continues to allow us to take aircraft out of the sky and replace smaller aircraft with larger aircraft, so we are seeing the network economies there.
I talked a little bit about our assets around the globe.
The 747 400 is a very capital-efficient asset that meets customer needs.
I think one of areas where we have not seen the operating leverage as much is in the wage arena.
Clearly, with us continuing to improve productivity, we have not had a need to add many employees.
So, we have still not yet seen the latent benefits of the labor contract where, as we begin to grow and add employees, we will see lower average wage rates ripple through the network.
So that's something we are looking forward to hopefully as the US recovery becomes more robust.
That should give us another leg in this operating leverage.
Justin Yagerman - Analyst
Got it.
That's very helpful.
Then I guess not to harp on this, but following up on Bill Greene's question on the share repurchases, you guys have a lot of cash.
Your balance sheet isn't overlevered.
What is really the danger here for you guys to push ahead?
Because it feels like -- maybe I'm getting ahead of myself -- but your waiting, you're obviously going to end up buying back the stock at a higher price and I think shareholders would rather see you guys buying now rather than later.
What's the downside consequence for just going ahead?
If S&P were to downgrade you guys, what's the impact to the Company?
Kurt Kuehn - CFO
I don't -- I think there is very little likelihood of S&P downgrading us, given the incredible momentum we've got.
But we did basically tell them our intentions to get those financial ratios robust.
We think, given the expectation of our current momentum being far beyond even where we thought we were at the beginning of the year, that there is a good possibility that we will talk with them and have a little better view.
So we are not totally beholding to them, but we also don't like the negative outlook.
We don't think it's appropriate and we intended to demonstrate the financial capacity before we got more aggressive.
But we committed five years ago to a policy of returning basically 100% of net income to shareowners either in the form of share repurchase or dividends.
I think Scott and I remain committed to that program.
We do think the stock is a bargain right now.
Hopefully, with these results, we will get that one little minor cloud cleared up and then we'll find what the best way to redistribute to shareowners is.
Operator
David Ross, Stifel Nicolaus.
David Ross - Analyst
Good morning.
A first question on the purchase transportation -- the costs were up significantly year-over-year in the quarter.
I know a decent amount of that is fuel; some is volume increases.
Can you just kind of talk about that line item a little bit, how much might be volume versus fuel versus network adjustments, where you bought purchase transportation instead of adding UPS capacity?
Kurt Kuehn - CFO
Yes, that line has a lot of moving parts now, especially as we become a larger and larger forwarder.
So the single biggest impact is the substantial growth we had in our forwarding unit.
Tonnage was up about 30% in the quarter.
On top of that, rates are dramatically higher than they were last year.
So the lion's share of that increase would be directly related to the forwarding and the increased rates.
Following that, there is, certainly within our International business, we have a substantial amount of purchase transportation, either for agents or transportation.
So with the dramatic 20% unit growth in International, that's also up.
Then the smaller part domestically would be fuel, and there is also TOFC in there.
So it's really a reflection of the forwarding and International growth, both which were in excess of 20%
David Ross - Analyst
Thanks.
Then congratulations on being named to the President's Export Council.
It's good to hear that a business leader is actually on that Council.
Scott Davis - Chairman, CEO
Ah Stop!
it is very important I think.
We talked earlier about the need for -- to get small business in the US -- get small-business people to export, and then I think the ability to help get out and train some of them on the ease of exporting.
We've identified 7,000 or 8,000 customers right now that export to just one country.
We're going to try to get them to go to at least two countries; we think that's very possible.
So I think it is very important for the country to get employment going again is to get small-business exporting.
We talked about 96% of the consumers outside the US that need to understand that.
David Ross - Analyst
I understand, but do you think it's possible to double exports over the next five years, given current capacity constraints and trade policies?
Scott Davis - Chairman, CEO
Yes, I think that all go hand-in-hand.
I think that's a stretch goal, but I think we are going to have to get more accommodated trade policies.
That starts with free-trade agreements with Korea, Colombia, and Panama.
That's certainly part of what we're trying to work on, on the Council.
Kurt Kuehn - CFO
I think a little closer to home, UPS is working like crazy to lowering the barriers to doing trade globally.
That's why things like our paperless invoice, import control, all of that stuff, just trying to automate things that used to be very confusing for small and midsize customers.
So, that's why we are so obsessed with technology and ease of use.
If we make it easy and the government facilitates it, then we think there is a lot of latent capabilities in US small business to grow.
Operator
John Barnes, RBC Capital Markets.
John Barnes - Analyst
Good morning guys.
Just a question back on the domestic volume growth -- if we are in for a more protracted level of modest growth, this kind of 1%, 1.5%, maybe 2% GDP for a protracted period of time, the reorganization you just completed of the Domestic Package business, is that enough cost reduction to sustain the margins where they were this quarter through a protracted period of maybe slower growth in the Domestic business?
Kurt Kuehn - CFO
I think it's our intention to increase margins, so no, absolutely.
We have aligned ourselves in a number of ways to be able to continue to get margins growing and back hopefully over time to where they were at our peaks.
So from a pure cost perspective, absolutely.
I think there's also strategic positioning in our restructuring maybe that Scott could talk about a little bit.
Scott Davis - Chairman, CEO
I think a big part of the restructuring was all about getting -- going to the customer, getting local control of our operations and our marketing.
I think we're just getting to the beginning of that process.
We have taken marketing to all the districts right now.
It used to be done out of corporate.
Every one of our markets are somewhat different.
I think the fact that we have this expertise now looking for different segments, looking at micromarketing, is going to help grow our business.
It's not going to do it overnight.
We're going to see more benefit the second half of the year than we saw in the first half of the year.
We'll see more benefit in 2011 than we saw in 2010.
So, I think it's a combination.
Certainly, we are going to save some costs, but I think the fact that we are giving more autonomy to our local operations, more decision making to our local operations, will help us run a better business.
John Barnes - Analyst
Very good.
The one thing I was a little bit surprised about in your answers in terms of the use of cash and the return of it, wasn't -- there wasn't a lot of discussion there on maybe some of your growth initiatives, or your acquisition outlook.
Could you elaborate a little bit on that in terms of where that fits in the whole scheme of use of cash on a go-forward basis?
Scott Davis - Chairman, CEO
Clearly, we're going to be looking at opportunities to grow the business.
I said many times before our focal points are really going to be on the International Package business, starting with Asia and then probably Central and Eastern Europe.
Clearly, there are opportunities out there that fit our needs, that add to our strengths as far as capabilities or lanes that we need to strengthen.
We will take advantage of that.
So that never is far from one of our core areas using cash.
We are always looking at the right acquisitions.
In the freight forwarding logistics world, again, if we find areas that will fortify trade lanes or add capabilities and logistics, we'll take a look at those also.
So, it's a combination, certainly, of acquisitions, investing in the business, and distributing cash to shareowners.
Kurt Kuehn - CFO
We are -- outlook for cash flow is very positive for the next couple of years with the completion of our Worldport air hub, with the really replenishment and replacement of all the older aircraft in our fleet.
Our capital needs for the next few years are going to be significant weight below the trend, even with strong growth.
So we are just in a good position of having a lot of choices right now with what we do with discretionary cash.
Certainly, growth would be the top priority.
John Barnes - Analyst
Thanks for your time.
Operator
Chris Ceraso, Credit Suisse.
Chris Ceraso - Analyst
Thank you.
Good morning.
I had a couple of items.
In your view, is any of the strength that you're seeing, particularly in the international volumes, reflective of maybe shippers looking to get ahead of the curve a little bit with regard to peak season because they're worried about capacity availability?
Kurt Kuehn - CFO
Chris, I do think that there may be some of that.
That was part of my intention in my comments talking about the ocean squeeze in some of that.
I think a number of our customers -- and this is direct from our sales interviews of customers - did feel exposed last peak season and got in a jam.
That's why there was such chaos trying to get goods out of Asia in late November and December.
And so there's a little bit of that not-this-time mentality.
So we do you think there's -- people are pushing stuff through a little earlier.
As they see the constraint on the ocean side, then it may make for an earlier air peak season also.
Chris Ceraso - Analyst
Do you think enough of that is happening that it will alter somewhat the normal seasonality as we go through the balance of the year?
Kurt Kuehn - CFO
I don't know.
I think, right now, it's way too early to afford to be impacting air freight, but air freight continues to be strong.
So it will be an interesting year.
I think, as we come back, assuming the economy stays reasonably strong, then it could be a fairly interesting time.
As there is some backlog, I think, on the ocean side already, the slow steaming in effect takes substantial capacity out.
So a lot of companies that wouldn't normally think about using air freight earlier in the holiday season have been talking about that.
Chris Ceraso - Analyst
then a follow-up -- to the extent you're having high-level discussions with customers about export and their strategic outlook, do you get any sense from customers that they are waiting for more clarity, either on the policy front or the legislative front, to make investments or to grow their businesses?
Are people kind of sitting on their hands waiting for government to kind of settle out?
Scott Davis - Chairman, CEO
I think, clearly, policy uncertainty is one of the worst things for a recovery.
I think the sooner we get some of these issues resolved, whether it be energy -- we've got healthcare I guess somewhat resolved at this point in time -- the sooner small business will to spending money again and bring in hired employees.
There is no doubt that policy uncertainty is an issue out there.
We need to resolve that to get this recovery going full-steam.
Chris Ceraso - Analyst
Thank you, Scott.
Operator
Chris Combe, Exane.
Chris Combe - Analyst
I had a follow-up to Robin's question on European, both international Domestic Package and export yields.
You gave some color, ex-turkey.
Could you also give us some sense of how much of an FX effect you had, given the quite significant impact in Q1 and that we've seen euro/dollar development, if anything, work against your favor a bit.
Kurt Kuehn - CFO
Yes, actually, due to the impact of our hedging, the currency was actually not a huge impact.
That we do show currency adjusted yields.
Export yields do show increases.
Without currency, it would be just a little bit lower.
So, no, we are seeing very good strength on our export side, good pricing power, and also the increased weight.
The other big thing that's happened -- and we saw a little bit of a shift -- the transcontinental, the Asia to Europe, Asia to US, really was stronger than the intra-regional shipments.
Typically, the yields on those long-distance flights are much higher.
So all in all, very strong pricing.
We are very comfortable that those trends will continue.
Chris Combe - Analyst
That's clear.
Just one quick follow-up -- in terms of the trade-up effect that you referred to, are you seeing any signs of that within European market?
Kurt Kuehn - CFO
Yes, we are, actually.
In Europe, we offer this very integrated range of services from Standard to Express with no time commitment or afternoon commitments and early morning.
We are seeing a little bit of a shift across all of those just the economy heats up.
Frankly, as we work with customers in Europe to help them realign their supply chains, you reduce your warehouses and you use a little more speed in your transportation network.
So that trend has also helped the yield.
Chris Combe - Analyst
Thank you.
Operator
That concludes our Q&A session today.
I will now turn the program back over to Mr.
Andy Dolny.
Andy Dolny - VP IR
Yes, I'm going to turn it over to Scott for final comments.
Scott Davis - Chairman, CEO
Thanks, Andy.
By any measure, UPS produced a great quarter.
While we've made good progress across all the business units, we still have a lot more to accomplish.
The UPSers around the world will continue to work extremely hard to help our customers compete in the growing global marketplace.
As a result, we are very excited about the outlook for UPS' future.
Thanks so much for joining us today.
We will see you next quarter.
Operator
Ladies and gentlemen, that does conclude our conference call, the UPS second-quarter earnings call.
On behalf of today's panel, I would like to thank you for your participation.
You may now disconnect.