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Operator
Good morning, my name is Steve and I will be your conference facilitator today.
And this time I would like to welcome everyone to the UPS investor relations first quarter 2011, 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 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.
Andy Dolny - Treasurer and Vice President of Investor Relations
Good morning, everyone.
Thanks for joining us today.
I'm here this morning with Scott Davis our CEO and Kurt Kuehn our CFO, to discuss the Company's results for the quarter and our outlook for the remainder of 2011.
Before for 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 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 and from the Securities and Exchange Commission.
Today's call is being webcast and will also be available on the UPS investor relations website.
I want to remind you of three adjustments we recorded in the first quarter of last year.
These charges related to the US domestic segment reorganization, the change of tax filing status of the German subsidiary, and the loss on sale of a supply chain business.
They reduced net income by $175 million and diluted earnings per share to $0.18.
In their remarks today, Scott and Kurt will refer to UPS's first quarter 2010 results excluding the impact of these items.
We believe this is the most accurate picture of the Company's performance.
Reconciliations to comparable GAAP measures and free cash flow, which is a non-GAAP financial measure, are explained in the schedules that accompanied our earnings news release.
These schedules are also available on the UPS investor relations website in the financial section.
Now, to begin our review, I will turn the program over to
Scott Davis - CEO
Good morning, everyone.
UPS had great results this quarter.
Continuing the momentum we had in 2010.
Earnings climbed 24% on 7% revenue growth.
Despite the obstacles we faced like unrest in North Africa and the Middle East, skyrocketing fuel costs, and some of the worst weather conditions in years.
So far, the global economic recovery has been resilient.
Yet their risks are a little greater than they were three months ago.
Consensus forecast have come down slightly.
As 2011 GDP growth for the US, is now expected to be 2.9% and global GDP is forecast to be 3.5%.
Employment has begun to show signs of improvement.
Here in the US, unemployment dipped below 9% for the first time in almost 2 years.
Further evidence that the recovery continues.
Obviously, everyone is aware of the tragic events in Japan.
UPS was one of the first to support the humanitarian efforts there working closely with relief agency partners in Asia.
UPS pledged $1 million in relief aid, and has been assisting with logistics support.
We have delivered many containers and truck loads of emergency supplies and equipment throughout Japan.
Some of these important deliveries include emergency shelters, generators, survival kits and food supplies.
UPS will continue to look for other opportunities to help the victims.
While the immediate impact on the global economy and UPS is not expected to be substantial, the median term implications on global supply chains are still not clear.
Here in the US, it is important for us to demonstrate economic leadership and increased promotion of free trade.
Expectations are that Congress will soon address pending free trade legislation that is critical to grow US exports and to create new jobs.
The South Korean free-trade agreement that President Obama endorsed back in December, has not yet passed.
This critical piece of legislation is needed to further our progress on meeting the Export Council's goal of doubling US exports in the next five years.
Other important trade agreements like those with Columbia and Panama are still in the approval process.
UPS stands ready to facilitate the growth of trade between countries once these agreements are finalized.
I would like to see Colombia and Panama approved as soon as possible.
However, I personally disagree with holding up the Korean agreement while waiting for approval of these other two FTAs.
During the quarter, UPS continued to be active in expanding our capabilities to serve the economies of the world.
For instance, UPS launched four direct flights from Hong Kong to Europe making us the clear leader in guaranteed next day delivery for this important trade lane.
We announced more intra-Asia flights from Tokyo to key hubs in Taipei and Guangzhou exhibiting our commitment to Japan.
UPS formed a new strategic alliance in Columbia that will provide increased access for customers to our superior global network.
Earlier this month, we hosted President Obama at our Landover, Maryland facility where he announced the National Clean Fleets Partnership and made us a charter member.
The UPS rolling laboratory of alternative fuel vehicles was on display for the president and his team.
With one of the largest alternative fuel fleets in operation today, we are uniquely qualified to discuss issues facing companies as they evaluate their options.
In fact, in February we celebrated the milestone when UPS's Green Fleet surpassed 200 million miles of service.
Just recently, UPS was acknowledge as the industry leader by Fortune magazine, when they once again identified us as the world's most admired Company in the delivery industry.
UPS is rated number one in eight of the nine attributes used for ranking.
Some of the key attributes were quality management, innovation, long-term investment and quality of products and services.
In addition, as reported by Forbes, the Reputation Institute recognized UPS as number one in the transportation industry and number six overall on its list of America's most reputable big companies.
We will continue to operate in a way that builds both our economic performance and corporate reputation.
All in all, it was another successful quarter for the UPS team.
We continue to produce the best results in the industry.
Our focus on quality of revenue and the value of our integrated network ensures that we continue to be the best.
Our innovative solutions, superior technology, and efficient use of capital have UPS poised for strong growth well into the future.
Now let me turn it over to Kurt.
Kurt Kuehn - CFO
Thanks, Scott and good morning everyone.
The UPS earnings growth story continues.
Operating profit for the quarter increased $248 million and margins expanded by 130 basis points to 11.3%.
UPS benefited from our superior products and our flexible integrated network.
The negative effects of escalating fuel prices and difficult weather, were more than offset by great execution from UPS-ers all around the world.
Now let's review how the segments performed this quarter, starting with the US domestic package business.
Operating profit jumped 29% on over 6% revenue gains.
These results were driven by yield improvements and increased network efficiency.
Operating margin expanded by 200 basis points.
Revenue per piece grew 5% with the biggest driver being increases in base rates.
As we get our prices back in line with the value we provide.
Higher fuel surcharges and package characteristics also contributed to the yield improvement.
We are executing our strategy on focusing on the quality of revenue .
The key objective of this strategy is to ensure that we are properly compensated for the value we provide customers, and this is paying off as evidenced by our strong yield gains.
Once again, we did a great job controlling cost in the quarter .
Operating efficiency improved substantially as direct labor hours were down 3% and miles driven down, 2.
This is phenomenal considering the challenging conditions we faced during the quarter.
US domestic volume growth was relatively flat to last year.
Clearly this was negatively impacted by severe weather, a softer economy and the timing of Easter.
In 2010, the holiday buildup occurred in March, while this year it is occurring in April.
We estimate that the combination of weather and the Easter calendar had a negative impact on average daily volume of about 2% for the quarter.
While overall, our next day air was up about 1%, next day package volume grew at mid-single digit rates, reflecting our focus on the quality of revenue.
During the quarter, UPS made a substantial commitment to expand our fleet of liquefied natural gas tractors.
Later this year, the 48 new LNG tractors will join our fleet of almost 2000 alternative fuel vehicles.
We are encouraged by the ability of this technology to offer an alternative to diesel fuel for large over the road vehicles.
Now, let's turn to the international segment .
Revenue increased 10% with a solid operating margin of 15.4%.
The operating profit of $446 million is the best first quarter result in UPS history.
Although year-over-year earnings growth did slow to 4.4%.
Clearly the rapid increase in fuel costs had a negative impact.
As we stated during our last call, the first quarter of 2010 benefited from our euro hedging program.
This negatively affected the year-over-year comparisons by about $30 million.
Average daily export value increased over 7%, outpacing the market.
We continue to see strong export growth in Europe to all regions of the world, as customers there recognized the benefits of the UPS value proposition.
International Package yields grew 4.5% on a currency neutral basis, driven by higher rates, fuel surcharge increases, and product mix.
UPS was active during the quarter, adding capacity to our Asian air network.
In addition to the direct flights from Hong Kong to Cologne and the new routes from Japan that Scott mentioned earlier, we also upsized our capacity serving the important South Korea to US trade lane.
With the addition of a 767 flying in and out of Inchon.
Further emphasizing the breadth of solutions we provide, in March UPS opened the 2012 Olympic Games logistic center in England.
This is an important milestone that will allow UPS to deliver the games.
We are responsible for virtually all distribution and logistics services for the London 2012 Olympic and Paralympic games.
Now for the supply chain and freight segment, which continues to produce strong results.
Operating profits climbed 44% on revenue growth of 7.6%.
Driven primarily by improvements in UPS Freight and the forwarding business unit.
Operating margin increased 150 basis points to 6.1%.
In the forwarding unit, operating margin improved significantly as capacity in the market expanded and buy rates came down.
Top line growth moderated somewhat, as we focused on revenue management initiatives implemented last year.
UPS Freight revenue climbed 23%, continuing the strong rebound that started last year.
LTL shipments improved 10%, and weight per shipment was up, 2.
LTL revenue per 100 weight was up more than 8% and continues to be one of the best in the industry.
Operating results improved on a year-over-year basis despite challenging weather conditions.
During the quarter, UPS announced the expansion of our express air freight services to customers in Israel and Slovakia.
These developing countries are becoming important hubs for automotive, technology and other manufacturing industries.
We also expanded our preferred less than container load ocean freight service in Asia.
More customers can now benefit from this unique expedited service that improves ocean freight delivery times to the US by up to 40%.
Now, let's look at one of the hallmarks of UPS, our ability to generate cash.
Free cash flow for the period was $900 million in spite of $1.2 billion in accelerated pension contributions made earlier in the quarter.
Capital expenditures were $400 million.
With respect to distributions to share owners, we paid $500 million in dividends, reflecting a 10.6% increase per share announced during the quarter.
Continuing the UPS tradition of more than four decades of raising or maintaining our dividend.
The Company also spent $500 million to repurchase approximately 6.8 million shares.
Regarding our outlook for the rest of 2011, the global economic outlook has become a little cloudier than it was three months ago.
However, we still expect 2011 to be a great year, with record earnings per share for UPS.
In fact, our confidence has increased and we are raising guidance for 2011 to a range of $4.15 to $4.40 per share, representing a 17% to 24% improvement over last year.
In the US domestic segment, we expect average daily volume to increase approximately 2% for the second quarter with continued strengthening in the second half of 2011.
For the full year, Next Day Air and Ground are expected to grow at a similar pace.
Yields will remain strong as we continue to focus on the quality of revenue, and operating profit growth is expected to exceed 20% for the year, up from our previous guidance.
For the international segment, both revenue and operating profit are expected to grow approximately 10%.
Full-year operating margins are expected to be similar to 2010.
Year-over-year comparisons in the second quarter will be especially difficult as a result of headwinds created by our euro hedging programs.
We estimate the impact to be approximately $40 million.
Our supply chain and freight segment is expected to produce mid to high single digit revenue growth with continued margin expansion, driven primarily by UPS Freight.
So, in conclusion, UPS is off to a good start, performing well in the face of challenging conditions.
We are executing our strategy of focusing on the quality of revenue, providing the best service, and offering the most comprehensive set of solutions to our customers.
The UPS integrated global network is operating with incredible flexibility and efficiency.
We are confident in our ability to meet customer needs and excited about the results that UPS share owners will see in the future.
Thanks for your attention and now Scott and I would be happy to
Operator
Thank you.
Ladies and gentlemen we will now begin the question-and-answer session.
(Operator Instructions).
Mr.
Gary Chase, Barclay's Capital.
Gary Chase - Analyst
I wanted to see, Kurt, if I could ask you to follow up a little bit on some of the volume commentary.
I know you noted what you expected was a 2% impact for Easter and weather it even if I adjust that away I still don't seemingly have a lot of volume growth relative to what we are seeing, say in industrial production and some of these other drivers.
Is that the impact of these pricing initiatives?
Is it demarketing of some business that you just don't think it's compensatory?
What other color can you provide there?
Kurt Kuehn - CFO
We don't think there is a big impact of our yield focus.
We have seen a little bit of a differential, though, in the growth certainly of the heavy freight end of the market from the small package.
As we look at some of the statistics, industrial production is showing strength but the majority of the strength in industrial production is coming from some of the heavier industry side, metals and some of those things that don't necessarily impact small package.
We do think that Q1, the economy was a little softer than we had anticipated.
I know some of the quarter-to-quarter numbers are now coming in at estimated 1.9%.
We see this really as transitory and we think over time small package, the growth will ripple into there and that the freight is more the leading indicator.
Scott Davis - CEO
Gary, during the recession the IP numbers was down a lot more than small package market volume was.
So I think part of this as the recovery, too, has distorted some of those correlations.
Gary Chase - Analyst
Okay, and then just as a quick follow-up to that, you guys have always talked about the leverage you have in the labor contract as it relates to volume.
Do we need a lot of growth in order to recognize that or are we reaching a stage where maybe attrition will allow you a little bit of leverage there?
Kurt Kuehn - CFO
I think we are seeing pretty good leverage right now.
Even with the headwinds we had of some of the most extraordinary weather in the first quarter, we did a great job of expanding domestic margins and comp and benefit adjusted were up just slightly more than volume rate.
We think that the operating efficiency and the operational technology that is kicking in is showing substantial benefit.
I think we are seeing these benefits even without the tailwind of significant benefit of a wage moderations.
Still more to come as growth continues.
Gary Chase - Analyst
Thanks, guys.
Operator
Kevin Sterling, BB&T Capital Markets.
Kevin Sterling - Analyst
Thank you.
Scott, are you guys seeing customers move up and down the supply chain with the volatility in oil prices?
Scott Davis - CEO
I think not as much as we would have seen the last time through in 2008.
I think, one, we have adjusted our surcharge index so the difference between air and ground is not as dramatic as it was in the past.
And what you saw in the first quarter was actually better performance in the premium products internationally and better performance on next day package domestically.
We are not seeing that at this point in time.
Kevin Sterling - Analyst
Okay, thank you.
Kurt Kuehn - CFO
That's been a big priority for us following the spike in fuel in 2008 to revisit the structure of our fuel surcharges.
In general, the surcharges are lower because we have continued to move some of that rate into the core rates and then as Scott said we have narrowed the gap so we don't think the risk of trade down will be as great.
Kevin Sterling - Analyst
Okay, great.
Thank you.
And Kurt, as a follow-up, you mentioned in your prepared remarks that miles driven being down in the quarter, but as volumes pick up this year do you anticipate this increasing?
Or given the initiatives that you have in place can you keep miles driven flat?
Kurt Kuehn - CFO
It really depends on how great that growth is.
We would love to see an increase in miles driven by a robust economy and significant increases, we are confident that our miles will continue to grow at a much lower rate than our volume and growth in stocks.
The operational technology we have put in to optimize and focus on reducing fuel consumption is paying some real dividends.
Kevin Sterling - Analyst
Okay, great.
Thanks so much for your time this morning.
Operator
Mr.
Ed Wolfe, Wolfe, Trahan.
Ed Wolfe - Analyst
Just back at the volumes domestically, did I hear you right, Kurt, the guidance was 2% for second quarter for domestic volume and better than that in third and fourth?
And if that's the case, you are down a little bit this quarter and a couple points for weather you are saying.
Were March and April better?
Is that what is giving you the confidence to go from minus to positive 2?
And if so what were March and April?
Kurt Kuehn - CFO
March was not really better, Ed, because of the Easter lag.
The buildup in Easter comes as several weeks before Easter.
This year with a late Easter, that has really moved over into April.
We are seeing the typical seasonal build up into April.
We don't see the core economic growth picking up dramatically.
Slightly better than Q1, but the noise of the unprecedented weather really all three months saw significant weather headwinds and the calendar impact and a little slower economy.
As we factor through all those we are pretty confident that the core growth rate coming into Q2 should be about 2%.
Scott Davis - CEO
And April is performing better than we saw in the first three months.
Ed Wolfe - Analyst
Can you give some number to that?
Scott Davis - CEO
It's tough, Ed, right now because of the Good Friday and Easter Monday comparisons.
Certainly the first two weeks were quite strong, last week we were compared against Good Friday down a little bit, but we will see a certainly a better April than we saw the first three months.
Ed Wolfe - Analyst
Okay, and as a follow-up, with the domestic volume not there you were still able to show the leverage and grow the domestic margin.
Can you talk a little bit about what some of those levers our?
Is it time and hiring people that is letting you leverage the underlying contract a little bit?
Is it something else?
Where are you seeing this leverage and what does 2% mean to that leverage relative to 0.6?
Kurt Kuehn - CFO
The leverage is really coming from two components.
Number one is the top line leverage where, as I said one of our top priorities is making sure that we get pricing back to the levels that compensate us for the value we have created.
And so, the relatively firm stand on pricing and extracting the value that is there is a big driver of that.
And at the same time that we are seeing the benefits of the deep investments we have made in operational technology.
We will show a lot more of that at our investor conference in September, to give you guys are little more understanding of the multiple areas that we are streamlining the network.
All of that is without significant benefits of growth which will help us both on scale densities and also the moderating the wage increases.
Ed Wolfe - Analyst
Thanks for your time.
Operator
Nate Brochmann, William Blair Company.
Nate Brochmann - Analyst
Just wanted to follow-up on Ed's question there a little bit in terms of talking about the yields and the price increases.
Obviously, you're doing a great job there and it's a big priority, but how easy is it to get the customer acceptance with fuel surcharges rising so rapidly?
I know a little bit more of that is in the base, but how are you thinking about that and what's the customer acceptance there?
Kurt Kuehn - CFO
I think so far at least, the customer pushback has been minimal because certainly the levels are below some of the peaks that we saw.
So far, not too much disruption on that front.
We have gone back in and worked with customers actively to see how we can re-align their supply chains to minimize the impact of that.
So far, we haven't seen a significant impact of people really going back and revisiting their blend of premium and standard products.
Scott Davis - CEO
The real concern for us is how long, and how high energy prices go because that will probably impact the economy more.
I think the rule of thumb for economists are that if oil prices go up to $10 a barrel, it's going to knock down GDP about 0.2 year one and about a 0.5% in year two.
We've seen about a $30 run in crude oil , so that could certainly have an impact in 2012 .
That will knock out about half of the growth.
That is our concern.
How high the price will go and
Nate Brochmann - Analyst
Fair enough, and in terms of we talked a little bit about domestic maybe being just a little bit slower, how are you feeling on the international side in terms of the volume trends there going forward?
Kurt Kuehn - CFO
We were clearly thrilled by the continued very strong growth, 7% unit growth in our export volumes.
Europe continues to outperform even with continued sluggish economy in Europe.
We feel very good that the international business is continuing to move forward.
The comparisons to last year were a little tougher, as we said, because of some very beneficial hedging we had in 2010.
A global trade continues to move along fairly strong, as Scott mentioned in his prepared comments, not too much disruption yet on the Japan side.
But the UPS story continues to be great.
Scott Davis - CEO
Our global GDP numbers have maybe come down a tick from what we looked at three months ago, and that's pretty impressive when you consider what was now three months ago was the Japan situation.
Clearly the problems in the Mid East and North Africa, impact on energy prices, I think overall we have seen the global GDP drop from 3.7 to 3.5 so that's pretty encouraging really as we move forward.
Europe actually has gotten a little bit better in the timeframe, it is up 0.2, the expectations for the rest of the year, so we feel its a resilient economy and we will see strong global trade throughout this year.
Kurt Kuehn - CFO
And I think one other thing we are doing is we are continuing to reinvest in that.
With the announcement of the direct flights Hong Kong into Europe, you connect those fights into our all points hub in Cologne and we could have guaranteed service to 34 countries within Europe next day.
We are leveraging that deep integrated network we have in Europe and connecting that to Asia.
Nate Brochmann - Analyst
Great, thanks for the time and thanks for the color.
Operator
Scott Malat, Goldman Sachs.
Scott Malat - Analyst
Thanks.
For domestic yields, can you just help us think about the positive impact of dimensional weight changes, what you're seeing there , anything you could talk about weight changes in general would be
Kurt Kuehn - CFO
In general, weight is fairly stable, maybe up just a little bit.
That is typical with a recovery.
It has not been perhaps as rapid as some other recoveries, but neither has the absolute economic growth.
The dim weight is just a part of our annual recalibration of the appropriate pricing, and it more strongly focuses on those high Q packages that eat up a lot of space in our vehicles.
It is a contributor, but certainly not material.
The base rates, the fuel surcharge, and some of the characteristic mixes are all a bigger impact than the DIM weight in and of itself.
Scott Malat - Analyst
Okay, thanks, that's helpful.
Just following up on a question from before, can you talk about what percentage of drivers are in the highest paid tier, remind us what kind of typical averages are?
Just help us think through the mix right now of your drivers.
And then can you talk about the timing seasonality of turnover, do you get more turnover in Q2 than the rest of the year?
Kurt Kuehn - CFO
We remain at a very high percentage.
Over 90% of our drivers are at the full senior rate.
As we continue to streamline the network and reduce our direct hours, there is not as much mix of new employees then.
That is still a latent opportunity for us as we show stronger growth and the economy continues to expand.
But we did not get any benefit from that in Q1.
Scott Malat - Analyst
So over 90 and normalized levels are low 80's, 82?
Kurt Kuehn - CFO
Something like that.
It differs based on the velocity of growth and the seniority of our employees.
Scott Davis - CEO
This is as high as we can ever remember it.
Scott Malat - Analyst
Okay, thanks.
Operator
Mr.
Ken Hoexter, Merrill Lynch.
Ken Hoexter - Analyst
Just sticking on that same theme, Scott and Kurt, it looks like your comp costs were up 1% year-over-year.
You are obviously well below your revenue growth and obviously that is a great move and part of margin gains.
Can you talk about is that kind of that contribution toward the pension you have made?
What is driving that slight increase?
Kurt Kuehn - CFO
We did have a few cost headwinds into the year that we talked about in our guidance.
Our pension expense was up substantially, we reinstated the employee match for the 401(k) at the same time we were able to limit our unit cost as it were, across the whole Company to less than 1%.
We feel very good about the trends in our comp and a our productivity.
Scott Davis - CEO
I think, Ken, it's just improved productivity and we're continuing to invest in technology in that arena and we will spend some time at the investor conference in September to walk through some of these.
There is more to be had there also.
Ken Hoexter - Analyst
Are we seeing actual employment numbers come down aside from the driver numbers Scott was just talking about?
Are we seeing, is this increased productivity that gets rid of -- are you looking at employee numbers coming down on that?
Kurt Kuehn - CFO
Not dramatically.
It depends on the growth, certainly.
If the US economy stagnates then there may be some reductions as we improve productivity.
With modest growth we can basically offset the need to increase employees.
Scott Davis - CEO
Ken, we are so flexible that answer is different every day based on package volume that we see coming in.
Ken Hoexter - Analyst
If I can get my follow-up on the forwarding business, it looked like again, you had -- I guess growth slowed there about 3% from mid teens of the last couple quarters.
Is there anything going on on the freight side?
Just trying to find something else because on the core side you did such a great job on the margin gains.
Kurt Kuehn - CFO
We actually were very pleased with our overall supply chain and freight performance with over 40% profit improvement.
I did mention that in the forwarding, we have been clearly going back and focusing on revenue management .
Margins improved substantially.
The other thing that is in that forwarding and logistics line, is there is some headwind because we are overlapping the disposition of two businesses that were in that space.
One, a small German supply chain business that we liquidated last year, and then late last year, we did sell our logistics technology business.
There is a bit of a revenue headwind on that front, that took the core logistics growth down from solid mid-single digits to just slightly increasing.
That distorts the numbers a little
Scott Davis - CEO
And air freight in the first quarter last you remember was extremely strong because there was still a capacity, the shortage out there.
Rates were high and strong.
This year, pretty slow February out of Asia particularly with the Chinese New Year and people coming back to work late.
Ken Hoexter - Analyst
Thanks, guys.
Operator
Mr.
Tom Wadewitz, JPMorgan.
Tom Wadewitz - Analyst
Your domestic package margin performance was very good in the quarter.
I guess if you look at it from an incremental margin perspective it looks like about 43%, which is a pretty strong incremental margin performance.
When you look to second quarter, do you think that can actually get better because first quarter clearly you had the weather and fuel lag impacts and volumes not quite as good, so I guess if you could just offer thoughts of can you do even better looking forward?
Because it would seem that that would be a natural conclusion given the headwinds in first quarter.
Kurt Kuehn - CFO
Tom, I guess I won't get into the details on incremental margins.
There's a lot of moving parts there.
Some is driven by total revenue, some is driven by yield and some by productivity.
We certainly feel that Q2 will be a better quarter than Q1.
A, seasonally it is usually stronger, and B, once again we had some extraordinary headwinds in Q1.
Those of you that live in New York know the kind of whether that we faced.
Our small package operation because of the flexible network was able to adapt.
We did see a little more headwind in the freight.
But assuming we don't get snow in May in Manhattan we think we will be in much better shape on the domestic side.
And it's really the domestic outlook that was the driver of our guidance increase that we gave this quarter.
Tom Wadewitz - Analyst
Okay, and then in terms of the follow-up, you were asked earlier about the broad approach on pricing.
Do you think there is a significant difference in the sales force this year versus what you would have been this time last year in terms of how they are approaching the market and that that is playing some role in terms of realizing more price and a little less volume?
Kurt Kuehn - CFO
Tom, we are placing a slightly stronger focus on yield as opposed to just pure growth for its own sake-- it is possible at the increment that there is some reduction in volumes.
Although, we are not explicitly deciding to slow the growth down.
We feel pretty good that we are finding a good balance.
As I said, Q1 was a very noisy quarter with calendar issues, with fuel, with the economy slowing and with weather.
I wouldn't read too much into the Q1 results.
We think we will get back on a reasonable growth trend and that is encompassed in our guidance.
But we did say over a year ago that one of our priorities is making sure that UPS gets compensated for the value that it creates and we feel good that we are on track for that.
Tom Wadewitz - Analyst
Thank you.
A good quarter and thanks for your time.
Kurt Kuehn - CFO
Thanks, Tom.
Operator
Jon Langenfeld, Robert W.
Baird.
Jon Langenfeld - Analyst
On the international side, can you talk about how general pricing trends in the trans-Pacific, tans-Atlantic and intra-Europe?
Kurt Kuehn - CFO
Pricing has remained pretty positive.
If you look at our currency adjusted results, Jon, they have actually strengthened.
We do feel pretty good that it is a very stable environment and certainly there is no one consistent message for each market .
Asia can be a little more volatile because of the big swings in capacity and growth, but we are very focused, just as we are in the US, on making sure that we are pricing to value.
For UPS, that unique value proposition is extremely strong with us really being the only one of our major competitors that has a very strong balance position in Asia, in Europe and in the US.
With the incredible capabilities we have within Europe, with our linkage of Asia to Europe next day, all of those things just continue to give our salespeople a very strong value proposition.
And on top of that this ability to align our supply train and freight capabilities with the small package solutions makes it so we don't really have to get aggressive on price to continue to grow
Jon Langenfeld - Analyst
Okay, good.
Then the same question in your domestic business, Kurt, you talked about the small and mid sized shipper being a hollow recovery, not seeing as much there.
Can you comment on any recent trends there and how that segment looks?
Kurt Kuehn - CFO
Yes, Jon, that is one of the side stories in the domestic economy that we have seen the large global companies have bounced back more quickly, and certainly that's the story in the US, where our big accounts and our accounts that have a global footprint have seen more growth, and that Main Street has been lagging some of these global companies.
Liquidity has not been available and that the recovery to some extent has been delayed in the middle market.
That trend has continued.
We do see higher growth in our global companies than we do in our small and medium-sized ones.
We think frankly that could be a tail wind going forward as that part of the economy picks up more.
Scott Davis - CEO
Jon, I am optimistic that you will see a pick up later this year in that group, I think clearly the credit availability has improved dramatically from where it was 12 months ago for the SMEs.
That will help an awful lot.
We are also working hard to get some of these free trade agreements done to help get the SMEs in the exporting part of the business.
That's what the future is for them.
You've heard many times 95% of consumers are outside the US.
We have to get small and medium sized enterprises to export.
Jon Langenfeld - Analyst
Thank you.
Operator
Jeff Kauffman, Sterne Agee.
Jeff Kauffman - Analyst
Thank you very much.
Congratulations.
Very solid quarter.
Two questions.
You spoke a little bit about the heavy versus light and the small shipper versus global shipper.
I noticed you had seen.
I was wondering if you could give us a bit more geographic color.
We have been hearing a theme across a lot of companies that the middle of the country and the farm belt was a relatively stronger economy then on the coast.
Could you give us a view of geographically or industrywide of where you are seeing some changes?
Kurt Kuehn - CFO
Jeff, there's not huge differences although, I think your pick up on the Midwest certainly with some of the manufacturing rebound and some commodity and early products and supply chain booming that we are seeing some firmness there.
Although clearly the automotive group has recovered substantially versus where it was at a year ago.
I think on a year-over-year basis, we are seeing some pockets of strength centered around some of those industries.
Scott Davis - CEO
From a sector perspective, Jeff, for us it seemed like we still saw the first quarter the major growth in the retail and probably the technology side, and as Kurt said, we are seeing sequential strengthening in the manufacturing and wholesale global as we move through the quarter.
So, it's looking a little bit better as we move forward.
Jeff Kauffman - Analyst
Okay, thank you.
And the follow-up, you made a comment on the freight forwarding side that I thought was interesting.
Is that you were able basically to purchase your capacity at better rates, which would seem to fly in the face of we've got great strength in the international markets.
Is it more on the ocean side?
Is it more on the custom side?
Or is it just that you are able to fully pass on price increases to customers?
Kurt Kuehn - CFO
It is more on the air side.
We think one of the real opportunities, Jeff, for us is to take advantage of this very unique business model we have, where we are both an airline and a very large freight forwarder.
And one of our top priorities over the last six to nine months has been really perfecting our buy rate capabilities and knowing when to use our network and when to buy capacity.
With the softness in Asia, especially because of the Chinese new year, there were some opportunities to do some a spot buys at attractive rates .
If you are opportunistic and you have comprehensive systems and you can look at alternative ways to get goods to move, there are some real opportunities to get good
Jeff Kauffman - Analyst
Thank you very much.
Operator
Bill Greene, Morgan Stanley.
Bill Greene - Analyst
I just had a couple of quick data questions.
The first was, Kurt could you just talk a little bit about the size of your B to C business now and the growth rate in the first quarter?
Kurt Kuehn - CFO
Yes, B to C remains a little bit over a third of our volume and it certainly was stronger in the first quarter.
Bill Greene - Analyst
Stronger than B to B?
Kurt Kuehn - CFO
Stronger than B to B yes.
B to C growth continues to be stronger certainly especially at the lighter end of the market where there's a lot of focus.
Bill Greene - Analyst
Okay, and then the follow-up question here is just on the buyback.
I guess, given how good the first quarter cash flows were and how well you actually did in 2009, I realize there is uncertainty in the world, but I would think that your buyback could be a bit more aggressive and I'm just curious what holds you back
Kurt Kuehn - CFO
We guided to a fairly substantial increase, $2 billion for the year.
We increased the dividend almost 11%.
Having said that, Bill, I think you are correct, that the cash flow outlook is strong, even with all those distributions.
Our forecasts are for an increase in cash balance.
We will continue to look at that.
Right now, we are executing around what we guided and we did purchase about 25% of the annual amount.
Some of that we are doing systematically and some opportunistically and we will continue that way.
Bill Greene - Analyst
Yes, I know but you raised your earnings guidance so I thought maybe you raised this as well.
Kurt Kuehn - CFO
Well, we will see.
Bill Greene - Analyst
Okay, thanks for the time.
Operator
David Campbell Thompson Davis & Co.
David Campbell - Analyst
Thank you very much.
I heard your favorable comments about forwarding and the supply chain solutions divisional profits, but assuming that the freight division broke even versus a loss a year ago, there wasn't a lot of growth in earnings in the supply chain business.
What happened there?
Kurt Kuehn - CFO
I don't think that's true.
No, we saw significant improvements in both fronts.
Our forwarding group increased and we did see good improvements in our freight.
David, you are correct, the UPS freight segment overall was approximately breakeven.
It had a real great March, which had a little better weather, but the flexibility of LTL isn't as much as package.
We did see some headwinds in January and February, but overall the segment is up 44% and our forwarding unit did see substantial improvements in Margins versus last year.
Scott Davis - CEO
LTL didn't lose $40 million in last year's first quarter.
It was much less than that.
David Campbell - Analyst
Okay.
So, you are optimistic about the forwarding operations in the second quarter?
Kurt Kuehn - CFO
Yes, we are.
We have the global network put together and we are continuing to enhance our forwarding capabilities.
We are expanding cold chain capabilities as we target the healthcare market and there is clearly a lot of opportunity for high-quality forwarding with temperature control capabilities.
There is a lot of ways we think we can continue to differentiate our forwarding capabilities across the globe.
David Campbell - Analyst
Okay, thank you very much.
Operator
David Ross, Stifel Nicolaus.
David Ross - Analyst
Good morning gentlemen.
First question is on the other operating expenses.
Outside of fuel, which we know why that was up more than the rest of them -- repairs and maintenance was up significantly more than the others.
Is there any weather impact in repairs and maintenance line or was that because of fleets being a little bit older -- and are you due for some normal maintenance checks?
Kurt Kuehn - CFO
I think it's just not atypical for us to see repair and maintenance jump in a quarter or two and this is primarily driven to engines and airplanes, maintenance there, and that will vary by quarter based on timing of seat checks and those type of things.
Nothing out of line there.
David Ross - Analyst
Okay, and then if you look at the UPS Freight segment, with yields up high single digits, can you give us a little bit of a breakdown in terms of how much of that was maybe fuel surcharge, how much was mix related and how much pure pricing is going up right now in the LTL markets right now for you guys?
Kurt Kuehn - CFO
Yes, fuel was a little more than half of the 8.5% revenue per hundred weight, so we still had very good solid base rate improvements.
We think we are striking a real good balance of steady, prudent growth and also very firm yields.
We are pleased with the progress we are making.
We continue to show great results in broadening our market share, especially in the middle market and aligning our capabilities so customers can move back and forth between freight and small package.
David Ross - Analyst
Thanks.
Operator
Our next question will come from the line of Matt Brooklier of Piper Jaffray.
Matt Brooklier - Analyst
Thanks, good morning.
We heard your comments regarding weather's impact on volume, 2 percentage points at domestic package.
Is there any way to quantify the incremental cost you guys saw in the quarter from weather?
Scott Davis - CEO
That was weather and the timing of Easter.
Kurt Kuehn - CFO
And no, we really haven't broken out the cost, it was -- although certainly there was some.
As I said, probably the net operational impact was greater in freight than in package.
Our package network is highly flexible.
But we did see demand impact and our sense is that will ripple through into Q1 GDP estimates that will be coming out shortly.
It was a headwind for cost but it was a balanced mix of both the revenue reduction and some additional increase in expense.
Matt Brooklier - Analyst
Okay, we got your guide for '11 at supply chain and freight all in with respect to the revenue growth.
Any chance you want to provide some color on the out margins of that division in '11?
Kurt Kuehn - CFO
We do think it will continue to show moderate improvements in margins.
We feel pretty good about the progress on that.
Clearly we are not going to show 44% improvement every quarter-- the comps to last year were a little easier.
Frankly, this quarter they will be a little tougher in the second quarter.
We think in general, we are going to see good solid upper single-digit revenue growth and margin expansion.
Scott Davis - CEO
LTL normally is stronger in Q2 and Q3 which will help us.
Matt Brooklier - Analyst
Okay, thanks guys.
Operator
Chris Wetherbee, Citigroup.
Chris Wetherbee - Analyst
Thanks.
You guys have commented a couple times on trends in Asia.
I am just wondering if you can develop or build on that a little bit just what you have seen particularly in March and April, as we came out of the Chinese New Year holiday and if we've seen strengthening in that region?
Scott Davis - CEO
I think we are seeing strength, and I think January and February started off a little bit slow due to the factory closures in China.
March has strengthened, April is staying strong.
The unknown right now obviously is the impact to supply chain from Japan.
Right now, it has not had a big impact to our volume and revenue numbers, but as we go forward, it could be a bigger impact overall to the economy.
I heard a lot of things yesterday, I think Johnson Controls mentioned that big reduction in imports for them from Japan going forward.
I think clearly you will see an impact on the automotive sector.
And the technology is unknown at this point in time.
It's really hard to see.
There's lots of rumors of parts shortages at UPS.
We are a big procurer of technology.
We have not seen shortages at this point in time.
It could have an impact, but overall we are seeing a pretty good strength in and out of Asia and global trade should stay strong.
Chris Wetherbee - Analyst
Okay, and then just on the back of that when you think about your guidance for the full year, marrying in the price of fuel and what we are seeing out of Asia, I'm guessing, could you just give a little bit of color of your underlying assumptions there particularly as it relates to fuel and then what we're seeing as Japan, have you included anything in your forecast as you look forward, I know you mentioned domestic is a bit of the driver for the increase going forward.
Kurt Kuehn - CFO
No, we really have not factored in an explicit Japan impact.
We've looked at that and you can come up with numerous positives and negatives.
We have seen some customers reaching out to us to help them relocate their distribution capabilities, so depending on how it ripples through the supply chain, there may be movement from ocean to air.
Certainly there is going to be some demand disruption.
So, the Japan factor we have not explicitly quantified.
We have estimated fuel to be somewhere around $105 or maybe a little more than that for the year.
Maybe a little exposure there.
But remember, the big issue for us on fuel is a rapid change.
When it moves rapidly as it has this year, we do suffer a two month lag and certainly April has a headwind because we are overlapping February and then early March's increases.
If that stabilizes even at its current level, then there should not be too much downside risk.
Scott Davis - CEO
And we have factored in as our GDP baseline, we have knocked it down a couple tenths of a point primarily due to fuel.
As we said before the fuel runs about $105, $110 per barrel will probably have a couple tenths impact in the overall global and US GDP this year.
Chris Wetherbee - Analyst
Okay.
Great, that's helpful.
Thank you.
Thank you.
Operator
Rob Byde, HSBC.
Robin Byde - Analyst
Just a question on the expansion of your Asia-Eurpoe air bridge.
Can you say a bit more about the reasons for expanding at this time?
For example, has there been a particular shift in capacity put on by TNT, DHL, or another competitor?
And then, just a follow-up, can you give us a bit more color on the mix between heavier freight and parcels?
Is this additional activity more freight forwarding them parcels?
Kurt Kuehn - CFO
Rob, let me start with the second half of your question first.
The separation in our reporting is pretty clean.
Our international export growth is definitely package growth.
That 7% plus that we showed was legitimate, small and medium-size packages.
The freight shows up elsewhere.
So, even though we do see in the US a fairly significant difference between the freight growth and the small package, the spread is not great as great internationally.
Although that's probably a company specific story.
We did decide to add those direct flights from Hong Kong and really exercise our structural advantage after seeing that a number of competitors did frankly, and we do have the capability of linking Asia to Europe in a way that no one else does.
And so it did seem it was an appropriate way.
We put up our 747 direct flight and it is operating very well and we are seeing a good demand for that.
So, it's both matching some competitive challenges but also raising the bar.
We are comfortable to do that when the returns are there.
Robin Byde - Analyst
Thank you.
Operator
And due to time constraints our last question will come from the line of Mr.
Scott Flower of Macquarie Securities.
Scott Flower - Analyst
A couple questions.
One is, in a sense the competitive environment is fairly benign, but -- and you have a lot of noise in the volume numbers in the first quarter.
Are you at all worried that maybe there is some share loss seeping in on the ground side because obviously that number was a bit weaker than I would've expected, understanding there is weather and some noise there.
Kurt Kuehn - CFO
Scott, am I would not characterize the market as benign.
The market is extremely competitive and customers have multiple choices.
We are out there competing like crazy.
The comparisons to our competitors are a little confusing because some of them use a different calendar.
FedEx for example, had the December in the last quarter which makes comparisons a little unusual.
We haven't heard yet from the post office which is also a very large player.
We suspect they will show negative results.
We do think the economy was a little softer and we are certainly watching carefully, and we think over the longer-term it has been clear that we have been able to maintain share and our expectation is that we will continue to.
Scott Flower - Analyst
Okay, and then the other question is, and I know obviously from a soft first quarter things should improve, but I'm just wondering with some of the potential depressing effects of oil and obviously you could argue about one year impacts or two year impacts but it comes in a lag basis and government cutbacks and some of the impacts maybe of the Euro on exports, why do you feel other than a pickup from 1Q that there might not be some softness as we go a little bit later with some of those impacts that may lag a bit?
Scott Davis - CEO
Scott, you are right.
There are a lot of clouds out there.
In Japan and gasoline prices near $4.00 and tightening in China but there are a lot of positives out there also.
I think if we look back at Fed Funds are still near zero, very accommodative, credit conditions I mentioned earlier are improving for small and medium-sized businesses.
Emerging markets are likely to continue to drive growth.
I think profits are strong, corporate balance sheets are strong.
And you are seeing great numbers and good IP numbers and good retail numbers.
There are some risks out there, but there is an awful lot of strengths also.
Scott Flower - Analyst
Will the Euro strengthening at all hurt your European export business?
Scott Davis - CEO
It certainly hasn't to date.
We have shown strong growth there and obviously we ought to get better US exports with the weak dollar.
Kurt Kuehn - CFO
Actually the strongest area we are seeing is actually a Europe to Asia where the comparisons aren't as difficult .
Scott, maybe just to put an edge on this.
We did increase our guidance for the year.
It is not based on an estimate of increased demand across the globe.
What it really is based on is our increased confidence in the UPS business model to adapt to conditions and to continue to generate good economic results.
So it's more an affirmation that we feel the Company is operating well than that the global economy has got a lot of upside.
We are not gloomy on where the world is heading but we are also cautious, but we are confident we can adapt to conditions as they
Scott Flower - Analyst
Great, well, thank you all.
Operator
That does conclude our Q&A session for today.
I would now like to turn the conference back over to Mr.
Dolny for any closing remarks.
Andy Dolny - Treasurer and Vice President of Investor Relations
I am going to turn it over to Scott for some final comments.
Scott Davis - CEO
Thanks, Andy.
This past quarter presented significant challenges for many companies across the globe.
It reminds me of something our founder Jim Casey said, way back in 1947.
He said, determined people make conditions.
They do not allow themselves to be victims of them.
His observation more than 60 years ago, still rings true today.
UPS did not write the quarter off when faced with challenging conditions.
We rose to the occasion and demonstrated resilience and flexibility of UPS and it is evidenced in the results that we announced today.
Thanks so much for listening and have a great day.