聯合包裹運送服務公司 (UPS) 2012 Q1 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the UPS investor relations first-quarter 2012 earnings conference call.

All lines have been placed on mute to prevent any background noise and after the speakers' remarks, there will be a question-and-answer period.

Please note we will take only one question from each participant to accommodate more analysts during the call.

Thank you for your cooperation.

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

Andy Dolny, UPS Treasurer and Investor Relations Officer.

Sir, the floor is yours.

Good morning.

Today, I am joined by Scott Davis, our CEO and Kurt Kuehn, our CFO, to discuss the Company's results for the quarter and future expectations.

Before they begin, 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 2011 Form 10-K report.

This report is available on the UPS investor relations website and from the Securities and Exchange Commission.

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.

In March, UPS announced it reached an agreement to acquire TNT Express.

Although we expect the transaction to close before the end of the year, any guidance that we provide will not include the results of TNT operations nor any synergies or integration expense associated with the acquisition.

As always, today's call is being webcast and is also available on the UPS investor relations website.

As a reminder, our goal is to allow as many as possible to participate on the call.

As a result, each person will be allowed one question and then required to get back in the queue for a follow-up.

I thank you in advance for your cooperation.

Now let me turn it over to Scott.

Thanks, Andy.

Good morning, everyone.

2012 was off to a good start for a couple of reasons.

First, we announced our intention to acquire TNT Express, an investment that will contribute to our growth for many years to come.

Secondly, looking more near term, first-quarter results built upon momentum from last year.

We continue to see strong demand from UPS products and services, especially in the US and Europe.

Both the US Domestic and Supply Chain & Freight segments delivered double-digit profit growth in the quarter.

Back in January, we discussed that expectations for the US economy were improving, especially compared to the rest of the world.

During the quarter, the most positive news has come from the US where indications of economic rebound are evident.

Retail sales have grown faster than expected and the employment environment has improved.

On the other hand, economies in other parts of the world continue to face challenges.

Europe struggles under austerity measures and slowing growth persists out of Asia.

Despite this, we continue to see our export volume in both Europe and intra-Asia perform well.

UPS is executing on its strategy of investing to grow with the announcement of two acquisitions.

First, in February, we acquired the European consumer delivery company, Kiala.

Its retail delivery network and unique technology will benefit UPS as we continue to look for ways to serve the growing B2C market, especially outside the US.

As you know, last month, UPS announced an offer to acquire TNT Express.

While we have not closed on the transaction, we have made initial contact with the regulators.

UPS remains confident it will receive all required approvals.

The acquisition of TNT will diversify our global revenue, increasing our portfolio of solutions and expanding our geographic footprint.

We are excited about the prospects of adding such a strong and respected company to the UPS family.

During the quarter, UPS received accolades from a number of organizations for our reputation, ethics and brand.

One of the more widely recognized honors we received was the number one ranking by Fortune magazine as our industry's most admired company.

This is the 27th time UPS has received this recognition in the 31 years the award has been given.

Also during the quarter, UPS My Choice, the B2C solution we introduced in October, surpassed one million subscribers.

UPS has received a positive response from customers as they enjoy unprecedented levels of visibility and control over their deliveries.

Before I turn it over to Kurt, I want to congratulate the almost 6000 members of the UPS Circle of Honor, individuals who have achieved 25 years or more of accident-free driving.

In fact, this year, we recognized our first driver to surpass the 50-year milestone.

That's truly amazing.

This is just one example of how these drivers and the rest of the approximately 400,000 UPSers around the world contribute to our Company's success.

As you can see, 2012 is off to a good start.

UPS continues to be a global leader investing for growth, developing innovative solutions and continuing to build on our corporate legacy.

With that, let me turn it over to Kurt to review the results for the quarter.

Well, thanks, Scott and good morning, everyone.

Yes, we are off to a good start.

Daily package volume for the quarter was up a strong 4.3% as online shipping continued the rapid growth seen last quarter.

Boosted by strong results from the US Domestic and Supply Chain & Freight segments, earnings per share grew 10%.

Let's take a look at the segments.

Operating profit for the US Domestic segment jumped 13% on revenue growth of 6.1%.

Operating margin expanded by 70 basis points to the highest first-quarter margin for this segment since 2008.

Our package volume increased 4.5%.

Deferred products were up 10% as online retailers clearly recognize the value of using our network to expedite the movement of goods to their customers.

Our Next Day Air volume increased 5% with Next Day package up 6.5% and some gains in letter volume.

Something frankly we have not seen in many quarters.

Our Next Day Saver product was the primary source of growth as residential deliveries for large e-commerce shippers continued to expand.

Ground shipments rose 4% with approximately half of the growth resulting from a 30% increase in lightweight products.

These solutions are proving to be very popular with our customers and are creating connectivity to other UPS products.

As we saw in the fourth quarter, the strong demand for Saver and lightweight products like SurePost impacted yield growth.

Base pricing was up about 2.5% to 3%, but it was somewhat offset by changes in product and customer mix that I just discussed.

The impact on yields will begin to moderate as we ramp the buildout of our SurePost launch.

This will become most evident by the fourth quarter.

Keep in mind, while these trends negatively impact yield, they do have a positive impact on our cost to serve and on our capital consumption.

Direct labor hours, block hours and miles driven all increased at a rate significantly less than the 4.5% volume growth.

Operating leverage was also apparent in the quarter as we continue to improve efficiency, benefiting from productivity gains, greater economies of scale and a mild winter.

Now turning to the International segment.

Although we faced some challenges, primarily due to shifting trade patterns, our international export volume continues to perform well, up 5.4%.

Average daily volume comparisons did benefit by about 1% due to year-over-year differences in local operating days.

Looking at the regions, exports increased at a mid-single digit pace for both Europe and the Americas; however, our long higher-yielding lanes out of Asia were relatively flat.

We also saw European shippers increasing their reliance on our standard products.

International yield growth was flat as the benefits from the fuel surcharge and base rate increases were offset by the impact of shorter trade lanes, changes in product mix and the impact of currency.

On a currency-neutral basis, yield was up 2%.

The International segment operating profit came in at $408 million.

Currency translation and rising fuel costs accounted for over a third of the $45 million decline; although our operating margin of 13.8% remains industry-leading.

Moving on to Supply Chain & Freight, operating profits increased substantially, up 19% with forwarding and distribution leading the way.

The segment did receive a $9 million benefit from the sale of a surplus facility.

Revenue for the forwarding business declined due to lower tonnage and yields as excess capacity remained in the market.

However, operating profit and margin improved due to growth in customized solutions and brokerage services in addition to improved productivity.

The distribution business saw profit expansion in an environment of increased investment in healthcare capabilities.

UPS expects to add five new healthcare-compliant facilities this year around the world bringing our total to 38 dedicated facilities.

In what is typically the most challenging quarter for the industry, our UPS Freight unit broke even.

Tonnage declines were offset by higher revenue per hundredweight and improved productivity.

Looking now at cash on our balance sheet, UPS generated $1.8 billion in free cash flow during the period.

Capital expenditures were $417 million, including the delivery of three additional 767s, bringing our total fleet count to 226 aircraft.

In the quarter, the Company repurchased more than 7 million shares for approximately $550 million, less than expected as internal guidelines caused us to restrict purchases during the TNT acquisition negotiations.

As UPS prepares to close on this transaction, we are reviewing multiple alternatives for financing.

Although our plans are not yet finalized, we remain committed to the preservation of a strong balance sheet and our dividend approach.

And under any scenario, we do expect significant share repurchases in 2012 and beyond.

We are evaluating our options and will update you on our decision.

Regarding guidance, UPS is right where we expected to be at the end of the first quarter.

So our full-year guidance remains unchanged.

We anticipate 2012 diluted earnings per share of between $4.75 and $5, which represents a 9% to 15% increase over 2011.

I do, however, want to take a couple of minutes to provide more insight into the remaining quarters.

On a consolidated basis, second-quarter earnings per share is anticipated to grow at a similar pace to the first quarter.

Third-quarter earnings per share growth should be a bit lower due to one less operating day compared to last year.

And we expect fourth-quarter earnings to grow at the fastest pace.

This is due to the operating leverage generated by peak season volume growth and our proven ability to efficiently process e-commerce shipments.

Our guidance for the US Domestic segment remains consistent with what we told you back in January.

For the full year, we expect to generate high single digit operating profit growth.

Although our expectations are for 2% to 3% base pricing, yield growth will be muted by changes in product and customer mix.

And we do anticipate average volume growth of 3.5% to 4% with Air growing slightly faster than Ground.

Turning now to International, for the second quarter, we expect revenue trends to be similar to the first.

Local day comparisons will negatively impact reported daily volume growth, a reversal of what we saw in the first quarter.

Although we expect operating profit to improve compared to the first quarter, it will be relatively flat to last year.

Beyond the second quarter, year-over-year comparisons should improve.

For the second half of 2012, we expect operating profit growth in the mid-teens on high single digit revenue improvement.

Regarding Supply Chain & Freight, we expect second quarter revenue growth to be similar to the first quarter and operating margin to be relatively flat compared to last year.

Looking at the second half of 2012, we anticipate operating profit growth of mid to high teens on high single digit revenue growth.

So all in all, we are off to a good start to what should be an exciting year for UPS.

Although market dynamics continue to change, UPS will benefit by adapting to them.

Whether it is e-commerce growth, shifting trade patterns or demographic changes, UPS has the capabilities to meet the challenges.

Thanks for listening this morning and now Scott and I will be happy to answer your questions.

Chris Wetherbee, Citi.

Great, thanks, good morning.

Maybe a question I guess on the yield side.

I just wanted to kind of tease out a little bit of the mix kind of impact as you go forward here and think about it.

Is it 2Q and 3Q before -- 4Q, you start to see a little bit of improvement where we can actually see that core yield growing in the kind of 2% to 3% range?

Certainly the dramatic impact we have seen in our lightweight products has changed the shape of what you guys see anyway.

But the core underlying philosophy we have for pricing has not changed.

On an account by account basis, our discipline and approach is the same.

Individual customers are all being reviewed and we are executing our normal yield processes.

And if you look at Q4, really the trends, if you take out fuel surcharge changes, the trends are really pretty stable.

The only product really that sees any notable difference in changes are our Next Day product where the substantial growth of the Saver product, which is the afternoon delivery, does come in at a lower yield, but generates substantially lower cost and so profits are good.

But to answer your question directly, yes, what you'll really see, as we just really initiated the SurePost at the beginning of last year, it ramped up and really began to hit its stride in Q4.

So the year-over-year comps will moderate over the year.

In Q4, you will see more of the core underlying base rates that we've talked about.

Okay.

Thanks very much.

I appreciate it.

Nate Brochmann, William Blair.

Good morning, everyone.

Hey, I wanted to talk a little bit just on that question strategically.

I mean obviously you have the benefits of the integrated network and probably can shift pretty easily.

But what are you having to do with the network to kind of accommodate the new SurePost product and how do you kind of adjust the rest of the network to accommodate the faster pace of e-commerce that's obviously grown pretty rapidly?

I think the thing that gives us some confidence that this is actually a positive trend for UPS is that, with the deep integration we have done of these products through every component of our business, it flows through very smoothly, it utilizes existing assets and the incremental impact on the network is minimal.

As we mentioned, our hours, our miles and those things are just barely up for the quarter, even though we showed some of the strongest volume growth you have seen in some time.

Another great proof point of that is I guess if you look at the compensation and benefits, it is up 4% over year-on-year on a 4% volume increase.

So we are able to process this volume very efficiently and the incremental impact on expense and capital is very minimal.

Nate, I think the things we are doing like the My Choice helps us get that delivery there the first time.

It is the consumer taking control of it, get the delivery the first time; Kiala, the acquisition in Europe, looks at alternative delivery locations, the same thing.

We are having more deliveries, helps density as opposed to one package to one house.

So a variety of things we are doing is helping that.

So it is an interesting time for us.

We are seeing changing mix at a rate that is more frequent and more significant that you have normally seen.

The core underlying momentum of the business remains very steady and our approach to the market is unchanged.

Layering on top of that then though is this rapid expansion of products frankly that we hadn't competed for in the past.

Tom Wadewitz, JPMorgan.

Yes, good morning.

I wanted to touch on I think that kind of broader topic you're talking about here with B2C and the impact as well.

If I look at fourth quarter, I think you had a pretty big favorable impact from B2C growth and you see that in the deferred air certainly and you had a very strong incremental margin.

I calculated just simply on the Domestic Package, 52%.

It seems that your mix effect is probably similar in first quarter with a lot of growth in B2C, but the incremental margin shows up as 25% in Domestic Package.

So I wonder if you can just talk about what the differences in the two would be because I guess looking at margin performance, that kind of helps us figure out whether it is good business or how good the business is that you are bringing on?

Thank you.

It is a lot of moving parts to try to decompose incremental margin quarter-to-quarter I guess and clearly, we have talked at some length about the Q4 and the process there.

Certainly, in Q4, these trends were even more extreme and as we mentioned during December, over half of our volume in aggregate was B2C.

We feel good about the Domestic margin expansion.

We saw a full 70 basis point expansion and we expect margin expansion to continue with these trends.

And typically, Tom, you are going to see that kind of change from Q4 to Q1.

There is certainly some seasonality to that.

Would you think that incremental margin would accelerate then through 2012 or it's more of kind of fourth quarter is just different than you see in any of the other quarters?

We are more focused on overall total margin improvement than the calculation of incremental margin quarter-to-quarter.

We are confident that we are going to continue to increase the margins on the Domestic side and work towards our long-term target.

I think, as we said in January as far as our margin goals domestically, we felt extremely confident and frankly a little ahead of target right now.

Ken Hoexter, Merrill Lynch.

Good morning.

Maybe I can come at that a little bit differently.

Just if -- typically the first quarter is impacted by weather and you, obviously, didn't have that this year.

Yet the volumes in the first quarter were the highest you have posted kind of relative to the rest of the year.

So what occurs in the first quarter that pushes your overall margins to be the lowest?

Again, I just want to dig into the understanding of that incremental concept of why we see this lower given the beneficial weather environment?

Well, we did see significant improvements in margin.

Q1 historically is a tougher year.

You still have winter weather and lower aggregated volumes typically versus the year spanned overall.

I mean certainly there are some headwinds in the quarter.

Fuel was a bit of a headwind with the rise in fuel and the like and the surcharge.

We do have some increased pension expenses.

Although we will see those all year and that is in our guidance.

So we are pretty comfortable with a 70 basis point improvement.

Q1 is not typical of the entire year and we expect to see margin continuing to increase over that.

On the flipside, clearly, we did -- this was a pretty benign weather period for Q1 and that helped offset some of the things that I just mentioned.

So we are pretty pleased.

Domestically, we are getting back to margins that we have not seen since early '08.

We expect them to continue to grow.

Okay, so just to understand that, there is something in the first quarter that keeps it lower than what you see in second and third quarter despite volume declines on a relative basis in 2 and 3Q relative to what you see in the first quarter?

Historically, yes, Q1 is a challenging quarter for us in Domestic because of the weather, as is Q3 usually the most challenging quarter in the International because of European holidays.

So I think if you look, those are pretty typical seasonal patterns.

Great.

I appreciate the insight.

Thanks.

I remind people one question please, so we can get everybody on the call.

Thank you.

Ben Hartford, Baird.

Good morning, gentlemen.

I just wanted to talk about International and thinking about it over the course of the next two or three years, the margin performance in particular.

In the release, you talked about changing product mix and shifting trade patterns as being one of the big contributing factors to the margin declines year-over-year.

So just trying to get a handle around how big of an impact that is going to be given the changes in trade patterns expected going forward.

And if we can kind of talk about it irrespective of TNT and just think about kind of shorter length of haul or changing length of haul and what impact that might have over the next two or three years in terms of progress toward what you had talked about I guess late last year at the Analyst Day in terms of the ability to get back to 18% plus margins in the segment.

Yes, clearly, it is a moving target right now and we have seen, really for the last three quarters I guess, Asia be a bit of a challenge.

It at least was more or less of a breakeven this quarter.

So we did see an impact where the long-distance highest yield lanes, namely Asia to Europe and the US, were relatively flat; whereas we saw robust growth on intra-Asia and the European volumes, most of the exports, which tend to stay in the continent.

I think over the medium term, we adjust all those and our combination of an air and ground network allows us to create economic value out of both.

Certainly, the capital demands of the intra-European volume are much less than dedicated high-value assets flying 6000, 7000 miles; although it does create challenges as those transitions happen.

So we feel pretty good actually that we are in great shape to handle that.

Whether it is regional trade patterns across North America or Europe, we can adapt and certainly be profitable.

But it does have some impact on margins in the transition.

I think -- longer term, I think global trade is going to stay strong.

I don't think you're going to see long term these trade flows change that dramatically.

I think some of the Asia impact clearly has been weaker consumer demand in Europe and last year weaker consumer demand in the US, which is picking up now.

So I think we are fairly optimistic you're going to see later this year some of the Asia export numbers start picking up again.

So I think this is kind of a temporary predicament we are in right now.

And I guess just to reinforce, we are not sitting on our hands just watching these patterns change and not reacting.

We are continuing to make network adjustments.

If you look year-over-year, we have taken our Asia capacity down about 10%.

We have some additional things that have been rolled out to maintain the kind of service levels we want, but at the same time reduce our exposure.

We continue to show great growth within our European capabilities, but we are also cautious and so we have a number of operating cost initiatives there.

We have seen some increase in consumers' choice of our lower value products and so there is definitely some tradedown, which, over time, can be adjusted because things like time of day and those can reduce our costs, but that does require aggressive cost focus to get there.

And at the same time, we are looking at revenue management strategies to make sure that we are extracting the value we should and being paid for the services.

So there is a number of initiatives in the International to adapt and we do -- clearly, we are not thrilled with the Q1 performance in International.

It was a challenging quarter for us and I think for most players, but we have got pretty good plans and that is why we are confident in our results going forward.

Ed Wolfe, Wolfe Trahan.

Thanks.

Good morning, guys.

Outside of the mix issues with SurePost, it does seem like Domestic volumes, particularly the Next Day Air, particularly spiked in first quarter while the yields declined.

Is there some intentional marketshare gains you are looking for in the Next Day Air?

And can you talk to SurePost and is that all recorded within Ground or is there some of that that impacts what the yields might look like in any of the Air products?

Ed, I think there is some indirect benefit.

I mean SurePost is just one product in the portfolio and I think as we have mentioned since we first introduced this, it is part of an overall combined value proposition to customers.

So typically, for every SurePost product, there is five or six other packages through our traditional Ground service or our Air products.

So there is some portfolio benefit I guess.

But we did see the e-commerce momentum that is clearly pushing our results right now ripple through both to Air and Ground.

I think in the fourth quarter, we talked about that being a big impact on our deferred Air as a lot of the premium retailers are taking advantage of the time-definite services.

We are also seeing some of that ripple into the Next Day also and it creates surprisingly strong growth in our Next Day product.

The vast majority of that, as I said, is our Next Day Saver, which has no time-of-day commitment.

So it really looks and feels to us like a traditional Ground product, but it flies in our Air network.

So it is a good product for us; it doesn't have the kind of high delivery cost that a time-committed to Air product does.

So we are very confident that it is good volume for us and that we can handle those e-commerce shippers' needs very appropriately.

As Kurt said, clearly, the big change was I think the large online retailers looking for that competitive advantage and going to the Next Day Saver product.

We are focused on that base rate 2% to 3% increase and we are holding to that.

Jeff Kauffman, Sterne Agee.

Thank you.

Sorry about the printer sound in the background here, guys.

The big mix shifts going around, and I know the previous two questions have addressed this as well, I think you did a great job saying, okay, what is going on in Southeast Asia we think was kind of a shorter-term issue related to consumerism.

But how much of the mix shift and the shift down the product chain do you think is structural and kind of a longer-term fact of life, which it's sounding more like the US is, as opposed to just shorter term, this trade lane wasn't here or customers were just a little bit conservative with their product choices in a tough economy?

I don't think we are overly concerned on that, Jeff.

I mean clearly Europe is a bit of a wild card right now, so that is probably the area where there is the most movement.

It is also a market that is not as mature for product differentiation.

What we call our standard product in a lot of cases exceeds the delivery commitments of other companies' express products.

So there may be some settling on it, but we don't see this as a big risk.

It is more a matter of adapting and having the appropriate capacity both for the overnight services and then the definite services.

So we don't see it as a long-term risk I think; it is more of just a bit of a moving target.

And as economies -- economic conditions get challenging, we do see customers tightening up a little bit and extending their time commitments to save a little money on transportation.

But what is not changing though is the growth of B2C and that really benefits the small package industry and we are going to benefit from that.

That's where you are seeing some of the package volume grow.

Now our job is to figure out best ways to serve that and that's why we did the Kiala acquisition to help with the density on residential shipments, find alternative delivery locations.

That is why we did My Choice.

So that trend will not change going forward.

Justin Yagerman, Deutsche Bank.

Good morning.

Can you guys put some numbers around the sequential shift in B2C?

You talked about 50% of Domestic in December.

I guess I am just trying to get at this a different way and get a handle on -- back to Tom's question.

As that shift in incremental margins moved down sequentially -- I guess am trying to understand if some of this business that has come on in the B2C space is coming on at discounted pricing because you are getting good volume through your network from like an Amazon Prime or somebody like that who is able to deliver big volume and so it gives you good utilization, but you are willing to take a step down on the pricing on that product in order to get that and maybe get a foot in the door to raise pricing in a better time period.

So I'm trying to understand how that mix shift is working and the sequential change in the B2C percentage.

We are seeing some market shifts in the customer composition in the B2C space.

Clearly, there has been consolidation.

If you look back five years ago or more, there were more numerous players all vying to create marketshare in the B2C.

And we have seen both some of the big traditional retailers become much more focused on it and some of the pure plays like you mentioned.

So, no, there is absolutely a large customer impact right now.

We are seeing overall greater growth in large customers and small customers.

That does tend to reduce yields, but they also bring significant economies of scale both in direct expense and in support expense because we can connect electronically to them.

So that is a trend very much that is in place.

Larger customers in general are outperforming.

We have talked before about small business and the challenges they are facing.

Nonetheless, across the board on our revenue management, we are managing those customers and extracting base rate increases.

Again, this is not a new trend.

Back in September at our investor conference, we shared with you our long-term targets for Domestic operating profit growth and Domestic margin growth and we are right on target.

We feel very confident in those long-term targets.

Art Hatfield, Raymond James.

Thank you.

I was going to ask about the mix shift, but I am going to move on from that.

I want to move on to the margins in Supply Chain & Freight.

If I recall, and I can't remember what you said recently, but over the long haul, you always had a focus in that kind of high single digits, roughly 7% -- I think 7% to 8%.

You are kind of there in Q1.

Can you talk a little bit about how you feel about where those margins are now in Supply Chain & Freight and if you think you can get those up to double-digit levels?

Yes, thanks, Art, for giving us something else to talk about here.

We feel pretty good that this capability we have built of an integrated Supply Chain & Freight offering is continuing to pay some dividends.

Our margins were very strong in the quarter; although clearly the growth was more muted as some of the buy rates on the forwarding side have come down over time and we were able to adjust and adapt in taking costs out.

So we feel great on that front.

The distribution group is a great asset.

We are investing right now, but we have been able to maintain decent margins there even with the headwind of deep investment in healthcare.

And then our UPS Freight group clearly has a lot of opportunity going forward.

Their results were relatively flat in this quarter, but we are making great progress on differentiating ourselves and trying to strike a balance between being a disciplined yield player and still generating good growth.

And that's what makes that margin that much greater because when rate starts kicking in, then you can see better margins there.

Bill Greene, Morgan Stanley.

Good morning, guys.

Hey, I am sorry to beat this dead horse, but I just want to understand when you have conversations with your customers and they are considering moving to a SurePost or a product like that, how does this conversation go?

Because I think all of us sort of look at this and say it is not just a yield mix risk; there is a profit risk mix as well.

And I know you are aware of sort of the risks there, but how do you ensure that you can keep defenses up and keep premium Ground?

Because Ground is so good for you that I would think by offering a SurePost, you create some risk of cannibalization of your own very good business.

So how do you manage that?

How do you think about that?

Yes, I think, Bill, it is a portfolio management issue.

I mean we have always faced that issue.

As having such an integrated network, it is very easy for customers to move from 8 a.m.

Air to 10.30 to Saver to two-day Air products to Ground.

So it is not a new concept at all for us.

I think, if anything, we have had a lot of experience.

We do -- the SurePost is one piece of a puzzle, but what it really is is it is giving us now a relevance in a very lightweight into the market that, in a lot of cases, we weren't relevant for.

So there's always cannibalization risk, but, at the same time, we are continuing to differentiate our Ground product.

If you use SurePost, you can't take the advantages of the great UPS pickup and delivery network as much; you don't have the capabilities with My Choice to redirect deliveries.

So it is a multitiered strategy of differentiating the UPS Ground product, but at the same time offering a different alternative for very lightweight low-value shipments.

So is there risk to it?

Absolutely.

Do we talk about those things?

Those are critical marketing issues and the appropriate approach is what we have done from years is to create differences across our productline, price those appropriately and then let customers take advantage of it.

So the vast majority of what we are seeing is new volume coming in that we hadn't been really targeting.

Is there some transition from our basic product, which was a start on this into SurePost?

Absolutely.

But in aggregate, it is bringing more volume in all fronts across rather than cannibalizing.

Yes, okay.

Listen, thank you for the time.

David Vernon, Sanford Bernstein.

Good morning.

You talked a little bit about pulling down buybacks in the quarter.

Can we expect that to get made up in the second and third quarter?

Can you give us a little bit more insight into what you are expecting on that front?

Yes, once we got hot and heavy on the discussions with TNT, it was appropriate for us to restrict our purchases in the market.

Fortunately, we had put in some accelerated share repurchases before that started, so we were able to, at least, continue to purchase a reasonable amount of shares.

As I mentioned in my prepared remarks, we are revisiting a number of alternatives for how we finance and structure the acquisition -- pending acquisition of TNT and we do expect to reach conclusion on that in the not-too-distant future.

We intend to maintain a very strong balance sheet.

Our dividend policy will remain unchanged, but we are reviewing the purchase -- the repurchase strategy and we do expect to be a significant buyer of stock under all scenarios.

But at least at this point, we are not ready to lock in guidance as far as repurchases in the short to medium term.

We will give you guys an update on that in the not too far future.

Peter Nesvold, Jefferies.

Good morning.

So if I take a step back, earnings were up 10% year-over-year this quarter.

The midpoint of the range implies 12% earnings growth.

So you're going to grow low teens for the rest of the year.

There are a lot of different moving parts; you have identified a number of them.

And I promise I am not asking you to write my note for me, but could you rank prioritize let's say the three key bullet points?

Why is year-over-year earnings growth going to accelerate as this year progresses?

Because it does seem like you had some tailwinds, so whether it was productivity from good weather in the US or additional operating days in Asia.

Thank you.

Yes, although Andy said he would volunteer to write your note for you if you would like.

I don't think my boss would let me.

As we said, we actually are right on target for what we expected.

There may be a couple of you that got a little ahead, but there is not dramatic differences I think.

We do have some headwinds with fuel moving up a little bit this quarter and the currency wasn't particularly friendly.

Those things -- we expect currency clearly to moderate with our hedges in place, so the International gets a little bit of help there.

We do expect our ability to adjust and adapt to the International, so we are going to -- we showed negative earnings declines in Q1 for International.

We do not expect those going forward.

We are going to see improved results and the business momentum we feel is strong.

I mean we feel great about what is going on in the Domestic business, 13% profit improvement.

We feel that the momentum in the Domestic business continues unabated, so we feel good about the US economy.

And we also saw some stability and firming in Asia I think in March and into April anyway.

So we feel in general positive and think that the guidance is appropriate.

I think when we gave the guidance in January, we talked about tough comparisons for Forwarding and for International Package in the first half of the year.

Obviously, Asia fell off in August of last year.

The comps get much easier in the second half of the year for both International Package and Forwarding.

So as Kurt said, we are right on target with where we thought we would be at this point in time.

John Barnes, RBC Capital Markets.

Just in looking at this specific quarter and the next couple of quarters, can you elaborate at all -- were there any costs associated with what you have done on TNT and any costs associated with the expansion of Air Freight capacity that you mentioned in your press release around Latin America that you can quantify that would've impacted this specific quarter that might not be there on an ongoing basis?

Kind of start-up costs or one-time in nature as you kind of tackle those two issues.

Clearly, we have got a lot of people spending a lot of time in airplanes and other activities, John, but at least in the scheme of the scope of UPS, I'd hate to characterize those things as anything but negligible.

We do have expenses every day.

Clearly the Kiala acquisition, we've got work we are doing on that to build the capability across the globe.

But in the scheme of things, most of that is not material and the bulk of the expenses clearly with the potential TNT acquisition will be in Q2, Q3.

And as they get to be material, we will discuss and give you guys clarity around those.

So at this point, they are more of a rounding issue.

And then the expansion in Latin America?

Well, that is just part of our overall dynamic Air Freight network.

It does add some expense as we add capacity there, but, once again, not enough to hugely move the needle.

But that's -- I mean some of those steps we make now will position us well and that is part of why we are giving you the guidance we are going forward.

The biggest drag on international clearly was fuel cost, it was currency and slow growth out of Asia.

Brandon Oglenski, Barclays.

Good morning, everyone.

I just want to come back to this Next Day Saver product that you guys are definitely showing quite a bit of growth in.

It has been my understanding that, at least historically, some of your highest cost operations are delivering those Next Day packages to residential addresses.

So how is that levering into your network here where you can get a similar profit profile on those new packages?

That is a great question and that is really why the Saver distinction is so critical for residential.

It is very challenging for us or anybody to work their way out to a residential suburban area and make an 8 a.m.

commitment or in some cases even a 10.30 commitment.

You do what we call break trace.

You go off the optimal travel path or you have to have a dedicated driver driving it out there.

With the Saver agreement, we get it there next day guaranteed, but we have the flexibility to deliver it in the afternoon.

So we are able to deliver that package during the normal optimal trace that all of our great operational technology tells us we should.

So there is a dramatic reduction in operating expense in return for not having that early-morning commitment.

Most consumers aren't driving to get the thing first thing in the morning; if they are, then the product would not be Saver.

So it is a great way to generate Next Day Air yields, but have a minimal impact on the pickup and delivery operation and utilize our integrated network.

One other interesting anecdote, which I mentioned earlier, was we did see growth in our letter products, that we are seeing the beginning of an uptick in refinancing applications in the mortgage industry.

So that is another nice trend that has taken letters from being negative to positive in that this is the first quarter in some time that we have seen that.

David Campbell, Thompson Davis & Co.

Good morning, everybody.

During your initial comments, you said the International trends and revenue trends in the second quarter would be like the first quarter.

But there has been substantial rate increases in sea freight and some in air freight and some, as you mentioned, firming in the Asia-Pacific market.

So I am kind of surprised that the revenue growth would be the same as the first quarter.

Well, the first quarter was almost -- can almost split the first quarter into half as far as the air freight market.

We were very disappointed in January results and then February didn't totally compensate for it.

So it was a challenging period.

In March, as some of the big product launches came out, then there was an improvement in demand and yields did move up.

So it is hard -- the first quarter was really a tale of two different cycles anyway.

We've seen demand stabilize a bit; although I don't get a sense that yields are moving up significantly in the air freight industry right now.

If anything, there may be a slight decline heading forward.

Chris Ceraso, Credit Suisse.

Thanks, good morning.

I just wanted to follow up on the International business.

I know you mentioned that Asia to US and Asia to Europe was a little bit soft.

And you characterized it mainly as a consumer concern on the delivery side of that.

But are you seeing anything with your customers that are relocating any of their manufacturing facilities back to North America, for example and is there maybe some underlying structural trend that will weigh on outbound Asia volumes going forward?

I don't think so, Chris.

I mean I think there is some of that and there is -- we are seeing some manufacturing growth in the United States, but I don't think we are seeing a dramatic shift at this point in time.

I think what will drive that shift is energy prices if they climb.

I think the big change in lanes I think would be if energy prices do climb a lot, then you will see some near sourcing, but today I don't think there is a dramatic shift yet.

David Ross, Stifel Nicolaus.

Yes, good morning, gentlemen.

With UPS Freight, surprised by the tonnage declines there.

Seemed to be an easy comp quarter; industry volumes were higher, especially with yields not being too great either.

Can you talk a little bit about why the negative volumes there?

Yes, it is a combination of kind of us trying to find the right balance of growth in yield and also some tough comps to last year.

We had a pretty strong quarter last year with substantial growth in both yield and shipments and we are seeing some moving patterns.

Some of the players in the market are getting a little more aggressive.

So we are trying to find a middle ground right now as things stabilize.

So we feel good that the business units are making good progress, but we are trying to be selective and continuing to focus more on the middle-market areas than an across-the-board growth strategy.

Helane Becker, Dahlman Rose.

Thank you very much for taking my question.

So you have I think a pilot contract that came due recently.

Can you just give us an update on how the negotiations are going and what the timing is you think for resolving that?

The contract became amendable and we are having discussions, but I would say we are early on in the discussions at this point in time.

Typically, in pilot negotiations, they don't get completed until two, three years after the amendable date.

We are hoping to get it done sooner than that, but so far early in discussions and they are underway.

Tom Wadewitz, JPMorgan.

Yes, great, thank you.

I thought it would be helpful if you could give us a little breakdown in terms of what the composition of the yields were.

I know you talked about kind of 2% to 3% base price, but can you run through on let's say the Air Express.

I don't know if you want to do Air Express and Ground, but how much is price, how much is change in weight per piece and then how much is fuel impact just to give us a little better sense of what is really driving the yields.

Yes, Tom, we did see a big impact on overall weight.

The Ground was down a couple percent in aggregate and our Air products were down 4% to 5%.

So that is a fairly large piece, probably the most notable issue and that encompasses both the mix of the B2C, which tends to be lighter and the lightweight focus.

The core underlying base rates, in most cases, is 2% to 3% customer to customer.

So the changing mix both of lower service with Saver, for example, where there is a yield hit.

Although, as we mentioned, there is an offsetting price benefit.

As I mentioned, Q4 to Q1, the trends are very similar for Ground and deferred air if you take out fuel surcharge.

Next Day Air shows a bigger difference because of the substantial increases we are seeing on the Saver side and the weight being lighter.

So all in all, the base rates as we factor out those things are very steady at 2.5% to 3%.

Ground a little better than that average, Air maybe a little below that average.

But we know that on a customer-by-customer basis, as we do our customer strategies, those yield increases are happening.

But with the significant mix change, it has masked that a bit.

Mr.

David Vernon, Sanford Bernstein.

Could you maybe give us an update on the regulatory process with TNT?

I think we are making good progress.

I guess what has happened since we had our call back on March 19 and announced the deal is, one, TNT has held their annual meeting, which I thought went quite well, which I think is important to get a perspective of where their shareowners are.

We have had discussions with the regulators, a couple of meetings so far.

We're working through the process; so far so good.

Probably the next big thing is we are going to file the offer of memorandum by May 11 with the AFM, so that is a big next step.

We will also file the Form CO with the European Commission probably mid-May.

It's early in the process still, but so far so good.

Any feedback from them on divestitures or any sort of increased concern on your part on that end?

No, too early for that at this point in time.

That concludes our Q&A session for the day.

I would now like to turn the conference call back over to Mr.

Dolny.

Yes, that concludes our call for this morning.

Thanks for joining us today and have a great day.