聯合包裹運送服務公司 (UPS) 2013 Q1 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the UPS investor relations first-quarter 2013 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 my 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 and welcome to our first-quarter earnings call.

Joining me today are Scott Davis, our CEO and Kurt Kuehn, our CFO; along with Chief Operating Officer, David Abney; International President, Dan Brutto; President of US Operations, Myron Gray; and UPS Chief Sales and Marketing Officer, Alan Gershenhorn.

Before we 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 2012 Form 10-K report.

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

During the quarter, we reported a $36 million after-tax net gain related to our attempted acquisition of TNT.

This is made up of two components, a $213 million after-tax currency gain from the liquidation of a foreign subsidiary and a $177 million after-tax charge for the termination fee and other transaction-related costs.

These adjustments resulted in an after-tax benefit of $0.04 per share.

Ignoring the impact of this gain, diluted earnings per share for the first quarter were $1.04.

In our remarks today, we will refer to UPS first-quarter 2013 results, excluding these one-time 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 included in the schedules that accompanied our earnings news release.

These schedules, along with the webcast of today's call, are available on the UPS investor relations website.

Finally, as a reminder, our goal is to allow as many as possible to participate on today's call.

We weren't able to do that last quarter, so please ask only one question and then get back in the queue.

And for those of you who like five-part questions, don't be surprised when we select which part to answer.

Thanks for your cooperation.

Now let me turn it over to Scott.

Thanks, Andy and good morning.

We entered 2013 in an environment of global uncertainty, yet confident in our strategies and ability to execute.

UPS delivered another quarter of growth, reflecting the management discipline and earnings consistency you have come to expect.

The US domestic business continues to expand margins, a testament to the ability of our integrated network and operations technology to serve the fast-growing B2C market profitably.

We continue to raise the bar, differentiating our service in unique ways.

Just last week, we deployed a new enhancement to UPS My Choice, allowing our 3 million subscribers to upgrade to UPS Ground from SurePost, increasing their visibility and improving time in transit.

Although the International and Supply Chain & Freight segments are facing macro challenges, we are adapting our strategies to keep UPS on the path to long-term growth.

Emerging markets, B2C and industry-specific solutions like healthcare have enormous potential and UPS continues to invest in them.

For example, during the quarter, UPS became the first global express delivery company to have wholly-owned operations in Vietnam, a dynamic export-oriented economy.

This investment reflects our growing commitment to emerging markets, which will generate the bulk of global growth in coming decades.

In addition, leveraging the Kiala business to retail model, we launched UPS Access Point locations in the UK to better serve the growing European B2C market.

We expect 1500 locations there by the end of the summer.

Continuing this B2C strategy, in May, we will begin recruiting partner stores in Germany and expect to have more than 2000 by the end of the year and more than 4000 by the end of 2014.

And most recently, we announced the acquisition of the medical logistics company, Cemelog.

We expect the transaction to close in June.

It will add about 250,000 square feet of dedicated healthcare space in Budapest, Hungary and enable UPS to further offer customers expanded access to regional expertise reaching new patient populations.

This is yet another piece of the comprehensive capabilities we are building for our healthcare customers across Europe and the world.

While expanding capabilities, UPS also will remain dedicated to collaborating with policy leaders around the world to promote global trade and support our customers' growth initiatives.

For example, in the important US to Canada trade lane, the recently increased custom sealing for low value shipments will enable faster clearance of goods.

Also, talks were launched on a transatlantic trade and investment partnership, an opportunity to increase trade between the US and EU member states.

UPS sees a strengthening of this relationship as a way to improve US and European economies.

Speaking of economies, although the US economy is poised for growth, it is being restrained somewhat by the tax increases and sequestration implemented during the first quarter.

This will be a drag on 2013 GDP expansion with current expectations for about 2% growth.

However, we expect the small package market to grow faster than the economy.

Around the globe, the eurozone remains sluggish, though UPS volume continues to show steady growth again outperforming the economy.

In Asia, uncertainty has increased.

After a strong fourth quarter, China's GDP and industrial production growth appear to have slowed a bit.

Regardless of the mixed economic recovery, you can be sure that UPS will remain focused, execute our strategy and deliver consistent results.

As I wrap up, there are a few items I want to address related to our most important asset, our people.

First representing all UPSers, I want to extend my sincere gratitude to Dan Brutto, President of UPS International, who is retiring after 38 years of service.

Under Dan's leadership, we have introduced innovative services and technologies to help solve the needs of our customers.

His contributions will have a lasting impact on future generations of UPSers.

Dan, we wish you well in retirement.

The International business will be in good hands with Dan's replacement, Jim Barber.

Jim began his UPS career in 1985 and has been a Senior Executive of the International management team since 2004.

Most recently, he served as President of UPS Europe.

Continuing on the topic of dedication and service, in March, UPS demonstrated our commitment to the mission of supporting those that serve our country.

UPS already employs about 25,000 veterans and members of the National Guard and Reserve.

As a result of our participation in the Joining Forces program, there are 25,000 more American veterans whom we plan to make UPSers over the next five years.

Lastly, I want to provide an update on our labor negotiations.

UPS and the Teamsters have made significant progress.

We have resolved the most important issues in the contract and are optimistic that we will reach a deal very soon.

We are eager to move forward working in unison with all our employees to deliver unique, innovative products and services that help our customers prosper and enable UPS to deliver superior and consistent results.

With that, I will turn it over to Kurt to cover the financials.

Well, thanks, Scott and good morning, everyone.

The first quarter exemplifies how the UPS business model delivers earnings growth in a mixed global economic environment.

The US Domestic business continued to perform well while the International and Supply Chain segments faced some challenges.

Let's review our results by segment.

In the US Domestic, January started out of the gate fast with the post-holiday season fueling first-quarter results.

Strong demand for UPS Ground products led to daily package volume growth of 4.4%, increasing operating profit 9% and expanding operating margin by 70 basis points.

As expected, we did experience increases in pension and healthcare costs.

Although, this quarter, they were mostly offset by reduced workers' compensation expense, the result of ongoing improvements in our safety programs.

UPS results continue to be lifted by e-commerce as omni-channel strategies are playing a bigger role.

An increased focus by traditional retailers on using their brick-and-mortar locations as distribution sites is creating more pickups at retail locations for ultimate residential delivery.

As we noted last call, B2C growth and differentiated products like our returns portfolio produced surprisingly strong January volume levels.

However, daily package growth for the remainder of the quarter came in pretty much as forecast.

Revenue in the US segment increased 3.3% with balanced daily package growth across all products.

UPS base rate pricing remains consistent and in line with our long-term objectives; although that is not fully apparent in our reported yields.

The Ground revenue per piece increase of 1.5% reflects the continuing trend of higher growth in both our lighter weight B2C products and our returns portfolio.

Air revenue per piece was impacted by reduced fuel surcharges and changes in both product and customer mix.

But, overall, the US Domestic is adapting successfully to the explosive growth in e-commerce.

Through the use of proprietary technology, systems can now seamlessly merge UPS SurePost packages with other UPS packages at the point of delivery.

This and other enhancements like UPS My Choice are helping to expand margins and at the same time empowering consumers with tools to better manage their incoming shipments.

Now let's cover International.

Export volume per day grew nearly 4% in the quarter.

Asia exports were up about 8%.

European exports increased about 3%, while the US was up just slightly.

On a currency-neutral basis, export yields, down 2.5%, continue to be pressured by lighter-weight packages and an increased reliance on nonpremium products.

We expected operating profit to be flat year-over-year.

However, currency and fuel created a headwind of about $30 million as we ended the quarter $17 million below last year.

As expected, comparisons were negatively affected by the timing of Easter resulting in fewer local operating days on a year-over-year basis.

In order to address current conditions, we are implementing a number of programs to bring in-country costs in line with yield growth, generating positive operating leverage.

In the UPS Air Network, past changes we have made provided benefits.

During the first quarter, our International block hours were down 2.5%; although our exports grew by 4%.

We also responded to customers' needs with air service enhancements in Panama and Malaysia and keep in mind the UPS network efficiency is a long-term trend.

In fact, since 2008, International volume has grown significantly while block hours have remained flat.

Moving onto the Supply Chain & Freight segment, frankly, it was a tough quarter.

Revenue grew just 1% as increases in UPS Freight and Distribution were nearly offset by a decline in Forwarding.

Profit in this segment was down $23 million; although we did maintain a respectable operating margin of 6.5%.

Keep in mind that, last year, we did have a very strong quarter and benefited from the sale of a surplus facility.

As a result of overcapacity, the Forwarding market remains under pressure, especially in the Transpacific trade lanes.

UPS Asia air freight tonnage and yields were down and we had an overall 9% decline in revenue.

Cost containment and growth in our Ocean business could not make up the shortfall.

In the Distribution business, UPS's integrated services global reach and specialized capabilities supported a revenue increase of about 10%.

The Healthcare segment remains a growth engine; although margin expansion was limited by the deployment of technology and investments in infrastructure, including new healthcare facilities in both North America and Europe.

At UPS Freight, shipment and yield growth combined with productivity improvements helped grow profits and expand margins.

However, profitability in this business unit is still not where we would like it to be.

Now let's review our financial strength.

UPS generated $1.4 billion in free cash flow this quarter after capital expenditures of $453 million.

In the quarter, we paid $572 million in dividends, an increase of almost 9% per share.

In addition, we repurchased 12.2 million shares for approximately $1 billion.

In February, reflecting confidence in our cash outlook, the Board of Directors reauthorized UPS's share repurchase program for $10 billion and we are on track to achieve our target of $4 billion for 2013.

We anticipate an average share count of about 952 million shares for the second quarter.

Lastly, let's discuss guidance.

Even though there are some mixed economic signals, we are reaffirming our full-year guidance for earnings per share of $4.80 to $5.06.

As you have just heard, first-quarter results were a little better than we had expected due to the strong January in the US Domestic segment.

However, we anticipate that that benefit will be pretty much offset going forward due to the negative trends in global freight markets.

As a result, in Supply Chain & Freight, we are reducing our full-year guidance for revenue and are now expecting low to mid-single digit growth.

We anticipate operating margin of approximately 8%.

To give you some shape on the second quarter, we expect low single digit earnings per share growth.

In the US Domestic segment, operating margin and profit should be relatively flat due to the continued headwind from pension expense and the significant benefit last year from the fuel surcharge lag.

Keep in mind, as we get beyond the second quarter, we expect profit growth and margin expansion in the segment.

In Supply Chain & Freight, we expect operating profit will most likely be down on a year-over-year basis, but, for International, we anticipate both profit growth and margin expansion over last year as we see some pull through from our continued network optimization and in-country initiatives.

So to wrap it up, UPS will continue to work hard and adapt, demonstrating the power of our business model across a wide range of economic conditions and changing market dynamics.

Therefore, we are maintaining our guidance and anticipate full-year earnings per share to grow 6% to 12% over 2012.

With that, we would now like to open the call up for your questions.

(Operator Instructions).

Brandon Oglenski, Barclays.

Yes, good morning, everyone.

I wanted to ask about your Domestic profitability and how, even with the change in UPS My Choice, being able to ship SurePost packages to your Ground network, how is that increasing efficiency for you guys and the profitability outlook for the segment?

Yes, great, the My Choice is kind of a win-win situation.

It is a positive for customers and it gives them control and it is a positive for our operations because it allows us to pre-notify customers that packages are arriving.

Myron, maybe you can talk a little bit about how that is helping operations.

Yes, in a previous call, we talked about how technology has continued to enable us to adapt and adjust and keep strong margins.

One recent one that we spoke about was residential consolidation where, in the fourth quarter, we were able to adjust and approximately 15% of our SurePost packages were then redirected with a UPS driver, which certainly enhanced our customer experience and allowed us to continue to reduce costs.

Right.

So we will be continuing to leverage technology to both delight customers and maintain our economic profitability.

The real focus there is just increasing density and we are doing a very good job of increasing density on the B2C.

Kevin Sterling, BB&T Capital Markets.

Thank you, good morning, gentlemen.

Kurt or Scott, maybe you could just touch on the type of trends you are seeing, particularly on the International Package side in April?

Well, I would just say generally the International Package volume flows have picked up in the fourth quarter last year and really carried through the first quarter and we expect some of the same going forward the rest of the year.

The big change, in the middle two quarters last year, we had negative trade flows.

This year, what we are seeing, we think, global trade growing faster than global GDP and we saw both in the fourth quarter and the first quarter strong growth out of Asia, upper single-digit growth, both to the US and to Europe.

So those trade flows were very weak last year.

They are better this year.

So on the Package side, we feel pretty good.

The International air freight side, while the tonnage is growing slightly, still way too much capacity and yields are weak.

Okay, thank you.

Tom Wadewitz, JPMorgan.

Good morning, it's Alex Johnson on for Tom.

So congratulations on the Healthcare acquisition.

I just was curious if you can give us an update maybe pro forma what is -- you talk a lot about Healthcare.

What is the mix of Healthcare in your business and kind of what is the growth rate that we should be thinking about?

We have seen healthcare in aggregate grow double digits now really for the last several years since we targeted this as an initiative.

One of the things we like most about Healthcare is that it does fully utilize really the entire breadth of the Company.

On the Distribution side, we have got millions of square feet of Healthcare-compliant space.

We have developed Healthcare-compliant forwarding with cold chain capabilities and re-icing at airports and all kinds of good stuff and then our world-class small package network with things like delivery intercept and proactive notification, we can maintain high-quality oversight.

And even our UPS Freight group has benefited from it.

So it is a very diverse and broad set of products and that is one of the things that keeps us so excited about it is it allows us to bring the entire breadth of the Company for customers' benefit.

We see really the next 10 years growth similar to the last 10 years and Cemelog really is just another piece of the puzzle that is going to help us in Central and Eastern Europe and we are very excited about it.

Art Hatfield, Raymond James.

Thank you for taking my question.

Just a real quick one.

Kurt, in your guidance, you had commented on a bunch of different things, but I thought I heard you say that you expected low single digit growth in EPS in Q2.

Did I mishear that and if so, can you correct me what I should've heard?

Right.

No, that is -- we do think the second quarter will show profit growth, but it will be in the low to mid-single digits.

The International, as we said, we expect to see a good strong bounce back.

Supply Chain is still facing some challenges and there is a bit of a year-over-year comp issue on the Domestic side where the second quarter of last year on the Domestic side, we had some benefits, variable comp reductions and some of those things.

But, in general, we are still cranking along just fine.

We just wanted to give you guys a little bit of the quarter-to-quarter shape.

We had a good fuel benefit last year too in second quarter, right?

Right, thank you.

That's helpful.

Ken Hoexter, Merrill Lynch.

Great, good morning.

Kurt, I have one question, but 12 parts.

Uh-oh.

Ken, that gives me lots of choices then.

Maybe, Scott, we are hearing a lot of -- maybe some of the e-tailers, you're talking about the growth of e-commerce and a lot of announcements about same-day deliveries from some of these e-tailers or potential of it.

Maybe you can address the potential for UPS to participate in that market or if you have got trials or anything of the such.

Well, I will start it off, Ken and let Alan maybe kick in.

But we certainly have experimented with this with certain customers.

I think that is what it is right now is an experiment, trying it out.

I am not sure yet that the economic feasibility is going to be there for this to be a big service ongoing.

But, Alan, you may want to dig into that a little bit.

Yes, I think same-day is really going to be a niche offering that's out there.

The real story is about omni-channel.

We have got about 25 or more major retailers that are either using or moving to the UPS omni-channel solutions and it is really about leveraging UPS's shipping and visibility technologies.

It helps enable a seamless connectivity between the retailers' websites, the fulfillment warehouses, the brick-and-mortar stores and the consumers and returns.

It also -- for the retailer, it enables inventory optimization and less markdowns and for the consumers, it enables faster click-to-deliver times and greater access to retailer inventory and a broader variety.

So that is really one of the big stories that is driving e-commerce and why customers are coming to UPS.

Chris Ceraso, Credit Suisse.

Thanks, good morning.

I am wondering if you guys are having any issues with the FAA and air traffic control disruptions because of sequestration?

Is that having a productivity impact on your US business at all?

Yes, we will have David respond on that.

So far, it has had very limited impact and we have been working with the FAA and working with the Department of Homeland Security to make sure that continues.

We do disagree with furloughing of the air traffic controllers and we also disagree on certain closing of night operations.

We think there are more efficient ways that they can cut costs that will not impede commerce and I think that more and more people are agreeing with that as we go through.

It sounded like maybe some breakthroughs overnight too.

So hopefully we will see some corrections on that in the near term.

Okay, thanks.

David Vernon, Bernstein.

So when you think about the capital budget kind of looking forward from here, what types of projects are you guys prioritizing either internally or from an organic perspective?

Like what should we be thinking about from a uses of capital outside of the increase buyback going forward?

Well, clearly, our top priority for capital deployment is to grow the business.

As you know, our physical capabilities, our aircraft are in great shape and we have limited need for replacement assets.

So we are very focused on growth capital.

You saw some examples of that in our announcement with the purchase of the Cemelog, the healthcare company, so that is our top priority and we are going to be opportunistic around the world really to build a platform in emerging markets and other areas.

Yes, I think emerging markets covers an area that we are going to invest in.

You saw us buy our partnership out in Vietnam.

We are 100% owned in Vietnam in the quarter.

There has been more opportunities like that as we go forward.

And like the previous question, global B2C gives us lots of opportunities and we will see areas where we can make investments, do acquisitions to help enhance that product.

Kelly Dougherty, Macquarie.

Hi, guys.

Thanks for taking the question.

Just wondering if you can give us some color on the scenarios that got you to the high versus the low end of guidance.

Maybe what you are thinking about from a macro backdrop to get you to one end or the other for the full year?

Sure, Kelly.

Well, certainly, the overall global economic environment will be a huge driver of it.

Domestically, we are fairly confident that the US economy will be stable if unexciting.

Internationally, the trade flows have been very volatile and so we have to stay attuned to that.

So I think the broad economic environment would be the biggest single driver of the variability; although, the other is certainly the attitude of consumers.

As B2C becomes a bigger part of our business, then growth in that environment becomes increasingly important.

And I think the way we talked about it earlier too is the International air freight market, while the tonnage is growing slightly, we'd like to see that get more in balance with capacity.

Dan, you may talk about it.

It's a challenging market right now.

Yes, I mean, right now, certainly out of Asia, there is more capacity, so customers are taking advantage of obviously spot rates.

I think we still have the best option for our customers in that we can move some of that freight into our own aircraft to fully utilize and right now, certainly are margins are up because we are fully utilizing our aircraft.

We are still running a 13/1 margin in a difficult marketplace and that is primarily Internationally because of the utilization of our own aircraft in this hybrid model where we can move in our Forwarding business when we need space on our aircraft and move it back when the market expands.

Jeff Kauffman, Sterne Agee.

Thank you very much and congratulations guys.

I want to follow up on an earlier question.

You are announcing a Healthcare acquisition every other quarter.

We talked a little bit about Kiala in the beginning of the quarter.

Can you help put together the whole mosaic for us in terms of what you're doing in Europe, what you are doing in Healthcare and kind of what the bigger picture looks like down the road in terms of how this helps drive shareholder value and earnings?

Well, I think, Jeff, we talked about -- I think those are two of the big areas that we are going to continue to expand in.

We know the global B2C market is going to grow at a ferocious pace for the next couple of decades.

There is just lots of opportunities.

The US I think is leading the way.

Certainly we are leading the way with answers to that marketplace with My Choice and other offerings.

But Europe is starting to -- the percentage of business that is B2C is starting to grow.

Asia will grow at a very fast pace.

So we just need to put together the pieces of the puzzle to fill out the customer needs and we are doing that and we are doing that in the US.

We did it with Kiala in Europe.

We are taking some of the Kiala applications to other places around the world that will utilize that.

So lots of opportunities.

Dan, you look like you're --.

Yes, I would say, on the whole Healthcare, we are building out primarily on the backs of our customers that are forcing us into other areas of the world and Cemelog is a great example of that.

Many of our large multinational healthcare customers have requested certainly that we get into areas such as Central and Eastern Europe.

We also opened up in Australia.

I am going to be at a ribbon-cutting for a building later this month in Hangzhou, China.

So as our Healthcare expands throughout the world, we will follow where our customers' needs are and many of those needs are in emerging markets and certainly we will set up a platform to serve them around the world in those areas.

And with the acquisition of Cemelog, we now have over 6.5 million square feet dedicated to Healthcare and that is spread out throughout the world.

And we are in the early innings, Jeff, in that.

Chris Wetherbee, Citi.

Thanks, good morning.

Maybe a quick question on B2B.

Just kind of curious how B2B volumes trended during the quarter maybe.

What do you think about the outlook for the rest of the year?

Do you see that coming back at all as you move out into the second half of 2013?

Yes, B2B volume remains fairly sluggish and so that is an area that -- clearly, we are hopeful that the industrial base of the US catches fire a little more.

We think there are some fundamentals.

The other thing we are seeing though is that the omni-channel that Alan referred to, actually when it is done well, does drive B2B volume because, in effect, your forward stocking inventory in the stores has to be replenished.

It shrink shipment sizes and so the state-of-the-art retailers are now actually doing more frequent deliveries to stores to keep inventories balanced.

In the segments we saw the growth in certainly the last couple quarters were Retail and Fire and some Healthcare and Manufacturing we think of for B2B primarily has been weak and is still negative and even though we see a renaissance of Manufacturing coming in the US, it is not quite there yet.

That's helpful.

Thank you.

Justin Yagerman, Deutsche Bank.

Hey, good morning, guys.

I wanted to ask, you referenced e-commerce returns in the release and just wanted to get a sense of how that business is growing and really how the economics compare to the original leg of that trip?

Is it better or worse?

When you think about the final mile, obviously the customer is bringing that to you.

So I would think that there might be better economics there.

But I'm just kind of curious how you guys think about that.

It is certainly an area that we are very focused on.

We have invested a lot of money and technology to create a very comprehensive set of solutions for retailers.

Alan, maybe you could talk a little bit about it.

Yes, as you heard earlier, the vast majority of our growth was driven by e-commerce in the first quarter.

And easy returns are obviously an important part of driving consumers to shop online at a retail website.

We have got a very robust portfolio that provides maximum efficiency, visibility and control for the retailer.

And returns are essentially like you said, a B2B move that is created by B2C.

Most of the time, these returns are dropped off by the consumer at a UPS dropbox or at a UPS Store, so you have very dense pickups and then you obviously have very dense deliveries back to the retailers.

So I would just add that our returns are up about 10% year-over-year in the first quarter.

As you know, Justin, dense is good.

Yes, that is kind of what I inferred.

Thanks.

William Greene, Morgan Stanley.

Yes, hi there, good morning.

I wanted to follow up on, Scott, some of the comments you made on sort of working with some of these e-commerce retailers on same-store -- or sorry same-day delivery and whatnot.

Some of the questions I get asked out though are whether these same retailers are going to try to build a network that doesn't incorporate the current parcel carriers in ways that they could actually end up being a competitor.

Can you just comment how do you think about that risk and how do you address it?

Well, we always evaluate risk and we always looked at how do we serve customers the best way possible.

We've certainly evaluated that.

I think it is very difficult to replicate the network that UPS has built over the 105 years we have been around.

So while we are not complacent saying there is not better solutions out there, we will continue to invest in the technology and have the best offering out there.

And right now, I think we are working very closely with all the large customers you are talking about and driving the solutions.

Alan, you work with it every day.

Any thoughts?

Yes, I would just say that, maybe to the earlier question about what we are doing with B2C in Retail and Healthcare, we have got a very focused strategy on the industry segments where we are seeing most of the growth and the opportunity.

And certainly Retail and Healthcare are two of those.

So we're very focused on creating solutions for both brick-and-mortar and e-tail only retailers out there.

On this whole omni-channel, getting back to that, what the retail is really like about the UPS solution, in addition to the networking of the technology for shipping and visibility at all their stores is the one-driver pickup.

UPS can come in there at the end of day or really any time during the day or evening and pick up both their Ground, Air and their SurePost packages and provide in the local area next-day delivery for them.

So we do think we have got a real advantage there.

And I think Alan highlights it there.

We think that the real issue will become more next-day fulfillment rather than same-day; although, clearly, we will help customers do whatever they need.

Ben Hartford, Baird.

Good morning.

Can you guys maybe provide a little bit of perspective on the weakness in the declines in the tonnage market that we see within Freight Forwarding and the weakness out of Asia that is expected relative to the growth of 8% in the International Package segment, specifically the daily export volume growth?

The divergence has been there for several quarters, but I'm just wondering if there is anything specific to what you guys are doing that is causing that divergence?

Are you parcelizing more freight, putting it into the export volume market?

Is there something else going on that would help characterize that discrepancy?

Thanks.

Yes, I guess -- this is Dan Brutto.

First, I would say that there is overcapacity out of the market primarily in Asia because of the belly space that the 777s have allowed.

So you have now got upsized newer planes that have belly space.

So at this stage of the game, that would be one issue.

That would describe kind of the price pressure.

The second issue is that the manufacturer out of Asia is not what it was.

Things are lighter, so there is not as much freight.

Last year, if I look at comps last year, there was a couple of big releases on the technology side that drove up Freight.

Those releases did not occur in the first quarter of this year.

Going forward, we think that that is probably going to continue for the short/medium term.

On the other hand, an area that doesn't have overcapacity is Ocean and our Ocean business is very robust.

In fact, on the less-than-container load, that business is up over 26% for the first quarter.

We added 300 more destinations as of February.

So we think that that is certainly not going to make up the variance in International air freight, but we think that that is a good product that we put in the market.

So all in all, we think that it's going to be a little rocky road for at least the next quarter in International air freight until the manufacturing gets back and the capacity in the marketplace gets back to more normal.

Nate Brochmann, William Blair & Company.

Good morning, everyone.

Hey, actually just to follow up on that question and I think that is kind of a good thought-provoking thing a little bit longer term.

I mean certainly, like you say, Dan, the manufacturers kind of a little bit weak and a lot of that is probably tied to consumption near term.

But longer term, how do you think about like the International air freight market in terms of how much of the pressure today is cyclical versus secular in terms of how far down the curve are we on these lower package weights or the shift from Air to Ocean or just the change in behavior as it relates to maybe some US near-shoring?

Just kind of wanted to get your bigger-picture thoughts on where we stand with all that?

So Nate, I would say that the whole idea of innovative products is always going to continue and those products are going to require air freight to move those around the world.

As the world shifts and we look at what is manufactured in China, now we see a lot of that manufacturing going down to Vietnam.

After Vietnam, could be Indonesia.

After Indonesia, India.

So we are very bullish on the fact that there will be manufacturing all around the world.

Global trade will certainly increase; although it has been a little choppy here for the last few quarters and that will require air freight.

And that is perfectly in our sweet spot.

The other thing that I would say is, when the market does contract as it has, we have our own air fleet, so we can move freight into our air fleet.

When the market picks back up, we will move that same freight and serve our customers through the use of flying on other folks' planes.

So we are very bullish in the future about air freight continuing to be a big part of our portfolio.

John Barnes, RBC Capital Markets.

Hey, good morning, guys.

Nice quarter.

A quick question just to follow up on the B2C discussion.

Can you just talk a little bit about the e-commerce customers that you are working with, how much success are you having in making UPS the sole shipping option for that retailer versus just being thrown up as one of a portfolio of companies that offer the service to the end customer?

Well, John, certainly, it is our goal to differentiate and I think we think we have done a great job with that being out a year and a half ahead of our competitors with something like My Choice.

So that is the ultimate solution to that, but, Alan, any other thoughts you have on that?

Yes, certainly, something like UPS My Choice is out there to drive consumer preference.

It is extremely relevant to both our retailers and our consumers and unlike our competitor, most of our residential packages get delivered by our UPS driver.

As Scott mentioned I think in the opening here that our My Choice consumers now have the option to initiate a SurePost upgrade to UPS Ground residential service.

So now essentially all UPS residential deliveries, whether they are Air, Ground, or SurePost, are eligible for My Choice delivery options and that is really the power of the UPS integrated network.

The other point I would make is that the offerings like Kiala, which is now being rebranded as UPS Access Point that we have over there in Europe, that also begins to create that preference and you will see UPS Access Point branded on the retailers' website and consumers able to pick that particular service under the UPS brand.

So we are very focused on establishing both consumer and retailer preference for UPS services and really through value creation.

Peter Nesvold, Jefferies.

Good morning.

I was hoping to clarify the guidance.

So for the year, the midpoint implies about 9% EPS growth.

If I look at the first-year results and take into perspective the second-quarter outlook, it seems to suggest that you have to grow kind of 12% to 14% in the back half of the year to hit the midpoint of the range.

Now clearly the year-ago comps are easier in the second half.

Is it primarily -- would the acceleration in growth year-over-year be primarily on the easier year-ago comps or is there something that sequentially you should see more than a normal seasonal uplift?

Thanks.

We have been seeing historically Q4 get stronger and stronger as B2C plays a bigger role.

So that is part of a seasonal evolution to where we are seeing that happen.

We do have an extra working day in Q3.

The International group has got a lot of initiatives that are being rolled into place.

Air Network, we have done a lot of adjusting to and now that we are doing a number of things on the in-country costs.

So, no, your arithmetic is correct that absolutely we are maintaining our full-year guidance and we do expect to see stronger and stronger results as the years goes on based on all those factors.

I think particularly Forwarding, we had a good start to last year in the Forwarding side and had a bad finish and we expect to have good comparisons on the Forwarding side the second half of the year.

Scott Group, Wolfe Trahan.

Hey, thanks.

Morning, guys.

So hoping for a little bit more color on some of the mix and trade-down issues going on at International Package.

Is there a way we can think about what percentage of Package now internationally is these nonpremium products and where do you think it goes?

And maybe along those lines, what can you do to mitigate the impact of that or maybe even change the customer behavior?

Yes, I will let Dan expand a little bit; although you do have to be careful when we talk about nonpremium products.

Those are defined against a lot of our competitors.

Those are still time or date-definite what would be considered Express products.

So we do offer a broad portfolio and we have seen customers move up and down.

So I wouldn't put too strong a point on it as a long-term issue, but, Dan?

Yes, I guess, Kurt, just to expand a little bit, we call a nonpremium product our Trans-Border product in Europe, which, for us, is very profitable and growing very well even in a tough European economy.

Our premium product, Worldwide Express, I think Worldwide, we have seen some trade-down for customers to use our Worldwide Expedited product, but, by all means, we are very successful in our standard product.

They are profitable, they are strong and we are confident that the Worldwide Express products will come back as the world economies strengthen over the year.

And I think, Scott, maybe just to put a final point on it, UPS's success has been on finding cost-effective, yet profitable ways for us to meet the customers' needs when they do need to trade down.

So we are not trying to upsell.

We are building an integrated network and if the customer gives us an extra day to get the product somewhere, we will take advantage of that either through leveraging other forms of transportation or taking advantage of that from an economic perspective.

So give us a little time to adapt and the integrated UPS network will continue to generate high returns.

That's right.

I guess do you think that there is more of that to go though in terms of more shifting to some of the -- an extra day kind of business?

Scott, I think we made it pretty clear; we will move on to the next question.

David Ross, Stifel.

Good morning, gentlemen.

UPS Freight saw very nice tonnage per day growth in the first quarter taking marketshare.

Can you talk about what drove those gains and what still needs to be done to get back to your target LTL margin level?

Great.

I will let Myron talk to that.

Good morning, David.

While we did experience continued growth in our Freight segment, we continue to be disappointed in that business unit.

We have grown it by offering integrated solutions for that customer segment and we continue to expect slow but steady growth in the Freight group.

Clearly, the technology that UPS has integrated is being a real differentiator on the market side.

Having shipping systems, visibility systems, pickup confirmation, the ability to have a.m.

guaranteed deliveries, all of those things that we have been so successful within our Package environment is differentiating us on the Freight side; although, as Myron says, we've still got some work to do to get the margins up to our targets.

Scott Schneeberger, Oppenheimer.

Thanks, good morning.

In US Domestic, congratulations on your 70 basis points of operating margin expansion.

Could you speak to the stronger driver being B2C or B2B?

Just a little more elaboration on that?

And was weather much of an impact in US Domestic in February or March?

Well, given my executive privilege to pick one, I will let Myron talk about weather.

Fortunately, this is pretty much an all-weather business and we have the ability to adapt to changing situations and the US operating unit has done a very good job of making those adjustments every year.

In terms of B2B or B2C, as we spoke earlier, the technology that we have deployed has just continued to enable us to adapt to the changing business, whether they are heavyweight packages or small B2C retail customers and continue to expand margins.

So we feel very confident about our abilities moving forward.

Yes, Myron is being humble.

This was one of the hardest quarters in recent history for weather and operations, just continued storms just about everywhere and even April, we are suffering with the floods a bit, but they've managed to execute really well in that environment.

Keith Schoonmaker, Morningstar.

Thanks, good morning.

Normally, we have thought of Europe as representing about half of your International business, quite material even with the current standalone network.

Would you share your observations on the evolution of consumer shipping trends in the two markets, US versus EU, at these different stages of maybe adaption and recovery perhaps also including the B2B/B2C split?

Yes, clearly, we have seen tremendous evolution and innovation in both areas.

We do think that Europe is migrating very quickly, perhaps a little earlier stage as far as maturity of the market.

I know, Dan, you could talk to that.

Yes, I would say Europe is probably three to five years behind the US in the whole B2C.

Depending on what country you're in, I think there are some countries in Europe such as France, UK are moving a little quicker and I think that is primarily the reason we bought Kiala because technology and turning a B2C into a B2R is very important for us to be successful.

So we are certainly, from an operational standpoint and a customer standpoint, preparing for more B2C growth in Europe.

We think there will be some acceleration and certainly we are preparing operationally and through our technology to take advantage of that when it comes up.

To Dan's point, we are over 40% B2C in the US right now and probably our biggest countries in Europe are maybe 25% B2C.

So that gives you a flavor for where they are at this point in time.

Yes, I was just going to add that our early adoption of having Trans-Border services throughout Europe has certainly paid significant dividends over the years and how we are connecting the countries and certainly in the B2C market with solutions like Kiala and other ones to come, our ability to network those countries so that shoppers can shop in any country and receive it back in their home country is going to be a real advantage for us and that is what we're focused on.

Jack Atkins, Stevens.

Good morning, guys and thanks for taking my questions.

Just if we could kind of go back to the Freight Forwarding business for a moment, you talked about the challenges you are facing there.

Could you maybe comment on the profitability trends you have been seeing on a per-shipment basis?

We have heard of increasing competitive pressures from other forwarders in this market, especially in the Transpacific.

Just sort of curious if that is part of the headwinds you are facing and if so, how do you address that?

Yes, absolutely.

Dan?

Yes, I would say -- thanks, Kurt.

The profitability in the air freight has obviously been squeezed.

I think a lot of customers, because there is overcapacity in the market, have gone out with spot rates and outside the contract just because the capacity that is in the marketplace.

We see that continuing at least through the next quarter, but think that it will get back to more normalcy at the end of the year.

On the other hand, our Ocean profit has been doing very well, not enough to make up the International air freight, but this premium less-than-containerload Ocean product we think is very successful.

We have a supplier management -- again, we couple technologies so a customer can -- instead of getting a whole containerload get less than containerload.

We have great road network in the US that we can feed and accelerate the time that the Ocean shipment actually gets into the US market and even the European market.

Helane Becker, Cowen Securities.

Thanks very much.

Hi, everybody.

Thanks for the time.

So this is going to be a really easy question for you.

Does your guidance for the rest of the year include any changes in compensation or productivity as a result of the Teamster contract being concluded?

No, we have really not factored in anything dramatically different.

We have kind of trended as if the ongoing numbers were similar to previous trends in our basic guidance.

And maybe Scott can talk a little bit on the status of the contract negotiations.

No, I think we are quite pleased with the progress to date on the contract.

We have told our customers that we want to get this done earlier than usual.

Teamsters agree.

It is important for our customers to get it done.

We have taken on the tough issues, issues like pension, issues like healthcare, particularly.

We are getting very close to getting this thing done and we feel good about the outlook, but we will hopefully have something to announce before you know it.

Great.

Thank you very much.

David Vernon, Bernstein.

Dan, you had mentioned the capacity issue on belly space.

I guess I wanted to get your guys' perspective on the main deck freighter capacity in the Transpacific.

With rates being where they are, you'd think that that capacity would start to come down.

We know FedEx took a service down.

You guys did some belt-tightening.

Are you starting to see any of the main deck freighter operators in the Transpacific respond to that lower rate environment and if not, how long do you think that will take?

Yes, I mean, as of this point, there are, outside of some Chinese carriers such as Jade that have got four 740s, 7400s sitting on the fence at Shenzhen.

There is a lot of talk.

I know Cafe has certainly talked about it.

There has been some large carriers that have talked about, if the rates continue to be low, obviously, we had that situation in 2009 where you saw some folks take down some aircraft.

It is not at that stage yet.

I would say from a UPS standpoint, we have taken 10% of our capacity year-over-year out of the Transpacific lane and that is also 20% down from the first quarter in 2011.

So I think everyone is adjusting more frequencies today instead of taking whole planes down.

Kelly Dougherty, Macquarie.

Hi, thanks for taking the question.

I just wanted to see if you could give us a sense -- obviously, with a 70 basis point improvement in the US Domestic business this quarter, how much more do you think you can improve in that business given the B2C mix, but then some technology and other initiatives you guys have in the works?

Clearly, we set out long-term targets at our investor conference of margins of 14% to 15%.

We are making good progress towards that and I am not going to -- there is no specific numbers other than that I am going to share with you.

Although you are seeing great changes, you are seeing innovation driving both customer satisfaction and improved margins and we will keep investing deeply in operations technology.

There is a lot more good stuff to come on that that we will be sharing with you.

So there is still more to come and I think we feel pretty good on the business overall.

Thanks very much.

That concludes our Q&A session for today.

Now I will turn the program back over to Mr. Dolny.

Please go ahead, sir.

Yes, I'm going to turn it over to Scott.

I think we got off to a good start in 2013, but as you probably detected from a lot of our answers, we are still constructively dissatisfied.

We want to do better and we expect to do better as we go forward.

But since this is Dan's last call, I am going to let Dan Brutto have the last word today.

Dan?

Well, thanks, Scott.

It has been a great 38 years with UPS starting in Chicago in 1975 when we were essentially just a ground delivery company and what a journey it has been to now be an international company serving 220 countries and territories with Air products, Freight Forwarding products, Distribution products, Brokerage products, so it has been an outstanding run.

The foundation of UPS is solid.

We have a great management team and I am very confident Jim Barber and our International team will lead us on to more growth and certainly better opportunities with our great customer base.

Thanks, Scott.

All right.

That's the end of our call and thanks for joining us today.