聯合包裹運送服務公司 (UPS) 2013 Q3 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 third-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 our pleasure to turn the floor over to our host, Mr. Andy Dolny, UPS Treasurer and Investor Relations Officer.

Sir, the floor is yours.

Good morning and welcome to UPS's third-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 Jim Barber, 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 and 2013 10-Q reports.

These reports are available on the UPS Investor Relations website and from the Securities and Exchange Commission.

In our remarks today, all quarterly and full-year comments and comparisons to 2012 will refer to adjusted results.

In addition, we will discuss UPS's free cash flow, which is a non-GAAP financial measure.

The webcast of today's call, along with the reconciliation of free cash flow and adjusted results, are available on the UPS Investor Relations website.

Finally, our goal is to allow as many as possible to participate on today's call, so please ask only one question and then get back in the queue.

Thanks for your cooperation.

Now let me turn it over to Scott.

Thanks and good morning.

Our third-quarter results improved from the first half of the year, even though our business faced similar market dynamics.

Customers continue to streamline their supply chains, allowing UPS to meet their needs with our integrated solutions and logistics expertise.

The U.S. Domestic business continues to benefit from e-commerce, while International experienced strong demand for UPS deferred products.

Performance in our Supply Chain & Freight segment improved, primarily from ocean forwarding, brokerage and North American airfreight results.

Regarding the global economic environment, forecasts for growth in the EU have been revised upward as it begins to recover from recession.

However, Asian economic projections are mixed, as expansion in Japan has been offset somewhat by slowing China growth.

Here in the US, uncertainty created by the partial shutdown of the US Government has created some anxiety.

While the impact to UPS on the surface appears to be minimal, some experts predict the shutdown will be a drag on fourth-quarter GDP.

Though the shutdown is behind us, temporary solutions like sequestration and government furloughs only delay the inevitable.

Hitting the snooze button on our fiscal problems only extends uncertainty and dampens economic growth.

No business can survive without carefully managing its resources and our country can't either.

Now is the time for the government to fix the debt and put America's house in order.

Although our political leaders struggle to effectively implement economic policy, companies worldwide are successfully adapting to evolving market conditions and evaluating all options to improve their bottom lines.

And UPS can help with our comprehensive portfolio of capabilities.

We are built to meet the needs of business, whether it is via ground, air or ocean.

An integral part of developing these solutions is listening to our customers.

For example, when Latin American executives told us they expected strong growth in their region, we took action.

During the quarter, UPS launched the industry's first guaranteed standard service from the US to Mexico.

By leveraging our extensive network and brokerage expertise, UPS now provides a seamless delivery experience for southbound shipments.

The Company also expanded our preferred LCL Ocean product to serve the Asia-to-Mexico lane.

In addition, UPS has opened new express service centers to serve the fast-growing region of northern Mexico.

Continuing our commitment to invest across the portfolio and around the world, we opened distribution facilities in Chengdu and Shanghai, China, further expanding our capabilities.

Now I want to take a moment to update you on our labor negotiations.

As we announced back in the summer, our employees approved the national master, which covers the key elements of the contract, wages, pension and healthcare.

Work continues on the open supplements.

In the last month, progress has been made, with a majority receiving approval.

This includes the largest area, the central region, and other large areas, like New York.

The remaining supplements will go out soon, and we are confident in their approval.

UPS will continue to work to expedite ratification so our employees can start receiving improved wages and benefits in the new contract.

Until then, the current agreements remain in place.

Now let me turn it over to Kurt to provide more insight into UPS third-quarter results.

Well, thanks, and good morning, everyone.

As Scott noted, while supply chains are becoming more and more efficient, they are increasing in their complexity.

UPS's third-quarter results reflect the Company's ability to adapt to the shifting demands of our customers around the world.

Earnings per share improved 9.4% on revenue growth of 3.4%.

These are solid results considering market trends and the global economic environment.

Now let's review the segment results.

U.S. Domestic had a good quarter.

Operating profit climbed 16% and margin expanded 140 basis points to 14.4%.

Volume growth, improved efficiency, including savings from UPS safety initiatives, and one additional operating day contributed to the success.

In addition, while the fuel surcharge lag was a slight drag for the quarter, on a year-over-year basis it was a benefit.

Revenue was up 5% on a daily package volume increase of 2.3%, as e-commerce continues to thrive.

B2C shipments were up 5% during the quarter, and we saw an increase in B2B volumes also, mainly from retail shippers.

Looking at the product level, daily Ground volume was up 3% and deferred air improved 2.3%.

Next Day Air volume declined 3.3%, reflecting losses of letter volume.

Further contributing to slower air growth, some shippers have moved their distribution facilities closer to their customers, enabling the greater use of UPS Ground to obtain shorter time in transit.

Revenue per piece increased 1%, reflecting base rate increases that were offset by lower fuel surcharges, lighter average weight and changes in product and customer mix.

UPS Next Day Air yield was 3% higher, while Ground was up 1.9%.

Deferred yield declined 2%, primarily due to significantly lower average weight.

We were able to create operating leverage and lowered our cost per piece by effectively managing the UPS network.

Our typical cost metrics of miles driven, direct labor hours and block hours all contributed to productivity.

Now for some details on the International results.

Total segment revenue increased 2.5% on strong volume growth of 6.5%.

Operating profit declined 7% to $417 million.

Operating margin and profit were lower, as savings from network adjustments and cost initiatives were offset by $75 million in headwinds from currency and fuel.

Without these two items, operating profit would have been up approximately 10%.

In addition, the segment continues to be impacted by shifting customer preference for deferred products.

Currency-neutral yields dropped 4.3%, driven primarily by a 5% decline in export product yields.

Shippers continued to use nonpremium UPS products, like Worldwide Expedited and Transporter Standard, both of which increased 11%.

In addition, our premium products were up 1%.

Growth in shorter trade lanes and lower fuel surcharges also contributed to yield declines.

UPS daily export volume increased by 6.7% in the quarter, driven by faster growth from Europe, Canada and Mexico.

Intra-Europe volume was up more than 10%, while Asian exports were flat with last year.

Non-U.

S. domestic products climbed 6.3% per day, led by strong gains across Europe and Canada.

The developing economies of Turkey and Poland were both up approximately 20%.

So, we saw good growth in the quarter, but overall, our results were a little bit less than we expected.

Rest assured, UPS is building on our in-country cost initiatives and will make the necessary network adjustments to ensure that we continue to generate the industry's highest margins.

Now, regarding Supply Chain & Freight.

The segment demonstrated improvement this quarter, with operating profit up almost 7% on flat revenue growth.

Top-line gains at UPS Freight were offset by declines in Forwarding.

Operating margins expanded 60 basis points to 8.9%, matching our previous high for the segment.

The weak demand in the Asia Forwarding market continues to put pressure on rates.

International Forwarding revenue declined due to lower tonnage and revenue per kilo, both down about 3% to 4%.

But solid performance from our ocean, our brokerage and our North American air freight sectors enabled the business unit to expand operating profit and margin in the quarter.

And in addition, our International Air Freight made good progress in adapting to these market conditions.

In Distribution, operating profit improved and generated a margin of approximately 9%, though revenue growth was relatively flat to last year.

Revenue gains in the healthcare and mail services were offset by some declines in the high-tech sector.

And remember, during 2012, the unit did benefit from UPS's participation in the London Olympic Games.

Turning now to UPS Freight, LTL revenue increased 5.5%, driven by shipment growth of about 4% and improvements in revenue per hundredweight.

Operating margin for the business contracted slightly, as wage and benefit increases were not fully offset by productivity improvements.

Now let's review our financial strength.

For the nine months ended September 30, UPS generated $3.6 billion in free cash flow after capital expenditures of $1.6 billion.

So far this year, UPS has paid $1.7 billion in dividends, an increase of almost 9% per share.

In addition, we have repurchased 33 million shares for approximately $2.9 billion, well on our way to our guidance of $4 billion for the year.

Our cash position and balance sheet remain strong.

The first priority always is to use it to grow the business, then to reward our shareowners, and finally, to seek opportunities to mitigate risk and volatility to our balance sheet.

I do want to highlight that our Q3 tax rate increased to 36%.

This was partially due to an increased mix of profits from the US compared to the rest of the world.

We do expect a rate of 36% for the fourth quarter also.

Now for a bit more color on fourth-quarter guidance for the business segments.

In U.S. Domestic, we expect daily volume to grow by 3% to 4%.

Revenue is expected to be up about the same as volume.

Base rate improvements will be masked somewhat by lower fuel surcharges, as well as changes in mix and package characteristics.

We expect operating profits to grow in line with revenue.

Reflecting back to 2012, remember that our Domestic margin benefited from nearly 8% growth in Next Day Air, something we don't expect to see this year.

Looking forward, the wild card will be the opportunities and challenges of a compressed peak season.

For the International segment, we expect volume growth of 3% to 5%, although product mix and currency will continue to weigh on yields.

We expect high-single-digit profit growth, with operating margin around 16%.

These expectations include a negative currency impact of approximately $30 million to $40 million.

At Supply Chain & Freight, we expect revenue growth to be down somewhat, as freight forwarding continues to experience lower demand and yield.

Despite the challenging conditions in the International air freight market and continued investments in healthcare, we expect operating margin to expand to about 8%.

So overall, we remain confident in our full-year earnings-per-share guidance in the range of $4.65 to $4.85 per share.

We are looking forward to the fourth quarter, and of course the holiday season.

And now Alan Gershenhorn will share with you some thoughts about the upcoming peak.

Alan?

Thanks, Kurt, and good morning.

The holiday peak season is always an exciting time at UPS, and this year will be no different.

Consumers around the world count on us to deliver their holiday gifts on time and in perfect condition.

For 2013, the National Retail Federation expects holiday retail sales to increase 3.9%.

More importantly for UPS, online sales are expected to rise between 13% and 15%.

At UPS, some of our retailers are cautious in their holiday outlook.

However, they go into the season with more flexible supply chain options than ever before.

Retail customers are focused on managing inventory levels and providing the right customer experience to drive growth.

This includes working with UPS on omnichannel strategies which help to create better touchpoints for consumers, improve utilization of brick-and-mortar square footage and to ship inventory directly from stores, all enhancing the overall customer experience.

Retail customers also talk to us about having a flexible supply chain so they can respond quickly to market changes.

At UPS, we expect this year's holiday season will be another for the record books, as we pick up more than 34 million packages on our peak day.

As Kurt mentioned, in the fourth quarter, we expect package volume to grow 3% to 4%.

However, with the later Thanksgiving this year, there are six fewer shopping days from Black Friday to Christmas, and as a result, we expect daily volume over this shortened window to be up 8%.

UPS is continuing to make the holidays easier for consumers too.

Our industry-first solution, UPS My Choice, has now exceeded 5 million subscribers.

Recent enhancements will provide subscribers the ability to organize their hectic holiday schedule by managing their online orders with the UPS delivery calendar.

In addition, UPS My Choice consumers can choose to receive their UPS SurePost shipments earlier by upgrading to UPS Ground.

And by the way, UPS My Choice services are now available on Facebook, the online home to more consumers.

Peak season does not end for us at Christmas.

The rapid growth of e-commerce has created a third peak for UPS that starts after the holidays and keeps us bustling into the middle of January.

During this period, consumers are taking advantage of gift cards and retailer year-end closeouts, as well as returning gifts received during the holidays.

The UPS returns portfolio offer several solutions that help shippers control return goods and provide their customers with a hassle-free returns experience.

As you can see, there is a lot going on at UPS to prepare for the high demands for service.

I want to wish you and your family a wonderful holiday season, and of course, order early, often and, most importantly, have it shipped UPS.

And now I will turn it back over to Kurt.

Well great.

Thanks, Alan, and we are ready now to open up for questions.

Nate Brochmann, William Blair.

Good morning, everyone.

I wanted to talk a little bit -- I mean, obviously, if you go back to last quarter, we had a lot of disruption in terms of kind of like shifting around some assets to account for where the freight was coming from and a lot of the customer preferences on the deferred.

Clearly, you guys have done a pretty quick job of that and obviously that is a benefit of the integrated network.

As we go into the holiday season and you talk about the flexible solutions that Alan just mentioned, how do you continue to reallocate assets based on where the freight is flowing to maintain the most flexibility for your customers, while maintaining the most profitability for you guys?

Well, that is certainly something that UPS has been working on for many years, and we think is a benefit of us being able to have one integrated network, where we can shift capacity.

Having a ready fleet of aircraft we can adjust to and certainly having the ability to move those quickly is important.

One area, though, the clearly we do this time of year especially is we spend a lot of time talking to our major shippers about the holidays.

And that helps us get a little bit of a shape for the peak season, anyway.

And Alan, maybe you could talk a little bit about our approach of preparing for expectations for peak.

Yes, so, as I said in my opening comments there, some of our retailers are a bit cautious, but they are ready more than ever with the execution of these Omni channel strategies that we are helping them with.

And really what that does is it helps these retailers better optimize, minimize and better utilize both their in-store and their DC inventories so they are prepared for any online growth acceleration.

It obviously also helps them maximize the price they get for their goods by avoiding markdowns, and it also creates that seamless in-store and online experience for the shoppers.

So we are pretty excited about the solutions that we have in place for our retailers this year to adjust for any eventualities.

And I guess the other component in your question there is the International component.

And Jim, maybe you can talk a little bit about the flexibility that we try to build and react to customer demand this time of year.

So no problem.

Obviously, the base network, I think you would know, as you said in the open, we have done a pretty good job over the years to balance that and utilize that.

I think the other capabilities that we have in our Forwarding unit go down to charters, the ability for our large customers to flex when they need it, so we can bring charters into the network or not.

And then the other advantage that we have with our network is the ability to flex it with extra rotations at peak capacity.

So at that time, we feel like we have got the baseline and the foundation, and we have a good optimized network at the same time.

Thanks.

Ken Hoexter, Merrill Lynch.

Great, good morning.

Great job on the Domestic side, so let me kind of focus a bit on International.

And Kurt, if I heard you right, I think you said margins might rise to about 16%.

And seeing as they were down year on year, if I heard that right, in this quarter, just want to know what you are doing there in order to get that margin up.

And is there a cost-cutting program?

Are you taking more assets out?

Just given that International looked like a little disappointing in contrast to the strength you saw on the Domestic side.

Yes, Ken, thanks for the question.

No, we are feeling very good about the activities at International.

I will let Jim talk a little bit about it.

But, you know, you saw the very strong growth that we had in the quarter.

We think that momentum is going to continue.

And also the headwind of the fuel and the currency did offset a lot of the hard work.

So Jim, maybe you could talk a little bit about why you have increasing confidence in our International sector.

Sure, so obviously, this quarter, we were down $32 million, we had $75 million in headwinds going against it.

We talked about the headwinds coming.

But at the same time, when you get beneath that and you look across the geographies, you can see increasing momentum quarter over quarter over quarter.

And right now, we have got very, very good growth and capabilities in Europe and our Americas business.

And you have heard some of the comments in the opening lines of the Transborder network.

So as Asia continues to struggle a bit, in the middle of that, we adjust, we go forward.

And you heard a couple other comments about some of our new integrated networks in Turkey and Poland that have great 20% growth year over year.

So we are confident in the forecast and we are confident when some of these headwinds get behind us you will see that as well.

Yes, and again, Kurt mentioned that fundamentals, we really grew profits 10% you take care of the currency and the fuel.

So we feel good about the fundamentals of business.

As you look to 2014, again, we think that currency will not be the issue we saw in 2013.

So that will eliminate one of those headwinds as we move into next year.

I appreciate the answer.

Tom Wadewitz, JPMorgan.

Yes, good morning.

I wanted to ask you a little bit more about International.

I guess it will probably be a popular topic today.

But can you give us a sense on what pricing conditions are?

And then I guess in terms of if there is some weakness in pricing -- you have got the tradedown -- how much of a headwind is that to margin when you look at 2014?

Or is it something that, given the ability to adapt the network, that it is really not a big issue for you when you look at kind of profitability in International in 2014?

Thanks.

Yes, Tom, the issue in International, even though I know the currency-adjusted yields for exports look very weak with a negative 5%, the vast majority of that impact is not pricing pressure.

It is the trade lane mix and the use of deferred products.

As we said, our deferred products grew by 11%.

And a very strong growth, the continent of Europe showed a 10% growth in shipments.

So packages moving around Europe have substantially lower revenues, but also a lot less cost.

So we feel very comfortable that the market is competitive but stable on the price side.

And as we adjust and adapt -- and it is great to see Europe picking up steam -- I think part of that is the economy getting a little firmer, but most of it is company specific.

And as we had talked about early this year, we felt that as we focus back on our organic growth strategy, you would see the results of that.

So we are pretty comfortable that the pricing environment is rational.

Okay, great.

Thanks.

William Greene, Morgan Stanley.

Hi there.

Good morning.

Hey, Kurt, I am wondering if you can provide us with a little bit more color on the fourth quarter.

You gave a lot of details around each one of the operating segments, and that was helpful.

But I think there might be some puts and takes here that I am not fully grasping.

And when I look at sort of the normal sequential change in the earnings, typically, I think it is up in the fourth quarter about 14%, 15%.

But the midpoint of the range here would be closer to 29%, 30%.

Is it all currency that is kind of driving that?

It feels like that is not enough.

So I am not sure what else I am missing that would kind of get us more to the midpoint.

Or is it just the economic assumptions that really justify the top and low-end of the ranges there?

So you are talking for the business in aggregate, rather than just International?

Yes, more like an EPS comment, just because when you take the midpoint, it seems like it is a pretty big step-up, and I am not sure I have all the pieces.

Well, I don't think it is a huge gap against the historical trends, anyway.

We are seeing good, positive momentum in International and gave you the guidance on that.

International, we are looking for profit growth, although frankly, there are both great opportunities and also some risks of a compressed peak season that Myron will certainly talk about in a little while.

As you compress the holidays into less days, if things go smoothly and the weather is positive, then there is good opportunity.

On the other hand, it does create some challenges.

So we are comfortable that we can deliver in the range that we have given, and I think the parts of the puzzle that we gave will help to back that up.

Okay, thank you.

David Vernon, Bernstein Research.

Good morning, guys.

A quick question on the Domestic competitive dynamic.

The last couple of quarters, Next Day Air volume, you noted that the letter traffic is down.

You are seeing some things about sort of one-rate pricing, stuff like that, coming out.

How do you feel about the Domestic sort of priority market and the competitive dynamic there?

Well, certainly the market is continuing stable.

We did show some improvements.

But I will let Alan talk a little bit about some of the other issues.

Yes, certainly, we had strong growth in our Ground and our Deferred product.

Speaking specifically to the Next Day Air, certainly its letter volume was down, and that is tied to professional services, with a slowdown in the financial services sector as a result of interest rates climbing a bit.

And we did see a few losses from some of our large banks.

And the corresponding uptick in the Next Day Air yield, is that sort of a positive mix shift or better pricing in there?

That would be more packages versus letters would help drive that.

I guess one other point just to remember on the Air is we did have a very strong Air quarter last year.

I think our Next Day shipments were up 7%.

So part of that is a much tougher comp.

Okay.

Justin Yagerman, Deutsche Bank.

Hey, good morning, guys.

Good morning, Justin.

I wanted to dig in a little bit on the Domestic side.

I mean, it looks like you guys got some good pickup on efficiency gains.

And I know you have got some pretty major initiatives with ORION and the Sure Post redirect pieces of the business going on.

So maybe you could talk a little bit about where you are in ORION implementation and how many miles you have gotten out of your network.

And on the SurePost redirect, how much of that e-commerce traffic that you are moving is being leveraged by the UPS network now instead of handing off to USPS?

Great.

No, glad to.

I will turn that over to Myron to fill you in a little bit.

But we were pleased clearly with the Domestic for the quarter.

I did mention, though, it had an extra working day, which also helps.

And we had some safety benefits.

But Myron's people have been very busy rolling out some of these new applications.

Myron?

Good morning, Justin.

We continue to take advantage of a healthy pipeline of technology deployments throughout the year.

However, to answer your question specifically, we have been able to redirect approximately 20% of our SurePost volume back into the U.S. Domestic delivery network by improving our delivery densities.

And as a result of that, we have been able to control the number of direct miles driven.

Simultaneously, we have also taken advantage of leveraging our Worldport operations by reducing domestic block hours by over 3.7%.

And if you will also recall, we had fully deployed telematics only six months ago, so we expect to get continued upside from that.

And we have only deployed about 13% of our US drivers on ORION right now, and early results have been extremely positive.

So we believe that there is more there for us.

Do remember, though, that the ORION is a multiyear rollout.

It is a very deep, integrated expansion that has to be route-specific.

That was great.

Thank you.

Kelly Dougherty, Macquarie.

Hi.

Thanks for taking my question.

I just wanted to stick with U.S. Domestic.

It was nice to see you specifically call out B2B volumes during the quarter.

So was just wondering if you can kind of give us a sense of the magnitude and whether we may have turned a corner from the B2B perspective?

And then how should we think about that leveraging into the network.

You had strong margins during the quarter.

Can B2B help sustain levels like we saw in the third quarter going forward?

I think the B2B did show modest growth; really B2C continues to outperform.

I don't want to put too positive a spin on it, I guess.

It was really the retail sector, especially with the Omni channel and us moving goods between stores and retailers adjusting their supply chains that drove up the B2B component.

The rest of the sectors were fairly flat, maybe slightly negative.

Yes, we are still looking for that pickup in manufacturing that has been called for.

It has been slow all year long, but hopefully, if we can make some decisions in Washington, we will get the manufacturers going again.

And then can you help us just think about whether these margin levels -- it was very strong in the third quarter.

How can we think about that going forward maybe?

We have given you some pretty good sense for fourth quarter anyway, and both the opportunities and the challenges.

We will be talking a lot more about 2014 next quarter anyway, so we are really not at a point to give any guidance going forward.

But rest assured we are working hard to keep our customer satisfied and manage our costs.

And if we keep being successful on projects like ORION, that certainly bodes well for Domestic margins.

And Jim talked about where we are going internationally.

And we will tell you a lot more in January.

Thanks very much.

Chris Wetherbee, Citi.

Thanks.

Good morning, guys.

Can you talk a little bit about international capacity?

Just curious kind of how you think about the pace of activity internationally, and whether there is really the need to do anything more with capacity.

Sort of where you stand in the quarter as well would be helpful.

Thanks.

Let me start off with David Abney talking about their Air Network and utilization and how we have reacted there.

Well, we have continued to match network capacity to volume trends.

For our International for the third quarter, block hours were down 1%, while our export volume was up 6.7%.

For the fourth quarter, the trunk routes from Asia to the US, we will fluctuate between the 7.5% and 8%.

We will probably be down about 4% total International block hours from last year.

So that is where we sit.

You have to remember that we have significantly cut Asia-to-US block hours by 20% over the last two years, and we are continuing to monitor and see where we need to make ad hoc flight cuts.

Great.

Thank you.

Scott Group, Wolfe Research.

Hey, thanks.

Good morning, guys.

Good morning.

So want to just drill down on the Domestic package margins a little bit again.

Is there any way, Kurt, to just put some numbers around how much you think that the operating day benefits you?

The safety improvements, is there any number around that and do you view that is ongoing or one time-ish?

And then I am just curious, in this interim period without the labor contract, are you still accruing further wage increases?

Yes, I guess what we have I think pretty consistently estimated, that an extra working day usually gives you about $50 million, maybe $60 million, depending on when it hits anyway.

So that is something we anticipate and plan and forecast for.

Third quarter every year is the year usually where we make entries for Worker's Comp and safety.

Actually last year, there was a little more of that in the fourth quarter than the third, so that gave us a little bit of a boost, but not material.

And yes, we are accruing for the contract as it stands, and as Scott said, we are working through the details on that and are looking forward to getting that wrapped up pretty soon.

Do you have a number on the accrual for the safety?

No, I don't.

It is a little bit in multiple sectors.

But it is something, as Kurt said, over the last 10 years, pretty much every third quarter we do an actuarial valuation, and we have done a great job on safety and every year we see benefit.

Okay, great.

Thanks, guys.

Ben Hartford, Baird.

Good morning, guys.

Jim, could you provide some context I guess to the Forwarding dynamics?

I know you guys have been managing your capacity tightly in the international trade lanes.

I know Asian volumes are still a little soft or at least growth is decelerating.

But it sounds like capacity has been taken out in that market, and pricing dynamics within the forwarding market are still pressured.

Do you get the sense that there is still lingering margin gross margin pressure within Forwarding, given the pricing dynamics in the industry plus underlying rates firming up or being rational?

Well, I guess before I turn it over to Jim, in our guidance, we do expect to see modest revenue declines, although the unit has done a good job of adjusting.

But Jim, maybe you could fill us in a little bit more on the view of the market.

Yes, I guess over the last couple of days and about the last week or so, some information has come out that actually contradicts that, in that there is some backlogs out in Asia coming out.

Quite frankly, the way we look at it right now is that there are some upticks in volume, obviously, which would obviously coincide with some rate issues.

But we plan for that.

We know there are some capacity reductions in the market as well that kind of go in hand-in-hand.

But I think over the next couple of weeks, we will ultimately see what happens with the demand side.

But we think at UPS we are in good shape to handle that, obviously, with the way we run the network.

But the other side about the Forwarding business is it is a pretty volatile market all the time.

You have to adjust to it.

And we feel like in the last couple of years, we have invested nicely in some technology to help us do that in the years to come.

So we are pretty comfortable with where the rates are going.

Thanks, Jim.

Art Hatfield, Raymond James.

Hey, morning, everyone.

Real quick on the fourth quarter -- and you have made some comments regarding the shortened holiday season.

It would seem to me that given your flexibility and all the different services you can offer customers the potential benefits would outweigh the risks.

But it sounds like you are focusing on the potential incremental cost or the risk associated with the shortened holiday season.

Can you kind of help me understand that a little bit better?

I will take a shot at that.

I think Kurt used the term wild card.

And frankly, a compressed holiday period, if weather is perfect, is good, probably will benefit us.

Because we are going to be able to move our volume through our network efficiently in shorter days and shorter hours.

The question is if you get an ice storm in Louisville one of those days, it is going to be hard to make up for it.

So I think it is one of those things that has got -- it's kind of a risk-reward type deal.

If weather is great, we will probably get rewarded.

If weather is bad, it will be a challenge for us.

All right.

Thank you.

Brandon Oglenski, Barclays.

Yes, good morning, everyone, and congrats on the Domestic results this quarter.

When I go back to your 2011 analyst meeting, and you laid out the growth targets of 10% to 15% for EPS, you guys, I think, were assuming a US economy of 2.5% to 3.5% at that time.

Have you gotten to the point where you have transitioned the business to reflect the slower environment, where you think you can get back on track for some of these longer-term earnings growth targets?

We have made pretty good progress on our Domestic business, with the margins steadily improving and moving forward.

And so we feel that clearly we have done a lot of adaptation, both the product shifts and economic changes.

International, clearly, with the headwinds in global trade that we saw for the last couple years, has probably been the bigger surprise.

And that is one where Jim and the network people have been very busy adapting to that.

And hopefully, you get a sense that we think we are making progress on that.

But that has really been the bigger probably difference since the investor conference a couple years ago.

Yes, and looking at this year, we weren't very far off those goals when we set our guidance at the start of the year, taking out the currency and the fuel impact and pension particularly.

So hopefully, if interest rates stay where they are, pension will not be a headwind next year.

We think currency will not be a headwind next year.

So we will be positioned better to get closer to those targets.

Thank you.

Thomas Kim, Goldman Sachs.

Thanks.

What is the organic growth rate you are seeing out of the European operations on a same-store basis?

That 10% growth in exports is purely organic.

Now, some of that -- Turkey and Poland came from acquisitions several years ago.

But I think we feel particularly gratified that we are seeing, as Jim mentioned, this extension that we have done to the periphery markets around Europe succeeding.

Jim?

You know, I guess really both in Europe, I think we are pretty proud of the last couple years.

We had some acquisitions in Poland and Turkey and the UK.

All those integrations are done, behind us.

And all of those markets, quite frankly, are all growing double-digit.

So that that and the combination of the Transborder network over there and the Express network, it is a really good story for us right now.

So everything for the most part is good.

Obviously, our next step was TNT.

That is behind us now, and now we kind of turn our focus of our people and all that UPS has to offer to customers, to emerging markets and some of the other places that we are now going.

So we think the future is bright.

And if I could ask it, what is the sort of key end markets that the growth is occurring?

Is it more intra-Europe or is it actually Transatlantic?

And if you could just maybe add a little bit more detail around that, that would be helpful.

Thanks.

Well, right now, if you stand inside of Europe, from that geography, obviously, our intra-European growth is very good.

You have got a double-digit growth in the inside because of the great network we have there.

You have got some lanes, depending on where you are going, our US Lane continues to grow nicely across the globe.

And again, we are pretty proud of being able to offer domestic customers in geographies from Turkey to the UK to Germany across the world and that piece of the world some great opportunity, and they grow at double digits at 12%.

So it is growing (inaudible).

Thank you.

Allison Landry, Credit Suisse.

Just following up on the European business, you have talked a lot about double-digit growth in the intra-European geography.

So I was wondering if you could comment on the relative profitability of regional package flows versus more intra-country.

And then also, your thoughts on whether European margins can ultimately reflect those in the US.

Yes, in general, we do have higher margins in our Export business than the Domestic business.

The benefit of our Domestic businesses, they give us a decent margin, but they also create the density that allows this UPS integrated network to create the returns that you guys enjoy so much.

So as far as the target, certainly, the priority is growth in Export.

And Jim's people balance then what the appropriate amount of domestic business is, country by country, to create infrastructure.

Beyond that, what we really look at is return on capital.

And so we make sure that those products that drive the most assets, those flying across oceans and those things, generate the higher margins.

But beyond that, we don't really open up the can of worms.

Okay, sounds good.

Thank you.

David Ross, Stifel.

Good morning, gentlemen.

Good morning.

I wanted to talk about UPS Freight.

Yields declined a little bit, partially due to the higher average weight per shipment.

Could you comment on kind of what is going on with the average length of haul in that division that may have also impacted the yield?

And then any update you have on the new union contract with the UPS Freight teamsters would be great.

First, let me correct fact.

Yields were up in the quarter.

So they weren't up quite as much as in previous quarters, but still, we showed a 2.2% increase in revenue per hundredweight.

So there is no -- that is not an issue.

Okay, in the Excel sheet I got, it was 21.94 versus 22 a year ago.

So it had actually a decline of 0.3% in LTL revenue per hundredweight.

Maybe -- I don't know what you are looking at.

We will have to take it off-line.

Okay.

Go ahead, Myron, maybe on the business progress and what you guys are doing.

Yes, I think our progress is in line with what we told you guys at our investors conference in 2011, would expect a margin improvement.

While revenue did improve over 5% and revenue per ton went up over 4%, it was somewhat offset by not being able to get the kind of productivity improvements that we look for out of our freight operations.

And we will continue to deploy small package like productivity improvements with the use of technology in Freight in the coming months and would expect to perform better.

As far as the contract, I think we are making progress.

I think where we are spending a lot of time between the UPS teams and union leadership, really communicating and educating the people about the new contract.

There were changes in healthcare that were confusing to people.

We have done this process in the package side and the master and have had good results when we communicated the new contract.

We expect the same on the freight side.

Hopefully, we will get it out for a vote here in the near future.

Kurt, sorry, I was looking at the year-to-date yield numbers, rather than the third quarter.

Okay, thanks.

Scott Schneeberger, Oppenheimer.

Good morning, guys.

This is Daniel Hoffberg filling in for Scott.

Touching on the buybacks and the use of capital, can you please clarify is the $4 billion is still a target for 2013; and if you can help us understand how you think about the use of capital in 2014 as well?

Thank you.

Yes, well, certainly as we said, we remain on target to deliver the redistribution with the share repurchases.

We purchased just a little shy of -- spent a little shy of $3 billion year to date on that front.

So we are moving along as said, and we tend to set a target each year and complete what we do.

So barring any unusual market conditions or something, we expect to continue the remainder of that.

The higher priority always is to invest in growth.

And certainly we have got the balance sheet to do it, although we have been targeting more smaller acquisitions, things like CEMELOG in Eastern Europe to expand our healthcare network and other targeted acquisitions.

So we will continue following that path and also continue to support a very strong dividend.

So we are looking for opportunities and application of capital, plus we'd also use capital in some cases to reduce the risk and volatility to the balance sheet.

You have seen that with some of the moves we have done on the pension.

So we have got a lot of choices, and part of our job is to prudently allocate capital.

And keep remembering that it is shareowners' money and it is our duty to use it prudently or return it.

Okay, great.

Thanks.

Jack Atkins, Stephens.

Hi, thanks for the time.

Just to dig in again here on the Forwarding business, just curious if you could maybe comment on the competitive landscape, the competitive dynamics really within the Forwarding industry, and if you have seen any improvement there as we move through the year with regard to just competitive pricing pressures.

And then secondly, when you think about the slate of tech launches that a lot of folks are expecting to see over the course of this quarter, what type of volume trends would you expect to see in your Forwarding business out of Asia to the US in the 4Q?

Yes, I will start off at least with kind of the trends.

There is clearly -- as Jim was mentioning, we are seeing some pickup in demand.

That is typical for the beginning of peak season.

And there are some launches that will give a boost.

And Jim, any thoughts or comments on the competitive environment?

Well, as I said a minute ago, over the last couple days, some of the competitors have seen what appears to be some pickup in demand that is matched against the capacity constrictions.

But from our perspective, we feel like we are in good shape.

As I said last quarter, we feel like we are a bit too concentrated in some areas in Forwarding that we will move in the next quarter to work through that.

But we know that based upon the charter activity we are being asked to perform right now in the next in -- the previous couple of weeks and going forward, we know there is demand out there and we need to fulfill that.

So we feel like we are pretty comfortable with that.

Thanks again for the time.

Jeff Kauffman, Buckingham.

Thank you very much and congratulations.

Thanks.

Could you -- most of my questions have been asked at this point.

Could you give us an update on UPS Access Point, how that is performing in Europe, and if there are thoughts that that product could eventually be rolled out in other global markets?

Yes, we would be happy to talk about that.

That is clearly a big initiative for the International access.

So Jim, do you want to talk a little bit about the rollout and where we are heading on that?

Sure.

I think you have to remember that when we bought Kiala, they had about 6500 access points in France and the Benelux.

We have rolled that out now and expanded into the UK and Germany.

By the middle of next year, we will have 2000 to 3000 access points in each of those countries.

The rollout is going just as we thought it would.

In a second, I will turn it over to Alan with respect to going forward to some widening of what we see.

But we also like the combination of Access Points and what it can do for our delivery network.

We are already expanding it into the use of drivers and alternate delivery.

We also like the power of the Access Points to create cross-border traffic in the single market of Europe.

So we are pretty pleased with where we are, and, Alan, if you want to add anything.

Yes, I think to that point, Jim, it's a Swiss Army knife, really, because we are changing residential into high-density commercial stops.

We are using it for these not in one alternate deliveries back to these access points.

We are using it for e-commerce returns and prepaid drop-offs.

So we are real excited about what it is enabling us to do to penetrate the B2C market in Europe cost-effectively.

We are over 10,000 access points now, so we are now in the UK and Germany.

Those were our expansion plans.

And we are continuing to grow in France, Benelux and Spain.

And we are serving about 450 retailers at this particular point right now in Europe.

So we are real excited about the opportunity it is creating for us in the European environment.

Do you think the bigger opportunity is more customer penetration because you have more convenient access points, or is there a cost-saving side where you are reducing the amount of redeliveries or just making it easier to get packages to customers?

It's actually both.

So we are -- as you know, in the United States, we are very big in retail.

Retail has not been our focus really in the past in Europe from a B2C perspective.

So this is a big opportunity for UPS to penetrate the retail market throughout Europe with better solutions than are available in the market today.

And to your point, do it in a way that is profitable because of the density that we can create.

And the other point I would just make is that many of the consumers in Europe really prefer getting their deliveries at these access points versus at home, and some of our retailers have over 50% of their packages being delivered to these access points versus their residential homes.

Okay, thank you very much and congratulations.

David Campbell, Thompson, Davis & Company.

Yes, thank you very much and good morning.

I heard you say that your International block hours would be down 4% in the fourth quarter, which is apparently more than they were down in the third quarter.

Given this pickup in demand in the Asia-Pacific region, how is that going to help your Company International revenues and Forwarding profits in the fourth quarter?

That's a good question, David.

We certainly have some flexibility.

Maybe David, you could talk about that.

Yes, what I said was that it would be down 4% from last year in the fourth quarter.

And one of the things that we look at very closely is how the calendar falls and where we can cut flights on an ad hoc basis, and we make those decisions.

We continue to monitor the capacity and we have the ability to ramp up flights if we need to and add those rotations.

But we can also cut back.

So we have the flexibility, we have the network in place, and we have been doing this for years.

In fact, if you look since 2008, our international block hours are down almost 5% and our export volume is up almost 20%.

So we have this thing fine-tuned and we can make the adjustments we need, no matter which way it may swing throughout the quarter.

Thank you.

One of the real value creations that we have been working on the last few years is to take advantage of both our Forwarding network and our own fixed assets, and having that flexibility to move volume and freight especially in and out of both of them.

Helane Becker, Cowen.

Thanks very much, operator.

Hi, everybody.

Almost all my questions but one have been actually asked and answered.

Thank you very much.

As we look ahead, Kurt, to 2014 and we think about some of the changes in healthcare laws and so on, how should we think about compensation as regards to healthcare?

And I know you make some changes earlier this year to your plans, but what healthcare cost increases are going to look like.

Thank you.

Yes, hi, Helane.

Unfortunately, you may help us wrap this call on a down note.

I'm sorry.

Healthcare expenses continue to be a challenge.

We have made some modifications to our plans to help to manage costs.

But still, the Affordable Care Act is continuing to add a burden to us.

The transition tax per covered life is a big deal for us.

We think there is over $100 million of expense all in all that is a headwind that will be in the healthcare for next year on that.

Okay, thank you.

And you can repeat something positive if you want.

That's okay.

It is an important issue and certainly we are eager to find solutions to it.

Thank you.

Anthony Gallo, Wells Fargo.

Good morning.

Thank you.

You mentioned continued efforts with Omni channel retailing.

I am curious if you could bring us up to speed on where some of the retailer efforts are with ship-to-store activity; it was sort of a hot topic earlier this year.

Is it experimental now or is traction being gained?

And has there been any benefit on the margin front from the density that you gained from that?

Well, it is certainly beyond experimental.

Alan can fill you in on some details on that.

Yes, I would say that initially, the retailers were really looking at it to optimize their inventories by better utilizing their in-store and DC inventories, shipping inventories sometimes all the way across the United States, if in fact the goods weren't selling in one part, but they could still get the list prices in another part of the country.

Now what it has shifted to is how to compete in the local markets.

So they are enabling -- we are doing some things with late pickups in the evenings for these clients and enabling next-day fulfillment in a local territory by utilizing our night sorts.

So they are really using it in a wide variety of ways, to both become more effective with their inventory, as well as serve the consumers in a better way to compete with other retailers in the marketplace.

You have got probably about 25 large retailers underway today, and they are using it to ship to and from stores, store-to-store, returns to the store.

And obviously, some of those create even more B2B moves, which Kurt talked about earlier.

Is it starting to move the needle in margins or volume?

Well, it certainly a part of the B2B retail uptick that we have seen, yes.

Yes, I think clearly, anything we do to help density helps margins in the long-term.

Thank you.

Tom Wadewitz, JPMorgan.

Great, thank you for giving me a chance on a follow-up.

I wanted to see if you could give us a little more data on the comment of the flat export out of Asia.

That was, I guess, flat package out of Asia.

And was there trade-down within that where you had premium down and deferred up?

Or was the kind of 11% growth in International deferred really a phenomenon that is taking place in your European business?

Yes, Jim can give us certainly a little color on that.

Yes, it is.

I mean, the network has more expedited in it this year than last year, but that is something we have to adjust to.

And the network essentially is flat; it has got a different type of a product in it this year.

But that is not just with UPS.

The whole supply chains across the world are moving that way.

And it doesn't mean it is going to stay that way in the future.

But as it exists right now, in the flat discussions we have had, it is flat and it has also got some down-trade in it, but we have to then -- back to David's comments -- adjust the network the right way to be able to keep it going forward for the customers and shareholders.

And Tom, I said earlier that I guess the fact is the export market is not shrinking.

It is growing at a slow pace.

The reality is expedited is growing at a fast pace right now.

So again as we get more innovation development, more technology products and the economy gets a little bit better, I would expect to see some better growth in Express going forward.

Okay, but that mix effect is true in Europe and Asia as well?

It a little bit -- I mean, Europe, quite frankly, you have got obviously big strong ground Transborder networks that are a little bit different.

But you have got -- I think the trade-down to Expedite is more predominant in Asia obviously because of the length of the supply chain.

So it is more predominant there from my perspective.

Okay, great.

Thank you.

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

Please go ahead, sir.

And I will turn it over to Scott for some closing comments.

Thanks, Andy.

You all know that shippers and consumers around the world have come to depend on UPS to successfully deliver the holidays.

Peak season UPS is a culmination of months of planning, training and preparation for the ultimate test - the timely delivery of almost double our normal days' work.

And in advance, I want to thank the more than 400,000 dedicated UPSers around the world, who will put in the long hours and go the extra mile for our customers this year.

I also want to thank all of you for taking part in today's call.

Thanks.