Good morning. My name is Cheryl and I will be your conference facilitator today. We apologize for the technical difficulties. At this time, I would like to welcome everyone to the UPS Investor Relation second quarter 2008 earnings conference call. (Operator Instructions) It is now my pleasure to turn the floor over to your host, Mr. Andy Dolny, Vice President of Investor Relations. Sir, the floor is yours.

Good morning, everybody and thanks for joining us today. Scott Davis, our CEO, and Kurt Kuehn, our CFO, are ready to provide insight into the company’s second quarter results and our expectations going forward. Before I turn the program over to them, however, I want to review the Safe Harbor language. Some of the comments we’ll make today are forward-looking statements that address our expectations for the future performance or results of operations of the company. These anticipated results are subject to risks and uncertainties, which are described in detail in our 2007 Form 10-K and first quarter 2008 10-Q reports. These reports are available on the UPS investor relations website or from the Securities and Exchange Commission. This conference call is being webcast and will be available on our investor relations website for a few weeks. In his remarks, Kurt will refer to UPS' cash flow, which is a non-GAAP financial measure. Reconciliation is included with the news announcement this morning and is available on the UPS IR website. Now I’ll turn the program over to Scott.

Good morning. It’s obvious to everyone in the business world that economic conditions in the U.S. continue to slow. Economists hold a bleaker outlook for the second half of this year and it was the case even three months ago. Soaring fuel prices, falling housing starts, increased unemployment, weaker consumer confidence -- all of this paints a picture of a faltering economy. While GDP and industrial production may bottom out in the second half of this year, recovery is expected to be a slow, drawn-out process. Predictions are that it will be 2009 before improvement in the economy becomes apparent. Deteriorating economic conditions and high fuel prices had a significant negative impact on our package business. Volumes in our premium products declined at a greater pace than in the first quarter and our costs increased. We’re feeling the impact of higher energy costs throughout the company, not just at the fuel pump. This includes such items as purchased transportation and increased utility expense. I assure you that we are pursuing a range of initiatives to address today’s marketplace challenges and trends. Some of these will have short-term benefits, others will take longer. Kurt will provide details shortly. Despite the difficult economic environment, UPS' focus is on long-term growth opportunities. Our investment to develop supply chain management capabilities, which is now paying dividends, is a good case in point. Going forward, the proposed contract with DHL is another such opportunity. As a reminder, we are developing a 10-year agreement with DHL to provide air lift for their express, deferred, and international volume within the U.S., in between the U.S., Canada, and Mexico. Both sides are working diligently and making good progress towards concluding this agreement. This illustrates how UPS is looking outside the box to develop growth strategies that we might…

Thanks, Scott and good morning, everyone. As we look at the second quarter, three major trends affected our global package business -- escalating fuel prices, volume declines, and a sharper reduction in the use of premium products, that last two being related to economic conditions. Fuel had a significant impact in the quarter, increasing $470 million, or 67% over last year. Fuel price increases had ramifications beyond just the direct cost. They caused our indirect expenses to accelerate. Items such as purchase transportation, utilities, and the costs for outside service providers around the world. Crude prices increased from $100 a barrel in early April to $140 by the end of June. This rapid increase during the quarter magnified the impact of our fuel surcharge lag. As you know, there is a two-month delay in the application of fuel surcharges to capture this increased expense. This factor alone accounted for over half of the profit decline in both the U.S. domestic and international package segments. The 1.3% decline in total U.S. domestic volume was a larger shortfall than we had expected. All products posted declines, from 6% on next day air products to a little less than 1% on ground. This is a good news/bad news story. Due to the investments we’ve made in our broad product portfolio, we have retained customers and kept them in the portfolio. However, some of them shifted away from our premium products in an effort to control their own costs. These trends pressured our operating results. The international segment performed significantly below our expectations because of volume, mix, and fuel price issues that I just discussed, and slowing economic conditions. Although export volume and revenue growth were robust, it should be noted that the 10% export growth was aided by the timing of Easter. Without…

(Operator Instructions) Your first question is coming from Jon Langenfeld of Robert Baird.

Good morning. Can you just talk a little bit about the demand destruction, a little bit more on the demand destruction on the domestic express side? First off, it looks like the surcharge is probably going to go from 24% in the second quarter to 34% in the third quarter, so I’m assuming there’s more price elasticity you are going to bump up against here. And then secondly, do you think historically, as customers have shifted away from express, is that a permanent shift or do they typically -- is there some element that comes back with better [accounting]?

John, certainly that’s been a topic that’s had a lot of discussion lately. First off, this behavior is a typical cyclical process and in slow downs in the past, we have seen that our next day air products, and most premium products, are more economically sensitive. Frankly, when the economy is hot, there’s more need to get goods urgently to their end destination. So it’s important to keep that I perspective, that there’s a substantial amount of these current trends that are seasonal, or cyclical. On the other hand, clearly with fuel hitting unprecedented levels and the surcharges being high, there is increased pressure and customers are looking for ways to cut cost, and so we are seeing some shifts in our products. Our sense is that that’s probably beginning to stabilize. Clearly if fuel takes another run and we have a $40 increase over the span of the quarter, like we did in Q2, you know, it’s very difficult to forecast. But we expect overall our surcharges to be up on the year about 8% this quarter, not quite as dramatic as you quoted. And our guidance clearly includes our outlook from continued declines in premium products.

Jon, we saw back in 2002 and 2003 that the express products were negative both years. Came back in 2004, next day grew 7% plus. I’m not expecting 7% plus necessarily next year or two with the energy prices where they are but there’s no reason to think they can’t come back.

Okay, good. Good color. And then the follow-up question was on the international trend. Did you see similar trends on the heavy weight freight side in your supply chain business, as you commented on the parcel business?

A little bit, but not quite as dramatically, I guess. We have seen some recent numbers for May and June that suggests slowing. We had a good solid quarter. Clearly the freight coming into the U.S. has been anemic on the U.S. -- on our small package side. All regions of the world really were down as far as their shipments to the U.S. and we did see some slowing on the freight side, but we’ve got a lot of new offerings. The air freight portfolio has been pretty well-received and that may be helping to offset some of it. And we continue to see strong growth in our Asia to Europe lanes, even though there’s been some external discussions of that slowing.

Thank you.

Thank you. Your next question is coming from Tom Wadewitz of J.P. Morgan.

Good morning. Let’s see, the first question on the competitive environment, can you give us a sense of whether the base rates have gotten more challenging -- base rate increases have gotten more challenging to achieve, in light of how much fuel surcharge customers are paying, and just whether the competitive dynamics have gotten a little bit worse or if they are still pretty stable?

Well, certainly with the surcharges in the air as high as they are, the fuel surcharge has become a part of price negotiations in an increasing fashion, and so it is much more a part of those discussions than it was before. And as a result, it gets a little harder to isolate pure price taking versus real surcharge. But in general, the market’s healthy. Pricing is very rational. Clearly this is a business where you’ve got to cover your costs and grow -- the [loan] doesn’t provide synergies if you are not in value. You know, we are focused right now on making sure that we go through our customer base and that our rates and surcharges are appropriate. In some cases, there are caps on our fuel surcharge that seem pretty benign back a year ago that now are -- really don’t fit the economics, so we do have some initiatives underway to recalibrate some of those and make sure that we find an appropriate balance of price for customers.

Okay, and then the follow-up question, in terms of the margin performance, I know you highlighted fuel as being a pretty significant factor. I think you implied it would -- maybe $180 million operating income impact is the number I came up with, the way you characterized it. And I’m wondering -- do you think margins will, year over year performance will be a lot better if we see fuel stabilize? Or is it really much more about the weakness in volumes and it’s kind of hard to see margin trends improve at all without the volumes really changing?

Really, this whole fuel phenomena, you really have to separate into two buckets, Tom. One is the absolute level of fuel and the other is the rate of change. In the second quarter, the most notable difference was this rapid increase from crude of $100 to $140 by the end of the quarter. That’s just unprecedented and that was the major impact that caused half of our operating profit declines in the package business. So the rapid increase is a short-term issue that as fuel prices stabilize, will cease being a headwind. And then if fuel prices drop significantly, we’ll have a tailwind and finally recover the substantial amounts that we’ve had shortfalls on as fuel [inaudible]. The second issue is the absolute high level of fuel and that is one that will impact customer demand. Certainly it’s driving cost, both in our fuel line and, as I mentioned, a lot of other line items. And there the issue is A, our ability to recover that cost, and B, the impact of those fuel prices on the economy. So the short-term issue, things would stabilize. We would have less drag on our earnings as fuel stabilizes, although it would sure be nice to see a little decline in that, the cost, to get some real boost on the margins.

Okay. Thank you for the time.

Thank you. Your next question is coming from Edward Wolfe of Wolfe Research.

Let’s assume that the overnight doesn’t come back, not because of the economy but because of fuel, and so growth starts to be in other, less high-yielding products on a secular basis. What can you do in your network and at what point could you improve domestic margins, do you think, given that context that the rest of the business is going to grow and the overnight air is on a secular decline? And then maybe as a follow-up, what the DHL contract -- could you give an update on how that might play into the whole thing?

We’ve been looking for months, doing some scenario planning on what happens if oil is at $150, what happens if oil is at $200 a barrel -- how does that change the business? Not only domestic air, but international? If we see prolonged, very high oil, you may see trade lanes change. You may see more near sourcing in the future, people building the goods closer to the end consumer. So we certainly tried to look at a lot of scenario planning from that standpoint. There will be some challenges. Obviously some of the distances shipped may be shortened as we go forward, but there’s going to some opportunities out there. We think that there’s a -- I’ve talked to a lot of CEOs who have company-owned fleets and have courier services that frankly are going to have a lot of trouble with these energy levels. So we see new markets that we really don’t participate in today opening up and the efficiency of the UPS network, we see an awful lot of revenue opportunities. And again, that’s all about utilizing our network more efficiently, which should help margins in the future. So I think there are some challenges for us but there’s also some great opportunities to move ahead.

But I’m not talking about the revenue side. If you look at the cost side, can you get the costs to a position where the network can work with kind of a secular decline in air if other areas are growing? And then also on DHL, if you would.

I guess I’ll answer that with the DHL question; clearly as we looked ahead, there is some risk to the domestic express market. As we look at the next four or five years, we don’t know if it’s going to grow, be neutral, but clearly we lessened our risk with the DHL line haul contract. It’s something that we’re -- not having completed the contract yet, the teams are working, making an awful lot of progress. We think that’s going to -- the additional volume we get out of that will clearly make for more efficiency, better asset utilization of our air network -- not just the airplanes, but also the hubs for so many purposes. So that’s one major step, I think, in the better utilization of our network and possibly helping the margins as we move forward.

What’s the timing of when you’ll with that contract?

Well, we said we’d have it done before the end of the year. We would like to get it done as soon as possible and hopefully get some volume in the network late in 2008, and the goal is to have it totally implemented by the middle, latter part of 2009.

Is that a push-back from what you had said earlier?

No, same dates. I think the team is making great progress. I think we said all along that we hoped that we’d have the contract done in 2008. The teams are working very hard to get it done as soon as possible.

Thanks for the time.

Thank you. Your next question is coming from William Green of Morgan Stanley.

Just to ask about the way you could maybe address some big network changes if the freight flows change, would you ever reconsider now maybe upping the DIM weights on the grounds from what you’ve currently got?

Upping the DIM weight meaning taking larger packages?

Meaning changing the -- basically making it as you charge for air, where it’s all DIM weight as opposed to actual weight.

Well, certainly we look at all options, Bill, but the on-the-ground, the cubic size is not as big a driver of total cost of the product as it is in air, so with our current DIM weight, we really look for the outsized packages that are over three cubic feet, and those are the ones that we make sure we’re charging appropriately. So it’s not something at this present time that we are evaluating but we’ll continue to look at revenue management opportunities and clearly our basic strategy in our pricing is to make sure that we price appropriately to reflect costs, so that’s always an option.

Okay, and then as you look at the changes that fuel is forcing on your customers, where is the weakness most pronounced? Is it sort of B2B that you are seeing it? Can you parse it out from the economy? Is it B2C? Where’s the big change?

I think proportionally it’s similar in both segments. B2C continues to have better performance than does B2B, but it is sequentially over the last three, four quarters, it has seen actually a greater slowing than the commercial side, so it’s -- that’s the -- you know, the consumer clearly is in question right now and we’re watching those trends very carefully, both for our big retail companies that we’re delivering to and then the end consumer business.

Long-term, I think that if you think about B2C, it really is much more efficient to have UPS delivering a package to your host than it is for you to go to the mall and buy that package, so I think that even high energy prices will probably drive B2C business over the long-term and benefit the consumer.

Just lastly, what’s your average domestic parcel [inaudible]?

I don’t believe we disclose that distance.

All right. Thanks for your help.

Thank you. Your next question is coming from Ken Hoexter of Merrill Lynch.

Good morning. You talked about changes, or I guess the high fixed structure of the international. What kind of changes to that network do you envision that you can make to maybe make it more variable in nature?

Clearly that’s an area of very high focus for us. We saw fairly substantial changes over the course of the quarter, and as you know, we’ve had an incredible run over the last five, six years on the international side, but we did see some slowing from April to May to June, frankly, that caught us a little off guard. One of the core issues around international is the big worldwide services where we have the major flights going across the oceans. That is a more fixed cost, unless we choose to take a substantial step down in capacity. Frankly, if flows between the continents continue to slow, then we will be looking very critically at perhaps reducing temporarily some selected flights between the continents, and that assessment is underway right now, looking at how we can take some cost out. We continue to see though very strong growth intra-region, and both Asia and Europe showed high-single-digit to low-double-digit shipments within the regions, and so in the short-term, we are seeing some of that regional trade flourish even as the worldwide trade is slowing. So some of these things are recalibrating our network, some is perhaps taking out capacity. Also in the international, we don’t have quite the same variable structure as we do in the U.S. on the ground. Labor laws and the nature of our employee contracts are different by country and some we actually pay monthly salaries to our employees, rather than the typical hourly rates that we use in the U.S., where we can adjust on a daily basis. So it’s a large business with very many different moving parts, but we’re on high alert right now and all of the regions are looking at local plans and global plans, or how to stay ahead of the curve.

Great, and then you made another comment earlier, Kurt. You said that -- it actually was also in the release -- that you are going to seen an improvement in the second half of results and obviously your targets indicate that with your second half EPS targets. I’m just wondering, is that kind of just mostly on the fuel catch-up, on the surcharge? And if so, what does the -- you know, you keep highlighting the move from $100 to $140. What does the move back down to $130, is that significant at all in helping with that catch-up and does that maybe even further enhance your second half target?

There are some company-specific issues, Ken, that we have been talking about and we’re confident will begin to provide us a little more of a tailwind, starting in the second quarter. Certainly the new labor agreement we have with the teamsters is one that we feel will be favorable to us, basically in any economic climate. The inflation of wages will moderate substantially. The increases are split into two tranches, one each sixth month, so our effective increase in August will be substantially less than it was in the previous year. We had some more favorable language regarding eligibility for healthcare for our part-timers, still giving the best benefits in the industry for those part-timers that stay with us a year or more, but not necessarily giving eligibility after 60 days or 90 days. So there are a number of specific issues there. Also, certainly the assumption we have is that fuel will stabilize, I guess. We’re not counting on a precipitous decline, so at least that big headwind that frankly put us on our heels a bit in the second quarter will moderate. And then we’ve got a lot of initiatives on the international to make sure we are reacting appropriately. And then last but certainly not least, we’re seeing great results in the supply chain in freight unit. The LTL environment does seem to be stabilizing a bit and clearly UPS freight should be able to benefit from that.

This outlook is really based on crude oil right around $140 a barrel, so if it goes up, that hurts us; if it goes down, that helps us some.

Great. Thanks so much for the time.

Thank you. Your next question is coming from Justin Yagerman of Wachovia Capital.

I guess my first question is related to the international side. I was curious -- you guys mentioned that you saw strength intra-regionally international. I was curious if you could quantify around whether or not you thought that was more market share growth and company-specific driven, or -- because we’ve begun to hear reports that Western Europe has slowed a little bit from some of the heavier industrial companies that have reported. And then on the export growth side, you had mentioned in the release that you saw slowing throughout the quarter and I wanted to get some color on that; maybe you could detail the growth month by month in the second quarter.

First off, Justin, on the market share gain, we’ve been gaining market share in the international segment for 10 years now and we’re pretty confident we continue to have a superior business model with the integrated network and the broad range of offerings in every geography. But we did see some of those trends that you’ve seen externally, and there was a significant slowing from April to May to June, really with June being the weaker, in most of the regions and so certainly Europe was a part of that. Europe had a strong April but partially because of the Easter distortion. But we have seen some slowing. The nice thing about our portfolio though is that we are continuing to see this regional trade pattern in Europe moving forward and as fuel prices get high, our sense is that European companies are looking to Eastern Europe rather than the Far East perhaps a little more, and so that helps to offset things.

Okay, and I noticed in the freight division that the weight per shipment at LTL was down. Many of your competitors in their early kind of notes on the quarter have mentioned that they are seeing an opposite trend, and I was curious what you’d attribute the lower weight per shipment to. Is that increased leveraging across the small package network and the freight networks, as you get more -- as the labor is more organized within the freight division? How are you guys viewing that trend within your freight business?

I wouldn’t put too sharp a point on it. It’s five pounds for a thousand-pound average shipment, so -- no, I think the good news is that the weight per shipment has stabilized and that’s a good sign economically. And clearly our value proposition is working well and we are continuing to target medium-sized shippers and large shippers also. But I think the weight stabilizing is good news and the other companies are validating that also. What we are seeing great results on though is our continued success in our yield management and our revenue per hundred weight, so that’s more of a priority for us than focusing solely on the weight per shipment.

Got it. All right, thanks so much.

Thank you. Your next question is coming from Garrett Chase of Lehman Brothers.

Good morning. This is actually Brandon [Oblanksy]. Not to belabor the point on international, but you guys had mentioned that you are looking at intra-region growth as continuing but global lanes are slowing a little bit more than anticipated. How should we think about the profitability impact of this going forward?

Certainly both flows have good margins but from an economic perspective, at least in the short-term, the worldwide flows have a much higher proportion of fixed costs. Volume was negative come into the U.S. from all regions but frankly, we weren’t able to take down any of those big jets coming in from those regions. So in the short-term, the ship is a headwind for us because there is less variable costs in those worldwide products. And on the flip side, on the regional, intra-regional, we do have more options. It is more variable and so it behaves more like a typical U.S. shipment would, where we can adjust pretty well and adapt. So it’s the process of adaptation to these things and as those trends continue, it will mean we will have less lift going across oceans and more lift moving across the continent, and that’s some of the long-term issues that Scott spoke to.

We’ll end up the year with still mid-teens margins international, which is obviously the best of any of the competitors. Not as high as we’d like them to be but certainly solid margins.

Okay, and if you do decide to take down some of this global and intercontinental capacity, is that going to place further pressure on the domestic network? Because I’m sure that some of the export products are actually moving through the U.S. network, so does that place a little bit more pressure on the flexibility of the domestic network?

We’re going to put up lift for any packages that want to come into the U.S. or anywhere else, so we will match capacity to demand. We’re not going to truncate demand with capacity reductions.

What you end up doing if you took planes down internationally, you’d probably move those to the U.S. and then retire older classic aircraft in this situation.

Okay. Thanks a lot, gentlemen.

Thank you. Your next question is coming from Robin Byde of HSBC.

Good morning, everybody. Just two questions, if that’s okay; on the European business, now that [inaudible], what are the next priorities in expanding the European network? And just [on the commission structure], you [won’t see] [inaudible] in the market again as consolidation of the sector, so can you just update us on UPS' strategy on acquisitions? Thank you.

Our strategy in acquisitions has not changed, I think, than what we’ve talked about in the last couple of years. What I’ve said in the past is clearly we’re not going to do anything domestically in the package business, but supply chain and freight, we’ve said we wanted to have a couple of years of good execution and improving margins. We’re seeing that, we’re seeing some good progress there. The one area that we’d be most interested in still is international package, areas that make sense and that’s been the case for the last several years. Certainly Asia and Europe are areas that we are interested in, particularly Central and Eastern Europe.

Thank you. And just on Europe?

Robin, your first question wasn’t really clear. The connection wasn’t really clear. Could you repeat it?

Yes, sure, sorry about that. I was just asking you now that the [inaudible] integrated, what are your next priorities in expanding the European network? I guess from what you are saying, more expansion in Eastern Europe.

Right, yeah, sorry, I didn’t pick up the Tamworth. The Tamworth is a very large ground hub that allows us to complete the operational integration of the acquisition we did of Link several years ago, and it was a big step and actually created somewhat of an operational challenge for us in the second half. But we now have the ability to have one inter-lined operation. We’ve aligned the customer portfolio and so that really is the capstone on our U.K. acquisition and we’ll be harvesting the benefits of that going forward. We’re continuing to benefit from the acquisition we did in Poland. That’s been a great one for us and strengthens our position and clearly we would like to continue to strengthen the Central and Eastern Europe theaters, certainly because of their increased focus on regional trade, so that’s an area that we are investing in and we will certainly continue to do organic expansions with capacity. We expanded our Cologne airport just a year ago and we’ll keep looking for organic opportunities and certainly selective operations. Acquisition is not off the table either, so a combined strategy of both organic growth, which has served us well in Europe, and then keeping eyes open for opportunities.

Great. Thank you.

Thank you. Your next question is coming from John Larkin of Stifel Nicolaus.

Good morning, gentlemen. I just had a question on the two month delay in the fuel surcharge. Is there any kind of structural impediment that prevents you from tightening that down a little bit so that you are doing a better job of matching the surcharge with the actual underlying fuel price? And as a corollary to that, is there any kind of a delayed effect here because the big fuel prices really aren’t probably kicking in until right about now. Are you fearful that there could be an acceleration of the trade-down from premium products here during the months of say July and August?

I think when we set up this index, I think we wanted to be fair to our customers, give them advance notice of what the rates would be. We’re going through an unusual phenomena right now where oil has gone in one direction. It will not go up forever and when it comes down, we’ll get equalized. So I think the right thing to do for our customers is to give them that 45-day notice of when the surcharges will be.

And we continue to do some limited hedging activity, but frankly it’s not within the bounds of the kind of moves we’ve seen, so to minimize the volatility.

Just maybe one follow-on here regarding the international business; have you seen much of a trade-down from air to ocean, and if so, have you been able to capture some of the ocean movements through your forwarding operation? And if so, can you give us a sense for the relative profitability of that business?

Well, we’ve not seen huge shift. I mean, clearly we’re working with a lot of customers as we evaluate supply chains, and Scott referenced that too. But actually ocean seems to be struggling perhaps more. I know the recent data showed a 6% decline in ocean. That’s not company-specific but some external numbers into the U.S. So I think all modes right now are struggling and really the big message is the U.S. engine that drives the substantial amount of imports into the U.S. is slowing right now, and so all of the theaters are seeing some sequential headwinds.

I think we would expect more ocean freight growth with the fuel prices but the market data, you’re not seeing it. You’re seeing negative -- certainly in June the market data showed negative growth.

Within our air freight portfolio, we are seeing more rapid growth in the deferred and porting products as compared to the express freight, so that easy choice we’re giving customers to move from the guaranteed express service down to deferred forwarding, we are seeing that flex back and forth, so it’s just another example of our keep it in the portfolio strategy that we’ve been building towards.

Thank you. That’s great color.

Thank you. Your next question is coming from David Campbell of Thompson Davis.

Good morning, everyone. Some of your competitors have mentioned an improving price control, or have been improving revenue trends in June in the licensed truckload and trucking business. That is the capacity to improve pricing better than in previous months. Did you see the same thing and what does that tell you, if anything, about the economic growth?

I think we really have not seen the headwinds on pricing, David. That’s been one of the real positives with our new value proposition, with the guarantee we launched in January, with the deep integration to our World Ship application for generating freight shipments. Yield has not been a challenge for us. We feel pretty comfortable with our yields. What we have seen though, I guess to support the market anecdotes, is a firming of demand and also a stabilizing of weight per shipment, which are both good leading indicators, we think.

David, looking at the economy, we think that the second quarter GDP is probably going to be the best GDP of the year, helped obviously by the rebate checks. I think that number will be a bigger number than most people expect. But as we move ahead throughout the year, we still -- [we’re not the] leading indicators but certainly what you read and what you see, we expect probably slightly positive growth in the economy but still anemic. Really the important barometer we follow is manufacturing IP. Manufacturing IP was negative in the first half of the year, slightly negative and expected to be slightly negative for the year. So it’s not going to get a lot worse but [it will get a lot better] for the rest of this year.

And the decrease in export yields in the second quarter after increasing in the first quarter, can you explain that, please?

Well, export yields have been fairly steady, both on a pre-currency and a post-currency basis. We’ve seen steady domestic increases and the overall export yields have been flat to slightly negative, and that’s primarily mix issue that we’ve talked about for a number of quarters, with the trans-border services growing faster than the worldwide services. So trends are fairly stable there.

Okay. Thank you very much.

Thank you. Your next question is coming from Art Hatfield of Morgan Keegan.

Most of my questions have been answered but Scott and Kurt, you’ve alluded to the fact that if things don’t change and if say fuel is at these higher levels permanently, you are going to have to make structural changes. I know this is kind of a hypothetical, but do you have in your mind kind of a period of time that you look at to say if fuel is at this sustained level for say six months or a year, there’s kind of an inflection point in time where you decide you have to make major structural changes to the network?

I think, Art, this is a long-term phenomena. I think it’s an evolutionary process and we’ve done a lot of scenario planning on this topic and I think it’s something that if companies decide they want to start building goods closer to the end consumer, it’s going to happen over many, many years. It won’t happen overnight. It’s a big shift for businesses, so you may see a slow movement to near sourcing but it won’t happen very quickly.

And we don’t want to put too much emphasis on it. I mean, it’s prudent for us to stay in the future and think about the trends. We thought it was appropriate to share some of our thinking to let you know that we are long-term players in this industry and we are going to stay ahead of the curve. But as Scott said, these are evolutionary issues and we don’t expect any rapid changes, even if fuel stays high.

Okay. Thank you. That’s very, very helpful. Thanks.

Thank you. Your next question is coming from John [Mins] of BB&T Capital Markets. John Mins - BB&T Capital Markets : Good morning. I’m standing in for John Barnes. Looking at CapEx going forward, if these current conditions persist, could you all reach a point where you put some of the larger CapEx projects on hold?

We continue to evaluate CapEx in an ongoing fashion and frankly we tightened it up prior to giving our guidance for 2008, so we will be right at $3 billion, which is below our 6% of revenue threshold that is typical. But we’ve got a couple of major investments right now that are full speed ahead. We’re expanding our World Port hub. That will continue to pay dividends that allows us to optimize the air network, it allows us to sort faster and fly slower, which saves air fuel, fuel for our aircraft. And should our contract with DHL be completed, having that extra sort capacity in World Port is absolutely essential. So domestically, there are investments we are making and those will wrap up in the next year, year-and-a-half or so that we’ll continue. And then globally, certainly we’ll adjust air fees appropriately but we are continuing to build capacity. China is a very busy place for us right now. Scott gave you an extended tour of all of the Olympics activities but behind the scene also is a substantial amount of increase in our geographic coverage, browning up the country, if you would, and building an infrastructure there. So a lot of work going on. We do have a lot of control over CapEx. We had some committed aircraft in the future but it’s a modest amount and frankly as 2012 comes around and some of the aging aircraft directives come in, it will be a natural transition for us to replace our DC8s with 767s. So we feel real good about where we’re at from a CapEx perspective and we’ll be reacting, but not -- we don’t feel that it’s going to hamper our capabilities at all.

We’ll continue to make the right decisions for the long-term for this company but rest easy that we are vigilant about invested capital, we are focused on economic profits, so we’ll only do CapEx when it makes an awful lot of sense for the company. John Mins - BB&T Capital Markets : I appreciate the time. Thanks a lot.

Thank you. Your next question is coming from Matthew Troy of Citigroup.

Thanks. [inaudible] an earlier question, I was wondering, the economic assumptions underlying your outlook -- I understand the value of your network visibility is a coincidental economic indicator and some forward-looking capability, given delivery stocking and sell-through of what you are actually moving through your customers. But looking at the dashboard of your outlook, you mentioned IP. What are the other key metrics you evaluate in determining your broader outlook? To what extent does --

Certainly IP is probably the best barometer but clearly retail sales I think combined with IP are the two that we’ll look at closest as we move forward. And again, the outlook that we see as we move through the rest of 2008 is the retail sales got a bump in the second quarter with the rebates. They will moderate. They are still growing below inflation levels at this point in time. Manufacturing IP is going to be flat to slightly negative, so we really are -- our economic assumptions for the rest of this year are just real slight growth in the U.S. economy.

What extent does that economic outlook incorporate customer dialog? And really, what is the visibility you’ve got? Is it two months, is it three months out? I’m just trying to get a good sense of how we should weight your economic read relative to some commentary we’re hearing at some other industries.

Well, the macroeconomic really comes from consensus estimates out there but we talk to our customers all the time and get a feel for where their business is going, particularly as we head into peak season. We have to plan our peak season months and months in advance, so we talk to an awful lot of our shippers and get an idea of what they see as inventory stocking levels. So it’s a combination of the macroeconomic data available and certainly talking to our customers. And I think the feedback we are getting from our customers today is somewhat consistent with our macroeconomic outlook -- it’s going to be anemic growth; growth, but anemic growth.

A follow-up question; in times like this in the service-based industry, customers often lean on their suppliers, if not on price than for greater value or more service. Are you seeing -- you talked about the trade-down from premium that’s occurred, in addition to some lower traffic levels. Are customers asking you to do more for them, whether to commit your assets as rolling warehouses or put your balance sheet to work on their behalf? Is there something that you see at the margin that customers are asking you to do that might have been different than 12 months ago? Thanks.

Yeah, they’re asking us to do more for them but I think what it is is they want us to help them adapt. And so although there is certainly cost pressures, we’ve got a number of just great anecdotes where we’re working with companies to realign their distribution as the balance of transportation cost and distribution expenses changed. So it’s a very busy time for our customer solutions group, working with customers to partner and help them figure out how to manage. And in some cases, we cannibalize revenue and in other cases, we grow revenue substantially by broadening the relationship. So it’s a very busy time but frankly an exciting one for our sales and solutions people.

Thank you very much.

Thank you. Your next question is coming from Tom Wadewitz of J.P. Morgan.

I just have one follow-up question; I know that it’s a ways out from 2009 but if you look at the prior downturn, Scott, I think you had talked about air volumes being down a bit either in ’01/02 or ‘02/03, and it seems like you don’t necessarily get a quick recovery the second year after, or the first year after a downturn. Is it reasonable to think that margins could be up in ’09 if volumes are kind of flat to slightly up, given the teamster contract, given DHL? Or do you really need to see more meaningful volume growth in 2009 to get margins moving in the right directions?

We think with not a lot of growth, we’re still going to see a better 2009 than 2008. We’re optimistic about the outlook. We’ve done a lot of good things with the company, including the contract, which will benefit us, including the potential DHL contract, which we hope to have signed here soon. That’s going to help us in 2009. We feel good about the outlook. We think that the business is solid in all areas. Comparisons obviously get a little easier after 2008, so we’re obviously optimistic about ’09 at this point in time. Clearly growth helps us. If we see the volume grow, it lowers our effective weight rate increases and that’s also helpful. Right now, we’re seeing certainly the effective weight rate increases, you know, [similar] to the contract increases through the July 31st period. Now into August, that will be less painful, as the rate goes down, as the rate increase goes down. But I think that we can show improving margins. We’ve had a lot of volume growth, certainly volume growth would help us in effective [inaudible].

Okay, great. Thank you.

Thank you. Your final question is coming from Ed Wolfe of Wolfe Research.

Just a follow-up to the question I asked before on the timing of the DHL contract; when you had announced it and DHL announced it, you talked about $1 billion of potential annual revenue. I was under the impression that was for 2009. Is that still the thought process?

Well, the discussion, you know, with the contract still being negotiated and [it’s been sent] on their levels of business as we [get into it], so we’re not -- until we really sign the contract, we can’t really determine that number clearly but we were looking at full year, first full year would be 2010, I guess. We’ll have it fully implemented, we hope, by the second half of 2009, so the first full year will be 2010 and we’re talking about those type of levels

Ed, we said we’d be at a full burn rate during -- after the ramp up in ’09 but we did not suggest it was the full revenue for ’09.

Okay, and so the first full peak season when you would be doing this would be ’09 though?

Yeah, that’s correct.

Okay, thanks, guys.

I guess I’ll leave you with two points; first, we expect full-year earnings per share to be within a range of $3.50 to $3.70; and then second, while adapting to the current environment, we are still investing to expand our global presence, ensuring we maintain our leadership role in the industry. Thanks for joining us today.

Thank you. This concludes today’s UPS investor relations second quarter 2008 earnings conference call. You may now disconnect.