United Parcel Service, Inc. (UPS) Q1 2011 Earnings Report, Transcript and Summary

Good morning. My name is Steven, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the UPS Investor Relations First Quarter 2011 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, everyone. Thanks for joining us today. I'm here this morning with Scott Davis, our CEO; and Kurt Kuehn, our CFO to discuss the company's results for the quarter and our outlook for the remainder of 2011. Before they begin, 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 risk and uncertainties, which are described in detail in our 2010 Form 10-K report. This report is available on the UPS Investor Relations website and from the Securities and Exchange Commission. Today's call is being webcast, and will also be available on the UPS Investor Relations website. I want to remind you of 3 adjustments we recorded in the first quarter of last year. These charges related to the U.S. Domestic segment reorganization, the change of tax filing status of a German subsidiary and the loss on sale of a Supply Chain business. They reduced net income by $175 million and diluted earnings per share by $0.18. In the remarks today, Scott and Kurt will refer to UPS's first quarter 2010 (sic) [2011] results excluding the impact of these items. We believe this is the most accurate picture of the company's performance. Reconciliations to comparable GAAP measures and free cash flow, which is a non-GAAP financial measure, are explained in the schedules that accompanied our earnings news release. These schedules are also available on the UPS Investor Relations website in the financial section. Now to begin our review, I'll turn the program over to Scott.

Good morning, everyone. UPS had great results this quarter, continuing the momentum we had in 2010. Earnings climbed 24% on 7% revenue growth despite the obstacles we faced like unrest in North Africa and the Middle East, skyrocketing fuel costs and some of the worst weather conditions in years. So far, the global economic recovery has been resilient, yet, the risks are a little greater than they were 3 months ago. Consensus forecasts have come down slightly, as 2011 GDP growth for the U.S. is now expected to be 2.9% and global GDP is forecast to be 3.5%. Employment has begun to show signs of improvement. Here in the U.S., unemployment dipped below 9% for the first time in almost two years, further evidence that the recovery continues. Obviously, everyone is aware of the tragic events in Japan. UPS is one of the first to support the humanitarian efforts there, working closely with the relief agency partners in Asia. UPS pledged $1 million in relief aid and has been assisting with logistics support. We have delivered many containers and truck loads of emergency supplies and equipment throughout Japan. Some of these important deliveries include emergency shelters, generators, survival kits and food supplies. UPS will continue to look for other opportunities to help the victims. While the immediate impact on the global economy and UPS is not expected to be substantial, the medium-term implications on global supply chains are still not clear. Here in the U.S., it is important for us to demonstrate economic leadership and increased promotion of free trade. Expectations of the Congress will soon address pending free trade legislation that is critical to grow U.S. exports and to create new jobs. The South Korean free trade agreement, that President Obama endorsed back in December, has not yet passed. This critical piece of legislation is needed to further our progress, of meeting the export council's goal of doubling U.S. exports in the next 5 years. Other important trade agreements like those with Colombia and Panama are still in the approval process. UPS stands ready to facilitate the growth of trade between countries once these agreements are finalized. I would like to see Colombia and Panama approved as soon as possible, however, I personally disagree with holding up the Korean agreement while waiting for approval of these other 2 FTAs. During the quarter, UPS continued to be active in expanding our capabilities to serve the economies of the world. For instance, UPS launched 4 direct flights from Hong Kong to Europe, making us the clear leader in guaranteed next-day delivery for this important trade lane. We announced more inter-Asia flights from Tokyo to key hubs in Taipei and Guangzhou, exhibiting our commitment to Japan, and UPS formed a new strategic alliance in Colombia that will provide increased access for customers to our superior global network. Earlier this month, we hosted President Obama at our Landover, Maryland facility where he announced the National Clean Fleets Partnership and made us a charter member. The UPS rolling laboratory of alternative fuel vehicles was on display for the President and his team. With one of the largest alternative fuel fleets in operation today, we are uniquely qualified to discuss issues facing companies as they evaluate their options. In fact in February, we celebrated a milestone when UPS green fleet surpassed 200 million miles of service. Just recently, UPS was acknowledged as a industry leader by FORTUNE Magazine when they once again identified us as the World's Most Admired company in the delivery industry. UPS is rated #1 in 8 of the 9 attributes used for ranking. Some of the key attributes were quality of management, innovation, long-term investment and quality of products and services. In addition, as reported by Forbes, the Reputation Institute recognized UPS as #1 in the transportation industry and #6 overall on its list of America's Most Reputable Big Companies. We will continue to operate in a way that builds both our economic performance and corporate reputation. All in all, it was another successful quarter for the UPS team. We've continued to produce the best results in the industry. Our focus on quality of revenue and the value of our integrated network ensures that we continue to be the best. Our innovative solutions, superior technology and efficient use of capital have UPS poised for strong growth well into the future. Now let me turn it over to Kurt.

Well thanks, Scott. And good morning, everyone. The UPS earnings growth story continues. Operating profit for the quarter increased $248 million, and margins expanded by 130 basis points to 11.3%. UPS benefited from our superior products and our flexible integrated network. The negative effects of escalating fuel prices and difficult weather were more than offset by great execution from UPSers all around the world. Now let's review how the segments performed this quarter, starting with the U.S. Domestic Package business. Operating profit jumped 29% on over 6% revenue gains. These results were driven by yield improvements and increased network efficiency. Operating margin expanded by 200 basis points. Revenue per piece grew 5% with the biggest driver being increases in base rates, as we get our prices back in line with the value we provide. Higher fuel surcharges and package characteristics also contributed to the yield improvement. We are executing our strategy on focusing on the quality of revenue. The key objective of this strategy is to ensure that we are properly compensated for the value we provide customers. And this is paying off as evidenced by our strong yield gains. Once again, we did a great job controlling costs in the quarter. Operating efficiency improved substantially, as direct labor hours were down 3% and miles driven down 2%. This is phenomenal considering the challenging conditions we faced during the quarter. U.S. Domestic volume growth was relatively flat to last year. Clearly, this was negatively impacted by severe weather, a softer economy and the timing of Easter. In 2010, the holiday buildup occurred in March, while this year, it's occurring in April. We estimate that the combination of weather and the Easter calendar had a negative impact on average daily volume of about 2% for the quarter. While overall, our Next Day Air was up about 1%, Next Day Package volume grew at mid-single-digit rate, reflecting our focus on the quality of revenue. During the quarter, UPS made a substantial commitment to expand our fleet of Liquefied Natural Gas tractors. Later this year, the 48 new LNG tractors will join our fleet of almost 2,000 alternative fuel vehicles. We're encouraged by the ability of this technology to offer an alternative to diesel fuel for large over-the-road vehicles. Now let's turn to the International segment. Revenue increased 10% with a solid operating margin of 15.4%. The operating profit of $446 million is the best first quarter result in UPS history. Although year-over-year earnings growth did slope to 4.4%. Clearly, the rapid increase in fuel cost had a negative impact. As we stated during our last call, the first quarter of 2010 benefited from our euro hedging program. This negatively affected the year-over-year comparisons by about $30 million. Average daily export volume increased over 7%, outpacing the market. We continue to see strong export growth in Europe to all regions of the world, as customers there recognize the benefits of the UPS value proposition. International Package yields grew 4.5% on a currency-neutral basis, driven by higher rates, fuel surcharge increases and product mix. UPS was active during the quarter, adding capacity to our Asian Air network. In addition to the direct flights from Hong Kong to Cologne and the new routes from Japan that Scott mentioned earlier, we also upsized our capacity serving the import in South Korea to U.S. trade lane, with the addition of a 767 flying in and out of Incheon. Further emphasizing the breadth of solutions we provide, in March, UPS opened the 2012 Olympic Games Logistics Center in England. This is an important milestone that will allow UPS to deliver the games. We are responsible for virtually all distribution and logistic services for the London 2012 Olympic and Paralympic Games. Now for the Supply Chain and Trade segment, which continues to produce strong results. Operating profits climbed 44% on revenue growth of 7.6%, driven primarily by improvements in UPS Freight and the Forwarding business unit. Operating margin increased 150 basis points to 6.1%. In the Forwarding unit, operating margin improved significantly, as capacity in the market expanded and buy rates came down. Top line growth moderated somewhat, as we focused on revenue management initiatives implemented last year. UPS Freight revenue climbed 23%, continuing the strong rebound that started last year. LTL shipments improved 10%, and weight per shipment was up 2%. LTL revenue per hundredweight was up more than 8% and continues to be 1 of the best in the industry. Operating results improved on a year-over-year basis despite challenging weather conditions. During the quarter, UPS announced the expansion of our express air freight services to customers in Israel and Slovakia. These developing countries are becoming important hubs for automotive, technology and other manufacturing industries. We also expanded our preferred less-than-container-load Ocean Freight service in Asia. More customers can now benefit from this unique expedited service that improves Ocean Freight delivery times to the U.S. by up to 40%. Now let's look at one of the hallmarks of UPS, our ability to generate cash. Free cash flow for the period was $900 million in spite of $1.2 billion in accelerated pension contributions made early in the quarter. Capital expenditures were $400 million. With respect to distributions to share owners, we paid $500 million in dividends, reflecting a 10.6% increase per share announced during the quarter, continuing the UPS tradition of more than 4 decades of raising or maintaining our dividend. The company also spent $500 million to repurchase approximately 6.8 million shares. Regarding our outlook for the rest of 2011, the global economic outlook has become a little cloudier than it was 3 months ago. However, we still expect 2011 to be a great year with record earnings per share for UPS. In fact, our confidence has increased, and we are raising guidance for 2011 to a range of $4.15 to $4.40 per share, representing a 17% to 24% improvement over last year. In the U.S. Domestic segment, we expect average daily volume to increase approximately 2% for the second quarter with continued strengthening in the second half of 2011. For the full year, Next Day Air and Ground are expected to grow at a similar pace. Yields will remain strong, as we continue to focus on the quality of revenue. And operating profit growth is expected to exceed 20% for the year, up from our previous guidance. For the International segment, both revenue and operating profit are expected to grow approximately 10%. Full year operating margins are expected to be similar to 2010. Year-over-year comparisons in the second quarter will be especially difficult, as a result of headwinds created by our euro hedging programs, we estimate the impact to be approximately $40 million. Our Supply Chain and Freight segment is expected to produce mid to high single-digit revenue growth with continued margin expansion, driven primarily by UPS Freight. So in conclusion, UPS is off to a good start, performing well in the face of challenging conditions. We are executing our strategy of focusing on the quality of revenue, providing the best service and offering the most comprehensive set of solutions to our customers. The UPS integrated global network is operating with incredible flexibility and efficiency. We are confident in our ability to meet customer needs and excited about the results that UPS share owners will see in the future. Well, thanks for your attention. And now Scott and I would be happy to answer your questions.

[Operator Instructions] And our first question will come from the line of Mr. Gary Chase of Barclays Capital.

I wanted to see, Kurt, if I could ask you to follow up a little bit on some of the volume commentary. I know you noted what you expected was a 2% impact for eastern weather. Even if I adjust that away, still don't seemingly have a lot of volume growth relative to what we're seeing, say, in industrial production and some of these other drivers. Is that the impact of these pricing initiatives? Is it de-marketing of some business that you know -- you just don't think is compensatory? What other color can you provide there?

No, we don't think there's a big impact of our yields focus. We have seen a little bit of a differential though in the growth, certainly, at the heavy freight end of the market from the small package. As we look at some of the statistics, industrial production is showing strength, but the majority of the strength in industrial production is coming from some of the heavier industry side, metals and some of those things that don't necessarily impact small package. So we do think that the Q1 was a little -- the economy was a little softer than we'd anticipated. I know some of the quarter-to-quarter numbers are now coming in at estimated 1.9%. But we see this really as a transitory, we think over time small package, the growth will ripple into there and that the freight is more of a leading indicator.

And Gary, during the recession, the IP numbers were down a lot more than the small package market volume was. So I think part of this recovery too is kind of distorted those correlations.

Okay, and then just as a quick follow-up to that, you guys have always talked about the leverage you have in the labor contract as it relates to volume. Do we need a lot of growth in order to recognize that? Are we reaching a stage where maybe attrition will allow you a little bit of leverage there?

Well, I think we're seeing pretty good leverage right now, even with the headwinds we had and some of the most extraordinary weather in the first quarter. We did a great job of expanding domestic margins, and comp and benefit adjusted were up just slightly more than volume rates. So we think that the operating efficiency, the operational technology that's kicking in is showing substantial benefits. So I think we're seeing these benefits even without the tailwind of significant benefit of wage moderations. So still more to come as growth continues.

Thanks, guys.

Our next question will come from the line of Kevin Sterling of BB&T Capital Markets. Kevin Sterling - BB&T Capital Markets: Thank you, Scott, Kurt and Andy. Scott, are you guys seeing customers move up and down the supply chain with the volatility in oil prices?

I think not as much as we would have seen the last time through in 2008. I think one, we've adjusted our surcharge index where the difference between Air and Ground is not as dramatic as it was in the past. And then what you saw the first quarter actually was better performance in the premium products internationally and better performance on Next Day Package domestically, so we're not seeing it at this point in time. Kevin Sterling - BB&T Capital Markets: Okay, thank you.

That's been a big priority for us following the spike in fuel in 2008 to revisit the structure of our fuel surcharges. And in general, the surcharges are lower because we have continued to move some of that rate into the core rates. And then, as Scott said, we've narrowed the gap so that we don't think the risk of trade down will be as great. Kevin Sterling - BB&T Capital Markets: Okay, great, thank you. And Kurt, as a follow-up, you mentioned in your prepared remarks that miles driven being down in the quarter. But as volumes pick up this year, do you anticipate this increasing? Or given the initiatives that you have in place, can you keep miles driven, say, flat?

Well, it really depends how great the growth is. I mean, we'd love to see an increase in miles driven by a robust economy and significant increases. We are confident that our miles will continue to grow at a much lower rate than our volume and growth and stops. The operational technology we put in to optimize and the focus on reducing fuel consumption is paying some real dividends. Kevin Sterling - BB&T Capital Markets: Okay, great. Thanks so much for your time this morning.

Our next person comes from the line of Mr. Ed Wolfe of Wolfe Trahan.

Thanks. Just back at the volumes domestically, did I hear you right, Kurt, the guidance was 2% for second quarter for domestic volumes and better than that in third and fourth? And if that's the case, and you're down a little bit this quarter and a couple points for weather you're saying, were March and April better? Is that what's giving you the confidence to go from minus to positive 2%? And if so, kind of what were March and April?

March was not really better, Ed, because of the Easter lag. The buildup in the Easter comes several weeks before Easter. This year, with a late Easter, that's really moved over into April, and so we are seeing the typical seasonal buildup into April. So we don't see the core economic growth picking up dramatically, slightly better than for Q1. But the noise of the unprecedented weather, really, all 3 months, saw a significant weather headwinds, and the calendar impact and the little slower economy. As we factor through all those, we're pretty confident that the core growth rate coming into Q2 should be about 2%.

And April thoroughly is performing better than we saw in the first 3 months.

Can you give some number to that?

I think it's tough, Ed, right now because of the Good Friday and Easter Monday comparisons. Certainly, the first 2 weeks were quite strong last week compared against Good Friday, down a little bit. But we'll see a, certainly, a better April than we saw in the first 3 months.

Okay, and as a follow-up, with the domestic volume not there, you were still able to show the leverage and grow the domestic margin. Can you talk a little bit about what some of those levers are? Is it time and hiring people that's letting you leverage the underlying contract a little bit? Is it something else? Where are you seeing this leverage and what does 2% mean to that leverage relative to 0.6%?

The leverage is really coming from 2 components. Number 1 is the top line leverage, where as I said, one of our top priorities is making sure that we get pricing back to the levels that compensate us for the value we've created. And so the relatively firm stance on pricing and extracting the value that is there is a big driver of that. And at the same time, we are seeing the benefits of the deep investments we've made in operational technology. And we'll show a lot more of that at our Investor conference in September to give you guys a little more understanding of the multiple areas that we're streamlining to network. So -- and all of that is without significant benefits of growth, which will help us both on scale densities and also the moderating the wage increases.

Thanks for the time.

Our next question will come from the line of Nate Brochmann of William Blair & Company. Nathan Brochmann - William Blair & Company L.L.C.: I just wanted to follow up on Ed's question there a little bit in terms of talking about the yields and the price increases. Obviously, you're doing a great job there, and it's a big priority. But how easy is it to get the customer acceptance with fuel surcharges rising so rapidly? I know a little bit more of that's in the base, but how are you kind of thinking about that and what's the customer acceptance there?

I think so far, at least, the customer pushback has been minimal because certainly the levels are below some of the peaks that we saw. So, so far, not too much disruption on that front, but we have gone back in and worked with customers actively to see how we can realign their supply chains to minimize the impact of that. But so far, we haven't seen a significant impact of people really going back and revisiting their blend of premium and standard products.

The real concern for us is how long and how high energy prices go because that will probably impact the economy more. I think the rule of thumb for economists are that if oil prices go up $10 a barrel, it's going to knock down GDP about 0.02% in the year 1, about 0.5% in year 2. We've seen about $30 run in crude oil, so that could certainly have an impact in 2012, knock out about half the growth. So that's our concern, how high the prices go and how long. Nathan Brochmann - William Blair & Company L.L.C.: Fair enough. And then, in terms of -- we talked a little bit about domestic maybe being just a little bit slower, how are you feeling on the International side in terms of the volume trends there and kind of going forward?

We were clearly thrilled by a continued very strong growth, 7% unit growth in our export volumes. Europe continues to outperform even with continued sluggish economy in Europe. So we feel very good that the International business is continuing to move forward. The comparisons to last year were a little tougher, as we said, because of some very beneficial hedging we had in 2010. But global trade continues to move along fairly strong, as Scott mentioned, in his prepared comments, not too much disruption yet on the Japan side, but UPS story continues to be great.

Yes, I think the global GDP numbers have maybe come down a tick from what we looked at 3 months ago. And that's pretty impressive when you consider what was now 3 months ago was the Japan situation, clearly, the problems in the Mideast and North Africa, the impact on energy prices, I think overall we've seen the global GDP drop from 3.7% to 3.5%, that's pretty encouraging really as we move forward. Europe actually has got a little bit better in that time frame, it's up 0.02%, the expectation for the rest of the year. So we feel it's a resilient economy, and we'll seek strong global trade throughout this year.

And I think one of the things we're doing is we are continuing to reinvest in that. With the announcement of the direct flight of Hong Kong into Europe. You connect those flights into our -- all points hub in Cologne, and we can have guaranteed service to 34 countries within Europe next day. So we're leveraging that deep integrated network we have in Europe and connecting that to Asia. Nathan Brochmann - William Blair & Company L.L.C.: Great. Thanks for the time, and thanks for the color.

Our next question will come from the line of Scott Malat of Goldman Sachs.

Thanks. For domestic yields, can you just help us think about the positive impact of the dimensional weight changes, what you're seeing there? And then, anything you could tell us about weight changes, in general, will be helpful.

In general, weight is fairly stable, maybe up just a little bit, and that's typical with a recovery. It hasn't been perhaps as rapid as some other recoveries but neither has the absolute economic growth. The dim weight is just a part of our annual recalibration of the appropriate pricing, and it just more strongly focuses on those high cube packages that eat up a lot of space in our vehicles. So it is a contributor but certainly not material. I mean, the base rates, the fuel surcharge and some of the characteristics mixes are all a bigger impact in the dim weight in and of itself.

Okay. Thanks, that's helpful. Then just following up on a question from before, can you talk about what percentage of drivers are on the highest paid tier, remind us what kind of typical averages are? Just help us think through the mix right now of your drivers. And then, can you talk about the timing seasonality of turnover? Do you get more turnover in 2Q than the rest of the year?

Yes. No, we remain at a very high percentage, over 90% of our drivers are at the full senior rate. And as we continue to streamline the network and reduce our direct hours, there's not as much mix of new employees in. So that's still a latent opportunity for us as we show stronger growth and the economy continues to expand. But we did not get any benefit from that in Q1.

So over 90% and normalized levels are low 80s, 82%?

Something like that, yes. It differs based on the velocity of growth and the seniority of our employees.

This is as high as we can ever remember it.

Okay, thanks.

Our next version will come from the line of Mr. Ken Hoexter of Merrill Lynch.

Great. Just sticking on that same theme, Scott and Kurt. It looks like your comp costs were up 1% year-over-year, obviously, well below your revenue growth and obviously great move there and part of the margin gains. But can you talk about -- is that kind of the contribution toward the pension you've made? What is driving that spike increase?

Well, we did have a few cost headwinds into the year that we talked about in our guidance. So our pension expense was up substantially. We reinstated the employee match for the 401(k). At the same time, with -- we were able to limit our unit costs as it were across the whole company to less than 1%. So we feel very good about the trends in our comp and our productivity.

Yes, I think, Ken, it's just improved productivity. And we're continuing to invest in technology in that arena and will spend some time in the investor conference in September to walk through some of these, but there's more to be had there also.

So are we seeing actual employment numbers come down, aside from the driver numbers Scott was just talking about? Are we seeing -- is this increased productivity that gets rid of -- are you looking at employee numbers coming down on that?

Up dramatically. I mean, with the -- it depends on the growth, certainly, if the U.S. economy stagnates, then there may be some reductions as we improve productivity. But with modest growth, we can basically offset the need to increase employees.

Ken, we're so flexible. That answer is different everyday based on package volume that we see coming in.

Great, and if I can get my follow-up on the Forwarding business. It looks like, again, you had, I guess, growth slowed there, down 3% from kind of mid-teens the last couple of quarters. Is there anything going on in the freight side, just trying to find something else because on the core side, you did such a great job on the margin gain.

Yes. No, we've been -- we've -- actually, we're very pleased with our overall supply chain and freight performance with over 40% profit improvement. I did mention that in the Forwarding, we have been clearly going back and focusing on revenue management. Margins improved substantially. The other thing that's in that Forwarding and Logistics line is there is some headwind because we were overlapping the disposition of 2 businesses that were in that space. One, a small German Supply Chain business that we liquidated last year. And then late last year, we did sell our Logistics technology business, so there is a bit of a revenue headwind on that front that took the core Logistics growth down from solid mid-single-digits to just slightly increasing. So that distorts the numbers a little bit.

In air freight, in the first quarter last year, if you remember, it was extremely strong as there was still a capacity shortage out there. Rates were high and strong. This year, pretty slow February out of Asia, particularly with the Chinese New Year and people coming back to work late.

Thanks, guys.

Our next question will come from the line of Mr. Tom Wadewitz of JPMorgan. Thomas Wadewitz - JP Morgan Chase & Co: So your Domestic Package margin performance was very good in the quarter. I guess, if you look at it from an incremental margin perspective, it looks like about 43%, which is a pretty strong incremental margin performance. When you look at second quarter, do you think that, that can actually get better because first quarter, clearly, you didn't -- you had the weather and fuel lag impacts and volume is not quite as good. So I guess, if you can just offer thoughts of, can you do even better looking forward because it would seem that, that be kind of a natural conclusion, given the headwinds in first quarter? Thanks.

Tom, I guess I won't get into the details on incremental margins. There's a lot of moving parts there. Some is driven by total revenue, some is driven by yield and some by productivity. But we certainly feel that Q2 will be a better quarter than Q1. A, seasonally, it's usually stronger. And B, once again, we had some extraordinary headwinds in Q1. For those of you that live in New York know the kind of weather that we faced. Our small package operation because of the flexible network was able to adapt. We did see a little more headwind in the freight. But assuming that we don't get snow in May in Manhattan, we think we'll be in much better shape on the domestic side. And that's really the domestic outlook that was the driver of our guidance increase that we gave this quarter. Thomas Wadewitz - JP Morgan Chase & Co: Okay. And then in terms of a follow-up, you were asked earlier about just the broad approach on pricing. Do you think there is a significant difference in the sales force this year versus what you would have been this time last year in terms of how they're approaching the market, and that, that is playing some role in terms of realizing more price and a little less volume?

Tom, we are placing a slightly stronger focus on yield as opposed to just pure growth for its own sake. So it's possible at the increment that there's some reduction in volumes. Although we're not explicitly deciding to slow the growth down, so we feel pretty good that we're finding a good balance. As I said, Q1 was a very noisy quarter with calendar issues, with fuel, with the economy slowing and with weather. So I wouldn't read too much into the Q1 results. We think we'll get back on a reasonable growth trend, and that's encompassed in our guidance. But we did say over a year ago that 1 of our priorities is making sure that UPS gets compensated for the value that it creates. And we feel good that we're on track for that. Thomas Wadewitz - JP Morgan Chase & Co: Great. Well, good, good quarter, and thanks for the time.

Thanks, Tom.

Our next question will come from the line of Jon Langenfeld of Robert W. Baird. Jon Langenfeld - Robert W. Baird & Co. Incorporated: On the international side, can you talk about how pricing, general pricing trends in the trans-Pacific, transatlantic and intra-Europe?

Yes, pricing has remained pretty positive, and you'll see that if you look at our currency adjusted results, John, that they've actually strengthened. So we do feel pretty good that it's a very stable environment. Certainly, there's no one consistent message for each market. Asia can be a little more volatile because of the big swings in capacity and growth, but we are very focused just as we are in the U.S. on making sure that we're pricing to value. And then for UPS, that unique value proposition is extremely strong, with us really being the only -- one of our major competitors that has a very strong balance position in Asia, in Europe and in the U.S., with the incredible capabilities we have within Europe, with our linkage of Asia to Europe next day, all of those things just continue to give our sales people a very strong value proposition. And on top of that, this ability to align our supply chain and trade capabilities with the small package solution makes it so that we really don't have to get aggressive on price to continue to grow reasonably. Jon Langenfeld - Robert W. Baird & Co. Incorporated: Okay, good. And then same question, in the Domestic business, Kurt, you've talked about the small and midsized shipper being a hollow recovery and not seeing as much there. Can you comment on any recent trends there, and how that segment looks?

Yes, John, that is one of the kind of the side stories in the domestic economy that we have seen that large global companies have bounced back more quickly. And certainly, that's the story in the U.S. where our big accounts and our accounts that have a global footprint have seen more growth. And that Main Street has been lagging some of these global companies. Liquidity hasn't been available, in that the recovery has, to some extent, been delayed in the middle market. So that trend has continued. We do see higher growth in our global companies than we do in our small and medium-sized ones. We think frankly, that could be a tailwind going forward as that part of the economy picks up more.

John, I think I'm optimistic you'll see a pickup later this year in that group. I think clearly the credit availability has improved dramatically from where it was 12 months ago, for the SMEs. That will help an awful lot. We're also working hard to get some of these free trade agreements done to help get the SMEs into the exporting part of the business because that's where the future is for them. And you heard many times, 95% of the consumers are outside of the U.S. We have to get small and medium-sized enterprises to export. Jon Langenfeld - Robert W. Baird & Co. Incorporated: Thank you.

Our next question will come from the line of Jeff Kaufman of Sterne Agee. Jeffrey Kauffman - Sterne Agee & Leach Inc.: Thank you very much. 2 questions, you spoke a little bit about the heavy versus light and the small shipper versus global shipper notice you had seen. I was wondering if you could give us a little bit more geographic color. We've been hearing a theme across a lot of companies that kind of the, the middle of the country and the farm belt was a relatively stronger economy than on the coast, could you give us a view either geographically or industry-wide of where you're seeing some changes?

Yes, Jeff, there's not huge differences. Although I think your pickup on the Midwest, certainly, with some of the manufacturing rebound and some of the commodity and early products and supply chain booming that we are seeing some firmness there. Although, clearly, the automotive group has recovered substantially versus where it was at a year ago. So I think on a year-over-year basis, we're seeing some pockets of strength centered around some of those specific industries.

From a sector perspective, Jeff, and for us, it seems like we still saw in the first quarter the major growth in the retail, on the technology side. As Kurt said, we are seeing sequential strengthening in the manufacturing of wholesale durables as we've moved through the quarter. So it's looking a little bit better as we move forward. Jeffrey Kauffman - Sterne Agee & Leach Inc.: Okay, thank you. And the follow-up, you made a comment on the freight forwarding side that I thought was interesting is that you were able basically to purchase your capacity at better rates, which would seem to fly in the face of we've got great strength in the international markets. Is it more on the Ocean side, is it more on the custom side, or is it just that you are able to fully pass on price increases to customers?

No, it's more on the Air side. And we think one of the real opportunities, Jeff, for us is to take advantage of this very unique business model we have where we are both an airline and a very large freight forwarder. And 1 of our top priorities over the last 6 to 9 months has been really perfecting our buy rate capabilities and knowing when to use our network and when to buy capacity. So with the softness in Asia, especially because of the Chinese New Year, there were some opportunities to do some spot buys at attractive rates. So if you're opportunistic and you've got comprehensive systems and you can look at alternative ways to get goods to move, there's some real opportunities to get good margins. Jeffrey Kauffman - Sterne Agee & Leach Inc.: Okay. Thank you very much.

Our next question will come from the line of Bill Greene of Morgan Stanley.

I just had a couple of quick data questions. The first was, Kurt, could you just talk a little bit about the size of your B2C business now and the growth rate in the first quarter?

Yes, B2C remains, Bill, a little bit over 1/3 of our volume. And it certainly was stronger in the first quarter.

Stronger than B2B?

Stronger than B2B, yes. The B2C growth continues to be stronger, certainly, especially at the lighter end of the market where there is a lot of focus.

Okay. And then, the follow-up question here is just on the buybacks, I guess, given how good the first quarter cash flows were and how well you actually did in 2009, I realize there's uncertainty in the world, but I would think that your buyback could be a lot more aggressive. And I'm just kind of curious what holds you back.

Well, we guided to a fairly substantial increase, up $2 billion for the year. We increased the dividend almost 11%. Having said that, Bill, I think you're correct that the cash flow outlook is strong even with all of those distributions. Our forecasts are for an increase in cash balance, and we'll continue to look at that. But right now, we're executing around what we guided, and we did purchase about 25% of the annual amount. We do some of it. We're doing systematically and some opportunistically, and we'll continue that way. So...

Yes. No, but you're raised your earning guidance, so I thought maybe you'd raise this as well.

Well, we'll see. We'll see.

Okay. Thanks for the time.

Our next question will come from the line of David Campbell of Thompson Davis. David Campbell - Thompson Davis & Co: It's Thompson Davis & Company, and thank you very much. I heard your kind of favorable comments about Forwarding and the Supply Chain Solutions divisional profits, but assuming that the Freight division sort of broke even versus a loss a year ago, there wasn't a lot of growth in earnings in the Supply Chain business. What happened there?

Well, I don't think that's true. No. We saw significant improvements in both fronts. Our Forwarding group increased, and we did see good improvements in our Freight. David, you're correct. The UPS Freight segment, overall, was approximately breakeven, did had a real great March, which had a little better weather, but the flexibly of the LTL isn't as much as package. So we did see some headwinds in January and February. But overall, the segment's up 44%, and our Forwarding unit did see substantial improvements in margins versus last year.

The LTL margins didn't lose $40 million last year's first quarter. It's much less than that. David Campbell - Thompson Davis & Co: Okay. So you're optimistic about that forwarding operations in the second quarter?

Yes, we are. We think we've got the global network put together. We're continuing to enhance our forwarding capabilities. We're expanding cold chain capabilities as we target the healthcare market, and there's clearly a lot of opportunity for high-quality forwarding with temperature control capabilities. So there's a lot of ways we think we can continue to differentiate our forwarding capabilities across the globe. David Campbell - Thompson Davis & Co: Okay, thank you very much.

Our next question will come from the line of David Ross of Stifel, Nicolaus.

First question is on the other operating expenses. Outside of fuel, which we know why that was up more than rest of -- repairs and maintenance was up significantly more than the others, is there any weather impact in the repairs and maintenance line, or is that because the fleet is getting a little bit older, you kind of due for some normal maintenance checks?

I think it is not atypical for us to see repair and maintenance jump in a quarter or 2, and this has primarily driven the, I think, engines and airplanes with maintenance there. Now that will vary by quarter based on timing of C checks and those type of things. So nothing out of line there.

Okay. And then, if you look at the UPS Freight segments with yields up high single digits, can you give us a little bit of a breakdown in terms of how much of that was maybe fuel surcharge, how much is mix-related, and how much pure pricing is going up right now in the LTL market for you guys?

Yes. Fuel was a little more than half of the 8.5% revenue per hundredweight. So we still had very good solid base rate improvements. And so we think we're striking a real good balance of steady, prudent growth, and also very firm yields. So we're pleased with the progress we're making. We continue to show great results in broadening our market share, especially in the middle market. And aligning our capabilities, so customers can move back and forth between freight and small package.

Thanks.

Our next question will come from the line of Matt Brooklier of Piper Jaffray.

Thanks. We heard your comments regarding weather's impact on volume, 2 percentage points at domestic packages. Is there any way to quantify the incremental cost you guys saw during the quarter from weather?

That was the weather and the timing of Easter.

No, we really haven't broken out the cost. It was -- although, certainly, there was some, as I said, probably the net operational impact was greater in freight than in package. Our package network is highly flexible, but we did see demand impact. And our sense is that we'll ripple through into Q1 GDP estimates or that, that will be coming out shortly. So it was a headwind for cost, but it was a balanced mix of both the revenue reduction and some additional increase in expense.

Okay. When we got your guide for '11 at Supply Chain and Freight, all in, with respect to the revenue growth, any chance you want to provide some color on the out margins at that division in '11?

Well, we do think it will continue to show moderate improvements in margins. And we feel pretty good about the progress on that. Clearly, we're not going to show 44% improvements every quarter. The comps to last year were a little easier. Frankly, this quarter, they'll be a little tougher in the second quarter. But we think, in general, we're going to see good solid upper single-digit revenue growth and margin expansion.

And KL is normally stronger in Q2 and Q3, which will help us.

Right. Okay. Thanks, guys.

Our next question will come from the line of Chris Wetherbee of Citigroup.

Okay, thanks. You guys have commented a couple of times on trends in Asia. I just wonder if you could develop or build on that a little bit. Just kind of what you have seen, particularly in March and April, as we came out of the Chinese New Year holiday and if we've seen strengthening in that region.

I think we are seeing strengthening. And I think, January and February started off a little bit slow due to the factory closure in China. But I think, March has strengthened, April is staying strong. The unknown right now obviously is the impact to supply chain from Japan. Right now, it's not had a big impact to our volume and revenue numbers. But as we go forward, that could be a bigger impact, overall, for the economy. I heard a lot of things yesterday, I think Johnson Controls mentioned that big reduction in parts and imports for them from Japan going forward. So I think, clearly, you're going to see an impact on the automotive sector. The technology is unknown at this point in time. It's really hard to see. There's lots of rumors of parts shortages. At UPS, we're big a procurer of technology. We have not seen shortages at this point in time. So it could have an impact, but overall, we're seeing a pretty good strength out of Asia and global trade should stay strong.

Okay. And just on the back of that, when you think about your guidance for the full year, marrying in the price of fuel and what we're seeing out of Asia, I'm guessing, could you just give a little bit of color of what your -- underlying assumptions there, particularly as it relates to fuel? And then what we're seeing, I guess, as Japan, have you included anything in your forecast as you look forward, I know you mentioned domestic is a bit of the driver for the increase going forward?

No, we really have not factored in an explicit Japan impact. We've looked at that and you can come up with numerous positives and negatives. I mean, we have seen some customers reaching out to us to help them relocate their distribution capabilities. So depending on how it ripples through the supply chain, there may be movement from Ocean to Air. Certainly, there's going to be some demand disruption. So with the Japan factor, we've really not explicitly quantified. We have estimated fuel to be somewhere $105, maybe a little more than that for the year. So there's maybe a little exposure there. But remember, that the big issue for us on fuel is rapid change. So when it moves rapidly, as it has this year, we do suffer a 2-month lag. And certainly April has a headwind because we're overlapping February, and then early March's increase. But if that's stabilizes, even at its current level, then there shouldn't be too much downside risk.

And we have factored in, as our GDP baseline we've knocked it down a couple tenths of a point, primarily due to fuel. As we said before, the fuel's running about $105, $110 a barrel, we'll probably have a couple tenths impact in the overall global and U.S. GDP this year.

Okay, great. That's helpful, guys. Thank you.

Our next question will come from the line of Rob Byde of HSBC.

Just a question on the expansion of your Asia Europe Air bridge. Can you say a bit more about the reasons for expanding at this time? For example, has there been a particular shifting capacity put on by T&T, DHL or another competitor? And then, just to sort of follow-up, can you give us a bit more color on the mix between heavier freight and parcel? So is this additional activity more freight forwarding than parcels?

Robin, let me start with the second half of your question first. The separation in our reporting is pretty clean, that our international export growth is definitely package growth. So that 7-and-plus percent that we showed was legitimate small and medium-sized packages. The freight really shows up elsewhere. So that, even though we do see in the U.S. a fairly significant difference between the freight growth and the small package, the spread is not as great internationally, although that's probably a company-specific story. We did decide to add those direct flights from Hong Kong and really exercise our structural advantage after seeing a number of competitors did frankly. And we do have the capability of linking Asia to Europe in a way that no one else does. And so it did seem that it was an appropriate way. We put up our 747 direct flight, and it's operating very well, and we are seeing good demand for that. So it's both matching some competitive challenges, but also raising the bar, and that we're comfortable to do that when the returns are there.

Thank you.

And due to time constraints, our last question will come from the line of Mr. Scott Flower of Macquarie Securities.

Scott and Kurt, couple of questions. 1 is, and I sense obviously the competitive environment is fairly benign. And you have a lot of noise in the volume numbers in first quarter, but are you at all worried that maybe there's some share loss seeping in on the Ground side because obviously that number is a bit weaker than I would have expected, understanding there is weather and some noise there?

Yes, Scott, I wouldn't characterize the market is benign. The market's extremely competitive. Customers have multiple choices, and so we're out there competing like crazy. The comparisons to our competitors are a little confusing because some of them are use a different calendar. FedEx, for example had the December in their last quarter, which makes comparisons a little unusual. And we haven't heard yet from the post office, which is another very large player. We suspect they'll show negative results. So we do think the economy was a little softer. We're certainly watching carefully, and we think over the longer term, it's been clear that we've been able to maintain share, and our expectation is we'll continue to.

Okay. And then the other question is, and I know obviously, from a soft first quarter, things should improve, but I'm just wondering, with some of the potential depressing effects of oil and obviously, you could already bet, 1-year impact or 2-year impacts, that comes in a lag basis and government cut backs and some of the impacts maybe of the euro on exports. Why you feel other than sort of a pickup from 1Q, that there might not be some softness as we go a little bit later, with some of those impacts that may lag a bit?

Scott, you're right. There are a lot of clouds out there in Japan and gasoline prices near $4, and tightening in China, but there's a lot of positives out there also. I think if you look back at Fed funds they're still near 0, very accommodative. Credit conditions, as I mentioned earlier, are improving for small and medium-sized businesses. Emerging markets are likely to continue to drive growth. I think profits are strong, corporate balance sheets are strong, and you're seeing great numbers, good IP numbers and good retail numbers. So there are some risks out there, but I think there's an awful lot of strengths also.

Will the euro strengthening at all hurt your European export business?

It certainly hasn't to date. We just show strong growth there and then obviously ought to get better U.S. exports with the weak dollar.

And actually the strongest area we're accessing is Europe to Asia where the comparisons aren't as difficult. Scott, maybe just to put an edge on this, we did increase our guidance for the year. It's not based on an estimate of increased demand across the globe. What it really is based on is our increased confidence in the UPS business model to adapt to conditions and to continue to generate good economic results. So it's more an affirmation that we feel the company is operating well than that the global economy has got a lot of upside. We're not gloomy on where the world's heading, but we're also cautious, but we're confident we can adapt to conditions as they occur.

Great. Well, thank you, all.

Thanks, Scott.

That does conclude our Q&A session for today. I would now like to turn the conference back over to Mr. Dolny for any closing remarks.

Yes, I'm going to turn it over to Scott for some final comments.

Thanks, Andy. Well, this past quarter presented significant challenges for many companies across the globe. It reminds me of something, our founder, Jim Casey said, way back in 1947, he said, "Determined people make conditions. They do not allow themselves to be victims of them." His observation of over 60 years ago, still rings true today. UPS is not to write the quarter off when faced with challenging conditions. We rose to the occasion and demonstrated the resilience and flexibility of UPS. And it's evidenced in results that we announced today. Thanks so much for listening, and have a great day.