Good morning. My name is Stephen, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the UPS Investor Relations Third Quarter 2013 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. Please note, we will take only one question from each participant to accommodate more analysts during the call. Thank you for your cooperation. It is now my pleasure to turn the floor over to our host, Mr. Andy Dolny, UPS Treasurer and Investor Relations Officer. Sir, the floor is yours.

Good morning and welcome to UPS's third quarter earnings call. Joining today are Scott Davis, our CEO and Kurt Kuehn, our CFO, along with Chief Operating Officer, David Abney; International President, Jim Barber; President of U.S. Operations, Myron Gray and UPS Chief Sales and Marketing Officer, Alan Gershenhorn. Before we begin, I want to review the Safe Harbor language. Some of the comments we will make today are forward-looking statements that address our expectations for the future performance or results of operations of the company. These anticipated results are subject to risks and uncertainties, which are described in detail in our 2012 Form 10-K and 2013 10-Q reports. These reports are available on the UPS Investor Relations website and from the Securities and Exchange Commission. In our remarks today, all quarterly and full year comments and comparisons to 2012, will refer to adjusted results. In addition, we will discuss UPS's free cash flow, which is a non-GAAP financial measure. The webcast of today's call along with the reconciliations of free cash flow and adjusted results are available on the UPS Investor Relations website. Finally, our goal is to allow as many as possible to participate on today's call, so please ask one question and then get back in the queue. Thanks for your cooperation. Now, let me turn it over to Scott.

Thanks and good morning. Our third quarter results improved from the first half of the year even though our business faced similar market dynamics. Customers continue to streamline the supply chains allowing UPS to meet their needs with our integrated solutions and logistics expertise. The U.S. domestic business continues to benefit from the e-commerce, while international experienced strong demand for UPS deferred products. Performance in our Supply Chain & Freight segment improved, primarily from ocean forwarding, brokerage and North American Airfreight results. Regarding the global economic environment, forecast for growth in EU have been revised upward as it begins to recover from recession. However, Asian economic projections are mixed as expansion in Japan has been offset somewhat by slowing China growth. Here in the U.S., uncertainty created by the partial shutdown of U.S. government has created some anxiety, while the impact to UPS on surface appears to be minimal, some experts predict the shutdown will be a drag on fourth quarter GDP. Though the shutdown is behind us, temporary solutions like sequestration and government furloughs only delayed the inevitable. Hitting the snooze button on our fiscal problems only extends uncertainty and dampens economic growth. No business could survive without careful management's resources and our country can't either. Now is the time for the government to fix the debt and put America's house in order. Although our political leaders struggled to effectively implement economic policy, companies worldwide are successfully adapting to evolving market conditions and evaluating all options to improve their bottom lines and UPS can help with our comprehensive portfolio of capabilities. We are built to meet the needs of business whether it's via ground, air or ocean, an integral part of developing these solutions, is listening to our customers. For example, our Latin American executives told us they expected…

Well, thanks and good morning everyone. As Scott noted, while supply chains are becoming and more efficient, they are increasing in their complexity. UPS's third quarter results reflect the company's ability to adapt to the shifting demands of our customers around the world. Earnings per share improved 9.4% on revenue growth of 3.4. These are solid results considering market trends and the global economic environment. Now, let's review the segment results. U.S. Domestic had a good quarter. Operating profit climbed 16% and margin expanded 140 basis points to 14.4%. Volume growth improved efficiency including savings from UPS safety initiatives and one additional operating day contributed to the success. In addition, while the fuel surcharge lag was a slight drag for the quarter, on a year-over-year basis it was a benefit. Revenue was up 5% on a daily package volume increase of 2.3 as e-commerce continues to thrive. B2C shipments were up 5% during the quarter and we saw an increase in B2B volumes also mainly from retail shippers. Looking at the product level, daily ground volume was up 3% and deferred air improved 2.3%. Next Day Air volume declined 3.3%, reflecting losses of letter volume. Further contributing to slower air growth, some shippers have moved their distribution facilities closer to the customers enabling the greater use of UPS ground to obtain shorter time in transit. Revenue per piece increased 1%, reflecting base rate increases that were offset by lower fuel surcharges, lighter average weight and changes in product and customer mix. UPS Next Day Air yield was 3% higher while ground was up 1.9%, deferred yield declined 2%, primarily due to significantly lower average weight. We were able to create operating leverage and lowered our cost per piece by effectively managing the UPS network. Our typical cost metrics of miles…

Thanks, Kurt, and good morning. The holiday peak season is always an exciting time at UPS, and this year will be no different. Consumers around the world count on us to deliver their holiday gifts on time and in perfect condition. For 2013, the National Retail Federation expects holiday retail sales to increase 3.9%. More importantly, for UPS, online sales are expected to rise between 13% and 15%. At UPS, some of our retailers are cautious in their holiday outlook, however they go into the season with more flexible supply chain options than ever before. Retail customers are focused on managing inventory levels and providing the right customer experience to drive growth. This includes working with UPS on omni-channel strategies, which help to create better touch points for consumers, improve utilization of brick-and-mortar square footage and to ship inventory directly from stores, all enhancing the overall customer experience. Retail customers also talk to us about having a flexible supply chain, so they can respond quickly to market changes. At UPS, we expect this year's holiday season will be another for the record books as we picked up more than 34 million packages on our peak day. As Kurt mentioned in the fourth quarter, we expect package volume to grow 3% to 4%, however with the later Thanksgiving this year, there are six fewer shopping days from Black Friday to Christmas. As a result, we expect daily volume over this shortened window to be up 8%. UPS is continuing to make the holidays easier for consumers too. Our industry first solution UPS My Choice has now exceeded 5 million subscribers. Recent enhancements will provide subscribers the ability to organize their hectic holiday schedule by managing their online orders with the UPS delivery calendar. In addition, UPS My Choice consumers can choose to receive their UPS SurePost shipments earlier by upgrading to UPS ground. By the way UPS, MyChoice services are now available on Facebook, the online home to more consumers. Peak season does not end for us at Christmas. The rapid growth of e-commerce has created a third peak for UPS that starts after the holidays and keeps us tussling into the middle of January. During this period, consumers are taking advantage of gift cards and retailer year end close outs as well as returning gifts received during the holiday. The UPS returns portfolio offer several solutions that help shippers control returned goods and provide their customers with a hassle free returns experience. As you can see, there's a lot going on at UPS to prepare for the high demands for service. I want to wish you and your family a wonderful holiday season, and of course order early, often, and most importantly, have it shipped through UPS. Now, I'll turn it back over to Kurt.

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

Our first question will come from the line of Nate Brochmann of William Blair. Please go ahead.

Hi. Why don't you talk a little bit, I mean obviously if you go back to last quarter, we had a lot of disruption in terms of like shifting around some assets to account for where the freight was coming from and lot of the customer preferences on the deferred. Clearly, you guys have done a pretty quick job of that and obviously that's benefited the integrated network. As we go into the holiday season and you talk about the flexible solutions that Alan just mentioned, how do you continue to reallocate assets based on where are the freight's flowing to maintain the most flexibility for your customers while maintaining the most profitability for you guys?

Well, that's certainly something that UPS has been working on for many years and we think as a benefit of us being able to have one integrated network or we can shift capacity. You know, having a ready fleet of aircraft we can adjust to and certainly having ability to move those quickly is important. One area though that clearly we do this time of the year especially is, we spend a lot of time talking to our major shippers about the holidays and that helps get us a little bit of shake for the peak season anyway. Alan, maybe you could talk a little bit about our approach of preparing expectations for peak.

Yes. As I said in my opening comments, some of our retailers are a bit cautious, but they are ready more than ever with the execution of these omni-channel strategies that we are helping them with, and really what that does is it helps these retailers better optimize, minimize and better utilize both, their in-store and their DC inventories, so they are prepared for any online growth acceleration. It obviously also helps them maximize the price they get for their goods by avoiding markdowns and it also creates that seamless in-store and online experience for the shoppers, so we are pretty excited about the solutions that we have in place for our retailers this year to adjust for any eventualities.

I guess the other component in your question there is, the international component. Jim, maybe you can talk a little bit about the flexibility that we try to build and react to customer demand this time of the year.

No problem. Obviously, the base network, I think you would note as you said in the opening open, we have done a pretty good job over the years to balance that and utilize that. I think the other capabilities that we have in our forwarding unit go down the charters, the ability for a large customers to flex when they needed, so we can bring chatterers into the network or not. The other advantage that we have with network, the ability to flex it with extra rotations at peak capacity, so at that time we feel like we have got the baseline and the foundation, we have a very optimized network at the same time.

Our next question will come from the line of Ken Hoexter of Merrill Lynch. Please go ahead.

Great. Good morning. Thanks. Great job on the domestic side, so let me kind of focus a bit on the international. Kurt, if I heard you right, I think you said margins might rise to about 16%, and they were down year-on-year if I heard that right in this quarter. Just wanted to know what you're doing there in order to get that margin up and is there a cost cutting program and you are taking more assets out just given that international look like a little disappointing in contrast to the strength you saw on the domestic side?

Yes, Ken. Thanks for the question. We are feeling very good about the activities in international. I'll let Jim talk a little bit about it, but you saw the very strong growth that we had in the quarter. We think that momentum is going to continue. Also the headwinds of the fuel and the currency did offset a lot of the hard work, so Jim, maybe you could talk a little bit about why you have increasing confidence in our international sector.

Sure. Obviously, this quarter down $32 million, we had [$75 million] headwinds going against that. We talked about the headwinds coming, but at the same time, beneath that when you look across the geographies, you can see increasing momentum quarter-over-quarter-over-quarter. Right now, we have got very, very good growth and capabilities in Europe and our Americas business and you have heard some of the comments in the opening lines of the trans-border network, so as Asia continues to struggle a bit, in the middle of that, we adjust, we go forward and you have heard a couple other comments about some of our new integrated networks in Turkey and Poland that have great 20% growth year-over-year, so we are confident for best and we are confident when some of these headwinds get behind us, you will see that as well.

Kurt mentioned that fundamentals, we really grew profits 10%, take care of the currency and the fuel, so we felt good about the fundamentals of the business. As you look to 2014, again, we think that currency will not be the issue we saw on 2013, so that will eliminate one of those headwinds as we move into next year.

Our next question will come from the line of Tom Wadewitz of JPMorgan. Please go ahead.

Good morning. I wanted to ask you little bit more about international, I guess it will probably be a popular topic today, but can you give us a sense on what pricing conditions are? Then, I guess, in terms of if there is some weakness in pricing you got to trade down, how much of a headwind is that to margin when you look at 2014, or is it something that given the ability to adapt the network that it's really not a big issue for you when look at kind of profitability in international in 2014? Thanks.

Tom, the issue in international even though I know the currency adjusted yields for exports look very weak with the negative 5%, the vast majority of that impact is not pricing pressure. It is the trade lane mix and the user deferred products. As we said, our deferred products grew by 11%, and a very strong growth, the continent of Europe showed a 10% growth in shipments, so packages moving around Europe have substantially lower revenues, but also a lot less cost so we feel very comfortable that the market is competitive but stable on the price side. As we adjust and adapt and it is great to see Europe picking up steam, I think part of that is the economy getting a little firmer, but most of it is company-specific. As we had talked about early this year, we felt that as we focus back on organic growth strategy, you would see the results of that, so we are pretty comfortable with the pricing environments rational.

Our next question will come from the line of William Greene of Morgan Stanley. Please go ahead.

Hey, Kurt. Kurt, I am wondering if you can provide us with a little bit more color on the fourth quarter. You gave a lot of details around each one of the operating segments and that was helpful, but I think there might be some puts and takes, so that I am not fully grasping in. When I look at sort of a normal sequential change in the earnings, typically I think it's up in the fourth quarter about 14%, 15%, but the midpoint of the range here would be closer to 29%, 30%. Is it all currency that's kind of driving that? It feels like that's not enough, so I am not sure what else I'm missing that would kind of get us more to the mid-point or is it just the economic assumptions that really justify the top and low end of the ranges there?

You are talking for the business in aggregate, rather than just international?

Yes. More like an EPS comment. Just because when you take the mid-point, it seems like it's a pretty big step-up and I am not sure I have all the pieces.

I don't think it's a huge gap against the historical trends anyway. You know, we are seeing good positive momentum in International. I gave you the guidance on that. International, we are looking for profit growth, although frankly there are both, great opportunities and also some risks of a compressed peak season that and Myron will certainly talk about in little while. As you compress the holidays into less days, if things go smoothly and the weather is positive, then there is good opportunity. On the other hand, it does create some challenges, so we comfortable that we can deliver in the range that we have given and I think that the parts of the [Parcel] that we gave will help to back that up.

Our next question will come from the line of David Vernon of Bernstein Research. Please go ahead.

Hi. Good morning, guys. A quick question on the domestic competitive dynamic. Last couple of quarters Next Day Air volume, you noted that the letter traffic is down, you are seeing some things about sort of One Rate pricing stuff like that coming out. How do you feel about the domestic sort of priority market and the competitive dynamic there?

Yes. Certainly, the market continuing to stable, we did show some improvements, but I will let Alan talk a little bit about some of the other issues.

Yes. Certainly, we had strong growth in our ground and our deferred products. Speaking specifically to the Next Day Air, certainly our letter volume was down and that's tied to professional services with a slowdown in the financial services sector as a result of the interest rates climbing a bit and we did see a few losses from some of our large banks.

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

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

Okay great.

I guess one other point just to remember on the air is, we did have a very strong air quarter last year. I think our next day shipments were up 7%, so part of that is the much tougher comp.

Our next question comes from the line of Justin Yagerman of Deutsche Bank. Please go ahead.

Why don't I dig in a little bit on the domestic side? I mean, it looks like you guys got some good pickup on efficiency gains and I know you've got some pretty initiatives with ORION and the SurePost redirect pieces of the business going on, so maybe you could talk a little bit about where you are ORION implementation and how many miles have gotten out of your network. Then on the SurePost redirect, how much of that e-commerce traffic that you are moving is being leveraged by the UPS network now instead of handing off to USPS?

Great. Glad to. I'll turn that over to Myron to fill you in little bit, but we were pleased clearly with the domestic for the quarter and I did mention though we had an extra working day which also helps and we had some safety benefits, but, yes, Myron's people have been very busy rolling out some of these new applications, so Myron?

Good morning, Justin. We continue to take advantage of a healthy pipeline of technology deployments throughout the year. To answer your question specifically, we have been able to redirect approximately 20% of our SurePost volume back into the U.S. Domestic delivery network by improving our delivery densities. As a result of that, we have been able to control the number of direct miles driven. Simultaneously, we have also taken advantage of leveraging our Worldport operations by reducing domestic block hours by over 3.7%. If you will also recall, we fully deployed telematics only six months ago, so we expect to get a continued upside from that and we have only deployed about 13% of our U.S. drivers on ORION right now and early results have been extremely positive, so we believe that there is more available for us.

Yes. Do remember though that the ORION is a multi-year rollout. It's very deep integrated expansion that has to be route specific, but thanks.

Our next question will come from the line of Kelly Dougherty of Macquarie. Please go ahead.

Hi. Thanks for taking the question. Just wanted to stick with U.S. Domestic, it was nice to see a specifically call out B2B volumes during the quarter, so just wondering if you can give us a sense of the magnitude and whether we may have turned a corner from the B2B perspective? Then how we should think about that leveraging into the network? You had strong margins during the quarter. Can B2B help sustain levels like we saw in the third quarter going forward?

Well, I think the B2B did show modest growth, really B2C continues to outperform. I don't want to put too positive a spin on it. I guess, it was really the retail sector, especially with the omni-channel and us moving goods between stores and retailers adjusting their supply chains that drove up the B2B component. The rest of the sectors were fairly flat, maybe slightly negative.

We are still looking for that pickup pick up in manufacturing that's been called for. It's been slow all year long, but hopefully if we can make some decisions on Washington, we will get the manufacturing going again.

Then can you help us to think about whether these margins levels you had very strong in third quarter. How we can think about that going forward maybe?

Well, we have given you some pretty good sense for fourth quarter anyway and both, the opportunities and the challenges. We will be talking a lot more about 2014 next quarter anyway, so we are really not at a point to give any guidance going forward, but rest assured we are working hard to keep our customers satisfied and manage our cost.

If we would be successful on projects like ORION, naturally bodes well for domestic margins and Jim talked about where we are going internationally and then we will tell you a lot more in January.

Our next question will be from the line of Chris Wetherbee of Citi. Please go ahead.

Thanks. Good morning guys. You talked a little bit about international capacity just curious kind of how you think about the pace of activity internationally and whether there is really the need to joining more overcapacities for where you stand in the quarter as well would be helpful. Thanks.

Let me start off with David Abney talking about their air network and utilization and how we reacted there.

Well, we have continued to match network capacity to volume trends. For international, for the third quarter, block hours were down 1%, while our export volume was up 6.7%. For the fourth quarter, the truck routes from Asia to the U.S., we will fluctuate between the 7.5% and 8%. We would probably be down about 4% total international block hours from last year, so that's what we are seeing. You have to remember that we have significantly cut Asia to U.S. block hours by 20% over the last two years and we are continuing to monitor and see where we need to make Ad Hoc cuts.

Our next question is from the line of Scott Group of Wolfe Research. Please go ahead.

Thanks. Good morning, guys. Why don't you just drill down on the domestic package margins a little bit again? Is there any way - Kurt, you just put some numbers around how much you think that the operating day benefits you. The safety improvements, is there any number around that and do you view that as ongoing or one-time-ish. Then I am just curious in this interim period without the labor contract, are you still approving for the wage increases?

I guess to what we have I think pretty consistently estimated that an extra working day usually gives you about $50 million, maybe $60 million depending on when it hits anyway, so that's something we anticipate and plan and forecast for. Third quarter, every year is a year usually where we make entries for workers' comp and safety. Actually, last year, there was a little more of that in the fourth quarter than the third, so that gave us a little bit of a boost, but not material. Yes. We are accruing for the contract as it stands and as Scott said, we are working through the details on that and are looking forward to getting that wrapped up pretty soon.

Do you have a number on the equivalent for that safety?

No. I don't. It's been a little bit in multiple sectors.

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

Our next question will be from the line of Ben Hartford with Baird. Please go ahead.

Good morning, guys. Jim, could you provide some context to the forwarding dynamics? I know you guys have been managing your capacity tightly in the international trade lanes. I know Asia volumes are still a little softer, which growth is decelerating, but it sounds like capacity has been taken out of that market and pricing dynamics within the forwarding market are still pressured. Do you get the sense that they are still lingering margin gross margin pressure with forwarding given the pricing dynamics in the industry, plus underlying rates firming up or being rational?

Before I turn it over to Jim, in our guidance, we do expect to see modest revenue declines although the unit's done a good job of adjusting. Jim, maybe you could fill us in a little bit more on the view of the market.

Yes. I guess, over the last couple of days and about the last week or so some information has come out that actually contradicts that and that there are some backlogs out in Asia coming out. Quite frankly, the way we look at it right now is that there are some upticks in volume, obviously that would obviously coincide with some rate, but we planned for that. We know there is some capacity reductions in the market as well that kind of go in hand-in-hand, but I think over the next couple of weeks we will ultimately see what happens with the demand side, but we think, we at UPS, we are in good shape to handle that obviously with the way we run the network, but the other side of about the forwarding businesses is, it is a pretty volatile market all the time, you have to adjust to it and we feel like in the last couple of years, we invested nicely in some technology to help us do that in the years to come, so we are very comfortable with where the rates are going.

Our next question will come from the line of Art Hatfield of Raymond James. Please go ahead.

Good morning, everyone. Real quick on the fourth quarter, and you have made some comments regarding the shortened holiday season. It would seem to me that given your flexibility and all the different services you can offer customers, the potential benefits would outweigh the risks, but it sounds like you are focusing on the potential incremental costs or the risk associated with the shortened holiday season. Can you kind of help me understand that a little bit better?

I will take a shot at that. I think, Kurt, used the term wildcard. Frankly, a compressed holiday period, if weather is perfect it's good. Probably it will benefit us as we have been able to move our volumes to our network efficiently in the shorter days, shorter hours. The question is, if we get a nice storm (Inaudible), you know one of those days? It's going to be hard to make up for it. I think it's one of those things that are kind of a risk reward type deal. If whether is great, we will probably get rewarded. If weather is bad, there will be a challenge for us.

Our next question comes from the line of Brandon Oglenski of Barclays. Please go ahead.

Good morning, everyone. Congrats on the domestic results this quarter. When I go back to your 2011 Analyst Meeting, and you laid out the growth targets of 10% to 15% for EPS, you guys, I think were assuming a U.S. economy of 2.5% to 3.5% at that time. Have you gotten to the point where you have transitioned the business to reflect the slower environment, where you think you can get back on track for some of these longer term earnings growth targets?

We have made pretty good progress on our domestic business with the margins steadily improving and moving forward, so we feel that clearly we have done a lot of adaptation both, product shifts and economic changes. International, clearly with the headwinds and global trade that we saw for the last couple of years has probably been the bigger surprise and that is one where Jim and the network people have been very busy adapting to that, and hopefully you get a sense that we think we are making progress on that, but that's really the bigger probably difference since the investor conference couple of years ago.

Looking at this year, we weren't very far off those goals when we set our guidance at the start of the year taken out the currency and the fuel impact and pension, particular, so hopefully if interest rates stay where they are, pension will not be a headwind next year. We think currency will not be a headwind next year, so we are positioned better to get close to those targets.

Our next question is from the line of Thomas Kim with Goldman Sachs. Please go ahead.

Thanks. What's the organic growth rate you are seeing out of the European operations on the same-store basis?

That 10% growth in exports is purely organic. Now, some of that's Turkey and Poland came from acquisition several years ago, but I think we feel particularly gratified that we are seeing, as Jim mentioned, this extension that we have done to the periphery markets around Europe is succeeding. Jim?

Really both in Europe, I think we are pretty proud over the last couple of years, we had some acquisitions in Poland, in Turkey and the U.K. all those integrations are done, behind us, and all of those markets quite frankly all growing double-digit, so that in the combination of the trans-border network over there and the express network, it's a really good story for us right now, so everything for the most is good obviously. Our next step with TNT, that's behind us now and now kind of turned our focus over our people and all that UPS has to offer the customers to emerging markets in some of the other places that we are now going, so we think the future is bright.

If I could ask what is the sort of key end market that the growth is occurring? Is it more intra-Europe or is that actually Transatlantic? If you could just maybe add little bit more detail around that that would be helpful? Thanks.

Well, right now if you stand inside Europe from that geography, obviously, our intra-European growth is very good. You have got a double-digit growth in the inside, because of the great network we have there. We have got some lanes depending on where you are going our U.S. lane continues to grow nicely across the globe. Again, we are pretty proud of being able to offer domestic customers and geographies from Turkey to the U.K. to Germany, across the world and that piece of the world some great opportunity and they grow at double digits as well, so it's growing in many facets.

Our next question is from the line of Allison Landry of Credit Suisse. Please go ahead.

Just following up on the European business, you have talked a lot about double-digit growth in the intra-European geography, so I was wondering if you could comment on the relative profitability of regional package flows versus more intra-country. Then also your thoughts on whether European margins can ultimately reflect those in the U.S.?

Yes. In general, we do have higher margins in our export business than the domestic business. The benefit of our domestic business is, they give us a decent margin, but they also create the density that allows this UPS integrated network to create the returns that you guys enjoy so much. As far as the targets, certainly the priority is growth in export. Jim's people balance them, what the appropriate amount of domestic business is country-by-country to create infrastructure. Beyond that, what we really look at is return on capital, so we make sure that those products that drive the most assets, those flying across oceans and those things, generate the higher margins. Beyond that, we don't really open up the can of worms.

Our next question is from the line of David Ross of Stifel. Please go ahead.

Good morning, gentlemen. Wanted to talk about UPS Freight. Yields declined a little bit, but partially due to the higher average weight per shipment. Could you comment on of kind what's going on the average length of haul in that division that may have also impacted the yield? Then any update you have on the new union contracts of the UPS Freight team, it would be great?

Yes. First let me correct fact. Yields were up in the quarter, so they weren't up quite as much as in previous quarters, but still we showed a 2.2% increase in revenue per 100 weight, so that's not an issue.

Okay. In the Excel sheet I got to, 21.94 versus 22 a year ago, so had it actually declined 0.3% LTL revenue per 100 weight?

Maybe. I don't know what you are looking at. We will have to take it offline. Go ahead, Myron, maybe on the business progress from what you guys are doing?

Yes. I think, our progress is in line with what we told you guys at our Investor's conference in 2011, with expected margin improvement. While revenue did improve over 5% and revenue per tonne went up over 4% and it was somewhat offset by not being able to get the kind of productivity improvements that we look for out of our freight operations and we will continue to deploy small package-like productivity improvements with the use of technology in freight in the coming months and would expect to perform better.

As far as the contract, I think we are making progress. I think we would spend lot of time between the UPS teams and union leadership really communicating and educating the people about the new contract, there were changes in healthcare that were confusing to people. We have done this process and the package side of the Master have had good results and we communicated the new contract. We expect the same on the freight side. Hopefully, we will get it out for vote here in near-future.

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

Our next question will come from the line of Scott Schneeberger of Oppenheimer. Please go ahead.

Good morning, guys. This is Dan Hartford filling in for Scott. Touching on the buybacks and the use of capital, can you please clarify the $4 billion is for the target for 2013? And if you can help us understand how you think about the use of capital in 2014 as well? Thank you.

Yes. Well, certainly, as we said we remain on target to deliver the redistribution with the share repurchases. We spent just a little shy of $3 billion year-to-date on that front, so we are moving along as said and we tend to set a target each year and complete what we do, so barring any unusual market conditions or something, we expect to continue the remainder of that. The higher priority always is to invest in growth. Certainly, we have got the balance sheet to do it. Although, we have been targeting more smaller acquisitions things like CEMELOG in Eastern Europe to expand our healthcare network and other targeted acquisitions, so we will continue following that path, also continue to support a very strong dividend, so we are looking for opportunities and application, capital, plus we would also used capital in some cases to reduce the risk and volatility to the balance sheet. You have seen that with some of the moves we have done on the pension, so we have got a lot of choices and part of our job is to prudently allocate capital and keep remembering that it's share owner's money and it's our duty to use it prudently or return it.

Our next question comes from the line of Jack Atkins of Stephens. Please go ahead.

Hi. Thanks for the time. Just to dig in again here on the forwarding business, just curious if you could maybe comment on the competitive landscape, competitive dynamics really within the forwarding industry? Have seen any improvement there as we move through the year with regard to just competitive pricing pressures? Then secondly, when you think about the slate of tech launches that a lot of folks are expecting to see for this quarter, but what type of volume trends would you expect to see in your forwarding business out of Asia to the U.S. in the 4Q?

Yes. I'll start off at least kind of the trends. Clearly, as Jim mentioned, we are seeing some pickup in demand. That's typical for the beginning of peak season and there are some launches that will give a boost. Jim, any thoughts or comments on the competitive environment?

As I said a minute ago, I mean, over the last couple of days some of the competitors have seen what appears to be some pickup in demand that's match against the capacity constrictions, but from our perspective, we feel like we are in good shape. As I said last quarter, we feel like we are bit too concentrated in some areas in forwarding that we will move in the next quarter to work through that, but we know that based upon the charter activity, we are being asked to perform right now in the previous couple of weeks and going forward. We know there is demand out there and we need to fulfill that, so we even feel like we are pretty comfortable with that.

Our next question will come from the line of Jeff Kauffman of Buckingham. Please go ahead.

Thank you very much and congratulations. Most of my questions have been asked at this point. Could you give us an update on UPS Access Point? How that's performing in Europe, and if there are thoughts that that product could eventually be rolled out in other global markets?

Yes. We would be happy to talk about that. That is clearly a big initiative for the international access, so Jim do you want to talk a little bit about the rollout and where we are heading on that?

Sure. I think, we have to remember when we bought Kiala, they had about 65,500 access points in France in Benelux and we have rolled that out now and expanded into the U.K. and Germany by the middle of next year we will have 2,000 to 3,000 access points in each of those countries. The rollout is going just as we thought it would. In a second, I will turn it over to Alan with respect to going forward to some widening of what we see, but we also like that the combination of access points and what it can do for our delivery network, we are already expanding it into the usage of drivers in alternate delivery. We also like to power of the access points to create cross-border traffic in the single market of Europe, so we are pretty pleased with where we are. Alan, if you want to add anything?

Yes. I think to that point, Jim, it's a Swiss army knife really, because we are changing residential into high density commercial sops, we are using it for these not-in-one alternate deliveries back to these access points. We are using it for e-commerce returns and prepaid drop-offs, so we are really excited about what it's enabling us to penetrate the B2C market in Europe cost effectively. We are over 10,000 in access points now, so we are now in the U.K. and Germany. Those were our expansion plans and we are continuing to grow in France, Benelux and Spain, and we are serving about 450 retailers at this particular point right now in the Europe, so we are really excited about the opportunity it's creating for us in the European environment.

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

It's actually both. As you know in the United States, we are very big in retail. Retail has not been our focus really in the past in Europe from a B2C perspective, so this is the big opportunity for UPS to penetrate the retail market throughout Europe with better solutions that are available in the market today. To your point, do it in a way that is profitable, because of the density that we can create and the other point I would just make is that many of the consumers in Europe really prefer getting their deliveries at these access points versus at home and some of our retailers have over 50% of their packages being delivered to these access points versus their residential homes.

Okay. Thank you very much and congratulations.

Our next question will come from the line of David Campbell of Thompson Davis & Company. Please go ahead.

Yes. Thank you very much and good morning. I heard you say that your international block hours would be down 4% in the fourth quarter, which is apparently more than they were down in the third quarter. Given this pickup in demand in Asia-Pacific region, how is that going to help your company international revenues and forwarding profits in the fourth quarter?

That's good question, David. We certainly have some flexibility that maybe, David, you could talk about that.

Yes. What I said was that it would be down 4% from last year in the fourth quarter. One of the things that we look at very closely is, how the calendar flows and where we can cut flights on an ad hoc basis and we made those decisions. We continue to monitor the capacity and we have the ability to map up flights if we need to and add those rotations, but we can also cutback, so we have the flexibility, we have the network in place and we have been doing this for years. In fact, if you look since 2008, our international block hours are down almost 5%, our export volume is up almost 20%, so we have this thing fine tuned and we can make the adjustments we need no matter which way it may swing throughout the quarter.

Thank you.

Yes. One of the real value creations, where we have been working on the last few years is to take advantage of both, our forwarding network and our owned fixed assets and have enough flexibility to move volume and freight especially in and out of them.

Our next question will come from the line of Helane Becker of Cowen. Please go ahead.

Thanks very much, operator. Hi, everybody. Almost all my questions, but one, have been actually asked and answered. Thank you very much. As we look ahead, Kurt, to 2014, and we think about some the changes in healthcare laws and so on, how should we think about compensation as regard to the healthcare? I know you made some changes earlier this year to your plans, but what healthcare cost increases are going to look like? Thank you

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

Our healthcare expenses continue to be a challenge. We had made some modifications to our plans to help to manage cost, but still the Affordable Care Act is continuing to add a burden to us. The transition tax for covered life is a big deal for us. We think there is over $100 million of expense, so all-in-all that is a headwind that will be in the healthcare for next year on that.

Okay. Thank you. You can repeat something positive if you want.

That's okay. It's an important and certainly we are eager to find solutions to it.

Thank you.

Our next question will come from the line of Anthony Gallo of Wells Fargo. Please go ahead.

Good morning. Thank you. You mentioned continued efforts with omni-channel retailing. I am curious if you could bring us up to speed on where some of the retailer efforts are with ship-to-store activity was sort of a hot topic earlier this year. Is it experimental now or is traction being gained and has there been any benefit on the margin front in the density that you gain from that? Thank you.

Well, it's certainly beyond experimental. Alan can fill you in on some details on that.

Yes. I would say that initially that the retailers were really looking at it to optimize their inventories by better utilizing their in-store and D.C. inventories. Shifting inventories sometimes all the way across the United States, in fact the goods were not selling in one part, but they could still get the list prices in another part of the country. Now what it shifted to is, how to compete in the local markets, so they are enabling - we are doing some things with late pickups in the evenings for these clients and enabling next day fulfillment in the local territory by utilizing our night source, so they are really using it in a wide variety of ways to both, become more effective with their inventory as well as serve the consumers in a better way to compete with other retailers in the marketplace. We have got probably about 25 large retailers underway today and they are using it to ship-to and from-stores, store-to-store, returns to the store and obviously some of those create even more B2B moves, which Kurt talked about earlier.

Is it fair to move the needle on margins or volumes?

It's certainly a part of the B2B retail uptick that we are seeing. Yes.

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

Due to time constraint, our last question will come from the line of Mr. Tom Wadewitz with JPMorgan. Please go ahead.

Great. Thank you for giving me a chance on a follow-up. I wanted to see if you could give us a little more data on the comment of the flat export out of Asia. That was, I guess, flat package out of Asia and was there trade down within that or you had premium down and deferred up, or with the kind of 11% growth in international deferred really a phenomenon that's taking place in your European business?

Yes. Jim can get us certainly a little color on that.

Yes. It is. I mean, the network has more expedited this year than last year, but that's something we have to adjust to and the network essentially is flat. It's got a different type of product in it this year, but that's not just with UPS. The whole supply chains across the world are moving that way. It doesn't mean it's going to stay that way in the future, but as it exist right now in the flat discussions we have had, it is flat and it has also got some down trade in it, but we have to then, back to David's comment adjust the network the right way to be able to keep it going forward for the customers and shareholders.

Tom, as said earlier I guess the fact is the export market is not shrinking. It's growing at a slow pace. The reality is expedited is on the fast pace right now. As we get more innovation development, more technology products and the economy gets a little bit better, I would expect to see some better growth in express going forward.

Okay, but that makes the fact is true in your advantage as well.

A little bit. I mean, Europe, quite frankly, you have got obviously big strong ground trans-border networks that are a little bit different, but you've got I think the trade-down to expedite is more predominant in Asia obviously, because of the length of supply chain, so it's more predominant there from my perspective.

I would like to turn the conference call back over to Mr. Dolny. Please go ahead, sir.

Okay, and I will turn it over to Scott for some closing comments.

Thanks, Andy. You all know that shippers and consumers around the world have come to depend on UPS to successfully deliver the holidays. Peak season UPS is a combination of months of planning, training and preparation for the ultimate test. The timely delivery is almost double our normal's days worked. In advance, I want to thank more than 400,000 dedicated UPSers around the world, who put in the long hours and go the extra mile for our customers this year and I also want to thank all of you for taking part in today's call. Thanks.