United Parcel Service, Inc. (UPS) Q1 2012 Earnings Report, Transcript and Summary

Andy Dolny - Vice President of Investor Relations D. Scott Davis - Chairman, Chief Executive Officer and Chairman of Executive Committee Kurt P. Kuehn - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Treasurer

Christian Wetherbee - Citigroup Inc, Research Division Nathan Brochmann - William Blair & Company L.L.C., Research Division Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division Ken Hoexter - BofA Merrill Lynch, Research Division Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division Edward M. Wolfe - Wolfe Trahan & Co. Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division Justin B. Yagerman - Deutsche Bank AG, Research Division Arthur W. Hatfield - Raymond James & Associates, Inc., Research Division William J. Greene - Morgan Stanley, Research Division David Vernon - Sanford C. Bernstein & Co., LLC., Research Division H. Peter Nesvold - Jefferies & Company, Inc., Research Division John L. Barnes - RBC Capital Markets, LLC, Research Division Brandon R. Oglenski - Barclays Capital, Research Division David P. Campbell - Thompson, Davis & Company Christopher J. Ceraso - Crédit Suisse AG, Research Division David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division Helane R. Becker - Dahlman Rose & Company, LLC, Research Division

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 2012 Earnings Conference Call. [Operator Instructions] It is now our pleasure to turn the floor over to your host, Mr. Andy Dolny, UPS Treasurer and Investor Relations Officer. Sir, the floor is yours.

Good morning. Today, I'm joined by Scott Davis, our CEO; and Kurt Kuehn, our CFO, to discuss the company's results for the quarter and future expectations. Before they begin, 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 2011 Form 10-K report. This report is available on the UPS Investor Relations website and from the Securities and Exchange Commission. 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 Financials section. In March, UPS announced it reached an agreement to acquire TNT Express. Although we expect the transaction to close before the end of the year, any guidance that we provide will not include the results of TNT operations nor any synergies or integration expense associated with the acquisition. As always, today's call is being webcast and is also available on the UPS Investor Relations website. [Operator Instructions] I thank you in advance for your cooperation. Now let me turn it over to Scott.

Thanks, Andy. Good morning, everyone. 2012 is off to a good start for a couple of reasons. First, we announced our intention to acquire TNT Express, an investment that will contribute to our growth for many years to come. Secondly, looking more near-term, first quarter results built upon momentum from last year. We continue to see strong demand from UPS products and services, especially in the U.S. and Europe. Both the U.S. Domestic and Supply Chain and Freight segments delivered double-digit profit growth in the quarter. Back in January, we discussed that expectations for the U.S. economy were improving, especially compared to the rest of the world. During the quarter, the most positive news has come from the U.S. where indications of economic rebound are evident. Retail sales have grown faster than expected, and the employment environment has improved. On the other hand, economies in other parts of the world continue to face challenges. Europe struggles under austerity measures, and slowing growth persists out of Asia. Despite this, we continue to see our export volume in both Europe and intra-Asia perform well. UPS is executing on its strategy of investing to grow with the announcement of 2 acquisitions. First, in February, we acquired the European consumer delivery company, Kiala. Its retail delivery network and unique technology will benefit UPS, as we continue to look for ways to serve the growing B2C market, especially outside the U.S. As you know, last month, UPS announced an offer to acquire TNT Express. While we have not closed on the transaction, we have made initial contact with the regulators. UPS remains confident it will receive all required approvals. The acquisition of TNT will diversify our global revenue, increasing our portfolio of solutions and expanding our geographic footprint. We're excited about the prospects of adding such a strong and respected company to the UPS family. During the quarter, UPS received accolades from a number of organizations for our reputation, ethics and brand. One of the more widely recognized honors we received was the #1 ranking with Fortune Magazine as our industry's most admired company. This is the 27th time UPS has received this recognition in the 31 years the award has been given. Also during the quarter, UPS My Choice, the B2C solution we introduced in October, surpassed 1 million subscribers. UPS has received a positive response from customers, as they enjoy unprecedented levels of visibility and control over their deliveries. Before I turn it over to Kurt, I want to congratulate the almost 6,000 members of the UPS Circle of Honor: Individuals who have achieved 25 years or more of accident-free driving. In fact, this year, we recognized our first driver to surpass the 50-year milestone. That's truly amazing. This is just one example of how these drivers and the rest of the approximately 400,000 UPS's around the world contribute to our company's success. As you can see, 2012 is off to a good start. UPS continues to be a global leader, investing for growth, developing innovative solutions and continuing to build on our corporate legacy. With that, let me turn it over to Kurt to review the results for the quarter.

Well, thanks, Scott, and good morning, everyone. Yes, we are off to a good start. Daily package volume for the quarter was up a strong 4.3%, as online shipping continued the rapid growth seen last quarter. Boosted by strong results from the U.S. Domestic and Supply Chain and Freight segments, earnings per share grew 10%. Let's take a look at the segments. Operating profit for the U.S. Domestic segment jumped 13% on revenue growth of 6.1%. Operating margin expanded by 70 basis points to the highest first quarter margin for this segment since 2008. Our package volume increased 4.5%. Deferred products were up 10%, as online retailers clearly recognize the value of using our network to expedite the movement of goods to their customers. Our Next Day Air volume increased 5%, with Next Day package up 6.5%. And some gains in letter volume, something, frankly, we've not seen in many quarters. Our Next Day Saver product was the primary source of growth, as residential deliveries for large e-commerce shippers continued to expand. Ground shipments rose 4%, with approximately half of the growth resulting from a 30% increase in lightweight products. These solutions are proving to be very popular with our customers and are creating connectivity to other UPS products. As we saw in the fourth quarter, the strong demand for saver and lightweight products, like SurePost, impacted yield growth. Base pricing was up about 2.5% to 3%, but it was somewhat offset by changes in product and customer mix that I just discussed. The impact on yields will begin to moderate as we wrap the buildout of our SurePost launch. This will become most evident by the fourth quarter. Keep in mind, while these trends negatively impact yield, they do have a positive impact on our cost to serve and on our capital consumption. Direct labor hours, block hours and miles driven all increased at a rate significantly less [ph] than the 4.5% volume growth. Operating leverage was also apparent in the quarter, as we continue to improve efficiency, benefiting from productivity gains, greater economies of scale and a mild winter. Now turning to the International segment. Although we face some challenges, primarily due to shifting trade patterns, our international export volume continues to perform well, up 5.4%. Average daily volume comparisons did benefit by about 1% due to year-over-year differences in local operating days. Looking at the regions, exports increased at a mid-single digit pace for both Europe and the Americas. However, our long higher-yielding lanes out of Asia were relatively flat. We also saw European shippers increasing their reliance on our standard products. International yield growth was flat, as the benefits from the fuel surcharge and base rate increases were offset by the impact of shorter trade lanes, changes in product mix and the impact to currency. On a currency-neutral basis, yield was up 2%. The International segment operating profit came in at $408 million. Currency translation and rising fuel costs accounted for over 1/3 of the $45 million decline, although our operating margin of 13.8% remains industry-leading. Moving onto Supply Chain and Freight. Operating profits increased substantially, up 19%, with forwarding and distribution leading the way. The segment did receive a $9 million benefit from the sale of a surplus facility. Revenue for the Forwarding business declined due to lower tonnage in yields, as excess capacity remained in the market. However, operating profit and margin improved due to growth in customized solutions and brokerage services in addition to improved productivity. The Distribution business saw profit expansion in an environment of increased investment in health care capabilities. UPS expects to add 5 new health care compliant facilities this year around the world, bringing our total to 38 dedicated facilities. And what is typically the most challenging quarter for the industry, our UPS Freight unit broke even. Tonnage declines were offset by higher revenue per 100 weight and improved productivity. Looking now at cash and our balance sheet. UPS generated $1.8 billion in free cash flow during the period. Capital expenditures were $417 million, including the delivery of 3 additional 767s, bringing our total fleet count to 226 aircraft. In the quarter, the company repurchased more than 7 million shares for approximately $550 million. Less than expected, as internal guidelines caused us to restrict purchases during the TNT acquisition negotiations. As UPS prepares to close on this transaction, we are reviewing multiple alternatives for financing. Although our plans are not yet finalized, we remain committed to the preservation of a strong balance sheet and our dividend approach. And under any scenario, we do expect significant share repurchases in 2012 and beyond. We are evaluating our options and will update you on our decision. Regarding guidance. UPS is right where we expected to be at the end of the first quarter, so our full year guidance remains unchanged. We anticipate 2012 diluted earnings per share of between $4.75 to $5, which represents a 9% to 15% increase over 2011. I do, however, want to take a couple of minutes to provide more insight into the remaining quarters. On a consolidated basis, second quarter earnings per share is anticipated to grow at a similar pace to the first quarter. Third quarter earnings per share growth should be a bit lower due to one less operating day compared to last year's. And we expect fourth quarter earnings to grow at the fastest pace. This is due to the operating leverage generated by peak season volume growth and our proven ability to efficiently process e-commerce shipments. Our guidance for the U.S. Domestic segment remains consistent with what we told you back in January. For the full year, we expect to generate high single-digit operating profit growth. Although our expectations are for 2% to 3% base pricing, yield growth will be muted by changes in product and customer mix. And we do anticipate average volume growth of 3.5% to 4%, with air growing slightly faster than ground. Turning now to International. For the second quarter, we expect revenue trends to be similar to the first. Local day comparisons will negatively impact reported daily volume growth, a reversal of what we saw in the first quarter. Although we expect operating profit to improve compared to the first quarter, it will be relatively flat to last year. Beyond the second quarter, year-over-year comparison should improve. For the second half of 2012, we expect operating profit growth in the mid-teens on high single-digit revenue improvement. Regarding Supply Chain and Freight, we expect second quarter revenue growth to be similar to the first quarter and operating margin to be relatively flat compared to last year. Looking at the second half of 2012, we anticipate operating profit growth of mid- to high-teens on high single-digit revenue growth. So all in all, we're off to a good start to what should be an exciting year for UPS. Although market dynamics continue to change, UPS will benefit by adapting to them. Whether it's e-commerce growth, shifting trade patterns or demographic changes, UPS has the capabilities to meet the challenges. Thanks for listening this morning. And now, Scott and I will be happy to answer your questions.

Our first question will come from the line of Mr. Chris Wetherbee of Citi.

Yes, maybe a question, I guess, on the yield side. I just wanted to kind of tease out a little bit of the mix kind of impact as you go forward here and think about it. Is it 2Q and 3Q before 4Q you start to see a little bit of improvement where we can actually see that core yield growing in the kind of 2% to 3% range?

Yes. Certainly, the dramatic impact we've seen in our lightweight products has changed the shape of what you guys see anyway. The -- but the core underlying philosophy we have for pricing has not changed. On an account-by-account basis, our discipline and approach is the same. Individual customers are all being reviewed, and we are executing our normal yield processes. And if you look at Q4, really, the trends, if you take out fuel surcharge changes, the trends are really pretty stable. The only product, really, that sees any notable difference in changes, our Next Day product, where the substantial growth of the Saver product, which is the afternoon delivery, does come in at a lower yield, but generates substantially lower cost and so profits are good. But to answer your question directly, yes, what you really see is, as we just really initiated the SurePost at the beginning of last year, it ramped up and really began to hit its stride in Q4. So the year-over-year comps will moderate over the year. In Q4, you'll see more of the core underlying base rates that we've talked about.

Our next question will come from the line of Mr. Nate Brochmann of William Blair. Nathan Brochmann - William Blair & Company L.L.C., Research Division: I wanted to talk a little bit just on that question strategically. I mean, obviously, you have the benefits of the integrated network and probably can ship pretty easily. But what are you having to do with the network to kind of accommodate the new SurePost product? And how do you kind of adjust the rest of the network to accommodate the faster pace of e-commerce that's obviously growing pretty rapidly?

Yes, I think the thing that gives us some confidence that this is actually a positive trend for UPS is that with the deep integration we've done of these products through every component of our business, it flows through very smoothly, it utilizes existing assets and the incremental impact on the network is minimal. As we mentioned, our hours, our miles and those things are just barely up for the quarter, even though we showed some of the strongest volume growth you've seen in some time. Another great proof point of that is, I guess, if you look at the compensation and benefits, it's up 4% over year-on-year on 4% volume increase. So we are able to process this volume very efficiently, and the incremental impact on expense and capital is very minimal.

And, Nate, I think things we're doing, like the My Choice, helps us get that delivery there the first time, has the consumer take control of it and get the delivery the first time. Kiala, the acquisition in Europe, looks at alternative delivery. Location's the same thing. We are having more deliveries, helps the density as opposed to the one package to one house. So the variety of things we're doing is helping that.

So it's an interesting time for us. We are seeing changing mix and at a rate that's more frequent and more significant than you'd normally seen. The core underlying momentum of the business remains very steady and our approach to the market is unchanged. Layering on top of that then, though is this rapid expansion of products frankly, that we haven't competed for in the past.

Our next question will come from the line of Mr. Tom Wadewitz of JPMorgan. Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division: I wanted to touch on, I think, the kind of broader topic you're talking about here with B2C and the impact as well. If I look at fourth quarter, I think you've seen a pretty big favorable impact for B2C growth. And you see that in the deferred air, certainly. And you had a very strong incremental margin. I calculate just simply on the Domestic Package, 52%. It seems that your mix effect is probably similar in first quarter with a lot of growth in B2C. But the incremental margin shows up as 25% in Domestic Package. So I'm wondering if you can just talk about what the differences in the 2 would be. Because I guess looking at margin performance, that kind of helps us figure out whether it's good business or how good the business is that you're bringing on.

Yes, Tom, it's a lot of moving parts to try to decompose incremental margin quarter-to-quarter, I guess. And clearly, we talked at some length about the Q4 and the process there. Certainly, in Q4, these trends were even more extreme. And as we mentioned during December, over half of our volume in aggregate was B2C. We feel good about the domestic margin expansion. We saw a full 70-basis point expansion. We expect margin expansion to continue with these trends.

I think, typically, Tom, you're going to see that kind of change from Q4 to Q1. There's certainly some seasonality to that. Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division: Would you think that incremental margin would accelerate then through the 2012? Or it's more of kind of fourth quarter is just different than you see in any of other quarters?

We're more focused on overall total margin improving than the calculation of the incremental margin quarter-to-quarter. We are confident that we're going to continue to increase the margins on the domestic side and work towards our long-term target.

Yes, I think, as we said in January as far as our margin goals domestically, we feel extremely confident, frankly, a little ahead of target right now.

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

Maybe I can come at that a little bit differently. Just it’s typically the first quarter is impacted by weather and you obviously didn't have that this year. Yet, the volumes in the first quarter were the highest you've posted kind of relative to the rest of the year. So what occurs in the first quarter that pushes your overall margins to be the lowest? Again, I just want to dig into the understanding of that incremental concept of why we see this lower, given the beneficial weather and environment?

Well, we did see significant improvements in margin. Q1, historically, is a tougher year. You still have winter weather and lower aggregated volumes typically versus the year spend overall. I mean, certainly there are some headwinds in the quarter. Fuel was a bit of a headwind with the rising fuel and the like and the surcharge. We do have some increased pension expenses, although, we'll see those all year, and that's in our guidance. So we're pretty comfortable with the 70-basis point improvement. Q1 is not typical of the entire year, and we expect to see margin continuing to increase over that. On the flip side, clearly, the -- we did -- this was a pretty benign weather period for Q1, and that helped to offset some of the things that I just mentioned. So we're pretty pleased just on, domestically, we're getting back to margins that we've not seen since early '08, and we expect them to continue to grow.

Okay. So just to understand that, there is something in the first quarter that keeps it lower than what you see in second and third quarter, despite volume declines on a relative basis in 2 and 3Q relative to what you see in the first quarter.

Historically, yes, Q1 is a challenging quarter for us in domestic because of the weather. As is Q3, usually the most challenging quarter in the international because of European holidays. So I think if you look those are pretty typical seasonal pattern.

[Operator Instructions]

Our next question will come from the line of Ben Hartford of Baird. Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division: I just wanted to talk about international and thinking about it over the course of the next 2 or 3 years, the margin performance in particular. In the release, you talked about changing product mix in shifting trade patterns as being one of the contributing factors to the margin declines year-over-year. So just trying to get a handle around how big of an impact that's going to be, given the changes in trade patterns expected going forward. And if we can kind of talk about it irrespective of TNT and just think about kind of shorter lengths of haul or changing lengths of haul, and what impact that might have over the next 2 or 3 years in terms of progress toward what you had talked about, I guess, late last year at the Analyst Day in terms of the ability to get back to 18-plus percent margins in the segment.

Yes, clearly, it is a moving target right now. And we have seen, really, for the last 3 quarters, I guess, Asia be a bit of a challenge. It at least was more or less of a breakeven this quarter. So we did see an impact where the long-distance highest yield lanes, mainly Asia to Europe and the U.S., were relatively flat. Whereas we saw robust growth on intra-Asia and the European volumes, most of the exports, which tend to stay in the continent. I think over the medium term, we adjust all those in our combination of an air and ground network, allows us to create economic value out of both. Certainly, the capital demands of the intra-European volume are much less than dedicated high-value of assets flying 6,000, 7,000 miles. Although it does create challenges as those transitions happen. So we feel pretty good actually that we're in great shape to handle that. Whether it's regional trade patterns across North America or Europe, we can adapt and certainly be profitable. But it does have some impact on margins in the transition.

Yes, I think, longer-term, I think global trade is going to stay strong. I don't think you're going to see, long term, these trade flows change that dramatically. I think some of that Asia impact clearly has been weaker consumer demand in Europe than in last year, consumer demand in the U.S. which is picking up now. So I think we're fairly optimistic. You're going to see later this year some of the Asia export numbers start picking up again. So I think this is kind of a temporary predicament we're in right now.

Yes, and I guess, just to reinforce, we are not sitting on our hands just watching these patterns change and not reacting. We are continuing to make network adjustments. We've -- if you look year-over-year, we've taken our Asia capacity down about 10%. We have some additional things that have been rolled out to maintain the kind of service levels we want, but at the same time, reduce our exposure. We continue to show great growth within our European capabilities, but we're also cautious. And so we have a number of operating cost initiatives there. We have seen some increase in consumers' choice of our lower-value products. And so there is definitely some trade down, which over time, is -- it can be adjusted because things like time of day and those, we reduce our cost, but it does require aggressive cost focus to get there. And at the same time, we're looking at revenue management strategies to make sure that we are extracting the value we should and being paid for the services. So there's a number of initiatives in the international to adapt. And we do -- clearly, we're not thrilled with the Q1 performance in international. It was a challenging quarter for us and, I think, for most players. But we've got pretty good plans and that's why we're confident in our results going forward.

Our next question will come from the line of Mr. Ed Wolfe of Wolfe Trahan. Edward M. Wolfe - Wolfe Trahan & Co.: Outside of the mix issues with SurePost, it does seem like domestic volumes, particularly the Next Day Air, particularly spiked in the first quarter while the yields declined. Is there some intentional market share gains you're looking for in the Next Day Air? And can you talk to SurePost? And is that all recorded within ground? Or is there some of that, that impacts what the yields might look like in any of the air products?

Ed, I think there is some indirect benefit. I mean, SurePost is just one product in the portfolio. And I think as we've mentioned since we first introduced this, it is part of an overall combined value propositions for customers. So typically, for every SurePost product, there's 5 or 6 other packages through our traditional ground service or our air products. So there is some portfolio benefit, I guess. But we did see the e-commerce momentum that is clearly pushing our results right now, ripple through both to air and ground. I think in the fourth quarter, we talked about that being a big impact on our deferred air, as a lot of the premium retailers are taking advantage of the time-definite services. We're also seeing some of that ripple into the Next Day also. And it did create surprisingly strong growth in our Next Day product. The vast majority of that, as I said, is our Next Day Saver, which has no time-of-day commitment. So it really looks and feels to us like a traditional ground product, but it relies in our air network. So it is a good product for us. It doesn't have the kind of high delivery cost that a time-committed air product does. So we're very confident that it is good volume for us and that we can handle those e-commerce shippers' needs very appropriately.

Yes, Ed, as Kurt said, clearly, the big change was I think the large online retailers looking for that competitive advantage and going to the Next Day Saver product. We are focused on that base rate 2% to 3% increase, and we're holding to that.

Our next question will come from the line of Mr. Jeff Kauffman of Sterne Agee. Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division: The big mix shifts going around and the previous 2 questions have addressed this as well. I think you did a great job, saying, okay, what's going on in Southeast Asia we think was kind of a shorter term issue related to consumerism. But how much of the mix shift and the shift down the product chain do you think is structural and kind of a longer-term fact of life, which it's sounding more like the U.S. is as opposed to just shorter term, this trade lane wasn't here or customers were just a little bit conservative with their product choices in a tough economy.

I don't think we're overly concerned on that, Jeff. I mean, clearly, Europe is a bit of a wildcard right now. So that's probably the area where there's the most movement. It's also a market that's not as mature for product differentiation. What we call our standard product, in a lot of cases, exceeds the delivery commitments of other companies' express products. So there may be some settling on it. But I don't -- we don't see this as a big risk. It's more a matter of adapting and having the appropriate capacity, both for the overnight services and then the definite [ph] services. So we don't see it as a long-term risk, I think. It's more of just a bit of a moving target. And as economies -- economic conditions get challenging, we do see customers tightening up a little bit and extending their time commitments and to save a little money on transportation.

But what is not changing though is the growth of B2C. And that really benefits the small-package industry, and we're going to benefit from that. And that's some -- where you've seen some of the package volume grow. Now our job is to figure out the best way to serve that. And that's why we did the Kiala acquisition to help with the density on residential shipments on alternative delivery locations. That's why we did My Choice. So that trend will not change going forward.

Our next question will come from the line of Mr. Justin Yagerman of Deutsche Bank.

Can you guys put some numbers around the sequential shift in B2C? You talked about 50% of domestic in December. I guess I'm just trying to get at this in a different way and get a handle on back to Tom's question. Has that shifted and incremental margins move down sequentially? I guess I'm trying to understand if some of this business that's come on in the B2C space is coming on at discounted pricing because you're getting good volume through your network from like an Amazon Prime or somebody like that who's able to deliver big volume, and so it gives you good utilization, but you're willing to take a step down on the pricing on that product in order to get that and maybe get a foot in the door to raise price in a better time period. So I'm trying to understand how that mixed shift is working and the sequential change in the B2C percentage.

Well, we are seeing some market shifts in the customer composition in the B2C space. Clearly, there has been consolidation. If you look back 5 years ago or more, there were more numerous players all vying to create market share in the B2C. And we have seen both some of the big traditional retailers become much more focused on it and some of the pure plays, like you mentioned. So, no, there is absolutely a large customer impact right now. We're seeing overall greater growth in large customers and small customers that does tend to reduce yields, but they also bring significant economies of scale, both in direct expense and in support expense because we can connect electronically to them. So that is a trend very much that's in place. Larger customers in general are outperforming. We've talked before about small business and the challenges they're facing. Nonetheless, across-the-board, on our revenue management, we are managing the customers and extracting base rate increases.

Again, this is not a new trend. Back in September at our investor conference, we shared with you our long-term targets for domestic operating profit growth and domestic margin growth, and we're right on target. So I feel very confident with those long-term targets.

Our next question will come from the line of Mr. Art Hatfield of Raymond James. Arthur W. Hatfield - Raymond James & Associates, Inc., Research Division: I was going to ask about the mixed shift, but I'm going to move on from that. I want to move on to the margins in Supply Chain and Freight. If I recall, and I can't remember what you said recently, but over the long haul, you always had a focus on that kind of high single-digits, roughly 7% -- I think 7% to 8%. You're kind of there in Q1. Can you talk a little bit about how you feel about where those margins are now in Supply Chain and Freight? And if you think you can get those up to double-digit levels?

Yes, thanks, Art, for giving us something else to talk about here. No, we feel pretty good that this capability we built of an integrated Supply Chain and Freight offering is continuing to pay some dividends. We -- margins were very strong in the quarter. Although, clearly, the growth was more muted, as some of the buy rates on the forwarding side have come down over time. And we were able to adjust and adapt and taking cost out. So we feel great on that front. The distribution group is a great asset. We are investing right now, but we've been able to maintain decent margins there, even with the headwind of deep investment in health care. And then our UPS Freight group clearly has a lot of opportunity going forward. Their results were relatively flat in this quarter, but we're making great progress on differentiating ourselves and trying to strike a balance between being a disciplined yield player and still generating good growth.

And that's what makes it -- that margin that much greater because when freight starts kicking in, then you can see better margins there.

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

Hey, I just -- I'm sorry to beat this dead horse, but I just want to understand when you have conversations with your customers and they're considering moving to a SurePost or a product like that, how does this conversation go? Because I think all of us sort of look at this and say, it's not just the yield mix risk, there's a profit risk mix as well. And I know you're aware of sort of the risks there. But how do you ensure that you can keep defenses up and keep premium ground. Because ground is so good for you that I'd think by offering your SurePost, you'd create some risk of cannibalization of your own very good business. So how do you manage that? How do you think about that?

Yes, I think, Bill, it's a portfolio management issue. I mean, we've always faced that issue as having such an integrated network. It's very easy for customers to move from 8:00 a.m. air to 10:30 to Saver to 2-day air products to ground. So it's not a new concept at all for us. And I think, if anything, we've had a lot of experience. We do -- the SurePost is one piece of a puzzle, but what it really is, is it's giving us now a relevance in a very lightweight in to the market than in a lot of cases where we weren't relevant before. So there's always cannibalization risk. But at the same time, we're continuing to differentiate our ground product. If you use SurePost, you can't take the advantages of the great UPS pickup and delivery network as much, you don't have the capabilities with My Choice to redirect deliveries. So it's a multi-tiered strategy of differentiating the UPS ground product, but at the same time, offering a different alternative for very lightweight, low-value shipment. So is there risk to it? Absolutely. Do we talk about those things? Those are critical marketing issues, and the appropriate approach is what we've done from years, is to create differences across our product line, price those appropriately and then let customers take advantage of it. So the vast majority of what we're seeing is new volume coming in that we hadn't been really targeting. Is there some transition from our basic product, which was a start on this into SurePost? Absolutely. But in aggregate, it's bringing more volume in all fronts across rather than cannibalizing.

Our next question will come from the line of Mr. David Vernon of Sanford Bernstein. David Vernon - Sanford C. Bernstein & Co., LLC., Research Division: You talked a little bit about pulling down buybacks in the quarter. Can we expect that to get made up in the second and third quarter? Can you give us a little bit more insight as to what you're expecting on that front?

Yes, we -- once we got hot and heavy on the discussions with TNT, it was appropriate for us to restrict our purchases in the market. Fortunately, we had put in some accelerated share repurchases before that started. So we weren't -- we were able to at least continue to purchase that reasonable amount of shares. As I mentioned in my prepared remarks, we are revisiting a number of alternatives for how we finance and structure the acquisition -- pending acquisition of TNT. And we do expect to reach conclusion on that in the not too distant future. We intend to maintain a very strong balance sheet. Our dividend policy will remain unchanged. But we are reviewing the purchase -- the repurchase strategy. And we do expect to be a significant buyer of stock under all scenarios. But at least at this point, we're not ready to lock in guidance as far as repurchases in the short to medium term. We'll give you guys an update on that not too far in the future.

Our next question will come from the line of Peter Nesvold of Jefferies. H. Peter Nesvold - Jefferies & Company, Inc., Research Division: So if I take a step back, earnings were up 10% year-over-year this quarter. The midpoint of the range implies 12% earnings growth. So you've got to grow low teens for the rest of the year. And there are a lot of different moving parts. You've identified a number of them. And I promise I'm not asking you to write my note for me. But could you rank prioritize let's say the 3 key bullet points why is year-over-year earnings growth going to accelerate as this year progresses? Because it does seem that you had some tailwinds, so whether it's productivity from good weather in the U.S. or additional operating days in Asia.

Yes, although Andy said he would volunteer to write your note for you. He just wants you to know. H. Peter Nesvold - Jefferies & Company, Inc., Research Division: I don't think my boss would let me, but...

Yes, no, as we said, we actually are right on target for what we expected. There may be a couple of you that got a little ahead, but it's -- there's not dramatic differences, I think. We do have some headwinds with fuel moving up a little bit this quarter and the currency wasn't particularly friendly. Those things -- we expect currency, clearly, to moderate with our hedges in place. So the international gets a little bit of help there. We do expect our ability to adjust and adapt to the international, so we're going to -- we showed negative earnings declines in Q1 for international. We do not expect those going forward. We're going to see improved results. And the business momentum, we feel is strong. I mean we feel great about what's going on in the Domestic business, 13% profit improvement. We feel the momentum in the Domestic business continues unabated. So we feel good about the U.S. economy. And we also saw some stability and firming in Asia, I think, in March and into April anyway. So we feel, in general, positive and think that the guidance is appropriate.

Yes, I think when we gave the guidance in January, we talked about tough comparisons for forwarding and for international package in the first half of the year. Obviously, Asia fell off in August of last year, and the comps get much easier in the second half of the year for both the international package and forwarding. So like I say -- as Kurt said, we're right on target where we thought we'd be at this point in time.

Our next question will come from the line of John Barnes of RBC Capital Markets.

Just in looking at this specific quarter and the next couple of quarters. Can you elaborate at all, were there any costs associated with what you have done on TNT? And any costs associated with the expansion of airfreight capacity that you mentioned in your press release around Latin America that you can quantify, that would have impacted this specific quarter that might not be there on an ongoing basis? Kind of startup costs or onetime in nature, as you kind of tackle those 2 issues.

Clearly, we got a lot of people spending a lot of time in airplanes and other activities, John. But at least in the scheme of the scope of UPS, I'd hate to characterize those things as anything but negligible. We do have expenses everyday. Clearly, the Kiala acquisition, we've got work we're doing on that to build the capability across the globe. But in the scheme of things, most of that is not material. And the bulk of the expenses, clearly, with the potential TNT acquisition will be in Q2, Q3. And as it gets to be material, we will discuss and give you guys clarity around those. So at this point, they're more of a rounding issue.

And in the expansion in Latin America?

Just -- well, that's just part of our overall dynamic air fleet network. It does add some expense as we add capacity there. But once again, not enough to hugely move the needle. But that's -- I mean, some of the steps we make now will position us well and that's part of why we're giving the guidance we are going forward.

The biggest drag on international clearly was fuel cost, it was currency and slow growth out of Asia.

Our next question will come from the line of Brandon Oglenski of Barclays.

I just want to come back to this Next Day Saver product that you guys are definitely showing quite a bit of growth in. It's been my understanding that, at least historically, some of your highest cost operations are delivering those Next Day packages to residential addresses. So how is that levering into your network here where you can get similar profit profile on those new packages?

That's a great question. And that is really why the Saver distinction is so critical for residential. It is very challenging for us or anybody to work their way out to a residential suburban area and make an 8:00 a.m. commitment. Or in some cases, even a 10:30 commitment. You do what we call break trace. You go off the optimal travel path or you have to have a dedicated driver driving it out there. With the Saver agreement, we get it there next-day guaranteed, but we have the flexibility to deliver it in the afternoon. So we're able to deliver that package during the normal optimal trace that all of our great operational technology tells us we should. But there's a dramatic reduction in operating expense in return for not having that early-morning commitment. Most consumers aren't driving to get the thing first thing in the morning. If they are, then the product would not be Saver. So it's a great way to generate next-day air yields, but have a minimal impact on the pickup and delivery operation and utilize our integrated network. One other interesting anecdote, which I mentioned earlier, was we did see growth in our letter products that we are seeing a beginning of an uptick in refinancing applications in the mortgage industry. So that's another nice trend that has taken letters from being negative to positive and that this is the first quarter in some time that we've seen that.

Our next question will come from the line of Mr. David Campbell of Thompson, Davis & Company. David P. Campbell - Thompson, Davis & Company: During your initial comments, you said the international trends and revenue trends in the second quarter would be like the first quarter. But there's been substantial rate increases, sea freight and some in airfreight, and some, as you mentioned, firming in the Asia-Pacific market. So I'm kind of surprised that the revenue growth will be the same as the first quarter.

Well, there -- the first quarter was almost -- you can almost split the first quarter into half as far as the airfreight market. We were very disappointed in January results. And then, February didn't fully compensate for it. So it was a challenging period. In March, as some of the big product launches came out, then there was an improvement in demand and yields did move up. So it's hard that the first quarter was really a tale of 2 different cycles any way. We've seen demand stabilize a bit. Although I don't get a sense that yields are moving up significantly in the airfreight industry right now. If anything, there may be a slight decline having forwarded.

Our next question will come from the line of Mr. Chris Ceraso of Crédit Suisse. Christopher J. Ceraso - Crédit Suisse AG, Research Division: I just wanted to follow up on the international business. I know you've mentioned that Asia to U.S. and Asia to Europe was a little bit soft. And you characterized it mainly as a consumer concern on the delivery side of that. But are you seeing anything with your customers that are relocating any of their manufacturing facilities back to North America, for example? And is there maybe some underlying structural trend that will weigh on outbound Asia volumes going forward?

I don't think so, Chris. I mean I think there's some of that and there is -- we're seeing some manufacturing growth in the United States. But I don't think we're seeing a dramatic shift at this point in time. I think what will drive that shift is energy prices if they climb. I think that a big change in lanes, I think, would be if energy prices do climb a lot then you will see some near sourcing. But today, I don't think there's dramatic shift yet.

Our next question will come from the line of Mr. David Ross of Stifel, Nicolaus. David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division: With UPS Freight, surprised by the tonnage decline there. It seemed to be an easy comp quarter and industry volumes were higher, especially with yields not being too great either. Can you talk a little bit about why the negative volume there?

Yes, it's a combination of kind of us trying to find the right balance of growth in yields and also some tough comps to last year. We had a pretty strong quarter last year with substantial growth in both yields and shipments. And we are seeing some moving patterns. Some of the players in the market are getting a little more aggressive. So we're trying to find a middle ground right now as things stabilize. So we feel good that the business unit's making good progress, but we are trying to be selective and continuing to focus more on the middle market areas than an across-the-board growth strategy.

Our next question will come from the line Of Helane Becker of Dahlman Rose. Helane R. Becker - Dahlman Rose & Company, LLC, Research Division: So you have, I think, a pilot contract that came due recently. Can you just give us an update on how the negotiations were going and what the timing is using for resolving that?

Yes, Helane, the contract became amendable and we are having discussions. But I'd say we're early on the discussion at this point in time. Typically, in pilot negotiations, they don't get completed until 2, 3 years after the amendable date. We're hoping to get it done sooner than that. But so far, early in discussions and they are underway.

Our next question is a follow-up from the line of Mr. Tom Wadewitz of JPMorgan. Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division: I thought it would be helpful if you could give us a little breakdown in terms of what the composition of the yields were. I know you talked about kind of 2% to 3% base price. But can you run through on, let's say, the air express -- I don't know if you want to do air express and ground. But how much is price? How much is change in weight per piece? And then how much is fuel impact just to give us a little better sense of what's really driving the yields?

Yes, Tom, we did see a big impact on overall weight. The ground was down a couple of percent in aggregate and our air products were down 4% to 5%. So that's a fairly large piece. The -- probably the most notable issue, and that encompasses both the mix of the B2C, which tends to be lighter, and the lightweight focus. The core underlying base rate, in most cases, is 2% to 3% customer-to-customer. So the changing mix, both of lower service, with Saver, for example, where there is a yield hit. Although, as we mentioned there's an offsetting price benefit. As I mentioned, Q4 to Q1, the trends are very similar for ground and deferred air, if you take out fuel surcharge. Next Day Air shows a bigger difference because of the substantial increases we're seeing on the Saver side and the weight being letters. So all in all, the base rates, as we factor out those things, are very steady at the 2.5% to 3%. Ground, a little better than that average. Air maybe a little below that average. But we know that on a customer-by-customer basis, as we do our customer strategies, those yield and freezes are happening. But with the significant mix change, it has masked that a bit.

Due to time constraint, our last question will come from the line of Mr. David Vernon of Sanford Bernstein. David Vernon - Sanford C. Bernstein & Co., LLC., Research Division: Could you maybe give us an update on the regulatory process with TNT?

All right, sure. Yes, David, we're -- I think we're making good process. I guess, what's happened since we had our call back on March 19 announced the deal is one that TNT's held their annual meeting, which I thought gone quite well, which is I think is important to get a perspective of where there shareowners are. We have had discussions with the regulators a couple of meetings so far. We're working through the process. So far, so good. Probably, the next big thing is we're going to file the offer memorandum by May 11 with the AFM, so that's a big next step. And we'll also file the form CO with the European Commission probably mid-May. So far -- it's early in the process, still. But so far, so good. David Vernon - Sanford C. Bernstein & Co., LLC., Research Division: Any feedback from them on divestures or any sort of increased concern on your part on that end?

No, too early for that at this point in time.

I would now -- that concludes our Q&A session for the day. I would now like to turn the conference call back over to Mr. Dolny.

Yes, that concludes our call for this morning. Thanks for joining us today, and have a great day.