Good morning. At this time, I would like to welcome everyone to the UPS Investor Relations first quarter 2013 earnings conference call. [Operator instructions.] It is now my 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, and welcome to our first quarter earnings call. Joining me today are Scott Davis, our CEO, and Kurt Kuehn, our CFO, along with Chief Operating Officer David Abney, International President Dan Brutto, 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'll make today are forward-looking statements that address our expectations for the future performance or results of operations of the company. These anticipated results are subject to risks and uncertainties which are described in detail in our 2012 Form 10-K report. This report is available on the UPS Investor Relations website and from the Securities and Exchange Commission. During the quarter, we reported a $36 million after tax net gain related to our attempted acquisition of TNT. This is made up of two components, a $213 million after tax currency gain from the liquidation of a foreign subsidiary and a $177 million after tax charge for the termination fee and other transaction-related costs. These adjustments resulted in an after tax benefit of $0.04 per share. Ignoring the impact of this gain, diluted earnings per share for the first quarter were $1.04. In our remarks today, we will refer to UPS first quarter 2013 results excluding these one-time items. We believe this is the most accurate picture of the company's performance. Reconciliations to comparable GAAP measures and free cash flow, which is a non-GAAP financial measure, are included in the schedules that accompany our earnings new release. These schedules, along with the webcast of today’s call, are available on the UPS investor relations website. Finally, as a reminder, our goal is to allow as many as possible to participate on today’s call. We weren’t able to do that last quarter. So, please ask only one question, and then get back in the queue. And, for those of you who like five-part questions, don’t be surprised when we select which part to answer. Thanks for your cooperation. Now, let me turn it over to Scott.

Thanks, Andy, and good morning. We entered 2013 in an environment of global uncertainty, yet confident in our strategies and ability to execute. UPS delivered another quarter of growth, reflecting the management discipline and earnings consistency you have come to expect. The U.S. domestic business continues to expand margins, a testament to the ability of our integrated network and operations technology to serve the fast-growing B2C market profitably. We continue to raise the bar, differentiating our service in unique ways. Just last week we deployed a new enhancement to UPS My Choice, allowing our 3 million subscribers to upgrade to UPS Ground from Surepost, increasing their visibility and improving time in transit. Although the international supply chain and price segments are facing macro challenges, we are adapting our strategies to keep UPS on the path to long term growth. In emerging markets, B2C and industry specific solutions like healthcare have enormous potential and UPS continues to invest in them. For example, during the quarter UPS became the first global express delivery company to have wholly owned operations in Vietnam, a dynamic, export-oriented economy. This investment reflects our growing commitment to emerging markets, which will generate the bulk of global growth in coming decades. In addition, leveraging the [unintelligible] business to retail model, we launched UPS access point locations in the U.K. to better serve the growing European B2C market. We expect 1,500 locations there by the end of the summer. Continuing this B2C strategy, in May we will begin recruiting partner stores in Germany, and expect to have more than 2,000 by the end of the year and more than 4,000 by the end of 2014. And most recently, we announced the acquisition of the medical logistics company CEMELOG. We expect the transaction to close in June. It will add…

Thanks, Scott, and good morning everyone. The first quarter exemplifies how the UPS business model delivers earnings growth in a mixed global economic environment. The U.S. domestic business continued to perform well, while the international and supply chain side effects faced some challenges. Let’s review our results by segment. In the U.S. domestic, January started out of the gate fast, with the post-holiday season fueling first quarter results. Strong demand for UPS Ground products led to daily package volume growth of 4.4%, increasing operating profit 9% and expanding operating margin by 70 basis points. As expected, we did experience increases in pension and healthcare costs, although this quarter they were mostly offset by reduced worker’s compensation expense, the result of ongoing improvements in our safety programs. UPS results continue to be lifted by ecommerce, as omnichannel strategies are playing a bigger role. And increased focus by traditional retailers on using their brick and mortar locations as distribution sites is creating more pickups at retail locations for ultimate residential delivery. As we noted last call, B2C growth and differentiated products like our returns portfolio produced surprisingly strong January volume levels. However, daily package growth for the remainder of the quarter came in pretty much as forecasted. Revenue in the U.S. segment increased 3.3%, with balanced daily package growth across all products. UPS base rate pricing remains consistent and in line with our long term objectives, although it’s not fully apparent in our reported yields. The ground revenue per piece increase of 1.5% reflects the continuing trend of higher growth in both our lighter weight B2C products and our returns portfolio. Air revenue per piece was impacted by reduced fuel surcharges and changes in both product and customer mix, but overall the U.S. domestic is adapting successfully to the explosive growth in…

[Operator instructions.] Our first question will come from the line of Brandon Oglenski of Barclays. Please go ahead. Brandon Oglenski – Barclays: I wanted to ask about your domestic profitability and how, even with the change in UPS My Choice, being able to ship Surepost packages to your ground network, how is that increasing the efficiency for you guys and the profitability outlook for the segment?

The My Choice is kind of a win-win situation. It’s a positive for customers in that it gives them control, and it’s a positive for our operation, because it allows us to pre-notify customers that packages are arriving. Myron, maybe you can talk a little bit about how that’s helping operations.

In a previous call, we talked about how technology has continued to enable us to adapt and adjust and keep strong margins. One recent one that we spoke about was residential consolidation, where in the fourth quarter we were able to adjust and approximately 15% of our Surepost packages were then redirected with a UPS driver, which certainly enhanced our customer experience and allowed us to continue reduce cost.

So we’ll be continuing to leverage technology to both delight customers and maintain our economic profitability.

The real focus there is just increasing density, and we’re doing a very good job of increasing density on the B2C.

Our next question will come from the line of Mr. Kevin Sterling of BB&T Capital Markets. Please go ahead. Kevin Sterling - BB&T Capital Markets: Kurt or Scott, maybe you could just touch on the type of trends you’re seeing, particularly on the international package side in April?

I’d say generally the international package volume flows have picked up in the fourth quarter last year and really carried through the first quarter, and we expect some of the same going forward the rest of the year. The big change in the middle two quarters last year we had negative trade flows. This year we’re seeing, we think, global trade growing faster than global GDP. And we saw both in the fourth quarter and in the first quarter strong growth out of Asia, upper single digit growth, both to the U.S. and to Europe. So those trade flows were very weak last year. They’re better this year. So on the package side, we feel pretty good. The international air freight side, while the tonnage is growing slightly, still way too much capacity, and the yields are weak.

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

Good morning, it’s Alex Johnson on for Tom. So congratulations on the healthcare acquisition. Just was curious if you can give us an update maybe pro forma, you talk a lot about healthcare. What is the mix of healthcare in your business and kind of what is the growth rate that we should be thinking about?

We’ve seen healthcare in aggregate grow double digits now really for the last several years, since we targeted this in an initiative. One of the things we like most about healthcare is that it does fully utilize really the entire breadth of the company. On the distribution side, we’ve got 1 million square feet of healthcare compliant space. We’ve developed healthcare compliant forwarding with cold chain capabilities and re-icing at airports and all kinds of good stuff. And then our world-class small package network with things like delivery intercept and proactive notification, we can maintain high quality oversight. And even our UPS Freight group has benefitted from it. So it’s a very diverse and broad set of products, and that’s one of the things that keeps us so excited about it, is it allows us to bring the entire breadth of the company for customers’ benefit.

We see really the next 10 years’ growth similar to the last 10 years. And CEMELOG really is just another piece of the puzzle that’s going to help us in Central and Eastern Europe. We’re very excited about it.

Our next question will come from the line of Mr. Art Hatfield of Raymond James. Please go ahead. Arthur W. Hatfield – Raymond James: Just a real quick one. Kurt, in your guidance, you had commented on a bunch of different things, but I thought I heard you say that you expected low single digit growth in EPS in Q2. Did I mishear that? And if so, can you correct me, what I should have heard?

Right. No, we do think the second quarter will show profit growth, but it will be in the low to mid-single digits. The internationals we said we expect to see a good strong bounce back. Supply chain is still facing some challenges. And there’s a bit of a year over year comp issue on the domestic side, where second quarter of last year, on the domestic side, we had some benefits, variable comp reductions and some of those things. But in general, we’re still cranking along just fine. We just wanted to give you guys a little bit of the quarter to quarter shape.

We had a fuel benefit last year too in the second quarter, right?

Yeah.

Our next question will come from the line of Ken Hoexter of Merrill Lynch. Please go ahead. Ken Hoexter – Bank of America Merrill Lynch: Kurt, I have one question, but 12 parts.

That gives me lots of choices then.

You were talking about the growth of ecommerce, and a lot of announcements about same-day deliveries from some of these etailers, or the potential of it. Maybe you can address the potential for UPS to participate in that market, or if you’ve got trials or anything.

I’ll start it off and then maybe let Alan kick in. But we certainly have experimented with this, with certain customers. I think that’s what it is right now, an experiment, trying it out. I’m not sure yet the economic feasibility is going to be there for this to be a big service ongoing. But Al, you may want to dig into that a little bit?

Yeah, I think same-day is really going to be a niche offering that’s out there. The real story is about omnichannel. We’ve got about 25 or more major retailers that are either using or moving to the UPS omnichannel solutions. And it’s really about leveraging UPS’s shipping and visibility technologies. It helps enable a seamless connectivity between the retailer’s website, the fulfillment warehouses, the brick and mortar stores, and the consumers and returns. For the retailer, it enables inventory optimization and less markdowns, and for the consumers, it enables faster click to deliver times and greater access to retailer inventory and a broader variety. So that’s really one of the big stories that’s driving ecommerce and why customers are coming to UPS.

Our next question will come from the line of Christopher Ceraso of Crédit Suisse. Please go ahead. Christopher Ceraso - Crédit Suisse: I’m wondering if you guys are having any issues with the FAA and air traffic control disruptions because of sequestration. Is that having productivity impact on your U.S. business at all?

We’ll have David respond on that.

You know, so far it’s had very limited impact, and we have been working with the FAA and working with the Department of Homeland Security to make sure that continues. We do disagree with furloughing of the air traffic controllers, and we also disagree on certain closing of night operations. We think there are more efficient ways that they can cut cost that will not impede commerce. And I think that more and more people are agreeing with that as we go through.

It sounds like maybe some breakthroughs overnight too, so hopefully we’ll see some corrections on that in the near term.

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

When you think about the capital budget kind of looking forward from here, what types of projects are you guys prioritizing either internally or from an organic perspective? What should we be thinking about from a uses of capital outside of the increased buyback going forward?

Clearly our top priority for capital deployment is to grow the business. As you know, our physical capabilities, our aircraft are in great shape, and we have limited need for replacement assets. So we’re very focused on growth capital. You saw some examples of that in our announcement with the purchase of the CEMELOG healthcare company, so that’s our top priority, and we’re going to be opportunistic around the world really to build the platform in emerging markets and other areas.

I think emerging markets is an area we’re going to invest in. You saw us buy our partnership out in Vietnam, we’re 100% owned in the Vietnam in the quarter. There’s more opportunities like that as we go forward. And like the previous question, global B2C gives us lots of opportunities. We’ll see areas where we can make investments and new acquisitions to help enhance that product.

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

Just wondering if you can give us some color on the scenarios [unintelligible], the high versus the low end of guidance, and maybe what you’re thinking about from a macro backdrop to get you to one end or the other for the full year?

Certainly the overall global economic environment will be a huge driver of it. Domestically, we’re fairly confident that the U.S. economy will be stable, if unexciting. Internationally, the trade flows have been very volatile, and so we have to stay attuned to that. So I think the broad economic environment would be the biggest single driver of the variability, although the other is certainly the attitude of the consumers as B2C becomes a bigger part of our business. Then growth in that environment becomes increasingly important.

I think the way we talked about it earlier too is international air freight market, while the percentage is growing slightly, we’d like to see that get more balanced with capacity. Dan, you may talk about it. It’s a challenging market right now.

Yeah, right now, certainly out of Asia, there’s more capacity, so customers are taking advantage of obviously spot rates. I think we still have the best option for our customers in that we can move some of that freight into our own aircraft to fully utilize. And right now certainly our margins are up because we’re fully utilizing our aircraft. We’re still running a 13.1 margin in the difficult marketplace, and that’s primarily internationally, because of the utilization of our own aircraft in this hybrid model where we can move in our forwarding business when we need space on our aircraft and move it back when the market expands.

Our next question will come from the line of Jeff Kauffman of Sterne Agee. Please go ahead. Jeff Kauffman – Sterne Agee: I want to follow up on an earlier question. You’re announcing a healthcare acquisition every other quarter. We talked a little bit about Kiala in the beginning of the quarter. Could you help put together the whole mosaic for us in terms of what you’re doing in Europe, what you’re doing in healthcare, and kind of what the bigger picture looks like down the road in terms of how this helps drive shareholder value and earnings?

I think those are two of the big areas that we’re going to continue to expand in. We know the global B2C market is going to grow at a ferocious pace for the next couple of decades. And there’s just lots of opportunities. The U.S. is leading the way. And certainly we’re leading the way with answers to that marketplace with My Choice and other offerings. But Europe, the percentage of business that’s B2C is starting to grow. Asia will grow at a very fast pace. So we just need to put together the pieces of the puzzle to fill out the customer needs. And we’re doing that, we’re doing that in the U.S. We did it with Kiala in Europe. We’re taking some of the Kiala applications to other places around the world, and we’ll utilize that. So lots of opportunities. Dan?

Yeah, I would say on the whole healthcare, we’re building out primarily on the backs of our customers that are forcing us into other areas of the world, and CEMELOG’s a great example of that. Many of our large multinational healthcare customers have requested certainly that we get into areas such as Central and Eastern Europe. We also opened up in Australia. I’m going to be at a ribbon cutting for a building later this month in [Hang Jo], China. So as our healthcare expands throughout the world, we will follow where our customers’ needs are. Many of those needs are in emerging markets and certainly we’ll set up a platform to serve them around the world in those areas.

And you know with the acquisition of CEMELOG, we now have over 6.5 million square feet dedicated to healthcare and that is spread out throughout the world.

And we’re in the early innings in that.

Our next question will come from the line of Chris Wetherbee of Citi. Please go ahead. Christian Wetherbee – Citi: Maybe quick question on B2B. Just kind of curious how B2B volumes trended during the quarter. What do you think about the outlook for the rest of the year? Do you see that coming back at all as you move out into the second half of 2013?

B2B volume remains fairly sluggish, and so that’s an area that clearly we are hopeful that the industrial base of the U.S. catches fire a little more. We think there are some fundamentals. The other thing we are seeing is that the omnichannel that Alan referred to actually, when it’s done well, does drive B2B volume. Because in effect your forward stocking inventory in the stores has to be replenished. It shrinks shipment sizes, and so the state of the art retailers are now actually doing more frequent deliveries to stores to keep inventories balanced.

And the segments we saw the growth in the last couple of quarters were retail and [fire] and some healthcare. And manufacturing we think that for B2B primarily it has been weak and still negative. And even though we see a Renaissance in manufacturing coming in the U.S., it’s not quite there yet.

Our next question will come from the line of Justin Yagerman with Deutsche Bank. Please go ahead. Justin Yagerman – Deutsche Bank: You referenced ecommerce returns in the release, and just wanted to get a sense of how that business is growing, and really how the economics compare to the original leg of that trip. Is it better? Worse? When you think about the final mile, obviously the customer is bringing that to you, so I would think that there might be better economics there, but just kind of curious how you guys think about that.

It is certainly an area that we’re very focused on. We’ve invested a lot of money and technology to create a very comprehensive set of solutions for retailers. Alan, maybe you could talk a little bit about it.

As you heard earlier, the vast majority of our growth was driven by ecommerce in the first quarter. And easy returns are obviously an important part of driving consumers to shop online at a retail website. And we’ve got a very robust portfolio that provides maximum efficiency, visibility, and control for the retailer. And returns are essentially, like you said, a B2B move that’s created by B2C. Most of the time, these returns are dropped off by the consumer at a UPS drop box or at a UPS store, so you have very dense pickups and then you obviously have very dense deliveries back to the retailers. And I would just add that our returns are up about 10% year over year in the first quarter.

As you know, Justin, dense is good.

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

I wanted to follow up on Scott, some of the comments you made on working with some of these ecommerce retailers on same-day delivery. Some of the questions I get asked, though, are whether these same retailers are going to try to build a network that doesn’t incorporate the current parcel carriers in ways that they could actually end up being a competitor. Can you just comment, how do you think about that risk? And how do you address it?

I’ll just say that maybe even to the earlier question about what we’re doing with B2C and retail and healthcare, we’ve got a very focused strategy on the industry segments where we’re seeing most of the growth in the opportunity, and certainly the retail and healthcare are two of those. So we’re very focused on creating solutions for both brick and mortar and etail only retailers out there. On this whole omnichannel, getting back to that, what the retailers really like about the UPS solution, in addition to the networking of the technology for shipping and visibility at all their stores, is the one driver pickup. UPS can come in there at the end of the day, or really any time during the day or evening, and pick up all their ground, air, and their Surepost packages and provide, in the local area, next-day delivery for them. So we do think we’ve got a real advantage there.

I think Alan highlights it there. We think the real issue will become more next-day fulfillment rather than same-day. Although clearly we will help customers do whatever they need.

Our next question will come from the line of Benjamin Hartford of Baird. Please go ahead. Benjamin Hartford –Robert W. Baird: Can you guys maybe provide a little bit of perspective on the weakness and the declines in the tonnage market that we see within freight forwarding and the weakness out of Asia that’s expected relative to the growth of 8% in the international package segment, specifically the daily export volume growth? The divergence has been there several quarters, but I’m just wondering if there’s anything specific to what you guys are doing that’s causing that divergence. Are you parcelizing more freight, putting it into the export volume market? Is there something else going on that would help characterize that discrepancy?

First, I would say that there’s overcapacity out of the market primarily in Asia because of the [belly] space that the 777s have allowed, so you’ve now got upsized newer planes that have belly space. So at this stage of the game, that would be one issue. That would describe kind of the price pressure. The second issue is that manufacture out of Asia is not what it was. Things are lighter, so there’s not as much freight. Last year, if I look at comps last year, there was a couple of big releases on the technology side that drove up freight. Those releases did not occur in the first quarter of this year. Going forward, we think that that’s probably going to continue for the short and medium term. On the other hand, an area that doesn’t have overcapacity is ocean, and our ocean business is very robust. In fact, on the [less than a] container load, that business is up over 26%. For the first quarter we added 300 more destinations as of February. So we think that that’s certainly not going to make up the variance in international air freight, but we think that that’s a good product that we put in the market. So all in all, we think that it’s going to be a little rocky road for at least the next quarter in international air freight until the manufacturing gets back and the capacity in the marketplace gets back to more normal.

Our next question will come from the line of Nate Brochmann of William Blair & Company. Please go ahead. Nathan Brochmann - William Blair & Company: Just to follow up on that question, and I think that’s kind of a provoking thing, a little bit longer term. Certainly, like you say, the manufacturers kind of a little bit weak, and a lot of that’s probably tied to consumption near term. But longer term, how do you think about the international air freight market in terms of how much of the pressure today is cyclical versus secular in terms of how far down the curve are we on these lower package weights, or the ship from air to ocean, or just a change in behavior as it relates to maybe some U.S. [near shoring]. Just kind of wanted to get your bigger picture thoughts on where we stand with all that.

I would say that the whole idea of innovative products is always going to continue, and those products are going to require air freight to move those around the world. As the world shifts, and we look at what’s manufactured in China, now we see a lot of that manufacturing going down to Vietnam. After Vietnam it could be Indonesia. After Indonesia, India. So we’re very bullish on the fact that there will be manufacture all around the world. Global trade will certainly increase, although it’s been a little choppy here for the last few quarters. And that will require air freight. And that’s perfectly in our sweet spot. The other thing that I would say is when the market does contract, as it has, we have our own air fleet. So we can move freight into our air fleet. When the market picks back up, we’ll move that same freight and serve our customers through the use of flying on other folks’ planes. So we’re very bullish on the future about air freight continuing to be a big part of our portfolio.

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

Quick question, just to follow up on the B2C discussion, can you just talk a little bit about the ecommerce customers that you’re working with, how much success are you having in making UPS the sole shipping option for that retailer versus just being thrown up as one of a portfolio of companies that offer the service to the end customer?

Certainly it’s our goal to differentiate, and I think we think we’ve done a great job with that, being out a year and a half ahead of our competitors with something like My Choice. So that’s the ultimate solution to that. But Alan, any other thoughts on that?

Certainly something like UPS My Choice is out there to drive consumer preference. It’s extremely relevant to both our retailers and our consumers. And unlike our competitor, most of our residential packages get delivered by a UPS driver. Scott mentioned I think in the opening that our My Choice consumers now have the option to initiate a Surepost upgrade to UPS ground residential service. So now essentially all UPS residential deliveries, whether they’re air, ground, or Surepost, are eligible for My Choice delivery options. And that’s really the power of the UPS integrated network. The other point I’d make is that the offerings like Kiala, which is now being rebranded as UPS Access Point, that we have over there in Europe, that also begins to create that preference. And you’ll see UPS Access Point branded on the retailer’s website and consumers able to pick that particular service under the UPS brand. So we’re very focused on establishing both consumer and retailer preference for UPS services, really through value creation.

Our next question will come from the line of Peter Nesvold of Jefferies. Please go ahead. Peter Nesvold - Jefferies & Company: I was hoping to clarify the guidance. For the year, the midpoint implies about 9% EPS growth. If I look at the first [two] results, and take into perspective the second quarter outlook, it seems to suggest that you have to grow kind of 12-14% in the back half of the year to hit the midpoint of the range. And clearly the year ago comps are easier in the second half. Would the acceleration in growth year over year be primarily on the easier year ago comps? Or is there something that sequentially you should see more than a normal seasonal uplift?

We’ve been seeing, historically, Q4 get stronger and stronger, as B2C plays a bigger role. And so that is part of a seasonal evolution to where we’re seeing that happen. We do have an extra working day in Q3. The international group’s got a lot of initiatives that are being rolled into place. Air network, we’ve done a lot of adjusting to, and now that we’re doing a number of things on the in-country cost. So your arithmetic is correct. Absolutely. We’re maintaining our full year guidance, and we do expect to see stronger and stronger results as the years go on, based on all those factors.

I think particularly forwarding. We had a good start to last year on the forwarding side, and had a bad finish. And we expect to have good comparisons on the forwarding side second half of the year.

Our next question will come from the line of Scott Group of Wolfe Trahan. Please go ahead.

Hoping for a little bit more color on some of the mix and [trade down] issues going on in international package. Is there a way we can think about what percent of package now internationally is these non-premium products and where do you think it goes? And maybe along those lines, what can you do to mitigate the impact of that, or maybe even change the customer behavior?

I’ll let Dan expand a little bit, although you do have to be careful, when we talk about non-premium products, against a lot of our competitors, those are still time or day definite, what would be considered express products. So we do offer a broad portfolio and we’ve seen customers move up and down. So I wouldn’t put too strong a point on it as a long term issue.

I guess just to expand a little bit, we call a non-premium product our trans-border product in Europe, which for us is very profitable and growing very well, even in a tough European economy. Our premium product, Worldwide Express, I think worldwide we’ve seen some trade down for customers to use our Worldwide Expedited product. But by all means, we’re very successful in our standard product. Their profitable, they’re strong, and we’re confident that the Worldwide Express products will come back as the world economies strengthen over the year.

And I think maybe just to put a final point on it, UPS’s success has been on finding cost effective yet profitable ways for us to meet the customer’s needs when they do need to trade down. So we’re not trying to upsell, we’re building an integrated network, and if the customer gives us an extra day to get the product somewhere, we’ll take advantage of that, either through leveraging other forms of transportation or taking advantage of that from an economic perspective. So give us a little time to adapt, and the integrated UPS network will continue to generate high returns.

Do you think there’s more of that to go, though, in terms of more shifting to some of an extra day kind of business?

Scott, I think we made it pretty clear. We’ll move on to the next question.

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

UPS Freight saw very nice tonnage per day growth in the first quarter, taking market share. Can you talk about what drove those gains, and what still needs to be done to get back to your target LTL margin level?

I’ll let Myron talk to that.

While we did experience continued growth in our freight segment, we continue to be disappointed in that business unit. We’ve grown it by offering integrated solutions for that customer segment, and we’ve continued to expect slow but steady growth in the freight group.

Clearly the technology that UPS has integrated has been a real differentiator on the market side. Having shipping systems, the visibility systems, pick up confirmation. The ability to have a.m. guaranteed deliveries, all of those things that we’ve been so successful with in our package environment is differentiating us on the freight side, although as Myron says, we’ve still got some work to do to get the margins up to our targets.

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

In U.S. domestic, congratulations on your 70 basis points of operating margin expansion. Could you speak to the stronger driver being B2C or B2B? Just a little more elaboration on that? And was weather much of an impact in U.S. domestic in February or March?

Well, given my executive privilege to pick one, I’ll let Myron talk a little about weather.

Fortunately this is pretty much an all-weather business, and we have the ability to adapt to changing situations and the U.S. operating unit has done a very good job of making those adjustments every year. In terms of B2B or B2C, as we spoke earlier, the technology that we’ve deployed has just continued to enable us to adapt to changing business, whether they’re heavyweight packages or small B2C retail customers, and continue to expand margin. So we feel very confident about our abilities moving forward.

Myron is being humble this was one of the hardest quarters in recent history for weather and operations. Just continued storms, just about everywhere, and even April we’re suffering with the floods a bit. But they managed to execute really well in that environment.

Our next question will come from the line of Keith Schoonmaker of Morningstar. Please go ahead.

Normally we thought of Europe as representing about half of your international business, quite material even with the current standalone network. Would you share your observations on the evolution of consumer shipping trends in the two markets, U.S. versus E.U., at these different stages of adaption and recovery, perhaps also including the B2B B2C split?

Clearly we’ve seen tremendous evolution and innovation in both areas. We do think that Europe is migrating very quickly, perhaps at a little earlier stage as far as the maturity of the market. I know Dan, you could talk to that.

I would say Europe is probably three to five years behind the U.S. in the whole B2C, depending on what country you’re in. I think there are some countries in Europe, such as France, U.K., are moving a little quicker, and I think that’s primarily the reason we bought Kiala, because technology and turning a B2C into a B2R is very important for us to be successful, so we’re certainly, from an operational standpoint, and a customer standpoint, preparing for more B2C growth in Europe. We think there will be some acceleration and certainly we are preparing operationally, and through our technology, to take advantage of that when it comes up.

To Dan’s point, we’re over 40% B2C in the U.S. right now and probably our biggest countries in Europe are maybe 25% B2C. So that gives you a flavor for where they are at this point in time.

I was just going to add that our early adoption of having trans-border services throughout Europe has certainly paid significant dividends over the years, and how we’re connecting the countries, and certainly in the B2C market, with solutions like Kiala and other ones to come, our ability to network those countries so that shoppers can shop in any country and receive it back in their home country is going to be a really advantage for us, and that’s what we’re focused on.

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

If we could kind of go back to the freight forwarding business for a moment, you talked about the challenges you’re facing there. Could you maybe comment on the profitability trends you’ve been seeing on a per-shipment basis? We’ve heard of increasing competitive pressures from other forwarders in this market, especially in the trans-Pacific. I’m just sort of curious if that’s part of the headwinds you’re facing and if so, how do you address that?

I would say the profitability in the air freight has obviously been squeezed. I think a lot of customers, because there’s overcapacity in the market, have gone out with spot rates and outside the contract, just because of the capacity that’s in the marketplace. We see that continuing at least for the next quarter, but think that it will get back to more normalcy at the end of the year. On the other hand, our ocean profit has been doing very well. Not enough to make up the international air freight, but this premium [less than a container load] ocean product we think is very successful. We have a supplier management. Again, we couple technologies so a customer can, instead of getting a whole container load, get less than a container load. We have a great road network in the U.S. that we can feed and accelerate the time that the ocean shipment actually gets into the U.S. market and even the European market.

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

This is going to be a really easy question for you. Does your guidance for the rest of the year include any changes in compensation or productivity as a result of the Teamster contract being concluded?

No, we’ve really not factored in anything dramatically different. We’ve kind of trended as if the ongoing numbers were similar to previous trends in our basic guidance. And maybe Scott can talk a little bit on the status of the contract negotiation.

I think we’re quite pleased with the progress to date on the contract. We’ve told our customers that we want to get this done earlier than usual. The Teamsters agree it’s important for our customers to get it done. We’ve taken on the tough issues, issues like pension, issues like healthcare particularly. We’re very close to getting this thing done. And we feel good about the outlook, but we’ll hopefully have something to announce before you know it.

Our next question will be a follow up from the line of Mr. David Vernon of Bernstein. Please go ahead.

Dan, you had mentioned the capacity issue on belly space. I guess I wanted to get your perspective on the main deck freighter capacity in the trans-Pacific. With rates being where they are, you’d think that that capacity would start to come down. We know Fedex took its service down. You guys did some belt tightening. Are you starting to see any of the main deck freighter operators in the trans-Pacific respond to that lower rate environment? And if not, how long do you think that will take?

As of this point, there are, outside of some Chinese carriers such as [Jade] that have got four 7400s sitting on the fence at [Chen Zin], there is a lot of talk. I know Cathay has certainly talked about it. There’s been some large carriers that have talked about if the rates continue to be low, obviously we had a situation in 2009 where you saw some folks take down some aircraft. It’s not at that stage yet. I would say from the UPS standpoint, we’ve taken 10% of our capacity year over year out of the trans-Pacific lane, and that’s also 20% down from the first quarter in 2011. So I think everyone is adjusting more frequencies today instead of taking whole planes down.

Due to time constraints, our last question will be a follow up from the line of Ms. Kelly Dougherty of Macquarie. Please go ahead, ma’am.

I just wanted to see if you could give us a sense, obviously with the 70 basis point improvement in the U.S. domestic business this quarter, how much more do you think you can improve in that business, given the B2C mix, but then some technology and other initiatives you guys have in the works?

Clearly we set out long term targets at our investor conference, of margins of 14%-15%. We’re making good progress towards that, and there’s no specific numbers other than that I’m going to share with you, although you’re seeing great changes, you’re seeing innovation driving both customer satisfaction and improved margins. And we’ll keep investing deeply in operations technology. There’s a lot more good stuff to come on that that we’ll be sharing with you. So there’s still more to come, and I think we feel pretty good on the business overall.

That concludes our Q&A session for today. Now I will turn the program back over to Mr. Dolny. Please go ahead sir.

I’m going to turn it over to Scott.

I think we got off to a good start in 2013, but as you probably detected from a lot of our answers, we’re still constructively dissatisfied. We want to do better, and we expect to do better as we go forward. But since this is Dan’s last call, I’m going to let Dan Brutto have the last word today. Dan?

Thanks, Scott. It’s been a great 38 years with UPS, starting in Chicago in 1975 when we were essentially just a ground delivery company. And what a journey it’s been to now be an international company serving 220 countries and territories with air products, freight boarding products, distribution products, brokerage products. So it’s been an outstanding run. The foundation of UPS is solid, we have a great management team, and I’m very confident Jim Barber and our international team will lead us on to more growth and certainly better opportunities with our great customer base. Thanks, Scott.

All right. That’s the end of our call, and thanks for joining us today.