Good morning. At this time, I would like to welcome everyone to the UPS Investor Relations second 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 second 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 Jim Barber, President of U.S. Operations Myron Gray, and UPS Chief Sales and Marketing Officer Alan Gershenhorn. Before we begin, I want to review the Safe Harbor language. Some of the comments we'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 and first quarter 10-Q reports. These reports are available on the UPS Investor Relations website and from the Securities and Exchange Commission. In our remarks today, all full year comments and comparisons will refer to adjusted results. In addition, we will discuss UPS’ free cash flow, which is a non-GAAP financial measure. Reconciliations of free cash flow and adjusted results, 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. So, please ask only one question, and then get back in the queue. Again, no multi-part questions, as we will select which part to answer. Thanks for your cooperation. Now, let me turn it over to Scott.

Good morning. UPS second quarter results reflect the impact of customer behavior and market trends. International freight forward operating profits and margins continue to be influenced by moderating demand and changes in shipper preference. Customers around the world continue to put greater emphasis on cost, rather than time in transit, trading down in the UPS product portfolio. We believe this trend is primarily cyclical. Over the last few quarters, there’s been a trough in the innovation cycle. Demand for new high tech products traditionally drives express small package and air freight out of Asia. On the other hand, some of the trade down is likely permanent. More international trade is being conducted regionally, and supply chains are becoming more efficient, so the need for the fastest express options may not grow quite as strong in the future. Here in the U.S., volume growth was a little less than we expected. Some opportunities were missed due to labor negotiations. Regarding labor, on June 25 we announced that the Teamster International master contract received majority approval. We believe this agreement provides a fair competitive wage and benefit package that rewards our employees while also enabling UPS to remain competitive for the long run. UPS and the Teamsters have committed to address unresolved local supplements in UPS freight. The supplements cover specific geographic areas and include topics such as bidding and local area work rules. Until then, the current agreements remain in place, including UPS freight. The company and the Teamsters have agreed to contract extensions while we continue to discuss the remaining issues. Looking forward at the macro picture, though global economic expansion for the second half of 2013 is still expected, forecasts have been lowered in 10 of the 12 largest economies, including here in the U.S. One area the U.S. continues to struggle with is exports, especially to Europe. So UPS strongly supports the Transatlantic Trade Investment Partnership. This is a great opportunity for the U.S. and the E.U. to set the standard for trade pacts. Business cycles are creating short term challenges similar to those we have faced many times before. UPS still sees great growth prospects in B2C throughout the world, emerging markets, and healthcare solutions. In healthcare, for example, during the quarter we announced the opening of two new distribution facilities in Hangzhou, China and Louisville, bringing our total healthcare space to more than 6 million square feet worldwide. At UPS, the key to expanding operating profit is to adapt our integrated network and expand our portfolio to capitalize on changing market conditions. In a moment, David will provide details of several operational cost initiatives and growth opportunities, but first Kurt will take you through the financial results and updated guidance. Kurt?

Good morning everyone. As Scott noted, we faced several trends during the quarter that continued to impact revenue and operating profit growth. Total company revenue was $13.5 billion, on volume gains of 2.3%. A couple of weeks ago, UPS announced our second quarter results of $1.13 per share, slightly below our expectations. The profit of our forwarding business unit dropped significantly, and our international results were reduced as customers continued to choose lower yielding products. In addition, we lowered guidance for full year earnings per share to a range of $4.65 to $4.85, reflecting a 4% to 13% improvement for the back half of the year, as economists around the world reduced their outlook. Now let’s review the segment results. U.S. domestic total revenue was up 2.3% on average daily volume growth of 1.9. Operating profit was flat with last year, and margin declined 40 basis points to 13.7%, as productivity improvements did not fully offset higher driver wage and benefit costs. Daily ground volume increased 2.3%, and deferred was up 1.4. Our next day air volume declined for the first drop in five quarters. Next day package volume gained slightly; however letter volume was down more than 5%. During negotiations, our ability to win new business was hampered. Even though we received a handshake early, we missed some opportunities and did experience some minor volume diversions. Our average revenue per package was relatively flat, and though we see consistent base rate improvements, lower fuel surcharges and changes in mix and package characteristics weighed on reported yields. Now for our international results. Total international revenue was up 1.6%, while operating margin contracted 40 basis points to 14.7. Operating profit was down slightly to $451 million. It was lowered by shifting customer preference for deferred products, especially out of Asia. Network…

Thanks, Kurt. I want to spend a few minutes discussing how UPS is adapting to the conditions that Scott and Kurt just identified in their opening comments. Economic cycles and consumer behaviors change, creating challenges and opportunities. The key to long term success is adapting our model to capitalize on these changes. This is something we’ve been doing for more than 100 years. It goes without saying that we have already identified overhead and discretionary cost reduction opportunities. I can assure you that I have an internal checklist of these items. But that’s not all I want to discuss. Today I’m going to provide insight into how UPS is making strategic changes to our network and portfolio to meet the evolving needs of the market. In our U.S. domestic operations, UPS is wrapping up technology implementations like Orion, which takes route optimization to a new level. To give you an idea of the scale of this project, we have assigned almost 500 people to this multiyear development. At the same time, we’re delaying some projects that don’t deliver immediate results. Additionally, we have identified opportunities to move more premium volume over the road, taking advantage of more important capabilities and the UPS integrated network. To meet customer demand, we are leveraging our relationships with retail shippers to develop more sophisticated distribution models that better utilize their store inventory. The implementation of omnichannel fulfillment is still in the early stages, and we’re seeing great results, including B2B shipment growth. In our international business, margins do benefit from the adjustments we make to our global air network. Maximizing aircraft utilization has always been important. We have already cut our Asia capacity by about 20%, and we will continue to reduce truck routes and schedule frequencies, making adjustments from Asia to the U.S.…

Great. Thanks, David, and hopefully you can see that we do have a wide array of both opportunities and initiatives in motion to address current conditions. And operator, I’ll turn it over to you now and we’ll take your questions.

[Operator instructions.] Our first question will come from the line of Brandon Oglenski of Barclays. Please go ahead.

I want to talk about your domestic growth. Last year you had pretty good traction with the new next day saver packages. We could see that in the numbers. But I’m wondering if that at this point in time have you reached a saturated point in the market where that new premium offering has met a level where you can’t drive much more share with that? And what are the type of innovative products that you can leverage the integrated network with relative to your competitor.

The major driver of the reduction in our next day air business for the quarter was a reduction in letters. The actual package business, which is more related to the B2C, and certainly the omnichannel, continued to grow moderately. But we did see a big decline in letters, and we do see some cycle there with refinancing dropping a bit, and also it certainly was impacted by some of the uncertainty in the second quarter.

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

Despite some of the slowing demand trends, or some of the markets where there may be a little bit of excess capacity, are you seeing any irrationality in pricing in any of your markets?

In general, I think the small package market remains rational. Clearly there’s a desire for customers to trade down. Probably the one area that has the most volatility is in the freight forwarding arena, and most notably Asia. And I’ll have Jim Barber comment a little bit on the trends there.

I think that’s right, Kurt. Obviously you look at the international segment. We feel very strong about the Europe piece of the business, and very solid. Foundations are good, pricing is rational. As the market capacity moves largely out of Asia, you get a lot of pressure through the network in pricing and capacity, with freighters coming out of the market and then belly space coming in. So we’ve got to manage to that, but in general the pricing position within UPS we feel very good about.

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

: You guys have been very successful in offsetting some of the international small package yield headwind from trade downs by managing up the air network utilization. I was trying to get a sense for what the level of utilization is right now in the trans-Pacific and how much more you might be able to offset ongoing yield headwinds if these trends continue.

Certainly, as David mentioned, we’re doing a lot of work on the network changes. So David, maybe let’s start with you.

Yeah, I think it’s an area we’ve done a great job with over the years in managing that balance, matching capacity to volume trends. In fact, since 2011, we have reduced our Asia capacity by 20%. And even this last quarter, from an international standpoint, with export volume up 5%, [block] hours were down 1.2%. That being said, though, it’s an ever-changing environment, and we have to watch it very closely. And for this next quarter, we plan to reduce from 8 to 7.5 truck routes out of Asia. We also are reducing one weekly frequency from Asia to Europe. But we also have the ability to plan in advance, and when we see days that are going to have less volume, we will shut down lanes for particular days of the week, which we’re having a lot of success with. So something that we’re actively managing.

To add on to what David said, obviously internationally, I think if you look at the results over the years in our operating margin, the network has a big play into it, but the other factor that we believe we do very well in international is to manage our in-country operations. You can see that comes through in the margins. We feel like we’ve done it very well over the last couple of years as the economies have moved across the world. So it’s a balance of the network as well as our UPS leadership across the world to manage the in-country operations, and the results of that, I think, as you can see, is our international margin. So we’re pretty comfortable with that.

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

I wanted to ask you a little bit more on the trade down. What do you think is timing, and I don’t know if you have product launches in mind. That’s one thing with tech shippers, as you mentioned, on trade-down. But what do you think is potential timing where you would have some more evidence to say either we’re right that this trade down is cyclical or you say maybe it’s a bigger issue and it’s more persistent? Is that a couple of quarters out? How would you look at the visibility and timing for potential change in net trade down dynamic?

I think I’d start with the fact that clearly there’s less need for speed in a soft global environment. And I think we’ve seen that, we’ve been in that environment, unfortunately, for a couple of years now. But I do think that what gets express going again is obviously innovative and high value goods. And as I said earlier in my comments, we’ve been in a trough. We’ll come out of that trough at some point in time in the future. For me to say it’s going to be two quarters or three quarters, I’m not sure, but we know there’s going to be product launches coming up, new innovation coming up. We’re not done innovating new products. And when that happens, again, you’ll see the express product grow. I’m not sure you’ll see express products grow as fast as you did 10 years ago, unless you get a strong global economy and good growth in global trade. But I do think the fact is, we talked five years ago about the fact that the next day market in the U.S., being a market that was going nowhere. Last two years, we grew that market faster than the ground. So again, I think we sometimes overreact on these things, and I do expect it will be back.

Yeah, and I think as David mentioned, we’re doing a lot of product innovation and expansion, both to increase the yield on our aircraft and add some new product capabilities in the lower arena. So maybe Alan, you can talk a little bit about the portfolio and how we’re adding products.

Yeah, I guess first, Scott alluded to high-tech launches, and we’re certainly looking forward to some of the launches that should take place in late third, fourth quarter this year. We’ve got a great portfolio there to help high tech companies with those launches. David talked about worldwide express freight. It’s surpassing our expectations. Again, this is a new piece of the express market that we’ve entered, so we’re excited because there’s a tremendous amount of upside for UPS there. And we’re also able to bundle that to win other express package. And then on the yield management side, again, David talked about the expedited expansion. Again, a couple of keys there is that utilizing our lower cost integrated network we’re able to utilize ground transport or standard ground network in Europe as well as our second day air and ground network in the United States to lower the cost and keep the packages off the planes. And one interesting note there is that 75% of the new volume we’re getting on those lanes are coming from shippers that never shipped on those lanes before. So it’s new business, and it’s not down trading from express.

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

Domestic margins took a bit of a downturn year over year. What was the growth of short post and how is the shift to sure post and ecommerce impacting margins? And how is that felt within the negotiations?

I’ll take at least the pure growth part of that, and then Myron can talk a little bit about our productivity and other issues. But we’ve wrapped a lot of the ramp up of sure post. It’s continuing to grow. Clearly B2C continues to outperform B2B in our portfolio, and we’re doing fine with that. The biggest issue, clearly, in the second quarter for domestic, was the slowdown of volume growth, below what we’d expected. And Myron, clearly you guys are adapting to that.

On the heels of slower growth than what we expected, when you look at the [wrap] of the basic product in the sure post, we were able to improve our operating margins by deploying sure post redirect. During the second quarter, on average we saw 17.5% of the packages that would have been delivered by the post office we were able to redirect our package delivery drivers, matching them up with other stops that were going to residences, which drove density. So we’ll see continued expansion of our productivity and moving into the third quarter we’ll try to hone those productivity improvements.

Our next question will come from the line of Kevin Sterling of BB&T Capital Markets. Please go ahead. Kevin Sterling - BB&T Capital Markets : Can I dive a little bit more into your freight forwarding comments? The weakness that you’re seeing, is it mainly a mix issue, volatile buy rates, volume? Really what’s driving that deterioration in forwarding?

It’s all those together, quite frankly, and some of the comments we started with, we know that in our network right now we’re really concentrated in a couple of ways. The Asia lane is driving a lot of the growth historically. It concentrates in high tech, and Scott talked about some of the innovation trough. You heard some comments about military and defense. We’ve had some of those movements going on across the world. So some of those pressures combine to where we are right now in the current quarter. But looking forward, as David said, we’re pretty confident. We’ve been investing in freight. The UPS freight forwarding over the last couple of years. You mentioned, David, kind of a go-forward new piece of go-to-market on how we’re going to go to the procurement side of freight, so we’re comfortable that we can take that and continue the growth. And we also have to take a look at emerging markets. And quite frankly, we feel like the emerging market announcements we’ve had recently, as the trade patterns in the world move, is going to provide us great opportunity to match our network with that emerging market investment and continue to grow all of those together. And at the end, even in these tough times, the margins weren’t the worst you’ve ever seen, so we’re kind of holding those. Year over year comps aren’t the best, but at the end of the day, we still have some pretty strong margins in freight. We continue to keep going down that path and we’ll manage them together.

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

Maybe a question just on the second half guidance, when you think about the 8% midpoint. Can you give us a little bit of some of the inputs and the expectations, I guess, for volume progression as you move throughout the year, that kind of gets you to that point? I guess maybe what I’m asking is how much is it reliant on maybe a somewhat more normalized peak or some product launches that go on later on in the second half of the year?

You know, we’re not basing our guidance on any significant ramp up economically, as I think I mentioned. We’re looking for basically a steady state economy, unexciting, a little underperforming, clearly, from where we thought it would be at the beginning of the year, but not radically down. We do expect the U.S. business to ramp up a bit as we ramp up some of the customers, perhaps, that got deferred or delayed during the negotiation period. So [cross talk] volume growth strengthen with Q4 clearly being stronger than Q3. On the international side, kind of steady as she goes on that. Clearly there’s volatility in the air freight, but we feel pretty good that the core business is very strong. Europe continues strong. So no real unique shape to the rest of the year as far as economic conditions.

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

Just want to follow up on forwarding a bit. You talk about air freight overcapacity. I’m wondering if you can talk about some of the moving parts. Are you seeing that in lower purchase transportation costs? Or maybe you have to then pass that through more quickly from a pricing standpoint? If you can help us think about how that’s working on the air freight side, and then maybe a little color on ocean as well, please.

I think the major overcapacity in the forwarding is that it’s not so much on the dedicated cargo carriers, but the passenger airlines clearly have added capacity. And our real strategy, as Jim said, is to adapt so we’re as flexible as we can be to reflect buy rates. And then importantly, also, to develop a portfolio to help customers move up and down as much as we do in our package environment. So, you know, the forwarding market is volatile, and cycles happen quite a bit. We think we’re reacting accordingly and building a good base.

Any color, maybe, on the ocean side?

Ocean remains solid, and that’s part of the reason we’re building and expanding for it, is we’re profitable in ocean and looking forward to growing it.

Our next question will come from the line of Justin Yagerman with Deutsche Bank. Please go ahead.

In David’s remarks, you guys talked about moving from 8 to 7.5 truck routes. I think you were talking about the Asian market. And I think it was the first time you had given color around that. And I was kind of curious, as I frame up the international small package business, can you give us a sense of how much of that business stays on the ground as opposed to actually flying in either your owned or chartered aircraft? That would be helpful, I think, in terms of getting an idea of the profitability of the business.

To just clarify, last quarter we were at 8 truck routes. And this quarter we’re moving to 7.5. And what that means is there’ll be some days that are, [end of the week], 8, and then there are other days that are 7. But these truck routes, of course, are the routes that are very important, connecting Asia to the U.S. and Asia to Europe.

Clearly the issue, it’s more of a challenge for us coming out of Asia, where you fly the goods. When you hit the cross border in Europe, you’re going to have to seek to move between air and ground, and that flexibility. But the challenge, for us, obviously, is when business slows down out of Asia, you fly it.

And so just framing up the back half of that question, in terms of the overall percentage of the international small package business that stays on the ground, any color around that?

Most of that question really pertains to our European operations, because of the way we’ve been at it since we went over there in 1976. The network we built that is both trans-border air and ground allows us to essentially keep about 85% of what we pick up in Europe to stay in Europe. And it’s the customer’s choice. They can fly or they can put it on the ground. And the power of that network allows them to do both. So that kind of gives you a feel for the materiality of the European [unintelligible].

And you know, Europe is over half our revenue in international, so it’s a big piece. And Canada is also a decent sized operation.

I was just going to say that we’ve got a material business between the U.S. and Canada, and we just recently launched a ground business to Mexico, so we now have U.S. to Mexico standard, and Mexico to U.S. standard, which is, again, also exceeding our expectations in terms of growth.

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

Maybe just an update on the Teamsters negotiations and the contract status there. With the tentative deal on the package side, are you starting to see any of the domestic volumes come back more than you thought in the second quarter? And then on the LTL side, are you seeing any of the volumes start to go away given that you seem further away on the deal there?

First of all, you’re right. We’ve got the national [master] agreement done, and the national master covers the important things on the package side, and covers the wages, the pension, and the health and welfare. We do have some supplements open that we’re working our way through. We’re working with the Teamsters and our employees right now, and those issues, they generally involve work rules. I’d say that, as we’ve said before, we’re really not seeing additional diversion or any diversion at this point in time. We missed some opportunities and as we negotiated it took us a while to put these new wins on board, to convert them. And I think we’ll see that, and we’ll see more in the third quarter, and we’ll see more in the fourth quarter. So I don’t see any more losses from that perspective. On the LTL side, we’ve got to finish that agreement. We do have an extension, which gives our customers a little bit of a calm feeling, because we have that extension. And I’d say currently we’re really not seeing a lot of lost volume on the LTL side. We feel pretty good about it. We just need to get that agreement done.

Our next question is from the line of Bill Greene of Morgan Stanley. Please go ahead.

I’m wondering if you could comment on something that we get asked a lot, which is when we look at sort of what appears to us as a duopoly in the U.S. market, it seems somewhat surprising that we don’t see more, I guess, stronger pricing power overall. And I realize there’s always puts and takes and mix shifts and whatnot, but I’m wondering if you can comment at all about how you think about the progression of this market. DHL’s been gone for quite some time, so maybe talk a little bit about how you think about pricing.

First thing I have to do, I guess, is take issue with your framing that the market is a duopoly. Clearly this is a competitive market. The post office is a very large player in the ground business especially, and there’s a number of regional players. In general, the pricing is rational in this industry, and that’s one of the great elements, but I think some of the trends we’ve talked about do create some challenges and mask that. That goods are getting smaller and lighter. The average weights are down 2% to 3% typically year over year, and that there’s been a transition of goods to some extent from business to business to business to consumer. So pricing remains rational. It’s somewhat masked. It’s sometimes hard for you guys to see all the moving parts, but if you factor out average weight and some of the other product changes, we’re still looking at core base rates of over 2%.

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

I’m wondering if I can get some perspective on my choice and where you think that technology is as it relates to capturing B2C benefits, both in terms of volume and utilization in the network. Maybe just kind of framing where that product technology is and whether we’re on the front end or back end of realizing the benefits.

First, I’d say that we’re on the front end of that. We have over 3.3 million consumers signed up right now, and certainly by the end of the quarter we should approach or exceed 4 million enrollments. We have 54 million deliveries that have taken place, and about 14% of those deliveries the consumer actually takes action on them. So there’s some real value being created there. Certainly on the cost side for us, we’re reducing our send against or making sure that more packages are being delivered on the first attempt. Just recently, we introduced the ability to upgrade your sure post packages to UPS ground, and that’s also resonating well with our customers and exceeding our expectations. And we’re the only provider out there in the marketplace now that enables all residential services to have consumer day before visibility and ability to reroute or reschedule The other exciting thing is we just launched the UPS my choice Facebook app, and that enables a Facebook login and also my choice capability on Facebook. It’s just out a couple of weeks, and we have 120,000 new users that have linked their UPS my choice or their myups.com to Facebook. So we’re excited about that. We’re also listed as one of the top 10 Facebook apps right now. Just some other interesting stats, we have 3.6 million downloads now on our iPad, iPhone and Android apps, so a lot of traction with my choice. Also really resonating with retailers.

Right. So if you don’t get it, we’re moving well on my choice, and if you guys haven’t signed up yet, you’re missing a great service.

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

That’s a great transition here to my question, which is as you guys continue to get more B2C business, and you’re able to leverage more off your drivers, even by rerouting from sure post into the regular ground network, what’s that doing for your margins in that B2C business, and how much higher can that go as you continue to get more density and more business through those channels?

Yeah, I think Myron clearly will fill you in on the redirects, and also Orion. In general B2C is a bit more challenging, but through the innovation we’ve done, we’re finding ways to grow very profitably with B2C.

In David’s opening comments, he addressed Orion, but before we go there, let me remind you that just last year we finished completion of deploying telematics in the U.S. So in the quarter, we were able to drive 1.6 million less miles on top of 1.9% volume growth. Now, a couple of on top of that. You talk about the 500 people that we’ve deployed with Orion, which is an on-road integrated optimization system that will allow us to reduce additional miles. Keep in mind that for every average mile reduced there’s a $50 million savings to UPS. So we feel very confident that as we grow B2C volume, we’ll deploy technology that will allow us to balance the cost. But as we get additional B2C, we’ll also increase density, which obviously will help us improve margins.

Right, and I guess just to reinforce, the Orion is a major deployment that’s going to take us 3 to 4 years to get fully rolled out. But it does create a very dynamic environment that allows us to do real time adjustments.

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

Could you speak to the back half guidance. What would be the two, or three, or four biggest swing factors to put you at the high end or the low end as you approach it?

Well, certainly the economic factors will be a big driver. I think in the domestic side, making sure that this nascent recovery continues, our success clearly on bringing in customers to accelerate the volume growth and then normal execution. Internationally, the product launches, I think, in late Q3, Q4, have a big impact on demand conditions. Although in Europe we’re plugging along pretty strong, we had growth upper single digits in Europe and continue to see that work as our integrated network differentiates. So biggest factors really would be the economic environment.

It’s our job to adapt to whatever we faced in the second half of the year. The team here will adapt to conditions. Kurt said in earlier comments that we’re assuming the same trends we saw coming out of the second quarter. Hopefully we’ll get a little bit better, but we’ll adapt to whatever we get.

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

I was wondering if you could talk a little bit about how much you expect to improve profitability at the forwarding division once you’re able to implement some of the initiatives that you were speaking about earlier.

We have given guidance that the overall supply chain and freight will have 8% margins for the remainder of the year. So clearly that represents a very solid margin and we’re comfortable that the actions we’re taking will get us to that point.

And is there a longer term expectation?

We’ve not laid out exact numbers for that subsegment, but clearly if that sector is in the 8% to 10% margin over the long term, we’re generating economic profit and feel good. And then it’s just a matter of continuing to grow that sector.

And we think international air freight is at a trough and it’s hard to imagine it getting much worse going forward.

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

Not to beat the forwarding question over the head here. I’m just trying to segregate what’s more of a short term issue versus a long term issue. You mentioned weakness in the [tech] out of Asia, and you mentioned weakness in the military. How much of that do you believe is shorter term in nature or timing in nature versus how much do you think is more of a secular issue?

Scott talked about the innovation trough in the beginning, so that’s obviously a piece of the drag on the high tech sector. The military and the defense side, you know, you can see what happens across the world and what’s going on with that. And I think our real opportunity is to reverse the concentration in what we’ve got. You know, we’ve been investing, for instance, in healthcare over the last couple of years, and we expand that footprint. We’re going to go down the path here into emerging markets, which quite frankly in their early years of development as trade continues to grow. That’s really a freight need that they have to connect to the world, as opposed to in express products. So all of those provide great opportunities for UPS in the years to come, so we’re very comfortable. We’re glad we’re in forwarding, and right now it is a bit of a trough. We hold the margins tight. We continue to invest, and we’ll continue to grow it as UPS should.

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

UPS freight showed an increase in density with shipment volume up nicely in the quarter, and yields were up just a little bit, but margins, it said in the press release, declined slightly due to increases in compensation and benefit expense. Could you explain if that’s anything out of the normal annual increase in wages and benefits? And then also why the increased density wouldn’t have driven margin improvement?

Yeah, there was a bit of a tough comp to the previous year that gave us a little bit of a headwind. But Myron, maybe you could talk about some of the deployment of UPS technology into freight that should help us drive margins.

Yeah, as Kurt noted, in the quarter, while we did see continued growth in revenue, we did see also continued abilities to attract additional market share, which boded well for us. However, with the increase in health and benefit costs, we were not able to improve margin expansion. We will continue to deploy customer-facing as well as operational technology. Customer-facing technology like pickup notification utilizes UPS’s world ship, that gives our customers an hour timeframe of when they’ll get the pickup. And we’ll continue to deploy small package technology and freight to get additional operational improvement.

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

I just had a question on capital allocation and capital deployment. I know you guys are very committed to the dividend and the share repurchase program. And yet your share count is going down, your revenue growth is flat, and your earnings are going down. So can you just talk about your thoughts with respect to capital allocation within the context of slowing revenue growth environment?

Clearly we’re committed to our distributions. We’re committed to our dividends, we’re committed to our share repurchase, the numbers we’ve talked about in the past. But we’re also committed to reinvesting in the business. So we have a lot of opportunities out there right now for us to reinvest, particularly in areas of emerging markets. We talked about that a little bit earlier. There’s all kinds of opportunities in healthcare that we’re just tapping right now. And the B2C we’ve talked about throughout the call. Around the globe, there’s a lot of opportunities for us to enable our customers’ growth in B2C. So we see plenty of ideas and plenty of opportunities to reinvest interest business.

And Helane, I can’t let you get off the phone here without taking issue with you. I mean, we’re looking for profit growth in the next quarter and revenue growth, an 8% midpoint for profit growth. So we did hit a bit of a hiccup in the second quarter, but we feel very confident in both short term and the long term outlook for the company.

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

Just to go back to your comments earlier about air freight capacity, as an operator of your own asset, I’d be curious to hear your thoughts on the long term outlook for air freight capacity, especially given the influx of passenger belly space we’ve seen over the last several years. I’d just like to hear your broader thoughts on the capacity situation, both over the next 12 months and the next 3 to 5 years. [David Abney]: I think, the first thing, you certainly hit it right. What’s increased the capacity has been the belly space and all of the passenger airlines and aircraft that have been added. What you are seeing us do, and other people in our marketplace, is to watch very closely the trade lanes and to make sure that we deploy those assets to match the volume in those trade lanes. So when we need to pick up the lift in certain areas, quickly you deploy that aircraft and then on the other hand, when we need to pull back, we still can effectively do that. One of the things that’s unique, I think, to our company right now is we have not ordered any aircraft after the 767s that we’re receiving this year. So that gives us some time to just hold firm and see what’s going to go on in the marketplace in the next couple of years.

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

You mentioned the double digit revenue declines in forwarding, and Scott, I’ve heard you say in the past, [it’s all trade on board]. I’d like to ask you to comment on volume shifts, namely DC customers who shifted to air in the past, diverting all the way down to ocean. Or are you seeing shippers simply shipping fewer shipments? And as a corollary, are you margin neutral on these modes? Or does slower ocean demand fewer UPS resources?

Let’s let Alan answer that. I think clearly we’re probably seeing all the above, but Alan will take a shot.

Yeah, we’re seeing some of our customers look for solutions that move the air freight to ocean. Certainly there are certain products that Scott talked about earlier in terms of innovation and high value that just don’t fit that mode. You know, we recently introduced, and David talked about, our preferred ocean LTL, which is really a combination of our ocean move and then using our integrated network to expedite those moves once they hit the destination, say in the U.S. here, where we’ve got some nice margins on that. That’s obviously higher than regular ocean, and it speeds up the time in transit to faster than ocean, but still somewhat slower than air freight. And that’s been boding low for us.

About the margins, is ocean more or less attractive to you compared to air?

In the short term, if we’ve got premium volumes sitting in an aircraft, there’s a higher incremental impact. It’s harder to adjust, especially flights out of Asia, than it is other integrated areas. Over the long term, we are very profitable in ocean. In fact, we have major investments to help supplier management and to help accelerate ocean. So we’re building the portfolio, classic UPS approach, and we’ll make sure that the margins are appropriately compensatory for the investment.

Our next question will come from the line of David Campbell of Thompson Davis & Company. Please go ahead. David Campbell - Thompson Davis & Company: I don’t want to overdo it on forwarding, but I haven’t heard, unless I missed it, how much forwarding air freight tonnage was down in the second quarter.

It was down a little over 10% in the quarter. And as we said before, the military was a big piece of that. And that was certainly a very volatile group as movements happen. And then the core underlying weakness also in high tech drove that.

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

Kurt, I was just wondering if you could maybe give us a sense for what the right level of maintenance capex should be on the airline side once you lap the new aircraft deliveries in this coming year.

We’ve got the youngest fleet in the industry, so at least the day to day maintenance is pretty minimal. But yeah, we think in general, depreciation is a reasonable representation of maintenance capex. As David said, we’re not real long on aircraft right now. We’re bringing in a couple more 767s this year, and then the fleet’s in great shape. And we’ll be flexible and decide what happens from there. But we feel really good about our capital position, very few capital commitments and great cash flow for the company going forward. And the depreciation, we think, really represents a pretty good shot at what maintenance capex is.

And we have a question from the line of Mr. Scott Group of Wolfe Research. Please go ahead.

Just following up on those comments about free cash should be really good the next couple of years. What prevents you from being even more aggressive with the buyback or the dividend? Because the stock is up so far this year, you’re above a 3% yield, you’ve got $6 billion of cash, you used to run the business with closer to a billion of cash. Why not be more aggressive?

We have, you know, a policy that we manage to fairly steadily, Scott, as you know, of just [targeting] approximately 100% of net income in the form of either dividends or share repurchases. This year we are more aggressive with a stated target of $4 billion in share repurchases, partially to catch up for last year, where we held back as we accumulated cash. But we think a steady programmatic approach is the best way to do it. We do buy it back and retire the shares that we commit, and so I think investors can count on a programmatic approach that is understandable and foreseeable. And at least for now that makes a lot of sense. Clearly if markets get crazy, we’ve got the cash if we want to become more aggressive in share repurchase. But right now we’re very comfortable with our current approach.

As I said earlier, I think that even though it’s a slow growth global economy, we see a lot of opportunities to reinvest in ideas we have out there.

Due to time constraints, our last question for the day will come from the line of Kelly Dougherty of Macquarie. Please go ahead.

I just wanted to change gears and see if you could talk a little bit about the B2B side of things. You know, what you’re seeing from perhaps a stabilization or when you think that maybe you’ll see growth reaccelerate, and how the omnichannel might fit into that. So maybe any color you could give on B2B would be helpful.

Yeah, we did reference in our earlier a little bit of a slowing in the industrial base. So we saw some drag there. But Alan, maybe you could talk about what’s happening in the retail sector?

Certainly your comment about omnichannel, that certainly does create B2B shipments. We’re really excited about helping brick and mortar retailers provide an omnichannel experience for their consumers that obviously merges the online with the brick and mortar. We’re finding that there’s a lot of customers out there, consumers, that want to order online and ship to store. We’re also enabling our retailers with our technology to be able to drop orders to their stores and ship to other stores, or ship directly to consumers, which is a win-win-win for UPS, the retailer, and the consumers, because the consumers are getting faster fulfillment of their orders. The retailer’s getting it at cost-effective rates, and obviously we’re getting new business. We’ve got probably about 25 retailers that are engaged with us today on that, and it’s resonating well with them. The other thing that I would just add is the one driver really resonates well with the retailers, because obviously the store personnel needs to stay focused on the in-store consumers, and using our technology and one driver to pick up all the air and ground and deliver all the air and ground keeps those employees on track.

And do you think that this omnichannel driving that can lead to a stabilization in the B2B volumes any time soon?

Yeah, I think certainly it’s going to help grow B2B. Obviously you wouldn’t have thought in the past that the B2C or online would generate B2B, but you’re finding more and more that the folks are getting packages delivered to their work, delivered to stores. We certainly have our Kiala UPS access point model in Europe, with 8,000 access points for consumers. Many consumers are preferring to pick up those packages at businesses versus at home. So yeah, we’re excited about the prospects of a more balanced B2C market or online ecommerce market that generates more B2B than it has in the past.

Kelly, in the second quarter, if you watched the economic statistics, the inventories got liquidated, so inventories are at a pretty low level right now. And U.S. exports were really weak orders. So both those two areas should really help B2B going forward to get back to normal.

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

I’m going to turn it over to Scott for some final thoughts.

Thanks for doing this today. First let me say that I am quite confident UPS will achieve the goals that we discussed today. And that’s despite a slower economic growth forecast and the trade down we’re experiencing. I want to reiterate the comments I made on Helane’s question. I really can’t remember a time in my 28 years at UPS when we had more opportunities in front of us. Opportunities like the omnichannel in the U.S. retail that we’ve just been talking about, market share expansion in the fast-growing emerging markets, healthcare solutions to assist an aging population, and UPS enabling global B2C business growth around the globe. Lots of opportunities ahead of us. Thanks for joining us today.