United Parcel Service Q2 2010 Earnings Call Transcript

United Parcel Service (UPS)

Q2 2010 Earnings Call

July 22, 2010 8:30 am ET

Executives

D. Davis - Chairman, Chief Executive Officer and Chairman of Executive Committee

Andy Dolny - Vice President of Investor Relations

Kurt Kuehn - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Treasurer

Analysts

David Ross - Stifel, Nicolaus & Co., Inc.

Justin Yagerman - Deutsche Bank AG

Arthur Hatfield - Morgan Keegan & Company, Inc.

Helane Becker - Citi

Robin Byde - HSBC Global Research

Ken Hoexter - BofA Merrill Lynch

Thomas Wadewitz - JP Morgan Chase & Co

Garrett Chase - Barclays Capital

Scott Malat - Goldman Sachs Group Inc.

David Campbell - Thompson Davis & Co

Christopher Combe - Exane SA

Bill Greene - Morgan Stanley

Christopher Ceraso - Crédit Suisse AG

John Barnes - RBC Capital Markets Corporation

Kevin Sterling - BB&T Capital Markets

Jon Langenfeld - Robert W. Baird & Co. Incorporated

Edward Wolfe - Bear Stearns

Nathan Brochmann - William Blair & Company L.L.C.

Matthew Brooklier - Piper Jaffray Companies

Presentation

Operator

Good morning. My name is Steven, and I will be a conference facilitator today. At this time, I would like to welcome everybody to the UPS Investor Relations Second Quarter 2010 Earnings Conference Call. [Operator Instructions] It is now my pleasure to turn the call over to your host, Mr. Andy Dolny, Vice President of Investor Relations. The floor is yours, sir. Please go ahead.

Andy Dolny

Good morning, everyone. Thanks for joining us today. Scott Davis, our CEO, and Kurt Kuehn, our CFO, will discuss the second quarter results and our expectations going forward.

Before they begin, however, I want to review the Safe Harbor language. Some of the comments we'll make today are forward-looking statements that address our expectations for the future performance or results of operations of the company. These anticipated results are subject to risk and uncertainties, which are described in detail in our 2009 form 10-K and first quarter 10-Q reports. These reports are available on the UPS Investor Relations website or from the Securities and Exchange Commission. Today's call is being webcast and will also be available on our Investor Relations website.

I want to remind you of an adjustment we made in the second quarter of 2009 for certain foreign currency obligations which did not qualify for hedge accounting treatment. The after tax impact of this charge was $48 million or $0.05 per share. In the remarks today, Scott and Kurt will refer to UPS' second quarter 2009 results excluding the impact of this charge. Additionally, all 2010 full year references and comparisons to 2009 will refer to adjusted results. We believe this is a more accurate picture of the company's performance.

Reconciliation to comparable GAAP measures is explained in the schedules that accompanied our earnings news release this morning. The schedules are also available on the UPS IR website in the Financials section. Finally, during the call, we refer to free cash flow, which is a non-GAAP financial measure. A reconciliation is also included in the news announcement this morning and is available on the UPS Investor Relations website.

To begin our review of the quarter, I'll turn the program over to Scott.

D. Davis

Thanks, Andy. Good morning, everyone. We continue to see strong momentum in 2010 as evidenced by our results announced this morning. UPS earnings jumped 71% on revenue growth of 13% with improvement across all business units. Now, this was achieved despite the fact that mixed economic signals continue to dominate the headlines. The U.S. is witnessing strong corporate earnings and moderate GDP growth, although employment and housing data remain weak. The debt crisis in Europe has kept everyone's interest, the stock markets around the globe reflecting this uncertainty. Yet, we are pleased that our European business showed solid growth again this quarter. And Asia continued to experience significant economic expansion. Our export volumes in the region grew over 40%. UPS has exceeded this environment while also investing to further strengthen our global network.

In the quarter, we enhanced and built new relationships with partners in Asia. UPS expanded the reach for our services through strategic alliances in Vietnam and in Malaysia, providing greater access to customers in these important emerging markets.

In May, UPS announced a significant new partnership in China with Alibaba, the world's largest small business e-commerce company. The agreement benefits UPS by giving us access to small and medium-size wholesalers through their new online marketplace. This platform provides easy use of our services for Chinese suppliers and eventually will be available to users around the globe. Our approach to international expansion, using alliances, service partners and acquisitions, has proved to be successful. The evidence can be seen in the strong international growth UPS has delivered over the years. We are confident in this strategy. In fact, during the quarter, UPS was recognized as the market leader in Poland by industry trade magazines and the local press, accomplishing this in just five years following our acquisition of Stalicha. [ph] (18:22) Poland has become a key manufacturing center and distribution point for Europe.

I am equally confident in our U.S. domestic strategy. Our reorganization effort has started to pay dividends. UPSers has embraced the need for change and quickly adapted to the new organizational structure. Through the superb execution of our people, significant network efficiencies have been achieved, and our go-to market strategy is beginning to bear fruit. In the midst of the one of the most substantial changes in our history, the U.S. domestic segment reported 57% improvement in operating profit. We are not yet where we need to be, but we are moving in the right direction.

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