UPS - Q1 2014

Transcript

Operator (participant)

Good morning. My name is Steven, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the UPS Investor Relations first quarter 2014 earnings conference call. All lines have been placed on mute to prevent any background noise, and after the speaker's remarks, there will be a question-and-answer period. Please note, we will take only one question from each participant to accommodate more analysts during the call. Thank you for your cooperation. It is now my pleasure to turn the floor over to your host, Mr. Joe Wilkins, Investor Relations Officer. Sir, the floor is yours.

Joe Wilkins (Head of Investor Relations)

Good morning, and welcome to the UPS first quarter 2014 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 risk and uncertainties, which are described in detail in our 2013 Form 10-K, which is available on the UPS Investor Relations website and from the Securities and Exchange Commission.

Although there were no adjustments to first quarter 2014 results, there was an adjustment related to the attempted acquisition of TNT that increased first quarter 2013 diluted earnings per share by $0.04. As a result, in our remarks today, all quarterly and full-year comments and comparisons will refer to adjusted results. In addition, we will discuss UPS's free cash flow, which is a non-GAAP financial measure. The webcast of today's call, along with a reconciliation of free cash flow and adjusted results, are available on the UPS Investor Relations website. Before we review the details of the quarter, I want to announce that we plan to hold an investor conference later this year. The 2014 UPS Investor Conference will be held at the Grand Hyatt Hotel in New York on November 13th.

We look forward to updating you on our strategy, demonstrating our technology, and sharing our plans for the future. You will be receiving a Save the Date invitation soon with more details. Just as a reminder, as on previous calls, please ask only one question, so that we may allow as many as possible to participate. Thanks for your cooperation. Now I will turn it over to Scott.

Scott Davis (CEO)

Thanks, Joe. Welcome to your first call, and good morning, everyone. UPS first quarter performance produced mixed results. International demonstrated strong volume growth and margin expansion on an 8% increase in export shipments. Supply chain and freight delivered results that were about as we expected. However, our U.S. domestic segment fell short due to the unusually harsh weather during the first quarter. We pride ourselves on being an all-weather company, but the intensity of this year's winter storm season produced challenging conditions. Buildings across the UPS network were forced to cease operations somewhere in the U.S. on 34 days during the quarter. These weather events not only led to increased costs, but also influenced UPS product and customer mix, contributing to lower yields. We saw business-to-business shipments slow as manufacturers, distributors, and retailers closed shop. On the other hand, snowbound consumers took to the internet to make their purchases.

Clearly, UPS results in the U.S. reflect both the lost revenue and the additional costs associated with these storms, and Kurt will provide more details in just a moment. While we've yet to see the first quarter U.S. GDP numbers, it's safe to say that growth will be slower due to the weather. The good news is that spring has arrived, and we expect the pace of U.S. economic growth to pick up as 2014 progresses. In Europe, the economy is showing signs of recovery and faster growth. Yet, if the situation in Ukraine deteriorates, that pace may slow. Economic expansion in Asia has remained steady, with mid-single-digit growth. In Latin America, expectations call for increased merchandise exports. The economic benefit of global trade is clearly visible in both established and emerging economies.

Trade promotes economic expansion, creates jobs, makes companies more competitive, and lowers prices for consumers. Congress now needs to act to pass a Trade Promotion Authority bill, or TPA, that supports economic growth and job creation in the US. TPA gives the administration authority to pursue trade agreements that meet objectives laid out by Congress. We strongly encourage swift passage of TPA, as there are currently three important trade pacts pending that provide real economic benefits, and TPA will clearly increase their chances of success. The expansion of global trade is an important catalyst to the UPS growth strategy. Recently, our Management Committee and Board of Directors conducted a detailed review of UPS's long-term strategic initiatives and identified key opportunities that bring long-term value to both customers and shareowners. The updates we received were encouraging.

UPS is on the right path to ensure that our solutions meet the ever-changing needs of the marketplace. We will continue to stay focused on providing industry-specific solutions as we invest in our healthcare capabilities and develop omni-channel solutions for the retail industry. In addition, we reviewed the implementation of the operational technology projects, ORION and Hub Automation. On the international front, Jim Barber will bring you up to date this morning on how we're expanding the UPS global network in both developed and emerging economies... as well as what we're doing to serve end consumers around the world. In support of our healthcare strategy, UPS announced several investments during the quarter, including the acquisition of Polar Speed. This addition to our global healthcare network will provide improved access to the important UK market, as well as unique cold chain transportation capabilities.

Also, UPS opened new healthcare distribution facilities in Canada and Mexico, and announced plans to expand with additional facilities in Brazil and Chile later this year, further increasing our capabilities in Latin America. Adding to these industry-specific solutions, we've expanded our distribution network in North America for retail and manufacturing clients. These investments add almost 500,000 sq ft to our footprint at three key distribution sites in Kentucky, California, and Alberta, Canada. Now, before I turn it over to Kurt, I want to give you a quick update on what we've been doing regarding peak season. During the last couple of months, we have met with UPS's largest customers. We are working collectively to improve forecasting accuracy, increase visibility of shipments, and improve mutual planning capabilities. Our shared goal is to enhance the end consumer's experience.

In addition, David Abney and his team are on track with the system changes, facility automation, and capacity enhancements we discussed last quarter. These improvements will provide better flexibility at peak and will deliver service and productivity gains throughout the year. As we continue to implement these enhancements, we will keep you updated on our progress. Now, Kurt will take you through the details of the quarter.

Kurt Kuehn (CFO)

Well, thanks, Scott, and good morning, everyone. You know, our goal today is not to make this call all about weather, but unfortunately, it did significantly weigh on earnings, so we'll have to spend a minute or two talking about it. The difficult weather environment this quarter created severe operational challenges that increased costs and also pressured demand. But fortunately, due to our diversified portfolio, weather is not the only story. Most notably, we're encouraged by the strong momentum in international and the positive results in the supply chain and freight segment. We expect both of these to continue. Now, let's review the segment results. Our U.S. domestic operating profit was $927 million, down $158 million, with margin contracting 220 basis points. Clearly, the impact of weather was reflected in the bottom line.

We estimate that profitability was lowered by almost $200 million. This includes the additional expense from lost productivity, snow removal, increased utilities. In addition, it was a drag on revenue due to perishable demand and increased service refunds. UPS experienced service disruptions in the network on more than half of the operating days in the quarter, materially increasing network costs as we attempted to navigate around the many storms. For example, a substantial rise in the number of delayed trailers slowed network operations and pushed direct labor hours up 5.4%, including a 20% increase in overtime. US domestic revenue increased 2.6% to $8.5 billion. We were encouraged to see strong demand in the US, as daily volume was up 4.2%.

Ground products were up 4.4%, driven by SurePost, which grew more than 50%. UPS deferred products grew 6.3%, and Next Day Air was 1.5% higher, due to increases in Next Day Air Saver package. B2C shipping contributed broadly to gains across all products, while B2B improved slightly, primarily from e-commerce, including omni-channel customers. Average revenue per package declined by 1.5%. Base rate increases were more than offset by changes in customer and product mix. Slightly lower fuel surcharges and weather also contributed to yield declines. A couple of interesting things we noticed. Customer mix shifted a bit as large accounts were able to more effectively manage around storms.

Also, B2B volume was clearly reduced by weather events, whereas in contrast, B2C growth remained robust as consumers were able to continue shopping online, pushing our residential delivery mix to almost 44%. Next, the international segment results. We're encouraged by the positive business trends we're seeing, especially in Europe. UPS international revenue was up 5% to $3.1 billion. Operating profit increased 12%, and operating margin expanded 90 basis points to 14%. Over the last several quarters, we've been making adjustments to optimize network efficiencies. These improvements, coupled with the increased shipments, contributed to margin expansion during the quarter. Our international export volume was 7.7% higher, with Europe leading the way with growth to all regions of the world. Strong demand for UPS transborder products increased intra-European exports by more than 15%.

Non-US domestic volume jumped more than 8%, led by Germany, Poland, the UK, and Canada. Export yields on a currency-neutral basis were down 3.2%, negatively impacted by shorter trade lanes and changing product mix, as non-premium products grew by 13%, with premium up 4%. Looking now at supply chain and freight. Operating profit was up 3.5% to $148 million, led by the forwarding and distribution business units. Operating margin expanded 30 basis points to 6.8%. In forwarding, shipments and tonnage increased, while market conditions drove revenue per kilo lower. The ocean forwarding and brokerage businesses both experienced solid revenue gains and improved profitability. The distribution unit continued to expand its footprint with the facility openings that Scott mentioned earlier. The retail and healthcare sectors combined to produce mid-single-digit revenue growth.

Operating margin expanded 80 basis points to 9%, despite the expansion costs. UPS Freight saw both pressure on demand and higher operating costs due to weather. Revenue was up slightly due to a 3% improvement in LTL revenue per hundredweight that was offset by a 2% tonnage decline. Operating profit was lowered by increased network costs associated with the difficult conditions. Looking now at cash in our balance sheet, the ability to generate free cash flow on a consistent basis is a hallmark of UPS. This quarter, UPS once again had a conversion rate well in excess of 100%, generating $1.9 billion in cash. Capital expenditures were about $320 million. The pace of investment will accelerate as the year progresses. We expect capital expenditures to reach $2.5 billion for 2014.

Many of the network enhancements and operational technology projects will ramp up during the second and third quarters. Regarding shareowner distributions, UPS paid $596 million in dividends, reflecting the 8.1% increase announced by the board in February. In addition, the company repurchased 6.8 million shares for approximately $660 million. On the labor front, we are pleased with the progress that's been made, and while we've not yet received final word from the Teamsters, we feel it's an appropriate time to share with you some key elements of the new agreement. A detailed presentation will be made available on the IR website upon implementation of the contract. The new agreement includes reasonable wage and benefit increases, as well as flexibilities that will improve service and profitability.

UPS has devoted substantial time and effort working to help the Teamsters better understand our cost structures and the changes needed to provide attractive benefits in the future while remaining competitive in the industry. Sponsorship of healthcare plans has become expensive, largely due to high healthcare inflation trends and legislation like the Affordable Care Act. After much evaluation, we determined that the best path for UPS was to move our union employees to multi-employer healthcare plans. In simple terms, UPS is moving from a defined healthcare benefit plan to a defined contribution environment, with the contribution set for the duration of the contract. Once the new contract is implemented, the responsibility for providing medical coverage will be assumed by Teamster plans. As a part of this settlement, UPS will also remove existing post-retirement healthcare liabilities from our balance sheet.

This obligation for future retirees, as well as ongoing coverage for active employees, will become the responsibility of the multi-employer plans. When we transfer this liability to the union, UPS expects to make a significant cash payment to these plans and record a one-time charge. As I said, more details will come in the future when the contract is finalized. Looking now at our expectations for the rest of the year. While we took a hit in the first quarter, our expectations for the remainder of the year are unchanged. In U.S. Domestic, we still anticipate operating margin of approximately 14% for the remainder of the year. We expect a little higher package growth, somewhere between 4% and 5%, resulting from the gains in UPS SurePost.

Looking more closely at the quarters, as we discussed back in January, we will be incurring at least $100 million in extra operating expense. This expense is related to network and systems enhancements, as well as the accelerated deployment of ORION. The lion's share of this expense will weigh on the second and third quarters by about $0.02-$0.03 each. Our expectations for International and the Supply Chain and Freight segments remain unchanged. So overall, we are encouraged by the positive trends we've seen across the business and anticipate the remaining three quarters to perform as we originally guided. However, due to the challenging start to 2014, we expect to be at the low end of our earnings per share guidance range of $5.05-$5.30. Now, Jim will take you through our international business.

Jim Barber (International President)

Thanks, Kurt. I would like to take a few minutes to update you on the key components of our international strategy and the positive momentum we are experiencing. The International segment delivered our best volume growth since the third quarter of 2010, up almost 8% per day. This growth, combined with our network and operating efficiencies, drove our industry-leading margin to 14%. As we look at the business around the world, UPS experienced high growth in many developed economies during the first quarter. For instance, in large European markets like Germany, the UK, France, and Spain, exports were up more than 17%. Meanwhile, large Asian markets, like Hong Kong and Japan, saw export growth of more than 6%. We continue to align our networks to market conditions and regional trade patterns. Europe has been the foundation for UPS international investment and growth.

Our customers continue to value the capabilities and solutions that we provide to support the single market economy. One of the most rewarding components of our Europe growth is to see the success of our recent acquisitions. Some examples of that success are: Turkey, with revenue up 18%, the UK was up 11%, and Poland was 15% higher. UPS operational methods and systems facilitated the successful integrations of these key acquisitions. Our intra-Europe air and ground networks are proving attractive to customers looking to optimize their supply chains. We recently invested $200 million in the UPS Europe Air Network with the expansion of our Cologne air hub. This increased our sort capacity by 70%, coupled with state-of-the-art security screening, and improves our air and ground network performance.

The value of our extensive ground network in Europe was also evident, as cross-border shipments were up 15% in the first quarter. Recent investments, such as our Kiala acquisition and the UPS Access Point rollout in Europe, are further strengthening our e-commerce proposition, escalating our ability to serve the end consumer around the world. UPS My Choice continues to be a great success in the U.S. As part of our global retail strategy, we're evaluating expansion opportunities for this end consumer solution in markets around the world. In 2012, we changed how we interact with our middle-market customers across our international business. We understand their needs better and are tailoring industry-specific solutions that add value for them. This initiative is paying dividends as we achieve double-digit gains in four important verticals: retail, healthcare, industrial, and automotive.

UPS capabilities and solutions resonate well in these verticals, giving us confidence that recent trends are sustainable. Emerging markets are the next logical step in the UPS international expansion strategy and will contribute to growth as we enhance our capabilities in these underserved markets. We are in the early stages of the UPS emerging market strategy. The realignment of the international business units is allowing us to concentrate our efforts and leadership teams in these developing economies. As we progress, we will keep you updated. In closing, I'm proud of the dedication and hard work of UPSers around the world that produce these results. In fact, I see our most important competitive advantage as the UPS culture and how it integrates with local communities in our diversified portfolio. No matter where I go, UPS people speak the language of dedication and commitment to exceeding our customer expectations. Thanks.

Now I'll turn it back to you, Kurt.

Kurt Kuehn (CFO)

Well, great. Thanks, Jim, and we look forward to a lot of great future events in the international segment. Operator, we'll turn it back over to you, then, to open up the lines.

Operator (participant)

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

Scott Schneeberger (Managing Director and Senior Analyst)

Thanks. Good morning, guys. Yeah, I'll address the weather and the guidance first off here. You know, you're maintaining that you can hit the low end of the previously stated guidance range, despite the tough first quarter. Just curious, what are the, you know, the two or three main drivers that give you the confidence? You mentioned some strong package growth in SurePost, but just the two or three broadly that you think will help you, and maybe some trends here into the second quarter that support your confidence in those. Thanks.

Kurt Kuehn (CFO)

Yeah, Scott, you know, it has been a challenging time, and our operations people in the U.S. faced clearly extraordinary conditions and really storm after storm. As you heard, over half the days, we had some significant network operations with facilities shut down. So it was a very tough quarter. Beneath that, though, we do feel that the initiatives we've rolled out and the core momentum of the company is continuing steadily. So if you peel away that exclusion, basically, our guidance remains unchanged. We're seeing a little better volume on the lightweight side, and, you know, the operations, now that the skies have cleared, have worked a little better.

Myron, maybe you could talk a little bit of how you guys, I guess, survived Q1 and the momentum coming into Q2.

Myron Gray (President of U.S. Operations)

Yes, Scott and Kurt both have alluded to in their opening comments, on 34 of the 63 operating days in the quarter, we experienced severe weather conditions, prompting many of the governors in the states that were affected to issue Level 3 emergency conditions that prohibited us from working. We also saw a tremendous uptick in the number of trailers that were impacted by weather, rising over 400%. As a result of it, our direct labor hours, as well as overtime expense, went up significantly. Overtime hours were impacted by more than 20%. I don't think there's a person in the country who's more happy about seeing spring weather return, and as a result of it, in April, both our productivity and service has returned to normal levels. So as Kurt has alluded to, we don't see an issue moving forward.

Kurt Kuehn (CFO)

I'd just add the macroeconomic environment looks decent as we move forward. I think the both the global GDP and US GDP will be a little better than they were last year. Not robust, but better than they were a year ago. And what excites me is that I think we're going to see all three segments producing good growth. We saw international, and we saw supply chain and freight accomplish what they were supposed to in the first quarter. That momentum is going forward. In domestic, we started to see improvement at the end of March, and we're seeing it in April, so we feel very good about the 14% margins in domestic.

Scott Schneeberger (Managing Director and Senior Analyst)

Great. Thanks.

Operator (participant)

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

Scott Schneeberger (Managing Director and Senior Analyst)

Hi, good morning. Thanks for taking the question. You know, Kurt and Scott, I'm curious if you can talk a little bit about pricing. Scott, given the comments you just made about GDP and given the experience in the fourth quarter, where we kind of ran out of capacity, it would seem to me we've got maybe an increasingly positive backdrop for pushing harder on price. Can you talk a little bit about how you think about that? And are we entering a period where maybe pricing gets a bit better?

Kurt Kuehn (CFO)

Well, we do think that pricing is very stable, and I'll have Alan talk about it a little bit. Clearly, the significant change in our mix does mask what we think is a core base rate pricing of about 2%, ±. And so, with the substantial mix shift, it's made it hard to see. But, we feel pretty good that, you know, we're making investments, and we'll be compensated fairly for it. So Alan, maybe you could expand a little bit on pricing.

Alan Gershenhorn (Chief Sales and Marketing Officer)

Yeah, I mean, I would just add that, you know, the base rate increases of about 2% we've been experiencing for quite some time, certainly masked by customer and product mix changes that were certainly exacerbated by some of the weather trends that Kurt alluded to in the opening comments. As far as, you know, peak season goes, you know, our goal is to ensure we are appropriately compensated, you know, based on our customers' shipping characteristics and also their seasonal patterns. And we're certainly working with each customer and their specific contracts on an individual basis to make sure that, you know, we're compensated fairly for the services that we're providing.

Scott Schneeberger (Managing Director and Senior Analyst)

Thanks for the time.

Operator (participant)

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

Scott Schneeberger (Managing Director and Senior Analyst)

Great. Good, good morning. If I can just follow up on that, the pricing commentary there, and maybe just get a little bit more specific to, on that. Do you plan to use price to then adjust behavior in terms of getting it away from the December 23rd kind of peak day and kind of maybe shifting the behavior a little earlier to help the network? And I guess following on that, what additional projects... It sounded like you're doing things to accelerate shipments, maybe some more automation. Can you maybe dig into that a little bit in terms of where the $100 million and $500 million of investments are going?

Kurt Kuehn (CFO)

Ken, I'll take your first question anyway, and and I'm going to let Alan expand a little bit on our real priority with customers. Our top priority this year is to provide superior service and quality operations to help our customers succeed during peak season. So, you know, we'll talk a little more in the future about the network enhancements. But Alan, this is nothing new. You guys work with customers and plan out very specifically peak season, and use both price and strategy to manage that, right?

Alan Gershenhorn (Chief Sales and Marketing Officer)

Yeah. So, just to add a little bit of color on that, you know, we've met with all of our major and certainly our largest customers to increase the collaboration. Very, very productive meetings that we've had. You know, we're working on improving mutual planning capabilities, with obviously the ultimate goal of enhancing their end consumers' customer experience. You know, working on areas with these customers, splits, bypasses, direct ships, late multiple weekend pickup, special operating plans. And then we're obviously communicating the plans that we're working on unilaterally, you know, in the areas of forecasting, capacity planning, visibility, and communication.

Kurt Kuehn (CFO)

Ken, I'd just add that, you know, pretty much all options are still on the table. You know, it's early in the process. We said last quarter we really want to be able to meet customer expectations, but also meet our financial objectives at peak. So we're still evaluating alternatives out there.

Scott Schneeberger (Managing Director and Senior Analyst)

Thank you.

Operator (participant)

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

Scott Schneeberger (Managing Director and Senior Analyst)

Good morning, everyone. I wanted to talk a little bit about, maybe some of the network adjustments, you know, that you're making in terms of as you're getting more of the SurePost revenue, one of the benefits on the ground network had been getting the better density on that local delivery on the B2C-type front. And if more shifting over to the SurePost, you know, which is probably great for the overall network in terms of the revenue streams, but like you had to do on the international side, are you having to make any network adjustments, because of that flowing into SurePost? And then secondarily to that, and I know it's probably too early to talk specifics, but does the new contract with the Teamsters give you greater flexibility to maybe handle more SurePost away from the, direct ground business? Thank you.

Kurt Kuehn (CFO)

I'll take the Teamsters question, I guess, the contract question first, and we'll move it over to probably David. You know, the news just broke last night on this contract being ratified. We have not yet been formally notified by the Teamsters. Once we get formal notifications, as Kurt said, we will do a webcast for the details of the contract. So really don't want to get into the flexibilities of the cost until we get the formal notification, which hopefully is coming soon.

David Abney (COO)

Okay, as far as the changes in the system and effects that it could have by additional SurePosts, really, it's the same technology that we use in the rest of our business, certainly helps us here. So SurePost Redirect is about as good an example as you can have in how our technology allows us to accommodate this change. So very late in the process, we can determine if there are additional packages going to the same stop, and then we can redirect that, and then we will actually deliver it. It'll be much cheaper than tendering it to the post office. If it's a single package, then we would do just the opposite, let it go ahead and flow.

There's other, you know, the technology where we can scan and make those decisions and the automation that we have placed in our hubs, we also have in our preloads. So-

...So yes, we see a change in the types of packages and the flow of the packages, but we certainly have the automation, and we certainly have the technology to adjust to that.

Kurt Kuehn (CFO)

Yeah, I guess maybe one high-level recap on that is that, you know, the goal for us is to make the investments to get our variable costs down extremely low, and these packages drive very little capital and low operating expense as they flow through our automated system. So we're confident that we understand the operational changes, and we're making the investments to be able to profit off of this growth for a long time.

Scott Schneeberger (Managing Director and Senior Analyst)

Great. Thanks.

Operator (participant)

Our next question comes from the line of Mr. David Vernon of Sanford C. Bernstein. Please go ahead.

Scott Schneeberger (Managing Director and Senior Analyst)

Good morning, and thanks for taking the question. Could you give us a little bit of an update on the rollout of the ORION system, and maybe talk at the micro level about what type, what types of sort of productivity impact this is having, in terms of, you know, stops per hour an hour or any type of metric that could give us some better sense for how impactful this rollout can be going forward?

Kurt Kuehn (CFO)

Right. Well, other than the fact that we had some of our poor ORION people out in three feet of snow trying to chart out routes, I think it's moving pretty well. Myron, what do you think?

Myron Gray (President of U.S. Operations)

David, we're certainly encouraged by the results that we're seeing thus far. And as we alluded to in the last call, we've certainly added 200 resources to help us with our implementation. To date, only approximately 20% of our drivers have been implemented. We would expect that to approach nearly 45% by year's end. But it's too early to give you any numbers at this point, even though we're encouraged. And at the November investors conference, I think we will have more information to divulge to you.

But we're very encouraged by the progress we're seeing so far in it. And as Myron said, in November, we'll probably give you the metrics.

Scott Schneeberger (Managing Director and Senior Analyst)

Okay, great. Thanks.

Operator (participant)

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

Scott Group (Managing Director and Senior Analyst)

Hey, thanks. Morning, guys.

Kurt Kuehn (CFO)

Morning.

Scott Group (Managing Director and Senior Analyst)

So, wanted to ask a little bit about the buyback and if you see some flexibility now that the Teamsters contract's about to get approved to ramp that up. And maybe do you feel comfortable putting some broad numbers in terms of the payment to the multi-employer plans? And then as debt comes off the balance sheet, is that an important metric you look at or consider when you think about how much stock you do want to buy back?

Kurt Kuehn (CFO)

Okay, Scott, I'll try to piece all that together into one question, I guess. No, you know, our capital distribution policy, we guided this year of, you know, repurchasing $2.7 billion in stock. You can see that we're well along the way on that in the first quarter and the increased dividends. So the settlement of the contract is not a material impact on our capital policies. We remain, you know, very strong on free cash flow, and we'll distribute accordingly. We'll be sharing a lot more information on the migration of the retiree healthcare liability off our balance sheet, and they're always looking for ways to use our low cost of capital and our, you know, our quality balance sheet to minimize volatility and improve returns. So this is no different.

Myron Gray (President of U.S. Operations)

Yeah, and that, those information should be forthcoming soon. If the reports are accurate from last night, we should have the information hopefully in a couple of days-

Scott Group (Managing Director and Senior Analyst)

Yeah

Myron Gray (President of U.S. Operations)

- and share that with you. I guess the one thing I'd add, Scott, is even though obviously net income was impacted dramatically by the weather, our cash flow again was extraordinary in the first quarter, over $1.9 billion in free cash flow. So we'll always consider that in our decisions going forward.

Operator (participant)

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

Brandon Oglenski (Director and Senior Equity Research)

Hey, good morning, everyone. Kurt or Jim, I wanted to talk a little bit about international margins, because I know there's a lot of moving pieces this year, and you did have a good outcome in the first quarter, year-on-year, but the comps get a little bit more difficult in the second and fourth quarter. So what are some of your assumptions around margin improvement for the remainder of the year? Are you assuming sequential demand improvement and yield improvement? Can you talk a little bit more about that?

Kurt Kuehn (CFO)

Yeah, you know, we have guided to, you know, profits growing 12%-14% this year. Clearly, they're off to a good start, so I think you'll continue to see improvements. Hopefully, you got a sense that, you know, we do think that, things are moving well. So Jim, maybe you could expand a little bit on, on some of your guys' results and outlook.

Jim Barber (International President)

Yeah. So Brandon, obviously, the comments in the opening gave some framework to it. I think that we should keep in mind that international, we keep talking about momentum. This is really the fifth quarter in a row it's, it's come up. I think we have to also keep in mind it's been a year since the TNT situation ended, let's put it that way. And the business itself has really kind of gotten back to the basics of what's we're supposed to do. You can see that. And so the leadership teams are in good place right now. And I think the other comment that I would tell you is, we've also looked at the international business and not only investing today, what you're seeing today, but in some of the guidance, some of the emerging market investment, the teams, the restructuring is coming forward.

So we're actually, I think, in a very good place internationally and all the confidence in the world to the guidance we've given you so far.

Brandon Oglenski (Director and Senior Equity Research)

Thank you.

Operator (participant)

We have a question from the line of Mr. Chris Wetherbee of Citi. Please go ahead.

Chris Wetherbee (Senior Research Analyst)

Thanks. Good morning. Just following up on the international question. When you think about sort of this reacceleration of volumes that we're seeing, particularly in Europe, does it bring to the table any more opportunity to start thinking a bit more about price? It seems like sort of the underlying base rates are still pretty good. Just getting a rough sense, though, of how maybe there could be some leverage there. This is more going to be a sort of volume opportunity as you look forward over the course of the next couple of quarters.

Kurt Kuehn (CFO)

... Yeah, well, not all volume is created equally, and I think that, Jim, maybe you can expand a little bit on our focus there.

Jim Barber (International President)

Yeah, a couple of things that are also going on. I think you have to recognize, certainly in Europe, the supply chains are moving, too. They don't remain static. So some of the big supply chains around the world, the customers are trying to optimize their networks. We work with them to do that, so the zones move, the distribution patterns move. So our transborder growth in Europe, a lot of that was to support moving distribution patterns that shorten up zone. That affects the yield of the package, but our job is to create the margins in the new network. So we're very comfortable with that. I also made an opening comment that I think is important, which is our middle market acceleration.

We've seen in the last couple of quarters, and we really haven't seen this in, in the past, is our middle market is now outpacing some of our, our larger global enterprise accounts. And then the other thing that's going on, I think, of material nature is the high tech industry and the, and those product launches have kind of laid down. So in the middle of all that, some of our, our internal optimization investments seem to be paying dividends, and they'll move forward, and we'll leverage all that together, so.

Myron Gray (President of U.S. Operations)

You know what? I was encouraged, and Jim, in that quarter, too, is while we still saw the slower products grow at a double-digit pace, we still saw express grow at a 4%-5% pace internationally, which is-

Yeah.

a good sign to see the express market still growing.

Operator (participant)

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

Allison Landry (Senior Equity Research Analyst)

Hi. Thanks. Good morning.

Kurt Kuehn (CFO)

Hi.

Allison Landry (Senior Equity Research Analyst)

I wanted to ask about growth in Europe, and specifically the strength that you've seen in the Pan-European business.

Kurt Kuehn (CFO)

Mm-hmm.

Allison Landry (Senior Equity Research Analyst)

Can you give us a sense of the contribution of this segment to international profit margins and returns on invested capital? Do you think Europe, as a whole, will be able to achieve margins that are similar to the U.S. at some point?

Kurt Kuehn (CFO)

Yeah, you know, as you know, we don't break down margins specifically by area of the world, but clearly, you know, the international business has been a great business for us, and Europe is our flagship. Over half of our revenues are European-based. So we won't get into more detail, but you know, we do think Europe's here to stay and that the business model, Jim, that you're managing is in pretty good shape.

Jim Barber (International President)

Yeah, I mean, I think that the underpinning, as Kurt said, I think margins are products we'll keep away from. I think it's more about the network and its capability to react to the market, the single market that's there today, and we've been building that effectively, from my perspective, since about 1996. And it's in great shape, and we continue to invest in it, and we're very happy with the returns on capital, and we'll keep investing where that makes sense for us and for our customers, so.

Myron Gray (President of U.S. Operations)

That's absolutely right. I think the European networks are built a lot like the US network, and we're getting excellent returns on invested capital in that network.

Allison Landry (Senior Equity Research Analyst)

Fantastic. Thank you so much.

Operator (participant)

We have a question from the line of Mr. Kevin Sterling of BB&T Capital Markets. Please go ahead, sir.

Kevin Sterling (Managing Director and Equity Research Analyst)

Thank you. Good morning, gentlemen.

Kurt Kuehn (CFO)

Morning.

Jim Barber (International President)

Morning.

Kevin Sterling (Managing Director and Equity Research Analyst)

Just kind of dive in, maybe taking a different look at international. You talked about the strength we saw in the first quarter. I think it sounds like April's off to a good start. I think you also cited some improvements in your forwarding business on a net revenue basis, and maybe you could talk about a little bit what's going on there. Is that just kind of strength you're seeing in the overall international economy, or maybe you're getting some market share gains there as well?

Jim Barber (International President)

As the opening comments alluded to, yeah, we are. Tonnage is up, we know that. The yield is really kind of still pressured. And when I say that, what I mean is, a few quarters ago, I talked about concentration in high tech and military and making sure that we try to diversify through that. The team's doing a good job with respect to that. In some lanes, the markets still are, you know, tough to actually get the buy, sell just right. We're very, very happy with the ocean product, with the brokerage product, with the North American air freight product. So we're just we're very focused on and have some projects in the pipeline right now to kind of get at that air freight.

We continue the momentum there, and so we feel like we're hitting on three of the four cylinders, with the fourth one being worked on in a, in a pretty good way right now.

Kevin Sterling (Managing Director and Equity Research Analyst)

Okay, thanks for your time this morning.

Operator (participant)

Our next question comes from the line of Mr. Ben Hartford of Baird. Please go ahead.

Ben Hartford (Senior Equity Research Analyst)

So I think Scott had said that, that the international outlook was more or less unchanged. The total volume growth in the quarter, up 8%, above, I think, the target that you had provided for the beginning of for the full year of 4%-6%. I'm wondering, wondering if we should expect that rate of growth to decelerate through the year, to converge toward that target? And then I'm also, you know, in conjunction with that, can you provide any context to, to how you see, the growth between non-premium and premium products trending through the year as well? Thanks.

Kurt Kuehn (CFO)

Yeah, great. Couple of pieces there. But I think the, you know, we did show very strong growth in, in the first quarter. Surprised us to the positive just a little bit. There's a little bit of a benefit of the Easter timing, I think, in the first quarter. Easter was right at the break between Q1 and Q2, so you know, the-

Jim Barber (International President)

Last-

Kurt Kuehn (CFO)

Yeah, last year. So there may be a little extra beef in Q1 that would put a little drag on Q2. As far as the trends on premium versus standard, I'll let Jim talk to that a little bit.

Jim Barber (International President)

Yeah, I think again, I think as I mentioned a minute ago, 4 or 5 quarters of growth, and I would combine that with the acquisition comment I made in the opening, in the UK and Poland and the Turkey markets, for example. A lot of... There's some good, solid growth in the domestic product now, 4 or 5 quarters in a row, so you start to get lapping yourself, quite frankly, from that perspective. Therefore, the end of the year looks a little bit different than the first, but we keep talking about that in a momentum basis. But that kind of outlook that you see on paper is certainly we want to focus on the export.

... and then combining that with the domestics in the markets where we currently or will in the future, have the great capabilities.

Ben Hartford (Senior Equity Research Analyst)

Thank you.

Operator (participant)

We have a question from the line of Thomas Kim of Goldman Sachs. Please go ahead.

Thomas Kim (Senior Industrials Equity Research Analyst)

Hi, I had a couple questions just related to the Europe part. One was just, can you parse out the organic growth related to Europe, if you're able to parse out the, you know, harvesting of the recent investments? And then, I, you know, I guess just one of the other sort of comments or questions is, wondering if you could elaborate on the mix shift change that's happening in Europe, where your non-premium is growing more than premium, and should we be thinking about that mix shift change similar to the way that we've been seeing it sort of evolve over in Asia, where you've had, you know, increase in deferred, impacting the overall mix in pricing? Thanks.

Kurt Kuehn (CFO)

Yeah, let me piece the parts of that that I can combine for you here. First off, the issue of the organic is everything's organic right now. The acquisitions were several years ago, so there's no material acquisitions at all. Really, the only notable acquisition is in the healthcare space, and that did not impact the results at all. The whole issue of managing the mix changes, it makes a big difference if it's that you're seeing trade down against the same asset. That's been the challenge in Asia, where you've gone from express to slower modes, and if you don't adapt, then you're stuck with lower revenue on a fixed asset. But the whole nature of the UPS network is to allow customers to move up and down.

And I'll tell you, there's a huge difference in capital employed between a package moving from Asia to Europe in a 747, versus a package moving across Europe in our integrated ground network. So the capital required and the returns are substantially different, and so we're very happy to see robust growth through our integrated network. And then to Jim's point, as we grow the domestic business, what that does is it lowers the pickup and delivery cost for all products. So that's the benefit of the portfolio, that these products reinforce themselves, and we get both economy of scale as we get bigger in each country, and economy of scope as we have complementary products.

So as Scott said, Europe is very much following the lessons we've learned from the US, capital returns and investment, and we're happy to get standard volume there or premium.

Operator (participant)

Our next question will come from the line of Rob Salmon of Deutsche Bank. Please go ahead.

Rob Salmon (VP and Associate Analyst)

Hey, good morning. Thanks for taking my question. Kurt, a quick housekeeping item. Can you give us a sense if the new Teamsters contract is incorporated into the current guidance, because it's not yet finalized? And then, Jim, two quick follow-ups with regard to the European network. With the stronger than expected growth that we've been seeing to date, are there any sort of necessary incremental capital investments within the ground network? And can you talk a little bit about the density within your line haul network in Europe and how that compares to the U.S. currently? Thanks.

Kurt Kuehn (CFO)

Okay, I'll break ranks and answer two questions, because the answer to the first one is one word, and that is yes, it's in our guidance. Jim, maybe you could talk about the capital expansion for Europe and whether it's material.

Jim Barber (International President)

Yeah. So I would say that certainly in the network today, as part of the ongoing process and the numbers we give you every year, the capital is in there. But I would also say yes to the question is, we have to keep investing in that network. We talked about Cologne today, but our big hubs in Germany and the UK, we're investing in Turkey hubs as we speak. So yeah, there's continued capital requirements, but again, that's all baked into the overall network and bringing the customers in that they choose the network. So we're very, very comfortable with that. As far as density and line haul network question, they're really different networks, to be honest with you.

The way we run the networks Europe-wise versus U.S. is they're different, and the mix of the carriers and how we actually take those products across the single market in a UPS or a partnership or outside contractors is different. So you really can't compare the two networks from my perspective. But again, I think the networks in Europe are performing across the business beautifully, and they'll continue to do so.

Kurt Kuehn (CFO)

Yeah, I guess one comment on Europe, that, you know, clearly, we cycled through. This is the one-year anniversary of us bidding goodbye to the attempt to purchase TNT. During the period of negotiation and work with TNT, we clearly put some projects on hold, both strategic projects and opportunities, and also capital expansion, until we were sure how we'd optimize the new assets. So we certainly are in a period right now of, to some extent, facing the next five years through it with an aggressive organic approach. And we are thrilled to make investments to grow our integrated ground network in Europe.

Rob Salmon (VP and Associate Analyst)

Appreciate the time.

Operator (participant)

We have a question from the line of Keith Schoonmaker of Morningstar. Please go ahead.

Keith Schoonmaker (Director of Industrial Equity Research and Equity Analyst)

A quick follow-up on the capital investment. Given the growth in Europe and the mix realized, do you anticipate making adjustments to the air fleet, or is this where you need it for now?

Kurt Kuehn (CFO)

No, the air fleet's in great shape. As we said, you know, David and the airline finished purchasing seven 767s last year. And David, I think at least as far as the foreseeable future, we don't expect any major capital additions, right?

David Abney (COO)

No, we don't have any plans to buy any aircraft in the next few years. We have, of course, been able to increase our load factor, and then... And the biggest focus is just on improving the quality of the revenue that's in our aircraft. And with the fact that expedited volume has grown, it's given us a lot of flexibilities on how do we actually put that in our aircraft? Do we do something else with it, or do we hold it for a day to more fully utilize the aircraft? So it's given us a lot of flexibility.

Jim Barber (International President)

And this, Jim, I would add one comment to it, parallel to the opening comments, is the network in Europe as an intra-European fleet is in great shape, as everybody's saying. The real, the fun part of this right now, given where we are, is through the emerging markets, is to adapt and connect it globally across the world in a different way. And the teams are working on that. And as we go forward, that would probably be likely where the adaptations come to the network to connect to the European network versus changing the core of it.

Keith Schoonmaker (Director of Industrial Equity Research and Equity Analyst)

Thanks.

Operator (participant)

We have a question from the line of John Barnes of RBC Capital Markets. Please go ahead.

John Barnes (Managing Director and Senior Research Analyst)

Hey, good morning, guys. Just trying to keep track of the kind of investment that you were talking about in terms of being prepared for peak season and understanding that, you know, I wouldn't look at 9 of the next 10 years have the normal days between Thanksgiving and Christmas, not the compressed period. You know, just trying to get a sense of what percentage of the investment is being made with capital dollars to address network maybe deficiencies on a long-term basis versus, you know, what percentage may be addressed using operating dollars, you know, maybe through temporary employees or something like that? How are you trying to balance that investment?

Kurt Kuehn (CFO)

Yeah, I'll start off, and then David can fill you in maybe on the status of it. You know, we've really quoted a couple of numbers. One, that we're expanding our capital investments in general, broadly to expand capacity in the U.S. and automate facilities. Those are long-term investments that stand regardless of the peak issue. The other is we are doing some things on the technology side, on the customer alignment side, and on the flexible capacity side, and that's really driving that $100 million expense headwind this year. That's more of a one-time issue. And Dave, maybe you could expand a little.

David Abney (COO)

Certainly will. You know, our peak planning committee has been focusing all this year, made solid progress. And when it comes to capacity, we are taking two approaches. You know, the permanent capacity will help us throughout the years, and Kurt referred to that a little bit. But the North Bay automation refit, retrofit project is an example of that. We're also increasing the capacity of CACH, our Chicago consolidated hub, and we're also adding some trailer capability in Worldport, both from an unload and a load standpoint. But then the other thing we're doing is this temporary, what we call mobile capacity, that we can move from peak to peak, from building to building, and it's adding—we're gonna add nearly 10% car positions this year.

It's over 6,000 car positions, and it's in what we call mobile distribution units. And these will be addressing specific temporary needs, but if those needs change next year, we just simply move that capability from year to year.

John Barnes (Managing Director and Senior Research Analyst)

All right. Thanks for your time.

Operator (participant)

We have a question from the line of Mr. David Ross of Stifel. Please go ahead.

David Ross (Managing Director and Group Head)

Yes, good morning, gentlemen. Real quickly, on the ground side, U.S. domestic ground volumes, ex SurePost, you know, what did they grow year-over-year in the first quarter, and how are they trending in April?

Kurt Kuehn (CFO)

They were up moderately, and I think, you know, trends in April, as we've said, once now that the weather has cleared, continue very steadily. That's why we feel pretty good on the US economic outlook.

Operator (participant)

We have a question from the line of Kelly Dougherty of Macquarie. Please go ahead.

Kelly Dougherty (Analyst)

Good morning. Thanks for taking the question. I just wanted to follow up on the mixed conversation. Should we think about these mixed trends as secular trends that will accelerate, or do we expect some kind of normalization, if only from easier comps? And just wondering if you can give us a sense of what yields might look like, you know, after you incorporate your base rate increases and then what's going on on the mix side of things?

Kurt Kuehn (CFO)

Yeah, there's a couple of big dimensions, and I'll have Alan talk a little bit about it, that that some of them are cyclical and some of them are long-term trends. Certainly, the continuing growth of B2C, both in the U.S. and globally, is a something that's here to stay. But, but things like weight increasing or decreasing or nearshoring versus farshoring are things that come and go a bit.

Scott Davis (CEO)

Yeah, just let me, let me add before Alan gets it. Certainly, the first quarter was exaggerated, though, with the weather.

Kurt Kuehn (CFO)

Right.

Scott Davis (CEO)

I mean, it hit commercial, it hit manufacturing harder than it hit, obviously, e-commerce.

Kurt Kuehn (CFO)

Yeah.

Scott Davis (CEO)

So what you saw in the first quarter was exaggerated.

Kurt Kuehn (CFO)

You know, I think, you know, certainly the, you know, we're gonna continue to see, you know, strong, strong residential growth. And I think you'll see it across, you know, all of our, all of our residential products, whether it's air, ground, or, SurePost, as, you know, retailers are out there offering, you know, a wide variety of, services to their customers to, to meet the varying needs. You know, certainly, you know, these last few quarters, we've seen, you know, our commercial growth turn, you know, positive on the ground, you know, which is, which is a good sign also.

You know, I think that while there's certainly been a significant amount of down trading in the marketplace, you know, we believe that the express market, you know, will come back as you know the economy gets better and global trade increases.

Scott Davis (CEO)

We're not uncomfortable with these trends. We still think, you know, for the last nine months of this year, we'll generate 14% margins in the U.S. We did that really in 2012, in the first three quarters of 2013. So with our technology, with our network, we can still generate good margins on B2C.

Kelly Dougherty (Analyst)

Thanks. Is there any way you can just think about once you incorporate mix, so what, what yield may look like?

Kurt Kuehn (CFO)

It's a bit speculative for right now, and we'll move on to the next question.

Kelly Dougherty (Analyst)

Thanks.

Operator (participant)

We have a question from the line of Jack Atkins of Stephens. Please go ahead.

Jack Atkins (Research Analyst)

Morning, guys. Thanks for the time. So I guess focusing on the international airfreight side of things for a moment, trends thus far in 2014 seem to indicate that we're seeing some modest, sustained improvement there for the first time in, you know, a couple of years. So I guess, could you comment on, on what you think is, is really driving that? Is it, you know, a better global economic picture? Do you think maybe it's inventory restocking or, or is it something else? And do you feel like these trends are sustainable for 2014 and maybe beyond?

Kurt Kuehn (CFO)

Great. I'll have Jim talk about that.

Jim Barber (International President)

I would say it was all of what you just mentioned, plus one, and that is that our customers don't stay static with their supply chains, and they move them. And they're trying to optimize their supply chains, and they're moving from small package at times to airfreight and airfreight to ocean, and ocean to a domestic on another continent. So, you know, our job is to be ready for that and be one step or right in lockstep with them. So that and I think the other thing that you should keep in mind is that that's kind of the power of the UPS offering, is we don't run a pure freight network. It's a hybrid, and we've got a lot of options depending on how the customers choose to come to us.

So there's a lot of factors going on, and we just got to make sure we're supportive of the needs and the requests of our customers.

Kurt Kuehn (CFO)

Yeah, and I guess one of the nice things is we did see and are seeing, you know, some rebound in exports out of Asia on the freight side. But, Alan, we're also seeing quite a bit of strength, south of the border, right?

Alan Gershenhorn (Chief Sales and Marketing Officer)

Yeah. So, you know, on the US-Mexico lane there, you know, we, we've launched, you know, on the package side, a standard ground service to and from Mexico, which on a small base right now, is experiencing very, very significant growth on a percentage basis. So we're real excited about that. We've got our CrossBorder Connect product on the freight side that's also experienced some good growth. And I would just add to Jim's comment that, you know, the portfolio that we're positioning with our customers is also, I think, allowing us to penetrate the airfreight market in a bigger way. And I think you're going to see some broader gains in that area for us.

And the other last thing I would just say is, you know, Worldwide Express Freight, we haven't talked about today. You know, that's been launched, I guess, a little bit over a year ago now in a big way, and we're experiencing very, very high growth on that, in that area. Again, on a small base right now, but very, very well resonating with our customers.

Jack Atkins (Research Analyst)

Okay, great. Thanks for the time.

Operator (participant)

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

Helane Becker (Managing Director and Senior Advisor)

Thanks very much, operator. Thanks for the time. You might have talked about this, and I just missed it, but can you just talk about why the tax rate went up so much in the first quarter on a year-on-year basis?

Kurt Kuehn (CFO)

Yeah, Helane, we did, you know, we did guide this year that we would be seeing an increase in the tax rate. We ratcheted it up in the middle of last year, you know, from the 34.5% that we had in January of last year, first quarter, and it is now at 36%. So we have seen an increase. Yeah, this is the last quarter at which we'll have this big of a gap, but it clearly was an increase. It just has to do with the mix of profits around the world. Our forwarding unit that struggled last year and some of those things impacted our marginal rate.

So certainly, there's no company more eager to see U.S. tax reform and some rebalancing of rates around the globe than us, and we continue to make that a priority, and are working with Washington to ensure that the U.S. remains competitive.

Alan Gershenhorn (Chief Sales and Marketing Officer)

Helane, we did build the guidance in at 36%, so as expected.

Helane Becker (Managing Director and Senior Advisor)

Right. Right, I figured you did that, but I was just kind of wondering, you know, it was 30.4% last year, going to 36%, I think, this year. So, okay.

Kurt Kuehn (CFO)

The 30.4%... No, I'm sorry, Helane. That was distorted because of the nature of the TNT settlement.

Helane Becker (Managing Director and Senior Advisor)

Okay.

Kurt Kuehn (CFO)

Some of the payments were taxable, some weren't. But the core rate for last year on the adjusted is 34.5.

Helane Becker (Managing Director and Senior Advisor)

Gotcha. Okay, thanks for your help.

Kurt Kuehn (CFO)

Great.

Operator (participant)

Due to time constraints, our last question will come from the line of Mr. Jeff Kauffman of Buckingham. Please go ahead.

Jeff Kauffman (Director of Transport, Logistics and Machinery/Equipment Equity Research)

Well, thank you, and thank you for taking my question.

Kurt Kuehn (CFO)

Sure, Jeff.

Jeff Kauffman (Director of Transport, Logistics and Machinery/Equipment Equity Research)

I just wanted to touch base. The cash on the balance sheet's back over $7 billion. I know you mentioned it will cost you some money to exit these remaining pension liabilities, but could you talk a little bit about how much cash you think you need on the balance sheet? Because this is almost double what it was at the bottom of the recession here. And just kind of longer-term thoughts on capital deployment.

Kurt Kuehn (CFO)

Yeah. And as Scott said, we had a, you know, just a huge Free Cash Flow quarter in Q1. Capital expenditures were a little low. Clearly, it's hard to build buildings in the blizzards. So we'll ramp some of that up and use some of that cash for capital improvements, Jeff. But we do, you know, we do expect to continue strong distributions. The company has no agenda to hoard cash. At the same time, we, you know, we like to have a strong balance sheet, so we're going to continue with our basic targets of distributing near 100% of net income in the form of dividends and share repurchases, and keep a little powder dry for M&A and other strategic initiatives.

Alan Gershenhorn (Chief Sales and Marketing Officer)

In Q1, currently, I think we distributed 140% net income, so-

Kurt Kuehn (CFO)

Yeah.

Alan Gershenhorn (Chief Sales and Marketing Officer)

Jeff, it'll be a balance. You know, we'll continue the strong distributions, but we'll continue to reinvest in the business.

Jeff Kauffman (Director of Transport, Logistics and Machinery/Equipment Equity Research)

Okay. Thank you and congratulations.

Kurt Kuehn (CFO)

Thank you.

Alan Gershenhorn (Chief Sales and Marketing Officer)

Thanks.

Operator (participant)

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

Joe Wilkins (Head of Investor Relations)

Well, let me just... This is Scott. Let's do a quick recap. You know, it was clearly, the first quarter was a challenge, but again, as we talked about, the rest of 2014 looks quite promising. The economy, though, it's still not robust, it'll be better than what we saw last year, both here in the U.S. and globally. What I'm excited about is at UPS, we're going to be hitting it on all cylinders, as all three segments of our business will show nice improvements in operating profit over the last nine months of this year. And frankly, we've not seen all three segments improve at the same time since 2010. So look for good things ahead from UPS, and thanks for being on the call today.

Operator (participant)

Ladies and gentlemen, that does conclude our conference call for today. On behalf of today's panel, I'd like to thank you for your participation in today's conference call, and thank you for using AT&T. Have a wonderful day, and you may now disconnect.