United Parcel Service, Inc. (UPS) Q4 2010 Earnings Report, Transcript and Summary

Good morning. My name is Steve, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the UPS Investor Relations Fourth Quarter 2010 Earnings Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Mr. Andy Dolny, Vice President of Investor Relations. Sir, the floor is yours.

Good morning, everyone. Thanks for joining us today. I'm here this morning with Scott Davis, our CEO; and Kurt Kuehn, our CFO, to discuss the company's results for the quarter and our outlook for 2011. 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 2010 10-Q reports. These reports are available on the UPS Investor Relations website and from the Securities and Exchange Commission. Today's call is being webcast, and will also be available on the UPS Investor Relations website. In our earnings announcement today, you'll notice that we recognized a gain of $71 million on the sale of UPS Logistics Technologies Inc. This gain was offset somewhat by $13 million in additional guarantees relating to the German specialized transportation company that we sold in the first quarter. The net effect of these two events provided an after-tax benefit of $32 million or $0.03 per share. Excluding this transaction, diluted earnings per share for the fourth quarter were $1.08. In their remarks today, Scott and Kurt will refer to UPS's fourth quarter 2010 results, excluding the impact of this gain. Additionally, all 2010 full-year references and comparisons to 2009 will refer to adjusted results. We believe this is the most accurate picture of the company's performance. Reconciliations to comparable GAAP measures and free cash flow, which is a non-GAAP financial measure, are explained in the schedules that accompanied our earnings news release. The schedules are also available on the UPS Investor Relations website in the financial section. Lastly, mark your calendars. I'm pleased to announce that UPS will be hosting an investor conference in Louisville, Kentucky on September 14 and 15. We look forward to showcasing our flagship facilities, highlighting our many capabilities and communicating our plans for the future. More details will be forthcoming. Now to begin our review, I'll turn the program over to Scott.

Good morning, everyone. Today, UPS reported another quarter of significant growth in revenue and operating profit, with earnings up 44%. These extraordinary results were directly attributable to the superb execution of UPSers around the globe, during an environment of improving economic conditions. For example, here in the U.S., increased consumer confidence, combined with slightly better employment picture, produced strong retail sales spurred by double-digit e-commerce growth. In a moment, Kurt will take you through a detailed review of UPS performance. But first, I want to spend a few minutes reflecting on 2010. The appropriate place to start is to say I'm extremely proud of how UPSers collaborated to position the company for success. Much was achieved this past year, and I would like to highlight some of our accomplishments. I am most impressed with our balanced performance across all business segments. For the year, U.S. Domestic and International operating profits on a combined basis, are up more than 40% and Supply Chain and Freight up 95%, with the International Supply Chain and Freight segments hitting record levels. In 2010, UPS wrapped up key infrastructure projects, including the completion of the Worldport expansion and the addition of a new inter-Asia hub in Shenzhen, China. We continue to execute our strategy for growth by expanding the UPS brand in emerging markets and growing developing lines of business. We announced several important milestones in these areas, including strategic alliances with UPS service partners in Vietnam, Malaysia and Indonesia, the expansion of the world's largest service parts logistics network by adding over 100 new locations in China and just last month, a significant buildup of our global health care network, with new distribution centers in the U.S., Asia, Europe and Canada. While we were busy growing new business, 2010 was also a year of change and transition at UPS. The restructuring of the U.S. domestic business was one of the most significant in UPS history. We streamlined the organization and introduced our localized go-to-market strategy. Although some of the benefits have been realized, the full impact will be more evident in 2011 and beyond. In addition, we introduced a new global communications platform, along with an advertising campaign that highlights the power of logistics and the strength of UPS solutions. Not only are we acknowledged for our expertise in enabling global trade, but once again, UPS was distinguished for its leadership in community, diversity and environmental sustainability. For example, UPS's employees were recognized for their continued support of the United Way, as the first company to surpass $1 billion in combined contributions. Our company received the number one industry ranking by the climate count score card for the second consecutive year. And we were honored when President Obama asked UPS to participate in his Export Council, working alongside other business leaders to support the goal of doubling U.S. exports in the next five years. Yes, 2010 was an eventful year at UPS. As we look forward to 2011, I am encouraged by recent events that will quicken the pace of economic recovery in the months and years ahead. One such event is the recent U.S. tax law change. While I would like to see a more permanent solution, this is an important move in the right direction and should foster a more dynamic recovery in 2011. Businesses are in a much better position to make critical decisions with a greater understanding of what the impact will be to their bottom line. Clearly, this is reflected in the recent upward revisions in the 2011 economic indicators for the U.S. As UPS developed our guidance for 2011, we also considered the current state of the global economy and the fact that 2010 growth rates varied widely across the world. Some countries exhibited solid increases in economic output like Germany, with its strongest growth in almost 30 years, while other countries in Europe experienced almost no expansion at all. This economic pattern is expected to continue. Many of the world's top economies are forecast to expand at a slower pace, leading to the overall expectation of moderate global growth in 2011. Even with this forecast, 2011 is going to be another great year for UPS. Our industry-leading margins and superior financial strength uniquely position UPS to continue investing for growth. We expect revenue and margin expansion, driving earnings per share above previous peak levels. We will further expand our unique global portfolio of services, and create leverage through our superior operating model. This gives us great confidence in our ability to provide superior returns to UPS investors. Now, let me turn it over to Kurt.

Thanks, Scott, and good morning. Wow, what a difference a year makes. In 2010, earnings per share were up 54% to $3.56, and revenue jumped more than 9% to almost $50 billion. Operating profits moved higher, up $1.9 billion or 47%. The measures we put in place, combined with outstanding execution in an improving economic environment, led to these great results. Now, looking specifically at the fourth quarter. Revenue climbed 8.4% on a 3.9% increase in volume. Operating profit increased $500 million to $1.8 billion, up 40% over last year. Operating margins rebounded to 13.1%, a 290-basis point gain. It's true that rising fuel prices and challenging weather conditions were headwinds during the quarter. Our operators in the U.S. and abroad did a great job managing through these conditions. All in all, we were successful in controlling our costs, as compensation and benefit expense again increased at a slower pace than volume. Regarding peak season. Small improvements in the economy gave consumers enough confidence to return to more traditional holiday shopping patterns, and UPS was ready. Looking across the globe, peak season is more than just a U.S. phenomena. On peak day across the world, UPS delivered 25 million packages, processed 3 million pieces through our expanded Worldport facility and handled 48 million tracking requests with UPS technology. Now, let's look at our segment performance starting with U.S. Domestic. Total revenue was up 7% to $8.1 billion on an average daily volume increase of 1.7%, with Next Day Air volume up 2.6% and ground up 2%. Remember, these daily growth rates were negatively impacted by an additional operating day that fell between Christmas and New Years in 2010. Revenue per piece improved 3.5%. The yield improvements were primarily driven by higher fuel surcharges and our ability to retain a larger portion of the general rate increase, as customers recognize the value we provide. Operating margin improved to 12.9%, up 280 basis points. Our management team effectively controlled expense during the quarter, with key operating statistics like direct-labor hours, miles driven and block hours, all down from last year. Now, let's review our International performance. As you may recall, this segment reported strong results in the fourth quarter of 2009. As capacity in the air freight market was constrained, benefiting international express. Despite tough comps, the Q4 2010 story is a good one. Operating profit increased 15% to $537 million, with margin expansion of 90 basis points. The industry's best margin of 17.6% was driven by volume growth and our ability to drive operating leverage. Export volumes reached new highs, approaching 1 million deliveries per day, up almost 9%. All regions showed improvements, with notable gains in Asia and Europe. China continued to impress, up more than 30%, and our largest operation, Germany, experienced double-digit growth. Our non-U.S. Domestic strategy is focused on managing growth while improving profitability. In the fourth quarter, average daily volume was over 1.5 million packages, up 2.4%. Clearly, this growth was adversely affected by the worst weather that Europe has seen in decades. As we grow around the world, we continue to set new records. For the full year, International operating profits were more than $1.9 billion, with average daily volume of 2.3 million packages. Both of these are new highs for UPS. In order to capitalize on the growth in global trade, we made significant expansions to the UPS global air network. For example during 2010, we increased capacity for key Asian lanes to the U.S. and Europe by over 40%. Now, turning to the Supply Chain and Trade segment. 2010 was a record-setting year for this segment also. Operating profits almost doubled to $577 million on a revenue increase of 17%. For the quarter, operating profit jumped more than 500% to $176 million, with all business units contributing. Revenue increased 12.8% to $2.3 billion, driven primarily by Forwarding and UPS Freight. Forwarding revenue returned to normal fourth quarter trends, as supply in the global air freight market more closely aligned with demand. Revenue management initiatives, coupled with better equilibrium in the air freight market drove strong profit improvements. In the Logistics business unit, margin expanded as customers in the healthcare and high-tech industries recognize the value of our distribution expertise. We continue to see increasing demand for our healthcare solutions. This is coming from all types of organizations, including pharmaceutical, biotech and medical device companies. But UPS healthcare resources go far beyond our brick-and-mortar distribution facilities. They also include the largest transportation network in the world, offering customers both small package and freight solutions, and we continue to invest and expand capabilities across the entire portfolio. Recently, UPS announced a significant expansion of its global healthcare distribution network. New facilities are being added in the U.S., Asia, Europe and Canada to accommodate our rapid growth in healthcare. UPS freight clearly outpaced the market, as it posted substantial revenue growth, up almost 23%, with an 11% gain in LTL shipments per day. Revenue per hundredweight increased 8.7%, one of the strongest in the industry. Yield benefited from our focus on the middle market and the ability to offer technology in bundled solutions. The early general rate increase also contributed to this improvement. Clearly, the disciplined strategy employed by UPS Freight over the past several quarters is paying off. We are seeing both strong growth and improved operating profit, though work still needs to be done to fully achieve our goals. Now, let's talk about cash flow. Even after making an additional $2 billion in discretionary pension contributions in the fourth quarter, UPS generated $3.1 billion in free cash flow for the year. Efficient use of capital and a strong balance sheet continue to be a hallmark of UPS. In 2010, we paid $1.8 billion in dividends, reflecting a 4.4% increase per share, invested $1.4 billion in capital expenditures and spent more than $800 million to repurchase approximately 12 million shares. As I mentioned last quarter, we were considering accelerated pension contributions. And given the low levels of interest rates, we thought it was financially prudent to issue debt to pre-fund our pension plans. In November, we issued $2 billion in 10- and 30-year notes at very attractive rates. For example, our 10-year notes have a coupon rate of only 3 1/8%. The proceeds from this debt were immediately contributed to our pension plans. In January 2011, another $1.2 billion in cash was also contributed to our plans. As a result, UPS defined benefit pension plans, are now over 100% funded. The financing was balance sheet neutral and the overall transaction was a great move for UPS shareowners and will substantially reduce contributions in the years to come. As we’d previously discussed, UPS, like most companies with defined benefit plans, will experience higher pension expense in 2011 as a result of lower discount rates and the amortization of the 2008 market losses. The benefits of our recent pension contributions will help offset the impact, but not totally eliminate it. We do expect a 2011 pension expense headwind of approximately $0.07. Regarding our funds flow from operations-to-debt metric, we ended 2010 at 47%. Note that we've decided to modify our calculation for FFO-to-debt to incorporate pension liabilities. Based on this formula, we expect to significantly exceed 50% by the end of this year. As far as our outlook for 2011, economic expectations call for modest growth, but we expect a record-setting year for UPS, with earnings per share reaching an all-time high. We anticipate earnings in a range of $4.12 to $4.35 per share, an increase of 16% to 22%. Looking at the first quarter, there will be some challenges with currency headwinds and certainly, the significant weather events we've had so far this year. Nonetheless, we expect the year-over-year growth rate for the first quarter earnings to be similar to that for the year overall. In the U.S. Domestic segment, average daily volume should increase in line with GDP growth. Revenue will rise in the mid- to high-single digits, and the operating profit growth rate will be in the mid to upper teens. Operating margins should continue their rebound, improving on a year-over-year basis. Current estimates call for a modest decline in the rate of growth for global GDP in 2011. Despite this, the International segment expects revenue and operating profit growth of approximately 10%. For the first half of 2011, year-over-year comparisons will be impacted primarily by benefits received from currency hedging in 2010 and a slightly weaker euro. As a result, the first half operating margins should see slight year-over-year declines. In the second half, margins will expand over last year, and we expect full-year operating margins to be similar to 2010. For Supply Chain and Freight, we expect to see mid- to high-single digit revenue growth, with modest margin expansion and operating profit improving in the low to mid teens percent. Our overall tax rate for 2011 should be between 34% and 35%. So all in all, 2011 should be a good year of solid operating performance. Now, let's talk about our plans for cash. 2011 will be another great year, continuing our investments in growth opportunities. Capital expenditures are projected to be $2.2 billion or about 4% of revenue. We will look for ways to take advantage of the accelerated depreciation opportunity that exists. UPS is also committed to significantly increasing distributions to shareowners. Share repurchases are expected to increase substantially, moving from $800 million in 2010 to approximately $2 billion in 2011. And dividends will continue to be a high priority for the company. As we close the books on 2010, the tough decisions we've made over the last few years have positioned UPS well for the future, leading us to anticipated record earnings per share in 2011. Thanks for your attention. And now, Scott and I will be happy to answer your questions.

[Operator Instructions] Our first question will come from the line of Jon Langenfeld of Robert W. Baird. Jon Langenfeld - Robert W. Baird & Co. Incorporated: Good morning. Could you talk about some of the metrics within the Domestic business, specifically how weight per shipment is trending and then how your effective wage rate is flowing up, given all the puts and takes for turnover and new hiring?

Yes, Jon. Sure. I'd be glad to. In general, we had great operating results in the fourth quarter, with miles per driver and our direct labor hours down as compared to volumes. Our wage rates in aggregate were up about 3%. We continue to have a very high proportion of our drivers that are full-time rate. But as growth continues, we do see some moderating trends along those lines. So a little bit of growth then continued operational execution, and we should be in pretty good shape. Jon Langenfeld - Robert W. Baird & Co. Incorporated: And then on the yield side within Domestic, how should we think about that? I mean 3% with fuel prices rising, hopefully, weight per shipment was going up. That was a little bit lower on the ground side than what I might have anticipated. So where am I missing out? Because it sounds like you described the pricing environment as continuing to be very healthy.

Yes, it is. Absolutely. The absolute base rates were up a couple percent. Clearly, the overall yield increases were a greater impact than the fuel was. There is a little bit of a lag on the fuel. Weight actually has flattened out. We’ve not seen increasing weight, and so there's been no tailwind from that yet.

Also, on the fourth quarter, Jon, the retail segment really performed the strongest and generally you'll see a little lighter weights on the retail side.

Our next question will come from the line of Tom Wadewitz of JPMorgan. Thomas Wadewitz - JP Morgan Chase & Co: I want to see if you could provide a little bit further perspective on how we would think on pricing, I guess, it's kind of a little follow-on to the prior question. But do you think that versus your comment of base rates up a few percent in fourth quarter that, that would accelerate a bit as we go through 2011? And I guess any further comments on kind of just the competitive environment in general in Domestic Package?

Yes. In general, we've been pleased with a rational and stable pricing environment. We did have our annual rate increase that kicked in, in January. And overall, the acceptance of that has been positive, so we do expect continual, gradual firming and improvement in the yield management and pricing arena. So far so good on that front, and we're certainly seeing that in our long-term improvements and margins, and we do see the environment as stable. Thomas Wadewitz - JP Morgan Chase & Co: And I guess for the follow-up question, you mentioned that your guidance for 2011 implies that you're going to exceed prior peak earnings, which is great to see. If you look at Domestic Package margin, I would assume that you're still probably going to be quite a bit below your prior peak of, call it, 84-ish type of operating ratio. Do you think that if you look the next two years, there's a chance that you return to prior peak in Domestic Package margin?

Tom, we do feel very confident that margins will expand. And we've been pleased with the progress, and I think the Domestic business has recovered ahead of schedule, and that's why we've been thrilled to be confident that we will exceed peak earnings this year. The exact timing of when margins do return up to their high levels will depend on how the economy recovers. Certainly, the weight conditions and the revenue conditions. So we're highly confident, we're improving margins but we're at this point, we're not ready to draw a line in the sand on exactly when we'll hit what margins.

Clearly, Tom, we're looking at a strong 2011. And Domestics will show the biggest margin expansion of any of the three segments next year. So we're seeing a lot of progress there.

Our next question will come from the line of Ed Wolfe of Wolfe Trajan.

When I just look at the Next Day Air yields, sequentially they look to me to be down about 4%. And fuel, obviously, went up during that period, so I'm trying to understand what might be impacting the Next Day Air, or am I looking at this wrong on the yields?

No. You're absolutely looking at it right. That was a number that did move quite a bit from quarter-to-quarter. The biggest factor on that really, Ed, was a shift in the mix component that -- the third quarter, we saw good growth in our industrial side, manufacturing side. And as we moved into the fourth quarter, as Scott mentioned, the retail segment really kicked in, certainly the holidays being a part of that. So we actually saw lower weights in the air, Next Day Air most notably and also, more use of our Saber product or afternoon product which tends to be more prevalent in retail. So, we don't see it anything structural. We see it as just the nature of the fourth quarter that kicked in. So in general, the base rates look good, it was really just an issue that the mix changed quite a bit quarter-to-quarter.

The $0.07 pension headwind, I just want to clarify, that was net of your contributions, the $0.07 headwind? And then if you could give a guidance on the LCL OR, like you did last time, is it modestly profitable? Was it more profitable than third quarter? Can you give us a sense on that?

Yes, the pension is the outlook for 2011 with the 60 basis points, or so reduction in discount rate. That did cause an actual increase expense year-over-year even with the funding. The biggest issue is the amortization of the losses from 2008, that given the nature of pension accounting which can be pretty arcane, those losses are smoothed out over a number of years, and so that's kicking in a little bit. Having said that, we're pleased that it did end up just being a $0.07 impact and over time, certainly if those contributions that we put in generate good earnings, we should be in great shape pension-wise. I made brief comment about substantial reduction in future funding. We could be upwards of $1 billion saved in the next several years of required contributions having done this full funding. So we're in great shape on the pension.

And then on the LTL question, I'd say we are modestly profitable for the fourth quarter. But the good thing there is that, generally expect the third quarter to be more profitable than the fourth quarter due to seasonality. And we really held our own in the fourth quarter with the third. So good progress in that segment.

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

You talked a bit about aircraft growing about 40% in between U.S., Asia, Europe. Can you talk about what kind of level you plan to invest to maintain your kind of near double-digit international growth?

We are certainly continuing to expand the air fleet. And for 2011, we expect to take delivery of two 747-400s, which are certainly flagship assets in the International and another five 767s. So that should put us in good stead and serve us well. And as I mentioned, we continue to get great benefits from the expanded Worldport that's allowed us to make better use of those aircraft assets, in some cases, making the Domestic network more efficient and freeing up assets for International.

So as you see that growth, is that meeting your 8% to 10% international growth? Is there something you need to make to make further investments to capture more than that as you see it picking up? Or is it just more efficiency of unused utilization of that aircraft?

No. The aircraft we’re in good shape for. Certainly, those increases will be fine, and we'll continue to make investments around the globe and on the ground assets, sector expansion like healthcare and expanding our hubs where we need it. But the aircraft we’re in good shape here.

And Ken, we're flexible in that we carry a fair amount of cargo also, and as the Package business grows, we can take cargo off and fly packages and use common carriage for the cargo.

Kurt, in your guidance of the 16% to 22%, can you talk a little bit about what kind of growth levels you anticipate maybe on the ground or any of the specifics on overall volume growth you're targeting within that?

Yes. We expect the Domestic package market to grow in line with GDP, and we're estimating GDP somewhere around 3%, maybe a little higher. We'll see how the stimulus works. So our Ground business and our Next Day Air business should grow at or slightly above that, and our deferred business may grow a little below that range. But we feel pretty good that both the Next Day Air and the Ground Product will show good solid growth this year.

And Ken, it's encouraging for us that we're expecting industrial production again to outperform GDP in 2011. So most people look at IP growing over 4% this year, which is encouraging.

Our next question will come from the line of Scott Malat of Goldman Sachs.

For International, probably more specifically in Europe, how do we think about the balance between margins and share gains? You said margins are going to be relatively flat. Should we think of this as a function of margins already at pretty high levels? Maybe the focus is a bit more on taking share rather than increasing margins from here?

Absolutely. Our top priority in International is growth. And we've been thrilled with the return to peak margins, 17.6% in the fourth quarter. So when you’ve got the best business model, when you've got double the margins of your competitors, growth is priority, and that will remain the focus. The one headwind at the International is that we did smooth out the impact of a declining euro last year. And so some of those comps year-over-year, the euro will be a headwind. Could be as much as $100 million or so because of our hedging that we've done several years ago that helped us smooth out the significant decline we've seen in the euro. So that really puts the – that’s the primary issue that's putting the headwind to the margin, but our priority is growth. But overall, the global economy, we're pretty optimistic for 2011. While a lot of people think it won’t grow quite as much as it did last year, it's still going to grow in the upper 3% level. Strong growth out of Asia. China, the GDP was 10½% last year. It will be high nines this year, it’ll be a little slower but still real strong growth. Europe, there's some concern that there may be some moderation but we're really seeing maybe a tenth or two less growth in the economy in Europe this year versus last year. So overall, it's a pretty good environment for UPS to grow International.

Just on compliance rates on fuel surcharge, historically as fuel moves up, we get a little bit lower compliance rates, is that still the case? You get a little bit less of an impact than you did in the past? How do we think about that as we go through the year?

Certainly, as fuel spikes, that becomes a big issue. At this point, compliance is reasonably stable. Clearly it's not a 100%, but we are able to get a significant majority of the rates. As fuel moves over a $100 a barrel and goes even higher, there's some risk to that. Although one thing we have done in the last couple of years is we did narrow the difference between the air surcharge and the ground surcharge, especially if fuel spikes. So we think that will buffer, to some extent, pressure on compliance and also hopefully minimize the trade down impact that was so challenging for us a few years ago.

But certainly, with what's going in Egypt, we'll pay attention to that. But again, our biggest problem with compliance was when fuel got to $120, $130, $140 a barrel. Fortunately, we have a ways to go and hopefully we will not hit that in the near-term.

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

Can I just ask you, you referenced the strength of the online retailers. How big was B2C in the fourth quarter? Did it approach 50% of volumes?

Not for the quarter overall. Certainly, there was some time during December when it was that or more during those last couple of peak weeks. Overall, for the quarter, it was about 35% though.

And the growth rate year-over-year for B2C?

It was in the mid- to upper-single digits. It had flattened out a little bit during the summer, but it did come back in pretty strong. Although frankly, the one thing that did offset the peak a little bit is very late in peak and into that week after peak, things did cool off quite a bit.

And then how about inventories broadly? I think there's a sense that the inventory to sales ratio is pretty low. Does that suggest we could see surprises on the Air side in 2011? How do you think about where your customer inventories are?

Bill, I do think inventory to sales ratios are still pretty low, historically they’re pretty low, maybe not at the very bottom. But I think it bodes pretty well for replenishing inventories this year, which again combining that with a pretty strong IP year, should help the Air business. So we're expecting good Next Day growth in 2011.

Were you referring to Domestic?

Domestic. Correct.

But not -- the export’s not where you would expect to see the big surprise?

From the U.S. exports' standpoint, I'm still optimistic. I’m part of the Export Council, our jobs are to double exports the next five years, and I think I'm optimistic you'll see good growth in U.S. exports.

Our next question will come from the line of Gary Chase of Barclays Capital.

Just a couple on the Domestic business. Scott, during the prepared remarks, you said something about the restructuring being more impactful in 2011. Just wondered if you could elaborate on whether there are any other shoes we should expect to drop there during the course of the year that will be helpful.

No, I think we had a very successful transformation in 2010. And in 2011, clearly, we have 12 months of the benefits with less people and compensation expenses. But I think the real key is the marketing, the local marketing, going to work. And we're doing a much better job as we've decentralized and given more authority to our presence in the districts. They've got a marketing staff, they're able to direct the sales force better than in the past. I think what you'll see is better target marketing, and that will benefit us 2011, 2012 and beyond.

If I could piggyback on part of the answer to a question that I think Tom was asking. If you take a look at the past four quarters where you had peakish margins around 16% in the Domestic business and they're down to 13% now, you've restructured, you're more efficient. Is the erosion explainable entirely by the price impact that we saw in '08 and '09, or is there some other factor that we should be thinking of that needs to turn in order for you to get back to those kinds of levels?

Well, clearly, the go-go economy of 2007 is not fully back yet. So if you look at the industries, the manufacturing, some of those things, we're not really back to peak economic output, I think, across the U.S. as we were. So yes, we do have about a couple of hundred basis point gap still that we'd like to work towards. We are guiding to mid to upper teens income growth for this year. So clearly, that will get us a good piece of that. But it's a number of factors. It's continued prudent management of yields. We're not trying to make up for a few years of declines with one big step so we're being prudent and disciplined on yield management. Weights hopefully will continue to come back as the business and manufacturing side of the economy continue to grow. And then us continuing our big focus on operational technology and efficiencies, so it's the sum total of many things but we feel pretty good with guiding to mid to upper teens improvements and profits for the year.

The only thing I'll add to that, Kurt, is that, clearly, that the wage rate will benefit us. Right now, we’re still having an effective labor wage rate higher than our contract rate. And as we get the volume growth, the effective rate should go below the contract rate which will be beneficial to margins.

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

Clearly, a great quarter in Q4 given the challenges of fuel and weather. I was curious, as you look back at Q4 and you look out now towards Q1, as we're supposed to get an ice storm here in New York today. This isn't an outdoor sport, but what do you think was the impact of weather in Q4 and thus far, how bad has the impact on your Domestic network and even in Europe been in Q1?

First of all, all of you New Yorkers are as tired of the weather as we are. It's been a rugged one. Clearly, Europe, the worst weather I think in the U.K. in 60 years. Had a big impact on us. But January, there really hasn't been a good, clean week in January so far, week after week. We're still, as Kurt said in his guidance, we’re optimistic for the first quarter but if this carries on for another two, three, four weeks, there's going to be pressure on the first quarter. Right now, we do a pretty good job of operating through it. Our people have done a great job. But this kind of weather, it certainly impairs the economy and you're going to see, I think, in January, some weakened retail sales numbers and other numbers due to the impact of the weather.

Yes. I think if you look at Q4, the primary impact was on the demand side. It clearly had an impact on our European Domestic services. The Export business isn't quite as impacted, but clearly, we did show lower growth there. And frankly, that's what we're saying so far for the U.S. environment in January with growth that had been solid actually going flat or even negative for January. That's primarily where it is. I think our operations know to work around it but frankly, if businesses are shut down, it's hard to do. So hopefully, this clears up quickly and the storm this week is the last one for the quarter. But we'll continue to manage as best we can.

When I think about the CapEx guidance that you guys gave, you talked about bonus depreciation plan, a bit of a roll there. But you also came in, I think a little light versus plan on 2010. So is there a pull through that went into 2011? And then I guess if you broke it down, what do you guys think is your maintenance CapEx right now at this point? And how much of this should we be thinking of as your mark for growth? And what is that growth going towards?

Yes, we did come in lower than we had projected on the CapEx for 2010. And frankly, a lot of that was decisions to defer projects a year or so and some of the areas will see the biggest increase. Vehicles is one of the most discretionary areas. Clearly, there'll be benefits on the depreciation side for that. Our building and facility projects, when in doubt, we tend to delay those. So there is some push from 2010 into 2011. Having said that, we are aggressively looking for opportunities where it makes sense to invest this year and next year, frankly, for some of the longer-term assets to take advantage of the rapid depreciation.

I think the best encouraging thing here is I think that what UPS is doing, most of corporate America is also going to do. When you look at this 100% depreciation that came in the tax change, it is going to encourage investment. It will help the economy, and it will create jobs. And I think that's good for all of us.

And I guess back to the second half of your question, over the long term, we think depreciation pretty fairly represents maintenance CapEx. Although with us just having completed Worldport and having substantial new capacity, we were able to reduce our CapEx below that level. So we've been investing for growth even with these historically low rates. The aircraft, we've got an all-new fleet so all of our aircraft additions are capacity expansion -- so we’re investing for growth even at these low rates of capital.

And you've focused more of this CapEx in Europe, given what the euro's doing right now? Or is that not play into your thought process?

No, it's really around the globe. We've got a very large hub in Cologne that we’ll likely do some expansions on. But inter-network expansions, many of those go to Europe, but we don't, we aren’t particularly trying to time the euro as far as capital expansions.

Some of it will be geared around our healthcare expansion when necessarily. We're expanding healthcare in Asia, in Europe, in the Americas and so on. So, it'll be around the world as Kurt said.

Our next question will come from the line of Robin Byde of HSBC.

Just a more general question on fuel surcharges and mix. I was just wondering, do these apply in the same way to International Package, particularly IP Domestic as they do to U.S. Domestic? So I guess what I'm getting at here is as your mix shifts away from the U.S., does your ability to recover higher fuel cost through surcharges, does that stay the same or get more challenging?

No. Robin, I think it is very similar. They are different indexes and different levels of surcharges across the world, but we've put in very similar structures over the last few years. Our domestic markets, most of the larger markets, we do have some form of surcharge, although there are some where there isn't, but the impact of that’s much less material because it's really the aircraft that consume the highest proportion of fuel. So no, we feel very good about the capability to manage yield in a rising fuel environment across the globe. And I think if you look at our currency adjusted yields for the quarter, they were quite strong. Our domestics actually show a 3% increase currency adjusted in those domestic markets. Part of that is us rationalizing some customer bases as we've had great growth. But all in all, we feel very good about the fuel surcharge across the globe and don't see any exposure there.

And just a quick follow-up on Supply Chain, you talked quite a lot about expansion of healthcare. Can you give us an indication of the margins you make in the Supply Chain segment, specifically? Or at least just say if these are higher or lower than your divisional average?

I guess I'll just talk specifically on the numbers, and then maybe Scott can expand a little bit on our healthcare strategy. But in general, our distribution and Logistics margins in healthcare are above average. And because of the value added, it takes more investment and certainly, capabilities are more challenging. But when you get it right, it is highly profitable. So we are seeing upper single-digit margins in our distribution business, Forwarding business is doing well. The only business really that still has quite a ways to go on the margin side is the LTL business that is modestly profitable but it, clearly, we expect margins to expand. And if we can continue to grow shipments 11% and yields remain firm, then we're highly confident that, that will be a very profitable business for us. So some of that is the environment improving, some of that is the benefit of us focusing on the middle market and value, and you can see the results on this quarter on the revenue side.

I think you covered it pretty well, Kurt. I think that the healthcare customers really have complex supply chains. And as a result, it requires tailored solutions for them as opposed to just standardized solutions, which should drive to higher margins and 300% response.

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

In looking at the Domestic business again, and all of the questions about getting back to a peak margin, do you have any type of bubble in your employment? A group of employees maybe that are reaching the retirement age where you would get a sudden improvement in the wage rate? Or is this going to be more of a gradual event as you just continue to hire the new employees and at the lower wage rate?

That's a good question, John, and you really have to segment our workforce into two groups. On the full-time employees, the drivers primarily, it will be a gradual process. Although clearly, retirements are, I think age is extending a little bit as with the economic uncertainty. So with our full-time drivers, that will be a gradual process of retirement and really growth will drive the catalyst. On the part-timers though, that workforce is much more fluid. And what we've seen with the recession and the slow recovery is many of the part-time workers, that worked for us in college that normally would migrate to full-time jobs elsewhere, frankly have hung on to their part-time job because it's the best they can get right now. With continued economic recovery and the job market improving, we could see a substantial change in our part-time workforce and so that would have a material impact.

It’s important, John, like the unemployment rate in the U.S., you need GDP to grow faster than 2½% to get it going. I think we’re seeing 2½%, 3% growth. If we can get that to 3½% to 4%, you're going to see unemployment rates come down in the United States, and it will also help our situation.

And then, if I'm looking at kind of the same discussion with regard to Supply Chain in the freight division, you did nice work in the last couple of quarters on getting that LTL margin back to where it needs to be or at least profitable. What does it take to get back to levels of profitability in the higher single-digit range or better? I mean is it, again, is it just the economy there or is there some additional restructuring of LTL that needs to be done in order to get back there?

No. John, I think the vast majority of it is the environment. I think as both players are reporting, we still have a long ways to go for profitability in the LTL industry to get back anywhere near to typical rates. We feel very happy that we've kind of managed through what seemed to be a price war with the disciplined approach. Clearly, our yields didn't take the huge drop that many of our competitors did and we continued growing. I think what you're seeing now is as the market rationalizes, as the players that were very aggressive on price get more rational, we are seeing more growth on because we've got such a great value proposition. A little bit more time, frankly, and a better environment as all the players become a little more rational and we’re highly optimistic on our great offering. We think, if anything, the market’s moving towards us with this highly integrated, regional, national network all combined with technology and ease of use. So we think we’re on the right track with the LTL. Clearly, it's been a humbling couple of years, but so far, so good and as the environment improves, we'll certainly bring that to the bottom line.

We have a question from the line of Kevin Sterling of BB&T Capital Markets. Kevin Sterling - BB&T Capital Markets: It looks like you're getting pricing across-the-board. Are you getting push back from your customers? Maybe you could talk a little bit about the customer mindset these days?

Yes. I think there's always a give-and-take with pricing, and we are determined to manage this business carefully and also, gradually improve yields over time. So we're not trying to change things overnight. But every negotiation we have, certainly, it's our intent to make sure that we are compensated for the value we create. And as I mentioned earlier, we do see the pricing environment to be rational. There are times when we will decide not to pursue volume if the price seems below what we need to be compensated for our services. So it's a balancing act. We have seen, in general, good trends and the rate increase this year has been reasonably well received. There are some new wrinkles in it. We did change some of the dim weight impacts on our rates and so far, that transition has gone pretty well also. Kevin Sterling - BB&T Capital Markets: Looking at potential acquisitions, are you seeing opportunities out there both internationally and domestically? Maybe you could touch on the M&A market?

We are always keeping our eyes open for good opportunities. We're always looking for targets to provide additional capabilities that we don't already have or may open up a new land or a territory. So that won't change. I said many times in the past though, our real focus has been in International Package in Asia, Central Europe and Eastern Europe. That hasn't really changed. I think in the Forwarding Logistics area, again, if it would expand lane coverage or add capabilities, we’d be interested. So the answer is yes, we’re always interested in that area.

We have a question from the line of Nate Brochmann of William Blair and Company. Nathan Brochmann - William Blair & Company L.L.C.: I'm wanting to talk a little bit longer-term outlook on the Logistics segment. We just talked a little bit on Kevin’s question about kind of the M&A environment and Logistics. But what else do you really seek to add in that business and where could that really go in the next three to five years?

I think, certainly one of the areas that we've talked about, putting an investment in and expanding our interest in is healthcare. So that's an area that again, we’ll look for added capabilities around the world, look for maybe locations that we don't cover today. Many of our multinational customers have needs throughout the world, so we'll certainly address our -- I guess, our vision that way. But healthcare is always one of the areas we'd look at.

Nate, in general, with the substantial profit improvements we've been showing, we see this as a growth platform. And it's not a coincidence that as this business is operated better, we've launched a major advertising campaign, celebrating the role of Logistics and highlighting UPS's capabilities. So, we think this is an incredible area of value add for customers. Everybody's supply chains are global these days. It's not just transportation. And as we expand across the world, we do see Logistics in its broadest sense being a great platform for us. So it all fits together and having the Internet work and the Forwarding capabilities, the Distribution capabilities, the Small Package capabilities fit together, we think is a great platform for growth long-term.

We said before that Logistics is the great equalizer. It really brings a small or medium sized enterprise into the global fray. And I think that, that if the U.S. is going to double exports the next five years, small and medium sized enterprises have to drive that growth. The Logistics will help that. Nathan Brochmann - William Blair & Company L.L.C.: And how much current overlap? We talk about kind of the integrated potential offering? My guess is it's pretty small today in terms of your packaging customers that also use Logistics. Could you help frame that a little bit in terms of what penetration you have and where that could potentially go in the next three to five years?

It really differs by both the customer size and the portfolio. We see the best success in the very large customers today of melding all of our capabilities, they really get it. Part of the realignment of field marketing that Scott talked about, is how do we bring those capabilities to the middle market. So that's a big priority for us to take advantage of that and really begin to bring those kind of capabilities to small and medium enterprises that Scott talked about. Nathan Brochmann - William Blair & Company L.L.C.: And is the total size of that market just as large and potentially if not larger than what you're doing right now with the large customers?

I think it's extremely large, yes. If you look at the size of that market, if you look at – the make-up of the GDP and so much of it comes from small and medium-sized enterprises. It's a bigger market.

And Nate, I guess it takes an awful lot of work though to get to that market. It's not easy to get to. You need sales resources. You need to make it simple. That's why we've invested so much over the last three to four years in our customer-facing technologies so that it feels similar whether you're shipping freight shipments on our LTL network, air freight to Asia or small package and linking all of those together is really what you have to do in order to get to that middle market.

And on top of that, it’s a huge education job just in the United States alone that trades a good thing. If you saw that last survey that came out between NBC and the Wall Street Journal, think I said, 60% of Americans think free trade agreements are bad. So it's a combination of -- big education project.

We have a question from the line of Chris Ceraso of Credit Suisse. Christopher Ceraso - Crédit Suisse AG: Can you give us a feel if there's been any notable disruption in your business in the Middle East given what's going on or is it not big enough to move the needle for you?

I think it's really not material to our business today. I mean we certainly do business and serve Egypt, but it would not have a big impact on our business. The bigger impact and overriding concern, obviously, is the impact on energy prices and if this thing spreads. But I think that what we’re paying more attention to you today, obviously, we'd like to see them get the problems resolved in Egypt. But the impact it could have on the energy could have an influence on the economy. Christopher Ceraso - Crédit Suisse AG: And then I know you don't have full information quite yet, but maybe you can give us a feel for what happened in terms of market share for you in the major markets in 2010 and what you're thinking in terms of share growth in '11?

Yes, I think as you look across our portfolio, our International business was successful in gaining share, pretty much across the world. If you look either at the four big integrators or you take even more detailed view. UPS freight, we slowed our share growths for a few quarters there while the bloodbath in pricing was occurring. But clearly, the last couple of quarters, we feel highly confident that we're back to substantial share gains. Our Domestic business, all in all, if you look at the year in total, we see our share fairly stable. That business actually has got a little more difficult to measure because of the blurring between some traditional package and some of the postal volume and the lightweight volume. So you do have to look carefully at that. We report our basic product, which has a lot of lightweight postal injection in our package numbers. If you take a broader view of the market and bring a lot of that postal volume in, actually, the USPS is the second-largest player in the industry. So substantial share gains in International, we think solid share gains in our Freight business and holding market share in the Domestic is our view of 2010. Christopher Ceraso - Crédit Suisse AG: Anything different for '11?

No. I think those trends will continue. We expect to grow at market in the Domestic environment. Our International business, it just continues to be on a roll. Even Europe grew at 8% this most recent quarter as we continue to provide Pan-European solutions. Big focus on emerging markets and making sure we can bring economic connectivity to them. So we feel pretty good across all our segments that we will continue to gain share.

Due to time constraints, our last question will come from the line of Peter Nesvold of Jefferies. H. Nesvold - Jefferies & Company, Inc.: So we've danced around this a little bit. The comp and benefits as a percent of revenue, in the quarter, it was 51.1%, it's within shouting distance of your best ever fourth quarter of 50.2% in '07 and on a full-year basis, you're only about 50 bps away. And what I was just trying to get a better feel for is, do you anticipate that we'll see that sort of best ever number this year? You did talk to the effective wage rate being above the contract rate. So does that cycle through by the end of this year? Or is this more like a two- or three-year type evolution?

Peter, the comp and benefits as a percent of revenue, the good news is that's a less meaningful statistic than it was when we were primarily Domestic and primarily Small Package. As we've grown into areas like Freight Forwarding distribution and even International, the proportion of direct comp and benefits to revenue drops. So some of that is just the continued diversification of our business stream. But in general, we are seeing great operating results. The U.S. Domestic restructuring, we didn't talk a lot on the call today, but we have a tremendous number of efforts underway within operational technology enhancements. We'll actually talk about those at the investor conference in September. So there's a lot of good work going on to streamline an already efficient business, not to mention the tailwind that Scott mentioned earlier, hopefully that we see as growth continues on our average wage rate. We're very pleased with our efficiencies on managing comp and benefits. As we become more diversified globally and across our segments, that number will continue to drop, we think. H. Nesvold - Jefferies & Company, Inc.: And other than yields, where else might I see from a financial standpoint, continued operating leverage? Because early on in your prepared remarks, you talked to some pretty significant operating leverage in Domestic Package.

It's a combination. It's the benefit of the restructuring we’ve done, the value focus that we have and our yield management and the continued productivity. As long as we can keep our comp and benefit growing at a lower rate than volume, we're in great shape and even if there's a little inflation, we anticipate it will be substantially less than our yield.

We're still investing heavily in technology, and technology has resulted in improved productivity. And we have more to gain there.

I would now like to turn the conference call back over to Mr. Dolny for any further closing remarks.

Yes, I'm going to turn it over to Scott for closing comments.

Thanks, Andy. It was hard for us to imagine in the throes of the great recession that in just two short years, we'd be talking about record EPS levels. You may recall back then that I said, when economic trends do improve, the business landscape would be different. Some companies will be gone, others will be viable, but damaged and no longer leaders. But that UPS would emerge stronger, leaner and more customer focused, prepared to benefit from improving trends. UPS has emerged a much stronger company, with the best financial and competitive position in our industry, a rock-solid balance sheet, strong earnings growth and tremendous free cash flow. Thanks so much for joining us today. We look forward to talking to you next time.

Thanks, Scott. That concludes our fourth quarter earnings call. Thanks for participating. Have a great day.