United Parcel Service, Inc. (UPS) Q4 2011 Earnings Report, Transcript and Summary

Andy Dolny - Vice President of Investor Relations D. Scott Davis - Chairman, Chief Executive Officer and Chairman of Executive Committee Kurt P. Kuehn - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Treasurer

Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division Justin B. Yagerman - Deutsche Bank AG, Research Division Ken Hoexter - BofA Merrill Lynch, Research Division David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division Nathan Brochmann - William Blair & Company L.L.C., Research Division Christian Wetherbee - Citigroup Inc, Research Division Garrett L. Chase - Barclays Capital, Research Division Arthur W. Hatfield - Morgan Keegan & Company, Inc., Research Division William J. Greene - Morgan Stanley, Research Division David Vernon - Sanford C. Bernstein & Co., LLC., Research Division Christopher J. Ceraso - Crédit Suisse AG, Research Division H. Peter Nesvold - Jefferies & Company, Inc., Research Division Scott H. Group - Wolfe Trahan & Co. Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division Robert F. Pickels - Manning & Napier Advisors, LLC John L. Barnes - RBC Capital Markets, LLC, Research Division David P. Campbell - Thompson, Davis & Company Keith Schoonmaker - Morningstar Inc., Research Division Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division

Good morning. My name is Stephen, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the UPS Investor Relations' Fourth Quarter 2011 Earnings Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Mr. Andy Dolny, UPS Treasurer and Investor Relations Officer. Sir, the floor is yours.

Good morning, everyone. I'm here this morning with Scott Davis, our CEO; Kurt Kuehn, our CFO, to discuss the company's results for the quarter and expectations going forward. Before they begin however, I want to review the Safe Harbor language. Some of the comments we'll make today are forward-looking statements that address our expectations for the future performance or results of the operations of the company. These anticipated results are subject to risk and uncertainties, which are described in detail in our 2010 Form 10-K and 2011 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. On Friday, January 27, UPS announced an accounting change relating to expense recognition for company-sponsored pension and postretirement benefit plans, adopting a mark-to-market methodology. This new method implemented in the fourth quarter of 2011 is preferable and will result in simpler, more transparent financial reporting. As we said on our call last Friday, mark-to-market pension accounting provides several benefits. It's simpler, as gains and losses outside of the 10% corridor are recognized in the year incurred rather than amortized. It provides more transparency to UPS' underlying results, and it's considered preferable by GAAP since it more closely aligns with fair value principles. And remember, there is no impact on benefits to participants, pension plan funding or UPS cash flow. It is an accounting change. As we outlined on Friday, as a result of adopting this new methodology, adjusted diluted earnings per share increased by $0.03 for the fourth quarter and $0.12 for 2011. In addition, a 2011 mark-to-market charge of $827 million was recorded in the fourth quarter. Therefore, on a GAAP basis, diluted earnings per share for the quarter and total year will be reduced by $0.51 and $0.41, respectively. This is inclusive of both the benefit from the accounting change and the mark-to-market adjustment. This accounting change must be applied retrospectively. As a result, 2010 adjusted diluted EPS and GAAP diluted EPS were reduced by $0.08 and $0.15, respectively. To assist in comparisons, revised results for prior periods back to 2007 have been provided. The impact to UPS financials are shown on the web schedules and described in detail in the presentation we distributed last week. The presentation and the web schedules are available on our website. I wanted to point out that we included a few extra financial schedules in this morning's quarterly package. For both the fourth quarter and 2011 full year, we provided 3 selected financial data schedules: One that provides adjusted and GAAP results under the new pension accounting methodology, a second under the previous method and a third that reconciles the two. We hope you find this information helpful. Separate from pension, in the fourth quarter of 2010, UPS recorded a net $58 million gain on the sale of certain non-core assets in its Supply Chain and Freight segment. The after-tax benefit was $32 million or $0.03 per share. During this morning's call, all 2011 fourth quarter and full year references and comparisons to 2010, will refer to adjusted results unless otherwise noted. We believe this is a more 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. These schedules are also available on the UPS Investor Relations' website in the financial section. Finally, in an effort to allow maximum participation on today's call, each participant will be allowed one question and then be required to get back in the queue for any follow-up. I hope you understand. And thank you for your cooperation. Now, let me turn it over to Scott.

Thanks, Andy. Good morning, everyone. I hope all of you had a safe and Happy New Year. I can tell you that during December, we were very busy at UPS, ensuring holiday shipments arrived where they needed to be all around the world. In fact, we experienced our busiest peak ever, delivering almost 500 million packages between Thanksgiving and Christmas. And UPS wrapped up the year with record EPS, free cash flow exceeding $5 billion and a new high in return on invested capital. In the U.S. we saw a robust growth in e-commerce, while traditional retailers experienced mixed holiday sales. Continued migration to B2C contributed significant growth in UPS' residential shipments. This rapidly expanding market segment enables more and more opportunities for consumers to experience the unique solutions provided by UPS. Solutions like UPS My Choice, the industry's first offering that puts receivers in control of their shipments. UPS delivered almost 3 million packages to My Choice users during the quarter. Enrollment exceeded expectations approaching 0.75 million subscribers, not bad for a service offering in its first 3 months of existence. All in all, the U.S. market performed very well, growing at a faster pace than we projected. Turning our focus to other parts of the world, in Europe, recession concerns, the debt crisis and the instability of the euro dominated headlines. But for UPS, solid growth continued. While in Asia, economic output and our volume lagged expectations. Looking to 2012, global economic expansion is expected to be slightly below the rate seen in 2011. The U.S. is one of the few economies where expectations are greater than last year. Some countries in Europe are expecting growth while others are facing contraction. And in Asia, although there's discussion about slowing, growth there is still projected to outpace the rest of the world. Businesses in Asia understand the power of global trade. And clearly, their economies benefit greatly. The U.S. needs to pick up the pace of exports and increase the participation of small and large companies alike. Recently, 3 key trade agreements were approved. These pave an excellent avenue for growth. Small and medium-sized businesses are currently underrepresented in global trade. UPS is actively engaged in enhancing the export process for them through our broad set of solutions, expertise of our people and the reach of our network, bringing it all together through the power of UPS technology. Companies throughout the world face many challenges today. In parts of China, supply chains are stressed by rapid wage inflation, while in other parts of the world volatile energy prices, natural disasters and social unrest provide additional strains. Companies also face more industry-specific challenges as they look to serve the global market. Take healthcare for example, where companies encounter increased regulations, greater competition from generics and a heightened focus on cost control. As a result, more businesses are trying to diversify the components of their supply chains. And they are looking for reliable outsourcing partners so that they can focus on their core competencies. As these shifts occur, the complexity of the logistics model increases. UPS is uniquely positioned to assist customers worldwide with their distribution and transportation needs as they evolve. This evolution will require further investments on our part to develop new innovative solutions, increase channel access to our global network and expand our unmatched logistics capabilities. We, at UPS were encouraged by comments made during the state of the union address that supported all of the above when it comes to alternative fuels. We have talked quite a bit in the past about our rolling laboratory approach; not just one alternative fuel solves our needs. Expanding the availability and the use of natural gas is one answer in improving the environment and reducing dependence on oil. We were honored to be recognized recently by President Obama for our work in this area. But finding solutions that improve processes is what UPS-ers do every day. And for that reason, I want to thank UPS-ers around the world for their hard work and dedication in providing excellent service. Each of them impacts how UPS is perceived by our customers and communities. All in all, a job well done. As I told you a year ago, 2011 was going to be a great year for UPS, and it was just that. We experienced solid top line growth in a challenging economic environment, continued gains in productivity, 20% improvement in operating profit, record EPS and on top of that, we had strong free cash flow, enabling UPS to continue our trend of significant distributions to our shareowners. Now let me turn the call over to Kurt.

Well, thanks, Scott, and good morning. Before I get started, I want to explain how I will discuss fourth quarter performance in light of the pension accounting change announced last Friday. To make comparisons to past trends easier, I will review our results as they would've been under the old methodology first. After covering all segments, I will bridge results to the new methodology and then guidance, of course, will reflect the impact of our new pension accounting. Now let's get started. A year ago, we announced that UPS expected to achieve record earnings per share in 2011. I am pleased to report today that we did just that, exceeding our previous peak earnings per share of $4.11, generating earnings per share of $4.23. Not only did we set a new high in earnings per share, UPS also achieved record revenue of $53.1 billion, up more than 7%, and we surpassed the $4 billion mark in consolidated package volume for the year. All of this was accomplished during a period of uneven global economic conditions. In the fourth quarter, revenue climbed 5.6% on average daily volume growth of 3.6%. Operating profit approached $2 billion, up 12.6% over last year. And operating margin improved to 14.0%, an increase of 90 basis points compared to 2010. Notice that the tax rate during the fourth quarter came in higher than expected at 35.3%. This was due to a greater portion of profitability in the U.S. than planned, as well as some year-end adjustments. For the full year, our tax rate was 34.3%. Despite this additional tax expense, earnings per share for the quarter were $1.25. These results are impressive considering the macro trends that Scott outlined. Overall, UPS had a fantastic peak season with global average daily volume exceeding 27 million packages on 2 days, and exceeding 25 million on 5. UPS technology provided customers and receivers visibility into their shipment as never before, handling almost 58 million tracking requests on peak day. Now let's review segment performance during the quarter starting with U.S. Domestic. The segment saw strong revenue growth of 7.3% on a 3.8% jump in average daily package volume. Our Deferred Air products rose 12%, while ground was up 3.5%. All products benefited from the surge in online shopping, as we experienced robust gains in B2C volume, especially in our suite of lightweight solutions. Revenue per piece was up 3.4%. Higher base rates and fuel surcharges were somewhat masked by a decline in weight per shipment and changes in both customer and product mix. Growth from large e-commerce customers outpaced smaller accounts, impacting both customer mix and package characteristics. As a result of this rapid growth in B2C, UPS experienced a meaningful decrease in weight per shipment, down almost 3% compared to the fourth quarter of 2010. We successfully adapted to this changing product mix, with an operating profit increase of 24% and margin expansion of 200 basis points to 14.9%. The U.S. domestic operations executed one of their best peak seasons, demonstrating the benefits of scale, as well as the flexibility and efficiency of the UPS network. And of course, a little help from Mother Nature never hurts. Key operating statistics, like direct labor hours, miles driven and block hours, all grew at a slower pace than volume. Moving to the International segment. Challenging economic conditions existed in many regions of the world. UPS export volume out of the U.S. declined, as the dollar strengthened against the euro. Meanwhile, UPS remained resilient in Europe and continued to produce solid results. And though our growth rate in export from Asia improved slightly compared to the third quarter, it was basically flat with last year and below expectations. These conditions and a nearly 2% unfavorable currency impact, contributed to the UPS revenue growth of 3.5%. UPS did set a new benchmark in export daily volume, surpassing 1 million packages. The increase of 4.5% was driven by high-single-digit gains from Europe, as well as strong intra-Asia and Asia to Europe trade. What makes this new high in export volume even more impressive is the fact that the Asia to U.S. lane was down by almost 3%. Non-U.S. domestic volumes were up a little over 1%, as strong growth from Poland, Turkey and France helped offset weaker demand in other markets. Operating profit declined $40 million to $497 million. The year-over-year comparison was negatively impacted by approximately $30 million, due to currency fluctuation and our hedging programs. Despite the challenging impact of changes in product mix and shifting trade patterns, UPS once again generated the highest operating margin in the industry, in line with our expectations of 15.8%. We experienced a shortening in trade lanes as a result of solid intra-regional shipment growth and weakness in the Asia to U.S. Lane. International yield was up 2%, negatively impacted by a currency translation. Neutralizing this, it was up almost 4%. Also, during the quarter, UPS made available several improvements for International shippers. These included enhanced return logistic solutions, as well as expanded availability of our customer-facing technology, including mobile apps. Now for the Supply Chain and Freight segment. Operating profits increased 8.5% on revenue growth of a little over 2%. Operating margin expanded 50 basis points over last year to 8.2%. UPS Freight led the way with good operating profit improvement from gains in productivity and the solid increase in revenue. Though LTL shipments and tonnage were down 2.4% and 1.3%, respectively, revenue per hundredweight was up almost 9%, driven by revenue management initiatives and higher fuel surcharges. The Forwarding business unit experienced a decline in revenue and operating profit, as overcapacity and weak demand in the airfreight market put downward pressure on both tonnage and rates. Margins, however, remained strong. Our Distribution unit continues to be a success, exhibiting growth in both revenue and profitability, while expanding operating margins. This was accomplished even as the business continued to invest in its healthcare capabilities. In fact during the quarter, we opened the 33rd dedicated UPS healthcare facility and have plans to open 4 more this year. UPS also completed a healthcare acquisition during the quarter, purchasing the Italian pharma logistics provider, Pieffe. With these added capabilities, UPS is positioned to serve pharmaceutical, biotech and medical device companies doing business there. Moving on to review our cash position. During 2011, UPS generated more than $5 billion in free cash flow, after making capital expenditures of $2.0 billion and pension contributions of $1.4 billion. In 2011, UPS increased its share repurchase program significantly and stepped up dividends. In fact, for the year, we repurchased 38.7 million shares for approximately $2.7 billion and paid dividends totaling $2 billion, up 10.6% per share. This demonstrates UPS' continued commitment to distributions to shareowners. Before discussing our expectations for 2012, I want to take a few minutes to build a bridge to UPS' results under the new pension accounting methodology. This new method implemented in the fourth quarter 2011 is preferable and will result in simpler, more transparent financial reporting. It will be the foundation used for results from this point forward, and will be the basis for comparisons noted in guidance. Keep in mind, as Andy mentioned earlier, that historical financial statements reflecting both methods are available on the UPS Investor Relations website. So looking at the fourth quarter, the new methodology had a positive impact on adjusted diluted earnings per share of $0.03. Earnings per share came in at $1.28 per share, an increase of 21% over prior year results, on a 17% improvement in operating profit. 2011 operating margin of 14.3%, increased 140 basis points over the 12.9% in 2010. And looking at our full year 2011 results, adopting this new methodology resulted in an increase in adjusted diluted earnings per share of $0.12. Total company earnings per share came in at $4.35 per share, an increase of 25% over prior year results on a 20% improvement in operating profits. And 2011 operating margin of 12.9% increased 140 basis points over the 11.5% in 2010. Remember, the pension accounting change we adopted has no impact on cash flow or plan funding. In fact, we ended the year 94% funded for UPS-sponsored pension plans. Looking towards to 2012, even though we adopted this new method, we still project that ongoing pension expense will increase on a year-over-year basis by more than $100 million, due to additional service cost and an approximately 35-basis-point decline in the discount rate. Continuing with our outlook for 2012, recent economic news about slowing in Europe and Asia is in contrast to the more optimistic tone we are seeing here in the U.S. Our expectation is for mixed economic growth around the world, with modest improvements in the U.S. Overall, we expect global economic expansion to be slightly less than the growth rate seen in 2011. In spite of this macro outlook, UPS expects another strong year of earnings growth and we are anticipating earnings per share in the range of $4.75 to $5 per share, an increase of 9% to 15% over our 2011 earnings of $4.35. For the full year, U.S. Domestic segment average daily volume is projected to grow around 2% to 3%. Revenue is expected to be up mid-single digits. Base rate improvements of 2% to 3% are expected, although these may be masked somewhat by continued growth in lightweight solutions that serve the ever-expanding e-commerce market. Operating profit should grow at an upper single-digit pace, as we anticipate continued margin expansion. In our International business, we expect revenue to increase at a mid- to high-single digit rate on a 5% to 6% growth in export average daily volume. Domestic volumes are projected to be similar to last year's levels. We expect operating profit growth of about 10% with some margin expansion. The first quarter is expected to be flat to last year, due to more challenging comparisons and the current weakness in the euro. Although as the year progresses, we do not anticipate currency to have a meaningful impact on year-over-year results. For Supply Chain and Freight, the first half of 2012 comparisons will be more challenging, due to strong performance in freight forwarding last year. Given this, operating profit growth will most likely be flat to down slightly. For the full year, we expect both revenue and operating profit to increase at a mid- to high-single digit pace. Continued gains in UPS Freight will be somewhat offset by healthcare investments in the distribution unit. The Supply Chain and Freight segment overall is expected to maintain a strong operating margin of approximately 8%. Looking at total company results for the first quarter, due to the items highlighted in both International and Supply Chain and Freight, we expect year-over-year growth in earnings per share to be a little less than the average for the year. Our overall tax rate for 2012 should be between 34% and 35%. We expect capital expenditures for 2012 to be approximately $2.2 billion. Regarding cash flow for 2012, UPS expects strong cash flow conversion to continue, exceeding 100% of net income. We remain committed to distributions to shareowners, with planned share repurchases of $2.7 million. And as always, dividends will continue to be a priority. So to wrap this up, 2011 was a record year for UPS as our business model generated outstanding results. The robust fourth quarter performance that we experienced gives us momentum as we move into 2012. We entered this year with the expectation of delivering strong earnings growth with earnings per share in the range of $4.75 to $5.00, up 9% to 15% compared to 2011 earnings of $4.35. Thanks for listening this morning. And now Scott and I will be happy to answer your questions.

[Operator Instructions] Our first question will come from the line of Ben Hartford of Robert W. Baird. Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division: I was wondering if you could provide a little bit more color into the guidance as it relates to the pension impact and maybe shedding some light on that, I know that we have the $0.12 impact in 2011. What would have been the impact in 2012 if we were to normalize for the old pension accounting?

Well, we would've seen, certainly, an increase in pension expense for 2012 under both methodologies. And as I mentioned, we do expect more than $100 million, actually about $115 million, in additional pension expense for 2012. But I guess one thing to keep in mind, that the increase is, perhaps not necessarily as drastic as many of you projected, really due to 2 facts. Number one, the plan did exceed its expected rate of return. We actually generated a 9.4% return. And the discount rate did decline by about 35 basis points and certainly there were some estimates that estimated higher. And as far as the 2 methods, going forward, in some years, the old method results in more expense and in some, it results in less. You could see that in 2010 and 2011. So you saw this in our restated results were we've shown those results. So the best reference point, really, is from the base that we've restated 2011. We do expect to see about $115 million increase in pension expense, and you could adjust accordingly based on that.

Our next question will come from the line of Tom Wadewitz of JPMorgan. Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division: I was wondering if you could give a bit more perspective on how much of the volume improvement was, really, just a very strong peak season and your, obviously, good traction with your products to serve online, those shipping online sales. And how much is, I guess, either a change in your share performance or a change in the economy? Because it's a pretty notable difference in your Domestic Package volumes versus kind of flat in the third quarter. And your guidance in 2012 also implies, I think, a better volume trajectory than you saw in 2011. So I wonder if you could give more color on that.

Let me start, Tom, with kind of the macro approach. I think that we certainly are seeing a better U.S. economy than we would have thought back in, probably August, September, back at Investor Conference time. I think that, back to that time frame, people were talking about a chance for a second recession. You don't hear that anymore. Clearly, we saw a strengthening economy and a strong holiday season. And frankly, it stayed fairly strong into January. So I think the U.S., while I wouldn't call it a robust economy right now, I do think the small package market is performing better than we would've thought 4 and 5 months ago.

Yes. That's right. So at a macro level, clearly, we feel a little better about where the U.S. is at. Looking more specifically, I guess, to your question, Tom, we clearly were pleasantly surprised by the demand surrounding the holiday season. Really, this is the first peak where we've really had our full suite of lightweight product offerings in place. And about half of the additional growth we do, we did see in our basic and SurePost products. If you recall, SurePost really was just launched in 2011. So we did see a big uptick and clearly, this fits into the trend of lighter-weight products, computers moved to tablets or portables and a lot of small products. And then the e-commerce growth continues unabated. We estimate, in general, e-commerce was probably up about 15% for the holiday season. So basically, we were in place with a new suite of products that was able to both attract volume and at the same time, handle it very profitably. So we were pleasantly surprised, frankly. I think, that combined with the increased focus we've had on B2C with My Choice and really differentiating our residential products, created a nice uptick. We also saw, the other number that might have surprised you a little bit, was the substantial growth in deferred air. And a lot of this is also surrounding the e-commerce trends, I guess, that there were a number of Internet retailers that decided to differentiate their products by offering a tighter Time-In-Transit. So we're seeing some pieces moving around. But all in all, we were thrilled that our business model and our product offerings were able to generate a great quarter. Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division: Do you think there's a difference in share dynamic or competitive dynamic, is that part of this as well?

I wouldn't comment on that. I think, in general, it was a good holiday season. The market moved pretty well. So we'll see how everything else settles out.

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

I wanted to ask about the B2C trends, obviously, quite strong in the quarter. So it sounds like, deferred strength was driven partially there. But you also talked about a mix shift that's occurring. So maybe you could put some numbers around the growth in B2C that you saw in your business this year versus last year, some expectations going forward. And then, maybe help us think about why that weight per shipment is lower and how that affects mix from a yield standpoint?

Yes. As I guess a ballpark number, I think there's a couple of parts to it. Number one, B2C is growing robustly, especially through the e-commerce venue. Clearly, the e-commerce branches of companies seemed to do a lot better than the brick and mortar. In fact, in December, B2C volume was over 50% of our volume. December, it always spikes. So we are continuing to see that grow. The other nuance, and this is more company specific, is the substantial success of our SurePost product, which for the first time has offered a broader suite of services for lightweight products, lower values. So that was another big part of the success. So the combination of the trends in general, UPS positioning and us being able to differentiate. And as we mentioned, sign up 0.75 million customers for the new My Choice service, we think really puts us in a great position to capture some of the benefit of these trends.

And Justin, I think you'll also see these trends internationally; it's not going to be unique to the United States. I think the whole global B2C phenomenon is still in the early innings and we'll see that grow going forward. But the key is that UPS is adapting the operations to be profitable in this business.

Can you guys just remind us, SurePost, that’s the competitive product with SmartPost on your primary competitor side?

Yes. SurePost is for lightweight, relatively low-value products where we do postal injection. We also, though, have a basic product that's a mix of both UPS delivered and injection.

Our next question will come from the line of Mr. Ken Hoexter of Merrill Lynch. [Operator Instruction]

Can you talk on the International side, you talked about the slowing of growth or the expectations for a bit slower, particularly out of Asia. When you think about your CapEx, I guess, you talked about increasing it 10%, is that -- can you talk about what you're doing in terms of are you slowing down or shutting down any lanes and where are you increasing that CapEx?

Well, we did certainly make some adjustments in the network after the fairly significant slowing we saw during the third quarter. And as we said, the Asia ended up being a little slower than we'd anticipated, most notably on the U.S., Asia to U.S. lane. Yes, we have tweaked our network. Actually, if you look at Asia, specifically, we reduced capacity about 10% over the last couple of quarters maintaining service levels in all markets, but some of the duplicate flights and additional lift we took out. And that allowed us to sustain still a pretty good margin, although we will continue to adjust. Trends so far for this year are a little hard to tell because the Chinese New Year is coming a little earlier. But we'll stay responsive in monitoring where things are at in Asia. On the flip side though, Ken, we did see yet another quarter of solid intra-Europe growth. So in spite of the headline risks in Europe, we are continuing to see good growth there and some of our investments for next year surround the expansion of our Cologne air hub in Germany, that helps to support all that.

And in general, Ken, our CapEx is still historically quite low. It's going to be still around 4% of revenue. If you recall, we used to spend between 5% and 8% of revenue. So we've had, really, a 3 low years. I mean 2009 was extremely really low, 2010 was low and 2011, what, 3.8%, I think 2011, and about 4% for 2012. So still, it’s still quite low.

Our next question will come from the line of Mr. David Ross of Stifel, Nicolaus. David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division: On the Supply Chain and Freight side of things, you mentioned that you saw a decline in revenue and operating profit due to mainly overcapacity and weak demand in the air freight market, but that margins were strong. Did margins actually expand year-over-year for the Freight Forwarding segment? And also, if you could comment on ocean and what you're seeing on the ocean side of things?

Margins expanded slightly year-over-year. But yes, there's clearly been a reduction in demand, not surprisingly, and rates. And there is certainly some challenges with margin squeeze. Ocean, we did pretty well on, although I think, clearly, the market remains very slow. But we've done a lot of work on our expanded ocean portfolio less than container load. But it remains a minority part of the business, air freight is the primary focus.

Our next question will come from the line of Nate Brochmann of William Blair & Company. Nathan Brochmann - William Blair & Company L.L.C., Research Division: Wanted to talk a little bit about the disconnect that I'm kind of picking up on a little bit between the very strong U.S. e-commerce activity through the different channels, coupled with the kind of slower import growth in terms of wondering where, in terms of the shift in production, a lot of those e-commerce products then might be coming from or how the supply chains are moving?

I think, in general, it's been all about inventory levels. And I think that we did not, even though inventory seemed to add to GDP in the fourth quarter, we feel that most of the inventories are still pretty slight in the United States. I think we saw the holiday season, a lot of people are running out of product. We have seen a pretty strong January. I think those people had to replenish inventory levels. So I think that, that because of low imports from Asia you're going to, hopefully, see some improvements in the near term as people replenish the inventory levels.

I think we are fairly bullish though on production within the U.S. seeing somewhat a renaissance. If you look at the cost of energy with natural gas so low, you look at the fact that wages on a global competitive perspective have improved in the U.S. And the fact that people are realizing that it's nice to have local sourcing in addition to global sourcing. We feel generally bullish that the U.S. economy is seeing a bit of an uplift and will next year.

Our next question will come from the line of Mr. Chris Wetherbee of Citi.

I was wondering if you could give us a little bit of color on kind of the intra-European volume flows during the quarter, and maybe what you're seeing in the first month of this year?

Yes. As I said, Europe continues to be a good story. And I think it's really 2 components. One, is the UPS-specific success in offering European shippers an integrated solution. And the other is I think the, and we heard some of this from Davos, that the core business activity is probably a little better than the headlines would suggest. So I think, we did see upper single-digit growth in shipments within Europe, that is a little slower than some of the previous quarters, but reports of Europe's demise have been exaggerated a bit.

Yes, we really are -- have built our plan on a pretty flat economy, probably slightly negative European economy in 2012. But again, that small package market should grow even in that environment.

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

I hate to ask you this one, but it's polluting my inbox right now. Could you just clarify, Kurt, you said when you were giving your outlook, I thought what I heard you say was flat international profit and that EPS at the corporate level, you were thinking was going to be lower growth in the earlier part of the year than in the back half. I think some people might have heard that it was flat EPS with, I think it's $0.88 last year. Could you just clarify? Could you just go back over that and clarify exactly what you were trying to communicate there, please?

Great. I'm glad you asked that if it was confusing, because that was not the intention. We had said that the first quarter for international is likely to be flat, really, because of some of the trends we've talked about, plus we do have a pretty strong euro headwind in the first quarter. We're currently hedged and protected at about 1.30; last year, it was at about 1.36, so that was purely a quarterly guidance. Overall, for the company, we expect earnings increases in the first quarter. They'll just be probably a little less than the average that we guided for, for the year. We guided a 9% to 15% range. So that was solely a comment about the first quarter, Gary.

And the currency drag, Gary, is euro is primarily in the first quarter, our hedging program will protect us pretty well from Q2, 3 and 4.

Our next question will come from the line of Mr. Art Hatfield of Morgan Keegan. Arthur W. Hatfield - Morgan Keegan & Company, Inc., Research Division: Just a quick follow-up on that. To make sure we understand your guidance correct there, Kurt, what numbers are you using, the quarter numbers for the year and for the full year?

Well, overall, we're guiding to a 9% to 15% increase, $4.75 to $5.00 a share. We've said, in general, we expect Q1 to be a little more challenged. So it'll show earnings growth but at a little lower rate than the rest of the year, primarily because of the headwind in international. And also the comps in supply chain are tough, given the current margin squeeze.

So remember, Art, we guide annually to help you a little bit on the quarterly, but we guide annually. Arthur W. Hatfield - Morgan Keegan & Company, Inc., Research Division: No, that's helpful. I was just curious which base you were using.

No, all bases are against the restated. We're moving past the old numbers. I wanted to review and give you some sense since you'd anchored on those for Q4. But we have a base earnings of $4.35, that is the methodology. And all the guidance is based off of that base. And as I said, we do have a pension headwind heading into next year. But virtually, everything that we talk about and you see from now on will be based on this improved, more transparent approach. And we feel good about the year, but we do feel Q1 will be just a little more challenging.

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

Kurt, can we just come back to the impact from the changes on the pension accounting. Will that affect any of the long-term guidance that you gave us back in September? Did those numbers get affected? I assume there is some impact, but how would we think about that impact?

Bill, they really don't. When we restated, 3 of the years went one way, and 2 of the years went the other. So if you paint me a scenario of different discount rates and market returns, yes, it may be different. But as we've looked at it, it's not a material change over the longer term for margins or any of that. Well, it may make the results slightly different year-over-year. So we went back and looked at that, and we really don't see a scenario. If discount rates rise and markets do well, this method is a drag, because we are not going to take credit for those market returns on our quarter results. Conversely, if we stay with these incredibly low discount rates with 10-year treasuries under 2%, then we -- this method may pull some of that, those investment losses or at least the discount rate impact out of core earnings. But long term, our guidance that we gave in September remain. Probably, the only notable difference in guidance is we are actually a little more optimistic on 2012. If you remember, we gave guidance of 10% to 15% to earnings in September, but said that 2012 would be more challenging because we believe there would be below-trend growth in the global economy. But we do think it's going to be below-trend growth but clearly, we're giving earnings guidance very close to that long-term momentum.

Our next question will come from the line of David Vernon of Bernstein. David Vernon - Sanford C. Bernstein & Co., LLC., Research Division: Question on the international cargo revenue that's booked within the International Package segment. That number is sort of lower than it's been since the recession and I was wondering how much of that decline is due to less space on the brownfield aircraft for cargo revenue or just very weak rates for the filler freight you are taking on?

It's a little bit of all of those. A, we did reduce capacity out of Asia, so we had less excess capacity to use. Rates have also softened a little bit. Plus some of that space is used by our forwarder and would not show up in that cargo line.

But clearly, the excess capacity has driven down rates and that’s going to have an impact on the revenue.

Our next question will come from the line of Mr. Chris Ceraso of Crédit Suisse. Christopher J. Ceraso - Crédit Suisse AG, Research Division: I have a question on the pension. What's driving the increase in service cost? Did you change benefits? And also, what is your plan for cash contributions? Are you putting anything in the plan in '12?

Yes. Service cost is just going to be up as kind of a normal continued growth. Each of us clicks another year on the pension, I guess. The biggest impact is the lower discount rate. And as far as contributions, we expect to make about $400 million of direct contributions to the pension plans, and another $400 million or so to cover our post-employment benefits retiree, medical and some of those things.

And everybody is living a little bit longer, so mortality tables have an impact on it also.

Our next question will come from the line of Peter Nesvold of Jefferies. H. Peter Nesvold - Jefferies & Company, Inc., Research Division: If we got the model together fast enough before the call, it looked like deferred air yields in the U.S. Package business were up 2.5% year-over-year in 4Q, which was kind of a notable step down from the 9.8% in 3Q. And again, assuming we got the model together is fast enough, is there any kind of trade down that's happening in that business or is there anything else that may be impacting the yields there?

On deferred air, it's really trade up, if anything, from ground. The big issue there is the weights are significantly lower. That was the product hit most significantly by reductions in weight. So a lot of e-commerce volume with lightweight volume being shipped. So we're very conscious of it, the base rates underlying, as we said, remains strong 2% to 3%. But a 4% reduction in weight for deferred air, clearly, caused a big impact. H. Peter Nesvold - Jefferies & Company, Inc., Research Division: And then a brief follow-up and I'm done. Any conversations around Brent? Oil prices these days, north of $100 here for a couple of months. Is that starting to creep up again and shift our conversations?

Really not. Over the last several years, we have migrated gradually some of the new normal for fuel into base rates. So the absolute amount of the surcharge is lower than it was in historical. And our plan for the year assumes fuel somewhere plus or minus near the $100 rate anyway.

Our next question will come from the line of Scott Group of Wolfe Trahan. Scott H. Group - Wolfe Trahan & Co.: So wanted to talk a little bit about the pricing guidance. I think you mentioned 2% to 3% pricing in the U.S. And I know that's in line with the longer-term expectations, but seems like a step down from what we got in 2011. And wanted to understand kind of the drivers of that, is this just being conservative or is there something changing in the pricing market that's not letting you get in '12 what you got in '11?

No. We think the core momentum as I was -- certainly, something we've been looking at very closely. The core base rates are continuing very stable. We did see in Q4 significant impact of customer mix with our lightweight product suite, really kicking into gear. And we do expect that momentum to continue for a while. So the overall reduced weights, 3% in Q4, and that trend may continue given the customers and the e-commerce that we're seeing. It does create a net impact that shows lower yield. But as you can see, we are able to profit on that. So all in all, we think the market pricing is stable, it remains a very high priority for us. You're just really seeing a fairly significant market change and also a significant change in mix to UPS as we've really hit our stride with this light rate e-commerce volume.

As Kurt said, the market is rational from a pricing standpoint. What can help us obviously is, Kurt referred earlier to the manufacturing increase in the U.S. If we see that throughout 2012, that certainly can help the weight and help the yield. Scott H. Group - Wolfe Trahan & Co.: Yes. Well, I guess, I mean, I understand the negative mix impact from lower weight. I guess, I would've thought, though, with an improving macro outlook that there could have been an opportunity for better than 2% to 3% underlying pricing, and just trying to understand the drivers of that if it's just being conservative or what?

It's consistent with what we talked about in September. Our long-term goal is to, in the domestic environment, is to generate 2% to 3% base rate increases. As long as we can keep yields moving at that rate and be able to keep our unit cost below that rate, we'll see gradual and positive margin expansion. So Scott, we think that's a very disciplined and appropriate approach. It maintains a stable relationship with our customers and we're very pleased if we can continue that positive balance of yield and unit cost.

And our next question will come from the line of Jeff Kauffman of Sterne Agee. Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division: I just want to clarify. You said going forward you were looking for about $400 million direct contribution of the planned $400 million postretirement benefit contributions. So $800 million versus the $1.4 billion I think that you talked about making last year. In terms of longer-term modeling, we should think of the $800 million as a base plus or minus being outside the corridor with your 94% funding?

It's hard to forecast perfectly, but that's probably more normal. Clearly, we were catching up and fully funding the new plan that we had over the last year or 2. And frankly, that's one of the good news stories on our cash flow long term. Scott mentioned that CapEx should remain at or below 4%. The pensions are, even after what has been a tough year because of lower discount rates, we’re 94% funded. So yes, the pension plans will not be a major hit on cash flow for the foreseeable future.

Yes. Even from a tax formula standpoint, we're actually over 100%, and that really was what drive your contributions going forward. So we feel good. Now we would have said a year ago that interest rates wouldn't have dropped. So I wouldn’t expect them to drop going forward long- term rates, which could have an impact. They go up, that improves our funding position.

Our next question will come from the line of Robert Pickels of Manning & Napier. Robert F. Pickels - Manning & Napier Advisors, LLC: Hope it's not a repeat, I think it's a little different from Tom Wadewitz's question. But I'm just wondering how all of this growth in e-commerce is changing the seasonal nature of your business. It seems like the e-retail might make 4Q even stronger than some of the other quarters on a go-forward basis. And I'm just wondering how you manage this. Is it significantly different? Do you have to take capacity up and down more than you used to? Just comment on that, please.

Yes. Robert, you're absolutely right. And we've done a lot of work studying this. If you look at the seasonal factors of how different quarters and different seasons compare to themselves, we are really seeing that the fourth quarter become more and more important. And really 2 issues, I guess, number one, the demand for the fourth quarter has really created almost 2 peaks. We were extremely busy after the Black Friday and Cyber Monday period, that was a peak. Settled down and then, certainly, the last week of the holidays was another peak. The one piece of great news and this is reflected in our earnings results, is that the big challenge for us in the past of a large peak was tremendous amounts of training, a lot of disruption in our operations. As you guys saw in our investor conference, we have done a tremendous amount of work to, through operational technology to streamline our jobs, to deskill, so we don't have to train as much, and to optimize in real time. So what you really saw in the fourth quarter was a great demonstration of operational performance, driven by data-driven operations. And so the good news is we can handle these peaks and this growth in e-commerce very productively.

And in fact, in the fourth quarter, our productivity improvements offset the entire wage rate increase. Now you'll see that because of the large scale in the fourth quarter, you won't see that necessarily in Q1, 2 and 3. But it does come through in a large-scale period like the fourth quarter. Robert F. Pickels - Manning & Napier Advisors, LLC: Does it make it harder for the -- is it possible the fourth quarter is less indicative of broader economic trends because of the e-commerce?

Yes. I think that's a valid point. I mean, if you look at overall retail, it was a little better perhaps than expected but not hugely. With our bias with the e-commerce hitting our industry more heavily, you do get a little bit of an outsized gain.

But it's still tied somewhat to consumer sentiment. And if consumer sentiment is negative, you're going to get impact in of the fourth quarter or the first quarter. So it's got to be a good sign of what the consumers are thinking, consumer confidence in the fourth quarter.

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

Just a quick question on International. Kurt, I heard your commentary around you're reducing flights and that type of thing out of Asia, took out some of the duplicate type of businesses. But I'm kind of curious, it looked like the incremental margins domestically were very strong, some degradation on the international side. Is there anything else you can do to manipulate that cost structure to maybe get the incremental margins positive again on international? Or is it just a matter of kind of letting that [indiscernible]?

Absolutely not. I mean, you know us, John. We're working very hard to make sure that we've optimized the network, that our cost infrastructure is appropriate. As we did mention, we had about a $40 million decline in profits, $30 million of that was purely due to the euro hedge comparison. We'll face a little bit of that in Q1 but after that, as Scott had mentioned, our hedges put us in very good shape. So if you factor out that currency issue, we came pretty close to holding profits even in an environment where trade flows are changing substantially. So we're going to stay on our toes, make sure we've got the right assets in the right place and that our productivity and efficiencies cover it. One of the big trends that we're working on is taking some of the operational technology that we showcase that's used primarily for domestic and beginning to migrate that over to our international environment. So there's still more to come.

Our next question will come from the line of Mr. David Campbell of Thompson, Davis & Company. David P. Campbell - Thompson, Davis & Company: I just wanted to say that Asia, it seems like business there has been relatively stable since April. It hasn't really been dropping. So when we get to April this year, won't there be -- isn't there a good likelihood of an increase in business that could be better than you're anticipating in your estimates.

Well, I think, David, that yes, with certainly Asia exports to Europe and the U.S. have not been that strong for -- really, for us it started in August, we saw the fall off. But intra-Asia has stayed strong. Certainly, as time goes on and consumer optimism keeps improving in the U.S. that will help demand, help imports from Asia into the U.S. We're guarded right now. We think there's some room for improvement, but we're just pretty guarded as far as what we see in 2012. It'll get a little bit better but we're not seeing a robust consumption out of the U.S.

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

Can you please comment on SurePost facilities, magnitude and margins? I'm wondering is this handled in existing sort facilities? Is the order of magnitude below a percentage point of ground volume and I imagine ground margins -- or margins, are slightly lower in SurePost than they are in your own network?

Yes. The concept of unique SurePost facilities is a misnomer. This is another product in the UPS suite portfolio. Virtually all of the SurePost volume comes to us from customers that give us multiple times volume in our traditional networks. So really the only difference with SurePost is the last final mile of lightweight volume going to the post office. But the pickup process, all of our sortation and our feed networks, that really remains in the UPS network. So it's traditional UPS taking advantages of the economies of scale and integrating it. So it is just one product in the suite of products that our customers choose from. And as I mentioned, for every SurePost package we have, a given customer will have 4 or 5 other packages with them.

Our next question will come from the line of Jason Seidl of Dahlman Rose. Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division: Wanted to focus a little bit on your Asia to U.S. number. Obviously, it was a decline of 3%. Can you remind us when we stop lapping the negative year-over-year comps? And also, could you comment whether you think part of this might be a little bit of a shift in terms of some of the near sourcing that we've seen occur down toward Mexico?

The volume out of Asia, really as I said earlier, slowed down in August of 2011. So when we get to August 2012, the comps will get much easier.

Yes. And the Mexico trend does seem to be an interesting one. It's hard to call it a groundswell but clearly, in our supply chain discussions with companies, there is a lot of discussion about should the next unit of capacity be closer to home. It's not necessarily that people are shutting down operations in any area, but there is a lot of interest. I think if you look over the last year or 2, whether it's floods or earthquakes, supply chains are very extended and can be fragile, as Scott mentioned. And so we do see a lot of interest in near sourcing.

Yes. We saw it peak in 2008, when oil got to $145 a barrel. So if oil and energy prices were to peak again, we'd certainly expect to see more of that.

Our next question will be a follow-up from the line of Mr. Tom Wadewitz of JPMorgan. Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division: I wanted to get your comments on cost inflation and productivity within the domestic network in 2012, I don’t think I've heard much of that on the call. And given that you expect positive volumes, could you see your seniority begin to come down and kind of how would you view the per hour inflation when you look at the labor side in Domestic Package in 2012?

Yes. Tom, we do expect those trends. Certainly as the business grows and we're able to add new employees or see turnover as people find full-time jobs that are part-timers today, we will see some benefit. And our wage rates mitigated and moderated just a touch in the fourth quarter. It wasn't a huge driver but it was a slight positive. We do expect to keep comp and benefits somewhere between 1% and 2% increases year-over-year as opposed to volume. So as long as we're able to do that and at the same time manage the yield environments above that, then we're pretty confident we can manage margin expansion.

Again, we are confident that our product [indiscernible] will offset probably half of the wage rate increase, which is consistent with what we've been doing.

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

I wanted go back to the conversation about the tax rate and understanding that it came in lower than you expected because of the international profitability. What was it -- obviously, you adapted during the quarter, you tried to reduce capacity to combat some of the international weakness. It sounds like that didn't have quite the offsetting impact that you were expecting. Can you elaborate a little bit on that and then just help us think about of how you think that will play into the New Year and how things will improve during 2012?

Yes, Gary, sure. Yes, the impact of our year-ending tax adjustment did reduce earnings by about $0.03 versus what we had guided to. As we said, one of the primary areas is, as we rolled up our profits from around the world in the 200 countries we operate, certainly, the lower international profits are taxed at a lower rate. Plus, the U.S. had a very strong quarter. So the U.S. rate's just about the highest in the world, so you've got a weighted average mix that drove our rate up and did impact profits by $0.03 or $0.04 a share or so. It's just part of the normal mix of business. Clearly, we're doing a lot of work to improve the international. We do expect to see profits up, approximately 10% next year. So we still feel great about the International business, but the tax accounting can be challenging when you've got dramatic changes in mix.

And always, in the fourth quarter, Gary, we true up to returns we've filed from the prior year also, which results in some adjustments. And unfortunately, this fourth quarter, they went the wrong way.

Our next question will come from the line of Mr. Art Hatfield of Morgan Keegan. Arthur W. Hatfield - Morgan Keegan & Company, Inc., Research Division: I'm sorry. My follow-up has been answered.

And due to time constraints, our last question will come from the line of Mr. William Greene of Morgan Stanley.

If you look at what you did on rates in 2011, I think they were basically in line with your guidance sort of in this 2% to 3% range. But I think it also, correct me if I'm wrong, I think it benefited from some unique changes, things like dim weight, if I remember correctly or maybe I don't. So can you just clarify sort of are there any unique attributes to the rate changes for 2012 that we need to keep in mind when modeling?

There's always moving -- multiple moving parts within the rate structure, Bill. I mean dim weight was a visible one, but it wasn't material outside the scope of normal adjustments we do for rates. So we expect a fairly typical rate environment for the coming year. We did announce our rates for both air and ground last quarter, and do expect base rates to remain in the 2% to 3% level. The guidance, really, is just that with this changing mix and the influx of lighter weight e-commerce packages that's coming in at a greater-than-expected rate, the top-level rate may look a little lower than that. But if you get to the bottom of it, the core rates will remain strong.

Yes. The yields, you mean, right?

Right.

I would now like to turn the floor back over to your facilitator, Mr. Andy Dolny.

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

Thanks, Andy. We finished 2011 on a strong note with an exceptional peak season. UPS produced strong Domestic Package margins in the fourth quarter. In the period we've talked about where e-commerce and B2C dominated our growth, we've been able to adapt and we'll continue to adapt our business to meet the demands of the marketplace. As Kurt said, despite a mixed economic outlook for 2012, we expect earnings growth to be in line with our long-term targets. We look forward to another record year. Thanks so much for your time today.