聯合包裹運送服務公司 (UPS) 2005 Q4 法說會逐字稿

Good morning.

My name is Denise, and I will be your conference facilitator today.

At this time I would like to welcome everyone to the UPS Investor Relations fourth quarter earnings release conference call.

All lines have been placed on mute to prevent any background noise; and after the speakers' remarks, there will be a question and answer period. [OPERATOR INSTRUCTIONS].

Please note we will take one question and one follow-up question from each participant.

Thank you.

It is now my pleasure to turn the floor over to your host, Ms. Teresa Finley, Vice President of Investor Relations.

Ma'am, the floor is yours.

Good morning, everyone.

Thank you for joining us today.

We're all thrilled with the way we finished 2005.

We're energized and looking forward to the excellent prospects that lie ahead in 2006.

In a moment, Scott Davis, our CFO, will provide insight into our fourth quarter and year end results and comment on our expectations going forward.

Before Scott begins, however, I'll read the Safe Harbor language.

Some of the comments we'll make today are forward-looking statements that address our expectations for the future performance or results of operations of the Company.

These anticipated results are subject to risks and uncertainties, which are described in detail in our Form 10-K and 10-Q report.

These reports are available on the UPS Investor Relations website or from the Securities and Exchange Commission.

This conference call is being webcast and will be available on our Investor Relations website for a few weeks.

Before I turn the program over to Scott, I want to point out several items that affected fourth quarter results in both 2005 and 2004.

In the 2005 fourth quarter we increased our provision for income taxes by 18 million to reflect our year end analysis of the Company's effective tax rate, which was higher than we had estimated earlier in the year.

This equated to a $0.02 reduction in earnings per share in the fourth quarter.

Without this tax increase, UPS would have exceeded our fourth quarter earnings guidance of $0.90 to $0.96 per share.

For 2006, we expect our tax rate will be 36.25%.

In addition, the fourth quarter of 2004 adjusted operating profit excludes a pretax aircraft impairment charge and a pretax pension charge.

Net income for that same quarter excludes the after-tax effect of these two items and excludes net credits to income tax expense.

You can find an explanation of these items on the schedule accompanying this morning's earnings news announcement and on the IR website.

If you exclude the effects of the 2004 items I just mentioned, adjusted earnings per diluted share in the fourth quarter of 2004 were $0.82 compared with the $0.95 per diluted share in 2005.

Scott's remarks about the quarter and full year are based on comparisons with the adjusted numbers in 2004.

Now, I'll turn the program over to Scott.

Thanks, Teresa, and good morning, everyone.

2005 was an outstanding year.

It was a year that we demonstrated who we are and what we can accomplish.

In the U.S., we redirected our efforts, executed our initiatives, and strengthened our position in the market.

Our international business turned in another brilliant year, with exceptional profit growth across all regions of the world.

We also took more steps toward our vision of synchronizing global commerce, with major acquisitions in our supply chain and freight segment.

These acquisitions allow us to bring a seamless, comprehensive suite of transportation supply chain services to our customers.

For the full year, revenue grew over 16%.

Earnings per share increased almost 20%.

Company operating margin extended 30 basis points to 14.4%, improving on an already industry-leading operating margin and we generated $3.5 billion of free cash flow.

In short, an excellent year with balanced financial performance and all segments contributing.

We're quite pleased with fourth quarter results.

In fact, this was a milestone for us.

Our first ever billion dollar adjusted net income quarter.

Let's begin with a review of our U.S. domestic operations.

We ended the year on a high note in the U.S.

The consumer did not let us down.

Use of the internet for holiday purchasing once again supported strong B to C growth.

The manufacturing environment was also favorable.

The result, a decent economy and a robust small package market.

December was especially strong for UPS.

Historically, we experienced one peak day of volume, with almost 20 million packages, but we blew right by that number and experienced four days of volume over 20 million packages the week before Christmas.

And I'm pleased to report that UPSers planned and executed the peak season extremely well.

All products posted significant volume increases, with total domestic volume up 6.2% for the quarter.

Ground volume increased 5.9%, for an additional 691,000 packages each day.

Average daily volumes for next day air and deferred air were up 6.3% and 8.5%, respectively.

Revenue per piece was firm, up 2.7% overall.

The underlying growth and revenue per piece characteristics for the quarter were similar to previous quarters and paid off even more in the fourth quarter when customers especially count on UPS to handle their transportation and supply chain needs.

First and most important, the middle market initiatives we began executing at the beginning of 2005 are driving success.

The realignment of our senior management enabled them to increase their focus on the middle market.

In addition, we accelerated the pace of technology integrations and enhanced our portfolio of services, which produced gains across all product lines.

Other characteristics that affected growth and revenue per piece were, first, B to C is growing faster, which drives a higher mix of lighter weight packages.

Second, a stronger next day market is driving a higher mix of our Next Day Saver product, which has a 3:00 p.m. delivery time and a lower revenue per piece.

And finally, the two and three-day deferred products continued to be driven by an uptick in the businesses services sector, generating new business with lighter weight shipments.

Excellent volume growth, firm pricing, and solid execution resulted in operating profit improvement in the U.S. domestic segment of almost 22% for the quarter.

Turning now to international operations, what an outstanding year.

Profitability at 1.5 billion reflects 28% growth and was the highest the segment has ever achieved.

For the quarter, revenue increased over 18%.

Operating profit was up more than 25% with an operating margin of 19.4%.

Total international volume was up 25% to over 1.8 million packages per day.

Export volume increased over 15% with double-digit growth in the U.S., Europe, and Asia.

International domestic volume, which stays within the borders of countries outside the U.S., increased almost 32%.

Much of this increase was driven by the Stolica and LYNX Express acquisitions in 2005.

However, organic growth of international domestic product remains strong, up 7% in average daily volume.

Total revenue per piece was negatively impacted by currency and a higher mix of domestic business.

During the quarter, we continued to build a foundation for global growth.

We completed the expansion of our air hub in Cologne.

This investment nearly doubled the hub's capacity to 110,000 packages per hour, and will enable us to handle larger aircraft, which increases the efficiency of our worldwide network.

The U.S. domestic and international small package industry is currently very robust and we're seeing great growth in all markets.

The strengths UPS has honed in the U.S. domestic market -- products, technology, brand, service, network infrastructure -- all play an equally important role in meeting the needs of our international customers.

Now for the supply chain and freight segment.

The improvement in annual results was due primarily to the inclusion of acquisitions, a full year of Menlo Freight Forwarding and almost five months of Overnite.

For the quarter, the supply chain and freight segment contributed $43 million in operating profits, primarily due to Overnite's solid performance in the quarter.

Daily revenue for Overnite was up over 15%, tonnage increased 10%, and shipments were up almost 8%.

We are well on our way toward combining the Overnite and UPS organizations.

We expect to realize some net synergies in 2006, but they will be more significant in 2007.

The transition plan includes deployment of technology, sales training, network enhancements, and a brand launch.

Most of the transition plan expenses will be incurred in the first half of this year.

However, we expect Overnite to grow faster than the overall market and add nicely to the segment's profitability.

Our freight forwarding business remained firm, with particular strength in North America air freight and in ocean freight.

In fact, we outpaced market growth rates in each area.

International air freight results declined, in part, due to difficult comparisons with the 2004 fourth quarter.

In that year, international air freight benefited from West Coast port congestion. 2006 should see significant improvement.

Although there will be additional expenses in the first half of the year, we still expect 50 to $100 million in savings in the second half, following the completion of our U.S. air freight network.

The final topic I want to address before turning to our outlook for 2006 is UPS's stellar balance sheet.

Strong cash generation is a defining characteristic of this Company.

Our capital expenditures for 2005 totaled $2.2 billion, about $300 million less than what we had planned.

Some projects we're moving to this year, so our capital budget will be approximately 3 billion for '06.

This is a little higher than in past years, but when averaged with '05, our CapEx should still be less than 6% of revenue, on the lower end of our historical range.

Free cash flow for 2005 after CapEx was $3.5 billion.

We used our cash resources to pay $1.4 billion in dividends, 1.5 billion for acquisitions, and 2.4 billion to repurchase shares.

In 2005, UPS repurchased 33.3 million shares, reducing shares outstanding by 2.6% and we have 1.4 billion authorized for additional share repurchase as of year end.

We finished 2005 with a long-term debt to total capital ratio of 15.7%.

UPS consistently generates strong cash flow from our operations.

Developing the most efficient capital structure is a top priority.

We will continue to reinvest in our business and improve distributions to our shareholders.

Turning now to our outlook for this year.

We expect another year of solid revenue growth of above 10%, boosted by our 2005 acquisitions.

Earnings should increase 11 to 16%, consistent with our historical CAGR.

We should continue to generate strong cash flow and best-in-class return on invested cap.

Let me now give you some insight into our business segments for 2006.

In the U.S., we expect the market to grow slightly faster than GDP and our domestic business should grow at market rates.

We anticipate a more favorable pricing environment than in 2005, since all players have announced solid rate increases.

At UPS, we intend to balance volume growth and margin, while maintaining our market position.

Revenue per piece increases, including the fuel surcharge, should be in line with our historical range.

Our international business should continue the same very strong trends we've seen over the last few years.

We anticipate export volume will grow at double-digit rates across the major regions of the world.

International domestic and pan-European products will become a larger proportion of the total business mix.

We expect to maintain margins in this business at about 2005 levels, while we keep our focus on increasing operating profit.

As is our practice, we will invest in our U.S. and international small package business to grow our competitive advantage.

In 2006, we will enhance our combined small package and freight portfolio, improve productivity, increase the speed of our network, invest in the training of our worldwide sales teams, and continue to build a strong foundation across global markets, especially in Asia, by increasing our brand awareness and investing in our network there.

Now, for the supply chain and freight segment.

As I pointed out earlier, the first half of 2006 will see additional integration expense before we begin reaping benefits in the second half.

The segment should more than double profits in 2006.

Improvements in financial performance in this segment will come from more than integration synergies.

We will strengthen pricing discipline and contract management; increase the premium freight product mix; work toward operational excellence across all freight and distribution activities; and focus logistics opportunities in the high tech, healthcare, and retail verticals, where connectivity across all UPS businesses is strong.

Overall, we do anticipate some headwinds for the Company in 2006 from a number of factors, which include an increase in pension costs resulting from a change in the discount rate from 6.25 to 5.75%.

For the year, the discount rate change will increase pension expense by more than $120 million.

Double-digit increases in both rail expense and in healthcare costs, the adoption of FAS 123R, and finally, negative currency comparisons versus 2005, especially in the first quarter.

Even with the headwinds of currency and integration costs, earnings per share for the first quarter should be between $0.85 and $0.89 compared with $0.78 in 2005.

In summary, we are very pleased with our 2005 performance.

We had an ambitious plan to get the domestic operations back on track, grow the international operations, and integrate two significant acquisitions.

UPSers responded superbly.

Their hard work resulted in another year of record performance and set the stage for an even better 2006.

Now, we'd be happy to answer your questions.

[OPERATOR INSTRUCTIONS].

Tom Wadewitz, J.P. Morgan.

Yes, good morning, Scott.

Good morning, Teresa.

Good morning, Tom.

Hi, Tom.

Let's see, I have a question for you on the momentum in the volume side.

We don't have exactly comparable quarters in terms of FedEx versus you, but it looked like your volume growth pace was faster than FedEx for the first time in a while, and I'm wondering if this is something that you think you can grow above the market for another couple quarters, given some of the specific initiatives that you have had in place, middle markets and so forth, or is that something that December was just particularly strong and we should just really think about you growing in line with the market?

Well, Tom, yes, thanks for the question.

We're very pleased with the fourth quarter performance.

Probably the best volume growth since the 2000 year for the Company.

We really had a strong November and December.

Trends were strong.

January, we're really seeing some of the same trends for the first three weeks of January.

I would think that you'll probably see outperformance in the first quarter of the year, but our long-term objective is to grow at the market.

So I think you'll see some of this momentum for the fourth quarter carrying into the first quarter.

Hey, Tom, I would add that our position on the market during the second half of the year and towards the first half of next year, that the overall market is growing stronger than GDP.

Okay, great.

And then I guess a follow-up on that, can you give a little further color on the pricing and how you feel that would have evolved in 2005?

It sounds like you're actually a little more constructive on pricing environment in '06, but I'm wondering if you can give a little further color on how that evolved during 2005 in terms of the competitive environment.

Well, I think it was a rational pricing environment during 2005.

I think earlier in the year we talked about there are certain customers and certain lanes that each of the competitors and ourselves are more aggressive in because it fits your network.

You'll still see some of that in 2006.

But I think in general, all the competitors have done higher than the high end of the normal range of rate increases.

The floor of the market, the post office, just did a 5.4% increase.

So I think in general, you're going to see a little better pricing market going into 2006.

You got to look at the overall revenue per piece increase too to evaluate it.

We think that you got to look at the fuel surcharge in conjunction with the rate increase because as fuel surcharges got very high, it could impact incentives you gave on the basic rates.

So the 2.7% revenue per piece increase we saw in Q4 was strong, and we expect to see strong increases going forward.

Okay.

Thank you for the time.

Thanks, Tom.

Ken Hoexter, Merrill Lynch.

Hi, great.

Good morning.

Scott, if you could just expand a little bit, I think you threw out there that the supply chain side -- I think you might have mentioned excluding Overnite and Emery, was down year-on-year.

Can you talk a little bit about that, what you're doing to get that to improve going into '06?

Yes, Ken.

I think we had said all along we expect to see the major improvements in supply chain come middle of '06 when we have the domestic heavy freight network complete and make the move from Dayton to Louisville in our other hubs.

Overall, in the fourth quarter, we're somewhat flat in SCS versus a year ago and that's continued integration costs on Menlo, which we expect another 20 million in the first half of '06, continue to make investments in technology.

International air freight, we talked about, the comps were very difficult versus the fourth quarter a year ago, but overall, we see some good trends ahead and I think the second half of the year, you'll start seeing improving margins.

Okay, great.

And then in the next day air, some very solid -- some solid volumes.

Is there any change in the pattern there?

Are you getting smaller package shipments because of the issues from DHL?

And just -- I want to ask just one thing and I think I missed it.

Are you renaming Overnite?

Did you say that?

Well, we're evaluating the rebranding of Overnite and that will come.

There's likely there'll be some rebranding this year in Overnite.

As far as the Next Day product, the momentum is very strong there.

We're seeing some good, solid growth.

The yield issues there are tied to the same issues we talked about the last couple of quarters.

The Next Day Saver product is still growing at a very fast pace.

That's a product that's delivered at 3:00 in the afternoon instead of 10:30.

That product is discounted probably 10 to 15% versus the a.m. product.

That's what's driving the yield issues.

But the services market, which uses that Saver product, is extremely strong right now, especially good first quarter in that product.

Very helpful.

Thank you.

Ed Wolfe, Bear Stearns.

Good morning, Scott.

Hi, Ed.

Just talking about that volume and yield, that trade-off that you've been talking about, clearly in the last year you've been focused on volume.

We haven't seen the yield and operating leverage as a result of that.

Can you talk a little bit in the quarter how much of the volume, first of all, was related to the change in accounting and second of all, talk a little bit about strategically the process of, now you got the volume, how you go about getting those -- those new customers up to higher rates?

How long does that take?

What's the process like, and how long should we expect to see this play out?

Well, first of all, the deferred revenue calculation was worth about 0.5% to our volume in the fourth quarter.

So not real dramatic.

It was also worth about $50 million, which we estimated to operating profit, .

As we estimated earlier.

As far as the yield, again, the 2.7% overall yield is strong and as I said before, Ed, I think you got to look at it together.

You got to look at the fuel surcharge and the rate together.

I think people try to separate that.

I think as you get into 2006, the basic rate increases, you won't have the bump likely from the fuel surcharge being a lot higher in comparison, but I think we'll do better in keeping the rate increase as we go into '06.

It's always a balancing act.

We want to grow the business.

We've said we want to grow the business at market, domestically, and that's our objective and we'll balance the two.

I guess what I'm saying is, what's giving you that confidence that you're going to be able to, if the fuel stabilizes really get that on the rate side?

Are you getting that sense from customers at this point?

Is it early enough to tell that, or is it just generally over the last couple of years, you've been able to get at a total when you look at fuel, when you look at rate, a certain amount and you think you're going to be in that similar range?

I think the value proposition's there.

I think that competitors are offering a value proposition, and I think it's an extremely rational market going into 2006.

As I said before, the rate increase for everybody is on the higher end of the normal range.

I'd be expecting to keep more of that than we have in the past.

Okay, thanks for the time.

I'll get back in line.

Thanks.

Jon Langenfeld, Robert Baird.

Good morning, all.

Hi, Jon.

Good morning, Jon.

The question on just the strong end of the performance -- strong year end performance and how that related maybe to some of your investment spending or your discretionary costs, did the second half of the year change your plan at all in terms of that?

I mean were you able to do some more discretionary spending that you had not planned on doing at the beginning of the year?

No, I think that -- I think that we pretty much kept to our plan, if we're talking about the semi variable arena, I think we kept to our plan throughout the year.

Clearly, when you get into peak season, you stretch your capacity pretty dramatically, so you may not see as much operating leverage in the fourth quarter peak season as you see the rest of the year, because you're out hiring additional capacity, whether it's rentals, trailer rentals, whether it's vehicles, or whether it's chartered aircraft.

But I think overall that our spending levels were pretty disciplined all year long.

We expect to see the same thing in 2006.

And how surprised were you -- as the fourth quarter progressed, how surprised were you at how strong the volumes were [for the] domestic --

Well, the biggest question, I think, Jon, when we went into October, was we were concerned -- obviously, it was after Katrina and Rita and we really weren't sure what the holiday season would be like.

So obviously we were pleasantly surprised to see the results we saw.

Clearly, e-tailing played a bigger role again this year, probably made up almost a third of our business in the holiday season.

So we were pleased to see the activity, and there was a question mark in October as to how strong that would be.

Okay.

Great.

Thank you.

Sure.

Jordan Alliger, Deutsche Bank.

Yes, hi, good morning.

Hi, Jordan.

Good morning.

Can you maybe assess how you felt the peak operating fluidity went to you this quarter?

I know given the issues from last year, it would appear that you're certainly dropping down way more leverage to the bottom line in terms of incremental profit dollars for every incremental revenue dollar.

I'm just wondering how much the operational side played into it, let's say, versus just growing the ground volumes by 6%?

We had -- had a very smooth peak season, like we have most years.

Last year was the exception.

I think we did a wonderful job.

The operators did a fantastic job of delivering a lot of packages.

We talked about four days over 20 million, three days over 21 million packages, and the service was fantastic.

We got a big -- package flow really showed up and helped us an awful lot in December, I think.

The -- we added a lot of temporaries this year, lot of temporary helpers, helped in the fourth quarter.

More than normal this year, and I think having a package will let us really add new routes and gave us the flexibility to make these routes more efficient.

In fact, this year I think we actually -- we ran less miles with the 6% volume increase.

A lot of that is due to the package flow technology and having better visibility.

So overall, I think it was a well-run quarter.

Again, I think just to remind you on the results, too, the -- we reported the $0.95, but if you take out the $0.02 tax item that Teresa talked about, you also -- we had a securities write-down of about $16 million in other income, which was -- which involved some government sponsored enterprise securities we invested in, Fannie Mae type investments, that due to credit quality issues lost some value.

So we impaired those in the fourth quarter.

That's worth another penny.

So we really would have been above the range, probably at about $0.98 without that.

So it's a very strong performance, and we did get some leverage you were talking about.

And just a follow-up.

Presumably when you look forward into next year, the hope or the expectation from you guys would be to continue to see leverage on the domestic side.

I guess my question is what do you assess as the key drivers from that?

I assume further rollout of package flow technology, but any other specific focuses there?

I know you've worked on the cost controls in the past.

Was it just the productivity with the volumes?

I think it's a combination of us continuing to control the -- we're going to continue to invest in the business, first of all.

We're always investing in the business.

We've talked about the investments we're going to make, but obviously we're going do more package flow, we'll probably have over three quarters of the drivers deployed by the end of the year.

We have no need for redeployments this year.

I think we learned our lesson in 2004 and did an excellent job of training our people, and saw good results in '05.

So I think it's going to be more of the same.

UPS is continually reinventing itself, getting better, and you'll see that in '06 and ‘07.

Thank you.

Jason Seidl, Credit Suisse.

Good morning, everyone.

Hi, Jason.

If we can just drill down a little bit about -- on the supply chain division, you mentioned there's going to be some headwinds at Menlo in the beginning of the year of about $20 million, if I'm correct.

Can you talk about some of the synergy gains for the full year that you're expecting out of Menlo and if that's changed from your prior guidance?

It hasn't changed at all.

We're looking at still a $50 to $100 million in the second half of the year, once we have the Louisville facility built and move it into the UPS air network.

And in 2007, we're still looking for greater than $200 million of synergies.

So we see a very strong second half of the year in the supply chain side.

Overnite also, we're making some significant investments there.

We're doing a lot of sales training.

We're deploying new technology, and enhancing the network there.

So there'll be a little bit of a drag in the first half of the year.

It'll still contribute good profits, but second half of the year will be better yet. [And you’ll] see more of the revenue synergies in the second half of the year with Overnite.

The 50 to 100 million, now, that's purely from Menlo, right?

That's Menlo.

Yes, exactly.

Menlo will more than double the profits in that segment this year.

Have you given us a number on what you expect from Overnite in terms of drag, and then maybe a little bit of accretion?

Well, I would say just ballpark, for the year, I'd say the incremental benefit from Overnite is going to be in the $0.05 range.

$0.05.

Okay.

Fair enough.

And if I could stick on Overnite for my follow-up question, you kind of hinted that there's probably going to be a little bit of the integration this year.

Does that include bundling of services or are we going to have to wait 'til '07 'til you guys bundle that product?

On Overnite?

No, I think we're going to see some of that in the latter part of this year.

We've done a lot of test sites and bundling of sales throughout the country already.

We're seeing great results.

We'll be applying those results into the second half of the year.

So I think you'll see some enhanced revenue out of Overnite starting third quarter.

Okay.

Thank you.

James Valentine, Morgan Stanley.

Great, thanks.

Very impressive results here.

Thanks, Jim.

The one thing that came in different than I guess I was expecting was in your other operating expense item.

If we take out the aircraft impairment and the pension costs from last year in the fourth quarter, that line item looks like it was up about 12%.

And that's not too bad relative to your revenue, but I thought based on some of your cost cutting efforts announced earlier in the year, that you were going to -- early in '05 that you were going to see that line item go down.

And I'm wondering, was there anything in the fourth quarter, like a -- either a catch-up or just kind of shoring up a reserve or something going on that could have made that number a little bit above what would be a more sustainable type run rate.

I think the biggest move there is primarily the addition of Overnite, LYNX, and Menlo, frankly, for the fourth quarter.

There's really nothing out of the line.

I think we did a very good job achieving our goals in the semi variable cost area.

So I think you've just got to look at that as the addition of the acquisitions this year.

Okay, great.

And the other thing that I guess I -- kind of stood out when you were going through your formal remarks, you made some reference about the -- you're going to be looking at the optimal capital structure.

And I wasn't sure if that's referencing just fine tuning and, or if this is something bigger.

I mean at least talking to many institutional investors when they look at your capital structure, they say your company could take on a lot more debt if you wanted to and so I'm just trying to understand, is that statement potentially signalling that there's going to be a bigger change maybe in '06 or '07?

Well, I think we are saying that we're very serious about an optimal capital structure.

And I think we have -- certainly we've done a pretty good job in the last year and a half, two years of increasing distributions and spend on acquisitions, reinvesting in the business.

I think as we go forward, clearly we're going to keep that trend going.

I think you'll see continual reinvestment and increased distribution.

So is there anything radically different about that versus what we said in the last year?

Not radically different, but we're focused on it.

Okay, great.

Thanks.

Thanks, Jim.

Scott Flower, Citigroup.

Good morning, all.

Hello, Scott.

And I know that you hit it in different pieces.

I guess I wanted to maybe come at it holistically.

Could you give us some sense in fourth quarter and then for all of '07 what the currency headwind/integration costs were?

Because I'm just trying to piece together, because there's lots of different moving parts between Menlo and the international division and Overnite.

And I'm just trying to get a sense of integration costs and currency headwinds, and how I should think about those as they affected fourth quarter and then prospectively what you're thinking as we look in total between those two for '07.

Well, for '06, the integration costs were primarily in the Menlo side, probably another 15 or $20 million in the quarter, totaling about $50 million for the year.

We think in total, the integration costs on Menlo are going to be about $70 million as we move forward.

Currency related, we did have about a $20 million drag in the fourth quarter on currency, which impacted international.

As we move forward to 2006, there's going to be some challenges on currency.

We have done some hedging, but last year, particularly in the first quarter, we had a $40 million currency gain when the Euro averaged 1.31.

We've gone out and hedged that currency for this first quarter of '06 at 1.275, so there's a slight drag there of maybe $10 million.

Our hedging philosophy has been to hedge slightly out of the money so we won't have dramatic comps.

As you move throughout the year, though, the comps get easier.

So I think you'll see the biggest drag, biggest impact on the first quarter.

Okay, and was there any integration costs on Overnite?

I know that the networks, per se, won't, but in terms of training or incremental costs over the last quarter, in terms of Overnite and bringing that into the fold?

We certainly have invested in training.

As I said earlier, Scott, we've had some beta tests out in the field on the bundling effort.

I think you'll see that the major training expenses in the first half of this year.

We'll see more of the benefits in the second half of the year.

Okay, and then just one quick follow-up.

Are you seeing anything in LTL pricing obviously between Con-Way and some of the other discussions, as well as sort of -- or third party looks at LTL pricing?

It seems as if things are becoming more competitive there and yet you talk pretty positively about what you saw at Overnite.

I'm just trying to get a sense of how you see yields in the LTL business.

We had a -- we had a solid quarter.

We had positive yields and it was a tougher comparison for us because last year the fourth quarter, Overnite pared a lot of the low yielding volume away.

We still showed positive yield increases in the fourth quarter.

Going forward, we think it's a good environment.

We -- we think the UPS brand, the UPS value proposition, and the fine Overnite network is going to result in strong yields going forward.

Thank you.

Sure.

John Barnes, BB&T Capital Markets.

Hi, good morning, guys.

Hi, John.

One housekeeping item, just the security write-down, what line item did that hit?

That would have been in the investment income.

Okay, very good.

So most of that decrease, 16 million of that $17 million decrease was that write-down.

Okay, very good.

That's what I thought.

I just wanted to make sure I had the right line item.

On your CapEx breakdown, on the 3 billion in '06, can you give us a breakdown, just a little bit more detail as to where you're spending it and then could you also kind of give us an idea how much is carried over from '05?

I'm just trying to get order of magnitude, how much you kind of delayed out of '05 and into '06.

It'll be 300 million carried over.

We would -- our original plans was to spend 2.5 billion in '05 and 2.7 billion in '06, and the increase in '06 was driven a lot by Overnite and some of the acquisitions that we need to add to their fleets.

So that was the biggest driver.

As far as the mix, it's going to be pretty similar to what we've seen in the past, about 45% aircraft, 30% buildings facilities and the balance split between vehicles and IT.

Okay, very good.

Nice quarter.

Thanks for your time.

Thanks.

David Ross, Stifel Nicolaus.

Good morning, Scott.

Good morning, Teresa.

Good morning, David.

Hi, David.

Question on the international package segment.

Netting out currency fluctuations, how high should we see that margin get over time?

Last several years we've seen it grow from 7% to 13 to 17 to 19, and actually if you net out that $20 million currency headwind you guys were talking about, it was over 20% this quarter.

Where should we be looking for that to go?

Obviously [with growth -- has] costs, but pricing also seems fairly strong in that segment.

What I would say to that is our -- we don't think we're going back on the margins.

We think that the margins we've attained have come through the economies of scale in the network and we're not going backwards.

But again, our focus, as I've said several times is to maximize international operating profits, so it's a balance between growing that top line and maximizing the operating profits, so I'm not sure that -- what the exact sweet spot is there, whether it's 19%, 18%, 20% margins, but we'll maximize operating profits and that'll be our objective.

Okay.

And then one follow-up, you mentioned the rail pricing is expected to go up double digits for you this year.

How has service been with the rails?

Well, truthfully, the service has been not great.

They're all working on improving the service, but there are still capacity issues out there and challenges.

Okay.

But obviously they're in a pretty good position with the demand coming from the ports right now.

So it's -- it's a tougher negotiating position.

Understandable.

Thank you very much.

Thanks.

Helane Becker, Benchmark.

Thank you very much, operator.

Thank you, Scott, for taking my question.

Hello, Helane.

So could you just comment a little bit about China?

I think you get more routes starting in March and could you just talk a little bit about how business was in that market specifically and what your plans are for this year?

Absolutely.

Asia, again, had a very strong quarter for us growing 20% on export volumes.

So once again, an outstanding, outstanding quarter.

We do get additional rights in March.

I think we're going from 18 frequencies to 21 frequencies.

We're going to add two to Shanghai, one to Guangzhou, I think as we move into that.

Business in China is still extremely strong.

We saw the Chinese GDP numbers come out yesterday.

Numbers are very strong, 9.5% growth.

That's not slowing down at all.

So we don't see anything getting in the way of this growth for many years to come.

A big market, a lot of opportunities, we'll continue to offer a great value proposition with our network.

And anything new on Sinotrans?

How's that coming along?

It's great.

We've taken -- we did the acquisition over a year ago now.

We've taken control of the 23 operating locations.

We serve over 200 cities and 80% of the GDP of China.

It's worked out very well.

We're able to control the quality of the service offering for UPS and puts us in an excellent position.

Great.

Thank you so much.

Thanks, Helane.

Okay, thank you.

We're excited about the prospects we see for each of our businesses.

The momentum that built in 2005 remains strong and we're looking forward to another excellent year for UPS.

Thanks for joining us today, and we'll look forward to seeing you soon.

Thank you.

This does conclude today's UPS Investor Relations conference call.

You may now disconnect your lines and have a wonderful day.