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Operator
Good morning. My name is Shwana and I will be your conference facilitator today. At this time, I would like to welcome everyone to the UPS Investor Relations third quarter 2007 earnings conference call. (OPERATOR INSTRUCTIONS)
It is now my pleasure to turn the floor over to your host, Mr. Andy Dolny, Vice President of Investor Relations. Sir, the floor is yours.
- Vice President of Investor Relations
Good morning everyone, and welcome to our earnings call. As you probably know this is my first as, Vice President of Investor Relations, at UPS. Over the next few months, I'm looking forward getting to know all of you. Shortly Mike Eskew, our CEO, and Scott Davis, our CFO, will discuss third quarter results and our future expectations. But before they begin let me cover the Safe Harbor language. Some of the comments we'll make today are forward-looking statements that address our expectations for the future performance or results of operations of the Company. These anticipated results are subject to risk and uncertainties which are described in detail in our 2006 Form 10K and 2007 Form 10Q reports. These reports are available on the UPS Investor Relations website, or from the Securities and Exchange Commission. Today's call is being webcast and will also be available on our investor relations website.
I'm sure you've noticed there was a charge in the quarter for restructuring a repair business and exiting a specialized road business in France. The activities of the road business were neither scalable nor core to our supply chain services. The pretax charge for the quarter was $46 million, or about $0.03 per diluted share. In their remarks today, Mike and Scott will focus on results from operations excluding this charge, since we believe these results more accurately reflect UPS's true performance in the quarter. Now to begin our review I'll turn the program over to Mike.
- CEO
Thank you Andy and good morning everyone. To most of you the third quarter of 2007 was just another three months in the annual business cycle. However to us at UPS, it was a milestone. On August 28th, we celebrated our 100th anniversary. It was time for us to reflect on our history and heritage, our successes and failures, our challenges and transformations. But more than that, it was a time for reinvigoration to imagine where we will go from this threshold, where innovation might take us over the next 100 years. Wherever that might be, I know we're prepared, because the principles on which this Company was founded will continue to guide us whatever the future brings.
The third quarter was historic not only for our Centennial celebration, but also for a first in our 80 year history with the Teamsters, reaching a hand shake agreement well ahead of July 31st, 2008 expiration date of our current contract. This is a testament to a lot of hard work by UPS and the Teamster leadership. This is a fair contract from many perspectives. It enables UPS to adapt to the changing business environment, to respond to the needs of our customers, to aggressively grow the business, and to continue to create opportunities for our people. The contract obviously includes increases to wages, healthcare and pension plans. It also allows UPS to withdrawal from the Central State's multi-employer pension plan and establish a single employer plan for this group of employees. UPS will make a one time pretax payment of $6.1 billion in connection with this withdrawal. The net after tax amount will be approximately $3.9 billion. We'll make this payment in the fourth quarter upon ratification of the contract. The ratification process has begun, and should conclude in December. If ratified the new contract will run until July 31st 2013. Both UPS and the Teamsters leadership whole heartedly endorsed the contract and we're confident the majority of our employees will support it as well.
Turning now to another bright spot in the quarter. A year ago, I explained the issues surrounding the Supply Chain and Freight segment. I outlined the efforts to address the problems in each of these business units. We needed to make some tough but necessary decisions and I'm pleased to say today that the results speak for themselves. For the first nine months of 2007, this segment has improved operating profit by almost $250 million. All of the UPSers involved in making this happen are to be complimented for a job well done. There is, of course, more to do to accelerate revenue growth, but clearly we're headed in the right direction, and I'm encouraged by the progress that's been made.
As you know a week ago, I announced that on December 31st, I'll retire from the position of, Chairman and CEO, of UPS. In addition to introducing Scott as my successor we also shared some changes in our Management Committee. I've been working with the Board on this transition for over a year. The announcement highlighted one thing very clearly, the strength of UPS is in its people. We have great bench strength with capable Managers at the ready, to take on positions of increased responsibility. I'm confident this talented Senior Management team will lead UPS to even greater heights than we've seen so far. These are exciting times to be at UPS. I also want to personally thank all UPSers, our customers and shareholders, for their support. It's been an honor for me to know and work with you throughout my career, and in particular in the last six years. Now I'll turn the program over to Scott for a review of the quarter and insights into the remainder of the year.
- CFO
Good morning, everywhere. UPS turned in strong results for the third quarter. Earnings per share were up over 9%. Operating profit increased more than 11%, with all three segments showing profit improvement. In consolidated operating margin improved 90 basis points to 14.4%. Before I discuss results, let me share our thoughts on the U.S. small package market, which has been growing slower than the economy. This was again the case in the third quarter. We believe however that market trends are starting to improve slowly. Economists estimate that industrial production numbers bottomed out the third quarter and will begin recovering in the fourth. Offsetting this somewhat is consumer spending. Retail sales growth is expected to remain weak and is a wildcard going into the holiday shipping season. Looking at the economy, experts anticipate GDP to grow about 2% for the year with industrial production about the same. It remains to be seen how quickly the U.S. economy will return to long-term growth trends.
So much for the economy, now let's get to our results. Starting with U.S. package operations. As we told you, we expected a slight increase in package volume this quarter. In fact volume increased almost 1% with gains in ground volume more than offsetting the slight decline in error. Revenue per piece remained firm. Ground revenue per piece was up 2.4%, with a slight negative fuel surcharge comparison. Air revenue per piece was down. However, adjusting for the year-over-year change in fuel surcharge, air revenue per piece actually improved. Our U.S. operations team adjusted well to the low volume growth levels, as evidenced by the segment's 16.3% operating margin. In this type of challenging operating environment, cost control becomes particularly important. We did a good job of controlling semi-variable costs, which make up 30% to 40% of our domestic costs structure. We focused on reducing costs in all areas of discretionary spending.
Similar to last year, domestic results were positively impacted by our safety efforts and their effects on worker's compensation expense. In the quarter we realized a year-over-year improvement in worker's compensation expense of about $30 million. Our people have made major strides in this area. Work-related injuries have declined by about 50% since 2002. UPSers are to be congratulated for taking health and safety so seriously in their day-to-day activities. We're also very pleased with across the board service improvements in the quarter, including gains in industry leading on-time deliveries. Such improvements show up in improved revenue and variable cost savings and filter through to the bottom line. At UPS, the pursuit of cost improvements is always a focus. This mindset will remain unchanged.
Now for our international business. Once again, this segment turned in good results. Operating profit increased over 10% to $428 million, with operating margin a healthy 16.9%. Export volume remains strong, well ahead of market growth rates. Asia and Europe reported double-digit volume increases, and U.S. export volume increased at a mid-single digit rate. During the quarter, UPS put up another around the world flight which supports our long-term growth plans. This flight along with higher fuel expense caused a slight decline in the international operating margin.
In the quarter, UPS also received the authority to operate six daily flights between the U.S. and Nagoya, Japan in addition to our daily service to Tokyo and Osaka. Nagoya offers UPS significant opportunities to continue expanding our business in Asia. We will connect these flights to our new air hub in Shanghai on which we began construction in the quarter. The new hub will link all of China to our international network with direct service across the globe. Just after the quarter ended, UPS introduced two industry firsts for international shippers, Paperless Invoice and international returns. To be launched in January, these new products will make it easier for our customers to expand their businesses to new markets around the world.
Now for the Supply Chain and Freight segment. As Mike said, we're very pleased that this segment reported a profit increase of $117 million in the quarter and approximately $250 million year-to-date. Third quarter profits significantly improved in each of the main business units. Forwarding, logistics and freight. Forwarding and logistics increased revenue 4.7%. The forwarding operations are beginning to show results from enhanced revenue management, improved asset utilization and better customer service. In particular, international air freight posted volume and revenue gains while improving yields and profit. Our air forwarding volumes are now approaching market growth rates and we're confident that this trend will continue.
Logistics also performed well as a result of revenue management, cost reduction initiatives and selective targeting of new accounts. UPS freight posted shipment, revenue and profit gains in a very difficult LTL environment. Shipments were up over 13% continuing three quarters of accelerating volume growth. LTL revenue increased over 12% to $521 million with regional, interregional and long haul each showing double-digit gains. 60% of revenue growth is from existing UPS customers with the remainder coming from new customers who are attracted by our value proposition focused on improved reliability and technology. In addition increasing numbers of customers are using both UPS small package and freight shipment capabilities. We anticipate such traction will continue as we offer freight services to more of our small package customers. We're quite pleased with the turn around in this segment. As we move forward, our focus is on growing topline revenue with improving profitability.
Before I talk about our outlook for the rest of the year, I want to review our financial position. For the first nine months UPS generated over $5.2 billion in cash from operations, invested $2 billion in CapEx, spent $2 billion to repurchase 27.9 million shares, paid dividends of $1.7 billion, and still ended the first nine months with $2 billion in cash and investments. Through the end of the quarter free cash flow exceeded $3.1 billion. After the Teamster contract is ratified, we will initially fund our $6.1 billion withdrawal payment to the Central State's pension plan primarily through commercial paper. To accommodate the borrowing we will increase the authorization for a commercial paper program and enter into an additional backup credit facility. We anticipate that a significant portion of the commercial paper will be replaced with longer maturity debt. Even after this payment, UPS will clearly still be in a financially strong position, with the ability to adapt to changing conditions and opportunities.
Now for our outlook on the fourth quarter. We expect domestic volume to increase, but it will be the slowest fourth quarter growth in the last four years. This stems from what we anticipate will be only a modest increase in retail sales. Pricing should remain firm, and as always, we intend to operate very effectively. Once again, we expect our international business to post good results. Export volume growth should be strong, approximately 10%, with firm pricing and mid-teens profit improvement. The Supply Chain and Freight segment should make more progress in the fourth quarter. For the year, operating margin in this segment should be around 4%, up from the original guidance we gave at the beginning of 2007. For the full year, we have adjusted our planned CapEx down to $2.9 billion from the $3.1 billion originally forecasted. In addition, we expect to deliver adjusted earnings per share for the year between $4.13 and $4.19, in the middle of the range we had set at the beginning of 2007.
UPS has a 100 year history of managing well through all kinds of economic scenarios. We expect this one will be no different. The steps we're taking now, cost containment, service improvements, new products, will result in a stronger organization, ready to capitalize on opportunities that emerge as the U.S. economy strengthens. Before we take your questions, I want to tell you how much I've enjoyed working with you as UPS's Chief Financial Officer. In addition, I want to thank Mike for his vision and leadership of the Company. I take the reigns from his capable hands at an exciting time, and I'm humbled by the confidence he and the Board of Directors have shown by giving me this new responsibility. Now we'd be happy to answer your questions.
Operator
(OPERATOR INSTRUCTIONS) Our first question is coming from Gary Chase with Lehman Brothers. Please go ahead.
- Analyst
Good morning, guys.
- CEO
Good morning, Gary.
- CFO
Good morning Gary.
- Analyst
Congratulations Mike and Scott on the news.
- CEO
Thank you.
- Analyst
Scott, wondered if you could just provide a little bit of color on what's going on, sort of by business segment? Seem to be a lot of concerns out there economically. Are you seeing anything that's troubling? The guidance would suggest that's not the case.
- CFO
Gary, it was still not a surprising quarter for us, the way the economy performed. We, I think we expected somewhat muted GDP growth, and I think year-over-year that numbers going to come in a little over 2%, which was pretty much the number for the year we're expecting. Industrial production I think we expected would bottom out in the third quarter. That appears to be the case, I think most of the economist expect industrial production to improve in Q4. As far as across the markets I think that once again, the service sector probably was the strongest of the bunch. Beyond that, I think the manufacturing was fairly slow. Retail sales, consumer spending is certainly an area of concern for all of us as we go forward. As I said earlier, we expect retail sales to be slow, yet they still should grow in the fourth quarter, as should our package volume. So again, a slow but not a-- not really declining from what we've seen in the past.
- Analyst
And then just quickly as you look within Supply Chain, can you give us a little bit more color on, how these results are being generated. Are you seeing down side on the freight side that you're able to offset at Menlo, or are you seeing upside on both sides of that?
- CFO
Well as we've said earlier Gary that the first half of the year most of the operating profit, all of the operating profit improvement came from the forwarding and distribution side of the business. We expected in the third quarter to have LTL kick in and help on comparisons, and it did. So really all of the businesses in the third quarter showed year-over-year improvements. We're quite pleased with the improvements, in forwarding and distribution, I think seeing the air freight forward, international air freight forwarding revenue grow close to market, was a very important quarter for us, so we're optimistic on that going forward. So across the board, I thought we saw good improvement.
- Analyst
Okay, thanks guys.
- CFO
Sure.
Operator
Thank you. Our next question is coming from Jon Langenfeld with Baird. Please go ahead.
- Analyst
Good morning. Scott, can you just talk a little bit about the semi-variable costs and how long you can keep those under control? And is that something that turns into a headwind here if the environment remains kind of at this 2% type GDP growth?
- CFO
Well Jon I think you've followed us for a long time, and I think year-in, year-out we are doing a very good job of controlling semi-variable costs. That's a big pull, as we said 30% to 40% of our expenses was a big number. We've done it for as long as I've been around here, and I expect for as long as I will be around here, we'll see improvements. We've spent an awful lot of 2007 looking at 2008 and what would be better in 2008. Clearly we talked at the last year's investors conference about the shared services movement that we've got going. That is something that will generate improvements for many years to come. So I don't think we're anywhere near the bottom of semi-varable cost savings.
- Analyst
Okay great. And then your long-term earnings growth that you talked about, the 9% to 14%, I'm assuming you need a better environment than 2% GDP growth to hit that. But if the current environment doesn't change, is mid-single-digit or higher profit growth like you've been achieving here, is that sustainable?
- CFO
I think that obviously we've had a challenging year in 2007 with the economy. Not withstanding that, we're going to hit the middle of our 6% to 10% earnings guidance range we gave you, which isn't too far off the bottom of that 9% to 14%. Clearly on the domestic side of our business growing volume at flat to 1%, puts a lot of pressure on our effective wage rate. We saw last year we averaged probably 1.7% effective wage rate increases. This year, we've averaged about 3.5%. That puts pressure on domestic margins. So you'll see more improvement in earnings performance as the volume-- domestic volume grows. But we're optimistic that with the improvement in Supply Chain and Freight, with continued strength of international package we can achieve those numbers going forward.
- Analyst
Great. Nice quarter, thanks.
- CFO
Thank you.
- CEO
Thanks.
Operator
Thank you. Our next question is coming from William Greene with Morgan Stanley. Please go ahead.
- Analyst
Yeah, hi. Scott, can you tell us how much of the improvement in ground yields came from dim weight?
- CFO
No, we wouldn't quantify. That's just one piece of I think of many of the rate increases we did last year. I mean there's certainly, it contributed, but I wouldn't say that's a primary factor in the ground yield increases.
- Analyst
And so the growth mainly is coming just from underlying list rate increases?
- CFO
Correct.
- Analyst
And when you look at it on a B-to-B or B-to-C basis, I assume the B-to-C is still growing faster than B-to-B is that correct?
- CFO
That is correct. It hasn't grown at the pace in 2007 that we saw in 2006. And we said that's one of the factors in the overall small package market being closer to flat this year. It's still growing faster than GDP, but not the pace we've seen the last four or five years. We expect it will get back to that large growth in the near future.
- Analyst
Oh I'm sorry, so (inaudible) correctly B-to-C is not growing faster than the economy?
- CFO
B-to-C is faster than B to B, not as much of a discrepency as we saw the last couple of years. Okay and then just real quick. The $6.1 billion payment you'll make to Central States, are you going to fund all of that with that? Like in otherwords when you roll it over out of commercial paper, you'll keep all of it on the balance sheet, or you'll just do the post tax portion of it? It'll be, it'll be -- initially, it'll be funded entirely with commercial paper, and then when debt markets are right, we will go out and fund the after tax portion with long-term debt, so about $3.9 billion of it will be funded as long-term debt, likely early next year.
- Analyst
Okay. Thank you.
Operator
Thank you, our next question is coming from Tom Wadewitz with JPMorgan. Please go ahead.
- Analyst
Yes, good morning. And Mike congratulations any the contract and your retirement, and Scott congratulations on being named the new CEO.
- CEO
Thanks, Tom.
- Analyst
Let's see. If you look at Supply Chain, you've seen quite a substantial improvement in '07. Can you give us any thoughts on whether that type of trajectory can continue in '08. Or I guess in terms of margin is 4%, is that a pretty good level to be at for awhile and it's more growth picking up as opposed to further margin expansion?
- CEO
Tom, we did 4%, 6% in the quarter, I think for the year we'll come in at 4%. But, I mean it's been a game of focus and execution, and we really have implemented a number of initiatives. Scott talked about in this talk about revenue management, asset utilization, high tech services and those kinds of things and we're delighted. I think there's a whole lot of upside here, and we think we've got this model going in the right direction. I don't want to put a lot of pressure on Scott and Andy, but I think there's a whole lot more we can do here.
- CFO
We're not satisfied at 4% margins. We've said all along that we need to get our margins into the 7% to 9% level to generate the economic profit we expect out of this segment. And we're going to improve more in 2008 as we move to that 7% to 9% area.
- CEO
And if you look at the LTL segment it's up. The regional the interregional, the long haul, all showed double-digit growth in both shipments and revenue, so I-- and the service is great, so I really-- I'd look for a lot of upside there.
- Analyst
Okay. Great. And then a second question. On the -- there's been a lot of movements in exchange rates. I know you have pretty good leverage to Europe, and I'm wondering -- and also movements in fuel. I wonder if you could just give some comments on the higher fuel prices and also the significant moves in dollars versus the Euro are affecting your business trends and perhaps reported results, as well?
- CFO
Well all three quarters, Tom, have shown the Euro about 10 points above last year. So all three quarters, we've certainly had some favorable variances due to the weak dollar, strong Euro. In the third quarter, we did show benefit from the currency, largely offset by the fuel cost increase we saw, so I think that is a benefit internationally due to the currency, but a lot of it was offset by the fuel prices. Always the fuel surcharges as prices climb quicker, the surcharge takes a while to catch up and that hurts you in the short term, it'll turn around eventually.
- Analyst
Okay. Thank you for the time.
- CEO
Great Tom.
- CFO
Thank you.
Operator
Thank you. Our next question is coming from Edward Wolfe with Bear, Stearns. Please go ahead.
- Analyst
Thank you. Hey congratulations Mike, congratulations Scott.
- CEO
Thanks.
- Analyst
Just a little clarification. Is it a $6.1 billion initial payment on December 31st, or whatever that day in December is, then over what period of time do you receive the tax benefit from it? And what's the interest rate that you're expecting to pay on that $6.1 billion, and then when you flip over to $3.9 billion?
- CFO
Well, the interest rate is going to stand -- in the short term it'll probably be a little over 5% on commercial paper. What the long-term debt markets are at January/February time frame will probably dictate that, but probably in the upper 5% to 6% level is probably a good guess. As far as how quick you get the money back on the tax refund, we frankly got some of it back already, because we didn't make our estimated tax payments in September, thinking we're going to get this deduction. We will make another one in January. And probably you can file for a quick refund, and get the money back in about four months.
- Analyst
Okay. As a follow-up. I think you noted that exports out of the U.S. were only up mid-single-digits below your total export volumes in third quarter, but you expect them to pick up in fourth quarter. Can you talk a little to the weak dollar? And I assume that over time, filling the export and balancing plains could be a positive. Can you talk a little about those trends?
- CFO
Absolutely. The weak dollar certainly should generate more exports out of the U.S. I think the small package market maybe hasn't shown as much of it as the overall export growth has been. A lot of the growth has been Boeing airplanes that type of growth, commodities like grain, that type of thing, although we're seeing, still seeing solid growth in the U.S. small package export market. I think that the fact the you saw our export volume drop slightly a little 10% this quarter was actually more of a U.S. import issue. We've seen very strong growth out of Asia over the last several years, still great growth, in the upper teens this quarter, but that's below the 25% that we saw last quarter. That's primarily U.S. imports being a little weak due to the economy here.
- Analyst
Thank you I appreciate the (inaudible). Congrats again guys.
Operator
Thank you. Our next question is coming from Scott Flower with Banc of America Securities. Please go ahead.
- Analyst
Yeah. Well congratulations to you, Mike and Scott both. Just a couple of quick questions. One is in terms of the export rates, if I look at the currency adjusted rates, they were down about 1.5%. Is that a mix issue? What is going on when I look at some of the currency adjusted export rates on small package?
- CFO
Scott it's very similar I think to what you saw in the last couple of quarters. Rates didn't change much. It's primarily mix. It's the transporter business in Europe is growing at a real fast rate in a shorter distance in lower revenue per piece. You expect Europe to the rest of the world is low due to the strength of the Euro, and as we said we didn't see quite as much growth out of Asia to the U.S. because of the weak U.S. economy. That's long range, high revenue piece product. But nothing other than a little bit of mix switch there.
- Analyst
Okay. And then the other quick question is obviously you talked about sort of nudging down CapEx expectations for this year. Can you give us some sense of is that just going to roll into '08 from a deferral standpoint, or are there some things you actually did diminish in terms of where you wanted to invest in different businesses based on the economic outlook?
- CFO
I think the reduction was primarily vehicles in the U.S. for this year. That's obviously tied to the volume growth in small package market has not grown very much in 2007 lessening our need for the new vehicles. As we go forward, as I said, I guess for a while now, we still expect our CapEx range to be the low end of our normal 5% to 8% revenue spend.
- Analyst
Okay.
- CFO
I don't see that changing dramatically in 2008.
- Analyst
Okay. Well great. Well congratulations again to you both.
- CEO
Thanks.
Operator
Thank you. Our next question is coming from Jason Seidl with Credit Suisse. Please go ahead.
- Analyst
Thank you, operator. Congratulations Scott and Mike. A couple of quick questions. One, Scott, I think you mentioned that international margins were negatively impacted by both fuel and the new flights. If you exclude those two items what would the margins look like?
- CFO
Better. I haven't calculated it out, but certainly that would have had a fairly pretty dramatic impact on the margins.
- Analyst
Would you'd been on par with last year?
- CFO
We would have been.
- CEO
Sure a big piece of it.
- CFO
Right.
- Analyst
Okay. Perfect. And when you give your outlook for the full year for Supply Chain, you mentioned 4% margins. Are you guys including or excluding that charge from France?
- CFO
We'll be excluding that charge from France.
- Analyst
Excluding the charge from France.
- CFO
I remembered we started the year looking at 2% to 3% margins, and last quarter we said 3%, at least 3% so now we're at 4%.
- CEO
Yeah, we're 4% right now. We just hit 4.6%, excluding.
- Analyst
Okay and fuel for the fourth quarter, I mean I'm assuming you're factoring that in, how much of an impact do you think negatively that's going to have on the numbers?
- CFO
It depends on where the cost go in the short term. Clearly by December, with our fuel surcharge numbers going to be up much higher than it's been, due to the fact the fuel prices have been up the last couple of months. Now what I can't tell is fuel going to be $100 a barrel or $70 a barrel by December. That'll drive the impact on P&L, where fuel costs will be. But currently the surcharge revenue is increasing due to the fact that cost have run up the last several months.
- Analyst
Okay. Gentlemen, thanks for the time as always.
- CFO
Thank you.
Operator
Thank you. Our next question is coming from Ken Hoexter with Merrill Lynch. Please go ahead.
- Analyst
Great. Good morning and congratulations as well to both of you. On the -- I don't think you mentioned, on the less-than-truckload side, on the overnight side, did you mention what the revenue per hundred weight had done? It sounded like had you said buyings were up double-digits and revenues--
- CEO
It's up 9.9%.
- Analyst
I'm sorry, Mike?
- CEO
It was up 9.9%.
- Analyst
Revenue per 100 weight was?
- CFO
Yes. A lot of that is the mix of the customers. We've won a lot of mid-sized companies as versus national accounts has helped drive that revenue per hundred weight.
- Analyst
Well if revenue per hundred weights up 9.9%, and tonnage was up double-digits--
- CFO
Tonnage is up 1.9%. Shipments were up 13%.
- Analyst
Tonnage was 1.9%?
- CFO
Weight per shipments down.
- Analyst
Okay. And are you still not giving any contract details? Can you talk about kind of the -- you talked a bit about the employees. Can you talk about wages going forward, wages or benefits?
- CEO
The ballots are out late this week. And we're going to let our people take a look at it before we-- that's been our story pattern, we let the people see it first.
- CFO
I know that everybody out there would like to have more of the details, but as Mike said, really, it's only fair to our people to let them get the ballots and see the details first and make their decisions. After the ratification clearly we'll be able to communicate some of the impacts, financial impacts of the contract to all of you.
- Analyst
Can you tell us if there are any major differences than what we've seen in the past on term of wages and benefits?
- CFO
As we said, we'll let all the ballots be cast, and then we'll share the details with you.
- Analyst
Okay and then lastly, Scott, when we were over in Japan you had said that there was always a need to get more routes into it and get more business, it sounds like you have some more flights going in. Can you talk-- are you going to start increasing spend or capital dollars in Japan to build out that network more?
- CFO
Well clearly we're going-- Nagoya routes will probably not be up and running until summer of next year, it's going to take us a while to get the gateway ready, but we're very excited about the possibilities of the U.S. to Nagoya flights and tying that it into our Shanghai-- new Shanghai hub. So clearly we'll continue to make some infrastructure investments in Japan and throughout Asia. But we think it's going to a great return by doing that.
- CEO
And we've been spending a lot of money in Japan the last couple of years are as we round out that operation.
- Analyst
Okay great. Thank you.
- CFO
Thanks Ken.
Operator
Thank you. Our next question is coming from David Ross with Stifel Nicolaus. Please go ahead.
- Analyst
Good morning, gentlemen.
- CFO
Hi, David.
- Analyst
I wanted to ask a little bit about the growth in bundling. Do you have any numbers for the numbers of customers who currently use UPS freight and brown now versus they used only one of those services a year ago, and what the growth looks like?
- CFO
Well, I think that we talked about on the LTL side that of the growth, 60% came from existing customers and 40% from new customers. Most of those new customers are obviously UPS customers that are adding LTL services. (Inaudible) to quantify, but clearly that is where a lot of that growth, and why we're outperforming the LTL markets so dramatically is the ability to bring this new service to the UPS customer base.
- Analyst
Also on the other operating expenses line item in the quarter, it declined about a $100 million year-over-year, showed a nice improvement. Is that part of the cost reductions you're going after, and just want to know the sustainability of that number?
- CFO
Well it's definitely part of those cost reductions. If you recall last year we had a (inaudible) settlement in the third quarter of 2006 of about $87 million. So you take that out, we were flat to down a little bit, but that was the biggest driver.
- Analyst
Okay.
- CFO
My variable cost savings show up in that line.
- Analyst
Okay. Thank you very much.
- CFO
Sure.
Operator
Thank you. Our next question is coming from David Campbell with Thomas Davis Incorporated. Please go ahead.
- Analyst
Yes. Thank you. This might be the first time that a CFO has been promoted to CEO at UPS. Maybe this -- maybe this means you're going to get better numbers going forward.
- CEO
By the way, it's not the first time David. But you're right, the numbers-- I hope the numbers get better going forward.
- CFO
Expect such, David.
- Analyst
I think it's great news. Congratulations. The -- the bad, bad news and the horrible impact on human life in Southern California with these fires. Do you have any thoughts on what it does business in the fourth quarter?
- CEO
It's a little too early to tell right now. It's -- we've got some folks out of their homes, and we've been watching our people right now, and it's just hard to quantify the business aspects at this point.
- Analyst
Right. And the last question is -- two questions, actually, the third quarter tax rate was low, I thought. Was the fourth quarter -- do you think the fourth quarter will be back up to 38%, or -- ?
- CFO
I think we've been running, David, at about 36.25% tax rate for probably the past year and a half. We think the effective tax rate going forward is 36%, so a little bit lower then we've been running.
- Analyst
Okay and the next question, the $46 million charge in the third quarter, was that in compensation cost?
- CFO
It had been-- $46 million had been mostly compensation and benefits, correct.
- Analyst
Okay.
- CFO
And (inaudible) costs, right.
- Analyst
Okay thank you.
- CFO
Thanks, David.
Operator
Thank you. And our last question is coming from John Mims with BB&T Capital Markets. Please go ahead.
- Analyst
Hey good morning, guys. This is John Mims standing in for John Barnes. Real quickly, I know you've discussed Japan and China, but could you break down, just kind of international business by region, and highlight any pockets of strength, and particularly pockets of weakness you've seen, or where you expect to see the most growth going forward?
- CFO
Well, I think it's been -- we've had a pretty sterling record of strong growth in both Europe and Asia for many years. As we've talked about a lot of times, Europe really since 1997 has really only had four quarters we haven't grown double-digit in the export volume growth , and it showed it again in the last quarter. So we're still seeing strength in Europe. Asia, we expect to see strong growth for many years to come out of Asia. The only -- I guess you could say softness growing out of Asia, upper teens as opposed to 25% the previous quarter. A little softer, but again that's driven by the U.S. imports being a little bit weaker this quarter. But I think going forward we're very confident that around the world we're going to see strong growth. We'd like to see a little better growth out of South America still, but we'll expect that going forward.
- Analyst
All right. Thanks a lot.
- CFO
Thank you.
Operator
Thank you. I would now like to turn the call back over to Mr. Andy Dolny.
- Vice President of Investor Relations
Thank you. To summarize, here are the key points I'd like you to remember. Our financial strength is outstanding. We posted strong third quarter results with earnings per share up over 9%. All three business segments reported profit gains. For the year, we expect earnings per share to be between $4.13 and $4.19. Thank you for joining us today, and we look forward to seeing you soon.
Operator
Thank you. This does conclude today's UPS conference call. You may now disconnect, and have a great day.