聯合包裹運送服務公司 (UPS) 2007 Q4 法說會逐字稿

Good morning.

My name is [Sharona] and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the UPS Investor Relations fourth-quarter 2007 earnings conference call.

All lines have placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer period.

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

Thank you.

It is now my pleasure to turn the floor over to your host, Mr.

Andy Dolny, Vice President of Investor Relations.

Good morning, everybody, and thanks for joining us today.

In a moment, Scott Davis, our CEO, and Kurt Kuehn, our CFO, will discuss fourth-quarter and full-year results and comment on our expectations going forward.

Before we proceed, I would like you to mark March 12 in your calendars.

On that date, we will host an investor conference in New York with some of our senior management team.

In addition to Scott and Kurt, we will have David Abney, our Chief Operating Officer, and Alan Gershenhorn, Senior Vice President of Worldwide Sales and Marketing.

More details will be forthcoming and we're looking forward to seeing you there.

Now I will review the Safe Harbor language.

Some of the comments we will 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 10-K and 2007 10-Q reports.

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

Additionally this conference call is being webcast and will also be available on our Investor Relations website.

Before I turn the call over to Scott, I want to comment on our financial statements.

As you know, a component of our recent labor agreement with the Teamsters was UPS's withdrawal from the Central States Pension Plan.

As a result, following ratification of the contract, on December 26 we paid $6.1 billion before taxes to that plan.

The entire payment was expensed to the U.S.

Package segment in the quarter.

A new, jointly-trusteed plan has been established that preserves pensions and restores benefits that were previously reduced for employees in the Central States Plan.

Despite the cost of restoring benefits, the new plan will be cost-effective.

Resolving this issue brings stability to our pension planning and is expected to minimize our future expenses.

On a stand-alone basis, withdrawing from the Central States Plan is positive from a net present value perspective.

The labor agreement addresses all the issues we identified as significant when negotiations began.

It does so with cost implications to UPS very similar to the 2002 contract, including the payment to withdraw from the Central States Pension Plan.

It gives us the flexibilities we need to remain competitive in the marketplace.

There is a presentation on our Investor Relations website provides more detail about this contract.

When Scott and Kurt discuss fourth quarter results today, they're referring to results from operations excluding the impact of the charge to withdraw from the Central States Plan.

Reference to full-year results also excludes the impact of this charge and these other adjustments made in previous quarters -- an impairment charge of $221 million on the accelerated retirement of certain aircraft; a $68 million charge for the special voluntary separation opportunity offered to some corporate employees; and a $46 million charge related to the restructuring and disposal of a French operation in the Supply Chain and Freight segment.

A reconciliation of GAAP and adjusted results can be found with the schedules accompanying our announcement this morning, as well as on the Investor Relations website.

Now it is my pleasure to turn the program over to Scott.

Thanks, Andy, and good morning, everyone.

2007 was a good year for UPS.

In fact, the Company posted record results in terms of revenue, operating profit and EPS despite the sluggish economic conditions in the U.S.

This was due to the strong performance of our international small package operations, as well as excellent contributions from the Supply Chain and Freight units.

Both segments produced healthy profit gains.

In the U.S., profits did decline, but overall, we operated well in an economic environment which worsened as the year progressed.

Our operations team raised service levels to new highs and continued our focus on cost control.

Now let's take a look at what we said 2007 would bring and how we actually performed.

We expected the global small package market to expand moderately.

That is what happened, with international strength offsetting slow growth in the U.S.

We targeted a 15% operating margin in our Domestic Package segment and it came in at 15.4%.

We said world trade should remain strong, supporting a robust international small package market.

We expected a 10% increase in export volume and that is what happened.

Our international small package operations performed well, with profit increasing to $1.9 billion.

Operating margin came in 18.5%, just slightly below our guidance at the beginning of 2007.

These are still results to be proud of.

We anticipated that the Supply Chain and Freight segment would turn the corner on profitability, with performance picking up in the second half of the year.

This is what happened, with performance improving sooner in the year than anticipated.

This segment saw profit leap $330 million in 2007.

While we targeted at two to 3% operating margin, we actually achieved almost four.

For 2007, we came within the middle of the earnings range we had set a year ago, achieving 8% growth, or earnings of $4.17 per share.

I am pleased to say that, once again, we did what we said we would do.

I'd like to thank UPSs around the world for their efforts in a difficult environment.

In addition, we celebrated the Company's 100th anniversary, reached an early labor contract with the Teamsters and developed a new financial policy to enhance shareholder value.

All in all, 2007 was a busy year in which we laid the groundwork for future success.

Looking forward, UPS has always invested for long-term growth and 2008 will be no different.

Granted, economic uncertainty will probably make 2008 more challenging last year, however UPS has a long history of growth in many different economic environments.

Building on the foundation already in place, we will continue to expand or global presence.

These investments will take the form of new products and services, technological innovations and infrastructure expansion.

For example, earlier this month, we simplify our international and North American airfreight shipping portfolios.

As a result, we created a unique global supply chain offering.

On the technology front, the 2008 release of WorldShip offers the ability within a single application to process small package, air and ground freight shipments.

This capability, combined with the new reliability guarantee for UPS freight, and improved service and technology are attracting new freight customers from virtually all of our major competitors.

On the international front, we just introduced two new industry-leading products -- our Paperless Invoice and international returns.

We will continue investing in growth opportunities around the world, including service enhancements, new or expanded air hubs and expansion in China, where we are strengthening our presence through sponsorship of the Beijing Olympics.

We remain bullish about the long-term dynamics driving our industry.

Globalization, direct-to-consumer shipping, just-in-time inventory, outsourcing supply chain management, these trends are firmly in place and all play to the strengths of UPS.

Now for comments on segment performance for the fourth quarter and insight into our 2008 expectations, I'll turn the program over to Kurt.

Thank you, Scott, and good morning, everyone.

Before I begin, I would like to say that I'm looking forward to working with all of you in my new role at UPS, both those of you that I worked with when I was part of Investor Relations group in the past and those that I haven't a chance to meet yet.

For the fourth quarter, diluted earnings per share were $1.13, up 8.7%.

A healthy 6.1% revenue gain combined with a moderate 3.4% increase in compensation and benefit expense and good semi-variable cost control all helped to offset the substantial rise in fuel costs during the quarter.

Results from the quarter also benefited from a lower effective tax rate of 33.8%, compared to 35.4% for the year.

Let's now begin our review with the Domestic Package operation.

Overall, volume increased 1.4%, in line with expectations.

Ground was up 1.5% and Next Day Air improved 2.2%.

Pricing remained firm, with revenue per piece up 2.3%.

Deferred and ground revenue per piece grew around 3% each.

Next Day Air was flat as once again we saw strong growth in our saver products and a greater percentage of lower weight packages during the holiday season.

Effective planning, execution and cost control helped offset some of the impact of rapidly-rising fuel costs and wage rate increases, resulting in a 14.5% operating margin for the quarter and 15.4 for the full year.

Each year, our peak shipping period becomes more compressed than in the past.

In the seven days prior to Christmas, we saw volume increase dramatically; however, in contrast, the first couple of weeks of December were significantly below plan.

This lighter volume challenged our ability to efficiently use the additional assets and people we deploy each year to handle holiday shipping.

Operations functioned very smoothly in spite of the challenge the winter months often bring.

Our integrated network provided great flexibility.

We used our ground network to move many of our express packages and we operated a full global air network on the Sunday before Christmas to provide our customers with outstanding service.

The bottomline in December, all of our customer service metrics improved over prior-year results.

Turning now to the International Package segment, daily export volume increased over 12%, with double-digit improvements in Asia, Europe and the U.S.

Revenue was up over 17% with a 19.4% operating margin.

Pricing remained firm, with revenue per piece, adjusted for currency, increasing 4%.

Profit was somewhat impacted by fuel prices that increased rapidly during the quarter and the around-the-world flight that was launched in July.

In the quarter, we continued investing to extend our international presence.

We expand our reach in India through an alliance with AFL.

This relationship will promote UPS's international express delivery service to AFL's customers and function as a domestic service provider across India.

Turning now to the Supply Chain and Freight segment, revenue increased almost 8% and operating profit was $82 million, resulting in an operating margin for the quarter of 3.7%.

Forwarding and logistics revenue increased 6.4%.

Service reliability improved across all products and customer churn continued to decline.

UPS Freight post another good quarter.

LTL revenue increased nearly 13%, with daily shipments up 7.8%.

Since this is well beyond industry growth, UPS Freight clearly continued to take market share.

Investments and operational technology have helped move the need one performance improvement and better operating performance and continued investments in customer-facing technology are clearly attracting new business.

For example, Quantum View Manage continued to bring in new customers for both freight and small package shipping.

In short, we are very pleased with the progress this segment has made in 2007.

Next I want to comment on UPS's financial position at year end.

Strong cash generation is a defining characteristic of the Company.

UPS continued to generate exceptional cash flow from operations -- $1.1 billion for the year, even with the impact of the onetime payment of $6.1 billion to the Central States Pension Plan.

In early January we issued long-term debt of $4 billion to finance the withdrawal from the Central States Plan.

We were very pleased that the debt issue was substantially oversubscribed, even in an unsettled debt market.

This attests to the Company's reputation and financial strength.

Our capital expenditures for 2007 totaled $2.8 billion, just 5.7% of revenue.

We paid $1.7 billion in dividends and spent $2.6 billion to repurchase 35.9 million shares.

Clearly, UPS continues to be financially strong.

Before addressing our outlook, I would like to make a few comments on our new financial policy that UPS adopted in early January.

Going forward, we will manage our balance sheet to a target ratio of 50 to 60% funds from operations to total debt.

At December 31, that ratio was approximately 75%.

We anticipate moving to the range over the next two years.

As part of this financial policy, in January, our directors authorized an immediate increase in the amount of funds available for stock repurchases to $10 billion.

We expect to complete those share repurchases over the next 24 months.

We spent a great deal of time studying various scenarios for leveraging our balance sheet.

We believe UPS has taken the right actions at the right time to ensure that we enhance shareowner value over the long-term by lowering our cost of capital while still maintaining a great deal of financial flexibility.

Now for our outlook on 2008, forecasters are predicting U.S.

economic growth this year will expand at a slower rate than in 2007.

The same holds true for industrial production and global GDP, plus there are concerns that consumer spending may decline due to high-energy costs and the slow housing market.

That being said, we still anticipated growing our global business through improving our customer supply chains.

The first quarter will be the most difficult one of the year.

Because Easter falls in March, will have two less operating days in Europe and two lighter-than-normal days in the U.S.

This will create a drag on volume growth in both domestic and international operations, which will reduce profitability in the quarter.

In addition, we will have cost pressure from increased interest payments, without yet realizing the full benefits of the new labor contract.

As a result, earnings for the quarter should be in the range of $0.94 to $0.98.

For the full year, U.S.

domestic performance should accelerate in the second half of 2008 as benefits from the new labor contract begin to materialize.

Domestic volumes should grow one to 2% for the year and we anticipate that operating margin will be approximately 15%, as we remain highly focused on execution.

In the second quarter, our international business should recoup the volume shortfall from Easter.

For the year, we anticipate about a 10% increase in export volume, growing faster than the overall market, and operating profit growth in the low to mid-teens.

We expect the Supply Chain and Freight segment to post improved results.

Operating margin should come in between four and 5% for the year as we focus on profitable growth.

For 2008, our capital expenditure budget is projected to be $3 billion, at the low end of our historical range, and our tax rate should approximate 36%.

For the full year, we expect earnings per share to be in the range $4.30 to $4.50.

This guidance includes the $0.09 to $0.10 per share headwind that we disclosed in December.

If you recall, this represents the additional interest expense from financing the Central States withdrawal payment, partially offset by reduced pension expense.

This range also assumes that we will make $5 billion of share repurchases over the course of the year.

The timing of the repurchases will depend on market conditions.

To summarize, 2008 will be a year of both challenges and opportunities for the Company.

We will invest for long-term growth and remain focused on execution and cost control, as we were last year, ensuring that UPS continues to deliver regardless of the economic environment.

Thank you for your attention and now we would be happy to take your questions.

(OPERATOR INSTRUCTIONS) Jon Langenfeld, Robert W.

Baird & Co.

When you think about the benefits of the Teamster contract and that layering in late '08 and early '09, are you going to show the benefits of that or does that give you opportunities to reinvest in the business?

I guess what I'm wondering is it would kind of go back to the package flow analogy a couple years ago, where you had a lot of benefits from that, but you used that to kind of invest in the business.

I guess I'm wondering how much of the benefits of that Teamster contract you will actually show as they materialize?

John, this is Kurt.

I think that will depend somewhat on market conditions, but clearly we are excited about this new contract.

We made a very large investment with the Central States buyout, but we do expect to see benefits from that.

That investment becomes cost-neutral in '09 and then begins to get benefits.

In addition, there is a range of really positive attributes and flexibilities that we think will allow us to both reduce cost and continue to operate competitively.

So it is hard at this point for us to bake in exactly what the future may hold on that, but we do feel very good about the structure of it.

You know, it certainly is baked into this year's guidance, although, frankly, it's a headwind this year that should begin to mitigate and then actually be tailwind starting in 2010.

-- just to add-on, Jon, that I think that, clearly, the compensation benefits, as time goes on, will show less increase than you've seen in the past.

It obviously should benefit earnings in the years ahead.

And I know -- I'm not looking for specific numbers, but I guess I'm expecting out of the contract -- given that we've had this big lump sum payment, I'm expecting that the benefits that come out of that, both directly from pension and then from the flexibility on the work rules, I'm expecting that manifests itself in better margins over time in domestic.

Am I thinking about that correctly?

Certainly if we operate well, there's a lot of opportunity for that.

The overall cost of this contract is very similar to what we did in '02 even with that large payment included.

So there's a lot of opportunities and it will clearly allow us to be competitive.

Okay, then as a follow-up on the international side, you know, the pressure on the margins, I'm assuming a lot of that do with fuel, same with the domestic side, but how come we're talking about fuel now when over the last couple of years we've seen some pretty big spikes in fuel and you guys have digested that pretty efficiently?

Well, Jon, the absolute amount of fuel we've seen before, but I think Q4 was almost unprecedented in the rate of increase and that is really where our exposure is with fuel.

Over time, the surcharges calibrate and even out, but it was pretty dramatic increase in that Q4 and we did see fuel up over 30%, so it was very hard for us to recover that in the short-term and it did provide us a headwind and it dampened the margin a little bit in international.

Good job in the quarter and the full year, thank you.

Tom Wadewitz, JPMorgan.

Let's see, I wanted to see if you could give a little bit of further perspective on the fuel impact in terms of -- you said it was probably a greater impact in international margin, but was that half of the margin deterioration or how big was that impact?

And then in terms of domestic margin impact, any thoughts for just the magnitude of that?

I guess the -- we generated, Tom, a 19.4% operating margin in Q4, which is still very strong.

We did have an exceptionally good margin last year, actually the highest margin we've ever shown at 21%.

So I wouldn't overreact to the year-over-year comparisons too much on that.

Fuel was absolutely a headwind and without that headwind, our results would have been better and probably more -- getting closer to the kind of rates we saw in Q4 of last year for the international.

On the domestic side, the combination of direct fuel costs and also costs we see through surcharges and TOFC.

It was a big headwind and our domestic market would have shown a profit increase without that headwind.

Okay, then in terms of the volume outlook you've given, I think you are talking about 1% unit growth domestically or so.

That seems pretty similar to what you had on a full-year basis in '07 and your fourth-quarter volumes were pretty constructive, yet your qualitative comments are saying, well, things got weaker in fourth quarter and were tougher.

Do you think the market has actually slowed in small parcel and you have offset that with greater traction in the market?

Or are you just concerned that it may slow further going forward, because it doesn't really look like we're seeing a sharp slowing in your volume numbers.

This is Scott.

I think as we look at 2008, we are kind of planning I guess our outlook on a slower growth economy in 2008 than we saw in 2007.

Now, the caveat, again, we're not a leading economic indicator, so we're going on basically consensus information out there.

I guess what we are seeing right now, though, is -- I think you saw it in the fourth quarter, you saw GDP numbers come out just a few minutes ago.

GDP was up 0.6%.

Our volume was up 1.4% domestically.

I think you're starting to see the small package market get back to at least economic growth levels and we are expecting that in 2008.

The small package market should perform at least as well as the economy as we move into 2008.

But we are expecting a weak economy, probably one to 2%.

We still expect growth in the economy, but real slow growth in '08.

Okay, but you didn't see a market slowdown within the quarter, it's just kind of a little bit of caution within the forecast?

I think we are expecting a little bit slower overall economy in 2008 than we saw in 2007, but an improving small package market relative to the economy.

Okay, great.

Thank you for the time.

Tom, I think we are also fairly comfortable with the fundamentals of UPS's progress in the domestic market.

Clearly resolving the contract issues 7.5 months early is a plus and the Company is executing well.

Edward Wolfe, Bear Stearns & Co.

I just want to make sure I heard what you said right, Kurt, in response to Tom's question about the fuel impact.

Did you say that the international OR would've been equal to a year ago and that the domestic operating income would've been flat without the difference in fuel lag?

The international would not have quite reached those levels, Tom, but certainly would've looked better, but yes, the domestic operations would have been flat to slightly profitable had the rapid increase in fuel not hit us.

Domestic EBIT you're saying, not OR?

EBIT, yes.

Okay, DHL has been in the news a lot and taken a big write-down in the U.S.

There's been a lot of ups and downs about that.

Can you talk to if you're seeing any opportunity because of uncertainty there and the antitrust issues, if you see any, between either yourself or your largest competitor purchasing DHL?

Well, as for the impact to the marketplace, I think it is too early to tell.

I think these market rumors have really been out there just for a few weeks, so I think it is early on there.

As far as what DHL is going to do, you are going to have to talk to DHL.

We're not going to comment on those rumors.

The antitrust question?

Antitrust, that's something that we would have to look at.

We have not evaluated that at this point in time.

Okay, last follow-up.

When you look at the extra operating -- or the fewer operating day in the quarter, is there any way to quantify that impact of having 61 days versus 62 year ago?

What are the correct operating days for first-quarter, given what you said about Easter versus a year ago?

Well, we are showing 61 operating days in '07 as compared to 62 in '06 and we will have 61 in '07 also, but there will be two working days in the first quarter, Good Friday and Easter Monday, frankly, that are below typical operating levels.

So in the U.S., although the working days aren't significantly impacted, you do have those soft days that would normally fall into April.

Then in Europe, business does shut down around those time periods, so Europe actually has two less working days in real terms.

So it is a material impact, certainly will be heavier impact to the international than the domestic, maybe all in all, Ed, maybe $50 million or something to the Company.

And how about in the fourth quarter?

The fourth quarter impact having a one fewer day, can you quantify what that impact was?

(multiple speakers)

The typical rule of thumb for us for one less operating day in the U.S.

is $50 million.

That could be the rule of thumb.

Okay.

Thanks a lot, guys.

William Greene, Morgan Stanley.

I'm wondering if you can talk a little bit about B2B versus B2C trends in the domestic business, how did those two growth rates compare.

Really, the trends have continued much as we've talked about, Bill, in the last year and a half or two years.

The B2C has certainly exceeded the rate of B2B, although we have seen significant slowing, really, over the course of '07.

That was probably the biggest story as far as the overall volume changes in '07.

Still positive, but slower on the B2C side, perhaps as the consumer has a little less additional money to spend.

The B2B is very driven by industrial production and some of those other statistics and we've seen the B2B really be flat for a number of quarters, frankly.

And B2C, was it noticeably weaker in December year-over-year versus how it had been in prior months of the quarter?

I think not so much throughout the quarter and the year, but I think B2C throughout 2007 did not show the growth we saw in the previous years.

Still grew nicely, better than the economy, but not at the pace we saw the last several years.

I think the real story for December, as I mention in my prepared comments, was the timing.

That, frankly, the first couple weeks of December were quite light for us and we were concerned and then at the last minute, we got substantial amounts of volume.

So an average, December came in pretty well, but it's a tale of two halves of the month.

Okay, then the list rate increases you announced for 2008, how well have those been -- how well have you been able to push that into yield and not give it back in discount, given the slowness?

We see the pricing environment continuing to be stable.

I mean, it is competitive out there and we continue to perform and execute on service and quality.

But so far, no real difference than previous years, I guess.

The rate increases are covering our costs and it's all part of negotiations.

So typically we think of you sort of keeping sort of in the range of three-quarters of what you announced, sort of you if you announce three to four, you kind of keep maybe two to three.

Is that about the range you're suggesting here?

Yes, I wouldn't hang a number out specifically, but we do feel that the trends are continuing very steadily in the market and our value proposition is holding up pretty well.

Thanks for your help.

Scott Flowers, Independent Research.

Just a couple questions.

One is I just wanted to get a little more color in international.

I am not quibbling with the absolute level of margins.

Those are obviously stellar, but I guess one of the things you mentioned, Kurt, was that ex-fuel, margins would have been close to last year, but yet one of the things I have always sort of felt is that obviously with the Euro being quite strong in fourth quarter, that should've been an additional tailwind.

So I'm just trying to understand was there any mix effect, was the around-the-world play more of a drag?

So if we strip out fuel and understand that the Euro strengthened, which should've helped you, I'm just trying to understand what other dynamics are going on in international.

Yes, Scott, certainly all of those were factors.

The fuel did more than offset any currency benefits in Q4 and the around-the-world flight, although it's a great investment for the Company, continues to be a bit of a headwind for us.

We will lap that in the second quarter and then be able to show more benefits from that, but the international business is still doing well.

We have guided to mid to upper teens profit increases, so we're looking for another good year.

Then just wondering if you look at the ground market -- and I know that Ed broached this, that also, obviously, your other competitor had some issues in the structure of their company and that may not have dribbled down operationally yet, but are you seeing any impact in the ground market between some of the things that DHL is trying to do just to improve profitability, as well as some of the issues with the contractor model at FedEx or have things been pretty stable in the ground market?

Well, I think as Scott said, so far the market has been stable.

I think clearly UPS's position is good right now.

Both of those competitors we're selling against our labor negotiations and so the fact that we have got both a long contract and one that makes us very competitive is good news.

And we're just continuing to execute effectively, aligning all of the new capabilities of the Company and the market, so no dramatic shifts in competitive balance at this point, although certainly we feel pretty good about where we are at this point.

I think the shoe is sort of on the other foot right now and most people thought we would be battling late into 2008 on a new contract, so we really have no distractions for our customers.

We are in a great position to the compete as we (inaudible) forward.

Thank you all.

Jason Seidl, Credit Suisse.

A couple quick questions.

If I can look at the LTL, I noticed -- great numbers, but the weight per shipment was off a lot.

Is that just because your business mix is shifting a little bit?

I guess the most direct factor on weight per shipment is the economic conditions.

We find that shipments grow when things are good and shrink when they're not.

But we are also having great success selling in the middle market and bringing value to the very broad array of UPS customers that haven't tried our LTL service.

So these trends have been fairly consistent, actually, if you look over the last three quarters.

So we're seeing good growth.

We're growing in all sectors, but certainly the weight has reflected the slower economic conditions.

When you say middle markets, you mean sort of midsized customers, not middle like the hall?

Yes, midsized customers, the bread and butter of -- hundreds of thousands of customers that UPS serves everyday.

You're growing in all lanes, but are you growing faster in three, four day versus next day?

Not a dramatic difference.

Part of what's unique about our value proposition is that we are able to offer very competitive local and regional service and also have a comprehensive, integrated, highly-aligned national network.

So the paradigm for us is we can handle whatever the customer needs us to handle.

Okay, in regards to the share repurchase program, any thought to trying to get most of it out of the way in one lump sum versus just sort of market conditions, or --?

No, at this point, the guidance we've given is that we intend to make those repurchases over the next 24 months, so we will be watching the market and making our best calls based on conditions and what our thoughts are.

But really, I can't give any specific guidance on that.

We did assume in our guidance that we would repurchase about half of that, $5 billion worth, in '08, but beyond that I really can't give you much guidance.

Okay, gentlemen.

Thanks as always.

Gary Chase, Lehman Brothers.

Just a question on the supply chain, first.

You noted that things are turning faster than you thought and certainly the outlook there is better than what you anticipated a few quarters back.

Sounds like the expectations for '08, though, are similar, with a four to 5% margin expectation, so just curious, have your expectations overall for that business risen in 2008 or is there a little bit of -- a little bit of caution in there relative to the economy?

I guess just to relate it to that, are we talking about maybe four to five margin on more revenue?

Clearly we're looking both to improve margins and to grow revenue.

In the U.S., the LTL market is very challenging, so clearly, we want to be prudent on a reasonable forecast for that, although we do intend to continue to gain share and profits.

The outlook for global forwarding, we expect to growth with market at market and our logistics group is a compliment to those and we will grow that as makes sense.

So we feel like we've made tremendous progress in the last year and a half, two years, and we're going to be stretching a little bit, but still in this environment, we think it's prudent to manage our capacity in line with the market.

We did see a little slowing in the international airfreight market in the fourth quarter also, Gary, that we think that that may not grow quite as fast as we saw in 2007 with the concerns on the overall global economy, but those trends will come back and we certainly expect to grow at or above market in international airfreight.

Okay, then on the domestic business where you'd hinted towards a 15% margin, I wondered if maybe you could just give us a little bit of color on how much tailwind is going to be in there from just shifting some of the pension burden out of the operating line and into the financing line and it seems like with that you're implying a decent margin decline in domestic for 2008 and just curious, I mean, is that all economic or is there something else there we should be aware of?

No, clearly they're in aggregate.

There is $0.09 to $0.10 headwind from that.

Now, it will move, to your point, from operating expenses into interest expense, but we also for the first eight months or seven months of 2008, we are still on the old contract, frankly.

So we're in a little bit of a in between state there with increased expenses on the interest side and the continual cost pressures of the old contract.

Starting in August as the new one comes into place, then the benefits will be more manifest.

But is there not some at least pension change in the domestic margin in the first part of the year, or does that take until implementation?

No, there is some benefit in that earlier in the year, but as we said, the net expense overall to the company is $0.09 to $0.10 in light of the substantial increase in the interest expense.

A lot of the key benefits out of the contract, the longer progression, some of the full-time job creation, the healthcare rating periods, the split wages come with time.

You'll see more of that each year as we move into the contract.

Okay, guys.

Thanks.

Ken Hoexter, Merrill Lynch.

If we look at other expenses, it seemed after being down anywhere from 1% to 13% over the past couple of quarters, it jumped 6% this quarter.

I'm wondering if any of those kind of charges that I think Andy mentioned at the start of the call or anything was in there.

I'm just trying to see if there was anything that pushed domestic margins down.

Because if I look at fuel alone, we kind of targeted that right in line with where it was.

So I'm just trying to look at why other jumped so much.

You're talking other other, I guess, right?

Yes.

I mean, that's a multitude of various expense, and it grew more or less in line with revenue.

We did have some auto liability insurance increases that kicked into that, some supplies and miscellaneous stuff, but nothing super material on that.

Then, Scott, if I remember the last couple quarters you've made comment on how audit felt that the small package flows had really grown slower than GDP.

It sounds like with your 1.5% growth this quarter versus I think you just said it came out at 0.6, it's kind of returned to the normal trend.

Is there anything you fee or can see that is driving that return to what you would call normal?

I've been saying all year, Ken, that we would get back there.

The question was when would we get back there.

But as I said before, the macrotrends we've always talked about, the just in time, direct to consumer shipping, online purchasing are not going away.

They are going to be trends that are going to be here for many years to come, and that is going to benefit small package.

For whatever reason the first couple quarters, and it could've been a combination of the industrial production being weaker than the economy and maybe retail sales being a little weak, we certainly saw -- it looks like based on the numbers we saw this morning that in the fourth quarter, small package is getting back to where it should be.

We expect that in 2008.

We do not expect small package to lag the economy in 2008.

That's great to hear.

In your numeral 1% to 2% kind of target, can you get a little more granular?

I guess you gave first-quarter guidance.

Do you think we slip into a negative environment in the first half before rebounding to get to that 1% to 2%, or are you thinking we stay in the positive territory straight throughout?

I think we will stay in positive territory throughout the year, and I think January we're seeing positive growth.

So I don't expect to go negative.

Then on the next day air, I guess somebody else was asking about the DHL before.

Do you feel like any of that next day air which was so robust in this economy, was any of that maybe some market share shift from perhaps the DHL or the post office, or do you think we've seen strengthening on the next day air side?

Nothing specific that we'd want to share in that case.

I think we are just continuing to operate and execute, and with some of the headwinds removed from customers' concerns, I think it puts us in a competitive position.

So you think those concerns about the contract really started that early.

Certainly made it harder to close deals with an uncertainty, so it's not that we were seeing diversion, but certainly it was an issue that was a concern in customers' minds.

That along with continued good execution is helping to bring in new business.

John Barnes, BB&T Capital Markets.

Given your comments about your longer-term strategy with the balance sheet and the fact that you're going to get to those debt levels primarily through share repurchases, is this any signal to us from an acquisition standpoint that you're kind of done on that side, or that there's nothing of size out there?

Maybe there's some smaller things you can do and you don't need debt, but there's nothing of size that really moves the needle that you need to maintain some cushion in your debt levels to buy?

I think when we did the 50 to 60% funds from operations to debt, that gave us plenty of capacity.

We're still very strong, have strong financial statements.

We're still one of the top 45 rated companies in the country.

So we have that firepower to go out and do acquisitions if we feel they are right and will add value to shareowner.

I think clearly when we made the announcement on recapitalization, we made it clear that we will still be reinvesting in the business.

All right, on your CapEx, just how do you look at CapEx right now in this kind of environment?

I hear what you're saying in terms of the economy is going to be a little bit slower, but you're looking for a little bit better package environment.

How are you -- are there any projects that have been shelved right now that could force CapEx higher this year if the economy were to improve or on the other side, if things were a little bit worse than you expected, what magnitude of decline could we see in CapEx if things don't materialize the way you hope?

We're always focused on return on invested capital, so we are always going to do the CapEx when it is necessary.

A lot of the CapEx we do is for the long-term.

When we're looking at airplanes, we are looking at the next 30, 40 years.

So you make commitments earlier.

So you're not going to change those CapEx requirements in the short-term based on maybe you had two or three slow quarters.

Buildings, we got a WorldPort expansion going on, which is tied in to both our domestic and our global trade, which is growing at a fast pace, so we are going to keep doing that.

China, we're building a hub in Shanghai that is very important for the future of the Company.

There are areas like vehicles where you can look at the volume, unit volume you're bringing in and you can slow those down and we will do that.

I think the major expenditures we're making are things that are important for the future of the Company and the growth of the Company.

Thanks a lot.

David Ross, Stifel Nicolaus.

I have a question on the rail TOFC business, it's a pretty big spend.

Has there been any talk of lightening that up or where does that stand year-over-year in terms of volume?

Then are you looking to move to a more container-based system there?

We are evaluating and constantly evaluate the network and what the best way to operate is.

With the rails, service is the key.

As long as we are able to see good quality service and good speed, we are very happy to use the rails.

We've got good relationships with them and we are able to manage those rails in a way to offer guaranteed service.

On the other hand, though, we are constantly experimenting with other approaches.

We're constantly looking at different lanes.

We are doing some work looking at the changes in the containers, both in size and in format, so we will constantly be looking at that trying to find better ways to utilize it.

One area of focus where we have increased use of the rails is in the LTL industry, where we are starting to leverage some of the skills and processes we have developed to move our ground package business for LTL also.

Okay, then just one follow-up question on the international around-the-world flights.

You said it's probably about a 10 to 12-month drag on earnings before it becomes profitable.

How many of those around-the-world flights do you have now and how many are you targeting over the next couple of years?

We have really three comprehensive around-the-world flights now and, at least at this point, haven't announced any specific plans to extend that, but it is giving us great connections and as long as global trade continues to grow, those are just tremendous investments for us and we will keep pushing.

David Campbell, Thompson, Davis & Co.

I just wanted to try to explain -- understand this 50% -- 50 to 60% cash from operation to debt balance.

It seems like, for example, in '07 that would have been about a $4 billion -- 50% of the cash flow would have been about $4 billion and that would bring you up to, what, $8 billion of long-term debt and you're at $7.5 billion now.

That means you have $500 million left to --

David, the funds from operations, you're probably taking in the Central States payment.

It would've been more like well over $6 billion without the onetime Central States payment.

That's the way you have to look at it.

So we're probably 75% or so funds from operations to debt at the end of the year.

So we have plenty of capacity.

Yes, we can take you through the line items offline if you want, David, but we're pretty comfortable that there's a significant amount of capacity remaining.

Okay, thanks.

And the impact of the tax rebates that is going to Congress right now, has that been included in your economic forecasts or don't you have any thoughts or impact on that?

We've built the forecast based on, really, what the consensus is saying out there and the consensus is looking at that as they look at the outlook for '08.

So I'd say to a certain extent, yes, it is built in.

Okay, thank you.

A follow up from Tom Wadewitz, JPMorgan.

Yes, I just wanted to follow-up.

I guess to things, on the cost savings, in the past, when you've hit periods of more challenging economic conditions, you've been able to come up with some pretty significant cost savings initiatives and I am wondering if you already have specific large cost initiatives in place for '08 or if not, if you've kind of got something in your back pocket that you can bring out that would be pretty significant if the volumes slow down.

How might we think about the cost opportunity in '08?

Tom, we had not thought of that.

We've been very busy, certainly, last couple of months as the increased economic uncertainty is highlighting that there's risks to our forecasts and all other economic forecasts.

So we have been very focused across all of the business units and all the functions to highlight those areas of discretionary cost and to create flexibility for us to react when we need to.

So we will be as responsive as we need to be going forward.

Is there a kind of an order of magnitude of the pretty straightforward belt-tightening type things that you can do and get cost savings?

Is that $50 million?

Is that $100 million.

How might we think about that in terms of magnitude?

Nothing at this point that really we want to make manifest, but as you know, we have a long history of making costs variable and sustaining our ability to reduce both totally variable and semi-variable cost in the medium-term, so no specific number that we would want to quote at this time.

Remember, Tom, again, you have heard it many times, that 50% of our costs were adjusted on a daily basis, so that our truly daily variable.

And 30 to 40% are semi-variable and that is really the base that you got to react to on how slow the economy gets and that's -- we will be vigilant on those costs.

Okay, great.

Then the other one on the Shanghai hub opening, can you give an update on what the timing for that is and when that comes online if that's going to drive some new flights and some impact we might see in the international export volume numbers?

I think it's late fall, Tom, that we are going to open that hub and we certainly think that's going to increase our competitiveness, particularly in the U.S.

to Asia, but also inter-Asia flights.

It's going to give us a lot more better time in transit and help us in China quite a bit.

Absolutely.

Okay, great.

Thank you.

Scott Flowers, Independent Research.

I just had a couple of quick follow-ups.

I know that we have sort of given some qualitative sense, but could you give us some sense of -- just even if qualitatively -- how volumes trended in the quarter and then into January domestically, at least?

Have they gotten weaker successively as we've gone through?

I appreciate your comments, Kurt, about the first couple of weeks of December and then Christmas, but I'm just trying to get a sense of has the rate of growth slowed, been about the same as we've gone over the last 3.5 months or so?

I think overall it has gotten a little better through the second half of the year.

First half we were slightly negative, down 0.2 in the first two quarters, and it got a little better in the third quarter, slightly better in the fourth quarter and throughout the quarter with that late rush before Christmas, that helped December be the best month of the three.

January has showed slow growth, but growing.

So I'd say it stayed pretty steady.

Okay, the other I guess quick question I had is on the labor contract -- and I remember this from the last round -- is there any impact that you may have in terms of some of the saves relative to whether the economy is slow, because, obviously, I know this contract is different, but obviously some of the turnover rates on part-timers slowed and etc.

And so there was an impact economically to what saves could achieve and so I don't know what the second half growth is going to be in the U.S., but let's say it slower, is there any potential impact that some of the saves you might achieve with the new contract with a slower-growth economy?

Yes, Scott, certainly our contract and our whole Company benefit from growth and this is no different.

This contract is not heavily-levered to high growth rates, so clearly if we are able to grow the business and bring in new employees that work through progression, there is a benefit, but it is not going to make a huge difference as far as some of the progression rates and some of that.

But clearly, we are very happy to operate in a growing environment where we have nice a nice mix of junior and senior employees.

Will you lose just the efficiencies period if you just have a very slow growth environment?

We would have to really talk through that a little bit for specifics.

Clearly, as I said, we get lower effective rates and we've got a mix of new and old employees, as volume slows, then there's a negative impact in that the effective rates go up.

But I can't -- I'm not really ready to comment as to whether that would undo all the benefits of the contract.

I don't think it would, but it would depend on your assumptions.

Okay, thank you all.

Great.

There are no further questions.

Okay, thank you, operator.

To summarize the key takeaways from this call -- first, UPS delivered what we said, 8% growth in earnings per share; second, for 2008, we expect earnings per share of $4.30 to $4.50; and third, we're looking forward to seeing you in New York City on March 12.

Thanks for joining us today.

This does conclude today's UPS Investor Relations fourth-quarter 2007 earnings conference call.

You may now disconnect.