聯合包裹運送服務公司 (UPS) 2011 Q3 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the UPS Investor Relations third-quarter 2011 earnings conference call.

All lines have been 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 from each participant to accommodate more analysis during the call.

Thank you for your cooperation.

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

Andy Dolny, UPS Treasurer and Vice President, Investor Relations.

Sir, the floor is yours.

Good morning, everyone.

Before I get started, I want to point out that during the call today we will make references to our recent investor conference.

For those of you who were unable to attend, all information presented is available on our website.

I encourage you to watch it.

Based on feedback from those that have, I think you will find it worthwhile.

Now regarding our earnings.

I am here this morning with Scott Davis, our CEO, and Kurt Kuehn, our CFO, to discuss the Company's results for the quarter and our expectations going forward.

Before they begin, however, I want to 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 2010 Form 10-K and 2011 10-Q reports.

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

Today's call is being webcast and will also be available on the UPS Investor Relations website.

I want to remind you of an adjustment we recorded in the third quarter of last year.

The adjustment was related to the sale of real estate and increased net income by $61 million, or $0.06 per share.

As a result, in their remarks today, Scott and Kurt will refer to UPS's third-quarter 2010 results excluding the impact of this gain.

Additionally, all 2011 full-year references and comparisons to 2010 will refer to adjusted results.

We believe this is a more accurate picture of the Company's performance.

Reconciliations to comparable GAAP measures and free cash flow, which is a non-GAAP financial measure, are explained in the schedules that accompanied our earnings news release.

These schedules are also available on the UPS Investor Relations website in the Financial section.

Finally, in an effort to allow maximum participation on the call, each participant will be allowed one question and then be required to get back in the queue for any follow-up.

I hope you understand and thank you for your cooperation.

Now, to begin our review I will turn the program over to Scott.

Thanks, Andy, and good morning to everyone.

It was great seeing you at our conference Louisville.

I hope you came away with a better understanding of our many capabilities and the investments we are making for the future.

UPS delivered another good quarter of earnings growth.

Highlighting the balance of our global business model and its ability to perform in the face of challenging economic conditions, results like these reflect the value that UPS solutions are providing customers.

There is increasing uncertainty in the global economic environment, most notably exports from Asia, which slowed significantly during the quarter.

On the other hand, it appears that the US economy has stabilized and continues to show modest growth.

Despite all the concerns of the European economy, our business there continues to perform well, with exports up 9%.

The outlook for the remainder of the year is for continued slow growth.

Because we have seen less buildup of inventories headed into peak season, UPS could benefit if consumers respond with stronger-than-expected holiday purchases, just like they did in 2009.

We really won't know this until two weeks prior to Christmas as peak has more compressed.

Taking a step in the right direction, I want to congratulate Congress and the Administration for approving the critical trade agreements with South Korea, Colombia and Panama.

Export growth to these countries will provide economic growth and create jobs here at home.

I am encouraged to finally see some bipartisan cooperation, and hopeful that our leadership in Washington can continue to work together to stimulate our economy, like a jobs bill that delivers real results and tax reform that encourages business investment.

Here at UPS, we are not standing by, waiting for the government or the economy to lead us.

As we demonstrated during our conference, we continue to innovate and invest in the technology and solutions that our customers value.

Recently, we rolled out several innovative groundbreaking products, the most notable being UPS My Choice, which provides consumers with unparalleled delivery options.

This service puts controls in the hand of the residential customer.

As a secondary benefit, it helps UPS lower costs by eliminating multiple delivery attempts.

Since the recent launch of this product, we have over 100,000 subscribers, and that number continues to increase rapidly.

To support our continued growth in Europe, we announced a significant expansion of the Cologne air hub.

This $200 million project will include state-of-the-art UPS technology and boost capacity by more than 70%.

Capital investments like this allow us to grow our network efficiently and achieve the return on investment capital goals unveiled at our conference.

As we outlined there, UPS's solution-based approach spans the entire supply chain.

These global capabilities are unmatched, and customers recognize the value UPS provides.

The connectivity across business units and the reach of our network continues to drive results.

Though economists expect global economic growth for 2012 to remain below historic trends, I am confident in our ability to perform, rewarding shareowners during both the current period of uncertainty and over the long term.

With that said, let me turn it over to Kurt.

Thanks, Scott, and good morning, everyone.

On last quarter's call, some thought that UPS was a little ahead of the curve with our economic outlook.

However, during the past few months, we did witness the effects of economic slowing and continue to see the near-term outlook pointing to slow, but steady growth.

Now let's discuss UPS's third-quarter results.

With the exception of the International segment, UPS performance during the quarter held up well, especially considering the economic conditions and increased uncertainty.

UPS experienced strong revenue growth of 8%, and once again, earnings-per-share improved at a double-digit rate of 14%.

Now let's take a look at the segment performance, starting with US Domestic.

Operating margin is the highest we've experienced in three years, improving 60 basis points to 13.1%.

Clearly, this segment is on the right track.

Revenue increased almost 7% on flat daily package growth.

Our focus on quality of revenue is paying off, as yields were once again strong, up 6.5%.

Base price increases of about 3% and higher fuel surcharges were the key factors.

UPS Next Day Air volume gains were encouraging, up more than 1%, with strong growth from Packages offsetting the decline in Letters.

Operating leverage was apparent, as improvements in productivity and investments in UPS technology helped produce operating profit growth of more than 11%.

In fact, we once again experienced reductions in direct labor hours, miles driven and block hours.

During the quarter, we took another step in extending our early morning delivery advantages when we announced the expanded coverage of UPS Next Day Air Early A.M.

We have added or improved coverage on 1300 zip codes, which solidifies our market-leading position.

Now for the International segment, which is both about slowing economic activity and challenging comparisons to strong results last year.

If you recall, in Q3 '10, we experienced 47% volume growth in the Asia to US lane.

This year in the third quarter, UPS International operating profit declined slightly due to excess capacity, higher fuel prices and a slight drag from currency fluctuations.

Remember, during our second-quarter earnings call, we mentioned that due to macro conditions, exports from Asia were starting to exhibit softness.

This eventually turned into volume declines on the Asia to US lane.

UPS acted swiftly to take down aircraft and full capacity out of the market, but not quickly enough, and margins were negatively impacted.

The bottom line is we built a network expecting a certain level of growth that did not materialize.

Because of this, we have now reduced our airlift capacity out of Asia, while still maintaining our recently added service enhancements.

If demand continues to soften, we can make additional adjustments.

On the other hand, UPS is capable of adding back capacity if a surge in consumer demand occurs before peak, like it did in 2009.

Despite this slowdown, UPS's international revenue jumped more than 14%, driven by solid volume growth in other theaters.

Export volume was strong, up 6.5%.

UPS continues to lead the industry in international export growth.

However, during the quarter, this growth occurred in the shorter trade lanes, such as within Europe or within Asia, as well as across North America.

Non-US domestic volume increased 3.5%, with strong growth in Germany, France and Poland.

Package yields were up more than 9% as a result of currency, higher fuel surcharges and base rate increases.

These were offset somewhat by changes in product mix, as the growth in our transporter products outpaced worldwide express.

On a currency-neutral basis, yields grew 3.2%.

To support our international growth, we announced the expansion of UPS WorldShip to 25 additional origin countries, bringing the total number to 63.

Now, let's discuss the Supply Chain and Freight segment.

As a perfect example of leveraging our technology across the entire portfolio, we've extended the UPS paperless invoice to include air freight shipments.

Now our customers can enjoy the most comprehensive digital customs clearance option offered in the industry.

Revenue for the segment was $2.3 billion, up more than 5% compared to last year.

Operating profits were $195 million, with margin expanding to 8.3%.

UPS Freight led the way, with margin expansion and solid revenue improvement to 15%.

LTL revenue per hundredweight was up over 13%, resulting from higher fuel surcharges and stronger base rates.

Revenue in the Forwarding business unit was muted due to excess capacity in the air freight industry and the slowing demand from Asia.

However, margin expanded and operating profit grew slightly.

As expected, the Distribution business experienced a mid-single-digit increase in revenue, while margin expansion was impacted by investments in the healthcare sector.

During the quarter, we continued to expand our global healthcare distribution presence with the addition of facilities in Brazil and the Netherlands.

These new buildings bring the total UPS healthcare compliance space to more than 4.5 million square feet.

Regarding taxes, we have lowered our expected tax rate for 2011 to 34%, based on the geographic mix of taxable income and other items.

This impacted the third quarter and will impact the fourth as well.

Now let's talk about cash flow.

For the first nine months of 2011, UPS generated free cash flow of more than $3.7 billion, after capital expenditures of $1.6 billion and $1.4 billion in pension contributions.

Distributions to shareowners accelerated during the quarter, as UPS significantly increased share repurchase activity.

Given the weak market conditions, we jumped at the opportunity and increased share buybacks to more than $1.1 billion in the quarter.

So far this year, UPS has repurchased 32 million shares for approximately $2.2 billion and paid dividends of one $1.5 billion, an 11% increase in dividends per share.

Regarding our guidance for the remainder of 2011, as I indicated at the investor conference, we are reiterating our earnings per share guidance of $4.15 to $4.40 per share.

As we think about peak season, it seems a lot like last year, where customer sentiment is mixed and cautiously optimistic.

In general, inventory levels are tight and consumer demand for the holidays remains to be seen.

As we have experienced in the past, the last two weeks before Christmas can have a meaningful impact on fourth-quarter results.

In our US Domestic business, we expect year-over-year margin expansion similar to what we experienced in the third quarter as we continue our focus on the quality of revenue and improved efficiency.

Daily package volume growth is expected to be 1% to 2% for the quarter.

International volume and revenue growth is expected to outpace the market once again.

Revenues should increase approximately 10%, driven by strong growth in intraregional shipments.

We expect the growth environment out of Asia to improve a bit.

Operating profit is expected to be slightly above last year's level, with operating margin in the mid-teens.

For the Supply Chain and Freight segment, we expect moderate year-over-year revenue growth and continued margin expansion.

So, to wrap this up, UPS continues to produce quality earnings growth in an environment of moderate economic activity.

We remain confident in our ability to succeed in these conditions and expect to produce record earnings per share for 2011.

Thanks for listening this morning, and now Scott and I will be happy to answer your questions.

(Operator Instructions) Jon Langenfeld, Baird.

Good morning.

On the Domestic side, the International piece, I know you had a pretty tough comp there.

Margins came in better than you had talked about.

But if I think about that over the next couple years and kind of playing out a relatively subdued growth environment, is there still enough room from the pricing offsetting the cost to move this higher as we progress over the next couple years?

John, this is Andy.

Are you talking International Domestic or US Domestic?

I'm talking about the overall Domestic on the profit margin side.

We feel pretty happy about our continued momentum in the Domestic business.

Even in a muted growth environment, with the focus on yields and the broad productivity improvements leveraging many of the things we talked about at the conference, we are continuing to see margin expansion.

Clearly, it is a lot easier in a more robust economy, and time will tell how 2012 looks.

But as long as we keep focusing on our effectiveness and improve the value proposition with things like My Choice, we feel pretty bullish about the long-term domestic opportunity.

And I think we will stay in a rational pricing environment, which will also help us enhance the margins.

Good.

Thank you.

Ken Hoexter, Merrill Lynch.

Andy or Kurt, I guess you talked about the story of decreasing letters going on for years.

I just want to know as you talked about the focus, we could see kind of a sharp rebound into the peak season here.

So can you talk about -- when you talk about Next Day Air, is that kind of where the focus will feel it first?

Do you see ground kind of feeling some of that in a rebounding economy.

And kind of on the mix changes within that Next Day Air, does that impact it as well?

Thanks.

Ken, clearly we've been pleased with our progress in the air business.

With the financial industry continuing to struggle and the housing industry weak, it does negatively impact the letter business.

But we've seen good growth in our next day package, both with the a.m.

commitments and with the afternoon commitments.

So we do see most of the growth in the package arena as supply chains continue to speed up, and that is accentuated in an improving economic environment.

And Ken, I think the lean inventories that our customers are stocking right now could certainly lead us to stronger both International and Domestic air express business in the fourth quarter.

Great.

Thank you.

David Vernon, Bernstein.

Good morning.

Could you talk a little bit about the tax rate changes and how that will be or not be sustainable into the fourth quarter and beyond?

We had guided at the beginning of the year to a range of 34% to 35%, and we do expect overall that the rate will come in at the low end of that range, at 34%.

And it is a combination of the geographic mix of our earnings and some minor specific settlement.

So it really just means that we are coming in at the lower end of the range and we will probably see a similar adjustment in Q4 as we had in Q3.

And David, in January, we will talk about the rate for next year, as we look at the expected earnings -- distribution of earnings.

Tom Wadewitz, JPMorgan.

Good morning.

I wanted to ask you about the International side and get a sense of how significant the cost take-out and network adjustment is on trans-Pacific.

I guess in terms of how much cost reduction we can look at in fourth quarter.

And then also, if you want to comment on pricing within International, given that capacity utilization came down a bit.

Thank you.

I think, Tom, the good news is that the pricing has remained stable in the international environment.

It is a rational environment.

Clearly on the cargo and the freight side, the pricing is a little weaker, and that benefits our Forwarding unit.

We do expect to see the international demand firm up a little bit in Q4.

There were some product launches that last year were in the third quarter that are now in the fourth quarter.

On the other hand, though, we did take a substantial amount of capacity out, so we've lowered our year-over-year capacity out of Asia by about 10% or so.

And we will continue to look at that.

We did -- we have made, though, over the last year, year and a half a number of substantial enhancements with the direct flights to Europe and some of those things, and we do think that investing in that and continuing to leverage that platform is wise.

But we will adjust and adapt as the economy tweaks it, but right now, we feel like we are in pretty good shape.

And barring further declines, we should be pretty well calibrated.

Okay.

Thank you.

Art Hatfield, Morgan, Keegan.

Thank you.

Kurt, given your comments about pricing, could you talk a little bit about the sequential decline in yields?

My assumption was that fuel surcharges had been flat throughout the quarter.

Was I wrong about that, one?

And two, was it a mix issue?

The International did see some impact, and that is really that demonstration of the mix.

As we said, we showed continued strong growth.

European exports, most of which stay on the Continent, grew upper single digits.

North America trade continued strong.

So there is a mix within that international export that did have an impact.

And if you take out the currency and the fuel, certainly that was a somewhat negative impact on yields.

But we think on a same-package basis or a same-store basis that yields remain firm and there are some mix changes.

But all in all, we feel very comfortable both domestically and international that the value proposition is such that we are able to sustain good yields.

I think domestically.

the yields between the third quarter and the second quarter were very similar.

There really was no degradation whatsoever.

Great.

Thank you.

Ed Wolfe, Wolfe Trahan.

Good morning, guys.

The International profitability just feels like it has been an issue now, that that is more than just a slowdown in demand.

And your International volumes weren't that terrible.

International is a lot of things going on.

Is there some part of the world where profitability is becoming a bigger issue relative to what you saw most of the last five or six years?

First of all, the question is Europe.

That is not the answer.

Europe has stayed very strong.

We've had -- been very pleased with the performance and profitability out of Europe.

Clearly, this was an Asia issue.

And as you know, Ed, that we have the most leverage, both positive and negative, coming out of Asia.

And it is tough to get the network cut down quick enough.

But clearly, the issue here was Asia in the third quarter and the second quarter.

Ed, I guess I would comment that we are just showing a very slight decline in profits, 2%.

Just the impact of fuel and currency would more than account for that.

So we are not pleased with the third-quarter results, but we are taking steps and we feel very confident that the International segment is going to continue to outgrow.

And we had a pretty sudden change in Asia.

We telegraphed that in July and talked about it also in September.

So it is a challenge, but we still feel very positive on the long-term prospects for the International.

Can you talk to the Asia capacity in terms of what you were built for growth and what capacity you took out, and so what you are aligned for growth right now from Asia and what the volumes actually were in the quarter.

You really have to look lane by lane, Ed.

We did actually go to negative on the US to Asia lane, and clearly that is a lane that we have substantial capacity.

The other lanes remain positive; actually Asia to Europe continued to look good.

And as I said, we did take out approximately 10% of capacity in the quarter, and barring continual declines, we should be in better shape.

Thank you.

Peter Nesvold, Jefferies.

Good morning.

I was a little distracted early on in the prepared comments.

I think you said that core pricing was up 3% year-over-year.

And I was hoping you could just elaborate on that data point a little bit more.

Is that a mixed-neutral sort of same sales number, number one?

Is that just Domestic?

How did that compare to the last couple of quarters and do you sort of see that number being the base level going forward?

That was a Domestic reference, and it was a weighted average of all the products.

The ground is probably a little higher than the average and the air is a little lighter than the average.

Clearly, that is not a big change.

And in general, those trends are pretty darn similar to Q2 if you X it all out.

So as you know, we continue to focus on creating as much value as possible and pricing accordingly, and that has gone very well this year.

And does that -- is that mix neutral or does it incorporate the mix, so that if mix deteriorated modestly to slower modes during the quarter, that sort of the same-store pricing might have been a little bit better than that?

The only place that would be relevant a little bit might be in some of the premium services, where we are seeing a little higher growth in the afternoon services versus the a.m.

So, yes, you could adjust that out.

We are seeing a similar trend, although slight, in the International, too, with a little higher growth in our standard services.

Great.

Thank you.

Just a reminder, please.

One question per caller, and if you have a second, please get back into queue.

Thank you.

Kevin Sterling, BB&T Capital Markets.

Thank you.

Good morning, Scott, Kurt and Andy.

As you look across the international environment, you said you parked some airplanes to manage the decline in volumes in the third quarter.

Have you seen any improvement in October volumes?

And how much of an uptick do you need to see to bring capacity back online?

We have seen -- I guess it differs by theater a little bit.

Asia, we are seeing some firming.

Certainly some of that is due to these major product launches that you read about in the paper.

Europe remains fairly stable, although clearly, we are probably a little bit cautious on Europe, with all the headline risk.

And the US, perhaps a little bit softer.

but not a big change in trends.

I'd say just in the economy in general, we are probably a little more optimistic than we were one and two months ago.

We've had a lot of good economic reports in the US.

Retail sales looked better last month.

Unemployment claims are improving.

Manufacturing is getting better.

Bank loans are increasing.

So I think we feel a little bit better, and that has been the problem on Asia exports.

The demand out of the US has slowed down, and somewhat in Europe demand has slowed down.

So I think if we can get some decision-making done in Washington and Brussels, you will see firmer demand going forward, which obviously will help Asian exports.

All right.

Okay.

Thanks for your time this morning.

Bill Greene, Morgan Stanley.

Thank you.

Kurt, just some data points, if you can provide them.

FX impact, and if you have any sense for pension for 2012.

Thanks.

Pension expense, that is.

Yes, Bill.

We clearly show the FX impact on the revenue side, and there was a fairly significant impact.

On the P&L, though, we actually had a slight negative impact for FX.

It cost us about a penny or so.

It's a combination of some of the collars we put on, where it capped our coverage, and also some strengthening in Asia against the dollar.

So it is a mixed issue, not a huge trend, but it was a headwind.

The pension, Bill, is going to be obviously determined by the discount rate at December 31st, so we can't calculate that yet.

Our returns and our plans have been pretty good this year, despite the turmoil in the market.

So it is all going to depend on the discount rate.

So we won't know that number until we announce it in January.

Thank you.

Rob Byde, HSBC.

Hi there.

Good morning, guys.

Just on Europe and the Cologne hub, night flying has recently been banned, at least temporarily, at Frankfurt Airport.

Is this likely to be a concern for your plans at Cologne?

We feel pretty comfortable with the relationship we have at Cologne.

And certainly, as we've discussed these expansions with the administrators at Cologne Airport, we've got assurances that we are in good shape for many years to come.

Okay.

Thank you.

Chris Wetherbee, Citi.

Good morning, guys.

When you think about the fourth-quarter outlook on the International side, is that supported by the product launches and the firming that you've been seeing in Asia, or do you need to see any ramp-up going into the holiday season, or would that all be upside relative to your expectations as it stands right now?

Certainly if there is a little bit of an inventory squeeze, and I would say there is a decent probability of that, then there is some upside.

As Scott mentioned earlier, especially those long trans-Pacific routes, there is incredible leverage on.

And so to some extent, you make your bets and you see how it comes through.

There does seem to be a little uptick, as Scott had said, in sentiment right now.

And that could create the need to speed up supply chains.

Clearly, the flooding in the Southeast Asia is a challenge; that may also lead to some late hurry-up orders to catch up on supply.

So it's one of the reasons we've been, I guess, balanced in our capacity reductions, taking enough out that we don't feel like we've got too much, but at the same time, keeping enough infrastructure in place to capitalize on the benefit.

Okay, great.

Thanks for the time.

Nate Brochmann, William Blair.

Good morning, everyone.

I want to talk a little bit -- as we talk about some of the trends shifting internationally more from maybe exporting to more the intraregional trade networks within Europe and Asia, I was wondering if you could talk a little bit about what you are doing to take advantage of that and what kind of growth opportunities you see as maybe some of those economies shift a little bit.

Talked a lot about this in last quarter and at the investor conference that we really have invested pretty heavily in our intra-Asia network, as it is probably the fastest-growing business in the world right now.

So we've obviously improved time in transit.

We've added a lot more flights between locations over there.

And we will continue to invest heavily as we go forward.

But I think generally, we are focused on, we are paying a lot of attention to and probably made our heaviest investments this year.

Yes, and really, the combination of the intra-Asia flights, as Asia trades more with itself, and the continuing migration of integrated supply chains in Europe tends to drive the intra-European shipments also.

So we remain very focused and bullish on both those theaters.

And again, I think we are not writing off Asia exports to the US.

I think as the US economy stabilizes, you are going to see more demand -- [raise] in product.

So I think you will see a pickup.

Whether it's this quarter or next quarter, you are going to see exports from Asia to the US pick up again.

Great.

Thanks for the color.

Chris Ceraso, Credit Suisse.

Thank you.

Good morning.

So it seems like most of the weakness in your international margins are the declines in Asia, maybe some mix, going to shorter haul flights and some FX.

But was there any hit from your expansion in Germany, because you've got extra capacity or you're spending there?

And if not, is that something that you think might weigh on results in Q4 or Q1 of next year?

Not material.

I mean, we certainly have been in a growth and an expansion mode in International, both with aircraft and with sales resources and some other things.

So, you know, we have been investing for growth and we continue to see the benefits of that, with UPS far exceeding any of our competitors' profits and growth rates.

So we are probably a little bit heavier on the investment side than on average, so there is some exposure if growth doesn't materialize.

But no single -- the Cologne expansion would be the biggest capital investment in Europe, and clearly that haven't really broken ground yet.

I want to reiterate, though, that Europe has stayed strong.

Kurt talked about upper single-digit growth; last quarter, our profits were good.

So we are comfortable.

Everybody is worried about the headlines.

You read about Europe's economy, but our business has stayed strong and we expect it to stay strong going forward.

Okay.

Thanks.

David Ross, Stifel Nicolaus.

Good morning, gentlemen.

On the LTL side, it looks like you guys are still in freight selection mode.

Can you talk a little bit about excess capacity that's in the network and when you think you want to chase volume and add to density?

We continue to be pleased with our progress there.

As we said, freight shipments were basically flat this quarter.

We think that's pretty much in line with the industry.

We do see the market proceeding towards a more healthy outcome.

Clearly, we've been consistent on our revenue management policies, but many of our competitors have been pretty erratic.

So we are continuing to focus on value and offering a unique proposition to customers.

We will dial up our aggressiveness on market share as we see the right time in the industry.

But at this point, we are pretty pleased with the progress we are making.

Matt Brooklier, Piper Jaffray.

Thanks.

Good morning.

I think you may have talked a little bit to it, but wanted to get kind of the all-in impact from fuel in the quarter.

Fuel was a modest tailwind for the Domestic and a modest headwind for the International.

It wasn't a huge number either way.

But in International, the absolute level of fuel is more important, whereas in Domestic it is primarily a timing issue.

So in aggregate, it is not a big story, but it did help the Domestic a bit and was a headwind for the International.

All right.

Thank you.

Justin Yagerman, Deutsche Bank.

Good morning, guys.

It is Rob Salmon on for Justin.

There has been a lot of talk, I guess, about the aircraft capacity coming out of Asia.

You guys indicated you took out about 10% of capacity out of those lanes.

Could you give me a sense of how freight load factors trended in Q2, where we were in Q3 and kind of where they are directionally thus far in October?

Clearly, with the softening in Asia, capacity utilization across the freight networks dropped fairly substantially.

And ocean freight clearly was kind of underwhelming this year, with the normal peak being certainly smaller than we expected.

We've really not written the story yet on airfreight.

As I said, we think there is certainly a decent probability that there will be a bit of a squeeze in the next couple of months.

But at least so far to date, the air buildup has been fairly modest.

So we remain cautious in that theater.

It is a benefit for the margins in our Forwarding group and certainly helped us to generate the 8.3% margin in that segment.

But we do remain cautious.

There are a lot of players, and there is some risk of overcapacity certainly.

You know, at this time in 2009, we did not see the airfreight peak that happened.

So it is -- because the holiday season is so compressed and it is down to just a few weeks in December now, you won't see it for a while.

But at this time -- this call in 2009, we did not see the peak that we were heading into.

So can't say it's going to happen in 2011, but it is certainly a possibility.

That makes a lot of sense.

When we are thinking about kind of how full the planes are coming out of Asia, could you give us a sense of the magnitude of where we are in October versus were we had been in Q3, kind of following the adjustments you guys had made to the network?

It is really too soon to lock that in, I guess.

With the product launches and some of the normal volatility, it is too early for us to make a call on if we've nailed capacity and demand perfectly on the balance.

Remember, though, that we do have the ability to -- as a very strong forwarder -- to help smooth out the utilization of our airline with utilization of our forwarding capacity.

So in aggregate, if you look at both business segments combined, it does reduce the volatility.

What I will say, we are planning on growth out of Asia in the fourth quarter and we have less capacity, so it should help utilization.

Jeff Kauffman, Sterne, Agee.

Thank you very much, and congratulations.

Some of these have been answered already.

You mentioned the $0.01 per share impact of currency.

You mentioned fuel was a drag on International.

So if I had to look at the International decline in profits versus a year ago, how much did the fuel impact that?

How much of that was more volume-mix impact?

You've already identified the currency aspect.

Jeff, you know, if you factor out the two commodities, the fuel and the currency, clearly we would have shown decent profit increases, probably mid-single-digit profit increases, maybe a little better.

And then the product mix jumps around on us, and this was one of the most volatile quarters.

If you think of where we were at at the beginning of the quarter and then the whole roller coaster we've been on with demand and expectations around this global trade, we were pleased that we continued to seek growth in those regional shipments, but with the high leverage, those long-distance runs clearly had an impact on the margins.

I think, Jeff, again, a lot of this was driven by concern and uncertainty in the United States when after the first- and second-quarter GDP numbers came out and got revised down, there was a lot of concern of a double dip, and people stopped buying, stopped consuming.

Over the last month or so, we are starting to see I could say better economic numbers, so there is more optimism out there.

And that could turn things around.

We are still expecting a slow-growth economy, but I don't think it is as negative as people were thinking two and three months ago.

So we are confident that the International segment will be back on a profit growth trend and continue the market share gains.

How rapid that profit growth is will depend somewhat on the mix of how the next couple of months come together.

Thank you very much.

Keith Schoonmaker, Morningstar.

Thanks.

You identified a 2014 LTL EBIT margin of 6% as a target.

I guess I'm wondering, in addition to volume and price improvement, are there some operational changes required to achieve this?

Certainly continued leverage of technology in our Freight operation is a big part of the margin improvements.

We had a good quarter this quarter, about two thirds of the way to that goal as far as margins are concerned.

But we are leveraging a lot of the technology that we manage our business with, both on the linehaul and the pickup and delivery to streamline the freight.

And that is part of the synergies that we bring.

Much as we've added paperless invoice to our airfreight shipments to streamline the customs clearance, we are also bringing the operational technology to the UPS Freight.

And it is likely we will have some other exciting announcements continuing on the UPS Freight, both for the customer benefit and the operational.

Thank you.

David Campbell, Thompson, Davis & Company.

Good morning.

I think my question has been answered, but just to make sure, third-quarter tonnage in the Asia-Pacific region was up for you.

But I assume that when you talk about product mix, what you mean in the fourth quarter is that there will be more growth -- or less of a decrease in your Packaged business in the fourth quarter, and that is what is driving better results and higher yields per ton.

Is that one way to look at it?

David, you are a little too optimistic.

We actually did see volume declines in our International business on the small package.

The forwarding was down also, but sometimes the volume that hits our planes or doesn't hit it can move around.

So no, we did see low single-digit declines in exports out of Asia, which is unusual for us.

We are expecting that to get back up to modest increases for Q4.

But no, there were real sequential year-over-year declines, at least, that was part of the problem.

Okay, thank you.

Gary Chase, Barclays Capital.

Good morning, everybody.

Wanted to see if I could get a little bit of flavor for some of the moving pieces in the Domestic segment.

I clearly hand you that the comps are getting a lot tougher from a margin perspective.

But you still have pricing that -- I think you said up 2 to 3.

Volumes looked actually okay in that segment, better than at least I was expecting.

So just curious if there is sort of something going on on the cost side that is slowing that down, and whether or not that is something that could look better in future periods if these trends continue with volume and price the way you've been seeing them.

It is a good question.

Clearly, we did pretty well in a flat growth environment.

We improved margins 60 basis points.

But the comps versus last year on the comp and benefits were tougher, and it was part of why we had fairly cautious guidance on that.

But typically, the third quarter is a quarter where we true up our self-insured liabilities, workers' comp, some of those things.

And the adjustment we made in 2010 was a much larger credit than what we saw in 2011.

So that did cause the comp and benefit line to be a little higher in comparison to volume than normal.

We don't -- that is basically a one-time event, although it does get adjusted every year.

So we continue to be optimistic.

That is why we remain committed to the range we've done, and are seeing great operational results and are expecting volumes to begin picking up a bit in the fourth quarter.

(inaudible) the key ways we talked about in the past to improve the margins, Gary, is to get -- our average wage rate is still high because we're not growing the business enough.

And right now, productivity is saving us half of that wage increase.

If we can get that average weight increase down by bringing in lower-seniority employees, that is going to help us an awful lot.

So instead of saving half of the wage increase, we will save much more than that with the productivity improvements.

And just to be clear, the things you were mentioning, Kurt, like the workers' comp, et cetera, those are not things that are uniquely hurting 3Q.

Those are things that we should expect to continue in the run rate looking forward, right?

It was really primarily a this year-last year comparison for the third quarter, yes.

Okay.

Thanks very much, guys.

Jason Seidl, Dahlman Rose.

Thank you.

Good morning, guys.

If we look at the volumes in Asia, you mentioned they are expected to pick up a little bit here in 4Q due to some of the product launches.

Will you expect them to be up if you X out the product launches in 4Q?

It is almost impossible to factor that out.

There is always product launches going on.

As to whether it would be positive or not, I'm not sure.

We've had estimates on the product launches, and you have some for multiple companies every year.

But we do see Asia without the product launches getting a little firmer.

I guess that is the bottom line.

That's good color.

I appreciate (multiple speakers).

It really comes down though -- it comes down to, I guess, your projections of demand out of Europe and demand out of the United States.

And right now, there is cautious optimism, as Kurt said earlier, on the peak season in the United States.

The National Retail Federation is calling for a 2.8% increase in sales, which is actually higher than average for the last 10 years.

Not as good as last year, but higher than the average of the last 10 years.

And if that happens, that will create demand.

But as I said before, it is a compressed season, so we'll have to wait and see.

Thank you.

Rob Pickels, Manning & Napier.

Good morning.

Thanks for taking my question.

Just following up in the international markets, you talked about demand and your own capacity.

I'm curious a little bit about competitive capacity.

One of your biggest competitors has been buying a lot of long-haul planes.

Is that the chief sort of competitive capacity issue, or are you also seeing it from smaller competitors or airlines?

Just comment a little bit on that.

And then are you seeing any of your competitors take down capacity as you have?

We are seeing some of our competitors react and take down excess capacity.

Some of them have changed their routes to improve their utilization and maybe done some fuel tech stops.

But it is not just the express carriers.

As you mentioned, there are other players.

Some of the foreign flag aircraft that have added some capacity.

So we do think the market is rational.

But clearly, when you make those big investments, you have to plan for the long term.

And so far, though, we do see people adjusting and taking some capacity out.

So we don't think there is much risk of this thing getting drastic with a dramatic imbalance, but we do have to be cautious.

You know, we are taking out capacity, and we generate probably double the margins of our competitors.

So you think there's got to be a lot of pressure on them to reduce capacity going forward.

Okay, thank you.

Tom Wadewitz, JPMorgan.

I've got a follow-up question for you in terms of the pension view on 2012.

Going into this year, you had put in large cash contributions, I think -- I guess in 2010.

Then you had a pretty large contribution in January this year, which offset some of what would have been pension expense pressure this year.

I'm wondering if you would consider -- if it looks like the discount rate is lower and going to cause pressure on pension expense in 2012, if you would also consider a large cash contribution, which would mitigate some of the potential expense pressure in 2012.

Tom, we'll talk in certainly much more detail on the next quarter about our expectations for that.

You know, we did have about a $0.07 headwind this year for increased pension expense.

And with these frustratingly low discount rates, it does create some real challenges, at least from an accounting perspective, on the earnings side.

However, we feel pretty confident that over time, these incredibly low rates will come back up to a more normal historical level, which would do wonders for some of the plans.

Having said that, our plan is in great shape.

As you mentioned, with the funding we did early in the year, we are pretty much 100% funded.

So if rates stay this low through the end of the year, there will be some headwinds on our -- at least our reported expense for the plan.

But it will still be very well-funded.

And at least at this point, we are not planning for major additional funding, anything that would be outside the normal.

Okay, thank you.

David Vernon, Bernstein.

Just a quick follow-up on the European volume story.

Kind of within Europe, are you seeing a different mix as far as the transporter standard versus kind of overnight inside of Europe?

A little bit.

The blessing and the curse of this great integrated network is it is very easy for customers to move up and down the portfolio.

It was a tremendous strength for us during the recession because customers could trade down the portfolio to save money, rather than trading out.

So we are seeing a little bit of that.

Is it the beginning of a trend or is it just a blip?

We're not sure yet.

But we have seen in the last quarter a little bit of an acceleration in the growth in our more standard products and slower growth in our premium products.

But all in all, Europe exports grew upper single digits, which is, I think, far above the market.

We will hear from some of our other competitors in the next couple of weeks and see.

But we remain very confident that we've got a very strong value proposition there and are hoping customers compete in a challenging environment.

I might add, we do very well on profitability in our transporter standard.

So just because you are trading down, doesn't mean you're hurting your profitability.

I was going to ask -- so is it a similar delta in the premium to deferred in the US versus -- in transporter Europe, or is it a little less?

I guess the trick in the short term is that the premium products tend to have more fixed cost.

And the extreme is the Asia to US flights.

So it is mainly an issue for us of adapting our network, rightsizing, getting the right-sized plane and the right assets.

So over time, as Scott says, we can adjust and continue to generate the incredible margins that we are able to no matter what the product mix.

But in the short term, it can create some challenges to adapting the assets.

Great.

Thank you.

Due to time constraints, our last question will come from the line of David Ross of Stifel Nicolaus.

You talked a little bit about the guidance range, Kurt.

You didn't narrow it at all going into the fourth quarter and we only have one quarter left.

Kind of looking at the expectations you've laid out for the fourth quarter, it looks as if you are going to be in the lower end of the guidance range, and so there is a lot of upside there.

Is the fourth quarter -- you mentioned if the consumer spends better than people expect -- is there that much upside leverage to the model, where you could potentially hit the upside of that range?

David, I don't want to get in detailed specifics on it.

Clearly, we've migrated over the last couple years to an annual guidance.

If we think there is a risk of going out of that, either to the positive or the negative, we would adjust.

But it has been a bit of a roller coaster the last few months anyway.

We've taken a hard look at it.

We are very confident that we will complete the year in that guidance.

And with the uncertainty in the US on the holidays, with the volatility we've seen across the globe, we figured we would leave us a pretty wide range and not try to thread the needle for the remainder of the year anyway.

So we remain optimistic, but we do think that since peak becomes more and more intense and more and more short, we thought it safe just to go ahead and stay with this current annual range.

David, I said last quarter I thought that the economy could be anywhere between 1% and 3.5% in the second half of the year.

And where the economy ended up could drive where we are in the range, so I think there is a good chance we are going to be somewhere in the middle of it, in that economy, the economic forecast of 1% to 3.5%.

So we feel pretty comfortable keeping the range where it is.

Still, as Kurtz said, the holiday season has a big, wide range on the results, so we left it where it was.

Thank you very much.

That concludes our Q&A session for the day.

I would now like to turn the program back over to Mr.

Dolny.

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

Thanks, Andy.

UPS produced solid results as we managed through the economic soft patch in the third quarter.

But now, we are starting to see a number of developments that give me optimism.

The US economy is stable and showing modest growth.

And we've started to see important decisions be made in both Washington and Brussels, although much more action is needed there.

UPS is ready with a global integrated network in place to support stronger growth going forward.

As we look for the rest of the year, UPS is prepared to meet the needs of our customers and finish up the year with a strong fourth quarter as we achieve record earnings per share for the year.

Thanks so much, and have a great day.