聯合包裹運送服務公司 (UPS) 2011 Q4 法說會逐字稿

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  • Operator

  • Good morning.

  • My name is Stephen and I will be your conference facilitator today.

  • At this time, I would like to welcome everyone to the UPS investor relations fourth-quarter 2011 earnings conference call.

  • All lines have been placed on mute to prevent any background noise, and after the speakers' remarks, there will be a question-and-answer period.

  • Please note we will take only one question from each participant to accommodate more analysts during this call.

  • Thank you for your cooperation.

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

  • Andy Dolny, UPS Treasurer and Investor Relations Officer.

  • Sir, the floor is yours.

  • Andy Dolny - Treasurer, VP of IR

  • Good morning, everyone.

  • 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 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 the operations of the Company.

  • These anticipated results are subject to risk and uncertainties, which are described in detail in our 2010 Form 10-K and 2011 10-Q reports.

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

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

  • On Friday, January 27, UPS announced an accounting change relating to expense recognition for Company-sponsored pension and post-retirement benefit plans, adopting a mark-to-market methodology.

  • This new method, implemented in the fourth quarter of 2011, is preferable and will result in simpler, more transparent financial reporting.

  • As we said on our call last Friday, mark-to-market pension accounting provides several benefits.

  • It's simpler, as gains and losses outside of the 10% corridor are recognized in the year incurred rather than amortized.

  • It provides more transparency to UPS's underlying results, and it is considered preferable by GAAP, since it more closely aligns with fair value principles.

  • And remember, there is no impact on benefits to participants, pension plan funding or UPS cash flow.

  • It is an accounting change.

  • As we outlined on Friday, as a result of adopting this new methodology, adjusted diluted earnings per share increased by $0.03 for the fourth quarter and $0.12 for 2011.

  • In addition, a 2011 mark-to-market charge of $827 million was recorded in the fourth quarter.

  • Therefore, on a GAAP basis, diluted earnings per share for the quarter and total year will be reduced by $0.51 and $0.41, respectively.

  • This is inclusive of both the benefit from the accounting change and the mark-to-market adjustment.

  • This accounting change must be applied retrospectively.

  • As a result, 2010 adjusted diluted EPS and GAAP diluted EPS were reduced by $0.08 and $0.15, respectively.

  • To assist in comparisons, revised results for prior periods back to 2007 have been provided.

  • The impact to UPS financials are shown on the Web schedules and described in detail in the presentation we distributed last week.

  • The presentation and the Web schedules are available on our website.

  • I wanted to point out that we included a few extra financial schedules in this morning's quarterly package.

  • For both the fourth quarter and 2011 full year, we provided three selected financial data schedules -- one that provides adjusted and GAAP results under the new pension accounting methodology; a second under the previous method; and a third that reconciles the two.

  • We hope you find this information helpful.

  • Separate from pension, in the fourth quarter of 2010, UPS recorded a net $58 million gain on the sale of certain non-core assets in its Supply Chain and Freight segment.

  • The after-tax benefit was $32 million, or $0.03 per share.

  • During this morning's call, all 2011 fourth-quarter and full-year references and comparisons to 2010 will refer to adjusted results, unless otherwise noted.

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

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

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

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

  • I hope you understand and thank you for your corporation.

  • Now let me turn it over to Scott.

  • Scott Davis - Chairman, CEO

  • Thanks, Andy.

  • Good morning everyone.

  • I hope all of you had a safe and happy new year.

  • I can tell you that during December, we were very busy at UPS, ensuring holiday shipments arrived where they needed to be all around the world.

  • In fact, we experienced our busiest peak ever, delivering almost 500 million packages between Thanksgiving and Christmas.

  • And UPS wrapped up the year with record EPS, free cash flow exceeding $5 billion and a new high in return on invested capital.

  • In the US, we saw robust growth in e-commerce, while traditional retailers experienced mixed holiday sales.

  • Continued migration to B2C contributed to significant growth in UPS residential shipments.

  • This rapidly expanding market segment enables more and more opportunities for consumers to experience the unique solutions provided by UPS.

  • Solutions like UPS My Choice, the industry's first offering that puts receivers in control of their shipments.

  • UPS delivered almost 3 million packages to My Choice users during the quarter.

  • Enrollment exceeded expectations, approaching three quarters of a million subscribers -- not bad for a service offering in its first three months of existence.

  • All in all, the US market performed very well, growing at a faster pace than we projected.

  • Turning our focus to other parts of the world, in Europe, recession concerns, the debt crisis and the instability of the euro dominated headlines.

  • But for UPS, solid growth continued.

  • While in Asia, economic output and our volume lagged expectations.

  • Looking to 2012, global economic expansion is expected to be slightly below the rate seen in 2011.

  • The US is one of the few economies where expectations are greater than last year.

  • Some countries in Europe are expecting growth, while others are facing contraction.

  • And in Asia, although there is discussion about slowing, growth there is still projected to outpace the rest of the world.

  • Businesses in Asia understand the power of global trade, and clearly their economies benefit greatly.

  • The US needs to pick up the pace of exports and increase the participation of small and large companies alike.

  • Recently, three key trade agreements were approved.

  • These pave an excellent avenue for growth.

  • Small- and medium-size businesses are currently underrepresented in global trade.

  • UPS is actively engaged in enhancing the export process for them through our broad set of solutions, expertise of our people and the reach of our network, bringing it all together through the power of UPS technology.

  • Companies throughout the world face many challenges today.

  • In parts of China, supply chains are stressed by rapid wage inflation, while in other parts of the world, volatile energy prices, natural disasters, and social unrest provide additional strains.

  • Companies also face more industry-specific challenges as they look to serve the global market.

  • Take healthcare for example, where companies encounter increased regulations, greater competition from generics and the heightened focus on cost control.

  • As a result, more businesses are trying to diversify the components of their supply chains, and they are looking for reliable outsourcing partners so that they can focus on their core competencies.

  • As these shifts occur, the complexity of the logistics model increases.

  • UPS is uniquely positioned to assist customers worldwide with their distribution and transportation needs as they evolve.

  • This evolution will require further investments on our part to develop new innovative solutions, increase channel access to our global network and expand our unmatched logistics capabilities.

  • We at UPS were encouraged by comments made during the State of the Union address that supported all of the above when it comes to alternative fuels.

  • We have talked quite a bit in the past about our rolling laboratory approach -- not just one alternative fuel solves our needs.

  • Expanding the availability and the use of natural gas is one answer in improving the environment and reducing dependence on oil.

  • We were honored to be recognized recently by President Obama for our work in this area, but finding solutions that improve processes is what UPS does every day.

  • And for that reason, I want to thank UPSers around the world for their hard work and dedication in providing excellent service.

  • Each of them impacts how UPS is perceived by our customers and communities.

  • All in all, a job well done.

  • As I told you a year ago, 2011 was going to be a great year for UPS, and it was just that.

  • We experienced solid top-line growth in a challenging economic environment, continued gains in productivity, 20% improvement in operating profit, record EPS, and on top of that, we had strong free cash flow, enabling UPS to continue our trend of significant distributions to our shareowners.

  • Now let me turn the call over to Kurt.

  • Kurt Kuehn - CFO

  • Well, thanks, Scott, and good morning.

  • Before I get started, I want to explain how I will discuss fourth-quarter performance in light of the pension accounting change announced last Friday.

  • To make comparisons to past trends easier, I will review our results as they would have been under the old methodology first.

  • After covering all segments, I will bridge results to the new methodology.

  • And then guidance, of course, will reflect the impact of our new pension accounting.

  • Now, let's get started.

  • A year ago we announced at UPS expected to achieve record earnings per share in 2011.

  • I am pleased to report today that we did just that, exceeding our previous peak earnings per share of $4.11, generating earnings per share of $4.23.

  • Not only did we set a new high in earnings per share, UPS also achieved record revenue of $53.1 billion, up more than 7%, and we surpassed the 4 billion mark in consolidated package volume for the year.

  • All of this was accomplished during a period of uneven global economic conditions.

  • In the fourth quarter, revenue climbed 5.6% on average daily volume growth of 3.6%.

  • Operating profit approached $2 billion, up 12.6% over last year, and operating margin improved to 14.0%, an increase of 90 basis points compared to 2010.

  • Notice that the tax rate during the fourth quarter came in higher than expected at 35.3%.

  • This was due to a greater portion of profitability in the US than planned, as well as some year-end adjustments.

  • For the full year, our tax rate was 34.3%.

  • Despite this additional tax expense, earnings per share for the quarter were $1.25.

  • These results are impressive considering the macro trends that Scott outlined.

  • Overall, UPS had a fantastic peak season, with global average daily volume exceeding 27 million packages on two days and exceeding 25 million on five.

  • UPS technology provided customers and receivers visibility into their shipments as never before, handling almost 58 million tracking requests on peak day.

  • Now let's review segment performance during the quarter, starting with US Domestic.

  • The segment saw strong revenue growth of 7.3% on a 3.8% jump in average daily package volume.

  • Our Deferred Air products rose 12%, while Ground was up 3.5%.

  • All products benefited from the surge in online shopping, as we experienced robust gains in B2C volume, especially in our suite of lightweight solutions.

  • Revenue per piece was up 3.4%.

  • Higher base rates and fuel surcharges were somewhat masked by a decline in weight per shipment and changes in both customer and product mix.

  • Growth from large e-commerce customers outpaced smaller accounts, impacting both customer mix and package characteristics.

  • As a result of this rapid growth in B2C, UPS experienced a meaningful decrease in weight per shipment, down almost 3% compared to the fourth quarter of 2010.

  • We successfully adapted to this changing product mix, with an operating profit increase of 24% and margin expansion of 200 basis points to 14.9%.

  • The US Domestic operations executed one of their best peak seasons, demonstrating the benefits of scale as well as the flexibility and efficiency of the UPS network.

  • And of course, a little help from Mother Nature never hurts.

  • Key operating statistics, like direct labor hours, miles driven and block hours all grew at a slower pace than volume.

  • Moving to the International segment, challenging economic conditions existed in many regions of the world.

  • UPS export volume out of the US declined as the dollar strengthened against the euro.

  • Meanwhile, UPS remained resilient in Europe and continued to produce solid results.

  • And though our growth rate and export from Asia improved slightly compared to the third quarter, it was basically flat with last year and below expectations.

  • These conditions and a nearly 2% unfavorable currency impact contributed to the UPS revenue growth of 3.5%.

  • UPS did set a new benchmark in export daily volume, surpassing 1 million packages.

  • The increase of 4.5% was driven by high-single-digits gains from Europe, as well a strong intra-Asia and Asia-to-Europe trade.

  • What makes this new high in export volume even more impressive is the fact that the Asia-to-US lane was down by almost 3%.

  • Non-US Domestic volumes were up a little over 1%, as strong growth from Poland, Turkey and France helped offset weaker demand in other markets.

  • Operating profit declined $40 million to $497 million.

  • The year-over-year comparison was negatively impacted by approximately $30 million due to currency fluctuation and our hedging programs.

  • Despite the challenging impact of changes in product mix and shifting trade patterns, UPS once again generated the highest operating margin in the industry, in line with our expectations at 15.8%.

  • We experienced a shortening in trade lanes as a result of solid intraregional shipment growth and weakness in the Asia-to-US lane.

  • International yield was up 2%, negatively impacted by a currency translation.

  • Neutralizing this, it was up almost 4%.

  • Also during the quarter, UPS made available several improvements for international shippers.

  • These included enhanced return logistics solutions, as well as expanded availability of our customer-facing technology, including mobile apps.

  • Now for the Supply Chain and Freight segment.

  • Operating profits increased 8.5% on revenue growth of a little over 2%.

  • Operating margin expanded 50 basis points over last year to 8.2%.

  • UPS Freight let the way, with good operating profit improvement from gains in productivity and the solid increase in revenue.

  • Though LTL shipments and tonnage were down 2.4% and 1.3%, respectively, revenue per hundredweight was up almost 9%, driven by revenue management initiatives and higher fuel surcharges.

  • The Forwarding business unit experienced a decline in revenue and operating profit as overcapacity and weak demand in the air freight market put downward pressure on both tonnage and rates.

  • Margins, however, remained strong.

  • Our Distribution Unit continues to be a success, exhibiting growth in both revenue and profitability, while expanding operating margins.

  • This was accomplished even as the business continued to invest in its healthcare capabilities.

  • In fact, during the quarter, we opened the 33rd dedicated UPS healthcare facility, and have plans to open four more this year.

  • UPS also completed a healthcare acquisition during the quarter, purchasing the Italian pharma logistics provider Pieffe.

  • With these added capabilities, UPS is positioned to serve pharmaceutical, biotech and medical device companies doing business there.

  • Moving on to review our cash position, during 2011, UPS generated more than $5 billion in free cash flow, after making capital expenditures of $2.0 billion and pension contributions of $1.4 billion.

  • In 2011, UPS increased its share repurchase program significantly and stepped up dividends.

  • In fact, for the year, we repurchased 38.7 million shares for approximately $2.7 billion and paid dividends totaling $2 billion, up 10.6% per share.

  • This demonstrates UPS's continued commitment to distributions to shareowners.

  • Before discussing our expectations for 2012, I want to take a few minutes to build a bridge to UPS's results under the new pension accounting methodology.

  • This new method, implemented in the fourth quarter 2011, is preferable and will result in simpler, more transparent financial reporting.

  • It will be the foundation used for results from this point forward and will be the basis for comparisons noted in guidance.

  • Keep in mind, as Andy mentioned earlier, that historical financial statements reflecting both methods are available on the UPS Investor Relations website.

  • So looking at the fourth quarter, the new methodology had a positive impact on adjusted diluted earnings per share of $0.03.

  • Earnings per share came in at $1.28 per share, an increase of 21% over prior-year results on a 17% improvement in operating profit.

  • 2011 operating margin of 14.3% increased 140 basis points over the 12.9% in 2010.

  • And looking at our full-year 2011 results, adopting this new methodology resulted in an increase in adjusted diluted earnings per share of $0.12.

  • Total Company earnings per share came in at $4.35 per share, an increase of 25% over prior-year results, on a 20% improvement in operating profits.

  • And 2011 operating margin of 12.9% increased 140 basis points over the 11.5% in 2010.

  • Remember, the pension accounting change we adopted has no impact on cash flow or plan funding.

  • In fact, we ended the year 94% funded for UPS-sponsored pension plans.

  • Looking towards 2012, even though we adopted this new method, we still project that ongoing pension expense will increase on a year-over-year basis by more than $100 million due to additional service costs and an approximately 35-basis-point decline in the discount rate.

  • Continuing with our outlook for 2012, recent economic news about slowing in Europe and Asia is in contrast to the more optimistic tone we are seeing here in the US.

  • Our expectation is for mixed economic growth around the world, with modest improvements in the US.

  • Overall, we expect global economic expansion to be slightly less than the growth rate seen in 2011.

  • In spite of this macro outlook, UPS expects another strong year of earnings growth, and we are anticipating earnings per share in the range of $4.75 to $5 per share, an increase of 9% to 15% over our 2011 earnings of $4.35.

  • For the full year, US Domestic segment average daily volume is projected to grow around 2% to 3%.

  • Revenue is expected to be up mid-single digits.

  • Base rate improvements of 2% to 3% are expected, although these may be masked somewhat by continued growth in lightweight solutions that serve the ever-expanding e-commerce market.

  • Operating profit should grow at an upper-single-digit pace as we anticipate continued margin expansion.

  • In our International business, we expect revenue to increase at a mid- to high-single-digit rate on a 5% to 6% growth in export average daily volume.

  • Domestic volumes are projected to be similar to last year's levels.

  • We expect operating profit growth of about 10%, with some margin expansion.

  • The first quarter is expected to be flat to last year due to more challenging comparisons and the current weakness in the euro, although as the year progresses, we do not anticipate currency to have a meaningful impact on year-over-year results.

  • For Supply Chain and Freight, the first half of 2012 comparisons will be more challenging due to strong performance in freight forwarding last year.

  • Given this, operating profit growth will most likely be flat to down slightly.

  • For the full year, we expect both revenue and operating profit to increase at a mid- to high-single-digit pace.

  • Continued gains in UPS Freight will be somewhat offset by healthcare investments in the Distribution unit.

  • The Supply Chain and Freight segment overall is expected to maintain a strong operating margin of approximately 8%.

  • Looking at total Company results for the first quarter, due to the items highlighted in both International and Supply Chain and Freight, we expect year-over-year growth in earnings per share to be a little less than the average for the year.

  • Our overall tax rate for 2012 should be between 34% and 35%.

  • We expect capital expenditures for 2012 to be approximately $2.2 billion.

  • Regarding cash flow for 2012, UPS expects strong cash flow conversion to continue, exceeding 100% of net income.

  • We remain committed to distributions to shareowners, with planned share repurchases of $2.7 billion, and as always, dividends will continue to be a priority.

  • So to wrap this up, 2011 was a record year for UPS, as our business model generated outstanding results.

  • The robust fourth-quarter performance that we experienced gives us momentum as we move into 2012.

  • We enter this year with the expectation of delivering strong earnings growth, with earnings per share in the range of $4.75 to $5, up 9% to 15% compared to 2011 earnings of $4.35.

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

  • Operator

  • (Operator Instructions).

  • Ben Hartford, Robert W.

  • Baird.

  • Ben Hartford - Analyst

  • Good morning.

  • I was wondering if you could look provide a little bit more color into the guidance as it relates to the pension impact and maybe shedding some light on that.

  • I know that we had the $0.12 impact in 2011.

  • What would have been the impact in 2012 if we were to normalize for the old pension accounting?

  • Kurt Kuehn - CFO

  • Well, we would have seen certainly an increase in pension expense for 2012 under both methodologies.

  • And as I mentioned, we do expect more than $100 million, actually about $115 million, in additional pension expense for 2012.

  • But I guess one thing to keep in mind, that the increase is perhaps not necessarily as drastic of many of you projected, really due to two facts.

  • Number one, the plan did exceed its expected rate of return; we actually generated a 9.4% return.

  • And the discount rate did decline by about 35 basis points, and certainly there were some estimates that estimated higher.

  • You know, and as far as the two methods going forward, in some years, the old method results in more expense, and in some, it results in less.

  • You could see that in 2010 and 2011.

  • So you saw this in our restated results, where we have shown those results.

  • So the best reference point really is from the base that we have restated, 2011, we do expect to see about $115 million increase in pension expense and you can adjust accordingly based on that.

  • Thanks.

  • Ben Hartford - Analyst

  • Great.

  • Thanks.

  • Operator

  • Tom Wadewitz, JPMorgan.

  • Tom Wadewitz - Analyst

  • Good morning, and congratulations on the strong fourth quarter.

  • The volumes were very impressive and good performance.

  • I was wondering if you could give a bit more perspective on how much of the volume improvement was really just a very strong peak season and your obviously good contraction with your products to serve online shipping, online sales, and how much is, I guess, either a change in your share performance or a change in the economy.

  • Because it is a pretty notable difference in your Domestic Package volumes versus kind of flat in third quarter.

  • And your guidance in 2012 also implies I think a better volume trajectory than you saw in 2011.

  • So wondering if you could give more color on that.

  • Thank you.

  • Scott Davis - Chairman, CEO

  • Let me start with kind of the macro approach.

  • I think that we certainly are seeing a better US economy than we would have thought back in probably August/September, back at investor conference time.

  • I think back to that time frame, people were talking about a chance for a second recession; you don't hear that anymore.

  • Clearly, we saw a strengthening economy and a strong holiday season.

  • And frankly, it stayed fairly strong into January.

  • So I think the US, while I wouldn't call it a robust economy right now, I do think the small package market is performing better than we would have thought four or five months ago.

  • Kurt Kuehn - CFO

  • Yes, that's right.

  • So at a macro level, clearly, we feel a little better about where the US is at.

  • Looking more specifically, I guess, to your question, Tom, we clearly were pleasantly surprised by the demand surrounding the holiday season.

  • Really, this is the first peak where we have really had our full suite of lightweight product offerings in place.

  • And about half of the additional growth we did see in our Basic and SurePost products.

  • If you recall, SurePost really was just launched in 2011.

  • So we did see a big uptick, and clearly this fits into the trend of lighter-weight products; computers moved to tablets or portables and a lot of small products.

  • And then the e-commerce growth continues unabated.

  • We estimate in general, e-commerce was probably up about 15% for the holiday season.

  • So basically, we were in place with a new suite of products that was able to both attract volume and at the same time handle it very profitably.

  • So we were pleasantly surprised, frankly.

  • I think that combined with the increased focus we have had on B2C, with My Choice and really differentiating our residential products, created a nice uptick.

  • We also saw -- the other number that might have surprised you a little bit was the substantial growth in Deferred Air.

  • And a lot of this is also surrounding the e-commerce trends, I guess, that there were a number of Internet retailers that decided to differentiate their products by offering a tighter time in transit.

  • So we are seeing some pieces moving around, but all in all, we were thrilled that our business model and our product offerings were able to generate a great quarter.

  • Tom Wadewitz - Analyst

  • Do you think there is a different in share dynamic or competitive dynamic?

  • Is that part of this as well?

  • Kurt Kuehn - CFO

  • I wouldn't comment on that.

  • I think in general it was a good holiday season.

  • The market moved pretty well.

  • So we will see how everything else settles out.

  • Tom Wadewitz - Analyst

  • Okay, great.

  • Thank you.

  • Operator

  • Justin Yagerman, Deutsche Bank.

  • Justin Yagerman - Analyst

  • Hey guys, appreciate you taking the call.

  • I wanted to ask about the B2C trends; obviously, quite strong in the quarter.

  • So it sounds like Deferred's strength was driven partially there.

  • But you also talked about a mix shift that is occurring.

  • So maybe you could put some numbers around the growth in B2C that you saw in your business this year versus last year, some expectations going forward, and then maybe help us think about why that weight per shipment is lower and how that affects mix from a yield standpoint.

  • Kurt Kuehn - CFO

  • As, I guess, a ballpark number -- I think there is a couple of parts to it.

  • Number one, B2C is growing robustly, especially through the e-commerce venue.

  • Clearly, the e-commerce branches of companies seem to do a lot better than the brick-and-mortar.

  • In fact in December, B2C volume was over 50% of our volume.

  • December, it always spikes.

  • So we are continuing to see that grow.

  • The other nuance -- and this is more Company-specific -- is the substantial success of our SurePost product, which for the first time has offered a broader suite of services for lightweight products, lower values.

  • So that was another big part of it -- part of the success.

  • So the combination of the trends in general, UPS positioning and us being able to differentiate, and, as we mentioned, sign up three quarters of a million customers for our new My Choice service, we think really puts us in a great position to capture some of the benefit of these trends.

  • Scott Davis - Chairman, CEO

  • I think you will also see these trends internationally.

  • It is not going to be unique to the United States.

  • I think the whole global B2C phenomenon is still in the early innings and we will see that grow going forward.

  • But the key is that UPS is adapting the operations to be profitable in this business.

  • Justin Yagerman - Analyst

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

  • Scott Davis - Chairman, CEO

  • Yes, SurePost is for lightweight, relatively low-value products where we do postal injection.

  • We also, though, have a Basic product that is a mix of both UPS-delivered and injection.

  • Andy Dolny - Treasurer, VP of IR

  • I'm going to remind people, one question please.

  • Justin Yagerman - Analyst

  • Thanks.

  • Operator

  • Ken Hoexter, Merrill Lynch.

  • (Operator Instructions)

  • Ken Hoexter - Analyst

  • Good morning.

  • Can you talk -- on the International side, you talked about the slowing of growth, or the expectations for a bit slower, particularly out of Asia.

  • When you think about your CapEx, I guess you talked about increasing it 10%.

  • Can you talk about what you are doing in terms of are you slowing down or shutting down any lanes, and where are you increasing that CapEx?

  • Thanks.

  • Kurt Kuehn - CFO

  • We did certainly make some adjustments in the network after the fairly significant slowing we saw during the third quarter.

  • And as we said, Asia ended up being a little slower than we had anticipated, most notably on the Asia-to-US lane.

  • Yes, we have tweaked our network.

  • Actually, if you look at Asia specifically, we reduced capacity about 10% over the last couple of quarters, maintaining service levels in all markets, but some of the duplicate flights and additional lift we took out.

  • And that allowed us to sustain still a pretty good margin, although we will continue to adjust.

  • Trends so far this year are a little hard to tell because the Chinese New Year has come in a little earlier.

  • But we will stay responsive and monitoring where things are at in Asia.

  • On the flip side, though, we did see yet another quarter of solid intra-Europe growth.

  • So in spite of the headline risks in Europe, we are continuing to see good growth there.

  • And some of our investments for next year surround the expansion of our Cologne Air Hub in Germany that helps to support all that.

  • Scott Davis - Chairman, CEO

  • In general, our CapEx is still historically quite low.

  • It is going to be still around 4% of revenue.

  • If you recall, we used to spend between 5% and 8% of revenue.

  • So we have had really three low years.

  • 2009 was extremely low, 2010 was low and 2011 -- what -- 3.8%, I think, in 2011, and about 4% for 2012.

  • So still quite low.

  • Ken Hoexter - Analyst

  • Great.

  • Appreciate the insight.

  • Thank you.

  • Operator

  • David Ross, Stifel Nicolaus.

  • David Ross - Analyst

  • Good morning, gentlemen.

  • On the Supply Chain and Freight side of things, you mentioned that you saw a decline in revenue and operating profit due to mainly overcapacity and weak demand in the air freight market, but that margins were strong.

  • Did margins actually expand year over year for the Freight Forwarding segment?

  • Also, if you could comment on Ocean and what you are seeing in the Ocean side of things.

  • Kurt Kuehn - CFO

  • Margins expanded slightly year over year, but yes, there has clearly been a reduction in demand, not surprisingly, and rates, and there is certainly some challenges with margin squeeze.

  • Ocean, we did pretty well on, although I think clearly the market remains very slow.

  • But we have done a lot of work on our expanded Ocean portfolio, less than container load.

  • But it remains a minority part of the business.

  • Air Freight is the primary focus.

  • Operator

  • Nate Brochmann, William Blair & Company.

  • Nate Brochmann - Analyst

  • Good morning, everyone.

  • I wanted to talk a little bit about the disconnect that I am kind of picking up on a little bit between the very strong US e-commerce activity through the different channels, coupled with the kind of slower import growth, in terms of wondering where -- in terms of the shift in production a lot of those e-commerce products then might be coming from or how the supply chains are moving.

  • Scott Davis - Chairman, CEO

  • I think in general, it has been all about inventory levels.

  • And I think that we did not -- even though inventory seemed to add to GDP in the fourth quarter, we feel that most of the inventories are still pretty slight in the United States.

  • I think we saw at the holiday season a lot of people were running out of product.

  • We have seen a pretty strong January, I think, as people had to replenish inventory levels.

  • So I think that because of the low imports from Asia, we would be hopeful you will see some improvements in the near term, as people replenish the inventory levels.

  • Kurt Kuehn - CFO

  • I think we are fairly bullish, though, on production within the US, seeing somewhat a Renaissance.

  • If you look at the cost of energy with natural gas so low, you look at the fact that wages on a global competitive perspective have improved in the US, and the fact that people are realizing that it is nice to have local sourcing in addition to global sourcing, we feel generally bullish that the US economy is seeing a bit of an uplift and will next year.

  • Operator

  • Chris Wetherbee, Citi.

  • Chris Wetherbee - Analyst

  • Great, thanks.

  • Good morning.

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

  • Kurt Kuehn - CFO

  • Yes, as I said, Europe continues to be a good story, and I think it is really two components.

  • One is the UPS-specific success in offering European shippers an integrated solution.

  • And the other is, I think -- and we heard some of this from Davos -- that the core business activity is probably a little better than the headlines would suggest.

  • So I think -- we did see upper single-digit growth in shipments within Europe.

  • That is a little slower than some of the previous quarters.

  • But reports of Europe's demise have been exaggerated a bit.

  • Scott Davis - Chairman, CEO

  • We really built our plan on a pretty flat economy, probably slightly negative European economy in 2012.

  • But again, that small package market should grow, even in that environment.

  • Chris Wetherbee - Analyst

  • Great.

  • Thank you.

  • Operator

  • Gary Chase, Barclays Capital.

  • Gary Chase - Analyst

  • Hey, good morning, guys.

  • I hate to ask you this one, but it is polluting my inbox right now.

  • Could you just clarify -- Kurt, you said when you were giving your outlook, I thought what I heard you say was flat International profit, and that EPS at the corporate level you were thinking was going to be lower growth in the earlier part of the year than in the back half.

  • I think some people might have heard that it was flat EPS with, I think, it is $0.88 last year.

  • Could you just clarify -- could you just go back over that and clarify exactly what you were trying to communicate there, please?

  • Kurt Kuehn - CFO

  • Great, I am glad you asked that if it was confusing, because that was not the intention.

  • We had said that the first quarter for International is likely to be flat, really because of some of the trends we've talked about, plus we do have a pretty strong euro headwind in the first quarter.

  • We are currently hedged and protected at about 1.30.

  • Last year, it was about 1.36.

  • So that was purely a quarterly guidance.

  • Overall for the Company, we expect earnings increases in the first quarter.

  • They will just be probably a little less than the average that we guided for for the year; we guided a 9% to 15% range.

  • So that was solely a comment about the first quarter.

  • Scott Davis - Chairman, CEO

  • And the currency drag is -- euro is primarily in the first quarter.

  • Our hedging program will protect us pretty well from Q2, 3 and 4.

  • Gary Chase - Analyst

  • Okay, guys.

  • Well, guess I got to get back in the queue.

  • Thank you.

  • Operator

  • Art Hatfield, Morgan Keegan.

  • Art Hatfield - Analyst

  • Morning, everyone.

  • Just a quick follow-up on that.

  • To make sure we understand your guidance correct there, Kurt, what numbers are you using -- the quarter numbers for the year and for the full-year?

  • Kurt Kuehn - CFO

  • Well, overall, we are guiding to a 9% to 15% increase, $4.75 to $5 a share.

  • We've said in general we expect Q1 to be a little more challenged.

  • So it will show earnings growth but at a little lower rate than the rest of the year, primarily because of the headwind in International.

  • And also the comps in Supply Chain are tough, given the current margin squeeze.

  • Scott Davis - Chairman, CEO

  • So remember, we guide annually -- help you a little bit on the quarterly, but we guide annually.

  • Art Hatfield - Analyst

  • No, that's helpful.

  • I was just curious which base you were using.

  • Kurt Kuehn - CFO

  • All bases are against the restated.

  • We are moving past the old numbers.

  • I wanted to review and give you some sense since you had anchored on those for Q4.

  • But we have a base earnings of $4.35; that is the methodology.

  • And all the guidance is based off of that base, and, as I said, we do have a pension headwind heading into next year.

  • But virtually everything that we talk about and you see from now on will be based on this improved, more transparent approach.

  • And we feel good about the year, but we do feel Q1 will be just a little more challenging.

  • Art Hatfield - Analyst

  • No, that's helpful.

  • Thank you.

  • I just wanted to clarify that.

  • Operator

  • William Greene, Morgan Stanley.

  • William Greene - Analyst

  • Hi, good morning.

  • Kurt, can we just come back to the impact from the changes on the pension accounting.

  • Will that affect any of the long-term guidance that you gave us back in September?

  • Do those numbers get affected?

  • I assume there is some impact, but how would we think about that impact.

  • Kurt Kuehn - CFO

  • Bill, they really don't.

  • When we restated, three of the years went one way and two of the years went the other.

  • So if you paint me a scenario of different discount rates and market returns, yes, it may be different.

  • But as we have looked at it, it is not a material change over the longer-term for margins or any of that.

  • It just -- it may make the results slightly different year over year.

  • So we went back and looked at that, and we really don't see a scenario -- if discount rates rise and markets do well, this method is a drag, because we are not going to take credit for those market returns in our core results.

  • Conversely, if we stay with these incredibly low discount rates, with 10-year Treasuries under 2%, then this method may pull some of that -- those investment losses, or at least the discount rate impact, out of core earnings.

  • But long-term, our guidance that we gave in September remains.

  • Probably the only notable difference in guidance is we are actually a little more optimistic on 2012.

  • If you remember, we gave guidance of 10% to 15% to earnings in September, but said that 2012 would be more challenging, because we believed there would be below-trend growth in the global economy.

  • We do think it is going to be below-trend growth, but clearly, we are giving earnings guidance very close to that long-term momentum.

  • William Greene - Analyst

  • Okay, thank you.

  • Operator

  • David Vernon, Bernstein.

  • David Vernon - Analyst

  • Good morning.

  • A question on the International cargo revenue that is booked within the International Package segment.

  • That number is sort of lower than it has been since the recession, and I was wondering how much of that decline is due to less space on the [Bransio] aircraft for cargo revenue or just very weak rates for the filler freight you are taking on.

  • Kurt Kuehn - CFO

  • It is a little bit of all of those.

  • A, we did reduce capacity out of Asia, so we had less excess capacity to use.

  • Rates have also softened a little bit.

  • Plus some of that space is used by our forwarder and would not show up in that cargo line.

  • Scott Davis - Chairman, CEO

  • But clearly, excess capacity has driven down rates, and that is going to have an impact on revenue.

  • David Vernon - Analyst

  • All right.

  • Thanks.

  • Operator

  • Chris Ceraso, Credit Suisse.

  • Chris Ceraso - Analyst

  • Thank you, good morning.

  • I have a question on the pension.

  • What is driving the increase in service cost?

  • Did you change benefits?

  • And also what is your plan for cash contributions?

  • Are you putting anything in the plan in '12?

  • Kurt Kuehn - CFO

  • Service cost is just going to be up as kind of a normal continued growth, each of us clicks another year on the pension, I guess.

  • The biggest impact is the lower discount rate.

  • And as far as contributions, we expect to make about $400 million of direct contribution to the pension plans and another $400 million or so to cover our post-employment benefits, retiree, medical and some of those things.

  • Scott Davis - Chairman, CEO

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

  • Chris Ceraso - Analyst

  • Okay, thanks.

  • Operator

  • Peter Nesvold, Jefferies.

  • Peter Nesvold - Analyst

  • Good morning, guys.

  • Great report.

  • If we got the model together fast enough before the call, it looked like Deferred Air yields in the US Package business were up 2.5% year over year in 4Q, which was kind of a notable stepdown from the 9.8% in 3Q.

  • And again, assuming we got the model together fast enough.

  • Is there any kind of tradedown that is happening in that business or is anything else that may be impacting the yields there?

  • Kurt Kuehn - CFO

  • On Deferred Air, it is really tradeup, if anything, from Ground.

  • The big issue there is the weights are significantly lower.

  • That was the product hit most significantly by reductions in weight.

  • So a lot of e-commerce volume, with lightweight volume being shipped.

  • So we are very conscious of it.

  • The base rates underlying, as we said, remain strong, 2% to 3%.

  • But a 4% reduction in weight for Deferred Air clearly caused a big impact.

  • Peter Nesvold - Analyst

  • And then the brief follow-up, and I am done.

  • Any conversations around Brent oil prices these days?

  • With it north of $100 here for a couple of months, is that starting to creep up again in shipper conversations?

  • Thank you.

  • Kurt Kuehn - CFO

  • Really not.

  • Over the last several years, we have migrated gradually some of the new normal for fuel into base rates.

  • So the absolute amount of the surcharge is lower than it was in historical.

  • And our plan for the year assumes fuel somewhere plus or minus at near the $100 rate anyway.

  • Operator

  • Scott Group, Wolfe Trahan.

  • Scott Group - Analyst

  • Thanks.

  • Good morning guys.

  • So wanted to talk a little bit about the pricing guidance.

  • I think you mentioned 2% to 3% pricing in the US.

  • And I know that is in line with the longer-term expectations, but it seems like a step down from what we got in 2011.

  • And wanted to understand kind of the drivers of that.

  • Is this just being conservative or is there something changing in the pricing market that is not letting you get in '12 what you got in '11?

  • Kurt Kuehn - CFO

  • No, we think the core momentum, as I was -- certainly something we have been looking at very closely.

  • The core base rates are continuing very stable.

  • We did see in Q4 significant impact of customer mix with our lightweight product suite really kicking into gear, and we do expect that momentum to continue for a while.

  • So the overall reduced weights, 3% in Q4, and that trend may continue given the customers and the e-commerce that we are seeing, does create a net impact that shows lower yield.

  • But as you see, we are able to profit on that.

  • So all in all, we think the market pricing is stable.

  • It remains a very high priority for us.

  • You're really just seeing a fairly significant market change, and also a significant change in mix to UPS, as we've really hit our stride with this light-weight e-commerce volume.

  • Scott Davis - Chairman, CEO

  • As Kurt said, the market is rational from a pricing standpoint.

  • What could help us obviously is -- Kurt referred earlier to the manufacturing increase in the US.

  • If we see that throughout 2012, that certainly can help the weight and the yield.

  • Scott Group - Analyst

  • I guess -- I mean I understand the negative mix impact from lower weight.

  • I guess I would have thought, though, with an improving macro outlook that there could have been an opportunity for better than 2% to 3% underlying pricing.

  • And just trying to understand the drivers of that, if it's just being conservative or what.

  • Kurt Kuehn - CFO

  • It's consistent with what we talked about in September.

  • Our long-term goal in the domestic environment is to generate 2% to 3% base rate increases.

  • As long as we can keep yields moving at that rate and be able to keep our unit cost below that rate, we will see gradual and positive margin expansion.

  • So we think that is a very disciplined and appropriate approach.

  • It maintains a stable relationship with our customers, and we are very pleased if we can continue that positive balance of yield and unit cost.

  • Scott Group - Analyst

  • Okay, great.

  • Thanks for the time.

  • Operator

  • Jeff Kauffman, Sterne Agee.

  • Jeff Kauffman - Analyst

  • Thank you very much.

  • I just want to clarify -- you said going forward you were looking for about $400 million direct contribution to the plan, $400 million post-retirement benefit contribution.

  • So $800 million versus the $1.4 billion I think that you talked about making last year.

  • In terms of longer-term modeling, we should think of the $800 million as a base, plus or minus, being outside the corridor (multiple speakers) 94% funding?

  • Kurt Kuehn - CFO

  • It is hard to forecast perfectly, but that is probably more normal.

  • Clearly, we were catching up and fully funding the new plan that we had over the last year or two.

  • And frankly, that is one of the good news stories on our cash flow long-term.

  • Scott mentioned that CapEx should remain at or below 4%.

  • The pensions are -- even after what has been a tough year because of lower discount rates -- were 94% funded.

  • So, yes, the pension plans will not be a major hit on cash flow for the foreseeable future.

  • Scott Davis - Chairman, CEO

  • Even from a tax formula standpoint, we are actually over 100%, and that really [was supposed] to drive your contributions going forward.

  • So we feel good.

  • Now, we would have said a year ago that interest rates wouldn't have dropped, so I wouldn't expect them to drop going forward, long-term rates, which could have an impact.

  • If they go up, that improves our funding position.

  • Kurt Kuehn - CFO

  • The only downside is (multiple speakers).

  • Jeff Kauffman - Analyst

  • Thanks and congratulations, guys.

  • Operator

  • Robert Pickels, Manning & Napier.

  • Robert Pickels - Analyst

  • Hi.

  • Thanks for take my question.

  • I hope it is not a repeat.

  • I think it is a little different from Tom Wadewitz's question.

  • But I am just wondering, you know, how all of this growth in e-commerce is changing the seasonal nature of your business.

  • It seems like the e-retail might make 4Q even stronger than some of the other quarters on a go-forward basis.

  • And I am just wondering how you manage this.

  • Is it significantly different?

  • You have to take capacity up and down more than you used to?

  • Just comment on that, please.

  • Kurt Kuehn - CFO

  • Yes, Robert, you are absolutely right and we have done a lot of work studying this.

  • If you look at the seasonal factors of how different quarters and different seasons compare to themselves, we are really seeing that the fourth quarter becomes more and more important.

  • And really two issues, I guess.

  • Number one, the demand for the fourth quarter has really created almost two peaks.

  • We were extremely busy after the Black Friday and Cyber Monday period; that was a peak.

  • Settled down, and then certainly the last week of the holidays was another peak.

  • The one piece of great news -- and this is reflected in our earnings results -- is that the big challenge for us in the past of a large peak was tremendous amounts of training, a lot of disruption in our operations.

  • As you guys saw in our investor conference, we have done a tremendous amount of work through operational technology to streamline our jobs, to de-skill so we don't have to train as much and to optimize in real time.

  • So what you really saw in the fourth quarter was a great demonstration of operational performance driven by data-driven operations.

  • So the good news is we can handle these peaks and this growth in e-commerce very productively.

  • Scott Davis - Chairman, CEO

  • In fact, in the fourth quarter, our productivity improvements offset the entire wage rate increase.

  • You'll see that because of the large scale in the fourth quarter.

  • You won't see that necessarily in Q1, 2 and 3.

  • But it does come through in a large-scale period like the fourth quarter.

  • Robert Pickels - Analyst

  • Does it make it harder -- is it possible the fourth quarter is less indicative of broader economic trends because of the e-commerce?

  • Kurt Kuehn - CFO

  • I think that is a valid point.

  • I mean, if you look at overall retail, it was a little better perhaps than expected, but not hugely.

  • With our bias, with the e-commerce hitting our industry more heavily, you do get a little bit of an outsized gain.

  • Scott Davis - Chairman, CEO

  • But it is still tied somewhat to consumer sentiment, and if consumer sentiment is negative you're going to get impacted in the fourth quarter or the first quarter.

  • So it is got to be a good sign on what the consumers were thinking, consumer confidence in the fourth quarter.

  • Robert Pickels - Analyst

  • Thank you.

  • Operator

  • John Barnes, RBC Capital Markets.

  • John Barnes - Analyst

  • Good morning, guys.

  • Nice quarter.

  • Just a quick question on International.

  • Kurt, I heard your commentary around you are reducing flights and that type of thing out of Asia, took out some of the duplicate type of business.

  • But I'm kind of curious just what might be -- incremental margins domestically were very strong.

  • Some degradation on the International side.

  • Is there anything else you can do to manipulate that cost structure, to maybe get the incremental margins positive again on International, or is it just a matter of kind of letting (technical difficulty)?

  • Kurt Kuehn - CFO

  • Absolutely not.

  • I mean, you know us, John, we are working very hard to make sure that we have optimized the network, that our cost infrastructure is appropriate.

  • As we did mention, we had about a $40 million decline in profits.

  • $30 million of that was purely due to the Euro hedge comparison.

  • We will face a little bit of that in Q1, but after that, as Scott had mentioned, our hedges put us in very good shape.

  • So if you factor out that currency issue, we came pretty close to holding profits even in an environment where trade flows are changing substantially.

  • So we are going to stay on our toes, make sure we've got the right assets in the right place and that our productivity and efficiencies cover it.

  • One of the big trends that we are working on is taking some of the operational technology that we showcase that is used primarily for Domestic and beginning to migrate that over to our International environment.

  • So there is still more to come.

  • John Barnes - Analyst

  • All right.

  • Thanks for the color, guys.

  • Nice quarter.

  • Operator

  • David Campbell, Thompson Davis & Company.

  • David Campbell - Analyst

  • Yes, thank you very much.

  • I just wanted to say that Asia, it seems like business there has been relatively stable since April; it hasn't really been dropping.

  • So when we get to April this year, won't there be a good likelihood of an increase in business that could be better than you are anticipating in your estimates?

  • Scott Davis - Chairman, CEO

  • I think, David -- yes, certainly Asia exports to Europe and the US have not been that strong for -- really for us, it started in August; we saw the falloff.

  • But intra-Asia has stayed strong.

  • Certainly as time goes on and consumer optimism keeps improving in the US, that will help demand, help imports from Asia into the US.

  • We are guarded right now.

  • I think we think there is some room for improvement, but we are pretty guarded as far what we see in 2012.

  • It will get a little bit better, but we are not seeing a robust consumption out of the US.

  • David Campbell - Analyst

  • Thank you.

  • Operator

  • Keith Schoonmaker, Morningstar.

  • Keith Schoonmaker - Analyst

  • Yes, thanks.

  • Can you please comment on SurePost facilities, magnitude and margins.

  • I'm wondering is this handled in existing sort facilities?

  • Is the order of magnitude below a percentage point of ground volume.

  • And I imagine ground margins are slightly lower in SurePost than they are in your own network.

  • Thanks.

  • Kurt Kuehn - CFO

  • Yes, the concept of unique SurePost facilities is a misnomer.

  • This is another product in the UPS suite portfolio.

  • Virtually all of the SurePost volume comes to us from customers that give us multiple times volume in our traditional networks.

  • So really the only difference for SurePost is the last final mile lightweight volume go into the post office.

  • But the pickup process, all of our sortation in our feed networks, that really remains in the UPS network.

  • So it is traditional UPS taking advantages of the economies of scale and integrating it.

  • So it is just one product in the suite of products that our customers choose from.

  • And as I mentioned, for every SurePost package, a given customer will have four or five other packages with them.

  • Operator

  • Jason Seidl, Dahlman Rose.

  • Jason Seidl - Analyst

  • Good morning, gentlemen.

  • I wanted to focus a little bit on your Asia-to-US number.

  • Obviously, it was a decline of 3%.

  • Could you remind us when we stop lapping the negative year-over-year comps?

  • And also, could you comment whether you think part of this might be a little bit of a shift in terms of some of the near-sourcing that we have seen occur down toward Mexico?

  • Scott Davis - Chairman, CEO

  • The volume out of Asia, really, as I said earlier, slowed down in August of 2011.

  • So when we get to August 2012, the comps will get much easier.

  • Kurt Kuehn - CFO

  • And the Mexico trend does seem to be an interesting one.

  • It is hard to call it a groundswell, but clearly in our supply-chain discussions with companies, there is a lot of discussion about should the next unit of capacity be closer to home.

  • It is not necessarily that people are shutting down operations in any area, but there is a lot of interest.

  • I think if you look over the last year or two, whether it's floods or earthquakes, supply chains are very extended and can be fragile, as Scott mentioned.

  • And so we do see a lot of interest in near-sourcing.

  • Scott Davis - Chairman, CEO

  • We saw a peak in 2008 when oil got to $145 a barrel.

  • So if oil and energy prices were to peak again, we would certainly expect to see more of that.

  • Jason Seidl - Analyst

  • Gentlemen, thank you for the time.

  • Operator

  • Tom Wadewitz, JPMorgan.

  • Tom Wadewitz - Analyst

  • Yes, thanks for giving me a follow-up here.

  • I wanted to get your comments on cost inflation and productivity within the Domestic network in 2012.

  • I don't think I've heard much on that on the call.

  • And given that you expect positive volumes, could you see your seniority begin to come down, and kind of how would you view the per-hour inflation when you look at the labor side in Domestic Package in 2012?

  • Kurt Kuehn - CFO

  • We do expect this trend.

  • Certainly as the business grows and we are able to add new employees, or see turnover as people find full-time jobs that are part-timers today, we will see some benefit.

  • And our wage rates mitigated and moderated just a touch in the fourth quarter.

  • It wasn't a huge driver, but it was a slight positive.

  • We do expect to keep comp and benefits somewhere between 1% and 2% increases year-over-year, as opposed to volume.

  • So as long as we are able to do that and at the same time manage the yield environment above that, then we are pretty confident we can manage margin expansion.

  • Scott Davis - Chairman, CEO

  • Again, we were confident that our product (technical difficulty) will offset probably half of the wage rate increase, which is consistent with what we have been doing.

  • Tom Wadewitz - Analyst

  • Okay, great.

  • Thank you.

  • Operator

  • Gary Chase, Barclays Capital.

  • Gary Chase - Analyst

  • Hey, guys, thanks for taking the second one here.

  • I wanted to go back to the conversation about the tax rate, and understanding that it came in lower than you expected because of the International profitability.

  • What was it -- obviously, you adapted during the quarter, you tried to reduce capacity to combat some of the International weakness.

  • It sounds like that didn't have quite the offsetting impact you were expecting.

  • Can you elaborate a little bit on that?

  • And then just help us think about how you think that will play into the new year and how things will improve during 2012.

  • Kurt Kuehn - CFO

  • Sure, the impact of our year-ending tax adjustment did reduce earnings by about $0.03 versus what we had guided to.

  • As we said, one of the primary areas is as we rolled up our profits from around the world, in the 200 countries we operate, certainly the lower International profits are taxed at a lower rate.

  • Plus the US had a very strong quarter.

  • So the US rate is just about the highest in the world, so you have got a weighted average mix that drove our rate up and did impact profits by $0.03 to $0.04 a share or so.

  • It is just part of the normal mix of business.

  • Clearly, we are doing a lot of work to improve the International.

  • We do expect to see profits up approximately 10% next year.

  • So we still feel great about our International business, but the tax accounting can be challenging when you have got dramatic changes in mix.

  • Scott Davis - Chairman, CEO

  • And always in the fourth quarter, we true up to returns we have filed in the prior year also, which results in some adjustments.

  • And unfortunately, this fourth quarter they went the wrong way.

  • Gary Chase - Analyst

  • Okay.

  • Thanks, guys.

  • Operator

  • Art Hatfield, Morgan Keegan.

  • Art Hatfield - Analyst

  • I'm sorry, my follow-up has been answered.

  • Thanks for the time, though.

  • Operator

  • William Greene, Morgan Stanley.

  • William Greene - Analyst

  • Thanks again for the follow-up.

  • If you look at what you did on rates in 2011, I think they were basically in line with your guidance, sort of in this 2% to 3% range.

  • But I think it also -- correct me if I'm wrong -- I think it benefited from some unique changes, things like DIM weight, if I remember correctly, or maybe I don't.

  • So can you just clarify sort of are there any unique attributes to the rate changes for 2012 that we need to keep in mind when modeling?

  • Kurt Kuehn - CFO

  • There is always moving -- multiple moving parts within the rate structure.

  • I mean DIM weight was a visible one, but it wasn't material outside the scope of normal adjustments we do for rates.

  • So, no, we expect a fairly typical rate environment for the coming year.

  • We did announce our rates for both air and ground last quarter and do expect base rates to remain in the 2% to 3% level.

  • The guidance really is just that with this changing mix and the influx of lighter-weight e-commerce packages that is coming in at a greater-than-expected rate, the top-level rate may look a little lower than that.

  • But if you get to the bottom of it, the core rates will remain strong.

  • William Greene - Analyst

  • The yields, you mean, right?

  • Kurt Kuehn - CFO

  • Right.

  • William Greene - Analyst

  • Okay, great, thanks for the time.

  • Operator

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

  • Andy Dolny.

  • Andy Dolny - Treasurer, VP of IR

  • I am going to turn it over to Scott for some final comments.

  • Scott Davis - Chairman, CEO

  • Thanks, Andy.

  • We finished 2011 on a strong note, with an exceptional peak season.

  • UPS produced strong Domestic Package margins in the fourth quarter in the period we've talked about, where e-commerce and B2C dominated our growth.

  • We have been able to adapt and will continue to adapt our business to meet the demands of the marketplace.

  • As Kurt said, despite a mixed economic outlook for 2012, we expect earnings growth to be in line with our long-term targets.

  • We look forward to another record year.

  • Thanks so much for your time today.