聯合包裹運送服務公司 (UPS) 2012 Q4 法說會逐字稿

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 2012 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 only one question from each participant to accommodate more analysts during the call.

Thank you for your corporation.

It is now my pleasure to turn the floor over to your host, Mr. Andy Dolny, UPS Treasurer and Investor Relations Officer.

The floor is yours, sir.

Good morning and welcome to our fourth-quarter earnings call.

Joining me today are Scott Davis, our CEO and Kurt Kuehn, our CFO.

Along with Chief Operating Officer, David Abney; International President, Dan Brutto; President of US Operations, Myron Gray; and Alan Gershenhorn, UPS Chief Sales and Marketing Officer.

Before we begin, I want to review the Safe Harbor language.

Some of the comments we will make today are forward-looking statements that address our expectations of 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 2011 Form 10-K and 2012 10-Q reports.

These reports are available on the UPS investor relations website and from the Securities and Exchange Commission.

During our third-quarter earnings call in October, I explained that if interest rates remain low, UPS would likely record a sizable pension mark-to-market charge in the fourth quarter.

Interest rates did remain low and although the plans exceeded their expected rate of return, that benefit was more than offset by the 120 basis point decline in average year-end discount rates.

Under GAAP, UPS is required to use a portfolio of AA bonds to calculate our pension plan discount rates.

In 2011, there were many AA bonds of financial institutions that were part of the portfolio calculation.

In 2012, some of the bonds of financial institutions were downgraded and therefore excluded from our portfolio, while the spreads on the ones that remained compressed at a much greater rate than corporate bonds.

These two factors, the change in the bond portfolio mix and the compression in the spreads to treasuries, resulted in a significant drop in our average discount rate.

This led to a non-cash mark-to-market after-tax charge of $3 billion on our Company-sponsored pension and post retirement benefit plans for 2012.

As a result, on a GAAP basis, diluted earnings per share for the quarter were reduced by $3.15.

Keep in mind this charge does not affect UPS cash flow, benefits paid to plan participants or required pension funding.

In fact, over the next three years, required pension contributions for UPS are significantly less than the previous three years.

Ignoring the impact of this charge, diluted earnings per share for the fourth quarter were $1.32.

To provide additional information on the mark-to-market accounting process, we have posted a tutorial on the IR website, which includes a sensitivity analysis that illustrates the impact of changes in discount rates.

For example, a 100 basis point increase in discount rates could result in a mark-to-market gain.

In our remarks today, we will refer to UPS fourth-quarter 2012 results, excluding the impact of the mark-to-market charge.

Additionally, all 2012 full-year references and comparisons to 2011 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 included in the schedules that accompanied our earnings news release.

These schedules, along with a webcast of today's call, are available on the UPS investor relations website.

A couple of reminders.

Any guidance that we provide for 2013 does not include expenses related to our attempted acquisition of TNT.

And finally, each of you will be allowed to ask one question and then get back into queue for follow-up.

Thanks for your corporation.

Now let me turn it over to Scott.

Thanks, Andy and good morning.

I hope that everyone had a safe and happy holiday season.

Despite an environment of sluggish global trade that existed for most of 2012, and increased uncertainty in the US created by the November elections and the fiscal cliff, UPS executed well.

Although we fell short of our goals for the year, we did achieve record earnings per share.

Our US domestic business led the way.

We continue to see robust growth in residential shipments as the UPS portfolio provides a rapidly growing e-commerce market with unequaled solutions.

Whether it is putting goods in consumers' hands the next day or through more economical products like UPS SurePost, we are getting the job done.

We have been around for more than 100 years; things never stand still at UPS.

And 2012 was definitely a year filled with opportunities and challenges.

Our bid to acquire TNT Express is probably the first to come to mind.

It would be an understatement to say we are disappointed by the decision of the European Commission to block the acquisition.

UPS essentially put all hands on deck to get this deal done over the last year.

I would like to thank the many UPSers around the world who worked tirelessly on this project.

We will, of course, continue to pursue growth opportunities, both organic and through acquisitions.

While we view the TNT transaction as part of a compelling growth platform and it consumed a lot of internal resources, we are moving on.

Our financial strength enables UPS to evaluate future prospects, as well as continue to invest in our portfolio.

The UPS vision and focus centers on four transformative strategies -- deploying technology-enabled operations, providing unique industry-specific customer solutions, expanding our global network and finally, serving the needs of end consumers around the world.

In fact, during 2012 and early 2013, we have launched powerful, new, more enhanced services as we continue to invest for growth to support the needs of our customers.

For example, we expanded the footprint of UPS Next Day Air service in the US and today, UPS delivers to more businesses and zip codes overnight by 8.30 a.m.

and 10.30 than anyone.

Our Forwarding unit added innovative supply chain management technology like UPS Order Watch.

Most recently, we launched the new UPS Worldwide Express Freight service for heavy air freight.

It offers a seamless experience between shipping express packages and express freight.

And finally, UPS further developed capabilities through new and expanded healthcare sites around the world, and through operating facility expansions like a Cologne hub, which is on track to be completed in 2013.

On the labor front, UPS started negotiations early with the Teamsters and we continue to be engaged in productive discussions.

Things are progressing and we look forward to an early conclusion.

Regarding 2013, the global economic environment shows that we remain in a cycle of mixed growth and mixed signals.

I have talked to a number of customers and it is clear that fiscal uncertainty continues to erode business confidence and growth prospects.

This will continue until Washington starts to compromise and make decisions in some key areas.

Yet, I must admit that, in the US, we are off to a surprisingly strong start in January.

In Europe, there has been some improvement.

Forecasts for Germany and the UK are better while the Netherlands and Poland are worse.

But, clearly, we are starting 2013 in Europe in a more stable situation than last year.

Asia's GDP forecasts have also improved.

In the fourth quarter, global trade returned to more normal trends and expectations are for that to continue.

I am confident that whatever the global trade environment is, our people will deliver.

UPS is made up of hundreds of thousands of dedicated employees.

I want to thank UPSers for their efforts during 2012 and I'm proud of how our people rose to the challenges they faced and want to give special recognition to those who went the extra mile in the aftermath of Hurricane Sandy, UPSers stepping up to lend a hand in a time of crisis.

Great job.

Regardless of external uncertainty, UPS is not waiting around for change.

We are leveraging our growth strategies to adapt and prosper.

We intend to maintain our high standard for earnings, return on invested capital and free cash flow.

And UPS is confident in our ability to achieve the long-term targets we defined at our 2011 investor conference.

Now before Kurt covers the financials, David Abney will share information on our peak season.

Thanks, Scott.

Holiday retail sales came in slightly below expectations, but UPS still hit a new high delivering over 500 million packages globally during peak season.

Our Air business was especially strong and reflected the trust customers place on the speed and effectiveness of UPS.

On our peak Air day, Christmas Eve, UPS delivered over 8 million Air packages, more than 2.5 times our normal Air volume and over one million pieces more than last year.

Processing this many packages makes having the UPS integrated global network all the more beneficial.

Over the years, we have made strategic capital investments to expand Worldport, modernize our fleet and develop state-of-the-art technologies like Telematics and next-generation small sort.

These investments give UPS a competitive advantage and are one of the keys to success.

Our innovative technologies, combined with the best people in the business, enabled us to deliver peak season volume more efficiently than ever before, offer innovative services like UPS My Choice, which increases operational performance and enhances the customer experience, and manage complex operating plans during two distinct volume surges, Black Friday/Cyber Monday and the two weeks before Christmas.

We are even seeing a third spike develop, one to manage the post-sales process where the UPS returns portfolio is well-positioned to capture growth.

Since the financial community loves numbers, here are a few more stats for you.

Volume on peak day, December 19, was almost 28 million packages and on six days, we delivered over 25 million.

Our busiest tracking day was December 18 when more than 65 million tracking requests occurred.

And my favorite as COO -- efficiency metrics.

In the US, where daily volumes grew by 3%, miles driven were up 1.2% and direct labor hours were up 2.3%.

On the Air side, US Next Day Air grew almost 8% while block hours were up only 1.6%.

International exports improved over 5%, yet International block hours declined 1%.

UPS efficiency is nothing new.

For example, since 2008, US domestic volume handled per block hour has increased more than 20%.

This is just the way we run our business.

We don't wait to implement big operations initiatives.

UPS seeks incremental improvements every day, year after year.

So as you can see, UPS Airline operations are as productive as ever and this positions us for growth and better returns to our investors.

Finally, I would like to take a moment to recognize the more than 20,000 employees of the UPS airline.

You may not know this, but it was 25 years ago tomorrow that UPS Airlines operated its first revenue flight when aircraft tail number N880UP, a DC8, flew from Louisville to Milwaukee.

In August of that year, UPS announced plans to form its own airline and it became the fastest startup in FAA history.

So congratulations and thanks to all of you who made it possible.

Now I will turn things over to Kurt to discuss the financial highlights.

Well, thanks, David and good morning, everyone.

On a consolidated basis, UPS fundamentals are as strong as ever.

We wrapped up the year with free cash flow of approximately $5.4 billion and although we fell short of our target for the year, UPS generated record earnings per share of $4.53.

This was achieved in the face of weak global trade and in spite of Superstorm Sandy, which cost us about $0.05 a share.

UPS annual revenue of $54.1 billion was our highest ever as were the 4.1 billion packages we delivered globally.

Pricing improvements, along with the efficiencies that David highlighted, led to margin expansion.

For the quarter, consolidated package volume grew 3% per day.

Revenue of $14.6 billion set a record, as did operating profit at $2 billion.

While the US Domestic segment improved profitability, International experienced a slight decline and faced with a margin squeeze in Forwarding, the Supply Chain & Freight segment also exhibited lower profit.

Now let's review our results in detail starting with the US Domestic segment.

In the US, we fired on all cylinders.

Operating profit was nearly $1.4 billion, a new high.

Average daily volume grew 3% with Next Day Air up almost 8% and Ground up 3%, driven by expansion in B2C shipments.

Despite slightly weaker than forecast holiday retail sales, shoppers went online like never before.

We experienced strong growth in Next Day Air Saver and traditional UPS Ground.

And of course, our lightweight solution, SurePost, was also popular this holiday season.

We continue to see strong growth there even though we wrapped last year's rollout of this product.

Revenue for the segment grew 3% with Next Day Air and Ground up 5.4% and 3.4% respectively.

Revenue per piece increased 1.7%, driven by base rate improvements in both Ground and Air.

As a result of increased demand for our Saver products, Next Day Air revenue per piece declined 60 basis points.

Operating profit of almost $1.4 billion was up 4.4% and operating margin expanded to 15.4%.

Hurricane Sandy was a challenge in the quarter, but our operations expertise and integrated network mitigated some of its impact.

In addition, rising healthcare benefit costs continues to be a headwind, but its impact on the quarter was partially offset by some one-time items.

Moving onto our International segment, UPS delivered 1.1 million export packages per day, up 5.5%, although that was boosted about 1% by global operating day differences.

Leading the growth was Asia where export volume grew in the mid-teens aided strongly by tech sector product launches.

During the quarter, export revenue per piece declined 3.5% on a currency-neutral basis.

Typically, Asia growth would be a great story, but, during the holidays, this growth was concentrated in lower-weight packages from high-volume shippers using less premium products.

Europe exports improved as a result of growth in non-premium products.

Companies there continue to streamline their supply chains and lever UPS solutions to meet their needs.

Germany, Italy and the UK all showed solid export increases.

We are confident in the opportunities created by a developing European small package market and we will continue to aggressively pursue growth strategies there.

Domestic revenue in the International segment increased 1.3% on flat daily volume growth.

Revenue per piece increased more than 4% on a currency-neutral basis, reflecting our focus on revenue management.

Overall, total UPS International revenue grew 1.5% to $3.2 billion.

Operating profit was $499 million, down slightly.

Changes in customer and product mix lowered profits; however, operating margin of 15.6% continues to set the bar in the industry.

Acquisition-related expenses of approximately $30 million were higher than anticipated and negatively impacted earnings per share by about $0.01 more than originally expected.

Now for Supply Chain & Freight, revenue increased 4% over last year's $2.4 billion.

Our Forwarding & Logistics group improved $40 million, or 2.5%, while UPS Freight revenue increased by $39 million or 6.2%.

In the Forwarding business, tonnage and yield improvements led to revenue growth; though this growth was somewhat offset by reductions in other transportation solutions.

Increases in transportation expense were a challenge for profit.

In the Asia airfreight market, there was a short-term volume surge, which exceeded capacities and drove up buy rates.

As a result, our margin was squeezed and profit declined.

However, UPS Ocean products did very well.

Revenue and profit increased year-over-year and the popularity of our less-than-container load offering exceeded expectations.

The UPS distribution business increased revenue by providing healthcare and high-tech customers effective solutions to better manage their supply chains.

In fact, healthcare revenue increased by more than 20%.

During the quarter, we opened three new healthcare facilities and more are scheduled for 2013.

At UPS Freight, LTL revenue was up 6.5% and gross weight hauled increased by almost 5%.

For the quarter, operating margin was similar to last year and overall for the year, margin expanded by 70 basis points.

Let me shift gears and spend a moment on pensions.

First, a reminder that the mark-to-market charge that Andy spoke about does not affect UPS cash flow, benefits paid to plan participants or required pension funding.

Funding requirements for UPS-sponsored pension plans were modified by recent legislation and as a result, UPS plans are fully funded and we have no required cash contributions in 2013.

As for pension expense in 2013, the lower discount rates do cause higher service and interest costs.

As a result, we expect pension expense for these plans to increase about $225 million compared to last year.

This will be a significant drag in 2013, although when discount rates go back up, we will see decreases in pension expense.

Looking now at our cash and our balance sheet, during 2012, UPS generated $5.4 billion in free cash flow after capital expenditures of $2.2 billion.

We ended the year with almost $8 billion in cash and marketable securities.

Although keep in mind that $1.75 billion has already been used this month to pay off maturing debt.

For the year, UPS paid $2.1 billion in dividends, an increase of 9.6% per share.

In addition, we have repurchased 21.8 million shares for approximately $1.6 billion.

Looking ahead to 2013, UPS expects strong free cash flow to continue, again exceeding 100% of net income.

As a result of our strong financial position and reflecting our commitment to shareowner distributions, UPS is increasing our 2013 guidance for share repurchases by an additional $2.5 billion, up to a total of $4 billion.

As always, dividends will also continue to be a priority.

Looking at guidance beyond cash, as Scott alluded to, the global economic environment shows that we remain in a cycle of mixed recovery with more improvement in some places than others.

We are confident that the strategies outlined by Scott position UPS well.

As a result, we expect another good year of earnings growth.

We are anticipating earnings per share in the range of $4.80 to $5.06, an increase of 6% to 12%.

Looking at the segments, for the full year, US Domestic average daily volume is projected to grow around 2% to 3%, slightly above GDP estimates.

Revenue is expected to be up mid-single digits with base rate improvements of 2% to 3%.

We are pleased with the momentum in our Domestic business, although UPS does expect increased healthcare and pension expense to limit margin expansion.

We anticipate an operating margin approaching 14% resulting in profit growth at a mid-single digit pace.

In our International business, UPS expects revenue to increase at a mid-single digit rate with domestic and export daily volume growing faster than global GDP.

Export yields will continue to be pressured by both changing customer mix and increased reliance on non-premium products.

We expect operating margin will expand slightly in spite of an estimated currency headwind of $125 million.

In Supply Chain & Freight, for the full year, we expect revenue to increase at a mid to high single digit pace with some margin expansion resulting in profit growth of approximately 10%.

The segment is expected to maintain a strong operating margin of at least 8% despite continued investments in healthcare solutions and facilities.

Looking specifically at expectations for the first quarter, there are a number of items that will negatively impact year-over-year comparisons.

Most notably, one less operating day and the timing of an early Easter.

Even though UPS expects full-year earnings per share growth in the range of 6% to 12%, for the first quarter, we anticipate that earnings per share growth will be relatively flat.

Reviewing segments for the first quarter, both US Domestic and International are expected to generate results similar to Q1 of last year.

Supply Chain & Freight profit and margin should be down on a year-over-year basis because of investments in technology and a gain recognized last year on the sale of a surplus facility.

To wrap up the income statement, our overall tax rate for 2013 should be between 34% and 35%.

Regarding CapEx, for the full year, we expect our spending to be $2.4 billion, keeping us at approximately 4% of revenue.

In summary, 2012 had its challenges.

UPS set some records, but we also fell short in some areas.

We are always constructively dissatisfied at UPS, seeking to attain new highs and this year will be no different.

Despite another year of mixed global economic conditions and approximately $350 million in headwinds from pension and currency, UPS will continue to raise the bar with expected full-year earnings per share growth of 6% to 12% and as Scott mentioned earlier, we remain confident in our ability to achieve the UPS long-term target of 10% to 15% earnings per share growth.

Well, thanks and now we will be happy to answer your questions.

(Operator Instructions).

Justin Yagerman, Deutsche Bank.

Hey, good morning, guys.

I wanted to reconcile the guidance and the commentary on the economy in the press release to, Scott, your earlier remarks on how the economy is trending here in the beginning of 2013.

It felt like guidance was potentially a little bit conservative here.

Kurt, you did a good job running through some of the assumptions, but I mean is it really just the weakness on the International yields and the $350 million of headwinds that get you nervous to do you see anything else from an economic standpoint that really gives you some pause here in the early part of the year.

Well, Justin, let me start.

I think that overall we still see 2013 as a slow growth economy.

I think that the good signs, as I talked about, is I think you see a more stable Europe than we saw a year ago.

We are starting to see a pickup in global trade, which is very important for us as we look forward.

In the second and third quarters of 2012, we saw global trade lag the global economic growth, which is very unusual.

So it feels like that is getting more normal.

In the US, as I said, I think we got off to a strong start in January.

I think a variety of reasons for that.

I think with the trends the last few years, we have seen strong last weeks of January or the last weeks of December, early January due to I think gift card purchases after Christmas due to a lot of returns.

Yesterday's GDP number said obviously the inventories are very low, so I think we are seeing restocking of inventories early in January.

But I am still cautious as we move through the year that we'll -- I do think we will see growth in the US, but we still are going to be addressing the debt ceiling in the second quarter.

More than likely, that is going to cause some uncertainty.

So we have some challenges.

As far as the guidance, the big number I think is the drag due to pension and currency and the pension is out of your control.

Low discount rates had a big impact and that impacts earnings by about 5%.

So you take that and add that to the 6% to 12% guidance would have been a very strong guidance without those headwinds.

Yes, I think the basic expectations are that the US economy will be somewhere around 2% and global GDP somewhere around 2.5%.

So certainly not a barnburner year.

We expect undertrend performance and as Scott said, the pension could just as easily turn around next year and if we get 100 basis point increase in the discount rate, that would be a $200 million tailwind.

What do you guys looking for to get more excited this year in terms of economic signs and what are you seeing out of Asian airfreight?

That has been a place of particular weakness.

Didn't hear too much on that.

Yes, certainly some getting resolution in Washington to some extent will be a big deal.

So consumer confidence pulling through with the activities in DC.

I will turn it over maybe to Dan Brutto, our President of International, to talk a little bit about the trends we are seeing in Asia.

Yes, I guess the Asia trends really are -- right now, you have got a lot of large high-tech customers that have sent out product launches, but after the first of the year, they are getting more positive in Asia.

Also, the area of somewhat concern is folks are using less premium products in Asia coming in.

The Chinese New Year is also later this year.

It is in the first week, almost the second week of February.

So right now, we are off to a good start, as Scott said, in January.

So we expect Asia to come back.

The tale of the tape will be how it will come back, do customers in the middle market where we provide a lot of solutions for start utilizing premium products to take care of this inventory shortage that we know is in the marketplace.

Let me just add, I think a more stable Europe will also aid in Asia exports, which were very negative last year up until the fourth quarter and in US exports.

I mean that certainly has had a big drag on US exports in 2012.

So as Europe stabilizes and begin buying goods again, that will be good for exports.

That makes a lot of sense.

Thanks, guys.

I appreciate the time.

Tom Wadewitz, JPMorgan.

Yes, good morning.

I wanted to ask you -- the effective mix.

Dan just talked about how that's a bit of a headwind International, but can you help me think about mix, both domestic, as you have growth in B2C and how much that affects your margin view?

Is that something that maybe makes you a little bit cautious on margin in Domestic?

And then from an International perspective, how material is that impact on your International margins?

Can you deal pretty well with growth in less than premium products or is that a material factor to consider in our margin view on International?

Yes, I think, on the Domestic side, we really saw all of 2012 as a year where B2C was really the lead that our B2B business was relatively flat, just up slightly in the fourth quarter and really the continuing process of direct-to-consumer was a big factor.

And even in that environment and even with the headwind of Sandy, we did show margin improvements in the US.

So is B2C a little tougher than B2B?

Yes, it is.

On the other hand, Myron and the deployment of technology-enabled operations has made us, we think, able to profitably grow with that.

On the International side, in Europe, we have got great Pan-European capabilities.

The yields on our Express volumes certainly are higher than the standard, but we think we can manage through those things.

The big product launch is certainly something that does distort margin a little bit because those are high revenue, relatively low yielding products.

So those probably have more to do with any disruption that you saw in the trends.

I guess on the International front, as far as margins are concerned, if you take a look at the last quarter, we really take a close look at the Domestic to make sure that we maintain our margins in the Domestic business and we serve essentially those customers that are importers and exporters.

For our export product internationally, we do very well with B2C, as well as B2B.

In fact, certainly even in the tough economy in the fourth quarter, a 15.6% margin continues to be industry-leading by a significant amount.

We expect that to continue in the future.

Great.

Thanks for the time.

David Vernon, Bernstein.

Hi, good morning, guys.

So the increased guidance for buybacks to $4 billion for 2013 is still going to leave you with quite a bit of cash on the balance sheet.

Can you talk about kind of future plans for that capital, as well as how you think about growth going forward in a world without the TNT acquisition?

Yes, I guess if you are looking at the year-end balance sheet, clearly, we did pay back a large debt issuance that came due in January, as I referenced too.

So about $1.75 billion of cash was used for that.

No, we are stepping back our repurchase scenario.

We pulled back on that in light of the big commitment of the TNT acquisition and we are certainly getting back on track with that.

The $4 billion basically catches up the shortfall that we had in 2012 because of us being a little more conservative.

As far as use of cash in the future, I will turn it over to Scott to talk about that.

Well, I think the game plan is we will keep a balanced use of cash going forward.

We will continue to increase distributions to shareowners, we will review dividend policy here in a couple of weeks at our Board meeting for 2013 and clearly, we will reinvest in the business.

We think there is opportunities out there in the emerging markets.

There is opportunities out there in the supply chain world.

We are doing a lot more in healthcare these days.

So we will have opportunities to reinvest via the acquisition route also.

So there is the possibility then for some other inorganic stuff to come up in priority.

Absolutely, there is a possibility.

We are always looking for opportunities out there.

There won't be things the size of TNT likely, but there will be opportunities for us to reinvest in the business.

And would that be core package or would you think more Supply Chain & Freight?

David, we are going to try to limit the questions to get everybody on the call.

We will answer this one and then I will ask you to be your last question.

Great, thanks.

I think we have always said that our priorities are International package, looking for areas where we think we can expand the network.

That stays a priority.

Certainly, in the forwarding and distribution world, we see opportunities namely in healthcare.

So I think nothing has changed as far as the outlook there.

Ben Hartford, Baird.

Good morning.

Dan, maybe you could address a little bit about International capacity on the airfreight side at the moment.

I know you guys took delivery of seven aircraft in 2012.

Are you expecting -- can you talk maybe about the expected timeline of the eight remaining deliveries of the 767s?

And then more broadly, can you talk about the dynamics on capacity in these key trade lanes from a dedicated freighter perspective, as well as from some of the passenger aircraft and maybe where we stand from an equilibrium perspective?

Thanks.

Yes, I will turn it over to David Abney to talk about the airline deliveries and the overall global network.

Yes, as far as the 767s that we are receiving this year, we are going to receive eight.

We look to put seven of them in the domestic routes, one international.

As far as the international flying, just due to the fragile global economics, we are managing the network very closely by bid period.

So we are making those adjustments every eight weeks or so.

Yes, I guess I would say, on the international arena, our capacity and utilization of aircraft has never been better.

And certainly, as David said, we want to utilize our planes.

With our hybrid network, we actually, on the Forwarding business, can move a lot of our freight into the commercial market.

In fact, for every 5 kilos that we pick up in our Forwarding business, 4 kilos goes on another carrier's aircraft, about 1 kilo goes on a UPS aircraft.

That is very good because when the economy flexes either up or down, we can move more premium or more freight into our own network to make sure that that is fully utilized, as well as optimizing the use of commercial aircraft.

Chris Ceraso, Credit Suisse.

Thank you very much.

Good morning.

I just wanted to get a clarification on the guidance and then a question about the pension.

The guidance -- does the $4.80 to $5.06 include the expected reduction in your share count associated with the $4 billion buyback?

Yes, it would.

It reflects the expected $4 billion spread over the year reasonably ratably and also includes the expectation of the pension increase and others, so that is all in.

What it doesn't include is any expenses from the TNT, either the break fee or the substantial amount of legal and internal resources that we have deployed.

Just to remind you, the share buyback does benefit earnings growth by about 2%, the pension and currency drags earnings growth by about 5% in that guidance range.

Okay, thanks.

I will follow up off-line.

Ken Hoexter, Merrill Lynch.

Hi, good morning.

If we could just follow up on the International side again.

Just, as you noted, you continue to improve efficiency, but how do you think about that as the International margins continue to fall?

I noted you said they were at solid level relative to the industry, but are there things you can do to continue to get that back on track or is that as you watch these new supersaver products continue to deteriorate that over time?

Certainly before Dan talks about it, I guess you do have to take the results of the International business with some perspective that we have been involved over the last couple quarters with the largest project in Company history and a very large number of resources and people have been involved in the TNT acquisition.

So as Dan takes a breath and as people get focused on the future, clearly there is plenty of opportunity.

I would just add on to that that certainly we had an extremely large team to work on the TNT transaction.

That team now is coming back.

A lot of that team was very much involved with our customers, which are value-added sales to customers and certainly now we have that team back in full force.

So that will be a big certainly element in us moving forward to get greater margins in the future.

And the fourth quarter, we absolutely talked about it, we had larger customers in the mix, we had lighter products, we had slower moving products.

That impacted it, but I think, as you look forward, we are more optimistic on global trade getting back to a little more normal in the future and there are things going on and we talked about Europe, we talked about the US making some progress on the fiscal cliff, a long ways to go, but that could help US consumption.

Energy prices have somewhat stabilized compared to the ups and downs we saw the last few years.

Japan's easing is going to help trade out of Japan and I think the recent change in Chinese leadership is going to help stabilize things and cause quicker growth in China.

So things are starting to get us back to where we feel that global trade will outperform the global economy, whether it is 1.25% to 1.50% over the growth of the GDP, we don't know, but it will get back to a more normal relationship.

I think one other thing, maybe to let Alan Gershenhorn talk a little bit about the product innovation too because, as we've said, we are not standing still and we do have a lot of initiatives that are adding more value in the marketplace.

So as Kurt said, we have made a number of enhancements in new product introductions.

We just announced the introduction of UPS Express Freight that Scott talked about in his opening comments.

It is from 37 origins to 47 destinations and it covers about 85% of world trade and we are certainly excited about that.

That product again provides a seamless transition between our Express package services into Express Freight.

We have also just enhanced our worldwide expedited service.

We have added 145 destinations.

That is really targeted at higher weight, higher yielding packages.

We have also introduced US to Mexico and Mexico to US standard ground service and I guess, last but not least, we have enhanced our paperless invoice service, which really does streamline the international process and creates a significant differentiation for our customers.

I appreciate the insight.

Thank you.

Bill Greene, Morgan Stanley.

Good morning.

Kurt, I think you can hear from some of the questions there is a sense that the guidance is conservative in light of the commentary.

And one piece of it that I'm just curious about then is do you make any assumption that there may be a shift of business as we approach the deadline for the Teamsters contract or is that not expected at all?

Maybe you can get it done even early?

No, I think we feel very confident, as Scott said, that we are making good progress and we are still almost half a year out left to go on that and we do expect that to get concluded successfully and early.

The biggest issue really, as you talk about the Domestic, is the headwind we have with the pension that frankly was unexpected to some extent and does create about a 5% headwind on the Domestic results.

Scott Group, Wolfe Trahan.

Hey, thanks.

Good morning, guys.

So just wanted to clarify, the $0.05 of Sandy impact, if you could break that out among the three segments.

And then just kind of the longer-term question, the guidance for Domestic Package margins pretty flattish year-over-year.

Is that just a sense of the pension impact is going to be mostly felt there or do you think we are getting closer to peak on those Domestic Package margins?

And then maybe within the margin commentary if you can give some thoughts on if you have assumed any material changes in the economics with the Teamsters and anything with the Priority Mail contract with the post office.

Okay, a lot of pieces to that one.

I will try to unfold them.

I will talk a little bit about some of the margin issue and the guidance and then Myron clearly can talk about Sandy and also some of the things that we are doing going forward.

Basically, the issue for 2013, we are looking at a subtrend US GDP of about 2%.

We have made good progress and we expect that.

We do not think we are at peak margins, but we do have $200 million, the vast majority of which is US Domestic.

So it does hit primarily the Domestic segment.

So we do think we are continuing to make good progress, but with that blip and with a muted US economy, the guidance is appropriate that we do expect modest margin improvement and profits up in the mid-single digits.

I will turn it over to Myron to talk about Sandy, how that impacted the segments and then a little bit about some of the operating initiatives we have.

Good morning.

Myron Gray.

As you heard, Sandy did impact us probably by about $75 million in the fourth quarter.

But despite that, as you've heard, we did have a good fourth quarter.

Looking forward, as Kurt and Scott have both alluded to, we do face a headwind of about $200 million from pension-expected headwind.

Without that, we would be looking at a 10% growth in profit.

However, despite the headwinds that we face, we have continued to attract profitable volume, both in B2B as well as B2C and with the deployment of world-class technologies, we expect that we will get closer to the 14% margin.

Actually if you look at full-year '12, margin was 13.8%.

So we are right at the expected number and really don't expect not to make it.

And that one last piece of the puzzle, you made a quick reference to the postal contract.

I will have Dave Abney update you a little bit on that.

Yes, we have responded to the USPS RFP to provide airlift services.

We expect to hear back sometime next month.

We are confident we can support the Postal Service's commitment to its mail customers creating significant growth opportunities for UPS.

We look forward to expanding our relationship with them.

Art Hatfield, Raymond James.

Good morning, everybody.

Most of my questions have been answered, but just one quick question on Europe.

Post TNT, do you see or anticipate or have you heard from any of your customers that the competitive landscape may change given what has gone on with this potential acquisition now going away?

Well, Dan just came back from Europe last night.

So I'll let Dan give you an answer to that.

Yes, I guess I spent last week in Davos and had the opportunity to talk to many European multinational customers.

They asked me about what our future plans are in Europe.

Certainly there is opportunity for us to expand in certain areas of Europe and Eastern Europe.

We do have the best product portfolio right now in Europe with our transborder product and certainly our breadth of portfolio, which goes all the way from Ocean to certainly Express Air.

I think, for the most part, we can provide the service.

I think certainly TNT would've helped us get there faster, but there are still all kinds of opportunities for us and right now, our ability just in the healthcare field to expand our healthcare operations across Europe, we spend a lot of time with healthcare customers who are very excited about getting out of the supply chain brick-and-mortar business and turning that over to UPS to handle the end-to-end supply chain needs that they have.

So we are very excited about the future in Europe.

Chris Wetherbee, Citigroup Global.

Thanks, good morning, guys.

Maybe a question just on shipper behavior, particularly in the Asia outbound market.

You mentioned some tradedown it sounds like.

Is that more of just a customer mix issue doing more for the larger players as opposed to more middle markets or are you seeing more strategic changes on how your customers on the whole are kind of treating or managing that supply chain, particularly in that region?

I will turn it over to Dan to talk a little bit about that.

Yes, I guess what is happening is we saw in the last quarter certainly is margins from some of our large customers get squeezed in the high-tech area, and I would argue in other areas, they look to more efficiency as far as using less premium products, even to the point of going all the way down to Ocean.

As Kurt mentioned before, we were very successful in Ocean in the fourth quarter and actually for 2012, we had our most profitable year in Ocean.

So I don't suspect that that is going to happen forever because innovation certainly in the world allows new products to come to market.

Those new products have a higher margin and those are the products that fly on our airplanes and utilize the premium service.

I am going to have Alan maybe talk just a little bit.

At the same time, we are meeting the needs of very large customers who have a number of initiatives and enabling middle-market customers to export.

Yes, so I think you heard earlier that we are focusing our attention on industry-specific customer solutions.

We've talked a lot about healthcare on the call.

In terms of investing in healthcare-compliant facilities and technology to enable these mid-market customers.

Also, certainly on the retail side, really working on deploying end-to-end logistics solutions for them.

Just switching gears a bit, I was just in Europe also, and with our Kiala acquisition -- we had a conference, we are launching UK UPS access points and had close to 100 retailers there excited about that opportunity and that solution there turns those B2C packages into B2B shipments and provides a lot more convenience and accessibility to consumers enabling these retailers to grow their business.

What fixes it faster than anything is increased demand out of Europe and the United States.

Certainly, in the last couple of years, we have had weak demand in most of the developed world.

So as that strengthens, and we are projecting that will strengthen, that will help this problem.

Kevin Sterling, BB&T Capital Markets.

Thank you, good morning, gentlemen.

You guys have talked about the tradedown with customers to an economy service from a priority or overnight service.

What do you think reverses this trend?

Is it simply an uptick in the economy or maybe that is the new normal?

I think it is a combination of events.

I will have Alan talk maybe a little bit about what we see.

All this talk about tradedown, we clearly are seeing some of that in the International arena and Europe probably most notably.

At the same time, we had Next Day Air volume growth of 8%.

So we are certainly not suffering too badly with our premium product up that strongly.

One of the reasons we are seeing that is what we like to call this new omni-channel strategy that many retailers are adopting.

So, Alan, maybe you could open that up a little bit?

Yes, and I think, Kurt, to your point, we have been gaining share in the Air business for quite some time and a lot of that has to do with our success in the retail sector.

Again, whether it is the B2C or B to the stores.

And this omni-channel phenomena is really a transformation of what is happening in the retail industry and our customers are out there looking for ways to manage between the online channel and the brick-and-mortar.

So you are seeing folks ordering online to the store.

You are seeing folks fulfill online orders from the store, maximizing their existing inventories and enabling later pickups and so on and so forth.

I think that the key to this is having the broad portfolio of services out there, and while there is certainly the phenomenon of folks looking for less expensive alternatives, there is also still plenty of market out there for consumers that have an urgent need for product and so on and so forth that has been driving really our Air business to the degree that Kurt mentioned.

Thanks for your time this morning.

Nate Brochmann, William Blair & Co.

Good morning, everyone.

I wanted to talk a little bit -- kind of this whole mantra of the tradedown, etc., but a little bit more specifically on the new Express Freight product that kind of seamlessly integrates this.

I assume that is driven by some of those high-tech customers that are now packaging what used to be small parcel as more freight shipments.

I was wondering how that is kind of affecting, one, kind of your load balances and two, just kind of looking forward whether that freight is more like the UPS traditional small parcel customers moving to that or whether you are gaining additional shares from what would have been more traditional freight customers.

Thanks.

Yes, great, good question and I guess certainly we see a lot of opportunity for new and additional volume for this, but, Dan, why don't you talk a little bit?

Yes, Nate, on this whole Express Freight product, first of all, it is not limited, as we have seen to date, to the high-tech field.

It is in aerospace, it is in high-end retail.

It is in diversified manufacturing, automotive, as well as high-tech.

So it cuts across all -- from a customer standpoint, many of the customers use UPS today, but the confusion was how do I get this once-a-month or once-every-other-month Express Freight shipment that has to be there.

And the unique part about this is they can use the same UPS technology, the same labeling, the same tracking, the same tracing, the same billing, which allows them seamlessly to use Express Freight from us where many times they had to call a forwarder or someone different to do that.

So we think it is very exciting.

The product is off to a great launch.

We think it cuts across multiple industries and it is going to be a big winner for UPS this year and into the future.

And this is a premium product initiative.

This will have yields much higher than our forwarding and are highly compensatory in the Express arena.

We just have not focused on that segment as much as perhaps we could have in the past.

Jeff Kauffman, Sterne Agee.

Thank you very much.

Thanks, guys.

Just one question, I am going to focus a little bit on Europe, but I know a couple speakers have already asked that.

In the wake of no longer being involved in TNT, but going through the diligence, were their practices or things you noticed about the way they were doing business in Europe or something that would have happened as a result of that acquisition that makes you rethink the way you want to move going forward?

I know you talked a little bit about Kiala.

Does that change the importance of Kiala?

Does that make you rethink say a road freight network or something like that?

Jeff, I think probably the biggest impact of our TNT deal was that we put a lot of initiatives on hold.

We have been very excited about Europe.

We have got a great multi-decade story of growth in Europe.

Frankly, with the largest acquisition in Company history and one that would have taken us over 1000 people to integrate at max, we were focused on that.

And so we did slow down some of the initiatives.

But we remain focused on growth there.

Alan already mentioned the fact that we are kicking off our Kiala offering in the UK.

Dan has mentioned that he is putting the scores of people that we had working on the integration planning back to work.

So it is really just kicking back into gear with some of the growth strategies.

I would just add that we understand Europe very well.

We have been there since the mid-'70s.

We think we have, as Dan said, the best network over there already.

We did learn that the regulatory process is a complicated process over there, so we learned a lot about the commission, but we think we know the market well in Europe.

Thank you.

Brandon Oglenski, Barclays.

Good morning, everyone and thanks for taking my question.

When we look at Domestic profitability in the fourth quarter, excluding the Sandy impact, it actually looked like close to a record margin.

And you have been closer to flat throughout the year.

So can you talk about some of the initiatives that you have had to better leverage the B2C traffic in your network, along with the flat outcomes in B2B?

Yes, certainly, as we've said, operations enhanced with technology is a big priority and I will let Myron talk a little bit about some of the things that worked well to meet the B2C growth this year and then maybe David talk about some of our research and development for the future.

For years, we have talked about enhancing our operating leverage through package flow technology and with that deployment over the last few years has helped us totally control the number of base hours that we absorb from our employee base.

New technologies like Orion and Telematics helped us reduce the miles driven, hold them flat to 1% while we saw volume growth of 3%.

Now while we have experienced a flurry of B2C growth, I think balance is the more appropriate way to look at it when you balance B2C with B2B.

And a carrier like UPS that has an integrated network, it totally allows us to control our costs.

So with base rate improvements of 1.7% in the quarter, it helped us balance yield with ops expense of 1.4%.

So it really was a good quarter for us from a balanced approach.

And we are certainly doing a lot of research and development to continue this momentum.

David, maybe you can talk a little bit about some of the things that are happening.

One of the technologies that we are very excited about is SurePost Redirect.

And what this gives us the capability to do is to route SurePost packages to the lowest cost network.

For example, it could be that the final last mile delivery would be through USPS or if we have other packages that are going to be delivered through the UPS network, we can make the call, make that decision on a day-to-day basis and switch those packages over to the UPS network for last mile delivery.

So its these operational technologies that are not only reducing our costs, streamlining our network, but they also provide a platform for new customer solutions such as UPS My Choice that we have talked about.

I guess one less lower tech issue that clearly continues to be a driver of positive momentum in the Domestic is this growth in our Next Day Air products that the integrated network allows us to deliver those Next Day Air products, particularly the Saver products at a very reasonable rate and that is part of why we are attracting that market so effectively.

Thanks for the response.

Helane Becker, Dahlman Rose.

Thanks very much, operator.

Hi, everybody.

I just have a fleet-related question.

I thought you said that you were taking delivery of eight of the 767s this year, which is what you have on order.

And then you have got something like a quarter of the fleet in three and four engine aircraft.

With fuel prices really not showing signs of going down, are you thinking about replacement aircraft?

Are you thinking about next steps and more efficient aircraft for those 747s and MD-11s?

David, I will let you talk about that.

Like you said, we did talk about the 767s that we are bringing into the network.

One thing we have to remember that we have the most modern, most quiet, fuel-efficient fleet in the industry.

We are the only global integrator that is Stage IV compliant and the age of our aircraft is just much younger than any of our competitors.

So we feel real good about our aircraft and we have made changes for the last 10 to 15 years in updating our aircraft.

And now we are getting the benefit of such.

The fleet is almost a decade younger than our primary competitors.

It also means we don't have virtually anything in the way of replacement CapEx for aircraft for the next few years.

And part of the great cash flow forecast we will see, especially after this year, that our needs for new aircraft will moderate for a while and certainly will be a great story for cash flow.

Absolutely.

Low CapEx, no pension contributions for a couple of years does equate to good cash flow.

Yes, sounds like.

Okay, thank you very much.

Peter Nesvold, Jefferies & Co.

Good morning.

I think most of my questions have been answered.

I guess just from a numbers standpoint, one thing that is still not perfectly clear to me, if you are guiding a 9% earnings growth at the midpoint for the year, but you are looking at flat year-over-year for 1Q, that would assume 12% on average through 2Q and 4Q and that is despite the 5% pension headwind.

So what drives the step-up?

Are there kind of two or three major factors that you can just outline briefly and why you see the earnings acceleration as we progress through the year?

I think the outlier is more Q1.

There is one less working day.

That working day moves to Q3.

Typically, that is $50 million or more that you would shift.

And also, the early Easter hurts Q1 a bit.

So those are the seasonal issues that really drag down the Q1 scenario.

Other than that, the year should be pretty balanced with the third quarter perhaps showing the biggest percent increase year-over-year primarily because of the working day.

But other than that, no, we are expecting solid stable results.

Perhaps the economy will pick up a little bit later in the year, but we are not banking on a robust recovery.

Clearly, you have heard that in our guidance.

Great, that is helpful to clarify.

Thank you.

Thomas Kim, Goldman Sachs.

Thank you.

Can I ask you how backhaul volumes are trending both on the Trans-Pacific and Europe back to Asia?

Great, yes, I will give it over to Dan to give us some updates on trends we are seeing right now.

I guess on the way back to Asia, primarily from -- I will start with the US.

Certainly the US export, as we all heard, is unrelatively flat, but it was down at least for the first, second and third quarters and it got to flat in the fourth quarter.

So we don't see a tremendous uplift in US exports.

And that is part of what Scott has guided to.

As far as the European market, again, not a lot of robust growth.

I will tell you though, on the positive side, the Asia consumer is very interested in buying goods from both the US and from Europe.

So as Kurt said, we are hoping that, in the second half of the year, we are going to see a little bit more of an uplift and some better balance with Asian consumers buying more European and US products.

And I think if you look longer term that is clearly something that most economists are forecasting that, as consumption increases in Asia, that the balance of flows will begin to improve.

Clearly, the lower cost of energy and other issues is bringing some manufacturing back to the US.

So that would be a long-term very positive for the Air business to make sure that you get comparable loads both directions would be very -- highly accretive.

Great.

If I could just add a follow-up to that.

Presumably then this should be margin-enhancing just given the overall load factor trends where they had been let's say Q2, Q3?

Absolutely.

Putting volume on an empty plane is just wonderful for margins.

Right.

If I could just ask one last question, just with regard to DHL, they came out mid-last year suggesting some pretty aggressive expansion plans in Asia.

Have you seen anything to that effect that suggests some changes in the pricing dynamics in that market?

Thank you.

Pricing remains very competitive; although we haven't seen any dramatic change in the basic relationship.

It is rational, but competitive and certainly cycles somewhat with capacity and demand imbalances.

So thanks, you all, for the call and we will talk to you later.