聯合包裹運送服務公司 (UPS) 2015 Q4 法說會逐字稿

Good morning, My name is Stephen and I will be a conference facilitator today.

At this time I would like to welcome everyone to the UPS investor relations fourth-quarter 2015 earnings conference call.

(Operator Instructions)

It is now my pleasure to turn the floor over to your host, Mr. Joe Wilkins, Investor Relations Officer.

Sir, the floor is yours.

Good morning and welcome to the UPS fourth-quarter 2015 earnings call.

Joining me today are David Abney, our CEO; Richard Peretz, our CFO; along with International President Jim Barber, President of US Operations Myron Gray, and Chief Commercial Officer Alan Gershenhorn.

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 for the future performance or results of operations of the Company.

These statements are subject to risk and uncertainties which are described in detail in our 2014 Form 10-K and 2015 10-Qs.

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

Before we begin I would like to make you aware of a few adjusting entries that impact our reported results.

UPS recorded a non-cash after-tax mark-to-market pension charge of $79 million.

The charge resulted from lower asset returns that were partially offset by higher discount rates.

Investment returns on plant assets were negatively affected by the overall market performance.

The impact of the shortfall was mostly offset by increased interest rates used to calculate the plan discount rate.

In the prior-year period the Company reported a non-cash after-tax charge of $692 million.

The charge related to pension mark-to-market was $670 million and the amount of the healthcare liability transfer was $22 million.

More details on mark-to-market accounting are available in a presentation that is on the IR website.

Excluding the impact of these charges, adjusted diluted earnings per share for the fourth-quarter 2015 were $1.57 and GAAP earnings per share were $1.48 while fourth-quarter 2014 adjusted diluted earnings per share were $1.25 and GAAP earnings per share were $0.49.

In our remarks today all quarterly and full-year comments and comparisons will refer to adjusted results.

In addition, we will discuss UPS' free cash flow which is a non-GAAP financial measure.

The webcast of today's call along with the reconciliation of free cash flow and adjusted results are available on the UPS investor relations website.

And just a reminder, as on previous calls please ask only one question so that we may allow as many as possible to participate.

Thank you for your cooperation.

Now I will turn the call over to David.

Thanks, Joe.

Good morning everyone.

Our results make it quite a good morning here at UPS.

I'm pleased to report a very positive fourth quarter, capping our strong full-year performance.

A year ago we laid out a plan for a successful peak 2015.

This year through the extraordinary efforts of UPSers around the globe we delivered the high-quality service that customers deserve and the financial discipline that shareholders expect.

This was the fourth consecutive quarter that UPS exceeded financial expectations.

And this quarter we expanded margins and produced double-digit operating profit growth in all three business segments.

That's worth repeating: all three segments demonstrated excellent operating profit growth.

In fact, the International segment achieved its best quarterly and full-year results ever, exceeding $2 billion in annual operating profit.

UPS ended 2015 with record fourth-quarter earnings per share and the highest operating profit ever reported.

Full-year 2015 diluted earnings per share increased 14% to $5.43, an all-time high.

Although the industrial side of the economy has slowed, the explosive growth of e-commerce continues to create great opportunity.

I want to spend some time discussing how we capitalized on our peak season opportunity by managing the challenges it creates.

I can sum it up in three words: collaboration, control, commitment.

Expanded collaboration with customers combined with key investments were central to our success.

We work together with a shared interest in fully utilizing UPS network capacity while simultaneously maintaining excellent service.

UPS implemented certain pricing controls and maintained disciplined operating plans to ensure our peak package volume did not jeopardize the overall integrity of the network and could be delivered on time.

For example, we optimized available capacity during the weekend prior to Christmas and collaborated with customers to tender shipments ahead of the original schedule.

This moved our peak day up to December 21 and smoothed volume for the rest of the week, ensuring our customers' packages reached their customers' doorsteps before Christmas.

This year our customers worked more closely with us than ever.

And I want to thank them for making adjustments and being flexible.

Together we delivered a successful peak season.

Again working closely with our customers, we delivered a successful peak season.

Turning to control.

Our actions to tighten dispatch, reduce special sorts and implement just-in-time hiring resulted in significant cost benefits for UPS as we exercised more precise control over the network.

We also expanded capacity, opened more than 8,000 UPS Access Points in the US and completed several automation projects across the network.

These investments provide year-round benefits.

In fact, our automated air facilities were essential in servicing nearly 13% growth in US Domestic Air volume during the quarter.

The flexibility of our integrated network also gave us the control needed to seamlessly move volume between air, rail and ground to maintain excellent on-time service.

This year we again implemented a management process called the control tower in the US and expanded it to Canada and Europe.

We handled customers' unplanned volume surges by efficiently utilizing available UPS network capacity.

Our goal was to find a solution that worked for our customers and UPS.

Working together, we were able to service more than 90% of these last-minute requests.

Another aspect of control is managing outside transportation cost which spikes dramatically during this time of year.

Our recent acquisition of Coyote Logistics helped manage this expense.

They played an expanded role this peak season and provided truckload brokerage service for UPS and its customers.

Coyote's synergies remained on plan.

The final C is commitment exemplified by the actions of our employees to deliver on-time service during a period when our volume nearly doubles.

There are numerous examples of UPSers going the extra mile every day for our customers and they again demonstrated that commitment this peak season.

I want to take a moment to say thank you to all the UPSers around the world whose enthusiasm and extraordinary efforts during the holiday season produced these great results.

I am proud of their determination, dedication and hard work.

While peak season 2015 helped drive strong fourth-quarter results, we've turned our attention to 2016.

Our business is more diverse than retail and peak season.

Customers continue to choose UPS because of our broad portfolio of solutions across many industries like health care, aerospace, high-tech and manufacturing.

We will continue to capitalize on opportunities within these market segments by further expanding our network, improving operational efficiency, and focusing on high growth in adjacent markets.

Looking at the global economy, conditions remain uncertain with the first half of 2016 continuing the mixed economic trends from the last half of 2015.

Across Europe and Asia GDP growth was modest in 2015.

However, slight improvements are expected this year.

At the same time, we continue to see challenges in emerging markets in 2016.

Global macroeconomic conditions reinforce the need for nations to continue making progress on free trade agreements such as TPP and T-TIP.

While the US GDP growth outlook is muted for the first half of 2016, it is expected to gain strength in the second half.

Further, the US remains dependent on a consumer-based economy for growth while industrial manufacturing continues to be held down by a strong dollar and lower global demand.

Through this uncertain backup, UPS will continue to implement our investment and growth strategies in 2016.

Our strong execution of these strategies will enable UPS to continue to create excellent share owner value.

Now Richard will give you more details.

Thanks, David.

It's good to be with you this morning and report on an outstanding fourth quarter.

All three segments performed better than expected.

They achieved solid results by focusing on revenue management and operational execution.

These efforts expanded operating margins and increased shareowner value.

Total fourth-quarter revenue was up slightly to $16.1 billion.

On a currency neutral basis, it was up 2.4%.

Changes to currency and lower fuel surcharges reduced revenue by more than $600 million.

Overall, UPS produced fourth-quarter earnings per share for 2015 of $1.57, up 26% from last year.

Full-year 2015 earnings per share were $5.43, a 14% increase over 2014.

These results included discrete tax credits of about $0.07 for the quarter and $0.10 for the year.

Excluding these on an annual basis, earnings per share grew more than 12%.

Now turning to details within the business segments, in the US we had a great quarter.

Revenue was up 2.6% to $10.3 billion.

Lower fuel surcharges reduced revenue growth by about 250 basis points.

Average daily volume increased 2.4% led by Deferred Air products up 15% and Next Day Air up 10%.

Clearly UPS customers are choosing the value of our Air Products to meet their customers' expectations.

Both business and residential deliveries grew in the quarter with B2C outpacing B2B 2 to 1. E-commerce continues to drive higher residential shipments.

In fact, in December more than 60% of our deliveries were to consumers.

Revenue per package increased slightly as strong base rates and product mix improvements were somewhat offset by lower fuel surcharges and changing customer mix.

Operating profit jumped 18% to more than $1.3 billion and margin expanded 170 basis points to 13.1%.

Solid execution of the peak operating plan and our network investments led productivity gains.

Average daily direct labor hours declined about 1% while package deliveries increased 2.4%, some of the best results we've produced.

The growth in e-commerce continues to increase delivery stops in our network.

During the fourth quarter delivery stops increased 5.1%.

That's more than twice as fast as our volume growth.

Technology investments such as ORION are enabling us to reduce the cost of residential stops.

As a result, we held package delivery miles flat and reduced cost per piece.

These results demonstrate our ability to adapt.

We're bending the cost curve and the US team is delivering high-quality service while improving efficiency and cost.

Looking now at the International segment, we had a record-setting quarter and year, achieving a 16% improvement in our fourth quarter operating profit to $624 million, delivering greater than 10% profit growth every quarter in 2015.

Our results are driven by two efforts: first, rate actions that began late in 2015 resulted in losing some low yielding accounts, predominantly affecting the International Domestic volume; and second, network management improvements continue to contribute to bottom-line results as we modified international block hours to match volume and trade lane demand.

Revenue in the fourth quarter was $3.2 billion.

Base rates increased across all regions, although they were offset by about a 350 basis point drag from lower fuel surcharges.

Total export shipment growth slowed, reflecting the execution of previously mentioned pricing initiatives along with varying market growth rates around the world.

Imports from Europe into the US were strong for the fourth consecutive quarter aided in part by the appreciating US dollar.

The International business continues to demonstrate the ability to adjust in an unsteady economic environment.

Turning to the Supply Chain & Freight group, operating profits grew more than 11% with an expanded operating margin.

Overall revenue growth increase 6% with the addition of Coyote.

However, organic revenue growth declined due to two factors: first, ongoing weakness in both Forwarding and US LTL markets and secondly, the continuation of our targeted revenue management actions.

Both the Forwarding and UPS Freight units are executing initiatives that are driving change into customer mix to improve profitability.

The Forwarding unit improved operating margins as the group held firm with rates, achieving their highest buy/sell rate spread in the last few years.

In UPS freight, LTL revenue per hundredweight improved 2.1% with a drag of about 550 basis points from lower fuel surcharges.

However, market conditions continue to challenge UPS freight as they saw tonnage decline about 12%.

The distribution unit saw double-digit revenue growth from targeted industries healthcare and aerospace, particularly in the US and in Europe.

Now let's turn to our cash flow.

Throughout 2015, UPS continued to generate healthy free cash flow, producing over $5 billion after $2.4 billion in capital investments.

Once again we returned more than 100% of net income to share owners as UPS purchased 27 million shares for approximately $2.7 billion and paid out another $2.5 billion in dividends, up 9% per share over last year.

Looking at our tax rate as previously mentioned during the quarter, UPS resolved a few outstanding tax items.

Together these resulted in $63 million of discrete credits or about $0.07 per share.

For 2016 we expect our tax rate to be 35.25%.

Now I'll cover the rest of our guidance.

We expect 2016 to be another good year at UPS.

Revenue should increase between 6% and 8%.

Looking more closely at the segments.

In the US the domestic segment average daily volume should increase about 2% to 4%, driving revenue up 4% to 6%.

Operating margin is forecasted to expand and operating profit should grow 5% to 9%.

In the International business shipments per day are projected to increase 2% to 4%.

Growth rates will be held down during the first half of the year due to the revenue management actions we discussed earlier.

We anticipate a drag of about 150 basis points from non-hedged currencies and lower fuel surcharges.

As a result, revenue will grow at a similar pace as volume.

Operating profit is expected to be up 8% to 12% with some margin expansion.

In the Supply Chain & Freight segment, revenue should be up 15% to 20% with Coyote added for the full-year.

The segment's organic revenue growth is projected between 3% and 5%.

Operating profit growth is forecasted between 6% and 10%.

However, first-quarter growth will likely be down about 8% to 12% from last year due to the continued softness in the LTL, Freight Brokerage and Freight Forwarding markets.

As a reminder, the West Coast port strike provided some benefits in 2015.

Operating margin for the Supply Chain & Freight segment should be around 7%.

For the total Company, we expect our 2016 operating profit distribution by quarter to be very similar to 2015.

From a cash flow perspective investment in the business remains our first priority with CapEx expected to be about 4.5% of revenue or $2.8 billion.

Next, we remain committed to paying a strong dividend.

Finally, we have about $2.7 billion in share repurchases planned.

As we've mentioned in the past we will continue to follow this framework and make necessary adjustments if new opportunities arise.

Overall we expect 2016 to be a solid year for UPS.

We will continue to execute on our investments as planned and the network improvements we're making are producing financial benefits.

As a result, we are projecting diluted earnings per share to increase within a range of $5.70 to $5.90, a growth rate of 5% to 9%.

And excluding the 2015 tax credits our growth rate is 7% to 11%.

In closing, despite the unsteady economic climate we are well-positioned to make significant progress again in 2016.

Thank you for your attention.

I will ask the operator to open the line so we can take your questions.

Operator?

Tom Wadewitz, UBS.

Yes, good morning and congratulations on the strong results and the special peak season.

I wanted to -- I guess it's one question but it's really focused on your volumes within fourth quarter in Domestic Package.

I know you've had a spread of strong year volumes driven by e-commerce but it seems that spread versus Ground widened out.

I was wondering if you could give a sense of what were some of the key drivers of Domestic Package volume and that spread in fourth quarter, what was B2B like in Ground, what was the impact of your controls to have a peak, was that an impact on the softer ground and was there weakness of any kind, what were some of the key drivers within that Domestic volume?

Thank you.

Hey Tom, this is Alan, yes certainly it was a solid peak season.

We delivered more than 612 million packages over the peak period.

It was the most in the Company history, up about 7%.

And as you said, the air volume was well above our expectations in the quarter with the Deferred growing almost 15 and Next Day at 10.

The Ground volume, yes, was a little bit below our estimates.

Certainly the soft industrial production that David mentioned and certainly some of the revenue management action on some of the low yielding accounts earlier in the year and for peak had some impact.

Our B2B growth was positive.

If you remember last quarter it went negative but it rebounded last quarter and as Rich mentioned our resi grew at about a 2 to 1 ratio to the commercial.

Thanks.

Tom, this is David.

When it comes to volume I think it's worth taking the time to look at the over the two years the stacked volume for the fourth quarter and if you compare 2013 to 2015 you'll see that our total volume was up 9% and our Ground volume was up 7.6%.

So when you look at it over a two-year period what you see is that 2014 had a tremendous increase in Ground and then we added to that but the two-year stack gives a pretty good picture of where we've been in the last couple of years.

OK.

Scott Group, Wolfe Research.

Hey, thanks, good morning guys.

So one quick housekeeping question and then one broader question.

Is there anything in the fourth quarter or the guidance related to this spot rate pension accounting that a lot of companies are doing?

And then just bigger questions on the volume growth outlook.

So forecasting and acceleration volume growth, and I think you kind of said it will be more back-end loaded, should we think about the -- I guess what gives you confidence in that re-acceleration of volume growth in the back half of the year and should we expect the earnings growth to also be back-end loaded?

This is Joe, just before we get started.

We're just going to do one question because we've got a lot of people but we will take this dual-part question now, but Richard why don't you --

So the question you asked around pension is that we currently use a mark-to-market as a deck presentation on our website that explains the mark-to-market and we use a quarter approach for that.

And I think that goes through the process and we've done that each year the last few years, whenever we make an adjustment.

This year was a much smaller adjustment and I think once you go through that if there are some more questions we can handle that appropriately.

In terms of the volume and the guidance on volume we did have solid top-line growth this year.

In fact, it was 5% growth this year and we really see 2016 is a continuation of what we did in 2015.

It does have some cycles through the quarters.

Obviously we talked about each quarter kind of looking similar to the previous year.

And so when you think about how our volume grows, our revenue and our profits I would point you back to that.

But we feel real good about where we're at.

We think it's not just what's happening outside externally in the macroenvironment, it's also all the initiatives and the things that we're doing inside UPS right now that are gaining traction and are actually the reasons that the results were so good for the fourth quarter and for all of 2015.

And on the volume just a little bit more on that.

In 2015 we said all along due to peak cost and to other costs that we're going to have to focus on yield which we did and for 2016 we just want to make sure that we have the right balance and I am absolutely confident that the team will between maintaining yield and increasing our volume.

So with the initiatives that we have feel comfortable that we're going to maintain the air volumes the way they are and feel like we will improve the ground volumes.

Kevin Sterling, BB&T Capital Markets.

Thank you.

Good morning gentlemen and congratulations on a nice quarter and outlook in a challenging environment.

My wife thanks you for a successful peak season.

Real quick on ORION, how much more do you have to implement across your driver network?

And is it possible to quantify the cost savings in Q4 from ORION?

Good morning, Kevin, this is Myron.

During the year we increased the deployment for ORION from 45% in 2014 to up to 70% by year's end.

We expect to be completed with the deployment of ORION by the first day in January 2017 and we're extremely pleased with the results that we're getting today.

And Kevin, this is David.

I would want you to tell your wife we really appreciate her efforts to increase our volumes.

So thank you for that.

I will.

Thank you.

Nate Brochmann, William Blair.

Yes, good morning, thank you for taking the question.

I was curious little bit just about the Coyote acquisition in terms of how that's progressing so far and where you've seen the most benefits in terms about you utilize that in terms of moving some of your own package freight throughout the network in the fourth quarter and also, too, in terms of just seeing that business organically in terms of still working with their kind of core customer base?

This is Alan.

Coyote certainly performed well during peak and we are going to continue to expand that role.

They were certainly one of the difference makers.

They are playing a crucial role in our ability to manage our outside transportation services and cost certainly year-round but very integral during the peak season.

So they provided the flexible capacity to meet the demand surges and they also helped us to improve our capacity utilization.

On an overall basis as David said in his opening comments, the synergies are on track.

I'd also say that we are getting some good purchased transportation [per current] benefits and those are exceeding our expectations.

Ken Hoexter, Merrill Lynch.

Great, good morning and I echo a great job through the peak season.

Great to see.

But I think you mentioned that you turned away 3% of volumes given the control tower.

I just want to understand some of the economic commentary as you look ahead to your outlook.

Ground volumes remain up pretty slight.

So are you still seeing a trade-up to Next Day Air and Deferred just given the strength there or is this just an economic difference of e-commerce versus what you're seeing on the ground side?

First of all we didn't turn away 3% of our volume, 3% of volume with the control tower.

The control tower was an absolute success this year from both a customer and a UPS perspective and I'd also say from an e-commerce, retail and also a year-round customer perspective all the other industry segments that we serve.

So a real success.

And the primary goal there was to optimize the network capacity and find solutions that worked for our customers and UPS.

And in fact, between Cyber Week and Super Weekend we were able to accommodate all the customer requests.

And during those final few days there was a few that we needed to turn down but even then some of those were some dual source customers who chose not to make longer-term business commitments to UPS.

So we thought it was a resounding success.

We had a very disciplined approach to the volume, the capacity and managing the yields to produce the excellent fourth quarter that we had.

I'm sorry, and the trade-up down commentary?

Look I think the Air Products are resonating really well with our customers and certainly the just-in-time nature.

So our Deferred was up 14% and the Next Day Air Overnight products, mainly the Saver, was up about 10%.

And I think customers are choosing the services that they need based on the time in-transit that they are looking for.

Ben Hartford, Baird.

Thanks, good morning.

Jim, maybe this question is for you.

I'd be curious on your perspective on business inventories generally from customers.

There's been a lot of discussion on some destocking, whether that has taken place in the fourth quarter.

I'd be curious on your view of the International side what you are hearing as it relates to inventory destocking during the fourth quarter, any planned destocking in 2016 and then any perspective that you can provide on the domestic side would be helpful as well.

Thanks.

Yes, this is Alan.

I'm going to take that first and I will pass it over to Jim.

Certainly what's happening international has a broad impact on the US but as you probably know all know, the US inventory sales ratio has come down slightly but it still remains elevated, certainly indicating we've got a continued overhang of inventories in the economy and customers are obviously attempting to work them down.

We expect the strong US dollar to continue to influence the trade lanes.

And I guess the last thing I'll say is that our omnichannel e-commerce strategies like ship from store enabling retailers to burn some of that off effectively.

I guess, Ben I would add the comment probably from a forwarding perspective because that tends to be the kind of front end of some of these inventory moves.

If you look at about the last year what we've seen is the continued gap of demand and capacity.

But I would say in the last two months of data what we start to see is some load factors turning up.

So with that moves forward now we also have Chinese new year coming on us right now so that will give us our second read.

But from that perspective I think as some of the guys mentioned earlier the buy/sell spreads which is reflective of capacity and demand have been at its widest point through 2015.

But early indications, there's a little bit of turn towards the end of 2015 but we don't see anything that spikes in a great way just yet but that will lead us to further evaluation of the inventory.

So I appreciate the question.

David Vernon, Bernstein.

Good morning and thanks for taking the question.

Richard, great to hear the guidance on the Domestic margin expansion but I have a question for you on International.

How much are we, how much are you guys seeing benefit from the currency gains in the fourth quarter?

How should you expect that hedge gain to play out in 2016 and then should there be a cliff on the hedge rolloff in 2017?

We've gotten a lot of questions about how that interaction will play out over the course of the year in terms of reported gains on the currency hedge.

Sure.

We use a currency hedge program that really is about protecting our profits.

But when you separate that out, right now we do have protection for all of 2016.

And at different points through the last few years we've gone in and made the necessary adjustments.

But when we looked at the operating margin, it is improved a little bit because of the hedge and it's about 200 basis points, just over 200 basis points in the margin that you should be thinking about that's really driven because the hedge program that is really meant to allow the operators to look at the business and step away from what's happening with the currency and concentrate on growing the business.

I'm actually going to ask Jim to talk a little bit about the record-setting year that International has had.

Okay, thanks, David, and thanks Rich.

I think with respect to currency that's going to work through in the hedges as Rich pointed out is how we manage it.

I do want to point you back to what we consider to be a very solid year in International, a couple of obviously record-breaking points.

But I think the key for us is to continue to lean into the networks.

We talked to you in late 2014 at the Investor Conference about efficiencies and continuing to invest in the network specifically up to about $2 billion in Europe.

We continue on that path.

Our Europe team continues to execute.

We get the revenue management initiatives that go with it.

So all that really keeps us at really the end of the story which is industry-leading margins in the International business.

And we'll manage that and currencies will do what they will do and we will continue to grow the business internationally and manage to the top of the industry margins.

So appreciate the question.

So just to kind of clarify, should we then be expecting that 200 basis point the margin to roll off in 2017?

Or are you guys making progress on mitigating that impact?

It's a little early to start guiding you on 2017 but there are certain actions that we are taking on.

And as it becomes more appropriate to cover and things are more complete, we'll give you a better story on that.

All right, thanks very much for the time great print.

Allison Landry, Credit Suisse.

Good morning, thanks.

I wanted to follow up on an earlier question, on pension and if you could provide or quantify what's embedded in your guidance in terms of the year-over-year expense tailwind or headwinds.

Sure, thank you, Allison.

You know when we look at the pensions overall we're expecting our expense to actually be flat this year with 2015 and that's what's embedded in the guidance.

The activities around pension are an important area for UPS.

We continue to actively manage that area and as I said for the year it's going to be flat.

So there won't be any increase in expense for 2016.

Jack Atkins, Stevens.

Great, thanks for take my question guys.

So I guess just to focus here on Amazon for a moment, we saw several media reports late in the fourth quarter that the company is planning to lease a number of 767s and perhaps 737s to operate both in US and Europe.

If this is indeed the case what impact do you think this move will have on the competitive pricing dynamics in the domestic and European express market?

This is David.

First, let me make sure to express that Amazon is a good customer of ours.

We have a mutually beneficial relationship.

And you know, our goal with Amazon or any other big customer is to continue to show our value through the integrated network and through our technologies and to have a value proposition that is difficult to match.

We do add capacity and for large customers such as Amazon.

We do it, though, we ensure we have the proper economic return.

At the same time we also ensure the integrity of our network for all customers by planning and forecasting our volumes.

So I didn't read anything in the last quarter that we felt like is on any kind of substantial basis is going to affect our pricing, pricing in the market.

We just believe we need to continue to focus on our values, stay on our strategies and our technologies.

And we feel that we'll have another good year this year as far as return to investors.

Brandon Oglenski, Barclays.

Good morning guys and congrats on the better outcome this year.

Totally different from 12 months ago.

But can I just ask you what's your general perception of industrial exposure in your Domestic Package network?

Because if I look back historically when we saw IP contracting I think it's been very difficult for UPS to get earnings.

So can you talk to some of the risk that the outlook has if the industrial economy keeps weakening?

And then maybe some of the counter proactive or positive things that are happening in the network that are giving you this positive outlook?

This is Alan.

Look, I think the story with industrial production has been happening now for quite a while.

Certainly it's trending more negative than it has been.

Our business today as Rich said even at peak season we were up to 60% residential.

So about half of our business is on the retail e-commerce side now.

And I think we're going to be able to manage through that real well.

I think the value proposition that we have in place for both retail and the other industry segments including industrial manufacturing, high-tech and healthcare bode well.

So we feel pretty good that we've embedded these trends into our 2016 plans and are very confident in achieving those results.

And this is Richard.

And just a few other things I think it's important to think about when you think about what's embedded in our guidance is the volume is not just based on what's happening externally.

It's also what's going on within UPS.

And so we start out externally and look at various scenarios of what we think could happen.

And so embedded in the range is different volume assumptions and that's why there's a range.

But also it's the story about the economies that we're getting out of the ORION project and the adjustments we're making in the air network.

You bring all that together and that's why the range is as we put it out there.

So we feel very confident that what we're putting out there is the expectation based on both the external and internal efforts we're doing here at UPS.

This is David.

Just a last comment on industrial production.

If you looked at our results five years ago I think there was a tighter correlation.

Now of course with our e-commerce and residential business growing as fast as it is I think that maybe it's not quite as direct.

And if you look at the fourth quarter, industrial production was down all three months of the fourth quarter and we had record results.

And I think part of that was because consumer confidence is still high.

And so I wouldn't draw too much of a connection there if I was you.

But thanks for the question.

Art Hatfield, Raymond James.

Thank you.

Thanks for taking my question.

I hope I get this out appropriately or word this right.

I think you touched on this a little bit but obviously e-commerce is going to continue to grow at a very rapid pace.

And it seems to me that as we move forward you're going to have more and more difficult decisions during peak with regards to having to potentially turn away business.

How do you think about that decision-making process going forward and how do you balance all of your customers' needs?

This is David.

I will start that question and then I will hand it over to Alan.

The key to remember this year, though, is our focus was not on capping or turning away customers but the control tower, our focus is to pull volume in, work with our customers and find ways to utilize sources or areas of our network that aren't capped such as we were very successful in pulling volume into the weekends.

This is how we were able to actually move up peak day from December 22 to the 21.

So one of the ways that we addressed what you were just referring to is the way that we do manage.

We also had substantial capacity this year for peak and from our CapEx plans that's going to continue.

And the increase in technology, ORION that you heard Myron talk about, over 70% utilized and Access Points and other technologies like that.

So I don't think we have a future of just seeing how much volume we can cap.

It's just the opposite of how we can increase our capacity and how we can increase our effectiveness.

Alan, from a customer standpoint.

I just say look, we've talked for a while now about bending the cost curve.

And David talked about some of the things we're doing there with ORION, but UPS My Choice, Access Points, SurePost redirect.

And SurePost this year we redirected over 35% of our SurePost packages back into the network where we were able to create a 2 piece stop, our omnichannel strategy, so on and so forth.

All these things are working in concert to help us be able to manage peak at levels today where this year our peak volumes will almost double what they are during the remaining part of the year.

Keep in mind that as we work with all these projects here a lot of them are focused in on delivery density and one-tenth piece per stop increase creates about $200 million of operating profit improvement.

So we feel like the things that we're doing to our network now are going to enable us to handle bigger and bigger peaks.

Chris Wetherbee, Citi.

Thanks, good morning.

I want to ask a question about pricing.

I wanted to get a sense of maybe on the domestic side how the core pricing looked and maybe how mix looked at whether or not we saw some acceleration into the fourth quarter?

I'm just trying to get a sense if during peak is pricing stronger or are there other mix offsets that we should be thinking about?

Thanks.

Hey, this is Alan.

Thanks for the question.

Certainly we had strong base rate pricing improvements throughout 2015.

The fourth quarter was no exception.

We came in at the higher end of the 2% to 3% long-term target range.

It's really the GRI, the dim weight, some of the tactical pricing decisions as well as disciplined and prudent revenue management.

For 2016 our expectation is to achieve again within 2% to 3% of the range for base rate improvements going forward.

John Barnes, RBC Capital Markets.

Thanks.

Let me echo my congratulations as well.

Nice quarter.

Real quick, you talked a little bit in your guidance about some revenue management actions you've taken in Europe.

It seems like LTL volumes continue to be a little bit weak there.

I'm just kind of curious, are there any other revenue management areas that you are attacking right now?

Is LTL one or is this isolated to Europe?

Can you elaborate on that just a little bit?

Yes, this is Richard.

And John, I think the last few quarters we've talked about the revenue management initiatives and David mentioned improving the yield in some of his comments.

And the thing to keep in mind is it's really broad-based.

We're doing it in small package, we're doing it in the International Air Freight market.

And the LTL it's really about making sure we have the right customers and the right yield in each of our networks.

David Ross, Stifel.

Yes, good morning gentlemen.

A question on the peak season volumes.

The last couple of years in 2013 and 2014 the peak period was about 72%, 73% over a normal week period or a normal period.

Alan said it was nearly twice this year.

So was that 75%, was that 95%?

And in addition to that what can you do in 2016 to make the network run even better during peak than it did this year?

Thank you.

Sure.

And this is Richard again.

When you look across peak obviously peak is a little different in different weeks of it.

But when you go across the entire peak period it was slightly elevated from where it was last year.

And we moved the peak day up by one because the available capacity over the weekends and made the customers collaborating with us made the necessary adjustments.

I'm going to ask Alan to talk a little bit about specifically but what's going on with volume.

Alan?

Yes, look, my point was that during peak we handle almost double on any given day.

But the spike occurs on an ongoing basis between Cyber Monday and Christmas Day.

Throughout the quarter our volume between October and November was softer and December on a secular basis continued to rise.

Alex Vecchio, Morgan Stanley.

Good morning, thanks for taking the question.

I wanted to ask about the LTL environment.

Broadly speaking it's been several quarters now that volumes have been challenged, not just for you but for the entire industry.

And I guess I want to get a sense from you guys to the extent to which you're seeing increasingly competitive or aggressive pricing behavior from your peers.

Are you starting to see any of that or would you kind of characterize the industry as still broadly holding discipline on price?

Alex, this is Myron.

If you go back to the fourth quarter of 2014 each corresponding quarter we've continued to see softness in the market and it has adversely affected each of the carriers in the market.

However, base rate improvements have remained steady and we're not seeing any adverse actions to the negative that are being taken by any carriers and we would expect that to remain that way moving forward.

Matt Troy, Nomura.

Good morning and thanks for taking my question.

I just had a pretty straightforward inquiry on CapEx.

I was wondering if you could talk about your CapEx budget for 2016.

I know you guys have a lot of irons in the fire in terms of optimization and modernization programs across the network.

So just wondering what the capital budget is for 2016 and what are some of the major projects or allocations from the budget we can expect you guys to make progress on in 2016?

Thanks.

Sure, Matt, this is Richard.

You know, our CapEx as I mentioned in my talk is expected to be about $2.8 billion right now.

The model that we've built in UPS and the network is very unique.

And we're continuing to make the necessary adjustments in automating our Tier 1 buildings but we are doing it at a measured pace because we also have to make sure that we continue to provide the service that our customers expect.

In fact, in the last few years we've actually doubled the spend in our buildings and facilities and we expect that will continue and that's probably the area where we'll be spending the most money next year.

But the results of this quarter were really driven by the investments we made the last few years and that's helped us to achieve the margins and the profit level that we got for 2015.

Kelly Dougherty, Macquarie.

Good morning guys.

Thanks for the time.

I just wanted to think about the different macro outlooks throughout the world.

And can you give us a sense of how much of your revenue you would estimate touches the US at least at one end, so whether it's generated domestically or imports or exports?

And then also maybe if you could give us a similar estimate for Europe as well?

Kelly, this is Richard again.

When you think about the total Company obviously the US is a very large piece of our business.

And we've talked about the importance not only of the US but also of both imports and exports coming into and leaving the US.

And today of course the imports into the US are stronger.

And that's really something we've seen because it strengthened the dollar.

So exports coming out of the rest of the world coming into the US are much higher.

And we've talked about in the past that Europe is a very large part of our International.

It's about 50% of the International business.

So together those two are a very large part of the Company.

But the other piece of the network are important because the customers are sending packages all over the world back and forth.

Is there any way to kind of quantified 75%, 80%, whatever the number is percent of your revenue that actually touches the US in some way shape or form?

Kelly, this is Joe.

We can take it that detailed question off-line when we talk later on today.

Thanks.

Rob Salmon, Deutsche Bank.

Hey, good morning guys and thanks for squeezing me in here.

With regard to the margins in Q4, US Domestic Package got back to in-line margins for the full year.

And I think it's a testament to a lot of the internal initiatives that you guys are calling out as well as the strength on pricing.

How are you guys thinking about margins looking out next year and a few years out within Domestic?

Are the internal initiatives enough where we'll start to see fourth-quarter margins again be better despite the greater concentration of home deliveries and B2C shipments?

Or should we think about it roughly in line with the broader full-year overall margin in US Domestic Package.

Rob, again this is Richard.

I think you have to look at 2016 and David actually made a comment earlier that this is going to be a balanced year.

So volume growth and making sure that we align the revenue with the resources that are used in UPS, that's very important.

As well, for the last two years we've been down this road of improving our internal operations.

You saw that because for the first time you actually see stops growing twice as fast as volume yet your cost per stop came down.

And that's a testament to the technology and the US operations that's had a good quarter and I'll actually ask Myron to come on and comment on that.

So Rob, let me begin by thanking the thousands of UPSers who helped to execute on a well-designed plan.

We will continue to deploy technology, tighten our direct labor hours and add capacity where necessary to take advantage of this expedited growth in residential deliveries.

Deployments like ORION that helped us control our miles, actually they were flat in the fourth quarter.

Our direct labor hours were down from last year.

And the service was exceptional.

And we continue to deploy Access Points that gave control and convenience to our customers.

So we believe that this expedited growth in residential deliveries don't pose an issue for us moving forward.

Thank you.

Helane Becker, Cowen and Company.

Thanks very much operator.

Hi gentlemen, thank you also for the time.

As you guys think about the CapEx you're spending on improving the technology in the buildings, are you actually able to grow without adding additional headcount?

And I think Myron maybe just started to address that question with respect to improving margins without increasing either headcount or salaries that much.

I think our automation strategy will allow us to not add headcount.

And our automation strategy moving forward is to either deploy technology in the existing footprint that we have when we build new buildings or where we may need to add capacity that will help us reduce handles.

In the fourth quarter our direct labor hours were flat.

Now we hired what we expected in terms of people, the 90,000 to 95,000 but because of this automation we were able to bring them on much later at peak and our actual hours were down 8%.

So we don't see a need to add headcount.

Thank you.

This is David.

Just to put a recap on it, each of these automated facilities we see about a 20%, 25% efficiency.

So that gives you an idea of what they mean to us.

Thank you.

Jeff Kauffman, Buckingham Research.

We'll move on to our next question from Bascome Majors, Susquehanna.

Yes, thanks for squeezing me in here guys.

Just taking a step back, if you're going to design a parcel network from scratch to serve e-commerce customers levered to residential deliveries, can you talk a little bit about how it would be different from the network that you have today?

Look, I think that the network that we have today the air and ground integrated network is second to none.

And the enhancements we're making to that network whether it's the operational efficiencies that Myron talked about with ORION and hub automation or whether it's some of the customer facing technologies that we're putting in place that also help reduce cost and make us more efficient and make us attractive to both consumers and retailers is really the best network in the business.

And again when you think about this e-commerce ecosystem that we're putting in place with our base, ground and air package network adding on the UPS My Choice, UPS Access Point, the Synchronized Delivery Solution, the SurePost and the SurePost Redirect, our returns portfolio, i-parcel, combining that with some of the efficiencies really makes UPS network the e-commerce network of the future.

Scott Schneeberger, Oppenheimer

Thanks for fitting me in guys and congratulations.

Just back to B2B domestically, if you could address it in US Package and Supply Chain & Freight, how did you see the trend as you ended fourth quarter and into first quarter and if you could speak a little bit to end markets that were most impacted good or bad?

Thank you.

This is Alan.

Thanks for the question.

So certainly in the US here our B2B business was positive all year with the exception of a slight dip in the third quarter growing at or about half the pace of B2C and like we said it rebounded back in the fourth quarter but mainly driven by retail.

Certainly on the Supply Chain & Freight side of our business the vast majority of that business is in fact B2B.

And on the International business a much larger preponderance of our business is B2B.

So the growth you're seeing that would in fact also be B2B.

I would now like to turn the conference back over to our Investor Relations Officer, Mr. Joe Wilkins.

Please go ahead.

Thanks, Stephen.

Appreciate it.

I will now turn it over to David for closing comments.

Thanks, Joe.

We're successfully executing our strategies and capitalizing on our investments.

Due to the strong peak, the fourth quarter, the four consecutive quarters of 2015 where we exceeded expectations are all evidence of our execution.

We're carrying this momentum into 2016.

We feel good about the year even with a little less certain environment around us and we expect once again to deliver strong earnings growth this year.

Thank you for your time and see you next quarter.

Thank you.