United Parcel Service, Inc. (UPS) Q3 2011 Earnings Report, Transcript and Summary

Andy Dolny - Vice President of Investor Relations D. Scott Davis - Chairman, Chief Executive Officer and Chairman of Executive Committee Kurt Kuehn - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Treasurer

William J. Greene - Morgan Stanley, Research Division Ken Hoexter - BofA Merrill Lynch, Research Division Garrett L. Chase - Barclays Capital, Research Division Keith Schoonmaker - Morningstar Inc., Research Division David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division Robin Byde - HSBC, Research Division Nathan Brochmann - William Blair & Company L.L.C., Research Division Kevin W. Sterling - BB&T Capital Markets, Research Division Edward M. Wolfe - Wolfe Trahan & Co. David Vernon - Sanford C. Bernstein & Co., LLC., Research Division Christian Wetherbee - Citigroup Inc, Research Division Arthur W. Hatfield - Morgan Keegan & Company, Inc., Research Division Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division Christopher J. Ceraso - Crédit Suisse AG, Research Division H. Peter Nesvold - Jefferies & Company, Inc., Research Division Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division Jon A. Langenfeld - Robert W. Baird & Co. Incorporated, Research Division Matthew Brooklier - Piper Jaffray Companies, Research Division Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division Robert H. Salmon - Deutsche Bank AG, Research Division

Good morning. My name is Steve, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the UPS Investor Relations Third Quarter 2011 Earnings Conference Call. [Operator Instructions] It is now our pleasure to turn the floor over to your host, Mr. Andy Dolny, UPS Treasurer and Vice President Investor Relations. Sir, the floor is yours.

Good morning, everyone. Before I get started, I want to point out that during the call today we will make references to our recent investor conference. For those of you who are unable to attend, all information presented is available on our website. I encourage you to watch it. Based on feedback from those that have, I think you'll find it worthwhile. Now regarding our earnings. I'm here this morning with Scott Davis, our CEO; and Kurt Kuehn, our CFO, to discuss the company's results for the quarter and our expectations going forward. Before they begin, however, I want to review the Safe Harbor language. Some of the comments we'll make today are forward-looking statements that address our expectations for the future performance or results of operations of the company. These anticipated results are subject to risk and uncertainties, which are described in detail in our 2010 Form 10-K and 2011 10-Q reports. These reports are available on the UPS Investor Relations website and from the Securities and Exchange Commission. Today's call is being webcast, and will also be available on the UPS Investor Relations website. I want to remind you of an adjustment we recorded in the third quarter of last year. The adjustment was related to the sale of real estate and increased net income by $61 million or $0.06 per share. As a result, in their remarks today, Scott and Kurt will refer to UPS' third quarter 2010 results excluding the impact of this gain. Additionally, all 2011 full year references and comparisons to 2010 will refer to adjusted results. We believe this is a more accurate picture of the company's performance. Reconciliations to comparable GAAP measures and free cash flow, which is a non-GAAP financial measure, are explained in the schedules that accompanied our earnings news release. These schedules are also available on the UPS Investor Relations website in the Financial section. [Operator Instructions] Now to begin our review, I'll turn the program over to Scott.

Thanks, Andy, and good morning, everyone. It was great seeing you at our conference in Louisville. I hope you came away with the better understanding of our many capabilities and the investments we're making for the future. UPS delivered another good quarter of earnings growth. Highlighting the balance of our global business model and its ability to perform in the face of challenging economic conditions. Results like these reflect the value that UPS solutions are providing customers. There is increasing uncertainty in the global economic environment, most notably, exports from Asia, which slowed significantly during the quarter. On the other hand, it appears that the U.S. economy has stabilized and continues to show modest growth. Despite all the concerns of the European economy, our business there continues to perform well with exports up 9%. The outlook for the remainder of the year is for continued slow growth. Because we have seen less buildup of inventories heading into peak season, UPS could benefit if consumers respond with stronger than expected holiday purchases just like it did in 2009. We really won’t know this until the 2 weeks prior to Christmas as peak has become more compressed. Taking a step in the right direction, I want to congratulate Congress and the Administration for approving the critical trade agreements with South Korea, Colombia and Panama. Export growth in these countries will provide economic growth and create jobs here at home. I'm encouraged to finally see some bipartisan cooperation and hopeful that our leadership in Washington can continue to work together to stimulate our economy like a jobs bill that delivers real results and tax reform that encourages business investment. Here at UPS, we are not standing by waiting for the government or the economy to lead us. As we demonstrated during our conference, we continue to innovate and invest in the technology and solutions that our customers value. Recently, we rolled out several innovative, groundbreaking products. The most notable being UPS My Choice, which provides consumers with unparalleled delivery options. This service puts controls in the hand of the residential customer. As a secondary benefit, it helps UPS lower costs by eliminating multiple delivery attempts. Since the recent launch of this product, we have over 100,000 subscribers and that number continues to increase rapidly. To support our continued growth in Europe, we announced a significant expansion of the Cologne air hub. This $200 million project will include state-of-the-art UPS technology and boost capacity by more than 70%. Capital investments like this allow us to grow our network efficiently and achieve the return on investment capital goals unveiled at our conference. As we outlined there, UPS' solution-based approach spans the entire Supply Chain. These global capabilities are unmatched and customers recognize the value UPS provides. The conductivity across business units and the reach of our network continues to drive results. Though economists expect global economic growth for 2012 to remain below historic trends, I am confident in our ability to perform, rewarding share owners during both the current period of uncertainty and over the long term. With that said, let me turn it over to Kurt.

Thanks, Scott, and good morning, everyone. On last quarter's call, some thought that UPS was a little ahead of the curve with our economic outlook. However, during the past few months, we did witness the effects of economic slowing and continue to see the near-term outlook pointing to slow but steady growth. Now let's discuss UPS' third quarter results. With the exception of the International segment, UPS performance during the quarter held up well, especially considering the economic conditions and increased uncertainty. UPS experienced strong revenue growth of 8% and once again earnings per share improved at a double-digit rate, up 14%. Now let's take a look at the segment performance starting with U.S. Domestic. Operating margin is the highest we've experienced in 3 years, improving 60 basis points to 13.1%. Clearly, this segment is on the right track. Revenue increased almost 7% on flat daily package growth. Our focus on quality of revenue is paying off as yields were once again strong, up 6.5%. Base price increases of about 3% and higher fuel surcharges were the key factors. UPS Next Day Air volume gains were encouraging, up more than 1% with strong growth from packages offsetting the decline in letters. Operating leverage was apparent as improvements in productivity and investments in UPS technology helped produce operating profit growth of more than 11%. In fact, we once again experienced reductions in direct labor hours, miles driven and block hours. During the quarter, we took another step in extending our early morning delivery advantages when we announced the expanded coverage of UPS Next Day Air Early A.M. We've added or improved coverage on 1,300 zip codes, which solidifies our market-leading position. Now for the International segment, which is both about slowing economic activity and challenging comparisons to strong results last year. If you recall in Q3 '10, we experienced 47% volume growth in the Asia-to-U.S lane. This year, in the third quarter, UPS International operating profit declined slightly due to excess capacity, higher fuel prices and a slight drag from currency fluctuations. Remember, during our second quarter earnings call, we mentioned that due to macro conditions, exports from Asia were starting to exhibit softness. This eventually turned into volume declines on the Asia-to-U.S. lane. UPS acted swiftly to take down aircraft and full capacity out of the market, but not quickly enough, and margins were negatively impacted. Bottom line is, we built a network expecting a certain level of growth that did not materialize. Because of this we have now reduced our airlift capacity out of Asia while still maintaining our recently added service enhancements. If demand continues to soften, we can make additional adjustments. On the other hand, UPS is capable of adding back capacity if the surge and consumer demand occurs before peak like it did in 2009. Despite this slowdown, UPS' International revenue jumped more than 14%, driven by solid volume growth in other theaters. Export volume was strong, up 6.5%. UPS continues to lead the industry in international export growth. However, during the quarter, this growth occurred in the shorter trade lanes, such as within Europe or within Asia, as well as across North America. Non-U.S. Domestic volume increased 3.5% with strong growth in Germany, France and Poland. Package yields were up more than 9% as a result of currency, higher fuel surcharges and base rate increases. These were offset somewhat by changes in product mix as the growth in our transporter products outpaced Worldwide Express. On a currency-neutral basis, yields grew 3.2%. To support our International growth, we announced the expansion of UPS WorldShip to 25 additional origin countries, bringing the total number to 63. Now let's discuss the Supply Chain and Freight segment. As a perfect example of leveraging our technology across the entire portfolio, we have extended the UPS Paperless Invoice to include airfreight shipments. Now our customers can enjoy the most comprehensive, digital customs clearance option offered in the industry. Revenue for the segment was $2.3 billion, up more than 5% compared to last year. Operating profits were $195 million, with margin expanding to 8.3%. UPS Freight lead the way with margin expansion and solid revenue improvement to 15%. LTL revenue per hundredweight was up over 13%, resulting from higher fuel surcharges and stronger base rates. Revenue in the Forwarding business unit was muted due to excess capacity in the airfreight industry and the slowing demand from Asia. However, margin expanded and operating profit grew slightly. As expected, the Distribution business experienced a mid- single-digit increase in revenue while margin expansion was impacted by investments in the health care sector. During the quarter, we continued to expand our global health care distribution presence with the addition of facilities in Brazil and the Netherlands. These new buildings bring the total UPS health care compliance space to more than 4.5 million square feet. Regarding taxes. We have lowered our expected tax rate for 2011 to 34% based on the geographic mix of taxable income and other items. This impacted the third quarter and will impact the fourth as well. Now let's talk about cash flow. For the first 9 months of 2011, UPS generated free cash flow of more than $3.7 billion after capital expenditures of $1.6 billion and $1.4 billion in pension contributions. Distributions to share owners accelerated during the quarter as UPS significantly increased share repurchase activity. Given the weak market conditions, we jumped at the opportunity and increased share buybacks to more than $1.1 billion in the quarter. So far this year, UPS has repurchased 32 million shares for approximately $2.2 billion and paid dividends of $1.5 billion, an 11% increase in dividends per share. Regarding our guidance for the remainder of 2011. As I indicated at the Investor Conference, we are reiterating our earnings per share guidance of $4.15 to $4.40 per share. As we think about peak season, it seems a lot like last year where customer sentiment is mixed and cautiously optimistic. In general, inventory levels are tight and consumer demand for the holidays remains to be seen. As we have experienced in the past, the last 2 weeks before Christmas can have a meaningful impact on fourth quarter results. In our U.S. Domestic business, we expect year-over-year margin expansion similar to what we experienced in the third quarter, as we continue our focus on quality of revenue and improved efficiency. Daily package volume growth is expected to be 1% to 2% for the quarter. International volume and revenue growth is expected to outpace the market once again. Revenue should increase approximately 10%, driven by strong growth in inter-regional shipments. We expect the growth environment out of Asia to improve a bit. Operating profit is expected to be slightly above last year's level with operating margin in the mid-teens. For the Supply Chain and Freight segment, we expect moderate year-over-year revenue growth and continued margin expansion. So to wrap this up, UPS continues to produce quality earnings growth in an environment of moderate economic activity. We remain confident in our ability to succeed in these conditions and expect to produce record earnings per share for 2011. Thanks for listening this morning, and now Scott and I will be happy to answer your questions.

[Operator Instructions] Our first question will come from the line of Mr. Jon Langenfeld of Baird. Jon A. Langenfeld - Robert W. Baird & Co. Incorporated, Research Division: On the Domestic side, the International piece, I know you had a pretty tough comp there, margins came in better than you had talked about. But if I think about that over the next couple years and kind of playing out a relatively subdued growth environment, is there still enough room from the pricing offsetting the cost to move this higher as we progress over the next couple of years?

John, this Andy. Are you talking International Domestic or U.S. Domestic? Jon A. Langenfeld - Robert W. Baird & Co. Incorporated, Research Division: I'm talking about the Domestic -- overall Domestic on the profit margin side.

Yes. We feel pretty happy about our continued momentum in the Domestic business, even in a muted growth environment with a focus on yields and the broad productivity improvements leveraging many of the things we talked about at the conference. We are continuing to see margin expansion. Clearly, it's a lot easier in a more robust economy and time will tell how 2012 looks. But as long as we keep focusing on our effectiveness and improve the value proposition with things like My Choice, we feel pretty bullish about the long-term Domestic opportunity.

I think, Jon, we'll stay in a rational price environment, which will also help us enhance the margins.

The next question will come from the line of Ken Hoexter of Merrill Lynch.

Andy, you talked about -- or Kurt, I guess you talked about the story of decreasing letters going on for years. I just want to know, as you talked about the focus, we could see kind of a sharp rebound into the peak season here, so can you talk about -- when you talk about Next Day Air, is that kind of where the focus will feel at first? Do you see ground kind of feeling some of that in a rebounding economy and kind of on the mix changes within that Next Day Air? Does that impact it as well?

Yes, Ken. Clearly, we've been pleased with our progress in the Air business with the financial industry continuing to struggle and the housing industry weak. It does negatively impact the Letter business, but we've seen good growth in our Next Day Package, both with the a.m commitments and with the afternoon commitments. So we do see most of the growth in the package arena as supply chains continue to speed up and that is accentuated in an improving economic environment.

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

Our next question will come from the line of David Vernon of Bernstein. David Vernon - Sanford C. Bernstein & Co., LLC., Research Division: Could you talk a little bit about the tax rate changes, and how that will be or not be sustainable into the fourth quarter and beyond?

Yes, we had guided at the beginning of the year to a range of 34% to 35%, and we do expect overall that the rate will come in at the low-end of that range at 34%. And it's a combination of the geographic mix of our earnings and some minor specific settlements. So it really just means that we are coming in at the lower end of the range and we'll probably see a similar adjustment in Q4 as we had in Q3.

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

Our next question will come from the line of Mr. Tom Wadewitz of JP Morgan. Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division: I wanted to ask you about the International side and get a sense of how significant the cost take-out and network adjustment is on transpacific, I guess, in terms of how much cost reduction we can look at in fourth quarter. And then also if you want to comment on pricing within International given that capacity utilization came down a bit.

Yes, I think, Tom, the good news is, is that the pricing has remained stable in the International environment. It is a rational environment. Clearly, on the Cargo and the Freight side, the pricing is a little weaker and that benefits our Forwarding unit. We do expect to see the International demand firm up a little bit in Q4 with some product launches that last year were in the third quarter that are now in the fourth quarter. On the other hand, though, we did take a substantial amount of capacity out so we've lowered our year-over-year capacity out of Asia by about 10% or so and we'll continue to look at that. We did -- we have made, though, over the last year, 1.5 years a number of substantial enhancements with the direct flights to Europe and some of those things. And we do think that investing in that and continuing to leverage that platform is wise, but we'll adjust and adapt as the economy tweaks it. But right now, we feel like we're in pretty good shape, and borrowing further declines, we should be pretty well-calibrated.

Our next question will come from the line of Art Hatfield of Morgan Keegan. Arthur W. Hatfield - Morgan Keegan & Company, Inc., Research Division: Kurt, given your comments about pricing, can you talk a little bit about the sequential decline in yields. Was that -- my assumption was that fuel had been -- surcharges had been flat throughout the quarter, was that a -- was I wrong about that, one? And 2, was it a mix issue?

The international showed -- did see some impact and that's really that demonstration of the mix. As we said, we showed continued strong growth. European exports, most of which stay in the continent, grew upper single digits. North America trade continued strong, so there's a mix within that International export that did have an impact and if you take out the currency and the fuel, certainly that was a somewhat negative impact on yields. But we think on a same-package basis or a same-store basis that yields remain firm and there are some mix changes, but all in all, we feel very comfortable both domestically and international that the value proposition is such that we're able to sustain good yields.

Domestically, the yields between the third quarter and second quarter were very similar, there really was no degradation, whatsoever.

Our next question in queue comes from the line of Mr. Ed Wolfe of Wolfe Trahan. Edward M. Wolfe - Wolfe Trahan & Co.: The International profitability just feels like it's been an issue now that that's more than just a slowdown in demand and your International volumes weren't that terrible. International has a lot of things going on. Is there some part of the world where profitability is becoming a bigger issue relative to what you saw most of the last 5 or 6 years?

First of all the question is Europe, that's not the answer. Europe has stayed very strong. We’ve had -- we're very pleased with performance and profitability out of Europe. I mean, clearly, this was an Asia issue. And as you know, we had the most leverage both positive and negative coming out of Asia and it's tough to get the network cut down quick enough. But clearly, issue here was Asia in the third quarter and the second quarter.

And I guess I will comment that we're just showing a very slight decline of profits, 2%. Just the impact of fuel and currency would more than account for that. So we're not pleased with the third quarter results, but we're taking steps and we feel very confident that the International segment is going to continue to outgrow and we had a pretty sudden change in Asia. We telegraphed that in July and talked about it also in September. So it is a challenge, but we still feel very positive on the long-term prospects for the International. Edward M. Wolfe - Wolfe Trahan & Co.: Can you talk to the Asia capacity in terms of what you were built for growth and what capacity you took out and so what you're aligned for growth right now from Asia and what the volumes actually were in the quarter?

It's all -- you really have to look lane by lane, Ed. We did actually go to negative on the U.S. to Asia lane, and clearly, that's a lane that we have substantial capacity. The other lanes remained positive. Actually, Asia to Europe continued to look good. And as I said, we did take out approximately 10% of capacity in the quarter, and barring continual declines, we should be in better shape.

Our next question will come from the line of Peter Nesvold of Jefferies. H. Peter Nesvold - Jefferies & Company, Inc., Research Division: I was a little distracted early on in the prepared comments. I think you said that core pricing was up 3% year-over-year. And I was hoping you could you just elaborate on that data point a little bit more? Is that a mix neutral sort of same sales number, #1. Is that just Domestic? How did that compare to the last couple of quarters and do you sort of see that number being the base level going forward?

That was a Domestic reference, and it was weighted average of all the products. The Grounds, probably a little higher than the average, and the Air is a little lighter than the average. Clearly, that's not a big change. And in general, those trends are pretty darn similar to Q2 if you x it all out. So as you know, we continue to focus on creating as much value as possible and pricing accordingly, and that's gone very well this year. H. Peter Nesvold - Jefferies & Company, Inc., Research Division: Is that mixed neutral or does it incorporate the mix so that if mix deteriorated modestly to slower modes during the quarter, that sort of the same-store pricing might have been a little bit better than that?

The only place that would be relevant a little bit might be in some of the premium services where we are seeing high -- little higher growth in the afternoon services versus the a.m. So yes, you could adjust that out. We're seeing a similar trend, although slight in the International too, with a little higher growth in our standard services.

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

And our next question will come from the line of Kevin Sterling of BB&T Capital Markets. Kevin W. Sterling - BB&T Capital Markets, Research Division: As you look across the International environment, you said you parked some airplanes to manage the decline in volumes in the third quarter. Have you seen any improvement in October volumes? And how much of an uptick do you need to see to bring capacity back online?

We have seen, I guess, it differs by theater a little bit. Asia, we are seeing some firming. Certainly, some of that is due to these major product launches that you read about in the paper. Europe remains fairly stable, although clearly, we are probably a little bit cautious on Europe with all the headline risk. And the U.S., perhaps a little bit softer, but not a big change in trends.

I'd just say just in the economy in general, we're probably a little more optimistic than we were 1 or 2 months ago. We've had a lot of good economic reports. In the U.S., retail sales are looking -- better last month, unemployment claims are improving, manufacturing is getting better, bank loans are increasing. So I think we feel a little bit better. And that's been the problem on Asia exports, the demand of the U.S. has slowed down, and somewhat in Europe, demand has slowed down, so I think if we can get some decision-making done in Washington and Brussels, you'll see a firmer demand going forward, which obviously will help Asian exports.

Our next question comes from the line of Mr. Bill Greene of Morgan Stanley.

Kurt, just some data points, if you can provide them, FX impact and if you have some sense for pension for 2012, pension expense that is.

Yes, Bill, we clearly show the FX impact for the -- on the revenue side and there was fairly significant impact. On the P&L though, we actually had a slight negative impact for FX, cost us about $0.01 or so. It's a combination of some of the collars we put on where it capped our coverage and also some strengthening in Asia against the dollar. So it's a mixed issue, not a huge trend, but it was headwind.

The pension, Bill, is going to be obviously determined by the discount rate at December 31, so we can't calculate that yet. Returns on our plans have been pretty good this year despite the turmoil of the market. So it's all going to depend on the discount rates. So we won't know that number until we announce it in January.

We have a question from the line of Rob Byde of HSBC.

Just on Europe and the Cologne hub. Night flyings are recently being banned, at least temporarily, at Frankfurt Airport. Is this likely to be a concern for your plans at Cologne?

We feel pretty comfortable with the relationship we have at Cologne. And certainly, as we discuss these expansions with the administrators at Cologne Airport, we've got assurances that we're in good shape for many years to come.

Our next question will be from the line of Chris Wetherbee of Citi.

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

Well, certainly, if there's a little bit of an inventory squeeze, and I'd say there's a decent probability of that, then there is some upside. As Scott mentioned earlier, especially those long transpacific routes, there's incredible leverage on. And so to some extent, you make your bets and you see how it comes through. There does seem to be a little uptick as Scott had said in sentiment right now and that could create the need to speed up supply chains. Clearly, the flooding in Southeast Asia is a challenge that may also lead to some late hurry-up orders to catch up on supply. That's one of the reasons we've been, I guess, balanced in our capacity reductions, taking enough out that we don't feel like we've got too much, but at the same time, keeping enough infrastructure in place to capitalize on the benefit.

Our next question will come from the line of Nate Brochmann of William Blair & Company. Nathan Brochmann - William Blair & Company L.L.C., Research Division: I wanted to talk a little bit as we talk about some of the trends shifting internationally more from maybe exporting to more of the intra-regional trade networks within Europe and Asia. I was wondering if you could talk a little about what you're doing to take advantage of that and what kind of growth opportunities you see as maybe some of those economy shift a little bit?

We talked, Nate, a lot about this the last quarter at the Investor Conference that we really have invested pretty heavily in our intra-Asia network as it is probably the fastest growing business in the world right now. So we've obviously improved Time-In-Transit. We've added a lot more flights between locations over there and we'll continue to invest heavily as we go forward, but I think, generally, we're focused on, we're paying a lot of attention to and probably made our heaviest investments this year.

And really the combination of the intra-Asia flights as Asia trades more with itself and the continuing migration of integrated supply chains in Europe tends to drive the intra-European shipments also. So we remain very focused and bullish on both those theaters.

And again, I think we're not writing off Asia exports to the U.S. I think, as the U.S. economy stabilizes, you're going to see more demand for Asian products. So I think you will see a pick-up then. But this quarter or next quarter, you're going to see exports in Asia the U.S. pick up again.

We have a question from the line of Christopher Ceraso of Credit Suisse. Christopher J. Ceraso - Crédit Suisse AG, Research Division: So it seems like most of the weakness in your International margins are the declines in Asia, maybe some mix going to shorter haul flights and some FX, but was there any hit from your expansion in Germany because you've got extra capacity or you're spending there? And if not, is that something you think might weigh on results in Q4 or Q1 of next year?

Not material. I mean, we certainly have been in the growth and in expansion mode in International, both with aircraft and with the sales resources and some other things. So we have been investing for growth and we continue to see the benefits of that with UPS far exceeding any of our competitors' profits and growth rates. So we are probably a little bit heavier on the investment side than on average, so there's some exposure if growth doesn't materialize, but no single -- the Cologne expansion is the -- would be the biggest capital investment in Europe, and clearly, that hasn't really broken ground yet.

Yes, I want to reiterate though that Europe has stayed strong. Kurt talked about upper single digit growth. Last quarter, our profits were good. So we're comfortable. I mean, everybody is worried about the headlines, about Europe's economy, but our business has stayed strong and we expect it to stay strong going forward.

We have a question from the line of Mr. David Ross of Stifel Nicolaus. David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division: On the LTL side, it looks like you guys are still in freight selection mode. Can you talk a little bit about excess capacity that's in the network and when you think you want to chase volume and add density?

Yes, we continue to be pleased with our progress there. As we said, freight shipments were basically flat this quarter. We think that's pretty much in line with the industry. We do see the market proceeding towards a more healthy outcome. Clearly, we've been consistent on our revenue management policies, but many of our competitors have been pretty erratic. So we're continuing to focus on value and offering a unique proposition to customers and we will dial-up our aggressiveness on market share as we see the right time in the industry. But at this point, we're pretty pleased with the progress we're making.

Our next question comes from the line of Matt Brooklier of Piper Jaffrey.

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

Fuel was a modest tailwind for the Domestic and a modest headwind for the International. It wasn't a huge number either way. But in International, the absolute level of fuel is more important, whereas, in Domestic, it's primarily a timing issue. So in aggregate, it's not a big story, but it did help the Domestic a bit and was a headwind for the International.

And we have a question from the line of Mr. Justin Yagerman of Deutsche Bank.

It's Rob Salmon on for Justin. There's been a lot of talk, I guess, about the aircraft capacity coming out of Asia. You guys indicated you took out about 10% of capacity out of those lanes. Could you give me a sense of how freight load factors trended in Q2, where we were in Q3 and kind of where they are directionally thus far in October?

Clearly, with the softening in Asia, capacity utilization across the freight networks dropped fairly substantially. And Ocean Freight clearly was kind of underwhelming this year with the normal peak being certainly smaller than we expected. We've really not written a story yet on airfreight, as I said. We think there is certainly a decent probability that there'll be a bit of a squeeze in the next couple of months, but at least so far to date, the air buildup has been fairly modest. So we remain cautious in that theater. It is a benefit for the margins on our Forwarding group and certainly, helped us to generate the 8.3% margin in that segment, but we do remain cautious. There are a lot of players and there's some risk of overcapacity, certainly.

This time in 2009, we did not see the airfreight peak that happened. So it's -- because holiday season is so compressed, it is down to just a few weeks in December now. You won't see it for a while, but at this time -- this call in 2009, we did not see peak that we're heading into. So can't say it's going to happen in 2011, but it's showing possibility.

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

It's really too soon to lock that in, I guess. With the product launches and some of the normal volatility, it's too early for us to make a call on -- if we've nailed capacity and demand perfectly on the balance. Remember though that we do have the ability to, as a very strong forwarder, to help smooth out the utilization of our airline with utilization of our forwarding capacity. So in aggregate, if you look at both business segments combined, it does reduce the volatility.

What I'll say, we're planning on growth out of Asia in the fourth quarter, and we have less capacity so that should help utilization.

Our next question will come from the line of Mr. Jeff Kauffman of Sterne Agee. Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division: Some of these have been answered already. You mentioned the $0.01 per share impact of currency. You mentioned fuel was a drag on International, so if I had to look at the International decline in profits versus a year ago, how much did the fuel impact that? How much of that was more volume mix impact? You've already identified the currency aspect.

Yes, if you factor out the 2 commodities, the fuel and the currency, clearly, we would've shown decent profit increases, probably, mid-single digit profit increases, maybe a little better. And then the product mix jumps around on us and this was one of the most volatile quarters. I mean, if you think of where we were at the beginning of the quarter and the whole roller coaster we've been on with demand and expectations around this global trade, that we were pleased that we continue to see growth in those regional shipments but with a high leverage. Those long-distance runs has clearly had an impact on the margins.

I think, Jeff, again, a lot of this was driven by concern and uncertainty in the United States when after the first and second quarter GDP numbers came out and got revised down. There was a lot of concern of a double dip and people stopped buying, stopped consuming. In the last month or so, we're starting to see actually better economic numbers. So there's more optimism out there and that could change -- that could turn things around. We're still expecting a slow growth in economy, but I don't think it's negative as people were thinking 2 and 3 months ago.

So we are confident that the International segment will be back on a profit growth trend and continue to market share gains. How rapid that profit growth is will depend somewhat on the mix of how the next couple of months come together.

Our next question will come from the line of Keith Schoonmaker of Morningstar.

You identified a 2014 LTL EBIT margin of 6% as a target. I guess I'm wondering, in addition to volume and price improvement, are there some operational changes required to achieve this?

Certainly, continued leverage of technology in our freight operation is a big part of the margin improvements. We had a good quarter this quarter, about 2/3 of the way to that goal as far as margins are concerned. But we're leveraging a lot of the technology that we manage our business with both on the line haul and the pick-up and delivery to streamline the freight. And that's part of the synergies that we bring. Much as we added paperless invoice to our airfreight shipments to streamline the customs clearance, we're also bringing the operational technology to the UPS Freight. And it's likely we'll have some other exciting announcements continuing on the UPS Freight both for the customer benefit and the operational.

Have a question from the line of Mr. David Campbell of Thompson, Davis & Company.

I think my question has been answered. But just to make sure, is there a quarter of tonnage, and the Asia-Pacific region was up for you, but I assume that when you talk about product mix, what you mean in the fourth quarter is that there will be more growth or less of a decrease in your Package business in the fourth quarter and that's what's driving a better results and higher yields per tonne. Is that one way to look at it?

No, David, you're a little too optimistic. We actually did see volume declines in our International business on the Small Package. The Forwarding was down also, but sometimes the volume that hits our planes or doesn't hit it can move around. So no, we did see low single-digit declines in exports out of Asia, which is unusual for us. We are expecting that to get back up to modest increases for Q4. But no, there were real sequential or year-over-year declines at least, but was part of the problem.

We have a question from the line of Gary Chase of Barclays Capital.

Wanted to see if I could get a little bit of flavor for some of the moving pieces in the Domestic segment. I clearly hand you that the comps are getting a lot tougher from a margin perspective, but you still have pricing that I think you said up 2% to 3%. Volumes looked actually okay in that segment, better than at least I was expecting. So just curious if there's sort of something going on, on the cost side that is slowing that down and whether or not that's something that could look better in future periods if these trends continue with volume and price the way you've been seeing them.

Yes, it's a good question. Clearly, we did pretty well in a flat growth environment. We improved margins 60 basis points, but the comps versus last year on the comp and benefits were tougher and it was part of why we had fairly cautious guidance on that. But typically, the third quarter is a quarter where we true-up our self-insured liabilities, workers comps, some of those things. And the adjustment we made in 2010 was a much larger credit than what we saw in 2011. So that did cause the comp and benefit line to be a little higher in comparison to volume than normal. We don't -- that is basically a onetime event, although, it does get adjusted every year. So we continue to be optimistic, that's why we remain committed to the range we've done and are seeing great operational results and are expecting volumes to begin picking up a bit in the fourth quarter.

Key ways we talked about in the past to improve the margins, Gary, is to get, our average weight rate is still high because we're not growing the business enough. And right now productivity is same as half of that in wage increase. We can get that average weight increase down by bringing in lower seniority employees, that's going to help us an awful lot. So instead of saving half of the wage increase can save much more than that with the productivity improvements.

And just to be clear, the things you were mentioning, Kurt, like the workers comp, et cetera, those are not things that are uniquely hurting 3Q. Those are things that we should expect to continue in the run rate looking forward, right?

It's really primarily a this year, last year comparison for the third quarter.

Our next question will come from the line of Jason Seidl of Dalhman Rose. Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division: If we look at the volumes in Asia, you mentioned they're expecting to pick up a little bit here in 4Q due to some of the product launches. Were you expecting to be up a few x out the product launches in 4Q?

It's almost impossible to factor that out. There's always product launches going on, as to whether it would be positive or not, I'm not sure. We've had estimates of some of the product launches and you have some for multiple companies every year. But we do see Asia without the product launches getting a little firmer. I guess, that's the bottom line.

It really comes down though -- it comes to your, I guess your projections of demand out of Europe and demand out of United States. And right now, there's some cautious optimism, as Kurt said earlier, on the peak season in the United States where the National Retail Federation is calling for a 2.8% increase in sales, which is actually higher than average for the last 10 years. Not as good as last year, but higher than the average for the last 10 years. If that happens, that will create demand. But as I said before, it's a compressed season, so we'll have to wait and see.

Our next question will come from the line of Mr. Rob Pickels of Manning & Napier.

Just following up on the International market. You talked about demand in your own capacity. I'm curious a little bit about competitive capacity. I mean, one of your biggest competitors has been buying a lot of long-haul planes. Is that a chief sort of competitive capacity issue or you're also seeing it from smaller competitors or airlines? Just comment a little bit on that, and then are you seeing any of your competitors take down capacity as you have?

No. We are seeing some of our competitors react and take down excess capacity. Some of them have rechanged their routes to improve their utilization, and may be doing some fuel tech stops. But it's not just the express carriers, as you mentioned, there are other players, some of the foreign flag aircraft that have added some capacity. So we do think the market is rational, but clearly, when you make those big investments, you have to plan for the long-term. And so far, though, we do see people adjusting and taking some capacity out. So we don't think there's much risk of this thing getting drastic with a dramatic imbalance, but we do have to be cautious.

We're taking out capacity and we generate probably double the margins of our competitors, so you think there's got to be a lot of pressure on them to reduce capacity going forward.

Our next question will come from the line of Mr. Tom Wadewitz of JP Morgan. Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division: Some kind of follow-up question for you in terms of the pension beyond 2012. Going into this year, you had put in large cash contributions, I think, I guess, in 2010, then you had a pretty large contribution in January this year which offset some of what would have been the pension expense pressure this year. I'm wondering if you would consider -- if it looks like the discount rate is lower and going to cause pressure on pension expense in 2012, if you would also consider a large cash contribution which would mitigate some of the potential expense pressure in 2012.

Tom, we'll talk in certainly much more detail on the next quarter about our expectations for that. We did have about $0.07 headwind this year for increased pension expense. And with these frustratingly low discount rates, it does create some real challenges at least from an accounting perspective on the earning side. However, we feel pretty confident that over time, these incredibly low rates will come back up to a more normal historical level, which would do wonders for some of the plans. Having said that, our plan is in great shape as you mentioned, with the funding we did early in the year. We're pretty much 100% funded. So if rates stay this low through the end of the year, there will be some headwinds on our, at least our reported expense for the plan, but it will still be very well funded. And at least at this point, we're not planning for major additional funding, anything that would be outside the normal.

And our next question is from the line of Mr. David Vernon of Bernstein. David Vernon - Sanford C. Bernstein & Co., LLC., Research Division: Just a quick follow-up on the European volume story. Kind of within Europe, are you seeing a different mix as far as the transporter standard versus kind of overnight inside of Europe?

Yes, a little bit, a little bit. The blessing and the curse of this grade integrated network is it's very easy for customers to move up and down the portfolio. It was a tremendous strength for us during the recession because customers could trade down to the portfolio to save money rather than trading out. So we're seeing a little bit of that. Is it the beginning of a trend or is it just a blip, we're not sure yet. But we have seen, in the last quarter, a little bit of an acceleration in the growth in our more standard products and slower growth in our premium products. But all in all, Europe exports grew upper single digits, which is, I think, far above the market. We'll hear from some of our other competitors in the next couple of weeks and see, but we remain very confident that we've got a very strong value proposition there and are helping customers compete in a challenging environment.

I might add, we do very well on profitability in our transporter standard. So just because you're trading down, doesn't mean you're hurting your profitability. David Vernon - Sanford C. Bernstein & Co., LLC., Research Division: Yes, I was going to ask you, so is it a similar delta than the premium to differ in the U.S. versus in transporter Europe or is it a little less?

I guess the trick in the short term is that the premium products tend to have more fixed costs, and that the extreme is the Asia to U.S. lines. So it's mainly an issue for us of adapting our network, rightsizing, getting the right size plane and the right assets. And so over time, as Scott says, we can adjust and continue to generate the incredible margins that we're able to, no matter what the product mix. But in the short term, it can create some challenges to adapting the assets.

Due to time constraints, our last question will come from the line of David Ross of Stifel Nicolaus. David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division: Could you talk a little bit about the guidance range, Kurt? You didn't narrow it at all going into the fourth quarter and we only have one quarter left. Kind of looking at, the expectations you've laid out for the fourth quarter looks as if you're going to be in the lower end of the guidance range and so there's a lot of upside there. Is the fourth quarter, you mentioned that the consumer spend is better than people expect, is that much upside leverage to the model where you could potentially hit the upside of that range?

David, I don't want to get in detailed specifics on it. Clearly, we've migrated over the last couple of years to an annual guidance. If we think there's a risk of going out of that, either the positive or the negative, we would adjust. But it has been a bit of a roller coaster in the last few months anyway. We've taken a hard look at it. We are very confident that we will complete the year in that guidance. And with the uncertainty in the U.S. on the holidays, with the volatility we've seen across the globe, we figured we'd leave us a pretty wide range and not try to thread the needle for the remainder of the year anyway. So we remain optimistic, but we do think that since peak becomes more and more intense and more and more short, we thought it safe just to go ahead and stay with this current annual range.

David, I said last quarter, I thought that the economy could be anywhere between 1% and 3.5% in the second half of the year and where the economy ended up could drive where we are in the range. So I think there's a good chance we're going to be somewhere in the middle of it, in that economy, the economic forecast of 1% to 3.5%. So we feel pretty comfortable keeping the range where it is. Still, as Kurt said, the holiday season has a big wide range on the results, so we left it where it was.

That concludes our Q&A session for today. I would now like to turn the program back over to Mr. Dolny.

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

Thanks, Andy. Now UPS produced solid results as we managed through the economic soft patch in the third quarter, but now we're starting to see a number of developments that give me optimism. U.S. economy is stable in showing modest growth. We've started to see important decisions being made in both Washington and Brussels, although much more action is needed there. UPS is ready with a global integrated network in place to support stronger growth going forward. As we look for the rest of the year, UPS is prepared to meet the needs of our customers and finish up the year with a strong fourth quarter as we achieve record earnings per share for the year. Thanks so much, and have a great day.