United Parcel Service (UPS) Class B Earnings Call Insights: Slow Growth Economy and International Margins
Slow Growth Economy
Justin Yagerman – Deutsche Bank: I wanted to reconcile the guidance and the commentary on the economy in the press release to Scott, your early remarks kind of on how the economy is trending here in the beginning of 2013. I mean, it felt like guidance was potentially a little bit conservative here. Kurt, you did good job running through some of the assumptions. But I mean, is it really just the weakness on international yields and the $350 million of headwinds that get you nervous or do you see anything else from an economic standpoint that really gives you some pause here in the early part of the year?
D. Scott Davis – Chairman and CEO: Justin, let me start. I think that, overall, we still see 2013 as a slow growth economy. I think that the good signs that I talked about is I think that you see a more stable Europe than we saw a year ago. We are starting to see a pickup in global trade which is very important for us as we look forward. Second and third quarters of 2012, we saw global trade lag the global economic growth which is very usual. So, it feels like that’s getting more normal. In the U.S., as I said, I think we got off to a strong start in January. I think a variety of reasons for that. I think with the trends the last few years, we’ve seen strong last weeks of January or last weeks of December, early January due to I think gift card purchases after Christmas due to a lot of returns. Yesterday’s GDP numbers said that, obviously, the inventories are very low. So I think we are seeing restocking of inventories early in the January. But I’m still cautious as we move through the year that we’ll – I do think we’ll see growth in U.S., but we still are going to be addressing the debt ceiling in the second quarter, more than likely that’s going to cause some uncertainty. So, we have some challenges. As far as the guidance the big number, I think, is the drag due to pension and currency. And the pension is out of your control; low discounts rates had big impacts, and that has impacted earnings by about 5%. So you take that and add that to the 6% to 12% would have been a very strong guidance without those headwinds.
Kurt Kuehn – CFO: Yeah, I think that the basic expectations are that the U.S. economy will be somewhere around 2% and global GDP somewhere around 2.5%. So, certainly not a barnburner year; we expect under-trend performance, and as Scott said, the pension could just as easily turn around next year and if we get 100 basis point increase in the discount rate, that’d be a $200 million tailwind.
Justin Yagerman – Deutsche Bank: What are you guys looking for to get more excited this year in terms of economic signs, and what are you seeing out of Asian air freight? That’s been a place of particular weakness; didn’t hear too much on that?
Kurt Kuehn – CFO: Yeah, we – certainly some getting resolution in Washington to some extent will be a big deal, so consumer confidence pulling through with the activities in D.C. I’ll turn it over maybe to Dan Brutto, our President of International talk a little bit about the trends we’re seeing in Asia.
Daniel J. Brutto – President, UPS International: Yeah, I guess, the Asia trends really are – right now, you’ve got a lot of large high-tech customers that have send out product launches, but after the first of the year, we’re getting more positive in Asia. Also, the area of somewhat concern is folks are using less premium products in Asia (coming). The Chinese New Year is also later this year. It’s in the first week; almost the second week of February, so right now, we’re off to a good start, as Scott said, in January. So, we expect Asia to come back. The tail of the tape will be how it will come back to customers in the middle market where we provide a lot of solutions for start utilizing premium products to take care of this inventory shortage that we know is in the marketplace.
Kurt Kuehn – CFO: Just let me add. I think a more stable Europe will also aid in Asia exports which were very negative last year up until the fourth quarter and in U.S. exports. I mean, that certainly has had a big drag on U.S. exports in 2012. So, as Europe stabilizes and begin buying goods again, that will be good for exports.
Thomas Wadewitz – JPMorgan: I wanted to ask you the effective mix you’ve – so, Dan just talked about how that’s bit of a headwind in International, but can you help me think about mix, both Domestic if you have growth in B2C and how much that affects your margin view? Is that something that maybe makes you a little bit cautious on margin in Domestic and then from an international perspective how material was that impact on your International margins? Can you deal pretty well with growth in less than premium products or is that a material factor to consider in our margin view on International?
Daniel J. Brutto – President, UPS International: Tom, I think on the domestic side, we really saw all of 2012 as a year where B2C was really the lead that our B2B business was relatively flat, just up slightly in the fourth quarter and really the continuing process of direct to consumer was a big factor and even in that environment and even with the headwind of Sandy we did show margin improvements in the U.S. So, is B2C a little tougher than B2B? Yes, it is. On the other hand, Myron and the deployment of technology-enabled operations has made us, we think, able to profitably grow with that. On the International side, in Europe, we’ve got great pan-European capabilities, the yields on our Express volume certainly are higher than the standard, but we think we can manage through those things. The big product launch is certainly something that does distort margin a little bit, as those are high revenue, relatively low yielding products, so those probably have more to do with any disruption that you saw in the trends.
D. Scott Davis – Chairman and CEO: I guess, on the International front as far as margins are concerned, if you take a look at the last quarter, we really take a close look at the domestic to make sure that we maintain our margins in the domestic business and we served essentially those customers that are importers and exporters. For our export product internationally, we do very well with B2C as well as B2B. In fact, certainly even in the tough economy, in the fourth quarter, 15.6% margin continues to be industry-leading by a significant amount and we expect that to continue in the future.
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