United Parcel Service, Inc. (UPS)

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United Parcel Service (UPS)

Q4 2011 Earnings Call

January 31, 2012 8:30 am ET

Executives

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

Analysts

Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

Justin B. Yagerman - Deutsche Bank AG, Research Division

Ken Hoexter - BofA Merrill Lynch, Research Division

David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division

Nathan Brochmann - William Blair & Company L.L.C., Research Division

Christian Wetherbee - Citigroup Inc, Research Division

Garrett L. Chase - Barclays Capital, Research Division

Arthur W. Hatfield - Morgan Keegan & Company, Inc., Research Division

William J. Greene - Morgan Stanley, Research Division

David Vernon - Sanford C. Bernstein & Co., LLC., Research Division

Christopher J. Ceraso - Crédit Suisse AG, Research Division

H. Peter Nesvold - Jefferies & Company, Inc., Research Division

Scott H. Group - Wolfe Trahan & Co.

Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division

Robert F. Pickels - Manning & Napier Advisors, LLC

John L. Barnes - RBC Capital Markets, LLC, Research Division

David P. Campbell - Thompson, Davis & Company

Keith Schoonmaker - Morningstar Inc., Research Division

Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division

Presentation

Operator

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

Andy Dolny

Good morning, everyone. 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 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 the operations of the company. These anticipated results are subject to risks and uncertainties, which are described in detail in our 2010 Form 10-K and 2011 10-Q reports. These reports are available on the UPS Investor Relations' website and from the Securities and Exchange Commission. Today's call is being webcast, and will also be available on the UPS Investor Relations website.

On Friday, January 27, UPS announced an accounting change relating to expense recognition for company-sponsored pension and postretirement benefit plans, adopting a mark-to-market methodology. This new method implemented in the fourth quarter of 2011 is preferable and will result in simpler, more transparent financial reporting.

As we said on our call last Friday, mark-to-market pension accounting provides several benefits. It's simpler. As gains and losses outside of the 10% corridor are recognized in the year incurred rather than amortized. It provides more transparency to UPS' underlying results, and it's considered preferable by GAAP since it more closely aligns with fair value principles. And remember, there is no impact on benefits to participants, pension plan funding or UPS cash flow. It is an accounting change.

As we outlined on Friday, as a result of adopting this new methodology, adjusted diluted earnings per share increased by $0.03 for the fourth quarter and $0.12 for 2011. In addition, a 2011 mark-to-market charge of $827 million was recorded in the fourth quarter. Therefore, on a GAAP basis, diluted earnings per share for the quarter and total year will be reduced by $0.51 and $0.41, respectively. This is inclusive of both the benefit from the accounting change and the mark-to-market adjustment.

This accounting change must be applied retrospectively. As a result, 2010 adjusted diluted EPS and GAAP diluted EPS were reduced by $0.08 and $0.15, respectively. To assist in comparisons, revised results for prior periods back to 2007 have been provided. The impact to UPS financials are shown on the web schedules and described in detail in the presentation we distributed last week. The presentation and the web schedules are available on our website.

I wanted to point out that we included a few extra financial schedules in this morning's quarterly package. For both the fourth quarter and 2011 full year, we provided 3 selected financial data schedules: One that provides adjusted and GAAP results under the new pension accounting methodology, a second under the previous method and a third that reconciles the two. We hope you find this information helpful. Separate from pension, in the fourth quarter of 2010, UPS recorded a net $58 million gain on the sale of certain non-core assets in its Supply Chain and Freight segment. The after-tax benefit was $32 million or $0.03 per share.

During this morning's call, all 2011 fourth quarter and full year references and comparisons to 2010, will refer to adjusted results unless otherwise noted. We believe this is a more accurate picture of the company's performance, reconciliations to comparable GAAP measures and free cash flow, which is a non-GAAP financial measure, are explained in the schedules that accompanied our earnings news release. These schedules are also available on the UPS Investor Relations' website in the financial section.

Finally, in an effort to allow maximum participation on today's call, each participant will be allowed one question and then be required to get back in the queue for any follow-up. I hope you understand. And thank you for your cooperation. Now, let me turn it over to Scott.

D. Scott Davis

Thanks, Andy. Good morning, everyone. I hope all of you had a safe and Happy New Year. I can tell you that during December, we were very busy at UPS. Ensuring holiday shipments arrived where they needed to be all around the world. In fact, we experienced our busiest peak ever, delivering almost 500 million packages between Thanksgiving and Christmas. And UPS wrapped up the year with record EPS, free cash flow exceeding $5 billion and a new high in return on invested capital.

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