Good morning. My name is Steven and I will be your conference facilitator for today. At this time, I would like to welcome everyone to the UPS Investor Relations fourth quarter 2015 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. Please note we will only take one question from each participant to accommodate more analysts during the call. Thank you for your cooperation. 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. 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 U.S. 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'll 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 risks 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 plan 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. 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. GAAP earnings per share were $1.48. While fourth quarter 2014 adjusted diluted earnings per share were $1.25. 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's 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. 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. 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 share owners This was the fourth consecutive quarter that UPS exceeded financial expectations. In 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 worked 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 21st 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 U.S., 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 U.S. 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 U.S. 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 synergies remain 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 healthcare, 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 U.S. GDP growth outlook is muted for the first half of 2016, it is expected to gain strength in the second half.
Further, the U.S. 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 backdrop, 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 shareowner 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 U.S., 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 two to one. 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 to 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 of 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 U.S. 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. 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 U.S. were strong for the fourth consecutive quarter, aided in part by the appreciating U.S. dollar. The international business continues to demonstrate the ability to adjust in an unsteady economic environment. Turning to the supply chain and freight group, operating profits grew more than 11% with an expanded operating margin. Overall revenue growth increased 6% with the addition of Coyote. However, organic revenue growth declined due to two factors. First, ongoing weakness in both forwarding and U.S. LTL markets. 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. 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 U.S. and in Europe. 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%. I'll cover the rest of our guidance. We expect 2016 to be another good year at UPS. Revenue should increase between 6%-8%. Looking more closely at the segments. In the U.S., the domestic segment average daily volume should increase about 2%-4%, driving revenue up 4%-6%. Operating margin is forecasted to expand, and operating profit should grow 5%-9%. In the international business, shipments per day are projected to increase 2%-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.
Revenue will grow at a similar pace as volume. Operating profit is expected to be up 8%-12%, with some margin expansion. In the supply chain and freight segment, revenue should be up 15%-20%, with Coyote added for the full year. The segment's organic revenue growth is projected between 3%-5%. Operating profit growth is forecasted between 6%-10%. First quarter growth will likely be down about 8%-12% from last year due to the continued softness in the LTL, freight brokerage, and freight forwarding markets. The West Coast port strike provided some benefits in 2015. Operating margin for the supply chain and 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. We remain committed to paying a strong dividend. 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. 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. We are projecting diluted earnings per share to increase within a range of $5.70-$5.90, a growth rate of 5%-9%. Excluding the 2015 tax credits, our growth rate is 7%-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'll ask the operator to open the lines so we can take your questions. Operator?
Our first question will come from the line of Tom Wadewitz of UBS. Please go ahead.
Yes, good morning, congratulations on the strong results and the successful peak season. Let's see. I guess it's one question, but it's really focused on your volumes within fourth quarter and domestic package. I know you've had a spread of strong air volumes driven by e-commerce, but it seems that spread versus ground widened out. I was just wondering if you could give a sense of what were some of the key drivers of the 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 a big factor on the softer ground? Just was there a weakness of the 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's the most in the company history, up about 7%. 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. As Rich mentioned, our resi grew at about a two to one 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 over the two years, the stacked volume for the fourth quarter. If you compare 2013 to 2015, you'll see that our total volume was up 9% and our ground volume was up 7.6%. 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. The two-year stack gives a pretty good picture of where we've been the last couple of years.
Okay.
Our next question will come from the line of Scott Group of Wolfe Research. Please go ahead.
Hey, thanks. Morning, guys. One quick housekeeping question, 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, then just bigger questions on the volume growth outlook. Forecasting an acceleration in volume growth, and I think you kind of said it'll be more back-end loaded. I guess, what gives you confidence in that re-acceleration in volume growth in the back half of the year? Should we expect the earnings growth then to also be back-end loaded?
This is Joe Wilkins. Just before we get started, we're just going to do one question because we've got a lot of people, but we'll take this dual part question now. Richard Peretz, why don't you?
Sure. Scott Group, the question you ask around pension is that we currently use a mark-to-market. There's a deck presentation on our website that explains the mark-to-market, and we use a corridor approach for that. 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 it was a much smaller adjustment, and I think once you go through that, if there's 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 as 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.
When you think about how our volume grows, our revenue and our profits, I would point you back to that. We feel real good about where we're at. We think it's not just what's happening outside externally on the macro environment, 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.
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. 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. With the initiatives that we have, feel comfortable that we're going to maintain the air volumes the way they are and feel like that we will improve the ground volumes.
Thank you, guys.
Our next question will come from the line of Kevin Sterling of BB&T Capital Markets. Please go ahead.
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.
Hi, 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 of 2017, and we're extremely pleased with the results that we're getting today.
Kevin, this is David. I would want you to tell your wife we really appreciate her efforts to increase our volume. Thank you for that.
I will. Thank you.
The next question will come from the line of Nate Brockman of William Blair. Please go ahead.
Yeah, good morning. Thank you for taking the question. I was curious a 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 of how 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 kind of seeing that business organically in terms of still working with their kind of core customer base.
Yeah, Nate. This is Alan. Coyote certainly performed well during peak, we're going to continue to expand that role. They were certainly one of the difference makers. They're 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. They provided the flexible capacity to meet the demand surges, 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're getting some good purchase transportation procurement benefits, those are exceeding our expectations.
Thanks.
Our next question will come from the line of Ken Hoexter of Merrill Lynch. Please go ahead.
Great. Good morning. I echo a great job through the peak season. Great to see. 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. 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?
Yeah. First of all, we didn't turn away 3% of volume with the control tower. The control tower was an absolute success this year.
From both a customer and a UPS perspective. I'd also say from an e-commerce, retail, and also a year-round customer perspective, all the other industry segments that we serve. A real success. The primary goal there was to optimize the network capacity and find solutions that worked for our customers and UPS. 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. Even then, some of those were some dual-source customers who chose not to make longer-term business commitments to UPS. 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.
Great. I'm sorry, the trade up-down commentary?
Yeah. Look, I think that the air products are resonating really well with our customers, and certainly, the just-in-time nature. Our deferred was up 14%, and the next-day air overnight products, mainly the saver, was up about 10%. I think customers are choosing the services that they need based on the time and transit that they're looking for.
Thank you for the time.
Our next question will be from Ben Hartford of Baird. Please go ahead.
Thanks. Good morning. Jim, maybe this question is for you. I'd be curious in your perspective on business inventories generally from customers. There's been a lot of discussion on some destocking or whether that has taken place in the fourth quarter. I'd be curious on your view on 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.
This is Alan. I'm going to take that first and pass it over to Jim. Certainly, what's happening international has a broad impact on the U.S. As you probably all know, the U.S. inventory sales ratio has come down slightly, but it still remains elevated, certainly indicating we got a continued overhang of inventories in the economy. Customers are obviously attempting to work them down. We expect the strong U.S. dollar to continue to influence the trade lanes. 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 a comment probably from the 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 a continued gap of demand and capacity. I would say in the last 2 months of data, what we start to see is some load factors turning up. As that moves forward, now we also have Chinese New Year coming on us right now, that'll give us our second read. 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.
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. That will lead us to further evaluation of the inventory. Appreciate the question.
Our next question will come from the line of David Vernon of Bernstein. Please go ahead.
Hi, good morning, and thanks for taking the question. Richard, great to hear the guidance on the domestic margin expansion. I have a question for you on international. How much are you guys seeing a benefit from the currency gains in the fourth quarter? How should you expect that sort of hedge gain to play out in 2016? Should there be a cliff on the hedge roll-off in 2017? We've got a lot of questions about how that interaction will play out over the course of the year in terms of reporting gains on the currency hedge.
Sure. We use our currency hedge program that really is about protecting our profits. When you separate that out, right now we do have protection for all of 2016. At different points through the last few years, we've gone in and made the necessary adjustments. When we look at the operating margin, it is improved a little bit because of the hedge, and it's about 200 basis points, or just over 200 basis points in the margin that you should be thinking about that's really driven because of the hedge program that's 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 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. 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. All that really keeps us
At the really end of the story, which is industry-leading margins in the international business. We'll manage that, and currencies will do what they'll do, and we'll continue to grow the business internationally and manage to the top of the industry margins. Appreciate the question.
Just to kind of clarify, should we then be expecting that 200 basis point to 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, there are certain actions that we are taking on. 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 and great print.
Our next question will be from the line of Allison Landry of Credit Suisse. Please go ahead.
Good morning. Thanks. I wanted to follow up on an earlier question on pension. If you could provide or quantify what's embedded in your guidance in terms of the year-over-year expense tailwind or headwind.
Sure. Thank you, Allison. When we look at the pensions overall, we're expecting our expense to actually be flat this year with 2015. 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. As I said, for the year, it's going to be flat. There won't be any increase in expense for 2016.
Our next question will come from the line of Jack Atkins of Stephens. Please go ahead.
Great. Thanks for taking my questions, guys. 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 in both U.S. 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?
Okay. This is David. First, let me make sure and express that Amazon's a good customer of ours. We have a mutually beneficial relationship. 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's difficult to match. We do add capacity. 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 volume. 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 or 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.
Next question will come from the line of Brandon Oglenski of Barclays. Please go ahead.
Hey. Good morning, guys. Again, congrats on a better outcome this year, totally different from 12 months ago. Can I just ask you, what's your general perception of industrial exposure in your domestic package network? If I look back historically when we saw IP contracting, I think it's been very difficult for UPS to get earnings. Can you talk to some of the risk that the outlook has if the industrial economy keeps weakening? Maybe some of the counter proactive or positive things are happening in the network that are giving you this positive outlook.
Hey, Dan. This is Alan. Look, I think the story with industrial production has been happening now for quite a while. Certainly, it is trending more negative than it has been. Our business today is, 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. I think we are 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. We feel pretty good that we have embedded these trends into our 2016 plans and are very confident in achieving those results.
This is Rich. Just a few other things I think that is important to think about when you think about what is embedded in our guidance is that the volume is not just based on what is happening externally, it is also what is going on within UPS. We start out externally and look at various scenarios of what we think could happen. Embedded in the range is different volume assumptions, and that is why there is a range. Also, it is the story about the economies that we are getting out of the ORION project and the adjustments we are making in the air network. You bring all that together, and that is why the range is as we put it out there. We feel very confident that what we are putting out there is the expectation based on both the external and the internal efforts that we are doing here at UPS.
This is David. Just a last comment on industrial production. If you look at our results five years ago, I think there was a tighter correlation. Now, of course, with our e-commerce and the residential business growing as fast as it is, I think that maybe it is not quite as direct. If you look at the fourth quarter, industrial production was down all three months of the fourth quarter, and we had record results. I think part of that was because consumer confidence is still high. I would not draw too much of a connection there if I was you. Thanks for the question.
Thank you.
Our next question will come from the line of Art Hatfield of Raymond James. Please go ahead.
Thank you. Hey, thanks for taking my question. I hope I get this out appropriately or word this right. I think you've 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'll start that question, then I'll hand it over to Alan. The key to remember this year, though, is our focus was not on capping or turning away customers. With 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, is how we were able to actually move up peak day from the 22nd of December to the 21st. One of the ways that we address what you were just referring to is the way that we do manage. We also add substantial capacity this year for peak and from our CapEx plans, that's going to continue.
The increase in technology, ORION, that you heard Myron talk about, over 70% utilized and access points and other technologies like that. 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?
Well, I'd just say, look, we've talked for a while now about bending the cost curve. David talked about some of the things we're doing there with ORION. UPS My Choice, Access Points, SurePost Redirect. In 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.
We feel like the things that we're doing to our network now are going to enable us to handle bigger and bigger peaks.
Our next question comes from the line of Christian Wetherbee of Citi. Please go ahead.
Thanks. Good morning. I want to ask a question about pricing. One, to get a sense of maybe on the domestic side how the core pricing looked and maybe how mix looked and whether or not we saw sort of an acceleration into the fourth quarter. I'm just trying to get a sense of 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%-3% long-term target range. It's really the GRI, the dimensional 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% or 3% of the range for base rate improvements going forward.
Our next question comes from the line of John Barnes of RBC Capital Markets. Please go ahead.
Hey, 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. 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're attacking right now? Is LTL one or is this isolated to Europe? Can you elaborate on that just a little bit? Thanks.
Sure. This is Richard. 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. The thing to keep in mind is it's really broad based. We're doing it in the 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.
We have a question from the line of David Ross of Stifel. Please go ahead.
Yes. Good morning, gentlemen. Question on the peak season volumes. The last couple of years in 2013, 2014, the peak period was about 72%, 73% over a normal week period or a normal period. Alan just said it was nearly twice this year. Was that 75%? Was that 95%? 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. This is Richard again. When you look across peak, obviously peak is a little different at different weeks of it. When you go across the entire peak period, it was slightly elevated from where it was last year. We moved the peak day up by one because of the available capacity over the weekend, and 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?
Yeah, look, my point was that during peak, we handle almost double on any given day. The spike occurs in an ongoing basis between Cyber Monday and Christmas Day. Throughout the quarter, our volume between October and November was softer, in December on a secular basis, continued to rise.
Our next question will come from the line of Alex Vecchio of Morgan Stanley. Please go ahead.
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. 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 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's 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 it to remain that way moving forward.
The next question will come from the line of Matthew Troy of Nomura. Please go ahead.
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. Just wondering what the capital budget is for 2016, and what are some of the major projects or allocations from that budget we can expect you guys to make progress on in 2016? Thanks.
Sure, Matt. This is Richard. Our CapEx, as I mentioned in my talk, is expected to be about $2.8 billion right now. The model that we've built at UPS in the network is very unique, and we're continuing to make the necessary adjustments and automating our tier 1 buildings. 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. The results of this quarter were really driven by the investments we've made the last few years, and that's helped us to achieve the margins and the profit level that we got for 2015. Thank you.
Thank you.
Our next question will come from the line of Kelly Dougherty of Macquarie. Please go ahead.
Morning, guys. Thanks for the time. Just wanted to think about the differing macro outlooks throughout the world. Can you give us a sense of how much of your revenue you would estimate touches the U.S., at least at one end, so whether it's generated domestically or imports or exports? Also maybe if you could give us a similar estimate for Europe as well?
Yeah. Kelly, this is Richard again. When you think about the total company, obviously the U.S. is a very large piece of our business. We've talked about the importance not only of the U.S., but also both imports and exports coming into and leaving the U.S. Today, of course, the imports into the U.S. are stronger, and that's really something we've seen because of the strength of the dollar. Exports coming out of the rest of the world coming to the U.S. are much higher. 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. Together, those two are a very large part of the company, but the other pieces 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 quantify, 75, 80, whatever the number is, % of your revenue actually touches the U.S. in some way, shape, or form?
Kelly, this is Joe. We can take that detailed question offline when we talk later on today.
Thanks.
Our next question will come from the line of Rob Salmon of Deutsche Bank. Please go ahead.
Hey, good morning, guys, thanks for squeezing me in here. With regard to the margins in Q4, U.S. Domestic Package got back to in-line margins for the full year, I think it's a testament to a lot of the internal initiatives that you guys were 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 that we'll start to see fourth quarter margins again be better despite the greater concentration of home deliveries and B2C shipments? Should we think about it roughly in line with the broader full-year overall margin in U.S. Domestic Package?
Rob, again, this is Richard. I think you have to look at 2016, David actually made a comment earlier that this is going to be a balanced year. There's both 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 few 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. That's a testament to the technology and the U.S. operations. It had a good quarter. I'll actually ask Myron to comment on that.
Rob, let me begin by thanking the thousands of UPSers who helped execute on a well-designed plan. We will continue to deploy technology, tighten our direct labor hours, 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, the service was exceptional. We continued to deploy access points that gave control and convenience to our customers. We believe that this expedited growth in residential deliveries don't pose an issue for us moving forward. Thank you.
Our next question will come from the line of Helane Becker of Cowen and Company. Please go ahead.
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? I think, Myron, maybe you just started to address that question with respect to improving margins without increasing either headcount or salaries that much.
Yeah, I think our automation strategy will allow us to not add headcount. 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 at 90,000-95,000, but because of this automation, we were able to bring them on much later at peak, and our actual hours were down 8%. We don't see a need to add headcount. Thank you.
Thank you.
Yeah, this is David. Just to put a recap on that, each of these automated facilities, we see about a 20%, 25% efficiency. That gives you an idea of what they mean to us. Thank you. Next question.
Next question will come from the line of Jeff Kaufman of Buckingham Research. Please go ahead. Kaufman, your line is open. We'll move on to our next question from Bascome Majors of Susquehanna. Please go ahead.
Yeah, thanks for squeezing me in here, guys. Just taking a step back. If you were 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'll 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. 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 to make us attractive to both consumers and retailers is really the best network in the business. 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 UPS SurePost and the UPS SurePost Redirect, our returns portfolio, i-parcel, combining that with some of the efficiencies really makes the UPS network the e-commerce network of the future.
Due to time constraints, our last question will come from the line of Scott Schneeberger of Oppenheimer. Please go ahead.
Thanks for fitting me in, guys, and congratulations. Just back to B2B domestically, if you could address it in U.S. Package and supply chain and freight, how did you see the trend as you ended fourth quarter and into first quarter? If you could speak a little bit to end markets that were most impacted, good or bad. Thank you.
Yeah. Hey, this is Alan. Thanks for the question. Certainly in the U.S. 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. Like we said, it rebounded back in the fourth quarter, but mainly driven by retail. Certainly on the supply chain and freight side of our business, the vast majority of that business is in fact B2B. In the international business, a much larger preponderance of our business is B2B. The growth you're seeing in there would in fact also be B2B.
I would now like to turn the conference back over to our investor relations.
Thanks, David.
Mr. Joe Wilkins, please go ahead.
Thanks, David, appreciate it. I'll now turn it over to David Abney for closing comments.
Okay. Thanks, Joe. We're successfully executing our strategies and capitalizing on our investments. Through 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