UPS to Bolster Package Network as Holiday Surge Hurts Earnings

This story appears in the Feb. 3 print edition of Transport Topics.

UPS Inc. last week outlined new steps to strengthen its domestic package network this year in the wake of an 8.5% decline in profit triggered by an unexpected late surge of holiday shipments.

Fourth-quarter net income was $1.17 billion, or $1.25 per share, but the overall figures were hurt by a decline of $178 million, or 13%, in domestic package profit before taxes and interest. In the year-earlier period, adjusted net income was $1.28 billion, or $1.32, excluding pension costs, the Atlanta-based company reported on Jan. 30. Revenue climbed 2.8% to $15 billion.

The UPS Freight unit raised revenue by 6.1% to $712 million from $671 million. Less-than-truckload revenue improved 2.3% to $616 million, and truckload revenue rose 39% to $96 million from $69 million.

In addition to bad weather, UPS was hurt by a peak holiday shipment day that occurred six days later than planned, pushed later by a shift in customer orders to more last-minute Internet purchases. Chief Operating Officer David Abney said one retailer, which he didn’t identify, was offering next-day delivery for orders as late as 11 p.m. on Dec. 23.

“UPS has been working around the clock to improve service and performance to ensure we don’t have a repeat of [the] 2013 peak,” Abney said on a conference call.

He outlined several steps that will be taken this year to better prepare for the 2014 holiday shipping surge.

One initiative will be what he termed “increased collaboration with high-impact customers to develop predictive models” for their shipments.

UPS wants customers to provide information on what is in trailers when they are dropped off, which now is sometimes unavailable, Abney said.

Another step is to increase investment in the company’s route-planning software, so that 45% of drivers can use that to improve delivery efficiency. Last year, barely 10% of drivers used that program, which is known as “Orion.”

UPS is adding 200 people to facilitate the expansion of Orion.

The other step being planned is to expand facilities and do more automation, particularly at a Northern California location.

In total, UPS is shifting $500 million of its 2014 capital spending to capacity expansion and postponing some new aircraft purchases.

“I do want to reinforce that our core business remains sound,” CEO Scott Davis said on the conference call. “We are moving forward to make the appropriate investments.”

The company has projected earnings per share of $5.05 to $5.30 for this year, compared with $4.57 per share in 2013.

Chief Financial Officer Kurt Kuehn said the company expects domestic package shipments to rise 3% to 4% in 2014 and that profit margin will be 14%.

That is an improvement from the 12.8% pace in the fourth quarter.

Kuehn also said “positive momentum” will continue this year in the international segment.

Fourth-quarter international segment revenue was 5.3% higher at $3.37 billion, and income before taxes and interest was up 7.6% to $537 million. The results were helped by a recovering European economy and what the company said was “significant growth in the Asia-to-Europe trade lane.”

International shipments topped last year’s peak volume on 11 days in December.

The Freight unit increased revenue per 100 pounds of freight by 1.6% to $22.41 and increased shipments by 2.3% to 2.55 million. Weight per shipment fell 1.4% and profitability declined.

The company doesn’t specify profit for the Freight or other businesses within the supply chain unit, where operating income was $171 million, down $1 million.

Overall, the Supply Chain and Freight unit, which includes forwarding and distribution, reported 5.8% lower revenue at $2.3 billion. Results were hurt by lower international freight-forwarding revenue, but ocean forwarding improved.

In total, UPS estimated operating costs rose as much as $150 million during the holiday season and revenue fell $50 million because of refunds for late deliveries.

Full-year net income fell 1.2% to $4.33 billion or $4.57 per share from $4.39 billion, or $4.53 per share. Revenue rose 2.4% to $55.4 billion.