UPS’ Net Rises 3.2% in 1Q; Plans to Buy 700 LNG Trucks

This story appears in the April 29 print edition of Transport Topics.

UPS Inc. last week said first-quarter net income rose 3.2% to $1 billion, reported it was nearing a contract agreement with the Teamsters union and announced plans to buy 700 tractors powered by liquefied natural gas.

The Atlanta-based company credited the earnings improvement to a post-holiday surge in domestic packages consumers ordered from Internet businesses. That resulted in a 4% rise in daily package volume, 9% higher operating income — which excludes interest and taxes — of $1.09 billion and 3% more revenue to $8.27 billion.

Diluted earnings per share were $1.04, compared with $1 for the same period last year.

Profit at the international and supply chain businesses fell a combined 11% to $495 million amid weaker global air and ocean freight markets, as revenue from those units was almost unchanged at $5.17 billion.

Its UPS Freight subsidiary increased revenue by $70 million, or 11%, to $688 million, which includes $28 million in less-than-truckload revenue.

That trucking unit’s profit wasn’t disclosed, but Chief Financial Officer Kurt Kuehn said Freight’s “shipment and revenue growth combined with productivity improvements helped grow profits and expand margins.”

“The global [business-to-consumer] market is going to grow at a ferocious pace,” CEO Scott Davis said on a conference call, noting that the United States is well ahead of Europe and other countries in that market.

Alan Gershenhorn, the company’s chief sales, marketing and strategy officer, said business-to-consumer shipments have now risen to 40% of U.S. packages, far ahead of the 25% figure in Europe.

In the international package business, revenue was almost unchanged at $3 billion, and revenue per package fell 2.5% because shipments were lighter and customers chose lower-priced shipping options.

Supply chain and freight revenue, including the LTL unit, rose less than 1% to $2.2 billion, signaling a decline in markets other than trucking.

UPS Freight raised LTL shipments per day 3.6% to 40,000, boosted revenue per 100 pounds of freight 1.7% to $21.47. Tonnage rose 5.1%.

UPS revenue totaled $13.43 billion, up 2%.

“Although the international, supply chain and freight segments are facing macro challenges, we are adapting our strategies,” Davis said. “Emerging markets, B-to-C and industry-specific solutions, such as health care, have enormous potential.”

To further that strategy, UPS said it’s agreed to acquire Hungary’s  Cemelog to enhance health-care logistics in Eastern Europe.

Earnings were reduced $37 million by the combined effect of costs related to the failed effort to buy Netherlands-based package and freight operator TNT N.V. and the proceeds from an asset sale. Average package revenue rose 1% to $7.19.

UPS maintained its forecast that its earnings this year will be $4.80 per share to $5.06 per share, an increase of about 10% over last year.

Second-quarter earnings are expected to grow in the “low single-digit” range in domestic markets, increase in the international business and decline in the supply chain and freight segment, Kuehn said.

On the labor front, Davis said, “We’re quite pleased with the progress.”

“We want to get this done earlier than usual,” he continued. “We have taken on the tough issues such as health care. We are very close to getting this thing done. We’ll hopefully have something announced before you know it.”

UPS and the union have been negotiating for six months, intending to forge an agreement long before the contract expires July 31.

The April 23 announcement to buy 700 LNG tractors said the company’s purchases by the end of next year will be accompanied by construction of four new fueling stations to create a service network covering 10 states.

UPS has 112 LNG-powered tractors running between four Western locations. All of the current and new tractors will be assigned to haul small packages, with LNG power on about 8% of its tractors after expansion.

Fleets of all sizes have been testing natural-gas power for tractors over the past two years, drawn to fuel savings of $1 to $1.50 per gallon and emissions reductions. High acquisition costs and limited fueling infrastructure, however, have slowed the adoption of natural gas as a fleet fuel.

“When other shipping and logistics companies are talking about possibilities, we are putting alternative-fueled vehicles on the highway,” said Davis. “We are helping to knock down some of the biggest hurdles to broad market acceptance of LNG in commercial transportation.”

Stations will be added in Dallas and three Tennessee locations: Nashville, Memphis and Knoxville. UPS also will assign the new equipment to run between Tennessee and Dallas, Houston and San Antonio.

UPS has had a natural-gas operation for more than 10 years.