UPS Profits Dip 4% to $1.07 Bln. on Slumping International Freight

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

UPS Inc.’s second-quarter net income fell 4% to $1.07 billion from a year earlier, weighed down, company officials said, by slumping international freight forwarding and some customer hesitation to make package shipping commitments during Teamsters union contract talks.

Earnings per share were $1.13, down from $1.15 in the 2012 second quarter, when net income totaled $1.12 billion. Revenue was 1.2% higher at $13.5 billion.

“We did hit a little bit of a hiccup in the second quarter,” Chief Financial Officer Kurt Kuehn said on a July 23 conference call. He cited freight-forwarding revenue that fell 10%, pushing down profit 21% in the supply chain and freight unit as customers chose lower-priced shipping options.

Another factor was uncertainty related to the company’s contract talks with the Teamsters union.

Without giving specifics, Kuehn said, “During negotiations, our ability to win new business was hampered. We did experience some minor volume diversions.”

Kuehn said he expected the U.S. Package business to “ramp up a bit” as new business is added from some customers who deferred or delayed shifting their business to UPS during contract talks.

UPS is continuing talks with the Teamsters on side agreements that didn’t pass when Package division members approved the main contract. Talks also are continuing on a separate contract with the UPS Freight division, which was re-jected by a 2-1 margin. Both contracts, originally slated to expire July 31, have been extended while talks continue.

A spokesman for UPS — which ranks No. 1 on the Transport Topics Top 100 list of the largest for-hire carriers in the United States and Canada — declined to provide more details about lost Package division business.

UPS Freight, however, isn’t experiencing a decline in volume.

That unit raised revenue 11%  to $731 million. Less-than-truckload revenue was $635 million, with an additional $96 million from truckload.

LTL shipments rose 5.2%, and tonnage rose 5.8%. Rates expressed as revenue per 100 pounds of freight rose 0.5% to $21.61.

Operating profit declined slightly at UPS Freight because margins were hit by higher health care and benefit costs. UPS doesn’t disclose specific profitability for its LTL unit.

Package unit revenue was $8.24 billion, 2.3% above the 2012 period, with no change in operating income of $1.13 billion. Package volume rose 1.9%. Revenue per domestic package inched up 3 cents to $9.66.

International package shipments rose even faster at 5%, but the drop in revenue per package resulted in revenue growth of 1.6% to $3.06 billion from that business.

Kuehn said that, even after previously lowering the profit forecast, the company still expects earnings to grow between 4% and 13% on a per-share basis over the second half of the year.

“The outlook for the rest of the year is for continued growth in all sectors,” he said. “We are confident we will deliver a solid second half in 2013 and beyond.”

In the Package division, Kuehn said, revenue will grow slightly faster than volume, and profit should improve “at a mid-single-digit pace.”

Revenue and daily volume should grow about 4% to 5% in the international sector.

For the supply chain and freight unit that includes freight forwarding and UPS Freight, the forecast calls for an 8% operating margin and profit growth in “mid-single digits.”

CEO Scott Davis said a portion of the switch to lower-cost freight options that hurt the forwarding business appears to be permanent because of supply chain efficiency improvements made by shippers.

However, he also expressed optimism that demand for expedited services will pick up when customers introduce a new round of high-value, high-technology products.

“There is less of a need for speed in a slow economic environment,” he said, without giving a timeframe.

“We think international airfreight is at a trough, and it is hard to expect it will get worse,” Davis said.

Chief Operating Officer David Abney said UPS is taking steps such as cutting air capacity in Asia and continuing to expand package-routing technology to improve efficiency and cut costs.

For the first half, net income totaled $2.11 billion, or $2.21 per share, up 1.2% from $2.09 billion, or $2.15 per share. Revenue in the first six months totaled $26.9 billion, up 1.7%.