UPS Seeks 10% Profit Gains, Offers New Delivery Service

UPS Inc. last week set ambitious financial targets based on annual profit growth of about 10% companywide, while also announcing a new residential package delivery service with a two-hour delivery window option.

Kurt Kuehn, chief financial officer, speaking during an investors meeting that was webcast on Sept. 15, said profits are expected to double at the UPS Freight less-than-truckload unit by 2014, producing a 6% operating margin. Domestic package profit growth was pegged at 7% to 10% annually through 2016, with annual revenue growth of 5% to 6% over the same period from $29.7 billion last year.

The LTL target was based on an operating margin of “a little less than 3%,” Kuehn said, through the first half of 2011. It was the company’s first public disclosure of that unit’s operating performance since purchasing the former Overnite Transportation in 2005.

A 97 operating ratio at UPS Freight trails industry leader Old Dominion Freight Line Inc.’s 89.1 and is close to Con-way Inc.’s 96.2 for the same period.

The most ambitious profit target is in international business, Kuehn said, with 10% to 15% annual improvement through 2016 and with revenue growth of as much as 12% from $11.1 billion in 2010.

More immediately, Kuehn reiterated that UPS still expects to have the highest earnings per share ever this year, saying “this is still solid progress.”

The company’s guidance is between $4.15 and $4.40 per share.

Kuehn also noted a weaker international business climate.

“We are seeing a slowdown in [international] air freight — greater than we expected,” he said, without giving specifics. Domestically, business is “stable but slow. It’s not better, not worse — pretty much steady as she goes,” he said.

Kuehn also described 2012 expectations for “another below trend year” and pegged 2013-2016 gross domestic product growth at 2.5% to 3.5%. Earnings could hit $8.60 a share and revenue could reach $79 billion by 2016, he said.

Though international trends are weakening, CEO Scott Davis underlined the importance of trade.

“Nearly every possible scenario continues to see an expansion of global trade,” he said. “We must find ways to increase exports. America’s economy and jobs depend on it. Foreign markets are hungry for American products.”

“The right package opportunities” are at the top of the company’s acquisition target list, Davis said, without disclosing names. He also said that freight forwarding and logistics companies focused on health care also were a high priority.

Meanwhile, the residential service known as UPS “My Choice” will start on Oct. 3 and “is designed to make missed deliveries a thing of the past,” Chief Marketing Officer Alan Gershenhorn said.

He said “My Choice” should please both shippers whose product deliveries are delayed and customers who are tired of missing deliveries.

“We are putting the customer in charge of delivery,” said Gershenhorn, who called the move “a seminal moment in the history of package delivery.”

The basic “My Choice” program is free, with a premium product priced at $40 a year. Premium product customers can specify a two-hour delivery window, Gershenhorn said.

Customers who sign up will receive an alert the day before delivery by telephone, e-mail or text message with an estimated drop-off time. They can also authorize delivery of a package without a signature through the same methods.

For $5, they can reroute a package destined for a specific address to be delivered at another location or to a UPS retail store.

Davis would not say how much revenue or profit the new program is expected to generate.