UPS has embarked on $500 million worth of cost saving measures including air and ground networkrestructuring and a managerial pay freeze after its Q4, 2008, adjusted operating profits slumped
25% due to the worsening world economy and continued tough conditions in the US domestic market.But the company remains financially strong and could take advantage of acquisitionopportunities this year, even though 2009 is expected to be to be “one of the most difficult years”in the company’s history, top executives stressed today.
In the October – December quarter, UPS reported a net profit of $254 million compared to the$2,641 million net loss in the final quarter of 2007. The Q4, 2008 figure includes impairmentcharges of $548 million for UPS Freight and $27 million related to UPS UK, while the Q4, 2007figure included a $6.1 billion charge related to the withdrawal of UPS employees from the CentralStates Pension Plan.
On an adjusted basis, excluding these charges, UPS’ Q4, 2008 operating profit dropped 25.4%to $1,378 million, and net income was down 26.7% at $829 million. Group revenue declined 5.2% to$12,697 million while consolidated volumes declined by 3.7% to 1.04 billion packages.
For the full year, UPS reported an operating profit of $5,382 million versus the previousyear’s $578 million, and net income of $3,003 million compared to $382 million in 2007. On anadjusted basis, excluding the charges, UPS suffered a 15.1% drop in 2008 operating profits to$5,957 million, while net income declined by 18.1% to $3,578 million. Consolidated revenueincreased 3.6% to $51,486 million and consolidated volumes were down 1.3% to 3.9 billion packages.
In Q4, US domestic package revenues declined 3.9% to $7,988 million while average volumesdropped 2.8%. This resulted in a $932 million operating profit which was 22.8% down on an adjustedbasis. Next-day air revenues dropped 9.1% on an 8.6% volume decline, while deferred revenues fell7.1% on a 3.5% volume decline. Ground revenues fell only 1.7% despite a 2.1% drop in volumes.
Total US domestic volumes declined 4.4% in Q4 despite the positive effect of additionalvolumes gained from DHL, CFO Kurt Kuehn commented during an analysts’ call. After a sharp drop inOctober and November, peak Christmas volumes of US packages had been flat compared to 2007, henoted. However, pricing had remained “very rational” and with the sharp drop in fuel surcharges andexit of DHL from the US market, UPS now aimed to restore some of the loss in base rates, he said.
UPS saw a rapid decline in its international business in the October-December 2008 quarter.Revenues fell 8% to $2,637 million despite a 3% increase in average volumes. Export revenuesdeclined 5.5% on a 3.2% volume rise, while international domestic revenues fell 11.9% despite a2.8% volume increase. International package profits ended the quarter down 29.4% at $393 million.
Commenting on UPS’ Q4 international package trends, Kuehn said that US exports had fallen by “ a mid-single digit” level, Asia had also declined despite growth in China exports but Europe hadshown “mid-single digit” growth, based mostly on intra-regional traffic.
The operating loss for the Supply Chain & Freight segment was $495 million, including theeffect of the $548 million UPS Freight goodwill impairment. Fourth quarter revenue for thesegment declined 6.5% and adjusted operating profit of $53 million represented a $29 milliondecrease over last year’s results. Declines in UPS Freight profitability weighed on segmentresults. LTL revenue declined 9.6% with shipments per day down 8.2% in the weakest LTLenvironment in decades. A key priority this year would be to increase cross-selling betweenUPS Freight and the small package business, CEO Scott Davis said.
“The severe decline in economic activity around the world resulted in sharply lower packageand freight volumes for UPS,” Davis declared. “Consequently, we’re making the tough decisionsnecessary to adapt our enterprise to today’s realities. This includes changes inorganisational structure, compensation and network configuration.”
UPS is seeking about $500 million worth of cost savings, mostly to be realised during 2009,he said. In the USA, UPS has closed down six district offices, nine sorting centres and oneadministrative building, and reduced some air segments. The company also announced it is freezingmanagement salaries as of March 2009.
In addition, the company wants to “right-size” its air network in response to rapid changesin international volumes, Kuehn said. It is also looking at opportunities to “align” its groundparcel and freight forwarding networks in Europe. He noted that the $27 million impairment chargein the UK related to a revaluation of the domestic customer list gained with the acquisition ofLynx Express several years ago.
More positively, Davis said UPS planned to “go after” DHL’s international business to andfrom the USA during 2009 following the latter’s exit from the US domestic market. Negotiations withDHL over the planned US domestic airlift deal were continuing but with the much-reduced scale ofDHL’s US business “we are finding it difficult to reach an agreement”, he commented. Davis alsostated: “We think there will be opportunities for UPS to buy assets or companies.”
UPS did not issue any financial outlook for 2009 as a whole, providing only Q1 guidance ofearnings per share within a range of $0.52 – $0.68. “Visibility into the future has becomeincreasingly difficult given the enormous amount of economic uncertainty around the world,” Kuehncommented. “The year will undoubtedly be one of the most difficult in UPS’s history,” hecontinued. “Since economists do not expect any meaningful recovery until 2010, earnings in2009 will suffer. Lower volume levels and reductions in package weight will put furtherpressure on margins. We anticipate the first quarter will be weak, with slight improvementslater in the year as initiatives take hold.”
UPS expects its US domestic package business to decline by 3%-5% in Q1, 2009, andinternational exports to decline slightly. Capital expenditure will be down to $2.2 billion thisyear compared to $2.6 billion in 2008. The key measures will be completion of the Worldportexpansion and delivery of six aircraft (3 B747s, 3 B767s).
