United Parcel Service, Inc. (UPS)

UPS 
$99.35
*  
0.49
0.5%
Get UPS Alerts
*Delayed - data as of Jul. 30, 2014  -  Find a broker to begin trading UPS now
Exchange: NYSE
Industry: Transportation
Community Rating:
 
 
Symbol List Views
FlashQuotes InfoQuotes
Stock Details
Summary Quote Real-Time Quote After Hours Quote Pre-market Quote Historical Quote Option Chain
CHARTS
Basic Chart Interactive Chart
COMPANY NEWS
Company Headlines Press Releases Market Stream
STOCK ANALYSIS
Analyst Research Guru Analysis Stock Report Competitors Stock Consultant Stock Comparison
FUNDAMENTALS
Call Transcripts Annual Report Income Statement Revenue/EPS SEC Filings Short Interest Dividend History
HOLDINGS
Ownership Summary Institutional Holdings Insiders
(SEC Form 4)
 Save stocks for next time

United Parcel Service, Inc. (UPS)

Q4 2012 Earnings Conference Call

January 31, 2013 8:30 a.m. ET

Executives

Andy Dolny - Vice President of Investor Relations

Scott Davis - Chairman, Chief Executive Officer and Chairman of Executive Committee

Kurt Kuehn - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Treasurer

Alan Gershenhorn - Senior Vice President of Worldwide Sales, Marketing and Strategy

Daniel Brutto - Senior Vice President and President of UPS International

Myron Gray - President of U.S. Operations

David Abney - Chief Operating Officer of UPS International

Analysts

Justin B. Yagerman – Deutsche Bank AG
Tom Wadewitz - JPMorgan
David Vernon - Sanford C. Bernstein
Benjamin J. Hartford –Robert W. Baird & Co. Inc.
Christopher J. Ceraso - Crédit Suisse AG
Ken Hoexter – Bank of America Merrill Lynch
Bill Greene - Morgan Stanley
Scott Group - Wolfe Trahan

Arthur W. Hatfield – Raymond James & Associates, Inc.
Christian Wetherbee – Citigroup Inc.
Kevin Sterling - BB&T Capital Markets
Nathan Brochmann - William Blair & Company
Jeff Kauffman – Sterne Agee
Brandon Oglenski – Barclays
Helane Becker - Dahlman Rose & Company
Peter Nesvold - Jeffries & Company
Tom Kim - Goldman Sachs

Presentation

Operator

Good morning. My name is Stephen and I will be your conference facilitator today. At this time, I would like to welcome everyone to the UPS Investor Relations Fourth Quarter 2012 Earnings Conference Call. (Operator Instructions) It is now my pleasure to turn the floor over to your host, Mr. Andy Dolny, UPS Treasurer and Investor Relations Officer. The floor is yours, sir.

Andy Dolny

Good morning and welcome to our fourth quarter earnings call. Joining me today are Scott Davis, our CEO, and Kurt Kuehn, our CFO along with Chief Operating Officer, David Abney; International President, Dan Brutto; President of U.S. Operations, Myron Gray; and Alan Gershenhorn, UPS Chief Sales and Marketing Officer.

Before we begin, I want to review the Safe Harbor language. Some of the comments we'll make today are forward-looking statements that address our expectations for the future performance or results of operations of the company. These anticipated results are subject to risks and uncertainties which are described in detail in our 2011 Form 10-K and 2012 10-Q reports. These reports are available on the UPS Investor Relations website and from the Securities and Exchange Commission.

During our third quarter earnings call in October, I explained that if interest rates remain low, UPS would likely record a sizable pension mark-to-market charge in the fourth quarter. Interest rates did remain low and although the plans exceeded their expected rate of return, that benefit was more than offset by the 120 basis point decline in average year-end discount rates. Under GAAP, UPS is required to use portfolio of double A bonds to calculate our pension plan discount rates. In 2011, there were many double A bonds of financial institutions that were part of the portfolio calculation. In 2012, some of the bonds of financial institutions were downgraded and therefore excluded from our portfolio. While the spreads on the ones that remained compressed at a much greater rate than corporate bonds.

These two factors, the change in the bond portfolio mix and the compression in the spreads to treasuries resulted in a significant drop in our average discount rate. This led to a non-cash mark-to-market after-tax charge of $3 billion on our company sponsored pension and post-retirement benefit plans for 2012. As a result, on a GAAP basis, diluted earnings per share for the quarter were reduced by $3.15. Keep in mind this charge does not affect UPS cash flow, benefits paid to plan participants, or required pension funding. In fact, over the next three years, required pension contributions for UPS are significantly less than the previous three years.

Ignoring the impact of this charge, diluted earnings per share for the fourth quarter were $1.32. To provide additional information on the mark-to-market accounting process, we have posted a tutorial on the IR website which includes a sensitivity analysis that illustrates the impact of changes in discount rates. For example, a 100 basis point increase in discount rates could result in a mark-to-market gain.

In our remarks today, we will refer to UPS fourth quarter 2012 results excluding the impact of the mark-to-market charge. Additionally, all 2012 full-year references and comparisons to 2011 will refer to adjusted results. We believe this is a more accurate picture of the company's performance. Reconciliations to comparable GAAP measures and free cash flow which is a non-GAAP financial measure, are included in this schedules that accompanies our earnings news release. These schedules along with a webcast of today's call are available on the UPS investor relations website.

A couple of reminders. Any guidance that we provide for 2013 does not include expenses related to our attempted acquisition of TNT. And, finally, each of you will be allowed to ask one question and then get back into queue for follow up. Thanks for your cooperation.

Now, let me turn it over to Scott.

Scott Davis

Thanks Andy and good morning. I hope that everyone had a safe and happy holiday season.

Despite an environment of sluggish global trade that existed for most of 2012 and increase in uncertainty in the U.S created by the November elections and the fiscal cliff, UPS executed well. Although we fell short of our goals for the year, we did achieve record earnings per share. Our U.S domestic business led the way. We continue to see robust growth in residential shipments as the UPS portfolio provides a rapidly growing e-commerce market with unequaled solutions. Whether it’s putting goods in consumers’ hands the next day, or through more economical products like UPS SurePost, we are getting the job done.

Though we’ve been around for more than 100 years, things never stand still at UPS and 2012 was definitely a year filled with opportunities and challenges. Our bid to acquire TNT Express is probably the first to come to mind. It would be an understatement to say we’re disappointed by the decision of the European Commission to block the acquisition. UPS essentially put all hands on deck to get this deal done over the last year. I’d like to thank the many UPSers around the world who worked tirelessly on this project. We will of course continue to pursue growth opportunities, both organic and through acquisitions. While we view the TNT transaction as part of a compelling growth platform and it consumed a lot of internal resources, we are moving on.

Our financial strength enables UPS to evaluate future prospects as well as continue to invest in our portfolio. The UPS vision and focus centers on four transformative strategies; deploying technology enabled operations; providing unique industry specific customer solutions; expanding our global network; and finally, serving the needs of end consumers around the world.

In fact during 2012 and early 2013, we have launched powerful new, all enhanced services as we continue to invest for growth to support the needs of our customers. For example we expanded the footprint of UPS Next Day Air Service in the U.S and today, UPS delivers to more businesses and zip codes overnight by 8:30 a.m. and 10:30 than anyone. Our forwarding unit added innovative supply chain management technology like UPS Order Watch.


Most recently we launched the new UPS Worldwide Express Freight Service for heavy airfreight. It offers a seamless experience between shipping express packages and express freight. And finally, UPS further developed capabilities through new and expanded healthcare sites around the world and through operating facility expansions like our Cologne Hub, which is on track to be completed in 2013.

On the labor front, UPS started negotiations early with the Teamsters and we continue to be engaged in productive discussions. Things are progressing and we look forward to an early conclusion.

Regarding 2013, the global economic environment shows that we remain in a cycle of mixed growth and mixed signals. I’ve talked to a number of customers and it’s clear that fiscal uncertainty continues to erode business confidence and growth prospects. This will continue until Washington starts to compromise and make decisions in some key areas. Yet I must admit that in the U.S, we were off to a surprisingly strong start in January.

In Europe there has been some improvement. Forecast for Germany and the U.K are better, while the Netherlands and Poland are worse. But clearly, we’re starting 2013 in Europe in a more stable situation than last year. Asia’s GDP forecasts have also improved.

In the fourth quarter, global trade returned to more normal trends and expectations are for that to continue. I’m confident that whatever the global trade environment is, our people will deliver. UPS is made up of hundreds of thousands of dedicated employees. I want to thank UPSers for their efforts during 2012 and I’m proud of how our people rose to the challenges they faced. I want to give special recognition to those who went the extra mile in the aftermath of hurricane Sandy, UPSers stepping up to lend a hand in a time of crisis. Great job.

Regardless of external uncertainty, UPS is not waiting around for change. We are leveraging our growth strategies to adapt and prosper. We intend to maintain our high standard for earnings, return on invested capital and free cash flow. And UPS is confident in our ability to achieve the long-term targets we defined at our 2011 Industrial Conference. Now before Kurt covers the financials, David Abney will share information on our peak season.

David Abney

Thanks, Scott. Holiday retail sales came in slightly below expectations but UPS still hit a new high, delivering over 500 million packages globally during peak season. Our air business was especially strong and reflected the trust customers place on the speed and effectiveness of UPS. On our peak air day, Christmas eve, UPS delivered over 8 million air packages, more than 2.5 times our normal air volume and over 1 million pieces more than last year. Processing this many packages makes having the UPS integrated global network all the more beneficial.

Over the years, we have made strategic capital investments to expand Worldport, modernize our fleet, and develop state of the art technologies like telematics and next generation small sorts. These investments give UPS a competitive advantage and are one of the keys to success. Our innovative technologies combined with the best people in the business, enabled us to deliver peak season volume more efficiently than ever before. Offer innovative services like UPS My Choice, which increases operational performance and enhances the customer experience and manage complex operating plans during two distinct volume surges, Black Friday, Cyber Monday, and the two weeks before Christmas.

We are even seeing a third spike develop. One to manage the post sales process where the UPS returns portfolio is well positioned to capture growth. Since the financial community loves numbers, here are few more stats for you. Volume on peak day December 19, was almost 28 million packages. And on six days we delivered over 25 million. Our busiest tracking day was December 18, when more than 65 million tracking requests occurred. And my favorite as COO, efficiency metrics. In the U.S. where daily volumes grew by 3%, miles driven were up 1.2% and direct labor hours were up 2.3%.

On the air side, U.S. Next Day Air grew almost 8%, while block hours were up only 1.6%. International exports improved over 5% yet international block hours declined 1%. UPS efficiency is nothing new. For example, since 2008 U.S. domestic volume handled per block hour has increased more than 20%. This is just the way we run our business. We don’t wait to implement big operations initiatives. UPS seeks incremental improvements everyday year after year. So as you can see, UPS airline operations are as productive as ever and this positions us for growth and better returns to our investors.

Finally, I would like to take a moment to recognize the more than 20,000 employees of the UPS airline. You may not know this, but it was 25 years ago tomorrow that UPS airlines operated its first revenue flight when aircraft tail number, N880UP, a DC-8 flew from Louisville to Milwaukee. In August of that year, UPS announced plans to form its own airline. And it became the fastest startup in FAA history. So congratulations and thanks to all of you who made it possible. Now I will turn things over to Kurt to discuss the financial highlights.

Kurt Kuehn

Read the rest of this transcript for free on seekingalpha.com