UPS Beats Estimates on U.S. Package Volume, Higher Prices

United Parcel Service Inc., the world’s largest package-delivery company, posted third-quarter earnings that beat analysts’ estimates after carrying more U.S. shipments at higher rates.

Net income more than doubled to $1.1 billion, or $1.16 a share, Atlanta-based UPS said today, affirming a full-year forecast for per-share earnings in a range of $4.65 to $4.85. Analysts projected profit of $1.15 a share for the quarter and $4.75 for 2013, based on estimates compiled by Bloomberg.

While UPS reaped less revenue from each international package, in part because of a customer shift to cheaper shipping, it had a gain on that basis for domestic parcels along with an increase in U.S. volumes. UPS is considered an economic bellwether because it moves a variety of goods worldwide.

“International package is struggling with the trade down, currency and fuel,” David Vernon, a Sanford C. Bernstein & Co. analyst, said in a report. “But in domestic -- which is 65 percent of the operating income story -- operating margins are developing more strongly than we had expected.”

Vernon has an outperform rating on the shares.

A rise in interest rates contributed to a 3.3 percent decline in U.S. Next Day Air volume as financial services companies and banks shipped fewer refinancing documents, while online sales remained strong, Chief Financial Officer Kurt Kuehn said in an interview.

Holiday Spending

The company projected growth of 3 percent to 4 percent for daily U.S. shipments and revenue this quarter. International volume should rise 3 percent to 5 percent, with high single-digit profit growth and an operating margin of about 16 percent, UPS said. Currency and the move from high-cost shipping options will “continue to weigh on yields” in global markets, Kuehn said today on a conference call.

“Looking to the fourth quarter, although some major retailers have expressed caution about holiday spending, they still expect robust online sales,” Kuehn said.

UPS didn’t give a forecast for 2014, and said it expects currency fluctuations to negatively affect results by as much as $40 million this quarter.

The shares increased 1.2 percent to $95.61 at the close in New York. The stock has climbed 30 percent this year, topping the 23 percent advance for the Standard & Poor’s 500 Index while trailing the 44 percent gain for FedEx Corp., the operator of the world’s largest cargo airline.

U.S. Revenue

U.S. domestic package revenue rose 5 percent to $8.3 billion, buoyed by a 6.6 percent gain in sales for the ground-delivery business. Shipments increased by 2.3 percent, and revenue from each domestic parcel climbed 1 percent.

The number of deferred international shipments climbed 11 percent as customers extended the shift away from more costly express deliveries, the company said. Export volumes from Asia were unchanged, and average revenue per piece from international packages declined 0.3 percent.

Also weighing on operating profit was a $75 million negative impact from unfavorable currency rates and higher fuel prices. A year earlier, diluted earnings per share were 48 cents as a result of an after-tax, non-cash charge of $559 million related to pension liabilities.

The company reduced hours flown domestically and internationally during the quarter as UPS sought to boost efficiency and reduce costs.

Cost Savings

UPS said in July it was trimming main aircraft routes out of Asia to an average 7.5 from 8, lowering headcount through attrition and slower hiring to reduce costs. UPS declined to put a dollar value on the changes, which partially were made in response to the shipping tradedown.

FedEx, which operates the world’s biggest cargo airline, has trimmed capacity between the U.S. and Asia twice and said in September it would seek more ways to reduce spending. Those changes are on top of a program begun in 2012 to lower operating costs by $1.7 billion over three years to combat the move away from overnight shipments.

UPS said today it expects daily shipping volumes to rise 8 percent during the peak shipping period between Thanksgiving and Christmas, led by growth in online shopping, according to a separate statement.

The company expects package pickups on Cyber Monday, Dec. 2, to reach 32 million. Deliveries will peak on Dec. 16 at more than 34 million packages. UPS also said it would add 55,000 seasonal employees to handle the increase.

Cyber Monday

FedEx on Oct. 23 estimated it would handle more than 85 million shipments the week of Dec. 1-7, up 13 percent from last year’s busiest week. The Memphis, Tennessee-based shipper, which plans to hire more than 20,000 seasonal workers this year, expects its busiest day to be Cyber Monday, Dec. 2, on growing purchase from online retailers.

Progress is being made in negotiations on about 9 local supplement and rider provisions to the national Teamsters contract with UPS that was ratified in June. The company is operating under an open-ended contract extension until agreements are reached and the supplements approved. The union represents 235,000 employees in the small package division.

“The remaining supplements will go out soon, and we are confident in their approval,” Chief Executive Officer Scott Davis said on the conference call.

In July UPS reached a similar extension with the Teamsters for the 15,000 employees in its freight unit, which eliminated the risk of a strike when the current contract was set to expire on July 31. UPS and the union are in talks for a new agreement after an earlier accord was rejected in a ratification vote.

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