UPS United Parcel Service

By Paul Ziobro 

United Parcel Service Inc. will spend up to $7 billion this year to upgrade its delivery network, adding jumbo jets and automating facilities, as it tries to fix service issues that hurt profits during its latest quarter.

The network came under pressure during the past holiday season, as UPS delivered 762 million packages during the peak period, more than its initial forecast of 750 million. The company said Thursday it incurred an extra $125 million in costs as it scrambled to lease planes and trucks to handle the extra volume and clear backlogs that hit the network during the week after Thanksgiving.

The added costs caused UPS operating profit to fall 5.5% in its large domestic segment during the fourth quarter, even as the extra business and higher prices boosted revenue 8.4%. Overall for the period, UPS operating profit, excluding a pension accounting charge, rose 3.2% while revenue surged 11% to $18.83 billion.

UPS did try a new pricing strategy during the period, hitting shippers with additional surcharges for residential deliveries during the busiest shipping weeks. UPS said the extra fees, which also applied to oversize packages, helped increase revenue and shifted some deliveries to less congested weeks, but not enough to avoid problems early on.

"We didn't have quite the success that we thought we would in shaping [demand] and we're going to look into that," Chief Executive David Abney said Thursday on the earnings call.

In an interview, Mr. Abney said UPS's volume in the week after Thanksgiving rose 20% compared with the prior year, much more than the 9% increase it expected. UPS also had to cap its volume on certain days, adding to shipping times.

UPS needs to work closer with its shippers to anticipate the higher demand, which was widespread among shippers of all sizes, he said. "It's not just the big ones you can think of. It was the small ones, the medium ones and the big ones," Mr. Abney said.

FedEx Corp., which devotes a smaller portion of its business to home deliveries, didn't appear to suffer similar setbacks during the holidays. In a research note Thursday, Citi analysts said FedEx didn't incur "meaningful disruptions" during the holiday period and also seemed to avoid "elevated costs." A FedEx spokesman declined to comment.

UPS's capital spending plans this year are a significant step up from 2017, when the company spent $5.2 billion on capital projects. Executives said that benefits from the new corporate tax law as well as plans for increasing demand caused the company to move up its spending budgets.

The added spending, however, worried investors, as the company's recent upgrades to its network haven't been able to keep up with demand and margins have decreased. In recent trading, UPS shares fell almost 6% to $120.05.

The outlays include automating more parts of its network. UPS plans to build or retrofit 18 facilities, including three new major ground hubs in the U.S., the first such facilities its added in two decades. Most of the extra capacity will be built in parts of its network that suffered bottlenecks during the holiday period.

Mr. Abney said UPS is now able to accelerate automation projects because the technology needed to retrofit existing facilities is more compact. Previously, adding the equipment could eat up to a third of a 30,000-square-foot buildings space. But now, UPS can make the upgrades without sacrificing the footprint.

UPS will also expand Saturday delivery, which they began last year, to more markets.

The company said Thursday it also plans to buy another 14 747-8 aircraft, exercising options for the freighter version of the jumbo jet granted when it made a firm order for 14 of the Boeing Co. planes last September. UPS is also adding four new 767-300Fs to the 59 it already operates. The company operates more than 500 aircraft that it owns or leases.

The Atlanta-based company also said it made a $5 billion contribution to its pension plan last year, seeking to bolster the plan and optimize tax benefits under the new law.

For the fourth quarter, UPS reported a profit of $1.1 billion, or $1.27 a share, compared with a loss of $239 million, or 27 cents a share, a year earlier. The prior-year quarter was hurt by a $1.90 per share pension-related charge while the current quarter results were boosted by 30 cents due to the tax overhaul.

The courier also said it expected 2018 adjusted per-share earnings of $7.03 to $7.37. Analysts polled by Thomson Reuters had forecast annual profit of $7.16 per share.

Imani Moise contributed to this article

Write to Paul Ziobro at Paul.Ziobro@wsj.com

(END) Dow Jones Newswires

February 01, 2018 12:10 ET (17:10 GMT)

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