UPS CEO Calls Sale Of UPS Freight To TFI A 'Win-Win'

UPS Inc.'s UPS sale of its less-than-truckload business, UPS Freight, to Canadian firm TFI International Inc. TFII works out well for both parties as it relieves UPS of a noncore, low-margin asset and puts the business in the hands of a more freight-centric carrier, UPS CEO Carol Tomé said Tuesday.

The $800 million all-cash deal, which was announced last week, is expected to close at the start of the second quarter, Tomé (pictured) told analysts on a conference call Tuesday to discuss UPS' fourth-quarter and full-year results. UPS will use the proceeds to pay down debt, she said. Montreal-based TFI will rebrand the unit as TForce Freight. UPS will sell the new TFI service for no less than five years and will provide back-office services for three years. All 14,500 UPS Freight employees, including 11,500 Teamsters union members, will join TFI.

Tomé said she made the disposal of UPS Freight a top priority as soon as she started the job on June 1. Tomé, who was named to UPS' board in 2003, watched as UPS acquired Overnite Transportation Co., the forerunner of UPS Freight, two years later for the then-lofty price of $1.25 billion, only to take an impairment charge shortly after the acquisition was completed.

"It's never turned out to be what we thought it would be," she said, referring to UPS Freight. "It's a capital-intensive, low-margin business that we don't need to own" to make money by offering an LTL solution to shippers, she said. 

Tomé said that UPS Freight employees should also be happy to join a company that's more aligned with their interests than was UPS, a parcel-delivery-focused concern that positioned UPS Freight as a loss leader by offering cut-rate prices in exchange for more small-package business. 

"We couldn't be happier" with the way the transaction turned out, Tomé said.

Her remarks came as the Atlanta-based package giant reported one of its most impressive quarters in years. The nation's largest transportation company also reported all-time annual records for revenue at $84.2 billion and adjusted diluted earnings per share of $8.23. After adjustments and dilution, UPS posted a fourth-quarter gain of $2.66 a share, way above estimates that ranged between $2.10 and $2.20 a share. The adjusted EPS figures were 55 cents higher than the adjusted 2019 results, equating to a 26.1% year-on-year gain, Atlanta-based UPS said. 

On an adjusted basis, operating income rose 26% to $2.2 billion, the highest quarterly operating profit in the company's 114-year history.

The 2020 adjustments included a $4.9 billion noncash charge for pension-related changes; a $545 million after-tax impairment change for selling UPS Freight; and a $114 million after-tax charge for UPS' ongoing multiyear project to reengineer its massive distribution network to handle more business-to-consumer (B2C) traffic resulting from online orders. 

Fourth-quarter 2020 revenue rose 21% to $24.9 billion. The domestic package division was the upside standout, with domestic revenue up a surprising 17.7%, and operating margins up 8.8%, also higher than analysts had expected. U.S. domestic revenue per piece rose 7.8%, the highest growth  rate in more than 10 years. Ground revenue per piece increased by 11.2%. 

In what Tomé referred to as a "turning point" for the company's finances, domestic package revenue grew faster than average daily volume during the fourth quarter, a pattern she said will continue into 2021. This bodes well for pricing and margin strength, she said.

UPS clearly benefited in the fourth quarter by a massive spike in peak-season online ordering, which by the end of the year had accounted for more than 20% of all U.S. retail sales. Tomé does not see much of a leveling off in 2021 because a broader swath of the U.S. population has become comfortable with and accustomed to e-commerce. This will continue to put pressure on capacity and push UPS to further optimize its network, she said. As a result, UPS will likely emphasize the higher-margin SMB segment and focus less on the big, high-volume customers that have long enjoyed favorable pricing conditions. 

This may include Amazon.com Inc. AMZN, which accounted for 13.3% of UPS' 2020 revenues in 2020 and remains its largest single customer.

UPS shares closed the day Tuesday up more than 2.5% at $160.29 a share.