From the May 2010 issue of Treasury & Risk magazine

Delivering the Goods in Bad Times

For UPS CFO Kurt Kuehn, the recession was an opportunity to streamline the global package delivery company.

Kurt Kuehn, United Parcel Service's CFO, sounds almost nostalgic as he recalls the financial turmoil of the last couple of years. "Even though it's been the worst financial crisis in my career, it's been a great time to be a CFO," he says. The need to ensure liquidity meant companies relied on their CFOs and finance departments more than ever, Kuehn says, and while heading finance during the crisis was stressful, it was also "energizing."

The downturn didn't spare the package delivery company, which experienced "an unprecedented decline in demand and revenues across the globe," Kuehn says. UPS saw revenue fall to $45.3 billion in 2009 from $51.5 billion in 2008, while the number of packages it delivered dropped to 15.1 million a day last year, down from 15.5 million in 2008.

Kuehn argues, though, that hard times give finance departments a chance to push through major changes that might otherwise meet with opposition. Certainly that's the tack UPS took. The Atlanta-based company reviewed all of its fixed assets, he says, eliminating the least efficient vehicles and retiring one older model of airplane earlier than planned. UPS also took the opportunity to restructure, most notably by slashing the number of its U.S. package delivery business divisions from 46 to 20. Now that divisions are bigger geographically, the company can spend more on local marketing efforts, Kuehn says. And by the end of 2009, UPS had 408,000 employees, down 4% from 426,000 at the end of 2008.

Kuehn cites the efforts of the company's real estate group as an example of the way companies can wring value from tough circumstances. "We got our business group to go out and actively renegotiate leases," he says, noting that landlords value creditworthy tenants like UPS during hard times. "In some cases we agreed to extend the lease for a couple of years in return for a 10% or 20% reduction. In some cases we actually bought facilities that we had been renting for years, because it was a great opportunity." The real estate changes saved the company "millions of dollars on an annualized basis in multiple locations," he says.

Taking into account all of the cuts UPS made, "we believe that our initiatives saved us probably something like $1.4 billion over the course of last year," Kuehn says, adding that finance estimates about two-thirds of those cuts can be made permanent. "That's the advantage, or at least the opportunity, of tough times," he says. "They give companies a chance to streamline and reinvent themselves."

And in fact UPS seems to have come through the recession in good shape as a result of that effort. Last month, it announced first-quarter earnings of 71 cents a share, handily beating analysts' estimates of earnings of 52 cents a share. "If you think about all the actions they took over the last 12 to 18 months to reduce costs, when things turn around, the bump they get on the earnings front is materially higher, and that's what you see here," said Bill Selesky, a senior analyst at Argus Research.

Of course, what sounds clean and neat in hindsight was anything but at the time. UPS is "obsessive" about planning and forecasting, but the economic turbulence upended that process, Kuehn says. "Pretty quickly we realized that the scope of this global recession was beyond anything our forecasting could anticipate and so we really stopped forecasting." Instead, the company, which operates in 200 countries, emphasized flexibility.

"It was really just a process of having every function and every business unit realize that they've got to find a way to manage their costs to whatever level the revenue is going to come in," Kuehn says. "Finance stepped up and took a strong leadership role and helped every business and every function begin to react and develop plans to stay afloat and be prudent during this big downturn."

The company's solid ratings--AA3 from Moody's and AA-minus from S&P--meant Kuehn averted the anxiety about access to credit that burdened other finance executives. "I was probably one of the few CFOs in the country that wasn't agonizing over how we would maintain liquidity," he says. "Other than a couple of days, really, when things blew up, we were fortunate and we really had unfettered access to commercial paper markets, based primarily on the financial credibility of the company."

But the skyrocketing cost of credit did cause UPS to rethink the extent of its credit facilities. Amid the meltdown, "banks had to pull back radically and began charging very high fees for that limited capacity they had," Kuehn says.

Given the price increases, the company looked very carefully at what it needed in the way of credit lines. "When it was very cheap, it was easy to have a lot of excess," he says. "When the price went up, I challenged my guys. 'You may be spending $5 million or $10 million more dollars than we need. Are we really going to do that?' And frankly, for a company with high-quality credit, like UPS, we could go out and generate additional funds if we needed to in some other modes."

As a result, UPS has reduced its credit lines by "several billion" dollars, he says. "We didn't need that much capacity."

Kuehn predicts "slow but steady improvement" in the economy. "Although the consumer is in better shape, clearly there's still a long ways to go. And with unemployment staying high, that is going to be a little bit of a drag on the speed of the recovery," he says. "But we do feel that inventories have become very low, businesses have delayed and deferred investments. We remain moderately optimistic."

For a company the size of UPS, with operations in 200 countries, challenges are routine. though no one expected volcanic ash from an eruption in Iceland to shut down many airports in Europe last month, delaying the movement of packages. UPS says it responded by trucking some packages across the continent, but did not comment further at press time.

Kuehn says one current UPS project is an examination of all of the company's risk exposures, the extent to which they're correlated and how that can inform decisions about hedging. For example, "we have a significant operation in Canada and we typically have hedged the Canadian dollar," Kuehn says. "We also have tremendous fuel exposure and we hedge the fuel. But as we've looked at correlations, the Canadian dollar and fuel have a very high correlation because of the substantial amount of commodities that Canada generates in the area of fuel."

If the two are highly correlated, it might not be necessary to hedge them both independently, he says, adding that the company's review of its exposures includes the pension plan and looking at how its net liabilities change with moves in interest rates.

Kuehn, 55, started his career at UPS as a delivery driver during winter break from college. In more than three decades with the company he has worked in operations and engineering as well as finance. Kuehn headed investor relations when the company went public in 1999, and just prior to stepping into the CFO job in 2008, spent four years running sales and marketing.

While sales and marketing isn't typically part of a CFO's career path, that position "did help me realize that every function in a business can be a catalyst for growth, and that growth is everyone's job," Kuehn says, a realization that has informed his work in finance. "There are a lot of things that finance can do to make the company more able to grow easily," he says. "A lot of things even within what you think is a fairly arcane area of finance ultimately have an impact on either the customer experience or our managers' abilities to manage well and help grow the business."

Dealing with such considerations requires not only finance know-how, but knowledge about company fundamentals, he says. "Balancing those two skill sets I think is what creates the best benefit for companies."

As concerns about the economy subside, Kuehn is looking ahead to the impact a recovery will have on finance's role.

"The risk is that as business gets back to a more normal process, some finance functions and CFOs will go back to a narrower scope and be less relevant to the success of the business," he says. "The challenge I see right now for finance is keeping that seat at the table that they certainly gained during the economic meltdown."

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