Strong peak season operations and e-commerce activity spur strong Q4 earnings for UPS

UPS finished 2015 in solid fashion, with strong fourth quarter earnings results.

Fourth quarter revenue at $16.1 billion was up 1 percent annually, and earnings per share were up 26 percent at $1.57, marking the fourth straight month of EPS growth. For all of 2014, EPS was up 14 percent annually at $5.43, which was an all-time high. Total operating profit also set a new record, up 54.3 percent at $7.7 billion.

With a keen focus on revenue management and operational execution, UPS said it saw gains across all three of its key operating segments–U.S. Domestic Package, International Package, and Supply Chain and Freight, which was evident in its strong Peak Season performance that was spurred on by heavy e-commerce activity.

UPS CEO David Abney said on an earnings conference call today that the company’s fourth quarter earnings reflect the plan the company laid out a year ago focused on having a successful 2015 Peak Season, which he said paid off in the form of high quality service and financial discipline its shareholders expect.

“Although the industrial side of the economy has slowed, the explosive growth in e-commerce continues to create great opportunity,” he said. “We capitalized on our Peak Season opportunity by maximizing the challenges it creates. Expanded collaboration with customers combined with key investments were central to our success. We worked together with a shared interest in fully utilizing UPS network capacity while simultaneously maintaining excellent service. UPS implemented certain pricing controls to maintain disciplined operating plans to ensure our peak package volume did not jeopardize the over all integrity of the network and could be delivered on time.”

As an example, Abney explained how UPS optimized available capacity during the weekend before Christmas and collaborated with customers to tender shipments ahead of the original schedule, which moved its peak day up to December 21 and smoothed out volume for the rest of the week, ensuring its customers packages reached their doorsteps before Christmas. This showed, he said how UPS’s customers worked with the company more closely than ever before in making adjustments and being flexible during Peak Season.

Also key in its earnings success were the company’s actions to tighten dispatch, reduce special sorts, and implement just-in-time hiring resulted in significant cost benefits for UPS as it exercised more precise control over its network.

“We also expanded capacity, opened up more than 8,000 UPS Access Points in the U.S. and completed several automation projects across the network,” he said. “These investments provide year-round benefits…with the automated air facilities essential in servicing nearly 13 percent of growth in U.S. Domestic Air volume in the quarter. The flexibility of our integrated network also gave us the control needed to seamlessly move volume between air, rail, and ground to maintain excellent on-time service.”

In the fourth quarter, UPS delivered 1.3 billion packages for a 1.8 percent annual increase, with 612 million packages delivered during Peak Season for a new company high, and for all of 2015 it delivered 4.7 billion packages, marking a 2.1 percent annual gain.

Consolidated revenue per piece at $9.93 was down 1.6 percent, with U.S. domestic packages and international package averages at $8.89 (down 0.2 percent) and $16.37 (down 6.0 percent), respectively. UPS said the gains in base rates were paced by company actions remained strong, although changes in fuel surcharges and customer mix lowered revenue-per-package growth.

U.S. domestic package revenue increased 2.6 percent to $10.3 billion, with operating profit was up 66.7 percent at $4.7 billion. Average daily package volume was up 2.4 percent at 18.61 million, with package volume growth benefitting from strong e-commerce demand. And Deferred Air products were up 14.8 percent at 1.778 million per day, and Next Day Air saw a 10 percent annual gain at 1.515 million daily packages.

Total international package revenue was down 7.3 percent at $3.175 billion, and operating profit was up 27.4 percent at $2.14 billion. Average daily package volume was off 1.4 percent at 2.975 million, and operating profit up 16 percent at $624 million, which UPS said was paced by a strong performance in Europe, as well as disciplined pricing, favorable customer and product mix, and improved operational performance.

Third quarter revenue for UPS Supply Chain and Freight was up 6 percent at $2.614 billion, and operating profit was up 76.9 percent at $764 million. UPS said that having its recent acquisition of Coyote Logistics reflected in its earnings for the full quarter helped to offset the impact of softer markets, lower fuel surcharges, and actions taken to improve revenue quality in its other business units. And UPS Freight LTL revenue per hundredweight was up 2.1 percent, but UPS said the gain was offset by a 12 percent tonnage decline, which lowered revenues.

“UPS was clicking on all cylinders in the 4th quarter, as service levels were maintained despite record setting volumes,” said Jerry Hempstead, president of Hempstead Consulting. “They had obviously done a lot of pre-planning in the first three quarters and reviewed lessons learned from prior peak seasons and engineered a measured combination of variable cost and commitment to on time delivery. In Q4 of 2014 they threw too many man hours into the operation which took a toll on earnings, but UPS appears have developed a system to match man hours with demand so in the end it manifested itself in increased earnings for the shareholders.

Other items of noted cited by Hempstead included the deployment of software to match transactions in their network via their Sure Post service to redirect those parcels away from the United States Postal Service when the parcel is going to a delivery stop where they will have a UPS driver going with a package moving in their traditional ground (Brown) service level.

“Basically, UPS removes the variable cost associated with paying the USPS to make that delivery, he explained. “When volumes swell like they do in Q4, there are more and more opportunities to capture this cash.”

And ff concern to shippers, he said, were statements where UPS noted it intentionally parted with some international customers where the yield was not to their liking. In addition UPS stated that it said “no” to some business in Q4, where it would impede the service it was providing to their customers but what was more frightening, he said, was saying no to customers that were not willing to make long-term commitments to UPS.

“With only two players in the USA, this type of response from a carrier puts shippers in a real tenuous position,” he said. “UPS is painting a very rosy picture for earnings in 2016 which can be translated to success in their yield improvement program. In English this means higher costs for the packages they are shipping.”