UPS Q4 earnings in line with revised guidance; revenue up 6.1 percent to $15.9 billion

UPS today reported today that fourth quarter revenue increased 6.1 percent to $15.895 billion, and operating profit was off 60.5 percent annually at $754 million. Earnings per share were flat at $1.25 and were in line with earnings pre-guidance it recently issued that called for earnings per share to come in at $1.25.

In its earnings pre-announcement on January 23, Big Brown cited an underperforming U.S. domestic segment as the main reason for earnings being lower than previous guidance, adding that although package volume and revenue results matched up with what the company expected, the company’s operating profit was negatively impacted by what it said were “higher than expected peak-related expenses.

“We are disappointed in our fourth quarter results but pleased with our strong service levels,” said UPS CEO David Abney on the company’s earnings call today. “Peak season 2014 provided us with the opportunity to deliver excellent service during period where UPS volume more than doubles. To meet the challenge, we invested in capacity, facilities, automation, and expanded operations. It was important to fortify the trust of customers and protect our brand and from that perspective UPS was successful.”

Abney added that in 2015, UPS will take measured steps to address the disparity between excellent service and disappointing financial results with revenue and cost actions to boost profits, increase operational efficiency, and adjusting price where appropriate.

For the full-year 2014, UPS generated $3.4 billion in free cash flow, after making after-tax contributions of $800 million to company-sponsored pension plans, and $1.5 billion to transfer certain union employees to multiemployer healthcare plans in the second quarter, as well as investing $2.3 billion in capital expenditures during the year.

UPS said that in the fourth quarter it delivered 1.3 billion packages, which marked at 8.1 percent increase on an annual basis, and for all of 2014 it delivered 4.6 million packages for a 6.8 percent year-over-year improvement.

Revenue for UPS’s U.S. domestic package at $10 billion was up 7.2 percent, with daily package volume up 6.6 percent at 18.186 million and deferred air and ground seeing 11 percent and 7.1 percent gains, respectively.

Consolidated revenue per piece at $10.09 was down about 2 percent, with U.S. domestic packages and international package averages at $8.87 (down 0.8 percent) and $17.41 (down 4.9 percent), respectively. UPS SurePost, its economy ground service for delivery to residential locations, saw a 28 percent fourth quarter gain.

Fourth quarter adjusted operating profit for the U.S. domestic package segment was down 5.3 percent at $1.1 billion, with operating expenses up more than $200 million due in large part to higher than expected anticipated peak-related costs, said UPS. Other contributors included decreased productivity, higher contract carrier rates, overtime, and training hours.

International package revenue was up 5.9 percent to $3.4 billion and was driven by a 4.3 percent gain in daily package volumes at 3.016 million. UPS said export volumes were up 5.2 percent per day and paced by 8.5 percent growth in Europe, which was offset by a decline in Asia export volume. Fourth quarter international operating profit was off 38 percent to $335 million, due to UPS’s pension market-to-market charge as well as the transfer of certain healthcare liabilities.

Revenue for UPS Supply Chain and Freight rose 7.4 percent to $2.5 billion, due to gains for both Distribution and UPS Freight, while adjusted operating profit saw a 4.7 percent gain to $179 million. UPS said that operating profit for its Forwarding group was off because of challenges on the International Freight side.

On the less-than-truckload side, UPS Freight revenue was up 8.6 percent at $773 million, with tonnage up 4.8 percent at 2.884 million tons per day and total shipments up 5.9 percent at 2.7 million.

UPS had no revenue or shipment growth issues in the fourth quarter,” said Jerry Hempstead, president of Orlando, Fla.-based Hempstead Consulting. “They had an incredibly horrible expense issue. Because of the ‘black eye’ its service received in [Q4 2013] UPS overreacted. They hired 100,000 seasonal workers based on shipment forecasts given to them by their customers. E-commerce firms in particular have an extraordinary number of their packages shipped between Thanksgiving and Christmas and for many firms their estimates are [mainly] guesses. Since there is no financial consequence related to the estimate provided by the shipper, this method of planning staff is flawed.
This resulted in fantastic service for shippers and consumers but tanked UPS’ earnings because they had too many folks at too high a cost that was not covered.”

Hempstead maintained that this is easily solved by UPS providing consequences for shippers who are seasonal and highly residential, adding that it is likely UPS going forward will be attempting to implement and enforce a new seasonal residential surcharge on a selective customer basis.

“We shall see how successful UPS will be implementing an equitable (and competitive) Q4 pricing plan,” he said. “It really requires FedEx to implement a similar plan so that UPS does not risk losing shippers. The history is that these two players follow the lead of the other with new pricing pain. The amazing story is the growth of SurePost, which is their hybrid postal product where the USPS makes the ‘last mile’ delivery to the consumer. At this growth rate, if it continues, can become UPS’s largest ground parcel solution unless the USPS continues to raise the price for Parcel Select- an increase is in the works). UPS is also apparently going to add seasonal surcharges to SurePost.The issues at UPS are really not revenue, packages or service. They need to manage the process better, employ more automation and do a better job at staffing and are all solvable.”