UPS reports a 2.8 percent gain in Q4 revenue to $14.9 billion

Fourth quarter revenue for transportation and parcel bellwether UPS headed up 2.8 percent annually to $14.9 billion, the Atlanta-based company reported today. Adjusted operating profit at $1.9 billion was down 7.3 percent, and earnings per share at $1.25 was off $0.7 from a year ago and missed Wall Street estimates of $1.43 per share.

“UPS fourth quarter results fell far short of our expectations, however…the core business strategies at UPS remain sound and appropriate for the future,” said UPS Chairman and CEO Scott Davis on an earnings call today. “Given the compressed calendar between Thanksgiving and Christmas, UPS knew this holiday season would be one of the most challenging ever. Shipments produced by e-commerce significantly exceeded even the most optimistic forecasts as more and more Americans shopped online. In addition, we experienced a much later peak day than expected as purchasing decisions by consumers shifted closer to Christmas. A surge in volume and inclement weather strained our network, causing delays. We took extraordinary measures and deployed additional people and equipment and placed a greater emphasis on service and costs and did not meet the service standards that UPS historically does at Christmas.”

Going forward, Davis said UPS will make the necessary investments and operational improvements to ensure it effectively manages peak demand in the future.

For the fourth quarter, average daily package volume of 19.9 million packages was up 6.0 percent, with total U.S. domestic packages averaging 17.0 million for a 5.6 percent increase and total international packages up 8.8 percent at 2.9 million packages per day. U.S. domestic package next-day air daily volume was up 1.2 percent at 1.42 million packages per day while deferred—at 1.4 million packages—and ground at 14.2 million packages—were up 8.0 percent and up 5.8 percent, respectively.

Revenue for UPS’s U.S. domestic package at $9.3 billion was up 4.2 percent.
Consolidated revenue per piece at $10.30 was down 1.4 percent, with U.S. domestic packages and international package averages at $8.94 (down 1.3 percent) and $18.31 (down 3.2 percent), respectively. These increases were driven by base rate improvements in both ground and air. UPS said the decline in total revenue per package was attributed to lower fuel surcharges, changes in product and customer mix, and higher service refunds.

International package revenue at $3.4 billion was up 5.3 percent, and operating profit at $537 million was up 7.6 percent. Average revenue per package for international was down 3.2 percent at $18.31. Revenue growth was due to gains in daily package volume, with international export products up 9.5 percent per day in large part to 13 percent growth in Europe and growth in the Asia-to-Europe trade lane, too, coupled with non-U.S. domestic products seeing an 8.2 percent gain.

Supply chain and freight revenue at $2.3 billion was down 5.8 percent. UPS Freight, the less-than-truckload segment of UPS, saw revenues up 9.2 percent at $2.882 billion, which was spurred by LTL tonnage and pricing gains. The segment was down annually because of declines in its Freight Forwarding group, which were due to lower tonnage and revenue per kilo in International Air Freight, said UPS. 

In regards to U.S. domestic fourth quarter results, Davis said UPS is not satisfied.

“We conduct a thorough review of peak performance following Christmas, and this year…we have identified a number of areas to improve,” said Davis. “The lessons learned from peak will enable UPS to improve the customer service experience, network efficiency, and capacity management.”

UPS COO David Abney said on the call that UPS has been working around the clock to determine how to improve peak operations and service performance, ensuring it does not have a repeat of 2013. He added that he is leading a team of senior UPS executives with deep experience in all areas of the business and have identified areas for improvement and will make the necessary adjustments to its operating plans.

Among the major issues that impacted fourth quarter operations cited by Abney were:
-e-commerce shipments far exceeded peak forecasts starting with a strong Cyber Week, with volume typically slowing the following week but continuing to rise this year, adding there were eight days alone in December in which delivery volumes exceeded the previous historical high, with a delivery volume per day growth rate of more than 14 percent was almost twice what it planned;
-last-minute promotions by online retailers drove extraordinary volume growth leading up to Christmas; and
-weather events in the U.S., especially in the southwest, contributing to network disruption, with operations in Texas and Oklahoma shut down for 3.5 days following ice storms there, and stranded volume became a volume and UPS deployed more than a 1,000 employees to these areas

“When a network is stressed to those levels, it becomes vulnerable, add to that a wave of last-minute online orders, along with weather disruptions and processes started to break down and errors occur,” he said. “Unfortunately, that is exactly what happened.”

To prevent this from happening again to counter a rapidly developing marketplace, he said UPS will have increased collaboration with high impact customers to further develop predictive models that incorporate changing consumer behavior and sales promotions with a better understanding of the impact these customers will have on the network. This will provide UPS to better prepare for these adjustments.

Another area he cited is to enhance network throughput by making appropriate investments in things like facility enhancements, process automation and job simplification, and the acceleration of technology implementation through ORION, its routing efficiency technology, which he said will see 45 percent of its driver routes using it by the end of this year.

UPS will address is to better manage the impact certain customers have on its network during peak, with the goal of meeting customer expectations and its financial objectives.

Abney also cited the timely and accurate visibility of shipments, explaining as more customers work with UPS to optimize their supply chains, a growing number of trailers were dropped at their facilities with limited visibility to their contents.

“We will collaborate with customers to obtain package visibility on all trailers before arrival; this will improve UPS tracking and exception reporting and is critical to provide accurate visibility to customers,” he said. “Improved communication with our shippers and receivers is needed. UPS must enhance our processes and standards necessary to ensure timely and accurate communication, especially during periods of peak demand and network disruption along with improved visibility for our customers.”

Despite what the weather did to the network UPS is solid, said Jerry Hempstead, president of Hempstead Consulting in Orlando, Fla. 

“They did what they had to do with labor hours when faced with the prospect of delayed shipments,” he explained. “One needs to keep in mind that the event was not unique to UPS. It affected all the players in the parcel game. Impressive are the volumes. It bodes well for 2014. E-commerce has become the driver of small package volumes as consumers become comfortable with the convenience and predictability. The biggest concern for volume shippers is that the tremendous growth in packages might embolden the carriers to charge more for transport during the peak season, because of the impact the volumes have had on corporate earnings.”