UPS will impose peak season surcharges and tighten up on costs in the USA this year after excessivespending on additional capacity that proved surplus to demand pushed down profits in Q4, 2014.
Top executives said today that surcharges on residential deliveries and other revenuemanagement measures at peak season will ensure the company is fairly paid for its availablecapacity. Combined with the general rates increase introduced in January and dimensional weightpricing on all ground packages, they should improve yields, offset higher operating costs andimprove profits in the US domestic business.
In parallel, UPS will tighten up on peak season operating costs by scaling back on temporarysorting capacity, third-party transportation and the length of temporary contracts.
Confirming its profit warning issued on January 23, UPS announced Q4, 2014 adjusted dilutedearnings per share of $1.25, flat to the prior-year period. On a GAAP basis, fourth quarter 2014diluted earnings were $0.49 per share, compared to $1.25 in 2013.
Q4 revenues grew by 6.1 per cent to $15,895 million and volumes increased 8.1 per cent to1.3 billion packages in total. But operating costs soared by 15.9 per cent to $15,141 million,including over $1 billion worth of additional pension costs. As a result, reported profits slumpedby 60.5 per cent to $754 million while adjusted operating profits, excluding these costs, dropped2.9 per cent to $1,852 million.
For 2014 as a whole, UPS increased revenue by 5 per cent to $58,232 million and volumes were6.8 per cent higher at 4.6 billion packages. Operating profit dropped 29.4 per cent to $4,968million on a reported basis but rose by a fractional 0.8 per cent to $7,132 million on an adjustedbasis.
The US Domestic Package business was the main drag on Q4 financial results due to the heavyinvestment in extra sorting and delivery capacity for the end-of-year peak season which turned outto be more than was needed. US Domestic Package revenues increased by 7.5 per cent to $10 billionin the fourth quarter as volumes grew by 6.6 per cent to a daily average of 18.2 million packages.UPS SurePost grew 28 per cent in the fourth quarter. But total revenue per package was down0.8 per cent, as lower fuel surcharges and changes in product mix offset increases in base rates.
Adjusted operating profits fell by 5.3 per cent to $1,137 million after operating expensesincreased more than $200 million primarily due to higher than anticipated peak related costs.Decreased productivity, higher contract carrier rates as well as overtime and training hourscontributed to the excess costs. On a reported basis, fourth quarter 2014 operating profit wasdown 63 per cent to $444 million as a result of the pension mark-to-market charge and the transferof certain healthcare liabilities.
During peak season 2014, UPS hired 100,000 temporary employees, experienced a 12 per centincrease in both Cyber Monday and Peak Day deliveries, exceeding company projections, and delivereda total of 572 million packages worldwide in December.
“UPS customers were delighted with the high quality service we delivered during the holidayseason,” said David Abney, UPS chief executive officer. “However, the financial results werebelow our expectations.
“As we move into 2015, we will address this disparity with both cost and revenue actions,”continued Abney. “We will take actions necessary to improve profitability by increasing operationalefficiency and adjusting price where appropriate.” These measures will include selected surchargeson residential deliveries to improve yields.
International Package revenues, on a currency-neutral basis, increased 5.9 per cent to $3.4billion on 4.3 per cent growth in daily package volume. Export shipments were up 5.2 per centper day, driven primarily by 8.5 per cent growth from Europe, offset somewhat by a decline in Asiaexport volume. Non-U.S. domestic products were up 3.6 per cent with strong growth in Canada, Spainand Mexico.
The underlying business performance showed positive momentum. However, currency fluctuationscontributed $40 million in year-over-year comparison headwinds. In addition, one-time items,including a restructuring charge, weighed on results by approximately $30 million. Internationaladjusted operating profit was $536 million, relatively flat with the prior-year.
Export yield contracted 1.7 per cent on a currency-neutral basis, as a result of lower fuelsurcharges, product mix and stronger intra-regional shipment growth. Non-U.S. domestic revenueper package increased 0.8 per cent when adjusted for currency. On a reported basis, operatingprofit for the fourth quarter declined 38 per cent to $335 million as a result of the pensionmark-to-market charge and the transfer of certain healthcare liabilities.
Revenue in the Supply Chain & Freight segment increased 7.4 per cent to $2.5 billion,driven by growth in Distribution and UPS Freight. Adjusted operating profit increased 4.7 per centto $179 million as improvements in Distribution and UPS Freight were offset by declines in theForwarding unit.
Operating profit for Forwarding was lower, as results in North American Air Freight andOcean were offset by challenges in International Air Freight. Distribution revenues increased at amid-teens growth rate, as demand from Retail and Healthcare customers remained strong. Operatingprofit expanded over the prior year results.
UPS Freight experienced solid revenue growth of 8.6 per cent, primarily driven by LTLtonnage gains of 4.8 per cent and yield improvements. The business unit expanded operating profitand margin over the prior year.
On a reported basis, operating loss for the fourth quarter 2014 was $25 million as a resultof the pension mark-to-market charge and the transfer of certain healthcare liabilities.
Looking ahead, CFO Kurt Kuehn stated: “This year will be one of continuous improvement andadvances in strategic initiatives that have great potential for the company. E-commerce growth,operations technology implementation, emerging market expansion and industry specific solutionswill provide momentum for UPS as we move throughout the year.
“The company expects growth across all business units,” Kuehn continued. “We anticipatefull-year 2015 diluted earnings per share of $5.05 to $5.30, a 6 per cent-to-12 per cent increaseover our 2014 adjusted results.”
* CEP-Research will publish a detailed report on UPS’ plans for the 2015 peak seasontomorrow.
