UPS’ wide-ranging package of revenue and cost measures to ensure a successful peak season in 2015, after two years of misjudging demand, appears to have paid off.
Speaking at a conference call on the company’s Q4 results, CEO David Abney was in upbeat mood, explaining that UPS had capitalized on “the peak season opportunity by managing the challenges it creates.”
He said the success of the 2015 peak season could be summed up in three words: Collaboration Control and Commitment.
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,” he explained.
“UPS implemented certain pricing controls and maintained disciplined operating plans to ensure our peak package volume did not jeopardise the overall integrity of the network and could be delivered on time.
“For example, we optimized available capacity during the weekend prior to Christmas and collaborated with customers to tender shipments ahead of the original schedule.
“This moved our peak day up to December 21 and smoothed volume for the rest of the week ensuring our customers’ packages reached their customers’ doorsteps before Christmas.
"This year (2015) our customers worked more closely with us than ever and I want to thank them for making adjustments and being flexible. Together, we delivered a successful peak season."
Turning to Control, Abney said that UPS’ actions to tighten dispatch, reduce special sorts and implement just-in-time hiring resulted in considerable cost benefits for UPS "as we exercised more precise control over the network.
“We also expanded capacity, opened more than 8,000 UPS Access Points in the US and completed several automation projects across the network. These investments provide year-round benefits. In fact our automated air facilities were essential in servicing nearly 13% growth in US domestic air volume during the quarter.
“The flexibility of our integrated network gave us the control needed to seamlessly move volume between air, rail and ground to maintain excellent on-time service. This year we again implemented a management process, called the Control Tower, in the US and expanded it to Canada and Europe.
"We handled customers’ unplanned volume surges efficiently utilizing available UPS network capacity. Our goal was to find a solution that worked for our customers and UPS. Working together, we were able to service more than 90% of these last-minute requests.
“Another aspect of Control was managing outside transportation cost which spikes dramatically at this time of year. Our recent acquisition of Coyote Logistics helped manage this expense. They played an expanded role this peak season providing truckload brokerage service for UPS and its customers. Coyote’s synergies remain on plan.”
Abney said the final ‘C’ was Commitment "exemplified by the actions of our employees to deliver on-time service during a peak period when our volume nearly doubles. There are numerous examples of UPSers going the extra mile every day for our customers and they again demonstrated that commitment this peak season.”
UPS' Executive Vice President and Chief Commercial Officer, Alan Gershenhorn, played down reports highlighted at the conference call that UPS had turned away 3% of its peak volume because of ‘Control Tower’ constraints.
"The Control Tower was an absolute success this year from both a customer and a UPS perspective and also from an e-commerce and retail and year-round customer perspective and all the other industry segments we serve. And the primary goal there was to optimize the network’s capacity and find solutions which worked for our customers and UPS.
"The fact that between Cyber Week and Super Weekend we were able to accommodate all the customer requests and in those final few days there were a few we needed to turn down but even then some of them were dual source customers who chose not to make longer term business commitments to UPS. We thought it (the Control Tower) was a resounding success. A very disciplined approach to volume and capacity and managing the yields produced the excellent fourth quarter we had.”
Responding to a question on the exposure of UPS’ domestic package network to the weakening US industrial economy, Alan Gershenhorn replied:
"The story with industrial production (IP) has been happening now for quite a while. Certainly, it’s trending more negatively than it has been. But about half of UPS’ business is in retail and e-commerce now and ‘residential’ had accounted for 60% of the total during the peak season.”
He underlined that the ‘value proposition’ UPS had in place, for both retail and the industry segments, such as manufacturing, high-tech and healthcare, boded well for 2016 and beyond.
CEO David Abney remarked that a study of UPS’ results five years ago showed a tighter correlation with industrial production compared to today which saw the company’s activities being increasingly focused on e-commerce and the ‘residential’ segment.
"If you look at the fourth quarter, (US) industrial production was down for each of the three months during which we had record results and part of that was because consumer confidence is still high. So I wouldn’t draw too much of a connection there (with industrial production).”
Both business and residential deliveries had grown in Q4 but a revealing statistic had been that B2C had outpaced B2B two-to-one.
Looking at the global economy, conditions will remain uncertain with the first half of 2016 continuing the mixed economic trends from the last half of 2015, Abney predicts.
"Across Europe and Asia, GDP growth was modest in 2015. However, slight improvements are expected this year. At the same time, we continue to see challenges in emerging markets in 2016. Global macroeconomic conditions reinforce the need for nations to continue making progress on free trade agreements such as TTP and TTIP.
"While the US GDP outlook is muted for the first half of 2016 it is expected to gain strength in the second half. Further, the US remains dependent on a consumer-based economy for growth. While industrial manufacturing continues to be held down by a strong dollar and lower global demand.
To this uncertain backdrop, UPS will continue to implement investment in growth strategies in 2016. Our strong execution of these strategies will enable UPS to continue to create excellent shareholder value,” he concludes.
As for the outlook for UPS in 2016, CFO Richard Peretz expects it to be another good year for the company with an increase in revenue of between 6-8%.
"Looking more closely at the segments: in the US, the domestic segment’s average daily volume is set to increase 2-4%, driving up revenue by 4-6%. Operating margin is forecasted to expand and operating profit should grow 5-9%."
“In the International business, shipments per day are projected to increase 2-4%. Growth rates will be held down during the first-half of the year due to the revenue management actions,” he reveals.
Revenue is projected to grow at a similar pace to volume while operating profit is expected to be up 8-12% with some margin expansion.
In the Supply Chain and Freight segment, revenue should be up 15-20% with Coyote Logistics (acquired in the second half of last year) added for the full year, with organic revenue growth of 3-5%.
"Operating profit growth is forecasted at between 6-10%. However, first-quarter growth is likely to be down 8-12% on last year due to continued softness in the LTL, freight brokerage and freight forwarding markets. As a reminder, the (US) west coast port strike provided some benefits in (Q1) 2015."
Operating margin for the Supply Chain and Freight segment should be around 7%, he adds.
"For the total company, we expect the 2016 operating profit distribution by quarter to be very similar to 2015."
