Transportation and logistics: UPS reports Q4 income is up, but total revenue declines

Company cites international growth and strong holiday volumes

Sean Murphy -- Supply Chain Management Review, 2/2/2010

Despite experiencing shaky market conditions throughout most of 2009, UPS finished the year strong, with a significant gain in fourth quarter net income of $757 million, a 198.0 percent year-over-year gain.

Company officials cited international growth and a well-operated Peak Season as drivers for the quarterly net income increase.

While net income was up, total revenue for the quarter was down 2.5 percent year-over-year at $12.38 billion. And quarterly operating profit of $1.26 billion was 56.8 percent ahead of the fourth quarter 2008.

Unlike last year, when consumer spending levels were even lower heading into the holiday season than they currently are, average daily package volume for UPS was "less worse" at 17.284 million packages, which was off only by 0.2 percent, and topping last year's 2.1 percent annual decline. Average daily package volume is widely viewed as a barometer for overall economic activity. And average revenue per piece of $9.70 was off 4.0 percent compared to last year's $10.10. And consolidated volume at 1.054 billion packages was up 1.4 percent from last year's 1.039 billion packages.

What's more, UPS said that during the holiday shipping season, global volume exceeded 22 million packages on eight days, with two days higher than 24 million packages. Company officials said that UPS experienced higher year-over-year delivery volumes on each of the seven days leading up to Christmas, attributing "a well-executed peak season operating plan and significant growth in online retail sales [contributing] to the stronger-than-expected results for the quarter."

Revenue breakdown by company segment: UPS' U.S. domestic revenue at $7.55 billion was down 5.5 percent, with average daily volume at 14.9 million compared to 15.1 million last year-a 1.9 percent year-over-year decline. Revenue per piece at $8.33 was down 5.2 percent, due mainly to lower fuel surcharges and weight declines.

International Package revenue at $2.79 billion was up 5.8 percent compared to last year's $2.64 billion, and average daily package volume at 2.42 million was up by 11.8 percent compared to last year's 2.12 million. UPS said that average daily export volume at 1.5 million was up 17.8 percent, and average daily export volume at 918,000 was up 3.1 percent

Quarterly revenue for the Supply Chain and Freight business units was down 1.8 percent year-over-year at $2.03 billion. UPS officials said that reductions in segment revenue and operating profit were due to declines in global forwarding and UPS Freight, its less-than-truckload business.

"UPS ended 2009 on a high note by leveraging network changes implemented throughout the year and executing flawlessly during the peak holiday shipping period, which was stronger than we had anticipated," said UPS Chairman and CEO Scott Davis, in a statement. "The company demonstrated its ability to manage effectively in changing market conditions. UPS has emerged from the worst recession in decades leaner, more focused and better positioned to take advantage of increased global trade."

Earnings in line with guidance: Fourth quarter earnings came in at $0.75 per share, beating its original guidance of $0.58-to-$0.65 per share, due primarily to strong international growth, said UPS. On January 8, UPS upped its fourth quarter guidance to $0.73-to-$0.75 per share, due to what CFO Kurt Kuehn described as "better than expected results in both domestic and international operations and savings through cost management."

On the same date, UPS also rolled out several initiatives to augment operations and overall performance in the U.S. package segment, including reducing its U.S. regions from five to three and its U.S. districts from 46 to 20, effective April 2010. UPS officials said that as part of this endeavor, the company will also expand its outreach to customers by strengthening local sales and marketing efforts, as well as leverage its technology offerings and management strengths of its employees.

The company also noted that reducing its U.S. regions and districts will eliminate about 1,800 management and administrative positions nationwide. But UPS noted it is not planning to shutter any operating facilities. CEO Davis said that this new management structure creates regions and districts that are better geographically realigned and allow more local and decision-making resourced to be deployed for its customers.

And on today's earnings call, UPS said it will include a charge pertaining to the 1,800 job eliminations.

"This announcement [showed] that volumes are starting to pick up," said Doug Caldwell, principal of Parcel Research. "UPS has really leveraged its technology to reduce costs, and it is paying off for them in a big way. Reducing the number of districts and regions is probably a good move, because when you tend to consolidate, you also tend to remove layers of bureaucracy in your organization."

2010 outlook: CFO Kuehn said that economic forecasts indicate gradual improvement as 2010 unfolds, with the first quarter expected to be the most challenging of the year-indicating that profitability likely only showing a slight improvement.

Kuehn also noted that by leveraging its product portfolio and global network UPS expects earnings per share to be in the $2.70-to-$3.05 range, a 17-to-32 percent increase over 2009. And capital expenditures, said Kuehn, are expected to total $1.8 billion, which is below UPS' historical range of roughly $2.5-to-$3 billion, although it still supports growth opportunities.

Wall Street insight: "We believe that the 4Q09 results and full year 2010 guidance indicate that UPS's story remains on track," wrote J.P. Morgan analyst Tom Wadewitz in a research note. "We continue to believe that a combination of rising volumes and weight per piece along with a favorable cost side outlook should allow a pattern of significant margin expansion and EPS growth in 2010."