UPS finishes fourth quarter on a high note with strong earnings

Even though the economy is still taking its lumps en route to a full-fledged recovery, UPS appears to be ahead of the game based on its fourth quarter and full-year 2010 earnings performance.

Fourth quarter revenue—at $13.42 billion—was up 8.4 percent year-over-year, and full year 2010 revenue—at $49.5 billion—was up 9.4 percent. Net income for the quarter—at $1.119 billion—was up 47.8 percent annually, and earnings per share of $1.08 saw a 44 percent gain, beating Wall Street estimates in the $1.05 range, with full-year earnings per share up 54 percent at $3.56. Quarterly operating profit of $1.81 billion was up 44.1 percent.

Average daily volume of 17.7 million packages was up 2.3 percent, and for the full year UPS delivered 3.9 billion packages per day for an average of 15.6 million per day. Consolidated quarterly package volume at 1.095 billion was up 3.9 percent for the quarter, and up 3.4 percent for the year at 3.941 billion. Consolidated revenue per piece of $10.02 was up 3.3 percent, and they were up 4.2 percent for 2010 at $10.24.

Total U.S. domestic package average revenue per piece at $8.62 was up 3.5 percent, with total average U.S. domestic package volume at 15,118 was up 1.7 percent, with Next Day Air up 2.6 percent and Deferred and Ground down 2.7 percent and up 2.0 percent, respectively, on a daily basis. Total International Package volume growth on a daily basis at 2,537 on average per day were up 4.8 percent, with domestic international up 2.4 percent and international export up 8.7 percent.

“During an environment of improving economic conditions, increased consumer confidence, coupled with a slightly better employment picture, produced strong retail sales spurred by double-digit e-commerce growth,” said UPS CEO Scott Davis on an earnings call.

Davis attributed much of the company’s quarterly and full-year success to a balanced performance across all of its business segments, with domestic and international operating profits up more than 40 percent on a combined basis and its supply chain and freight units up a cumulative 95 percent for the quarter. He added that the international supply chain and freight segments hit record levels for the quarter.

Other notable accomplishments for UPS in 2010 cited by Davis included: the completion of its WorldPort expansion in Louisville, Kentucky and the completion of its Indonesian hub in Shenzen, China. He added that a major objective for the company is to expand the UPS brand in emerging markets, including announcing service partnerships with Vietnam-based partners, the addition of 100 new locations in China, and the introduction of new global UPS healthcare facilities in the U.S., Asia, Europe, and Canada.

“The measures we put in place combined with outstanding execution and an improving economic environment led to these great results,” said UPS CFO Kurt Kuehn on the conference call. “Rising fuel prices and challenging weather conditions were headwinds during the quarter. We were successful in controlling our costs, with compensation and benefits expenses increasing at a slower pace in volume.”

Another factor for a strong fourth quarter was a solid peak season, with Kuehn explaining that small improvements in the economy gave consumers enough confidence to return to more traditional holiday shopping patterns. As an example he noted that on its peak day for 2010 UPS delivered more than 25 million packages globally, handled 3 million pieces through its WorldPort facility and handled 48 million tracking requests.

On the pricing side, Kuehn explained that quarterly and annual yield improvements were primarily driven by higher fuel surcharges and the company’s ability to retain a larger portion of its general rate increase. He added that the company’s non-U.S domestic strategy is focused on managing growth while improving profitability.

Pricing rationalization and yield management were echoed throughout the conference call by UPS management. Jerry Hempstead, principal of Orlando-based Hempstead Consulting told LM that was apparent, citing how while domestic next-day air shipments were up 2.6 percent for the quarter, revenue was up 7.9 percent, and ground shipments were up 2 percent, with revenue up 7.2 percent.

“As most understand it’s the ground that provides the energy for the rest of the machine to push on,” said Hempstead. “Clearly, UPS has taken advantage of their size and the reality that the U.S. market is now a duopoly and they can extract from shippers ever increasing revenue per shipment and per pound. The announcement should be great news for all that the economy is doing better albeit modestly with a 2 percent annual increase in ground parcels, which tends to be the real [indicator] on the domestic economy, and if one accepts this premise then the recession ended in the fourth quarter of 2009. Shippers, though, should be concerned that the realities of the numbers demonstrate that their costs for shipping are going to go up faster than the economy expands and it’s not just because of fuel.”

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