e-commerce causing “significant” market changes for UPS

UPS achieved record results during the full year 2011, as its latest results revealed a 17% increase in adjusted profits for the fourth quarter, with executives noting the “significant” influence of e-commerce in the market. The Atlanta-based shipping giant recorded a 6% year-on-year increase in its revenues, to $14.2bn, for the fourth quarter, with profit for the three months reaching $2bn when adjusted for recent one-off charges.

During the quarter, package volumes increased 3.6% compared to the same period last year, with UPS delivering 1.13bn packages, particularly thanks to holiday season volumes that surpassed 25m packages on five different days.

The quarter was considerably boosted by e-commerce package volumes, which accounted for 480m items during the festive season as executives estimated that online retail activity increased 15% compared to the year before.

Overall, UPS said its performance in the domestic US market had been better than previously expected, while profits were down on the international side, the company saying its operations in Europe had remained “resilient”, and although the Asia-to-US trade lane remained difficult, the company had achieved good growth in business within the Asia region.

US domestic package services saw revenues up 7.3% and adjusted profit up 30% on last year’s fourth quarter, with operating margins at 15.2%. Average daily volumes were up 3.8% in the quarter to 15.69m per day, fuelled by “robust” internet shopping.

International revenues were up 3.5% to $3.15bn despite very “mixed” economic growth around the world, with operating profit down 33% to $334m. However, UPS executives highlighted the international division’s surpassing of the million packages per day average for the first time in company history. International operating margins for the quarter were at an industry-highest 16%, but this was down on last year thanks to weakness in the US-Asia trade lane.

In supply chain and freight, UPS saw revenue growth of 2.15%, to $2.34bn, and operating profit growing 11% to $199m, with lower daily shipments but increased productivity, particularly on LTL freight.

e-commerce

For UPS, it was the first peak season in which its “full suite” of e-commerce services were available, with the company claiming success for its Sure Post service and its new UPS My Choice service, which allows consumers to pick a four-hour delivery window and now has nearly 750,000 registered members.

e-commerce is also leading a “substantial” growth in deferred ground services in the US, which saw a 12.3% growth for the fourth quarter in the US, compared to the 3.5% in standard ground services. The deferred service adds a day or two to delivery, but UPS executives said more websites were looking to use it as an alternative to postal services.

Kurt Kuehn, the UPS chief financial officer, said the company had been “pleasantly surprised” by the festive volume growth, which had caused a few glitches in the network, such as in Colorado where the US media reported a 50,000-package backlog in the run-up to Christmas.

Kuehn said: “B2C is growing robustly, especially through the e-commerce avenue. In December, B2C was almost 50% of our volume.”

But the company also noted in a conference call with analysts today that a general shift in the market towards business-to-consumer packages was causing a “significant” change in the corporation’s package mix and resulting yields with the increase in lighter-weight parcels.

Scott Davis, the UPS CEO said this morning that one of the key priorities for his company was to adapt its operations to the changing market.

“There’s a fairly significant market change and a significant change in UPS in meeting the demand for lightweight products,” he said.

Outlook

Looking forward, UPS executives were forecasting that mixed growth conditions would continue around the world during 2012, with a “modest” growth in the United States thanks in part to a manufacturing “renaissance” partly assisted by cheaper energy in the US.

Davis said his company had built its strategy for 2012 based on expectations of “flat” growth in the European economy, possibly some downturn.

UPS is predicting that diluted earnings per share would beat 2011’s record levels of $4.35 per share, reaching in the range of $4.75 to $5 per share in 2012.

Kuehn said the company would be looking to make $2.7bn in share repurchases during the year.