UPS reports second quarter revenue is up 1.2 percent at $13.35 billion

Despite profitable quarter, company falls short of Wall Street expectations

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Second quarter revenue for transportation and parcel giant UPS was up 1.2 percent annually at $13.35 billion, and adjusted operating profit saw a 4.4 percent gain at $1.79 billion. Earnings per share at $1.15 were up 7.5 percent, falling short of Wall Street estimates of $1.17 per share.

On an earnings call today, UPS CEO Scott Davis explained that the company’s second quarter results were driven by its Domestic Express segment that allowed the company to quickly adapt to the evolving needs of e-commerce shippers profitably. But he added that the company’s International results continue to be impacted by declines in exports from Asia into the U.S.

“Economies around the world are showing signs of weakening, and our customers are increasingly nervous,” said Davis. “In the U.S., uncertainty, stemming from this year’s elections and the looming fiscal cliff constrains the ability of businesses to make important decisions such as hiring new employees and making capital investments and re-stocking inventories. This will further restrict economic growth. This was evident with June’s ISM manufacturing numbers and U.S. retail sales numbers, which were the worst we have seen since 2009 and impacting commercial volume growth. Given these trends, we think current second half economic forecasts in the U.S. are too high, with GDP growth likely closer to 1 percent.” 

For the fourth quarter, average daily package volume of 15.3 million packages was up 2.7 percent, with total U.S. domestic packages averaging 13.1 million for a 3.5 percent gain and total international packages down 1.6 percent at 2.3 million packages per day. U.S. domestic package next-day air was up 5.0 percent decline in daily volume at 1.2 million packages per day while deferred—at 924,000 packages—and ground at 10.9 million packages—were up 8.6 percent and 3.0 percent, respectively. And International Domestic and Export daily volumes at 1.36 million and 923,000 were down 3.2 percent and up 0.8 percent, respectively.

Revenue for UPS’s U.S. domestic package at $8.1 billion was up 4.1 percent.
Consolidated revenue per piece at $11.12 was down 0.8 percent, with U.S. domestic packages and international package averages at $9.63 (up 0.6 percent) and $19.64 (down 2.4 percent), respectively.

Supply chain and freight revenue at $2.3 billion was down 1.6 percent, with an operating profit of $202 million and a new high for its operating margin at 8.9 percent. Company officials said the revenue decline for this segment was due to slowing International Air Freight demand and lower pricing, as Forwarding is seeing pricing pressure out of Asia, with excess capacity still intact. The Distribution business saw revenue growth spurred by healthcare and e-commerce. And UPS Freight, the company’s less-than-truckload (LTL) unit, having flat revenue, with tonnage offset by higher yields, while seeing operating profit improvement and margin expansion.

UPS CFO Kurt Kuehn said on the call that the company’s quarterly results were solid considering the change of pace in the global economic environment.

“This points to the flexibility of our product portfolio and the efficiency of the UPS network,” he noted. “Strong operating leverage resulted from the volume growth, base rate increases, and continued network efficiencies. The quarter did benefit by over $60 million from the fuel surcharge lag.”

Kuehn added that the 3.5 percent gain in overall daily volume for U.S. domestic packages was driven almost entirely by B2C (business-to-consumer) activity, while one concern—as CEO Davis also alluded to—was lower manufacturing numbers from the ISM for June, which pointed to lower purchasing activity and contributing to a deceleration in its critical B2B (business-to-business) volume growth.

Yields across all UPS products in the second quarter benefitted from base pricing but were offset by faster growth from large customers and changes in product mix, according to Kuehn.

In addressing UPS’s International segment, Kuehn said it has been a challenging environment over the last 12 months but during this time the company has implemented various revenue and cost initiatives, including network reductions, and will continue to do so, with a planned 10 percent reduction in its Asian air network.

“The macro environment we expect in the second half of 2012 calls for slower growth than originally anticipated,” said Kuehn. “We now expect 2012 diluted earnings per share to be between $4.50-$4.70. This represents a 3-to-8 percent increase over 2011. Our first half results have been respectable with U.S. Domestic and Supply Chain and Freight segments performing well. [But] we are seeing indications of a weakening global economy creating challenges for companies in the quarters ahead.” 

Jerry Hempstead, principal of Hempstead Consulting, said that the most telling takeaway of this earnings announcement is the continued strong growth of B2C traffic, which he said was the “high point” of the quarter for UPS.

“Packages and revenue were positive because of this shift in shipping behavior,” he said. “Clearly direct to consumer delivery is being adopted and embraced and is reflected in this release. It is obvious the global economy is in distress, and there is a lack of confidence in the U.S. economy moving positive in the near term and as we move toward the fiscal changes coming from our government the picture looking forward is muted. What was not said was how the move by states to collect sales taxes on e-commerce sales might dampen even the positive growth in B2C shipping.”

About the Author

Jeff Berman, Group News Editor
Jeff Berman is Group News Editor for Logistics Management, Modern Materials Handling, and Supply Chain Management Review. Jeff works and lives in Cape Elizabeth, Maine, where he covers all aspects of the supply chain, logistics, freight transportation, and materials handling sectors on a daily basis. Contact Jeff Berman

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