Logistics business: UPS earnings up nearly 70 percent in the third quarter

Keeping in line with the second quarter, UPS reported solid third quarter results earlier today.

Quarterly revenue—at $12.19 billion—was up 9.3 percent year-over-year, and operating profit—at $1.6 billion—was up 74 percent. Net income at $991 million was up 80.5 percent, and earnings per share—at $0.93—were up 69 percent and topping Wall Street estimates that were in the $0.80-$0.92 range.

Average daily volume of 15.0 million packages was up 3.8 percent, and consolidated quarterly volume of 958 million packages was up 5 percent, with consolidated revenue per piece—at $10.27—up 3.7 percent. UPS said that average domestic daily package volume—at 12,730—was up 3.6 percent year-over-year. Total U.S. domestic package average revenue per piece at $8.95 was up 4.1 percent. And total international daily package volume—at 2,239—was up 13.4 percent, with total international package average revenue per piece at $17.75 down 1.2 percent.

Company officials said that these increases were due to growth in Ground and Next Day Air, with average revenue per piece up 3.7 percent largely because of base pricing increases and higher fuel surcharges.

UPS’ U.S.domestic package revenue at $7.3 billion was up 6.2 percent. International package revenue at $2.7 billion was up 10.5 percent, and Supply Chain and Freight at $2.2 billion was up 19.4 percent. Operating profit for U.S. domestic package at $1.02 billion was up 98.4 percent. And International Package at $419 million and Supply Chain and Freight at $177 million were up 33.9 percent and 73.5 percent, respectively.

“These results…are another step in getting back to peak earnings,” said UPS CEO Scott Davis on an earnings call. “I find it especially encouraging to see our three segments hitting on all cylinders. This validates our comprehensive supply chain strategy.”

Davis cited various inroads UPS made on the global trade front during the third quarter, including the introduction of UPS Import Control, a service that helps shippers better manage inbound shipments, and its UPS Paperless Invoice technology, which helps shippers with expedited customs clearance in 92 countries.

And he added UPS is continuing to expand in important emerging markets, including a joint venture in Indonesia with domestic courier PT Tiki Jalur Nugraha Eka Kurir (JNE) to extend pick-up and delivery service for international express packages throughout all of Indonesia, as well as alliances with companies in Malaysia and Vietnam and a new LCL (less-than-container-load) service called Preferred LCL Ocean Freight.

On the domestic side, Davis pointed to the recent introduction of UPS Returns Flexible Access, a new service to help shippers better manage returns processes, which he said provided unmatched alternatives for customers.

UPS CFO Kurt Kuehn said on the call that this was another tremendous quarter, with earnings up almost 70 percent, and revenue up 9 percent and continuing to reflect strong growth.

“These are impressive results, considering the slow pace of the economic recovery,” said Kuehn. “UPS’ operating margin expanded 410 basis points to 12.4 percent, continuing our rebound towards historic levels. Current margins do reflect reinstated merit increases and growth in incentive compensation that is due to solid business performance.”

Kuehn added that for the quarter total costs and benefits increased only 1 percent on volume growth of 3.3 percent, which he said clearly reflects the impact of greater volume, productivity improvements, network enhancements, and the U.S. restructuring plan announced earlier this year.

UPS said that for the nine months ending September 30, the company generated $3.5 billion in free cash flow, paid dividends totaling $1.36 billion, repurchased 9.3 million shares at a cost of $589 million, and invested $1 billion in capital expenditures.

Looking ahead to fourth quarter guidance, Kuehn said that expectations for economic output have declined from where they were three months ago although modest growth is still expected. And looking towards Peak Season Kuehn said customer sentiment is “mixed” but leaning towards cautious optimism.

He added that for the U.S. domestic segment he expects the revenue year-over-year growth rate to be slightly better than the third quarter, with year-over-year volume trends muted by one more working day between Christmas and January 1 compared to last year, putting average daily package volume growth in the fourth quarter to be about 1.5-to-2 percent.

On the international side, Kuehn said he expects volume growth rates to outpace the market although he said they will moderate to an extent.

In an interview with LM, Jerry Hempstead, principal of Hempstead Consulting said that UPS’ strong performance is clearly this is an indication that the carriers are not just cannibalizing each others customers.

“The growth is clearly organic…[and] they have internalized the fact that as volume grows that they will restrain capital investment to maximize profits and therefore capacity will become reduced and pricing will be higher for customers in a true cost paid per pound or per package,” he said.

Hempstead added that this signals a phase where the carriers are in charge and shippers will have lesser leverage in pricing negotiations, citing anecdotal reports that companies are prepared to walk away from accounts and when a contract comes up for renewal they are taking the customers rates up to increase yields. What’s more, he noted that while shippers are seeing fairly hefty increases in the net prices they pay, carriers know shippers are not likely to get an extraordinarily better deal from competitors. 

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