Third quarter revenue for UPS down less than 1 percent at $13.07 billion

Third quarter revenue for transportation and parcel giant UPS was basically flat, falling 0.7 percent to $13.07 billion, with operating profit down 54 percent at $766 million. Earnings per share at $1.06 were flat compared to last year’s $1.09 per share and were in line with Wall Street estimates of $1.06 per share.

The decline in operating profit was due in part to a decision announced in August to restructure pension liabilities for certain employees, which resulted in an after-tax, non-cash charge of $559 million during the quarter, according to UPS. Third quarter revenue was also down slightly due to one less operating day.

UPS CEO Scott Davis said on an earnings call today that its U.S. domestic business benefitted from e-commerce in the third quarter, and international results rebounded as exports from Asia grew slightly. He added that Europe was stagnant while U.S. exports remained weak.

“In Europe, more countries are slipping into recession as they impose austerity measures,” said Davis. “Though the economy there has contracted the small package market has not. In Asia…economic growth leads the world but exports continue to lag GDP growth. Here in the U.S., while some of the recent economic indicators provide optimism, economists have lowered their expectations for the remainder of the year. The lack of direction on future tax and spending policy has and will continue to slow business investment. This will clearly impact the B2B small package market.”

Regardless of the outcome of the Presidential election in November, Davis said the U.S. is on the edge of a so-called “fiscal cliff,” with many concerns remaining over whether politicians can come to an agreement to solve these issues. He added that the lack of political will to solve the United States’ debt problem adds to economic uncertainty.

In the third quarter, average daily package volume of 15.5 million packages was up 2.9 percent, with total U.S. domestic packages averaging 13.2 million for a 3.7 percent gain and total international packages down 1.2 percent at 2.3 million packages per day. U.S. domestic package next-day air was up 5.7 percent in daily volume at 1.3 million packages per day while deferred—at 931,000 packages—and ground at 11 million packages—were up 9.3 percent and 3.0 percent, respectively. And International Domestic and Export daily volumes at 1.39 million and 930,000 were down 2.7 percent and up 1.2 percent, respectively.

U.S. domestic package revenue at $7.86 billion was up 1.2 percent. Consolidated revenue per piece at $10.90 was down 1.4 percent, with U.S. domestic packages and international package averages at $9.45 (down 0.8 percent) and $19.16 (down 1.3 percent), respectively.

International operating profit at $449 million was up 7.7 percent and was the third highest third quarter in that segment in the company’s history.

Supply chain and freight revenue at $2.3 billion was down 3.2 percent, with an operating profit of $188 million, which was down 7.4 percent and an operating margin at 8.3 percent. Company officials said the $15 million decline in operating profit was due to declines on the Forwarding side, which was pressured by overcapacity specifically in Europe, coupled with decreased revenue with lower yields offsetting modest tonnage gains, and partially offset by improvements at UPS Freight, its less-than-truckload unit. 
UPS Freight revenue increased by 3.6 percent, with daily shipments up slightly as well as modest gains in revenue per hundredweight and gross weight hauled.

UPS CFO Kurt Kuehn said on the call that in the second quarter UPS had expressed its concern over global economic expansion, particularly in the U.S., and has taken the necessary steps with network changes and other adjustments over the last three months.

“While B2B declined a bit, average daily volume growth was slightly higher than anticipated across all products, advanced entirely by B2C” said Kuehn. “Ground rose 3 percent and was fueled by lightweight and residential products. Not only are e-commerce shippers leveraging our extensive Ground solutions but they are also using UPS Premium products to enhance their competitive edge, resulting in Next Day air volume increasing by nearly 6 percent.”

Base rate improvement in the third quarter was more than offset by significantly lower fuel surcharges and changes in both product and customer mix, said Kuehn. And revenue growth in lightweight B2C shipments continued to push average weight per package lower, he said.

Jerry Hempstead, principal of Hemsptead Consulting in Orlando, Fla., said that the measure of health of packages at UPS is moving through the switch.

He explained that save for domestic international transactions—for packages moving within a country like Canada, for example—every parcel service category for UPS was positive, whereas areas that its biggest competitor UPS is seeing declines include domestic express and deferred, areas where UPS saw strong increases.  As an example, he cited how UPS saw a very impressive 5.9 percent increase in its domestic air express segment—for next morning and next day— compared to a 3.9 percent dip reported by FedEx in its recent fiscal first quarter earnings release. And for deferred air, he noted that UPS was up 9.3 percent compared to FedEx being down 8.15 percent.

“The shipment count is a bellwether of the general health of the economy and seeing positive package count numbers going into the historically busy fourth quarter shipping season bodes well for UPS,” said Hempstead. “Although UPS missed the top line revenue number, UPS can moderate this with actions in pricing and discounts. The point to ponder is ‘did UPS attract this new business away from FedEx through pricing incentives and this perhaps is what caused the average revenue per package to decline?’ If so it may be a good time to invite UPS in to offer a proposal or is UPS is the current carrier for the reader perhaps its a time to renegotiate ones contract as I suspect UPS does not want to lose any customers going into a tenuous 2013.”