UPS reports solid Q2 earnings paced by international and B2C growth

Despite an uneven global and domestic economic outlook, transportation and logistics bellwether UPS reported solid second quarter earnings results today.

Quarterly revenue was up 3.8 percent annually at $14.6 billion, with earnings per share up 6 percent at $1.43 for the sixth straight month and matching Wall Street expectations.

UPS said much of its quarterly success was driven by ongoing gains in its international segment, which hit a new second quarter operating profit record and continued B2C gains paced by e-commerce.

“These results demonstrate the power of UPS’s diversified business model,” said UPS CEO David Abney on an earnings call today. “The international segment again led the way. This is the sixth consecutive quarter of double-digit operating profit growth. The U.S. domestic business is growing operating profit with higher B2C demand. Supply chain and freight continued to execute in a challenging macro environment.

Abney noted that the consumer market in the U.S. remains healthy, and e-commerce forecasts have been elevated for 2016, with UPS seeing that growth. But he also pointed out that B2B volumes have been affected by the continuing weakness in industrial production.  Global GDP and industrial production forecasts have been slightly downgraded, due to delayed inventory drawdowns and soft export demand will likely remain headwinds in the latter part of 2016, he said, adding that UPS is mindful of current political commentary on trade.

“Increased trade not only bolsters business but also produces jobs here in the U.S. and abroad,” he said. “Historically, through the ratification of trade deals, we have seen a 20 percent increase in U.S. exports to the countries involved. U.S. is a steadfast proponents of trade and supports agreements that minimize friction in the global supply chain. Trade legislation that accelerate economic expansion like the Transpacific Partnership is vital to the U.S. economy.”

UPS CFO Richard Peretz said on the call that the company continues to see high growth in the e-commerce and healthcare sectors, while the LTL and forwarding markets remain challenged.

“Our performance reflected the gains in our investment strategies despite the mixed macro environment,” he said. “The internatonal segment outperformed while the U.S. segment was on target.

Conslidated average daily package volume for UPS rose 2.8 percent at 17.687 million for the quarter, and consolidate revenue per package at $10.57 was down 0.3 percent annually.

Individual segment results:
-U.S. domestic operating profit at $1.2 billion for a 2.4 percent annual gain, with operating margin up 10 basis points to 13.7 percent and consolidate revenue per piece was down 0.1 percent at $9.44, with Next Day Air down 2.6 percent at $19.51 (daily volumes up 5.6 percent at 1.311 million), Deferred up 2.6 percent at $12.44 (daily volumes down 0.3 percent at 1.129 million), and Ground down 0.1 percent at $9.44 (with daily volumes up 2.4 percent at 12.489 million);
-International Package operating profit was up 1.1 percent at $3.077 billion, with domestic up 3.5 percent at $621 million (daily domestic volume up 4.5 percent at 1.599 million and export up 3.9 with daily export volume up 3.9 percent at 2.758 million. Total operating profit was up more than 11 percent at $613 million for a new second quarter record, with UPS pointing volume growth across all products and disciplined pricing and network efficiency gains; and
-Supply Chain and Freight revenue was up more than 13 percent at $2.5 billion, due in large part to last year’s acquisition of Coyote Logistics. UPS said weak market conditions in the air freight forwarding and LTL markets weighed on top-line growth. LTL revenue was off 7.3 percent at $600 million, with revenue per hundredweight up 2.9 percent at $23.47, and average LTL weight per shipment down 3.3 percent a 1,006.

While UPS had a strong quarter, top line revenue was hampered for various reasons,  noted Jerry Hempstead, president of Hempstead Consulting.

“Brexit caused a euro value drop, which means when revenue from Europe is converted from euros to be expressed in dollars, it shows up lower,” he explained. “It is not an expression of their business handling any fewer transactions or margin. Secondly, fuel is down and that hampers their ability to charge fuel surcharges to the level they collected them, same time last year. Again it’s not a reflection in volume or their ability to manage the business. In fact to the opposite, the data shows very strong product management on both domestic and international.”