UPS second quarter revenue heads up 5.6 percent to $14.3 billion

Second quarter revenue for transportation and logistics titan UPS headed up 5.6 percent annually at $14.3 billion, while operating profit sank 57.1 percent to $747 million. Quarterly net income fell 57.6 percent to $454 million.

Quarterly earnings per share—at $1.21—were down up 7.1 percent annually and three cents below Wall Street expectations.

Profit declines for the Atlanta-based company were due in large part to the transfer of post-retirement liabilities fort certain Teamster employees to defined contribution healthcare plans and recorded an after-tax charge of $665 million, UPS said.

“UPS experienced robust second quarter revenue and volume growth across the portfolio, and we are encouraged that all three segments had an operating profit for the first time since 2011,” said Chairman and CEO Scott Davis on an earnings call today. “Our results also reflect the challenges of today’s evolving marketplace, and earnings were somewhat less than we expected. The accelerated growth in Peak Season preparations are driving implementation costs, as well as increased investments in automation and new capacity.”

The outgoing top executive added that UPS will continue looking for opportunities to improve revenue management, driving more bottom line growth and industry-leading margins well into the future. And he also added that changes UPS is making in dimensional weight pricing will help to ensure UPS is properly compensated for network consumption. Davis said that in the second quarter UPS saw economies around the world pick up a bit, with the U.S. economy rebounding as expected from the weather-related problems in the first quarter, and solid economic fundamentals drove retail sales, especially e-commerce, higher. 

In the second quarter, average daily package volume of 16.8 million packages was up 7.2 percent. Total U.S. domestic packages averaged 14.3 million for a 7.4 percent increase and total international packages were up 6.6 percent at 2.5 million packages per day. U.S. domestic package next-day air daily volume was up 1.6 percent at 1.2 million packages per day while deferred—at 988,000 packages—and ground at 12.0 million packages—were up 5.4 percent and up 8.1 percent, respectively.

UPS’s U.S. domestic package revenue at $8.6 billion was up 5.2 percent. And total consolidated revenue per piece at $10.91 was off by 1.5 percent annually, with U.S. domestic packages and international package averages at $9.47 (down 2.0 percent) and $18.97 (flat), respectively.

UPS said that Ground growth was paced by lightweight e-commerce shipments, and shipments for UPS SurePost, a contract-only service that combines the consistency and reliability of the UPS Ground network, from pickup through transferring to the Post Office, were up more than 60 percent annually and represented roughly half of its growth.

International package revenue at $3.2 billion was up 6.2 percent, and International Package operating profit at $444 million was down 1.5 percent.  UPS said strong export growth shipments paced revenue growth on the international side.
Average daily international package volume—at 2.396 million—was up 5.0 percent.

Supply chain and Freight revenue at $2.3 billion was up 6.5 percent, and operating profit at $176 million was up 11 percent. UPS Freight, the less-than-truckload segment of UPS, saw revenues up 5.5 percent at $771 million. LTL revenue per hundredweight was up 4.1 percent at $22.50, and average weight per shipment was up 0.8 percent at 1,091 pounds. 

The Forwarding and Logistics segment with the Supply Chain and Freight group had a strong quarter, with $1.4 billion in revenue for a 7.4 percent annual increase. UPS said that improvements in North American air freight, brokerage, and ocean freight were offset to a degree by declines in international air freight, with market pricing on the Asia-to-U.S. lane putting pressure on rates.

Peak Season preparation was a recurring theme of today’s earnings call. Chief Operating Officer David Abney, who will replace Davis as CEO in September, said preparation for Peak Season has been a key topic of discussion with customers.

“We have had meaningful conversations with customers about our plans,” he said. “These discussions provide the foundation for a joint commitment to forecast volume, enabling UPS to better manage how large accounts impact our network. We have made changes to UPS technology that will improve communication with customers. Solutions have been implemented to provide better information on package location and shipment status.”

Jerry Hempstead, president of Orlando, Fla.-based Hempstead Consulting, said that
although UPS failed to meet the earnings expectations of Wall Street for the quarter and they lowered their full year guidance, that should not overshadow how important the direction and degree to which shipments improved year over year.

“The machine is clicking on all cylinders and appears not to be hampered by any drag of the economy or global conditions,” he said. “Earnings can and will improve because UPS has pricing power in a world now served for all intents by two carriers with a full portfolio of domestic and international services.”

He added that the 60 percent growth for SurePost is even more impressive, considering it is on the tail end of 50 percent growth in the first quarter and well ahead of the 8 percent decline FedEx experienced for SmartPost, its competing product.

Some important things to highlight is the 60% growth in the Sure Post product. That’s on the tail of a 50% growth in the prior quarter. Contrast that to the 8 percent decline in year over year growth from the competing FedEx product called Smartpost.

What’s more, although both FedEx and UPS are growing in both domestic and international air transactions, he said it appears from the UPS numbers that they are growing at a faster pace, and gaining a greater piece of the customers wallet.

“One also should note that some of the UPS numbers showed a far greater investment in equipment, IT and facilities to be better equipped for this years peak, he said UPS has made it quite clear that they don’t want to repeat the results of q4 2013. They had originally projected $100 million and now project a spend of $175 million. In addition they have cleaned up some potential liabilities for the future of the company by an arrangement with the Teamsters on retiree healthcare and although UPS takes a hit now, they may have considerable leverage from this move in the future.”