UPS turns in very strong Q3 earnings results

Third quarter earnings results issued today for Atlanta-based global freight transportation and logistics services provider UPS came in ahead of expectations. 

Quarterly revenue, at $21.2 billion, increased 15.9% annually, and adjusted earnings per share, at $2.28, was up 10.1% compared to a year ago, far outpacing Wall Street expectations, at $1.67. Net income, at $2.0 billion, was up 11.8% annually, and operating profit rose 11.0%, to $2.4 billion. 

“Our performance highlights the agility of our global integrated network amid the ongoing challenges of the pandemic.  Our results were fueled by continued strong outbound demand from Asia and growth from small and medium-sized businesses,” said Carol Tomé, UPS chief executive officer, in a statement. 

Individual segment results for Q2:

• U.S. domestic package revenue headed up 15.5%, to $13.2 billion, and average daily volume rose 13.8%, to 20.375 million daily packages, with UPS attributing that gain to growth across all products and elevated residential demand, and total average revenue per package flat at $9.99; 
• International Package revenue, at $4.087 billion, was up 17%, with average daily volume up 12.1%, to 3.480 million packages per day, and total revenue per package up 2.7% to $17.37, with UPS noting that this was driven by double-digit export growth globally and continued strong outbound demand from Asia; and
• Supply Chain & Freight revenue, at $3.926 billion, rose 16.5%, with UPS pointing to elevated air freight forwarding demand coming out of Asia, which was partially offset by weaker demand early in the second quarter for its less-than-truckload and truckload brokerage units

UPS officials said that the company will not be providing guidance, for revenue and diluted earnings per share, “due to the timing and pace of the economic recovery,” adding that it “is unable to predict the extent of the business impact or the duration of the coronavirus pandemic, or reasonably estimate its operating performance in future quarters.”

In a research note, Robert W. Baird & Co. analyst Ben Hartford wrote that these results “continue UPS' recent momentum, both externally (given a favorable operating environment and building parcel pricing strength) and internally (under CEO Carol Tomé's and CFO Brian Newman's leadership, new cost initiatives have recently been launched).”

On the company’s earnings call today, UPS CEO Tomé said that throughout the third quarter UPS optimized its network and captured share in SMB (small and medium-sized business).

“As a result, we saw revenue per piece improve sequentially in the U.S. from what we reported in the first two quarters of this year,” she said. “Further, revenue growth in our International and Supply Chain & Freight segments was the highest quarterly growth we have seen in nearly three years.   

And she also noted that over the past few months UPS has intensified the focus on executing its strategy of customer-first, people-led, and innovation-driven.  From the customer-first perspective, she pointed to how e-commerce sales are now projected to make up more than 20% of all U.S. retail sales in 2020. 

“We don’t think the penetration of e-commerce retail sales will decline, even after the pandemic,” she explained. “But it isn’t just retail; our customers across all business segments are reinventing the ways they do business. We have heard from our customers that speed and ease are most important. In the U.S., we completed our weekend expansion ahead of schedule, enabling broader market coverage, as we are the only carrier that provides both commercial and residential pickup and delivery services on Saturdays as a general service offering. And next week we will complete our fastest-ever Ground initiative eight months ahead of plan. We have improved Ground transit times between millions of zip codes, and we will be at parity or better than the competition in 20 of the 25 most populated U.S. markets. Weekend Ground volume is up 161% versus last year, and SMB volume on our fastest Ground-ever lanes has grown 25.7%.”

Addressing Peak Season, Tomé observed that UPS has been operating in a peak-like environment globally for many months, which is helping UPS prepare for the elevated demand ahead.

And she noted that the 2020 peak will have two more operating days than 2019, as well as two full weeks between Cyber Week and Christmas week. While UPS has high expectations for peak, she pointed out that there are some industry capacity constraints, while it still expects to see solid annual volume growth, with sequential quarterly growth rates expected to moderate in the fourth quarter. 

“While we expect this holiday season to have its challenges, we are ready to deliver a successful peak,” she said. 

UPS CFO Brian Newman said on the call that while reported revenue per piece was flat annually, excluding the negative impacts of fuel and SurePost, revenue per piece grew both sequentially and annually. 

Jerry Hempstead, president of Hempstead Consulting, likened these earnings results to Christmas coming early.

“Volumes are off the charts and will be more so as we approach peak,” he said. “The downside for shippers is surcharges for peak, for some quantity limits of what can be tendered each day and a more bold attitude on pricing. They may be telegraphing what's coming in 2021 (they have not yet announced rates and rules). The CEO said on the call that 'Our Better, not Bigger approach had a positive impact on our performance in the quarter, specifically through the revenue-quality actions we’ve taken.' I suspect they may not be as aggressive on quotes and negotiations next year and may walk from low yielding traffic UNLESS you have a bunch of Domestic Air business, where their volume was down for express and deferred. So until the COVID-19 vaccine is approved (which may consume some of their network) air business may be the lipstick that might make your account more desireable.”