UPS improved its Q2, 2011 profits strongly thanks to better yields and margins but uncertaintyover the US economy and a slowdown in Asia may result in a weaker third quarter for the
company. A new Europe-Chengdu air service has also been launched this week.The US group announced that it increased revenues by 8.1% to $13.2 billion in the April – Junequarter. Consolidated operating profits improved by 21.1% to $1.7 billion ($1.67 billion on anadjusted basis), leaving the operating margin at 12.9% (adjusted 12.6%) compared to 11.5% in Q2,2010. Reported net profits rose 25.8% to $1.06 billion, with adjusted profits up 23.4% at $1.04billion.
The key factors were higher domestic package profits and a strong improvement in the supplychain/freight results. “UPS’s results reflect the continued execution of our strategy and theability to grow earnings in an uneven economic environment,” said Scott Davis, UPS chairman andCEO. “Customers are recognising the value of the integrated solutions that leverage UPScapabilities around the globe and across the entire supply chain.”
Looking ahead, UPS reaffirmed its 2011 full-year guidance of adjusted diluted earnings per sharein a range of $4.15-to-$4.40. “Despite softening economic conditions, UPS delivered its highestever second quarter earnings per share. We remain confident in our ability to execute and surpassprior peak EPS this year,” said CFO Kurt Kuehn.
UPS’ US domestic package business increased its adjusted operating profit by 31% to $981 millionwith revenues up by 6.4% at $7.74 billion. The adjusted operating margin rose to 12.7% from 10.3%last year. Volume growth was flat as a result of the slow US economy but revenues and profits rosedue to higher yields and the positive effects of the restructuring of the US network.
Kuehn told analysts on a conference call that the company’s US domestic business had seen “sluggish but stable trends” during the second quarter due to the weak economy and the “flat”domestic small package market. UPS was keeping market share and focusing on good yields, hestressed.
UPS was seeing “robust” growth for e-commerce, not only in the USA but around the world, and islooking at ways to increase its B2C business, the CFO said in response to an analyst’s query. Anymajor post office closures in the USA could present opportunities for UPS, he added.
CEO Davis said the US economy was not recovering as strongly as expected and, in a reference tothe political dispute over government debt levels, commented that “gridlock in the nation’s capitalis not helping”. The two top executives admitted there was a “lot of uncertainty” about US economicprospects, with diverging growth forecasts, and Kuehn said UPS might see ‘slower’ volumes in Q3before stronger growth in the fourth quarter.
UPS saw its high international profits drop back by 4.6% to $497 million in Q2, 2011, due to the$50 million impact of currency effects and hedging programmes, and the operating margin droppedback to 15.8% from 18.8%. But H2 international profits would see double-digit growth once thehedging impact was over, Kuehn pointed out.
The company’s Q2 international revenues rose 13.3% to $3.14 billion with volumes up 6.2%.Exports increased by 8.1%. Europe and China continued their strong growth trends, with Germany “out-performing”, but the rest of Asia weakened, in particular intra-Asia volumes. Kuehn said thatAsia “has been slowing in the last couple of months”, for example in Hong Kong, but China was stillgrowing at double-digit rates.
Non-US domestic volumes were 4.9% higher, with good business in Europe. Overall internationalrevenue per piece climbed 6.3% with currency, fuel surcharges, rate increases and product mix allcontributing. After adding more international flight capacity over the last 12 months, the prioritywould be to maximise yields over the next few quarters, Kuehn said.
Meanwhile, UPS said it has continued to expand its Asian air network with the launch of a new“around the world” flight this week to serve western China. The daily MD-11 flight originates inCologne, Germany, and makes a stop in Warsaw before transiting to fast-growing Chengdu, capital ofSichuan province in western China, on the way to Shanghai.
“We are going to see tremendous growth in western China over the next five years,” Davispredicted. UPS was inaugurating the flight in response to customer demand, he stressed. “China’s‘Go West’ program is making it very attractive for companies to move production facilities toinland cities like Chengdu and we believe the area is poised for accelerated growth in expressshipping,” added UPS International President Dan Brutto. Chengdu’s foreign trade surged 36% toUS$32.78 billion in 2010 and the Chinese government declared the area an export processing zonelast December.
With the addition of the Chengdu flight, UPS now connects Europe and Asia with 24 flights perweek, claiming to provide more next day options, guaranteed, than any logistics carrier. UPSoperates 200 weekly flights connecting China to markets around the world.
The UPS Supply Chain & Freight division improved its results dramatically in the secondquarter. Operating profit climbed 41% on an adjusted basis to $187 million with revenue growth of7%. The adjusted operating margin for the segment increased 200 basis points to 8.1%. This wasdriven by significant improvements in the Forwarding business as a result of revenue managementinitiatives and favourable buying rates. On a reported basis, including the positive impact of a$48 million real estate transaction, operating profit increased 77% and operating margin grew 410basis points to 10.2%.
UPS Freight revenue increased 19% over the prior-year period, driving improved profitability.The business saw strong increases in LTL revenue per hundredweight and gross weight hauled, up11.2% and 6.2%, respectively.
