US profits drive UPS Q3 growth as Asia volumes drop

Higher US and supply chain profits outweighed lower international profits at UPS in the thirdquarter ending September 30, 2011. Asia capacity has been scaled back by 10% after a volume decline

UPS’ total revenue increased 8% to $13.17 billion in the third quarter while total packagevolumes were just 0.7% higher. The adjusted operating profit, excluding a $109m property sale inQ3, 2010, improved by 7.4% to $1.62 billion while the adjusted operating margin dropped back to12.3% from 12.4% one year ago. The Q3 net profit was 12% higher at $1.04 billion.

The Q3 results were driven by the US Domestic and Supply Chain & Freight segments. The USDomestic operating margin improved to 13.1% compared to last year’s adjusted results and SupplyChain and Freight operating profit increased more than 10%. “UPS produced another solid quarter ofearnings growth against the backdrop of a deceleration in exports from Asia and a challengingglobal economic environment,” stated CEO Scott Davis.

In the USA, the domestic package business increased its revenues by 6.5% to $7.77 billiondespite flat volumes due to the slow economy. UPS Next Day Air volume rose 1.3%, however. Theadjusted operating profit was 11.4% higher at $1,015 million, pushing the profit margin up 60 basispoints to 13.1%. Profit drivers were higher yields, favorable product mix changes and networkefficiencies.

In Q4, UPS is expecting low volume growth in the 1-2% range in its domestic US package business,although “consumer demand for the holidays remains to be seen”, CFO Kurt Kuehn commented in ananalysts call. The new B2C added-value service ‘MyChoice’ is already proving a success with morethan 100,000 subscribers since the product launch in early October and numbers “are continuing togrow rapidly”, Davis pointed out.

After several quarters of strong growth, UPS’ international business was impacted by a slowdownin Asia in the third quarter of this year while its Europe business remained strong. “Europe hasbeen strong and stable. This was an Asia issue,” Davis stressed.

International revenue improved 14.2% to $3.06 billion, driven by export volume growth of 6.5%.Revenue per piece climbed 9.4% with currency, higher fuel surcharges and base rate increases allcontributing. But operating profit and margin for the segment declined due to excess capacitycaused by a deceleration in package volume on the Asia-to-U.S. trade lane. They were alsonegatively impacted by product mix, higher fuel prices and currency fluctuations. As a result, theadjusted operating profit dropped 2.4% to $409 million and the operating profit fell back to 13.4%from 15.7% one year earlier.

In Asia, there was a ‘deceleration’ in intercontinental export volumes. Kuehn said UPS had lowerAsia-US volumes in the quarter while Asia-Europe volumes remained good. In response, the companyquickly reduced airlift capacity out of the region by 10%. Competitors have also taken capacity outof the market, he noted. In general, the company saw international growth on shorter,intra-regional trade routes, primarily within Europe and within Asia, in the quarter, he added. InQ4, UPS expects a recovery in Asia volumes driven in particular by new product launches, whichwould also improve freighter utilisation factors. “We are planning growth out of Asia in Q4 withless capacity, so that should help utilisation,” Davis commented.

UPS’ Europe business remained strong in the third quarter, with export volumes up by 9%, Davissaid. “Everyone is worried about the (European) economy but our business has remained strong,” heremarked. Growth was particularly strong in Germany, France and Poland, Kuehn said. UPS had seensomewhat more growth in its slower ‘standard’ service than in its faster express product range, headded.

Overall international revenues should grow about 10% in Q4, driven by strong growth in Europe,Kuehn said. “We expect international demand to firm up a little in Q4,” he said. “We feel confidentthat the international segment will continue to grow. We are confident that international will beback to profit growth.”

Meanwhile, UPS’ Supply Chain & Freight business also performed well in the third quarter.Revenues rose 5.3% to $2.34 billion and the operating profit climbed more than 10% to $195 million.The operating margin improved to 8.3% from 8.0% one year earlier. UPS Freight increased revenuesabout 15% and improved its operating profit and margin. The Forwarding business had lower revenuesdue to excess capacity in the air freight industry but expanded its operating margin and slightlyimproved its operating profit.

Looking ahead, the company confirmed its financial guidance for the full 2011 financial year.“We are reiterating our 2011 guidance for UPS adjusted diluted earnings per share to a range of$4.15-to-$4.40,” Kuehn said.