UPS expects to improve its domestic package margins despite the continuing shift from B2B to B2Cvolumes and the associated challenges this creates, CEO Scott Davis told investors today upon the
release of the company’s Q3 results. However, he remained tight-lipped about the issues raised bythe European Commission over UPS’s proposed takeover of TNT, insisting that the contents of the EC’s Statement of Objections (SO) had to be kept confidential.CFO Kurt Kuehn said UPS’s domestic US B2B business was continuing to show slight declines “although it didn’t get significantly worse in Q3 than in Q2”, he noted. “However, with thechallenges currently facing the industrial sector, we are not seeing a lot of strength there.”
In contrast, B2C growth was in “upper single-digits”, he said. “And so B2C is absolutely thedriver for the volume growth, and this is one of the market changes that we are adapting ourbusiness model to,” added Kuehn. “B2C is a little more challenging, and so you can see that on theoperational technology side and on the consumer side we are focusing enhancements to addressthat.”
Davis said B2C had been increasing its “share of the pie” by around 1% a year for the lastdecade. “But over the last two years, that has probably increased to around 2% a year,” notedDavis.
Asked how that would affect margins, Davis said: “Our long-term targets on the domestic side are14-15% margins for 2014 to 2016, and we are not backing off from those margins as we moveforward.”
That compares with a margin of 13% in the third quarter this year, down from 13.5% in the samequarter last year, although the company said it expected to see its domestic margins increase to15% in the fourth quarter.
US domestic daily package volumes increased 3.7% in the third quarter, with “rapid e-commercegrowth” driving volumes of its Ground and Deferred products up by 3% and 9.3%, respectively. ‘Next Day Air’ volume expanded 5.7% over the prior-year period.
Meanwhile, UPS’s international package business rebounded in the third quarter, with Asia seeinga slight increase in exports after several quarters of declining figures. President of UPSInternational, Dan Brutto, said the company’s air network to and from Asia was now broadly in linewith demand, leading to significant improvements in aircraft utilisation.
But although UPS’s overall Asia air capacity had been cut by around 10%, he said the company hadstill been adding capacity to lanes where demand justified it. For example, it had increased itscapacity to and from western China, in response to the continuing shift of industry in Chinatowards the country’s western interior.
Brutto said US exports “continue to disappoint”, although Europe was slightly up on exports.However, European domestic volumes had seen a slight decrease, mainly due to problems in southernEurope, he observed.
Although investors pressed UPS management for further information about the TNT deal, followingthe issuing last week of the Statement of Objections (SO) from the European Commission (EC)addressing the competitive effects of the intended merger on the international express smallpackage market in Europe, Davis declined to say whether the Commission was likely to impose morestringent or less stringent conditions than the company had anticipated.
Brutto said: “The European Commission has a team and we have a team and we are workingconstructively on this. The good news is we have an open dialogue.”
Davis stressed that UPS was “committed to the deal” and remained “confident of completing thetransaction in early 2013”. He said that the SO was a normal step in a second phase mergerprocedure, and that UPS and TNT would respond to the SO “in the next couple of weeks”. But both UPSand TNT intended to preserve the confidentiality of the document and discussions “in line withcommon practice”.
