UPS reports ‘best non-peak results since 2007’

UPS today reported strong operating results for the third quarter of 2014, including the highestrevenue growth for three years and the highest non-peak operating margin since 2007, driven by

Group operating profits increased by 8.3% thanks to “balanced” growth across all three businesssegments, including a 6.9% increase in global package volumes to more than 17 million packages perday. This drove up revenues by 5.7%.

Speaking at today’s results conference for analysts and investors, chief financial officer KurtKuehn commented: “After three tough quarters in a row, it is great to be discussing positiveresults again. In fact, revenue growth was the highest we’ve seen in three years, up 5.7% over thethird quarter 2013.

“Operating margin expanded 40 basis points to 13.7%, our best non-peak results since 2007.”

US Domestic revenue increased to $8.7 billion, up 5.3% over the third quarter 2013, resultingfrom 6.9% increase in daily package volume.  This was led by gains in UPS Ground and Deferredproducts, up 7.7% and 5.9%, respectively.

“E-commerce continues to be the catalyst for growth; however B2B shipments gains of 3.4% werethe highest for several years,” said Kuehn.

US Domestic operating profit was $1.3 billion, up 7.8%, while the operating margin expanded 30basis points to 14.7%. “The segment experienced positive operating leverage as investments in newtechnology and capacity helped lower costs,” observed Kuehn.

Total revenue per package declined 1.5% as base rate improvements were offset by changes incustomer and product mix.

UPS SurePost shipments increased more than 50%, contributing to the mix change. “The primaryreason for the yield reduction was the more than 50% jump in UPS SurePost volume,” Kuehnexplained.

Total cost per packet decreased by 1.9%, “leading to positive operating leverage”, he added. “Several factors drove our cost base lower: we benefited from improvements in productivity, wagerates deflation, and reductions to workers’ compensation expense.

“These gains helped to offset the additional peak-related projects and the excess costs createdby continued rail disruption,” he added.

US Domestic highlights during the quarter included UPS announcing the expansion of its AccessPoint alternative delivery solution to the New York City and Chicago areas. Plans were announced toadd locations in other US cities, in addition to more than 4,400 existing UPS Stores, by the end of2015.

Meanwhile, international revenue increased 5.5% to $3.2 billion, on daily package growth of6.7%, “with all regions of the world showing solid growth” Kuehn said. Operating profit improved10.3% to $460 million, while operating margin expanded 70 basis points over the prior-year period,to 14.5%.

Local revenue and cost initiatives implemented during the quarter contributed to the marginimprovements, while favourable currency and fuel prices also added to the bottom line, heexplained.

Export shipments jumped 9.4% with gains from all regions of the world, the result of robustgrowth out of Asia and Europe. Shipments out of Asia grew 16% and Europe was up 14%.

“Volume from Asia to both the US and Europe benefited somewhat from high-tech product launchesat the end of the quarter,” Kuehn said. Non-US domestic shipment volumes improved by 5%, withCanada, the UK, and Italy leading the way.

However, currency-neutral revenue per package declined 1%, as a result of the 3.5% yieldreduction in export products, due to changing product mix and continued strength in shorter tradelanes. Non-premium products continue to outpace premium, putting pressure on yield.

“High demand and shorter trade lanes and product mix continued to pressure yields and offsetbase rate increases,” Kuehn said. “Non-premium product grew by 16%, while our premium product grewby 5%.”

Highlights included the announcement on 7 October of the acquisition of international e-commerceenabler i-parcel. The company’s experience and technology in cross-border e-commerce assists UK andUS-based retailers to expand their reach to consumers in over 100 countries worldwide, UPSsaid.

Elsewhere, Supply Chain and Freight revenue improved 7.4% to $2.4 billion, with gains from allthree business units, Kuehn said, but primarily from growth in the Distribution and UPS Freightbusiness units. Operating profit was 7% higher at $215 million, and operating margin was 8.9%, thesame as last year.

Forwarding and distribution revenue increased 7.4%. Forwarding revenue was higher primarily dueto increased International Air Freight (IAF) tonnage, which was aided by high-tech product launchesand government sector gains. Operating profit improvements in North American Air Freight and OceanForwarding were more than offset by continued pricing pressure in IAF.

Distribution revenue increased more than 10% over the same quarter last year. Strong demand fromHealthcare and Retail sector customers contributed to the growth, UPS said.

“However, our forwarding operating profit was down,” Kuehn said. “The spread between third-partyproviders and customer rates out of Asia continued to pressure operating profit growth.Distribution operating profits improved, as growth offset investments in acquisitions, technology,and new facilities.”

UPS Freight revenue increased 7.9% to $810 million due to LTL shipment increases of 4.7% andrevenue per tonne improvements of 1.1%. Operating profit and margin expanded from the third quarterlast year, and ground freight pricing growth contributed to these positive results, Kuehn said.

In terms of outlook, Kuehn commented: “Looking at our expectations for the fourth quarter, weexpect to see high demand for UPS services and we are ready for the increased volume. In the US, weexpect average daily volume to increase between 5% and 6%. Yields should be down around 1% as aresult of the continued SurePost product gains. Operating profit is expected to increase 11% to13%.”

As previously stated, Kuehn said UPS expects approximately $115 million in additional operatingcosts in the fourth quarter, “due to Black Friday operations, temporary capacity additions, and theOrion implementation costs”, as the company prepares for further US peak season volume growth andattempts to avoid the operational problems experienced last year.

“For the international segment, reported growth rates are expected to slow in the fourth quarteras a result of a number of large wins late last year, and the addition of one extra US operatingday this year,” said Kuehn.

“Average daily volume and total revenue are expected to grow between 3% and 4%. Internationaloperating profit is expected to improve by 10 to 12% over the fourth quarter of 2013.”

He continued: “For supply chain and freight, we expect mid to high single-digit revenue growth,with similar operating profit gains. Our tax rate is forecast to be 35% for the 4th quarter.

“So, in summary, UPS produced solid performance this quarter and we are maintaining ourfull-year guidance for earnings per share to be in a range of $4.90 to $5.”

UPS expects shipments delivered during December to climb 11% over the prior year. As previouslyannounced, the company committed an additional $175 million in operating expense and $500 millionin capital expenditures to enhance its capabilities and prepare the network for peak and futurevolume growth.

“It is encouraging to see all three segments show positive momentum, as we head into our busiesttime of year,” said Kuehn. “We expect another robust peak season and are confident our network isprepared to operate at the highest level. As a result, we are reiterating our expectations foradjusted diluted earnings per share to be in a range of $4.90 to $5.00, a 7% to 9% increase over2013 adjusted results.”

CEO David Abney commented: “The solid performance we delivered this quarter establishes ourability to stay ahead of market growth and generate positive operating leverage. We continue makinginvestments in technology and expanding our capabilities around the world to ensure we provide thelong-term solutions customers demand.”