UPS today confidently predicted it will continue to grow in Europe despite the forthcoming FedEx – TNT merger after announcing a double-digit rise in first-quarter profits driven by international volume growth and pricing measures.
The company’s Q1 operating profit increased 11% to $1.7 billion while revenue grew by 1.4% to $14 billion, with an underlying 3.6% rise after adjusting for foreign currency changes. Total shipments increased 2.8% to 1.1 billion packages.
International operating profit improved by 14% to $498 million as volume growth, pricing initiatives and lower fuel expense all contributed to improved profitability. The operating margin expanded 280 basis points to 16.8%. International revenue increased 2.4% to $3.0 billion on a currency-neutral basis, compared to the reported decline of 5.0%. Lower fuel surcharges also weighed on revenue growth.
Worldwide Export yield contracted 5.2% on a currency-neutral basis, with the majority of the decline due to an approximately 300 basis point reduction in fuel surcharge revenue. Product mix changes and stronger intra-regional shipment growth also contributed to the lower yield. Export shipments jumped 6.7%, led by European growth of 9.4%.
“We feel real good about Europe this year,” CEO David Abney told analysts on the Q1 results call. “We are expanding and investing in Europe, and we expect to continue to grow,” he underlined. UPS last year announced a $1 billion investment programme for the continent over the next few years to expand its network and sorting capacity.
Abney emphasised that UPS has achieved strong organic growth in Europe in recent years, with average annual export volume growth of 9% in the past 10 years, and said overall volumes in the region had more than doubled over the last decade. European GDP is now expected to grow 1.9% this year, with higher export volumes, he pointed out.
Asked about the impact of the FedEx-TNT deal, the CEO commented: “The FedEx-TNT deal is complex. We expect regulatory agencies to be as stringent on this as on previous deals.” UPS’ own bid for TNT was blocked by the European Commission two years ago.
UPS International chief Jim Barber commented that “the expansion of the network in Europe is starting to pay off” and growth was also being driven by the domestic acquisitions made in recent years. He pointed out that the strength of the US dollar, which is making European exports cheaper, meant that “we are seeing a move from imports to exports”. The company had a 6% gap between import and export volumes in Europe.
Meanwhile, the outlook for Asia is more mixed due to the economic slowdown in China. Confirming “slower growth” in the region, Barber praised the Asia team for “balancing network costs with volume growth”. However, he said UPS had had “really good” business for Chinese New Year.
The U.S. Domestic Package business also had a solid first quarter with revenue up 3.8% to $8.8 billion. Daily package volume improved 2.4%, lifted by growth in Deferred Air, up 12% and UPS SurePost, up 7.0%. Total revenue per package was up 1.3% primarily due to UPS Ground yield increasing 3.1%. Base rate improvements more than offset an approximately 200 basis point drag from lower fuel surcharges. The division’s operating profit increased 11% to $1 billion and the operating margin expanded 70 basis points, driven by productivity gains.
The US Domestic business is benefitting from various pricing measures, including the introduction of dimensional weight pricing for all domestic packages, executives said. Chief Commercial Officer Alan Gershenhorn told analysts that “dim weight pricing and revenue management” had contributed to higher average prices.
He also pointed out that B2B volumes had grown faster than B2C in the first quarter for the first time in recent years, although he cautioned that this was just one quarter’s worth of figures. CEO David Abney confirmed that UPS had turned away some lower-yield business by not renewing some contracts in order to protect its yields, resulting in slower volume growth.
Revenue in the Supply Chain & Freight segment increased 1.3% to $2.2 billion, driven by growth in Distribution and UPS Freight. Revenue growth was lowered by currency exchange rates and reduced fuel surcharge revenue. Operating margin expanded to 6.9%, generating operating profit of $151 million.
Although Forwarding revenue declined due to currency changes and revenue management actions, profitability was improved over the same period last year. Congestion at the West Coast port terminals created challenges for many Ocean Freight customers but the flexibility of the UPS portfolio allowed customers to accelerate their ocean freight or reroute to non-affected ports, the company said. The Distribution business delivered solid top-line growth but operating profit and margin were limited by continued investments in technology and infrastructure.
UPS Freight revenue was up 2.3% resulting from gains in LTL and Ground Freight Pricing products, although lower fuel surcharges weighed on the revenue growth rate. LTL shipments per day increased 3.5% over the prior-year period.
Looking ahead, CFO Kurt Kuehn said: "We remain on plan to meet our guidance for full-year 2015 diluted earnings per share of $5.05 to $5.30, a 6%-to-12% increase over our 2014 adjusted results."
