UPS today revealed better than expected profits for the second quarter of 2015 driven by healthy growth in Europe and Asia offsetting lower US growth, announced a major B2C expansion in the US but kept tight-lipped about reports of a possible $1.8 billion logistics acquisition.
The company’s revenues dropped by 1.2% to $14.1 billion in the April – June quarter due to exchange rate effects and lower fuel surcharges but operating costs were 10.3% lower, largely due to high one-off charges in Q2 last year, resulting in a reported operating profit of $1.96 billion compared to $747 million in the same period last year. On an adjusted basis, the $1.96 billion operating profit was an 8.1% increase, while net income rose by 9.9% to $1.23 billion.
All three operating segments improved operating profit and margin, led by International and Supply Chain and Freight. Total company shipments increased 2.1% over the second quarter last year to 1.1 billion packages, led by U.S. Deferred Air products and International Export shipments.
Slower growth for US Domestic
The US Domestic Package business showed low growth in the second quarter, with slower B2C growth and flat yields. Revenue increased 1.6% to $8.8 billion while total daily volumes were 1.8% higher. Ground revenues rose 2.1% on a 0.9% volume increase, Deferred Air volumes increased by 15%, resulting in a 6.4% revenue rise, while next-day air revenues dropped 2.8% with volumes down 0.6%.
Overall, continued improvements in US domestic base rates were offset by lower fuel surcharges. Revenue per package was flat, as changes in fuel surcharges dropped reported yield by almost 300 basis points, UPS said.
The US Domestic Package segment improved its adjusted operating profits by 3% to $1.2 billion and the operating margin expanded to 13.6% as improved pricing and productivity offset higher benefit costs.
CEO David Abney told analysts that the recent mixed US economic trends, including slower GDP growth, had led UPS to be “cautious” about the immediate outlook for the domestic business. New CFO Richard Peretz said the segment’s Q3 operating profits were likely to be flat compared to last year but there should be low double-digit growth in Q4 operating profits.
Chief Commercial Officer Alan Gershenhorn said that UPS had seen “balanced” growth of B2B and B2C in the quarter, with slightly slower B2C growth than in recent quarters, although he noted the “tough” comparison with the strong results of Q2, 2014.
Abney also announced a major rollout of UPS Access Points (parcel shops and self-service terminals) to 100 US cities this year after “very positive” results in five test markets, giving the company 8,000 parcel pick-up locations in the US and a total of 22,000 worldwide by the end of the year. “The Access Points and MyChoice give us a real differentiator to offer the marketplace,” he said.
Europe and Asia drive higher international profits
The International Package business performed strongly in the second quarter. Operating profit increased 17% on an adjusted basis to $552 million, with network improvements, volume growth and pricing initiatives all contributing to an expanded operating margin and increased profitability, UPS said.
Revenue dropped 6.4% to just over $3 billion on a reported basis but this was largely due to currency effects, and currency-adjusted International revenue was up 1.5%. Daily export shipments increased 5.5%, primarily due to an 8.5% increase in intra-Europe shipments. The strong dollar drove US imports higher, primarily from Europe, while US exports were down slightly. Non-US domestic volumes increased by 2.3%, resulting in an overall 3.6% increase in international shipments.
International chief Jim Barber told analysts that Europe was doing well, based on a mix of product, network and cost measures, while Asia was also performing well, both for intercontinental and intra-regional volumes. He stressed that UPS was not impacted by China’s economic slowdown as UPS was “firmly” in the import-export market and growing about 5-6%. “We have to keep an eye on it but our business will grow based on imports and exports,” he said.
CEO Abney added that UPS is seeing “a lot of strong momentum” in its Europe business where its pan-European network, which had been “perhaps a few years before its time”, was now benefiting as more customers switched to European distribution models.
In general, the International business experienced growth from middle-market accounts and improved premium product sales. Underlying base rates were up across all regions, though revenue per package decreased 2.4% on a currency-neutral basis. Lower fuel surcharges reduced reported revenue per package by about 350 basis points.
Supply Chain & Freight profits improve
Supply Chain & Freight revenue declined 4.5% to $2.2 billion, due to Forwarding revenue management initiatives, currency effects and lower fuel surcharges at UPS Freight. Adjusted operating profits improved by 18% to $207 million, driven by gains in Forwarding.
UPS Forwarding operating profit and margin expanded to high single digits as the business unit continued to implement a disciplined pricing strategy across key trade lanes. The unit also benefited from improved market conditions and customer mix. Forwarding tonnage and revenue dropped during the quarter, primarily due to revenue management initiatives and the impact of currency fluctuations.
Distribution revenue increased at a mid-single digit growth rate. Growth in Mail services, Healthcare and Aerospace industries contributed to revenue improvements. Overall Forwarding and Logistics revenues were 7.9% lower at $1.3 billion.
UPS Freight revenue declined 2.5% to $752 million due to lower fuel surcharges and a drop in tonnage driven by changes in customer mix and slowing market growth. LTL (less-than-truckload) revenue per hundredweight growth remained positive, with a 1.4% gain.
Asked indirectly by analysts about the recent media speculation about a possible $1.8 billion takeover of US firm Coyote Logistics, CEO David Abney said that UPS “does not respond to rumours” and “does not discuss M&A activities”. He confirmed only that UPS already has an existing 4PL truckload brokerage business within UPS Freight. But he did highlight the recent UPS Capital acquisitions of two small high-value parcel delivery firms which extended the company’s portfolio.
Speaking generally on the company’s M&A strategy, Abney explained that UPS looked at three different areas: new opportunities to extend the portfolio; geographical expansion; and additional network capacity or a new service offering.
He concluded: “During the quarter, UPS continued to invest for the future by expanding capacity and launching new capabilities that provide higher value to customers. The strong momentum in our International segment is expected to continue and gives us confidence in achieving the upper end of our guidance range."
The company's guidance for 2015 full-year diluted earnings per share is $5.05 to $5.30, a 6% to 12% increase over adjusted 2014 results.
