UPS is upbeat about its performance in the final quarter of 2015 in spite of mixed signals coming from the US economy and international markets.
This will be driven largely by a buoyant B2C segment which is expected to make a major contribution to 'record' holiday shipments.
Speaking at conference call, yesterday on the occasion fo the presentation of the Q3 results, CFO Richard Peretz said UPS was expecting operating profit to increase at double-digit pace in Q4 "in all three of our business segments."
In the US, the company expects higher daily volume growth in the fourth quarter to be around 4 to 5%.
"We anticipate fourth quarter operating profit to be at the highest growth rate of the year, in the low double digits. supporting our guidance for full year operatng margin," Peretz underlined.
He said "International (division) momentum" will continue in the fourth quarter with operating profit growth at the high-end of the range.
Currency and fuel surcharge will again weigh on top line reported revenue growth while underlying base rates will remain strong.
Looking at Q4 (International) volume growth, he said this will be flat to last year – "driven by the weakness in the global economy and the on-going revenue management initiatives we've implemented."
In Supply Chain and Freight, fourth quarter revenue is expected (to grow) between 7% and 9%
"The revenue actions we are taking in the forwarding unit will be outweighed by the addition of Coyote's revenues. Operating margin is expected to be about 8%."
Peretz added that UPS' "strong execution" is generating positive momentum.
"We are managing our capital efficiently. We have experienced positive returns on our investments in additional capacity and capabilities, producing strong free cash flow and at the same time we have closed on our largest acquisition to date. In addition, to three quarters, we have returned more than 100% of net income in the form of dividends and share repurchases.
"Going into the fourth quarter, with three consecutive quarters of earnings per share growth and peak preparations, we are confident in achieving our full year 2015 guidance."
Asked about the current economic climate, Peretz accepted that the US economy was "a mixed bag" with negative industrial production in the last quarter unlikely to change going into the final quarter.
"However, at the same time, you have B2C which looks like it's going to have a solid quarter. E-commerce is still expected to be strong. When we look at it internally and what we are doing…. the preparation (for the peak) we're making all the right moves. We've made the adjustments in our operations to calibrate the expectations of what customers are expecting.
"We are working with customers to ensure that the volume comes in on the times we are expecting – the days of the week and we've aligned our revenues and our costs. and when you put all those factors together we expect our bottom line growth to come and that our company performance the last three quarters will continue into the fourth quarter."
UPS CEO David Abney highlighted what he described as "some softness" in the US economy which appeared to affecting the B2B segment principally.
"In the third quarter, B2B faded a little bit and we are seeing mixed signals. We are seeing growth from the consumer side, especially on-line retail which continues to outpace overall retail.
"But there is definitely softness in the manufacturing sectors. International production (IP) in the second quarter declined and in the third quarter we saw an acceleration in that decline and we do estimate that IP is going to be negative in the fourth quarter."
Part of this could be attributed to the continued strength of the US dollar (in relation to other currencies) which was affecting exports, he said.
"It's just soft global demand whether it be in China or Asia or wherever."
But UPS was taking full advantage of the buoyant e-commerce B2C segment.
"Quarter over quarter – first quarter to third quarter – our B2C result continued to improve in terms of volume growth and that's even with some tough comparisons from last year on some Surepost wins in the third quarter," said UPS' Executive Vice President and Chief Commercial Officer, Alan Gershenhorn.
"We're also seeing some very positive growth in our air products. Next day air grew 4% and our deferred products are growing double-digit again despite tough year over year copmparisons.
"So we think on the B2C side, for peak season, we're sitting really well in terms of what the growth projections are and we're going to finish the year in line with the volume expectations that we set out at the beginning of the year."
Commenting on the peak season, Abney said UPS' plans include a multi-facted strategy.
"We're implementing selective pricing initiatives, adding new capacity that is aligned with customer needs and installing innovative technology solutions.
"UPS is working closely with customers to ensure that we have the operating plans in place that will provide excellent service at an appropriate cost. We expect peak season to provide great value to UPS customers and investors."
UPS' President, US Operations, Myron Gray, was asked whether labour disputes, notably with the company's pilots, could affect the peak season.
He replied : "We are confident that negotiations will be completed with our pilots without any disruption to our customers just as it has been with previous rounds negotiations with our pilots.
"UPS and IPA are still bargaining in good faith at the table under the direction of the National Mediation Board A strike is not possible without the permission of the NMB and even if they were to give permission, it would only be given after exhausting a lengthy series of safeguards. The next round of negotiations are already scheduled for November and December," he added.
