Lower profits, margins and yields resulting from fewer B2B shipments but a surge in B2C and healthcare deliveries as the coronavirus pandemic disrupted business worldwide were the key trends in the UPS results for January – March 2020 disclosed today.
With the outlook for the rest of the year “impossible to predict”, the company is now withdrawing its financial guidance for 2020 as a whole. It is scaling back planned capital expenditure by about $1 billion and saving about $783 million by suspending planned share buybacks for the rest of the year.
For January – March 2020, UPS reported a 13% drop in consolidated net profit to $965 million while the adjusted net profit fell by 17% to $1 billion. Net profits “included material headwinds due to disruptions from the coronavirus pandemic, higher self-insurance accruals and other items”, the company said.
Adjusted operating profits dropped by 26% to $1,117 million from $1,517 million in Q1, 2019. As a result, the adjusted operating margin fell back by 2.6 percentage points to 6.2% from 8.8% last year.
On the positive side, consolidated revenue increased by 5.1% to just over $18 billion, driven by growth in B2C shipments and gains in healthcare that outweighed declines in other areas. UPS also invested $939 million worth of capital expenditure in its operational network during the quarter.
In terms of the Covid-19 operational impact, UPS stressed that it has been designated as a Critical Infrastructure Business by governments around the world and continues to operate in all major countries, while adhering to additional regulatory requirements. In the USA it is supporting the Project Airbridge of the Federal Emergency Management Agency (FEMA) by managing international charter flights and bringing several million pounds of Personal Protective Equipment (PPE) into the country.
“I want to thank all 495,000 UPSers for their extraordinary efforts to leverage the full power of our global network in the fight against the coronavirus pandemic, keeping critical goods moving for businesses and consumers globally,” said David Abney, UPS chairman and CEO. “The world is counting on UPS more than ever before as we support the people on the front lines of this crisis and our customers with speed, ingenuity and reliability.”
U.S. Domestic revenues up but profits down
In the U.S, where the Covid-19 pandemic struck later than in Asia and Europe, the progression of stay-at-home restrictions closed businesses and disrupted supply chains, “resulting in an unprecedented shift in customer and product mix in the quarter”, UPS explained.
The company’s automated hubs and other transformation investments generated efficiency gains; however, these benefits did not offset the significant headwinds from the impact the coronavirus pandemic had on UPS customers, coupled with higher self-insurance accruals. UPS is also continuing to adapt its network to the current economic environment while supporting customers and critical government programs.
The Domestic Package division increased revenues by 9.3% to nearly $11.5 billion between January and March 2020 but adjusted operating profit plummeted by 42% to $401 million. The profit margin weakened by 3.1 percentage points to 3.5% as a result.
UPS average daily volume was up 8.5%, with growth across all products that was driven by large customers. This included a 20.5% rise in Next Day Air average daily volume, the fourth consecutive quarter of double-digit increases and believed to be largely driven by higher Amazon volumes.
However, the product mix changed with fewer B2B deliveries and more residential deliveries. As a result, revenue per piece decreased by 0.8%, including an 8.8% fall for Next Day Air shipments. On-time performance across all service levels “was near a record high in a dynamic environment”, the company noted.
International volumes and revenues weaken
UPS’s International business saw revenue drop by 2.2% to $3,383 million during the first quarter as global economic activity weakened. However, the company claimed it had “executed well to contain costs and target customer opportunities” as the coronavirus pandemic rapidly spread from Asia to other parts of the world.
UPS international average daily volume was down 1.8% with declines in commercial deliveries, while healthcare, high-tech and e-commerce sectors were positive contributors. China volume primarily rebounded in March as its economic recovery accelerated, offsetting declines in January and February.
Revenue per piece fell by 1.8% for international shipments while cost per piece was down 0.5%, primarily due to the impact of currency. Additionally, the significant change in mix was partially offset by network adjustments to align capacity to changing trade patterns.
Overall, UPS reported adjusted international operating profits of $558 million, which was nearly 9% lower than the first quarter of 2019. The adjusted operating margin fell by 1.2 percentage points but remained high at 16.5%.
Mixed picture at Supply Chain and Freight
The Supply Chain and Freight segment’s revenue was down less than 1% to $3.2 billion “due to disciplined focus on growth opportunities and the segment’s broad portfolio of solutions” but adjusted operating profit dropped by 25% to $158 million.
Logistics grew both revenue and operating profit, led by double-digit growth from healthcare subsidiary Marken, while within the Forwarding unit, International Air Freight tonnage rebounded in March generating revenue and profit growth in the quarter. However, toward the end of the quarter, UPS Freight and Coyote experienced depressed volume levels primarily from mandated stay-at-home restrictions and businesses closures.
“The segment is taking numerous actions to assist customers and improve financial performance as demand recovers, including activating aircraft charters from Asia, expanding customer relationships in the healthcare sector and applying peak surcharges where appropriate”, UPS noted.
2020 financial guidance withdrawn
UPS said that at present it is “unable to predict the extent of the business impact or the duration of the coronavirus pandemic, or reasonably estimate its operating performance in future quarters”. As a result, the company is withdrawing its previously issued 2020 revenue and diluted earnings per share growth guidance.
CFO Brian Newman stated: “We will continue to adapt through this challenging period and prioritize investments and operational decisions that put UPS in the best financial position. We take a disciplined and balanced approach to capital allocation and are confident in our liquidity position including our commitments to capital management and dividends.”
- CEP-Research will report more on the UPS Q1, 2020 results tomorrow.
