UPS turns in strong third quarter earnings performance

Third quarter earnings results issued today by Atlanta-based UPS were solid despite challenges posed during the quarter as a result of multiple hurricanes and other natural disasters.

Revenue for the quarter was up 7% annually to $15.798 billion, with earnings per share up 1 cent to $1.45, meeting Wall Street expectations. Operating profit, at $2.035 billion, was up slightly over last year’s $2.034 billion.

“UPS had solid quarterly results, with revenue gains and good execution in our segments,” said UPS CEO David Abney on the company’s earnings call earlier today. “The performance is driven by UPS’s high-value solutions, broad portfolio of services, efficient global network, and strategic investments.”

Restoring service to areas experiencing difficult conditions created by several natural disasters was a core focus for UPS during the quarter, explained Abney, who praised UPS employees for their dedication in delivering life-sustaining supplies in affected areas.

Individual segment results: 

• U.S. domestic revenue rose 3.9% to $9.649 billion, with operating profit down 5.6% at $1.182 billion, average daily U.S. domestic package volume up 3.9% at 15.885 million (Deferred Air products were down 1.6%, Next Day Air was up 8%, and Ground was up 3.4%). Revenue per package for the entire segment was up 2% at $9.64, with Next Day Air off 2.6%, Deferred up 7%, and Ground up 2.2%. UPS said that this segment was paced by online retail customer demand for Next Day and Ground services, with consumers placing more emphasis on online shopping;
• International Package revenue was up 11.2% at $3.364 billion, with UPS noting that this growth was paced by strong demand as export shipments increased across all regions, with strong growth stemming from its premium products. Total daily International Package volume was up 11.3% at 3.103 million, with daily international domestic and export packages up 5.7% and 19.0%, respectively. Average revenue per package was up 1.9% to $16.52; and total consolidated revenue per package for U.S. domestic and international packages rose 2.7% to $10.77; and
• Supply Chain and Freight revenue was up 13.4% to $2.965 billion, due to teams in each business unit executing on revenue quality improvements coupled with structural cost reduction programs, and tonnage gains in Freight Forwarding and UPS Freight (LTL) contributing to improved top-line results. LTL revenue was up 9.3% at $673 million, with revenue per hundredweight up 3.6% at $24.47, and shipments up 1.5% at 2.589 million

These strong third quarter results highlight the flexibility of the global UPS business model and the power of the company’s investments, UPS CFO Richard Peretz said on the call.

“We managed through headwinds in the U.S., delivered strong…broad growth in the international business and continued to generate excellent results in the supply chain and freight group,” he said.

And he added that growth in the quarter was driven by sustained revenue expansion in all segments, but in the U.S. he noted that there was a $50 million drag in operating profits, due to the natural disasters in Texas, Florida, and California.

Other areas receiving attention on the call were UPS’s announcement for 2018 rates, which was issued yesterday, as well as the company’s Peak Season planning and preparation efforts.

On the rates side, UPS said effective December 24, 2017, rates for UPS Ground, UPS Air, and International services, as well as UPS Air Freight rates within and between the U.S., Canada and Puerto Rico will increase by 4.9% on average. For packages, a large package surcharge will apply to any U.S. Domestic package with a length exceeding 96 inches or a length plus girth greater than 130 inches, effective December 24. And the dimensional weight divisor for packages less than or equal to one cubic foot in size (1,728 cubic inches) will be 139 for all U.S. Domestic services subject to Daily Rates or Alaska and Hawaii Rates. And effective July 8, 2018, the Large Package Surcharge for any U.S. Domestic package delivered to a residential address will be $90 and the Additional Handling surcharge for any U.S. Domestic package exceeding 70 pounds in actual weight will be $19.00.

As for Peak Season, UPS said it plans to deliver more than 750 million packages globally in the 25 days between Thanksgiving and New Year’s Eve, adding that the record-breaking seasonal global delivery volume is approximately 5 percent above last year’s holiday peak shipping season volume. What’s more, of the 21 holiday delivery days before December 25, 17 are expected to exceed 30 million delivered packages. UPS also said that with the launch of UPS Saturday Ground pickup and delivery service, customers in nearly 4,700 cities and towns across the country will benefit from five additional ground pickup and delivery days between Thanksgiving and Christmas.

Jerry Hempstead, president of Hempstead Consulting, said that third quarter success for UPS was evident but expressed caution regarding the coming rate increases.

“International was part of the story, but when you see that they had one less operating day, several natural disasters, and investments in infrastructure it's a mighty good quarter,” he said. “The increase in domestic next day air is particularly encouraging. It tells me the economy is getting stronger, because when the economy gets tight the first thing to go is the premium next day product when shippers make a routing decision. Looking forward, the 2018 rates are loaded with accessorial land mines for shippers. It's good for UPS but extremely onerous for shippers. It's so complex that shippers are going to have great difficulty getting their arms around the impact, without external professional help.”