UPS turns in solid Q3 earnings amid mixed economic signals

Third quarter 2022 earnings issued earlier today by Atlanta-based global transportation and logistics services provider UPS turned in solid results amid challenging economic conditions.

Quarterly revenue—at $24.161 billion—increased 4.2% annually, and adjusted earnings per share—at $2.99—increased 10.3% annually and beat Wall Street estimates at $2.89 per share. Quarterly operating profit rose 7% to $3.113 billion.

“I want to thank UPSers around the world for their unstoppable spirit and for continuing to deliver outstanding service to our customers,” said Carol Tomé, UPS chief executive officer, in a statement. “The macro environment is very dynamic, but we are on track to achieving our 2022 financial targets by executing our strategy and controlling what we can control.”

Individual segment results for UPS in Q2 2022:

• U.S. domestic package revenue saw an 8.2% annual increase, to $15.374 billion, and average daily package volume fell 1.5%, to 19.539 million, with UPS attributing the revenue growth to an 9.8% gain in revenue per piece, to $12.29;
• International Package revenue, at $4.799 billion, rose 1.7%, driven by the gains in revenue per piece, with average daily volume down 5.2%, to 3.361 million, and average revenue per package up 6.4%, to $21.07; and
• Supply Chain Solutions revenue, at $3.988 billion, fell 6.3%, due to declines in its air and ocean freight forwarding units, which were partially offset by growth in its logistics and healthcare segments

For the full-year 2022, UPS said it remains on track for its consolidated financial targets of roughly $102 billion in revenue, with an adjusted operating margin of around 13.7% and adjusted return on invested capital topping 30%.

On the company’s earnings call this morning, Tomé noted that the global economy softened in the third quarter, especially outside the United States, noting that both international and freight forwarding volumes were challenged.

“But we quickly responded,” she said. “We adjusted our network to match volume levels and continued to win in the most attractive parts of the market. The execution of our customer-first, people-led, innovation-driven strategy has fundamentally improved nearly every aspect of our business, [with] better revenue quality, higher operating margins, and improved bottom-line results.”

Addressing the 2022 Peak Season, Tomé noted that over the last four holiday seasons UPS has been the industry leader in on-time delivery performance, with the company intending on that trend to continue.

“This performance does not happen by accident,” she said. “We built our integrated network to flex with volume. And our investments in our people, automation, and technology enable greater agility. To prepare for Peak, we made enhancements to all the areas of our business that delivered a great peak last year.”

UPS anticipates Peak Season volume this year to hit a peak later in December compared to 2022, as it expects consumers will return to more pre-pandemic shopping behaviors, explained Tomé. And she said that while UPS will continue to use technology to match daily capacity with customer demand, UPS is also optimizing air and ground volume to make room for new customers, where it can add the most value.

“While we will have a Peak…overall volume, for the fourth quarter, is expected to decline from last year, due to contractual agreements,” she said. “In terms of labor, we will bring on more than 100,000 seasonal hires this year.”   

UPS CFO Brian Newman said on the earnings call the macroeconomic outlook remained dynamic in the third quarter, citing crosscurrents in the U.S., driven by a strong job market and healthy consumer spending, despite higher inflation and interest rates.

On the international side, he said that the macroeconomic environment weakened more than expected, due to high inflation, volatile energy prices, lockdowns in Asia, and the war in Eastern Europe.

“We responded quickly to the changing market conditions by leveraging the agility of our global integrated network to provide excellent service to our customers and deliver our bottom-line commitments to shareowners,” said Newman.

While U.S. domestic average daily volume was off 1.5% annually, Newman said the segment’s growth rate marked an improvement over the first half of 2022, as new volume and a record number of new customer wins came into the UPS network, with the gap between annual B2C and B2B average daily volume growth rates narrowed, due to what he called more normalized consumer shopping behaviors.

Newman added that UPS recently rolled out its 2023 U.S. General Rate Increase (GRI) of 6.9%, which he said reflects the value of the services UPS offers and also cost inflation in the market.

Jerry Hempstead, president of Orlando-based Hempstead Consulting, said that when looking at UPS’s quarterly volumes, “the difference in volume decline [between UPS and its biggest competitor FedEx] is really dramatic.”

For the third quarter period (FedEx results are based on the fiscal year calendar for the months of July, August, and September), Hempstead observed that UPS’s total domestic package volume was down 1.5, whereas FedEx was off 8.1%, with UPS’s next-day air, deferred, and ground volumes being off 0.9%, 10.7%, and 0.7%, respectively, compared to the same segments for FedEx down 8.1%, 10.6%, and 3.5%, respectively. And on the international package side, UPS saw declines of 9.4% and 0.6%, for domestic and export, with FedEx seeing declines of 14.9% and 7.2%, for the same segments.

“There is a tiny bit of apples and oranges [in the months being compared], but the difference is negligible when looking at average shipment count across a quarter,” said Hempstead.