Everything is coming up roses for UPS

UPS reported strong financial and operational performance in the second-quarter of 2017, with net income up 9.1% y-o-y to $1.38 billion as revenue rose 5.0% to $15.75 billion. Operating income for the quarter was up 8.7% to $2.22 billion.

Revenue rose in all three of the company’s operating segments, and operating income was up in both the US Domestic and Supply Chain & Freight segments. Operating income was down in the International segment, but this was the result of foreign exchange effects, rather than of underlying performance issues.

Average daily volume was up for all products in both the US Domestic and International segments, but, again, currency headwinds pushed revenue per piece down in the International segment.

Looking at the quarter on a segment-by-segment basis:

US Domestic Package: It was a quarter in which everything went well in UPS’ core segment. Package volumes and per-package revenues were up strongly for all three products, and segment operating income rose 13.1%. Worth noting is that these gains did not come in comparison to a terrible quarter the previous year – quite the opposite, in fact, as the second quarter of 2016 was a strong one for UPS.

Commenting on the results, UPS pointed to the continuing switch from physical to online shopping, saying the US Domestic segment “benefited from growing demand for e-commerce deliveries.”

Average daily package volumes were well up for all products, led by an 11.0% increase for Deferred Air, with Next Day Air up 6.4% and Ground up 4.2%. Per-package revenue was up by low-single-digit percentages for all three products, and up 3.0% overall, with the increase helped by both base-rate price increases and higher fuel surcharges.

The combination of growth in both volume and yield led to a 13.1% increase in segment operating income, and the US Domestic Package segment achieved an enviable operating margin of 14.3%.

International Package: Increasing demand for cross-border shipments “generated solid top-line improvements” for UPS’ International Package division. Average daily package volume was up 5.6% for the segment, led by an 11.6% jump in International Export volume, while International Domestic volume increased 1.3%.

As mentioned above, the bottom line for the International segment was hit by negative currency effects, and operating income fell to $583 million, down by 4.9% compared to 2Q16. Adjusting for the foreign exchange impact, UPS said segment operating income would have been $697 million. But, despite the hit to profitability, the segment still reported an extremely strong operating margin of 18.4%

Looking ahead, we note that UPS’ international activities should benefit from the alliance it formed with China-based SF Express in the second quarter. You can read our analysis of that deal here.

Supply Chain & Freight: By revenue and operating income, Supply Chain & Freight is UPS’ smallest segment, but in terms of second-quarter performance it is the company’s star. Revenue was 12.0%, led by a 14.1% gain in the Forwarding & Logistics unit, and operating income leaped 24.0%. Operating margin was not at the level of the other two segments, but still healthy at 8.4%.