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Package segments drive strong UPS quarter

David Harris by David Harris
April 30, 2015
in Express
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UPS 1Q15UPS reported first-quarter 2015 net income up 12.6% y-o-y to $1.15 billion, as total revenue rose 1.4% to $13.98 billion. Operating income for the quarter was up 10.6% to $1.67 billion.

All three of the company’s reporting segments contributed to the overall gains, with particularly strong performances by the International and Domestic Package segments, where operating profit was up 13.7% and 10.5%, respectively. Discussing the results, UPS said that decreasing fuel surcharge revenue negatively impacted both total revenue and per-package yields. So, with yield falling, particularly in the International Package segment, how did operating profit increase so strongly? As we pointed out last month when analyzing FedEx’s most recent quarter, yield decline due to falling surcharge revenue is not a problem as long as fuel costs are also falling.

As shown in the chart at right, average daily package volumes were up for two of the three products in UPS’ US Domestic Package segment, with deferred volume up 12.3% and Ground volume up 2.0%. Volume was down 1.9% for the high-yield Next Day Air product, but overall performance for the segment was strong, with operating profit up 10.5% to $1.02 billion. UPS said one thing that affected shipment growth rates was that “the company chose not to pursue some lower-yielding contract renewals.

In the International Package segment, revenue was down 5.0% to $2.97 billion, and per-package yield declined more than 10%. Much of the yield decline was due to falling surcharge revenue, although stronger intra-regional shipment growth and “product mix changes” also contributed to the lower yield. Adjusting for foreign exchange effects, UPS said International Package revenue was up 2.4%, and with operating profit up 13.7% to $498 million, it is clear the segment performed well. Of particular interest, given the well documented problems in the euro zone, was that Export shipments from Europe were up 9.4% in the quarter, leading the overall 6.7% growth in Export package volume.

If there was a weak spot in UPS’ first quarter, it was the performance of the Supply Chain & Freight segment, where revenue rose just 1.4% to $2.19 billion, and operating profit was up 2.0% to $151 million. But while revenue and operating profit growth was relatively low, the Supply Chain& Freight segment reported an operating margin of 6.9%, so to characterize segment performance as weak is misleading – not as strong as the two Package segments, but definitely not weak.

Looking ahead, UPS said that it expected full-year net income to be between 6% and 12% above 2014.

Tags: earningsUPS. earnings
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