UPS package volumes rise 7%

UPS 2Q14A 7.2% increase in average daily package volume drove strong second-quarter operational performance for UPS.

Total revenue for the quarter was up 5.6% to $14.27 billion, but the company took a one-time charge of $665 million (related to post-retirement health-care benefits), which drove net income down 57.6% y-o-y to $454 million, and operating profit down 57.1% to $747 million. Adjusted for the one-time charge, net income was up 4.5% to $1.12 billion and operating profit rose 4.1% to $1.81 billion, but neither this, nor the strong operational performance, reassured investors, and UPS’ share price fell close to 3% following release of the second-quarter results.

Adding to investor unease was UPS’s decision to invest $175 million to expand its capability to deal with peak-season e-commerce surges. Given the problems UPS (and FedEx) faced last year when a massive spike in demand for express shipments overwhelmed capacity, investing in increased peak-season capability seems more than reasonable. But since it will have an impact on this year’s bottom line – UPS lowered its full-year earnings guidelines slightly – it did not sit well with investors.

However, looking at the underlying solidity of second-quarter operating results puts a different light on things.

In the company’s core US Domestic Package segment, average daily volumes were up for all three products, led by an 8.1% increase in Ground volume. As shown in the chart, volumes were also up for Deferred (5.4%) and Next Day Air (1.6%). UPS said that the growth in Ground was driven primarily by lightweight e-commerce shipments. Volumes at UPS SurePost, a low-cost product with last-mile delivery handled by the US Postal Service, were up over 60%, and accounted for about half the Ground growth. Per-package yield was up 1.0% for Next Day Air, but down 2.0% for Deferred and down 1.8% for Ground (primarily due to the increase in low-yield SurePost volume). Revenue was up for all three US Domestic Package products, and, adjusting for the one-time charge, segment operating profit was up 3.0% to $1.17 billion.

The International Package segment also reported substantial gains in average daily volume and revenue. Strong growth in demand for International Export shipments (up 9.1%) boosted revenue 6.4% to $2.41 billion despite a slight decline in per-package yield. International Domestic volume was up 4.8%, and this, combined with a 2.4% gain in per-package yield boosted revenue 7.3% to $692 million. Overall, International Package revenue was up 6.2% to $3.25 billion, and adjusted operating profit increased 4.4% to $471 million.

The Supply Chain and Freight segment also reported strong results, with revenue up 6.5% in the quarter to $2.35 billion, driven primarily by growth in the Forwarding and Distribution business unites. Adjusted operating profit jumped 10.7% to $176 million. UPS said its Forwarding unit saw strong improvements in North American Air Freight, Brokerage, and Ocean Freight, with only International Air Freight lagging as “market pricing on the key Asia-to-US lane continues to put pressure on rates.”

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