UPS reports strong third quarter earnings, with a sharp focus on peak season

Third quarter earnings for Atlanta-based freight transportation and logistics services bellwether UPS did not disappoint, with the company recording a strong performance and setting a new earnings record for the second straight quarter.

Quarterly revenue-at $18.318 billion-saw a 5% annual gain, with net income-at $1.750 billion-up 9.7%. Earnings per share-at $2.01-rose 9.5%, slightly topping Wall Street expectations.

“Our results reflect significant progress from our transformation initiatives, and our ability to generate growth and deliver increased efficiencies in a dynamic economic environment,” said David Abney, UPS chairman and CEO, in a statement. “As we recently announced, we continue to forge new partnerships and create innovative solutions to accelerate growth in the most attractive opportunities.”

While there were many drivers for the company’s strong quarterly growth, company officials highlighted strong U.S. domestic and international group output.

Individual segment results in Q3 2019:

• U.S. domestic revenue rose nearly 10% to 11.455 billion, led by B2B and B2C shippers in the retail, healthcare, and high-tech sectors. Average daily package volume at 17.909 million, was up 9.2%, with Next Day Air up 13.2%, Deferred up 17.1%, and Ground up 7.8%. Total revenue per piece, at $9.99, was off 1.1%;
• International Package revenue was up 0.5% at $3.494 billion. Total International Package revenue per piece, at $16.92, was down 0.8%. UPS pointed to strong cost control, good execution, and targeted domestic and export growth as levers for growth; and
• Supply Chain and Freight revenue was down 4.5% annually at $3.369 billion. LTL revenue was down 4.9% to $699 million, and LTL revenue per hundredweight was up 3.9% at $26.71

“We are reporting a strong performance in a dynamic environment,” Abney said on the company’s earnings call this morning. “Our Transformation investments continue to deliver benefits, driven by our highly efficient and expanding global network, as well as our focus and targeted growth for the most attractive opportunities and solid execution of our efficiencies. And our innovative solutions are differentiating UPS from others in the industry. As a result, consolidated revenue grew 5% and operating profit grew more than 20%, creating strong operating leverage and the highest quarterly operating profit in the company’s history. This is a testament to the quality of our strategies and disciplined execution.”

Addressing the economy, the top UPS executive explained that trade uncertainty continues to create macro challenges, and UPS is working closely with its customers to help them adjust while also making the most efficient use of UPS assets.

“In the U.S., the consumer continues to drive the economy, with strong retail, healthcare, and e-commerce sales bolstered by solid consumer economic conditions,” he said. “Our strategy is resonating with customers, despite the slowdown in the industrial sector, as evidenced by B2B volume growth in other sectors for the fourth consecutive quarter. We are benefiting from improved SMB customer mix and expect it will continue as we prepare for another record peak season.”

Addressing peak season, UPS Chief Operating Officer Jim Barber, whom the company announced will be retiring at the end of this year, said UPS is confident in its plan to again successfully execute peak season this year, with the company’s global strategy focused on three key areas: implementation of the proven tools and best practices from last year; full utilization of its expanded network capacity; and deeper collaboration with customers for fulfilling daily volume expectations.

“We expect another record peak season, barring any unforeseen weather events,” said Barber. “Retail sales are forecast to grow more than 5%, and online holiday retail sales [are likely to be high]. Our network operations are running extremely well, with industry-leading on-time performance and excellent operating efficiency, giving us great momentum as we move into the holiday season. We had a highly successful peak last year. It was well planned and cleanly executed.”

Since last year’s peak season, Barber said UPS has taken delivery of nine new aircraft, with two more on the way, in support of growing demand for UPS air services, coupled with adding nearly 5 million square-feet of highly automated facilities, including another 400,000 pieces per hour of automated sort capacity. Roughly two-thirds of that sort capacity is already online and operational, which is ahead of last year, when nearly all of UPS’s capacity came online in the fourth quarter.

UPS has also improved its ground network, he said, widening the reach of its next-day capabilities and speeding up transit times in key lanes.  And it is adding around 100,000 seasonal employees, too.

“We expect the holiday shipping season to start the week of Thanksgiving and rise sharply during Cyber Week and remain heavy through Christmas,” he said. “We are also planning for heavy returns volume following Cyber Week and again after Christmas to mid-January. Over all, for peak 2019, we expect a greater than 5% increase in daily global deliveries above last year, plus we estimate we will deliver more than 32 million packages per day, an increase of more than 50% over regular daily volume. We expect demand to be strong during peak as next-day delivery increasingly becomes the new standard for B2C and B2B e-commerce. Our preparations also include deeper collaboration with our customers.”

Analyst take: In assessing UPS’s third quarter performance, Jerry Hempstead, president of Hempstead Consulting said that the third quarter gain in U.S. package volume, at nearly ten percent, is the company’s best performance in at least 20 years. And he also pointed to strong gains for Next-Day Air, Deferred, and Ground, too.

“As an industry vet, these are enviable numbers,” he said. “The Next- Day Air jump is partly due to Amazon and FedEx parting ways a few months ago. Stay tuned to what that will mean in Q4. And just because UPS failed to hit the Wall Street analysts prognostications does not mean that it didn’t have a great quarter despite a slowing economy and the trade war.”