UPS report drop in profits for 3Q

UPS reported a drop in revenue of almost $2bn compared to 2008 levels as it published its third quarter results. The company revealed diluted earnings per share of $0.55 for the third quarter on $11.2bn in revenue.

A stabilising economic environment led to improving volume trends during the quarter, while UPS’s International business continued to increase market share.

The $0.55 in diluted earnings per share was at the high end of the company’s guidance range of $0.45 to $0.55.

“I’m encouraged by the signs of economic recovery that are becoming apparent, although we still have a long way to go,” said Scott Davis, chairman and CEO. “Ongoing strategic investment has positioned UPS to capitalise on growth opportunities around the world. We are managing operations well, while controlling costs and maintaining excellent service.”

Consolidated Results	3Q 2009	3Q 2008
Revenue	$11.15bn	$13.11bn
Operating profit	$929m	$1.63bn
Operating margin	8.3%	12.4%
Average volume per day	14.26m	14.85m
Diluted earnings per share	$0.55	$0.96

Consolidated volume for the three months ended 30 September 2009, totaled 927m packages, down 2.4% from the same period in 2008. Average daily volume and revenue per piece declined 3.9% and 11.3%, respectively. Operating profit decreased to $929m as the benefits of substantial cost reductions and productivity gains were more than offset by the economic impact of lower volumes and changes in product mix.

Through effective management of capital expenditures and working capital, UPS generated an impressive $3.4bn in free cash flow for the first nine months of 2009. The company also:

• Paid $1.3bn in dividends.
• Invested $1.2bn in capital expenditures.
• Repurchased 7.8m shares at a cost of $396m.
• Ended the quarter with $2.8bn in cash and short-term investments.

Total package volume was 799m pieces, down 3.6%, reflecting the weakness in the U.S. economy. Average daily volume declined 5.1%. While Next Day Air volume increased 2.4%, ground decreased 6.2%. Revenue per piece declined 9.1% as a result of significantly lower fuel surcharges and lighter-weight packages.

As part of its focus on the environment, UPS became the first small package carrier to offer its customers the ability to offset the carbon emissions generated by the transport of their packages within the United States. The service is being well received and gives shippers the option of paying a small fee that UPS matches to purchase carbon offsets.

International average daily volume rose 4%. Domestic volume increased 9.1% due to expansion of domestic services and an acquisition in Turkey. Export volume per day declined 3.2%, outperforming the market. Revenue per piece dropped 21%, reflecting the impacts of reduced fuel surcharges, currency and product mix.

During the quarter, the London Organising Committee of the Olympic Games named UPS the official logistics and express delivery supplier of the 2012 Games. UPS will oversee the Games Logistics and Command Centre as well as manage all transportation and supply chain operations, including venue logistics and transportation, warehousing services, customs brokerage, freight forwarding and courier services.

Although revenue and operating profit declined in the quarter, operating margin was flat with last year due to excellent revenue management and cost control.

Both the Logistics and Forwarding business units experienced moderation in the rate of revenue decline. The Logistics unit again achieved significant growth from its services to the healthcare industry.

UPS Freight performance was negatively impacted by increasingly competitive conditions in the freight environment. Nonetheless, the business outperformed the market and gained share while maintaining yields.

“The business environment in the third quarter began similarly to that of the preceding quarter. However, we did see profitability improvement due to effective cost management and firming volume later in the quarter,” said Kurt Kuehn, UPS’s chief financial officer.

“We’re confident in our ability to thrive by partnering with our customers and providing them the services they need to grow,” he continued. “UPS is poised for the recovery when it comes. We’ve instituted cost initiatives that will approach $1.4bn this year, making UPS more efficient than ever. In addition, we will reduce our 2009 capital expenditures to $1.7bn, down $500m from our initial budget.”

Although there are signs of economic recovery, forecasters predict US consumers will spend conservatively for the holidays this year. “Our customers have widely differing views on their outlook for the holiday season. Nevertheless, UPS is primed to handle the seasonal package surge as it materialises,” Kuehn added. “Continuing our earnings momentum from the third quarter, we expect earnings per diluted share within a range of $0.58 to $0.65 for the fourth quarter.”