UPS posts 21% profit rise, remains “cautious” on global economy

UPS today posted a 21% increase in operating profits for the first quarter of the year – despite a “softer” economy than expected and challenges from “unprecedented” weather and a late Easter. Higher shipping prices and fuel surcharges helped UPS to grow its global revenue 7.3% in the three months up to March 31, 2011, to $12bn for the quarter.

Operating profit increased to $1.43bn and margins expanded from 8.9% to 11.3%.

This morning, the company raised its share guidance for the year, predicting diluted earnings of $4.15-$4.40 per share, despite some concerns about the global economy at the moment.

During the quarter, the UPS network saw a slight overall growth in volumes, from 14.9m pieces per day to 15m as UPS delivered 957m packages in the quarter, although US volumes dipped.

Speaking to analysts this morning, UPS CEO Scott Davis blamed the severe weather, particularly in the US, and a late Easter for a 2% impact on volumes, although the flexibility of the UPS small package network meant it adapted somewhat to the problems, more so than the freight side.

Financially, UPS also took a $175m hit during the quarter from reorganization of its domestic US business, from a loss on the sale of its logistics technology business and liquidation of a small German supply chain business.

Reporting on its results this morning, the company also noted its accelerated pension contributions in the quarter, of $1.2bn, $400m capital expenditure and $500m spent buying back 6.8m shares as expected.

Explaining the increased guidance for its share earnings for the year, which would put share earnings 17-24% up on 2010, the company said the move mainly stemmed from its increased confidence in the UPS network adapting to the current economic trends, rather than in expectations for global volumes.

Kurt Kuehn, UPS’s chief financial officer, said: “It’s more an affirmation that we feel the company is operating well than that the global economy has got a lot of up-side. We’re not gloomy on where the world’s heading, but we’re also cautious but we’re confident we can adapt to conditions as they occur.”

US Domestic Package

Among the different business segments, UPS said yield improvements and increased network efficiency had helped revenues in its US domestic package unit to a 6.2% growth to $7.54bn.

Operating profit grew 29% to $849m, with margins expanding from 7.9% to 11.3%.

Volumes per day in the US dropped from 12.73m to 12.67m pieces, but revenue per piece improved 5% as the company’s sales force brought prices “back in line with the value we provide”.

Kuehn explained: “The key objective of this strategy is to ensure we are properly compensated for the value that we provide customers, and this is paying off as evidenced by our strong yield gains.”

Premium product growth outpaced ground services, while UPS Next Day Air services saw mid-single digit growth in volumes. Among business customers, UPS said its global-scale customers are seeing good growth at the moment, while smaller businesses are taking longer to rebound from the economic difficulties.

The UPS executives noted the particular importance of business-to-consumer channel, with B2C accounting for around a third of volumes, “certainly stronger than B2B in the first quarter”.

Meanwhile, UPS has said its US domestic division has been doing well to control costs, with direct labour hours down 3% and miles driven down by 2%, “phenomenal considering the challenges we faced during the quarter.”

International Package

Internationally, UPS saw some good growth led by exports from Europe to the rest of the world.

Revenues grew 10% to $2.9bn, with operating profit increasing $19m to $446m.

Higher prices and fuel surcharges were offset to some degree by currency issues, but nevertheless saw a 3.8% increase in revenue-per-piece and a 4.5% growth in international package yields on a currency-neutral basis.

The UPS bosses said they were “thrilled” by the 7.2% growth in daily export volumes, which they said was outperforming the market, and led by exports from Europe despite a difficult economy there.

Supply Chain and Freight

In its Supply Chain and Freight division, UPS posted a 7.6% increase in its revenues to $2.14bn, with operating profit up 44% to $131m.

Margins have improved from the previous first quarter of 2.7%, up to 7.1%, driven by improvements in the Forwarding and UPS Freight divisions. The UPS executives said this had come particularly thanks to extra transport capacity opening up, allowing UPS to make capacity purchases outside of its own air fleet, for example during the Chinese New Year period in Asia.

As well as reducing transport costs, continuing revenue management initiatives to improve income from its accounts was bringing benefits.

UPS Freight saw its revenue increasing 23% year-on-year, “continuing the strong rebound started last year”, Kuehn said. Increases in LTL revenue per hundredweight surpassed 8%, making the unit ” one of the best in the industry”.

UPS also noted the expansion of its UPS Express Freight service to Israel and Slovakia, announced in February, locations it saw as “key hubs” for high tech, automotive and other manufacturing industries.