Better operations at UPS delivers profit growth

UPS appears to have worked-out how to make money out of ecommerce. The recently released quarterly (4thQ) results confirm a trend of rising profits driven by a combination of internet retailing demand and greater effectiveness in operational management.

For the core Domestic US Express business over the 4th quarter, which of course includes the crucial Christmas period, volumes increased by 2.4% in terms of shipments and 2.6% in revenue to $10.3bn. The latter figure was higher despite 2.5% lower fuel surcharge. Stripping-out the effects of pension contributions, operational profit jumped by 18.4% year-on-year. It is not merely higher asset utilisation that resulted in higher margins but an ability to drive business to higher margin air express services and to improve the productivity of last mile operations with more deliveries per driver stop. Before adjustments operating profit was $1.284bn.

The main problem for the ‘International’ Express business was the strong dollar. This depressed dollar reported sales, which fell by 7.3% on a year-on-year basis over the last quarter. Yet after stripping-out pension cost effects, operating profit increased by 16.4% to $624m. As in the US, this strong rise was due to a shift to higher margin services particularly in its businesses in Europe.

Even away from the core Express operations, UPS delivered better results. The ‘Supply Chain’ business saw operating profit increased by 11% year-on-year for the quarter to $199m – helped by the fact that much of this business is in the US and consequently earnings are in dollars- on a rise in revenue of 6% to $2.6bn.

Much of this was ascribed to operational improvements as a result of the integration of the Coyote Logistics purchase. Other than this, market conditions were described as “soft”. However, the Freight Forwarding business expanded margins despite falls in tonnage by exploiting low freight rates and a move to higher margin services resulting “the best pricing spreads in several years”. The road freight ‘Less Than Trailer Load’ business also saw better yield per tonne, which was fortuitous as the business saw a 12% decline in tonnage carried.

Over the twelve months UPS has seen revenue increase by 0.2% to $58,363m and, after stripping-out pension effects, operating profit rise by 9.2% to $7,786m. Net income before tax rose by 9.7% to $7,460m. This is a reasonable performance in a global economy which is not growing so fast and the better results towards the end of the year suggest better prospects for 2016. However, in addition to the fall in oil prices which must have helped profit margins as it depressed revenue, the fair wind provided by internet retailing has given the Express sector a big opportunity for growth so UPS ought to be prospering. Rather, its recent recovery has been as much about fixing internal problems as any improvement in underlying demand.

Source: Transport Intelligence, 4th February 2016

Author: Thomas Cullen