UPS is healthy in adversity but profits grow modestly

UPS has announced it is accelerating its cold chain capabilities with specialty pharmaceutical offerings and establishing UPS Cold Chain Solutions.

Perhaps unsurprisingly, UPS’ second quarter results reflect the continued buoyancy of e-retail activity, but as in the first quarter, it is not all good news. Revenue for the quarter was up 13.4% year-on-year, whilst net income rose 4.9% to $1.768bn. Operating profits hit $2.2bn, up 3.2% year-on-year.  

The biggest impact came from the core ‘US Domestic Package’ business, which saw revenue up 17.3% but operating profit fall by 2.2% to $1.182bn. Volumes in this business were up 22.8% at 21.1 million items, dominated by ‘B2C’ traffic that grew by 65.2% in the quarter. These numbers strongly imply that whilst demand growth remains very strong, problems with profitability in B2C remain. Indeed, after accounting for ‘transformation strategy’ costs, operating margin was 9.0%.

The situation was a little different in the ‘International’ express business. Whilst revenue here was also 5.7% higher, operating profit rose by 16.3%. Volumes overall rose by 9.8%, however it might be suggested that the issue here has been that UPS has benefitted from international traffic out of Asia and in Europe, a business that has a different cost profile from that of the domestic US operations, dominated by in-house ‘last mile’ activity.

‘Supply Chain & Freight’ fell back slightly, with revenue up 8.5% but operating profit down 4.8%. It is hard to interpret what this means as UPS themselves commented that on the one hand airfreight demand was very strong but on the other, road freight was hit hard. It is also the case that ‘Supply Chain & Freight’ is heavily exposed to the pharma and healthcare sectors which are booming. On balance, it might be disappointing that higher demand has not been translated into better profits.

Carol Tomé, UPS’ new CEO, described the results as “better than we expected, driven in part by the changes in demand that emerged from the pandemic, including a surge in residential volume, COVID-19 related healthcare shipments and strong outbound demand from Asia”, but perhaps this is a little indulgent. Certainly, compared to some other sectors UPS is robust and volumes are strong. However, profits are not really following the double-digit jump in demand.

Source: Transport Intelligence, July 30, 2020

Author: Thomas Cullen

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