UPS Clocks Revenue Growth Despite Fuel Surcharge Headwinds

Revenue grew 4.9% Y-o-Y to $14.9 billion versus $14.2 billion in the year-ago period

u1United Parcel Service Inc. (NYSE: UPS), the world’s largest package delivery company, announced its Q3 FY16 financial results on October 27th, 2016.

The Atlanta, Georgia-based company provides transportation, logistics, and financial services in the U.S. and internationally. It operates in three segments: U.S. Domestic Package, International Package, and Supply Chain & Freight. The U.S. Domestic Package segment offers time-definite delivery of letters, documents, small packages, and palletized freight through air and ground services in the United States. The International Package segment provides guaranteed day and time-definite international shipping services in Europe, the Asia Pacific, Canada and Latin America, the Indian sub-continent, the Middle East, and Africa. It offers guaranteed time-definite express options, including Express Plus, Express, and Express Saver.

The Supply Chain & Freight segment offers international air and ocean freight forwarding, customs brokerage, truckload freight brokerage, distribution and post-sales services, and mail and consulting services in approximately 220 countries and territories; and less-than-truckload and truckload services to customers in North America. UPS also offers shipping, visibility, and billing technologies; and insurance, financing, and payment services. It operates a fleet of approximately 110,000 package cars, vans, tractors, and motorcycles; and owns 33,000 containers used to transport cargo in its aircraft. Read more about UPS’s financial results below.

Q3 FY16 financial highlights

During Q3 FY16, United Parcel Service’s reported revenue growth of 4.9% Y-o-Y to $14.9 billion versus $14.2 billion in the year-ago period, despite facing headwinds from changes in fuel surcharges and currency exchange rates. On a currency-neutral basis, revenue grew 5.1% Y-o-Y during the reporting quarter. In addition, lower fuel surcharge rates reduced revenue growth by approximately 50 basis points. On the brighter side, international operating profit rose 14% to $576 million, the seventh consecutive quarter of double-digit growth.u2

The Company’s revenue was mainly driven by U.S. domestic package service revenue, which grew 4.8% during the reporting quarter. Daily export shipments were up 7.1% led by double-digit gains in Asia. In all, UPS reported net income growth of less than 1% to $1.27 billion, or diluted EPS of $1.44, from $1.26 billion, or diluted EPS of $1.39, a year earlier.

Segmental highlights

U.S. Domestic Package: This segment’s Q3 FY16 revenue increased 4.8% Y-o-Y to $9.3 billion. Average daily package volume increased 5.7%, with Deferred Air products up 10%, Next Day Air up 5.9%, and Ground products up 5.2%. Strong business-to-consumer (B2C) growth trends continued this quarter, while business-to-business (B2B) growth was positive primarily due to online retail returns.

u3Revenue per package increased 0.9% Y-o-Y during the reporting quarter. Fuel surcharge rates reduced revenue per package growth by about 40 basis points, while increases in base rates offset changes in product and customer mix. Operating profit was $1.3 billion and operating margin was 13.5% during Q3 FY16.

UPS and its rival FedEx Corporation (NYSE: FDX) are facing pressure on operating margins owing to the burgeoning e-commerce demand during peak seasons, which has called for increases in capacity and manpower. Both companies are responding to this by increasing rates by the end of 2016, instead of chasing volume growth over the few months. Both FedEx and UPS also face competition from Inc. (NASDAQ: AMZN), which is leasing 40 planes to carry goods and buying branded truck trailers to ramp up its delivery capacity during the peak holiday season.

International Package: This segment’s Q3 FY16 operating profit jumped 14% to $576 million, a record for any third quarter in the company history. Volume growth in all products, base-rate increases and network efficiency gains contributed to the improved profitability.

The segment’s revenue grew 2.2% Y-o-Y to $3.0 billion, and was up 3.1% on a currency-neutral basis during the reporting quarter. In addition, lower fuel surcharges reduced revenue growth by approximately 70 basis points. Daily Export volume increased 7.1%, on double-digit gains out of Asia and high-single digit cross-border shipments within Europe.

Revenue per package decreased 2.8% Y-o-Y from the prior year, with currency-neutral yields down 1.9%. Additionally, lower fuel surcharge rates reduced revenue-per-package growth. Changes in trade lanes and product mix offset base rate improvements.

Supply Chain and Freight: This segment’s revenue jumped 8.1% to $2.6 billion during Q3 FY16, primarily due to the Coyote Logistics acquisition in 2015. Weak market conditions in the Air Freight Forwarding and LTL (less than truckload) markets weighed on top-line growth.

Market conditions in International Air Freight and the U.S. truckload brokerage industries remain soft. Despite these conditions, UPS saw increased loads in Coyote Logistics. The Forwarding business experienced tonnage growth in the Ocean and North American Air Freight products partially offsetting the decline in International Air Freight tonnage.

The Distribution unit reported mid-single-digit revenue growth during the reporting quarter, with gains in the Healthcare, Retail and Aerospace sectors. UPS Freight LTL revenue per hundredweight increased 3.7% Y-o-Y, while total tonnage faced headwinds from current market conditions.

Other highlights

u4Cash flow: For the nine months ended September 30th, 2016, UPS generated $5.4 billion in cash from operations, which includes a planned discretionary pension contribution of $1.2 billion in the third quarter. Free cash flow was $3.6 billion after making capital expenditures of $1.8 billion.

Dividends and share buyback: UPS paid dividends of about $2.0 billion and repurchased 19.5 million shares for $2.0 billion during Q3 FY16.

UPS purchases 14 new 747-8f Jumbo Freighters: On October 31st, 2016, UPS announced that it has ordered 14 new Boeing 747-8 cargo jets with a list value of $5.3 billion to meet increased demand for air shipping services. UPS’s long-term strategy is to increase customers’ access to global markets and air shipments are a major growth opportunity for the company. The 747-8s will enable UPS to begin a cascade of aircraft route reassignments that will add significant air capacity in the busiest lanes, thereby optimizing global air network capacity well beyond the impact of adding new cargo jets.u5

The 14 aircraft are to be delivered between 2017 and 2020, with the first 2 aircraft to be delivered by the end of 2017. The value of the contract, which also contains options for 14 additional jets in the future, was not disclosed. The new jumbo freighters will be added to the company’s existing operating fleet of more than 500 aircraft.

The 747-8 offers training and operating efficiencies to UPS. Pilots of the company’s existing 747-400 fleet will enjoy a common equipment rating, allowing them to fly both aircraft types. Furthermore, UPS will realize greater economies of scale in maintenance and ground handling by operating the 747-8 aircraft. The 747-8 freighters carry 34 shipping containers on its main deck and 14 in its lower compartments. The 747-8 has a cargo capacity of 307,600 pounds, or approximately 30,000 packages and a range of 4,340 nautical miles. The new -8 aircraft line has a strong industry safety and reliability record.

The 747-8 freighters primarily will be used on routes with heavy package volumes between the U.S. and Asia, Europe and the Middle East. The greater size of the 747-8 will allow UPS to carry more packages than it currently can with 747-4 jets, which will be redeployed to the U.S.

Rate hikes: UPS increased its air freight rates within and between the U.S., Canada, and Puerto Rico, by an average net of 4.9%. It also hiked tariffs by an average net 4.9% effective September 19th, 2016.u6

Effective December 26th, 2016, the published rates for UPS’ services will also be increased to support the ongoing investments that the company is making with regard to the speed, scope, and coverage of its transportation network. The rate hikes will also support ongoing expansion and capabilities enhancements to maintain high service levels to customers.

Outlook for Q4 FY16 and full year FY16

The company’s adjusted earnings guidance for full-year 2016 remains at $5.70 to $5.90 per diluted share. However, for the all-important upcoming holiday season, given the weak freight demand and economic slowdown, UPS is looking to take advantage of consumer deliveries growing more than business deliveries, strong e-commerce demand, and an increasing demand for certain premium services. UPS said it expects record peak volumes of more than 700 million packages between Thanksgiving and New Year’s Eve, with daily volumes expected to hit more than 30 million packages on 13 days leading up to Christmas.

Stock Performance


UPS’s stock finished the day at $106.84, falling 0.85%, at the close on Tuesday, November 1st, 2016, having vacillated between an intraday high of $108.03 and a low of $106.16 during the session. The stock’s trading volume was at 2,906,894 for the day. The Company’s market cap was at $92.61 billion as of Tuesday’s close.

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