UPS on Thursday reported positive third-quarter revenue and profit growth, turning around nearly two years of poor performance. However, the company also cautioned that macroeconomic conditions and increased in-store shopping could dampen shipping activity during the peak season.
Full-year revenue guidance of $91 billion declined slightly, primarily due to the sale of Coyote Logistics. The forecast suggests that UPS (NYSE: UPS) doesn’t expect rapid growth in its shipping business in the current quarter, especially as management notes slowing U.S. online sales and lower-than-expected global manufacturing activity.
“Recently, shippers have tempered their volume expectations,” Chief Executive Carol Tome said on a conference call with analysts. More than 100 of UPS’s largest customers, representing 60% of network volume and 85% of peak growth, have tightened their outlook for the holiday season.
Estimated fourth-quarter e-mail and mail-order sales are expected to grow about 3%, up from the previous 5%, the UPS executive said.
“We believe this is partly due to a tight, compressed peak period. There are only 17 shipping days between Thanksgiving and Christmas Eve. Forecasters and some of our customers say that due to the (short) shipping season, many customers will head to the store to complete their holiday shopping.
“The consumer is actually in pretty good shape. It will still be a good peak, but not as dynamic as thought at the beginning of the year,” Tome said.
The parcel logistics giant said higher revenues – up 5.6% year-over-year to $22.2 billion – combined with productivity initiatives resulted in operating profit of $2 billion, an increase of $22.8 % on an adjusted basis. Despite uncertain macroeconomic conditions, UPS was able to increase revenues and profit margins by improving revenue quality and maintaining cost control.
The results topped analyst estimates of adjusted earnings per share of $1.76 versus the consensus estimate of $1.57. In September, UPS completed the sale of freight brokerage business Coyote Logistics to RXO for $1 billion, resulting in an after-tax gain of $152 million.
Strong domestic volumes
UPS said a 6.5% increase in domestic shipment volume, partially offset by a 2% decline in profitability, increased domestic revenues by almost 6% to $14.5 billion. Consolidated operating profit before tax increased by almost 47%. This was the second consecutive quarter of average daily volume growth in this segment and the highest year-over-year growth rate since the first quarter of 2021. Management said third-quarter unit revenue improved sequentially due to upward base rate adjustments to less profitable B2B shipments from sources such as Shein and Temu in China.
Domestic shipment volumes fell 6.9% in the third quarter, all attributed to a deteriorating relationship with Amazon, UPS’ largest customer. Amazon has been shifting transportation away from UPS and other carriers in recent years while building its own logistics infrastructure. Tome said Amazon’s air shipment reduction is based on Amazon shifting from air to cheaper ground transportation and moving some shipments to its own air transportation network.
UPS has closed 45 sorting facilities so far this year, including nine full buildings. The consolidation contributed to an 8% increase in pieces per hour, said Chief Financial Officer Brian Dykes.
“While 8% may not seem like a large number, it translated into an 11 million-hour increase in productivity,” and overall production improvements offset a 50% increase in union wages over last year’s labor agreement, he said. The express delivery provider moves 5% more shipments through automated facilities and ensures legacy sortation centers meet performance targets.
Costs will also improve as high wage inflation normalizes at the start of the contract.
International air capacity
Revenue in the international shipments segment rose 3% to $4.4 billion, boosted by higher profits as volumes flattened. A margin of 18% resulted in an increase in profit before tax by 17%. UPS has launched more than 200 flights connecting the Asia-Pacific region with Europe and the United States to meet peak holiday package demand, a significant increase compared to the same period last year. UPS recently announced that it has also added a new air connection at Sharjah International Airport in the United Arab Emirates, allowing packages from China and South Korea to be delivered in as little as two business days to markets such as Nigeria, Pakistan, Saudi Arabia and the Republic of South Africa.
According to freight data providers, global air cargo volumes increased 12% in the first three quarters compared to 2023 and are expected to remain strong in the last three months.
In September, UPS also expanded Saturday residential deliveries to eight of Europe’s largest markets at no additional charge.
UPS’s supply chain business improved revenues by 8%, driven primarily by growth in air and sea freight and the onboarding of the U.S. Postal Service as a customer. UPS took over the entire domestic air freight contract from the Postal Service on Oct. 1, but began serving some routes in the summer to ensure the network would be ready for the peak season. Traffic migration from incumbent FedEx only began in September. Management said fourth-quarter results will be significantly better because daytime aircraft and truck utilization will be significantly higher and all U.S. Postal Service volume will now be handled by the UPS system.
“Now that the volume is in full swing, the fourth quarter will look much different than the third quarter from an earnings standpoint,” Tome said.
With the Coyote and Postal Service moves, “we have eliminated a very volatile truck brokerage business and added air cargo volume that is predictable and has a positive margin,” Tome said.
UPS advanced its strategy to become a leading provider of end-to-end healthcare logistics services, last month announcing plans to acquire Germany-based Frigo-Trans, expanding its ability to provide integrated cold and frozen supply chain services to pharmaceutical customers in Europe. Frigo-Trans has an extensive network of temperature-controlled warehouses and trucks, as well as forwarding. The transaction is expected to close in the first quarter. In the third quarter, UPS generated $2.5 billion in consolidated healthcare revenue.
UPS shares were up 5% in late afternoon trading to $138.30.
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