UPS experiences heavy declines at Supply Chain division

UPS’s second quarter revenue rose 1.2% and income before tax fell by 3.3% year-on-year, but this moderate downturn disguised a big fall in profits at the ‘Supply Chain and Freight’ business.

The company’s core US domestic package business saw revenue up 2.3% year-on-year on volumes also up from 13.08m packages in Q2 2012 to 13.33m in Q2 of this year. The segment’s operating profit was flat at $1.13bn.

International package volumes increased by 5% year-on-year to 2.4m pieces, but its profit margin weakened from 15.1% to 14.7%, leading to operating profit falling by $3m to $451m. This decline was driven by customers’ preference for cheaper services.

The nasty surprise in these results was in the ‘Supply Chain and Freight’ segment. Here, revenue fell year-on-year by 3.2%, whilst operating profit fell by over 20% from $202m to $159m; margins also weakened from 8.9% to 7.2%. UPS attributed the fall largely to the freight forwarding business “as tonnage declined and yields were negatively impacted by lower demand in trans-Pacific trade lanes. Lower operating costs could not offset these headwinds.”

In discussing the results, UPS’s CEO, Scott Davis, gave an interesting commentary on the results, stating that “international freight forwarding operating profits and margins continued to be influenced by moderating demand and changes in shipper preference. Customers around the world continue to put greater emphasis on cost rather than time in transit, trading down in the product portfolio.” In a slight tone of optimism he continued, “we believe this trend is primarily cyclical. Over the last few quarters there has been a trough in the innovation cycle. Demand for new hi-tech products traditionally drives Express small package and air freight out of Asia.”

However, he also hinted at a structural change, observing that “on the other hand some of the trade downs is likely permanent. More international trade is being conducted regionally and supply chains are becoming more efficient so the need for the fast express options may not grow quite as strong in the future.”

Further analysis of structural changes in global supply chains can be found in Ti’s recent reports: