UPS dubs 2014 “the year of investing for the customer” in its Q2 results

“The year of investing for the customer,” this is how UPS’s Chief Executive Officer, Scott Davis describes this year for UPS. After a 2013 holiday peak season the company would probably prefer to forget, UPS announced plans to invest in its US network earlier in the year to develop technology to improve communications and forecasting, the ORION project and open 50 new hub source locations in existing buildings to expand sorting capacity. Also, in a nod towards the importance of the unofficial start of the US holiday season, Black Friday, it was announced UPS would go from limited operations to making it a full operating day.

While the company is making the needed investments, it is incurring larger than anticipated expenses. What was originally anticipated to cost around $100m to make the needed preparations for 2014 peak season has now been increased to $175m. And these are not the only expenses the company has incurred. For example it was noted UPS experienced “very poor rail performance” during the quarter and as a result had to utilize an alternative operating plan which increased its purchase transportation expense as a result.

Meanwhile in Europe, because of the strong quarterly shipment growth and changing volume distribution patterns, UPS had to pay a premium for short-term capacity. As a result, this contributed to higher delivery and network expenses, driving in-country costs up by 8.9%.

Overall for the second quarter, the company reported total revenue of $14.3bn up 5.6% from Q2 2013. Total operating expenses were up 14.9% for the same period and as a result unadjusted operating profit declined 57.1%. This decline was due to a tax charge associated with transferring post-retirement health obligations to multiemployer healthcare plans for certain employees; a change necessitated by the requirements of the Teamsters National Master Agreement. Adjusted operating profit increased 4.1%.

By division, improving signs are emerging from the Supply Chain group. In particular, double-digit operating profit growth was noted for the Freight Forwarding group. This growth was due to improvements within its North American Air Freight, Brokerage and Ocean Freight groups. However, while shipments are rising for International Air Freight, market pricing on the Asia to US lane continues to put pressure on rates.

The International Package group’s revenue increased 6.2% with export shipments up 9.1%. Europe led the way with this sharp increase with daily shipment gains of more than 13%. This was followed by Asia up more than 6%.

And finally, UPS’ largest division, US Domestic increased its revenue by 5.2% and saw its daily package volume rise by 7.4%. The volume growth is indeed impressive but the growth was driven mostly by lightweight e-commerce shipments. According to UPS, its SurePost shipments increased more than 60% over the prior year period and accounted for about half of the total growth. This lightweight volume is pressuring yields and adding that to the investments UPS is making in preparation for Peak season, yields will likely be pressured for the rest of this year and perhaps into 2015 depending on the new dimensional-weight price change that will be implemented with the new year.

Still, the company is seeing signs of improvement for the global market. It appears it is doing a good job in Europe, its largest region outside of the US, however, competition is fierce. If it isn’t careful, a rate battle may ensue. Signs of improvement appear to be occurring in Asia as well.

Finally, in his closing statement from the quarterly investor call, Scott Davis said, “Clearly, 2014 is a year that we are investing for the customer but we expect an excellent peak season and in the future, these investments will clearly benefit not just the customer but also our employees and our shareowners”.

Note: Dimensional weight is a method of pricing that takes account of a consignments size, shape and weight.