The two-year transformation of UPS Inc., summarized by CEO Carol B. Tomé in her now-familiar mantra of “better, not bigger,” has played out amid an environment of steadily rising volumes. The mantra hasn’t changed, but the environment has.
The Atlanta-based transportation and logistics giant (NYSE: UPS) posted first-quarter results on Tuesday that offered insight into the company’s ability to manage through an uncertain macroeconomic outlook that led to the first period of weaker-than-expected demand since Tomé took over in June 2020. Revenue rose 6.4% year-over-year to $24.4 billion. Adjusted operating profit increased 12.1% to $3.3 billion, while operating margin expanded to 13.6%, 70 basis points above last year.
All three business segments grew their operating profits, with the smallest of the three, Supply Chain Solutions, posting operating profit of $481 million and an 11% operating margin, both records for the unit, propelled by strength in freight forwarding and its health care services.
Adjusted diluted earnings per share came in at $3.05, well above the $2.87-per-share median estimate among analysts polled by Barchart. Still, shares fell 3.5% amid a sharp sell-off in U.S. equities.
UPS reaffirmed its full-year 2022 financial targets and said it would double its share buyback program to $2 billion.
The results came amid a slowdown in demand for the company’s U.S. and international package services, with the latter being something that UPS did not plan for. U.S. average daily volume declined 3% year-over-year, pressured by a tough comparison with the 2021 results, when government stimulus checks spurred a burst in consumer spending.
Residential delivery volumes dropped 7.4% year-over-year as waning stimulus, higher food and fuel prices, and inflation uncertainties prompted consumers to rein in their spending. The drop was partially offset by a 3.6% year-on-year increase in business-to-business demand. As of the end of the quarter, B2B accounted for 43% of U.S. volumes, up from 40% in the year-earlier period.
Domestic revenue per piece increased 9.5%, which more than offset the volume decline. Increases in base rates and fuel surcharges contributed more than 80% of the improvement, UPS said.
International volumes were hit by pandemic-related lockdowns in Asia and, to a small degree, Russia’s Feb. 24 invasion of Ukraine; Russia, Ukraine and Belarus combined represented just 1% of UPS’ total 2021 revenue. In the quarter, average daily international volume fell 6.7%, with intra-country volumes declining 10.1% year-on-year. Total export average daily volume declined 2.9% due to the lockdowns in Asia, among other things. Average daily volume from the U.S. to Europe grew 10.7%
International revenue increased 5.8% to $4.9 billion. Revenue per piece increased 10.5%. Operating profit rose 2.7% to $1.1 billion, while operating margin fell 70 basis points to 23%.
In a continued seller’s market for parcel delivery services, UPS can remain selective about the business it accepts and still build solid margins. Company executives said they aren’t pressured globally to reduce their rates.