Tuesday, July 24, 2012

Global market affects UPS earnings

It appears the global economy has caught up to UPS as the company missed analysts’ expectations for both earnings and revenue. As a result of the economic uncertainty, UPS lowered its full year forecast by 25 cents per share to a $4.50 to $4.75 range.
For the second quarter, revenue increased 1.2% to $13.35bn while overall profit increased an adjusted 4.7% to $1.7bn.

Similar to first quarter of this year, revenue was driven by the company’s US domestic division with revenue up 4% to $8.06bn. The increase was due to a 3.5% increase in package volume. The volume increase was thanks in part to UPS’ targeted efforts toward ecommerce businesses.
The Supply Chain Solutions group reflected the growing concern of the economy as it reported a decline in revenue by almost 2% to $2.28bn. The decline was attributed mostly to slowing international air freight demand and lower pricing.  Its LTL group noted flat revenue as lower tonnage was offset by higher yields. The Distribution business did experience revenue growth which was driven by healthcare and e-commerce customers. However, implementation of technology and infrastructure to support the company’s healthcare initiative negatively weighted on operating profit.

Long the driver of growth for UPS, the international business declined 4.3% to $3.01bn while profit declined over 10% to $454m. Double-digit decline in Asian exports to the US and Europe was the main culprit for the disappointing performance.  Although international export volumes increased 0.8%, non-US domestic volumes declined 3.2% for the quarter.
Despite the increased scrutiny of the European Commission of the TNT acquisition, UPS expects to close on the deal in fourth quarter of this year.  In the current economic environment, it will be interesting to see how TNT earnings will impact those of UPS’ particularly as UPS noted declines in its international revenue and volumes.

A reflection of the overall economy, this latest earnings report from UPS follows similar reports from FedEx and Kuehne + Nagel as all have noted an increasingly difficult market.  According to UPS’ CFO, Kurt Kuehn, “As we look toward the second half of the year, customers are more concerned as greater uncertainty exists.”  Indeed, expectations for the remainder of 2012 are not promising as there seems to be little hope for economic improvement in Europe and although recent data from China indicate possible improvements, demand for its goods remain muted in Europe and elsewhere. Finally, the US economy, while still growing, is slowing amid the troubling European and Asian economies.
For the second half of the year, logistics providers will need to continue with revenue and cost management initiatives as global freight demand will be minimal at best. Freight forwarders and asset-based companies such as UPS, FedEx and DHL will likely continue to feel the negative effects of the weak global freight market. However, growth industries such as ecommerce and healthcare will probably remain revenue generators for these companies.