UPS highlights effects of COVID-19 on first quarter earnings

With COVID-19, or the coronavirus, continuing to take a toll on global logistics operations, Atlanta-based global freight transportation and logistics services provider UPS felt its impact, too, based on first quarter 2020 results, which were issued this morning.

Quarterly revenue, at $18 billion, headed up 4.9% annually, and earnings per share, at $1.11, was off compared to $1.28 per share a year ago and down compared to Wall Street expectations of $1.23. Net income, at $965 million, was off 13.15% annually, with UPS noting it included material headwinds stemming from COVOD-19 and higher self-insurance accruals, among other factors.

Individual segment results for Q1:

• U.S. domestic package revenue increased 9.3% to $11.5 billion, with operating profit, at $364 million, down 45.4%. Revenue per package was down 0.8% at $6.49, due to changes in customer and product mix and average daily volume rose 8.5%. UPS said that commercial deliveries fell, and residential deliveries were “elevated,” with shipment growth driven by large customers;
• International Package revenue, at $3.383 billion, was down 2.2%, with operating profit coming in at $558 million on an adjusted basis, in light of decreasing global economic activity, with average daily volume falling 1.8%, and total revenue per package down 1.8% to $16.48;
• Supply Chain and Freight revenue was down less than 1% annually at $3.196 billion. UPS Freight and UPS Coyote saw depressed volume levels at the end of the quarter, due to mandated stay at home restrictions and business closures, and its logistics unit saw revenue and operating profit gains

On an earnings conference call, UPS Chairman and CEO David Abney said consumer e-commerce demand for essential and necessary good surged in the first quarter, with UPS meeting customers’ needs with excellent on-time delivery.

“Several years ago, we identified healthcare and e-commerce as two of our strategic growth initiatives, and we have been investing in innovative solutions to enhance our capabilities,” he said.

And in late January UPS provided 2020 guidance, which did not include any COVID-19-related impact, with Abney noting it was still early and there was no significant impact it would have on customers and the global economy. Throughout the quarter, he said that UPS adjusted its network and controlled costs but was not able to offset the unprecedented and swift changes in market demand and mix.

“Business closures and stay at home restrictions disproportionally affected SMBs, and we are seeing a dramatic shift in consumer shopping behavior,” he said. “By late March, residential deliveries approached nearly 70% of our volume and drove increased delivery costs, a trend we are seeing continue in April. Most economists are currently predicting a recession, but there is broad disagreement of the length and shape of the recovery. The main economic indicators, U.S. industrial production, goods retail, global industrial production, and global exports are all forecasted to decline significantly.”

And due to the uncertainties ahead, Abney said UPS is unable to assess the impact of the pandemic or reasonably estimate the company’s financial performance in future quarters. As a result, he said UPS is withdrawing 2020 guidance. 

On the capital expenditures front, Abney said that as a result of changing business conditions, UPS analyzed its 2020 capex budget, which helped re-prioritize its spending for those key investments necessary to support its Transformation initiative growth efforts.

“We are reducing capex by $1 billion,” he said. “This decision was governed by two priorities. First, we will continue to make investments that best position the company to seize future opportunities as conditions improve. Second, by prioritizing investments and spending that yield the greatest long-term benefits to the company.”

As an example, he said UPS remains on track to speed up the U.S. Ground network and expand weekend operations, which will bolster its competitive position and help all customers meet the demand for faster delivery. And UPS will continue to expand its integrated network by adding about 5 million square feet of automated capacity in 2020.    

“UPS revenue increased 9.3% in Q1 and its average daily volume was up 8.5%, with growth across all their services,” said Jerry Hempstead, president ogf parcel consultancy Hempstead Consulting. “That should be good news but its profits declined significantly and in the light of a General Rate Increase (GRI) of 4.9% and the price of fuel declined materially during the quarter, we chalk this quarter to profitless prosperity. UPS said that commercial deliveries declined during the quarter, while residential deliveries were elevated. Read this as the Amazon business took off during the quarter to the point in Q1 most likely saw a run up in packages close to Christmas peak. The bad news is these are residential, tend to be bulky, and drag down revenue shipment because of the discounts Amazon commands for its volume. This caused the revenue per piece to decrease less than 1%, due to the changes in the UPS customer and product mix. The good news was also the fact that the premium Next-Day Air product grew significantly. I suspect Q2 will be helped by all the work UPS is doing for FEMA to keep up with the item demands of the coronavirus.”