UPS Exceeds Q2 Targets but Sees Lower Volume

UPS city delivery

UPS exceeded its Q2 revenue and earnings projections, but a lowering of volume due to consolidation steps the company has taken, including reducing Amazon packages by mutual consent, plus the challenged macro environment didn’t resonate well on Wall Street as the stock slid a bit.

For the second quarter, UPS’s consolidated revenue was up 5.7% to $24.8 billion, while operating profit grew 9.3% to $3.6 billion. Consolidated operating margin was 14.4%, up from 14% in 2021.

Average daily volume in the U.S. was down 4% or 823,000 packages per day vs. a year ago, 111,000 more than UPS projected for the quarter. More than half of that decline was due to steps the company took to optimize air and ground volume with some of UPS’s largest customers, UPS CFO Brian Newman told analysts on an earnings call. Shipping volumes in general have been declining due to lower consumer spending in a near-recession.

Breaking it down further, Newman said residential volume decreased 8.2% in Q2, but was partially offset by a 2.3% increase in B2B average daily volume; that category represents 43% of UPS volume, up from 40% a year ago. B2B and SMB is where UPS is putting much of its focus under CEO Carol Tome’s “better not bigger” quality revenue initiative. SMB average volume also grew, by 3.3%, representing 29.2% of total U.S. volume.

Tome said UPS is working closely working with largest customer Amazon on volume it will take on vs. that Amazon will handle itself. She said the ecommerce giant will represent about 11% of volume by year end as UPS takes a “glide path” down. The carrier is looking to make that up by expanding in B2B and SMB plus healthcare, Tome said, adding enterprise accounts didn’t contribute as much as was hoped, partly due to the challenging economy.

“We’ve contractually agreed on what makes sense for (Amazon) vs. what makes sense for them,” Tome said. “That means that both volume and revenue for Amazon is coming down.”

In a key metric, revenue per piece increased 11.9%, helped by higher fuel prices, which contributed 4% of that increase. Fuel price spikes benefit both UPS and FedEx on the top and bottom line through surcharges applied to shippers, so the recent dip will likely impact the next quarter.

Newman said wage and benefit increases for the Teamsters union, which represents the majority of workers, will cost $600 million in the second half of 2022. He added it will be partially offset by UPS’s new Total Service Plan, which optimizes driver routing and reduces dwell times, plus various facility automation initiatives.

Tome outlined a pilot program UPS is conducting with a single large retailer, to improve residential ecommerce delivery density by integrating with a major OMS partner she would not name. Through the OMS, some customer orders are put on a virtual hold for delivery until another is going to the same address, but the hold isn’t released if customer service levels are affected.

Tome explained that the average last-mile delivery cost for UPS is $5.50, and the incremental cost of an additional parcel to the same address is 60 cents. So, combining them into a single delivery costs $6.10, vs. $11 for two separate trips.

“Imagine the value that can be released if we improve the density,” she said. “So, we’re going to give some of that value back to our customers. Why not? Their service level is not disrupted and we are going to value share.” She added the pilot will go live with the customer in Q3, with nine other retailers interested in taking part.