UPS package volume and earnings declined in the second quarter as the phased contraction in Amazon business gained momentum. Results were also impacted by the escalation in international tariffs, cautious consumer sentiment and missed savings targets from streamlining network operations.
Average daily domestic package volume at UPS (NYSE: UPS) during the second quarter fell 7.3%, primarily due to the move away from low-margin business, like Amazon delivery, which helped drag down revenue 2.7% to $21.2 billion, the company announced on Tuesday.
Adjusted operating income of $1.9 billion was down 9.1% year over year, with adjusted earnings per share of $1.55 down 13.4%. Revenue and earnings per share came in slightly ahead of Wall Street expectations, but the stock was down 10% in late-afternoon trading in apparent reaction to a cloudy future after UPS pulled financial guidance and had difficulty achieving bottom-line benefits from its restructuring.
A better business mix, partly helped by the planned 50% glide down in Amazon deliveries, helped offset the volume impact, with domestic revenue down just 0.8%.
Total air average daily volume was down 11.6%, but was up 1.4% when excluding Amazon shipments on the strength of healthcare and high-tech customers. Average ground daily volume was down 6.6% and within ground, Ground Saver volume declined 23.3% as UPS raised prices on the new basic economy product for U.S.-based e-commerce companies to encourage use of premium products. Delivery expenses were $85 million higher because UPS was unable to cut as many delivery stops as projected to optimize density, which offset a 5.5% increase in revenue per piece and weighed on profitability.
Ground Saver was rebranded this year after UPS insourced its SurePost final-mile delivery product from the U.S. Postal Service.
“We are laser focused on improving revenue quality and the changes we are making are beginning to show up in our results,” said Chief Financial Officer Brian Dykes.
Demand from small-and-medium businesses, which represent nearly a third of total U.S. volume, was flat. Average daily volume for enterprise customers, excluding Amazon, was down 10.4%, because of the effort to improve the customer mix and the soft market. Among those customers, B2B volume declined 2.3% while B2C demand was down nearly 11%.
UPS’s average daily package volume in the U.S. was down 3.5% in the first quarter.
Trade trends
International package volume increased 3.9%, helping to boost international revenue by 2.6%. The operating margin dipped more than one point due to the change in geographic mix and lower demand-related surcharges. UPS’s international parcel business is about a fifth the size of the domestic operation by volume.
But the impact of the Trump administration’s 30% tariffs on Chinese-made goods and the elimination of the tariff-free exemption for low-value goods from China caused average daily volumes on the China-U.S. trade lane — the company’s most profitable shipping route — to tumble 35% during May and June, Tomé said during an earnings briefing with analysts. Higher U.S. tariffs made trade to other countries more attractive, with UPS exports from China to the rest of the world up 22.4%.
UPS adjusted its network accordingly. During the second quarter, it added or canceled more than 100 flights in Asia, Europe and U.S. international lanes as customers shifted orders in response to changing tariffs. The integrated logistics company nearly doubled capacity between India and Europe to meet growing export demand between those regions.
The U.S. crackdown on Chinese imports also hurt the Supply Chain Solutions business, where global freight forwarding revenue dropped 44% to $132 million. Overall, revenue for the Supply Chain unit declined 18.3%, primarily due to the impact from last year’s divestiture of Coyote Logistics.
Tomé said UPS’s effort to acquire Mexican express delivery company Estafeta, announced a year ago, has taken longer than expected to clear regulatory and pre-closing conditions. But UPS remains confident about the expansion opportunity in Mexico, especially as businesses increasingly look to migrate production from China to minimize geopolitical and tariff impacts from U.S.-China tensions. So far this year, UPS has conducted more than 600 supply chain mapping assessments to help customers evaluate reshoring options, the CEO said.
Network downsizing
Through the first half, UPS has closed 74 package distribution centers (one more than the company estimated in its first-quarter results) as part of a five-year initiative to consolidate activity in fewer buildings with automated sortation capabilities while maintaining its delivery footprint. More closures, including in New Orleans, are planned in the second half. Each building has a closing checklist of more than 1,000 steps.
UPS in April announced plans to shed 20,000 jobs and 25 million work hours because fewer workers will be required to operate the right-sized network and support diminished Amazon volumes. The attrition rate in the second quarter was lower than anticipated as workers balk at taking exit packages, which kept expenses higher than planned. Fewer than 10% of workers depart in the first month after a facility closes, with the departure rate rising to 25% by the third month. Management expressed confidence that more part-time workers will quit in the near future instead of relocating, but is uncertain how full-time workers will respond. So far, 9,500 positions have been eliminated out of 490,000 total employees at the start of the year. Under the Teamsters contract, employees have a right to follow their work to a new location, although their hours could decline.
The company this month offered a voluntary separation program to package car drivers and the CEO said there has been “a lot of interest” so far, despite the Teamsters union encouraging members not to accept the buyout offer of $1,800 per year of service.
About 85% of UPS drivers are at the top end of the pay scale, with anywhere from 25 to 40 years of service, and they would be the most likely candidates to accept the buyout package, said Nando Cesarone, president of the U.S. region and UPS Airlines.
The network optimization along with a new initiative to redesign more efficient processes are expected to save the company $3.5 billion this year, the company has said. During the second quarter, UPS implemented a global digital payment system that centralizes how it makes and receives payments.
The effort to reduce Amazon volume is contributing to those savings. In the first half, Amazon’s average daily volume declined 13%, but management expects the volume decline to accelerate to 30% year over year in both the third and fourth quarters. UPS is working closely with Amazon to ensure an orderly transition for UPS and Amazon customers, which will result in a sequential drawdown of 500,000 parcels in the third quarter. In the first half, UPS filtered 1 million Amazon packages from its system. Dykes said it is important to reduce costs associated with abandoned buildings as Amazon’s volumes go down.
“In the second quarter, 64% of our volume went through automated facilities, up from 60% in the second quarter of last year,” Dykes said. “And those automated facilities give us more flexibility to add sorts, be more dynamic with how we manage the volume, and ultimately, will help us scale more efficiently for peak [season]and drive better cost structure as we reset the network.”
UPS abstained from providing revenue or profit guidance for the rest of the year, citing uncertainty surrounding the macroeconomic environment, the Ground Saver price changes and the driver buyouts. July volumes were good, Tomé said, but it is difficult to determine if that is a byproduct of one-off events such as Amazon Prime Days and similar promotions from other retailers, as well as shippers rushing to pre-purchase overseas inventories before the Aug. 1 and Aug. 12 U.S. deadlines for raising tariffs on countries that haven’t reached a negotiated trade deal. Small businesses, in particular, may hold back on orders if their tariff risk rises.
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