UPS shares drop sharply despite decent Q2 results

UPS Inc. on Tuesday reported second-quarter results that, on balance, came in better than expected. However, the results couldn’t keep shares from falling sharply amid broad equity market weakness. A little past the half-way point of trading, UPS shares were down nearly $6.77 a share, a 3.5% decline.

UPS (NYSE: UPS) also said it has launched an initiative in the U.S. called the Total Service Plan, which executives said is designed to manage the company’s vast domestic network at levels of on-time precision and predictability that have never been accomplished before. The program, which began July 11, has already led to improvement in hitting road feeder departure schedules, UPS executives said.

The executives revealed few details about the program on Tuesday’s call with analysts. CEO Carol B. Tomé went as far as any executive when she said that the program will result in UPS running its U.S. network the “way it was designed to be run.”

The Atlanta-based company posted $3.29 in second-quarter adjusted diluted earnings per share, which beat analysts’ consensus estimates. Adjusted operating profits hit $3.5 billion, up 9.3% and the best quarter for profits in 15 years. Revenues of $24.8 billion were up 5.7% from 2021 figures. Adjusted operating profits increased year over year (y/y) across UPS’ three business units. UPS’ Supply Chain Solutions unit, which contains all of the company’s non-package delivery businesses, posted a record quarterly profit of $517 million.

Average daily volume in the U.S. package segment, by far its largest unit, fell 4% y/y, the company said. UPS attributed half of the overall U.S. volume decline to decisions to shed lower-margin residential business tendered by large enterprise customers. Amazon.com Inc. (NASDAQ: AMZN), UPS’ largest individual customer by revenue, will account for less than 11% of revenue in 2022. That is down from about 11.3% of revenue in 2021. UPS has made clear that it will turn away Amazon traffic that it deems insufficiently profitable.

U.S. residential delivery volumes fell 8.2% as e-commerce activity leveled off. Business-to-business volumes rose 2.3%. B2B accounted for 43% of the U.S. volume mix, up from 40% in the 2021 quarter. Revenue per piece rose 11.9%, with fuel surcharges accounting for 4% of that. 

UPS reaffirmed its 2022 financial guidance, which includes $102 billion in revenue and a 13.7% adjusted operating margin. It also said it would repurchase $3 billion worth of shares in 2022, up from the $2 billion level announced earlier this year.

Like virtually every company, UPS is experiencing labor and overall cost inflation, as well as continued global supply chain disruptions. Costs in the U.S. rose 6.9% y/y due to higher fuel and health care expenses. Tomé said UPS’ operations in Shenzhen are effectively locked down due to another round of COVID-19 protocols imposed by the Chinese government.

Source: freightwaves - UPS shares drop sharply despite decent Q2 results
Editor: Mark Solomon