UPS reports declines in third quarter earnings, citing lower global demand

Third quarter 2023 earnings issued today Atlanta-based global transportation and logistics services provider UPS largely saw declines.

Quarterly revenue, at $21.1 billion, saw a 12.8% annual decrease, and adjusted earnings per share, at $1.57, were off 47.5%. Consolidated quarterly operating profit came in at $1.3 billion, which was off 48.7% annually on an adjusted basis.

“While unfavorable macro-economic conditions negatively impacted global demand in the quarter, our U.S. labor contract was fully ratified in early September and volume that diverted during our labor negotiations is starting to return to our network. I want to thank all UPSers for their hard work and efforts during this challenging time and for once again providing industry-leading service to our customers,” said Carol Tomé, UPS CEO, in a statement. “Looking ahead, we are well-prepared for the peak holiday season.”

Individual segment results for UPS in Q3 2023:

• U.S. domestic package revenue decreased 11.1%, to $13.66 billion, and average daily package volume was down 11.5% annually, to 17.286 million, with average daily volume partially offset by a 2.0% increase in revenue per piece, to $12.54;
• International Package revenue, at $4.267 billion, was down 11.1% annually, with average daily volume down 6.6%, to 3.139 million, and total average revenue per package, at $20.78, down 1.4%, with UPS attributing the decrease in average daily volume and revenue decrease to continued softness on Asia and Europe trade lanes; and
• Supply Chain Solutions revenue, at $3.134 billion, fell 21.4%, with the revenue decline attributed to market rate and volume declines in forwarding, which was partially offset by growth in its healthcare segment, with Forwarding revenue off 38.6%, to $1.327, and Logistics revenue up 9.8%, to $1.43 billion

On its earnings call earlier this morning, CEO Tomé said that UPS expected conditions in the third quarter to be challenging, noting that the global macro environment remained weak with some countries in recession, which pressured international and freight forwarding volume.

“In the U.S., labor uncertainty negatively impacted volume for most of the quarter,” she said. “From a demand perspective, August proved to be the most challenging, as some customers waited for the ratification of our Teamster contract before returning volume to our network.”

Since the UPS-Teamsters contract was ratified in late August, she explained UPS has been gaining volume momentum, as it exited the last week of September with U.S. average daily volume (ADV) down 7.4%, which she described as a “marked improvement” from the rest of the quarter. And she added that UPS salespeople have delivered record results, stemming from the combination of win-back and new customers.

“To date, we have won back roughly 600,000 ADV of diverted volume, and we are working to win back all diverted volume by the end of the year,” she noted. “Looking at our sales pipeline, we are pulling through new customers that value our superior on-time performance and want to come to UPS prior to the busy peak holiday season.

Peak Season: Addressing Peak Season, Tomé explained that over the past five years, UPS’s service over the Peak Season period has been better that than of its closest competitor (FedEx) by an average of 310 basis points.

“Service matters all the time, but especially at Peak,” she said. “So, to prepare, we are collaborating with customers on volume projections and the timing of their promotions. We will also leverage technology, or network planning tools, to control how the volume comes in, utilize available capacity, and adjust the network to operate as efficiently as possible. Regarding peak hiring, are people that strategy enables greater flexibility to serve our customers during the holiday rush. We still expect to have healthy Peak Season volume in the fourth quarter but based on what appears to be slowing demand in all business segments, we are revising our guidance accordingly.”  

Economic impact: UPS CFO Brian Newman said on the call that the macro environment in the third quarter was challenging, with the weakness UPS saw in the second quarter continuing into the third quarter, especially in Asia and Europe. And he added that real exports and industrial production moved lower, due to falling demand and global consumer conditions not significantly changing.

“In the U.S., we faced tough conditions due to several factors,” he said. “To begin, the volume diversion we experienced in the second quarter continued into the third quarter, which led to more volume diversions than we anticipated. Next, some customers that diverted waited until our Teamster contract was fully ratified…before returning volume to our network. And lastly, we incurred higher labor costs associated with the new contract and added headcount earlier than normal to ramp up for peak so we can ensure we maintain our industry-leading service levels.”

Prior to the ratification of the Teamsters contract, Newman said that August represented the low watermark, when average daily volume was down 15.2% annually. Post-ratification, UPS exited the third quarter at half that rate and is continuing to see its week-over-week volume levels improve, despite a challenging retail backdrop, he added. And in the U.S. third quarter average daily volume was down 11.5%, with Newman saying UPS estimates the impact of volume diversion reducing total volume by approximately 1.5 million packages per day.

Pricing: Despite lower third quarter volumes, Newman said UPS remained disciplined on revenue quality, or pricing, as revenue per piece saw a 2% annual gain.

“The combination of strong base rates and improved customer and product mix improved the revenue per piece growth rate by about 410 basis points,” he said. “Changes in fuel prices decreased the revenue per piece growth rate by 190 basis points. The remaining 20 basis points of decline was driven by multiple factors, including package characteristics.”

Outlook: Citing a slowing in the global demand environment, coupled with macroeconomic conditions remaining challenging, Newman said UPS has lowered its full-year guidance and provided a range to reflect that uncertainty in the market, with the company now expecting consolidated revenue to be between $91.3-to-$92.3 billion and consolidated operating margin to be between 10.8%-to-11.3%.

“In the U.S., we are winning back volume at a rapid pace, but we've also seen demand softness, due to several factors with many of our customers who did not divert,” he said. “Additionally, our consumer spending has been resilient in 2023. Headwinds are mounting for the consumer in the fourth quarter. And looking at estimates for holiday retail sales this year. increases range from over 4%-to-12%.”