The current earnings season has been disappointing for the industrial sector, but United Parcel Service, (NYSE:UPS) managed to buck the trend with its set of second-quarter results. In truth, the positive news was more about the company's execution rather than any help from the macro environment. With that said, let's take a closer look at five of the key things management wants you to know about the quarter, and what it means for the company in 2015.
1. Softening economy
In line with what many other companies have reported, UPS CFO Richard Peretz disclosed that U.S. economic growth is slowing: "The U.S. Domestic business is on track with its revenue management and efficiency gains; however, we are seeing some softening in the economy."
Moreover, he went on to note the effects of slowing growth to its U.S. operations: "In the U.S., we expect Domestic volume to increase between 2% and 3%, as a result of the slowing pace of growth in the economy. Revenue should grow at a slightly faster pace as base rate pricing remains strong."
A company like UPS is never truly going to decouple from global growth, and particularly U.S. growth, but the second-quarter results indicate that UPS managed well under difficult circumstances. Nevertheless, the weakness in the economy should be noted, as UPS is usually a good economic bellwether. Ultimately, full-year guidance for operating profit growth of 5% to 9% in the U.S. Domestic Package segment was left unchanged.
2. Business-to-consumer growth
Peretz noted some differing trends in Business to Consumer, or B2C, and Business to Business, or B2B: "The pace of B2C expansion continued slowing, while B2B gains were due to omnichannel and return services in the retail sector." CCO Alan Gershenhorn would later disclose that the split in the U.S. "right now" is 45% B2C and 55% B2B.
With regard to B2C, the slowing trend is obviously a concern, but CEO David Abney explained that on a volume basis, B2C is actually up 9% compared with two years ago -- it's just that last year's comparison is a tough one. Meanwhile, B2B's growth was attributed primarily to e-commerce and omni-channel. However, Abney noted a "slight decrease" from manufacturing and suggested it was behind the company's cautious approach to its full-year performance in the U.S. -- something to look out for.
3. Outperforming International Package segment
As I outlined in the UPS results review, the international segment was the star segment in the quarter. The segment's adjusted operating profit increased by more than 17%, with Peretz attributing the strong performance to a "balance of export shipment growth, network efficiency gains, and a strong focus on revenue management initiatives."
Peretz also discussed how the strength of the U.S. dollar helped expand operating margin in the segment -- an interesting observation, running contrary to what many other companies have reported in their international operations.
Furthermore, Peretz expects "to see positive momentum continue in the second half of the year, with operating profits at the high end of our 6% to 12% range." Later on the earnings call, Abney highlighted UPS' building of a "pan-European network that we put in place maybe a few years before its time, before the market started shifting to a pan-European inventory replacement model."
4. Ready for peak?
Regular followers of UPS will already know about its failure to live up to expectations during peak demand periods in the holiday season. With this in mind, Chris Wetherbee of Citigroup asked a peak-related question on the earnings call. As part of management's response, Gershenhorn said, "We do have comprehensive peak pricing initiatives under way to increase revenue from the customers that surge and ultimately drive significantly greater cost at peak."
In other words, the company is taking active pricing measures to better manage demand during peak season. In addition, president of U.S. Operations Myron Gray discussed "10 projects" intended to improve "hub modernization, automation, or expanded capacity" and argued that the "flow-through at the end of peak season will be enhanced by over 6%."
5. UPS Access Points
As part of his response to the question on peak, Gray reminded investors about UPS' plans to expand UPS Access Points -- locations used as alternatives to home delivery for e-commerce deliveries to consumers. "We're going to deploy them in over 100 cities, and we'll have over 8,000 Access Points by the end of the year," he said.
Their expansion should help the company's efforts during peak demand, and also help allay some of the fears that retailers and restaurants such as, say, Waffle House, are about to eat UPS' lunch. By offering themselves as drop-off points and using alternative delivery methods, companies like Waffle House could threaten UPS in future. .
Where next for UPS in 2015?
All told, investors should keep an eye out on the U.S. economy, because slower economic growth will surely hurt UPS. B2C growth is slowing, but so far it's a major issue, and in any case, the company's focus is certainly on making sure it deals with B2C peak demand adequately during the holiday season. Meanwhile, the international segment continues to do well.
In short, all eyes are on the economy, and how UPS handles peak demand this year.