Tough quarter starts the year for UPS

International revenue fell to $4.54 billion from $4.87 billion, while operating profit declined to $806 million from $1.12 billion. Average daily volume dropped 6.2% year over year.

At the company’s Supply Chain Solutions business, revenue decreased 22.5% due to rate and volume declines in its freight forwarding business. Gains in the unit’s health care business didn’t fully offset the decline. 

As a result, UPS adjusted its full-year results to touch the low end of expectations. Revenue will come in around $97 billion, while adjusted operating margin will end the year at 12.8%. UPS is looking for a better second half than the first half.

Adjusted diluted earnings per share came in at $2.20, roughly in line with median estimates.

In the U.S. domestic market, the company’s largest market, UPS in the first quarter expected average daily volume to decline between 3% and 4%. For the quarter, average daily volume was down 5.4% year over year, primarily because volume in March moved lower than the company had expected.

Volume mix was lower across the board from retail to high tech. Business-to-consumer average daily volume fell 5.5%, while business-to-business volume fell 5.4%. One bright spot, perhaps unsurprisingly, was returns volumes, which rose 6.8%. B2B accounted for 42.7% of all average daily volumes, unchanged from a year ago.

International was expected to be bumpy, and it was. Asian export activity started very weak due to the extended Lunar New Year holiday. It improved somewhat, but at a more gradual clip than the company expected. Asia export average daily volume was down 8.9% and included a 20% drop in the China to U.S. lane.

Additionally, UPS continued to see a major shift in modal preferences as customers made cost trade-offs and took advantage of faster ground transit times. Total average air daily volume dropped 16.7%, while ground volumes fell 3%. Within Ground, the company’s SurePost product, in which massive parcel volumes are inducted deep into the postal delivery network for last-mile residential deliveries, actually rose a couple of percentage points.

Wall Street, as expected, didn’t respond favorably. As of midafternoon, shares were off about $18.50 a share, a drop of nearly 9.5%.

One of the points Tomé raised was the value of the UPS Store, the retail storefront chain with 5,100 locations. Tomé touted the Store’s density as a super-convenient way to drop off or return a package. The stores are rolling out self-service kiosks where customers can drop off items without shipping labels and be on their way, she said.

UPS, like other carriers, is being hit by a shift in disposable income from goods to services, and a growing percentage of the goods are low-margin foodstuffs that are typically ordered in a store. While the first quarter took a stair step down for each month, April volumes seem to have stabilized, the company said.

Tomé again voiced optimism that a threatened Aug. 1 strike by the Teamsters union could be avoided. The negotiations into a national master contract began a week ago Monday. To be on the safe side, UPS has dispatched 127 high-end account executives to work personally with its top 380 customers, which account for one-third of its total volume, she said.

The role of these high-impact executives is to update customers on ongoing negotiations with the Teamsters and to “keep them with us,” she said. Tomé also said there are contingency plans in the event of a work stoppage and that the company will continue to sell its services through whatever situation arises.

Shippers who may divert parcels away from UPS have told the company they plan to return once the dust settles, she said.

In her first public comment since union leaders said they would not negotiate a national, or master, contract unless the company stopped stonewalling on negotiating 30 of the 40 regional supplemental pacts that accompany the main agreement, Tomé said the company is negotiating in good faith and that both sides have made very good progress.