UPS downbeat on outlook for economy

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UPS, the largest package delivery company in the world, cut its earnings forecast after a “dramatic” weakening in the US economy hit its first quarter earnings and said that conditions were not expected to pick up in the near future.

The company, which is seen as a bellwether for the US economy, said that domestic shipments of packages had fallen in the quarter and US customers were also opting less for costlier services such as overnight delivery.

Net income rose to $906m, or 87 cents a share, in line with projections the company issued in an earnings warning earlier this month. The year before UPS earned $843m, or 78 cents, when one-off costs hit net income. Revenues rose 6.7 per cent to $12.7bn from $11.9bn.

“UPS’s first quarter results illustrate the dramatic slowing in the US economy,” said Scott Davis, UPS chairman and chief executive in call with analysts.

The company said it was cutting its earnings outlook on expectations of continued economic weakness - only the third time it has done so since going public in 1999.

UPS said it was also moving to cut costs - restricting hiring, stopping all “non critical” projects and limiting discretionary spending including business travel to run the business “as tightly as we possibly can”, according to Kurt Kuehn, chief financial officer.

“We see no signs of economic strengthening in the second quarter,” said Mr Kuehn.

UPS forecast earnings per share of $3.90 to $4.20 for the full year, lower than its previous outlook of $4.30 to $4.50 a share.

“UPS is hunkering down and tightening its belt,” said UBS analysts in a note. The company is “too exposed to the US economy, with nowhere to hide.”

In the domestic business, average daily volume fell by 0.3 per cent to 13.25m packages from 13.29m in the same quarter last year. The fall in volume and a shift to cheaper options hit profit margins, which slipped to 12.4 per cent from an adjusted profit margin of 15.3 per cent in the previous year. Operating profit was down 17 per cent at $959m.

“Many of our customers have tightened their belts resulting in a shift away from our premium air products to ground shipments,” said Mr Davis.

UPS’ smaller international delivery business also seemed to have suffered, although export volume growth from the US was “strong”. Although average daily volume was up 2.1 per cent at 1.88m packages, operating profit fell to $421m from an adjusted $440m last year, as profit margins fell. The company said it had been hit by higher fuel costs in the quarter.

Mr Davis said the company would continue to invest in infrastructure and new products and services in spite of the slowdown.

“UPS has successfully managed its operations through many economic cycles and we will do so again,” Mr Davis said.

Shares in UPS were little changed in morning trading at $71.85.

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