UPS hits US 'bump in the road'
UPS, the world’s largest package delivery group, has warned it faces a “challenging year” in the US as the slowing domestic economy puts the brakes on parcel shipments.
Shares in the group were down more than 3 per cent yesterday afternoon after it issued lower-than-expected earnings guidance for 2007 and said the year had started slowly in the US.
But Scott Davis, chief financial officer, remained “bullish” about the long-term outlook, predicting that the US slowdown would prove short-lived.
“We feel that this economy is a bump in the road and expect it to get back to normal towards the end of this year or the start of 2008,” he said.
Mike Eskew, chief executive, said domestic weakness would be offset by continued strength in international business this year, predicting that global trade would remain robust.
Surging international shipments, particularly from Europe and Asia, helped lift fourth-quarter net profits by 7.5 per cent, in spite of weaker-than-expected US volumes in the peak shipping season before Christmas.
UPS has invested heavily in its international network over the past decade to take advantage of soaring cross-border trade and reduce dependence on the mature US market.
The group is engaged in a fierce battle for global dominance against FedEx, its largest US rival, and DHL and TNT, the two biggest European competitors.
UPS is building a new Asian hub in Shanghai, China, and last year completed a Dollars 135m expansion of its European hub in Cologne, Germany, almost doubling capacity.
International revenues rose 10 per cent in the fourth quarter, compared with a 4 per cent increase in domestic business.
In addition to generating stronger volume growth, international business is also more profitable, with an average operating margin of 21 per cent, compared with 15.9 per cent for domestic packages. But domestic shipments still account for about two-thirds of total revenues, leaving the group heavily influenced by economic conditions in the US.
Mr Davis said the domestic parcel market was closely correlated with US industrial production growth, which is forecast to fall by more than a third this year.
He forecast full-year earnings growth of 6-10 per cent, below last year’s 11 per cent and shy of the group’s long-term target of 9-14 per cent. Weakness in the US trucking market helped push the group’s struggling supply chain and freight division narrowly into the red in the fourth quarter.
But Mr Davis said the business would improve this year after cost-cuts and restructuring.
Total net earnings were Dollars 1.13bn, or Dollars 1.04 a share, in line with Wall Street expectations. Revenues rose 5.6 per cent to Dollars 12.6bn.
