The chairman and CEO of UPS Inc. today tempered his view on the U.S. economic recovery, saying the domestic economic outlook today is "muddier" than it was at the start of the year and that the U.S. economy "will not be robust at all" during 2011.
Scott Davis told a Sanford C. Bernstein investor conference in New York City that UPS expects slightly less than 3 percent expansion in gross domestic product (GDP) in 2011, with better prospects for the second half of the year than the first half. UPS's 2011 projections of 17- to 24-percent earnings growth over 2010 are not based on projections of strong economic growth but are instead predicated on the carrier's offering a better value proposition to customers and by executing more efficiently, Davis said. The company feels reasonably bullish about the global economic landscape, he added.
UPS's comments on the macro-economic outlook are considered significant because the shipping giant transports the equivalent of 6 percent of U.S. GDP and about 2 percent of the world's output of goods and services.
Davis said the company has been able to maintain firm pricing across its three business channels: domestic package, international package, and supply chain and freight. Davis said he was particularly satisfied with the performance of the supply chain business, which is finally showing profit margins in the mid to high single-digit range after many years below that threshold. The one exception is UPS Freight, the company's less-than-truckload operation, which is at about a break-even profit position, Davis said.
"We have an ability to do a better job in price across our solutions portfolio," Davis said.
Despite high oil prices and a general moderating in economic growth, Davis reported that UPS has seen little, if any, customer trade-down from air to less-expensive ground or ocean service. Nor is it seeing a downgrade from express services to slower, less-costly non-express solutions, he said.
The reason is that businesses remain committed to keeping inventories lean and are willing to pay for expedited shipping to avoid maintaining buffer stock, Davis said. "People will never stock high inventories again," he said, adding that the low-inventory mindset has become permanently entrenched in the supply chain landscape. Disruptive events like the earthquake and tsunami in Japan may alter practices for a few months, but with the exception of the auto industry, businesses will soon return to the low-inventory practice, he said.
Davis said UPS's capital expenditures will run only 4 to 5 percent of revenue over the next two to three years, well below the company's traditional ratio of about 8 percent of revenue. The company invested heavily in the past five to 10 years on equipment and technology, and is able to throttle back on expenditures as it works to reap the benefits of the prior investments, Davis said.
The executive predicted that by 2026, about half of UPS's business will be in the business-to-consumer segment, as e-commerce becomes a staple in personal and business lives in the United States and overseas. Many e-commerce shipments consist of one or two small, lightweight items, making them suitable for UPS's core small-package delivery network.