UPS scales back company, economic projections as domestic, international weakness hit Q2 results

UPS Inc., hit by slowing domestic freight volumes and persistent weakness in Asian and European markets, has scaled back second-half growth projections for its business and for the macro economy in which it plays such a huge role.

In releasing its second quarter results yesterday, the Atlanta-based shipping and logistics giant reduced its earnings-per-share guidance for the rest of 2012. UPS cited the growing U.S. economic slowdown and weakness in key world markets as the reason for the revision in its numbers.

"As we look toward the second half of the year, customers are more concerned as greater uncertainty exists. Additionally, economic growth expectations have come down," said Kurt Kuehn, UPS' CFO.

UPS, whose forecasts often err on the side of caution, predicted U.S. Gross Domestic Product growth of just 1 percent in the second half of the year, a slower pace of expansion than many have projected. Given that UPS ships the equivalent of 6 percent of U.S. GDP and about 2 percent of the world's output, its macro forecasts are not taken lightly.

MIXED RESULTS
Kuehn labeled the second quarter performance as "mixed." Decent results in the domestic package market and supply chain and freight segments were offset by declines in intercontinental and European intra-country markets.

The weakness that hit in the second quarter is likely to persist into the third quarter before cost-reduction steps taken by UPS bring fourth-quarter results into favorable stead with the same period in 2011, according to Benjamin Hartford, analyst for Robert W. Baird & Co.

In the second quarter, domestic revenue rose 4.1 percent over the prior-year period, which included by a 3.5-percent gain in package volume. Ground volumes grew by 3 percent, and next-day and deferred air traffic rose 5 percent and 8.6 percent, respectively.

The domestic numbers were skewed by double-digit gains in low-weighted e-commerce shipments that don't generate the same level of revenues and operating margins as UPS' heavier shipments. Not surprisingly, the average revenue per package rose just 0.6 percent, as the company's higher base rates were neutralized by the growing prevalence of e-commerce transactions.

UPS, like other providers, continues to struggle with weakness out of Asia, with year-over-year double-digit volume declines leading the company to taker another 10 percent of export capacity off the market. Asian export capacity is nearing the capacity reductions taken during the 2009 recession.

The company said it still seeing growth in its intra-regional businesses on the major continents.

UPS Freight, the company's less-than-truckload arm, reported a 2.9-percent year-over-year drop in shipment volumes but a 2.8-percent gain in yields. This indicates that the company is hauling more profitable freight and will not take on business just to gain share or fill trucks.

Analysts didn't find much in the report to be optimistic about in the near term. William Greene, lead transport analyst for Morgan Stanley & Co., said in a research note that "it is tough to be constructive" on parcel trends for the rest of the year. "Given UPS's economic bellwether status, investors will be hard-pressed to ignore UPS's commentary about domestic demand and concerns that trends may get more challenging before improving," Greene wrote.

David G. Ross, analyst for Stifel, Nicolaus & Co., said that the deceleration in business-to-business parcel traffic has been offset by the strength in the business-to-consumer segment, but even that category is starting to experience a slowdown. "This lack of freight growth is consistent with what we have heard from the railroads and other truckers, and the carriers appear to be focused more on pricing and operational improvements as a result," Ross wrote.

Separately, UPS and TNT Express have delayed the completion of UPS' planned $6.3 billion buyout of the Dutch express firm pending a more detailed European Commission review of the transaction's competitive impact. Because a review can take up to six months to complete, UPS said the deal will likely close during the fourth quarter rather than during the third.