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UPS Sees Cooling Demand Showing Lower U.S. Economic Gains

UPS Cuts Full-Year Forecast as Slowing Economy Presses Earnings
A United Parcel Service Inc. driver delivers packages in San Francisco, California. Photographer: David Paul Morris/Bloomberg

United Parcel Service Inc. predicted the U.S. economy will grow 1 percent in the rest of 2012 as slowing volume growth prompted the world’s largest package-delivery company to conclude average forecasts are too high.

The projection by Atlanta-based UPS, an economic bellwether because it moves goods from financial documents to pharmaceuticals, contrasts with a 2.2 percent growth rate predicted by economists in a Bloomberg survey.

“Right now, the estimates are a little too optimistic,” Chief Financial Officer Kurt Kuehn said today in a telephone interview. “We’re not trying to ring the alarm bell, but we do think that there’s probably a little more likelihood that the numbers will turn lower than estimates.”

UPS is bracing for the slower expansion, reducing its full-year profit outlook to $4.50 to $4.70 a share from an April projection of $4.75 to $5 after second-quarter earnings trailed analysts’ estimates.

The stock dropped 4.6 percent to $74.34 at the close in New York, the most since Aug. 8. That trimmed UPS’s gain for the year to 1.6 percent.

Revenue in the International Package business, the company’s second-largest, fell 4 percent to $3.01 billion as exports from Asia to the U.S. and Europe decreased. A declining euro exacerbated currency fluctuations that pulled the unit’s yields down about 4.5 percent, UPS said.

‘Not Immune’

“International volume is particularly weak,” Kevin Sterling, an analyst at BB&T Capital Markets in Richmond, Virginia, said in a telephone interview. “They are not immune from China softening and everything happening in Europe.”

FedEx Corp., the operator of the biggest cargo airline, has encountered similar pressures internationally. Last month, the Memphis, Tennessee-based company cited Europe’s debt crisis and a slowdown in Asia when it gave a smaller profit forecast than analysts estimated for the fiscal year ending in May.

UPS is reducing its Asian air network by 10 percent, to the size it was in 2009, mostly by decreasing the frequencies of flights, Kuehn said.

“The Asia export story has been a really significant shift,” he said. “We are seeing shipments within Asia continue to grow and we think that’s a trend that’s going to become increasingly important.”

Asia Rebound?

In the fourth quarter, the company predicts an uptick in Asian exports driven by new products from large manufacturers.

Companywide revenue climbed 1.2 percent to $13.3 billion, UPS said. Growth was slower than last quarter’s 4.4 percent expansion partly because of customers opting for cheaper shipment options.

Some of the adjustments UPS announced may imply the company is “gearing the business to be permanently lower,” Helane Becker, an analyst at Dahlman Rose & Co. in New York, said in an interview. “UPS is so big. It just may wind up growing in line with the economy.”

Second-quarter net income climbed 2.2 percent to $1.12 billion, or $1.15 a share, from $1.09 billion, or $1.09 a share, a year earlier, as U.S. domestic package revenue increased. Volume gains there were driven by lightweight shipments from online retailers to their customers, UPS said.

“The deferred products are still leading the pack,” Logan Purk, an analyst at Edward Jones & Co. in St. Louis, said in a telephone interview. “Clients are still choosing the slower methods of delivery and that is impacting results in terms of yield.”

‘Gradual Deceleration’

Kuehn said softening in the U.S. economy has come with a “gradual deceleration” in business-to-business shipments, which make up more than 60 percent of the UPS network. The business-to-consumer component continues to show “fairly solid growth,” he said.

The company, which is seeking to expand in Europe with the $6.5 billion acquisition of TNT Express NV, said it expects to complete the purchase in the fourth quarter. The deal is the biggest in UPS’s 105-year history.

“Europe continues to be a good story for us,” Chief Executive Officer Scott Davis said on an earnings call. “Intra-regional shipments are continuing to show growth.”

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