UPS lowers 2012 view on slowing global economy

Tue Jul 24, 2012 1:06pm EDT

A bicycle delivery man rides past a UPS truck in New York's Times Square, July 23, 2012. REUTERS/Brendan McDermid

A bicycle delivery man rides past a UPS truck in New York's Times Square, July 23, 2012.

Credit: Reuters/Brendan McDermid

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(Reuters) - United Parcel Service (UPS.N) lowered its 2012 outlook, citing global economic uncertainty, and the world's largest package delivery company said it would cut capacity in Asia after exports from that region slowed.

UPS, which on Tuesday reported a quarterly profit that missed estimates, said it is considering other capacity adjustments and spending controls as more customers favor less-expensive delivery options.

"Economies around the world are showing signs of weakening and our customers are increasingly nervous," UPS Chief Executive Scott Davis said.

Double-digit declines in high-yielding shipments from Asia to Europe and the United States were a drag on profitability in the quarter, UPS executives told analysts on a conference call.

"In the U.S., uncertainty stemming from this year's elections and the looming fiscal cliff constrain the ability of businesses to make important decisions such as hiring new employees, making capital investments and restocking inventories," said Davis.

UPS forecast that U.S. gross domestic product will grow by 1 percent in the second half of the year, a slower rate than the general consensus.

UPS said it plans to reduce its service network in Asia by 10 percent because of the slowing export traffic.

Chief Financial Officer Kurt Kuehn said the company expects to record a lower third-quarter profit than a year ago but that the fourth quarter should show "solid improvement."

"With Europe having so much uncertainty, we've heard some anecdotes that in August, some (European) businesses may shut down rather than just taking a couple of weeks holiday," Kuehn said in an interview. "We think there is some risk that Europe will have a more dramatic slowing in August."

But as technology companies launch new products in the fourth quarter, demand for UPS shipping services out of Asia should increase, he said.

In the United States, deliveries in the second quarter rose 3.5 percent, driven by e-commerce shipping to residential customers. International exports were up about 1 percent.

The company does not expect major network restructuring in the United States but is looking to reduce spending.

"We will be looking at a typical range of costs ... initiatives, discretionary spending, really just making sure we've recalibrated the network," Kuehn said.

UPS lowered its full-year outlook to $4.50 to $4.70 a share, from its prior earnings estimate of $4.75 to $5.00 per share, citing growing customer concerns about the economy.

The revised full-year outlook would represent an increase of between 3 percent and 8 percent over 2011 adjusted results.

"International is week, but we've known that and it appears to be manageable," said Benjamin Hartford, a senior research associate at Robert W. Baird in Milwaukee.

"But we've seen a weakening in domestic freight trends over the past two to three months and that appears to be the biggest near-term headwind for UPS, and they're taking cost actions to adjust to lower assumed growth," he added.

UPS shares fell 5.2 percent to $73.80 in midday trading, wiping out most of this year's gain. The stock is up 1 percent so far this year.

Atlanta-based UPS's adjusted profit rose 7.5 percent from a year ago to $1.15 per share, shy of the $1.17 per share average estimate according to Thomson Reuters I/B/E/S. Revenue rose to $13.35 billion, below the $13.7 billion estimated by analysts on average.

Raymond James & Associates has a strong buy recommendation on UPS. The election and uncertain global economy "create earnings uncertainty for a couple of quarters, but beyond that we should see re-accelerated growth on pent-up demand," said Art Hatfield, managing director of equity research.

UPS and No. 2 parcel delivery company FedEx (FDX.N) are viewed as economic bellwethers because of the volume of goods they handle.

FedEx said in June it was stepping up cost-cutting measures, such as upgrading its fleet to more fuel-efficient aircraft, to boost profits as a sluggish global economy curbs shipping volume and demand for premium-priced delivery options.

UPS expects to close on the purchase of Dutch company TNT Express (TNTE.AS), the biggest takeover in its 105-year history, in the fourth quarter.

(Reporting By Lynn Adler; Editing by Maureen Bavdek and Steve Orlofsky)

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