UPS today announced a double-digit drop in adjusted Q1, 2008, profits as the weak US economy hitits core parcel business but with continued strong growth for its international package and supply
chain businesses. It also outlined cost-cutting measures and downgraded its full-year profitoutlook.In January-March 2008, UPS increased total revenues by 6.5% to $12,675 million despite flatoverall volumes of 968 million packages, while costs rose 6% on the back of soaring fuel prices.The operating profit was $1,493 million, which was a 9.9% unadjusted rise on Q1, 2007, but a 9.4%drop adjusted to exclude one-off charges 12 months ago.
The Q1, 2008 operating margin was 11.8% compared to the adjusted previous year margin of13.8%. Pre-tax profits were down 12.2% to $1,416 million, based on the adjusted Q1, 2007 figures,and net income fell 11.8% to $906 million.
“U.S. economic activity deteriorated more rapidly than expected during the quarter,” statedScott Davis, UPS chairman and CEO. “While we will be extremely vigilant with respect to costs inthis difficult environment, we will not lose our focus on growing the business. We will continue toinvest in the infrastructure, new products and services that will enable our customers to succeedin the global marketplace. UPS has successfully managed its operations through many economic cyclesand we will do so again.”
CFO Kurt Kuehn told analysts in a conference call that in the USA, where customers areswitching from premium air to cheaper ground services, UPS will cut costs through a hiring freeze,stopping non-critical investment projects and reducing working hours for some handling staff. Buthe highlighted growth opportunities for the international package business in markets such asAsia-Europe and stressed there would be no cutbacks to any major international projects.
In the first quarter, UPS’s dominant US domestic package business increased revenues 2.4% to$7,735 million despite a 0.3% drop in average daily volumes. The operating profit fell 16.8% on anadjusted basis to $959 million as customers downtraded through the product portfolio to cheaperservices and fuel costs rose.
The US next-day air business saw volumes decline 3.8% and revenues fall 0.9%, while thedeferred air business suffered a 2.9% drop in volumes and had a fractional 0.4% revenue increase.The ground package business increased volumes 0.3% and achieved a 3.8% revenue increase. But yieldsfor all three product segments rose due to what Kuehn called “rational pricing” by market playersand higher fuel surcharges.
UPS increased international package revenues by 15.7% to $2,759 million in Q1 on the back ona 10% rise in international export volumes, with Asia, Europe and the US each generatingdouble-digit increases. The international operating profit dropped 4.3% to $421 million due tohigher fuel costs and two fewer working days. Kuehn described Asia-US volumes as “steady” andAsia-Europe growth as “strong”, and said UPS will launch a new Shanghai-Nagoya flight next month.
Looking ahead, UPS does not expect any improvement in the US economy over the coming months,and foresees a 1% downturn in the US package market, and a parallel drop in its own domesticvolumes, this year. But the company is confident of maintaining a 10% growth rates forinternational export volumes.
“Most forecasters are projecting that current anaemic conditions will prevail for theremainder of the year. Therefore, we are reducing our 2008 earnings expectations to a range of$3.90 to $4.20 per diluted share,” Kuehn said.
