April 26, 2018 / 11:44 AM / 7 months ago

UPDATE 3-More parcels, higher prices lift UPS profit but costs soar

(Adds analyst reaction, paragraph 6; 2018 EPS outlook paragraph 7)

By Eric M. Johnson

NEW YORK, April 26 (Reuters) - United Parcel Service Inc reported higher first-quarter net profit on Thursday, driven by strong package volumes in its core U.S. segment, but higher costs from Saturday delivery and nasty winter weather weighed on operating results.

The world's largest package delivery company, viewed as an indicator of economic strength, reported revenue increased 10 percent to $17.1 billion in the first quarter from a year ago, topping analyst expectations of $16.47 billion.

Revenue at its core U.S. domestic package service rose 7.2 percent to $10.2 billion from a year-ago, driven by a 4.6 percent rise in package volumes fueled by the growth of online purchases.

However, severe winter weather dragged down its operating profit by $85 million, as did higher expenses for network improvements, higher pension costs, and a big expansion of Saturday delivery over the last year. Operating profit in its core domestic segment plummeted 20 percent, and was down 6 percent overall.

Shares were flat in pre-market trade.

"Higher costs continue to pressure earnings," Cowen & Co analyst Helane Becker said in a research note. "In general, the company struggles with capacity issues during the peak season (the weeks leading up to Christmas), and could have issues achieving their EPS target unless their performance improves."

UPS reaffirmed its 2018 earnings per share range of $7.03 to $7.37.

The company also maintained its 2018 spending plan of between $6.5 billion to $7 billion, and said it spent $1.5 billion in the quarter on network improvements like new technology and automating its parcel sorting hubs.

Atlanta-based UPS and rival FedEx Corp have spent billions of dollars upgrading networks to handle surging e-commerce package volumes, weighing on margins and leaving investors frustrated over the expense.

The rapid rise in online shopping has been a boon for shipping demand, but UPS has struggled to bring down the extra costs of making more, smaller deliveries to households, compared to businesses that receive more parcels at once.

Revenue per parcel delivered rose just 2.6 percent, as higher prices and fuel surcharges offset the higher costs associated with delivering packages bought online, the company said.

UPS is betting that if it can handle more volume it can increase the number of packages it delivers to households and improve profitability, versus pushing for higher prices and less volume, analysts say.

UPS posted first-quarter net income of $1.35 billion or $1.55 per share, up from $1.17 billion or $1.33 per share a year earlier, a 17 percent rise on a per share basis.

Analysts expected earnings per share of $1.54. (Reporting by Eric M. Johnson in New York Editing by Nick Zieminski)

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