Tuesday, United Parcel Service, Inc. (UPS), the world's largest package-delivery company, reported a 21% drop in its second-quarter profit as surging fuel costs and a weak U.S. economy hurt domestic shipments. UPS' earnings results were in line with its own projections and matched Wall Street's projections. However, the company reduced its full-year earnings forecast.
Increasing fuel costs and a stagnant U.S. economy caused the earnings decline in both the U.S. Domestic and International Package segments, the company said.
Kurt Kuehn, UPS's CFO, said, "Slow U.S. economic activity and fuel price increases hit us and our customers during the quarter."
The Atlanta, Georgia-based company posted second-quarter net income of $873 million, or $0.85 per share, down from $1.10 billion, or $1.04 per share, in the same quarter last year.
On average, 14 analysts polled by First Call/Thomson Financial expected earnings of $0.85 per share for the second quarter. Earlier, UPS estimated second-quarter earnings in the range of $0.83 to $0.88 per share.
On a sequential basis too, the latest quarter's profit decreased from $906 million or $0.87 per share reported in the first quarter of 2008.
Operating profit for the second quarter declined 18% to $1.45 billion from $1.77 billion last year. Operating margin also dropped to 11.2% from 14.5% in the corresponding quarter of 2007.
Quarterly revenues rose 6.7% to $13.0 billion from $12.2 billion in the comparable quarter a year-ago. Eight Wall Street analysts had a consensus revenue estimate of $12.81 billion. Also, sequentially, the revenues grew from $12.3 billion generated in the first quarter of 2008.
For the latest quarter, UPS delivered consolidated volume of 959 million packages, essentially unchanged from last year, and revenue per piece increased 5.9%. According to UPS, a 67% increase in fuel expense, a reduction in premium product volumes and weakness in U.S. imports negatively affected the quarterly results.
Among the segments, U.S. Domestic Package revenue increased 1.8% to $7.71 billion from $7.58 billion a year-ago. However, segment profit fell 24.6% to $899 million from $1.19 billion prior year.
The slow U.S. economy caused average daily volume in the United States to decline 1.3% in the quarter and also contributed to a more pronounced reduction in premium products than in the previous quarter.
International Package unit generated revenue of $2.95 billion, up 18% from $2.5 billion last year. Profit for the unit, however, slipped 14.3% to $407 million from $475 million last year. International results were negatively impacted by higher fuel costs, declining U.S. import volume and slower growth in premium services in the major regions of the world.
Supply Chain & Freight segment had 10.9% growth in revenue of $2.34 billion, compared to $2.11 billion in the prior year period. As a result, segment profit rose 51% to $148 million from $98 million in the same period last year. Results were driven by the continued strong performance of the Forwarding and Logistics businesses.
For the first-half, UPS reported earnings of $1.78 billion or $1.72 per share, lower than $1.95 billion or $1.82 per share in the first-half of last year. Total revenue, however, increased 6.6% to $25.7 billion from $24.1 billion in the corresponding period prior year.
CFO Kuehn said, "Even though economists do not predict a recovery until 2009, we anticipate that the second half of 2008 will generate modestly better results than the first half, assuming business conditions do not worsen."
For the second half, the company forecasts earnings between $1.78 and $1.98 per share, up from $1.72 a share earned in the first half.
Kuehn also pointed out that comparisons to last year's results would be more difficult in the third quarter and moderate in the fourth.
For the full-year, UPS lowered its earnings target to a range of $3.50 - $3.70 per share from prior estimate of $3.90 - $4.20 per share. Analysts expect earnings of $3.64 per share for the full-year.
Shipping companies are under pressure, as decline in consumer spending and slumping housing market have dampened the companies' core business. In addition, skyrocketing oil prices are eating into their profits and showing no signs of receding. With crude oil prices at record highs, companies like UPS are bound to feel bigger pinch in future. Adding to their woes, the slowing U.S. economy has also reduced demand for freight services. UPS is passing higher fuel costs on to customers through fuel surcharge on shipments. However, the surcharge increases have not kept pace with rapidly rising fuel prices.
In May, UPS, a Dow component, said it would work towards an agreement with Deutsche Post AG's struggling U.S. unit DHL Express under which UPS would provide air-shipping services to DHL in the U.S. UPS expects a final contract to be reached later this year. The agreement, when finalized, is expected to extend for 10 years and generate up to $1 billion in additional annual revenue for UPS.
UPS, along with rival FedEx Corp. (FDX), is considered a barometer for the state of the U.S. economy as a whole. Last month package delivery giant FedEx reported a fourth-quarter loss of $241 million or $0.78 per share after it recorded a hefty charge tied to the acquisition of Kinko's. The quarterly results also took a hit from soaring fuel costs and a weak economy, which limited demand for U.S. domestic express and copy and print services.
UPS shares are up $1.85 or 3.11% and currently trading at $$61.31. In the past 52-weeks, the stock has been trading between $56.10 and $78.99.
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