AP
UPS reports 2Q profit decline, lowers outlookTuesday July 22, 5:38 pm ET
By Harry R. Weber, AP Business Writer
UPS says profit fell nearly 21 percent in second quarter, lowers outlook for year


ATLANTA (AP) -- Customers are using UPS shipping services within the U.S. less amid a slumping U.S. economy and soaring fuel prices. The company's international business was affected as imports into the country declined in the second quarter.

As it reported a nearly 21 percent profit decline in the April-June period and lowered its outlook for the year, United Parcel Service Inc. said Tuesday it was working to cut costs.

"Brace yourselves for more tough times," Edward Jones analyst Dan Ortwerth said.

Even so, Ortwerth said the Atlanta-based company has the financial wherewithal to steer through the rough patch. UPS shares rose more than 4 percent in Tuesday trading.

"There is far too much long-term competitive pressure as the economy globalizes to meet customer needs and to meet them rapidly, and businesses cannot afford to walk away from the best services available to them," he said.

UPS, hit by an average daily volume decline in the U.S. and soaring fuel costs, said its profit was $873 million, or 85 cents a share, in the second quarter, compared to a profit of $1.10 billion, or $1.04 a share, for the same period a year ago. Revenue grew to $13 billion from $12.2 billion.

"We're feeling the impact of higher energy costs throughout the company," Chief Executive Scott Davis told analysts during a conference call.

UPS' international business, usually a strong spot for the company, saw moderating growth in the second quarter as import volume into the U.S. declined. The company has seen slower growth in premium services in the major regions of the world. The international unit still saw a volume increase in the quarter, thanks to exports from various countries.

Executives said they were taking several initiatives to control costs, including a freeze on hiring non-sales jobs.

The earnings results for the most recent quarter met Wall Street expectations, which were reduced after UPS provided updated guidance on June 23. Analysts polled by Thomson Financial, on average, expected earnings of 85 cents a share in the April-June quarter.

UPS can pass higher fuel costs on to customers as a fuel surcharge on shipments. However, the surcharge increases have not kept pace with rapidly rising fuel prices.

Operationally, UPS' average daily package volume in the U.S. declined 1.3 percent in the second quarter. Domestic next-day air shipments declined 6.1 percent, while deferred shipments declined 2.3 percent. Ground shipments declined a slight 0.7 percent.

As she unloaded packages from her SUV and dropped them off at a UPS Store in Atlanta on Tuesday, Amy Mattingly, a 41-year-old homemaker, said with a smile, "Nothing's that important it has to get there the next day."

She said that if the economy worsens and gas prices continue to soar, she may buy things online more and have them shipped to her, rather than drive to a store to shop.

"I'm more likely to do that than walk around a store and look," she said.

Online shipping could be a way for UPS to increase revenue if people's shopping patterns change substantially.

"We think that is one area where there is an opportunity," Chief Financial Officer Kurt Kuehn said in an interview.

For the first half of the year, UPS earned $1.78 billion, or $1.72 a share, compared to a profit of $1.95 billion, or $1.82 a share, for the same period a year earlier. Six-month revenue rose 6.6 percent to $25.68 billion, compared to $24.1 billion recorded a year earlier.

Going forward, UPS said it expects earnings per share for 2008 to be within a range of $3.50 to $3.70. Previously, it expected earnings per share for the full year to be between $3.90 and $4.20. Analysts expected $3.64 per share for the year.

Davis said UPS' strategy on acquisitions has not changed. The company is interested in expanding its international package business. Asia and Europe are of particular interest to the company, he said.

Kuehn said the company's stock buyback program remains on pace.

UPS is working out a contract to carry some air packages for DHL, the struggling U.S.-based express shipping unit of German postal service Deutsche Post AG. UPS, when it announced the proposed collaboration on May 28, predicted that the deal, when completed, will add up to $1 billion in annual revenue for the company.

The deal could be a significant blow to DHL's current vendors for the air shipments UPS is seeking to take over. Thousands of jobs could be lost in Ohio, where some officials are trying to scuttle the deal.

UPS shares rose $2.65, or 4.5 percent, to close at $62.11 in Tuesday trading.