Earnings Decline Caused by Economic Weakness, Fuel Costs;
Supply Chain & Freight Continues to Exceed Expectations
– UPS (NYSE:UPS) today reported a 6.7% revenue increase in the second quarter but an 18.3% decline in diluted earnings per share to $0.85 compared to $1.04 the prior year. Increasing fuel costs and a stagnant U.S. economy caused the earnings decline in both the U.S. Domestic and International Package segments.
In contrast, the Supply Chain and Freight segment posted a substantial improvement in profitability.
“Although operating conditions in the second quarter were challenging, UPS firmly believes the long-term growth fundamentals for our company and for our industry are very favourable”, said Scott Davis, UPS chairman and CEO. “We are helping our customers manage through this difficult period while doing everything we can inside UPS to adapt to current conditions”.
Consolidated Results 2Q 2008 2Q 2007
Revenue $13.00 B $12.19 B
Operating profit $1.45 B $1.77 B Operating margin 11.2 % 14.5 %
Average volume per day 15.0 M 15.0 M
Diluted earnings per share $0.85 $1.04
For the three months ended June 30, 2008, UPS delivered consolidated volume of 959 million packages, essentially unchanged from the second quarter last year. Revenue rose to $13.0 billion and revenue per piece increased 5.9%. Results were negatively affected by a 67% increase in fuel expense, a reduction in premium product volumes and weakness in U.S. imports.
Cash Position
For the first six months of 2008, free cash flow remained strong at $3.4 billion, including approximately $1 billion in U.S. federal cash tax benefits related to the company’s withdrawal from the Central States Pension Plan. The company also:
• Purchased 34.8 million shares at a cost of $2.4 billion.
• Paid dividends totaling $1.3 billion.
• Invested $1.4 billion in capital expenditures.
• Ended the quarter with $1.7 billion in cash and short-term investments.
U.S. Domestic Package 2Q 2008 2Q 2007
Revenue $7.71 B $7.58 B
Operating profit $0.90 B $1.19 B
Operating margin 11.7 % 15.7 %
Average volume per day 13.1 M 13.2 M
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. Volumes per day declined 6.1% for Next Day Air®, 2.3% for deferred air and 0.7% for ground. Consolidated revenue per piece rose 3.1%, increasing for all services.
These factors, along with the rapid increase in fuel cost and the impact of the two-month lag in the application of the fuel surcharge, were responsible for the declines in second quarter operating results.
During the quarter, UPS and DHL announced they were working on a 10-year agreement through which UPS would provide air lift for DHL’s express, deferred and international volume within the U.S. and between the U.S., Canada and Mexico.
International Package 2Q 2008 2Q 2007
Revenue $2.95 B $2.50 B
Operating profit $407 M $475 M
Operating margin 13.8 % 19.0 %
Average volume per day 1.93 M 1.80 M
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.
Export volume increased an industry-leading 10.2%, aided by the calendar effect of an early Easter, which boosted growth rates by approximately 2%. However, volume growth slowed significantly through the quarter.
During the period, UPS continued its global investments. In the United Kingdom, the company completed network integration of Tamworth, its largest ground hub outside the U.S. In Asia, UPS announced construction of an intra-Asia hub in Shenzhen, China; initiated five weekly flights to Nagoya, Japan, and concluded the buyout of its joint venture partner in Korea.
Supply Chain and Freight 2Q 2008 2Q 2007
Revenue $2.34 B $2.11 B
Operating profit $148 M $98 M
Operating margin 6.3 % 4.6 %
Segment revenue increased almost 11% with operating profit climbing more than 50%. Results were driven by the continued strong performance of the Forwarding and Logistics businesses. During the quarter, UPS announced an expansion of its logistics campus in Burlington, Ontario, Canada, to address healthcare and high-tech customers’ needs.
UPS Freight LTL revenue grew 7.2%, but shipments declined 2.3% as a consequence of the stagnant U.S. economy. UPS Freight expanded its reliability guarantee on shipments to and from Canada and introduced time-in-transit enhancements to 1,000 lanes in the United States.
Outlook
“Slow U.S. economic activity and fuel price increases hit us and our customers during the quarter”, said Kurt Kuehn, UPS’s chief financial officer. “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. Therefore, we are providing earnings-per-share guidance for 2008 within a range of $3.50 to $3.70. This translates to a range of $1.78-to-$1.98 for the second half compared to $1.72 for the first half”.
Kuehn pointed out that comparisons to last year’s results would be more difficult in the third quarter and moderate in the fourth.
“We are taking the necessary steps to control costs, add value for customers and grow our business while adjusting to the realities of today’s challenging environment”, Kuehn added.
UPS (NYSE: UPS) is the world's largest package delivery company and a global leader in supply chain and freight services. With more than a century of
experience in transportation and logistics, UPS is a leading global trade expert equipped with a broad portfolio of solutions. Headquartered in Atlanta, USA, UPS serves more than 200 countries and territories worldwide. The company can be found on the Web at UPS.com. To get UPS news direct, visit www.pressroom.ups.com.
