UPS Eases Off Profit Targets

Still, shares rise after the company says the second half should be better than the first half of the year.
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UPS

(UPS) - Get Report

said a stagnant economy and higher fuel costs dragged its second-quarter earnings down 18.3%, and the package carrier trimmed its full-year profit projection.

Despite reducing the earnings range it provided three months ago, the company still forecast that the second half of the year would be better than the first half, lifting its shares 3.2% at $61.35. Rival

FedEx

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was up 2.2%.

For the quarter, UPS said it earned $873 million, or 85 cents a share, in line with estimates. Revenue rose 6.7% to $13 billion. Analysts had estimated $12.8 billion. A year earlier, earnings were $1.04 a share.

Earnings fell in both the domestic and international package segment, while the supply chain and freight segment posted increases. Fuel expenses rose by 67%, premium package volume fell, and U.S. imports were weak.

"It's obvious to everyone in the business world that economic conditions continue to slow," said CEO Scott Davis, on an earnings conference call. "Recovery is expected to be a slow, drawn-out process."

CFO Kurt Kuehn attributed about half of the company's profit decrease to the lag time in implementing fuel-cost surcharges. Additionally, he said, "import volume into the U.S. from every region in the world declined." Such trends could force UPS to reduce long-haul air service, he said.

The company forecast it would earn between $3.50 and $3.70 during 2008, with earnings of $1.78 to $1.98 in the second half compared with $1.72 in the first half. Analysts are estimating full-year earnings of $3.64. In April, the company had said it had expected full-year earnings of $3.90 to $4.20 a share. The new outlook is based on oil prices around $140 a barrel.

Kuehn said a new labor contract, which takes effect in August, will have a positive effect on the fourth quarter. Additionally, negotiators are working to quickly complete a deal to provide airlift services for DHL Air Express in North America, which would improve margins, while "the headwinds that put us on our heels in the second quarter will moderate," he said.

During the second quarter, in the U.S. domestic package segment, operating profit was about $900 million, down from $1.19 billion a year earlier. Average daily package volume declined 1.3% to 13.1 million from 13.2 million.

In the international package segment, operating profit fell to $407 million from $475 million. The supply chain and freight division saw its operating profit rise to $148 million from $98 million.