By Lisa Baertlein and Priyamvada C
(Reuters) -United Parcel Service cut its full-year revenue and profitability targets on Tuesday as the world's largest package deliverer faces higher labor costs and fights to win back U.S. business lost during tumultuous contract talks with the Teamsters.
UPS reached a tentative five-year deal for some 340,000 U.S. employees represented by the International Brotherhood of Teamsters union shortly before the July 31 expiration of their contract. In the run-up to the deal, as the union threatened to strike, customers diverted more shipments than expected to rivals, UPS CEO Carol Tome said on a conference call with analysts.
Rival FedEx (NYSE:FDX) required that shippers ramp up volume ahead of the UPS contract expiration in order to guarantee deliveries during a potential strike.
UPS customers shifted about 1 million packages per day to other providers, resulting in about $200 million of lost sales. Data suggests the U.S. Postal Service, FedEx and regional rivals each picked up about one-third of that business, Tome said.
"It's all hands on deck to get back the volume that was diverted as a result of the negotiations," she said, adding that the company expects to complete that effort by the end of 2023.
Atlanta-based UPS also grappled with business losses in previous contract negotiations. Much of that is expected to return because customers want to take advantage of volume discounts.
Voting by employees on whether to ratify the handshake labor agreement wraps up on Aug. 22. The deal includes wage hikes, ends a two-tier wage system for delivery drivers, adds one paid holiday and begins installing air conditioning in new delivery trucks next year. UPS retained flexibility for weekend service, temporary holiday workers and technology adoption.
UPS forecast annual consolidated revenue to be about $93 billion in 2023, down from a prior view of about $97 billion, and said it expected adjusted operating margin this year of around 11.8%, compared with an earlier forecast of about 12.8%.
Shares of UPS were down about 1.0% in mid-afternoon trading, while FedEx shares were up about 2%.
UPS said it would detail labor costs from the deal after it is ratified by employees.
'STAY ON STRATEGY'
UPS, often seen as a bellwether for the U.S. economy, and other logistics companies are facing a global shipping demand slump from soft e-commerce and weak export and industrial production that has squeezed margins.
The company reported adjusted profit of $2.54 per share for the second quarter, beating market expectations by 4 cents per share. Revenue fell about 11% and missed estimates of $23.1 billion, as per Refinitiv data.
The quarterly profit beat "underscores continued strong execution by UPS," Fadi Chamoun, an analyst at BMO Capital Markets, said in a client note. Nevertheless, Chamoun said the forecast revision calls for "a very meaningful step down in profitability" that has potential negative implications for 2024 and 2025.
To shield its profit, UPS slashed costs and focused on moving high-margin parcels for healthcare and other businesses.
Its U.S. division, which accounted for 58% of adjusted operating profit in the second quarter, cut labor hours by almost 10% and lowered its management headcount by 2,500. It also reduced flights by moving more air volume into its Worldport hub in Louisville, Kentucky, and improved efficiency by shifting package flows from smaller non-automated buildings to larger automated facilities.
"We will stay on strategy to capture growth in the most attractive parts of the market," Tome said.