UPS says its profit will fall after it reaches a Teamsters deal

By Chris Isidore, CNN

New York (CNN) — UPS’s tentative labor deal with the Teamsters hasn’t even taken effect yet. But it has already taken a bite out of its earnings and revenue, as both fell in the second quarter ahead of the deal being reached.

The company also cut its profit forecast, expecting narrower margins, as it works to win back customers who shifted to other services for fear there would be an August 1 strike by the 340,000 Teamsters at the company.

Shares of UPS (UPS) were down 1% in mid-morning trading following the report, although that was up from earlier lows.

UPS reported adjusted income of $2.2 billion in the quarter, down 24% from a year earlier, though slightly better than estimates of analysts surveyed by Refinitiv. Revenue fell 11% to $22.1 billion.

The company also trimmed its full-year revenue outlook by $4 billion to $93 billion. UPS said it lost business during its labor negotiations and online purchases have been weaker. It also said its full-year profit margin will be 1% lower than its previous guidance, partly due to the cost of the labor deal with the union.

Some of the decline in shipment volumes came as shippers started shifting away from UPS even before talks with the Teamsters broke down in early July.

“We experienced more volume diversion [in the second quarter] than we anticipated,” CEO Carol Tome told analysts during a conference call Tuesday. She said about a third of the shipments went to FedEx (FDX), a third went to the US Postal Service and a third went to regional package delivery services. She said about 1 million packages a day were diverted to those other delivery services during the quarter. But that made up only about a bit more than half the dropin domestic package volume in the period. .

Tome said the company is already working to win back the business that was diverted to other carriers.

“It doesn’t happen overnight, of course,” she said. “It’s already starting to flow back in. But we think by the end of the year, we’ll win it all back.”

When talks between UPS and the Teamsters broke down after a marathon session that ended early July 5, it took nearly three weeks for the two sides to return to the table, and additional customers shifted their business to rival carriers to protect themselves from the risk of a strike.

But the shift in volume due to nervous customers wasn’t the only headwind affecting its business. The company had already warned three months ago that it expected lower volumes this year due to a softening economy. Although the US economy has remained stronger than many economists had forecast earlier this year, a shift in consumer buying habits has hurt the trucking industry. Consumers who were staying close to home during the early months and years of the pandemic increased their purchases of goods for their homes, many purchased online. That helped UPS post a series of record annual profits in recent years.

But this year consumers have shifted spending away from goods to services to experiences like travel, movies, eating out and live events such as concerts and sports. Those don’t move by truck.

Despite the lower revenue and earnings guidance, the company said it expects to stick with its plan to pay $5.4 billion in dividends and repurchases of $3 billion in shares.

The company reached a tentative deal with the Teamsters on July 25, just ahead of an August 1 strike deadline. The 340,000 members of the union who work at the company are now voting on whether or not to ratify the deal. Vote results are expected on August 22.

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