Carol Tomé changed United Parcel Service Inc.’s. management theme to “Better and Bolder” during contentious labor-union talks last year, leaving investors wondering what the chief executive officer meant. They know now.
On Tuesday, after reporting disappointing earnings, UPS announced it would save more than $1 billion by cutting 12,000 of its 85,000 management jobs. The company also will demand that workers be in the office five days a week. And it will study selling its trucking brokerage business, which has slumped amid a freight recession.
“We are going to fit our organization to our strategy and align our resources against what’s wildly important,” Tomé said on the earnings call. She said that even after shipping volumes grow, those jobs will not come back, as “it’s a change in the way we work.”
Tomé and other UPS executive on the analyst call hinted at more changes to come, repeating multiple times that they would offer additional details at its March 26 Investor Day.
UPS shares fell 8.2% on Tuesday in New York, the biggest drop since April.
The jobs cuts, likely the largest in UPS’s 116-year history, were made possible by new technologies including artificial intelligence, Tomé said. Citing one example, she said that machine learning allows salespeople to put together proposals without having to get pricing information from executives.
UPS had previously warned that its new labor deal for about 340,000 union members would hurt profit in the first half because a good part of the wage increases come through in the first year.
Tomé said Tuesday that UPS is focused on boosting efficiency. The company’s total payroll had swelled to 540,000 during the peak pandemic demand and is now down to 495,000 employees through attrition, closing stores and other actions, she said.
Glenn Gooding, an industry consultant with iDrive Logistics and a former UPS executive, said that the job cuts will only accelerate a change in UPS’s culture, which in the past saw more top executives rise to the top after starting their careers as delivery drivers or package handlers.
“It will not boost morale,” he said. “Invariably they cut out a lot of real contributors and a lot of knowledge.”
Tomé took the reins of UPS at the height of the pandemic storm in June 2022 and steered the company to higher margins with a theme of “Better, not Bigger,” which signaled the end of chasing volume.
Now she’s having to take bold action to protect those margins that are being hurt by the steep increase of labor costs and from lower volume as shoppers return to stores and inflation bites into buying power.
UPS has won back nearly 60% of its shipping volume lost during contentious union talks last summer when customers who were nervous over a potential strike shifted to competitors. Tomé is trying to win back the rest of that volume without lowering prices, which would only hurt margins.
The Coyote truckload brokerage, which was purchased in 2015, is “highly cyclical with considerable earnings volatility,” Tomé said. The potential divestiture would add to UPS’s move away from the trucking business after Tomé sold UPS’s less-than-truckload unit for $800 million in 2021.
“Perhaps this is worth more to someone else than it is to us,” she said.
UPS had snapped up companies like Coyote to provide a larger range of services to keep ahead of FedEx Corp., said John Haber, chief strategy officer for Transportation Insights, which offers logistics services. But Tomé has been more aggressive that previous managers about “selling off businesses that are not producing,” he said.
If UPS sells Coyote soon, it will be near the bottom of the cycle for truck brokerages and the company may face a write down, Haber said.
Sales for 2024 are expected to be between $92 billion and $94.5 billion, UPS said. That’s lower than the $95.7 billion midpoint of estimates from 30 analysts surveyed by Bloomberg News. And the combined effects of the labor deal, which took effect Aug. 1, and the sales outlook will squeeze profit — UPS predicts adjusted operating margin will be 10% to 10.6% for the year, below analysts’ expectations of 11.3%.
The guidance sets a floor for earnings, said Allison Poliniak-Cusic, an analyst with Wells Fargo, in a note to clients following the conference call.
“Investors will likely take a skeptical view, given 2023’s challenges,” Poliniak-Cusic said. “We believe the UPS cost story is in the early stages.”
Conor Cunningham, an analyst with Melius Research, said that the first quarter of the year was likely the low point for margins.
“This guide seems conservative but likely needed as UPS looks to get a couple wins under their belt given the missteps in 2023,” Cunningham said.