United Parcel Service Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
January 30, 2024

There are 14 speakers on the call.

Operator

Good morning. My name is Steven, and I will be your conference facilitator today. And I would like to welcome everyone to the UPS Investor Fourth Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. And after the speakers' remarks, It is now my pleasure to turn the floor over to your host, Mr.

Operator

P. J. Guido, Investor Relations Officer. Sir, the floor is yours.

Speaker 1

Good morning, and welcome to the UPS 4th Quarter 2023 Earnings Call. Joining me today are Carole Tome, our CEO Brian Newman, our CFO and a few additional members of our executive leadership team. Before we begin, I want to remind you that some of the comments we'll make today are forward looking statements within the federal securities laws and address our expectations for the future performance or operating results of our company. These statements are subject to risks and uncertainties, which are described in our 2022 Form 10 ks and other reports we file with or furnish to the Securities and Exchange Commission. These reports when filed are available on the UPS Investor Relations Web site and from the SEC.

Speaker 1

Unless stated otherwise, our discussion refers to adjusted results. For the Q4 of 2023, GAAP results include a non cash after tax mark to market pension charge of $274,000,000 after tax transformation and other charges of $154,000,000 and a non cash after tax charge of $84,000,000 related to our Coyote trade name in our truckload brokerage unit. The after tax total for these items is $512,000,000 or $0.60 per diluted share. Additional details regarding year end pension charges are included in the appendix of our Q4 2023 earnings presentation that will be posted to the UPS Investor Relations website following this call. A reconciliation to GAAP financial results is available on the EPS Investor Relations website and also available in the webcast of today's call.

Speaker 1

Following our prepared remarks, we will take questions from those joining us via the teleconference. And now I'll turn the call over to Carol.

Speaker 2

Thank you, PJ, and good morning. Let me begin by thanking UPS'ers for their hard work and efforts. I'm proud of our team for their commitment to customer service and for once again making UPS the industry leader in on time performance, not only during peak, but throughout 2023. Looking at our volume trends for the 4th quarter, while total average daily volume or ADV declined 7 0.5% from last year. Our performance was a marked improvement from what we reported in the 3rd quarter.

Speaker 2

During the Q4, our sales people did an outstanding job of winning back debited volume and pulling through new volume. In fact, U. S. Domestic ADV surged 30% from the Q3 to 4th, which was our highest sequential volume ramp ever. By the end of December, we had won back and pulled through nearly 60% of the volume diverted during our labor negotiation.

Speaker 2

Winning back and winning new volume is part of a program we call Project Brown and this program will continue into 2024. You will recall that at the end of the third quarter, we provided a range of expected revenue and operating profit for the 4th quarter. Looking at our 4th quarter results versus last year, consolidated revenue declined 7.8 percent to $24,900,000,000 which was slightly below the low end of our expectation. Operating profit was $2,800,000,000 a decrease of 27.1% from last year, but slightly higher than the low end of our expectations. As a result, our consolidated operating margin was 11.2%, which was well within our expectation.

Speaker 2

For the year, consolidated revenue was $91,000,000,000 a decrease of 9.3%. Consolidated operating profit totaled $9,900,000,000 28.7 percent lower than last year And consolidated operating margin was 10.9%. We generated $5,300,000,000 in free cash flow during 2023 And we returned $7,600,000,000 to share owners in the form of dividends and share repurchases. Brian will provide more detail about our financial results in a moment. 2023 was a unique And quite candidly, a difficult and disappointing year.

Speaker 2

We experienced declines in volume, revenue and operating profit in all three of our business segments. Some of this performance was due to the macro environment and some of it was due to the disruption associated with our labor contract negotiation as well as higher costs associated with the new contract. Through the year, however, we controlled what we could control And in many areas, we delivered the highest productivity results in our company history. And I think most importantly, We stayed on our strategy of customer first, people led and innovation driven. Let me share a few examples of how our strategy is establishing a foundation for future growth.

Speaker 2

Starting with customer first. In 2023, our healthcare portfolio achieved our target of $10,000,000,000 in revenue. Here we've made strong progress towards our goal of becoming the number one complex health provider in the growing $130,000,000,000 global healthcare logistics market. Our global network of healthcare compliant distribution space topped 17,000,000 square feet in 2023 And our acquisitions of Viomi Group and MNX Global Logistics have expanded our cold chain capabilities and are enabling us to reach new markets and customers. To support growth in our international small package business, In December, we announced plans to build a new air hub at Hong Kong International Airport.

Speaker 2

This new air hub supports our plans to grow in the vast parts of the market, including highly profitable Asia trade lines and will enable us to expand our export and import business in the region. During the year, we continue to grow our SMB penetration. In 2023, SMBs made up 28.6 percent of our total U. S. Volume, an increase of 60 basis points from last year.

Speaker 2

Part of this growth came from DAP, Our digital access program. DAP has transformed how small companies do business with UPS. And in 2023, we generated $2,900,000,000 in DAP revenue, an increase of 22% year over year. Moving to People led, in 2023, we delivered a labor agreement that provides certainty for the next 5 years. And because I'm a big believer in the power of 1 UPS, this year we are returning to a policy of everyone back in the office 5 days a week.

Speaker 2

In terms of our culture, we are a network company, not just of logistics capabilities, but a personal relationships too, which brings me to innovation driven. On our busiest peak days, We sort over 50,000,000 packages in the U. S. And deliver more than 30,000,000 packages worldwide. How do we do it?

Speaker 2

By leveraging the agility of our integrated network powered by UPS technology and the skills of our engineers and operating team. Our network planning tools enabled us to quickly match capacity with volume across the network and drive productivity. Technology also enabled improvements to driver and helper route planning and dispatch, resulting in improvements in density fewer seasonal support drivers than in prior year. It might surprise you to learn that we typically see an increase in returns volume Before Christmas, in the Q4, we moved lightning fast to integrate happy returns. We made box free, label free returns available in over 5,000 UPS store locations just 8 days after the acquisition closed.

Speaker 2

Happy Returns digital experience helped drive returns volume in the Q4 with momentum extending into the Q1 of 2024. Finally, we continue to deploy transformative technology to increase efficiency within our warehousing facilities. The latest example is our state of the art Pick, Pack and Ship Center in Louisville, Kentucky that we call UPS Velocity. We named it Velocity because it leverages robotics, automation, machine learning and artificial intelligence to streamline fulfillment operation. This facility is capable of processing over 350,000 units per day and enables a best in class experience for our customers and their customer.

Speaker 2

Our customer first, people led innovation driven strategy The foundation of our business and our continued execution of the strategy enabled us to exit 2023 with momentum. But momentum is not enough. We've decided to take some bold moves to right size our company for the future and to focus on the key enablers of growth. So today, we are announcing 2 actions. First, we plan to explore strategic alternatives for our truckload brokerage business known as Coyote.

Speaker 2

Coyote is part of supply chain solution and is a business that is highly cyclical with considerable earnings volatility. We will keep you apprised as we move forward with this analysis. 2nd, we are going to fit our organization to our strategy and align our resources against what's wildly important. This will result in a workforce reduction of approximately 12,000 positions and around $1,000,000,000 in cost out this year. Here we've identified new ways of working and are calling this fit to serve.

Speaker 2

Let me end by sharing our 2024 outlook. In 2024, the small package market in the U. S. Excluding Amazon is expected to grow by less than 1% And projected market growth rates for the rest of our business segments suggest some improvement, but not until the latter part of the year. In building our 2024 financial targets, we incurred the low end of our guidance on market growth and for the high end of our guidance included growth we should experience if we capture market share.

Speaker 2

In 2024, we expect to generate consolidated revenue ranging from $92,000,000,000 to $94,500,000,000 and a consolidated operating margin ranging from approximately 10 to 10.6%. Given the nuances of our new labor contract, there will be stark contrast between our first half and our second half performance. First half earnings will be compressed and second half earnings will expand. In both the low and high end of our guidance range, we expect to exit the year with the U. S.

Speaker 2

Operating margin of 10%. Brian will provide more details in a moment. UPS remains rock solid strong. While our dividend payout is currently higher than our targeted payout of 50% of our prior year's adjusted earnings per share. We are confident in our future.

Speaker 2

As a result, The UPS Board approved a penny increase in the quarterly dividend from $1.62 per share to $1.63 per share. This is the 15th consecutive year we have increased the UPS dividend. So now that 2023 is behind us, We look forward to seeing you at our upcoming Investor and Analyst Day on March 26. At that time, we will share our 3 year plans to grow and drive shareowner value. With that, thank you for listening.

Speaker 2

And now I'll turn the call over to Brian.

Speaker 1

Thanks, Carol, and good morning. In my comments, I'll cover 3 areas, starting with the macro and our 4th quarter results, then I'll review our full year 2023 results, including cash and shareowner returns. And lastly, I'll provide comments on expectations for the market and our financial outlook for 2024. Macro environment in the 4th quarter showed improvement. However, in the transportation and logistics sector, conditions remained under pressure both in the U.

Speaker 1

S. And internationally due to soft demand and overcapacity in the market. Throughout the quarter, we leveraged the agility of our integrated network to match capacity with demand and we were recognized by an independent third party for providing industry leading service for the 6th peak in a row. Looking at our financial results, in the Q4 consolidated revenue was $24,900,000,000 down 7.8% from the Q4 of 2022. All three of our segments demonstrated agility and on a combined basis drove down total expense by $1,100,000,000 in the 4th quarter year over year.

Speaker 1

This enabled us to deliver operating profit within the range we communicated to you last quarter. Consolidated operating margin was 11.2% for the quarter and in line with our expectations. For the Q4, diluted earnings per share was $2.47 down 31.8 percent from the Q4 2022. Now let's look at our business segments. In U.

Speaker 1

S. Domestic, we knew going into the 4th quarter that volume would be ramping up often exceptionally low Q3. Our efforts to win back diverted volume and pull through new volume resulted in a record sequential volume surge. Throughout peak, we delivered excellent service to our customers while managing expenses. In the 4th quarter, average daily volume came in at the low end of our range and was down 7.4% year over year.

Speaker 1

B2B average daily volume in the 4th quarter was down 6.8% year over year driven by declines in the retail, manufacturing and high-tech sectors. In the 4th quarter, B2B represented 35.5% of our volume, which was up slightly from 35.3% in the same period last year. Also in the 4th quarter, Continued macro pressures drove customers to seek economy products as we saw customers shift volume out of the air onto the ground. Total air average daily volume was down 15% year over year and ground average daily volume was down 5.8% versus the Q4 of last year. For the quarter, U.

Speaker 1

S. Domestic generated revenue of $16,900,000,000 down 7.3%. Revenue per piece was slightly positive year over year with a number of moving parts. A combination of strong base rates and customer mix increased the revenue per piece growth rate by about 3.90 basis points. This was offset by a few factors.

Speaker 1

1st, changes in product mix and package characteristics decreased the revenue per piece growth rate by 140 basis points. 2nd, reflecting the lower volume in the quarter, peak season surcharge revenue declined, which reduced the revenue per base growth rate by about 120 basis points. And lastly, changes in fuel prices decreased the revenue per base growth rate by 110 basis points. Turning to cost, total expense was down 3.6% And in the face of a 12.1% increase in union wage rates, which was driven by the contractual increase that went into effect last August, We pulled several levers to more than offset the higher expense. First, we leveraged our network planning tools and total service plan to reduce total hours in the 4th quarter by 10.2%, which was more than the decline in average daily volume.

Speaker 1

This enabled us to decrease compensation and benefits, which drove down the total expense growth rate by around 30 basis points. 2nd, lower purchase transportation expenditures reduced the expense growth rate by around 70 basis points, primarily from lower volume levels and our continued optimization efforts. Next, lower fuel costs contributed 160 basis points to the decrease in the total expense growth rate. And lastly, The net of all other expense items and allocations reduced the expense growth rate by 100 basis points. Pulling it all together, These actions helped us reduce U.

Speaker 1

S. Domestic expense in the 4th quarter by $578,000,000 which was our largest 4th quarter dollar cost reduction ever. Looking specifically at peak, as volume returned to the network and our biggest customers drove a surge in peak volume, we ran our integrated network with Agility. In fact, in 2023, we closed over 30 sorts and they remain closed during peak. By leveraging our network planning tools, We took advantage of the flexibility of our integrated network and flowed more volume into our automated buildings.

Speaker 1

And with smart package facility in over 1,000 buildings, missed load frequency improved 67%, contributing to the superior service we delivered to our customers. The U. S. Domestic segment delivered $1,600,000,000 in operating profit, down 32.6% compared to the Q4 of 2022. However, compared to the Q3 of 2023, operating profit in U.

Speaker 1

S. Domestic increased $904,000,000 and was our highest sequential operating profit increase ever. Operating margin in the 4th quarter was 9.3%, a 440 basis point improvement over the Q3 of 2023. Moving to our international segment, soft demand continued to pressure volumes out of Asia And in Europe, several key economies remained in recession, which pressured demand and drove a shift away from Express Services. In response, we focused on revenue quality and adjusted our global network to match changes in geographic demand.

Speaker 1

Looking at volume, In the Q4, international total average daily volume was down 8.3% year over year. The decline was primarily due to lower domestic average daily volume, which was down 10.8% driven by declines in Europe and Canada, areas of the world that continue to face persistent inflationary pressures. On the export side, total average daily volume declined 5.9% on a year over year basis, driven by declines in Europe due to weak macro conditions. Looking at Asia, export average daily volume was down 8.9% driven by soft demand in the retail and high-tech sectors. However, export volume on the China to U.

Speaker 1

S. Lane, which is our most profitable lane, increased 2.7% driven by SMBs. Nearly offsetting the decline in Asia over in the Americas region, Export average daily volume grew 11.9 percent led by customers in Canada and Mexico leveraging our cross border ground service. In the Q4, international revenue was $4,600,000,000 which was down 6.9% from last year, primarily due to the decline in volume. Revenue per piece increased 3.1%.

Speaker 1

Strong base pricing and a change in customer mix drove a 4 20 basis point increase in the revenue per piece growth rate. Our reduction in fuel surcharge revenue negatively impacted the revenue per piece growth rate by 60 basis points and lower demand related surcharge revenue, which was partially offset by the impact of a weaker U. S. Dollar decreased the revenue per piece growth rate by 50 basis points. Moving to expense.

Speaker 1

In the 4th quarter, total international expense was down 100 and $2,000,000 primarily driven by lower fuel expense. Additionally, in response to the lower demand environment, We managed our network to match capacity with demand, which included reducing international block hours by 9.4%. Operating profit in the international segment was $899,000,000 down $192,000,000 year over year. Operating margin in the 4th quarter was 19.5%. Now looking at Supply Chain Solutions, In the Q4, revenue was $3,400,000,000 down $435,000,000 year over year.

Speaker 1

Looking at the key drivers, in international air freight, overall volumes were down despite a mid quarter spike in e commerce. Market rates continued to be pressured resulting in lower revenue and operating profit. On the ocean side, Volume increased driven by the retail sector, however, excess market capacity pressured revenue and operating profit. Within forwarding, our truckload brokerage unit known as Coyote continued to face pressure from excess capacity in the market, which drove revenue and operating profit down. In the 4th quarter, supply chain solutions generated operating profit of $319,000,000 and an operating margin of 9.4%.

Speaker 1

Walking through the rest of the income statement, we had $207,000,000 of interest expense. Our other pension income was $66,000,000 and our effective tax rate for the 4th quarter was 22.5%. Now let me comment on our full year 2023 results. For the full year 2023, revenue declined 9.3 percent to $91,000,000,000 We generated operating profit of $9,900,000,000 a decrease of 28.7% compared to full year 2022. Consolidated operating margin was 10.9%.

Speaker 1

We generated $10,200,000,000 in cash from operations and continue to follow our capital allocation priorities. We invested $5,200,000,000 in CapEx. Additionally, we acquired MNX Global Logistics and Happy Returns. We distributed $5,400,000,000 in dividends, which represented a 6.6% increase on a per share basis over 2022. We repaid $2,400,000,000 in debt that during the year and at the end of the year, our debt to EBITDA ratio was 2.2 turns.

Speaker 1

Lastly, we completed $2,250,000,000 share buybacks in 2023. And in the segments for the full year, in U. S. Domestic operating profit was $5,400,000,000 and operating margin was 9%. The international segment generated $3,300,000,000 in operating profit and operating margin was 18.4%.

Speaker 1

And Supply Chain Solutions delivered operating profit of $1,200,000,000 and an operating margin was 9%. With 2023 behind us, let us move to our outlook for 2024. S and P Global is forecasting an improvement in global macro conditions as the year progresses. Outside the U. S, real exports in Europe are expected to improve each quarter throughout the year.

Speaker 1

Looking at Asia, we saw positive momentum on the China to U. S. Lane exiting the year and remain cautious on the outlook for 2024. In the U. S, the projected small package market growth rate is just under 1% excluding Amazon.

Speaker 1

A slight improvement is expected in U. S. Manufacturing and the consumer is expected to remain resilient despite lingering inflationary pressures. We've built a plan that reflects the current environment and potential risks that we see. This includes fitting our organization to our strategy and aligning execution to our wildly important initiatives under what we call fit to serve.

Speaker 1

As Carol mentioned, We are exploring strategic alternatives for Coyote, our truckload brokerage business, which will enable us to address some of the cyclical impacts in our forwarding business. And we are reducing our workforce by approximately 12,000 positions. This will cut around $1,000,000,000 in costs in 2024. Moving to our 2024 financial outlook, we are providing a range based on volume growth. The low end of the range has UPS growing at market rate and the high end of the range has us gaining share.

Speaker 1

For the full year 2024 on a consolidated basis, Revenues are expected to range from approximately $92,000,000,000 to $94,500,000,000 and operating margin is expected to range from approximately 10 to 10.6%. In the range provided, we expect to move total average daily volume from negative growth in the first half of the year to positive growth in the back half. This is primarily driven by lapping the volume diversion we experienced in the U. S. Last year during our labor negotiations.

Speaker 1

Additionally, costs will weigh on us in the first half of the year, primarily due to the high labor cost inflation associated with the new contract. Looking at consolidated revenue, in the first half of the year, we expect the growth rate to decline with a range of approximately 1% to 2% with the Q1 driving the decline. And in the back half of the year, revenue growth is anticipated to be up within a range of mid to high single digits. Looking at consolidated operating profit, we expect material improvement as the year progresses with the second half of the year outperforming the first half. Lastly, we expect to generate our lowest consolidated operating margin of the year in the Q1.

Speaker 1

Now let me give you a little color on the segments. Looking at U. S. Domestic, average daily volume growth is expected to be within a range of approximately flat to up 2% for the full year. At both the low and high end of the range, we expect the revenue per piece growth rate to outpace the cost per piece growth rate beginning in the 3rd quarter and we expect to exit the year at a 10% operating margin.

Speaker 1

Moving to the international segment, we expect 2024 average daily volume be within a range of approximately flat to up around 3%. At both ends of the guidance range, operating margin is anticipated to be in the high teens. And in supply chain solutions for the full year in 2024, we expect revenue to be within a range of approximately $13,000,000,000 to $13,500,000,000 At both ends of the guidance range, operating margin for SCS is expected to be high single digits. And for modeling purposes, In total below the line, we expect approximately $400,000,000 in expense in 2024. This is net $262,000,000 in pension income.

Speaker 1

We included a slide in the appendix of today's webcast deck to provide you more detail on pension. The webcast deck will be posted to the UPS Investor Relations website following this call. Now let's turn to full year 2024 capital allocation. Our capital allocation priorities have not changed. We are staying on strategy and we'll make the best long term decisions to capture growth, improve efficiency and deliver value to our shareowners.

Speaker 1

We expect 2024 capital expenditures to be within our target of around 5% of revenue or $4,500,000,000 Now let's turn to our expectations for cash and the balance sheet. We expect free cash flow to be within a range of approximately $4,500,000,000 to $5,300,000,000 including our annual pension contributions of $1,400,000,000 which are equal to our expected service costs. As Carol mentioned, the board has approved a dividend per share of $1.63 for the Q1. We are planning to pay out around $5,400,000,000 in dividends 2024 subject to board approval. Finally, our effective tax rate in 2024 is expected to be approximately 23.5%.

Speaker 1

In closing, we look at 2024 as a year to pivot away from negative volume to positive volume growth and from high labor cost inflation to a much lower growth rate. We are laser focused on executing our strategy, controlling what we can control and improving our financial performance. We look forward to sharing our multi year targets and details on our strategy at our Investor Day event on March 26. Thank you. And operator, please open the lines.

Operator

Thank you. We will now conduct a question and answer session. Our first question will come from the line of Chris Wetherbee of Citigroup. Please go ahead.

Speaker 3

Hey, thanks. Good morning, guys. I guess I wanted to start on maybe some of the cost out. You mentioned the 12,000 physicians that you're reducing and the $1,000,000,000 of cost in 2024. I was hoping maybe you could help us sort of understand the timing of that.

Speaker 3

So based on the 10% kind of run rate exiting 2024, it would imply that the Q1 is fairly low. So I just want to make sure I understand some of those moving pieces and when that $1,000,000,000 is going to

Speaker 1

start to accrue. Sure. Happy to give you some color. So we talked about 12,000 heads out. 75% of the reductions will come in the first half, which drives the $1,000,000,000 in the 2024 calendar year.

Speaker 1

But you're absolutely right, in terms of the timing and announcement, it will be back end weighted. And really, the thing I'd like to point out, it's a change in the way we work. So as volume returns to the system, we don't expect these jobs come back. It's changing the effective way that we operate.

Speaker 2

And I might just add a little more color if I could, Chris. Today we have about 495,000 UPS'ers around the world. A few years ago and the when the COVID demand was peaking, we had 500 40,000 UPS ers. So Kate and Nano have done a masterful job of managing our operational headcount to meet the volume in our company And they've done that by managing turnover and attrition and closing sorts and reducing block hours, etcetera. We have about 85,000 UPSers who are management and this could be full time and part time management.

Speaker 2

The targeted headcount falls really within that group as well as some contractors that will be leaving us. And to Brian's point, this is really about a new way of working. So it's $1,000,000,000 of cost out now, but there's even more cost out to come as we have a full year benefit in 2025.

Speaker 1

Thank you.

Operator

Our next question will come from the line of David Vernon of Bernstein. Please go ahead.

Speaker 4

Hey, good morning guys and thanks for taking the question. So I just wanted to ask on the productivity side, obviously hours down more than volume. We've had a couple of quarters of that, obviously not the Q3 this year. Is there a point where Volume declines are become more difficult to offset. I'm just trying to understand the downside risk, right, if volumes continue to remain flat or weaker than you expect, how should we be thinking about the downside risk on the margin side?

Speaker 2

So we believe that productivity is a virtuous cycle here at UPS and I'll give you one example, then I'm going to throw it over to Nando to address this. But if I look at just One metric, cube utilization. We reached the highest cube utilization in our company history at 60%. That's the equivalent of reducing 1500 loads per day. So that's not an hours, but it's just a cost out.

Speaker 2

So we've got productivity Across the operations. And, Nando, why don't you talk about what you're going to do in 2024?

Speaker 1

Yes. So, David, thanks for the question. For us, it is a virtuous cycle. So we're working ahead of any type of volume variability. So whether it goes up We're down.

Speaker 1

We've got some of our best engineers, operations folks, finance folks identifying additional cost outs as we move forward As we're executing the ones that we have in front of us. So we feel good that there's a good pipeline of opportunity no matter what the volume does. And as Carol had mentioned, we lever our hourly headcount and match that to the volume and the activity. And so far so good, but Still lots in front of us and they're pretty meaty, so we feel really good about those initiatives.

Speaker 2

And at our Investor Day in March, we're going to talk to you about network of the future. We've got an integrated network. We don't have to integrate. But we can transform our network with some very exciting ideas. So we're going to share that with you in March.

Speaker 4

And the rate at which resource needs is going to need to be added back on the other side was maybe we get to some volume expansion. Can you talk to the Expectations for operating leverage on the upside?

Speaker 1

Yes. I think as we look to the back end of the year, Certainly, the volume projections that are in there, in terms of the volume growth for the back end of the year in that 2% to 4% range domestically, We start to see CPP growing slower than RPP and so that balance is what's going to create the operating margin. With the sorts we closed over 30 sorts did not reopen them during peak. So we're changing. Nando is doing an effective job of basically managing more volume with less.

Speaker 1

So we'll continue to drive that.

Speaker 4

All right. Thank you, guys.

Speaker 3

Thanks.

Operator

Our next question will come from the line of Amit Mehrotra of Deutsche Bank. Please go ahead.

Speaker 5

Thanks, everyone. I just wanted to Brian, on the guidance, I guess the guidance implies $9,600,000,000 in operating profits. You've been pretty helpful historically about giving us kind of the first half, second half cadence of that. And then just related to that, I want to make sure, so you said the $1,000,000,000 is included in the guidance. Can you just expand on that a little bit?

Speaker 5

Because if I take out the 1,000,000,000 The implied change in profits relative to the improvement in revenue is quite a bit worse. So I'm just trying to understand What's actually included in the guidance from the $1,000,000,000 and how that kind of translates to what you're assuming underneath that in terms of change of profit change your revenue?

Speaker 1

Sure. Happy to, Amit. So from a shape of the year perspective, the full year we called revenue at 1% to 4%, But based on lapping of the volumes and the contract overlap, we would expect revenue to be flat to down 2% in the first half, up 4% to 8% in the back half. And from a profit perspective, I had mentioned that it's a tale of 2 cities in terms of halves of the year. The second half of the year, we'd expect profit to grow about 20% to 30%.

Speaker 1

So Q1 will be the biggest challenge because we're lapping from A volume comp perspective and a full contract, but on a full year basis, we're looking at op margin 10% to 10.6%. Think you can expect the second half of the year to be in $11,000,000 to $12,000,000 in that range and you can back into the first half. In terms of your question of backing out the $1,000,000,000 cost, $1,000,000,000 will be a cost benefit in 2024. But I think we've said in the past, Amit, it would take 12 months to digest the new labor cost. We are confident we can get back to consistent expansion of U.

Speaker 1

S. Margins as we lap the 1st year of the contract. That will be a combination of pricing and productivity. So net net, it's really lapping that contract and then you start to get the benefits. As Carol said, some of those benefits would accrue over to 2025 as well.

Speaker 5

And are we done there on the $1,000,000,000 or is there like there's $55,000,000,000 in total cost. I mean, are we just getting started or like what's the actual opportunity there beyond the 1,000,000,000

Speaker 1

So as Carol talked about the differences between the Nando and Kate, the operating cost and what we're talking about management headcount. If you bifurcate the 2, I think you're going to hear more at the Investor Day through things like network of the future, how we go after additional headcount in that area, this would be about a 14% reduction in that 85,000 heads.

Speaker 2

Yes. We're never done. We continue to drive productivity. It's a virtuous cycle here. And Technology has changed so much in the past year when you think about the advent of generative AI and the applications in side of our business.

Speaker 2

We're just getting started and I'm really excited about what the future will mean in of driving productivity and as well as improving the customer experience.

Speaker 5

Thank you very much.

Speaker 1

Thanks Amit.

Operator

Our next question will come from the line of Connor Cunningham of Melius Research. Please go ahead.

Speaker 5

Hi, everyone. Just to with the productivity side. You've been obviously pretty dynamic with your network and you mentioned I think 30 sort closures and whatnot. Can you just talk about consolidation opportunity in 2024 and how that may play out to drive further efficiencies in the business? Thank you.

Speaker 2

We'd be happy to do that, but we're going to kick that question to our March conference because we've got a great presentation to share with you regarding Network of the Future And it would take up way too much time today to go through that. We want to spend a good amount of time talking to you about that in March. So thank you for understanding.

Speaker 1

Thanks, Connor.

Operator

Our next question will come from the line of Allison Poliniak of Wells Fargo. Please go ahead.

Speaker 6

Hi, good morning. Just want to turn to the growth aspect of it, I guess more specifically the market share capture. You maybe walk through the different levers in terms of I know you mentioned Project Brown, your ability to recapture diversion diverted volume, but also talking to The SMB penetration, your opportunity on the health care side, just any color in terms of where those levers can be pulled for that market share growth in 2024. Thanks.

Speaker 2

I'll start with a few comments about Project Brown. Project Brown, really is a new way of going after business. And it has many elements to it and I'll make some of those real to you. First of all, we looked at ourselves and said what's getting in the way of speed because it was taking us too long to respond to a customer. And we found that we hadn't really declared service level agreements amongst the various groups that participated in this exercise of providing offers our customers.

Speaker 2

So we've shortened up the time to response and that's important and that's going to be with us now forever. I can make that real for you outside of the United States that used to take 22 days, we dropped it to 6 days. We're now at 2 days. That's best in class and we made similar improvements in the United States. Project Brown was also looking at Deal Manager.

Speaker 2

Deal Manager is the new tool that we introduced that uses artificial intelligence and machine learning to score a deal and avoid the need for our salespeople to go up to our pricing people for appeal. They can actually see the towards our deal. We've had great acceptance in win rates, 79% win rates with this tool. But we found Project Brown that we weren't offering all of our products in the tool. And one of the products we weren't offering was Sherpa's, which is a great product.

Speaker 2

So we introduced Surepost into the deal manager and we're getting some good return on that. That's particularly attractive for our small and medium sized customers. Another thing that we did is that we improved and increased weekend pickups in several key markets during the year. So and I could go on and on and on, but this is a way of operationalizing excellence to drive the business and capture share. So where are we going to capture share?

Speaker 2

We're going to continue to lean into the small and medium sized segment we're seeing some real success in that area. We're going to continue to lean into health care. When I started here, the health care revenues were around $6,000,000,000 Now $10,000,000,000 and we're going to continue to grow. We'll lay out our 3 year growth plans for you at our March Investor Day, I think you'll be very pleased with that. We are going to continue to sell off the service that we provide and the capabilities that we have that actually no one else has and that's our integrated network.

Speaker 2

So at our Investor Day in March, we'll lay out market share capture. But let me just make the market real for you because this might be helpful too. As we think about the addressable market, the addressable market in the United States, It's a little over, 50,000,000, 52,000,000 packages a day. So there's plenty of addressable market for us to go get And plenty of market for us to get outside of the United States because we are under penetrated in so many areas. One reason I called out our new air hub in the Hong In the world, 37% of all China exports go through that airport.

Speaker 2

And today, we have small way over capacity and buildings that are inefficient with lease rates that are sky high. So we are building a 20,000 Square meter facility will make us the 2nd largest air hub in that important part of the market. So expect to see a lot of growth coming off of that over time.

Speaker 6

Great. Thank you.

Operator

Our next question will come from the line of Tom Wadewitz of UBS. Please go ahead.

Speaker 7

Yes, good morning. So I wanted to see if you could talk a little bit about the competitive dynamic in the market. I know the backdrop is that you had some share loss associated with the Teamster contract, but it also seems like there might be risks that Other competitors are gaining traction in the market. So if you look at Postal Service at I think up 7% volumes and they had a new product, the Ground Advantage. And so I guess the question is, is there a risk that the competitive set has got more challenging?

Speaker 7

And how do we think about what you need to do to have a better volume outcome in 2024? Is there more pressure on price? Or is it a different formula to get the better volume outcome in 2024? Thank you.

Speaker 2

So I would say that the pricing environment is very rational. And you can see that as Brian ticked out the RPP performance in the 4th quarter. We had very strong base rate performance. Now the RPP was muted because of lower fuel costs and product characteristics and the product mix change and lower demand surcharges, but the base was very strong. And we expect the base to continue into 2024.

Speaker 2

Our GRI For 2024, it's 5.9%. Will we keep all of it? No. But will we keep a lot of it? Yes.

Speaker 2

Just like we did in 2023, we kept about 60% of the GROI in 2023. So the pricing environment is rational. In terms of competitive products, It's incumbent upon us to stay at leading edge and meeting our customers where they want us to be. That's one reason we offered a hyper local product beginning last quarter, which is really a short zone product. We haven't had that before.

Speaker 2

And as we look at the offerings that we will go to market with, this year, we've got some things underway, Not ready for prime time, but I suspect looking over at our new Chief Commercial Officer, Matt Duffy, that we might be able to talk about that at our March Investor Conference,

Operator

Our next question will come from the line of Jeff Kauffman of Vertical Research Partners. Please go ahead.

Speaker 8

Thank you very much. I'm going to defer the Big picture stuff to March, but I'm just kind of curious, how did your global view change Between when we were discussing the labor deal back in August, September to the year end, you mentioned the softness in Europe, you mentioned shift from air to ground, but kind of what were the big changes in your outlook over that 4 or 5 month period?

Speaker 2

Well, what really softened up was Europe. If you look at our volume decline, both domestic and export, it was heavily weighted in Europe. In fact, the decline in our export, was 94% driven by the softness in Europe. So you see what's happening with, industrial manufacturing there is just way off. So that is a big change.

Speaker 2

There are also dynamics happening in air and ocean freight. As you've been watching, we've all been watching the drama in the Red Sea, the fact that the water levels in the Panama Canal are low that certainly is causing a lot of chaos actually in ocean and airfreight. Interestingly, on the air side, Both rates and volumes were down. On the Oceanside, volumes are up. But as Brian called out, the rates were considerably down.

Speaker 2

As we sit here today, it's a very dynamic market and ever changing, a little hard to predict candidly because what we're seeing today is for shippers who have high value packages. They're actually they're worried about the ocean conditions, so they're moving to the air. So air rates are tightening a bit. And on the ocean side, because shippers are starting to have to reroute away from the Red or the Panama Canal. The routing is taking longer, so there's some change to the dynamics of the pricing there We just have to stay super nimble here and Kate and her team are doing a great job at that.

Speaker 2

Kate, what would you like to add here?

Speaker 9

Yes. I would say that The market remains volatile. Even in Europe, with the drop off and the inflationary softening, We were able to pull back on the cost to deliver a great margin and that's our commitment and then to ensure that in the forwarding side of the house as we've done stay just razor sharp to ensure that we are right on track with any trend that we see. And I'm really proud of the team because have got the initiative to gain those customers with high value goods and that international air freight that's coming as a result.

Speaker 8

And just if I could follow-up on that answer. So given the global events with Suez Canal, Panama Canal, Looking at the lemonade out of lemon side of this, is this a bigger opportunity for you in Europe or is this a bigger opportunity for air out of Asia?

Speaker 9

It actually is first showing up Asia to Europe, Lane. And but I will say this is going to be repositioning vessels around the globe, it's going to be a global event. So we see it as an opportunity throughout. And Our portfolio is global, so UPS is very well positioned to take advantage of it.

Speaker 8

Okay. Thank you.

Speaker 1

Thanks, Jeff.

Operator

Our next question will come from the line of Brandon Oglenki of Barclays. Please go ahead.

Speaker 10

Hey, good morning and thanks for taking my question. Can you guys speak to your enterprise customers and the volume trends that you saw in the Q4 and expectations going into And maybe comparing Contrerasite with B2B as well as your small and medium business mix?

Speaker 1

So happy to, Brandon. We were actually pleased with the volume momentum. We were at a low watermark in August of last year, down 15% And we saw sequential monthly improvement as we looked at our volume domestically from an ADV perspective down to mid single digit declines in the month of December. So That trend continued to play out well. We're going to see some tough comps though in the Q1.

Speaker 1

So I wouldn't expect positive volume growth in Q1. We start to see positive volume growth in Q2 and then certainly in the back half of the year as the comps change. SMB, Carol mentioned, very focused on penetration on the SMB side and specifically some of the medium SMB customers. We've stated we would like to see that mix trend up to 30% plus. We finished the year at 28%, so we're well on our way in that direction.

Speaker 2

Maybe another comment because this is just an interesting observation on the market. If I look at our top 5 decliners in the quarter, that would include our largest customer and there's an intentional decline there. So then if I look at the remaining decliners, it's really interesting to see what's happening. Of those, only one has diverted some volume. They're a dual sourcer and they have diverted some volume and I suspect they'll stay dual sourcing.

Speaker 2

The rest, either their business is just way off or they have worked really hard to create a better experience inside the store to encourage buy online, pickup in store. There is a bit of dynamic happening within our large enterprise customers. I think for all of us, we're delighted to have anniversaried The demand that we saw through COVID now that that's behind us, now that the volume for the small package market has reverted back to the mean, This is an opportunity now for everyone to grow.

Speaker 10

Thank you both.

Speaker 1

Thanks, Brian.

Operator

Our next question will come from the line of Helane Becker of TD Cowen. Please go ahead.

Speaker 11

Thanks very much Everybody, and thanks team for the time. So on Coyote, what when you did the acquisition, What did you think the benefits would be that made it important to do the acquisition? And then what really what actually happened that, is causing you to rethink how Coyote fits in the network. And my follow-up question is unrelated. You recently bought 27,478 freighters, I saw.

Speaker 11

And I'm just wondering if you bought those off lease or where they came from since Boeing doesn't make the 747 anymore. Thank you.

Speaker 2

I'm happy to address the Coyote question to the best of my ability. I was on the Board in 2015 when we bought the company, But the strategic rationale was really about expanding the portfolio, and it was a very thoughtful strategic rationale to expand the portfolio. But I don't think we fully understood at the time was just how cyclical this business is and I'll make it real for you. When we acquired Coyote in 2015, the revenues In the previous year for Coyote were $2,100,000,000 During COVID, Coyote peaked up to over $4,000,000,000 in revenue. Well, it's come way down since then.

Speaker 2

In fact, if you look at our supply chain solutions business, it was down $3,000,000,000 year on year, which is a third of the overall company decline. Within that $3,000,000,000 Coyote made up 38% of the for the year and 48% of the decline for the Q4. So you can see the volatility in the revenue line And then we've got a business that has a very low margin. So if you've got that kind of volatility on the revenue line, you're going to have even more volatility on the earnings line. So we're like, gosh, is there another way to skin this cat?

Speaker 2

Can we think about an alternative that continues to allow us to provide the service but without all the overhead or perhaps this business is worth more to someone else than it is to us. We don't know. We don't know the outcome of our alternative work, But as soon as we do, we'll share that with you. And on the freighter question.

Speaker 1

So the 2 planes were picked up through Qatar and really it's part of a broader airline strategy to retire some of the MD-elevens in terms of efficiency and sustainability.

Speaker 11

Got it. Thank you.

Speaker 2

Thank you.

Operator

Our next question will come from the line of Scott Group of Wolfe Research. Please go ahead.

Speaker 12

Hey, thanks. Good morning. Just want to follow-up a couple of things on the guidance. Brian, I know you said 10% U. S.

Speaker 12

Margin exiting the year. Any color on the shape of the year? You also talked a couple of times about just Q1 being hard. Any more specific color on Q1? And then just lastly, I know every year on this call you typically give an update on the biggest customer exposure, if you can give us an update there.

Speaker 12

Thank you.

Speaker 1

Happy to, Scott. So from a domestic margin perspective, we're looking at the back half of the year Being in the range of from an op profit perspective, we're looking at 20% to 30% growth, Scott, from a margin and from a margin, will be in the 10% to 10% plus range for the 4th quarter. The challenge we have is the Q1, we actually expect to be down in the neighborhood. We had a low mortar mark in Q3 of last year, so we're not going to be down to that point. I don't think we'll be much better from a margin perspective in the U.

Speaker 1

S. In the Q1 of this year. From an Amazon perspective, We finished the year at 11.8%, and that was not due to an increase in the business. We're still executing our plan with them in terms of a glide down. Was more to the overall enterprise revenue coming down, as a part of the enterprise.

Speaker 2

It just came down faster than Amazon. Exactly. Yes.

Speaker 1

Stephen, we have time for one more question.

Operator

Our final question will come from the line of Jordan Alliger of Goldman Sachs. Please go ahead, sir.

Speaker 13

Hi, good morning. So

Speaker 2

I was

Speaker 13

sort of thinking about the small package growth that you guys targeted at less than 1% this year. Pretty conservative after a couple of years of probably negative industry growth as well. So I'm just sort of curious What's informing that? Is that your economic outlook, your forecast? And then maybe this is your Analyst Day, you'll address it, but sort of on a normalized Basis, what kind of small package domestic growth, underlying industry growth do you think about over a longer term basis?

Speaker 13

Thanks.

Speaker 2

Yes. The longer term view is very good. It's 3%. So that's really good growth actually, and we're looking forward to getting into that growth mode. We use a number of external factors to inform our perspective on the market growth.

Speaker 2

We triangulate from a number of different sources and come up with our best view. This is our best queue.

Operator

Okay. Thanks.

Speaker 3

Thanks, Sean.

Operator

I will now turn the floor back over to our host, Mr. P. J. Guiding. Please go ahead, sir.

Speaker 1

J. Guiding:] Thank you, Stephen. This concludes our call.

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Earnings Conference Call
United Parcel Service Q4 2023
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