UPS held its Q4 2023 earnings call on January 30, 2024.

The carrier fell short of revenue estimates and announced it will lay off 12,000 part- and full-time management positions as part of an organization right-sizing initiative called Fit to Serve. A bit of a harsh name for an initiative that involves layoffs.

Overall, results reaffirmed the decline in parcel demand and shift from carrier’s to buyer’s market after a year that CEO Carol Tomé summed up as, “a unique, and quite candidly, a difficult and disappointing year.”

Here are our notes and highlights from this morning’s call:


Q4 Results YoY

  • Revenue:
    • Q423: $24.9B
    • Q422: $27B
    • Revenue down 7.8%
  • Operating Profit:
    • Q423: $2.8B
    • Q422: $3.9B
    • Operating Profit down 27.1%
  • Operating Margin:
    • Q423: 11.2%
    • Q422: 14.1%
    • Margin down 290 bps

 

Full Year Results: 2022 vs. 2023

  • Total Revenue:
    • 2023: $90.9B
    • 2022: $100B
    • Revenue down 9.3% YoY
  • Total Profit:
    • 2023: $9.8B
    • 2022: $13.8B
    • Total Profit down 28.7% YoY
  • Total Margin:
    • 2023: 10.9%
    • 2022: 13.8%
    • Total Margin down 290 bps
  • Revenue Per Piece (RPP)
    • Increase RPP ~390 bps
    • Why:
      • Combination of strong base rates and customer mix increased RPP growth ~390 bps
      • Changes in product mix and package characteristics decreased RPP growth ~140 bps
      • Decline in peak season surcharge revenue reduced RPP growth ~120 bps
        • Thinking this is from all the “Demand Surcharge” discounts we’re seeing from “Go Brown”, and possibly carrier diversification?
      • Fuel prices decreased RPP growth rate by ~110 bps
        • Another surcharge discount we’ve been seeing on “Go Brown” not previously available to smaller shippers
      • Average Daily Volume:
        • Down 7.4% from 2022
          • B2B volume declined 6.8% 4Q23
          • B2B was 35.5% of ADV, up from 35.3% 4Q22
        • Why:
          • Customers seeking economy products (i.e., Air to Ground, Ground to SurePost)
          • Air volume down 15% YoY
          • Ground volume down 5.8% YoY
          • Notes: Carol Tomé- UPS Domestic ADV surged 30% from Q3 to Q4
            • Highest-ever sequential volume ramp
            • By the end of Dec. ’23, won back and pulled through almost 60% of volume diverted during labor negotiations (part of “Project Brown” to continue through 2024)
              • I presume this is what we describe as “UPS Go Brown,” their aggressive pricing for SMBs
            • Expenses:
              • Down 3.6% despite 12.1% union wage rate increase
              • Pulled several “levers” to reduce
                • Network Planning Tools/Total Service Plan to reduce total hours by 10.2% in 4Q23, exceeding the decline in volume
                • Lower purchased transportation reduced expense growth ~70 bps, primarily from lower volume levels and continued optimization efforts
                • Lower fuel costs contributed ~160 bps decrease from total expense growth rate
                • All other expense items/allocations reduce expense growth rate ~100 bps
              • Adjusted operating margin 9.3%, largest ever Q4 cost reduction

 

Executive Comments:

  • Carol Tomé (CEO):
    • UPS claims to be industry leader in on-time performance for 6th year, including through Peak season
      • By the end of Dec. ’23, won back nearly 60% of lost volume
    • “2023 was a unique, and quite candidly, a difficult and disappointing year.”
    • Experienced declines in revenue, volume, and operating profit across in all three business segments
    • Some performance decline due to the macro environment, some due to labor negotiation disruption, along with higher costs associated with the Teamsters new contract
    • Delivered the highest productivity results in company history
    • Taking “Bold Moves” to right-size the company. Announced two actions:
    • Explore strategic alternatives for truckload brokerage business, Coyote Logistics
      • Part of UPS SCS, highly cyclical, considerable earnings volatility
      • Continued to face pressure due to excess capacity
    • Workforce reduction of 12K positions, resulting in $1B in cost out in 2024
      • Most reductions coming from management positions
      • Identified “new ways of working”
      • 75% of reductions coming first half of 2024
      • Brian Newman, CFO: “As volume returns, we don’t expect jobs to come back”

 


2024 Outlook:

Carol Tomé:

  • Expect U.S. small package growth <1% (excluding Amazon) – Improvement in International and SCS business segments is not expected until 2nd half of 2024
  • Expect 2024 revenue between $92B to $94.5B – This equates to decline from 2023 of $4.3B to $6B
  • Expect operating margin between 10.0% to 10.6% – This equates to a decline from 2023 of 0.3% to 0.9%
  • First-half earnings compressed, second-half earnings will expand
  • Sharing 3-year growth plan at a March investors’ event

Brian Newman (CFO)

  • Q4 Macro environment showed improvement
  • The transportation and logistics sector remained under pressure for both U.S. and Int’l
    • Why:  Soft demand and excess capacity in the market
    • Domestic ADV down 10.8%
    • Total Q4 Int’l ADV down 8.3%
      • Pressures from soft demand impact volumes out of Asia,
      • Several key European economies are still in recession
      • Volume shifted away from express services
    • Exports ADV down 5.9% YoY
      • Driven by weak macro conditions in Europe
    • Asia Export ADV down 8.9%
      • Driven by soft demand in retail and high-tech sectors
      • Export volume on the China to US lane (most profitable) increased by 2.7% driven by SMBs
    • Americas region
      • Export ADV grew 11.9%, led by customers in Canada & Mexico leveraging cross-border Ground services
    • Full-year 2023 Segment Highlights:
      • Adjusted Op. Profit
        • US Domestic: $5.4B
        • International $3.3B
        • SCS: $1.2B
      • Adjusted Op. Margin
        • US Domestic: 9.0%
        • International 18.4%
        • SCS: 9.0%


UPS Initiatives:
 

  • Customer First:
    • Healthcare portfolio achieved target of $10B revenue in 2023
    • 17M+ sq ft of healthcare-compliant distribution space globally; acquisitions of Bomi Group and MNX Global Logistics enhance cold chain capabilities
    • Building a new air hub at Hong Kong Int’l Airport to expand export/import business
    • SMBs made up 28.6% of total U.S. volume in 2023 (an increase of 60 bps)
      • Part of this growth fueled by DAP; 2023 DAP revenue of $2.9B, up 22% YoY
    • People Led:
      • Delivered labor agreement that provides “certainty” for the next five years
      • Returning to a policy of UPS’ers in the office five days a week
    • Innovation Driven:
      • Leveraged integrated network to drive efficiency during peak
        • On busiest peak days, sort 50M+ packages in U.S. and deliver 30M+ globally
        • Network planning increased stop density for driver/helper teams, resulting in fewer seasonal support drivers vs. prior years
      • Launched Happy Returns in 5K+ UPS Stores for box-free, label-free returns 8 days after acquisition closed
        • Helped drive returns volume in Q4, extending momentum into Q1 2024
      • Opened UPS Velocity, a state-of-the-art pick, pack and ship center in Louisville, KY
        • Robotics, automation, machine learning, and AI to streamline fulfillment operations
        • Capacity to process 350K+ units per day


Additional Notes
:

  • Better cube-utilization
    • 1,500 less loads per day
  • Good pipeline of opportunity regardless of volume decline
    • States there is an addressable market 52M+ daily packages, both Domestic and under-penetrated International
    • New competitive products to stay at the leading edge of where customers want to be
  • Deal Manager (UPS Pricing Tool)/”Project Brown”
    • Leveraging AI/Machine learning to score deals to eliminate sales going to revenue management for appeals (79% win rates)
    • Dropped customer-response time from 22 days to 6 days to 2 days
    • Previously Deal Manager didn’t support SurePost, now adding this service to Deal Manager
    • Increased weekend pickups in certain markets
    • Capture more share from SMB segment and Healthcare
    • New “short zone” product not previously offered
  • GRI:
    • UPS expects to retain approx. 60% of GRI
  • Enterprise Shippers/Amazon:
    • Of the top 5 decliners (excluding Amazon), only 1 has diverted some volume (dual-source shipper and expected to remain so)
      • The rest have had business decline or worked hard to create better experience in store to encourage BOPIS (Buy online, Pickup In store)
    • Intentional volume decline with Amazon
      • Overall enterprise revenue declined faster than Amazon revenue decline