UPS Q4 2023 Earnings Call – Notes & Highlights

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 6^th 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 2^nd 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