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
- Down 7.4% from 2022
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”
- UPS claims to be industry leader in on-time performance for 6th year, including through Peak season
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%
- Adjusted Op. Profit
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
- Leveraged integrated network to drive efficiency during peak
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
- Of the top 5 decliners (excluding Amazon), only 1 has diverted some volume (dual-source shipper and expected to remain so)