United Parcel Service, Inc. (NYSE:UPS) Q4 2023 Earnings Call Transcript
United Parcel Service, Inc. (NYSE:UPS) Q4 2023 Earnings Call Transcript January 30, 2024
United Parcel Service, Inc. beats earnings expectations. Reported EPS is $2.47, expectations were $2.44. UPS isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
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 Relations Fourth Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise and after the speakers' remarks, there will be a question-and-answer period. [Operator Instructions] It is now my pleasure to turn the floor over to your host Mr. PJ Guido, Investor Relations Officer. Sir, the floor is yours.
PJ Guido: Good morning, and welcome to the UPS Fourth Quarter 2023 Earnings Call. Joining me today are Carol 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-K and other reports we filed with or furnished to the Securities and Exchange Commission. These reports, when filed, are available on the UPS Investor Relations website and from the SEC. Unless stated otherwise, our discussion refers to adjusted results.
For the fourth quarter of 2023, GAAP results include a non-cash after-tax mark-to-market pension charge of $274 million, after-tax transformation and other charges of $154 million, and a non-cash after-tax impairment charge of $84 million relating to our Coyote trade name in our truckload brokerage unit. The after-tax total for these items is $512 million or $0.60 per diluted share. Additional details regarding year-end pension charges are included in the appendix of our fourth quarter 2023 Earnings Presentation that will be posted to the UPS Investor Relations website following this call. A reconciliation to GAAP financial result is available on the UPS Investor Relations website, and also available in the webcast of today's call. Following our prepared remarks, we will take questions from those joining us via the teleconference.
[Operator Instructions] And now, I'll turn the call over to Carol.
Carol Tome: Thank you, PJ, and good morning. Let me begin by thanking UPSers for their hard work and effort. 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 fourth quarter, while total average daily volume or ADV declined 7.5% from last year, our performance was a marked improvement from what we reported in the third quarter. During the fourth quarter, our salespeople did an outstanding job of winning back diverted volume and pulling through new volumes. In fact, US Domestic ADV surged 30% from the third quarter to the fourth which was our highest sequential volume ramp ever.
By the end of December, we had one back and pull through nearly 60% of the volume diverted during our labor negotiations. 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 fourth quarter. Looking at our fourth quarter results versus last year, consolidated revenue declined 7.8% to $24.9 billion, which was slightly below the low end of our expectation. Operating profit was $2.8 billion, 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.
For the year, consolidated revenue was $91 billion, a decrease of 9.3%. Consolidated operating profit totaled $9.9 billion, 28.7% lower than last year. And consolidated operating margin was 10.9%. We generated $5.3 billion in free cash flow during 2023 and we returned $7.6 billion to shareowners 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. We experienced declines in volume, revenue, and operating profit in all three of our business segments. Some of this performance was due to the macroenvironment and some of it was due to the disruption associated with our labor contract negotiations 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. Starting with customer first. In 2023, our healthcare portfolio achieved our target of $10 billion in revenue. Here we've made strong progress towards our goal of becoming the number-one complex healthcare provider in the growing $130 billion global healthcare logistics market. Our global network of healthcare-compliant distribution space topped 17 million square feet in 2023. And our acquisitions of Bomi 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. This new air hub supports our plans to grow in the best 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% of our total US volume, an increase of 60 basis points from last year. 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 $2.9 billion 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 five years.
And because I'm a big believer in the power of One UPS. This year, we are returning to a policy of everyone back in the office five days a week. 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 million packages in the US and deliver more than 30 million packages worldwide. How do we do it? By leveraging the agility of our integrated network powered by UPS technologies 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 help our route planning and dispatch, resulting in improvements in density and 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 fourth quarter, we moved lightening fast to integrate Happy Returns. We made box-free, label-free returns available in over 5,000 UPS store locations just eight days after the acquisition close. Happy Returns digital experience helped drive returns volume in the fourth quarter with momentum extending into the first quarter 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 operations.
This facility is capable of processing over 350,000 units per day and enables a best-in-class experience for our customers and their customers. Our customer first, people led innovation driven strategy is the foundation of our business. And our continued execution of the strategy enables us to exit 2023 with momentum. But momentum is not enough. We have 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 two actions. First, we plan to explore strategic alternatives for our truckload brokerage business known as Coyote. Coyote is part of Supply Chain Solutions, and it's a business that's highly cyclical with considerable earnings volatility. We will keep you apprised as we move forward with this analysis.
Second, 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 billion in cost out this year. Here, we've identified new ways of working and are calling this fit to serve. Let me end by sharing our 2024 outlook. In 2024, the small package market in the US, excluding Amazon, is expected to grow by less than 1%. And projected market growth rates for the rest of our business segments picked up 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.
In 2024, we expect to generate consolidated revenue ranging from approximately $92 billion to $94.5 billion 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 US 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. As a result, the UPS Board approved $0.01 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 26th. At that time, we will share our three-year plans to grow and drive shareowner value. With that, thank you for listening. And now I will turn the call over to Brian.
Brian Newman: Thanks, Carol, and good morning. In my comments, I'll cover three areas, starting with the macro and our fourth-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 markets and our financial outlook for 2024. The macroenvironment in the fourth quarter showed improvements. However, in the transportation and logistics sector conditions remained under pressure, both in the US 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 sixth peak in a row.
Looking at our financial results, in the fourth quarter, consolidated revenue was $24.9 billion, down 7.8% from the fourth quarter of 2022. All three of our segments demonstrated agility and on a combined basis drove down total expense by $1.1 billion in the fourth quarter year-over-year. 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 fourth-quarter, diluted earnings per share was $2.47, down 31.8% from the fourth quarter of 2022. Now, let's look at our business segments. In US Domestic, we knew going into the fourth quarter that volume will be ramping up of an exceptionally low third quarter.
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 fourth quarter, average daily volume came in at the low end of our range and was down 7.4% year-over-year. B2B average daily volume in the fourth quarter was down 6.8% year-over-year, driven by declines in the retail, manufacturing, and high-tech sectors. In the fourth quarter, B2B represented 35.5% of our volume, which was up slightly from 35.3% in the same period last year. Also in the fourth quarter, continued macro pressures drove customers to seek economy products as we saw customers shift volumes 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 fourth quarter of last year. For the quarter, US Domestic generated revenue of $16.9 billion, 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 rates by about 390 basis points. This was offset by a few factors. First, changes in product mix and package characteristics decreased the revenue per piece growth rate by 140 basis points. Second, reflecting the lower volume in the quarter, peak season surcharge revenue declined, which reduced the revenue per piece growth rate by about 120 basis points.
And lastly, changes in fuel prices decreased the revenue per piece growth rate by 110 basis points. Turning to costs, 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 fourth quarter by 10.2% which was more than the decline in average daily volume. This enabled us to decrease compensation and benefits, which drove down the total expense growth rate by around 30 basis points. Second, 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 US Domestic expense in the fourth quarter by $578 million, which was our largest fourth 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 networks and flowed more volumes into our automated buildings.
And with smart package smart facility in over 1,000 buildings, misload frequency improved 67%, contributing to the superior service we deliver to our customers. The US Domestic segment delivered $1.6 billion in operating profit, down 32.6% compared to the fourth quarter of 2022. However, compared to the third quarter of 2023, operating profit in US Domestic increased $904 million and was our highest sequential operating profit increase ever. Operating margin in the fourth quarter was 9.3%, a 440 basis point improvement over the third quarter of 2023 Moving to our International segment. Soft demand continue to pressure volumes out of Asia. And in Europe, several key economies remain in recession, which pressured demand and drilled the shift away from Express Services.
In response, we focused on revenue quality and adjusted our global network to match changes in geographic demand. Looking at volume, in the fourth quarter, 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 US 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%, led by customers in Canada and Mexico, leveraging our cross-border ground service.
In the fourth quarter, International revenue was $4.6 billion, which was down 6.9% from last year, primarily due to the decline in volumes. Revenue per piece increased 3.1%. Strong base pricing and a change in customer mix drove a 420 basis-point increase in the revenue per piece growth rate. A 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 US dollar decreased the revenue per piece growth rate by 50 basis points. Moving to expense. In the fourth quarter, total international expense was down $152 million, 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 million, down $192 million year-over-year. Operating margin in the fourth quarter was 19.5%. Now, looking at Supply Chain Solutions. In the fourth quarter, revenue was $3.4 billion, down $435 million year-over-year. Looking at the key drivers, in international air freight, overall volumes were down despite a mid-quarter spike in e-commerce. Market rates continue 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 fourth quarter, Supply Chain Solutions generated operating profit of $319 million and an operating margin of 9.4%. Walking through the rest of the income statements, we had $207 million of interest expense. Our other pension income was $66 million, and our effective tax rate for the fourth quarter was 22.5%. Now, let me comment on our full-year 2023 results. For the full-year 2023, revenue declined 9.3% to $91 billion and we generated operating profit of $9.9 billion, a decrease of 28.7% compared to full-year 2022. Consolidated operating margin was 10.9%. We generated $10.2 billion in cash from operations and continue to follow our capital allocation priorities. We invested $5.2 billion in CapEx. Additionally, we acquired MNX Global Logistics and Happy Returns.
We distributed $5.4 billion in dividends, which represented a 6.6% increase on a per share basis over 2022. We repaid $2.4 billion in debt that matured during the year. And at the end of the year, our debt-to-EBITDA ratio was 2.2 turns. Lastly, we completed $2.25 billion in share buybacks in 2023. And in the segments for the full year, in US Domestic, operating profit was $5.4 billion and operating margin was 9%. The International segment generated $3.3 billion in operating profit and operating margin was 18.4%. And Supply Chain Solutions delivered operating profit of $1.2 billion and an operating margin was 9%. With 2023 behind us, let us move to our outlook for 2024. S&P Global is forecasting an improvement in global macro conditions as the year progresses.
Outside the US, real exports in Europe are expected to improve each quarter throughout the year. Looking at Asia, we saw positive momentum on the China to US lane exiting the year, and remain cautious on the outlook for 2024. In the US, the projected small package market growth rate is just under 1% excluding Amazon. A slight improvement is expected in US 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 getting our organization to our strategy and aligning execution to our wildly important initiatives under what we call fit to serve. 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 billion 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 as us gaining share. For the full year 2024, on a consolidated basis, revenues are expected to range from approximately $92 billion to $94.5 billion, 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 US last year during our labor negotiations.
Additionally, cost will weigh on us in the first half of the year, primarily due to the higher 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 first quarter 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 first quarter. Now let me give you a little color on the segments.
Looking at US 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 third quarter and we expect to exit the year at a 10% operating margin. Moving to the International segment, we expect 2024 average daily volume to 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 billion to $13.5 billion. 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 million in expense in 2024. This is net of $262 million in pension income. 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. We expect 2024 capital expenditures to be within our target of around 5% of revenue or $4.5 billion. 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 $4.5 billion to $5.3 billion including our annual pension contributions of $1.4 billion, which are equal to our expected service costs. As Carol mentioned, the Board has approved a dividend per share of $1.63 for the first quarter. We are planning to pay out around $5.4 billion in dividends in 2024 subject to Board approval. Finally, our effective tax rate in 2024 is expected to be approximately 23.5%. 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 in detail on our strategy at our Investor Day event on March 26th. Thank you. And operator, please open the lines.
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