UPS CFO talks labor deal benefits, plans for margin boost

The United Parcel Service (UPS) hosted its Investor Day Conference on Tuesday, as the company aims to return to growth and boost its profitability. UPS CFO Brian Newman joins Yahoo Finance to discuss the company's financial projections.

Newman expresses confidence in the postal courier's "great plans" for the future, mentioning the company has set a 5% revenue growth target for its top line. Additionally, he highlights the potential for "inorganic M&A opportunities" to help UPS reach its projected $114 billion in revenue. Newman emphasized that UPS has "proven" itself to be "agile on cost," which will aid in achieving the projected 13% margin.

Regarding the M&A opportunities, Newman clarifies that these are not focused on a single, large deal but rather "a series of deals" targeting the healthcare and international sectors.

Newman highlights that the labor deal reached by UPS, which will mark its first anniversary in August, will allow the company to reduce internal costs, thereby propelling margin growth. He states that 46% of the contracts' value materialized in the first year, so the "good news" is that this will drop labor inflation and "drive cash."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Angel Smith

Video Transcript

[AUDIO LOGO]

JOSH LIPTON: United Parcel Service today hosted its investor day conference. The company saying it was a difficult market last year. But it now sees better days ahead with the small package industry poised to return to growth.

Here with more is UPS Chief Financial Officer Brian Newman. Brian, it is good to have you on the show. And I want to get right to these financial projections, Brian. So you're estimating annual consolidated revenue climb as high as 114 billion in 2026. That would be a big jump from last year.

Also, calling for adjusted operating margin here, above 13% in three years. The stock reversed early gains, Brian. It's now in the red.

And perhaps some investors are kind of skeptical. You'll be able to hit these financial bogeys you've laid out. What's your response to that, Brian?

BRIAN NEWMAN: Well, I think, Josh, we have great plans in front of us and a lot of confidence. The trajectory on top line growth is revenue growth of 5% takes us to $108 billion. And then the incremental 6 billion to get to 114 that you referenced, that involves some inorganic M&A opportunities that we see.

So I know there was a reversal. I think people are looking at the supply and demand capacity in the market. But net, we feel good about the top line. One thing we've proven at UPS, Josh, is we're very agile on cost. And so we see a path to the 13% margin.

JOSH LIPTON: And those inorganic M&A opportunities, Brian, can you give us a little more color there?

BRIAN NEWMAN: Happy to. It's not any one huge deal. The $6 billion that we're looking at from a revenue growth perspective, it would be a series of deals targeted mostly at the health care space, which we're very excited about and also in the international area where we're looking to be the premium leader.

JOSH LIPTON: And what about pricing as well, Brian? I'm just curious how you're thinking about that dynamic as you kind of pursue these twin revenue and margin targets. And would you be willing, Brian, to reduce share if that meant looking ahead to protect your margins?

BRIAN NEWMAN: Josh, it's a great question. We have fairly balanced the algorithm. Right now, we're calling in the domestic business. 3% volume growth over the next three years.

And 2.5% what we call RRP revenue per piece growth, which generates that 5 plus percent revenue. We always evaluate the trades here. Net, net I want to ensure though better and bolder means returning to growth. So we're trying to grow in the right areas of the market, which ultimately drives the margin when you grow SMB, you grow health care, and you grow international premium.

JOSH LIPTON: And let's talk competition, too, Brian. I'm especially interested in just how you think about your relationship with Amazon. As you think about it, Brian, is that a customer? Is it a competitor? Is it a bit of both?

BRIAN NEWMAN: Yes, Josh. The answer is yes. It's both of those. We have a mutual beneficial relationship with Amazon. We are not their supply chain. We deliver a large amount of packages for them.

But over the past few years, Josh, we've basically glided down the business with Amazon to a place where now we think it's the right volume in the network. So, at this point, we've reached somewhat of an equilibrium. And we feel like there's a glide path forward with Amazon finding those right packages in the market

JOSH LIPTON: Brian, you reached that new labor deal, new union labor deal last year. And I'm curious given just how much wages went up, Brian, did that deal kind of accelerate your decision to bring more AI in-house, more robotics in-house?

BRIAN NEWMAN: Well, for sure. Look, the labor deal, we reached, Josh, was a five-year deal, in aggregate over the five years. It's an inflation of 3.3%. That's a very good number in aggregate.

The challenge we had was the first year of the labor deal was worth about 46% of the contract. So the good news is we're going to go from, and when we anniversary the first year of the contract in August, our labor inflation, wage inflation will go down to less than 2%. What that does for us is allow us to balance the RRP, the pricing, and the cost per piece management to reflect positive margins, which then drives cash, et-cetera.

In terms of your question on technology, absolutely, we're trying to be more efficient and effective in everything we do. AI allows us to go faster. It also allows us to reduce the amount of reliance on labor in terms of efficiency.

JOSH LIPTON: You're also targeting capital spending US here, Brian. It looks like 24, 26, about 5.5% of total revenue. Any color of what and where you're spending on, Brian?

BRIAN NEWMAN: Yeah, Josh, the CapEx over the next three years will be about 5.5% of our revenue. So 17 to $18 billion. Very consistent with what we've been spending the last couple of years.

The focus of that, the single biggest project is something called network of the future. And it's an opportunity to drive efficiency and take cost out of the network in the US.

JOSH LIPTON: And Brian, finally here, I do want to ask you about the collapse of Baltimore's Francis Scott Key Bridge. Of course, hit by that large cargo ship. There are potential economic implications, Brian, is there going to be any impact on UPS operations?

BRIAN NEWMAN: First of all, a lot of empathy for the situation that people are going through. Terrible situation as far as our business and your question. None of our employees were impacted.

And from a workaround perspective from a supply chain, we're always working on contingency plans to ensure packages get there on time. So not a big impact from a UPS standpoint. But certainly, hearts and thoughts go out to the people affected.

JOSH LIPTON: Brian, thank you so much for joining the show today. Appreciate your time.