Q4 2020 United Parcel Service Inc Earnings Call
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Good morning, My name is Steven and I will be your facilitator today I would like to welcome everyone to the U P. S Investor Relations fourth quarter 2020 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.
It is now my pleasure to turn the floor over to your host Mr. Scott Childress Investor Relations officer, Sir the floor is yours.
Good morning, and welcome to the U P S fourth quarter 2020 earnings call Joe.
Joining me today are careful to me, our CEO and Brian Newman our CFO.
Before we begin I want to remind you that some of the comments, we'll make today are forward looking statements within the federal security laws and address our expectation for the future performance or operating results of our company. These statements are subject to risks and uncertainties, which are described in detail in our 2019.
<unk> form 10-K subsequently filed form 10, Qs and other reports we file with the Securities and Exchange Commission per at these reports when filed are available in the U P S Investor Relations website.
C C.
For the fourth quarter of 2020 GAAP results included a noncash after tax mark to market pension charge of $4 $9 billion.
And after tax transformation charge of $114 million and an after tax impairment charge of $545 million related to the company's decision to sell UBS freight. The after tax total for these items is $5 6 billion and impact to the fourth quarter.
A 2020 EPS of $6.38 per diluted share.
The mark to market pension charge of $4 $9 billion included a benefit from higher than anticipated asset returns, which did not fully offset the negative impact of lower discount rates. It also included the remainder of our current best estimate of potential Central States.
Coordinating benefits as of December 31, 2020, additional details regarding the year end pension charges will be available in a presentation posted to our Investor Relations website later today.
Unless stated otherwise our comments will refer to adjusted results, which exclude the year end pension charges transformation cost and noncash impairment charge.
The webcast of today's call along with the reconciliation of non-GAAP financial measures are available in the U P S Investor Relations website.
Following our prepared remarks, we will take questions from those joining us via the teleconference. If you wish to ask a question price. One then zero on your phone to enter the queue. Please ask only one question. So that we may allow as many as possible to participate you may rejoin the queue for the opportunity to ask an.
<unk> question.
And now I'll turn the call over to Carol.
Thank you Scott we have a lot to cover with you. This morning, we were very busy in the fourth quarter I will review our peak season, and then provide an update on our strategic progress.
Brian will cover the financial details for the quarter, and then finish with an outlook for 'twenty 'twenty one.
Let me begin with a huge thank you to our more than 540000 U P. S Earth for not only delivering one of the best peaks in our company history.
But also for their extraordinary efforts throughout 2020.
U P. S Earth are essential workers and I could not be more proud of the team.
And a year unlike any other they delivered what matters.
Looking at the fourth quarter, our results were strong and considerably better than we expected.
Consolidated revenue in the quarter rose, 21% from last year to $24.9 billion.
And operating profit grew 26 per cent from last year to $2 $9 billion.
This is the highest quarterly operating profit in the company's history with record profit produced in each segment.
For the year UBS generated record revenue of $84 $6 billion with growth in all three segments, we increased operating profit by 7% to $8 $7 billion and we generated diluted earnings per share of $8.23.
An increase of $9 three per cent.
Turning back to the fourth quarter, let me address our holiday peak performance.
The environment was very dynamic largely due to market demand exceeding market supply.
But we were ready.
Our early collaboration with customers and a disciplined approach to executing our peak plans proved to be very successful.
We delivered industry, leading service levels, which in turn accelerated new customer request for our services.
Peak holiday approached we saw F N B's, our small and medium sized businesses increasingly turn to U P F.
In the U S. In the fourth quarter SMB volume grew 28, 5% outpacing our larger customers, which grew by 4%.
By running the network with more discipline and through the deployment of new tools.
We reduced what we refer to as cash costs or costs associated with bottlenecks and overtime pay.
Additionally share opposed to redirect reached a new record in December near.
Nearly 50% of share posted volume was delivered by UBS drivers optimizing our network.
And just a comment about peak outside of the U S. It was a very peaky peak with the highest volume in our history delivered with excellent service levels.
And while this peak was one of our best we know that we can do even better.
We have identified additional areas for improvement and are including them in our peak 'twenty 'twenty one planning.
During the height of the peak season, the FDA and other health authorities approved the use of COVID-19 vaccine we.
We were ready for this as we had reserve capacity in our network we've been in the health care logistics business for more than 15 years.
Our expertise in cold chain logistics positions us well and thus far we have provided above 99% service per vaccine delivery.
Looking back to 2020, we laid a strong foundation for future success.
On my first earnings call in July I mentioned that we were operationalized our strategy customer first people led innovation driven.
Through a better not bigger framework we.
We are making solid progress.
From a customer first perspective speed and enabling capabilities are very important our goal is to provide the best digital experience powered by our smart Global logistics network.
And we're targeting our solutions to high yielding sectors like F&B among others.
We've moved the needle on speed for.
For the year, we can ground volume was up 93, 9% over last year.
And SMB volume on our fastest ground ever lanes grew by 40% in the fourth quarter since we improve these lengths.
Now have more than 700000 accounts and DAP, which is our digital access program and revenue from that program grew more than 360% in 2020.
We expect our GAAP revenues to reach $1 billion in 'twenty 'twenty one.
People that focuses on building a better workplace for our people.
Over the past several months, we've addressed some of the pain points here and early feedback has been very positive and.
In fact, we've seen a 13 percentage point improvement in likelihood to recommend the primary metric we use to measure our progress on our people led initiative.
As Brian will detail during the quarter, we accelerated certain annual bonus awards that were paying out over five years going forward. Our annual management incentive plan will pay out in one year and will include targets for return on invested capital.
Further we are simplifying ourselves incentive programs and incorporating profitability targets into those programs.
These changes better align employee performance to the interest of all shareowners.
People that also means creating fewer but more impactful jobs and lowering our non operating costs.
Brian will provide you with an update on our transformation activities.
Innovation driven it means driving higher returns on the capital, we deploy using new tools processes and technologies.
Driving higher returns starts by improving our revenue quality and here our efforts are working.
In the fourth quarter U S. Domestic revenue per piece was up seven 8% the highest growth we've seen in more than 10 years.
While this year over year growth rate reflects peak surcharges.
It also reflects a change in mix.
Smbs accounted for 64% of U S average daily volume growth in the quarter.
We also saw solid SMB volume growth outside of the U S.
Lastly, we have tightened the linkage between our investments and returns.
As I mentioned back in July with the exception of our five core principles everything else is under review.
Last week, we announced that we had entered into an agreement to sell UBS freight R. L. T L business unit.
UBS freight is a capital intensive low returning business, we do not need to own this business to provide and L. T L solution for our customers.
With the disposition of U P. S freight we will be smaller, but we will be better as without it we will see an improvement in our operating margin and return on invested capital.
Being better not bigger also means derisking, our balance sheet, we will use the proceeds from the sale of UBS freight to pay down long term debt.
Looking ahead uncertainty remains well we are optimistic about the future. We don't know the pace of the vaccine rollout or the impact that a continuing pandemic will have on the global economy.
On the other hand, we don't think E commerce sales as a percentage of retail sales will decline, which means continued supply and demand imbalances.
This scenario supports our efforts to improve revenue quality, while optimizing our existing network.
These efforts coupled with a relentless focus on productivity and effective capital allocation should result in both operating margin expansion and higher return on invested capital in 2021.
But until we have more certainty what the economic environment, we are not providing revenue or earnings per share guidance.
Let me close with a note of reflection I've been in the CEO Chair since June 1st and has been an honor and a privilege to serve especially this year are.
A year the world won't forget.
UBS is a purpose driven company with a proud past and an even brighter future.
I'm excited about the opportunities that lie ahead.
And with that I'll turn the call over to Brian.
Thanks, Carol and good morning, My comments today, I will cover four areas, starting with high level of macroeconomic trends and.
Then the results for each of our business segments.
Next I'll review full year cash and Shareowner returns and lastly, I'll wrap up with some color on our 2021 outlook, including full year guidance for capital allocation.
Let's start with the macro.
Which can be best described as dynamic and has created both opportunities and obstacles pushing business activity in multiple directions.
Global GDP for the fourth quarter is expected to finish down one 7% a slight improvement versus the third quarter.
In the U S reported consumer sentiment in December was $80 seven up three eight points from November and consumers continue to shop online with year over year growth for non store retail sales up 24, 3% to finish at 29% of all U S. REIT.
Sales in the fourth quarter.
On the commercial side of the U S economy growth in industrial production during the fourth quarter remained negative at minus four 7% year over year, but improved 180 basis points from the third quarter.
Overall macro conditions are weak however, the shift in buying patterns generated elevated residential demand.
Moving to performance for the quarter consolidated revenue profit and EPS were all up more than 20%.
<unk> consolidated revenue increased 21% to $24 9 billion.
Operating profit totaled $2 9 billion.
26% higher than last year.
The operating margin for the company expanded to 11, 5%, which was 40 basis points above last year and diluted earnings per share was $2 66.
Up 26, 1% from the same period last year.
Our strong fourth quarter financial results provide a glimpse into our strategic progress and what is possible.
Moving into the segments.
In U S. Domestic our success was driven by our revenue quality efforts and a disciplined approach to executing our peak plans.
As expected average daily volume increased eight 9% year over year to a total of $25 2 million packages per day.
More importantly customer mix improved.
SMB volume growth accelerated 980 basis points sequentially.
Moving from 18, 7% growth in the third quarter to 28, 5% in the fourth.
Both smbs and our larger customers grew residential shipments across air and ground products.
Overall, BDC shipments increased 19, 9% year over year and represented 67% of total volume.
Conversely, both smbs and large customers shipped fewer <unk> packages on a year over year basis.
<unk> average daily volume finished down eight 3%.
Health care and automotive were bright spots and delivered single digit <unk> growth.
However, they were unable to offset weakness in retail at Hy Tech.
For the quarter U S domestic generated its highest ever quarterly revenue up 17, 4% to $15 7 billion.
Driven by growth in ground products, we are extremely pleased with our revenue quality efforts, which were well above our expectations.
More specifically SMB growth accelerated and we had higher than anticipated peak season surcharge revenue.
As a result reported revenue per piece grew seven 8% year over year with ground revenue per piece up 11, 2%.
Turning to cost expenses were up 17, 7% over the fourth quarter of last year and cost per piece was up eight 2%.
Our expenses grew faster than revenue due to several factors.
First in 2019, we had $150 million in expense reductions from alternative fuel tax credits and lower management incentives that did not repeat.
Second total delivery stops increased by 15, 7% due to high growth and single piece shipments and lower delivery density increased costs by $185 million.
Third in the quarter, we had higher benefit expenses of $100 million related to the employees hired early in 2020, and finally as Carol mentioned in the fourth quarter, we elected to accelerate the vesting of certain previous compensation awards, a onetime expense impact of $129 million.
If you ignore the impact of the accelerated vesting of awards, we would've leveraged expense in the quarter.
When we look specifically at our peak period, despite the complexities our operators and engineers executed extremely well.
Together with the sales teams, we controlled volume that entered the network avoiding chaos costs, while delivering best in class service.
As one example overtime hours and our operations in December went down seven 7% compared to last year.
Pulling it altogether in the fourth quarter. The U S generated $1 4 billion and operating profit an increase of 14, 3% compared to last year.
Moving to international.
The segment delivered another quarter of record operating profit.
We exceeded our volume expectation with total average daily volume up 21, 9% driven by export and domestic volume growth in all regions.
We added 365 flights above our normal schedules to support high market demand for our export services.
In fact total exports grew 27, 8% on a year over year basis led by Asia exports up 45% and Europe exports up 37%.
B to C average daily volume grew 104, 1%, while <unk> was up 2% the first quarterly <unk> growth in 2020.
For the quarter International revenue was up 26, 8% to $4 8 billion.
Revenue per piece was up three 8% and cost per piece was up 0.3% year over year, which generated positive operating leverage in the quarter.
For the fourth quarter International delivered operating profit of $1 2 billion.
An increase of 43, 4% and operating margin expanded 280 basis points to 24, 3%.
Operating profit and margin are both record highs for the segment.
Looking at supply chain and freight.
The segment results were excellent with revenue up 29% to $4 $4 billion.
Strong market demand drove revenue and profit growth in almost all business units.
Forwarding had another great quarter led by elevated demand out of Asia.
Our <unk> business grew operating profit by focusing on revenue quality efforts and healthcare had its best quarterly topline and bottom line growth ever driven by outbound direct to patient shipments all while providing near perfect service in late December for COVID-19 vaccine deliveries.
Overall in supply chain and freight operating profit was $331 million, an increase of 26, 3% year over year.
Walking down our income statement, we had $175 million of interest expense. Other pension income was $327 million and lastly, our effective tax rate came in at 23, 2%.
Now, let's turn to cash and shareowner returns.
Our cash flow was strong throughout the year, we generated $10 $5 billion in cash from operations, which included a benefit of $1 1 billion related to the cares Act federal payroll tax deferral.
<unk> offset by pension contributions totaling $3 1 billion.
Capital investments totaled $5 6 billion.
Which includes 16, new aircraft 16000, new vehicles, and 18 facilities added to our smart Global logistics network.
All of which resulted in free cash flow for 2020, a $5 1 billion.
In 2020, UBS distributed $3 6 billion in dividends, which represents a five 2% increase on a per share basis over 2019.
Moving to our outlook for 2021.
As Carol mentioned due to the continuing economic uncertainty, we are not providing revenue or diluted earnings per share guidance at this time.
But I do want to give you some color as you think about 2021.
First let me update you on what we have been calling transformation 2.1.
Through a combination of various programs, we plan to reduce our non operating expenses by more than $500 million in 2021.
As Carol mentioned, we are focused on creating fewer but more impactful jobs.
Second we expect the sale of UBS freight will close during the second quarter of 2021.
So you will want to adjust your models accordingly.
Third we are gaining traction on our revenue quality initiatives.
As a result, we would expect our small package revenue in 2021 to grow faster than our average daily volume.
As we further evaluate the year one of our wildly important initiatives is to review our network design and look at alternatives for how we expand capacity.
And finally, because of our revenue quality initiatives, along with our actions to drive higher levels of productivity and take cost out.
We expect operating margin and return on invested capital to expand.
And just to comment on the first half of the year.
We will face more difficult comps in the second quarter of 2021 than in the first quarter.
As a result, we anticipate much stronger year over year financial results in the first quarter relative to the second quarter.
While it is early in the quarter now we are pleased with how the year has begun.
Looking at our full year capital allocation in 2021, we expect capital expenditures to be about $4 billion with 40% allocated to maintenance capex.
50% for both technology initiatives and network capabilities in 2021 with over half of this investment being deployed to international and health care.
And the remaining 10% for growth projects that will come online after 2021.
Dividends are expected to grow subject to board approval.
And to further strengthen the balance sheet, we will pay off $2 5 billion of funded debt.
We have no plans to repurchase shares or access the debt capital markets.
And lastly, our effective tax rate is expected to be approximately 23, 5%.
Before I wrap up I would like to confirm that we will host an investor meeting on June nine, where we will share multi year financial targets and our specific plans for how we will achieve those targets.
In closing we are laser focused on executing our strategy and leaning into the best market opportunities to improve the financial performance of the company per.
<unk>, the best customer experience and benefit our shareowners.
And operator, please open the lines.
Thank you we will now begin the question and answer session. As a reminder, for those that have not queued up if you have a question. Please depress to zero followed by the one on your Touchtone pad. Our first question will come from the line of Amit Mehrotra of Deutsche Bank. Please go ahead.
Thanks, operator, good morning, everybody congrats on the good results.
Brian just on your margin comment.
Just wondering if you can clarify on the second quarter. If you expect margins to be up year over year in the second quarter I understand the.
The tougher comp, but just trying to get a sense of how youre thinking about on a year over year basis and then.
I was just hoping you can help us think about yielding cost per package.
As we progress through 2021 yield Youll progress has been great, but just wondering if that's something you can continue to sustain and build upon.
In 2021, thank you.
Yeah, Amit happy to take that so from a yield perspective, very happy with the progress, particularly in the U S business. We went from Q2 yield was minus 4% four four we were flat in Q3 and up 708 in Q4. So I think you've heard us talk about the revenue quality actions. We've been implementing it is a combination of mix its a combination.
Asian of.
Surcharges and customer action. So I think the the progress speaks for itself in terms of op margins for 2021.
As I mentioned, we're committed to expanding our domestic op margin in the year I won't get into Q1 versus Q2 will certainly give you some more guidance and clarity when we get together in June to talk about the second half of the year, but but suffice it to say the combination of revenue quality and cost actions will expand domestic margins.
In the year.
Just one quick related to that.
The cost per package inflation was pretty high in the quarter, you, obviously called out some specific items as we look at the progression over this year.
Yield dynamics look sticky maybe cost per package can come down at least the inflation in cost per package come down, especially as you get BW recovery is that a fair way to think about the spread between cost price and cost per piece as we progressed through the year relative to obviously, what it was in the fourth quarter.
Yes, I mean, I think we talked on the last quarter about some of the headwinds we were walking into in the fourth quarter of 'twenty.
We added 40000 employees coming on which was about $100 million headwind, we were investing in fastest ground ever I guess, what I would call your attention to if youre looking for margin per progression and progress. We made an intentional decision as Carol mentioned to accelerate so divesting some awards.
And if you back that out.
That was worth about 80 basis points. So we would have actually generated positive positive leverage in Q4. So as you think about that relationship we would've seen positive leverage that we chose not to pull that forward hopefully that answers.
Got it thank you very much I appreciate it.
Our next question comes from the line of Tom White with UBS. Please go ahead Sir.
Yes, good morning.
Wanted to give you a I guess another angle on that domestic package margin. Congratulations on the strong results as well as you say that first.
How do you think about the kind of.
The factors that may be drive stronger or weaker performance.
Mastic package margin improvement as you kind of look at it.
Right.
2021 is that you know how well <unk> recoveries is it.
Kind of.
Your cost initiatives and do we think about kind of a building as you look out in quarters and even look further out in the pace of margin improvement.
So I guess, just a couple of things trying to get more of a sense not a number I know you don't want to give that but how do we think about the levers and whether that improvement is something that accelerates.
Maybe beyond the second quarter comment you gave.
Yeah.
Maybe I'll start and then turn it to you we look at Q4 as a as a turning point in our company, where our revenue grew faster than our Adv and that was driven really by three factors in the U S. We were beat our U S expectations on the top line by nearly $850 million and it was driven by <unk>.
Your peak surcharges it was driven by a change in mix as we called out with that increase in SMB, almost 29% and it was driven by the actions that we started last year to optimize our network all along with that better not bigger framework and we think this is proof positive that better not bigger work.
And in the face of the demand capacity constraints. We believe that will continue so as we look forward to 2021, we expect our revenue to grow faster than our Adv, which provides leveraging opportunities, but it doesn't stop at the top line. It also means continued productivity on the bottom line.
So Brian called out to our actions to take out $500 million of costs, that's caused us being eliminated from our company and then we are driving productivity in our operations expense lines as well. So it's a combination of better revenue quality and productivity that will lead to margin expansion not just.
In 2021, but beyond that we're going to lay this out for you in great detail at our Investor Conference in June So I hate to kick the can to June, but we're going to kick the can continuing a bit because we've got some more work to do Brian anything you want to add to that just Tom on the Q4, the inflection Kal referenced.
If you look back the last decade, or so we're used to seeing peak in Q4 margin is actually decelerate to go down from Q3. This was actually an inflection point, where we actually saw an $8 six go to an eight eight.
Sequential quarter over quarter basis, So I think the levers we're pulling on revenue the levers we're pulling on costs that Carol referenced we're looking for the right glide path, but we'll give you more clarity on that.
Great. Thank you.
Thank you.
We have a question from the line of Brian Us in back of J P. Morgan. Please go ahead Sir.
Hey, good morning, Thanks for taking my question I just wanted to ask you about the capital intensity of growth I think Brian you mentioned Youre looking at network design and expanding sales capacity. So maybe if you can clarify if that's in the U S U S domestic or more broadly speaking across the whole network.
And then just when you think about automation and how much more investment do you think you need to do there too.
Sort of get this sort of levers that you're talking about if we still see a pretty big step up in b to b to C and E commerce throughout the next year.
Well I'll talk take the automation question by the end of 2021, we expect that 88% of our packages will go through an automated sort. So we're reaching sort of where we want it to be in that regard that doesn't do it talk about robot.
And what we are doing with robot application inside of our domestic business. We've got some interesting pilots underway that are actually starting to take traction, particularly as it relates to label applications and we'll be happy to share with you more information in that regard too it's pretty exciting when I think about what we what we can do from that perspective longer term in terms of how.
How were spending our capital this share Brian you might want to talk about that sure. So.
We have pivoted a little bit the the buildings and auto piece is going to represent about $2 billion before.
We do have about $1 billion six of maintenance that we need to continue to invest in the business and we're reserving the balance for growth I think the shift towards higher return were going for shorter term paybacks in areas like international and health care and technology. Those are areas that we're pivoting to two to generate capture the growth in high return areas, maybe a little bit more.
A city here will expand our retrofit about seven buildings in 'twenty and 'twenty. One it's about 2 million square feet that will be added 130000 packages per hour. We are adding 11, new aircraft, which will certainly help support the demand that we're seeing outside of the United States. So we're planning to grow.
So we're planning to grow smartly, it's about being better not bigger.
Yeah.
Okay. Thank you very much.
Our next question will come from the line of Allison Landry of Credit Suisse. Please go ahead ma'am.
Thanks, Good morning, So Joe.
Sort of a way to ask the other question about domestic revenue is growing faster than volume, obviously, you're focusing on F N B's and other high margin sectors, but how do we think about just broadly growth at our largest customers are you, taking a specific action price or otherwise to materially reduce exposure to some of the low margin.
High volume business and then lastly, if you could just speak to your thoughts on the sustainability of the F&B growth rate. Thanks.
So, let's just address the elephant in the room, which is our largest customer we have over 19 million customers.
Amazon is our largest customer we enjoyed growth with that customer and 2020. If you look at total revenues for our company in 'twenty Amazon now makes up about 13, 3% of our total revenues up from 11, 6% last year, but we had growth in other customers as well as we look at our large enterprise customers in the fourth quarter.
Our alone we had enterprise customers, who are growing at 80% year on year full year, we had enterprise customers, who are growing 100 per se right year on year. So we see growth across the board to your question Allison about the stickiness of the SMB customer we are laser focused here because this is such an important customer.
For us and one we think values are end to end network. So we have 16 customer journeys that we are investing into to improve the customer experience now it started with our fastest ground every initiative and we made good progress in that regard, but we are not done we know there's more we can do to invest in that.
That experience can speed really matters for this customer, but it's also about a frictionless digital experience and I'll. Just give you. One example of our 16 customer journeys. That's our billing system. If you look at our billing system for our SMB customers compare to our competitors and if you get out of Harvey ball compare.
And you would see that many of our Harvey balls are empty, which means our capabilities are well at a competitive disadvantage.
This is a system that was built by EPS years ago, Gosh, I don't know how long ago eight years ago, we are replacing that system with a new SaaS provided software application and when you do the capability comparison against what we will have against our competitors lower best in class that matters to this customer.
Because the billing system can be personalised for their experience in every SMB customer with different now we can't have this in every country around the world because some countries require paper still today, but in many countries. We can install this billing system and we believe that will result in stickiness. It's also about the <unk>.
Loosens that we provide when we provide solutions to our customers, we see they stick with us and the numbers are quite quite impressive in terms of the stickiness. If they have a solution and don't have a solution. So we continue to invest in that and at our June 9th Investor Conference. So we're going to unpack. This a pretty good detail for you. So you can get.
A sense of what we're talking about the one other data point that I will share with you is churn and I think we talked about churn on my first earnings call I didn't win we've got a laser focus on SMB churn what we saw.
In December is our churn improved for the company year over year or the first month of this year and we think that's really in large part because of the customer journey is we're investing in and our fastest ground ever and as a reminder, every point of churn improvement in the United States is about $170 million of revenue.
Yeah.
Our next question will come from the line of Allison <unk> of Wells Fargo. Please go ahead ma'am.
Hi, Good morning, just turning back to the commercial customer within that <unk> segment.
Clearly the industrial production has been on a positive trend line is that something you're seeing within your your business says Wow.
Any thoughts from your customers in that segment in terms of how they're thinking about 'twenty 'twenty, one any color on that segment.
Well to your point Allison the trends are certainly encouraging in terms of what we're seeing from a production perspective, our largest commercial account is actually retail and it's related to stores and how product flows to stores. So until we see more store openings, we think our commercial business to be under some pressure, but we did see some growth signs that Brian you called out.
Some signs of growth we saw in the industrial side Allison healthcare and auto were were positive also if we look internationally, we actually saw Asia and Europe contribute.
With the high Tech and international in particular, we saw 2% positive <unk> growth in the quarter in international that was that was the first positive sign in 2020. So hopefully the <unk> trend stayed about the same down 8% in the U S, but hopefully with that as a sector has come back and as Carol mentioned as retail opens back up we can grow that as well.
Its just still so much uncertainty isn't there because until we get this pandemic under control, it's a little just a little bit walking on jello.
Understood. Thank you. Thank you.
We have a question from the line of Ken Hicks to Bank of America. Please go ahead Sir.
Hey, great.
Good morning, and solid results.
Brian can you clarify that margin comment that was just domestic or were you talking overall and then I guess my question would be on the $500 million transformation is that the employee reductions that you've already done or are there other projects in the transformation of <unk> I don't know if you also want to detail what was in the charges that you had.
This quarter, yes.
So on those two can.
The margin comment I was referring to was domestic where we're looking to expand that on a year over year basis and committing to do that.
The transformation to point out I called out $500 million of benefit in 2021 that's.
That's related specifically to what we call it transformation to point out the non operating spend.
The gross number on it was actually $750 million. So net of some investments. It was 500 for the year, but but please remember when we talked about transformation. This was a non op initiative, we're reducing our non op spend by about 8%. So that's a good first step we're going to move into transformation three point O and get after the operating costs inside the business, which is the <unk>.
X wave and I think look you will provide more detail and clarity on that as we get to June.
Just to clarify so youre, commenting on domestic but you're not sending any target for international rate or would you commit to it being up as well.
So from a margin perspective.
My reference was that domestic would expand where we're going to talk to you about the full year margins when we get to June 9th Ken So theres a lot of volatility going on right now.
Asia, Europe et cetera, so more clarity to come on that if your timeshare.
I think we could help you if you're trying to build a model that you should plan for operating profit to grow outside of the United States. Yes. The margin question is highly dependent on supply and demand and whether or not surcharges will be maintained their holding today. The question is will they hold for the balance of the year, we'll have much more clarity on that in June.
Thank you Caroline I appreciate that thanks.
Thanks, Ken.
Next up we have David Vernon of Bernstein. Please go ahead Sir.
Hey, good morning, a question.
For you on that topic around surcharges in the holding of surcharges as Youre looking out at.
Renegotiating contracts and in talking to your customers given the tightness of last year's market can you give us some color on the receptivity of customers to be working with you either through taking rate increases or working to help drive efficiencies at the edge of the network that would help them kind of make the customer base are either a little bit stickier or more profit.
As we get into 'twenty, one 'twenty two.
We're very pleased with the relationships that we have with our good customers. This has been a challenging year for all of US we have all exceeded this.
<unk> enjoyed this unprecedented demand, which candidly pressure, but as we've worked through it and we've been able to land really I think very favorable contracts for us and for our customers. It's really about optimizing the network leaning into the customer segment that values our end to end network.
And there's always going to be Rebased in day to today's rates or how do we see that playing out the way you should think about it is very different than the past, we're moving to more personalized pricing.
Thank you Youre welcome.
We have a question from the line of Jordan Alegar of Goldman Sachs. Please go ahead Sir.
Yeah, Hi, just.
Quick follow up on some of the density and productivity around the domestic price I know that may still be to come on transformation, but.
Can you maybe talk a little bit it assuming ecommerce obviously remains elevated residential remains elevated.
And there are a couple of things you could point to that maybe improve like stops per house or improve that delivery density, which you mentioned was a financial impact in the fourth quarter and then secondly, just a quick follow up when you mentioned that.
<unk> outlook for the first quarter.
Being better than the second quarter, I'm, assuming you're talking about year over year profit growth.
On that front thanks.
Let me take the second so yes, Jordan Youre right on a year over year profit growth.
Certainly the.
Margins were lapping lower domestic margins in the U S. Those ramp up to about nine 3% in the second quarter. So I was referring to for profit growth on that.
Look at our productivity.
Results I am pleased with what I'm seeing in our feed I'm pleased what I'm seeing in our sort I'm pleased that I've seen in our hubs I'm not pleased what im seeing in our preload and Nando and team are really looking at how they can drive productivity or preload and clearly we've got some density opportunities now we've been trying to drive synthetic density through our access point.
And our EPS stores, we have 22000 access points and you have EPS stores that we are trying to utilize to drive delivery density, it's not working as well as we thought quite candidly so as a team where we've taken this as a strategic imperative and we're going to talk about other ideas. We have to improve density Kevin you can't.
They changed the demand pattern, but there are things that we can do internally, we believe to drive productivity. So more to come this will certainly be something that we impact on Joe Knight.
Thank you.
Yeah.
We have a question from the line of Ravi Shanker of Morgan Stanley. Please go ahead Sir.
Thanks, Good morning, Carol you said in your prepared remarks that you do not expect E commerce as a percentage of retail sales to decline in 2021 can you just unpack that comment a little more for US what are your large retail customers telling you.
And hopefully as stores reopen again in a post pandemic water back off a deal or do they expect traffic, they're going to stores or not and what does that do to your E Commerce Williams.
So they're all hoping that their stores will reopen because they've got a huge investment in the real estate of course, but from a demand perspective, there's no one out there that thinks that the demand is going to change we were in a new normal even art my my.
Relatives, who are older are shopping online before they would never do that so.
They're all telling us they don't expect that demand to go back there's been a step change in the demand patterns, which then translates into a capacity.
Shortfall candidly. So if you think about what happened in peak of this year. It was about a 3 million Adv shortfall.
Terms of the demand and if you look forward into 'twenty 'twenty, one you would expect that shortfall to contest.
Which just gives us an opportunity to continue to optimize our network.
Yeah.
Thank you.
David Ross of Stifel. Please go ahead Sir.
Yes, thank you very much.
Ken I, just wanted to talk a little bit about the labor issues.
Fourth quarter and the peak you guys handled exceedingly well and we're able to demonstrate profitability how much of a headwind was managing through this period of absences.
Scheduling pilot is calling out sick that kind of stuff that normally doesn't happen. During peak. If you actually had a normal environment, where somebody says that and call up and say I'm out for the next two weeks and last minute.
How much.
Net of health.
Well youre right and that this is a very difficult environment, one that we've never been faced with before but the team did a masterful job of managing through it a few things were different than this peak than last peak one was the use of <unk>, our personal vehicle drivers we've used them in the past, but this year we.
Really leaned into it so in the United States. This year, we had 39000 TBD drivers and they delivered 69 million packages that we believe drove $92 million of benefit in the quarter. So this is something that really worked very well and we're going to lean into.
This as we think about peaks of the future. We were also able to use our our dream tool with a dispatch tool to give our teamster drivers who work so hard to give them some time with their families which hasn't been the case in prior seasons. So we were happy to be able to deliver that.
We were also pleased with our ability to redirect our share posted volume back into our network.
We saw it in December alone, 50% of the share posted volume was redirect Richard.
Directed back into the network delivered by our EPS drivers that resulted in productivity savings as well of about $44 million now what's their money left on the table sure we had disruption with pilots and part of the world like Shanghai for sure. We had some money left on the table.
But I would say we had more good news than bad news coming out of the challenges in the fourth quarter.
Excellent. Thank you Scott.
Yeah.
Our next question will come from the line of basketball nature of Susquehanna. Please go ahead Sir.
Yeah. Good morning, and thank you for taking my question Carol you've made a lot of progress very fast here one thing that comes to mind is.
Feeling with organized labor, which which really wasn't an issue at your prior employer.
I mean, you have a change in Washington that that should be more labor sympathetic youre going to have a change at the head of the Teamsters Union. This year can you talk about your strategy for that relationship.
Finding a happy medium that takes care of your employees to Union and your shareholders over the next three to five years.
Yeah, well as you know we employ more teamsters than any other company and we love our teamster employees Ups's first Teamsters second as we think about labor our contract comes due in the United States that comes due in 2023, and we think about the mutually beneficial outcome for both our Teamsters and EPS as we prepare for it.
That contract for viewing labor is a strategic imperative and we want to keep those jobs, we want to grow jobs. So we're gonna be speaking with them.
Union representation about how we do that going forward. We're also candidly.
Excited about what the new administration could mean for pension reform and pension reform would be good for us and it would be good for our team.
We will continue to work that agenda, because we think it's in the best interest of all parties.
Thank you.
Yeah.
Our next question will come from the line of Scott Group of Wolfe Research. Please go ahead Sir.
Hey, Thanks, Good morning, So I wanted to ask on balance sheet cash flow cash.
Do you think this is the new sort of new normal for Capex, how much do you want to want to improve the balance sheet before you start.
Back stock if you're we're at this inflection in margins why not buy back stock now and maybe just any thoughts around pension contributions for this year and pension impact. Thank you. Thank.
Thank you Scott, Brian why don't you take that share Scott so.
Look we're focused on strengthening the balance sheet I think in my prepared remarks I talked about.
For modeling purposes assume no buybacks in 2021, we.
We think by by reinvesting in the business in areas that are driving higher cash returns strengthening our balance sheet, Scott will end up with a one apparel five imperatives, our strong credit rating as we go forward, which gives us optionality to evaluate.
Opportunities organic and inorganic.
From my perspective.
We have ample.
Ample room to allocate capital back into the business back to the shareholders. We just want to make sure that we generate the right return on that and to your point I haven't been in the seat for that long and it's been big company to try to get your hands around that as we look at the opportunities to invest we're going to have opportunities to invest we just want to make sure that every dollar that we invest.
Generates a higher return on capital that circle and the share buybacks will come we got for modeling purposes. It would just help us to say no buybacks. If we change our mind on that will tell you what we're doing and you can put it into your models.
Our next question will come from the line of Scott Schneeberger of Oppenheimer. Please go ahead.
Thanks, Good morning.
Sure.
With the share of EPS right here in this forum.
Some puts and takes in the decision making process and then just to get a little more granular there.
Discuss the EPS, great with Great racing Crazy I am there yet.
And then some top line.
The impact the day to day certain economies market, they're gonna be a day.
So the question was a bit muffled, but I think it was on EPS freight and the rationale of the decision behind EPS freight and then the go forward commercial agreement.
So as I mentioned back in July on my first earnings call other than our five core principles everything in the business was under radio and immediately looked at UBS freight you know I was on the Upa sports for a long time I went on the EPS for 2003. So I was on the board when we acquired overnight back in 2005, I haven't been laser focused on this.
We had to impair it shortly after we bought it and it's never turned out to be what we thought it would be it's a capital intensive low margin business that we don't need to own to offer the solution. So we're like if we can get a price where this asset is worth more to someone else than it is to us shouldn't we move on that asset but keep the.
Commercial agreement so that we can serve our customers and that's where we landed we couldn't be happier with this announced acquisition that should close I think the beginning of the second quarter.
I'm thrilled for our freight <unk>, because theyre going to be now part of a big freight company. So from a career perspective, I think the opportunities for personal growth will be better for them.
I'm thrilled for our shareowners and I'm thrilled for our customers because that commercial agreement will be a great agreement and Oh by the way there's margin on that that's going to flow to our U S. Small pack business as well. So I think it's a win win win anything else, Brian Yeah, I know, there's some capex avoidance on a low margin business and we expect a positive improvement to our margin.
And ROIC, which are a core focus so I think it's a win win.
Okay.
We have a question from the line of Jack Atkins of Stephens. Please go ahead, great. Thank you and just following up on that point are there maybe some other non core businesses Carol that maybe have come into the company through acquisitions over the last 10 or 15 years that could also be a target for potential divestitures are there or is it just sort of.
First off here with UBS freight thank you well.
Well as you can appreciate it wouldn't be appropriate for me to speculate on assets that might be available for sale, but everything is under review.
Okay.
Branded Oh glad ski of Barclays. Please go ahead Sir.
Hey, good morning, Thanks for taking my question.
Brian could we come back to the pension impact and how that possibly impacting cash flow this year and I'm not sure but did you guys reserve another charge for central States here too.
Yes, Brendan so we had a $6 $5 billion Mark Theres actually a deck that we'll provide you the details on it but.
The the discount rate change.
Little was a little over $4 billion in Central States. We took what we believe to be the the last reserve for that which was a little over $2 billion. So those are the two elements that made up the mark in terms of headwinds for up on the service cost side, if that's what you're asking about it from a pension perspective, we have a similar headwind to what we had in 2020, it's about 300 billion.
Related to service cost in the U S business and Brian we made some cash contributions.
In 2020, we're not planning that in 2021 right. So we pulled forward about $1 billion seven in contributions into December of 2020, and don't anticipate having those in 2021 Carol.
Okay.
Yep.
David Vernon of Bernstein. Please go ahead Sir.
Hey, guys. Thanks for coming back to me Bryan I just wanted to.
Clarify that the 500 million non op expense reduction were expecting this year, that's a net of of cost to implement number.
I just want to make sure there aren't any other sort of non typical inflationary costs that we should be kind of budgeting for or thinking about when we're building a building an outlook here for 2021.
We've got 750 was the gross program, we reinvested to get to a net 500, we do have transformation charges associated with severance that will show up in the guidance that we gave you.
That'll be that'll be adjusted out of our results, though right.
Non core so it will adjusted out and will shine a light on that for you.
Okay.
Line nothing like it.
Sorry.
The return on those investments are kind of seven to eight months. So we're looking for better returns I think you'll find that the investment in the transformation charges non core are good paybacks.
Okay, and then Theres nothing like the the investment in the speeding up the network that faster faster ground network service stuff are we gonna be recruiting any of those sort of like operational investments in the 'twenty one period.
So it'll be the majority will be related to the transformation 2.0 programs. We we talked to you about.
Alright, Thanks again for the time thanks.
Okay.
Well, Joe It arm of Daiwa. Please go ahead.
Yeah.
Yeah, Hi, Thanks for taking my question. So I was just wanted to refer to your Capex plan and you talked about 130000 packages per hour increase.
Increase.
I don't know at 29 million packages daily volume, it's probably about 7%.
And so and then on top of that the revenue quality.
So is that is that kind of a run rate.
The capacity increase we should expect in about maybe I don't know.
Load like close to double digit.
The increase in revenue that it's possible that it's potentially a longer term.
If youre looking for a longer term answer we're gonna put to June night, because on June 9th working to lay out our longer term plan and we can answer that question in great detail.
Okay and just in fact, if I could follow up the you talked about the 3 million shortage in peak.
Peak, how do you make sure that you don't attract new and new and trends.
Moving to the market.
With this strategy.
Nature finds its finds holiday survey I guess markets also find it basically.
So there are a number of regional players are there are a number of new entrants that are coming in the market. Our job is to provide the best end to end experience for the customers that we are bringing into our network are those customers who value what we.
We have to offer in many ways, it's about leaning into segments like health care line.
F N B's and other high growth areas that value our end to end networking and just on health care, if I could make a comment on vaccines, because we haven't talked about it but I just might share what we're doing in the vaccine solution here as you know.
Complicated supply chain, there's upstream supply chain, where the raw materials are delivered to the manufacturers and then.
There's a place where we play which is delivering vaccines from the manufacturers to the dosing locations and then there is the administration of the vaccines by the dosing locations as it relates to the space that we play manufacturers to the Dunkin' locations. We've delivered about 225000 shipments about $36 5 million vaccines at service level.
At 90, 999%, so our health care logistics team is just doing a just a really great job of.
Moving these vaccines for it and couldn't be more proud of that team.
Okay. Thank you Latoya I think.
Yeah.
Oh, well, it's Steven Thank you very much for hosting us.
And introducing we appreciate all the comments, we got all the investors that join US today and that concludes the EPS fourth quarter 2020 earnings call. Thank you.
Yes.
Yeah.
Yeah.
We're sorry your conferences ending now please hang up.
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