Q4 2021 United Parcel Service Inc Earnings Call
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Speaker 1: Good morning, my name is Stephen and I will be your facilitator today. I would like to welcome everyone to the UPS investor relations fourth quarter 2021 earnings conference call all lines have been placed on you to background noise and after the speakers remarks, there will be a question and answer period.
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 2021 earnings conference call all lines have been placed on mute.
Background noise and after the Speakers' remarks, there will be a question and answer period any analysts that wants to ask a question now was the time depressed. The want then zero on your telephone keypad. It is now my pleasure to turn the floor over to our host Mr. Scott Childress Investor Relations officer, Sir the floor is yours.
Speaker 1: any analyst that wants to ask a question, now is the time to press the 1 then 0 on your telephone keypad. It is now my pleasure to turn the floor over to our host, Mr. Scott Childress, Investor Relations Officer.
Yes.
Good morning, and welcome to the UBS fourth quarter 2021 earnings call. Joining me today are Carol <unk>, our CEO and Brian Newman, our CFO before we begin I wanted to remind you that some of the comments, we'll make today are forward looking statements within the federal Securities laws.
Speaker 2: Good morning and welcome to the UPS fourth quarter 2021 earnings call. Joining me today are Carol Tomei, 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 securities laws and address our expectation for the future performance or operating results of our company.
And address our expectation for the future performance or operating results of our company. These.
Speaker 2: These statements are subject to risk and uncertainties, which are described in our 2020 Form 10-K , subsequently filed Form 10-Q s, and other reports we file with or furnish to the Securities and Exchange Commission.
These statements are subject to risks and uncertainties, which are described in our 2020 Form 10-K subsequently filed form 10, Qs and other reports, we file with or furnish to the Securities and Exchange Commission. These reports when filed are available on the UBS Investor Relations website.
Speaker 2: These reports, when filed, are available on the UPS Investor Relations website and from the SEC.
And from the SEC for the fourth quarter of 2021 GAAP results included a noncash after tax mark to market pension charge of $14 million.
Speaker 2: For the fourth quarter of 2021, GAAP results include a non-cash after-tax mark-to-market pension charge of $14 million and after-tax transformation and other charges of $45 million. The after-tax total for these items is $59 million, an impact of fourth quarter 2021 EPS of 7 cents per diluted share.
And after tax transformation and other charges of $45 million. The after tax total for these items is $59 million and impact to fourth quarter 2021, EPS of seven per diluted share.
The mark to market pension charge of $14 million represents losses recognized outside of a 10% corridor on company sponsored pension and post retirement plans and additional detail regarding year end pension charges are included in the appendix of our fourth quarter 2012.
One earnings presentation that will be posted to the UBS Investor Relations Web site later today.
Unless stated otherwise our comments will refer to adjusted results, which exclude year end pension charges and transformation and other charges. The webcast of today's call along with a reconciliation of non-GAAP financial measures is available on the UBS Investor Relations website.
Knowing our prepared remarks, we will take questions from those joining us via teleconference. If you wish to ask a question press. 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.
You may rejoin the queue for the opportunity to ask an additional question and now I will turn the call over to Carol. Thank.
Thank you Scott and good morning, what an incredible year its been at UBS, Let me begin by recognizing the efforts of our amazing <unk>.
534000 strong around the world.
Not only did our team once again provide industry leading service during peak, but over the last year, we delivered $1 1 billion COVID-19 vaccine doses with 99, 9% on time service.
I am so very proud of our team and what we've accomplished.
The external environment is challenging due to the ongoing impacts of the pandemic labor tightness upstream supply chain jams, and hygiene inflation, but inside our better not bigger framework. We are maniacal about controlling what we can control we are laser focused on improving revenue quality.
Reducing our cost to serve and allocating capital in a disciplined fashion.
This is enabling us to move faster and to be more agile. So that we capture the best opportunities in the market enhance the customer experience and continuously improve our financial performance.
Looking at the fourth quarter, our results exceeded our expectations driven by improved revenue quality across all three of our business segments and significant gains in productivity.
Solidago revenue Rose 11, 5% from last year to 27 8 billion.
And operating profit grew 37, 7% from last year to $4 billion.
This is the highest quarterly operating profit in the company's history.
And for the full year 2021, our business delivered record financial results.
Solidago revenue increased 15% to reach $97 3 billion.
Operating profit totaled $13 1 billion.
58% higher than last year.
We generated $10 $9 billion in free cash flow more than double the amount generated in the prior year.
And diluted earnings per share were $12 13.
An increase of 47, 4%.
In a moment, Brian will provide more detail about our financial results.
At our June Investor and Analyst Day, I said intent is not a strategy and vision without action is just a dream.
At UBS, we are acting on our customer first people led innovation driven strategy as we transformed nearly every aspect of our business.
Starting with customer first as we've.
Discussed we are focused on growing in the parts of the market that value our end to end network, including BTB healthcare Smbs and large enterprise accounts.
In 2021, our F&B average daily volume grew 18% and represented 26, 8% of our total U S volume, putting us on track to achieve our 2023 target of more than 30%.
Our digital access program, our DAP. It makes it easy for Smbs to access <unk> services, and it's an important driver of our SMB growth.
In 2020, I challenge the team to turn DAP into $8 billion business in.
In 2021, GAAP generated one $3 billion in revenue.
Looking ahead, we expect GAAP to reach more than $2 billion in 2022, and as we add new partners and expand to additional countries.
F&B opportunities outside of the U S are tremendous and in the fourth quarter, our international F&B revenue growth rate was 18% as.
As we expand GAAP ROE with Smbs across Europe , and introduced new partnerships, we expect to gain overall F&B revenue share faster than the market growth healthcare is another market. We are focused on and in 2021, our health care portfolio reached more than $8 billion.
And revenue.
Here, we serve complex customers with our global footprint of health care facilities and cold chain solutions.
<unk> healthcare expertise and end to end solutions are unmatched in the industry and we are well on our way to hitting our $10 billion revenue target for 2023.
And amid the bottlenecks and uncertainty our supply chain solutions group is providing customers supply chain flexibility and resiliency through alternative routing and solutions.
Demand for forwarding products continued to be strong in the fourth quarter in fact ocean shipments were up double digits and container rates remain elevated in the market.
Now from an experience perspective customer first is about providing a frictionless end to end customer experience. We are attacking the biggest pain points first and over the last several months have rolled out improvements to the digital experience and pickup claims and UBS dot com.
You may not notice, but we generate over $9 billion in gross revenue annualized from transactions on our global website.
We redesigned the U S site in 2021 and saw a site visits grow 100 volt with an equally impressive growth in monthly page views up from 10000 in January to 600000 in December .
We've got more plans to improve the UBS dot com experience around the world, which should lead to higher revenue and better customer satisfaction.
We know it will take time to move the needle on our net promoter score which stands at 30, but we set a target of 15 and have laid out a path to get there.
Moving to the second element of our strategy people led here, we focus on the employee experience and making UBS a great place to work, we measure our performance, but how likely an employee is to recommend others to work at UBS.
I became CEO in 2020, our likelihood to recommend metrics stood at 51% globally.
And our goal is to surpass 80%.
We've made great strides gaining 10 percentage points to finish 2021 at 61%.
And now to the last leg of our strategic platform.
Innovation driven is at the heart of what we do.
Our global Smart logistics network powered by technology developed by <unk> Engineers enabled us to deliver another successful peak.
It may have been our hardest peak ever we had higher volume than we expected at the beginning of the quarter and lower volume at the end, but our sales engineering and operating teams remain agile and pivoted with changes in global market conditions and the needs of our customers we delivered excellent service levels.
Avoided chaos cost and improved efficiency in the network.
In fact productivity in our U S operations improved by one 7% for the fourth quarter as measured by pieces per hour.
Progress on the innovation driven element of our strategy is all about driving higher returns on invested capital.
As Brian will detail in 2021, we reversed a multi year downward trend in this metric and delivered a return on invested capital of 38% 910 basis points above 2020.
We remain disciplined in our capital allocation priorities and commitments in regard to capital expenditures, we are increasing our investments back into the business to drive innovation and growth.
We just started the first phase of what were calling smart package smart facility, which over time will put RFID tags on all of our packages.
This initiative will enhance customer experience, while improving UBS productivity by eliminating millions of manual scans every day.
Brian will share more detail on our Capex plans during his remarks.
In June we told you we were going to target a dividend payout ratio at year end of 50% of adjusted earnings per share.
And we're doing just that.
Today, the <unk> Board approved a 49% increase in the quarterly dividend from $1 <unk> per share to $1 52 per share. This represents the largest quarterly dividend increase in our company's history. Our strategy is building a solid foundation for our business.
And enabling agility.
While we expect 2022 to be another challenging year, we've got momentum.
So let me end by sharing our 2022 financial goals.
Building on the record results, we delivered last year, we anticipate delivering our 2023 consolidated revenue and operating margin targets. One year ahead of our plan in 2022 consolidated revenues are expected to be about $102 billion.
Operating margin is expected to be approximately 13, 7%.
And return on invested capital is anticipated to be about 30%.
Brian will provide more details on our outlook.
I am excited about the many opportunities in front of us.
And with that I'll turn the call over to Brian .
Thanks, Carol and good morning in my comments I will cover three areas, starting with our fourth quarter results.
Then I'll cover our full year 2021 results, including cash and shareholder returns and lastly, I will share our financial outlook for 2022.
In the fourth quarter supply chain challenges and the emergence of the Alba Korlym COVID-19 variant weighed on global economic growth.
In fact, the U S December retail sales report came in lower than forecasted and the inventory to sales ratio remained at historic lows.
Despite these factors our financial performance was better than we expected as the progress we've made executing our strategy continues to deliver strong results.
Consolidated revenue increased 11, 5% to $27 8 billion.
Consolidated operating profit totaled $4 billion.
37, 7% higher than last year.
Consolidated operating margin expanded to 14, 2%, which was 270 basis points above last year.
For the fourth quarter diluted earnings per share was $3 59 up 35% from the same period last year and full year EPS was $12 13 per diluted share an increase of 47, 4% year over year.
Now, let's look at our business segments.
Domestic delivered outstanding fourth quarter results. Our success was driven by gains in revenue quality and productivity as well as our ability to quickly adjust our network to match capacity with the needs of our customers, while providing industry leading service.
Average daily volume increased by 39000 packages per day, or 0.2% year over year to a total of $25 2 million packages per day.
This was below our expectations due to the soft retail environment in December .
Regarding revenue quality the impact of our better not bigger approach is continuing to drive improvement in customer mix in.
In fact, SMB average daily volume, including platforms grew eight 4% outpacing the market and.
And in the fourth quarter Smb's made up 25, 8% of U S domestic volume up 240 basis points versus last year.
Mix also shifted positively towards commercial volume as our <unk> average daily volume continued to recover it was up eight 8%.
<unk> represented 36% of our volume compared to 33% in the fourth quarter of 2020.
For the quarter U S domestic generated revenue of $17 7 billion.
Up 12, 4% driven by a 10, 5% increase in revenue per piece.
Fuel drove 380 basis points of the revenue per piece growth rate and demand related surcharges drove 110 basis points of the growth rate increase.
Revenue per piece grew across all products and customer segments with ground revenue per piece up 10%.
Turning to costs total expense grew eight 1%.
Fuel drove 230 basis points of the expense growth rate increase.
Wages and benefits, which included market rate adjustments drove 410 basis points of the increase.
And the remaining increase in the expense growth rate was due to several factors, including higher depreciation federal excise taxes and weakened expansion costs.
Productivity improvements helped partially offset the increase in expense for example through our ongoing efforts to optimize our trailer loads. We eliminated over 1000 loads per day compared to the same time period last year.
Turning to the holiday season in the U S. Our teams did an excellent job executing our plan and adjusting where appropriate.
Early in the quarter volume came in stronger than expected and we quickly adjusted our network by leveraging our weekend operations package flow technology and automated facilities late in the quarter volume levels were lower than we expected as omicron and inventory challenges negatively impacted the enterprise retail sector.
Again, our operators adjusted the network and importantly, also pulled out cost we decreased staffing levels and return rental equipment early which helped to lower the year over year operating expense growth rate.
The U S. Domestic segment delivered $2 2 billion and operating profit an increase of $786 million.
We're 57% compared to the fourth quarter of 2020.
And operating margin expanded 340 basis points to 12, 2%.
Moving to international the segment delivered excellent results by focusing on revenue quality and adjusting network capacity.
Because of tough year over year comps and COVID-19 dynamics, we anticipated a fourth quarter decline in average daily volume, which was down four 8%.
On a more positive note product mix was favorable with <unk> average daily volume up four 7% on a year over year basis is partially offset a decline in <unk> volume, which was down 18, 4% compared to an increase of 104% during the same period last year.
In addition to tough year over year comps total export average daily volume declined by five 2% due to the decrease in volume between the UK and Europe arising from Brexit disruptions and from fewer flights coming out of Asia.
In the fourth quarter, we operated 105 fewer flights than planned primarily due to COVID-19.
Despite these factors for the fourth quarter International revenue increased 13, 1% to $5 4 billion.
Revenue per piece increased 16, 4%, including a 730 basis point benefit from fuel at a 340 basis point benefit from demand related surcharges the.
The International segment delivered record operating profit in fourth quarter operating margin.
Operating profit was $1 3 billion.
An increase of 14, 7% and operating margin was 24, 7%.
Now looking at supply chain solutions the.
The business segment delivered record fourth quarter top and bottom line results as our team executed extremely well in a challenging environment.
Revenue increased to $4 7 billion up six 7%, despite a $789 million reduction in revenue from the divestiture of UBS free.
Looking at the key performance drivers forwarding revenue was up 37, 9% and operating profit more than doubled as global market demand remained strong and capacity stayed tight.
International Air freight kilos increased three 3%.
And in Ocean freight volume growth on the Trans Pacific eastbound Lane, our largest trade lane grew seven 8%, which was more than twice the market growth rate.
Within forwarding, our truckload brokerage unit grew revenue and profit by double digits, driven by revenue quality initiatives and strong cost management at.
At our health care portfolio delivered strong profits in the fourth quarter led by pharma and medical device customers.
In the fourth quarter supply chain solutions generated strong operating profit of $456 million and delivered an operating margin of nine 7%.
Walking through the rest of the income statement, we had $173 million of interest expense. Other pension income was $267 million and lastly, our effective tax rate came in at 22%.
Now, let me comment on our full year 2021 results.
Starting at the consolidated level revenue increased $12 7 billion to $97 3 billion.
We reduced our cost to serve through a combination of nonoperating cost reductions along with improved productivity.
We grew operating profit by $4 4 billion, an increase of 58%, finishing the year at $13 1 billion.
Operating margin was 13, 5% an increase of 320 basis points and for context. This is the highest consolidated operating margin we've had in 2014 years.
We increased our ROIC to 38% an increase of 910 basis points.
We generated $10 $9 billion of free cash flow, an increase of 114% over 2020.
And we strengthened the balance sheet by paying off $2 $5 5 billion of long term debt and we reduced our pension liabilities by $7 8 billion.
Which improved our debt to EBITDA ratio to one nine turns compared to $3 six last year.
And we returned over $3 9 billion of cash to shareowners through dividends and share buybacks.
Now for a few full year highlights for the segments.
In U S. Domestic operating profit was up 62, 7% an increase of $2 6 billion.
To reach $6 7 billion for the full year, and we expanded operating margin to 11, 1% a year over year increase of 340 basis points.
International grew operating profit by $1 2 billion.
Ending the year at a record $4 7 billion and profit and operating margin was 24, 2% an increase of 200 basis points.
And supply chain solutions increased operating profit by $649 million.
Up 61, 3% and delivered operating margin of nine 8% 280 basis points above 2020.
2021 was an outstanding year for UBS.
Which brings us back to our outlook for 2022.
Global GDP is expected to grow four 2%, we are continuing to pay close attention to and manage through several external factors, including COVID-19, inflationary pressures upstream supply chain constraints and labor shortages as a result, we expect the environment to remain dynamic in 2022.
Most importantly within this backdrop, we will focus on controlling what we can control and continuing to advance our strategic initiatives and.
And as Carol stated, we expect to deliver our 2023 consolidated financial targets one year early.
So looking at 2022 on a consolidated basis revenues are expected to be about 102 billion.
Which takes into account the divestiture of UBS freight.
Additionally, consolidated operating margin is expected to be approximately 13, 7%.
In U S. Domestic we anticipate revenue growth of around five 5% with revenue per piece growing faster than volume.
We expect pricing in the industry to remain firm and we will continue to price based on the value we provide to our customers.
As a result, we anticipate domestic operating margin will expand around 50 basis points in 2022.
Lastly in the U S. We expect to deliver an incremental revenue to profit conversion percentage in the low <unk> for the full year.
Moving to the international segment, we expect to continue growing faster than the market.
Revenue growth is anticipated to be approximately seven 7% with volume growing slightly faster than revenue.
More specifically, we expect to grow fastest in our trans border ground products.
Additionally, we expect international demand related surcharges to remain elevated in 2022.
Pulling it altogether operating profit in the international segment is expected to increase around 5% and operating margin is anticipated to be around 23, 6%.
In supply chain solutions, we expect revenue to be around $17 billion.
Driven by continued strong growth in healthcare and elevated demand and forwarding. However, we expect ocean surcharge rates to moderate below 2021 peak levels. Therefore, we expect operating profit to be down from what we reported in 2021 operating margin is expected to be about nine 4%.
And for modeling purposes below the line, we anticipate $1 2 billion in <unk>.
Other pension income, partly offset by $665 million and interest expense.
The full year net impact is expected to be around $570 million, which can be spread evenly across the quarters.
Now, let's turn to full year 2022 capital allocation.
As we discussed at last year's Investor and Analyst day, we've transitioned to a disciplined and programmatic approach to capital expenditures.
In line with the Capex range. We shared then we expect 2022 capital expenditures to be about five 4% of revenue or $5 5 billion.
These investments will continue to improve overall network efficiency and move us further down the path to achieving our 2050 carbon neutral goal.
About 60% of our capital spending plan will be allocated to growth projects and about 40% to maintenance. Let me give you a few project highlights we have 30 delivery centers and two automated hub projects planned to be delivered this year.
Combined these projects will enable us to drive greater efficiency by better balancing sort capacity with delivery capacity.
We will purchase over 3700 alternative fuel vehicles this year, including around 425 arrival electric delivery vehicles to be deployed in the U S and in Europe .
We will take delivery of two new 747 dash eight aircraft in 2022, which adds international capacity and we will make pre delivery payments on the 19, Boeing 767 freighters that we announced in December .
The 760 sevens or plan to enter our fleet between 2023 and 2025.
And lastly across these projects and others. Our annual capital expenditures will again include over $1 billion of investments that support our carbon neutral goals.
Now, let's turn to our expectations for cash in the balance sheet.
We expect free cash flow of around $9 billion.
Including our annual pension contributions, which are equal to our expected service costs as.
As Carol mentioned the board has approved a dividend per share of $1 52 for the first quarter, which represents a 49% increase in our dividend.
We are planning to pay out around five 2 billion in dividends in 2022 subject to board approval.
We expect to buy back at least $1 billion of our shares and we will evaluate additional opportunities as the year progresses, we expect.
Diluted share count to be about 880 million shares throughout the year.
Finally, our effective tax rate is expected to be around 23%.
In closing the strategic and financial progress we made in 2021 delivered consistent returns and created strong momentum as we enter 2022.
We remain laser focused on continuously improving our financial performance by enhancing revenue quality, reducing our cost to serve and staying disciplined on capital allocation.
Thank you and operator, please open the lines.
Thank you. Our first question will come from the line of Jordan I'll agree with Goldman Sachs. Please go ahead.
Yes, hi, good morning.
Obviously, you guys did a really good job on domestic profit per package in the fourth quarter and you gave some good color for 2022 can you talk a little bit more about.
How are you thinking about the revenue per piece cost per base maybe.
Some of the key drivers are in 2022 around productivity.
Thanks.
Hey, Jordan Thanks for the question so in 2022.
All were thinking Adv, it will probably be in the low single digits one 5%.
Revenue were expecting to be five five.
As we think about that F&B mix will continue to grow probably about 150 basis points, so slightly lower than the growth trajectory. We saw in 2021, but continue to pushing that drives benefit on the revenue side demand surcharges are likely to be fairly flattish.
And then fuel.
It's going to be likely not as high as we saw in 2021 the rate as you know most of our contracts are locked in for multi year contracts. So those rates are in place driving a five 5% revenue growth.
On the productivity side, we're going to build on the momentum we saw in Q4 Carol talked about the pieces per hour productivity over one 5% very very favorable we'll continue those trends and continue to take non op cost out of the business. So we feel good about the margin expansion of 50 basis points in the in the 2022, maybe just a little more color.
On the productivity initiatives nanos doing and team are doing a great job there but.
He has identified 10 key productivity initiatives in 2022 running anywhere from improving cube utilization and we've already seen some good movement, there, but we've got more to do.
To basically making sure that we are adhering to our operating standards across the network.
Further we've got more non op cost reductions don't way and that's all part of our productivity initiatives. So we feel very good about our ability to leverage expenses as we move into 2022.
Thank you.
Our next question comes from the lineup Amit Mehrotra of Deutsche Bank. Please go ahead.
Thanks, Operator, hi, everybody congrats on the results.
I guess I had a two parter if I could just talking.
Talking about productivity Carroll and the domestic business.
Through the lens of packages for direct labor hour everybody's trying to figure out where the endpoint or not.
What the potential is for domestic margins and if we look at it through.
The number of packages per direct labor hour.
Where are you on that metric how much further improvement do you think thats there through the capex that youre allocating to technology, just give us a little bit.
That may give us a little bit of a hint into further margin opportunities in 2022, and just as a follow up I was hoping you could also update us on the Amazon exposure as you typically do.
When you close out the year. Thank you.
Sure.
Cited about the productivity opportunities we have inside of our business, we're pretty good at what we do but we can be even better I think at the third quarter earnings call. We talked a lot about inside operations and how we're going about automating our inside operations. We have about 140000 people inside of our operations and through automatic.
Bagging automatic label application robotic induction into the small sorts theres a way to really drive productivity inside of the buildings.
We also have an opportunity with the RFID.
A project that we've just kicked off smart package smart facility you can imagine our pre loaders are manually scanning every package that's $20 million plus packages of data that's being manually scan that manual scan will disappear with the smart package smart facility. So.
The opportunities are endless in many ways to your question about where will the U S margin goal and we have told you. Our goal is 12%, let us get there we will ring the Bell and then we'll reset.
As it relates to Amazon as we've talked to at the end of the third quarter.
Amazon's revenue surged with us during 2020 as a result of the pandemic and the third quarter or their revenue as a percent of our total is trending more like what we experienced in 2019 and that held true for the entire year Amazon's revenue as a percent of our total for the year was 11 seven.
<unk> compared to 11, 6% in 2019.
Okay. Thank you very much.
Our next question comes from the line of Allison <unk> with Wells Fargo. Please go ahead hi.
Good morning.
Ask a little bit about international a lot of moving parts. There right. Now you did talk about some F&B opportunity growth and I know, there's some white space that you're going after in your margin for 'twenty. Two it's certainly trending above that sort of 23 target could you maybe help us understand the evolution of the international business I know, it's surcharges come off potentially.
And three of that revenue quality focus versus that white space opportunity that you have there.
Well, we're thrilled with our international business and it's been challenging there because of Covid and they've done a masterful job of working through that and the profitability is as you pointed out Allison above where we thought we would be when we put together our three year targets. So as we look to 2022, we anticipate that the.
ABB will actually grow faster than the revenue because of Geo and mixed changes. The team has really leaning into trans border Europe excited about what we can do there and we do that as you know in an asset light fashion, which is very valuable nutritive for our company. We're also liking the isn't the opportunity to grow our Asian clients and us.
You know we added two new large freighters to help grow that space, Brian anything you want to add I think as we think about growing faster than the market Carol.
Drs, we see as remaining elevated theres been a lot of challenges on the passenger side with the <unk>. So we expect Allison those surcharges to remain elevated this year. So while there is the 80 basis point decline in margin year over year $23. Six is actually ahead of where we thought we'd be in terms of the journey here. So team is doing a terrific job and I was remiss in not.
Mentioning that we've had such success with tap here in the United States and we're taking our adapt platform outside the United States, which will be a driver of growth.
Great. Thank you.
Yes.
Our next question comes from the line of Ken <unk> of Bank of America. Please go ahead.
Hey, good morning, Tom Brian , Yes, great quarter, great job.
Following through on the better not bigger. So my question is just on the pricing, Brian you mentioned kind of most locked into contracts. It sounded like multiyear context, maybe dig into the sustainability of pricing growth you had 10% at domestic you start lapping those double digit growth levels as we enter 2000 to maybe talk about your thoughts there and then just to wrap that up.
Our peak was so different this year.
There is something we should think about the year ahead, just because maybe costs, where we're better because the.
Network was flat or so how should we think about the impact for next year.
Yes happy to talk about the revenue quality, it's been a hallmark of our success and I think underpinning the better not bigger look I think Carol said at the Investor Conference. If we did one thing which was get the SMB mix up to 30% that would that would basically deliver our 12% domestic margin.
We were at $26 eight at the close of last year, we have plans to grow that by 150 basis points or investing in capability. We're very confident in our ability to do that so I would like to sustainability from an F&B mix perspective, as you think about rate in the contracts.
Pushing around 60% in terms of renegotiating contracts. So there is still mileage there to go from a sustainability standpoint. So overall demand surcharges were elevated last year. So we're not counting in the plan too much from an increase there.
We feel not only is <unk> 22 in good shape, but we've got room to run in 'twenty three and beyond.
And the small package.
Market is expected to grow about 5% in 2022, there is additional capacity being added but not enough that's going to create surplus. So the environment supports firm pricing has been limited to 2022.
Todd Fowler of Keybanc capital markets. Please go ahead.
Great. Thanks, and good morning, and congratulations on the strong results.
Brian I was curious if maybe you would share some of the shape of your expectations, particularly for U S. Domestic I know that the comparisons are difficult in the first half of the year, but is the expectation that youre going to see that low single digit volume growth pretty consistently and any directional comments on the expectations for that 50 basis points of margin improvement.
Yes happy to so as we think about volume revenue and profit in the domestic business for one agent to H I would tell you that revenue is going to be fairly balanced.
And maybe a little bit higher than the five five in the second half right around or slightly lower so you can count on five five ish is that as a good metric for the first and the second half in terms of growth rates and actually the.
Operating margin of 11, six I think thats a good number for you to hold for one <unk> and two H because thats from a planning perspective, we're also fairly balance might be a little bit softer volume in the first half of the year as we came out of a low retail sales report coming in December on <unk>, obviously had a little bit of impact going into January but overall low.
Single digit for the full year, we feel good about.
Brian I feel terrible we didn't answer Ben's questions about peak expectations, we just talked about pricing.
I'll go a little bit about peak, because I don't want to lose the opportunity to give a shout out to the team for operating in such a really interesting environment, where our volume was higher at the beginning of the quarter than we expected and lower at the end our team showed incredible agility to adjust to the market demands and thats.
You should expect going forward incredible agility, we have built technology.
That is surpassed in the industry that allows us to react day by day to what we're seeing in the marketplace. We also have a different attitude.
So we're not going to just keep vehicles and planes and people in place, hoping that the volume will come we're going to react to the market and that really drove productivity. The other aspect of peak this year.
As we look forward that may not materialize next year. We don't think it will is the slowdown in December retail sales that was a function of omicron and low inventory to sales ratio and so many other factors.
Factors, we would expect peak next year from a revenue mix to be more like what we've seen in the past, which is more enterprise business. So hopefully those two dynamics are helpful. As you think about peak of 2022.
Ravi Shanker of Morgan Stanley . Please go ahead.
Thank you good morning, everyone.
So it looks like compensation and benefits as a percentage of revenue dropped about 45%, which is your lowest level in a while I know some of that is obviously a benefit from your recent automation initiatives, but also we are in a very inflationary labor environment. So would love your view on <unk>.
How that trends into 'twenty, two and 23. Thank you.
Yes. Please.
Please go ahead.
Ravi look the trends on comp and benefit.
See anything extraordinary obviously from a management compensation standpoint, delivering the targets et cetera will fluctuate in terms of the.
The stock comp et cetera, but but we're looking to manage from a management compensation Carol talked about agility.
We're trying to think through from a field perspective, how do we manage the labor cost we have a good handle on the union piece in terms of contractual rates and then we're pulsing mras as needed.
And then just a couple of nuances in the quarter. When you look at the year over year. Our performance remember last year, we had an impairment because of freight so that that was on the different line that was on the other expense line, but up on the comp and benefit line, Frank had a $245 million impact year on year. It didn't it so you've got to back the freight noise out to understand the real.
Performance in comp and benefits.
Sure.
Thank you.
Chris Wetherbee of Citigroup. Please go ahead.
Hey, great. Thanks, Good morning, maybe.
Maybe just to follow up on pricing. So if you could just sort of give us an update on where you are in terms of the book of business in terms of domestic re pricing and then maybe how much you think youll be getting in 2022, and if you can give us some help around the magnitude of some of these rate increases I think it would be helpful. And then just wanted to understand.
And also just kind of on the comment about omicron impacting December .
Volume activity.
Is that in the rearview do you feel like you've kind of re accelerated back to what you would expect to be somewhat normal levels for this time of the year I just wanted to get a sense of how that's playing out.
Yes.
Ill comment further on the pricing side, so as we look at 'twenty two comp.
Composition of roughly 4% RPT growth rate is going to be about 40% of that.
I mentioned, we're about 60% the way through with contract renegotiations mix will be another 30% and then fuel will actually contribute about 30%. They are all levers that we pull with respect to revenue management.
And in terms of current trends the first week of January I'm like where are the customers everybody.
Because of Almond crunch, but the business has come back Roaring. So we're feeling really good about the guidance that we've just given.
Great. Thank you.
Our next question will come from the line of David Vernon of Bernstein. Please go ahead.
Yes.
And you mentioned 60 40 is the right split for growth to maintenance.
How would that look if we thought about domestic versus international and just as a follow up to that if you could talk a little bit about how you're thinking about growing capacity in the domestic network longer term I'm just wondering if we think about.
Post Covid world, where supply chains are reorganizing, maybe a little bit more BW group the network ready for four four.
For that kind of go.
Dan.
Yes, David happy to comment.
As you think about the Capex domestically.
We're going to have about $1 3 billion increase in Capex from 'twenty, one to 'twenty two about 75% of that is going to go into car positions, we've got sortation capacity and automation, which Carol was referencing earlier about 25% will be increase.
Increasing the amount of vehicles and it investments so that's a relative split from a.
Largely a domestic point of view and in terms of capacity going forward. We're not just relying on capital we're enhancing the weekend service to provide additional capacity smoothing the days of the week, but we are putting 60% of our capital spend in 2022 to $5 $1 billion is going towards growth, we're bringing on 30 delivery centers, we actually have 50 coming online but 30.
In the year and then we've got a big hub regional hub in Pennsylvania coming on as well.
And as we think about the future we really over the past.
18 months have really worked to optimize our network and feeling good about that that gives us confidence in our ability to grow into the future and add capacity that will be neutral to two the return on capital and to the bottom line, but as Brian said for our plans for 'twenty. Two we are well set to handle that.
Volume that will come our way.
Alright, Thank you guys.
Sure.
Our next question will come from the line of Tom Wildwoods. Please go ahead.
Yes, good morning.
I think you said, let us let us hit the 12% margin first and then we'll kind of get back to you.
So I'm not looking for an update on that target, but I wondered if you could offer some kind of directional thoughts on when you get to 2023 do you shift the mix of focus too.
More volume growth or more revenue growth and less focus on margin improvement or do you think that you continue with what I'd characterize as a pretty balanced approach in terms of revenue growth and margin and then I guess, if I can sneak in another one on the Amazon mix do you expect that.
Percent of revenue to go down or to be kind of stable. Thank you.
So as we think about longer term margin I'd really like to get to that 12% number.
Ah can about longer term margin a year ago, we sat on this call and we said we would have a double digit operating margin in the U S in that regard.
<unk> I don't think youre going to do that well we showed that we could let us get to the 12% number and then we will come back and tell you, where we think we're going to take take the company on.
On the Amazon percentage of total revenue, it's totally a function of where the growth comes from.
Have.
We have a great relationship with Amazon and we have mutually agreed about the volume that we should take in the volume that they should keep that works best for both companies and so as we continue to lean into Smbs in health care and B to B youre going to see shifting up penetration will be.
Report that out to you is as the time goes by.
Great. Thank you.
Our next question will come from the line of Brandon <unk> with Barclays. Please go ahead.
Hey, good morning, and thanks for taking my question. So I guess I don't want to focus too much on Amazon, but if I look at your average yield performance throughout the year up double digits.
And I think just back of the envelope math here your largest customer revenue would have been about flat year on year is there anything to suggest that maybe there was.
Upwards of like a 10% volume shipped to their internal network Carol off that last comment there.
So I will just tell you that their revenue grew with us in 2021.
Okay I tried.
Thank you.
Our next question will come from the line of Scott Group of Wolfe Research. Please go ahead.
Hey, Thanks, good morning.
Good morning, So I understand you don't want to talk about U S margin targets, but maybe talk consolidated.
Getting there a year early how do you think about 2023.
And then.
Sorry, that's got some background noise. So you finished the year with around $10 billion of cash.
<unk> 9 billion of free cash flow this year $5 billion of dividend.
Why not more buybacks.
So Scott it's.
Brian I'm happy to take that or returned to shareholders in 'twenty, one was $3 9 billion.
Take the dividend and the buyback thats going up to $6 $2 billion. This year at 59% increase pretty healthy that said we've declared the dividend.
We told you to put a $1 billion in your model for share repo, we do have authorization from the board and we do have ample cash should should we want to get back into the market. So I would tell you take $1 billion as a placeholder and we'll update you as we go forward I would say, it's a floor. The authorization that's remaining that's $4 5 billion.
Thanks Scott.
Our next question will come from the line of Duane <unk> worth.
Evercore ISI. Please go ahead.
Hey, good morning, Thank you.
I appreciate the detailed segment guidance, but wanted to get your thoughts on inflation as you look at the balance of the year.
You expect consistent trends from first half to second half.
Or should we be thinking about a lower cost per package.
And lower required revenue per package growth to achieve the same margin expansion outcome at some point this year.
From an inflation standpoint, I think we would look for higher growth in the first half of the year versus the second half of the year. So.
As you think about cost per piece in the U S in particular, which.
Which is sort of three plus percent I would expect that number to be higher in <unk> and slightly lower in two age with a few moving pieces.
Thanks, and I Wonder if I could get a second one on returns not returns on capital, which are great, but within the context of E. Commerce returns how big of a business is that for you and can you talk about growth of that service within the context of your biggest enterprise customers. Thanks for taking.
The questions.
Well, we've been public on our holiday return estimate 60 million packages.
We're well on our way of meeting that number.
Broadly speaking, we've got a really great return process for our largest customer.
Where recipients.
Recipients of packages from that customer can take them to a <unk> store and we will ship them back it's a great experience and as you know we have over 5000 UBS store locations I think about the UPN store is just an extension of our network.
I'm very excited about what we might be able to do with that asset it's working for us really well now, but we can do even more with that asset.
Thank you.
Yep.
Our next question will come from the line of Jeff Kauffman with vertical research partners. Please go ahead.
Thank you very much congratulations.
Again, thank you also for all that.
Details on the division outlooks.
Carol I wanted to focus a little bit on the ESG here, you mentioned, a $1 billion of capex into carbon neutral investments you mentioned the.
3700 alternative fuel vehicles that you'll be bringing on next year.
Right now customers are choosing based on scarcity, but eventually that's going to change.
No doubt the ESG conversations with your customers are picking up as well.
Where are you ahead of the curve in terms of where you want to be right now on ESG and where is there more work needed to be done.
Well. This is part of our core values and has been part of our core values for a long long time.
And we look at.
For example, our.
Automotive equipment is it Rolling laboratory, we have 13000 vehicles today that are empowered by some sort of an alternative fuel and we are continuing to invest in that as you as you heard from Brian we have set forth measurable goals and milestones along the way to our our goal of being carbon neutral by 2050.
And some of the investments that we're making today are enabling that the aircraft. For example that we are buying from Boeing are more energy efficient.
On.
Mobile is that we're buying are more.
And of course, we're moving to all renewable energy to power. Our buildings. So you can get all of these details in our ESG report and we are.
Committed to.
To reaching that carbon neutral.
By 2050 as it relates to customer.
Needs wants and desires.
It's starting to actually increase particularly outside of the United States. So this isn't just good for the planet it's good for business.
Thank you very much that's my one.
Thank you.
Our next question will come from the line of basketball majors Susquehanna. Please go ahead.
Thanks for taking my questions.
What's the update will be operating targets for the pull forward of 2023, I'm not sure how meaningful the three year cash flow absolute numbers worse.
I understand you don't want a guide 23 early but can you talk a little bit about if anything you have visibility into on either capex or cash taxes pension funding that would impact.
Ever profit trend that we assume for 2023 as far as the cash flow dropdown. Thank you.
Yes, I think the free cash flow <unk> is going to do.
By about $1 $6 billion seven from 'twenty, one to 'twenty two so as you think about what's driving that we had pre funded some of our service costs in 2020. So if you take that $1 billion seven out.
It's relatively flattish.
For the moment that is a good placeholder, we're throwing off a lot of cash we're investing in the business to drive operating margin to improve operating cash flow I don't see a big spike in Capex anytime soon if we increased capex, it's likely to be for automation to reduce cost et cetera, but I don't want to get out ahead of my skis in terms of the 23 guide at this.
<unk>.
Thank you for that and with respect to when you'd be comfortable issuing another long term outlook now that you've pulled forward. The one from last year any thoughts is that something that we could expect early next year or do you think you need to get through the teamsters negotiation to be able to have that level of certainty just any thoughts on when we might hear a longer term.
It would be helpful. Thank you.
Yes.
A very fair question, if you don't know where you're going any road will get you. There. So we appreciate the need to give longer term guidance, let us get to our targets and then we will come back and talk to you.
Thank you.
Vessel.
Our next question will come from the line of Jed Nathan Agarwal. Please go ahead.
Hi, Thanks for taking my questions. So I just wanted to kind of.
In terms of your better but.
Not because of strategy.
Hi.
As the company has done.
Most of the areas, where you would like to Peel back.
Is there more to be done there.
Oh, there is no finish line.
We're just getting started in so many ways when I think about our approach to enterprise data I'm. So excited about this initiative today, we have data held in a number of data pools that arent, particularly clean we've just kicked off in an enterprise data strategy initiative, that's going to clean up all of that data put it.
And two eight domains all the consumer applications will go into the domains will have one version of the truth, that's going to drive productivity like we've never seen in this company. That's just one example.
Underway.
So there is no finish line, which are great. Brian Yeah, No. We're very focused on a handful of while the important initiatives in that.
Running the better not bigger playbook.
Yes, there is no finish line so perpetual flywheel.
Okay.
Sure.
I was specifically referring to on the revenue side, because if I look at your comments you said.
Health care will be up about $2 billion in 2022 from 2021.
I think <unk> was about <unk> 7 billion.
And then if I look at your revenue increase it's about $5 billion. So it is it looks like.
There is some there is still left some revenue left on some areas.
Revenue sources that he would be peeling back and saying kind of getting out of the market. So I. Just wanted to understand is that is that the right way to think about it.
So.
We might have confused the messaging because we had some 23 numbers and some 2022 numbers. The guide we gave was for 2022 and it may not look as aggressive as you might think if I remember there is freight sales that we are comping in 'twenty one.
One that will not materialize in 'twenty, two and that's about $1 billion of revenue. So there is plenty of growth for us to go get plenty.
Okay.
Thanks.
Stephen It's Scott we've got time for one more question. Please.
Our last question will come from the line of Scott Schneeberger of Oppenheimer. Please go ahead.
Thanks, very much for fitting me in here.
I'm going to ask on.
BDC versus B to B, Brian how are we comparing now in that mix versus pre COVID-19 levels and what's implicit in the guidance over 2022 about how you think each will each will play an N in the upcoming year. Thanks.
Yes, Scott good to hear from you we finished.
The fourth quarter at 64% BDC the guide for 'twenty.
<unk>, one is will be roughly in that 60% low sixties range.
As we go forward. So we see it in kind of a low <unk> range for the full year. It was in the low sixty's lesson.
61 39.
When I came to the company the previous year was more like 50 50, there's been a step change in the mix I think it is going to stay around this.
<unk>.
139 areas don't you agree the entry.
Thanks and congratulations.
Thank you.
I will now turn the floor over to Mr. Brian Newman.
Thank you operator.
I'd like to take a minute as we close our call to announce the change with our within our Investor Relations Group Scott Childress has done an excellent job leading the IR team over the last six years.
I've asked Scott to take on an exciting new role within the finance team continuing to reports myself Scott will transition his current IR role, Ken Cook, who most of you already know Scott and Ken have worked together over the past couple of years to ensure a seamless transition Scott I know I speak for the entire executive leadership team when I Express express our sincere gratitude.
To you on a job well done I would also like to welcome Ken into his new role. So thanks for dialing in today, we look forward to talking to you all soon and this concludes our call.
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