Q4 2022 United Parcel Service Inc Earnings Call

Speaker 2: Now is the time to press the one, then zero, on your telephone keypad. It is now my pleasure to turn the floor over to your host, Mr. Kim Cook, and Vestor Relations Officer.

Speaker 3: Sir, the floor is yours. Good morning and welcome to the UPS 4th quarter 2022 earnings call. Joining me today are Carol Tomay, our CEO , Ryan Newman, our CFO , and a few additional members of our executive leadership team.

Speaker 4: 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's laws and address our expectations for the future performance or offering results of our company. These statements are subject to risks and uncertainties which are described in our 2021 Form 10K.

Speaker 5: Subsequently, filed forms 10Qs and other reports we file with

And in terms of IP, we will invest $830 million, which includes accelerating the rollout of smart package smart facility in the U S. Continuing to develop our delivery density solutions and building out our logistics as a service platform and lastly across these projects and others over $1 billion of investment.

Support our carbon neutral goals.

Now, let's turn to our expectations for cash in the balance sheet.

We expect free cash flow to be around $8 billion in our base case.

Distant with our policy of a stable and growing dividend. The board has approved a dividend per share of $1 62 for the first quarter, which represents a six 6% increase in our dividend.

We are planning to pay out around five 4 billion in dividends in 2023 subject to board approval.

We plan to buyback around $3 billion of our shares.

Finally, our effective tax rate is expected to be around 23, 5% with a tax rate higher in the first quarter compared to the rest of the year due to the timing of our employee stock Awards.

In closing we are focused on controlling what we can control.

We will continue to invest in our business to balance efficiency and growth opportunities under our better in Boulder framework.

The fundamental changes we've made to our business coupled with the continued execution of our strategy will help us navigate what's ahead in 2023.

Thank you and operator, please open the lines.

And Steven one note before we do that we did experience a technical difficulty with the webcast. This morning, So apologies to those of you who missed a portion of our prepared remarks, we plan to post a full recording of today's call to our Investor Relations website. Shortly after the completion of our call.

So Steven please open the lines.

Thank you we will now conduct a question and answer session.

Our first question will come from the line of Amit <unk>.

<unk> of Deutsche Bank. Please go ahead.

Thanks, Operator, hi, everyone Bryan that was.

Really helpful guidance framework. So I appreciate that a couple of just clarification points.

I guess, the net service cost benefit is zero and domestic if I look at the service component I'm just trying to understand how much of that margin uplift is absolutely a gross and net.

Service I don't know if you talked about I might've missed it sorry, there are a lot of numbers. There. If you talked about the financial impact from what you're assuming on a new labor deal. So if you could just talk about those two items and then Carol.

There's a lot of rhetoric, that's heating up on labor contract. It seems like every day, we wake up as new Big article about it I'm wondering what your message is to enterprise customers that may start to get a little bit uneasy with all the rhetoric, that's heating up out there. Thank you.

Thanks, Amit I'll get started we had about $420 million benefit to our consolidated operating costs and that that is being offset with investments of that for <unk>. Specifically I think you were talking about the domestic business, which is $3 80 of the $4 20.

Which is worth about <unk> <unk> on a CPP. So when you think about the investments we're going to make into the business, which are about $400 million as I mentioned in my prepared remarks that basically offsets the pension service cost impacted domestic so it's more of a one for one on the labor front.

So we've modeled in.

Rates in both our base and our downside scenario.

And I'm not going to get into the the wage and benefit component of that but I guess there is a broader labor question in there.

And I'm happy to address the labor question.

Question is.

Without getting into the details of what will take place at the bargaining table I think it's important to remember the teamsters have been part of the U P. S family for more than 100 years.

So over 10 decades, we've negotiated many many contracts this is not our first rodeo.

Our approach with the Teamsters is a win win win win for the Teamsters wind for our employees and went for UBS and our customers now let me to your.

Sure observations there have been a lot of articles and headlines recently that might cause someone to question, whether or not a win win win is achievable, but I would submit that a win win win it's very achievable because we are not far apart on the issue and let me make this real for you by giving you a few weeks.

Apple's first both Teamsters and U P. S. FRE that are healthy and growing UBS is good good for teamsters that for our people and good for our customers. In fact, we added more than 70000 teamster jobs. Since 2018, so are aligned and are growing in <unk>.

UBS is good.

To be growing and healthy we need to be competitive and make sure that our offerings to meet the needs of our customers and a lot has changed since the last time, we negotiated our contract.

Recipients want their packages delivered when where and how they want them to lever herd, which means we can delivery well it's become table Stakes.

<unk> is fully acknowledge that but have worried about the pressures placed on our workforce with weekend operations and they refer to that to.

For the six punch, which is when people work six days, a week or $22. Four drivers we share the same concerns I don't want people working six days a week unless they want to so we're aligned on this we just needed to get to the bargaining table and work it out and candidly, we think with just a few tweaks to our existing contract.

We can work this out so we're not far apart we're aligned we just need to work it out another matter that's come up if he's there can be no dispute sadly that the earth is heating up and that puts an uncomfortable situation on our employees and the height of the summer.

Safety is our number one priority for our people. So we're not a part on this issue in fact, we're not waiting for the bargaining table, we've already kicked off a total revamp of our safety program, bringing in new technology, our hydration cooling systems and a whole lot more to address so we're not apart we are going to do the right thing for our people.

So those are just a few examples of where I see a win win win is achievable in fact, I'm committed to delivering with the rest of the team and win win win contract before the end of July .

Very good. Thank you very much everybody appreciate it.

Thanks R R.

Our next question will come from the line of Tom <unk> of UBS. Please go ahead.

Yes, good morning, I wanted to ask if Brian if you could run through the productivity programs and put some ballpark around the impact that you expect smart package smart facility.

TSP. If you have other programs that are notable so we can have a little more visibility on how to think about productivity in the eye and I'm thinking in domestic package in 2023. Thank you.

Sure Tom will look.

The team has done a great job and pivoting and really driving productivity in the fourth quarter. They did an outstanding job and we're calling for low single digit or a CPP.

<unk> in 2023.

I referenced some of the investments that I think you were talking about in terms of smart Pak smart facility may be if I unpack those you'll get a sense of where we're investing so smart tax mark facility that really drives productivity inside the buildings, but it also improves the customer experience by reducing Miss loads I think missiles today are running about one in 400 post the smart tax.

Our facility will be up at one 800, and there's a path to something higher beyond that and then there is accelerating pilots for phase two which is <unk> packaged car. Another area. We're investing in probably the second largest is health care. That's a great growth business for us we're going to be adding about two 4 million square feet in warehouse space next year some of them.

Outside the U S half are in the EU and happen in Americas, and then that has been a great performer for us we're going to continue to invest in the the DAP program, both domestically and internationally enhancing the plug and play and adding brokerage and UBS access points in terms of capability and then theres further investments into the customer experience and Nextgen brokerage. So Tom I think we have a lot of comp.

In terms of the ability to drive total service plan the investments, we're making in <unk> facility health care depth and Thats whats contributing to the low single digits CPP in 2023, and maybe just to dimensionalize it a little bit more in the fourth quarter alone in the United States productivity reduced our expense by $271 million I mean, that's a lot that's a lot.

Im really proud of the team and just got smart package smart facility because I'm just so enthralled with this project.

We have of the 100 buildings that were in we have 50 buildings, where the missiles are now one in 1000 that's.

Six Sigma perfection. So we're really excited about rolling it out to the 940 remaining buildings in the United States and here's the cool thing we're gonna roll out the first part of the those buildings with wearable devices, but then we've got plans to move away from the devices and actually make the car smart and last week I was able to load a package this isn't.

And our laboratory I was able to load a package onto a smart car and saw the car.

Actually checking the package no human being did that so this is way cool technology that we're excited about the productivity that that's going to be.

As a result and to Tom just from a seasonality perspective that we have planned productivity gains year over year in every quarter in 'twenty three and so the team will be reducing hours more than volume in the U S through the programs Carolyn I just alluded to the TSP in the automated capacity. So it's a balanced program.

Okay, great. Thank you.

Okay.

Our next question comes from the line of David Vernon of Bernstein. Please go ahead.

Hey, good morning, and thanks for the time, so if we step back from the guidance at the midpoint. Your EBIT number is down call it 6% from 2023 levels.

And obviously, we are coming into a choppy macro.

Hey, Carol or Brian can you talk about the levers that you need to pull to kind of get re accelerating growth and how much of that is going to be sort of macro dependent as we think about the bridge from wherever we end up at 23% to 24 I'm just curious to get your perspective on on what are the catalyzing agents that would.

Reverse the trend in overall EBIT growth.

Well I think there are a number of catalyzing agents, we need to get through this choppy economic environment for sure, but you think about where we've had some huge home runs let's talk about our digital access program.

We have seen enormous growth and that's when I started it was less than $150 million now over $2 $3 billion in 2022 on its way to be $3 billion in 2023, and we're growing outside of the United States.

It had been just a U S.

Programme now are going outside the United States and this is one area of investment for next year. So that's a catalyst for growth because we are investing in a customer that is underserved today.

The catalyst for growth is what we're doing on the customer journey as we continue to move the needle on improving the experience with US we see every year increasing penetration in our F&B It's Brian .

Part of the plan for next year, that's right. So we will be adding about 100 basis points Carol familiar volume mix perspective on the SMB front, so that customer experience translating into continued growth on the SMB front and from a macro perspective, obviously built into the guide is an improvement in the back half of the year. So we need to see a bit of a pick up in Asia and the U S rebounding somewhat slow.

Backdrop perspective, another catalyst for growth of course is health care logistics couldn't be more proud of the progress that we've made in this space and we're just getting started.

A huge opportunity for growth here around the world and Kate and her team are doing a nashville drop of leading us there.

And as you think about the opex that youre, putting in to offset some of the above the line sort of service cost.

Is that sort of onetime in nature or is that just project based work around implementing RFID in our facilities as there were some some cost drag there that comes away or is that just cost drag that moves onto the next initiative I am just trying to think from a puts and takes perspective.

Some of the investments international adapt for example, we're investing in the first part of the year that will start to payback latter part of the year and then the deployment of smart tax smart facility, that's probably more of a payback in 'twenty four 'twenty three as we faced a complete phase one and start to move on to phase two to Dimensionalize. The investment that we're making in smart package smart facility, it's about 104.

<unk> million dollars of expense this year, which will not repeat the following year and about 106 million of capital again.

That's super helpful. Thank you.

Our next question comes from the line of Ken <unk> of Bank of America. Please go ahead.

Hey, great. Good morning, Carol Great to hear the target to have the contract done by the end of July I think last you had talked to you you werent even planning on staying down early so I think that's encouraging to hear.

Maybe you could talk a little bit about what the largest customer kind of represented full year for for 'twenty. Two your thoughts I know you talk about the pace of the loss of that business.

But it sounds like it's accelerating into into 'twenty three maybe you could talk a little bit about that in perspective of your your you're countering SMB wins, and then on international to maintain that 21%, Brian what's the assumptions in there to maintain that level.

Sure on Amazon front can we finished up a year ago at 11 seven in terms of the percentage of Amazon as a percentage of our business that came down to 11, 3%.

Last year. So it was really a decline of about 40 basis points. We will continue on a mutually agreed path to glide that business down in 2023, and that's factored into our guide. So we feel good about being able to manage manage that down.

On the international front can you what was the second part of your question. So we've got.

We've got an assumption that Asia comes back in the second half of the year, so that theyre going through some challenges right now in the early part of the year. There was a two week lunar holiday.

Had some COVID-19 challenges, particularly out of China, So cadence team they've done a masterful job in the fourth quarter and also in the beginning of this year in terms of.

Pivoting, our air network I think.

They took down about 200 flights in Asia, which was really remarkable that they were able to do that in such a short period of time, so managing the air network seeing a little bit of a rebound in China and then getting after the opportunities that we're investing in international DAP was one I just mentioned and then going after the premium side of the market. So a lots of lots of encouraging optimism for the back half of the year.

And it's really really is the name of the game isn't at here. It is it's the end of January I would say, our crystal ball is pretty murky, but I can tell you what we're seeing in the business today.

The U S is actually doing a bit better than the base case, then international is doing a bit worse because we're in it now a two week [laughter] lunar new year holidays, who would've thought that.

Herd immunity coming we believe in China things should get better outside the United States.

And just to clarify that 11, three I think Carol you had mentioned that you were targeting maybe less than 11% on Amazon for 'twenty two so it sounds like maybe.

Maybe it's not drifting away as fast as is an accelerating decline no Ken it's a really it's a function of currency.

Effects.

<unk>, our top line by $1 $3 billion. So had we not had the pressure on the topline the percentage, but it.

Does that makes sense yeah, absolutely of course, thanks for the clarification yeah. Thanks, Thanks, Ken and then just a reminder, please limit yourself to one question. So we can get through as many participants as possible.

Our next question comes from the line of Scott Group of Wolfe Research. Please go ahead.

Hey, Thanks, Good morning, guys. So just want to make sure I'm understanding the guidance pieces here. So I think you said in the base case, Brian The U S margin is 12% can you talk about where you see it in the downside scenario and then.

You talked about.

More than half of the operating profit in the second half of the year I mean, it's typically somewhere between 50 and 50 and 55% should we should we think anything differently I don't know if you want to give us a little bit more color on first half second half.

Profit margins any color there. Thank you Scott.

Scott good to hear from you. So I'll start with the latter question first we expect about 56% of our profit to come in the second half of the year relative to <unk> and then I would also just give you a little bit of color there will be a similar bathtub effect in the first half between <unk> and <unk> stepping up into Q from a domestic guy.

Perspective, the other half of your question.

Nando and the team are focused on 12% that was actually the same number that we had guided to back in our Investor day, and I'd say, the world's changed a little bit since then, but but we're getting after the 12% margin in 2023. The low end is based on 11% and so there are a number of things that are factored in there. The biggest change would be a change in the top line relative to volume if the macro.

It doesn't come back as quickly as we think it might there's labor negotiations going on so we thought it was prudent to put a floor in.

Thank you guys. Thanks.

Our next question comes from the line of Todd Fowler of Keybanc capital markets. Please go ahead.

Hey, great. Thanks, and good morning, and thanks again for the detail.

Wanted to ask on the expectations for revenue per piece and U S. Domestic if I kind of tease out kind of the comments you've got revenue in the base case up low single digits volume down slightly so revenue piece, maybe low to mid single digits a bit of a deceleration from where you've been over the last two years, you've obviously done a good job of moving that up.

Can you talk about.

The ability to see continued improvement in revenue per piece as you move through 'twenty three how much of that base pricing and mix and then the opportunity longer term. Thanks.

Yes, it's a great question. So the <unk> as you know was six 9% and with the service rates, we'll keep a decent amount of that.

Guide for RPT that we're building in our base case is mid single digit for RVP and that is facing two headwinds off of that number you've got product mix and fuel which are re each combined about 150 to 200 basis points off of that mid single digit. So that's how we're thinking about on the product mix is is really less air Morris <unk>.

Shifting the product mix and then the fuel component.

Fuel is not going to have a big net impact to the business in 2023, but obviously, there's a cost component versus a revenue component.

Got it that's helpful. Thanks, a lot.

Our next question comes from the line of Allison millennia.

Wells Fargo. Please go ahead.

Hi, Good morning, I, just wanted to turn to the health care is quickly approaching sort of that original target of $10 billion in revenue. There obviously investing more this year in that in that vertical is there a way to think of what kind of outgrowth, you're seeing there sort of what's the base market Keith.

Health care this year versus what you guys are seeing or growing about just any color there.

Well I think the cadence here in case it would be great. If you could just take that question. Please yeah, absolutely. Thank you Allison.

We've really been able to grow healthcare beyond even lapping the vaccine distribution that we did over $1 billion.

That was because with that service that we're delivering and the capability around the globe, we're actually selling more into biologics and some of the developing treatment. So that continues to fuel lots for the future growth, we have seen double digit growth and we're planning for double digit growth this year as well with very strong margin.

Great. Thank you.

Our next question comes from the line of Jordan Oliver of Goldman Sachs. Please go ahead.

Yeah, Hi morning, knowing that the SMB penetration continues to be important part of the strategy just kind of curious in an environment. That's tougher does it get more difficult to penetrate them and do you find that maybe when you do their sort of trading down in services, just kind of curious, especially given your large customer will continue to sort of sure.

Zinc over the coming years. Thanks.

Well, we've been investing in the experience because we think that's the way to not only grow but to keep that very important customer and I couldn't be more proud of what the team has delivered in this regard. So if you think about customer journey. If you will there were three really big pain points one was.

<unk> value and that's why we're so thrilled with still a manager can still manage or is that a huge home run.

We are our win rate is 22% higher than we thought it would be with better revenue quality and the customers are happy because they're getting a deal with us within seven days it used to take weeks so negotiated value.

As an important part of continuing to serve this customer another is reroute a package.

We had some issues.

Chemically that needed to be addressed and we fixed that so now we can reroute a package and then finally resolving a claim here we had a broken link. So when you had a claim it was not a good experience for our customers and we've seen our net promoter score in this area alone improved dramatically and they speak to pay the claim needs to pay.

Improved by 10 days, so we continue to lean into the experience and Brian I know you want to add something thanks, Carol Yes, I would just follow up and say, we're putting some opex investments $400 million into the business. This year, we invested in a similar capacity and fastest ground ever at Smbs et cetera, a couple of years ago and as I think about the F&B journey by investing in those <unk>.

<unk> experience points Carlos talking about those investments are paying off and that's what gives us confidence we are seeing 40% higher smbs today than in 2019, when we started that journey of that investment and we're actually we've increased penetration Carroll for the last 10 consecutive quarters. So it's a bit of a proof point on the SMB front in terms of the investment and to pay off.

Thank you.

Our next question will come from the line of Chris Wetherbee of Citigroup. Please go ahead.

I guess, maybe I had a question on volume wanted to understand a little bit better sort of the growth outlook for some of the smbs, the non sort of Amazon business and it sounds like that's going to be up so kind of curious about sort of what gives you confidence there or how much market share have you been able to win sort of thoughts around that and then Brian a quick point of clarification as well I think you've talked about sort of you know the first half second half.

They make a profit being weighted to the back half and then again in <unk> should we be using sort of similar numbers like 44 56 somewhere in that ballpark is a reasonable way to think about that first half as well.

Maybe on the F&B question, let's look at our digital access program, that's been a huge home run for us.

Year over year, we saw $1 billion of growth in this in this program here's the important part it's $3 5 million customers.

These are very small customers, who are shipping with us through the platform and we see continued growth opportunities ahead for us in fact, we think our that program will be over $3 billion in 2023.

On the.

The seasonality, yes, so you should consider a similar step up in mix from a Q1 to Q2 perspective.

From a Q1 perspective, Chris we've got some Q4 trends coming out from a consumer to macro perspective that our challenge, we're seeing that product mix headwinds and we're making some of these investments in the early part of the year. So you should apply that same bathtub effect.

For Q1 Q2.

Thank you.

And then Stephen we have time for one more.

Our last question will come from the line of Brian Awesome Big of Jpmorgan. Please go ahead.

Hey, good morning, Thanks for the time.

Just wanted to come back to pensions real quick.

Hey, Brian can you talk about maybe any changes to the sensitivity is a little bit different than what we thought maybe not as big of an impact did you change your expected returns assumption or anything along those lines and then maybe you can just wrap up with a bit of commentary on pricing.

Pricing in yield and productivity and how all of those really really it can trend throughout the year in an environment, where youre seeing.

Decelerate you talked about all the different sort of headwinds or uncertainties. Some of which was showed up in peak. So really just looking to see if you're seeing some demand destruction out there and if you're able to drive these productivity gains if the volumes don't necessarily show up where you think they could surprise to the downside.

Happy to Brian So.

So on the pension front look we've been on a path to derisk the pension and we actually feel good about the glide path there were up in the high 90%, 98% funded level, which is great for our employees.

From a liability perspective, we've taken that down from about 16 billion. A couple of years ago to 4 billion $4 8 billion now. So overall the glide path has been good. The challenge. We have is that we've seen historic rise in interest rates and so that 900 plus million dollars number that I gave you a below the line that is a non cash number but it moves up and down with the mark.

So we try to try to give you the transparency.

Do tend to look through that as its a non it's a noncash number when we think about our capital allocation vis vis the dividend et cetera. So net net I think we're doing the right thing for the company, but given the volatility in the interest rates. It is a challenging environment and we will move up and down on a relative basis I.

I think about productivity is a virtuous cycle here at UBS and I couldn't be more proud of what our team has done.

Quarter after quarter after quarter to drive productivity and that will maybe you can share a few of them.

Action items in 2023 to continue that flywheel sure. Just if you look at the shape of the volume, especially in the fourth quarter and quarters before that.

We've shown tremendous agility.

Making sure we're matching the hours and the activity in our operations to the actual volume and the revenue that will continue.

Quite frankly, our people are masters of efficiency.

So as we rollout the second iteration of our total service plan, which kicks off on March 3rd.

We're learning a lot about our network and there's cost that we had in not just on road activity or inside our facilities, but across the entire network can work.

Laser focused on those initiatives and whatever volume and how it comes into us in different shapes and sizes, we will make sure that we're prepared to bandwidth effectively and hopefully we're building up a little bit of a track record to show that that's exactly what we have been doing so I appreciate it.

Excellent I wanted to thank everybody for joining the call. This morning, we look forward to talking to you next quarter and that concludes our call.

Okay.

Yeah.

Okay.