Q1 2023 United Parcel Service, Inc. Earnings Conference Call

Yeah.

And we are on track to generate around $3 billion and DAP revenue this year.

Did you know that in the U S. About one out of every four adapt packages enters our network through a U P S door.

With more than 5100 locations in the U S U P F stores, our strategic asset and fee.

Back to 85% of the U S population is within 10 miles of the store, giving customers ultra convenient entry points to the U P. S network, whether they're on F. N B shipping an item they've sold online are customer returning an item big box given the strategic importance of these stores we are leaning in.

Two investments here to improve the customer experience.

For example, the stores are rolling out self service kiosks that enabled customers to bypass the counter when they have shipments and returns.

Even returns with no box are no label.

These kiosks make it easier for customers to get in and get out of the store.

We rolled out nearly 200 kiosks, so far and we will deploy 1000 by the end of October this year.

And we're not stopping there.

Another area of focus is improving the claims process.

Which used to be a hassle for both customers and franchisees.

In March the U B S store launched an online claims we've seen in more than seven years.

Turning to health care in the first quarter of 2023, we expanded our global footprint by opening nearly 1 million square feet of dedicated health care space.

Including our first facility in Germany. This facility provides customers a broad range of temperature sensitive and handling solution.

Its location in the center of Germany connects our customer shipments the fast growing European health care market.

The facility is also close to our European Air hub in Cologne.

And customers to leverage the speed and reach of our global network.

As a reminder, in the fourth quarter of 2022, we completed the acquisition of BOMA group and to date revenue and cost synergies are running ahead of targets.

Further we are continuing to invest in the global expansion of U P. S Premier which is now available in 45 countries with four more to be added this year.

Our goal is to become the number one complex health care logistics provider in the world to help us get there we plan to open a total of seven dedicated health care facilities. This year.

In the first quarter revenue from our health care portfolio reached $2 $4 billion.

We expect to generate over $10 billion in healthcare revenue in 2023.

Turning to people Ed let me discuss the progress of our negotiations with the Teamsters.

Negotiations on a new contract with the Teamsters are underway and good progress has been made on many of our local supplemental agreement to.

Together, we've set up five subcommittees at the national bargaining table to take on key areas of the contract which enables us to move faster.

We are aligned on several key issues like solving the staffing needs for weekend deliveries.

And ways to mitigate the summer heat and our package delivery vehicle.

Well, we expect to hear a great deal of noise during the negotiation.

I remain confident that a win win win contract is very achievable.

And that U P F and the Teamsters will reach agreement by the end of July .

Now, let's move to the last leg of our strategy innovation driven.

We have the best most efficient global integrated network in the World and we are getting even better today.

Today, we operate our network with more agility than ever before and when it comes to productivity. We are relentless about creating a virtuous cycle of improvement in our network.

For example, our total service plan, which addresses running a predictable on time network has delivered continued productivity improvements.

Being introduced last year.

Our massive and highly complex network it naturally generate sufficiency when volume increases.

But when volume levels drop historically, it's been harder to generate productivity improvement.

With total service plan.

Have driven our productivity, even with declining volume in.

In the first quarter U S volume declined by five 4%.

But hours declined even further which resulted in improved productivity as measured by pieces per hour.

As we've discussed last quarter, we've accelerated investment in our smart package smart facility RFID solution.

Planned to complete deployment and more than 900 buildings across the U S. By the end of October .

Throughout the process, we've continued to learn and improve which has enabled stronger results than we originally expected.

And the facilities, where we have this technology, we've cut the frequency of mis flow.

From around one in 400 packages to one and 1000 packages.

Which reduces miles handles and costs.

Had it improves both the customer and employee experience.

Innovation driven is also about combining digital capabilities with our integrated network to improve the customer experience and efficiency.

Our upstream delivery density solution checks both boxes.

This month, we are onboarding, our second large national retailer, which gives us more opportunity to increase density as we can match volume in the U S network with orders of participating customers.

Still early days of this initiative as we learn we continue to adjust the match rate algorithms and we are happy with the results.

Lastly, our innovation driven initiatives are moving us towards our 2050 carbon neutrality goal. We are focused on the de carbonization of our global supply chain.

In 2022, our scope one two and three C. O two emissions declined by six 9% from 'twenty to 'twenty one.

We've been investing in alternative fuel for more than 20 years and operate more than 15600 alternative fuel and advanced technology vehicles.

<unk>, we took delivery of 10 fully electric class eight semi trucks in California.

These trucks are quiet and they are the first zero emission semis to run and argue P F.

Our 2022 sustainability report was published on April 12. This is our twenty-first annual sustainability report and you can find it on about Scott you P. S Dot com.

Moving to our outlook for 2023 last quarter, we provided a range for 2023 financial targets.

As we've discussed there's been a deceleration in U S retail sales growth in certain non U S markets remain challenged.

As a result, we know.

I expect to be at the low end of our previously provided revenue and operating profit margin range.

Ryan will share more detail in a moment.

I've lived through difficult times, before and I've seen the power of making the right decisions and the pitfalls of making wrong decisions.

Uncertain market conditions, it's easy to fall into the trap of managing the business for the short term.

We will control what we can control.

He will also stay on strategy.

Over the past three years, we have fundamentally improved nearly every aspect of our business and we are just getting started.

Yes, those are the best in the industry.

Because of them.

I am convinced we will come out of this cycle faster stronger and with a wider lead on our competition.

With that thank you for listening and.

And now I'll turn the call over to Brian .

Thanks, Carol and good morning in my comments I'll cover four areas, starting with the macro environment.

Then our first quarter results next I'll cover cash and Shareowner returns and lastly, I'll review, our updated financial outlook for 2023.

Okay, let's start with the macro in the first quarter the macro environment was challenging for both a commercial and consumer perspective.

The growth rate for U S manufacturing production fell throughout the quarter and was down 0.9% in March year over year.

On the consumer side of the U S economy, the growth rate on services spending is continuing to outpace the growth rate on good spend.

Within the goods bucket consumer spent more on our central items like groceries, which tend to be purchased in store.

These factors plus a five point drop in consumer sentiment from February to March contributed to the reduction in our volume levels.

Outside the U S in the first quarter.

Exports remained weak while Europe narrowly avoided a winter recession.

In the face of all this we responded with agility and remained focused on controlling what we could control to deliver great service for our customers and bottom line results for shareholders.

In the first quarter consolidated revenue was $22 9 billion down.

Down 6% from last year and slightly below our base plan expectations.

Operating profit was $2 6 billion.

A decrease of 22, 8%. However, we achieved our base plan operating profit.

Consolidated operating margin was 11, 1% a decline of 250 basis points compared to last year.

For the first quarter diluted earnings per share was $2 20 down 27, 9% from the same period last year.

Now, let's look at our business segments.

U S domestic revenue quality initiatives, nearly offset the decrease in volume and as the decline in volume accelerated towards the end of the quarter. We responded quickly by adjusting the network to eliminate costs, while maintaining our industry leading service levels.

In the first quarter, we expected average daily volume to decline between three and 4%.

For the quarter average daily volume was down five 4% year over year, primarily because volume in March moved lower than we expected.

Looking at mix in the first quarter, we saw lower volume across all industry sectors with the largest declines from retail and high Tech.

<unk> average daily volume declined five 5% compared to last year and <unk> average daily volume declined five 4%.

Bright spot in <unk> in the quarter was returns, which was up six 8% year over year.

In the first quarter <unk> represented 42, 7% of our volume, which was unchanged from a year ago.

Additionally, the shift in product mix from air to ground that we saw in the fourth quarter of 2022 continued in the first quarter as customers made cost tradeoffs and took advantage of the speed improvements we made in our ground network and further leverage our <unk> product.

Compared to the first quarter of last year total Air average daily volume was down 16, 7% ground declined 3% and within ground share post grew one 8%.

Looking at customer mix.

<unk> average daily volume declined significantly less than our enterprise customers in the first quarter.

Smbs, including platforms made up 29, 6% of our total U S volume, an increase of 120 basis points year over year.

For the quarter U S domestic generated revenue of $15 billion down 0.9%.

Revenue per piece increased four 8% nearly offsetting the decline in volume.

The combination of base rates and customer mix increase the revenue per piece growth rate by 500 basis points driven by strong keep rates from our general rate increase and increased F&B penetration.

Fuel drove 200 basis points of the revenue per piece growth rate increase.

Remaining factors reduce the revenue per piece growth rate by 220 basis points driven by the combination of negative product mix with ground packages outpacing air growth and lighter package waves.

Turning to cost total expense was relatively flat with an increase of 0.6% or $80 million in the first quarter.

Higher union wage and benefit rates increased expense by over $300 million.

From a six 1% increase in average union wage rates driven by the annual pay increase for our teamster employees that went into effect in August of 2022.

The U S. Domestic team did an excellent job pulling cost out of the network in response to lower volume.

We managed hours down five 6%, which was more than the decrease in average daily volume and we reduced head count throughout the quarter as volume growth rates decline.

Together these actions reduced expenses by more than $220 million, partially offsetting the increase in wage and benefit rates.

Additionally, we reduced purchase transportation by $100 million.

Primarily from utilizing UBS, Peter drivers to support our fastest ground ever and from continued optimization efforts, which enabled us to reduce trailer loads per day by seven 5% compared to the same period last year.

The remaining variance was driven by multiple factors, including maintenance and depreciation.

The U S. Domestic segment delivered one 5 billion and operating profit, which was slightly above our base plan and down 12, 7% compared to the first quarter of 2022 and operating margin was nine 9%.

Moving to our international segment, we expect that the macro environment to be bumpy and it was.

Looking at Asia export activity started off very weak due to the extended lunar new year holiday.

It gradually recovered through the quarter, but at a slower pace than we anticipated.

In Europe , the macro environment was a little better than we expected, which helped to offset the weakness in Asia relative to our base plan.

In the first quarter International total average daily volume came in as expected and was down six 2% year over year.

Domestic average daily volume was down nine 5%, which drove three quarters of the total average daily volume decline.

Total export average daily volume declined two 8% on a year over year basis, driven by declines in retail and high tech market demand.

Asia export average daily volume was down eight 9% and included a 20% year over year decline on the China and the U S Lane.

Through the first quarter, we remained agile and reflects the network to match demand reduced Asia block hours by more than the decline in Asia export volume and delivered excellent service to our customers.

In the first quarter International revenue was $4 5 billion down six 8% from last year.

Due to the decline in volume and a $161 million negative revenue impact from a stronger U S. Dollar.

Revenue per piece was relatively flat year over year, but there were a number of moving parts, including a 370 basis point decline due to currency and a 180 basis point decline from demand related surcharges.

These were offset by an increase in the fuel surcharge of 230 basis points and an increase of 330 basis points due to the combination of a high <unk> keep rate.

And a favorable product mix as export volume outperformed domestic volume.

Operating profit in the international segment was $806 million down $314 million from the same period last year, primarily due to the decline in exports out of Asia and.

<unk> included a $97 million reduction in demand related surcharge revenue and a $51 million negative operating profit impact from currency.

Operating margin in the first quarter was 17, 7%.

Now looking at supply chain solutions in the first quarter revenue was $3 4 billion down $983 million year over year.

Looking at key drivers and forwarding softer global demand, especially out of Asia drove down market rates and volume, resulting in lower revenue and operating profit.

We are continuing to manage buy sell spreads and have taken steps to reduce operating cost in this business.

Logistics delivered revenue growth driven by gains in our health care logistics and clinical trials business and increased operating profit.

In the first quarter supply chain solutions generated an operating profit of $258 million and an operating margin of seven 6%.

Walking through the rest of the income statement, we had $188 million of interest expense or other pension income.

One was $66 million and our effective tax rate for the first quarter was 24, 8%, which was less than we anticipated in our base plan due to lower tax impacts from our employee stock Awards.

Now, let's turn to cash and shareowner returns in the first quarter, we generated $2 $4 billion in cash from operations free cash flow for the period was $1 8 billion.

Including our annual pension contributions of $1 $2 billion that we made in the first quarter.

Also in the first quarter, we issued $2 5 billion in long term debt that we are using to pay off debt maturing in 2023.

And in the first quarter UBS distributed $1 3 billion in dividends and completed $751 million in share buybacks.

Moving to our outlook for the full year 2023.

In January we provided a range for our 2023 financial targets due to the uncertain macroeconomic environment, we saw at that time.

Since then the volume environment has deteriorated, especially in the U S driven by continued challenging macro conditions and changes in consumer behavior.

As a result, we expect full year revenue and operating margin to be at the low end of the previously provided range.

For the full year 2023, we expect consolidated revenues of around 97 billion.

And consolidated operating margin of around 12, 8% with about 56% of our operating profit coming in the second half of the year.

And U S. Domestic we expect full year volume to decline around 3% versus 2022 with revenue per piece growth nearly offsetting the decline in volume and operating margin is expected to be around 11%.

International we anticipate both volume and revenue to be down by around 4% and we expect to generate an operating margin of around 20%.

And its supply chain solutions, we expect full year revenue to be around $14 3 billion in.

And operating margin is expected to be around 10%.

We have proven our ability to adapt in a dynamic environment, we have many levers to pull on the cost side and we will continue to control what we can control by delivering industry, leading service and remaining disciplined on revenue quality.

We will also continue investing in growth and efficiency initiatives like international that healthcare and smart package smart facility, which will help us come out of this economic cycle faster and stronger.

Specifically now that our volume is trending at the downside of our range. We are executing our plan to take out semi variable and fixed costs, including in the U S. Air network. We are adjusting package flows to maximize utilization of our next day flights, which enables us to reduce block hours in our two day operation.

On the ground, we are pulling more volume into our large regional hubs further leveraging the automation in those buildings and enabling us to eliminate sorts and smaller buildings.

Giving more consolidation of the ground could potentially allow us to reduce our overall building footprint in the U S.

Internationally based on the volume levels over the last couple of quarters. We further reduced scheduled flights to reflect lower market demand, while ensuring we maintain our agility in the network to quickly add flights where needed as volume returns more strongly than we expect.

Across our global business, we will continue to manage head count with volume levels.

And in terms of overhead we see opportunities to further reduce costs by leveraging technology.

Now, let's turn to capital allocation.

Our plans have not changed we will continue to make long term investments to support our strategy and capture growth coming out of this cycle.

We still expect 2023 capital expenditures to be about $5 3 billion, including.

Including investments in automation and will add $2 3 million square feet of healthcare logistics space to our global network. This year.

We'll also complete the deployment of the first phase of Smart package smart facility in the U S. <unk>.

Expand DAP internationally and continue building out our logistics as a service platform.

We are still planning to pay out around $5 4 billion in dividends in 2023 subject to board approval we.

We still plan to buy back around $3 billion of our shares and lastly, our effective tax rate for the full year is expected to be around 23, 5%.

In closing.

Despite the challenging macro backdrop, we will continue to provide industry, leading service to our customers and we will stay on strategy.

We are investing to make our network, even more efficient and to strengthen our customer value proposition to enable us to capture growth coming out of this cycle.

And operator, please open the lines.

Yes.

Thank you.

We will now conduct a question and answer session.

Our first question will come from the line of David Vernon of Bernstein. Please go ahead Sir.

So Karen I wanted to follow up on your commentary around the productivity and lighter volume.

As you guys think about the way the business is performing against the lower volume outlook right. Now how confident are you that if we get into a better volume environment say 'twenty four 'twenty five that some of those productivity gains are going to be able to be held and then.

Brian maybe just a follow up can you give us a sense for what sort of magnitude of facility reductions you you might be able to pull off here in the next couple of years. Thanks.

Well David Thank you for your question first as it relates to productivity, we introduced our total service.

Last year, that's not one and done that's the way we're going to operate our business forever productivity as a virtuous cycle here at UBS and Nando and the team continue to find opportunities to drive productivity in down markets as well as up market.

And on the second part of your question, Dave in terms of the scope of building consolidation et cetera, narrow and the team are doing a nice job working a project called network of the future still early days, we do have some facility sales planned in the second quarter in the back half of the year, but that doesn't really ramp up in terms of the the opportunity.

<unk> to consolidate until 'twenty four 'twenty five in that timeframe.

It might be able to consolidate some of the spinoffs.

Yeah.

So I'm just trying to understand.

Yes.

It was an evolution about where we expected in January February a little bit little bit lighter, but March was there was a trail off and so as we've seen the macros.