United Parcel Service, Inc. (NYSE:UPS) Q4 2023 Earnings Call Transcript

United Parcel Service, Inc. (NYSE:UPS) Q4 2023 Earnings Call Transcript January 30, 2024

United Parcel Service, Inc. beats earnings expectations. Reported EPS is $2.47, expectations were $2.44. UPS isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning. My name is Steven and I will be your conference facilitator today. And I would like to welcome everyone to the UPS Investor Relations Fourth Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise and after the speakers’ remarks, there will be a question-and-answer period. [Operator Instructions] It is now my pleasure to turn the floor over to your host Mr. PJ Guido, Investor Relations Officer. Sir, the floor is yours.

PJ Guido: Good morning, and welcome to the UPS Fourth Quarter 2023 Earnings Call. Joining me today are Carol Tome, our CEO; Brian Newman, our CFO, and a few additional members of our executive leadership team. 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 expectations for the future performance or operating results of our company. These statements are subject to risks and uncertainties, which are described in our 2022 Form 10-K and other reports we filed with or furnished to the Securities and Exchange Commission. These reports, when filed, are available on the UPS Investor Relations website and from the SEC. Unless stated otherwise, our discussion refers to adjusted results.

For the fourth quarter of 2023, GAAP results include a non-cash after-tax mark-to-market pension charge of $274 million, after-tax transformation and other charges of $154 million, and a non-cash after-tax impairment charge of $84 million relating to our Coyote trade name in our truckload brokerage unit. The after-tax total for these items is $512 million or $0.60 per diluted share. Additional details regarding year-end pension charges are included in the appendix of our fourth quarter 2023 Earnings Presentation that will be posted to the UPS Investor Relations website following this call. A reconciliation to GAAP financial result is available on the UPS Investor Relations website, and also available in the webcast of today’s call. Following our prepared remarks, we will take questions from those joining us via the teleconference.

[Operator Instructions] And now, I’ll turn the call over to Carol.

Carol Tome: Thank you, PJ, and good morning. Let me begin by thanking UPSers for their hard work and effort. I’m proud of our team for their commitment to customer service. And for once again making UPS the industry leader in on-time performance, not only during peak, but throughout 2023. Looking at our volume trends for the fourth quarter, while total average daily volume or ADV declined 7.5% from last year, our performance was a marked improvement from what we reported in the third quarter. During the fourth quarter, our salespeople did an outstanding job of winning back diverted volume and pulling through new volumes. In fact, US Domestic ADV surged 30% from the third quarter to the fourth which was our highest sequential volume ramp ever.

By the end of December, we had one back and pull through nearly 60% of the volume diverted during our labor negotiations. Winning back and winning new volume is part of a program we call Project Brown. And this program will continue into 2024. You will recall that at the end of the third quarter, we provided a range of expected revenue and operating profit for the fourth quarter. Looking at our fourth quarter results versus last year, consolidated revenue declined 7.8% to $24.9 billion, which was slightly below the low end of our expectation. Operating profit was $2.8 billion, a decrease of 27.1% from last year, but slightly higher than the low end of our expectations. As a result, our consolidated operating margin was 11.2%, which was well within our expectation.

For the year, consolidated revenue was $91 billion, a decrease of 9.3%. Consolidated operating profit totaled $9.9 billion, 28.7% lower than last year. And consolidated operating margin was 10.9%. We generated $5.3 billion in free cash flow during 2023 and we returned $7.6 billion to shareowners in the form of dividends and share repurchases. Brian will provide more detail about our financial results in a moment. 2023 was a unique and quite candidly a difficult and disappointing year. We experienced declines in volume, revenue, and operating profit in all three of our business segments. Some of this performance was due to the macroenvironment and some of it was due to the disruption associated with our labor contract negotiations as well as higher costs associated with the new contract.

Through the year, however, we controlled what we could control and in many areas, we delivered the highest productivity results in our company history. And I think most importantly, we stayed on our strategy of customer first, people led, and innovation driven. Let me share a few examples of how our strategy is establishing a foundation for future growth. Starting with customer first. In 2023, our healthcare portfolio achieved our target of $10 billion in revenue. Here we’ve made strong progress towards our goal of becoming the number-one complex healthcare provider in the growing $130 billion global healthcare logistics market. Our global network of healthcare-compliant distribution space topped 17 million square feet in 2023. And our acquisitions of Bomi Group and MNX Global Logistics have expanded our cold-chain capabilities and are enabling us to reach new markets and customers.

To support growth in our international small package business, in December, we announced plans to build a new air hub at Hong Kong International Airport. This new air hub supports our plans to grow in the best parts of the market, including highly profitable Asia trade lines and will enable us to expand our export and import business in the region. During the year, we continue to grow our SMB penetration. In 2023, SMBs made up 28.6% of our total US volume, an increase of 60 basis points from last year. Part of this growth came from DAP, our Digital Access Program. DAP has transformed how small companies do business with UPS. And in 2023, we generated $2.9 billion in DAP revenue, an increase of 22% year-over-year. Moving to People Led. In 2023, we delivered a labor agreement that provides certainty for the next five years.

And because I’m a big believer in the power of One UPS. This year, we are returning to a policy of everyone back in the office five days a week. In terms of our culture, we are a network company not just of logistics capabilities, but a personal relationships too which brings me to innovation driven. On our busiest peak days, we sort over 50 million packages in the US and deliver more than 30 million packages worldwide. How do we do it? By leveraging the agility of our integrated network powered by UPS technologies and the skills of our engineers and operating team. Our network planning tools enabled us to quickly match capacity with volume across the network and drive productivity. Technology also enabled improvements to driver and help our route planning and dispatch, resulting in improvements in density and fewer seasonal support drivers than in prior year.

It might surprise you to learn that we typically see an increase in returns volume before Christmas. In the fourth quarter, we moved lightening fast to integrate Happy Returns. We made box-free, label-free returns available in over 5,000 UPS store locations just eight days after the acquisition close. Happy Returns digital experience helped drive returns volume in the fourth quarter with momentum extending into the first quarter of 2024. Finally, we continue to deploy transformative technology to increase efficiency within our warehousing facilities. The latest example is our state-of-the-art pick, pack, and ship center in Louisville, Kentucky, that we call UPS Velocity. We named it Velocity because it leverages robotics, automation, machine-learning, and artificial intelligence to streamline fulfillment operations.

This facility is capable of processing over 350,000 units per day and enables a best-in-class experience for our customers and their customers. Our customer first, people led innovation driven strategy is the foundation of our business. And our continued execution of the strategy enables us to exit 2023 with momentum. But momentum is not enough. We have decided to take some bold moves to right-size our company for the future and to focus on the key enablers of growth. So today, we are announcing two actions. First, we plan to explore strategic alternatives for our truckload brokerage business known as Coyote. Coyote is part of Supply Chain Solutions, and it’s a business that’s highly cyclical with considerable earnings volatility. We will keep you apprised as we move forward with this analysis.

Second, we are going to fit our organization to our strategy and align our resources against what’s wildly important. This will result in a workforce reduction of approximately 12,000 positions and around $1 billion in cost out this year. Here, we’ve identified new ways of working and are calling this fit to serve. Let me end by sharing our 2024 outlook. In 2024, the small package market in the US, excluding Amazon, is expected to grow by less than 1%. And projected market growth rates for the rest of our business segments picked up some improvement, but not until the latter part of the year. In building our 2024 financial targets, we incurred the low end of our guidance on market growth. And for the high-end of our guidance included growth we should experience if we capture market share.

In 2024, we expect to generate consolidated revenue ranging from approximately $92 billion to $94.5 billion and a consolidated operating margin ranging from approximately 10% to 10.6%. Given the nuances of our new labor contract, there will be stark contrast between our first-half and our second-half performance. First-half earnings will be compressed and second-half earnings will expand. In both the low and high end of our guidance range, we expect to exit the year with US operating margin of 10%. Brian will provide more details in a moment. UPS remains rock-solid strong. While our dividend payout is currently higher than our targeted payout of 50% of our prior year’s adjusted earnings per share, we are confident in our future. As a result, the UPS Board approved $0.01 increase in the quarterly dividend from $1.62 per share to $1.63 per share.

This is the 15th consecutive year we have increased the UPS dividend. So now that 2023 is behind us, we look forward to seeing you at our upcoming Investor and Analyst Day on March 26th. At that time, we will share our three-year plans to grow and drive shareowner value. With that, thank you for listening. And now I will turn the call over to Brian.

Brian Newman: Thanks, Carol, and good morning. In my comments, I’ll cover three areas, starting with the macro and our fourth-quarter results, then I’ll review our full-year 2023 results, including cash and shareowner returns. And lastly, I’ll provide comments on expectations for the markets and our financial outlook for 2024. The macroenvironment in the fourth quarter showed improvements. However, in the transportation and logistics sector conditions remained under pressure, both in the US and internationally due to soft demand and overcapacity in the market. Throughout the quarter, we leveraged the agility of our integrated network to match capacity with demand. And we were recognized by an independent third party for providing industry-leading service for the sixth peak in a row.

Looking at our financial results, in the fourth quarter, consolidated revenue was $24.9 billion, down 7.8% from the fourth quarter of 2022. All three of our segments demonstrated agility and on a combined basis drove down total expense by $1.1 billion in the fourth quarter year-over-year. This enabled us to deliver operating profit within the range we communicated to you last quarter. Consolidated operating margin was 11.2% for the quarter and in line with our expectations. For the fourth-quarter, diluted earnings per share was $2.47, down 31.8% from the fourth quarter of 2022. Now, let’s look at our business segments. In US Domestic, we knew going into the fourth quarter that volume will be ramping up of an exceptionally low third quarter.

Our efforts to win back diverted volume and pull through new volume resulted in a record sequential volume surge. Throughout peak, we delivered excellent service to our customers while managing expenses. In the fourth quarter, average daily volume came in at the low end of our range and was down 7.4% year-over-year. B2B average daily volume in the fourth quarter was down 6.8% year-over-year, driven by declines in the retail, manufacturing, and high-tech sectors. In the fourth quarter, B2B represented 35.5% of our volume, which was up slightly from 35.3% in the same period last year. Also in the fourth quarter, continued macro pressures drove customers to seek economy products as we saw customers shift volumes out of the air onto the ground.

Total air average daily volume was down 15% year-over-year, and ground average daily volume was down 5.8% versus the fourth quarter of last year. For the quarter, US Domestic generated revenue of $16.9 billion, down 7.3%. Revenue per piece was slightly positive year-over-year with a number of moving parts. A combination of strong base rates and customer mix increased the revenue per piece growth rates by about 390 basis points. This was offset by a few factors. First, changes in product mix and package characteristics decreased the revenue per piece growth rate by 140 basis points. Second, reflecting the lower volume in the quarter, peak season surcharge revenue declined, which reduced the revenue per piece growth rate by about 120 basis points.

And lastly, changes in fuel prices decreased the revenue per piece growth rate by 110 basis points. Turning to costs, total expense was down 3.6%. And in the face of a 12.1% increase in union wage rates, which was driven by the contractual increase that went into effect last August, we pulled several levers to more than offset the higher expense. First, we leveraged our network planning tools and total service plan to reduce total hours in the fourth quarter by 10.2% which was more than the decline in average daily volume. This enabled us to decrease compensation and benefits, which drove down the total expense growth rate by around 30 basis points. Second, lower purchase transportation expenditures reduced the expense growth rate by around 70 basis points, primarily from lower-volume levels and our continued optimization efforts.

Next, lower fuel costs contributed 160 basis points to the decrease in the total expense growth rate. And lastly, the net of all other expense items and allocations, reduced the expense growth rate by 100 basis points. Pulling it all together, these actions helped us reduce US Domestic expense in the fourth quarter by $578 million, which was our largest fourth quarter dollar cost reduction ever. Looking specifically at peak, as volume returned to the network and our biggest customers drove a surge in peak volume, we ran our integrated network with agility. In fact, in 2023, we closed over 30 sorts and they remain closed during peak. By leveraging our network planning tools, we took advantage of the flexibility of our integrated networks and flowed more volumes into our automated buildings.

And with smart package smart facility in over 1,000 buildings, misload frequency improved 67%, contributing to the superior service we deliver to our customers. The US Domestic segment delivered $1.6 billion in operating profit, down 32.6% compared to the fourth quarter of 2022. However, compared to the third quarter of 2023, operating profit in US Domestic increased $904 million and was our highest sequential operating profit increase ever. Operating margin in the fourth quarter was 9.3%, a 440 basis point improvement over the third quarter of 2023 Moving to our International segment. Soft demand continue to pressure volumes out of Asia. And in Europe, several key economies remain in recession, which pressured demand and drilled the shift away from Express Services.

In response, we focused on revenue quality and adjusted our global network to match changes in geographic demand. Looking at volume, in the fourth quarter, International total average daily volume was down 8.3% year-over-year. The decline was primarily due to lower domestic average daily volume, which was down 10.8% driven by declines in Europe and Canada. Areas of the world that continue to face persistent inflationary pressures. On the export side, total average daily volume declined 5.9% on a year-over-year basis, driven by declines in Europe due to weak macro conditions. Looking at Asia, export average daily volume was down 8.9% driven by soft demand in the retail and high-tech sectors. However, export volume on the China to US lane, which is our most profitable lane increased 2.7% driven by SMBs. Nearly offsetting the decline in Asia over in the Americas region export average daily volume grew 11.9%, led by customers in Canada and Mexico, leveraging our cross-border ground service.

In the fourth quarter, International revenue was $4.6 billion, which was down 6.9% from last year, primarily due to the decline in volumes. Revenue per piece increased 3.1%. Strong base pricing and a change in customer mix drove a 420 basis-point increase in the revenue per piece growth rate. A reduction in fuel surcharge revenue negatively impacted the revenue per piece growth rate by 60 basis points. And lower demand-related surcharge revenue, which was partially offset by the impact of a weaker US dollar decreased the revenue per piece growth rate by 50 basis points. Moving to expense. In the fourth quarter, total international expense was down $152 million, primarily driven by lower fuel expense. Additionally, in response to the lower demand environment, we managed our network to match capacity with demand, which included reducing international block hours by 9.4%.

Operating profit in the International segment was $899 million, down $192 million year-over-year. Operating margin in the fourth quarter was 19.5%. Now, looking at Supply Chain Solutions. In the fourth quarter, revenue was $3.4 billion, down $435 million year-over-year. Looking at the key drivers, in international air freight, overall volumes were down despite a mid-quarter spike in e-commerce. Market rates continue to be pressured, resulting in lower revenue and operating profit. On the ocean side, volume increased, driven by the retail sector. However, excess market capacity pressured revenue and operating profit. Within forwarding, our truckload brokerage unit known as Coyote continued to face pressure from excess capacity in the market, which drove revenue and operating profit down.

In the fourth quarter, Supply Chain Solutions generated operating profit of $319 million and an operating margin of 9.4%. Walking through the rest of the income statements, we had $207 million of interest expense. Our other pension income was $66 million, and our effective tax rate for the fourth quarter was 22.5%. Now, let me comment on our full-year 2023 results. For the full-year 2023, revenue declined 9.3% to $91 billion and we generated operating profit of $9.9 billion, a decrease of 28.7% compared to full-year 2022. Consolidated operating margin was 10.9%. We generated $10.2 billion in cash from operations and continue to follow our capital allocation priorities. We invested $5.2 billion in CapEx. Additionally, we acquired MNX Global Logistics and Happy Returns.

We distributed $5.4 billion in dividends, which represented a 6.6% increase on a per share basis over 2022. We repaid $2.4 billion in debt that matured during the year. And at the end of the year, our debt-to-EBITDA ratio was 2.2 turns. Lastly, we completed $2.25 billion in share buybacks in 2023. And in the segments for the full year, in US Domestic, operating profit was $5.4 billion and operating margin was 9%. The International segment generated $3.3 billion in operating profit and operating margin was 18.4%. And Supply Chain Solutions delivered operating profit of $1.2 billion and an operating margin was 9%. With 2023 behind us, let us move to our outlook for 2024. S&P Global is forecasting an improvement in global macro conditions as the year progresses.

Outside the US, real exports in Europe are expected to improve each quarter throughout the year. Looking at Asia, we saw positive momentum on the China to US lane exiting the year, and remain cautious on the outlook for 2024. In the US, the projected small package market growth rate is just under 1% excluding Amazon. A slight improvement is expected in US manufacturing and the consumer is expected to remain resilient despite lingering inflationary pressures. We’ve built a plan that reflects the current environment and potential risks that we see. This includes getting our organization to our strategy and aligning execution to our wildly important initiatives under what we call fit to serve. As Carol mentioned, we are exploring strategic alternatives for Coyote, our truckload brokerage business, which will enable us to address some of the cyclical impacts in our forwarding business.

And we are reducing our workforce by approximately 12,000 positions. This will cut around $1 billion in costs in 2024. Moving to our 2024 financial outlook, we are providing a range based on volume growth. The low end of the range has UPS growing at market rate and the high-end of the range as us gaining share. For the full year 2024, on a consolidated basis, revenues are expected to range from approximately $92 billion to $94.5 billion, and operating margin is expected to range from approximately 10% to 10.6%. In the range provided, we expect to move total average daily volume from negative growth in the first half of the year to positive growth in the back half. This is primarily driven by lapping the volume diversion we experienced in the US last year during our labor negotiations.

Additionally, cost will weigh on us in the first half of the year, primarily due to the higher labor cost inflation associated with the new contract. Looking at consolidated revenue, in the first half of the year, we expect the growth rate to decline with a range of approximately 1% to 2% with the first quarter driving the decline. And in the back half of the year, revenue growth is anticipated to be up within a range of mid-to-high single-digits. Looking at consolidated operating profit, we expect material improvement as the year progresses with the second half of the year outperforming the first half. Lastly, we expect to generate our lowest consolidated operating margin of the year in the first quarter. Now let me give you a little color on the segments.

Looking at US Domestic, average daily volume growth is expected to be within a range of approximately flat-to-up 2% for the full year. At both the low and high end of the range, we expect the revenue per piece growth rate to outpace the cost per piece growth rate beginning in the third quarter and we expect to exit the year at a 10% operating margin. Moving to the International segment, we expect 2024 average daily volume to be within a range of approximately flat-to-up around 3%. At both ends of the guidance range, operating margin is anticipated to be in the high teens. And in Supply Chain Solutions, for the full year in 2024, we expect revenue to be within a range of approximately $13 billion to $13.5 billion. At both ends of the guidance range, operating margin for SCS is expected to be high-single-digits.

And for modeling purposes, in total below the line, we expect approximately $400 million in expense in 2024. This is net of $262 million in pension income. We included a slide in the appendix of today’s webcast deck to provide you more detail on pension. The webcast deck will be posted to the UPS Investor Relations website following this call. Now, let’s turn to full year 2024 capital allocation. Our capital allocation priorities have not changed. We are staying on strategy and we’ll make the best long-term decisions to capture growth, improve efficiency, and deliver value to our shareowners. We expect 2024 capital expenditures to be within our target of around 5% of revenue or $4.5 billion. Now, let’s turn to our expectations for cash and the balance sheet.

We expect free cash flow to be within a range of approximately $4.5 billion to $5.3 billion including our annual pension contributions of $1.4 billion, which are equal to our expected service costs. As Carol mentioned, the Board has approved a dividend per share of $1.63 for the first quarter. We are planning to pay out around $5.4 billion in dividends in 2024 subject to Board approval. Finally, our effective tax rate in 2024 is expected to be approximately 23.5%. In closing, we look at 2024 as a year to pivot away from negative volume to positive volume growth and from high labor cost inflation to a much lower growth rate. We are laser-focused on executing our strategy, controlling what we can control, and improving our financial performance.

We look forward to sharing our multi-year targets in detail on our strategy at our Investor Day event on March 26th. Thank you. And operator, please open the lines.

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Q&A Session

Operator: Thank you. We will now conduct a question-and-answer session. Our first question will come from the line of Chris Wetherbee of Citigroup. Please go ahead.

Chris Wetherbee: Yeah. Hey, thanks. Good morning, guys. I guess I wanted to start on maybe some of the cost out. You mentioned the 12,000 positions that you’re reducing and the $1 billion of cost in 2024. I was hoping maybe you could help us sort of understand the timing of that. So based on a 10% kind of run rate exiting ’24, it would imply that the first quarter is fairly low. So I just want to make sure I understand some of those moving pieces and when that $1 billion is going to start to accrue?

Brian Newman: Sure. Happy to give you some color. So we talked about 12,000 heads out. 75% of the reductions will come in the first half, which drive the $1 billion in the 2024 calendar year. But you’re absolutely right in terms of the timing and announcement, it will be back-end weighted. And really the thing I’d like to point out is it’s a change in the way we work. So as volume returns to the system, we don’t expect these jobs to come back. It’s changing the effective way that we operate.

Carol Tome: And I might just add a little more color, if I could, Chris. Today we have about 495,000 UPSers around the world. A few years ago, when the COVID demand was peaking, we had 540,000 UPSers. So Kate and Nando have done a masterful job of managing our operational headcount to meet the volume in our company. And they’ve done that by managing turnover and attrition and closing sorts and reducing block hours, et cetera. We have about 85,000 UPSers who are management, and this can be full-time and part-time management. The targeted headcount falls really within that group as well as some contractors that will be leaving us. And to Brian’s point, this is really about a new way of working. So it’s a $1 billion of cost out now, but there’s even more cost out to come as we have a full-year benefit in 2025.

Chris Wetherbee: Thank you.

Operator: Our next question will come from the line of David Vernon of Bernstein. Please go ahead.

David Vernon: Hey, good morning, guys, and thanks for taking the question. So, just wanted to ask, on the productivity side, obviously hours down more than volume. We’ve had a couple of quarters of that, obviously not the third quarter this year. Is there a point where volume declines are become more difficult to offset? I’m just trying to understand the downside risk, right, if volumes continue to remain flat or weaker than you expect, how should we be thinking about the downside risk on the margin side?

Carol Tome: So we believe that productivity is a virtuous cycle here at UPS. And I’ll give you one example, then I’m going to throw it over to Nando to address this. But if I look at just one metric, cube utilization, we reach the highest cube utilization in our company history at 60%. That’s the equivalent of reducing 1,500 loads per day. So that’s not in hours, but it’s just a cost out. So we’ve got productivity across the operations. And Nando, why don’t you talk about what you’re going to do in 2024?

Nando Cesarone: Yeah. So, David, thanks for the question. For us, it is a virtuous cycle. So we’re working ahead of any type of volume variability. So whether it goes up or down, we’ve got some of our best engineers, operations folks, finance folks, identifying additional cost-outs as we move forward, as we’re executing the ones that we have in front of us. So we feel good that there’s a good pipeline of opportunity no matter what the volume does. And as Carol had mentioned, we lever our hourly headcount and match that to the volume and the activity. And so far so good, but still lots in front of us and they’re pretty meaty. So we feel really good about those initiatives.

Carol Tome: And at our Investor Day in March, we’re going to talk to you about network of the future. We’ve got an integrated network. We don’t have to integrate, but we can transform our network with some very exciting ideas. So we’re going to share that with you in March.

David Vernon: And the rate at which resource needs is going to need to be added back on the other side you know maybe we get some volume expansion. Can you talk to the expectations for operating leverage on the upside?

Brian Newman: Yeah, I think as we look to the back end of the year, certainly the volume projections that are in there, in terms of the volume growth for the back end of the year, in that 2% to 4% range, domestically, we start to see CPP growing slower than RPP. And so that balance is what’s going to create the operating margin. With the sorts we closed over 30 sorts did not reopen them during peak. So we’re changing. Nando’s doing an effective job of basically managing more volume with less. So we’ll continue to drive that.

David Vernon: All right. Thank you, guys.

Brian Newman: Thanks.

Operator: Our next question will come from the line of Amit Mehrotra of Deutsche Bank. Please go ahead.

Amit Mehrotra: Thanks, everyone. I just wanted to, Brian, on the guidance, I guess the guidance implies $9.6 billion in operating profits. You’ve been pretty helpful historically about giving us kind of the first-half, second-half cadence of that. And then just related to that, I want to make sure, so you said the $1 billion is included in the guidance. Can you just expand on that a little bit? Because if I take out the $1 billion, the implied change in profits relative to the improvement in revenue is quite a bit worse. So I’m just trying to understand what’s actually included in the guidance from the $1 billion and how that kind of translates to what you’re assuming underneath it in terms of change of profit, relative change of revenue?

Brian Newman: Sure. Happy to Amit. So, from a shape of the year perspective, the full year we called revenue at 1% to 4%. But based on lapping of the volumes and the contract overlap, we would expect revenue to be flat to down 2% in the first half, up 4% to 8% in the back half. And from a profit perspective, I had mentioned that it’s a tale of two cities. In terms of halves of the year, the second half of the year, we’d expect profit to grow about 20% to 30%. So Q1 will be the biggest challenge because we’re lapping from a volume comp perspective and a full contract. But on a full-year basis, we’re looking at OP margin 10% to 10.6%. I think you can expect the second half of the year to be 11% to 12% in that range and you can back into the first half.

In terms of your question of backing out the $1 billion in cost, that $1 billion will be a cost-benefit in 2024. But I think we’ve said in the past, Amit, it would take twelve months to digest the new labor cost. We are confident we can get back to consistent expansion of US margins as we lap the first year of the contract. That’ll be a combination of pricing and productivity. So, net-net, it’s really lapping that contract and then you start to get the benefits. As Carol said, some of those benefits would accrue over to 2025 as well.

Amit Mehrotra: And are we done there on the $1 billion or is there like there’s $55 billion in total cost? I mean, are we just getting started or like what’s the actual opportunity there beyond the $1 billion?

Brian Newman: So Carol talked about the differences between the Nando and Kate, the operating cost and what we’re talking about management headcount. If you bifurcate the two, I think you’re going to hear more at the Investor Day through things like network of the future, how we go after additional headcount in that area. But this would be about a 14% reduction in that 85,000 heads.

Carol Tome: Yeah, we’re never done. We continue to drive productivity. It’s a virtuous cycle here, and technology has changed so much in the past year. When you think about the advent of Generative AI and the applications inside of our business, we’re just getting started and I’m really excited about what the future will mean in terms of driving productivity and as well as improving the customer experience.

Amit Mehrotra: Thank you very much.

Brian Newman: Thanks, Amit.

Operator: Our next question will come from the line of Conor Cunningham of Melius Research. Please go ahead.

Conor Cunningham: Hi, everyone. Just to stick with the productivity side, you’ve been obviously pretty dynamic with your network and you mentioned, I think, 30 close outs — sort closures and whatnot. Can you just talk about the consolidation opportunity in ’24 and how that may play out to drive further efficiencies in the business? Thank you.

Carol Tome: Yeah. We’d be happy to do that. But we’re going to kick that question to our March conference because we’ve got a great presentation to share with you regarding network of the future, and it would take up way too much time today to go through that. We want to spend a good amount of time talking to you about that in March. So thank you for understanding.

Brian Newman: Thanks, Conor.

Operator: Our next question will come from the line of Allison Poliniak of Wells Fargo. Please go ahead.

Allison Poliniak: Hi. Good morning. Just want to turn to the growth aspect of it, I guess, more specifically the market share capture. Could you maybe walk through the different levers in terms of — I know you mentioned Project Brown, your ability to recapture diverted volume, but also talking to the SMB penetration, your opportunity on the healthcare side, just any color in terms of where those levers can be pulled for that market share growth in ’24? Thanks.

Carol Tome: I’ll start with a few comments about Project Brown. Project Brown really is a new way of going after business and it has many elements to it, and I’ll make some of those real to you. First of all, we looked at ourselves and said, what’s getting in the way of speed? Because it was taking us too long to respond to a customer. And we found that we hadn’t really declared service level agreements amongst the various groups that participate in this exercise of providing offers to our customers. So we shortened up the time to response and that’s important and that’s going to be with us now forever. I can make that real for you. Outside of the United States, it used to take 22 days. We dropped it to six days. We’re now at two days.

That’s best in class. And we’ve made similar improvements in the United States. Project Brown was also looking at Deal Manager. Deal Manager is the new tool that we introduced that uses artificial intelligence and machine learning to score a deal and avoid the need for our salespeople to go up to our pricing people for appeals, they can actually see the score of their deal. We’ve had great acceptance and win rates, 79% win rates with this tool. But we found through Project Brown that we weren’t offering all of our products in the tool and one of the products we weren’t offering was SurePost, which is a great product. So we introduced SurePost into the Deal Manager, and we’re getting some good return on that. That’s particularly attractive for our small and medium-sized customers.

Another thing that we did is that we improved and increased weekend pickups in several key markets during the year. So and I could go on and on and on, but this is a way of operationalizing excellence to drive the business and capture share. So where are we going to capture share? We’re going to continue to lean into the small and medium-sized segment opportunities, we’re seeing some real success in that area. We’re going to continue to lean into healthcare. When I started here, the healthcare revenues are around $6 billion, now at $10 billion, and we’re going to continue to grow. We’ll lay out our three-year growth plans for you at our March Investor Day. I think you’ll be very pleased with that. We’re going to continue to sell off the service that we provide and the capabilities that we have that actually no one else has, that’s our integrated network.

So at our Investor Day in March, we’ll lay out market share capture. Let me just make the market real for you because this might be helpful too. As we think about the addressable market, the addressable market in the United States. It’s a little over 52 million packages a day. So there’s plenty of addressable market for us to go get. And plenty of market for us to get outside of the United States because we are underpenetrated in so many areas. One reason I called out our new air hub in the Hong Kong International Airport is that the greater China Bay area is unbelievable economic power base, the 13th largest economy in the world, 37% of all China exports go through that airport. And today, we have small way overcapacity hubs and buildings that are inefficient with lease rates that are sky high.

So we are building a 20,000 square meter facility. It will make us the second largest air hub in that important part of the market. So expect to see a lot of growth coming off of that over time.

Allison Poliniak: Great. Thank you.

Operator: Our next question will come from the line of Tom Wadewitz of UBS. Please go ahead.

Tom Wadewitz: Yeah, good morning. So I wanted to see if you could talk a little bit about the competitive dynamic in the market. I know the backdrop is that you had some share loss associated with the Teamster contract, but it also seems like there might be risks that other competitors are gaining traction in the market. So if you look at postal service had, I think, up 7% volumes and they had a new product, the ground advantage. And so I guess the question is, is there a risk that the competitive set has got more challenging? And how do we think about what you need to do to have a better volume outcome in 2024? Is there more pressure on price, or is it a different formula to get the better volume outcome in ’24? Thank you.

Carol Tome: So I would say that the pricing environment is very rational. And you can see that as Brian ticked out the RPP performance in the fourth quarter, we had very strong base rate performance. Now the RPP was muted because of lower fuel costs and product characteristics and the product mix change and lower demand surcharges, but the base was very strong. And we expect the base to continue into 2024, our GRI for 2024 is 5.9%. Will we keep all of it? No. But will we keep a lot of it? Yes, just like we did in 2023, we kept about 60% of the GRI in 2023. So the pricing environment is rational. In terms of competitive products, it’s incumbent upon us to stay at leading edge and meeting our customers where they want us to be.

That’s one reason we offered a hyper-local product beginning last quarter, which is really a short-zone product. We haven’t had that before. And as we look at the offerings that we will go to market with this year, we’ve got some things underway, not ready for prime time, but I suspect looking over at our new Chief Commercial Officer, Matt Guffey, that we might be able to talk about that at our March investor conference and he’s nodding his head. So stay tuned for that.

Tom Wadewitz: Okay. Thank you.

Operator: Our next question will come from the line of Jeff Kauffman of Vertical Research Partners. Please go ahead.

Jeff Kauffman: Thank you very much. I’m going to defer the big picture stuff to March. But I’m just kind of curious, how did your global view changed between when we were discussing the labor deal back in August, September to the year-end? You mentioned the softness in Europe. You mentioned the shift from air to ground, but kind of what were the big changes in your outlook over that four, five-month period?

Carol Tome: Well, what really softened up was Europe. If you look at our volume decline, both domestic and export, it was heavily weighted in Europe. In fact, the decline in our export was 94%, driven by the softness in Europe. So you see what’s happening with industrial manufacturing there is just way off. So that is a big change. There are also dynamics happening in air and ocean freight as you’ve been watching. We’ve all been watching the drama in the Red Sea, the fact that the water levels in the Panama Canal are low, and that certainly is causing a lot of chaos actually in ocean and air freights. Interestingly, on the air side, both rates and volumes were down. On the ocean side, volumes are up. But as Brian called out, the rates were considerably down.

As we sit here today, it’s a very dynamic market and ever-changing. A little hard to predict candid like is what we’re seeing today is for shippers who have high value packages, they’re actually — they’re worried about the ocean conditions, so they’re moving to the air. So air rates are tightening a bit. And on the ocean side, because shippers are starting to have to reroute away from the Red Sea or the Panama Canal, the routing is taking longer, so there’s some change to the dynamics of the pricing there too. We just have to stay super nimble here and Kate and her team are doing a great job at that. Kate, what would you like to add here?

Kate Gutmann: Yeah, I would say that the market remains volatile, even in Europe with the drop off in the inflationary softening. We were able to pull back on the cost to deliver a great margin, and that’s our commitment. And then to ensure that in the forwarding side of the house, as we’ve done, stay just razor sharp to ensure that we are right on track with any trend that we see. And I’m really proud of the team because we have got the initiative to gain those customers with high-value goods and that international air freight that’s coming as a result.

Jeff Kauffman: And just if I could follow up on that answer. So given the global events with Suez Canal, Panama Canal, looking at the lemonade out of lemons side of this, is this a bigger opportunity for you in Europe? Or is this a bigger opportunity for air out of Asia?

Kate Gutmann: It actually is first showing up Asia to Europe lane. And — but I will say this is going to be repositioning of vessels around the globe. It’s going to be a global event. So we see it as an opportunity throughout and our sales resources are global. Our portfolio is global. So UPS is very well positioned to take advantage of it.

Jeff Kauffman: Okay, thank you.

Brian Newman: Thanks, Jeff.

Operator: Our next question will come from the line of Brandon Oglenski of Barclays. Please go ahead.

Brandon Oglenski: Hey, good morning, and thanks for taking my question. Can you guys speak to your enterprise customers and the volume trends that you saw in the fourth quarter and expectations going into 2024? And maybe compare and contrast that with B2B as well as your small, medium business mix?

Brian Newman: So happy to, Brandon. We were actually pleased with the volume momentum. We were at a low watermark in August of last year, down 15%, and we saw sequential monthly improvement as we looked at our volume domestically from an ADV perspective, down to mid-single-digit declines in the month of December. So that trend continues to play out well. We’re going to see some tough comps, though, in the first quarter, so I wouldn’t expect positive volume growth in Q1. We start to see positive volume growth in Q2 and then certainly in the back half of the year as the comps change. SMB, Carol mentioned, very focused on penetration on the SMB side and specifically some of the medium SMB customers. We’ve stated we would like to see that mix trend up to 30% plus. We finished the year at 28%. So we’re well on our way in that direction.

Carol Tome: Maybe another comment because this is just an interesting observation on the market. If I look at our top five decliners in the quarter, that would include our largest customer and there’s an intentional decline there. But then if I look at the remaining decliners, it’s really interesting to see what’s happening. Of those, only one has diverted some volume. They’re a dual sourcer and they have diverted some volume. And I suspect they’ll stay dual-sourcing. The rest, either their business is just way off or they have worked really hard to create a better experience inside the store to encourage buy online pick up in store. So there is a bit of dynamic happening within our large enterprise customers. I think for all of us, we’re delighted to have anniversaried the demand that we saw through COVID. Now that that’s behind us, now that the volume for the small package market has reverted back to the mean, this is an opportunity now for everyone to grow.

Brandon Oglenski: Thank you both.

Brian Newman: Thanks, Brandon.

Operator: Our next question will come from the line of Helane Becker of TD Cowen. Please go ahead.

Helane Becker: Yeah, guys. Thanks very much, everybody, and thanks team for the time. So on Coyote, when you did the acquisition, what did you think the benefits would be that made it important to do the acquisition? And then what really would actually happened that is causing you to rethink how Coyote fits in the network? And my follow-up question is then related. You recently bought two 747-8 freighters, I saw. And I’m just wondering if you bought those off lease or where they came from since Boeing doesn’t make the 747 anymore? Thank you.

Carol Tome: I’m happy to address the Coyote question to the best of my ability. I was on the Board in 2015 when we bought the company but the strategic rationale was really about expanding the portfolio. And it was a very thoughtful strategic rationale to expand the portfolio. But I don’t think we fully understood at the time was just how cyclical this business is. And I’ll make it real for you. When we acquired Coyote in 2015, the revenue in the previous year for Coyote were $2.1 billion. During COVID, Coyote peaked up to over $4 billion in revenue. Well, it’s gone way down since then. In fact, if you look at our Supply Chain Solutions business, it was down $3 billion year-on-year, which is a third of the overall company decline.

Within that $3 billion, Coyote made up 38% of the decline for the year and 48% of the decline for the fourth quarter. So you can see the volatility in the revenue line, and then we’ve got a business that has a very low margin. So if you’ve got that kind of volatility on the revenue line, you’re going to have even more volatility on the earnings line. So we’re like, gosh, is there are another way to skin this cat. Can we think about an alternative that continues to allow us to provide the service but without all the overhead? Or perhaps this business is worth more to someone else than it is to us. We don’t know. We don’t know the outcome of our alternative work. But as soon as we do, we’ll share that with you. And on the freighter question.

Brian Newman: So the two planes were picked up through Qatar and really it’s part of a broader airline strategy to retire some of the MD11s in terms of efficiency and sustainability.

Helane Becker: Got it. Thank you.

Carol Tome: Thank you.

Operator: Our next question will come from the line of Scott Group of Wolfe Research. Please go ahead.

Scott Group: Hey, thanks. Good morning. Just wanted to follow up on a couple of things on the guidance. Brian, I know you said 10% US margin exiting the year. Any color on the shape of the year? You also talked a couple of times about just Q1 being hard. Any more specific color on Q1 and then just lastly, I know every year on this call, you typically give an update on the biggest customer exposure, if you can give us an update there? Thank you.

Brian Newman: Happy to, Scott. So from a domestic margin perspective, we’re looking at the back half of the year being in the range of — from an OP profit perspective, we’re looking at 20% to 30% growth, Scott, from a margin will be in the 10-plus range for the fourth quarter. The challenge we have is the first quarter, we actually expect to be down in the neighborhood. We had a low mortar mark in Q3 of last year. So we’re not going to be down to that point, but I don’t think we’ll be much better from a margin perspective in the US in the first quarter of this year. From an Amazon perspective, we finished the year at 11.8%. And that was not due to an increase in the business. We’re still executing our plan with them in terms of a glide-down. It was more to the overall enterprise revenue coming down as a part of the enterprise.

Carol Tome: It just came down faster than Amazon, yeah.

Brian Newman: Exactly.

PJ Guido: Steven, we have time for one more question.

Operator: Our final question will come from the line of Jordan Alliger of Goldman Sachs. Please go ahead, sir.

Jordan Alliger: Hi, good morning. So I was sort of thinking about the small package growth that you guys targeted at less than 1% this year. Feels pretty conservative after a couple of years of probably negative industry growth as well. So I’m just sort of curious what’s informing that? Is that your economic outlook, your forecast? And then maybe this is your Analyst Day, you’ll address it, but sort of on a normalized basis, what kind of small package domestic growth, underlying industry growth you think about over a longer-term basis? Thanks.

Carol Tome: Yeah. The longer-term view is very good. It’s 3%. So that’s really good growth actually. And we’re looking forward to getting into that growth mode. We use a number of external factors to inform our perspective on the market growth. We triangulate from a number of different sources and come up with our best view. This is our best view.

Jordan Alliger: Okay, thanks.

Brian Newman: Thanks, Jordan.

Operator: I will now turn the floor back over to our host, Mr. PJ Guido. Please go ahead, sir.

PJ Guido: Thank you, Steven. This concludes our call. Thank you for joining, and have a good day.