Yahoo Finance United Parcel Service, Inc. (NYSE:UPS) Q1 2024 Earnings Call Transcript
United Parcel Service, Inc. (NYSE:UPS) Q1 2024 Earnings Call Transcript April 23, 2024
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Operator: Good morning. My name is Stephen Dye, and I will be your conference facilitator today. I would like to welcome everyone to the UPS Investor Relations First Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. And after the speaker's 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 first quarter 2024 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 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 2023 Form 10-K and other reports we file with or furnish 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 first quarter of 2024, GAAP results include a total charge of $110 million, or $0.13 per diluted share, comprised of after-tax transformation and other charges of $75 million and a non-cash after-tax impairment charge of $35 million, driven by plans to consolidate certain acquired brands within our healthcare portfolio. A reconciliation to GAAP financial results 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] Please ask only one question so that we may allow as many as possible to participate. You may rejoin the queue for the opportunity to ask an additional question.
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 doing what they do better than anyone, and that's deliver industry-leading service. Through the first quarter, UPSers continued to execute our strategy by focusing on growth and efficiency and exemplified our purpose of moving our world forward by delivering what matters. Moving to our results, the first quarter turned out as we expected, starting with a decline in average daily volume. U.S. average daily volume, or ADV, declined year-over-year, but the rate of decline slowed as the quarter progressed, ending with March down less than 1%. And on a sequential basis, the ADV decline rate in the first quarter showed marked improvement compared to the fourth quarter of 2023.
This improving performance is primarily due to the efforts of our sales team to win and pull through new volume into our network. Outside of the U.S., the ADV decline rate also improved sequentially compared to the fourth quarter of last year, and we saw pockets of export growth in certain markets and lanes. For the first quarter, consolidated revenue was $21.7 billion, a decline of 5.3% versus last year. Operating profit was $1.7 billion, down 31.5% compared to last year, due for the most part to higher labor costs associated with the first year of our Teamster’s contract. Consolidated operating margin was 8%. Our operating profit performance was a bit better than we expected due to higher productivity. At our Investor and Analyst Day last month, we shared our three-year targets and how we intend to reach them under our Better and Bolder approach.
We are reimagining our network through Network of the Future, and we are leaning into the parts of the market that value our end-to-end integrated network. For example, we recently announced that UPS will become the primary air cargo provider for the United States Postal Service. Under this contract, we will move most of the USPS’ air cargo within the United States. The USPS air cargo business fits beautifully with our strategy to grow our B2B business. To win, we put together an innovative and differentiated solution that leverages our integrated network and existing assets. The USPS air cargo business will contribute to top-line growth and be accretive to consolidated and U.S. domestic operating margins. Brian will share more details, including what to expect during the transition period and where this will show up in our financial reporting.
Moving to our strategic update, through our customer-first, people-led, innovation-driven strategy, we are investing to grow in the premium parts of the market and drive efficiency. Let me give you a few recent examples. Starting with customer-first. Through our on-demand network, we are expanding our addressable market with capabilities like no-box, no-label returns, through Happy Returns, and the convenience of our more than 5,200 UPS store locations. During the first quarter, our overall returns volume in the U.S. increased 1.4%, and Happy Returns more than quadrupled its ADV in the first quarter. Returns are attractive to us for a couple of reasons. First, they are typically B2B movements, and as a result, drive pickup and delivery density.
Second, our frictionless offering creates customer loyalty and repeat business. We are also expanding our addressable market with capabilities like big and bulky deliveries through Roadie. In the first quarter, we launched RoadieXD, which adds cross-dock capabilities to RoadieXL. Our cross-dock solution brings the digital and physical together for long-zone deliveries of bulky items, such as grills and furniture, that do not fit in the UPS small package network. This is enabling us to unlock additional revenue opportunities in the highly fragmented $60 billion big and bulky market in the U.S. It's still early days, but this is a large opportunity for us to grow quality revenue and profit and serve the needs of our customers. As we laid out at our Investor Day, our long-term target is to grow our U.S. S&D volume penetration to 40%.
DAP, our digital access program, is one of the tools we will use to reach this target. Recently, we enhanced our DAP pricing capabilities by launching a solution we call Fast Lane. With Fast Lane, we can optimize rates and target attractive volume growth, whether it be by partner, by product, or by customer segment, all of which can drive revenue per piece growth. We can even target volume growth by geography to drive density. Prior to Fast Lane, rate and other adjustments in DAP could take months. Now we can make them in a matter of days or even hours. In terms of results, in the first quarter, DAP revenue grew by 3% year-over-year. And in 2024, we expect to generate over $3 billion in global DAP revenue. Speaking of S&D, over the last year, we've gained traction on improving the customer experience across 16 journeys.
Take pickups. We redesigned our process and deployed new driver dispatch technology. This resulted in a 74% reduction in pickup concerns and a Net Promoter Score, or NPS, of 48 for this journey, which is an all-time high for UPS. And for our international customers, our next-gen brokerage solution is making it easier for S&Ds to navigate the ins and outs of exporting, as evidenced by a 40% decline in custom brokerage holds since April of 2023. Turning to healthcare, we aim to become the number one complex healthcare logistics provider in the world. Healthcare companies are innovating, and so are we. Our latest example is the opening of LabPort at Worldport, our global air hub in Louisville, Kentucky. LabPort is unique. It's an end-of-the-runway, state-of-the-art facility built specifically for lab customers.
By being at Worldport, we can deliver urgent air packages to our lab customers well before the sun comes up, so they can provide diagnostic results by early morning. And in terms of healthcare revenue, in the first quarter, revenue from our healthcare portfolio reached $2.6 billion. Outside the United States, we're continuing to enhance our network to grow our premium international business. Our most recent example is the launch of Next Day flights between Shenzhen, China, and Sydney, Australia. The addition of these flights enables faster import and export movements between 11 Asian markets in Australia. And now, exports from Australia can even reach Europe by the next business day. This enhancement further enables us to serve our customers, particularly those that are in high-tech manufacturing and healthcare, as they are shifting their supply chains in response to changing international trade flows.
Now, let's turn to innovation-driven. As we've discussed, Network of the Future includes physical and digital changes that will deliver benefits in the short-term and the long-term. Smart Package, Smart Facility, our RFID solution, is a great digital example. We are moving from a scanning network to a sensing network. Following last year's Phase 1 deployment to our preload operations, this year, we are installing RFID readers in over 40,000 U.S. package cards, with a balance to be completed in 2025. Package card readers will enable us to further reduce our misloads, which will improve efficiency and the customer experience. The physical aspect of Network of the Future has launched, and in the quarter, we continue to close sorts and flow more volume into automated facilities.
Most of the Phase 1 major projects we outlined during our Investor Day have begun and are in the contracting and execution phases. Innovation-driven is also about achieving carbon neutrality by 2050. We recently published our 22nd Sustainability Report, and we are well on our way to achieving our goals. In 2023, our Scope 1, 2, and 3 CO2 emissions declined 8.1% compared to 2022. We operate more than 18,000 alternative fuel and advanced technology vehicles in our rolling laboratory. And the use of alternative fuels in our ground operations reached 28.8% last year, keeping us on track to achieve our target of 40% by 2025. Moving to our outlook, we are reaffirming our previously announced 2024 consolidated financial goals. 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%.
Versus last year, we still expect first half earnings to decline and second half earnings to grow as we lap the first year of the Teamster’s contract, and we still expect to exit the year with a U.S. operating margin of 10%. As we move forward, we are staying on strategy and under our Better and Bolder approach, we are pursuing our declarations to become the premium small package provider and logistics partner in the world. With that, thank you for listening. And now I'll turn the call over to Brian.
Brian Newman: Thanks, Carol. Good morning. In my comments, I'll cover four areas. First, I'll review our first quarter results followed by our 2024 financial outlook. Then I'll provide some comments on our business with the USPS. And lastly, I'll close with a recap of our 2026 targets. While the macro environment in the first quarter showed improvement in some areas, continued soft demand pressured all three parts of our business. Through the quarter, we adjusted our integrated network to match volume levels and drove out expense while maintaining industry-leading service levels. Moving to our financial results, our overall quarterly performance was in line with our expectations. In the first quarter, consolidated revenue was $21.7 billion, down 5.3% compared to the first quarter of 2023.
All three of our segments demonstrated cost agility and on a combined basis, drove DAP expense by $414 million in the first quarter. This enabled us to deliver $1.7 billion in consolidated operating profit and consolidated operating margin was 8%. Diluted earnings per share was $1.43, down 35% from the first quarter of 2023. Now let's look at our business segments. In U.S. Domestic, we remained focused on controlling what we could control to improve volume growth and drive productivity. In the first quarter, average daily volume was down 3.2% year-over-year. When looking at ADV sequentially, the growth rate showed strong improvement compared to the third and fourth quarters of 2023. B2B average daily volume was down 5.5% compared to the first quarter of last year, primarily driven by declines in the retail and manufacturing sectors.
And B2B represented 41.6% of our volume. Looking at product mix and in line with recent trends, we continue to see a shift from air to ground as customers prioritize cost savings over transit times by taking advantage of our ground services. Compared to the first quarter of 2023, total air average daily volume was down 8.3%. Ground declined 2.3% and within ground, sure post volume grew 10.8%. For the quarter, U.S. domestic generated revenue of $14.2 billion, down 5%. Revenue per piece was relatively flat year-over-year. Looking at the key drivers, base rates increased the revenue per piece growth rate by 240 basis points. This was offset by a couple of factors. First, changes in customer and product mix due to growth in sure post combined with changes in package characteristics decreased the revenue per piece growth rate by 180 basis points.
And second, changes in fuel prices decreased the revenue per piece growth rate by 90 basis points. Turning to cost, total expense was down 0.8% or $104 million in the first quarter. Union wage rates increased 13% driven by the contractual increase that went into effect last August. Leveraging technology and the agility of our integrated network, we took several actions which more than offset the increase in compensation. We leveraged total service plan and network planning tools to reduce total operational hours by 6.6%, which was more than the decline in average daily volume. We closed 18 sorts and reduced operational resources by 4.8% compared to last year. We lowered block hours by 15.2% versus last year. We reduced management and support staff by approximately 5,400 positions year-over-year.
In addition, we reduced purchase transportation by 17%, primarily from our continued optimization efforts. And lastly, lower fuel costs contributed to the decrease in total expense. The U.S. domestic segment delivered $839 million in operating profit, down 43.6% compared to the first quarter of 2023, and operating margin was 5.9%. Moving to our international segment, the macro environment remained challenged, primarily in Europe and Asia. However, volume growth in the Americas region showed early signs of nearshoring. In the first quarter, international total average daily volume was down 5.8% year-over-year. About two-thirds of the decline came from lower domestic average daily volume, which was down 8.1%, and driven primarily by declines in Canada and major markets in Europe.
On the export side, average daily volume declined 3.6% year-over-year primarily due to weak manufacturing activity in Europe. In Asia, export average daily volume was down 4.8%, which was an improvement from the fourth quarter of 2023. Within Asia, export volume on the China to U.S. lane increased 12.8% and showed steady growth for the second consecutive quarter. More than offsetting the overall decline in Asia, nearshoring became evident as export average daily volume in the Americas region increased 3.8%. This was led by SMB customers in Canada and Mexico, leveraging our cross-border ground service. In the first quarter, international revenue was $4.3 billion, down 6.3% from last year, primarily due to the decline in volume. Revenue per piece increased 2% and included a number of moving parts.
Strong base pricing drove a 360 basis point increase in the revenue per piece growth rate, a decline in fuel surcharge revenue, combined with a stronger U.S. dollar negatively impacted the revenue per piece growth rate by 80 basis points. And finally, lower demand-related surcharge revenue decreased the revenue per piece growth rate by 80 basis points. In the first quarter, total international expense was down $163 million, a decline of 4.4%. Similar to previous quarters, we leveraged the agility of our integrated network to reduce block hours by 6.6%. Operating profit in the international segment was $682 million, down $124 million year-over-year. Operating margin in the first quarter was 16%. Now looking at Supply Chain Solutions, in the first quarter, revenue was $3.2 billion, down 5.3% year-over-year.
Looking at the key drivers within forwarding, market rates in international airfreight continue to drive down top-line revenue. On the ocean side, excess market capacity continued to pressure market rates and drove a decrease in revenue despite volume growth. And our truckload brokerage unit continued to face soft demand and market rate pressures. Logistics delivered revenue growth and increased operating profit driven by gains in health care. In the first quarter, Supply Chain Solutions generated operating profit of $226 million, down $32 million year-over-year and an operating margin of 7%. Walking through the rest of the income statement, we had $195 million of interest expense. Our other pension income was $67 million, our effective tax rate for the first quarter was 26.8%.
Now let's turn to cash and shareholder returns. In the first quarter, we generated $3.3 billion in cash from operations. Free cash flow for the period was $2.3 billion. We finished the quarter with strong liquidity and no outstanding commercial paper. Also in the first quarter, UPS rewarded shareowners with $1.3 billion in dividends. Turning to our outlook. As Carol mentioned, we are reaffirming our 2024 consolidated financial targets. For the full year 2024, on a consolidated basis, revenues are expected to range between $92 billion and $94.5 billion, and we expect to generate a consolidated operating margin ranging from approximately 10% to 10.6%. Looking at the shape of the year. In the first half of the year, we expect consolidated operating profit to be down between 20% and 30%.
And in the back half of the year, we expect volume and revenue growth to accelerate as we lap the diversion we experienced as a result of our labor negotiations. Additionally, our labor cost growth rate will drop substantially. We will also see the majority of the $1 billion in savings from Fit to serve. We still expect revenue per piece to outperform cost per piece. And lastly, in U.S. domestic, we expect to exit the year at a 10% operating margin. Looking at cash flow and capital spending. For the full year in 2024, we still expect capital expenditures to be within our target of around 5% of revenue or $4.5 billion. We're reviewing certain aspects of our pension strategy, and so we expect free cash flow to be within a range of approximately $5.9 billion to $6.7 billion before reflecting any pension contributions.
Now let me share more detail about servicing Air Cargo for the USPS. This is good business for us, and we are moving quickly to begin onboarding this cargo. We will leverage our integrated network and existing assets, and we expect the majority of the volume will fit within our current U.S. domestic daytime flight operations. Our operators and engineers are already planning the network to support the complete transition to UPS in the third quarter. In terms of financial reporting, the revenue and expense associated with USPS Air Cargo will show up in the SCS other line in our financial reporting. Adding the USPS air cargo volume to our existing network will result in a higher share of the network cost being allocated to SCS, indirectly benefiting our U.S. domestic segment.
We expect to see a benefit to operating margins this year at both the consolidated level and within the U.S. Domestic segment. To wrap up, we are also reaffirming our three-year consolidated revenue and operating margin targets we put forth at our March Investor and Analyst Day. Specifically, we aim to grow revenue to be between $108 million and $114 billion by 2026. The high end of the range includes inorganic opportunities, primarily in health care and international. Additionally, we expect to expand our consolidated operating margin to more than 13% by 2026, which includes expanding our domestic operating margin to at least 12%. And I'll note that the USPS volume is consistent with our better and bolder approach to grow in the parts of the market that leverage our integrated network, and it gives us a strong start to our 2026 targets.
With that, thank you, and operator, please open the lines.
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