UPS fourth quarter earnings see more declines

Fourth quarter earnings results issued this morning by Atlanta-based global freight transportation and logistics services provider UPS were down.

Quarterly revenue, at $24.9 billion, saw a 7.8% annual decrease, and adjusted earnings per share, at $2.47, were off 31.8%. Consolidated quarterly operating profit came in at $2.5 billion, which was off 22.5% annually on an adjusted basis.

For calendar year 2023, revenue fell 9.3% annually, to $91.0 billion. And operating profit, at $9.1 billion, was off 30.2%

“I want to thank UPSers for providing the best on-time performance of any carrier for the sixth year in a row,” said Carol Tomé, UPS chief executive officer, in a statement. “2023 was a unique and difficult year and through it all we remained focused on controlling what we could control, stayed on strategy and strengthened our foundation for future growth.”

Individual segment results for UPS in Q4 2023:

• U.S. domestic package revenue decreased 7.3%, to $16.9 billion, and average daily package volume was down 7.4% annually, to 22.449 million, with average daily revenue per piece, essentially flat, down 0.1%, to $11.96;
• International Package revenue, at $4.6 billion, was down 6.9% annually, with average daily volume down 8.3%, to 3.424 million, and total average revenue per package, at $20.68, up 3.1%,
• with UPS attributing the decrease in revenue to continued softness in Europe; and
• Supply Chain Solutions revenue, at $3.396 billion, fell 11.4%, with the revenue decrease attributed to market rate declines and excess capacity in forwarding, with Forwarding revenue off 27.0%, to $1.317 billion, and Logistics revenue up 9.8%, to $1.66 billion

CEO Tomé said on the company’s earnings call today that while total average daily volume (ADV) in the fourth quarter was off 7.5% [at 25.9 million] annually, it was a marked improvement compared to the third quarter.

“Our salespeople did an outstanding job of winning back diverted volume and pulling through new volume,” she said. “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 won back and pulled 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.

Regarding 2023 overall, Tomé said that it was a unique, difficult and disappointing year, with the company experiencing declines in volume, revenue, and operating profits in all three of its business segments, with some of this performance due to the macro environment and some of it due to the disruption associated with its labor contract negotiation, as well as higher costs associated with the new contract.

Looking ahead, Tomé outlined what she described as some “bold moves” to right-size UPS for the future and focus on key enablers of growth in the form of two actions, including: exploring “strategic alternatives for its truckload brokerage business, Coyote, which she said is a business that is highly cyclical with considerable earnings volatility; and taking steps to “fit the organization to its strategy and align its resources against what it widely important,” resulting in a workforce reduction of approximately 12,000 positions and around $1 billion in costs out this year.

As for 2024 expectations, Tomé said that the small package market outlook for 2024 in the U.S., excluding Amazon, is expected to grow by less than 1%, adding that projected market growth rates for the rest of its business segments “see just some improvement” but not until the latter part of the year.

“In building our 2024 financial targets, we include the low end of our guidance on market growth and for the high end of our guidance, including growth we should experience if we capture market share,” she said. “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 that year with a U.S. operating margin of 10%.”

UPS CFO Brian Newman said on the earnings call that transportation and logistics sector, conditions remained under pressure both in the US and internationally, due to soft demand and overcapacity in the market, adding that throughout the quarter, UPS leveraged the agility of its integrated network to match capacity with demand.

For the company’s U.S. domestic segment, Newman said that going into the fourth quarter, UPS knew volume would be ramping up off 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,” he said. “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, B2Brepresented 35.5% of our volume, which was up slightly from 35.3% in the same period last year.”

What’s more, Newman explained that in the fourth quarter continued macro pressures drove customers to seek economy products, as UPS saw customers shift volume out of the air and onto the ground, with total air average daily volume down 15% year-over-year, and ground average daily volume down 5.8% versus the fourth quarter of last year. And with lower quarterly volume, he said Peak Season surcharge revenue declined, which reduced the revenue per base growth rate by around 120 basis points, coupled with changes in fuel prices decreasing the revenue per base growth rate by 110 basis points.

And on the international side, he said that soft demand continued to pressure volumes out of Asia and in Europe several key economies remained in recession, which pressured demand and drove a shift away from express services. In response, he said UPS focused on revenue quality and adjusted its global network to match changes in geographic demand. International volume declines were 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, he noted.

For 2024, Newman said a slight improvement is expected in U.S. manufacturing and the consumer is expected to remain resilient, despite lingering inflationary pressures. To that end, he said that UPS has built a plan that reflects the current environment and potential risks it sees.

“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,” he said. And we are reducing our workforce by approximately 12,000 positions. This will cut around $1 billion in costs in 2024.”

Newman said that 75% of the staff reductions will come in the first half of the year, with the remaining cuts being back end-weighted, calling it a change in the way UPS works and saying that as volume returns to the system, UPS does not expect those jobs to come back, with these moves effectively changing the way UPS will operate as a company.

CEO Tomé said that today UPS has around 495,000 employees globally, as opposed to a few years back, when pandemic-based demand was peaking and it had around 540,000 employees.

“We have about 85,000 UPSers who are management, and this can be full time and part time management,” she said. “The targeted headcount falls really within that group, as well as some contractors that will be leaving. This is really about a new way of working. It's a billion dollars of cost out now but there's even more cost out to come as we have a full year benefit in 2025.”

UPS’s declining fourth quarter earnings results are not all due to the movement of customers in August for fear of a strike, according to Jerry Hempstead, president of Orlando-based Hempstead Consulting.

“This decline in shipments has been ongoing for eight quarters,” he said. “Their business was way off in every service category. Watch for more price adjustments. That’s the magic of a duopoly. I think the projections of volume increases in the second half may not be based in science and perhaps overly optimistic. They need to turn on the pricing lever and start going after restoration of market share in an aggressive way. You can’t increase prices on packages that you are not handling. The history of parcel has shown road to recovery is rapid package count increases.”

John Haber, president of the parcel business unit for transportation and logistics services provider Transportation Insight, said that the UPS job cuts announced this morning are part of its core strategy to improve the profitability of the business.

“UPS is faced with significant 2024 cost increases from the new Teamsters Labor agreement in conjunction with declining volumes and revenues,” he said. “In order to improve overall margins and profitability, UPS needs to reduce costs. There are certain key expense categories that are being strategically targeted, and the 12,000 jobs being eliminated are projected to save almost $1B in 2024. This is a key component of their strategy to improve profitability in a challenging environment.”