Key highlights from United Parcel Service, Inc. (UPS) Q2 2023 Earnings Concall
Management Update:
- [00:06:13] UPS’s digital access program (DAP) continues to grow and generated more than $1.4 billion in revenue in 1H23 and is targeting $3 billion in revenue in 2023.
- [00:17:23] UPS’s U.S. domestic segment took out $889 million of expense year-over-year, which is the largest year-over-year cost reduction in the company’s history.
- [00:25:37] In the U.S. domestic segment, UPS expects its average daily volume level to be about even with December of last year.
- [00:25:47] UPS expects U.S. average daily volume to be down by a mid-single-digit percentage year-over-year in 2H23.
Q&A Highlights:
- [00:28:24] David Vernon of Bernstein asked about the expected shape of inflation over the course of the contract and how is UPS set up for inflation from a CAGR perspective. Brian Newman CFO answered that the new contract has a barbell-type inflation curve, with a large increase in year one followed by more moderate increases in years two through four and another step up in year five.
- [00:30:48] David Vernon at Bernstein enquired about UPS’s plans to win back volume lost during the contract uncertainty and how quickly does UPS expect this volume to return. Carol Tome CEO answered that UPS is taking a number of steps to win back volume lost during the contract uncertainty, including amplifying its service message, expanding its speed campaign, and launching new offerings for small and medium-sized businesses.
- [00:32:52] Ken Hoexter from Bank of America asked about the peak season, considering the contract uncertainty and the economic backdrop. Carol Tome CEO said that UPS expects to have a peak season this year, even though it will be smaller than last year. The company is collaborating with its top customers to prepare for peak and is confident that it can handle the increased volume.
- [00:34:05] Amit Mehrotra at Deutsche Bank asked for guidance on the change in volume diversion and wage accruals, the monthly cadence of domestic volumes in June and July. Brian Newman CFO said that UPS lowered its guidance for revenue and profit, with most of the decline coming from the domestic business due to lower volume and higher wages.
- [00:34:50] Amit Mehrotra at Deutsche Bank also asked for the thoughts on the return profile of the domestic business from an operating margin perspective given the new wage deal and 3.3% inflation. Carol Tome CEO said UPS’s domestic volume was down 12% in June and down double-digits in July, but better than 12%. The new contract with the Teamsters front-loaded some of the wage inflation, which will put pressure on margins in the short term. However, UPS is confident that it can return to 12% or higher margins in the U.S. by 2024.
- [00:38:28] Allison Poliniak of Wells Fargo enquired about the productivity effort, Smart Package Smart Facility, and how it will offset wage inflation going forward. Carol Tome CEO answered that UPS is using a variety of tools to improve its productivity, including Smart Package Smart Facility, network planning tools, and new technology inside of its buildings. These tools will help to offset the pressure from wage inflation going forward.
- [00:41:51] Ravi Shankar of Morgan Stanley asked about the $7 billion sales pipeline, including the types of customers and end markets, and how it is expected to develop over time. Carol Tome CEO said that UPS is focused on expanding its sales pipeline in all customer segments with a new pricing architecture that offers personalized pricing based on shipping needs. The sales team is excited to sell the value of the company’s service, which is considered the best in the industry.
- [00:42:12] Ravi Shankar of Morgan Stanley also asked for an update on the largest customer, including any changes to the relationship or volumes, and the potential impact of union talks. Carol Tome CEO replied that the company has a good relationship with its largest customer and the business is operating as expected, on a glide path but not a glide out.
- [00:43:47] Chris Wetherbee with Citi asked how UPS plans to get back the 1.2 million packages per day that were diverted to competitors during the contract uncertainty. Carol Tome CEO answered that UPS expects to win back all of the diverted volume and 200,000 additional packages by the end of the year.
- [00:44:01] Chris Wetherbee with Citi also asked for guidance on the QtoQ margin dynamics for 3Q and 4Q, and how the cadence of volumes might look in 2H23. Brian Newman CFO said that UPS expects 3Q to be more challenged than 4Q due to slower ADV growth rates, seasonality, and one-time costs.
- [00:50:06] Bruce Chan of Stifel enquired if UPS see continued growth opportunities for DAP in 2024 and beyond. Carol Tome CEO said that UPS is pleased with the growth of DAP and sees continued growth ahead, both domestically and globally. The company is making it easier to onboard the platform with widgets.