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    United Parcel Service Inc (UPS)

    Q3 2023 Earnings Summary

    Reported on Jan 10, 2025 (Before Market Open)
    Pre-Earnings Price$146.93Last close (Oct 25, 2023)
    Post-Earnings Price$142.50Open (Oct 26, 2023)
    Price Change
    $-4.43(-3.02%)

    What went well

    • UPS has significantly improved revenue quality by focusing on small and medium business (SMB) customers, increasing SMB mix from 23% to 29% since 2019, and raising net revenue per piece from $9.99 to $12.54.
    • UPS is rapidly winning back customers and expects to regain lost volume before peak season, with approximately 40% of the 1.5 million diverted packages already recaptured.
    • UPS is investing in strategic acquisitions like Happy Returns and MNX to drive growth, with the healthcare business projected to generate $10 billion in revenue this year with double-digit margins.

    What went wrong

    • Significant Margin Pressure Due to Increased Labor Costs from New Teamster Contract: UPS experienced a $500 million expense related to the new Teamster labor contract in Q3, causing U.S. Domestic margins to drop to 4.9%. The contract is front-end loaded with 46% of the costs in the first year, leading to continued margin pressure in the near term.
    • Uncertainty in Volume Recovery Amidst Challenging Macroeconomic Conditions: Despite efforts to recapture diverted volume, UPS now expects U.S. Domestic average daily volume to decline by low single-digit to mid-single-digit percentages in December compared to the prior year, rather than achieving flat volumes as previously hoped. The pace of winning back customers may slow down, and macroeconomic headwinds and retail demand uncertainties pose risks to volume recovery.
    • Revenue and Mix Pressures from Customers Trading Down and Largest Customer Declines: UPS is experiencing shifts from higher-yielding air services to lower-yielding ground services as customers trade down, and is also guiding down with its largest customer. These trends may negatively impact revenue per piece and overall mix, exerting pressure on revenue growth and profitability.

    Q&A Summary

    1. Q4 Profit Improvement
      Q: How will you achieve the significant profit improvement in Q4?
      A: To reach the low end of our guidance, we need an additional $800 million in profit over Q3's $665 million. This improvement is driven mainly by increased volume and better revenue quality. From August to October, average daily volume increased from 16 million to 19 million pieces, a step-up of 2.7 million pieces compared to 1.5 million last year.

    2. Volume Recapture
      Q: How much of the lost volume have you recaptured?
      A: We have recaptured over 600,000 pieces per day of the volume that was diverted during the labor negotiations. About 50% of this recaptured volume is coming from our largest competitor. The momentum is accelerating as we continue to win back customers before peak season.

    3. Margin Outlook
      Q: When will domestic margins improve?
      A: The new labor contract is front-end loaded, impacting margins in the near term. However, once we move past this initial phase, margins will grow significantly. We expect substantial margin improvement after the first year, as cost pressures ease and productivity gains take effect.

    4. International Margins
      Q: What are your expectations for international margins in Q4?
      A: In Q3, international margins were 15.8%. We anticipate margins to improve to the mid-range between the 18% in Q1 and 20% in Q2. Effective cost management, including adjustments to block hours and headcount, will support this margin expansion.

    5. Consumer Demand
      Q: How is weaker consumer spending affecting volumes?
      A: Consumers are shifting spending from goods to services, impacting some of our large retail customers who are experiencing declining online sales. This shift affects our volume, but we are focusing on growth areas like health care logistics and returns to drive future growth.

    6. Acquisitions
      Q: What are your recent acquisitions?
      A: We are acquiring MNX and Happy Returns for a total of about $1 billion. These acquisitions enhance our capabilities in health care logistics and consolidated returns, providing better value to retailers and improving our delivery density.

    7. Revenue Guidance Confidence
      Q: What is your confidence level in the new revenue guidance?
      A: We are confident in the narrowed revenue range, now within $1 billion. The key factor between the high and low end is the retail outlook during the holiday season. Close collaboration with our top customers, who represent 86% of peak volume, provides good visibility.

    8. Recapture Costs
      Q: Are there costs associated with recapturing volume?
      A: There are no material costs associated with recapturing volume. Customers are returning due to our superior service, and while we may assist with transitioning from long-term contracts, it doesn't involve significant discounts.

    9. 2024 Margin Recovery
      Q: How will margins recover in 2024?
      A: Higher average daily volume and benefits from pricing actions will help margins recover in 2024. The first half may be more challenging due to cost overhangs from the labor contract, but we expect improvements in the back half as inflation eases.

    10. SMB Growth Impact
      Q: How is growth in small and medium businesses impacting revenue?
      A: Our small and medium business (SMB) mix has grown from 23% in 2019 to 29%. This shift has increased our revenue per piece from $9.99 to $12.54. By enhancing customer experience and focusing on revenue quality, we are achieving better pricing.

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