UPS - NYSE

Good morning, my name is Greg Alexander, and I will be your facilitator today. I would like to welcome everyone to the UPS Fourth Quarter 2024 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.

Thank you, Carol and good morning, everyone. Our financial performance in the fourth quarter was better than we expected due to our focus on revenue quality and excellent cost management. The positive momentum that we began in the third quarter continued throughout our busiest time of the year. This morning, I'll cover four areas, starting with our fourth quarter results, followed by a review of our full year 2024 results, including cash and shareowner returns, then I'll provide more detail on the business and operational changes we are making. And I'll close with our expectations for the market and our financial outlook for 2025. Starting with our consolidated performance. In the fourth quarter, we delivered revenue and operating profit growth and margin expansion. This is a continuation of the momentum that we showed in the third quarter and the first time in three years that we've shown growth in the fourth quarter on all three of these financial metrics. In the fourth quarter, we generated $25.3 billion in consolidated revenue, an increase of 1.5% compared to the fourth quarter of last year. Consolidated operating profit was $3.1 billion, an increase of 11.2% versus the fourth quarter of 2023, and consolidated operating margin was 12.3%, an increase of 110 basis points compared to the fourth quarter of last year. Diluted earnings per year was $2.75, up 11.3% from the fourth quarter of 2023. Now moving to our segment performance. U.S. domestic delivered strong fourth quarter results driven by gains in revenue quality and outstanding cost management. And during the compressed 2024 peak season, our average on-time service led the industry by 470 basis points over our closest competitor, which drove high demand for our services, allowing us to continue winning new customers throughout peak. For the quarter, U.S. average daily volume or ADV was flat to last year, ground average daily volume increased 2.1% year-over-year, while total air average daily volume was down 12.9%. Excluding the volume decline from our largest customer, total air ADV grew driven by demand from healthcare and high-tech customers. Within ground, SurePost ADV as a percentage of total ADV, increased slightly compared to the third quarter of 2024. Through the power of our matching algorithm, we increased SurePost redirects by 660 basis points sequentially from the third quarter, which resulted in half of the SurePost volume being delivered by UPS drivers. For the quarter, total B2B average daily volume was down 1% year-over-year. However, we saw B2B growth from healthcare customers, including healthcare SMBs. On the B2C side, average daily volume was up slightly year-over-year and made up 64.7% of our volume. In terms of customer mix, we saw strong ADV growth from SMB customers, which grew 4.5% in the fourth quarter, driven by double-digit growth in December. In the fourth quarter, SMBs made up 27.8% of total U.S. volume. This was the highest fourth quarter concentration we've seen in 10 years. For the quarter, U.S. domestic generated revenue of $17.3 billion, up 2.2% compared to last year due to the strength of small package in December and increases in air cargo. In the fourth quarter, the revenue per piece growth rate flipped positive for the first time this year, and was up 2.4% year-over-year, which was a sequential improvement of 460 basis points from the third quarter of this year. Breaking down the components of the 2.4% revenue per piece improvement, base rates increased the revenue per piece growth rate around 250 basis points. Strong keep-rates on our holiday demand surcharge increased the revenue per piece growth rate by 110 basis points. The net impact of customer mix, combined with product mix and lighter weights decreased the revenue per piece growth rate by 80 basis points. Lastly, fuel drove a 40 basis point decline in the revenue per piece growth rate. Turning to cost, total expense increased 1.3%. Since we -- the first year of our labor contract at the end of July, this was the first full quarter at a lower contractual union wage growth rate. In fact, the average increase over the prior four quarters was 10.5%, and the fourth quarter this year union wage rates increased by only 3%. Through our network of the future initiative, we exceeded our initial target by completing 49 operational closures this year, including 11 buildings. By leveraging our technology and increasing automation, we've processed and delivered the same amount of volume in the fourth quarter as last year, but we did it with 3 million fewer hours while delivering excellent service. We lowered small package block hours within our air network in response to changing volume levels, purchase transportation and other expenses declined as we insourced 50% of SurePost volume during the fourth quarter, and we tightly managed rental equipment through peak. Lastly, our safety performance was better than we expected and drove a benefit in casual peak spend. Looking at cost per piece, throughout the fourth quarter in the peak period, we leveraged technology and our proven practices to hold the increase to just 0.9%. The U.S. domestic segment delivered $1.8 billion in operating profit at 11% increase compared to the fourth quarter of 2023, and the operating margin was 10.1%, a year-over-year increase of 80 basis points. Moving to our international segment, for the second quarter in a row, our international business grew revenue and operating profit and expanded operating margins. Total international average daily volume growth were positive for the first time in three years and was up 8.8% year-over-year. International domestic average daily volume increased 5.8% compared to last year, driven by strong performance in Canada. And on the export side, average daily volume increased 11.7% year-over-year, with all regions delivering ADV growth. Asia export average daily volume was up 15.4%, delivering growth for the third consecutive quarter. And at the country level, 17 of our top 20 export countries grew export ADV led by Mexico and Germany. And in Germany, which is our largest export market, export average daily volume increased 8.6% compared to last year. In the fourth quarter, international revenue was $4.9 billion up 6.9% from last year, with all regions growing revenue year-over-year. International generated positive operating leverage, driven by our ongoing network optimization and cost management efforts. Operating profit in the international segment was $1.1 billion, an increase of 18.1% year-over-year. Operating margin in the fourth quarter was 21.6%, an increase of 210 basis points from a year ago. Moving to supply chain solutions, in the fourth quarter, revenue was $3.1 billion. Revenue decreased $306 million, with the reduction impacted by $588 million in revenue from Coyote in the 2023 period. Revenue within our forwarding and logistics businesses increased $282 million. Looking at the key drivers, air and ocean forwarding revenue was up 10.3%, led by continued strong market demand out of Asia. And logistics revenue grew by 16.2%. In the fourth quarter, Supply Chain Solutions generated operating profit of $284 million down $24 million year-over-year, which included an impact of $13.5 million of operating profit from Coyote in the same period in 2023. Operating margin in the fourth quarter was 9.3%, an increase of 20 basis points compared to last year. Walking through the rest of the income statement, we had $229 million of interest expense, our other pension income was $67 million, and our effective tax rate for the fourth quarter was approximately 20.5%, lower than our expectations due to discrete items. Now let me comment on our full-year 2024 results. For the full-year 2024 revenue was $91.1 billion, a slight increase over 2023. We delivered operating profit of $8.9 billion and a consolidated operating margin of 9.8%. We generated $10.1 billion in cash from operations and continued to follow our capital allocation priorities. We invested $3.9 billion in CAPEX, we distributed $5.4 billion in dividends, we repaid $3.8 billion in debt that matured during the year, and at the end of the year, our debt to EBITDA ratio was 2.25 turns. Lastly, we completed $500 million in share buybacks in 2024. And in the segments for the full year, U.S. domestic operating profit was $4.5 billion and operating margin was 7.5%. The international segment generated $3.4 billion in operating profit, and operating margin was 18.7%. And Supply Chain Solutions delivered operating profit of $1 billion and operating margin was 8%. Which brings us to 2025. As Carol described, we are taking a set of strategic actions to address the challenges facing our U.S. business head-on. Execution is already well underway and these actions together will create a more agile and profitable UPS. Let me provide more detail on what we're doing. I'll start with the agreement in principle we've reached with our largest customers significantly reduced the volume we deliver for them. The accelerated decline has already begun and will step up meaningfully so that by the second half of 2026, their volume will be down by more than 50% of what it was at the beginning of the year. The speed of the glide down is five times faster than our initial glide down efforts between 2021 and 2024. The results of this change will be lower overall volume levels but an improved customer mix at a significantly higher revenue per piece. We are deliberately shifting our business and increasing our focus on growing higher yielding volume and value share. Lower overall volume levels from this customer will lead to lower revenue dollars in the near term. However, we expect to grow revenue per piece through shifting our customer mix and by leveraging our architecture of tomorrow pricing technology. This will enable us to continue the strong base rate improvements in 2025 that we delivered from our enterprise and SMB customers in the second half of 2024. Additionally, we will double down on growing volume and revenue in the best parts of the market for us, including SMB, healthcare, and B2B. And in terms of SMBs, this year we expect to take the SMB percent of our U.S. volume to 32%, and the momentum will continue for the longer term. Now looking at cost, as we bring volume down, we will not only reduce the hours and miles associated with this volume, we will be able to take out fixed costs to match our capacity to our new expected volume levels. All facts to the network are included in the reconfiguration. And we expect to close up to 10% of our building, cut back our vehicle and aircraft leads, and reduce labor. The right sizing of our U.S. capacity allows us to accelerate our network of the future initiative. We will be able to more quickly bring down less efficient capacity while further investing in automation across the network, getting us to a more efficient U.S. network faster. The capital requirements to run our reconfigured network will also decrease. We will share more details on our execution plan on our first quarter earnings call in April. Now turning to the changes we made with SurePost. As of January 1st we began delivering 100% of our SurePost volume, and in mid-January we implemented a 9.9% average rate increase on SurePost. Offering a reliable economy service is an important part of our product portfolio and overall value proposition. The changes we made give us greater point-to-point operational control and the ability to provide better service to our customers, which brings me to our Efficiency Reimagined initiatives. Lower overall volume and a reconfigured U.S. network created an opportunity for us to increase efficiency by redesigning processes from end to end. Through our Efficiency Reimagined we expect to deliver approximately $1 billion in savings. Pulling it all together, even while we're undergoing the largest network reconfiguration in our history, we expect to expand U.S. domestic operating margin in every quarter of 2025, with a full year operating margin approaching 9%. As the impact of our cost-out efforts increased over the next 18 months, we expect to pace operating margin improvement to accelerate into 2026, where we expect by the fourth quarter to generate a 12% U.S. operating margin. And we see even more upside potential in the longer term. Turning to guidance for 2025, starting with the macro, S&P Global Forecast Global GDP growth of 2.5% compared to 2024. Real exports and global industrial production are both expected to increase around 2% year-over-year. In the U.S., manufacturing is expected to turn positive for the first quarter of 2025 after seven quarters of negative year-over-year growth, and the consumer is expected to remain resilient. Moving to our 2025 financial outlook, for the full year 2025 on a consolidated basis, revenue is expected to be approximately $89 billion, and operating margin is expected to be approximately 10.8%. Our guidance for 2025 does not reflect any significant potential global trade implications due to changes in tariffs. Now let me give you a little color on the segment. Looking at U.S. domestic, as a result of the actions we're taking, full year 2025 revenue is expected to decline 2.3% year-over-year driven by an ADV reduction of about 8.5%, partially offset by strong expected revenue per piece growth of approximately 6%, and we will wrap the newly on-boarded USPS air cargo business. We expect the intended volume and revenue declines to accelerate as we progress throughout the year. Full year operating margin is expected to be approximately 8.8%, an increase of 130 basis points compared to 2024. And to provide a little shape for the first quarter, which has one fewer operating day compared to the first quarter of 2024 we expect revenue to increase nearly 1% year-over-year, despite ADV being down approximately 4% and we expect to expand operating margin by approximately 140 basis points year-over-year. Moving to the international segment, we expect mid-single digit ADV growth throughout the year, but with lower demand related surcharges than we've seen in prior years. For the year, we expect 2025 revenues to increase approximately 2.5% year-over-year, with an operating margin of around 18.6% and looking at the first quarter, we expect revenue to be flattish compared to the same period last year, and operating margin to be moderately down year-over-year due to lower demand related surcharges. And in Supply Chain Solutions for the full year 2025, we expect revenue to be approximately $11 billion and operating margin to be approximately 8.5%. In SCS in the first quarter, revenue is expected to decline about $500 million due to the reduction in revenue associated with Coyote in the same period last year. Operating margin in SCS in the first quarter is anticipated to be low to mid-single digits due to pressure from purchase transportation costs related to our mail innovations business. We expect the first quarter to be the lowest SCS operating margin in 2025. For modeling purposes, in total below the line, we expect approximately $780 million in expense, with a little more than half in the back half of the year. We expect pension expense to be approximately $37 million for the full year 2025 which is $306 million higher than in 2024 primarily due to the impact of market shifts and interest rates on our pension assets last year. We included a slide in the appendix of today's webcast deck to provide you more detail on pension. The webcast deck is available on the UPS Investor Relations website. Now let's turn to our expectations for cash and the balance sheet. We expect free cash flow to be approximately $5.7 billion including our annual pension contribution of $1.4 billion. Capital expenditures are expected to be about $3.5 billion. While we are accelerating our network of the future initiative, our reconfigured U.S. network should require less investment in vehicles and aircraft as we right size the capital base. We are planning to pay out around $5.5 billion in dividends in 2025 subject to Board approval. We expect to buyback around $1 billion of our shares. And lastly, we expect the tax rate for the full year to be approximately 23.5% as we expect the current U.S. corporate tax regime to remain. We've covered a lot today. We're moving quickly to continue our momentum. The results of our actions will be an even stronger, more agile, and more profitable UPS that's growing in the best parts of the market that value our end to end integrated network. With that Operator, please open the lines for questions.

Thank you. Your first question today comes from the line of Tom Wadewitz from UBS. Please go ahead.

Sure, thanks. And this question Tom, just to give you comfort here, you'll know that five facilities already in January have been partially or completely closed, and this year we'll have 140 active network of the future projects, 61 of them will go live this year. Of course, just driving up the number of shipments that run through our automated facility. So that gives me a lot of confidence, gives our people a lot of confidence. So we feel good about these moves and we're ahead of schedule.

Great. Thank you.

Your next question comes from the line of Jordan Alliger from Goldman Sachs. Please go ahead.

Yeah, sure. So Jordan, there's multiple opportunities for us to match shipments now, as we control that volume over multiple days. We've also adjusted our algorithm to really target stops or stop matching to 100 feet of a regular stop. And certainly this helps us smooth the daily dispatch for our employees. So resources in terms of spiking one day versus another, we're able to flatten that and keep the staffing picture very linear for the company. In addition to that, of course, we're exploring different ways on how we can move the volume through slower networks, because it is an economy service as we look at rail and how we leverage rail across the country, as well as ground movements to make sure that we're hitting our service portfolio. Early days show, as Carol had said, mileage index looks good, packages per car look good, the just overall performance right now just really proud of the team, and they continue to try to optimize this service as we go forward.

And Nando, if I could just add one thing, because I think it relates to the prior question as well, because I think the investments that we have made in the network and the technology allowed us to insource almost 1.5 million stops within a matter of weeks. I think it's a testament to the operators, but also a testament to the agility that we've created into the network, and that will help us as we move forward with the reconfiguration we're undertaking. The other thing I do think is important that you should know is that we have included some expectation that there could be some churn, right, with the GRI and the changing service. There are some customers that this might not work for, and we've taken that into account in our forecast.

Thank you.

Your next question comes from the line of David Vernon from Bernstein. Please go ahead.

David, I think it's important, because you're absolutely right. There's a lot of moving parts on how we go from 2024 to 2025. But if you look at the change in the revenue, the 91 to the 89 take SCS out of it, because that's really related to Coyote, and you've got about 1.5 billion of revenue decline associated with Coyote. And you just look at the domestic business, look the actions that we're taking with our largest customer, we are going to draw down revenue about $2.5 billion. And then we've got growth, right, that's going to plug that gap of over $1 billion, which as Carol said, is really focused in SMB enterprise, and these differentiated capabilities that are going to allow us to grow in the market and take share.

Your next question comes from the line of Stephanie Moore from Jeffries. Please go ahead.

Yeah, so as Carol mentioned, look, we came out with the 9.9% GRI and we made sure that we aligned the value to service. Number one, what was most important is to protect the service of our customers that we just highlighted. But I'd ask you just to remember a couple things, SurePost is a product in our full portfolio. So when our customers buy, they don't just buy the SurePost product they also buy our ground residential, which is our premium offering. So both of these, the product was designed and once the way we price it to be, it's an economy product that is less time sensitive. But both ground residential and ground SurePost will provide service and reliability to our customers, and we price accordingly to the value.

Your next question comes from the line of Ken Hoexter from Bank of America. Please go ahead.

Great. I guess if I could throw a follow in, the pace of the consolidated, the facility shutdowns, Nando you were talking about how you've already started that. Is there kind of numbers you can throw out, maybe update us on how quick you can get some of those out?

Yeah, Ken, as I mentioned before, we've got a lot of stakeholders that we need to talk to related to the network reconfiguration. We're going to lay that out for you on the first quarter call. It's fair to say it will accelerate as we go through the year, especially in the second half and then into the first half of 2026. But give us until April, and we'll lay that plan out for you.

Thank you.

Your next question comes from the line of Ari Rosa from Citigroup. Please go ahead.

Your next question comes from the line of Chris Wetherbee from Wells Fargo. Please go ahead.

Your next question comes from the line of Scott Group from Wolfe Research. Please go ahead.

And Scott, I also wanted to because you asked about pricing discipline. And I think this is a really important point because we recently figuring the network to the new volume level. So we are not chasing volume in order to fill empty capacity. The capacity will adjust to the new volume level. And that’s really a key point because we have some pricing discipline in the second half of 2024. We saw great revenue per piece growth in the fourth quarter and that is going to extend into 2025 and be a portion of the rev per piece improvement that we see. That pricing discipline is implemented. We've got processes in place, and we absolutely are going to continue to keep that going forward.

So you think you can reduce capacity, one for one with the volume drop here?

Your next question comes from the line of Ravi Shankar from Morgan Stanley. Please go ahead.

Great. Thank you. Just a few things, you quantified the Amazon revenues a couple of times now. Can you quantify what percentage of the U.S. domestic volumes are Amazon because I think that's pretty important stat for doing the math here? And also to your point on the returns, I think Amazon did start trialing an in house return program last year. Do you see risk to that scaling up over time as well?

So Ravi, on the volume, if you think around 20% of the volume in the U.S. network 2025 depending on the time and the price, look on the returns and I'll let Matt talk a little bit about our returns portfolio in a second. But what I would say is, there's a lot of return solutions in the market. Here's what I know, our returns growth continues to grow with UPS Store. We have a great footprint. We have a great customer experience. And Matt, maybe you want to talk a little bit about how we've been adding to that.

So your next question comes from the line of Brian Ossenbeck from J.P. Morgan. Please go ahead.

So regarding peak, we stretch our network with variable costs. So we'll rent equipment. We'll set up temporary sort facilities. A lot of that's not going to be required. We'll lease aircraft, we won't need to. We rent tractors and trailers and shifters and all that stuff from our vendors, and clearly as the volume settles, that's an opportunity for us to not rent those pieces of equipment this peak season. So I think we've built that little hedge for ourselves with the variable cost that we're just going to pull all that back in.

Your next question comes from the line of Bascome Majors from Susquehanna. Please go ahead.

Thank you.

Your next question comes from the line of Bruce Chan from Stifel. Please go ahead.

Your next question comes from the line of Brandon Oglenski from Barclays. Please go ahead.

Thank you.

And Greg, we have time for one more question.

Okay, that question comes from the line of Jon Chappell from Evercore ISI. Please go ahead.

That's right. So if you think about where that is coming from, Carol is exactly right. It's about a third from the strong base race and look, there's nothing sexy about it. This is a grind, and Matt and I spend every Monday morning going through how we're seeing the market evolve, the pricing, and looking at how customer is performing. And we've created a lot of discipline around that, so it's a rational price environment, but we're getting really smart about how we do it, and that helps us get the key. Matt, I'll let you elaborate on it in one second. On the mix, on the other pieces, though, you've got a third that base rate. You've got a third that's customer mix driven, right. So, as Carol said, our focus on SMBs is allowing us to win there. And when you look at it, we won through peak and SMBs, and we also won it through peak on premium products, right, which is the other third of the rev per piece improvement. Matt, do you want to add anything?

I think you hit on two points that are important. One is, we just put a lot of rigor and discipline behind the pricing -- our pricing practices here and we'll continue that. To Brian's point, it is an interesting stat, because in Q4 we really leaned in on the premium segment. 60% of our wins in Q4 were in the premium segment. And that's focused on the products that value our end to end network what Carol highlighted as complex. The last thing I would just highlight is, look, we've talked to you about schedule tomorrow, which is our pricing technology. And we've talked to you about Deal Manager, which allows us the ability to leverage pricing signs for SMBs. Now with Deal Manager it's in the fourth quarter. 96% of our deals we've been able to price up to $10 million all came through Deal Manager, which allows us speed, we can turn time and we can customize them unique for the customers. So it's given us a lot of flexibility to drive the right value for our customers, but also align our costs and our prices.

Thanks.

I will now turn the floor back over to your host, Mr. PJ Guido.

Thank you, Greg. This concludes our call. Thank you for joining and have a great day.