Good morning. My name is Steven and I will be your conference facilitator today. And I would like to welcome everyone to the UPS Investor Relations Fourth Quarter 2023 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.

Good morning, and welcome to the UPS Fourth Quarter 2023 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 the 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 2022 Form 10-K and other reports we filed with or furnished 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 fourth quarter of 2023, GAAP results include a non-cash after-tax mark-to-market pension charge of $274 million, after-tax transformation and other charges of $154 million, and a non-cash after-tax impairment charge of $84 million relating to our Coyote trade name in our truckload brokerage unit. The after-tax total for these items is $512 million or $0.60 per diluted share. Additional details regarding year-end pension charges are included in the appendix of our fourth quarter 2023 Earnings Presentation that will be posted to the UPS Investor Relations website following this call. A reconciliation to GAAP financial result 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] And now, I'll turn the call over to Carol.

Thank you, PJ, and good morning. Let me begin by thanking UPSers for their hard work and effort. I'm proud of our team for their commitment to customer service. And for once again making UPS the industry leader in on-time performance, not only during peak, but throughout 2023. Looking at our volume trends for the fourth quarter, while total average daily volume or ADV declined 7.5% from last year, our performance was a marked improvement from what we reported in the third quarter. During the fourth quarter, our salespeople did an outstanding job of winning back diverted volume and pulling through new volumes. In fact, 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 one back and pull 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. You will recall that at the end of the third quarter, we provided a range of expected revenue and operating profit for the fourth quarter. Looking at our fourth quarter results versus last year, consolidated revenue declined 7.8% to $24.9 billion, which was slightly below the low end of our expectation. Operating profit was $2.8 billion, a decrease of 27.1% from last year, but slightly higher than the low end of our expectations. As a result, our consolidated operating margin was 11.2%, which was well within our expectation. For the year, consolidated revenue was $91 billion, a decrease of 9.3%. Consolidated operating profit totaled $9.9 billion, 28.7% lower than last year. And consolidated operating margin was 10.9%. We generated $5.3 billion in free cash flow during 2023 and we returned $7.6…

Thanks, Carol, and good morning. In my comments, I'll cover three areas, starting with the macro and our fourth-quarter results, then I'll review our full-year 2023 results, including cash and shareowner returns. And lastly, I'll provide comments on expectations for the markets and our financial outlook for 2024. The macroenvironment in the fourth quarter showed improvements. However, in the transportation and logistics sector conditions remained under pressure, both in the US and internationally due to soft demand and overcapacity in the market. Throughout the quarter, we leveraged the agility of our integrated network to match capacity with demand. And we were recognized by an independent third party for providing industry-leading service for the sixth peak in a row. Looking at our financial results, in the fourth quarter, consolidated revenue was $24.9 billion, down 7.8% from the fourth quarter of 2022. All three of our segments demonstrated agility and on a combined basis drove down total expense by $1.1 billion in the fourth quarter year-over-year. This enabled us to deliver operating profit within the range we communicated to you last quarter. Consolidated operating margin was 11.2% for the quarter and in line with our expectations. For the fourth-quarter, diluted earnings per share was $2.47, down 31.8% from the fourth quarter of 2022. Now, let's look at our business segments. In US Domestic, we knew going into the fourth quarter that volume will be ramping up 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. 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…

Thank you. We will now conduct a question-and-answer session. Our first question will come from the line of Chris Wetherbee of Citigroup. Please go ahead.

Yeah. Hey, thanks. Good morning, guys. I guess I wanted to start on maybe some of the cost out. You mentioned the 12,000 positions that you're reducing and the $1 billion of cost in 2024. I was hoping maybe you could help us sort of understand the timing of that. So based on a 10% kind of run rate exiting '24, it would imply that the first quarter is fairly low. So I just want to make sure I understand some of those moving pieces and when that $1 billion is going to start to accrue?

Sure. Happy to give you some color. So we talked about 12,000 heads out. 75% of the reductions will come in the first half, which drive the $1 billion in the 2024 calendar year. But you're absolutely right in terms of the timing and announcement, it will be back-end weighted. And really the thing I'd like to point out is it's a change in the way we work. So as volume returns to the system, we don't expect these jobs to come back. It's changing the effective way that we operate.

And I might just add a little more color, if I could, Chris. Today we have about 495,000 UPSers around the world. A few years ago, when the COVID demand was peaking, we had 540,000 UPSers. So Kate and Nando have done a masterful job of managing our operational headcount to meet the volume in our company. And they've done that by managing turnover and attrition and closing sorts and reducing block hours, et cetera. We have about 85,000 UPSers who are management, and this can be full-time and part-time management. The targeted headcount falls really within that group as well as some contractors that will be leaving us. And to Brian's point, this is really about a new way of working. So it's a $1 billion of cost out now, but there's even more cost out to come as we have a full-year benefit in 2025.

Thank you.

Our next question will come from the line of David Vernon of Bernstein. Please go ahead.

Hey, good morning, guys, and thanks for taking the question. So, just wanted to ask, on the productivity side, obviously hours down more than volume. We've had a couple of quarters of that, obviously not the third quarter this year. Is there a point where volume declines are become more difficult to offset? I'm just trying to understand the downside risk, right, if volumes continue to remain flat or weaker than you expect, how should we be thinking about the downside risk on the margin side?

So we believe that productivity is a virtuous cycle here at UPS. And I'll give you one example, then I'm going to throw it over to Nando to address this. But if I look at just one metric, cube utilization, we reach the highest cube utilization in our company history at 60%. That's the equivalent of reducing 1,500 loads per day. So that's not in hours, but it's just a cost out. So we've got productivity across the operations. And Nando, why don't you talk about what you're going to do in 2024?

Yeah. So, David, thanks for the question. For us, it is a virtuous cycle. So we're working ahead of any type of volume variability. So whether it goes up or down, we've got some of our best engineers, operations folks, finance folks, identifying additional cost-outs as we move forward, as we're executing the ones that we have in front of us. So we feel good that there's a good pipeline of opportunity no matter what the volume does. And as Carol had mentioned, we lever our hourly headcount and match that to the volume and the activity. And so far so good, but still lots in front of us and they're pretty meaty. So we feel really good about those initiatives.

And at our Investor Day in March, we're going to talk to you about network of the future. We've got an integrated network. We don't have to integrate, but we can transform our network with some very exciting ideas. So we're going to share that with you in March.

And the rate at which resource needs is going to need to be added back on the other side you know maybe we get some volume expansion. Can you talk to the expectations for operating leverage on the upside?

Yeah, I think as we look to the back end of the year, certainly the volume projections that are in there, in terms of the volume growth for the back end of the year, in that 2% to 4% range, domestically, we start to see CPP growing slower than RPP. And so that balance is what's going to create the operating margin. With the sorts we closed over 30 sorts did not reopen them during peak. So we're changing. Nando's doing an effective job of basically managing more volume with less. So we'll continue to drive that.

All right. Thank you, guys.

Thanks.

Our next question will come from the line of Amit Mehrotra of Deutsche Bank. Please go ahead.

Thanks, everyone. I just wanted to, Brian, on the guidance, I guess the guidance implies $9.6 billion in operating profits. You've been pretty helpful historically about giving us kind of the first-half, second-half cadence of that. And then just related to that, I want to make sure, so you said the $1 billion is included in the guidance. Can you just expand on that a little bit? Because if I take out the $1 billion, the implied change in profits relative to the improvement in revenue is quite a bit worse. So I'm just trying to understand what's actually included in the guidance from the $1 billion and how that kind of translates to what you're assuming underneath it in terms of change of profit, relative change of revenue?

Sure. Happy to Amit. So, from a shape of the year perspective, the full year we called revenue at 1% to 4%. But based on lapping of the volumes and the contract overlap, we would expect revenue to be flat to down 2% in the first half, up 4% to 8% in the back half. And from a profit perspective, I had mentioned that it's a tale of two cities. In terms of halves of the year, the second half of the year, we'd expect profit to grow about 20% to 30%. So Q1 will be the biggest challenge because we're lapping from a volume comp perspective and a full contract. But on a full-year basis, we're looking at OP margin 10% to 10.6%. I think you can expect the second half of the year to be 11% to 12% in that range and you can back into the first half. In terms of your question of backing out the $1 billion in cost, that $1 billion will be a cost-benefit in 2024. But I think we've said in the past, Amit, it would take twelve months to digest the new labor cost. We are confident we can get back to consistent expansion of US margins as we lap the first year of the contract. That'll be a combination of pricing and productivity. So, net-net, it's really lapping that contract and then you start to get the benefits. As Carol said, some of those benefits would accrue over to 2025 as well.

And are we done there on the $1 billion or is there like there's $55 billion in total cost? I mean, are we just getting started or like what's the actual opportunity there beyond the $1 billion?

So Carol talked about the differences between the Nando and Kate, the operating cost and what we're talking about management headcount. If you bifurcate the two, I think you're going to hear more at the Investor Day through things like network of the future, how we go after additional headcount in that area. But this would be about a 14% reduction in that 85,000 heads.

Yeah, we're never done. We continue to drive productivity. It's a virtuous cycle here, and technology has changed so much in the past year. When you think about the advent of Generative AI and the applications inside of our business, we're just getting started and I'm really excited about what the future will mean in terms of driving productivity and as well as improving the customer experience.

Thank you very much.

Thanks, Amit.

Our next question will come from the line of Conor Cunningham of Melius Research. Please go ahead.

Hi, everyone. Just to stick with the productivity side, you've been obviously pretty dynamic with your network and you mentioned, I think, 30 close outs -- sort closures and whatnot. Can you just talk about the consolidation opportunity in '24 and how that may play out to drive further efficiencies in the business? Thank you.

Yeah. We'd be happy to do that. But we're going to kick that question to our March conference because we've got a great presentation to share with you regarding network of the future, and it would take up way too much time today to go through that. We want to spend a good amount of time talking to you about that in March. So thank you for understanding.

Thanks, Conor.

Our next question will come from the line of Allison Poliniak of Wells Fargo. Please go ahead.

Hi. Good morning. Just want to turn to the growth aspect of it, I guess, more specifically the market share capture. Could you maybe walk through the different levers in terms of -- I know you mentioned Project Brown, your ability to recapture diverted volume, but also talking to the SMB penetration, your opportunity on the healthcare side, just any color in terms of where those levers can be pulled for that market share growth in '24? Thanks.

I'll start with a few comments about Project Brown. Project Brown really is a new way of going after business and it has many elements to it, and I'll make some of those real to you. First of all, we looked at ourselves and said, what's getting in the way of speed? Because it was taking us too long to respond to a customer. And we found that we hadn't really declared service level agreements amongst the various groups that participate in this exercise of providing offers to our customers. So we shortened up the time to response and that's important and that's going to be with us now forever. I can make that real for you. Outside of the United States, it used to take 22 days. We dropped it to six days. We're now at two days. That's best in class. And we've made similar improvements in the United States. Project Brown was also looking at Deal Manager. Deal Manager is the new tool that we introduced that uses artificial intelligence and machine learning to score a deal and avoid the need for our salespeople to go up to our pricing people for appeals, they can actually see the score of their deal. We've had great acceptance and win rates, 79% win rates with this tool. But we found through Project Brown that we weren't offering all of our products in the tool and one of the products we weren't offering was SurePost, which is a great product. So we introduced SurePost into the Deal Manager, and we're getting some good return on that. That's particularly attractive for our small and medium-sized customers. Another thing that we did is that we improved and increased weekend pickups in several key markets during the year. So and I could go…

Great. Thank you.

Our next question will come from the line of Tom Wadewitz of UBS. Please go ahead.

Yeah, good morning. So I wanted to see if you could talk a little bit about the competitive dynamic in the market. I know the backdrop is that you had some share loss associated with the Teamster contract, but it also seems like there might be risks that other competitors are gaining traction in the market. So if you look at postal service had, I think, up 7% volumes and they had a new product, the ground advantage. And so I guess the question is, is there a risk that the competitive set has got more challenging? And how do we think about what you need to do to have a better volume outcome in 2024? Is there more pressure on price, or is it a different formula to get the better volume outcome in '24? Thank you.

So I would say that the pricing environment is very rational. And you can see that as Brian ticked out the RPP performance in the fourth quarter, we had very strong base rate performance. Now the RPP was muted because of lower fuel costs and product characteristics and the product mix change and lower demand surcharges, but the base was very strong. And we expect the base to continue into 2024, our GRI for 2024 is 5.9%. Will we keep all of it? No. But will we keep a lot of it? Yes, just like we did in 2023, we kept about 60% of the GRI in 2023. So the pricing environment is rational. In terms of competitive products, it's incumbent upon us to stay at leading edge and meeting our customers where they want us to be. That's one reason we offered a hyper-local product beginning last quarter, which is really a short-zone product. We haven't had that before. And as we look at the offerings that we will go to market with this year, we've got some things underway, not ready for prime time, but I suspect looking over at our new Chief Commercial Officer, Matt Guffey, that we might be able to talk about that at our March investor conference and he's nodding his head. So stay tuned for that.

Okay. Thank you.

Our next question will come from the line of Jeff Kauffman of Vertical Research Partners. Please go ahead.

Thank you very much. I'm going to defer the big picture stuff to March. But I'm just kind of curious, how did your global view changed between when we were discussing the labor deal back in August, September to the year-end? You mentioned the softness in Europe. You mentioned the shift from air to ground, but kind of what were the big changes in your outlook over that four, five-month period?

Well, what really softened up was Europe. If you look at our volume decline, both domestic and export, it was heavily weighted in Europe. In fact, the decline in our export was 94%, driven by the softness in Europe. So you see what's happening with industrial manufacturing there is just way off. So that is a big change. There are also dynamics happening in air and ocean freight as you've been watching. We've all been watching the drama in the Red Sea, the fact that the water levels in the Panama Canal are low, and that certainly is causing a lot of chaos actually in ocean and air freights. Interestingly, on the air side, both rates and volumes were down. On the ocean side, volumes are up. But as Brian called out, the rates were considerably down. As we sit here today, it's a very dynamic market and ever-changing. A little hard to predict candid like is what we're seeing today is for shippers who have high value packages, they're actually -- they're worried about the ocean conditions, so they're moving to the air. So air rates are tightening a bit. And on the ocean side, because shippers are starting to have to reroute away from the Red Sea or the Panama Canal, the routing is taking longer, so there's some change to the dynamics of the pricing there too. We just have to stay super nimble here and Kate and her team are doing a great job at that. Kate, what would you like to add here?

Yeah, I would say that the market remains volatile, even in Europe with the drop off in the inflationary softening. We were able to pull back on the cost to deliver a great margin, and that's our commitment. And then to ensure that in the forwarding side of the house, as we've done, stay just razor sharp to ensure that we are right on track with any trend that we see. And I'm really proud of the team because we have got the initiative to gain those customers with high-value goods and that international air freight that's coming as a result.

And just if I could follow up on that answer. So given the global events with Suez Canal, Panama Canal, looking at the lemonade out of lemons side of this, is this a bigger opportunity for you in Europe? Or is this a bigger opportunity for air out of Asia?

It actually is first showing up Asia to Europe lane. And -- but I will say this is going to be repositioning of vessels around the globe. It's going to be a global event. So we see it as an opportunity throughout and our sales resources are global. Our portfolio is global. So UPS is very well positioned to take advantage of it.

Okay, thank you.

Thanks, Jeff.

Our next question will come from the line of Brandon Oglenski of Barclays. Please go ahead.

Hey, good morning, and thanks for taking my question. Can you guys speak to your enterprise customers and the volume trends that you saw in the fourth quarter and expectations going into 2024? And maybe compare and contrast that with B2B as well as your small, medium business mix?

So happy to, Brandon. We were actually pleased with the volume momentum. We were at a low watermark in August of last year, down 15%, and we saw sequential monthly improvement as we looked at our volume domestically from an ADV perspective, down to mid-single-digit declines in the month of December. So that trend continues to play out well. We're going to see some tough comps, though, in the first quarter, so I wouldn't expect positive volume growth in Q1. We start to see positive volume growth in Q2 and then certainly in the back half of the year as the comps change. SMB, Carol mentioned, very focused on penetration on the SMB side and specifically some of the medium SMB customers. We've stated we would like to see that mix trend up to 30% plus. We finished the year at 28%. So we're well on our way in that direction.

Maybe another comment because this is just an interesting observation on the market. If I look at our top five decliners in the quarter, that would include our largest customer and there's an intentional decline there. But then if I look at the remaining decliners, it's really interesting to see what's happening. Of those, only one has diverted some volume. They're a dual sourcer and they have diverted some volume. And I suspect they'll stay dual-sourcing. The rest, either their business is just way off or they have worked really hard to create a better experience inside the store to encourage buy online pick up in store. So there is a bit of dynamic happening within our large enterprise customers. I think for all of us, we're delighted to have anniversaried the demand that we saw through COVID. Now that that's behind us, now that the volume for the small package market has reverted back to the mean, this is an opportunity now for everyone to grow.

Thank you both.

Thanks, Brandon.

Our next question will come from the line of Helane Becker of TD Cowen. Please go ahead.

Yeah, guys. Thanks very much, everybody, and thanks team for the time. So on Coyote, when you did the acquisition, what did you think the benefits would be that made it important to do the acquisition? And then what really would actually happened that is causing you to rethink how Coyote fits in the network? And my follow-up question is then related. You recently bought two 747-8 freighters, I saw. And I'm just wondering if you bought those off lease or where they came from since Boeing doesn't make the 747 anymore? Thank you.

I'm happy to address the Coyote question to the best of my ability. I was on the Board in 2015 when we bought the company but the strategic rationale was really about expanding the portfolio. And it was a very thoughtful strategic rationale to expand the portfolio. But I don't think we fully understood at the time was just how cyclical this business is. And I'll make it real for you. When we acquired Coyote in 2015, the revenue in the previous year for Coyote were $2.1 billion. During COVID, Coyote peaked up to over $4 billion in revenue. Well, it's gone way down since then. In fact, if you look at our Supply Chain Solutions business, it was down $3 billion year-on-year, which is a third of the overall company decline. Within that $3 billion, Coyote made up 38% of the decline for the year and 48% of the decline for the fourth quarter. So you can see the volatility in the revenue line, and then we've got a business that has a very low margin. So if you've got that kind of volatility on the revenue line, you're going to have even more volatility on the earnings line. So we're like, gosh, is there are another way to skin this cat. Can we think about an alternative that continues to allow us to provide the service but without all the overhead? Or perhaps this business is worth more to someone else than it is to us. We don't know. We don't know the outcome of our alternative work. But as soon as we do, we'll share that with you. And on the freighter question.

So the two planes were picked up through Qatar and really it's part of a broader airline strategy to retire some of the MD11s in terms of efficiency and sustainability.

Got it. Thank you.

Thank you.

Our next question will come from the line of Scott Group of Wolfe Research. Please go ahead.

Hey, thanks. Good morning. Just wanted to follow up on a couple of things on the guidance. Brian, I know you said 10% US margin exiting the year. Any color on the shape of the year? You also talked a couple of times about just Q1 being hard. Any more specific color on Q1 and then just lastly, I know every year on this call, you typically give an update on the biggest customer exposure, if you can give us an update there? Thank you.

Happy to, Scott. So from a domestic margin perspective, we're looking at the back half of the year being in the range of -- from an OP profit perspective, we're looking at 20% to 30% growth, Scott, from a margin will be in the 10-plus range for the fourth quarter. The challenge we have is the first quarter, we actually expect to be down in the neighborhood. We had a low mortar mark in Q3 of last year. So we're not going to be down to that point, but I don't think we'll be much better from a margin perspective in the US in the first quarter of this year. From an Amazon perspective, we finished the year at 11.8%. And that was not due to an increase in the business. We're still executing our plan with them in terms of a glide-down. It was more to the overall enterprise revenue coming down as a part of the enterprise.

It just came down faster than Amazon, yeah.

Exactly.

Steven, we have time for one more question.

Our final question will come from the line of Jordan Alliger of Goldman Sachs. Please go ahead, sir.

Hi, good morning. So I was sort of thinking about the small package growth that you guys targeted at less than 1% this year. Feels pretty conservative after a couple of years of probably negative industry growth as well. So I'm just sort of curious what's informing that? Is that your economic outlook, your forecast? And then maybe this is your Analyst Day, you'll address it, but sort of on a normalized basis, what kind of small package domestic growth, underlying industry growth you think about over a longer-term basis? Thanks.

Yeah. The longer-term view is very good. It's 3%. So that's really good growth actually. And we're looking forward to getting into that growth mode. We use a number of external factors to inform our perspective on the market growth. We triangulate from a number of different sources and come up with our best view. This is our best view.

Okay, thanks.

Thanks, Jordan.

I will now turn the floor back over to our host, Mr. PJ Guido. Please go ahead, sir.

Thank you, Steven. This concludes our call. Thank you for joining, and have a good day.