Release Date: July 23, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- United Parcel Service Inc (UPS, Financial) returned to volume growth in the U.S. for the first time in nine quarters.
- The company is on track with its Fit to Serve initiative, aiming to deliver roughly $1 billion in savings by the end of the year.
- UPS announced plans to acquire Estafeta, a leading domestic small package provider in Mexico, enhancing its logistics capabilities.
- The Digital Access Program (DAP) generated $1.5 billion in revenue in the first six months of the year, with a target of over $3 billion for 2024.
- UPS expanded its weekend service offering to six additional markets in the U.S., providing deliveries one day earlier than competitors.
Negative Points
- Consolidated revenue for the second quarter was $21.8 billion, a decline of 1.1% compared to last year.
- Consolidated operating profit was down 29.3%, and the operating margin was 9.5%.
- International volume growth was down 2.9% year-over-year, with a notable shift toward value products.
- The company experienced a shift in product mix, with customers favoring more economical products, impacting revenue per piece growth.
- Union wage rates increased 11.7%, contributing to a 3.2% increase in total expenses for the second quarter.
Q & A Highlights
Q: Can you offer more thoughts on what's happening with domestic package volume and the mix effect?
A: Brian Dykes, CFO: In the second quarter, we saw customers favoring more economical products, shifting from air to ground and within ground to SurePost. This was driven by new e-commerce customers with different models. We expect this mix to rationalize by year-end. Carol Tomé, CEO: Our commercial business was down year-on-year but is expected to improve in the back half due to a robust pipeline.
Q: What changes customer behavior to go back to premium products, and what are your thoughts on the B2B side?
A: Carol Tomé, CEO: B2B was down year-on-year due to customers leaving during contract negotiations. We expect to win them back and see improvement in the back half. New e-commerce entrants have increased volume more than anticipated. Brian Dykes, CFO: We expect RPP growth to moderate in the back half, approaching breakeven by year-end. We have a strong pipeline of ground-ready products.
Q: Can you talk about the reaction we should see in the third quarter regarding margins and pricing?
A: Carol Tomé, CEO: Base pricing was impacted by tough comparisons and new entrants without GRI. We expect base rates to improve in the second half. Brian Dykes, CFO: We expect domestic package EBIT to grow 10-15% in Q3, with moderated growth in Q4. International and Supply Chain Solutions segments are also expected to show strong performance.
Q: Will you meter growth from new e-commerce customers as part of better, not bigger? Can you dimension the size of returns in your operation?
A: Carol Tomé, CEO: We focus on segments that value our end-to-end network, particularly SMBs and healthcare. Returns are integrated into our B2B product and ground commercial breakout. Brian Dykes, CFO: Returns leverage our technology and UPS Store footprint, with Happy Returns adding consolidated returns capabilities.
Q: Are we at an inflection point where you can start pushing price more aggressively?
A: Carol Tomé, CEO: Peak season is condensed, leading to high volume and the need to charge for service. We expect prices to stick due to demand. New pricing tools like Pricing Architecture of the Future and Deal Manager help us win more deals at better rates. Matt Guffey, EVP: We are competing in a rational pricing environment and leveraging dynamic pricing across customer segments.
Q: Has something changed in your focus on value over volume?
A: Carol Tomé, CEO: We are not chasing volume; new customers' demand was higher than anticipated. We remain focused on segments that value our end-to-end network. Brian Dykes, CFO: SurePost volume drives productivity improvements throughout the network, helping to manage costs.
Q: What are some actions to adjust to network and product mix changes?
A: Carol Tomé, CEO: Accelerating Network of the Future, including more operational closures and automation. Nando Cesarone, President U.S. and UPS Airline: Additional automation projects and matching SurePost with other packages to reduce costs. Kathleen Gutmann, EVP: Flattening structure internationally to speed up decision-making and improve customer service.
Q: Can you provide more color on revenue contribution for Estafeta and the M&A landscape?
A: Carol Tomé, CEO: Estafeta acquisition will make UPS a $1 billion-plus business in Mexico, enhancing our North American leadership. Brian Dykes, CFO: Estafeta covers 95% of Mexico's population with 145 facilities. Kathleen Gutmann, EVP: Previous acquisitions like Marken and MNX are meeting business cases and synergies. We continue to evaluate our portfolio for optimization.
Q: How does SurePost move through your network, and what changes would be needed if it remains a higher mix?
A: Carol Tomé, CEO: SurePost is integrated into our network, providing a Sunday solution and delivery density through matching algorithms. Nando Cesarone, President U.S. and UPS Airline: SurePost flows through regular feeders and hubs, with opportunities to improve matching and reduce costs.
Q: Can you elaborate on the pipeline and the USPS contract?
A: Carol Tomé, CEO: Two new e-commerce customers had explosive volume growth. Nando Cesarone, President U.S. and UPS Airline: USPS contract implementation is on track, with full volume expected by October 1. Both teams are working well together despite some initial bumps.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
