United Parcel Service, Inc. (UPS) 2024 Q2 Earnings Call Summary

Optimistic Highlights

• Return to Volume Growth: UPS experienced volume growth in the United States for the first time in nine quarters, marking a significant turning point.
• Strategic Acquisitions and Expansions: Announced plans to acquire Estafeta, enhancing logistics capabilities in Mexico. Opened new healthcare facilities in Dublin and expanded in the Netherlands.
• Digital Access Program Success: Generated $1.5 billion in revenue in the first six months of 2024, on track to meet the $3 billion target for 2024.
• Network Enhancements: Made several network enhancements in Asia and expanded supply chain operations at Frankfurt Airport Gateway.
• Innovation and Automation: Continued to automate operational tasks and deploy RFID solutions for improved package handling and tracking.

Pessimistic Highlights

• Revenue Decline: Consolidated revenue declined by 1.1% versus last year.
• Operating Profit and Margin Drop: Operating profit down 29.3% with a consolidated operating margin of 9.5%.
• Volume Mix Shift: Experienced a shift toward value products, impacting revenue per piece growth.
• International Volume Growth Down: International volume growth was down 2.9% year-over-year.
• Adjustment of Full-Year Guidance: Adjusted full-year operating margin guidance due to volume mix characteristics in the US.

Company Outlook

• Revenue and Operating Margin Adjustments: Consolidated revenue expected to be approximately $93 billion with a consolidated operating margin of about 9.4%. Aiming for a US operating margin of 10% by the end of 2024.
• Share Repurchase Program: Restarting share repurchase program with the intent of repurchasing about $1 billion of shares annually.
• Strategic Focus: Continuing to focus on becoming the premium small package, logistics orchestrator, and complex healthcare logistics provider.

Q & A Highlights

• Q: Can you offer more thoughts on what's happening with domestic package volume and the mix effect? (Tom Wadewitz, UBS)

  A: In Q2, customers favored more economical products, leading to a shift from air to ground and within ground from ground to SurePost. This was driven by a broad base of customers and new e-commerce customers. Expect the mix to rationalize towards the end of the year. (Brian Dykes)

• Q: What changes customer behavior to go back from economic products to more premium products? And thoughts on the B2B side? (Jordan Alliger, Goldman Sachs)

  A: B2B down year-on-year due to customers who left during contract negotiations not returning yet. Pipeline of commercial accounts is robust, expecting improvement in the back half of the year. (Carol Tome)

• Q: Can you talk about the spread of margins and the impact of pure pricing? (Ken Hoexter, Bank of America)

  A: Expect domestic package EBIT to be up in the 10% to 15% range in Q3. Base rates increased the revenue per piece growth rate by 90 basis points. (Brian Dykes, Carol Tome)

• Q: Given the volume growth from new e-commerce customers, will you be looking to meter this growth? And can you dimension the size of returns in your operation? (Ravi Shanker, Morgan Stanley)

  A: Focused on serving segments that value our end-to-end network. Returns remain a bright spot, increasing 3% year-over-year. (Carol Tome, Brian Dykes)

• Q: Can you clarify US package EBIT growth expectations and thoughts on peak season surcharges? (Scott Group, Wolfe Research)

  A: Expect domestic package EBIT to be up 10% to 15% in Q3. Peak season surcharges are due to a condensed peak and highest volume ever expected on Peak day. (Brian Dykes, Carol Tome)

• Q: Has the focus on value over volume changed given the guidance update? (David Vernon, Bernstein)

  A: Not chasing volume, but new e-commerce customers' volume exceeded expectations. Focused on segments that value our network. (Carol Tome)

• Q: What can be done to adjust to network changes and product mix changes? (Chris Wetherbee, Wells Fargo)

  A: Accelerating Network of the Future initiatives and focusing on productivity improvements. (Carol Tome, Nando Cesarone)

• Q: Can you provide color on revenue contribution for Estafeta and views on the M&A landscape? (Conor Cunningham, Melius Research)

  A: Estafeta and UPS will be a $1 billion+ business in Mexico. Continuously evaluating the portfolio of assets. (Carol Tome, Brian Dykes, Kate Gutmann)

• Q: How does SurePost move through your network and what changes are needed if it becomes a higher mix? (Bascome Majors, Susquehanna)

  A: SurePost flows through the same network as other packages, improving productivity. Working on matching algorithms for better efficiency. (Carol Tome, Nando Cesarone)