United Parcel Service Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 25, 2023

Key Takeaways

  • Q1 revenue was $22.9 B, down 6% year-over-year, operating profit fell 22.8%, and operating margin declined 250 bps to 11.1%.
  • Average daily volume in the U.S. dropped 5.4% in Q1, driven by a shift in consumer spending from goods to services and higher food costs.
  • U.S. revenue per piece rose 4.8%, nearly offsetting volume declines through disciplined pricing, with GRI keep rates above 60% and fuel surcharges adding 2.3 pp of growth.
  • Productivity initiatives—like the Total Service Plan and Smart Package/Smart Facility RFID rollout—reduced misloads and improved pieces-per-hour despite lower volumes.
  • SMB and Healthcare segments saw robust growth: DAP revenue jumped 51.5% (on track for $3 B) and dedicated healthcare space expanded by ~1 M sq ft, driving $2.4 B in Q1 healthcare revenue.
AI Generated. May Contain Errors.
Earnings Conference Call
United Parcel Service Q1 2023
00:00 / 00:00

There are 16 speakers on the call.

Operator

Good morning. My name is Steven, and I will be your facilitator today. I would like to welcome everyone to the UPS Investor Relations First Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. And after the speakers' remarks.

Operator

There will be a question and answer period. Call. It's now my pleasure to turn the floor over to our host, Mr. Ken Cook, Investor Relations Officer. Sir, the floor is yours.

Speaker 1

Good morning, and welcome to the UPS Q1 2023 earnings call. Joining me today are Carol Tomei, our CEO Brian Newman, our CFO and a few additional members of our executive leadership team. Call. 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 call 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 ks call and other reports we file with or furnish to the Securities and Exchange Commission.

Speaker 1

These reports, when filed, are available on the UPS Investor Relations website call and from the SEC. Unless stated otherwise, our discussion refers to adjusted results. For the Q1 of 2023, GAAP results include quarter after tax transformation and other charges of $9,000,000 or $0.01 per diluted share. A reconciliation to GAAP financial results is available on the UPS Investor Relations website along with the webcast of today's call. Following our prepared remarks, we will take questions from those joining us via the teleconference.

Speaker 1

Call. Please ask only one question so that we may allow as many as possible to participate. Call. You may rejoin the queue for the opportunity to ask an additional question. And now, I'll turn the call over to Carol.

Speaker 2

Thank you, Ken, and good morning. Call. Let me begin by thanking UPSers for once again delivering industry leading service to our customers. Service call. Defines UPS.

Speaker 2

It is one of our values and I'm proud of our team who continue to make it a key priority. Call. Another company value is safety. UPS drivers are among the safest in the industry and every year we invest call. 1,000,000 of dollars in safe driving education and training.

Speaker 2

Our Circle of Honor program recognizes drivers call. We have achieved 25 years or more of accident free driving. This year, we inducted more than 1200 UPS drivers into the circle of honor, call, bringing the total to more than 10,400 around the globe. Congratulations to these drivers call on their achievements. Turning to our results, 2023 is proving to be an interesting year.

Speaker 2

Call. In the U. S, relative to our base plan, volume was higher than we expected in January, close to our plan in February call and then move significantly lower than our plan in March as retail sales contracted and we saw a shift in consumer spending. Call. For example, food as a percentage of household budgets reached 9% in the Q1 compared to 7% a couple of years ago.

Speaker 2

Call. U. S. Discretionary sales are lagging grocery and consumable sales and disposable income is shifting away from goods to services. Quarter.

Speaker 2

Outside of the U. S, export activity out of Asia remained weak, which negatively impacted revenue in both international and Supply Chain Solutions. In response, we focused on controlling what we could control. We remained disciplined on price. Call.

Speaker 2

We increased penetration in the most attractive parts of the market. We managed the network with agility. Call. We drove productivity and we stayed on strategy. Looking at our Q1 financial results versus last year, call.

Speaker 2

Consolidated revenue was $22,900,000,000 down 6%. Operating profit was $2,600,000,000 quarter, a decrease of 22.8 percent and consolidated operating margin was 11.1%, quarter, a decline of 250 basis points. While revenue fell short of our base plan due to a relentless focus on productivity, quarter. Both operating profit and operating margin were in line with our base plan. Moving to our strategic update.

Speaker 2

Call. To our customer first, people led innovation driven strategy, we are investing to improve the customer experience call and drive efficiency. Starting with Customer First, key investments here are driving growth in targeted customer segments call, like SMBs and Healthcare. Looking at SMBs, we continue to invest in the international expansion of our digital access program quarter. We now have 16 countries producing DAP revenue.

Speaker 2

In the Q1, total DAP revenue was up call. 51.5 percent compared to last year and we are on track to generate around $3,000,000,000 in DAP revenue this year. Call. Did you know that in the U. S.

Speaker 2

About 1 out of every 4 DAP packages enters our network through a UPS store? Call. With more than 5,100 locations in the U. S, UPS stores are strategic assets. Call.

Speaker 2

In fact, 85% of the U. S. Population is within 10 miles of a store, giving customers ultra convenient entry points to the UPS network, call, whether they're an SMB shipping an item they've sold online or a customer returning an item they bought. Call. Given the strategic importance of these stores, we are leaning into investments here to improve the customer experience.

Speaker 2

Call. For example, the stores are rolling out self-service kiosks that enable customers to bypass the counter when they have shipments and returns, call. Even returns with no box or no label. These kiosks make it easier for customers to get in and get out of the store. Call.

Speaker 2

We've rolled out nearly 200 kiosks so far and will deploy 1,000 by the end of October this year call. And we're not stopping there. Another area of focus is improving the claims process, which used to be a hassle call for both customers and franchisees. In March, the UPS store launched an online claims portal to all U. S.

Speaker 2

Locations call that's designed specifically for the needs of the store shipper. With this portal, claims that used to take weeks for resolution quarter. Are now resolved within an average of about 2 days. One final comment on SMBs. In the Q1, SMBs, quarter, including platforms made up 29.6 percent of our total U.

Speaker 2

S. Volume. This is the 11th consecutive quarter of increased quarter and it's the highest level we've seen in more than 7 years. Turning to Healthcare. In the Q1 of 2023, quarter.

Speaker 2

We expanded our global footprint by opening nearly 1,000,000 square feet of dedicated healthcare space, including our first facility in Germany. Call. This facility provides customers a broad range of temperature sensitive and handling solutions. Its location in the center of Germany call. Our customer shipments to fast growing European healthcare market.

Speaker 2

The facility is also close to our European Air Hub in Cologne, enabling call. As a reminder, in the Q4 of 2022, we completed the acquisition of Baumann Group call. And to date, revenue and cost synergies are running ahead of target. Further, we are continuing to invest in the global expansion of UPS Premier, call, which is now available in 45 countries with 4 more to be added this year. Our goal is to become the number one complex healthcare logistics provider in the world.

Speaker 2

To help us get there, we plan to open a total of 7 dedicated healthcare facilities this year. Quarter. In the Q1, revenue from our healthcare portfolio reached $2,400,000,000 and we expect to generate over call $10,000,000,000 in healthcare revenue in 2023. Turning to people led, let me discuss the progress of our negotiations with the Teamsters. Call.

Speaker 2

Negotiations on a new contract with Teamsters are underway and good progress has been made on many of our local supplemental agreement. Together, we've set up 5 subcommittees at the national bargaining table to take on key areas of the contract, call, which enables us to move faster. We are aligned on several key issues, like solving the staffing needs for weekend delivery call and ways to mitigate the summer heat in our package delivery vehicle. While we expect to hear a great deal of noise during the negotiation, call. I remain confident that a win win win contract is very achievable and that UPS call and the Teamsters will reach agreement by the end of July.

Speaker 2

Now let's move to the last leg of our strategy, innovation driven. Call. We have the best, most efficient global integrated network in the world and we are getting even better. Today, we operate our network quarter. And when it comes to productivity, we are relentless about creating a virtuous cycle of improvement in our network.

Speaker 2

Call. For example, our total service plan, which addresses running a predictable on time network, has delivered continued productivity improvements call. Our massive and highly complex network naturally generates efficiency when volume increases. Call. But when volume levels drop, historically it's been harder to generate productivity improvement.

Speaker 2

With total service plans, quarter. We have driven productivity even with declining volume. In the Q1, U. S. Volume declined by 5.4%, call.

Speaker 2

But ours declined even further, which resulted in improved productivity as measured by pieces per hour. As we discussed last quarter, call. We've accelerated investment in our smart package, smart facility RFID solution and plan to complete deployment call in more than 900 buildings across the U. S. By the end of October.

Speaker 2

Throughout the process, we've continued to learn and improve, call, which has enabled stronger results than we originally expected. In the facilities where we have this technology, call. We've cut the frequency of miss loads from around 1 in 400 packages to 1 in 1,000 packages, quarter, which reduces miles, handles and costs, and it improves both the customer and employee experience. Call. Innovation driven is also about combining digital capabilities with our integrated network to improve the customer experience and efficiency.

Speaker 2

Call. Our upstream delivery density solution checks both boxes. This month, we are onboarding our 2nd large national retailer, call, which gives us more opportunity to increase density as we can match volume in the UPS network with orders of participating customers. Call. It's still early days of this initiative.

Speaker 2

As we learn, we continue to adjust the match rate algorithm and we are happy with the results. Call. Lastly, our innovation driven initiatives are moving us towards our 2,050 carbon neutrality goal. We are focused on the decarbonization of our global supply call. In 2022, our Scope 1, 23 CO2 emissions declined by 6.9% Call of 2020 1.

Speaker 2

We've been investing in alternative fuel for more than 20 years and operate more than 15 call. Recently, we took delivery of 10 Fully Electric Class 8 Semi Truck in California. These trucks are quiet call, and they are the 1st 0 emission semis to run-in our UPS fleet. Our 2022 sustainability report was call published on April 12. This is our 21st annual sustainability report and you can find it call on about.

Speaker 2

Ups.com. Moving to our outlook for 2023. Quarter. Last quarter, we provided a range for our 2023 financial targets. As we've discussed, there's been a deceleration in U.

Speaker 2

S. Retail sales growth call. And certain non U. S. Markets remain challenged.

Speaker 2

As a result, we now expect to be at the low end of our call. Brian will share more detail in a moment. Call. I've led through difficult times before and I've seen the power of making the right decisions and the pitfalls of making wrong decisions. Call.

Speaker 2

In uncertain market conditions, it's easy to fall into the trap of managing the business for the short term. While we will control what we can control, call. We will also stay on strategy. Over the past 3 years, we have fundamentally improved nearly every aspect of our business and we are just getting started. Call.

Speaker 2

UPS' are the best in the industry and because of them, I am convinced we will come out of this cycle faster, call stronger and with a wider lead on our competition. With that, thank you for listening. And now I'll turn the call over to Brian.

Speaker 3

Call. Thanks, Carol, and good morning. In my comments, I'll cover 4 areas, starting with the macro environment, then our first quarter results. Call. Next, I'll cover cash and shareowner returns.

Speaker 3

And lastly, I'll review our updated financial outlook for 2023. Call. Okay. Let's start with the macro. In the Q1, the macro environment was challenging from both a commercial and consumer perspective.

Speaker 3

The growth rate for U. S. Manufacturing production fell throughout the quarter and was down 0.9% in March year over year. Call. On the consumer side of the U.

Speaker 3

S. Economy, the growth rate on services spending is continuing to outpace the growth rate on goods spending. Call. And within the goods bucket, consumers spent more on essential items like groceries, which tend to be purchased in store. Call.

Speaker 3

These factors, plus a 5 point drop in consumer sentiment from February to March, contributed to the reduction in our volume levels. Quarter. Outside the U. S. In the Q1, Asia exports remained weak, while Europe narrowly avoided a winter recession.

Speaker 3

Quarter. In the face of all this, we responded with agility and remained focused on controlling what we could control to deliver great service for our customers quarter and bottom line results for shareowners. In the Q1, consolidated revenue was $22,900,000,000 quarter, down 6% from last year and slightly below our base plan expectations. Operating profit was $2,600,000,000 a decrease of quarter. However, we achieved our base plan operating profit.

Speaker 3

Consolidated operating margin was 11.1%, quarter, a decline of 2 50 basis points compared to last year. For the Q1, diluted earnings per share was $2.20 down 27.9% quarter from the same period last year. Now let's look at our business segments. In U. S.

Speaker 3

Domestic, revenue quality initiatives nearly offset the decrease in volume. Call. And as the decline in volume accelerated toward the end of the quarter, we responded quickly by adjusting the network to eliminate costs while maintaining quarter, our industry leading service levels. In the Q1, we expected average daily volume to decline between 3% 4%. Quarter.

Speaker 3

For the quarter, average daily volume was down 5.4% year over year, primarily because volume in March moved lower than we expected. Quarter. Looking at mix in the Q1, we saw lower volume across all industry sectors with the largest quarter. The decline from retail and high-tech. B2C average daily volume declined 5.5% compared to last year call and B2B average daily volume declined 5.4%.

Speaker 3

A bright spot in B2B in the quarter was returns, call, which was up 6.8% year over year.

Speaker 4

In the

Speaker 3

Q1, B2B represented 42.7% of our volume, call, which was unchanged from a year ago. Additionally, the shift in product mix from air to ground that we saw in the Q4 of 2022 continued quarter in the Q1 as customers made cost trade offs and took advantage of the speed improvements we made in our ground network and further leveraged our Surepost product. Quarter. Compared to the Q1 of last year, total air average daily volume was down 16.7%, call. Ground declined 3% and within ground, Sherpa's grew 1.8%.

Speaker 3

Looking at customer mix, call. SMB average daily volume declined significantly less than our enterprise customers in the Q1. SMBs including platforms quarter. The quarter call. U.

Speaker 3

S. Domestic generated revenue of $15,000,000,000 down 0.9%. Revenue per piece increased 4.8%, call. Nearly offsetting the decline in volume. The combination of base rates and customer mix increased the revenue per piece growth rate by 500 basis points, call, driven by strong keep rates from our general rate increase and increased SMB penetration.

Speaker 3

Call. Fuel drove 200 basis points of the revenue per piece growth rate increase. Remaining factors reduced the revenue per piece growth rate by 220 basis points, quarter, driven by the combination of negative product mix with ground packages outpacing air growth and layer package weights. Call. Turning to cost, total expense was relatively flat with an increase of 0.6% or $80,000,000 in the 1st quarter.

Speaker 3

Call. Higher union wage and benefit rates increased expense by over $300,000,000 primarily from a 6.1% increase call in average union wage rates, driven by the annual pay increase for our Teamster employees that went into effect in August of 2022. The U. S. Domestic team did an excellent job pulling cost out of the network in response to lower volume.

Speaker 3

Call. We managed hours down 5.6%, which was more than the decrease in average daily volume and we reduced quarter. We are pleased with the progress we made in the quarter as volume growth rates declined. Together, these actions reduced expenses by more than $220,000,000 quarter, partially offsetting the increase in wage and benefit rates. Additionally, we reduced purchase transportation by $100,000,000 call, primarily from utilizing UPS feeder drivers to support our fastest ground ever and from continued optimization efforts, call, which enabled us to reduce trailer loads per day by 7.5% compared to the same period last year.

Speaker 3

Call. The remaining variance was driven by multiple factors including maintenance and depreciation. The U. S. Domestic segment delivered $1,500,000,000 in operating profit, call, which was slightly above our base plan and down 12.7% compared to the Q1 of 2022 quarter.

Speaker 3

And operating margin was 9.9%. Moving to our International segment, we expected the macro environment to be bumpy and it was. Call. Looking at Asia, export activity started off very weak due to the extended Lunar New Year holiday. It gradually recovered through the quarter,

Speaker 5

quarter, but at a slower pace than we anticipated.

Speaker 3

In Europe, the macro environment was a little better than we expected, call, which helped offset the weakness in Asia relative to our base plan. In the Q1, international total average daily volume came in as expected quarter and was down 6.2% year over year. Domestic average daily volume was down 9.5%, which drove 3 quarters of the total average daily volume decline. Quarter. Total export average daily volume declined 2.8% on a year over year basis, driven by declines in retail call and high-tech market demand.

Speaker 3

Asia export average daily volume was down 8.9% quarter and included a 20% year over year decline on the China to U. S. Lane. Through the Q1, we remained agile and we flexed the network to match demand, quarter. Reduced Asia block hours by more than the decline in Asia export volume and delivered excellent service to our customers.

Speaker 3

Quarter. In the Q1, international revenue was $4,500,000,000 down 6.8% from last year call due to the decline in volume and a $161,000,000 negative revenue impact from a stronger U. S. Dollar. Quarter.

Speaker 3

Revenue per piece was relatively flat year over year, but there were a number of moving parts, including a 370 basis point decline due to currency call and a 180 basis point decline from demand related surcharges. These were offset by an increase in the fuel surcharge of 2 30 basis points quarter and an increase of 3.30 basis points due to the combination of a high GRI keep rate and a favorable product mix quarter as export volume outperformed domestic volume. Operating profit in the International segment was $806,000,000 down $314,000,000 from the

Speaker 5

quarter. The same period last

Speaker 3

year, primarily due to the decline in exports out of Asia and included a $97,000,000 reduction in quarter and a $51,000,000 negative operating profit impact from currency. Operating margin in the first quarter quarter 17.7%. Now looking at Supply Chain Solutions. In the Q1, revenue was $3,400,000,000 down $983,000,000 year over year. Looking at key drivers, in forwarding, softer global demand, especially out of Asia,

Speaker 5

quarter.

Speaker 3

We are continuing to manage buy sell spreads call and have taken steps to reduce operating cost in this business. Logistics delivered revenue growth driven by gains in our Healthcare Logistics and Clinical Trials business and increased operating profit. In the Q1, Supply Chain Solutions generated an operating profit of 258 quarter and an operating margin of 7.6%. Walking through the rest of the income statement, We had $188,000,000 of interest expense. Our other pension income was $66,000,000 and our effective tax rate for the Q1 was 24 point quarter, which was less than we anticipated in our base plan due to lower tax impacts from our employee stock awards.

Speaker 3

Call. Now let's turn to cash and shareowner returns. In the Q1, we generated $2,400,000,000 in cash from operations. Call. Free cash flow for the period was $1,800,000,000 including our annual pension contributions of $1,200,000,000 that we made in the Q1.

Speaker 3

Quarter. Also in the Q1, we issued $2,500,000,000 in long term debt that we are using to pay off debt maturing in 2023. Quarter. And in the Q1, UPS distributed $1,300,000,000 in dividends and completed $751,000,000 in share buybacks. Call.

Speaker 3

Moving to our outlook for the full year 2023. In January, we provided a range for our 2023 financial targets call. Due to the uncertain macroeconomic environment we saw at that time, since then the volume environment has deteriorated,

Speaker 5

call, especially

Speaker 3

in the U. S, driven by continued challenging macro conditions and changes in consumer behavior. As a result, call. We expect full year revenue and operating margin to be at the low end of the previously provided range. For the full year 2023, we expect quarter.

Speaker 3

Consolidated revenues of around $97,000,000,000 and consolidated operating margin of around 12.8%, with about 56% of our operating profit call coming in the second half of the year. In U. S. Domestic, we expect full year volume to decline around 3% versus 2022 call with revenue per piece growth nearly offsetting the decline in volume and operating margin is expected to be around 11%. Call.

Speaker 3

In international, we anticipate both volume and revenue to be down by around 4% and we expect to generate an operating margin of around 20%. Call. And in Supply Chain Solutions, we expect full year revenue to be around $14,300,000,000 and operating margin is expected to be around 10%. Call. We have proven our ability to adapt in a dynamic environment.

Speaker 3

We have many levers to pull on the cost side and we will continue to control what we can control call by delivering industry leading service and remaining disciplined on revenue quality. We will also continue investing in growth and efficiency initiatives call, like international debt, healthcare and smart package smart facility, which will help us come out of this economic cycle faster and stronger. Call. Specifically, now that our volume is trending at the downside of our range, we are executing our plan to take out semi variable and fixed costs, including call. In the U.

Speaker 3

S. Air network, we are adjusting package flows to maximize utilization on our next day flights, which enables us to reduce block hours call in our 2 day operation. On the ground, we are pulling more volume into our large regional hubs, further leveraging the automation in those buildings call and enabling us to eliminate sorts in smaller buildings. Driving more consolidation on the ground could quarter to potentially allow us to reduce our overall building footprint in the U. S.

Speaker 3

Internationally, based on the volume levels over the last couple of quarters, call. We further reduced scheduled flights to reflect lower market demand while ensuring we maintain agility in the network to quickly add flights where needed call. Thank you, operator. Thank you, operator. Thank you, operator.

Speaker 3

Thank you, operator. Thank you, operator. Thank you, operator. Thank you, operator. Thank you, operator.

Speaker 3

Thank you, operator. Thank you, operator. Thank you, operator. Thank you, operator. Thank you, operator.

Speaker 3

Thank you, operator. Thank you, operator. Call. And in terms of overhead, we see opportunities to further reduce costs by leveraging technology. Now let's turn to capital allocation.

Speaker 3

Call. Our plans have not changed. We will continue to make long term investments to support our strategy and capture growth coming out of this cycle. Call. We still expect 2023 capital expenditures to be about $5,300,000,000 including investments in automation call and we'll add 2,300,000 square feet of healthcare logistics space to our global network this year.

Speaker 3

We'll also complete the deployment call of the first phase of SmartPakage smart facility in the U. S, expand DAP internationally and continue building out our logistics as a service platform. Call. We are still planning to pay out around $5,400,000,000 in dividends in 2023 subject to Board approval. Call.

Speaker 3

We still plan to buy back around $3,000,000,000 of our shares. And lastly, our effective tax rate for the full year is expected to be around 23.5 quarter. In closing, despite the challenging macro backdrop, we will continue to provide industry leading service to our customers call and we will stay on strategy. We are investing to make our network even more efficient and to strengthen our customer value proposition call to enable us to capture growth coming out of this cycle. Thank you.

Speaker 3

And operator, please open the lines.

Operator

Quarter. Thank you. We will now conduct a question and answer session. Our first question will come from the line of David Vernon of Bernstein. Please go ahead, sir.

Speaker 6

Call. So Carol, I wanted to follow-up on your commentary around the productivity in Inlyter volume. Call. As you guys think about the way the business is performing against the lower volume outlook right now, how confident are call. If we get into a better volume environment, say, 2024, 2025, that some of those productivity gains are going to be able to be held.

Speaker 6

And then, Brian, maybe just a follow-up. Call. Can you give us a sense for what sort of magnitude of facility reductions you might be able to pull off here in the next couple of years? Thanks.

Speaker 2

Call. Well, David, thank you for your question. First, as it relates to productivity, we introduced our total service plan last quarter. That's not one and done. That's the way we're going to operate our business forever.

Speaker 2

Productivity is a virtuous cycle here at quarter. Yes. Enando and the team continue to find opportunities to drive productivity in down markets as well as up markets.

Speaker 3

Call. And on the second part of the question, Dave, in terms of the scope of building consolidation, etcetera, Nano and the team are doing a nice job quarter. Working a project called Network of the Future, still early days. We do have some facility sales planned in the Q2 or the back half of the year, but that doesn't really ramp up in terms of call. The opportunity to consolidate until 'twenty four or 'twenty five in that time frame.

Speaker 2

Just a little bit more color on that perhaps. If you think about how we grew up as a company, if we build up a facility which spun off a building and then we would fill up another facility and spin off a building. As Nado and his team have looked at it, we found that, call. We might be able to consolidate some of the spin offs into highly automated buildings, drive productivity and not lose any drive time, call. Not impact our customer service in any negative way.

Speaker 2

So we're looking at that. It's pretty exciting.

Speaker 3

But it is a change in culture. I don't think, Carol, we've actually closed buildings outside of the non op side. So it's a pivot to be more optimized and focused.

Operator

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

Speaker 4

Call. Thanks, operator. Good morning, Carol and Brian. So Brian, the volume environment is obviously weaker and the weakness seems to have accelerated quarter towards the end of the quarter. So I'm just trying to understand where are we now?

Speaker 4

I mean, there call. You're obviously confident about achieving the low end of the guidance.

Speaker 7

I'm just trying to

Speaker 4

understand that confidence in the context of the volume uncertainty. And then just as a follow-up, if I could, Carol, call. It's great that you think a win win win is still achievable, but the rhetoric is getting like really bellicose. And so, I'm quarter. Wondering if you could give some color on that dynamic because it seems like it's costing you guys some volume right now.

Speaker 4

And I know you made an acquisition last year with delivery solution that gives you access to a lot of contingent capacity. So talk about the win win win against the rhetoric, against the investments you've made. There's a lot in there, but I'll let you answer it however you want. Thanks.

Speaker 3

Yes. Amit, the biggest change in terms of the base case versus downside is the volume. We were quarter. Looking at volumes of down 1% in the base case and now we've pivoted to the downside of down 3%. The Q1 was an evolution call.

Speaker 3

About where we expected in January, February a little bit lighter, but March was the trail off. And so as we've seen the macros quarter. We look at things like IP Manufacturing and ESMO. Those have continued to devolve. And so we basically adjusted quarter.

Speaker 3

The volume outlook for the first half of the year. And so two reasons we're confident that the full year in the case of the domestic business will be at 11%. Call. We have confidence that the volume will come back post the summer related to customer conversations and some of the macro, which we think will trough in the middle part of the year. Call.

Speaker 3

And also cost, we can go into more detail, but our ability to control cost and take more of the semi variable out will help us deliver that 11% in the U. S.

Speaker 2

Call. And maybe just a little more color on volume and then I'll go to your question about TeamSTEPPS. As we as Brian detailed, call. The rate of acceleration in the year over year decline caused us pause because we were down around 3 quarter. 5% in February and 7% in March.

Speaker 2

As we look at April, April has stabilized call relative to how we exited March. So we feel very good that volume has stabilized. If we look at the year over year decline in the U. S. Of a little over 1,000,000 packages call.

Speaker 2

Today, we would attribute over 60%, nearly 62% of the decline due to macro and a planned decline with our largest customers. You know, we're quarter. So it's really a macro story here and we're delighted to see that the volume has stabilized. Call. To Brian's point then, what gives us confidence that the volume will come back in the back half of the year?

Speaker 2

I'll share with you our strategy as it relates to sales. Call. And this is a multifaceted strategy. It starts with keep to your point about volume diversion, which by the way wasn't very much in the Q1. We've assigned 127 high impact executives to over 380 call.

Speaker 2

The role of the high impact executive is to meet with our customers, call. Update them on our ongoing negotiations with the Teamsters and to keep them with us. The next element of our strategy is protect. Call. In the unlikely event of a work stoppage and we're not counting on that because we are confident we're getting our contract, but in the unlikely event, we do have contingency plans call.

Speaker 2

The 3rd leg of our strategy is to win back for any volume that has diverted and we did have some, it would be call. Unreasonable to expect that we wouldn't have any. For volume that has diverted, we are going to win it back as they told us they're coming back. Call. In fact, one customer just signed on the dotted line that they're coming back once we have a handshake.

Speaker 2

The third is to continue to sell. We are selling in the environment call. And we want to sell and close and pull through those new customers. And then finally is work the pipeline. Call.

Speaker 2

We have a pipeline that's greater than $6,000,000,000 That's hard to sell into right now because of Doug Teamster negotiation, call. We are going to go hard at it once we have that handshake deal. And we're going to go at it in a way that we've never done before because we will be using our dynamic pricing model. Call. This is a very difficult way to go to market because we are creating value propositions for our customers that we haven't done before call using the architecture of tomorrow pricing model that we've created, which creates modifiers to base price, call.

Speaker 2

The win for our customer and our win for UPS. So that's really how we're getting confident in the volume projections that we shared with you this morning. Now to your question about the Teamsters. We told you from the beginning that it was call. And that's turning out to be true.

Speaker 2

But let me just comment on the recent rhetoric. There was call. Some noise about supplemental agreements. We have over 40 supplemental agreements with the Teamsters. We have been negotiating in call.

Speaker 2

Good faith with the Teamsters on those supplemental agreements and have made very good progress. In fact, Teamsters leadership and UPS leadership

Speaker 5

were in Washington, D. C. Last

Speaker 2

week, both giving opening comments call. Last week, both giving opening comments regarding the master agreement. So I feel like we are very much on track call as to our timeline to accomplish a win, win, win. And why am I confident about a win, win, win? Well, first of all, we are aligned on the North Star.

Speaker 2

Call. And the North Star is that a thriving, growing UPS is good for Teamsters, it's good for UPS, and it's good for our call. And when you are aligned on the North Star, everything else can get worked out. On some of the issues that Teamsters have been very call. And we talked about it the last time we had an earnings call.

Speaker 2

We're aligned. For example, we all agree that weekend delivery is table stakes, call. Because that's what consumers are expecting. We all agree. It's how we go about doing that from an operating model perspective that we need to work it out.

Speaker 2

Call. Because of restrictions in our contract, in some instances, we have teamsters working 6 days a week. Call. Teamsters don't like that. I don't like that.

Speaker 2

If you want to work 6 days a week, that's fine with me. But if you don't, we shouldn't force you. So we've got to work that out. Call. And there are a number of other issues just like that.

Speaker 2

When we get to the bargaining table, we'll figure out a way to work it out. I'm highly confident call that we're going to get a win win win agreement. But like any negotiation, it's going to be noisy and a few bumps along the way. And I call. I had this argument with my husband about a puppy.

Speaker 2

It was noisy. It was bumpy. But in any negotiation, that's going to be the case. And it's certainly the case here. And that's why call.

Speaker 2

I go back to our sales strategy of these high impact executives putting their arms around our customers and making sure they're comfortable with us because we are

Speaker 5

call. We're confident we'll deliver our contract.

Speaker 4

Got it. Thank you. Good luck with the puppy.

Speaker 2

Thank you.

Operator

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

Speaker 8

Hi, good morning. Call. Just want to go back to the productivity side that the hours deployed the spread between hours deployed and the volumes certainly narrowed this quarter. I call. I know you talked about some stabilization in April and certainly some cost outs going forward.

Speaker 8

Just any color on how we should think of that call. Brad, should it remain positive and maybe expand as we get towards the back half of the year? Thanks.

Speaker 3

Yes. So quarter. Look, we're going to need to take cost out balance of year. It will be a big reduction in CPP. We were mid single digits, Allison, in the U.

Speaker 3

S. And candidly, if call. If you told me wages were going to be up 6% and volume was going to be down 5%, I would have expected something like a double digit CPP about 3 or 4 years ago. Nando and the team have done extraordinary job call of driving that 6% that we saw in the quarter, but we are expecting low single digits for the balance of the year as you think about CPP. It's going to come from 4 areas.

Speaker 3

Call. One, Carol talked about total service plan and that's that reducing hours more than volume and managing the headcount. The second is our network. Call. We deal with both ground and air, as you know.

Speaker 3

And in the ground side, how do we consolidate volume into automated facilities, closed sorts and really focus on the efficiency there. On the air side, it's changing the package flows to better utilize the one day network. And in fact, domestic block hours, quarter. They were down about 4% in the Q1. We would expect to exit the 2nd quarter at 2x that rate.

Speaker 3

The 3rd piece that we are focused on is overhead. And call. Following the technology group, our delivering technology efficiency to allow us to do our jobs on the non op side more efficiently and we will continue to reduce headcount as volume warrants. Call. And lastly, fuel.

Speaker 3

We expect fuel prices to be down double digit year over year in the balance of the year, 2Q and 2H. Quarter. So that will reduce both RPP and CPP, but those four things combined drive a high amount of confidence in a low single digit CPP balance a year.

Speaker 8

Quarter. Understood. Thanks for the color.

Speaker 3

Yes.

Operator

Our next question comes from the line of Tom Wadewitz of UBS. Please go ahead, sir.

Speaker 9

Call. Yes, good morning. That was really helpful, Brian, in terms of the cost per piece framework. Do you have a kind of a comparable thought for looking forward on revenue per piece and maybe also some just some commentary on how the pricing environment is holding up. I think your primary competitor is pretty focused on margins, cutting costs, cutting capacity.

Speaker 9

Call. Obviously, you're doing a good job managing costs and capacity as well. So I think there's a lot of potential for a good pricing environment, but call. Any thoughts on that and also just how we think about the drivers of revenue per piece? Thank you.

Speaker 9

Yes.

Speaker 3

Tom, happy to and I call. I assume you're talking about the domestic business. So we had guided originally to an RPP growth of about 3% this year. Call. Carol mentioned volumes are coming in a bit softer, but we're holding on to that RPP.

Speaker 3

And the RPP composition, we actually saw close to 5% RPP growth in the Q1. Call. That was driven by a tailwind in fuel about 200 bps. That flips around, Tom, in the back end of the year where we expect double digit decline in fuel price. So call.

Speaker 3

The way I think about the GRI and the customer mix piece, that should be mid single digit, about 5 points, and then we'll have about a 200 bps decline from fuel. That gets us right into that 3% range. We did see some headwinds in the product mix, the air to ground in the Q1. Call. That will moderate as we go into Q2 and the back end of the year.

Speaker 3

So that's the composition.

Speaker 2

And maybe just a comment on the pricing environment. Call. The keep rate on the GRI is the highest it's been. In the United States, it's north of 60%. It's even higher outside of the United States.

Operator

Our next question comes from the line of Jordan Alliger of Goldman Sachs. Please go ahead, sir.

Speaker 7

Yes. Hi. You talked a little bit about call. What's going to drive cost per piece back half of the year, but maybe can you talk a little bit about some of the specific buckets? Notably, that other expense was quarter.

Speaker 7

Quite a bit higher and is it more opportunity to purchase transport? Just trying to get a sense for what where it's going to be impacted the most? Thanks.

Speaker 3

Call. Yes. PT was we were able to take cost out of that. And as you look at the back end of the year, call. From another perspective, we're certainly getting after a lot of the non operating costs.

Speaker 3

We're taking consulting spend out of the business. We're taking headcount out of the business. So we're really driving from a non ops perspective down to something closer to a 4% of revenue from a cost perspective.

Speaker 2

Call. And maybe just a comment on that other expense line item, because it does look out of, sort. Call. We are moving to software as a service. It's a line item move, right, call.

Speaker 2

Brian, you're the finance person here, but rather than depreciation, we're

Speaker 1

going to move into expense. That's exactly right.

Speaker 2

So there's a little bit of a difference if you have call. Software as a service for your technology deployment versus what you build.

Speaker 3

Transition of buckets. Thank you. Yes.

Speaker 7

Got it. And then just a quick follow-up. You talked a lot about call. The domestic environment and stabilization perhaps in April, but what about the Asian and Export Business. Is there anything on that front that gives a little confidence right now?

Speaker 7

Thanks.

Speaker 2

Well, here's what we're seeing in the business. Week quarter. After week, it's better. It's still down year on year, but it's better, slowly coming out of this negative year over year decline of almost 20% in the Q1. And Kate and her team are doing a masterful job of managing through that.

Speaker 2

In fact, if you look at productivity outside the United States, our ex Asia export business down 8.9%, our block hours were down 14%, quarter. And she's taking more block hours out in the second quarter even with improvements just to optimize the ER network.

Speaker 7

Quarter. Thank you.

Speaker 3

Thanks, Jordan.

Operator

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

Speaker 10

Call. Hey, good morning, Carol and Brian. You talked about the sharp decline in mid February. I guess you've seen this before where we've had some stabilization and then a sharp decline. Inventory still seem high, maybe your thoughts on the backdrop and maybe Brian a little more international.

Speaker 10

You talk about getting to 20% margin on international, but it seems like pre COVID you were operating maybe 16% to 19%. Did something structurally change or the mix change that you think that that is the new floor versus in a shifting environment, it goes a little bit lower? Thanks.

Speaker 3

Call. Yes, Ken, happy to start, you taking the last piece first. On international, we had guided a couple of years ago, we went out with 3 year guidance to a 21 point call. In international, obviously, the world has changed a lot since then, but the mix of Kate's business that she is running and the Agility on the network in terms of managing the airflow has I don't know about a floor, but I think we're comfortable with the 20%. Call.

Speaker 3

You'll see that 20% margin, Ken, fairly consistently Q2 through Q4. So we feel comfortable about that in terms of how the business evolves.

Speaker 2

Call. And on the volume question, again, it goes back to our sales strategy. We have pretty good visibility into the pipeline. We just got to pull that pipeline through. In today's environment with the contract negotiation about 100 days out to completion, kind of hard to get it pulled through, but we're going to pull it through when we get that

Speaker 7

call. Thanks Sean. Thanks Sean. Thanks Sean.

Operator

Our next question comes from the line of Mr. Scott Group of Wolfe. Please go ahead.

Speaker 4

Call. Hey, thanks. Good morning. Brian, just a couple of follow ups on the guidance. The 11% U.

Speaker 4

S. Margin, call. How does that trend throughout the course of the year? And then the volumes were down the volumes down 3% for the year. Quarter.

Speaker 4

How should we think about Q2? And is the back half sort of flat to positive? Is that what you're expecting? Thank you.

Speaker 3

Call. Yes. I would say the in terms of shaping the year, Scott, maybe that helps. We don't manage in quarters, but to help you shape. Call.

Speaker 3

I referenced in the prepared remarks, 56 percent of our full year operating profit coming in the second half for the company. If you look at the U. S. Domestic business, call. I'd expect ADV year over year growth rates to bottom in Q2 and then improve from there to your point.

Speaker 3

And that relates to the actions we're call. As we think about margin, the actions we're taking on semi variable costs and margins will improve sequentially in Q2 and then throughout. Quarter. Fuel PPG will reduce both RPP and CPP, so it's not a material profit impact, but I would expect operating margins quarter. It will be better in the Q2 than in the first.

Speaker 3

On the international side, I think ADV will gradually improve through the year. And as I mentioned, we'll have the consistency of the op margin quarter for the next three quarters of around 20% in the balance of the year. And then finally, in supply chain, revenue should be marginally better in Q2 than Q1 call. And you can hold that 10% as a full year op margin.

Operator

Thank you.

Speaker 7

Yes.

Operator

Our next question will come from the line of Bruce Chan Stifel. Please go ahead, sir.

Speaker 11

Yes, thanks and good morning everyone. Just want to ask here question on the share shift issue.

Speaker 3

If you're able to quantify or even qualify the attrition

Speaker 11

that you're seeing. And I just ask because I think there's been a lot of focus on your upcoming negotiations. But just based on your service investments and what are some pretty major, I think, operational changes at your largest competitor, call. I'm wondering if you're actually seeing any business wins. Appreciate it.

Speaker 2

Oh, we are. We are definitely seeing business wins. Quarter. I have to give a hat off to our sales team for selling through this environment. We are delivering packages for customers that we've never delivered before.

Speaker 2

Why? Call. Because our service is the best in the industry. But what we see with some of our long term existing large customers is that their business is call. And I can give you a few anecdotes if that's helpful.

Speaker 2

1 of our large customers reports publicly every month their same store sales. Call. This is a customer who for 80 quarters in a row had positive same store sales and in the month of March saw a negative same store sale. One of our other customers who has both in store sales as well as online sales has seen a shift in their customer shopping behavior from online to stores. Call.

Speaker 2

So they're shutting down, shifts inside of their warehouses, which makes sense for them. So we see generally macro and a change quarter. The consumer behavior impacting our volume, but we're winning and we're just going to win faster and we will win faster when the uncertainty is behind us. Call. I'm quite convinced of the Teamster negotiation.

Speaker 2

Customers say we'd like to ship with you, we're just going to sit on the sidelines till you're done. So we just need to get done and we will.

Operator

Our next question will come from the line of Brian Ossenbeck of JPMorgan. Please go ahead, sir.

Speaker 12

Quarter. Hey, good morning. Thanks for taking the question. So Carol, you just gave some commentary about some of the volume trends from some of the question. Are you seeing anything that you would attribute to perhaps demand destruction from parcel rates going up with capacity constraints with some of the disruptions and surcharges, including on fuel.

Speaker 12

Do you attribute any of the volume weakness to that? And then Brian, maybe you can elaborate a bit more on returns. You mentioned it was a pretty good growth driver in the quarter, but your largest customer is also floating the idea of perhaps charging for some returns in the future. I wanted to see if that was some consideration we should think about in terms of what that could do for that volume driver, which seems to be a pretty good one, at least for the time being. Thank you.

Speaker 2

So to your first question, we don't see volume disruption because of pricing. We do quarter. Product change, however. If you looked at our air product in the quarter, it was down year on year more than ground. Call.

Speaker 2

We see customers moving out of air to ground. Why? Well, we've really worked to improve our time in transit. So we've got the fastest time in quarter. So you can get your package where it needs to go quicker than before and people are looking for value.

Speaker 2

So I can watch customer by customer moving out of

Speaker 3

call. And on the returns business, it's a great business. The margins are attractive. Quarter. We saw positive growth in the Q1, as I called out, and a big piece of that is the over 5,000 stores we have, UPS stores across the country.

Speaker 3

Carol mentioned quarter. 7% of the volume originates in those stores and is a great easy way for consumers to with the returns that are going on as quarter. The e com economy pursues. So we feel good about that and something we're building capability in every day.

Speaker 2

And convenience matters from returns. Call. If you want to get that package back, so you get credit back into your wallet, you want a convenient place to return. And with our location near 85 quarter.

Speaker 5

Percent of

Speaker 2

the U. S. Population within 10 miles of 85% of the U. S. Population were extraordinarily convenient.

Operator

Quarter. Our next question comes from the line of Chris Wetherbee of Citigroup. Please go ahead, sir.

Speaker 13

Call. Hey, just wanted to maybe hit on the cadence question again about sort of how this year progresses on the guidance. I think 6% of the profit in the back half of the year implies around the $2,900,000,000 or so in 2Q and just any thoughts around step up we would might see between domestic and international. And then I guess just Brian on the RPP, CPP point, call. Do you have a line of sight or does the guidance include a flip back to RPP outperforming or outpacing CPP by the end of the year.

Speaker 13

Is that a volume function? Is that more of a cost function? Just want to make sure I understand sort of how you guys are thinking about that?

Speaker 3

Call. So we're longer term, Chris, as we've talked to you, we're always going to drive for RPP to outpace CPP. We're call. We're in a bit of an extraordinary environment right now with the macros and everywhere they are. So, we don't have margin expansion this year based on the guide.

Speaker 3

So, you won't see that likely return until 2024, call. We feel good about the taking cost and CPP down to low single digit as RPP does come back. So feel okay about that. Quarter. And then your math is fairly accurate in the second quarter.

Speaker 3

You're doing the squeeze the right way.

Speaker 7

Okay. Call.

Speaker 13

Thank you very much.

Speaker 3

Yes.

Operator

Our next question comes from the line of Ari Rosa of Credit Suisse. Please go ahead.

Speaker 11

Call. Hey, good morning, Brian. Good morning, Carol. So I just wanted to understand, how do you think about the softer economic environment quarter, potentially impacting your discussion with the union. Is there any dimension on which it maybe makes negotiations a little bit easier or gives you a little bit more leverage visavis that discussion?

Speaker 11

Thanks.

Speaker 2

Call. So we look out we don't look in the current moment. We look out call for where we both want to go as growing and thriving UPS is in the best interest of Teamsters, quarter. So the current economic environment, it is what it is, but our negotiations are all about the future.

Operator

Quarter. Our next question will come from the line of Helane Becker of TD Cowen. Please go ahead, ma'am.

Speaker 14

Call. Thanks very much, operator. Hi, everybody, and thank you very much for the time. I wonder, Brian, if you could talk a little bit about what margins in the stores are call. I feel like you are hinting at one of your most profitable business lines.

Speaker 14

So I'm kind of wondering if you could put some more color to that.

Speaker 3

Call. You are talking about the UPS stores. So, it's a great foundation for volume origin. Call. We have a royalty relationship that generates our royalty stream that comes in from the stores as far as what income comes into UPS.

Speaker 3

Call. And as that volume grows, our royalty grows.

Speaker 2

We do look at the profitability of stores because I'm curious, I'm an old retailer, so are the stores profitable? The stores are very profitable, which means franchisees call. We add about 100 new stores every year because this is a great small business to own. And in terms of the royalty fee that comes call. To our company, there's some expenses against that, but if you look at the margin against that royalty, I would say it's the highest margin business that we've got.

Speaker 1

Call. Excellent. Stephen, we have time for one more question.

Operator

Our last question will come from the line of Stephanie Moore of Jefferies. Please go ahead, ma'am.

Speaker 15

Call. Hi, good morning. Thank you. Hi, Carol and Brian. I just wanted call.

Speaker 15

To kind of look through your updated guidance, particularly your consolidated margin outlook, certainly understand it's a very fluid environment as it call. It relates to volumes and appreciate the additional color of you guys executing on what's in your control. Call. Could you talk a little bit about your ability to maybe still hit that margin target and volumes were quarter. Deteriorate worse than you expected and how you kind of framed that in your outlook as you kind of looked at, the puts and takes for what is a pretty volatile year?

Speaker 15

Thank you.

Speaker 3

Call. Yes, happy to. And the whole reason we went out at the beginning of the year with 2 scenarios is we didn't know what was going to happen with the macros and the macros quarter. Continue to deteriorate in the first half of the year. So we had a playbook, which was the downside scenario.

Speaker 3

We pulled that off the shelf and are executing quarter. The TSP, the network changes for ground and air, the overhead to fuel. And so from a line of sight perspective, what we control, I feel good about the 12.8 that we've call. Obviously, the top line is what it is, what Carol said. We've got the largest pipeline of sales that we've had in 5 years, which is a very big number, dollars 6,000,000,000 And so our ability to pull that in posted negotiation with the labor, that gives us confidence on the top line.

Speaker 2

Call. Well, you might share the split of variable, semi variable and fixed.

Speaker 3

Yes. So, well, I'm not sure anything is fixed anymore, Carol. So, we do about a third quarter. Variable on the 70% in the semi and the fixed bucket, and we're really redefining that. As we talked earlier, we don't have a call.

Speaker 3

But everything is on the table because in the new world, there has been a growth over 100 years of a bunch of buildings call located around. And so Nando's ability to go and shut down some sorts and drive, we're going to match the volume. The one thing, Carol, I would add is call. When volume returns and make no mistake, volume will return to this business, we will be positioned very well to throw off cash because we will have positioned the cost structure in a good way.

Speaker 1

Call. Thanks, Brian. And I want to thank everybody for joining us this morning. Look forward to talking to you next quarter. And that concludes today's call.

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