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UPS finds way to steer through treacherous Q4 waters

UPS Inc. navigated through a turbulent fourth quarter in decent fashion, posting revenues on Tuesday that were below consensus but reporting on-target adjusted operating margins and a modest year-on-year gain in diluted earnings per share that was still higher than analysts’ estimates.

At the same time, the Atlanta-based transport and logistics giant guided its 2003 top line downward, and its CFO warned of a “bumpy year” ahead.

Part of that bumpiness no doubt revolves around the uncertainty on contract negotiations with the Teamsters union, which represents about 350,000 employees. The current five-year agreement expires July 31, and union leaders have warned that if a contract is not agreed to by Aug. 1, they will call UPS workers out on strike.

UPS CEO Carol B. Tomé, talking to analysts after the results were made public, said she is committed to reaching an agreement before July 31. Tomé also said that UPS (NYSE: UPS) and the union are “not far apart on the issues” and both sides want the company to remain a vibrant enterprise. 

In addition, Tomé said the company will launch a “total revamp” of its safety program, part of which will address driver concerns about excessive summer heat putting their health at risk in vehicles that are not air-conditioned.

Tomé said the package delivery world has changed dramatically since the last contract in 2018. Today, consumers demand deliveries when, where and how they want. Though weekend deliveries are table stakes, UPS will not ask union employees to work six days a week unless they want to. A tier of unionized full-time UPS workers — known as 22.4 workers — currently work Tuesdays through Saturdays. UPS does not operate on Sundays.

The Teamsters declined to comment on Tome’s remarks, saying that negotiations haven’t begun yet.

Mixed but OK results

In a period of macro weakness, UPS posted fourth-quarter adjusted diluted earnings of $3.62 per share. Analysts polled on Barchart forecast EPS to come in at $3.58 per share. The actual EPS figure was 0.8% higher than in the 2021 quarter.

UPS posted quarterly revenue of $27 billion, down 2.7% from last year, and adjusted operating profit of $3.2 billion, a 3.3% adjusted year-on-year decline.

Domestic package revenue rose to 3.1% to $18.2 billion, led by a 7.2% increase in revenue per piece. Adjusted operating profit rose to $2.3 billion from $2.16 billion, UPS said.

Domestic average daily volumes in the quarter declined 3.8% year over year, UPS said. Small to midsize businesses made up 26.5% of UPS’ domestic volumes in the quarter, a year-on-year increase of 70 basis points. That represented the 10th consecutive quarter of increased penetration of the domestic SMB market, UPS said.

Business-to-consumer (B2C) traffic, mostly e-commerce volumes, accounted for 65% of total U.S. volumes. Business-to-business (B2B) volumes made up the rest.

International revenue fell 8.3% to $4.95 billion, due to an 8.6% year-on-year drop in average daily volume in intra-country markets and weakness in China trade lanes. Adjusted operating profit fell to $1.09 billion from $1.33 billion. Adjusted operating margin came in at 22%.

Revenue at UPS’ Supply Chain Solutions unit, which comprises all of the company’s non-package business, came in at $3.83 billion, an 18% decline from $4.67 billion, the company said. Adjusted operating profit fell to $403 million from $456 million in the year-earlier period. The unit’s air and ocean forwarding business experienced volume and rate declines, UPS said. That weakness was offset by growth in the company’s health care logistics business, the company said.

For all of 2022, UPS posted revenue of $100.3 billion, a 3.7% year-on-year gain and the first time in its 115-year history it broke the $100 billion revenue mark. Adjusted operating profit of $13.9 billion was up 5.4% year on year, UPS said.

For investors, the big news was that UPS boosted its quarterly dividend to $1.62 per share, a 6.6% increase. It also announced that it was authorized to buy back $5 billion in shares, up from the current $3 billion buyback authorization. Those actions helped send shares up nearly 6% in midday New York Stock Exchange trading Tuesday. Inc. (NASDAQ: AMZN), UPS’ largest individual customer, accounted for 11.3% of revenue in 2022, slightly lower than the 11.7% figure in 2021. Had UPS not experienced currency headwinds last year due to a rising U.S. dollar, that percentage would have been lower, Tomé said. 

CFO Brian Newman said the two companies are on a “mutually agreed path to wind down” the business. He wouldn’t elaborate.

UPS has said for several years that it will accept the Amazon business that makes sense from a profitability standpoint and allow Amazon to handle the volumes that don’t.

UPS is planning for macroeconomic weakness of to persist in the first half of 2023. The company has developed what it calls a “baseline” macro scenario and a second scenario that calls for more pronounced weakness. In the base scenario, the U.S. experiences a mild first-half recession followed by a moderate recovery. Europe goes into recession in the first half, while Chinese trade lanes experience weak demand in the first quarter. Both scenarios forecast a recovery from those levels, UPS said.

In the domestic U.S. market, the base-case scenario shows average daily volumes slightly contracting and with single-digit revenue gains. The so-called “downside plan” projects a 3% full-year decline in average daily volumes.