UPS 2023 Earnings: UPS “All Hands On Deck” Scrambling to Deal With Volume Losses, Lowers 2023 Guidance
Fresh off the heels of closing its negotiations with the Teamsters, UPS reported Q2 2023 earnings. First the bad news:
At the end of 2022, UPS predicted average daily volume (ADV) to be between flat (bull base) and down 5% (bear case). In Q1, UPS affirmed the bear case of 5% decline.
Well, this quarter, the bear got eaten by a larger bear, as US volumes declined almost 10%. By any measure, that is not good. The UPS CEO reports its “all hands on deck” and has set up a war room/control tower environment to monitor their progress on recovering volumes.
UPS remains bullish on eCommerce trends in the back half of the year: reversion to pre-COVID volumes, at least in the US.
US Domestic Q2 2023 Highlights:
* Revenues Declined 6.9% y/y to $14.4 billion (accelerated decline from 0.9% Q1)
* Operating profits declined, about half due to volume and half due to wages.
* Operating margin 11.1% (up from 9.8% Q1, and more in line with 11% achieved in Q1 2022)
* 9.9% decrease in ADV (Q1 was a 5.4% decrease in ADV y/y) (SMB declined less than Enterprise) Customers shifting volume from air to ground.
* 3.3% increase in revenue per piece slightly offsets the ADV declines.
2023 Guidance:
* UPS updated its guidance based on the results of the recent labor negotiations. Revenue is expected to be $93 billion with an adjusted operating margin of 11.8%.
* May not recover diverted volume until towards the end of the year.
Commentary and Other Tidbits:
* At the end of 2022, the company had guided between $97 billion and $99.4 billion. The lowered guidance of $93 billion reset indicates that downward ADV trends got ahead of UPS expectations.
* UPS says they lost volume due to Teamsters negotiations, but clearly, they lost more than they expected (perhaps both in volume and in salary/benefits). They flew a little close to the sun, affecting their shipper’s plans.
* Work cut out for them to regain it, given the competitive market and the continued growth of regional and super-regional carriers. ⅓ volume lost to UPS, ⅓ to FedEx, and ⅓ to regional carriers. I expect this last third to be the hardest to recover.
* That said, volume declines continued into July (though better than June). Volumes may not recover to y/y numbers until December. To the extent they recover volumes faster than expected, they might be able to beat their adjusted guidance.
* Company is leveraging AI technology they call NPT to change their network, planning, and scheduling. Contributed to a 10% decline in hours to offset the volume declines - helped hold margins higher.
* Management headcount was reduced by 2,500, continuing a widespread industry trend.
* Relative to Amazon: Amazon spends about 4x UPS’ worth of capex each year. I'd be worried!
* UPS took a board seat on CommerceHub. I didn’t realize this.
