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May 3 2023 05:40 AM

On January 31, UPS held its Q4 2022 earnings call. Despite relatively positive packaging, results were mixed. After walking away from Q4 with continued strong margins and a 13.2% dividend increase over the past two years, UPS now faces a looming Teamsters contract negotiation, with the current contract set to expire in July 2023.

So, with all that going on, many were eager to hear what UPS would respond, but the tone was surprisingly light-hearted; almost upbeat.

Here is the TLDR (too long didn’t read) version of the UPS 4Q22 earnings call:

- They realize that the company did not perform as well as it could have in late 2022.

- High margins (though lower than last year) couldn’t offset falling package volumes, resulting in lower operating profit.

- They understand the significance of the Teamster negotiations.

- Everything is fine…

Ken Cook started off the call with some announcements, then introduced CEO, Carol Tomé.

Tomé set the initial tone by thanking “UPSers” for their hard work, by now a staple of virtually all of Tomé’s public statements, then touched on Q4 financials:

“Looking at our fourth quarter results, we expected volume levels to decline from last year and they did, but more than we planned due to macro conditions that Brian (Newman) will discuss. We responded by managing our network with agility and a focus on service. Consolidated revenue was $27 billion, down 2.7% from last year, and operating profit was $3.8 billion, a decrease of 3.3%. While our consolidated operating margin declined by 10 basis points from last year, to 14.1%, our US operating margin expanded to 12.8% and reached the levels not seen in 10 years.”

Next, she mentioned the Teamsters Negotiations.

“Regarding our upcoming labor contract negotiations, we are well prepared for negotiations, and are focused on achieving an agreement that is a win for our employees, a win for the Teamsters. and a win for UPS and our customers. We have great jobs with industry leading pay and benefits… Now, I suspect many of you listening today, would like to talk about our negotiating strategy.” Adding, “Well, we believe the best way to achieve a win, win, win, outcome is for us to leave the details of the negotiations at the bargaining table.”

UPS seems to be playing its negotiation strategy close to the vest. Probably a smart play, but disappointing for the rest of us.

Later in the call, Brian Newman (UPS CFO) spiced things up by talking more about key macro conditions impacting operational expenses, highlighting rising fuel costs and increased union wages (Tomé also mentioned these earlier).

Newman’s statement about fuel costs increasing operational expenses left were likely confusing to many. While fuel costs did increase in 2022, UPS’s fuel expenses are more than offset by customer-paid fuel surcharges. Fuel cost reimbursement happens through the fluctuating fuel surcharges put into place during the 1973 oil crisis. This was initially imposed to protect carriers against huge price variations in the gasoline and diesel fuel market (pricing tables published weekly by the EIA). So, while fuel costs do initially impact UPS, the sting only lasts for a short while. UPS then not only gets reimbursed but it also ends up making money. Like many other fees and surcharges, fuel surcharge has evolved from a way to align cost-to-serve with price into a revenue and margin generator. This is not the first time UPS has listed rising fuel costs as one of the reasons for a deficit. Just from a quick search, I can see it was mentioned in 2006 and again in the 2008 Q2 earnings calls. One might think that “rising fuel costs” may have become a convenient scapegoat.

Increased union wage rates were mentioned as the second reason for the Q4 shortfall. This will likely be a key negotiating point for UPS as it approaches negotiations with the Teamsters Union. However, any argument UPS makes that labor costs have negative impact is going to fall on deaf ears. The 2018 Teamsters contract largely shielded UPS from the impacts felt by other carriers in the last two years. For example, according to then CFO Michael Lentz, labor shortages cost FedEx $470M in 2021, due to higher rates paid to employees and the increased use of outside trucking companies. Even if UPS could make a case, Sean O’Brien is not likely to be a receptive audience, particularly when UPS has seemed very proud of increased profits over the last few years.

Aside from the Teamsters negotiation, the biggest thing on UPS’s mind coming out of 2022 is likely what to do about falling market volumes, as yield increases cannot keep up. This means UPS has to first protect existing customers, and second, seek new market share, if it is going to maintain profitability until market volumes turn around. This likely points to increased competitiveness in the parcel markets, with UPS looking hungrily at FedEx shippers. It also means that a Teamsters work stoppage would be disastrous. FedEx has already started talking to many SMBs, urging them to convert and commit volume now, or receive no access to capacity if the Teamsters walk. FedEx is providing competitive rates, but also requiring multi-year commitments for large shares of volume. UPS has to find an answer to this, and soon.

But don’t feel too sorry for UPS. 2022 was far from a disaster for Big Brown. Carol Tomé deftly steered UPS through a tumultuous couple of COVID years, and she shows no signs of slipping anytime soon. While there are storm clouds on the horizon, UPS continues to maintain high margins, and the largest single share of the US domestic, export, and import small parcel markets. The company has a high-performing and highly efficient network and people who obviously know their business. It just may have to settle for some givebacks on yields and margins to ensure it’s getting / keeping its market share in a tough market, and share a little of the fat of the last couple of years with Sean O’Brien and the Teamsters.

Adam Holcomb is a Senior Business Analyst for Intelligent Audit. He helps shippers achieve optimal results in execution and cost containment.

This article originally appeared in the March/April, 2023 issue of PARCEL.