United Parcel Service (UPS) Q4 2023 Earnings Call Transcript

United Parcel Service (UPS 0.14%)
Q4 2023 Earnings Call
Jan 30, 2024, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning. My name is Stephen, and I will be your conference facilitator today. And I would like to welcome everyone to the UPS investor relations fourth quarter 2023 earnings conference call. All lines have been placed on mute to prevent any background noise.

And after the speakers' remarks, there will be a question-and-answer period. [Operator instructions] It is now my pleasure to turn the floor over to your host, Mr. PJ Guido, investor relations officer. Sir, the floor is yours.

PJ Guido -- Investor Relations Officer

Good morning, and welcome to the UPS fourth Quarter 2023 earnings call. Joining me today are Carol Tome, our CEO; Brian Newman, our CFO; and a few additional members of our executive leadership team. 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 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-K and other reports we filed with or furnished to the Securities and Exchange Commission.

These reports, when filed, are available on the UPS investor relations website and from the SEC. Unless stated otherwise, our discussion refers to adjusted results. For the fourth quarter of 2023, GAAP results include a noncash after-tax mark-to-market pension charge of $274 million, after-tax transformation and other charges of $154 million, and a noncash after-tax impairment charge of $84 million related to our Coyote trade name and our truckload brokerage unit. The after-tax total for these items is $512 million or $0.60 per diluted share.

Additional details regarding year-end pension charges are included in the appendix of our fourth quarter 2023 earnings presentation that will be posted to the UPS investor relations website following this call. A reconciliation to GAAP financial results is available on the UPS investor relations website and also available in the webcast of today's call. Following our prepared remarks, we will take questions from those joining us via the teleconference. If you wish to ask a question, press 1 and then 0 on your phone to enter the queue.

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

Carol Tome -- Chief Executive Officer

Thank you, PJ, and good morning. Let me begin by thanking UPSers for their hard work and efforts. I'm proud of our team for their commitment to customer service and for once again making UPS the industry leader in on-time performance, not only during peak but throughout 2023. Looking at our volume trends for the fourth quarter.

While total average daily volume, or ADV, declined 7.5% from last year, our performance was a marked improvement from what we reported in the third quarter. During the fourth quarter, our salespeople did an outstanding job of winning back diverted volume and pulling through new volume. In fact, U.S. domestic ADV surged 30% from the third quarter to the fourth, which was our highest sequential volume ramp ever.

By the end of December, we had won back and pulled through nearly 60% of the volume diverted during our labor negotiation. Winning back and winning new volume is part of a program we call Project Brown, and this program will continue into 2024. You will recall that at the end of the third quarter, we provided a range of expected revenue and operating profit for the fourth quarter. Looking at our fourth quarter results versus last year, consolidated revenue declined 7.8% to $24.9 billion, which was slightly below the low end of our expectation.

Operating profit was $2.8 billion, a decrease of 27.1% from last year but slightly higher than the low end of our expectations. As a result, our consolidated operating margin was 11.2%, which was well within our expectation. For the year, consolidated revenue was $91 billion, a decrease of 9.3%. Consolidated operating profit totaled $9.9 billion, 28.7% lower than last year, and consolidated operating margin was 10.9%.

We generated $5.3 billion in free cash flow during 2023, and we returned $7.6 billion to shareholders in the form of dividends and share repurchases. Brian will provide more detail about our financial results in a moment. 2023 was a unique and, quite candidly, a difficult and disappointing year. We experienced declines in volume, revenue, and operating profit in all three of our business segments.

Some of this performance was due to the macro environment, and some of it was due to the disruption associated with our labor contract negotiation, as well as higher costs associated with the new contract. Through the year, however, we controlled what we could control. And in many areas, we delivered the highest productivity results in our company history. And I think most importantly, we stayed on our strategy of customer-first, people-led, and innovation-driven.

Let me share a few examples of how our strategy is establishing a foundation for future growth. Starting with customer-first. In 2023, our healthcare portfolio achieved our target of $10 billion in revenue. Here, we've made strong progress toward our goal of becoming the No.

1 complex healthcare provider in the growing $130 billion global healthcare logistics market. Our global network of healthcare-compliant distribution space topped 17,000,000 square feet in 2023, and our acquisitions of Bomi Group and MNX Global Logistics have expanded our cold chain capabilities and are enabling us to reach new markets and customers. To support growth in our international small package business, in December, we announced plans to build a new air hub at Hong Kong International Airport. This new air hub supports our plans to grow in the best parts of the market, including highly profitable Asia trade lanes, and will enable us to expand our export and import business in the region.

During the year, we continue to grow our SMB penetration. In 2023, SMBs made up 28.6% of our total U.S. volume, an increase of 60 basis points from last year. Part of this growth came from DAP, our digital access program.

DAP has transformed how small companies do business with UPS. And in 2023, we generated $2.9 billion in DAP revenue, an increase of 22% year over year. Moving to people-led, in 2023, we delivered a labor agreement that provides certainty for the next five years. And because I'm a big believer in the power of One UPS, this year, we are returning to a policy of everyone back in the office five days a week.

In terms of our culture, we are a network company, not just of logistics capabilities but a personal relationships, too, which brings me to innovation-driven. On our busiest peak days, we sort over 50 million packages in the U.S. and deliver more than 30 million packages worldwide. How do we do it? By leveraging the agility of our integrated network powered by UPS technology and the skills of our engineers and operating teams.

Our network planning tools enabled us to quickly match capacity with volume across the network and drive productivity. Technology also enabled improvements to driver and helper route planning and dispatch, resulting in improvements in density and fewer seasonal support drivers than in prior years. It might surprise you to learn that we typically see an increase in returns volume before Christmas. In the fourth quarter, we moved lightning fast to integrate Happy Returns.

We made box-free, label-free returns available in over 5,000 UPS store locations just eight days after the acquisition closed. Happy Returns digital experience help drive returns volume in the fourth quarter, with momentum extending into the first quarter of 2024. Finally, we continue to deploy transformative technology to increase efficiency within our warehousing facilities. The latest example is our state-of-the-art pick, pack, and ship center in Louisville, Kentucky that we call UPS Velocity.

We named it Velocity because it leverages robotics, automation, machine learning, and artificial intelligence to streamline fulfillment operations. This facility is capable of processing over 350,000 units per day and enables a best-in-class experience for our customers and their customer. Our customer-first, people-led, innovation-driven strategy is the foundation of our business, and our continued execution of this strategy enabled us to exit 2023 with momentum. But momentum is not enough.

We've decided to take some bold moves to rightsize our company for the future and to focus on the key enablers of growth. So, today, we are announcing two action. First, we plan to explore strategic alternatives for our truckload brokerage business known as Coyote. Coyote is part of supply chain solution and is a business that is highly cyclical with considerable earnings volatility.

We will keep you apprised as we move forward with this analysis. Second, we are going to fit our organization to our strategy and align our resources against what's wildly important. This will result in a workforce reduction of approximately 12,000 positions and around $1 billion in cost-out this year. Here, we've identified new ways of working and are calling this Fit to Serve.

Let me end by sharing our 2024 outlook. In 2024, the small package market in the U.S., excluding Amazon, is expected to grow by less than 1%. And projected market growth rates for the rest of our business segments suggest some improvement but not until the latter part of the year. In building our 2024 financial targets, we anchored the low end of our guidance on market growth and, for the high end of our guidance, included growth we should experience if we capture market share.

In 2024, we expect to generate consolidated revenue ranging from approximately $92 billion to $94.5 billion and a consolidated operating margin ranging from approximately 10% to 10.6%. Given the nuances of our new labor contract, there will be stark contrast between our first-half and our second-half performance. First-half earnings will be compressed, and second-half earnings will expand. In both the low and high end of our guidance range, we expect to exit the year with a U.S.

operating margin of 10%. Brian will provide more details in a moment. UPS remains rock-solid strong. While our dividend payout is currently higher than our targeted payout of 50% of our prior year's adjusted earnings per share, we are confident in our future.

As a result, the UPS board approved a penny increase in the quarterly dividend from $1.62 per share to $1.63 per share. This is the 15th consecutive year we have increased the UPS dividend. So, now that 2023 is behind us, we look forward to seeing you at our upcoming investor and analyst day on March 26th. At that time, we will share our three-year plans to grow and drive shareholder value.

With that, thank you for listening. And now, I'll turn the call over to Brian.

Brian Newman -- Chief Financial Officer

Thanks, Carol, and good morning. In my comments, I'll cover three areas, starting with the macro and our fourth quarter results, then I'll review our full year 2023 results, including cash and shareholder returns. And lastly, I'll provide comments on expectations for the market and our financial outlook for 2024. The macro environment in the fourth quarter showed improvement.

However, in the transportation and logistics sector, conditions remained under pressure both in the U.S. and internationally due to soft demand and overcapacity in the market. Throughout the quarter, we leverage the agility of our integrated network to match capacity with demand, and we were recognized by an independent third party for providing industry-leading service for the sixth peak in a row. Looking at our financial results, in the fourth quarter, consolidated revenue was $24.9 billion, down 7.8% from the fourth quarter of 2022.

All three of our segments demonstrated agility and, on a combined basis, drove down total expense by $1.1 billion in the fourth quarter year over year. This enabled us to deliver operating profit within the range we communicated to you last quarter. Consolidated operating margin was 11.2% for the quarter and in line with our expectations. For the fourth quarter, diluted earnings per share was $2.47, down 31.8% from the fourth quarter of 2022.

Now, let's look at our business segments. In U.S. domestic, we knew going into the fourth quarter that volume would be ramping up off an exceptionally low third quarter. Our efforts to win back diverted volume and pull through new volume resulted in a record sequential volume surge.

Throughout peak, we delivered excellent service to our customers while managing expenses. In the fourth quarter, average daily volume came in at the low end of our range and was down 7.4% year over year. B2B average daily volume in the fourth quarter was down 6.8% year over year, driven by declines in the retail, manufacturing, and high-tech sectors. In the fourth quarter, B2B represented 35.5% of our volume, which was up slightly from 35.3% in the same period last year.

Also, in the fourth quarter, continued macro pressures drove customers to seek economy products as we saw customers shift volume out of the air onto the ground. Total air average daily volume was down 15% year over year, and ground average daily volume was down 5.8% versus the fourth quarter of last year. For the quarter, U.S. domestic generated revenue of $16.9 billion, down 7.3%.

Revenue per piece was slightly positive year over year with a number of moving parts. A combination of strong base rates and customer mix increased the revenue per piece growth rate by about 390 basis points. This was offset by a few factors. First, changes in product mix and package characteristics decrease the revenue per piece growth rate by 140 basis points.

Second, reflecting the lower volume in the quarter, peak season surcharge revenue declined, which reduced the revenue per piece growth rate by about 120 basis points. And lastly, changes in fuel prices decreased the revenue per piece growth rate by 110 basis points. Turning to cost, total expense was down 3.6%. And in the face of a 12.1% increase in union wage rates, which was driven by the contractual increase that went into effect last August, we pulled several levers to more than offset the higher expense.

First, we leveraged our network planning tools and total service plan to reduce total hours in the fourth quarter by 10.2%, which was more than the decline in average daily volume. This enabled us to decrease compensation and benefits, which drove down the total expense growth rate by around 30 basis points. Second, lower purchase transportation expenditures reduced the expense growth rate by around 70 basis points, primarily from lower volume levels and our continued optimization efforts. Next, lower fuel costs contributed 160 basis points to the decrease in the total expense growth rate.

And lastly, the net of all other expense items and allocations reduced the expense growth rate by 100 basis points. Pulling it all together, these actions helped us reduce U.S. domestic expense in the fourth quarter by $578 million, which was our largest fourth quarter dollar cost reduction ever. Looking specifically at peak, as volume returned to the network and our biggest customers drove a surge in peak volume, we ran our integrated network with agility.

In fact, in 2023, we closed over 30 sorts, and they remained closed during peak. By leveraging our network planning tools, we took advantage of the flexibility of our integrated network and flowed more volume into our automated buildings. And with smart package smart facility in over 1,000 buildings, misload frequency improved 67%, contributing to the superior service we delivered to our customers. The U.S.

domestic segment delivered $1.6 billion in operating profit, down 32.6% compared to the fourth quarter of 2022. However, compared to the third quarter of 2023, operating profit in U.S. domestic increased $904 million and was our highest sequential operating profit increase ever. Operating margin in the fourth quarter was 9.3%, a 440 basis point improvement over the third quarter of 2023.

Moving to our international segment, soft demand continue to pressure volumes out of Asia. And in Europe, several key economies remained in recession, which pressured demand and drove a shift away from express services. In response, we focused on revenue quality and adjusted our global network to match changes in geographic demand. Looking at volume, in the fourth quarter, international total average daily volume was down 8.3% year over year.

The decline was primarily due to lower domestic average daily volume, which was down 10.8%, driven by declines in Europe and Canada, areas of the world that continue to face persistent inflationary pressures. On the export side, total average daily volume declined 5.9% on a year-over-year basis, driven by declines in Europe due to weak macro conditions. Looking at Asia, export average daily volume was down 8.9%, driven by soft demand in the retail and high-tech sectors. However, export volume on the China to U.S.

lane, which is our most profitable lane, increased 2.7%, driven by SMBs, nearly offsetting the decline in Asia. Over in the Americas region, export average daily volume grew 11.9%, led by customers in Canada and Mexico, leveraging our cross-border ground service. In the fourth quarter, international revenue was $4.6 billion, which was down 6.9% from last year, primarily due to the decline in volume. Revenue per piece increased 3.1%.

Strong base pricing and a change in customer mix drove a 420 basis-point increase in the revenue per piece growth rate. A reduction in fuel surcharge revenue negatively impacted the revenue per piece growth rate by 60 basis points. And lower demand-related surcharge revenue, which was partially offset by the impact of a weaker U.S. dollar, decreased the revenue per piece growth rate by 50 basis points.

Moving to expense. In the fourth quarter, total international expense was down $152 million, primarily driven by lower fuel expense. Additionally, in response to the lower demand environment, we managed our network to match capacity with demand, which included reducing international block hours by 9.4%. Operating profit in the international segment was $899 million, down $192 million year over year.

Operating margin in the fourth quarter was 19.5%. Now, looking at supply chain solutions. In the fourth quarter, revenue was $3.4 billion, down $435 million year over year. Looking at the key drivers.

In international air freight, overall volumes were down despite a mid-quarter spike in e-commerce. Market rates continued to be pressured, resulting in lower revenue and operating profit. On the ocean side, volume increased, driven by the retail sector. However, excess market capacity pressured revenue and operating profit.

Within forwarding, our truckload brokerage unit, known as Coyote, continued to face pressure from excess capacity in the market, which drove revenue and operating profit down. In the fourth quarter, supply chain solutions generated operating profit of $319 million and an operating margin of 9.4%. Walking through the rest of the income statement, we had $207 million of interest expense. Our other pension income was $66 million, and our effective tax rate for the fourth quarter was 22.5%.

Now, let me comment on our full year 2023 results. For the full year 2023, revenue declined 9.3% to $91 billion. And we generated operating profit of $9.9 billion, a decrease of 28.7% compared to full year 2022. Consolidated operating margin was 10.9%.

We generated $10.2 billion in cash from operations and continued to follow our capital allocation priorities. We invested $5.2 billion in capex. Additionally, we acquired MNX Global logistics and Happy Returns. We distributed $5.4 billion in dividends, which represented a 6.6% increase on a per-share basis over 2022.

We repaid $2.4 billion in debt that matured during the year. And at the end of the year, our debt-to-EBITDA ratio was 2.2 turns. Lastly, we completed $2.25 billion in share buybacks in 2023. And in the segments for the full year, in U.S.

domestic, operating profit was $5.4 billion, and operating margin was 9%. The international segment generated $3.3 billion in operating profit, and operating margin was 18.4%. And supply chain solutions delivered operating profit of $1.2 billion, and operating margin was 9%. With 2023 behind us, let us move to our outlook for 2024.

S&P Global is forecasting an improvement in global macro conditions as the year progresses. Outside the U.S., real exports in Europe are expected to improve each quarter throughout the year. Looking at Asia, we saw positive momentum on the China to U.S. lane exiting the year and remain cautious on the outlook for 2024.

In the U.S., the projected small package market growth rate is just under 1%, excluding Amazon. A slight improvement is expected in U.S. manufacturing, and the consumer is expected to remain resilient despite lingering inflationary pressures. We've built a plan that reflects the current environment and potential risks that we see.

This includes fitting our organization to our strategy and aligning execution to our wildly important initiatives under what we call Fit to Serve. As Carol mentioned, we are exploring strategic alternatives for Coyote, our truckload brokerage business, which will enable us to address some of the cyclical impacts in our forwarding business. And we are reducing our workforce by approximately 12,000 positions. This will cut around $1 billion in costs in 2024.

Moving to our 2024 financial outlook, we are providing a range based on volume growth. The low end of the range has UPS growing at market rate, and the high end of the range has us gaining share. For the full year 2024, on a consolidated basis, revenues are expected to range from approximately $92 billion to $94.5 billion. And operating margin is expected to range from approximately 10% to 10.6%.

In the range provided, we expect to move total average daily volume from negative growth in the first half of the year to positive growth in the back half. This is primarily driven by lapping the volume diversion we experienced in the U.S. last year during our labor negotiations. Additionally, costs will weigh on us in the first half of the year, primarily due to the high labor cost inflation associated with the new contract.

Looking at consolidated revenue. In the first half of the year, we expect the growth rate to decline with a range of approximately 1% to 2%, with the first quarter driving the decline. And in the back half of the year, revenue growth is anticipated to be up within a range of mid to high single digits. Looking at consolidated operating profit.

We expect material improvement as the year progresses with the second half of the year outperforming the first half. Lastly, we expect to generate our lowest consolidated operating margin of the year in the first quarter. Now, let me give you a little color on the segments. Looking at U.S.

domestic, average daily volume growth is expected to be within a range of approximately flat to up 2% for the full year. At both the low and high ends of the range, we expect the revenue per piece growth rate to outpace the cost per piece growth rate beginning in the third quarter, and we expect to exit the year at a 10% operating margin. Moving to the international segment, we expect 2024 average daily volume to be within a range of approximately flat to up around 3%. At both ends of the guidance range, operating margin is anticipated to be in the high teens.

And in supply chain solutions, for the full year in 2024, we expect revenue to be within a range of approximately $13 billion to $13.5 billion. At both ends of the guidance range, operating margin for SCS is expected to be high single digits. And for modeling purposes, in total below the line, we expect approximately $400 million in expense in 2024. This is net of $262 million in pension income.

We included a slide in the appendix of today's webcast deck to provide you more detail on pension. The webcast deck will be posted to the UPS investor relations website following this call. Now, let's turn to full year 2024 capital allocation. Our capital allocation priorities have not changed.

We are staying on strategy and will make the best long-term decisions to capture growth, improve efficiency, and deliver value to our shareholders. We expect 2024 capital expenditures to be within our target of around 5% of revenue or $4.5 billion. Now, let's turn to our expectations for cash and the balance sheet. We expect free cash flow to be within a range of approximately $4.5 billion to $5.3 billion, including our annual pension contributions of $1.4 billion, which are equal to our expected service costs.

As Carol mentioned, the board has approved a dividend per share of $1.63 for the first quarter. We are planning to pay out around $5.4 billion in dividends in 2024, subject to board approval. Finally, our effective tax rate in 2024 is expected to be approximately 23.5%. In closing, we look at 2024 as a year to pivot away from negative volume to positive volume growth and from high labor cost inflation to a much lower growth rate.

We are laser focused on executing our strategy, controlling what we can control, and improving our financial performance. We look forward to sharing our multiyear targets and details on our strategy at our investor day event on March 26th. Thank you. And, operator, please open the lines.

Questions & Answers:

Operator

Thank you. We will now conduct a question-and-answer session. Our first question will come from the line of Chris Wetherbee of Citigroup. Please go ahead.

Chris Wetherbee -- Citi -- Analyst

Yeah. Hey, thanks. Good morning, guys. I guess I wanted to start on maybe some of the cost-out.

You mentioned the 12,000 positions that you're reducing in the billion dollars of cost in 2024. I was hoping maybe you could help us sort of understand the timing of that. So, you know, based on a 10% kind of run rate exiting '24, it would imply that the first quarter is fairly low. So, I just want to make sure I understand some of those moving pieces and when that billion is going to start to accrue.

Brian Newman -- Chief Financial Officer

Sure, happy to give you some color. So, we talked about 12,000 heads out. Seventy-five percent of the reductions will come in the first half, which drive the 1 billion in the 2024 calendar year. But you're absolutely right.

In terms of the timing and announcement, it'll be back-end weighted. And really, the thing I'd like to point out, it's a change in the way we work. So, as volume returns to the system, we don't expect these jobs to come back. It's changing the effective way that we operate.

Carol Tome -- Chief Executive Officer

And I might just add a little more color if I could, Chris. Today, we have about 495,000 UPSers around the world. A few years ago, in the -- when the COVID demand was peaking, we had 540,000 UPSers. So, Kate and Nando have done a masterful job of managing our operational headcount to meet the volume in our company.

And they've done that by managing our turnover and attrition and closing sorts and reducing block hours, etc. We have about 85,000 upstairs who are management, and this can be full-time and part-time management. The targeted headcount falls really within that group, as well as some contractors that will be leaving us. And to Brian's point, this is really about a new way of working.

So, it's $1 billion of cost-out now, but there's even more cost-out to come as we have a full year benefit in 2025.

Chris Wetherbee -- Citi -- Analyst

Thank you.

Operator

Our next question will come from the line of David Vernon of Bernstein. Please go ahead.

Dave Vernon -- AllianceBernstein -- Analyst

Hey, good morning, guys, and thanks for taking the question. So, I just wanted to ask on the productivity side. Obviously, hours is down more than volume. We've had a couple of quarters of that, obviously, not the third quarter this year.

Is there a point where volume declines are become more difficult to offset? I'm just trying to understand the downside risk, right? If volumes continue to remain flat or weaker than you expect, how should we be thinking about the downside risk on the margin side?

Carol Tome -- Chief Executive Officer

So, we believe that productivity is a virtuous cycle here at UPS, and I'll give you one example. Then, I'm going to throw it over to Nando to address this. But if I look at just one metric, cube utilization. We reached the highest cube utilization in our company history at 60%.

That's the equivalent of reducing 1,500 loads per day. So, that's not an hours, but it's just a cost-out. So, we've got productivity across the operations. And, Nando, why don't you talk about what you're going to do in 2024?

Nando Cesarone -- Executive Vice President and President, US

Yeah, so, David, thanks for the question. For us, it is a virtuous cycle, so we're working ahead of any type of volume variability. So, whether it goes up or down, we've got some of our best engineers, operations folks, finance folks identifying additional cost-outs as we move forward, as we're executing the ones that we have in front of us. So, we feel good that there's a good pipeline of opportunity no matter what the volume does.

And as Carol had mentioned, we lever our hourly headcount and match that to the volume and the activity. And so far, so good, but still lots in front of us. And they're pretty meaty, so we feel really good about those initiatives.

Carol Tome -- Chief Executive Officer

And at our investor day in March, we're going to talk to you about network of the future. We've got an integrated network. We don't have to integrate, but we can transform our network with some very exciting ideas. So, we're going to share that with you in March.

Dave Vernon -- AllianceBernstein -- Analyst

And the rate at which resource needs is going to need to be added back on the other side was -- you know, maybe we get some volume expansion. Can you talk to the expectations for operating leverage on the upside?

Brian Newman -- Chief Financial Officer

Yeah. I think as we look to the back end of the year, certainly, the volume projections that are in there in terms of the volume growth for the back end of the year in that 2% to 4% range domestically, We start to see CPP growing slower than RPP. And so, that balance is what's going to create the operating margin. We -- the sorts we closed, over 30 sorts, did not reopen them during peak.

So, we're changing -- Nando's doing an effective job of basically managing more volume with less. So, we'll continue to drive that.

Dave Vernon -- AllianceBernstein -- Analyst

All right. Thank you, guys.

Brian Newman -- Chief Financial Officer

Thanks.

Operator

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

Amit Mehrotra -- Deutsche Bank -- Analyst

Thanks, everyone. I just wanted to -- Brian, on the guidance. I guess the guidance implies 9.6 billion in operating profits. You've been pretty helpful historically about giving us kind of the first-half, second-half cadence of that.

And then, just related to that, I want to make sure. So, you said the billion dollars is included in the guidance. Can you just expand on that a little bit? Because if I take out the billion, the implied change in profits relative to the improvement in revenue is quite a bit worse. So, I'm just trying to understand, you know, what's actually included in the guidance and the billion dollars and how that kind of translates to what you're assuming underneath that in terms of change of profit relative to change in revenue.

Brian Newman -- Chief Financial Officer

Sure. Happy to, Amit. So, from a shape-of-the-year perspective, the full year, we called revenue at 1% to 4%. But based on lapping of the volumes and the contract overlap, we would expect revenue to be flat to down 2% in the first half, up 4% to 8% in the back half.

And from a profit perspective, I had mentioned that it's a tale of two cities in terms of halves of the year. The second half of the year, we'd expect profit to grow about 20% to 30%. So, Q1 will be the biggest challenge because we're lapping from a volume comp perspective and a full contract. But on a full year basis, we're looking at op margin 10 to 10.6.

I think you can expect the second half of the year to be in 11 to 12 in that range and you can get back into the first half. In terms of your question of backing out the billion in costs, that billion will be a cost benefit in 2024. But I think we've said in the past, Amit, it would take 12 months to digest the new labor cost. We are confident we can get back to consistent expansion of U.S.

margins as we lap the first year of the contract. That will be a combination of pricing and productivity. So, net-net, it's really lapping that contract, and then you start to get the benefits. As Carol said, some of those benefits would accrue over to 2025 as well.

Amit Mehrotra -- Deutsche Bank -- Analyst

And are we done there on the billion, or is there like -- there's 55 billion in total costs. I mean, are we just getting started? Or like what's the actual opportunity there beyond the billion?

Brian Newman -- Chief Financial Officer

So Carol talked about the differences between the -- Nando and Kate, the operating costs and what we're talking about, management headcount. If you bifurcate the two, I think you're going to hear more at the investor day, through things like network of the future, how we go after additional headcount in that area. But this would be about a 14% reduction in that 85,000 heads.

Carol Tome -- Chief Executive Officer

Yeah. We're never done. We continue to drive productivity. It's a virtuous cycle here.

And technology has changed so much in the past year when you think about the advent of generative AI and the applications inside of our business. We're just getting started, and I'm really excited about what the future will mean in terms of driving productivity and as well as improving the customer experience.

Amit Mehrotra -- Deutsche Bank -- Analyst

Thank you very much.

Brian Newman -- Chief Financial Officer

Thanks, Amit.

Operator

Our next question will come from the line of Conor Cunningham with Melius Research. Please go ahead.

Conor Cunningham -- Melius Research -- Analyst

Hi, everyone. Just to stick with the productivity side. You've been obviously pretty dynamic with your network, and you mentioned, I think, 30 sort closures and whatnot. Can you just talk about the consolidation opportunity in '24 and how that may play out to drive further efficiencies in the business? Thank you.

Carol Tome -- Chief Executive Officer

Yeah, we'd be happy to do that, but we're going to kick that question to our March conference because we've got a great presentation to share with you regarding network of the future, and it would take up way too much time today to go through that. We want to spend a good amount of time talking to you about that in March, so thank you for understanding.

Brian Newman -- Chief Financial Officer

Thanks, Conor.

Operator

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

Allison Poliniak -- Wells Fargo Securities -- Analyst

Hi. Good morning. I just want to turn to the growth aspect of it more, I guess, more specifically, the market share capture. Could you maybe walk through the different levers, you know, in terms of -- I know you mentioned Project Brown, your ability to recapture diversion -- diverted volume, but also, you know, talking to the SMB penetration, your opportunity on the healthcare side.

Just any color in terms of where those levers can be pulled for that market share growth in '24. Thanks.

Carol Tome -- Chief Executive Officer

I'll start with a few comments about Project Brown. Project Brown really is a new way of going after business, and it has many elements to it. And I'll make some of those real to you. First of all, we looked at ourselves and said, "What's getting in the way of speed?" Because it was taking us too long to respond to our customer.

And we found that we hadn't really declared service level agreements among the various groups that participated in this exercise of providing offers to our customers. So, we've shortened up the time to response. And that's important, and that's going to be with us now forever. I can make that real for you.

Outside of the United States, it used to take 22 days. We dropped it to six days. We're now at two days. That's the best in class, and we've made similar improvements in the United States.

Project Brown was also looking at Deal Manager. Deal Manager is the new tool that we introduced that uses artificial intelligence and machine learning to score a deal and avoid the need for our salespeople to go up to our pricing people for appeals. They can actually see the score of their deal. We've had great acceptance and win rates, 79% win rates with this tool.

But we found through Project Brown that we weren't offering all of our products in the tool. And one of the products we weren't offering was SurePost, which is a great product. So, we introduced SurePost into the Deal Manager, and we're getting some good return on that. That's particularly attractive for our small- and medium-sized customers.

Another thing that we did is that we improved and increased weekend pickups in several key markets during the year. So -- and I could go on and on and on, but this is a way of operationalizing excellence to drive the business and capture share. So, where are we going to capture share? We're going to continue to lean into the small- and medium-sized segment opportunities. We're seeing some real success in that area.

We are going to continue to lean into healthcare. You know, when I started here, the healthcare revenues were around 6 billion, now 10 billion. And we're going to continue to grow. We'll lay out our three-year growth plans for you at our March investor day.

I think you'll be very pleased with that. We're going to continue to sell off the service that we provide and the capabilities that we have that actually no one else has, and that's our integrated network. So, at our investor day in March, we'll lay out market share capture. But let me just make the market real for you because this might be helpful, too.

As we think about the addressable market, the addressable market in the United States, it's a little over 50 million, 52 million packages a day. So, there's plenty of addressable market for us to go get and plenty of market for us to get outside of the United States because we are under penetrated in so many areas. One reason I called out our new air hub in the Hong Kong International Airport is that the Greater China Bay area is an unbelievable economic power base, the 13th largest economy in the world. Thirty-seven percent of all China exports go through that airport.

And today, we have small, way over-capacity hubs and buildings that are inefficient with lease rates that are sky-high. So, we are building a 20,000 square meter facility. It will make us the second-largest air hub in that important part of the market. So, expect to see a lot of growth coming off of that over time.

Allison Poliniak -- Wells Fargo Securities -- Analyst

Great. Thank you.

Operator

Our next question will come from the line of Tom Wadewitz of UBS. Please go ahead.

Tom Wadewitz -- UBS -- Analyst

Yeah. Good morning. So, I wanted to see if you could talk a little bit about the competitive dynamic in the market. I know the backdrop is that you had some share loss associated with the Teamsters contract, but it also seems like there might be risks that other competitors are gaining traction in the market.

So, if you look at Postal Service had, I think, up 7% volumes, and they had a new product, the Ground Advantage. And so, I guess the question is, is there a risk that the, you know, competitive set has got more challenging? And how do we think about what you need to do to have a better volume outcome in 2024? You know, is there more pressure on price, or is it a different formula, you know, to get the better volume outcome in '24? Thank you.

Carol Tome -- Chief Executive Officer

Well, I would say that the pricing environment is very rational. And you can see that, as Brian ticked out the RPP performance in the fourth quarter. We had very strong base rate performance. Now, the RPP was muted because of lower fuel costs and product characteristics and the product mix change and lower demand surcharges, but the base was very strong.

And we expect the base to continue into 2024. Our GRI for 2024 is 5.9%. Will we keep all of it? No. But will we keep a lot of it? Yes, just like we did in 2023.

We kept about 60% of the GRI in 2023. So, the pricing environment is rational. In terms of competitive products, it's incumbent upon us to stay at leading edge and meeting our customers where they want us to be. That's one reason we offered a Hyperlocal product beginning last quarter, which is really a short-zone product.

We hadn't had that before. And as we look at the offerings that we will go to market with this year, we've got some things underway. Not ready for prime time, but I suspect, looking over at our new chief commercial officer, Matt Guffey, that we might be able to talk about that at our March investor conference. And he's nodding his head.

So, stay tuned for that.

Tom Wadewitz -- UBS -- Analyst

OK. Thank you.

Operator

Our next question will come from the line of Jeff Kauffman of Vertical Research Partners. Please go ahead.

Jeff Kauffman -- Vertical Research Partners -- Analyst

Thank you very much. I'm going to defer the big picture stuff to March. But I'm just kind of curious, you know, how did your global view change between when we were discussing the labor deal back in August, September to the year-end. You mentioned the softness in Europe, you mentioned the shift from air to ground.

But, you know, kind of what were the big changes in your outlook over that four- or five-month period?

Carol Tome -- Chief Executive Officer

Well, what really softened up is Europe. If you look at our volume decline, both domestic and export, it was heavily weighted in Europe. In fact, the decline in our export was 94%, driven by the softness in Europe. So, you see what's happening with industrial manufacturing there is just way off.

So, that is a big change. There are also dynamics happening in air and ocean freight. As you've been watching, we've all been watching, the drama in the Red Sea, the fact that the water levels in the Panama Canal are low, and that's certainly is causing a lot of chaos, actually, in ocean and air freight. Interestingly, on the air side, both rates and volumes were down.

On the ocean side, volumes are up. But as Brian called out, the rates were considerably down. As we sit here today, it's a very dynamic market and ever-changing. A little hard to predict [Inaudible] because what we're seeing today is for shippers who have high-value packages, they're actually -- they're worried about the ocean conditions, so they're moving to the air.

So, air rates are tightening a bit. And on the ocean side, because shippers are starting to have to reroute away from the Red Sea or the Panama Canal, the routing is taking longer, so there's some change to the dynamics of the pricing there, too. We just have to stay super nimble here, and Kate and her team are doing a great job at that. Kate, what would you like to add here?

Kate Gutmann -- Executive Vice President and President of International, Healthcare, and Supply Chain Solutions

Yeah, I would say that the market remains volatile even in Europe with the drop-off in the inflationary, you know, softening. We were able to pull back on the cost to deliver a great margin, and that's our commitment. And then, to ensure that in the forwarding side of the house, as we've done, stay just razor sharp to ensure that we are right on track with any trend that we see. And I'm really proud of the team because we have got the initiative to gain those customers with high-value goods and that international airfreight that's coming as a result.

Jeff Kauffman -- Vertical Research Partners -- Analyst

And just if I could follow up on that answer, so given the global events with Suez Canal, Panama Canal, looking at the lemonade out of lemons side of this, is this a bigger opportunity for you in Europe, or is this a bigger opportunity for air out of Asia?

Carol Tome -- Chief Executive Officer

It actually is first showing up Asia to Europe Lane, and -- but I will say this is going to be repositioning of vessels around the globe. It's going to be a global event, so we see it as an opportunity throughout. And our sales resources are global, our portfolio is global, so UPS is very well positioned to take advantage of it.

Jeff Kauffman -- Vertical Research Partners -- Analyst

OK. Thank you.

Brian Newman -- Chief Financial Officer

Thanks, Jeff.

Operator

Our next question will come from the line of Brandon Oglenski of Barclays. Please go ahead.

Brandon Oglenski -- Barclays -- Analyst

Hey, good morning, and thanks for taking my question. Can you guys speak to your enterprise customers and the volume trends that you saw in the fourth quarter and expectations going into 2024, and maybe compare and contrast that with B2B, as well as your small medium business mix?

Brian Newman -- Chief Financial Officer

So, happy to, Brandon. We were actually pleased with the volume momentum. We were at a low watermark in August of last year, down 15%. And we saw sequential monthly improvement as we looked at our volume domestically from an ADV perspective, down to mid single-digit declines in the month of December.

So, that trend continued to play out well. We're going to see some tough comps, though, in the first quarter, so I wouldn't expect positive volume growth in Q1. We start to see positive volume growth in Q2 and then certainly in the back half of the year as the comps change. SMB, Carol mentioned, very focused on penetration on the SMB side and specifically some of the medium SMB customers.

We've stated we would like to see that mix trend up to 30%-plus. We finished the year at 28, so we're well on our way in that direction.

Carol Tome -- Chief Executive Officer

Maybe another comment because this is just an interesting observation on the market, if I look at our top five decliners in the quarter, that would include our largest customer and there's an intentional decline there. So, if I look at the remaining decliners, it's really interesting to see what's happening. Of those, only one has diverted some volume. They're a dual sourcer, and they have diverted some volume, and I suspect they'll stay dual sourcing.

The rest, either their business is just way off, or they have worked really hard to create a better experience inside the store to encourage buy online, pick up in store. So, there is a bit of dynamic happening within our large enterprise customers. I think for all of us, we're delighted to have anniversaried the demand that we saw through COVID. Now that that's behind us, now that the volume for the small package market has reverted back to the mean, this is an opportunity now for everyone to grow.

Brandon Oglenski -- Barclays -- Analyst

Thank you both.

Brian Newman -- Chief Financial Officer

Thanks, Brandon.

Operator

Our next question will come from the line of Helane Becker of TD Cowen. Please go ahead.

Helane Becker -- TD Cowen -- Analyst

Oh, gosh. Thanks very much, everybody, and thanks, team, for the time. So, on Coyote, what -- when you did the acquisition, what did you think the benefits would be that made it important to do the acquisition? And then, what really -- would actually happened that is causing you to rethink how Coyote fits in the network? And my follow-up question is unrelated. You recently bought two 747-8 freighters, I saw.

And I'm just wondering if you bought those off lease where they came from since Boeing doesn't make the 747 anymore. Thank you.

Carol Tome -- Chief Executive Officer

I'm happy to address the Coyote question to the best of my ability. I was on the board in 2015 when we bought the company, but the strategic rationale was really about expanding the portfolio. And it was a very thoughtful strategic rationale to expand the portfolio. But I don't think we fully understood at the time just how cyclical this business is.

And I'll make it real for you. When we acquired Coyote in 2015, the revenues in the previous year for Coyote were $2.1 billion. During COVID, Coyote peaked up to over $4 billion in revenue. Well, it's come way down since then.

In fact, if you look at our supply chain solutions business, it was down $3 billion year on year, which is a third of the overall company decline. Within that $3 billion, Coyote made up 38% of the decline for the year and 48% of the decline for the fourth quarter. So, you can see the volatility in the revenue line. And then, we've got a business that has a very low margin.

So, if you've got kind of volatility on the revenue line, you're going to have even more volatility on the earnings line. So, we're like, gosh, is there another way to skin this cat? Can we think about an alternative that continues to allow us to provide the service but without all the overhead? Or, perhaps, this business is worth more to someone else than it is to us. We don't know. We don't know the outcome of our alternative work.

But as soon as we do, we'll share that with you. And on the freighter question --

Brian Newman -- Chief Financial Officer

So, the two planes were picked up through Qatar. And really, it's part of a broader airline strategy to retire some of the MD-11s in terms of efficiency and sustainability.

Helane Becker -- TD Cowen -- Analyst

Got it. Thank you.

Carol Tome -- Chief Executive Officer

Thank you.

Operator

Our next question will come from the line of Scott Group of Wolfe Research. Please go ahead.

Scott Group -- Wolfe Research -- Analyst

Hey, thanks. Good morning. I just want to follow up a couple of things on the guidance, Brian. I know you said 10% U.S.

margin exiting the year. Any color on the shape of the year? You also talked a couple times about just Q1 being hard. Any more specific color on Q1? And then, just lastly, I know every year on this call, you typically give an update on the biggest customer exposure. If you can give us an update there.

Thank you.

Brian Newman -- Chief Financial Officer

Happy to, Scott. So, from a domestic margin perspective, we're looking at the back half of the year being in the range of -- from an off-profit perspective, we're looking at 20% to 30% growth, Scott, from the margin. And from the margin, we'll be in the 10 to 10-plus range for the fourth quarter. The challenge we have is, the first quarter, we actually expect to be down in the neighborhood.

We had a low watermark in Q3 of last year, so we're not going to be down to that point, but I don't think we'll be much better from a margin perspective in the U.S. in the first quarter of this year. From a Amazon perspective, we finished the year at 11.8%. And that was not due to an increase of the business.

We're still executing our plan with them in terms of a glide-down. It was more to the overall enterprise revenue coming down as a part of the enterprise.

Carol Tome -- Chief Executive Officer

It just came down faster than Amazon.

Brian Newman -- Chief Financial Officer

Exactly.

Carol Tome -- Chief Executive Officer

Yeah.

PJ Guido -- Investor Relations Officer

Stephen, we have time for one more question.

Operator

Our final question will come from the line of Jordan Alliger of Goldman Sachs. Please go ahead, sir.

Jordan Alliger -- Goldman Sachs -- Analyst

Yeah. Hi, morning. So, I was sort of thinking about the small package growth that you guys targeted at less than 1% this year. You know, it's pretty conservative after a couple of years of, you know, probably negative industry growth as well.

So, I'm just sort of curious, you know, what's informing that. Is that your economic outlook, your forecast? And then, maybe this is -- in your analyst day, you'll address it, but sort of on a normalized basis, what kind of small package domestic growth, underlying industry growth, you know, do you think about over a longer-term basis? Thanks.

Carol Tome -- Chief Executive Officer

Yeah, the longer-term view is very good. It's 3%. So, that's really good growth actually, and we're looking forward to getting into that growth mode. We use a number of external factors to inform our perspective on the market growth.

We triangulate from a number of different sources and come up with our best view. This is our best view.

Jordan Alliger -- Goldman Sachs -- Analyst

OK, thanks.

Brian Newman -- Chief Financial Officer

Thanks, Jordan.

Operator

I will now turn the floor back over to our host, Mr. PJ Guido. Please go ahead, sir.

PJ Guido -- Investor Relations Officer

Thank you, Stephen. This concludes our call. Thank you for joining, and have a good day.

Duration: 0 minutes

Call participants:

PJ Guido -- Investor Relations Officer

Carol Tome -- Chief Executive Officer

Brian Newman -- Chief Financial Officer

Chris Wetherbee -- Citi -- Analyst

Dave Vernon -- AllianceBernstein -- Analyst

Nando Cesarone -- Executive Vice President and President, US

Amit Mehrotra -- Deutsche Bank -- Analyst

Conor Cunningham -- Melius Research -- Analyst

Allison Poliniak -- Wells Fargo Securities -- Analyst

Tom Wadewitz -- UBS -- Analyst

Jeff Kauffman -- Vertical Research Partners -- Analyst

Kate Gutmann -- Executive Vice President and President of International, Healthcare, and Supply Chain Solutions

Brandon Oglenski -- Barclays -- Analyst

Helane Becker -- TD Cowen -- Analyst

Scott Group -- Wolfe Research -- Analyst

Jordan Alliger -- Goldman Sachs -- Analyst

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