Q3 2020 United Parcel Service Inc Earnings Call
[music].
Good morning, My name is Steven I will be your conference facilitator today I would like to welcome everyone to the U.P.S. Investor Relations third quarter 2020 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. It is now my pleasure to turn the floor over to your host.
Mr., Scott Childress Investor Relations officer, Sir the floor is yours.
Good morning, and welcome to the <unk> third quarter 2020 earnings call. Joining me today are careful to may our CEO and Brian Newman, our CFO 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 expectation.
For the future performance or operating results of our company. These statements are subject to risk and uncertainty which are described in detail in our 2019 form 10-K subsequently filed form 10, Qs and other reports, we file with the Securities and Exchange Commission.
These reports when filed are available on the EPS Investor Relations website and from the FCC during the quarter GAAP results included a pre tax charge of $44 million equivalent to four cents on an earnings per share basis. The charge resulted from transformation related activities.
Primarily in the international and U.S domestic segments in the prior year period GAAP results included a pre tax charge for transformation cost of $63 million equivalent to six cents on diluted earnings per share unless stated otherwise our comments will refer to adjusted results, which.
Excludes transformation cost the webcast of today's call along with the reconciliation of non-GAAP financial measures are available on EPS Investor Relations website.
Following our prepared remarks, we will take questions from those joining via the teleconference. If you wish to ask a question press. One then zero 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. Thank you Scott we are moving quickly and Operationalizing our strategy under the better not bigger framework, we're leaning in on the wildly important areas of our business and tackling challenges head on.
This morning, I'm pleased to discuss our achievements and the opportunities we see before us.
One thing is certain everything we accomplished is the result of our winning people and culture.
We have everyday heroes that EPS.
We're keeping the overall supply chains, moving and delivering what matters.
From a central household item two critical healthcare needs.
You'd be answers are making a positive difference in the world.
And for that I'm, so very proud of this team and want to thank them for their hard work and effort.
During the quarter, we continue to flex our network to capture market opportunities and better position us for the long term.
Our performance was better than we expected even amid the challenges from the pandemic consolidated revenue in the quarter rose, 15.9% from last year to $21.2 billion.
Operating profit grew 9.9% from last year to $2.4 billion.
While our commercial business remained under pressure due to the economic downturn during.
During the quarter, we began to optimize our network and captured share an SMB or small and medium sized businesses. As a result, we saw revenue pump piece improved sequentially in the less from what we reported in the first two quarters of this year.
Further revenue growth in our international and supply chain and freight segment was the highest quarterly growth we've seen in nearly three years.
Brian will share more details about the quarter in a moment.
Over the past few months, we have intensified the focus on executing our strategy customer Onest people led innovation driven from a customer first perspective, there has been a step change in the composition of retail sell.
As E Commerce sales are now projected to make up more than 20% of all U.S. retail sell this year.
We don't think the penetration of ecommerce retail sales will decline even after the pandemic.
But it isn't just retail our customers across all business segments are reinventing the way they do business.
We've heard from customers that speed and ease our most important so.
So we are focused on delivering the capabilities that matter most to our customers.
Let's start with speed in the U.S., we completed our weekend expansion ahead of schedule, enabling broader market coverage as we are the only carrier that provides both commercial and residential pickup and delivery services on Saturdays as a general service offering.
And next week, we will complete our fastest ground ever initiative eight months ahead of plan, we have improved ground at transit times between millions of Zip code.
And we will be at parity or better than the competition in 20 of the 25, most populated U.S. markets and customers have noticed we can ground volume is up 161% versus last year.
And SMB volume on our fastest ground ever lanes has grown 25.7% since we made the improvements.
Moving to ease its all about removing friction from the customer experience and serving customers the way they want to be served for.
For Smbs, we are highly focused on our digital access program, which we refer to as DAP.
Through platform partnerships, we are making it easier for Smbs to open a new PS account and access the world's largest small package network revenue growth from our DAP program exceeded our expectations.
As we added 150000, new accounts and several new partners in the quarter.
Our fastest ground ever weekend services and DAP complement each other enabling our customers to deliver what matters to their customers speed and a better experience.
Our efforts in the United States are having a positive impact.
In the third quarter total us SMB volume grew 18.7%.
Outpacing our larger customers and was the highest growth rate, we've experienced with smbs in 16 years.
We are seeing strong results in the international segment too with international SMB volume up 9.9% during the quarter. Another area that we are leaning into his healthcare logistics.
[music] PS healthcare spans all reporting segments has world class technology deep expertise and the most sophisticated suite of services in the industry. We are significantly expanding our freezer farm capacity by installing validated freezers that range from negative 20 to negative 80.
Degrees Celsius.
These farms are strategically located in Louisville, Kentucky, and Venlo the Netherlands.
And our good distribution practice certified and for added control during transit you PS premiere. Our next generation package sensor technology offers priority handling real time monitoring and continuous visibility.
We understand that health care logistics isn't just about the package it's about the patient.
Our market health care team is supporting clinical trials across all stages for COVID-19 vaccines.
Early involvement gives us valuable data and insights to design commercial distribution plans and manage the logistics for these complex products.
We have a great opportunity and frankly, a great responsibility to serve the world when a COVID-19 vaccine becomes available.
When that time comes our global network Cold chain solutions, and our people will be ready moving.
Moving to the second element of our strategy people led we know successful outcomes are built from a strong culture of teamwork respect trust and empowerment.
We are enabling our people to move the business forward by giving them more decision making authority.
And we're identifying which activities add value and stopping those that don't we're also investing in training on topics, including unconscious bias and diversity and inclusion to ensure our actions match our values.
In the past we have talked to you about transformation one dato we.
We are on track to deliver the more than $1 billion of benefit we identified when we kicked it off in 2018 in September of this year, we began transformation to dato by announcing a voluntary separation allowance program.
To the U.P. answers, who will take this offer I. Thank you for your service to our company.
Transformation Twod auto is about creating fewer but more impactful jobs.
We will share more details with you as we finalize our plans.
The final piece of our strategy innovation driven comes down to being better not bigger.
Now that doesn't mean, you PS is not going to grow because we are in.
It means that we will lean into growth from the right opportunities like Smbs International global freight forwarding and other high yielding sectors.
And we will grow from our revenue quality initiatives.
We are on a journey to optimize the volume that flows through our network.
Additionally, in our approach calls for greater efficiency and requires that we lower our cost to serve.
Our transformation efforts are vitally important to our ongoing success.
While we are finishing transformation one dot Io, we've already begun transformation to dato.
And we are road mapping transformation Threed auto in preparation to launch next year.
Transformation Threed auto we'll focus on decreasing core operating expense.
Further to improve our return on invested capital, we are applying greater scrutiny to capital spending and ensuring clear linkage to cash returns.
You should expect our 2021 capital spending to be significantly lower from what we are spending in 2020.
Since being named CEO Ive immersed myself in our business and spent lots of zoom hours with our people at.
I've also helped our team build out a value, creating strategic and financial framework.
As a reminder, from our last call outside of our five core principles everything else is under review.
I spent a lot of time looking at the risks and opportunities facing our business, including an evaluation of our business portfolio.
We are an opportunity rich company.
We are making progress, but given the size of our business. He will take time to optimize our network to stop processes that have added cost and no customer value and to fully reach our potential.
Now moving on to the upcoming holiday season peak.
Peak is extremely important to our customers so its extremely important to us.
We have been operating in a peak like environment globally for many months, which is helping us prepare for the elevated demand ahead.
2020 peak, we'll have two more operating days than last year and two full weeks between cyber week and Christmas week.
We are projecting a pretty picky peak, but there are some industry capacity constraints as Brian will detail.
As a result, we expect to see solid volume growth year over year, but sequentially the quarterly growth rate in the U.S. will moderate in the fourth quarter, our peak preparation starts with ensuring the safety of our people and our customers.
From that we're employing two key strategies.
First we will continue to collaborate with our customers to help them time their promotions and match their needs to our available capacity second we will leverage proven and some new tools to ensure flexibility control and visibility across the network. This.
This year, we added automated sort capacity and greatly expanded our weekend operations.
We sped up our ground network and are using more real time data to better manage the expected increase in volume.
From my involvement in our peak preparation I will tell you that while we expect this holiday season to habits challenges.
We are ready to deliver a successful peak.
As you can see in our results, we are making progress against the better not bigger framework, we outlined in July we.
We have more work to do and plan to provide additional detail about our actions during investor day, we will host in 2021 once the environment is more stable.
And with that I'll turn the call over to Brian Thanks, Carol and good morning.
Overall, we are pleased with our results in the quarter.
As I shared the details you will see early indications that our actions are having a positive impact on our operating performance and financial returns I'll also share the trends we are seeing as we approach year end, starting with the macro environment. The global economy continued to feel the effects of the Corona virus Pandemics Global trade has generally improved.
With Asia outbound leading other geographies.
However, both global and us real GDP growth rates in the third quarter are estimated to be down 3.7%.
In the us consumer confidence has held up well however.
However, industrial production remains mixed.
Auto manufacturing has fully recovered, but it will take more time for all industrial production to return to pre coated levels. So what does this mean for our business.
We see no signs that the structural market shift to E commerce will slow anytime soon in.
In fact forecasters estimate the E commerce share or retail has been advanced by two to three years due to the pandemic and at the same time, we expect the commercial side of our business to face continued softness extending into 2021.
During the quarter, we adjusted our network and took deliberate actions to better position us for the future three key items underscored our performance first both the international and supply chain and freight segments delivered record profits.
We executed extremely well within a tight capacity market and were able to meet high demand out of Asia.
Mixed in the us SMB growth accelerated and our revenue quality actions began yielding results and lastly, we face both planned and unplanned expense pressures in the us domestic segment or.
For the quarter consolidated revenue increased 15.9% to $21.2 billion.
Operating profit totaled $2.4 billion or 9.9% higher than last year.
The operating margin for the company was 11.3%, which was 70 basis points below last year.
Diluted earnings per share was $2.28 up 10.1% from the same period last year.
Moving into the segments in us domestic average daily volume increased 13.8% year over year to a total of 20.4 million packages per day, the SMB volume growth rate accelerated by 820 basis points going from 10.5% in the second quarter to 18.7% in the.
Third quarter.
B to C shipments increased 33.4% year over year and represented 61% of total volume.
Conversely, B to B average daily volume was down 7.8% year over year, but has improved from the second quarter. While we saw a positive b to b growth in health care and automotive that growth was not able to offset weakness in other industrial sectors.
For the quarter us domestic revenue was up 15.5% to $13.2 billion driven by the strength in ground and deferred air products as well as the impact of one additional operating day.
While reported revenue per piece was flat year over year, excluding the negative impacts from fuel and Surepost revenue per piece grew both sequentially and year over year.
Lower fuel prices reduced revenue per piece growth by 130 basis points and elevated surepost volume reduced revenue per piece growth by 230 basis points.
As a reminder, surepost is a higher return on invested capital product the underlying improvement in revenue per piece indicates that our revenue quality actions are beginning to have a positive impact.
Turning to costs expenses were up 18.4% over the third quarter of last year and grew faster than volume and revenue cost per piece, excluding fuel increased 37 cents or 4.4% over last year.
Several items drove expense deleverage in the quarter.
First our initiatives to expand weaken operations and speed up the ground network.
Second benefit expenses from the additional employees, we hired in the second quarter.
And third lower productivity gains than we planned and lower deliver density.
For the quarter, the us generated $1.1 billion in operating profit a decline of 8.8% compared to last year.
Operating margin was down 220 basis points year over year.
We are focused on improving revenue and reducing cost in the us domestic business and we are pleased with our early revenue progress. Additionally, we see opportunities to decrease our cost structure as we optimize our network and implement transformation initiatives.
Moving over to international.
The segment delivered another quarter of record operating profit with double digit positive year over year growth.
The flexibility of our global network and winning solutions allowed us to lean into the most profitable areas of elevated demand.
Volume increased globally by double digits year over year.
Asia outbound average daily volume growth was 37.6% with air capacity in tight supply. We added 268 flights above our normal schedules to meet the high demand.
In Europe continued to see elevated cross border BDC with export average daily volume up 15.5%.
We saw growth across customer segments with SMB volume growing in all regions BDC mixed moderated to 31% of total volume and B to B improved but was still down 3.2% year over year.
For the quarter International revenue was up 17% to $4.1 billion revenue per piece was up 2.7% and included a decline of 260 basis points from fuel and a benefit of 140 basis points from currency.
On the expense side cost per piece declined 2.3% year over year, primarily due to lower fuel costs.
For the third quarter International generated operating profit of $972 million, an increase of 40.3% led by elevated demand out of Asia.
And finally, our international operating margin expanded 400 basis points.
Looking at supply chain and freight the segment results were excellent.
Elevated demand drove revenue up 16.5% to $3.9 billion and we generated record quarterly profit market capacity remain tight while economic activity picked up in the quarter slowing demand for PV was offset by inventory replenishment.
More specifically, we saw high air and Ocean freight forwarding demand out of Asia led by the high Tech retail and industrial sectors.
Our LTL business improved efficiency and productivity while at the same time advancing the revenue quality in our freight business.
Revenue per hundredweight, excluding fuel increased 7.2% in the quarter. Conversely performance in our truckload brokerage unit had a negative impact of profit on a year over year basis due to continued market challenges.
Operating profit was $302 million, an increase of 18% year over year with multiple units contributing and which highlights the diversity within the supply chain and freight portfolio.
Looking at the overall enterprise in the third quarter, you'll see us generated operating profit of $2.4 billion up 9.9%.
A few notable items on the income statement include other pension income was $327 million driven by last years, 17.6% return on pension assets and the discount rate was 90 basis points below last year.
We had $176 million of interest expense, which is above last year due to our $3.5 billion debt issuance in March.
And lastly, our effective tax rate came in at 22.5% compared to last year's third quarter tax rate of 20.8%, reflecting certain discrete tax items that did not repeat this year.
Now, let's turn to cash and shareowner returns.
Our cash flow remains very strong for the first nine months of the year, we generated $9.3 billion in cash from operations at about $5.9 billion in adjusted free cash flow.
This includes $725 billion from the cares act federal payroll tax deferral offset by a $1 billion discretionary contribution to pension plans cap.
Capital investments totaled $3.4 billion through September and we expect full year capex of $5.6 billion and remain on track with our automation targets for 2020.
So far this year, yes has distributed $2.7 billion in dividends, which represents a 5.2% increase on a per share basis over the same period last year.
Now I'll make a few comments regarding the balance of the year.
We expect strong consumer demand during peak.
As Carol mentioned in the US we will have two additional operating days between Thanksgiving and December 30, onest compared to last year, which helps our operations.
We anticipate some industry capacity constraints through the period in response, we're working closely with customers to pull demand ahead of the traditional peak period.
In fact, many large retailers ran ecommerce sales events in mid October and our network performed well during this period with high service levels and good productivity.
Looking ahead, our peak plans volume management and surcharge approach will also help promote a more optimized volume mix. We will also leverage our technology to control the volume we bring into the network utilize available capacity and efficiently operate during peak.
While we're not providing consolidated revenue or diluted earnings per share guidance I want to provide some color to help frame up the fourth quarter.
In the US average daily volume is anticipated to increase by high single digits.
And revenue growth to be above volume growth.
Working against us are difficult year over year comps and known expenses that will pressure operating margin they.
They include an increase in benefits expense between a 150 and $200 million due to additional union headcount over last year, including the new employees, we hired in the second quarter.
Next new legislation in 2019 for alternative fuel tax credits and reductions and management incentives, which together lowered operating expense last year by about $150 million are not expected to repeat.
And the acceleration of our time and transit and weakened operations initiatives.
Working in our favor are the positive effects from our revenue quality efforts and growth from Smbs.
In our international segment, we expect the year over year profit growth rate to be in the high teens.
And in supply chain and freight we expect operating profit growth to be relatively flat given the anticipated market dynamics, particularly in the truckload brokerage business.
In summary, while macro conditions remain dynamic and the recovery uncertain market demand continues to be elevated.
We are laser focused on improving cash generation by executing our strategy under the better not bigger framework. Thank you and operator, please open the lines.
Thank you we will now conduct a question and answer session.
As a reminder.
For teleconference participants if you would like to ask a question. Please press one benazir oak on your telephone keypad.
And our first question will come from the line level meat Machold. Sir. Please go ahead.
Before the call and task.
Last question Carol I think.
It's still early days with respect to.
Transform trends for the transformation 2.03, 0.0, but the facts as it relates to the third quarter you.
The profits.
In the domestic business were down over 100 million from the prior period revenues were up almost 2 billion when does that equation quota.
Quota share stunned.
When do you think you'll be able to you know maybe report more positive operating leverage and margin expansion in the business.
Well I mean, thank you very much for your question and then let's just unpack the performance on the expense line, a little bit more than Bryan to add Brian called out three drivers of the de leverage in the U.S. business in the third quarter. The first of which was our decision to speed up our fastest ground ever initiative.
That decision cost us $179 million in the quarter. It was the right thing to do because you saw the market share gains that we enjoyed with our SMB business. So it was the right thing to do but it certainly put some pressure on the expense line. If you back that out our expenses our operating profit would have grown year on year on Earth.
Line item that was a de leverage in the quarter was.
Productivity below our expectations and here, we have a real opportunity as we turned that around looking past the fourth quarter of this year and into 21 and 2022.
One reason for the decline in productivity is the fact that we had 40000, new European answers and higher turnover. This year than we did last year turnover as a function of many things, including coal that candidly, but when you have a lot of new people in your operations Sadly, we just weren't as productive as we should have been we have a new leader over are you.
Domestic small packets business Nando is all over this and productivity is going to be a laser focus of transformation three that all and it's not just about putting more packages through our facilities on a per hour basis is about so we get better at running the business better at.
And our people so we lower our cost of turnover better at keeping our people safe. So we lower our casualty reserves, there's a real opportunity here to just get better in running the business without a lot of investment actually so we are building our 2021 financial plan as we speak we're road map in three years.
Errors and once that plan is finalized we will share with you our actions that we are taking to grow the operating margin in the U.S. small package business I appreciate that Carol, but I mean, just to just to make sure I understand your comments are you, saying that starting in the fourth quarter because of some of the idiosyncratic costs in the third quarter.
Sure. So the business will return to positive operating leverage in the fourth quarter and that was extended to 2021 is that what you're saying if I'm understanding you correctly and that is not what I'm, saying the turn won't happen until 2021 because of the expense pressures that Brian carefully called out in the fourth quarter and Brian.
You might just want to remind and meet with those expense pressures are in the fourth quarter as as we look forward to the fourth quarter. I mean, we do have the underlying benefits as Carol said of both optimizing volume and improving pricing, but there are three in particular that that Q4 headwinds we've got the seasonality, which you know year over year, we normally go about down two.
100 basis points on a sequential Q3 to Q4 standpoint, because of peak. So there's that natural seasonality impact we've got benefits ranging in the $150 million to $200 million that that will be impacting Q4, and then we're lapping last year, we had some legislation rattle alternative fuel tax as well as a low management incentive number last.
Year together those are about $150 million lap. So those combined with the fastest ground ever that we'll finish off in Q4 investments that's going to put pressure on the fourth quarter. As we look forward now okay. At the end of the second quarter. We said that we thought that the operating margin for the back half of the year can be 100 basis points lower than the operating margin in.
The first half of their because of our outperformance in the third quarter and because of the revenue quality that we are enjoying in the U.S. business. We now think the operating margin in the back half of the year will be higher than the first half of the year. So hopefully that's helpful to you as you build your model.
That's very helpful. Thank you Carol Thank you Brian appreciate it.
Thanks Mitch.
We have a question from the line of Chris Wetherbee of Citi. Please go ahead.
Hey, Thanks, and good morning.
Carol you talked about Capex on the call and I thought that was kind of interesting I think the comment was significantly lower than 2020, which I think is running just under a Vegas Rose 5.6 billion can you talk with a little bit more specificity about what significantly means and sort of where you potentially see that savings seems like there's a lot of growth out there's a lot of it is.
What kind of order of magnitude we might be talking about.
Well, we are finalizing our capital plans as we speak about for modeling purposes, I would I would use $4 billion. So that's a significant reduction from what we're running today and it's really a reduction across all major categories of our capital as Weve as weve until the layers of the onion we've discovered.
Opportunity to sweat our assets and a more efficient way, we have over 500 sub sorting facilities in our us business over a thousand.
Delivery of facilities and as I look at that capacity utilization in those facilities. We've got opportunities now clearly we need to work with our customers to optimize the fixed investments that we've made that we clearly have opportunities here to sweat the assets. The same is true with the airlines as we think about where the demand is going for next day air in the United States versus.
Where the demand is exploding outside of the United States, we have an opportunity to optimize our aircraft globally. So that's enabling us to take our capital down Brian any color you want to add that just a little bit Chris as you shape next year, and we think about pulling the buildings buildings represent about 50% of our Capex we spent.
We've made those investments in capacity, so you'd expect to see that come down the airline to likely come down and it's this pivot to international healthcare digital that's where we're pivoting the capital spend.
Okay. Thank you very much appreciate it.
We have a question from the line of Allison Poliniak Wells Fargo. Please go ahead.
Hey, guys. Good morning, I'm, just turning to the SMB initiative as you know clearly gaining some share there and there's a lot of the expense noise in the quarter, but we put that aside is the incremental pull through from that as volumes that you're getting on SMB, where you thought they'd be at this point in the cycle at the investment cycle for you or are they better any color on that.
Yes happy to give you some color on the SMB volume we were so pleased to see 18.7% growth the highest in 16 years, if I think about SMB as a percentage of our total business in the United States. It's growth on a 23% last year to now 24%. This year so were so.
Shifting the penetration, which is really about how we want to drive revenue quality in our business. If you until the layer of the onions for our SMB business in the quarter, we see that they're figuring it out on the commercial side of the SMB was down.
7% in the quarter, but the residential piece at S&P was up 62%, so they're figuring out how to go to market and they're using our end to end network to drive that so if you. If you then say okay care all of that flowing down to the bottom line well we were very pleased with what we saw in that regard too. So we will continue.
Need to invest in this customer segment, you've heard us talk about fastest ground ever it doesn't just stop with that I think last time I talked about how we break apart our customer segments within SMB and I told you. It was de went through before and I didn't really know what that meant well the team has done a really great job.
Above defining what it means so now when you think about our SMB customers think of them as medium small micro and platform and when you think of those customers think of that like a pyramid. So at the top of the pyramid are medium sized customers and those are several thousands of accounts and as you go down the pyramid.
The customer base, well expand dramatically from a revenue perspective flipped the pyramid upside down so the bulk of the revenue is at the top and that small piece of the business is at the bottom, but interestingly when we looked at the performance of Smbs across all four of those segments, we saw each of them grow.
And the growth came from our medium sized businesses as well as our platform businesses and within platform. The platform segment, that's where flop fall and yes that is small but it's growing in fact, we expect our revenue on our GAAP account to grow 400.
Good per cent this year and that is a very profitable segment for us.
Great. Thanks for the color yes.
We have a question from the line of David Ross of Stifel. Please go ahead.
Yes, good morning, Carol Good morning, Brian.
You made a comment in.
Im wondering interviews about green dots and red dots and coming in and looking at initiatives to.
What you should stop doing and what were wildly important can you just add some more color specifically, maybe mainly around some of the red dots that you guys came up with.
So thanks for the question it was such an interesting exercise because when we started at all the Green Dot went up but it was really hard to pin the red dots up because initiatives that you love them you fall in love with any of it by themselves they sound like they're really value, creating but the truth is not so much. So I can give you. An example of one week.
This initiative called New PS next and U P. S. Next was all about driving innovation in the company well when we looked at what the U.P.S. Nicks team was working on they were working on exactly the same projects as other groups within the company. So we put the red Dot on EWP, Yes next and all.
People, who are working on that project, while they are either gone or they'd be reassigned to additional work. So that gives you a sense of what we mean by stopping work we are opportunity rich. Let me give you. Another example, they haven't stopped us yet but were going to die.
So I asked Nanoknife at Endo through many reports do we ask our operator to work every week because I had familiarity with this in my previous life, where we tend to put too much work in our operators and they couldn't focus on things like productivity. So none of the Bakken said Carol we send 462 reports.
To our operators every week to work.
So you can appreciate what that means.
I mean, none of that is being worked that's work that's going to stop and think about the overhead here at the headquarters that's producing those reports so that's all being streamlined to those wildly important metrics that matter to the customer experience for productivity and the rest is just going to get stopped.
Thank you.
You're welcome.
We have a question from the line of David Vernon of Bernstein. Please go ahead.
Hey, Carol.
Thanks for the time I just wanted to kind of talk about a a similar thing as you think about you know changing their behaviors inside of the company and stopping those activities you're coming into the CRC from the board level.
What surprised you about that transition and how long do you think it will be before those those changes you're making.
So our concern into the tangible operating leverage that the street, so desperately looking for inside of the domestic business.
Well as a board member I was always so very impressed by how you P. ssrs respond to a crisis in many ways you passed as a first responder, they're always there to help the communities and customers that we serve.
Into the company I was blown away by our reaction to coded you Panthers are essential workers and I'm, just so proud of them for.
For what they do every day you know they actually we all work, but they are actually going to work they are putting on uniforms, and they're flying planes and driving packets cars and delivering packages and and sorting packages and I'm just so so proud of them.
What I didn't understand is how we went about what we do.
Yes, it's a 113 year old company, and many 113 old companies, they layer and bureaucracy and processes that.
Our fine, but actually slow you down.
But I didn't know when I came on board is that we had 21 committee.
We're meeting to make decisions about the business.
21 committees take it just the amount of Calendaring time to meet and discuss and and recommendations would be held until the committee meeting I heard.
That's not a way to run the business or affect change quickly. So we took those 21 committee is down to six and the fantastic thing is that the answer is are there. They are energized by this I was really worried about you know the being rejected that's not happened.
PSS are embracing me, they're embracing change they're excited about what we can do together as a company and what this allows us to do actually is too.
Without debate or controversy talk about the real opportunities to.
Moving and to get movement on the U.S. operating margin and part of that is about controlling our own destiny.
By improving the revenue quality in our business working with our customers to enable that to happen to look at the root cause.
Of why we've been de leveraging and going after that in a meaningful way in the past we did it by increments. We're now doing it in a meaningful way in a meaningful way. So if I told you that our casualty reserves that are driven by both workers comp and.
Idled auto liability brand they stand at how much today, we're over a billion dollar over $1 billion and casualty reserves get a 10% reduction in that because you have to stay for operation as a $100 million $100 million can move that U.S. operating margin in a meaningful way that talking about the cost of turnover, which I know.
I'm going to do but the cost of turnover is high for our company, we got 20% of that it's another meaningful way to move the operating margin. If we improve the delivery density what we must do we have had ideas on the shelf to do that we just have an optimal way.
Additionally, though that's a meaningful way to improve the operating margin so.
This is a pig company. It's it's just can't pull the band it off because you could you could hurt the customer experience and we don't want to do that but as we wouldn't start to pivot into this through the fourth quarter into 2021, we're gonna be laying out tangible action plans that will show improvements in the operating model.
Okay, and then as we optimize our capital spending or all translates into higher return on invested capital.
We have a question from the line of Allison Landry of Credit Suisse. Please go ahead.
Hi, good morning. Thanks.
So Karen you've talked about a focus on what customers are willing to pay for and optimizing the volumes that flow through the network clearly are starting to see that with the.
The step up in SMB growth, but we also interpret this as a signal that you might see market. Some volume from large customers that aren't meeting to return threshold and if that's the case.
Over what timeframe can you drive enough profitable share gains from SMB is that that would allow you to walk through some of the lower margin business.
Yes, if you could just speak to how you're balancing that added while at the same time trying to maximize asset utilization. Thank you.
Yes. So as you know there is capacity constraints in the industry doesn't matter what supply chain you are theres a capacity constraints in the industry and if we took all the volume that was available to US we would end up with a customer experience that wouldn't be good for us our customers and we would end up with what we call cash.
Paul So we've actually been controlling the volumes since July and we're doing that in a number of different ways. We will work with our customers to help them rethink their operations be violent buy online pick up in store different timing for their promotions a different availability of their packages. So a number of.
Alternatives and options that we've been working through a solution based approach with our customers.
When you have tight capacity. It also means that prices tighten and as prices tighten there is a shift in certain customers, who are more price sensitive than others. We're okay with that if we're losing non nutritive sales, we're okay with that it's not about.
Out volume share it's about value share growth. So that's how we'd like you to think about us at least in the short term value share growth. That's clearly the U.S. all package business is going to grow its estimated I think the volume 80 was something like 58 million in 2000.
In the 19, it should double by 2025 of course, we're going to be growing to service that growth, but right now it's all about value share.
We have a question from the line of Scott Schneeberger of Oppenheimer. Please go ahead.
Thanks, very much good morning wanted to focus a little bit on international very strong in the quarter acceleration to export volume growth third quarter from second quarter, just wanted to discuss kind of the trends through year end, you think it and maybe beyond how sustainable is this strength in international.
And ill and Brian and this what you said about you said high teens I didn't know if that was profit growth or margin in fourth quarter, but if you could elaborate a little bit on on sustainability of margin in that segment. Thanks.
Thanks, Scott for the question so from an international perspective, very happy with the Q3 performance. They continue to post double digit top line and profit growth and the real strength is coming out of Asia and Europe. In particular I was referencing operating profit growth in the high teens. Scott was was what I commented on and the operating margin.
And as come in about 23% over the last two quarters.
A lot in the international side depends on the international backdrops. So obviously were watching that very closely but the overall business is sound Carol I don't know if you have anything to add the one comment I would make on the margin, which was outstanding and the profit growth in the third quarter, we did have surcharge or in.
The third quarter because of the capacity is just so tight so we've had about a $120 million of surcharges in our international business in the third quarter, whether or not that sustains is really a subject of market demands hopefully that's helpful to you.
We have a question from the line of Ravi Shanker.
Morgan Stanley. Please go ahead.
Thanks, Good morning, everyone. Carol you highlighted a big Capex cuts coming next year.
How do you make sure that you are kind of keeping pace with others, who are investing significant significantly to grow their capacity it kind of going back to what you just mentioned about value share.
Is that something you P.S. can do by themselves if the rest of the industry is going to try to.
Take share and kind of aggressively grow capacity and pursue that growth.
Well. This is all about are better, but not bigger framework, which is a start of pivoting to this business to position us for success in the future sweating. The existing investments that we've made is a really good thing in next year. Then we'll look at where we want to grow and how we want to grow.
But for next year, we're going to sweat the investments that we've made Brian you might want to talk about that yeah. Ravi. It's a it's a good question. If we look backwards first we put over $15 billion in the capacity in the us over the last several years and that was needed, but now 85% or so of our ground volume is going through some sort of automated capacity in hub. So as we're looking.
Got that and those investments I watch the ROI see actually trend down a real focus going forward is going to say, how do we lower capex and sure its driving shorter term paybacks to get better benefit and I talked about where we're going to shift to in terms of health care or some specific to international markets thinking about digital so it's a different type of spend going forward, but I don't want to front run the IND.
Mr Conference next year, we'll we'll unpack that in more detail.
I would I would comment just on the technology front, because that's such an important area of investment for us well for everybody actually the customer wants a digital experience and so we can't move off of that digital experience in fact, we need to lean into that.
But that isn't necessarily a capital expenditure because software as a service as you know as paid through a licensee. So we're moving away from internally developed IP solutions to software as a service. So you will see a line item differences happening.
The other thing I would ask you to.
Remember as as we grow outside of the United States, Our international business tends to have an asset light.
Profile in most areas of the rest of the world and that asset light profile will certainly help spur growth and generate higher returns.
Great. Thank you.
Jordan Oliver.
Goldman Sachs. Please go ahead.
Yes, hi, good morning, everyone I just want to come back.
Fourth quarter second.
Obviously, you mentioned the puts and takes on the expense side balanced against sort of the revenue quality and then.
Hi, lighter than normal sequential domestic decline a couple hundred basis points I mean should we be thinking then.
Turning to the fourth quarter domestic market at a base level sort of holding on to that first half margin at around 6.66, 0.7%. I mean is that when you put all the puts and takes together is that the baseline we should be thinking about.
Jordan its Brian Thanks for the question it.
It's a fair baseline, though we had some some pressures in the in the third quarter, which we discussed but as you go forward.
Talking about the the the 8.6 other we posted in the third quarter. The first half of the year was 6.6. So as you look to the back half of the year, assuming a baseline of 6.6 is a fair assumption and we're going to do everything we can to beat that we're seeing.
Improvement on the on the pricing and the revenue quality side, the challenge or the headwinds I outlined for the fourth quarter. So balancing those two is going to dictate where we land.
Okay. Thanks, very much thanks Jordan.
Jack Atkins of Stephens. Please go ahead.
Good morning, and thank you for taking my question just just curious if you could comment for a moment.
Given the surgeon the virus that we've been seeing in Europe over the last several weeks. If that's had any impact on business trends there or just if you could comment broadly on on it that's had an impact on on the market in Europe.
So our business trends continue to be very strong coming out of our international business there.
There's a big watch out that because of cold Ed.
We see cases spiking concerning right because if we were to have disruption, let's say in our pilots that would be a real problem and we haven't seen that but we're just watching this very very closely.
Tom water, which yes. Please go ahead.
Mr Water, what's your line is open.
Even you want to move to the next caller, we will do our next question will come from the line of Scott Group of Wolfe Research. Please go ahead.
Hey, Thanks morning, So you said revenue better than volume in the fourth quarter is that a sustained inflection or a more of a one off with the record surcharges and then Carol you made I had a great line last quarter about the bees and referring to billions of cost savings just drew.
We're actually should we be thinking.
A billion plus or potentially multiple billions of cost savings here. Thank you.
So Scott I'll take the first piece of this in terms of the pricing. If you look at the underlying health of the price and the quality of overall revenue really if it's more than just pricing, but as you look at the second quarter, you'll remember I I peeled out fuel and ensure opposed to give you a a good read it the growth and were one and a half or.
Percent positive that was the first time, we saw positive number there in quite some time that was that would equate to 3.6 in the third quarter. So you see that sustained momentum we'd expect expect to see continued improvement. There. The question then comes down to the balance in terms of B to B to C. In SMB and how we how we flow throughs were trying to pivot the business.
As we walk through but but I think you can look for underlying continued improvement in the up the RPP ex fuel and Surepost Charles you want to comment on the B, yes, So weve got transformation.
One dato coming to a close so we'll turn to transformation to the auto which the first wave of transformation Twod auto was the Bcf that we announced this fall we offered that be SAP in two waves to over 11000 U.P.S. errors. Thus far we've had about 1600 people apply will land.
Something around there maybe a little less so you can do the math of what that might translate into savings that's not a billion. That's several hundred million, but it's the first phase of transformation to dot Oh, there are more activities that will come what is not going to tell you before we tell our people, but there are more activity.
Yes that will come in transformation to DAPL. When you think about transformation to dot O think of about that attacking non operating expense in other words general overhead it's going after spans and layers, it's going after labor arbitrage that sort of opportunity there real money and candidly Arden Arden, our non operating expense.
It's about $6 billion.
On an annual basis, so the real opportunity did get billions out isn't the operating side of our business and this is all about productivity and going after the big buckets of cost that we need to turn down to add up to a billion. We're going to have an investor conference in 2021 when.
Thanks calm down I don't know, Brian what we're thinking about early June early June okay, hopefully hopefully going to settle down we can do that confidence and in June of 21, 21, and then we'll lay this all out for you I just want to get out ahead of my skis, you know, it's downhill race or for a long time and you've got to have your schemes you double down the mountain I just want to do that so.
It is going to be very very thoughtful very planful.
Planful about this and then we'll lay that out for you. So that you can hold us accountable to what we said we're going to do.
We have a question from the line of Jairam Nathan of Guy will please go ahead.
Yes, Thanks for your question I.
I want to do.
Better than bigger team I wanted to understand how you're changing guidance into compensation.
To align with that and then.
Just one modeling your fuel expense was higher sequentially significantly.
Significantly and was there anything in there that we should consider.
Okay on the fuel side.
Durham, Oh, we saw about a $60 million in benefit in the quarter or 30 of that coming were roughly half of it coming in domestic and half international we'd expect that to moderate in the fourth quarter. So it step down from Q2 to Q3 by about 50%, we'd expect that to continue to step down in the fourth quarter. Gerald you want it went up.
The widely important initiatives is.
People and as we look at the people opportunities incentive compensation is certainly one of those opportunities.
The design of our incentive compensation doesn't.
Necessarily tie to the the results that we want to achieve so we're gonna be resetting the goals to make that happen to make them much more return focus they were two line items focus if that makes any sense. So you get you get bonused off of revenue per piece, that's an incomplete look at the business isn't it because it doesn't have the cost and it doesn't have the capital.
So we will be re looking at the elements of both our short term, which is on our annual bonus as well as our long term our long term incentives do have a return.
Ah characteristic to them. So that's good but I really want to work on the short term incentives also we're going to redo our sales incentives for our sales team.
Yes, so complicated I tend to think I can understand math I I have a hard time right and this out.
We're going to simplify this so it's really easy for people to understand how they get paid and actually tighten incentives to better not bigger.
But can you then it's a it's Scott we've got time for one more question if you want.
The last question will come from the line of Tom Wadewitz of UBI US. Please go ahead.
Maybe stuck on mute or is one more question that to the next caller. Please our next question will come from the line of Brandon Oglenski of Barclays. Please go ahead.
Hi, everyone and thanks for sneaking me on hair.
Carol I guess, you know thinking about not only repeat mistakes of the past if we go back.
Two predecessors ago, Capex came down a lot and you do have individually.
Independent contractor competition okay.
At least doubling your growth rate right now so how do you balance the need for productivity.
Air growth as well as achieving that higher value with lower Capex right.
Right so to your point, it's a balance.
And we are well aware of the changing competitive environment and the changing customer environment and are thinking through how to best attack those.
Opportunities.
In ways that are different than what we've done in the past.
That's just a hint of what's to come.
But we'll be talking more about that.
Next year.
That that concludes our call and I want to thank everyone for participating on today's call and have a great day. Thank you.
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