Q3 2022 United Parcel Service Inc Earnings Call
Okay.
Good morning, My name is Steven and I will be your facilitator today I would like to welcome everyone to the U P. S Investor Relations third quarter 2022 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.
Any analysts that want to ask a question now is the time depressed. The one then zero on your telephone keypad.
It is now my pleasure to turn the floor over to your host Mr. Ken Cook Investor Relations Officer, Sir the floor is yours.
Good morning, and welcome to the EPS third quarter 2022 earnings call. Joining me today are Carol <unk> our CEO .
Ryan 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 2021 Form 10-K subsequently filed form 10, Qs and other reports, we filed with or furnished to the securities and Exchange Commission.
These reports when filed are available on the UBS Investor Relations website and from the SEC.
Unless stated otherwise are discussion refers to adjusted results for the third quarter of 2022 GAAP results include after tax transformation and other charges of $27 million or <unk> <unk> per diluted share of <unk>.
Reconciliation to GAAP financial results is available on the EPS Investor Relations website, along with the webcast of today's call.
Following our prepared remarks, we will take questions from those joining us via the teleconference.
You wish to ask a question press, one and 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.
Ken and good morning.
I'd like to begin by thanking all of <unk> for their hard work and dedication to survive.
I am proud of the unstoppable spirit of Ups's everywhere and how they leverage the agility of our global integrated network to deliver outstanding service for our customers.
Strong results for our shareowners.
In the third quarter, the global economies softened, especially outside the United States.
International in freight forwarding volumes were challenged but we quickly responded.
We adjusted our network to match volume level and.
Continued to win in the most attractive parts of the market.
For the third quarter consolidated revenue rose four 2% from last year to $24 2 billion and operating profit grew 6% to $3 $1 billion.
Consolidated operating margin expanded to 13% a 20 basis point improvement from last year.
This was our highest third quarter consolidated operating margin.
<unk>.
Turning to our strategic update the execution of our customer first people led innovation driven strategy.
Mentally improve nearly every aspect of our business.
Having better revenue quality higher operating margins and improved bottom line results.
Building on our strong foundation created by our better not bigger approach we.
We are moving to the next phase of our strategic framework better and Boulder.
What do we mean by better on Boulder.
First the better part of our framework is not changing.
We will continue to focus on growing value share improving the customer experience.
And driving higher productivity from the assets we own.
Boulder is about moving faster to grow in our targeted market segments.
It's also about combining digital solution with our global integrated network to create more value for our customers and new revenue opportunities for <unk>.
We plan to combine the capabilities of our strong Standalone digital services, including roadie, Coyote delivery solutions, UBS capital and our partnership with Commerce hub.
To create a powerful offering of logistics as a survey.
And when we combine logistics as a service with our integrated physical network.
We believe we will be unstoppable.
We will share more detail about better in Boulder in the coming quarters, but let me give you two examples of what we are doing.
On our second quarter earnings call I introduced our upstream delivery density solution.
Here, we are building a digital platform that goes upstream to look at orders and other and packages at the shopping cart level.
We then match this new order with other orders that have the same delivery date commitment, which create delivery density.
We've gone live with one customer and we're delighted with the results we've seen and in fact, we are currently onboarding several new customers to the platform.
Another example of better on Boulder is our pending acquisition of <unk> group, whose network of healthcare facilities in Europe , and Latin America, and expertise and cold chain will help accelerate growth and complex health care.
Along with our recent expansion of UBS Premier in Europe .
We are on track to generate at least $10 billion and health care revenue in 'twenty two 'twenty three.
Now, let's look at the three legs of our strategy starting with customer first.
Customer first is about creating a frictionless customer experience.
Target it at the parts of the market, where we want to grow including F&B health care International and certain large enterprise accounts.
Given global economic softening, we are convinced that a relentless focus on customer first matters now more than ever before.
And we believe our strategy is working.
We've continued to gain share.
For example, we are leveraging our time in transit and visibility advantages in Europe to win in.
In fact, we grew Europe export volume in the third quarter.
Another example is the growth we are seeing in our digital access program or that in the third quarter. We grew U S. F&B average daily volume, including platforms by one 9% and Smbs made up 28, 3% of our total U S volume in the quarter an increase of 90.
Basis points from last year.
That continues to add partners and revenue.
With more than 3 million merchants shipping with gap in the first nine months of this year, we generated over $1 $6 billion in GAAP revenue.
And we expect to exceed our $2 billion of DAP revenue target in 2022.
Moving to the people that part of our strategy.
Our people are our most valuable asset.
And it's important to us.
<unk> reviews, our company as a great place to work.
We know that when we take care of our people they will take care of our customers.
Recently UBS reached contract extension agreement with the independent pilots Association and our aircraft maintenance technician.
Contractors continue to reward these you'll be answered with industry, leading pay and benefits.
And will help ensure the company's future success.
And we are making other changes to improve our employee experience and satisfaction.
For example, through what we call our operator experience program. We recently worked with our U S drivers to create individualized dispatch plan.
Giving them more choice over the hours they work with.
We also automated tasks and reorganized our operations team to improve work life balance for our operating supervisor.
And for our management employees globally, we are evaluating our overall payor mix composition.
While total compensation compares favorably with our markets.
We may have some opportunities to rework the payback to make our compensation even more attractive.
Now to the last leg of our strategy innovation driven.
This is about driving more productivity from the assets to be on.
Our integrated network is the best in the industry, but.
But we are leveraging data and technology to make it even smarter more automated and more efficient.
In the third quarter, our productivity improvements continued to deliver benefits.
In the U S. We optimize trailer load by eliminating nearly 1000 loads per day compared to the third quarter of last year.
And we successfully managed hours in line with volume level.
We also launched total service plan, which is about running a predictable on time networks.
Execution is going as planned and as of last week, our on time theater departures and arrivals improved six 5% compared to last year.
Reducing idle time in the network.
Additionally, this month, we completed the initial rollout of our smart package smart facility, which enables RFID label technology in 101 buildings in our network.
Other we opened our eighth regional hub in the United States located in Harrisburg, Pennsylvania. This 800000 square foot automated hub provides significant processing horsepower to better serve the northeast corridor and helps enable greater network flexibility across the U S.
This habit is also home to Ups's largest natural gas fueling station within our network. This fueling station will remove 8 million gallons of diesel fuel per year.
As equivalent to removing more than 17000 gasoline powered passenger cars from the road.
Turning to peak for the last for a holiday season, UBS has been the industry leader and on time delivery performance.
And we intend for that to continue.
This outperformance doesn't happen by accident.
We built our integrated network to flex with volume.
And our investments in our people automation and technology enabled greater agility.
To prepare for peak, we made enhancements to all of the areas of our business that delivered a great peak last year.
Let me share a few details about our peak plans for this year starting with volume.
This year, we anticipate our volumes will peak later in December compared to last year as we expect consumers will return to more pre pandemic shopping behaviors.
While we will continue to use technology to match daily capacity with customer demand.
Also optimizing air and ground volume to make room for new customers, where we can add the most value.
While we will have a peak as Brian will to tell overall volume in the fourth quarter is expected to decline from last year due to contractual agreement.
In terms of labor will bring on more than 100000 seasonal hires this year.
Related to hiring we're ahead of where we were this time last year.
One reason is because we've made the digital hiring process, even faster and easier this year.
We've also improved training for our new driver helpers, which shortened the amount of time from hired to this fast newly.
Newly hired driver helpers can complete training on their phones and began work on day one.
Bottom line, we are ready to deliver another successful peak.
Let me end by reaffirming our 2022 targets of consolidated revenue of around $102 billion.
Consolidated operating margin of about 13, 7% and return on invested capital greater than 30%.
In the face of a very dynamic macro environment, we are demonstrating more agility than ever before.
We are focused on controlling what we can control and.
And under our better and Boulder framework, we are combining digital capabilities with our global integrated network to continue winning in the most attractive parts of the market.
Driving operational excellence.
And delivering best in class service for our customers.
So thank you for listening and now I'll turn the call over to Brian . Thanks, Carol and good morning in my comments I'll cover four areas, starting with the macro environment than our third quarter results.
Next I'll cover cash and Shareowner returns and lastly, I'll wrap up with some comments on our outlook for the rest of the year and.
In the third quarter, the macro environment remains dynamic in the U S. We continued to see crosscurrents, driven by the strong job market and healthy consumer spending despite higher inflation and interest rates.
Internationally, the macro environment weakened more than we expected due to high inflation volatile energy prices Lockdowns in Asia and the war in Eastern Europe . We responded quickly to the changing market conditions by leveraging the agility of our global integrated network to provide excellent service to our customers and deliver our bottom line commitments to shareowners.
In the third quarter consolidated revenue increased four 2% to $24 2 billion.
Consolidated operating profit totaled $3 1 billion, 6% higher than last year consolidated operating margin expanded to 13%, which was 20 basis points above last year.
For the third quarter diluted earnings per share was $2 99 of 10, 3% from the same period last year.
Now, let's look at our business segments and U S. Domestic our revenue quality efforts and the execution of our planned cost initiatives drove third quarter results above our expectations.
In the third quarter average daily volume was down one 5% versus the same time period last year, but the growth rate was an improvement over the first half of 2022 as new volume from a record number of wins, we had in the second quarter came into the network.
In the third quarter the gap between year over year, BTC and <unk> average daily volume growth rates narrowed as we left more normalized consumer shopping behaviors.
The average daily volume declined two 2% driven by contractual agreements, we reached with certain enterprise customers.
<unk> average daily volume was down 5% year over year due to declines in manufacturing volumes, which was partially offset by growth in retail <unk> to be driven by returns volume.
In the third quarter <unk> represented 42, 8% of our volume, which was up slightly from the 42, 4% in the same period last year.
Looking at customer mix the execution of our strategy is continuing to drive improvement.
In the third quarter, we grew SMB average daily volume, including platforms one 9%.
In SMB is made up 28, 3% of our total U S domestic volume in the quarter, an increase of 90 basis points from one year ago.
For the quarter U S. Domestic generated revenue of $15 4 billion up eight 2% revenue per piece increased nine 8% more than offsetting the decline in volume.
Our revenue quality efforts continue to deliver results in the third quarter about one third of the revenue per piece growth rate increase came from continued strength in base pricing.
Another third of the revenue per piece growth rate increase came from changes in fuel price per gallon and the final third came from the combination of mix and our fuel pricing actions.
Turning to costs total expense grew 7% way.
Wages and benefits contributed about 310 basis points of the increase driven by the annual increase for our teamster employees that went into effect in August .
Fuel drove 220 basis points of the expense growth rate increase due primarily to the rise in price per gallon compared to last year.
And the remaining variance was driven by multiple factors, including maintenance and depreciation costs in U S. Domestic came in as we expected due to our planned productivity initiatives, which drove our cost per piece growth rate to be lower in the third quarter than it was in the second quarter and partially offsetting wage and benefit increases we are continuing to see the benefits of our <unk>.
<unk> utilization and other productivity efforts, including total service plan, which launched on July 11th.
I'll share more about our productivity initiatives in a moment.
To sum it up revenue growth was above expense growth, which created positive operating leverage for the seventh consecutive quarter.
The U S. Domestic segment delivered $1 7 billion and operating profit an increase of $272 million or 19, 2% compared to the third quarter of 2021, and operating margin expanded 100 basis points to 11% moving to our international segment.
Global macro environment continued to soften, but we remained agile and flex our network in response to changing market conditions and delivering excellent service to our customers at.
At the beginning of the quarter, we expected the international average daily volume growth rate to improve compared to the first half of 2022.
And it did.
However, it did not improve as much as we anticipated due to continued macro softening.
In the third quarter International average daily volume was down five 2%.
Total export average daily volume declined 0.6% on a year over year basis, China export volume declined due to lockdown and disruptions to manufacturing output.
In response, we quickly adjusted the network and cancelled 75, China, and Hong Kong origin place and rerouted twenty-seven flights to other gateways in support of our customers.
These changes have enabled us to move volume for our customers where it was available.
Maintain high levels of service.
And achieve a payload utilization of over 98% on our Asia outbound Intercontinental placed in the third quarter.
Looking at Europe , we continue to win on our speed and service advantages at strong revenue quality. Despite softer market conditions. We grew trans border average daily volume two 6% and total Europe export average daily volume grew 0.6% in the third quarter.
In the third quarter International revenue increased one 7% to $4 8 billion, which included a negative currency impact of $335 million and a fuel benefit of $363 million.
Revenue per piece increased six 4%, which included the fuel and currency impacts I, just covered and a 510 basis point increase from the combination of product mix and revenue quality actions we took.
Operating profit in the international segment was $1 billion.
Which included an $82 million negative impact from currency.
There was no year over year impact from fuel on our international operating profit.
Operating margin in the third quarter was 29%, which was down from the same period last year due to the delevering of our fixed costs and the impact of a stronger U S. Dollar.
Now looking at supply chain solutions, our teams continued to navigate a dynamic macro environment in the third quarter and did an excellent job, serving our customers and managing cost to deliver year over year operating margin expansion.
In the third quarter revenue was 4 billion down $268 million year over year, which included a $92 million negative impact from currency.
Looking at the key drivers in freight forwarding declines in volume and market rates reduced revenue and operating profit. However, the team was able to effectively manage buy sell spreads and continued supporting our customers.
Within forwarding, our truckload brokerage unit delivered strong operating profit growth driven by revenue quality initiatives.
And logistics delivered strong top and bottom line growth driven by our complex health care business from cold chain clinical trials and medical device customers.
In the third quarter supply chain solutions generated operating profit of $459 million and delivered a record third quarter operating margin of 11, 5% an increase of 100 basis points over last year.
Walking through the rest of the income statement, we had $177 million of interest expense.
Our other pension income was $297 million and our effective tax rate for the third quarter was 21%, which was better than we expected due primarily to discrete items.
Let's turn to cash and shareowner returns year to date, we generated $10 8 billion in cash from operations and free cash flow was $8 $5 billion and so far this year Ups's paid $3 8 billion in dividends and completed two 2 billion in share buybacks.
Now I'll make a few comments regarding our outlook. According to IHS full year global GDP is expected to grow two 8% in U S. GDP is expected to grow one 7%.
Both are lower than their forecast at the beginning of the year.
We are continuing to pay close attention to macro elements, including Lockdowns in Asia inflationary pressures the health of the consumer and the geopolitical environment.
Needless to say the macroeconomic environment is much different now versus our expectations. When we started the year looks.
By controlling what we can control quickly adjusting the network to match changes in volume levels and delivering excellent service to our customers. We are still on track to deliver our full year financial targets.
We expect consolidated revenues to be around 102 billion.
Consolidated operating margin is expected to be about 13, 7% and return on invested capital is anticipated to be above 30%.
Now, let me give a little color on the fourth quarter.
Starting with U S. Domestic we anticipate fourth quarter 2022 revenue growth of around four 5% driven by strong revenue quality and we expect fourth quarter operating margin to expand year over year to around 12, 4%.
Looking at peak in the U S. We expect peak volume to come in heavier later in the peak period, and we have one additional delivery day compared to last year, which gives us more flexibility.
As you update your models for U S. Domestic there are a few things to keep in mind.
We anticipate the average daily volume growth rate will be lower in the fourth quarter of 2022 than in the third quarter due to contractual agreements, we have reached with certain enterprise customers.
We expect increases in wage and benefit rates will be higher than the same time period last year due to the annual increase our teamster employees received in August .
And third we are continuing to execute our productivity initiatives to help offset wage and benefit rate increases.
Our biggest productivity initiatives as total service plan, which is performing as planned.
The launch on July 11th we've improved our driver dispatch timeliness by 13%.
This is about getting our drivers out of the building on time, which creates a more predictable environment for our employees a better service for our customers.
Also in regard to productivity in the third quarter, we brought on additional automation in the network prior to peak, including automated bagging robotics small sort induction and autonomous erect vehicles.
As a result of all these efforts we expect the U S. Domestic fourth quarter 2022 cost per piece growth rate to be lower than it was in the third quarter of 2022.
Moving to international we expect revenue in the fourth quarter of 2022 to be relatively flat to the fourth quarter of last year.
We anticipate our share growth and revenue quality initiatives will offset the weaker macroeconomic environment and negative currency impacts and we expect international operating margin to increase sequentially in the fourth quarter of 2022 to around 21, 5% as we continue to respond to market changes with agility.
In supply chain solutions, we expect revenue in the fourth quarter to be above $4 billion.
As we partially offset declines in the air and Ocean freight forwarding revenue with continued growth in logistics and our health care business.
Operating margin for supply chain solutions in the fourth quarter of 2022 is expected to be around 11, 4% as we continued to effectively manage the buy sell spreads and a dynamic environment.
Turning to capital allocation for the full year in 2022, we expect free cash flow to be above $9 billion, including pension contributions to fund annual service cost.
Capital expenditures are now expected to be about $5 billion, which is $500 million less than our original plan.
Great. Thank you.
Our next question will come from the line of Mohit <unk> of Deutsche Bank. Please go ahead.
Market share trends.
Well starting with the question on market share a big turning point for our company is when we invested in fastest ground ever improving in our time in transit and yes. We are advantaged are at parity in 717 of the top 25 markets. We offer seven day residential service Saturday pickup for our business.
Customers. So this is made a significant difference in our business and if you look at it through the lens of market share just looking at SMB in the United States. We have seen that we have seen that we've grown both revenue and ABB market share ahead of our competitors and when we look at it through the lens of enterprise, we've grown revenue share so.
We're delighted with the share gains that we've seen in the United States, but the share gains continued outside of the United States as well Super pleased of the time in transit advantage that we have in Europe , and what that's meant for our share gains in Europe . Despite the very uncertain market.
In terms of the international side. It is a challenging macro environment out there, but we expect total volume levels in Q4 will actually be higher than Q3, improving utilization from an <unk> perspective, our growth rates, we expect to improve we're looking to win share in Europe .
Execute on the initiatives to grow the U S export lane, which going into the peak season is helpful. So there are lots of cost initiatives that Kate and her team are executing real time, I think you saw that in sort of the flexibility, we're taking down slates in Asia, and rerouting to where the customer needs, where we feel great about the agility of the international business.
Yes, thank you very much.
Our next question will come from the line of Chris Weatherby of Citi. Please go ahead.
Yeah. Thanks, good morning.
And I wanted to look a little ahead to 2023, and maybe think a little bit more on the cost side. Obviously the macro is challenging as you noted there's cross currents in the U S. But it seems like we're in a decelerating demand trends I wanted to get a sense of sort of big picture initiatives. You guys are working on from a cost perspective in 2023, and I think I've asked you this before but as you think out to.
<unk> 23, assuming where we are in a more cautious or potentially negative volume environment are we still confident that we have the ability to sort of grow the domestic margins as well as domestic profit next year.
Well, maybe I'll start with just a philosophical approach to building our plan for 'twenty three and then we can have both Brian and I will talk about some of our cost initiatives and taken joined into.
So first this is a very interesting time to be building a financial plan because there is so much uncertainty there is economic uncertainty there is geopolitical uncertainty we do have a contract that's coming up for renewal next year as well. So there's a lot of uncertainty, but here's our philosophical approach to building our plan one we're gonna stay on strategy.
Because we believe that we should invest through whatever comes our way. So that we can continue to improve the customer experience as well as the employee experience. So we're going to stay on strategy, we're going to build more agility into our plan than we've seen before and I would say, we're pretty agile today, well, we're going to we have to be able to turn on a dime and so we're going to build it.
Agility into the plant, we're going to build a plan of conservatism because if you are too optimistic then your expenses are too high and then if there's a whole bunch of would you have to chop to get those expenses out so well think conservatively and will factor into the plan. Some of the challenges that will come our way as a result of higher interest rates and what that may mean for our attention but.
I'm Super excited about what I'm seeing in terms of momentum on the productivity initiatives inside of that business and if I could just talk about one and then I'll turn it over to Brian and the team to talk.
About a year ago, we talked to you about smart package smart facility and how we were going to introduce RFID.
RFID labeling onto our packages.
Said, we'd get it done this year at about 100 of our buildings. We did it's live now in 101 of our buildings, let me share with you. Some of the results that we're seeing because this is pretty cool on average one out of every 400 packages is miss loaded onto a package car that means that it cannot be delivered as a <unk>.
It has to come back into the center bolster the sorting process again and get reloaded. The next day for delivery talk about productivity bleed out.
A good way to operate our business with RFID labels, we now see that the Miss loads are one 800 moving to one in a thousand which is a six sigma level. So as I think about how we're going to invest through we are definitely going to invest in accelerating smart package smart facility because of.
The benefits that we're seeing inside of our business and it's not just in this mode, though that's pretty cool imagine the elimination of all of those are annual scans by our pre letters every day, it's pretty doggone exciting, but what does the productivity initiatives that we're working on so carol thanks.
Just go back to this control what we can control and a lot will happen with the macros on the topline, but we had guided to a $13 seven on the <unk>.
Operating profit margin embedded underneath that was a 12% domestic margin and a 21 five international so nando and the team have got a lot of initiatives from total service plan to what Charles talked about smart package smart facility pushing out automation, Andrew do you want to offer a little bit of color yeah sure. So I'll just.
You know quickly discuss total service planning well.
We kicked that off mid July we are building muscle.
And it's also allowing us to look at other activities that occur within the network.
That arent perfectly aligned with that.
Total service plan and so as we start to refine those areas such as our administrative and clerical areas for.
Packages that are undeliverable.
And other activities that we are closely linked to.
Things like cube utilization, where quality becomes much easier to first visualizing that improve the cost.
Cost structure as a result, and then I think one of the bigger <unk> for US is to really manage our demand through day of week and we start to flatten the demand curve for the week, we see some really impressive.
Cost results there.
As we start to achieve some of those books.
So we will give you our thoughts on 2003, when we released our fourth quarter earnings call. Because we are still in the middle of building a plan, but we've got a lot of initiatives underway. It doesn't stop just in the United States, but that's sort of interesting initiatives underway outside of the United States too.
Absolutely for international as you can imagine the complexity of it we are all about matching the network to demand and in some markets. That's very good because of the record competitive wins, we're having as you heard Brian talk about shifting 27 of our flights to Europe or that export growth at the same time in the moment pulling on the throttle when.
We saw the Lockdowns for energy in China, and pulling down that 75 flights that didn't match with demand, but on top of that we run a significant ground network in Europe for instance, and it's all about utilization on the ground and the trailers to cut back on trailers and we've got hundreds of trailers by driving the highest production rates.
Within that Q, so that you get more you sweat the asset Alamo Theater network, and therefore reduce cost of rentals as well as drivers and trailers all the while maintaining best in class.
Time service performance at 98%.
And it's resonating with customers I mentioned the growth, we're seeing that again that competitive win that we expect to play out in the upcoming quarters as well.
Thank you very much Greg great comments. Thank you.
Our next question will come from the line of top Waterworks of UBS. Please go ahead.
Yes, good morning, and congratulations on the strong results.
Wanted to see if you could offer some thoughts about sensitivity to lower international airfreight rates.
I think your comment on <unk> sounds like currency was bigger effect I don't think you mentioned the impact of lower rates, but how should we think about that impact on international margin.
If international Airfreight rates keep falling does that flow through to your international export.
Or do you have some resiliency relative to that and then also if you can look back and I think at your analyst meeting you had talked about I don't know if it was 21 or 21, 5%, but some type of a margin level, where you say you know after the belly space capacity comes back. This is what we get two so couple of questions for you on the international margin.
Thank you.
So Tom from a service perspective, Katy and the team are doing an outstanding job.
In terms of managing.
The.
International rates the airfreight declined over the rates that you mentioned those will bleed through a bit but the reality is the the margin in the third quarter. It was really all about about 80% plus was due to currency and then some of it on the U S export land, which we don't control as much of that is where we delever. We expect that volume to go up in the fourth quarter.
To be able to pass some of the leverage through so I think we have we have a line of sight to manage that our international margin will increase sequentially Q3 to Q4 and part of that is because of the great work that Kate and team are doing to move off of charter onto Brown <unk> Brown tells or just a better economic equation for us and we're utilizing the aircraft that we own which will certainly help that margin pressure.
In terms of what a good operating margin is for international level.
We love, what we've got and we want to continue to grow its okay to declare that we're gonna be number one and the premium international logistics market, so that means higher margin.
Okay.
Thank you.
Thank you thanks, Tom.
Our next question will come from the line of Brian <unk> of J P. Morgan. Please go ahead.
Hey, good morning, Thanks for taking the question. So just wanted to get your thoughts on durability of pricing in the industry, especially U S domestic.
Is there a longer term trend here to reset expectations around service levels as you kind of alluded to coming from historical thought process that shipping is supposed to be free.
And maybe you can offer some comments around price elasticity in some of your target markets and if you've seen any demand destruction yet.
And then Brian just a quick one of the only give too much on 2023, but it's hard to ignore that move on interest rates.
Maybe you can just impacts on pensions both above the line when it comes to U S domestic margins and perhaps overall sensitivity for the whole company. Thank.
Thank you.
So in terms of pricing durability.
Value is defined by what our customers are willing to pay and the customer is willing to pay for the service that we provide.
The new business that we've won and we've been winning new business has come in at very very solid revenue quality.
So as I look back over the past several years from 2019 to now we've grown our RFP P in the United States by 23% and.
And we did that through a number of different ways by renegotiating our longer term contracts by leaning into the parts of the market that really value. Our end to end network through some demand surcharges a little bit of help from fuel. It's been a real success story was also driven productivity during that timeframe, but the margin expansion.
It's really driven by the RCP barrel.
They're ahead, we will continue to have RPT growth you heard Brian talk about the G. R. R. Cri that we just announced but there will be more of a balance between RVP and productivity to enable our our margin expansion going forward. We think that's just the right thing to do in fact, as we continue to draw.
<unk> productivity.
Productivity inside of our business, we're willing to give some of that back to our customers through a revenue share because why not if we can increase delivery density and we're seeing some good proof in our in our both our pilots and our a live case will give some of that back because we should I think about a third a third a third.
Third a third for the customer or a third for the shareholder and a third for UBS.
No we have not seen any demand destruction at this point because value is defined by the customer by what the customer is willing to pay for in service matters.
I'll pick up the second part of the question in terms of the pension and Carol alluded to in an earlier answer. This morning that rates are moving and pension in 'twenty three it's going to be determined by discount rates and asset performance actually on December 31st. So it's too early to get into specifics, but I think the gist of your question is if the year ended today I would expect higher discount rates would ask.
Reduced service costs and increase our profit in the domestic business above the line, but thats, Unfortunately going to be probably more than offset by higher interest expense and lower pension income below the line. So I think net net in the P&L it will be a net headwind.
Some favorability above the lines offset by some headwinds below the line.
Okay. Thank you.
Our next question will come from the line of Ravi Shanker of Morgan Stanley . Please go ahead.
Thanks, Good morning, everyone. A couple of questions on peak I think you mentioned that you're going to <unk> volume decline is due to.
Some contractual agreements with enterprise customers I think you said that in <unk> as well can you detail that a little bit more and maybe kind of what the kind of Amazon run rate looks like by the time you exit the year.
And also just broadly on peak.
Why are you why is your peak season hiring flat.
When <unk> are lower and your.
And then do you have more automation than last year, you were using some other.
<unk> been hiring can be materially lower so it kind of maybe some rationale again that'd be great.
So first on peak volume if you started last year and since the easy way to think about it between Q3 and Q4 volume grew 25% and then obviously during the peak time, which is Thanksgiving through Christmas, it's even higher than that as we look to this year, we expect to see the similar search Q3 Q4.
Maybe more in the 24% area why because we have as you as we shared with you reached agreement with our largest customer about the volume and that we will take into our network and the volume that they will deliver so it's just a function of that contractual arrangement and what that does for us actually it gives us room.
And by additional customers into our network and give them great service during peak.
Which we are which we are doing.
In terms of the hiring question Ravi.
There is turnover in the numbers because we don't keep everybody that we hire. It's also just a nice round number so I wouldn't read anything into that other.
Other than it's just a nice round number what I'm Super pleased about is how we've changed some of our processes to make it easier to hire people into <unk>.
EPS for peak for example, we have a QR code. If you open up the QR code on your phone you can apply for a job and get a job offer in less than 30 minutes. That's way cool we have shortened the time it takes to onboard a driver into our company last year. It was eight weeks. This year, it's 11 days that's.
Cool.
We've really put the pedal to the metal on our social.
Messaging, if you will our social campaigns, so by amplifying our social mattresses, we saw that we had $1 4 million impressions in the month of September that's up 60% year on year, we had a very successful October job fast and Brown Friday is coming up on November 4th.
We're really excited about Brown Friday last year, we had 85000 applications on Brown Friday, so were expecting a similar amount. This year. So we are ahead of where we were a year ago on the hiring frac feeling very good because we've got to get a lot of people in to manage this or it's Brian you want to add something I would just add Carol Ravi we're sort of executing the play we had call we had guided.
Does it mean that the bottom line on a 11 six full year and that was an 11 618 hundred 11 <unk> were actually delivered the first half of the year, obviously a lot of changes in dynamics in the market, but we're on track to deliver an 11 seven in the back half of the year. So net net Ravi I think we're delivering what we said we would do slightly different playbook in terms of volume price cost, but at the end of the day.
Executing on those contracts it was part of the original plan.
Great. Thanks, guys.
Our next question will come from the line of Jordan Oliger of Goldman Sachs. Please go ahead.
Yes, Hi, just sort of curious on I know you mentioned the higher shifts or.
Maybe back towards December sort of what gives you confidence in that and does that sort of imply that may be things that start a little slower, but you're hearing from your customers that.
Yeah.
It's going to do that shift back to sort of traditional patterns pre COVID-19 pattern snacks.
I remember last year when there were all these supply chain jams and inventory was at very low levels.
Everyone was same shop early shop early shop early so we just believe that the inventory levels are much better shape than they were a year ago.
To return to a more normalized shopping pattern for me.
And if we can just talk about the tone of business. Our current business here. It is almost Halloween October as well.
Good.
Yes.
And we've got an extra delivery day, Jordan and in December so feeling feeling good and we expect the peak to be a little bit later and we're ready for it.
Thank you.
Our next question will come from the line of Todd Fowler of Keybanc capital markets. Please go ahead.
Okay, great. Thanks, and good morning, So Carol in your prepared remarks, you talked about logistics as a service and I was just curious if you could expand a little bit on that and kind of how you see that unfolding and if theres any external benchmarks that we should be looking at to kind of mark the progress on that thanks.
So we're building logistics as a service and it's very early days, but it includes components of what we've talked to you about in the past one of the pillars of logistics as a service is improving delivery density and as you know we've been partnering with commerce hub to go upstream in the cart to improve delivery density.
With our lives in this case, it's going very well, so we're adding additional customers onto that platform. The second pillar of logistics as a service is improving visibility end to end and we've talked to you about this in the past I think we called it project if all of our projects Symphony, but it really is providing visibility from the many.
Factor all the way to the end distribution planes, but that's part of logistics as a service. The third pillar is providing financial solutions, we do that today through Ucs capital, where we have a very robust insurance product, we're looking at adding some additional financial products to that pillar.
We then move to <unk> I will say advanced capabilities, which is.
Including technology to help you.
<unk>, how to optimize our supply chain warehousing fulfillment, our Sabine and then lastly, while we have a very good returns business. We think we could have a robust reverse logistics business and all of that will be powered by technology.
As a way to measure this in the future will be and a number of different ways, but basically this is going to create new revenue streams for us.
So as we build this out we will put these new revenue streams into our into our our plans and then we will share those with you and then you can hold us accountable to those plans.
Sounds good. Thank you. Thank you.
Our next question will come from the line of David Vernon of Bernstein. Please go ahead.
Hey, Good morning, guys two quick ones for me, Brian you mentioned.
You quantified the productivity tailwind sort of accelerating into the fourth quarter should we be expecting that same sort of order of magnitude productivity on the domestic side as we go through the next couple of quarters here as you as you annualize the impact of this whole service plan in New York May be tracking in that kind of stuff I'm, just wondering whether how much of that is sensitive to two overall volume levels.
We expect that same sort of dollar value of productivity in the first half of next year and then with respect to the Union agreements you guys have reached with the pilots and the machine.
Can you talk a little bit about kind.
Kind of.
The level of adjustments were made there and whether there's any read across to the broader negotiation for next year.
Yes happy to take.
The cost question, so look the momentum with nano and the team. They are really just getting started we saw CPP growth about 20 about double digit in the first half that will be high single digit in the second half of the year, we would probably expect to see that trajectory continue into next year I don't want to get out of my skis, though so we'll come out at the end of the fourth quarter. It gives you some guidance.
For RVP and CPP for next year.
We were pleased with the contract extensions that we had both with our pilots as well as our aviation mechanics. The terms of those contract extensions were in line with the longer term financial plans that we had already built so we felt very good about that but more importantly, let's say percentage of out there.
Ups's, who voted in favor of the contract extension I was delighted with that it exceeded our expectations and it speaks volumes to the relationships that we have with our employees.
The fact that these are really great job. So the only read through to the upcoming Teamsters contract negotiation would be either they've got a great relationship with our employees and these are great jobs.
Alright, thanks for the time guys.
Thank you.
Our next question will come from the line of Bruce Chan of Stifel. Please go ahead.
Hi, good morning, everyone and thanks operator.
Just wanted to touch on equipment and capacity quickly, Brian you mentioned higher maintenance cost is that just a function of inflation or is that fleet age two and if its fleet age when do you think that starts to normalize.
And then maybe just a follow up quickly on the aircraft fleet side you had some other providers out there that are looking to reduce capacity any plans for you to do the same as we look at tail risk in 23. Thank you.
So from a maintenance perspective, we've actually gone through a very systematic programmatic approach.
<unk> gone out with multi year on the airline for example, we now have a 10 year maintenance programs to manage the fleet age of the equipment. It is going up in terms of age and it will be a factor that in on more of a normalized run rate over the next decade.
Okay, and then just as far as capacity on the on the fleet side any plans to reduce or youre going to keep things fairly static.
Right now we announced some recent acquisitions with Boeing and so we have the next several years outlined will remain fluid on that as we track volumes and shift the aircraft around I guess, the part of the advantage of having an aging fleet is that we can retire if need be if that's right.
That's news is actually replacing the aircraft with better energy efficient aircraft and more and actually take our cost down as we sat down some of the MD elevens from a sustainability standpoint, that's a positive thing from an operating.
Productivity standpoint, that's also a positive thing so.
That's part of the overall strategy that we've run over the next 10 years.
And Steven we have time for one more question.
Our final question will come from the line of Stephanie more of Jefferies. Please go ahead.
Hi, good morning, Thank you.
I wanted to touch on the upstream delivery density pilot apparel that you mention you know maybe if you could share any kpis on that pilot. What we you saw that gave you confidence to expand it with other customers and kind of what we should be looking for in terms of the eventual rollout of that that off that platform. Thank you.
Yeah. So it's still early days Stephanie Butler, we're pleased with what we're seeing you know we were in pilot then we went live with one of our customers and we started to see good matches, but to get that 110th improvement and delivery density they really need a 5% match and we werent seeing 5%. So what we just did is we increased the halsey.
We had been holding the orders of the cart for an hour we increase the whole time to six hours and now we're starting to see a creep up to that 5% match, that's cool because of 5% match then if you translate it out too.
These are our opportunity set that's every assay 110th improvement in delivery density, which is a 300 million dollar of value unlock so early early days, but we really like what we're seeing.
Excellent alright, well, thanks, everybody for joining us today look forward to talking to you all next quarter and that concludes our call.
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