Q3 2024 United Parcel Service Inc Earnings Call
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Speaker Change: Good morning, My name is Greg Alexander and I will be your facilitator today I would like to welcome everyone to the U P. S third quarter 2024 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 any analysts that want to ask a question that was there.
Speaker Change: To press one then zero on your telephone keypad. It is now my pleasure to turn the floor over to your host Mr. P. J <unk> Investor Relations officer, Sir the floor is yours.
Speaker Change: Good morning, and welcome to the UBS third quarter 2024 earnings call.
Speaker Change: A reconciliation of non-GAAP adjusted amounts to GAAP financial results.
Speaker Change: Is available in today's webcast materials.
Speaker Change: These materials will also be available on the UBS Investor Relations website.
Speaker Change: Following our prepared remarks, we will take questions from those joining us via the teleconference. If you.
Speaker Change: Wish to ask a question press, one and then zero on your phone to enter the queue.
Speaker Change: 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.
Speaker Change: Now I'll turn the call over to Carol.
Carol: Thank you P J and good morning.
Carol: On our last earnings call, we said that the second quarter would not only be the bottom, but a turning point for our performance and that we would return to revenue and profit growth in the third quarter, which we get I.
Carol: I would like to recognize and thank <unk> for their hard work and efforts.
Carol: Their relentless focus on driving productivity, while ensuring excellent customer service allowed us to deliver these results.
Carol: In the third quarter, we faced a macro environment that was slightly worse than we expected.
Carol: In the U S online sales slowed and manufacturing activity was lower than we anticipated.
Carol: This slowdown in manufacturing activity was also true outside of the U S.
Carol: As we continue to see lower industrial production way on volume in certain geography.
Carol: But the macro environment didn't prevent us from growing revenue and profit.
Carol: As we leaned into the parts of the market that value our end to end network and we drove expense leverage through ongoing productivity initiatives.
Carol: In the third quarter, our consolidated revenue was $22 $2 billion, an increase of five 6% versus last year.
Carol: Consolidated operating profit was $2 billion.
Carol: Of 22, 8% from last year.
Carol: And consolidated operating margin was eight 9%.
Carol: In the U S. This was the second consecutive quarter of average daily volume growth.
Carol: And it was our highest year over year ADB growth rate since the first quarter of 2021.
Carol: In the third quarter, we responded strategically adjusting our pricing and optimizing our operating plans on a portion of this business.
Carol: Further we increased our focus on matching our pricing to the quality and attributes of the service we provide.
Carol: We did this by leveraging the power of pricing science through our pricing architecture of tomorrow or a O T technology.
Carol: Our revenue per piece growth rate improved in the third quarter from what we reported in the second quarter and.
Carol: And we expect this trend to continue.
Carol: On the cost side, our team did an excellent job of managing expenses across the board.
Carol: As it relates to our two major cost out initiatives, we are continuing to deliver solid results.
Carol: Fit to serve which was designed to optimize and rightsize. Our management structure is slightly ahead of forecast.
Carol: And with network of the future.
Carol: So far this year, we've completed 45 operational closures, including nine full buildings that had been shut down.
Carol: I'd like to give you a brief update on our customer first people led innovation driven strategy.
Carol: Starting with customer first.
Carol: We've discussed we have a goal to become the number one complex health care logistics provider in the world to that end, we said, we would pursue certain inorganic opportunities and we have.
Carol: Last month, we entered into an agreement to acquire frigo trap.
Carol: Move that will enhance our end to end temperature sensitive health care capabilities across Europe.
Carol: Today, 80% of pharmaceuticals in Europe require temperature controlled transportation.
Carol: Rico trends offers pan European Cold chain transportation, as well as temperature controlled and time critical freight forwarding capabilities.
Carol: <unk> worked closely with the U S. P S to ensure the transition progressed smoothly and again.
Carol: As of October one all contracted USPS, Eric cargo business has been fully on boarded and.
Carol: We expect this business to deliver strong consistent revenue at an attractive margin.
Carol: Moving to people led since our founding we've had a culture of driving safe work practices and by using new technology and tools, we've seen a dramatic improvement in the number of injuries and accidents.
Carol: For example in the U S. This year, we've had our best safety results and and yards.
Carol: The advances in safety were achieved through innovative driver education and training like our intergraph driver training schools.
Carol: This focus on safety enables driver achievements like our circle of honor.
Carol: Which recognizes drivers with 25 years or more of driving without an accident.
Carol: Today, our circle of honor has grown to nearly 10000 driver.
Carol: Now, let's turn to innovation, driven which for this call is all about the peak holiday season.
Carol: This year's holiday season has only 17 shipping days between Black Friday and Christmas Eve.
Carol: We haven't seen such a compressed peak since 2019.
Carol: We do peak better than anyone and we're six years in a row of industry leading service.
Carol: We're confident our plans and execution will make that seven.
Carol: To prepare we've been collaborating with our customers on daily volume expectations and the timing of their promotion.
Carol: While our customers are still expecting a good holiday selling season.
Carol: <unk> shippers have tempered their volume expectations.
Carol: In any case will be ready to deliver and will leverage our network planning tools and other proven technologies to control first how the volume comes in.
Carol: Operating margin was eight 9% an increase of 120 basis points compared to the third quarter of last year.
Carol: Diluted earnings per share was $1 76 up 12, 1% from the third quarter of 2023.
Carol: Now, let's look at our business segment.
Carol: In the U S domestic segment our performance in the third quarter was driven by two factors.
Carol: First with strong volume growth the highest growth rate, we've seen in more than three years.
Carol: And second was excellent cost management, which resulted in a year over year decrease in cost per piece of four 1%.
Carol: U S average daily volume or Adv increased six 5% compared to the third quarter of 2023.
Carol: Looking at product mix in the third quarter ground average daily volume increased eight 9% by total air average daily volume was down six 3%.
Carol: We continue to see customers shifting down from air to ground and some ground volume is shifting down to share for us.
Carol: Within ground share post volume levels rose slightly compared to the second quarter driven by growth in our digital access program.
Carol: While share post volume comes at a lower revenue per piece given the enhancements we've made to our matching algorithm, we were able to redirect more surplus packages into our network driving delivery density.
Carol: Yeah.
Carol: For the quarter <unk> average daily volume was up 8% year over year.
Carol: Increasing for the first time in two years.
Carol: Growth was driven by Smbs, which had an increase in <unk> average daily volume of three 8%.
Carol: <unk> average daily volume increased 11% year over year and made up 58, 3% of our volume a.
Carol: The slight downward shift from the second quarter.
Carol: In terms of customer mix, we saw Adv growth from both enterprise and SMB customers Smbs made up 29, 4% of total U S volume in the third quarter.
Carol: For the quarter U S domestic generated revenue of $14 5 billion up five 8% compared to last year driven by strong volume growth.
Carol: Key drivers air and Ocean forwarding revenue was up 15, 1% driven by strong market demand out of Asia.
Logistics delivered revenue growth driven primarily by the impact of the <unk> acquisition.
Carol: And on boarding of USPS air cargo contributed to revenue growth in SCS.
Carol: Partially offsetting these gains was weaker performance at Coyote truckload brokerage business and the completion of the sale in mid September.
Carol: In the third quarter supply chain solutions generated operating profit of $217 million down $58 million year over year, primarily driven by our efforts to configure our air network as we on boarded the USPS air cargo business.
Carol: Now that we have fully on boarded this volume we expect it to generate consistent revenue and we expect an attractive margin on a consolidated basis.
Carol: Sure.
Carol: For SCS operating margin in the third quarter was six 4%.
Carol: Walking through the rest of the income statement, we had $230 million of interest expense.
Carol: Our other pension income was $68 million.
Carol: And our effective tax rate for the third quarter was approximately 21%.
Carol: Now, let's turn to cash and capital allocation.
Carol: So far this year, we generated $6 $8 billion in cash from operations and free cash flow of $4 billion.
Carol: Including our annual pension contribution of $1 4 billion.
Carol: We refinanced $1 5 billion and current maturities year to date, and we finished the quarter with strong liquidity and no outstanding commercial paper.
Carol: So far this year ups's paid $4 billion in dividend.
Carol: And lastly, we have completed our targeted $500 million share repurchase program in the third quarter.
Carol: Which brings us to our outlook.
Carol: In July we provided an update to our full year financial targets based on global economic forecast and our performance in the first half of the year.
Carol: Now looking ahead at the full year, we have updated our outlook to reflect three things.
Carol: First our third quarter results and the focus on revenue quality.
Carol: The sale of Coyote.
Carol: And finally, new softer peak volume forecast from our customers.
Carol: As have been tempered and we believe it's driven by a couple of factors first external forecast for the holiday season.
Carol: Come in in fact to the forecast for ESMO in the fourth quarter is now about 3% early in the year. It had been about 5%. If you look at the just the peak part of the of the holiday season forecast are all over the board candidly from a low of 2% to a high of 11% and F&B global Hasnt at about <unk>.
Carol: Three 5% part of this we believe is influenced by the tight compressed peak period. They are only 17 shipping days between Thanksgiving and Christmas Eve and what forecasters in some of our customers are saying is because of the tightness of the shipping.
Carol: Season that many customers will go into a store to complete their holiday purchases. The consumer actually is in pretty good shape, but we think there'll be some dynamics and how the consumer shops. During the peak season. So it will still be a good peak in fact in our prepared remarks, we called out that our peak day will deliver 2 million more packages than we.
Carol: Did last year, they'll still be a good peak, but just not as dynamic as people thought at the beginning of the year.
Carol: Whatever happens we're prepared we're prepared to handle the volume and then on the pricing surcharge.
Speaker Change: Seeing real good take rate on the pricing surcharge for the holiday I should say and and maybe Matt got easier math, perhaps you want to comment on the holiday surcharge yeah, absolutely. So first off we're working closely in collaboration with all of our customers you know Carol talked about the top 100, which are extremely important just due to the peaking is that they bring during during the season, but.
Matt: We've really worked again, we've got a good structure in a process in place where we can manage our our holiday demand surcharge at the customer level and we have a lot more flexibility to work with them as we go through through the peak season.
Matt: We've made the lanes faster and as a result that premium unlock and by the way with retrofits growing so we feel good about the equation and we will definitely continue it.
Speaker Change: I know I don't think I asked the question well I actually was thinking a little bit about domestic in terms of the margin.
Matt: [laughter].
Matt: So I think in the domestic side productivity as a virtuous cycle here and as Nigel pointed out.
Speaker Change: There is nothing that's not under review right everything is under review and we continue to drive productivity that exceeds our expectations, Brian anything you want to yes, I would just say so.
Brian: If you were if you remember we've got a contract that locked up that we have.
Brian: <unk> cost for the next four years for 60% of our domestic cost structure.
Brian: With a focus on revenue quality and our ability to to to win win more and win new and the places where we really want to like you saw in the third quarter with commercial and SMB commercial growing.
Brian: Starting to grow again, we do think we have the ability to one continue to take actions to drive rep repeats ourselves as well as Carol said productivity production of the virtuous cycle with a known cost structure as we go into 'twenty, five and we like that commercial business.
Brian:
Brian: Delivery metrics associated with that and other packages per delivery and one way we can win commercialized with new capabilities. So we had a big win in the third quarter and.
Brian: Determining factor for this customer to come into our network.
Brian: RFID labels, so thats, a new capability that we didn't have before.
Speaker Change: Great. Thank you.
Speaker Change: Yeah.
Speaker Change: Your next question comes from the line of Conor Cunningham familiar research. Please go ahead.
Speaker Change: Conor Cunningham your line is open check your mute button.
Speaker Change: Okay, we'll move on we'll go to the line of.
Speaker Change: Jordan <unk> from Goldman Sachs. Please go ahead.
Jordan <unk>: Yeah, Hi morning.
Jordan <unk>: Question for you, so a little bit more on the U S. Postal Onboarding, if I could maybe if you could share some of the experience I know you had the upfront step up costs.
Jordan <unk>: But is it still a few weeks and perhaps talk about how the operations are going there.
Delivering on the profit levels that you had talked about.
Jordan <unk>: Just any general thoughts around how that's going to contribute going forward. Thanks.
Speaker Change: Well as you point out Jordan.
Speaker Change: We did have a bit of a transition in the third quarter as the USPS contract with their previous carrier expired October one and.
Speaker Change: And we didn't want to wait until October one to onboard that volume because speakers right around the corner. So we agreed with the USPS that we would operationalized.
Speaker Change: Copies to inflect positive in the U S and that's really driven by a couple of things look we talked about actions that we're going to take around specific customers that were enabled by our architecture of tomorrow and the work that we've been doing the investments have been made to create more sensitive demand channels, DAP and Iot and the modifiers and were leveraging those in order to.
Speaker Change: Adjustments to help drive rep per piece. The other thing is what we're doing on the surcharges and the <unk> that we will continue to see lift as we go through the fourth quarter and into 25. So we look at.
It's a positive trajectory on retrofits and it's clearly an area of focus as we move from our year, one door plus two strategy.
Speaker Change: And pricing architecture of Tomorrow is really moving from the art to the science and pricing.
Speaker Change: The elements of this architecture modifiers that we use modifiers that can provide discounts to our customers are modifiers that allow us to increase right and I'll just give you a real life example of what happened in the third quarter to help you understand it.
Speaker Change: In the third quarter, we had a discount modifier that we adjusted basically tested the elasticity, we reduced the discount.
Jeff: Thanks, Jeff.
Jeff: Which increased the RFP.
Jeff: By 12% and reduced the volume of 26.
Jeff: We liked that training and the <unk>.
Jeff: It's a modifier is not a contract that has to be reopened and re negotiated.
Jeff: Adjusted.
Jeff: And this this is just one element of pricing architecture of tomorrow that we will use not only in the fourth quarter, but in 'twenty five and beyond.
Speaker Change: Great. Thank you.
Speaker Change: Your next question comes from the line of Daniel <unk> from Stephens. Please go ahead.
Hey, guys. This is Joe <unk> on for Daniel Thanks for taking the question just wanted to ask another one actually on a revenue per piece.
One of your peers noted increased price competition in the market are you seeing any of that today and then do you think we've felt peak trade down pressures yet.
Speaker Change: Okay.
Speaker Change: So I'll start on the on the price pressures look we exist in a very price competitive industry, but we think it's very rational right and when you look bid forbid in product a product. It is very rational we know we have to win on capabilities and that that's where we continue to add with every customer every day.
Speaker Change: You got to deliver service to do it it starts with US Foodservice and then and then we add incremental capabilities, Mike RFID to win win where we really want to win most and.
Speaker Change: I pointed out as Carol mentioned, we've had big enterprise commercial went through that we also are seeing commercial now grow nearly 1% for the first time this year.
Speaker Change: We really started to catch that from from the contract that's been a big momentum point, and then specifically F&B commercial growing three 8% those sorts of things allow us the capabilities that we have allow us to win more and win new in those areas that helped drive rep for peace growth, despite a very competitive pricing environment.
Speaker Change: Your next question comes from the line of Brandon or Glinski from Barclays. Please go ahead.
Speaker Change: Hey, good morning, and thanks for taking my question and congrats on the growth for the first time in a couple of years here.
Speaker Change: Carol I think you mentioned something about enterprise customers and I know in the past you've talked about glide down. So can you just put that in context as you head into 2025, and then just very quickly on fit to serve I didn't get it but is that going to incrementally deliver more in the fourth quarter and thank you.
Speaker Change: So first on the customer glide town.
Speaker Change: We have as you know open in a glide down arrangement with our largest customer and they continue to be our largest customer.
Speaker Change: It's fair to say that we have seen them drive a lot of the reduction in our air volume in fact, if I look at the third quarter performance, 100% of the decline in airline was down about six 5% is it attributable to their largest customer so they like many trading down from air to ground and in their case, a little bit of ground out to their own network.
Speaker Change: We're fine with that because it creates opportunity for us to grow in other areas and then looking ahead, yes, and then on the Fitzgerald point, yes.
Speaker Change: We do expect about $70 million incremental to go to about $350 million in the fourth quarter and we've seen great great progress with that program.
Speaker Change: Thank you.
Speaker Change: Your next question comes from the line of Ken <unk> from Bank of America. Please go ahead.
Speaker Change: Hi, Good morning, this is Adam calcium for context there.
Speaker Change: You noted in the release that you are the scope of the fit to serve initiatives.
Speaker Change: Which previously called for a reduction of about 12000 positions.
Speaker Change: Could you just expand on what that means is there.
Speaker Change: That actually accelerated this quarter.
Speaker Change: And just any thoughts on how you would expand the scope and what you would target there. Thanks.
Speaker Change: So youre just asking for a status update on fit to serve.
Speaker Change: Yes on Fiserv is as we said we have pulled forward incremental incremental savings opportunities.
Speaker Change: We hit the full run rate than we expected we will have some incremental benefit as we ramp into the fourth quarter, but but where we are.
Speaker Change: We're continuing forward with it as planned and to your question on do you have additional opportunities.
Speaker Change: An opportunity Rich company and as you heard from nano, we're looking at all opportunities to drive it better.
Speaker Change: Experience for our customer and actually higher productivity.
Gregory have time for one more question.
Gregory: Okay. Your final question comes from the line of Ravi Shanker from Morgan Stanley. Please go ahead.
Ravi Shanker: Thanks, Good morning, everyone.
Ravi Shanker: Could you maybe just a follow up on the holiday side.
Ravi Shanker: I think you announced a pretty big step up in your hiring for the first time in many years I know to be compressed.
Ravi Shanker: Or do you see peak season.
Ravi Shanker: But whats the logic behind that if youre seeing a little bit of a reduction in customer experience or expectations on volumes here.
Ravi Shanker: Or do you think that's creating that and is there like a minimum surcharge bogey you guys need to going to a couple of extra costs. Thank you.
Speaker Change: So last year, we announced that we were hiring 100000 for the peak holiday season, and our Adv declined seven 4%. This year, we announced that we're hiring 125000, and our ABB will be positive. So it's not out of the realm recently.
Speaker Change: We should hire more people this year than we did last year.
Speaker Change: Is what you need to know we will hire what we need for peak, regardless of where the volume actually and so we're not going to over hire for people, we will hire what we need and what we've done over time Ravi as we've added this amazing capability, we're within just a few.
Speaker Change: Now just a few minutes, we can actually get a job offer out where we can reset itself.
Speaker Change: So we can flex up our fleet flex down the way, we need to we know that what you'd like to add any yeah. I would just say the number also includes a favorable employee mix. So this year, we're adding we're going to increase our help our teams with our drivers by above 10% that's not a small number so a big percentage of our volume will be delivered.
Speaker Change: By helpers seasonal helpers that can deliver at Christmas time, and we've amped that up and make sure that we've got every position optimized.
Speaker Change: That is the number is Carol headset, and we're going to deliver a great peak season.
Speaker Change: Thank you.
Speaker Change: Thank you Greg. This concludes our call. Thank you all for joining and have a great day.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Ladies and gentlemen that does conclude your conference for today. Thank you for your participation and for using AT&T teleconference. You may now disconnect.
Speaker Change: Yeah.
Speaker Change: Yeah.