United Parcel Service Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 24, 2024

There are 10 speakers on the call.

Operator

Good morning. My name is Greg Alexander, and I will be your facilitator today. I would like to welcome everyone to the UPS 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.

Operator

Any analysts that want to ask a question, now is the time to press 1 and 0 on your telephone keypad. It is now my pleasure to turn the floor over to your host, Mr. PJ Guido, Investor Relations Officer. Sir, the floor is yours.

Speaker 1

Good morning and welcome to the UPS Q3 2024 earnings call. Joining me today are Carole Thome, our CEO Brian Dykes, 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 2023 Form 10 ks and other reports we file with or furnish to the Securities and Exchange Commission. These reports, when filed, are available on the UPS Investor Relations website and from the SEC.

Speaker 1

Unless stated otherwise, our discussion today refers to non GAAP adjusted results. For the Q3 of 2024, GAAP results include an after tax net gain of $36,000,000 or $0.04 per diluted share comprised of a $152,000,000 gain from the divestiture of our Coyote Logistics business, net of transformation strategy costs of $116,000,000 Transformation strategy costs consisted of after tax costs of $81,000,000 related to our fit to serve program and $35,000,000 related to our Transformation 2.0 program. Additional detail on our transformation costs and initiatives as well as a reconciliation of non GAAP adjusted amounts to GAAP financial results is available in today's webcast materials. These materials will also be available on the UPS Investor Relations website. Following our prepared remarks, we will take questions from those joining us via the teleconference.

Speaker 1

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.

Speaker 2

Thank you, PJ, and good morning. On our last earnings call, we said that the Q2 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 Q3, which we did. I would like to recognize and thank UPSers for their hard work and efforts. Their relentless focus on driving productivity while ensuring excellent customer service allowed us to deliver these results. In the Q3, we faced a macro environment that was slightly worse than we expected.

Speaker 2

In the U. S, online sales slowed and manufacturing activity was lower than we anticipated. This slowdown in manufacturing activity was also true outside of the U. S. As we continue to see lower industrial production weigh on volume in certain geographies.

Speaker 2

But the macro environment didn't prevent us from growing revenue and profit 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. In the Q3, our consolidated revenue was $22,200,000,000 an increase of 5.6% versus last year. Consolidated operating profit was $2,000,000,000 up 22.8 percent from last year and consolidated operating margin was 8.9%. In the U. S, this was the 2nd consecutive quarter of average daily volume growth and it was our highest year over year ADV growth rate since the Q1 of 2021.

Speaker 2

In international, average daily volume growth finished flattish and continued the upward momentum we've seen since the Q1 of this year. And in SCS, air and ocean forwarding contributed to strong revenue growth. Looking at the U. S, during the quarter we focused on growing certain pockets of commercial business and grew B2B volume by nearly 1% compared to last year. 1 of the areas of commercial focus was retail B2B.

Speaker 2

Our B2B roots are in retail. In fact, we deliver merchandise to over 20,000 retail outlets across the country. To serve these customers, we offer a store replenishment with delivery window solution that provides retailers daily inventory replenishment within a 2 hour window. Within this solution, we also provide visibility to the number of packages scheduled to be delivered. Our store replenishment solution along with our RFID technology enables retailers to reduce stockouts and more efficiently run their receiving operations.

Speaker 2

This is just one example of how our customer focused capabilities are enabling us to win new commercial volume. Now that U. S. Volume was flowing back into our network, we have heightened our attention to revenue quality with a focus on the segments of the market we want to serve. You will recall that in the second quarter, we saw an unexpected surge of short zone lightweight e commerce packages flow into our network.

Speaker 2

In the Q3, we responded strategically, adjusting our pricing and optimizing our operating plans on a portion of this business. Further, we increased our focus on matching our pricing to the quality and attributes of the service we provide. We did this by leveraging the power of pricing science through our pricing architecture of tomorrow or AOT technology. Our revenue per piece growth rate improved in the 3rd quarter from what we reported in the Q2 and we expect this trend to continue. On the cost side, our team did an excellent job of managing expenses across the board.

Speaker 2

As it relates to our 2 major cost out initiatives, we are continuing to deliver solid results. Fit to serve, which was designed to optimize and right size our management structure is slightly ahead of forecast. And with Network of the Future, so far this year, we've completed 45 operational closures, including 9 full buildings that have been shut down. I'd like to give you a brief update on our customer first people led innovation driven strategy, starting with customer first. As we've discussed, we have a goal to become the number one complex healthcare logistics provider in the world.

Speaker 2

To that end, we said we would pursue certain inorganic opportunities and we have. Last month, we entered into an agreement to acquire Frigo Tram, a move that will enhance our end to end temperature sensitive healthcare capabilities across Europe. Today, 80% of pharmaceuticals in Europe require temperature controlled transportation. Frigo Trans offers pan European cold chain transportation as well as temperature controlled and time critical freight forwarding capabilities. Plus Frigo Trans has temperature controlled warehousing capabilities with every temperature from cryopreservation, which is -196 degrees Celsius to ambient, which is about 25 degrees Celsius.

Speaker 2

We are targeting to close the FreegoTrans acquisition in the Q1 of next year. Complex healthcare logistics is a growing business for us and we're continuing to invest in the capabilities needed to accelerate growth. We have dedicated healthcare facilities in 36 countries and provide specialized handling and visibility to our customers through our UPS Premier product. In the Q3, we generated $2,500,000,000 in consolidated healthcare revenue, which contributed to revenue growth across all three segments. Shifting to international.

Speaker 2

In time for the holidays, we've made several enhancements. In September, we expanded residential Saturday delivery to the 8 largest markets in Europe without an additional charge. This enhancement meets our customers' need for speed and we now provide a superior service offering. Further, we sped up deliveries to over 35 countries across Asia, Africa and the Middle East. And to meet the expected demand for this year's peak holiday season, we added over 200 flights connecting Asia to Europe and the U.

Speaker 2

S. Quickly touching on DAP, our digital access program. DAP continues to deliver strong SMB growth in both B2B and B2C segments. In the 1st 9 months of this year, we generated $2,300,000,000 in global DAP revenue and we expect to deliver over $3,000,000,000 in DAP revenue for the full year. As you know, we have been onboarding our new air cargo business with the United States Postal Service.

Speaker 2

During the Q3, our network planning teams worked closely with the USPS to ensure the transition progressed smoothly, and it did. As of October 1, all contracted USPS air cargo business has been fully onboarded and we expect this business to deliver strong, consistent revenue at an attractive margin. 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.

Speaker 2

For example, in the U. S, this year we've had our best auto safety results in 10 years. The advances in safety were achieved through innovative driver education and training like our Inter Grad driver training schools. This focus on safety enables driver achievements like our circle of honor, which recognizes drivers with 25 years or more of driving without an accident. Today, our circle of honor has grown to nearly 10,000 drivers.

Speaker 2

Now let's turn to innovation driven, which for this call is all about the peak holiday season. This year's holiday season has only 17 shipping days between Black Friday and Christmas Eve. We haven't seen such a compressed peak since 2019. We do peak better than anyone and with 6 years in a row of industry leading service, we're confident our plans and execution will make that 7. To prepare, we've been collaborating with our customers on daily volume expectations and the timing of their promotions.

Speaker 2

While our customers are still expecting a good holiday selling season, recently shippers have tempered their volume expectations. In any case, we'll be ready to deliver and we'll leverage our network planning tools and other proven technologies to control first how the volume comes in second, how to flow more volume to our automated facilities and third, how to adjust the network to operate as efficiently as possible. And talking about efficiency, this year on our peak day, which is December 18, in the U. S, we expect to deliver 2,000,000 more packages than we did on peak day last year, but we'll do it at a higher productivity rate. This will be possible due to the efficiency improvements we've made over the years and the use of seasonal support drivers, many of which are experienced part time UPS'ers who work inside our facilities.

Speaker 2

To sum it up, we're ready to deliver another successful peak. Moving to our financial outlook. We continue our better not bigger approach enhanced by some bold move. The addition of the USPS air cargo business and the divestiture of Coyote are recent examples. With these moves, we eliminated a highly volatile truckload brokerage business and added air cargo volume that is predictable and margin positive.

Speaker 2

Looking at our consolidated revenue outlook. In the Q3, we increased our emphasis on revenue quality resulting in a glide down of certain volume, which we expect will continue into the 4th quarter. Given our Q3 results, our latest peak volume expectations and adjusting for the impact of the Coyote disposition, we now expect consolidated revenue of approximately $91,100,000,000 for the year and are lifting our consolidated operating margin target to approximately 9.6%. Brian will provide more details. So with that, thank you for listening.

Speaker 2

And now I'll turn the call over to Brian.

Speaker 1

Thank you, Carol, and good morning, everyone. This morning, I will cover our Q3 results, review our capital allocation for the year, and then I'll wrap up by providing additional detail for our Q4 and full year financial outlook. Starting with our results, in the Q3, we returned to revenue and profit growth the first time in 2 years. Looking at our consolidated performance, in the Q3, we generated $22,200,000,000 in revenue, an increase of 5.6% compared to the Q3 of last year, with all three of our business segments delivering revenue growth. Consolidated operating profit was $2,000,000,000 an increase of 22.8% versus the Q3 of 2023 and consolidated operating margin was 8.9%, an increase of 120 basis points compared to the Q3 of last year.

Speaker 1

Diluted earnings per share was $1.76 up 12.1 percent from the Q3 of 2023. Now let's look at our business segment. In the U. S. Domestic segment, our performance in the Q3 was driven by 2 factors.

Speaker 1

1st was strong volume growth, the highest growth rate we've seen in more than 3 years. And second was excellent cost management, which resulted in a year over year decrease in cost per piece of 4.1%. U. S. Average daily volume or ADV increased 6.5% compared to the Q3 of 2023.

Speaker 1

Looking at product mix in the Q3, ground average daily volume increased 8.9%, while total air average daily volume was down 6.3%. We continue to see customers shifting down from air to ground and some ground volume is shifting down to Sherpa's. Within ground, Sherpa's volume levels rose slightly compared to the Q2 driven by growth in our digital access program. While Sherpa's volume comes at a lower revenue per piece, given the enhancements we've made to our matching algorithm, we were able to redirect more Surepost packages into our network, driving delivery density. For the quarter, B2B average daily volume was up 0.8% year over year, increasing for the first time in 2 years.

Speaker 1

Growth was driven by SMBs, which had an increase in B2B average daily volume of 3.8%. B2C average daily volume increased 11% year over year and made up 58.3% of our volume, a slight downward shift from the Q2. In terms of customer mix, we saw ADV growth from both enterprise and SMB customers. SMBs made up 29.4% of total U. S.

Speaker 1

Volume in the 3rd quarter. For the quarter, U. S. Domestic generated revenue of $14,500,000,000 up 5.8% compared to last year driven by strong volume growth. As expected, U.

Speaker 1

S. Domestic revenue per piece was down year over year. In the Q3, revenue per piece declined 2.2% year over year, but showed a 40 basis point sequential improvement from the Q2. Breaking down the components. First, we took actions to address revenue quality, which translated into higher base rate.

Speaker 1

In the quarter, base rates increased the revenue per piece growth rate by 170 basis points. 2nd, the combination of product mix, lighter weights and shorter zones decreased the revenue per piece growth rate by 300 basis points. And finally, we experienced a 90 basis point decline in the revenue per piece growth rate due to the combination of changes in customer mix and fuel. Turning to costs, as you will recall, the cost of our new labor contract was front end loaded. As of the end of July, we lapped the 1st year of the contract and for the quarter union wage rate growth slowed to 5.2% year over year.

Speaker 1

Productivity is a virtuous cycle at UPS and in the Q3 we took several actions to drive productivity. Through our Network of the Future initiative, this year we've completed 45 operational closures contributing to an 8% improvement in pieces per workforce hour. While 8% might not seem like a big number that translated into an efficiency gain of 11,000,000 hours. Production improvements including total service plan offset 50% of the union wage increase and we continued to see positive trends in our safety performance, which contributed to lower expense. The U.

Speaker 1

S. Domestic segment delivered $974,000,000 in operating profit, a 46.5% increase compared to the Q3 of 2023 and the operating margin was 6.7%, a year over year increase of 180 basis points. Moving to our international segment. In the Q3, our international business grew revenue and operating profit and expanded operating margin for the first time in nearly 3 years. This performance was driven by strength in exports in 13 of our top 20 export countries.

Speaker 1

Total international average daily volume growth continued its sequential improvement trend from the Q2 and was about flat to last year. In the Q3, international revenue was $4,400,000,000 up 3.4% from last year with all regions growing revenue year over year. International revenue per piece increased 2.5% driven by strong base pricing and a positive impact of region and product mix. Touching on costs, total international expense was relatively flat year over year, which was achieved by optimizing our network and our ongoing cost management efforts. Operating profit in the international segment was $792,000,000 an increase of 17.3 percent year over year.

Speaker 1

Operating margin in the 3rd quarter was 18%, an increase of 2 20 basis points from a year ago. Moving to supply chain solutions. In the 3rd quarter revenue was $3,400,000,000 up 8% year over year. Looking at the 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 MNX acquisition and onboarding of USPS air cargo contributed to revenue growth in SCS.

Speaker 1

Partially offsetting these gains was weaker performance at Coyote, our truckload brokerage business and the completion of the sale in mid September. In the 3rd quarter, Supply Chain Solutions generated operating profit of $217,000,000 down $58,000,000 year over year, primarily driven by our efforts to configure our air network as we onboarded the USPS air cargo business. Now that we have fully onboarded this volume, we expect it to generate consistent revenue and we expect an attractive margin on a consolidated basis. For SCS, operating margin in the 3rd quarter was 6.4%. Walking through the rest of the income statement, we had $230,000,000 of interest expense.

Speaker 1

Our other pension income was $68,000,000 and our effective tax rate for the Q3 was approximately 21%. Now let's turn to cash and capital allocation. So far this year, we generated $6,800,000,000 in cash from operations and free cash flow of $4,000,000,000 including our annual pension contribution of $1,400,000,000 We've refinanced $1,500,000,000 in current maturities year to date and we finished the quarter with strong liquidity and no outstanding commercial paper. So far this year, UPS has paid $4,000,000,000 in dividends. And lastly, we've completed our targeted $500,000,000 share repurchase program in the 3rd quarter, which brings us to our outlook.

Speaker 1

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. Now looking ahead at the full year, we have updated our outlook to reflect 3 things. 1st, our 3rd quarter results and the focus on revenue quality. 2nd, the sale of Coyote. And finally, new softer peak volume forecast from our customers.

Speaker 1

At the consolidated level, we now expect full year revenue of approximately $91,100,000,000 Due to our focus on revenue quality coupled with the efficiency of our integrated network and our ability to manage costs, we are lifting our consolidated operating margin expectation to approximately 9.6% to align with these new volume and revenue expectations. Now looking at the segments in the 4th quarter, starting with U. S. Domestic, we expect the combination of both volume and revenue per piece growth to increase revenue by 1.5% in the 4th quarter. We expect to generate a 4th quarter operating margin of approximately 9.5% and we now expect the operating margin in December to be slightly higher than 10%.

Speaker 1

Looking at international, we expect the positive volume momentum we've experienced throughout the year will continue. With that in mind, we expect 4th quarter revenue growth to be up mid single digits year over year and we still expect around a 20% operating margin in the 4th quarter. In Supply Chain Solutions, we expect revenue in the 4th quarter of around $3,300,000,000 which takes into consideration the disposition of Coyote and we expect to generate an operating margin of approximately 9%. Turning to capital allocation. For the full year end 2024, we expect free cash flow to be around 5,100,000,000 after the $1,400,000,000 pension contribution we made to fund annual service costs.

Speaker 1

Capital expenditures are expected to be about $4,000,000,000 We plan to pay around $5,400,000,000 in dividends subject to board approval. And lastly, we expect the tax rate for the full year to be between 23% and 23.5%. With that, operator, please open the lines for questions.

Operator

Thank you. We will now conduct a question and answer session. Our first question comes from the line of David Vernon from Bernstein. Please go ahead.

Speaker 3

Hey, good morning, everyone, and thanks for taking the time and taking the questions. So when we think about the ramp here from 3Q into 4Q, the operating profit guidance sort of suggests a close to a 50% bump from 3Q to 4Q. Brian, maybe can you walk us through some of the drivers of what makes that look realistic? And then if you think about those drivers taking hold, how does that affect sort of the shape of profitability as we carry into 2025?

Speaker 1

Sure. Thank you, David, and I appreciate the question. And yes, we do have an increase from Q3 to Q4 on the profit side. And really it's driven by a couple of things. One, as we mentioned, this focus on revenue quality and the moves that we've made to drive revenue improvement, both through pricing policy as well as the take rate that we're seeing on HCS, coupled with the acceleration of fit to serve and network of the future and just the productivity initiatives give us the incremental bump over the normal seasonality.

Speaker 1

We feel very confident in both of those and we're seeing them actually start to come through in the Q3 and early in Q4 on the revenue side. And you can see from our cost performance, we feel that the fit to serve and then OS stuff is sticking very well.

Speaker 3

And then how that's going to affect sort of into 2025?

Speaker 1

Yes, yes. And so as we roll through 20 24, you can see that we've raised the consolidated margin. We do expect the domestic margin to be around 9.5%. And now we do expect to exit the year higher than slightly higher than the 10% that we guided to before. We'll come back to you as we get through peak on 25%, but we want to close out peak first.

Speaker 3

All right. Thank you.

Speaker 1

Thank you.

Operator

Your next question comes from the line of Brian Ossenbeck from JPMorgan. Please go ahead.

Speaker 4

Hey, good morning. Thanks for taking the questions. Maybe can you expand a little bit more on the softness you're seeing in the peak season? What type of themes and concerns maybe you're hearing from the customers as they sort of dial down their expectations on volume? And maybe within that a broader comment on the pricing and the surcharges, thinking if you're getting more pushback on that or seeing more trade downs at this point?

Speaker 4

Thank you.

Speaker 2

Well, I'll start with the customer feedback. We work with a little over 100 of our customers who represent 60% of the volume in our network, but 85% of the peak surge. So we develop operating plans for each of these customers and these plans have been in process now for months. As the year has progressed, they continue to tighten up their forecast and we just received their last forecast on October 2. And their forecasts have been tempered and we believe it's driven by a couple of factors.

Speaker 2

First, external forecasts for the holiday season have come in. In fact, the forecast for ESMO in the Q4 is now about 3%. Earlier in the year, it had been about 5%. If you look at just the peak part of the holiday season, forecasts are all over the board, candidly from a low of 2% to a high of 11% and SMB Global has it at about 3.5%. Part of this, we believe, is influenced by the tight compressed peak period.

Speaker 2

There are only 17 shipping days between Thanksgiving and Christmas Eve. And what forecasters and some of our customers are saying is because of the tightness of the shipping 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 in 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 on peak day, we'll deliver 2,000,000 more packages than we did last year.

Speaker 2

It will still be a good peak, but just not as dynamic as people thought at the beginning of the year. Whatever happens, we're prepared to handle the volume. And then on the pricing surcharge, we're seeing real good take rate on the pricing surcharge for the holiday, I should say. And maybe Matt Guppy is here. Matt, perhaps you want to comment on the holiday surcharge.

Speaker 2

First off, we're

Speaker 1

working closely in collaboration with all of our customers. Carol talked about the top 100, which are extremely important just due to the peakiness that they bring during the season. But we've really worked again, we've got a good structure and a process in place where we can manage our holiday demand surcharge at the customer level. And we have a lot more flexibility to work with them as we go through the peak season. But at the end of it, it's all about us creating continuing to drive value and with our customers and to deliver a great peak.

Speaker 1

So we're staying close on the forecast, but also working very closely with them on this holiday demand surcharge.

Speaker 2

And we're seeing a good keep rate

Speaker 1

on that. Yes. Very, very good keep rate, probably one of the best keep rates we've seen. And Brian, I would just add that we're on our plan if you remember, there were changes because of the compressed peak that opened the peak, the holiday demand surcharge to a larger set of volume, right. And that's what drives some of the incremental outperformance year over year that you're seeing.

Speaker 4

Okay. Thank you very much.

Operator

Your next question comes from the line of Chris Wetherbee from Wells Fargo. Please go ahead.

Speaker 5

Hey, thanks. Good morning. I wanted to drill down a little bit on the cost improvement on a per piece basis in domestic. So down about 4% was better than what we were looking for. I guess maybe 2 pieces to the question.

Speaker 5

How do you think about that progress potential in the 4th quarter and then maybe widening out a little bit with some of the initiatives that you're working on bigger picture about managing the footprint as well as maybe the headcount? How do we think this can trend as we move into 2025?

Speaker 2

So why don't you take the Q4 question and then we'll turn to Nano for some thoughts.

Speaker 1

Great. Yes, thank you. And yes, it's a great question because the cost performance in the Q3 was outstanding, right? And I think there's a couple of dynamics that are going on. As we said in our earlier remarks, we lapped the contract at the end of July, right?

Speaker 1

So you start to see that high wage inflation that we talked about in the 2nd quarter is being 12%, now coming down to 5.2 percent and we will now get a full clean quarter of wage inflation at a normalized level in Q4. But also as we mentioned, we've accelerated sit to serve and are now outperforming our forecast as well as you'll see from the network of the future discussion that we've closed more stores and we've closed more buildings. So we're pulling that forward, which helps in the cost performance. As we carry into Q4, we do expect to have strong cost performance. We'll probably be up about 1% per piece, which is still going to be less than our rev per piece growth rates.

Speaker 1

So we'll maintain a positive spread, but it will be a little bit more normal as you go through it. Dan, do you want to talk a little bit about network of future and how we're pulling things forward? Yes. Thanks, Brian. And, look, you may be asking how are we able to have 45 operational closures and 9 buildings that we've closed.

Speaker 1

We are moving much more volume, about 5% through our automated facilities and we're also making sure that our legacy production indices are performing the way we expect them to perform. The teams are doing an excellent job allowing us to really shrink the network and be a lot more productive. Safety of course helped and at the end of the day it comes down to hours and people and we were down about 11,000,000 hours compared to last year. So really just an excellent job all around. And the last thing I would say is there's nothing that we're overlooking.

Speaker 1

So every piece of our business from carwash to automated dispatching, we are prepared for all of it and looking and scrutinizing all of that cost and finding some good improvements there.

Speaker 2

All the while maintaining outstanding service levels, which is job number 1 for UPS. And just to put the 5% number that Nando mentioned into perspective, talking about automated volumes through our hubs, right? And we now process 63% of the volume in our hubs in some sort of an automated way. That's up 5 percentage points from a year ago. That's pretty good.

Speaker 1

Absolutely. And look, we've got 21 active projects here in this quarter. You would think it's peak season. Why would we take that undertaking. We have full confidence that that's going to provide very good productivity improvements.

Speaker 1

And then next year, we're accelerating and pulling in the number of projects that we can execute in 2025.

Operator

Your next question comes from the line of Tom Wadewitz from UBS. Please go ahead.

Speaker 6

Yes. Good morning and congratulations on the strong results. Wanted to ask a bit about, Carol, you started the call. I think you commented about some industrial economy weakness. You're clearly doing some idiosyncratic things that are going well.

Speaker 6

How do you think about as we go into 2025, how much of margin improvement would be in your control? And if you don't see improvement in macro, is it reasonable to translate improvement in revenue per piece and network of the future those things to margin expansion? Thank you.

Speaker 2

Well, I think, our team has done a masterful job of managing a very choppy environment, over the past several years actually. As we think about our business outside the United States, we saw improvement in every quarter this year. In fact, our export business grew in the Q3 and domestic was down just slightly. So Kate, maybe you want to talk about how you would manage the business outside the United States if the industrial production remains softish? Yes, absolutely.

Speaker 2

And I think the quarter was a good example of that. The macro indicators have come down, but yet we've expanded the revenue profit and margin in the international business and posting an 8% margin. We intend to continue to run those same plays. Let me go into a few just as Nando indicated on the domestic side, 60% of our volume goes through automated hubs. And that's for the domestic and transborder of all of our large international volume market.

Speaker 2

And then on the air side of the house, we continue to show that revenue quality matters, especially when you have expensive assets and we align with demand. So we had strong rep per piece for international. We held our cost CPP flat and so delivered operating leverage. We would continue to do that, into the next year. And in markets that are soft, to win, you gain share and you gain share not by dropping price, but by actually increasing your capability.

Speaker 2

And our Saturday delivery is one example of that. We are the only carrier that offers standard Saturday delivery at no charge in these 8 markets. And that's driving some nice performance, isn't it, Kate? We started it. It really is.

Speaker 2

And so Europe and Canada exceeding expectations, unlocking more of the customer share of wallet and in the premium spaces too. So cross border trade, we're seeing growth with the expansion of our service out of Asia to Europe as well as throughout intra Asia. We've made the lanes faster. And as a result, that premium unlock and by the way, with rep per piece growing. So we feel good about the equation and we'll definitely continue it.

Speaker 6

I hate to add, I don't think I asked the question well. I actually was thinking a little bit about domestic, in terms of the margin.

Speaker 2

So I think in the domestic side, productivity is a virtuous cycle here. And as Randall pointed out, there's 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?

Speaker 1

Yes. I would just say so, if you remember, look, we've got a contract that locked up that we have known cost for the next 4 years for 60% of our domestic cost structure. With the focus on revenue quality and our ability to win more and win new in the places where we really want to, like you saw in the Q3 with commercial and SMB commercial growing starting to grow again. We do think we have the ability to 1, continue to take actions to drive rep repeats ourselves as well as, as Carol said, production divert to a cycle with a known cost structure as we go into 2025.

Speaker 2

And we like that commercial business. We it's got a more dense delivery metric associated with that, in other words, more packages per delivery. And one way we can win commercial is with new capabilities. We had a big win in the 3rd quarter and the determining factor for this customer to come into our network for our RFID labels. So that's a new capability that we didn't have before.

Speaker 6

Great. Thank you.

Speaker 2

Thank you.

Operator

Your next question comes from the line of Connor Cunningham from Melius Research. Please go ahead. Conor Cunningham, your line is open. Check your mute button. Okay, we'll move on.

Operator

We'll go to the line of Jordan Alliger from Goldman Sachs. Please go ahead.

Speaker 4

Yes. Hi, morning. Question for you. So a little bit more on the U. S.

Speaker 4

Postal onboarding, if I could. Maybe if you could share some of the experience. I know you had the upfront step up costs, but as it's still a few weeks in, perhaps talk about how the operations are going there? Is it delivering on the profit levels that you had talked about? And just any general thoughts around how that's going to contribute going forward?

Speaker 4

Thanks.

Speaker 2

Well, as you point out, Jordan, we did have a bit of a transition in the Q3. The USPS contract with their previous carrier expired October 1. And we didn't want to wait until October 1 to onboard that volume because PIKA is right around the corner. So we agreed with the USPS that we would operationalize, this service to them while over time they on boarded their volume. And it was over time actually, we didn't get much wait until September.

Speaker 2

So there was a mismatch between our operational model and the volume, but now the volume is all in. So the Q4 is going to look a lot different than the Q3 did. And from a performance perspective, Sandoz, you just met with the Postmaster General. And so tell us what he said. Sure.

Speaker 1

So as early as yesterday, we meet face to face and yesterday the purpose was peak planning. So both teams face to face in DC and we're working really well. Professionals on both sides that have executed a very difficult plan and made it look very, very simple. Feedback from the Postmaster General himself has been positive and we see the resources that we've applied are in line with what we had modeled when we have accepted the business and the contract was negotiated with the USPS. So, good things ahead for that contract.

Speaker 2

And I just can't overemphasize the heavy lift here. And in fact, it was over 50,000,000 cubic feet that we had to take into our network in the Q3 and there'll be more obviously in the 4th. So job well done by our team in working with the USPS as well. Absolutely.

Speaker 4

Thank you.

Operator

Your next question comes from the line of Bascome Majors from Susquehanna. Please go ahead.

Speaker 7

Thanks for taking my questions. Just to follow-up on another piece of the Postal Service relationship. Can you talk about where you are in negotiating the delivery service agreement that enables Sure Post and Sunday delivery with their effort to renegotiate some of those contracts? And maybe along with that, what challenges does that create either on cost to serve or Sunday delivery operations, but also what opportunities might that create for your own trucks to deliver more packages in the marketplace in a world where the post office is seeking to retain more up stream business and push customers into that? Thank you.

Speaker 2

Well, thanks for the question. And Matt, why don't you take on this question?

Speaker 1

Yes. So first off, so we to Nando's point, we had an opportunity to meet with the PMG yesterday. We continually work to find a mutually agreeable agreement for both USPS and UPS. More work to be done, but we are moving very, very quickly. And hopefully, we'll have this to a close in very short order.

Speaker 2

And to your question about what challenges and what opportunities, I think it's some and some. I think it's some and some. And so once we get this contract agreed to, we'll show you what those some and some are, but we're confident we can work through this.

Speaker 7

In the expiration, I believe you've said before it's at year end. Can you confirm roughly when we should hear more on that and what the go forward relationship will be?

Speaker 2

Yes. You should hear something about it in our Q4 earnings.

Speaker 1

Yes. No impact in the Q4. We'll tell you more about it when we come back with the Q4 earnings in January.

Operator

Your next question comes from the line of Ari Rosa from Citigroup. Please go ahead.

Speaker 5

Hi, good morning.

Speaker 3

I was hoping you could

Speaker 5

give us a sense of how much excess capacity you see in the network right now. Just trying to understand how you're thinking about planning kind of given the weaker outlook in terms of both customer demand and also industrial production and some of the weakness in the macro. How do you think about kind of matching resources to that lower volume? And do you think you're carrying excess resources right now?

Speaker 2

So I think our team has done an excellent job of taking capacity out of the market. In fact, with 45,000,000 45 operational closures, it's about 1,000,000 ADB per day of capacity that we've taken out of the market. And we see capacity rationalization happening in other parts of the market as well. And clearly, it's peak time, so we're all adding resources to handle the surge in the holiday, but capacity is coming in.

Operator

Your next question comes from the line of Scott Group from Wolfe Research. Please go ahead. Hey, thanks. Good morning. So, how much, if any, does the new USPS contract help the Q4 U.

Operator

S. Margin just with the cost allocation? And then, I don't know, Carol, I just big picture, right? You're now saying margins in the U. S.

Operator

In Q4 are going to be they'll be slightly positive. We've now lapped the Teamster contract, yields are now turning positive. That's good. Peak season surcharges. Just big picture, like when do we start to see more meaningful margin improvement?

Operator

Does that start right away in 2025 or does that take some more time?

Speaker 2

First, why don't we address the impact in the Q4? Sure, sure.

Speaker 1

So, hey, Scott, and thank you for the question. So, on the USPS contract, so we put a network in place that was all part of the plan. There's no incremental impact to domestic in the Q4 from the USPS contract. So the cost that Carol referred to was startup costs associated with getting the contracts stood up that impacted SCS, doesn't impact domestic. And then in the Q4, we'll see SCS go back to 9 about 9% and domestic to around 9.5%.

Speaker 1

So I don't think that's going to impact us there.

Speaker 2

No. And then in terms of when are we going to see more meaningful margin expansion, let us get through the Q4 and then we'll give you our outlook for 2025. Thank you.

Operator

Your next question comes from the line of Stephanie Moore from Jefferies. Please go ahead.

Speaker 2

Great. Thank you. Good morning. I was hoping you could talk a little bit about our domestic RPT trends throughout the quarter. Maybe if you could talk a little bit about how they trended as the months progressed and really what this means for 4Q and your thoughts into 2025 if you have them?

Speaker 2

Thanks.

Speaker 1

Sure. Thanks for your question, Stephanie. Yes, so we saw positive momentum going from Q2 to Q3 and domestic rev per piece. As I mentioned in my earlier remarks, really when you think about what happened in the base rate, in the Q2 base rate added about 90 basis points of improvement to rev per piece. In the Q3 that jumped to 170.

Speaker 1

Now as we translate into the 4th quarter, we actually expect rep per piece to inflect positive in the U. S. And that's really driven by a couple of things. Look, we talked about actions that we were going to take around specific customers that were enabled by our architecture of tomorrow and the work that we've been doing and investments have been made to create more sensitive demand channels, DAS and AOT and the modifiers. And we're leveraging those in order to make adjustments to help drive rep per piece.

Speaker 1

The other thing is what we're doing on the surcharging in the GRIs that we will continue to see lift as we go through the Q4 and into 2025. So look, it's a positive trajectory on rep for peace and it's clearly an area of focus as we move from our year 1 to our plus 2 strategy.

Speaker 2

And pricing architecture of tomorrow is really moving from the art to the science of pricing. And one of the elements of this architecture are modifiers that we use. Modifiers that can provide discounts to our customers or modifiers that allow us to increase in price. And I'll just give you a real life example of what happened in the Q3 to help you understand. In the Q3, we had a discount modifier that we adjusted basically test the elasticity.

Speaker 2

We reduced the discount by $0.25 which increased the RPP by 12% and reduced the volume by 26%. We liked that trade. And because it's a modifier, it's not a contract that has to be reopened and renegotiated. We just adjust the model. And this is just one element of pricing architecture of tomorrow that we will use not only in the Q4, but in 2025 and beyond.

Speaker 2

Great. Thank you.

Operator

Your next question comes from the line of Daniel Imbro from Stephens. Please go ahead.

Speaker 1

Hey, guys. This is Joe

Speaker 8

Enderlin on for Daniel. Thanks for taking the question. Just wanted to ask another one actually on revenue per piece. One of your peers noted increased price competition in the market. Just are you seeing any of that today?

Speaker 8

And then do you think we felt peak trade down pressures yet?

Speaker 1

So I'll start on the price pressures. Look, we've been in a very price competitive industry, but we think it's very rational, right? And when you look bid for bid and product to product, it is very rational. We know we have to win on capabilities and that's where we continue to add. With every customer every day, it's you got to deliver service to do it.

Speaker 1

It starts with us with service and then we add incremental capabilities like RFID to win, win where we really want to win most. And I point you that as Carol mentioned, we've had big enterprise commercial win through that. We also have seen commercial now grow nearly 1% for the first time this year. As we really started to catch that from the contract, that's been a big momentum point. And then specifically, SMB Commercial growing 3.8%.

Speaker 1

Those sorts of things allow the capabilities that we have allow us to win more and win new in those areas that help drive rep for piece growth despite a very competitive price environment.

Operator

Your next question comes from the line of Brandon Oglenski from Barclays. Please go ahead.

Speaker 4

Hey, good morning and thanks for taking the question and congrats on growth for the first time in a couple of years here. Good to see. Carol, I think you mentioned something about enterprise customers and I know in the past you talked about GlideDown. 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 Q4?

Speaker 4

And thank you.

Speaker 2

So first on the customer glide down, we have as you know been in a glide down arrangement with our largest customer and they continue to be our largest with our largest customer and they continue to be our largest customer. I think 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 3rd quarter performance, the 100% of the decline in air volume was down about 6.5%. Is it a 100% of the decline in air volume was down about 6.5%. Is it attributable to the largest customer?

Speaker 2

So they, like many, trading down from air to ground and in their case a little bit of ground out to their own network. But we're fine with that because it creates opportunity for us to grow in other areas. And then looking ahead Yes.

Speaker 1

And then on the fit to serve point, yes, so we do expect about $70,000,000 incremental to go to about $350,000,000 in the Q4, and we've seen great progress with that program.

Speaker 4

Thank you.

Operator

Your next question comes from the line of Ken Hoexter from Bank of America. Please go ahead.

Speaker 3

Hi, good morning. This is Adam Raskowski on for Ken Hoexter. You noted in the release that you are guiding to the scope of the fit to serve initiative, which previously called for reduction of about 12,000 positions. Could you just expand on what that means? Is there has that actually accelerated this quarter?

Speaker 3

And just any thoughts on how you would expand the scope and what you would target there? Thanks.

Speaker 2

So you're just asking for a status update on fit to serve?

Speaker 1

Sure. Yes. On fit to serve, as we said, we have pulled forward incremental savings opportunities. We hit the full run rate that we expected. We will have some incremental benefit as we wrap into the Q4.

Speaker 1

But we're continuing forward with it as planned.

Speaker 2

And to your question, do you have additional opportunities? We are an opportunity rich company. And as you heard from Nando, we're looking at all opportunities to drive a better experience for our customer and actually higher productivity. Thank you.

Speaker 1

Greg, we have time for one more question.

Operator

Okay. Your final question comes from the line of Ravi Shanker from Morgan Stanley. Please go ahead.

Speaker 9

Thanks. Good morning, everyone. So maybe just a follow-up on the holiday side. I think you announced a pretty big step up in your hiring for the first time in many years. I know it's a peak compressed earnings peak season.

Speaker 9

But what's the logic behind that if you're seeing a little bit of a reduction in customer experience or expectations on volumes here? How do we think of squaring that? And is there like a minimum surcharge bogey you guys need to kind of cover the extra costs? Thank you.

Speaker 2

So last year, we announced that we were hiring 100,000 for the peak holiday season and our ADB declined 7.4%. This year, we announced that we're hiring 125,000 and our ADB will be positive. So it's not out of the realm of reasonable that we should hire more people this year than we did last year. But this is what you need to know. We will hire what we need for peak.

Speaker 2

Regardless of where the volume actually ends up, we're not going to overhire for peak. We will hire what we need. And what we've done over time, Robbie, is we've added this amazing capability where within just a few less than an hour, just a few minutes, we can actually get a job offer out or we can resend a job offer. So we can flex up or flex down the way we need to. And Nando, would you like to add anything?

Speaker 1

Yes. I would just say, the number also includes a favorable employee mix. So this year, we're adding we're going to increase our helper teams with our drivers by about 10%. That's not a small number. So a big percentage of our volume will be delivered 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 and that is the number as Carol had said and we're going to deliver a great deep season.

Speaker 1

Thank you. Thank you, Greg. This concludes our call. Thank you all for joining and have a great day.

Operator

Ladies and gentlemen, that does

Remove Ads
Powered by Quartr
Earnings Conference Call
United Parcel Service Q3 2024
00:00 / 00:00
Remove Ads