United Parcel Service, Inc.

Good morning. My name is Steven. I will be your conference facilitator today. I would like to welcome everyone to the UPS Investor Relations third quarter 2020 earnings conference call. All lines have been placed on mute to prevent any background noise. And after the speaker's remarks, there will be a question and answer period. It is now my pleasure to turn the floor over to your host, Mr. Scott Childress, Investor Relations Officer. Sir, the floor is yours.

Good morning, and welcome to the UPS third quarter 2020 earnings call. Joining me today are Carol Tomei, our CEO, and Brian Newman, our CFO. Before we begin, I want to remind you that some of the comments we'll make today are forward-looking statements within the federal securities laws and address our expectation for the future performance for operating results of our company. These statements are subject to risk and uncertainty, which are described in detail in our 2019 Form 10-K, subsequently filed Form 10-Qs, and other reports we file with the Securities and Exchange Commission. These reports, when filed, are available on the UPS Investor Relations website and from the SEC. During the quarter, GAAP results included a pre-tax charge of $44 million, equivalent to $0.04 on an earnings per share basis. The charge resulted from transformation-related activities primarily in the international and U.S. domestic segments. In the prior year period, GAAP results included a pre-tax charge for transformation cost of $63 million, equivalent to six cents on diluted earnings per share. Unless stated otherwise, our comments will refer to adjusted results, which excludes transformation costs. The webcast of today's call, along with the reconciliation of non-GAAP financial measures, are available on the UPS Investor Relations website. Following our prepared remarks, we will take questions from those joining via the teleconference. If you wish to ask a question, press 1, then 0 on your phone to enter the queue. Please ask only one question so that we may allow as many as possible to participate. you may rejoin the queue for the opportunity to ask an additional question. And now, I'll turn the call over to Carol.

Thank you, Scott. We are moving quickly and operationalizing our strategy under the Better Not Bigger framework. We're leaning in on the wildly important areas of our business and tackling challenges head on. This morning, I'm pleased to discuss our achievements and the opportunities we see before us. One thing is certain. Everything we accomplish is the result of our winning people and culture. We have everyday heroes at UPS who are keeping the world's supply chains moving and delivering what matters. From essential household items to critical health care needs, UPSers are making a positive difference in the world. And for that, I am so very proud of this team and want to thank them for their hard work and efforts. During the quarter, we continued to flex our network to capture market opportunities and better position UPS for the long term. Our performance was better than we expected, even amid the challenges from the pandemic. Consolidated revenue in the quarter rose 15.9% from last year to $21.2 billion, and operating profit grew 9.9% from last year to $2.4 billion. Well, our commercial business remained under pressure due to the economic downturn. During the quarter, we began to optimize our network and captured share in SMB or small and medium-sized businesses. As a result, we saw revenue per piece improve sequentially in the U.S. from what we reported in the first two quarters of this year. Further, revenue growth in our international and supply chain and freight segments was the highest quarterly growth we've seen in nearly three years. Brian will share more details about the quarter in a moment. Over the past few months, we've intensified the focus on executing our strategy, customer first, people led, innovation driven. From a customer first perspective, there has been a step change in the composition of retail sales, as e-commerce sales are now projected to make up more than 20% of all U.S. retail sales this year. We don't think the penetration of e-commerce retail sales will decline, even after the pandemic. But it isn't just retail. Our customers across all business segments are reinventing the ways they do business. We've heard from customers that speed and ease are most important. So we are focused on delivering the capabilities that matter most to our customers. Let's start with speed. In the U.S., we completed our weekend expansion ahead of schedule, enabling broader market coverage as we are the only carrier that provides both commercial and residential pickup and delivery services on Saturdays as a general service offering. And next week, we will complete our Fastest Ground Ever initiative, eight months ahead of plan. We have improved ground transit times between millions of zip codes, and we will be at parity or better than the competition in 20 of the 25 most populated U.S. markets. And customers have noticed. Weekend ground volume is up 161% versus last year. And SMB volume on our fastest ground ever lanes has grown 25.7% since we made the improvement. Moving to ease, it's all about removing friction from the customer experience and serving customers the way they want to be served. For SMBs, we are highly focused on our digital access program, which we refer to as DAP. Through platform partnerships, we are making it easier for SMBs to open a UPS account and access the world's largest small package network. Revenue growth from our DAP program exceeded our expectations. As we added 150,000 new accounts, and several new partners in the quarter. Our fastest ground ever, weekend services, and DAP complement each other, enabling our customers to deliver what matters to their customers, speed and a better experience. Our efforts in the United States are having a positive impact. In the third quarter, total U.S. SMB volume grew 18.7 percent, outpacing our larger customers. and was the highest growth rate we've experienced with SMBs in 16 years. We are seeing strong results in the international segment, too, with international SMB volume up 9.9% during the quarter. Another area that we are leaning into is healthcare logistics. UPS Healthcare spans all reporting segments, has world-class technology, deep expertise, and the most sophisticated suite of services in the industry. We are significantly expanding our freezer farm capacity by installing validated freezers that range from negative 20 to negative 80 degrees Celsius. These farms are strategically located in Louisville, Kentucky, and Venlo, the Netherlands, and are good distribution practice certified. And for added control during transit, UPS Premier, our next generation package sensor technology, offers priority handling real-time monitoring, and continuous visibility. We understand that healthcare logistics isn't just about the package. It's about the patient. Our market healthcare team is supporting clinical trials across all stages for COVID-19 vaccines. Early involvement gives us valuable data and insights to design commercial distribution plans and manage the logistics for these complex products. We have a great opportunity and, frankly, a great responsibility to serve the world when a COVID-19 vaccine becomes available. When that time comes, our global network, cold chain solutions, and our people will be ready. Moving to the second element of our strategy, people-led, we know successful outcomes are built from a strong culture of teamwork, respect, trust, and empowerment. We are enabling our people to move the business forward by giving them more decision-making authority, and we're identifying which activities add value and stopping those that don't. We are also investing in training on topics including unconscious bias and diversity and inclusion to ensure our actions match our values. In the past, we have talked to you about Transformation 1.0, We are on track to deliver the more than $1 billion of benefit we identified when we kicked it off in 2018. In September of this year, we began Transformation 2.0 by announcing a voluntary separation allowance program. To the UPSers who will take this offer, I thank you for your service to our company. Transformation 2.0 is about creating fewer but more impactful jobs. We will share more details with you as we finalize our plan. The final piece of our strategy, innovation-driven, comes down to being better, not bigger. Now, that doesn't mean UPS is not going to grow, because we are. It means that we will lean into growth from the right opportunities, like SMBs, international, global freight forwarding, and other high-yielding sectors. And we will grow from our revenue quality initiatives. We are on a journey to optimize the volume that flows through our network. Additionally, our approach calls for greater efficiency and requires that we lower our cost to serve. Our transformation efforts are vitally important to our ongoing success. While we are finishing Transformation 1.0, we've already begun Transformation 2.0, and we are roadmapping Transformation 3.0 in preparation to launch next year. Transformation 3.0 will focus on decreasing core operating expense. Further, to improve our return on invested capital, we are applying greater scrutiny to capital spending and ensuring clear linkage to cash returns. You should expect our 2021 capital spending to be significantly lower from what we are spending in 2020. Since being named CEO, I've immersed myself in our business and spent lots of Zoom hours with our people. I've also helped our team build out a value-creating strategic and financial framework. As a reminder from our last call, outside of our five core principles, everything else is under review. I've spent a lot of time looking at the risks and opportunities facing our business, including an evaluation of our business portfolio. We are an opportunity-rich company. We are making progress, but given the size of our business, it will take time to optimize our network, to stop processes that have added cost and no customer value, and to fully reach our potential. Now, moving on to the upcoming holiday season, peak is extremely important to our customers, so it's extremely important to us. We have been operating in a peak-like environment globally for many months, which is helping us prepare for the elevated demand ahead. 2020 peak will have two more operating days than last year and two full weeks between Cyber Week and Christmas Week. We are projecting a pretty peaky peak, but there are some industry capacity constraints, as Brian will detail. As a result, we expect to see solid volume growth year over year, but sequentially, the quarterly growth rate in the U.S. will moderate in the fourth quarter. Our peak preparations start with ensuring the safety of our people and our customers. From that, we are employing two key strategies. First, we will continue to collaborate with our customers to help them time their promotions and match their needs to our available capacity. Second, we will leverage proven and some new tools to ensure flexibility, control, and visibility across the network. This year, we added automated sort capacity and greatly expanded our weekend operations. We sped up our ground network and are using more real-time data to better manage the expected increase in volume. From my involvement in our peak preparations, I will tell you that while we expect this holiday season to have its challenges, we are ready to deliver a successful peak. As you can see in our results, We are making progress against the better, not bigger framework we outlined in July. We have more work to do and plan to provide additional detail about our actions during an investor day we will host in 2021, once the environment is more stable. And with that, I'll turn the call over to Brian.