United Parcel Service, Inc.

Good morning. My name is Keeley Johnson, and I will be your facilitator today. I would like to welcome everyone to the UPS Investor Relations third quarter 2021 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 2021 earnings call joining me today are carol tomay our ceo and brian newman our cfo before we begin i want to remind you that some of the comments we'll make today are forward-looking statements within the federal securities laws and address our expectation for the future performance or operating results of our company. These statements are subject to risk and uncertainties, which are described in our 2020 Form 10-K, subsequently filed Form 10-Qs, 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. For the third quarter of 2021, GAAP results included after-tax transformation and other charges of $54 million or six cents per diluted share. Unless stated otherwise, our comments will refer to adjusted results, which exclude transformation and other charges. The webcast of today's call, along with the reconciliation of non-GAAP financial measures is available on the UPS Investor Relations website. Following our prepared remarks, we will take questions from those joining us via the teleconference. If you wish to ask a question, press 1 and 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 will turn the call over to Carol.

Thank you, Scott, and good morning, everyone. I'd like to begin by thanking all UPSers for continuing to deliver great service to our customers. In the 17 months that I've been CEO, I've learned that no matter what comes our way, UPSers deliver. The third quarter brought several extreme weather events, including the widespread effects of Hurricane Ida in the U.S. But through it all, UPSers leverage the flexibility of our integrated network and the technology that powers it to deliver what matters. A little over one year ago, we laid out our Better Not Bigger framework under a customer-first, people-led, innovation-driven strategy. Inside that strategic framework is a focus on three main areas. First is to improve revenue quality. including growing SMB volume. Second is to reduce our cost to serve through productivity and cost takeout initiatives. And third is to effectively allocate capital to create a better customer experience, happier UPSers, and higher returns on the capital we deploy. While it is early in the execution of our strategy, the progress we are making is clearly visible in our results. Looking at the third quarter, our performance was better than we anticipated. Consolidated revenue rose 9.2% from last year to $23.2 billion, driven by another quarter of improved revenue quality across all three of our operating segments. Consolidated operating profit grew 23.4% to $3 billion, driven by solid revenue growth and strong expense control. Each of our segments delivered year over year operating profit improvement and double digit operating margins. And for the first nine months of 2021, UPS has generated more operating profit than any full year in our history. Brian will share the details of our performance shortly. As we've discussed, we are laser focused on adding capabilities that enable UPS to grow with SMBs. These improvements also benefit large customers that value our end-to-end network. Expanded weekend delivery services is one of our new capabilities. This initiative will be completed in the U.S. as planned by the end of this week. We will now cover about 90% of the U.S. population on Saturday for both residential and commercial pickups and deliveries. In addition, expanded Saturday services provides more capacity for Sunday SurePost delivery. The best part of our weekend delivery program is that we've unlocked additional network capacity that benefits all customers without deploying additional capital. And we've done this while expanding our U.S. operating margin on a year-over-year basis. As we look at our third quarter results, we see that SMBs value the new capabilities we are providing. In the U.S., SMB average daily volume, including platforms, was up 10.9% year over year. In fact, we've seen strong growth here for the past six quarters. In the third quarter, SMBs made up 27.4% of our total U.S. volume, up 380 basis points from one year ago. And outside the U.S., SMB average daily volume growth was 3.9%. We see many opportunities to grow our international SMB volume as we continue to improve our digital experiences and roll out DAP, our digital access program, to customers outside of the U.S. Let me also touch on SMBs in healthcare. When COVID-19 vaccines were rolled out late last year, the world turned to UPS. and we were ready with connected capabilities, technology, and expertise. Our brand relevance here is attracting new SMB healthcare customers and significantly driving profit growth in this sector. And just on COVID-19 vaccines, we are on track to deliver more than 1 billion vaccine doses by the end of this year with 99.9% on-time delivery. Moving to productivity, We are relentlessly focused on reducing our cost to serve, and we're making good progress. While Brian will go through the details, I'll call out a few highlights. In the U.S., we drove a measurable improvement in productivity as PPH, or pieces per hour, increased by 2.5%. Additionally, as Nando described at our June Investor Day, through our ongoing efforts to optimize loads in our trailers, cube utilization in the third quarter was up 520 basis points versus last year. This helped us eliminate more than 10% of daily trailer loads year over year. And as we've discussed previously, we are creating fewer but more impactful jobs. So to reduce turnover and improve productivity, We are converting around 1,000 part-time supervisor positions in our operations into nearly 400 full-time positions at no additional cost to our company. Turning to what we refer to as Transformation 2.0, or plans to optimize our non-operating expense, we are on track to eliminate $500 million in non-operating costs this year. with about $500 million of additional opportunity in 2022. Finally, our third area of focus is disciplined capital allocation. Since we began executing our strategy, we've seen marked improvement in our employee satisfaction and competitive net promoter scores, due in part to how we've allocated capital to enhance the employee and customer experience. In October, we completed the acquisition of ROTI, a technology platform that also provides delivery services for packages that don't lend themselves to our small package network. We are delighted to welcome the ROTI team to UPS. We continue to be disciplined in our capital spending practices. This discipline plus record earnings yield a significant amount of cash. So far this year we've generated a record $9.3 billion in free cash flow and we expect full year 2021 return on invested capital to be around 29%, which is a 730 basis point improvement from what we reported at the end of last year. Turning to the fourth quarter, the global supply chain market is challenging. There are capacity congestion and cost concerns. But for UPS, our outlook is positive, as once we get a package, we get it delivered. Outside of the U.S., where we peak, we are ready, and tight capacity benefits our freight forwarding business. In the U.S., we project a robust peak season, and through our planning efforts, we believe we are well on our way to deliver a peak that will be a win for UPS shippers, recipients, and share owners. Let me share a few details. To begin with, the calendar is helpful as we have one more peak operating day than last year. Further, we've expanded weekend delivery and added additional sorting capacity. Nonetheless, we expect consumer demand will outpace capacity in the market. We began collaborating with our largest customers several months ago and will stay in close contact with them during the holiday shipping season. Our technology allows us to match daily capacity with customer demand. And where we need to, we will again control the amount of volume that enters our network. These actions will minimize chaos costs and enable high service levels. On the labor front, we've digitized and simplified our job application process, enabling qualified applicants to receive a job offer within 30 minutes of applying. In parts of the country, labor costs are higher than they were last year, but we are effectively managing through that cost pressure. When you add it up, in the fourth quarter, we expect to generate record consolidated operating profit and expand operating margin year over year. While we are laser focused on peak, our business doesn't end on December 31st. Later this week, we will release our U.S. general rate increase. The 2022 increase will be 5.9%, reflecting the value of the services we offer and cost inflation pressures. The details will be posted to ups.com. As we move ahead, we will continue to execute by leveraging our global smart logistics network, our amazing UPSers, and a strategy that's driving strong financial results today and positions us well for the future. Thank you. And now I'll turn the call over to Brian.