United Parcel Service, Inc.

Good morning. My name is Steven, and I will be your facilitator today. I would like to welcome everyone to the UPS Investor Relations third quarter 2022 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. Any analysts that want to ask a question, now is the time to press the one, then zero on your telephone keypad. It is now my pleasure to turn the floor over to your host, Mr. Ken Cook, Investor Relations Officer. Sir, the floor is yours.

Good morning and welcome to the UPS third quarter 2022 earnings call. Joining me today are Carol Tomei, our CEO, Brian Newman, our CFO, and a few additional members of our executive leadership team. Before we begin, I want to remind you that some of the comments we'll make today are forward-looking statements within the federal securities laws and address our expectations for the future performance or operating results of our company. These statements are subject to risks and uncertainties which are described in our 2021 Form 10-K, subsequently filed Form 10-Qs, and other reports we 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. Unless stated otherwise, our discussion refers to adjusted results. For the third quarter of 2022, GAAP results include after-tax transformation and other charges of $27 million, or 3 cents per diluted share. A reconciliation to GAAP financial results is available on the UPS Investor Relations website, along with the webcast of today's call. Following our prepared remarks, we will take questions from those joining us via the teleconference. 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'll turn the call over to Carol.

Thank you, Ken, and good morning. I'd like to begin by thanking all UPSers for their hard work and dedication to service. I'm proud of the unstoppable spirit of UPSers everywhere. and how they leverage the agility of our global integrated network to deliver outstanding service for our customers and strong results for our share owners. In the third quarter, the global economy softened, especially outside the United States. International and freight forwarding volumes were challenged, but we quickly responded. We adjusted our network to match volume levels and continued to win. in the most attractive parts of the market. For the third quarter, consolidated revenue rose 4.2% from last year to $24.2 billion, and operating profit grew 6% to $3.1 billion. Consolidated operating margin expanded to 13%, a 20 basis point improvement from last year. This was our highest third quarter consolidated operating margin in 15 years. Turning to our strategic update, the execution of our customer-first, people-led, innovation-driven strategy has fundamentally improved nearly every aspect of our business, causing better revenue quality, higher operating margins, and improved bottom line results. Building on the strong foundation created by our better not bigger approach, we are moving to the next phase of our strategic framework. better and bolder. What do we mean by better and bolder? First, the better part of our framework is not changing. We will continue to focus on growing value share, improving the customer experience, and driving higher productivity from the assets we own. Bolder is about moving faster to grow in our targeted market segments. It's also about combining digital solutions with our global integrated network to create more value for our customers and new revenue opportunities for UPS. We plan to combine the capabilities of our strong standalone digital services, including Roti, Coyote, Delivery Solutions, UPS Capital, and our partnership with Commerce Hub to create a powerful offering of logistics as a service. And when we combine logistics as a service with our integrated physical network, we believe we will be unstoppable. We will share more detail about Better and Bolder in the coming quarters, but let me give you two examples of what we're doing. On our second quarter earnings call, I introduced our upstream delivery density solution. Here, we are building a digital platform that goes upstream to look at orders in other words, packages, at the shopping cart level. We then match this new order with other orders that have the same delivery date commitment, which creates delivery density. We've gone live with one customer, and we're delighted with the results we've seen. In fact, we're currently onboarding several new customers to the platform. Another example of Better on Boulder is our pending acquisition of Bomi Group, whose network of healthcare facilities in Europe and Latin America and expertise in cold chain will help accelerate growth in complex healthcare. Along with our recent expansion of UPS Premier in Europe, we are on track to generate at least $10 billion in healthcare revenue in 2023. Now, let's look at the three legs of our strategy, starting with customer first. Customer First is about creating a frictionless customer experience targeted at the parts of the market where we want to grow, including SMBs, healthcare, international, and certain large enterprise accounts. Given global economic softening, we are convinced that a relentless focus on Customer First matters now more than ever before, and we believe our strategy is working. because we've continued to gain share. For example, we are leveraging our time on transit and visibility advantages in Europe to win. In fact, we grew Europe export volume in the third quarter. Another example is the growth we are seeing in our digital access program, or DAP. In the third quarter, we grew U.S. SMB average daily volume, including platforms, by 1.9%. and SMBs made up 28.3% of our total U.S. volume in the quarter, an increase of 90 basis points from last year. DAP continues to add partners and revenue. With more than 3 million merchants shipping with DAP, in the first nine months of this year, we generated over $1.6 billion in DAP revenue. and we expect to exceed our $2 billion DAP revenue target in 2022. Moving to the people-led part of our strategy, our people are our most valuable asset, and it's important to us that every UPSer views our company as a great place to work. We know that when we take care of our people, they will take care of our customers. Recently, UPS reached contract extension agreements with the Independent Pilots Association and our aircraft maintenance technicians. Both contracts continue to reward these UPSers with industry-leading pay and benefits and will help ensure the company's future success. And we are making other changes to improve our employee experience and satisfaction. For example, through what we call our Operator Experience Program, We recently worked with our U.S. drivers to create individualized dispatch plans, giving them more choice over the hours they work. We also automated tasks and reorganized our operations team to improve work-life balance for our operating supervisors. And for our management employees globally, we are evaluating our overall pay mix composition. While total compensation compares favorably with the market, we may have some opportunities to rework the pay mix to make our compensation even more attractive. Now to the last leg of our strategy, innovation driven. This is about driving more productivity from the assets we own. Our integrated network is the best in the industry, but we are leveraging data and technology to make it even smarter more automated, and more efficient. In the third quarter, our productivity improvements continued to deliver benefits. In the U.S., we optimized trailer loads by eliminating nearly 1,000 loads per day compared to the third quarter of last year. And we successfully managed hours in line with volume level. We also launched total service plan, which is about running a predictable on-time network. Execution is going as planned, and as of last week, our on-time feeder departures and arrivals improved 6.5% compared to last year, reducing idle time in the network. Additionally, this month we completed the initial rollout of our Smart Package Smart Facility, which enables RFID label technology in 101 buildings in our network. Further, We opened our eighth regional hub in the United States. Located in Harrisburg, Pennsylvania, this 800,000 square foot automated hub provides significant processing horsepower to better serve the Northeast corridor and helps enable greater network flexibility across the U.S. This hub is also home to UPS's largest natural gas fueling station within our network. This fueling station will remove 8 million gallons of diesel fuel per year. That's equivalent to removing more than 17,000 gasoline-powered passenger cars from the road. Turning to peak, for the last four holiday seasons, UPS has been the industry leader in on-time delivery performance, and we intend for that to continue. This outperformance doesn't happen by accident. We built our integrated network to flex with volume, and our investments in our people, automation, and technology enable greater agility. To prepare for peak, we made enhancements to all of the areas of our business that delivered a great peak last year. Let me share a few details about our peak plans for this year, starting with volume. This year, we anticipate our volumes will peak later in December compared to last year, as we expect consumers will return to more pre-pandemic shopping behaviors. While we will continue to use technology to match daily capacity with customer demand, we're also optimizing air and ground volume to make room for new customers where we can add the most value. While we will have a peak, as Brian will detail, overall volume in the fourth quarter is expected to decline from last year due to contractual agreement. In terms of labor, we'll bring on more than 100,000 seasonal hires this year. Related to hiring, we're ahead of where we were this time last year. One reason is because we've made the digital hiring process even faster and easier this year. We've also improved training for our new driver helpers, which shortens the amount of time from hired to dispatched. Newly hired driver helpers can complete training on their phones and begin work on day one. Bottom line, we are ready to deliver another successful peak. Let me end by reaffirming our 2022 targets of consolidated revenue of around $102 billion, consolidated operating margin of about 13.7%, and return on invested capital greater than 30%. In the face of a very dynamic macro environment, we are demonstrating more agility than ever before. We are focused on controlling what we can control. And under our better and bolder framework, we are combining digital capabilities with our global integrated network to continue winning in the most attractive parts of the market, driving operational excellence and delivering best-in-class service for our customers. So thank you for listening, and now I'll turn my call over to Brian.