United Parcel Service, Inc.

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. 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.

Good morning and welcome to the UPS third quarter 2024 earnings call. Joining me today are Carol Tomei 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 will make today our 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 10k 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 today refers to non-GAAP adjusted results. For the third quarter of 2024 GAAP results include an after-tax net gain of 36 million dollars or 4 cents per diluted share comprised of a 152 million dollar gain from the divestiture of our Coyote logistics business net of transformation strategy costs of 116 million dollars. Transformation strategy costs consisted of after-tax costs of 81 million dollars related to our fit to program and 35 million dollars 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 material. 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. 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 PJ and good morning. 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 did. I would like to recognize and thank UPS'ers 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 third quarter we faced a macro environment that was slightly worse than we expected. In the US online sales slowed and manufacturing activity was lower than we anticipated. This slowdown in manufacturing activity was also true outside of the US as we continue to see lower industrial production weigh on volume in certain geographies. 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 -to-end network and we drove expense leverage through ongoing productivity initiatives. In the third quarter our consolidated revenue was $22.2 billion dollars an increase of 5.6 percent versus last year. Consolidated operating profit was 2 billion dollars up 22.8 percent from last year and consolidated operating margin was 8.9 percent. In the US this was the second consecutive quarter of average daily volume growth and it was our highest -over-year ADV growth rate since the first quarter of 2021. In international average daily volume growth finished flattish and continued the upward momentum we've seen since the quarter of this year. And in SCS air and ocean forwarding contributed to strong revenue growth. Looking at the US during the quarter we focused on growing certain pockets of commercial business and grew B2B volume by nearly 1% compared to last year. One of the areas of commercial focus was retail B2B. Our routes 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 two-hour window. Within the 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 stock-outs and more efficiently run their receiving operations. This is just one example of how our customer focused capabilities are enabling us to growth we have also been able to increase our revenue volume by a new commercial volume. Now that US volume is 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. In the third quarter 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 third quarter from what we reported in the second quarter and we expect this trend to continue. On the cost side our team did an excellent job of managing expenses across the board. As it relates to our two 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 nine full buildings that have been shut down. I'd like to give you a starting with customer first. As we discussed we have a goal to become the number one complex healthcare logistics provider in the world. To that end we said we would pursue certain inorganic opportunities and we have. Last month we entered into an agreement to acquire freego trans a move that will enhance our -to-end temperature sensitive healthcare capabilities across Europe. Today 80% of pharmaceuticals in Europe require temperature controlled transportation. Freego trans offers pan-european cold chain transportation as well as temperature controlled and time-critical freight forwarding capabilities. Plus freego trans has temperature controlled warehousing capabilities with every temperature from cryo preservation which is minus 190 degrees Celsius to ambient which is about 25 degrees Celsius. We are targeting to close the freego trans acquisition in the first quarter 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 third quarter we generated 2.5 billion dollars in consolidated healthcare revenue which contributed to revenue growth across all three segments. Shifting to international, in time for the holidays we've made several enhancements. In September we expanded residential Saturday delivery to the eight 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 US. Quickly touching on DAP, our digital access program, DAP continues to deliver strong SMB growth in both B2B and B2C segments. In the first nine months of this year we generated 2.3 billion dollars in global DAP revenue and we expect to deliver over 3 billion dollars 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. During the third quarter our network planning teams work closely with the USPS to ensure the transition progressed smoothly and it did. As of October 1st 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. For example in the US 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 intergrad driver training schools. This year we've had a number of driver skills 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. 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 six years in a row of industry leading service we're confident our plans and execution will make that seven. To prepare we've been collaborating with our customers on daily volume expectations and the timing of their promotion. 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 18th in the US we expect to deliver two million 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 UPSers who work inside our facilities. 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 moves. 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. Looking at our consolidated revenue outlook in the third quarter we increased our emphasis on revenue quality resulting in a glide down of certain volume which we expect will continue into the fourth quarter. Given our third quarter results our latest peak volume expectations and adjusting for the impact of the Coyote disposition we now expect consolidated revenue of approximately $91.1 billion 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. And now I'll turn the call over to Brian.

Thank you Carol and good morning everyone. This morning I will cover our third quarter results, review our capital allocation for the year and then I'll wrap up by providing additional detail for our fourth quarter and full year financial outlook. Starting with our results in the third quarter we returned to revenue and profit growth the first time in two years. Looking at our consolidated performance in the third quarter we generated $22.2 billion in revenue, an increase of .6% compared to the third quarter of last year with all three of our business segments delivering revenue growth. Consolidated operating profit was $2 billion, an increase of .8% versus the third quarter of 2023 and consolidated operating margin was 8.9%, an increase of 120 basis points compared to the third quarter of last year. Deluded earnings per share was $1.76, up .1% from the third quarter of 2023. Now let's look at our business segment. In the U.S. domestic segment our performance in the third quarter was driven by two factors. First was strong volume growth, the highest growth rate we've seen in more than three years. And second was excellent cost management, which resulted in a year over year average daily volume or ADV increased .5% compared to the third quarter of 2023. Looking at product mix in the third quarter, ground average daily volume increased .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 surepost. Within ground surepost volume levels rose slightly compared to the second quarter, driven by growth in our digital access program. While surepost 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 .8% year over year, increasing for the first time in two years. 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 .3% of our volume, a slight downward shift from the second quarter. In terms of customer mix, we saw ADV growth from both enterprise and SMB customers. SMBs made up .4% of total U.S. volume in the third quarter. For the quarter, U.S. domestic generated revenue of $14.5 billion, up .8% compared to last year, driven by strong volume growth. As expected, U.S. domestic revenue per piece was down year over year. In the third quarter, revenue per piece declined .2% year over year, but showed a 40 basis point sequential improvement from the second quarter. Breaking down the components, first, we took actions to address revenue quality, which translated into higher base rates. In the quarter, base rates increased the revenue per piece growth rate by 170 basis points. Second, 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 first year of the contract, and for the quarter, union wage rate growth slowed to .2% year over year. Productivity is a virtuous cycle at UPS, and in the third quarter, 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 million 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.S. domestic segment delivered $974 million in operating profit, a .5% increase compared to the third quarter 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 third quarter, our international business grew revenue and operating profit and expanded operating margin for the first time in nearly three years. This performance was driven by strength in exports in 13 of our top 20 export countries. Total international average daily volume growth continued its sequential improvement trend from the second quarter and was about flat to last year. In the third quarter, international revenue was $4.4 billion, up .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 cost, 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 million, an increase of .3% year over year. Operating margin in the third quarter was 18%, an increase of 220 basis points from a year ago. Moving to supply chain solutions. In the third quarter, revenue was $3.4 billion, 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 M&X acquisition and onboarding of USPS air cargo contributed to revenue growth in SCS. Partially offsetting these gains was weaker performance at Coyote, our truckload brokerage business, and the completion of the sale in mid-September. 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 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 third quarter was 6.4%. Walking through the rest of the income statement, we had $230 million of interest expense, our other pension income was $68 million, and our effective tax rate for the third quarter was approximately 21%. Now let's turn to cash and capital allocation. So far this year, we've generated $6.8 billion in cash from operations and free cash flow of $4 billion, including our annual pension contribution of $1.4 billion. We've refinanced $1.5 billion in current maturity here to date and we finished the quarter with strong liquidity and no outstanding commercial paper. So far this year, our USPS has paid $4 billion in dividends. And lastly, we've completed our targeted $500 million share repurchase program in the third quarter. Which brings us to our outlook. 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 three things. First, our third quarter results in the focus on revenue quality. Second, the sale of Coyote. And finally, new softer peak volume forecast from our customers. At the consolidated level, we now expect full year revenue of approximately $91.1 billion. 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 .6% to align with these new volume and revenue expectations. Now looking at the segments in the fourth quarter. Starting with US domestic, we expect a combination of both volume and revenue per piece growth to increase revenue by .5% in the fourth quarter. We expect to generate a fourth quarter operating margin of approximately 9.5%. And we now expect the operating margin in December to be slightly higher than 10%. Looking at international, we expect the positive volume momentum we've experienced throughout the year will continue. With that in mind, we expect fourth quarter revenue growth to be up mid single digits year over year. And we still expect around a 20% operating margin in the fourth quarter. In supply chain solutions, we expect revenue in the fourth quarter of around $3.3 billion, 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 in 2024, we expect free cash flow to be around $5.1 billion after the $1.4 billion pension contribution we made to fund annual service costs. Capital expenditures are expected to be about $4 billion. We plan to pay around $5.4 billion 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.

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

Good morning, everyone. Thanks for taking the time and taking the questions. When we think about the ramp here from 3Q into 4Q, the operating profit guidance sort of suggests 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?

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 made to drive revenue growth and improvement, both through pricing policy as well as the take rate that we're seeing on HCF, 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. We feel very confident in both of those, and we're seeing them actually start to come through in the third quarter and early in the fourth quarter on the revenue side. And you can see from our cost performance, we feel that Fit to Serve and NOS stuff is sticking very well.

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

Yeah. And so as we roll through 2024, 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 slightly higher than the 10% that we got it to before. We'll come back to you as we get through peak on 25, but we want to close out peak first.

All right. Thank you. Thank you.

Your next question comes from the line of Brian Olsenbeck from JP Morgan.

Please go ahead. Hey, good morning. Thanks for taking the questions. Maybe you can 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, sticking if you're getting more pushback on that or seeing more trade downs at this point. Thank you.

Well, I'll start with the customer feedback. We work with a little over a hundred 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 2nd. And their forecasts have been tempered. And we believe it's driven by a couple of factors. First, external forecasts for the holiday season have come in. In fact, the forecast for ESMO in the fourth quarter 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. 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 will 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 million more packages than we did last year. 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.

Yeah, absolutely. So first off, we're 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. At the end of it, it's all about us creating, continuing to drive value with our customers and to deliver a great peak. So we're staying close on the forecast, but also working very closely with them on this holiday demand surcharge. And

we're seeing a good keep rate on that. Very good, yeah.

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. And that's what drives some of the incremental outperformance year over year that you're seeing.

Okay,

thank

you very much.

Your next question comes from the line of Chris Weatherby from Wells Fargo.

Please go ahead. 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 two pieces to the question. How do you think about that progress potential in the fourth 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?

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

Great. Yeah, thank you. And yeah, it's a great question because the cost performance in the third quarter was outstanding. I think there's a couple dynamics that are going on. As we said in our earlier remarks, we lack the contract at the end of July. So you start to see that high wage inflation that we talked about in the second quarter as being 12%, now coming down to 5.2. 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 our service hit to serve and are now outperforming our forecast as well as you'll see from the Network for the Future discussion that we've closed more sorts 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 rep per piece growth rate. So we'll maintain a positive spread, but it'll be a little bit more normal as you go through it. Yeah, thanks,

Brian. And look, you may be asking how are we able to have 45 operational closures and nine buildings that we've closed. 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 million 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. So every piece of our business, from car wash to automated dispatching, we are prepared for all of it and looking and scrutinizing all of that cost and finding some good improvements there.

All the while maintaining outstanding service levels, which is job number one for UPS. And just to put the 5% number that Nando mentioned into perspective, he's talking about automated volume 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% of points from a year ago. That's pretty good.

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

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

Good morning and congratulations on the strong results. I 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. 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.

I think our team has done a masterful job of managing a very choppy environment over the past several years, actually. And 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 third quarter. 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.

Yeah, absolutely. 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 transporter of all of our large international volume markets. 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. And our Saturday delivery is one example of that. We are the only carrier that offers standard Saturday delivery at no charge in these eight markets. And that's driving some nice performance, isn't it, Kate? We just started it.

It really is. And so Europe and Canada are exceeding expectations, unlocking more of the customer share of wallets 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.

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

So I think in the domestic side, productivity is a virtuous cycle here. And as Nando pointed out, there's nothing that's not under review, right? Everything's under review. And we continue to drive productivity that exceeds our expectations. Brian, anything you want to?

Yeah, I would just say so if you remember, we've got a contract that we have known costs for the next four 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 third quarter with commercial and SMB commercial growing, starting to grow again. We do think we have the ability to one, continue to take action to drive rep per piece ourselves as well as, as Carol said, productive production, the virtuous cycle with a known cost structure as we go into 25.

And we like that commercial business. 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 third 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.

Great. Thank you.

Your next question comes from the line of Connor Cunningham from Melius Research. Please go ahead. Connor Cunningham, your line is open. Okay, we'll move on. We'll go to the line of Jordan Allager from Goldman Sachs. Please go ahead.

Yeah. Hi. Morning. 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 cost, 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 should be going forward?

Thanks. Well, as you point out, Jordan, we did have a bit of a transition in the third quarter. The USPS contract with their previous carrier expired October 1st. And we didn't want to wait until October 1st to onboard that volume because SICA is right around the corner. So we agreed with the USPS that we would operationalize this service to them while over time they onboarded their volume. And it was over time, actually. We didn't get much wait until September. So there was a mismatch between our operational model and the volume. But now the volume is all in. So the fourth quarter is going to look a lot different than the third quarter did. And from a performance perspective, Sando, you just met with the PostMetro General. And so tell us what you said.

Sure. So as early as yesterday, we meet -to-face. And yesterday the purpose was peak planning. So both teams -to-face in D.C. 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 PostMetro 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.

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

Thank you. Your next question comes from the line of Basco Majors from Susquehanna. Please go ahead.

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 SurePost and Sunday Delivery with their effort to renegotiate some of those contracts? And maybe along with that, what challenges does that create either on calls 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 upstream business and push customers into that? Thank you.

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

So first off, 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

in that order. 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.

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?

Yes, you should hear something about it in our fourth quarter earnings.

Yes. Yeah, no impact in the fourth quarter. We'll tell you more about it when we come back with the fourth quarter earnings in January.

Thank you.

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

Please go ahead. Hi, good morning. I was wondering if you could 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?

So I think our team has done an excellent job of taking capacity out of the market. In fact, with 45 million operational closures, it's about 1 million 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.

Your next question comes from the line of Scott Group from Wolf Research.

Please go ahead. Hey, thanks. Good morning. So how much, if any, does the new USPS contract help the fourth quarter US margin just with the cost allocation? And then, I don't know, Carol, just big picture, right? You're now saying margins in the US and 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. When do we start to see more meaningful margin improvement? Does that start right away in 2025 or does that take some more time?

Well, first of all, we addressed the impact to the fourth quarter. Sure, sure.

So, say, 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 fourth quarter from the USPS contract. The cost that Carol referred to was startup costs associated with getting the contract stood up. It was that impacted SES doesn't impact domestic. And in the fourth quarter, we'll see SES go back to about 9 percent and domestic to around 9.5. So, I don't think that's going to impact us there.

In terms of when are we going to see more meaningful margin expansion, let us get through the fourth quarter and then we'll give you our outlook for 2025.

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

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 Q and your thoughts into 2025 if you have them.

Thanks. Sure. Thanks for your question, Stephanie. Yeah, so we saw positive momentum going from Q2 to Q3 and domestic rep per piece. As I mentioned in my earlier remarks, really when you think about what happened in the base rate, in the second quarter base rate added about 90 basis points of improvement to rep per piece and the third quarter that jumped to 170. Now, as we translate into the fourth quarter, we actually expect rep per piece to inflict positive in the US and that's really driven by a couple 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, staff and AOT and the modifiers and we're leveraging those in order to make adjustments to help drive rep per piece. The other thing is what we're doing on the surcharging in the GRIs that we will continue to see list as we go through the fourth quarter and into 2025. So look, it's a positive trajectory on rep per piece and it's clearly an area of focus as we move from our year one to our plus two strategy.

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 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 third quarter to help you understand. In the third quarter, we had a discount modifier that we adjusted to basically test the elasticity. We reduced the discount by 25 cents, which increased the cost of the product. We 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 modifiers. And this is just one element of pricing architecture of tomorrow that we will use not only in the fourth quarter but in 2025 and beyond.

Great. Thank you.

Your next question comes from the line of Daniel Imbrill from Stevens. Please go ahead.

Hey, guys. This is Joe Inderlin on for Daniel. Thanks for taking the question. I just wanted to ask another one actually on 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?

So I'll start 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 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, you've got to deliver service to do it. It starts with us with service and then we add incremental capabilities like RFID to win where we really want to win most. And I pointed that as Carol mentioned, we've had big enterprise commercial wins 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 S&B commercial growing 3.8%. Those sorts of things allow the capabilities that we have allow us to win more and win new in those areas that help drive the rep for peace growth despite a very competitive price environment.

Your next question comes from the line of Brandon Oglensky from Barclays.

Please go ahead. 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 you. 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 Fit2Serve, I didn't get it, but is that going to incrementally deliver more in the fourth quarter? And thank you.

So first on the customer GlideDown, we have, as you know, been in a GlideDown arrangement 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 third quarter performance, 100% of the decline in air volume was down about 6.5%. Is it attributable to the 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. But we're fine with that because it creates opportunity for us to grow in other areas. And then looking ahead... Yeah,

and then on the Fit2Serve point, yeah, so we do expect about $70 million incremental to go to about $350 million in the fourth quarter. And we've seen great progress with that program.

Thank you. Your next question comes from the line of Ken Hexter from Bank of America. Please go ahead.

Hi, good morning. This is Adler Oskowsky on for Ken Hexter. You noted in the release that you are aggrieved with the scope of the Fit2Serve initiative, which previously called for reduction of about 12,000 positions. Could you just expand on what that means? Has that actually accelerated this quarter? And just any thoughts on how you would expand the scope and what you would target there? Thanks.

So you're just asking for a status update on Fit2Serve?

Sure, yeah. On Fit2Serve, 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 fourth quarter, but we're continuing forward with it as planned.

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.

Gregory, time for one more question.

Okay, your final question comes from the line of Ravi Shankar from Morgan Stanley. Please go ahead.

Thanks, good morning everyone. So just to 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 earning peak season, but what's the logic beyond 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 cost? Thank you.

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. Regardless of where the volume actually ends up, we're not going to over hire 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?

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 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 to 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 peak season.

Thank you.

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

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.