Good morning. My name is Stephen and I will be your facilitator today. I would like to welcome everyone to the UPS Investor Relations Third Quarter 2022 Earnings Conference Call. [Operator Instructions] 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 Tome, 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 will 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 furnished 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 $0.03 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. [Operator Instructions] And now, I will 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 am 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 shareowners. 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 continue 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 to 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 segment. 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 Roadie,…

Thanks, Carol and good morning. In my comments, I’ll cover four areas, starting with the macro environment, then our third quarter results. Next, I will cover cash and shareowner returns. And lastly, I will wrap up with some comments on our outlook for the rest of the year. In the third quarter, the macro environment remained dynamic. In the U.S., we continue to see cross currents driven by the strong job market and healthy consumer spending despite higher inflation and interest rates. Internationally, the macro environment weakened more than we expected due to high inflation, volatile energy prices, lockdowns in Asia, and the war in Eastern Europe. We responded quickly to the changing market conditions by leveraging the agility of our global integrated network to provide excellent service to our customers and deliver our bottom line commitments to shareowners. In the third quarter, consolidated revenue increased 4.2% to $24.2 billion. Consolidated operating profit totaled $3.1 billion, 6% higher than last year. Consolidated operating margin expanded to 13% which was 20 basis points above last year. For the third quarter diluted earnings per share was $2.99, up 10.3% from the same period last year. Now, let’s look at our business segments. In U.S. domestic, our revenue quality efforts and the execution of our planned cost initiatives drove third quarter results above our expectations. In the third quarter, average daily volume was down 1.5% versus the same time period last year, but the growth rate was an improvement over the first half of 2022 as new volume from the record number of wins we had in the second quarter came into the network. In the third quarter, the gap between year-over-year B2C and B2B average daily volume growth rates narrowed as we lapped more normalized consumer shopping behaviors. B2C average daily volume…

Thank you. [Operator Instructions] Our first question will come from the line of Allison Poliniak of Wells Fargo. Please go ahead.

Good morning. Just want to talk to the total service plan and some of the automation you put through. Brian, I think you had talked to $300 million of productivity. It sounds like you’re on your path there. Do we start to see that accelerate into Q4? Are these trending better than maybe you would have thought originally? Just any color there. Thanks.

Hey, Allison. Good morning. So we had talked about driving productivity of about $300 million in the back half of the year. No more than half of that is going to come in the fourth quarter relative to the third quarter, and TSP is one of the largest drivers of that. We’re actually on track, and we’re seeing the system running more on time. I called out in my prepared remarks 13% increase in terms of the efficiency and the drivers. So the idle time is decreasing, and we’re very pleased with the performance.

Maybe just a little more color there. Our overtime hours were down 1 million hours in the quarter. Our bench has dropped from 29% to 20% and we reduced fluctuations in driver pay days by 39%. So the plan is working, and we just got started with it on July 3.

Great. Thank you.

Our next question will come from the line of Amit Mehrotra of Deutsche Bank. Please go ahead.

Thanks, operator. Hi, everyone. Congrats on the results. I just – I guess I had a quick two-parter. Carol, can you talk about market share trends? UPS has obviously been investing in time in transit. I think you said when we met after Labor Day that UPS is maybe at parity or better on 17 of the top 25 lanes in the U.S. So obviously, there is some room for improvement there. But can you just talk about what you’re seeing on market share trends, both driven by what you’re investing in times in transit and, obviously, some of the challenges in your direct competitor? And then Brian, there is obviously a lot of uncertainty beyond our borders. You have a massive – your road business over-the-road business, ground business in Europe. The international profits have held in there remarkably well. There is obviously some cracks and concerns on that market. Can you just talk about your confidence in being able to kind of maintain this level of earnings cadence in the international business, given all the uncertainty out there? Thank you very much.

Well, starting with the question on market share, a big turning point for our company is when we invested in fastest ground ever, improving our time in transit. And yes, we are advantaged or at parity in 17 of the top 25 markets. We offer 7-day residential service, Saturday pickup for our business customers. So this has made a significant difference in our business. And if you look at it through the lens of market share, just looking at SMB in the United States, we see that – we have seen that we’ve grown both revenue and ADB market share ahead of our competitors. And when we look at it through the lens of enterprise, we’ve grown revenue share. So we are delighted with the share gains that we’ve seen in United States, but the share gains continued outside of the United States as well. Super pleased of the time in transit advantage that we have in Europe and what that’s meant for share gains in Europe despite the very uncertain market.

Yes, Amit. In terms of the international side, it is a challenging macro environment out there. But we expect total volume levels in Q4 will actually be higher than Q3, improving utilization from an ADV perspective. Growth rates, we expect to improve. We’re looking to win share in Europe, execute on the initiatives to grow the U.S. export lane, which going into the peak season is helpful. So there are lots of cost initiatives that Kate and the team are executing real time. I think you saw that in sort of the flexibility with taking down flights in Asia and rerouting to where the customer needs were. So we feel great about the agility of the international business.

Yes. Thank you very much.

Our next question will come from the line of Chris Wetherbee of Citi. Please go ahead.

Yes, thanks. Good morning. And I want to look a little ahead to 2023 and maybe think a little bit more on the cost side. Obviously, the macro is challenging. As you noted, there is cross currency in the U.S. But it seems like we’re in a decelerating demand trend. So I wanted to get a sense of sort of the big picture initiatives you guys are working on from a cost perspective in 2023. And I think I’ve asked you this before, but as you think out to ‘23, assuming we are in a more cautious sort of potentially negative volume environment, are we still confident that we have the ability to sort of grow the domestic margins as well as domestic profit next year?

Well, maybe I’ll start with just a philosophical approach to building a plan for ‘23. And then we can have both Brian and Nando talk about some of our cost initiatives. Kate can join in too. So first, this is a very interesting time to be building a financial plan because there is so much uncertainty, there is economic uncertainty, there is still political uncertainty. We do have a contract that’s coming up for renewal next year as well. So there is a lot of uncertainty. But here is our philosophical approach to building the plan. One, we’re going to stay on strategy because we believe that we should invest through whatever comes our way so that we can continue to improve the customer experience as well as the employee experience. So we’re going to stay on strategy. We’re going to build more agility into our plan than we’ve seen before. And I would say we’re pretty agile today. Well, we’re going to – we have to be able to turn on a dime, and so we’re going to build agility into the plan. We’re going to build a plan of conservatism because if you’re too optimistic, then your expenses are too high and then there is a whole bunch of wood you have to chop to get those expenses out. So we will plan conservatively and we will factor into the plan some of the challenges that will come our way as a result of higher interest rates and what that may mean for our pension. But I am super excited about what I’m seeing in terms of momentum on the productivity initiatives inside of the business. And if I could just talk about one, and then I’ll turn over to Brian and the team to talk, about a…

So, Carol, thanks. And I just go back to this control what we can control and a lot will happen with the macros on the top line. But we had guided to a 13.7% on the UPS operating profit margin. Embedded underneath that was a 12% domestic margin and a 21.5% international. So Nando and the team have got a lot of initiatives from total service plan to what Carol talked about, smart package, smart facility, pushing out automation. Nando, do you want to offer a little bit of color?

Yes, sure. So I’ll just quickly discuss the oil service plan. And while we kicked that off mid-July, we are building muscle, and it’s also allowing us to look at other activities that occur within the network that aren’t perfectly aligned with that – the total service plan. And so as we start to refine those areas, such as our administrative and clerical areas for packages that are undeliverable and other activities that were closely linked to things like cube utilization where quality becomes much easier to first visualize and then improve the cost structure as a result. And then I think one of the bigger unlocks for us is to really manage our demand through day of week and we start to flatten the demand curve for the week. We see some really impressive cost results there as we start to achieve some of those moves.

So we will give you our thoughts on ‘23 when we release our fourth quarter earnings call because we’re still in the middle of building the plan, but we’ve got a lot of initiatives underway. It doesn’t stop just in the United States, but there is some interesting initiatives underway outside of the United States, too, Kate?

Yes, absolutely. For international, as you can imagine of it, we are all about matching the network through demand. And in some markets, that’s very good because of the record competitive wins we’re having, as you heard Brian talk about, shifting 27 of our flights to Europe for that export growth at the same time, in the moment, pulling on the throttle when we saw the lockdowns for energy in China and pulling down the 75 flights that didn’t match with demand. But on top of that, we run a significant ground network in Europe, for instance, and it’s all about utilization on the ground in the trailers to cut back on trailers, and we have cut hundreds of trailers by driving the highest production rates within that cube so that you get more. You sweat the asset of the feeder network and, therefore, reduce cost of rentals as well as drivers and trailers, all the while maintaining best-in-class on-time service performance at 98%. And it’s resonating with customers. I mentioned the growth. We are seeing, again, that competitive win that we expect to play out in the upcoming quarters as well.

Thank you very much. Appreciate the comments. Thank you.

Our next question will come from the line of Tom Wadewitz of UBS.

Yes. Good morning and congratulations on the strong results. I wanted to see if you could offer some thoughts about sensitivity to lower international air freight rates. I think your comment on 3Q, it sounds like currency was a bigger effect. I don’t think you mentioned the impact of lower rates. But how should we think about that impact on international margin if international airfreight rates keep falling? Does that flow through to your international export, or do you have some resiliency relative to that? And then also if you kind of look back at I think at your analyst meeting and you had talked about, I don’t know if it was 21% or 21.5%, but some type of a margin level where you say after the belly space capacity comes back, this is what we get to. So, a couple of questions for you on international margin. Thank you.

So, Tom, from a service perspective, Kate and the team are doing an outstanding job in terms of managing the international rates. The air freight decline over the rates that you mentioned, those will bleed through a bit, but the reality is the margin in the third quarter, it was really all about 80%-plus was due to currency and then some of it on the U.S. export land, which we don’t control as much. So, that’s where we de-levered. We expect that volume to go up in the fourth quarter. So, we will be able to pass some of the leverage through. So, I think we have a line of sight to manage that.

Our international margin will increase sequentially Q3 to Q4. And part of that is because of the great work that Kate and team are doing to move off of charter on to brown tills [ph]. Brown tills are just a better economic equation for us, and we are utilizing the aircraft that we own, which will certainly help that margin pressure. In terms of what a good operating margin is for international, well, I don’t know. We love what we have got. We want to continue to grow it. So, Kate has declared that we are going to be number one in the premium international logistics market. So, that means higher margins.

Great. Thank you.

Thank you.

Thanks Tom.

Our next question will come from the line of Brian Ossenbeck of JPMorgan. Please go ahead.

Hey. Good morning. Thanks for taking the question. So, Carol, I just wanted to get your thoughts on durability of pricing in the industry, especially U.S. domestic. Is there a longer term trend here to reset expectations around service levels as you kind of alluded to, coming from the historical thought process that shipping is supposed to be free? And maybe you can offer some comments around price elasticity in some of your target markets and if you see any demand destruction yet. And then, Brian, just a quick one, early on to give too much on 2023, but it’s hard to ignore the move on interest rates. So, maybe you can just – back on pensions, both above the line when it comes to U.S. domestic margins and perhaps overall sensitivity for the whole company. Thank you.

So, in terms of pricing durability, value is defined by what a customer is willing to pay, and the customer is willing to pay for the service that we provide. So, the new business that we have won and we have been winning new business has come in at very, very solid revenue quality. Now, as I look back over the past several years, from 2019 to now, we have grown our RPP in the United States by 23%. And we did that through a number different ways by renegotiating on longer term contracts, by leaning into the parts of the market that really value our end-to-end network through some demand surcharges, a little bit of help from fuel. It’s been a real success story. We have also driven productivity during that timeframe, but the margin expansion has been really driven by the RPP growth. Looking ahead, we will continue to have RPP growth. You heard Brian talk about the GRI that we just announced. But there will be more of a balance between RPP and productivity to enable our margin expansion going forward. We think that’s just the right thing to do. In fact, as we continue to drive productivity inside of our business, we are willing to give some of that back to our customers through a revenue share, is why not. If we can increase delivery density and we are seeing some good proof in our both our pilots and now our live case, we will give some of that back because we should. I think about a third, a third, a third, a third for the customer, a third for the shareholder and a third for UPS. So, we have not seen any demand destruction at this point because value is defined by what the customer is willing to pay for and service matters.

I will pick up the second part of the question in terms of the pension, and Carol alluded to it in early answer this morning that rates are moving. And pension in ‘23, it’s going to be determined by discount rates and asset performance actually on December 31st. So, it’s too early to get into specifics, but I think the gist of your question is, if the year ended today, I would expect higher discount rates would actually reduce service costs and increase our profit in the domestic business above the line. But that’s unfortunately going to be probably more than offset by higher interest expense and lower pension income below the line. So, I think net-net, in the P&L, it will be a net headwind, some favorability above the line, offset by some headwinds below the line.

Okay. Thank you.

Next question will come from the line of Ravi Shankar of Morgan Stanley. Please go ahead.

Thanks. Good morning everyone. A couple of questions on peak. I think you mentioned the kind of 4Q volume decline is due to some contractual agreements with enterprise customers. I think you said that in 3Q as well. Can you detail that a little bit more and maybe kind of what the kind of Amazon run rate looks like by the time you exit the year? And also just broadly on peak, where are you – why is your peak season hiring flat when volumes are lower and your – and then do you have more automation than last year? We have seen some other kind of peak season hiring kind of be materially lower. So, kind of maybe some rationale at the end, that would be great.

So, first on peak volume, if you go over last year, is the easy way to think about it, between Q3 and Q4, the volume grew 25%. And then obviously, during the peak time, which is Thanksgiving through Christmas, it’s even higher than that. As we look to this year, we expect to see the similar surge Q3 to Q4 but maybe more in the 24% area. Why, because we have, as we shared with you, reached agreement with our largest customer about the volume that we will take into our network and the volume that they will deliver. So, it’s just a function of that contractual arrangement. And what that does for us, actually, it gives us room to invite additional customers into our network and give them the rate service during peak, which we are doing. In terms of the hiring question, Ravi, there is turnover in the numbers because we don’t keep everybody that we hire. It’s also just a nice round number. So, I wouldn’t read anything into that other than it’s just a nice round number. What I am super pleased about is how we have changed some of our processes to make it easier to hire people into UPS for peak. For example, we have a QR code. If you open up the QR code on your phone, you can apply for a job and get a job offer in less than 30 minutes. That’s way cool. We have shortened the time it takes to onboard a driver into our company. Last year, it was eight weeks. This year, it’s 11 days. That’s way cool. We have really put the pedal to the metal on our social messaging, if you will, our social campaign. So, by amplifying our social messages, we saw that we had 1.4 million impressions in the month of September. That’s up 60% year-on-year. We had a very successful October job fest, and Brown Friday is coming up on November 4th. We are really excited about Brown Friday. Last year, we had 85,000 applications on Brown Friday. So, we are expecting a similar amount this year. So, we are ahead of where we were a year ago on the hiring front, feeling very good because we have got to get a lot of people in to manage the surge. Brian, do you want to add something?

I would just add, Carol, Ravi, we are sort of executing the play. We had called – we had guided what does it mean at the bottom line, 11.6 full year, and that was an 11.6 1H and 11.6 2H were actually delivered the first half of the year. Obviously, a lot of changes in dynamics in the market, but we are on track to deliver an 11.7 in the back half of the year. So, net-net, Ravi, I think we are delivering what we said we would do, slightly different playbook in terms of volume price cost. But at the end of the day, executing on those contracts, it was part of the original plan.

Great. Thanks both.

Our next question will come from the line of Jordan Alliger of Goldman Sachs. Please go ahead.

Yes. Hi. Just sort of curious on peak, I know you mentioned higher ships or maybe back towards December. Sort of what gives you confidence in that? And does that sort of imply that maybe things have started a little slower, but you are hearing from your customers that it’s going to do that shift back to sort of traditional patterns, pre-COVID patterns? Thanks.

Remember last year, when there were all these supply chain dams and inventory was at very low levels, everyone was saying shop early, shop early, shop early. So, we just believe that the inventory levels are in much better shape than they were a year ago. So, we are going to return to a more normalized shopping pattern for peak. And if we can just talk about the tone of business, current business, here it is. It’s almost Halloween, October was good.

Yes. We have got an extra delivery day, Jordan, in December, so feeling good. We expect the peak to be a little bit later, and we are ready for it.

Thank you.

Our next question will come from the line of Todd Fowler of KeyBanc Capital Markets. Please go ahead.

Great. Thanks and good morning. So, Carol, in your prepared remarks, you talked about Logistics-as-a-Service. And I was just curious if you could expand a little bit on that and kind of how you see that holding and if there is any external benchmarks that we should be looking at to kind of mark the progress on that. Thanks.

So, we are building Logistics-as-a-Service, and it’s very early days, but it includes components of what we have talked to you about in the past. One of the pillars of Logistics-as-a-Service is improving delivery density. And as you know, we have been partnering with CommerceHub to go upstream in the cart to improve delivery density with our live use case. It’s doing very well. So, we are adding additional customers on to that platform. The second pillar of Logistics-as-a-Service is improving visibility end-to-end and we have talked to you about this in the past, I think we called it project with all other project symphony. But it really is proving visibility from the manufacturer all the way to the end of distribution clients. That part of Logistics-as-a-Service, the third pillar is proving financial solutions. We do that today through UPS Capital, where we had a very robust insurance product. We are looking at adding some additional financial products to that filler. We then move to I will say, advanced capabilities, which is including technology to help you, understand how to optimize your supply chain, warehousing fulfillment for shipping. And then lastly, while we have a very good returns business, we think we could have a robust reverse logistics business, and all of this will be powered by technology. So, the way to measure this in the future will be in a number of different ways. But basically, this is going to create new revenue streams for us. So, as we build this out, we will put these new revenue streams into our plans, and then we will share those with you. And then you can hold us accountable to those plans.

Sounds good. Thank you.

Thank you.

Our next question will come from the line of David Vernon of Bernstein. Please go ahead.

Hey. Good morning guys. Two quick ones for me. Brian, you mentioned you quantified the productivity tailwind sort of accelerating into the fourth quarter. Should we be expecting that same sort of order of magnitude productivity on the domestic side as we go through the next couple of quarters here as you annualize the impact of the total service plan and the RFID tracking and that kind of stuff? Just wondering whether how much of that is sensitive to overall volume levels, or should we expect that same sort of dollar value or productivity in the first half of next year? And then with respect to the union agreements you guys have reached with the pilots and the mechanics, can you talk a little bit about kind of the level of adjustments that were made there and whether there is any read across to the broader negotiation for next year?

Happy to take the cost question. So look, the momentum with Nando and the team, they are really just getting started. We saw CPP growth about double digit in the first half. That will be high-single digit in the second half of the year. We would probably expect to see that trajectory continue to next year. I don’t want to get ahead of my skis though. So, we will come out at the end of the fourth quarter and give you some guidance for RPP and CPP for next year.

We were pleased with the contract extensions that we had both with our pilots as well as our aviation mechanics. The terms of those contract extensions were in line with the longer term financial plans that we had already built. So, we felt very good about that. But more importantly, with the percentage of the UPSers who voted in favor of the contract extension, I was delighted with that. It exceeded our expectations and it speaks volumes to the relationships that we have with our employees and the fact that these are really great jobs. So, the only read-through to the upcoming Teamster contract negotiation would be the – we have got a great relationship with our employees, and these are great jobs.

Thanks for the time.

Thank you.

Our next question will come from the line of Bruce Chan of Stifel. Please go ahead.

Hi. Good morning everyone and thanks operator. Just want to touch on equipment and capacity quickly. Brian, you mentioned higher maintenance costs. Is that just a function of inflation, or is that fleet age, too? And if it’s fleet age, when do you think that starts to normalize? And then maybe just to follow-up quickly on the aircraft fleet side. You had some other providers out there that are looking to reduce capacity? Any plans for you to do the same as we look at risk in ‘23? Thank you.

So, from a maintenance perspective, we have actually gone to a very systematic, programmatic approach and gone out with multiyear. On the airline, for example, we now have a 10-year maintenance program to manage the fleet age of the equipment. It is going up in terms of age and therefore we factor that in on more of a normalized run rate over the next decade.

Okay. And then just as far as capacity on the fleet side, any plans to reduce, or you are going to keep things fairly static?

So, right now, we announced some recent acquisitions with Boeing. And so we have the next several years outlined. We will remain fluid on that as we track volumes and shift the aircraft around.

I guess part of the advantage of having an aging fleet is that we can retire if need be.

That’s right.

But the best news is actually replacing the aircraft with better energy-efficient aircraft and more – and actually take our cost down.

As we set down, some of the MD11s from a sustainability standpoint, that’s a positive thing from an operating – productivity standpoint, that’s also a positive thing. So, that’s part of the overall strategy that we have run over the next 10 years.

And Steven, we have time for one more question.

Our final question will come from the line of Stephanie Moore of Jefferies. Please go ahead.

Hi. Good morning. Thank you. I wanted to touch on the upstream delivery density pilot, Carol, that you mentioned. Maybe if you could share any KPIs from that pilot, what you saw that gave you confidence to expand it with other customers and kind of what we should be looking for in terms of the eventual rollout of that platform? Thank you.

Yes. So, it’s still early days, Stephanie, but we are pleased with what we are seeing. We were in pilot, then we went live with one of our customers, and we started to see good matches. But to get that one-tenth improvement and delivery density, you really need a 5% match. And we weren’t seeing 5%. So, what we just did is we increased the whole time. We had been holding the orders in the car for an hour. We increased the whole time six hours. And now we are starting to see a creep up to that 5% match. That’s cool because a 5% match, then if you translate it out, to our opportunity set, that’s a one-tenth improvement in delivery density, which is a $300 million value unlock. So, early, early days, but really like what we are seeing. End of Q&A:

Excellent. Alright. Well, thanks everybody for joining us today. We look forward to talking to you all next quarter. And that concludes our call.