Good morning. My name is Steven and I will be your conference facilitator today. I would like to welcome everyone to the UPS Investor Relations Third Quarter 2023 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. [Operator Instructions] 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 2023 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'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 2022 Form 10-K and other reports we filed 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 2023, GAAP results include an after-tax charge of $219 million, or $0.26 per diluted share, comprised of a one-time payment of $46 million to certain US-based non-union part-time supervisors, transformation and other charges of $70 million, and non-cash goodwill impairment charges of $103 million. 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] 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.

Thanks, PJ, and good morning. Let me begin by thanking UPSers for their hard work and effort. Our US labor contract wasn't fully ratified until early September and I'm proud of our UPSers for staying focused during the entire labor negotiation and for providing industry-leading service to our customer. We expected conditions in the third quarter to be challenging and they were. The global macroenvironment remained weak, with some countries in recession, which pressured international and freight forwarding volume. And in the US, labor uncertainty negatively impacted volume from most of the quarter. From a demand perspective, August proved to be the most challenging, as some customers waited for the ratification of our Teamster contract, before returning volume to our network. Since contract ratification, we've been gaining volume momentum. We exited the last week of September with US average daily volume or ADV down 7.4%, a marked improvement from the rest of the quarter. Our sales people have produced record results and the combination of win-back and new customers. To-date, we've won back roughly 600,000 ADV of diverted volume and we are working to win back all diverted volume by the end of the year. And looking at our sales pipeline, we're pulling through new customers that value our superior on-time performance, and want to come to UPS, prior to the busy peak holiday season. Moving to our financial results, our third quarter performance while down considerably from last year, was in line with our expectations, and factored in both the timing of contract ratification, and higher labor costs, resulting from the new labor contract. Consolidated revenue in the third quarter was $21.1 billion, down 12.8% compared to last year. Operating profit was $1.6 billion, a decrease of 48.7% from last year, and consolidated operating margin was 7.7%. Brian will…

Thanks, Carol, and good morning. In my comments today, I'll cover four areas. I'll start with the macro, followed by our third quarter results. Next, I'll cover cash and shareowner returns. Then, I'll provide detail around our updated guidance. The macroenvironment in the third quarter was challenging. The weakness we saw in the second quarter continued into the third quarter, especially in Asia and Europe. Real exports and industrial production moved lower due to falling demand, and global consumer conditions did not significantly change. In the US, we faced tough conditions due to several factors. To begin, the volume diversion we experienced in the second quarter continued into the third quarter, which led to more volume diversions than we anticipated. Next, some customers that diverted, waited until our Teamster contract was fully ratified in September, before returning volume to our network. And lastly, we incurred higher labor costs associated with new contract, and added headcount earlier than normal to ramp-up for peak, so that we can ensure we maintain our industry-leading service levels. Through the end of the quarter, we adjusted our integrated network, to support our customers' needs, managed cost, and stayed focused on bringing volume back into our network. Looking at our financial results for the quarter, consolidated revenue was $21.1 billion, down 12.8% from last year. Consolidated operating profit was $1.6 billion, down 48.7% compared to the same period last year. Consolidated operating margin was 7.7%. For the third quarter, diluted earnings per share was $1.57 down 47.5% from the same period last year. Now, let's look at our business segments. In US Domestic, we knew the third quarter would be a challenge, and it was, due to our labor negotiations, higher costs, and a dynamic economic backdrop. As we discussed on our last call, we ended…

Steven, we're ready for our first question.

We will begin the question-and-answer period and our first question will come from the line of Chris Wetherbee of Citigroup. Please go ahead.

Hey, thanks, good morning guys. Maybe to start on the guidance, and specifically for the fourth quarter, so I think it implies a pretty meaningful step-up in operating profit, and we understand that, you know, I'm guessing ADV probably has a significant piece to do with that improvement in the operating profit for how low it was in the third quarter, but maybe you could help us bridge from how we're going to get from the third quarter, which, obviously, was quite challenged to what is a significant improvement sequentially. In that context, maybe if you could give us with the help of with what October ADV looks like on the domestic side. I think it's a very important number, so kind of curious if you can help us with that too.

Sure, happy to, Chris. Good morning. So, if you look at the bridge, I'll take the low end from -- so Q3, we put -- posted $665 million in operating profit. To get to the low end of the guide, it would require about $800 million in profit. The two biggest drivers of that are volume and revenue quality. The productivity that the teams are generating, Nando in the US, is offsetting the labor contract step-up because you realize we have three months in the third and fourth quarter, and we had two months of the new labor contract in the second. Your question on volume, as we think about volume and revenue quality, those two alone provide a majority of the 800 step up, but if you think about where we were in August, and where we are in October, the momentum is increasing. We had a low watermark as I mentioned in the prepared remarks, down 15% in terms of ADV volume in August. That translates to around 16 million pieces from an ADV perspective. That's actually, in October, we're seeing 19 million pieces, so we've seen that step-up. I went back, Chris, and looked at last year, and the August to October step-up, was 1.5 million pieces. This year, the August to October step-up is 2.7 million pieces, so from a glide path and a trajectory, we're seeing momentum, the absolute levels are coming up, and that's what led to the guide.

Okay, thank you.

Our next question will come from the line of Allison Poliniak of Wells Fargo. Please go ahead.

Hi, good morning. Just want to go back to the comments on the recapture trends. I think you mentioned it's really starting in September in terms of that recapture rate. Is that like a huge acceleration in terms of what you're seeing in October? Is it from that recapture? And then, also related to that, is there any cost associated with that volume you're recapturing today? Thanks.

So we're really pleased with how we're recapturing volume back in our business. We have recaptured over 600,000 pieces per day of the volume that was lost and I will say, 50% of that recapture is coming from our largest competitor. The recapture continues day by day, but it's not just about recapturing what we lost, it's about growing new business. You may recall, Allison, at the end of the second quarter, we said we had about a $7 billion pipeline of new business. Today, we've won about 25% of that pipeline. Now, that $7 billion is an annualized number. So, all those packages and volume haven't come into the network yet, it will come in over the next year. So, I couldn't be more pleased with how our sales team is performing, and winning new accounts, and winning back volume that deferred.

Got it. And then, just as a follow-up to the recapture, any cost associated with that recapture that you have to make?

There's no material costs associated with the recapture. Customers are coming back because of our superior service.

Great. Thank you.

Yes.

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

Hey, thanks for taking the question, guys. So, Brian, you mentioned the $800 million step-up. That's incremental sequential from 3Q to 4Q. I just want to make sure that I heard that correctly. That's the low end of your guidance range assumption?

That's right, Dave.

Okay. And then -- and maybe more bigger picture, right. As we think about the exit rate kind of implied in the guide, I think, it works out to something like down 20% year-over-year at EBIT. How do we think about that build back in 2024. You know, in the front half, obviously, you have inflation, which you've got the GRI to offset. Should we be expecting that sort of, you know, second derivative rate of change to slowly get better, and then snapback, or does it get, you know, meaningfully better in sort of 1Q, 2Q? How do we think about the shape of 2024, and how it's stepping up to recover in the domestic margin side?

So two big pieces of sort of forward momentum, Dave. One is the exit rate on volume. Carol just talked about the win-back, and also the pipeline of new business. So going into next year, getting back on level footing with a system that has higher ADV will help us certainly from a cost and margin perspective, the revenue per piece we announced a 5.9% GRI, so that will be coming in. We talked to you recently about the cost overhang of the contract, that goes from August-to-August, so I would tell you from a shape, certainly the first half of the year will be more challenged than the back half of the year. Back half of the year, we get into two to three-year glide path with lower inflation per year, and then, so pricing and productivity can help expand the margins. But those are the pluses and minuses as we look into '24. Obviously, we'll go into a lot more detail March '26 when we get together with you all for our next Investor Day.

And that rate of change in the first half better than 4Q?

Let me come back to you, Dave, but we're certainly building momentum.

Let's finish of the year, Dave, and then, we'll give you some color about 2024.

So always about 2024. Thanks for the time.

Thanks, Dave.

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

Yeah. I was wondering if you could give some color on your confidence level on the new revenue range. How much certainty do you feel the visibility, and what frames the high end, low end? Thank you.

So thanks, Jordan, for the question. Look, we feel good about the revenue range. We've narrowed it to $1 billion, and I think the thing that's going to drive the upper end versus the lower end, really has to do with the retail backdrop. I mentioned in my script, there's sort of the broad range of the online retail sales for the holiday period. To the extent it's in the higher end of that, we'll have more volume, and more revenue, to the extent it comes in with some of the risks we're seeing is towards the lower end.

Thank you.

Thanks, Jordan.

Our next question --

Maybe one other comment, if I could, Brian, on the volume range. We know which of our customers peak during peak. There are about a 117 customers in the US that make up about 86% of our peak volume. We're sitting down with each of those customers, understanding what their plans are, as we work on our operating plans to make sure we deliver superior service, having that insight, if you will, gives us a lot of confidence in the US volume numbers that Brian shared with you.

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

Yeah. You made a couple of comments on the volume that you're recapturing, and I just want to make sure I understand it. I guess, it's an important point. So, I think, Carol, you said 600,000 pieces a day have been recaptured. But then, Brian, you said kind of last year, the August to October was 1.5 million and it's 2.7 million increase this year. So that implies, I guess 1.2 million increase. So, I just wondered if you could give a little more perspective of kind of where we're at in October, and how much of that loss business has been recaptured, and then, I guess, another way you framed it was December. You were going to get back to flat volumes before. I think it was a prior comment. Do you still think you can do that, or are we thinking December volumes are down? Thank you.

Yeah, Tom. So, to frame it up for you, we were trying to get December back to flat versus prior year. I think the guide now implies from a low-single-digit to a mid-single-digit in the month of December, and that's pending some of the backdrop I just talked about in terms of the retail outlook. So, from a momentum perspective, I gave in August to an October number, but as Carol mentioned, we lost 1.5 million or we had diverted 1.5 million pieces. We've seen 40% of that, roughly 600,000 pieces already come back to the system. We're also pushing forward with new business that Carol referenced as well.

Okay, thank you.

Thanks.

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

Hi. Good morning. Thank you for the questions. This is Joe Hafling on for Stephanie Moore. I had maybe a conceptual question on sort of the recapture, looking at the near term. Given its peak season, and customers are focused on their own execution right now, does this limit your ability to win back volumes in the near term, and shippers don't want to disrupt any of the plans that they've already got in place? Obviously, you've highlighted the capture rates sort of September-October, but just wondering if that slows down as we kind of get into November-December, just as shippers don't want to disrupt their own operations right now?

Actually, it's accelerating. Customers want to come back into our network before peak because of our superior service that we've exhibited over the past five years.

Got you. Thank you so much and helpful.

Our next question will come from the line of Ken Hoexter of Bank of America. Please go ahead.

Hey. Great. Good morning. If I could just clarify one thing on the step-up, I think to Allison, do you say you're not using increasing pricing as you get towards the tail end of that volume gain? And then, my question is on international, right. You're looking, I guess, Brian, to really snapback closer back to that 20% range. Is that kind of what you are still looking at in terms of margins at international as we move into the fourth quarter? I just want to understand the shift from peak versus belly space coming back on, and the impacts to margin there?

Yeah. On the first question, Ken, obviously, you've got volume and pricing. I was talking to with Allison about the volume component. We have announced a 6% to 7% peak season surcharge. So that's, obviously, flowing through from a revenue standpoint in the fourth quarter as well.

I think Allison's question was, are there costs associated with winning back volume. And as I responded, not meaningful. Ken, from time to time, we have found customers who diverted, and they entered into longer-term contracts, and we might help them to exit those longer-term contracts, but it's not a meaningful discount. It's just we might help them. It's nothing measurable.

Our next question will come from the line of Scott Group of Wolfe Research. Please go ahead.

Hey, thanks. Good morning. So, hey, Brian, one of the earlier questions about the bridge from Q3 to Q4, you answered it sort of how do we get to the low end. So, should we think that the low end of the range is more of your base case? I just want to understand sort of that answer. And then, can you just maybe, more explicitly, just talk about what your -- the margin expectations are for each of the segments in Q4? Just -- I wasn't sure what you were -- what you're thinking for each business. Margin or profit, however you want to answer, yeah.

I have a walk in front of me for the high end and the low end, so I can give it to either range, and I think it's retail backdrop uncertainty that drives the delta in volume, which drives the delta in profit. So, it's the same levers. It's the volume and the revenue quality, really driving the majority at a higher component, at the high end versus the $800 million I referenced at the lower end. So net-net, I think from a margin shape standpoint, we finished Q3 mid-single-digit in the US. Obviously, that's a very low watermark, driven by the volumes we saw in the quarter. We're looking in the fourth quarter to step back up into that high-single-digit, low-double-digit range. And so, getting back to the trajectory, and then from an international perspective, we were at 15.8% in the third quarter. I think Kate and the team have planned largely through controlling what we can control, whether it's block hours, whether it's headcount. Taking that and they've done a good job of demonstrating that Q1 was 18% margin International, Q2 was a 20%, so we're probably in the middle of that range for the fourth quarter. Hopefully that helps.

Thank you.

Yeah.

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

Thank you, operator. Hi, everybody. I guess maybe just a very simple question, I guess, is when do we return to margin expansion in domestic? I mean RPP, CPP spread was really negatively wide in the third quarter. I assume it's still negative, albeit less so in the fourth quarter. Can we get to a situation where we get back to year-on-year margin expansion in early next year or do we have to wait until August when the labor really -- inflation really steps down?

Well, maybe just an observation on the US margin in the third quarter. Recall that we had $500 million of expense related to our Teamster contract in the third quarter. If we back that out, the US margin would have been 8.5%. 8.5% on volume down a 11% is not a bad margin. So, we've got a bit of pressure on the margin that we shared with you because of our new contract. The contract is front-end loaded. We're bearing the pain of that front-end load. For a five-year contract that's very attractive. The compounded annual growth rate on the five years is 3.3%. So once we get through this first front-end load with 46% of the cost in the first year, once we get through that, the margin is going to grow. It's going to grow in a big way. So hopefully, that's helpful.

I mean, it kind of is helpful, but I mean, I guess, the question is that, are we stuck in this return profile through the first half of next year, and then we see a step function improvement, or can we see improvement as you guys maybe rip off some of the -- rip out some of those seasonal costs in the first quarter, and we can get back to year-on-year growth in the first quarter even?

No again -- absolutely fair question, Amit. Let us finish this year. Then, we will give you guidance for 2024, and we can break it down by quarter, if that's going to be helpful.

Okay. Thank you.

Yep.

Our next question will come from the line of Ravi Shanker of Morgan Stanley. Please go ahead.

Hey, guys. Good morning. This is Christyne McGarvey on for Ravi. I wanted to take a step back and ask about kind of the path to some of the longer-term targets that you set out at your previous Investor Day particularly just on some of the macro assumptions that you think you'll need to get there. You've seen definitely muted consumer spending in the last 18 months, but not a collapse. So how much of an uptick in consumer spending do you need to get there or maybe said another way, kind of how much do you feel is in -- directly in your control?

So, as we look at the small package volume in the United States, what we're seeing is basically a reversion to mean. So, we're at pre-pandemic levels. And I think our learning -- all of our learnings is that, if the pipeline spikes because of an event, things are going to revert back to the main. If you look at the growth rates projected for the small package market in the United States, it's low single-digits for the next couple of years. So we plan to grow not just at the market, but ahead of the market because of the investments that we're making with new products, new capabilities and actually new acquisitions, which we're very excited about. And maybe I'll just take a minute to talk about Happy Returns, which we just announced last night. Our returns business has been pretty growthy because of the explosion of e-commerce. It's grown 25% since 2020. And we like this business a lot. But we know we can offer a better experience for our retailers because it's expensive. Retailers estimate that between 20% and 30% of all online orders are returned, and it cost them on average, about $33 to process that return. So it's Happy Returns. We're going to offer consolidated returns for our customers, which will reduce their handling costs. Actually improve our delivery density. So it's a win-win-win. And so we're going to put the pedal to the metal in terms of growing the returns business because it's a very good business for us and one that our customers need a sale force. So I'm excited about that. The other acquisition that I'm excited about is in health care. Our health care business will be $10 billion this year against an addressable market that's over $100 billion. We're going to grow that market. It's got double-digit margins. We're going to grow it because we need to grow it. It's important for the world. It's important for humanity. And we are the best in the world access. So that doesn't require any consumer spending. That's just leading into a market share capture with the capabilities that we are investing in, be it cold chain capabilities and more.

Really helpful. Thank you.

Yeah.

Our next question will come from the line of Jeff Kauffman of Vertical Research Partners. Please go ahead.

Thank you very much. I'd like to drill down a little bit on the macro comments as they relate to domestic. I think it's pretty straightforward. What you're saying about Europe and Asia. But can you help put some understanding around your concern for the weaker consumer with student loans and what have you. It does sound like we're going to be in for a reasonable holiday season. Where are you seeing the weakness, whether it's a -- an industry segment or a consumer segment. What concerns you on e-commerce and the domestic consumer?

Well we've seen clearly a shift from goods to services and people through the pandemic started going back to work, taking vacations, eating out at restaurants, going to amusement park. They're spending their dollars differently. It's like source. It's not that the consumer is not healthy, they're spending their dollars different way. And what we're seeing with many of our retail customers. It's a real desire to bring people back into the stores and they should bring people back into the stores, because it's their largest investment. So you see retailers offering buy online pickup in-store, where they hadn't offered that before. So I can give you example after example of customers, not by name, obviously, but customers that are in our top 20 where they're seeing their same-store sales down year-on year, because their anniversary in that COVID peak, if you will, and they're seeing their online sales down even more. And part of that is because people are going back into stores -- part of that and shifting. So that's that comment that Brian made in his remarks about just some demand softening Is that, we do see that with some of our larger customers who didn't divert but their overall business and you can look at their guy, so I'm not talking about anything that's not public. You can look at our guidance, were they not only have reported declining sales, but they are guiding softer.

Thank you for the clarification.

Yeah.

Our next question will come from the line of Brandon Oglenski of Barclays. Please go-ahead.

Hey, good morning, and thanks for taking my question. Brian, you did talk about revenue quality initiatives. I know folks have brought up price quite a bit on this call, but can you talk about not just your pricing outlook. But maybe the mix impact from some of these initiatives you've had in the past on small and medium enterprises.

Yeah, SMBs, Brandon, are very attractive part of the business and we've continued to penetrate that market. So that's been favorable from a mix perspective. We are seeing customers trade-down though from air product to ground. And so we've seen that in the numbers. Air was down more than ground volume. So there's a bit of a headwind there from a customer mix perspective. So overall, we have a customer mix impact as well that's going on, we're gliding down with our largest customer. So there is a shift there. That tends to help from an RPP perspective.

No, it's interesting if you go back to 2019, our volumes by the same as in the third quarter as it was back in 2019. But our SMB mix has moved from 23% to 29%. And our net revenue per piece has moved from $9.99 to $12.54. So we've been laser-focused on improving the revenue quality in our business and we will continue to do that. Value is defined by what the customer is willing to pay for and we are improving our experience every day. A good example of that is delivery photo. We're now 92% of all of our residential drops are photographed which is creating a better experience for our recipients for our customers and for us candidly. We're leaning into simplifying the experience of how does that work with us and we'll talk to you about the widgets that we have with DAP or improvements that we've made in our claim process. You see our net promoter score now in the high 40s, so we believe that experience because it helps grow the revenue quality and we're going to continue to do that.

Thank you.

Thanks, Brandon.

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

Hey, good morning. Thanks for taking my questions. Maybe just two quick follow-ups actually. Can you talk about the pace of getting the share back, is you go into the fourth-quarter. Do you think, perhaps, you have the lower-hanging fruit easier ones to convert back, do you think that those came back sooner and maybe the pace from here just little bit harder. And then on the buybacks, you mentioned you're cutting your list your staffing the buyback for the quarter. You've got two acquisitions targeted. I just wanted to make sure I was clear in terms of what these are, if those were the Happy Returns and MNX or if there is potentially something else that was on the horizon.

We have nothing else planned, Brian, today. So we'll be buying MNX and Happy Returns this quarter, and it's about $1.3 billion in total that we'll be spending on those two companies. In terms of the pace of getting share. As I mentioned earlier is accelerating because of the fact that the peak is nearly on us. So people want to come into the network. Here's the truth though. It does take time to come back in. I get weekly updates Fernando and the team, from Kate and the team about how is the volume coming back in. And I see that, oh, we've gotten a handshake. We've got an agreement from a customer that's coming back in. And then I see it takes 30 days to get it back into on-car. And so now I'm like I want photos when it's on car because I want to make sure that's actually in the network. And that's what we're getting. We're having some fun with that actually because we're seeing it. picked up from our competitors. That's always done when you're picking up volume from your competitors. So it accelerates.

Okay. Thank you.

Steven, we have time for one more question. Okay, with no further questions. Thank you for your time and have a good day.

Ladies and gentlemen that does conclude our call for today. Thank you for your participation. You may now hang up.

Thank you.