UNITED PARCEL SERVICE INC Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Macro Environment: Faced a slightly worse macro environment with U.S. online sales slowing and lower manufacturing activity, but still achieved revenue and profit growth.
• Revenue and Profit: Consolidated revenue was $22.2 billion, up 5.6% y-o-y. Consolidated operating profit was $2 billion, up 22.8% y-o-y, with an operating margin of 8.9%.
• Initiatives: Fit to Serve is slightly ahead of forecast. Network of the Future has completed 45 operational closures. Acquired Frigo-Trans to enhance healthcare logistics in Europe. Expanded residential Saturday delivery in Europe and sped up deliveries in Asia, Africa, and the Middle East. Digital Access Program (DAP) continues to drive SMB growth.
• Peak Season: Preparing for the compressed holiday season with 17 shipping days between Black Friday and Christmas Eve, leveraging network planning tools and technology to optimize operations.
• USPS Air Cargo: Fully onboarded USPS air cargo business as of October 1, expecting consistent revenue and attractive margins.

Segment Performance

• U.S. Domestic: Generated revenue of $14.5 billion, up 5.8% y-o-y. ADV increased 6.5%. B2B average daily volume up 0.8%, B2C up 11%. Operating profit was $974 million, with an operating margin of 6.7%.
• International: Revenue was $4.4 billion, up 3.4% y-o-y. Operating profit was $792 million, with an operating margin of 18%.
• Supply Chain Solutions (SCS): Revenue was $3.4 billion, up 8% y-o-y. However, operating profit was $217 million, down $58 million y-o-y due to USPS air cargo onboarding. Operating margin was 6.4%.

Guidance

• Full Year: Expect consolidated revenue of approximately $91.1 billion and consolidated operating margin of approximately 9.6%.
• Fourth Quarter: U.S. domestic expects revenue growth from volume and revenue per piece; International expects mid-single digit revenue growth; SCS expects revenue around $3.3 billion with an operating margin of approximately 9%.

Risks

• Macro Environment: Continued softness in manufacturing activity and online sales could impact volume and revenue.
• Contract Negotiations: Uncertainties around USPS delivery service agreement negotiations may create challenges for cost-to-serve and operations.
• Competitive Pressures: Intense competition in the logistics industry could lead to pricing pressures and trade-downs from customers.

Q: When we think about the ramp from 3Q into 4Q, how does the operating profit guidance look realistic?

A: Driven by focus on revenue quality, revenue improvement through pricing policy, acceleration of Fit to Serve and Network of the Future, and productivity initiatives.

Q: What type of themes and concerns are heard from customers regarding peak season volume?

A: Customers have tempered volume expectations due to tight compressed peak period and external forecasts showing lower growth. However, UPS is prepared and has a good keep rate on holiday surcharges.

Q: How do you think about cost improvement progress potential in the fourth quarter and into 2025?

A: Wage inflation is normalizing, Fit to Serve and Network of the Future are outperforming forecasts, and productivity is a virtuous cycle. Expect strong cost performance in Q4 with continued productivity gains in 2025.

Q: How much excess capacity is seen in the network and how is it managed?

A: 45 operational closures have removed about 1 million ADV per day of capacity. Capacity is being rationalized, and the team is focused on matching resources to lower volume while preparing for peak season.

Q: What's the status of the USPS delivery service agreement negotiation?

A: Still ongoing, with more details expected in the fourth quarter earnings. No impact on Q4 operations, and the relationship will be discussed further in January's fourth quarter earnings.