UPS CEO on Earnings, Data Center Logistics and Trade

Sticking with UPS as chairs rally after that guidance boost, let's get straight to Romaine Bostick, host of the close. He joins us live from UPS headquarters in Atlanta with the CEO of UPS, Carol Tomay, for an exclusive interview. Romaine? Thank you, Scarlet. Yes. We are here with Carol Tomay fresh off the UPS's most recent earnings report, a q three number that beat on several metrics and guidance going higher for the full year. There are a lot of questions right now about the sustainability of the growth, the sustainability of the turnaround that you've orchestrated. What assurances did you give investors today that 2027 looks even better than 2026? Well, Romaine, first, welcome to our headquarters here in Atlanta, Georgia. We're delighted to have you here. And I'm super proud of the UPS team because we did report solid results today, including a return to volume growth for our SMB and enterprise customers in The United States. And that gave us confidence to lift the guidance for the full year. In fact, we're heading into the busiest season of the year, which is the peak holiday season. Mhmm. And based on forecast that we receive from our customers, we expect our volume, our average daily volume to increase about 25% from the third quarter to the fourth quarter. So given the underlying strength of the business, we were delighted to raise both our revenue and our profit guidance for the year. And we've created now this this this, algebraic formula of growth going into 2027, which is we'll have volume growth. Mhmm. We'll have revenue per piece growth. Our cost per piece will grow, but at a less growth rate than the revenue per piece. So we'll have profit and margin expansion next year. Well, on the revenue per piece and on that cost per piece, I mean, you had decent growth there. I think domestically, it was, 6.1% or something, but cost was 5.5%. I mean, that's lower, than obviously what you're making in revenue, but that's still a relatively small gap, only 60 basis points. And I know in the past, you and other management have talked about a range of maybe 50 to as much as 100 basis points in terms of that differential. How do you get that higher? Well, as you know, fuel prices are up. Mhmm. We drive 5,000,000,000 miles a year, and we fly a lot of planes. Yeah. So in that cost per piece increase in the quarter was fuel. Both fuel as well as the cost of purchase transportation, which is also up. So we still believe that the gap between RPP and CPP, if you will, will range between 50 and a 100 basis points. But if we do get a moderation in gas and diesel prices, obviously, that would help on the cost side, but some of your revenue per piece was also the result of fuel surcharges. I believe the CFO said something like half, of that increase was directly related to fuel surcharges. I assume those surcharges go away if if prices go down. Well, they will go away. Yeah. But half of that RPP was in our base rate and mix. And if I look at the cost per piece, a 100% of the growth was in fuel and purchased transportation. So if that goes down, we still have RPP growth Mhmm. That would cover any cost. There's been a lot of talk about the transformation of this company. You've been at the helm now for six plus years. Yes. You came in, with a very clear mandate, and you have executed on that in a lot of ways. But that execution had a lot to do with making this company to a certain extent smaller, not necessarily financially smaller, but smaller in terms of the amount of packages it moves. And I am curious as to why being a little bit leaner in that sense, in your view, is better. So we're dispelling the old myth that all packages are created equal and that volume solves all problems because it's just not true. Instead, we looked at our end to end network, our global smart integrated network, and said, okay. Who can we serve best and serve them better than anybody else? And we've determined it's not a, you know, a lightweight short zone, box of sweaters. Mhmm. It's actually complex logistics, like complex health care, where we've made significant investments over the past six years. You know, when I got here, our health care revenue was less than $6,000,000,000. By the end of this year, it will be more than $13,000,000,000. And we've invested around the world. We have over 20,000,000 square foot of dedicated, square footage for health care logistics. Mhmm. We operate in, gosh, 36 countries. We have 273, buildings. We have coaching capabilities. We have special labeling, control towers. So we have cemented our leadership position as the number one provider of complex health care logistics in the world. It doesn't stop there. We've gotten growth in other other areas as well, but this is certainly one area of focus. Focus. On health care, though, are are the margins materially better than the overall delivery business? The margins are in the low to mid teens. Okay. And you can see... And you view that as a longer term growth driver for UPS overall. As we look at the addressable market for complex health care logistics globally, it's about $90,000,000,000. There's lots of opportunity for growth there. And just think about what's happened with the explosion of GLP one drugs. Mhmm. And now the pharmaceutical company is going direct from manufacturer to home. We're delivering all of that. Do you have sort of a unique position in that space? Meaning, is this something that UPS is only capable of or UPS and maybe FedEx and a couple others? It's a very attractive market, and lots of carriers are attempting to get into this market. But we've invested in capabilities that provide a superior experience for our customers. And we really earned this right during the pandemic. We invested in cold chain because we knew the vaccines that were coming out would need cold chain logistics. We were the first carrier to deliver the COVID nineteen vaccine. We did it with our brown network. Mhmm. We delivered a billion vaccines in the first year at ninety nine point nine percent effectiveness, which meant we never lost someone. We didn't have a temperature excursion. That gave us the authority to win in the space, and we've done very well with this since then. There's been a lot of talk about your pullback from Amazon. Yeah. You laid out a plan in early twenty twenty five. The Amazon, then your single largest customer, would have to be a much smaller portion, if any portion at all of the UPS business. That plan is largely complete. You dictated that to investors today. What does a post Amazon UPS look like for investors? Well, we're returning to growth Mhmm. Both volume, revenue, and profit growth on a network that's much more, automated and efficient. And so this was the... It was a difficult pivot candidly. Lots of hard decisions had to be made, but we knew it was the right thing to position us for the future. Because now as we look to the future, we have a have a... Assessed the addressable market to be about $923,000,000,000. And that means from factory floor to front door. Mhmm. We serve every step of a supply chain, and we're gonna lean into that in a meaningful way. But we wanna also focus in on the premium part of that market, which globally is about $535,000,000,000. And here in The United States, it's about a $150,000,000,000. So lots of opportunity for us to grow in the premium space. Well, I am curious. I mean, your supply chain solutions umbrella, however you characterize it, I mean, had decent growth, I think, the quarter, 18% growth roughly. It's still only, what, you know, less than 15% of your business overall. How much further can you get that in terms of... As a share of your business and in what time frame? So we're very excited about the opportunities for for growth in that side of our business, which is really forwarding and logistics. And let's just focus on forwarding. That would be ocean freight and air freight. We saw 17% growth in that business in the in the quarter, driven really by two things. One, premium health care. Two, data centers. So, yes, with the explosion of data center growth here in The United States, the builders of these data centers, well, they need materials to construct the data centers. And most of those materials, many of them are being manufactured outside The United States. They need to come over to our country in some sort of a forwarding asset, be it ocean or air. So we can bring it here. We can then warehouse it for them, and then we can get it delivered to their construction site. Once things are at the construction site, there's a small package need as well. So we assess the opportunity for data centers in the logistics space. Well, it's over $15,000,000,000. Is that though just a short term story? Once these centers are built, does that business go away? How how do you make that a longer term revenue? What I know about assets, we're a capital intensive business. What I know about them is they have to be refreshed. Mhmm. So this isn't one and done. This is something that's gonna continue. Well, then you have to... Obviously, I've been paying close attention to what's been going on in the tech space with regards to the data center build out. Based on your own internal projections for UPS, are you seeing any delays or any potential road bumps in that data center build out? We aren't. Now it's early days for us, and we're nascent in this space, I will say, but we haven't seen any delays. Mhmm. So you think that this could also be a material part of the business longer term? I do. Because I'm trying to get at sort of what UPS looks like Yeah. Five, ten years, twenty years from now Yeah. Maybe when you're gone. I I assume you'll be gone then. Right? There's been a lot of speculation about how long you're gonna stay around. I I heard you on the conference call today saying that, you know, you wanna be around to negotiate the next Teamsters contract. That's in 2028. It is. Six years. It is. You plan to be here through 2028? So I I wanna see this through. Yeah. I am committed to seeing it through. Yeah. And then I'm looking forward to getting to my farm. I got... I gotta get this through. So I'm committed to seeing this through. But you came off your farm for this job. You came out of retirement. Why? Did. There were a number of reasons why. One, I'm a values based person and so is UPS, a values based company, so I knew that our values were aligned. I love to develop people. I love to develop people. And I thought if I get in, I can develop the next CEO of UPS. Because it's always risky when you go to the outside. And I thought if I get in, I can develop the next CEO. And I've got an amazing leadership team, really top notch talent that we're investing in, see how high is up for them. I also thought I could create some value. You know, when I got here, I said, we'll double the market cap in three years. We did it, and then lost it, but we're back up. We're growing again. And then finally, candidly, I've been married for forty two years. And my husband said to me, would you please go back to work? You are driving me crazy. So I'm like, alright. Well, it's time I've been called. I've been called to go back in, and I'm really... It's been an honor and a and a privilege to be here. What about some of those management changes? You recently sort of reorganized the structure of this company, focus on, obviously, international health care, The US business, the global operations, and then, commercial strategy. You've pretty much put in people for all of those roles except for the commercial strategy role. Yes. Why? What... What's the holdup there? It's been a couple of months since that announcement. Are you looking for someone? So I am so pleased with how the reorg has developed in just a short period of time. You know, we run the most efficient global smart integrated network. But the truth is we ran it like an international business, not like a global business. And that we had What does that mean? Well, we had different standards. Some of the building standards that we had in The United States were different than the standards that we had outside The United States. Okay. Automation was different inside The United States than outside The United States. We run an airline, but our gateways were managed locally, not under the airline. I'm like, we have so much opportunity to globalize with standards and SLA service level agreements to support the commercial businesses as efficient as we are. We have the best margins in the industry. As efficient as we are, we can be even more efficient. So we put our best operator, NATO Cesar on, in charge of that, and I couldn't be more pleased with what he's doing. Then we've got two p and l leaders. These are experienced UPSers, one running The US and one running international health care and supply chain. And they're they're one of the reasons why the results were so good and why we've got so much confidence in the fourth quarter and beyond. A lot of analysts took note of the expansion of Nando Cesarone's duties, kinda overseeing all the physical stuff, and they immediately looked at that and said, that must be the successor to Carol Tomay. Oh, well, there's not been... I've got a bunch of potential candidates here. There's not been a successor called. And isn't that what leaders should do? They should develop strong succession plans. And you're doing that? And that's what I'm doing. When you are doing that, what is the ultimate goal here? Because we get back to this idea of growth. And you mentioned your stock price, doubling the market cap. But, of course, this shares peaked back in 2022. Yeah. They're down significantly from that. Yeah. Investors are asking the question as to what are they buying. Are they buying a value company? Are they buying a growth company? I mean, what is your successor or, for that matter, you actually carrying forward here? Yeah. Precision growth. This is a big important value equation, precision growth. We wanna be selective, focused, and balanced, grow in the right parts of the market, serve our customers better than anybody else, and create a whole lot of money doing that. So you'll see top line growth and profit growth in an addressable market that's healthy. Mhmm. That's that's focused, and and we're all we're all excited about the future and lined up and ready to go. Alright. Is most of the cost cutting done? I know there's still a little bit left in the efficiency program. I know you said it was gonna run through 2020 Yeah. I don't think productivity is ever done. I think it's a virtuous cycle. When you think about just just the RFID scanning that we've introduced into our our our our company, it's actually not scanning, but sensing, moving our company from a scanning to a sensing company. This is gonna drive productivity like we've never seen before. Mhmm. Imagine all the package cars that go out for delivery every day. We had loaders loading packages into those cars and scanning them. Now the car senses the package. So we would go... Used to go out with a misload. In other words, the wrong package was put on the package car, and it couldn't be delivered. That's all behind us now. And and we'll continue to invest in other capabilities that will drive productivity. How do you balance, though, this sort of technological progress that creates greater productivity with the human aspect of it? I mean Yeah. Sean O'Brien, the head of the team service, has made it clear that automation and technology is gonna be a key bargaining point, when negotiations do finally start ahead of that 2028 expiration of the contract. So inside of our buildings, these are part time jobs. Mhmm. And oftentimes, these part time jobs are held by students. So there's a lot of turnover inside of our buildings. Mhmm. So if automation comes into the building just with natural turnover, you just don't backfill for that. Mhmm. For our drivers, these are the brand people of UPS. Every day, they're in front of our customers belly to belly. Mhmm. They're not just delivering packages. They're doing good. Oftentimes, a driver will save someone's life, pull them out of a burning builder. I have no desire to automate that or bring in autonomy to that. They're the face of UPS. And I believe... Well, I I believe that's where leadership is really focused is on that population. Have you thought about the contract negotiations? I know it's still, what, a year and a half away. It is. But I'm sure it's gotta be in your radar. Sean O'Brien has been out talking about it in some cases, very profane ways. Do you have a relationship with him? So I've certainly have met Sean on several occasions. And, you know, we invited Teamsters into our company over one hundred years ago, and our approach has always been to have a constructive relationship with Teamster leadership. And And I can give you an example of that. This summer, we had a driver buyout program that was oversubscribed, and Teamster leadership was very vocal about their displeasure with that program. Mhmm. So we met with them, and we reached alignment on what was mutually satisfactory for both of both of us. So that's our approach to work with with Teamster leadership. To your point, the contract is out until, you know, 08/01/2028. Would you start those negotiations any earlier than that, though? So there's really no mechanism for starting early. I I I think for for us, our focus right now is returning our company to to growth. I I will say this, Romaine. As I reflect back on our company history, now over a hundred years with Teamsters in our company, I believe I... Other than our founder, I will be the only CEO who's negotiated two union contracts, two Teamster contracts. Mhmm. And I have a lot of lessons learned from the 2023 negotiation. I'm not gonna share those lessons learned with you today, but I have a lot of lessons learned. I think that gives me a distinct advantage as we think about the upcoming contract, which, again, is not till 2028. What were those lessons, though? I mean, there were some people that looked at that contract... That was contract talks in 2023. I know you avoided, the catastrophe of an actual strike, but it was still kinda sloppy. Well, I'll I'll share one Yeah. One lesson with you. We said in 2023 that our desired outcome was win win win. I wasn't very clear, was it? Mhmm. In 2028, we'll be very clear on what our desired outcome is. Mhmm. I am curious with about where you go next and about this idea of who you look to and who you model yourself after. You worked at Home Depot for years. You worked under Arthur Blank. Yeah. I know you've talked about him publicly terms in of what he's meant to you as a as a mentor and as a friend. But I think about CEOs that have either had to go through turnarounds or have had to shrink their company in order to make it bigger or better, as you would say. Is there an example that you look to, or is UPS a singular story? Well, in in some ways, I I look back at Home Depot because I was the CFO during the financial crisis. So we shrunk. We lost 25% of our revenue in one year. Yeah. We shrunk, And it it enabled us to really focus on what mattered to the customer. And what mattered to the customer was moving off of some of the promotional drugs that are very commonplace in retail and go to everyday low value to meet the customers where they wanna be and be consistent in the value proposition. And that's similar to here. We're smaller. We're better, and now we're gonna meet our customers where they want us to be. Complex logistics, supply chains are complicated. We wanna absorb the complexity, present simplicity, and help them run their business. Is the tariff issue kinda behind us? I know you've talked about this idea that companies have found a way to manage it. What what does that mean? They managed it, and now it's there, but just less surprising? Well, it's certainly been a lot of change in trade. And and, you know, trade doesn't stop. It moves, and we certainly have seen that in our business. But because of our integrated network, we've been able to turn on a dime to meet our customers where they need us to be and serve them as as they were moving their supply chains around the world. What we see in our business is this. We see some trade lanes recovering. In fact, at the end of the quarter, we saw inbound into The US grow turn positive. Mhmm. That's good news for us because it's very nutritive. We saw Asia to Asia trade lanes grow over 8% in the quarter. We saw softness coming out of Europe principally because in Europe, they eliminated the de minimis exemption in July. There was a pretty significant drop in trade, but that's starting to recover now. Candidly, there's a little softness on the Canadian borders as you might expect. But all of this, I would say, is not structural. It's more cyclical. It's gonna it's gonna sort out, I think, over time.