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UPS CEO talks upbeat earnings, business model pivot, price increases, and hiring

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UPS CEO Carol Tomé joins Yahoo Finance Live to discuss better-than-expected earnings, hiring challenges, supply chain disruptions, and the overall outlook for the logistics company.

Video Transcript

BRIAN SOZZI: Shares of UPS are soaring as the logistics giant blew away analyst profit forecasts for the fourth quarter. The company also delivered an upbeat outlook for 2022, most notably on profit margins. Joining us now for a Yahoo Finance exclusive is UPS CEO Carol Tome.

Carol, always nice to get some time with you. Good to see you here this morning. Look, I tweeted out this morning-- I think there are a lot of investors that are not used to seeing this type of quarter from a storied company like UPS. Help us understand some of the biggest drivers of the business right now.

CAROL TOME: Well, Brian, it's great to see you and thanks for asking me to come on your show. You know, when I came here, we took a hard look at our business model. And what we understood is that what got us here, to be the largest logistics company in the world wasn't going to get us to where we needed to go. Our customers were changing, our competitors were changing, and the rate of change was accelerating.

So we took a hard look at our business model and started to pivot-- pivot into the segments of the market that really valued our end to end network, like SMBs. And I'm delighted to see the progress that we're making in that regard. In fact, SMBs as a percent of our total volume in 2021 grew 420 basis points. Nearly 27% now of our volume is with SMBs.

We also leaned heavy into health care, leveraging our health care logistics and cold chain solutions. And that's translated into an amazing business-- health care portfolio $8 billion this year, on its way to $10 billion by 2023. So a lot of really positive movement on the top line.

And then as it relates to productivity, well, we're laser focused on productivity. And I'm really delighted by the progress that we're making in that regard. So when you grow your revenue faster than your expenses, your margin expands. And when you have a disciplined approach to capital like we do, well, your return on invested capital also expands. And, gosh, we delivered a 900 basis point improvement in return on capital this year. So super proud of the team.

BRIAN SOZZI: Carol, I was just thinking now-- I think every conversation you and I have had maybe over the past eight or nine years-- of course, when you were the CFO of Home Depot-- we have talked about return, invested capital, and profit margins. So let's talk about it here.

Margins up in all three of your segments in the fourth quarter. Are gains like that sustainable? And what is driving that?

CAROL TOME: We think they are sustainable. And we've guided that our margin will expand in 2022-- in fact, hitting the consolidated margin in 2022 that we thought we would hit in 2023. So we will be achieving our consolidated targets one year ahead of our plan. What's driving it?

Well, again, we're leaning into this segments of the market that really value our end-to-end network. We are working revenue quality hard. You know, we used to think a package is a package-- that's just not the case any longer. So we are leaning into the segment that values our end-to-end network.

And we've also taken advantage of a demand capacity imbalance. And that's going to stay for a while. We know that there are upstream supply chain jams, you know, airfreight demand has returned to 2019 levels, but the capacity has not yet returned.

And when you have that kind of an imbalance, well, pricing remains firm. And it's going to stay that way for a while.

JULIE HYMAN: Carol, it's Julie here. I want to get into this on a pricing question. There's remaining firm and I guess there's getting firmer. So I'm curious how much more pricing power-- how much you think you're going to be able to continue to raise prices in 2022.

CAROL TOME: So our largest customers are typically-- we negotiate a three-year contract with them typically. So we set prices with them for three years. And we're about 60% of the way through those contract negotiations. So we've got about 40% more of contract negotiations to occur, and there'll be pricing movements within those large accounts.

As it relates to our general rate increase, we just announced our general rate increase for 2022. That was 5.9%. So that gives you a sense of the pricing dynamics today. And it's not just about pricing, though. It's about the service that we provide.

And we provide a premium service. In fact, during the last peak, we had the highest service levels of any integrator, as measured by an independent third party.

BRIAN SOZZI: Carol, it was my understanding that UPS is piloting or testing dynamic pricing-- or charging higher prices where demand is the greatest. When does something like that go out nationally?

CAROL TOME: So we're still in the process of working the technology that's necessary to really empower dynamic pricing. But it's part of our future. Think about airlines and how successful they've been with dynamic pricing-- the same should be true here for our company.

JULIE HYMAN: Carol, I want to ask you about labor. You were talking about the service that you provide. Certainly, part of that is because of the workers that you have. And in this working environment, you have to pay them a certain amount. So how much is that a challenge for you guys right now-- not just paying the workers what they are demanding, but finding the workers as well?

CAROL TOME: Yeah, we're really fortunate, Julie, in that we have always had very attractive and well-paying jobs. In fact, a third of the people that we hire in for temporary workers during the holiday peak season end up staying with us as full-time UPSers. These are great-paying jobs. So pay has never really been an issue for us.

Now, parts of the market in the United States where we've seen some wages get a little bit ahead of what we were paying, we had to make some what we call market rate adjustments. But that's all factored in to not only the performance that we just reported, but as well as our outlook. This isn't just a job. This is a career.

When I think about people who are in senior leader positions in our company, many of them started as part-time UPSers. So that sets us apart from a lot of the world. As it relates to, I will call it, technology, because there's a war on talent for technology, we are working on really cool projects here. And technologists want to work on cool projects.

For example, we just announced the first phase of what we're calling smart package, smart facility, where we're putting RFID tags on all of our packages and adding technology in with wearable devices-- so no longer will there be a manual scan, it'll all be done through the wearable device. If you are a technologist, that's pretty cool.

We're working on robotics. We're working on drones. We're working on just a number of very cool technology projects. So people want to work for us. And I'll tell you this-- I measure UPS happiness through a likelihood to recommend metric. And likelihood to recommend in our IT team is 81%. That's pretty good. When people are happy, they're going to stay with you.

JULIE HYMAN: Carol, and I can see you're happy even just talking about this-- those technological changes, which is cool. I also want to ask you about the unionization of your workforce, which is a big part of who UPS is as well. We are seeing that union push at some other employers. And as someone who has now had deep experience with that, I'm curious what advice you would offer to other companies.

Because in many ways, that has worked to UPS' advantage-- or at least in some ways, it has. So I'm curious what you would advise other CEOs whose workforces are working towards unionizing.

CAROL TOME: Well, 75% of our workforce in the United States is covered by some sort of a collective bargaining agreement, the largest of which are with Teamsters. And we've had a 100-year history with the Teamsters. And we love our teamster UPSers. We also have work councils outside the United States. So we're very accustomed to working with unions. I think my advice to CEOs is understand what are the needs and wants of your employees, how best to serve them.

BRIAN SOZZI: Carol, recently, I saw a UPS truck was held up and at gunpoint-- a driver. These are scary times. What can you do to prevent workers from just going through that situation? How do you rethink the network just to even bolster employee safety?

CAROL TOME: Employee safety, number one. It's an employee bill of rights-- a UPSer bill of right to leave work the same way they came to work. And, sadly, there's an increase of violence, and larceny, and theft around our country.

So we are doubling down on training our people as to how to react if they are ever faced with that situation. In that case, if I'm thinking of the case you're referring to, Brian, our driver did exactly what he needed to do and he got out of that situation just fine. We don't want them, obviously, to engage with the bad folks. We want them to disengage.

So we are also increasing safety throughout our company with security cameras, as you can appreciate-- all the ways that you can put protection around your people. Their safety is number one priority to me.

BRIAN SOZZI: Good to hear. You know, also, too, switching gears a bit, on the inflation front, are you seeing any signs in your business that inflation has neared a peak?

CAROL TOME: Well, it's interesting that our largest expense is compensation and benefit. And for the most part, that's contractually guided. So we don't see a lot of inflationary pressures coming into our business. So I can't really give you a good comment on what's happening in the country.

BRIAN SOZZI: But in terms of just growth in here, we're getting a lot of folks, I think, out there on Wall Street, they're concerned about a slowdown in this country as we move to this land of higher interest rates. I remember back when you were on the board of directors or at the Federal Reserve Bank of Atlanta-- put your old school Fed hat on here, Carol-- I mean, do you see the economic recovery at risk because of these rate hikes?

CAROL TOME: Well, the projected growth of GDP is still very high as we look at 2022-- north of 4%. That's still pretty growthy in the history of the United States. And taking interest rate moves to put a cap on the inflation rates that are facing the country seems like it's a wise thing. It shouldn't tip the growth rate negative.

BRIAN SOZZI: Interesting. Lastly, Carol, you know, again, as I mentioned at the top, this is not the UPS a lot of folks have come to know. Are we watching a rebirth of this company? And what do you think the next decade will be like for UPS?

CAROL TOME: It's really an exciting time for us. We say internally that we're writing the next chapter of this 115-year-old company. And when we think about, well, what does that really mean? It means providing the best digital experience powered by our smart global logistics network.

Because everything is moving to a digital experience, from our shippers to our recipients. And we want to make this the most simple, and frictionless, and fun place to do business with. So we're leaning in to technology in a way that we never have before-- not just technology that we build, but technology that we buy through SaaS solutions to make sure that it is frictionless and seamless.

I'll give you one example. In 2021, we took five websites that had over 3,300 pages of stuff consolidated into one website with 500 pages of information. And we saw the page views grow from 10,000 a month to 600,000 a month.

This is the way that customers want to do business with us. This is the way that prospective employees want to consume information about us. This is about how communities want to learn more about all the good work that we do in our company. So expect to see the best digital experience of a trucking company that's available.

BRIAN SOZZI: Well, you'll have to give me some tips offline, Carol, on how to boost page views. I'm all about boosting page views, but always good to get some time with you. UPS CEO Carol Tome, good to see you. Stay safe.