At One Earnings Call, UPS CEO does his own job

(Bloomberg Opinion) – Some new CEOs prefer to sit back, watch and learn while planning their legacy. Others carry out the plans of their predecessors. And then there are those who don’t waste time making work their own. United Parcel Service Inc.’s new CEO, Carol Tome, falls into the latter category.

Thursday marked the first day of earnings for new CEO Carol Tome, a former executive at Home Depot Inc. and a member of the UPS board who succeeded longtime leader David Abney in June. I would say it was a respectable debut, but that somehow makes it cheaper. It was downright impressive. The presentation felt refreshing on many fronts. Tome (pronounced “Toe-MAY”) was able to combine a frank and harsh assessment of UPS’s past spending habits with a little personality. She exuded confidence and competence, but she also made some jokes and it seemed like she was really being herself. That’s not an easy thing to do as a woman in business; Tomé is one of approximately 30 female CEOs among S&P 500 companies.

It helped Tome have solid numbers to promote: Adjusted earnings in the second quarter were double what analysts had anticipated at $ 2.13 per share. Profit margins soared in the international business as UPS added more flights with higher returns to meet an increase in demand for products outside Asia. But they also held up much better than might be expected in a household segment that saw an average daily volume increase of nearly 23% in the quarter, as coronavirus blockages sparked an e-commerce frenzy among everyday consumers. Such deliveries tend to be less cost-effective because ordering online for residences requires more driving and additional stops than commercial shipments.

The resilience of margin in the domestic segment is in part a reflection of the surcharges and route limitations that UPS and rival FedEx Corp. have imposed on deliveries for their busiest customers. Looking ahead to the earnings call, my biggest question was whether that would be sustainable once the immediate increase in Covid purchase began to fade. However, as soon as Tomé began to speak, it was clear that this was the beginning of a much deeper change. “It’s about being better, not bigger,” Tome said. For him, this means rethinking how UPS invests in his business, taking a tougher stance with retailers on pricing and prioritizing higher quality volume.

He gave the example of the company’s Boeing Co. 747 fleet. The company commissioned those widebody aircraft to help handle the high demand for products outside Asia with fewer flights in an effort to “sweat the assets we have.” But when an opportunity recently became available to buy more planes, UPS passed. The planes would have created excess capacity that UPS would have had to find to fill the volume, probably at unappealing prices. “We have not obtained the returns that we should have delivered on some of the capital investments we made,” Tome said. “We will get the network right before we think about investing more dollars” in it, he said.

That is bad news for Boeing and other aerospace providers who hoped that cargo companies’ lawsuit could mitigate unrest among commercial airlines with the pandemic that brings air travel to a standstill. But it’s great news for UPS shareholders who have long complained about the lack of visible billions of dollars of benefits that the company has disbursed in the name of making its network more efficient and profitable.

The 747s are just the tip of the iceberg. UPS is rethinking all levels of its spending and will only spend money on projects that customers really want and will pay for. It sounds simple, but it’s easy for big traders with a long history to get caught up in old-school thought trains. Tome noted that an initial review of the 400 to 500 different UPS products found that approximately 100 were unsold, and yet all of the offerings, along with the sales force, technology, and financial infrastructure supporting them, had remained in the books.

Once you have the right products, you can go after the right type of customer. Tome is accelerating an effort to reduce the amount of time small and medium-sized business packages spend in transit in an effort to attract more of those types of customers. “Why am I focusing on SMB?” Tomé asked, referring to small and medium-sized companies. “Because the SMB customer values ​​an end-to-end network and pays us for it.” The implicit contrast is with a customer like Amazon.com Inc., who is most interested in negotiating discounts regarding their large volume quantities. Every percentage point in retained sales among small business customers translates into $ 170 million of high-quality revenue, Tome said.

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