Investors are learning the details of the new deal reached between United Parcel Service (UPS) and Teamsters-represented workers. The contract will last five years and "total cost growth" will be 3.3%. UPS CFO Brian Newman sits down with Yahoo Finance’s Julie Hyman and Brad Smith to discuss the details of the agreement between UPS and it's workers. Some of these new benefits include an increase in wages, improved working conditions, and the use of tech to increase productivity.

Video Transcript

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- After months of negotiations, UPS and the Teamsters Union reached a five-year labor deal in July. Now, we've got a sense of the financial implications of the agreement. The company says the deal raises wages and benefits by over 3% per year with 46% of wage increases coming the first year.

UPS employs about 340,000 Teamster members, making it the largest single employer of the Union. Brian Newman, chief financial officer of UPS, joins us now to tell us more about what this new contract means. Great to have you here with us. We've also got Yahoo Finance's Julie Hyman.

Look, Brian, we got a lot to discuss here. And-- and it's particularly interesting as we were listening in to the announcement and hearing you highlight some of the details there. You've got kind of all in costs here. It's pay plus benefits.

You've got new AC installs for vehicles here. So kind of take us through some of the highlights just very briefly.

BRIAN NEWMAN: Yeah, Brad and Julie, it's good to be with you this morning. Thanks very much. Look, we're-- we're actually very pleased with the contract. Now that it's been fully ratified, we can come out and talk about it, which-- which we've wanted to do for some time.

It's a five-year agreement. The total cost growth or inflation will be 3.3%. We're actually giving back things we were already investing in like vehicles AC, heat for heat reduction through some hydration programs, et cetera.

So we're investing in our facilities. We're investing in our people. But we actually think, Brad and Julie, that having the best workforce in the industry will deliver that service that we're known for, and ultimately that delivers for our customers. And so a 3.3% inflation rate over the next five years, you just benchmark that versus a 4 plus percent five-year treasury, that's a pretty good rate.

JULIE HYMAN: So give us a little more color about how that money is gonna be spent and at what cadence, because you all have described this as sort of a barbell, right, with 46% of the cost coming in the first year. What's the other end of that barbell in the last year then? And-- and how is it-- is that paid out in the form of bonuses? What is that gonna look like?

BRIAN NEWMAN: So-- so the-- the barbell is a good optical piece. I think, Julie, the tough part is the front end of the barbell. I'm less worried about the back end of the barbell. I'll tell you why in a minute.

But the front end over the next 12 months, having nearly half, 46% of the inflation hit in that part, what it does is it sets you up for years 2, 3, and 4. That's a number that 3.3%, that's a gross number, does not include pricing, does not include productivity. So it gives us the ability to drive pricing and productivity to expand margins, throw off cash, et cetera.

By year 5, there's another step-up. But the reason I'm not as worried about that is we have-- we've basically maintained the technology clause in the contract that allows us to-- to deploy and leverage technology to become more efficient and drive productivity. So the investments we'll be making over the next 3, 4 years will be really focused on how does UPS become more efficient? And that's in-- in technology, like, RFID, digital capability, et cetera. But that-- that basically drives productivity.

BRAD SMITH: Perhaps something that investors will be a-- a little bit more excited about here is that this kind of locks in or at least gives them a benchmark for what labor costs will look like for-- for the next five years. But something on the other side here for-- for drivers if we consider how this also changes their existing assignments, the scheduling, what does that look like as part of this negotiation and part of the dealing that's essentially come to what you described as a win-win agreement?

BRIAN NEWMAN: Yeah, it really, Brad. It is a win-win agreement. I was-- I was in New York with a lot of our employees and drivers a couple of weeks ago as we celebrated Founder's Day. I'm out here on the West Coast this morning with-- with our employees as well.

The drivers will be making $170,000 at the end of this contract. That's a fantastic wage, and it basically locks in that service and-- and-- and reliability that-- that our customers rely on for UPS. So I think we have the best employees.

Ultimately, by-- by-- by giving them the pay they deserve, and-- and-- and it's a fair-- fair trade, we've also employed flexibility. So our part timers can now-- during the sea-- seasonal holiday during peak, they can come on as part time seasonal drivers. And so we're leveraging the best of both worlds, take the part timers who UPS, give them the flexibility to drive as part time sea-- or full time seasonal drivers. That's a really positive spin. So flexibility and getting the best labor out there will deliver the service.

JULIE HYMAN: And-- and, Brian, just to be clear, that 170,000 is salary and benefits. That's not like the base salary. So just to-- for-- for clarity's sake there.

BRIAN NEWMAN: All angel.

JULIE HYMAN: All of this said, investors are not entirely convinced, I think safe to say, at least if you look at the stock price and how it has done over the course of these negotiations but not even over the course of negotiations since they have been concluded and even today as you gave more details on these costs over the next few years. What are investors missing here? They're seeing these big numbers and maybe a little spooked.

BRIAN NEWMAN: Yeah, Julie, I think there's a-- a bit of a hangover. Coming out of the contract negotiation, we were waiting for full ratification. Now that we're out there and-- and basically have shared the 3.3%, if-- if the certainty is great I think for investors. So over the long term, the next five years, they know what our biggest input costs will-- will grow.

I think the challenge becomes in the short term, that 46% of the contract inflation happens in the first 12 months. There's a bit of an overhang short term. And I think investors are waiting to see the volume pull through. We have a $7 billion pipeline of sales out there, and now it's our job since last week the contract fully ratified.

Now we have to pull those sales through, show them the volume, and we've already proven that we can-- we can generate a lot of productivity in the business. So I-- I like the trade going forward. I think the investors are just cautious with the short-term productivity, but I think certainly years 2, 3, and 4, they bode well for the stock.

BRAD SMITH: What amount of that $7 billion pipeline do you believe could come through by the holiday season, by or before the holiday season, which is a-- a peak time, we know, for logistics operations?

BRIAN NEWMAN: Well, it's-- the cardboard is going on the truck this week, Brad, so-- so it's-- it's happening. As I said, as a-- as a benchmark, we would like December of this year to get back to flat versus prior year. We exited the last quarter down 12% in the month of June. So that down 12 will-- will-- will transition to flat over the course of the back half of the year. So we're very focused on it, but-- but the sales team, the US operations, they're-- they're both winning back, and they're pulling through that sales pipeline, big focus right now.

JULIE HYMAN: Brian, forgive me for a small detour here, but I wanna address some news that came out this morning from one of your competitors, a newer competitor, that is, Amazon that is launching a new supply chain sort of end to end product for sellers. And again, forgive me. I'm not sure if it directly competes with something that UPS offers. So what-- what can you tell us about this and-- and the sort of competitive risk here?

BRIAN NEWMAN: So Amazon is-- is one of our biggest partners. And-- and we-- we have a mutually beneficial agreement or arrangement that-- that we're pleased with. At the end of the day, we have a path with-- with Amazon from a volume perspective to try and glide the volume down.

We've talked about that publicly. And-- and so as we do that, we focus on the packages that make the most sense to be in the UPS system, and Amazon's focused on their volume. We're not Amazon supply chain in any way, shape, or form. We're a part of their supply chain, which is particularly valuable in-- in the peak season when the volume goes up significantly and-- and also through elements like returns that they leverage UPS for.

BRAD SMITH: Brian, thanks so much for taking the time to help break down some of the components of this deal. And we look forward to hearing much more about where this is actually showing up in the financials as well. Brian Newman, chief financial officer of UPS, and Yahoo Finance's own Julie Hyman joining us.

BRIAN NEWMAN: Thanks, Brad. Thanks, Julie.