United Parcel Service, Inc.

Good morning. My name is Steven, and I will be your facilitator today. I would like to welcome everyone to the UPS Investor Relations fourth quarter 2020 earnings conference call. All lines have been placed on mute to prevent any background noise, and after the speaker's remarks, there will be a question and answer period. It is now my pleasure to turn the floor over to your host, Mr. Scott Childress, Investor Relations Officer. Sir, the floor is yours.

Good morning. and welcome to the UPS fourth quarter 2020 earnings call. Joining me today are Carol Tomei, our CEO, and Brian Newman, our CFO. Before we begin, I want to remind you that some of the comments we'll make today are forward-looking statements within the federal security laws and address our expectation for the future performance or operating results of our company. These statements are subject to risk and uncertainties, which are described in detail in our 2019 Form 10-K, subsequently filed Form 10-Qs, and other reports we file with the Securities and Exchange Commission. These reports, when filed, are available on the UPS Investor Relations website and from the SEC. For the fourth quarter of 2020, GAAP results included a non-cash, after-tax, mark-to-market pension charge of $4.9 billion, an after-tax transformation charge of $114 million, and an after-tax impairment charge of $545 million related to the company's decision to sell UPS Freight. The after-tax total for these items is $5.6 billion, an impact to the fourth quarter of 2020 EPS of $6.38 per diluted share. The mark-to-market pension charge of $4.9 billion included a benefit from higher than anticipated asset returns, which did not fully offset the negative impact of lower discount rates. It also included the remainder of our current best estimate of potential central states coordinating benefits as of December 31, 2020. Additional details regarding the year-end pension charges will be available in a presentation posted to our investor relations website later today. Unless stated otherwise, our comments will refer to adjusted results, which exclude the year-end pension charges, transformation cost, and non-cash impairment charge. The webcast of today's call, along with the reconciliation of non-GAAP financial measures, are available on UPS investor relations website. Following our prepared remarks, We will take questions from those joining us via the teleconference. If you wish to ask a question, press 1 then 0 on your phone to enter the queue. Please ask only one question so that we may allow as many as possible to participate. You may rejoin the queue for the opportunity to ask an additional question. And now, I'll turn the call over to Carol. Thank you, Scott.

We have a lot to cover with you this morning. We were very busy in the fourth quarter. I will review our peak season and then provide an update on our strategic progress. Brian will cover the financial details for the quarter and then finish with an outlook for 2021. Let me begin with a huge thank you to our more than 540,000 UPSers for not only delivering one of the best peaks in our company history, but also for their extraordinary efforts throughout 2020. UPSers are essential workers, and I could not be more proud of the team. In a year unlike any other, they delivered what matters. Looking at the fourth quarter, our results were strong and considerably better than we expected. Consolidated revenue in the quarter rose 21 percent from last year to $24.9 billion. and operating profit grew 26% from last year to $2.9 billion. This is the highest quarterly operating profit in the company's history, with record profit produced in each segment. For the year, UPS generated record revenue of $84.6 billion, with growth in all three segments. We increased operating profit by 7% to $8.7 billion, and we generated diluted earnings per share of $8.23, an increase of 9.3 percent. Turning back to the fourth quarter, let me address our holiday peak performance. The environment was very dynamic, largely due to market demand exceeding market supply, but we were ready. Our early collaboration with customers and a disciplined approach to executing our peak plans proved to be very successful. We delivered industry-leading service levels, which in turn accelerated new customer requests for our services. As peak holiday approached, we saw SMBs, or small and medium-sized businesses, increasingly turn to UPS. In the U.S. in the fourth quarter, SMB volume grew 28.5%, outpacing our larger customers, which grew by 4%. By running the network with more discipline and through the deployment of new tools, we reduced what we refer to as chaos costs, or costs associated with bottlenecks and overtime pay. Additionally, SurePost Redirect reached a new record in December. Nearly 50% of SurePost volume was delivered by UPS drivers, optimizing our network. And just a comment about peak outside of the U.S. It was a very peaky peak with the highest volume in our history delivered with excellent service levels. And while this peak was one of our best, we know that we can do even better. We have identified additional areas for improvement and are including them in our peak 2021 planning. During the height of the peak season, the FDA and other health authorities approved the use of COVID-19 vaccines. We were ready for this. as we had reserved capacity in our network. We've been in the healthcare logistics business for more than 15 years. Our expertise in cold chain logistics positions us well. And thus far, we have provided above 99% service for vaccine delivery. Looking back to 2020, we laid a strong foundation for future success. On my first earnings call in July, I mentioned that we were operationalizing our strategy customer-first, people-led, innovation-driven, through a better, not bigger framework. We are making solid progress. From a customer-first perspective, speed and enabling capabilities are very important. Our goal is to provide the best digital experience powered by our smart global logistics network. And we're targeting our solutions to high-yielding sectors, like SMBs, among others. We've moved the needle on speed. For the year, weekend ground volume was up 93.9% over last year. And SMB volume on our fastest ground ever lanes grew by 40% in the fourth quarter since we improved these lanes. We now have more than 700,000 accounts in DAP, which is our digital access program. And revenue from that program grew more than 360% in 2020. We expect our DAP revenues to reach $1 billion in 2021. People-led focuses on building a better workplace for our people. Over the past several months, we've addressed some of the pain points here, and early feedback has been very positive. In fact, we've seen a 13 percentage point improvement in likelihood to recommend, the primary metric we use to measure progress on our people-led initiative. As Brian will detail, during the quarter we accelerated certain annual bonus awards that were paying out over five years. Going forward, our annual management incentive plan will pay out in one year and will include targets for return on invested capital. Further, we are simplifying our sales incentive programs and incorporating profitability targets into those programs. These changes better align employee performance to the interests of all share owners. People-led also means creating fewer but more impactful jobs and lowering our non-operating costs. Brian will provide you with an update on our transformation activities. Innovation-driven means driving higher returns on the capital we deploy using new tools, processes, and technologies. Driving higher returns starts by improving our revenue quality, and here our efforts are working. In the fourth quarter, U.S. domestic revenue per piece was up 7.8 percent, the highest growth we've seen in more than 10 years. While this year-over-year growth rate reflects peak surcharges, it also reflects a change in mix, as SMBs accounted for 64 percent of U.S. average daily volume growth in the quarter. We also saw solid SMB volume growth outside of the U.S., Lastly, we have tightened the linkage between our investments and returns. As I mentioned back in July, with the exception of our five core principles, everything else is under review. Last week, we announced that we had entered into an agreement to sell UPS Freight, our LTL business unit. UPS Freight is a capital intensive, low returning business. We do not need to own this business to provide an LTL solution for our customers. With the disposition of UPS freight, we will be smaller, but we will be better, as without it, we will see an improvement in our operating margin and return on invested capital. Being better, not bigger, also means de-risking our balance sheet. We will use the proceeds from the sale of UPS freight to pay down long-term debt. Looking ahead, Uncertainty remains. While we are optimistic about the future, we don't know the pace of the vaccine rollout or the impact that a continuing pandemic will have on the global economy. On the other hand, we don't think e-commerce sales as a percentage of retail sales will decline, which means continued supply and demand imbalances. This scenario supports our efforts to improve revenue quality while optimizing our existing network. These efforts, coupled with a relentless focus on productivity and effective capital allocation, should result in both operating margin expansion and higher return on invested capital in 2021. But until we have more certainty with the economic environment, we are not providing revenue or earnings per share guidance. Let me close with a note of reflection. I've been in the CEO chair since June 1st. It has been an honor and a privilege to serve, especially this year, a year the world won't forget. UPS is a purpose-driven company with a proud past and an even brighter future. I'm excited about the opportunities that lie ahead. And with that, I'll turn the call over to Brian.