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 Second Quarter 2021 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 second quarter 2021 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 securities laws and address our expectation for the future performance or operating results of our company. These statements are subject to risk and uncertainty which are described in our 2020 Form 10-K, subsequently filed Form 10-Qs and other reports that we file with or furnish to the Securities and Exchange Commission. These reports, when filed, are available on the UPS Investor Relations website and from the SEC. For the second quarter of 2021, GAAP results include after-tax transformation and other charges of $11 million, or one cent per diluted share. Also in the second quarter, on April the 30th, we closed on the sale of UPS freight, which triggered remeasurement of certain of our pension and post-retirement benefit plans. The remeasurement resulted in a $2.1 billion reduction in pension and post-retirement benefit obligations on our balance sheet, primarily due to higher discount rates. The vast majority of the remeasurement impact fell within the corridor, so the impact to GAAP net income was negligible at approximately $3 million. Unless stated otherwise, our comments will refer to adjusted results, which exclude transformation and other charges. The webcast of today's call, along with a reconciliation of non-GAAP financial measures, is available on the 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 one, then zero 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, and good morning, everyone. Let me start by thanking all UPSers for their hard work and efforts. Our Better Not Bigger framework is enabling consistently high service levels and producing improved financial results. Our team is truly moving our world forward by delivering what matters. More specifically, we are winning in the most attractive parts of the market with new capabilities like our fastest ground ever, weekend initiatives, and improvements in our customer experience journeys. We are continuing to deliver life-saving COVID-19 vaccines, and our healthcare growth initiative is gaining momentum. We are also driving sustainable revenue per piece growth through targeted revenue quality strategies. And lastly, we are driving productivity improvements in the network and implementing targeted transformational expense reductions. Our second quarter financial results across all segments were much better than we anticipated. Consolidated revenue in the quarter rose 14.5% from last year to $23.4 billion. And operating profit grew 40.8% to $3.3 billion. As we expected, US average daily volume for the quarter was down slightly from one year ago. driven primarily by tough comparisons due to the jump in e-commerce-related volume last year. But our revenue quality in the U.S. was much improved due to a change in customer mix as well as our revenue quality strategies. All of our business segments delivered record quarterly operating profit and expanded operating margin on a year-over-year basis. In the U.S., operating margin was 11.6%, our highest second quarter operating margin since 2017. In the international segment, operating profit increased 41.3%, and operating margin reached a record 24.7%. And in supply chain solutions, continued strength in freight forwarding and healthcare drove operating margin of 9.7%, a record for this segment. While we closely monitor external factors like the tight labor market and low inventory levels, the execution of our initiatives has put us well on our way to achieving the high end of our 2023 financial targets. Brian will share more details with you during his remarks. Moving to our customer-first, people-led, innovation-driven strategy, We strive to provide our customers with the best digital experience powered by our global smart logistics network. Customer first is about creating a frictionless customer experience and building the capabilities that matter the most to our customers. During the second quarter, Saturday ground delivery volume grew 13% as we continued expanding our weekend coverage. This is an example of better, not bigger. as we are expanding service with very little capital spending. We are currently halfway through our efforts to expand our existing centers and turn on Saturday operations in more than 200 additional centers. By the end of October of this year, we will cover about 90 percent of the U.S. population on Saturdays, which will further extend our market-leading Saturday commercial delivery and pickup services. and support our ongoing Sunday delivery services. These improvements benefit all of our customers, large and small, by enabling faster time in transit and expanding capacity. As we execute our strategy, our focus is on growing value share. We are changing the growth targets of the company and are no longer focused solely on volume growth. Instead, we are creating new capabilities and leveraging our competitive advantages to grow revenue and profit from the most attractive parts of the market, like SMB, B2B, healthcare, and international, while at the same time providing value and service to targeted large enterprise customers. It's early days, but we believe our strategy is working. For example, in the U.S., we grew SMB average daily volume, including platforms, by 21.6% and we saw total U.S. revenue per piece increase by 13.4%. As you know, healthcare is one of our wildly important customer first initiatives. In the second quarter, healthcare customer revenue on a global basis grew 19.8% and contributed to margin expansion in all three segments. To grow in the healthcare sector, We are creating new capabilities, like our recent launch of UPS cold chain solutions. And we're deploying sophisticated solutions that customers want into new geographies, like the expansion of UPS Premier to Canada and Europe. These actions are advancing our leadership position in the global healthcare logistics market. To support growth in our international segment, we continue to invest broadly. including the launch of our first-ever daily flight from Osaka to Shenzhen, thus significantly speeding up our time in transit across multiple trade lines. We are also improving the customer experience across 16 journeys to make them simpler and more helpful. One of the customer pain points we are addressing is claims. We recently completed a successful pilot that shortened the average claim processing time from 20 days to five. The improvements we made resulted in a 1.9% reduction in churn among pilot participants. We are rolling out our new claims process to all US SMB customers over the next 12 months. To put this into perspective, every one percentage point reduction in US SMB churn is worth about $170 million in annual revenue. Moving to the people-led component of our strategy, our focus here is to make UPS a great place to work so that our people feel confident recommending UPS to others. During the second quarter, our executive leadership team spent many days in our operations around the world, delivering packages, walking our facilities, and talking with our people. When we visit, we don't take a list. We bring back a list. of the actions we can take to simplify our processes, drive productivity, and improve the quality of the work environment for our people. I cannot say enough about the commitment of UPSers who over the last year rose to meet the challenges of elevated volume while ensuring great service to our customers day in and day out. I'd like to recognize our 38,000 part-time management employees in the U.S. that work primarily in our preload, hub, sort, and air operations. In appreciation of their extraordinary efforts, we provided them with a one-time financial award in the second quarter. People-led builds on a strong foundation, and we will continue living our values, modernizing our policies, and rewarding our people to make UPS an even better place to work and employer of choice. Turning to innovation driven, our disciplined approach to capital allocation is generating significant levels of free cash flow. In fact, in the first six months of this year, we generated $6.8 billion in free cash flow. This is a record. We've generated more free cash flow in the first six months of this year than we previously generated in any full year at any time in our company's history. Also in the second quarter, we completed the divestiture of UPS Freight, a capital-intensive, low-returning part of our business. This, along with other actions, have greatly improved our financial condition from one year ago, as Brian will detail. And looking ahead, we expect to see a significant increase in our return on invested capital this year. Innovation Driven will also help us reach carbon neutrality by 2050. In August, we will publish our annual sustainability reports, which include our 19th GRI Content Index, along with our second Sustainability Accounting Standards Board, or SASB report, and our first Task Force on Climate-Related Financial Disclosures, or TCFD report. Social and environmental stewardship goes right to our core values. and we remain committed to providing investors transparency through our expanded ESG disclosures. Next month, UPS will celebrate our 114th anniversary. It is such an honor for me to guide this company through our next chapter. We are a purpose-driven company, and we are investing in the capabilities that matter most to our customers to create value for our share owners. Thank you. And now I'll turn the call over to Brian.