United Parcel Service, Inc.

Good morning. My name is Stephen, and I will be your facilitator today. I would like to welcome everyone to the UPS Investor Relations first quarter 2023 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. Any analysts that would like to ask a question, now is the time to press the 1, then 0 on your touch-tone keypad. And it's now my pleasure to turn the floor over to our host, Mr. Ken Cook, Investor Relations Officer, serve the floor as yours.

Good morning and welcome to the UPS first quarter 2023 earnings call. Joining me today are Carol Tomei, our CEO, Brian Newman, our CFO, and a few additional members of our executive leadership team. 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 expectations for the future performance or operating results of our company. These statements are subject to risks and uncertainties which are described in our 2022 Form 10-K and other reports 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. Unless stated otherwise, our discussion refers to adjusted results. For the first quarter of 2023, GAAP results include after-tax transformation and other charges of $9 million, or one cent per diluted share. A reconciliation to GAAP financial results is available on the UPS Investor Relations website, along with the webcast of today's call. Following our prepared remarks, we will take questions from those joining us via the teleconference. If you wish to ask a question, press 1 and 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, Ken, and good morning. Let me begin by thanking UPSers for once again delivering industry-leading service to our customers. Service defines UPS. It is one of our values. and I'm proud of our team who continue to make it a key priority. Another company value is safety. UPS drivers are among the safest in the industry, and every year we invest millions of dollars in safe driving education and training. Our Circle of Honor program recognizes drivers who have achieved 25 years or more of accident-free driving. This year, we inducted more than 1,200 UPS drivers into the Circle of Honor, bringing the total to more than 10,400 around the globe. Congratulations to these drivers on their achievements. Turning to our results, 2023 is proving to be an interesting year. In the U.S., relative to our base plan, volume was higher than we expected in January, close to our plan in February, and then moved significantly lower than our plan in March as retail sales contracted and we saw a shift in consumer spending. For example, food as a percentage of household budgets reached 9% in the first quarter compared to 7% a couple of years ago. U.S. discretionary sales are lagging grocery and consumable sales, and disposable income is shifting away from goods to services. Outside of the U.S., export activity out of Asia remained weak, which negatively impacted revenue in both international and supply chain solutions. In response, we focused on controlling what we could control. We remained disciplined on price. We increased penetration in the most attractive parts of the market. We managed the network with agility. We drove productivity. And we stayed on strategy. Looking at our first quarter financial results versus last year, consolidated revenue was $22.9 billion, down 6%. Operating profit was $2.6 billion, a decrease of 22.8%. And consolidated operating margin was 11.1%, a decline of 250 basis points. While revenue fell short of our base plan, Due to a relentless focus on productivity, both operating profit and operating margin were in line with our base plan. Moving to our strategic update, through our customer-first, people-led, innovation-driven strategy, we are investing to improve the customer experience and drive efficiency. Starting with customer-first, key investments here are driving growth in targeted customer segments like SMBs, and healthcare. Looking at SMBs, we continue to invest in the international expansion of our digital access program, or DAP. We now have 16 countries producing DAP revenue. In the first quarter, total DAP revenue was up 51.5% compared to last year, and we are on track to generate around $3 billion in DAP revenue this year. Did you know that in the U.S., About one out of every four DAP packages enters our network through a UPS store. With more than 5,100 locations in the U.S., UPS stores are strategic assets. In fact, 85% of the U.S. population is within 10 miles of a store, giving customers ultra-convenient entry points to the UPS network, whether they're an SMB shipping an item they've sold online or a customer returning an item they've bought. Given the strategic importance of these stores, we are leaning into investments here to improve the customer experience. For example, the stores are rolling out self-service kiosks that enable customers to bypass the counter when they have shipments and returns, even returns with no box or no label. These kiosks make it easier for customers to get in and get out of the store. We've rolled out nearly 200 kiosks so far. and will deploy 1,000 by the end of October this year. And we're not stopping there. Another area of focus is improving the claims process, which used to be a hassle for both customers and franchisees. In March, the UPS Store launched an online claims portal to all U.S. locations that's designed specifically for the needs of the store shipper. With this portal, claims that used to take weeks for resolution are now resolved within an average of about two days. One final comment on SMBs. In the first quarter, SMBs, including platforms, made up 29.6% of our total U.S. volume. This is the 11th consecutive quarter of increased SMB penetration, and it's the highest level we've seen in more than seven years. Turning to healthcare, In the first quarter of 2023, we expanded our global footprint by opening nearly 1 million square feet of dedicated healthcare space, including our first facility in Germany. This facility provides customers a broad range of temperature sensitive and handling solutions. Its location in the center of Germany connects our customer shipments, the fast-growing European healthcare market, The facility is also close to our European air hub in Cologne, enabling customers to leverage the speed and reach of our global network. As a reminder, in the fourth quarter of 2022, we completed the acquisition of Bomi Group, and to date, revenue and cost energy are running ahead of target. Further, we are continuing to invest in the global expansion of UPS Premier, which is now available in 45 countries, with four more to be added this year. Our goal is to become the number one complex healthcare logistics provider in the world. To help us get there, we plan to open a total of seven dedicated healthcare facilities this year. In the first quarter, revenue from our healthcare portfolio reached $2.4 billion, and we expect to generate over $10 billion in healthcare revenue in 2023. Turning to people-led, let me discuss the progress of our negotiations with the Teamsters. Negotiations on a new contract with Teamsters are underway, and good progress has been made on many of our local supplemental agreements. Together, we've set up five subcommittees at the national bargaining table to take on key areas of the contract, which enables us to move faster. We are aligned on several key issues, like solving the staffing needs for weekend deliveries and ways to mitigate the summer heat in our package delivery vehicle. While we expect to hear a great deal of noise during the negotiations, I remain confident that a win-win-win contract is very achievable and that UPS and the Teamsters will reach agreement by the end of July. Now let's move to the last leg of our strategy, innovation-driven. We have the best, most efficient global integrated network in the world, and we are getting even better. Today we operate our network with more agility than ever before, and when it comes to productivity, we are relentless about creating a virtuous cycle of improvement in our network. For example, our total service plan, which addresses running a predictable on-time network, has delivered continued productivity improvements since being introduced last year. Our massive and highly complex network naturally generates efficiency when volume increases, but when volume levels drop, historically it's been harder to generate productivity improvement. With total service plan, we have driven productivity even with declining volume. In the first quarter, U.S. volume declined by 5.4 percent, but ours declined even further, which resulted in improved productivity as measured by pieces per hour. As we've discussed last quarter, we've accelerated investment in our Smart Package Smart Facility RFID solution and plan to complete deployment in more than 900 buildings across the U.S. by the end of October. Throughout the process, we've continued to learn and improve, which has enabled stronger results than we originally expected. In the facilities where we have this technology, we've cut the frequency of misflows from around 1 in 400 packages to one in 1,000 packages, which reduces miles, handles, and costs. And it improves both the customer and employee experience. Innovation Driven is also about combining digital capabilities with our integrated networks to improve the customer experience and efficiency. Our upstream delivery density solution checks both boxes. This month, we are onboarding our second large national retailer. which gives us more opportunity to increase density as we can match volume in the UPS network with orders of participating customers. It's still early days of this initiative. As we learn, we continue to adjust the match rate algorithm, and we are happy with the results. Lastly, our innovation-driven initiatives are moving us towards our 2050 carbon neutrality goal. We are focused on the decarbonization of our global supply chain. In 2022, our Scope 1, 2, and 3 CO2 emissions declined by 6.9% from 2021. We've been investing in alternative fuel for more than 20 years and operate more than 15,600 alternative fuels and advanced technology vehicles. Recently, we took delivery of 10 fully electric Class 8 semi-trucks in California. These trucks are quiet, and they are the first zero-emission semis to run in our UPS fleet. Our 2022 sustainability report was published on April 12th. This is our 21st annual sustainability report, and you can find it on about.ups.com. Moving to our outlook for 2023, last quarter we provided a range for our 2023 financial targets. As we've discussed, there's been a deceleration in US retail sales growth, and certain non-US markets remain challenged. As a result, we now expect to be at the low end of our previously provided revenue and operating profit margin range. Brian will share more detail in a moment. I've led through difficult times before, and I've seen the power of making the right decisions and the pitfalls of making wrong decisions. In uncertain market conditions, it's easy to fall into the trap of managing the business for the short term. While we will control what we can control, we will also stay on strategy. Over the past three years, we have fundamentally improved nearly every aspect of our business, and we are just getting started. UPSers are the best in the industry, and because of them, I am convinced we will come out of this cycle faster, stronger, and with a wider lead on our competitions. With that, thank you for listening. And now I'll turn the call over to Brian.