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 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 analyst that wants to ask a question, now is the time to press the one, then zero on your telephone keypad. It is now my pleasure to turn the floor over to your host, Mr. Ken Cook, Investor Relations Officer. Sir, the floor is yours.

Good morning, and welcome to the UPS second 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 second quarter of 2023, GAAP results include after-tax transformation and other charges of $106 million, or 12 cents 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 commenting on our agreement with the change service. We believe this contract is a win-win-win. Together, we reached agreements on the issues that were important to Teamster leadership, to our employees, and to UPS. We have the best people, and our new contract continues to reward our employees with the best pay and benefits in our industry. I'll share some highlights of the new contract in a moment. The second quarter was challenging, and I'd like to recognize the more than 500,000 UPSers around the world for their hard work and efforts, and for doing what they do better than anyone, and that's deliver industry-leading service. I'd also like to give a special shout-out to our salespeople for their dedication to our customers. And most importantly, I want to thank our customers for putting their trust and their business with us during our labor negotiations. And for those customers who diverted, we look forward to bringing you back to our network. Moving to our second quarter results, we expected negotiations with the Teamsters to be late and loud, and they were. As the noise level increased throughout the second quarter, we experienced more volume diversion than we anticipated. Now, when faced with volume declines, some companies might go off strategy or chase unprofitable business, but that is not today's UPS. Today's UPS is focused on the long term. During the quarter, we stayed on strategy and continued to invest in the business. We also maintained our pricing discipline. Further, the investments we've made in our automated facilities and technology, like network planning tools or NPT, have enabled greater agility than ever before. As volume levels declined, we demonstrated that agility by quickly adjusting our integrated networks and maintaining high levels of productivity. Looking at our second quarter results, versus last year, consolidated revenue declined 10.9 percent to $22.1 billion under our expectations due to lower volume. But by controlling what we could control, we quickly took costs out of the network and delivered $2.9 billion of operating profit in line with our expectations. Consolidated operating margin was 13.2%, which exceeded our expectations. Over the past three years, we've executed several initiatives in support of our customer first, people led, innovation driven strategy. Let me highlight some recent accomplishments. Starting with customer first, during the labor negotiation, communication and transparency with customers was a top priority. During the quarter, over 500 UPS executives had regular contact with many, many customers. Our approach with these customers was to keep volume from diverting, or if it diverted, win it back after the labor negotiation was settled. This approach brought us closer to our customers, and we've gained an even better understanding of their end-to-end supply chain, which will allow us to better serve them. We are now laser-focused on executing our win-back initiative and pulling through the more than $7 billion of opportunity in our sales pipeline. To do so, we will leverage our superior service and capabilities and the investments we've made in the digital customer experience. While all win-back and new volume won't happen immediately, we are already seeing some volume return. On the digital front, our digital access program, or DAP, continues to grow. We've introduced new plug-and-play technology to make it even easier for e-commerce platforms to connect. In the second quarter, we added seven new platforms to DAP, including four international platforms. In the first six months of this year, DAP generated more than $1.4 billion in revenue, putting us on our way to achieving our 2023 DAP revenue target of around $3 billion. One of our strategic objectives is to become the number one complex healthcare logistics provider in the world. In the second quarter, we further expanded our European footprint by opening our first dedicated healthcare distribution facility in Ireland, giving us certified healthcare facilities in 35 countries. For the first six months of 2023, revenue from our healthcare portfolio reached $4.7 billion. For the full year, we expect to generate $10 billion in healthcare revenue. On the international small package front, we've been quickly expanding in India, which is one of the fastest-growing economies in the world. In May of last year, we launched Mubin, our asset-light domestic joint venture. And we recently expanded from three cities to 49 of the largest cities in India, now covering approximately 90% of the B2B market opportunity. Turning to PeopleEd, we expect our new labor contract to be ratified in two weeks. Today, I'll just share some highlights, and we will provide more details after ratification. Let's start with weekend delivery. the new contract converts all 22.4 employees who are our weekend delivery drivers to regular full-time package car drivers. This gives us the flexibility we need to schedule delivery drivers Tuesday through Saturday and provides more work-life balance for our drivers. Further, we kept our Sunday delivery service by maintaining our SurePost products. Moving to working conditions, We will be improving the working conditions for all employees, including air conditioning in every new U.S. package car starting in January 2024. We retained our ability to introduce new technology and the flexibility to use seasonal support during the peak holiday season. For our Teamster employees, this contract further strengthens the industry-leading pay and benefits they already enjoy. When you look at total compensation, by the end of the new contract, the average UPS full-time driver will make about $170,000 annually in pay and benefits. And for all part-time union employees that are already working at UPS, by the end of this contract, they will be making at least $25.75 per hour while receiving full healthcare and pension benefits. In fact, our part-timers are among only 7% of all U.S. part-time workers in the private sector who enjoy these benefits. There's much, much more, but the last point I would like to highlight is the addition of a new paid holiday on Martin Luther King Jr. Day, which will be a benefit for all U.S. employees. UPS has a long history of honoring Dr. King, and this additional paid holiday aligns with our values. All of this and more helps to make UPS the best place to work. Which brings me to Innovation Driven. We run the most efficient integrated network in the world, powered by technology developed by UPS engineers. In the quarter, we leveraged the agility of our network to match capacity with volume levels. Key to this agility was NPT, which is a set of technologies that use AI and machine learning to harness the value of our data to quickly make changes to load planning, scheduling, and volume flows across the network. This technology is powerful. In fact, NPT can do in an afternoon what used to take a team of engineers months to do. By using NPT with our total service plan, we quickly match the network to volume levels. This resulted in a nearly 10% reduction in hours in the US, in line with the decline in volume. Additionally, MPT enabled us to further reduce semi-variable and fixed costs, which Brian will detail in a moment. Importantly, we did all of this while continuing to provide industry-leading service to our customers. There is no finish line when it comes to driving efficiency. For example, we've made great progress in rolling out Smart Package, Smart Facility, our RFID initiative. At the end of the second quarter, almost 50% of our U.S. buildings were operating with this technology. And we expect to complete the U.S. deployment by the end of October. Quickly touching on our outlook. Now that labor negotiations are behind us, we've updated our guidance for the full year primarily to reflect the volume impact from labor negotiations and the cost associated with the tentative agreement. Brian will share more detail in a moment. Let me close by talking about our future. Customer first, people led, innovation driven under our better and bolder framework is a winning strategy. We are winning in the best parts of the market. and making our integrated network even more agile and efficient. And now, for the people-led part of our strategy, our new contract establishes a platform for the future. Our company is stronger than ever, and we will move even faster to execute our strategy and continue delivering industry-leading service for our customers. I'm excited about what the future holds and what UPSers will accomplish together. I truly believe our best days are ahead of us. And with that, thank you for listening. And now I'll turn the call over to Brian.