United Parcel Service, Inc.

Good morning. My name is Stephen, and I will be your conference facilitator today. And I would like to welcome everyone to the UPS Investor Relations fourth 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. P.J. Guido, Investor Relations Officer. Sir, the floor is yours.

Good morning, and welcome to the UPS fourth 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 fourth quarter of 2023, DAP results include a non-cash after-tax mark-to-market pension charge of $274 million, an after-tax transformation and other charges of $154 million. and a non-cash after-tax impairment charge of $84 million related to our Coyote trade name in our truckload brokerage unit. The after-tax total for these items is $512 million, or 60 cents per diluted share. Additional details regarding year-end pension charges are included in the appendix of our fourth quarter 2023 earnings presentation that will be posted to the UPS Investor Relations website following this call. A reconciliation to GAAP financial results is available on the UPS Investor Relations website and also available in 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, PJ, and good morning. Let me begin by thanking UPSers for their hard work and efforts. I'm proud of our team for their commitment to customer service and for once again making UPS the industry leader in on-time performance, not only during peak, but throughout 2023. Looking at our volume trends for the fourth quarter, while total average daily volume, or ADV, declined 7.5% from last year, our performance was a marked improvement from what we reported in the third quarter. During the fourth quarter, our salespeople did an outstanding job of winning back diverted volume and pulling through new volume. In fact, U.S. domestic ADV surged 30% from the third quarter to the fourth which was our highest sequential volume ramp ever. By the end of December, we had won back and pulled through nearly 60% of the volume diverted during our labor negotiations. Winning back and winning new volume is part of a program we call Project Brown, and this program will continue into 2024. You will recall that at the end of the third quarter, we provided a range of expected revenue and operating profit for the fourth quarter. Looking at our fourth quarter results, versus last year, consolidated revenue declined 7.8% to $24.9 billion, which was slightly below the low end of our expectation. Operating profit was $2.8 billion, a decrease of 27.1% from last year, but slightly higher than the low end of our expectations. As a result, our consolidated operating margin was 11.2%, which was well within our expectation. For the year, consolidated revenue was $91 billion, a decrease of 9.3%. Consolidated operating profit totaled $9.9 billion, 28.7% lower than last year, and consolidated operating margin was 10.9%. We generated $5.3 billion in free cash flow during 2023, and we returned $7.6 billion to share owners in the form of dividends and share repurchases. Brian will provide more detail about our financial results in a moment. 2023 was a unique, and quite candidly, a difficult and disappointing year. We experienced declines in volume, revenue, and operating profit in all three of our business segments. Some of this performance was due to the macro environment, and some of it was due to the disruption associated with our labor contract negotiation, as well as higher costs associated with the new contract. Through the year, however, we controlled what we could control. And in many areas, we delivered the highest productivity results in our company history. And I think most importantly, we stayed on our strategy of customer first, people led, and innovation driven. Let me share a few examples of how our strategy is establishing a foundation for future growth. Starting with customer first. In 2023, our healthcare portfolio achieved our target of $10 billion in revenue. Here, we've made strong progress towards our goal of becoming the number one complex healthcare provider in the growing $130 billion global healthcare logistics market. Our global network of healthcare compliant distribution space topped 17 million square feet in 2023, and our acquisitions of Bomi Group and MNX Global Logistics have expanded our cold chain capabilities and are enabling us to reach new markets and customers. To support growth in our international small package business, in December, we announced plans to build a new air hub at Hong Kong International Airport. This new air hub supports our plans to grow in the best parts of the market, including highly profitable Asia trade lines, and will enable us to expand our export and import business in the region. During the year, we continue to grow our SMB penetration. In 2023, SMBs made up 28.6% of our total U.S. volume an increase of 60 basis points from last year. Part of this growth came from DAP, our digital access program. DAP has transformed how small companies do business with UPS. And in 2023, we generated $2.9 billion in DAP revenue, an increase of 22% year over year. Moving to PeopleLed, in 2023, we delivered a labor agreement that provides certainty for the next five years. And because I'm a big believer in the power of one UPS, this year we are returning to a policy of everyone back in the office five days a week. In terms of our culture, we are a network company, not just of logistics capabilities, but of personal relationships too. Which brings me to Innovation Driven. On our busiest peak days, we sort over 50 million packages in the U.S. and deliver more than 30 million packages worldwide. How do we do it? By leveraging the agility of our integrated network powered by UPS technology and the skills of our engineers and operating team. Our network planning tools enabled us to quickly match capacity with volume across the network and drive productivity. Technology also enabled improvements to driver and helper route planning and dispatch, resulting in improvements in density and fewer seasonal support drivers than in prior years. It might surprise you to learn that we typically see an increase in returns volume before Christmas. In the fourth quarter, we moved lightning fast to integrate happy returns. we made box-free, label-free returns available in over 5,000 UPS store locations just eight days after the acquisition closed. Happy Returns Digital Experience helped drive returns volume in the fourth quarter, with momentum extending into the first quarter of 2024. Finally, we continued to deploy transformative technology to increase efficiency within our warehousing facilities. The latest example is our state-of-the-art pick, pack, and ship center in Louisville, Kentucky that we call UPS Velocity. We named it Velocity because it leverages robotics, automation, machine learning, and artificial intelligence to streamline fulfillment operations. This facility is capable of processing over 350,000 units per day and enables a best-in-class experience for our customers and their customers. Our customer-first, people-led, innovation-driven strategy is the foundation of our business, and our continued execution of this strategy enabled us to exit 2023 with momentum. But momentum is not enough. We've decided to take some bold moves to right-size our company for the future and to focus on the key enablers of growth. So today we are announcing two actions. First, we plan to explore strategic alternatives for our truckload brokerage business known as Coyote. Coyote is part of Supply Chain Solutions and is a business that is highly cyclical with considerable earnings volatility. We will keep you apprised as we move forward with this analysis. Second, we are going to fit our organization to our strategy and align our resources against what's wildly important. This will result in a workforce reduction of approximately 12,000 positions and around $1 billion in cost out this year. Here, we've identified new ways of working and are calling this Fit to Serve. Let me end by sharing our 2024 outlook. In 2024, the small package market in the U.S., excluding Amazon, is expected to grow by less than 1%. and projected market growth rates for the rest of our business segments suggest some improvement, but not until the latter part of the year. In building our 2024 financial targets, we anchored the low end of our guidance on market growth, and for the high end of our guidance, included growth we should experience if we capture market share. In 2024, we expect to generate consolidated revenue ranging from approximately $92 billion to $94.5 billion and a consolidated operating margin ranging from approximately 10 to 10.6%. Given the nuances of our new labor contract, there will be stark contrast between our first half and our second half performance. First half earnings will be compressed and second half earnings will expand. In both the low and high end of our guidance range, we expect to exit the year with a U.S. operating margin of 10%. Brian will provide more details in a moment. UPS remains rock solid strong. While our dividend payout is currently higher than our targeted payout of 50% of our prior year's adjusted earnings per share, we are confident in our future. As a result, the UPS Board approved a penny increase in the quarterly dividend from $1.62 per share to $1.63 per share. This is the 15th consecutive year we have increased the UPS dividend. So now that 2023 is behind us, we look forward to seeing you at our upcoming Investor and Analyst Day on March 26. At that time, we will share our three-year plans to grow and drive shareowner value. With that, thank you for listening, and now I'll turn the call over to Brian.