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 second quarter 2024 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 1 then 0 on your telephone keypad. It is now my pleasure to turn the floor over to your host, Mr. P.J. Geidel, Investor Relations Officer. Sir, the floor is yours.

Good morning and welcome to the UPS second quarter 2024 earnings call. Joining me today are Carol Tomei, our CEO, Brian Dykes, our new 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 2023 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 today refers to adjusted results. For the second quarter, GAAP results include an after-tax charge of $120 million, or 14 cents per diluted share, comprised of a one-time payment of $94 million to settle an international regulatory matter, and transformation and other charges of $26 million. 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 welcoming Brian Dykes as UPS's new Chief Financial Officer. With over 25 years of multinational experience with the company, Brian brings deep financial and strategic experience to our executive leadership team. Welcome, Brian. Our second quarter performance was a significant turning point for our company. as we return to volume growth in the United States, the first time in nine quarters. I would like to recognize and thank UPSers for their hard work and efforts in delivering these results. At the beginning of the year, we shared our outlook for 2024 based on four key planning assumptions. The first planning assumption acknowledged the front-loading of cost associated with our new labor contract, which we believed would cause our financial performance to reflect a bathtub effect with first half 2024 earnings down as much as 30% and second half earnings returning to growth. In the first half of the year, our earnings were in line with the down 30% scenario. The second assumption was that we would return to volume growth, which we did in the U.S. during the month of May. Further, while international volume growth in the second quarter was down 2.9% year-over-year, we saw growth in certain markets. The third planning assumption was based on our fit-to-serve initiative to right-size our management structure, and we are on track with this initiative to deliver roughly $1 billion in savings by the end of the year. Finally, we said we would explore a strategic alternative for a coyote, and we did. leading to a pending sale to RXO at considerably more than our carrying value. So the key assumptions we used to build our plan are holding with one distinction, and that's U.S. volume mix, both in terms of product and customer segmentation. During the quarter, we experienced a shift toward value products, with shippers choosing ground over air and surepost over ground. And there was also a notable shift in product characteristics with a surge in lightweight short zone volume moving into our network. We will discuss the full year impact of these shifts in a few moments. But let me first highlight our second quarter results and then provide a few updates on our longer term strategies. In the second quarter, consolidated revenue was $21.8 billion. a decline of 1.1% versus last year. Consolidated operating profit was $2.1 billion, down 29.3%, and consolidated operating margin was 9.5%. At our March Investor Day, we set forth our declarations to become the premium small package provider, the premium logistics orchestrator, and the number one complex healthcare logistics provider in the world. To that end, we said we would pursue certain inorganic opportunities, and we have. As you've seen, we just announced our plans to acquire Estafeta, a leading domestic small package provider in Mexico. This is a big win for UPS, and it's a big win for our customers. By combining Estafeta with the end-to-end services we already have in Mexico and connecting it to the global reach of our integrated network, We will greatly enhance our logistics orchestration capabilities for customers that are shifting manufacturing and distribution closer to the United States. We are targeting to close this acquisition by the end of this year. Let me share a few other strategic updates starting with customer first. In healthcare, we just opened our first dedicated healthcare facility in Dublin, Ireland. This 82,000-square-foot facility provides storage and fulfillment for a range of complex pharmaceutical and healthcare products. And in the Netherlands, we increased the size of our flagship facility in Roermond to now more than 235,000 square feet, including expanded ultra-cold storage capabilities to support the growing market of complex biopharma products. Looking at SMBs, we continue to add partners to our digital access program, or DAP, meeting small businesses where they are. In the first six months of this year, DAP generated $1.5 billion in revenue, and we are well on our way to achieving our 2024 DAP revenue target of over $3 billion. And because speed will always be important to our customers, In the U.S., we expanded our weekend service offering to six additional markets. With this service, we provide deliveries one day earlier than competitors who don't offer weekend pickup services. In fact, we are the only private U.S.-based carrier that provides both commercial and residential pickup and delivery services on Saturday as a general service offering. Outside of the U.S., We are continuing to enhance our portfolio to support our customers as they balance the need for speed with cost. For example, in record time, we launched enhancements to our worldwide economy service globally. This is an e-commerce solution for non-urgent cross-border shipment. Here, we created a true door-to-door service with customs clearance and delivery fees baked into the solution, making the experience simpler for the shipper and the receiver. In Asia, over the last several quarters, we've made a series of network enhancements, with the latest being in Taiwan. Because Europe is a top three export destination for Taiwan, we've expanded our capacity by 30% and extended pickups to as late as midnight. These enhancements enable our customers, including high-tech manufacturing and automotive shippers, to better serve their European customers. by reaching their destination in just two business days. And in supply chain solutions, we've expanded our supply chain operations at our Frankfurt airport gateway by adding nearly 25% more warehouse space. This facility is a major SES hub for Central Europe, where it connects all transportation modes. And this expansion We can now provide even greater flexibility to the region's growing technology and healthcare industry. And importantly, also in SCS, we are onboarding the new USPS air cargo business with plans to be fully implemented before peak. The onboarding has gone well and we continue to expect this business to be margin accretive for the company. Now let's turn to innovation driven and progress with Network of the Future. In the first half of 2024, we completed 35 operational closures, which included closing five buildings. And we are on plan to complete an additional five operational closures in the second half of this year. Simultaneously, we are continuing to automate more of our operational tasks. For example, in the U.S., we are automating the dispatch process for our packaged car and feeder drivers to reduce dispatch staffing by half. We deployed phase one of the project, and so far this year, we've reduced staffings by 26%. As we continue deployment, we expect to achieve our reduction target by 2026. As a reminder, these actions are outside of fit to serve and are part of Network of the Future. Lastly, touching on Smart Package Smart Facility, which is our RFID solution, we are moving from a scanning network to a sensing network. As we've discussed, we're adding RFID readers to our package cars. But we're not stopping there. We're moving upstream. First, we are enabling customers to print RFID labels themselves. Second, we are installing readers at customer dock doors. This will enable immediate visibility as our trailers are loaded for pickup. This solution provides a significant competitive advantage to us and to our customers. Moving to our financial outlook, Brian will provide more details, but let me share a few highlights. First, while we have entered into an agreement to sell our Coyote business, we are retaining Coyote revenue and earnings in our outlook until the transaction is consummated. Second, while our first half earnings were in line with the low end of the guidance we provided, our revenue came in just short of the low end. Given the current volume momentum we are now experiencing in our business, we are resetting our revenue guidance, taking us to the midpoint of our original revenue guide. But for operating profit, as we look to the back half of the year, in the US we expect the same volume mixed characteristics as we had in the first half of the year, which compresses revenue per piece growth. While we still expect an operating profit bathtub effect with solid earnings growth in the back half of the year, The growth rate will not be as high as we projected at the beginning of the year. Accordingly, we are adjusting our full-year operating margin guidance to reflect the nature of the volume flowing through our U.S. network. As a result, we now expect consolidated revenue of approximately $93 billion and a consolidated operating margin of approximately 9.4%. Importantly, we expect to exit the final month of 2024 with a U.S. operating margin of 10%, which creates a solid footing as we drive the U.S. business to a longer-term operating margin target of 12%. One last comment before I hand the call over to Brian. We believe it is important to have a disciplined and balanced approach to capital allocation, with the first uses of capital going back to the business and to pay our dividends. and then any excess cash being used for share repurchases. As we have fine-tuned our capital requirements for Network of the Future, we expect to spend less than we originally anticipated. Further, with the pending sale of Coyote, we expect to free up cash that was not in our original guidance plan. As a result, we are restarting our share repurchase program with the intent of repurchasing about $1 billion of shares annually, including roughly $500 million in 2024. So with that, thank you for listening, and let me turn the call over to Brian.