United Parcel Service, Inc.

Good morning. My name is Greg Alexander, and I will be your facilitator today. I would like to welcome everyone to the UPS fourth 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 and 0 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 2024 earnings call. Joining me today are Carol Tomei, our CEO, Brian Dykes, 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 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. Now let me share a reporting change we've made between business segments. Effective with the fourth quarter of 2024, USPS air cargo results have been moved from supply chain solutions to the US domestic segment. We made this change to align with our management structure and to simplify intercompany allocations and reporting. This change is visible in the web schedules that have been posted on the UPS Investor Relations website. Note that U.S. domestic revenue per piece and cost per piece metrics are not impacted by this change as USPS transacts with us on a weight basis, not on a per piece basis. Unless stated otherwise, our discussion today refers to non-GAAP adjusted results. For the fourth quarter of 2024, GAAP results include a non-cash after-tax mark-to-market pension charge of $506 million. total after-tax transformation strategy costs of $73 million, after-tax asset impairment charges of $46 million, and an after-tax cost related to the withdrawal from a multi-employer pension plan of $14 million. The after-tax total for these items is $639 million, or 74 cents per diluted share. Additional details regarding year-end pension charges are included in the appendix of our fourth quarter 2024 earnings presentation that is posted to the UPS Investor Relations website. A reconciliation of non-GAAP adjusted amounts to GAAP financial results is available in today's webcast materials. These materials are also 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 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. We have a lot to cover today. I'll begin with a review of our fourth quarter and full year results. Then I'll provide an overview of the moves we are taking in 2025 to drive our performance. Brian will wrap up our prepared remarks with more detail about our financial performance and our 2025 outlook, and we'll leave plenty of time for questions. But first, let me start by thanking UPSers for their hard work and efforts as we executed another outstanding peak. For the seventh year in a row, we were the industry leader in on-time service during peak season, the most important time of the year for our customers. In the face of a compressed holiday period, our people, enabled by the agility of our integrated network, did what they do best, and that's deliver for our customers. Moving to our results, the positive momentum we saw in the third quarter continued into the fourth quarter. Compared to last year, consolidated fourth quarter revenue increased 1.5% to $25.3 billion. Operating profit was $3.1 billion, an increase of 11.2% from last year, better than we expected, and consolidated operating margin was 12.3%. Importantly, our U.S. domestic operating margin was over 10% for the quarter, reflecting improved revenue quality and strong expense control. Looking at the full year, consolidated revenue was $91.1 billion, slightly above last year. Consolidated operating profit totaled $8.9 billion and consolidated operating margin was 9.8%. We generated $10.1 billion in cash from operations in 2024, and we returned $5.9 billion to share owners in the form of dividends and share repurchases. Before I discuss our plans for 2025, let me share a few operational and financial highlights. In 2024, we continue to grow our U.S. SMB penetration and finish the year with SMBs making up 28.9% of our total U.S. volume. an increase of 30 basis points from last year. DAP, our digital access program, was a big driver of the increase. And in 2024, we generated $3.3 billion in global DAP revenue, a 17% increase year over year. As we discussed, we are moving from a scanning network to a sensing network through our Smart Package, Smart Facility RFID initiative. In 2024, we equipped nearly 60,000 US packaged cars with sensors, which represents 66% of our fleet, eliminating 12 million manual scans per day and enhancing package visibility for our customers. Within Network of the Future, in 2024, we accelerated operational closures and completed nine more than planned, resulting in 49 operational closures which included permanently closing 11 buildings. And we did this while continuing to deliver outstanding customer service. Today, about 63% of our U.S. volume flows through our automated facilities, compared to 60% in 2023. Finally, we took actions in our healthcare logistics business to further support our growth plans. Earlier this month, we completed the acquisition of Frigo Trans, a European healthcare logistics company specializing in cold chain. And in December, we opened two state-of-the-art healthcare cross-doc facilities in Italy and Germany. These moves further expand our cold chain capabilities to serve a growing European market. Before I talk about 2025, I'd like to take a short look back at the last five years. In June of 2020, in the face of the COVID-19 pandemic, we launched our Better Not Bigger strategy, hinged on three elements, customer first, people led, innovation driven. For the first few years, we focused on growing select markets and optimizing financially attractive volume, including volume from SMBs and healthcare customers. Further, we focused on making productivity a virtuous cycle by launching Transformation 2.0, and we began a portfolio optimization program, including selling our LTL freight business and making a few strategically important acquisitions. From 2020 through 2022, we delivered solid financial results in line with our strategy at a time when much of the world was struggling due to the challenges presented by the pandemic. In 2023, our financial results faced unexpected challenges due to an unfavorable economic environment and a prolonged labor negotiation with the Teamsters. While the labor negotiation caused volume and earnings disruption, we gained certainty regarding our labor costs for the next several years. After wrapping the first year of our new labor contract, in the third quarter of 2024, positive momentum began to build, and we returned to volume, revenue, and operating profit growth. We continued to drive productivity through several programs and focused on revenue quality. And we took further actions to optimize our portfolio by selling our truckload brokerage business known as Coyote. And we entered into agreements to acquire Estafeta, a leading Mexican logistics integrator, and Frigotramp. We closed out 2024 with an outstanding peak, delivering best-in-class service and financial results ahead of our target. But as we wrapped up 2024, it became clear to us that if we didn't address three specific challenges facing us in the U.S., we could lose momentum. The first challenge relates to the dynamics of the U.S. small package market. Today, it's a slow growth market with changing package characteristics. The second challenge comes from the concentration of volume and revenue we have with our largest customer. Looking ahead, we project this business if we take no action. We'll drive diminishing returns. The third challenge is the reliance we have had with the USPS for our SurePost product. In this case, the USPS is changing its operating model, which we believe puts service at risk. So we've taken actions to address all three of these challenges head-on, including doubling down on revenue quality and serving the customer segments we want to serve best. First, we've reached an agreement in principle with our largest customer for a significant reduction in volume, lowering their volume with us by more than 50%. by the second half of 2026. With this, we will right-size our network and retain the volume that is nutritive for us and for our customer. Second, effective this year on January 1st, we no longer use the USPS for our SurePost product. Service is a fundamental part of our value proposition, and by insourcing this product, we can be certain we deliver great service with no material impact to our financial performance. In connection with these changes, while I'm incredibly proud of the productivity actions taken by our leaders, we've realized we're not done. We are reconfiguring our U.S. network and have launched multi-year initiatives we're calling Efficiency Reimagined, which tackle our processes from end to end, from peak hiring practices to processing payments and more. efficiency reimagined should drive approximately $1 billion in savings. These significant business and operational changes, coupled with the foundational changes that we've already made, will put us further down the path to becoming a more profitable, agile, and differentiated UPS that is growing in the best parts of the market, namely healthcare, B2B, S&B, and international. We've got some work to do to make this all happen, but there's no better team than the UPS team. We will deliver. As Brian will detail, in 2025, these actions are expected to result in expanded operating margins and an improvement in return on invested capital. And by taking these actions, we expect by the fourth quarter of 2026 to have a U.S. domestic operating margin of at least 12%. With that, Thank you for listening, and I'll now turn the call over to Brian.