PJ Guido :

Good morning and welcome to the UPS Second Quarter 2024 Earnings Call. Joining me today are Carol Tome, 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 $0.14 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. [Operator Instructions] 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.

Brian Dykes :

Thank you, Carol, and good morning everyone. First, I'm very thankful for the opportunity to lead the global finance organization and work with the entire leadership team to achieve the targets we set. We have a lot of opportunity in front of us and the right team to achieve our goals. I'm also particularly eager to meet our investors as I hit the road over the next few weeks. This morning I'll review our second quarter results, provide an update on capital allocation and lastly, provide additional detail for our 2024 financial outlook. First, our results. The second quarter represented an important turning point for our business. In the US, volume inflected positively and it was the last full quarter of the high wage growth rate associated with the first year of our new Teamsters contract. Outside the US, we saw pockets-of-demand improved in each export region driving growth in many of our more profitable lanes. Additionally, through our fit-to-serve initiative, we reduced our workforce by over 11,500 positions which has translated into approximately $350 million in savings for the first half of 2024. And as Carol said we are on track to deliver roughly $1 billion in savings by the end of the year. Looking at our consolidated performance. In the second quarter, revenue was $21.8 billion, a reduction of $237 million compared to the second quarter of 2023. Consolidated operating profit was $2.1 billion, down 29.3%, and consolidated operating margin was 9.5%. Diluted earnings per share was $1.79, down 29.5% from the second quarter of 2023. Now let's look at our business segment. In the second quarter, US average daily volume increased 0.7% year-over-year. This marks a return to positive volume growth for the first time since the fourth quarter of 2021. And sequentially, when compared to the first quarter of 2024, the average daily volume year-over-year growth rate increased by 390 basis points. At the beginning of the year, we expected to see three things in the second quarter; volume growth, growth in B2C and relatively consistent product mix to what we had experienced last year. While we saw strong volume growth in the second quarter led by B2C, it came with a different product mix. For the quarter, B2C volume increased 4.8% year-over-year and made up 58.5% of our volume, an increase of 220 basis points from a year ago. This growth was driven in large part by several new e-commerce customers that entered our network. B2B average daily volume finished down 4.6%. Returns remained a bright spot and increased 3% year-over-year. From a product perspective, we saw customers trade down between services. Specifically, we saw customers shift from air to ground and from ground to SurePost. As a result, total air average daily volume was down 7.8%, while ground average daily volume increased 2.3%. Within ground SurePost average daily volume grew 25%, driven by new shippers product choices, product trade downs and easier comparisons due to last year's decline in volume during our contract negotiations. By enhancing our matching algorithm, we saw an increase in the percentage of SurePost packages redirected to UPS for delivery. As a result, SurePost redirect increase returning to 2020 level. Turning to SMBs. We saw the trend from the first quarter continue with total SMB volume down until June when it flipped positive. And in terms of total volume, SMBs made up 29.7% in the second quarter. For the quarter, US Domestic generated revenue of $14.1 billion, down 1.9% compared to last year. Revenue per piece was down 2.6% year-over-year. Let me break down the components of the revenue per piece decline. Base rates increased the revenue per piece growth rate by 90 basis points. The combination of product mix, lighter weights and shorter zones decreased the revenue per piece growth rate by 310 basis points. The remaining [40] (ph) basis point decline in the revenue per piece growth rate was due to the combination of changes in customer mix and fuel. Turning to costs. Total expense increased 3.2% in the second quarter. Union wage rates increased 11.7%, driven by the contractual increase that went into effect in August of last year. The US Domestic team took several actions and executed on productivity initiatives to partially offset the increase in compensation rate. We leveraged total service plan and network planning tools to reduce total operational hours by 1.4%, while volume grew 0.7%. Through Network of the Future, we had 17 operational closures in the second quarter, bringing our year-to-date total to 35. And because we're routing more volume through our automated facilities, we've permanently closed five buildings so far this year. We lowered block hours by 12.5% versus last year and we recorded our best auto safety results in 10 years, driving a better outcome for our people and a better long-term cost picture for UPS. Putting it all together, due to the actions we took in the second quarter, we held the cost per piece growth rate to only 2.5% even as union wages increased nearly 12%. This is the lowest cost per piece growth rate we've seen in more than three years. The US Domestic segment delivered $997 million in operating profit, down 40.7% compared to the second quarter of 2023, and the operating margin was 7.1%. Moving to our International segment. The second quarter was a turning point for our International business well. For the first time in 10 quarters, 11 of our top 20 export countries demonstrated year-over-year average daily volume growth, including several key markets in Europe. At the region level, Asia grew average daily volume and revenue in the quarter. And in the Americas regions, we continue to see solid signs of the shift in nearshoring. Looking at volume in the second quarter, International total average daily volume was down 2.9% year-over-year which is half the decline we saw in the first quarter of this year. About three-quarters of the decline in the second quarter came from lower domestic average daily volume, which was down 4.4%, primarily driven by Europe. On the export side, average daily volume declined 1.5% year-over-year. However, on a sequential basis from the first quarter, export average daily volume improved 210 basis points. While overall export average daily volume was down in Europe, in Germany, our largest export market, outbound grew 1%. In Asia export average daily volume increased 1.7%. And within Asia, export volume on the China to US trade lane increased 20.6%. This is the third consecutive quarter of volume growth on this lane, which is our most profitable lane. And looking at the Americas region, export average daily volume increased 5%, which was the sixth consecutive quarter of growth. As we see the shift in nearshore and continue to take hold, our announced acquisition of Estafeta will further enhance our end-to-end services in Mexico. In the second quarter, International revenue was $4.4 billion down 1% from last year, primarily due to the decline in volume. Revenue per piece increased 2.4%, driven by strong base pricing and the positive impact of region and product mix. In the second quarter total International expense was relatively flat year-over-year. Here we leverage the agility of our integrated network to manage block hours down 2.1% compared to last year. Operating profit in the International segment was $824 million down $78 million year-over-year. Operating margin in the second quarter was 18.9%. Moving to Supply Chain Solutions. In the face of a dynamic market, we remained agile and leaned into areas of growth. In the second quarter revenue was $3.3 billion, up 2.6% year-over-year. Looking at the key drivers. Within international air freight, strong e-commerce demand particularly in China outbound, drove an increase in volume and lifted market rates as demand outpaced capacity, resulting in an increase in revenue. On the ocean side, total volume and revenue was down year-over-year. However toward the end of the quarter, demand on Asia outbound lanes improved and drove market rates higher. Our truckload brokerage business known as Coyote, continued to face market pressures, which drove revenue down. And then logistics revenue grew driven by the impact of MNX and Health care. In the second quarter, Supply Chain Solutions generated operating profit of $243 million, down $93 million year-over-year reflecting market conditions, Operating margin was 7.3%. Walking through the rest of the income statement, we had $206 million of interest expense. Our other pension income was $67 million. And our effective tax rate for the second quarter was 23.4%. Now let's turn to cash and capital allocation. Year-to-date, we've generated $5.3 billion in cash from operations and free cash flow of $3.4 billion. We finished the quarter with strong liquidity and no outstanding commercial paper. In May, we successfully issued $2.8 billion of debt to refinance $1.6 billion in current maturities which will shore up additional liquidity and support our acquisition strategy. And in the quarter, we announced that we would be outsourcing the asset management portion of our pension plan in order to focus squarely on our core business, while adding more expertise and oversight that will benefit UPS retirees. Lastly, so far this year UPS has paid $2.7 billion in dividends, which brings us to our outlook for the second half of 2024. Global economic growth forecast remained relatively unchanged in the back half of 2024. According to S&P Global, global GDP is expected to grow 2.7% for the full year 2024 and US GDP is expected to grow 2.4%. Additionally, as we've discussed we still expect the US small package market excluding Amazon to grow by less than 1%. Looking at our business in the first half of 2024, revenue was below our expectations and operating profit was at the low end of the range we provided and finished down about 30%. Based on our performance in the first half of the year combined with our expectation that the product shift we experienced in the US will continue through the rest of 2024, we have updated our guidance. This includes moving to a point estimate because it represents our best view of the many moving parts within our business. We now expect consolidated revenue to be approximately $93 billion, and because the volume characteristics are different from what we originally anticipated, we now expect a consolidated operating margin of approximately 9.4%. Our guidance includes roughly $1 billion in savings from fit-to-serve. And as Carol mentioned, Coyote revenue and operating profit remains in our guidance and will until the transaction is executed. Looking at the segments. In US Domestic, we anticipate back half 2024 revenue growth of around 5%, driven by strong volume growth. As you update your models for US Domestic there are a few things to keep in mind. First, we expect average daily volume to grow by mid-single digits. Second, we’ll anniversary the first year of the Teamsters contract on August 1. Next, product mix is expected to continue to pressure revenue per piece. However through expense management and slowing labor inflation, we expect to grow third quarter operating profit by double digits and exit the year with a US operating margin of 10%. And lastly, we expect a strong peak driven by volume growth and demand surcharges. Within the International segment, our full year and second half outlook remains consistent with what we provided at the beginning of the year. For the second half of 2024, we anticipate volume growth rates will inflect positively and the revenue growth to be in the mid-single digits. Operating margin in the second half of the year in the International segment is anticipated to be approximately 20%. And in Supply Chain Solutions, in the second half of 2024, we expect revenue to be over $7 billion and an operating margin in the high-single digits. Included in our guidance is the newly won air cargo business from the USPS, which will be fully onboarded by the end of the third quarter. And lastly, we expect the tax rate to be approximately 22% for the remainder of the year. Turning to capital allocation. For the full year in 2024, we expect free cash flow to be around $5.8 billion before any pension contribution. We've tightened our capital expenditure forecast and now expect to spend about $4 billion. We plan to pay out around $5.4 billion in dividends, subject to Board approval. And given our strong liquidity, while we originally had not planned to repurchase shares, we now plan to repurchase approximately $500 million of shares this year. With that, operator, please open the lines for questions.

Tom Wadewitz:

Yeah. Good morning. I wanted to see if you could offer some more thoughts on what's happening with domestic package volume and the mix effect. If I look at the core ground, so excluding SurePost it looks like you saw a decline sequentially. So let us say, 2 point -- excuse me, 12.3 million pieces a day in 1Q to 11.7 million, if I exclude SurePost. So do you think -- is that just market weaker? Or is that kind of competitive performance? So just wanted to see if you could offer more thoughts on what's happening in domestic package volume. And then maybe why -- what are key levers to see that mix performance improve, as we look at second half. Thank you.

Carol Tome:

And maybe a couple of other comments about just the volume. As you saw our commercial business was down year-on-year, although the rate of decline has moderated greatly. As we look to the back-half of the year, we expect that to improve. Our pipeline is quite robust. So we expect to see good movement in that space.

Operator:

Our next question will come from the line of Jordan Alliger of Goldman Sachs. Please go ahead.

Carol Tome:

On the B2B front, as we discussed it was down year-on-year. Part of that was because of customers who left us during the contract negotiation that have not returned. They left us, they locked themselves into long-term contracts and they have not yet returned. That just gives us an opportunity to win them back for the excellent service that we provide. We've also seen some dynamics within the B2B space occur recently within poolers, companies going out of business like overnight which gives us an opportunity to bring that business back into our network. It's already starting to flow. And as I mentioned, the pipeline of commercial accounts is robust. So we expect that to improve dramatically in the back half of the year. On the RPP, it is really interesting. We've had these new e-commerce entrants into the United States. And their volume, well, it is exploded. It was certainly more than we anticipate flowing into our network. So in -- to your question, is this a phenomenon forever? I don't know. It depends on what consumer demand will be. But we are going to focus on the parts of the market that really value our end-to-end service and expect to see some of the pressure that we saw on the RPP in the second quarter moderate. And Brian, maybe you can give a little bit more color on what we think the RPP will look like in the back half of the year.

Carol Tome:

And maybe one other comment about SurePost because the question may be, do you like that product. We actually like the product. It provides a steady solution for us. We also through our matching algorithm, we can redirect the packages back into the ground network. And in fact, the redirect percentage was 40%. So that's returning back to levels we saw during the COVID.

Operator:

Our next question will come from the line of Ken Hoexter of Bank of America. Please go ahead.

Carol Tome:

So maybe I'll talk about the RPP and then you can talk about the margin. So on the base pricing, there are many dynamics on the base pricing. First, we were up against very tough comparisons from a year ago. Why? Well, you'll recall that our volume declined in the United States in the second quarter by almost 10%. And this was related to noise around the labor contract negotiation. If you look at who declined during that time frame it was predominantly dual-sourcers, who are low GRI customers. So last year's base pricing was a bit artificially inflated because it is just the mix change. If you roll forward now to this year, what you see in the base pricing is, okay the tough comparisons year-on-year, as well as new entrants that don't have a GRI because they are starting to ship with us for the first time. And then finally, if you zoom out and say well, what's the keep rate looking like on those customers who have a GRI? The keep rate is looking at about 50%. So as we get past this time frame and get into an easier compare, that's why we think our base rates can improve dramatically in the -- from where it was in the second half. And maybe you can talk about the margins.

Carol Tome:

And just one other piece of color, don't forget that we are anniversarying our labor contract on August 1. So the pressure associated with that contract moderates dramatically in the back half.

Ken Hoexter:

Thank you.

Ravi Shanker:

Thanks. Good morning. Two parter if I may, please. Given -- I mean, you've done a pretty good job of kind of managing your largest customer in terms of size. Will you be looking to also meter the growth from these new e-commerce customers as part of better, not bigger if the mix is not being helpful? And second question is can you help us dimension the size of returns in your operation either in terms of volume or revenue please? Thank you.

Brian Dykes:

Yes. So Ravi we don't -- returns rolls up into our B2B product and also into the ground commercial breakout that we give. Look returns is a portfolio that UPS has had for a long time that we continue to add to and be a leader in. It's one that we've continued to see growth in B2B even when we have, had pressures in other parts of the business. And it leverages not only are kind of single piece returns and technology capabilities that enable customers to integrate with their process, but also the UPS store footprint which allows us to have a very unique returns offering. Now when you add Happy to that, we are able to do consolidated returns, it really becomes a unique portfolio that provides growth in B2B.

Matt Guffey:

Absolutely. So Happy Returns integration has been extremely important. Remember, we made that acquisition last November. We turned on all 5,200 stores in a matter of eight weeks, which gives us great scale. And with this to Brian's point, it's just not about the digital capabilities, but it is also about that physical footprint and the experience that you can drive for not just the consumer but also the shipper. So we continue to see growth from the Happy Returns portfolio and -- but it also complementary to the single piece returns as well. So as we think about no box, no label and consolidation, we are also doing the no box, no label single piece. So it allows consumers and shippers to get the benefit on -- and managing the rules on how they want the returns to come back to them.

Operator:

Our next question will come from the line of Scott Group of Wolfe Research. Please go ahead.

Carol Tome:

Well, let's talk about the margin first and then we will talk about peak.

Carol Tome:

I'll be happy to talk about peak. So it is a condensed peak. It is the most condensed peak since 2019. There are only 17 days between Thanksgiving and Christmas. And as we look at the volume projections for peak, we’re expecting on our Peak day, which is December 18, has the highest volume ever in our network. Now when you have that kind of volume flowing to your network, you actually have to charge to service them well because you have to hire people and lease aircraft and delivery vehicles so on and so forth. So we think that the prices are going to stick because of what the environment is telling us from a demand perspective. I would also say candidly, they are up against very easy comparison last year. Because, as you recall, well we peaked, volume was declining in the network. So the year-over-year comparisons and the fact that this peak is tight gives us confidence. That being said we also have an opportunity to price -- moving from the art of pricing to the science of pricing through the new tools that we have been talking to you about. Pricing architecture of the future gives us the opportunity to use modifiers and price that creates opportunities for value for our customers, as well as value for ourselves. That plus deal manager, which has been a huge home run for us. We are winning more deals at less discounts than we have in the past. And Matt, maybe I'll turn it back over to you for a comment on price.

Carol Tome:

So hopefully, that's helpful, Scott.

Operator:

Our next question will come from the line of David Vernon of Bernstein. Please go ahead.

Carol Tome:

Yes. So we are not chasing volume. We actually accepted new customers into our network of with certain volume expectations that blew up on us. We are not chasing it. It is just their demand was much higher than we had anticipated. And so we are laser focused -- focusing on the segments of the market that value our end-to-end network. Better not bigger has not gone away. We'll be managing through this. We need to manage through it and we will be managing through it. So don't read anything into this other than we had new customers come in to our network whose volume blew up. And we were able to serve that with the best on-time service of any carrier.

David Vernon:

So I mean, I guess I appreciate that. But when you think about the guidance you just gave for 3Q being 10% to 15% off a really low base, it just doesn't seem like it is dropping to the bottom-line. And that's what investors are looking to capitalize your earnings, not necessarily productivity or cost per piece growth.

David Vernon:

Got it. Thank you for the time.

Operator:

Our next question will come from the line of Chris Wetherbee of Wells Fargo. Please go ahead.

Carol Tome:

So one way is to accelerate Network of the Future. And I get a review from the team every two weeks on what we are doing in that regard, while we committed to five additional closures in the back half of this year, I think there is an opportunity to do more. Nando, would you like to comment on that?

Carol Tome:

And Kate, the same is true outside of the United States. So what cost down activities are you focused on?

Carol Tome:

Productivity is a virtuous cycle here at UPS. I think we've shown that we can drive cost out, and we will continue to do that.

Bruce Chan:

Hi, thanks operator. And good morning everyone. Brian, you talked a little bit about the line of sight on volumes in the back half. And I'm wondering if maybe you could give us a bit more color on where RPP or yield trends have been moving into the third quarter so far. And I ask this because I think we saw a little bit of a deterioration, maybe a surprise deterioration on those metrics. Last quarter, it seems like that was not expected. So I'm just kind of curious, what makes you so confident that mix issues and the trade down issues that surprised us have kind of stabilized here and won't continue to deteriorate? And then maybe just worth a shot here, but is it possible to talk about what domestic volume growth would have been without that e-commerce customer?

Carol Tome:

And just on the line of sight question, we've really tightened up the visibility as to when we win an account versus when it actually comes into the network. I will say we -- our visibility there wasn't as sharp as it should have been, so we've gotten much better now. And we are holding everyone accountable for getting the cardboard onto the package car. And that makes a -- well it may not be cardboard, it may be a poly bag, but the package on to package car. So I feel much better than I have over the past several years, candidly in terms of our visibility on onboarding.

Carol Tome:

Thank you.

Brian Ossenbeck:

Good morning. Thanks for taking the question. Carol, following up on the pipeline. You mentioned that several times in terms of the visibility, the types of customers, the confidence coming through there. Maybe you can elaborate on that last comment, given just how that one large customer or e-commerce customer surprised the upside when volumes blew up. And then separately, can you give us an update on the USPS contract, how it is going so far, any surprises and whether or not that was a big contributor to the updated '24 guide. Thank you.

Nando Cesarone:

Sure. I think because with regard to the USPS, both teams are actually face-to-face planning and executing so far close to 50% of the change. And we'll continue pushing forward. We'll be fully implemented in terms of the UPS network in place to serve the USPS on September 8 and contract really starts officially 10/01, where we'll see the -- all of the volume come over to UPS. So far, in recognition of two parties getting together for the first time in this regard, there's been some bumps but nothing systemic. So it's working out really well on both sides, professionals from the USPS and UPS, really doing some good work there.

Operator:

Our next question will come from the line of Conor Cunningham of Melius Research. Please go ahead.

Carol Tome:

So we're super excited about the Estafeta announcement. Acquiring companies in Mexico isn't easy. The team has worked very hard to get us to this point, and we'll work through all the closing conditions. We hope to have the acquisition closed by the end of the year. Together UPS and Estafeta will be a $1 billion plus business. So this firmly cements our leadership position in North America and we couldn't be more excited about it. Do you want to take the second part of the question?

Kate Gutmann:

Yes, absolutely. So think about first of all, that 300,000 pieces, all those shippers. They need a transporter, a cross-border solution that is quality and that has access to the best small package network in the US. That's what we give it. So it's the additional packages. I'll answer that other part of the question on our track record with the acquisitions. If you look back at Marken, also Bomi, onto MNX all of them are meeting their business cases, as well as their synergy both on the revenue and cost side of the equation. Because what it does is opens up again this end-to-end opportunity to these premium customers. We expect the same thing we are ahead of the supply chain shift into Mexico. Our supply chain cross-border business is up double digit. So this will only help with us that as well.

Brian Dykes:

That's right.

Brian Dykes:

Stephen, we have time for one more question.

Bascome Majors:

Thanks for taking my questions. If you go back to the trade down discussion in the SurePost, can you talk a little bit high level about how that business moves through your network? And what's different about it that better matches the cost of that package with the lower yield for that package? And just extending that a little bit further if SurePost is a higher mix of the domestic business than you'd expected longer-term, what nuance changes would there need to be with the network to make that a better fit? Thank you.

Nando Cesarone:

Yes, sure. And as Brian mentioned earlier, I mean, SurePost is going to flow through our network, regular feeders, regular hubs, sortation. What we are working on and very close to solving is looking ahead more than one day, so we can match even more of those SurePost shipments. So right now, if a package shows up at a destination, that particular morning, we will match that package with other deliveries for that day. The option moving forward is to look for additional matching opportunities, and we are very close to that solution so we can actually look further out. In total, as I said before, we're matching a lot more, about 3% more than last year. And each one is offsetting the cost and providing profitability to that shipment or that delivery, if you will to that one location.

Bascome Majors:

Thank you.

Operator:

I would now like to turn the conference back over to our host, Mr. Guido. Please go ahead.

PJ Guido :

Good morning, and welcome to the UPS first quarter 2024 earnings call. Joining me today are Carol Tome, 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 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 refers to adjusted results. For the first quarter of 2024, GAAP results include a total charge of $110 million, or $0.13 per diluted share, comprised of after-tax transformation and other charges of $75 million and a non-cash after-tax impairment charge of $35 million, driven by plans to consolidate certain acquired brands within our healthcare portfolio. 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. [Operator Instructions] 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.

Brian Newman:

Thanks, Carol. Good morning. In my comments, I'll cover four areas. First, I'll review our first quarter results followed by our 2024 financial outlook. Then I'll provide some comments on our business with the USPS. And lastly, I'll close with a recap of our 2026 targets. While the macro environment in the first quarter showed improvement in some areas, continued soft demand pressured all three parts of our business. Through the quarter, we adjusted our integrated network to match volume levels and drove out expense while maintaining industry-leading service levels. Moving to our financial results, our overall quarterly performance was in line with our expectations. In the first quarter, consolidated revenue was $21.7 billion, down 5.3% compared to the first quarter of 2023. All three of our segments demonstrated cost agility and on a combined basis, drove DAP expense by $414 million in the first quarter. This enabled us to deliver $1.7 billion in consolidated operating profit and consolidated operating margin was 8%. Diluted earnings per share was $1.43, down 35% from the first quarter of 2023. Now let's look at our business segments. In U.S. Domestic, we remained focused on controlling what we could control to improve volume growth and drive productivity. In the first quarter, average daily volume was down 3.2% year-over-year. When looking at ADV sequentially, the growth rate showed strong improvement compared to the third and fourth quarters of 2023. B2B average daily volume was down 5.5% compared to the first quarter of last year, primarily driven by declines in the retail and manufacturing sectors. And B2B represented 41.6% of our volume. Looking at product mix and in line with recent trends, we continue to see a shift from air to ground as customers prioritize cost savings over transit times by taking advantage of our ground services. Compared to the first quarter of 2023, total air average daily volume was down 8.3%. Ground declined 2.3% and within ground, sure post volume grew 10.8%. For the quarter, U.S. domestic generated revenue of $14.2 billion, down 5%. Revenue per piece was relatively flat year-over-year. Looking at the key drivers, base rates increased the revenue per piece growth rate by 240 basis points. This was offset by a couple of factors. First, changes in customer and product mix due to growth in sure post combined with changes in package characteristics decreased the revenue per piece growth rate by 180 basis points. And second, changes in fuel prices decreased the revenue per piece growth rate by 90 basis points. Turning to cost, total expense was down 0.8% or $104 million in the first quarter. Union wage rates increased 13% driven by the contractual increase that went into effect last August. Leveraging technology and the agility of our integrated network, we took several actions which more than offset the increase in compensation. We leveraged total service plan and network planning tools to reduce total operational hours by 6.6%, which was more than the decline in average daily volume. We closed 18 sorts and reduced operational resources by 4.8% compared to last year. We lowered block hours by 15.2% versus last year. We reduced management and support staff by approximately 5,400 positions year-over-year. In addition, we reduced purchase transportation by 17%, primarily from our continued optimization efforts. And lastly, lower fuel costs contributed to the decrease in total expense. The U.S. domestic segment delivered $839 million in operating profit, down 43.6% compared to the first quarter of 2023, and operating margin was 5.9%. Moving to our international segment, the macro environment remained challenged, primarily in Europe and Asia. However, volume growth in the Americas region showed early signs of nearshoring. In the first quarter, international total average daily volume was down 5.8% year-over-year. About two-thirds of the decline came from lower domestic average daily volume, which was down 8.1%, and driven primarily by declines in Canada and major markets in Europe. On the export side, average daily volume declined 3.6% year-over-year primarily due to weak manufacturing activity in Europe. In Asia, export average daily volume was down 4.8%, which was an improvement from the fourth quarter of 2023. Within Asia, export volume on the China to U.S. lane increased 12.8% and showed steady growth for the second consecutive quarter. More than offsetting the overall decline in Asia, nearshoring became evident as export average daily volume in the Americas region increased 3.8%. This was led by SMB customers in Canada and Mexico, leveraging our cross-border ground service. In the first quarter, international revenue was $4.3 billion, down 6.3% from last year, primarily due to the decline in volume. Revenue per piece increased 2% and included a number of moving parts. Strong base pricing drove a 360 basis point increase in the revenue per piece growth rate, a decline in fuel surcharge revenue, combined with a stronger U.S. dollar negatively impacted the revenue per piece growth rate by 80 basis points. And finally, lower demand-related surcharge revenue decreased the revenue per piece growth rate by 80 basis points. In the first quarter, total international expense was down $163 million, a decline of 4.4%. Similar to previous quarters, we leveraged the agility of our integrated network to reduce block hours by 6.6%. Operating profit in the international segment was $682 million, down $124 million year-over-year. Operating margin in the first quarter was 16%. Now looking at Supply Chain Solutions, in the first quarter, revenue was $3.2 billion, down 5.3% year-over-year. Looking at the key drivers within forwarding, market rates in international airfreight continue to drive down top-line revenue. On the ocean side, excess market capacity continued to pressure market rates and drove a decrease in revenue despite volume growth. And our truckload brokerage unit continued to face soft demand and market rate pressures. Logistics delivered revenue growth and increased operating profit driven by gains in health care. In the first quarter, Supply Chain Solutions generated operating profit of $226 million, down $32 million year-over-year and an operating margin of 7%. Walking through the rest of the income statement, we had $195 million of interest expense. Our other pension income was $67 million, our effective tax rate for the first quarter was 26.8%. Now let's turn to cash and shareholder returns. In the first quarter, we generated $3.3 billion in cash from operations. Free cash flow for the period was $2.3 billion. We finished the quarter with strong liquidity and no outstanding commercial paper. Also in the first quarter, UPS rewarded shareowners with $1.3 billion in dividends. Turning to our outlook. As Carol mentioned, we are reaffirming our 2024 consolidated financial targets. For the full year 2024, on a consolidated basis, revenues are expected to range between $92 billion and $94.5 billion, and we expect to generate a consolidated operating margin ranging from approximately 10% to 10.6%. Looking at the shape of the year. In the first half of the year, we expect consolidated operating profit to be down between 20% and 30%. And in the back half of the year, we expect volume and revenue growth to accelerate as we lap the diversion we experienced as a result of our labor negotiations. Additionally, our labor cost growth rate will drop substantially. We will also see the majority of the $1 billion in savings from Fit to serve. We still expect revenue per piece to outperform cost per piece. And lastly, in U.S. domestic, we expect to exit the year at a 10% operating margin. Looking at cash flow and capital spending. For the full year in 2024, we still expect capital expenditures to be within our target of around 5% of revenue or $4.5 billion. We're reviewing certain aspects of our pension strategy, and so we expect free cash flow to be within a range of approximately $5.9 billion to $6.7 billion before reflecting any pension contributions. Now let me share more detail about servicing Air Cargo for the USPS. This is good business for us, and we are moving quickly to begin onboarding this cargo. We will leverage our integrated network and existing assets, and we expect the majority of the volume will fit within our current U.S. domestic daytime flight operations. Our operators and engineers are already planning the network to support the complete transition to UPS in the third quarter. In terms of financial reporting, the revenue and expense associated with USPS Air Cargo will show up in the SCS other line in our financial reporting. Adding the USPS air cargo volume to our existing network will result in a higher share of the network cost being allocated to SCS, indirectly benefiting our U.S. domestic segment. We expect to see a benefit to operating margins this year at both the consolidated level and within the U.S. Domestic segment. To wrap up, we are also reaffirming our three-year consolidated revenue and operating margin targets we put forth at our March Investor and Analyst Day. Specifically, we aim to grow revenue to be between $108 million and $114 billion by 2026. The high end of the range includes inorganic opportunities, primarily in health care and international. Additionally, we expect to expand our consolidated operating margin to more than 13% by 2026, which includes expanding our domestic operating margin to at least 12%. And I'll note that the USPS volume is consistent with our better and bolder approach to grow in the parts of the market that leverage our integrated network, and it gives us a strong start to our 2026 targets. With that, thank you, and operator, please open the lines.

Eric Morgan :

Hey, good morning. This is Eric Morgan on for Brandon. Thanks for taking the question. I just wanted to ask about the guidance in the first half. I know you mentioned 1Q kind of coming in line with your expectations, but you did call out the 40% decline expectation at the Investor Day. So just wondering if anything happened late in the quarter that drove EBIT above your expectations in the first quarter? And then, are there anything negative going on in 2Q that led you to maintain the first half guidance rather than raise it similar to the 1Q beat. Thank you.

Operator:

Our next question will come from the line of Amit Mehrotra. Please go ahead.

Carol Tome :

Well, thanks very much for your question, Amit. And we're delighted to have won the air cargo business from USPS our team put together an innovative solution using our integrated network. And as in contrast to traditional hub-and-spoke models, we don't have to run all of the air volume through our main air hub at Westport. Of course, we will use Worldport, but we will also use our regional gateways. That allows for splits to occur outside of the network, so they'll be built in origin and then we will bypass the main hub and go point to point. This is an integrated solution that's very different than I think the former provider offered. We also will use all of the assets of our integrated network, and that will allow us to actually optimize block hours. Now in terms of the investments that we need to make to services volume, we have plenty of space on our existing aircraft. So we won't be purchasing any aircraft. We will be hiring some pilots but less than 200 pilots, and we factored all of that into the cost model that we built. So this will be margin accretive. It will be EPS great at beginning in year one and through the life of the contract.

Tom Wadewitz :

Hi, good morning. I wanted to see Brian or Carol, if you could walk through what are the key pieces of the 2Q versus 1Q ramp in EBIT. And then I guess the same thing for second half. Obviously, you've got Fit to Serve as a significant cost benefit versus 1Q. But I think just trying to figure out how much of the improvement sequentially is based on volume that you have visibility to and how much would be based on anticipation of improvement in the broader parcel market kind of macro improvement. Thank you.

Carol Tome :

And maybe just a few more comments on RPP since our RPP in the U.S. was flat in the first quarter. We expect RPP growth as we head towards the back half of the year. Why? Well, first of all, fuel prices were a drag on the RPP in the first quarter. The projection for fuel is that is going to increase. We are also announcing a fuel surcharge later today. So those two components of fuel will be a bonus to RPP as we head towards the back half. We also are going to have a pretty picky peak, we anticipate for fewer operating days this year than last, which means the demand surcharge should be pretty strong this year compared to last year. And then we brought in a lot of SurePost product into our network. We're meeting our customers where they want to go we'll be anniversarying a lot of that in the back half of the year as well. So we don’t expect we love by the way, but we don’t expect to see the drag on the RPP I’m sure costs in the back half, like we said, in the first quarter. Any other color you’d like to provide?

Operator:

Our next question comes from the line of Jordan Alliger of Goldman Sachs. Please go ahead.

Carol Tome :

Well, productivity is a virtuous cycle here at UPS domestically and outside of the U.S. And I just can’t say enough good things about how our team is running our business. Ours are running under the volume declines, higher productivity and cull utilization packages per hour. We measure productivity in minutes, miles and practice per hour and all across the board, we’re seeing record levels. One different callouts that we’ve been talking about this for a while is safety. Our safety stats, if you will, are the best they’ve been in five years. And of course, if you haven’t run a safer business, where you don’t have as many claims for is comp and auto liability. So a real shout out to our operators. And I certainly might say, why is the productivity getting better? One reason is because our turnover is down. And as people stay in place, we were just more productive. And let me throw it over Nando. Is there anything you’d like to add on the productivity side?

Carol Tome :

And Kate, outside the United States in your word talk about product.

Operator:

We have a question from the line of Ken Hoexter of Bank of America. Please go ahead.

Carol Tome :

Well, first on the international margin, I think Keith did a terrific job of managing costs in an environment where demand was down. There was a onetime item that we didn’t call out in our prepared remarks. But if you back out that onetime item, the international margin would 17%. The first quarter is usually our lowest margin quarter. So we anticipate that the international business and our planning for the international business to be in the high teens as we told to.

Ken Hoexter :

And can you clarify what the one item was there?

Ken Hoexter :

Thanks a lot for the time. Appreciate it.

Operator:

We have a question from the line of David Vernon of Bernstein. Please go ahead.

Carol Tome :

So from a volume mix perspective, if I look at the volume that’s in our pipeline, I would say the volume that’s in our pipeline is not sure cost. We’ve got commercial volume in our pipeline, additional enterprise volume in our pipeline. So we’re going to be our customers where they want to go. But the mix is looking very different as we look ahead than it was in the first quarter. And in terms of pricing, I don’t think we’re going to talk pricing on this for this call but we always look for opportunities to optimize our pricing.

Operator:

We have a question from the line of Scott -- we have a question from the line of Scott Group of Wolfe Research. Please go ahead.

Carol Tome :

Well, maybe I'll talk about the full year guidance and then you can talk specifically about the second quarter. One of the questions may be, well, why aren't you changing your guidance now that you won this air cargo business and you say it's going to be margin accretive. We were highly confident of the range of guidance that we provided at the end of the year, and we're even more confident now but it's just too early in the year to change the guidance. So once we get through the second quarter, we'll tell you what we think the back half of the year will be. On Q2 alone, why don't you talk about?

Scott Group :

And then any thoughts on that the postal shift and the margin benefit for Q4?

Scott Group :

Okay.

Ravi Shanker :

Thanks, good morning, everyone. Carol, in your opening comments, you mentioned that returns were a good business because they were B2B. I'm a little surprised to hear that because I mean, it almost seems like a C2B type business with pretty high fragmentation in the last mile. So if you can just unpack kind of how that works through the supply chain and kind of the profit contribution of that, that would be great. Thank you.

Operator:

Our next question will come from the line of Brian Ossenbeck of JPMorgan. Please go ahead.

Carol Tome :

So on the fuel surcharge as we look to the rest of the year, fuel prices are increasing. And this is not atypical for us to adjust our surcharge on the base of rising fuel costs. You also should know that, that doesn't impact all of our customers. Clearly, some are exempted from this. So in terms of the ability to stick, we think the will stick. And just a comment on the capacity at our Investor and Earnings Day, we said there was about $12 million ADV excess capacity in the market, and that equilibrium is about 6%, you need about 6%. So really, the excess capacity is around 6 million today, and we think that will be fully absorbed by 2025. Now you may say why. Well, we're part of that excess. And so we're closing stores. We're taking capacity out of the market, and our Network of the Future initiative is capacity neutral. Also with our large competitors' consolidation efforts capacity will be leaving the market. And then another player headquartered in Seattle on the regional, I think the capacity will be taken out of the market. So we think all that capacity will be absorbed in the pricing environment is actually very rational.

Carol Tome :

Yeah. Our pensions are very well funded. They're over 90% funded. And it gives us an opportunity to step back on. You just look at our asset liability strategy, our funding strategy. So we thought we should just pause right now, take a look at it and then when we -- if we make any decisions, we'll share that with you.

Operator:

Our question will come from the line of Conor Cunningham of Melius Research. Please go ahead.

Brian Newman :

So from an ADV perspective in domestic, I think that's where you're headed with a little bit of a slight tick up in positive volume in the second quarter will likely finish low single-digit decline in the first half, second half we'd expect that to be low single-digit increase. And you can look at it through various different lenses. We're building momentum ever since August, each month is basically getting sequentially better each quarter from Q3, Q4, Q1 improves. We'd expect to see slight positive volume trends in the second quarter. And then just from a comp standpoint, I mean if I go back from a trend perspective, over the last 10 years, our Q3 is generally about close to 300,000 ADV better than Q1. And even if we assume flat from a Q3 to Q1, that would be 4.5% growth. So any way you cut it, we see the back end of the year and most important, it's the visibility on the sales pipeline that we're pulling through and the volume levels we're seeing going into Q2.

Operator:

Our next question will come from the line of Jonathan Chappell of Evercore ISI. Please go ahead.

Brian Newman :

Yeah. The initiative is progressing slightly ahead of plan. Reductions began in March and will continue through I2. We’d expect more than 80% of the resource reductions to be complete by I2. We’re on track to that $1 billion that I mentioned. And at a full annual run rate going into next year, we’d expect $1.3 billion. So there’ll be some benefit early part of next year.

Operator:

Our next question will come from the line of Daniel Amaro [ph] of Stephens Incorporated. Please go ahead.

Carol Tome :

Well, clearly, we want to get all the volume on boarded before peak. That’s in their interest in our best interest. We will onboard the volume as we can. Our teams are in Washington, D.C. working with the postal service hand-in-hand as we build our operating plan.

Bascome Majors :

Yeah, thanks for taking my questions. As you work on cash flow with the pension strategy stuff you've talked about that we might hear more about late this year. Can you talk a little bit about the dividend? If you look at your payout guidance, it implies roughly $13 in earnings at the dividend level that you're paying now. Is there an opportunity to start to raise it more meaningfully before the earnings power of the business gets there? Or do you think we need to wait and get more increases like we saw this year until the business is supporting that more literally? Thank you.

Brian Newman :

Just, Carol, this year marks the 15th consecutive year we've increased the dividend, and we're committed to a stable and growing dividend. So we will earn back into that, but certainly committed to it.

Matt Guffey :

Yeah, absolutely. So thank you, Carol. First of, yes, we do set minimums in the contract. As we built this, we identified a win-win for both the USPS and for us it's just imperative that, one, we not only have it on the protection for our side and our business on what we're bringing on but also for the USPS because we want to make sure, as Carol mentioned, that we're onboarded before peak season, and we're bringing this on as quickly as possible, and we're working collectively with them. Nando and the team have done a great job with their operational team. And to Carol's point, we're meeting with them every week in DC to continue to onboard that volume to make sure it's a smooth transition.

Operator:

Stephanie Moore of Jefferies. Please go ahead.

Carol Tome:

Well, I give a shout out to our sales team. The improving volume trends are in large part due to their hard work and efforts. You may recall at the beginning of the year, we said the growth in the market wasn't going to be very growthy this year. So the fact said, we're able to see sequential improvement in the magnitude that we're seeing is really because of our sales team. We are winning new. We are gaining additional penetration of existing customers. We are meeting customers where they want us to be. And our sales team will continue to do that around the world. And that's one reason that we're confident in the volume projection that Brian did share.

Bruce Chan :

Hey, thanks. And good morning everyone. Carol, just back to your DAP comment from the beginning of the call. I know that's big part of your S&D growth efforts. You said you grew 3% in the first quarter. And I can't help but notice that that's materially [indiscernible] you said the plan was over $3 billion and then at the Investor Day, you said materially over $3 billion. So I just want to know if there's something happening that's driving a slower growth outlook for DAP.

Bruce Chan :

Okay, that’s very helpful. Thank you.

Operator:

Our next question will come from the line of Scott Schneeberger of Oppenheimer. Please go ahead.

Carol Tome :

Yeah. So we're right now at about 29% as of the end of the first quarter. And as we look towards the end of this year, we should be over 30 in the low 30s. So we're trending nicely. And Kate outside the United States how's SMB performance?

PJ Guido :

Hey, Stephen, we have time for one more question.

David Vernon :

Thanks for coming back to me. I just wanted to ask about -- you mentioned the pricing environment being kind of rational. Could you elaborate on how effective the GRI has been this year? What's the stick rate there? And as you think about the underlying performance in domestic yields ex some of the mix headwinds, could you talk a little bit about the trajectory or the rate of change through the quarter?

David Vernon :

Okay. Thank you.

Operator:

I will now turn the floor back over to our host, Mr. P.J. Guido. Please go ahead, sir.

PJ Guido:

Good morning, and welcome to the UPS Fourth Quarter 2023 Earnings Call. Joining me today are Carol Tome, 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 filed with or furnished 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, GAAP results include a non-cash after-tax mark-to-market pension charge of $274 million, after-tax transformation and other charges of $154 million, and a non-cash after-tax impairment charge of $84 million relating to our Coyote trade name in our truckload brokerage unit. The after-tax total for these items is $512 million or $0.60 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 result 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. [Operator Instructions] And now, I'll turn the call over to Carol.

Brian Newman:

Thanks, Carol, and good morning. In my comments, I'll cover three areas, starting with the macro and our fourth-quarter results, then I'll review our full-year 2023 results, including cash and shareowner returns. And lastly, I'll provide comments on expectations for the markets and our financial outlook for 2024. The macroenvironment in the fourth quarter showed improvements. However, in the transportation and logistics sector conditions remained under pressure, both in the US and internationally due to soft demand and overcapacity in the market. Throughout the quarter, we leveraged the agility of our integrated network to match capacity with demand. And we were recognized by an independent third party for providing industry-leading service for the sixth peak in a row. Looking at our financial results, in the fourth quarter, consolidated revenue was $24.9 billion, down 7.8% from the fourth quarter of 2022. All three of our segments demonstrated agility and on a combined basis drove down total expense by $1.1 billion in the fourth quarter year-over-year. This enabled us to deliver operating profit within the range we communicated to you last quarter. Consolidated operating margin was 11.2% for the quarter and in line with our expectations. For the fourth-quarter, diluted earnings per share was $2.47, down 31.8% from the fourth quarter of 2022. Now, let's look at our business segments. In US Domestic, we knew going into the fourth quarter that volume will be ramping up of an exceptionally low third quarter. Our efforts to win back diverted volume and pull through new volume resulted in a record sequential volume surge. Throughout peak, we delivered excellent service to our customers while managing expenses. In the fourth quarter, average daily volume came in at the low end of our range and was down 7.4% year-over-year. B2B average daily volume in the fourth quarter was down 6.8% year-over-year, driven by declines in the retail, manufacturing, and high-tech sectors. In the fourth quarter, B2B represented 35.5% of our volume, which was up slightly from 35.3% in the same period last year. Also in the fourth quarter, continued macro pressures drove customers to seek economy products as we saw customers shift volumes out of the air onto the ground. Total air average daily volume was down 15% year-over-year, and ground average daily volume was down 5.8% versus the fourth quarter of last year. For the quarter, US Domestic generated revenue of $16.9 billion, down 7.3%. Revenue per piece was slightly positive year-over-year with a number of moving parts. A combination of strong base rates and customer mix increased the revenue per piece growth rates by about 390 basis points. This was offset by a few factors. First, changes in product mix and package characteristics decreased the revenue per piece growth rate by 140 basis points. Second, reflecting the lower volume in the quarter, peak season surcharge revenue declined, which reduced the revenue per piece growth rate by about 120 basis points. And lastly, changes in fuel prices decreased the revenue per piece growth rate by 110 basis points. Turning to costs, total expense was down 3.6%. And in the face of a 12.1% increase in union wage rates, which was driven by the contractual increase that went into effect last August, we pulled several levers to more than offset the higher expense. First, we leveraged our network planning tools and total service plan to reduce total hours in the fourth quarter by 10.2% which was more than the decline in average daily volume. This enabled us to decrease compensation and benefits, which drove down the total expense growth rate by around 30 basis points. Second, lower purchase transportation expenditures reduced the expense growth rate by around 70 basis points, primarily from lower-volume levels and our continued optimization efforts. Next, lower fuel costs contributed 160 basis points to the decrease in the total expense growth rate. And lastly, the net of all other expense items and allocations, reduced the expense growth rate by 100 basis points. Pulling it all together, these actions helped us reduce US Domestic expense in the fourth quarter by $578 million, which was our largest fourth quarter dollar cost reduction ever. Looking specifically at peak, as volume returned to the network and our biggest customers drove a surge in peak volume, we ran our integrated network with agility. In fact, in 2023, we closed over 30 sorts and they remain closed during peak. By leveraging our network planning tools, we took advantage of the flexibility of our integrated networks and flowed more volumes into our automated buildings. And with smart package smart facility in over 1,000 buildings, misload frequency improved 67%, contributing to the superior service we deliver to our customers. The US Domestic segment delivered $1.6 billion in operating profit, down 32.6% compared to the fourth quarter of 2022. However, compared to the third quarter of 2023, operating profit in US Domestic increased $904 million and was our highest sequential operating profit increase ever. Operating margin in the fourth quarter was 9.3%, a 440 basis point improvement over the third quarter of 2023 Moving to our International segment. Soft demand continue to pressure volumes out of Asia. And in Europe, several key economies remain in recession, which pressured demand and drilled the shift away from Express Services. In response, we focused on revenue quality and adjusted our global network to match changes in geographic demand. Looking at volume, in the fourth quarter, International total average daily volume was down 8.3% year-over-year. The decline was primarily due to lower domestic average daily volume, which was down 10.8% driven by declines in Europe and Canada. Areas of the world that continue to face persistent inflationary pressures. On the export side, total average daily volume declined 5.9% on a year-over-year basis, driven by declines in Europe due to weak macro conditions. Looking at Asia, export average daily volume was down 8.9% driven by soft demand in the retail and high-tech sectors. However, export volume on the China to US lane, which is our most profitable lane increased 2.7% driven by SMBs. Nearly offsetting the decline in Asia over in the Americas region export average daily volume grew 11.9%, led by customers in Canada and Mexico, leveraging our cross-border ground service. In the fourth quarter, International revenue was $4.6 billion, which was down 6.9% from last year, primarily due to the decline in volumes. Revenue per piece increased 3.1%. Strong base pricing and a change in customer mix drove a 420 basis-point increase in the revenue per piece growth rate. A reduction in fuel surcharge revenue negatively impacted the revenue per piece growth rate by 60 basis points. And lower demand-related surcharge revenue, which was partially offset by the impact of a weaker US dollar decreased the revenue per piece growth rate by 50 basis points. Moving to expense. In the fourth quarter, total international expense was down $152 million, primarily driven by lower fuel expense. Additionally, in response to the lower demand environment, we managed our network to match capacity with demand, which included reducing international block hours by 9.4%. Operating profit in the International segment was $899 million, down $192 million year-over-year. Operating margin in the fourth quarter was 19.5%. Now, looking at Supply Chain Solutions. In the fourth quarter, revenue was $3.4 billion, down $435 million year-over-year. Looking at the key drivers, in international air freight, overall volumes were down despite a mid-quarter spike in e-commerce. Market rates continue to be pressured, resulting in lower revenue and operating profit. On the ocean side, volume increased, driven by the retail sector. However, excess market capacity pressured revenue and operating profit. Within forwarding, our truckload brokerage unit known as Coyote continued to face pressure from excess capacity in the market, which drove revenue and operating profit down. In the fourth quarter, Supply Chain Solutions generated operating profit of $319 million and an operating margin of 9.4%. Walking through the rest of the income statements, we had $207 million of interest expense. Our other pension income was $66 million, and our effective tax rate for the fourth quarter was 22.5%. Now, let me comment on our full-year 2023 results. For the full-year 2023, revenue declined 9.3% to $91 billion and we generated operating profit of $9.9 billion, a decrease of 28.7% compared to full-year 2022. Consolidated operating margin was 10.9%. We generated $10.2 billion in cash from operations and continue to follow our capital allocation priorities. We invested $5.2 billion in CapEx. Additionally, we acquired MNX Global Logistics and Happy Returns. We distributed $5.4 billion in dividends, which represented a 6.6% increase on a per share basis over 2022. We repaid $2.4 billion in debt that matured during the year. And at the end of the year, our debt-to-EBITDA ratio was 2.2 turns. Lastly, we completed $2.25 billion in share buybacks in 2023. And in the segments for the full year, in US Domestic, operating profit was $5.4 billion and operating margin was 9%. The International segment generated $3.3 billion in operating profit and operating margin was 18.4%. And Supply Chain Solutions delivered operating profit of $1.2 billion and an operating margin was 9%. With 2023 behind us, let us move to our outlook for 2024. S&P Global is forecasting an improvement in global macro conditions as the year progresses. Outside the US, real exports in Europe are expected to improve each quarter throughout the year. Looking at Asia, we saw positive momentum on the China to US lane exiting the year, and remain cautious on the outlook for 2024. In the US, the projected small package market growth rate is just under 1% excluding Amazon. A slight improvement is expected in US manufacturing and the consumer is expected to remain resilient despite lingering inflationary pressures. We've built a plan that reflects the current environment and potential risks that we see. This includes getting our organization to our strategy and aligning execution to our wildly important initiatives under what we call fit to serve. As Carol mentioned, we are exploring strategic alternatives for Coyote, our truckload brokerage business, which will enable us to address some of the cyclical impacts in our forwarding business. And we are reducing our workforce by approximately 12,000 positions. This will cut around $1 billion in costs in 2024. Moving to our 2024 financial outlook, we are providing a range based on volume growth. The low end of the range has UPS growing at market rate and the high-end of the range as us gaining share. For the full year 2024, on a consolidated basis, revenues are expected to range from approximately $92 billion to $94.5 billion, and operating margin is expected to range from approximately 10% to 10.6%. In the range provided, we expect to move total average daily volume from negative growth in the first half of the year to positive growth in the back half. This is primarily driven by lapping the volume diversion we experienced in the US last year during our labor negotiations. Additionally, cost will weigh on us in the first half of the year, primarily due to the higher labor cost inflation associated with the new contract. Looking at consolidated revenue, in the first half of the year, we expect the growth rate to decline with a range of approximately 1% to 2% with the first quarter driving the decline. And in the back half of the year, revenue growth is anticipated to be up within a range of mid-to-high single-digits. Looking at consolidated operating profit, we expect material improvement as the year progresses with the second half of the year outperforming the first half. Lastly, we expect to generate our lowest consolidated operating margin of the year in the first quarter. Now let me give you a little color on the segments. Looking at US Domestic, average daily volume growth is expected to be within a range of approximately flat-to-up 2% for the full year. At both the low and high end of the range, we expect the revenue per piece growth rate to outpace the cost per piece growth rate beginning in the third quarter and we expect to exit the year at a 10% operating margin. Moving to the International segment, we expect 2024 average daily volume to be within a range of approximately flat-to-up around 3%. At both ends of the guidance range, operating margin is anticipated to be in the high teens. And in Supply Chain Solutions, for the full year in 2024, we expect revenue to be within a range of approximately $13 billion to $13.5 billion. At both ends of the guidance range, operating margin for SCS is expected to be high-single-digits. And for modeling purposes, in total below the line, we expect approximately $400 million in expense in 2024. This is net of $262 million in pension income. We included a slide in the appendix of today's webcast deck to provide you more detail on pension. The webcast deck will be posted to the UPS Investor Relations website following this call. Now, let's turn to full year 2024 capital allocation. Our capital allocation priorities have not changed. We are staying on strategy and we'll make the best long-term decisions to capture growth, improve efficiency, and deliver value to our shareowners. We expect 2024 capital expenditures to be within our target of around 5% of revenue or $4.5 billion. Now, let's turn to our expectations for cash and the balance sheet. We expect free cash flow to be within a range of approximately $4.5 billion to $5.3 billion including our annual pension contributions of $1.4 billion, which are equal to our expected service costs. As Carol mentioned, the Board has approved a dividend per share of $1.63 for the first quarter. We are planning to pay out around $5.4 billion in dividends in 2024 subject to Board approval. Finally, our effective tax rate in 2024 is expected to be approximately 23.5%. In closing, we look at 2024 as a year to pivot away from negative volume to positive volume growth and from high labor cost inflation to a much lower growth rate. We are laser-focused on executing our strategy, controlling what we can control, and improving our financial performance. We look forward to sharing our multi-year targets in detail on our strategy at our Investor Day event on March 26th. Thank you. And operator, please open the lines.

Chris Wetherbee:

Yeah. Hey, thanks. Good morning, guys. I guess I wanted to start on maybe some of the cost out. You mentioned the 12,000 positions that you're reducing and the $1 billion of cost in 2024. I was hoping maybe you could help us sort of understand the timing of that. So based on a 10% kind of run rate exiting '24, it would imply that the first quarter is fairly low. So I just want to make sure I understand some of those moving pieces and when that $1 billion is going to start to accrue?

Carol Tome:

And I might just add a little more color, if I could, Chris. Today we have about 495,000 UPSers around the world. A few years ago, when the COVID demand was peaking, we had 540,000 UPSers. So Kate and Nando have done a masterful job of managing our operational headcount to meet the volume in our company. And they've done that by managing turnover and attrition and closing sorts and reducing block hours, et cetera. We have about 85,000 UPSers who are management, and this can be full-time and part-time management. The targeted headcount falls really within that group as well as some contractors that will be leaving us. And to Brian's point, this is really about a new way of working. So it's a $1 billion of cost out now, but there's even more cost out to come as we have a full-year benefit in 2025.

Operator:

Our next question will come from the line of David Vernon of Bernstein. Please go ahead.

Carol Tome:

So we believe that productivity is a virtuous cycle here at UPS. And I'll give you one example, then I'm going to throw it over to Nando to address this. But if I look at just one metric, cube utilization, we reach the highest cube utilization in our company history at 60%. That's the equivalent of reducing 1,500 loads per day. So that's not in hours, but it's just a cost out. So we've got productivity across the operations. And Nando, why don't you talk about what you're going to do in 2024?

Carol Tome:

And at our Investor Day in March, we're going to talk to you about network of the future. We've got an integrated network. We don't have to integrate, but we can transform our network with some very exciting ideas. So we're going to share that with you in March.

Brian Newman:

Yeah, I think as we look to the back end of the year, certainly the volume projections that are in there, in terms of the volume growth for the back end of the year, in that 2% to 4% range, domestically, we start to see CPP growing slower than RPP. And so that balance is what's going to create the operating margin. With the sorts we closed over 30 sorts did not reopen them during peak. So we're changing. Nando's doing an effective job of basically managing more volume with less. So we'll continue to drive that.

Brian Newman:

Thanks.

Amit Mehrotra:

Thanks, everyone. I just wanted to, Brian, on the guidance, I guess the guidance implies $9.6 billion in operating profits. You've been pretty helpful historically about giving us kind of the first-half, second-half cadence of that. And then just related to that, I want to make sure, so you said the $1 billion is included in the guidance. Can you just expand on that a little bit? Because if I take out the $1 billion, the implied change in profits relative to the improvement in revenue is quite a bit worse. So I'm just trying to understand what's actually included in the guidance from the $1 billion and how that kind of translates to what you're assuming underneath it in terms of change of profit, relative change of revenue?

Amit Mehrotra:

And are we done there on the $1 billion or is there like there's $55 billion in total cost? I mean, are we just getting started or like what's the actual opportunity there beyond the $1 billion?

Carol Tome:

Yeah, we're never done. We continue to drive productivity. It's a virtuous cycle here, and technology has changed so much in the past year. When you think about the advent of Generative AI and the applications inside of our business, we're just getting started and I'm really excited about what the future will mean in terms of driving productivity and as well as improving the customer experience.

Brian Newman:

Thanks, Amit.

Conor Cunningham:

Hi, everyone. Just to stick with the productivity side, you've been obviously pretty dynamic with your network and you mentioned, I think, 30 close outs -- sort closures and whatnot. Can you just talk about the consolidation opportunity in '24 and how that may play out to drive further efficiencies in the business? Thank you.

Brian Newman:

Thanks, Conor.

Allison Poliniak:

Hi. Good morning. Just want to turn to the growth aspect of it, I guess, more specifically the market share capture. Could you maybe walk through the different levers in terms of -- I know you mentioned Project Brown, your ability to recapture diverted volume, but also talking to the SMB penetration, your opportunity on the healthcare side, just any color in terms of where those levers can be pulled for that market share growth in '24? Thanks.

Allison Poliniak:

Great. Thank you.

Tom Wadewitz:

Yeah, good morning. So I wanted to see if you could talk a little bit about the competitive dynamic in the market. I know the backdrop is that you had some share loss associated with the Teamster contract, but it also seems like there might be risks that other competitors are gaining traction in the market. So if you look at postal service had, I think, up 7% volumes and they had a new product, the ground advantage. And so I guess the question is, is there a risk that the competitive set has got more challenging? And how do we think about what you need to do to have a better volume outcome in 2024? Is there more pressure on price, or is it a different formula to get the better volume outcome in '24? Thank you.

Tom Wadewitz:

Okay. Thank you.

Jeff Kauffman:

Thank you very much. I'm going to defer the big picture stuff to March. But I'm just kind of curious, how did your global view changed between when we were discussing the labor deal back in August, September to the year-end? You mentioned the softness in Europe. You mentioned the shift from air to ground, but kind of what were the big changes in your outlook over that four, five-month period?

Kate Gutmann:

Yeah, I would say that the market remains volatile, even in Europe with the drop off in the inflationary softening. We were able to pull back on the cost to deliver a great margin, and that's our commitment. And then to ensure that in the forwarding side of the house, as we've done, stay just razor sharp to ensure that we are right on track with any trend that we see. And I'm really proud of the team because we have got the initiative to gain those customers with high-value goods and that international air freight that's coming as a result.

Kate Gutmann:

It actually is first showing up Asia to Europe lane. And -- but I will say this is going to be repositioning of vessels around the globe. It's going to be a global event. So we see it as an opportunity throughout and our sales resources are global. Our portfolio is global. So UPS is very well positioned to take advantage of it.

Brian Newman:

Thanks, Jeff.

Brandon Oglenski:

Hey, good morning, and thanks for taking my question. Can you guys speak to your enterprise customers and the volume trends that you saw in the fourth quarter and expectations going into 2024? And maybe compare and contrast that with B2B as well as your small, medium business mix?

Carol Tome:

Maybe another comment because this is just an interesting observation on the market. If I look at our top five decliners in the quarter, that would include our largest customer and there's an intentional decline there. But then if I look at the remaining decliners, it's really interesting to see what's happening. Of those, only one has diverted some volume. They're a dual sourcer and they have diverted some volume. And I suspect they'll stay dual-sourcing. The rest, either their business is just way off or they have worked really hard to create a better experience inside the store to encourage buy online pick up in store. So there is a bit of dynamic happening within our large enterprise customers. I think for all of us, we're delighted to have anniversaried the demand that we saw through COVID. Now that that's behind us, now that the volume for the small package market has reverted back to the mean, this is an opportunity now for everyone to grow.

Brian Newman:

Thanks, Brandon.

Helane Becker:

Yeah, guys. Thanks very much, everybody, and thanks team for the time. So on Coyote, when you did the acquisition, what did you think the benefits would be that made it important to do the acquisition? And then what really would actually happened that is causing you to rethink how Coyote fits in the network? And my follow-up question is then related. You recently bought two 747-8 freighters, I saw. And I'm just wondering if you bought those off lease or where they came from since Boeing doesn't make the 747 anymore? Thank you.

Brian Newman:

So the two planes were picked up through Qatar and really it's part of a broader airline strategy to retire some of the MD11s in terms of efficiency and sustainability.

Carol Tome:

Thank you.

Scott Group:

Hey, thanks. Good morning. Just wanted to follow up on a couple of things on the guidance. Brian, I know you said 10% US margin exiting the year. Any color on the shape of the year? You also talked a couple of times about just Q1 being hard. Any more specific color on Q1 and then just lastly, I know every year on this call, you typically give an update on the biggest customer exposure, if you can give us an update there? Thank you.

Carol Tome:

It just came down faster than Amazon, yeah.

PJ Guido:

Steven, we have time for one more question.

Jordan Alliger:

Hi, good morning. So I was sort of thinking about the small package growth that you guys targeted at less than 1% this year. Feels pretty conservative after a couple of years of probably negative industry growth as well. So I'm just sort of curious what's informing that? Is that your economic outlook, your forecast? And then maybe this is your Analyst Day, you'll address it, but sort of on a normalized basis, what kind of small package domestic growth, underlying industry growth you think about over a longer-term basis? Thanks.

Jordan Alliger:

Okay, thanks.

Operator:

I will now turn the floor back over to our host, Mr. PJ Guido. Please go ahead, sir.

PJ Guido:

Good morning and welcome to the UPS third quarter 2023 earnings call. Joining me today are Carol Tome, 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 filed with, or furnished 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 third quarter of 2023, GAAP results include an after-tax charge of $219 million, or $0.26 per diluted share, comprised of a one-time payment of $46 million to certain US-based non-union part-time supervisors, transformation and other charges of $70 million, and non-cash goodwill impairment charges of $103 million. 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. [Operator Instructions] 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.

Brian Newman:

Thanks, Carol, and good morning. In my comments today, I'll cover four areas. I'll start with the macro, followed by our third quarter results. Next, I'll cover cash and shareowner returns. Then, I'll provide detail around our updated guidance. The macroenvironment in the third quarter was challenging. The weakness we saw in the second quarter continued into the third quarter, especially in Asia and Europe. Real exports and industrial production moved lower due to falling demand, and global consumer conditions did not significantly change. In the US, we faced tough conditions due to several factors. To begin, the volume diversion we experienced in the second quarter continued into the third quarter, which led to more volume diversions than we anticipated. Next, some customers that diverted, waited until our Teamster contract was fully ratified in September, before returning volume to our network. And lastly, we incurred higher labor costs associated with new contract, and added headcount earlier than normal to ramp-up for peak, so that we can ensure we maintain our industry-leading service levels. Through the end of the quarter, we adjusted our integrated network, to support our customers' needs, managed cost, and stayed focused on bringing volume back into our network. Looking at our financial results for the quarter, consolidated revenue was $21.1 billion, down 12.8% from last year. Consolidated operating profit was $1.6 billion, down 48.7% compared to the same period last year. Consolidated operating margin was 7.7%. For the third quarter, diluted earnings per share was $1.57 down 47.5% from the same period last year. Now, let's look at our business segments. In US Domestic, we knew the third quarter would be a challenge, and it was, due to our labor negotiations, higher costs, and a dynamic economic backdrop. As we discussed on our last call, we ended the second quarter with an average daily volume in June, down 12.2%. As contract negotiations became later and louder, we saw more volume diversion than we anticipated. August represented the low watermark when average daily volume was down 15.2% year-over-year. Post ratification, we exited the third quarter half that way, and we're continuing to see our week-over-week volume levels improve, despite a challenging retail backdrop. In the US, in the third quarter, average daily volume was down 11.5%, and we estimate the impact of volume diversion reduced our volume by approximately 1.5 million packages per day. Moving to mix, in the third quarter, we saw lower volumes across all industry sectors, with the largest declines from retail and high-tech. B2C average daily volume declined 13.4% compared to last year, and B2B, average daily volume was down 9%. In the third quarter, B2B represented 44% of our volume, which was an increase of 120 basis points from a year ago. Also in the third quarter, we continued to see customers shift volumes out of the air, onto the ground. Total air average daily volume was down 15.8% year-over-year, with about half of the decline coming from our largest customer, as anticipated. Ground average daily volume was down 10.7%. In terms of customer mix, in the third quarter, SMBs, including platforms, made up 28.5% of our total US volume, an increase of 20 basis points year-over-year. For the quarter, US Domestic generated revenue of $13.7 billion, down 11.1%. Despite lower volume, we remained disciplined on revenue quality. In the third quarter, revenue per piece increased 2%. Looking at the key drivers, the combination of strong base rates, and improved customer and product mix increased the revenue per piece growth rate by 410 basis points. Changes in fuel prices decreased the revenue per piece growth rate by 190 basis points. The remaining 20 basis points of decline was driven by multiple factors including package characteristics. Turning to costs, total expense was down 5.1% in the third quarter. Compensation and benefits decreased the total expense growth rate by around 50 basis points. Total union wage rates were up 11.5% in the third quarter, primarily driven by the contractual wage increase that went into effect on August 1st. Additionally, we began network preparations for peak. Offsetting the total increase in compensation and benefits, we leveraged our total service plan, and network planning tools, to reduce total hours in the third quarter by 11.4%. We reduced the expense growth rate for purchase transportation by around 190 basis points, primarily from lower volume levels, and our continued optimization efforts. Lower fuel costs contributed 170 basis points to the decrease in total expense growth rate. The net of all other expense items and allocations reduced the expense growth rate by 100 basis points. The US Domestic segment delivered $665 million in operating profit, down 60.6% compared to the third quarter of 2022, and operating margin was 4.9%. Moving to our International segment, macro conditions were uneven in the third quarter with some regions of the world were challenged than others. Continued falling demand pressured Asia, and in Europe, consumers continued to contend with high inflation, and tight financial conditions. In response, we adjusted headcount and block hours, in our global networks to match changes in geographic demand. In the quarter, international total average daily volume was down 6.6% year-over-year. Nearly three quarters of the decline came from lower domestic average daily volume, which was down 9.1%, driven primarily by declines in Europe. On the export side, average daily volume declined 4.1% on a year-over-year basis. Looking at Asia, export average daily volume was down 8%, and export volume on the China to US lane, which is our most profitable lane, was down 10.3% year-over-year. One bright spot was the Americas region, where export average daily volume grew 4.7%, led by Canada and Mexico, leveraging our cross-border ground service. In the third quarter, International revenue was $4.3 billion, which was down 11.1% from last year, due to the decline in volume and a 1.4% reduction in revenue per piece. The decline in revenue per piece was driven by several factors. Lower fuel surcharge revenue contributed 230 basis points to the revenue per piece growth rate decrease, a reduction in demand-related surcharge revenue contributed 200 basis points to the decline, partially offsetting the decline multiple factors increased the revenue per piece growth rate by 290 basis points, including strong base rates, and a weaker US dollar. Moving to costs, in the third quarter, total international costs was down $203 million, primarily driven by lower fuel expense. In response to lower demand, we adjusted our integrated network and cut costs, which included reducing international block hours by 13.9% compared to last year, and reducing headcount in operations and overhead functions by a total of 2,300 positions, and we did all of this while continuing to deliver excellent service to our customers. Operating profit in the International segment was $675 million, down $329 million year-over-year, which included a $98 million reduction in demand-related surcharge revenue. Operating margin in the third quarter was 15.8%. Now looking at Supply Chain Solutions, in the third quarter, revenue was $3.1 billion, down $854 million year-over-year. Looking at the key drivers, let's start with forwarding. In international air freight, softer global demand, and lower volume, resulted in a decline in revenue and operating profit. On the ocean side, demand flipped positive, driven by the retail sector, and generated volume growth. However, excess market capacity pressured revenue and operating profit. In response to the dynamic forwarding market, we cut operating costs. Within forwarding, our truckload brokerage unit continued to face pressure from excess capacity in the market, which drove revenue and operating profit down. Logistics delivered revenue and operating profit growth. In the third quarter, Supply Chain Solutions generated operating profit of $275 million, and an operating margin of 8.8%. Walking through the rest of the income statement, we had $199 million of interest expense. Our other pension income was $66 million, and our effective tax rate for the third quarter was 12.6%, which benefited from certain discrete items, including tax credits and global audit resolutions. Now, let's turn to cash and shareowner returns. Year-to-date, we generated $7.8 billion in cash from operations, and free cash flow was $4.9 billion. And so far this year, UPS has paid $4 billion in dividends, and we've completed $2.25 billion in share buybacks. Now, I'll share a few comments about our outlook. We expected 2023 to be a bumpy year, and it has been. We've navigated record-high inflation, rising interest rates, disruptions in China, a war in Eastern Europe, now a humanitarian crisis in Israel and Gaza, and the disruption around our US labor negotiations. Through all of this, we remained focused on controlling what we can control, and are continuing to adjust the network to match volume levels, and deliver industry-leading service to our customers. Since our last earnings call, the global demand environment has slowed, and macroeconomic conditions remain challenging. As a result, we've lowered our full-year guidance, and have provided a range to reflect the uncertainty in the market. We now expect consolidated revenue to be between $91.3 billion and $92.3 billion, and consolidated operating margin to be between 10.8% and 11.3%. Let me walk you through our assumptions for the guidance range. In the US, we are winning back volume at a rapid pace, but we've also seen demand softness due to several factors, with many of our customers who did not divert. Additionally, while consumer spending has been resilient in 2023, headwinds are mounting for the consumer in the fourth quarter, and looking at estimates for holiday retail sales this year, increases range from over 4% to 12%. Moving to international, a further downturn in exports and lower consumer spending in some of the largest European markets, including Germany and the UK are negatively impacting volume. And exports on our most profitable trade lane, which is China to the US, are not improving at the pace we had expected. Finally in forwarding, air and ocean capacity has increased, which is putting additional downward pressure on market rates. In fact, in ocean, there was extreme overcapacity versus demand in the market, and the forwarding demand outlook in the fourth quarter remains weak. Turning to capital allocation for the full-year, capital expenditures are still expected to be about $5.3 billion. We are still planning to pay out around $5.4 billion in dividends in 2023, subject to Board approval. We have repaid $1.6 billion in debt this year as planned, and expect to repay an additional EUR700 million of debt in the fourth quarter. We now expect $2.25 billion in share buybacks in 2023, which we have already completed. In the fourth quarter, we're redeploying cash, back into the business for growth initiatives, such as strategic acquisitions to drive shareowner value. And lastly, we expect the tax rate for the full-year to be approximately 22%. In closing, while navigating a very challenging macroenvironment, we remain focused on the job in hand. For the past five years, we've held the record as the industry-leader in service during peak. We intend to do it again this year. Thank you. And operator, please open the lines.

Operator:

We will begin the question-and-answer period and our first question will come from the line of Chris Wetherbee of Citigroup. Please go ahead.

Brian Newman:

Sure, happy to, Chris. Good morning. So, if you look at the bridge, I'll take the low end from -- so Q3, we put -- posted $665 million in operating profit. To get to the low end of the guide, it would require about $800 million in profit. The two biggest drivers of that are volume and revenue quality. The productivity that the teams are generating, Nando in the US, is offsetting the labor contract step-up because you realize we have three months in the third and fourth quarter, and we had two months of the new labor contract in the second. Your question on volume, as we think about volume and revenue quality, those two alone provide a majority of the 800 step up, but if you think about where we were in August, and where we are in October, the momentum is increasing. We had a low watermark as I mentioned in the prepared remarks, down 15% in terms of ADV volume in August. That translates to around 16 million pieces from an ADV perspective. That's actually, in October, we're seeing 19 million pieces, so we've seen that step-up. I went back, Chris, and looked at last year, and the August to October step-up, was 1.5 million pieces. This year, the August to October step-up is 2.7 million pieces, so from a glide path and a trajectory, we're seeing momentum, the absolute levels are coming up, and that's what led to the guide.

Operator:

Our next question will come from the line of Allison Poliniak of Wells Fargo. Please go ahead.

Carol Tome:

So we're really pleased with how we're recapturing volume back in our business. We have recaptured over 600,000 pieces per day of the volume that was lost and I will say, 50% of that recapture is coming from our largest competitor. The recapture continues day by day, but it's not just about recapturing what we lost, it's about growing new business. You may recall, Allison, at the end of the second quarter, we said we had about a $7 billion pipeline of new business. Today, we've won about 25% of that pipeline. Now, that $7 billion is an annualized number. So, all those packages and volume haven't come into the network yet, it will come in over the next year. So, I couldn't be more pleased with how our sales team is performing, and winning new accounts, and winning back volume that deferred.

Carol Tome:

There's no material costs associated with the recapture. Customers are coming back because of our superior service.

Carol Tome:

Yes.

David Vernon:

Hey, thanks for taking the question, guys. So, Brian, you mentioned the $800 million step-up. That's incremental sequential from 3Q to 4Q. I just want to make sure that I heard that correctly. That's the low end of your guidance range assumption?

David Vernon:

Okay. And then -- and maybe more bigger picture, right. As we think about the exit rate kind of implied in the guide, I think, it works out to something like down 20% year-over-year at EBIT. How do we think about that build back in 2024. You know, in the front half, obviously, you have inflation, which you've got the GRI to offset. Should we be expecting that sort of, you know, second derivative rate of change to slowly get better, and then snapback, or does it get, you know, meaningfully better in sort of 1Q, 2Q? How do we think about the shape of 2024, and how it's stepping up to recover in the domestic margin side?

David Vernon:

And that rate of change in the first half better than 4Q?

Carol Tome:

Let's finish of the year, Dave, and then, we'll give you some color about 2024.

Brian Newman:

Thanks, Dave.

Jordan Alliger:

Yeah. I was wondering if you could give some color on your confidence level on the new revenue range. How much certainty do you feel the visibility, and what frames the high end, low end? Thank you.

Jordan Alliger:

Thank you.

Operator:

Our next question --

Operator:

Our next question will come from the line of Tom Wadewitz of UBS. Please go ahead.

Brian Newman:

Yeah, Tom. So, to frame it up for you, we were trying to get December back to flat versus prior year. I think the guide now implies from a low-single-digit to a mid-single-digit in the month of December, and that's pending some of the backdrop I just talked about in terms of the retail outlook. So, from a momentum perspective, I gave in August to an October number, but as Carol mentioned, we lost 1.5 million or we had diverted 1.5 million pieces. We've seen 40% of that, roughly 600,000 pieces already come back to the system. We're also pushing forward with new business that Carol referenced as well.

Brian Newman:

Thanks.

Joe Hafling:

Hi. Good morning. Thank you for the questions. This is Joe Hafling on for Stephanie Moore. I had maybe a conceptual question on sort of the recapture, looking at the near term. Given its peak season, and customers are focused on their own execution right now, does this limit your ability to win back volumes in the near term, and shippers don't want to disrupt any of the plans that they've already got in place? Obviously, you've highlighted the capture rates sort of September-October, but just wondering if that slows down as we kind of get into November-December, just as shippers don't want to disrupt their own operations right now?

Joe Hafling:

Got you. Thank you so much and helpful.

Ken Hoexter:

Hey. Great. Good morning. If I could just clarify one thing on the step-up, I think to Allison, do you say you're not using increasing pricing as you get towards the tail end of that volume gain? And then, my question is on international, right. You're looking, I guess, Brian, to really snapback closer back to that 20% range. Is that kind of what you are still looking at in terms of margins at international as we move into the fourth quarter? I just want to understand the shift from peak versus belly space coming back on, and the impacts to margin there?

Carol Tome:

I think Allison's question was, are there costs associated with winning back volume. And as I responded, not meaningful. Ken, from time to time, we have found customers who diverted, and they entered into longer-term contracts, and we might help them to exit those longer-term contracts, but it's not a meaningful discount. It's just we might help them. It's nothing measurable.

Scott Group:

Hey, thanks. Good morning. So, hey, Brian, one of the earlier questions about the bridge from Q3 to Q4, you answered it sort of how do we get to the low end. So, should we think that the low end of the range is more of your base case? I just want to understand sort of that answer. And then, can you just maybe, more explicitly, just talk about what your -- the margin expectations are for each of the segments in Q4? Just -- I wasn't sure what you were -- what you're thinking for each business. Margin or profit, however you want to answer, yeah.

Scott Group:

Thank you.

Operator:

Our next question will come from the line of Amit Mehrotra of Deutsche Bank. Please go ahead.

Carol Tome:

Well, maybe just an observation on the US margin in the third quarter. Recall that we had $500 million of expense related to our Teamster contract in the third quarter. If we back that out, the US margin would have been 8.5%. 8.5% on volume down a 11% is not a bad margin. So, we've got a bit of pressure on the margin that we shared with you because of our new contract. The contract is front-end loaded. We're bearing the pain of that front-end load. For a five-year contract that's very attractive. The compounded annual growth rate on the five years is 3.3%. So once we get through this first front-end load with 46% of the cost in the first year, once we get through that, the margin is going to grow. It's going to grow in a big way. So hopefully, that's helpful.

Carol Tome:

No again -- absolutely fair question, Amit. Let us finish this year. Then, we will give you guidance for 2024, and we can break it down by quarter, if that's going to be helpful.

Carol Tome:

Yep.

Christyne McGarvey:

Hey, guys. Good morning. This is Christyne McGarvey on for Ravi. I wanted to take a step back and ask about kind of the path to some of the longer-term targets that you set out at your previous Investor Day particularly just on some of the macro assumptions that you think you'll need to get there. You've seen definitely muted consumer spending in the last 18 months, but not a collapse. So how much of an uptick in consumer spending do you need to get there or maybe said another way, kind of how much do you feel is in -- directly in your control?

Christyne McGarvey:

Really helpful. Thank you.

Operator:

Our next question will come from the line of Jeff Kauffman of Vertical Research Partners. Please go ahead.

Carol Tome:

Well we've seen clearly a shift from goods to services and people through the pandemic started going back to work, taking vacations, eating out at restaurants, going to amusement park. They're spending their dollars differently. It's like source. It's not that the consumer is not healthy, they're spending their dollars different way. And what we're seeing with many of our retail customers. It's a real desire to bring people back into the stores and they should bring people back into the stores, because it's their largest investment. So you see retailers offering buy online pickup in-store, where they hadn't offered that before. So I can give you example after example of customers, not by name, obviously, but customers that are in our top 20 where they're seeing their same-store sales down year-on year, because their anniversary in that COVID peak, if you will, and they're seeing their online sales down even more. And part of that is because people are going back into stores -- part of that and shifting. So that's that comment that Brian made in his remarks about just some demand softening Is that, we do see that with some of our larger customers who didn't divert but their overall business and you can look at their guy, so I'm not talking about anything that's not public. You can look at our guidance, were they not only have reported declining sales, but they are guiding softer.

Carol Tome:

Yeah.

Brandon Oglenski:

Hey, good morning, and thanks for taking my question. Brian, you did talk about revenue quality initiatives. I know folks have brought up price quite a bit on this call, but can you talk about not just your pricing outlook. But maybe the mix impact from some of these initiatives you've had in the past on small and medium enterprises.

Carol Tome:

No, it's interesting if you go back to 2019, our volumes by the same as in the third quarter as it was back in 2019. But our SMB mix has moved from 23% to 29%. And our net revenue per piece has moved from $9.99 to $12.54. So we've been laser-focused on improving the revenue quality in our business and we will continue to do that. Value is defined by what the customer is willing to pay for and we are improving our experience every day. A good example of that is delivery photo. We're now 92% of all of our residential drops are photographed which is creating a better experience for our recipients for our customers and for us candidly. We're leaning into simplifying the experience of how does that work with us and we'll talk to you about the widgets that we have with DAP or improvements that we've made in our claim process. You see our net promoter score now in the high 40s, so we believe that experience because it helps grow the revenue quality and we're going to continue to do that.

Brian Newman:

Thanks, Brandon.

Brian Ossenbeck:

Hey, good morning. Thanks for taking my questions. Maybe just two quick follow-ups actually. Can you talk about the pace of getting the share back, is you go into the fourth-quarter. Do you think, perhaps, you have the lower-hanging fruit easier ones to convert back, do you think that those came back sooner and maybe the pace from here just little bit harder. And then on the buybacks, you mentioned you're cutting your list your staffing the buyback for the quarter. You've got two acquisitions targeted. I just wanted to make sure I was clear in terms of what these are, if those were the Happy Returns and MNX or if there is potentially something else that was on the horizon.

Brian Ossenbeck:

Okay. Thank you.

Operator:

Ladies and gentlemen that does conclude our call for today. Thank you for your participation. You may now hang up.

Ken Cook:

Good morning, and welcome to the UPS Second Quarter 2023 Earnings Call. Joining me today are Carol Tome, 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 filed with or furnished 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 $0.12 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. [Operator Instructions]. And now I'll turn the call over to Carol.

Brian Newman:

Thanks, Carol, and good morning. Let me begin by echoing Carol's comments on how pleased we are no achieving a win-win-win labor agreement covering our more than 300,000 Teamster employees. This contract provides UPS a significant measure of certainty around labor, gives us operational flexibility to increase productivity and continue providing industry-leading service to our customers, and it will help us attract and retain the best employees in the industry. Now in my comments today, I'll cover 4 areas. I'll start with the macro, followed by our second quarter results. Next, I'll cover cash and shareholder returns. And lastly, I'll provide some comments on the second half of the year. In the second quarter, the overall macro conditions in the U.S. were in line with our expectations. Internationally, conditions were a little worse than we expected due to lower growth in both real exports and industrial production. Moving to our financial results. For the quarter, consolidated revenue was $22.1 billion, down 10.9% from last year. All 3 of our segments demonstrated agility and on a combined basis, drove down total expense by $2.1 billion in the second quarter year-over-year. This enabled us to deliver $2.9 billion in operating profit, which is the target we communicated to you last quarter and was a decrease of 18.4% compared to last year. Consolidated operating margin was 13.2%, a decline of 120 basis points compared to the same period last year, with all 3 segments achieving double-digit operating margins. For the second quarter, diluted earnings per share was $2.54, down 22.8% from the same period last year. Now let's look at our business segments. In U.S. domestic, our disciplined approach to revenue quality partially offset the decrease in volume. As volume declined throughout the quarter, the team did an excellent job adjusting the network to match demand and drive out cost in real-time, all while maintaining industry-leading service levels. We expected volumes to decline in the second quarter, and it did, but we saw more volume diversion than anticipated as noise levels around our labor negotiations increased. We estimate the impact of volume diversion, combined with a slowdown in our sales pipeline pull-through, reduced volume in the second quarter by approximately 1.2 million packages per day. For the quarter, total average daily volume was down 9.9%, with June down 12.2%. Moving to mix. In the second quarter, we saw lower volumes across all industry sectors with the largest declines from retail and high tech. B2C average daily volume declined 11.5% compared to last year, and B2B average daily volume was down 7.7%. In the second quarter, B2B represented 43.7% of our volume, which was an increase of 100 basis points from a year ago. Also in the second quarter, we continued to see customers shift volumes out of the air onto the ground. Total air average daily volume was down 16.5% year-over-year, and ground average daily volume declined 8.6%. In terms of customer mix, in the second quarter, SMB average daily volumes declined less than volume from our enterprise customers. SMBs, including [Audio Gap] quarter. U.S. domestic generated revenue of $14.4 billion, down 6.9%. Revenue per piece increased 3.3%, partially offsetting the decline in volume. The combination of strong base rates and improved customer mix increased the revenue per piece growth rate by 670 basis points. Changes in fuel prices decreased the revenue per piece growth rate by 220 basis points. The remaining 120 basis point decline was due to multiple factors, including package characteristics and product mix. Turning to costs. The U.S. domestic team took out $889 million of expense year-over-year, which is the largest year-over-year cost reduction in our history. How did we do it? We leveraged our technology and the agility of our integrated network. Let me walk you through some of the levers we've pulled. We continued to execute our total service plan and reduced labor hours by nearly 10% to maintain our high levels of productivity. We leveraged the power of our network planning tools to optimize package flows and pull volume out of smaller nonautomated buildings and flow it into our larger automated facilities. While total volume was down 9.9%, we reduced the volume in our nonautomated building by 18%. This enabled us to close door and reduce operations headcount by 7% compared to last year. We reduced feeder movements by continuing to manage cube utilization in our trailers and brought on more UPS feeder drivers to support our fastest ground-ever lane. Looking at air volumes, we pulled more activity into WorldPort, our global AirHub in Louisville. This enabled us to move more volume via our next day flight and reduced second day flights. As a result, domestic block hours were lower by 6.5% versus last year, and we exited the second quarter with block hours down more than 10%. And lastly, we reduced management headcount by over 2,500 positions year-over-year. All of these actions helped us reduce U.S. domestic expense in the second quarter. Specifically, compensation and benefits was down $205 million year-over-year, despite a 6.5% increase in average union wage rates. Purchase transportation declined $207 million. Fuel expense was lower by $394 million and there were multiple factors that drove the remaining $83 million reduction in expense. Our results are proof of our agility. And in the second quarter, we took out a record amount of cost and held the cost per piece growth rate to 3.7%, while volume was down nearly 10%. The U.S. Domestic segment delivered $1.7 billion in operating profit, in line with our expectations and down 9.4% compared to the second quarter of 2022. Operating margin was 11.7%, an increase of 180 basis points from the first quarter of this year. Moving to our International segment. Macro conditions remained sluggish in the second quarter. In Europe, persistent high inflation and tight financial conditions weighed on the consumer. And in Asia, the slow recovery we experienced in the first quarter stalled in the second quarter. In the quarter, International total average daily volume was down 6.6% year-over-year. About 2/3rd of the decline came from lower domestic average daily volume, which was down 8.7%, driven primarily by declines in Europe. On the export side, average daily volume declined 4.5% on a year-over-year basis. Looking at Asia, export average daily volume was down 10.1%. Export volume on the China to U.S. lane was down 7% year-over-year, which was an improvement from the first quarter. In the second quarter, International revenue was $4.4 billion, which was down 13% from last year due to the decline in volume and a 5.7% reductions in revenue per piece. The decline in revenue per piece was primarily driven by a 570 basis point decrease from fuel surcharge revenue. Additionally, a reduction in demand-related surcharge revenue contributed 240 basis points to the decline. And there was an 80-basis point decline in revenue per piece due to a stronger U.S. dollar. Partially offsetting the decline, multiple factors increased the revenue per piece growth rate by 320 basis points, including strong base rate and favorable volume mix as export volume outperformed domestic volume. Moving to cost. In the second quarter, total international costs was down $356 million, primarily driven by lower fuel expense. We leveraged the agility of our integrated network to match capacity with demand and focused on controlling what we could control. These actions included flight reduction, which drove international block hours down 9.4% compared to last year, which includes a 15.5% block hour reduction on Asia-outbound Transcontinental flights. We also reduced headcount in operations and overhead functions by a total of more than 1,700 positions and we did all of this while continuing to deliver excellent service to our customers. Operating profit in the International segment was $902 million, down $302 million year-over-year, which included a $123 million reduction in demand-related surcharge revenue. Operating margin in the second quarter was 20.4%, in line with our expectations. Now looking at Supply Chain Solutions. Our teams continued to navigate a challenging macro environment and executed our plans to reduce cost. In the second quarter, revenue was $3.2 billion, down $990 million year-over-year. Looking at the key drivers. Forwarding continued to be impacted by softer global demand, especially out of Asia, which drove market rate and volume lower. This resulted in a decline in revenue and operating profit. In response, we cut operating costs and are continuing to manage buy-sell spreads. Logistics delivered revenue and operating profit growth, including gains in our health care business. In the second quarter, Supply Chain Solutions generated operating profit of $336 million and an operating margin of 10.4%. Walking through the rest of the income statement. We had $190 million of interest expense, our other pension income was $66 million, and our effective tax rate for the second quarter was 23.5%. Now let's turn to cash and shareowner returns. Year-to-date, we generated $5.6 billion in cash from operations, and free cash flow was $3.8 billion, including our annual pension contribution of $1.2 billion that we made in the first quarter. Also this year, in the first quarter, we issued $2.5 billion in long-term debt. We've used $1.6 billion to pay off debt maturities in the second quarter, and we plan to use $900 million to pay off debt maturities in the second half of this year. And in the first half of 2023, UPS paid $2.7 billion in dividend. We also completed $1.5 billion in share buybacks at an average price of around $178 per share. Now I'll share a few comments about our outlook. As Carol mentioned, with the contract out for ratification, we have updated our consolidated revenue and adjusted operating margin guidance. For the full year 2023, we expect consolidated revenues of about $93 billion and consolidated operating margin of around 11.8%. Now let me provide some color to help you update your models for the second half of the year. The U.S. Domestic segment is navigating a couple of unique factors in the back half of the year. First, in the second quarter and into July, we experienced more volume diversion than we anticipated because of this, our volume ramp-up for the second half of the year is starting from a lower base. We're already executing our initiatives to win back diverted volume and accelerate the pull-through from our sales pipeline while remaining disciplined on revenue quality. As a result of our efforts, by the end of the year, we expect our average daily volume level to be about even with December of last year. And overall, for the second half of 2023, we expect U.S. average daily volume to be down by a mid-single-digit percentage year-over-year. And second, looking at expense in the U.S. Domestic segment. The union wage rate increases included in our new labor agreement for the first year are higher than we originally planned. We started to accrue for the terms of the tentative agreement on August 1, while the contract is out for ratification. Further, we will address wage compression that resulted from the new labor contract. These additional labor costs in the back half of the year will be partially offset by the network adjustments we made in the second quarter. Turning to the International segment. In the second half of the year, we expect the year-over-year volume growth rate to be similar to what we saw in the second quarter and revenue per piece growth to be flattish compared to the same period last year. And in Supply Chain Solutions, we expect second half revenue to be down by a high single-digit percentage year-over-year, with full year revenue approaching $14 billion. Moving to capital allocation. Our 2023 full year targets have not changed. We will continue to stay on strategy and invest in both efficiency and growth opportunities. Capital expenditures are still expected be about $5.3 billion, which includes completing the deployment of the first phase Smart Package Marketability in the U.S., continuing to expand our health care logistics footprint globally, expanding DAP internationally and investing in our Logistics-as-a-Service platform. We are still planning to pay out around $5.4 billion in dividends in 2023, subject to Board approval. And for the full year, we still plan to buy back around $3 billion of our shares. With negotiations behind us, we are moving our business forward. For our people, we have a platform for the future that continues to reward our employees, which helps us to deliver industry-leading service to our customers and enables us to win that volume and drive revenue quality. We will control what we can control, which means continuing to manage costs as we scale up the network with volume. And we are staying on strategy and investing through this cycle, which will enable us to grow in the most attractive parts of the market, make our integrated network even more efficient and continue to reward our shareholders. Thank you, and operator, please open the line.

David Vernon:

So Brian or Carol, I just want to understand kind of at a high level, what we should be expecting about the shape of inflation over the course of the contract. I know we're probably not going to get into too many of the details today, but I'd love to understand kind of from a CAGR perspective how you're set up for inflation over the life of this contract.

Brian Newman:

Yes, Carol. I'm going to host the call, Dave, and go a bit deeper on it, but it's sort of a barbell type effect. We've got a majority of the increase or not majority, over 40% in year one, and then years 2, 3, 4 quite reasonable from an inflation standpoint, and then with another step-up in year 5. But I'll go into more details on that when we host a call following the ratification.

Carol Tomé:

So it's all hands on deck to win back the volume that was diverted as a result of the labor negotiations. The first thing we did is that we stood up a control tower. This is the same kind of control tower that we use during peak to ensure that we can onboard this volume coming back without disruption. So that is up and running, and I'm very pleased with what I'm seeing in that regard. We have, of course, mitigated all the risk that was still remaining because we didn't know the outcome of the contract. So those high-risk customers are now shipping with us without any risk. From a marketing perspective, we're doing a number of things. The first thing we're doing is we're amplifying our service message because we do have the best service in the industry. We are also amplifying our SurePost advantage because this is a very attractive product that you're shipping low-weight packages. We are expanding our speed campaign because we are faster than our largest competitor in many, many markets. So we are amplifying our speed campaign. We are also expanding our weekend pickup to four markets. We are expanding our Saturday delivery by 890 postal codes. And we are launching new offerings inside Deal Manager, which is the tool that we use to win new small- and medium-sized businesses. There's a lot of effort underway to bring back this business that we lost and to win new business. Now I will tell you, it's not all going to happen at once. And so we understand that. We're working with our customers to bring it in as it can, but also as smoothly as we can for them as they've diverted. Looking at our volume in July, I will say that it was still down year-on-year, but not as much as the decline that we saw in June.

Ken Hoexter:

Maybe just a little bit, Carol, your thoughts into the peak season here. Maybe outside of the diversion, what was underlying in your thoughts here? And I think Brian mentioned still expecting negative all the way through the end of December. So maybe just a little bit of thoughts on the backdrop and the differences between the contract and what's going on economically.

Operator:

Our next question will come from the line of Amit Mehrotra of Deutsche Bank.

Brian Newman:

Amit, thanks for the question. So from a guide perspective, we went from $97 billion to $93 billion in revenue. That's a $4 billion change. About $1 billion of that is from the softer volume Carol talked about in the second quarter, the higher diversion and about $3 billion is coming from the second half, as we think about volume and exiting the second quarter, down 12. You'll remember, in March and April, we were down 7, but June exited at minus 12. So if we take that minus 12 exit and you get to flat by the end of the year, that glide over the balance of the year is about -- it's down mid-single digit, down about 6%. From a profit standpoint, we dropped about $1.4 billion in profit to $11 billion or 11.8 margin. And most of that is coming from the domestic side, about $1 billion. That $1 billion, Amit, is split fairly evenly between wages and then also the lower volume I just referenced. There was a $400 million piece related to some inconsistent recovery in the euro inflation and interest rates. Germany's in a recession and a bit of Asia, but the vast majority is really split, half and half between wages and volume.

Brian Newman:

Right. Right.

Operator:

Our next question will come from the line of Allison Poliniak of Wells Fargo.

Carol Tomé:

Yes. So Smart Package, Smart Facility is just one of the levers in our productivity toolkit. Our network planning tools are powerful tools. They are powered by machine learning and AR. And if you think about it, we've just really completed the rollout of network planning tools in 2020. So every year, we get better because the tools get better. And think about what the tools were enabled us to do in the second quarter. When we saw the volume starting to slow down and actually divert, we were able through our tools to move volume away from unautomated hubs to automated hubs. And let me make that real for you. Last year, of the volume that was started by our hubs in the United States, about 53% went through an automated hub. This year, 57% of the volume went through an automated hub. So the tools are making us more effective. And then, we are introducing new technology inside of our buildings to make us more effective like automated label application and automated bagging and robotic small sort induction. And I can go on and on just kind of gig out on the tools, but it's a complement of tools that will help offset some of the wage pressure that we will see over the next year.

Brian Ossenbeck:

Just wanted to see if disagreement now behind you and out for ratification. Has that changed any of your thinking about the timing and magnitude of GRI or pricing in general? Maybe, Brian, you can give more detail on RPP trends and mix in the U.S. And then, Carol, I wanted to see, you mentioned the SurePost Advantage. Can you just give some context around the USPS Ground Advantage product that just launched? And if you see that as a competitive threat now that it's been out there for a month or so, maybe some initial impressions of that service and what they're able to deliver and what it means for you. Thanks.

Carol Tomé:

And on our SurePost product, it compares very favorably to the [indiscernible] product, and we're going to continue to invest in that product. We like it a lot because of the delivery density associated with that product.

Ravi Shanker:

Carol, can you give us a little more color on the $7 billion sales pipeline? Kind of what kind of customers, what kind of end markets? I haven't heard you guys talk about a sales pipeline before too often. How is that kind of building up or kind of expect it to come through over time? And also, can you give us an update on your largest customer at least and kind of any changes to that relationship/volumes there over the course of the potential kind of union docks? Thank you.

Operator:

Our next question will come from the line of Chris Wetherbee of Citi.

Carol Tomé:

Well, the 1.2 million packages per day is about 1 million of diverted volume. In other words, volume that we had that diverted elsewhere, and about $200 million of sales that we couldn't pull through because of concerns about the outcome of the labor negotiation. As Brian commented, we think by the end of the year, we will pull back everything that diverted. And I think we're going to win that extra 200,000 packages as well. It doesn't happen overnight, of course. It's already starting to flow back in. But we think by the end of the year, we'll win it all back.

Carol Tomé:

And you might ask, well, where does that volume go? And so we don't have great intelligence there, but we do have some market share intelligence through a tool that we use from Nielsen IQ. And what that would tell us it's not perfect. But what I would tell us is that 1/3 went to the Post Office, 1/3 went to FedEx and 1/3 went to the regionals. So that actually directs our activities as when we think about how to win that set volume back.

Jordan Alliger:

I was wondering if you could give a little more color. I think I have a good sense on the domestic margin. It looks like there's a small piece in your profitability guide that's Supply Chain and International. So can you maybe talk about or unpack a little bit sort of the margins expectations for the full year on that? And if indeed, the U.S. margin should be at or around the 10% level, give or take. Thanks.

Operator:

Our next question will come from the line of Jeff Kauffman of Vertical Research Partners.

Brian Newman:

Jeff, so 3.3% is an all-in number, so it includes wages and benefits of the two net together. Rather than go into a lot of detail on this call, I'm going to host a call shortly after ratification, and I'll take you through all the details at that point.

Brian Newman:

I can go very deep then.

Operator:

Our next question comes from the line of Tom Wadewitz of UBS.

Carol Tomé:

Well, we run the business as a portfolio. So we want both. We want volume and we want price, but price doesn't necessarily mean price increases. It means moving into segments that value our end-to-end network and have different products. So we run it as a portfolio. We want both. That's the easy answer to that question.

Operator:

Our next question will come from the line of Bruce Chan of Stifel.

Carol Tomé:

So thanks for your comments about DAP. We're very pleased with that product, and we see nothing but growth ahead. Global growth. We are just scratching the surface when we think about DAP outside of the United States. And we continue to add new partners here in the United States, now up to 27 partners. One thing we're doing to continue to grow DAP is to make it easier to onboard the platforms. So we are introducing widgets, which are basically pre-programmed applications that a DAP partner can put into its website and avoid the user interface and API onboarding that can slow things down. The first widget that we introduced is a locator widget. So our DAP partner can put the locator widget into its website, and then you push a button and up pops the closest UPS store to ship that package. So we're going to continue to make it easier to do business with as we continue to grow with this important part of our business.

Brian Newman:

Yes. We're looking at ESMO improving in the back end of the year. So from a macro standpoint, I think the trends are stable to improving in the U.S., obviously, under some more pressure internationally.

Operator:

Our next question will come from the line of Scott Schneeberger of Oppenheimer.

Brian Newman:

So on the bottoming, we have thought we would have seen the bottom in Asia in Q2, which I would say, it didn't recover. It stalled. In Europe, we think the bottom will be more in Q3, but there could be an elongated period here. So we're not putting in a lot of recovery into the international business going forward. On the CPP basis, we're still calling from a U.S. basis, we would look from a full year standpoint to be about 11.24, which is about a 1.4% change from the 11.08 we had previously.

Stephanie Moore:

I'd want to touch a little bit on kind of your automation efforts as part of your ongoing productivity tools. I think you said last year, it was 53% went through some form of an automated hub, this year at 57%. Do you have kind of a line of sight on where that can go over time?

Operator:

Our next question will come from the line of Brandon Oglenski of Barclays.

Carol Tomé:

Sure. So we were redirecting a little under 40% at the end of the second quarter. It was a point of the negotiations. We'd agreed to redirect 50%. No problem at all with that. No concern about cost because the delivery density with SurePost is really, really good.

Amit Mehrotra:

So I just had a couple of quick ones. So Brian, I think you said the labor deal is $500 million headwind in the back half relative to what you accrued for estimated in the prior guidance. I wasn't sure if that was a gross number, or there was some productivity against that. And then, Carol, I wanted to ask about M&A, because it doesn't get enough attention. But I think you guys have done some interesting strategic acquisitions from Delivery Solutions. You also took a stake or a board seat on CommerceHub. These are small, but I view kind of as important deals kind of long-term view. Can you just talk about what they give you? And is there more in the pipeline? Because you're generating oodles of cash flow and wondering if there's an opportunity to tack on more deals even on the health care vertical, which is such a big vertical for you guys. If you can just expand on that. Thank you.

Carol Tomé:

And on the acquisitions that we've made, we couldn't be happier because they are giving us enabling capabilities from a Delivery Solution greeting product from us [indiscernible], which is creating cold chain logistics for us in parts of the world that we didn't have that. So I couldn't be happier. And I don't want to miss out any of the companies that we've acquired. So we're pleased with Rhodium, what it's providing for us as well. They're enabling capabilities. And as we look ahead, expect us to continue to acquire enabling capabilities, particularly in those areas that we really want to own. Health care logistics would certainly be one of those. Technology investments that give us platforms to accelerate the digital experience for our customers, absolutely expect us to lean into that space. And we'll be giving you updates as we go.

Jon Chappell:

I just want to tie together a couple of things from before. As you think about regaining that 1 million packages that was diverted and you think about your pricing path going forward, do you have to lead with price in the next 6 months to win the diverted traffic and then think about pricing from a new starting point in 2024? Or do you think it's strictly service your relationships? And that package flow will come back to you without adjusting the way you think about the revenue management?

Ken Cook:

All right. I want to thank everybody for joining us this morning. We look forward to talking to you soon, and that concludes our call.

Ken Cook:

Good morning, and welcome to the UPS first quarter 2023 earnings call. Joining me today are Carol Tomé, 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 third quarter of 2023, GAAP results include after-tax transformation and other charges of $9 million or $0.01 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. [Operator instructions] 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.

Brian Newman:

Thanks, Carol, and good morning. In my comments, I’ll cover four areas, starting with the macro environment, then our first quarter results, next I’ll cover cash and shareholder returns, and lastly, I’ll review our updated financial outlook for 2023. Okay, let’s start with a macro. In the first quarter, the macro environment was challenging from both a commercial and consumer perspective. The growth rate for U.S. manufacturing production fell throughout the quarter and was down 0.9% in March year-over-year. On the consumer side of the U.S. economy, the growth rate on services spending is continuing to outpace the growth rate on good spending, and within the goods bucket, consumer spent more on essential items like groceries, which tend to be purchased in store. These factors plus a five point drop in consumer sentiment from February to March contributed to the reduction in our volume levels. Outside the U.S. in the first quarter, Asia exports remained weak while Europe narrowly avoided a winter recession. In the face of all this, we responded with agility and remain focused on controlling what we could control to deliver great service for our customers and bottom line results for shareholders. In the first quarter, consolidated revenue was $22.9 billion, down 6% from last year and slightly below our base plan expectations. Operating profit was $2.6 billion, a decrease of 22.8%, however, we achieved our base plan operating profit. Consolidated operating margin was 11.1%, a decline of 250 basis points compared to last year. For the first quarter, diluted earnings per share was $2.20 down 27.9% from the same period last year. Now, let’s look at our business segments. In U.S. Domestic, revenue quality initiatives nearly offset the decrease in volume and as the decline in volume accelerated toward the end of the quarter, we responded quickly by adjusting the network to eliminate costs while maintaining our industry leading service levels. In the first quarter, we expected average daily volume to decline between 3% and 4%. For the quarter, average daily volume was down 5.4% year-over-year, primarily because volume in March moved lower than we expected. Looking at mix in the first quarter, we saw lower volume across all industry sectors with the largest declines from retail and high-tech. B2C average daily volume declined 5.5% compared to last year, and B2B average daily volume declined 5.4%. A bright spot in B2B in the quarter was returns, which was up 6.8% year-over-year. In the first quarter, B2B represented 42.7% of our volume, which was unchanged from a year ago. Additionally, the shift in product mix from air to ground that we saw in the fourth quarter of 2022 continued in the first quarter as customers made cost tradeoffs and took advantage of the speed improvements we made in our ground network and further leveraged our SurePost product. Compared to the first quarter of last year, total air average daily volume was down 16.7%, ground declined 3% and within ground SurePost grew 1.8%. Looking at customer mix, SMB average daily volume declined significantly less than our enterprise customers in the first quarter. SMBs, including platforms made up 29.6% of our total U.S. volume, an increase of 120 basis points year-over-year. For the quarter, U.S. Domestic generated revenue of $15 billion down 0.9%. Revenue per piece increased 4.8%, nearly offsetting the decline in volume. The combination of base rates and customer mix increase the revenue per piece growth rate by 500 basis points driven by strong keep rates from our general rate increase and increased SMB penetration. Fuel drove 200 basis points of the revenue per piece growth rate increase. Remaining factors reduced the revenue per piece growth rate by 220 basis points driven by the combination of negative product mix with ground packages outpacing air growth and lighter package weights. Turning to cost, total expense was relatively flat with an increase of 0.6% or $80 million in the first quarter. Higher union wage and benefit rates increased expense by over $300 million, primarily from a 6.1% increase in average union wage rates driven by the annual pay increase for our Teamster employees that went into effect in August of 2022. The U.S. Domestic team did an excellent job pulling cost out of the network in response to lower volume. We managed hours down 5.6%, which was more than the decrease in average daily volume, and we reduced headcounts throughout the quarter as volume growth rates decline. Together, these actions reduced expenses by more than $220 million, partially offsetting the increase in wage and benefit rates. Additionally, we reduced purchase transportation by $100 million, primarily from utilizing UPS feeder drivers to support our Fastest Ground Ever and from continued optimization efforts, which enabled us to reduce trailer loads per day by 7.5% compared to the same period last year. The remaining variance was driven by multiple factors including maintenance and depreciation. The U.S. domestic segment delivered $1.5 billion in operating profit, which was slightly above our base plan and down 12.7% compared to the first quarter of 2022. And operating margin was 9.9%. Moving to our international segment, we expected the macro environment to be bumpy and it was. Looking at Asia, export activity started off very weak due to the extended lunar New Year holiday. It gradually recovered through the quarter, but at a slower pace than we anticipated. In Europe, the macro environment was a little better than we expected, which helped offset the weakness in Asia relative to our base plan. In the first quarter, international total average daily volume came in as expected and was down 6.2% year-over-year. Domestic average daily volume was down 9.5%, which drove three quarters of the total average daily volume decline. Total export average daily volume declined 2.8% on a year-over-year basis driven by declines in retail and high tech market demand. Asia export average daily volume was down 8.9% and included a 20% year-over-year decline on the China to U.S. lane. Through the first quarter, we remained agile and we flexed the network to match demand. Reduced Asia block hours by more than the decline in Asia export volume and delivered excellent service to our customers. In the first quarter, international revenue was $4.5 billion, down 6.8% from last year due to the decline in volume and a $161 million negative revenue impact from a stronger U.S. dollar. Revenue per piece was relatively flat year-over-year, but there were a number of moving parts including a 370 basis points decline due to currency and a 180 basis points decline from demand related surcharges. These were offset by an increase in the fuel surcharge of 230 basis points and an increase of 330 basis points due to the combination of a high GRI keep rate and a favorable product mix as export volume outperformed domestic volume. Operating profit in the international segment was $806 million, down $314 million from the same period last year, primarily due to the decline in exports out of Asia and included a $97 million reduction in demand related surcharge revenue and a $51 million negative operating profit impact from currency. Operating margin in the first quarter was 17.7%. Now looking at supply chain solutions. In the first quarter, revenue was $3.4 billion, down $983 million year-over-year. Looking at key drivers. In forwarding, softer global demand, especially out of Asia, drove down market rates and volume resulting in lower revenue and operating profit. We are continuing to manage buy/sell spreads and have taken steps to reduce operating costs in this business. Logistics delivered revenue growth driven by gains in our healthcare logistics and clinical trials business and increased operating profit. In the first quarter, supply chain solutions generated an operating profit of $258 million and an operating margin of 7.6%. Walking through the rest of the income statement, we had 188 million of interest expense. Our other pension income was $66 million and our effective tax rate for the first quarter was 24.8%, which was less than we anticipated in our base plan due to lower tax impacts from our employee stock awards. Now let’s turn to cash and shareholder returns. In the first quarter, we generated $2.4 billion in cash from operations. Free cash flow for the period was $1.8 billion, including our annual pension contributions of $1.2 billion that we made in the first quarter. Also, in the first quarter, we issued $2.5 billion in long-term debt that we are using to pay off debt maturing in 2023. And in the first quarter, UPS distributed $1.3 billion in dividends and completed $751 million in share buybacks. Moving to our outlook for the full year 2023. In January, we provided a range for our 2023 financial targets due to the uncertain macroeconomic environment we saw at that time. Since then, the volume environment has deteriorated, especially in the U.S., driven by continued challenging macro conditions and changes in consumer behavior. As a result, we expect full year revenue and operating margin to be at the low end of the previously provided range. For the full year 2023, we expect consolidated revenues of around $97 billion and consolidated operating margin of around 12.8% with about 56% of our operating profit coming in the second half of the year. In U.S. domestic, we expect full year volume to decline around 3% versus 2022 with revenue per piece growth yearly offsetting the decline in volume and operating margin is expected to be around 11%. In international, we anticipate both volume and revenue to be down by around 4% and we expect to generate an operating margin of around 20%. And in supply chain solutions, we expect full year revenue to be around $14.3 billion, and operating margin is expected to be around 10%. We have proven our ability to adapt in a dynamic environment. We have many levers to pull on the cost side and we will continue to control what we can control by delivering industry leading service and remaining disciplined on revenue quality. We will also continue investing in growth and efficiency initiatives like international DAP, healthcare and Smart Package smart facility, which will help us come out of this economic cycle faster and stronger. Specifically, now that our volume is trending at the downside of our range, we are executing our plan to take out semi variable and fixed costs. Including in the U.S. air network, we are adjusting package flows to maximize utilization on our next day flights, which enables us to reduce block hours in our two-day operation. On the ground, we are pulling more volume into our large regional hubs, further leveraging the automation in those buildings and enabling us to eliminate sorts in smaller buildings. Driving more consolidation on the ground could potentially allow us to reduce our overall building footprint in the U.S. Internationally, based on the volume levels over the last couple of quarters, we’ve further reduced scheduled flights to reflect lower market demand while ensuring we maintain agility in the network to quickly add flights where needed if volume returns more strongly than we expect. Across our global business, we will continue to manage headcount with volume levels. And in terms of overhead, we see opportunities to further reduce costs by leveraging technology. Now let’s turn to capital allocation. Our plans have not changed. We will continue to make long-term investments to support our strategy and capture growth coming out of this cycle. We still expect 2023 capital expenditures to be about $5.3 billion, including investments in automation, and we’ll add 2.3 million square feet of healthcare logistics space to our global network this year. We’ll also complete the deployment of the first phase of Smart Package Smart Facility in the U.S., expand DAP internationally and continue building out our logistics as a service platform. We are still planning to pay out around $5.4 billion in dividends in 2023 subject to Board approval. We still plan to buy back around $3 billion of our shares. And lastly, our effective tax rate for the full year is expected to be around 23.5%. In closing, despite the challenging macro backdrop, we will continue to provide industry leading service to our customers and we will stay on strategy. We are investing to make our network even more efficient and to strengthen our customer value proposition to enable us to capture growth coming out of this cycle. Thank you. And operator, please open the lines.

David Vernon:

So Carol, I wanted to follow up on your commentary around the productivity in lighter volume. As you guys think about the way the business is performing against the lower volume outlook right now, how confident are you that if we get into a better volume environment, say 2024, 2025, that some of those productivity gains are going to be able to be held? And then Brian maybe is just a follow-up. Can you give us a sense for what sort of magnitude of facility reductions you might be able to pull off here in the next couple of years? Thanks.

Brian Newman:

And on the second part of the question, Dave in terms of the scope of building consolidation, et cetera, Nando and the team are doing a nice job working a project called network of the future, still early days. We do have some facility sales planned in the second quarter of the back half of the year, but that doesn’t really ramp up in terms of the opportunity to consolidate until 2024, 2025 in that timeframe.

Brian Newman:

But it is a change in culture. I don’t think Carol, we’ve actually closed buildings outside of the non-op side. So it’s a pivot to be more optimized and focused.

Amit Mehrotra:

Thanks, operator. Good morning, Carol and Brian. So Brian, the volume environment is obviously weaker and the weakness seems – seem to have accelerated towards the end of the quarter. So I’m just trying to understand, where are we now? I mean, they’re obviously – you’re obviously confident about achieving the low end of the guidance. I’m just trying to understand, that confidence in the context of the volume uncertainty. And then just as a follow-up if I could, Carol, it’s great that you think a win-win-win is still achievable, but the rhetoric is getting like really bellicose. And so, I’m wondering if you’d give some color on that dynamic because it seems like it’s costing you guys some volume right now. And I know you made an acquisition last year with Delivery Solutions that gives you access to a lot of contingent capacity. So talk about the win-win-win against the rhetoric, against the investments you’ve made. There’s a lot in there, but I’ll let you answer it however you want. Thanks.

Carol Tomé:

And maybe just a little more color on volume, and then I’ll go to your question about Teamsters. As we – as Brian detailed, the rate of acceleration in the year-over-year decline caused us pause because we were down around 3% in January, 5% in March – February and 7% in March. As we look at April, April has stabilized relative to how we exited March. So we feel very good that volume has stabilized. If we look at the year-over-year decline in the U.S. a little over 1 million packages today, we would attribute over 60%, nearly 62% of the decline due to macro and a plan decline with our largest customers. We’re declining with them in a mutually agreed way. So it’s really a macro story here and we’re delighted to see that the volume has stabilized. To Brian’s point, then, what gives us confidence that the volume will come back in the back half of the year. I’ll share with you our strategy as it relates to sales. And this is a multifaceted strategy. It starts with keep to your point about volume diversion, which all by the way wasn’t very much in the first quarter. We’ve assigned 127 high impact executives to over 380 customers representing about one third of our total volume. The role of the high impact executive is to meet with our customers, update them on our ongoing negotiations with the Teamsters and to keep them with us. The next element of our strategy is protect in the unlikely event of a work stoppage. And we’re not counting on that because we are confident we’re getting our contract. But in the unlikely event, we do have contingency plans to protect. The third leg of our strategy is to win back for any volume that has diverted. And we did have some it would be unreasonable to expect that we wouldn’t have any for volume that has diverted. We are going to win it back because they’ve told us they’re coming back. In fact, one customer just signed on the dotted line that they’re coming back once we have a handshake. The third is to continue to sell. We are selling in the environment and we want to sell and close and pull through those new customers. And then finally is work the pipeline. We have a pipeline that’s greater than $6 billion. That’s hard to sell into right now because of that Teamsters negotiation. But we are going to go hard at it once we have that handshake deal. And we’re going to go at it in a way that we’ve never done before because we will be using our dynamic pricing model. This is a very different way to go to market because we are creating value propositions for our customers that we haven’t done before. Using the architecture of tomorrow pricing model that we’ve created, which creates the modifiers to base price it’s a win for our customer and our win for UPS. So that’s really how we’re getting competent in the volume projections that we shared with you this morning. Now to your question about the Teamsters. It – we told you from the beginning that it was going to be noisy and that’s turning out to be true. But let me just comment on the recent rhetoric. There was some noise about supplemental agreements. We have over 40 supplemental agreements with the Teamsters. We have been negotiating in good faith with the Teamsters on those supplemental agreements and have made very good progress. In fact, Teamsters leadership and UPS leadership were in Washington D.C. last week, both given in opening comments regarding the Master agreement. So I feel like we are very much on track as to our timeline to accomplish a win-win-win. And why am I competent about a win-win-win? Well, first of all, we are aligned on the Northstar. And the Northstar is that a thriving, growing UPS is good for Teamsters, it’s good for UPS and it’s good for our people. And when you are aligned on the Northstar, everything else can get worked out on some of the issues that Teamsters have been very public about. And we talked about it’s the last time we had an earnings call. We’re aligned. For example, we all agree that weekend delivery is table stakes because that’s what consumers are expecting. We all agree it’s how we go about doing that from an operating model perspective, that we need to work it out. Because of restrictions in our contract, in some instances, we have Teamsters working six days a week. Teamsters don’t like that. I don’t like that. If you want to work six days a week, that’s fine with me, but if you don’t, we shouldn’t force you. So we’ve got to work that out. And there are a number of other issues just like that when we get to the bargaining table, we’ll figure out a way to work it out. I’m highly confident that we’re going to get a win-win-win agreement. But like any negotiation, it’s going to be a noisy and a few bumps along the way. And I just had this argument with my husband about a puppy. It was noisy, it was stuffy [ph]. But in any negotiation, that’s going to be the case and it’s certainly the case here. And that’s why I go back to our sales strategy of these high impact executives putting their arms around our customers and making sure they’re comfortable with us because we are confident we’ll deliver our contract.

Carol Tomé:

Thank you.

Allison Poliniak:

Hi, good morning. Just want to go back to the productivity side that the hours deployed, the spread between hours deployed and the volumes certainly narrowed this quarter. I know you talked about some stabilization in April and certainly some cost outs going forward. Just any color on how we should think of that spread? Should it remain positive and maybe expand as we get towards the back half of the year? Thanks.

Allison Poliniak:

Understood. Thanks for the color.

Operator:

Our next question comes from the line of Tom Wadewitz of UBS. Please go ahead, sir.

Brian Newman:

Yes. Tom, I’m happy to. And I assume you’re talking about the domestic business. We had guide….

Brian Newman:

Originally to an RPP growth of about 3% this year. Carol mentioned volumes are coming in a bit softer, but we’re holding on to that RPP and the RPP composition, we actually saw close to 5% RPP growth in the first quarter. That was driven by a tailwind in fuel about 200 bps that flips around Tom in the back end of the year where we expect double-digit decline in fuel price. So the way I think about the GRI and the customer mix piece, that should be mid-single digit about 5 points. And then we’ll have about a 200 bps decline from fuel. That gets us right into that, that that 3% range. We did see some headwinds in the product mix, the air to ground in the first quarter, that’ll moderate as we go into Q2 in the back end of the year. So that’s the composition.

Tom Wadewitz:

Okay. Great. Thank you.

Operator:

Our next question comes from the line of Jordan Alliger of Goldman Sachs. Please go ahead, sir.

Brian Newman:

Yes. [Indiscernible] was we were able to take cost out of that. And as you look at the back end of the year from another perspective, we’re certainly getting after a lot of the non-operating costs. We’re taking consulting spend out of the business. We’re taking headcount out of the business. So we’re really driving from a non-ops perspective down to something closer to a 4% of revenue from a cost perspective.

Brian Newman:

That’s exactly right.

Brian Newman:

Transition of buckets.

Brian Newman:

Yes.

Carol Tomé:

Well, here’s what we’re seeing in the business, week after week it’s better. It’s still down year-on-year, but it’s better slowly coming out of this negative year-over-year decline of almost 20% in the first quarter. And Kate and her team are doing a masterful job of managing through that. In fact, if you look at productivity outside the United States, our Asia export business down 8.9%, our block hours were down 14% and she’s taking more block hours out in the second quarter even with improvements just to optimize VR [ph] network.

Brian Newman:

Thanks, Jordan.

Ken Hoexter:

Hey, good morning, Carol and Brian. You talked about the sharp decline in mid-February. I guess you’ve seen this before where we’ve had some stabilization and then the sharp decline inventory still seem high. Maybe your thoughts on the backdrop, and maybe Brian a little more international, you talk about getting to 20% margin on international, but seems like pre-COVID you were operating maybe 16% to 19%. Did something structurally change or the mix change that, that you think that that is the new floor versus in a shifting environment it goes a little bit lower? Thanks.

Carol Tomé:

And on the volume question, again, it goes back to our sales strategy. We have pretty good visibility into the pipeline. We’re just going to pull that pipeline through. In today’s environment with the contract negotiation about a 100 days out to completion, it’s kind of hard to get it pulled through, but we’re going to pull it through when we get that handshake deal.

Brian Newman:

Thanks, Ken.

Scott Group:

Hey, thanks. Good morning. Brian, just a couple follow-ups on the guidance, the 11% U.S. margin. How does that trend throughout the course of the year? And then the volumes were down – the volumes down 3% for the year, how should we think about Q2? And is the back half sort of flat to positive? Is that what you’re expecting? Thank you.

Scott Group:

Thank you.

Operator:

Our next question will come from the line of Bruce Chan with Stifel. Please go ahead, sir.

Carol Tomé:

We are definitely seeing business wins. And I’m – I have to give a hat off to our sales team for selling through this environment. We are delivering packages for customers that we’ve never delivered before. Why? Because our service is the best in the industry. But what we see with some of our long-term existing large customers is that their business is changing. And I can give you a few anecdotes if that’s helpful. One of our large customers reports publicly every month their same-store sales. This is a customer who for 80 quarters in a row had positive same-store sales and in the month of March saw negative same-store sales. One of our other customers who has both in-store sales as well as online sales has seen a shift in their customer shopping behavior from online to stores. So they’re shutting down shifts inside of their warehouses, which make sense for them. So they receive generally macro and a change in consumer behavior impacting our volume, but we’re winning and we just got to go win faster and we will win faster when the uncertainty is behind us. I’m quite convinced of the Teamster negotiation. Customers say, we’d like to ship with you, we’re just going to sit on the sidelines till you’re done. So we just need to get done. And we will.

Brian Ossenbeck:

Hey, good morning. Thanks for taking the question. So Carol, you just gave some commentary about some of the volume trends from some of the customers. Are you seeing anything that you would attribute to perhaps demand destruction from parcel rates going up with capacity constraints, with some of the disruptions and surcharges including on fuel? Do you attribute any of the volume weakness to that? And then Brian, maybe you can elaborate a bit more on returns. You mentioned it was a pretty good growth driver in the quarter, but your largest customers also floating the idea of perhaps charging for some returns in the future. I wanted to see if that was some consideration we should think about in terms of what that could do for that volume driver, which seems to be a pretty good one, at least for the time being. Thank you.

Brian Newman:

And on the returns business, it’s a great business. The margins are attractive. We saw positive growth in the first quarter as I called out. And a big piece of that is the – over 5,000 stores, we have UPS stores across the country. Carol mentioned 7% of the volume originates in those stores. And it’s a great easy way for consumers to with the returns that are going on as the e-comm economy pursues. So we feel good about that and something we’re building capability in every day.

Operator:

Our next question comes from the line of Chris Wetherbee of Citigroup. Please go ahead, sir.

Brian Newman:

So we’re longer term, Chris, as we’ve talked to you. We’re always going to drive for RPP to outpace CPP. We’re a bit of an extraordinary environment right now with the macros and everywhere they are. So we don’t have margin expansion this year based on the guide. So you won’t see that likely return until 2024. But we feel good about the taking cost and CPP down to low single digit as RPP does come back. So feel okay about that. And then your math is fairly accurate in the second quarter, you’re doing the squeeze the right way.

Brian Newman:

Yes.

Ari Rosa:

Hey, good morning, Brian. Good morning, Carol. So I just wanted to understand, how do you think about the softer economic environment potentially impacting your discussion with the union? Is there any dimension on which it maybe makes negotiations a little bit easier or gives you a little bit more leverage vis-à-vis that discussion? Thanks.

Operator:

Our next question will come from the line of Helane Becker of TD Cowen. Please go ahead ma’am.

Brian Newman:

You’re talking about the UPS stores? So it’s a great foundation for volume origin. We have a royalty relationship that generates a royalty stream that comes in from the stores as far as what income comes into UPS. And as that volume grows, our royalty grows.

Ken Cook:

Excellent. Steven, we have time for one more question.

Stephanie Moore:

Hi, good morning. Thank you. Hi, Carol and Bryan. I just wanted to kind of look through your updated guidance, particularly your consolidated margin outlook. It certainly understand it’s a very fluid environment as it relates to volumes and appreciate the additional color of you guys executing on what’s in your control. But could you talk a little bit about your ability to maybe still hit that margin target and volumes were to deteriorate worse than you expected? And how you kind of framed that in your outlook as you kind of looked at the puts and takes for it. What is a pretty volatile year? Thank you.

Carol Tomé:

Well, you might share the split of variable, semi variable and fixed.

Ken Cook:

Thanks, Brian. And I want to thank everybody for joining us this morning. Look forward to talking to you next quarter. And that concludes today’s call.

Ken Cook:

Good morning, and welcome to the UPS fourth quarter 2022 earnings call. Joining me today are Carol Tome, 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 2021 Form 10-K, subsequently filed Form 10-Qs and other reports we file with or furnished 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 third quarter of 2022, GAAP results include a non-cash after-tax mark-to-market pension gains of $782 million, a onetime non-cash after tax charge of $384 million resulting from accelerated vesting of restricted performance units in connection with the change in incentive compensation program design, a non-cash after tax charge of $58 million from a reduction in the residual value of our MD11 aircraft and after tax transformation and other charges of $41 million. The after tax total for these items is $299 million, a benefit to fourth quarter 2022 EPS of $0.34 per diluted share. Additional details regarding your pension adjustments are included in the Appendix of our fourth quarter 2022 earnings presentation that will be posted to the UPS Investor Relations website later today. 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. [Operator Instructions]. And now I'll turn the call over to Carol.

Brian Newman :

Thanks, Carol and good morning. In my comments, I'll cover three areas, starting with our fourth quarter results. Then I'll review our full year 2022 results including cash and shareholder returns. And lastly, I'll provide comments on expectations for the macro environment and our financial outlook for 2023. In the fourth quarter, the macro environment was challenging. In the U.S. inflation-sensitive consumers returned to more pre pandemic shopping patterns and holiday retail sales were lower than expected, especially after Cyber week. Internationally, demand in Europe remained under pressure. Ocean and air freight rates declined and exports out of Asia worsened due to COVID conditions in China. Despite these conditions in the fourth quarter, we responded quickly and again delivered for our customers and shareholders. In the fourth quarter. Consolidated revenue was $27 billion, down 2.7% from the fourth quarter of last year, and operating profit was $3.8 billion, a decrease of 3.3% compared to the fourth quarter of last year. Consolidated operating margin was 14.1% for the quarter, down 10 basis points from the same time period last year. For the fourth quarter, diluted earnings per share was $3.62, up 0.8% from the same period last year. Now let's look at our business segments. In U.S. domestic, revenue quality initiatives more than offset the decline in volume and drove strong fourth quarter results. In the fourth quarter, average daily volume was down 3.8% versus the same time period last year, with about half of the decrease coming from our largest customer, per the mutually beneficial contractual agreement we reached some time ago. In the fourth quarter, volume in October and November came in as we expected, including a surge in late-November from Black Friday through Cyber week. In December, volume fell short of our expectations, reflecting consumer spending cutbacks at the height of the holiday season. B2C average daily volume declined 3% in the fourth quarter compared to last year. B2B average daily volume in the fourth quarter was down 5.2% year-over-year, driven by declines in retail and industry sectors that are more sensitive to rising interest rates, like manufacturing and distribution. In the fourth quarter, B2B represented 35.3% of our volume, which was down slightly from 35.8% in the same time period last year. Looking at customer mix, SMBs made up 26.5% of our total U.S. domestic volume in the fourth quarter, an increase of 70 basis points from one year ago, and the 10th consecutive quarter of increased SMB penetration. For the quarter, U.S. domestic generated revenue of $18.3 billion, up 3.1%. Revenue per piece increased 7.2% driven by revenue quality, which more than offset the decline in volume. Improvements in base pricing more than offset a small decline due to product mix and together drove about half of the revenue per piece growth rate increase. The remaining half of the revenue per piece growth rate increase was driven by the combination of higher fuel price per gallon and our fuel pricing actions. Turning to costs, total expense grew 2.5%. First, higher fuel costs contributed about 150 basis points of the total expense growth rate increase. Second, higher wages and benefit expense contributed 150 basis points of the increase. Total union wage rates were up 5.6% in the fourth quarter, driven by the annual wage increase and cost of living adjustment for our Teamster employees that went into effect in August of 2022. Productivity initiatives help partially offset the increase in expense. For example, total service plan has improved driver dispatch time by 7.9% since its launch in July 2022. This is helping us run an on-time network. And in the fourth quarter we increased total productivity by 1.6% as defined by pieces per hour. Lower purchase transportation expenditures reduced the total expense growth rate by around 140 basis points, primarily from utilizing UPS feeder drivers to support our fastest ground ever and continued optimization efforts. And the remaining expense growth rate increase was driven by multiple factors including maintenance and depreciation. Looking specifically at our peak period, our sales, engineering and operating teams planned and executed another successful peak. We used our technology to maximize the agility of our integrated network, including our newest regional hub in Harrisburg, Pennsylvania. All of which enabled us to respond to changes in volume levels and difficult weather as winter storms rolled across the country close to Christmas. Our network never stopped and we provided industry leading service to our customers for the fifth year in a row. The U.S. domestic segment delivered $2.3 billion in operating profit, up 7.5% compared to the fourth quarter of 2021. And operating margin was 12.8% year-over-year increase of 60 basis points. Moving to our international segment. The macro environment was challenging and resulted in lower volume than we anticipated in the fourth quarter. We leveraged the agility of our global network to quickly adjust capacity while delivering excellent service to customers. In the fourth quarter, international average daily volume was down 8.6%. The decline was primarily driven by a 12.9% decrease in domestic average daily volume and weakness out of Asia due to COVID. Total export average daily volume in the fourth quarter declined 4% on a year-over-year basis. Asia export average daily volume declined 10.3% driven by lower global demand and disruptions to manufacturing output from the changes in China's COVID policy. In response, we quickly adjusted the network and cancelled over 200 of our China and Hong Kong origin flights maintained high service levels and achieved a payload utilization of over 98% on our Asia outbound intercontinental flights. In the fourth quarter, international revenue was $5 billion, down 8.3% from last year, due to the decline in volume and a $321 million negative impact currency. Revenue per piece was relatively flat year-over-year, but there were a number of moving parts including a 660 basis point decline due to a stronger U.S. dollar, a 540 basis point increase from fuel surcharges and the remaining increase of 100 basis points was due to the combination of multiple factors including favorable product mix, base price increases and lower demand related surcharge revenue. Operating profit in the international segment was $1.1 billion, down $240 million from last year due to $139 million reduction in demand related surcharge revenue and a $98 million negative impact from currency. Operating margin in the fourth quarter was 22%. Now looking at Supply Chain Solutions, in the fourth quarter revenue was $3.8 billion, down $846 million year-over-year. Looking at the key drivers in forwarding, software global demand drove down volume and market rates more than we expected, resulting in lower revenue and operating profit. Logistics partially offset the declines in forwarding and delivered double digit revenue in operating profit growth driven by gains in our complex healthcare business from coaching and clinical trials customers. In the fourth quarter, Supply Chain Solutions generated an operating profit of $403 million and operating margin was 10.5%. Walking through the rest of the income statement, we had $182 million of interest expense. Our other pension income was $297 million. And our effective tax rate for the fourth quarter was 22.4%. Now let me comment on our full year 2022 results. In 2022, we remained focused on controlling what we could control and provided excellent service to our customers, which enabled us to deliver our consolidated operating margin and return on invested capital targets. A few consolidated highlights. Revenue reached $100.3 billion, an increase of $3.1 billion over 2021. This was $1.7 billion below our $102 billion revenue target, but included a $1.3 billion year-over-year negative impact from currency. In 2022, we generated operating profit of $13.9 billion, an increase of 5.4% over full year 2021 consolidated operating margin was 13.8%, an increase of 30 basis points. We increased our ROIC to 31.3%, up 50 basis points compared to last year. We generated $14.1 billion in cash from operations and continue to follow our capital allocation priorities. We invested $4.8 billion in CapEx. Additionally, we acquired Bomi Group, a delivery solutions and made an investment in Commerce Hub. We distributed $5.1 billion in dividends, which represented a 49% increase on a per share basis over 2021. We've repaid $2 billion in debt that matured during the year and our net pension liability decreased by over $3 billion. Both of which helped us reach our targeted debt to EBITDA ratio of 1.4 turns, giving us ample financial flexibility to continue deploying capital to create value for our shareholders. Lastly, we completed $3.5 billion in share buybacks in 2022. And in the segments for the full year, a U.S. domestic operating profit was $7.6 billion up 12.8% and we expanded operating margin to 11.8%, a year-over-year increase of 70 basis points. The International segment generated $4.4 billion in operating profit and operating margin was 22.4%. And Supply Chain Solutions delivered operating profit of $1.9 billion, an increase of $153 million and operating margin was 11.3% an increase of 150 basis points over 2021. Moving to our outlook for 2023. We expect 2023 to be a bumpy year, due to rising interest rates, decades high inflation, recession forecasts, a war in Eastern Europe, COVID disruptions in China, and our U.S. labor negotiations. While we anchor our plans to S&P Global economic forecasts, we have developed multiple plans scenarios that will help us quickly pivot in an uncertain macro environment. Further, given our financial strength and solid cash position, we are increasing strategic investments to enhance our ability to capture growth opportunities, as we come out of this cycle. I'd like to share two of those scenarios with you now, which are the basis for the guidance we are providing this year. The first is our base case that delivers the high end of the target range. And the second scenario includes additional top-line risks and represents the low end of the range. Let's start with our assumptions for the base case at a segment level. In the U.S., we expect a mild recession in the first half the year, with a moderate recovery in the second half of the year. In the U.S. domestic segment, we anticipate average daily volume will be down slightly due to our continued volume glide down from our contractual agreements with our largest customer which will be nearly offset with growth from SMB and other enterprise customers. And we expect volume growth to be better in the second half of the year compared to the first. We also expect the revenue growth rate to be low-single digits. On the cost side. While we will manage the network to match volume levels, we have increased both capital and operating expenses for projects that drive efficiency and growth. One example is the accelerated deployment of our smart package smart facility initiative to all remaining U.S. facilities, which we plan to complete by the end of the year. And on the growth front, we will continue to invest in improving customer experience. Putting it all together, we expect to grow revenue per piece at a faster rate than cost per piece, and expand full year domestic operating margins to 12%. Turning to international in 2023. In our base case plan, we expect a recession in Europe in the first half of the year. And in China, we expect weak demand in the first quarter with recovery beginning in the second quarter. We are accelerating initiatives like international data to help us gain share and partially offset macroeconomic softness. We anticipate international average daily volume will decline by low-single digit, with volume growth better in the second half of the year compared to the first. We expect revenue to decline by low-single digits, including reduction in demand related surcharges. We will continue to manage our costs with agility and expect to generate an operating margin of around 21%. Turning to Supply Chain Solutions, we expect revenue to be around $14.6 billion as forwarding volumes will remain challenged and market rates will fall from year-end 2022 levels. We expect to partially offset declines in forwarding revenue from double digit growth in our healthcare business, resulting in an operating margin of nearly 11%. In our downside plan, which represents the low end of our range, we start with our base case assumptions for all segments and layer in the following. In U.S. domestic, we reduced expected enterprise and SMB volume growth rates, resulting in a full year volume decline of around 3% versus 2022. In international, we layer in weaker demand out of Asia for the entire first half of the year, and a slower recovery in Europe in the second half of the year, resulting in a mid-single digit decline in average daily volume. And in Supply Chain Solutions, we lowered our assumptions for air and ocean freight forwarding market volume and rates, which reduced full year revenue for supply chain solutions by around $200 million. Bringing it all together for the full year 2023, we expect consolidated revenues to be between $97 billion and $99.4 billion and consolidated operating margins to be between 12.8% and 13.6%, with more than half of our operating profit coming in the second half of the year. Now turning to pension. There are a couple of factors to keep in mind as you update your models. First, beginning in 2023, we froze our defined benefit pension plan for U.S. non-union employees and have replaced it with enhanced 401(k) benefits. Second, high discount rates at the end of 2022 will result in lower service costs in 2023. Above the line, we expect the combination of these two factors will reduce operating expenses by approximately $420 million in 2023, with around 90% of the reduction in the U.S. domestic segments. Below the line, we expect pension income of around $260 million for the full year 2023, which is $930 million less than in 2022 primarily due to higher interest rates, resulting in an increase in pension interest expense and a reduction in the value of our pension assets for market performance in 2022. We've included a few slides in the Appendix of today's webcast deck to provide you more detail. The webcast deck will be posted to the UPS Investor Relations website following this call. Now let's turn to full year 2023 capital allocation. Our capital priorities have not changed and we will continue to make the best long-term investment decisions that will keep us on strategy and enable us to strengthen our customer value proposition and capture growth coming out of this cycle. We expect 2023 capital expenditures to be about $5.3 billion. And here are a few project highlights. We will invest $2.4 billion in buildings and facilities to add automated storage capabilities and increase efficiency across the network. And we'll add 2.4 million square feet of healthcare logistics space to our global network. We will invest $1.3 billion in vehicles, including adding more than 2,400 alternative fuel vehicles to our fleet. We will invest $745 million in our air fleet, including taking delivery of seven 767 aircraft in 2023. And in terms of IT, we will invest $830 million, which includes accelerating the rollout of smart package smart facility in the U.S., continuing to develop our delivery density solutions, and building out our logistics-as-a-service platform. And lastly, across these projects, and others, over $1 billion of investment will support our carbon neutral goals. Now, let's turn to our expectations for cash and the balance sheet. We expect free cash flow to be around $8 billion in our base case. Consistent with our policy of a stable and growing dividend, the board has approved a dividend per share of $1.62 for the first quarter, which represents a 6.6% increase in our dividend. We are planning to payout around $5.4 billion in dividends in 2023 subject to board approval. We plan to buy back around $3 billion of our shares. And finally, our effective tax rate is expected to be around 23.5%, with a tax rate higher in the first quarter compared to the rest of the year, due to the timing of our employee stock awards. In closing, we are focused on controlling what we can control, but we will continue to invest in our business to balance efficiency and growth opportunities under our better and bolder framework. The fundamental changes we made to our business, coupled with the continued execution of our strategy will help us navigate what's ahead in 2023. Thank you. And operator, please open the lines.

Operator:

Thank you. We will now conduct a question-and-answer session. Our first question will come from the line of Amit Mehrotra of Deutsche Bank. Please go ahead.

Brian Newman :

Thanks, Amit, I'll get started. We had about $420 million benefit to our consolidated operating costs, and that Amit, is being offset with investments. So that 420 specifically, I think you were talking about the domestic business, which is 380 of the 420, which is worth about $0.07 on a CPP. So when you think about the investment we're going to make into the business, which are about $400 billion, as I mentioned in my prepared remarks, that basically offsets the pension service cost impacted domestic. So it's more of a one for one. On the labor front, so we've modelled in rates in both our base and our downside scenario, Amit. And I'm not going to get into the wage and benefit component of that. But I guess there's a broader labor question in there.

Amit Mehrotra:

Very good. Thank you very much, everybody. Appreciate it.

Operator:

Our next question will come from the line of Tom Wadewitz of UBS. Please go ahead.

Brian Newman :

Sure, Tom. Well, look, Nando and the team have done a great job in pivoting and really driving productivity in the fourth quarter, they did an outstanding job. And we're calling for low single digit CPP in 2023. I referenced some of the investments that I think you're talking about in terms of smart pack smart facility, maybe if I unpack those, you'll get a sense of where we're investing. So smart pack smart facility that really drives productivity inside the buildings, but it also improves the customer experience by reducing misloads. I think misloads today are running about one in 400, post the smart pack smart facility we will be up in one in 800. And there's a path to something higher or beyond that. And then there's accelerating pilots for Phase 2 which is sort baggage car. Another area we're investing in, probably the second largest is healthcare. That's a great growth business for us. We're going to be adding about 2.4 million square feet in warehouse space next year. Some of that outside the U.S., half of that in the EU and half in the Americas. And then DAP has been a great performer for us. We're going to continue to invest in the DAP program, both domestically and internationally, enhancing the plug and play and adding brokerage in UPS access points in terms of capability. And then there's further investments into the customer experience and next gen brokerage. So Tom, I think we have a lot of confidence in terms of the ability to drive total service plan, the investments we're making in smart pack smart facility, healthcare, DAP, and that's what's contributing to the low single digit CPP in 2023.

Brian Newman :

And to Tom just from a seasonality perspective, we have planned productivity gains year-over-year in every quarter in '23. And so now the team will be reducing hours more than volume in the U.S. through the programs Carol and I just alluded to TSP and the automated capacity. So it's a balanced program.

Operator:

Our next question comes from the line of David Vernon of Bernstein. Please go ahead.

Carol Tome :

Well, I think there are a number of catalyzing agents. We need to get through this choppy economic environment for sure. But if you think about where we've had some huge homeruns, let's talk about our Digital Access Program. We have seen enormous growth in this. When I started, it was less than $150 million, now over $2.3 billion in 2022 on its way to be $3 billion in 2023. And we're growing outside of the United States, had been just a U.S. program, now we're going outside the United States. And this is one area of investments for next year. So that's a catalyst for growth, because we're investing in a customer that's underserved today. Another catalyst for growth is what we're doing on the customer journey. As we continue to move the needle on improving the experience with us, we see every year increasing penetration in our SMBs. Brian, that's part of the plan for next year.

Carol Tome :

Another catalyst for growth, of course, is healthcare logistics. Couldn't be more proud of the progress that we've made in this space. And we're just getting started. There's a huge opportunity for growth here around the world. And Kate and her team are doing a masterful job of leading us there.

Brian Newman :

Now, some of the investments, international DAP for example, we're investing in the first part of the year, that'll start to pay back latter part of the year. And then the deployment of smart packs, smart facilities, that's probably more of a payback in '24 than '23 as we phase, complete Phase 1, and start to move on to Phase 2.

David Vernon :

That's super helpful. Thank you.

Ken Hoexter :

Hey, great. Good morning. Carol, great to hear the target to have the contract done by the end of July. I think last year we had talked to you, you weren't even planning on sitting down early. So I think that's encouraging to hear. Maybe you could talk a little bit about what the largest customer kind of represented full year for '22, your thoughts? I know you talked about the pace of the loss of that business, but it sounds like it's accelerating into '23. Maybe you could talk a little bit about that in perspective of your countering SMB wins. And then on international to maintain that 21%, Brian, what's the assumptions in there to maintain that level?

Carol Tome :

And agility really is the name of the game, isn't it. Here it is. It's the end of January. I would say our crystal ball is pretty murky, but I can tell you what we're seeing in the business today. The U.S. is actually doing a bit better than the base case. And International is doing a bit worse because we're in a now a two-week Lunar New Year holidays, who would have thought. But with herd immunity coming, we believe in China, things should get better outside the United States.

Carol Tome :

No, Ken, it's really is a function of currency. FX impacted our top line by $1.3 billion. So having not had the pressure on the top line, the percentage would have been different. Does that make sense?

Carol Tome :

Yeah, thanks, Ken.

Ken Cook :

And just a reminder, please limit yourself to one question, so that we can get through as many participants as possible.

Scott Group :

Hey, thanks. Good morning, guys. So I just want to make sure I'm understanding the guidance piece this year. So I think you said in the base case, Brian, the U.S. margin is 12%. And can you talk about where you see it in the downside scenario? And then you talked about more than half of the operating profit in the second half of the year. I mean it's typically somewhere between 50% and 55%. Should we think anything differently? I don't know if you want to give us a little bit more color on first half or second half profit margins and any color there? Thank you.

Scott Group :

Thank you, guys.

Operator:

Our next question comes from the line of Todd Fowler of KeyBanc Capital Markets. Please go ahead.

Brian Newman :

Yeah, it's a great question. So the GRI, as you know, was 6.9%. And with the service rates, we'll keep a decent amount of that. The guide for RPP that we're building in our base case is mid-single digit for RPP, and that is facing two headwinds off of that number. You've got product mix and fuel, which are each combined, about 150 to 200 basis points off of that mid-single digit. So that's how we're thinking about it. And the product mix is really less air, more sure post, so a shift in the product mix. And then the fuel component, fuel is not going to have a big net impact to the business in 2023. But obviously, there's a cost component versus a revenue component.

Operator:

Our next question comes from the line of Allison Poliniak of Wells Fargo. Please go ahead.

Carol Tome :

Well, I think Kate is here. And Kate, it would be great if you could just take that question, please.

Allison Poliniak:

Great. Thank you.

Jordan Alliger :

Yeah, hi. Good morning. Knowing that the SMB penetration continues to be an important part of the strategy, just sort of curious in an environment that's tougher, does it get more difficult to penetrate them? And do you find it maybe when you do, they're sort of trading down in services? Just sort of curious, especially given your large customer will continue to sort of shrink over the coming years. Thanks.

Brian Newman :

Thanks, Carol. Yeah, I would just follow up and say we're putting some OpEx investments, $400 million, into the business this year. We invested in a similar capacity in fastest ground ever and SMBs, et cetera, a couple of years ago. And as I think about the SMB journey by investing in those customer experience points Carol was talking about, those investments are paying off. That's what gives us confidence. We are seeing 40% higher SMBs today than in 2019 when we started that journey in that investment. And we're actually -- we've increased penetration, Carol, for the last 10 consecutive quarters. So it's a bit of a proof point on the SMB front in terms of the investment and the payoff.

Operator:

Our next question will come from the line of Chris Wetherbee of Citigroup. Please go ahead.

Carol Tome :

Maybe on the SMB question, let's look at our Digital Access Program. It's been a huge home run for us. Year-over-year, we saw $1 billion of growth in this program. Here's the important part. It's 3.5 million customers. It's -- these are very small customers who are shipping with us through the platform, and we see continued growth opportunities ahead for us. In fact, we think our DAP program will be over $3 billion in 2023.

Chris Wetherbee :

Thank you.

Operator:

Our last question will come from the line of Brian Ossenbeck of JPMorgan. Please go ahead.

Brian Newman :

Happy to, Brian. So on the pension front, look, we've been on a path to derisk the pension. And we actually feel good about the glide path there. We're up in the high-90s, about 98% funded level, which is great for our employees. From a liability perspective, we've taken that down from about $16 billion a couple of years ago to $4 billion, $4.8 billion now. So overall, the glide path has been good. The challenge we have is that we've seen historic rise in interest rates. And so that $900 million plus number that I gave you below the line, that is a non-cash number, but it moves up and down with the market. So we try to give you the transparency. We do tend to look through that as it's a non-cash number when we think about our capital allocation vis-a-vis the dividend, et cetera. So net-net, I think we're doing the right thing for the company. Given the volatility in the interest rates, it is a challenging environment and will move up and down on a relative basis.

Nando Cesarone :

Sure. Just if you look at the shape of the volume, especially in the fourth quarter and quarters before that, we've shown tremendous agility making sure we're matching the hours and the activity in our operations to the actual volume and the revenue. That will continue. And quite frankly, our people are masters of efficiency. So as we rollout the second iteration of our total service plan, which kicks off on March 3, we're learning a lot about our network. And there's cost to be had in not just on-road activity or inside our facilities, but across the entire network. And we're laser-focused on those initiatives. And whatever volume and how it comes into us in different shapes and sizes, we'll make sure that we're prepared to handle it effectively. And hopefully, we're building up a little bit of a track record to show that, that's exactly what we have been doing. So I appreciate it.

Ken Cook:

Good morning, and welcome to the UPS third quarter 2022 earnings call. Joining me today are Carol Tome, 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 will 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 2021 Form 10-K, subsequently filed Form 10-Qs and other reports we file with or furnished 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 third quarter of 2022, GAAP results include after-tax transformation and other charges of $27 million or $0.03 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. [Operator Instructions] And now, I will turn the call over to Carol.

Brian Newman:

Thanks, Carol and good morning. In my comments, I’ll cover four areas, starting with the macro environment, then our third quarter results. Next, I will cover cash and shareowner returns. And lastly, I will wrap up with some comments on our outlook for the rest of the year. In the third quarter, the macro environment remained dynamic. In the U.S., we continue to see cross currents driven by the strong job market and healthy consumer spending despite higher inflation and interest rates. Internationally, the macro environment weakened more than we expected due to high inflation, volatile energy prices, lockdowns in Asia, and the war in Eastern Europe. We responded quickly to the changing market conditions by leveraging the agility of our global integrated network to provide excellent service to our customers and deliver our bottom line commitments to shareowners. In the third quarter, consolidated revenue increased 4.2% to $24.2 billion. Consolidated operating profit totaled $3.1 billion, 6% higher than last year. Consolidated operating margin expanded to 13% which was 20 basis points above last year. For the third quarter diluted earnings per share was $2.99, up 10.3% from the same period last year. Now, let’s look at our business segments. In U.S. domestic, our revenue quality efforts and the execution of our planned cost initiatives drove third quarter results above our expectations. In the third quarter, average daily volume was down 1.5% versus the same time period last year, but the growth rate was an improvement over the first half of 2022 as new volume from the record number of wins we had in the second quarter came into the network. In the third quarter, the gap between year-over-year B2C and B2B average daily volume growth rates narrowed as we lapped more normalized consumer shopping behaviors. B2C average daily volume declined 2.2% driven by contractual agreements we reached with certain enterprise customers. B2B average daily volume was down 0.5% year-over-year due to declines in manufacturing volumes, which was partially offset by growth in retail B2B driven by returns volume. In the third quarter, B2B represented 42.8% of our volume, which was up slightly from the 42.4% in the same period last year. Looking at customer mix, the execution of our strategy is continuing to drive improvement. In the third quarter, we grew SMB average daily volume, including platforms, 1.9% and SMBs made up 28.3% of our total U.S. domestic volume in the quarter, an increase of 90 basis points from 1 year ago. For the quarter, U.S. domestic generated revenue of $15.4 billion up 8.2%. Revenue per piece increased 9.8%, more than offsetting the decline in volume. Our revenue quality efforts continue to deliver results. In the third quarter, about one-third of the revenue per piece growth rate increase came from continued strength in base pricing. Another third of the revenue per piece growth rate increase came from changes in fuel price per gallon and the final third came from the combination of mix and our fuel pricing actions. Turning to costs, total expense grew 7%. Wages and benefits contributed about 310 basis points of the increase driven by the annual increase for our teams to employees that went into effect in August. Fuel drove 220 basis points of the expense growth rate increase due primarily to the rise in price per gallon compared to last year and the remaining variance was driven by multiple factors, including maintenance and depreciation. Cost in U.S. domestic came in as we expected due to our planned productivity initiatives, which drove our cost per piece growth rate to be lower in the third quarter than it was in the second quarter and partially offsetting wage and benefit increases. We are continuing to see the benefits of our cube utilization and other productivity efforts, including total service plan, which launched on July 11. I will share more about our productivity initiatives in a moment. To sum it up, revenue growth was above expense growth, which created positive operating leverage for the seventh consecutive quarter. The U.S. Domestic segment delivered $1.7 billion in operating profit, an increase of $272 million or 19.2% compared to the third quarter of 2021. And operating margin expanded 100 basis points to 11%. Moving to our International segment. The global macro environment continued to soften, but we remained agile and flexed our network in response to changing market conditions and delivering excellent service to our customers. At the beginning of the quarter, we expected the international average daily volume growth rate to improve compared to the first half of 2022, and it did. However, it did not improve as much as we anticipated due to continued macro softening. In the third quarter, international average daily volume was down 5.2%. Total export average daily volume declined 0.6% on a year-over-year basis. China export volume declined due to lockdown and disruptions to manufacturing output. In response, we quickly adjusted the network and canceled 75 China and Hong Kong origin flights and rerouted 27 flights to other gateways in support of our customers. These changes enabled us to move volume for our customers where it was available, maintain high levels of service and achieve a payload utilization of over 98% on our Asia outbound intercontinental flights in the third quarter. Looking at Europe. We continue to win on our speed and service advantages at strong revenue quality despite softer market conditions. We grew transborder average daily volume 2.6%, and total Europe export average daily volume grew 0.6% in the third quarter. In the third quarter, international revenue increased 1.7% and to $4.8 billion, which included a negative currency impact of $335 million and a fuel benefit of $363 million. Revenue per piece increased 6.4%, which included the fuel and currency impacts I just covered and a 510 basis point increase from the combination of product mix and revenue quality actions we took. Operating profit in the International segment was $1 billion, which included an $82 million negative impact from currency. There was no year-over-year impact from fuel on international operating profit. Operating margin in the third quarter was 20.9%, which was down from the same period last year due to the delevering of our fixed costs and the impact of a stronger U.S. dollar. Now looking at Supply Chain Solutions. Our teams continue to navigate a dynamic macro environment in the third quarter and did an excellent job serving our customers and managing costs to deliver year-over-year operating margin expansion. In the third quarter, revenue was $4 billion down $268 million year-over-year, which included a $92 million negative impact from currency. Looking at the key drivers. In freight forwarding, declines in volume and market rates reduced revenue and operating profit. However, the team was able to effectively manage buy/sell spreads and continued supporting our customers. Within Forwarding, our truckload brokerage unit delivered strong operating profit growth driven by revenue quality initiatives. And Logistics delivered strong top and bottom-line growth driven by our complex healthcare business from cold chain, clinical trials and medical device customers. In the third quarter, Supply Chain Solutions generated operating profit of $459 million and delivered a record third quarter operating margin of 11.5%, an increase of 100 basis points over last year. Walking through the rest of the income statement, we had $177 million of interest expense. Our other pension income was $297 million, and our effective tax rate for the third quarter was 21%, which was better than we expected due primarily to discrete items. Let’s turn to cash and shareholder returns. Year-to-date, we’ve generated $10.8 billion in cash from operations and free cash flow was $8.5 billion. And so far this year, UPS has paid $3.8 billion in dividends and completed $2.2 billion in share buybacks. Now I’ll make a few comments regarding our outlook. According to IHS, full year global GDP is expected to grow 2.8% and U.S. GDP is expected to grow 1.7%. Both are lower than their forecast at the beginning of the year. We are continuing to pay close attention to macro elements, including lockdowns in Asia, inflationary pressures, the health of the consumer and the geopolitical environment. Needless to say, the macroeconomic environment is much different now versus our expectations when we started the year. But by controlling what we can control, quickly adjusting the network to match changes in volume levels and delivering excellent service to our customers, we are still on track to deliver our full year financial targets. We expect consolidated revenues to be around $102 billion. Consolidated operating margin is expected to be about 13.7% and return on invested capital is anticipated to be above 30%. Now let me give a little color on the fourth quarter. Starting with U.S. domestic, we anticipate fourth quarter 2022 revenue growth of around 4.5% driven by strong revenue quality, and we expect fourth quarter operating margin to expand year-over-year to around 12.4%. Looking at peak in the U.S., we expect peak volume to come in heavier later in the peak period, and we have one additional delivery day compared to last year, which gives us more flexibility. As you update your models for U.S. domestic, there are a few things to keep in mind. We anticipate the average daily volume growth rate will be lower in the fourth quarter of 2022 than in the third quarter due to contractual agreements we have reached with certain enterprise customers. Second, we expect increases in wage and benefit rates will be higher than the same time period last year due to the annual increase our teams or employees received in August. And third, we are continuing to execute our productivity initiatives to help offset wage and benefit rate increases. Our biggest productivity initiative is total service plan, which is performing as planned. Since the launch on July 11, we’ve improved our driver dispatch timeliness by 13%. This is about getting our drivers out of the building on time, which creates a more predictable environment for our employees and better service for our customers. Also, in regard to productivity in the third quarter, we brought on additional automation in the network prior to peak, including automated tagging, robotic small store induction and autonomous – vehicles. As a result of all these efforts, we expect the U.S. domestic fourth quarter 2022 cost per piece growth rate to be lower than it was in the third quarter of 2022. Moving to international. We expect revenue in the fourth quarter of 2022 to be relatively flat to the fourth quarter of last year. We anticipate our share growth and revenue quality initiatives will offset the weaker macroeconomic environment and negative currency impacts, and we expect international operating margin to increase sequentially in the fourth quarter of 2022 to around 21.5% as we continue to respond to market changes with agility. In Supply Chain Solutions, we expect revenue in the fourth quarter to be above $4 billion as we partially offset declines in the air and ocean freight forwarding revenue with continued growth in logistics and our healthcare business. Operating margin for Supply Chain Solutions in the fourth quarter of 2022 is expected to be around 11.4% as we continue to effectively manage the buy/sell spreads in a dynamic environment. Turning to capital allocation for the full year. In 2022, we expect free cash flow to be above $9 billion, including pension contributions to fund annual service costs. Capital expenditures are now expected to be about $5 billion, which is $500 million less than our original plan. The largest driver of the variance is the result of our decision to lease certain facilities instead of purchasing them. This approach enables us to maintain higher levels of agility and further improve our overall capital structure. We plan to pay out around $5.2 billion in dividends, subject to Board approval. We have repaid $2 billion in debt this year as planned, including $1 billion in October. We expect to complete at least $3 billion in share repurchases for the year. And lastly, we expect the tax rate for the full year to be around 22%. Before I wrap up, last week, we announced our U.S. general rate increase. The 2023 increase will be 6.9%, reflecting the value of the services we offer and cost inflation in the market. The details have been posted to ups.com. Executing our strategy under better not bigger has led to a greater agility across our business and stronger financial performance. Our move to better and bolder enables future growth in revenue and margin. By combining the strength of our physical network with new digital capabilities, we will continue providing excellent service to our customers, win in the most attractive parts of the market, increase the efficiency of our operations and create value for our shareowners. Thank you. And operator, please open the lines.

Allison Poliniak:

Good morning. Just want to talk to the total service plan and some of the automation you put through. Brian, I think you had talked to $300 million of productivity. It sounds like you’re on your path there. Do we start to see that accelerate into Q4? Are these trending better than maybe you would have thought originally? Just any color there. Thanks.

Carol Tome:

Maybe just a little more color there. Our overtime hours were down 1 million hours in the quarter. Our bench has dropped from 29% to 20% and we reduced fluctuations in driver pay days by 39%. So the plan is working, and we just got started with it on July 3.

Operator:

Our next question will come from the line of Amit Mehrotra of Deutsche Bank. Please go ahead.

Carol Tome:

Well, starting with the question on market share, a big turning point for our company is when we invested in fastest ground ever, improving our time in transit. And yes, we are advantaged or at parity in 17 of the top 25 markets. We offer 7-day residential service, Saturday pickup for our business customers. So this has made a significant difference in our business. And if you look at it through the lens of market share, just looking at SMB in the United States, we see that – we have seen that we’ve grown both revenue and ADB market share ahead of our competitors. And when we look at it through the lens of enterprise, we’ve grown revenue share. So we are delighted with the share gains that we’ve seen in United States, but the share gains continued outside of the United States as well. Super pleased of the time in transit advantage that we have in Europe and what that’s meant for share gains in Europe despite the very uncertain market.

Amit Mehrotra:

Yes. Thank you very much.

Chris Wetherbee:

Yes, thanks. Good morning. And I want to look a little ahead to 2023 and maybe think a little bit more on the cost side. Obviously, the macro is challenging. As you noted, there is cross currency in the U.S. But it seems like we’re in a decelerating demand trend. So I wanted to get a sense of sort of the big picture initiatives you guys are working on from a cost perspective in 2023. And I think I’ve asked you this before, but as you think out to ‘23, assuming we are in a more cautious sort of potentially negative volume environment, are we still confident that we have the ability to sort of grow the domestic margins as well as domestic profit next year?

Brian Newman:

So, Carol, thanks. And I just go back to this control what we can control and a lot will happen with the macros on the top line. But we had guided to a 13.7% on the UPS operating profit margin. Embedded underneath that was a 12% domestic margin and a 21.5% international. So Nando and the team have got a lot of initiatives from total service plan to what Carol talked about, smart package, smart facility, pushing out automation. Nando, do you want to offer a little bit of color?

Carol Tome:

So we will give you our thoughts on ‘23 when we release our fourth quarter earnings call because we’re still in the middle of building the plan, but we’ve got a lot of initiatives underway. It doesn’t stop just in the United States, but there is some interesting initiatives underway outside of the United States, too, Kate?

Chris Wetherbee:

Thank you very much. Appreciate the comments. Thank you.

Tom Wadewitz:

Yes. Good morning and congratulations on the strong results. I wanted to see if you could offer some thoughts about sensitivity to lower international air freight rates. I think your comment on 3Q, it sounds like currency was a bigger effect. I don’t think you mentioned the impact of lower rates. But how should we think about that impact on international margin if international airfreight rates keep falling? Does that flow through to your international export, or do you have some resiliency relative to that? And then also if you kind of look back at I think at your analyst meeting and you had talked about, I don’t know if it was 21% or 21.5%, but some type of a margin level where you say after the belly space capacity comes back, this is what we get to. So, a couple of questions for you on international margin. Thank you.

Carol Tome:

Our international margin will increase sequentially Q3 to Q4. And part of that is because of the great work that Kate and team are doing to move off of charter on to brown tills [ph]. Brown tills are just a better economic equation for us, and we are utilizing the aircraft that we own, which will certainly help that margin pressure. In terms of what a good operating margin is for international, well, I don’t know. We love what we have got. We want to continue to grow it. So, Kate has declared that we are going to be number one in the premium international logistics market. So, that means higher margins.

Carol Tome:

Thank you.

Operator:

Our next question will come from the line of Brian Ossenbeck of JPMorgan. Please go ahead.

Carol Tome:

So, in terms of pricing durability, value is defined by what a customer is willing to pay, and the customer is willing to pay for the service that we provide. So, the new business that we have won and we have been winning new business has come in at very, very solid revenue quality. Now, as I look back over the past several years, from 2019 to now, we have grown our RPP in the United States by 23%. And we did that through a number different ways by renegotiating on longer term contracts, by leaning into the parts of the market that really value our end-to-end network through some demand surcharges, a little bit of help from fuel. It’s been a real success story. We have also driven productivity during that timeframe, but the margin expansion has been really driven by the RPP growth. Looking ahead, we will continue to have RPP growth. You heard Brian talk about the GRI that we just announced. But there will be more of a balance between RPP and productivity to enable our margin expansion going forward. We think that’s just the right thing to do. In fact, as we continue to drive productivity inside of our business, we are willing to give some of that back to our customers through a revenue share, is why not. If we can increase delivery density and we are seeing some good proof in our both our pilots and now our live case, we will give some of that back because we should. I think about a third, a third, a third, a third for the customer, a third for the shareholder and a third for UPS. So, we have not seen any demand destruction at this point because value is defined by what the customer is willing to pay for and service matters.

Brian Ossenbeck:

Okay. Thank you.

Ravi Shankar:

Thanks. Good morning everyone. A couple of questions on peak. I think you mentioned the kind of 4Q volume decline is due to some contractual agreements with enterprise customers. I think you said that in 3Q as well. Can you detail that a little bit more and maybe kind of what the kind of Amazon run rate looks like by the time you exit the year? And also just broadly on peak, where are you – why is your peak season hiring flat when volumes are lower and your – and then do you have more automation than last year? We have seen some other kind of peak season hiring kind of be materially lower. So, kind of maybe some rationale at the end, that would be great.

Brian Newman:

I would just add, Carol, Ravi, we are sort of executing the play. We had called – we had guided what does it mean at the bottom line, 11.6 full year, and that was an 11.6 1H and 11.6 2H were actually delivered the first half of the year. Obviously, a lot of changes in dynamics in the market, but we are on track to deliver an 11.7 in the back half of the year. So, net-net, Ravi, I think we are delivering what we said we would do, slightly different playbook in terms of volume price cost. But at the end of the day, executing on those contracts, it was part of the original plan.

Operator:

Our next question will come from the line of Jordan Alliger of Goldman Sachs. Please go ahead.

Carol Tome:

Remember last year, when there were all these supply chain dams and inventory was at very low levels, everyone was saying shop early, shop early, shop early. So, we just believe that the inventory levels are in much better shape than they were a year ago. So, we are going to return to a more normalized shopping pattern for peak. And if we can just talk about the tone of business, current business, here it is. It’s almost Halloween, October was good.

Jordan Alliger:

Thank you.

Todd Fowler:

Great. Thanks and good morning. So, Carol, in your prepared remarks, you talked about Logistics-as-a-Service. And I was just curious if you could expand a little bit on that and kind of how you see that holding and if there is any external benchmarks that we should be looking at to kind of mark the progress on that. Thanks.

Todd Fowler:

Sounds good. Thank you.

Operator:

Our next question will come from the line of David Vernon of Bernstein. Please go ahead.

Brian Newman:

Happy to take the cost question. So look, the momentum with Nando and the team, they are really just getting started. We saw CPP growth about double digit in the first half. That will be high-single digit in the second half of the year. We would probably expect to see that trajectory continue to next year. I don’t want to get ahead of my skis though. So, we will come out at the end of the fourth quarter and give you some guidance for RPP and CPP for next year.

David Vernon:

Thanks for the time.

Operator:

Our next question will come from the line of Bruce Chan of Stifel. Please go ahead.

Brian Newman:

So, from a maintenance perspective, we have actually gone to a very systematic, programmatic approach and gone out with multiyear. On the airline, for example, we now have a 10-year maintenance program to manage the fleet age of the equipment. It is going up in terms of age and therefore we factor that in on more of a normalized run rate over the next decade.

Brian Newman:

So, right now, we announced some recent acquisitions with Boeing. And so we have the next several years outlined. We will remain fluid on that as we track volumes and shift the aircraft around.

Brian Newman:

That’s right.

Brian Newman:

As we set down, some of the MD11s from a sustainability standpoint, that’s a positive thing from an operating – productivity standpoint, that’s also a positive thing. So, that’s part of the overall strategy that we have run over the next 10 years.

Operator:

Our final question will come from the line of Stephanie Moore of Jefferies. Please go ahead.

Carol Tome:

Yes. So, it’s still early days, Stephanie, but we are pleased with what we are seeing. We were in pilot, then we went live with one of our customers, and we started to see good matches. But to get that one-tenth improvement and delivery density, you really need a 5% match. And we weren’t seeing 5%. So, what we just did is we increased the whole time. We had been holding the orders in the car for an hour. We increased the whole time six hours. And now we are starting to see a creep up to that 5% match. That’s cool because a 5% match, then if you translate it out, to our opportunity set, that’s a one-tenth improvement in delivery density, which is a $300 million value unlock. So, early, early days, but really like what we are seeing.

Ken Cook:

Excellent. Alright. Well, thanks everybody for joining us today. We look forward to talking to you all next quarter. And that concludes our call.