Ladies and gentlemen, we’d like to say good morning to you. My name is Stephen and I will be your conference facilitator today. At this time, I would like to welcome everyone to the UPS Investor Relations first quarter 2020 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer period. It is now my pleasure to turn the floor over to your host, Mr. Scott Childress, Investor Relations Officer. Sir, the floor is yours.

Good morning and welcome to the UPS first quarter 2020 earnings call. Joining me today are David Abney, our CEO; Brian Newman, our CFO; Kate Gutmann, our Chief Sales and Solutions Officer, along with International President Nando Cesarone, President of U.S. Operations George Willis, our Chief Information and Engineering Officer Juan Perez, and Scott Price, our Chief Strategy and Transformation Officer. 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 expectation for the future performance or operating results of our company. These statements are subject to risks and uncertainties which are described in detail in our 2019 Form 10-K and other reports filed with the Securities and Exchange Commission. These reports when filed are available on UPS Investor Relations website and from the SEC. During the quarter, GAAP results included a pre-tax charge of $45 million or $0.04 per share on an after-tax basis. The charge resulted primarily from transformation-related activities. In the prior year period, adjusted results excluded a pre-tax charge from transformation costs of $123 million or $0.11 per share on an after-tax basis. Unless stated otherwise, our comments will refer to adjusted results. The webcast of today’s call along with a reconciliation of non-GAAP financial measures are available on UPS Investor Relations website. Webcast users can submit live questions during the call. We will attempt to answer questions of a long-term strategic nature. Callers are asked to submit only one question so that we may allow as many as possible to participate. Thank you, and now I’ll turn the call over to David.

Thanks Scott, and good morning everyone. I would first like to thank UPSers worldwide for going above and beyond during the coronavirus pandemic. Since this crisis began, we have been operating as a critical infrastructure business leveraging the strength of our global network to keep supply chains moving around the world. People are counting on UPS more than ever before, and I am proud of the heroic actions of our employees throughout this pandemic. This crisis touches all parts of our business, and we have been methodical in our response. Our actions prioritize safety, focus on our customers, ensure our liquidity, and position UPS for additional opportunities as conditions improve. Regarding safety, we have adjusted our health and safety protocols throughout our company with increased social distancing, which includes waiving customer signature requirements where possible; more personal protective equipment, or PPE for our people; frequent cleaning of our facilities and equipment, and teleworking for our employees where feasible. Those are just some of the safeguards we’ve implemented to protect our people and customers, and we will continue to adjust as conditions change. I also want to recognize the extraordinary efforts of healthcare professionals and everyone on the frontlines in the communities where we live and work. On behalf of UPS, we are grateful for their efforts and sacrifices. UPS is one of the few companies with the logistics expertise and global infrastructure to keep critical healthcare and other supply chains moving. We’ve embraced our leadership role supporting FEMA with Project Airbridge and other healthcare-related missions by managing charter flights to deliver millions of pounds of PPE and test kits from around the world into dedicated UPS distribution space outside Worldport. From there, we’re providing overnight delivery to locations throughout the U.S. UPS is also assisting other federal and state government…

Good morning everyone. During the quarter, UPS saw unprecedented and rapid change in customer and volume fundamentals. As a result, we faced a challenging and uncertain environment. I’ll begin today by describing the factors that contributed to our results, then cover the strength of our liquidity and wrap up by sharing the trends we see in our business. Let me start with how the quarter unfolded. First, as David mentioned, leading economic indicators have turned negative. Historically, the small package industry was highly correlated with GDP but with two important variations. The small package industry typically grows faster than GDP over the long run, especially in a strong ecommerce environment; and second, during a recession demand volatility is elevated. During the quarter, our business rapidly changed due to the coronavirus pandemic and declines in global economic activity. Let me begin with Asia. China average daily volume was down 16% in January and February on a local day basis, and then partially rebounded in March, growing 23%. Europe followed a different pattern with January and February average daily volume growth slightly positive and then down mid to high single digits in March. Declines in economic activity trailed the spread of the coronavirus as it emerged in new locations and then surfaced in the U.S. The virus spread quickly, making it difficult for our customers to know how to respond or make adjustments to their businesses. UPS’ global network and solutions enabled flexibility and support to our customers; however, we experienced an overall decline in commercial packages of around 2% for the quarter, but in March the decline was actually 8.9%. It’s also important to recognize that businesses were affected differently throughout the quarter. For example, many small and medium sized businesses with limited alternatives were more likely to temporarily halt their…

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

Great, good morning. David or Brian, can you talk a bit about perhaps the domestic at 3.5% margin despite the network transformation? If residential is at 70% of volumes, but only for March, and if we now see stay-at-home lasting maybe April, May, do you expect then additional pressure on those margins, or are you seeing any benefit from increased density in the residential deliveries?

Sure Ken, good morning, it’s Brian. Thanks for the question. From a domestic margin perspective, as you mentioned 3.5%, there were three items that weighed on the margin in the U.S. in the quarter. The coronavirus, as I mentioned, was about 100 basis points. We had auto liability impact of about 130 basis points, and then the extra day was actually positive, Ken, by about $50 million. One other piece I didn’t mention was the SMB initiative that we previously invested, that was about an 80 point impact, and we’re continuing, Ken, to make those investments through the quarter. George, maybe I’ll toss it over to you for a little color on the U.S. business.

Thanks Brian, and Ken thanks for the question. Before I answer, I’d like to first of all thank all the UPSers for their heroic efforts and their leadership through this crisis. As we look into the U.S., despite the headwinds, we were able to continue to drive efficiency gains in our operations. Brian just spoke to the $100 million impact of corona, also $130 million for insurance, and $62 million for pension. Despite strong volume and revenue results, investment and efficiency gains, we were not able to offset the impact of the coronavirus and some other headwinds. Our operating leverage was down for the first quarter since first quarter 2019, but it was driven by elevated miles, which was about 10%, and daily stops, which was up about 15% as a result of the elevated B2C. The rapid changes in customer and product mix in the quarter, those were mostly closed businesses. So, we did make progress in our transformation initiatives. We generated exceptionally high service levels. As David said, we led the industry, and we helped our customers adapt their supply chain.

Thanks George. This is a good question, and I want to spend just a little more time on it. I think it just absolutely verifies the importance of transformation and what we’ve been doing, what we have in place, and what we will be doing. Scott, you want to add just a little more color to that?

Thanks David. I think it’s important to understand in the quarter that we are continuing to shift resources to the future of UPS, which is faster and nimbler. We have continued to target high quality growth opportunities, improving our operating leverage with efficiency initiatives, disguised by some of the issues that Brian raised with the focus upon long term earning power of the company. Because of the work that we’ve already done in transformation, we believe that we are better prepared to weather the crisis, and as we continue to implement and invest in projects this year, we think that we will continue to see very, very solid numerous benefits in the future as well.

We’re going to take an online question here. This question comes from multiple analysts - Jordan Alliger over at Goldman Sachs, and Chris Wetherbee over at Citi. Do you think the COVID-19 pandemic will change the long-term dynamics of small/medium businesses and part of the UPS strategy?

Great question. This is David. Prior to the coronavirus, SMBs were and are a strategic imperative for UPS, and recent events will certainly speed up our SMB strategy. We’re prioritizing our strategies and investments to take advantage these opportunities as market conditions improve in order to get the greatest long-term benefit. We’re seeing unprecedented and swift changes in market demand, so are our SMB customers at the same time, and more and more they’re seeing the value of our network. Many of these SMBs, especially those that have had to temporarily close, are actively seeking other avenues and other platforms to conduct their business and to reach new markets. Kate, why don’t you share a few stories on what we’re doing in this regard with SMBs.

Yes, absolutely. Thank you. As David said, SMBs are a priority and they are really--our solutions are resonating with the SMBs as we all find ourselves in these unprecedented times. From a demand generation connection, we’ve got our digital access program, so as some of the demand shifts away from the store on to further online, we actually are seamlessly integrated into where SMBs sell through this program - Stamps.com, Shopify, Amazon Marketplace, and we see vast opportunity in front of us as well, so ensuring they still have mechanisms to reach their consumers. Likewise at this time, they need fulfillment assistance, and we’re seeing our e-fulfillment and where to go solutions really resonating to help them to keep up with the demand on the fulfill side of the house. Then, of course that critical time in transit piece, so that they reach their customers in a timely manner. We’re speeding time in transit, as we’ve said, to over 80% of consumers in the market and through the weekend. This is really helping the SMBs through this difficult time to take advantage of online business. Of course, while the pandemic is upon us, SMBs did face a disproportionate headwind with the shutting of their businesses, with stay-at-home restrictions, but UPS is here to help them as they recover when the markets open.

We’re going to take our next online question. This question comes from Dave Ross over at Stifel. What are you seeing in terms of capacity and demand out of Asia and Europe?

I’ll take that, thank you David. It’s Nando. I’ll start with Asia, and really what we saw was our average daily volume for the quarter was down 2%, but we saw a bounce back in March to offset early softness. We still see strong demand today. In the quarter, we were successful at using our broad portfolio of freight, cargo, small package to better utilize our aircraft and serve our customers. We created capacity by reallocating aircraft from other parts of the world to where the demand was and currently is, and we’ve created capacity with purchase transportation where it made sense. We did these things to be where our customers needed us to be and we did it with industry-leading margins, and we are certainly seizing the opportunity that is in front of us right now in Asia. A little bit of a different story in Europe. We see Europe is still in recovery, so still very hard to predict demand at this point and capacity demand, but I can assure you that the team in Europe is positioned for whatever comes next.

This is a great example of the need to show agility in a changing work environment. This is a very dynamic environment, and many of us when we were kids played musical chairs - well in this case, we’re having to play musical airplanes. We’re having to move these aircraft spur of the moment, very quickly making these decisions, and just absolutely proud of the way that we’ve been able to do that, but it’s not stopping for a while. It’s going to continue to be that way, and we just have to be responsive to the needs of our customers, and we will continue to do so.

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

Hey, good morning guys. Thanks for the time. Brian, when you call out the added costs for coronavirus and self insurance, are those costs that should come out as we move through the rest of the year, or are those going to be recurring? Then I guess a broader question kind of strategically for the company would be, that even if you were to back out some of those costs, the decrementals here on the ecommerce-driven growth are pretty negative. Is there a point where you really feel like you need to change the way you’re pricing that business to offset that decremental margin, in case this mix shift does stay with us for a while? I guess I’m surprised at the lack of operating leverage, even ex-some of those costs.

David, just in terms of the cost, your first part of the question, the impact of the coronavirus was felt in two ways. One was from a reduction in the SMB business and the shift to B2C - that came through in customer and product mix, which was worth about 120 basis points in terms of the U.S. RPP. We also incurred some costs associated with PPE and other associated opex expense, safety equipment for our folks as well. In terms of continuation, look - we’re going to do whatever it takes to keep our employees safe and we’ve been preparing for some time for the shift to ecommerce. We’ll monitor that as it comes and adapt accordingly. Thanks Dave.

And the second part of the question on changing your approach to pricing some of the residential?

David, we’re trying to get to as many questions as possible, and that question is going to come up. We’ve got an email question that’s very similar to that, so we’ll get to that in just a moment. Thank you.

We’re going to take on online question real quick from Fadi Chamoun over at BMO. Would you consider scaling back the dividend if necessary?

Look - from a dividend perspective, Scott, the dividend remains very important to our investors. We’re aware of that. UPS has good liquidity and we do not expect to impact the dividend. We review it quarterly with our board. The first priority in our business is to reinvest in the business. We have a very strong ROIC and there continue to be a number of levers that we can pull to further strengthen our liquidity. Hopefully that answers the question.

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

Hi. You spoke a little bit about the transformation program, I think remaining on track, and just sort of curious if you can give more color around the facilities you planned on opening this year, you know, pulling forward some of the costs for the weekend delivery, and then once we get out on the other side of this, do you expect the leverage to be back on track from a margin standpoint, you know, in terms of what you were thinking about in 2022, both from a margin recovery standpoint and an additional EPS standpoint? I know there’s a lot of moving parts, but any color around that would be helpful.

Absolutely Jordan, thank you for the question. I’ll start first with the facility investments that we’re making this year. As Brian noted in his opening comments, we will continue to make investments in building capacity across the network. We still are on plan to be able to process 85% of the eligible volume in automated facilities in 2020, which is a significant milestone for us, but we’re not changing the view that by 2022, 100% of our eligible volume will be flowing through automation. That will provide significant benefits to UPS. This year as it relates to capacity, we will continue to build capacity. We plan on having roughly 350,000 packages per hour of new retrofit automated capacity in our network. That’s going to prove very useful during peak season. Again, all that capacity will be available before peak. The majority of it will be done by the third quarter, giving us an opportunity to optimize the utilization of that capacity. And then, we are still making improvements in the way that we run volume in our existing facilities through the implementation of new technologies. This year, we’re still on path to implement more autonomous guided vehicles in our facilities to be able to automate the movement of irregular large size packages, and we’re also in the process of implementing more automated small sorts across the network. Scott?

In addition to investing in costs, we also invest in new solutions that will continue to help us drive higher quality revenue. A few examples - Kate mentioned reduced transit time, making us very competitive with SMDs; seven day a week operations as we continue to expand our Saturday and Sunday; the UPS Flight Forward and an announcement made yesterday in terms of expanding that and CVS. But as Kate mentioned, the UPS digital access program, it’s powerful for SMBs, it will drive that higher quality revenue, and importantly it cements UPS’ position as truly the long-term ecommerce provider of choice.

We’re going to take a live question. This question comes from Rick Paterson over at Loop Capital. In January, you reported that Amazon accounted for about 11.6% of your total revenue. What is Amazon’s percentage of total sales in the first quarter?

Thanks, this is David. We review Amazon’s percent of our global revenue on an annual basis, and so we announced in January the 11.6%. What I can tell you is that their percent in the first quarter of 2020 has really been consistent with their run rate from the start of the next day structural ship that we announced in the second quarter of last year, so that trend second, third and fourth quarter of last year has been very consistent going into the first quarter of this year. I also would like to say that the growth of ecommerce, whether it’s Amazon or other large customers, does make it pretty difficult for any of them to completely in-source all their transportation needs and it does show the value of existing partners, and we believe that we justify that value on a daily basis. Thank you, and we’ll go to the next question.

Tom Wadewitz, UBS, please go ahead.

Yes, good morning. David, congratulations on the retirement. I know you’ve driven probably a lot more change at UPS than we would see from the outside, so congratulations on all the things you’ve done over time as the leader of UPS. I apologize for kind of a near term question, Brian, but I’m having difficulty with visibility here. Do you think that, given the big changes end of the quarter, that things are meaningfully tougher from a domestic perspective in second quarter? Is there room for some adjustment that would improve over some seasonality? I’m wondering if operating income in domestic second versus first, or margin or any framework you’d care to provide.

I’ll start that and then, Brian, if there is anything that you want to jump in, then you can certainly do so. What we have seen in first quarter, at the end of the first quarter has been pretty consistent with what we’ve seen in April, but we can’t tell you what we think it’s going to be the rest of the--even the rest of the quarter, or certainly the rest of the year. What we’ve seen in March and April is a reflection of this closure condition that we’re in. At some point in time, we’re going to see that bounce back, we just don’t know when and we don’t know how far it’s going to bounce back. But as businesses start to open, then you’re going to see more B2B increase. As far as B2C, don’t know that we’ll ever get back to what we’d call the old normal, but we’re not ready to declare what we see today as a new normal either. That’s really about as much color as we can put on it. I wish to heck we knew more and I wish we could predict what’s going to happen. We just have to deal with where we are today and then we will adjust accordingly.

Our next question, we’re going to take an online question from Scott Schneeberger over at Oppenheimer. What steps has UPS taken to balance volume and price in the current environment?

Good morning, Scott. I wanted to start with of course our continuous position, that we ensure we get proper returns for the value we create for our customers. Through this unprecedented time, we saw significant changes in characteristics, which I’ll get to, but we also implemented surcharges on our international worldwide products from China and Hong Kong origins. We are also in the U.S. addressing characteristic and pricing changes on a customer-by-customer basis, so when you look at base pricing outside of the characteristic change, we’re still within our range of 2% to 3%. I did want to zoom in a little bit more on those characteristic changes. The drop in weight with essentials and necessary goods, really largely purchased online as well as the large essential shippers with that demand coming their way, and then as David mentioned, the stay-at-home restrictions and the shutdown of the commercial businesses would actually impact largely that B2B and B2C mix, with 19% growth in B2C and negative 2% in B2B. Those all impacting the view, but the pricing that I noted continues through the period as well as into the future.

So pricing is going to be dynamic, just like everything else, and with the world projected to go into a recession and with a lot of the indicators that we follow forecasted to go down, we just have to be very careful and watch what we’re doing here. As the demand indicates and as we continue to prove our value, obviously our goal is to maximize our pricing, at the same time keeping our network utilized. More to come on that, but we are very attuned to it and we will make adjustments accordingly.

We have a question from the line of Chris Wetherbee of Citi. Please go ahead.

Hey, thanks. Good morning. Maybe thinking a little bit about some of the longer term transformation targets, it would seem that a result of what we’re seeing now would be an acceleration of ecommerce growth and sort of a build within your mix towards B2C versus B2B, or acceleration of that. How do you think that impacts your ability to hit some of the longer term transformation targets, and are there things that you’re going to need to do, either from a capex perspective or an opex perspective, to be able to adapt to that, because it seems like it’s happening maybe quicker than we would have expected pre-coronavirus.

Yes, Scott here, thanks for the question, Chris. We continue to reaffirm our transformation target. Importantly, I think that transformation, as I mentioned earlier, has set us up for success. We do believe that our previous estimates of acceleration of ecommerce will probably increase as we think over the next five-year period of time, therefore the investments we’re making in automation, the investments we’re making in efficiency, we believe will help us deliver those long term transformational targets.

We’re going to take an online question from Todd Fowler over at KeyBanc. Discuss what you’re seeing in the secular shifts around COVID-19 and how UPS will position itself to the response of these shifts coming out on the recovery side.

Okay. This is David again. First, I can tell you that going through this pandemic, our highest priority has certainly been the health and safety of our people and of our customers and the communities that we deal in, so we adopted a lot of new health protocols and procedures in place to make sure that we have done the right things there. Then of course, it really is focusing on what are the opportunities that we believe that are happening here in these shifts that are taking place, and it’s really open up in two immediate opportunities that also happen to be our strategic imperatives, and it has ramped up our initiatives in these areas. Kate, do you want to talk about that a little bit?

Yes, absolutely. I’ll start with healthcare. We have noted previously that healthcare is one of our strategic growth imperatives. We last year set up the healthcare division, inclusive of our acquisition of Marken, and we are really involved in the recovery for our customers, the communities at large through this time. We also saw high growth in healthcare pre corona period as well and do expect that to continue, but we’re engaged with companies like Owens and Miner, CVS and Medtronics and Henry Schein, and really helping them as they participate in this recovery. David noted earlier the involvement in FEMA both with the transportation from Asia to the U.S. but also in the fulfillment services and the dedicated space that UPS has. Within healthcare, we have 8.1 million square feet dedicated, and that’s really resonating. Then the other one I would hit on of the strategic growth imperatives is the SMBs and just that critical area of our business, both now and in the future. I took you through our solutions that are resonating, helping them to grab the online opportunity through this time and in the future and giving them faster time in transit, more seamless integration to platforms as we help them to make the most of this situation.

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

Hey, thanks. Morning guys. I just want to follow up - I think I heard mid single digit volume growth in the U.S. in April. Can you share what the B2B and B2C trends are, and maybe any color on number of stops that you’re seeing? Then I know most of the focus has been on domestic, but any thoughts on international and how you think mix is trending and how margins typically hold up in a recession here? Thank you.

Scott, thanks - this is Kate. I would say that what we saw as the stay-at-home restrictions started at the end of March have continued into April, and so we saw the double digit growth of B2C, the negative growth on B2B as companies were closed, and that continues. We also saw the air softening both from the COVID impact and then also from the wrap that we noted in Q2 of last year with the structural change in the market, so we are seeing a continuation of that end of March period in April. That’s largely the U.S. comment, but Nando, I’ll pass it to you for international.

Yes, sure. We’re seeing similar dynamics on the residential side, but not as pronounced, of course, as the U.S. business. We do have a selective ecommerce strategy that is really focused on cross-border products and making sure that we’re being compensated for the service we’re providing, and in turn the margins, as you saw with all the changes in the quarter, still maintained a pretty decent level. We think that the investments that we’ve made in our European network, the efficiency gains from that also the deployment of our 747-8s really has created a lot of great unmatched capabilities and play well into our ecommerce cross-border strategy. Thanks for the question.

We’re going to take an online question. This question comes from multiple analysts, including Fadi Chamoun of BMO. President Trump has suggested that the USPS should raise rates 4 to 5x as part of postal reform. What are the implications for UPS?

Yes, this is David again, and obviously we can’t make any comments on our competitors’ rates, but as we stated before, we do support a healthy and a viable USPS and we have a unique relationship with them. We’re a customer of theirs, they’re a customer of ours, and we also compete. Where we are concerned, though, is their use of funding from declining monopoly products subsidizing competitive products, and we were certainly in agreement with most all of the president’s postal task force recommendations. They were aligned with many of our priorities, and we think if many of them had been implemented, that there may be a different situation today regarding the postal service than what exists. We do support the president’s view that stimulus grants do not solve the underlying issues at the USPS, at the post office, and we think that any government financial support must be accompanied by important business model and cost accounting reform. We don’t believe the role of government is to pick winners and losers, and when you look at the $10 billion of funding in stimulus 3, you look at the $75 billion that’s being asked for in the next stimulus package, if that was left unfettered, it would create a very unlevel playing field, so we’re very supportive of the postal task force recommendations and do believe that there needs to be a focus on reform at the same time.

We have a question from the line of Scott Schneeberger. Please go ahead.

Thanks very much. Good morning. Could you please discuss volumes and particularly pricing you’ve encountered on international export parcels in light of the fluctuating level of commercial airlines flying cargo in their belly space over the past few months due to the coronavirus impact? Thanks.

Yes, I’ll start off - it’s Nando, thanks. Just talking about belly capacity for a second, we know it’s limited right now and for a period of time into the future. The industry is down around 80% at this point in time and approximately 70,000 daily tons, so quite a bit of capacity that’s been taken out of the market. Not sure how long the condition will last, but certainly a recovery will most likely happen when businesses, business travel and tourist travel begin again into the future, and that’s really the big question mark. For now, we have added aircraft, we have added flights where we see, and if it’s appropriate in terms of profitability, we will purchase transportation. But we are dealing with that capacity that’s not available as it was in the past allowing us to make sure we run our network as efficiently as possible.

I’ll just add on the pricing side of it, the market rate in China and the Asian origins has gone up, as well as we’ve implemented surcharges during this period to address that as well.

Our next question is a live question from--or an online question from Brian Ossenbeck over at JP Morgan. What other measures to preserve cash or capital are under consideration and available to UPS?

Thanks very much for the question - it’s Brian. Look, we feel good about our liquidity today in terms of preservation of capital. The priority is to stay liquid, reinvest in the business, and fund the dividend. We have taken, as mentioned, and continue to evaluate several actions to ensure our liquidity. We recently did a $3.5 billion debt issuance which satisfied our upcoming refinancing needs. We suspended the share buybacks for the rest of the year, which gave us a use of funds reduction of about $800 million. Working capital is a focal point for our team, so we saw good results in Q1, and then finally CP and international markets remain open and attractive, so UPS finally has good access to financial revolvers in the event of any unforeseen risks. I feel good about our liquidity and I feel like we’re taking the right measures in terms of preservation of capital. Thanks Scott.

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

Yes, good morning everyone. Just a question on the cost side of things. The self insurance accrual headwind of $130 million was significant, so if you could just talk a little bit more about that. I’m kind of surprised, because the weather was milder this winter. Was that from some nuclear verdicts, and did that drive a change in either your insurance policy of self retention levels? Then also, I saw repairs and maintenance is up 30% year-over-year. Any comments on that?

Thanks for the question. It’s Brian. In terms of the casualty, auto liability, severity really was the driver of that. We are implementing corrective actions to address in the short term. I would say that the trends would probably continue over the next couple of quarters. Specifically what are we doing? Targeting safety training, installing accident avoidance technology, leveraging data analytics. All of these things are sort of proven to address the auto liability risk, but net-net once we implement those three, we’d expect to see significant improvements over time.

We’re going to take an online question. This comes from Allison over at Wells Fargo. As the wave of the virus moved globally, any lessons learned that you’ve been able to apply and adjust that help you in a positive way?

Yes, and I talked about a little earlier, the first is you’ve got to take care of your people and make sure not only that you’re doing the right things, but that you’re communicating and making sure that people realize that part of being a critical infrastructure business is we were able to operate, and we have learned a lot from that. Then second, this is such a changing environment, and one thing that we have learned from Asia and are learning in Europe, and obviously in the United States, is that the needs of our customers change and change quickly, and if you’re going to be a player in that, you have to be able to change with them. So we’ve had to be very dynamic in our approach and listen, and Kate and her group have spent more time talking to our customers and finding out just exactly what their changing needs are, and it can be from one week to the next, so we’ve had to adjust to that. Another one that’s been very interesting, that applies throughout, is that a lot of governments with the best of intentions have been changing a lot of the rules and regulations, and we have learned that, first, you talk to them about the effects of those rules and regulations and try to get them to see sometimes that there is a full side of the story that needs to be considered, but then second is you adjust and you collaborate and you comply, and if you do that, and we’ve had 113 years of changing rules, maybe not to the speed that we’re seeing now, and we have learned that you adjust to those quickly and then sometimes you have to make up for it through extra people, and other times you move your assets around. But just got to be very attentive to what’s going on and then very responsive at the same time. There are challenges, there’s no doubt about it, but there are opportunities, but those opportunities only come to the people that are going to be assertive and are going to read these things quickly and then respond. That pace of change that we’ve been talking about since we’ve been undergoing transformation has never been any more true than what it is right now. Thank you for that question.

We have a question from the line of Amit Mehotra of Deutsche Bank. Please go ahead.

Thanks Operator, hi everybody. Thanks for taking my question, I appreciate it. I think it would just be helpful to get a sense of how you think about the structural margin profile of the domestic business over the long term. I’m not talking about obviously this year or next year, but really four or five years from now, what do you think is an achievable domestic margin and what needs to happen between now and then for you to be able to achieve that? Obviously that question is in the context of seemingly accelerating B2C volume mix, but then also overlaid with some successes you’ve had bending the cost curve really in the back half of last year, from a cost per piece perspective. If you could just talk about kind of the four or five year, what’s achievable from a domestic margin perspective. Thank you.

Why don’t I take the outlook portion and then I’ll kick it to Kate for a little color. Look - we withdrew our guidance this morning, so I don’t think it’s appropriate to be talking about looking down three or four years in terms of what the margins will do. We’ll come back to you with that when the timing is right. Kate, do you want to give some color?

Yes, absolutely. Our pricing strategy overall, of course, is to match the pricing with the value that we deliver for our customers. What you’re seeing, and we are all seeing in this time, is big shifts with characteristics, so addressing those. When I say characteristics, weight - when people are buying essentials that come out of each’s, so single, you see a big weight drop, and ensuring that we continue to help customers with heavy weight solutions, density solutions. You’ve heard us talk about synthetic density - that’s a part of the pricing structure and strategy because the more you can get people to match up at our expansive access point network, then it’s a commercial delivery, lower cost, lower price for them. So we maintain our focus on revenue quality through the future, and then also have learned quite a bit, of course, with the characteristic swings that we see currently.

So the key to margins, and whether it’s five months, five years or 50 years down the road, right, it’s going to be the value that you provide to your customers and the services that we offer, and how we price those. Then, it’s going to be on looking at our cost structure, and that’s one of the big things that transformation has focused on, and it will continue. Scott, you want to just talk a little bit more about a little bit longer term, what we’re focusing on from a transformation standpoint?

Yes, thanks David. The transformation program is multi-year, and as I mentioned before, it’s focused on how we enable and invest in higher revenue business, but also how we protect margin through reductions in cost. Juan covered the reduction in costs that we’re making through automation and technology. We also continue to invest in a more efficient business overall. Our cost per piece in the long term, we see as an opportunity to continue to invest to reduce. We have continued to invest over these periods of time in our competitiveness, both in terms of revenue and cost, and we’ll continue to do that with the expectation that net total shareholder value will increase.

We’re going to take an online question. This comes from Jordan Alliger over at Goldman Sachs. Do you expect to see more growth potential from ecommerce post the pandemic due to the consumers moving more to online orders?

Thanks Jordan. I would say that yes, we expect to see more online orders regardless, even prior to the pandemic, just as more and more consumers are shifting online as well as then sellers have migrated and are connected to different platforms and the like for ease to reach their consumers. Then of course with the pandemic, there are various reports out there saying that online purchasing will be migrating in advance of four to five years, depending on which report you go to, so we do see an increase there and we’re well positioned through our solutions, such as the digital access platform. Scott, you want to expand on that?

Yes, I think what’s important is that we have tracked over the last several years a number of market dynamics, but I think substantially the brick and mortar world has had a reset. What that reset will mean into the long term is not yet clear until we emerge into recovery, but I think that there is now a behavior that is baked and we continue to assess now what our estimates are going to be - one, the penetration of retail in terms of digital platforms, and then what volume that creates for UPS.

We have a question from the line of Jack Atkins. Please go ahead.

Good morning. Thank you very much for taking my question. I guess this is directed towards Kate. Could you talk for a moment about how you see supply chains perhaps structurally changing as we emerge from the coronavirus pandemic, especially on the heels of the trade war? Do you think we could see more near-shoring activity moving forward, maybe more of a demand for more safety stock and more inventory? I’m just curious how UPS is being positioned for what could be some larger structural changes here. Thank you.

Absolutely. Thanks so much, Jack, for the question. We do see a shift, and even prior to with the different tariff discussions that were going on in the world, our customers more than ever were reaching out to us and we were doing solutions redesigns globally for them, to help them evaluate how they would be more protected by having production in different parts of the world. I think that continues. It only magnifies with any situation like a pandemic. What we bring to them is, first of all, our solutions approach, having engineering and design time when they may not have resources available, but then our network supports, our portfolio that helps them right from origin throughout the globe, all the forwarding moves, whether ocean or air, and then fulfillment has really taken off. I think the answer is clearly through this pandemic, especially with small and medium sized businesses that didn’t have fulfillment options and did need to pivot, we’ve seen a really big uptick there as well as the time in transit that we know is so critical, fastest in the world, fastest in Europe, and then also with our enhanced time in transit in the U.S. All of those position us well for this continued trend of looking at customer supply chain.

So we have this team of supply chain solutions experts that really focus on solutions, and we also have an advanced technology group that is going to play an even greater role. With the agility that’s going to be required, you see those two teams working together well along with our engineers, and at the end of the day if we listen to our customers, if we will take a look at how we can make a difference, and if we make sure that we’re looking further down the road than just immediate needs, then we can continue to add to the value that we provide. Great question.

We have a question from the line of Brandon Oglenski. Please go ahead.

Hi, thank you for taking my question. David, I just want to come back to the pricing discussion, and especially with the comments you guys made on your international selective ecommerce growth strategy, where you do have higher returns. What is different about the U.S. market, because as we’ve seen B2C get bigger over the past decade, there’s just been a pretty strong correlation with [indiscernible] profitability. Is it something about the competitive landscape potentially with the post office or is it potentially Amazon in-sourcing more in the future that has you a little bit more fearful, or is it even something with your [indiscernible] cost structure that just doesn’t allow you to extract a greater return on that B2C traffic?

Brandon, this is Kate. I’ll address that. For the U.S. specifically with the pricing, I do want to underscore 2.2% was the base pricing increase, and we are actually implementing pricing changes and also solutions that will impact characteristics, but we’re doing it customer by customer. If you think about the U.S., SMBs are most impacted by this stay-at-home with businesses closing, and then we see the large customers who are actually gaining the demand for the essential products especially, and that’s why we’ve decided to selectively through customer by customer pricing increase that and then achieve that 2.2. The characteristic change that’s going on can mask that, and that’s why I wanted to make sure I clarified that for the U.S.

It’s really a balance. You want to take advantage of the opportunities and you want to certainly price for the value that you bring. At the same time, though, you have to look at utilization of the network, and with this recession that’s being predicted globally, if - and there are so many ifs out there that we just don’t know what’s going to happen - but if demand drops due to the recession, then we have to make sure we respond accordingly there too. So it will be extremely hard, and that’s why we withdrew guidance, to give any kind of future prediction on what we’re going to do with pricing that’s further out than where we are now. A lot of it is going to depend on what we see unfold over the next few months, hopefully, but could go further than that, so we’ll have to just take a look and see. But appreciate the question, and it’s something we ask ourselves on a regular basis. Kate’s referred to this range that we’re talking about of 2% to 3%. She’s also made it very clear that we never see that as a barrier, that the value that we provide gives us the opportunity, we of course would increase and operate above the range, that’s for sure.

That concludes our Q&A. I will now turn the program back over to Mr. Childress. Please go ahead, sir.

Thank you Stephen. David, closing comments?

I will, thanks Scott. Certainly a dynamic environment, and if somebody had asked me a couple of years ago if we’d be facing what we are today, or if I would be facing on my last earnings call talking about withdrawing guidance and the uncertainty that we have seen, I just wouldn’t have believed it, but it is the world that we’re in. UPS has responded well, not only to the needs of our customers but also to governments around the world, and I’m really pleased with the response of UPSers. I am truly grateful for the wonderful career that UPS has enabled me to have, and like many fellow UPSers past and present, I have gotten a chance to live the American dream through the opportunities of this great, great company. Throughout my journey from a part-time package handler in Mississippi years ago to becoming CEO, it’s just been a real privilege to have worked alongside you for those 46 years. To our customers, investors, and friends, I truly value the relationships that I’ve made over the years, many of which have turned into long lasting friendships. I’ve never counted the number of earnings calls - I know some do - that I’ve participated on as a COO or a CEO, but what’s most important, it’s been an honor to speak with and hear from all of you over the years. Carol will lead the next earnings call. I am absolutely confident you will be in great hands with her. I just want to thank everyone for joining us today and urge you to stay safe and stay healthy. That’s the end of our call. Thank you.