Good morning. My name is Steven and I will be your facilitator today. I would like to welcome everyone to the UPS Investor Relations First Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. And after the speakers’ remarks, there will be a question-and-answer period. [Operator Instructions] It’s now my pleasure to turn the floor over to our host, Mr. Ken Cook, Investor Relations Officer. Sir, the floor is yours.

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. Carol Tomé: Thank you, Ken, and good morning. Let me begin by thanking UPSers for once again delivering industry-leading service to our customers. Service defines UPS. It is one of our values and I’m proud of our team who continue to make it a key priority. Another company value is safety. UPS drivers are among the safest in the industry and every year we invest millions of dollars in safe driving education and training. Our…

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…

Thank you. We’ll now conduct a question-and-answer session. Our first question will come from the line of David Vernon of Bernstein. Please go ahead, sir.

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. Carol Tomé: Well, David, thank you for your question. First, as it relates to productivity, we introduced our total service plan last year. That’s not one and done. That’s the way we’re going to operate our business forever. Productivity is a virtuous cycle here at UPS. And Nando and the team continue to find opportunities to drive productivity in down markets as well as up markets.

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. Carol Tomé: Just a little bit more color on that perhaps if you think about how we grew up as a company, if we build up a facility, we spun off a building and then we would build up another facility and spin off a building. As Nando and his team have looked at it, we found that, huh, we might be able to consolidate some of those spinoffs into highly automated buildings, drive productivity and not lose any drive time, not impact our customer service in any negative way. So we’re looking at that, it’s pretty exciting.

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.

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

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.

Yes. The biggest change in terms of the base case versus downside is the volume. We were looking at volumes of down 1% in the base case, and now we’ve pivoted to the downside of down 3%. The first quarter was an evolution about where we expected in January, February a little bit lighter, but March was the trail off. And so as we’ve seen the macros to deteriorate, we look at things like IP manufacturing and ESMO [ph], those have continued to devolve. And so we’ve basically adjusted the volume outlook for the first half of the year. And so two reasons, we’re confident that the full year in the case of the domestic business will be at 11%. We have confidence that the volume will come back post the summer related to customer conversations and some of the macro which we think will trough in the middle part of the year. And also cost we can go into more detail, but our ability to control cost and take more of the semi-variable out will help us deliver that 11% in the U.S. 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…

Got it. Thank you. Good luck with the puppy. Carol Tomé: Thank you.

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

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.

Yes. So look – but we’re going to need to take cost out balance a year. It’ll be a big reduction in CPP. We were mid-single digit Allison in the U.S. And candidly, if you had told me wages were going to be up 6% and volume was going to be down 5%, I would’ve expected something like a double-digit CPP about three or four years ago. Nando and the team have done extraordinary job of driving that 6% that we saw in the quarter, but we are expecting low-single digits for the balance of the year. As you think about CPP, it’s going to come from four areas. One, Carol talked about total service plan, and that’s that reducing hours more than volume and managing the headcount. The second is our network. We deal with both ground and error, as you know, and in the ground side, how do we consolidate volume and automated facilities, closed sorts and really focus on the efficiency there. On the air side, it’s changing the package flows to better utilize the one day network. And in fact, domestic block hours they were down about 4% in the first quarter, we would expect to exit the second quarter at 2x [indiscernible] The third piece that we’re focused on is overhead and following the technology group delivering technology efficiency to allow us to do our jobs on the non-op side more efficiently and will continue to reduce headcount as volume warrants. And lastly, fuel. We expect fuel prices to be down double-digit year-over-year in the balance of the year 2Q and 2H. So that will reduce both RPP and CPP. But those four things combined drive a high amount of confidence in a low-single digit CPP balance a year.

Understood. Thanks for the color.

Yes.

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

Yes, good morning. That was really helpful, Brian, in terms of the cost per piece framework, do you have a kind of a comparable thought for looking forward on revenue per piece? And maybe also some – just some commentary on how the pricing environment’s holding up. I think your primary competitor’s pretty focused on margins, cutting cost, cutting capacity. Obviously, you’re doing a good job managing cost and capacity as well. So I think there’s a lot of potential for a good pricing environment, but any thoughts on that? And also just how we think about the drivers of revenue per piece. Thank you.

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

Yes. Domestic, thanks. Yes.

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. Carol Tomé: Yes. May be just a comment on the pricing environment, the keep rate on the GRI is the high as it’s been. In the United States, it’s north of 60%. It’s even higher outside of the United States.

Okay. Great. Thank you.

Thanks, Tom.

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

Yes. Hi. You talked a little bit about what’s going to drive cost per piece back after the year, but maybe can you talk a little bit about some of the specific buckets notably that other expense was quite a bit higher and is it more opportunity purchase transport? Just trying to get a sense for what – where it’s going to be impacted the most. Thanks.

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. Carol Tomé: And maybe just a comment on that other expense line item because it does look out of sorts, we are moving to Software-as-a-Service. It’s a line item move, right, Brian, you’re the finance person here, but rather than depreciation’s it’s going to move into expect.

That’s exactly right. Carol Tomé: So there’s a little bit of a difference if you have Software-as-a-Service for your technology deployment versus what you build.

Transition of buckets. Carol Tomé: Thank you.

Yes.

Got it. And then just a quick follow-up, talked a lot about the domestic environment and stabilization perhaps in April, but what about the Asian export business? Is there anything on that front that, that gives a little confidence right now? Thanks. 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.

Thank you.

Thanks, Jordan.

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

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.

Yes, Ken, happy to start. You taking the last piece first, on international, we had guided a couple years ago when we went out with three-year guidance to a 21.5% in international, obviously the world’s changed a lot since then. But the mix of Kate’s business that she’s running and the agility on the network in terms of managing the airflow has I don’t know about a floor, but I think we’re comfortable with the 20%. You’ll see that 20% margin can fairly consistently Q2 through Q4. So we feel comfortable about that in terms of how the business evolves. 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.

Thanks, Carol. Thanks, Brian.

Thanks, Ken.

Our next question comes from the line of Mr. Scott Group of Wolfe. Please go ahead.

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.

Yes. I would say the – in terms of shaping the year, Scott, maybe that helps. We don’t manage in quarters, but to help you shape, I referenced in the prepared remarks, 56% of our full year operating profit coming in the second half for the company. If you look at the U.S. domestic business, I’d expect ADV year-over-year growth rates to bottom in Q2 and then improve from there to your point. And that relates to the actions we’re – as we think about margin, the actions we’re taking on semi variable costs and margins will improve sequentially in Q2 and then throughout. Fuel PPG will reduce both RPP and CPP. So it’s not a material profit impact but I would expect operating margins to be better in the second quarter than in the first. On the international side, I think ADV will gradually improve through the year. And as I mentioned, we’ll have to see consistency of the op margin for the next three quarters of around 20% in the balance of the year. And then finally it’s supply chain. Revenue should be marginally better in Q2 than Q1, and you can hold that 10% as a full year op margin.

Thank you.

Yes.

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

Yes, thanks, and good morning, everyone. Just want to ask here on the share shift issue if you’re able to quantify or even qualify the attrition that you’re seeing. And I just ask because I think there’s been a lot of focus on your upcoming negotiations, but just based on your service investments and what are some pretty major, I think, operational changes at your largest competitor. I’m wondering if you’re actually seeing any business wins. Appreciate it. 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.

Our next question will come from the line of Brian Ossenbeck of J.P. Morgan. Please go ahead, sir.

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. Carol Tomé: So to your first question, we don’t see volume disruption because of pricing. We do see product change however. If you looked at our air product in the quarter, it was down year-on-year, more than ground. We see customers moving out of air to ground. Why? Well, we’ve really worked to improve our time in transit. So we’ve got the fastest time in transit now, so you can get your package where it needs to go quicker than before. And people are looking for value. So I can watch customer by customer moving out of air to SurePost, by the way. SurePost is up in the quarter, almost 2%.

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. Carol Tomé: And convenience matters from returns. If you want to get that package back so you get credit back into your wallet, you want a convenient place to return. And with our locations near 85% of the U.S. population within 10 miles of 85% of the U.S. population were extraordinarily convenient.

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

Yes. Hey, just wanted to you maybe hit on the cadence question again and about sort of how this year progresses on the guidance. I think 56% of the profit on the back half of the year implies around $2.9 billion or so in 2Q. And just any thoughts around the step up we would might see between domestic and international? And then I guess just Brian on the RPP, CPP point, do you have a line of sight? Does the guidance include a flip back to RPP outperforming or outpacing CPP by the end of the year? Is that a volume function? Is that more of a cost function? Just want to make sure I understand sort of how you guys are thinking about that.

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.

Okay. Thank you very much.

Yes.

Our next question comes from the line of Ari Rosa of Credit Suisse. Please go ahead.

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. Carol Tomé: So we look out – we don’t look in the current moment. We look out for where we both want to go as growing and thriving UPS is in the best interest of Teamsters, UPS, and our people. So the current economic environment, it is what it is, but our negotiations are all about the future.

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

Thanks very much, operator. Hi everybody. And thank you very much for the time. I wonder, Brian, if you could talk a little bit about what margins in the stores are like, I feel like you were hinting at their – one of your most profitable business lines. So I’m kind of wondering if you could put some more color to that.

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. Carol Tomé: We do look at the profitability of stores. Because I’m curious, I’m an old retailer. So are the stores profitable? The stores are very profitable, which means franchisees are happy. We add about 100 new stores every year, because this is a great small business to own. And in terms of the royalty fee that comes into our company, there’s some expenses against that. But if you look at the margin against that royalty fee, I would say, it’s the highest margin business that we’ve got.

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

Our last question will come from the line of Stephanie Moore of Jefferies. Please go ahead ma’am.

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.

Yes, happy to. And the whole reason we went out at the beginning of the year with two scenarios is we didn’t know what was going to happen with the macros and the macros to continue to deteriorate in the first half of the year. So we had a playbook which was the downside scenario. We pulled that off the shelf and our executing the TSP, the network changes for ground and air, the overhead the fuel. And so from a line of sight perspective, what we control I feel good about the 12.8 that we’ve got in for the downside scenario. Obviously, the top line is what it is, but Carol said we’ve got the largest pipeline of sales that we’ve had in about five years, which is a very big number, $6 billion. And so our ability to pull that in posted negotiation with the labor that gives us confidence on the top line. Carol Tomé: Well, you might share the split of variable, semi variable and fixed.

Yes. So well, I’m not sure anything’s fixed anymore, Carol. So we do about a third variable on the 70% in the semi and the fixed bucket and we’re really redefining that. As we talked earlier, we don’t have a history of closing or selling buildings per se, but everything’s on the table because in the new world there has been a growth over a 100 years of a bunch of buildings located around. And so Nando’s ability to go and shut down some sorts and drive, we’re going to match the volume. The one thing Carol I would add is, when volume returns and make no mistake, volume will return to this business, we will be positioned very well to throw off cash, because we’ll have positioned the cost structure in a good way.

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.