In the first paragraph of the article, Stephen, the facilitator, welcomes everyone to the UPS Investor Relations Second Quarter 2023 Earnings Conference Call and introduces Ken Cook, the Investor Relations Officer. Ken outlines the expectations for the call and provides a brief overview of the agreement with the Teamsters. He then turns the call over to Carol Tome, the CEO, to begin the call.

UPS recognized their employees for their hard work and customers for their trust during the labor negotiations. Despite volume declines in the second quarter, UPS stayed on strategy and maintained their pricing discipline. They also adjusted their integrated network and delivered $2.9 billion of operating profit with a consolidated operating margin of 13.2%, exceeding expectations. These results are due to the initiatives taken over the past three years to support their Customer First, People Led, Innovation Driven strategy.

UPS has recently focused on customer communication and transparency, and have seen some volume return as a result. They have also introduced new plug-and-play technology to make it easier for e-commerce platforms to connect, and have seen over $1.4 billion in revenue from their digital access program in the first 6 months of the year. They have also expanded their European footprint by opening a dedicated health care distribution facility in Ireland, resulting in $4.7 billion in revenue from their health care portfolio in the first 6 months of 2023.

UPS has been expanding in India and recently expanded from 3 cities to 49, covering 90% of the B2B market. In two weeks, a new labor contract will be ratified, which will give delivery drivers more work-life balance, improved working conditions, and industry-leading pay and benefits. By the end of the contract, the average UPS full-time driver will make $170,000 in pay and benefits annually, and part-time employees will make at least $25.75 per hour with full health care and pension benefits.

UPS has added a paid holiday on Martin Luther King Junior Day to honor Dr. King and make it the best place to work. They have also leveraged their network with NPT, a set of technologies that use AI and machine learning to quickly match the network to volume levels, resulting in a nearly 10% reduction in hours and fixed costs. Additionally, they have made progress in rolling out their RFID initiative and have updated their guidance for the full year due to labor negotiations and the costs associated with the tentative agreement.

UPS achieved a labor agreement covering their 300,000 Teamster employees that provides them with operational flexibility and the ability to attract and retain the best employees. In the second quarter, the overall macro conditions in the U.S. were in line with expectations and internationally were a little worse than expected. Consolidated revenue was down 10.9% year-over-year, but the company was able to reduce total expenses by $2.1 billion.

In the second quarter, U.S. domestic saw a decrease in volume, with total average daily volume down 9.9% and June down 12.2%. B2C average daily volume declined 11.5% and B2B average daily volume was down 7.7%. Total air average daily volume was down 16.5% year-over-year, and ground average daily volume declined 8.6%. SMBs saw less of a decline than enterprise customers, with SMB average daily volumes declining in the second quarter. Despite the decrease in volume, the team was able to adjust the network and drive out cost in real-time, achieving double-digit operating margins and delivering $2.9 billion in operating profit.

UPS saw a 6.9% decline in domestic generated revenue of $14.4 billion, with revenue per piece increasing 3.3%. This was due to strong base rates and improved customer mix, but was partially offset by changes in fuel prices. To reduce expenses, the U.S. domestic team took out $889 million of expense year-over-year, reducing labor hours by 10%, closing doors and reducing operations headcount by 7%, pulling more activity into WorldPort, and reducing management headcount by 2,500.

The second quarter saw a record amount of cost reduction, with the cost per piece growth rate at 3.7% despite a 10% volume decrease. The U.S. Domestic segment saw an operating profit of $1.7 billion, a 9.4% decrease from the same period in 2022. The International segment experienced sluggish macro conditions, with total average daily volume down 6.6% and export average daily volume down 4.5%. Revenue for the International segment was down 13%, due to a decrease in volume and a reduction in revenue per piece, primarily from a decrease in fuel surcharge revenue and a stronger U.S. dollar.

The revenue per piece growth rate increased by 320 basis points due to strong base rate and favorable volume mix, while international costs decreased $356 million due to lower fuel expense. International segment operating profit was $902 million, down $302 million year-over-year, with an operating margin of 20.4%. Supply Chain Solutions revenue was $3.2 billion, down $990 million year-over-year, with operating profit of $336 million and an operating margin of 10.4%. Cost reductions were implemented through flight reduction, headcount reduction, and cost cutting.

UPS had an effective tax rate of 23.5% and generated $5.6 billion in cash from operations in the first half of 2023. They paid $2.7 billion in dividends and issued $2.5 billion in long-term debt, of which $1.6 billion was used to pay off debt maturities in the second quarter. For the full year 2023, UPS expects consolidated revenues of $93 billion and an operating margin of 11.8%. In the second half of the year, they anticipate a mid-single-digit percentage decrease in average daily volume year-over-year, however they are executing initiatives to win back diverted volume and accelerate the pull-through from their sales pipeline.

The new labor agreement includes higher union wage rates than originally planned, and the union contract is out for ratification. The International segment is expected to have similar year-over-year volume growth in the second half of the year, and Supply Chain Solutions revenue is expected to be down by a high single-digit percentage year-over-year. Capital expenditures are still expected to be around $5.3 billion, with dividends of $5.4 billion and share buybacks of $3 billion. The agreement rewards employees and helps the company to deliver industry-leading service and win more volume.

Carol Tomé outlines the benefits of the contract for all stakeholders involved, including UPS employees, customers, the country, and shareholders. She states that the contract will provide better wages and benefits for employees, improved working conditions, better work-life balance, and air conditioning for package cars. Additionally, the contract will avoid a work stoppage and disruption to the economy.

Carol Tomé explains that the economic package of the labor negotiations is a win-win-win for UPS, their shareowners, and their customers. Brian Newman then explains that the increase in wages is spread out over a five-year period in a "barbell type effect". To win back the volume lost due to the contract uncertainty, UPS has set up a control tower to onboard the volume without disruption and is doing a number of marketing tactics to amplify their service message.

Carol Tomé explains that, despite the diversion of business, there will still be a peak season for UPS this year. The peak season will last 21 days, with search levels expected to be around 60%. They are working with the top 100 customers to ensure their operating plans are ready for peak season. Despite the lost business, they are well prepared to handle the peak season.

Brian Newman of the company answered a question from Amit Mehrotra of Deutsche Bank about the guidance change and the monthly cadence of domestic volumes in June and July. He explained that the guidance change was due to both a softer volume and higher wages. The company's profit dropped by $1.4 billion to $11 billion, with most of the drop coming from the domestic side, split evenly between wages and lower volume.

Carol Tomé explains that there is pressure on the margin due to an agreement with Teamsters to front-load some wage inflation. However, this pressure is only for the next year, and then the inflation is manageable. She cites the example of Smart Package, Smart Facility, which has improved pre-loader scanning and will soon move to car scanning, increasing productivity. At an investor conference in Spring 2024, they will lay out 3-year targets to reach a 12% or higher margin in the U.S.

Carol Tomé explains that Smart Package is just one of the levers in the productivity toolkit, and that the network planning tools have been powered by machine learning and AR which has enabled them to divert volume away from unautomated hubs to automated hubs. She also mentions new technology such as automated label application and robotic small sort induction which will help to offset wage pressure in the next year. Finally, she addresses the question about the timing and magnitude of GRI or pricing in general, and states that there has been no change in her thinking.

Brian Newman addressed the GRI and the 500-basis point improvement in rate, as well as the 200 basis point headwind in fuel. Carol Tomé discussed the SurePost product, noting its delivery density and that they will continue to invest in it. Ravi Shanker asked about the $7 billion sales pipeline, what kind of customers and end markets it consists of, as well as an update on their largest customer and any changes to the relationship/volumes.

Carol Tomé discussed the company's sales pipeline which covers all customer segments, and the new pricing architecture which offers modifiers like day of week, Cube, and ZIP code plus 4. She also mentioned that the company has a good relationship with its largest customer. Regarding the 1.2 million packages per day, it is mostly diverted volume and it is unclear how long it will take to get back to that level. Brian gave some insight on the quarter-to-quarter margin dynamics in terms of getting to the full year number.

Brian Newman and Carol Tomé discussed the volume that had been diverted elsewhere and the $200 million of sales that they were unable to complete due to labor negotiations. They believe that by the end of the year, they will have won back all of the diverted volume and the extra 200,000 packages. They also noted that the third quarter will be more challenging than the fourth quarter due to ADV growth rates and seasonality. Additionally, they estimated that 1/3 of the diverted volume went to the Post Office, 1/3 went to FedEx, and 1/3 went to the regionals. Lastly, they projected that International margins will be 19-20% for the full year and SCS margins will be 10%.

The International business is expecting a 6.5% decrease in the second half ADV, due to weak real export growth and a recession in Germany. To combat this, Kate and the team are focusing on controlling what they can, such as air side and headcount, and have achieved a 20% margin in the second quarter. The full year revenue for SCS is expected to be around $14 billion with a margin of 10%. Volume and forwarding rates are stabilizing, but still down year-over-year. Additionally, expanding health care and cost initiatives are strategic priorities for the company. When it comes to labor contract economics, Brian Newman will be hosting a call shortly after ratification to go into detail, including wages and benefits together.

Carol Tomé and Brian Newman discussed the importance of managing between price and volume and the lack of visibility for 2024. Tomé mentioned that they want to run their business as a portfolio, seeking both volume and price. Newman added that the first half of 2024 will be under pressure due to the labor contract, but the back half should have less inflation. Tomé also commented on the success of the DAP rollout in 2020, and whether the growth of the channel will start to slow or if there is still more opportunity. Finally, Newman was asked about e-commerce demand trends, and if they have turned the corner.

UPS is looking to grow their business by introducing widgets to make it easier for partners to use their services. They have already introduced a locator widget to find the nearest UPS store. Global e-commerce demand has been up since the start of the pandemic, and is likely to remain stable or improve in the US and Europe in the third and fourth quarters. UPS expects domestic cost per piece to remain steady.

Carol Tomé provides an update on the company's automation efforts, which have increased from 53% to 57%. She also provides an update on SurePost, which is currently being redirected in the network, and discusses potential cost implications and inefficiencies that could arise if they need to in-source more on an accelerated basis.

Brian Newman explains that the labor deal has a $500 million headwind in the back half of the year, which is double what they had originally assumed. Carol Tomé is pleased with the acquisitions they have made, which are providing them with enabling capabilities and cold chain logistics.

UPS executives Carol Tomé and Ken Cook discussed the company's plan to regain the 1 million packages that had been diverted and their strategy for pricing going forward. They stated that they do not need to lead with price to win back the diverted traffic, but rather focus on service to their customers and rebuilding their relationships. They concluded the call by thanking those on the call.

This summary was generated with AI and may contain some inaccuracies.