The conference facilitator, Stephen Dye, introduces the UPS Investor Relations First Quarter 2024 Earnings Conference Call and reminds participants that all lines are on mute. PJ Guido, the Investor Relations Officer, welcomes everyone and introduces the other members of the executive leadership team. He also mentions that some of the comments made during the call are forward-looking statements and refers to the company's 2023 Form 10-K for more information. He also provides a reconciliation to GAAP financial results. Questions will be taken after the prepared remarks, with a request for participants to only ask one question.

In the second paragraph, Carol Tome thanks UPS employees for their exceptional service and discusses the company's first quarter results. While there was a decline in average daily volume, the rate of decline slowed and there was marked improvement compared to the previous quarter. Consolidated revenue and operating profit were down, but the operating profit was better than expected due to higher productivity. Tome also mentions the company's three-year targets and their approach to achieving them through reimagining their network and focusing on the parts of the market that value their integrated network.

UPS recently announced a contract with the United States Postal Service to become their primary air cargo provider, which aligns with their strategy to grow their B2B business. They are also investing in their customer-first, people-led, and innovation-driven strategy, with recent examples including expanding their addressable market through capabilities like no-box, no-label returns and big and bulky deliveries through Roadie. These initiatives are expected to contribute to top-line growth and increase operating margins.

UPS is focusing on unlocking revenue opportunities in the big and bulky market in the US through their digital access program (DAP). With the recent launch of Fast Lane, they can now optimize rates and target volume growth in a matter of days or hours. In the first quarter, DAP revenue grew by 3% and they expect to generate over $3 billion in global DAP revenue by 2024. They are also improving the customer experience across 16 journeys, such as pickups and international shipments, resulting in a 74% reduction in pickup concerns and a 40% decline in custom brokerage holds. In the healthcare sector, UPS aims to become the top complex logistics provider and recently opened LabPort at their global air hub in Kentucky.

The company has built a state-of-the-art facility at Worldport to deliver urgent air packages to lab customers early in the morning. Revenue from the healthcare portfolio has reached $2.6 billion in the first quarter. The company is enhancing its network to grow its premium international business, such as launching Next Day flights between Shenzhen and Sydney. The company is also focusing on innovation, such as implementing RFID technology to improve efficiency and the customer experience. The physical aspect of Network of the Future has launched and the company is also working towards achieving carbon neutrality by 2050.

The company's 22nd Sustainability Report shows progress towards achieving goals, with a decrease in CO2 emissions and increased use of alternative fuels. The company reaffirms its 2024 financial goals and expects a decline in first half earnings and growth in the second half. The company remains focused on becoming a premium small package provider and logistics partner. The first quarter results were in line with expectations, with soft demand affecting all three parts of the business.

In the first quarter, the company's consolidated revenue decreased by 5.3%, but they were able to drive down expenses and achieve a consolidated operating profit of $1.7 billion. The U.S. Domestic segment saw a 3.2% decrease in average daily volume, but there was a sequential improvement compared to the previous two quarters. B2B volume was down 5.5%, with a shift from air to ground services. Revenue per piece was relatively flat, with base rates increasing the growth rate by 240 basis points. Total expenses were down 0.8% or $104 million in the first quarter.

The first quarter saw a 13% increase in union wage rates, but the company was able to offset this through various actions such as reducing operational hours and resources, closing sorts, and reducing staff. Lower fuel costs also contributed to a decrease in total expenses. The U.S. domestic segment's operating profit was down compared to the previous year, while the international segment faced challenges in Europe and Asia but showed signs of nearshoring in the Americas region. Overall, international average daily volume was down, with declines in both domestic and export volume, but there was growth in the China to U.S. lane and nearshoring in the Americas.

In the first quarter, international revenue for the company decreased by 6.3% due to a decline in volume. However, revenue per piece increased by 2% due to strong base pricing. Total international expenses decreased by 4.4% and operating profit for the international segment was $682 million. In the Supply Chain Solutions segment, revenue decreased by 5.3% but logistics saw growth in revenue and operating profit. The company had $195 million in interest expense and an effective tax rate of 26.8%.

In the first quarter, UPS generated $3.3 billion in cash from operations and $2.3 billion in free cash flow. They also rewarded shareholders with $1.3 billion in dividends. The company reaffirmed their 2024 financial targets, expecting revenues between $92 billion and $94.5 billion and an operating margin of 10%-10.6%. In the first half of the year, operating profit is expected to decline, but volume and revenue growth will accelerate in the second half. UPS also plans to make $1 billion in savings from Fit to Serve and expects revenue per piece to outperform cost per piece. They also expect to exit the year with a 10% operating margin in U.S. domestic operations. In terms of cash flow and capital spending, UPS plans to keep capital expenditures at 5% of revenue or $4.5 billion and expects free cash flow to be between $5.9 billion and $6.7 billion before pension contributions. The company also plans to quickly begin servicing Air Cargo for the USPS, leveraging their existing network and assets.

UPS is planning for the complete transition to UPS in the third quarter and will report the revenue and expenses associated with USPS Air Cargo in the SCS other line in their financial reporting. This addition to their network will result in a higher share of network costs being allocated to SCS, benefiting their U.S. domestic segment. They expect to see a benefit to operating margins this year and are reaffirming their three-year revenue and operating margin targets. The first question in the Q&A session asks about the guidance for the first half and if anything happened late in the quarter that drove EBIT above expectations.

The speaker, Brian Newman, responds to a question about why the company's guidance for the first half of the year remains the same, despite a positive performance in the second quarter. He explains that there was positive volume momentum towards the end of the quarter, but some cost timing affected the profits. The next question is about the contribution margins associated with the company's new contract with USPS, and the speaker assures that the decision was not based on price, but rather on the company's improved pricing discipline. He also mentions that the company will be increasing block hours to service the new volume and may incur additional costs.

Carol Tome discusses the company's recent win of the air cargo business from USPS and how their integrated network will allow for more efficient and cost-effective solutions. The company will not need to purchase any new aircraft but will hire some pilots. The second question from Tom Wadewitz asks about the key factors contributing to the expected improvement in EBIT in the second quarter and second half of the year. Brian Newman responds by mentioning the impact of the Fit to Serve program and the anticipated volume growth in the parcel market.

The company expects marginal growth in volume, which is in line with past trends of Q1 stepping down to Q2. This will naturally lead to an increase in EBIT. The Fit to Serve program will generate $1.3 billion in savings for the full year and will ramp up in Q2. The company also expects RPP growth in the back half of the year due to projected fuel price increases, a fuel surcharge, and a peak in demand. Additionally, the company has brought in a lot of SurePost product into their network and expects to anniversary this in the back half of the year. The company does not expect to see the same drag on RPP costs in the back half as they did in the first quarter.

The UPS team has taken several actions to drive profit, such as closing sorts and improving peak purchase transport. They have also seen a record level of productivity, with safety stats being the best in five years. Turnover is down, leading to increased productivity. The company is focused on closing stores and moving volume to automated facilities to further increase productivity. This strategy is also being implemented outside of the United States.

The speaker, Kate Gutmann, discusses the value of expense management at UPS and how it has helped the company set records in cube utilization and margins. She also mentions the growth of the health care and SMB segments as a fuel for this success. A question is then asked about international margins and the speaker, Carol Tome, clarifies that the international margin was impacted by decreased demand but is expected to be in the high teens. Another question is asked about the impact of USPS on SCS and domestic margins, to which Brian Newman explains that USPS comes in through SCS and will have a positive effect on domestic margins. Carol Tome also mentions a one-time item that affected the international margin, but it was a minor issue.

David Vernon from Bernstein asked two commercial questions to the operator on the line. He asked about the volume outlook outside of SurePost and when pricing for the product will be addressed. Carol Tome, the operator, responded that the volume mix is looking different for the future and they are always looking for opportunities to optimize pricing. Brian Newman added that the headwind from the mix will not be as significant in the next quarter. Scott Group from Wolfe Research asked for more directional color on the second quarter guide, which implies a potential decrease in EBIT of 10-30%.

The company is confident in their full-year guidance and will wait until the second quarter to provide updates. They are maintaining their first half profit range of negative 20% to 30%. The domestic ADV is expected to be slightly positive and RPP should be consistent with the first quarter. The company expects cost per piece to improve in Q3 and international business to improve over the course of the year. The company is not changing their guidance based on the recent air cargo business win, but they expect it to be margin accretive. They will provide updates on the back half of the year after the second quarter.

Carol Tome explains that they will provide more information about their second quarter performance after it is completed. She also discusses their return business, which is considered a B2B business due to consolidating returns for large customers. The margins for this business are attractive due to the density of returns. A question is then asked about the profitability of this business.

In this paragraph, the questioner asks about pricing and the fuel surcharge increase, as well as the company's pension contribution strategy. Carol Tome, the speaker, explains that the fuel surcharge increase is necessary due to rising fuel costs and that the company's excess capacity will likely be absorbed in the market by 2025. She also mentions that the pricing environment is rational. Brian Ossenbeck, another speaker, adds that the company's free cash flow, excluding pension, is estimated to be between $59 million and $67 million, with an annual service cost of $1.4 billion.

The company is currently in the process of evaluating strategic options for their pension plan, which is over 90% funded. They plan to share their decisions later in the year. When it comes to volume, they expect a slight uptick in the second quarter and a low single-digit increase in the second half, with each month showing sequential improvement. Comparing to previous years, the third quarter generally has about 300,000 more average daily volume (ADV) than the first quarter.

The company expects to see 4.5% growth in the back end of the year, with strong visibility in the sales pipeline. They also anticipate $1 billion in productivity by the end of 2024, with 80% of resource reductions to be completed by the second quarter. The USPS contract will bring in air cargo in the fourth quarter, and there may be some business coming in sooner. There are no minimum volume requirements for the contract.

The speaker discusses the company's plan to protect against a decrease in air cargo volume and mentions working with the postal service to develop an operating plan. They then answer a question about the possibility of raising the dividend and state their commitment to a stable and growing dividend.

In response to a question about minimum levels within the USPS contract, UPS executives Carol Tome and Matt Guffey confirm that they do set minimums in the contract to protect both parties and ensure a smooth onboarding process. They also credit their sales team for the improving volume trends, which were not expected to be very growthy this year. The team has been working hard and winning new business, leading to sequential improvement in volume.

The speaker is discussing the growth of their DAP portfolio, which saw a 3% increase in the first quarter. They attribute this to meeting customers' needs and have confidence in their projected volume. The speaker also addresses a slower growth outlook for DAP, but notes that it is still expected to exceed $3 billion by the end of the year. They also mention strong growth outside the United States.

The speaker asks Carol for an update on the company's progress with small and medium-sized businesses (SMBs) and how it compares to international performance. Carol responds that they are currently at 29% and expect to be in the low 30s by the end of the year. Kate adds that their SMB share outside the US is 62% and they are implementing a digital access program which is resonating well with SMB shippers. The speaker then asks about the pricing environment and the effectiveness of the general rate increase (GRI). Brian responds that they expected a 50% keep rate but saw a 250 basis point increase in the first quarter.

The speaker expects the base rate to remain consistent throughout the year and attributes this to factors such as fuel prices, PSS during peak season, and a focus on commercial, SMB, and healthcare. They are confident in delivering a low single digit RPP in the second half of the year. The call has now ended.

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