Good morning. My name is Steven, and I will be your facilitator today. I would like to welcome everyone to the UPS Investor Relations Second Quarter 2020 Earnings Conference Call. [Operator Instructions] 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 second quarter 2020 earnings call. Joining me today are Carol Tomé, our CEO; and Brian Newman, our CFO. 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, subsequently filed Form 10-Q’s and other reports we filed with the Securities and Exchange Commission. These reports, when filed, are available on the UPS Investor Relations website and from the SEC. During the quarter, GAAP results included a pretax charge of $112 million, equivalent to $0.10 on an earnings per share. The charge resulted from transformation-related activities in the international and U.S. domestic segments. In the prior year period, GAAP results included a pretax charge for transformation cost of $21 million, equivalent to $0.02 on an earnings per share. Unless stated otherwise, our comments will refer to adjusted results, which exclude transformation costs. The webcast of today’s call, along with the reconciliation of non-GAAP financial measures, are available on UPS Investor Relations website. Following our prepared remarks, we will take questions from those joining us via the teleconference. [Operator Instructions] And now I’ll turn the call over to Carol. Carol Tomé: Thank you, Scott and good morning. I’m honored to be hosting my first UPS earnings call. Before I begin, I would like to thank David Abney, who after 46 years of service to UPS passed the baton to me on June 1. We wish David all the best. UPS is a special company with a unique culture powered by more than 528,000 UPSers around the world. Through this…

Thanks, Carol and good morning. Today, I will discuss our quarterly performance and current trends in our business, which the teams are navigating well. Before I start, I want to point out the expanded disclosure in our web schedules. To improve transparency, we brought the 10-Q balance sheet and cash flow statements forward and have included them in the materials released today. Through the second quarter, we face challenges from the coronavirus pandemic and resulting recession. Global real GDP and global industrial production are estimated to be down 9.3% and 14.6% respectively. And in the U.S., real GDP and industrial production declined with unemployment reaching historic highs. In response, we adjusted our network to support our customers’ needs. We manage costs and leaned into three significant changes in demand in the markets we serve. First, our ability to shift air capacity to where it was needed enabled us to meet the strong demand out of Asia, using both our own assets and asset-light solutions. We met the demand for more capacity by flying about 635 extra flights using both brown tail and third-party aircraft. Next during the quarter, the U.S. e-commerce market jumped 34.4% and SMB is quickly adapted to participate. In fact, through our digital access program, we captured 120,000 new customer accounts, a significant increase from recent trends. And finally, our healthcare expertise and global portfolio of services enabled us to meet the urgent need for PPE and COVID-19 testing supplies, and provide support for vaccine and treatment studies. All of which, contributed to our results in each of our three segments. For the quarter, consolidated revenue increased 13.4% to $20.5 billion. Net income rose 8.8% to $1.9 billion and operating profit totaled $2.3 billion or 7.4% higher than last year. The operating margin for the company was…

Thank you. We will now conduct the question-and-answer session. [Operator Instructions] Our first question will come from the line of David Ross of Stifel. Please go ahead.

And Carol, you’ve picked a good call to start off with. Carol Tomé: Good morning.

Wanted to see how you guys are thinking about peak season. In the quarter, you talked about a mini peak or peak-like conditions, where you had some network constraints. If some of that strength continues and then we have on top of that, a holiday surge, how are you talking about it with your customers? What are you thinking about it from a network investment standpoint, any bottlenecks that may emerge there? Carol Tomé: Yes. Thanks for the question on peak. As a leadership team, we’ve agreed, we are going to have an outstanding peak season. I participated in my first peak planning committee several weeks after I joined the company and very impressed by how we are planning to manage through, what could be a very peaky season, is about making sure that we’ve got our network aligned both on the high end and on the low end, because it’s uncertain out there. So we’re building an optionality, in terms of how we’re going to run the network. And then Kate with her team are talking to our customers customer-by-customer and how we will best manage through peak.

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

Hey, thanks and congrats, Carol. So first, if you can just clarify that the second half margin comment is that lower than the second quarter or lower than the full first half. And then just Carol, just bigger picture, I wanted to just get your perspective on how you’re thinking about the growth algorithm for UPS in the U.S. business. So the last few years, it’s been volume outpacing revenue and margins falling. Do you think we see more or less volume growth going forward than what we’ve seen? You’ve historically talked about 2% to 3% price. Does that meaningfully change? And then I guess, do you think you can – when do you think you can get back to a double digit margin? I know there’s lot there, but any perspective would be great. Thank you. Carol Tomé: Yes. Absolutely happy to share some perspective. As Brian said, it’s – our operating margin in the U.S. domestic business could be lower in the back half of the year than what we reported in the first half of the year. Lot of uncertainty in the marketplace, of course, but we thought it was helpful for Brian to kick out some of the expense related items that we’re pretty sure will happen, because we’re not terribly sure about the demand side. Now longer term, this is where we’re very excited about what we’re going to do with our company. In my prepared remarks, I’ve talked about, it’s all about being better, not bigger. What do I mean by that? Well, just a couple of things. This may be a longer-winded answer then you’re looking for. But I’ll go ahead and take the opportunity to share with you, what I mean by that and what we mean by that. First, we are…

Chris Wetherbee of Citi. Please go ahead.

Hey, great. Thank you very much. I really wanted to kind of make sure I understood sort of how that answer pertains to sort of profit growth on the domestic side. So lots of revenue, lots of demand, as it stands right now. Is there a clear path and maybe the next couple of quarters, maybe not necessarily the third quarter, this heap profit growth in the context of the revenue growth that we’re seeing, because the revenue is obviously spectacular in the second quarter on the domestic side, we actually saw profits down a little bit? So just want to kind of get a sense of what are the sort of steps that you need to take to be able to get that profit, to grow in line with revenue or at least closer. Carol Tomé: Yes. The easy way to think about profit growth is of course with pricing increases. And as you know, we did take some short surcharge increases at the end of May, but it’s much more than pricing. It’s really about optimizing the network and leaning into the customer segments that value the end-to-end network that we offer. And one of those segments is small and medium-sized businesses. And you heard Brian talk about the growth that we saw in that space in the second quarter up 11%. As I look at our small and medium-size customer base, we divide it into four big segments D1 through D4, that’s based on customer size. D1 and D2 customer segments, we’ve got pretty good market share there. But in D3 and D4, we’re underpenetrated relative to our competitors. We have an opportunity to grow into that space, but we need some enabling capabilities. The number one enabling capability to grow into that space is time and…

Jordan Alliger of Goldman Sachs. Please go ahead.

Yes. Thanks. International may have had a strongest margin quarter ever, and I know there are obviously outsize gains in Asia and what have you. I’m just curious, how do we think about the longer term margin in international, or maybe even as we move forward from here, given the strong performance in the second quarter? Thanks. Carol Tomé: We were thrilled with our performance in our international segments and we expect them to have a very good back half as well. That model is a very different model than the one we run in inside the United States. It’s an asset-light outside service provider model. So the margins will always be stronger outside of the United States than they are inside the United States. And we view that as a competitive opportunity for us, candidly. We’ve identified 10 growth markets that we will grow into. We’ll be updating you as those opportunities present themselves. In the second quarter, we did enter into an alliance with a firm in Mexico. We’re very excited about that, because that’s one of our top 10 growth markets and we will now have the leading capabilities in Mexico, both inside Mexico and exporting out. So look for good things to come out of our international.

And Jordan, if I can just add, the B2C growth in Europe in the quarter or in international in the quarter was up 95%. And so I think the combination of the shift towards B2C and their ability to expand margins was another proof point of why we’re confident in that model.

Thank you.

Ravi Shanker of Morgan Stanley. Please go ahead.

Thanks. Good morning, everyone. Carol, would love, if you could share any learnings or takeaways from your prior stent as CFO at an e-commerce/consumer retail focused company that it can bring to UPS? And also in the context of customer concentration, you have a pretty large number one customer, kind of what are your thoughts on that? And how do you see that evolving over time? Thanks. Carol Tomé: I’m happy to do so. First, let me talk about my learnings during the last recession, which was housing-led recession. And my former employer, we felt it hard. They lost 25% of the top line during that recession. Two key learnings during that time. One, invest through the crisis. No better opportunity, if you have the financial wherewithal to do so, to invest through the crisis. So that when things settle down, you are positioned to take share. And that’s what we’re doing with time and transit. Our time and transit investment this year is $750 million. We could have canceled that. But we said, no, we’re going to pull that board. And we’re going to invest through the crisis. My second learning is to invest in your people. Now it doesn’t mean that you don’t have a fewer people in a downturn, but for those people that you have, you need to invest in. And if you looked at our population of UPSers, actually we’re down in Supply Chain and Freight, as you would expect, because the demand softened up there. But for the people who are left behind, we are investing in them, because it creates loyalty and better experience and better service for our customers. So we’re investing in incentives for our people. We’ve been promoting people. It pays huge dividends if you stay true to your people. Those are very good learnings in a downturn. Learnings as a retailer, is that when cost increases come your way, if you are a large retailer, you can pass those costs increases across the SKU base, and the customers don’t know. So while retailers may squawk at price increases that come their way, large retailers have a way to spread that across. And nobody knows. So there’s an opportunity here on the pricing side to do what we need to do. From a customer concentration perspective, I looked at our top 20 customers and their performance in the second quarter and of those top 20 customers, all but one group, the only one that didn’t grow was government. And I can’t tell you why, but it didn’t grow. But if I look at our top 20 customers who are retailers, who were predominantly store-based retailers, who when their stores closed and demand shifted online, well for those customers, they had triple-digit growth in the second quarter. Our largest customer did not have triple-digit growth. So that gives you some perspective on how we manage through customer concentration and how we’re thinking about optimizing the portfolio long-term.

Thank you.

Allison Poliniak of Wells Fargo. Please go ahead.

Good morning. You had mentioned or talked about a little bit about the mix between B2B and B2C. But within B2C, could you talk about any mixed challenges that you face in the quarter and how they may have progressed that could have hindered margins there as well? Carol Tomé: Well, maybe I’ll start. Brian, you can chime in. I just looked at our ground business and we break our ground business into four segments. There’s 100 weight in commercial, so that’s more industrial. Then there’s ground resi, which is going to be predominantly B2C and SurePost. If I look at the profitability of ground resi, which now makes up 44% of our total ground business in the U.S. The profitability was up year-on-year. We’re taking actions actually to drive profitability in the business. And Brian, do you want to add any more color to that?

Yes. I just say, as we peel that business apart, I think I had mentioned it in my script. But as we extract the SurePost product, it gives us some encouraging signs for the underlying pricing health of the business within B2C. Because pricing, if you exclude SurePost, Carol, and fuel, we were up 1.5%, and that’s better than the last three or four quarters. So it’s encouraging signs for how we’re managing B2C.

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

Thanks very much, good morning. I’m curious, I know the visibility is not great, but specifically in B2B, U.S. and frankly, everywhere, just how did you see that evolve through the quarter? What are you seeing in this quarter? How are you managing and competitively positioning to try and be well positioned as hopefully that comes back. And then the discussion of end markets that are particularly strong or weak over in that category. Thank you.

So maybe I’ll take that one, Scott. And Carol can chime in. The B2B growth was down 22% in the quarter. In terms of the evolution, we actually saw that number get better. It was still down overall. But April, May, June, as it progressed, we started the quarter down 38%. Got a little better down 20%, finished June at down 8% in terms of how we’re seeing it play out in this next quarter that we’re holding at about the June levels down, 9-ish in the month of July, as we think about the B2B business. So SMBs, which we’re also very focused on, they were up 11% in the quarter. So as we think about our small and medium businesses, we’re seeing those June trends of growth continue into July in the high teens range. Carol, anything to add? Carol Tomé: I think the stability invest new, it’s not getting worse, not getting better, but it’s not getting worse on the pure B2B.

Brian Ossenbeck of JPMorgan. Please go ahead.

Hi, good morning. Thanks for taking the question. Just had one on capacity in U.S. domestic. With this type of volume, essentially at the same holiday peak because a couple of years ago, how close is the U.S. network to maxing out capacity? I know you said, you expect volumes to moderate a bit in the back half of the year. But can you focus on revenue quality to help some of that moderation? Or do you think there’s a multiyear potential capital investment program around the corner? And I guess in general, can you just talk about what you think of the capital intensity rather of incremental B2C from here in the U.S. Thank you. Carol Tomé: So again, our theme is better, not bigger, optimizing the capacity that we have. And we have capacity to handle the peak volume that we are anticipating this year. There are capacity constraints in the United States, which gives opportunity to manage through with pricing, also opportunities to manage with our customers. As a former retailer, I know this very well, how to manage through, when you have promotions, how long you have promotions, how you use your store base, how you use our access points. Don’t forget that we have over 15,000 access points that we can be used to address the capacity issues. So we are feeling very good about peak this year. And as we look forward, it’s about right-sizing optimizing the investments that we had before we think about continued investments in capital. It’s about being better, not bigger.

Carol, maybe I’ll just add on the CapEx piece. We spent the last three years building capacity in automation. And so we’re now reaching 85% in the U.S. system. So we feel pretty good about our ability to manage that volume. And as we’re not chasing any volume or any package at any price, we think we’ll be selective in terms of what goes through the network.

Thank you very much.

Ben Hartford of Baird. Please go ahead.

Hey, good morning. Carol, just interested in your perspective on the multiyear transformation efforts. What you may or may not change, what you like or don’t like about what’s been undertaken to date. And just the pathway as you kind of finish up here over the next year and a half. And related to that, maybe Brian, could you provide any perspective on the previous guidance that you had provided in terms of the incremental EPS benefit by 2022 of $1 to $1.20, where that may sit given some of the changes here particularly year to date, and what changes or improvements could come to affect that number? Thank you. Carol Tomé: Well, on transformation 1.0, I think that’s what you’re referring to. We began that in 2018 and on a gross basis life to date, we recognized $2.5 billion of savings. We have reinvested a good piece of that. On a net basis $1.1 billion in savings and tax effected, it’s about $0.95 of EPS on a cumulative basis. That’s not enough, candidly. It’s great. Take credit for that. It’s not enough. We have initiatives underway, we’re calling it, Transformation 2.0 and 3.0 to drive continued productivity and efficiency in our company. Part of this will be enabled by technology. We are moving from my company as an example, that what was really stuck in a static business logic environment. And that resulted in a lot of overhead doing a lot of reports, looking through the rear view mirror to drive the company. We’re moving to analytical decisions science as Juan and his team, build out our digital factory, and that’s going to free up productivity. That will absolutely free up productivity. Until this year, believe it or not, we only had two IT releases a year. We now…

And Ben just to follow-up, I think Carol answered it, the second half of your question on the $1 to $1.10. We’re approaching $1 we have a year left in that Transformation 1.0 program. So we’re on track to deliver. I think the more exciting focus now is Transformation 2.0 and 3.0, how do we really change the game on a profit per piece, linking back to the productivity.

Amit Mehrotra of Deutsche. Please go ahead.

Thanks operator. Good morning, everybody. Carol, congrats on the appointment as CEO. If this sounds like it’s TSR for UPS, which may be the case. Just in that context, I was hoping you can expand on the commentary of excess cost that can be removed. Is it $500 million, is it $1 billion, just any sense of how much is being left on the table, so to speak because of the over-engineering and whatever the commentary you just mentioned actually. And how fast can you adjust the cost structure, given the size and scope with UPS? And then also capacity and capital, it’s a big focus area for you. Should we expect near-term cuts in CapEx intensity? Capital spending for UPS is, I don’t need to tell. You have increased $5 billion in the last four years, but the domestic margins have contracted 500 basis points. So is that something we should also expect. Can you address those points, please? Carol Tomé: Yes. I’m happy to do so. TSR for UPS is the name of the game. We are all in. And as a leadership team, this is what we talk about as we get together on a weekly, hourly basis. How can we get more out of the assets that we have invested? So thank you for mentioning that, I came to UPS for a few reasons. One, because I love this company; two, because I want to make an impact on our people and three, I want to get the stock price moving. It’s all about creating value for our shareholders. And you do that through effective capital allocation. It starts with how you allocate capital. And I will say that we have not gotten the returns that we should have delivered on some of the capital investments that we made. For all whole kinds of reasons, and it’s not – we don’t need to look back for those reasons, but looking forward, it’s just we’re going to have a different lens on how we allocate capital. As we’ve talked this morning, I gave an example of not buying aircraft to have excess capacity, that would have been value destroying. So we opted not to make that capital investment. We will get the network righted before we think about investing more dollars in the network. That suggests lower capital intensity going forward. To your question about, well, okay, great, I get the capital, which is the denominator side. How do you fix the numerator? Or how much cost can you take out? How you’re going to fix the revenue? How are you going to get the cost out? I don’t like anything unless it starts with a B, because it’s just not worth our time. We’re focusing on the wildly important here. So if it’s not worth – if it doesn’t start with a B, we’re not doing it. So that gives you a sense of the cost that we’re looking to take out.

Allison Landry of Credit Suisse. Please go ahead.

Good morning. Thanks for taking my question. So I wanted to ask a little bit more of a follow-up question on the conversation of capital efficiency and specifically your thoughts on the returns on incremental invested capital. So you mentioned that at least for the near-term to mid-term you’re to try to more with less at an that should translate into perhaps some lower CapEx levels. But maybe you think about longer-term and what could be the requirements of the business for that technology or for something for speeding up the network. Do you think relative to what UPS has historically delivered from a return on incremental invested capital standpoint? Can you get back to maybe prior peak or that not the right way to think about that? So any thoughts on capital efficiency would be great. Thank you.

Well, Allison I’ll start that. From a return on invested capital, look, we’ve gone down about 400 basis points as we look back the last couple of years on ROIC. We’re very focused on moving that in the opposite direction, moving it up. We’re down in the low 20’s right now. I think you’re referring to the peak where we were in the high 20’s. It’ll take some time to get back in towards that trajectory. But there’s a base level of CapEx that we’re going to need to spend, call it $2.5 billion to $3 billion on maintenance and that’s ongoing. But everything above that that we’ve been spending on capacity and growth is getting looked at through a different lens. And Carol alluded to it, from a TSR we’re very focused on the cash returns and looking at the annual payback and how long the payback is. So I think you can look for us to drive improved ROIC. I think the pace will give you some more clarity on that when we come out with guidance. Carol, would you add anything? Carol Tomé: The only thing I would add is that value is defined by what the customer is willing to pay for. And if we’re spending on capital on enabling capabilities or services or products that they’re not willing to pay for, I don’t know why we would spend that capital. So we are bringing a different lens. It’s value defined by what the customer is willing to.

Thank you so much.

Ken Hoexter of Bank of America. Please go ahead.

Hey, great. Good morning, Carol, again, congrats and welcome. And Brian, look forward to working with you both. You mentioned – just real quickly, you mentioned the weaker domestic in the second half. You mentioned some longer-term thoughts international. Did I hear you say that international will stay at these levels in the second half? I just want clarity on that. And then digging into the second half domestic margins, Brian, is that time in transit, is that – are these kind of the startup costs and that’s going away? Or are you looking maybe – Carol, your thoughts on your long-term thoughts on getting back to that double digit margin or is it beyond that given these moves you’re talking about?

So, Ken, thanks for the question. I’ll start with the domestic piece in terms of the back half. Yes, Carol alluded to the investments in time and transit, and we think that’s a critical investment to continue to invest to drive the service for our customers and speed up time and transit. We’ve got a handful of one-off items that I think I alluded to. There’s a land sale, fuel excise tax, management incentive. Those are all laps, but they add up to a couple hundred million dollars. So it’s a meaningful number. There’s also a benefit catch up in terms of expense. We put on about 40,000 heads to handle the volume surge in the second quarter. So that will be coming back in terms of benefits, if you’re full time, your benefits kick in at 30 days, if you’re part time, it kicks in about six months. So you’ll see those creep up. But that’s why I provided the caution on the back half of the year. Longer-term though, I think the steps we’re taking will drive the overall improvement in domestic margins. On the international side, I think you saw a large peak in the middle of the quarter coming out of Asia with the additional flights. And so I think that would moderate balance of the year. And Ken, as we’ve talked before, I think the focus in international it’s on EBIT dollars, because I think the team really have an opportunity to drive their share at those elevated margin levels. So margin may not stay at this level, but as you think about the future EBITDA will and there are certainly 2x the domestic margins, a very attractive growth. Carol, anything to add on domestic and international? Carol Tomé: Just perhaps on the growth side. Our volume will be up in the back half. It’s just the growth rates won’t be the same. And I just want to make sure we’re really clear on that. I don’t want to have any confusion there. And on the international side, I think our margin will be quite healthy in the back half.

Thanks, Ken.

Thanks. Appreciate that.

Jack Atkins of Stephens. Please go ahead.

Hey, good morning and thank you for taking my question. So I just wanted to focus on the growth that you’re seeing within B2B and e-commerce in your international markets. And maybe e-commerce adoption in the international markets as well. To what degree is this potentially a headwind to profitability and margins internationally as we sort of look forward, as we sort of see e-commerce and B2C grow there? Or are there some differences in terms of how that market is structured or how you’re network is structured that would make that not the case. Thank you. Carol Tomé: Yes. Our international business is quite different than the domestic business. It’s an asset light outside service provider in many of the markets in which we serve. We actually like this cross border opportunity to grow B2C business, and the margins are quite healthy.

This is Scott. We’ve got time for one more question before we wrap up.

Our final question will come from the line of Bascome Majors of Susquehanna. Please go ahead.

Yes. Carol, in your 17 years on the UPS board, you’ve witnessed several substantial changes in the competitive landscape for the company. And you’ve been part of steering the board strategy to bring in some more outside perspectives and the senior management, which has certainly seemed to reach a new level, appointing you as CEO here. Can you give the investors some board level perspective on that evolution and thinking UPS is a storage strategy from promoting from within. And any thoughts on where the cultural shift that UPS has headed over the next several years with you at the helm? Thank you. Carol Tomé: Yes. We’re a big believer as a board and the company’s culture, because we think it is a competitive point of differentiation. As the board looked at CEO succession, they came up with a qualification, if you will, of what the next CEO should possess in terms of experience, in terms of just knowledge in certain areas. And they map that up against both internal and external candidates. Obviously, I wasn’t part of that, but there was a search committee that was formed and they looked at, here are the qualifications of the next CEO. And they looked at our internal team as well as external team and decided to go outside for the role. And I was delighted that they asked me to take the role. It’s because of the time that we’re in. As I look to the future of UPS, my goal is to get CEO succession ready candidate. So then when it’s time for me to move on and actually retire, because I have been retired. But when it’s time for me to move on, we have ready now candidates inside the company to promote. The big believer and investing in people to help them get to their highest potential, whatever it may be. So don’t expect to see a big cultural shift just because I came in for this time. And I am delighted to be here. It’s an awesome leadership team. They’re in the room with me today, giving me support just for answering your questions. We really do appreciate all the thoughtful questions that came to Brian and me today. So thank you for that. And Scott, I’ll turn it back to you.

Final comments, we just want to thank you for joining us today. We wish you a very good remainder of your day. And then we look forward to speaking with you next quarter. And that concludes the call. Thank you.