00:00Keeping an eye on the broader markets and keeping an eye on shares of UPS down about 6%
00:05after the company reported earnings this morning. The company did actually beat on most of the main
00:10metrics, adjusted EPS above analyst estimates, revenue in the quarter above analyst estimates,
00:15and the company boosting its full year sales forecast as well as providing an adjusted
00:20earnings forecast ahead of analyst estimates. A testament here to a lot of changes that the
00:25CEO has made over the last few months to wean themselves off some of the lower margin business
00:30and move deeper into some of the higher margin products and services. Pleased to say that the
00:35CEO of UPS, Carol Tomei, she joins us right now on the heels of that earnings report. And Carol,
00:41I do want to start off with the guidance for the rest of the year. It looks relatively strong.
00:45And I know you've talked in the past that not only 2026 would be a good year for this company,
00:51but you alluded last quarter that 2027 could potentially be even better. Are we still on
00:57track to see that? Well, Romain, it's good to be with you. And, you know, I'm delighted to say that
01:04we launched a strategic transformation of our company 18 months ago to glide down Amazon volume
01:11and reconfigure our network. And we did that. And then we returned to profit and revenue growth.
01:17And as you look to the guidance for the balance of the year, we will continue to grow our profit
01:22and earnings, which gives us runway for a really good 2027. Talk to me a little bit about the
01:28domestic business. And I mean, when I was looking at the share drop today and we spoke to some
01:32analysts, some people seem to raise some concerns here about the margins on the domestic business,
01:38why they weren't as strong as some folks were looking for, as well as the guidance going forward.
01:42Is that a reflection of what you've lost from the Amazon business? Or is that more related
01:48to tariffs and other economic issues? Well, we were quite pleased with our margin performance
01:54in the domestic business in the second quarter. It was up 400 basis points from what we reported
02:00in the first quarter and up 100 basis points year on year. If you look at the back half of
02:07the year,
02:07we guided to continued margin expansion year over year in both the third and fourth quarter
02:14because we've added new productivity into our business to help lower the cost per piece while
02:21leaning into the segments of the market that really value our end-to-end capabilities like complex
02:27healthcare logistics and SMB and B2B. And when you think about those segments, we saw good growth
02:33growth in the second quarter. Healthcare reported its second $3 billion quarter in a row. SMB volume
02:41in the United States was up over 4% year on year. And we're gaining share in industrial and automotive.
02:47So I'm super pleased about the progress that we're making and the results that we'll deliver.
02:53I do want to talk about healthcare in a bit, but I'm just curious, though, on the domestic business,
02:58because, I mean, there is a disparity between what we saw on the adjusted numbers and on the gap basis,
03:03which seems to suggest that some of the positive that we saw is coming from cost cuttings. But as
03:08we get into that second half of the year, and you could correct me if I'm wrong, you're saying U
03:12.S.
03:12revenue per piece growth is going to be about 4% to 4.5% in the second half. That
03:17would be down
03:18sequentially from 9% plus that we saw in Q2. Average daily volume is also supposed to decrease,
03:24although I think either you or the CFO alluded that that was more seasonal factors. Just kind of square
03:30the circle as to why there seems to be some deceleration with regards to the U.S. business.
03:35Yeah, happy to do so. So first of all, on the volume side, while volume will be down year over
03:42year, that's a reflection of the Amazon glide down dynamic. Because while the third, if you look at
03:49the third and fourth quarter of last year, we glided down volume in the first and second quarter of this
03:55year. So the year over year comparison makes the volume look negative. But if you ignore Amazon,
04:00we'll actually grow volume in our U.S. business just like we did in the second quarter if you ignore
04:07Amazon. On the RPP differences, in the second quarter we had strong RPP growth driven by solid base rates,
04:16customer mix improvements, as well as fuel. And fuel was about half of that RPP growth in the second
04:24quarter. There's a lot of volatility in the fuel market, as you know. We think some of the strength
04:30and fuel will carry, but not all of it. So we are expecting not to see the kind of benefits
04:36in the
04:37back half of the year as we did in the second quarter. We're also up against a couple of tough
04:42comparisons year on year because we made some price adjustments last year that aren't repeating this
04:47year. So all in all, as long as we have our RPP growing faster than our cost per piece, well,
04:53we're going to expand our margin. With regards to the relationship with Amazon, you said on the call
04:58you're basically about 9 percent of your revenues now from Amazon. That's significantly lower than
05:03the 13, 14 percent that we saw a few years ago. Are you planning to sort of get that share
05:08down even
05:09further? Is there some sort of floor either that you want or a contractual floor that maybe you have
05:15to abide by? Our glide down is behind us. We're all about focusing on growth, optimizing Amazon volume
05:23in our in our network. It's an important customer for us. But we're going to grow in other areas. So
05:28where the percentage of Amazon volume lands up will be a function of growth in other segments.
05:33And we'll report on that as we go. So talk about the supply chain solutions. You kind of alluded to
05:38health care, cold chain, a lot of that decent growth there. I think supply chain was 8 percent higher.
05:44Our margins are pretty healthy in the double low double digits as well. Is that the growth story
05:48that investors should be focusing on? Complex health care logistics is a big growth story
05:54for UPS because we are the only carrier that owns all the assets necessary to provide control
06:02and visibility for this very important package. It's actually not a package. It's a patient.
06:08And so it is a growth story for us. We are growing faster than the market. And oh, by the
06:13way,
06:13the market's pretty growthy. The market's growing around 6 percent. We're growing faster than the
06:18market. We're doing that organically as well as through the aid of a few acquisitions we've made
06:23over the past several years that are gaining momentum. So if you look at the profitability of
06:29our supply chain business in the second quarter, it was driven in large part the year over year
06:34change by health care. But we also saw good profitability improvement in our digital business.
06:40And this would include roadie and happy returns. With regards to the digital business and also more
06:46importantly, just some of the changes that you made to the warehouses with regards to automation,
06:50how much does that help your cost structure going forward, particularly in the context of
06:55meeting some of the guidance that you've given? So we've invested in automation in our network in a
07:02meaningful way. Get this. At the end of the second quarter, 68 and a half percent of the volume that
07:07flowed through our network in the United States went through an automated building. That's up 400 basis
07:13points from a year ago. And to put that in perspective, that meant we had over 330 million packages going
07:21through an automated process more than last year. Why does it matter? The cost per piece in an automated
07:27building is 28 percent lower than in a non-automated or conventional building. So that's why we've really
07:34focused on automation so that we can drive productivity going forward and capacity. So as growth comes back
07:40into the network, we've got capacity to manage that growth. I have to ask you, get your just kind of
07:46general
07:46view on the economy. Carol, obviously you move a ton of our economy effectively. I think I saw a stat
07:53that like UPS is
07:54like three percent of global GDP in terms of what goes through your hands in one way or another. Is
07:59the economy
08:00healthy, the global economy right now healthy enough?
08:04As we look at the global economy, we see elements of recovery. In fact, our most profitable trade lane outside
08:12of the United
08:13States is China to U.S. And we saw that return to growth beginning in May. In fact, that trade
08:20lane grew by 22 percent in the
08:22second quarter. If we look at Asia to Asia trade lanes, we saw volume growth there as well, up 14
08:30percent.
08:30So that gives you a sense that there's certainly some strength outside of the U.S. if you look at
08:35those
08:35Asia to Asia trade lanes. And then coming back into the United States, the consumer seems pretty resilient.
08:42And as the consumer goes, so does the economy. And the consumer seems pretty resilient to us.
08:47A final question, Carol. And this kind of has to do with this idea of making sure that investors sort
08:54of feel
08:54comfortable with what you've delivered. And I know the share draw, the share move that we've seen today is just
08:59a one day knee jerk reaction. There are a lot of people that look at the free cash flow that
09:04you had in the quarter,
09:05which is in the millions. They look at the dividend obligations that you have going forward, which is in the
09:10billions.
09:11When does that kind of right size itself that maybe give investors a little bit more comfort
09:15that they are going to get at least what they think they deserve?
09:20So protecting the dividend is is job number one for UPS. And I'm pleased with the improvements that
09:27we're seeing in our cash flow generation. The second quarter had a one time hit because of a driver
09:34choice buyout program we launched to buy out drivers from their contracts here at UPS.
09:41I came with a billion dollar cost, but it was worth it. So that's behind us. And we look at
09:46the cash flow
09:47projections for the full year. We will generate more cash than our dividend. And as the margin continues to
09:54grow, so will the cash.
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