Good morning. My name is Steven and I will be your facilitator today. I would like to welcome everyone to the UPS Investor Relations Fourth Quarter 2021 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. The operator provided instructions on how to participate. It is now my pleasure to turn the floor over to our host, Mr. Scott Childress, Investor Relations Officer. Sir, the floor is yours.

Good morning, and welcome to the UPS Fourth Quarter 2021 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 our 2020 Form 10-K, subsequently filed Form 10-Qs 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. For the fourth quarter of 2021, GAAP results included a non-cash after-tax mark-to-market pension charge of $14 million and after-tax transformation and other charges of $45 million. The after-tax total for these items is $59 million, an impact to fourth quarter 2021 EPS of $0.07 per diluted share. The mark-to-market pension charge of $14 million represents losses recognized outside of the 10% corridor on company-sponsored pension and post-retirement plans. Additional detail regarding year-end pension charges are included in the appendix of our fourth quarter 2021 earnings presentation that will be posted to the UPS Investor Relations website later today. Unless stated otherwise, our comments will refer to adjusted results, which exclude year-end pension charges and transformation and other charges. The webcast of today's call, along with the reconciliation of non-GAAP financial measures, is available on the UPS Investor Relations website. Following our prepared remarks, we will take questions from those joining us via the teleconference. If you wish to ask a question, press one then zero on your phone to enter the queue. 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.

Thank you, Scott, and good morning. What an incredible year it's been at UPS. Let me begin by recognizing the efforts of our amazing UPSers, 534,000 strong around the world. Not only did our team once again provide industry-leading service during peak, but over the last year we delivered 1.1 billion COVID-19 vaccine doses with 99.9% on-time service. I'm so very proud of our team and what we've accomplished. The external environment is challenging due to the ongoing impacts of the pandemic, labor tightness, upstream supply chain jams and rising inflation, but inside our better not bigger framework, we are maniacal about controlling what we can control. We are laser focused on improving revenue quality, reducing our cost to serve and allocating capital in a disciplined fashion. This is enabling us to move faster and to be more agile so that we capture the best opportunities in the market, enhance the customer experience and continuously improve our financial performance. Looking at the fourth quarter, our results exceeded our expectations driven by improved revenue quality across all three of our business segments and significant gains in productivity. Consolidated revenue rose 11.5% from last year to $27.8 billion and operating profit grew 37.7% from last year to $4 billion. This is the highest quarterly operating profit in the company's history. And for the full year 2021, our business delivered record financial results. Consolidated revenue increased 15% to reach $97.3 billion and operating profit totaled $13.1 billion, 50.8% higher than last year. We generated $10.9 billion in free cash flow, more than double the amount generated in the prior year, and diluted earnings per share were $12.13, an increase of 47.4%. In a moment, Brian will provide more detail about our financial results. At our June Investor and Analyst Day, I said intent is not a strategy and vision without action is just a dream. At UPS, we are acting on our customer-first, people-led, innovation-driven strategy as we transform nearly every aspect of our business. Starting with Customer First, as we've discussed, we are focused on growing in the parts of the market that value our end-to-end network, including B2B, healthcare, SMBs and large enterprise accounts. In 2021, our SMB average daily volume grew 18% and represented 26.8% of our total U.S. volume, putting us on track to achieve our 2023 target of more than 30%. Our Digital Access Program, or DAP, makes it easy for SMBs to access UPS services and it's an important driver of our SMB growth. In 2020, I challenged the team to turn DAP into a $1 billion business. In 2021, DAP generated $1.3 billion in revenue. Looking ahead, we expect DAP to reach more than $2 billion in 2022 as we add new partners and expand to additional countries. SMB opportunities outside of the U.S. are tremendous. And in the fourth quarter, our international SMB revenue growth rate was 18%. As we expand DAP, grow with SMBs across Europe and introduce new partnerships, we expect to gain overall SMB revenue share faster than the market growth. Healthcare is another market we are focused on. And in 2021, our healthcare portfolio reached more than $8 billion in revenue. Here, we serve complex customers with our global footprint of healthcare facilities and cold chain solutions. Our healthcare expertise and end-to-end solutions are unmatched in the industry, and we are well on our way to hitting our $10 billion revenue target for 2023. And amid the bottlenecks and uncertainty, our Supply Chain Solutions group is providing customers supply chain flexibility and resiliency through alternative routings and solutions. Demand for forwarding products continued to be strong in the fourth quarter. In fact, ocean shipments were up double digits and container rates remain elevated in the market. Now from an experience perspective, Customer First is about providing a frictionless end-to-end customer experience. We are attacking the biggest pain points first and over the last several months have rolled out improvements to the digital experience in pickup and claims at ups.com. You may not know this, but we generate over $9 billion in gross revenue annually from transactions on our global website. We redesigned the U.S. site in 2021 and saw site visits grow one hundredfold with an equally impressive growth in monthly page views, up from 10,000 in January to 600,000 in December. We've got more plans to improve the ups.com experience around the world, which should lead to higher revenue and better customer satisfaction. We know it will take time to move the needle on our Net Promoter Score, which stands at 30, but we set a target of 50 and have laid out a path to get there. Moving to the second element of our strategy, people-led; here we focus on the employee experience and making UPS a great place to work. We measure our performance by how likely an employee is to recommend others to work at UPS. When I became CEO in 2020, our likelihood-to-recommend metric stood at 51% globally and our goal is to surpass 80%. We've made great strides, gaining 10 percentage points to finish 2021 at 61%. And now to the last leg of our strategic platform, innovation-driven is at the heart of what we do. Our global smart logistics network powered by technology developed by UPS engineers enabled us to deliver another successful peak. It may have been our hardest peak ever. We had higher volume than we had expected at the beginning of the quarter and lower volume at the end, but our sales, engineering and operating teams remained agile and pivoted with changes in global market conditions and the needs of our customers. We delivered excellent service levels, avoided chaos costs and improved efficiency in the network. In fact, productivity in our U.S. operations improved by 1.7% for the fourth quarter as measured by pieces per hour. Progress on the innovation-driven element of our strategy is all about driving higher returns on invested capital. As Brian will detail, in 2021 we reversed a multi-year downward trend in this metric and delivered a return on invested capital of 30.8%, 910 basis points above 2020. We remain disciplined in our capital allocation priorities and commitments. In regard to capital expenditures, we are increasing our investments back into the business to drive innovation and growth. We just started the first phase of what we're calling smart package, smart facility, which over time will put an RFID tag on all of our packages. This initiative will enhance customer experience while improving UPS productivity by eliminating millions of manual scans every day. Brian will share more detail on our CapEx plans during his remarks. In June, we told you we were going to target a dividend payout ratio at year-end of 50% of adjusted earnings per share. And we're doing just that. Today, the UPS Board approved a 49% increase in the quarterly dividend from $1.02 per share to $1.52 per share. This represents the largest quarterly dividend increase in our company's history. Our strategy is building a solid foundation for our business and enabling agility. While we expect 2022 to be another challenging year, we've got momentum. So let me end by sharing our 2022 financial goals. Building on the record results we delivered last year, we anticipate delivering our 2023 consolidated revenue and operating margin targets one year ahead of our plan. In 2022, consolidated revenues are expected to be about $102 billion. Operating margin is expected to be approximately 13.7% and return on invested capital is anticipated to be above 30%. Brian will provide more details on our outlook. I'm excited about the many opportunities in front of us. And with that, I'll turn the call over to Brian.

Thanks, Carol. And good morning. In my comments I'll cover three areas, starting with our fourth quarter results, then I'll cover our full year 2021 results, including cash and shareholder returns, and lastly, I'll share our financial outlook for 2022. In the fourth quarter, supply chain challenges and the emergence of the Omicron COVID-19 variant weighed on global economic growth. In fact, the U.S. December retail sales report came in lower than forecasted and the inventory-to-sales ratio remained at historic lows. Despite these factors, our financial performance was better than we expected as the progress we've made executing our strategy continues to deliver strong results. Consolidated revenue increased 11.5% to $27.8 billion. Consolidated operating profit totaled $4 billion, 37.7% higher than last year. Consolidated operating margin expanded to 14.2%, which was 270 basis points above last year. For the fourth quarter diluted earnings per share was $3.59, up 35% from the same period last year. And full year EPS was $12.13 per diluted share, an increase of 47.4% year-over-year. Now let's look at our business segments. U.S. Domestic delivered outstanding fourth quarter results. Our success was driven by gains in revenue quality and productivity, as well as our ability to quickly adjust our network to match capacity with the needs of our customers while providing industry-leading service. Average daily volume increased by 39,000 packages per day, or 0.2% year-over-year, to a total of 25.2 million packages per day. This was below our expectations due to the soft retail environment in December. Regarding revenue quality, the impact of our better not bigger approach is continuing to drive improvement in customer mix. In fact, SMB average daily volume, including platforms, grew 8.4% outpacing the market. And in the fourth quarter, SMBs made up 25.8% of U.S. domestic volume, up 240 basis points versus last year. Mix also shifted positively toward commercial volume as our B2B average daily volume continued to recover and was up 8.8%. B2B represented 36% of our volume compared to 33% in the fourth quarter of 2020. For the quarter, U.S. Domestic generated revenue of $17.7 billion, up 12.4% driven by a 10.5% increase in revenue per piece. Fuel drove 380 basis points of the revenue-per-piece growth rate. And demand-related surcharges drove 110 basis points of the growth-rate increase. Revenue per piece grew across all products and customer segments with Ground revenue per piece up 10%. Turning to costs, total expense grew 8.1%. Fuel drove 230 basis points of the expense growth-rate increase. Wages and benefits, which included market-rate adjustments, drove 410 basis points of the increase. And the remaining increase in the expense growth rate was due to several factors, including higher depreciation, federal excise taxes and weakened expansion costs. Productivity improvements helped partially offset the increase in expense. For example, through our ongoing efforts to optimize our trailer loads, we eliminated over 1,000 loads per day compared to the same time period last year. Turning to the holiday season in the U.S., our teams did an excellent job executing our plan and adjusting where appropriate. Early in the quarter volume came in stronger than expected. And we quickly adjusted the network by leveraging our weekend operations, package flow technology and automated facilities. Late in the quarter, volume levels were lower than we expected as Omicron and inventory challenges negatively impacted the enterprise retail sector. Again, our operators adjusted the network and importantly also pulled out cost. We decreased staffing levels and returned rental equipment early, which helped to lower the year-over-year operating expense growth rate. The U.S. Domestic segment delivered $2.2 billion in operating profit, an increase of $786 million or 57% compared to the fourth quarter of 2020. And operating margin expanded 340 basis points to 12.2%. Moving to International, the segment delivered excellent results by focusing on revenue quality and adjusting network capacity. Because of tough year-over-year comps and COVID-19 dynamics, we anticipated a fourth quarter decline in average daily volume, which was down 4.8%. On a more positive note, product mix was favorable with B2B average daily volume up 4.7% on a year-over-year basis. This partially offset a decline in BSC volume, which was down 18.4% compared to an increase of 104% during the same period last year. In addition to tough year-over-year comps, total export average daily volume declined by 5.2% due to the decrease in volume between the U.K. and Europe arising from Brexit disruptions and from fewer flights coming out of Asia. In the fourth quarter, we operated 105 fewer flights than planned, primarily due to COVID-19. Despite these factors, for the fourth quarter international revenue increased 13.1% to $5.4 billion. Revenue per piece increased 16.4%, including a 730 basis point benefit from fuel and a 340 basis point benefit from demand-related surcharges. The International segment delivered record operating profit and fourth quarter operating margin. Operating profit was $1.3 billion, an increase of 14.7%, and operating margin was 24.7%. Now looking at Supply Chain Solutions, the business segment delivered record fourth quarter top- and bottom-line results as our team executed extremely well in a challenging environment. Revenue increased to $4.7 billion, up 6.7%, despite a $789 million reduction in revenue from the divestiture of UPS Freight. Looking at the key performance drivers, forwarding revenue was up 37.9% and operating profit more than doubled as global market demand remained strong and capacity stayed tight. International air freight kilos increased 3.3%. And ocean freight volume growth on the trans-Pacific eastbound lane, our largest trade lane, grew 7.8%, which was more than twice the market growth rate. Within forwarding, our truckload brokerage unit grew revenue and profit by double digits, driven by revenue quality initiatives and strong cost management. And our healthcare portfolio delivered strong profits in the fourth quarter led by pharma and medical device customers. In the fourth quarter, Supply Chain Solutions generated strong operating profit of $456 million and delivered an operating margin of 9.7%. Walking through the rest of the income statement, we had $173 million of interest expense. Other pension income was $267 million, and lastly our effective tax rate came in at 22%. Now let me comment on our full year 2021 results. Starting at the consolidated level, revenue increased $12.7 billion to $97.3 billion. We reduced our cost to serve through a combination of non-operating cost reductions along with improved productivity. We grew operating profit by $4.4 billion, an increase of 50.8%, finishing the year at $13.1 billion. Operating margin was 13.5%, an increase of 320 basis points. And for context, this is the highest consolidated operating margin we've had in 14 years. We increased our ROIC to 30.8%, an increase of 910 basis points. We generated $10.9 billion of free cash flow, an increase of 114% over 2020. And we strengthened the balance sheet by paying off $2.55 billion of long-term debt. We reduced our pension liabilities by $7.8 billion, which improved our debt-to-EBITDA ratio to 1.9 turns compared to 3.6 last year. And we returned over $3.9 billion of cash to shareholders through dividends and share buybacks. Now for a few full year highlights for the segments. In U.S. Domestic, operating profit was up 62.7%, an increase of $2.6 billion to reach $6.7 billion for the full year. And we expanded operating margin to 11.1%, a year-over-year increase of 340 basis points. International grew operating profit by $1.2 billion ending the year at a record $4.7 billion in profit and operating margin was 24.2%, an increase of 200 basis points. Supply Chain Solutions increased operating profit by $649 million, up 61.3% and delivered operating margin of 9.8%, 280 basis points above 2020. 2021 was an outstanding year for UPS, which brings us back to our outlook for 2022. Global GDP is expected to grow 4.2%. We are continuing to pay close attention to and manage through several external factors, including COVID-19, inflationary pressures, upstream supply chain constraints and labor shortages. As a result, we expect the environment to remain dynamic in 2022. Most importantly, within this backdrop, we will focus on controlling what we can control and continuing to advance our strategic initiatives. And as Carol stated, we expect to deliver our 2023 consolidated financial targets one-year early. So, looking at 2022 on a consolidated basis, revenues are expected to be about $102 billion, which takes into account the divestiture of UPS Freight. Additionally, consolidated operating margin is expected to be approximately 13.7%. In U.S. Domestic we anticipate revenue growth of around 5.5% with revenue per piece growing faster than volume. We expect pricing in the industry to remain firm and will continue to price based on the value we provide to our customers. As a result, we anticipate domestic operating margin will expand around 50 basis points in 2022. Lastly, in the U.S. we expect to deliver an incremental revenue-to-profit conversion percentage in the low-20s for the full year. Moving to the international segment, we expect to continue growing faster than the market. Revenue growth is anticipated to be approximately 7.7% with volume growing slightly faster than revenue. More specifically, we expect to grow faster in our transborder ground products. Additionally, we expect international demand-related surcharges to remain elevated in 2022. Pulling it all together, operating profit in the international segment is expected to increase around 5% and operating margin is anticipated to be around 23.6%. In Supply Chain Solutions we expect revenue to be around $17 billion driven by continued strong growth in healthcare and elevated demand in forwarding. However, we expect ocean surcharge rates to moderate below 2021 peak levels. Therefore, we expect operating profit to be down from what we reported in 2021. Operating margin is expected to be about 9.4%. And for modeling purposes below the line, we anticipate $1.2 billion in other pension income, partly offset by $665 million in interest expense. The full-year net impact is expected to be around $570 million, which can be spread evenly across the quarters. Now let's turn to full year 2022 capital allocation. As we discussed at last year's Investor and Analyst Day, we've transitioned to a disciplined and programmatic approach to capital expenditures in line with the CapEx range we shared then. We expect 2022 capital expenditures to be about 5.4% of revenue or $5.5 billion. These investments will continue to improve overall network efficiency and move us further down the path to achieving our 2050 carbon-neutral goal. About 60% of our capital spending plan will be allocated to growth projects and about 40% to maintenance. Let me give you a few project highlights. We have 30 delivery centers and two automated hub projects planned to be delivered this year. Combined, these projects will enable us to drive greater efficiency by better balancing sort capacity with delivery capacity. We will purchase over 3,700 alternative fuel vehicles this year, including around 425 Arrival electric delivery vehicles to be deployed in the U.S. and in Europe. We will take delivery of two new 747-8 aircraft in 2022, which adds international capacity and will make pre-delivery payments on the 19 Boeing 767 freighters that we announced in December. The 767s are planned to enter our fleet between 2023 and 2025. And lastly, across these projects and others, our annual capital expenditures will again include over $1 billion of investments that support our carbon-neutral goals. Now let's turn to our expectations for cash and the balance sheet. We expect free cash flow of around $9 billion, including our annual pension contributions, which are equal to our expected service costs. As Carol mentioned, the Board has approved a dividend per share of $1.52 for the first quarter, which represents a 49% increase in our dividend. We are planning to pay out around $5.2 billion in dividends in 2022 subject to Board approval. We expect to buy back at least $1 billion of our shares, and we'll evaluate additional opportunities as the year progresses. We expect diluted share count to be about 880 million shares throughout the year. Finally, our effective tax rate is expected to be around 23%. In closing, the strategic and financial progress we've made in 2021 delivered consistent returns and created strong momentum as we entered 2022. We remain laser-focused on continuously improving our financial performance by enhancing revenue quality, reducing our cost-to-serve and staying disciplined on capital allocation. Thank you, and operator, please open the lines.

Thank you. Our first question will come from the line of Jordan Alliger of Goldman Sachs. Please go ahead.

Hi. Good morning. Obviously, you have done a really good job on domestic profit per package in the fourth quarter and you gave some good color for 2022. Can you talk a little bit more about how you're thinking about the revenue per piece, cost per base and maybe what some of the key drivers are in 2022 around productivity? Thanks.

Hi, Jordan, thanks for the question. So, in 2022, we're thinking ADV will probably be in the low single digits, around 1.5%. Revenue, we're expecting to be 5.5. As we think about that, SMB mix will continue to grow probably about 150 basis points, so slightly lower than the growth trajectory we saw in 2021, but continuing to push, and that drives benefit on the revenue side. Demand surcharges are likely to be fairly flat, and then fuel is going to be likely not as high as we saw in 2021. The rate, as you know, most of our contracts are locked in for multi-year terms, so those rates are in place driving the 5.5% revenue growth. On the productivity side, we're going to build on the momentum we saw in Q4. Carol talked about the pieces-per-hour productivity over 1.5%, very, very favorable. We'll continue those trends and continue to take non-op cost out of the business. So, we feel good about the margin expansion of 50 basis points in 2022.

Maybe just a little more color on the productivity initiatives. Nando and his team are doing a great job there. He's identified 10 key productivity initiatives in 2022, running anywhere from improving cube utilization, and we've already seen some good movement there, but we've got more to do, to basically making sure that we are adhering to our operating standards across the network. Further, we've got more non-ops cost reductions, and that's all part of our productivity initiatives. So, we feel very good about our ability to leverage expenses as we move into 2022.

Thank you.

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

Thanks, operator and everybody. Congrats on the results. I guess I had a two-parter, if I could. Just talking about productivity in the domestic business to the lens of packages per direct labor hour, everybody is trying to figure out where the endpoint — or not the endpoint, what the potential is for domestic margins. And if we look at it through the number of packages per direct labor hour, where are you on that metric? How much further improvement do you think is there through the CapEx that you're allocating to technology? Just give us a little bit — that may give us a little bit of a hint into what the further margin opportunities in 2022 are. And just as a follow-up, I was hoping you could also update us on the Amazon exposure as you typically do when you close out the year. Thank you.

Sure. Well, I'm super excited about the productivity opportunities we have inside of our business. We're pretty good at what we do, but we can be even better. I think at the third quarter earnings call, we talked a lot about inside operations and how we're going about automating our inside operations. We have about 140,000 people inside of our operations. And through automatic bagging, automatic label application, robotic induction into the small sorts, there is a way to really drive productivity inside of the buildings. We also have an opportunity with the RFID project that we've just kicked off, smart package, smart facility. You can imagine our pre-loaders are manually scanning every package. That's 20 million-plus packages a day that are being manually scanned. That manual scan will disappear with the smart package, smart facilities. So, the opportunities are endless in many ways. To your question about where will the U.S. margin go? We have told you our goal is 12%. Let us get there. We'll ring the bell and then we'll reset it. As it relates to Amazon, as we talked to you at the end of the third quarter, Amazon's revenue surged with us during 2020 as a result of the pandemic. At the third quarter, their revenue as a percent of our total was trending more like what we experienced in 2019. And that's held true for the entire year. Amazon's revenue as a percent of our total for the year was 11.7% compared to 11.6% in 2019.

Okay, thank you very much.

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

Hi, good morning. I want to ask a little bit about international, a lot of moving parts there right now. You did talk about some SMB opportunity growth, and I know there's some white space that you're going after. Your margin for 2022 is certainly trending above that sort of 2023 target. Could you maybe help us understand the evolution of the international business? I know the surcharges come off potentially and — through that revenue quality focus versus that white space opportunity that you have there?

Well, we're thrilled with our International business, and it's been challenging there because of COVID and they've done a masterful job of working through that. And the profitability is, as you point out, Allison, above where we thought we would be when we put together our three-year target. So, as we look to 2022, we anticipate that the average daily volume will actually grow faster than the revenue because of geo and mix changes. The team is really leaning into transborder Europe, excited about what we can do there. We do that, as you know, in an asset-light fashion, which is very accretive to our company. We're also liking the opportunity to grow our Asian flights. And as you know, we added two new large freighters to help grow that space.

Well, I think, as we think about growing faster than the market, Allison, demand-related surcharges we see are remaining elevated. There's been a lot of challenges on the passenger side with the Asia lane. So, we expect those surcharges to remain elevated this year. So, while there's an 80 basis point decline in margin year-over-year, 23.6% is actually ahead of where we thought we'd be in terms of the journey here. So, the team is doing a terrific job.

And I was remiss in not mentioning DAP. We've had such success with the DAP here in the United States, and we're taking our DAP platform outside the United States, which will be a driver of growth.

Great, thank you.

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

Hi, good morning, Carol and Brian, obviously a great quarter and great job in following through on the better not bigger. So, my question is just on the pricing. Brian, you mentioned kind of most are locked into contracts. It sounded like it's a multiyear contract. Maybe dig into the sustainability of pricing growth. You hit 10% domestic. You start lapping those double-digit growth levels as we entered 2022. Maybe talk about your thoughts there. And then just to wrap that up, peak was just so different this year. Is there something we should think about in the year ahead just because maybe costs were better because the network was flatter? So how should we think about the impact for next year?

Yes, Ken, happy to talk about the revenue quality. It's been a hallmark of our success and I think underpinning the better not bigger. Look, I think Carol said at the investor conference, if we did one thing, which was get the SMB mix up to 30% that would basically deliver our 12% domestic margin. We were at 26.8% at the close of last year. We have plans to grow that by 150 basis points. We're investing in capability. We're very confident in our ability to do that. So, I like the sustainability from an SMB mix perspective. As you think about rate in the contracts, we're pushing around 60% in terms of renegotiating contracts. So there is still mileage there to go from a sustainability standpoint. So overall, demand surcharges were elevated last year. So, we're not counting in the plan too much from an increase there. So, I think we feel not only is 2022 in good shape, but we've got room to run in 2023 and beyond.

And the small package market is expected to grow about 5% in 2022. There is additional capacity being added, but not enough that's going to create surplus. So, the environment supports firm pricing as we look to 2022.

Todd Fowler of KeyBanc Capital Markets. Please go ahead.

Great. Thanks, and good morning and congratulations on the strong results. Brian, I was curious if maybe you would share some of the shape of your expectations, particularly for U.S. domestic. I know that the comparisons are difficult in the first half of the year. But is the expectation that you're going to see that low single-digit volume growth pretty consistently and any directional comments on the expectations for that 50 basis points of margin improvement? Thanks.

Yes, Todd, happy to. So, as we think about the volume, revenue and profit in the domestic business for 1H and 2H, I would tell you that revenue is going to be fairly balanced, maybe a little bit higher than the 5.5 in the second half, right around or slightly lower. So, you can count on 5.5-ish as a good metric for the first and the second half in terms of growth rates. And actually, the operating margin of 11.6% is a good number for you to hold for 1H and 2H because that's — from a planning perspective, we're also fairly balanced, might be a little bit softer volume in the first half of the year as we came out of the low retail sales report coming in December. Omicron obviously had a little bit of impact going into January. But overall, low single digit for the full year, we feel good about.

And Brian, I feel terrible. We didn't answer Ben's questions about peak expectations. We just talked about pricing. So maybe we should talk a little bit about peak because I don't want to lose the opportunity to just give a shout-out to the team for operating in such a really interesting environment, where our volume was higher at the beginning of the quarter than we expected and lower at the end. Our team showed incredible agility to adjust to the market demands. And that's what you should expect going forward, incredible agility. We have built technology that's unsurpassed in the industry that allows us to react day by day to what we're seeing in the marketplace. We also have a different attitude, I think. So, we're not going to just keep vehicles and planes and people in place, hoping that the volume will come. We're going to react to the market and that really drove productivity. The other aspect of peak this year, as we look forward that may not materialize next year, we don't think it will, is the slowdown in December retail sales. That was a function of Omicron and the low inventory-to-sales ratio and so many other factors. We would expect peak next year from a revenue mix to be more like what we've seen in the past, which is more enterprise business. So hopefully, those two dynamics are helpful as you think about peak of 2022.

Ravi Shanker of Morgan Stanley, please go ahead.

Thank you. Good morning, everyone. So, it looks like compensation and benefits as a percentage of revenue dropped about 45%, which is your lowest level in a while. I know some of that is obviously a benefit from your recent automation initiatives, but also, we are in a very inflationary labor environment. So would love your view on how that trends into 2022 and 2023. Thank you.

Yes, let me — Ravi, let me — Carol, go ahead.

Go ahead. On the comp and benefit line, the trends we don't see anything extraordinary. Obviously, from a management compensation standpoint, delivering the targets, et cetera, will fluctuate in terms of stock comp. But we're looking to manage from a management compensation perspective. From a field perspective, we're managing labor costs. We have a good handle on the union piece in terms of contractual rates and then we're pulsing market rate adjustments as needed. There are just a couple of nuances in the quarter when you look at the year-over-year performance. Remember last year, we had an impairment because of Freight, so that was on a different line. Freight had about a $245 million impact year-over-year. So you've got to back the Freight noise out to understand the real performance in comp and benefits.

Thank you.

Chris Wetherbee of Citigroup, please go ahead.

Hey, great, thanks. Good morning. Maybe just a follow-up on pricing if you could just sort of give us an update on where you are in terms of the book of business in terms of domestic repricing? And then maybe how much you think you'll be getting in 2022? And if you can give us some help around the magnitude of some of these rate increases, I think it would be helpful. And then just want to understand also just kind of on the comment about Omicron impacting December volume activity. Is that in the rearview? Do you feel like you've kind of reaccelerated back to what you'd expect to be somewhat normal levels for this time of the year? Just want to get a sense of how that's playing out.

Yes, happy to comment further on the pricing side. So, as we look at 2022, the composition of the roughly 4% RPP growth rate is going to be about 40% contract repricing. As I think I mentioned, we're about 60% of the way through with contract renegotiations, mix will be another 30%, and then fuel will actually contribute about 30%. They're all levers that we pull with respect to revenue management.

And in terms of current trends, the first week of January, I'm like, where are the customers? Everybody seemed to be home because of Omicron, but the business has come back roaring. So, we're feeling really good about the guidance that we've just given.

Our next question will come from the line of David Vernon of Bernstein, please go ahead.

You mentioned 60/40 is the right split for growth to maintenance. How would that split look if we thought about domestic versus international? And just as a follow-up to that, if you could talk a little bit about how you're thinking about growing capacity in the domestic network longer term. I'm just wondering, if we think about a post-COVID world where supply chains are reorganizing, maybe a little bit more B2B growth, is the network ready for that kind of demand?

Yes, David, happy to comment. So, as you think about the CapEx domestically, we're going to have about — of the $1.3 billion increase in CapEx from 2021 to 2022, 75% of that's going to go into sort positions, sortation capacity and tech automation, which Carol was referencing earlier. About 25% will be increasing the amount of vehicles and IT investments. So that's a relative split from a largely domestic point of view. And in terms of capacity going forward, we're not just relying on capital. We're enhancing the weekend service to provide additional capacity, smoothing the days of the week. But we are putting 60% of our capital spend in 2022 toward growth. We're bringing on 30 delivery centers. We actually have 50 coming online, but 30 in the year. And then we've got a big regional hub in Pennsylvania coming on as well.

And as we think about the future, we really, over the past 18 months, have worked to optimize our network and feel good about that. That gives us the confidence in our ability to grow into the future and add capacity that will be accretive to the return on capital and to the bottom line. But as Brian said, for our plans for 2022, we are well set to handle the volume that will come our way.

All right, thank you guys.

Our next question will come from the line of Tom Wadewitz. Please go ahead.

Yes, good morning. Carol, I think you said let us hit the 12% margin first, and then we'll kind of get back to you. So, I'm not looking for an update on that target. But I wondered if you could offer some kind of directional thoughts on when you get to 2023, do you shift the mix of focus to more volume growth or more revenue growth and less focus on margin improvement? Or do you think that you continue with what I'd characterize as a pretty balanced approach in terms of revenue growth and margin? And then I guess if I can sneak in another one on the Amazon mix, do you expect that percent of revenue to go down or to be kind of stable? Thank you.

So, if we think about longer-term margin, I'd really like to get to that 12% number before we talk about longer-term margin. A year ago, we said on this call and we said we would have a double-digit operating margin in the U.S. and the action was, people doubted we were going to do that. Well, we showed that we could. Let us get to the 12% number, and then we'll come back and tell you where we think we're going to take the company. On the Amazon percentage of total revenue, it's totally a function of where the growth comes from. We have a great relationship with Amazon, and we have mutually agreed about the volume that we should take and the volume that they should keep that works best for both companies. And so, as we continue to lean into SMBs, and healthcare and B2B, you're going to see shifting of penetration, and we'll report that out to you as time goes by.

Great. Thank you.

Our next question will come from the line of Brandon Oglenski of Barclays, please go ahead.

Hey good morning. And thanks for taking my questions. I guess I don't want to focus too much on Amazon, but if I look at your average yield performance throughout the year, up double digits. And I think just back-of-the-envelope math here, your largest customer's revenue would have been about flat year-on-year. Is there anything to suggest that maybe there was upwards of like a 10% volume shift to their internal network, Carol, off that last comment there?

So, I will just tell you that their revenue grew with us in 2021.

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

Hey, thanks. Good morning.

Good morning.

So, I understand you don't want to talk about the U.S. margin targets, but maybe talk consolidated if we're getting there a year early, how you think about 2023. And then — Carol, sorry, I've got some background noise. So, you finished the year with around $10 billion of cash, $9 billion of free cash flow this year, $5 billion of dividend. Why not more buyback?

So, Scott, it's Brian. I'm happy to take that. Our return to shareholders in 2021 was $3.9 billion. If you take the dividend and the buyback, that's going up to $6.2 billion this year. That's a 59% increase, pretty healthy. That said, we've declared the dividend. We told you to put $1 billion in your model for share repurchases. We do have authorization from the board, and we do have ample cash, should we want to get back into the market. So, I would tell you, take the $1 billion as a placeholder, and we'll update you as we go forward.

I would say it's the floor. The authorization that's remaining is $4.5 billion.

Our next question will come from the line of Duane Pfennigwerth of Evercore ISI. Please go ahead.

Hey good morning. Thank you. I appreciate the detailed segment guidance. But I wanted to get your thoughts on inflation as you look at the balance of the year. Do you expect consistent trends from first half to second half, or should we be thinking about a lower cost per package and lower required revenue per package growth to achieve the same margin expansion outcome at some point this year?

From an inflation standpoint, I think we would look for higher cost growth in the first half of the year versus the second half of the year. So, as you think about cost per piece in the U.S. in particular, which is sort of 3-plus percent, I would expect that number to be higher in 1H and slightly lower in 2H with a few moving pieces.

Thanks. And I wonder if I could get a second one here on returns, not returns on capital, which are great, but within the context of e-commerce returns. How big of a business is that for you? And can you talk about growth of that service within the context of your biggest enterprise customers? Thanks for taking the question.

Well, we've been public on our holiday return estimate, 60 million packages, and we're well on our way to meeting that number. Broadly speaking, we've got a really great return process for our largest customers, where recipients of packages from that customer can take them to a UPS Store and we'll ship them back. It's a great experience. And as you know, we have over 5,000 UPS Store locations. Think about the UPS Store as just an extension of our network. I'm very excited about what we might be able to do with that asset. It's working for us really well now, but we can do even more with that asset.

Thank you.

Our next question will come from the line of Jeff Kauffman of Vertical Research Partners. Please go ahead.

Thank you very much. Congratulations and again thank you also for all that detail on the division outlooks. Carol, I want to focus a little bit on ESG here. You mentioned $1 billion of CapEx into carbon-neutral investments. You mentioned the 3,700 alternative fuel vehicles that you'll be bringing on next year. Right now, customers are choosing based on scarcity. But eventually, that's going to change and no doubt, the ESG conversations with your customers are picking up as well. Where are you ahead of the curve in terms of where you want to be right now on ESG? And where is there more work needed to be done?

Well, this is part of our core values and has been part of our core values for a long, long time and we look at — for example, our automotive equipment is a rolling laboratory. We have 13,000 vehicles today that are powered by some sort of an alternative fuel, and we are continuing to invest in that as you heard from Brian. We've set forth measurable goals and milestones along the way to our goal of being carbon neutral by 2050 and some of the investments that we're making today are enabling that. The aircraft, for example, that we are buying from Boeing are more energy-efficient. The automobiles that we're buying are more energy efficient and of course, we're moving to all-renewable energy to power our buildings. So, you can get all of these details in our ESG report, and we're committed to reaching that carbon-neutral goal by 2050. As it relates to customer needs, wants and desires it's starting to actually increase particularly outside of the United States. So, this isn't just good for the planet, it's good for business.

Thank you very much. That's the one.

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

Yes. Thanks for taking my questions. With the update of the operating target to the pull forward of 2023, I'm not sure how meaningful the three-year cash flow absolute numbers were. And I understand you don't want to guide 2023 early, but can you talk a little bit about anything you have visibility into on either CapEx or cash taxes, pension funding that would impact whatever profit trend that we assume for 2023 as far as the cash flow drop-down? Thank you.

Yes. I think the free cash flow is going to dip by about $1.6 billion to $1.7 billion from 2021 to 2022. So, as you think about what's driving that, we had prefunded some of our service costs in 2020. So, if you take that $1.7 billion out, it's relatively flattish and I think for the moment, that's a good placeholder. We're throwing off a lot of cash. We're investing in the business to drive operating margin to improve operating cash flow. I don't see a big spike in CapEx anytime soon. If we increase CapEx, it's likely to be for automation to reduce cost, et cetera. But I don't want to get out ahead of my SKUs in terms of the 2023 guide at this point.

Thank you for that. And with respect to would you be comfortable issuing another long-term outlook now that you've pulled forward the one from last year? Any thoughts? Is that something that we could expect early next year? Or do you think you need to get through the Teamsters negotiation to be able to have that level of certainty? Just any thoughts on when we might hear a longer-term update would be helpful? Thank you.

It's a very fair question. If you don't know where you're going on any road, we'll get you there. So, we appreciate the need to give longer-term guidance. Let us get to our targets, and then we will come back and talk to you.

Thanks, Bascome.

Our next question will come from the line of Jairam Nathan of Daiwa. Please go ahead.

Hi. Thanks for taking my question. So, I just wanted to kind of — in terms of your better but not bigger strategy, is the company done with most of the areas where you would like to peel back? Or is there more to be done there?

Oh, there's no finish line. We're just getting started in so many ways. When I think about our approach to enterprise data, I'm so excited about it. Today, we have data held in a number of data pools that aren't particularly clean. We've just kicked off an enterprise data strategy initiative that's going to clean up all that data, put it into eight domains. All the consuming applications will connect into the domains. We'll have one version of the truth. That's going to drive productivity like we've never seen in this company. That's just one example of things that we got underway. So, there's just no finish line.

No, we're very focused on a handful of wildly important initiatives, and that's sort of running the better not bigger playbook, and yes, there is no finish line, so a perpetual flywheel.

And I was specifically referring to the revenue side because if I look at your comments, you said Healthcare will be up about $2 billion in 2022 from 2021. I think DAP was about $0.7 billion, and then if I look at your revenue increase, it's about $5 billion. So, it looks like there is some revenue left where you would be peeling back and saying you're kind of getting out of the market. So, I just wanted to understand, is that the right way to think about it?

So don't — we might have confused the messaging because we had some 2023 numbers and some 2022 numbers. The guide we gave was for 2022 and it may not look as aggressive as you might think. But remember there's Freight sales that we are comping in 2021 that will not materialize in 2022 and that's about $1 billion of revenue. So, there's plenty of growth for us to go get.

Steven, we've got time for one more question please.

Our last question will come from the line of Scott Schneeberger of Oppenheimer. Please go ahead.

Thanks very much. I'm going to ask on B2C versus B2B. Brian, how are we comparing now in that mix versus pre-COVID levels? And what's implicit in the guidance over 2022 about how you think each will play in the upcoming year? Thanks.

Yes, Scott, good to hear from you. We finished the fourth quarter at 64% B2C. The guide for 2022 is that we'll be roughly in that low-60s range as we go forward. So, we see it in kind of a low-60s range.

For the full year, it was in the low-60s. When I came to the company, the previous year it was more like 50/50. There's been a step change in the mix. I think it's going to stay around this 61/39 period.

Congratulations.

I will now turn the floor over to Mr. Brian Newman.

Thank you, operator. I'd just like to take a minute as we close our call to announce a change within our Investor Relations group. Scott Childress has done an excellent job leading the IR team over the last six years, and I've asked Scott to take on an exciting new role within the finance team continuing to report to me. Scott will transition his current IR role to Ken Cook, who most of you already know. Scott and Ken have worked together over the past couple of years to ensure a seamless transition. Scott, I know I speak for the entire executive leadership team when I express our sincere gratitude to you on a job well done. I'd also like to welcome Ken into his new role. So, thanks for dialing in today. We look forward to talking to you all soon, and this concludes our call.