Good morning. My name is Steven, and I will be your conference facilitator today. I would like to welcome everyone to the UPS Investor Relations First Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. It is now my pleasure to turn the floor over to our host, Mr. Ken Cook, Investor Relations Officer. Sir, the floor is yours.

Good morning, and welcome to the UPS First Quarter 2022 Earnings Call. Joining me today are Carol Tome, 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 2021 Form 10-K and other reports we file with, or furnished to, the Securities and Exchange Commission. These reports, when filed, are available on the UPS Investor Relations website and from the SEC. For the first quarter of 2022, GAAP results include a net charge of $19 million or $0.02 per diluted share, comprised of after-tax transformation and other charges of $43 million offset by an after-tax gain of $24 million resulting from the curtailment of benefits in a Canadian retirement plan. Unless stated otherwise, our comments will refer to adjusted results, which exclude pension adjustments 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 and 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, Ken, and good morning. This is my eighth earnings call at UPS. Since I joined the company, we faced a pandemic, social unrest, political unrest, the fallout from Brexit, and now a war. Through it all, I continue to be so impressed by the resiliency of UPSers and their commitment to moving our world forward by delivering what matters. I want to thank our team for their hard work and efforts in serving the needs of our customers, each other, and our communities during these most trying times. Before I discuss our results, I'd like to address our situation in Ukraine. Our hearts are with the people of Ukraine, who are feeling the effects of this tragedy firsthand. We have suspended all commercial operations in Ukraine, Belarus, and Russia, where we can – we are supporting humanitarian relief efforts and our focus is on the safety of our people. Putting the issues in Eastern Europe aside, as we discussed in February, we expected the macro environment to be dynamic, and it was. Our average daily volume fell short of our plan due to several external factors that Brian will detail, but we remain focused on controlling what we can control. And looking at the first quarter, we were pleased with our results. Consolidated revenue rose 6.4% from last year to $24.4 billion, and operating profit grew 12.1% from last year to $3.3 billion. Consolidated operating margin expanded to 13.6%, which was 70 basis points above last year. All of our business segments delivered operating profit growth. Of note, our Supply Chain Solutions businesses generated record operating profit of $481 million with a record operating margin of 11% driven by strength in forwarding and healthcare. We continue to pivot toward opportunity. We've made tremendous progress over the last two years. We are leveraging the power of our data to become much more agile. Under our Better not Bigger framework, we are investing in the capabilities that matter the most to our customers and we are winning in the parts of the market that value our end-to-end network like SMBs, healthcare, B2B, and large enterprise accounts. How do we know we are winning? Because we've gained market share. Winning comes down to successfully executing our customer-first, people-led, innovation-driven strategy. Looking at customer-first, this is about creating a frictionless customer experience. Here we've made two significant enhancements to digitize the onboarding experience, making it easier for SMBs to ship with us. The first change I'll share is for our smallest customers. In the U.S., they can now go online at ups.com, answer just three questions, and get a contract that includes pricing. This enables them to begin shipping in under two minutes, instead of our old process where they had to wait an average of 10 days to get started. The second enhancement is for larger SMBs. Here we are leveraging best-in-class technology to enhance the experience for our customers and our sales people. We've moved from a slow manual pricing process to a new digital platform that we call deal manager. This platform, which will be fully deployed to all U.S. SMB sales people by the end of this month, operationalizes our data and applies pricing science to present the customer with the right price the first time. For our customers, this means they no longer need to submit cumbersome sample data just to get a quote. For our sales people, they can close deals on the spot, making them more efficient and freeing them up to spend more time selling. Because this platform uses advanced analytics, the more we use it, the smarter it becomes. It's a key building block toward dynamic pricing. Our Digital Access Program, or DAP, is another important SMB growth driver. In the first quarter, we created more than 500,000 new DAP customer accounts. That's more than three times the number of new accounts created in the first quarter of last year. What's more, near the end of the first quarter, we began shipping DAP packages that originated outside of the U.S. As of today, DAP is available in 27 countries around the world and we are continuing to add DAP partners, putting us well on our way to achieving our $2 billion DAP revenue target in 2022. The enhancements we are making are resonating with SMB customers. In the first quarter, the U.S. SMB average daily volume growth rate including platforms outpaced the enterprise volume growth rate. In fact, in the first quarter, SMBs made up 28.4% of our total U.S. volume, up 140 basis points from one year ago. Looking at our international and supply chain solutions segments, the flexibility of our network allowed us to continue delivering for our customers within a dynamic environment. In many ways, this was one of our more challenging quarters as our international small package business faced tough year-over-year comparisons and demand was negatively impacted by ongoing disruptions due to the pandemic. But at the same time, we scurried to keep up with heightened demand in our forwarding and healthcare businesses. No matter what came our way, we kept delivering with outstanding service levels. Moving to people-led, as previously announced, in the quarter we realigned our executive leadership team. First, Nando Cesarone, who has been leading our U.S. operations since 2020, assumed additional responsibility for U.S. sales and parts of engineering. This change gets us even closer to the customer, helping us better go to market as one UPS and enabling our teams to move even faster to unlock value for our customers and our shareholders. Second, Kate Gutmann assumed a new role leading both the international and supply chain solution segments in addition to our healthcare business. This allows us to better serve our global customers with our full range of services and provides opportunity for synergies in both revenue and cost. Finally, we have an external search underway for our new Chief Digital and Technology Officer. I'm delighted with the candidates that have surfaced for this role and hope to fill the position soon, which brings us to innovation-driven. This is about driving higher returns from the capital we deploy. Here, we are continuing to leverage the technology investments we've made to power our global smart logistics network. Throughout the quarter, we leveraged our network planning tools, automated facilities, and other technologies to optimize the network and run it with greater agility. These efforts coupled with a laser focus on revenue quality contributed to a 90 basis point improvement in U.S. operating margin year-over-year. As we've discussed, we've turned productivity into a virtuous cycle at UPS. We have started the rollout of our RFID technology that we call smart package, with the intent of completing 100 centers in 2022. This year, we will also begin the implementation of automated bagging, automated label application, and robotic small sort induction, all this to drive increased productivity. As an innovation-driven company, we are marching down the path toward our goal of being carbon-neutral by 2050. Here is one example: we have two data centers that drive our global integrated network. These data centers are now powered 100% by renewable energy sources. To give you some context, the power used to run these two data centers is equivalent to the electricity needed to run 5,000 homes for one year. As we look ahead, we think the macro environment will be very dynamic, but we see many positives inside our business. We continue to deliver high service levels. We are gaining market share. We are more agile today than what I onboarded, and we are focused on controlling what we can control to achieve the financial targets we've laid out. Brian will share the details regarding our outlook, but let me end by reaffirming our 2022 consolidated financial goals. In 2022, we expect to generate about $102 billion in revenue, consolidated operating margin of approximately 13.7%. And we expect return on invested capital to be greater than 30%. We are confident in our outlook and our financial condition. As a result, we are increasing our share repurchases for 2022, taking the target up to $2 billion for the year. And now I'll turn the call over to Brian.

Thanks, Carol, and good morning. In my comments, I'll cover four areas, starting with the macro environment, then our first quarter results, next I'll cover cash and shareholder returns, and lastly, I'll provide an update on our financial outlook for 2022. As Carol mentioned, external factors resulted in a challenging operating environment in the first quarter. Early in January, Omicron negatively impacted retail sales and pressured volumes. The impact of Omicron subsided in February, and volume growth turned slightly positive. Then late in the quarter, the combination of record high inflation, a surge in energy prices, COVID-19 lockdowns in Asia, and geopolitical uncertainty resulted in our consolidated volume growth rates turning negative. Despite these external factors, we remain agile and delivered strong first quarter results by continuing to execute our strategy and quickly adjusting our network to match capacity with the needs of our customers. In the first quarter, consolidated revenue increased 6.4% to $24.4 billion. Consolidated operating profit totaled $3.3 billion, 12.1% higher than last year. Consolidated operating margin expanded to 13.6%, which was 70 basis points above last year. For the first quarter, diluted earnings per share was $3.05, up 10.1% from the same period last year. Now let's look at our business segments. U.S. domestic delivered strong first quarter results. Our success was driven by continued gains in revenue quality and by leveraging the agility of our network to control costs. We had planned for volume to be down slightly in the first quarter, based on volume projections from a few of our largest customers. We expected to fill this gap with other enterprise volume, but market conditions did not support this, and our volume was lower than planned. Total average daily volume in the U.S. was down 3% or 611,000 packages per day versus the first quarter of last year, driven by a 7.4% decline in residential volume. Looking back to March 2021, stimulus checks arrived at many U.S. households and contributed to difficult year-over-year comparisons in the first quarter of this year. The decline in residential deliveries included a reduction in SurePost volume of about 312,000 packages per day. The decrease in residential volume was partially offset by a 3.6% increase in B2B average daily volume, with growth from both enterprise and SMB customers. In the first quarter, B2B represented 43% of our volume, which was up from 40% in the first quarter of 2021. Even within the current environment, the execution of our strategy is continuing to drive improvement in customer mix. In the first quarter, SMB average daily volume, including platforms, was up 1.9%, and SMBs made up 28.4% of U.S. domestic volume, an increase of 140 basis points over last year. For the quarter, U.S. domestic generated revenue of $15.1 billion, up 8%, which included the benefit of one additional operating day. Revenue per piece increased 9.5%, more than offsetting the volume decline in the first quarter. Together, fuel surcharges and base rates drove 820 basis points of the revenue per piece improvement, with mix contributing the rest of the growth. Additionally, revenue per piece grew across all products and customer segments, with ground revenue per piece up 8.4%. Turning to costs, total expenses grew 6.9%. Total payroll and benefits, which included market rate adjustments, drove 390 basis points of the increase, and fuel drove 230 basis points of the expense growth rate increase. The remaining expense growth rate increase was driven by multiple factors, including weakened expansion and depreciation. The investments we've made in our automated facilities, coupled with our productivity improvement initiatives, enabled us to eliminate more than 1,300 trailer loads per day compared to the same period last year, which contributed to the positive operating leverage in the quarter. The U.S. domestic segment delivered $1.7 billion in operating profit, an increase of $242 million or 16.5% compared to the first quarter of 2021. And operating margin expanded 90 basis points to 11.3%. Looking outside of the U.S., let me start by providing some information on our direct exposure to Ukraine, Belarus, and Russia. Revenue from these three countries represented less than 1% of our consolidated revenue in 2021. While the direct financial impact is not material to our business, we are closely monitoring the broader impacts across the global economy. Moving to our international segment performance, by leveraging the agility of our global network and focusing on revenue quality, international executed well in a challenging global market, navigating through increases in global inflation, war, and COVID-19 disruptions. In contrast to the U.S., we planned for international volume to grow in the first quarter, and it did not. Total average daily volume was down 256,000 packages per day or 6.7% in the first quarter. Part of the decline was due to tough comparisons from one year ago. When looking at performance on a two-year stack basis, total international average daily volume was up 16.4%. In the first quarter of 2022, international domestic average daily volume was down 10.1%, representing nearly 80% of the decrease in international volume. Total export average daily volume declined 2.9% due to a combination of factors, including COVID-19 lockdowns in Asia. In response, we adjusted the network and were able to keep our operations moving in Asia and at the same time shifted capacity where it was needed to serve our customers globally. For example, average daily volume on the Europe to U.S. lane grew 10.7%. In the first quarter, international revenue increased 5.8% to $4.9 billion. Revenue per piece increased 10.5%, including a 710 basis point benefit from fuel and a 680 basis point benefit from revenue quality and mix, offset by a 340 basis point negative impact due to a stronger U.S. dollar. Operating profit was $1.1 billion, an increase of 2.7%, and operating margin was 23%, down 70 basis points year-over-year. Now looking at Supply Chain Solutions. In the first quarter, the segment delivered record operating profit in a dynamic environment. Revenue increased to $4.4 billion, up 2%, despite the divestiture of UPS Freight, which accounted for $767 million of Supply Chain Solutions revenue in the first quarter of 2021. Looking at the key performance drivers, forwarding revenue was up 25%, and operating profit more than doubled by managing the buy-sell spreads, while global market demand continued to outpace supply. Our teams did an outstanding job helping our customers manage through this challenging market. Within forwarding, our truckload brokerage unit delivered strong operating profit growth driven by revenue quality initiatives. And our Healthcare business delivered record revenue and operating profit results in the first quarter led by pharma, clinical trials, and lab customers. In the first quarter, Supply Chain Solutions generated an operating profit of $481 million and delivered a record operating margin of 11%, 180 basis points above last year. Walking through the rest of the income statement, we had $174 million of interest expense. Other pension income was $298 million. And lastly, our effective tax rate in the first quarter came in at 21.5%, flat to last year and lower than planned due to discrete items. For the full year and 2022, we expect our effective tax rate to be around 23%. Now let’s turn to cash and shareholder returns. We are continuing to generate strong cash flow from our disciplined focus on capital allocation and bottom line results. In the first quarter, we generated $4.5 billion in cash from operations. Free cash flow for the period was $3.9 billion, a 5.5% increase year-over-year. In the first quarter, UPS distributed $1.3 billion in dividends and completed $260 million in share buybacks, which brings us to our outlook for the remainder of 2022. According to IHS, GDP expectations for the full year have been lowered from previous forecasts. Global GDP is now expected to grow 3.2%, and U.S. GDP is expected to grow 3%, and the macro-environment is expected to be bumpy for the remainder of 2022. We are continuing to pay close attention to macro elements, including COVID-19, upstream supply chain constraints, inventory, and inflationary pressures, and the geopolitical environment. Despite this backdrop, we are reaffirming our consolidated financial targets for 2022 driven by our results in the first quarter and the momentum we are seeing in the second quarter. Consolidated revenues are expected to be about $102 billion, which takes into account the divestiture of UPS Freight. Consolidated operating margin is expected to be approximately 13.7%, and return on invested capital is anticipated to be above 30%. We expect our path to achieve these financial targets will be different than we shared with you in February. We have proven our ability to adapt in a dynamic environment, and we have many levers to pull that give us confidence in our ability to achieve our targets. In U.S. Domestic, our revenue guidance is not changing. We anticipate revenue growth of around 5.5%, with revenue per piece growing faster than volume. In terms of volume, however, we anticipate volume growth rates will be lower than we originally expected. The volume growth rate in the first half of the year is expected to be negative, and we expect it to improve in the second half of the year. Pricing is expected to remain firm and will continue to price based on the value we provide to our customers. Lastly, in U.S. Domestic, we expect operating margin to expand around 50 basis points for the full year in 2022. In International, our revenue guidance is unchanged. Revenue growth is anticipated to be approximately 7.7%, driven by revenue quality initiatives. We anticipate volume will be lower than originally planned, and given the value we offer our customers, we expect pricing to remain firm. Operating margin in the International segment is anticipated to be about 23.6%. In Supply Chain Solutions, our revenue expectation is unchanged at around $17 billion driven by our healthcare portfolio and forwarding. We expect ocean rates to moderate below 2021 peak levels. Operating margin is expected to be about 9.4%. As a reminder, we will lap the sale of UPS Freight at the end of April. Turning to capital allocation, for the full year and 2022, we still expect free cash flow to be around $9 billion, including our annual pension contributions. Capital expenditures are still expected to be about 5.4% of revenue or $5.5 billion, which includes two 747-8 aircraft, two automated hubs, more than 3,700 alternative fuel vehicles, and additional technology investments. All of which will enable greater efficiency in our integrated network and move us further down the path to achieving our 2050 carbon-neutral goal. In 2022, we are planning to pay out around $5.2 billion in dividends, subject to Board approval. Regarding debt repayment, as of today, our plan is to repay $2 billion in debt at maturity this year. Lastly, in terms of capital allocation, we are doubling the amount of cash we plan to allocate to share repurchases to $2 billion in 2022, further rewarding our shareholders. We are executing our strategy and we will remain agile as we continue to navigate the dynamic macro-environment. We are laser-focused on improving revenue quality, reducing our cost to serve, and disciplined capital allocation. By controlling what we can control, we are confident in our outlook and our financial condition. Thank you. And operator, please open the lines.

Thank you. Our first question will come from the line of Amit Mehrotra of Deutsche Bank. Please go ahead.

Thanks. Hi, everyone. Brian, what impact did fuel have on RPP in domestic? I know you said 800 bps fuel plus base rates. I wanted to see if you can just give us – just isolate the fuel piece of that. And Carol, I was hoping you can talk about the recent Amazon Buy with Prime initiative. It seems like that eats into the SMB strategy or potentially eats into the SMB strategy. Just wanted to get your thoughts on that strategy that Amazon is pursuing and the implications for UPS and also UPS’ relationship with Amazon as well?

Hi, Amit. Good morning. Happy to break down the fuel piece. And then I’ll turn it over to Carol for the Amazon question. You saw the 9.5% RPP growth in domestic, and think of that as about 80% rate and 20% mix approximately, the mix being driven by our continued performance on the SMB side. But the split of the 80% is roughly equal; it’s about half fuel and then half base pricing as you split it out. And Amit, I would just make one comment. As we think about pricing and as we go down further down this journey, fuel is one component of our pricing lever. We have surcharges, and we have base rate GRI. So within that, it was approximately split between base pricing and fuel. Carol, did you want to take Amazon?

Yes. Happy to take the Amazon question. Thank you, Amit. We have a very good relationship with Amazon. They are our largest customer. As we talked about at the end of the fourth quarter, we’ve reached an agreement with Amazon about the packages that we will take into our network and the packages that they will deliver on their behalf. It’s a mutually beneficial relationship. As it relates to their latest announcement, we see that as a very clever marketing play by Amazon, but just putting the Amazon Prime badge on an SMB website, if the website even exists, doesn’t put that much risk to us, we believe.

Okay. All right. Thank you very much. Appreciate it.

Our next question comes from the line of Tom Wadewitz of UBS. Please go ahead.

Yes. Good morning. I wanted to ask you a little bit – for a little bit more perspective, just on the volume framework. What – I mean, I’m guessing you don’t want to give us a kind of precise month by month. But what did – if you do great, but what did March look like in terms of how much weaker? And then what does April look like? I don’t know if you want to comment on. I mean, I’m asking primarily on domestic package, if you want to offer international thought as well. But just kind of that volume trajectory and how that fits into the overall outlook and expectation for second quarter?

Well, I’ll start. Brian, and then please join in. So Tom, as Brian mentioned, we planned for our U.S. Domestic volumes to decline slightly in the first quarter. We actually missed our plan by about 500,000 pieces per day. And when we started to peel back the layers of the onion to understand what happened because there was a lot of variability in the demand. January was soft because of Omicron, and then February came back and was nicely positive, and then March turned negative again. We’re like, why? Well, as we looked at the impact of the stimulus, we found an aha moment. When the stimulus checks hit last year, we saw our average daily volume jump by 400,000 pieces per day. We and our customers thought we could comp that this year, but because of all of the external factors that we’re facing consumers, that proved to be tough. In fact, if you look at the performance of our SurePost product, last year SurePost grew 35%. This year, SurePost declined in the first quarter 10.5%. And if you look through that, you can see that five customers actually drove more than 60% of the year-over-year decline. And in talking to those customers, they tell us it was just too hard to comp those stimulus checks. So that explains what happens in the quarter. Why do we feel good about the volume going forward? Well, the comparisons get easier. And I can look at what’s happening in April. Our April volume is better than our March volume, so we’re trending in the right direction. And then I look at the volume that’s coming into the network at great revenue quality for deals that we’ve just cut. So we feel very good about the volume projections that are coming into our new network. Just a comment on the international volume, if I could. We thought we’d have export volume growth in the quarter. We did not. It really was because of the COVID rolling lockdowns in Asia. We had flight cancellations; it was a tough environment. In fact, we still have people who are sleeping in sleeping bags in the hub. It’s a tough environment there. If you back out the COVID lockdowns and some shift from air to freight, our Asia export business would have been up in the quarter. So we’re going to get through this. We are convinced we’re going to get through this and expect the volume to improve internationally. Brian, what would you like to add?

Carol, I think you covered it well. The only thing I would add is one point in international, though we did prove agile with the COVID lockdowns in Asia. As you referenced, we were able to move some of that aircraft and airlift over to Europe. And as I mentioned, the Europe to U.S. air lane was up 10%. So moving the equipment despite the volume softness, I think plays very well in the integrated network.

Great. Thank you.

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

Can you elaborate on the productivity levers you mentioned? How can you adapt the network based on changes in overall demand to meet your targets? Thank you.

Sure. Happy to, Jordan. Good morning. We do have cost inflation and pressures like everyone else out there, and obviously payroll and benefits and fuel are the two biggest in our system. But we are driving productivity, as we think about it. We’re leveraging automated facilities. We’re bringing two automated hubs online this year, one in Pennsylvania, one in California, and that will allow us to leverage automated bagging, label applications, et cetera. Carol’s talked before about the smart package, smart facility. We’re rolling that out in 2022. And so that will be a further driver of productivity this year as we think about it. And then within the quarter, ADV was actually down 3%, as we mentioned, but hours per day were down 3%. So pieces per hour were basically flat. Lastly, one of the things that the team is doing very effectively in the U.S., Jordan, is the cube utilization, leveraging data to cube out the trucks. It reduced our loads per day better than the volume decline or outpaced it.

And I just want to give a shout out to our operators in the U.S. for managing through this very choppy volume environment. To have pieces per hour flat when volumes are up and down in a quarter is just a sign of agility. And as to your question about levers, we are able to manage hours very well. If there were to be sustained volume down, and we’re not counting on that, but if that were the case, then we would actually take headcount out. But now we’re just managing the hours and doing a manageable job of it.

Thank you.

Our next question will come from the line of Todd Fowler of KeyBanc Capital Markets. Please go ahead.

Hey, great. Thanks, and good morning. So I wanted to ask on the cadence of U.S. Domestic margins throughout the year. I think, Brian, previously you had given some guidance for first half versus second half. I’m just curious with the change in the volume expectations with what you’re seeing on the pricing front. If that pushes out kind of the cadence of how we see U.S. Domestic volumes trend throughout the year? Or are we going to be kind of in a more steady state and kind of reducing some of that seasonality like you’ve talked about in the past? Thanks.

Thanks, Todd. Yes, happy to talk about domestic margin. We’re sticking with the guidance I had given previously, which was 11.6% domestically for the full year. It was pretty balanced, pretty close to that the first half and second half. We printed an 11.3% in the first quarter. We’re still holding to that 11.6% for the first half, and we think the second half will look similar. So net-net up 90 basis points in the first quarter, but looking for a 60 basis point improvement in the first half.

Thank you.

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

Thanks. Good morning. Can you just talk about – I think you said that the volumes would be better or positive in the second half of the year. What changes first half or second half? Is that just a comp? And then are we in a period of more sustained volume pressure? What’s the ability to maintain this level of pricing improvement and margin improvement if the volumes, I guess, stay negative for longer?

So, in terms of our confidence of the volume and getting better, the comparisons do get easier, Scott, for sure. But we also are winning in the marketplace because of the service we provide. I’m super proud of our sales team, who are out there knocking on doors, bringing back customers, some of which candidly had left us, but they love the service that we provide. They're coming in at great revenue quality, and that's very important too. So we feel very good about what we see coming into the network. I just want to go back and talk a moment about DAP. Our DAP revenue grew over 50% in the first quarter; that platform is on fire, and we're taking it outside of the United States now, which is very exciting. We’re well on our way to getting to that $2 billion DAP target by the end of this year. In terms of sustained pricing, pricing is really a function of demand and supply, and there still is a demand/supply imbalance, particularly in certain geographies around the world, where for whatever reason— be it COVID, or labor shortages, or just challenges— the service levels are there. We price for the service that we provide and are not seeing any pressure on the pricing environment right now.

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

Hi, good morning. Thank you, operator. So, Carol, as you look out in the back half of the year, can you talk to kind of what's embedded in the guide with respect to mix? And whether you're seeing any sort of pickup in B2B traction, given the fact that the FedEx ground network seems to be running at service levels we probably haven't seen in, I don't know, 20-some-odd years?

Well, Brian, perhaps you want to talk more about the guidance?

Sure, so happy to. Look, in the first quarter, our resi B2C was 57% of the mix and commercial was 43%. We had guided for the full year to a 60:40 spread, and we still think that's a pretty good number. As we think about mix changes in the business, we're looking for SMB to actually grow about 150 basis points improved from a mix perspective. We saw 140 in the first quarter, so we think that 150 is a good number. So Dave, I think as you split the year, a 60:40 on the resi to commercial and about 150 improvement in the SMB is probably good—is still stands.

I would say, interestingly in the SMB space, it's now split 50:50, commercial-residential. We saw our commercial business grow almost 4% in the first quarter. So we're going to take every opportunity to win in that space as well because service matters to that customer base.

And do you have any thoughts on where that long-term mix like what are you kind of designing the network to be for, say, three years out? Is it that 60:40 is going to hold? Or, how do you think about what you want this business to look like in three years?

We want the business to be the best of our context as that meets the needs of the customers. And so, we haven't declared what that mix should be, but that's actually a pretty interesting challenge for us as a team at our June strategy meeting to think about what—where—what do we want to declare that mix to be.

All right. Thank you guys for the time.

Thank you.

Thank you.

Our next question will come from the line of Brian Ossenbeck of J.P. Morgan. Please go ahead.

Hi, good morning. Thanks for taking the question. So Carol, maybe to follow up on that last one. Can you just give us an update on where you think that the market sizing is when you look at the small—the short zone rather in the long and mid-zone? Last time I think the update was in the Investor Day in 2021. Has that really changed at all given all the various puts and takes and dynamics that we've seen here unfold in the last couple of quarters? And then maybe for Brian, have you seen any price sensitivity with fuel going up so much? If customers started to trade down and make other adjustments, given how much those prices will run up? Thank you.

So we haven't updated the market sizing in any material way since our June Investor Day. And when we do, we will certainly share that with you.

And just on the price sensitivity comment, no. I think, as Carol mentioned, probably the most important piece is the service we provide. And with the service numbers we're printing, not getting a lot of pushback on that because I think we're delivering good service. Also, when you think about the pricing, there is a split, as I mentioned, between fuel and the base rate. So we're managing holistically, but I think the pricing holding firm is probably the guide.

Yes. If I could just give a quick reminder to limit the questions to one, and then you can jump back in queue for follow-up opportunities.

Our next question will come from the line of Chris Wetherbee of Citi. Please go ahead.

Yes. Great. Thank you. I guess when you're thinking about the B2B, B2C mix, and I think you saw a 7% decline in residential; B2B was up for the quarter. I know 64 is sort of what you're looking for for the full year. I'm guessing in the interim it's probably more likely that we're seeing B2B grow faster than residential. And does that provide you any sort of margin tailwind when you think about sort of the outlook for the full year on the domestic side, 11.6? Are we expecting any sort of tailwind that you could get from pickup in B2B? And then maybe, Carol, just a little bit more finer point and sort of what you're seeing from the consumer. Just kind of curious, I know you mentioned the stimulus last year being part of that impact on volume. But are you seeing sort of anything else that might suggest either a pivot from goods to services or other deceleration in the consumer end market?

So we don't have direct insight to the consumer behavior. It's more from what we're hearing from our customers, who are telling us there has been a bit of a shift from goods to services. You’re probably experiencing that if you've gone on vacations, it seems like the hotels are full, all the planes are full, and people are going out to eat. And gosh, I was in Washington, D.C. last week, and the bar was hopping at midnight. So people are spending money differently than they would. But as it relates to the guidance that we've given, we feel good about the volume that's coming back into our network and the guidance that we've laid out.

Yes. And I just pick up one point on the commercial. Certainly, the B2B from a density standpoint is better than the residential, so we like that. But you have to remember, SurePost was down 10%, so that's impacting the mix as well.

Our next question will come from the line of Helane Becker of Cowen. Please go ahead.

We feel good about the volume returning to our network and the guidance we've provided. The B2B segment shows better density compared to residential, which is encouraging. However, we should note that SurePost was down 10%, which is affecting our overall mix.

Yes, Helane, happy to address the CapEx. We are holding at the $5.5 billion for the year, so not coming off that. There's a little bit of timing noise in the first quarter, so it looked like we understand, but that was simply timing. As far as where we're investing, certainly putting into automation—that's the one area we're trying to double down in. On the technology side, some of those are OpEx versus CapEx investments. In terms of splitting the type of investments we're making, but certainly we have two large automated hubs going in this year. We're looking at the smart package, smart facilities, so we're investing there. Whatever we can do to drive more automation is a positive thing from a cost expense standpoint.

Yes. What I've asked the team to do is to tell me how fast they can go because the capital is not going to get in the way of speed here. Automation is critically important to deliver service for our customers as well as drive productivity. Of the automation activities we have underway, be it automated label application or automated bagging or robotic sort induction, it's a headcount opportunity this year alone of 1,200 people inside our buildings, and that's going to double next year and continue to take off. We’re not going to let perfection get in the way of good enough here. We're going to go fast. As it relates to cybersecurity, that's the one budget I will not touch. We continue to invest in cyber. It's a scary time for all of us, but we are leaning in from a cyber perspective. Clearly, if you think about the challenges coming out of Eastern Europe, we have taken every system down. So we're at no risk there. But of course, we could—we have attacks on our company every day, but our cyber team does a masterful job warding off those attacks. We’re spending a lot of money to ensure that we protect our customer data, our personal information of our people, and all the incredible pricing information that we have that gives us a competitive advantage. So knock on wood, of course, because every company is vulnerable here, but we're certainly investing in protection.

That's very helpful. Thank you very much.

Thank you.

Thanks, Helane.

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

Great. Good morning. Just to clarify, Carol, Brian, if you see volumes more negative in the near-term, is then there a bigger push on pricing or mix gains to get to those same margin and revenue targets? And then, I guess, just a follow-up on CapEx, you only spent, I guess, $0.5 billion in the first quarter, yet you kept the CapEx at $5.5 billion. Is there increased confidence you can get the targets by year end or maybe just talk about your CapEx target a bit?

So Ken, on the CapEx, I mentioned a minute ago that it was more timing related in terms of the year-over-year. I think it was about $300 million decline year-over-year in the first quarter. So that basically was just timing. So that won't impact us. We'll come back in the middle of the year and re-look at the full-year number, but as of now holding to the $5.5 billion in CapEx.

We freed up some capacity in our network to allow us to go out and win, whereas in the past couple of years, it was harder because of peak gating. There's only so much volume a company like UPS can take into the network during peak. You only have so many doors for cars, and you only have so many buildings, but because we've freed up some capacity, we can actually give our customers more peak availability that's allowing us to win with great revenue quality. Right now, we don't view that the revenue quality is at risk. And remember there is still a demand/supply imbalance, and it's exacerbated in certain parts of the country. So we are winning because of the SurePost.

Great. Thank you.

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

Hey, good morning, everyone. And thank you for taking my question. I want to come back to the fuel issue because it looks like you guys have adjusted your fuel surcharge maybe three or four times in the better part of the past year. Is there any risk that if fuel prices were to materially come down from here that that's potentially a margin or profit headwind? Can you just tell us why adjusting surcharge still frequently is the right way to go?

So if we look at our fuel surcharge—as Brian mentioned—is just part of our overall pricing algorithm, and yes, it does move off of the weekly change in the PPG index. But to that, we add a pricing modifier. So think of it known differently than a demand surcharge or a network surcharge or just a plain price. People are willing to pay for this because of the service we provide. If we look at the impact to our business in the first quarter for the domestic business alone, 55% of the fuel benefit came from changes in the PPG index. 45% of the benefit came from actions that we took from a pricing perspective. We are always thoughtful about changes in pricing, of course. We price for the services we provide. Many of our published prices, as you know, are also discounted. So I think that's something you need to keep in mind too, as you think about, are you adjusting too frequently? We price for the services we provide, and then we also will discount, but just on a discounting, if I could, we mentioned the new tool that we just introduced too, which we call bill manager. This is providing pricing analytics to our sales team as they go about negotiating deals. In fact, as we looked at our pilots, 41% of our volume one and our volume rate wins or volume wins have increased from where they were trending. The discounting is lower in 41% of the volume wins than it had been using our old pricing science. So science rules in many ways when it comes to pricing. You ask a lot of questions here about elasticity and what are you doing with pricing; science really rules here as we think about providing the best overall equation for our customers.

Thank you.

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

Hi, thanks for taking my question. I just wanted to dig a little deeper on international. I think the original guidance for Jan, Feb was that intra-Europe volumes will improve. And we did see that kind of come below expectations in the first quarter. So what are you thinking right now on that?

So from an intra-Europe perspective, obviously there's been a lot of dislocation with the conflict over there, and—but as Carol mentioned at the top of the call, we had planned for volume growth internationally and it came down. We continue to monitor the COVID situation, lockdowns in Asia, and the European geopolitical conflict and will continue to manage from a volume perspective. But we anticipate the second quarter to look somewhat like the first quarter from a volume perspective.

So would you—is the plan to offset the lower volume with mix or price?

Well, I think we did that in the first quarter. We were down 70 basis points on a margin perspective. I think the full-year guide was down 60 basis points. So we were basically trending in line with our full-year guide in the first quarter to do exactly what you just said.

Okay, great. Thank you.

Thank you.

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

Thanks very much. Good morning. Carol, in this inflationary environment, obviously managing costs is important. I know it's a big focus for years. Now that we're about a third of the way through the year, any update on how you’re progressing on the $500 million of cost savings, managing the discussion of a little bit more in depth on how the RFIDs improving there and cube utilization, package selection time, any metrics there? And is there upside opportunity there with presumably an enhanced focus? Thanks.

So the $500 million cost-out target related to what we call non-ops or overhead. We initially had a $1 billion target in which we delivered $500 million last year. We're going to do it again this year. So that's tracking as we laid out; very proud of the team for that. When you introduce technology, it can free up a lot of manual activities. We’re really all about putting our resources where we can get the highest return. As it relates to the RFID technology, boy, we were worried about putting it in this year because of supply chain jams, but we were able to procure all the batteries and labels that we need. So we will get it up this year before peak and in a hundred of our centers. What this will do long-term for us looks pretty powerful. Wave one alone will eliminate all the manual scans done by our preloaders. If that doesn't drive productivity, I don't know what will. It will avoid all the miss sorts; when a package gets miss sorted and it goes into the wrong package car, that's not a very good experience for our customer, and it actually just drags on productivity. So really excited about where that's going to take us long-term, and the project is on track. Nando is also driving what he calls total service, which is running this network, which was designed for perfection at perfection. We haven't been there for lots of reasons—COVID and all kinds of reasons—but it's pretty powerful because if you think about just delays and traffic or delays leaving the package centers, it can cost hundreds of millions of dollars that relate. Running the network for the way it was designed is powerful, and Nando just kicked this off. I will bring you up to speed on this initiative as we go along.

Hey, Steven, we have time for one more question.

Our final question will come from the line of Ravi Shanker of Morgan Stanley. Please go ahead.

Hey everyone. This is Christyne McGarvey on for Ravi. Thanks for squeezing me in here at the end. Maybe I'll just go back to some of the B2C, B2B commentary from earlier in the call, but maybe I can ask it in a slightly different way. I think last week there was a Wall Street Journal article about e-commerce gains kind of that we saw through the pandemic, at least as a percentage of overall retail had been normalizing pretty sharply. I'd be curious if you guys are seeing something similar. And if not, maybe you can just touch on your thoughts on how much of those e-commerce gains you think will be permanent versus kind of reverting to trend line?

Well, look, I applaud the retail stores who are doing a masterful job of offering buy online, pickup in a store, buy online, return in store, come to my store, come to my store, come to my store because if they don't get traffic into their store, well, they'll deleverage that fixed cost, and then they’ll have to close stores. So I admire what they’re doing. But there’s still been a permanent shift in customer preferences. Customers want to shop when, where, and how they want to shop. They want their packages delivered to them when, where, and how they want them. It might be inside of the store. It might be at their home, or at their workplace, or at a consolidated pickup point. We’re not going to see the kind of growth that we experience during COVID clearly, but e-commerce sales will continue to grow. We want to serve that customer, but we also want to serve the commercial customer because that's a very good customer for us. So while we may have said a 60/40 mix, the mix is going to go where the volume is, and we will lean into that growth appropriately.

Excellent.

I would now like to turn the conference back over to our host, Mr. Ken Cook.

Excellent. Thanks, everybody, for joining today, and have a great day.