United Parcel Service Q1 2025 Earnings Call Transcript

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Provided by Quartr
April 29, 2025
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Operator

Good morning. My name is Matthew, and I'll be your facilitator today. I'd like to welcome everyone to the UPS first quarter two thousand twenty five earnings conference call. All lines have been placed on mute to prevent any background noise, And the speakers' remarks after the speakers' remarks, there'll be a question and answer period. Any analyst that wanna ask a question, now is the time to press star then one on your telephone keypad.

Operator

It is now my pleasure to turn the floor over to your host, mister PJ Guido, Investor Relations Officer. Sir, the floor is yours.

PJ Guido
Investor Relations Officer at UPS

Good morning, and welcome to the UPS first quarter '20 '20 '5 earnings call. Joining me today are Carol Tomei, our CEO Brian Dykes, our CFO and a few additional members of our executive leadership team. Before we begin, I want to

PJ Guido
Investor Relations Officer at UPS

remind you that some of

PJ Guido
Investor Relations Officer at UPS

the comments we'll make today are forward looking statements and address our expectations for the future performance or operating results of our company. These statements are subject to risks and uncertainties, which are described in our 2024 Form 10 ks 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. Unless stated otherwise, our discussion refers to adjusted results. For the first quarter of twenty twenty five, GAAP results included net charge of $83,000,000 or zero nine dollars per diluted share comprised of after tax transformation strategy costs of $44,000,000 and a non cash after tax impairment charge of $49,000,000 primarily related to asset and investment impairments.

PJ Guido
Investor Relations Officer at UPS

These charges were partially offset by a $10,000,000 benefit for the partial reversal of an income tax valuation allowance. A reconciliation of non GAAP adjusted amounts to GAAP financial results is available in today's webcast materials. These materials are also available on the UPS Investor Relations website. Following our prepared remarks, we will take questions from those joining us via the teleconference. You may rejoin the queue for the opportunity to ask an additional question.

PJ Guido
Investor Relations Officer at UPS

And now I'll turn the call over to Carol.

Carol Tomé
Chief Executive Officer at UPS

Thank you, PJ and good morning. In the face of a very dynamic environment, I'm pleased with our first quarter performance. To begin, I want to thank all UPSers for delivering outstanding service to our customers. I also want to recognize the excellent progress our teams have made in executing the strategies we announced on our last earnings call. There's a lot going on at UPS and in the world.

Carol Tomé
Chief Executive Officer at UPS

So let's move to our results. In the first quarter, our consolidated revenue was $21,500,000,000 a decrease of 0.7% versus last year and in line with our expectations. Consolidated operating profit was $1,800,000,000 an increase of 0.9% compared to last year. Consolidated operating margin was 8.2%, up 20 basis points versus last year. And diluted earnings per share were $1.49 up 4.2% from last year.

Carol Tomé
Chief Executive Officer at UPS

Consolidated operating profit, operating margin and diluted earnings per share were slightly ahead of our expectations. Of note, our U. S. Domestic segment increased operating profit by $164,000,000 year over year and expanded operating margin by 110 basis points. While our revenue and volume in the first quarter was in line with our expectations, Results by month were not.

Carol Tomé
Chief Executive Officer at UPS

Starting with The U. S, while we expected negative ADV growth given our Amazon glide down plan, January's ADV decline was less than expected marked by positive average daily volume or ADV growth in certain B2B, SMB and healthcare customers. Then as we moved into February and March, uncertainty surrounding global trade policies and other matters led to a drop in consumer confidence and muted demand from some enterprise and SMB customers. As a result, the decline in U. S.

Carol Tomé
Chief Executive Officer at UPS

ADV for the month of February and March was higher than we expected. Looking outside The U. S, demand for U. S. Inbound services surged as customers pull forward inventory purchases ahead of expected tariff changes.

Carol Tomé
Chief Executive Officer at UPS

In response, we leveraged the flexibility of our global portfolio with the power of our next gen brokerage technology, which helped our customers avoid border disruptions and kept their supply chains moving. As a result, in the international segment, our U. S. Outbound volume increased 9.5% in the first quarter. In January, we announced three strategic actions to drive our business to a more profitable, agile and differentiated UPS.

Carol Tomé
Chief Executive Officer at UPS

Let me provide a high level update on our progress. Let's start with our plan to accelerate the glide down of Amazon's volume. You'll recall that we reached agreement with Amazon to reduce their volume in our network by more than 50% by June of twenty twenty six. Note that the volume we are transitioning out is Amazon's fulfillment center outbound volume. This volume is not profitable for us nor a healthy fit for our network.

Carol Tomé
Chief Executive Officer at UPS

The Amazon volume we plan to keep is profitable and it is healthy volume. In other words, volume where we can add value like returns and seller fulfilled outbound volume. In the first quarter, Amazon's ADV decline ran slightly ahead of plan, but is expected to be on plan by the end of the first half of this year. The Amazon Glide Downs plans have been integrated into our Network of the Future initiative. We are executing the largest network reconfiguration in our history.

Carol Tomé
Chief Executive Officer at UPS

We will optimize the capacity of our network with expected volume levels as well as increased productivity through additional automation. With this reconfiguration, we will also lessen our dependency on labor, reduce the capital requirements needed to run the network and will drive structural operating margins and return on invested capital improvements. While this may be the largest network reconfiguration in our history, we've got experience that gives us confidence that we will be able to complete our plans with very little customer disruption and at the right cost to serve. Over the last couple of years, we've demonstrated our ability to manage hours and labor in line with changes in volume, all while staying within the confines of our labor agreement. In 2024, we successfully closed 11 buildings and the learnings from those closings became the blueprint for our network reconfiguration approach.

Carol Tomé
Chief Executive Officer at UPS

We are moving very quickly. In this first phase, we will complete 164 operational closures, including 73 building closures by the June. And there's more to come. While our building footprint is changing, our pickup and delivery footprint is not. We remain committed to providing industry leading reliability to all customers across the country.

Carol Tomé
Chief Executive Officer at UPS

We'll just do it with fewer buildings. For our larger customers, we are working with them to update their operating plan. And for our SMBs, in the areas where we're closing buildings, UPS will still be accessible and convenient for customer drop offs and pickup due to our network of 5,300 UPS stores and 29,000 drop boxes and UPS access points. 90% of The US population lives within five miles of these locations and about two thirds of them are open on Sundays for added convenience. In a moment, Brian will provide more details on our cost out and network reconfiguration progress.

Carol Tomé
Chief Executive Officer at UPS

Our second strategic action was the in sourcing of SurePost final mile delivery. We smoothly absorbed that volume into our network and adjusted operating plans to address the additional stops associated with the final mile. Earlier this month, we replaced the SurePost product with GroundSaver. This is a new and differentiated domestic economy service that balances speed and reliability for our customers, while allowing significant operational flexibility for UPS. The third strategic action we announced was our efficiency reimagined initiative, which is designed to deliver $1,000,000,000 in savings by improving many of the ways we do business, including the elimination of manual tasks and enhancing our purchasing processes.

Carol Tomé
Chief Executive Officer at UPS

We've made good progress here. And as planned, we expect to accelerate the benefits beginning in the second quarter. Moving to our strategic growth update, we are focused on improving revenue quality and growing in the best parts of the market like healthcare, international, B2B and SMB. Last week, we entered into an agreement to acquire Ann Lower Healthcare Group, a move that will bolster our healthcare capabilities in Canada by adding 39 dedicated healthcare facilities across the country along with cold chain packaging and specialized transportation solutions. The acquisition of Ann Lower supports our goal of becoming the number one complex healthcare logistics provider in the world.

Carol Tomé
Chief Executive Officer at UPS

We expect this acquisition to close in the second half of twenty twenty five. Touching on SMBs, in the first quarter, SMBs including platforms made up 31.2% of our total U. S. Volume. And looking at DAP, our digital access program, in the first quarter, global DAP revenue grew by 24% year over year.

Carol Tomé
Chief Executive Officer at UPS

Finally, during the quarter, we reintroduced UPS ground with freight pricing, which provides exceptional value for shipments weighing more than 150 pounds. This positions us to be the only small package carrier that offers parcel like pricing for less than truckload shipments, which is a true differentiator. Let's turn to a discussion about tariffs and our approach to managing through what is turning out to be a very complex and ever changing topic. From an exposure perspective, our U. S.

Carol Tomé
Chief Executive Officer at UPS

Import volume is roughly 400,000 pieces per day, which from a volume perspective is less than 2% of our total global ADV. From a revenue perspective, last year revenue on our China to U. S. Trade lanes represented 11% of our total international revenue. And revenue from other trade lanes to The U.

Carol Tomé
Chief Executive Officer at UPS

S. Represented roughly 17% of our total international revenue. Our China to US trade lanes are our most profitable trade lanes. In The US, we've talked with our top 100 customers to understand how their business is being impacted both directly and indirectly by changes in trade policy. These customers have told us that they are exploring various options to address the tariff from absorbing the cost to pushing them into retail prices to asking suppliers to help defray the expense.

Carol Tomé
Chief Executive Officer at UPS

At this point, it remains an open question as to what path they will choose and what the potential impact could be on consumer demand and our business. For the rest of the world, through the April, we have interviewed nearly 45,000 international and freight forwarding customers to ascertain their shipping plans. For small package shippers, over 95% of those customers have told us that they expect to maintain their current business model, while the rest are considering several options, including trade shifts, transportation mode shifts, or exiting the business. Most of these customers are also telling us that they are letting inventory levels sell off, which will lead to lower shipping activity, at least for now. Freight forwarding customers are telling us that where they can, they are looking to move from air freight to ocean freight.

Carol Tomé
Chief Executive Officer at UPS

From an internal exposure perspective, we've looked at our purchasing and capital plans to estimate any potential tariff related cost increases that may come our way. Roughly $2,700,000,000 of our annual direct purchases are sourced outside of The U. S. With little exposure to China. From a service perspective, we are focused on making it easier for our customers to do business.

Carol Tomé
Chief Executive Officer at UPS

Our next gen brokerage capabilities make it easier for our customers to reclassify goods under harmonized tariff schedule codes and clear customs easily. Our new global checkout product makes it known what customers will pay for duties, taxes, and fees. Using artificial intelligence, global checkout enables our customers to display to their customers a guaranteed landed cost, covering all duties, taxes, and fees during online checkout. This eliminates surprise import fees at delivery and provides a much better customer experience. Global checkout is available in 43 origin countries and UPS is the only global carrier that offers a guaranteed landed cost that's integrated into shipping and billing technology.

Carol Tomé
Chief Executive Officer at UPS

Finally, for customers who need it, UPS provides bonded warehousing and foreign trade zone enabled solutions. Moving to our outlook, given the uncertainty in the market, there is a wide range of possible outcomes. We continue to model different scenarios, but these are just scenarios. The world hasn't been faced with such enormous potential impacts to trade in more than one hundred years. So the only thing we're certain of is we don't know which, if any of our scenarios will play out.

Carol Tomé
Chief Executive Officer at UPS

But by modeling different scenarios, we'll be able to adjust to rapid shifts in the business. Regarding our expectations for the full year, should market and economic conditions stabilize to be more in line with the assumptions we used to build our 2025 plan, we would be confident in the full year outlook we provided in January. Given today's level of uncertainty, however, we are not providing any updates to our consolidated full year outlook at this time. We think instead, it's prudent to focus on what we can control and continue to execute against our strategic and financial goals. Today, we're providing second quarter guidance based on April results and our expectations for the balance of the quarter.

Carol Tomé
Chief Executive Officer at UPS

Once we are through the second quarter, we will hopefully have more clarity about tariffs and trade and the implications for demand dynamics and we'll provide an update at that point. In the face of uncertainty, there are some known. We are confident in our position as a trusted leader in global logistics. And with the agility of our integrated network,

Carol Tomé
Chief Executive Officer at UPS

our

Carol Tomé
Chief Executive Officer at UPS

broad reach, our portfolio of services, and our proven trade expertise, we are well positioned to enable our customers to navigate a changing trade environment. Further, the strategic actions we launched in January to reconfigure our network and reduce costs across the business to not be timelier. The environment may be uncertain, but with our actions, we will emerge as an even stronger, more nimble UPS. So with that, thank you for listening. And now I'll turn the call over to Brian.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

Thank you, Carol, and good morning everyone. This morning I'll cover three areas. Starting with our first quarter results including cash and share owner returns, then I'll provide more detail on our cost out and network reconfiguration progress as we reduce the volume we deliver for Amazon. Lastly, I'll touch on tariffs and trade policy changes and comment on our outlook for 2025. Starting with our consolidated performance.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

In the first quarter, we generated $21,500,000,000 in revenue, a decline of 0.7% compared to the first quarter of last year. Consolidated operating profit was $1,800,000,000 an increase of 0.9% versus the first quarter of twenty twenty four. And consolidated operating margin was 8.2%, an increase of 20 basis points compared to the first quarter of last year. Diluted earnings per share was $1.49 up 4.2% from the first quarter of twenty twenty four. Now moving to our segment performance.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

As Carol mentioned, while volume and revenue performance in the quarter were in line with our expectations, our monthly performance was not. In U. S. Domestic, following a strong January relative to our expectations, uncertainty in the market began impacting consumer behavior. Demand shifted down in February, falling further than our expectations and normal shipping patterns and remained at that level in March.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

For the quarter, total U. S. ADV was down 3.5%, ground average daily volume decreased 2.5% year over year and total air average daily volume was down 9.6%. Excluding the volume decline from Amazon, total air ADV grew 6.2% driven by demand from healthcare and high-tech customers. Within Ground, our new economy product called GroundSaver, which replaced SurePost had an ADV decline of 8.4%, primarily due to pricing actions we took to grow yields on e commerce volume.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

This

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

is the

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

first ADV decline we've seen in this product in five quarters as we have leaned into revenue quality. For the quarter, B2B average daily volume was up 1.5% compared to last year. Growth was driven by returns, which increased 8.8% year over year. We also saw ADD strength from healthcare and high-tech customers. B2C average daily volume decreased 7% year over year, driven by our managed decline in volume from Amazon, our focus on revenue quality and some demand softness.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

In terms of customer mix, we saw strong ADV growth from SMB customers of 4%. In the first quarter, SMBs made up 31.2% of total U. S. Volume. This is the highest SMB concentration we've seen in ten years and is driving meaningful change in overall volume and revenue quality.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

Moving to revenue. For the first quarter, U. S. Domestic generated revenue of $14,500,000,000 up 1.4% compared to last year, driven by increases in air cargo. In the first quarter, revenue per piece increased 4.5 year over year, which was the strongest revenue per piece growth rate we've seen in eight quarters and it partially offset declines in volume.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

Breaking down the components of the 4.5% revenue per piece improvement, the combination of base rates and package characteristics increased the revenue per piece growth rate by two forty basis points. Net impact of customer mix and product mix increased the revenue per piece growth rate by 170 basis points. Lastly, fuel drove a 40 basis point increase in the revenue per piece growth rate. Turning to costs, total expense increased 0.2% including an increase in air cargo. We continue to drive efficiency in the quarter as we reduced purchase transportation costs from insourcing 100% of Ground Saver volume for final mile delivery, partially offsetting the increase in delivery costs.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

And we lowered small package block hours within our air network in response to the changing volume levels. These cost reductions were partially offset by expenses related to challenging weather. In the first quarter, cost per piece increased 3.7%. The U. S.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

Domestic segment delivered $1,000,000,000 in operating profit, a 19.4% increase compared to the first quarter of twenty twenty four. Operating margin was 7%, a year over year increase of 110 basis points. Moving to our International segment, we leveraged the agility of our integrated global network to navigate this period of uncertainty and grew international average daily volume for the second consecutive quarter. Total international ADV increased 7.1% with all regions growing average daily volume versus last year. International domestic average daily volume increased 4.8% compared to last year led by Canada.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

On the export side, average daily volume increased 9.3% year over year. Asia and Europe delivered double digit export growth throughout the quarter and at a country level 15 of our top 20 export countries grew export ADV. In the first quarter, international revenue was $4,400,000,000 up 2.7% from last year as we expected. Revenue per piece declined year over year due to a stronger U. S.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

Dollar and lower demand related surcharges. Operating profit in the international segment was $654,000,000 down 4.1% year over year due to a mix shift to more economy services in Europe, lower demand related surcharges and investments we are making to expand weekend services in Europe. International operating margin in the first quarter was 15%. Moving to Supply Chain Solutions. In the first quarter, revenue was 2,700,000,000 Revenue decreased $471,000,000 driven by a reduction of $563,000,000 in revenue from Coyote due to our divestiture of this business in 2024.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

Within Supply Chain Solutions, Air and Ocean Forwarding revenue was flat to last year. Airfreight revenue was slightly lower year over year due to lower volume, which was more than offset by higher market rates in Ocean. Core Logistics grew revenue by 5.1% and UPS Digital, including RoTE and Happy Returns grew revenue 32.5% year over year. In the first quarter, Supply Chain Solutions generated operating profit of $98,000,000 Operating margin was 3.6%, a decline of three twenty basis points compared to last year, primarily driven by cost pressure in our Mail Innovations business. This is a postal injection product and our contract with USPS expired at the end of twenty twenty four.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

The new rates from the USPS are causing short term cost pressure, which we expect to address as we make adjustments to that business. Walking through the rest of the income statement, we had $222,000,000 of interest expense. Our other pension income was $37,000,000 which was higher than we anticipated due to updated expected return on asset assumptions and our effective tax rate for the first quarter was approximately 22.5%. Turning to cash and shareowner returns. In the first quarter, we generated $2,300,000,000 in cash from operations.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

Free cash flow for the period was $1,500,000,000 Also in the first quarter, UPS paid $1,300,000,000 in dividends to shareowners and we repurchased $1,000,000,000 of our shares completing our share repurchase target for the year. Now let me provide an update on our cost out and network reconfiguration efforts. As we've discussed, we are reducing the amount of volume we deliver for Amazon by more than 50% by June of twenty twenty Associated with this volume reduction, we are undertaking the largest network reconfiguration in our history. This effort has been combined with our Network of the Future initiative as both will help drive us to a more efficient network. The first phase of our network reconfiguration includes 164 operational closures, including 73 building closures by the June year, and there's more to come.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

These actions will enable us to expand our U. S. Domestic operating margin and increase profitability. Our reconfiguration plan is comprehensive and includes everything from closing buildings, reducing positions and cutting support costs through efficiency reimagine. To help you track along with our progress, we've grouped associated costs into three buckets.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

First is variable cost, which captures operational hours and flexes down quickly with volume. Second is semi variable cost, which is represented by operational positions and will also be adjusted to match volume levels. And third is fixed cost, which includes closing buildings and reducing expense from support functions, both of which have specific completion dates assigned. Our network reconfiguration and efficiency reimagine program is aligned with our anticipated Amazon volume reduction in 2025 and is expected to remove $3,500,000,000 in expense this year. Splitting the savings between our three cost buckets, approximately 35% of our cost reduction will come from variable costs, about 35% will come from semi variable and about 30% will come from savings and fixed costs.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

Now let me walk you through some of the details and how progress accelerates through the year. Starting with the pace of Amazon's volume decline. In the first quarter, Amazon ADV was down 16% year over year, which was more than we originally planned. Second quarter Amazon ADV is also anticipated to be down 16%, which is less than we originally planned. And looking at the first and second quarters together, our total expected Amazon decline for the first half of twenty twenty five is on track.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

Then in the back half of this year, the ADV decline is expected to be approximately 30% in each of the third and fourth quarters. Looking at variable costs, this year associated with the Amazon volume decline, we plan to reduce total operational hours by approximately 25,000,000 hours. Our reduction in hours was on track through the first quarter. Moving to semi variable costs, our operational reduction target for 2025 is around 20,000 positions. Position changes are not only connected to the buildings we are closing, but will also be made across the entire U.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

S. Network. Our planned reductions are in line with the total Amazon volume decline and our semi variable cost out efforts were on track through the first quarter. In our fixed cost bucket, we expect to close 73 buildings by the June. About two thirds of the buildings we are closing are in the Eastern part of the country with the remainder in the West.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

As an engineering driven company, we've developed a detailed checklist for each building closure to ensure that we continue to provide industry leading service to our customers, assist our employees through these changes and leverage our network planning tools and other technology to efficiently process volume in our network. And lastly, as Carol mentioned, our efficiency reimagine initiatives that are redesigning many end to end processes like procurement and customer onboarding are underway and we expect to accelerate these savings starting in the second quarter. We are pleased with the progress we made in the first quarter with our cost out and network reconfiguration efforts related to the accelerated glide down of Amazon volume. And we are on track to achieve our 2025 cost reduction target of $3,500,000,000 Now turning to guidance for 2025. The macro environment is highly uncertain due to changing trade policy and tariff uncertainty.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

As a global carrier, the eventual outcomes could result in pressure in some parts of our business and create new opportunities in others. We've modeled several different scenarios for how the balance of the year might play out so that we can quickly pivot, continue supporting our customers and lean into growth. And as Carol mentioned, we're also closely monitoring our direct exposure related to our purchasing and capital plan. Today, I'll provide you with our outlook for the second quarter. We are not providing any updates to our consolidated full year outlook until there's more certainty in the macro environment.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

Let's start with our assumptions for the second quarter. In our international business, we have factored in announced tariffs and changes to de minimis exemption. We also expect weakening demand on the China to U. S. Trade lane will be partially offset by two factors.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

First is growth on China to non U. S. Lanes and second is growth from the rest of the world inbound to The U. S. In our U.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

S. Domestic business, we have included our expectations for the impact of volume and mix from the current levels of consumer demand. And lastly, we are implementing changes with how we process volume within our Mail Innovations business. In the second quarter on a consolidated basis, revenue is expected to be approximately $21,000,000,000 and operating margin is expected to be approximately 9.3%. In The U.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

S. In the second quarter, we expect ADV to be down about 9% and revenue to be down low single digits compared to last year. SMBs will be disproportionately impacted by the uncertain environment, which will add some pressure to operating margin. We expect The U. S.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

Domestic operating margin to expand by approximately 30 basis points compared to last year. Turning to International, we expect revenue to be down approximately 2% to last year and operating margin to be in the mid teens due to lower demand related surcharges and trade uncertainty. And in Supply Chain Solutions in the second quarter, revenue is expected to decline approximately $500,000,000 due to the reduction in revenue associated with Coyote in the same period last year. Operating margin is anticipated to be in the high single digits. And finally, in the second quarter, in total below the line, we expect approximately $160,000,000 in expense and we expect the tax rate to be between 2323.5%.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

In closing, I'll note that this uncertain environment reinforces why we've taken action to reshape our volume mix, pull cost out and reconfigure our U. S. Network. We are focusing on controlling what we can control and executing our strategy to improve the long term profitability of our U. S.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

Business, drive cash generation and deliver shareowner value. With that, operator, please open the lines for questions.

Operator

Thank you. We will now conduct a question and answer star one on your phone at this time. We do ask that while posing your question, please pick up your handset if you're listening on speakerphone to provide optimum sound quality. Our first question comes from the line of Tom Wadewitz from UBS. Sir, please go ahead with your question.

Tom Wadewitz
Senior Equity Research Analyst at UBS Securities LLC

Good morning. Thanks for the question. Wanted to see if you could give a sense of, I guess, cost, how much of the $3,500,000,000 full year cost kind of comes And like how does it build through the year? And then is that like a full offset to the reduction in Amazon revenue or you know, kind of more or less? So maybe it's more on that.

Tom Wadewitz
Senior Equity Research Analyst at UBS Securities LLC

I don't know if you wanna offer a a thought on how that flows into '26 as well. Maybe that's asking too much, but, you know, if you have kind of a similar number in '26 or more or less. So more on the the Amazon cost takeout in three and a half would be great. Thank you.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

Sure. Thanks, Tom. And and yeah. So on the 3 and a half billion, if you think about it in the buckets that we laid out, right, the variable cost is gonna come out in line with the Amazon volume, right, as we as we kinda laid it out. The semi variable cost is generally going to follow the same pattern.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

The fixed cost, what we described is we will be closing 73 buildings in the second quarter. So the majority there's more fixed cost, about 60% of it is weighted towards the back half. Efficiency Reimagined is also in that and is also about 60% in the back half. So you think across those three buckets, generally, the first two will follow Amazon volume and the others will be back half weighted.

Carol Tomé
Chief Executive Officer at UPS

And the Amazon volume decline is higher in the back half of the year than it is in the first half

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

of the Correct.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

As we as

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

we laid out, it's about 16% in the first half, 30% in the second half.

Carol Tomé
Chief Executive Officer at UPS

And looking to 2026?

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

In 2026, look, we will wrap because remember, in the Amazon glide out, it's over the course of eighteen months. So in the first half of twenty twenty six, there will be incremental, both variable, semi variable, and fixed cost reductions that we'll lay out as we get the into the back half years. But those will be incremental to the three and a half billion that's in 2025.

Tom Wadewitz
Senior Equity Research Analyst at UBS Securities LLC

So do we think of

Tom Wadewitz
Senior Equity Research Analyst at UBS Securities LLC

it as kind of an exact match, or do you take out more cost than the revenue you lose?

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

Well, I think if you look at what we've talked about with the revenue and the cost that we're taking out, we are we are making structural changes to the business to improve the margin. Tom, I think we talked about the revenue that we're losing was non nutritive to the business, and so we are taking out more costs.

Carol Tomé
Chief Executive Officer at UPS

And the one thing I would add is on efficiency reimagined. That's really not tied to the Amazon volume decline. That's about making our business more productive. How does that play out, Brian?

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

Yes. So efficiency reimagined is all about making processes more efficient within the business. And so as we do that, we will also be taking out about $500,000,000 this year, rolling to 1,000,000,000 into 2026 that is going to be back half weighted in 2025, but will be incremental to the piece that's just directly related to the Amazon volume. It is included in the fixed cost bucket that we laid out, but but it's a route process redesign around restructuring of the business.

Tom Wadewitz
Senior Equity Research Analyst at UBS Securities LLC

Great. Thanks for the time.

Operator

Thank you. Your next question is coming from Ari Rosa from Citigroup.

Ari Rosa
Ari Rosa
Senior Analyst at Citigroup

Carol, you mentioned this objective of being less dependent on labor going forward. I think there was a headline we saw the other day that you were testing out robotics and leveraging more warehouse automation. Could you just talk about those efforts and how that fits into the efficiency reimagine initiative? What kind of cost savings do you expect to realize that realize from that over the longer term? Thanks.

Carol Tomé
Chief Executive Officer at UPS

Well, as part of our Network of the Future initiative, we are looking at automating our buildings by automating the sort. But there's much more to automation than just automating the sort. We're also looking at the use of robotics for automatic label application, automatic, many other automatic opportunities, unloading and loading trailers as well as, how we sort packages in certain of our functions. And maybe I'll turn to Nando for a little more comment on that.

Nando Cesarone
Nando Cesarone
EVP, U.S. at UPS

Yeah. Sure. So what you're going to see at the end of this is 400 facilities that are either partially or fully automated. On top of that, we're working ahead of ourselves as new automation technology, the application of AI in certain areas to help us with labor is introduced into these operations, and that allows us to really take cost out of the network. And also, the end state is 200 facilities that will be closed in our network.

Nando Cesarone
Nando Cesarone
EVP, U.S. at UPS

And of course, as we work through this, we're creating capacity for ourselves through the productivity improvements. And again, you know, as we look at this, we've developed really good muscle here, and we're moving at a speed that we're all really happy with. But the end result will be a much more efficient operation with less dependency on labor. And as we grow and scale up, that's going to continue to provide benefits for UPS.

Carol Tomé
Chief Executive Officer at UPS

And so that activity coupled with our Amazon activity gives us confidence that we'll reach that 12% US operating margin by the end of twenty twenty six.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

That's right. And and I would say we're, know, as as Carol and Endo have articulated, we're not stopping. Right? So while we're drawing down less efficient capacity, we're we're automating at the same time. We told you in the fourth quarter that 63% of our volume went through automated hubs.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

That's now 64, which is up about four and a half percent year over year. And so we're moving towards a new a a more efficient net more efficient, more scalable network faster.

Ari Rosa
Ari Rosa
Senior Analyst at Citigroup

Great. Thank you.

Operator

Thank you. Your next question is coming from Scott Group from Wolfe Research. Your line is live.

Scott Group
MD & Senior Analyst at Wolfe Research

Hey. Thanks. Good morning. So I just want to understand that the of the the 3,500,000,000.0, how much has been realized to date in q one? And then when I look at Q1 margins domestically improved 110

Scott Group
MD & Senior Analyst at Wolfe Research

basis points, I

Scott Group
MD & Senior Analyst at Wolfe Research

think you said second quarter only 30 basis points. That a function of more macro and getting worse? Or is that I guess, why is that why are we seeing a deceleration in the in the market improvement in q two as I would imagine the cost savings are ramping?

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

Sure. So Scott, just to hit on the first point, about $500,000,000 of the $3,500,000,000 is in Q1. And like I said, we that that will ramp as both the Amazon volume comes out as well as our initiatives ramp as we go through Q2. There's a couple of things happening in Q2. And the first is we have to, as we outlined, we built into our guide the expectation from our customers of what the announced tariffs will be, right?

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

The net impact of that is that we do see some volume deceleration in both enterprise and SMB, particularly in SMBs, they do not have the tools to deal with the changes that our enterprise customers do. That will put some pressure on RPP and margin. The second piece I would add is, look, we're closing 7% of our US buildings in the quarter, right? And so we have built in some chaos costs in order to manage the volume and maintain service as we go through that process.

Carol Tomé
Chief Executive Officer at UPS

And maybe just a little bit more color on the SMBs. Many of our SMBs as we talk to them are 100% single sourced from China. And this is causing so much uncertainty in the marketplace because the administration has announced as you know, 145% tariff on China goods starting May 2. And the elimination of the de minimis exception. So our SMBs who don't have the working capital capabilities to pull forward inventory are saying, wow, how are we going to handle this cost increase that's coming our way?

Carol Tomé
Chief Executive Officer at UPS

It doesn't mean that they're not trying to look for alternate forms of supply. They're working with original equipment and manufacturers trying to move to other countries, but as you can appreciate the large companies get to take the first phone call and they're the ones that are willing to work on changing supply chain. So we just want to factor that into our forecast for Q2. Understanding candidly, there's so much uncertainty around the China jars. We know what's been announced.

Carol Tomé
Chief Executive Officer at UPS

We don't know actually if it will happen. We don't know if it will stick. There are many things we don't know, but we thought it was prudent to factor that into our view.

Scott Group
MD & Senior Analyst at Wolfe Research

Okay, thank you.

Carol Tomé
Chief Executive Officer at UPS

Yeah.

Operator

Thank you. Your next question is coming from Jordan Alliger from Goldman Sachs. Your line is live.

Jordan Alliger
Jordan Alliger
VP & Equity Research Analyst at Goldman Sachs

Yeah. Hi. Realizing the tariff stuff and and supply chains are a bit of a moving target right now. Any updates on sort of your secular viewpoint for domestic and international volume growth sort of factoring out Amazon now that you're reducing it and maybe contemplating, I don't know, shifts in supply chains moving away from China, rest of the world? I know you'd given some thoughts on that at your Investor Day a while back.

Jordan Alliger
Jordan Alliger
VP & Equity Research Analyst at Goldman Sachs

Any updates given all the noise that's going on right now? Thank you.

Carol Tomé
Chief Executive Officer at UPS

Well, Jordan, you're right. It's very uncertain market. But if we go back to the beginning of the year, the small package industry in The States was expected to be very low single digit growing from a volume perspective. And if you look at value including GRI increases, again, single digit. Outside of The US, you know, it's a big addressable market.

Carol Tomé
Chief Executive Officer at UPS

We size the market outside The United States as $99,000,000,000 And it was expected to be growing in the mid single digits. Including in that $99,000,000,000 is about $18,000,000,000 of healthcare, which was expected to grow in the high single digits. And, you know, all of those growth projections were as of the beginning of the year. Healthcare continues to be a bit isolated from this. We had good healthcare growth.

Carol Tomé
Chief Executive Officer at UPS

You know, healthcare is reflected in all three of our operating segments. We had good healthcare growth in the first quarter. If you look at average daily net revenue, which adjusts for one less operating day, was up nearly 5% year on year. So we were pleased with that performance. And what I'm happy about from a UPS perspective is because of our presence in over 200 countries and territories around the world, we can move where supply chains move.

Carol Tomé
Chief Executive Officer at UPS

And they're gonna move. We know they're gonna move and we can move where they move. We've got a proof point if we go back to 2018 when China tariffs were imposed, we saw trade move. China to US decline, but China and rest of the world increased. And it all leveled out, our international business actually grew.

Carol Tomé
Chief Executive Officer at UPS

So because of our integrated network and our presence, we'll be able to manage through this.

Jordan Alliger
Jordan Alliger
VP & Equity Research Analyst at Goldman Sachs

Thank you.

Operator

Thank you. Your next question is coming from David Vernon from Bernstein. Your line is live.

David Vernon
MD & Senior Analyst at Bernstein

Hey. Good morning, and thanks

David Vernon
MD & Senior Analyst at Bernstein

for taking the question. So, Brian, maybe just to clarify, if we take the 3 and a half that we're gonna earn or the $3,500,000 of cost savings that we're gonna get in this year, can you just give us an annualized number of what that would look like for 2026? And then my question is really around the domestic side of the business with the SurePost Insourcing. You guys put a pretty healthy price increase in there. Could you give us a sense for whether you're seeing any book away or any sort of movement away in volume for stuff that you would have wanted to keep in that Insourcing or whether those pricing gains are actually sticking in there?

David Vernon
MD & Senior Analyst at Bernstein

Thank you.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

Yeah. So, Dave, on the first point, so the 3,500,000,000.0 is an in year 2025 number. I would expect a similar number as we do a kind of a similar type drawdown in into 2026. But we'll we'll clarify that as we go later into the year. On the Ground Saver volume, so we have seen Ground Saver decline.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

It's down about 8.5% in the quarter. But I will say the majority of that has been intentional decline with specific customers as we both adjust the cost structure to now be an in source model and the new product as well as we lean into revenue quality. So there has been some intentional decline of less nutritive business.

Carol Tomé
Chief Executive Officer at UPS

And we would expect to see that in Q2 as well.

David Vernon
MD & Senior Analyst at Bernstein

But you're not seeing any sort of additional churn or turnover from the from the the the competition with the post office? Okay. Thank you.

Carol Tomé
Chief Executive Officer at UPS

And maybe just

Carol Tomé
Chief Executive Officer at UPS

a little

Carol Tomé
Chief Executive Officer at UPS

more color there. That's one reason why we insourced it because of the reliability that we provide to our customers. Our on time in the, delivery was almost 97% in the first quarter. Yeah.

Operator

Thank you. Your next question is coming from Chris Wetherbee from Wells Fargo. Your line is live.

Chris Wetherbee
Chris Wetherbee
Senior Analyst at Wells Fargo

Hey, thanks. Good morning, guys. Maybe a question on international. I think you noted for the second quarter mid teens margins, I guess, also that the China U. S.

Chris Wetherbee
Chris Wetherbee
Senior Analyst at Wells Fargo

Lane was the most profitable. Just want to get a sense, is this sort of the right profitability level for the business going forward, assuming things don't change materially on the tariff side with China? Just kind of get a sense of maybe if there's specific items impacting the second quarter or is this more of a run rate just given what the trade looks like in the second quarter.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

Yes. So so in the second quarter, there's there's a couple moving pieces here. Because as Carol mentioned, trade flows are shifting, and that's what we anticipate as well. So so and and I outlined in my prepared remarks how we think about the the move in international. We expect China to The U.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

To decline a little less than 25%, but that's going be offset by material improvements in China to Rest of World and Rest of World to The U. S. So there's some shifting trade lanes that we're anticipating in the second quarter guide it that we expect to see. Now what that means is China, The U. S.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

Is our most profitable trade lane. There will be a little bit of profit headwind. Look, longer term, we expect international to get back to this mid to high teens margin as a long term margin.

Carol Tomé
Chief Executive Officer at UPS

And I think the first quarter margin was suppressed a bit because of the investments we're making in Europe for weekend delivery. We will lap those investments later in the year, so that will give us margin expansion at that point. We really like the volume that we're seeing as we provide that weekend service for our customers. So this is a good investment that we made.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

Absolutely.

Tom Wadewitz
Senior Equity Research Analyst at UBS Securities LLC

Great. Thank you.

Operator

Thank you. Your next question is coming from Ken Hoexter from Bank of America.

Ken Hoexter
Ken Hoexter
Managing Director at Bank of America

So maybe just digging in on that international side, de minimis impact and kind of the flow through and then maybe the sensitivity. Carol, you mentioned kind of the postponing of shipments from the small shippers. Is this something you think we're drawing it's kind of like Brian said, we're drawing down inventories that we should expect some sort of snapback in once these tariffs are settled? Is that kind of how you're thinking about kind of the pace of goods? Just want to understand because you've given us 2Q thoughts, you pulled the full year, just thinking about how quick we could see that reverse and maybe as policy is set.

Carol Tomé
Chief Executive Officer at UPS

Yes. So the real point of uncertainty is this China tariff matter. And so we're hoping to have that clearer by the end of the second quarter. The de minimis implications means that for China imports, they will be charged duties and tariffs for $800 or less. That hadn't been the case before.

Carol Tomé
Chief Executive Officer at UPS

So we have factored that into our outlook for our SMBs because they could be impacted by this. We think they will be impacted by this. But in terms of clearing goods across the borders, we are well positioned to do that. In fact, we clear goods without manual intervention about 85% of the time. So we're in great shape to be able to clear these goods as more items are coming through with tariffs identified on them.

Carol Tomé
Chief Executive Officer at UPS

What else would you wanna add to that, Brian?

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

Ken, I think I think your what you're outlining are some of the scenarios that we've been running. Yeah. Time is a big factor here on when this gets resolved. The final levels is a big factor here. And ultimately, how our customers end up dealing with it, from a price or a margin standpoint.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

And so those are a lot of the things that we're looking at. That's why there's so much uncertainty in the back half because all those will ultimately impact The US consumer, and and we're trying to help our customers deal with

Carol Tomé
Chief Executive Officer at UPS

Well, consumer sentiment is is down from where it was at the beginning of the year. The consumer is still pretty healthy. And so to your question about, well, if inventory levels are being drawn down, will it snap back? Well, commerce needs to continue. So one would assume that it will come back, may come back from a different country as importers change their source of origin.

Carol Tomé
Chief Executive Officer at UPS

But, you know, we're prepared to handle that given our breadth and our presence. That's right.

Ken Hoexter
Ken Hoexter
Managing Director at Bank of America

I guess if I can just clarify. Maybe what I'm confused at is international seems to be kind of in line with the Street, but U. S, that's where the change seems to be. I just want to make sure that's the message you're sending because that's down maybe a bit more 300 basis points more than where expectations were.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

Yes. So Ken, yes, you're right. Because in international, remember, as we said, there's going to be some offsetting trade flows here that help the international business balance the China to U. S. Trade lane.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

But ultimately, where a lot of the uncertainty lies is what's the impact to The US customer base.

Carol Tomé
Chief Executive Officer at UPS

So Kate, maybe you could give some more color on what we mean by these trade shifts. For example, China plus one and what you're seeing with these new countries.

Kate Gutmann
EVP, International, Healthcare and Supply Chain Solutions at UPS

Yeah, absolutely. So, to bring it to life, the export out of the non China Hong Kong lanes is up double digit from the remainder of the countries. A lot of that has to do with the investments that the company made three years ago to really unlock the right to win in that space.

Kate Gutmann
EVP, International, Healthcare and Supply Chain Solutions at UPS

And then all regions around the world grew the exports. So, we are seeing the shift occur. You know, Carol mentioned the 44,000 customers that we interviewed on their supply chains. We're helping SMBs try to move their manufacturing sourcing to, for instance, Mexico. So that down the road, they would have sourced more near to The US.

Kate Gutmann
EVP, International, Healthcare and Supply Chain Solutions at UPS

But it is the rest of the world is growing. I'll give South Korea as one shout out. We have we talk about our complex healthcare focus as well as international. It's a great market where they both come together and it's growing 24% export. So, shows that commerce keeps going, health keeps going, and we are positioned with our global network to catch it.

Kate Gutmann
EVP, International, Healthcare and Supply Chain Solutions at UPS

So hopefully that helps, Ken.

Ken Hoexter
Ken Hoexter
Managing Director at Bank of America

Yeah, definitely helps. Appreciate the thoughts. Thanks, guys.

Kate Gutmann
EVP, International, Healthcare and Supply Chain Solutions at UPS

Thank you.

Operator

You.

Operator

Your next question is coming from Jason Seidl from TD Cowen.

Operator

Your line is live.

Jason Seidl
Managing Director at TD Cowen

Thank you, operator. Hey, Carol. Hey, Brian and team. Thanks for all the thoughtful, data points and feedbacks here that you provided today. Wanted to focus a little bit on you talked about 95% of your customers said they're sort of maintaining their outlook, but will sort of draw down inventories for the moment.

Jason Seidl
Managing Director at TD Cowen

So sort of a two part question. Number one, what does that do to volumes when your customers are drawing down inventories? And number two, how long do you think they have in terms of an inventory drawdown so we could sort of level set expectations?

Carol Tomé
Chief Executive Officer at UPS

Well,

Carol Tomé
Chief Executive Officer at UPS

it depends on the importers. Some importers were buying ahead thirty days, sixty days, ninety days. And you can imagine that the larger importers, which would be the larger retailers were doing that thirty, sixty, ninety days. Don't think it goes much beyond that because there's no capacity to hold the inventory. And when we say 95 started to change or not change their business model, it means they're not changing how they ship their products to The United States.

Carol Tomé
Chief Executive Officer at UPS

So that I think is encouraging to us that they're not thinking about exiting the business. They're gonna stay in the business. They're gonna let inventory levels, roll down. They're gonna hope to have certainty on China, and then they'll decide what they do going forward.

Jason Seidl
Managing Director at TD Cowen

And so on a on a roll down in inventory, that would put pressure on your volumes at least for the near term.

Carol Tomé
Chief Executive Officer at UPS

But again, remember trade lanes are shifting, so that means trade from country to US. They will move to other trade lanes. So as as Brian just shared with you, we're not expecting a big difference in our international business in the second quarter.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

No. No. As I Jason, as I had mentioned before, so we expect just under 25% decline in China to US. That's offset by 40% increase in China to rest of world. Right?

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

And so we're seeing these things shift because manufacturers in China are not slowing down. Right. They're shifting where the goods are going.

Carol Tomé
Chief Executive Officer at UPS

And they're providing incentives to make that happen Mhmm. To their the Chinese company. Yep.

Jason Seidl
Managing Director at TD Cowen

And, Brian, as as it shifts to sort of a China plus one, I guess, outlook there, do you need to shift some costs around to handle increased business, or do you have capacity in some of those other areas?

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

So so we we manage we manage our network in a variable basis like that all the time. That's that's kinda that's come to work at UPS is is shifting the assets around to flex where where our customers need us to be, and that's part of having a globally integrated network. Alright. We can clear it. We can move it.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

We can deliver it in any country in the world where you need us.

Carol Tomé
Chief Executive Officer at UPS

And if the air volume comes down in The United States, it frees up lift for outside The United States.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

That's right.

Carol Tomé
Chief Executive Officer at UPS

So the power of the integration integrated network is is really helpful in this in this ever changing environment.

Jason Seidl
Managing Director at TD Cowen

Appreciate the color, and thanks for the time as always.

Carol Tomé
Chief Executive Officer at UPS

Thank you.

Operator

Thank you. Your next question is coming from Stephanie Moore from Jefferies. Your line is live.

Stephanie Moore
Stephanie Moore
SVP - Equity Research at Jefferies

Hi. Good morning. Thank you. Actually, maybe a continuation on on that last question and conversation. And, normally, I would never ask this at the April, but, you know, maybe as you speak to your customers and they think about peak season, have you had any conversations with how they would look to prepare, especially in the light of, you know, kinda what we just discussed and the drawing down of inventory and taking a bit of a wait and see approach?

Stephanie Moore
Stephanie Moore
SVP - Equity Research at Jefferies

But at some point, do we get to the point where there could be a bit of a squeeze here into the summer months as we start to prepare for kind of peak season shipments and what could still be a pretty disrupted supply chain environment. So any color there would be helpful. Thank you.

Carol Tomé
Chief Executive Officer at UPS

I I think your question is actually quite timely because most retailers would have to put orders in now for peak. And so we are starting to talk to our customers to understand what their plans are. Remember, we deal with very large enterprise retailers who have the financial wherewithal to manage through tariffs. Smaller retailers, we've heard anecdotally that some of them are rethinking their peak holiday orders, but those are smaller retailers. For us from an exposure perspective, I think we're in a pretty good place.

Carol Tomé
Chief Executive Officer at UPS

But we will continue to have those ongoing discussions given the uncertainty we have with the China tariffs. That's why it will be so helpful to have that resolved however it gets resolved.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

Yeah.

Carol Tomé
Chief Executive Officer at UPS

Brian, any color

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

you can And and Stephanie, I think, again, this sits on uncertainty and scenarios. Right? Because there's a scenario where it gets resolved, orders go in. There's one where it gets delayed, things move from ocean to air, that's which is good for us. Right?

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

And we were able to flex our network to to help people fulfill peak orders. Right? There's there's others where it gets pushed even further and and we see we see shock. So we're looking at all those different scenarios so we can move as quickly as we can and pivot the business.

Carol Tomé
Chief Executive Officer at UPS

Our peak planning has already begun. And right now, it's about scenarios, isn't it, Nat? We're thinking about various scenarios on how we will be prepared to deliver another great peak.

Nando Cesarone
Nando Cesarone
EVP, U.S. at UPS

Yeah. It actually will work out in the end. When you think about peak season, we put out a lot of variable cost. It's not cost that goes on forever in terms of hiring helpers, temporary employees. We charter aircraft or lease aircraft during peak season.

Nando Cesarone
Nando Cesarone
EVP, U.S. at UPS

Those would be considerations we make as we see the volume unfold, whether we need those resources or not. Or not. Yeah.

Stephanie Moore
Stephanie Moore
SVP - Equity Research at Jefferies

Great. Well, I appreciate the time. Thank you.

Carol Tomé
Chief Executive Officer at UPS

Thank you.

Operator

Thank you. Your next question is coming from Brian Ozenbeck from JPMorgan. Your line is live.

Brian Ossenbeck
Brian Ossenbeck
MD - Senior Analyst, Transportation at JP Morgan

Hey. Good morning. Thanks for taking the question. So maybe just one follow-up and then a question on capital allocation. Just on the pivot to the China plus one strategy, how quickly do you think the supply chain can really do that, especially with some of the SMBs?

Brian Ossenbeck
Brian Ossenbeck
MD - Senior Analyst, Transportation at JP Morgan

And are you seeing a big offset there? Like you think Brian mentioned China to the rest of the world, but what about rest of the world to The US? And then also for Brian, could you just run us through, capital allocation priorities, maybe the cash cost for restructuring, with this plan underway? Thank you.

Carol Tomé
Chief Executive Officer at UPS

So rest of the world to US, remember it's 17% of our international revenue, 3% of our total revenue. So from an exposure perspective, this is manageable exposure. Kate, what are you seeing rest of the world to The US? Yes, so we are seeing that we've got the growth out of Europe, for instance, to The US, and the exports growing very, you know, in a nice high digit, single digit factor. We're seeing Asia, Vietnam, Thailand, also to The US growing exports near double digits.

Carol Tomé
Chief Executive Officer at UPS

So I would tell you that it's shifting. It's already occurring. So to your point about the manufacturing and how fast, that's Carol's point about there's planning underway. The SMBs are looking at how they could source from manufacturing. The big companies get the first slot, basically, of these manufacturers.

Carol Tomé
Chief Executive Officer at UPS

And the SMBs are working through where they would, how they would go to near shoring. I love the China Plus analogy because this is basically the continuation of that, but magnified. The world is shifting already. And again, that's double digit growth that I'm emphasizing is the proof point tied to that. And I think it's important to remember, rest of world is really a 10% universal tariff.

Carol Tomé
Chief Executive Officer at UPS

So it's China that's the real uncertainty, I think, facing the economy. It's rest of world 10% is a manageable tariff.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

That's right. And just to put a pin in before I hit on capital structure, Kate mentioned the investments we made before that really help facilitate this and we're continuing to do that with air expansions in Clark, in Taiwan and continued investment in Near Shoring. All these things are gonna help us manage tariffs not only today, but it gets better as we go into the future. So I think they all set us up for long term benefit. Hitting, Brian, on your point around capital allocation, no change to our capital allocation policies.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

So I think we feel very comfortable where the balance sheet is. We're at 2.26 times debt to EBITDA, which is below our 2.5% target. We closed the year with $5,000,000,000 in cash on balance sheet. None of our CP, our $3,000,000,000 program is issued, so plenty of liquidity. So we feel very good about cash generation in the year coming, balance sheet strength and liquidity.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

On the charges associated with the restructuring plan, think about it as about 60% cash, 40% non cash. But I would tell you, remember that number is going to continue to be updated as we work through the year and and we and we work through, you know, additional assets that will will be, will be taken down, and when we roll into the first half of twenty six, and we take kind of the second tranche out. Matthew, we have time for one more question.

Brian Ossenbeck
Brian Ossenbeck
MD - Senior Analyst, Transportation at JP Morgan

Thanks for covering all that.

Carol Tomé
Chief Executive Officer at UPS

Thank you. No worries.

Operator

Certainly. Our final question comes from Bruce Chan from Stifel. Please go ahead with your question.

J. Bruce Chan
J. Bruce Chan
Director at Stifel Financial Corp

Hey. Good morning, everyone, and, you know, thanks for all the helpful color here. Maybe just a broader question. If I not to be a negative Nancy, but if I start to think about potential recessionary scenarios, we've had periods of decelerating volumes and uncertain macro to look back to. But as far as I'm aware, never one where you've been undertaking such a big network realignment.

J. Bruce Chan
J. Bruce Chan
Director at Stifel Financial Corp

Does that reduce your flexibility or optionality in terms of responding to lower macro demand? Maybe, for example, taking down TransAct flights or flexing labor down even more within the confines of your labor agreement? Thank you.

Carol Tomé
Chief Executive Officer at UPS

You know, I I actually think we're adding more agility and nimbleness to our business than we ever have. If you think about the volume that we're gliding down, from Amazon, Sixty percent of the volume that we're gliding down is not profitable for us. And by gliding that down we actually give ourselves financial flexibility to address other scenarios that might come our way. So while we have a lot to do to make this happen, we're building in flexibility and agility that we've never had before, being so dependent on that one customer for volume and growth. So we are working through a number of scenarios, aren't we, Brian?

Carol Tomé
Chief Executive Officer at UPS

We We're going as dark as can and as optimistic as we can and through all the scenarios I've seen nothing but ways that we can manage through.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

That's right.

Carol Tomé
Chief Executive Officer at UPS

All of that you'd like to add.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

So, look, we outlined that we're gonna be exiting 164 operations and 73, facilities by the June. There's another approximately 50 that we're evaluating after that, and we'll we'll continue to look at that. So I think it's important that look, we're building a muscle here, and we're building a muscle that's gonna allow us to to flex the network in a new way that we've done before. The second piece is I would say, as we as we consolidate to a more automated network, it gives us better efficiency with how we manage the volume to flex both up and down. And so we we feel that even in those scenarios where the volumes got to come down even more, we're gonna be in a more efficient network and we've the ability to go deeper on how we manage the cost in order to offset it.

Carol Tomé
Chief Executive Officer at UPS

And just maybe one other thought. One reason we're so focused on healthcare, complex healthcare is it is recessionary group and it's gonna grow. So this differentiates us from just delivering a sweater in a box. It's complex logistics. It's the future of our company.

Carol Tomé
Chief Executive Officer at UPS

So I work committed to continuing to make inorganic growth opportunities, acquisitions like the Ann Lower announcement, as well as to grow the core business, positioning UPS for the future.

J. Bruce Chan
J. Bruce Chan
Director at Stifel Financial Corp

Great. Really helpful.

Brian Dykes
Chief Financial Officer & Executive Vice President at UPS

Thank you.

Carol Tomé
Chief Executive Officer at UPS

Thank you.

Operator

You. I will now turn the floor back over to your host, mister PJ Guido.

PJ Guido
Investor Relations Officer at UPS

Thank you, Matthew. This concludes our call. Thank you for joining, and have a great day.

Executives
Analysts
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Key Takeaways

  • UPS reported Q1 revenue of $21.5 billion (-0.7%), operating profit of $1.8 billion (+0.9%), operating margin of 8.2% (+20 bp) and EPS of $1.49 (+4.2%).
  • UPS is executing its largest network reconfiguration, reducing Amazon volume by over 50% by June 2026, closing 164 operations in phase 1 (including 73 buildings) and targeting $3.5 billion in cost savings in 2025.
  • The company insourced SurePost final-mile delivery and launched GroundSaver economy service to enhance speed, reliability and revenue quality while gaining operational flexibility.
  • International average daily volume grew 7.1% with US outbound up 9.5%, and new brokerage and Global Checkout tools help customers manage evolving tariffs and supply-chain disruptions.
  • Due to tariff and macro uncertainty, UPS provided Q2 guidance of approximately $21 billion revenue and 9.3% operating margin but deferred any full-year updates pending greater trade clarity.
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