UPS - NYSE

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

Good morning, and welcome to the UPS first quarter 2025 earnings call. Joining me today are Carol Tome, our CEO; Brian Dykes, our CFO; and a few additional members of our executive leadership team. Before we begin, I want to remind you that some of 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-K 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.

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

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 is a lot going on at UPS and in the world. So, let's move to our results. In the first quarter, our consolidated revenue was $21.5 billion, a decrease of 0.7% versus last year and in line with our expectations. Consolidated operating profit was $1.8 billion, 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. 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 million 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. 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. ADV for the months of February and March was higher than we expected. Looking outside the U.S., demand for U.S. inbound services surged as customers pulled forward inventory purchases ahead of expected tariff changes. 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. 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 2026. 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. 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-down plans have been integrated into our network of the future initiatives. We are executing the largest network reconfiguration in our history. 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 margin 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. We are moving very quickly. In this first phase, we will complete 164 operational closures, including 73 building closures by the end of 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. 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 pickups due to our network of 5,300 UPS stores and 29,000 Drop Boxes and UPS Access Point. 90% of the U.S. population lives within 5 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. 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 Ground Saver. 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 billion in savings by improving many of the ways we do business, including the elimination of manual tasks and enhancing our purchasing processes. 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 updates. We are focused on improving revenue quality and growing in the best parts of the market like Healthcare, International, B2Bs, and SMBs. Last week, we entered into an agreement to acquire Andlauer 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 Andlauer supports our goal of becoming the number one complex healthcare logistics provider in the world. We expect this acquisition to close in the second half of 2025. 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. 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 shipment, 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. 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.S. represented roughly 17% of our total international revenue. Our China to U.S. trade lanes are our most profitable trade lanes. In the U.S., 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. 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 middle of 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 models, 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. 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 $2.7 billion 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. Our next-gen brokerage capabilities makes 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 visa 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. 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 100 years. So, the only thing we're certain of is we don't know which, if any of our scenarios will play out. 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. 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 knows. We are confident in our position as a trusted leader in global logistics, and with the agility of our integrated network, our 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 cannot 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.

Thank you, Carol, and good morning, everyone. This morning, I'll cover three areas. Starting with our first quarter results including cash and shareowner 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. In the first quarter, we generated $21.5 billion in revenue, a decline of 0.7% compared to the first quarter of last year. Consolidated operating profit was $1.8 billion, an increase of 0.9% versus the first quarter of 2024, 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 2024. Now moving to our segment performance. 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 at March. 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 Ground Saver, which replaced SurePost, had an ADV decline of 8.4%, primarily due to pricing actions we took to grow yields on e-commerce volume. This is the 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 ADV 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. 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 10 years, and it is driving meaningful change in overall volume and revenue quality. Moving to revenue. For the first quarter, U.S. Domestic generated revenue of $14.5 billion, 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. 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 240 basis points. The 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 cost. Total expense increased 0.2%, including an increase in air cargo. We continued 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, 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. Domestic segment delivered $1 billion in operating profit, a 19.4% increase compared to the first quarter of 2024. 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. 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 $4.4 billion, up 2.7% from last year, as we expected. Revenue per piece declined year-over-year due to a stronger U.S. dollar and lower demand-related surcharges. Operating profit in the International segment was $654 million, 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 $2.7 billion. Revenue decreased $471 million, driven by a reduction of $563 million in revenue from Coyote due to our divestiture of this business in 2024. Within Supply Chain Solutions, Air and Ocean Forwarding revenue was flat to last year. Air freight 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 ROE and Happy Returns, grew revenue 32.5% year-over-year. In the first quarter, Supply Chain Solutions generated operating profit of $98 million. Operating margin was 3.6%, a decline of 320 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 2024. 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 million of interest expense, our other pension income was $37 million, 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 $2.3 billion in cash from operations. Free cash flow for the period was $1.5 billion. Also, in the first quarter, UPS paid $1.3 billion in dividends to shareowners and we repurchased $1 billion 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 2026. 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 end of June of this year, and there's more to come. 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 Reimagined. To help you track along with our progress, we've grouped associated costs into three buckets. First is variable cost, which captures operational hours and flexes down quickly with volumes. 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 Reimagined program is aligned with our anticipated Amazon volume reduction in 2025 and is expected to remove $3.5 billion in expense this year. Splitting the savings between our three cost buckets, approximately 35% of our cost reduction will come from variable cost, about 35% will come from semi-variable, and about 30% will come from savings and fixed costs. 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 2025 is on track. 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 million 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.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 end of June. About two-thirds of the buildings we are closing are in the Eastern part of the country, with the remainder in the West. 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 Reimagined 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 $3.5 billion. Now, turning to guidance for 2025. The macro-environment is highly uncertain due to changing trade policy and tariff uncertainty. As a global carrier, the eventual outcomes could result in pressure in some parts of our business and create new opportunities in others. We 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. 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. 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.S. Domestic business, we have included our expectations. Margin is expected to be approximately 9.3%. In the U.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 margins. We expect the U.S. 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 million 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 million in expense, and we expect a tax rate to be between 23% and 23.5%. 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. business, drive cash generation, and deliver shareowner value.

Yes, good morning. Thanks for the question. Wanted to see if you could give a sense of, I guess, the cost -- how much of the $3.5 billion full year cost kind of comes through, and like, how does it build through the year? And then do you -- is that like a full offset to the reduction in Amazon revenue or kind of more or less? So, maybe just more on that. I don't know if you want to offer a thought on how that flows into 2026 as well. Maybe that's asking too much, but if you have kind of a similar number in 2026 or more or less, so more on the Amazon cost takeout in $3.5 billion would be great. Thank you.

Sure. Thanks, Tom. And yes, so on the $3.5 billion, if you think about it in the buckets that we laid out, right? The variable cost is going to come out in line with the Amazon volume, right, as we kind of laid it out. The semi-variable cost is generally going to follow the same pattern. So, 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 other -- the others will be back-half weighted.

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

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

And looking to 2026?

In 2026, look, we will rack because remember, in the Amazon glide-out, it's over the course of 18 months. So in the first half of 2026, there will be incremental, both variable, semi-variable, and fixed cost reductions that we'll lay out as we get into the back half of the year, so those will be incremental to the $3.5 billion that's in 2025.

So, do we think of it as kind of an exact match, or do you take out more cost than the revenue you loose?

Well, I think if you look at what we talk about with the revenue and the costs that we're taking out, 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 not nutritive to the business. And so, we are taking out more costs.

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, and how does that play out Brian?

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 million this year, rolling to $1 billion 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 it's a rough process redesign around restructuring of the business.

Great. Thanks for the time.

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

Hi, good morning. 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 Reimagined initiative? What kind of cost savings you expect to realize that -- realize from that over the longer term? Thanks.

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.

Yes, 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. And, of course, as we work through this, we're creating capacity for ourselves through the productivity improvements. And again, 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.

And so, that activity, coupled with our Amazon activity, gives us confidence that we'll reach that 12% U.S. operating margin by the end of 2026.

That's right. And I would say we're -- as Carol and Nando have articulated, we're not stopping, right? So, while we're drawing down less efficient capacity, we're automating at the same time. We told you in the fourth quarter that 63% of our volume went through automated hubs. That's now 64%, which is up about 4.5% year-over-year. And so, we're moving towards a new -- a more efficient -- more efficient, more scalable network faster.

Great. Thank you.

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

Hey, thanks. Good morning. So, I just want to understand the -- of the $3.5 billion, how much has been realized to date in Q1? And then, when I look at Q1, margins domestically improved 110 basis points. I think you said second quarter only 30 basis points. Is that a function of more macro getting worse, or is that -- I guess why is that -- why are we seeing a deceleration in the margin improvement in Q2, as, I would imagine, the cost savings are ramping?

Sure. So, Scott, just to hit on the first point, about $500 million of the $3.5 billion is in Q1. And like I said, 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. The first is we have -- as we outlined, we built into our guide the expectation from our customers of what the announced tariffs will be, right? 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 U.S. 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.

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 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. It doesn't mean that they're not trying to look for alternate forms of supply. They're working with original equipment 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 tariffs. We know it's been announced. 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.

Okay. Thank you.

Yes.

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

Yes. Hi. Realizing the tariff stuff 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. Any updates given all the noise that's going on right now? Thank you.

Well, Jordan, you're right. It's a very uncertain market. But if we go back to the beginning of the year, the small package industry in the United States was expected to be very low single digit growing from a volume perspective, and if you look at value, including GRI increases, again, low single digit. Outside of the U.S., it's a big addressable market. We size the market outside the United States as $99 billion. And it was expected to be growing in the mid-single digits. Including in that $99 billion is about $18 billion of healthcare, which was expected to grow in the high single digits. And 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. 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, it 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 chain move and they're going to move. We know they're going to 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 U.S. declined, but China to rest of the world increased, and it all levelled out, and our international business actually grew. So, because of our integrated network and our presence, we'll be able to manage through this.

Thank you.

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

Hey, good morning, and thanks for taking the question. So, Brian, maybe just to clarify, if we take the $3.5 billion that we're going to earn -- the $3.5 billion of cost savings that we're going to 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? Thank you.

Yes. So, Dave, on the first point, the $3.5 billion is an in-year 2025 number. I would expect a similar number as we do a kind of a similar type drawdown into 2026, but we'll clarify that as we go later into the year. On the Ground Saver volume, so we have seen Ground Saver decline. 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 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.

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

Yes.

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

We're not.

Okay.

We're not.

And maybe just a little more color there. That's one reason why we insourced it, because of the liability that we provide to our customers. Our on-time in the delivery was almost 97% in the first quarter.

Yes.

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

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. lane was the most profitable. Just wanted 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 trying to get a sense of maybe, is there 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?

Yes. So, in the second quarter, there's a couple of moving pieces here because, as Carol mentioned, trade flows are shifting, and that's what we anticipate as well. So -- and I outlined in my prepared remarks, how we think about the move in International. We expect China to the U.S. to decline a little less than 25%, but that's going to be offset by material improvement 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 you'll see it -- that we expect to see. Now, what that means is China-to-U.S. 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.

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.

Absolutely.

Great. Thank you.

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

Hey, great. So, maybe just digging in on that International side, the 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 sounded like Brian said we're drawing down inventories that we should expect some sort of snapback and 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?

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, but hadn't been the case before. 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 if more items are coming through with tariffs identified on them. What else would you want to add to that, Brian?

And I think you're -- what you're outlining are some of the scenarios that we've been running.

Yes.

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. 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 U.S. consumer, and we're trying to help our customers deal with it.

It's because -- while current consumer sentiment 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 as 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. But we're prepared to handle that given our breadth and our presence.

That's right.

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.

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

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?

Yes, absolutely. So just 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, and then all regions around the world grew the exports. So, we are seeing the shift occur. 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 U.S., but it is the rest of the world is growing. I'll give South Korea as one shout-out. 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% exports. So, it shows that commerce keeps going, health keeps going, and we are positioned with our global network to catch it.

So, hopefully, that helps, Ken?

Yes, it definitely helps. Appreciate the thoughts. Thanks, guys.

Thank you.

Thank you.

Thank you. Your next question is coming from Jason Seidl from TD Cowen. Your line is live.

Thank you, Operator. Hey, Carol. Hey, Brian and team. Thanks for all the thoughtful data points and feedbacks here that you've provided today. I 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. 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?

Well, it depends on the importer. Some importers were buying ahead 30 days, 60 days, 90 days. And you can imagine that the larger importers, which would be the larger retailers, were doing that, 30, 60, 90 days. Don't think it goes much beyond that because there's no capacity to hold the inventory. And when we say 95% have started to change or not change their business model, it means they're not changing how they ship their products to the United States. So that, I think, is encouraging to us because they're not thinking about exiting the business, they're going to stay in the business. They're going to let inventory levels roll down. They're going to hope to have certainty on China, and then they'll decide what they do going forward.

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

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

No. No. As I -- Jason, as I mentioned before, so we expect just under 25% decline in China-to-U.S., that's offset by 40% increase in China-to-rest of world, right? And so we're seeing these things shift because manufacturers in China are not slowing down, they're shifting where the goods are going.

And they're providing incentive to make that happen to their -- the Chinese company.

Yes.

And Brian, 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?

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

Right.

We can clear it, we can move it, we can deliver it in any country in the world where you need us.

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

That's right.

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

I appreciate the color, and thanks for the time, as always.

Thank you.

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

Hi, good morning. Thank you. Actually, maybe a continuation on that last question and conversation. And normally, I would never ask this at the end of April, but 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 kind of what we just discussed and the drawing down of inventory and taking a bit of a wait-and-see approach, 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 disruptive supply chain environment? So, any color there would be helpful. Thank you.

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. 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, any thoughts?

And Stephanie, I think, again, this hits on uncertainty and scenarios, right? Because there is a scenario where it gets resolved, orders go in. There's one where it gets delayed, things move from ocean to air that -- which is good for us, right? And we were able to flex our network to help people fulfill peak orders, right? There's others where it gets pushed even further and we see supply shock. So, we're looking at all those different scenarios, so we can move as quickly as we can and pivot the business.

Our peak planning has already begun. And right now, it's about scenarios, isn't it, Nando?

Yes.

We're thinking about various scenarios on how we will be prepared to deliver another great peak.

Yes, it actually will work out in the end. When you think about peak season, we put out a lot of variable costs. It's not cost that goes on forever in terms of hiring helpers, temporary employees. We charter aircraft or lease aircraft during peak season. Those would be considerations we make as we see the volume unfold, whether we need those resources or not.

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

Thank you.

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

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? And are you seeing a big offset there like you -- I think Brian mentioned China to the rest of the world, but what about rest of the world to the U.S. 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.

So, rest of the world to U.S., remember 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 U.S.?

Yes. So, we are seeing that we've got the growth out of Europe, for instance, to the U.S., and the exports growing at very -- in a nice high-digit single-digit factor. We're seeing Asia, Vietnam, Thailand also to the U.S. growing exports near double-digits. 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, and the SMBs are working through where they would, how they would go to nearshoring. 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. So, it's China, that's the real uncertainty, I think, facing the economy. Rest of world 10% is a manageable tariff.

That's right. And just to put a pin in before I hit on capital structure. Kate mentioned the investments we've made before that really help facilitate this, and we're continuing to do that with air expansions in Quark in Taiwan and continued investment in nearshoring. All these things are going to help us manage tariffs not only today, but get 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. So, I think, we feel very comfortable with 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 billion in cash on balance sheet. None of our CP on our $3 billion program is issued, so plenty of liquidity. So, we feel very good about cash generation in the year coming, balance sheet strength, and liquidity. On the charges associated with the restructuring plans, think about it as about 60% cash, 40% non-cash. But I will tell you, remember, that number is going to continue to be updated as we work through the year and we work through specific -- additional assets that will be taken down, and when we roll into the first half of 2026 and we take kind of the second tranche out.

Matthew, we have time for one more question.

Thanks for covering all that.

Thank you.

No worries.

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

Hey, good morning, everyone, and 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, number one, where you've been undertaking such a big network realignment. Does that reduce your flexibility or optionality in terms of responding to lower macro demand maybe, for example, taking down Transat flights or flexing labor down even more within the confines of your labor agreement? Thank you.

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, 60% 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 I'm -- we are working through a number of scenarios, aren't, Brian?

We are.

We're going as dark as we can and as optimistic as we can. And through all the scenarios, I've seen nothing but ways that we can manage through. Brian, you'd like to add?

So -- and look, we outlined that we're going to be exiting 164 operations in 73 facilities by the end of June. There's another approximately 50 that we're evaluating after that, and 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 going to allow us to flex the network in a new way that we've done before. The second piece is, I would say, 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 feel that even in those scenarios where the volumes got to come down even more, we're going to be in a more efficient network, and we've got the ability to go deeper on how we manage the cost in order to offset it.

And just maybe one other thought. One reason we're so focused on healthcare -- complex healthcare is it is recessionary-proof and it's going to grow. So this differentiates us from just delivering a sweater in a box. It's complex logistics. It's the future of our company. So, we're committed to continuing to make inorganic growth opportunities -- acquisitions like the Andlauer announcement as well as to grow the core business, positioning UPS for the future.

Great. Really helpful. Thank you.

Thank you.

Thank you. I will now turn the floor back over to your host, Mr. PJ Guido.