UPS - NYSE

Good morning. My name is Matthew, and I will be your facilitator today. I would like to welcome everyone to the United Parcel Service, Inc. fourth quarter 2025 earnings conference. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. Any analyst that would like to ask a question, now is the time to press star then one on your telephone keypad. It is now my pleasure to turn the floor over to your host, Mr. PJ Guido, Investor Relations Officer. Sir, the floor is yours.

Thank you, Carol, and good morning, everyone. Before I begin, I would also like to recognize and remember those affected by the crash of United Parcel Service, Inc. flight 2976. I would like to thank our team at Worldport for their steadfast commitment to the community, their teammates, and our customers. Now let's move to our performance. This morning, I will cover four areas, starting with our fourth quarter results, then I will review our full year 2025 results, including cash and shareholder returns. Next, I will discuss the Amazon Glide Down and our network reconfiguration and cost-out efforts. Lastly, I will close with our financial outlook for 2026. Moving to our results, starting with our consolidated performance, in the fourth quarter, revenue was $24.5 billion, and operating profit was $2.9 billion. Consolidated operating margin was 11.8%, and diluted earnings per share were $2.38. As noted in our earnings press release and financials, in the fourth quarter, we took a $137 million after-tax charge to write off our MD-11 fleet. During the fourth quarter, we proactively grounded our fleet of MD-11 aircraft and leveraged the flexibility of our integrated network to seamlessly operate through peak season. Specifically, we repositioned some aircraft from other parts of the world to the U.S., increased the amount of volume we moved on the ground, and leased additional aircraft to meet capacity demand. With the learnings from operating during peak season, we made the decision to accelerate the retirement of our MD-11 fleet, which was completed in the fourth quarter. Over the next fifteen months, we expect to take delivery of 18 new Boeing 767 aircraft, with 15 expected to deliver this year. As new aircraft join our fleet, we will step down the leased aircraft and associated expense. We believe these actions are consistent with building a more efficient global network positioned for growth, flexibility, and profitability. Now moving to our segment performance. U.S. Domestic demonstrated strong performance in the fourth quarter, driven by the combination of revenue quality and great execution. We delivered a very efficient peak, which is a testament to the transformational effects from the additional automation and network reconfiguration we made throughout the year. Importantly, we continue to take care of our customers during their busiest time of the year and provided industry-leading service during peak for the eighth consecutive year. For the quarter, total U.S. average daily volume was down 2.4 million pieces or 10.8%. More than half of the decline is from the glide down of Amazon volume and our deliberate actions to remove lower-yielding e-commerce volume from our network. Total air average daily volume was down 11.9%, driven by the glide down of Amazon. Ground average daily volume was down 10.6% compared to 2024. Within ground, Groundsaver ADV declined 27.7%, mainly due to our revenue quality actions. Moving to customer mix, SMB average daily volume was flat to last year. However, in the fourth quarter, SMBs made up 31.2% of total U.S. volume, an increase of 340 basis points compared to last year. This is the highest fourth quarter SMB penetration in our history. B2B average daily volume finished down 5.2% in the fourth quarter compared to last year, but returns were a bright spot and increased 1.6% year over year. B2B represented 37.5% of our U.S. volume, which was a 220 basis point improvement versus 2024 and was the highest fourth quarter B2B penetration we've seen in six years. B2C average daily volume was down 13.8% compared to 2024. The product and customer mix improvement we saw in the fourth quarter demonstrate the progress we are making as we shift our U.S. mix to more premium volume with a focus on revenue quality. Moving to revenue, for the fourth quarter, U.S. Domestic generated revenue of $16.8 billion. This was a decrease of 3.2% year over year against an ADV decline of 10.8%, with strong revenue per piece growth largely offsetting the lower volume. In the fourth quarter, revenue per piece increased 8.3% year over year, which was the strongest fourth quarter revenue per piece growth rate we've seen in four years. Breaking down the components of the 8.3% revenue per piece improvement, base rates and package characteristics increased the revenue per piece growth rate by 340 basis points. Customer and product mix improvement increased the revenue per piece growth rate by 320 basis points. The remaining 170 basis point increase was from fuel. Turning to cost, in the fourth quarter, total expense in U.S. Domestic was down 3.3%. The decline in total expense was primarily driven by our efforts to remove hours and operational positions to align with volume. Cost per piece increased 8.9% year over year, primarily due to costs associated with the insourcing of Groundsaver, as well as additional costs to secure air capacity after we grounded our MD-11 fleet. Even in the face of unexpected challenges, the U.S. segment delivered $1.7 billion in operating profit, and operating margin was 10.2%, a 10 basis point improvement compared to last year. Moving to our International segment, we continue to adjust the network to support our customers through evolving trade policies and delivered strong top-line growth driven by revenue quality efforts in all regions. In the fourth quarter, total international average daily volume declined 4.7%, 3.5% compared to last year. International domestic ADV decreased, led by a decline in Europe that was partially offset by growth in Canada. On the export side, average daily volume in the fourth quarter decreased 5.8% versus last year, led by declines on U.S. destination lanes resulting from the change in the de minimis exemption. U.S. imports in total were down 24.4% year over year, led by an ADV decline from Canada and Mexico of 30.5%, and the China to U.S. lane was lower by 20.9% compared to last year. Turning to revenue, in the fourth quarter, we generated revenue of $5 billion, up 2.5% from last year, despite the decline in volume. Operating profit in the International segment was $908 million, down $154 million year over year, with more than half of the decline related to trade policy changes, which resulted in a shift away from more profitable U.S. import lanes. As a result, international operating margin in the fourth quarter was 18%. Looking at Supply Chain Solutions, in the fourth quarter, revenue was $2.7 billion, lower than last year by $388 million. Looking at the key drivers, within Air and Ocean Forwarding, demand softness resulted in lower market rates, which drove a decline in revenue year over year. Logistics revenue was down year over year, driven by a decline in mail innovation. This was partially offset by revenue growth in Healthcare Logistics. United Parcel Service, Inc. Digital, which includes Roadie and Happy Returns, grew revenue 27% compared to 2024. In the fourth quarter, Supply Chain Solutions generated operating profit of $276 million, and operating margin was 10.3%, up 100 basis points compared to last year. Now let's move to our full year 2025 results. For the full year 2025, on a consolidated basis, revenue was $88.7 billion, operating profit was $8.7 billion, and operating margin was 9.8%. We generated $8.5 billion in cash from operations and continued to follow our capital allocation priorities. We invested $3.7 billion in CapEx and spent $2 billion on acquisitions. We distributed $5.4 billion in dividends. Lastly, we completed $1 billion in share repurchases. In the segments for the full year, U.S. Domestic operating profit was $4.6 billion, and operating margin was 7.7%. The International segment generated $2.9 billion in operating profit, and operating margin was 15.8%. Supply Chain Solutions delivered operating profit of $1.1 billion, and operating margin was 10.6%. Now let me provide an update on our Amazon Glide Down, cost-out, and network reconfiguration efforts in 2025. We are pleased with the progress we've made after four quarters of a six-quarter glide down, and we remain on track to achieve our targeted volume reductions. As Carol mentioned, we delivered $3.5 billion in savings from our network reconfiguration and efficiency reimagined initiatives. The savings came from three buckets. Starting with variable costs, in line with the declines in volume, we removed 26.9 million labor hours in 2025. Looking at semi-variable costs, which reflect operational positions, we finished down 48,000 positions, including 15,000 fewer seasonal positions compared to 2024. Moving to our fixed cost bucket, we completed the closure of 195 operations, including closing 93 buildings. We saw savings from our efficiency reimagined initiatives continue to accelerate in the fourth quarter. As we've discussed, offsetting some of these savings was the incremental costs associated with insourcing Groundsaver, which we expect to moderate in 2026. This brings us to 2026 and the last two quarters of our six-quarter glide down of Amazon volume. In total, for the full year, we intend to glide down another million pieces per day of Amazon volume. Along with this reduction in volume, we will continue to reconfigure our U.S. network and take out variable, semi-variable, and fixed costs. Looking at the variable costs associated with the Amazon volume decline, in 2026, we plan to reduce total operational hours by approximately 25 million hours. In terms of semi-variable costs, we expect to reduce operational positions by up to 30,000. This will be accomplished through attrition, and we expect to offer a second voluntary separation program for full-time drivers. In the fixed cost bucket, we have identified 24 buildings for closure in the first half of the year, and we are evaluating additional buildings to be closed later in the year. Plus, we plan to further deploy automation across the network. Pulling it all together, we are targeting $3 billion in savings related to the Amazon glide down. Moving to our 2026 financial outlook, for the full year 2026, on a consolidated basis, we expect revenue to be approximately $89.7 billion. Operating margin is expected to be approximately 9.6%, and diluted earnings per share are expected to be about flat to 2025. As a reminder, 2025 EPS included a $0.30 benefit from a sale-leaseback transaction. Lastly, our guidance for 2026 does not reflect any significant changes to the current tariff landscape. Now let me add color on the segment. Looking at U.S. Domestic, we are going through significant structural changes, and 2026 marks the inflection point of our strategy. Full year 2026 revenue is expected to be approximately flat year over year. We expect ADV to be down mid-single digits year over year due to our actions with Amazon, which will be offset by a strong revenue per piece growth rate in the mid-single digits. Full year operating margin is expected to be flat to 2025. Looking at the shape of the year, revenue and our cost structure in the back half of the year will be meaningfully different than in the beginning of the year. In the first half of the year, we expect a decline in revenue compared to 2025, driven by volume decline. Looking at 2026, we expect to generate an operating margin in the mid-single digits. This is due to short-term transition expenses related to Groundsaver, the timing of removing Amazon-related costs, including the execution of a voluntary driver separation program, and additional expense associated with the aircraft leases related to the retirement of our MD-11 fleet. In the second half of the year, we expect high single-digit operating profit growth, reflecting the completion of our strategic actions. We will still be comping year-over-year declines from Amazon, but we expect enterprise and SMB revenue growth. First half cost pressures are expected to be behind us, and we will be running a more agile U.S. network. The USPS will be delivering some of our Groundsaver product, and our driver staffing will align with our new delivery volume level. Our results in the second half of the year will be more indicative of our go-forward financial algorithm, with an emphasis on both top-line growth and operating margin expansion. Moving to the International segment, we expect the dynamic environment we experienced in 2025 will continue in 2026, primarily due to the tariff and de minimis policy changes that will continue to drive changes in trade lane mix. With that in mind, we anticipate revenue growth to be in the low single digits year over year, driven by a solid increase in revenue per piece. Operating margin in the International segment is expected to be in the mid-teens. Looking at the first quarter, we expect revenue to be approximately flat with a year-over-year decline in operating profit due to changes in trade lanes and tough comps from the front-running of tariff and de minimis changes in 2025. In Supply Chain Solutions, for the full year 2026, we expect revenue to be up high single digits, which includes revenue from our Andalar acquisition. Operating margin in SES is expected to be in the low double digits. For modeling purposes, in total below the line, expect approximately $760 million in expense, which includes pension income of approximately $250 million, and we expect the tax rate for the full year to be approximately 23%. Now let's turn to our expectation for cash and the balance sheet. We expect free cash flow to be approximately $6.5 billion, including our annual pension contribution of $1.3 billion, but before we factor in the financial impact of a voluntary driver separation program. Capital expenditures are expected to be about $3 billion. We are planning to pay out around $5.4 billion in dividends in 2026, subject to Board approval. To close, I would like to echo Carol's comments and express how proud I am of our teams for executing the strategy while continuing to take care of our customers. Our efforts today are setting our business up for future margin expansion and greater operational agility. We are focused on growing in the best parts of the market to deliver long-term value for our shareholders. With that, operator, please open the lines for questions.

Thank you. We will now conduct a question and answer session. If you have any questions or comments, please press 1 on your phone at this time. We do ask that while posting your question, please pick up your handset if listening on speakerphone to provide optimum sound quality. We do ask that participants please ask one question, then reenter the queue. Once again, if you have any questions or comments, please press 1 on your phone. Our first question comes from the line of David Vernon from Bernstein. Your line is live.

Hey, good morning, guys, and thanks for taking the question. So I guess, Brian, maybe just a big picture question in terms of what's embedded in the guidance and sort of the exit rate as we are leaving 2026. I think you mentioned full year domestic margin is expected to be flat. Can you kind of give us a sense for what the second half or the exit rate margin should be? And then as far as kind of what's embedded in the domestic cost outlook, is there any sort of numbers you can put around the cost of the retirement of the MD-11s? Or additional stuff maybe that we did not know before the earnings release today? Thanks.

Yeah. Great. Good morning, and thank you, Dave. So let me first just address the MD-11. I think in the fourth quarter, including our results, was about $50 million of incremental lease cost that we incurred to replace the capacity. It will be about double that in 2026 that's included in the guidance. About 90% of that in the first half. The 767s are scheduled to come in through the course of the year, with five in the first half and 10 in the second half, and then we will have three in 2027. So that's the first part. I think, when we think about the shape of the year, there are a couple of really important things to think about. First, as we saw as we went through 2025, and Carol mentioned in her remarks, there's a timing lag between us taking the cost out and realizing the benefits in the P&L along with volume. So as we go through the quarter, we are going to have a step down in the Amazon volume in the first quarter. We are taking actions in order to right-size the variable cost, semi-variable cost, and fixed cost, but there will be a lag in that that will hit the second quarter. So you do see pressure from three things in the first quarter. The drawdown of the Amazon volume and the timing of the cost out. The transition cost of moving Groundsaver back to the USPS will go through the first half of the year. We will see benefit come through in the second half of the year. And then as I mentioned before, this incremental MD-11 cost. That's going to put margin pressure on domestic in the first half. The way to think about it is really about a 100 basis points of pressure in the first half that will release in the second half, most of that pressure coming in the first quarter. In our international business, you have a similar dynamic, where we've got pressure from de minimis in the third quarter and fourth quarter, that's going to roll into Q1. Additionally, as I mentioned in my prepared remarks, we had a lot of pull forward in 2025, so we've got a really tough comp. That's not only going to put pressure on the margin as we saw in the fourth quarter, but also push down profit in international. We expect profit to be down about 30% in the first quarter and then recover as we go throughout the year. In the second half, we will look at a very different business. As I articulated, SMB and enterprise will be growing mid-single digits. We will be in a much more efficient cost structure. We will still be driving good mid-single digit rep per piece improvement through our pricing, and our cost per piece will normalize as we right-size the driver staffing, realize the benefits of automation, and we will be exiting at a healthy double-digit margin that will take us into 2027.

Alright. Thanks, guys.

Thank you. Your next question is coming from Tom Wadewitz from UBS. Your line is live.

Yeah. Good morning. Wanted to see if you could give some thoughts on just kind of like the algorithm post the glide down with Amazon. Do we think about it as for domestic package, so do we think about it as kind of low single digits revenue growth? Would that be kind of what you would aim for? And what kind of pace of margin improvement can you consider? I know obviously, macro matters, so there are a lot of things you do not necessarily know. But maybe high level how you think about that. And then I guess within that, if we look into 2026-2027, I think you've talked about maybe like $400 to $500 million of EBIT headwind in '25 from the insourcing of SurePost. So now that you're handing that back to postal, I do not know if you get that fully back and if that's kind of like half of a benefit in the second half of this year. And then you know, half of it in 2027. So just some thoughts on kind of that overall domestic pack margin and how to look at it. Thank you.

Sure. Yes. Yes. Thanks, Tom. So as we think about the kind of go forward with the algorithm, as I mentioned, look, we expect to see kind of mid-single digit enterprise and SMB volume growth in the back half. Now our rev per piece will normalize because of the mix benefits that we've seen as the Amazon volume has come down. Also come down, but we've had healthy base rate increases that have been continuing. So I would think about a couple percent on the base rate. From the cost side, our cost per piece will normalize as well. Right? And we expect to see cost per piece come down below the rep per piece, so we're driving unit cost improvement. As we have, you know, prior to the Amazon Glide Down. And that will drive kind of structural long-term margin improvement as we go forward. So look, I think what we'll see in the back half of the year is we're exiting with non-Amazon revenue volume and revenue growth and margin improvement. Will be the go-forward algorithm. On the USPS cost, so the, we will be transitioning a portion of our Groundsaver delivery back to the USPS through the first half of this year. We do expect that we'll see benefit start to materialize in the second half. It will look slightly different than what we have before because, obviously, we're going back at a different rate than what we had before with the USPS, but that will translate into savings in the second half of this year and going forward. It also helps us with aligning our product strategy with how we want to think about an economy product as a holistic part of our product portfolio.

Do you think you get back the full $400 to $500 million you gave up in '25 or maybe not?

Right. Okay. Thank you.

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

Hey, Greg. Good morning. Threw out some costs pretty quickly there, Brian. I just want to clarify. Did you throw out the costs in the first quarter on the driver out and the postal service costs impact that margin? But my question is just on the rate increases. For both domestic and international. I think you threw out there that it was going to be low single digit for domestic. Your thought on how this should trend for core rate, both domestic and international?

Yeah. So if you think about rev per piece for the year, Ken, it's about four and a half percent. Right? Rep per piece growth. But you're going to be higher than that in the first half and then normalize to about three in the second, right, as some of the mix benefit comes out. Look, in the fourth quarter, we saw a 340 basis point improvement in base rates. We've been seeing kind of around this 300 basis point improvement in base rate. I would expect that as you think about going forward. Related to the driver buyout, we didn't give a number because we have not yet launched the program. It's too early to make an estimate. Look, this is a tactical move that we used to do something similar last year in order to help us to right-size the position levels and the network infrastructure with the new volume and delivery levels. Right? Because it could include the change in the Groundsaver stops as well. We'll keep you updated with that as we go through the course of this year.

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

Hi, good morning. So I wanted to dig a little bit further into the cost per piece trends. Obviously, it was elevated a bit in the fourth quarter, but you talked, Brian, about that normalizing on a go-forward basis. Maybe you could separate those things out. Just like if we think about normalized CPP run rate, how we should think about that? And then as we think about the improvement in revenue quality and the kind of shift in mix, does that assume kind of a higher cost per piece to handle that business? Or can we get that back to kind of a low single-digit run rate more in line with inflation? Thanks.

Yeah. Sure. So I think the first six months of this year will be very similar to last year. In fact, we've already started optimizing some of the closures of sorts and buildings because we didn't stop automating until December 31. We did take a day off, but we're right back at it. And just for some proof points, as we work through the month of December, the activity was up 4.4%. By activity, I mean, a lot more stops out there to serve our customers. When in fact the volume was soft and negative. That is going to flip on us. So I'm very confident that the cost per piece will be in a much better position as we align to the driver buyout proposals that we're discussing, network of the future implementations, building closures, short closures, and, of course, the outsourcing of the USPS one.

Very helpful. Thank you.

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

Hey. Thanks. Good morning, guys. Maybe if we could touch a little bit on the international segment, make sure we just sort of move through the moving pieces there. Obviously, we talked a lot about the domestic side. But just get a sense of some of the pressure there, maybe we can sort of break out some of the individual costs or de minimis pressures as we go through the first quarter specifically, but also the first half?

Yeah. Thanks, Chris. So, yeah, in the international segment, what you saw in the third quarter is we did see export volume decline for the first quarter in 2025. That was really there was a lot of pressure both from Canada and Mexico as well as continued decline in our China to U.S. lanes and really, you know, all of our U.S. inbound lanes. That's going to roll over into the first quarter as well. Look, I think what we expect to see evolve in the international business is we are going to see extreme weakness in the first quarter that kind of gradually recovers. There are two dynamics going on. One is the first is volume. Right? So volume, we will lap the tariff impact in May, and start to see positive growth from that, and then we'll lap the de minimis impact in September. So the second dynamic is the trade lanes are shifting. Right? And that's driving a margin headwind. Look, we make double-digit margin on all of our U.S. inbound lanes. But the ones that are growing, right, are, I'll call it, mid-teens versus the high double-digit margins that we've got in, you know, 20, 30% margins that we have in the China to U.S. lane. So while we're seeing some offsetting volume growth, we are seeing margin pressure as a result of that. That also will abate as we go through the year. And what we expect to see is not only volume normalize but also margin improve as we go through the year. And look, I think the revenue quality actions that we're taking in international have helped to offset the volume declines in the third quarter and will continue to help drive revenue growth as we go through Q2, Q3, and Q4 of next year.

Yeah. Absolutely. We mentioned before, years ago, when we first saw the China lockdown, we invested heavily in Asia to burst diversification. And it has really unlocked growth. We're in Vietnam in a new air hub. And it's already 80% full for a five-year plan. So we've actually got double-digit growth going out of a lot of the Asian countries, but they're going to Europe and India. And so we shifted with the trade. So while we do that, you have to pull down the block hours, and we have shown that over the last couple of years that that is what we do. We are seeing good growth, and we're helping our customers to understand the shift well, whether it be by lane or by mode, package to forwarding. Or the reverse. So proud of the team. Last year with the tariff and de minimis, haven't seen anything like it in thirty-six years. And proud to say that we've delivered, for instance, in the fourth quarter to 18% margin.

Thank you.

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

Thank you.

Thank you. Your next question is coming from Ravi Shanker from Morgan Stanley.

Understood. Thank you.

Thank you. Our next question comes from Bruce Chan from Stifel. Your line is live.

Yes. Thank you, and good morning, everybody. I don't know if you've discussed it in the past, but I'm just curious if maybe you can talk about the selection process for which facilities were automated in 2025 versus what's ahead in 2026. I guess what I'm trying to get to is whether there's anything to read from the complexity of the operations that you attacked last year versus what you've got ahead this year?

That's great. Very helpful. Thank you.

Thank you. Your next question is coming from Richa Harnane from Deutsche Bank. Your line is live.

Yeah. Sure. Yeah. And Richa, yes. As Carol mentioned, yeah, we do have financing structures around the aircraft. But I think, importantly, look, if you think about the CapEx profile, our volumes continue to come down. Right? And as Carol mentioned, we've closed facilities. When we look at the asset categories, we really have pulled back. We're not buying as many vehicles, right, because we don't need them as we right-size the U.S. network. We continue to invest in our international network through both air hubs, aircraft, and vehicles. But it's bringing down our maintenance expense. It's bringing down our vehicle expense. And look, I think as we turn and we continue to grow, we'll be kind of around this three to three and a half percent of revenue as a normalized CapEx, but we're creating more efficiency. We're creating more flexibility so you don't have to spend CapEx on variable capacity like we used to. And that's going to allow us to run a more capital-efficient network going forward.

Okay. Thank you.

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

Yeah. No. I think just a couple of points. One is, look. We continue to ramp the volume up. This in the month of January, and it also gives us an opportunity that Brian highlighted earlier. It's really to differentiate our product portfolio because our customers are asking us, one, they want the reliability of the United Parcel Service, Inc. network. But we and the service that we can provide, we've demonstrated we can provide but they also want to make sure they have economical options. So this really gives us an opportunity to both Nando and Carol's point to one bring our customers online and get these dual labels so that we can have they can have visibility. But also giving them the right experience along the way with that economic option.

Appreciate the color.

Thank you. Your next question is coming from Bascome Majors from Susquehanna. Your line is live.

Sure. And I think Carol hit on the right points, right? When we started out with the labor contract, we knew that we were going to be investing in order to create a lower labor-intensive network, right, with more flexibility that had the ability to scale, right, particularly for peak because we've seen peak being increasingly important. Without the need for so much labor. You're seeing that. Right? We saw it, with and without the Amazon drawdown in 2020 without in 2024, with and without in 2025. We've set up targets for incremental position eliminations that'll drive efficiency. In 2026. And so as we approach that point, we will be driving down total expense. At the same time, remember, we will have a different characteristic of revenue in the network so that the incremental cost will not turn customer ORs upside down. Right? And so we will have a less labor-intensive, more nimble, more profitable network that will minimize the impact of the increase.

And, Matthew, we have time for one more question.

Certainly. Our final question comes from Brandon Oglenski from Barclays. Your line is live.

Thank you.

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