United Parcel Service, Inc. (UPS) Earnings Call Transcript & Summary

Let's go ahead and get started with the next presentation. This is my caboose, not really, not trains, but I'm very excited to have UPS with us. But for those who don't know me, I'm Tyler Brown, senior analyst here at Raymond James. I do quite a few things, Brian. I do transportation. We've had some waste companies. We've had some heavy construction materials companies. But like I said, this morning, I am very excited to have UPS with us. Now I think most of you know what UPS does, and you might even be having UPS pay you a visit today, whether you like that or not. But obviously, UPS is the largest parcel company in the U.S. for sure, globally, obviously, a huge player. But I think you move about 6% of the United States GDP to put that in perspective. So UPS plays a very critical role, obviously, in e-commerce, and there's a lot of things going on. So this morning, Brian Dykes, the company's CFO, we're going to do a couple of slides, and then we're going to kind of jump into a Q&A. So if anybody has any questions, please just raise your hand, let us know. But Brian, I'm going to go ahead and turn it over to you, and then I will be back up here for a lively fireside chat.

Perfect. Thank you, Tyler. And thank you all for taking the time. I know it's been a good couple of days. I hope you guys have enjoyed it. Just real quick, I've got some forward-looking statements in the presentation that obviously, results may differ. But I thought real quick, let me start. You can see the stats on UPS. Everybody is very familiar with UPS as a U.S. last mile provider. I'm sure all of our families see the UPS man frequently coming to their house or their place of work. But I do think it's also important that besides just the U.S. small package business, which is our leader, we also run a global small package business backed by one of the largest airlines in the world with an integrated ground network, not only in the U.S., but in Europe, Latin America, Asia and Middle East and Africa. We also have a global freight forwarding business. We're the leader in customs brokerage. We're the largest health care logistics provider in the world, really focusing on complex health care supply chains. And we have a portfolio of digital solutions that power things like returns and insurance and fraud detection and things like that for our customers. This portfolio of assets allows us not just to deliver final mile in the U.S., but really solve complex logistics problems for our customers. Just real quick to hit on where we are in 2025, and we'll talk more about where that takes us in 2026. Look, we went through on our fourth quarter call that we're building off the progress that we saw in 2025 going into 2026. There's really 3 big things that we're doing, right? Last year, we reduced about 1 million pieces a day of a portion of our relationship with Amazon. In the first half of 2026, we'll reduce another 1 million pieces a day. That's really meant to drive better network efficiency, improved profitability over the long run. At the same time, we're undergoing the largest network reconfiguration in our company's history, 118 years, right? That involves not just rightsizing the capacity in our U.S. network, but we're also investing heavily in automation to ultimately get to a smaller, more productive network that we can grow off of into the future. And the third pillar, I would say, is around the outsourcing of a portion of our Ground Saver economy product back to the USPS. In 2024, we had a negotiation with the USPS where we decided to in-source it. That was driven by service, right? That was really driven by a change in their operating model that was going to reduce the ability for us to provide the service to our customers that we want. In 2025, with the new management team at the USPS, they decided to change course on how they were treating service. And so we're now going through the process of outsourcing a portion of those stops back to them. Look, with that being said, leading into 2026, all of that is going to translate into slightly up revenue and EPS about flat, right? So we're just reiterating our guidance here that we put out in the fourth quarter. But it's very much a first half, second half story, right? Those 3 items on the left really drive some incremental costs that we're going to face in the first half as we bring this volume down, we rightsize the network. There's tariff and de minimis wrap that we've got to do in our International business. Then leading into the second half, we're going to see revenue up, right, in the low single digits. We'll see our operating margin recover. We'll be back to the business that we've been transforming into, which is focused on top line growth and margin expansion, right? But that does build into what does the first half look like, right? And why is the first half behaving so differently than what we've seen in the past, right? So again, we're not changing our guidance, but I think it's important to illustrate why is it different than what's happened before because we are behaving different than our normal seasonality. What you see on the left in the U.S. business, we've got several headwinds that are hitting us in the first quarter, right? The timing of the costs coming out with the Amazon drawdown, which I'm sure we'll hit on more, but we're taking out variable, semi-variable and fixed costs associated with that capacity rightsizing. We've got headwinds from replacing the MD-11 capacity in the first half of this year from the write-off of the MD-11 fleet that we did in the fourth quarter. We also have some transitional costs with moving that USPS volume or stops back to the postal service out of our network. Those start to abate as we go into the second quarter. And you can see on the domestic business, we start to see revenue growth and margin recovery as we go into the second quarter. On our International business, we have a tough comp from the pull forward of the China tariffs in the first quarter of last year as well as some network costs that are carrying over from the fourth quarter de minimis change that we saw. Those start to wrap as we get into the second quarter. You can see our margin starts to step up in the International business. In SES, we continue to see progress. We saw the margin improve as we went through 2025, and we'll continue to progress that as we go through 2026. So you can see there's a number of really unique factors going from first quarter to second quarter that then carry us into that second half margin trajectory that we've been looking for. So we talked about the Amazon drawdown. I think it's important to just reiterate as well because this is one of the big levers. This is where UPS is behaving very differently than what we've done in the past. And when I say in the past, I mean for like 118 years, right? Never before have we really reduced the fixed cost infrastructure as we've drawn down volume like we've done with this Amazon volume. Last year, in 2025, we set out targets to reduce 25 million hours, operational hours, reduce 73 buildings and cut 30,000 positions. We actually overachieved all of those metrics in 2025, and we set similar metrics for 2026. So we'll be pulling down another 1 million pieces a day of Amazon volume. We expect to remove another 25 million hours -- operational hours from our U.S. network, another 30,000 positions, including what we're doing with the driver choice program that I know we'll hit on shortly. And we've announced the closure of another 24 buildings in the first half of this year. We're evaluating more so we can rightsize capacity. So as we come out of the second quarter, as I talked about before, we'll have a more agile, more profitable network that we can grow off of with the right type of volume, right? Less e-commerce, more SMB, more B2B, more health care. And so that really sets us up for the growth trajectory as we go forward into the back half of '26 and into '27. And the last thing I'll end with, look, through this, we've been very focused on maintaining cash flow, a strong balance sheet, right, and making sure that we're protecting our return to shareholders. Just to start from the left, so we've given guidance of $6.5 billion of free cash flow. That's about $1 billion increase from 2025. That's before the Driver Choice program, but we've got plenty of cash flow to fund what we need to there. You can see we've got great liquidity and a strong balance sheet, right? Even with what we do with leases, with incremental debt, we maintain this 2.5x debt-to-EBITDA target right around there, which gives us a lot of strength, plenty of firepower in order to do what we want. Dividend, we're holding flat. Look, our dividend payout ratio is 50% of prior year net income. We're way above that right now as we've gone through this transition of our U.S. network. So we don't expect the dividend to increase, and we're not going to increase it in 2026. But we are going to work ourselves back toward that target. Our 10-year average payout is about 60%. We're running in the 80% to 90% range right now. So we'll grow back into that. But overall, we feel great about where the balance sheet is. It gives us plenty of strategic flexibility. We're very focused on cash flow generation and making sure that we maintain the payout to our shareholders.

Great. Excellent. Thank you so much for the shaping. That is extremely helpful. So clearly, there's a lot changing. I mean we've got tariffs. We've got Driver Choice Program, Amazon glide-down, SurePost outsourced resource. But one thing that hasn't really changed is service. And I want to kind of actually take a step back and talk about peak season because despite everything that's been going on, I know that this is really important to you, to Carol, to really the whole team. So can you just talk about service and how you performed through peak?

Sure. So we had our eighth straight year of being industry leader in service during peak. This is really meaningful, right? Because remember, we closed 93 buildings. So a little less than 10% of the buildings in our network were closed last year, and we had no issues with service, right? And that's -- let me tell you why that's important. That's important because when you want to go have a conversation with a customer about a 5.9% general rate increase, you better hit your service metrics. You better be better than your competition. And so good service translates into good revenue per piece the next year. It's something that we know we're the premium provider. We want to be the premium provider. So we expect to deliver premium service, and we've done it now 8 years in a row. We're super proud of that.

Perfect. So let's talk Amazon glide-down real quick. So what exactly does that mean for the good people out in the audience? I mean, you guys, I think, prior to what the change, it was as much as 10% of your revenue. So talk about what exactly the Amazon glide-down. And again, if you can just kind of give us some size of how much Amazon is kind of coming out of UPS?

Yes. So look, over a 2-year period, we'll shed about $5 billion of Amazon revenue, about 2 million pieces a day of Amazon volume. That's about half of what Amazon was for us in 2024. But it's important to realize what we're doing, right? So there's -- Amazon is a big animal. We talk about it like it's all one thing, but it's actually a very big thing. The portion of the volume that we're exiting is really the -- what they call their SC outbound, but it's the vertically integrated retailer, the stuff that's really in a warehouse, probably 50 miles from your house that's delivered in gray vans to your door. You don't need an integrated end-to-end network in order to move that kind of volume, right? And that's where Amazon has invested tremendously in their own supply chain. They can do that really, really well. And so we've decided that they can -- they're going to in-source that piece of the business, and we'll focus on other pieces of the business. They're still going to be one of our largest customers. We do a lot of returns from them through our UPS store network. We do things for small businesses that sell on the Amazon platform. So we work really well with them on the places where we can add value and the places where they can in-source it and do it themselves, that's what they're going to take. So look, I think this is still a very collaborative relationship. We've got multiyear contracts on the other pieces of the business. But this on the whole now will allow us to really focus our business on the places where we want to invest and we want to drive growth.

Perfect. So if UPS is, call it, [indiscernible] $100 billion roughly of revenue is maybe a $10 billion-ish pool. So we're talking about $5 billion. Clearly, there's going to be optics. So there's optics, but there's more than just Amazon, right? So we had also a development with the USPS. And maybe you can -- let's talk about that first because exactly what happened with the SurePost product, I think it maybe helps give some people some perspective?

Sure. So in 2024, our economy product was called SurePost. And it was a product where we delivered a portion of the volume and we injected a portion of the volume into the USPS at what they call the destination delivery unit or the DDU, effectively the post office post your house, and then they would deliver it the final mile. And when you do that, it's a day longer time in transit than if you ship it through UPS. But the service levels were really good if you delivered it to the post office and then let them do it the rest of the way. At the end of 2024, they decided to change their operating model, which was going to change that service component where we can no longer inject it at the DDU, but we were going to have to move further upstream into their network the service degrades considerably when you do that. And so we decided that we would in-source that volume, right? As we in-source that volume, we obviously had to change rates. We also had to shed some unprofitable customers, which a large portion of that was some Chinese e-commerce customers that were injecting very low-value goods into our network. And so that also created a headwind that we're wrapping as we went through the back half of '25 and first quarter of '26.

Right. So when I see ADV down, call it, circa 11%.

That's right.

There's a lot to that number.

There's a lot to it.

So how would you just kind of talk about the current environment? And maybe we could even bridge that into some changes in tariffs and how that's been impacting the business and how we should think about it even in relation to the guide?

Yes. So when you think about our guide, look, we'll be wrapping this -- let me talk about the U.S. first. And think about -- when we talk about core volume, that's our core enterprise and SMB volume, right? We'll wrap that Chinese e-commerce piece that was in our Enterprise segment in the first quarter. And then we're showing enterprise and SMB growth as we go through the course of the year. Not robust growth, mid-single-digit growth, but good solid growth with an increasing base rate, which drives good revenue growth. From the International side, look, International went through a lot of changes last year, a lot of, I would call it, volatility, right? First, we had China tariffs, which caused a big pull forward in the first quarter of '25. Then we had a pullback in the second quarter. Then we had the de minimis change, which was hugely impactful, not just to our International business, but also to our Brokerage business, which I'm sure we'll hit on later on because the technology kind of saved us there. So our International business had considerable headwinds in the comps that they had to overcome in 2026. Look, overall, I think we see the U.S. environment is pretty good, right? Our core business is performing. Internationally, we've seen a lot of trade lane shifts. But what I would say is trade has not stopped. Trade has just moved, right? So while our China to U.S. volume may be down 30%, our China to rest of world volume is up. The problem is we've got a margin issue on those lanes that we've got to address. But overall, look, I think we see okay growth going into 2026.

Pretty good. I'm going to take pretty good in this environment.

I'll take pretty good after 2025.

Okay. So again, there's a lot of optics around ADV. And I just want to reiterate, I mean, your goal is not to just retrench. I mean your goal is to grow, but your goal is to grow in the right place. So maybe talk just a little bit about that.

Sure. Look, and absolutely, it's not a shrink the company strategy, right? It's a growth strategy. But it's a growth strategy in the places where we can drive accretive growth, right? So our focus is really on how do you -- growing our enterprise customers, particularly in B2B and health care and industrial verticals where we can drive higher rev per piece and better characteristics for our network. SMB growth, which is huge for us. We started about 6 years ago, we started a program called Digital Access Program, our DAP program that is really about connecting to marketplaces that SMBs use to move online. This is not just Etsy stuff. This is also industrial retailers that are selling products online. That program has grown from $150 million 6 years ago to over $4 billion last year. It's about being where SMB customers need us to be, integrating with their technology stack and helping enable them to punch above their weight, right? And on the international side, our International business is 55% SMB, right? It's a much more distributed, better mix business that allows us to drive structurally better margin.

Okay. Perfect. So we're focused on the right parts of the market, absolutely. We're going to come back to RPP, but I want to talk about and you have some good info on slides. So obviously, there's a lot changing. The network is fundamentally -- obviously, some volume is moving out, but you're not sitting still. So talk a little bit about, again, each one of those, call it, variable, semi-variable and fixed cost because, again, I think it's pretty profound what UPS has really done, something that's not really been historically in your DNA.

That's right. Yes. And I mentioned before, this is not something that we've ever done. But when you pull this amount of volume down look in a relatively fixed-cost network, you have to take the cost out, you have to rightsize the capacity. And so in 2025 and again, in 2026, we laid out kind of how we were going to reduce the cost. So again, remember, we're getting rid of roughly $2.5 billion of Amazon revenue. We said we're going to save $3 billion in cost. The way that you do that is, first, on the variable side, as volume comes down, we have to plan less operational hours, right? That's just take out the variable pay. It means you need fewer drivers on road. It means you need fewer people in the buildings to sort packages, so you bring out the hours. The second piece is the semi-variable cost, which is really around those positions, right? So if I need fewer drivers, I can pull the cost out. But ultimately, I have to eliminate the position so I can eliminate the benefits, right? And then the third is then the fixed portion, the buildings and the actual physical capacity. Last year, we closed 93 buildings. This year, we've announced 24 in the first half. We're evaluating additional capacity reductions. All that enables us to now rightsize the capacity for the network. So as we're growing back into it, well, I'm sure we'll hit on automation soon. But as we're growing back into it, you're growing back into a smaller, leaner, more productive network than what we left.

Let's talk a little bit about the Driver Choice Program. So there's been obviously some court rulings on that side. Can you just talk about where we are and maybe the quantum? And how exactly is that going to work? So will there be charges as that goes on? And then there'll be ultimately a cash payment. So we need to consider that. But maybe just work through some of the mechanics.

So let me just explain a little bit about because we ran a driver -- a similar program last year that we called the driver voluntary separation package. The driver choice program that we're running now is an opportunity for UPS drivers to take a lump sum payout in order to leave the company and move on. This is important because UPS, like all union employers has a seniority-based system, right? Meaning if you've been there longer, you're basically guaranteed a job and you take out the less -- as you reduce positions, the less tenured people leave first, right, which means if I'm a long-tenured driver, even though I may not be able to drive, I can still take my wage rate and benefits and work on the inside. It's very hard to remove those positions. This gives us a way to accelerate it, right? So rather than wait for attrition, we can accelerate it. We did a similar program last year. And yes, there'll be a charge once we know the numbers. This one is structured a little bit differently. We've offered it to a little over 100,000 drivers between tractor trailer drivers and packaged car drivers and other full-timers. It's really early. We're seeing good take rates so far. We'll continue to update everybody on what the numbers look like as we go through the first quarter. Our expectation is that we'll close the program out in the second quarter, take the charge and then this start to drive benefits in the back half.

Excellent. So that really addresses a lot of that variable, semi-variable piece, the fixed cost piece. And this is where it gets really interesting because maybe UPS had an infamous slide one day at an Analyst Day once upon a time. But they felt like maybe there was a little bit of excess capacity in parcel U.S. domestic. It seems like there's been some calling of capacity. So maybe again, kind of talk about the fixed piece and some of the building closures. And even maybe talk a little bit about automation, but really talk about the closures, that would be helpful.

Sure. So we absolutely have been reducing capacity in line with what our expectation for the volume levels are coming out of the second quarter of this year. That's really the baseline. And so we've done it through closing buildings. We've also been eliminating sorts, right, which brings down your hub capacity and then investing in ways that the automation will make us more efficient as we grow back into it. We're not the only ones. This is going on around the industry. You've seen networks consolidating with some of our competitors. You've seen the USPS doing the same thing. So there has been a rationalization of capacity, and I think it's good structurally for the industry.

Right. So most of us, I think, went to business school, and we kind of understand simple supply and demand. So maybe there's a change in capacity and maybe just maybe it's a little bit better on the demand side. So can you talk about core RPP? And when I say RPP, I mean revenue per piece. So maybe just like talk a little bit about the core pricing. And then not only at the core level, but also what we talked about earlier is that mix should also help that number optically.

Yes. And let me maybe use the fourth quarter to illustrate because in the fourth quarter, our revenue per piece or our unit per package revenue growth rate was 8.3%. About 340 basis points of that is what we call base rate. That's really how much of your pricing increase are you able to put through and get improved just base pricing on a unit cost basis -- on a unit basis. Then there was another 320 basis points that was mix driven, which means less low-yielding volume, more high-yielding volume, right? And then there's a component that was fuel, right, to tie back to the total. What we see over time is that kind of 250 to 350 basis point base price increase, that's good, right? It's good over a very long period of time. And we've been achieving that a couple of ways. One is, obviously, we're leaning into the parts of the market where we can drive more value, which means you have better pricing power, right? Health care, high-value goods, complex supply chains, really sticky. When you're 99.99% on clinical trials drugs, they don't care if you put a 5% price increase through, right? It's a whole different ball game than if you're talking about a T-shirt, right, going to a residence. SMBs, where we can provide a lot of value by giving them distributed capabilities, B2B, where we can provide really good density characteristics and do some things in our network because we have employee drivers that some other providers can't do. So those allow us to get better base rate increase. The mix, right, the less low yielding, more high yielding, that will abate over time. And so when we look at 2026, we'll have about 6.5% full year rev per piece growth. It will be a little bit higher because of the mix in the first half and then that abates in the second half. And then we'll look for this 2.5% to 3.5% base rate improvement over time.

Okay. So RPP, hopefully moving in the right direction, CPP, maybe moving in the right direction. I think you guided to something like mid-single-digit domestic margins in Q1, but I don't think that's where you want to be. So when we kind of put it all together, I mean, how should we think about U.S. domestic margins not only shape-wise this year, but as we think out into '27, '28, '29 and beyond?

Yes. So look, we'll continue first half is going to be under pressure as you saw. You saw on the slide, particularly in the first quarter. Full year, we laid out our guide that will be about up 1% on revenue, about flat on EPS, pressure in the first quarter, recovering in the second quarter. Second half, you're back to about 100 basis point margin improvement overall. We'll start to see further improvement as we go into '27. More importantly, we've got the unit cost fixed, right? Because even though we'll see rev per piece normalize in this 2.5% to 3.5% cost per piece does as well. And we're back to driving revenue growth and margin expansion as we go into '27 and '28, and we'll move back toward double-digit margin over time.

U.S. domestic.

U.S. domestic.

Okay. On the International piece, it also and you alluded to this earlier, it has been under a little bit of margin pressure. Mix has certainly not helped. I believe the China lane is...

Very profitable...

Profitable lane. So can we just talk a little bit about where International could maybe go or where you would like to see it go, I should say, maybe over the next couple of years?

Sure. Look, on International, if you go back 3 years ago during COVID, when there was high demand surcharges, our margins were as high as 20%. Those were -- I think those were a unique situation because the air freight rates in the market shot up so much. Right now, we're going to see a lot of pressure in the first half of this year, particularly in the first quarter in International because we're wrapping the China impact tariffs. And as Tyler alluded to, we've seen a tremendous amount of lane shift, right? So China to the U.S. was our most profitable lane. We see a tremendous amount of growth in China to the rest of the world. The problem is it's about half as profitable, right, as China to the U.S. And so we've got this mix shift that's weighing on margin. So we expect it to be in mid-teens. I think it can get a little bit higher than mid-teens back over time because as that trade starts to normalize, two things happen. One is it gives us time to -- what I call harden off the network, right, to reallocate capacity to the places where we can drive higher returns. So one of the reasons China to the U.S. was our most profitable lane is our network was really built to consolidate volume in Shenzhen in order to get it back to the U.S., right? Once we figure out where those trade lanes are going to be, whether it's India to Cologne or China to Cologne, we'll reengineer the network, and we've got people that are really, really good at this in order to drive better profitability on the lanes where we see the most growth. But we need things to stabilize a little bit. And unfortunately, we thought we were almost there and then maybe not this week.

Yes, not this week. Working on it. So again, we've got a couple of minutes, but I want to come back to your last slide because I think the capital allocation and cash generation is a really important part of the story. So just again, kind of talk about the cash generative ability of the business today. And again, if margins do improve, there should be some upside to that. And we're going to talk about CapEx, but let's just talk about from a base operating cash flow perspective.

Sure. So we were just under $9 billion in operating cash flow. The business is incredibly cash generative. And we've been focused on making sure that we maintain dividend coverage as we've gone through this transition. It has high leverage to the upside as we start to get the U.S. margin recovering to 8%, 8.5%, 9%. We have really good cash flow through to the bottom line, and we're focused on getting there. And so yes, I think from a capital allocation standpoint, we always invest in the business first and foremost. And we'll talk about CapEx because our CapEx levels are down, but they're down for a reason. Then we want to maintain a strong balance sheet. And you saw our metrics, 2.5x debt to EBITDA, where we've got a really strong credit rating that gives us the financial flexibility to do any strategic actions that we want to do, and we'll continue to improve cash flow and protect the dividend.

Okay. I had to check my notes. So I think you guided to $3 billion in CapEx. But that's a 10-year dollar low if I'm not mistaken. There had been a moment in time if we go back, I think UPS invested heavily in the airline in the '80s. And then there was kind of this moment where you guys also really dipped down in CapEx. And then there was this whole CapEx I don't want to call it a bubble, but this resurgence. So I do get questions time to time, is $3 billion the right -- is that the right number at the current $100 billion, call it, roughly or I forget exactly on the revenues. Sorry if I got that wrong, but $90 billion on the revenue run rate.

Yes. So look, I think 3% to 3.5% of revenue is kind of the way we think about it. We have been pulling CapEx down, but the volume has been coming down as well. We've been consolidating the network. So when you're bringing down 2 million pieces a day, you don't need to buy vehicles. We closed 93 buildings. Those were, to be honest, some of our highest maintenance buildings, right? We're investing in automation that allows us to take out some of the older stuff, right, that requires less upkeep. To your point, we've got -- our air network has stabilized. We're still funding investments, right, in automation. We'll have 24 new facilities this year that will open up that are -- that will be automated. We're building new air hubs in Hong Kong and the Philippines that are going to allow us to expand and intra-Asia. And so we're still investing in the areas we need to invest. But the reality is the total CapEx requirement for the company is coming down.

Okay. So just to kind of finish it up, strong operating cash flow, CapEx stays relatively low. That leads to capital allocation opportunities. You have done some M&A, the dividend is a big deal.

Yes.

And maybe you could talk to everybody about the commitment to the dividend and then maybe some on the additional -- should we think buybacks, should we think M&A? Also what we should think?

Sure. So first and foremost, the actions that we're taking are about getting the margin moving in the right way. That will give us the cash flow flexibility that we want to have. From a dividend perspective, we recognize we were an employee-owned company until 1999. We still have a huge A shareholder base. When we look across our shareholder base, we recognize that the dividend is important, right? And so we will protect the dividend. But we will grow back into the dividend to get back to our long-term payout ratio of 50%, 60%. From a capital allocation standpoint, we want to invest in the business. You saw us close our second largest acquisition ever. Now for UPS, there's not -- it's a little over $1 billion acquisition. Those are tuck-ins, right, for most people for us, it's a meaningful expansion of our health care capabilities. We'll continue to look to do things like that where we think it makes sense and we can leverage the network to drive value for the business. But yes.

Okay. Perfect. We are on time. Thank you guys so much for joining us. Thank you, Brian. Thank you, UPS. Thank you.

Thanks.