United Parcel Service, Inc.

Good morning. My name is Matthew, and I'll be your facilitator today. I'd like to welcome everyone to the UPS First Quarter 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise, and after the speaker's remarks, there will be a question and answer period. Any analyst that wants to ask a question, now is the time to press star, then 1 on your telephone keypad. It is now my pleasure to turn the floor over to your host, Mr. P.J. Guido, Invest

Good morning, and welcome to the UPS first quarter 2025 earnings call. Joining me today are Carol Tomei, our CEO, Brian Dykes, our CFO, and a few additional members of our executive leadership team. Before we begin, I want to 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 companies. 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. For the first quarter of 2025, GAAP results included net charge of $83 million, or $0.09 per diluted share, comprised of after-tax transformation strategy costs of $44 million and a non-cash after-tax impairment charge of $49 million, primarily related to asset and investment impairment. These charges were partially offset by a $10 million benefit with a partial reversal of an income tax valuation allowance. A reconciliation of non-GAAP adjusted amounts to GAAP financial results is available in today's webcast materials. These materials are also available on the UPS Investor Relations website. Following our prepared remarks, we will take questions from those joining us via the teleconference. If you wish to ask a question, press star and then 1 on your phone to enter the queue. Please ask only one question so that we may allow as many as possible to participate. you may rejoin the queue for the opportunity to ask an additional question. And now I'll turn the call over to Carol.

Thank you, 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 margins 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 ADB 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 initiative. 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 increase productivity through additional automation. With this reconfiguration, we will also lessen our dependency on labor, reduce the capital requirements needed to run the network, and will drive structural operating margins and return on invested capital improvement. 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 points. 90% of the US population lives within five miles of these locations, and about two-thirds of them are open on Sundays for added convenience. In a moment, Brian will provide more details on our cost out and network reconfiguration progress. Our second strategic action was the insourcing of SurePost final mile delivery. We smoothly absorbed that volume into our network and adjusted operating plans to address the additional stops associated with the final mile. Earlier this month, we replaced the SurePost product with GroundSaver. This is a new and differentiated domestic economy service that balances speed and reliability for our customers while allowing significant operational flexibility for UPS. The third strategic action we announced was our Efficiency Reimagined Initiative, which is designed to deliver $1 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, B2B, and SMB. Last week, we entered into an agreement to acquire and lower healthcare group, a move that will bolster our healthcare capabilities in Canada by adding 39 dedicated healthcare facilities across the country, along with cold chain packaging and specialized transportation solutions. The acquisition of Ann Lauer 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 shipments. which is a true differentiator. Let's turn to a discussion about tariffs and our approach to managing through what is turning out to be a very complex and ever-changing topic. From an exposure perspective, our U.S. 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 US trade lanes represented 11% of our total international revenue. And revenue from other trade lanes to the US represented roughly 17% of our total international revenue. Our China to US trade lanes are our most profitable trade lanes. In the US, we've talked with our top 100 customers to understand how their business is being impacted. both directly and indirectly by changes in trade policy. These customers have told us that they are exploring various options to address the tariffs, from absorbing the costs 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 model, while the rest are considering several options, including trade shifts, transportation mode shifts, or exiting the business. Most of these customers are also telling us that they are letting inventory levels sell off, which will lead to lower shipping activity, at least for now. Freight forwarding customers are telling us that where they can, they are looking to move from air freight to ocean freight. 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 make it easier for our customers to reclassify goods under harmonized tariff schedule codes and clear customs easily. Our new global checkout product makes it known what customers will pay for duties, taxes, and fees. Using artificial intelligence, global checkout enables our customers to display to their customers a guaranteed landed cost covering all duties, taxes, and fees during online checkout. This eliminates surprise import fees at delivery and provides a much better customer experience. Global Checkout is available in 43 origin countries, and UPS is the only global carrier that offers a guaranteed landed cost that's integrated into shipping and billing technology. 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 no's. 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 could not be timelier. The environment may be uncertain, but with our actions, we will emerge as an even stronger, more nimble UPS. So with that, thank you for listening. And now I'll turn the call over to Bri.