United Parcel Service, Inc.

Good morning. My name is Matthew and I'll be your facilitator today. I would like to welcome everyone to the UPS fourth quarter 2025 earnings conference call. All lines have been placed on mute to prevent any background noise. And after the speaker's remarks, there'll be a question and answer period. Any analysts 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. P.J. Guido, Investor Relations Officer. Sir, the floor is yours.

Good morning and welcome to the UPS fourth 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 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. For the fourth quarter of 2025, GAAP results include total charges of $238 million, or 28 cents per diluted share, comprised of a non-cash after-tax charge of $137 million due to a write-off of the company's MD-11 aircraft lease. and after-tax transformation charges of $101 million. 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. Before I discuss our results, I'd like to start by remembering those who lost their lives in the tragic crash of UPS Flight 2976. Our thoughts and prayers remain with their families and everyone affected. I am incredibly proud of our team at Whirlport and how they responded to this accident. And I would like to thank the Louisville community as well as our business and industry partners for their outpouring of support. I also want to express my deep appreciation to UPSers around the globe for their exceptional dedication and tireless commitment to serving our customers. For the eighth year in a row, we were the industry leader and on-time service during peak. Looking at the fourth quarter, our results exceeded our expectations, driven by strong revenue quality, solid cost management, and overall great execution. All three of our business segments contributed to our outperformance, with U.S. domestic and supply chain solutions delivering year-over-year operating margin expansion. an international small package reporting record revenue with the highest fourth quarter revenue in four years. In the fourth quarter, consolidated revenue was $24.5 billion. Consolidated operating profit was $2.9 billion, and consolidated operating margin was 11.8%. Looking at the full year, consolidated revenue was $88.7 billion. Consolidated operating profit totaled $8.7 billion, and consolidated operating margin was 9.8%. Brian will provide more detail about our financial results in a moment. In 2025, we operated through a very dynamic macro environment, including significant change in global trade policies and increasing geopolitical concerns. But at the same time, 2025 was a year of considerable progress for UPS, as we took action to strengthen our revenue quality and build a network that's designed to deliver differentiated logistics capabilities. To that end, here's some of what we accomplished in 2025. By the end of the year, we reached our volume reduction target and reduced Amazon's volume in our network by approximately 1 million pieces per day. As planned, we delivered $3.5 billion in savings from our network reconfiguration and efficiency reimagined initiatives. We closed 93 buildings in the U.S. and deployed automation in 57 buildings while maintaining the high level of service our customers expect. We were disciplined on revenue quality and product mix and grew U.S. revenue per piece by 7.1% year-over-year. We increased small and medium-sized business or SMB penetration to 31.8% of total U.S. volume, driven by DAP, our digital access program, which grew revenue 25% year-over-year and delivered $4.1 billion in global revenue. As a percentage of total U.S. volume, we grew B2B to 42.3%, a 250 basis point improvement versus 2024. And importantly, we expanded our U.S. operating margin in 2025 on an average daily volume or ADB decline of 8.6% for the full year. We leveraged artificial intelligence and our next-gen brokerage capabilities to process nearly 90% of all cross-border transactions digitally, including in the U.S., where we saw more than a 300% increase in daily customs entries compared to last year. We completed our acquisitions of Frigo Trans and Ann Lauer Healthcare Group, further expanding our healthcare cold chain capabilities. In 2025, our global healthcare portfolio generated $11.2 billion in revenue, putting us well on our way to achieving our goal to become the number one complex healthcare logistics provider in the world. Our UPS digital business, which includes Rhody and Happy Returns, saw revenue grow by 24% compared to 2024. We deployed Smart Package Smart Facility, our RFID labeling solution, to 5,500 UPS store locations and completed installing RFID readers in all U.S. package cards. And we maintained a disciplined and balanced approach to capital allocation by generating $8.5 billion in cash from operations and returning $6.4 billion to shareholders in the form of dividends and share repurchases. While we made great progress in 2025, we have more work to do. Let's start with our network reconfiguration. One year ago, we announced our Amazon accelerated glide-down plan for the actions we plan to take that would drive future operating margin expansion and greater operational agility. Specifically, we set out to reduce the Amazon volume in our network by 50% over an 18-month period. while at the same time reconfiguring our network in line with our new volume levels. We're in the final six months of our Amazon accelerated glide-down plan, and for the full year 2026, we intend to glide down another million pieces per day while continuing to reconfigure our network. Given the success of our glide-down and cost-out efforts in 2025, We are confident that we will be able to complete our network reconfiguration plans without impeding our ability to grow in targeted markets. Brian will provide the details of our Amazon Glide Down plans in a moment, which remain anchored on reducing hours, labor, and fixed costs in line with new volume levels. Deliberately shrinking a network is a daunting task. and our success was driven by discipline planning and effective execution, as well as the added flexibility and efficiency that's coming from deploying state-of-the-art technology and automation across a smaller and nimbler network. This year, we plan to further automate our network, and as a result, we expect to increase the percentage of U.S. volume we process through automated facilities to 68% by the end of the year. up from 66.5% at the end of 2025. Our airline is a key part of our network, and over the past several years, we've taken a systematic, programmatic approach to modernizing our global air fleet. To that end, we made the decision to accelerate our plans and retire all MD-11 aircraft in our fleet. Over the next year or so, we will replace much of that capacity with new, more efficient Boeing 767 aircraft. Now let's move to our economy product we call Ground Saver. At the end of the fourth quarter, we formalized a new relationship with the United States Postal Service to support last-mile delivery of this product. Our new agreement improves the economics associated with this product while ensuring our service expectations are met. Ramp-up has already begun, and over the next several weeks and months, we will continue to increase the flow of ground saver volume to the USPS. As in the past, we will use density matching technology to determine which economy packages will be delivered by UPS versus the USPS. And touching on our activities outside the US, our new air hub in the Philippines is slated to open towards the end of 2026, and our expansion in Hong Kong is on track to open in 2028. Both gateways give us broader access and faster time in transit in the trade lanes that are growing in Asia. Now let me move to our 2026 outlook. In 2026, growth in the U.S. small package market, excluding Amazon, is expected to be up low single digits. Outside the U.S., export volume growth is expected to be subdued, partly due to the tough comparisons coming from the boost of tariff front running in 2025. Now looking at UPS in 2026, two important framing comments. First, for the first six months of the year, we will be working through the revenue and operating margin impacts of completing the Amazon glide down, the outsourcing of ground saver to the USPS, and adjustments to our international business in response to trade policy changes. Second, for the back half of the year, we will be operating a more efficient U.S. network and lapping trade lane disruptions. For the full year 2026, we expect to generate consolidated revenue of approximately $89.7 billion and a consolidated operating margin of approximately 9.6%. Brian will provide more details, but let me touch a bit more on the shape of the year, focusing specifically on the U.S. In the U.S., We expect revenue to be flattish year over year, with revenue declining in the first half of the year due to the Amazon glide-down plan and then sequentially increasing in the second half as the Amazon glide-down efforts will have concluded. While we expect overall U.S. domestic revenue to be flat, we are planning to grow SMB and enterprise revenue in the low single digits in the first half of the year and then accelerate that growth to mid-single digits in the second half of the year. From an operating profit perspective, higher expenses are expected to weigh on operating profit early in the year. These higher expenses are mostly related to when we will recognize benefits from the ground saver transition to the USPS and our network reconfiguration. We know that variable costs come out as volume exits the network. but have learned that reductions in fixed and semi-variable costs lag. We expect to return to operating profit growth in the second half of the year. The way I think about the year is like a bathtub effect. The halves will look different, first half down, second half up, but for the year, the U.S. revenue and operating margin will be flat, and we will exit 2026 with a leaner, more agile U.S. network, one that's built for growth. and sustained margin expansion. As I wrap up, I'm extremely proud of our team and the progress we've made in executing our strategy. June of 2026 will be the inflection point. Our strategy is not a shrink the company strategy, but rather one where we grow in the best parts of the market, including enterprise, SMB, B2B, healthcare, and international. Our strategy is about delivering differentiated value to our customers. improving the long-term profitability of our company, and delivering value for our shareholders through effective capital allocation. So with that, thank you for listening. And now I'll turn the call over to Brian.