United Parcel Service, Inc.

Good morning. My name is Matthew, and I will be your facilitator today. I'd like to welcome everyone to the UPS First Quarter 2026 Earnings Conference Call. All lines have been placed on mute to prevent background noise, and after the speaker's remarks, there will be a question and answer period. Any analysts that want 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 first quarter 2026 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 2025 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 2026, GAAP results include after-tax transformation charges of $42 million or 5 cents per diluted share. 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. Let me start by saying how incredibly proud I am of UPSers around the world. This past quarter brought significant external challenges. from volatile global markets to rising fuel costs. Even so, our team stayed focused, pushed our transformation forward, and upheld the exceptional service our customers rely on. The first quarter of 2026 marked a critical transition period for our company, one in which we needed to flawlessly execute several major strategic actions. And we delivered. First, we further reduced non-nutritive Amazon volume by an average of 500,000 pieces per day and closed 23 additional buildings. Second, under our new agreement, we shifted a portion of our ground saver volume back to the USPS for last mile delivery. Third, we launched a voluntary driver buyout program we called Driver Choice. through which we will reduce roughly 7,500 full-time driver positions. Interest in the program was extremely strong and ultimately exceeded our expectations. Based on these actions and more, we are firmly on track to achieve our $3 billion cost-out target for the year. Further, we began scaling back leased aircraft as we retired our MD-11 fleet and took delivery of new 767s, and we continued to capitalize on trade lane shifts resulting from last year's trade policy changes. It's a dynamic environment, but even against that backdrop, our underlying business performed exceptionally well. In the first quarter, consolidated revenue reached $21.2 billion, with consolidated operating profit of $1.3 billion and an operating margin of 6.2%. Across our segments, performance was strong. In the U.S., revenue quality remained high, with revenue per piece up 6.5% compared to the same period last year. Our international business delivered solid top-line momentum growing revenue by $167 million, or 3.8% year over year. And our supply chain solutions businesses more than doubled operating profit versus last year. Our results were considerably better than our financial plan and targets, but it's worthwhile calling out that while we planned for it, our first quarter performance deviated from seasonal norms. due to certain cost pressures that Brian will detail. These pressures are largely behind us. We expect to return to consolidated revenue and operating profit growth and expand operating margin in the second quarter of this year. Last year, we launched the most extensive U.S. network reconfiguration in our company history by targeting a 50% reduction in the volume we deliver for Amazon by June of 2026. with roughly two months to go, we are comfortably in the home stretch of this initiative. Our actions are moving us toward a more profitable U.S. small package business with the back half of 2026 expected to be the inflection point. With that as context, let me outline our priorities and how we intend to deliver revenue growth and margin improvement going forward. Our number one priority is to move the right packages and the right mix of volume through our network. The market has changed, and we're adapting to it. We're overturning the old industry assumption that scale alone drives profitability. Instead, we're focused on premium segments like SMB, B2B, and complex healthcare. Our strategy is working. We're seeing favorable mix improvements with SMB and B2B volume representing a larger share of total U.S. volume, and premium customer wins are driving meaningful revenue per piece growth. How are we winning? We're winning through innovative and differentiated capabilities like RFID labeling at customer locations, end-to-end cold chain solutions, ROTI for same day and big and bulky deliveries, happy returns for boxless, label-less returns, and much more. And that's only a part of our growth story, because we're also doing a better job retaining and growing our existing customers. In the U.S., we saw a meaningful reduction in churn through the first quarter. Our customer-first strategy focuses on what matters most, and that's speed, ease, and reliability. And while we're discussing capabilities, let me highlight DAP, our digital access program. DAP gives us access to over 8 million SMBs. And in the first quarter, we generated $1.2 billion in global DAP revenue, marking the second quarter in a row of delivering DAP revenue over $1 billion. As we drive revenue growth, we'll also drive profit growth, with margin improvement coming from higher productivity. We already run the industry's most efficient integrated network, and with expanded automation and robotic deployments, we will make the network even more productive and adaptable. That added agility will create the strategic capacity we need to fuel premium volume growth over the long term. Growing premium volume is not just a U.S. strategy. It's a global strategy. In international, we're speeding up our ground network in Europe to win premium commercial volume. And in Asia, we recently opened a major expansion of our Incheon Airport hub in South Korea. And in Taiwan, we opened our largest and most advanced logistics center in the region. We're speeding up our services across Asia Pacific, as well as to and from Europe, further enabling global supply chains, particularly in the manufacturing, high-tech, and healthcare sectors, all premium sectors. Speaking of healthcare, it remains a top priority growth engine for UPS. We've built a world-class, end-to-end logistics network to handle the most complex time and temperature sensitive healthcare products. And these capabilities are enabling us to win. In fact, our global healthcare portfolio has gained market share every year since 2021. And in the first quarter of this year, we generated our first $3 billion healthcare revenue quarter ever. with all three of our segments delivering year-over-year revenue growth. As I wrap up, we've now had three-quarters in a row of performance exceeding our expectations. As we look to the balance of the year, there are a few external factors that we are watching that could impact demand, especially higher fuel costs stemming from the conflict in the Middle East and U.S. consumer confidence, which is at historic lows. But these external pressures won't deter us As we reach the finish line on our Amazon glide down and complete our network reconfiguration, costs will continue to come out, premium volume will continue to strengthen, and we will return to revenue and profit growth with higher operating margins and stronger returns on invested capital. Today, we are reaffirming 2026 consolidated financial goals. For the year, we expect to generate consolidated revenue of approximately $89.7 billion and a consolidated operating margin of approximately 9.6%. 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 our first quarter results. Then I'll give an update on the Amazon glide down and our network reconfiguration and cost-out efforts. I'll wrap up with our financial outlook for the remainder of 2026. Moving to our results. Execution across our business was strong, with results coming in above our expectations. Starting with our consolidated performance, in the first quarter, revenue was $21.2 billion, and operating profit was $1.3 billion. Consolidated operating margin was 6.2%, and diluted earnings per share were $1.07. Now moving to our segment performance. U.S. domestic remained focused on revenue quality while executing our Amazon glide down and network reconfiguration initiative. These strategic actions drove S&B average daily volume growth and strong year-over-year revenue per piece growth. For the quarter, total U.S. average daily volume was down 8% versus the first quarter of last year. Nearly two-thirds of the decline came 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 8.9% year over year, including the glide down of Amazon volume. Ground average daily volume was down 7.9% compared to the first quarter of 2025. Moving to customer mix, SMB average daily volume increased 1.6% year over year, driven by high-tech, healthcare, and automotive customers. In the first quarter, SMBs made up 34.5% of total U.S. volume, marking the highest S&B penetration in our history. Looking at B2B, while average daily volume was down 5.1% year-over-year, it represented 45.2% of our total U.S. volume, which was a 140 basis point improvement versus the first quarter of last year and was our highest first quarter B2B penetration in six years. Our continued focus on revenue quality and a more premium U.S. volume mix has delivered several consecutive quarters of product and customer mix improvement, reinforcing that our strategy is working. Moving to revenue, for the first quarter, U.S. domestic generated revenue of $14.1 billion. This was a decrease of 2.3% year-over-year against an ADV decline of 8%. with strong revenue per piece growth of 6.5%, largely offsetting lower volume. Breaking down the components of the 6.5% revenue per piece improvement, base rates and package characteristics increased the revenue per piece growth rate by 340 basis points. Customer and product mix improvements increased the revenue per piece growth rate by 200 basis points. The remaining 110 basis point increase was due to changes in fuel price. Turning to cost, in the first quarter, total expense in U.S. domestic was nearly flat. While we delivered higher productivity and continued to make progress on the Amazon glide down, those benefits were partially offset by short-term cost pressures in the first quarter. As Carol mentioned, these included temporary third-party lease expense to cover capacity constraints from retiring our fleet of MD-11 aircraft, transition costs and excess operational staffing related to ground saver, and the combination of inclement weather costs and higher casualty expense. Combined, these pressures totaled about $350 million in additional expense for the first quarter. Cost per piece in the first quarter increased 9.5% year over year. The U.S. domestic segment delivered $565 million in operating profit and operating margin was 4%, including a 250 basis point negative impact from the short-term cost pressures. These cost pressures are largely behind us as we move into the final months of the execution of our Amazon Glide Down and Network Reconfiguration Initiative. Moving to our international segment. In the first quarter, revenue grew across all regions, driven by strong revenue quality and our focus on premium markets. Plus, we saw signs of recovery in trade lane shifts stemming from the 2025 trade policy changes. Additionally, with the onset of a conflict in the Middle East, we adjusted our network and continued to serve our global customers throughout the first quarter. In the first quarter, total international average daily volume declined 6%, International domestic ADV decreased 6.6% compared to last year, led by a decline in Europe that was partially offset by growth in Canada. Like in the US, we saw improvement in customer mix, with SMB penetration reaching over 60%. On the export side, average daily volume in the first quarter decreased 5.5% year-over-year. led by declines on U.S. destination lanes resulting from the pull forward of purchases in the first quarter of last year spurred by changes in trade policy. U.S. imports in total were down 16.4% year-over-year, led by a 22.5% ADV decline from Europe to the U.S. The China to the U.S. lane, which is our most profitable trade lane, was lowered by 18.3% compared to last year. But as we have said before, with changes in trade policies, we see that trade doesn't stop. It moves somewhere else. And we continue to see volume growth in other parts of the world. Turning to revenue, in the first quarter, international generated revenue of $4.5 billion, of 3.8% from last year, driven by strong revenue per piece growth. Operating profit in the international segment was $551 million. down $103 million year-over-year, primarily due to trade policy changes. International operating margin in the first quarter was 12.1%. Looking at supply chain solutions, supply chain solutions made strong progress during the first quarter, highlighted by the doubling of operating profit year-over-year, driven by improvements across business units. In the first quarter, revenue was $2.5 billion, lower than last year by $176 million. Logistics revenue was down year-over-year, driven by lower revenue in mail innovations. This was partially offset by revenue growth in healthcare logistics. Reflecting market conditions, air and ocean forwarding revenue was down year-over-year. And UPS Digital, which includes ROTI and Happy Returns, delivered another consecutive quarter of revenue growth, with revenue of 19.9% compared to the first quarter of 2025. In the first quarter, supply chain solutions generated operating profit of $206 million, an increase of $108 million year over year. Operating margin was 8.1% of 450 basis points compared to last year. Lastly, looking at cash, in the first quarter we generated $2.2 billion in cash from operations. Now, let me provide an update on our Amazon Glide Down, cost out, and network reconfiguration efforts from the first quarter. Starting with variable cost, total operational hours paced down with volume in the first quarter, and we're on track to reach our 2026 reduction target of 25 million hours versus last year. Looking at semi-variable cost, by the end of the quarter, we reduced operational positions by nearly 25,000 compared to the first quarter of last year. In addition, the driver choice program that we initiated during the quarter is expected to reduce full-time driver positions by approximately 7,500 over time, putting us firmly on target to reach our reduction goal of 30,000 operational positions this year. And moving to our fixed cost bucket, we completed the closure of 23 buildings during the first quarter. We are planning to close an additional 27 buildings this year, most of which will be closed in the second quarter. We are pleased with the progress that we are making on our Amazon Glide Down and Network Reconfiguration Initiative and are on track to achieve our targeted $3 billion in savings in 2026. Moving to our 2026 financial outlook. While the macroeconomic environment is different now compared to our expectations at the beginning of the year, we have been quick to adjust to the changing conditions and we're continuing to closely monitor the broader impacts across the global economy. As Carol stated, we are reaffirming our full year 2026 consolidated financial target. We are on track to generate revenue of approximately $89.7 billion with an operating margin of approximately 9.6% and diluted earnings per share expected to be about flat to 2025. The conflict in the Middle East in March drove an immediate spike in fuel costs. Our fuel surcharges are linked to published fuel benchmarks and adjust with fuel prices on a weekly basis. and we expect these surcharges to provide coverage as fuel prices continue to fluctuate. Now, let me add color on the segments. Looking at U.S. domestic, full-year 2026 revenue is still 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 still expected to be flat to 2025. Looking at the second quarter of this year compared to the first quarter, the USPS transition has been completed. The Amazon glide down and network reconfiguration will wrap up by the end of June. We are leasing fewer replacement aircraft as 767 deliveries continue. And premium volume is expected to further improve mix. As a result, we expect revenue to be up low single digits and operating margin to be between 7.5% and 8.5%. Moving to the international segment and starting with the full year, we still anticipate revenue growth 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 specifically at international in the second quarter, we will lap tough comparisons from changes in trade policy, benefit from normal seasonal uplift, and continue to realize savings from our air network cost action. As a result, we expect low single-digit revenue growth and an operating margin between 13% and 14%. And in supply chain solutions for the full year 2026, we still expect revenue to be up high single digits, which includes revenue from our Andalour acquisition, and operating margin in SES is expected to be in the low double digits. Looking at the second quarter, we expect momentum from the first quarter to continue, and we expect revenue in SES to be up low single digits year over year and operating margin between 9.5% and 10.5%. Now, let's turn to our expectations for cash in the balance sheet. Capital expenditures are still expected to be about $3 billion, and we plan to make our annual pension contribution of $1.3 billion. We expect free cash flow to be approximately $5.5 billion, including one-time payments for the driver choice program. Lastly, we are still planning to pay out around $5.4 billion in dividends in 2026, subject to board approval. As we near completion of our Amazon Glide Down and network reconfiguration initiative, we will enter the second half of this year with a more agile and more automated network. Our focus is on premium volume and revenue quality, and will grow in the best parts of the market. Taken together, these actions set us up for operating margin expansion and greater operational agility. 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 star 1 on your phone at this time. We do ask that while posing your question, please pick up your handset if you're listening on speakerphone to provide optimum sound quality. We do ask that participants please ask one question. Once again, if you have any questions or comments, please press star 1 on your phone. Our first question comes from the line of Tom Wadewitz from UBS. Your line is live.

Yeah, good morning. Thank you. So I wanted to ask you a question about the kind of ramp from 1Q to 2Q, you were a bit, I think in early March, you pointed to kind of 4% to 5% 1Q margin. You were at the lower end of that. I know you identified that, I think, kind of 350 million total transitional costs. How do you think about that, like the key pieces of that ramp and just visibility to that versus what you might have had in terms of visibility to that ramp a month ago or two months ago? So I don't know if that kind of a little lower margin in 1Q reduces visibility, or if you say, hey, that was just kind of transitional. And then how does fuel factor into the kind of 2Q versus 1Q? Is there some tailwind that you consider, or is that something you don't factor in but could give you a little support? So really just to kind of how do we think about the key levers, 2Q versus 1Q? Thank you.

Sure. Good morning, Tom, and thanks for the question. So, yeah, let me make a couple points on the impacts on the first quarter. So first, if you think inside the quarter, right, relative to the 4% margin, we incurred incremental weather and casualty costs that was more than what we had initially expected when we were setting the guide and where we were in March. That was about 70 basis points, which gets us, you know, kind of towards the higher end of the range that we laid out. Second, when you go from first quarter to second quarter, there's really two components, right? We have normal seasonal up list, right, from first quarter to second quarter. The other part is if you think about that weather and casualty, those are behind us, right? The aircraft leases, as Carol and I both mentioned, we continue to take delivery, so the incremental cost associated with those is coming down. And we've now completed the ground saver outsourcing, so a lot of that transitional cost that we incurred in the first quarter now comes out. And so that helps you bridge from first quarter to second quarter. On fuel, look, we reaffirmed our guide. We are not updating for fuel at this point. Fuel didn't have a material impact in the first quarter because really the rampant prices happened late in the quarter and as we've gone into April. Look, fuel, we manage fuel through fuel surcharges. So even though we have a large airline, we're very different than passenger airlines and our industry operates very differently. And so our fuel surcharge indexes protect us from impacts to profit, right? Now, there could be revenue impacts to that, but there will also be offsetting expense. What we don't know is how long the high prices could persist and then what happens relative to oil prices and commodity prices around the world where we actually procure. So we feel confident in the profit number based on the protection our indexes will provide and our surcharges, but it's not appropriate for us to update until we have further clarity on how long this will last.

It's just too early in terms of the conflict. Clearly there's a benefit right now to the top line, not so much on the bottom line because we're just covering our costs. But it's too early in the conflict to predict what fuel might mean for the rest of the year. So we're going to stay close to it, and we're going to manage through it as carefully as we can. But we didn't want to lift because it's just too early.

Great. Thank you. Thank you. Our next question is coming from Scott Group from Wolf Research. Your line is live.

Hey, thanks. Good morning. So just following up there, I get we don't know where fuel is going to end up, but you know, in a higher fuel price environment where you guys are also raising the surcharge schedules, like, should we assume that there is some sort of profit benefit from the higher fuel environment? And then maybe just, Carol, like, let's just take a step back, like, big picture, like, you know, we're going to end up in the 7%, 8% range on U.S. margin this year. Like, help us think about where that can go over the next couple of years. We get through the Amazon, you know, glide down. Maybe we start to see a little bit of wage inflation start to kick in again. But where do you think margins can start to go over the next couple of years here?

Sure. So let me talk quickly about the fuel. So, Scott, as I mentioned before, look, the prices have spiked very quickly. It will have a revenue impact, but we also have associated costs. So we don't see this as a windfall in the near term. And, again, depending on how long it lasts, It could have a revenue impact, but there could also ultimately be a demand impact. So, again, as Carol said, it's just too early to speculate on what the ultimate implications of it could be. We'll monitor it, and as we know more, we'll update.

And, Scott, we brought you all through a lot over the past almost 18 months, but we did it deliberately because it frees us to focus in on the markets that we want to serve and serve them better than anybody else. and that includes SMB and B2B and healthcare. And with those premium markets and the productivity that Nando and his team are driving in our business, there's an opportunity for continued margin expansion. This is the year of inflection, so the back half of the year will look considerably different than the first half of the year. And as we exit this year, we have an opportunity to grow U.S. margins in a meaningful way with a spread between RPP and CPP. So at the end of the year, we'll give you a sense of what we think 27 will look like, but it's going to be much better than 26 based on what we're seeing and the underlying health of the business. We're winning in the right markets. Our churn is declining, and all of this leads to stickiness with the customers that we want to serve, the right revenue quality, coupled with great productivity. You know, our productivity is the best it's been in 20 years, just to put a point on it. We now have automated 60s. 7.5% of our buildings, almost on our way to 68%. And we know that cost per piece in an automated building is 28% lower than the cost per piece in non-automated buildings. So there's some really good underlying trends here in the domestic business. And then outside the United States, we can't ignore that because our business performed better than we thought in the first quarter due to the great work of Kate and her team, who also are leaning into the premium segments of the market. Brian called out that we grew SMB penetration in the international business. We did. It's now 62%. We also grew our B2B penetration outside the United States, now about 71%. So Kate and team are going to continue to lean into the premium part of our international small package business. And we won't forget healthcare ever because healthcare is such an important part of our growth engine. It is in every segment of our business. with double-digit operating margins, then we're going to continue to lean into that space in a meaningful way. And with just one more comment on that, to put a pin on it, with just the changes that we're seeing in pharmaceutical companies with GLP-1 drugs and how they're going direct to consumer rather than through distributors, that's such an opportunity for us, and I'm proud to say that we lead the market in that area.

Thank you. Our next question comes from Chris Weatherby from Wells Fargo. Your line is live.

Hey, thanks. Good morning. Maybe it's a quick clarification question, then maybe a bigger picture, I guess. For the driver buyout in the second quarter, can you just give a sense of what the impact will be, if there will be a benefit in 2Q from that? And then maybe, you know, zooming out a little bit, we're about a quarter away or maybe a couple of months away from the end of the Amazon glide down trend. there still is a significant amount of revenue associated with that customer. And I think there's been some changes, and they're always doing various things in the market. But I guess the question is, Carol, is this sort of where you want the portfolio? Do you think there is incremental work that needs to be done around that? How defensible it is? Just sort of give us a sense of how you think about that customer exposure.

Yeah, on the driver buyout, 77% of the drivers are leaving in April. So there will absolutely be a benefit in the second quarter. I don't know, Brian, if you want to dimensionalize that.

Well, and that's part of the step-up that we've got, right? So we had roughly $150 million in transitional costs in the first quarter. That starts to go away as we go to the second quarter, and it helps us with the margin improvement that we see in the second quarter and then going into the second half.

And as it relates to the Amazon question, at the end of the first quarter, Amazon made up 8.8% of our total revenue. That's down from, gosh, it was north of 13% not very long ago. So really pleased with how we've partnered with Amazon on this glide down. We hold that company in very high regard. And for the volume that we have remaining with Amazon, I think we're going to get to where we want to be. We have a great return network. And as you know, returns are the nemesis of anybody who's in the e-commerce space. In fact, 19% of all e-commerce sales are returned online. And so with our great reverse network and the capabilities that we have for boxes, labels, returns, that relationship with Amazon is just going to continue to grow. And it's not just returns, but that certainly is a key part of it. So give a shout out to the team at Amazon for working with us. We're pleased where we are and want to continue our relationship in the nutritive way that it's turning out to be.

Thank you. Your next question is coming from Jonathan Chappell from Evercore ISI. Your line is live.

Thank you. Good morning. Brian, I want to take Tom's question and flip it to international. As Carol noted, you did much better there. You were looking for flat revenue. You did up almost 4%. Your margin was over 12%. The range was 10 to 11, yet the 2Q guide is exactly the same. Was there something temporary in 1Q that enabled you to beat by so much relative to what you were expecting in the first week of March? And why wouldn't that upside across both margin and revenue be extrapolated going forward?

Thanks. And yeah, we were very pleased with the performance in international. I think there's a couple of things that drove it in the first quarter, as Carol mentioned. Leaning into premium segments in Europe are helping us to drive revenue quality, as well as I would say that we mentioned the decline in the China-U.S. trade lane. While it's down, it's not as bad as what it has been, right? And so I would say things were not as bad as what we expected or what they could have been. And so we are starting to see some recovery in certain trade lanes. As we roll into the second quarter, remember, we're still lapping. May will be the lap of the Liberation Day and the China de minimis elimination, which will provide some improvement and step-up, and then we'll have another lap in September of the full de minimis elimination. So we do expect the improvement to persist. The other thing that's going on in international is we are seeing some incremental costs associated with the network reconfiguration around the Middle East conflict. It has impacted flight and block hours in some of the lanes. While it's not a large demand area or delivery area, it has impacted some of the network flows that we're managing through.

Thanks for making that point. I think that's an important point. If you look at our exposure in the Middle East, it's pretty small. Job number one was to keep our people safe. We have about 2,000 people there, and they're safe, I'm happy to say. In the first quarter, the export and import revenue was about $130 million. So it's not a lot of exposure, but we can't fly over the airspace. And because we can't fly over the airspace, that is putting cost into the network, because we want to continue to serve our customers. The other thing we're taking a cautious outlook on is just the elimination of de minimis in Europe. That happens this summer. We don't know if it'll be disruptive or not, but it's a change, and we saw the disruption that happened last year with the elimination of determinants here in the United States, so we're just watching that. But I couldn't be more happy about, actually, the work that our international team is doing to drive really great revenue quality and growth.

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

Hey, good morning, guys. I'd like to kind of maybe understand the pace of cost takeout. Has there been any shift in timing caused by the discussions you have with the unions around the driver buyout? And then, Brian, when you're thinking about the overall message you're trying to give us with guidance here, it does seem like first quarter domestic, if you give your credit for the 350, and international is performing really, really well, but we're not changing the full year. Is this just... well, you know what, we put the numbers out in the first quarter and we're going to see how the year plays out and we'll update it later, or is something getting worse in the business that we can't see? Because I think the market's kind of hearing a beat and no raise as a beat and maybe core worse for the last half of the year, and I'm just wondering if you could help me kind of understand what the messaging is here.

Well, maybe I'll start, and then, Brian, you can come in. It is early in the year to raise. The underlying business is better than we thought. If I look at the results in April, we're going to exceed the plan that we put in place. If I look at the results outside the United States, we have moved from red in certain trade lanes to orange. So everything is moving in the right direction. But, David, it's early in the year, and there is a war in the Middle East. High gasoline prices could potentially impact demand towards the end of the year. We don't know. So instead we want to stay with our plan, but I couldn't be more pleased – with how our company is performing. There's nothing on the underlying trend that should be concerning here. It's just too early in the year to raise.

And David, I would just add to that. On the guide, Carol's absolutely right. We feel very good about the health of the underlying business. If you remember, we said SMB grew in the first quarter. We expect that to continue. We'll lapse some of the actions that we took on the enterprise customers as we go through the second quarter and see growth at Amazon in volume in the back half. We expect revenue at Amazon to grow every quarter this year. So health of the underlying business is strong. Rep per piece is strong. Base pricing is strong. So we feel really good about that. And Carol hit on international. On the pace of cost takeout, nothing's changed, right? I think if you look at the actions that we took in the first quarter, they actually set us up to do exactly what we said we were going to do, right? We transitioned ground saver. We executed on the DCP. As Carol said, nearly 80% of those positions will be eliminated by the end of this month. We are replacing the MD-11 capacity as we take delivery of the 767s. So we're moving in the right direction. We're getting things behind us that are going to help us drive the margin inflection as we go into the second half.

And, Brian, isn't the shape of the cost out much like the shape of the cost out last year?

It is, very much so, right? And so you'll continue to see that improvement as we go through the course of the year.

It accelerates as we head towards the back, yeah.

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

Great. Good morning. Thank you. I wanted to maybe ask a clarification on the driver bio program. It sounds like it ended up coming in or the involvement is either in line or slightly better than what you expected. But admittedly, there are a lot of articles out there in the news that are kind of discussing maybe a little bit less willingness to move forward with that program on the driver's side. So it would be helpful if you could maybe separate facts and fiction, what you're seeing, help align expectations. Any clarification there would be helpful. Thank you.

Yeah, happy to. So when we laid out our internal plans for the driver buyout, we wanted to land on 7,500 positions. Our program was oversubscribed, so perhaps that's the basis for some of the articles. So we had more drivers applying than we could accept. We accepted the 7,500. We couldn't be more happy.

And, Stephanie, I would say that aligns with the pace of the cost takeout that we had laid out at the beginning of the year. We feel very comfortable that we're going to get to the $3 billion as we laid out, and the actions that I articulated earlier are how we're going to get there.

And you might say, well, why didn't you take more in? Well, we have to run the business. This is what we needed to run our business.

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

Yeah, hi, morning. Wanted to come back to international. Obviously, with all the trade lane shifts and everything that's gone on, margins are below what had historically been the long-term trend. So I'm just sort of wondering, over time, can we push back into a high teens margin level? What will it take to get that margin uplift again coming from international? Thanks.

Well, if you look at the international business, there's been a lot of movement in the trade lanes. And as we've talked to you, our China-U.S. trade lane is our most profitable trade lane. We saw the margin in our APAC region down 500 basis points year on year. This is a moment in time because of the impact of the tariffs. This is going to normalize over time. And in fact, with the elimination of the IEPA tariff and going back now to the 122 tariffs of 10%, we're actually seeing trade lines move from red to orange to yellow, and in some cases, green. So things are starting to normalize. So that means the margin will get back up.

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

Hi, thanks, and good morning, everybody. Maybe just wanted to zoom out here and get some high-level thoughts on, you know, demand and maybe what's assumed in your outlook here. We've I heard from a few companies this quarter that maybe got some early indications of industrial demand recovery. Again, maybe you can just give us some high-level macro thoughts and talk about what you're seeing in terms of maybe any pockets of emerging strength by segment or geography or end market or whatever.

Sure, sure. And good morning, Bruce. So as I mentioned in my earlier remarks, we've seen some flips and takes on the macros, right? GDP ticked down a little bit. Industrial production ticked up a little bit. I think you're right. We do see pockets of strength in the places where we're really leading in. We mentioned automotive, high tech, healthcare, industrial, where we are seeing our ability to win more and take share. We don't expect – we haven't seen a material shift in what we would expect for the addressable market growth on small package in the U.S., so low single digits, but we are winning where it matters to us. As Carol mentioned, healthcare in particular, we grew across all segments of the business, and we continue to see strong uptake in there, which is higher than the average market growth rate. On the international side, Carol hit on it, right? I would say that while we're still down on certain trade lanes, they are moving in the right direction, right? And then particularly we are seeing, you know, international to international origin destinations growing, right? So trade is moving in places that don't touch the U.S., and it's improving in places that do touch the U.S. So overall, I would say not a robust improvement, but incremental progress.

And if you look at China, the rest of the world, it's up 14% year-on-year. Yeah. It's a small portion of our business, but that's an encouraging sign to see that growth rate.

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

Hi, good morning. Carol, you mentioned the CPP versus RPP spread. We've seen RPP grow pretty nicely, but we've also seen CPP obviously take a pretty big step up. I'm wondering how you think about that normalizing and when we get to a more normal level, what that can look like. Specifically, in terms of what's driving up CPP, how much of that are fixed costs that start to go away? And then on RPP, how much is the pricing environment helping you versus the mixed benefit that you might be realizing from this shift towards higher yielding packages? Thanks.

Well, I'll let Brian take that. Sure, and I'll start. So, thanks, Ari. So, look, I think, you know, getting back to this call at 50 to 100 basis point spread is healthy, right, for our business. And we'll be back there by the end of this year, right, is the way that the year kind of sets out. When you think about what's going to drive that, one, we're taking actions to bring the network capacity in the U.S. back in line with the volume level. That's DCP. That's Amazon building consolidation. That's all the things that we've outlined. And those, for the most part now, are done or are in progress. So we feel really comfortable about our ability to get the capacity lined up in the back half. On the revenue side, look, we've talked about this 250 to 350 kind of range of base pricing improvement. And we've been in that range, right? And we've been very clear about what's mixed versus fuel versus base pricing. And I think we'll continue to get that kind of base pricing increase. You do that, right, through making sure that you're selling into the segments of the market where we can deliver value to our customers, right? S&B, B2B, healthcare, and that's where we're really leaning in and that's where we're winning. So, I think we do have the ability to get there in the near term and then manage that and grow in a more creative manner with a more efficient network as we go into the fourth quarter this year in 2017.

And I know Brian called this out in his prepared remarks, but in the U.S., the RPP growth was driven by base rate improvement, 340 basis points, mix improvement, 200 basis points, and then about 110 basis points from fuel. And that mix improvement is coming through this leaning into the premium segments, leaning into SMBs, and leaning away from, well, volume that was related to China e-commerce retailers, mostly ground savers. So that's been moved out of the network. We've offered that volume to the market. so that we can focus on the premium side.

Very helpful. Thank you. Your next question is coming from Ken Hoekstra from Bank of America. Your line is live.

Hey, Craig. Good morning. So, Carol, I guess your competitor noted it posted the strongest quarter of profitable U.S. share gain in 20 years. You noted your churn is declining today. You're seeing favorable mix improvements here, especially on the target audience, SMB, B2B. It sounded like, or Brian's answer to Bruce earlier, that there's not that underlying strength that you're kind of really seeing kind of run away here. I just want to understand, given what we're seeing in truck market on some of the rail volumes, that underlying, is there just a delay typically in what you see economically or Are you seeing some of that pop up? I just want to understand maybe that mix, or is it just what you're chasing is just different than the market now?

Well, let's talk about market share for a moment. If we ignore the volume that we have made available to the market, and that includes Amazon and volume from e-commerce, Chinese retailers, if we ignore that volume, we actually gained 1.2% market share growth. So we have made volume available to the market that has gone to other carriers, including our largest competitor. It has, because we deliberately made that volume available. So if I look at the underlying business, I'm really pleased with the share that we're getting.

In terms of trends... Yeah, and Ken, I think you're right. There is a slight delay in how things move through the supply chain, through the ports, through the TLs, the LTLs, and the RAILs. And like I said, Bruce, I would say we see incremental momentum in our B2B business, in the industrial business, part of that through capabilities, right, that we've been investing in, but part of it is through momentum. I would just say it has not been runaway growth that would cause us to fundamentally change our market growth assumption for the year yet.

Thanks, Brian. Thanks, Carl.

Thank you.

Thank you. Your next question is coming from Rich Harnon from Deutsche Bank. Your line is live.

Hey, thanks a lot. It's Richa here. So, yeah, trying to get a longer, a sense of longer term cost per package potential. Obviously, CPP pressure has been high recently influenced by your Amazon glide down. But as you progress through this year into next year, how could your CPP trajectory look in light of maybe more cost efficiency from automation, things to offset the step up that we're going to see in your contract, I believe, next year, if that's right? Trying to just You know, add more to, Carol, your point that 2027 should look a lot better than 2026. I'm just trying to understand, like, puts and takes on the CPP line. And then, you know, in the spirit of the longer-term potential, I just want to clarify one thing. Carol, I think you said you think margins will be back to high teens and international. Are you assuming U.S.-China business that wasn't structurally impaired from de minimis and it should return to where it was prior in terms of overall volume or How do you get back to high teams? I'm just trying to understand. Thank you.

Well, clearly, as the trade lanes normalize and we see more volume flowing through the China-US trade lane, that will help our margin. But it's not just that. We are investing in the premium opportunities where we're under-penetrated in Europe, moving away from e-commerce, which is low margin, into premium opportunities, and that's going to significantly improve our domestic margins in Europe. So it's a combination of actions that we are driving to drive back to mid to high teams in our international business. And then on the CPP potential, Brian, I'll let you take that.

Sure. And I think even if you look into the back half of this year, our CPP gets down into the low single digits, right? And that's, you know, as Carol said, while we've been going through the network reconfiguration, we have been eliminating some of the less productive older buildings that require more maintenance. We have been heavily investing in automation. that drives a much more efficient and agile network. That should allow us to keep CPP in the low single digits and then have that 50 to 100 basis points spread because we've got a more healthy customer mix and grow from there. That's a healthy business that can drive growth and profit improvement for us.

And with our new outsourced relationship with the USPS, we'll be able to drive density upon the delivery, and that's a real way to lower the cost per piece, is to improve the density per delivery. And as you know, we've just kind of completed the ramp up, so now we're going to start to see some benefits from that move.

Okay, just any offset from the contract with the Teamsters, and how is that going to influence EPP in the back half into 2027?

Well, I'll tell you one thing. We have a lot fewer employers in our company than we had when we started this work, so that helps on the CPP management next year.

Thank you so much.

Thank you. Your next question is coming from Brian Ozenbeck from J.P. Morgan. Your line is live.

Hey, good morning. Thanks for taking the questions. Maybe just two sort of quick follow-ups. Just on the mix shift, I understand the increasing percentage of Looks like B2B volume in Absolutes was down 5%. Don't know if you can provide some colors to why that occurred and what might be moving forward here. And then, Carol, just on the transition for the USPS, sounds like it's done. Maybe not everything went back to them in terms of final mile delivery. Can you give a little bit more color on that and also just how you expect to manage their own fuel surcharge, which was kind of a big headline. They never really had one in the past, so I don't know if that's something you can pass through as well with that program. Thanks very much.

So in the first quarter, we tendered about 977,000 ADV to the USPS, which is about 44% of our ground saver product. It was a ramp because we had to get work through dual labeling and some work that we had to do to transition. So it was a ramp up, really pleased with how we exited. And as we look to the second quarter, we'll be tendering around a million and a half, something like that. So that's moving the way we thought it would. In terms of their interesting surcharge that they put in, which appears to be a temporary surcharge, I'm not entirely sure. You know, it's not appropriate for us to talk about how we manage pricing by customer, but I will say the PULSA system tends to set the floor for the economy product, which is actually pretty good for the whole industry if they're raising prices.

That's right. And Brian, on your question around B2B, the B2B volume decline was really driven by some of the intentional actions that we took last year. Part of it is Amazon. Part of the Amazon volume that we're exiting through AFN is delivered to commercial addresses. There's other stuff that was returns for Chinese e-commerce and some other things. that we're moving through. We'll cycle through that as we go through the second quarter, and again, you know, we see strength in the underlying B2B business where we're winning on capability.

And that may sound a little curious that a retailer would be a B2B, but it's the way that we think about our customer segmentation. If it's a return to store or a return to a physical building, we're going to view that as a business transaction, even though the payee, if you will, the customer who's paying us might be a retailer.

Matthew, we have time for one more question.

Certainly. Our final question comes from the line of Ravi Shankar from Morgan Stanley. Your line is live.

Great, thanks. Morning, everyone. Carol, there's reports that you and your peer have applied for tariff refunds through the portal. Can you just tell us your understanding of how that will work and of when that might come through? And also, what happens next? Do you get to keep the tariffs or do you have to pass them through to the end customers?

Well, thanks for the question, Robbie. This is a complicated matter for sure. I'm going to zoom out just to talk about the IEPA tariffs in total. So last year, since the tariffs have been initiated, the Customs Border Protection processed 53 million IEPA-related entries and collected $166 billion in tariffs. For us, we processed 16 million IEPA-related entries and remitted over $5 billion to the S-Treasury. Robbie, we are just a pass-through. We collect and we remit to the government. So now that the tariffs have been deemed refundable, we are working with the Customs Board of Protection to apply for those refunds. Our approach is to work with the U.S. government and not to sue the U.S. government. We have applied for the refunds pursuant to the guidelines from the Customs Board of Protection. Interestingly, they are not going first in, first out, but actually last in. So it's for the tariffs that have happened this year. For us, it means applying for tariffs for 2.5 million entries, a little under $500 million. We are making those applications started on April 20th. We are making those applications today. We think it's going to take some time before the Treasury remits money to us, but as soon as we get that money, we're going to remit it right back to our customer.

Very helpful. Thank you.

Yeah, that's a really important point, and I think, as Carol mentioned, we are purely a pass-through, so we don't expect that this will have an impact on our financial statement.

Understood. Thank you, Ryan.

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

Thank you, Matthew. This concludes our call. Thank you for joining and have a good day.